Kyocera 6-K 2010
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 under
the Securities Exchange Act of 1934
For the month of November 2010
Commission File Number: 1-07952
6 Takeda Tobadono-cho, Fushimi-ku,
Kyoto 612-8501, Japan
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F x Form 40-F ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Registration S-T Rule 101(b)(1): ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Registration S-T Rule 101(b)(7): ¨
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
Date: November 12, 2010
Information furnished on this form:
CONSOLIDATED BALANCE SHEETS (Unaudited)
The accompanying notes are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS (Unaudited)(Continued)
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
The accompanying notes are an integral part of these statements.
<NOTES TO THE UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS>
1. ACCOUNTING PRINCIPLES, PROCEDURES AND FINANCIAL STATEMENTS PRESENTATION
In December 1975, Kyocera Corporation filed a registration statement, Form S-1 and a registration form for American Depositary Receipt (ADR) with the United States Securities and Exchange Commission (SEC) in accordance with the Securities Exchange Act of 1933 and made a registration of its common stock and ADR there. In February 1980, Kyocera Corporation again filed Form S-1 and a registration form for ADR with the SEC in accordance with the mentioned act, and in May 1980, listed its ADR on the New York Stock Exchange.
Kyocera Corporation has filed Form 20-F as an annual report with the SEC, which includes the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America, under section 13 of the Securities Exchange Act of 1934. Kyocera Corporation has also prepared quarterly consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial statements. Accounting principles generally accepted in the United States of America consist of the Financial Accounting Standards Board (FASB)s Accounting Standards Codification (ASC) and the SECs regulations for filing and reporting.
The following paragraphs identify the significant differences for Kyocera Corporation and its consolidated subsidiaries (Kyocera) between accounting principles generally accepted in the United States of America and accounting principles generally accepted in Japan.
(1) Revenue Recognition
Kyocera adopts ASC 605, Revenue Recognition. Kyocera recognizes revenue when the risks and rewards of ownership have been transferred to the customer and revenue can be reliably measured.
(2) Comprehensive Income
Kyocera adopts ASC 220, Comprehensive Income. Comprehensive income is the change in equity except for capital transactions and it consists of net income and other comprehensive income. Other comprehensive income includes changes in foreign currency translation adjustments, pension adjustments and net unrealized gains (losses) on securities and derivative financial instruments during a period.
(3) Business Combinations
Kyocera adopts ASC 805, Business Combinations. Kyocera adopts the acquisition method and measures identifiable assets, liabilities and noncontrolling interests at fair value. Kyocera recognizes transaction and restructuring costs as expenses, and recognizes any tax adjustment made after the measurement period as income tax expenses. Kyocera records in-process research and development at fair value on acquisition date as a part of fair value of acquired business. In addition, Kyocera recognizes an asset acquired or a liability assumed in a business combination that arise from a contingency at fair value, at the acquisition date, if the acquisition date fair value of that asset or liability can be determined during the measurement period.
(4) Goodwill and Other Intangible Assets
Kyocera adopts ASC 350, IntangiblesGoodwill and Other. Goodwill and intangible assets with indefinite useful lives, rather than being amortized, are tested for impairment at least annually, and also following any events and changes in circumstances that might lead to impairment.
(5) Lease Accounting
Kyocera adopts ASC 840, Leases. Kyocera records tangible assets as capital lease for all of rent transactions which rewards of ownership and transfers risk of property substantially.
(6) Benefit Plans
Kyocera adopts ASC 715, CompensationRetirement Benefits. Kyocera recognizes the overfunded or underfunded status of its defined benefit postretirement plans as an asset or liability in the consolidated balance sheet and recognizes changes in that funded status in the year in which the changes occur through comprehensive income. Prior service cost is amortized by the straight-line method over the average remaining service period of employees. Actuarial gain or loss is recognized by amortizing a portion in excess of 10% of the greater of the projected benefit obligations or the market-related value of plan assets by the straight-line method over the average remaining service period of employees.
(7) Unused Compensated Absence
Kyocera adopts ASC 710, CompensationGeneral. Kyocera records accrued liabilities for compensated absences that employees have earned but have not yet used.
(8) Income Taxes
Kyocera adopts ASC 740, Income Taxes. Kyocera records assets and liabilities for unrecognized tax benefits based on the premise of being subject to income tax examination by tax authorities, when it is more likely than not that tax benefits associated with tax positions will not be sustained.
(9) Stock Issuance Costs
Stock issuance costs, net of tax are deducted from additional paid-in capital.
2. SUMMARY OF ACCOUNTING POLICIES
(1) Basis of Consolidation and Accounting for Investments in Affiliated Companies
The quarterly consolidated financial statements include the accounts of Kyocera Corporation, its majority-owned subsidiaries and a variable interest entity for which Kyocera Corporation is the primary beneficiary under ASC 810, Consolidation. All significant inter-company transactions and accounts are eliminated. Investments in 20% to 50% owned companies are accounted for by the equity method, whereby Kyocera includes in net income its equity in the earnings or losses from these companies.
The consolidated variable interest entity for which Kyocera Corporation is the primary beneficiary does not have a material impact on Kyoceras consolidated results of operations, financial position and cash flows.
(2) Revenue Recognition
Kyocera generates revenue principally through the sale of industrial components and telecommunications and information equipment. Kyoceras operations consist of the following seven 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 and 7) Others.
Kyocera recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred and title and risk of loss have been transferred to the customer or services have been rendered, the sales price is fixed or determinable and collectability is reasonably assured in accordance with ASC 605, Revenue Recognition. Sales to customers in each of the above segments are based on the specific terms and conditions contained in basic contracts with customers and firm customer orders which detail the price, quantity and timing of the transfer of ownership (such as risk of loss and title) of the products.
For most customer orders, the transfer of ownership and revenue recognition occurs at the time of shipment of the products to the customer. For the remainder of customer orders, the transfer of ownership and revenue recognition occurs at the time of receipt of the products by the customer, with the exception of sales of solar power generating systems in the Applied Ceramic Products Group and information equipment in the Information Equipment Group for which sales are made to end users together with installation services. The transfer of ownership and revenue recognition in these cases occur at the completion of installation and customer acceptance, as Kyocera have no further obligations under the contracts and all revenue recognition criteria under ASC 605 are met. When Kyocera provides a combination of products and services, the arrangement is evaluated under ASC 605-25, Multiple-Element Arrangements.
In addition, in the Information Equipment Group, Kyocera may enter into sales contracts and lease agreements ranging from one to seven years directly with end users. Sales contracts and lease agreements may include installation services and have customer acceptance clauses. For sales and sales-type lease agreements, revenue is recognized at the completion of installation and customer acceptance which usually occurs on the same business day as delivery. For sales-type leases, unearned income (which represents interest) is amortized over the lease term using the effective interest method in accordance with ASC 840, Leases.
For all sales in the above segments, product returns are only accepted if the products are determined to be defective. There are no price protections, stock rotation or returns provisions, except for certain programs in the Electronic Device Group as noted below.
In the Electronic Device Group, sales to independent electronic component distributors may be subject to various sale programs for which a provision for incentive programs is recorded as a reduction of revenue at the time of sale, as further described below in accordance with ASC 605-50, Customer Payments and Incentives and ASC 605-15, Products.
(a) Distributor Stock Rotation Program
Stock rotation is a program whereby distributors are allowed to return for credit, qualified inventory, semi-annually, equal to a certain percentage of the previous six months net sales. In accordance with ASC 605-15, an estimated sales allowance for stock rotation is recorded at the time of sale based on a percentage of distributor sales using historical trends, current pricing and volume information, other market specific information and input from sales, marketing and other key management. These procedures require the exercise of significant judgments. Kyocera believes that these procedures enable Kyocera to make reliable estimates of future returns under the stock rotation program. Kyoceras actual results approximate its estimates. When the products are returned and verified, the distributor is given credit against their accounts receivable.
(b) Distributor Ship-from-Stock and Debit Program
Ship-from-Stock and Debit (ship and debit) is a program designed to assist distributors in meeting competitive prices in the marketplace on sales to their end customers. Ship and debit programs require a request from the distributor for a pricing adjustment of a specific part for a sale to the distributors end customers from the distributors stock. Ship and debit authorizations may cover current and future distributor activity for a specific part for a sale to their customers. In accordance with ASC 605, at the time Kyocera records the sales to distributors, an allowance for the estimated future distributor activities related to such sales is provided since it is probable that such sales to distributors will result in ship and debit activities. In accordance with ASC 605-15, Kyocera records an estimated sales allowance based on sales during the period, credits issued to distributors, distributor inventory levels, historical trends, market conditions, pricing trends noted in direct sales activity with original equipment manufacturers and other customers, and input from sales, marketing and other key management. These procedures require the exercise of significant judgments. Kyocera believes that these procedures enable Kyocera to make reliable estimates of future credits under the ship and debit program. Kyoceras actual results approximate its estimates.
In the case of sales to distributors in the Applied Ceramic Products Group and Information Equipment Group, Kyocera provides cash rebates when predetermined sales targets are achieved during a certain period. Provisions for sales rebates are recorded as a reduction of revenue at the time of revenue recognition based on the best estimate of forecasted sales to each distributor in accordance with ASC 605-50.
Kyocera records an estimated sales returns allowance at the time of sales based on historical return experience.
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 estimated product warranty liability based on its historical repair experience.
In the Information Equipment Group, Kyocera provides a standard one year manufacturers warranty on its products. For sales directly to end users, Kyocera offers extended warranty plans that may be purchased and that are renewable in one year incremental periods at the end of the warranty term. Service revenues are recognized over the term of the related service maintenance contracts in accordance with ASC 605-20, Services.
(3) Cash and Cash Equivalents
Kyocera considers cash, bank deposits and all highly liquid investments purchased with an original maturity of three months or less to be cash and cash equivalents.
(4) Translation of Foreign Currencies
Assets and liabilities of consolidated foreign subsidiaries and affiliates accounted for by the equity method are translated into Japanese yen at the exchange rates in effect on the respective balance sheet dates. Operating accounts are translated at the average exchange rates for the respective periods. Translation adjustments result from the process of translating foreign currency denominated financial statements into the Japanese yen. These translation adjustments, which are not included in the determination of net income, are included in other comprehensive income.
Assets and liabilities denominated in foreign currencies are translated at the exchange rates in effect on the respective balance sheet dates, and resulting transaction gains or losses are included in the determination of net income.
(5) Allowances for Doubtful Accounts
Kyocera maintains allowances for doubtful accounts related to trade notes receivables, trade accounts receivables and finance receivables for estimated losses resulting from customers inability to make timely payments, including interest on finance receivables. Kyoceras estimates are based on various factors, including the length of past due payments, historical experience and current business environments. In circumstances where it is aware of a specific customers inability to meet its financial obligations, a specific allowance against these amounts is provided, considering the fair value of assets pledged by the customer as collateral. The amounts of allowances for doubtful accounts included in investments in and advances to affiliates and unconsolidated subsidiaries at September 30, 2010 and at March 31, 2010 were ¥0 million and ¥1 million, respectively. The amounts of allowances for doubtful accounts included in other long-term investments at September 30, 2010 and at March 31, 2010 were ¥124 million and ¥253 million, respectively. The amounts of allowances for doubtful accounts included in other assets at September 30, 2010 and at March 31, 2010 were ¥1,871 million and ¥2,001 million, respectively.
Inventories are stated at the lower of cost or market. For finished goods and work in process, cost is determined by the average method for approximately 71% and 70% at September 30, 2010 and at March 31, 2010, respectively, and by other methods including the first-in, first-out method for the others. For raw materials and supplies, cost is determined by the first-in, first-out method for approximately 55% and 57% at September 30, 2010 and at March 31, 2010, respectively, and by other methods, including the average method, for the others. Kyocera recognizes estimated write-down of inventories for excess, slow-moving and obsolete inventories.
Debt and equity securities are accounted for under ASC 320, InvestmentsDebt and Equity Securities. Securities classified as available-for-sale securities are recorded at fair value, with unrealized gains and losses excluded from income and reported in other comprehensive income, net of taxes. Securities classified as held-to-maturity securities are recorded at amortized cost. Non-marketable equity securities are accounted for by the cost method.
Kyocera evaluates whether the declines in fair value of debt and equity securities 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 in fair value.
Kyocera also reviews its investments accounted for by the equity method for impairment quarterly. Factors considered in assessing whether an indication of other-than-temporary impairment exists include the achievement of business plan objectives and milestones including cash flow projections and the results of planned financing activities, the financial condition and prospects of each investee company, the fair value of the ownership interest relative to the carrying amount of the investment, the period of time during which the fair value of the ownership interest has been below the carrying amount of the investment and other relevant factors. Impairment to be recognized is measured based on the amount by which the carrying amount of the investment exceeds the fair value of the investment. Fair value is determined through the use of various methodologies such as discounted cash flows and comparable valuations of similar companies.
(8) Property, Plant and Equipment and Depreciation
Kyocera provides for depreciation of buildings, machinery and equipment over their estimated useful lives primarily on the declining balance method. The principal estimated useful lives used for computing depreciation are as follows:
Major renewals and betterments are capitalized as tangible assets and they are depreciated based on estimated useful lives. The costs of minor renewals, maintenance and repairs are charged to expenses in the period incurred. When assets are sold or otherwise disposed of, the profits or losses thereon, computed on the basis of the difference between depreciated costs and proceeds, are credited or charged to income in the period of disposal, and costs and accumulated depreciation are removed from accounts.
(9) Goodwill and Other Intangible Assets
Goodwill and other intangible assets are accounted for under ASC 350, IntangiblesGoodwill and Other. Goodwill and intangible assets with indefinite useful lives, rather than being amortized, are tested for impairment at least annually, and also following any events and changes in circumstances that might lead to impairment. Intangible assets with definite useful lives are amortized straight line over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.
The principal estimated useful lives for intangible assets are as follows:
(10) Impairment of Long-Lived Assets
Impairment of long-lived assets and intangible assets are accounted for under ASC 360, Property, Plant, and Equipment. Kyocera reviews its long-lived assets and intangible assets with definite useful lives for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.
Long-lived assets and intangible assets with definite useful lives are considered to be impaired when the expected undiscounted cash flow from the asset group is less than its carrying value. A loss on impairment is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived assets and intangible assets with definite useful lives.
(11) Derivative Financial Instruments
Derivatives are accounted for under ASC 815, Derivatives and Hedging. All derivatives are recorded as either assets or liabilities on the balance sheet and measured at fair value. Changes in the fair value of derivatives are charged in current earnings. However cash flow hedges may qualify for hedge accounting, if the hedging relationship is expected to be highly effective in achieving offsetting cash flows of hedging instruments and hedged items. Under hedge accounting, changes in the fair value of the effective portion of these hedge derivatives are deferred in accumulated other comprehensive income and charged to earnings when the underlying transaction being hedged occurs.
Kyocera designates certain foreign currency forward contracts, interest rate swaps and interest rate caps as cash flow hedges. Most of Kyoceras foreign currency forward contracts are entered into as hedges of existing foreign currency denominated assets and liabilities. Accordingly, Kyocera records changes in fair value of these foreign currency forward contracts in earnings. It is expected that such changes will be offset by corresponding gains or losses on the underlying assets and liabilities.
Kyocera formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as cash flow hedge to specific assets and liabilities on the balance sheet or forecasted transactions. Kyocera also formally assesses, both at the hedges inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting cash flows of hedged items. When it is determined that a derivative is not highly effective hedge or that it has ceased to be a highly effective hedge, Kyocera discontinues hedge accounting prospectively. When a cash flow hedge is discontinued, the net derivative gains or losses remain in accumulated other comprehensive income, unless it is probable that the forecasted transaction will not occur at which point the derivative gains or losses are reclassified into earnings immediately.
(12) Stock-Based Compensation
Costs resulting from share-based payment transactions are accounted for under ASC 718, CompensationStock Compensation, Kyocera recognizes such costs in the financial statements by fair value based measurement method. Under the modified prospective method, Kyocera recognized compensation costs which include:
(13) Net Income Attributable to Shareholders of Kyocera Corporation and Cash Dividends per Share
Earnings per share is accounted for under ASC 260, Earnings Per Share. Basic earnings per share attributable to shareholders of Kyocera Corporation is computed based on the average number of shares of common stock outstanding during each period, and diluted earnings per share attributable to shareholders of Kyocera Corporation is computed based on the diluted average number of shares of stock outstanding during each period.
Cash dividends per share are those declared with respect to the earnings for the respective periods for which dividends are proposed by the Board of Directors. Dividends are charged to retained earnings in the year in which they are paid.
(14) Research and Development Expenses and Advertising Expenses
Research and development expenses and advertising expenses are charged to operations as incurred.
(15) Use of Estimates
The preparation of the quarterly consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the quarterly consolidated financial statements and accompanying notes. However, actual results could differ from those estimates and assumptions.
(16) Recently Adopted Accounting Standards
Kyocera adopted the FASBs Accounting Standards Update (ASU) No. 2009-16, Accounting for Transfers of Financial Assets on April 1, 2010. This accounting standard codified former Statement of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140 issued in June 2009 in the ASC 860, Transfers and Servicing. This accounting standard removes the concept of a qualifying special purpose entity from former SFAS No. 140 and removes the exception from applying former FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, to qualifying special purpose entities and establishes specific conditions for reporting a transfer of a portion of a financial asset as a sale. The adoption of this accounting standard did not have a material impact on Kyoceras consolidated results of operations, financial position and cash flows.
Kyocera adopted the ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities on April 1, 2010. This accounting standard codified former SFAS No. 167, Amendments to FASB Interpretation No. 46(R) issued in June 2009 in the ASC 810, Consolidation. This accounting standard requires an enterprise to perform an analysis to identify the primary beneficiary of a variable interest entity and also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. The adoption of this accounting standard did not have a material impact on Kyoceras consolidated results of operations, financial position and cash flows.
(17) Recently Issued Accounting Standards
In July 2010, the FASB issued ASU No. 2010-20, Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This accounting standard requires an entity to provide certain existing disclosures and new disclosures, on a disaggregated basis, about its financing receivables and related allowance for credit losses. For public entities, the disclosure as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. As this accounting standard is a provision for disclosure, the adoption of this accounting standard will not have an impact on Kyoceras consolidated results of operations, financial position and cash flows.
Certain reclassifications and format changes have been made to the consolidated statements of cash flows for the six months ended September 30, 2009 to conform to the current presentation.
3. BUSINESS COMBINATION
On June 1, 2010, Kyocera Corporation acquired part of Thin Film Transistor Liquid Crystal Display business from Sony Mobile Display Corporation. The results of operations of the acquired business were included into Kyoceras quarterly consolidated financial statements since the acquisition date and for segment reporting, it is reported in the Electronic Device Group.
Kyocera Tycom Corp. has owned a 33.33% interest in Tycom Ltd., a sales company of cutting tools, and accounted for its investment by the equity method. On August 31, 2010, Kyocera Tycom Corp. acquired all of the remaining shares of Tycom Ltd. As a result, Tycom Ltd. has become a wholly-owned subsidiary of Kyocera and has been consolidated by Kyocera from that date. The results of operations of the acquired business were included into Kyoceras quarterly consolidated financial statements since the acquisition date and for segment reporting, it is reported in the Applied Ceramic Products Group.
These acquisitions did not have material impacts on Kyoceras consolidated results of operations, financial position and cash flows.
4. DEBT SECURITIES, EQUITY SECURITIES AND OTHER INVESTMENTS
(1) Debt and equity securities with readily determinable fair values
Investments in debt and equity securities at September 30, 2010 and March 31, 2010, included in investments in debt securities, current and in investments in debt and equity securities, long-term are summarized as follows:
At September 30, 2010, Kyocera held available-for-sale securities in unrealized loss positions of ¥22,942 million. Kyocera considered the impairments of equity securities were not other-than-temporary as the extent to which fair value was below the cost was minor and the duration of the impairments was within one year. Kyocera considered the impairments of debt securities were not other-than-temporary because the impairment was not caused by credit loss and Kyocera would receive the full cost amount.
(2) Other investments
Kyocera held time deposits and certificates of deposits which were due over three months to original maturity, non-marketable equity securities and long-term loans. Carrying amounts of these investments at September 30, 2010 and March 31, 2010, included in other short-term investments and in other long-term investments, are summarized as follows:
5. FAIR VALUE
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three levels of inputs that may be used to measure fair value are as follows:
(1) Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value of Level 1 investments is quoted price in an active market with sufficient volume and frequency of transactions.
The fair value of Level 2 investments is other than quoted price included within Level 1 that is observable for the asset or liability, either directly or indirectly through corroboration with observable market data. Kyocera did not recognize any transfers in and out of Levels 1 and 2 for the six and three months ended September 30, 2009 and 2010. In accordance with the provisions of ASC 815-15, Embedded Derivatives, Kyocera elects the fair value option for all hybrid financial instruments. Gains on hybrid financial instruments in the amount of ¥211 million and ¥85 million were recorded in other, net on the consolidated statement of income for the six months ended September 30, 2009 and 2010, respectively. Gains on hybrid financial instruments in the amount of ¥21 million and ¥56 million were recorded in other, net on the consolidated statement of income for the three months ended September 30, 2009 and 2010, respectively.
The fair value of Level 3 investments is determined using input that is both unobservable and significant to the values of instruments being measured.
The fair value of Level 2 derivatives is estimated based on quotes from financial institutions. With respect to the detail information of derivatives, please refer to the Note 7 to the Quarterly Consolidated Financial Statement on this Form 6-K.
The following table presents additional information about Level 3 corporate bonds and other debt securities measured at fair value on recurring basis for the six months ended September 30, 2009 and 2010, and the three months ended September 30, 2009 and 2010.
(2) Fair Value of Financial Instruments
The fair values of financial instruments and the methods and assumptions used to estimate the fair value are as follows:
Cash and cash equivalents, other short-term investments, trade notes receivable, trade accounts receivable, short-term borrowings, trade notes and accounts payable, and other notes and accounts payable approximate fair value because of the short maturity of these instruments.
Inventories at September 30, 2010 and March 31, 2010 are as follows:
7. DERIVATIVES AND HEDGING
Kyoceras activities are exposed to varieties of market risks, including the effects of changes in foreign currency exchange rates, interest rates and stock prices. Approximately 60% of Kyoceras revenues are generated from overseas customers, which exposes Kyocera to foreign currency exchange rates fluctuations. These financial exposures are monitored and managed by Kyocera as an integral part of its overall risk management program. Kyoceras risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.
Kyocera maintains a foreign currency risk management strategy that uses derivative financial instruments, such as foreign currency forward contracts and currency swaps, to minimize the volatility in its cash flows caused by changes in foreign currency exchange rates. Movements in foreign currency exchange rates pose a risk to Kyoceras operations and competitive position, since exchange rates changes may affect the profitability, cash flows, and business and/or pricing strategies of non Japan-based competitors. These movements affect cross-border transactions that involve, but not limited to, direct export sales made in foreign currencies and raw material purchases incurred in foreign currencies.
Kyocera maintains an interest rate risk management strategy that uses derivative financial instruments, such as interest rate swaps and interest rate caps, to minimize significant, unanticipated cash flow fluctuations caused by interest rate volatility.
By using derivative financial instruments to hedge exposures to changes in exchange rates and interest rates, Kyocera became exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contracts. When the fair value of a derivative contract is positive, the counterparty owes Kyocera, which creates repayment risk for Kyocera. When the fair value of a derivative contract is negative, Kyocera owes the counterparty and, therefore, it does not possess repayment risk. Kyocera minimizes the credit (or repayment) risk in derivative financial instruments by (a) entering into transactions with creditworthy counterparties, (b) limiting the amount of exposure to each counterparty, and (c) monitoring the financial condition of its counterparties.
Kyocera does not hold or issue such derivative financial instruments for trading purposes.
Cash Flow Hedges:
Kyocera uses certain foreign currency forward contracts with terms normally lasting for less than four months designated as cash flow hedges to protect against foreign currency exchange rate risks inherent in its forecasted transactions related to purchase commitments and sales. Kyocera also uses interest rate swaps and interest rate caps mainly to convert a portion of its variable rates debt to fixed rates debt.
Kyoceras main direct foreign export sales and some import purchases are denominated in the customers and suppliers local currencies, principally the U.S. dollar and the Euro. Kyocera purchases foreign currency forward contracts and currency swaps to protect against the adverse effects that exchange rate fluctuations may have on foreign-currency-denominated trade receivables, payables and borrowings. The gains and losses on both the derivatives and the foreign-currency-denominated trade receivables, payables and borrowings are recorded as foreign currency transaction gains, net in the consolidated statement of income. Kyocera does not adopt hedge accounting for such derivatives.
The aggregate contract amounts of derivative financial instruments at September 30, 2010 and March 31, 2010 are as follows:
The location and fair value of derivative financial instruments in the consolidated balance sheets at September 30, 2010 and March 31, 2010 are as follows:
The location and amount of derivative financial instruments in the comprehensive income for the six months ended September 30, 2009 and 2010 are as follows:
Derivatives designated as cash flow hedge:
Gains (losses) recognized in accumulated other comprehensive income
The location and amount of derivative financial instruments in the comprehensive income for the three months ended September 30, 2009 and 2010 are as follows:
Derivatives designated as cash flow hedge:
Gains (losses) recognized in accumulated other comprehensive income
8. BENEFIT PLANS
Net periodic pension costs at Kyocera Corporation and its major domestic subsidiaries for the six months ended September 30, 2009 and 2010 include the following components:
Net periodic pension costs at Kyocera International, Inc. and its consolidated subsidiaries, AVX Corporation and its consolidated subsidiaries (AVX) and TA Triumph-Adler AG and its consolidated subsidiaries, for the six months ended September 30, 2009 and 2010 include the following components:
9. INCOME TAXES
The effective tax rates for the six and three months ended September 30, 2010 were 26.4% and 20.7%, respectively. The downward difference in the effective income tax rate from 41.0 %, which is the Japanese statutory income tax rate, is mainly due to a reversal of valuation allowance against deferred tax assets at a certain overseas subsidiary with increasing realization of deferred tax assets, triggered by a significantly improved operating results for the three months ended September 30, 2010.
10. COMMITMENTS AND CONTINGENCIES
As of September 30, 2010, Kyocera had contractual obligations for the acquisition or construction of property, plant and equipment aggregating ¥12,554 million principally due within one year.
Kyocera is a lessee under long-term operating leases primarily for office space and equipment. Future minimum lease commitments under non-cancelable operating leases at September 30, 2010 are as follows:
Kyocera has entered into purchase agreements for a certain portion of an anticipated quantity of materials used in its operations. Under those agreements, during the six months ended September 30, 2010 and during the three months ended September 30, 2010, Kyocera purchased ¥8,201 million and ¥4,454 million, respectively and is obligated to purchase ¥238,362 million in total by the end of December 2020.
Kyocera guarantees the debt of employees, an investee and an unconsolidated subsidiary. At September 30, 2010, the total amount of these guarantees was ¥677 million. The financial guarantees are made in the form of commitments and letters of awareness issued to financial institutions and generally obligate Kyocera to make payments in the event of default by the borrowers.
AVX has been named as a Potentially Responsible Party (PRP) in state and federal administrative proceedings seeking contribution for costs associated with the correction and remediation of environmental conditions at various waste disposals and operating sites. AVX continues to monitor these actions and proceedings and to vigorously defend its interests. AVX currently has reserves for current remediation, compliance and legal cost related to these matters.
In July 2007, AVX received oral notification from the Environmental Protection Agency (EPA), and in December 2007, written notification from the U.S. Department of Justice indicating that the United States is preparing to exercise the reopener provision under a 1991 consent decree relating to the environmental conditions at, and remediation of, New Bedford Harbor in Massachusetts. The Commonwealth of Massachusetts has adopted the same position. EPA has indicated that remediation costs through October 22, 2010 were approximately ¥35,929 million.
In June 2010, EPA issued a proposal providing future cost estimates ranging from ¥30,408 million to ¥33,012 million, net present value, based on certain assumptions. AVX anticipates further discussions with the U.S. Department of Justice, EPA, and the Commonwealth of Massachusetts.
AVX has not yet completed an investigation of the monies spent or its available defenses in light of the notification. AVX has also not yet determined whether it can avoid responsibility for all, or some portion, of these costs because the remediation method has changed over time and costs can be appropriately allocated to parties other than AVX.
The potential impact of this matter on Kyoceras consolidated results of operations, financial position and cash flows cannot be determined at this time.
Kyocera is subject to various lawsuits and claims which arise, in the ordinary course of business. Kyocera consults with legal counsel and assesses the likelihood of adverse outcome of these contingencies. Kyocera records liabilities for these contingencies when the likelihood of an adverse outcome is probable and the amount can be reasonably estimated. However, based on the information available, management believes that damages, if any, resulting from these actions will not have a significant impact on Kyoceras consolidated results of operations, financial position and cash flows.
Based on the resolution for the payment of year-end dividends at the ordinary general shareholders meeting held on June 25, 2010, Kyocera paid cash dividends totaling ¥11,011 million, ¥60 per share of common stock on June 28, 2010 to shareholders of record on March 31, 2010.
Based on the resolution for the payment of interim dividends at the board of directors held on October 28, 2010, Kyocera plans to pay cash dividends totaling ¥11,011 million, ¥60 per share of common stock on December 6, 2010 to shareholders of record on September 30, 2010.
Changes in Kyocera Corporation shareholders equity, noncontrolling interests and total equity for the six months ended September 30, 2009 and 2010 are as follows:
Comprehensive income (loss) for the six months ended September 30, 2009 and 2010 are as follows:
Comprehensive income (loss) for the three months ended September 30, 2009 and 2010 are as follows:
12. SUPPLEMENTAL EXPENSE INFORMATION
Supplemental expense information is as follows:
13. SEGMENT REPORTING
Kyocera manufactures and sells a highly diversified range of products, including components involving fine ceramic technologies and applied ceramic products, telecommunications and information equipment etc.
Kyocera categorizes its operations into seven 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, and (7) Others.
Main products or businesses of each reporting segment are as follows:
(Fine Ceramic Parts Group)
Components for Semiconductor Processing Equipment and LCD Manufacturing Equipment
Information and Telecommunication Components
General Industrial Ceramic Components
(Semiconductor Parts Group)
Ceramic Packages for Crystal and SAW Devices
CMOS / CCD Sensor Ceramic Packages
LSI Ceramic Packages
Wireless Communication Device Packages
Optical Communication Device Packages and Components
Organic Multilayer Packages and Substrates
(Applied Ceramic Products Group)
Residential and Industrial Solar Power Generating Systems
Solar Cells and Modules
Cutting Tools, Micro Drills
Medical and Dental Implants
Jewelry and Fine Ceramic Application Products
(Electronic Device Group)
Ceramic Capacitors, Tantalum Capacitors
Timing Devices such as TCXOs, Crystal Units, Clock Oscillators and Ceramic Resonators
SAW Devices, RF Modules, EMI Filters
Thermal Printheads, Inkjet Printheads
Amorphous Silicon Photoreceptor Drums
Liquid Crystal Displays, Touch Panel
(Telecommunications Equipment Group)
CDMA Mobile Phone Handsets
Personal Handy Phone System (PHS) related Products such as PHS Mobile Phone Handsets and PHS Base Stations
Wireless Broadband Systems such as WiMAX associated products
(Information Equipment Group)
Color and Black & White Office Equipment such as ECOSYS Printers, Multifunction Peripherals
Wide Format Multifunctional Systems
Printer and Multifunction Peripherals Supplies
Business Solution Services such as Managed Print Service
Telecommunication Engineering Business
Integrated Business of Information Systems and Network Infrastructure
Data Center Business
Management Consulting Business
Molding Compounds for Semiconductor Encapsulation
Electrical Insulators, Molded Products
Inter-segment sales, operating revenue and transfers are made with reference to prevailing market prices. Transactions between reportable segments are immaterial and not shown separately.
Operating profit for each reporting segment represents net sales, less related costs and operating expenses, excluding corporate revenue and expenses, equity in earnings, income taxes and net income attributable to noncontrolling interests.
Kyoceras sales to KDDI Corporation and its consolidated subsidiaries (KDDI) which are mainly recorded in the Telecommunications Equipment Group are as follows:
Information by reporting segments for the three and six months ended September 30, 2009 and 2010 is summarized as follows:
Geographic segments (Net sales by region)
There are no individually material countries with respect to revenue from external customers in Asia, Europe and Others.
Geographic Segments (Net sales and Income before income taxes by Geographic area)
14. PER SHARE INFORMATION
A reconciliation of the numerators and the denominators of basic and diluted earnings per share computations are as follows:
15. THE CORPORATE REORGANIZATION PROCEDURE FOR WILLCOM, INC.
Since October 2004, Kyocera Corporation owned a 30% interest in WILLCOM, Inc., which is engaged in the personal handy phone system (PHS) business. Kyocera sells PHS handsets and PHS base stations to WILLCOM, Inc. Kyocera has accounted for its investment in WILLCOM, Inc. as an equity method investment.
On September 24, 2009, WILLCOM, Inc. applied and was accepted to undergo Alternative Dispute Resolution (ADR) with the Japanese Association of Turnaround Professionals (JATP), a process for corporate revitalization prescribed in the Act on Special Measures for Industrial Revitalization. The ADR process is not a legal procedure like a bankruptcy or a corporate reorganization procedure, but rather constitutes a flexible private settlement mechanism that allows the subject company to continue its daily commercial operations, while securing fairness through the involvement of the JATP. The JATP has been authorized by the Minister of Economy, Trade and Industry to act as an unbiased intermediary to achieve resolution among relevant parties.
During the three months ended December 31, 2009, Kyocera recognized an impairment loss of ¥19,987 million on its investment in WILLCOM, Inc., recorded as equity in losses of affiliates, reflecting managements belief that the investment might not be recoverable.
On February 18, 2010, WILLCOM, Inc. filed a petition with the Tokyo District Court for commencement of corporate reorganization procedures and applied to the Enterprise Turnaround Initiative Corporation of Japan (ETIC) for support, after terminating the ADR process. On March 12, 2010, the Tokyo District Court agreed to commence the corporate reorganization procedures. Upon such decision, most of the directors of WILLCOM, Inc., including all of those simultaneously serving as directors of Kyocera, resigned, and trustees and acting trustees were appointed by the Tokyo District Court. On the same day, the ETIC agreed to provide support to WILLCOM, Inc. Due to the commencement of the corporate reorganization procedures, Kyocera lost significant influence over WILLCOM, Inc. and therefore discontinued its application of equity method accounting.
Taking into consideration the decision to commence corporate reorganization procedures, Kyocera recognized a bad debt loss of ¥8,961 million on receivables from WILLCOM, Inc., recorded as selling, general and administrative expenses, based on publicly disclosed information such as the outline of the business revitalization plan of WILLCOM, Inc., etc.
On June 24, 2010, WILLCOM, Inc. requested the Tokyo District Court to extend the filing deadline for their reorganization plan, which was accepted. The new filing deadline was October 14, 2010.
On August 2, 2010, WILLCOM, Inc. entered into a sponsor agreement with SOFTBANK CORP. SOFTBANK CORP. agreed to dispatch a business trustee to WILLCOM, Inc. and to provide necessary support for business operations and execution of the reorganization plan.
On October 14, 2010, the trustees of WILLCOM, Inc. filed the reorganization plan with the Tokyo District Court.
Based on the filed reorganization plan, during the three months ended September 30, 2010, Kyocera recognized an additional bad debt loss of ¥708 million on receivables from WILLCOM, Inc., in selling, general, and administrative expenses.
The filed reorganization plan is subject to approval by the creditors committees and the Tokyo District Court. The deduction of ¥9,669 million is Kyoceras best estimate of the recovery of the receivables outstanding when WILLCOM, Inc. entered the reorganization procedures. In addition, Kyocera has continued to sell PHS handsets and PHS base stations to WILLCOM, Inc. The corporate reorganization procedures progress may have a significant effect on Kyoceras consolidated results of operations, financial position and cash flows.
16. SUBSEQUENT EVENT
Kyocera has evaluated subsequent events requiring recognition or disclosure in the quarterly consolidated financial statements during the period from October 1, 2010 through the date of issuance of this Quarterly Report in Japan. During the period, no material subsequent events were identified.
Reference Information (Unaudited)
1. Production (Sales price)