Risk Factors

The following items are major risks related to the business activities of the Benesse Group that could potentially have a significant effect on the judgment of investors, and that management recognizes as having the potential to seriously impact the Group’s financial position, business results, and cash flow. The Group has designated responsible persons in its administrative divisions, and based on assessment of potential risks and recognition of the possibility that they may materialize from an expert viewpoint, it considers and implements concrete measures with the aim of avoiding such risks and minimizing the impact on the Group's business results and financial position in the event that they should occur.

The following discussion of risk factors contains forward-looking statements, and reflects management's judgment as of June 29, 2020, the submission date of the Group's securities reportt (yukashoken hokokusho).

1. Information Security

The Group’s core business is the Domestic Education Business, in which it operates enrollment-style correspondence courses for students ranging from pre-school to senior high school students, including Kodomo Challenge and Shinkenzemi, extracurricular education courses such as cram schools and English language schools, and school and teacher support business such as Shinken Simulated Exams. In the Nursing Care and Childcare business, the main operations include nursing home care services, visitation and day-care nursing care services, and kindergartens. In the course of providing and marketing these products and services, it manages a variety of personal information about existing and potential customers, such as their names, genders, birthdates, addresses, and telephone numbers, as well as a variety of other information required for business activities in order to provide products and services that meet the needs of customers. Moreover, operation of these businesses requires the holding of confidential business information regarding topics such as marketing and development of products and services.

In order to manage and utilize this information, the Group strives to construct an information security environment that takes into account confidentiality, completeness, and availability, and implements necessary measures to completely prevent leaks or denials of service caused by unauthorized external access such as via cyberattack, targeted emails, and ransomware, and leaks by internal personnel.

In response to the leak of customers' personal information that came to light in 2014, the Group carried out rigorous fact-finding surveys to identify the cause and made every effort to control the spread of damage, while implementing countermeasures to prevent leaks, which it has continued to improve.

Should another leak of customers' personal information or a denial of service occur owing to the spread of digital technology or the greater sophistication and ingenuity of attacks on information security systems rendering the Group’s measures insufficient to prevent unauthorized external access, or to deliberate acts or errors by employees, such an incident could impair the Group's trustworthiness and brand value. There is a possibility this could affect the Group's business results and financial position.

2. Information system and network issues

The Group manages on its information systems personal information about existing and potential customers and a variety of other information required for business activities. Moreover, the Group provides educational services utilizing original tablet PCs and other digital devices, as well as language lessons and other services using the Internet.

In the course of managing these information systems and networks, the Group will construct the requisite infrastructure to provide its products and services, as well as implementing necessary measures to ensure stable operation and security of its information systems and networks, such as backing up information and appropriate server maintenance.

However, in the event that the capabilities of the information systems and networks used for managing this information or handling the scale of development and supply of products and services prove insufficient owing to significantly higher-than-expected access requests and data processing, or to a major network failure as a result of hardware or software defects or of incidents of damage, disaster, or accidents, it may not be possible to supply our product and services in a continued or stable manner or to provide basic business services such as order taking and claims management. There is potential for such situations to have an impact on the Group’s business results and business operations.

3. Natural disasters

In preparation for large-scale natural disasters including earthquakes and typhoons, the Group has drawn up business continuity plans for each Group company and is creating information gathering structures to assess the state of damages. It strives to ensure the safety of all users by strengthening logistical sites and information systems in its Domestic Education Business, providing nursing home care services in its Nursing Care and Childcare Business, establishing facility countermeasures and conducting regular training drills in its kindergarten and after-school childcare business, and creating emergency structures and conducting regular training drills in its language business and its cram school and prep school businesses.

However, in view of the fact that the Group’s main business company functions are concentrated in Tokyo, that most nursing home care facilities are located in major city areas, and that the major publishing and logistical functions for its correspondence courses and entrance exam courses are centered on Okayama, there is a possibility that the Group’s business results and financial situation may be impacted by damage to group facilities in affected areas, dislocations in social infrastructure such as transportation, communication, and logistics, and damage to suppliers in the event of a large-scale catastrophe such as a Tokyo near-field earthquake or Nankai megathrust earthquake.

4. Pandemics such as the novel coronavirus

The Group operates business locations at which it supplies services in its Domestic Education Business, including extracurricular education courses such as cram schools and language education business, in its Nursing Care and Childcare business, and in its Berlitz business for global language study. As a consequence, it may be affected by pandemics (the large-scale spread of infectious and communicable diseases). To guard against this, the Group implements necessary countermeasures to ensure continued operations, including maintaining constant stocks of masks, personal protection equipment, and disinfectants, particularly in its nursing care business, and establishing remote work foundations and encouraging staggered working hours to prevent the spread of infection among staff at its main domestic business locations.

However, the worldwide spread of the novel coronavirus, which originated in China in around December 2019 and was designated a pandemic at an emergency meeting of the World Health Organization on March 11, 2020, has unavoidably caused the Group to scale back its marketing activities both domestically and overseas, and to temporarily close some of its facilities in the language business, cram school, and prep school businesses and partially suspend service provided to schools owing to school shutdowns. In addition, it has caused delays in the creation and production of some products because of reduced rates of production activity in China and fall in procurement capabilities from both overseas and within Japan.

If the novel coronavirus pandemic continues around the world for a long period of time, there is a possibility of a serious impact on the Group’s business results and financial position, such as via decline in sales and increase in pandemic-related expenses.

5. Personnel strength

In order to maintain the Group’s competitive business advantages and ensure sustained growth, and also to develop and supply products and services that meet the needs and situations of each customer, it is essential to have personnel with high degrees of specialty that can support the execution of business plans centered on digital technologies such as AI and IoT. The Group promotes the acquisition and training of personnel by analyzing the IT personnel needs of each business company, identifying the skillsets necessary in the areas of planning, production, and development, and then strengthening hiring practices and creating training programs for each employment position.

In addition, a key issue to create sustainable growth in the Nursing Care and Childcare Business is the acquisition and retention of the nursing care and childcare staff needed to provide the company’s services. In the nursing care business in particular, the Group is striving to acquire personnel and to create an environment in which outstanding personnel can operate by expanding a remuneration system that reflects our appraisal of nursing care personnel’s abilities, experience, and skills.

However, there is a possibility the Group’s business results and financial position might be affected if it were unable to acquire sufficient outstanding personnel because of increased competition in hiring or change in job market conditions, if it failed to implement the necessary training of current personnel, or if there were obstacles to personnel retention.

6. Procurement and creation

For the creation and distribution of educational materials and direct mail shots used in its Kodomo Challenge and Shinkenzemi operations in the correspondence course business, the Group is striving to lower procurement, creation, and distribution costs by digitalizing materials and develop alternative marketing methods to direct mail shots. In addition, most of the teaching tools and toys that form part of the educational materials used in the Kodomo Challenge and Shinkenzemi operations are procured from China, and the Group is working to identify new sources of procurement owing to the possibility of high procurement costs resulting from sharp increases in labor and materials costs, and of delays in restocking because of country risk.

However, in the event of a sharp increase in the cost of paper and other materials or rises in logistical costs and overseas procurement costs before these measures can be executed or of a scale that exceeds our current assumptions, there is a possibility the Group’s business results and financial position might be affected.

7. Product and location safety

The Group provides a great variety of products and services in its core Domestic Education Business, including operating Kodomo Challenge and Shinkenzemi, and extracurricular education courses such as cram schools and English language education for children. Moreover, in its Nursing Care and Childcare business, the Group provides services for everyone from senior citizens to elementary school students and infants. In order for all the customers in these businesses to use services safely, we endeavor to create and improve the management structure required to maintain the safety of our products and locations. For product safety, we have created safety criteria based on international product safety standards, and work to evaluate and manage the safety and quality of products from the design stage onward, while striving to develop safer and more convenient products that reflect the opinions of our customers. In addition, in our cram school, prep school, schools, and nursing care and childcare operations, we ensure the provision of secure and safe locations through the implementation of on-site accident prevention guidelines, the creation of a variety of manuals, and training to cope with emergencies.

However, in the event of faults in the course of providing these products and services causing damage to the lives, health, or property of our customers, there is a possibility this could damage societal trust in the Group and threaten its continued business operation.

8. Overseas business

Group company Berlitz Corporation operates the Group’s language education business, and manages more than 400 schools in around 70 countries and regions in addition to an overseas study business. Moreover, the Group provides the Kodomo Challenge business in Asian countries such as China, and as of April 2020 had 1.1 million enrollees in China and 80,000 enrollees in Taiwan. There is a possibility that these overseas operations may be affected by differences and changes in the laws, regulations, foreign investment rules, and tax systems of each country and region, by deterioration in political and economic environments, by differences in trade practices and culture, by labor issues, by change in societal structure such as worsening in relations with Japan, and by war and terrorist incidents.

The Group collects information about revisions to legal systems and government practices, particularly in East Asia, in order to be prepared to make a response to change in conditions. However, there is a possibility that occurrence of such aforementioned incidents in these countries and regions might prevent the development or continued operation of our overseas businesses or require a response that creates a larger-than-expected burden, which could potentially have an effect on the Group's business results and financial position.

9. Impairment

One of the Group’s medium to long-term business strategies is to pursue new growth avenues via M&A, and there is a possibility going forward of increased recording of intangible fixed assets, including associated goodwill, on the consolidated balance sheet.

In the event of a dramatic decline in the profitability of the Company or its individual Group companies, it may become necessary to reduce the recoverable book value or listed fair value of land, buildings, goodwill, or other assets and to reflect these reductions by recording impairment losses. During FY2019, the Group recorded in its consolidated accounts impairment of ¥3,571 million, comprised of ¥1,585 million on goodwill for the language business of Berlitz Corporation and ¥1,560 million on buildings and goodwill for the children’s English language schools business of Benesse BE studio Inc.

In addition, the consolidated balance sheet for the period FY2019 lists goodwill (¥8,629 million) and intangible fixed assets and others (¥3,392 million). These amounts reflect significant goodwill (¥3,710 million) and customer-related assets (¥2,644 million), respectively, related to the January 8, 2019 acquisition of 65.2% of the issued shares of EDUCOM Corporation by the Group’s consolidated subsidiary Classi Corp. In the event that it became necessary in the future to record impairment for this goodwill and these customer-related assets, there is a possibility this could impact the Group’s business results and financial position.

10. Impact of earnings deterioration at subsidiaries

The global pandemic caused by the novel coronavirus has significantly altered the business environment for the Group, causing the Group to scale back its marketing activities both domestically and overseas, and to temporarily close some of its facilities in the language education business, cram school, and prep school businesses and partially suspend service provided to schools owing to school shutdowns.

The Group has had to respond to a particularly large impact on the Berlitz business of Berlitz Corporation, which was forced to temporarily close its language centers in almost all countries and regions. The Group recorded a special loss of ¥1,585 million in its consolidated profit and loss statement for FY2019 related to impairment of goodwill for this business, and recorded a special loss of ¥21,349 million in its non-consolidated financial results for FY2019 to reflect a loss on valuation of stocks of subsidiaries and affiliates. Berlitz Corporation is currently working to eliminate the business effects of this situation by shifting to online lessons and further reforming its business structure. However, in the event of the situation exceeding current assumptions, such as the global pandemic caused by the novel coronavirus lasting longer than expected, or of the reform of the business structure not proceeding as expected, there is a possibility of a significant impact on the Berlitz business.

A valuation of stocks held in affiliates related to the Berlitz business of ¥21,548 million and long-term loans to affiliates of ¥5,441 million were recorded on the non-consolidated balance sheet for the end of FY2019. As noted above, in the event of the situation exceeding current assumptions or of the reform of the business structure not proceeding as expected, it may become necessary to record additional losses on valuation of stocks of subsidiaries and affiliates or post default provisions for long-term loans to affiliates, and there is a possibility these factors could significantly impact the Group’s business results and financial position.

Last updated : 2020/07/21