20-F 1 d938425d20f.htm FORM 20-F FORM 20-F
Table of Contents

As filed with the Securities and Exchange Commission on June 30, 2020

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     .

For the transition period from                      to                     .

Commission File No.

 

 

NIPPON DENKI KABUSHIKI KAISHA

(Exact name of registrant as specified in its charter)

 

 

NEC Corporation

(Translation of Registrant’s name into English)

Japan

(Jurisdiction of incorporation or organization)

 

 

7-1, Shiba 5-chome, Minato-ku, Tokyo 108-8001, Japan

(Address of principal executive offices) (Zip Code)

+81-3-3454-1111, same address as above

(Name, Telephone, Facsimile number and Address of Company Contact Person)

 

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of each class

  

Trading Symbol(s)

  

Name of each exchange on which registered

None    Not applicable.    Not applicable.

Securities Registered Pursuant to Section 12(g) of the Act:

Common stock, without par value

 

 

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 

 

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covering by the annual report. As of March 31, 2020, 260,473,263 shares of common stock (including 646,963 shares of common stock held by the registrant as treasury stock)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.     Yes  ☐    No   ☒

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☐    No  ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ☐

  Accelerated filer  ☐   Non-accelerated filer  ☒
    Emerging growth company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐

    

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☒

   Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17   ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

 

 


Table of Contents

Table of Contents

 

               Page  
PART I   
ITEM 1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS      4  
ITEM 2.    OFFER STATISTICS AND EXPECTED TIMETABLE      4  
ITEM 3.    KEY INFORMATION      4  
   A.    Selected Financial Data      4  
   B.    Capitalization and Indebtedness      5  
   C.    Reasons for the Offer and Use of Proceeds      5  
   D.    Risk Factors      5  
ITEM 4.    INFORMATION ON THE COMPANY      22  
   A.    History and Development of the Company      22  
   B.    Business Overview      24  
   C.    Organizational Structure      33  
   D.    Property, Plant and Equipment      35  
ITEM 4A.    UNRESOLVED STAFF COMMENTS      37  
ITEM 5.    OPERATING AND FINANCIAL REVIEW AND PROSPECTS      38  
   A.    Operating Results      50  
   B.    Liquidity and Capital Resources      58  
   C.    Research and Development, Patents and Licenses, Etc.      62  
   D.    Trend Information      63  
  

E.

  

Off-Balance Sheet Arrangements

     63  
  

F.

  

Tabular Disclosure of Contractual Obligations

     63  
  

G.

  

Safe Harbor

     64  
ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES      64  
   A.    Directors and Senior Management      64  
   B.    Compensation      72  
   C.    Board Practices      76  
   D.    Employees      78  
  

E.

  

Share Ownership

     79  
ITEM 7.    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      80  
   A.    Major Shareholders      80  
   B.    Related Party Transactions      81  
   C.    Interests of Experts and Counsel      81  
ITEM 8.    FINANCIAL INFORMATION      81  
   A.    Consolidated Statements and Other Financial Information      81  
   B.    Significant Changes      82  

 

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               Page  
ITEM 9.    THE OFFER AND LISTING      82  
   A.    Offer and Listing Details      82  
  

B.

  

Plan of Distribution

     82  
  

C.

  

Markets

     82  
  

D.

  

Selling Shareholders

     82  
  

E.

  

Dilution

     82  
  

F.

  

Expenses of the Issue

     83  
ITEM 10.    ADDITIONAL INFORMATION      83  
   A.    Share Capital      83  
   B.    Memorandum and Articles of Incorporation      83  
   C.    Material Contracts      91  
   D.    Exchange Control      91  
   E.    Taxation      96  
   F.    Dividends and Paying Agent      102  
   G.    Statement by Experts      102  
   H.    Documents on Display      103  
  

I.

  

Subsidiary Information

     103  
ITEM 11.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      103  
ITEM 12.    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      105  
PART II   
ITEM 13.    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES      106  
ITEM 14.    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      106  
ITEM 15.    CONTROLS AND PROCEDURES      106  
ITEM 16A.    AUDIT COMMITTEE FINANCIAL EXPERT      106  
ITEM 16B.    CODE OF ETHICS      107  
ITEM 16C.    PRINCIPAL ACCOUNTANT FEES AND SERVICES      107  
ITEM 16D.    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      108  
ITEM 16E.    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      108  
ITEM 16F.    CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT      108  
ITEM 16G.    CORPORATE GOVERNANCE      109  
ITEM 16H.    MINE SAFETY DISCLOSURE      109  
PART III   
ITEM 17.    FINANCIAL STATEMENTS      110  
ITEM 18.    FINANCIAL STATEMENTS      110  
ITEM 19.    EXHIBITS      110  
CONSOLIDATED FINANCIAL STATEMENTS      F-1  

 

 

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USE OF CERTAIN TERMS AND PRESENTATION OF FINANCIAL AND OTHER INFORMATION

In this annual report, where we refer to “NEC,” the “Company,” “we,” “us,” “our” and similar terms, we generally mean NEC Corporation and its consolidated subsidiaries, but from time to time as the context requires, we mean NEC Corporation as an individual legal entity.

In this annual report, all of our financial information is presented on a consolidated basis, unless otherwise specified. For purposes of this annual report, we have presented our consolidated financial statements in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or the IASB, unless otherwise specified. Unless otherwise stated or the context otherwise requires, all financial information included in this annual report is expressed in Japanese yen.

In this annual report, unless otherwise indicated or the context otherwise requires, all figures are rounded to the figures shown. In some cases, figures presented in tables are adjusted to match the sum of the figures with the total amount, and such figures are also referred to in the related text.

Our fiscal year ends on March 31 of each year. References to years not specified as being fiscal years are to calendar years.

FORWARD-LOOKING STATEMENTS

We may from time to time make written or oral forward-looking statements. Written forward-looking statements may appear in documents filed with or submitted to the SEC, including this annual report, and other reports to shareholders and other communications.

The U.S. Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking information to encourage companies to provide prospective information about themselves. We rely on this safe harbor in making these forward-looking statements.

This annual report contains forward-looking statements regarding our current intent, business plan, targets, belief or expectations or the current belief or current expectations of our management with respect to our results of operations and financial condition. In many, but not all cases, we use words such as “anticipate,” “aim,” “believe,” “estimate,” “expect,” “intend,” “plan,” “probability,” “risk,” “will,” “should,” “seek,” “may” and similar expressions, as they relate to us or our management, to identify forward-looking statements. These statements reflect our current views with respect to future events and are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those which are currently expected. Our forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Potential risks and uncertainties include, without limitation, the following:

 

   

adverse economic conditions in Japan or internationally;

 

   

foreign currency exchange and interest rate risks;

 

   

changes in the markets in which we operate;

 

   

the recent outbreak of the novel coronavirus;

 

   

potential inability to achieve the goals in our medium-term management plan;

 

   

fluctuations in our revenue and profitability from period to period;

 

   

difficulty achieving the benefits expected from acquisitions, business combinations and reorganizations;

 

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potential deterioration in our relationships with strategic partners or problems relating to their products or services;

 

   

difficulty achieving our growth strategies outside Japan;

 

   

potential inability to keep pace with rapid technological advancements in our industry and to commercialize new technologies;

 

   

intense competition in the markets in which we operate;

 

   

risks relating to our concentrated customer base;

 

   

difficulties with respect to new businesses;

 

   

potential failures in the products and services we provide;

 

   

potential failure to procure components, equipment or other supplies;

 

   

difficulties protecting our intellectual property rights;

 

   

potential inability to obtain certain intellectual property licenses;

 

   

our customers may encounter financial difficulties;

 

   

difficulty attracting, hiring and retaining skilled personnel;

 

   

difficulty obtaining additional financing to meet our funding needs;

 

   

potential failure of internal controls;

 

   

potentially costly and time-consuming legal proceedings;

 

   

risks related to regulatory change and uncertainty;

 

   

risks related to environmental laws and regulations;

 

   

information security and data protection concerns and restrictions;

 

   

potential changes in effective tax rates or deferred tax assets, or adverse tax examinations;

 

   

risks related to corporate governance and social responsibility requirements;

 

   

risks related to natural disasters, public health issues, armed hostilities and terrorism;

 

   

risks related to our pension assets and defined benefit obligations; and

 

   

risks related to impairment losses with regard to goodwill.

In this annual report, we discuss these and certain other, but not necessarily all, risks and uncertainties that could cause actual results to differ from our current expectations in “Item 3.D. Key Information—Risk Factors,” “Item 4.B. Information on the Company—Business Overview,” “Item 5. Operating and Financial Review and Prospects” and elsewhere.

We do not intend to update our forward-looking statements. We are under no obligation, and disclaim any obligation, to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

 

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LIST OF KEY ACRONYMS

The table below spells out certain key acronyms used in this annual report:

 

3G

  3rd generation mobile technology

4G

  4th generation mobile technology

5G

  5th generation mobile technology

AI

  Artificial Intelligence

ICT

  Information and Communication Technology

IoT

  Internet-of-Things

LAN

  Local Area Network

NFV

  Network Functions Virtualization

SDN

  Software-Defined Networking

WAN

  Wide Area Network

 

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PART I

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

ITEM 3.

KEY INFORMATION

 

A.

SELECTED FINANCIAL DATA

We adopted IFRS as issued by the IASB (“IFRS”) from the fiscal year ended March 31, 2017, using a transition date from generally accepted accounting principles in Japan to IFRS of April 1, 2015.

The tables below set forth our selected consolidated financial information as of and for each of the five fiscal years ended March 31, 2020 prepared in accordance with IFRS. The financial information as of March 31, 2019 and 2020 and for the fiscal years ended March 31, 2018, 2019 and 2020 is derived from our audited annual consolidated financial statements as of the same dates and for the same periods included elsewhere in this annual report.

Our historical operating results are not necessarily indicative of operating results that may be expected in the future. The following selected financial data are qualified by reference to, and should be read in conjunction with, “Item 5. Operating and Financial Review and Prospects” and our audited annual consolidated financial statements and related notes included elsewhere in this annual report.

 

                                                                               
     Fiscal year ended March 31,  
     2016      2017      2018      2019      2020  
     (billions of yen, except per share amounts)  

Statement of Profit or Loss Data:

              

Revenue

   ¥ 2,824.8      ¥ 2,665.0      ¥ 2,844.4      ¥ 2,913.4      ¥ 3,095.2  

Gross profit

     840.1        755.6        797.6        829.9        887.6  

Operating profit

     91.4        41.8        63.9        57.8        127.6  

Profit before income taxes

     86.6        68.1        86.9        77.3        124.0  

Net profit

     83.2        35.2        60.2        51.9        112.7  

Per Share Data:(1)

              

Basic earnings per share

   ¥ 292.15      ¥ 105.10      ¥ 176.54      ¥ 152.75      ¥ 385.02  

Diluted earnings per share(2)

            105.10        176.54        152.75        385.01  

Cash dividends per share

     60.00        60.00        60.00        40.00        70.0  

Weighted average number of shares of common stock issued (less treasury shares) (in millions)

     259.8        259.9        259.8        259.7        259.6  
     Fiscal year ended March 31,  
     2016      2017      2018      2019      2020  
     (billions of yen)  

Other Financial Data:

              

Capital expenditures

   ¥ 103.2      ¥ 96.4      ¥ 107.9      ¥ 150.4      ¥ 209.4  

Depreciation and amortization

     83.8        80.4        96.0        99.7        166.4  

Research and development expenses

     124.0        109.3        108.1        108.1        109.8  

Personnel expenses

     868.6        856.0        901.6        890.7        891.1  

 

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     As of March 31,  
     2016      2017      2018      2019      2020  
     (billions of yen)  

Statement of Financial Position Data:

              

Total assets

   ¥ 2,528.9      ¥ 2,684.0      ¥ 2,821.4      ¥ 2,963.2      ¥ 3,123.3  

Total liabilities

     1,691.7        1,667.9        1,767.1        1,903.5        2,008.7  

Non-current liabilities

     671.0        665.4        704.0        745.3        786.9  

Total equity

     837.2        1,016.1        1,054.3        1,059.7        1,114.5  

Share capital

     397.2        397.2        397.2        397.2        397.2  

 

(1)

We effected a ten-for-one share consolidation on October 1, 2017. The per share data assume the effective date of the share consolidation to be April 1, 2015.

(2)

There were no dilutive shares in issue during the fiscal year ended March 31, 2016.

 

B.

CAPITALIZATION AND INDEBTEDNESS

Not applicable.

 

C.

REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.

 

D.

RISK FACTORS

Investing in our securities involves various risks. Before investing in our securities, you should carefully consider the risks described below as well as all the other information in this annual report, including our consolidated financial statements and related notes, “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

Our business, results of operations and financial condition could be materially and adversely affected by any of the factors discussed below. The trading price of our securities could decline due to any of these factors, and you may lose part or all of your investment. This annual report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks faced by us as described below and elsewhere in this annual report. See “Forward-Looking Statements.”

Risks Related to Our Operating Environment

The recent outbreak of the novel coronavirus could have a significant negative impact on our business, results of operations and financial condition.

In December 2019, a novel strain of a virus named SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), or coronavirus, which causes coronavirus disease, or COVID-19, was reported to have surfaced in Wuhan, China. Since that time, coronavirus has spread to other regions and countries including Japan where our primary office is located. On March 11, 2020, the World Health Organization characterized the coronavirus outbreak as a pandemic.

The coronavirus pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public health safety measures. The coronavirus and related government countermeasures may result in ongoing social, economic, financial and labor instability in the countries in which we, our suppliers and our customers operate. The extent to which the coronavirus will ultimately impact our operations and those of our suppliers and customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration

 

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of the pandemic and related countermeasures, new information that may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. As our corporate customers as well as our Japanese national and local government customers focus on addressing the various difficulties presented by the emergency situation, they may become more constrained in their ability to engage our services and purchase our products at the levels that we anticipated prior to the crisis. If the pandemic results in a decline in IT-related investments by our customers, our business, results of operations and financial condition would be adversely affected. In addition, disruptions in public and private infrastructure, including communications, financial services and supply chains, could materially and adversely disrupt our normal business operations.

To date, we have transitioned a significant subset of our employee population to a remote work environment in an effort to mitigate the spread of the coronavirus, which may exacerbate certain risks to our business, including increased risk of cybersecurity attacks and increased risk of unauthorized dissemination of proprietary or confidential information about us, our customers or other third-parties. Although we have not closed any of our production facilities and have not yet experienced significant disruptions in our supply chain, the ongoing pandemic could result in facility closures by our customers or suppliers, general business shutdowns and financial difficulties. The pandemic could also result in increased prices, delays or difficulty in obtaining such components and raw materials. We cannot presently predict the overall scope or duration of business disruptions as a result of the coronavirus, but our ability to conduct our business as previously planned could be materially and negatively impacted.

With respect to our remote work arrangements to address the spread of coronavirus, we had previously introduced a policy of allowing employees to work from home in 2018 and have been able to take advantage of such existing infrastructure and remote working initiatives to implement the pandemic-related transition. In order to further adapt to these remote working arrangements in response to the coronavirus, we have converted to various electronic means of internal authorizations and execution of agreements and work orders. Although we expect that our financial reporting systems, internal controls over financial reporting and disclosure controls and policies will continue to function effectively, even in the event that remote work arrangements continue for an extended period of time, there is no guarantee that these systems and controls will function with the same level of efficiency as before the pandemic, and these adaptations and modified processes do introduce additional risks of mistakes or failures.

Capital markets have been affected by the pandemic, and general credit spreads for corporate debt issuances, including ours, have begun to widen. If a prolonged pandemic were to result in a significant deterioration in the global economy such that the ordinary functioning of financial institutions is suspended, our ability to issue additional bonds or receive bank loans at satisfactory rates or at all could be adversely affected.

Depending on the overall duration and severity of the impact of the coronavirus pandemic, we may be required to recognize material impairments of our non-financial assets, including, but not limited to, goodwill, intangible assets and right-of-use assets. Additionally, declines in the value of our equity holdings in various major companies could negatively impact our financial condition. As of March 31, 2020, equity instruments designated as financial assets measured at fair value through other comprehensive income were valued at ¥167.2 billion, but we expect that the general negative impact of the coronavirus pandemic on equity markets may result in a decrease in the value of these holdings.

In light of the developments set forth above and other reasons that may emerge due to the coronavirus pandemic and any associated protective or preventative measures, it is difficult to estimate with certainty the overall future impact to our business, results of operations and financial condition. While the coronavirus pandemic did not have a material adverse impact on our consolidated financial statements as of and for the fiscal year ended March 31, 2020, future events and circumstances may result in the coronavirus pandemic having a more negative impact on our operations. To date, coronavirus-related developments have adversely affected the global economy and may have a material adverse effect on our business, results of

 

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operations and financial condition. See “Item 4.B. Information on the Company—Business Overview—Overview—Medium-Term Management Plan—Impact of the Coronavirus Pandemic,” “Item 5. Operating and Financial Review and Prospects—Introduction—Recent Developments—Coronavirus” and “Item 5.D. Operating and Financial Review and Prospects—Introduction—Trend Information.”

Adverse economic conditions in Japan, our primary market, or internationally may harm our business, results of operations and financial condition.

Our business is significantly dependent on the Japanese economy. Our sales to customers in Japan accounted for 75.7% of our consolidated revenue for the fiscal year ended March 31, 2020. Any future deterioration in the Japanese economy or the financial condition or performance of our customer base in Japan may materially and adversely affect our business, results of operations and financial condition. Additionally, the ongoing aging and decline of the population in Japan may adversely affect the Japanese economy. Our business may also be negatively affected by changes in economic conditions in other markets, particularly Asia, the United States and Europe, as well as by trends in the global economy. Geopolitical issues, such as recent military confrontations in the Middle East, and trade conflicts, including uncertainty regarding trade tensions between the United States and China and resulting trade restrictions such as tariffs, have recently contributed to increasing uncertainties in global markets, and increases in protectionist trade policies more generally may also contribute to slower global macroeconomic growth. Epidemics such as virus outbreaks, including the recent coronavirus pandemic, or seasonal influenza may also negatively affect economic conditions in the global economy. Shifts in the policy or budgetary focus of national or local governments in Japan or internationally for economic or other reasons may also adversely affect our business.

Uncertainties in the Japanese and global economy make it difficult to forecast future levels of economic activity. Because the components of our planning and forecasting depend upon estimates of economic activity in the markets that we serve, increasing economic uncertainties make it more difficult than usual to estimate our future revenue and required expenditures. If unexpected changes in economic conditions occur in the future, we may not be able to respond appropriately to the changing market conditions.

Our operating and financing activities expose us to foreign currency exchange and interest rate risks, which may adversely affect our revenues and profitability.

We are exposed to risks of foreign currency exchange rate fluctuations, particularly for the Japanese yen against the U.S. dollar and euro. Our consolidated financial statements, which are presented in Japanese yen, are affected by fluctuations in foreign exchange rates. Changes in exchange rates affect the yen value of our equity investments and monetary assets and liabilities arising from business transactions in foreign currencies. They also affect the costs and sales proceeds of products or services that are denominated in foreign currencies. Despite measures undertaken by us to reduce or mitigate foreign currency exchange risks, foreign exchange rate fluctuations may hurt our business, results of operations and financial condition. Depending on the movements of particular foreign exchange rates, we may be adversely affected at a time when the same currency movements are benefiting some of our competitors.

We are also exposed to risks of interest rate fluctuations, which may affect our overall operational costs and the value of our financial assets and liabilities, in particular, long-term borrowings. As of March 31, 2020, we had ¥65.7 billion of long-term borrowings subject to floating interest rates. Despite measures undertaken by us to mitigate our exposure against interest rate fluctuations, such fluctuations, whether due to ordinary course market movements or actions by central banks, may increase our operational costs, reduce the value of our financial assets or increase the value of our liabilities. For a discussion of foreign currency fluctuations, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Exchange Risk.”

Changes in the markets in which we operate may harm our business, results of operations and financial condition.

We are exposed to the risk that broader changes and trends in the ICT industry, both in Japan and overseas, may affect demand for the products and services that we provide. Demand for our products and services can be

 

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negatively affected by sluggish economic activity, a general lack of demand for the products and services that we provide during a given season or economic period, potential obsolescence due to market developments and technological trends, an increase in the level of inventories for the types of products we produce in the broader market as well as a decline in our cost competitiveness. Because the markets in which we operate are constantly evolving, a recovery in prices or demand in a certain segment of the market or over a specific period of time does not necessarily mean that prices or demand will not fall or otherwise adversely affect our operations again in the future. These types of market changes are unpredictable and may materially and adversely affect our business, results of operations and financial condition.

Risks Related to Our Management Strategy

We may not be able to achieve the goals set forth in our medium-term management plan.

In January 2018, we launched our current medium-term business plan for the three fiscal years ending March 31, 2021, with the goal of improving our profitability and growing our business. However, we may be unable to achieve this goal within our anticipated timeline or at all due to various factors, including those discussed in more details elsewhere herein, particularly:

 

   

intense competition not only with our current competitors but also with new entrants into our markets;

 

   

changes in the market or regulatory environment;

 

   

fluctuations in exchange rates, which may result in exchange rates that differ from the rates used in our projections;

 

   

increases in component prices, research and development expenses, and personnel expenses as well as incurrence of significant unexpected costs and expenses;

 

   

unexpected trends in the ICT industry or customer preferences or purchase patterns;

 

   

failure to achieve synergy and other benefits expected from our inorganic growth strategy, particularly with respect to the integration of acquisitions as part of our “Safer Cities” initiative;

 

   

inability to achieve anticipated cost reductions;

 

   

inability to deliver products and services that meet the required specifications and quality standards in a timely manner or inability to effectively control project costs and expenses, which could result in the incurrence of additional costs and compensation to customers for losses caused by such inability; and

 

   

negative impacts on our business, financial condition and results of operations caused by the coronavirus pandemic.

For a more detailed discussion on our current medium-term management plan, see “Item 4.B. Information on the Company—Business Overview—Overview—Medium-Term Management Plan.”

Our revenues and profitability can fluctuate from period to period, and are often difficult to predict for particular periods due to factors beyond our control.

Our results of operations for any quarter or year are not necessarily indicative of results to be expected in future periods. Our results of operations have historically been, and will continue to be, subject to quarterly and yearly fluctuations as a result of a number of factors, including:

 

   

introduction and market acceptance of new technologies, products and services;

 

   

delay or failure in development or commercialization of technologies or infrastructures to support them;

 

   

generational technology upgrades, expiration of support services contracts for widely used software products, and technology investment cycles;

 

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variations in product and service costs and mix of products and services sold;

 

   

seasonality of purchasing cycles of our customers, particularly some Japanese national and local governments and Japanese business enterprises that tend to increase their purchases and accept deliveries of products and services during the fourth quarter of their fiscal year, which typically ends on March 31;

 

   

size and timing of customer orders, which in turn will often depend upon the success of our customers’ businesses or specific products or services; and

 

   

impact of acquired businesses and technologies.

There are other trends and factors beyond our control that may affect our operations and make it difficult to predict results of operations for a particular period. These include:

 

   

adverse changes in the conditions in the markets of the products and services that we offer;

 

   

changes in conditions in the broader markets for ICT infrastructure and in the Japanese and global economies generally;

 

   

governmental decisions regarding the development and deployment of ICT infrastructure, including the size and timing of governmental expenditures in these areas;

 

   

size and timing of capital expenditures and ICT spending by our customers;

 

   

inventory management practices of our customers;

 

   

changes in governmental regulation or policy affecting the ICT industry;

 

   

adverse changes in capital and financial markets, and the ability of our customers and suppliers to obtain financing or to fund capital expenditures; and

 

   

adverse changes in the credit quality of our customers and suppliers.

These trends and factors could have a material adverse effect on our business, results of operations and financial condition.

We may have difficulty achieving the benefits expected from recently completed and future acquisitions and other business combinations and reorganizations.

As part of our business structure improvement strategy, we recently completed, and will continue to seek appropriate opportunities for, acquisitions and other business combinations. For example, as part of our growth strategy to expand our “Safer Cities” initiative, we acquired Northgate Public Services Limited in the United Kingdom in January 2018 (with the remaining shares acquired in March 2018) and KMD Holding ApS in Denmark in February 2019. However, we may be unable to find appropriate target companies with strengths that match the objectives of our inorganic growth strategy, whether due to a lack of such target companies, insufficient interest on the part of such target companies to be acquired or our inability to accurately discern which potential target companies would be appropriate. Even if we are able to find such appropriate target companies, the success of these acquisitions and other transactions are subject to various risks, such as the following:

 

   

we may be unable to realize the growth opportunities, cost efficiencies, investment effect and other expected benefits of these acquisitions, business combinations and reorganizations in the expected time period or at all;

 

   

future transactions may not be completed as scheduled, or at all, due to legal or regulatory requirements or contractual and other conditions to which such transactions are subject;

 

   

unanticipated problems could also arise in the integration process, including unanticipated restructuring or integration expenses and liabilities, as well as delays or other difficulties in coordinating,

 

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consolidating and integrating personnel, information and management systems, and customer products and services, particularly in markets outside Japan;

 

   

the combined or reorganized entities may not be able to retain existing customers and strategic partners to the extent that they wish to diversify their suppliers for cost and risk management and other purposes;

 

   

the combined or reorganized entities may require additional financial support from us;

 

   

the diversion of management and key employees’ attention may detract from our ability to increase revenues and minimize costs with respect to our existing core business segments;

 

   

goodwill and other intangible assets arising from the acquisitions, business combinations and reorganizations are subject to potential impairment charges;

 

   

our investments in the combined or reorganized entities are subject to possible valuation and other losses; and

 

   

the transactions may result in other unanticipated adverse consequences.

Any of the foregoing and other risks may adversely affect our business, results of operations, financial condition and stock price.

We rely on our strategic partners and co-participants in various projects, and our business could suffer if our relationships with them change adversely or if we encounter problems relating to their products or services.

We have entered into a number of long-term strategic alliances with leading industry participants, both to develop new technologies and products and to manufacture existing and new products. For example, in October 2018 we announced a mobile 5G development partnership with Samsung Electronics Co., Ltd. If our strategic partners encounter financial or other business difficulties, if their strategic objectives change or if they no longer perceive us to be an attractive alliance partner, they may no longer be able or desire to participate in our alliances. Our business could be hurt if we are unable to maintain our alliances. In addition, as a result of such strategic alliances, we may become dependent on our alliance partners for product lines using co-developed technologies, leaving us with less flexibility in expanding or diversifying our product offerings. Our competitors may form similar strategic alliances to strengthen their competitive positions in the same product lines.

We participate in various projects where we and various other companies provide services and products that are integrated into systems to meet customer requirements. If a partner company is unable to continue its role due to bankruptcy or other reasons or if any of the services or products that a partner company provides have any defects or other characteristics that cause the integrated systems to malfunction or otherwise fail, we may be unable to meet customer requirements, and our reputation and business could be significantly harmed.

We may not succeed in executing our growth strategies outside Japan.

Our strategies include various measures to expand our business in markets outside Japan such as the planned expansion of our “Safer Cities” initiative. As we expand our business geographically, we will be exposed to risks that are unique to particular jurisdictions or markets with which we may be less familiar. Our efforts to penetrate new markets or offer new products and services may not succeed if product or market opportunities develop more slowly than expected, if our new products and services are not well accepted among customers, if the profitability of opportunities is undermined by competitive pressures or regulatory limitations, or if our planned acquisitions, investments or capital alliances are not approved by regulators. We may also lack sufficient knowledge or understanding of local business practices or legal and regulatory requirements. Depending on the market, we may encounter difficulties in finding suitable business, joint venture and alliance partners. In various overseas markets, we face barriers in the form of long-standing relationships between our potential customers and their local suppliers as well as protective regulations. In addition, pursuing international growth opportunities

 

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may require us to make significant investments long before we realize any returns on the investments. Increased investments may result in expenses growing at a faster rate than revenues. Our overseas projects and investments could also be adversely affected by:

 

   

foreign currency exchange controls;

 

   

restrictions on foreign investment or the repatriation of income or invested capital;

 

   

nationalization of local industries;

 

   

changes in export or import restrictions;

 

   

regulations in foreign markets, including with respect to licenses and permits that may be required from local authorities;

 

   

changes in the tax system or rate of taxation in the countries where we do business; and

 

   

economic, social and political risks.

In addition, problems in foreign financial markets and economies could adversely affect demand from customers in the affected markets. Because of these factors, we may not succeed in expanding our business in international markets, and our business growth prospects, results of operations and financial condition could be materially and adversely affected.

Risks Related to Our Business Operations

If we fail to keep pace with rapid technological advancements in our industry, or if we pursue technologies that do not become commercially accepted, customers may not buy our products and services, and our revenue and profitability may decline.

The markets for the products and services that we offer are characterized by rapidly changing technology, evolving technical standards, changes in customer preferences and frequent introduction of new products and services. The development and commercialization of new technologies and the introduction of new products and services will often make existing products and services obsolete or unmarketable. Our competitiveness in the future will depend at least in part on our ability to:

 

   

keep pace with rapid technological developments and maintain technological leadership, including with respect to the increasingly important fields of AI, IoT, biometrics and cybersecurity technology;

 

   

enhance our existing products and services;

 

   

develop and manufacture innovative products and services that meet our customers’ needs in a timely and cost-effective manner;

 

   

utilize or adjust to new products, services and technologies;

 

   

attract and retain highly capable technical and engineering personnel;

 

   

accurately assess the demand for, and market acceptance of, new products and services that we develop;

 

   

avoid delays in developing or distributing new products;

 

   

address increasingly sophisticated and diversifying customer requirements; and

 

   

integrate our products into our customers’ products and systems.

We may not be successful in identifying and marketing product and service enhancements, or offering and supporting new products and services, in response to technological changes as well as changes in customer preferences that require increasingly diverse sources of value. Additionally, future technological changes may

 

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not advance in accordance with historical trends or predicted courses or timetables. For example, as the hardware in certain fields in which we operate has approached maturity, we have in recent years observed a general trend towards a focus on software innovation rather than continued hardware innovation. If we fail to adequately monitor and address these technological changes and changes in customer preferences or accurately anticipate the direction of such changes, our business, results of operations and financial condition may be significantly harmed. Furthermore, we may encounter difficulties in incorporating our technologies into our products and services in accordance with our customers’ expectations, which may adversely affect our relationships with our customers, our reputation and our revenues.

We seek to form and enhance alliances and partnerships with other companies to develop and commercialize technologies that will become industry standards for the products and services that we currently sell and plan to sell in the future. We spend significant financial, human and other resources on developing and commercializing such technologies. We may not, however, succeed in developing or commercializing such standard-setting technologies if our competitors’ technologies are accepted as industry standards. In such case, our competitive position, reputation, results of operations and financial condition could be adversely affected.

We are subject to intense competition in many of the markets in which we operate, and this may adversely affect our ability to maintain or grow our sales and profits.

Intense competition creates a challenging environment for us in many of the markets in which we operate. Such competition places significant pressure on our ability to maintain or improve our profitability and is particularly acute during market slowdowns. The entry of additional competitors into the markets in which we operate increases the risk that our products and services will become subject to intense price competition. Some of our competitors, mainly in Asian countries, may have an advantage of having lower operating costs than us and may be able to compete for customers more effectively than we can based on price. There is also the risk that our competitors may engage in strategic pricing, especially in the case of multinational corporations with which we may compete in the future that possess extensive financial resources that far exceed our own in terms of the ability to absorb sustained losses. Additionally, we may face new competition over time from such multinational corporations as technologies evolve and new technological solutions become available in the markets in which we compete. Such multinational corporations may also be able to invest significantly higher amounts of resources in research and development as well as employ far larger numbers of personnel. In recent years, the time between the introduction of a new product developed by us and the production of the same or a comparable product by our competitors has become shorter. This has increased the risk that the products we offer will become subject to intense price competition sooner than in the past.

We have many competitors in Japan and other countries, ranging from large multinational corporations to a number of relatively small, rapidly growing and highly specialized companies. Unlike many of our competitors, however, we operate in many businesses and compete with companies that specialize in one or more of our product or service lines. As a result, even if we have more combined resources than our specialized competitors, we may not be able to fund or invest in specific subsets of our businesses as much as our specialized competitors can, and we may not be able to change or take advantage of market opportunities as quickly or as effectively as they can due to their smaller size and narrower focus.

Our participation in competitive bidding or proposal processes for government and other large projects with demanding price and other requirements can place further downward pressure on our profitability. In order to maintain or improve our profitability while meeting such demanding requirements, we continuously strive to increase our revenue by, among other means, offering and delivering innovative and unique value to customers and to reduce our costs and expenses through optimization of our development and manufacturing operations, business process improvements and other measures. However, these measures may be insufficient to enable us to maintain or improve our operating profit margin on such projects.

We sell products and services to some of our current and potential competitors. For example, we receive orders from, and provide solutions to, competitors that further integrate or otherwise use our solutions for large

 

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projects for which such competitors are engaged as the primary solutions provider. If these competitors cease to use us as their secondary solutions provider for such large projects for competitive or other reasons, our business could be harmed.

We conduct a substantial amount of business with a concentrated customer base, and our business could suffer if they encounter business problems or decide to reduce their business with us.

A substantial portion of our business portfolio consists of projects for government entities and certain large network and other infrastructure companies, such as the NTT group. Fluctuations in demand for such projects, particularly large-scale projects, or our potential inability to secure such projects through the applicable bidding processes, may have a significant impact on our revenue. Furthermore, we engage in a significant amount of projects with a large number of government entities, and contracts with government entities can be reduced or terminated for funding, policy or other reasons. Similarly, corporate customers may reduce their level of capital expenditures or current procurement, shift their investment focus or otherwise reduce their business with us for business, financial or other reasons.

We are also subject to the risk that regulatory restrictions may prevent us from participating in the bidding or proposal processes that are required for obtaining contracts with the various government entities that are our customers and potential customers. For example, in February 2017, we received cease and desist orders from the Japanese Fair Trade Commission and were ordered to pay administrative monetary penalties totaling ¥1.4 billion for violating the prohibition on unreasonable restraint of trade under the Japanese Act on Prohibition of Private Monopolization and Maintenance of Fair Trade due to collusion with other bidders in connection with projects involving equipment for a public utility company and fire and emergency response operations. As a result of these cease and desist orders, we became temporarily ineligible to participate in the bidding process for projects with a significant number of Japanese government agencies and local governments for various periods ranging from one month to 27 months. We complied with all of the requirements under the orders and have implemented various remedial measures to reduce the risk of similar future violations, and all of the restrictions on our ability to bid on public projects had been lifted by May 23, 2019. To the extent that we become unable to participate in projects with our various government entity customers in the future, whether due to fluctuations in demand, changes in government policy or regulatory reasons, our business, results of operations and financial condition could be adversely affected.

We may face difficulties with respect to new businesses.

The process of developing new products and services entails many risks. The development and manufacturing processes can be lengthy and costly and require us to commit significant resources well in advance of sales. For example, in July 2019, we acquired OncoImmunity AS as part of our initiative to establish an AI-driven drug discovery business. Because we have limited experience with drug development, we anticipate that this initiative may not become profitable for an extended period and is still subject to the risk of failure despite continued effort and investment. Additionally, technology and standards may change while we are in the development stage, rendering any new products or services we develop obsolete or uncompetitive before their introduction. Any of our newly developed products or services may also contain undetected errors that may be discovered after their introduction and distribution, resulting in liability for losses caused by such errors and reputational harm, which may adversely affect our business, results of operations and financial condition.

Failures in the products and services that we provide, including potential claims relating to defects or delays, could result in significant direct or indirect costs to us.

Many of our products and services are used in critical situations where the adverse consequences of defects, failure to meet customers’ demands for reliability, safety and performance or delay of project completion may be severe, exposing us to even greater risk. Moreover, any defects in our products and services, including those used

 

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in the public services sector, may have a far-reaching impact, negatively affecting a large population of end-users. Product and service defects or delays could subject us to liability for significant damages, including consequential damages, as well as potential penalties, sanctions or costs in connection with product recalls. Although our products and services are generally related to ICT solutions, exposing us to customary risks of technology failure or computer viruses, many of our products and services are used in infrastructure that is directly related to the protection of human life, such as communication systems for fire rescue services. To the extent our products and services are involved in incidents that result in personal injuries or the loss of life, we may be exposed to liability far in excess of the risks faced by a typical company in the ICT industry. The innovative technologies in our products and services may also expose us to liability of a type that is difficult to foresee. Any reputational harm and regulatory sanctions that arise from these problems could harm our ability to sell our products and services. Furthermore, defects, delays, penalties, sanctions, recalls or other difficulties may result in projects that continue to be unprofitable for extended periods. These circumstances could adversely affect our business, results of operations and financial condition.

Our failure to procure components, equipment or other supplies as planned could adversely affect our results of operations.

Our operations depend on procuring components, equipment and other supplies in a timely manner. In some cases, we purchase on a just-in-time basis, which reduces the margin for error of our procurement activities. Because the products that we purchase are often complex or specialized, it may be difficult for us to substitute one supplier for another or one product for another within a reasonable time frame or at all. Some products are available only from a limited number of suppliers or a single supplier, which may decrease our bargaining power and negatively affect our procurement costs. Although we believe that supplies of the components, equipment and other supplies that we use are currently adequate, shortages in critical materials could occur due for example to an interruption in supply, a shift in regulatory trends, an increase in industry demand or geopolitical tensions that may result in tariffs or other trade restrictions. Any shortages may result in increased costs in order to adjust our supply chain to procure necessary replacements and could adversely affect our production capacity and efficiency. In addition, a financial market disruption could pose liquidity or solvency risks for our suppliers, which could reduce our sources of supply or disrupt our supply chains. Furthermore, in the event that we procure components, equipment or other supplies that are defective, the reliability and reputation of our products and services could be adversely affected. Our business, results of operations and financial condition would be adversely affected if we are unable to obtain adequate delivery of these supplies in a timely manner and at an acceptable price.

If we are unable to protect our intellectual property rights, our business and prospects may be harmed.

We depend on our proprietary technology and our ability to obtain patents and other intellectual property rights covering our products, services, business models, and design and manufacturing processes. As of March 31, 2020, we held approximately 47,000 patents issued in Japan and other jurisdictions and have a significant number of Japanese and foreign patent applications pending. The process of seeking and maintaining patent protection can be long and expensive. Our patents could be challenged, invalidated or circumvented. The fact that we hold many patents or other intellectual property rights does not ensure that the rights granted under them will provide competitive advantages to us. For example, the protection afforded by our intellectual property rights may be undercut by rapid changes in technologies in the industries in which we operate. Similarly, there can be no assurance that claims allowed on any future patents will be sufficiently broad to protect our technology. Effective patent, copyright and trade secret protection may be unavailable or limited in some countries, and our trade secrets may be vulnerable to disclosure or misappropriation by employees, contractors and other persons. Further, pirated products of inferior quality infringing our intellectual property rights may damage our reputation and adversely affect sales of our products. Litigation, which could consume significant financial and management resources, may be necessary to enforce our patents or other intellectual property rights.

 

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If we are unable to obtain certain intellectual property licenses owned by third parties, our business could be adversely affected.

Many of our products are designed to utilize software or other intellectual property licensed from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, we believe that, based upon experience and standard industry practice, these licenses generally can be obtained on commercially reasonable terms. However, there can be no assurance that we will be able to obtain the licenses that we will need from third parties on commercially reasonable terms or at all. If we are unable to obtain necessary licenses for the operation of our business, we may be required to limit or cease our operations that make use of such license and may be unable to compete effectively. Any of these results would adversely affect our business, results of operations and financial condition.

We are exposed to the risk that our customers, including those with whom we have made deferred payment or other financing arrangements, may encounter financial difficulties.

Many of our customers purchase products and services from us on payment terms that provide for deferred payment. If our customers for whom we have extended payment terms or provided other financing terms or from whom we have substantial accounts receivable encounter financial difficulties or fail to access credit from others and are unable to make payments on time, our business, results of operations and financial condition could be adversely affected.

We sometimes provide vendor financing to our customers or offer customers extended payment terms or other forms of financing to assist their purchase of our products and services. If we are unable to provide or facilitate such payment arrangements or other forms of financing to our customers on terms acceptable to them or at all, due to financial difficulties or otherwise, our results of operations and financial condition could be adversely affected.

If we fail to attract, hire and retain skilled personnel, we may not be able to achieve our business objectives.

As an ICT company, we must compete for talented employees to develop our products, services and solutions, and our competition for these potential employees includes multinational technology companies with considerable resources. As a result, our human resources organization focuses significant efforts on attracting and retaining individuals in key technology positions, and our recruitment and personnel costs may increase in the future. Changing technology and industry preferences may increase the need for hiring differently skilled and diversified talent. For example, recent trends in digitization and automation have resulted in increased demand for talent with differentiated skills in AI, machine learning, data science and statistical analysis, and we foresee fiercer competition for such talent. Moreover, the talent pools with such skills could be different from our traditional sources of recruitment. If we experience a substantial loss of, or an inability to attract, talented personnel, we may be unable to meet our business objectives.

We may not be able to obtain additional financing necessary to meet our funding needs due to a decline in our credit profile, difficult financial market conditions and other factors, and this may have a material adverse effect on our business.

Our primary sources of funds have historically been cash flows from operations, borrowings from banks and other institutional lenders and funding from the capital markets, such as offerings of commercial paper and other debt securities. A decline in our credit profile could result in a downgrade in our ratings or otherwise lead to increases in our interest expenses and could have an adverse impact on our ability to access the commercial paper market or the public and private debt markets, which could have an adverse effect on our liquidity, results of operations and financial condition. Because we maintain a relatively high level of leverage, our operations may be particularly affected in the event that we encounter difficulties in accessing public or private debt markets. As of March 31, 2020, the balances of our borrowings and bonds were ¥320.2 billion and ¥199.6 billion, respectively. See “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Sources of Funding and Liquidity.”

 

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A failure of one or more of our major lenders, a decision by one or more of them to stop lending to us or instability in the capital markets could have an adverse impact on our access to funding. If we fail to obtain external financing on terms acceptable to us, or at all, or to generate sufficient cash flows from our operations or sales of our assets, when necessary, we will be unable to fulfill our obligations, and our business, results of operations and financial condition may be materially adversely affected. To the extent we finance our operations with additional debt, we may become subject to financial and other covenants that may restrict our ability to pursue our business strategy.

Risks Related to Regulatory Environment and Legal Proceedings

Failure of internal controls may significantly harm our business, results of operations and financial condition.

We have established internal controls that are designed to provide reasonable assurance of the reliability of our financial reporting in accordance with the applicable Japanese regulatory standards, but our internal controls may not be successful or otherwise sufficient to detect all forms of potential errors or misconduct. While we evaluate and seek to enhance the effectiveness of our internal controls, human error, misconduct or fraudulent act may occur due to inherent limitations of internal controls or deficiencies or weaknesses in our internal controls. Unforeseen changes in the business environment or unusually complex transactions may impose challenges on our efforts to maintain effective internal controls. We may consequently be required to restate our financial information and spend significant resources on remedying deficiencies and weaknesses. We may also become subject to administrative or judicial action. In addition, our reputation may be damaged. These consequences could have a material adverse effect on our business, results of operations and financial condition.

As we operate in multiple markets with diverse business lines, we may encounter difficulty in streamlining our operational processes from the perspective of enhancing efficiency and ensuring effective internal controls, particularly when we acquire and integrate into our group a company that is engaged in a business unfamiliar to us or that operates in a market unfamiliar to us. Such streamlining efforts may require significant management, human and financial resources.

We may become involved in costly and time-consuming legal proceedings, including intellectual property litigation and infringement claims, that may substantially increase our costs and harm our business.

From time to time, we are sued or receive notices regarding patent and other intellectual property claims. Due to the existence of a large number of patents and other intellectual property rights in our industry and the rapid rate at which new patents and other intellectual property rights are created, we may be unable to determine in advance whether a product or service or any of its components may infringe any third-party intellectual property rights. Whether or not such infringement claims have merit, significant resources may be required to defend against them. If an infringement claim against us is successful and we are unable to obtain the license for the infringed technology or substitute it with similar non-infringing technology, our business could be adversely affected.

We may also become subject to judicial or administrative proceedings involving issues under commercial, anti-competition, anti-bribery, product liability, environmental and other laws and regulations. The outcome of such proceedings, including the extent of the potential impact of any unfavorable outcome on our financial results, however, is inherently uncertain and difficult to predict. The extent of financial, management, human and other resources required to deal with such proceedings or to take any action given such outcome is similarly uncertain and could be significant. Such resources may also be difficult for us to secure in a timely manner, and our operations could be disrupted if our resources are extensively deployed to deal with such proceedings and outcome. In addition, if we violate legal or regulatory requirements, we could be required to pay fines or penalties, and government agencies, local governments and intergovernmental organizations could suspend or debar us as a contractor or prevent us from participating in bidding or proposal processes, which could have a material adverse impact on our business, results of operation, financial condition and reputation.

 

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We face regulatory change and uncertainty, as well as potential legal liability, in many jurisdictions in which we operate.

In many of the jurisdictions in which we operate, our business is subject to various risks associated with unexpected legal or regulatory changes, uncertainty in the application of laws and governmental policies, and uncertainty relating to legal liabilities. Substantial changes in the legal or regulatory environment, including the economic, trade, tax, defense, labor, spending, privacy and other policies of the governments of Japan and other jurisdictions in which we operate could require us to change our businesses or otherwise adversely affect our business, results of operations and financial condition. For example, sanctions and import and export controls imposed by governments of various jurisdictions restricting or prohibiting transactions with certain persons or entities in or affiliated with certain countries or involving certain products or conduct expose us to potential administrative, civil and criminal liabilities and penalties, including fines, debarment from government contracts and loss of import and export privileges. Sanctions laws and import and export restrictions are changing rapidly for certain geographies. Our existing compliance program may not be effective at preventing violations of sanctions laws and import and export restrictions, and violations of such laws and restrictions could have an adverse effect on our reputation, business, results of operations and financial condition. In addition, we may be unable to gain or retain our customers or investors, government or non-government entities, including institutional investors, with policies to refrain from transacting with, or investing in, companies doing business with persons or entities in or affiliated with sanctioned countries. Moreover, if any products that we sold to customers are resold or reused in contravention with sanctions laws or import and export restrictions, our reputation may be damaged. For additional information, see “Item 8.A. “Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings.”

We are subject to various environmental laws and regulations, and there may be costs associated with compliance or remediation.

Our operations are subject to many environmental laws and regulations governing, among other things, air emissions, wastewater discharges, the use and handling of hazardous substances, waste disposal, chemical substances in products, product recycling, soil and ground water contamination, and global warming. We face risks of environmental liability arising from our current, historical and future manufacturing activities. Our failure to comply with current and future environmental laws and regulations, or the identification of contamination for which we are liable, could subject us to substantial costs, including fines, clean-up costs, third-party property damage or personal injury claims, and make significant investments to upgrade our facilities or curtail our operations. Identification of presently unidentified environmental conditions, more vigorous enforcement by a governmental authority, enactment of more stringent legal requirements or other unanticipated events could give rise to adverse publicity, restrict our operations, affect the design or marketability of our products or otherwise cause us to incur material environmental costs, adversely affecting our results of operations and financial condition. We endeavor to comply with laws and government policies through various measures, including our environmental management standards and long-term climate change policy guidelines as well as inspections and environmental auditing in accordance with our internal environmental policies, but these measures may not be effective at avoiding potential liabilities arising from our current, historical and future manufacturing activities. However, costs associated with additional or stricter environmental compliance or remediation obligations could adversely affect our business, results of operations and financial condition.

Information security and data protection concerns and restrictions could harm our business.

We collect, store, use, transfer or otherwise process a voluminous amount of personal information and confidential information in the regular course of our business. For example, we are required to handle personal information in compliance with the Personal Information Protection Act of Japan and similar laws in other jurisdictions in which we operate, including the European Union’s General Data Protection Regulation which became effective in May 2018. If personal or confidential information in our possession about our customers or employees is leaked or improperly accessed and subsequently misused, we may be subject to liability and

 

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regulatory action, and our reputation and brand value may be damaged. In addition, the cost and operational consequences of implementing further data protection measures could be significant.

In the current business environment, we face increasing and evolving risks regarding cybersecurity and privacy, including hacking, employee malfeasance, human or technological error, and fraudulent inducement of disclosure of information, which expose us to potentially significant financial loss, liability and damage to our brand and reputation. Such risks include attempted breaches not only of our own products, services and systems, but also those of our customers, contractors, suppliers, business partners and other third parties. Our products, services and systems, including cloud-based systems as well as systems and technologies that we maintain on behalf of our customers, may be used in their critical operations, or involve the storage, processing and transmission of personal, confidential and other sensitive data. These products, services and systems are also used by customers in highly regulated industries, such as financial and healthcare services, as well as government agencies. Cybersecurity breaches, if successful, could result in, for example, unauthorized access to or loss or destruction of personal, confidential and other sensitive data as well as systems, delays in and disruptions to business activities and denials of services, and disruptions to critical infrastructure, including utility, information technology and communications. In addition, the increasingly sophisticated and pervasive nature of certain cybersecurity threats and vulnerabilities, as well as the increasing scale and complexity of the business and infrastructure that can be targeted, make it possible that certain threats and vulnerabilities will not be detected or mitigated in a timely manner. For example, in July 2018, we discovered that certain files relating to a major customer had been accessed by third parties without authorization, although we do not believe that any confidential information was accessed in the intrusion. Cybersecurity risk to us and our customers also depends on factors such as the actions, practices and investments of customers, contractors, suppliers, business partners and other third parties. As our business and the cybersecurity landscape evolve, we may find it necessary to make significant further investments to protect data and infrastructure.

There are numerous laws and regulations in various jurisdictions regarding privacy, data protection, information security, and the storing, sharing, use, processing, transfer, disclosure and protection of personal data. In light of the increasing pace of new technology development, including with respect to biometric data, AI and related human rights issues that are particularly relevant to our “Safer Cities” initiative, the scope of these data protection and privacy-related laws and regulations are expanding, subject to differing interpretations, and may be inconsistent among jurisdictions, or conflict with other rules. These laws and regulations are evolving and may result in increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. We are also subject to the terms of our privacy policies and contractual obligations to third parties related to privacy, data protection and information security. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to customers or other third parties, or applicable laws or regulations relating to privacy, data protection, or information security may result in governmental investigations or enforcement actions, litigation, claims or public statements against us by consumer advocacy groups or others, and could result in significant liability or cause our customers to lose trust in us, which could cause them to cease or reduce use of our products and services and otherwise have an adverse effect on our reputation and business. Any similar failure or perceived failure by users of our products or services may also have an adverse effect on our reputation and business. In addition, legal, regulatory, contractual and other obligations as well as public concerns relating to privacy, data protection or information security could restrict our ability to store and process data as part of our solutions or otherwise impact our ability to provide our solutions in certain jurisdictions, and may result in the loss of business opportunities from customers operating in, or seeking to expand into, those jurisdictions.

Changes in effective tax rates or deferred tax assets, or adverse outcomes resulting from an examination of our income tax returns, may harm our results of operations.

Our effective tax rate is subject to volatility and could be adversely affected by, among other factors:

 

   

earnings declining in countries that have lower tax rates and increasing in countries that have higher tax rates;

 

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changes in the valuation of our deferred tax assets and liabilities;

 

   

transfer pricing adjustments;

 

   

tax effects of nondeductible compensation; or

 

   

changes in tax laws, regulations, accounting standards or interpretation thereof in the various jurisdictions in which we operate.

Any significant increase in our future effective tax rates could reduce our net profit for future periods. We currently carry deferred tax assets resulting from tax loss carryforwards and deductible temporary differences, both of which may reduce our taxable income in the future. Deferred tax assets may only be realized against taxable income. The amount of our deferred tax assets considered realizable could be reduced from time to time if estimates of future taxable income from our operations and tax planning strategies during the carryforward period are lower than previously estimated due to deterioration in market conditions or other circumstances. The amount of our deferred tax assets could also be reduced as a result of changes in applicable tax laws and regulations, including decreases in statutory tax rates, as well as applicable accounting standards. Any such reduction in our deferred tax assets will adversely affect our income for the period of such adjustment.

In addition, we are subject to continuous audits and examination of our income tax returns by tax authorities of various jurisdictions. We regularly assess the likelihood of adverse outcomes resulting from these audits and examinations to determine the adequacy of our provisions for income taxes. There can be no assurance that the outcomes of these audits and examinations will not have an adverse effect on our business, results of operations and financial condition.

Our business could be harmed if we fail to meet corporate governance and social responsibility requirements.

We are subject to corporate governance and social responsibility requirements, including those relating to fair dealing and competition, human rights, workplace safety and sanitation, sustainability and other issues. These requirements and legal frameworks continue to evolve, and in some of the jurisdictions in which we operate, we are under increasing scrutiny concerning such issues by not only regulatory authorities but also other stakeholders such as investors, non-government organizations and transaction counterparties. Despite our efforts to meet applicable regulatory requirements and stakeholder expectations regarding corporate governance and social responsibility issues through implementation and improvements of our internal policies, procedures and initiatives, and other measures, we may not be able to fully meet such requirements and expectations. Our inability to do so could expose us to regulatory, financial and reputational risks.

Risks Related to Other Aspects of Our Business

Natural disasters, public health issues, armed hostilities, terrorism and other causes over which we have little or no control could harm our business.

Natural disasters, fires, storms, floods, droughts and other severe weather conditions caused by climate change, public health issues, armed hostilities, terrorism and other events, whether in Japan or any other country in which we operate, could cause damage or disruption to us, our customers or suppliers, or could lead to economic stagnation, fluctuations in foreign currency exchange rates and interest rates, political or economic instability, or deterioration in public safety and other conditions, any of which could harm our business. In Japan, we are exposed to heightened risks of large-scale natural disasters, particularly earthquakes and typhoons. A large-scale earthquake may lead to, among other things, tsunamis, soil liquefaction and fires, as well as electricity power supply shortages, and may result in significant damage to, or losses of, tangible or human assets, market disruptions or a longer-term economic slowdown. With increasing intensity and frequency in recent years, typhoons may also result in, among other things, floods, landslides and gusts causing similar damage, losses and other consequences. For example, the Great East Japan Earthquake of 2011 caused the temporary suspension of manufacturing activity at our facility in the Tohoku region, and in October 2019 a typhoon caused some flooding-related damage at a portion of our Tamagawa plant.

 

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Our disaster mitigation measures, emergency and business continuity plans, training and education programs may not address all eventualities resulting from natural disasters, including disruption or destruction of power, gas, water, communications, transportation and other infrastructures, property and human casualties, reduction or suspension of manufacturing capacities, logistics and supply chain interruptions, deterioration in product and service quality, and safety, health and environmental issues. In addition, in the event of a viral epidemic, including a further escalation of the recent outbreak of the novel coronavirus COVID-19, we may encounter difficulty maintaining an adequate level of human resources or workplace safety, declines in demand for our products and services from customers in the affected areas and disruptions to the operations of our suppliers. These events could have a material adverse effect on our business.

Declines in our pension assets and changes in discount rates and other actuarial assumptions we use to determine our defined benefit obligation may adversely affect our financial condition and results of operations.

We may face adverse effects on our financial conditions and results of operations relating to our employees’ retirement benefit plans from changes in the market value of equity securities and other pension assets and a decline in returns on our pension assets. Furthermore, in accordance with applicable accounting rules, we make certain assumptions in determining the present value of our defined benefit obligation. Changes in the discount rates and other actuarial assumptions we use in determining the present value of our defined benefit obligation may have an adverse effect on our financial condition and results of operations. For example, any future reduction in discount rates or recognition of past service cost as a result of plan amendments may have the effect of increasing our defined benefit obligation and defined benefit cost.

We may be required to recognize impairment losses with regard to goodwill.

As a result of our acquisitions of Northgate Public Services Limited in the United Kingdom (in January 2018, with the remaining shares acquired in March 2018) and KMD Holding ApS in Denmark (in February 2019), we have recorded significant goodwill. As of March 31, 2019 and 2020, we had goodwill of ¥188.2 billion and ¥182.3 billion, respectively. We may also record additional goodwill as a result of further acquisitions in the future. Our consolidated financial statements are prepared in accordance with IFRS, which requires testing cash generating units, or CGUs, to which goodwill has been allocated for impairment at least once annually, regardless of any indication of impairment. In addition, whenever events or changes in circumstances indicate that a CGU to which goodwill has been allocated may be impaired, we perform an additional impairment test to determine whether the carrying amount of such CGU exceeds the recoverable amount. The recoverable amount of a CGU is the higher of its fair value less costs of disposal and its value in use. In determining the value in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate (or rates) that reflects current market assessments of the time value of money and the risks specific to the asset. If the carrying amount of a CGU with goodwill on our statement of financial position exceeds its recoverable amount, we would be required to recognize an impairment loss. Any impairment loss shall first reduce the carrying amount of goodwill allocated to the CGU. Any impairment losses for tested goodwill will adversely affect our results of operations and financial condition.

Risks Related to Owning Our Shares

Rights of shareholders under Japanese law may be different from rights of shareholders of companies organized in other jurisdictions.

Our articles of incorporation and the Companies Act of Japan (Act No. 86 of 2005), or the Companies Act, govern our corporate affairs. Legal principles relating to matters such as the validity of certain corporate procedures, directors’ and corporate officers’ fiduciary duties and liabilities, and shareholders’ rights under Japanese law may be different from, or less clearly defined than, those that would apply to a company incorporated in another jurisdiction. For example, under the Companies Act, only holders of 3% or more of our

 

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total voting rights or our outstanding shares are entitled to examine our accounting books and records. In addition, shareholders’ rights under Japanese law may not be as extensive as shareholders’ rights under the laws of other jurisdictions. Furthermore, there is a degree of uncertainty as to what duties the directors of a Japanese joint stock corporation (kabushiki kaisha) may have in response to an unsolicited takeover bid, and such uncertainty may be more pronounced than that in other jurisdictions. You may have more difficulty in asserting your rights as a shareholder than you would as a shareholder of a corporation organized in another jurisdiction. In addition, Japanese courts may not be willing to enforce judgments of non-Japanese courts against us which are based on non-Japanese securities laws, including U.S. federal and state securities laws.

Investors holding less than a full “unit” of shares of our common stock will have limited rights as shareholders.

Pursuant to the Companies Act and certain related legislation, our articles of incorporation provide that 100 shares of our common stock each constitute one unit of shares. Under the Companies Act, holders of shares of our common stock constituting less than a full unit do not enjoy the right to vote. In addition, shares constituting less than a full unit do not comprise a trading unit, except in limited circumstances, and accordingly may not be sold on the Tokyo Stock Exchange on which our common stock is listed. Under the unit share system, any holder of shares constituting less than a full unit has the right to request that we purchase such shares constituting less than a full unit. In addition, any holder of shares constituting less than a full unit has the right to request that, pursuant to our articles of incorporation and share handling regulations, we sell such number of shares that, when combined with the number of shares already held by such holder, constitute a whole unit of shares.

Because of daily price range limitations under Japanese stock exchange rules, you may not be able to sell our shares at a particular price on any particular trading day, or at all.

Stock prices on the Tokyo Stock Exchange are determined on a real-time basis by the balance between bids and offers. The Tokyo Stock Exchange is an order-driven market without specialists or market makers to guide price formation. To prevent excessive volatility, the Tokyo Stock Exchange sets daily upward and downward price range limitations for each listed stock, including our common stock, based on the previous day’s closing price or special quote. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell shares of our common stock at a price above or below the relevant daily limit on the Tokyo Stock Exchange may not be able to sell at such price on a particular trading day, or at all.

Our shareholders of record on a record date may not receive the dividend they anticipate.

The customary dividend payout practice and relevant regulatory regime of publicly listed companies in Japan may significantly differ from that widely followed or otherwise deemed necessary or fair in foreign markets. While we may announce forecasts of year-end and interim dividends prior to the record date, these forecasts are not legally binding. We are not able to ultimately determine any dividend payment amount to our shareholders of record as of a record date, including whether we will make any dividend payment to such shareholders at all, until after such record date. For that reason, our shareholders of record on a record date may not receive the dividends they anticipate.

You will be investing in securities that are not listed on any national securities exchange in the United States.

While our common stock is listed on the Tokyo Stock Exchange, we do not intend to seek any listing for our common stock on a national securities exchange in the United States. As a result, there may be little or no liquidity for shares of our common stock in the United States, and investors may be limited to trading through the Tokyo Stock Exchange or through some alternative trading markets.

In addition, because we do not intend to seek a listing on a national securities exchange in the United States, we are not subject to some of the corporate governance requirements typically applicable to public companies in

 

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the United States, particularly those imposed on listed companies by U.S. national securities exchanges, such as rules related to director independence and requirements related to audit and other board committees.

Prior notification under the Foreign Exchange and Foreign Trade Act of Japan may be required in the case of acquisition by foreign investors of a certain portion of our shares.

Because we are engaged in certain businesses designated by the Foreign Exchange and Foreign Trade Act of Japan (Act No. 228 of 1949, as amended, the “FEFTA”) and its related cabinet orders and ministerial ordinances (collectively, the “Foreign Exchange Regulations”), such as businesses of manufacturing equipment related to national defense, if a foreign investor intends to consummate an acquisition of shares of our common stock that constitutes an “inward direct investment” under the Foreign Exchange Regulations, the foreign investor, in general, must file prior notification of such inward direct investment with the Minister of Finance and any other competent Ministers. “Inward direct investment” includes an acquisition by a foreign investor of shares of our common stock as a result of which acquisition such foreign investor, in combination with any existing holdings, directly or indirectly holds 1% or more of the total number of issued shares or the total number of voting rights. While certain exemptions from the prior notification requirements are provided for under the Foreign Exchange Regulations, certain foreign investors seeking to make such acquisition may not be eligible for such exemptions. If such prior notification is filed, the proposed acquisition may not be consummated until the prescribed screening period expires. In some cases, the Ministers may extend the screening period, and may recommend or order any modification or abandonment of such acquisition. In addition, if certain conditions including those prescribed in light of national security of Japan under the Foreign Exchange Regulations are met, the Ministers may order the disposal of the shares acquired or take other measures. Consequently, any foreign investor seeking to acquire shares of our common stock that constitutes an “inward direct investment” may not consummate such acquisition in an expected time frame, in accordance with an intended plan, or at all.

Additionally, if a foreign investor directly or indirectly holds 1% or more of the total voting rights and, at a general meeting of shareholders, consents to certain proposals having a material influence on our management such as the (i) election of such foreign investor or any of its related persons (as defined in the Foreign Exchange Regulations) as our director or corporate auditor or (ii) transfer or discontinuation of its business, such consent, subject to certain exemptions, also constitutes an “inward direct investment” requiring prior notification. If such prior notification is filed, such consent cannot be given until the prescribed screening period expires. As a result, such foreign investors may have difficulties giving such consent in accordance with an intended plan, or at all.

The discussion above is not exhaustive of all possible foreign exchange controls considerations that may apply to a particular investor, and potential investors are advised to satisfy themselves as to the overall foreign exchange controls consequences of the acquisition, ownership and disposition of shares of our common stock or voting rights by consulting their own advisors. For a more detailed discussion on the requirements and procedures regarding the prior notifications under the Foreign Exchange Regulations, see “Item 10. Additional Information—D. Exchange Control.”

 

ITEM 4.

INFORMATION ON THE COMPANY

 

A.

HISTORY AND DEVELOPMENT OF THE COMPANY

NEC Corporation is a joint stock company (kabushiki kaisha) incorporated under the Companies Act. Our principal executive offices are located at 7-1, Shiba 5-chome, Minato-ku, Tokyo 108-8001, Japan. Our telephone number is +81-3-3454-1111.

NEC was formed on July 17, 1899 as a joint venture between Western Electric Company in the United States and two Japanese individuals. Initially, we acted as a sales agent for telephone equipment manufactured by Western Electric, but we soon commenced manufacturing similar equipment in Japan.

 

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In 1925, Western Electric’s equity interests in its foreign affiliates, including NEC, were sold to International Telephone & Telegraph Corporation, or ITT. In 1932, the holding company for businesses owned by the Sumitomo family acquired a substantial equity interest in NEC, which was sold to the public in 1948, following the passage of Japanese antimonopoly laws. ITT’s equity interest in NEC was successively reduced starting in 1958 and was completely disposed of in 1978.

We expanded our business lines to include the production of transmission equipment in 1929, radio broadcast equipment in 1930 and radio communications equipment in 1932. In 1958, we started mass production of transistors and, in the same year, we produced the NEAC 2201, the first fully transistorized commercial computer in the world.

We commenced research and development activities relating to integrated circuits in 1960. During the 1960s, we also entered the field of satellite communications and established our first overseas manufacturing subsidiary since the end of the second world war.

In the 1970s, we significantly increased our production of computers, semiconductors and other electronic devices. We began integrating our computer and communications products as significant further advances were achieved in technology, and as we increased our allocation of resources to research and development activities. Other important developments during this period included the establishment of our position as a world leader in specific high technology markets, such as satellite communication earth stations and certain semiconductor devices. We also diversified our customer base, particularly in the Japanese private sector and overseas, and we expanded our manufacturing facilities in both Japan and globally.

In the 1980s, we pursued a policy of globalization to conduct our diversified manufacturing and sales operations in closer proximity to our customers. We added a total of 50 subsidiaries and affiliated companies, 12 for manufacturing and 38 for marketing and other services, during the 1980s in overseas markets.

In the 1990s, we expanded our global operations and implemented measures to increase efficiency in order to enhance our global competitiveness and to respond to rapid changes in market demand. We expanded and upgraded some of our manufacturing facilities, promoted strategic alliances with major companies and augmented our research and development activities in the United States and Europe.

In the 2000s, we began to selectively focus on businesses in order to efficiently expand our operations and restructured our business portfolio. We also completed acquisitions both in Japan and overseas to focus on our selected areas, including solutions and software. For example, we made an initial investment in ABeam Consulting Ltd. to acquire 35.0% of the voting rights in the company in December 2004 and, through several additional investments, increased our voting rights in the company to 50.3% in January 2005 and to 100% in March 2015. In the United States, we acquired Netcracker Technology Corporation in October 2008. In addition, we exited the dynamic random access memory manufacturing business by reducing our voting rights in Elpida Memory, Inc., a joint venture with Hitachi, Ltd., from 50.0% to 25.0% as a result of Elpida Memory’s issuance of new shares to third party investors and the conversion of non-voting class shares held by other shareholders to common shares in December 2004 and to 13.9% and further to 11.1% through private sale of shares in August 2005 and February 2006.

In the 2010s, we continued to reorganize our business portfolio through various transactions, including the following:

 

   

In April 2010, we reduced our voting rights in NEC Electronics Corporation, a Japanese semiconductor manufacturer, from 70.0% to 35.5% as a result of its merger with Renesas Technology Corporation and the merged company’s issuance of new shares to us and other shareholders. Our voting rights in the merged company, including voting rights held through our retirement benefit trusts, declined further to 8.9% as a result of the company’s issuance of new shares to third party investors in September 2013 and to 4.3% through off-market sales of shares we made in June 2017 and May 2018.

 

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In July 2011, we spun off our personal computer manufacturing business by entering into a joint venture, Lenovo NEC Holdings B.V., with Lenovo Group Limited and selling the business to the joint venture. We initially had 49% of the equity shares in the joint venture. In July 2016, we sold 90% of our equity shares in the joint venture to Lenovo Group, while acquiring newly issued deferred shares of the joint venture, resulting in our retaining 33.4% of the voting right and 4.9% of the economic interest in the joint venture.

 

   

In March 2014, we sold all of our equity interest in NEC BIGLOBE, Ltd., a consolidated subsidiary providing internet services in Japan, to a special purpose company owned by Japan Industrial Partners, Inc.

 

   

In March 2016, we liquidated NEC Mobile Communications, Ltd., a consolidated subsidiary engaged in mobile phone device development, manufacturing, sale and support service operations, and transferred to NEC Corporation the operations relating to manufacturing and sale of, and support services for, the then-existing product lines. We discontinued the manufacturing operations in March 2017 and ceased sale of mobile phone devices in April 2017.

 

   

In January 2017, we increased our voting rights in Japan Aviation Electronics Industry, Limited, or JAE, a Japanese manufacturer of electronic device connectors, user interface related devices and aviation electronic devices, from 40.1% to 51.2% through a cash tender offer.

 

   

In January and March 2018, we acquired all of the equity interest in Northgate Public Services Limited, a U.K. software and ICT service provider for the public sector.

 

   

In February 2019, we acquired all of the equity interest in KMD Holding ApS, a Danish software and ICT service provider for the public sector.

 

   

In March 2019, we sold all of the equity interest we held in NEC Energy Devices, Ltd., a Japanese battery electrode manufacturing subsidiary and also sold all of the equity interest we held in Automotive Energy Supply Corporation, a Japanese lithium ion battery assembling affiliate.

 

   

In July 2019, we acquired OncoImmunity AS, a Norway-based bioinformatics company that develops proprietary machine learning software to support the fight against cancer. This acquisition is a part of our effort to establish an AI-driven drug discovery business.

 

   

In January 2020, we sold all of the shares of common stock we held in Nippon Avionics Co., Ltd. through the cash tender offer conducted by NAJ Holdings K.K., although we retain convertible preferred shares.

 

   

In March 2020, we announced the sale of a 66% equity interest in NEC Display Solutions, Ltd. to Sharp Corporation. The transaction is expected to close by the end of 2020.

The SEC maintains a web site (http://www.sec.gov) that contains reports, information statements, and other information regarding issuers, including us, that file electronically with the SEC. Our internet address is https://www.nec.com/. No information on our web site is deemed a part of this annual report.

 

B.

BUSINESS OVERVIEW

OVERVIEW

Our Mission

We seek to provide value as a “social value innovator” with the objective of “orchestrating a brighter world.” By operating in accordance with our core social values of safety, security, fairness and efficiency, our objective is to provide a wide variety of technological solutions that help advance societies worldwide toward deepened mutual understanding and the fulfillment of human potential.

 

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Introduction

We are a leading provider of advanced ICT solutions for government entities, communications service providers and other business enterprises in Japan and overseas markets. Across our business segments, we seek to leverage our core competency in system integration to create comprehensive solutions that are applicable in a wide variety of customer operating environments, ranging from large-scale government infrastructure (such as social security systems, air traffic control and emergency response systems) to company-specific information technology systems and network infrastructure (including hardware and software solutions and consulting on matters such as server infrastructure, operation management software and wireless access networks). We are also investing in the development of new technologies and solutions, including AI and big data analytics as well as biometric technology infrastructure. By focusing on high-growth market opportunities and building on our expertise and research and development capabilities, we seek to strengthen our position as an innovative provider of ICT solutions.

Business Segments

Our business operations consist of six principal segments—Public Solutions, Public Infrastructure, Enterprise, Network Services, System Platform, Global—in addition to certain other business activities.

Our various operations are generally organized into these segments based on the characteristics of the customers served. For example, our Public Solutions business segment and Public Infrastructure business segment both service primarily government and other public-sector entities, with our Public Solutions business segment focusing on providing solutions to local and regional government entities and our Public Infrastructure business segment engaging in projects for national-level government entities. Our Enterprise business segment focuses on the provision of IT services to large-scale corporate customers, our Network Services business segment provides products and services to customers in the telecommunications industry, and our System Platform business segment provides hardware and software products as well as maintenance services to customers. In contrast with our other businesses which generally target a specific category of customers based on their characteristics, our Global business segment provides a wide range of products and services to various types of customers, but concentrates its efforts on international operations, allowing us to bring our group’s accumulated experience to bear on solutions for customers around the world. Our management has specifically grouped most of our international operations within the Global business segment in order to maintain a focus on expanding our business outside of Japan.

The table below shows our revenue by segment for the periods indicated:

 

     Fiscal year ended March 31,  
     2018      2019      2020  
     (billions of yen)  

Revenue:(1)(2)

        

Public Solutions

   ¥ 268.3      ¥ 286.2      ¥ 324.6  

Public Infrastructure

     624.8        621.9        631.1  

Enterprise

     405.2        431.8        455.5  

Network Services

     442.5        460.3        509.8  

System Platform

     488.6        500.2        548.7  

Global

     420.5        409.4        493.8  

Others

     194.6        203.7        131.7  
  

 

 

    

 

 

    

 

 

 

Total revenue

   ¥ 2,844.4      ¥ 2,913.4      ¥ 3,095.2  
  

 

 

    

 

 

    

 

 

 

 

(1)

Revenue from external customers, excluding intersegment revenue.

(2)

The information in this table reflects the segment organizational changes described in “Item 5. Operating and Financial Review and Prospects—Introduction—Segment Reorganizations.” Please also see Note 6 to our consolidated financial statements included elsewhere in this annual report.

 

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Public Solutions

Our Public Solutions business segment provides the following products and services mainly to local and regional government entities and medical institutions in Japan:

 

   

system integration and development for local and regional governments—system integration and solutions relating to resident registration systems such as Japan’s “My Number” individual identification system and administrative information processing and management systems.

 

   

system integration and development for healthcare services providers—system integration and solutions relating to electronic medical record systems, hospital accounting systems, and systems for regional medical service liaison services.

 

   

system integration and development for fire control, disaster prevention, transportation and traffic, and other public services—ICT systems for fire control and disaster prevention services, transportation and traffic control systems for Japanese railroad operators, and highway toll systems.

 

   

system integration and development for medium-sized enterprises—system integration and solutions relating to enterprise resource planning systems, business process outsourcing systems, systems for controlling street lights, and systems for automated services.

Because we have long-standing relationships with many of the customers for our Public Solutions business segment, we are able to provide specific targeted solutions that can address our customers’ core concerns. In providing these solutions, we seek to create sustainable social value through, for example, application of our AI and biometrics technologies, combined with our accumulated expertise in system development and integration.

Public Infrastructure

Our Public Infrastructure business segment services Japanese national-level government organizations and enterprises that support national and social infrastructures primarily in Japan. The operations of JAE, which is a consolidated subsidiary, are also included in our Public Infrastructure business segment. We primarily service the categories of customers listed below:

 

   

government agencies—system integration and solutions for Japanese national government agencies and educational and other institutions, including those for:

 

   

Japanese national social security, tax administration and postal tracking;

 

   

business license application processing; police operations;

 

   

transportation and traffic management systems and satellite technology;

 

   

data transmission control;

 

   

immigration control;

 

   

biometrics-related solutions including facial recognition technology for airport boarding and customs procedures; and

 

   

public safety services.

 

   

aviation, space and defense sectors

 

   

air traffic control management systems;

 

   

satellites, satellite control systems and satellite management services for Japanese national space projects, such as the Hayabusa 2 project operated by the Japan Aerospace Exploration Agency, or JAXA, to send a spacecraft to monitor an asteroid; and

 

   

communications systems for the Japanese Ministry of Defense.

 

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media industry—broadcasting, studio, and typesetting and editing systems for broadcasting, including 4K and next-generation 8K satellite broadcasts.

We provide products and services designed to support the stable and secure operation of key national and social infrastructures, while investing in advanced technologies, including biometric technologies such as facial recognition, and space-related technologies. As with our Public Solutions business segment, we have long-standing relationships with many of our customers, which enables us to develop custom-tailored solutions based on our accumulated experience.

Enterprise

Our Enterprise business segment provides system integration and development services, including consulting, design and implementation, system maintenance and support services, and system outsourcing and cloud services, as well as related equipment, to business enterprises especially in the manufacturing, retail and services, and financial sectors primarily in Japan. Specifically, we provide the following products and services:

 

   

manufacturing sector—system integration and solutions relating to global supply chain management systems, design management systems, production management systems and sales management systems.

 

   

retail and services sectors—system integration and solutions relating to retail head office and sales outlet management systems, and distribution and logistics management systems. For example, we have worked with one of Japan’s top convenience store chains to design labor-saving systems that utilize payment by facial recognition, targeted advertising, facility monitoring (such as the monitoring of in-store refrigerators) and restocking assistance.

 

   

financial sector—system integration and solutions relating to core banking systems, including digital identity verification solutions, branch systems and enterprise systems for insurance and securities companies.

Network Services

Our Network Services business segment provides the following products and services to customers in the telecommunications market primarily in Japan:

 

   

mobile phone network base stations—development, manufacturing and maintenance of, and operation support for, mobile phone network base stations using various communications technologies such as 5G.

 

   

fixed and mobile phone networks—development, manufacturing and maintenance of, and operation support for, fixed and mobile phone network systems (other than base stations) such as optical and internet protocol, or IP, transmission systems as well as routers and switches.

 

   

ICT solutions for telecommunications carrier companies—development and maintenance of, and operation support for, ICT solutions for payment processing and administrative operations of telecommunications carrier companies, including operation support systems and business support systems.

 

   

enterprise network—network services for ICT systems, including wireless routers, telephone systems and other network connectivity equipment, unified communications solutions for business computer networks, and operation and business support systems for enterprises.

In July 2019, we started shipping commercial 5G radio units to NTT DOCOMO, Inc., and we are working to expand our 5G-related product portfolio and make proposals to global telecom carriers. We have also been selected as a 5G equipment provider for Rakuten Mobile, Inc., which is currently developing a cloud-based mobile network in Japan.

 

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System Platform

Our System Platform business segment provides hardware and software products as well as maintenance services to customers primarily in Japan:

 

   

non-customized products—manufacturing and sale to government agencies, local governments and business enterprises of hardware such as servers, mainframes, storage devices and wireless LAN routers, software such as database software, and middleware such as application servers, not customized for any specific industry or user, as well as sale of non-customized personal computers for business use to such customers. As an example of the types of solutions we offer, our SX-Aurora TSUBASA platform is a computer platform that uses a vector processor previously only found in supercomputers. This platform has a variety of models to correspond to a wide range of customer needs, enabling rapid, highly accurate processing of large quantities of data.

 

   

customized products—manufacturing and sale of customized hardware such as supercomputers, mainframes, point-of-sale systems and automatic teller machines, as well as software such as integrated operation management software, to the financial, retail and logistics sectors as well as research and academic institutions.

 

   

maintenance services—provision of hardware maintenance and operation support services for government agencies, local governments and business enterprises.

Global

Our Global business segment conducts the following five lines of business in overseas markets outside of Japan:

 

   

“Safer Cities”—public safety solutions, including biometric solutions such as facial recognition and fingerprint identification that can be used in contexts such as airport security, and digital government solutions, including ICT platforms for electronic public administration services, for government and public projects.

 

   

software services for service providers—operation support systems, business support systems, SDN and NFV solutions for communications service providers. We offer our advanced SDN and NFV solutions for communications service providers on a global basis by taking advantage of the innovative technologies of Netcracker Technology Corporation, our subsidiary in the United States.

 

   

network infrastructure—manufacturing, sale, installation and maintenance of submarine systems (including submarine cable systems and ocean observation systems) as well as mobile wireless backhaul equipment.

 

   

system devices—sales of displays and projectors as well as the provision of related software services.

 

   

energy storage solutions—sale, installation and maintenance of large-capacity energy storage systems for renewable energy and other projects.

We expect that the global markets for our “Safer Cities” solutions and software services for service providers will continue to grow, and we will seek to expand our operations in these business-lines. For example, to expand our “Safer Cities” initiative, we acquired Northgate Public Services Limited, a U.K. software and IT service provider for the public sector, in January 2018 (with the remaining shares acquired in March 2018), and we acquired KMD Holding ApS, a software and IT service provider in Denmark, in February 2019.

Others

In addition to the foregoing, we also provide data center infrastructure solutions, security solutions and other services and products to customers mainly in Japan.

 

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Medium-Term Management Plan

In January 2018, we announced our medium-term management plan for the three fiscal years ending March 31, 2021. Under the plan, with an aim to transform into a “social value innovator,” we have implemented various measures, and plan to implement additional measures, designed to reform our profit structure, pursue growth initiatives and restructure our business execution capabilities. We seek to improve our profitability to position us to pursue investment opportunities that contribute to our growth strategy.

Profit Structure Reform

To improve our profitability, we are focusing on three profit structure reforms—(1) reduction of costs and expenses, (2) optimization of our business structure, and (3) optimization of our manufacturing operations.

 

   

Reduction of costs and expenses—includes workforce reduction, particularly in the back-office functions and the hardware business in Japan, as well as reduction of costs relating to real estate (through the wider introduction of flexible work styles such as telecommuting and efficient use of office space), IT systems and marketing.

 

   

Optimization of our business structure—includes the streamlining of our business portfolio through strategic sales of businesses to improve our profitability on a consolidated basis as well as adapting to changes in customer preferences through initiatives such as deploying our network expertise in the telecom market to other related business areas. With respect to the streamlining of our overall business portfolio, we sold our battery electrode manufacturing business in March 2019 and our lighting equipment manufacturing business in April 2019. In January 2020, we sold all of the shares of common stock we held in Nippon Avionics Co., Ltd. through a cash tender offer conducted by NAJ Holdings K.K., although we still retain convertible preferred shares.

 

   

Optimization of our manufacturing operations—includes integration of manufacturing facilities for our System Platform business segment.

Growth Initiatives

To achieve growth, we are seeking to expand our “Safer Cities” initiative particularly in markets outside Japan using our AI, biometrics, security and network services technologies. As part of our growth strategy in this area, we acquired Northgate Public Services Limited in the United Kingdom (in January 2018, with the remaining shares acquired in March 2018) and KMD Holding ApS in Denmark (in February 2019).

Restructuring of Business Execution Capabilities

To improve our business operations, we are endeavoring to offer new value for customers by creating and commercializing competitive technologies and to incentivize management and employees to be more innovative and committed to achieve results. We intend to pursue opportunities to collaborate with third parties such as academic institutions and start-up companies in research and development projects, to invest in technology incubation, and to expand distribution channels for our products and services through collaboration with global vendors. We also seek to improve the productivity of our workforce through, for example, changes in our compensation structure and measures to increase diversity.

Impact of the Coronavirus Pandemic

The ongoing coronavirus pandemic has affected our business operations and may prevent us from being able to achieve all of the objectives of our medium-term management plan by its scheduled end on March 31, 2021. We believe that the primary impact of the pandemic on our ability to implement our medium-term management plan is the potential decline in IT-related investments by our customers. While the coronavirus pandemic did not have a material adverse impact on our consolidated financial statements as of and for the fiscal year ended

 

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March 31, 2020 and our management does not currently expect that the coronavirus impact will have a significant impact on our long-term operating results, any potential impacts on our financial performance for the fiscal year ending March 31, 2021 and our ability to achieve all of the objectives of our medium-term management plan on the previously planned timeline would depend among other things on the length of time until the pandemic is eventually resolved and the severity of the impact of the pandemic on the Japanese and global economy. See “Item 3.D. Key Information—Risk Factors—Risks Related to Our Operating Environment—The recent outbreak of the novel coronavirus could have a significant negative impact on our business, results of operations and financial condition,” “Item 5. Operating and Financial Review and Prospects—Introduction—Recent Developments—Coronavirus” and “Item 5.D. Operating and Financial Review and Prospects—Trend Information.”

SUPPLIERS

We purchase raw materials and components from a large number of Japanese and overseas suppliers. Such raw materials and components include semiconductors, central processing units, memory devices, routers, switches, operating systems, applications, database software and management software, liquid crystal display panels, storage hardware devices and servers. In terms of cost, for the fiscal year ended March 31, 2020, approximately 72% of our raw materials and components were purchased from suppliers in Japan, with approximately 12% from suppliers in Asia other than Japan and the remainder from suppliers in other regions. Our procurement activities are managed by NEC Corporation’s procurement division on a group-wide basis to optimize our procurement costs and expenses through centralization and standardization as well as the resulting economy of scale. We also co-develop some of these components with our business partners that are leading developers and manufacturers in their respective areas of expertise.

There are only a limited number of suppliers in the market for some of our raw materials and components. Thus, any market-wide shortage or unexpected deterioration in the ability of our suppliers of such raw materials or components may result in lower availability of, and higher prices for, them.

CUSTOMERS, SALES AND MARKETING

We provide our products and services to customers located in Japan and overseas. The following table shows our revenue by geographical market and our revenue by geographical market as a percentage of consolidated revenue for the periods indicated:

 

     Fiscal year ended March 31,  
     2018     2019     2020  
     (billions of yen except percentages)  

Japan

   ¥ 2,104.3        74.0   ¥ 2,224.3        76.3   ¥ 2,343.3        75.7

North America and Latin America

     185.3        6.5       174.4        6.0       164.1        5.3  

Europe, Middle East and Africa

     154.8        5.4       161.1        5.5       234.1        7.6  

China, East Asia and Asia Pacific

     400.1        14.1       353.6        12.1       353.8        11.4  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   ¥ 2,844.4        100.0   ¥ 2,913.4        100.0   ¥ 3,095.2        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

We primarily sell our products and services directly to customers. In some cases, we also sell our system platform products and services indirectly to customers through third-party contractors.

For large-scale public and commercial contracts, we perform our services based on customary negotiated contracts and contracts obtained through competitive bidding processes.

Our marketing efforts are managed and coordinated globally by NEC Corporation’s marketing strategy division and integrated marketing communication division. We seek to promote our products and services as well as our brand by various means, including (1) distribution of promotional contents through our own and paid media outlets such as the Internet, television, newspapers and industry magazines, (2) displays and demonstrations at trade shows, industry conventions and events that we sponsor, and (3) through sponsorship for sporting and other events.

 

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COMPETITION

We have many competitors in Japan and other countries, ranging from large multinational corporations to a number of relatively small, rapidly growing and highly specialized companies. Many of our competitors have leading positions in their respective markets and possess highly sophisticated technologies.

We seek to maintain and enhance our competitive position through, among other means, effective utilization of our accumulated experience in system development and integration, our industry knowledge and capabilities as a leading provider of ICT systems, components, services and solutions, as well as our technological achievements and market position as reinforced by our continuing research and development programs and marketing efforts.

Public Solutions. In the Public Solutions business segment, we compete with several large Japanese multinational ICT solutions companies capable of performing large-scale and highly complex government and public service contracts for system integrations, development and solutions projects for local governments, public service providers and healthcare service providers. These competitors include Fujitsu Limited, Hitachi, Ltd. and NTT DATA Corporation.

Public Infrastructure. In the Public Infrastructure business segment, we compete with mostly the same competitors as those in the Public Solutions business segment as well as Toshiba Corporation and Mitsubishi Electric Corporation for public infrastructure, defense and other projects.

Enterprise. In the Enterprise business segment, we compete mostly with the same competitors as those in the Public Solutions business segment, particularly for large-scale and highly complex commercial projects, as well as with large multinational ICT service providers such as IBM Corporation and Accenture plc. For smaller projects, we also compete with other companies, some of which are highly specialized in certain industries.

Network Services. In the Network Services business segment, our main competitors are large multinational information and data communications technology providers, including wireless communications technology companies, such as Fujitsu Limited, Telefonaktiebolaget LM Ericsson, Nokia Corporation and Huawei Technologies Co., Ltd. In some product-lines where we have entered into strategic alliances with leading industry participants, our competitors have also formed similar strategic alliances.

System Platform. In the System Platform business segment, we compete with a small number of large multinational ICT hardware and software providers, such as Fujitsu Limited, Hitachi, Ltd., IBM Corporation, Dell Technologies, Inc., Hewlett Packard Enterprise Company and Toshiba Corporation.

Global. In our “Safer Cities” initiative, we compete with highly specialized solutions providers, some of which are large multinational companies, while others are smaller new entrants into the market. In our service provider software services business-line, we compete with a few large multinational companies as well as many other smaller software solutions providers some of which are highly specialized in specific industries. In each of our energy storage, network infrastructure and system devices business-lines, we compete with large multinational equipment manufacturers.

INTELLECTUAL PROPERTY

As of March 31, 2020, we held approximately 47,000 patents issued under Japanese law and laws of other jurisdictions and have a large number of Japanese and foreign patent applications pending. We also own a large number of software and other copyrighted materials.

We have granted licenses to, and entered into technical assistance agreements with, various Japanese and foreign companies. In some instances, we have entered into cross licenses of patent portfolios with other parties.

 

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We actively continue to seek IP protection for our innovations, while increasing emphasis on other initiatives designed to leverage our IP leadership. Some of our technological innovations are used exclusively in our products, while others are licensed and may be used in our products or the products of the licensee. From time to time, we license certain of our intellectual property assets as part of our collaborative innovation strategy, for example, on open innovation platforms. The licensees are expected to contribute to the future development of the IP and ultimately expand the customer base for related innovations.

Although we consider our various patents, copyrights, licenses, and technical assistance agreements to be important to us, we do not believe our business, as a whole, is materially dependent on any particular patent, group of related patents, copyright, license, or technical assistance agreement.

For a discussion on our research and development activities, see “Item 5.C. Operating and Financial Review and Prospects—Research and Development, Patents and Licenses, Etc.”

REGULATIONS

Our business activities are subject to various governmental regulations in the countries in which we operate, such as import and export regulations, including those related to national security considerations, and regulations relating to business and investment approvals, tariffs, data protection, including personal information protection, anti-competition, anti-bribery, intellectual property, product liability, consumer and business taxation, exchange controls, and environmental and recycling requirements. As some of our business activities involve construction work for, among other things, ICT-related projects, we maintain licenses required for such construction work issued by the Minister of Land, Infrastructure, Transport and Tourism of Japan pursuant to the Construction Business Act of Japan (Act No. 100 of 1949, as amended).

For additional information, see “Item 3.D. Key Information—Risk Factors—Risks Related to Regulatory Environment and Legal Proceedings” and “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings.”

 

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C.

ORGANIZATIONAL STRUCTURE

NEC Corporation is the ultimate parent company with 300 consolidated subsidiaries as of March 31, 2020. The following chart summarizes our primary subsidiaries as of March 31, 2020:

 

 

LOGO

The following table sets forth information on our significant consolidated subsidiaries as of March 31, 2020:

 

Name of Subsidiary

 

Registered Office

 

Principal Business

  Portion of
Ownership
Interest
(%)
    Portion of
Voting
Rights
(%)
 

NEC Platforms, Ltd.

  Kawasaki-shi Kanagawa, Japan   Development, manufacturing, sale and maintenance of information and communications systems, equipment, and provision of system integration services     100.0       100.0  

NEC Fielding, Ltd.

  Minato-ku, Tokyo, Japan   Installation and maintenance of computers and network systems     100.0       100.0  

NEC Solution Innovators, Ltd.

  Koto-ku, Tokyo, Japan   Specialized IT services     100.0       100.0  

ABeam Consulting Ltd.

  Chiyoda-ku, Tokyo, Japan   Management consulting, business process consulting, and IT consulting and outsourcing     100.0       100.0  

 

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Name of Subsidiary

 

Registered Office

 

Principal Business

  Portion of
Ownership
Interest
(%)
    Portion of
Voting
Rights
(%)
 

NEC Display Solutions, Ltd.**

  Minato-ku, Tokyo, Japan   Development and sales of displays and projectors     100.0       100.0  

NEC Communication Systems, Ltd.

 

Minato-ku, Tokyo, Japan

 

Development and sale of network systems-related software and equipment

 

 

100.0

 

 

 

100.0

 

NEC Nexsolutions, Ltd.

  Minato-ku, Tokyo, Japan   Provision of system integration services and sale of computers     100.0       100.0  

NEC Facilities, Ltd.

  Minato-ku, Tokyo, Japan   Facility design, construction management and operation management     100.0       100.0  

NEC Management Partner, Ltd.

  Kawasaki-shi, Kanagawa, Japan   Provision of shared services for common operations     100.0       100.0  

NEC Networks & System Integration Corporation

 

Bunkyo-ku, Tokyo, Japan

 

Design, construction and maintenance of information and communications systems, installation of telecommunications systems, and sale of information and communications equipment

 

 

38.6

 

 

51.5

 

Japan Aviation Electronics Industry, Limited

 

Shibuya-ku, Tokyo, Japan

 

Manufacturing and sale of connectors and electronic devices for aircraft, satellites and spacecraft

 

 

35.7

 

 

50.9

 

NEC Corporation of America   Irving, Texas, USA   Regional representative and supervising operations in North America, sale of computer-related equipment and communications equipment, and provision of system integration services     100.0       100.0  

NEC Europe Ltd.

  Middlesex, UK   Regional representative and supervising operations in Europe     100.0       100.0  

NEC Asia Pacific Pte. Ltd.

  Singapore, Republic of Singapore   Regional representative and supervising operations in Asia, sale of computer-related equipment and communications equipment, and provision of system integration services     100.0       100.0  

NEC (China) Co., Ltd.

  Beijing, China   Regional representative and supervising operations in Greater China     100.0       100.0  

NEC Latin America S.A.

  Sao Paulo, Brazil   Regional representative and supervising operations in Latin America, sale of communications equipment, and provision of system integration services     100.0       100.0  

 

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Name of Subsidiary

 

Registered Office

 

Principal Business

  Portion of
Ownership
Interest
(%)
  Portion of
Voting
Rights
(%)
 

NEC Energy Solutions, Inc.

  Westborough, MA, USA   Design, manufacturing and integration of smart energy storage solutions for the electric grid and applications   100.0     100.0  

Netcracker Technology Corp.

  Waltham, MA, USA   Software development   100.0     100.0  

KMD A/S

  Ballerup, Denmark   Software development and IT services   100.0
(indirectly
owned)
    100.0  

Northgate Public Services (UK) Limited

 

Hertfordshire, UK

 

IT services

 

100.0
(indirectly
owned)

 

 

100.0

 

 

*

The difference between the portion of ownership interest and the portion of voting rights represents the equity securities that are held in the trust established for our retirement benefit program with respect to which we retain voting rights.

**

In March 2020, we announced the sale of a 66% equity interest in NEC Display Solutions, Ltd. to Sharp Corporation. The transaction is expected to close by the end of 2020.

 

D.

PROPERTY, PLANT AND EQUIPMENT

Our property, plant and equipment at cost as of March 31, 2019 and 2020 were as follows:

 

     As of March 31,  
     2019      2020  
     (billions of yen)  

Buildings and structures

   ¥ 550.1      ¥ 558.8  

Machinery and equipment

     249.6        241.5  

Tools, furniture and fixtures

     427.4        420.6  

Land

     75.4        72.8  

Construction in progress

     29.1        22.6  

Right-of-use assets

            206.3  

Total

     1,331.6        1,522.6  

Less: accumulated depreciation and accumulated impairment losses

     922.8        964.5  
  

 

 

    

 

 

 

Property, plants, equipment—net

   ¥ 408.8      ¥ 558.1  
  

 

 

    

 

 

 

 

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Our major properties, as of March 31, 2020, are listed below:

NEC Corporation:

 

Name (Location)

 

Business Segment

 

Uses

  Land Space  
    (Thousands of
square meters)
 

Tamagawa Plant (Kawasaki-shi, Kanagawa, Japan)

  Public Solutions, Public Infrastructure, Network Services, System Platform, Global and Others   Manufacturing of communications equipment and research and development     169

Fuchu Plant (Fuchu-shi, Tokyo, Japan)

  Public Infrastructure, System Platform, Others   Manufacturing of computers and communications equipment     220  

Sagamihara Plant (Sagamihara-shi, Kanagawa, Japan)

  Others   Research and development     139  

Abiko Plant (Abiko-shi, Chiba, Japan)

  Network Services and Others   Manufacturing of communications equipment     300

Headquarters and other registered offices and business locations (Minato-ku, Tokyo, Japan and others)

  Public Solutions, Public Infrastructure, Enterprise, Network Services, System Platform, Global and Others   Others     790

 

*

These figures include leased properties.

Subsidiaries:

 

Name

 

Location

 

Business Segment

 

Uses

Japan Aviation Electronics Industry, Ltd.

  Akishima-shi, Tokyo, Japan and others   Public Infrastructure   Manufacturing of connectors

NEC Facilities, Ltd.

  Minato-ku, Tokyo, Japan   Others   Provision of facility construction and operation management and environmental solutions

NEC Networks & System Integration Corporation

  Bunkyo-ku, Tokyo, Japan   Network Services   For outsourcing business

NEC Platforms, Ltd.

  Kawasaki-shi, Kanagawa, Japan   System Platform   Manufacturing of telecommunication equipment

NEC Platforms Thai Co., Ltd.

  Pathumthani, Thailand   System Platform   Manufacturing and sale of business phones and peripheral equipment

NEC Corporation of America

  Irving, TX, USA   Enterprise, System Platform and Global   Marketing of communications equipment and finger authentication systems

We own most of the land and facilities for NEC Corporation’s manufacturing and research and development activities. We lease the land and building of our corporate headquarters in Tokyo and a substantial portion of the land and facilities used by our subsidiaries.

 

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The following table sets forth our investments in property, plant and equipment by segment during the fiscal years ended March 31, 2018, 2019 and 2020, and our planned investments in property, plant and equipment by segment for the fiscal year ending March 31, 2021. The information in this table reflects the segment organizational changes described in “Item 5. Operating and Financial Review and Prospects—Introduction—Segment Reorganizations.” Please also see Note 6 to our consolidated financial statements included elsewhere in this annual report.

 

     Fiscal year ended March 31,      Fiscal year ending
March 31, 2021
(Plan)
 
   2018      2019      2020  
     (billions of yen)  

Public Solutions

   ¥ 0.4      ¥ 0.8      ¥ 2.0      ¥ 3.0  

Public Infrastructure

     21.4        26.7        29.2        28.0  

Enterprise

     1.0        1.3        1.0        1.0  

Network Services

     4.6        3.7        5.0        6.0  

System Platform

     6.0        5.7        6.2        6.0  

Global

     6.1        5.8        7.5        6.0  

Others

     5.8        18.7        16.5        20.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 45.4      ¥ 62.7      ¥ 67.4      ¥ 70.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows our contractual commitments for property, plant and equipment, and intangible assets outstanding as of March 31, 2019 and 2020:

 

     As of March 31,  
   2019      2020  
     (billions of yen)  

Property, plant and equipment

   ¥ 2.0      ¥ 1.9  

Intangible assets

     0.6        0.6  
  

 

 

    

 

 

 

Total

   ¥ 2.6      ¥ 2.4  
  

 

 

    

 

 

 

For the fiscal year ending March 31, 2021, we have budgeted a total of ¥70.0 billion for investments in property, plant and equipment. We plan to use cash on hand to fund such investments, which are summarized below for each of our segments:

 

   

Public Solutions—¥3.0 billion to enhance development and production of traffic control systems and systems for healthcare service providers;

 

   

Public Infrastructure—¥28.0 billion to enhance the production capabilities of JAE, one of our consolidated subsidiaries, and to enhance development and production of defense and satellite systems;

 

   

Enterprise—¥1.0 billion to enhance the development of services and systems;

 

   

Network Services—¥6.0 billion to enhance development and production of next generation telecommunications technologies;

 

   

System Platform—¥6.0 billion to enhance development and production of server, storage and other computer-related equipment as well as the development of related services;

 

   

Global—¥6.0 billion to enhance development of biometric authentication solutions as well as development and production of submarine cable and other systems; and

 

   

Others—¥20.0 billion in total, including investments in data centers and office improvements.

 

ITEM 4A.

UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis should be read in conjunction with “Item 3.A. Key Information—Selected Financial Data” and our consolidated financial statements and notes to those financial statements included elsewhere in this annual report.

INTRODUCTION

We are a leading provider of advanced ICT solutions for government entities, communications service providers and other business enterprises in Japan and overseas markets. Our operations consist of the following six business segments, which are organized primarily on the basis of the characteristics of the customers served, as well as certain other business activities:

 

   

Public Solutions—provides system integration and development services (including consulting, design and implementation) mainly to local and regional government entities in Japan as well as for healthcare services providers, fire control, disaster prevention, transportation and traffic and other public services and medium-sized enterprises such as enterprise resource planning systems, business process outsourcing systems and systems for automated services;

 

   

Public Infrastructure—provides system integration and development services (including consulting, design and implementation) for national-level government organizations in Japan as well as for enterprises that support national and social infrastructure primarily in Japan, including systems related to Japanese national social security, tax administration and postal tracking, police operations, transportation and traffic management and immigration control;

 

   

Enterprise—provides system integration and development services (including consulting, design and implementation) to large-scale corporate customers mainly in the manufacturing, retail and services and financial sectors primarily in Japan;

 

   

Network Services—provides products and services to customers primarily in Japan’s telecommunications sector, including network infrastructure equipment (including core network equipment, mobile phone base stations, optical transmission system equipment, routers and switches), system integration services (including consulting, design and implementation), service and management solutions (including operation support systems and business support systems) and enterprise network solutions (including internet protocol telephone systems, WAN and wireless access equipment and LAN products);

 

   

System Platform—provides hardware products (including servers, mainframes, supercomputers, storage, personal computers for business use, point-of-sale systems, automatic teller machines, control equipment and wireless LAN routers), software products (including integrated operation management software, middleware such as application servers, and database software) and maintenance services for these products, systems and equipment to customers primarily in Japan;

 

   

Global—provides customers outside Japan with “Safer Cities” solutions (including biometric solutions, such as facial recognition and fingerprint identification, and digital government solutions), software services for service providers (including operation support systems, business support systems, SDN solutions, and NFV solutions for communications service providers), network infrastructure equipment (including submarine cable systems, ocean observations systems and mobile wireless backhaul equipment), system devices (including displays and projectors) and energy storage solutions; and

 

   

Others—provides customers in Japan with data center infrastructure solutions, security solutions and other services and products.

For a more detailed discussion on our business segments, see “Item 4.B. Information on the Company—Business Overview.”

 

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Summary

Over the three fiscal years ended March 31, 2020, our total revenue increased steadily due to overall stronger demand for IT services, particularly in the public and financial sectors in Japan, as well as the acquisitions of Northgate Public Services Limited in the United Kingdom (in January 2018, with the remaining shares acquired in March 2018) and KMD Holding ApS in Denmark (in February 2019) as part of our growth strategy for our “Safer Cities” initiative. For details regarding these acquisitions, see “—Recent Developments—Acquisition of Northgate Public Services Limited” and “—Recent Developments—Acquisition of KMD Holding ApS” below. For details regarding the changes between periods in our total revenue as well as our revenue by business segment, see “—A. Operating Results—Results of Operations” and “—Operating Results—Segment Analysis” below.

Going forward, we believe that the ICT industry is entering a period of significant change and reinvestment due to the ongoing transition to 5G mobile networks as well as the digitization of government processes around the world. For further discussion of these trends, see “—D. Trend Information” below.

In order to respond to these trends and improve our profitability, we are currently in the process of implementing our medium-term management plan for the three fiscal years ending March 31, 2021 with measures that include, among other things, streamlining our business portfolio, reducing costs and optimizing our manufacturing operations. For a more detailed discussion of our medium-term management plan, see “Item 4.B Information on the Company—Business Overview—Overview—Medium-Term Management Plan.”

The coronavirus pandemic did not have a material adverse impact on our consolidated financial statements as of and for the fiscal year ended March 31, 2020, and our management does not currently expect that the coronavirus impact will have a significant impact on our long-term operating results due to the nature of the ICT industry in which the Company operates and the expectation of continuing demand for investments in the digital transformation of society that is expected to continue following the coronavirus pandemic. However, as events continue to evolve and additional information becomes available, actual results and outcomes in future reporting periods may differ materially from management’s estimates. See “Item 3.D. Key Information—Risk Factors—Risks Related to Our Operating Environment—The recent outbreak of the novel coronavirus could have a significant negative impact on our business, results of operations and financial condition,” “Item 4.B. Information on the Company—Business Overview—Overview—Medium-Term Management Plan—Impact of the Coronavirus pandemic” and “Item 5—Operating and Financial Review and Prospectus—Recent Developments—Coronavirus.”

Segment Reorganizations

From time to time in the past, in connection with changes in how we manage our various businesses due to significant changes in our business strategies, we have made changes in how we categorize our various businesses into business segments so that such categorization better aligns with the new business strategies. We also make adjustments to our business segments when the operations within each business segment become increasingly related and complementary with the operations in our various other business segments, which can occur due to the broad scope and the dynamically evolving technological nature of many of our businesses. Accordingly, our management regularly evaluates the delineation of operations between our business segments and from time to time makes adjustments to the business segment categorizations to the extent it determines necessary to improve management efficiency and operational productivity.

Effective as of April 1, 2018, we implemented a segment reorganization, which we refer to as the 2018 Segment Reorganization, that created our Global business segment. The 2018 Segment Reorganization was implemented in order to consolidate our business divisions that are primarily tasked with expanding in global markets into a single business segment in order to enhance our ability to manage these businesses as a whole in line with our new key business initiative of expanding our overseas businesses. The businesses that were

 

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incorporated into our Global business segment included our global software and service business for service providers, our wireless solutions business and our submarine systems business from the Telecom Carrier business segment as well as our global unified communications business and display solutions business from our System Platform business segment. Accompanying these transfers, we renamed our former Telecom Carrier business segment as the Network Services business segment.

Effective as of April 1, 2019, we implemented a segment reorganization, which we refer to as the 2019 Segment Reorganization. In contrast with the 2018 Segment Reorganization, which was focused on concentrating global-focused operations in a new centralized business segment, the 2019 Segment Reorganization was implemented in order to move certain businesses to other business segments where operations had become more related and mutually complementary over time due to the evolving nature of the technology industry. As part of the 2019 Segment Reorganization, (i) our enterprise network solutions business was moved from our System Platform business segment to our Network Services business segment, (ii) our global unified communications business was moved from our Global business segment to our System Platform business segment and (iii) our security business was moved from our System Platform business segment to our other business activities.

In addition, from the beginning of the fiscal year ended March 31, 2020, we have added a new segment profit (loss) line item in our segment information, which is measured by deducting amortization expenses on intangible assets recognized as a result of mergers and acquisitions (“M&A”) and M&A-related expenses (financial advisory fees and other fees) from selling, general and administrative expenses and other operating expenses for the respective segment, as an indicator for measuring underlying profitability in order to clarify the contribution of acquired companies to our overall earnings.

For more information regarding our business segments following these changes, see Note 6 to our consolidated financial statements included elsewhere in this annual report. For consistency and comparability, the segment information presented throughout this annual report reflects these changes.

Key Components of Results of Operations

To evaluate our performance, our management focuses on certain key components of results of operations and key performance metrics, each of which are discussed in further detail below.

Revenue

Each of our business segments generates revenue from the respective services and products described above. The tables below show our revenue by segment for the periods indicated:

 

     Fiscal year ended March 31,  
     2018      2019      2020  
     (billions of yen)  

Revenue:(1)(2)

        

Public Solutions

   ¥ 268.3      ¥ 286.2      ¥ 324.6  

Public Infrastructure

     624.8        621.9        631.1  

Enterprise

     405.2        431.8        455.5  

Network Services

     442.5        460.3        509.8  

System Platform

     488.6        500.2        548.7  

Global

     420.5        409.4        493.8  

Others

     194.6        203.7        131.7  
  

 

 

    

 

 

    

 

 

 

Total revenue

   ¥ 2,844.4      ¥ 2,913.4      ¥ 3,095.2  
  

 

 

    

 

 

    

 

 

 

 

(1)

Revenue from external customers, excluding intersegment revenue.

 

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(2)

The information in this table reflects the segment organizational changes described in “Item 5. Operating and Financial Review and Prospects—Introduction—Segment Reorganizations.” Please also see Note 6 to our consolidated financial statements included elsewhere in this annual report.

For the fiscal year ended March 31, 2020, our revenue was ¥3,095.2 billion, an increase of ¥181.8 billion, or 6.2%, compared to the fiscal year ended March 31, 2019. This increase was due to a general increase in revenue across our business segments, including an increase in revenue of ¥84.4 billion in our Global business segment primarily due to an increase in revenue from the “Safer Cities” initiative as well as increased sales of submarine cable systems, an increase in revenue of ¥49.5 billion in our Network Services business segment primarily as a result of increased demand from telecom carriers based on increased investments in preparation for 5G deployment as well as the completion of a one-time large-scale project related to IT services for a telecom carrier, an increase in revenue of ¥48.5 billion in our System Platform business segment primarily as a result of increased sales of non-customized personal computers to corporate customers, an increase in revenue of ¥38.5 billion in our Public Solutions business segment primarily as a result of higher demand for IT services by local governments and healthcare service providers, an increase in revenue of ¥23.7 billion in our Enterprise business segment primarily due to stronger demand for IT services in the financial sector in Japan and an increase in revenue of ¥9.3 billion in our Public Infrastructure business segment primarily as a result of higher revenue from large-scale projects in the aerospace and defense sectors.

For the fiscal year ended March 31, 2019, our revenue was ¥2,913.4 billion, an increase of ¥69.0 billion, or 2.4%, compared to the fiscal year ended March 31, 2018. The increase was primarily due to stronger demand for IT services particularly in the public and financial sectors in Japan, resulting in increases in revenue of ¥17.8 billion, ¥26.6 billion and ¥11.6 billion for the Public Solutions, Enterprise and System Platform business segments, respectively. We also benefited from investments by telecommunications carriers in Japan to enhance their network infrastructure, resulting in an increase in revenue of ¥17.8 billion for the Network Services business segment. For details regarding the factors affecting each business segment, see “—A. Operating Results—Segment Analysis—Fiscal Year Ended March 31, 2019 Compared to Fiscal Year Ended March 31, 2018” below.

Across our business segments, our services and products are generally provided on a contract basis with national, regional and local-level government entities, primarily in Japan, as well as private business enterprises. Although we have a diversified customer base and none of our business segments is substantially dependent on a contractual arrangement with any specific customer, our Public Infrastructure business segment derives roughly one quarter of its revenue from contracts with the Japanese Ministry of Defense and the Japanese Ministry of Land, Infrastructure, Transport and Tourism, and our Network Services business segment derives roughly one third its revenue from contracts with various entities in the NTT group.

 

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We categorize our revenue into three categories based on the source of the revenue, and the tables below shows our revenue by category for each business segment for the fiscal years ended March 31, 2019 and 2020:

 

    Public
Solutions
    Public
Infrastructure
    Enterprise     Network
Services
    System
Platform
    Global     Others     Total  
    (billions of yen)  

Fiscal year ended March 31, 2019:

               

Revenue(1):

               

Contracts for hardware and packaged software deployments

  ¥ 56.0     ¥ 254.1     ¥ 40.2     ¥ 119.7     ¥ 343.8     ¥ 184.4     ¥ 118.8       ¥1,116.9  

Contracts for services to customers (including maintenance and outsourcing)

    114.0       109.3       196.3       200.5       134.9       120.8       77.0       952.8  

Contracts for system integrations and equipment constructions

    116.2       258.5       195.2       140.1       21.5       104.1       8.0       843.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  ¥ 286.2     ¥ 621.9     ¥ 431.8     ¥ 460.3     ¥ 500.2     ¥ 409.4     ¥ 203.7     ¥ 2,913.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Public
Solutions
    Public
Infrastructure
    Enterprise     Network
Services
    System
Platform
    Global     Others     Total  
    (billions of yen)  

Fiscal year ended March 31, 2020:

               

Revenue(1):

               

Contracts for hardware and packaged software deployments

  ¥ 59.3     ¥ 248.3     ¥ 58.2     ¥ 150.7     ¥ 391.5     ¥ 161.3     ¥ 28.9       ¥1,098.1  

Contracts for services to customers (including maintenance and outsourcing)

    121.5       101.5       176.0       219.8       133.7       195.6       76.9       1,025.0  

Contracts for system integrations and equipment constructions

    143.9       281.4       221.3       139.4       23.5       136.8       25.9       972.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  ¥ 324.6     ¥ 631.1     ¥ 455.5     ¥ 509.8     ¥ 548.7     ¥ 493.8     ¥ 131.7     ¥ 3,095.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

The information in this table reflects the segment organizational changes described in “Item 5. Operating and Financial Review and Prospects—Introduction—Segment Reorganizations.” Please also see Note 6 to our consolidated financial statements included elsewhere in this annual report.

Revenue from contracts for hardware and packaged software deployments

Each of our segments derives revenue from contracts for hardware and packaged software deployments, although our Public Infrastructure business segment and our System Platform business segment account for the largest share, representing 22.6% and 35.6%, respectively, of our consolidated total revenue from contracts for

 

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hardware and packaged software deployments for the fiscal year ended March 31, 2020. The major products included in this category of revenue are hardware (such as servers, mainframes, supercomputers, storage, business personal computers, point-of-service terminals, automated teller machines, control equipment and wireless LAN routers), software (such as software designed for integrated operation management, application servers, security and databases), enterprise network solutions (such as internet protocol telephone systems and wireless access equipment), network infrastructure (such as core network equipment, mobile phone base stations and optical transmission systems), system devices (such as displays and projectors) and lighting equipment.

Revenue from contracts for services to customers (including maintenance and outsourcing)

Each of our segments derives revenue from contracts for services to customers (including maintenance and outsourcing), although our Network Services business segment and our Global business segment account for the largest share, representing 21.4% and 19.1%, respectively, of our consolidated total revenue from contracts for services to customers (including maintenance and outsourcing) for the fiscal year ended March 31, 2020. The major types of services that comprise this category of revenue include software services for service providers (such as services for operation support systems and business support systems), outsourcing and cloud services, data center infrastructure services and general maintenance and support.

Revenue from contracts for system integrations and equipment constructions

Each of our segments derives revenue from contracts for system integrations and equipment constructions, although our Public Infrastructure business segment and Enterprise business segment account for the largest share, representing 28.9% and 22.8%, respectively, of our consolidated total revenue from contracts for system integrations and equipment constructions for the fiscal year ended March 31, 2020. The major types of contracts included in this category that we enter into are for matters such as system integration (including system implementation and consulting), safety (including biometric solutions), network infrastructure and energy storage systems.

Cost of Sales

Cost of sales consists primarily of costs that are directly associated with manufacturing products or rendering services, including:

 

   

costs for the purchase, transportation and storage of raw material and components;

 

   

personnel costs relating to manufacturing products or rendering services;

 

   

facility maintenance costs;

 

   

royalties; and

 

   

warranty costs.

Cost of sales also includes:

 

   

depreciation of property, plant and equipment;

 

   

amortization of intangible assets involved in manufacturing products or rendering services;

 

   

write-downs on inventories; and

 

   

provisions for estimated expenses and loss on construction contracts and asset retirement obligations.

The following table sets forth our cost of sales for the periods indicated:

 

     Fiscal year ended March 31,  
     2018     2019     2020  
     (billions of yen except percentages)  

Cost of sales

   ¥ 2,046.9     ¥ 2,083.5     ¥ 2,207.7  

Cost of sales as percentage of revenue

     72.0     71.5     71.3

 

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For details regarding the factors affecting cost of sales between periods, see “—A. Operating Results—Results of Operations” below.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of:

 

   

sales commissions;

 

   

sales promotion and advertising expenses;

 

   

salaries and benefits for management and personnel in sales promotion divisions and advertising, general and administrative functions;

 

   

professional fees;

 

   

insurance, rent and office expenses; and

 

   

research and development expenses.

Selling, general and administrative expenses also include depreciation and amortization of assets involved in sales promotion and advertising, general and administrative activities.

The following table sets forth our selling, general and administrative expenses for the periods indicated:

 

     Fiscal year ended March 31,  
     2018     2019     2020  
     (billions of yen except percentages)  

Selling, general and administrative expenses

   ¥ 729.9     ¥ 743.0     ¥ 752.7  

Selling, general and administrative expenses as percentage of revenue

     25.7     25.5     24.3

For details regarding the factors affecting selling, general and administrative expenses between periods, see “—A. Operating Results—Results of Operations” below.

Other Operating Income and Expenses

Other operating income includes:

 

   

insurance recovery;

 

   

gain on loss of control of subsidiaries;

 

   

gain on sale of land;

 

   

indemnification received;

 

   

gain on reversal of contingent loss; and

 

   

gain on sales of subsidiaries’ stocks.

Other operating expenses includes:

 

   

impairment loss;

 

   

loss on disposal of property, plant and equipment;

 

   

provision for contingent loss;

 

   

business structure improvement cost; and

 

   

settlement payment and indemnification for damages.

 

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The following table sets forth our other operating income and other operating expenses for the periods indicated:

 

     Fiscal year ended March 31,  
     2018     2019     2020  
     (billions of yen)  

Other operating income

   ¥ 16.4     ¥ 21.7     ¥   13.3  

Other operating expenses

     20.2       50.8       20.6  
  

 

 

   

 

 

   

 

 

 

Other operating expenses, net

   ¥ (3.9   ¥ (29.1   ¥ (7.3
  

 

 

   

 

 

   

 

 

 

For details regarding the factors affecting other operating expenses between periods, see “—A. Operating Results—Results of Operations” below.

Operating Profit

Operating profit represents the amount of revenue less cost of sales and selling, general and administrative expenses, minus other operating expenses. The table below shows our consolidated operating profit for the periods indicated.

 

     Fiscal year ended March 31,  
     2018     2019     2020  
     (billions of yen)  

Operating profit

   ¥ 63.9       ¥  57.8       ¥ 127.6    

Our consolidated operating profit for each period is affected by the operations of our business segments, each of which are affected by different factors from period to period. For details regarding the factors affecting each of our business segments across periods, see “—A. Operating Results—Segment Analysis” below.

Key Performance Metrics

Operating Profit Margin

We use operating profit margin as a primary indicator of our profitability. Operating profit margin is calculated by dividing operating profit by revenue, each as reported in our consolidated financial statements prepared in accordance with IFRS. The table below sets forth our consolidated operating profit margin for the periods indicated.

 

                                      
     Fiscal year ended March 31,  
     2018     2019     2020  

Operating profit margin

          2.2          2.0          4.1

Based on the nature of its calculation, operating profit margin for each period is directly affected by changes in revenue and operating profit across our business segments. Due to the broad scope and diverse nature of our operations, the factors affecting the operations of each business segment across periods are specific to each business segment. For details regarding the factors affecting each of our business segments across periods, see “—A. Operating Results—Segment Analysis” below.

Return on Equity

We also monitor return on equity as a primary indicator of our performance. Return on equity is calculated by dividing net profit attributable to owners of the parent by equity attributable to owners of the parent, each as

 

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reported in our consolidated financial statements prepared in accordance with IFRS. The following table sets forth return on equity for the periods indicated:

 

                                      
     Fiscal year ended March 31,  
     2018     2019     2020  
     (billions of yen except percentages)  

Net profit attributable to owners of the parent

   ¥ 45.9     ¥ 39.7     ¥ 100.0  

Equity attributable to owners of the parent

     880.8       858.9       910.7  

Return on equity

     5.3     4.6     11.3

Based on the nature of its calculation, return on equity for each period is directly affected by changes in net profit. Net profit, and consequently, return on equity for the fiscal year ended March 31, 2020 were each higher than those recorded for the fiscal year ended March 31, 2019 due to a general increase in revenue across our business segments as well as the impact of business structure improvements implemented in the previous fiscal year. For details regarding the factors affecting each of our business segments across periods, see “—A. Operating Results—Segment Analysis” below.

Recent Developments

Coronavirus

The recent outbreak of coronavirus has required us to modify our ordinary operations, primarily through the transition of a significant subset of our employee population to a remote work environment. See “Item 3.D. Key Information—Risk Factors—Risks Related to Our Operating Environment—The recent outbreak of the novel coronavirus could have a significant negative impact on our business, results of operations and financial condition,” “Item 4.B. Information on the Company—Business Overview—Overview—Medium-Term Management Plan—Impact of the Coronavirus Pandemic” and “Item 5.D. Operating and Financial Review and Prospects—Trend Information.”

Implementation of Business Structure Improvement Measures

Under our medium-term management plan for the three fiscal years ending March 31, 2021, we have implemented business structure improvement measures to improve profitability. These measures include, among other things, streamlining our business portfolio, reducing costs and optimizing our manufacturing operations. For a more detailed discussion of our medium-term management plan, see “Item 4.B Information on the Company—Business Overview—Overview—Medium-Term Management Plan.”

We recorded restructuring costs related to improvements in our business structure in the amounts of ¥2.7 billion, ¥26.9 billion and ¥1.1 billion for the fiscal years ended March 31, 2018, 2019 and 2020, respectively. These expenses were included in other operating expenses in our consolidated statement of profit and loss.

Capital and Business Alliance with NTT Group

On June 25, 2020, we announced a capital and business alliance with the NTT group, pursuant to which Nippon Telegraph and Telephone Corporation intends to acquire 13,023,600 shares of our common stock (consisting of 12,376,600 newly issued shares and 647,000 treasury shares) via a third-party allotment at a price of ¥4,950 per share, or ¥64.5 billion in total. The share sale is expected to close in July 2020. The alliance aims to (i) strengthen the development and global expansion of compact integrated circuit (Digital Signal Processor) technology as well as ICT equipment integrating such technology, (ii) promote open radio access network (O-RAN) technology specifications and the global expansion of O-RAN compliant products and (iii) develop innovative technology that contributes to the realization and implementation of NTT group’s innovative optical and wireless network (IOWN) technology.

 

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Joint Venture with Sharp Corporation

On March 25, 2020, we announced an agreement to transfer a 66% equity interest in NEC Display Solutions, Ltd. to Sharp Corporation in order to form a joint venture focused on the display solutions business. The transaction is expected to close by the end of 2020.

Sale of Our Battery Business

In March 2019, we sold all of the equity interest we held in NEC Energy Devices, Ltd., a Japanese battery electrode manufacturing subsidiary, to Envision Electrodes Corporation Ltd, a subsidiary of Envision Group, a Chinese renewable energy company. We also sold all of the equity interest we held in Automotive Energy Supply Corporation, a Japanese lithium ion battery assembling affiliate, to Nissan Motor Co., Ltd, a Japanese automobile manufacturer. In connection with the NEC Energy Devices transaction, we recorded ¥9.1 billion of gain on sale of subsidiaries’ stocks, which were included in other operating income in our consolidated statement of profit and loss for the fiscal year ended March 31, 2019. In connection with the Automotive Energy Supply transaction, we recorded ¥10.0 billion of gain on sales of associates, which were included in financial income in our consolidated statement of profit and loss.

Acquisition of KMD Holding ApS

In February 2019, we acquired all of the equity interest in KMD Holding ApS, a software and IT service provider in Denmark, from Advent International, a U.S. private equity firm. Our consideration for this acquisition was ¥48.4 billion. In connection with this acquisition, we recognized ¥87.8 billion of goodwill. In addition, we recorded ¥1.1 billion of acquisition-related costs, which were reflected in selling, general and administrative expenses for the fiscal year ended March 31, 2019. From the acquisition date until March 31, 2019, KMD Holding ApS contributed ¥6.6 billion to our consolidated revenue and ¥0.1 billion to our consolidated net profit. KMD Holding ApS belongs to the Global business segment and is expected to contribute to our strategy to grow the “Safer Cities” initiative.

Acquisition of Northgate Public Services Limited

In January 2018, we acquired 90.0% of the equity interest in Northgate Public Services Limited, a U.K. software and IT service provider for the public sector, from Cinven, a U.K. private equity firm. In March 2018, we acquired the remaining equity interest in Northgate Public Services Limited. Our consideration for the acquisition was ¥27.6 billion. In connection with this acquisition, we recognized ¥43.1 billion of goodwill. In addition, we recorded ¥1.0 billion of acquisition-related costs, which were reflected in selling, general and administrative expenses for the fiscal year ended March 31, 2018. From the acquisition date until March 31, 2018, Northgate Public Services Limited contributed ¥2.7 billion to our consolidated revenue and had a negative impact of ¥0.8 billion on our consolidated net profit. Northgate Public Services Limited belongs to the Global business segment and is expected to contribute to our strategy to grow the “Safer Cities” initiative.

Critical Accounting Estimates and Judgments

The notes to our consolidated financial statements included elsewhere in this annual report provide a summary of our significant accounting policies. The accounting policies are important to understanding our financial condition and results of operations. Some of these accounting policies require management to make difficult, complex and subjective estimates and judgments which relate to factors that are inherently uncertain and subject to change, and which may significantly affect the amounts reported in our consolidated financial statements.

Our management has assessed the impact of significant uncertainty introduced by the coronavirus pandemic on its accounting estimates and judgments based upon the information currently available. The areas for which

 

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estimating the potential effects of coronavirus and various governments’ counter-measures with respect to future macroeconomic conditions was of particular importance for the fiscal year ended March 31, 2020 are the recoverable amount in the impairment testing of non-financial assets and the recoverability of deferred tax assets. Given the uncertainties associated with the coronavirus pandemic, it is difficult for our management to estimate the overall future impact of the pandemic. As of March 31, 2020, our management has determined that the coronavirus pandemic is not expected to have a significant impact on our long-term operating results due to the nature of the ICT industry in which the Company operates and the expectation of continuing demand for investments in the digital transformation of society that is expected to continue following the coronavirus pandemic. However, while there was not a material adverse impact to our consolidated financial statements as of and for the fiscal year ended March 31, 2020, as events continue to evolve and additional information becomes available, actual results and outcomes in future reporting periods may differ materially from management’s estimates.

The following is a summary of the critical accounting estimates and judgments:

Revenue Recognition

Revenue for fixed price service contracts including system integrations and equipment constructions is in principle recognized by the method of measuring the progress based on the costs incurred to date as a percentage of the total estimated project costs. When milestones for the obligations to be performed by us are defined at contract inception, revenue is recognized based on completion of the contractual milestones. Revenue on ongoing service contracts is recognized by measuring the progress based on the period of services already provided over the entire service period. Where outsourcing services are charged on a per unit basis, such as data usage, revenue is recognized when the service is provided. Where services are charged on a time period basis, revenue is recognized evenly over the period of the service contract. For maintenance, in principle revenue is recognized over the period in which the services are provided; however, where the contracts are charged on a time basis, revenue is recognized on a time and materials basis.

We believe that our revenue recognition policies are a critical accounting estimate because management’s judgment is required in identifying an appropriate method that faithfully depicts our progress towards complete satisfaction of performance obligations. To measure progress of our performance obligation, the cost-to-cost method is used. Under this method, management calculates the percentage of the costs incurred to date to the total reasonably estimated costs to completely satisfy the performance obligation. Since costs often increase or decrease due to changes in circumstances subsequent to the commencement of our performance of a contractual obligation, management continuously reassesses the total estimated costs by comparing the costs incurred to date to the previously estimated costs.

Recognition and Measurement of Provisions

We recognize provisions for various obligations, including product warranty liabilities, provision for business structure improvement, asset retirement obligations and provision for loss on construction contracts and others. We believe that these provisions are a critical accounting estimate because management’s judgement is required to estimate the expenses expected to be required to settle an obligation or transfer an obligation to a third party, considering the risks and uncertainty related to the obligation as of the end of a reporting period.

With respect to provision for loss on construction contracts and others, such provision is recognized for the anticipated loss on certain of our contracts for system integrations and equipment constructions, including customized software development, and other projects if management determines that it is probable that the total estimated project cost for a project exceeds the total estimated revenue from the project and the loss amount can be reliably estimated.

 

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Recoverable Amounts in Non-Financial Asset Impairment Testing

We recognize an impairment charge on a non-financial asset or a CGU and write down the carrying amount of such asset or CGU to its recoverable amount when we determine that the carrying amount of such asset or CGU exceeds its recoverable amount. Recoverable amount is the higher of fair value less costs of disposal or its value in use. In determining the recoverable amount of an asset or CGU, management uses estimates. For example, to measure the value in use of an asset or CGU, management calculates the future cash flows based on its estimate of a range of economic conditions that will exist over the remaining useful life of the asset or CGU. The estimated future cash flows are discounted to the present value using a pre-tax discount rate that reflects management’s current market assessments of the time value of money and the risks specific to the asset or CGU.

We believe that determining the recoverable amount of a non-financial asset or CGU is a critical accounting estimate because management’s judgement is required to estimate future cash flows derived from an asset or CGU, and appropriate discount rates considering the risks and uncertainty related to the future operations of the asset or CGU.

As of March 31, 2020, our management has determined that the coronavirus pandemic is not expected to have a significant impact on the Company’s long-term operating results. Accordingly, as of March 31, 2020, our management has determined that the coronavirus pandemic has not resulted in a material adverse impact on the recoverable amounts of the Company’s non-financial assets or CGUs.

Recoverability of Deferred Tax Assets

We consider the probability that a portion or all of future deductible temporary differences or unused tax losses can be utilized against future taxable profits in the recognition of deferred tax assets. In assessing recoverability of deferred tax assets, we consider the scheduled reversal of deferred tax liabilities, projected future taxable profits and tax planning strategies.

We believe that our accounting for the deferred tax assets is a critical accounting estimate because it requires us to evaluate and assess the probability of future taxable profit and our business plan, which are inherently uncertain.

As of March 31, 2020, our management has determined that the coronavirus pandemic is not expected to have a significant impact on the Company’s long-term operating results. Accordingly, our management has determined that, due to an increase in the probability of future taxable profit based on the improvement in the Company’s operating results for the fiscal year ended March 31, 2020 despite the impact of the coronavirus pandemic, the Company’s effective tax rate for the fiscal year ended March 31, 2020 was lower than the statutory tax rate. This improvement in the effective tax rate was mainly due to the recognition of deferred tax assets for previously unrecognized deductible temporary differences.

Accounting Changes and Recently Issued Accounting Pronouncements

See Notes 5 and 38 to our consolidated financial statements included elsewhere in this annual report.

 

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A.

OPERATING RESULTS

Results of Operations

The following table sets forth a summary of our results of operations for the periods indicated:

 

     Fiscal year ended March 31,  
     2018      2019      2020  
     (billions of yen)  

Revenue

   ¥ 2,844.4      ¥ 2,913.4      ¥ 3,095.2  

Cost of sales

     2,046.9        2,083.5        2,207.7  
  

 

 

    

 

 

    

 

 

 

Gross profit

     797.6        829.9        887.6  

Selling, general and administrative expenses

     729.9        743.0        752.7  

Other operating expenses

     3.9        29.1        7.3  
  

 

 

    

 

 

    

 

 

 

Operating profit

     63.9        57.8        127.6  

Finance income

     29.6        22.0        8.5  

Finance costs

     11.6        8.4        15.5  

Share of profit of entities accounted for using the equity method

     5.1        5.9        3.3  
  

 

 

    

 

 

    

 

 

 

Profit before income taxes

     86.9        77.3        124.0  

Income taxes

     26.8        25.4        11.3  
  

 

 

    

 

 

    

 

 

 

Net profit

   ¥ 60.2      ¥ 51.9      ¥ 112.7  
  

 

 

    

 

 

    

 

 

 

Seasonality

We derive a substantial portion of our revenue from Japanese national and local government contracts and large-scale ICT network and system platform contracts with private businesses in Japan. As a result, our revenue tends to be affected by the seasonality of their purchasing cycle and generally higher in the fourth quarter of each fiscal year, which ends on March 31. We believe this seasonality is caused by several factors, most notably the tendency of these customers’ procurement departments to prefer purchasing and accepting delivery of products and services at the end of their fiscal year, which also ends on March 31 in most cases, including the Japanese national and local governments and many private businesses in Japan.

Fiscal Year Ended March 31, 2020 Compared to Fiscal Year Ended March 31, 2019

Revenue. Our revenue increased ¥181.8 billion, or 6.2%, to ¥3,095.2 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. This increase was due to a general increase in revenue across our business segments, including an increase in revenue of ¥84.4 billion in our Global business segment primarily due to an increase in revenue from the “Safer Cities” initiative as well as increased sales of submarine cable systems, an increase in revenue of ¥49.5 billion in our Network Services business segment primarily as a result of increased demand from telecom carriers based on increased investments in preparation for 5G deployment as well as the completion of a one-time large-scale project related to IT services for a telecom carrier, an increase in revenue of ¥48.5 billion in our System Platform business segment primarily as a result of increased sales of non-customized personal computers to corporate customers, an increase in revenue of ¥38.5 billion in our Public Solutions business segment primarily as a result of higher demand for IT services by local governments and healthcare service providers, an increase in revenue of ¥23.7 billion in our Enterprise business segment primarily due to stronger demand for IT services in the financial sector in Japan and an increase in revenue of ¥9.3 billion in our Public Infrastructure business segment primarily as a result of higher revenue from large-scale projects in the aerospace and defense sectors.

By geographical location of customers, our revenue from customers in Japan increased ¥118.9 billion, or 5.3%, to ¥2,343.3 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. This

 

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increase was primarily due to increased demand from telecom carriers based on increased investments in preparation for 5G deployment and the completion of a one-time large-scale project related to IT services for a telecom carrier, increased sales of non-customized personal computers to corporate customers and higher demand for IT services by local governments and healthcare service providers. Between the same periods, while our revenue from customers in Europe, Middle East and Africa increased ¥73.0 billion, or 45.3%, to ¥234.1 billion, which was primarily attributable to the impact of the consolidation of KMD Holding ApS, our revenue from customers in North America and Latin America decreased ¥10.3 billion, or 5.9%, to ¥164.1 billion mainly as a result of the completion of more large-scale projects in the previous fiscal year, including projects related to our “Safer Cities” initiative, and our revenue from customers in China, East Asia and Asia Pacific slightly increased to ¥353.8 billion.

Cost of sales. Our cost of sales increased ¥124.2 billion, or 6.0%, to ¥2,207.7 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. The higher cost of sales primarily reflected the general increase in costs corresponding to the increase in revenue, particularly for the Global, System Platform and Network Services business segments. As a percentage of revenue, cost of sales decreased to 71.3% for the fiscal year ended March 31, 2020 compared to 71.5% for the previous fiscal year.

Selling, general and administrative expenses. Our selling, general and administrative expenses increased ¥9.7 billion, or 1.3%, to ¥752.7 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. The increase primarily reflected the general increase in costs corresponding to the increase in revenue. As a percentage of revenue, selling, general and administrative expenses decreased to 24.3% for the fiscal year ended March 31, 2020 compared to 25.5% for the previous fiscal year.

Other operating expenses. We recorded ¥7.3 billion of other operating expenses for the fiscal year ended March 31, 2020 compared to ¥29.1 billion of other operating expenses for the previous fiscal year. This decrease mainly reflected the large decrease in business structure improvement cost to ¥1.1 billion for the fiscal year ended March 31, 2020 from ¥26.9 billion for the previous fiscal year. The high level of business structure improvement cost for the fiscal year ended March 31, 2019 was mainly due to the incurrence of ¥20.1 billion of expenses in connection with the implementation of a voluntary early employee retirement program.

Finance income. Our finance income decreased ¥13.5 billion, or 61.4%, to ¥8.5 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. This decrease was primarily due to the decrease in gain on sale of associates to ¥0.1 billion for the fiscal year ended March 31, 2020 compared to ¥12.6 billion for the previous fiscal year. The high level of gain on sale of associates for the fiscal year ended March 31, 2019 was mainly due to sales of shares of Automotive Energy Supply Corporation.

Finance costs. Our finance costs increased by ¥7.1 billion, or 84.6%, to ¥15.5 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. This increase was primarily due to an increase in interest expenses of ¥3.0 billion, mainly due to the adoption of IFRS 16 on April 1, 2019, as well as foreign exchange losses of ¥3.6 billion compared to a lack of foreign exchange losses in the previous fiscal year.

Share of profit of entities accounted for using the equity method. Share of profit of entities accounted for using the equity method decreased ¥2.6 billion, or 43.4%, to ¥3.3 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. The decrease was primarily due to a decrease in the net profit of NEC Capital Solutions Limited, an equity-method affiliate.

Income taxes. Our income tax expenses for the fiscal year ended March 31, 2020 were ¥11.3 billion consisting of ¥25.4 billion of current tax expenses and ¥14.2 billion of deferred tax benefit, compared to ¥25.4 billion consisting of ¥18.8 billion of current tax expenses and ¥6.6 billion of deferred tax expenses for the previous fiscal year. Our effective tax rate for the fiscal year ended March 31, 2020 was 9.1% compared to the statutory tax rate of 30.5% applicable in Japan, which was primarily due to the recognition of previously unrecognized deductible temporary differences as well as the revaluation of deferred tax assets due to

 

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management’s expectation that the Company will be able to generate additional future taxable profits. Our effective tax rate for the previous fiscal year was 32.8% compared to the statutory tax rate of 30.5% applicable in Japan.

Net profit. Our net profit increase ¥60.8 billion, or 117.1%, to ¥112.7 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. As a percentage of revenue, net profit increase to 3.6% from 1.8%.

Fiscal Year Ended March 31, 2019 Compared to Fiscal Year Ended March 31, 2018

Revenue. Our revenue increased ¥69.0 billion, or 2.4%, to ¥2,913.4 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. We benefited from stronger demand for IT services particularly in the public and financial sectors in Japan, resulting in an increase in revenue of ¥17.8 billion for our Public Solutions business segment, an increase in revenue of ¥26.6 billion for our Enterprise business segment and an increase in revenue of ¥11.6 billion for our System Platform business segment. We also benefited from investments by telecommunications carriers in Japan to enhance their network infrastructure, resulting in an increase in revenue of ¥17.8 billion for our Network Services business segment. These positive trends were offset partially by declines in sales of displays and software services for service providers in overseas markets, resulting in a decrease in revenue of ¥11.1 billion for our Global business segment.

By geographical location of customers, our revenue from customers in Japan increased ¥120.1 billion, or 5.7%, to ¥2,224.3 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. This increase was primarily due to stronger demand for IT services by our corporate customers as well as an increase in telecommunications-related construction projects. Between the same periods, while our revenue from customers in Europe, Middle East and Africa increased ¥6.3 billion, or 4.1%, to ¥161.1 billion due primarily to the impact of the consolidation of Northgate Public Services Limited, our revenue from customers in North America and Latin America decreased ¥10.9 billion, or 5.9%, to ¥174.4 billion mainly as a result of increased competition in the display market, and our revenue from customers in China, East Asia and Asia Pacific decreased ¥46.5 billion, or 11.6%, to ¥353.6 billion due to a decrease in sales by JAE.

Cost of sales. Our cost of sales increased ¥36.7 billion, or 1.8%, to ¥2,083.5 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. The higher cost of sales primarily reflected the general increase in costs corresponding to the increase in revenue, particularly for the Enterprise, System Platform and Network Services business segments. As a percentage of revenue, cost of sales decreased to 71.5% for the fiscal year ended March 31, 2019 compared to 72.0% for the previous fiscal year. This improvement mainly reflected the positive effect of cost reduction measures implemented in the Global business segment.

Selling, general and administrative expenses. Our selling, general and administrative expenses increased ¥13.2 billion, or 1.8%, to ¥743.0 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. The increase was primarily attributable to the impact of the consolidation of Northgate Public Services Limited. As a percentage of revenue, selling, general and administrative expenses decreased to 25.5% for the fiscal year ended March 31, 2019 compared to 25.7% for the previous fiscal year.

Other operating income (expenses). We recorded ¥29.1 billion of other operating expenses for the fiscal year ended March 31, 2019 compared to ¥3.9 billion of other operating expenses for the previous fiscal year. This mainly reflected an increase of ¥24.2 billion in business structure improvement costs, including expenses related to personnel reductions, and an increase of ¥11.1 billion in impairment losses, which more than offset an increase of ¥9.0 billion in other operating income from the gain on sales of subsidiaries’ stocks. Our business structure improvement costs increased to ¥26.9 billion from ¥2.7 billion primarily as a result of incurring ¥20.1 billion of expenses in connection with the implementation of a voluntary early employee retirement program. Impairment losses increased to ¥12.6 billion from ¥1.5 billion, with impairment losses on property, plant and equipment increasing to ¥7.7 billion from ¥0.5 billion and impairment losses on goodwill increasing to

 

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¥2.9 billion from ¥0.8 billion. The ¥7.7 billion impairment losses on property, plant and equipment were recognized mainly as a result of our decision to close NEC Tsukuba Research Laboratories. The ¥2.9 billion impairment losses were recognized on the goodwill recorded in connection with the acquisition of an IT services subsidiary currently belonging to the Global business segment.

Finance income. Our finance income decreased ¥7.6 billion, or 25.6%, to ¥22.0 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. This decrease was primarily due to a ¥4.2 billion decrease in gain on sale of associates as well as the lack of gain on sales of equity instruments in the fiscal year ended March 31, 2019.

Finance costs. Our finance costs decreased by ¥3.2 billion, or 27.6%, to ¥8.4 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. This was primarily due to a decrease in foreign exchange losses to nil from ¥3.1 billion as a result of a weakening of the yen against the dollar during the fiscal year ended March 31, 2019.

Share of profit of entities accounted for using the equity method. Share of profit of entities accounted for using the equity method increased ¥0.8 billion, or 15.9%, to ¥5.9 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. The increase was primarily due to the improved performance of NEC Capital Solutions Limited, an equity-method affiliate.

Income taxes. Our income tax expenses for the fiscal year ended March 31, 2019 were ¥25.4 billion consisting of ¥18.8 billion of current tax expenses and ¥6.6 billion of deferred tax expenses, compared to ¥26.8 billion consisting of ¥21.0 billion of current tax expenses and ¥5.8 billion of deferred tax expenses for the previous fiscal year. Our effective tax rate for the fiscal year ended March 31, 2019 was 32.8% compared to the statutory tax rate of 30.5% applicable in Japan. Our effective tax rate for the previous fiscal year was 30.8% compared to the statutory tax rate of 31.0% applicable in Japan.

Net profit. Our net profit decreased ¥8.2 billion, or 13.7%, to ¥51.9 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. As a percentage of revenue, net profit decreased to 1.8% from 2.1%.

Segment Analysis

The following table sets forth our revenue by segment for the periods indicated:

 

     Fiscal year ended March 31,  
     2018     2019     2020  
     (billions of yen)  

Revenue:(1)(2)

      

Public Solutions

   ¥ 268.3     ¥ 286.2     ¥ 324.6  

Public Infrastructure

     624.8       621.9       631.1  

Enterprise

     405.2       431.8       455.5  

Network Services

     442.5       460.3       509.8  

System Platform

     488.6       500.2       548.7  

Global

     420.5       409.4       493.8  

Others

     194.6       203.7       131.7  
  

 

 

   

 

 

   

 

 

 

Total revenue

   ¥ 2,844.4      ¥ 2,913.4      ¥ 3,095.2   
  

 

 

   

 

 

   

 

 

 

 

(1)

Revenue from external customers, excluding intersegment revenue.

(2)

The information in this table reflects the segment organizational changes described in “Item 5. Operating and Financial Review and Prospects—Introduction—Segment Reorganizations.” Please also see Note 6 to our consolidated financial statements included elsewhere in this annual report.

 

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In order to measure the underlying profitability of our segments, we evaluate segment profit by deducting amortization of intangible assets recognized as a result of M&A and expenses for acquisition of companies (such as financial advisory fees) from selling, general and administrative expenses and other operating expenses for the segment. The following table sets forth our segment profit for the periods indicated. The information in this table reflects the segment organizational changes described in “Item 5. Operating and Financial Review and Prospects—Introduction—Segment Reorganizations.” Please also see Note 6 to our consolidated financial statements included elsewhere in this annual report.

 

     Fiscal year ended March 31,  
     2018     2019     2020  
     (billions of yen)  

Segment profit (loss):(1)

      

Public Solutions

   ¥ 4.4     ¥ 7.2     ¥ 18.6  

Public Infrastructure

     50.6       45.4       53.9  

Enterprise

     36.2       35.8       37.2  

Network Services

     22.9       20.7       38.2  

System Platform

     29.3       20.1       48.9  

Global

     (24.0     (22.5     (3.8

Others

     (3.1     19.0       9.4  

Reconciling items(2)

     (43.8     (55.7     (56.5
  

 

 

   

 

 

   

 

 

 

Total segment profit

     72.5       69.9       145.8  
  

 

 

   

 

 

   

 

 

 

Amortization of intangible assets(3)

     (7.4     (10.4     (17.0

M&A-related expenses(4)

     (1.2     (1.8     (1.2
  

 

 

   

 

 

   

 

 

 

Total operating profit

   ¥      63.9     ¥      57.8     ¥    127.6  
  

 

 

   

 

 

   

 

 

 

 

(1)

Segment profit (loss) is calculated by deducting amortization of intangible assets recognized as a result of M&A and expenses for acquisition of companies (such as financial advisory fees) from selling, general and administrative expenses and other operating expenses for the applicable segment.

(2)

The amount represents expenses and costs that were not allocated to any business segment, including corporate expenses, such as general and administrative expenses incurred at our headquarters and certain research and development expenses.

(3)

Amortization of intangible assets has been deducted mainly with respect to our acquisitions of Northgate Public Services Limited in January 2018 (with the remaining shares acquired in March 2018), KMD Holding ApS in February 2019 and OncoImmunity AS in July 2019.

(4)

M&A-related expenses consists of consulting fees, fees of financial advisors, accountant fees and legal fees in connection with (i) for the fiscal year ended March 31, 2018, our acquisition of Northgate Public Services Limited in January 2018 (with the remaining shares acquired in March 2018), (ii) for the fiscal year ended March 31, 2019, our acquisition of KMD Holding ApS in February 2019 and (iii) for the fiscal year ended March 31, 2020, our acquisition of OncoImmunity AS in July 2019.

 

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The following table sets forth our depreciation expenses for property, plant and equipment, and amortization of software and other intangible assets by segment for the periods indicated:

 

     Fiscal year ended March 31,  
     2018     2019     2020  
     (billions of yen)  

Depreciation and amortization:(1)

      

Public Solutions

   ¥ 3.9     ¥ 3.9     ¥ 3.9  

Public Infrastructure

     31.6       33.2       40.4  

Enterprise

     4.9       4.6       6.7  

Network Services

     7.6       7.6       9.5  

System Platform

     15.2       14.3       16.9  

Global

     11.2       14.2       27.9  

Others

     16.2       16.1       42.9  

Reconciling items(2)

     5.4       5.9       18.1  
  

 

 

   

 

 

   

 

 

 

Total depreciation and amortization

   ¥      96.0      ¥      99.7      ¥    166.4   
  

 

 

   

 

 

   

 

 

 

 

(1)

The information in this table reflects the segment organizational changes described in “Item 5. Operating and Financial Review and Prospects—Introduction—Segment Reorganizations.” Please also see Note 6 to our consolidated financial statements included elsewhere in this annual report.

(2)

The amount represents depreciation and amortization that were not allocated to any business segment, such as that incurred at our headquarters.

The increase in depreciation and amortization for the fiscal year ended March 31, 2020 as compared to the previous fiscal year was primarily attributable to increased depreciation expenses for right-of-use assets on leases previously classified as operating leases resulting from the adoption of IFRS 16 on April 1, 2019.

Fiscal Year Ended March 31, 2020 Compared to Fiscal Year Ended March 31, 2019

Public Solutions. Revenue for the Public Solutions business segment increased ¥38.5 billion, or 13.4%, to ¥324.6 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. The increase primarily reflected increased sales of ICT systems to local governments and healthcare service providers. Segment profit for the Public Solutions business segment increased ¥11.4 billion, or 157.0%, to ¥18.6 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. The increase was mainly attributable to the increase in revenue as well as the impact of approximately ¥2.0 billion of business structure improvement costs in the previous fiscal year due mainly to the implementation of a voluntary early employee retirement program.

Public Infrastructure. Revenue for the Public Infrastructure business segment increased ¥9.3 billion, or 1.5%, to ¥631.1 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. The increase primarily reflected higher revenue from large-scale projects in the aerospace and defense sectors. Segment profit for the Public Infrastructure business segment increased ¥8.5 billion, or 18.7%, to ¥53.9 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. The increase was mainly attributable to the increase in revenue, increased profitability from projects in the aerospace and defense sector as compared to projects in the previous fiscal year as well as profitability improvements due to the impact of business structure improvements implemented in the previous fiscal year.

Enterprise. Revenue for the Enterprise business segment increased ¥23.7 billion, or 5.5%, to ¥455.5 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. The increase primarily reflected growth in sales in the financial sector as customers increased their ICT system investments. Segment profit for the Enterprise business segment increased ¥1.3 billion, or 3.8%, to ¥37.2 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. The increase in segment profit mainly reflected the increase in revenue.

 

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Network Services. Revenue for the Network Services business segment increased ¥49.5 billion, or 10.8%, to ¥509.8 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. The increase was primarily due to increased demand from telecom carriers based on increased investments in preparation for 5G deployment as well as the completion of a one-time large-scale project related to IT services for a telecom carrier. Segment profit for the Network Services business segment increased ¥17.5 billion, or 84.8%, to ¥38.2 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. The increase in segment profit mainly reflected the increase in revenue.

System Platform. Revenue for the System Platform business segment increased ¥48.5 billion, or 9.7%, to ¥548.7 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. The increase primarily reflected increased sales of non-customized personal computers to corporate customers. Segment profit for the System Platform business segment increased ¥28.8 billion, or 143.3%, to ¥48.9 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. The increase was mainly attributable to the increase in revenue as well as the impact of approximately ¥8.0 billion of business structure improvement costs in the previous fiscal year due mainly to the implementation of a voluntary early employee retirement program.

Global. Revenue for the Global business segment increased ¥84.4 billion, or 20.6%, to ¥493.8 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. The increase primarily reflected an increase in revenue from the “Safer Cities” initiative as well as increased sales of submarine cable systems. The Global business segment recorded ¥3.8 billion of segment loss for the fiscal year ended March 31, 2020, compared to ¥22.5 billion of segment loss for the previous fiscal year. The decrease in the amount of segment loss for the fiscal year ended March 31, 2020 primarily reflected the increase in revenue, improved profitability due to the impact of business structure improvements relating to the optimization of overseas offices and impairment losses on property, plant and equipment and goodwill incurred in the previous fiscal year.

Others. Revenue for our other businesses decreased ¥72.0 billion, or 35.4%, to ¥131.7 billion for the fiscal year ended March 31, 2020 compared to the previous fiscal year. This decrease in revenue primarily reflected the sale of our battery electrode manufacturing business in March 2019 and the sale of our lighting equipment manufacturing business in April 2019. Segment profit for our other businesses for the fiscal year ended March 31, 2020 was ¥9.4 billion, compared to ¥19.0 billion of segment profit for the previous fiscal year. The decrease was mainly attributable to the lack of profits from the operations and sale of our battery electrode manufacturing business following its sale during the fiscal year ended March 31, 2019.

Fiscal Year Ended March 31, 2019 Compared to Fiscal Year Ended March 31, 2018

Public Solutions. Revenue for the Public Solutions business segment increased ¥17.8 billion, or 6.6%, to ¥286.2 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. The increase primarily reflected larger sales of ICT systems for public and healthcare service providers and fire control and disaster prevention systems following the expiration of the periods of our debarment from participating in bidding for public contracts in Japan. Segment profit for the Public Solutions business segment increased ¥2.8 billion, or 63.9%, to ¥7.2 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. The increase mainly reflected the positive impact of the increase in revenue of ¥17.8 billion, which was partially offset by the negative impact of an increase in business structure improvement costs in connection with the implementation of a voluntary early employee retirement program which accounted for approximately ¥2.0 billion of expenses.

Public Infrastructure. Revenue for the Public Infrastructure business segment decreased ¥2.9 billion, or 0.5%, to ¥621.9 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. Although we had an increase in sales from large-scale projects in the aerospace and defense sector, this was substantially offset by the decrease in sales of mobile and industrial equipment by JAE as a result of decreased capital investment originating from China. Segment profit for the Public Infrastructure business segment decreased ¥5.3 billion, or 10.4%, to ¥45.4 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal

 

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year. The decrease was mainly attributable to business structure improvement costs in connection with the implementation of a voluntary early employee retirement program which accounted for approximately ¥1.0 billion of expenses.

Enterprise. Revenue for the Enterprise business segment increased ¥26.6 billion, or 6.6%, to ¥431.8 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. The increase primarily reflected growth in sales in the manufacturing, retail and services, and financial sectors as customers in these sectors increased their ICT system investments. However, segment profit for the Enterprise business segment decreased ¥0.4 billion, or 1.2%, to ¥35.8 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. Although segment profit from the system implementation service business increased, segment profit was negatively affected by larger expenses for research and development relating to AI and IoT technology and business structure improvement costs in connection with the implementation of a voluntary early employee retirement program which accounted for approximately ¥1.0 billion of expenses.

Network Services. Revenue for the Network Services business segment increased ¥17.8 billion, or 4.0%, to ¥460.3 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. The increase was primarily due to growth in sales for the network infrastructure business, reflecting larger demand for network construction work, and the mobile telecommunications carrier business, reflecting a contract with Rakuten Mobile, Inc., the most recent entrant into the Japanese mobile telecommunications market. However, segment profit for the Network Services business segment decreased ¥2.2 billion, or 9.6%, to ¥20.7 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. Despite an improvement in the profitability of the network infrastructure business, the segment profit was negatively affected by losses on an ICT service project and business structure improvement costs in connection with the implementation of a voluntary early employee retirement program which accounted for approximately ¥2.0 billion of expenses.

System Platform. Revenue for the System Platform business segment increased ¥11.6 billion, or 2.4%, to ¥500.2 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. The increase primarily reflected growth in hardware sales, particularly personal computers for business use following the announcement of Microsoft Corporation’s plan to terminate the support services for the Windows 7 operating system. However, segment profit for the System Platform business segment decreased ¥9.2 billion, or 31.5%, to ¥20.1 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. The decrease was mainly attributable to business structure improvement costs in connection with the implementation of a voluntary early employee retirement program which accounted for approximately ¥8.0 billion of expenses and the closure of two manufacturing plants in Japan, which more than offset the positive impact of the increase in revenue.

Global. Revenue for the Global business segment decreased ¥11.1 billion, or 2.6%, to ¥409.4 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. The decrease primarily reflected weaker demand for software services for service providers and lower sales of displays particularly in the United States where price competition intensified, although revenue from the “Safer Cities” initiative increased as a result of our acquisition of Northgate Public Services Limited (in January 2018, with the remaining shares acquired in March 2018). The Global business segment recorded ¥22.5 billion of segment loss for the fiscal year ended March 31, 2019, compared to ¥24.0 billion of segment loss for the previous fiscal year. The segment loss for the fiscal year ended March 31, 2019 primarily reflected the decrease in revenue of ¥11.1 billion, business structure improvement costs relating to the optimization of overseas offices, and impairment losses on property, plant and equipment and goodwill, more than offsetting the positive impact of improvements in the profitability of the mobile wireless backhaul business through a strategic focus on selected product models and projects and in the profitability of the software services for service providers business and the “Safer Cities” initiative.

Others. Revenue for our other businesses increased ¥9.2 billion, or 4.7%, to ¥203.7 billion for the fiscal year ended March 31, 2019 compared to the previous fiscal year. This increase was due primarily to increased sales by our battery electrode manufacturing business prior to its sale in March 2019. Segment profit for our other businesses for the fiscal year ended March 31, 2019 was ¥19.0 billion, compared to ¥3.1 billion of segment loss

 

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for the previous fiscal year. The improvement was mainly attributable to gain on sale of shares of our battery electrode manufacturing business.

Foreign Currency Fluctuations

For a discussion of foreign currency fluctuations, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Exchange Risk.”

Governmental Factors

For a discussion of the governmental factors that could materially affect our operations, see “Item 3.D. Key Information—Risk Factors—Risks Related to Our Business Operations—We conduct a substantial amount of business with a concentrated customer base, and our business could suffer if they encounter business problems or decide to reduce their business with us.”

 

B.

LIQUIDITY AND CAPITAL RESOURCES

We meet our liquidity and capital needs mainly with cash flows from operations, borrowings from banks and other institutional lenders and funding from the capital markets, such as offerings of commercial paper and other debt securities. Our liquidity and capital needs principally relate to capital expenditures, research and development expenses, personnel expenses, procurement of raw material and components, and financial obligations, as well as acquisitions of companies. Our working capital, which is defined as current assets less current liabilities, as of March 31, 2020 was ¥477.1 billion. In our opinion, the working capital is sufficient for our present requirements. As of the date of this annual report, we do not expect that the coronavirus pandemic will materially affect our working capital.

The following table provides information for the credit ratings of our short-term borrowing and long-term debt from rating agencies, Standard & Poor’s Ratings Group (S&P), Japan Credit Rating Agency, Ltd. (JCR), and Rating and Investment Information, Inc. (R&I), as of March 31, 2020. A credit rating is not a recommendation to buy, sell or hold securities. A credit rating may be subject to withdrawal or revision at any time. Each rating should be evaluated separately of any other rating.

 

     S&P    JCR    R&I

Short-term borrowing

   A-3    n.a.    a-1

Long-term debt

   BBB-    A    A-

We endeavor to maintain appropriate and stable credit ratings in order to ensure access to sufficient funding in the financial and capital markets and financial flexibility in our liquidity and capital management. See “Item 3.D. Key Information—Risk Factors—Risks Related to Our Business Operations—We may not be able to obtain additional financing necessary to meet our funding needs due to a decline in our credit profile, difficult financial market conditions and other factors, and this may have a material adverse effect on our business.”

Sources of Funding and Liquidity

Our primary sources of funding and liquidity are cash flows from operations, borrowings from banks and other institutional lenders and funding from the capital markets, such as offerings of commercial paper and other debt securities, each of which are described below in further detail. As of March 31, 2020, we had ¥359.3 billion of cash and cash equivalents. As a result of our operating and investment activities, we had ¥177.8 billion of net cash inflows for the fiscal year ended March 31, 2020, ¥12.4 billion of net cash outflows for the fiscal year ended March 31, 2019 and ¥115.8 billion of net cash inflows for the fiscal year ended March 31, 2018.

For short-term funding, we primarily rely on short-term borrowings although we also issue commercial paper in Japan from time to time. We had ¥97.0 billion of short-term borrowings outstanding as of March 31, 2020. Under our current ¥500.0 billion commercial paper program, we had no commercial paper outstanding as of March 31, 2020.

 

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As of March 31, 2020, we had committed credit facilities from financial institutions in Japan totaling ¥328.0 billion. As of March 31, 2020, we had ¥2.0 billion drawn from our committed credit facilities. Cash and cash equivalents, together with undrawn committed credit facilities, amounted to ¥685.3 billion as of March 31, 2020.

For long-term funding, we have from time to time issued corporate bonds primarily to investors in Japan. We currently have a straight corporate bond issuance program in Japan of up to ¥300.0 billion in addition to already issued bonds. Under this program, we had straight unsecured corporate bonds outstanding (including current portion) in the aggregate principal amount of ¥200.0 billion as of March 31, 2020. As of the same date, we also had ¥223.2 billion of long-term borrowings (including current portion) from banks.

As of the date of this annual report, we do not currently expect to encounter any material difficulties with accessing the capital markets in Japan despite the ongoing coronavirus pandemic. See “Item 3.D. Key Information—Risk Factors—Risks Related to Our Operating Environment—The recent outbreak of the novel coronavirus could have a significant negative impact on our business, results of operations and financial condition.”

Cash Flows

The following table shows our cash flows for the periods indicated:

 

     Fiscal year ended March 31,  
     2018     2019     2020  
     (billions of yen)  

Net cash provided by (used in):

      

Operating activities

   ¥ 130.0     ¥ 64.2     ¥ 261.9  

Investing activities

     (14.2     (76.7     (84.0

Financing activities

     (7.2     (50.5     (91.7

Effect of exchange rate changes on cash and cash equivalents

     (2.4     (1.3     (4.5
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   ¥ 106.1     ¥ (64.2   ¥ 81.6  
  

 

 

   

 

 

   

 

 

 

Decrease in cash and cash equivalents resulting from transfer to assets held for sale

     (0.0     (3.5     (0.7
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at period end

   ¥ 346.0     ¥ 278.3     ¥ 359.3  
  

 

 

   

 

 

   

 

 

 

Fiscal Year Ended March 31, 2020 Compared to Fiscal Year Ended March 31, 2019

We had ¥261.9 billion of net cash inflows from operating activities for the fiscal year ended Mach 31, 2020, an increase of ¥197.6 billion compared to the previous fiscal year. This increase primarily reflected an increase in profit before income taxes of ¥46.7 billion and an increase in depreciation and amortization of ¥66.6 billion, mainly due to increased depreciation expenses for right-of-use assets on leases previously classified as operating leases resulting from the adoption of IFRS 16 on April 1, 2019.

We used ¥84.0 billion of net cash in investing activities for the fiscal year ended March 31, 2020 compared to ¥76.7 billion used for the previous fiscal year. The larger net cash outflows mainly reflected an increase in purchases of property, plant and equipment of ¥23.9 billion.

We used ¥91.7 billion of net cash in financing activities for the fiscal year ended March 31, 2020 compared to ¥50.5 billion used for the previous fiscal year. The larger net cash outflows mainly reflected a decrease in short-term borrowings of ¥52.6 billion primarily due to the issuance of ¥30.0 billion of commercial paper in the previous fiscal year, a decrease in repayments of long-term borrowings of ¥109.1 billion due to the repayment of long-term borrowings of KMD A/S, a consolidated subsidiary, in the previous fiscal year, a lack of proceeds from issuance of bonds compared to the proceeds of ¥50.0 billion from issuance of bonds in the previous fiscal year and the recording of repayments of lease liabilities of ¥53.6 billion following the application of IFRS 16 from April 1, 2019.

 

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Fiscal Year Ended March 31, 2019 Compared to Fiscal Year Ended March 31, 2018

We had ¥64.2 billion of net cash inflows from operating activities for the fiscal year ended Mach 31, 2019, a decrease of ¥65.7 billion compared to the previous fiscal year. This decrease primarily reflected the decline in our profit before income taxes of ¥9.6 billion and the impact of the decrease in our trade and other receivables of ¥196.8 billion as a result of nil due from customers for contract work as of March 31, 2019 as compared to ¥240.1 billion due from customers for contract work as of March 31, 2018.

We used ¥76.7 billion of net cash in investing activities for the fiscal year ended March 31, 2019 compared to ¥14.2 billion used for the previous fiscal year. The larger net cash outflows mainly reflected our increased investments in acquisitions, such as the acquisition of KMD Holding ApS in February 2019. Additionally, the one-time impact of a high level of proceeds from loan receivable collections related to sale of an investment in an associate contributed to the lower amount of net cash used in investing activities in the fiscal year ended March 31, 2018 as compared to the fiscal year ended March 31, 2019.

We used ¥50.5 billion of net cash in financing activities for the fiscal year ended March 31, 2019 compared to ¥7.2 billion used for the previous fiscal year. The larger net cash outflows mainly reflected an increase of ¥91.9 billion in our repayments of long-term borrowings and a decrease of ¥50.0 billion in proceeds from issuance of bonds.

Short-term Financing

The balance of our short-term financing was ¥110.6 billion and ¥97.0 billion as of March 31, 2019 and 2020, respectively.

Our short-term financing as of March 31, 2019 and 2020 consisted of the following:

 

     As of March 31,  
     2019      2020  
     (billions of yen)  

Short-term borrowings (average interest rate of 2.66% as of March 31, 2020)

   ¥ 80.6      ¥ 97.0  

Commercial paper

     30.0        —    
  

 

 

    

 

 

 

Total

   ¥ 110.6      ¥   97.0  
  

 

 

    

 

 

 

Long-term Financing

The balance of our long-term financing was ¥436.1 billion and ¥422.8 billion as of March 31, 2019 and 2020, respectively.

Our long-term financing as of March 31, 2019 and 2020 consisted of the following:

 

     As of March 31,  
     2019      2020  
     (billions of yen)  

Long-term borrowings (including current portion)
(average interest rate of 0.95% as of March 31, 2020)

   ¥ 236.7      ¥ 223.2  

Bonds (including current portion)

     199.4        199.6  
  

 

 

    

 

 

 

Total

   ¥ 436.1      ¥ 422.8  
  

 

 

    

 

 

 

 

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As of March 31, 2020, the following bonds (excluding current portion) were outstanding:

 

     As of March 31, 2020  
     (billions of yen)  

NEC 48th unsecured 0.658% bonds due July 15, 2022 (issued on July 17, 2015)

   ¥ 20.0  

NEC 50th unsecured 0.290% bonds due June 15, 2022 (issued on June 15, 2017)

     34.9  

NEC 51st unsecured 0.360% bonds due June 14, 2024 (issued on June 15, 2017)

     24.9  

NEC 52nd unsecured 0.455% bonds due June 15, 2027 (issued on June 15, 2017)

     14.9  

NEC 53rd unsecured 0.260% bonds due September 21, 2023 (issued on September 21, 2018)

     29.9  

NEC 54th unsecured 0.360% bonds due September 19, 2025 (issued on September 21, 2018)

     10.0  

NEC 55th unsecured 0.500% bonds due September 21, 2028 (issued on September 21, 2018)

     10.0  
  

 

 

 

Total

   ¥ 144.6  
  

 

 

 

Financial and Other Liabilities

See “—F. Tabular Disclosure of Contractual Obligations.”

Capital Expenditures

The following table sets forth our capital expenditures, including investments in property, plant and equipment, software and other intangible and tangible assets, that are capitalized by segment for the fiscal year ended March 31, 2020:

 

     Fiscal year ended
March 31, 2020
 
     (billions of yen)  

Capital expenditures:(1)

  

Public Solutions

   ¥ 6.2  

Public Infrastructure

     46.2  

Enterprise

     10.8  

Network Services

     17.2  

System Platform

     18.9  

Global

     57.7  

Others

     33.2  

Reconciling items(2)

     19.2  
  

 

 

 

Total capital expenditures

   ¥ 209.4  
  

 

 

 

 

(1)

The information in this table reflects the segment organizational changes described in “Item 5. Operating and Financial Review and Prospects—Introduction—Segment Reorganizations.” Please also see Note 6 to our consolidated financial statements included elsewhere in this annual report.

(2)

The amount represents capital expenditures that were not allocated to any business segment, such as that incurred at our headquarters.

For a description of our planned investments in property, plant and equipment for the fiscal year ended March 31, 2021, see “Item 4.D. Information on the Company—Property, Plant and Equipment.”

 

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C.

RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

Since the establishment of our first research laboratory in 1939, we have consistently recognized that our research and development activities are a critical component of our success. We have devoted and plan to continue to devote significant financial, personnel, and other resources to research and development efforts.

We have allocated approximately 4% of our revenue to research and development in recent periods. The following table sets forth our research and development expenses for the periods indicated:

 

     Fiscal year ended March 31,  
   2018     2019     2020  
     (billions of yen except percentages)  

Research and development expenses

   ¥ 108.1     ¥ 108.1     ¥ 109.8  

As a percentage of revenue

     3.8     3.7     3.5

The following table sets forth our research and development expenses by segment for the periods indicated:

 

     Fiscal year ended March 31,  
   2018      2019      2020  
     (billions of yen)  

Research and development expenses(1):

        

Public Solutions

   ¥ 1.8      ¥ 2.3      ¥ 4.8  

Public Infrastructure

     8.4        9.6        11.6  

Enterprise

     4.6        5.7        4.6  

Network Services

     22.0        20.7        20.3  

System Platform

     23.6        20.8        21.1  

Global

     24.6        22.9        17.7  

Others

     23.1        26.2        29.6  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 108.1      ¥ 108.1      ¥ 109.8  
  

 

 

    

 

 

    

 

 

 

 

(1)

The information in this table reflects the segment organizational changes described in “Item 5. Operating and Financial Review and Prospects—Introduction—Segment Reorganizations.” Please also see Note 6 to our consolidated financial statements included elsewhere in this annual report.

Our basic research and development policy is to focus our resources strategically on areas of innovation where we own unique and industry-leading technology assets. In particular, we have concentrated our investments in data science and ICT platform technologies in recent periods. In the data science area, we pursue development of AI and IoT technologies for mass data visualization, analysis and utilization that will enable us to provide new value for our customers in the midst of society’s digital transformation. In the ICT platform area, we pursue development of security technologies that will better ensure secure operation of information and communications systems as well as computing and networking technologies that will enable us to more timely and flexibly meet the constantly changing needs in the information and communications market. Our research and development efforts are global in scope, and we have research and development centers located in the Americas, Europe, Singapore and China. In July 2018, we established a new research and development center in India with a focus on solutions for developing countries. We also pursue research partnerships in the pursuit of cutting-edge technology development, and in March 2019 we established a specialized laboratory for the development of quantum computing technologies at the National Institute of Advanced Industrial Science of Technology facility in Tsukuba, Japan.

For a more detailed discussion on our intellectual property, see “Item 4.B. Information on the Company—Business Overview—Intellectual Property.”

 

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D.

TREND INFORMATION

See the discussions in “Item 4.B Information on the Company—Business Overview,” “—Introduction,” “—A. Operating Results” and “—B. Liquidity and Capital Resources.”

Additionally, we believe the ICT industry is entering a period of significant change. In the past, the telecommunications market has experienced evolutions in technological standards approximately every ten years, and these evolutions have accompanied wide-scale adoption of the latest generation of mobile networks. For example, 3G mobile networks were introduced around 2000 and 4G mobile networks were introduced around 2010. The move to a new standard of mobile network prompts industry-wide reinvestment, including sales of equipment corresponding to the new standard as well as consulting services to provide solutions and systems that are compatible with the new standard. The industry is currently in the initial stages of the move to 5G mobile networks, which we expect will involve a similar need for industry-wide reinvestment. Industry reinvestment may result in increased demand for ICT solutions, but we expect intense competition in the marketplace to continue.

In addition to the trend toward 5G mobile networks, we believe that there will be continuing widespread progress towards the digitization of government processes around the world, ranging from digitized administrative services to biometric authentication at airports. Our “Safer Cities” initiative within our Global business segment provides public safety solutions and digital government solutions to address this trend.

With respect to the ongoing coronavirus pandemic, because the overall duration and scope of the pandemic as well as possible additional government countermeasures are unknown, it is difficult for our management to estimate the future impact of the pandemic on our financial results. However, based on currently available information, our management does not expect that the coronavirus pandemic will have as significant an impact on our operating results compared to companies in many other industries because the technologies and solutions that we provide to customers generally relate to underlying ICT systems and infrastructure that are necessary for our customers’ continued operations. We believe that the ICT industry is currently entering a period of significant reinvestment due to a process that we refer to as the “Digital Transformation (DX)” of society, which includes developments such as the ongoing transition to 5G mobile networks as well as the digitization of government processes around the world. Accordingly, the technologies and solutions that we provide will continue to be necessary for our customers to update and maintain their underlying ICT systems and infrastructure throughout this technological transition period. At the same time, we believe our operating results in the near term could be temporarily adversely impacted due to a decline in the investment appetites of some customers, particularly in the private sector. For additional information, see “Item 3.D. Key Information—Risk Factors—Risks Related to Our Operating Environment—The recent outbreak of the novel coronavirus could have a significant negative impact on our business, results of operations and financial condition,” “Item 4.B. Information on the Company—Business Overview—Overview—Medium-Term Management Plan—Impact of the Coronavirus Pandemic” and “Item 5. Operating and Financial Review and Prospects—Introduction—Recent Developments—Coronavirus.”

 

E.

OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2019 and 2020, we did not have any off-balance sheet arrangements which have, or are reasonably likely to have, a material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

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F.

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table shows a summary of our cash requirements for certain contractual obligations as of March 31, 2020:

 

     Carrying
amount
     Contractual
cash flows
     1 year
or less
     1 to 2
years
     2 to 3
years
     3 to 4
years
     4 to 5
years
     Over
5 years
 
     (billions of yen)  

Non-derivative financial liabilities:

                       

Short-term borrowings

   ¥ 97.0      ¥ 99.5      ¥ 99.5      ¥ —        ¥ —        ¥ —        ¥ —        ¥ —    

Long-term borrowings

     223.2        332.2        6.1        6.7        44.5        43.7        3.9        227.3  

Bonds

     199.6        202.2        55.6        0.6        55.4        30.3        25.2        35.1  

Lease liabilities

     155.6        162.3        49.8        38.1        29.7        17.5        12.3        14.9  

Derivative financial liabilities:

                       

Forward exchange contracts

     1.1        1.1        0.8        0.2        0.0        0.0        0.0        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 676.5      ¥ 797.2      ¥ 211.8      ¥ 45.6      ¥ 129.7      ¥ 91.4      ¥ 41.4      ¥ 277.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In addition to the above, we have ¥1.9 billion of contractual commitments for the purchase of property, plant and equipment and ¥0.6 billion of contractual commitments for the purchase of intangible assets, mainly payable within the fiscal year ending March 31, 2021.

We also plan to contribute ¥18.1 billion to our defined benefit pension plans during the fiscal year ending March 31, 2021. Contributions beyond the next fiscal year are not currently determinable. See Note 22 to our consolidated financial statements included elsewhere in this annual report.

 

G.

SAFE HARBOR

See “Forward-Looking Statements.”

 

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.

DIRECTORS AND SENIOR MANAGEMENT

The following table sets forth the members of our board of directors as of June 30, 2020, together with their respective dates of birth, positions and business experience:

 

Name

(Date of Birth)

 

Position in NEC

  

Business Experience

Nobuhiro Endo
(November 8, 1953)

  Chairman of the Board    April 1981   Joined NEC Corporation
   July 2005  

Senior General Manager, Mobile Network Operations Unit, NEC

   April 2006  

Senior Vice President and Executive General Manager, Mobile Network Operations Unit, NEC

   April 2009  

Executive Vice President, NEC

   June 2009  

Member of the Board and Executive Vice President, NEC

   April 2010  

Representative Director and President, NEC

 

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Name

(Date of Birth)

 

Position in NEC

  

Business Experience

     April 2016  

Representative Director and Chairman of the Board, NEC

     June 2019  

Chairman of the Board, NEC (incumbent)

Takashi Niino
(September 8, 1954)

 

Representative Director, President and CEO

   April 1977  

Joined NEC Corporation

   April 2004  

Executive General Manager, 2nd Solutions Sales Operations Unit, NEC

   April 2005  

Senior General Manager, 3rd Solutions Operation Unit, NEC

   April 2006  

Executive General Manager, Financial Solutions Operations Unit, NEC

   April 2008  

Senior Vice President and Executive General Manager, Financial Solutions Operations Unit, NEC

     August 2008  

Senior Vice President, NEC

     April 2010  

Executive Vice President, NEC

     June 2011  

Member of the Board and Executive Vice President, NEC

     July 2011  

Member of the Board, Executive Vice President and CSO (Chief Strategy Officer), NEC

     April 2012  

Representative Director, Senior Executive Vice President, CSO and CIO (Chief Information Officer), NEC

     April 2016  

Representative Director, President and CEO, NEC (incumbent)

Takayuki Morita
(February 5, 1960)

 

Representative Director, Senior Executive Vice President and CFO

   April 1983  

Joined NEC Corporation

   April 2002  

General Manager, Business Development Division, NEC

   April 2006  

Senior Vice President and Executive General Manager, Corporate Business Development Unit, NEC

   April 2008  

Senior Vice President, NEC

     July 2011  

Executive Vice President, NEC

 

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Name

(Date of Birth)

 

Position in NEC

  

Business Experience

     April 2016  

Executive Vice President and CGO (Chief Global Officer), NEC

     June 2016  

Member of the Board, Executive Vice President and CGO, NEC

     April 2018  

Representative Director and Senior Executive Vice President, NEC

     June 2018  

Representative Director, Senior Executive Vice President and CFO, NEC (incumbent)

Norihiko Ishiguro
(May 3, 1957)

 

Member of the Board and Senior Executive Vice President

   April 1980  

Joined the Ministry of International Trade and Industry

     July 2009  

Director-General, Commerce and Information Policy Bureau, Ministry of Economy, Trade and Industry (METI)

   August 2011  

Director-General, Economic and Industrial Policy Bureau, METI

     June 2013  

Vice Minister for International Affairs, METI

     July 2015  

Retired from METI

     November 2015  

Advisor, Tokio Marine & Nichido Fire Insurance Co., Ltd. (until July 2016)

     August 2016  

Advisor, NEC Corporation

     October 2016  

Senior Executive Vice President, NEC

     June 2018  

Member of the Board and Senior Executive Vice President, NEC (incumbent)

Hajime Matsukura
(December 12, 1961)

 

Member of the Board, Executive Vice President and Chief Human Resources Officer (CHRO)

   April 1985  

Joined NEC Corporation

   April 2005  

General Manager, Marketing Planning Division, NEC

   April 2006  

Assistant Executive General Manager, Corporate Business Development Unit, NEC

   April 2008  

General Manager, Corporate Strategy Division, NEC

   April 2014  

Senior Vice President, NEC and President, NEC Management Partner, Ltd.

   April 2017  

Executive Vice President and CSO, NEC

 

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Name

(Date of Birth)

 

Position in NEC

  

Business Experience

     June 2017  

Member of the Board, Executive Vice President and CSO, NEC

     April 2018  

Member of the Board, Executive Vice President, CSO and CHRO, NEC

     April 2019  

Member of the Board, Executive Vice President and CHRO, NEC (incumbent)

Motoo Nishihara
(January 23, 1962)

 

Member of the Board, Executive Vice President and Chief Technology Officer (CTO)

   April 1985  

Joined NEC Corporation

   July 2011  

General Manager, System Platform Research Laboratories, NEC

   April 2012  

General Manager, Cloud System Research Laboratories, NEC

     April 2016  

Senior Vice president, NEC

     April 2019  

Executive Vice President and CTO, NEC

     June 2019  

Member of the Board, Executive Vice President and CTO, NEC (incumbent)

Kaoru Seto
(November 16, 1947)

 

Member of the Board (Outside Director)

   April 1970  

Joined Yamato Transport Co., Ltd. (currently, Yamato Holdings Co., Ltd.)

   June 1999  

Director of the Board and Regional President of Kansai Region, Yamato Transport

     June 2003  

Director of the Board and General Manager of HR Department at Headquarters, Yamato Transport

     June 2004  

Member of the Board and Managing Executive Officer, Yamato Transport

     November 2005  

Managing Executive Officer, Yamato Holdings

     June 2006  

Representative Director, President and Executive Officer, Yamato Holdings

     April 2011  

Representative Director and Chairman, Yamato Holdings

     April 2015  

Director Adviser, Yamato Holdings

     June 2016  

Adviser, Yamato Holdings

     June 2018  

Member of the Board, NEC Corporation (incumbent)

 

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Name

(Date of Birth)

 

Position in NEC

  

Business Experience

     June 2018  

Special Adviser, Yamato Holdings (incumbent)

Noriko Iki
(March 21, 1956)

 

Member of the Board (Outside Director)

   April 1979  

Joined Ministry of Labor

   July 2009  

Director-General, Equal Employment, Children and Families Bureau, Ministry of Health, Labor and Welfare

   July 2010  

Research Director, Japan Institute for Labor Policy and Training

   April 2011  

Senior Research Director, Japan Institute for Labor Policy and Training

   September 2012  

Director-General, Tokyo Labor Bureau, Ministry of Health, Labor and Welfare

     April 2014  

Ambassador Extraordinary and Plenipotentiary to Brunei Darussalam, Ministry of Foreign Affairs

     July 2017  

Retired from Ministry of Foreign Affairs

     March 2018  

Director, Japan Institute for Women’s Empowerment & Diversity Management

     June 2018  

President, Japan Institute for Women’s Empowerment & Diversity Management (incumbent)

     June 2018  

Member of the Board, NEC Corporation (incumbent)

Masatoshi Ito
(September 12, 1947)

 

Member of the Board (Outside Director)

   April 1971  

Joined Ajinomoto Co., Inc. (“ACI”)

   June 1999  

Member of the Board, ACI

   April 2003  

Representative Director and President, Ajinomoto Frozen Foods Co., Inc. (until March 2005)

   August 2006  

Representative Director, Corporate Senior Vice President and President of Food Products Company, ACI

   June 2009  

Representative Director, President and CEO, ACI

   June 2015  

Representative Director and Chairman of the Board, ACI

   June 2019  

Member of the Board, NEC Corporation (incumbent)

 

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Name

(Date of Birth)

 

Position in NEC

  

Business Experience

     June 2019  

Chairman of the Board, ACI (incumbent)

Kuniharu Nakamura
(August 28, 1950)

 

Member of the Board (Outside Director)

   April 1974  

Joined Sumitomo Corporation (Sumitomo Corp.)

     June 2009  

Representative Director, Senior Managing Executive Officer and General Manager of Mineral Resources, Energy, Chemical & Electronics Business Unit, Sumitomo Corp.

     April 2012  

Representative Director, Executive Vice President and General Manager of Mineral Resources, Energy, Chemical & Electronics Business Unit, Sumitomo Corp.

     June 2012  

Representative Director, President and CEO, Sumitomo Corp.

     April 2018  

Representative Director and Chairman of the Board of Directors, Sumitomo Corp.

     June 2018  

Chairman of the Board of Directors, Sumitomo Corp. (incumbent)

     June 2019  

Member of the Board, NEC Corporation (incumbent)

Jun Ohta

(February 12, 1958)

 

Member of the Board (Outside Director)

   April 1982  

Jointed The Sumitomo Bank, Limited (currently Sumitomo Mitsui Banking Corporation)

     June 2014  

Director, Sumitomo Mitsui Financial Group, Inc.

     April 2015  

Director and Senior Managing Executive Officer, Sumitomo Mitsui Banking Corporation (until April 2017)

     April 2017  

Director and Deputy President, Group CFO, Group CSO and Group CDIO, Sumitomo Mitsui Financial Group, Inc.

     June 2017  

Director Deputy President and Executive Officer, Group CFO, Group CSO and Group CDIO, Sumitomo Mitsui Financial Group, Inc.

 

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Name

(Date of Birth)

 

Position in NEC

  

Business Experience

     March 2018  

Director and Deputy President, Sumitomo Mitsui Banking Corporation (until April 2019)

     April 2018  

Director Deputy President and Executive Officer, Group CFO and Group CSO, Sumitomo Mitsui Financial Group, Inc.

     April 2019  

Director President and Group Chief Executive Officer, Sumitomo Mitsui Financial Group, Inc. (incumbent)

     June 2020  

Member of the Board, NEC Corporation (incumbent)

The following table sets forth the members of our Audit and Supervisory Board as of June 30, 2020, together with their respective dates of birth, positions and business experience:

 

Name

(Date of Birth)

 

Position in NEC

  

Business Experience

Hajime Kinoshita
(August 2, 1957)

 

Member of Audit and Supervisory Board

   April 1982  

Joined NEC Corporation

   April 2008  

General Manger, Legal Division, NEC

   April 2013  

Senior Vice President and General Manager, Internal Control Division, NEC

   April 2014  

Senior Vice President, NEC

   April 2016  

Executive Vice President, NEC

   April 2017  

Advisor, NEC

   June 2017  

Member of Audit and Supervisory Board, NEC (incumbent)

Isamu Kawashima
(February 20, 1959)

 

Member of Audit and Supervisory Board

   April 1981  

Joined NEC Corporation

   April 2009  

General Manager, Corporate Controller Division, NEC

   July 2010  

General Manager, Corporate Controller Division and General Manager, Internal Control over Finance Reporting Division, NEC

   June 2011  

Member of the Board, General Manager, Corporate Controller Division and General Manager, Internal Control over Finance Reporting Division, NEC

   July 2011  

Member of the Board, Senior Vice President and CFO, NEC

 

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Name

(Date of Birth)

 

Position in NEC

  

Business Experience

     April 2015  

Member of the Board, Executive Vice President and CFO, NEC

     April 2017  

Representative Director, Executive Vice President and CFO, NEC

     June 2018  

Member of the Audit and Supervisory Board, NEC (incumbent)

Taeko Ishii
(May 7, 1956)

 

Member of Audit and Supervisory Board

   April 1986  

Registered as an Attorney at Law (incumbent) and joined Ryoichi Wada Law Firm (until March 1992)

   March 1992  

Established Ohta & Ishii Law Firm (incumbent)

     June 2018  

Member of the Audit and Supervisory Board, NEC (incumbent)

Nobuo Nakata
(July 29, 1957)

 

Member of Audit and Supervisory Board

   April 1985  

Registered as an Attorney at Law (incumbent) and joined Ishiguro Law Office (until March 1987)

     April 1987  

Joined Masuda & Ejiri (currently Nishimura & Asahi)

     January 1991  

Registered as an Attorney at Law (New York Bar) (incumbent)

     January 1992  

Partner, Masuda & Ejiri (until January 2004)

     February 2004  

Joined Freshfields Bruckhaus Deringer as a Partner (until December 2006)

     January 2007  

Joined Allen & Overy as a Partner (until December 2011)

     January 2012  

Established Hibiya-Nakata, Representative Partner of Hibiya-Nakata (incumbent)

     June 2019  

Member of the Audit and Supervisory Board, NEC (incumbent)

Masami Nitta

(September 15, 1955)

 

Member of Audit and Supervisory Board

   October 1979  

Joined Tohmatsu Awoki & Co. (currently, Deloitte Touche Tohmatsu LLC)

     October 1983  

Licensed as Certified Public Accountant (incumbent)

 

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Name

(Date of Birth)

 

Position in NEC

  

Business Experience

     June 2004  

Managing Partner of Financial Advisory, Deloitte Touche Tohmatsu (currently, Deloitte Touche Tohmatsu LLC)

     October 2008  

Managing Partner of Financial Advisory, member of Management Board, Deloitte Touche Tohmatsu (currently, Deloitte Touche Tohmatsu LLC) (resigned from Managing Partner of Financial Advisory in September 2015; retired from Deloitte Touche Tohmatsu LLC in September 2016)

    

April 2009

 

President and CEO, Representative Director, Deloitte Tohmatsu Financial Advisory Service LTD (currently, Deloitte Tohmatsu Financial Advisory LLC) (until September 2016)

    

October 2016

 

Executive Officer, Deloitte Tohmatsu Financial Advisory LLC (until September 2017)

    

October 2017

 

Established Nitta Public Accountant Office and Representative of Nitta Public Accountant Office (incumbent)

    

June 2020

 

Member of the Audit and Supervisory Board, NEC (incumbent)

No family relationship exists among any members of our Board of Directors and Audit and Supervisory Board. No arrangement or understanding exists between any members of our Board of Directors and Audit and Supervisory Board and any other person pursuant to which any member of our Board of Directors or Audit and Supervisory Board was elected to his or her position at NEC.

 

B.

COMPENSATION

The aggregate amount of compensation paid, including benefits in kind granted and any contingent and deferred compensation accrued, by NEC and any of its subsidiaries for the fiscal year ended March 31, 2020 to our directors (excluding outside directors), to our audit and supervisory board members (excluding outside audit and supervisory board members), and to our outside directors and our outside audit and supervisory board members, was ¥755 million, ¥60 million and ¥96 million, respectively. No compensation was paid by any of the subsidiaries of NEC to our directors or our audit and supervisory board members for the same period.

The compensation paid by NEC for the fiscal year ended March 31, 2020 to our directors (excluding outside directors) consisted of annual base salaries paid in monthly installments, cash bonuses and stock compensation.

 

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The compensation to our outside directors and our audit and supervisory board members (including outside audit and supervisory board members) for the same period was paid by NEC in the form of annual base salaries paid in monthly installments.

The following table sets forth details of the aggregate compensation paid by NEC for the fiscal year ended March 31, 2020 to our directors (excluding outside directors), our audit and supervisory board members (excluding outside audit and supervisory board members), and our outside directors and our outside audit and supervisory board members:

 

Recipients

   Number of
Recipients
     Aggregate
Compensation
     Annual
Base Salary
     Cash Bonus      Stock
Compensation
 
     (millions of yen)  

Directors (excluding outside directors)(1)

     7      ¥ 755      ¥ 342      ¥ 217      ¥ 196  

Audit and Supervisory Board Members (excluding outside audit and supervisory board members)(2)

     2        60        60        —          —    

Outside directors and outside audit and supervisory board members(3)

     11        96        96        —          —    

 

(1)

Annual base salary for directors (excluding outside directors) includes the current directors and a director who retired upon expiration of his term of office in June 2019.

Cash bonus for directors (excluding outside directors) includes the current directors (except for a non-executive director).

Stock compensation for directors (excluding outside directors) include the current directors.

The stock compensation consisted of ¥196 million accrued as compensation expenses in the fiscal year ended March 31, 2020 under the 2018 Performance-based Stock Compensation Plan, the 2019 Performance-based Stock Compensation Plan and the 2019 Fixed Stock Compensation Plan. For more information on the 2018 Performance-based Stock Compensation Plan, the 2019 Performance-based Stock Compensation Plan and the 2019 Fixed Stock Compensation Plan, see “—Stock Compensation—Performance-based Stock Compensation.”

(2)

Includes the current audit and supervisory board members, but excludes the outside audit and supervisory board members.

(3)

Includes the current outside directors (except for a director who was newly elected in June 2020), the current outside audit and supervisory board members (except for an outside audit and supervisory board member who was newly elected in June 2020), a director and an outside audit and supervisory board member who retired upon expiration of their terms of office in June 2020 and two outside directors and one audit and supervisory board member who retired during the fiscal year ended March 31, 2020.

Among the recipients included in the table above, two individuals were paid compensation in an amount equal to or exceeding ¥100 million for the fiscal year ended March 31, 2020. Specifically, aggregate compensation of ¥100 million, including ¥92 million in annual base salary and ¥8 million in stock compensation under the 2017 Performance-based Compensation Plan (calculated based on the fair value of the shares of our common stock as of the time of delivery of the shares), was paid to Mr. Nobuhiro Endo by NEC. Aggregate compensation of ¥159 million, including ¥80 million in annual base salary, ¥71 million in cash bonus and ¥8 million in stock compensation under the 2017 Performance-based Compensation Plan (calculated based on the fair value of the shares of our common stock as of the time of delivery of the shares), was paid to Mr. Takashi Niino by NEC.

The maximum aggregate amount of compensation to be paid to all of our directors and all of our audit and supervisory board members are approved by shareholders, respectively. The amount of compensation to be paid individually to each director is determined by the board of directors based on the results of deliberations made by the nomination and compensation committee. The amount of compensation to be paid individually to each audit and supervisory board member is determined by mutual consultation among the audit and supervisory board members.

 

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Annual Base Salaries

Annual base salaries are paid to our directors (including outside directors) and our audit and supervisory board members (including outside audit and supervisory board members) in the form of monthly cash installment payments. The aggregate annual base salary paid to our directors (excluding outside directors) and our audit and supervisory board members (excluding outside audit and supervisory board members) for the fiscal year ended March 31, 2020 was ¥342 million and ¥60 million, respectively. The aggregate annual base salary paid to our outside directors and our outside audit and supervisory board members for the same period was ¥96 million.

In June 2019, our shareholders approved maximum aggregate annual base salaries in the amount of ¥580 million a year for our directors (including outside directors) and in the amount of ¥144 million a year for our audit and supervisory board members (including outside audit and supervisory board members). The approved maximum aggregate amounts of annual base salaries became applicable beginning in the fiscal year ended March 31, 2020.

Cash Bonuses

Cash bonuses for the fiscal year ended March 31, 2020 were paid to our directors (excluding non-executive directors and outside directors) in June 2020 in such amounts as determined based on their job responsibilities and other pre-determined criteria taking into account certain financial performance indicators, such as revenue and operating profit, derived from our consolidated profit or loss statement for the fiscal year ended March 31, 2020. None of the non-executive directors, outside directors or the members of the audit and supervisory board was eligible to receive a cash bonus. The aggregate cash bonus paid to our directors (excluding non-executive directors and outside directors) for the fiscal year ended March 31, 2020 was ¥217 million.

In June 2019, our shareholders approved a maximum aggregate amount of cash bonus in the amount of ¥800 million a year for our directors (excluding non-executive directors and outside directors). The approved maximum aggregate cash bonus amount was applied to the cash bonus for the fiscal year ended March 31, 2020 and is expected to be applied to cash bonuses for subsequent fiscal years, subject to any modification by shareholder vote.

In April 2019, we modified the cash bonus policy as part of amendments to the overall compensation system for our directors applicable beginning in the fiscal year ended March 31, 2020. Under this new cash bonus policy, our directors (excluding non-executive directors and outside directors) are eligible for cash bonuses, and the amount of cash bonus is determined based on (1) a director’s job responsibilities, (2) certain financial performance indicators, such as revenue, operating profit and free cash flow (defined as the sum of cash flows from operating activities and cash flows from investing activities), derived from our consolidated financial statements for the most recently ended fiscal year, (3) certain financial performance indicators, such as revenue, operating profit and free cash flow, for any business segment for which the director is responsible for the most recently ended fiscal year, and (4) non-financial performance indicators based upon each director’s contribution towards achievement of the relevant medium-term management plan targets.

Stock Compensation

Performance-based Stock Compensation

We adopted our first performance-based stock compensation plan in the fiscal year ended March 31, 2018, or the 2017 Performance-based Stock Compensation Plan, and the plan period for this plan ended on March 31, 2019. Under the 2017 Performance-based Stock Compensation Plan, qualified directors (excluding outside directors) were assigned points at the end of the plan period based on their job responsibilities and the extent to which financial performance targets relating to revenue, operating profit and return on equity on a consolidated basis set forth in our previous medium-term management plan for the three fiscal years ended March 31, 2019 were attained. These directors received in July 2019 delivery of the number of shares of our common stock

 

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corresponding to the number of points assigned to them as of March 31, 2019 under the 2017 Performance-based Stock Compensation Plan. Some of the deliverable shares were delivered to the recipients in the form of cash in an amount equal to the proceeds from sale of such shares on the open market. The shares deliverable to the recipients were purchased on the open market by the trustee of the trust established in Japan to administer the plan pursuant to a trust agreement among us, the trustee and the trust administrator. The trust was funded in cash by us within the maximum aggregate amount approved by shareholders.

Under our performance-based stock compensation plan applicable to a plan period from April 1, 2018 to March 31, 2021, or the 2018 Performance-based Stock Compensation Plan, qualified directors (excluding outside directors) are assigned points as of March 31, 2021 on their job responsibilities and the extent to which financial performance targets relating to revenue, operating profit and return on equity on a consolidated basis set forth in our current medium-term management plan for the three fiscal years ending March 31, 2021 are attained. The shares of our common stock in number corresponding to the number of points assigned to qualified directors (excluding outside directors) under the 2018 Performance-based Stock Compensation Plan are expected to be delivered to them in July 2021. Some of the deliverable shares are expected to be delivered to the recipients in the form of cash in an amount equal to the proceeds from sale of such shares on the open market. The shares to be delivered to recipients under the 2018 Performance-based Stock Compensation Plan were purchased on the open market in May 2018 and are held by the trustee of the trust. The aggregate performance-based stock compensation accrued for the fiscal year ended March 31, 2020 under the 2018 Performance-based Stock Compensation Plan was ¥17 million based on the fair value of the shares of our common stock as of the time of purchase of the shares. We are authorized by resolution of shareholders to fund the trust with up to ¥200 million in cash and deliver up to 88,000 shares of our common stock to eligible directors per plan period.

As part of the amendments to the overall compensation system for our directors, in June 2019, our shareholders approved adoption of a new performance-based stock compensation plan, or the 2019 Performance-based Stock Compensation Plan, which is applicable to fiscal years beginning on April 1, 2019. Under the 2019 Performance-based Stock Compensation Plan, qualified directors (excluding outside directors) are assigned, on a fiscal year basis, points based on their job responsibilities and the extent to which financial performance targets relating to operating profit and other metrics on a consolidated basis for each such fiscal year were attained. Qualified directors (excluding outside directors) are eligible to receive the number of shares of our common stock corresponding to the number of points assigned to them for each fiscal year after two years from the end of the relevant fiscal year. Some of the deliverable shares are expected to be delivered to the recipients in the form of cash in an amount equal to the proceeds from sale of such shares on the open market. The shares to be delivered to recipients are purchased on the open market by the trustee of the trust or made available from treasury shares. The aggregate performance-based stock compensation accrued for the fiscal year ended March 31, 2020 under the 2019 Performance-based Stock Compensation Plan was ¥140 million based on the fair value of the shares of our common stock as of the time of purchase of the shares. We are authorized by resolution of shareholders to fund the trust with up to ¥200 million in cash and deliver up to 88,000 shares of our common stock to eligible directors for each fiscal year.

None of the outside directors or the members of the audit and supervisory board are eligible to receive performance-based stock compensation.

Fixed Stock Compensation

In addition to the performance-based stock compensation plan, in June 2019, our shareholders also approved to adopt a new fixed stock compensation plan, or the 2019 Fixed Stock Compensation Plan. Under the 2019 Fixed Stock Compensation Plan, all qualified directors (excluding outside directors) are assigned the same amount of points for each term beginning on the date of an ordinary general meeting of shareholders related to a fiscal year and ending on the date of an ordinary general meeting of shareholders related to the next succeeding fiscal year. Directors will be eligible to receive the number of shares of our common stock corresponding to the number of points assigned to them for each term after two years from the end of the relevant term. Some of the

 

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deliverable shares are expected to be delivered to the recipients in the form of cash in an amount equal to the proceeds from sale of such shares on the open market. The aggregate fixed stock compensation accrued for the fiscal year ended March 31, 2020 under the 2019 Fixed Stock Compensation Plan was ¥39 million based on the fair value of the shares of our common stock as of the time of purchase of the shares. We are authorized by resolution of shareholders to fund the trust with up to ¥60 million in cash and deliver up to 20,000 shares of our common stock to eligible directors for each term.

 

C.

BOARD PRACTICES

Term of Office

All of our board members and our audit and supervisory board members are elected by a general meeting of shareholders. The normal term of office of a board member expires at the close of the ordinary general meeting of shareholders relating to the last fiscal year ending within the period of one year from the election of such board member. The normal term of office of an audit and supervisory board member expires at the close of the ordinary general meeting of shareholders relating to the last fiscal year ending within the period of four years from the election of such audit and supervisory board member. Board members and audit and supervisory board members may serve any number of consecutive terms.

Board of Directors and Audit and Supervisory Board

Our articles of incorporation provide for a board of directors of not more than 20 members and for not more than five audit and supervisory board members. Board members and audit and supervisory board members may be removed from office at any time by a resolution of a general meeting of shareholders.

Neither the Companies Act nor our articles of incorporation contain provisions relating to the borrowing power exercisable by a board member, to the retirement age of our board members and our audit and supervisory board members, or to a requirement of our board members and our audit and supervisory board members to hold any shares of our capital stock. There are no service contracts between any of our board members and us or any of our subsidiaries, including those providing for benefits upon termination of employment.

Board of Directors

The board of directors has the ultimate responsibility for the administration of our affairs. The board of directors designates, by its resolution, from among its members, representative directors who generally have the authority to individually represent us in the conduct of our affairs. The Companies Act requires a resolution of the board of directors for a company to acquire or dispose of material assets, to borrow substantial amounts of money, to employ or discharge important employees such as corporate officers, to establish, change, or abolish material corporate organizations such as branch offices, to determine the terms and conditions concerning offering of corporate bonds, and to establish and maintain an internal control system. The board of directors also oversee the execution by corporate officers of the fundamental strategies.

As of the date of this annual report, the board of directors consists of eleven directors—five executive directors, one non-executive director and five outside directors.

An “outside director” is defined by the Companies Act as a person who meets all of the following conditions:

 

   

the person is not currently, and has not been in the ten years prior to his or her assumption of office as outside director, an executive director, who is defined to be a director concurrently performing an executive role (gyomu shikko torishimariyaku), a corporate executive officer (shikkoyaku), a manager (shihainin) or any other type of employee of the company or any of its subsidiaries;

 

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if the person has been a non-executive director, an audit and supervisory board member, or an accounting adviser (kaikei sanyo) of the company or any of its subsidiaries within the ten years prior to his or her assumption of office as outside director, the person was not an executive director, a corporate executive officer, a manager or any other type of employee of the company or any of its subsidiary in the ten years prior to his or her assumption of office as such;

 

   

the person is not a director, a corporate executive officer, a manager or any other type of employee of the company’s parent company or a person who controls the company;

 

   

the person is not an executive director, a corporate executive officer, a manager or any other type of employee of another subsidiary of the company’s parent company; and

 

   

the person is not the spouse or a family member within the second degree of kinship of a director, a corporate executive officer, a manager, or any other type of important employee of the company or a person who controls the company.

Under the Companies Act, board members must refrain from engaging in any business competing with us unless approved by a board resolution, and no board member may vote on a proposal, arrangement, or contract in which that board member is deemed to be materially interested.

Audit and Supervisory Board

Our audit and supervisory board members may not simultaneously be a board member, an accounting advisor, a corporate executive officer, a manager or any other type of employees of us or any of our subsidiaries. Our audit and supervisory board members are not required to be and are not certified public accountants except for Mr. Masami Nitta. In addition, at least one-half of audit and supervisory board members must be persons who satisfy the requirements for an outside audit and supervisory board member under the Companies Act.

An “outside audit and supervisory board member” is defined by the Companies Act as a person who meets all of the following conditions:

 

   

the person has not been in the ten years prior to his or her assumption of office as outside audit and supervisory board member, a director, an accounting adviser, a corporate executive officer, a manager or any other type of employee of the company or any of its subsidiaries;

 

   

if the person has been an audit and supervisory board member of the company or any of its subsidiaries within the ten years prior to his or her assumption of office as outside audit and supervisory board member, the person was not a director, an accounting adviser, a corporate executive officer, a manager or any other type of employee of the company or any of its subsidiary in the ten years prior to his or her assumption of office as such;

 

   

the person is not a director, an audit and supervisory board member, a corporate executive officer, a manager or any other type of employee of the company’s parent company or a person who controls the company;

 

   

the person is not an executive director, a corporate executive officer, a manager or any other type of employee of another subsidiary of the company’s parent company; and

 

   

the person is not the spouse or a family member within the second degree of kinship of a director, a manager, or any other type of important employee of the company or a person who controls the company.

Under the Companies Act, audit and supervisory board members have the duty to examine our annual consolidated and non-consolidated financial statements and business reports to be submitted by a representative director at general meetings of shareholders and, based on such examination and a report of an accounting auditor referred to below, to individually prepare their audit reports. They also have the statutory duty to

 

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supervise the administration by the board members of our affairs. In addition, audit and supervisory board members are obligated to attend meetings of the board of directors and, if necessary, to express their opinion at such meetings. Audit and supervisory board members, however, are not entitled to vote at such meetings.

Audit and supervisory board members constitute the audit and supervisory board. Under the Companies Act, the audit and supervisory board has the statutory duty to, based upon the audit reports prepared by its respective members, prepare and submit an audit report to our accounting auditor and certain directors designated to receive such report (if such directors are not designated, the directors who prepared the financial statements and the business report). An audit and supervisory board member may note an opinion in the audit report issued by the audit and supervisory board if the opinion expressed in his or her report differs from the opinion expressed in the audit report issued by the audit and supervisory board. The audit and supervisory board has the authority to establish audit principles, the method of examination by its members of our affairs and financial position, and other matters concerning the performance of the duties of its members. The audit and supervisory board shall appoint one or more full-time members by its resolution.

Under the Companies Act, in addition to audit and supervisory board members, an independent certified public accountant or an audit corporation must be appointed by general meetings of shareholders as our accounting auditor. Such accounting auditor has, as its primary statutory duties, the duties to examine the annual consolidated and non-consolidated financial statements to be submitted by a representative director at general meetings of shareholders and to report its opinion thereon to certain audit and supervisory board members designated by the audit and supervisory board to receive such report (if such audit and supervisory board members are not designated, all of the audit and supervisory board members) and the directors designated to receive such report (if such directors are not designated, the directors who prepared the financial statements). As of the date of this annual report, our accounting auditor is KPMG AZSA LLC.

Liability Limitation Agreements

Pursuant to the Companies Act and our articles of incorporation, we have entered into liability limitation agreements with our outside directors and our outside audit and supervisory board members which limit the maximum amount of their liability for damages referred to in Paragraph 1, Article 423 of the Companies Act to the higher of either a fixed amount which is not less than ¥20 million or the amount stipulated by applicable laws and regulations, provided that such directors and audit and supervisory board members acted in good faith and without gross negligence.

Nomination and Compensation Committee

We have established, though not statutorily mandated under the Companies Act or other laws or regulations, a nomination and compensation committee to enhance transparency of the process for nominating our directors and audit and supervisory board members and determining the compensation for our directors and corporate officers. As of the date of this annual report, the committee consists of four members, three of whom are outside directors and one of whom is a non-executive director. The chairperson of the committee is appointed from among the members who are outside directors. This committee deliberates on (i) nominations for directors, representative directors and audit and supervisory board members, the chairperson of the board of directors and the president, and (ii) the structure and the level of compensation for directors, representative directors and corporate officers, taking our results of operations and other conditions and factors into account from an objective perspective. The committee reports the results of its deliberations to the board of directors.

 

D.

EMPLOYEES

As of March 31, 2018, 2019 and 2020, we had 109,390, 110,595 and 112,638 employees, respectively, on a consolidated basis, excluding part-time and temporary employees. We also had an average of approximately 8,585 part-time and temporary employees during the fiscal year ended March 31, 2020.

 

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The following table sets forth our full-time employees and part-time and temporary employees by segment as of March 31, 2020:

 

     Full-time employees      Part-time and temporary
employees
 

Public Solutions

     7,151        97  

Public Infrastructure

     17,810        62  

Enterprise

     11,100        95  

Network Services

     10,483        3,132  

System Platform

     16,731        118  

Global

     22,470        2,416  

Others

     26,893        2,783  
  

 

 

    

 

 

 

Total

     112,638        8,703  
  

 

 

    

 

 

 

As of March 31, 2020, NEC Corporation and its consolidated subsidiaries in Japan had a total of 76,180 full-time employees, while its consolidated subsidiaries outside Japan had a total of 36,458 full-time employees.

Most of the full-time non-management employees of NEC Corporation are members of NEC Workers’ Union. This labor union, together with the labor unions for full-time non-management employees of certain consolidated subsidiaries of NEC Corporation in Japan, forms the NEC Group Federation of Workers’ Unions, which is in turn affiliated with the Japanese Electrical, Electronic and Information Union. The NEC Group Federation of Workers’ Unions had approximately 43,000 members as of March 31, 2020. We believe our labor relations to be good.

 

E.

SHARE OWNERSHIP

The following table shows the number of shares of our common stock owned by our directors and audit and supervisory board members as of March 31, 2020:

 

     Number of shares owned  

Directors:

  

Nobuhiro Endo

     38,800  

Takashi Niino

     7,400  

Takayuki Morita

     1,900  

Norihiko Ishiguro

     3,300  

Hajime Matsukura

     2,500  

Motoo Nishihara

     1,200  

Takeshi Kunibe(1)

     —    

Kaoru Seto

     —    

Noriko Iki

     —    

Masatoshi Ito

     —    

Kuniharu Nakamura

     —    

 

     Number of shares owned  

Audit and supervisory board members:

  

Hajime Kinoshita

       3,100  

Isamu Kawashima

     6,800  

Kazuyasu Yamada(1)

     —    

Taeko Ishii

     —    

Nobuo Nakata

     —    

 

(1)

Retired upon expiration of their terms of office at the conclusion of the ordinary general meeting of shareholders on June 22, 2020.

 

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For information on the stock compensation for our directors and senior management, see “—B. Compensation.”

None of our directors or audit and supervisory board members is the owner of more than one percent of our common stock, and no director or audit and supervisory board member has voting rights with respect to our common stock that are different from any other holder of our common stock.

We maintain an employee stock ownership plan in Japan. Under the plan, full-time employees of NEC Corporation and certain major subsidiaries in Japan are eligible to participate in an employee shareholding association. Participating employees may contribute funds deducted from their salary and bonus payments to the association, and the plan administrator makes open-market purchases of shares of our common stock for the account of the association on a monthly basis. We contribute to the association matching funds equal to 7.5% of the funds contributed by the participating employees. As of March 31, 2020, the association held 4,498,966 shares.

 

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A.

MAJOR SHAREHOLDERS

The following table sets forth the ten largest holders of shares of our common stock appearing on the register of shareholders as of March 31, 2020, and the number and the percentage of such shares held by each of them:

 

     Number of
shares owned
     Percentage of
outstanding
shares(1)(2)
 

The Master Trust Bank of Japan, Ltd. (Trust Account)

     21,003,800        8.08

Japan Trustee Services Bank, Ltd. (Trust Account)

     17,343,200        6.67

STATE STREET BANK WEST CLIENT—TREATY 505234

     5,727,374        2.20

Sumitomo Life Insurance Company

     5,600,000        2.15

Japan Trustee Services Bank, Ltd. (Trust Account No.7)

     5,559,400        2.13

Japan Trustee Services Bank, Ltd. (Trust Account No.5)

     4,944,100        1.90

Japan Trustee Services Bank, Ltd. (Trust Account No.9)

     4,748,900        1.82

NEC Employee Shareholding Association

     4,498,966        1.73

NIHK A/C CLIENT (OWNED BY KKR FUNDS)

     4,486,100        1.72

JP MORGAN CHASE BANK 385151

     4,383,960        1.68

 

(1)

Percentages are calculated based on the total number of shares of our common stocks then outstanding (excluding treasury shares) and have been rounded down to the nearest second decimal point.

(2)

On June 25, 2020, we announced a third-party allotment of 13,023,600 shares of our common stock (consisting of 12,376,600 newly issued shares and 647,000 treasury shares) to Nippon Telegraph and Telephone Corporation, which is expected to close in July 2020. See “Item 5—Operating and Financial Review and Prospectus—Recent Developments—Capital and Business Alliance with NTT Group.”

Our major shareholders do not have different voting rights compared to other shareholders.

As of March 31, 2020, there were 175 record holders of our common stock with addresses in the United States, whose shareholdings represented approximately 13.1% of the outstanding shares of our common stock on that date.

 

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To our knowledge, we are not directly or indirectly owned or controlled by any another corporation, by any foreign government or by any other natural or legal person, severally or jointly.

 

B.

RELATED PARTY TRANSACTIONS

In the ordinary course of business, we purchase from and sell to our related parties materials, supplies and services. Such related parties include affiliated companies accounted for under the equity method and companies with which certain members of our board of directors are affiliated. We do not consider the amounts involved in these transactions to be material to our business.

For the fiscal year ended March 31, 2020, we had ¥147.3 billion of purchases from related parties and ¥150.6 billion of sales to related parties. As of March 31, 2020, we had ¥39.5 billion of trade and other payables to related parties and ¥25.3 billion of trade and other receivables from related parties.

During the fiscal year ended March 31, 2020 and up to the date of this annual report, we made no loans or guarantees to our directors or audit and supervisory board members or close members of their family, and, as of the date of this annual report, no loans or guarantees are outstanding to our directors or audit and supervisory board members or close members of their family.

 

C.

INTERESTS OF EXPERTS AND COUNSEL

Not applicable.

 

ITEM 8.

FINANCIAL INFORMATION

 

A.

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

All of the consolidated financial statements and other financial information are included elsewhere in this annual report. See “Item 18—Financial Statements.”

Export Sales

For information on our export sales, see “Item 4.B. Information on the Company—Business Overview—Customers, Sales and Marketing.”

Legal Proceedings

From time to time, we are involved in various litigation matters and other legal proceedings, including regulatory actions. Although the final resolution of any such matters and proceedings could have a material effect on our consolidated operating results for a particular reporting period, based on our current knowledge and consultation with legal counsel, we believe the current litigation matters and other legal proceedings, when ultimately determined, will not materially affect our results of operations or financial position. Although we establish reserves when necessary to account for the possibility of unfavorable outcomes with respect to such matters, such reserves are based on the information available to our management at such time. Actual outcomes or liabilities may differ materially from those envisioned by our assessments and estimates and may exceed our reserves for such matters.

In March 2018, we received a decision from the European Commission requiring us and TOKIN Corporation to pay an aggregate fine of €16.4 million based on its finding that TOKIN participated in a cartel for the supply of aluminum and tantalum electrolytic capacitors with several other Japanese capacitor manufacturers. TOKIN was our consolidated subsidiary during the period relevant to the decision and, subsequently, was deconsolidated and became an equity method affiliate in February 2013 followed by disposition of all of the

 

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remaining equity interest we held in the company in April 2017. In May 2018, we filed an appeal with the European Court of Justice challenging certain parts of the European Commission’s decision. Our appeal is currently pending in the European Court of Justice.

In June 2015, NEC Latin America S.A., our consolidated subsidiary, received from the Brazilian tax authorities an order imposing additional withholding taxes on the subsidiary’s loan receivables for previous years in the amount of approximately 367 million Brazilian real. Following the dismissal of its petition of objection to the order, the subsidiary brought a judicial action in April 2016 seeking revocation of the order. The subsidiary’s action is currently pending in the Brazilian court.

Dividend Policy

With respect to our dividend policy, our board of directors considers the profit status of each period in addition to future capital requirements and the execution of business operations with an emphasis on capital efficiency. Our board of directors believes that investment in growth areas and a sound financial structure are tied to the creation of long-term corporate value. Year-end dividends may be distributed in cash to shareholders of record as of March 31 in an applicable year pursuant to a resolution of our board of directors in proportion to the number of shares of our common stock held by each shareholder. In addition to year-end dividends, we may make cash distributions by way of interim dividends to shareholders of record as of September 30 in an applicable year as distribution of surplus by resolution of our board of directors. We paid year-end dividends of ¥60.0, ¥40.0 and ¥40.0 per share of our common stock to shareholders of record as of March 31, 2018, 2019 and 2020. We did not pay any interim dividends to shareholders of record as of September 30, 2017 or 2018. We paid an interim dividend of ¥30.0 per share of our common stock to shareholders of record as of September 30, 2019.

See “Item 10.B. Additional Information—Memorandum and Articles of Incorporation” for additional information on our dividends policy.

 

B.

SIGNIFICANT CHANGES

Other than as described in this annual report, no significant changes have occurred since the date of our consolidated financial statements included in this annual report.

 

ITEM 9.

THE OFFER AND LISTING

 

A.

OFFER AND LISTING DETAILS

Our common stock is listed on the First Section of the Tokyo Stock Exchange in Japan under the code “6701.” Our common stock is not listed on any securities exchange outside Japan.

 

B.

PLAN OF DISTRIBUTION

Not applicable.

 

C.

MARKETS

The information required by this item is set forth in “—A. Offer and Listing Details.”

 

D.

SELLING SHAREHOLDERS

Not applicable.

 

E.

DILUTION

Not applicable.

 

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F.

EXPENSES OF THE ISSUE

Not applicable.

 

ITEM 10.

ADDITIONAL INFORMATION

 

A.

SHARE CAPITAL

Not applicable.

 

B.

MEMORANDUM AND ARTICLES OF INCORPORATION

Introduction

We are a joint stock corporation (kabushiki kaisha) incorporated in Japan under the Companies Act. We are registered in the commercial register (shogyo tokibo) maintained by the Minato Branch Office of the Tokyo Legal Affairs Bureau, Ministry of Justice of Japan.

Our Corporate Purpose

Our articles of incorporation provide that our corporate purposes are to engage in the following business activities:

 

  (i)

to manufacture, sell or otherwise dispose of, telecommunications equipment, machinery and instruments, electronic computers and other electronics application equipment, machinery and instruments, electrical equipment, machinery and instruments, and all kinds of equipment, machinery, instruments and systems related to electricity;

 

  (ii)

to manufacture, sell or otherwise dispose of, nuclear energy machinery and instruments, aircraft machinery and instruments, medical machinery and instruments, measuring instruments, and all equipment, machinery, instruments and systems other than those mentioned in item 1 above;

 

  (iii)

to manufacture, sell or otherwise dispose of, electron tubes, semiconductor devices, integrated circuits and all parts and materials for use in or in connection with any equipment, machinery and instruments mentioned in any of the preceding items;

 

  (iv)

to provide telecommunications, data base, and other information services;

 

  (v)

to manufacture, sell or otherwise dispose of, medicines, quasi-medicines, reagents, and other chemical products, and to provide medical support services and medical testing services;

 

  (vi)

to provide mail order, money collection, travel agency, non-life insurance agency, life insurance agency, broadcasting, and security services by means of the Internet and other networks;

 

  (vii)

to contract for construction work;

 

  (viii)

to engage in any and all activities requisite to the promotion, handling, and carrying out of the businesses mentioned in any of the preceding items; and

 

  (ix)

to invest in businesses mentioned in any of the preceding items which businesses are under the administration of others.

Description of our Common Stock

Set forth below is information concerning the shares of our common stock, including brief summaries of the relevant provisions of our articles of incorporation, our share handling regulations, and the Companies Act and certain other laws and regulations relating to joint stock corporations (kabushiki kaisha), including us, each as currently in effect.

 

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General

Under our articles of incorporation, we are authorized to issue 750,000,000 shares of common stock. All issued shares of our common stock are fully-paid and non-assessable and generally transferable through the book-entry system as described below and in “—Transfer of Shares.”

The shares of our common stock are subject to the Japanese book-entry transfer system, as are all listed shares of Japanese companies, under the Act on Book-Entry of Company Bonds, Shares, etc. of Japan (Act No. 75 of 2001, as amended) including regulations promulgated thereunder (the “Book-Entry Act”). Under this system, shares of all Japanese companies listed on any Japanese stock exchange are dematerialized, and shareholders of listed shares must have accounts at account management institutions to hold their shares unless such shareholders have an account at Japan Securities Depository Center, Inc. (“JASDEC”), the only institution that is designated by the relevant Japanese government authorities as a clearing house under the Book-Entry Act. “Account management institutions” are financial instruments business operators (i.e., securities companies), banks, trust companies and certain other financial institutions that meet the requirements prescribed by the Book-Entry Act. Under the book-entry transfer system, when opening an account at an account management institution, a shareholder must enter into an agreement with the account management institution.

Under the Companies Act and the Book-Entry Act, in order to assert against us shareholders’ rights to which shareholders as of a given record date are entitled (such as the rights to vote at a general meeting of shareholders or receive dividends), a shareholder must have its name and address registered in our register of shareholders, except in limited circumstances. Under the central book-entry transfer system, such registration on the register of shareholders is made upon our receipt of necessary information from JASDEC through an all shareholders notice (soukabunushi tsuchi). See “—Record Date.

On the other hand, in order to assert shareholders’ rights to which shareholders are entitled regardless of record dates, such as minority shareholders’ rights (including the right to propose a matter to be considered at a general meeting of shareholders, but excluding shareholders’ rights to request us to purchase or sell shares constituting less than a full unit (as described in “—Unit Share System”)), JASDEC shall issue to us, upon a shareholder’s request, a notice of certain information (kobetsu kabunushi tsuchi), which information includes the name and address of such shareholder. Thereafter, such shareholder is required to present to us a receipt of the request of the notice in accordance with our share handling regulations. Under the Book-Entry Act, a shareholder must exercise its shareholder’s right within four weeks after the notice of certain information (kobetsu kabunushi tsuchi) is issued.

Non-resident shareholders are required to appoint a standing proxy in Japan or provide a mailing address in Japan. Each such shareholder must give notice of such standing proxy or mailing address to the relevant account management institution. Such notice will be forwarded to us through JASDEC. Japanese securities companies and commercial banks customarily act as standing proxies and provide related services for standard fees. Notices from us to non-resident shareholders are delivered to such standing proxies or mailing addresses.

Distribution of Surplus

General

Under the Companies Act, distribution of cash or other assets by a joint stock corporation to its shareholders, including dividends, takes the form of distribution of Surplus (as defined in “—Restrictions on Distributions of Surplus”). We are permitted to make distributions of Surplus to our shareholders any number of times per fiscal year, subject to certain limitations described in “—Restrictions on Distributions of Surplus.” Under the Companies Act, distributions of Surplus are, as a general rule, required to be authorized by resolution of a general meeting of shareholders. Distributions of Surplus are, however, permitted pursuant to a resolution of the board of directors if:

 

  (i)

our articles of incorporation provide that the board of directors has the authority to decide to make distributions of Surplus;

 

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  (ii)

we have (a) an independent auditor and (b) an audit and supervisory board, or an audit and supervisory committee, or three statutory committees under the Companies Act, as the case may be;

 

  (iii)

the normal term of office of each director terminates on or prior to the date of conclusion of the ordinary general meeting of shareholders relating to the last fiscal year ending within the period of one year from the election of such director; and

 

  (iv)

our non-consolidated annual financial statements and certain documents for the latest fiscal year fairly present our assets and profit or loss, as required by ordinances of the Ministry of Justice.

For a discussion on our dividend policy, see “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Dividend Policy.”

Distributions of Surplus may be made in cash or in kind in proportion to the number of shares of our common stock held by each shareholder. A resolution of a general meeting of shareholders or the board of directors authorizing a distribution of Surplus must specify the kind and aggregate book value of the assets to be distributed, the manner of allocation of such assets to shareholders, and the effective date of the distribution. If a distribution of Surplus is to be made in kind, we may, pursuant to a resolution of a general meeting of shareholders or (as the case may be) the board of directors, grant to our shareholders a right to require us to make such distribution in cash instead of in kind. If no such right is granted to shareholders, the relevant distribution of Surplus must be approved by a special resolution of a general meeting of shareholders. See “—Voting Rights” with respect to a “special resolution.”

Under our articles of incorporation, the record dates for year-end dividends and interim dividends, if any, are March 31 and September 30, respectively, in each year. In Japan, the “ex-dividend date” (the date from which purchasers of shares through Japanese stock exchanges will not be entitled to the dividends to be paid to registered shareholders as of any record date) and the record date for dividends precedes the date of determination of the amount of the dividend to be paid. The ex-dividend date of the shares of our common stock is generally the business day immediately prior to the record date. Under our articles of incorporation, we are not obligated to make any distribution of Surplus in cash that has not been received by a shareholder after the lapse of three years from the commencement date of such distribution.

Restrictions on Distributions of Surplus

In making a distribution of Surplus, we must set aside in our legal capital surplus and/or legal retained earnings an amount equal to one-tenth of the amount of Surplus so distributed until the sum of such legal capital surplus and legal retained earnings reaches one-quarter of our stated capital.

The amount of Surplus (the “Surplus”) at any given time must be calculated in accordance with the following formula:

A+B+C+D-(E+F+G)

In the above formula:

“A” = the total amount of other capital surplus and other retained earnings, each such amount being that appearing on our non-consolidated balance sheet as of the end of the last fiscal year

“B” = (if we have disposed of our treasury stock after the end of the last fiscal year) the amount of the consideration for such treasury stock received by us less the book value thereof

“C” = (if we have reduced our stated capital after the end of the last fiscal year) the amount of such reduction less the portion thereof that has been transferred to legal capital surplus or legal retained earnings (if any)

 

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“D” = (if we have reduced our legal capital surplus or legal retained earnings after the end of the last fiscal year) the amount of such reduction less the portion thereof that has been transferred to stated capital (if any)

“E” = (if we have cancelled our treasury stock after the end of the last fiscal year) the book value of such treasury stock

“F” = (if we have distributed Surplus to our shareholders after the end of the last fiscal year) the total book value of the Surplus so distributed

“G” = certain other amounts set forth in ordinances of the Ministry of Justice, including the following:

 

   

if we have reduced Surplus and increased our stated capital, legal capital surplus or legal retained earnings after the end of the last fiscal year, the amount of such reduction; and

 

   

if we have distributed Surplus to shareholders after the end of the last fiscal year, the amount set aside in our legal capital surplus or legal retained earnings, if any, as required by ordinances of the Ministry of Justice.

The aggregate book value of Surplus distributed by us may not exceed a prescribed distributable amount (the “Distributable Amount”), as calculated on the effective date of such distribution. The Distributable Amount at any given time shall be the amount of Surplus less the aggregate of (a) the book value of our treasury stock, (b) the amount of consideration for any of our treasury stock disposed of by us after the end of the last fiscal year and (c) certain other amounts set forth in ordinances of the Ministry of Justice, including all or a certain part of the amount by which one-half of our goodwill and deferred assets exceeds, if at all, the total of the stated capital, legal capital surplus and legal retained earnings, each such amount being the amount in our non-consolidated balance sheet as of the end of the last fiscal year, as calculated in accordance with ordinances of the Ministry of Justice.

If we have become, at our option, a company with respect to which its consolidated balance sheet should also be considered in the calculation of the Distributable Amount (renketsu haito kisei tekiyo kaisha), we shall further deduct from the amount of Surplus the excess amount, if any, of (x) the total amount of the shareholders’ equity appearing on our non-consolidated balance sheet as of the end of the last fiscal year and certain other amounts set forth in ordinances of the Ministry of Justice over (y) the total amount of the shareholders’ equity and certain other amounts set forth in ordinances of the Ministry of Justice appearing on our consolidated balance sheet as of the end of the last fiscal year. We currently have no intention to opt to become such a company.

If we have prepared interim financial statements as described below, and if such interim financial statements have been approved by the board of directors or (if so required by the Companies Act) by a general meeting of shareholders, then the Distributable Amount must be adjusted to take into account the amount of profit or loss, and the amount of consideration for any of our treasury stock disposed of by us, during the period in respect of which such interim financial statements have been prepared. We may prepare non-consolidated interim financial statements in accordance with the Companies Act and ordinances of the Ministry of Justice consisting of a balance sheet as of any date subsequent to the end of the last fiscal year and a statement of income for the period from the first day of the subject fiscal year to the date of such balance sheet. Interim financial statements so prepared by us must be audited by the audit and supervisory board members and the independent auditor, the detail of which is prescribed by ordinances of the Ministry of Justice.

Capital and Reserves

We may generally reduce our legal capital surplus or legal retained earnings by resolution of a general meeting of shareholders and, if so decided by the same resolution, may account for the whole or any part of the amount of such reduction as stated capital. On the other hand, we may generally reduce our stated capital by special resolution of a general meeting of shareholders and, if so decided by the same resolution, may account for

 

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the whole or any part of the amount of such reduction as legal capital surplus. In addition, we may reduce our Surplus and increase either (i) stated capital or (ii) legal capital surplus and/or legal retained earnings by the same amount, in either case by resolution of a general meeting of shareholders.

Stock Splits

We may at any time split shares of our common stock into a greater number of shares of our common stock by resolution of the board of directors. When a stock split is to be made, so long as our only class of outstanding stock is our common stock, we may increase the number of authorized shares by the same ratio as that of such stock split by amending our articles of incorporation, which amendment may be effected by resolution of the board of directors without the approval of shareholders. Before a stock split, we must give public notice of the stock split, specifying the record date therefor, not less than two weeks prior to such record date.

Consolidation of Shares

We may at any time consolidate shares of our common stock into a smaller number of shares by a special resolution of the general meeting of shareholders. When a consolidation of shares is to be made, we must give public notice at least two weeks (or, in certain cases where any fractions of shares are left as a result of consolidation of shares, 20 days) prior to the effective date of the consolidation of shares. We must disclose the reason for the consolidation of shares at the general meeting of shareholders.

Unit Share System

Our articles of incorporation provide that one hundred (100) shares each constitute one unit of shares. Under the unit share system, shareholders have, at general meetings of shareholders, one voting right for each unit of shares held by them, and shares constituting less than a full unit carry no voting rights. Our articles of incorporation provide that the holders of shares constituting less than a full unit do not have shareholder rights, except for those specified in the Companies Act or ordinances of the Ministry of Justice, which include rights (i) to receive dividends, (ii) to receive cash or other assets in the case of a consolidation of shares or stock split, share exchange (kabushiki-kokan) or share transfer (kabushiki-iten), or merger, or (iii) to be allotted rights to subscribe for new shares and stock acquisition rights for free when such rights are granted to shareholders. Holders of shares constituting less than a full unit may at any time request that we purchase such shares constituting less than a full unit at their market price in accordance with our share handling regulations. In addition, holders of shares constituting less than a full unit may require that we sell them such number of shares, that, when combined with the number of shares already held by such holder, constitute a whole unit of shares; provided that we be obliged to comply with such request only when there is a sufficient number of treasury shares to accommodate such request. As prescribed in our share handling regulations, such requests must be made through an account management institution and JASDEC pursuant to the rules set by JASDEC without going through the notification procedure required for the exercise of shareholders’ rights to which shareholders are entitled regardless of record dates as described in “—General.” The board of directors may reduce the number of shares constituting one unit or cease to use the unit share system by amendments to the articles of incorporation without shareholders’ approval even though amendments to the articles of incorporation generally require a special resolution of the general meeting of shareholders.

Under the book-entry transfer system described in “—Transfer of Shares,” shares constituting less than a full unit are transferable. Under the rules of the Japanese stock exchanges, including the Tokyo Stock Exchange, however, shares constituting less than a full unit do not comprise a trading unit, except in limited circumstances, and accordingly may not be sold on the Japanese stock exchanges.

General Meetings of Shareholders

Under our articles of incorporation, the ordinary general meeting of shareholders is held in June of each year. In addition, we may hold an extraordinary general meeting of shareholders whenever necessary. Notice of a

 

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general meeting of shareholders stating the place, the time and the purpose thereof must be given to each shareholder having voting rights (or, in the case of a non-resident shareholder, to its standing proxy or mailing address in Japan) at least two weeks prior to the date set for the meeting. The record date for an ordinary general meeting of shareholders is March 31 of each year.

Any shareholder holding at least 300 voting rights or 1% of the total number of voting rights for six months or longer may propose a matter to be considered at a general meeting of shareholders by submitting a request to a director at least eight weeks prior to the date of such meeting. Any of the minimum percentages, time periods and number of voting rights necessary for exercising the minority shareholder rights described above may be decreased or shortened if our articles of incorporation so provide. Our articles of incorporation currently do not include any such provisions.

Voting Rights

Shareholders of our common stock have one voting right for each unit of shares held by them.

Except as otherwise provided by law or in our articles of incorporation, a majority of the voting rights held by the shareholders present at a general meeting of shareholders is necessary to adopt a resolution at the meeting. Our articles of incorporation provide that the quorum for election of directors and audit and supervisory board members is one-third of the total number of voting rights. Our shareholders are not entitled to cumulative voting in the election of directors. A shareholder may exercise its voting rights in writing or through a proxy, provided that the proxy is also a holder of our shares having voting rights at such meeting.

The Companies Act provides that certain important matters shall be approved by “special resolution” of a general meeting of shareholders. Under our articles of incorporation, the quorum for a special resolution is one-third of the total number of voting rights, and the approval of not less than two-thirds of the voting rights held by the shareholders present at the meeting is required for adopting a special resolution. Such important matters include:

 

  (i)

any amendment to our articles of incorporation (except for such amendments that may be made without the approval of shareholders under the Companies Act, such as (a) an increase of the number of authorized shares by the same ratio as that of a stock split, (b) a reduction of the number of shares per unit of shares and (c) termination of the unit share system);

 

  (ii)

dismissal of any audit and supervisory board members;

 

  (iii)

our dissolution, merger or consolidation requiring shareholders’ approval;

 

  (iv)

establishment of a parent and wholly owned subsidiary relationship by way of a share transfer (kabushiki-iten) or share exchange (kabushiki-kokan) requiring shareholders’ approval;

 

  (v)

transfer of the whole or a substantial part of our business;

 

  (vi)

transfer of the whole or a part of our shares or equity interests in our subsidiary requiring shareholders’ approval;

 

  (vii)

taking over of the whole of the business of another company requiring shareholders’ approval;

 

  (viii)

our corporate split requiring shareholders’ approval;

 

  (ix)

consolidation of shares of our common stock;

 

  (x)

acquisition of shares of our common stock from a specific shareholder other than our subsidiary;

 

  (xi)

distribution of Surplus in kind (except when shareholders are granted the right to require that such distribution be made in cash instead of in kind);

 

  (xii)

issuance of new shares or sale of existing shares held by us as treasury stock to persons other than the shareholders at a “specially favorable” price; and

 

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  (xiii)

issuance of stock acquisition rights (including those incorporated in bonds with stock acquisition rights) to persons other than the shareholders under “specially favorable” conditions.

Liquidation Rights

In the event of our liquidation, the assets remaining after payment of all debts, liquidation expenses, and taxes will be distributed among holders of shares of our common stock in proportion to the respective numbers of shares held by them.

Issue of Additional Shares and Pre-emptive Rights

Holders of our common stock have no pre-emptive rights. Authorized but unissued shares of our common stock may be issued, or existing shares held by us as treasury stock may be sold, at such times and upon such terms as the board of directors determines subject to the limitations as to the issuance of new shares or sale of existing shares held by us as treasury stock at a “specially favorable” price mentioned in “—Voting Rights.” The board of directors may, however, determine that shareholders shall be given subscription rights regarding a particular issue of new shares or sale of existing shares held by us as treasury stock, in which case such rights must be given on uniform terms to all shareholders as of a record date not less than two weeks prior to which public notice must be given. Each of the shareholders to whom such rights are given must also be given at least two weeks’ prior notice of the date on which such rights expire.

In the case of an issuance of shares (including a sale of existing shares held by us as treasury stock) or stock acquisition rights whereby any subscriber (including its subsidiaries and other companies set forth in ordinances of the Ministry of Justice) will hold more than 50% of the voting rights of all shareholders, and if shareholders who hold one-tenth or more of the voting rights of all shareholders object to the issuance of shares or stock acquisition rights, the approval by a resolution of a general meeting of shareholders is generally required before the payment date pursuant to the Companies Act. In addition, in the case of an issuance of shares (including a sale of existing shares held by us as treasury stock) or stock acquisition rights by a listed company such as us by way of an allotment to a third party which would dilute the outstanding voting shares by 25% or more or cause change of the controlling shareholder, in addition to resolution of the board of directors, shareholders’ approval, through a resolution of a general meeting of shareholders or otherwise, or an affirmative opinion by a person independent of our management is generally required pursuant to the rules of the Japanese stock exchanges.

Stock Acquisition Rights

We may issue stock acquisition rights (shinkabu yoyakuken) from time to time. Holders of stock acquisition rights are entitled to acquire shares from us upon payment of the applicable exercise price and subject to other terms and conditions. We may also issue bonds with stock acquisition rights (shinkabu yoyakuken-tsuki shasai) from time to time. The issuance of stock acquisition rights and bonds with stock acquisition rights may be authorized by the board of directors unless it is made under “specially favorable” conditions, as described in “—Voting Rights” or, in certain cases where the approval of the shareholders or an affirmative opinion from an independent person may be required, as described in “—Issue of Additional Shares and Pre-emptive Rights.”

Record Date

As mentioned above, March 31 is the record date for the payment of year-end dividends, if any, and the determination of shareholders entitled to vote at the ordinary general meeting of shareholders. September 30 is the record date for the payment of interim dividends, if any. In addition, by resolution of the board of directors and after giving at least two weeks’ prior public notice, we may at any time set a record date in order to determine the shareholders who are entitled to certain rights pertaining to our stock.

Under the Book-Entry Act, JASDEC is required to give us notice of the names and addresses of our shareholders, the numbers of shares held by them and other relevant information as of such record date.

 

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Acquisition of Shares of Our Common Stock

We may acquire shares of our common stock:

 

  (i)

by way of purchase on any Japanese stock exchange on which the shares of our common stock are listed or by way of tender offer (in either case pursuant to resolution of the board of directors as currently authorized by our articles of incorporation as long as our non-consolidated annual financial statements and certain documents for the latest fiscal year fairly present our assets and profit or loss as required by ordinances of the Ministry of Justice);

 

  (ii)

from a specific shareholder other than any of our subsidiaries (pursuant to a special resolution of a general meeting of shareholders); or

 

  (iii)

from any of our subsidiaries (pursuant to a resolution adopted by the board of directors).

In the case of (ii) above, any other shareholder may make a request to us that such shareholder be included as a seller in the proposed purchase unless the purchase price or any other consideration to be received by the relevant specific shareholder will not exceed the higher of (a) the last trading price of the shares on the relevant stock exchange on the day immediately preceding the date on which the resolution mentioned in (ii) above is adopted (or, if there is no trading in the shares on the stock exchange or the stock exchange is not open on such day, the price at which the shares are first traded on such stock exchange thereafter) and (b) if the shares are subject to a tender offer on the day immediately preceding the date on which the resolution mentioned in (ii) above is adopted, the price of the shares under the agreement with respect to such tender offer on such day.

The total amount of the purchase price of shares of our common stock may not exceed the Distributable Amount as described in “—Distribution of SurplusRestrictions on Distributions of Surplus.”

We may hold the shares of our common stock acquired and may dispose of or cancel such shares generally by resolution of the board of directors.

Request by a Controlling Shareholder to Sell All Shares

A controlling shareholder holding, directly or indirectly, 90% (or such other percentage above 90% as may be provided in our articles of incorporation) or more of voting rights has the right to request, subject to approval by the board of directors, that the other shareholders and (if the controlling shareholder so determines) all holders of stock acquisition rights (in each case other than us and, if the controlling shareholder so determines, the controlling shareholder’s wholly owned subsidiaries) sell to the controlling shareholder all shares and all stock acquisition rights, as the case may be, held by them (kabushikitou uriwatashi seikyu). If the approval is granted by resolution of the board of directors, we will be required to give public notice thereof to all holders and registered pledgees of shares (and stock acquisition rights, as the case may be) not later than 20 days prior to the effective date of such sales, as proposed by the controlling shareholder.

Disposal of Shares of Our Common Stock Held by a Shareholder Whose Location is Unknown

We are not required to continue to send notices to a shareholder if notices sent by us to such shareholder fail to arrive for five consecutive years or more at such shareholder’s address registered in our register of shareholders or otherwise notified to us.

In the above case, if the relevant shareholder also fails to receive dividends on the shares continuously for five years or more at such shareholder’s address registered in our register of shareholders or otherwise notified to us, then we may in general dispose of such shares at their then market price and hold or deposit the proceeds of such disposition on behalf of the relevant shareholder.

 

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Transfer of Shares

The transfer agent for the shares of our common stock is Sumitomo Mitsui Trust Bank, Limited located at 1-4-1, Marunouchi, Chiyoda-ku, Tokyo, Japan. Our transfer agent maintains our register of shareholders.

Under the Book-Entry Act, transfer of the shares of our common stock is effected exclusively through entry in the records maintained by JASDEC and the account management institutions, and title to the shares passes to the transferee at the time when the transfer of the shares is recorded in the transferee’s account at an account management institution. The holder of an account at an account management institution is presumed to be the legal holder of the shares recorded in such account.

Reporting of Substantial Shareholdings

The Financial Instruments and Exchange Act of Japan (Act No. 25 of 1948, as amended) and its related regulations require any person, regardless of residence, who has become, beneficially and solely or jointly, a holder of more than 5% of the total issued voting shares of capital stock of a company listed on any Japanese stock exchange, or whose shares are traded on an over-the-counter market in Japan, to file a report concerning the shareholdings with the Director-General of the competent Local Finance Bureau of the Ministry of Finance, in general, within five business days with certain exceptions. A similar report must also be filed if the percentage of such holdings subsequently increases or decreases 1% or more, or if any change occurs in material matters set out in reports previously filed. For this purpose, shares issuable or transferable to such person upon his or her exchange of exchangeable securities, conversion of convertible securities or exercise of warrants or stock acquisition rights (including those incorporated in bonds with stock acquisition rights) are taken into account in determining both the size of his or her holding and the issuer’s total issued share capital. These reports are required to be filed and made publicly available through the Electronic Disclosure for Investor’s Network system, which is an electronic disclosure system operated by the Financial Services Agency of Japan.

 

C.

MATERIAL CONTRACTS

There were no material contracts entered into by us for the two years preceding the filing of this annual report that were not entered into in the ordinary course of business.

 

D.

EXCHANGE CONTROL

Japanese Foreign Exchange Controls Regulations

The following is a general summary of major Japanese foreign exchange controls regulations applicable to holders of shares of our common stock or voting rights thereunder who are “exchange non-residents” or “foreign investors”, as described below. The statements regarding Japanese foreign exchange controls regulations set forth below are based on the laws and regulations in force and as interpreted by the Japanese authorities as of the date of this annual report and are subject to subsequent changes in the applicable Japanese laws or interpretations thereof. This summary is not exhaustive of all possible foreign exchange controls considerations that may apply to a particular investor, and potential investors are advised to satisfy themselves as to the overall foreign exchange controls consequences of the acquisition, ownership and disposition of shares of our common stock or voting rights thereunder by consulting their own advisors.

The Foreign Exchange and Foreign Trade Act of Japan (Act No. 228 of 1949, as amended, the “FEFTA”) and its related cabinet orders and ministerial ordinances (collectively, the “Foreign Exchange Regulations”) govern certain aspects relating to the acquisition and holding of shares of our capital stock and voting rights by “exchange non-residents” and by “foreign investors” (as these terms are defined below). In general, the Foreign Exchange Regulations currently in effect do not, however, affect transactions between exchange non-residents to purchase or sell shares of a Japanese listed corporation outside Japan using currencies other than Japanese yen.

 

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“Exchange residents” are defined in the Foreign Exchange Regulations as:

 

  (i)

individuals who reside within Japan; or

 

  (ii)

corporations whose principal offices are located within Japan.

“Exchange non-residents” are defined in the Foreign Exchange Regulations as:

 

  (i)

individuals who do not reside in Japan; or

 

  (ii)

corporations whose principal offices are located outside Japan.

Generally, branches and other offices of non-resident corporations located within Japan are regarded as exchange residents. Conversely, branches and other offices of Japanese corporations located outside Japan are regarded as exchange non-residents.

“Foreign investors” are defined in the Foreign Exchange Regulations as:

 

  (i)

individuals who are exchange non-residents;

 

  (ii)

corporations or other entities organized under the laws of foreign countries or whose principal offices are located outside Japan;

 

  (iii)

corporations of which 50% or more of the total voting rights are held, directly or indirectly, by individuals and/or corporations falling within (i) and/or (ii) above;

 

  (iv)

partnerships under the Civil Code of Japan (Act No. 89 of 1896, as amended) established to invest in corporations, limited partnerships for investment under the Limited Partnership Act for Investment of Japan (Act No. 90 of 1998, as amended) or any other similar partnerships under foreign law of which (a) 50% or more of the total contributions are made by individuals and/or corporations falling within (i), (ii), (iii) above and/or (v) below or any other persons prescribed under the Foreign Exchange Regulations or (b) a majority of the general partners are individuals and/or corporations falling within (i), (ii), (iii) above and/or (v) below or any other persons prescribed under the Foreign Exchange Regulations; or

 

  (v)

corporations or other entities, a majority of whose directors or other officers (or directors or other officers having the power of representation) are individuals who are exchange non-residents.

Acquisition of Shares

In general, the acquisition by an exchange non-resident of shares of stock of a Japanese corporation from an exchange resident requires post facto reporting by the exchange resident to the Minister of Finance of Japan through the Bank of Japan. No such reporting requirement is imposed, however, if:

 

  (i)

the aggregate purchase price of the relevant shares is ¥100 million or less;

 

  (ii)

the acquisition is effected through any bank, financial instruments business operator or other entity prescribed by the Foreign Exchange Regulations acting as an agent or intermediary; or

 

  (iii)

the acquisition constitutes an “inward direct investment” described below.

Inward Direct Investment in Shares of Listed Corporations

On May 8, 2020, an amendment to the Foreign Exchange Regulations (the “Amendment”) came into effect. By the full implementation of the Amendment on June 7, 2020, the requirements and procedures regarding the prior notifications of inward direct investment to the Minister of Finance and any other competent Ministers

 

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under the FEFTA, as described below, were amended. After the full implementation of the Amendment on June 7, 2020, Japanese listed corporations are classified into the following categories:

 

  (i)

corporations engaged only in businesses other than certain businesses designated by the Foreign Exchange Regulations as Designated Businesses (the “Designated Businesses”);

 

  (ii)

corporations engaged in the Designated Businesses other than Core Sector Designated Businesses as defined in (iii) below (the “Non-Core Sector Designated Businesses”); and

 

  (iii)

corporations engaged in the certain Designated Businesses designated by the Foreign Exchange Regulations as core sector businesses (the “Core Sector Designated Businesses”).

We currently engage in the manufacturing of equipment necessary for our solutions business related to national defense, satellites, fixed and radio communications equipment, computers and storage and the development of software, and such activities are included in the Core Sector Designated Businesses. For reference purposes only, the Minister of Finance publishes, and may update from time to time, a list that classifies Japanese listed corporations into the above categories, and according to the list published by the Minister of Finance as of June 5, 2020, we are classified as category (iii) above.

Definition of Inward Direct Investment

If a foreign investor acquires shares or voting rights of a Japanese corporation that is listed on a Japanese stock exchange, such as the shares of our common stock, or that is traded on an over-the-counter market in Japan and, as a result of such acquisition, the foreign investor, in combination with any existing holdings, directly or indirectly holds 1% or more of the total number of issued shares or the total number of voting rights of the relevant corporation, such acquisition constitutes an “inward direct investment.” In addition, the acquisition of the authority to exercise, either directly or through instructions, voting rights held by other shareholders that results in the foreign investor, in combination with any existing holdings, directly or indirectly holding 1% or more of the total number of voting rights of the relevant corporation constitutes an “inward direct investment.”

In addition to the acquisitions of shares or voting rights described above, if a foreign investor (i) is granted the authority to exercise voting rights on behalf of other shareholders of the relevant corporation regarding certain matters controlling or having material influence on the management of such corporation such as the election or removal of directors or (ii) obtains consent from another foreign investor holding the voting rights of the relevant corporation to exercise the voting rights of such corporation held by such foreign investor jointly, and, in each case, as a result of these arrangements, the number of the voting rights directly or indirectly held by the foreign investor, including the total number of the voting rights subject to such proxy, or the sum of the number of the voting rights directly or indirectly held by the foreign investor and such other foreign investors subject to such joint voting agreement, as the case may be, is 10% or more of the total number of voting rights of the relevant corporation, each such arrangement regarding voting rights (hereinafter referred to as a “voting arrangement”) also constitutes an “inward direct investment.”

Additionally, if a foreign investor directly or indirectly holds 1% or more of the total voting rights of a Japanese listed corporation and, at a general meeting of shareholders, consents to certain proposals having material influence on the management of such corporation such as (i) the election of such foreign investor or any of its related persons (as defined in the Foreign Exchange Regulations) as directors or corporate auditors of the relevant corporation or (ii) transfer or discontinuation of its business, such consent also constitutes an “inward direct investment.”

Prior Notification Requirements regarding Inward Direct Investment

If a foreign investor intends to consummate an acquisition of shares or voting rights of a Japanese listed corporation that constitutes an “inward direct investment” as described above, in certain circumstances, such as

 

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where the foreign investor is in a country that is not listed on an exemption schedule in the Foreign Exchange Regulations, or where that Japanese corporation is engaged in the Designated Businesses, prior notification of the relevant inward direct investment must be filed with the Minister of Finance and any other competent Ministers.

However, if a foreign investor is seeking to acquire shares or voting rights of a Japanese listed corporation or the authority to exercise, either directly or through instructions, voting rights held by other shareholders and such acquisition would constitute an “inward direct investment”, such foreign investor may be eligible for the exemptions, if certain conditions are met.

In the case of an acquisition of shares or voting rights or the authority to exercise, either directly or through instructions, voting rights of a Japanese listed corporation that is engaged in the Non-Core Sector Designated Businesses, the foreign investor may be exempted from the prior notification requirement, if such foreign investor complies with the following conditions (the “Exemption Conditions”):

 

  (i)

the foreign investor or its related persons (as defined in the Foreign Exchange Regulations) will not become directors or corporate auditors of the relevant corporation;

 

  (ii)

the foreign investor will not make