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Kyocera 6-K 2007
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 2007

 

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 3, 2007


Table of Contents

Information furnished on this form:

 

EXHIBITS

 

    Exhibit    

    Number    


      
1.      Annual report for the year ended March 31, 2007


Table of Contents

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Table of Contents

Contents

 

1   

Financial Highlights

2   

To Our Shareholders

6   

Reporting Segments at a Glance

8   

Business Outlook and Strategy

8   

Fine Ceramic Parts Group

8   

Semiconductor Parts Group

9   

Applied Ceramic Products Group

10   

Electronic Device Group

10   

Telecommunications Equipment Group

11   

Information Equipment Group

12   

Others

13   

Corporate Governance

16   

Corporate Social Responsibility (CSR)

18   

Financial Section

72   

Major Consolidated Subsidiaries and Affiliates

73   

Directors, Corporate Auditors and Executive Officers

73   

Investor Information

 

Corporate Profile

 

Since its founding in 1959, Kyocera (as used in this Annual Report, “Kyocera” refers to the Kyocera Group on a consolidated basis) 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 efforts, contribute to the advancement of society and humankind.” In doing so, Kyocera creates new markets and develops new products and businesses using unique technologies. As a result, Kyocera has become a leading manufacturer of diverse components, devices and equipment, 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.

 

Based on our three basic management policies, “Practice the customer-first principle,” “Promote global management” and “Establish a highly profitable structure,” Kyocera aims to be “a creative company that continues to grow” by ensuring sustainable corporate growth. We will accomplish this by driving sales expansion and higher profitability in each business, and through the pursuit of synergies within the Group. At the same time, we seek 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,
     2003    2004    2005    2006    2007    2007

Net sales

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

Profit from operations

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

Income from continuing operations before income taxes and minority interests

     72,442      110,284      104,013      117,237      156,540      1,326,610

Net income

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

Earnings per share:

                                         

Net income

                                         

Basic

   ¥ 220.91    ¥ 364.79    ¥ 244.86    ¥ 371.68    ¥ 566.03    $ 4.80

Diluted

     220.86      364.78      244.81      371.43      564.79      4.79

Cash dividends declared per share:

                                         

Per share of common stock

     60.00      60.00      80.00      100.00      110.00      0.93

Total assets

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

Stockholders’ equity

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

Depreciation

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

Capital expenditures

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

 

Notes:

 

A)    Yen in millions and U.S. dollars in thousands, except per share amounts.

   

B)     U.S. dollar amounts have been translated at a rate of ¥118=US$1, the rate as of March 31, 2007.

   

C)     In accordance with Statement of Financial Accounting Standards No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets, “prior years’ financial statements have been retrospectively reclassified as to discontinued operations.

 

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Forward-Looking Statements

 

Certain of the statements made in this document 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 conditions in the Japanese or global economy; unexpected changes in economic, political and legal conditions in China; intense competitive pressures to which our products are subject; manufacturing delays or defects resulting from outsourcing or internal manufacturing processes; various export risks which may affect the significant percentage of our revenues derived from overseas sales; the effect of foreign exchange fluctuations on our results of operations; industry demand for skilled employees; insufficient protection of our intellectual property; expenses associated with licenses we require to continue to manufacture and sell products; our research and development not producing desired results; our market or supply chains being affected by terrorism, plague, wars or similar events; earthquakes and other natural disasters affecting our headquarters and major facilities; impairment losses on investments in equity securities; and our ability to launch innovative products and otherwise meet the advancing technical requirements of our customers, particularly in the highly competitive markets for ceramics, semiconductors and electronic components. 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 document.

 

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To Our Shareholders

 

To be “a creative company that continues to grow”

 

Fiscal 2007 Initiatives

 

Under the new organizational structure adopted in April 2006, the Kyocera Group produced significant achievements during the year ended March 31, 2007 (fiscal 2007) as we pursued our goal to be “a creative company that continues to grow.” In fiscal 2007 we recorded increases in both sales and profits for the third consecutive year.

 

To achieve continuous sales growth with high profitability for the future, we have focused on the following initiatives:

 

 

(1) Reinforcing the “Amoeba Management” System of Internal Control

 

From its early history, Kyocera has implemented “Amoeba Management,” a unique system of internal control which monitors profit performance at the small group level. Under this system, the company is divided into small groups, or amoebas, which operate on a self-supporting basis. The Amoeba Management System is designed to ensure that all employees share Kyocera’s corporate philosophy, which is based on universal values and integrity. Every amoeba member is encouraged to exercise responsibility and achieve individual targets using originality and ingenuity. We believe the Amoeba Management System has been a driving force in the growth of the Kyocera Group, providing a competitive advantage over other companies.

 

To continue Kyocera’s medium- to long-term growth, we will return to our origins and strengthen our practice of this system. Specifically, our top priorities are to enhance two key elements of the workplace: “executional excellence,” the ability of each amoeba to achieve its targets consistently; and “operational excellence” — the workplace vitality that exists across all development, manufacturing, sales and support divisions.

 

We believe that the reinforcement of Amoeba Management was a major contributor to the business expansion we achieved in fiscal 2007.

 

 

(2) Refining Our Business Portfolio

 

Kyocera refined its portfolio to focus on businesses with high market share and high growth potential, and concentrated management resources on businesses in need of strengthening.

 

In July 2006 a Kyocera subsidiary, Kyocera Kinseki Corporation, acquired Hertz Technology Inc. to enhance its crystal device business, a market which shows strong growth potential. Through this acquisition, the Kyocera Group gained new technology in tuning-fork crystal units, which are expected to grow in demand. Essential to mobile phone handsets and music players, these components represent a strategic expansion in the scope of our crystal device product line. By integrating the new management resources, we will develop a wide range of products to expand our crystal device business.

 

In August 2006 Kyocera divested itself of its shares in Kyocera Leasing Co., Ltd., a subsidiary engaged in financing services, due to reduced group synergies.

 

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Fiscal 2007 Results

 

Fiscal 2007 saw a significant increase in global production of mobile phone handsets, PCs, digital TVs and other digital consumer products, which impacted our Group’s major markets. As a result, demand for electronic devices and other components used in these products remained high throughout the year. Meanwhile, structural reforms implemented in the Telecommunications Equipment Group prior to fiscal 2007 yielded favorable results. In addition, new products in the Equipment Business contributed to a substantial improvement in sales and profit.

 

Consolidated net sales for fiscal 2007 increased by 9.4% compared with fiscal 2006, to ¥1,283,897 million ($10,880 million). In the Component Business, all segments showed profit increases. Sales in the Equipment Business also increased, notably in the Telecommunications Equipment and Information Equipment Groups.

 

In all business segments, operating profit increased compared with fiscal 2006. Profit from operations increased 35.5% to ¥135,102 million ($1,145 million). Income from continuing operations before income taxes rose 33.5% to ¥156,540 million ($1,327 million). Net income totaled ¥106,504 million ($903 million), an increase of 52.8% in comparison with fiscal 2006, due in part to a ¥4,305 million ($36 million) tax refund resulting from the voiding of a portion of a tax assessment relating to transfer pricing adjustments. Consequently, diluted earnings per share soared to ¥564.79 ($4.79).

 

For a more detailed analysis of business performance, see pages 18-34 (Operating and Financial Review and Prospects).

 

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Basic Management Policy

 

Kyocera has adopted the following three basic management policies in pursuit of its goal of being “a creative company that continues to grow.”

 

i) Practice the “customer-first” principle

 

Earning the trust of customers is the basis of business. Kyocera believes that we can overcome the toughest competition by providing complete customer satisfaction and winning our customers’ trust in all matters.

 

ii) Promote global management

 

Kyocera will promote global management on a product segment basis in both the Components and Equipment Businesses to become “a creative company that continues to grow.” Kyocera will create new technologies, products and markets by strengthening each business and pursuing effective use of all internal resources. We will also seek to continue optimizing development, manufacturing and marketing structures globally.

 

iii) Establish a highly profitable structure

 

To further enhance profitability, Kyocera will strengthen its “Amoeba Management,” which will drive our future growth.

 

 

Fiscal 2008 Initiatives

 

Based on these three basic management policies, Kyocera aims to be “a creative company that continues to grow.” During fiscal 2008, Kyocera will work to create new value to strengthen our competitiveness in each business and attain continuous sales expansion with high profitability. We will also continue efforts to reinforce our “Amoeba Management” as begun in fiscal 2007. Specific initiatives are as follows:

 

1) Further Improve Quality

 

Kyocera will continue to improve the quality of its products and services as its top priority, and will establish internal structures to attain the highest possible quality. We believe that quality improvement provides the very foundation for management’s goal to maximize revenue and minimize expenses.

 

2) Optimize Production Sites

 

To overcome intense competition, we will enhance our manufacturing capabilities by clearly defining the roles of production sites worldwide. At Japanese manufacturing sites we will strengthen production technology through such efforts as developing new processes and streamlining production lines. We will establish production systems that contribute to higher profitability than our competitors both in Asia and globally.

 

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Outside Japan, we will establish a system that is attentive to regional markets and customers, and enhance price competitiveness by reconsidering the best production locations for each product. In the process, we will strive to manage risk arising from any regional concentration of production facilities and continually examine the need for additional production sites.

 

3) Creating New Businesses and Markets through Group-wide Synergy

 

The Kyocera Group operates many businesses. Our goal is to organically integrate Group-wide management resources and technologies to create new businesses and cultivate new markets ahead of our competitors. Moreover, we will pursue a broad synergy of technologies — not only between components and equipment (vertical integration), but also within components and materials (horizontal development). In so doing, we will aim to create competitive, high-value-added products.

 

Kyocera will promote its diversification by selecting strategic business areas on the basis of existing management resources, potential for group synergy, and current market position. Each business will promote strict profitability enhancement using “ Amoeba Management” and swift decision making to support the different strategies within each segment. Kyocera will improve profitability within each business and make strategic investments to achieve mid- to long-term growth.

 

On the basis of the above criteria, Kyocera will expand its production capacity for solar energy products and ceramic capacitors during fiscal 2008, from a medium-term perspective. We will also expand our semiconductor parts and information equipment businesses by making use of the Kyocera Group’s management resources and targeting greater market share by differentiating Kyocera from competitors.

 

We will continue to strengthen our management foundation by returning to the origins of “Amoeba Management” as we work to create new value. The management of the Kyocera Group is confident that these policies will lead to sales and profit growth over the medium to long term. We respectfully ask all shareholders and other stakeholders for their continued support and understanding of these endeavors to enhance Kyocera’s corporate value.

 

June 2007

 

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Noboru Nakamura, Chairman

 

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Makoto Kawamura, President

 

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Reporting Segments at a Glance

 

Components Business

   Sales increased by 11.9%, with an increase of more than 10% in all segments of the Components Business, compared with fiscal 2006 due to rising demand for digital consumer equipment such as mobile phone handsets, digital TVs and video game consoles. Operating profit increased by 34.6% as a result of improved productivity. Operating profit ratio was 16.1%.

 

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Fine Ceramic

Parts Group

 

Semiconductor

Parts Group

  Applied Ceramic Products Group  

Electronic Device

Group

Demand for ceramic components for semiconductor processing equipment increased.   Demand for ceramic packages used in mobile phone handsets and digital cameras increased.  

Sales of solar energy products increased in the European market.

Sales of medical materials and cutting tools increased.

 

Sales of capacitors, crystal-related components and connectors, expanded.

AVX Corporation, a U.S. subsidiary, improved its performance.

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Major products   Major products   Major products   Major products

Information & telecommunication components

Sapphire substrates

Semiconductor processing equipment components

LCD manufacturing equipment components

Automotive & ITS related components

General industrial ceramic components

 

Ceramic packages for surface mount devices

CCD/CMOS sensor packages

LSI packages

Optical communication device packages and components

Organic multilayer packages and substrates

 

Residential & industrial solar power generating systems

Solar cells and modules

Cutting tools

Printed circuit board micro drills

Jewelry & applied ceramic related products

Dental implants, artificial bone and joint prosthesis

 

Ceramic capacitors, tantalum capacitors

Timing devices (temperature compensated crystal oscillators, ceramic resonators, crystal units)

RF modules, surface acoustic wave (SAW) filters, Thermal printheads, LED printheads

Amorphous silicon drums, liquid crystal displays Connectors

 

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Equipment Business

   Sales increased by 7.8% compared with fiscal 2006 due to stronger results both in the Telecommunications Equipment Group and the Information Equipment Group. Increased sales of Information Equipment, combined with improved profitability from Telecommunications Equipment and Optical Equipment led to a 71.0% increase in operating profit compared with fiscal 2006.

 

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Telecommunications Equipment Group  

Information

Equipment Group

 

Optical

Equipment Group

  Others

Sales of new mobile phone handsets expanded.

Operating profit improved due to the positive effect of increased sales in Japan and improved profitability at Kyocera Wireless Corp., a U.S. subsidiary.

 

Sales outside Japan increased due to successful new models and marketing activities.

Yen’s depreciation against Euro and U.S. dollar had a positive impact.

 

Sales decreased due to the downsizing of the camera business.

Operating loss declined due to expenses from structural reforms.

 

Revenue from Kyocera Communications Systems, Co., Ltd. increased due to growth in the telecommunications engineering business.

Operating profit declined slightly as a result of impairment of goodwill at a Japanese subsidiary.

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Major products   Major products   Major products   Major products and services

CDMA mobile phone handsets

Personal handy phone system (PHS) related products (PHS mobile phone handsets, PHS base stations, high speed wireless data transmission systems)

 

ECOSYS printers

Copying machines

Multifunctional systems

  Optical modules and lenses  

Chemical materials for electronic components, electrical insulators, synthetic resin molded parts

Telecommunications engineering business, information and communication technology business

Management consulting business

Realty development business

 

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Business Outlook and Strategy

 

Fine Ceramic Parts Group

 

Demand for fine ceramic components used in semiconductor processing equipment is expected to remain high throughout the year ending March 31, 2008. Kyocera will strive for greater sales and market share by promoting new product development and strengthening its production systems in Japan.

 

Current applications for LED-related sapphire products concentrate on mobile phone handsets. However, applications are expected to expand to include PC backlights and monitors for automotive navigation systems in the near future. Kyocera is developing higher-quality, lower-cost sapphire products in response to these emerging opportunities.

 

We will expand sales of ceramic components for automotive applications. In response to rising environmental awareness, the market for diesel-engined vehicles is growing, particularly in Europe. Kyocera provides heater cores for glow plugs and piezo stacks for fuel-injection components that help improve combustion and reduce diesel emissions. Ceramic glow plugs with Kyocera’s heater core reach operating temperature almost instantly and offer excellent high-temperature durability— properties that cannot be provided with metal glow plugs. Kyocera’s piezo stacks further enhance combustion efficiency and reduce emissions by facilitating extremely precise control over fuel delivery at higher fuel-injection pressures.

 

Kyocera will also expand sales of automotive cameras, which offer excellent compactness and reliability; ceramic substrates and assemblies for automotive electronic control units (ECUs); and other strategic components for automotive applications.

 

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Semiconductor Parts Group

 

Taking advantage of our leading position in the ceramic packaging market, Kyocera will strive to expand this segment using its excellent production technologies and new product development capabilities. As components used in digital consumer products become increasingly compact, multifunctional and sophisticated, ceramic package performance must improve accordingly to support such technology trends.

 

Although our surface-mount device (SMD) packages and image-sensor packages already command significant market share, Kyocera will aim for expansion by reinforcing product development.

 

As part of our effort to grow through new markets and products, we will strengthen our business in optoelectronic components that support FTTH (Fiber To The Home) fiber-optic communications services. Additional effort will be devoted to the growing market for low-temperature co-fired ceramic (LTCC) substrates, which are used in high-frequency wireless communications devices. Kyocera is actively cultivating other new markets, including automotive components and medical equipment, to expand this business.

 

In addition to ceramics, we will strengthen our organic package business, which will drive growth of this segment over the medium term. Our specific efforts will include mass-producing high-performance flip-chip packages used in game consoles, which

will grow in demand throughout fiscal 2008. We will also focus on expanding sales of thinner and higher density System-in-a-Package (SiP) substrates, in the expectation that the rising sophistication of mobile phone handsets will boost demand for application processors.

 

Consolidating Kyocera’s position as a comprehensive package manufacturer through these initiatives will provide the foundation for medium-term business expansion.

 

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Applied Ceramic Products Group

 

Due to a worldwide shortage of purified silicon, Kyocera was challenged to increase production of solar cells in fiscal 2007. To ensure the continued development of this high-growth business, we established a raw-material procurement system capable of supporting our production expansion plans for the medium term, beginning in the latter half of fiscal 2008. We will increase capacity at our key production base for solar cells in Shiga, Japan, while expanding solar module assembly capacity in Japan, China, Mexico and the Czech Republic. Through such measures we plan to boost our production volume to 500 megawatts of solar modules per year by fiscal 2011, equivalent to three times our production volume in fiscal 2007. At the same time, we will strive to reduce production costs and raise profitability by making cells thinner.

 

We expect intense competition in the solar energy business. Nonetheless, Kyocera intends to maintain a leading position by capitalizing on our unique competitive advantages, which include an integrated production system that covers the entire spectrum of the business — from raw-material processing to installing finished systems. Kyocera’s other differentiating advantages include excellent quality, high reliability and an extensive sales network accumulated over more than 30 years in the solar industry.

 

Kyocera will expand its cutting tool business to support rising production among automotive manufacturers in Japan, Southeast Asia, China and Europe. We will aggressively introduce new products to capture a larger customer base and greater market share. Kyocera also aims to raise profits by capitalizing on its integrated production center in Japan, which incorporates all material processes, from raw-material processing to finished products; and by increasing production capacity in China.

 

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Electronic Device Group

 

Fiscal 2008 is expected to bring sustained growth in production of consumer electronics, including mobile phone handsets, digital TVs, PCs and game consoles. Kyocera consequently expects demand for electronic components to remain strong during the year, led by components used in higher frequency, multifunctional consumer products. To seize this business opportunity, Kyo-cera aims to expand its business with new products, including miniature, high-capacitance ceramic capacitors and smaller, lower-profile crystal units for surface-mount device (SMD) applications.

 

We will open a new plant for ceramic capacitors in Japan to ensure mid- to long-term growth in this segment — targeting a 20 percent increase in capacity during fiscal 2008, with a mid-term plan to double our current production capacity in Japan. We will also reinforce the synergy between Kyo-cera Corporation and AVX Corporation in our global marketing of key electronic components. Profit enhancements will be targeted through cost reduction and more effective use of production facilities in China.

 

In thin-film devices, R&D has focused on organic light-emitting diode (OLED) displays, and preparations to commercialize this business will continue.

 

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Telecommunications Equipment Group

 

In fiscal 2008, we forecast slowing growth in the Japanese mobile phone handset market, but will strive to increase market share by launching new models. The slim W44K handset introduced in fiscal 2007 to strong sales was a good example of our product development strategy. We intend to release additional mobile handsets with superior performance and designs that anticipate the market’s evolving needs.

 

U.S. subsidiary Kyocera Wireless Corp. (KWC), which has struggled with profitability challenges, was profitable for the final three quarters of fiscal 2007. In fiscal 2008, KWC will strive to improve profitability by increasing market share at existing customers and winning more carriers with new models in the U.S. and other markets.

 

In the PHS-related business, we will concentrate on the Japanese market in fiscal 2008, aiming for increased market share by launching new handset models covering the spectrum from entry-level to sophisticated. In iBurst, a wireless broadband equipment business, Kyocera will cultivate new markets in the U.S., Russia and India for iBurst, an affordable, high-performance wireless broadband system.

 

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Information Equipment Group

 

We will differentiate our information equipment business on the basis of the ECOSYS concept, which is unique to Kyocera. Designed around our amorphous silicon photoconductor drum, with its extremely hard, durable surface, ECOSYS products offer outstanding reliability; a long-life print engine; lower running costs; and the eco-friendly benefit of reduced disposable waste. ECOSYS products thus help customers reduce their costs while promoting environmental preservation.

 

In fiscal 2008, the continued market transition from monochrome to color document equipment is expected to bring replacement demand for printers and multifunctional systems in developed markets even if the user base does not grow. Kyocera will continue to strengthen its business by introducing high quality, high speed color models into the market.

 

Moreover, we will introduce new products equipped with advanced technology that meet the corporate responsibility needs of the Sarbanes Oxley (SOX) Compliance. Our goal is to provide a central input/output device for the office environment capable of managing all document-imaging needs, in full color.

 

We will also introduce high-value-added monochrome models equipped for multiple document solutions in the European, Japanese and U.S. markets. In the BRIC markets (Brazil, Russia, India and China), we will focus on expanding sales with affordable entry-level models.

 

Research and Development

 

Kyocera is devoting substantial R&D resources for the development of new models based on the ECOSYS concept. In fiscal 2008 we will establish a new R&D center to unify various technologies for product design advancements, the development of image and electrophotography processing, printing controllers and software. The new R&D center will help accelerate our development of elemental technology and improve our collective strength and mobility.

 

Major development goals include strengthening our product line with color capability and solution functionality. Additionally, we will further improve our document management system, security and other coordination functions using “WiseCore,” Kyocera’s proprietary controller platform, which was released in fiscal 2007 to meet the growing needs of IT infrastructure.

 

Kyocera will expand its product line with high-reliability color models based on the advanced material technologies of the ECOSYS concept to achieve higher speeds and better image quality.

 

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Others

 

Expansion efforts within Kyocera’s Others segment will focus primarily on Kyocera Communication Systems Co., Ltd. (KCCS) and Kyocera Chemical Corporation (KCC), the segment’s major subsidiaries.

 

KCCS derives most of its revenue from information & communication technology (ICT) services and telecommunications engineering. In the ICT business, which includes systems integration and security solutions, KCCS seek to enhance profitability on a project-by-project basis. Among its telecommunications engineering services, KCCS installs, maintains and monitors base stations for mobile and wireless networks. The company regards Japan’s rising investment in mobile communications infrastructure as an opportunity to expand this business and will work to further increase its market share.

 

At KCC, resin products and sealants for semiconductors are a major product line. To seize opportunities for business expansion, KCC will make capital investments in this area in fiscal 2008 in response to increasing demand for these products. KCC will also strive to expand sales of magnesium-molded parts used in notebook personal computers and other devices. Meanwhile, KCC will offer continued synergies within the Kyocera Group through materials development in such fields as resins for miniature tantalum capacitors; ceramic capacitor electrodes; and polishing discs for crystal and sapphire substrates.

 

Commencing in fiscal 2008, the “Optical Equipment Group,” previously a separate reporting segment, will be reclassified under “Others.” We are striving to expand this business by integrating the Kyocera Group’s lens design and manufacturing technologies with our extensive electronic device expertise. Specifically, we will develop optical components for semiconductor processing equipment, digital cameras, scanners, data projectors and related products, and promote sales of these components. To reduce production costs and improve profitability, Kyocera will enhance its manufacturing activities for these products in China.

 

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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 its 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-today operations. Its principles demand impartial, fair and totally transparent management while placing emphasis on 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 this Philosophy, all employees are provided with an opportunity to receive education and materials devoted to its principles and practice. Through this education, employees acquire the ability to observe and implement the Kyocera Philosophy in the workplace. In fiscal 2007, Kyocera managers and employees in Japan had attended training and education sessions designed to promote deeper understanding of the Kyocera Philosophy, with a cumulative total of approximately 23,000 participations in such sessions. Additionally, a total of approximately 11,000 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 in June 2003 to enhance the efficiency and effectiveness of its business management. 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 the Articles of Incorporation approved by its shareholders meeting, Kyocera established the Corporate Auditors and a Board of Corporate Auditors to regularly evaluate Kyocera Group business conduct. These consist 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 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 has 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.

 

LOGO

 

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NYSE Corporate Governance Standards

 

Companies listed on the New York Stock Exchange (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 a majority “outside” corporate auditors 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 other employee of Kyocera Corporation or any of its subsidiaries previously.

 

As of March 31, 2007, Kyocera Corporation had five corporate auditors, of whom three were 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.        

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 audit 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.

 

Kyocera Corporation and other large Japanese companies, other than those which adopt a committee system under Japan’s company law or which adopt restrictions on share transfer, are required to have at least three corporate auditors. As of March 31, 2007, Kyocera Corporation had 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 proposal for each of such total amount of compensation is approved at the general meeting of shareholders, each of the board of directors and board of corporate auditors allocates the respective total amount among its 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, often 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 the purpose of granting stock options to their officers, etc. Typically, when stock acquisition rights are used for such purpose, 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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Table of Contents

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 new concept or value system, but is rather a question of putting the Kyocera Philosophy into action. Kyo-cera’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

 

Kyocera has a CSR Committee and a 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

 

Kyocera has adopted an 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 these 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/2007.html

 

In Japanese:

 

http://www.kyocera.co.jp/ecology/2007.html

 

16


Table of Contents

Financial Section

 

Contents

 

18

   Operating and Financial Review and Prospects

35

   Selected Financial Data

35

   Market Price and Dividend Data

36

   Consolidated Balance Sheets

38

   Consolidated Statements of Income

39

   Consolidated Statements of Stockholders’ Equity

40

   Consolidated Statements of Cash Flows

41

   Notes to The Consolidated Financial Statements

70

   Controls and Procedures

71

   Report of Independent Registered Public Accounting Firm

 

17


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 2007

 

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

 

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

 

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

 

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

 


 

Operating Results

 

Overview

 

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

 

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

 

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

 

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Table of Contents

Results of operations

 

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

 

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

 
     Years ended March 31,

   

Increase

(Decrease)


 
     2006

    2007

   
     Amount

    %

    Amount

    %

    %

 

Net sales

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

Cost of sales

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


 

 


 


 

 

Gross profit

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

Selling, general and administrative expenses

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


 

 


 


 

 

Profit from operations

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

Other income (expense):

                                          

Interest and dividend income

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

Interest expense

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

Foreign currency transaction losses, net

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

Equity in (losses) earnings of affiliates and unconsolidated subsidiaries

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

Gains on sales and maturities of securities, net

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

Gains on exchange for the shares

     5,294     0.4       24       203     0.0     (99.5 )

Gain on sale of investment in an affiliate

     6,931     0.6       26       220     0.0     (99.6 )

Loss on impairment of investment in an affiliate

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

Other, net

     1,180     0.1       1,188       10,068     0.1     0.7  
    


 

 


 


 

 

       17,542     1.5       21,438       181,678     1.7     22.2  
    


 

 


 


 

 

Income from continuing operations before income taxes and minority interests

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

Income taxes

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


 

 


 


 

 

Income from continuing operations before minority interests

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


 

 


 


 

 

Minority interests

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

Income from continuing operations

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

Income from discontinued operations

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


 

 


 


 

 

Net income

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


 

 


 


 

 

 

Note 1. Kyocera sold its entire shares in Kyocera Leasing Co., Ltd. (KLC), a subsidiary engaged in financing services; as a result, business results and profit on sales for KLC for fiscal 2007 have been recorded as income from discontinued operations in conformity with Statement of Financial Accounting Standards (SFAS) No.144, “Accounting for the impairment or disposal of Long-Lived Assets.” Figures for fiscal 2006 have been retrospectively reclassified for comparative purposes. As a result, reclassified consolidated net sales for fiscal 2006 decreased by ¥7,945 million compared with the result previously reported, reclassified profit from operations decreased by ¥3,512 million and income from continuing operations before income taxes and minority interests for fiscal 2006 decreased by ¥4,151 million, respectively.

 

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Table of Contents

Net sales

 

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

 

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

 

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

 

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

 

Net sales by reporting segment

 

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

 

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

 
     Years ended March 31,

   

Increase

(Decrease)


 
     2006

    2007

   
     Amount

    %

    Amount

    %

    %

 

Fine Ceramic Parts Group

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

Semiconductor Parts Group

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

Applied Ceramic Products Group

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

Electronic Device Group

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


 

 


 


 

 

Total Components Business

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

Telecommunications Equipment Group

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

Information Equipment Group

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

Optical Equipment Group

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


 

 


 


 

 

Total Equipment Business

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

Others

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

Adjustments and eliminations

     (19,047 )   (1.6 )     (24,304 )     (205,966 )   (1.9 )   —    
    


 

 


 


 

 

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


 

 


 


 

 

 

Note 2. Commencing in fiscal 2007, the Precision Machine Division of Kyocera Corporation, formerly included within “Corporate,” has been reclassified into “Others.” Accordingly, previously reported results of these reporting segments for fiscal 2006 have been retrospectively reclassified.

 

Note 3. For the reasons set forth in Note 1 and Note 2, net sales of “Others” in fiscal 2006 decreased by ¥7,565 million and “Adjustments and eliminations” increased by ¥(380) million compared with those previously reported.

 

(1) Fine Ceramic Parts Group

 

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

 

(2) Semiconductor Parts Group

 

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

 

(3) Applied Ceramic Products Group

 

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

 

(4) Electronic Device Group

 

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

 

(5) Telecommunications Equipment Group

 

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

 

 

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(6) Information Equipment Group

 

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

 

(7) Optical Equipment Group

 

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

 

(8) Others

 

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

 

Net sales by geographic segment

 

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

 

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

     Years ended March 31,

   Increase
     2006

   2007

   (Decrease)

     Amount

   %

   Amount

   %

   %

Japan

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

United States of America

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

Asia

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

Europe

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

Others

     69,731    6.0      85,188      721,932    6.6    22.2
    

  
  

  

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

  
  

  

  
  

 

Note 4. For the reasons set forth in Note 1, consolidated sales in Japan in fiscal 2006 decreased by ¥7,945 million, compared with those previously reported.

 

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

 

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

 

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

 

Cost of sales and gross profit

 

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

 

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

 

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

 

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SG&A expenses and profit from operations

 

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

 

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

 

Interest and dividend income

 

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

 

Interest expense

 

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

 

Foreign currency translation

 

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

 

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

 

Gains and losses from investments

 

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

 

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

 

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

 

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

 

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

 

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

 

Income from continuing operations before income taxes

 

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

 

 

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Operating profit by reporting segment

 

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

 

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

 
     Years ended March 31,

  

Increase

(Decrease)


 
     2006

   2007

  
     Amount

    %

   Amount

    %

   %

 

Fine Ceramic Parts Group

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

Semiconductor Parts Group

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

Applied Ceramic Products Group

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

Electronic Device Group

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


 
  


 


 
  

Total Components Business

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

Telecommunications Equipment Group

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

Information Equipment Group

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

Optical Equipment Group

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


 
  


 


 
  

Total Equipment Business

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

Others

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


 
  


 


 
  

Operating profit

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

Corporate

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

Equity in (losses) earnings of affiliates and unconsolidated subsidiaries

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

Adjustments and eliminations

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


 
  


 


 
  

Income from continuing operations before income taxes

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


 
  


 


 
  

 

Note 5. For the reasons set forth in Note 1 and Note 2, operating profit of “Others” in fiscal 2006 decreased by ¥3,577 million, “Corporate” decreased by ¥573 million and “Adjustments and eliminations” increased by ¥(1) million compared with those previously announced.

 

(1) Fine Ceramic Parts Group

 

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

 

(2) Semiconductor Parts Group

 

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

 

(3) Applied Ceramic Products Group

 

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

 

(4) Electronic Device Group

 

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

 

(5) Telecommunications Equipment Group

 

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

 

(6) Information Equipment Group

 

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

 

(7) Optical Equipment Group

 

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

 

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(8) Others

 

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

 

Corporate

 

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

 

Taxes

 

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

 

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

 

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

 

Minority interests

 

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

 

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

 

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

 

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

 

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Table of Contents

Liquidity and Capital Resources

 

Capital resources

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Cash flows

 

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

 

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

 
     Years ended March 31,

    Increase

 
     2006

    2007

    (Decrease)

 
     Amount

    Amount

    %

 

Cash flows from operating activities

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

Cash flows from investing activities

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

Cash flows from financing activities

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

Cash and cash equivalents at end of year

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

 

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

 

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

 

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

 

Net cash used in financing activities in fiscal 2007 decreased by ¥2,644 million ($22 million), or 11.4%, to ¥20,645 million ($175 million) from ¥23,289 million in fiscal 2006. This was due to an increase by ¥5,327 million ($45 million) in sale of treasury stock by exercises of stock options and a decrease in payments of long-term debt, which exceeded decreases in proceeds from short-term borrowings and long-term debt. On August 1, 2006, Kyocera sold its shares in KLC, a subsidiary engaged in financing services. As a result, both the amounts of proceed from insurance of short-tem and long-term debts, and the amounts of payments of short-term and long-term debt, which are included in financial activities, will decrease in fiscal 2008 and afterwards, however, such decreases will not have significant effects on Kyocera’s cash flows in total. See Note 3 to the Consolidated Financial Statements in this annual report.

 

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

 

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

 

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Table of Contents

Assets, liabilities and stockholders’ equity

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Table of Contents

Significant customer

 

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

 

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

 

Tabular disclosure of contractual obligations

 

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

 

     (Yen in millions)

Contractual obligations


   Less than
1 year


   2-3 years

   4-5 years

   Thereafter

   Total

Short-term borrowings

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

Interest payments for short-term borrowings *

     788      —        —        —        788

Long-term debt (including due within one year)

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

Interest payments for long-term debt *

     270      268      110      47      695

Supply agreement material used in operation

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

Operating Leases

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

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

     12,542      3,351      —        —        15,893
    

  

  

  

  

Total Contractual Obligations

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

  

  

  

  

     (U.S. dollars in thousands)

Contractual obligations


   Less than
1 year


   2-3 years

   4-5 years

   Thereafter

   Total

Short-term borrowings

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

Interest payments for short-term borrowings *

     6,678      —        —        —        6,678

Long-term debt (including due within one year)

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

Interest payments for long-term debt *

     2,288      2,273      932      398      5,891

Supply agreement material used in operation

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

Operating Leases

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

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

     106,288      28,398      —        —        134,686
    

  

  

  

  

Total Contractual Obligations

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

  

  

  

  

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

 

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

 

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Quantitative and Qualitative Disclosures About Market Risk

 

Kyocera is exposed to market risk, including changes in foreign currency 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. On August 1, 2006, Kyocera sold 100% of the shares of KLC, a subsidiary engaged financial services. As a result of this transaction, Kyocera recognized no financial receivables as well as significant decrease of debts on its consolidated balance sheet at March 31, 2007, which led to quantitative change in market risk exposure by a significant decrease in interest rate risk at March 31, 2007, when compared to March 31, 2006. 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, 2007, which include hedge accounting, 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

   ¥ 52,113     ¥ 51,598     ¥ 31,211

Fair value

     (288 )     (1,034 )     59

Weighted average contractual rates

     0.009       0.007       1.957
    

(Yen in millions) (Receive/Pay)

(Except average contractual rates)


Forward exchange contracts to purchase foreign currencies    Yen/US$     US$/Yen     CZK/STG

Contract amounts

   ¥ 8,152     ¥ 6,603     ¥ 5,790

Fair value

     108       (59 )     7

Weighted average contractual rates

     117.979       0.008       41.305
     (U.S. dollars in thousands) (Pay/Receive)

Forward exchange contracts to sell foreign currencies    US$/Yen     Euro/Yen     US$/STG

Contract amounts

   $ 441,636     $ 437,271     $ 264,500

Fair value

     (2,441 )     (8,763 )     500
     (U.S. dollars in thousands) (Receive/Pay)

Forward exchange contracts to purchase foreign currencies    Yen/US$     US$/Yen     CZK/STG

Contract amounts

   $ 69,085     $ 55,958     $ 49,068

Fair value

     915       (500 )     59

 

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Table of Contents

Interest rate risk

 

Kyocera may enter into interest rate swaps and other contracts to reduce market risk exposure to changes in interest rates.

 

The tables below provide information about Kyocera’s financial instruments that are sensitive to changes in interest rates.

 

Long term debt (including due within one year)     (Yen in millions)
           Expected maturity date

         
    

Average

pay rate


    2008

   2009

   2010

   2011

   2012

   Thereafter

   Total

   Fair value

Loans, principally from banks

   2.75 %   ¥ 5,853    1,899    1,488    1,370    1,020    1,506    ¥ 13,136    ¥ 13,165
Long term debt (including due within one year)    

(U.S dollars in thousands)

           Expected maturity date

         
    

Average

pay rate


    2008

   2009

   2010

   2011

   2012

   Thereafter

   Total

   Fair value

Loans, principally from banks

   2.75 %   $ 49,602    16,093    12,610    11,610    8,644    12,763    $ 111,322    $ 111,568

 

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 ¥312,724 million ($2,650 million), included ¥289,853 million ($2,456 million) derived from a rise in the market price of KDDI shares held by Kyocera Corporation. Detailed information appears in Note 4 to the Consolidated Financial Statements included in this annual report. Kyocera evaluates whether declines in fair value of debt and equity securities with readily determinable fair values are other-than-temporary. Other-than-temporary declines in fair value are recorded as a realized loss with a new cost basis. This evaluation is based mainly on the duration and the extent to which the fair value is less than cost and 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, 2005, 2006 and 2007 amounted to ¥1 million, ¥113 million and ¥797 million ($7 million), respectively. At March 31, 2007, Kyocera held the following available-for-sale marketable equity and debt securities.

 

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

     March 31, 2007

     Cost

   Fair Value

   Cost

   Fair Value

Due within 1 year

   ¥ 24,168    ¥ 24,295    $ 204,814    $ 205,890

Due after 1 year to 5 years

     52,338      52,391      443,542      443,991

Due after 5 years

     1,899      1,921      16,093      16,280

Equity securities

     272,653      585,274      2,310,619      4,959,949
    

  

  

  

     ¥ 351,058    ¥ 663,881    $ 2,975,068    $ 5,626,110
    

  

  

  

 

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Research and Development Activities

 

Kyocera aims continuously at expanding sales and boosting profitability in its Components and Equipment Businesses. To achieve these objectives, Kyocera seeks to create new technologies, products and businesses by integrating group-wide management resources while advancing and focusing technological capabilities.

 

Kyocera will channel its energies into two high-growth-potential areas; namely, the markets for telecommunications and information processing and for environmental preservation. R&D activities are conducted in all of these markets in the realms of materials, components, devices and equipment.

 

Specific initiatives in each reporting segment are as follows.

 

(1) Fine Ceramic Parts Group

 

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

 

(2) Semiconductor Parts Group

 

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

 

(3) Applied Ceramic Products Group

 

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

 

(4) Electronic Device Group

 

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

 

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

 

(5) Telecommunications Equipment Group

 

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

 

*

iBurstTM is a trademark of ArrayComm, Inc.

 

(6) Information Equipment Group

 

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

 

(7) Optical Equipment Group

 

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

 

(8) Others

 

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

 

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

 

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Table of Contents

R&D expenses by reporting segment are as follows.

 

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

 
     Years ended March 31,

      
     2006

    2007

  

Increase

(Decrease)


 
     Amount

    Amount

   %

 

Fine Ceramic Parts Group

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

Semiconductor Parts Group

     3,549       3,757       31,839    5.9  

Applied Ceramic Products Group

     3,923       4,138       35,068    5.5  

Electronic Device Group

     10,940       12,123       102,737    10.8  
    


 


 

  

Total Components Business

     21,519       23,787       201,585    10.5  

Telecommunications Equipment Group

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

Information Equipment Group

     16,416       17,983       152,398    9.5  

Optical Equipment Group

     1,079       585       4,958    (45.8 )
    


 


 

  

Total Equipment Business

     32,808       33,691       285,517    2.7  

Others

     3,109       3,622       30,695    16.5  
    


 


 

  

R&D expenses

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


 


 

  

% to net sales

     4.9 %     4.8 %     —      —    

 

Critical Accounting Policies and Estimates

 

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

 

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

 

Allowances for doubtful accounts

 

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

 

Inventory valuation

 

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

 

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

 

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

 

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Impairment of securities and investments

 

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

 

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

 

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

 

Impairment of long-lived assets

 

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

 

Goodwill and other intangible assets

 

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

 

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

 

Deferred tax assets

 

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

 

Benefit plans

 

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

 

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

 

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Table of Contents

Sensitivity analysis of benefit plans

 

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

 

     (Yen in millions)

 
     Effect on PBO
as of March 31, 2007


    Effect on income before
income taxes for the year ending
March 31, 2008


 

Discount rates

                

0.25% decrease

   ¥ 3,411     ¥ (86 )

0.25% increase

     (3,280 )     89  

Expected rate of return on plan assets

                

0.25% decrease

     —         (285 )

0.25% increase

     —         285  

 

Contingencies

 

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

 

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

 

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

 

Revenue recognition

 

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

 

Sales returns

 

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

 

Products warranty

 

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

 

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Table of Contents

Recently Issued Accounting Standards

 

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

 

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

 

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

 

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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)

     2003

   2004

   2005

   2006

   2007

   2007

For the years ended March 31:

                                         

Net sales

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

Profit from operations

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

Income from continuing operations

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

Income before cumulative effect of change in accounting principle

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

Net income

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

  

  

  

  

  

Earnings per share (B):

                                         

Income from continuing operations:

                                         

Basic

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

Diluted

     213.76      339.45      227.47      352.21      537.35      4.55

Income before cumulative effect of change in accounting principle:

                                         

Basic

     233.02      364.79      244.86      371.68      566.03      4.80

Diluted

     232.97      364.78      244.81      371.43      564.79      4.79

Net income:

                                         

Basic

     220.91      364.79      244.86      371.68      566.03      4.80

Diluted

     220.86      364.78      244.81      371.43      564.79      4.79

Weighted average number of shares outstanding:

                                         

Basic

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

Diluted

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

Cash dividends declared per share (B):

                                         

Per share of common stock

     60.00      60.00      80.00      100.00      110.00      0.93
    

  

  

  

  

  

At March 31:

                                         

Total assets

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

Long-term debt

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

Common stock

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

Stockholders’ equity

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

  

  

  

  

  

Depreciation

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

Capital expenditures

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

  

  

  

  

  

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

                                         

Period-end

   ¥ 118.07    ¥ 104.18    ¥ 107.22    ¥ 117.48    ¥ 117.56       

Average

     121.94      112.75      107.49      113.15      116.92       

High

     133.40      120.55      114.30      120.93      121.81       

Low

     115.71      104.18      102.26      104.41      110.07       
    

  

  

  

  

      

 

(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

 

         2006

         1st

   2nd

   3rd

   4th

Common Stock:

                               

Market price per share (A)

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

Cash dividends paid per share

         50.00      —        50.00      —  

American Depositary Share:

                               

Market price per share (B)

  – High    $ 78.45    $ 78.02    $ 74.27    $ 91.59
    – Low      67.20      69.01      62.58      73.33

Cash dividends paid per share (C)

         0.45      —        0.41      —  
                                 
         2007

          

1st

    

2nd

    

3rd

    

4th

Common Stock:

                               

Market price per share (A)

  – High    ¥ 11,590    ¥ 10,250    ¥ 11,310    ¥ 11,480
    – Low      8,180      8,300      9,970      10,040

Cash dividends paid per share

         50.00      —        50.00      —  

American Depositary Share:

                               

Market price per share (B)

  – High    $ 98.01    $ 87.75    $ 95.51    $ 95.65
    – Low      71.73      71.85      86.52      86.43

Cash dividends paid per share (C)

         0.43      —        0.43      —  

 

(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

 

 

35


Table of Contents

Consolidated Balance Sheets

Kyocera Corporation and Consolidated Subsidiaries

March 31, 2006 and 2007

 

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

 

ASSETS


   2006

    2007

    2007

 

Current assets:

                        

Cash and cash equivalents (Note 13)

   ¥ 300,809     ¥ 282,208     $ 2,391,593  

Short-term investments (Notes 4 and 13)

     87,942       213,495       1,809,280  

Trade receivables (Notes 7):

                        

Notes

     24,597       25,033       212,144  

Accounts

     210,393       236,380       2,003,220  

Short-term finance receivables (Notes 3, 5 and 13)

     39,505       —         —    
    


 


 


       274,495       261,413       2,215,364  

Less allowances for doubtful accounts and sales returns

     (7,425 )     (5,960 )     (50,508 )
    


 


 


       267,070       255,453       2,164,856  

Inventories (Notes 6)

     190,564       209,188       1,772,780  

Deferred income taxes (Note 16)

     40,411       45,390       384,661  

Other current assets

     33,872       40,757       345,398  
    


 


 


Total current assets

     920,668       1,046,491       8,868,568  
    


 


 


Investments and advances:

                        

Investments in and advances to affiliates and unconsolidated subsidiaries (Note 7)

     7,355       10,093       85,534  

Securities and other investments (Notes 4 and 13)

     553,377       690,568       5,852,271  
    


 


 


       560,732       700,661       5,937,805  

Long-term finance receivables (Notes 3, 5 and 13)

     80,970       —         —    

Property, plant and equipment, at cost (Note 9):

                        

Land

     58,286       56,806       481,407  

Buildings

     249,506       261,998       2,220,322  

Machinery and equipment

     697,383       729,636       6,183,356  

Construction in progress

     13,473       7,362       62,390  
    


 


 


       1,018,648       1,055,802       8,947,475  

Less accumulated depreciation

     (733,302 )     (774,896 )     (6,566,916 )
    


 


 


       285,346       280,906       2,380,559  

Goodwill (Note 8)

     31,351       32,894       278,763  

Intangible assets (Note 8)

     31,227       24,657       208,958  

Other assets (Notes 10 and 16)

     21,228       44,855       380,127  
    


 


 


     ¥ 1,931,522     ¥ 2,130,464     $ 18,054,780  
    


 


 


 

The accompanying notes are an integral part of these statements.

 

36


Table of Contents

 

            LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ EQUITY                


   2006

    2007

    2007

 

Current liabilities:

                        

Short-term borrowings (Notes 3, 9 and 13)

   ¥ 90,865     ¥ 15,250     $ 129,237  

Current portion of long-term debt (Notes 3, 9 and 13)

     16,347       5,853       49,602  

Notes and accounts payable:

                        

Trade

     103,503       100,295       849,958  

Other

     51,997       49,134       416,390  

Accrued liabilities:

                        

Payroll and bonus

     37,998       41,680       353,220  

Income taxes

     27,658       36,475       309,110  

Other

     31,414       33,391       282,975  

Other current liabilities (Note 16)

     18,841       24,110       204,322  
    


 


 


Total current liabilities

     378,623       306,188       2,594,814  
    


 


 


Long-term debt (Notes 3, 9 and 13)

     33,360       7,283       61,720  

Accrued pension and severance liabilities (Note 10)

     27,092       16,297       138,110  

Deferred income taxes (Note 16)

     125,686       206,858       1,753,034  

Other non-current liabilities

     12,742       12,355       104,703  
    


 


 


Total liabilities

     577,503       548,981       4,652,381  
    


 


 


Minority interests in subsidiaries

     64,942       66,923       567,144  

Commitments and contingencies (Notes 14)

                        

Stockholders’ equity (Note 15):

                        

Common stock:

                        

Authorized 600,000 shares

                        

Issued 191,309 shares

     115,703       115,703       980,534  

Additional paid-in capital

     161,994       162,363       1,375,958  

Retained earnings

     967,576       1,055,293       8,943,161  

Accumulated other comprehensive income

     72,947       203,056       1,720,814  

Common stock in treasury, at cost (Note 11):
3,554 shares at March 31, 2006 and 2,660 shares at March 31, 2007

     (29,143 )     (21,855 )     (185,212 )
    


 


 


Total stockholders’ equity

     1,289,077       1,514,560       12,835,255  
    


 


 


     ¥ 1,931,522     ¥ 2,130,464     $ 18,054,780  
    


 


 


 

The accompanying notes are an integral part of these statements.

 

37


Table of Contents

Consolidated Statements of Income

Kyocera Corporation and Consolidated Subsidiaries

For the three years ended March 31, 2007

 

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

 

     2005

    2006

    2007

    2007

 

Net sales (Note 7)

   ¥ 1,173,660     ¥ 1,173,544     ¥ 1,283,897     $ 10,880,483  

Cost of sales

     852,527       835,042       900,470       7,631,102  
    


 


 


 


Gross profit

     321,133       338,502       383,427       3,249,381  

Selling, general and administrative expenses

     223,473       238,807       248,325       2,104,449  
    


 


 


 


Profit from operations

     97,660       99,695       135,102       1,144,932  

Other income (expenses):

                                

Interest and dividend income

     6,443       8,990       15,472       131,119  

Interest expense (Note 12)

     (1,275 )     (1,301 )     (1,647 )     (13,958 )

Foreign currency transaction gains (losses), net (Note 12)

     2,606       (316 )     (65 )     (551 )

Equity in (losses) earnings of affiliates and unconsolidated subsidiaries (Note 7)

     (1,678 )     (1,216 )     2,621       22,212  

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

     (2,084 )     1,472       3,819       32,365  

Gains on exchange for the shares (Note 4)

     —         5,294       24       203  

Gain on sale of investment in an affiliate (Note 7)

     —         6,931       26       220  

Loss on impairment of investment in an affiliate (Note 7)

     —         (3,492 )     —         —    

Other, net

     2,341       1,180       1,188       10,068  
    


 


 


 


       6,353       17,542       21,438       181,678  
    


 


 


 


Income from continuing operations before income taxes and minority interests

     104,013       117,237       156,540       1,326,610  

Income taxes (Note 16):

                                

Current (Note 14)

     52,606       46,240       53,765       455,636  

Deferred

     5,608       520       (4,878 )     (41,339 )
    


 


 


 


       58,214       46,760       48,887       414,297  
    


 


 


 


Income from continuing operations before minority interests

     45,799       70,477       107,653       912,313  

Minority interests

     (3,142 )     (4,389 )     (6,324 )     (53,593 )
    


 


 


 


Income from continuing operations

     42,657       66,088       101,329       858,720  

Income from discontinued operations (Notes 3, 12 and 18)

     3,251       3,608       5,175       43,856  
    


 


 


 


Net income

   ¥ 45,908     ¥ 69,696     ¥ 106,504     $ 902,576  
    


 


 


 


Earnings per share (Note 19):

                                

Income from continuing operations:

                                

Basic

   ¥ 227.52     ¥ 352.44     ¥ 538.52     $ 4.56  

Diluted

     227.47       352.21       537.35       4.55  

Income from discontinued operations:

                                

Basic

     17.34       19.24       27.51       0.24  

Diluted

     17.34       19.22       27.44       0.24  

Net income:

                                

Basic

     244.86       371.68       566.03       4.80  

Diluted

     244.81       371.43       564.79       4.79  

Cash dividends declared per share:

                                

Per share of common stock

     80.00       100.00       110.00       0.93  

Weighted average number of shares of common stock outstanding:

                                

Basic

     187,489       187,514       188,160          

Diluted

     187,528       187,640       188,573          

 

The accompanying notes are an integral part of these statements.

 

 

38


Table of Contents

Consolidated Statements of Stockholders’ Equity

Kyocera Corporation and Consolidated Subsidiaries

For the three years ended March 31, 2007

 

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

 

     Common
Stock


   Additional
Paid-in
Capital


    Retained
Earnings
(Note 15)


    Accumulated Other
Comprehensive Income
(Note 15)


    Treasury Stock
(Notes 11 and 15)


    Comprehensive
Income


 

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 10)

                            (152 )             (152 )

Net unrealized losses on securities - net of taxes of ¥11,909 (Note 4)

                            (18,441 )             (18,441 )

Reclassification adjustments for net losses on securities - net of taxes of ¥1,234 (Note 4)

                            1,661               1,661  

Net unrealized losses on derivative financial instruments (Note 12)

                            (27 )             (27 )

Reclassification adjustments for net losses on derivative financial instruments (Note 12)

                            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 10)

                            (428 )             (428 )

Net unrealized gains on securities - net of taxes of ¥29,400 (Note4)

                            42,054               42,054  

Reclassification adjustments for net gains on securities - net of taxes of ¥1,206 (Note 4)

                            (1,866 )             (1,866 )

Net unrealized losses on derivative financial instruments (Note 12)

                            (75 )             (75 )

Reclassification adjustments for net losses on derivative financial instruments (Note 12)

                            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 )        

Net income for the year

                    106,504                     ¥ 106,504  

Foreign currency translation adjustments

                            10,474               10,474  

Minimum pension liability adjustment - net of taxes of ¥108 (Note 10)

                            (82 )             (82 )

Net unrealized gains on securities - net of taxes of ¥70,986 (Note 4)

                            103,334               103,334  

Reclassification adjustments for net gains on securities - net of taxes of ¥6 (Note 4)

                            (1,313 )             (1,313 )

Net unrealized gains on derivative financial instruments (Note 12)

                            89               89  

Reclassification adjustments for net losses on derivative financial instruments (Note 12)

                            49               49  
                                           


Total comprehensive income for the year

                                          ¥ 219,055  
                                           


Adjustment for initially applying SFAS No. 158 - net of taxes of ¥12,035 (Note 10)

                            17,558                  

Cash dividends

                    (18,787 )                        

Purchase of treasury stock (24)

                                    (251 )        

Reissuance of treasury stock (918)

            127                       7,539          

Stock option plans of subsidiaries

            242                                  
    

  


 


 


 


       

Balance, March 31, 2007 (188,649)

   ¥ 115,703    ¥ 162,363     ¥ 1,055,293     ¥ 203,056     ¥ (21,855 )        
    

  


 


 


 


       

Balance, March 31, 2006

   $ 980,534    $ 1,372,831     $ 8,199,797     $ 618,195     $ (246,975 )        

Net income for the year

                    902,576                     $ 902,576  

Foreign currency translation adjustments

                            88,763               88,763  

Minimum pension liability adjustment - net of taxes of $915 (Note 10)

                            (695 )             (695 )

Net unrealized gains on securities - net of taxes of $601,576 (Note4)

                            875,712               875,712  

Reclassification adjustments for net gains on securities - net of taxes of $51 (Note 4)

                            (11,127 )             (11,127 )

Net unrealized gains on derivative financial instruments (Note 12)

                            754               754  

Reclassification adjustments for net losses on derivative financial instruments (Note 12)

                            415               415  
                                           


Total comprehensive income for the year

                                          $ 1,856,398  
                                           


Adjustment for initially applying SFAS No. 158 - net of taxes of $ 101,992 (Note 10)

                            148,797                  

Cash dividends

                    (159,212 )                        

Purchase of treasury stock

                                    (2,127 )        

Reissuance of treasury stock

            1,076                       63,890          

Stock option plans of subsidiaries

            2,051                                  
    

  


 


 


 


       

Balance, March 31, 2007

   $ 980,534    $ 1,375,958     $ 8,943,161     $ 1,720,814     $ (185,212 )        
    

  


 


 


 


       

 

The accompanying notes are an integral part of these statements.

 

 

39


Table of Contents

Consolidated Statements of Cash Flows

Kyocera Corporation and Consolidated Subsidiaries

For the three years ended March 31, 2007

 

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

 

     2005

    2006

    2007

    2007

 

Cash flows from operating activities:

                                

Net income

   ¥ 45,908     ¥ 69,696     ¥ 106,504     $ 902,576  

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

                                

Depreciation and amortization

     65,909       73,186       82,182       696,457  

Provision for doubtful accounts

     (18 )     (466 )     (494 )     (4,186 )

Write-down of inventories

     10,405       8,446       11,328       96,000  

Deferred income taxes

     5,608       (218 )     (4,878 )     (41,339 )

Minority interests

     3,142       4,389       6,324       53,593  

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

     2,037       (1,652 )     (3,819 )     (32,365 )

Equity in losses (earnings) of affiliates and unconsolidated subsidiaries (Note 7)

     1,678       1,216       (2,621 )     (22,212 )

Gain on sales of investment in an affiliate (Note 7)

     —         (6,931 )     (26 )     (220 )

Loss on impairment of investment in an affiliate (Note 7)

     —         3,492       —         —    

Gains on sales of investment in subsidiaries (Note 3)

     —         —         (8,252 )     (69,932 )

Gains on exchange for the shares (Note 4)

     —         (5,294 )     (24 )     (203 )

Foreign currency adjustments

     (2,391 )     272       160       1,356  

Change in assets and liabilities:

                                

Decrease (increase) in receivables

     68,558       (9,237 )     (32,626 )     (276,492 )

(Increase) decrease in inventories

     (25,598 )     21,263       (25,100 )     (212,712 )

Decrease (increase) in other current assets

     14       (3,331 )     (1,901 )     (16,110 )

(Decrease) increase in notes and accounts payable

     (31,914 )     14,390       6,015       50,975  

Increase (decrease) in accrued income taxes

     13,566       (4,720 )     9,066       76,830  

(Decrease) increase in other current liabilities

     (1,744 )     3,284       11,111       94,161  

Decrease in other non-current liabilities

     (11,464 )     (118 )     (7,062 )     (59,847 )

Other, net

     1,827       3,410       3,757       31,839  
    


 


 


 


Total adjustments

     99,615       101,381       43,140       365,593  
    


 


 


 


Net cash provided by operating activities

     145,523       171,077       149,644       1,268,169  
    


 


 


 


Cash flows from investing activities:

                                

Payments for purchases of available-for-sale securities

     (81,946 )     (98,219 )     (44,582 )     (377,814 )

Payments for purchases of held-to-maturity securities

     (10,141 )     (11,070 )     (26,867 )     (227,685 )

Payments for purchases of investments and advances

     (11,858 )     (224 )     (307 )     (2,602 )

Sales and maturities of available-for-sale securities

     40,955       50,090       99,230       840,932  

Maturities of held-to-maturity securities

     8,719       2,340       27,889       236,347  

Proceeds from sales of investment in an affiliate (Note 7)

     —         24,133       60       508  

Proceeds from sales of investment in subsidiaries (Note 3)

     —         —         24,602       208,492  

Payments for purchases of property, plant and equipment

     (59,381 )     (91,436 )     (64,751 )     (548,737 )

Payments for purchases of intangible assets

     (4,820 )     (10,589 )     (8,215 )     (69,619 )

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

     2,920       3,350       2,693       22,822  

Acquisition of businesses, net of cash acquired (Note 20)

     (2,794 )     3       (756 )     (6,407 )

Deposit of negotiable certificate of deposits and time deposits

     (112,903 )     (132,286 )     (356,169 )     (3,018,381 )

Withdrawal of negotiable certificate of deposits and time deposits

     95,220       100,923       203,076       1,720,983  

Other, net

     3,535       (2,482 )     (7,606 )     (64,458 )
    


 


 


 


Net cash used in investing activities

     (132,494 )     (165,467 )     (151,703 )     (1,285,619 )
    


 


 


 


Cash flows from financing activities:

                                

(Decrease) increase in short-term debt

     (18,490 )     23,363       9,369       79,398  

Proceeds from issuance of long-term debt

     21,077       19,876       1,928       16,339  

Payments of long-term debt

     (58,720 )     (48,458 )     (13,361 )     (113,229 )

Dividends paid

     (12,614 )     (20,473 )     (20,632 )     (174,847 )

Purchase of treasury stock

     (170 )     (170 )     (251 )     (2,127 )

Sales of treasury stock

     142       2,339       7,666       64,966  

Other, net

     1,431       234       (5,364 )     (45,458 )
    


 


 


 


Net cash used in financing activities

     (67,344 )     (23,289 )     (20,645 )     (174,958 )
    


 


 


 


Effect of exchange rate changes on cash and cash equivalents

     3,775       7,896       4,103       34,772  
    


 


 


 


Net decrease in cash and cash equivalents

     (50,540 )     (9,783 )     (18,601 )     (157,636 )

Cash and cash equivalents at beginning of year

     361,132       310,592       300,809