(The following statement was released by the rating agency)
Nov 30 -
Summary analysis -- NEC Corp. ------------------------------------- 30-Nov-2012
CREDIT RATING: BBB-/Stable/A-3 Country: Japan
Primary SIC: Electronic
Mult. CUSIP6: 629050
Credit Rating History:
Local currency Foreign currency
30-Jan-2012 BBB-/A-3 BBB-/A-3
24-Feb-2004 BBB/A-2 BBB/A-2
The ratings on NEC Corp. reflect the company’s satisfactory business risk profile and significant financial risk profile. The ratings also reflect Standard & Poor’s Ratings Services’ expectation that the company will maintain its competitive strengths in its core information technology (IT) services and network-related solutions and products businesses, backed by its strong technological capabilities and solid customer base. NEC is one of Japan’s top electronics manufacturers managing IT and network solutions business. The company maintains a strong position in the systems integration and communication systems market in Japan. The ratings also reflect increased stability of NEC’s earnings, backed by restructuring of its mobile phone business and PC businesses for individuals, and the unconsolidation of its semiconductor business, which saw swings in earnings and required large investments.
The rating is constrained by the outlook for the domestic IT market, which remains severe due to sluggish investment. In addition, the ratings are constrained by a possible delay in a recovery in NEC’s profitability and financial indicators to a level that is commensurate with the current ratings. NEC’s profitability and cash flow-related measures remain weak due to continued high reliance on business in Japan and uncertainties about how much overseas business and new business--which are focus areas for NEC--will contribute to companywide earnings. The company’s capital structure has also weakened due to erosion of capital in fiscal 2011.
Standard & Poor’s views NEC’s liquidity as adequate. We expect its sources of liquidity (such as cash and cash equivalents, funds from operations (FFO) and unused commitment lines) to exceed 1.2x uses (loan obligations, capital expenditures, and dividends) over the next year. As of Sept. 30, 2012, the company had JPY206.1 billion in cash, deposits, and cash equivalents against short-term outstanding debt of about JPY223.2 billion. Short-term debt is premised on continuous refinancing, which is commonly seen among Japanese corporations and financial institutions. NEC had unused committed credit facilities of JPY251.8 billion as of March 2012, and a commercial paper program of up to JPY515 billion. In addition, its status as a major company within the Sumitomo Mitsui group and very strong relationship with Sumitomo Mitsui Banking Corp. (A+/Negative/A-1) sustains its liquidity, in our view.
The stable outlook reflects our expectation that NEC’s performance and financial standing may improve gradually despite a persistently tough business environment. We see a possibility of NEC generating around JPY20 billion of net income in fiscal 2012, which is almost the same amount as the company’s projection, and for free cash flow to crawl into the black, though it may fluctuate depending on capital investments.
We will consider a downgrade if a decline in earnings leads to a higher likelihood that NEC’s net profit and free cash flow will deteriorate materially. We will also consider lowering the ratings if NEC eases its financial discipline and increases investments, leading us to believe that a recovery in the company’s financial standing will be slower than our assumptions. Specifically, we will consider a downgrade if there is increasing likelihood that net profit and free cash flow projections for the current fiscal year ending March 2013 will be significantly lower than our assumption; if a steady improvement in the company’s operating margin over the next year or two becomes less likely; and if we think the ratio of NEC’s debt to EBITDA, after adjusting for lease and pension liabilities, is unlikely to moderate to below 4x in the next two years.
An upgrade would require clearer prospects for an improvement in the company’s financial soundness. However, we believe the probability of an upgrade scenario is low, taking into account current financial metrics, which are below our expectations for the rating.
Related Criteria And Research
2008 Corporate Criteria: Analytical Methodology, April 15, 2008