Press Release Media Contact: Daniel Mathieson NEC Corporation Tel: +81-3-3798-6511 Fax: +81-3-3457-7249 E-mail: d-mathieson@bu.jp.nec.com *****For immediate use April 26, 2001 1. Management Policy BACKGROUND TO FINANCIAL RESULTS FOR FISCAL 2001 (YEAR ENDED MARCH 31, 2001) NEC Corporation (NEC) believes that a next-generation Internet Society is rapidly evolving as networks quickly convert to broadband and mobile applications. NEC has named this nextgeneration Internet society the "i-society", foreseeing an environment where people do not perceive limits to the network around them and where these networks promote the exchange of information and knowledge for the realization of new creativity in society. NEC is focusing all its resources on becoming global number one in broadband and mobile networking and is reinforcing corporate-wide business operations in order to create maximum value for its shareholders, customers and employees. NEC will carry out the following management reforms to further reinforce NEC management's policy in its core businesses. (1) Business Restructuring Reforms and Strategic Alliances Starting last April, NEC is in the process of carrying out group-wide business restructuring and efficiency maximization including that of its affiliates, aiming to improve corporate value of the entire NEC group. Specifically, NEC has consolidated duplicative businesses, begun outsourcing of manufacturing to specialist EMS companies, formed strategic alliances and joint ventures with other business partners and promoted IPOs of subsidiary companies. In order to accelerate the process of becoming the global number one for broadband and mobile networking, NEC will move to quickly execute business structural reforms where necessary. (2) Strengthening Corporate Governance NEC has carried out various measures to strengthen its corporate governance. In April last year NEC established a company officer system. NEC further took the following measures: a) Revising the structure of the board of directors b) Reduction of number of board members c) Introduction of stock options d) Establishment of Advisory Committee e) Establishment of Compensation Committee NEC also announced the plans to increase the number of outside board members, and to revise the executive and company officer compensation system. NEC plans to further strengthen its
corporate governance in order to secure transparency and integrity of its management, and clear lines of accountability. (3) Growth Strategy to Maximize Corporate Value NEC is concentrating all resources on becoming the global number one in broadband and mobile networking for the next generation Internet Society. To meet this goal, each in-house company will focus on the following areas. 1) NEC Solutions NEC Solutions will promote Japanese-style E-commerce in the distribution and financial markets through NEC's Internet service provider, BIGLOBE, and system integration business focusing on large-scale open core systems. 2) NEC Networks Focusing on next generation network business operations, NEC Networks will specifically strengthen its engineering and technical resources in the fields of WDM (Wave Division Multiplex)- centered optical network systems and next generation mobile network (W-CDMA) systems and terminals. 3) NEC Electron Devices In addition to its focus on personal computer-related businesses, NEC Electron Devices will also focus on delivering device solutions for the mobile and broadband Internet areas. 2. Business Results The Situation during Fiscal 2001 (year ended March 31, 2001) During the first half of fiscal 2001, the economic recovery continued as exports increased resulting in a revival in corporate profitability and an increase in capital investment. However, in the second half, consumer spending remained low and with a drop in exports the feeling of uncertainty regarding economic conditions heightened. Overseas, the economy in the United States changed from continuous expansion to decelerated growth. Likewise, in the European economies uncertainties of economic expansion were seen, and in Asia, despite relatively strong domestic demand, the influence of the economic slow-down in the United States in the second half dulled the economic expansion. In the electronics industry, while the IT (Information Technology) revolution spurred strong demand for communications and information-related equipment, the slow-down in the personal computer market in the United States resulted in drastic price depreciation for electronic components, such as DRAMs and LCDs (Liquid Crystal Displays). In such an economic environment, NEC, foreseeing a full-scale Internet Society, advanced plans for its business growth and expansion, while carrying out organizational restructuring to speed up decision-making process in line with quickly-changing market conditions. In April 2000, in order to focus its company-wide operations on the Internet solution business field, NEC restructured its business organization into three in-house companies: NEC Solutions, NEC Networks and NEC Electronic Devices. NEC also introduced a company officer system and reduced the number of directors in order to increase management transparency and accelerate decision-making process. Furthermore, NEC promoted business restructuring through formation of business alliances and joint ventures with other partners. Such business restructuring efforts include, conclusion of a joint development agreement with Hitachi, Ltd. in the expected high growth area of optical
communications, formation of Elpida Memory, a joint venture company combining NEC and Hitachi's DRAM businesses, and formation of NEC TOSHIBA Space Systems, a joint venture company with TOSHIBA CORPORATION for the space-related business. In this fiscal year, restructuring of NEC group companies also commenced. The stocks of NEC Software and NEC Machinery' were listed on the market; and business integration with Nitsuko was decided in the fields of key telephone and POS (point of sale) terminals. NEC also endeavored to enhance its financial position through the reform of its cost and finance structure such as reduction of fixed costs and securitization of accounts receivable. In January 2001, NEC established an Advisory Committee aiming to improve transparency and integrity of its management, and a Compensation Committee for examining compensation of directors and company officers. Consolidated Financial Results Net sales during fiscal 2001 (year ended March 31 2001) grew 8.4% over the previous fiscal year period to 5,409.7 billion Yen. Although the sales of mainframe computers and color LCDs remained sluggish, growing sales of cellular telephones for domestic market and solid sales of personal computers and semiconductor memory in the first half period contributed to the growth of NEC's net sales. Regarding profitability, increased sales and continued cost reductions resulted in operating income of 185.1 billion Yen, an increase of 74.7 billion Yen over the previous fiscal period. NEC posted restructuring costs in connection with the restructuring of NEC Home Electronics and other subsidiaries, and impairment loss of marketable and investment securities. NEC also posted gain on the sales of its subsidiaries stock such as NEC Soft and on the sales of its foreign plants to contract manufacturers. As a result, income before income taxes was 92.3 billion Yen, an increase of 62.1 billion Yen over the previous fiscal period and net income was 56.6 billion Yen, an increase of 46.1 billion Yen. The promotion of financial restructuring measures produced free cash flow of 248.9 billion Yen. Interest-bearing debt at fiscal year-end stood at 1,684.2 billion Yen (a reduction of 272.9 billion Yen) and the company achieved a debt to equity ratio of 1.84 (a reduction of 0.16 points) Consolidated Net Sales and Segment Profit NEC Solutions Net sales: 2,228.4 billion Yen (-1.9%) 84.0 billion Yen (-0.3 billion Yen) Despite sales growth of personal computers in the first half period, reduction of personal computer sales in the United States due to the restructuring of Packard Bell NEC, as well as slow growth of hardware sales led to a slight decrease of net sales. This segment achieved almost the same level of segment profit as that of the previous year. Sales in this segment include those of system integration services, Internet service provider operations (BIGLOBE), personal computers, ACOS-series mainframe computers and Express5800-series PC servers. NEC Networks Net Sales: 1,834.3 billion Yen (+20.1%) 83.1 billion Yen (+26.0 billion Yen) Due to a large increase in shipments for i-mode cellular phones, as well as an expansion of capital investment by domestic telecommunications operators following the introduction of ISDN flat rate service, both net sales and segment profit increased. Major contributions to sales include those of cellular telephone systems, cellular telephone handsets, central office switching systems, transmission equipment, broadcasting equipment and microwave and satellite communications
equipment. NEC Electron Devices Net Sales: 1,228.8 billion Yen (+9.4%) 68.2 billion Yen (+18.8 billion Yen) Despite rapid deterioration of market environment, constant sales of memory, system LSIs and discrete ICs supported the increase of net sales by 9.4% and the improvement of operating income. Major sales in this segment include those of memories, microcomputers, system LSIs, discrete ICs and color LCDs. Others Net sales: 742.4 billion Yen (+2.6%) 20.2 billion Yen (+22.9 billion Yen) Growing sales of electronic components, semiconductor production and testing equipment and vacuum analysis equipment contributed to a significant improvement in profitability in this segment. Major products and services in this segment include electronic testing equipment, construction work of telecommunications system, LCD projectors. Non-consolidated Financial Results Non-consolidated net sales amounted to 4,099.3 billion Yen, an increase of 8.3% over the previous fiscal year, with ordinary income of 63.9 billion Yen, a 2.9% decrease over the previous fiscal year. NEC posted a non-recurring loss on impairment of its investments in affiliates applying the accounting principle for financial instruments. NEC also posted a gain on securities contribution to employee retirement benefit trust and on the sale of marketable and investment securities. As a result, net income was 23.6 billion Yen, an increase of 0.8 billion Yen over the previous fiscal year. Outlook for Fiscal 2002 (year ended March 31, 2002) The pace of global economic expansion has slowed down due to the deceleration of economy growth in the United States. This in turn has created an unpredictable business environment where stagnation in the personal computer and semiconductor market is expected to continue. Corporations and local governments in Japan are expected to increase their investment to information technology, and overseas investment focusing on next generation mobile communications is also predicted to grow. Given these circumstances, NEC forecasts consolidated net sales of 5,850 billion Yen (+8.1%) and non-consolidated net sales of 4,400 billion Yen (+7.3%) in fiscal 2002. Consolidated operating income is expected to reach 210 billion (+13.4%) and net income is anticipated to be 65 billion Yen (+14.8%). Non-consolidated ordinary income is forecasted to reach 70 billion Yen (+9.5%) and net income is forecasted to be 30 billion Yen (+26.7%). *** CAUTIONARY STATEMENTS: The above forecasts are forward-looking statements involving risks and uncertainties. The important factors that could cause actual results to differ materially from such statements include, but are not limited to, general economic conditions in NEC s markets, which are primarily Japan, North America, Asia and Europe; demand for, and competitive pricing pressure on, NEC s products in
the marketplace; NEC s ability to continue to win acceptance of its products in these highly competitive markets; and movements of currency exchange rates, particularly the rate between the yen and the U.S. dollar in which NEC makes significant sales. In case where the information contained in this supplement falls within the definition of Material Information under the Securities and Exchange Law, Article 166, Paragraph 2, if you read this supplement before the time of Publication (which is defined under the Securities and Exchange Law and its Enforcement Ordinance as twelve hours after its release; i.e., approximately 3:30 am on April 27, 2001 (JST)), you and the persons listed below may be prohibited from purchasing, selling, or making other transactions of shares of stock or other securities of NEC before the time of Publication. Other directors or employees of your company if the content of this press release comes to their knowledge in connection with their duty