For risks related to Group business, we indicate major factors with the potential to have a serious impact on investor decisions. With an awareness of the possibility of risk occurrence, our Group evaluates and implements specific measures to ensure risk avoidance and minimize the impact on our business results and financial condition in the event of occurrence.
The information provided below contains forward-looking statements and reflect judgments of the Group as of June 26, 2020.
i. Industry trends and competitors
Medical Outsourcing Business
Medical institutions, which are the primary customers of the Group, may have their business operations affected by revisions to medical fee payments, which are being implemented once every two years, or by reforms to Japan's medical care system, which are currently advancing.
Furthermore, trends that involve outsourcing of medical support and greater use of information technology for administrative tasks could also have adverse effects that would hinder opportunities to undertake services and the scope of such services rendered.
Even though the highly specialized knowledge required in providing these services means that barriers to entry are high in comparison with other businesses, we would still face the risk of a shifting competitive environment if a business provider who is capable of handling such services were to emerge.
Accordingly, these changes in the business environment could result in a change in the scope of outsourced tasks and the Group's share, and negatively impact the Group's business results and financial condition.
Elderly Care Business
Since coming into effect in April 2000, Japan's long-term care insurance system has become firmly established as a mechanism that enables people to enjoy peace of mind during their post-retirement years, amid a situation where numbers of retirees accessing elderly care services are rapidly increasing, particularly in-home services. Meanwhile, the outlook in the years ahead is one of ever increasing numbers of people drawing on elderly care services as the baby boomer generation approaches old age. With the market scale for elderly care services expected to grow, every year numerous legal entities are starting to engage in the elderly care market. Accordingly, if the competition becomes increasingly intense and a certain number of the Group's elderly care centers face difficulties in securing an adequate number of users, it could adversely affect the Group's business results and financial condition.
ii. New elderly care facilities and child care facilities
The Group has been conducting detailed market research with respect to establishing new operating locations, and has been forging ahead with efforts to open new facilities that provide elderly care, child care, and other services. In that regard, however, the Group's business results and financial condition could be adversely affected under a potential scenario where we find ourselves unable to secure property in favorable locations, or otherwise under a scenario where changes in the business environment and economic factors result in a situation where end results with respect to newly established facilities diverge substantially from outcomes envisioned in business plans.
iii. Revisions to Japan's social insurance scheme
The Group employs over 20,000 employees, and all of our fulltime employees and some of our non-fulltime employees are covered by health insurance, employees' pension, employment insurance and other components of the government's social insurance scheme. Due to population factors such as low birth rates and an aging population, there is a possibility the rates used to calculate social insurance premiums could increase in the years ahead, which could cause an increase in operating expenses.
The Group is taking steps to further streamline operations in order to address cost increases particularly in the Medical Outsourcing Business, and is also pushing ahead with efforts to ensure that adequate pricing in place with new business. However, the Group could face a situation where downward pressure on earnings adversely affect its business results and financial condition if a scenario were to unfold where the aforementioned measures fail to sufficiently absorb cost increases as planned.
i. Securing and training personnel
The primary business of the Group is that of providing services performed by employees. As such, we must secure and train personnel who are suited to helping us maintain and expand our scale of operations.
In the Medical Outsourcing Business, we need to secure and train highly professional medical support staff members who are capable of addressing the various needs of our medical institution clientele, in a manner that responds to changing workloads undertaken by the Group.
In our business involving elderly and child care services we need to ensure a steady pace of employee recruitment while providing training to develop high-quality personnel, in an operating environment characterized by a chronic shortage of elderly caregivers and child care professionals. Our Elderly and Child Care Business must also adhere to ordinances of Japan's Ministry of Health, Labour and Welfare and regulations of respective municipalities in order to maintain designated service provider status. In that regard, although the Company's facilities pay scrupulous attention to ensuring that they meet all such standards, we face the risk of a situation developing where we are no longer able to keep providing a currently offered service under certain scenarios such as where we find ourselves unable to recruit new employees in the wake of positions becoming vacant, or faced with the need to recruit additional employees due to changes in regulatory standards, or other such circumstances.
At the Group, we work on the active hiring and the training of our employees by taking comprehensive steps towards improving communication and increasing compensation. Through these actions, we strive to ensure improvement of retention rate and the consistent recruitment of employees who contribute to the development of our operations.
However, the Group could face a situation where its business results and financial condition are adversely affected under a potential scenario where we find ourselves unable to secure employees in line with recruitment plans, despite having pursued the initiatives described above.
ii. Mergers and acquisitions
At the Company, we actively promote mergers and acquisitions (subsidization or business transfer, etc.) opportunities premised on the notion that such business deals involving competitors in our industry and other entities could potentially complement and strengthen the Group's business operations. When engaging in this activity, we take steps to avoid risk as much as possible by performing exhaustive due diligence with respect to matters such as finances, tax, legal and business affairs of target companies and their operations, and otherwise sufficiently gathering, scrutinizing and considering information to the extent necessary to enable sound decisions, as well as evaluating the investment efficiency at the Investment Management Committee.
Despite such efforts, however, we face the risk that a mergers and acquisition could adversely affect the Group's business results and financial condition in a situation where it would become necessary for us to recognize impairment loss on a target entity's stock value or transferred assets, particularly if, after mergers and acquisitions, issues emerge that the Company had been unaware of, or if for whatever other reason operations failed to make progress according to plan.
The performance or acquisition value of a business we are targeting for mergers and acquisitions may change depending on the status of the market environment or the overall industry business environment, resulting in the Group not achieving the planned number of mergers and acquisitions transactions. This also could adversely affect the Group's business results.
iii. Personal information
The Group handles large amounts of personal information which includes details about patients in our Medical Outsourcing Business, details about elderly care and child care clientele in Elderly and Child Care Business, and details about students in Education Business. Accordingly, the Group regards the matter of safeguarding personal information as an issue of utmost importance, and as such we have been working to strengthen internal systems to that end through efforts that have included drafting policy on protecting personal information and implementing systematic employee education in that regard. However, the Group could face a situation where its business results and financial condition are adversely affected under an unlikely scenario involving an unforeseen state of affairs where personal information has been leaked or otherwise divulged, thereby resulting in a loss of public confidence in the Group, liability for damages and other adverse consequences.
iv. Client safety, health and incident, accident-prevention measures
Given the high number of elderly people who use the Group's elderly care services, a serious life-threatening accident could occur involving a fall, blocked airway, or other such incident. In our day service centers, group homes, nursing home and other such facilities, we also provide elderly care services that involve assisting with meals, bathing and other such tasks that pose a relatively high degree of risk with respect to the possibility of food poisoning, infectious outbreaks, or other health concerns. With the Elderly and Child Care Business, there is believed to be a relatively higher possibility of incidents of abuse or violence due to the fact that our employees provide long-term direct care to elderly users and children.
With respect to elderly care procedures, measures to prevent accidents, and other safeguards of the Group, we create operations manuals and train employees developed on the basis of our many years of experience in the industry. However, the Group's business results and financial condition could be adversely affected if an unlikely scenario were to arise involving incidents and accidents, food poisoning or other such development, thereby subjecting the Company to the issue of management liability which could have severe repercussions affecting the very survival of the facility in question.
In addition, we have also established a thorough framework with respect to the Company's child care facilities, equivalent to that of our elderly care facilities as described above. However, the business results and financial condition of the Group overall could be adversely affected by the unfortunate event of there being serious incidents and accidents or some sort of incident involving operations of a child care facility that threatens the ability of a facility to continue operating.
v. Service continuity
Due to the characteristics of the Group's business, there is a strong requirement for service provision continuity. As such, even if we have a center not seeing improved performance, it may be difficult to withdraw from that location based only on an evaluation of profitability.
vi. Long-term lease agreements
We are exposed to investment risk arising from our need to invest in land, buildings and other facilities in order to establish business operations and child care centers in our Elderly and Child Care Business. To contain such risks, our initiatives to develop facilities involve use of a leasing-based strategy of capital investment. As such, despite our efforts to contain investment risk, the Group's business results and financial condition could be adversely affected if we end up having to pay penalties and other fees for early termination of a contract under a scenario where we breach a contractual constraint against backing out of the agreement over a certain period of time.
Moreover, the Group's business results and financial condition could be adversely affected under a scenario where the prospect of maintaining ongoing use of land and buildings and recovering debts owed becomes difficult amid a situation where a corporate entity or individual who owns such property goes bankrupt or has other financial issues.
i. Worker Dispatching Act
While contract services constitute the main component of the Group's primary business of Medical Outsourcing Business, some of our services in that realm involve dispatching workers to medical institutions in order to precisely accommodate the demands such medical institution clientele.
Japan's Worker Dispatching Act and related laws and regulations govern matters involving worker dispatch operations, such as permits, licenses, the nature of services that may be performed by dispatch workers, and durations of such services. The Company obtains licenses for general worker dispatching pursuant to the Worker Dispatching Act. The Worker Dispatching Act stipulates that the authorities may order suspension for a stipulated period of time of all or part of a license for general worker dispatching if authorities find grounds for disqualifying a business operator providing dispatch services.
However, going forward, potential developments such as revisions of the Worker Dispatching Act and related laws and regulations, or documented interpretations thereof, could adversely affect our sales revenues from dispatch operations.
ii. The long-term care insurance system
The Group's Elderly Care Business mainly provides elderly care services pursuant to Japan's Long-Term Care Insurance Act, and is accordingly subject to that act as well as to related laws and regulations. Moreover, service providers that provide such elderly care services must conduct business as designated by prefectural governments and other municipalities. The Long-Term Care Insurance Act stipulates that the authorities may rescind the appointment as service provider if they find grounds for doing so such as in cases where an elderly care services provider files fraudulent insurance claims for elderly care compensation or violates standards pertaining to employees or equipment.
The government conducts and overall review of Japan's long-term care insurance system and revises compensation paid under long-term care insurance once every three years. Accordingly, a substantial portion of the income generated by the Elderly Care Business derives from long-term care insurance, making that business segment particularly susceptible to consequences of legal revisions. As such, to help balance out adverse effects of legal revisions on profitability, the Group has been pursuing initiatives that involve enhancing services offered by its nursing home and fortifying services, etc. not covered by long-term care insurance, in addition to its effort to strengthen its in-home elderly care services primarily involving home-visit and day service. Nevertheless, the business results and financial condition of the Group could be adversely affected under a potential future scenario where the government overhauls the long-term care insurance system and makes revisions involving compensation provided under long-term care insurance, thereby resulting in stiffer regulations imposed on our currently offered elderly care services along with substantial decreases in amounts paid in compensation for Elderly Care Business that are covered by the long-term care insurance scheme.
ⅲ. Other legal regulations
Business operations conducted by our Group are subject to various laws and regulations, including those outlined above. To ensure compliance with these laws and regulations, we proactively work to establish internal systems and engage in employee education. However, there is a possibility that our Group's business results and financial condition could be impacted in the event a lawsuit or other legal procedure is filed against our Group that results in an unfavorable verdict or in our Group being subject to legal action, or our Group's social credibility is lost due to the impact of said verdict or legal action.
Furthermore, on May 14, 2019, our offices were subjected to inspection by the Fair Trade Commission on suspicion of violations of antitrust laws. If as a result of said inspection it is deemed there was a violation of antitrust laws and administrative action is assessed, our Group's business results and financial condition could be impacted depending on the details of said administrative action.
i. Natural disasters and infectious disease
The Group operates day service centers, nursing home and other elderly care facilities primarily in the Tokyo metropolitan, Nagoya and Kansai areas, and also operates child care facilities primarily in the Tokyo metropolitan area. We face the risk of harm befalling our elderly care clientele, children in the child care facilities and our employees, and of damaged buildings, equipment and other facilities, in the event that an earthquake, fire or other unforeseen disaster strikes these facilities. In addition, the Group could also face a situation where its business results and financial condition are adversely affected under a scenario where we become unable to operate facilities should there be an outbreak of an infectious disease that begins to spread.
In response to the COVID-19 outbreak, the Company established a company-wide emergency headquarters in February 2020 to ensure the safety and health of service users and employees, business continuity and business continuity risk management, as well as to address requests from the national and local governments according to the circumstances. However, the Company's operating results, mainly those of the Elderly Care Business that comprises approximately 40% of the consolidated net sales, have been affected since March 2020 because users are curbing the use of services. Depending on the spread and duration of COVID-19, the impact on the Company's business performance may continue and expand.
The Group's policy is to maximize long-term corporate value by effectively using outside capital through loans and other liabilities rather than solely relying on proprietary capital for funds needed in business operations and growth. In the event that funding cannot be obtained as planned in the process of financing described above due to factors such as instability in financial markets, the Group's operating results or financial position or in the event of increases in interest rates, the Group's operating results and financial condition may be impacted.
iii. Accounting for asset impairment
The Group could face a situation where its business results and financial condition are adversely affected due to a potential scenario where it becomes necessary to recognize an impairment of land and buildings owned by respective Group companies if prospects for future profitability become substantially diminished.
Moreover, the Group is promoting M&As mainly in the Elderly Care Business. As a result, it has acquired property, plant and equipment, goodwill and other assets. In the event that a substantial impairment loss is recognized with respect to the above assets, it would significantly affect the Group's financial position and operating results. As of March 31, 2020, goodwill of 13,736 million yen, which accounts for 23.8% of total assets, was recorded on the consolidated balance sheet. This included Nagoyaka CareLink Co., Ltd. (3,049 million yen), Japan CareLink Co., Ltd. (2,106 million yen), and Meguminokai Co., Ltd. and Meguminokai Y.K. (1,916 million yen).
iv. Unfavorable rumors and other negative publicity
We are well aware that business of the Group is substantially influenced by the credibility and reputation we have among our clientele and other relevant parties. Knowing that, we engage in business in a manner that closely adheres to high ideals. Nevertheless, the Company's business results, its recruitment initiatives and other aspects of our operations could be adversely affected under a potential scenario where our reputation has been compromised for any reason, or where we find ourselves beset by unfavorable rumors about the Company.
v. Relationships with the parent company
The Company is classified as an affiliated company (other) of Daito Trust Construction Co., Ltd., which maintains holdings amounting to 33.7% of the Company's total number of issued shares (as a percentage of voting rights) upon its acquisition of an equity stake in the Company on December 16, 2015. Furthermore, the Company is now an equity-method affiliate of Daito Trust Construction, and Kanitsu Uchida of Daito Trust Construction has been appointed to serve as an Outside Director of the Company.
Under the management policy of the Group, it is recognized that we are to maintain independence and autonomy with respect to decision-making involving development of business and other important matters, and accordingly there are to be no matters requiring approval or prior reporting with respect to Daito Trust Construction. Furthermore, we recognize that Daito Trust Construction intends to maintain its holdings of the Company's shares over the medium to long term. Nevertheless, the liquidity and price of our shares, and the Group's business results, could be adversely affected under a future scenario where, for instance, there is a substantial change in the proportion of the Company's shares owned by Daito Trust Construction, or otherwise where the Daito Trust Construction Group alters its business strategy.