On October 29, 2020 NEC reported Financial Results for the Six-month period Ended September 30, 2020 (Press release, NEC, OCT 29, 2020, View Source [SID1234569288])
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1. Consolidated Financial Results for the Six-month Period Ended September 30, 2020 (April 1, 2020 – September 30, 2020)
2. Dividends
3. Consolidated Financial Results Forecast for the Year Ending March 31, 2021 (April 1, 2020 – March 31, 2021)
1. Overview of Business Results As stated in the July 21, 2020 announcement, "NEC to Revise Operating Segments", starting from the first quarter of the consolidated financial results for the fiscal year ending March 31, 2021, NEC announced operating results using revised segments. Figures for the corresponding period of the previous fiscal year have been restated to conform to the new segments. "Adjusted operating profit (loss)" is an indicator for measuring underlying profitability in order to clarify the contribution of acquired companies to NEC’s overall earnings. It is measured by deducting amortization of intangible assets recognized as a result of M&A and expenses for acquisition of companies (financial advisory fees and other fees) from operating profit (loss). Also, "Adjusted net profit (loss) attributable to owners of the parent" is an indicator for measuring underlying profitability attributable to owners of the parent. It is measured by deducting adjustment items of operating profit (loss) and corresponding amount of tax and non-controlling interests from net profit (loss) attributable to owners of the parent.
(1) Overview of Operating Results i) Overview of the six-month period ended September 30, 2020 The world economy and the Japanese economy both deteriorated significantly during the six-month period ended September 30, 2020, due to the effects of restrictions on personal movement and suspension of sales and production activities due to the global pandemic of new coronavirus ("COVID-19"). Even after the lifting of restrictions on personal movement, the pace of improvement slowed down mainly due to self-restraint of economic activity. Under this business environment, the NEC Group recorded consolidated revenue of 1,315.0 billion JPY for the six-month period ended September 30, 2020, a decrease of 134.0 billion JPY (-9.2%) year-on-year.
This decrease was mainly due to decreased revenue in the Enterprise business, the Public Solutions business and the Global business. Regarding profitability, operating profit worsened by 26.9 billion JPY year-on-year, to an operating profit of 20.0 billion JPY, mainly due to decreased revenue, despite improvement in selling, general and administrative expenses from the efficiency on expenditure, in addition to improvement in other operating income from gain on sales of subsidiaries. Adjusted operating profit worsened by 26.3 billion JPY year-on-year, to an adjusted operating profit of 29.0 billion JPY.
Profit before income taxes was a profit of 19.4 billion JPY, a year-on-year worsening of 26.8 billion JPY, mainly due to worsened operating profit. Net profit attributable to owners of the parent was a profit of 11.0 billion JPY, a worsening of 18.2 billion JPY year-on-year. This was primarily due to worsened profit before income taxes. Adjusted net profit attributable to owners of the parent worsened by 17.7 billion JPY year-on-year, to an adjusted net profit attributable to owners of the parent of 16.6 billion JPYNotes: Amounts in this section ii) "Results by main segment" are rounded to 0.1 billion JPY. Amounts in millions of JPY are shown in Note 3 "Segment Information" in Note
(5) "Notes to Condensed Interim Consolidated Financial Statements(Business segment figures in brackets below denote increases or decreases as compared with the corresponding period of the previous fiscal year.) Public Solutions Business Revenue: 177.1 billion JPY （-14.5%） Adjusted Operating Profit (Loss): 4.6 billion JPY （-5.3 billion JPY） In the Public Solutions business, revenue was 177.1 billion JPY, a decrease of 30.1 billion JPY (-14.5%) year-on-year, mainly due to decreased sales in sectors that include healthcare and regional industries, as well as reduced renewal demand for business PCs. Adjusted operating profit (loss) worsened by 5.3 billion JPY year-on-year, to an adjusted operating profit of 4.6 billion JPY, mainly due to decreased sales. Public Infrastructure Business Revenue: 281.6 billion JPY （-5.9%） Adjusted Operating Profit (Loss): 16.6 billion JPY （-7.7 billion JPY） In the Public Infrastructure business, revenue was 281.6 billion JPY, a decrease of 17.6 billion JPY (-5.9%) year-on-year, mainly due to decreased sales in sectors that include aerospace and defense, as well as decreased sales at consolidated subsidiaries. Adjusted operating profit (loss) worsened by 7.7 billion JPY year-on-year, to an adjusted operating profit of 16.6 billion JPY, mainly due to decreased profit at consolidated subsidiaries.
Enterprise Business Revenue: 238.1 billion JPY （-17.4%） Adjusted Operating Profit (Loss): 18.0 billion JPY （-7.3 billion JPY） In the Enterprise business, revenue was 238.1 billion JPY, a decrease of 50.1 billion JPY (-17.4%) year-on-year, mainly due to reduced IT investments in the manufacturing, retail and service sectors, in addition to decreased sales of large-scale projects as compared with the corresponding period of the previous year and reduced renewal demand for business PCs. Adjusted operating profit (loss) worsened by 7.3 billion JPY year-on-year, to an adjusted operating profit of 18.0 billion JPY, mainly due to decreased sales. Network Services Business Revenue: 225.5 billion JPY （+5.2%） Adjusted Operating Profit (Loss): 6.2 billion JPY （-2.9 billion JPY） In the Network Services business, revenue was 225.5 billion JPY, an increase of 11.1 billion JPY (+5.2%) year-on-year, mainly due to increased sales at consolidated subsidiaries. Adjusted operating profit (loss) worsened by 2.9 billion JPY year-on-year, to an adjusted operating profit of 6.2 billion JPY, mainly due to growing 5G investment, despite increased sales.Global Business Revenue: 219.3 billion JPY （-9.9%） Adjusted Operating Profit (Loss):-3.3 billion JPY （-4.4 billion JPY） In the Global business, revenue was 219.3 billion JPY, a decrease of 24.0 billion JPY (-9.9%) yearon-year, mainly due to decreased sales in the display and wireless backhaul areas, in addition to the termination of part of KMD’s business, which was expected from the time of its acquisition, despite increased sales of submarine systems. Adjusted operating profit (loss) worsened by 4.4 billion JPY year-on-year, to an adjusted operating loss of 3.3 billion JPY, mainly due to decreased sales. Others Revenue: 173.4 billion JPY （-11.8%） Adjusted Operating Profit (Loss): 7.2 billion JPY （-6.7 billion JPY） In the Others, revenue was 173.4 billion JPY, a decrease of 23.3 billion JPY (-11.8%) year-on-year.
Adjusted operating profit (loss) worsened by 6.7 billion JPY year-on-year, to an adjusted operating profit of 7.2 billion JPY(2) Overview of Financial Position Analysis of the condition of assets, liabilities, equity, and cash flows Total assets were 3,025.9 billion JPY as of September 30, 2020, a decrease of 97.3 billion JPY as compared with the end of the previous fiscal year. Current assets as of September 30, 2020 decreased by 108.7 billion JPY compared with the end of the previous fiscal year to 1,590.3 billion JPY, mainly due to the collection of trade and other receivables, despite increased inventories. Noncurrent assets as of September 30, 2020 increased by 11.3 billion JPY compared with the end of the previous fiscal year to 1,435.7 billion JPY.
This was mainly due to an increase in other financial assets resulting from the rising market value of equity securities. Total liabilities as of September 30, 2020 decreased by 179.7 billion JPY compared with the end of the previous fiscal year to 1,829.0 billion JPY. This was mainly due to a decrease in trade and other payables from the payment of materials cost and a decrease in interest-bearing debt from repayments. The balance of interest-bearing debt amounted to 631.0 billion JPY, a decrease of 44.5 billion JPY as compared with the end of the previous fiscal year. The debt-equity ratio as of September 30, 2020 was 0.64 (an improvement of 0.10 points as compared with the end of the previous fiscal year). The balance of net interest-bearing debt as of September 30, 2020, calculated by offsetting the balance of interest-bearing debt with the balance of cash and cash equivalents, amounted to 259.6 billion JPY, a decrease of 56.6 billion JPY as compared with the end of the previous fiscal year.
The net debt-equity ratio as of September 30, 2020 was 0.26 (an improvement of 0.09 points as compared with the end of the previous fiscal year). Total equity was 1,196.9 billion JPY as of September 30, 2020, an increase of 82.4 billion JPY as compared with the end of the previous fiscal year, mainly due to the execution of issuance of new shares by way of third-party allotment to Nippon Telegraph and Telephone Corporation ("NTT Corporation"), the increase in other components of equity resulting from the rising market value of equity securities, and the recognition of net profit for the six-month period ended September 30, 2020, despite payment of dividends. As a result, total equity attributable to owners of the parent (total equity less non-controlling interests) as of September 30, 2020 was 993.2 billion JPY, and the ratio of equity attributable to owners of the parent was 32.8% (an improvement of 3.7 points as compared with the end of the previous fiscal year). Net cash inflows from operating activities for the six-month period ended September 30, 2020 were 63.9 billion JPY, a year-on-year worsening of 41.4 billion JPY, mainly due to worsened profit before income taxes, despite improved working capital.
Net cash outflows from investing activities for the six-month period ended September 30, 2020 were 34.2 billion JPY, a decrease of 15.5 billion JPY year-on-year, mainly due to proceeds from sales of subsidiaries. As a result, free cash flows (the sum of cash flows from operating activities and investing activities) for the six-month period ended September 30, 2020 totaled a cash inflow of 29.7 billion JPY, a year-on-year worsening of 25.9 billion JPY Net cash flows from financing activities for the six-month period ended September 30, 2020 totaled a cash outflow of 14.3 billion JPY, mainly due to redemption of bonds, repayments of lease liabilities and dividends paid, despite proceeds from issuance of common shares and proceeds from issuance of bonds.
As a result, cash and cash equivalents as of September 30, 2020 amounted to 371.4 billion JPY, an increase of 12.2 billion JPY as compared with the end of the previous fiscal year.
(3) Outlook for the Fiscal Year Ending March 31, 2021 There is no change to the outlook for the fiscal year ending March 31, 2021, as previously disclosed on July 31, 2020.-9-2.
Condensed Interim Consolidated Financial Statements and Notes to Condensed Interim Consolidated Financial Statements
1. Going Concern Assumptions Not applicable.
2. Significant Accounting Policies Significant accounting policies adopted for the six-month period ended September 30, 2020 are consistent with those applied for the previous fiscal year ended March 31, 2020. Income taxes for the six-month period ended September 30, 2020 are calculated using reasonably estimated annual effective tax rate.
3. Segment Information
(1)General information about reportable segments The reportable segments of NEC Group ("the Company" or "NEC") are determined from operating segments that are identified in terms of similarity of products, services and markets based on business, and are the businesses for which the Company is able to obtain respective financial information separately, and the businesses are investigated periodically in order for the Board of Directors to conduct periodic investigation to determine distribution of management resources and evaluate their business results.
The Company has five reportable segments, which are Public Solutions, Public Infrastructure, Enterprise, Network Services, and Global businesses. Descriptions of each reportable segment are as follows: Public Solutions business mainly provides Systems Integration (Systems Implementation, Consulting), Maintenance and Support, Outsourcing / Cloud Services, and System Equipment, for Public, Healthcare, and Regional industries. Public Infrastructure business mainly provides Systems Integration (Systems Implementation, Consulting), Maintenance and Support, Outsourcing / Cloud Services, and System Equipment, for Government, and Media industry. Enterprise business mainly provides Systems Integration (Systems Implementation, Consulting), Maintenance and Support, Outsourcing / Cloud Services, and System Equipment, for Manufacturing, Retail, Services and Finance industries. Network Services business mainly provides Network Infrastructure (Core Network, Mobile Phone Base Stations, Optical Transmission Systems, Routers / Switches) and Systems Integration (Systems Implementation, and Consulting), and Services & Management (OSS/BSS, Service Solutions), for telecom market in Japan. Global business mainly provides Safer Cities (Public Safety, Digital Government), Software Services for Service Providers (OSS/BSS), Network Infrastructure (Submarine Systems, Wireless Backhaul), System Devices (Displays, Projectors), and Energy Storage System.
Notes: OSS: Operation Support System, BSS: Business Support System (2)Basis of measurement for reportable segment revenue and segment profit or loss Segment profit (loss) is measured by deducting amortization of intangible assets recognized as a result of M&A and expenses for acquisition of companies (financial advisory fees and other fees) from operating profit (loss). Intersegment revenues are made at amount that approximates arm’s-length prices
Notes:
1. "Others" mainly includes businesses such as business consulting and package solution services for the six-month period ended September 30, 2019 and 2020.
2. "Reconciling items" in segment profit (loss) includes amounts not allocated to each reportable segment that consist principally of corporate expenses of 26,558 million JPY and 19,852 million JPY for the six-month period ended September 30, 2019 and 2020, respectively. Corporate expenses are mainly general and administrative expenses and research and development expenses incurred at the headquarters of NEC.
Notes:
1. "Others" mainly includes businesses such as business consulting and package solution services for the three-month period ended September 30, 2019 and 2020.
2. "Reconciling items" in segment profit (loss) includes amounts not allocated to each reportable segment that consist principally of corporate expenses of 18,248 million JPY and 12,354 million JPY for the three-month period ended September 30, 2019 and 2020, respectively. Corporate expenses are mainly general and administrative expenses and research and development expenses incurred at the headquarters of NEC.
(4)Information about revising reportable segments From the first quarter of the fiscal year ending March 31, 2021, the Company’s descriptions of the reportable segments have been revised based on a new performance management system and a new organization structure effective as of April 1, 2020.
Under the former organization structure, among the products and services provided by each business unit to customers, products and services managed by other business units were recorded as revenue in the segment to which the business unit managing the products and services belonged. However, sales revenue of products and services are now recorded in the business unit providing products and services to customers.
Along with this, the "System Platform" segment is no longer an operating segment, and, excluding revenue recorded in other operating segments, revenue previously recorded in the "System Platform" segment, is now included in "Others". NEC also made segment changes due to organizational reforms and changes in the management system of subsidiaries that have been implemented to accelerate business development related to digital transformation (DX) and strengthen business execution capabilities by integrating businesses with compatibility.
In connection with this revision, segment information for the six-month period ended September 30, 2019 and the three-month period ended September 30, 2019 has been reclassified to conform to the presentation of the revised segments for the fiscal year ending March 31, 2021.4. Equity (1)Increase in equity due to issuance of new shares and disposal of treasury shares by way of third-party allotment The board of directors of the Company passed a resolution as of June 25, 2020, to issue 12,376,600 new shares and dispose of 647,000 treasury shares (a total of 13,023,600 shares) at a price of 4,950 JPY per share, or 64,467 million JPY in total, to NTT Corporation by way of third-party allotment. The board of directors also passed a resolution as of the same date, to execute a capital and business alliance agreement with NTT Corporation, and executed the agreement on the same date.
The payment for the shares has completed on July 10, 2020.
(2)Breakdown of other components of equity A breakdown of other components of equity as of March 31 and September 30, 2020, is as follows:
6. Subsequent Events Conclusion of a stock purchase and sale contract The board of directors of the Company passed a resolution as of October 3, 2020 to acquire all of the shares of WP/AV CH Holdings I B.V. ("WP/AV CH Holdings I"), which owns 100% share of Avaloq Group AG ("Avaloq"), a leading Swiss financial software company. This resolution is accompanied with the conclusion of a stock purchase and sale contract with Avaloq’s shareholding association, and a shareholder of WP/AV CH Holdings I that is indirectly wholly owned by funds managed by Warburg Pincus LLC.
Overview of this acquisition is as follows:
(1)Purpose of Acquisition The acquisition of Avaloq will provide NEC with digital finance software and domain knowledge as it enters into the field globally and strengthens its business in the digital government field.
(2)Amount of Acquisition The acquisition is expected to be worth 2.05 billion Swiss francs (approximately 236.0 billion JPY).
(3)Schedule of Acquisition The acquisition is expected to be executed by April 2021.