NEC CORP [NIPNF] Filings

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

 

						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;

 

1

•

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.

 

2

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

 

3

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

 

6

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

 

7

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;

 

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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;

 

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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;

 

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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

 

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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:

 

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

 

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

 

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

 

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

 

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inventory management practices of our customers;

 

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changes in governmental regulation or policy affecting the ICT industry;

 

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

 

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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:

 

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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;

 

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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;

 

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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;

 

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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;

 

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

 

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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;

 

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

 

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

 

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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:

 

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foreign currency exchange controls;

 

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

 

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nationalization of local industries;

 

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changes in export or import restrictions;

 

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

 

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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:

 

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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;

 

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enhance our existing products and services;

 

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

 

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utilize or adjust to new products, services and technologies;

 

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attract and retain highly capable technical and engineering personnel;

 

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

 

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avoid delays in developing or distributing new products;

 

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address increasingly sophisticated and diversifying customer requirements; and

 

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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:

 

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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;

 

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transfer pricing adjustments;

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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:

 

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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.

 

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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.

 

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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.

 

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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;

 

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business license application processing; police operations;

 

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transportation and traffic management systems and satellite technology;

 

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data transmission control;

 

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immigration control;

 

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

 

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public safety services.

 

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aviation, space and defense sectors

 

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air traffic control management systems;

 

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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:

 

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

 

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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.

 

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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.

 

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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.

 

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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:

 

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“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.

 

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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.

 

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

 

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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.

 

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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.

 

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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

 

29

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.

 

30

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.”

 

32

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:

 

 

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

 

33

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.

 

36

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.”

 

38

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

 

39

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.

 

41

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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