Business context and reporting period
ORIX Corporation’s Form 20-F is an audited annual report for the fiscal year ended March 31, 2016 (fiscal 2016), not a standalone 2015 fourth-quarter report. ORIX is a diversified Japanese financial-services and investment group operating across six segments: Corporate Financial Services, Maintenance Leasing, Real Estate, Investment and Operation, Retail, and Overseas Business. Financial statements use U.S. GAAP and Japanese yen.
Key financial metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total revenues | ¥2,369.2bn | ¥2,174.3bn | +9% |
| Operating income | ¥287.7bn | ¥256.8bn | +12% |
| Income before tax and discontinued operations | ¥391.3bn | ¥344.0bn | +14% |
| Net income attributable to ORIX shareholders | ¥260.2bn | ¥234.9bn | +11% |
| Basic EPS | ¥198.73 | ¥179.47 | +11% |
| ROE / ROA | 11.7% / 2.32% | 11.5% / 2.29% | Higher |
Operating margin was approximately 12.1%, versus 11.8% in FY2015; net margin was approximately 11.0%, versus 10.8%. These are calculated from reported revenues and income.
- Cash flow: Operating cash flow was ¥510.6bn, investing cash outflow ¥552.5bn, and financing cash outflow ¥48.0bn. Cash and cash equivalents declined ¥97.1bn to ¥730.4bn.
- Assets and credit: Total assets fell 4% to ¥10,996.9bn. Installment loans rose 5% to ¥2,592.2bn, while direct-financing lease investments fell 2% to ¥1,190.1bn. The allowance for doubtful lease receivables and probable loan losses was ¥60.1bn, down from ¥72.3bn.
- Debt and liquidity: Short- and long-term debt, excluding deposits, totaled ¥4,290.5bn, down 3%; deposits increased 9% to ¥1,398.5bn. Shareholders’ equity was ¥2,310.4bn; the equity ratio improved to 21.0% from 18.8%, and debt-to-equity was 1.9x. Cash plus unused committed credit facilities totaled ¥1,120.3bn. Long-term debt represented 92% of debt excluding deposits.
- Margins and credit quality: Interest expense was broadly flat at ¥72.8bn. Operating-lease revenue rose 3% to ¥373.9bn. Receivables at least 90 days past due were ¥94.3bn in total, down from ¥123.0bn; 90-day-past-due direct-financing leases were 1.06% of that portfolio.
Material changes versus FY2015
- Growth in shareholder earnings reflected higher profits in Corporate Financial Services, Maintenance Leasing, Real Estate, Investment and Operation, and Overseas Business. Retail profits fell 57% to ¥51.8bn, principally because FY2015 included a ¥36.1bn bargain-purchase gain on the HLIKK acquisition and FY2016 included a sharp reversal in related investment performance.
- Real Estate segment profit rose to ¥42.9bn from ¥3.5bn, with lower long-lived-asset write-downs and stronger facility-services income. Overseas Business profit increased 37% to ¥142.9bn, supported by the Houlihan Lokey partial divestment and higher affiliate income.
- FY2016 life-insurance-related investment income was a loss of ¥19.7bn, compared with income of ¥164.9bn in FY2015, largely reflecting variable-annuity and variable-life investment results at HLIKK. Life insurance costs also declined with a reserve reversal.
- Revenue mix shifted: goods and real-estate sales increased 85% to ¥834.0bn, while life-insurance premiums and related investment income declined 46% to ¥189.4bn. Gains on investment securities and dividends decreased 37% to ¥35.8bn.
- FY2016 included ¥57.9bn of net gains on sales of subsidiaries and affiliates, including gains related to Houlihan Lokey. Long-lived-asset write-downs decreased to ¥13.4bn from ¥34.9bn; security write-downs decreased to ¥4.5bn from ¥9.0bn.
Outlook, risks and unusual items
- Management targets ¥300bn of net income attributable to ORIX shareholders for FY2018 and ROE of approximately 11%–12%. Its stated strategy emphasizes non-finance-business growth, fee income, selective investment, and further risk-management development.
- For FY2017, planned capital expenditure was approximately ¥486bn, primarily operating-lease equipment and property (¥450bn) and power-generation equipment (¥36bn), funded through cash on hand, bank borrowings and other sources. Management projected an FY2017 interim dividend of ¥23 per share; the year-end dividend was undetermined.
- The FY2016 annual dividend was ¥45.75 per share, comprising ¥22 interim and ¥23.75 year-end. The filing also reports cash dividends paid during FY2016 of ¥76.0bn.
- Management cited weak and uneven global growth, uncertainty in Japan including negative interest-rate policy, intense price competition, credit deterioration, asset-value and residual-value volatility, interest-rate and foreign-exchange movements, securities-price risk, and potential constraints or higher costs in funding. A credit-rating downgrade could impair funding access and raise costs.
- Commercial commitments totaled ¥929.5bn, including guarantees of ¥493.1bn and committed credit lines and other commitments of ¥436.3bn. These are potential commitments, not necessarily expected losses. A U.S. subsidiary’s Fannie Mae-related guarantee exposure was ¥174.3bn; it reported no repurchase claims during FY2016. Management said ordinary-course litigation was not expected to materially affect financial condition or results, while noting adverse outcomes cannot be ruled out.
- Other notable items: ORIX began operating Kansai and Osaka International Airports as a concession in April 2016; a large-scale wind-power investment in India was decided during FY2016. The Houlihan Lokey partial sale reduced ORIX’s holding to 33% and changed the company to an equity-method affiliate. HLIKK merged into ORIX Life Insurance in July 2015.
- The filing identifies estimates in fair-value measurements, credit allowances, insurance liabilities, residual values, and asset impairments as important judgment areas. Level 3 recurring fair-value financial assets were ¥163.3bn, about 1% of total assets. Management and the auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified.
Most important facts an investor should verify
- Confirm that comparisons use the full year ended March 31, 2016, not a standalone quarter; the filing retrospectively adjusted prior periods for DAIKYO’s reporting lag and reclassified certain financial-statement line items.
- Assess the durability of earnings excluding the Houlihan Lokey divestment gain and other investment or disposal gains, and distinguish recurring performance from FY2015’s HLIKK bargain-purchase gain.
- Review the drivers, hedging, and potential future volatility of HLIKK-related variable-annuity and variable-life results and guarantees.
- Check liquidity and refinancing needs against debt maturities, deposit obligations, committed facilities, covenants, guarantees, and planned FY2017 investment spending.
- Evaluate credit quality and allowance adequacy, particularly past-due consumer loans, overseas corporate lending, collateral-dependent exposures, and asset residual values.
- Verify subsequent dividend decisions, progress toward the FY2018 earnings target, and the performance and funding requirements of new investments and airport and renewable-energy concessions.