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ANNUAL REPORT 2018

Editorial Policy

Since 2016, NEC Networks & System Integration
Corporation (NESIC) has been issuing its Annual
Report as an integrated report with its CSR report.
For the 2018 Annual Report, we have reported on awide range of corporate activities, including formulating a business strategy for the creation and provision of social value and for our growth over the
medium term as well as the initiatives we pursue
under that strategy.
Referring to various types of reporting guidelines,
we strive to provide information that stakeholders
across a wide spectrum will find valuable, in theinterests of providing a better understanding of the
NESIC Group. We would like for this report to beread as widely as possible, and welcome opinions
and comments.
Full details, including our financial results andmedium-term business strategy, are available on the“Investor Relations” section of our website. Further
details of initiatives relating to corporate social
responsibility meanwhile are available in the“CSR” section.

Period Covered

April 1, 2017 to March 31, 2018
(Some information related to the period followingthat noted above is also included.)Contents
01

Introduction

10

NESIC in Daily Life

Strategy and Value Creation Mechanism
12

Message from the President

18

History of Change

20

Social Value Creation Model

Earnings Trends and Financial Strategy
22

Financial & Non-Financial Highlights

24

Financial Base

25	
Review of Performance in the
Fiscal Year Ended March 31, 2018

Scope of Report

NEC Networks & System Integration Corporationand consolidated subsidiaries

Guidelines

	International Integrated Reporting Council (IIRC)
Integrated Reporting Framework	Global Reporting Initiative (GRI)	ISO 26000 (Guidance on social responsibility)

Contact	NEC Networks & System Integration Corporation
	CSR Promotion & Corporate Communications
Division	Investor Relations
http://www.nesic.co.jp/english/ir/	Corporate Social Responsibility
http://www.nesic.co.jp/english/csr/

Disclaimer

This report contains forecasts, outlooks, targets,plans, and other forward-looking statements
concerning the business performance, financial
condition, and other aspects of the management of
the NEC Networks & System Integration Corporation
Group. These forward-looking statements are basedon information NEC Networks & System Integration
Corporation had as of the time this report was
prepared and on certain premises judged to bereasonable. These judgments and premises, by
their nature, are subjective and characterized byuncertainty. Furthermore, forward-looking statements are not guarantees of future results andactual performance could be greatly affected byvarious factors.

ANNUAL REPORT 2018

Special Feature
26	Increasing Corporate Value throughWork-Style Innovation

Management Resources
30

Strengthening Management Resources

32

Message from the Senior Vice President

32

Human Resources and Organizational Climate

34

Technologies and Expertise

35

Business Bases Spread Across Japan

37

Relationships of Trust with Stakeholders

Corporate Governance38

Message from the Chairman

39

Corporate Governance42

Dialogue on NESIC with Outside Directors

46

Directors & Corporate Auditors

48

Corporate Overview

49

Stock Information

50

Financial SectionOur Vision
NEC Networks & System Integration Corporation Group Statement
The NEC Networks & System Integration Corporation Group enables communities
throughout the world to enjoy a safe, secure and plentiful tomorrow by continuallyfacilitating more welcoming and convenient communications, and supportinga connected society, from the floor of the ocean to the far reaches of outer space,with proven technologies and reliable services cultivated over many years.

Corporate Message

ANNUAL REPORT 201801

Our Businesses
Since its founding as a telecommunications construction company in 1953,
the NEC Networks & System Integration Corporation (NESIC) Group has expanded business fields in tune
with changes in the times and technologies. Today, as a “communications system integrator,”
the Company comprehensively supports the communications environments of its diverse customers
such as companies, telecom carriers, governments, and social infrastructure providers,from system installation to daily support service.

Enterprise Networks
Business

Carrier Networks
Business

Social Infrastructures
BusinessEnterprise Networks Business
NESIC offers comprehensive services that include installation, operation, maintenance, and outsourcing for networks, IT, and otherinformation communications technology (ICT), which are essential
to corporate activities. Additionally, the Company supports diverse
work styles that address social issues, such as balancing work withchildcare or nursing care, while proposing work-style innovationthat leads to greater productivity by developing frameworks that
foster collaboration within and outside of companies through ICT,and by innovating offices through a combination of ICT and officespace design.

Carrier Networks Business
NESIC supports daily communication with network design, verification, and system integration, as well as operation and maintenanceservices for telecom carriers. We also contribute to greater convenience in society by providing new communications services, suchas the Internet of Things (IoT), while leveraging our highly reliable,
large-scale network technology, which are assets developed in ourbusiness with telecom carriers.

Social Infrastructures Business
NESIC helps make daily life safer, more secure, and more comfortable through system integration, installation, maintenance, monitoring, and a wide array of other services for the ICT infrastructureused by central and local governments, broadcasters, expressway
and railway operators, and other providers of social infrastructure.

Breakdown of Net Sales in the Fiscal Year Ended March 31, 2018
OthersSocial Infrastructures Business

3%

32

Carrier Networks Business

41

%

%

Enterprise Networks Business

24%

ANNUAL REPORT 201803

Our Strengths
NESIC’s businesses are unique in that they entail the comprehensive provision of services extending
from planning to installation and daily support for a broad range of customers that include companies,
telecom carriers, governments, and social infrastructure operators. While putting the customer first,
we have accumulated unique strengths in all of our businesses.

Ability to Provide
a Broad Range of Services

Business
Development
Capabilities

Technological
Capabilities

Broad Business Fields andCustomer Base

Ability to Provide a Broad Range of Services

Business Development Capabilities

Comprehensive Services as an Integrator ofMultiple Vendors

Nationwide Service Network

NESIC offers comprehensive services from equipment
selection to system design, integration, operation,
maintenance, and outsourcing. In addition to using
reputable NEC products for networks, NESIC sources
products and technologies from a broad range ofvendors including venture firms in accordance withcustomer needs. The Company strives to provide
optimal solutions to customers through unique,meticulous, and comprehensive services.

NESIC has put in place a robust service structure forserving its customers across Japan, including its
nationwide network of sales bases, operation centersthat cover network operations to security monitoring,and comprehensive technical centers that coverlogistics and technology services. Our 24/7 full-service
structure is able to dispatch people and deliverproducts within two hours anywhere in Japan—aunique strength that underpins public infrastructure
supporting daily safety, security, and convenience.

We Even Do This
Domestic Service BasesNESIC combined a venture firm’s autonomous
robot with networks using its system integration
capabilities to deliver amenity goods and beverages
to guest rooms in hotels using elevators.

Over

400 locations in Japan

Technological Capabilities

Broad Business Fields and Customer BaseA System Integrator with Construction
Capabilities

From the Ocean Floor to the Far Reaches ofOuter Space, From Government Agencies toPrivate Companies

NESIC has built a unique position as a system integrator with construction capabilities by fusing
together its accumulation of construction capabilities as a telecommunications construction company
since its founding with its ICT technologies in tune
with the changing times. For example, NESIC is
involved in the design and construction of highly reliable core networks in addition to the installation ofmobile base stations for telecom companies. Moreover, NESIC is also involved in the construction of
spaces and facilities that take full advantage of ICT
for offices.
Employee Qualifications
Employees with managing engineer or
technical supervisor qualifications

Over

1,500

NESIC is uniquely involved in a broad range ofbusiness fields related to communications, startingwith corporate ICT, from telecommunications
networks 8,000 meters under the ocean to operating satellites and probes in the far reaches of outerspace. Accordingly, NESIC’s customers also range
from government agencies to social infrastructure
providers, telecom carriers, and a variety of companies. This results in the accumulation of extensive
know-how and stabilization of business.
We Even Do ThisNESIC has developed and installed submarine
seismometers by placing sensors on cablesin the ocean in order to rapidly collect andtransmit data on earthquakes and tsunamis.

Employees with advanced ICT qualifications

Over

700

ANNUAL REPORT 201805

Our Focus Areas
Under the current medium-term management plan, which ends in the fiscal year ending March 31, 2019,
NESIC aims for further growth as a “communications system integrator” by
maximizing its assets and leveraging the strengths it has refined in its three focus business areas.

“EmpoweredOffice”
Work-style Innovation Solution Business

IoT/MVNO Business

Cyber Security Business

Service

Broadcasting and
CATV Business

Infrastructure

GlobalOutbound Business

Disaster Prevention Business
Inbound Business
Mega Solar Power Plant
Construction BusinessService Business Area

The service business is a core business area that brings stable growth to the Company overthe longer term. We are strengthening and expanding the service business in the B-to-B fieldto help our customers create and improve their enterprise value through initiatives including
work-style innovation that addresses social issues and increases productivity.

Main Business Fields“EmpoweredOffice” work-styleinnovation solution businessWe propose new ideas for efficient andhighly productive ways of working that
free employees from the workplace, using
the latest technologies in AI (artificial intelligence) and RPA (robotic process automation) while leveraging the practicalknow-how we have gained from reforms
to our own work style since 2007.

Cyber security business
We rely on our achievements with our
extensive customer base and the Security
Operations Center (SOC), our support
service network, to protect the networksof our customers with rapid responsiveness and highly accurate analysis byoperating networks and monitoring
security.

IoT/MVNO (Mobile Virtual
Network Operator) business
NESIC provides innovative value tocustomers with its uniquely integrated
services, from equipment installation to
network connectivity and fine-tuning, as
well as equipment maintenance, data
accumulation and analysis in data centers, and flexible, highly secure network
services.

Infrastructure Business Area

The infrastructure business is an area where we respond to the ebbs and flows of investments in distinct fields. We aim to expand this business by concentrating on fields that arelikely to see brisk investment, such as the conversion to optical fiber in CATV for streamingnext-generation 4K broadcasts, radio systems for disaster prevention to ensure safety during
natural disasters, and the construction of mega solar power plants following revisions tofeed-in tariff (FIT) laws.
Main Business Fields

Broadcasting and
CATV businessWe are aggressively addressing demand
for upgrading terrestrial digital broadcasting equipment and converting to opticalfiber in CATV for streaming next-generation
4K broadcasts.

Disaster prevention business
NESIC proactively proposes ideas tounderprepared local governments for
ensuring safety and security in the eventof a natural disaster, while tapping into
renewal demand for radio disaster prevention systems.

Mega solar power plant
construction business
NESIC is moving aggressively to filldemand for the construction of mega
solar power plants in the wake of revisions
to feed-in tariff (FIT) laws, leveraging its
strengths in comprehensive services fromconstruction to maintenance of power
plants as well as its relations with financial companies.

Global (Outbound / Inbound) Business Area

Overseas, demand has strengthened for the construction of infrastructure, especially within
the ASEAN region. Moreover, an increasing number of foreign tourists visiting Japan has
expanded business opportunities in airports, public transportation, hotels, and tourist destinations. NESIC aims to expand both the outbound business for overseas customers and theinbound business for accommodating tourists from foreign countries.
Main Business Fields

Outbound business

Inbound businessWe aim to expand our outbound business throughlocal subsidiaries in mainly the ASEAN region,
where infrastructure investment has been robust in
mobile communications networks and other areas.
We will also leverage our strengths in Japanese federations to participate in Official Development
Assistance (ODA) projects for airports, railways,
and other network-related infrastructure.

We intend to expand our inbound business by tapping into business opportunities presented by the growing number of foreign tourists coming to Japan. The
Company supports the provision of hospitality through a wide range of systems
and services for hotels, including PBX (private branch exchange), guest room
management systems, and Wi-Fi, as well as through ICT infrastructure and information services for various tourism settings, including Visual Docking Guidance
Systems (VDGS) at airports, information transmission in buses and trains, andother information services at tourist destinations.

ANNUAL REPORT 201807

Taking on new businesses
with our system integration

capabilities

Our corporate culture takes on
new business challenges
without fear of failure.

P14

Launch of Companywide

digital transformation(DX) project
We are creating new businesses withstate-of-the-art technologies in
AI, IoT, and RPA.

P15, 34

Growing as a “Communications
System Integrator ”

Accelerating global businessdevelopment
We are developing new business in
Myanmar with our local subsidiary.

P15, 21

Advancingopen innovation globally
NESIC inspires innovation bycollaborating with venture firms
around the world through its own
Corporate Venture Capital (CVC) Fund.

P16, 35, 36
08

ANNUAL REPORT 2018

Ricky the autonomous delivery robot works as an “employee” of the Company.

Over 10 years ofwork-style innovation
We continue to put into practice our own
work-style innovation such as rolling out
telework throughout the Company.

P7, 15, 26

Business development from theperspective of women
Female employees engaged ina project that led to the developmentof telework solutions.

P33

We are a “communications system integrator” that is constantly designing new ways ofcommunication. With the aim of providing more value to customers, we will continue toinnovate with the inclination for innovation that is embedded in our DNA.

Expanding businessfields via M&A
We aim to develop new businesses
through M&A to acquire resources
we do not have.

P19

15 years of ongoingcost reforms

Ongoing cost reforms,
including increasing the efficiency ofprocesses, are a part of our DNA.

ANNUAL REPORT 201809

NESIC in Daily LifeNESIC Contributes to a Safe, Secure, and Plentiful
Tomorrow in Various Contexts of Daily Life.
1 Broadcasting2 	Work-Style Innovation

3 	Airports

4 Hotels

Construction, operation,and maintenance of digital
TV broadcasting facilities
and relay stations, andstudio facilities, as well as
installation of fiber-optic
cable for next-generation
4K and 8K broadcasting.

Proposal of collaborative work concepts that marshal
intelligence from within and outside of companies and forthe creation of new ideas, using ICT as a tool to facilitate
work styles unrestricted by location, such as working in theoffice or from home, while increasing work efficiency withstate-of-the-art technologies including AI, IoT, and RPA.

Visual Docking Guidance
Systems (VDGS), airport
information, and a broadarray of other services.

Comprehensive hotel solutions such as telephones
and switching equipment,room management systems,
and systems for providing
guests with information.

3

1

4

2

5

8

9

6

7
7

5 	Mobile Base

Stations

Installation of mobile basestations indispensable fordaily communication via
smartphone and flip
phone, and overall network support, together
with system integration ofcore networks.

10

ANNUAL REPORT 20186 	Fire-fighting &Ambulance

Construction of command
systems and radio systems
enabling rapid responses
to 119 emergency calls,
and the provision of multilingual call center services.

7 Railways and Roads

8 Disaster Prevention

9 	Shops andSupport for public transportation by constructing
and maintaining telecommunications networks andother systems for railway
and highway traffic control.

Warning systems that provide information at timesof emergency (earthquake,tsunami, typhoon, etc.) via
simultaneous announcements over disaster prevention communication
systems for greater safety
and security in daily life.

Creation of convenient
user environments forcustomers including Wi-Fi
networks, information
distribution systems, andvalue-added video
services.

Public Facilities

Leveraging the strengths derived from our technological capabilities, ability to provide a broad range of services,­business development capabilities, and broad business fields and customer base, we deliver comprehensive solutions
that improve the productivity and solve the issues of our customers.

10 Oceans

11 Space

12 Local Governments

13 	Mega Solar Power Plants

Installation of submarine
cables that support international communication,and support for earthquake warning systems
by integrating submarine
seismometers.

Support for control systems used to communicate with and operate
asteroid exploration, andother types of satellites
and probes.

Provision of networks usedby local governments toprotect citizens, provide
municipal services, andpromote citizen convenience and security, andtourism information
services for local
revitalization.

Construction of mega solar power
plants, drawing on capabilities
developed over many years, andsolar panel maintenance andmonitoring services capableof pinpointing panel damage.

11

10

12

13
14

17
16

18

15

14 Plants
Provision of IoT systems
able to detect and manage
the location of people andthings in real time at plants
and other production sites.

15 	Network Total

Operation Centers24/7 customer network
services ranging from security monitoring to network
operation.

16 	Comprehensive

Technical Centers

Comprehensive technicalservices ranging from
distribution control functions that run 24/7, to
new-technology evaluationand SI, and maintenanceand repair.

17 Data Centers

18 Contact Centers

Keeping of customers’ IT
assets in secure, robust
environments, and provision of wide-ranging
operation, outsourcing,and cloud services.

ICT system failure
response, help desk, andother support services forcustomer system administrators and system users,
and interpretation services
for multiple languages.

NESIC’s service platform

ANNUAL REPORT 201811

Message from the President

12

ANNUAL REPORT 2018

With innovation as a driving force,
we are accelerating change with theaim of achieving sustainable growth.

Yushi Ushijima
President

Advancing Reforms towarda “Strong and Attractive Company”
Upon becoming President, I declared that NESIC would
turn into a “strong and attractive company” able to growboth in size and profitability by providing highly competitive services. This is based on the belief that sustainablegrowth is unattainable without changing our business amid
the rapid changes in the operating environment. There isno future in maintaining the status quo. Although it may
sound extreme, I would not mind changing everything
except our core value of contributing to society throughcommunications technology, which is embedded in theGroup Statement and Corporate Message.
I joined NESIC in 1984 and built up a diverse rangeof experience throughout my career, marketing for customers in various industries and managing subsidiaries
before being appointed President of NESIC in 2017.
Although I thought I knew NESIC very well, I was
reminded of its unique strengths after looking at NESIC
from the perspective of top management through an
objective view of a subsidiary. These unique strengths
include its broad base of customers from various industries and its diverse range of technologies. During myfirst year as President, I initiated change and took on
new challenges based on the belief that the quickest
way to making NESIC a strong and attractive company
was to further refine these strengths and leverage themto their fullest. An example of the new initiatives wehave started is the launch of a digital transformation(DX) project as a Companywide initiative to promote theuse of state-of-the-art technologies such as AI and IoT.
We also engage in open innovation with startup firms
through venture investment funds. However, we have
only just begun our transition into a strong and attractive company.

ANNUAL REPORT 201813

Message from the President

Refining Our Strengths throughout History
NESIC was established in 1953 as a spin-off of NEC’s
telecommunication construction business section. In the
30 years or so since its founding, NESIC has refined its
technological strengths to levels that satisfy the stringent
requirements and expectations of customers for the
NEC Group, centered on telecommunications projects inJapan and overseas. Having put into place a network ofsupport and service bases in Japan, NESIC is able tooffer comprehensive services related to telecommunications infrastructure in the country, from construction tooperation and maintenance.
Back then, operations centered on NEC-related businesses, so the business structure was susceptible tochanges in the external environment, such as capital
investment trends at telecommunications companies. In
light of this exposure to changes in the external environment, backed by its extensive installation technologies
developed through telecommunications projects, NESIC
moved on to ICT technologies with the advent of Internet Protocol (IP) in communications technology. NESIC
has endeavored to build a stable earnings portfolio byexpanding into new business domains, including systems integration and outsourcing service that target
new customers, such as private-sector companies aswell as the public domain, including local governments,
transportation providers, and electric power companies.
Our headline EmpoweredOffice business is a uniquebusiness that NESIC can undertake thanks to its accumulated ICT technologies as well as its technologicalcapabilities in construction ranging from the wiring of
offices to the installation of equipment and office design.
This is why NESIC is able to turn ideas into reality for
office environments that invigorate communications
within companies with easy-to-use ICT. As businessgrew with customers involved in social infrastructure,such as government ministries and agencies, local
governments, and public utilities, NESIC reinforced its
24/7 nationwide support and service network. NESIC
began to handle a wider range of products from various

We have worked to stabilize
earnings by continuing to expand
our customer base.

14

ANNUAL REPORT 2018

vendors, including overseas companies, and this also
contributed to the acquisition of new customers.
NESIC’s history has been one of business transformationin tune with the times, with a corporate culture unafraidof change.
Another unique aspect of NESIC’s corporate culture
is its spirit of hospitality that puts customers first, garnered from on-site interactions with customers in various
industries. Working with multiple vendors, NESIC offers
diverse products made in Japan and overseas to satisfy
customer requirements with their best interest in mind.
Another unique strength of NESIC is its solid relationshipwith customers in a broad range of industries, which has
been carefully nurtured over many years.
Our corporate culture, which puts customers first andis unafraid of change, as well as the comprehensive
strengths that have contributed to our sustainable development as a company, are the engines for future growth.

Innovation That Continues to Create
The technologies behind the fourth industrial revolution
are often referred to as CAMBRIC (cloud, AI, mobility, Big
Data, robotics, IoT, and cybersecurity). The major corporations that make full use of these technologies haveincreased their presence across national borders andindustrial boundaries. Innovative services created byyoung startups have cannibalized traditional industries.
The shift from products to services has also gained
momentum in various industries.
While maintaining and further honing its strengths,
NESIC is taking on the challenge of creating a higher
dimension of service quality and speed with unconventional ideas that are truly helpful to its customers. Fromthe perspective of our customers’ customers, in otherwords, from the standpoint of end users and society, we
are accelerating innovation by aggressively incorporatingstate-of-the-art technologies and maximizing our strengths.
While reinforcing existing businesses, NESIC is making
concerted efforts to create new businesses andexpand markets.

Strengthening Existing Businesses
by Reviewing from Scratch
Existing businesses will continue to be a critical part ofour earnings foundation over the medium to long term.
In a traditional order-based business with specification
sheets, however, the value that can be provided tocustomers is limited. For this reason, NESIC aims to
sharpen its competitiveness by reviewing every aspectof its business from scratch.
The EmpoweredOffice business is no exception.
This is a headline business that increases the Company’s
brand recognition, and has achieved tremendous success.
When widening the scope of the business to a framework of services that advance work-style innovation,
we believe it is increasingly important to come up withideas that go beyond office environments. It takes
courage to reassess past successes, but by reviewing
successful businesses from scratch, we are able to makethem even stronger.
NESIC aims to further strengthen its technologicaland solutions capabilities. The Company is honing its
technological strengths by investing heavily in the training of its engineers. Rather than seeking to satisfy customers within the parameters of specification sheets, wewill leverage our broad business expertise accumulated
to date to provide customers with high added value. At
the same time, we will improve our solutions capabilities by bolstering our marketing activities.
Acceleration of Overseas Business Centered
On the ASEAN Region
The expansion of our overseas business is also an
important theme for realizing strong growth. When I joined
NESIC in the 1980s, the overseas business comprisedroughly half of the Company’s business. The Company’s
overseas business, which centered on the installation of
telecommunications equipment, has contracted due toa decrease in exports of telecommunications equipmentfrom Japan alongside the advent of IP in communications
technology. Even today, however, the spirit of taking on
overseas business development lives on in our DNA,and we have strong relationships with local customers
in a number of regions. From this foundation, we will­leverage our expertise in project management and ouraccumulated technological capabilities. In particular,
NESIC is focusing on the ASEAN region where investment
in social infrastructure is advancing at a rapid pace,with the intention of expanding business throughlocal subsidiaries.
In Myanmar, where the Company started full-fledged
operations of the telecommunication infrastructure construction business in 2015, NESIC established a local
joint venture in 2016 that has gotten off to a great start.
Looking ahead, we see business opportunities in offshore software development, along with growth in local
businesses alongside telecommunications companies
and governments.

NESIC is fully leveraging its
strengths to provide
new, easy-to-use products
and services.

Aggressively Introducing World’s Leading
Technologies in New Businesses
One characteristic of the Company’s businesses is its
approach to providing services that are easy to use forits customers by leveraging its expertise gained frompractical experience, while utilizing the latest technologies to the fullest extent and properly assessing thesetechnologies. From its broad reach into business fields,
NESIC has nurtured technologies within each section forenterprises, telecom providers, and social infrastructure
providers, including government agencies. However, inorder to address diversifying needs and advancing technologies, NESIC must be able to further deploy its comprehensive capabilities as a company. Based on thisconcept, our first round of initiatives is embodied in the
Companywide digital transformation (DX) project, which
commenced in April 2018. By bringing together engineers in DX technologies, who had been scatteredacross business divisions, the DX project aims to create
new services that make use of state-of-the-art technologies while mutually sharing knowledge and innovating
together. Plans call for DX technologies to first be introduced in businesses related to work-style innovation,and then be applied to social infrastructure and services
for governments in the future.

ANNUAL REPORT 201815

Message from the President

Working with external companies is also an importantpart of the innovation process, allowing us to aggressively utilize the knowledge and resources of our external partners. As a part of this effort, NESIC established
the Corporate Venture Capital (CVC) Fund in January
2018. Its first investment was in Boomtown Network, astartup in the U.S. Boomtown Network provides a newkind of support service leveraging state-of-the-art
technologies based on the sharing economy concept.
NESIC plans to utilize its business know-how and create
similar businesses in Japan that leverage its more than
400 support service bases across the country. We are
spreading the seeds of innovation across a broad fieldof businesses while honing our sensitivity to advanced
technologies. One of our strengths is our advanced
service and marketing network that covers all of Japanfor supporting infrastructure that protects the safety andsecurity of society and the networks of telecom providers.
There is an extremely good complementary relationshipbetween startups that possess rare state-of-the-art technologies and NESIC, which has the ability to integrate,deliver, and support systems for these technologies thatare easy for customers to use. Through open innovation,
we aim to create a series of new businesses andachieve a new growth trajectory that breaks out frompast trends.

16

ANNUAL REPORT 2018

Focusing on Issues for Growthin First Year as President
In the fiscal year ended March 31, 2018, after I became
President, the Company focused on identifying andaddressing issues in order to advance the growth strategy I have discussed so far.
One issue is maximizing the use of our resources.
NESIC has three core business fields, and the technologies in each field seem to be drawing closer together.
The Companywide DX project has already shown results
since its launch. Amid a recovery in investment in basestations at telecom providers, we took steps to address
issues related to resources by visualizing how internal
resources are deployed and optimizing construction
resources with the social infrastructure business. Next,
NESIC worked to improve the health of overseas subsidiaries during a lull in demand due to the postponementof projects and other factors. While addressing theseissues, the Company worked to increase the ratio of
high-value-added businesses, such as systems integration and services, in the Enterprise Networks Business,while continuing with reforms to the cost structure in
the Carrier Networks Business.
As a result of these initiatives, in the fiscal year ended
March 31, 2018, NESIC posted growth in both net sales
and operating income for the first time in three years.

Shifting Gears toward Growthin the Fiscal Year Ending March 31, 2019

Becoming a Strong Company andConsistently Contributing to Society

The fiscal year ending March 31, 2019 is positioned asa year for strengthening growth measures and solidifying
NESIC’s foundation for becoming a “strong and attractive
company,” with an eye on growth over the medium tolong term under the next medium-term management
plan. We will focus on creating “No. 1” and “Only 1”
businesses that are unique to NESIC with a competitiveedge not found at other companies. The Company isreinforcing businesses in state-of-the-art technologicalfields while accelerating the creation of new businesses
by aggressively deploying DX technologies and utilizing
the CVC Fund.
We expect year-on-year growth in both sales andprofits in the fiscal year ending March 31, 2019, basedon our forecast for net sales of ¥280 billion and operating income of ¥11.5 billion for an operating margin of
4.1%. Unfortunately, this means we do not expect toreach the targets set forth in our current medium-term
management plan, owing mainly to lackluster growth inour global business. Another reason for not expecting toreach our targets is in aiming to get off to a better startunder our next medium-term management plan, we
have budgeted for aggressive upfront investments. The
Company plans to spend around ¥2 billion on developing new services that utilize DX technologies, centeredon the work-style innovation business, as well as training
engineers and investing in internal IT.
As orders have been building up for major projects
including the construction of mega solar power plants,
we will make every effort to steadily bring these projects
to completion. These large-scale projects are opportunities to polish our technologies and hone our project
management skills, and we will take this know-how andapply it to other situations.

The Sustainable Development Goals (SDGs) and otherglobal trends have put more demands on companies tohelp solve social issues through their business activities.
NESIC is helping to solve diverse social issues throughits core businesses, such as by promoting work-styleinnovation, building safe and secure social infrastructure,and spreading the use of ICT worldwide. The Company
will also create new businesses that contribute tosolutions for social issues, such as future labor shortages
in Japan. In order to remain a company where employees
can work toward their dreams while continuing to reliably
help customers and society, we must truly become a“strong and attractive company.”
With innovation as an engine, NESIC will try to rapidly
create new businesses with a startup mentality andimplement change in order to realize its mission ofcontributing to society through communications technologies. We will strive to meet the expectations of our
stakeholders, including shareholders and investors. We
ask for your continued support and encouragement.

NESIC must become a“strong and attractive company”
in order to continue contributing
to the development ofa sustainable society.

The fiscal year ending March 31,
2019 is positioned as a year forsolidifying the foundations forevolving into a “strong andattractive company.”

President

ANNUAL REPORT 201817

History of Change
NESIC has continued to change in tune with the times, adding new strengths and honing existing strengths with afocus on creating value through the innovation and development of communications technology. From our founding
business of telecommunications infrastructure construction to the provision of services that invigorate communication,
we aim to create new value throughout our broad business fields and customer base.

Changes in the Business Environment

1950s

1960s-1970s

1980s-1990s

Reconstruction after World War II. Eraof construction in broadcasting andtelecommunications infrastructure

Increase in international communications and satellite
communications, expansion in demand for telecommunications infrastructure construction worldwide

Telecom liberalization, birth of
New Common Carriers (NCCs)

Main Initiatives
Nippon Electric Installation Company established in a spin-off fromNEC Corporation

Constructed satellite
telecom infrastructure
for the 1968 Olympic
Games, in Mexico City

Changed the company nameto NEC System Integration &Construction, Ltd.
Listed on the Tokyo Stock
Exchange onstruced the firstC
television broadcasting
facility

Business for NCCs took on
significant scale
Received major orders fromnew private-sector communications companies

Constructed microwave
telecom infrastructure forfive Central Americancountries
 onducted first overseas
C
project (construction andinstallation of switchingequipment in thePhilippines)

 xpanded businessE
based on our strengths
in the total provision of
network integrationand support services
 pened the CustomerO
Support Center for theenhancement of customer support services

 cquired special
A
construction businessand general construction
business licenses forseven categories of
construction businessEstablished the first overseas affiliate, in Brazil

Constructed communications
equipment on Mt. Everest(enabling broadcast from thepeak of Mt. Everest for the
first time)

Over ¥10 billion
1974

Net Sales

Expanded the enterprise system integration
business

Over ¥100 billion
1989

Over ¥200 billion
1997

History of Change through Augmentation of Strengths
Growth as a Telecommunications

Growth with Construction Capabilities and Refinement of ICTInfrastructure Construction Company

Alongside advances in technology, NESIC broadened its reach in the

NESIC was established in a spin-off of the telecom-

telecommunications infrastructure field to mobile communications basemunications engineering division from NEC Corporationin 1953. NESIC steadily built up its construction
capabilities, centered on NEC products, while tapping
into growing demand for telecommunications

stations, etc. The Company also expanded business to provide ICT to­corporations by creating voice networks, enabling it to provide construction,system integration, and maintenance services. Accordingly, NESIC set up
sales bases across the country and broadened its customer base.

infrastructure in Japan and overseas.

Technological
Capabilities(Construction
capabilities)

18

ANNUAL REPORT 2018

Ability to
ProvideServicesTechnological
Capabilities(Construction
capabilities+ ICT)
Customer
Base
Business
Development
Capabilities2000s2010sAdvance of IP and broadband networks, integration ofcommunications and broadcasting

Expansion of the use of the cloud, IoT,
Fourth Industrial Revolution

Established nTOC (Network Total
Operation Center)

Rolled out EmpoweredOffice in all sections upon transfer of head office to­Bunkyo-ku, Tokyo (Iidabashi Head Office)NESIC’s industry sector classification in the stock market changed from“construction” to “information & communication”
Established sDOC (Service Delivery Operations Center)Established S-iDC (Strategic Internet
Data Center), NESIC’s first data centerImplemented initiatives in high-speed mobile networks and next-generation
broadcasting hanged the company name toC
NEC Networks & System Integration
Corporation

Launched MVNO service for IoT
Established CVC Fund to create
new businesses through open
innovation with venture firms

 tarted the EmpoweredOffice businessSand began its rollout in certain
sections¥292.2 billion
FY2015/3 (record high)¥267.9 billion
FY2018/3

Substantial Expansion of Business Fields, Enhancement of Support Service Network
NESIC has substantially expanded its business fields by aggressively pursuing M&A, including
a merger in 2007 with NEC Telenetworks Co., Ltd., a company with strength in the service field,
and turning Q&A Corporation, which operates contact centers, into a subsidiary in 2013. At thesame time, NESIC has built a robust service platform with a support service network of more than
400 locations around the nation. Moreover, its range of products and services has increased
considerably to include EmpoweredOffice, which leverages the Company’s strengths, as well as
MVNO for IoT applications.

Ability to
Provide a Broad
Range of Services

Technological
Capabilities(Construction
capabilities+ ICT)

Social Value
Creationthrough Core Strengths

Broad Business
Fields andCustomer BaseBusiness
Development
Capabilities

ANNUAL REPORT 201819

Social Value Creation Model
We provide diverse value to society by promoting advances in communications while continuing to design more
pleasant and convenient means of communications.

Strengthening
Management
Resources
Human
Resources &Organizational
ClimateTechnologies
and Expertise

Accumulated

Ability to Provide

Strengths

a Broad Range ofWhile remaining focused on its communications domain, NESIC createsvalue by spurring innovation in various
fields through combining its accumulated strengths.

Services

Business

Technological

Development

Capabilities

Capabilities

Broad Business
Fields andCustomer BaseBusiness
Bases Spread
acrossthe Country

Stakeholder
Relationships
Built on Trust
Financial
Base

20

ANNUAL REPORT 2018

Creating Value throughCombined Strengths

Creating Value through Communications

Examples of Value Creation
Leveraging Our Strengths
EmpoweredOffice Business
Please see pages 7 and 26.

Value to customers and society

Improving productivity andwork–life balance

Building social infrastructure offering
greater safety, security, and comfort

Promoting the global use of ICT

Reducing environmental impacts

Promoting the Use ofState-of-the-Art Technologies
Zoom is a collaborative work solutionthat enables effortless visual communications within and outside of companies.
Our autonomous delivery robots are put
to use in hotels and clinical settings.
In these ways, NESIC repackages theunique technologies of venture firms intoeasy-to-use formats by building out systems that take advantage of its customer
base and nationwide service network.
We aim to help create a more convenientsociety through state-of-the-art
technologies.

Expanding the use of renewable energy
Increasing business value by
expanding the use of ICT

IoT/MVNO Business

Value to employees

Realizing flexible,
satisfying work styles

Developing specialized
human resources that
promote business growth

Promoting diversity andmotivation

IoT connects various things over theInternet to exchange data. NESIC provides unique comprehensive services inthese fields, from the installation of “things”
to their connection to networks, andthen collects and analyzes data after
their installation, in addition to flexible
and highly secure communications overits communications line services (MVNO).
We aim to help create a more convenientsociety through such measures as using
data from industrial equipment to prevent
accidents before they happen and using
location data for people and vehicles tomitigate traffic jams.

Value to shareholders and investorsInfrastructure Modernization
Project in Myanmar
Increase corporate value
by expanding cash flow

Providing stable returns
to shareholders

NESIC has made a full-scale entry into
the market in Myanmar, which has been
undergoing rapid democratization andeconomic reform, achieving remarkabledevelopment. By developing business in
Myanmar, we are contributing to its job
creation, human resource development,
and information infrastructure development, helping to bridge the international
digital divide.

We will contribute to the achievement of the SDGs
by creating value through communications.

ANNUAL REPORT 201821

Financial & Non-Financial Highlights

Orders Received / Net Sales

Operating Income / Ratio to Net Sales(¥ billion)(¥ billion / %)

267.9
292.2
257.9
280.0
270.3 299.1
287.8
280.1
279.2
274.9

16.2

14.4

14.1

11.1

10.0
5.3

2014/3

Orders received

2015/3

2016/32017/3

2018/3 （FY）

Net sales

5.5

2014/3

2015/3Operating income

Net Income Attributable to Owners of the Parent /
ROE

5.0

2016/33.9

2017/3

4.1

2018/3 （FY）

Ratio to net sales

Total Assets / ROA(¥ billion / %)(¥ billion / %)

8.3

7.8
9.6

8.7

6.0

2014/3

2015/3

2016/3

8.2

7.0

6.5

2017/3

202.0

189.1

7.4

6.5

196.6

7.1

2018/3 （FY）

2014/3

Total assets

Free Cash Flow /Cash and Cash Equivalents at End of Year

208.1

8.3

7.6

Net income attributable to owners of the parent
ROE (return on equity)

197.5

2015/3

2016/3

5.1

2017/3

5.4

2018/3（FYE）

ROA (return on assets)

Owner’s Equity / Owner’s Equity Ratio(¥ billion / %)(¥ billion)
59.6
44.4

39.0

57.3

6.6

47.2

45.8

46.3

19.9

17.8

99.5

94.6

92.7

92.6

87.5

43.9

47.9

47.8

2.0

–1.5
2014/3

Free cash flow

2015/3

2016/32017/3

2018/3 （FY）

Cash and cash equivalents at end of year

2014/3

Owner’s equity

2015/3

2016/32017/3

2018/32017/3

2018/3（FYE）

Owner’s equity ratio

Cash Dividends per Share / DOE

Stock Price / TSR*(¥ / %)

(¥)
3,000

64

60

74

72

70

2,000

3.5

2014/3

3.5

2015/3

Cash dividends per share

3.8

2016/33.8

2017/33.8

2018/3 （FY）

DOE (dividend on equity)

1,000

0

2014/3

2015/3

2016/3（FY）（5 years ago）
（4 years ago）
（3 years ago）（2 years ago）（1 year ago）
68%

46%

24%

67%

32%

* Percentages represent the ratio of return under the assumption thatthe investment was made relevant number of years before FY2018/3.

22

ANNUAL REPORT 2018

Number of Employees at End of Year /Number of New Graduates

Average Overtime (per month) (Non-consolidated)(Hours)(Employees)

1,110

1,136
103

98
6,150

20.3

18.9

2017/3

2018/3 （FY）

6,328

27

33

2016/3

24.0

85

6,310

32

27
2015/3

102

6,328

25.6

1,329

1,262

2017/3

2018/3（FY）

2015/3

2016/3

Male employees
Female employees
Male new graduates
Female new graduates

Employees with Qualifications (Non-consolidated)

EmpoweredOffice Visitors(Employees)(Companies / Individuals)

1,900

1,385

2,026

1,412

2,177

1,471

7,599

2,272
6,170

6,113

6,108

1,515
2,248

2,131
515

614

706

757

2015/3

2016/32017/3

2018/3（FYE）

2015/3

Employees with advanced ICT qualifications
Employees with managing engineer or technical supervisor qualifications

Companies

Volume of Copier Paper Purchased (Non-consolidated)

2,427

2,146

2016/32017/3

2018/3 （FY）

Individuals

Number of Foreign Employees / Ratio of Women in
Management Positions / Ratio of Employees with
­Disabilities (Non-consolidated)(t)(Employees / %)
87

90

27

82

73

20

19
2.2
2.1

2.8

2.2
2.1

2.1

3.0
2.3

9
2015/3

2016/32017/3

2018/3 （FY）

2015/3

2016/32017/3

2018/3（FYE）

Number of foreign employees
Ratio of women in management positions
Ratio of employees with disabilities

Outside Evaluations
2015

2016

2017

2018

Top Hundred Telework Pioneers(Announced in November)

SNAM Sustainability Index (Announced in June)

Certified Health and Productivity Management
Organization (Announced in February)* Established in February 2017

ANNUAL REPORT 201823

Financial BaseFinancial and Capital Strategy

From our solid financial base, we aim to increase
corporate value while balancing aggressive growthinvestments with stable shareholder returns.
NESIC has designated ROE (return on equity) as a key
performance indicator from the standpoint of its goal
to improve corporate value by efficiently deploying thecapital received from shareholders.
Basically, NESIC aims to improve ROE by increasing
the earnings power of its businesses while being awareof the cost of capital. The Company has implemented
various measures with a focus on reforming the cost
structure by taking steps to reduce its cost of sales andshifting resources within a challenging business environment over the past few years. As a result, net sales andoperating income returned to positive growth in thefiscal year ended March 31, 2018 for the first time inthree years. ROE also improved from 7.0%, to 7.6%.
However, in order to increase our earnings power evenfurther, we believe a key point will be the creation ofstrong businesses in addition to ongoing measures.
In the fiscal year ending March 31, 2019, management
plans to invest about ¥2 billion in growth, including instate-of-the-art technology fields such as DX, as well as
in personnel training. At the same time, the Company
will promote management with an eye on the SDGs
(Sustainable Development Goals) and fortify businesses
in preparation for the next medium-term management
plan, which will commence in the fiscal year ending
March 31, 2020. With the growth investment, significant
growth is not expected for the fiscal year ending March
31, 2019 with targets of ¥280 billion and ¥11.5 billion
for net sales and operating income, respectively, management has designated it as a year for solidifying its
footing with the objective of improving corporate value
over the medium to long term. Accordingly, the Company intends to effectively and aggressively deploy its
financial resources.
Returning profits to shareholders is one of our mostimportant management issues. NESIC intends to provide
steady returns to investors who hold its shares over thelong term, and distributes dividends regardless of shortterm profits by focusing instead on DOE (dividend on
equity). Based on this policy, management distributed
a dividend of ¥74 per share for the fiscal year ended
March 31, 2018, an increase of ¥2 per share from theprevious fiscal year, and plans to increase dividends per
share, for the 12th consecutive year, to ¥76 for the fiscal
year ending March 31, 2019.
Ensuring a sound financial position is essential tomaintaining growth investments and realizing greater
shareholder returns. NESIC has a solid financial position
with an equity ratio of 48% and net cash* of ¥49.2 billion
as of March 31, 2018. Management is working to improve
cash flow and the balance sheet through earnings
expansion. While ensuring a healthy financial position,
the Company aims to balance aggressive growth investments with greater shareholder returns in its overall
objective of improving corporate value over the medium
to long term and achieving SDGs.
* Net cash: cash and cash equivalents (including marketable securities)
minus debt

Hiroyuki Sekizawa
Associate Senior Vice President in charge of finance & IR

Cash Dividends Per-Share

Net Cash / Owner’s Equity Ratio(¥)(¥ billion / %)

Stable expansion in shareholder returns
Plans to increase dividends for 12th
consecutive year

Ensure a financial base for growth investments
and greater shareholder returns
76
51.4

74
38.0

2007/3 2008/3 2009/3 2010/3 2011/3 2012/3 2013/3 2014/3 2015/3 2016/3 2017/3 2018/3 2019/3 （FY）
（Forecast）

2014/3

Net cash24

ANNUAL REPORT 2018

35.4

32.8

46.3

14

49.2

47.2

45.8
2015/3

2016/3

Owner’s equity ratio

47.9

2017/347.8

2018/3（FYE）

Review of Performance in the Fiscal Year Ended March 31, 2018

Review of Consolidated Results
In the fiscal year ended March 31, 2018, both consolidated net sales and operating income returned to positive growth for the first time in three fiscal years after
bottoming out in the fiscal year ended March 31, 2017.
Orders received increased thanks to the acquisitionof new large-scale mega solar power plants and major
projects from national and local governments. In addition
to increasing sales to telecom carriers, sales benefited
from a large-scale mega solar power plant ordered in
the fiscal year ended March 31, 2017, and sales expanded
in focus fields including work-style innovation-related
fields. As a result, net sales grew in all segments. On theearnings front, profits increased in each profit category,
thanks to higher sales and reforms to the cost structure.
Enterprise Networks BusinessNet sales increased 3% year on year, to ¥110.9 billion,
reflecting growth in EmpoweredOffice work-style innovation solutions thanks to brisk ICT investment in work-styleinnovation. Operating income also increased a strong¥2.0 billion from the previous year, to ¥10.8 billion,
owing to higher sales, an improvement in the sales mix
through a reduction in low-margin projects alongside
an increase in high-value-added projects, and ongoing
efforts to reduce cost of sales.
Carrier Networks BusinessNet sales expanded 5% from the previous fiscal year, to¥64.9 billion, as the Company proactively responded tocapital investment by telecom carriers to improve thequality of their telecommunications networks. Operating
income grew ¥1.4 billion, to ¥5.0 billion, reflecting higher
sales and ongoing benefits from cost restructuring,
including cuts in outsourcing expenses and deploying
production in-house. The operating margin improved 1.9
percentage points, recovering to a level roughly equivalent to when business was brisk with telecom carriers.
Social Infrastructures BusinessNet sales grew 3% year on year, to ¥85.2 billion, despitea decline in overseas business due to a lull in projects,
with contributions to sales in the civil engineering fieldfrom the large-scale mega solar power plants ordered in
the fiscal year ended March 31, 2017. Operating income,however, decreased ¥2.6 billion, to ¥3.4 billion, owing todeterioration in the cost of sales ratio due to the emergence of unprofitable projects. The Company aims to
improve profitability by reinforcing project management
while working to reduce its cost of sales.

(¥ billion)

FY2017/3

FY2018/3

Orders received

279.2

287.8

Net sales

257.9

267.9

Gross margin

16.5%

16.5%

Operating income(Ratio to net sales)

10.0(3.9%)

11.1(4.1%)Net income attributable toowners of the parent(Ratio to net sales)

6.5(2.5%)

7.4(2.7%)

7.0%

7.6%

ROE

109.6
8.1

2016/3

107.4

110.9
9.7

8.2

2017/3

2018/3（FY）

Ratio to net sales (%)

Net sales (¥ billion)

69.3

64.9

61.6

2016/3

Net sales (¥ billion)

7.7

5.8

5.1

2017/3

2018/3（FY）

Ratio to net sales (%)

96.3

85.2

82.4
9.9
7.3

4.0
2016/3

Net sales (¥ billion)

2017/3

2018/3（FY）

Ratio to net sales (%)

ANNUAL REPORT 201825

Special Feature

Increasing Corporate Value
through Work-Style Innovation
Work-style innovation is an important initiative that NESIC should prioritize from the dual perspectives of advancing
human resources and seizing business opportunities. In 2007, NESIC came up with the EmpoweredOffice concept of
combining ICT with its facility management capabilities, which include office furniture and office space design. NESIC
leverages the expertise it has accumulated by constantly putting work-style innovation into practice internally toprovide solutions and services to customers.

01

Start of Office Innovation: Full Reform of Head Office2007	Launched office innovation business EmpoweredOfficeInnovated a part of the Shinagawa Head Office2010	Started full reforms at head office on move to Iidabashi

Ten Years of Work-Style
Innovation at NESICThe Company has spread work-styleinnovation, which began with officeinnovation, from the head office tobases across the country, while

Main Outcomes (Compared with before moving to Iidabashi Head Office)advancing telework, which frees
employees from the office.

Office floor space		

32% cut

Electricity use		

52% cut

Copier paper		

60% cut

 ime employeesTfrom sales division spend
with customers		

10% increase

AwardsTelework Promotion Award (2008)
Nikkei New Office Award(2009: Shinagawa Head Office, 2011: Iidabashi Head Office)Example Solution
SmoothMeeting
Paperless meeting solution utilizing tablets

Gross Margin
(%)
20.0

17.5

16.5 %

15.0

13.1 %

Increasing efficiency andproductivity by putting
work-style innovation into
practice has led to steady
improvements in the
gross margin.

12.5

02007/3

26

ANNUAL REPORT 20182008/3

2009/3

2010/3

2011/3

2012/3

2013/3

2014/3

2015/3

2016/32017/3

2018/3

(FY)

01

02

03

Ten Years of Work-Style
Innovation at NESIC

Phase Two of Work-Style
Innovation

Providing Value to Customers
through Services

Office Innovation at Bases in Japan

Telework Initiatives

2012	Enacted office innovation at 13 bases in Japan andone base overseas

2015	Experimented with work-at-home setups forfemale employees raising children(Women’s Project)	Created offices at each base in tune with regional
characteristics

See P.33 “Promoting Women in the Workplace”

AwardsNikkei New Office Award

2016

Conducted telework experiments

2017

Rolled out telework Companywide(Two bases in 2013, four bases in 2014, one base in 2015)

Main OutcomesJapan Facility Management Association Award(Honorable Mention) (2014)

Recovered about 50% of lost work hours for employeeswith shortened work hours

Example Solution

Increased work efficiency 4.5 hours/month(per employee)

SmoothSpace(Solution for communications integrated with separated
environments by using projection mapping technology)

AwardsTelework Promotion Award (2016, 2018)
Top Hundred Telework Pioneers (2017)

Example Solutions
Telework Watch (At-home work management system)
Zoom (Collaborative work solution)

EmpoweredOffice Visitors

Companies

Individuals(Companies / Individuals)

7,599

8,000
7,000
6,000
5,000
4,000
3,000

2,427

2,000

One feature of
NESIC’s work-styleinnovation is that it is
implemented by the Company and the experience isshared with its customers.
The number of cumulative
visitors has exceeded
40,000 people.

1,0000
2008/3

2009/3

2010/3

2011/3

2012/3

2013/3

2014/3

2015/3

2016/32017/3

2018/3(FY)

ANNUAL REPORT 201827

Special Feature: Increasing Corporate Value through Work-Style Innovation

02

Phase Two of Work-Style Innovation
NESIC takes on the challenge of innovating work styles bycombining collaborative work with DX technology.

Deployment of State-of-the-Art Technologies
NESIC has taken work-style innovation to the second phase, accelerating the creation of
innovation at the core of work-style innovation.
The Company is thoroughly reducing administrative work through the use of DX (digitaltransformation) technologies such as AI, IoT, and RPA. At the same time, we are creating aframework where each and every employee is able to easily access and bring to bear ourcollective intelligence, including mutual information, know-how, skills, and contacts. Moreover,
we are encouraging collaborative work that leads to the creation of new ideas as employees
take full advantage of our collective intelligence with immediate connectivity via Zoom withother people inside and outside the Company.
NESIC as a entire company is working union to accelerate initiatives to foster innovation, while
it advance the introduction of state-of-the-art technologies by utilizing the CVC Fund established in January 2018.

System engineer (SE) floor: Located in the center ofthe floor, this collaborative area is designed to facilitate open innovation.

Sales floor: This area is for collaboration between
sales personnel and system engineers that isconstantly connected via Zoom to the SE floor.

Platform for Accelerating Collaborative Work within and Outside of the Company

DX technology

AIIntelligence platform

IoT

Use intelligence including
customer information and

RPA

Customers

Partners
vendors

market trends
BasesIntelligenceconnect** Aiming to speed up operations and improve quality
by transforming employees’ skills into data thatcan be used in related
work (a registered trademark of NESIC).

Overseas

Number of meetings

Collaborative business platform forwithin and outside the Company
Create new technologies and ideas withexternal experts and other departments,
and create growth fields throughcollaboration with markets

Collaborative workwith Zoom
Within the
Company

2,620 times
per month

Outside theCompany

Visualization
and analysis

30% outside the Company,
10% overseas
As of February 2018

Teamwork platform that crosses
organizational boundaries
Understand customer opinions
and market trends

28

ANNUAL REPORT 2018

Management ofwork styles

03

01

02

03

Ten Years of Work-Style
Innovation at NESIC

Phase Two of Work-Style
Innovation

Providing Value to Customers
through Services

Providing Value to Customers through Services
We support work-style innovation of our customers by addressing their diverse needs.
Below, we introduce some examples.

Example 1

Example 2

Asahi Group Holdings, Ltd.

SCOPE Inc.

Help desk operations made more
efficient with AI

A project that integrated baseswith the head office

Challenge

Challenge

Asahi Group Holding’s in-house OA help desk responds to
72,000 inquiries by telephone every year. Asahi wants toimprove the productivity of its help desk and improve theliteracy of people calling in so that they can solve issues
on their own.

SCOPE wants to concentrate offices scattered about onto
a single floor. As an expert planning group that createsvalue, SCOPE hopes to create an office environment thatdraws out the creativity of its employees through better
communication across departments.

Solution

Solution

NESIC and Asahi Group Holdings, which has full knowledgeof its in-house needs, developed a solution by forming ateam together. In 2017, we built a system for a 24/7 chatbot
service that uses AI technology to understand the natureof the inquiry, which forwards calls to help desk operatorsfor inquiries it cannot solve on its own.

NESIC provided services ranging from consulting to ICT
infrastructure upgrades and office design modernization
for this customer, which was renewing its corporate
identity and visual identity for the 30th anniversary of its
founding. A state-of-the-art collaborative work environment was incorporated with Zoom into the highly refined
office environment.

Customer Feedback
Our immediate response rate for inquiries, including via
telephone, improved from 50% to 70%, and the chatbot
was rated highly by our employees. Help desk productivity
improved, and operating costs were reduced. Leveraging
the know-how of the AI help desk, we plan to adapt thissystem so that it can handle inquiries from other businessfields, such as the personnel department, from 2018.

Customer Feedback
At the consulting stage, NESIC diagnosed and analyzed
our current situation, identified specific issues, and thencame up with a new office concept that became a reality.
Our visit to NESIC was a great help by bringing clarity to
our priorities.

Meeting rooms with clear glass walls forcoming up with new ideas

Screenshot of AI help desk chatbot
The Palette multi-purpose community
space is designed for people to mingle
freely, like the mixing of colors fora painting.

ANNUAL REPORT 201829

Strengthening Management Resources
Management resources play an important role in supporting our growth. NESIC aims to differentiate itself from competitors
by honing its strengths and ensuring competitiveness by maintaining and reinforcing these important management resources.

Key Management Resources

Reasons for Importance
As a communications system integrator, NESIC’s greatest management resource is its humanresources. Amid an aging society and a declining labor force, retaining employees and hiring new
personnel has become a crucial issue. We focus on providing a work environment where employees

Human Resources andOrganizational Climate

from diverse backgrounds can continue to work without anxiety, while promoting health management. Furthermore, it is essential to have an organizational climate that encourages employees totake on challenges and to provide opportunities for open discussion so that each and every
employee can utilize their abilities to their fullest.

The Company’s strengths are its technological capabilities and its ability to provide a wide range ofTechnologies and Expertise

services, and these strengths are also the wellspring of its competitiveness. Further honing thesestrengths and enhancing specialization is an important aspect of our being able to continue providing value to our customers and society while sustaining growth as a company.

NESIC is engaged in the infrastructure business of supporting society and critical networks that must

Business Bases
Spread Across Japan

operate 24/7. NESIC’s more than 400 business and service bases across Japan and its massive operation centers allow it to rapidly provide high-level support services even in the event of a breakdown.
Our facilities are an essential component for vendors that do not have service networks in Japan,such as venture firms, in providing their cutting-edge technologies to customers with peace of mind.

Relationships of Trustwith Stakeholders

Maintaining and strengthening relationships of trust with stakeholders important to NESIC, such asits customers, employees, shareholders, investors, suppliers, and business partners, is essential tosustaining growth of the Company.

Having a robust financial base is extremely important for achieving stable and sustainable growth

Financial Base

without being affected by changes in the external business environment, as well as for consistently
investing in the creation of innovation.

Materiality Identification Process for FY2019/3

Identify social issues

Screen issues that are

2 highly relevant to the

3 initiatives to solve social

4 Assign priorities

Global social issues are identified

Issues identified in Japan and

The Company outlines the initia-

Priorities are assigned to the 31

based on the SDGs and com-overseas in 1 are compared withtives it will take to solve thecandidates from the standpoint of

pared with recent issues in Japan.

the Company’s operations to

issues screened in 2 that are

their importance to stakeholder

ISO 26000 and GRI (Global

screen for highly relevant issues.

highly relevant to its operations,

expectations and the Company’s

Reporting Initiative) are also

Relevance to the Company’s

and identifies 31 materiality

own operations, and then divided

referred to for identifying issues.

operations is determined withincandidates.

into six categories.

Company’s operations

the context of medium-term management plans, etc.

30

Outline company

1 (overseas / domestic)

ANNUAL REPORT 2018

issuesMateriality to Address in FY2019/3

Contribution to the SDGs

Details romote diversityPEstablish an organizational climate where
employees can work with peace of mind
Thorough efforts in corporate ethics andcomplianceP32–33

Provide value to society through the creationof communications
Continue to improve value of employees
Provide secure products and services thatdeliver peace of mind

P34–35

Provide value to society through the creationof communications
Provide secure products and services thatdeliver peace of mind

P35

Provide value to society through the creationof communications
Encourage sustainability at suppliers

P37

P24

Materiality in FY2019/3

5 Identify materiality
Continue to improve value
The Management Quality
Improvement Committee identi-

of employees andpromote diversity

Thorough efforts in corporate
ethics and compliance

Establish an organizational
climate where employees canwork with peace of mind

fies materiality after ascertaining
the appropriateness of issues inProvide secure products andthe six categories of priority

services that deliver peace ofissues and related initiatives.

mind (reassuring quality andinformation security)

Provide value to society
through the creation ofcommunications

Encourage sustainability
at suppliers

ANNUAL REPORT 201831

Strengthening Management Resources

Message from the Senior Vice President
Constantly Strengthening Management Resources inOrder to Sustain Value Creation
The five key business resources identified by NESIC are
essential to the achievement of its vision of becoming
a “strong and attractive company” and continuing tocreate value for society. NESIC is taking various measures to maintain and reinforce these resources whileheeding the opinions of its stakeholders, including its
customers, shareholders, investors, and employees, andconsidering international social issues and demands,
including the SDGs.
As a communications system integrator, NESIC understands that the basis of its business rests on its humanresources and organizational climate, as well as its
technologies and expertise, and is evaluating measuresin response to changes in the business environment.
Based on this way of thinking, we are creating plans
to invest in our human resources from a medium- tolong-term perspective, visualizing the skills and work
experiences of our employees, in order to strategicallyreinforce and effectively utilize our human resources
better in the future.
Since its founding, NESIC has nurtured a spirit oftaking on challenges and innovation. With this spirit inmind, we are making every effort to create an openorganizational climate that encourages broad-minded
communication so that each and every employee
can apply their abilities to their fullest and growthrough work.
NESIC will continue to create value for society by
reinforcing its foundation for growth while strengthening
its management resources, starting with its humanresources and organizational climate.

Komei Sakanashi
Senior Vice President

Human Resources and Organizational Climate
To Enable Our Diverse Human Resources to Work Herefor a Long Time with Peace of Mind
Work-Style Innovations for a Self-Motivated Work Style
Work-style innovation has become a major topic in
Japanese society. NESIC began its own efforts at work–
style innovation more than 10 years ago. The Company
has proactively worked to improve the work-life balanceof its employees, and in July 2017, NESIC rolled out atelework system for all of its employees as a part ofthese efforts. Employees who take advantage of our
reduced work hour system for child rearing and elderly
care are able to telework from home, thereby reducing
lost work hours by about 50%. For our employees who
are dealing with life-changing events, we provide work
environments that enable them to continue using theirabilities and experience to their fullest, as before. We
make every effort to create environments where employees from diverse backgrounds can work energetically in
self-directed work styles.
Telework Use (From its rollout in July 2017 to March 31, 2018)
Full-time employees: 1.4 days per month

Shortened work hour employees 3.2 days per month

32

ANNUAL REPORT 2018

Promotion of Health Management
By paying attention to the health of our employees, wehope each and every employee will be able to work to
the fullest of their abilities and boost productivity. At
NESIC, in addition to our efforts for promoting healthcentered on preventive care, we seek to reduce total
working hours including by reducing overtime. In the ICT
industry, where mental healthcare has become an issue,
we focus on preventive care while encouraging employees to take care of their own health through a comprehensive support system that covers them from the startof leave to their return to work.
Average Overtime and Paid Holidays Taken
Average overtime (per month) (as of FY2018/3): 18.9 hours

Ratio of paid holidays taken (as of FY2018/3): 67%

Promoting Women in the Workplace
We are working to increase the ratio of women in
management positions and expand the number ofwomen hired as a part of efforts to promote womenin the workplace. We are reflecting the viewpoints ofwomen in the creation of new businesses and work
environments. Led by a female employee who
returned after taking leave for child rearing, the Women’s Project was launched in 2014 for the purpose ofcreating new businesses based on the idea of empowering women in the workplace. The project is aimed
at advancing the careers of women and creating work

environments that are more welcoming for female
employees who are raising children. This project also
led to the introduction of the telework system, one of
the Company’s main work-style innovations today.
Going beyond this project, we will continue encouraging the taking of new challenges from a woman’s perspective with the aim of nurturing more innovation.
Ratio of Women in Management Positions
End of 2018/3: 3.0%

A Human Resource Strategy Linked To Growth Strategy
Strengthening Global Human Resources
NESIC has created and implemented the following training programs in order to expand global business, one of the
focus areas of its medium-term management plan.
System / Training

Objective

Overseas work training system

Through on-the-job training overseas, promote a global business mindset, understanding of foreign cultures, and relationship building through knowledge and skills
acquired while working abroad, in addition to learning foreign languages (young
employees are sent to one of the Company’s overseas subsidiaries for a year)

Short-term overseas training

Develop human resources with a keenawareness of overseas operations
through experience in cross-culturalcommunication

Short-term overseas training session (Bangkok)

Mission global training

Develop human resources who view differences in nationality as opportunities, notobstacles, as they go about their duties

Training for local employees atoverseas subsidiaries

Develop human resources capable of sharing issues throughout the Group andtaking the initiative in expanding our business

Hiring of Human Resources Able To Spur Innovation
Our basic policy on hiring is to reliably secure talented
personnel by hiring recent college graduates, and toensure we have people who can think on their feet byhiring experienced personnel. Based on this policy, inorder to become a “strong and attractive company,”
NESIC seeks out people who have a tenacious mindset
open to challenges and the ability to achieve goals without placing limits on themselves.
Through our hiring activities, we aim to secure diverse
human resources that will help foster an innovation
mindset and contribute to a corporate culture where
employees can maximize their individuality and abilities.

Strengthening Resource Management
We endeavor to visualize the experience and skills of
our employees as a way of facilitating the allocation ofhuman resources and enhancing the rapid and proper
training of personnel in tune with changes in businessconditions. We are establishing a structure that facilitates
employee awareness across organizational boundaries,
a willingness to take on greater roles, speedy matchingof skills to roles, and self-directed career formation.
Through these measures, we are strengthening
resource management further by putting the rightpeople in the right jobs in tune with changes in technologies and businesses while encouraging employees togrow their awareness across organizational boundaries.

ANNUAL REPORT 201833

Strengthening Management Resources

Technologies and Expertise
Promoting Acquisition of Companywide High-Priority
Professional Qualifications
To improve technological capabilities, we assist
employees with the acquisition of high-priority professional qualifications that align with our business strategy
by paying for their educational costs and improving
their technical knowledge by holding seminars taught
by in-house instructors.
Acquisition of Companywide High-Priority Professional
Qualifications (FY2018/3)
	Information processing engineers(network specialist examination)
	
15 employees with a pass ratio of 46.9%(national average: 13.6%)

Senior Partner System for Passing Down Technical Skills
Involved in various business fields, NESIC must secureengineers and increase their skill levels. As engineers
with various qualifications and experiences approachretirement, we are working to utilize their strengths andexpertise. NESIC has set up the Senior Partner Systemfor employees who have reached the mandatory
retirement age but wish to continue working, and holds
briefings on this system periodically. In FY2018/3, NESIC
had a 100% retention rate for employees with technicalqualifications. We strive to provide our employeeswith more opportunities to shine, while increasing
opportunities for them to pass their skills down toyounger employees, in a bid to maintain and strengthen
our core technological capabilities.

	Information processing engineers(registered information security specialist examination)	
10 employees with a pass ratio of 100%Rate of Continued Employment after Mandatory Retirement(national average: 17.1%)

FY2016/3

FY2017/3

FY2018/3

	Project management professionals

54.7%

66.6%

68.1%

60 employees with a pass ratio of 67.4%(national average: 60.0%)	First-class electrical work operation andmanagement engineers	
16 employees with a pass ratio of 69.6%(national average: 62.5%)

Strengthening State-of-the-Art Technologies
Companywide DX (Digital Transformation) Project
Aware of the importance of initiatives in new technological fields in order to achieve growth, NESIC launched a Companywide project to drive the DX business as an engine for innovation. While consolidating intelligence from across theCompany, NESIC is investing heavily in this project to create “No. 1” and “Only 1” services and solutions with the aim ofestablishing a strong position in growth markets and taking the lead over its competitors.
Companywide DX Project to Marshal Strengths and Quickly Commercialize Business
Our Strengths
Technologicalcapabilities
Ability to provide
a broad range of services
Utilize various products
and services, including
technologies at venture firms(state-of-the-art technologies,
networking technologies)

Examples ofstate-of-the-art technologies
Cloud, AI, mobility,
Big Data, robotics, IoT,
cybersecurity

Businessdevelopment capabilities
Platform for providing
ICT services (data centers,
nTOC, SOC, MVNO, etc.)

Broad business fields
and customer base

Leveraging our robust financial position, we are investing aggressively
in improving technological capabilities and developing services.

34

ANNUAL REPORT 2018

Establishing the Corporate Venture Capital (CVC) Fund
Collaborating with external resources, or open innovation, is essential to the timely incorporation of new technologies. In particular, collaboration with venture firms
with groundbreaking technologies is key to launching“Only 1” services. This is why NESIC established the CVC
Fund in January 2018.
NESIC is able to forge mutually beneficial relationships with venture firms so that it can deliver brand newtechnologies to customers in an easy-to-use format

Business Seeds(ideas andtechnologies ofventure firms)

Our Strengths

while leveraging its nationwide sales network and service provision bases. Through this fund, NESIC invests inventure firms in Japan and overseas that have excellent
technologies and novel ideas. As a business partner,
NESIC aims to quickly deliver new value to society whileaiming to advance its technologies to the next level.

“ No. 1”, “ Only 1”
New business planning

Business Bases Spread Across Japan
Support and Service Network for Providing Safety
and Security
Along with its branch offices, with sales and operating
functions, NESIC has more than 400 services bases
throughout Japan. NESIC has put in place a structure forproviding high-quality support services to customers
24/7. The Company has operations centers that provide
unified services ranging from help desk support to network operations, monitoring, and maintenance services.
The Company also has comprehensive technical centers,
which offer technical assessments, evaluations, andsystems integration, maintenance, and repair services
as well as logistics, and data centers, which are thefoundation for outsourcing services.

More than

400 bases in Japan
24/7 operations

Communications with Local BasesNESIC technologies are used in constant communications between the head office in Tokyo and its local
bases. Major branch offices in Osaka and Nagoya use
SmoothSpace, a solution for visual and audio communications that uses projection mapping technology to project
life-sized images, to stay in contact with other bases.
SmoothSpace makes it easy to casually communicate
whenever necessary while always projecting realistic
images. Even coworkers in distant locations can communicate as if they were in the same space.
For meetings at the individual and organizational
level, NESIC uses Zoom as a collaborative work solutionthat simplifies communications without regard to time or
location. This solution enables effortless communications with teleworking employees and external parties
such as customers and business partners, helping toincrease efficiency and decision-making speed. NESIC is
maintaining and strengthening collaboration across its
bases throughout Japan while incorporating communications-related technologies, a Company strength.

Zoom Use at NESIC (As of February 2018)
Number of meetings:

2,620 per month

Number of meetings with overseas members:

300 per month (meetings with over 20 countries)

Increase in work efficiency:

4.5 hours per month (per person)

nTOC (Network Total Operation
Center)

ANNUAL REPORT 201835

Strengthening Management ResourcesFirst
investment

TOPIC

Transforming into a Next-Generation Support Service Business by
Adopting the Latest Methods and Technologies
Investment in Boomtown Network
In recent years, the shortage of IT engineers has
become more serious due to labor shortages, andthe migration of IT systems into the cloud has accelerated. These factors demand that we change thesupport services we provide to our customers.
In light of these conditions, NESIC decided toinvest in Boomtown Network, a startup in the U.S.
that provides next-generation support services combining omnichannel-compatible contact centers thatuse such cutting-edge technologies as AI with on-site
support networks incorporating the concept of the
sharing economy.

by the CVC
Fund

NESIC already has systems and frameworks inplace to provide high-quality support services to its
customers. By combining the Company’s strength innationwide support bases with the framework ofBoomtown Network, it will become possible to provide our nationwide support services, which havebeen provided to major companies and major vendors that provide cloud services, more inexpensively
and more flexibly. Moreover, we will be able to offer
services at more affordable prices for small/mediumsize companies, small/medium-size cloud vendors,
and startup companies. We aim to expand our business further by providing meticulous support services
while helping our customers create new businesses.

Efficiently provides proven support services

Nationwide support service network

in North America

Vision for Next-Generation Support Services

Customers

NESIC
On-siteresponse

Customersthat want tosolve issues
on their own

Customersthat wantsomeone to
comeInformation
sharing

AI chatbot

Self-Help Support

Customersthat wantremotesupportContact center

Help customers solve

Various means ofmaking contact

36

ANNUAL REPORT 2018

AI-based matchingof users andengineers

Efficient deployment of engineers
AI finds the best engineer for the job fromtheir own problems with
automated chatbot responses

Information
sharingamong nationwide support partners anddispatches the engineer to the site

Relationships of Trust with Stakeholders
Communications with Customers
Ever since its founding, NESIC has placed a high priority
on creating relationships built on trust with customers.
In order to continue growing toward its aim of
becoming a “strong and attractive company,” NESIC
will continue efforts to win the trust and support ofits customers by providing them valuable services
and solutions.
Annual Main Initiatives
Hold NESIC Customer’s Fair, a private exhibition/seminar forcustomers (held in Tokyo and Osaka in 2018)
Conduct customer surveys to implement improvement measuresby sharing the results within the Company
Present awards to outstanding customer satisfaction activities
Hold outside instructor presentations on customer satisfaction
Topics in FY2018/3

Communications with Suppliers
NESIC utilizes labor suppliers who subcontract work
for installation, construction, and network integration
orders received by NESIC, as well as hardware suppliers
for procuring equipment used in systems integration.
NESIC views labor and hardware suppliers as essential
for the operations of the NESIC Group. Society strongly
demands that entire supply chains endeavor to improvesustainability, and with the cooperation of our suppliers,
we are promoting sustainable and ethical procurement
activities.
Annual Main Initiatives
Hold business activity briefings and safety quality meetings(held a total of 12 activities in FY2018/3)
Conduct inspections and surveys(CSR surveys, quality audits, information security audits)(conducted at a total of 137 companies in FY2018/3)

Increase in ratio of customers who responded “very satisfied”
or “strategic business partner” (the highest mark) on the survey
compared with the previous survey in FY2017/3
Examples of awards received from customers– Award for zero human errors thanks to stronger efforts
in safety quality– Award for quick work on restoring public facilities
after natural disasters– Award for high technological capabilities and good faith inan electrical facility upgrade project

Business activity briefing

Customer’s Fair

Communications between the President andYounger Employees“Ushijima lunches” are lunch meetings conducted
between the President and younger employees as avenue for the open exchange of opinions. By talking
frankly and openly about the President’s thoughts andthe daily issues dealt with by young employees, we aim
to increase the motivation of younger people.

Lunch meeting between the President and younger employees

ANNUAL REPORT 201837

Message from the Chairman

We aim to increase
corporate value by further
improving ourcorporate governance.

Proactive Efforts to Reinforce Corporate
GovernanceWith its proven technologies and reliable services cultivated over many years based on the NEC Networks &System Integration Corporation Group Statement, NESIC
has endeavored to solve the issues faced by its customers and society through the provision of solutions with
its customers in mind. At NESIC, we believe corporate
governance is the foundation upon which initiatives aretaken to sustain growth for the Group and improve corporate value over the medium to long term. Accordingly,
we have redoubled our efforts from the past to reinforce
our corporate governance structure.
Since NESIC operates with a parent company, it isimportant to build a structure that better protects therights of general shareholders. Since 2006, NESIC has
steadily strengthened this area by nominating independent
directors and auditors who do not have any conflicts ofinterest with general shareholders. Currently, over onethird of our directors and auditors are independent, as
three of our ten directors are independent directors, andtwo of our four corporate auditors are independent
auditors. We are making diligent efforts to improve management transparency, having set up in 2016 an advisory
panel mainly consisting of independent outside directors
to discuss nomination and compensation.

Invigorating Discussions and Improving Oversight Functions of the Board of Directors
As the chairman of the Board of Directors, I am awarethat the independent directors and auditors play asignificant role in corporate governance, and make every
effort to listen carefully to their opinions. In addition toperiodically sharing with them the opinions heard on
capital markets, we provide tours of our facilities inorder to deepen their understanding of our operations
with the intention of filling any gaps in information

38

ANNUAL REPORT 2018

between them and board members in charge ofbusiness execution. Independent directors and auditors
receive premeeting briefings and opportunities toexchange opinions about matters on the agenda of theBoard of Directors. On particularly important matters,
meetings are held multiple times by the Board of
Directors to ensure outside opinions are well referenced
before a resolution is made. We believe outside directors and auditors are a vital part of lively discussions
because they bring their knowledge and opinions about
the Company’s broad range of business fields. I believe
we have a diverse board membership from the standpoint of experience, knowledge, expertise, and gender,
having appointed people with corporate management
experience in different industries and an associate
professor with expert knowledge of business management and accounting.

Improving Corporate Value through Business
Execution That Prioritizes Compliance
In my previous role as President and current role as
Chairman of the Board at NESIC, I have always conveyed
to our employees that the highest priority must beplaced on compliance. All business activities begin withcompliance with laws and regulations. To preserve thetrust placed in us by our customers, shareholders, andother stakeholders, each and every employee will
engage in business and contribute to society by maintaining high ethical standards with the ultimate goal offurther improving corporate value.

Chairman of the Board

Corporate Governance (As of June 30, 2018)

NESIC believes that enhancing corporate governance is critical for realizing an advanced society with vibrant communication and for sustaining increases in corporate value. We therefore strive to build a management system that enables
quick decision-making so that we can respond promptly to changes in the operating environment, and we work toensure management soundness and transparency by practicing timely, appropriate disclosure.

History of Enhancing of Corporate Governance at NESIC
2000

MeasureObjective

Introduces an executive officer system

Clearly separate of the supervisory function from thebusiness execution function

Reduces the number of directors to ten or fewer from 20 or fewer

Expedite decision-making

Shortens the director’s term of office to a year

Clarify the directors’ management responsibilities

2006

Appoints the first independent outside auditor (introduces the independent director/
auditor (ID/A) system)

Improve management transparency

2008

Appoints an independent outside director, increasing the number of ID/A to two

Improve management transparency

Appoints an independent outside director, increasing the number of ID/A to three

Improve management transparency

Appoints the first female director

Increase the diversity of the directors

Appoints an independent outside auditor, increasing the number of ID/A to four

Improve management transparency

Strengthens compliance with the Corporate Governance Code: starts the assessment ofboard effectiveness and systematizes training for directors and corporate auditors

Strengthen the management oversight function

Appoints the first independent outside director with experience in corporate management

Improve the diversity of directors

Establishes an advisory panel consisting mainly of independent outside directors to discussnomination and compensation

Improve management transparency

Appoints an independent outside director (a female former CEO from a different industry),
increasing the number of ID/A to five

Improve management transparency and increase thediversity of directors

2005

2012
2015

2016

2017

Corporate Governance System

Board of Corporate Auditors
The Board of Corporate Auditors consists of four­auditors, including two outside auditors. The auditors
conduct business audits and accounting audits, andsupervise directors as they perform their duties.

Board of Directors
The Board of Directors consists of 10 directors (eight
men and two women), who serve one-year terms andinclude three outside directors. NESIC endeavors tostrengthen the management structure, such as by clarifying the management responsibilities of each director.

outside directors

outside auditors

NESIC’s Business Execution, Management Oversight, and Internal Control Framework
General Meeting of Shareholders
Elect/Dismiss

Elect/Dismiss

Elect/Dismiss

Management and Supervision

Board of Directors (Directors)

Audit

Board of Corporate Auditors(Corporate Auditors)

Supervise

Cooperate

Audit

Business Execution

Cooperate

Executive Committee(Executive Officers)

Accounting
Auditors

Business Execution Committee
Management Quality Improvement Committee

Corporate Staff, and Marketing & Sales andBusiness Operations Units and Divisions

Cooperate

Corporate Auditing Division

Management Section of
Affiliated Companies

Cooperate

Audit

Manage/Monitor

Affiliates
Corporate Ethics Hotline (Hotline for internal reporting and consultation)

ANNUAL REPORT 201839

Corporate GovernanceIndependent Directors / Auditors
To further strengthen its corporate governance, since2006, NESIC has nominated qualified independent directors and auditors who do not have any conflicts of interest with general shareholders.
NESIC has a total of five independent directors andauditors, comprising three directors and two auditors,
who satisfy the requirements for independent directors
and auditors, as defined by the Tokyo Stock Exchange.
This represents more than a third of the total number of
directors and auditors.
Name

NESIC has worked to reinforce its corporate governance structure. In the past, our independent board
members have included attorneys and university professors. Moreover, NESIC appointed experienced corporate
managers in June 2016 to bring a broader range of experience and perspectives to the Company’s management,
as well as a female manager from a different industry inJune 2017 to increase diversity.

Attendance during
FY2018/3

Reason for Nomination

Main Concurrent Positions

Board ofDirectors

Board ofCorporate
Auditors

Outside Director,
Tokyo Electron Device Limited

12/12

—

Hisayoshi
Fuwa

Hisayoshi Fuwa has extensive experience as a corporate manager, which has been
benefit management at the Company. He also has the ability to provide appropriate
advice and ideas on the Company’s overall management from a standpoint
independent from the managers who execute business. He is expected to continue
to supervise management toward improvements in the Company’s corporate value.

Michiko
HironoMichiko Hirono has the ability to provide appropriate advice and supervise theCompany’s management strategy from diverse viewpoints without being constrained bytraditional frameworks, backed by her management know-how in a different industry(B2C). She is expected to continue to supervise management toward improvements in
the Company’s corporate value.

Outside Director,
JAPAN POST Co., Ltd.

10/10

—

MichikoAshizawa

Michiko Ashizawa has the ability to provide appropriate advice and supervise the Company’s management from an objective standpoint, backed by her specialized knowledge in business management.

· Associate Professor, International College ofArts and Sciences, Yokohama City University· Associate Professor, Graduate School of International Management, Yokohama City University· Part-Time Instructor, Graduate School of Business Administration, Keio University· Outside Director (audit committee member),
Netyear Group Corporation

—

—

Yuji
KikuchiYuji Kikuchi has specialized knowledge of the Companies Act and corporate governance as an attorney. He is expected to supervise business execution from a fair andobjective standpoint as an outsider through his extensive knowledge and experience.

Partner, Tokyo Hatchobori
Law Office

12/12

14/14

Masayuki
Horie

Masayuki Horie will exercise his expertise in internal controls and other aspects of corporate management, and apply the fair and objective perspective of an outsider in
auditing the directors’ performance of their duties.

Professor, College of Commerce,
Nihon University

12/12

14/14

Notes
1. Michiko Hirono’s attendance at the Board of Directors meetings is for after her appointment as director at the 85th General Meeting of Shareholders held on
June 23, 2017.
2. Michiko Ashizawa was newly appointed as director at the 86th General Meeting of Shareholders held on June 21, 2018.

Directors’ Remuneration
To maintain competitiveness in the industry and provide
incentives to increase earnings, remuneration for theCompany’s directors is based on a compensation
structure set at appropriate levels while taking into
account their duties and achievements in order to link
their performance to corporate earnings.
Remuneration consists of a monthly salary set at alevel commensurate with rank, as well as a bonus thatreflects an evaluation of personal performance in theprevious fiscal year, contributions to the business forwhich the director is responsible, and an amount relative
to the change in the Company’s share price.

Breakdown of Director Remuneration

Fixed compensation: About 60 %40

ANNUAL REPORT 2018

Remuneration for directors in non-executive positions
is a fixed amount not linked to the Company’s performancein light of their role of supervising business execution.
Directors’ remuneration is determined by a representative director authorized by the Board of Directors,
within an upper limit for total remuneration set by resolution of the General Meeting of Shareholders, based oncompensation standards while referring to the opinionof an advisory panel, which consists mainly of independent board members (outside directors).

Short term
85%

Performance-linked

Medium tolong term
15%

compensation: About 40 %

Fiscal 2018/3
Category

Directors
Outside directors
Auditors
Outside auditors

No. of Recipients

Total Amount (¥ million)

12

167

3

23

5

43

3

13

Notes:
1. Employees who also serve as directors do not receive a salary (including bonus) as an employee.
2. Includes two directors and one auditor who retired as of the 85th General Meeting of Shareholders
held on June 23, 2017.
3. The director retirement bonus system was discontinued as of the conclusion of the 75th General
Meeting of Shareholders held on June 26, 2007.

Shares Held for Strategic Reasons

Investor Relations (IR) Activities

NESIC may own stock in other companies for the purpose of forging, maintaining, and stabilizing business
partnerships and commercial relations. Major strategic
shareholdings are meticulously reviewed by the Board of
Directors every year on the basis of the purpose andrationality for holding these stocks. Regarding the exercise of voting rights for these stocks, management
decides to approve or reject proposals after a comprehensive evaluation centered on whether the proposalsalign with the purpose of owning the stocks.

NESIC’s disclosure policy is to accurately and promptly
explain business conditions and management policies
to shareholders and other stakeholders. Management
periodically holds briefings and meetings to engage indialogue with capital markets.
Regarding dialogue with capital markets, the CSR
Promotion & Corporate Communications Division (IRGroup) and the President, among other top managers,
periodically engage in dialogue with investors at
briefings and one-on-one meetings. In fiscal 2018, 17
meetings were held with the President and/or Associate
Senior Vice President in attendance. The opinions andsuggestions received through these dialogues arereported to all board members, including independent
directors and auditors, as a part of efforts toward
constructive dialogue with capital markets.

Evaluation of the Board of Directors’ EffectivenessIn accordance with the Corporate Governance Code, NESIC evaluates the effectiveness of its Board of Directors every
year, and makes diligent efforts toward its strengthening and improvement.
Evaluation method

We conduct a survey once a year with all board members on the effectiveness of the Board of Directors.

Evaluation criteria· Composition of the Board of Directors· Operational methods of the Board of Directors· Role of the Board of Directors· Support systems for board members

Evaluation results

In fiscal 2018/3, the evaluation concluded that the Board of Directors is functioning effectively andoperating appropriately overall.

Initiatives to further
increase effectiveness· Enhance discussions on medium- to long-term management strategies, and provide more opportunities
and information for such discussions· Expand opportunities to impart the knowledge necessary for directors to properly perform their
expected duties and responsibilities

ANNUAL REPORT 201841

Dialogue on NESIC with Outside Directors

Three outside directors discussed strategies for change and corporate governance at NESIC.

Hisayoshi Fuwa

Michiko Hirono

Michiko Ashizawa

Outside Director

Outside Director

Outside Director

2011	President, Representative Director of the Board
and Chief Executive Officer (CEO),JVC KENWOOD Holdings, Inc.
(currently JVC KENWOOD Corporation)	President and Representative Director of the Board,
Victor Company of Japan, Limited
President, Kenwood Corporation
President, J&K Car Electronics Corporation
	President and Representative Director of the Board,
JVC KENWOOD Corporation2012 Senior Adviser, JVC KENWOOD Corporation
2016 	Outside Director of the Company (present position)2000	President and Representative Director of the Board,
21 Lady Co., Ltd.
2002	Representative Director of the Board,
HIROTA Co., Ltd.
2010	Representative Director of the Board,
ILLUMS JAPAN Co., Ltd.
2011	Representative Director, Chairman and President,
HIROTA Co., Ltd.
2017	Outside Director of the Company(present position)

1996	Joined Century Audit Corporation (currently
KPMG AZSA LLC), International Department* Retired in May 2001
2000	Registered as a certified public accountant
2003	Joined Industrial Revitalization Corporation of Japan
2006	Joined Advantage Partners LLP(currently Advantage Partners, Inc.)
2013	Associate Professor in Faculty of Liberal Arts at
Yokohama City University(present position)	Associate Professor in Graduate School of International Management at Yokohama City University(present position)2016	Part-time instructor in Graduate School of Business
Administration at Keio University(present position)2018 Outside Director of the Company (present position)

	To begin, Ms. Ashizawa, what is your first impresQ sion of NESIC after being appointed in June 2018?
Ms. Hirono, what is your opinion of the Company
after serving as outside director for a year?
HironoHaving seen work done on-site, my first impression of
NESIC is that it is a company with on-site presence, its feetfirmly planted on the ground, with the ability to provide
total solutions through construction of large-scale projects
such as mega solar plants, in addition to IT services.
As an outside director, I aim to help NESIC leveragethese strengths and take on challenges in markets
where it can create “No. 1” and “Only 1” businesses.

42

ANNUAL REPORT 2018

Ashizawa

When I heard that NESIC has a support service networkof over 400 bases in Japan, I was impressed with thehuge potential this represents. As networks become
decentralized through IoT, “things” will always be involved.
The business of supporting the maintenance of these“things” from brick-and-mortar bases is likely to becomea major pillar for “No. 1” and “Only 1” businesses, in myopinion. I also feel that the Company needs to grow insome fields, including application software. “Offensive
governance” is important for strongly supporting theCompany as it takes on these challenges, and we mustfind a way to balance this with “defensive governance.”
Before being appointed to this position, I trained board

members at the Company as an instructor, and thisexperience left me with the impression that NESIC isa company where lively discussions take place. This
impression has not changed since becoming an outside
director. In addition to lively debates by the Board of
Directors, there is open discussion on other topics suchas identifying the Company’s true strengths.
	In 2017, President Ushijima became the first presiQ dent to rise through the ranks at NESIC. What haschanged since his appointment as president?
Fuwa

Fuwa

At briefings for independent directors and auditors held
prior to meetings of the Board of Directors, executive
officers and other company managers courteously address
any concerns or questions we raise. The Company’sbusiness executives have a tradition of listening carefully
to concerns and opinions from the standpoint of an
independent director and auditors. I believe this creates
opportunities to have meaningful dialogues. This also
improves the quality of discussions at the Board of
Directors meetings. I am convinced that the benefits ofthese pre-meeting briefings go beyond complementing
the Board of Directors.

I am convinced that President Ushijima is an adept
leader in this era where “offensive management” isessential. After becoming president, he wasted no timemaking changes, such as strengthening systems forcreating new businesses. At the top, he is well aware ofmanagement issues, being well versed in the strengths
and values that NESIC has built up throughout its history.
The advisory panel also advocated for his nomination.
HironoI believe President Ushijima’s leadership style is unique
because of his ability to anticipate changes in needs
and to take action, thanks to his experience interacting
directly with customers on-site and his experience managing a B-to-B-to-C subsidiary. In a global business, onemust often go directly on-site in order to fully understand the situation. He has recently visited overseas
bases and decided that some changes were urgently
needed, which were quickly implemented. I was surprised by his ability to take action and the speed of his
decision-making.
Ashizawa

I think President Ushijima is an enthusiastic type of
person who energizes everyone around him. He is aneffective communicator who can deliver a strong message while also flexibly forming teams of people andgetting involved. His message of aiming to be “No. 1”
and “Only 1” is simple and persuasive.
Fuwa

Instead of arguing someone into submission, his communication style is unique in that it takes a “we are inthis together” approach. The open atmosphere of theBoard of Directors is a reflection of the president’s
unique communication style, in my opinion.

I believe it is the responsibilityof the outside directors to strikea balance between “offensive”
and “defensive” postures.


Ashizawa

Ashizawa

Indeed, the president strongly intends to move the Company in a good direction with everyone on the sameteam. He also gives us access to information without
holding anything back. However, since we are representatives of shareholders, we will remain objective observers and raise issues with internal matters as needed andwithout hesitation.

ANNUAL REPORT 201843

Dialogue on NESIC with Outside Directors

HironoAshizawa

Behind the respect for different values and culture ofcollaborating and learning together is the shared goalof increasing corporate value.
	In 2018, NESIC held another meeting for outside
Q directors and female employees, which began at
the heeding of former director Ms. Ichige. Regarding cultures that recognize diverse opinions, doyou have any opinions of your own about diversity?
HironoI believe NESIC is a company where talented women
can work with enthusiasm. In retail and other areas,some management positions are held by women, andwhile NESIC is a B-to-B company, it provides opportunities for women to use their abilities to their fullest. I am
impressed with the culture here, as employees do nothesitate to voice their opinions with their superiors.

The key to innovation is diversity. Joseph Schumpeter, aneconomist who came up with the theory that innovation
drives economic development, pointed out that new
things are created by combining things with different
qualities. Diversity, including the empowerment of
women, is absolutely necessary for the creation ofadded value in tune with the needs of the customers of
NESIC’s customers. Moreover, it is important to increase
diversity beyond gender. In the ICT domain, young
people are probably more adept at thinking up new
ideas. Companies that hire foreigners and other people
from various backgrounds have a strong capacity forinnovation, in my opinion. As independent directors, weshould also support the various employees of the Company in order to further increase its diversity.
Fuwa

Indeed, women are actively participating in the workforce, but the fact is the ratio of female employees is stillquite low. Instead of general talking points, I think morein-depth discussion on this matter is needed within thecontext of the Company’s growth strategy.
	Now that you mention growth strategy, NESIC
Q plans to unveil its next medium-term management plan in spring 2019. What is your perception of issues and opportunities for growth?
HironoNESIC has spread many seeds for growth. For example,
its work-style innovation field perfectly matches theneeds of the times. I think one important issue is deciding the fields to target for “No. 1” and “Only 1” businesses from among these seeds, and then selectively
concentrating on fostering them with a long-term
perspective.
Ashizawa

It is not easy to focus on the fields where the Company’s
strengths can be applied, but I believe NESIC has put
into place a foundation to grow in unison with the areasof IoT and digital transformation (DX).
Fuwa

With a culture that respects
diverse opinions, NESIC aims tochange in ways that increase
corporate value.


44

ANNUAL REPORT 2018

Fuwa

Among the broad business fields of the NEC Group,
NESIC is aggressively engaging in new business fields
where it can leverage its strengths. President Ushijima’s
extensive knowledge of the Company’s qualities will bean effective tool in this regard. As more effort is put into
its overseas business, it will be important to manage
project risk. I think establishing effectively functioning
processes overseas is an urgent management issue.

HironoI agree. I think management is taking the right steps, but
projects are gradually getting larger and taking longer tocomplete, and the Company is also moving into new fields.
I will continue keeping management alert to these risks.
Ashizawa

I think management could do a better job at conveying
the good aspects of NESIC to the outside world. In
other words, I think the Company needs to improve its
outward communications ability. I believe NESIC canbecome a stronger company with a clear and strong
message about what its services can accomplish andhow they can change the world.
Fuwa

I think so too. The Board of Directors needs to consider
in more depth how to communicate to the outside
world, such as specific goals for creating “No. 1” and“Only 1” businesses. The Company’s current businesses
have changed considerably since their establishment.
Over this period, NESIC has polished its know-how andimproved its quality in telecommunications infrastructure
construction and maintenance businesses, and theselive on in its DNA today. I think it is important to approachthe creation of new businesses by emphasizing this DNA
in the selection of business fields.
HironoFrom a base built up over decades, I see the potential
for the Company’s business structure to change asubstantial 20% in essence, such as through its CVC
Fund, which invests in venture firms in North America.
While maintaining 80% of its business foundation andleveraging this 20% in new ventures, I believe NESIC will
be able to consistently expand corporate value in its
own unique way. As an outside director, I will support
these endeavors.

I would like to point out theongoing need for moresophisticated risk management.
 Hirono

ANNUAL REPORT 201845

Directors & Corporate Auditors (As of June 21, 2018)

10

46

9

5

4

3

2

1

10

4

1

Morihiko Kudo

Yasuhiro Ito

Masao Wada

Member of the Board

Senior Vice President andMember of the Board

Chairman of the Board

5

2

Osamu Noda

Yushi Ushijima

Senior Vice President andMember of the Board

President

93Junji Ashida

Masafumi Gouji

Member of the Board

Senior Vice President andMember of the Board

ANNUAL REPORT 2018

6

7

8

13

14

11

12

6

13

12

Hisayoshi Fuwa

Yuji Kikuchi

Shoichi Fukaya

Member of the Board(Outside Director)

Corporate Auditor(Outside Auditor)

Corporate Auditor(Full-time)

7

14

Michiko Hirono

Masayuki Horie

Member of the Board(Outside Director)

Corporate Auditor(Outside Auditor)

8

11Michiko Ashizawa

Tokuo Yamamoto

Member of the Board(Outside Director)

Corporate Auditor(Full-time)

ANNUAL REPORT 201847

Corporate Overview (As of March 31, 2018)

Name

NEC Networks & System Integration Corporation

Head Office

Iidabashi First Tower,
2-6-1 Koraku, Bunkyo-ku, Tokyo
112-8560, Japan
URL: http://www.nesic.co.jp/english/

Established

December 1, 1953

Registered as a Stock Company

November 26, 1953

Capital¥13,122,000,000

Number of Employees

5,009 (Non-consolidated), 7,657 (Consolidated)

Fiscal Year

April 1–March 31

Ordinary General Shareholders Meeting

Annual meeting held in June

Listing

Tokyo Stock Exchange, First Section
Ticker Code: 1973

Accounting Auditor

KPMG AZSA LLC

Transfer Agent

Sumitomo Mitsui Trust Bank, Limited
1-4-1, Marunouchi, Chiyoda-ku, Tokyo
100-8233, Japan

Major Consolidated Subsidiaries (As of August 31, 2018)
Japan

Overseas

NEC Magnus Communications, Ltd.

NESIC BRASIL S/A

NICHIWA Co.

NESIC (Thailand) Ltd.

NEC Net Innovation, Ltd.

NESIC PHILIPPINES, INC.

Q&A Corporation

Networks & System Integration Saudi Arabia Co. Ltd.

K&N System Integration Corporation

ICT Star Group Myanmar Co., Ltd.

NEC Networks & System Integration Services, Ltd.

Outside Evaluations

SNAM Sustainability

Certified Health and

Top Hundred“Kurumin ”

Highest-grade

Index

Productivity Management

Telework Pioneerscertification mark*1“Eruboshi” certification*2

Organization 2018*1	The “Kurumin ” mark is a symbol of the certification granted to companies that have established an action plan and achieved targets in accordance withJapan’s Act on Advancement of Measures to Support Raising Next-Generation Children.
*2	The “Eruboshi ” logo is a symbol of the certification granted to companies that have formulated an action plan in accordance with Japan’s Act on Promotionof Women’s Participation and Advancement in the Workplace, and are implementing initiatives to a high standard.

48

ANNUAL REPORT 2018

Stock Information (As of March 31, 2018)

Number of Shareholders

7,267

Common Stock Authorized

100,000,000 shares

Issued49,773,807 shares

Trading Unit

100 shares

Major Shareholders (Top 10)
Number of
Shares Held(Thousands)

Percentage ofTotal Shares
Outstanding(%)*2

NEC Corporation

19,106

38.49

Japan Trustee Services Bank, Ltd.*1 (Sumitomo Mitsui Trust
Bank, Limited beneficiary trust account, NEC Corporation
retirement benefit trust account)

6,400

12.89

Japan Trustee Services Bank, Ltd. (Trust account)

2,394

4.82

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

2,126

4.28

Sumitomo Realty & Development Co., Ltd.

1,200

2.42

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

879

1.77

THE BANK OF NEW YORK MELLON 140044

703

1.42

Employees’ Stock Ownership Plan

692

1.40

GOVERNMENT OF NORWAY

625

1.26

STATE STREET BANK AND TRUST COMPANY 505103

479

0.97

Name of Shareholder*1	Shares held by Japan Trustee Services Bank, Ltd. (Sumitomo Mitsui Trust Bank, Limited beneficiary trust account,
NEC Corporation retirement benefit trust account) give NEC Corporation material voting rights because
NEC Corporation has contributed shares of the Company to its retirement benefit trust. The percentage of material voting rights held by NEC Corporation as of March 31, 2018 was 51.49%.
*2	Percentage of total shares outstanding is calculated based on the total number of shares outstanding minus treasury stock (137,435 shares) and effectively non-held stock (100 shares) despite the Company being listed on theshareholder registry for this stock.

Breakdown of Shareholders by Type
(%)

100

80

0.1
8.2

0.3
8.0

0.3
8.6

0.3
8.2

0.3
7.1

19.6

23.6

21.2

18.7

21.9

41.0

41.1

41.2

41.2

0.6

1.0

30.1

26.6

27.8

30.7

28.8

2014/3

2015/3

2016/32017/3

2018/3

60
41.0
40
1.0
20

0.9

0.7

0
（FYE）

Central government / local public bodies
Financial institutions
Investment securities firms
Other institutions
Foreign entities (institutions, individuals)
Individuals and others
Treasury stock

ANNUAL REPORT 2018

49

50

ANNUAL REPORT 2018

Financial Section
52

CONSOLIDATED TEN-YEAR SUMMARYCONSOLIDATED FINANCIAL STATEMENTS
54

CONSOLIDATED BALANCE SHEETS

56

CONSOLIDATED STATEMENTS OF INCOME

57

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

58

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

60

CONSOLIDATED STATEMENTS OF CASH FLOWS

62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

82

INDEPENDENT AUDITOR’S REPORTANNUAL REPORT 2018

51

CONSOLIDATED TEN-YEAR SUMMARY

FY2009/3

FY2010/3

FY2011/3

FY2012/3

Orders received¥245,257¥222,046¥212,277¥215,373

Net sales

249,070

217,727

217,948

204,658

Gross profit

35,47032,93833,132

32,079Operating income

10,968

9,867

10,835

9,747

4.4

4.5

5.0

4.8

4,995

5,644

4,660

4,474

Total assets¥147,251¥146,543¥149,464¥149,130

Net assets

69,12973,84977,00580,074

Owner’s equity

68,51873,21376,44579,503

Cash flows from operating activities¥ 6,953¥16,070¥ (1,595)¥18,595

Cash flows from investing activities(2,193)(1,885)(1,904)(2,648)

Free cash flows

4,759

14,184(3,499)15,946

Cash flows from financing activities(2,096)(1,382)(337)(3,979)Cash and cash equivalents at end of year

16,59029,51425,58737,456EPS¥   100.41¥   113.50¥   93.72¥   89.98

BPS

1,377.68

1,472.14

1,537.19

1,598.77

22.00

25.00

26.00

28.00

ROE*2

7.5

8.0

6.2

5.7

ROA*3

7.3

6.7

7.3

6.3

Owner’s equity ratio

46.5

50.0

51.1

53.3

DOE*4

1.6

1.8

1.7

1.8

Payout ratio

21.9

22.0

27.7

31.1

5,906

5,998

5,939

5,936

49,773,807

49,773,807

49,773,807

49,773,807

Performance Indicators (Millions of yen)

Operating income to net sales (%)
Net income attributable to owners of the parent
Financial Condition (Fiscal year end) (Millions of yen)

Cash Flows (Millions of yen)

Per-Share Indicators (Yen)

Cash dividends
Key Indicators (%)

Other
Number of employees
Number of shares outstanding*1 U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥106.24 = US$1.00 as of March 31, 2018.
*2 ROE (Return on Equity): Net income attributable to owners of the parent / Owner’s equity during the term [Average of owner’s equity at the beginning of
the term and at the end of the term] x 100*3 ROA (Return on Assets): Ordinary income / Total assets during the term [Average of total assets at the beginning of the term and at the end of the term] x 100*4 DOE (Dividend on Equity): Total annual dividends / Owner’s equity during the term [Average of owner’s equity at the beginning of the term and at the end of the term] x 100

52

ANNUAL REPORT 2018

FY2013/3

FY2014/3

FY2015/3

FY2016/3

FY2017/3

FY2018/3(Thousands of U.S. dollars) *1¥241,271¥280,071¥299,097¥274,946¥279,241¥287,831$2,709,252

235,716

270,326

292,164

279,961

257,912

267,9392,522,016

37,182

44,69048,11045,162

42,58544,265

416,650

12,483

14,41816,158

14,111

9,974

11,057104,075

5.3

5.3

5.5

5.0

3.9

4.1

—

7,246

8,257

7,791

5,996

6,549

7,357

69,248(Thousands of U.S. dollars) *1¥167,472¥189,059¥201,964¥196,569¥197,469¥208,050$1,958,301

85,974

89,166

94,173

94,397

96,674

101,732

957,567

85,26687,51492,55992,73894,611

99,473936,304(Thousands of U.S. dollars) *1¥ (1,723)¥23,313¥ 2,460¥ 9,435¥22,634¥ 4,779$ 44,983(3,429)(5,504)(3,929)(2,822)(2,697)(2,802)(26,374)(5,152)

17,809

(1,469)6,613

19,936

1,976

18,599(2,066)(3,824)(4,127)(1,402)(4,144)(4,366)(41,095)

30,31544,43438,95143,88959,64857,281

539,166(U.S. dollars) *1¥   145.73¥   166.06¥   156.72¥   120.80¥   131.94¥   148.23$ 1.391,714.74

1,760.06

1,864.61

1,868.25

1,906.03

2,004.04

18.86

45.00

60.00

64.00

70.00

72.00

74.00

0.69

8.8

9.6

8.7

6.5

7.0

7.6

—

7.7

8.2

8.3

7.1

5.1

5.4

—

50.9

46.3

45.8

47.2

47.9

47.8

—

2.7

3.5

3.5

3.8

3.8

3.8

—

30.9

36.1

40.8

57.9

54.6

49.9

—

6,024

7,164

7,260

7,464

7,572

7,657

—

49,773,807

49,773,807

49,773,807

49,773,807

49,773,807

49,773,807—

ANNUAL REPORT 2018

53

CONSOLIDATED BALANCE SHEETSNEC Networks & System Integration Corporation and Consolidated Subsidiaries
As of March 31, 2018 and 2017

Thousands of
U.S. dollars(note 3)

Millions of yen
2018

2017

2018

¥ 57,281¥ 59,648$  539,166

Notes and accounts receivable (notes 4 and 23)

103,91190,711

978,077

Electronically recorded monetary claims (note 4)

494

441

4,649

ASSETS
Current assets:
Cash and cash equivalents

Inventories (note 7)

8,237

8,494

77,532

Deferred tax assets (note 10)

4,524

4,102

42,582Other current assets

5,414

5,694

50,960

(121)

(92)

(1,138)

179,742

168,999

1,691,848

Land

2,410

2,507

22,684

Buildings and structures

9,763

9,875

91,895

182

187

1,713

14,826

14,435

139,551

Allowance for doubtful accounts
Total current assets

Non-current assets:
Property and equipment

Machinery, equipment and vehicles
Tools, furniture and fixtures
Construction in progress

222

382

2,089

Other

258

443

2,428

(17,570)(17,112)(165,380)

10,093

10,71995,001

5,384

4,561

50,677

Accumulated depreciation
Property and equipment, net

Intangibles, net of accumulated amortization (note 8)

Investments and other assets
Investment securities (notes 5 and 6)

516

421

4,856

Asset for retirement benefits (note 11)

444

324

4,179

Deferred tax assets (note 10)

8,596

8,881

80,911Other assets (note 23)

3,309

3,612

31,146

(37)

(51)

(348)

Allowance for doubtful accounts
Total investments and other assets

12,82913,188120,754

Total non-current assets

28,30828,469266,453¥208,050¥197,469$1,958,301

Total assets

54

ANNUAL REPORT 2018

Thousands of
U.S. dollars(note 3)

Millions of yen
2018

2017

2018

¥  4,086¥  4,069$   38,460

LIABILITIES AND NET ASSETS
Current liabilities:
Short-term bank loans (note 9)
Current installments of long-term debt (note 9)

3,171

171

29,847

Notes and accounts payable (notes 4 and 23)

39,57436,474372,496

728

—

6,852

Advances received (note 23)

3,811

4,678

35,871

Accrued income taxes (note 10)

3,768

2,964

35,466

Electronically recorded obligations

Accrued bonuses to directors

102

67

960

Accrued warranty on products

116

123

1,091

557

645

5,242

Other current liabilities

16,957

14,303

159,610

Total current liabilities

72,874

63,498685,937

Accrued losses on sales contracts (note 7)

Non-current liabilities:
Long-term debt (note 9)
Liability for retirement benefits (note 11)

842

4,014

7,925

30,42831,206

286,408

2,172

2,075

20,444

Total non-current liabilities

33,44437,296

314,796

Total liabilities

106,318

100,795

1,000,734

13,122

13,122

123,512

Other liabilities (notes 10 and 12)

Shareholders’ equity (note 13):
Common stock:
Authorized 100,000,000 shares; issued and outstanding
49,773,807 shares at March 31, 2018 and 2017
Capital surplus

16,655

16,652

156,767

Retained earnings

74,35770,622

699,896

(276)

(272)

(2,597)

103,858

100,124

977,579

Treasury stock, at cost; 137,435 shares at March 31,2018 and 135,911 shares at March 31, 2017
Total shareholders’ equity
Accumulated other comprehensive income:Net unrealized holding gains on other securities (note 5)
Foreign currency translation adjustments

42

35

395

(374)

(394)

(3,520)(4,053)(5,154)(38,149)(4,385)(5,513)(41,274)

2,258

2,062

21,253

Total net assets

101,732

96,674

957,567

Total liabilities and net assets¥208,050¥197,469$1,958,301

Accumulated adjustments for retirement benefits (note 11)
Total accumulated other comprehensive income
Non-controlling interests

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

ANNUAL REPORT 2018

55

CONSOLIDATED STATEMENTS OF INCOME
NEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31, 2018 and 2017

Thousands of
U.S. dollars(note 3)

Millions of yen

Net sales (note 23)
Cost of sales (notes 7 and 23)
Gross profit
Selling, general and administrative expenses(notes 16 and 17)
Operating income

2018

2017

2018

¥267,939¥257,912$2,522,016

223,674

215,326

2,105,365

44,26542,585

416,650

33,20832,611

312,575

11,057

9,974

104,075

Other income (expense):
Interest income

35

38

329

Interest expense

(127)

(85)

(1,195)

Dividends income of insurance

197

190

1,854

Gains on sale of investments in subsidiaries
and affiliates

38

—

357

Gain on sales of non-current assets (note 18)

283

—

2,663

Loss on disposal of non-current assets

(120)

(100)

(1,129)Business restructuring expenses for subsidiaries
and affiliates

(56)

(112)

(527)

Closing expenses for subsidiaries and affiliates

—

(93)

—

Relocation expenses for subsidiaries and affiliates

(60)

—

(564)

Other, net

32

71

301

Subtotal

222

(93)

2,089

11,2799,881

106,165

Current

4,548

2,973

42,808Deferred

(790)

(16)

(7,435)

3,757

2,957

35,363

7,521

6,923

70,792

Income before income taxes
Income taxes (note 10):

Subtotal
Net Income
Net Income attributable to:Non-controlling interests
Owners of the parent

164

374

1,543

¥  7,357¥  6,549$   69,248

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

56

ANNUAL REPORT 2018

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31, 2018 and 2017

Thousands of
U.S. dollars(note 3)

Millions of yen

Net Income

2018

2017

2018

¥7,521¥ 6,923$70,792

Other comprehensive income arisingduring the year (note 19):
Net unrealized holding loss on other securities

7

4

65

Foreign currency translation adjustments

81

(38)

762

1,101

(1,136)

10,363

0

—

0

1,190

(1,170)

11,201¥8,712¥ 5,753$82,003¥8,486¥ 5,398$79,875

225

355

2,117

Adjustments for retirement benefit
Share of other comprehensive income of entities
accounted for using equity method
Total other comprehensive income arisingduring the year
Comprehensive income
Comprehensive income attributable to:
Owners of the parent
Non-controlling interests

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

ANNUAL REPORT 2018

57

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETSNEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31, 2018 and 2017

Numbers ofshares ofcommon stock(Thousands)

Balance at April 1, 2016

49,773

Millions of yen
Shareholders’ equity
Commonstock

CapitalsurplusRetainedearnings¥13,122¥16,650¥67,597

Treasury
stock

Total

¥(270)¥ 97,100

Changes arising during the year:
Cash dividends(3,524)

Profit attribute to owners of the parent

6,549

Purchase of treasury stock
Disposition of treasury stock(0)

Increase in share of consolidated
subsidiaries by capital increase1(3,524)
6,549
(2)

(2)

0

0
1

Net changes in accounts otherthan shareholders’ equity
Total changes during the year
Balance at March 31, 2017

—
—

—

1

3,025

(2)

3,024

49,773

13,122

16,652

70,622(272)

100,124

Changes arising during the year:
Cash dividends(3,623)

Profit attribute to owners of the parent

7,357

Purchase of treasury stock
Disposition of treasury stock0

Change in ownership interest of parent due to transactions with
non-controlling interests

3(3,623)
7,357
(4)

(4)

0

0
3

Net changes in accounts otherthan shareholders’ equity
Total changes during the year
Balance at March 31, 2018

—
—

—

3

3,734

(4)

3,733

49,773¥13,122¥16,655¥74,357¥(276)¥103,858

Non-controllinginterests

Total
net assets

Millions of yen
Accumulated other comprehensive income

Balance at April 1, 2016

Net unrealized
holding gains
on othersecurities

Foreigncurrencytranslation
adjustments

Accumulated
adjustments
for retirement
benefits¥32¥(376)¥(4,018)

Total¥(4,362)¥1,659¥ 94,397

Changes arising during the year:
Cash dividends—(3,524)

Profit attribute to owners of the parent

—

6,549

Purchase of treasury stock—(2)

Disposition of treasury stock—0

Increase in share of consolidated
subsidiaries by capital increase—

1

Net changes in accounts otherthan shareholders’ equity
Total changes during the year
Balance at March 31, 2017

3

(18)

(1,136)(1,151)

403

(748)

3

(18)

(1,136)(1,151)

403

2,276

35

(394)

(5,154)(5,513)

2,062

96,674

Changes arising during the year:
Cash dividends—(3,623)

Profit attribute to owners of the parent

—

7,357

Purchase of treasury stock—(4)

Disposition of treasury stock—0

Change in ownership interest of parent due to transactions with
non-controlling interests—

3

Net changes in accounts otherthan shareholders’ equity
Total changes during the year
Balance at March 31, 201858

ANNUAL REPORT 2018

7

20

1,101

1,128

196

1,324

7

20

1,101

1,128

196

5,057

¥42

¥(374)¥(4,053)¥(4,385)¥2,258¥101,732

Thousands of U.S. Dollars (note 3)
Shareholders’ equity

Balance at April 1, 2017

Commonstock

CapitalsurplusRetainedearnings$123,512$156,739$664,740

Treasury
stock

Total

$(2,560)$942,432

Changes arising during the year:
Cash dividends(34,102)

Net income

69,248(34,102)69,248Purchase of treasury stock
Disposition of treasury stock0

Change in ownership interest of parent due to transactions with
non-controlling interests

28

(37)

(37)

0

0
28

Net changes in accounts otherthan shareholders’ equity—

Total changes during the year
Balance at March 31, 2018—28

35,146(37)

35,137$123,512$156,767$699,896$(2,597)$977,579

Non-controllinginterests

Total
net assets

Thousands of U.S. Dollars (note 3)
Accumulated other comprehensive income

Balance at April 1, 2017

Net unrealized
holding gains
on othersecurities

Foreigncurrencytranslation
adjustments

Accumulated
adjustments
for retirement
benefits$329$(3,708)$(48,512)

Total$(51,891)$19,408$909,958

Changes arising during the year:
Cash dividends—(34,102)

Net income—

69,248Purchase of treasury stock

—

(37)

Disposition of treasury stock—0

Change in ownership interest of parent due to transactions with
non-controlling interests—

28

Net changes in accounts otherthan shareholders’ equity
Total changes during the year
Balance at March 31, 2018

65

188

10,363

10,617

1,844

12,46265

188

10,363

10,617

1,844

47,599$395$(3,520)$(38,149)$(41,274)$21,253$957,567

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

ANNUAL REPORT 2018

59

CONSOLIDATED STATEMENTS OF CASH FLOWSNEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31, 2018 and 2017

Thousands of
U.S. dollars(note 3)

Millions of yen
2018

2017

2018

¥ 11,279¥ 9,881$ 106,165

2,526

2,834

23,776

Amortization of goodwill

251

255

2,362

Increase (decrease) in allowance for doubtful accounts

12

54

112

Cash flows from operating activities:
Net income before income taxes
Depreciation and amortization(Increase) decrease in asset for retirement benefits

310

8

2,917

Increase (decrease) in liability for retirement benefits

872

810

8,207

Increase (decrease) in accrued bonuses to directors

34

(31)

320

Increase (decrease) in accrued warranty on products

(7)

(66)

(65)

Increase (decrease) in accrued losses on sales contracts

(90)

242

(847)

Interest and dividend income

(46)

(50)

(432)

Interest expense

127

85

1,195

(13,061)

13,463(122,938)(Increase) decrease in notes and accounts receivable(Increase) decrease in inventories
Increase (decrease) in notes and accounts payable
Other, net
SubtotalInterest and dividend received
Interest paid
Income taxes paid
Net cash provided by operating activities

60

ANNUAL REPORT 2018

266

678

2,503

3,801

(2,640)35,777

2,326

1,207

21,893

8,604

26,73380,986

47

50

442

(127)

(85)

(1,195)(3,744)(4,063)(35,240)

4,779

22,63444,983

Thousands of
U.S. dollars(note 3)

Millions of yen
2018

2017

2018

(1,628)(1,886)(15,323)

386

2

3,633

Cash flows from investing activities:
Purchase of property and equipment
Proceeds from sale of property and equipment(1,532)(688)(14,420)

Proceeds from sales of intangibles

11

—

103

Purchase of intangibles
Purchase of investment securities

(27)

(9)

(254)

Loans receivable made

(2)

(1)

(18)

Collection of loans receivable

3

5

28

Proceeds from sales of investments in subsidiaries
and affiliates

74

—

696

Other, net
Net cash used in investing activities

(87)

(119)

(818)

(2,802)(2,697)(26,374)

Cash flows from financing activities:
Net increase (decrease) in short-term bank loans

(111)

23

(1,044)

Repayments of long-term debt

(171)

(163)

(1,609)

(4)

(2)

(37)

(3,620)(3,521)(34,073)

(23)

(14)

(216)

Proceeds from sale and purchase of treasury stock, net
Dividends paid to shareholders
Dividends paid to non-controlling interest

(435)

(466)

(4,094)(4,366)(4,144)(41,095)

22

(33)

207

Net increase (decrease) in cash and cash equivalents(2,366)15,758(22,270)

Cash and cash equivalents at beginning of year

59,64843,889561,445¥ 57,281¥59,648$ 539,166

Other, net
Net cash used in financing activities
Effect of exchange rate changes on cash andcash equivalents

Cash and cash equivalents at end of year

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

ANNUAL REPORT 201861

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEC Networks & System Integration Corporation and Consolidated Subsidiaries
March 31, 2018 and 2017

1. BASIS OF PREPARATION
NEC Networks & System Integration Corporation (the“Company”) and its domestic subsidiaries maintaintheir books of account in conformity with the financial
accounting standards of Japan. Its foreign subsidiaries
maintain their books of account in conformity withthose of their countries of domicile.
The accompanying consolidated financial statements
have been compiled from the consolidated financial
statements prepared by the Company as required under
the Japanese Financial Instruments and Exchange Law
and, have been prepared in accordance with accounting
principles generally accepted in Japan, which are different
in certain respects as to the application and disclosure
requirements of IFRSs.
As permitted by the Japanese Financial Instruments
and Exchange Law, amounts of less than one million yen
have been omitted. As a result, the totals shown in theaccompanying consolidated financial statements (both inyen and U.S. dollars) do not necessarily agree with thesum of the individual amounts.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(a) Consolidation
The Company has 17 subsidiaries (companies over which
the Company has the ability to control their operations)as of March 31, 2018 (17 subsidiaries as of March 31,2017) (the “Group”).
The accompanying consolidated financial statements
include the accounts of the Company and the significant
companies controlled directly or indirectly by theCompany. All significant intercompany balances andtransactions have been eliminated in consolidation.
The financial statements of the 7 subsidiaries with
year-end of December 31 have been used for consolidation. All material transactions that occurred in the period
from such year-end to March 31, which is the Company’s
year-end, have been adjusted.
The difference between the carrying amount andthe underlying net assets at fair value at the respective
dates of acquisition is allocated to identifiable assets
and liabilities based on fair market value at the dates ofacquisition. The unallocated portion of the difference,
which is recognized as goodwill, is amortized by thestraight-line method over a period of up to 20 years inwhich the future benefit of each investment is expected.
The Company also has 2 affiliates accounted for using
equity method.
If the closing date of affiliates differs from the Company,
financial statements prepared by their closing date areutilized in consolidation.
(b) Foreign currency translation
Monetary assets and liabilities denominated in foreign
currencies are translated into yen at the exchange rates
prevailing at the balance sheet dates. All revenues andexpenses associated with foreign currencies are translated at the rates of exchange prevailing when suchtransactions were made. The resulting exchange gainor loss is credited or charged to income.

62

ANNUAL REPORT 2018

The revenue and expense accounts of the foreignsubsidiaries are translated into yen at the average­exchange rates prevailing during the year, and, except
for the components of shareholders’ equity, the balance
sheet accounts are translated at the rates of exchange
in effect at the balance sheet date. The components
of shareholders’ equity are translated at their historicalexchange rates. Translation adjustments, except forthe portion included in non-controlling interests, are­presented as a separate component of net assets inthe accompanying consolidated financial statements.
(c) Cash equivalents
Cash and cash equivalents include all highly liquid investments – generally with original maturities of three months
or less – that are readily convertible to known amountsof cash and have negligible risk of changes in value dueto their short maturities.
(d) Investment securities
Marketable securities classified as other securities aremeasured at fair value with any changes in unrealized
holding gain or loss, net of the applicable income taxes,
included directly in net assets. Non-marketable securities
classified as other securities are carried at cost. Cost of
securities sold is determined by the moving-averagemethod.
(e) Inventories
Work in process is stated at the lower of cost or net
selling value determined on a specific project basis.
Purchased goods and materials are stated at the lowerof cost or net selling value determined primarily by themoving-average method.
(f) Depreciation and amortization
Depreciation of property and equipment is principally
computed by the straight-line method.
Significant renewals and improvements are capitalized.
Maintenance and repair costs are charged to expense.
The useful lives of property and equipment are­summarized as follows:
Buildings and structures3 to 50 years
Machinery, equipment and vehicles
2 to 17 years
Tools, furniture and fixtures
2 to 20 years
Intangibles are amortized by the straight-line method
over their estimated useful lives.
Software for sale is amortized based on projectedsales volumes over the estimated effective periods(within 3 years). Software for internal use is amortized by
the straight-line method over the estimated useful lives(within 5 years).
(g) Allowance for doubtful accounts
The allowance for doubtful accounts is provided at an
amount determined based on the historical experienceof bad debt with respect to ordinary receivables, and an
estimate of uncollectible amounts determined by reference to specific doubtful receivables from customers
which are experiencing financial difficulties.

(h)Accrued warranty on products
Accrued warranty on products is provided for at the estimated warranty cost.
(i) Accrued losses on sales contracts
Accrued losses on sales contracts are provided for at theamount of estimated losses for work in process at thebalance sheet date. Among sales orders of the Company
on hand at the balance sheet date, for projects in which
the estimated cost is expected to exceed the amountof the sales order, such excess costs on sales contracts
are accrued.
(j) Leases
Leased assets related to finance lease transactions­without title transfer are depreciated by the straight-line
method, with the lease term as their useful lives and noresidual value.
(k) Research and development costs
Research and development costs are charged to expense
as incurred.

Methods for significant hedge accounting(i) Hedge accounting method
	Deferral hedge accounting is applied. For forward
exchange contracts, the allocation method is applied
if the criteria for the allocation method are met.
(ii) Hedging instruments and hedged items
	Hedging instruments: Forward exchange contracts
	Hedged items: Any monetary receivables and payables and planned trading transactions that are­denominated in foreign currencies.
(iii) Hedging policy
	The Company uses derivative transaction in accordance with internal policies to mitigate and avoid
the foreign exchange fluctuation risk.
(iv) Hedging evaluation
	Hedge effectiveness is evaluated by comparing thetotal changes in values of hedging instruments andhedged items for the periods from the commencement of hedge contracts to the evaluation dates. For
forward exchange contracts which meet the criteria
for the allocation method, the evaluation of hedge
effectiveness is omitted.

(l) Retirement benefits
Liability for retirement benefits is provided mainly at an
amount calculated based on the retirement benefit obligation and the fair value of the pension plan assets atthe balance sheet dates, as adjusted for the actuarial
gain or loss and past service costs that are yet to berecognized. The retirement benefit obligation is attributed
to each period by the straight-line method over the­estimated years of services of the eligible employees.
Actuarial gain or loss is amortized in the subsequent yearthat it occurs by the straight-line method within the average remaining years (11 to 18 years) of service of theemployees. Past service costs are amortized beginningfrom the year it is incurred by the straight-line method
within the average remaining years (12 to 18 years) ofservice of the employees.
Certain consolidated subsidiaries use a simplified
method for calculating retirement benefit asset and liability
and retirement benefit costs that for lump-sum payment
plans, the payment for voluntary retirement at fiscal yearend is deemed as retirement benefit obligation, and forannuity payment plans, the actuarial obligation on pension finance calculation in the recent years is deemed as
the retirement benefit obligation.

(o) Revenue recognition
The percentage-of-completion method is applied if theoutcome of the construction activity can be estimatedreliably, otherwise, the completed-contract method isapplied. The percentage of completion as of the end of
the reporting period is estimated based on the percentage of the cost incurred to the estimated total cost.

(m) Income taxes
Deferred tax assets and liabilities are determined basedon the differences between financial reporting and thetax bases of the assets and liabilities and are measured
using the enacted tax rates and laws which will be ineffect when the differences are expected to reverse.

(s) Accounting standards and guidance issued but not
yet adopted
The following accounting standards and guidance were
issued but not yet adopted.

(n) Derivative financial instruments
Derivatives are recorded at their fair value with any
changes in unrealized gain or loss charged or credited
to income, except for those which meet the criteria fordeferral hedge accounting under which unrealized gainor loss, net of the applicable income taxes, is directly
included in net assets.

(p) Accrued bonuses to directors
The Company and its domestic consolidated subsidiaries
provide accrued bonuses to directors based on the­estimated amounts to be paid in respect of the year.
(q) Accounting for consumption taxes
Consumption taxes generally withheld upon sale, as
well as those paid for purchases of goods or services,
are recorded as a liability or an asset, and are excluded
from relevant revenue, costs or expenses.
(r) Reclassifications
Certain reclassifications have been made to the consolidated financial statements for the year ended March 31,2017 to conform to the presentation for the year ended
March 31, 2018.

“Implementation Guidance on Tax Effect Accounting”(ASBJ Guidance No. 28, February 16, 2018)“Implementation Guidance on Recoverability of Deferred
Tax Assets” (ASBJ Guidance No. 26 (revised 2018),
February 16, 2018)

ANNUAL REPORT 201863

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(1) Overview
	The above guidance was revised in regard to the treatments for taxable temporary differences for investments in subsidiaries within the context of
non-consolidated financial statements, and to clarify
the treatments in determining recoverability of deferred tax assets in a company which was categorized
as ‘Type1’ according to the guidance.
(2) Effective date	Effective from the beginning of the fiscal year ending
March 31, 2019.
(3) Effects of the application of the standards
	The adoption of the above guidance would haveno significant impact on the consolidated financial
statements.
“Accounting Standard for Revenue Recognition” (ASBJ
Statement No. 29, March 30, 2018)“Implementation Guidance on Accounting Standard
for Revenue Recognition” (ASBJ Guidance No. 30, March
30, 2018)(1) Overview
	International Accounting Standards Board (IASB) andthe Financial Accounting Standards Board (FASB) had
jointly developed comprehensive accounting standards
on revenue recognition and had issued “Revenue fromContracts with Customers” (which is called “IFRS 15”
in IASB, and “Topic 606” in FASB) in May 2014, andIFRS 15 applies to an annual reporting period beginning on or after January 1 2018, and Topic 606 applies to an annual reporting period beginning after
December 15, 2017. In these circumstances, the ASBJ
has developed comprehensive accounting standards
on revenue recognition, and has issued the above
accounting standard and implementation guidance.
		 The ASBJ followed two policies in developing a
new revenue standard. Basically, incorporate all IFRS
15 requirements for international comparability as oneof the benefit from conformity with IFRS 15, and consider additional alternative treatments where theywould make application easier for the practice ofbusiness in Japan, within the extent of that would
not significantly hinder international comparability.

64

ANNUAL REPORT 2018

(2) Effective date	Effective from the beginning of the fiscal year ending
March 31, 2022.
(3) Effects of the application of the standards
	The Company and its consolidated domestic subsidiaries are currently in the process of determining theeffects of these new standards on the consolidated
financial statements.
(t) Changes in presentation
Changes in the consolidated balance sheets“Electronically recorded monetary claims” included in“Notes and accounts receivable” in “Current assets” forthe year ended March 31, 2017 is presented as a separate account for the year ended March 31, 2018 due toan increase in materiality.
The consolidated financial statements for the year ended
March 31, 2017 have been reclassified to conform to thepresentation used for the year ended March 31, 2018.
As a result, “Notes and accounts receivable” of¥91,152 million in “Current assets” for the year ended
March 31, 2017 were reclassified to “Notes and accounts
receivable” of ¥90,711 million and “Electronically recorded monetary claims” of ¥441 million for the year ended
March 31, 2017, were presented as a separate accountfor the year ended March 31, 2018.
In addition, the above separate account of“Electronically recorded monetary claims” for the year
ended March 31, 2017, was reclassified in fair value offinancial instruments in note 21 (FINANCIAL
INSTRUMENTS).

3. U.S. DOLLAR AMOUNTS
The translation of yen amounts into U.S. dollar amounts
is included solely for the convenience of readers outside
Japan and has been made, as a matter of arithmetic
computation only, at ¥106.24 = U.S.$1.00, the approximate rate of exchange on March 31, 2018. The translation should not be construed as a representation thatthe yen amounts have been, could have been, or couldin the future be, converted into U.S. dollars at that or
any other rate.

4. NOTES AND ELECTRONICALLY RECORDED MONETARY CLAIMS MATURING
Notes and electronically recorded monetary claims are settled on the clearing date. As financial institutions in Japan
were closed on March 31, 2018, the following notes and electronically recorded monetary claims maturing on March
31, 2018 and collected or paid on the following business day, are included in the consolidated balance sheets.
Thousands of
U.S. dollars

Millions of yen
2018

2017

2018

¥75

¥—

$705

Electronically recorded monetary claims

18

—

169

Notes payable

30

—

282

Notes receivable

5. INVESTMENT SECURITIESThe components of unrealized gain or loss on marketable securities classified as other securities at March 31, 2018and 2017 are summarized as follows:
Millions of yen
March 31, 2018

Carrying
value

Acquisition
cost

Thousands of U.S. dollars
Unrealized
gain (loss)

Carrying
value

Acquisition
cost

Unrealized
gain (loss)

Securities whose carrying value
exceeds their acquisition cost:
Equity securities
Subtotal

¥179

¥ 98

¥ 80

$1,684$  922

$ 753

179

98

80

1,684

922

753

Securities whose acquisition costexceeds their carrying value:
49

74

(25)

461

696

(235)

49

74

(25)

461

696

(235)

¥228

¥172

¥ 55

$2,146$1,618$ 517

Equity securities
Subtotal
Total

Millions of yen
March 31, 2017

Carrying
value

Acquisition
cost

Unrealized
gain (loss)

Securities whose carrying value
exceeds their acquisition cost:
Equity securities
Subtotal

¥167

¥ 89

¥ 78

167

89

78

51

74

(22)

Securities whose acquisition costexceeds their carrying value:
Equity securities
Subtotal
Total

51

74

(22)

¥219

¥163

¥ 55

ANNUAL REPORT 201865

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Sales of securities classified as other securities for the years ended March 31, 2018 and 2017 are summarized
as follows:
Thousands of
U.S. dollars

Millions of yen
2018

2017

2018

Proceeds from sales

¥4

¥3

$37

Gain(Loss) on sales

3

(1)

28

Unlisted equity securities of ¥223 million ($2,099
thousand) and ¥202 million at March 31, 2018 and 2017,
respectively, are not included in the above table because
there is no market value thereof and future cash flows
cannot be estimated therefor, thus, making it extremely
difficult to measure the fair value.
Impairment loss recognized on investment securities
During the fiscal year ended March 31, 2018, the Com­pany recognized impairment losses of ¥11 million ($103
thousand) and ¥0 million ($0 thousand) on available-forsale securities with and without market value,

respectively. During the fiscal year ended March 31, 2017,
the Company recognized impairment losses of ¥2 millionand ¥0 million on available-for-sale securities with andwithout market value, respectively.
Securities with market value are fully impaired if theirmarket value as at fiscal year-end falls below 50% of their
original cost. If the decline in their market value is between 30% and 50%, the recoverability of their market
value is taken into account to determine the amount oflosses. Securities without market value are impaired if the
net asset per share falls below 50% of original cost due
to deterioration of issuers’ financial conditions.

6. INVESTMENT IN AN AFFILIATEThe aggregate carrying amount of investment in an affiliate as of March 31, 2018 is ¥64 million ($602 thousand).

7. INVENTORIESa) Inventories at March 31, 2018 and 2017 are as follows:
Thousands of
U.S. dollars

Millions of yen
2018Work in process
Purchased goods and materials
Total

2017

2018

¥5,858¥5,815$55,139

2,379

2,679

22,392¥8,237¥8,494$77,532b) Losses from revaluation of the lower of cost or net selling value included in cost of sales for the years ended March
31, 2018 and 2017 were ¥149 million ($1,402 thousand) and ¥–474 million, respectively.
c) Losses on sales contracts included in cost of sales for the years ended March 31, 2018 and 2017 were ¥338 million($3,181 thousand) and ¥555 million, respectively.
d) Accrued losses on sales contracts and work in process corresponding to the loss contract are not offset in the­accompanying consolidated balance sheets.
Work in process inventories corresponding to accrued losses on sales contracts at March 31, 2018 and 2017 are
as follows.
Thousands of
U.S. dollars

Millions of yen
2018Work in process

66

ANNUAL REPORT 2018

¥263

2017

¥127

2018

$2,475

8. GOODWILL
Goodwill at March 31, 2018 and 2017 is recorded in the accompanying consolidated balance sheets under the following captions:Thousands of
U.S. dollars

Millions of yen
2018

Intangibles, net of accumulated amortization¥1,39420172018¥1,689$13,121

According to Article 32 of the “Practical Guidelines on Accounting Standards for Capital Consolidation Procedures in
Preparing Consolidated Financial Statements” (Accounting Practice Committee Statement No. 7 amended on November
28, 2014 by the Japan Institute of Certified Public Accountants), goodwill is amortized.

9. SHORT-TERM BANK LOANS AND LONG-TERM DEBT
Short-term bank loans and long-term debt are unsecured.
The weighted average interest rates of current installments of long-term debt for the years ended March 31, 2018and 2017 were approximately 0.4% and 0.5% and those of long-term debt for the years ended March 31, 2018 and2017 were approximately 0.4% and 0.4%, respectively.
The annual maturities of long-term debt at March 31, 2018 are as follows:
Millions of yen

Thousands of
U.S. dollars

2019¥3,171$29,847

2020

171

1,609

2021

171

1,609

2022

171

1,609

2023

171

1,609

2024 and thereafter

157

1,477

Year ending March 31,As of March 31, 2018 and 2017, the Group executed a ¥9,000 million ($84,713 thousand) and ¥8,000 million,
respectively committed borrowing facility with two domestic banks, and there are no outstanding borrowings having
been occurred during the year.

10. INCOME TAXES
Income taxes applicable to the Company and its domestic subsidiaries comprise corporation, enterprise and inhabitants’ taxes, which, in the aggregate, resulted in a statutory tax rate of approximately 30.9% and 30.9% for 2018 and2017, respectively. Income taxes of the foreign subsidiaries are based generally on the tax rates applicable in theircountries of incorporation.
The effective tax rates reflected in the consolidated statements of income for the years ended March 31, 2018 and2017 differed from the statutory tax rate for the following reasons:
2018

2017

30.9%

30.9%

Expenses not deductible for tax purposes

1.5

1.4

Inhabitant tax per capita levy

1.2

1.4

Tax credit

(0.3)

(0.3)

Increase/(Decrease) in valuation allowance

(0.3)

(2.8)

Amortization of goodwill

0.2

0.3

Statutory tax rate
Effect of:Other, net

0.1

(1.0)

Effective tax rate

33.3%

29.9%

ANNUAL REPORT 201867

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Tax effects of significant temporary differences and tax loss carry-forwards that resulted in deferred tax assets or
liabilities at March 31, 2018 and 2017 are as follows:
Thousands of
U.S. dollars

Millions of yen
2018

2017

2018

Deferred tax assets:¥ 2,211¥ 1,973$ 20,811

Social security contribution on employees’ bonuses

316

284

2,974

Allowance for doubtful accounts

33

39

310

Accrued employees’ bonuses

282

246

2,654

1,278

1,187

12,029Accrued enterprise tax
Loss on revaluation of inventories
Unrealized profit on inventories

17

16

160

Accrued losses on sales contracts

162

177

1,524

Depreciation

200

189

1,882

Asset retirement obligations

240

240

2,259

Liability for retirement benefits

9,304

9,789

87,575

Stock dividends

106

106

997

Impairment loss on investment securities

29

57

272

—

101

—

1,696

1,495

15,963

Asset adjustment accountTax loss carry-forwards

408

376

3,840

16,28816,282

153,313(2,975)(2,694)(28,002)13,313

13,588125,310

Asset for retirement benefits

(56)

(28)

(527)

Restoration cost for asset retirement obligations

(151)

(167)

(1,421)

Goodwill

(251)

(302)

(2,362)

Liability adjustment account

(147)

(150)

(1,383)

Other

(26)

(46)

(244)

Other
Subtotal
Valuation allowance
Total
Deferred tax liabilities:

Total
Net deferred tax assets

(634)

(694)

(5,967)¥12,678¥12,893$119,333

Net deferred tax assets and liabilities as of March 31, 2018 and 2017 are reflected in the accompanying consolidated balance sheets under the following captions:Thousands of
U.S. dollars

Millions of yen
2018

68

2017

2018

¥4,524¥4,102$42,582

Investments and other assets—Deferred tax assets

8,596

8,881

80,911

Non-current liabilities—Other liabilities

(442)

(90)

(4,160)Current assets—Deferred tax assets

ANNUAL REPORT 2018

11. RETIREMENT BENEFIT PLANS
The Company and its consolidated subsidiaries havefunded or unfunded defined benefit plans and defined
contribution plans.
Lump-sum or annuity payments are paid from thecorporate defined benefit pension plans, all of which
are funded based on the employees’ job grade andlength of service.
Lump-sum payments are paid from unfunded lumpsum payment plans based on the employees’ job grade,
performance and length of service.

Certain consolidated subsidiaries use a simplified
method for calculating retirement benefit asset and­liability and retirement benefit costs that for lump-sum
payment plans, the payment for voluntary retirement at
fiscal year-end is deemed as retirement benefit obligation, and for annuity payment plans, the actuarial obligation on pension finance calculation in the recent years
is deemed as the retirement benefit obligation.

The information for the Company’s and the consolidated subsidiaries’ defined benefit plans at March 31, 2018 and2017 for the years then ended is as follows.
(1) Movement in retirement benefit obligations
Thousands of
U.S. dollars

Millions of yen

Retirement benefit obligation at beginning of year
Service cost

2018

2017

2018

¥59,713¥56,364$562,057

2,585

2,510

24,331

Interest cost

541

507

5,092

Actuarial gain and loss

(989)

2,042

(9,309)(1,948)(1,885)(18,335)

—

174

—

Benefits paid
Changes arising from the changes in accounting policy fromthe simplified method to the standard method

27

(1)

254

¥59,929¥59,713$564,090

Other
Retirement benefit obligation at end of year
Note: The above table excludes certain plans that have adopted the simplified method.

(2) Movements in plan assets
Thousands of
U.S. dollars

Millions of yen

Plan assets at beginning of year

2018

2017

2018

¥29,407¥28,558$276,797

722

699

6,795

Expected return on plan assets

127

(413)

1,195

Contributions paid by the employer

1,116

1,496

10,504

Benefits paid

(900)

(929)

(8,471)

Actuarial gain and loss

(2)

(3)

(18)

¥30,471¥29,407$286,812

Other
Plan assets at end of year
Note: The above table excludes certain plans that have adopted the simplified method.

(3) Reconciliation of changes in liability for retirement benefits whose plans adopted the simplified method
Thousands of
U.S. dollars

Millions of yen
2018

2017

2018

¥576

¥ 639

Retirement benefit costs

60

86

564

Benefits paid

(42)

20

(395)

Changes arising from the changes in accounting policy fromthe simplified method to the standard method

—

(157)

—

Liability for retirement benefits at beginning of year

Other
Liability for retirement benefits at end of year

$5,421

(67)

(13)

(630)

¥526

¥ 576

$4,951

ANNUAL REPORT 201869

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(4) Reconciliation from retirement benefit obligations and plan assets to liability (asset) for retirement benefits
Thousands of
U.S. dollars

Millions of yen
2018

2017

Funded retirement benefit obligation¥ 32,417¥ 32,798$ 305,129

2018

Plan assets(30,919)(29,815)(291,029)

1,497

2,982

14,09028,48627,899268,128

Net liability for retirement benefits¥ 29,984¥ 30,881$ 282,228

Liability for retirement benefits¥ 30,428¥ 31,206$ 286,408

(444)

(324)

(4,179)¥ 29,984¥ 30,881$ 282,228

Unfunded retirement benefit obligation

Asset for retirement benefits
Net liability for retirement benefits
Note: The above table includes certain plans that have adopted the simplified method.

(5) Retirement benefit costs
Thousands of
U.S. dollars

Millions of yen
2018

2017

2018

Service cost

¥2,585¥2,510$24,331

Interest cost

541

507

5,092

Expected return on plan assets

(722)

(699)

(6,795)

Net actuarial loss amortization

1,534

1,411

14,439

Past service costs amortization

(574)

(574)

(5,402)Retirement benefit costs calculated by the simplified method

60

86

564

Other

(0)

14

(0)

¥3,424¥3,256$32,228Retirement benefit costs(6) Adjustments for retirement benefit
Thousands of
U.S. dollars

Millions of yen
2018

Past service costs
Actuarial gains and losses
Total

2017

2018

¥ (574)¥ (574)$ (5,402)

2,652(1,044)24,962¥2,077¥(1,619)$19,550(7) Accumulated adjustments for retirement benefit
Thousands of
U.S. dollars

Millions of yen

Unrecognized prior service costs
Unrecognized actuarial gains and losses
Total

70

ANNUAL REPORT 2018

2018

2017

2018

¥(2,224)¥ (2,798)$(20,933)

8,006

10,65975,357¥ 5,782¥ 7,860$ 54,423

(8) Plan assets(a) The components of plan assets
Thousands of
U.S. dollars

Millions of yen
2018

2017

2018

Debt securities¥15,376¥14,792$144,728

Equity securities

4,645

4,328

43,721

General account

3,612

3,517

33,998

Alternative

59,939

6,368

6,172

Other

468

597

4,405

Total

¥30,471¥29,407$286,812

Note: Total plan assets include ¥413 million ($3,887 thousand) and ¥509 million in a retirement benefit trust established for the corporate pension plan as ofMarch 31, 2018 and 2017, respectively.
Alternative is mainly investment to hedge fund.

(b) Long-term expected rate of return
Current and target asset allocations, historical and expected returns on various categories of plan assets have been
considered in determining the long-term expected rate of return.
(9) Actuarial assumptions
The principal actuarial assumptions at March 31, 2018 and 2017 (expressed as weighted averages) are as follows:


2018

2017

Discount rate

0.9%

0.9%

Long-term expected rate of return

2.5%

2.5%

Expected increase rate of salary

4.1%

4.1%

The amounts to be paid by the Company and its consolidated subsidiaries to the defined contribution plans were¥479 million ($4,508 thousand) and ¥477 million for the years ended March 31, 2018 and 2017.

12. ASSET RETIREMENT OBLIGATIONS
The asset retirement obligations are based on estimated future restoration obligations related to leasehold contracts ofhead office and other facilities.
The obligations are calculated based on the estimated office rental period of mainly 20 years and a discounted rateof 1.7%.
The following table provides Company’s total asset retirement obligations for the years ended March 31, 2018and 2017:
Thousands of
U.S. dollars

Millions of yen
2018

2017

2018

¥781

¥756

8

34

75

Obligations settled

(42)

(19)

(395)

Accretion expense

10

10

94

Remeasurements

18

—

169

¥777

¥781

$7,313

Balance, beginning of year
Obligations incurred by asset acquisition

Balance, end of year

$7,351

ANNUAL REPORT 201871

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. SHAREHOLDERS’ EQUITY
Under Japanese laws and regulations, the entire amount
paid for new shares is required to be designated ascommon stock. However, a company may, by resolution of
the Board of Directors, designate an amount not ­exceeding
one half of the price of the new shares as additional paid-in
capital, which is included in capital surplus.
The Companies Act provides that an amount equal to
10% of distributions from retained earnings paid by theCompany and its Japanese subsidiaries be appropriatedas a legal earnings reserve. No further appropriations are
required when the total amount of the additional paid-in
capital and the legal earnings reserve equals 25% of theirrespective stated capital. The Companies Act also

provides that additional paid-in capital and legal earnings
reserve are available for appropriations by the resolutionof the shareholders. The legal earnings reserve amounted
to ¥546 million ($5,139 thousand) as of both March 31,2018 and 2017. Legal earnings reserve is included inretained earnings in the accompanying consolidatedbalance sheets.
Cash dividends charged to retained earnings for theyears ended March 31, 2018 and 2017 represent dividends paid out during those years. The amount available
for dividends is based on the amount recorded in the
Company’s non-consolidated books of account in­accordance with the Companies Act.

The movement of treasury stock is as follows:
Shares


2018

2017

At beginning of year

135,911

134,825

1,534

1,141

Increase - purchase of odd lot shares
Decrease - sale of odd lot shares
At end of yeara) Dividends paid during the year ended March 31, 2017
The following was approved by the Board of Directors on April 28, 2016.
(a) Total dividends¥1,737 million(b) Cash dividends per common share¥35(c) Record date
March 31, 2016(d) Effective date
May 31, 2016
The following was approved by the Board of Directors on October 31, 2016.
(a) Total dividends¥1,786 million(b) Cash dividends per common share¥36(c) Record date
September 30, 2016(d) Effective date
December 2, 2016b) Dividends to be paid after March 31, 2017 although record date for payment falls
within the year ended March 31, 2017
The following was approved by the Board of Directors on April 27, 2017.
(a) Total dividends¥1,786 million(b) Dividend source
Retained earnings(c) Cash dividends per common share¥36(d) Record date
March 31, 2017(e) Effective dateJune 2, 2017c) Dividends paid during the year ended March 31, 2018
The following was approved by the Board of Directors on April 27, 2017.
(a) Total dividends¥1,786 million ($16,810 thousand)(b) Cash dividends per common share¥36 ($0.33)(c) Record date
March 31, 2017(d) Effective dateJune 2, 2017
The following was approved by the Board of Directors on October 31, 2017.
(a) Total dividends¥1,836 million ($17,281 thousand)(b) Cash dividends per common share¥37 ($0.34)(c) Record date
September 30, 2017(d) Effective date
December 4, 201772

ANNUAL REPORT 201810

55

137,435

135,911d)	Dividends to be paid after March 31, 2018 although record date for payment falls
within the year ended March 31, 2018
The following was approved by the Board of Directors on April 27, 2018.
(a) Total dividends¥1,836 million ($17,281 thousand)(b) Dividend source
Retained earnings(c) Cash dividends per common share¥37 ($0.34)(d) Record date
March 31, 2018(e) Effective date
May 31, 2018

14. CONTINGENT LIABILITIESAt March 31, 2018 and 2017, the Company was contingently liable as guarantor of indebtedness of the Company’s
employees in the aggregate amount of ¥4 million ($37 thousand) and ¥9 million, respectively.

15. LEASES(1) Finance leases
Under finance leases that do not transfer ownership of the leased property to the lessee
Most of finance lease transactions are telecommunications equipment in Enterprise network business, and capitalized lease assets and lease obligations in the balance sheet. Finance lease assets that do not deem to transfer ownership of the leased property to the lessee are depreciated using the straight-line method over the period of the lease,with zero residual value(2) Operating leases
Future minimum operating lease payments subsequent to March 31, 2018 and 2017 for non-cancelable operatingleases are summarized as follows:
Thousands of
U.S. dollars

Millions of yen
2018

2017

2018

Due within one year

¥2,521¥2,447Due over one year

3,064

5,231

28,840¥5,585¥7,678$52,569

Total$23,729

16. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The significant components of selling, general and administrative expenses for the years ended March 31, 2018 and2017 are as follows:
Thousands of
U.S. dollars

Millions of yen

Employees salary
Provision for bonuses to directors
Retirement benefit costs
Provision of allowance for doubtful accounts

2018

2017

2018

¥16,035¥15,485$150,931

38

39

357

1,232

1,194

11,596

13

37

122

17. RESEARCH AND DEVELOPMENT COSTS
Research and development costs included in selling, general and administrative expenses amounted to ¥425million($4,000 thousand) and ¥387 million for the years ended March 31, 2018 and 2017, respectively.

18. GAIN ON SALES OF NON-CURRENT ASSETS
Gain on sales of non-current assets are due to the sales of buildings and land of company dormitory.

ANNUAL REPORT 201873

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19. OTHER COMPREHENSIVE INCOME
The reclassification adjustment and the related income tax effects allocated to each component of other comprehensive income for the years ended March 31, 2018 and 2017 are as follows:
Thousands of
U.S. dollars

Millions of yen
2018

2017

2018

Net unrealized holding gain on other securities:¥   (0)¥    5$     (0)Reclassification adjustment for gain/loss realized in net income

11

—

103

Before tax amount

10

5

94

Tax effect

(3)

(1)

(28)

Net-of-tax amount

7

4

65

781

Unrealized holding gain(loss) arising during the year

Foreign currency translation adjustments:
Foreign currency translation adjustments arising during the year

83

(38)

Reclassification adjustment for gain/loss realized in net income

—

—

—

Before tax amount

83

(38)

781

Tax effect

(2)

(0)

(18)

Net-of-tax amount

81

(38)

762

1,117

(2,456)

10,513

960

836

9,036

2,077

(1,619)19,550Adjustments for retirement benefit:
Adjustments for retirement benefit arising during the year
Reclassification adjustment for gain/loss realized in net income
Before tax amountTax effect

(976)

483

(9,186)Net-of-tax amount

1,101(1,136)

10,3630—0¥1,190¥(1,170)$11,201

Share of other comprehensive income of entities accounted for using equity method
Share of other comprehensive income of entities accounted for using
equity method arising during the year
Total other comprehensive income

20. AMOUNTS PER SHARE
Thousands of
U.S. dollars

Millions of yen
2018

2017

2018

Net income per share¥   148.23¥   131.94$ 1.39Net assets per share

2,004.04

1,906.03

18.86

The basis of calculation for net income per share and net income per share is as shown below.


Net income attributable to owners of the parent (millions of yen)

2017

7,357

6,549

—

—

Net income attributable to owners of the parent related to common stock (millions of yen)

7,357

6,549

Average number of shares during the term (thousands of shares)

49,637

49,638Amounts not attributable to common stock (millions of yen)

74

2018

ANNUAL REPORT 2018

21. FINANCIAL INSTRUMENTS
Conditions of Financial instruments(1) Management policy
The Group makes short-term deposits or uses high-security
financial instruments for fund management purposes.
The Group obtains funding for capital expenditureplans mainly through bank loans.
The Group utilizes derivative financial instruments
to hedge various risks as described in detail below anddoes not enter into derivatives for trading or speculative
purposes.
(2) Financial instruments and risks
The notes, accounts receivable and electronically­recorded monetary claims are exposed to credit riskof customers. Operating receivables and payables­denominated in foreign currencies are exposed to foreign
currency fluctuation risk.
Marketable and investment securities, except for
short-term investments, are held for business and capitalalliances with business associates, and are exposed tostock market fluctuation risk.
Maturities of notes, accounts payable and electronically recorded obligations are within one year.
Debts are for funding capital expenditure, and theirmaximum maturities are 6 years and 7 years after thebalance sheet date for the years ended March 31, 2018and 2017, respectively. Part of the obligations has floatinginterest rates and is exposed to interest rate risk.
In order to hedge the foreign exchange rates fluctuation risk associated with operating receivables and payables denominated in foreign currencies, forward foreignexchange contracts are used.
Hedge accounting is applied for certain derivativetransactions. Please refer to note 2 (n).
(3) Financial instruments risk management
1) Credit risk
To mitigate and quickly capture collectability issues, theGroup regularly monitors customers’ credit status, andperforms due date controls and balance controls foreach customer.

When the Group utilizes derivatives or deposits
money and purchases securities for cash management
purposes, to mitigate the counterparty risk, the counterparties to these transactions are financial institutions
with high credit ratings.
2) Market risk
The Group comprehends foreign currency fluctuation risk
by currency and by month, and to mitigate the risk, theGroup enters into a forward exchange contract for hedging the cash flow fluctuation risk associated with operating receivables and payables denominated in foreign
currencies.
To mitigate the stock market fluctuation risk, theGroup regularly monitors stock prices and financial statusof its business associates and continuously considers
whether the Group should hold the stock.
Derivative transactions entered into by the Group arein accordance with policies and rules that provide for risk
management, approvals, reporting and verifications.
3) Liquidity risk
To mitigate the liquidity risk, the Group prepares andupdates its funds management plan on a timely basis,and maintains an appropriate level of liquidity through its
cash and cash equivalents and unused committed lines.
(4) Supplemental explanation regarding fair value of­financial instruments
Fair value of financial instruments is measured basedon the quoted market price, if available, or reasonably
assessed value if a quoted market price is not available.
Fair value of financial instruments for which quoted
market price is not available is calculated based on certain assumptions, and the fair value may differ if different
assumptions are used. In addition, the contract amountof the derivative transactions described below in note 22(DERIVATIVES) does not represent the market risk of thederivative transactions.
(5) Concentration of credit risk
At both March 31, 2018 and 2017, 24% and 27% of­operating receivables were receivables from a certain
major customer.

ANNUAL REPORT 201875

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair value of financial instruments
The carrying amount on the consolidated balance sheets, fair value and differences as of March 31, 2018 and 2017 are
as follows.
Financial instruments, of which the fair value is extremely difficult to measure, are not included. (Please see (2)“Financial instruments of which the fair value is extremely difficult to measure”)
Millions of yen
March 31, 2018

Carrying
amountFair value¥ 57,281¥ 57,281

Thousands of U.S. dollars
Differences

Carrying
amountFair value$  539,166$  539,166$——

Differences

Assets:(1) Cash and cash equivalents(2) Notes and accounts receivable

978,077

494

4,649

(3) Electronically recordedmonetary claims(55)

Allowance for doubtful accounts(517)

104,350

104,350—

982,210982,210

228

228

—

2,146

2,146

—

¥161,860¥161,860¥—$1,523,531$1,523,531$—(4) Investment securities
Total

¥—

103,911

Liabilities:¥ 39,574¥ 39,574¥—$  372,496$  372,496$—(2) Electronically recorded
obligations

728

728

—

6,852

6,852

—

(3) Short-term bank loans

4,086

4,086

—

38,46038,460—(4) Current installments oflong-term debt

3,171

3,171

—

29,847

29,847—(1) Notes and accounts payable

842

842

—

7,925

7,925

—

Total

¥ 48,403¥ 48,403¥—$  455,600$  455,600$—

Derivative transactions

¥

¥

¥—

$

$

$—

March 31, 2017

Carrying
amountFair value¥ 59,648¥ 59,648(5) Long-term debt

—

—

—

—

Millions of yen
Differences

Assets:(1) Cash and cash equivalents(2) Notes and accounts receivable(3) Electronically recordedmonetary claims

441

Allowance for doubtful accounts(27)
91,124

91,124

—

219

219

—

¥150,992¥150,992¥—(4) Investments securities
Total

¥—

90,711

Liabilities:(1) Notes and accounts payable¥ 36,474¥ 36,474¥—(2) Electronically recorded
obligations

—

—

—

(3) Short-term bank loans

4,069

4,069

—

(4) Current installments oflong-term debt

171

171

—

(5) Long-term debt

4,014

4,010

(3)

Total

¥ 44,730¥ 44,726¥(3)

Derivative transactions

¥

¥

¥—

2

2

Notes: 1. Allowance for doubtful accounts are deducted from the above Notes and accounts receivable, and Electronically recorded monetary claims.
2. Derivative receivables and liabilities are on a net basis.

76

ANNUAL REPORT 2018

(1) Fair value measurement of financial instruments
Assets:1) Cash and cash equivalents
The carrying amount approximates fair value because of
the short maturity of these instruments.

Liabilities:
1) Notes payable, accounts payable and electronicallyrecorded obligations
The carrying amount approximates fair value because of
the short maturity of these instruments.

2) Notes receivable, accounts receivable and electronically recorded monetary claims
The carrying amount approximates fair value because of
the short maturity of these instruments.

2) Short-term bank loans
The carrying amount approximates fair value because of
the short maturity of these instruments.

3) Investment securities
The fair value of equity securities is calculated by thequoted market price. Please see note 5 (INVESTMENT
SECURITIES) for information by category.

3) Current installments of long-term debt
The carrying amount approximates fair value because of
the short maturity of these instruments.
4) Long-term debt
Fair value of long-term debts is based on the present
value of future cash flows discounted using the current
borrowing rate for similar debt with comparable maturity.
Derivative transactions:
Please see note 22 (DERIVATIVES).

(2) Financial instruments of which the fair value is extremely difficult to measure
Thousands of
U.S. dollars

Millions of yen
2018

2017

¥287

Unlisted equity securities

2018

¥202

$2,701

The above securities are not included in ”Assets:(4) Investment securities”, as market prices are not available and also
future cash flows cannot be estimated reliably. Thus, the fair value cannot be reasonably obtained.
(3) Projected future redemption of monetary claims and securities with maturities at March 31, 2018
Millions of yen

March 31, 2018

Cash and cash equivalents
Notes and accounts receivable
Electronically recorded monetary claims

Due within
one year

Due after
one year throughfive years

Due after five
years throughten years

Due after
ten years¥ 57,281

¥—

¥—

¥—

103,911

—

—

—

494

—

—

—

¥161,687

¥—

¥—

¥—

Thousands of U.S. dollars
Due after
one year throughfive years

Due after five
years throughten years

Due after
ten years

March 31, 2018

Due within
one year

Cash and cash equivalents$  539,166

$—

$—

$—

978,077———

Notes and accounts receivable
Electronically recorded monetary claims

4,649

—

—

—

$1,521,903

$—

$—

$—

ANNUAL REPORT 201877

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(4) The annual maturities of long-term debt and other interest-bearing debt at March 31, 2018
Millions of yen
Due after one
year throughtwo years

Due after two
years throughthree years

Due after three
years throughfour years

Due after four
years throughfive years¥4,086

¥   —

¥   —

¥   —

¥   —

¥   —

3,171

171

171

171

171

157

Due after one
year throughtwo years

Due after two
years throughthree years

Due after three
years throughfour years

Due after four
years throughfive years

Due within
one year

Short-term bank loans
Long-term debt

Due after
five years

Thousands of U.S. dollars
Due within
one year

Due after
five years

Short-term bank loans$38,460$     —

$     —

$     —

$     —

$     —

Long-term debt

29,847

1,609

1,609

1,609

1,609

1,477

22. DERIVATIVESThe Company enters into forward exchange contracts with major Japanese banks in order to manage certain risks
arising from adverse fluctuations in foreign currency exchange rates.
At March 31, 2018, there is no derivative transactions to report.
At March 31, 2017, the disclosure of fair value information for derivatives which are not accounted for as hedges is asfollows:
Millions of yen
Contract amountMarch 31, 2017

Total

Over 1 year

Fair value

Valuation gain

Forward exchange contracts:
Order to buy:
U.S. dollars
Total

¥65

¥6

¥2

¥2

¥65

¥6

¥2

¥2

The fair value of forward exchange contracts is computed based on quotes from counterparties.

23. RELATED PARTY TRANSACTIONS(1) The Company’s balances with related parties and related transactions
NEC Corporation owned 51.49% of the Company’s outstanding common stock as of both March 31, 2018 and 2017,
respectively.
Balances with NEC Corporation at March 31, 2018 and 2017, and related transactions for the years then ended aresummarized as follows:
Thousands of
U.S. dollars

Millions of yen
2018

2017

2018

¥60,855¥64,804$572,806¥25,250¥24,172$237,669

386

347

3,633

¥44,171¥45,140$415,766¥12,533¥12,202$117,968

Construction and maintenance of network system:
Transactions:
Sales
Balances:
Accounts receivable
Advances received
Purchases of communication device:Transactions:Purchases
Balances:
Accounts payable

78

ANNUAL REPORT 201824. SEGMENT INFORMATIONThe reported segments of the Company are the business
units for which the Company is able to obtain respective
financial information separately in order for the Board of
Directors to conduct periodic investigation to determine
the distribution of management resources and evaluate
their business results.
The “Enterprises networks business,” “Carrier networks business” and “Social infrastructures business” are
the Company’s reportable segments. The Company combines business segments which have similar economic
characteristics into these reportable segments. The business segments are based on the operation headquarters
by service lines, which are the units used for internalreporting for performance management.
The Enterprises networks business mainly renders service
integration relating to ICT solution for enterprises. The
segment renders total office solution services based on
ICT with securities or environmental solutions and related
operating/monitoring services, as well as outsourcing

services using our own data centers and contact centers.
The Carrier networks business mainly renders service
integration for telecom carriers’ ICT platforms (frommobile communications base stations to core networks),
including systems integration, installation, and related
services such as operations and monitoring, and systems
integration of large-scale, wide-area, carrier-grade ICT
platforms and data centers and the related operations/monitoring services.
The Social infrastructures business mainly renders
service integration of ICT infrastructure for governments
and public utilities (broadcasters, electric power companies, etc.), such as systems integration, installation andoperation/monitoring services, and these services provided by foreign subsidiaries.
Segment sales, income, assets and others are calculated by accounting methods similar to those employed
to prepare the accompanying consolidated financial
statements.

The reported segment information for the Company and its consolidated subsidiaries for the years ended March 31,2018 and 2017 is summarized as follows:
Millions of yen
Carrier networks

Socialinfrastructures¥110,887¥64,902¥85,192¥6,957————¥110,887¥64,902¥85,192¥6,957¥

Segment income¥ 10,797¥ 5,021¥ 3,399

Segment assets¥ 44,999¥30,750¥54,383¥  1,418¥   3611,469
40

March 31, 2018

Enterprisenetworks

OthersAdjustments

Total

Sales:(1) Sales to third parties¥—¥267,939———¥267,939¥  263¥ (8,424)¥ 11,057¥1,862¥76,054¥208,050¥   131¥    —¥   615¥  2,526

288

229

16

1,746

3,750

—

24

—

—

64

Carrier networks

Socialinfrastructures$1,043,740$610,899$801,882$65,483

—

—

—

—

Total

$1,043,740$610,899$801,882$65,483$

Segment income$  101,628$ 47,260$ 31,993

Segment assets$  423,559$289,439$   13,347(2) Intersegment sales
Total

Others:Depreciation and amortization
Purchases of property and equipment, andintangible assets
Investment to entities accounted
for using equity method

Thousands of U.S. dollars
March 31, 2018

Enterprisenetworks

OthersAdjustments

Total

Sales:(1) Sales to third parties(2) Intersegment sales$—$2,522,016

—

—

—

$2,522,016$ 2,475$ (79,292)$  104,075$511,888$17,526$715,869$1,958,301$  3,397$  1,233$—$  5,788$   23,776

13,827

2,710

2,155

150

16,43435,297

376

—

225

—

—

602

Others:Depreciation and amortization
Purchases of property and equipment, andintangible assets
Investment to entities accounted
for using equity method

ANNUAL REPORT 201879

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Millions of yen
March 31, 2017

Enterprisenetworks

Carrier networks

Socialinfrastructures¥61,579¥82,362

OthersAdjustments

Total

Sales:(1) Sales to third parties(2) Intersegment sales¥107,366¥6,602¥—¥257,912

—

—

—

—

—

—

¥107,366¥61,579¥82,362¥6,602¥—¥257,912

Segment income¥  8,823¥ 3,569¥ 6,029¥  246¥ (8,693)¥  9,974

Segment assets¥ 38,046¥27,872¥50,780¥1,339¥79,430¥197,469¥  1,536¥   337¥   152¥    —¥   806¥  2,834

1,529

520

130

9

533

2,723

Total

Others:Depreciation and amortization
Purchases of property and equipment, andintangible assets

Notes: 1. “Others” includes purchases of information and telecommunications equipment, etc., which are not included in the reported segments.
2.	“Adjustments” of ¥–8,424 million ($–79,292 thousand) and ¥–8,693 million in segment income for the years ended March 31, 2018 and 2017, respectively, are mainly administrative operation expenses.
3.	“Adjustments” of ¥76,054 million ($715,869 thousand) and ¥79,430 million in segment assets at March 31, 2018 and 2017, respectively, mainly consistof surplus funds (cash and deposits), land, long-term deposits and assets relating to the administrative operations of the parent company.
4. Segment income is adjusted with operating income in the consolidated statements of income.
5.	“Depreciation and amortization” for the years ended March 31, 2017 and “purchases of property and equipment, and intangible assets” for the years
ended March 31, 2018 and 2017 include long-term prepaid expenses and their amortization.

Related information
Related segment information for the years ended March 31, 2018 and 2017 are as follows:(1) Information by products and services
Please refer to the reported segment information.
(2) Geographical information
1) Sales		Disclosures are omitted because sales to Japanese customers are over 90% of sales in the consolidated statements of income.
2) Property and equipment
		Disclosures are omitted because property and equipment located in Japan are over 90% of property and equipment in the consolidated balance sheets.
(3) Information by major customers
Thousands of
U.S. dollars

Millions of yen
2018

2017

2018

¥67,203¥71,421$632,558

Customer name:
NEC Corporation
Sales

The above sales are related to the “Enterprise networks” segment, “Carrier networks” segment and “Social infrastructures” segment.

80

ANNUAL REPORT 2018

Information of impairment loss on fixed assets by reported segments for the years ended March 31, 2018 and 2017
There are no amounts to report.
Information of amortization of goodwill and balances of goodwill by reported segments as of and for the years ended
March 31, 2018 and 2017
Millions of yen
March 31, 2018

Amortization of goodwill
Balances of goodwill

Enterprisenetworks

Carrier networks

Socialinfrastructures

¥ 27

¥ 224

¥—

¥—

¥—

¥   251

150

1,243

—

—

—

1,394

OthersAdjustments

Total

Thousands of U.S. dollars
Carrier networks

Socialinfrastructures

Amortization of goodwill$  254$ 2,108

$—

$—

$—

$ 2,362

Balances of goodwill

1,411

11,699———13,121March 31, 2018

Enterprisenetworks

OthersAdjustments

Total

Millions of yen
Carrier networks

Socialinfrastructures

Amortization of goodwill¥ 30¥  224¥—¥—¥—¥   255

Balances of goodwill

221

1,468

—

—

—

1,689

March 31, 2017

Enterprisenetworks

OthersAdjustments

Total

Negative goodwill incurred by reported segments for the years ended March 31, 2018 and 2017
There are no amounts to report.

ANNUAL REPORT 2018

81

INDEPENDENT AUDITOR’S REPORT82

ANNUAL REPORT 2018

2-6-1, Koraku, Bunkyo-ku, Tokyo
112-8560, Japan
Telephone: +81-3-6699-7000
Website: http://www.nesic.co.jp/english/

181000400-EI-00