Business context and reporting period
ORIX Corporation filed this annual report on Form 20-F for the fiscal year ended March 31, 2014 (fiscal 2014), not a standalone 2013 fourth-quarter report. The diversified financial-services group reports under U.S. GAAP in yen; amounts below are millions of yen unless stated otherwise. Comparative period is fiscal 2013.
Key financial metrics
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Total revenues | 1,341,651 | 1,055,764 | +27% |
| Total expenses | 1,140,673 | 904,911 | +26% |
| Operating income | 200,978 | 150,853 | +33% |
| Income before taxes and discontinued operations | 283,726 | 172,572 | +64% |
| Income from continuing operations | 186,490 | 118,890 | +57% |
| Net income attributable to ORIX shareholders | 186,794 | 111,909 | +67% |
| Basic EPS | ¥147.30 | ¥102.87 | +43% |
| ROE / ROA | 10.5% / 2.13% | 7.4% / 1.33% | Improved |
Operating margin was approximately 15.0% versus 14.3% in fiscal 2013, calculated as operating income divided by total revenues. Fiscal 2014 net income included ¥7,501 million from discontinued operations, net of tax.
Balance sheet and liquidity: Total assets were ¥9,069,392, up 7%; ORIX shareholders’ equity was ¥1,918,740, up 17%, and the shareholders’ equity ratio rose to 21.2% from 19.5%. Short- and long-term debt totaled ¥4,168,465, down 7%; deposits were ¥1,206,413, up 12%. Debt-to-equity declined to 2.2x from 2.7x. Cash and cash equivalents were ¥827,299. Cash plus unused committed credit facilities totaled ¥1,254,524, stated as approximately 399% of short-term marketable liabilities. The long-term-debt share of total debt excluding deposits was 93%.
Cash flow: Operating activities provided ¥470,993, compared with ¥391,304 in fiscal 2013. Investing activities used ¥202,166, versus providing ¥105,657 the prior year, reflecting acquisition spending and higher lending, securities purchases and lease-equipment purchases. Financing activities used ¥274,579, versus ¥467,193 used in fiscal 2013. Cash and cash equivalents increased by ¥1,003 during fiscal 2014.
Material changes versus the prior comparable period
- Profit improved across five of six segments; Corporate Financial Services profit declined 4% to ¥24,874.
- Investment and Operation profit rose 169% to ¥94,111, primarily reflecting a ¥58,435 gain on remeasuring ORIX’s prior DAIKYO stake when ORIX obtained control in February 2014.
- Overseas Business profit rose 32% to ¥69,688, with Robeco consolidation and growth in Asian leasing and aircraft leasing contributing. Robeco was acquired in July 2013; its reported FY2014 revenue contribution was ¥111,027 and continuing-operations income was ¥17,251.
- Real Estate profit rose to ¥17,956 from ¥5,582, including stronger facility operations and gains on property sales; condominium deliveries fell and real estate sales declined 40% to ¥23,139, with a ¥3,920 sales margin loss.
- Retail profit increased 15% to ¥49,871, supported by higher life-insurance premiums and installment-loan revenues. Maintenance Leasing profit increased 6% to ¥37,062.
- Interest expense fell 18% to ¥82,859. Installment-loan interest revenue declined 18% to ¥118,287 as loan balances contracted, while operating-lease revenue increased 9% to ¥324,083.
- Asset-management and servicing revenue rose to ¥126,492 from ¥15,265, principally due to Robeco. Other operating revenues increased 56% to ¥491,313, alongside higher associated expenses.
Outlook, risks, contingencies, and unusual items
Management targets 10% ROE over the medium to long term and describes strategies centered on “Finance + Services,” growth in emerging markets, and developing new business pillars. It anticipated steady recovery in Japan and stable U.S. growth, while noting uncertainty around emerging economies and the potential impact of Japan’s April 2014 consumption-tax increase. The filing gives no specific fiscal 2015 earnings or revenue guidance.
Planned fiscal 2015 capital expenditures were ¥450,000: ¥400,000 for operating-lease equipment and property and ¥50,000 for power-generation equipment, to be funded from cash on hand, bank borrowings and other sources. A subsequent event disclosed ORIX Life’s planned purchase of Hartford Life Insurance K.K. for an estimated $895 million (approximately ¥91.6 billion), subject to regulatory approval and closing adjustments; closing was targeted for July 2014.
Key risks include credit losses and collateral/residual-value declines; interest-rate, foreign-exchange and securities-price exposure; refinancing, funding-cost and rating risks; acquisition and integration risks; and legal, regulatory and operational risks. Management said pending litigation was not expected to have a material adverse effect, while cautioning that adverse outcomes could still be material. Commercial commitments totaled ¥806,383, including guarantees of ¥441,929; these are commitments, not estimates of probable losses. A U.S. subsidiary’s Fannie Mae-related guarantees were ¥212,150, and it reported no repurchase claims during fiscal 2014. ORIX disclosed that it believed it was a PFIC for U.S. tax purposes, potentially producing unfavorable tax treatment for U.S. investors.
Auditors issued an unqualified opinion on the U.S. GAAP financial statements and internal control over financial reporting. DAIKYO, acquired near year-end, was excluded from management’s internal-control assessment; its assets of ¥358,237 were included in the balance sheet, but it contributed no post-acquisition revenue or continuing-operations income in fiscal 2014. The filing also reports a ¥10-for-1 stock split effective April 1, 2013; historical per-share data were adjusted accordingly.
Important facts for investors to verify
- How much of the earnings increase is repeatable: specifically, the DAIKYO remeasurement gain, property disposals, discontinued operations and acquisition-related contributions.
- Robeco’s ongoing fee income, margins, assets under management, integration costs and contingent consideration; and the final purchase-price allocations for Robeco and DAIKYO, which were preliminary.
- Credit quality and reserve adequacy: impaired loans fell to ¥135,824 and total past-due and individually impaired balances cited in selected data fell to ¥155,860, while the allowance declined to ¥84,796.
- Liquidity and refinancing exposure, including maturity schedules, covenant compliance, funding access and the composition of the reported ¥1,254,524 liquidity resources.
- Execution and funding of the ¥450,000 fiscal 2015 capital-expenditure plan and the proposed Hartford Life acquisition.
- Investor-specific implications of the PFIC disclosure, Japanese withholding taxes, ADS structure and yen exchange-rate exposure.