ORIX CORP annual report, Q4 FY2013

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ORIX Corporation — Form 20-F Summary

Reporting period: Annual report for the fiscal year ended March 31, 2013, prepared under U.S. GAAP and audited by KPMG AZSA LLC. The request metadata says “2012 Q4,” but the filing covers fiscal 2013; it does not present a standalone fourth-quarter summary. Unless noted, amounts below are in yen.

Business context and reporting period

ORIX is a diversified Japanese financial-services group spanning corporate finance, maintenance leasing, real estate, investment and operation, retail financial services, and overseas business. It operates in Japan and internationally, with significant activities in the United States and Asia. On April 1, 2013, it implemented a 10-for-1 stock split; reported per-share figures have been adjusted retrospectively.

Financial performance and position

  • Revenue and earnings: Revenue rose 10% to ¥1,065.6 billion; expenses rose 8% to ¥915.0 billion. Operating income increased to ¥150.6 billion from ¥124.5 billion. Income before taxes and discontinued operations increased 33% to ¥172.5 billion; net income attributable to ORIX shareholders rose 34% to ¥111.9 billion. Basic EPS was ¥102.87, up 32%.
  • Margins and returns: Operating margin was approximately 14.1%, versus 12.8% in fiscal 2012; net income attributable to shareholders was approximately 10.5% of revenue, versus 8.6%. ROE increased to 7.4% from 6.2%, and ROA to 1.33% from 0.99%.
  • Revenue drivers and expenses: Operating lease revenue rose 5% to ¥300.7 billion; interest on loans and securities rose 5% to ¥156.0 billion; life insurance premiums and related investment income rose 8% to ¥138.7 billion; and other operating revenue rose 27% to ¥336.5 billion. Real estate sales revenue fell 36% to ¥38.8 billion, and real estate sales recorded a ¥0.6 billion loss margin. Interest expense fell 8% to ¥101.3 billion, while selling, general and administrative expenses rose 15% to ¥225.6 billion.
  • Cash flow: Operating activities provided ¥391.3 billion, investing activities provided ¥105.7 billion, and financing activities used ¥467.2 billion. Cash and cash equivalents increased ¥39.4 billion to ¥826.3 billion.
  • Assets and credit quality: Total assets rose 1% to ¥8,439.7 billion. Direct financing leases increased 10% to ¥989.4 billion; operating leases increased 7% to ¥1,395.5 billion; installment loans declined 3% to ¥2,691.2 billion. Loans individually evaluated for impairment declined to ¥212.7 billion from ¥293.8 billion, and 90-days-past-due leases and loans, combined with impaired loans, declined to ¥236.3 billion from ¥319.8 billion. The allowance for doubtful receivables and probable loan losses fell 24% to ¥104.3 billion, or 2.8% of direct financing leases and installment loans.
  • Debt and liquidity: Short- and long-term debt totaled ¥4,482.3 billion, down 5%; deposits were ¥1,078.6 billion, down 2%. ORIX shareholders’ equity rose 19% to ¥1,643.6 billion; the equity ratio improved to 19.5% from 16.6%. Debt-to-equity declined to 2.7x, or 2.3x on the company’s adjusted non-GAAP basis. Long-term debt was 91% of debt excluding deposits. Cash plus unused committed credit facilities totaled ¥1,265.8 billion, reported as approximately 295% of short-term marketable liabilities. ORIX said it complied with its financial covenants.
  • Capital returns: The fiscal 2013 annual dividend was ¥13 per share, compared with ¥9 in fiscal 2012, on the retrospectively split-adjusted basis.

Material changes versus fiscal 2012

  • All six segments reported higher profit. The strongest increases were in Investment and Operation, up 119% to ¥34.9 billion, and Retail, up 123% to ¥43.2 billion.
  • Investment and Operation benefited from gains on Aozora Bank shares, large loan-servicing collections, and higher equity-method income. Retail benefited from consolidation of ORIX Credit, higher life insurance premiums, and no repeat of the prior-year Monex investment write-down.
  • ORIX Credit became wholly owned in June 2012. The step acquisition generated a ¥3.1 billion remeasurement gain. In February 2013, ORIX agreed to acquire approximately 90% of Robeco from Rabobank and to form a strategic alliance; the filing does not establish completion by fiscal year-end.
  • Provision expense for doubtful receivables and probable loan losses fell to ¥10.0 billion from ¥19.2 billion, while net charge-offs increased to ¥43.2 billion from ¥36.3 billion. Securities write-downs increased to ¥22.8 billion from ¥16.5 billion, and long-lived asset write-downs charged to operating income increased to ¥19.1 billion from ¥15.2 billion.
  • Shareholders’ equity increased partly because of convertible-bond conversions. Long- and short-term debt and deposits together declined 5% to ¥5,560.8 billion.

Outlook, commentary, risks and unusual items

  • Outlook and targets: Management described signs of moderate U.S. recovery and a possible bottoming-out in Japan, while noting continuing global downside risks, including Europe’s sovereign-debt concerns and slower growth in parts of Asia. ORIX’s medium-term target is 10% ROE; fiscal 2013 ROE was 7.4%. The filing provides strategic priorities, but no numerical earnings or revenue guidance.
  • Strategy: Priorities include expanding “Finance + Services,” pursuing growth in emerging markets, especially Asia, and reshaping current businesses to capture opportunities. Management also emphasized risk management, financial stability, and selective investment.
  • Key risks: Credit losses and collateral deterioration; real estate, aircraft, ship and other asset-value or residual-value declines; interest-rate and foreign-exchange movements; funding access and refinancing costs; economic or political disruption; competition; acquisitions and investments; regulatory and legal compliance; and operational, systems and information-security failures. ORIX stated it does not perfectly hedge all foreign-currency exposure.
  • Valuation and contingencies: Recurring Level 3 financial assets measured at fair value were ¥144.9 billion, approximately 2% of total assets, and depend on unobservable assumptions. The filing reported ¥21.1 billion of total long-lived asset impairment losses across operating and discontinued operations. Commercial commitments totaled ¥744.1 billion, including guarantees and committed credit lines or other commitments; contractual cash obligations totaled ¥5,454.5 billion. A U.S. subsidiary’s Fannie Mae-related guarantee exposure was ¥196.2 billion; it reported no repurchase claims during fiscal 2013.
  • Legal and reporting matters: Management said pending litigation was not expected to have a material adverse effect, while acknowledging adverse outcomes cannot be ruled out. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The retrospective adoption of the insurance-contract cost standard reduced fiscal 2012 net income by ¥2.6 billion and fiscal 2011 net income by ¥1.3 billion.

Most important facts for investors to verify

  • Whether the lower allowance and past-due balances adequately reflect portfolio risk, particularly given higher net charge-offs and the lower allowance-to-loan-and-lease ratio.
  • How much of fiscal 2013 earnings growth came from repeatable business performance versus asset sales, investment gains, acquisition accounting, and the absence of prior-year write-downs.
  • The valuation assumptions and collateral performance behind Level 3 securities, real estate-related assets, and other illiquid investments.
  • Funding and refinancing needs, committed-facility availability, covenant headroom, and the timing and terms of debt maturities.
  • The completion, financing, and expected returns of the proposed Robeco acquisition, and the integration and credit implications of ORIX Credit’s consolidation.
  • The complete financial-statement notes for cash-flow classification, contingent guarantees and commitments, VIE exposures, and the effect of the April 2013 stock split on investor per-share comparisons.