ORIX Corporation — Form 20-F Summary
Reporting period: Fiscal year ended March 31, 2011 (fiscal 2011), compared primarily with fiscal 2010. This is an annual report, not a standalone 2010 Q4 filing; quarterly results are not summarized here. Financial statements use U.S. GAAP and are presented in Japanese yen unless noted.
Business context and results
ORIX is a diversified financial services group with six reportable segments: Corporate Financial Services, Maintenance Leasing, Real Estate, Investment Banking, Retail and Overseas Business. Revenue sources include leasing, lending, insurance, securities, real estate and related services.
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Total revenue | ¥970.1bn | ¥912.3bn | +6% |
| Total expenses | ¥896.2bn | ¥883.6bn | +1% |
| Operating income | ¥74.0bn | ¥28.7bn | Up ¥45.3bn |
| Income before tax and discontinued operations | ¥92.0bn | ¥54.6bn | +68% |
| Net income attributable to ORIX | ¥67.3bn | ¥37.8bn | +78% |
| Basic / diluted EPS | ¥625.88 / ¥527.75 | ¥370.52 / ¥315.91 | +69% / +67% |
| Operating margin / net margin | 7.6% / 6.9% | 3.1% / 4.1% | Improved |
Margins are calculated from reported consolidated revenue and operating income or net income attributable to ORIX. FY2011 net income included ¥8.3bn of discontinued operations, net of tax; income attributable to ORIX from continuing operations was ¥59.1bn.
Cash flow, balance sheet and liquidity
- Cash flow: Operating activities provided ¥212.4bn; investing activities provided ¥251.6bn; financing activities used ¥363.6bn. Cash and cash equivalents rose ¥93.0bn to ¥732.1bn. Investing cash flow was positive despite increased equipment and securities purchases, with principal collections and asset-sale proceeds among the reported flows.
- Assets and equity: Total assets were ¥8.58tn, up 11%; ORIX shareholders’ equity was ¥1.32tn, up 2%. The reported equity ratio fell from 16.8% to 15.4%; management’s adjusted ratio, excluding specified VIE effects, increased from 17.2% to 17.7%.
- Debt and deposits: Short- and long-term debt totaled ¥5.01tn, up 14%; deposits were ¥1.07tn, up 25%. Reported D/E increased from 3.4x to 3.8x, while adjusted D/E declined from 3.2x to 3.0x. Management attributed much of the reported balance-sheet and leverage change to new VIE consolidation accounting.
- Funding access: Available committed credit facilities were ¥410.4bn of ¥464.4bn total. ORIX reported compliance with financial covenants. Ratings disclosed in the filing included S&P A- long-term, Moody’s A3 long-term and domestic ratings of A from R&I and JCR.
- Near-term obligations: Contractual long-term debt payments included ¥1.24tn due within one year; deposits included ¥668.0bn due within one year. Short-term debt of ¥478.6bn was presented separately from the contractual-obligations table.
Material changes versus fiscal 2010
- Lower credit-loss provisioning was a major earnings driver: provision for doubtful receivables and probable loan losses fell 56% to ¥31.1bn. Management cited fewer new non-performing loans and improved portfolio management.
- Segment profits improved notably in Corporate Financial Services, which returned to profit at ¥10.2bn from an ¥19.0bn loss; Investment Banking returned to profit at ¥13.0bn from a ¥2.8bn loss; and Overseas Business rose 23% to ¥45.6bn. Maintenance Leasing rose 12% to ¥26.2bn.
- Retail segment profit declined 24% to ¥23.8bn, mainly because FY2010 included gains on subsidiary sales. Real Estate segment profit was nearly flat at ¥54m, with higher real-estate sales offset by impairments and other pressures.
- Interest expense increased 51% to ¥123.5bn, principally due to VIE consolidation. Selling, general and administrative expenses fell 6% to ¥204.8bn.
- Long-lived asset write-downs rose to ¥20.3bn across continuing and discontinued operations; ¥18.9bn was reported in the income statement. Securities write-downs were ¥21.7bn.
Outlook, commentary and risks
- Outlook: Management set a medium-term target of around 10% ROE; FY2011 ROE was 5.14%. It emphasized “Finance + Services,” expansion in emerging markets, particularly Asia, and stronger risk management. The filing does not provide a specific numerical earnings forecast.
- Earthquake: The March 11, 2011 Great East Japan Earthquake and tsunami affected assets in the region. ORIX estimated exposure in Iwate, Miyagi and Fukushima at approximately ¥150bn, or 2% of total assets. It recorded about ¥4bn of additional credit-loss provisions and about ¥1bn of disposal losses and reduced revenues. Management described the FY2011 impact as limited but warned of possible subsequent effects on credit costs, vehicle supply, leasing and real-estate revenues.
- Accounting change: Adoption of new VIE and financial-asset transfer rules from April 1, 2010 increased assets by ¥1.147tn and liabilities by ¥1.169tn at initial adoption and reduced retained earnings by about ¥22bn net of tax. This materially affects year-over-year balance-sheet comparisons and reported leverage.
- Valuation uncertainty: Recurring Level 3 financial assets and liabilities, net, were ¥318.6bn, about 4% of total assets, including specified bonds and U.S. mortgage/asset-backed securities valued using significant unobservable inputs. Property values, collateral recovery and lease residual values are also sensitive to assumptions.
- Principal risks: Credit losses and collateral declines; real-estate and leased-asset valuation volatility; funding availability, refinancing and interest costs; interest- and foreign-exchange-rate movements; securities-market losses; economic weakness and regulatory changes. Management also identified uncertainty around the earthquake’s longer-term effects and Japanese economic recovery.
- Contingencies and assurance: Commercial commitments totaled ¥465.8bn, including ¥252.5bn of guarantees; a U.S. subsidiary’s Fannie Mae transferred-loan guarantee accounted for ¥166.9bn. Management said ordinary-course litigation was not expected to have a material adverse effect, while noting adverse outcomes cannot be ruled out. The auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective as of March 31, 2011.
Most important facts for investors to verify
- Separate operating improvement from the effects of VIE consolidation, acquisitions and changes in segment reporting; review the filing’s reconciliations of adjusted, non-GAAP measures.
- Assess whether lower credit-loss provisions are sustainable, including trends in impaired loans, past-due receivables, charge-offs and collateral values.
- Review debt maturities, deposits due within one year, committed facility availability, covenant headroom and the extent to which VIE liabilities are nonrecourse.
- Test the sensitivity of Level 3 securities, real-estate collateral and lease residual values to changes in market assumptions.
- Track post-earthquake asset quality, operating disruptions and any increase in provisions or declines in Japanese business volumes.
- Confirm that the medium-term ROE target and stated growth strategies are supported by subsequent results and cash generation; the filing provides no specific earnings guidance.