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47
Annual Report 2006
Cost of Sales, Selling, General & Administrative
Expenses, and Operating Income
In fiscal 2005, the cost of sales was ¥3,523.4 billion (US$29,860
million), while selling, general and administrative (SG&A) expenses
were ¥1,086.5 billion (US$9,208 million). The cost of sales ratio and
the ratio of SG&A expenses to net sales improved by 0.3 and 0.1 of a
percentage point, respectively, to 73.5% and 22.7%.
Consolidated operating income was ¥181.4 billion (US$1,538
million), an increase of ¥21.2 billion over the previous fiscal year.
Excluding a positive impact of ¥4.8 billion stemming from the change in
accounting policies this fiscal year, operating income increased by ¥16.4
billion. Income was affected by factors such as intensified competition in
server-related markets in Japan and overseas, as well as forward-looking
investments including accelerated development expenses for certain
products and expenses related to start-up of the 300mm wafer semicon-
ductor production facility (Fab No. 1) at our Mie Plant. However, this
was offset by higher sales of optical transmission systems, outsourcing
services, and HDDs, as well as by cost reductions stemming from
enhanced initiatives in manufacturing innovation, significantly lower
losses from loss-generating projects in our domestic systems integration
business, and the effect of restructuring our flat panel display business,
together enabling us to post higher profits.
Other Income (Expenses) and Net Income
Other expenses, net totaled ¥63.4 billion (US$537 million). Net inter-
est, comprising interest and dividend income and interest charges, was
negative ¥8.5 billion (US$73 million), an improvement of ¥1.0 billion
compared to a year earlier and reflecting a decrease in interest-bearing
loans and other factors. Equity in earnings of affiliates, net was a loss of
¥1.4 billion (US$13 million). Separately, we booked a loss on change in
interest of ¥8.4 billion (US$71 million) related to the initial public offer-
ing of Spansion Inc. Amortization of unrecognized obligation for retire-
ment benefits was ¥28.2 billion (US$239 million), an improvement of
¥11.0 billion, due to revisions in the Company’s pension system in Japan.
With effect from the fiscal year under review, we began booking a provi-
sion for prior product warranties as an expense under other income
(expenses). This is related to the provision to cover warranty-related costs
for products sold in prior fiscal years and totaled ¥7.4 billion (US$63
million) in the year under review. In addition, we booked a settlement
gain of ¥15.9 billion (US$135 million) related to the reconciliation of
litigation brought against component vendors and other parties in fiscal
2001 with respect to our HDD business. In addition, there was a gain
on business transfer of ¥3.4 billion (US$29 million) related to the trans-
fer of LCD panel operations.
We recognized ¥37.0 billion (US$314 million) as income taxes, which
combines current and deferred income taxes, against ¥118.0 billion
(US$1,001 million) of income before income taxes and minority interests.
This represented a significant decrease in taxes over fiscal 2004, when the
tax burden was higher due to the booking of a large valuation allowance on
deferred tax assets. Net income for fiscal 2005 was ¥68.5 billion (US$581
million), an increase of ¥36.6 billion compared to a year earlier.
2002
2003
2004
2005
2006
Operating Income (¥ Billions)
Operating Income Margin (%)
181
(74)
100
150
160
3.8
(1.5)
2.2
3.2
3.4
(Years ended March 31)
■ Operating Income and Operating Income Margin