This section describes major risks related to the Group's businesses that may have a significant impact on the decisions of investors. The Group analyzes the possibility of risk occurrence and impacts and timing in the event of occurrence, the 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.
This section contains forward-looking statements, which were made as of June 28, 2023.
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 reimbursement, which are being implemented once every two years, or by reforms to Japan's medical care system, which are currently in progress. Furthermore, trends that involve outsourcing of medical support and greater use of information technology for administrative works 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 that continuously 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.
In child care services, stable demand is expected to continue on the back of women's social advancement and an increase in dual-income households. However, if it becomes difficult to secure the number of children at many of the Group's child care facilities due to the acceleration of the declining birthrate or the increase in the number of operators in the future, the Group's business results and financial condition may be affected.
ii. Opening of new Elderly Care Business and Children Business facilities
The Group has been conducting detailed market research with respect to establishing new business locations, and has been forging ahead with efforts to open new facilities which provide elderly care and child care 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. Revision of the social insurance system
The Group employs approximately 30,000 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 is in place. 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 suited in maintaining and expanding 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 Elderly Care Business and Children Business, 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. Furthermore, Elderly Care and Children Business must adhere to ordinances of Japan's Ministry of Health, Labour and Welfare and regulations of respective municipalities related to staffing and facility standards 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.
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.
Futhermore, 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 and Smart Hospital Business, details about elderly care and child care clientele in Elderly Care Business and Children 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 Care Business and Children 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 Group'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. Information security
The Group has established information security policies that include information security-related compliance matters, management regulations, and responses in the event of a security accident. We are working to build and operate an information system to improve operational efficiency, improve the IT environment, and strengthen security measures. In particular, we have acquired ISMS/ISO27001 certification for the provision of remote medical administration services in Smart Hospital Business, which began in FY2021, and are thoroughly implementing information-security measures, such as providing services in accordance with the 2 guidelines of the 3 ministries. However, in the event that a system is shut down due to unexpected problems at communication facilities, or information security deficiencies, including leaks of confidential or personal information, arise due to unauthorized external access, cyber-attacks, or computer viruses, the scale of the damage may affect the Group's performance and financial condition.
ⅵ. 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.
ⅶ. 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 Care Business and Children 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 are 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.
If revisions of the Worker Dispatching Act and related laws and regulations, or documented interpretations thereof are made in the future, it 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.
On May 14, 2019, the Company was investigated by the Fair Trade Commission for alleged violations of Antimonopoly Act and the Company had given the fullest cooperation to the investigation of the Fair Trade Commission. The Japan Fair Trade Commission announced on October 17, 2022, that they concluded that there were violations of Antitrust Act among the bidding participants regarding outsourcing of medical administration of hospitals in Aichi or Gifu Prefectures, and they have imposed cease and desist order and penalty charges on the companies participated in the violations. The cease and desist order and penalty charges were not imposed on Solasto as its efforts to prevent recurrence and application of the leniency policy was approved, however, it was concluded that the Company participated in the said violations. In connection with this, if the Group incurs losses in the compensation for damages to customers or losses in the opportunity to receive orders due to the suspension of bidding participation, the Group's business performance and financial condition may be affected
i. Climate change
We recognize that the impact of climate change is immaterial in the Group's operations. However, in the future, an increase in the tax burden due to the introduction of a carbon tax, soaring energy prices such as electricity prices, and damage to the buildings and facilities caused by heavy rain, typhoons, and other extreme weather conditions could affect the Group's business results and financial condition.
ⅱ. Natural disasters and infectious diseases
The Group operates day service centers, nursing home and other elderly care facilities primarily in the Tokyo metropolitan, Chukyo 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.
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.
ⅳ. Recognition of an impairment loss
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, 2023, the total amount of property, plant and equipment and intangible assets related to Elderly Care Business in the consolidated balance sheet for the fiscal year under review was 25.226 billion yen, which accounted for 36.1% of total consolidated assets. In addition, goodwill of 16.656 billion yen, which is 23.8% of consolidated total assets, was recorded. The main components of goodwill were Nagoyaka CareLink Co.,Ltd. (2.482 billion yen), Cocoro Care Plan Corporation (1.718 billion yen), and Nanairo Co. Ltd.(1.372 billion yen).
Of the fixed assets recorded on fiscal year's balance sheet, the sum of tangible fixed assets and intangible fixed assets related to Elderly Care Business was 12.551 billion yen, which accounted for 18.5 % of total assets.
ⅴ. Unfavorable rumors and other negative publicity
We recognize 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 Group'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 Group.
ⅵ. Relationship with parent company and others
Daito Trust Construction Co., Ltd., which maintains holdings amounting to 33.6% 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, is an affiliated company of the Company. Furthermore, the Company is an equity-method affiliate of Daito Trust Construction, and Kanitsu Uchida of Daito Trust Construction has been appointed 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.