Orix Corp Ads 20-F 2009
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file number: 001-14856
ORIX KABUSHIKI KAISHA
(Exact name of Registrant as specified in its charter)
(Translation of Registrants name into English)
(Jurisdiction of incorporation or organization)
Mita NN Building, 4-1-23 Shiba, Minato-ku Tokyo 108-0014, Japan
(Address of principal executive offices)
Mita NN Building, 4-1-23 Shiba, Minato-ku Tokyo 108-0014, Japan
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.
As of March 31, 2009, 92,217,067 Shares were outstanding, including Shares that were represented by 1,446,586 ADSs.
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x Yes ¨ No
If this report is an annual or transition report, indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
¨ Yes x No
NoteChecking the box above will not relieve any Registrant required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes ¨ No
Indicate by check mark whether the Registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
¨ Yes ¨ No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
x Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer
Indicate by check mark which basis of accounting the Registrant has used to prepare the financial statements included in this filing.
x U.S. GAAP ¨ International Financial Reporting Standards as issued by the International Accounting Standards Board ¨ Other
If Other has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow.
¨ Item 17 ¨ Item 18
If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes x No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
¨ Yes ¨ No
TABLE OF CONTENTS
PRESENTATION OF FINANCIAL INFORMATION
As used in this annual report, unless the context otherwise requires, the Company and ORIX refer to ORIX Corporation and ORIX Group, we, us, our and similar terms refer to ORIX Corporation and its subsidiaries.
In this annual report, subsidiary and subsidiaries refer to consolidated subsidiaries of ORIX, generally companies in which ORIX owns more than 50% of the outstanding voting stock and exercises effective control over the companies operations, and affiliate and affiliates refer to all of our affiliates accounted for by the equity method, generally companies in which ORIX has the ability to exercise significant influence over their operations by way of 20-50% ownership of the outstanding voting stock or other means.
The consolidated financial statements of ORIX have been prepared in accordance with accounting principles generally accepted in the United States of America, or US GAAP. For certain entities where we hold majority voting interests but minority shareholders have substantive participation rights to decisions that occur as part of the ordinary course of the business, the equity method is applied pursuant to EITF96-16 (Investors accounting for an investee when the investor has a majority of the voting interest but a minority shareholder or shareholders have certain approval or veto rights). Unless otherwise stated or the context otherwise requires, all amounts in such financial statements are expressed in Japanese yen.
References in this annual report to yen or ¥ are to Japanese yen and references to US$, $ or dollars are to United States dollars.
Certain monetary amounts and percentage data included in this annual report have been subject to rounding adjustments for the convenience of the reader. Accordingly, figures shown as totals in certain tables may not be equal to the arithmetic sums of the figures which precede them.
The Companys fiscal year ends on March 31. The fiscal year ended March 31, 2009 is referred to throughout this annual report as fiscal 2009 or the 2009 fiscal year, and other fiscal years are referred to in a corresponding manner. References to years not specified as being fiscal years are to calendar years.
This annual report contains statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. When included in this annual report, the words, will, should, expects, intends, anticipates, estimates and similar expressions, among others, identify forward looking statements. Such statements, which include, but are not limited to, statements contained in Item 3. Key InformationRisk Factors, Item 5. Operating and Financial Review and Prospects and Item 11. Quantitative and Qualitative Disclosures About Market Risk, inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those set forth in such statements. These forward-looking statements are made only as of the filing date of this annual report. The Company expressly disclaims any obligation or undertaking to release any update or revision to any forward-looking statement contained herein to reflect any change in the Companys expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.
Item 3. Key Information
SELECTED FINANCIAL DATA
The following selected consolidated financial information has been derived from our consolidated financial statements as of each of the dates and for each of the periods indicated below except for Number of employees. This information should be read in conjunction with and is qualified in its entirety by reference to our consolidated financial statements, including the notes thereto, included in this annual report in Item 18, which have been audited by KPMG AZSA & Co.
In certain parts of this annual report, we have translated yen amounts into dollars for the convenience of readers. The rate that we used for translations was ¥98.23 = $1.00, which was the approximate exchange rate in Japan on March 31, 2009 using the telegraphic transfer rate of the Bank of Tokyo-Mitsubishi UFJ, Ltd. The following table provides the noon buying rates for Japanese yen per $1.00 in New York City for cable transfers in foreign currencies. As of June 19, 2009, the noon buying rate for Japanese yen per $1.00 in New York City for cable transfers in foreign currencies was ¥96.15 = $1.00. No representation is made that the yen or dollar amounts referred to herein could have been or could be converted into dollars or yen, as the case may be, at any particular rate or at all.
The following table provides the high and low noon buying rates for yen per $1.00 during the months indicated.
Investing in our securities involves risks. You should carefully consider the risks described below as well as all the other information in this annual report, including, but not limited to, our consolidated financial statements and related notes and Item 11. Quantitative and Qualitative Disclosures about Market Risk. Our business activities, financial condition and results of operations and the trading prices of our securities could be adversely affected by any of the factors discussed below or other factors. This annual report also contains forward-looking statements that involve uncertainties. Our actual results could differ from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, the risks faced by us described below and elsewhere in this annual report. See Forward-Looking Statements. Forward-looking statements in this section are made only as of the filing date of this annual report.
1. Risks related to our external environment
(1) Our business activities, financial condition and results of operations may be adversely affected by turmoil in the financial and capital markets and global economic conditions
The global economy is currently experiencing unprecedented turmoil in the worlds financial and capital markets. This turmoil has resulted in a variety of damaging effects on the operating environment of the financial industry, including a severe contraction in the availability of credit, a reduction in liquidity, a decrease of
confidence in the financial system and global economic decline. The soundness of many financial institutions is dependent on that of other financial institutions through their mutual credits, trading and other transactions. Accordingly, uncertainty regarding the creditworthiness of or the likelihood of default by certain financial institutions could result in significant liquidity problems, losses or defaults at other financial institutions. Although the governments of several major countries have taken extensive emergency measures to stabilize the global financial markets, there is no guarantee that such measures will be effective in correcting the current financial meltdown.
In Japan, exports have been adversely affected by both economic recessions in the United States and Europe as well as a stronger yen exchange rate vis-à-vis the dollar and euro. Concerns about Japans future economic growth, share price volatility, exchange rate volatility, rising unemployment, declining real estate prices and lower corporate earnings have added to the pressures on the Japanese economy. As a result of these pressures, there has been a rise in delinquencies and default rates, as well as a general lack of confidence in the financial markets amid fears of a prolonged recession in Japan.
Despite our attempts to minimize our exposure to these Japanese and global problems through the development and implementation of risk management procedures, further deterioration of Japanese and global financial and capital markets and economic conditions could continue to adversely affect our business activities, financial condition and results of operations.
(2) Our access to liquidity and capital may be restricted by economic conditions or instability in the financial markets
Our primary sources of funds from financing activities are: borrowings from banks and other institutional lenders, funding from capital markets (such as offerings of commercial paper, medium-term notes, straight bonds, convertible bonds, asset-backed securities and other debt securities) and deposits. Such sources include a significant amount of short-term debt such as commercial paper and short-term borrowings from various institutional lenders, and long-term debt maturing in the current fiscal year ending March 31, 2010. The dysfunction of, and turmoil in, the financial markets have led to a severe reduction in available credit due to increased concerns about, among other things, rising borrower default rates.
The reduction of available credit has increased the risks to our financial liquidity. These risks have increased due to a variety of factors including our ability to raise new funds in the market or renew existing funding sources is uncertain; we are exposed to increased funding costs; we may be more subject to volatility in the credit markets; and our securities may not be attractive to investors in the capital markets. If our access to liquidity is restricted, or if we are unable to obtain our required funding at acceptable costs, we may face a liquidity shortage that significantly impairs our financial condition, or, alternatively, we may be required to substantially, or suddenly, curtail our business activities, which would significantly and adversely affect our results of operations.
(3) We may lose market share or suffer reduced interest margins if our competitors compete with us on pricing and other terms
We compete with our competitors primarily on the basis of pricing, terms and transaction structure. Other competitive factors include industry experience, client service and client relationships. In recent years, Japanese banks, their affiliates and other finance companies have implemented strategies targeted at increasing business with small and medium-sized enterprises, which form the core of our customer base in Japan. Our competitors sometimes seek to aggressively compete on the basis of pricing and terms, without regard to profitability, and we may lose market share if we are unwilling to compete on pricing or terms. Similarly, some of our competitors are larger than we are and have access to capital at a lower cost than we have and may be better able to maintain profits at reduced prices. If we compete with our competitors on pricing or terms, we may experience lower income or reduced profitability.
(4) Negative press coverage or rumors could affect our business activities, financial condition, results of operations or share price
Our business depends upon the confidence of customers and market participants. Negative press coverage or rumors (including on the Internet) about our activities, our industry or parties with whom we do business could harm our reputation and diminish confidence in our business. If we become aware of such negative press coverage, we typically assess the situation and take appropriate action in response. However, even if we provide appropriate and timely explanations to the press and other interested parties, there is no assurance that we can prevent an adverse effect on our reputation. If we suffer reputational damage as a result of any negative publicity, there is a chance that we will lose customers or business opportunities, which could adversely affect our results of operations and cause our share price to decline.
(5) Our business may be adversely affected by economic fluctuations and political disturbances
We conduct business operations in Japan as well as overseas, including in the United States, Asia, Oceania, the Middle East and Europe. Shifts in commodity market prices, shifts in consumer demands, political instability or religious strife in any such region could adversely affect our operations.
(6) Changes in laws, regulations and accounting standards may affect our business activities, financial condition and results of operations
Changes in laws, regulations and accounting standards may affect the way that we conduct our business, the products that we may offer in Japan or overseas as well as our customers, borrowers and invested companies. Such changes are unpredictable and may cause our costs to increase. As a result our business activities, financial condition and results of operations could be adversely affected.
(7) Our business activities, financial condition and results of operations may be adversely affected by unpredictable events
Our business activities, financial condition and results of operations may be adversely affected by unpredictable events or any continuing effects caused by such events. Unpredictable events include man-made events, such as accidents, war, terrorism and insurgency, and natural events, such as earthquakes, storms, tsunamis, fires and outbreaks of new strains of influenza or other infectious diseases. These events may, among other things, cause unexpectedly large market price movements or an unexpected deterioration of the economic conditions of a country. If such a sudden and unpredictable event occurs in an area where we operate, either as a single event or in combination with other unpredictable events, we may be unable to respond to such changing economic conditions in time to protect our affected business operations, and our results of operations may be adversely affected.
2. Risks related to our financial affairs
(1) Our allowance for doubtful receivables on direct financing leases and probable loan losses may be insufficient and our credit-related costs might increase
We maintain an allowance for doubtful receivables on direct financing leases and probable loan losses. This allowance reflects our judgment of the loss potential of these items, after considering factors such as:
We cannot be sure that our allowance for doubtful receivables on direct financing leases and probable loan losses will be adequate to cover future credit losses. In particular, this allowance may be inadequate due to adverse changes in the Japanese and overseas economies in which we operate, or discrete events that adversely affect specific customers, industries or markets. Recently, the number of clients facing a deteriorating operating environment has been increasing due to restricted credit availability caused by the deterioration of the financial markets. As a result, while our charge-offs (net) have remained flat year on year, provisions for doubtful receivables and probable loan losses have been increasing. This, coupled with a deterioration of the real estate market, has caused significant increases in loans individually evaluated for impairment and provisions for doubtful receivables and probable loan losses for our installment loans to real estate-related companies. See Item 5Operating and Financial ReviewResults of OperationsYear Ended March 31, 2009 Compared to Year Ended March 31, 2008Details of Operating ResultsRevenues, New Business Volumes and Operating AssetsInstallment loans and investment securitiesAsset quality of our owned installment loans for additional details. If these trends continue, we may be required to make additional provisions in the future and our results of operations may be adversely affected.
In order to enhance our collections from debtors, we may forbear from exercising some or all of our rights as a creditor against companies that are unable to fulfill their repayment obligations, and we may forgive loans or extend additional loans to such companies. Furthermore, if economic or market conditions are adverse, the value of underlying collateral and guarantees may decline. As a result, there is a possibility that credit-related costs might increase. If we need to increase our allowance for doubtful receivables on direct financing leases and probable loan losses to cover these changes or events, our results of operations could be adversely affected.
(2) We may suffer losses on our investment portfolio
We hold investments in debt and equity securities, funds, ships, aircraft and real estate in Japan, the United States and other regions. The market values of our investment assets are volatile and may decline substantially in the current year or future years. Furthermore, debt and equity securities classified as trading securities are measured at fair value and changes in their values have a direct influence on our income and losses. Unrealized gains and losses on debt and equity securities classified as available-for-sale securities are recorded in shareholders equity, net of income taxes, and are not ordinarily charged directly to income. We recognize write-downs when we determine that declines in fair value on the securities (other than trading securities) are other than temporary.
The uncertainty in the global financial and capital markets has led to significant reductions in the liquidity of securities, greater volatility, widening of credit spreads and a lack of price transparency. For further details about valuation losses on our investment securities, see Item 5Operating and Financial ReviewResults of OperationsYear Ended March 31, 2009 Compared to Year Ended March 31, 2008Details of Operating ResultsRevenues, New Business Volumes and Operating AssetsBrokerage commissions and net gains (losses) on investment securities and ExpensesWrite-downs of securities. Although we attempt to minimize risks through the development and implementation of risk management procedures, a continuation of the present adverse market conditions or further deterioration in global financial market conditions could cause us to suffer unexpected losses from declines in the fair market value of securities. We record declines in the fair market value of the securities in accordance with applicable accounting principles. However, due to a decline in liquidity, or to the absence of liquidity, our securities may only be marketable below the recorded price.
(3) Changes in market interest rates and currency exchange rates could adversely affect our assets and our financial condition and results of operations
Our business activities are subject to risks relating to changes in market interest rates and currency exchange rates in Japan and overseas. Although we conduct asset-liability management (ALM), fixed and variable interest rates and terms of fixed-rate assets and liabilities are not uniform among our assets and liabilities. As such, increases or decreases in market interest rates or changes in the yield curve could adversely affect our results of operations.
In addition, the value of our assets may move independently of market interest rates. Where funds procurement costs are increasing due to a significant increase in market interest rates or the perception that an increase may occur, financing leases terms and loan interest rates for new transactions may diverge from the trend in market interest rates.
Furthermore, changes in market interest rates could have an adverse effect on the credit quality of our assets and our asset structure. With respect to our floating-rate loan assets, if market interest rates increase, this may increase the repayment burden that our customers bear. This increased burden could adversely affect the financial condition of our customers and their ability to repay their obligations to us, possibly resulting in defaults. Alternatively, a decline in interest rates could result in increased prepayments of loans and a decrease in our assets.
We have subsidiaries and affiliates in the United States and other countries outside of Japan. Although we generally attempt to hedge foreign exchange risks that arise from these business operations through matched funding, foreign exchange contracts, currency swaps and other hedging instruments, not all of our foreign exchange risks are perfectly hedged. Similarly, any retained earnings accumulated in foreign currencies at our overseas subsidiaries are also subject to exchange risks. As a result, a significant change in currency exchange rates could have an adverse impact on our financial condition and results of operations.
(4) Our funding may be adversely affected if our credit ratings are downgraded
We obtain credit ratings from ratings agencies and have been recently downgraded by JCR and placed on negative outlook by Moodys, S&P, JCR and R&I. Although this has not had an adverse impact on our business operations, any further downgrades in our credit ratings could result in an increase in our interest expenses, and could have an adverse impact on our fund raising ability by: increasing costs of issuing commercial paper and corporate debt securities, decreasing investor demand for our securities, increasing our bank borrowing costs or reducing the amount of bank credit available to us. Any one of these liquidity events could limit our ability to raise capital, thereby adversely affecting our financial condition and liquidity position. In such event we would seek financing from alternative sources, including asset sales. However, alternative financing may not be adequate to meet our funding needs if adverse conditions arise. As a result, our business activities, financial condition and results of operations may be adversely affected.
(5) Our use of derivatives to manage risk and reduce price fluctuations in our investment portfolio may adversely affect our financial condition and results of operations
We utilize derivative instruments to reduce investment portfolio price fluctuations, to manage interest rate and foreign exchange rate risk, and as part of our trading activities. However, we may not be able to successfully manage our risks through the use of derivatives. Counterparties may fail to honor the terms of their derivatives contracts with us. Alternatively, our ability to enter into derivative transactions may be adversely affected if our credit ratings are downgraded. We may also suffer losses from trading activities. As a result, our financial condition and results of operations could be adversely affected. For a discussion of derivative financial instruments and hedging, see Note 27 in Item 18. Financial Statements.
3. Risks related to our business overall
(1) We face various operational risks
Our various businesses entail many types of operational risks. Operational risk is defined as the risk of loss resulting from inadequacies in, or failures of, internal processes, people and systems, or from external events. Examples of operational risk include inappropriate sales practices, the divulging of confidential information, inadequate internal communication of necessary information, misconduct of officers or employees, errors in the settlement of accounts, erroneous stock orders, computer system security failures and conflicts with employees concerning labor and workplace management.
Our management attempts to control operational risk and maintain it at a level that we believe is appropriate. Notwithstanding our control measures, operational risk is part of the business environment in which
we operate, and we may incur losses at any time due to this risk. Even if we do not incur direct pecuniary loss, our reputation may be adversely affected.
Our main operational risks are as follows.
(i) A failure to comply with regulations to which our businesses are subject could result in sanctions or penalties, harm our reputation and adversely affect our business activities, financial condition and results of operations
Our business and employees in Japan are subject to laws, as well as regulatory oversight of government authorities who implement those laws, relating to the various fields in which we operate. This includes laws and regulations applicable to financial institutions such as the Moneylending Business Law, the Installment Selling Control Law, the Insurance Business Law, the Banking Law, the Trust Business Law, the Real Estate Trading Business Law and the Building Standards Law, as well as general laws applicable to our business activities such as the Company Law, the Financial Instruments and Exchange Law, the Antimonopoly Act and the Personal Information Protection Act.
Our businesses outside of Japan are also subject to the laws and regulations of the jurisdictions in which they operate and are subject to oversight by the regulatory authorities of those jurisdictions. For example, in addition to being subject to U.S. securities laws, we are also prohibited or otherwise restricted by U.S. law from entering into any transactions with countries listed as state sponsors of terrorism. Our compliance and legal risk management structures are designed to prevent violations of such laws and regulations, but they may not be effective in preventing all future violations. We engage in a wide range of businesses and may expand into new businesses through our acquisition activities. We implement various internal control measures for our businesses; however, with the expansion of our operations, these controls may not function adequately. In such cases, we may be subject to sanctions or penalties, and our reputation may be adversely affected. Future violations of laws and regulations could result in regulatory action and harm our reputation, and our business activities, financial condition and results of operations could be adversely affected. Even if there are no violations of laws, if we are investigated by government authorities and the investigation becomes publicly known, our reputation may be harmed and our business activities may be adversely affected.
(ii) Failures in our computer and other information systems could hinder our operations and damage our reputation and relationships with customers
We utilize computer systems and other information systems for financial transactions, personal information management, business monitoring and processing and as part of our business decision-making and risk management activities. We also offer data center services for our customers. System shutdowns, malfunctions or failures, the mishandling of data or fraudulent acts by employees or third parties, or infection by a computer virus could have adverse effects on our operations, for example by causing delay in the receipt and payment of funds, the leak or destruction of confidential information or personal information, the generation of errors in information used for business decision-making and risk management, and the suspension of other services provided to our customers. In such event, our liquidity could be adversely affected. Alternatively, the liquidity of customers who rely on us for financing or payment or who utilize our data center services could be adversely affected, and our relationships with such customers could also be adversely affected. The occurrence of any of these or any other disruptions could result in our being sued or subject to administrative penalty, or our reputation or credibility could be adversely affected.
Our information system equipment could suffer damage from a large-scale natural disaster or from terrorism. Since information systems serve an increasingly important role in business activities, there is an increasing risk of stoppage of the network or information systems due to disaster or terrorism. If networks or information systems fail, we could experience interruption of business activity, delay in payment or sales, or substantial costs for recovery of functionality.
(iii) We may not be able to hire or retain human resources to achieve our strategic goals
Our business requires a considerable investment in human resources and requires the retention of such resources in order to successfully compete in markets in Japan and overseas. Much of our business requires employment of talented individuals who have experience and knowledge in the financial field. If we cannot develop, hire or retain the necessary human resources, or if such personnel resign, we may not be able to achieve our strategic goals.
(2) The departure of senior management could adversely affect us
Our continued success relies significantly on the ability and skills of our senior management. The departure of current senior management could have an adverse effect on our business activities, financial condition and results of operations.
(3) Changes in the legal or financial stability of, or cultural differences with, any counterparties with whom we enter into joint ventures or alliances could adversely affect our results of operations
We operate joint ventures and enter into alliances with foreign and domestic third parties, and the success of these operations is often dependent upon the financial and legal stability of these third parties or counterparties. If one of the counterparties with whom we operate a joint venture or have a business alliance suffers a decline in its financial condition for any reason, or is subject to instability because of a change of the laws governing its operations after we have invested in the joint venture or the business alliance and begun operations, we may not be able to successfully operate the joint venture or alliance, may be required to pay in additional capital, or may be required to close the operations altogether. Likewise, significant differences in corporate culture between us and these partners may come to light, and may result in significant changes to the assumptions that we made when we decided to begin the operations. If our alliance counterparties are unable to perform as expected, or if any unexpected variations from the assumptions we made on entering into alliances occur, then we may not be able to continue those alliances successfully. Our inability to successfully operate joint ventures or alliances may adversely affect our reputation and results of operations.
(4) If our independent registered public accounting firm finds that our internal controls over financial reporting are insufficient, investors may lose confidence in the reliability of our financial statements, adversely affecting our share price, financial condition and reputation
The U.S. Securities and Exchange Commission (the SEC), as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring each SEC-registered foreign private issuer to include in its Annual Report on Form 20-F a report containing an assessment by management of the effectiveness of the companys internal control over financial reporting. In addition, the companys independent registered public accounting firm must provide an attestation report on the effectiveness of the companys internal controls over financial reporting. These requirements are reflected in our Annual Reports filed on Form 20-F for the fiscal years ended March 31, 2007 and thereafter.
Similarly, the Financial Instruments and Exchange Act was enacted in June 2006 in Japan. Article 24-4-4 thereof requires that a listed company shall submit its internal control report with an audit certificate issued by an independent registered public accounting firm together with its annual securities report. These requirements are applicable to annual securities reports issued for the fiscal year ended March 31, 2009. Pursuant to the provisions of the Cabinet Office Ordinance on the System for Ensuring Appropriateness of Statements on Finance and Accounting and Other Information (2007, No. 62) (the Cabinet Office Ordinance), our internal control reports required under the Financial Instruments and Exchange Act are prepared in conformity with the requirements under U.S. accounting standards for the terms, form and preparation method of internal control reports and by including additional information regarding significant differences between the reports prepared in accordance with Japanese accounting standards.
Although we have established and assessed our internal controls over financial reporting in a manner intended to ensure compliance with the requirements of various laws and regulations, in future periods our independent registered public accounting firm may identify material weaknesses in our internal controls over financial reporting and may issue a report that our internal controls over financial reporting are ineffective. These possible outcomes could have a negative impact on our share price, reputation, business activities, financial condition or results of operations due to a loss of investor confidence in the reliability of our financial statements.
(5) Our risk management may not be effective
We continuously seek to improve our risk management function. However, due to the rapid expansion of our business or significant changes in the business environment, our risk management may not be effective in some cases. We operate in a wide variety of business and geographic areas and if we are unable to effectively manage new or existing risks, our financial condition and results of operations could be adversely affected.
4. Risks related to specific businesses
(1) Our real estate-related operations expose us to various risks
The main areas of our real estate-related operations are real estate-related loans and real estate business. Real estate-related loans are comprised of loans to domestic real estate companies or construction companies, nonrecourse loans for which cash flow from real estate is the main source of repayment, and underwriting specified bonds that are issued by special purpose entities and secured by real estate. Our real estate business comprises the development and lease of office buildings, rental housing, commercial facilities and logistics warehouses; the construction and sale of condominiums; the operation of hotels, golf courses and training facilities; the development and operation of senior housing; integrated facilities management and related services; and asset management services for real estate investment trusts (REITs).
Due to the global financial crisis, the real estate markets in Japan and overseas have declined significantly, resulting in a dramatic deterioration of the funding environment for real estate purchase and development. Accordingly, the business conditions for our borrowers in the real estate industry, including real estate companies as well as construction companies, have deteriorated significantly, and the value of the real estate collateral supporting the loans that we have made is decreasing. These trends have led to increases in our provisions for doubtful receivables and probable loan losses as well as in our credit costs. See Provision for doubtful receivables and probable loan losses of Item 5 for further details. In addition, in our real estate business, profit on sales of lease properties is decreasing, and we have incurred valuation losses on property for sale in our condominium business. If the real estate market continues to deteriorate in the future, we may write down further the value of our properties (including real estate projects in which we have an interest), reschedule due dates of particular loans, purchase the senior portion of debt to preserve subordinated debt held by us, or make other additional investments to protect the viability of a project. Despite any additional investments, loans or other efforts that we make to maintain the viability of our properties and development projects, those efforts may fail and our investments may be lost. Any losses that we suffer due to additional write-downs of property values, losses on additional investments, or losses related to borrowers whose debts we have previously rescheduled or modified may be significant, and could have an adverse effect on our financial condition and results of operations.
Changes of initial real estate development project plans may be required as a result of discussions with neighboring residents about the impact of such plans on the neighborhood, even though all the governmental approvals and licenses required for such projects have been previously obtained. Any such change in our plans may also result in an increased likelihood that sales will become difficult due to lowered credibility of the real estate market, the resulting shifts in consumers company choice, or changes in results of operations and financial conditions of, or misconduct of the counterparties to, joint ventures. These factors could adversely affect our results of operations from our real estate business. Furthermore, since the results of operations of real estate-related companies to which we make loans may be adversely affected in the same way, debt collection from such borrowers. The liquidity of properties held by us as collateral may decline, which could also make debt collection difficult.
When we commence a building construction project, we try to obtain indemnity against any breach of contract or defect of property from the contractor. Also, when we purchase a property, we try to obtain indemnity from the seller to cover losses and expenses caused by any defects of geological condition, building structure or material in relation to such property. If construction work is postponed or cancelled due to the contractors circumstances, or if there is any defect in a building or facility sold or leased by us, and indemnity is not provided by the contractor or seller or if the indemnity provided is insufficient due to a deterioration of the indemnitors financial condition, we may be required to indemnify the tenant or purchaser and thereby incur losses. Even if we do not have to indemnify the tenant or purchaser, we may incur additional costs, including additional construction costs, to complete or operate property causing our expenditures to exceed budget. In addition, even if we do not incur financial loss, property defects may adversely affect our reputation due to our involvement as the seller, owner or original developer.
We may also have latent liabilities for soil contamination cleanup costs related to certain of our real estate acquisitions. Before the Soil Contamination Measures Law came into effect in February 2003, we did not, at the time of acquisition, investigate land (including land provided as loan collateral) that had been used as a factory site or operating facility in which hazardous materials were used or that otherwise could cause health problems due to soil contamination. If the land is polluted and it is necessary to take countermeasures under the Soil Contamination Measures Law, this could adversely affect the value of the land or the amounts conversable on foreclosure from land held as collateral. Although we have conducted investigations at the time of acquisition with respect to land acquired after the Soil Contamination Measures Law came into effect, our investigation may have failed to identify risk and a subsequent determination that such land is polluted may have the same adverse consequences.
If the Building Standards Law, the City Planning Law or any other property-related laws and regulations are amended, we may suffer additional responsibility and our expenses may increase.
We generally carry comprehensive property and casualty insurance covering our real estate investments acquired as part of our real estate business, with insured limits that we believe are adequate and appropriate in light of anticipated losses. However, certain types of losses, such as losses caused by wars, acts of terrorism, willful acts or gross negligence, are uninsurable. In addition, we do not usually carry insurance for damages caused by natural disasters such as earthquakes or typhoons because insurance coverage for such damages is limited and the insurance premiums are relatively expensive.
In the event that our real estate investments suffer uninsured losses, our investment balances in and revenues from such investments could be adversely affected. In addition, in the event that a building or real estate development project in which we have invested is destroyed or otherwise rendered unusable, we would likely remain liable for indebtedness and other financial obligations relating to the relevant property.
(2) We may be exposed to increased risks as we expand or reduce the range of our products and services, or acquire companies or assets
As we have proactively expanded the range of our product sales and services beyond our traditional businesses, we are exposed to new and increasingly complex risks, some or all of which we may be unable to control, and we may incur substantial losses. In addition, our efforts to offer new services and products may not achieve the expected results if business opportunities do not increase as expected or if competitive pressures undermine the profitability of the available opportunities. Restructuring of, or withdrawal from, businesses in which we engage could harm our reputation and adversely affect our financial condition and results of operations.
We cannot guarantee that the price we pay for acquisitions will be fair and appropriate. If the results of operations of acquired companies are lower than what we expected at the times we made the acquisitions, our acquisitions could result in large future write-downs of goodwill and other assets.
In recent years, the contribution from consolidated subsidiaries and equity method affiliates to our consolidated results of operations has increased and has been an important component of our income. There can be no assurance that this contribution will be maintained. While we will continue to review and selectively pursue investment opportunities, there can be no assurance that we will continue to identify attractive opportunities, or that investments will be as profitable as we originally expect. Our subsidiaries and affiliates have a wide range of business operations, including operations that are very different from financial services, our core business. Failure to manage investee companies effectively could result in financial losses as well as losses of future business opportunities. In addition, we may not be able to sell or otherwise dispose of investee at the time or price we initially expected. We may also need to invest additional capital in some investee companies if their financial condition deteriorates. We may lose key personnel in investee companies if such personnel are not satisfied with our management.
In the event that any subsidiary or affiliate to which we transfer our personnel to serve as directors or officers is implicated in a problem of significant public concern, our reputation may be adversely affected irrespective of whether such persons perform their obligations appropriately.
(3) We may suffer losses if we are unable to remarket leased equipment returned to us
We lease equipment to customers under direct financing leases and operating leases. We estimate the residual value at the time of contract, and we may suffer losses if we are unable to sell or re-lease the equipment at the end of the leasing period for the residual value that we estimated at the beginning of the lease. This risk is particularly significant for operating leases. Our estimates of the residual value of equipment are based on current market values of used equipment and assumptions about when and to what extent the equipment will become obsolete; however, we may need to recognize additional valuation losses if our estimate differs from actual trends in equipment valuation and the secondhand market.
(4) Leasing equipment distributors inappropriate sales activity may increase the number of customer claims against us and adversely affect our reputation and business performance
Our leasing business and reputation could be affected by the behavior of individual distributors of equipment and inappropriate industry business practices. In 2005, inappropriate sales activity was a serious problem in the telephone equipment leasing industry, and we received an increased number of customer claims and inquiries. In response to the industry trend, the Ministry of Economy, Trade and Industry amended the Act on Specified Commercial Transactions in 2005 and has provided guidance to firms in the related industries on compliance measures. If the same problem recurs, leasing contracts may be cancelled before maturity, adversely affecting our business performance, and our reputation may suffer. The measures that we have taken or may take in the future to resolve and address these problems may cause leasing business costs to increase and leasing transactions to decline.
(5) Increased competition or regulatory changes in entertainment-related industries could weaken the financial condition of companies to which we provide credit, which may adversely affect their ability to repay us
We provide credit to companies in entertainment-related industries, such as pachinko halls operators, primarily through direct financing leases and installment loans. Even though we have accumulated credit know-how from past experience and obtain collateral that we consider adequate after thorough examination of the risks presented by these industries, our business activities, financial condition and results of operations could be adversely affected by an intensification of competition or substantial changes in the regulation of these industries, which may adversely affect their financial condition and credit of our customers in these industries.
(6) Changes in the Moneylending Business Law may adversely affect our financial condition and results of operations
We provide consumer loans through ORIX Credit Corporation. The consumer lending industry has been shrinking because of the uncertain business environment that surrounds it due to the increased risk of claims for refunds of gray zone interest (that is the interest on loans in excess of the maximum rate prescribed by the Interest Rate Restriction Law, which is between 15% to 20% per annum, and the maximum rate of 29.2% permitted under the Capital Subscription Law) as a result of the strengthening of various related legal restrictions. Regulatory changes include a reduction in the maximum chargeable interest rates implemented by revisions to the Moneylending Business Law as well as the expansion of self-regulation by moneylending companies, include the introduction of aggregate borrowing limits, both of which will become effective by June 2010. The aggregate borrowing limits for consumer lending will in principle prohibit making a new loan to a borrower if the amount, when aggregated with the borrowers other outstanding debts, would exceed one-third of the borrowers annual income. Since ORIX Credit Corporation has generally not charged gray zone interest on its loans, the reduction of the maximum chargeable interest rate under the Moneylending Law does not directly affect it. However, the aggregate borrowing limits may result in a decline in our outstanding loan balance as we reduce loans to consumers to refrain from lending beyond their aggregate borrowing limits. Additionally, ORIX Credits credit costs may increase if the decreased borrowing limits constrict cash flows of our borrowers, thereby constraining their ability to pay their debts as they come due. Although we announced plans to transform ORIX Credit Corporation into a joint venture with Sumitomo Mitsui Banking Corporation to better compete in light of industry changes, the trend of the consumer loan industry as a whole may adversely affect our financial condition or results of operations.
(7) Accidents in our environment-related business could damage our reputation and cause us to incur financial losses
We began operations of an industrial waste disposal facility through ORIX Environmental Resources Management Corporation in June 2006 as a Private Finance Initiative, or PFI, under contract with Saitama prefecture in Yorii-machi, Saitama. In addition, we acquired Kanematsu Environmental Corporation (now Funabashi Environmental Corporation) in March 2008 to develop an industrial waste disposal business mainly in Funabashi, Chiba. In order to minimize the risk of emitting environmental pollutants, ORIX Environmental Resources Management Corporation utilizes advanced waste disposal techniques. ORIX Environmental Resources Management Corporation has contracted with the waste disposal specialist firm that constructed the facility to serve as operator of the facility. The Funabashi Environmental Corporation has established a facility that minimizes the risk of emitting environmental pollutants. Although we try to reduce the risks related to operating our industrial waste disposal business, environmental pollution could occur due to an operational error or defect in the disposal facility. To protect against a variety of such accident risks, ORIX Environmental Resources Management Corporation has ensured that the relevant operator bears responsibility for the operation and maintenance of the facility under its operating agreement and responsibility for defects in the facility under the design and construction contracts.
However, in the event that the financial condition of the operator has deteriorated to the point that it cannot perform its contractual obligations or indemnify us for losses, we will be required to bear such losses. Furthermore, we will be responsible for any accident occurring by reason of any event other than those for which the operator is responsible by contract. If such an accident occurs, we will be required to incur loss. Even if we do not incur any direct financial loss, our reputation could be adversely affected.
(8) Our medical business and nursing care business expose us to various risks
We operate the Kochi Health Sciences Center, which is a PFI business of Kochi prefecture and Kochi-city, through our subsidiary Kochi Medical PFI Corporation. The subsidiary is not engaged in medical services directly; however, since it contracts out for sterilization of medical materials, if an accident occurs, the subsidiary
could be liable for the contribution of the contracted service to the accident. Even if there is no pecuniary liability, our reputation could be adversely affected.
We rent medical instruments to customers. We contract for the inspection of such medical instruments with professionals designated by the manufacturers. The manufactures are responsible for any injuries or damages caused by defects in such medical instruments. However, as a lessor, we also have potential obligations for such defects. Further, even if there is no pecuniary liability, our reputation could be adversely affected by product defects.
We provide housing and elderly care services to senior citizens, including through the operation of at-home nursing care and nursing home facilities. If a nursing service accident occurs, we could be liable for damages, and our reputation could be adversely affected. In addition, if the nursing care insurance system is modified to reduce public financial support and the economic burden on the user is thereby increased, the nursing market could shrink and our results of operations could be adversely affected.
(9) If our advisory services and consulting services that we offer to our customers are insufficient, we may be obligated to compensate our customers
We provide M&A and financial advisory and consulting services to our customers, including through our subsidiaries ORIX M&A Solutions Corporation and Houlihan Lokey Howard & Zukin. If such services are insufficient and our customers suffer losses as a consequence, we may be obligated to compensate our customers for those losses.
(10) Our life insurance subsidiary is subject to risks that are specific to its business
We are exposed to the risk of unpredictable increases in insurance payments for deaths and hospital benefits, in relation to the business of ORIX Life Insurance Corporation, or ORIX Life Insurance. It may incur valuation losses or losses on sales if the value of securities or real estate that it purchases for asset management purposes decreases. ORIX Life Insurance is subject to strict regulatory oversight, which includes the maintenance of certain specified capital requirements. If ORIX Life Insurance suffers valuation or other losses that affect its ability to maintain its regulatory capital requirements, we may be required to provide financial support through capital contributions. In addition, if ORIX Life Insurance fails to conduct asset liability management, or ALM, to appropriately manage risks and returns on investment assets and underwriting risks on insurance policy benefits, its financial condition and results of operations may suffer.
ORIX Life Insurance is required to make contributions to the Life Insurance Policyholders Protection Corporation of Japan, or the PPC. The PPC was established in 1998 to provide financial support to insolvent life insurance companies. All life insurers in Japan, including ORIX Life Insurance, are members of the PPC and are required to make contributions to the PPC based on their respective share of insurance premiums and policy reserves within the industry. Because a number of life insurers have become insolvent since 1998, the PPCs financial resources have been depleted by financial support provided to those companies. If there are further bankruptcies of life insurers, other members of the PPC, including ORIX Life Insurance, may be required to make additional contributions to the PPC. In such an event, our financial condition and results of operations may be adversely affected.
(11) If the reputation of our professional baseball team declines, our share price, business activities, financial condition and results of operations could be adversely affected
We own and manage a professional baseball team in Japan, the ORIX Buffaloes. Management of a professional baseball team in Japan, due to its public nature, requires us to consider the various social effects that it may have and the reputation of the team. If the reputation of the baseball team declines, our business activities, financial condition, results of operations and our share price could be adversely affected as a consequence.
(12) Ship brokerage exposes us to market and credit risks
We operate a ship brokerage business in which we simultaneously place orders for new ships with shipbuilders and enter into purchase agreements with our customers who purchase the ships for use upon completion. As the process of shipbuilding takes several years from the placement of an order to delivery of the ship, if a purchasing customer defaults under its purchase agreement due to a decline in market conditions or deterioration of its cash flow, we are not extinguished from our obligation to purchase the ship upon completion. Also, if a shipbuilder becomes unable to complete and deliver a ship for financing or other reasons, we will be obliged to repay the deposit received from the customer regardless of whether or not the advance was repaid by the shipbuilder. Any of these above events may adversely affect our results of operation.
5. Risks related to holding or trading our Shares and ADRs
(1) Dispositions of Shares may adversely affect market prices for the Shares
A few of our shareholders hold more than five percent of the total number of outstanding Shares. These shareholders may, for strategic or investment reasons, decide to reduce their shareholdings in ORIX. Dispositions of Shares, particularly dispositions of large numbers of Shares by major shareholders, may adversely affect market prices for the Shares.
For information on major shareholders, see Item 7. Major Shareholders and Related Party Transactions. Due to changes in the global economy or political conditions, investors outside Japan may reduce their investments in Japanese stocks. A large portion of our Shares are held by investors outside Japan, and a reduction in Japanese stock investment by such investors may adversely affect market prices of our Shares.
(2) Change of listed sections and delisting of Shares could adversely affect the liquidity and price of the Shares
Each of the Tokyo Stock Exchange, Inc. and the Osaka Securities Exchange Co., Ltd, on which our Shares are listed in Japan, has certain standards for maintaining the listing of shares. If we fail to meet the listing standards, the listed section of the Shares may change from the more prestigious section 1 to section 2, or the Share may be delisted. In general, the liquidity of shares on section 2 is lower and share price volatility is higher than on section 1. If the Shares are moved to section 2, or are delisted, the liquidity of and prices for the Shares could be adversely affected.
(3) Rights of shareholders under Japanese law may be different from those under the laws of other jurisdictions
Our Articles of Incorporation, the regulations of our board of directors and the Company Law govern our corporate affairs. Legal principles relating to such matters as the validity of corporate procedures, directors and officers fiduciary duties and shareholders rights are different from those that would apply if we were incorporated elsewhere. Shareholders rights under Japanese law are different in some respects from shareholders rights under the laws of jurisdictions within the United States and other countries. You may have more difficulty in asserting your rights as a shareholder than you would as a shareholder of a corporation organized in a jurisdiction outside Japan. For a detailed discussion of the relevant provisions of the Company Law and our Articles of Incorporation, see Item 10. Additional InformationMemorandum and Articles of Incorporation.
(4) It may not be possible for investors to effect service of process within the United States upon ORIX or ORIXs directors or executive officers, or to enforce against ORIX or those persons judgments obtained in US courts predicated upon the civil liability provisions of the federal securities laws of the United States
ORIX is a joint stock company incorporated in Japan. Most or all of ORIXs directors and executive officers are residents of countries other than the United States. Although some of ORIXs subsidiaries have substantial
assets in the United States, substantially all of ORIXs assets and the assets of ORIXs directors and executive officers are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon ORIX or ORIXs directors and executive officers or to enforce against ORIX or those persons, in US courts, judgments of US courts predicated upon the civil liability provisions of US securities laws. ORIX has been advised by its Japanese counsel that there is doubt, in original actions or in actions to enforce judgments of US courts, as to the enforceability in Japan of civil liabilities based solely on US securities laws. A Japanese court may refuse to allow an original action based on US securities laws.
The United States and Japan do not currently have a treaty providing for reciprocal recognition and enforcement of judgments, other than arbitration awards, in civil or commercial matters. Therefore, if you obtain a civil judgment by a US court, you will not necessarily be able to enforce such judgment directly in Japan.
(5) We expect to be a passive foreign investment company
We expect to be a passive foreign investment company under the US Internal Revenue Code because of the composition of our assets and the nature of our income. US investors in our Shares or ADSs are therefore subject to special rules of taxation in respect of certain dividends or gain on such Shares or ADSs, including recharacterization of gains realized on the disposition of, and certain dividends received on, the Shares or ADSs as ordinary income earned pro rata over a US investors holding period for such Shares or ADSs, taxed at the maximum rate applicable during the years in which such income is treated as earned, and subject to interest charges for a deemed deferral benefit. See Item 10. Additional InformationTaxationUnited States Taxation. Investors are urged to consult their own tax advisors regarding all aspects of the income tax consequences of investing in our Shares or ADSs.
(6) If you hold fewer than 10 Shares, you will not have all the rights of shareholders with 10 or more Shares
One unit of the Shares is comprised of 10 Shares. Each unit of the Shares has one vote. A holder who owns Shares other than in multiples of 10, will own less than a whole unit (i.e., for the portion constituting fewer than 10 Shares.) The Company Law imposes significant restrictions on the rights of holders of shares constituting less than a whole unit, which include restrictions on the right to vote. Under the unit share system, a holder of Shares constituting less than a unit has the right to require ORIX to purchase its Shares and the right to require ORIX to sell it additional Shares to create a whole unit of 10 Shares. However, a holder of ADRs is not permitted to withdraw underlying Shares representing less than one unit, which is equivalent to 20 ADSs, and, as a practical matter, is unable to require ORIX to purchase those underlying Shares. The unit share system, however, does not affect the transferability of ADSs, which may be transferred in lots of any size.
(7) Foreign exchange fluctuations may affect the value of our securities and dividends
Market prices for our ADSs may decline if the value of the yen declines against the dollar. In addition, the dollar amount of cash dividends or other cash payments made to holders of ADSs will decline if the value of the yen declines against the dollar.
(8) A holder of ADRs has fewer rights than a shareholder and must act through the depositary to exercise those rights
The rights of shareholders under Japanese law to take various actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining a companys accounting books and records and exercising dissenters rights are available only to holders of record on a companys register of shareholders. The Shares represented by our ADSs are registered in the name of a nominee of the depositary, through its custodian agent. Only the depositary is able to exercise those rights in connection with the deposited Shares. The depositary will make efforts to vote the Shares represented by our ADSs as instructed by the holders of the ADRs representing such ADSs and will pay to those holders the dividends and distributions collected from
us. However, a holder of ADRs will not be able to directly bring a derivative action, examine our accounting books and exercise dissenters rights through the depositary unless the depositary specifically undertakes to exercise those rights and is indemnified to its satisfaction by the holder of ADRs for doing so.
Item 4. Information on the Company
ORIX is a joint stock corporation (kabushiki kaisha) formed under Japanese law. Our principal place of business is at Mita NN Building, 4-1-23 Shiba, Minato-ku, Tokyo 108-0014, Japan, and our phone number is: +81 3 5419 5000. Our general contact URL is https://ssl.orix-form.jp/ir/inquiry_e/ and our URL is: www.orix.co.jp/grp/index_e.htm. The information on our website is not incorporated by reference into this annual report. ORIX USA Corporation, or ORIX USA, is ORIXs agent in the United States, and its principal place of business is at 1717 Main Street, Suite 900, Dallas, Texas 75201, USA.
ORIX was established on April 17, 1964 in Osaka, Japan as Orient Leasing Co., Ltd. by three trading companies and five banks that included Nichimen Corporation, Nissho Corporation and Iwai Corporation (presently Sojitz Corporation), the Sanwa Bank and Toyo Trust & Banking (presently Mitsubishi UFJ Financial Group, Inc.), the Industrial Bank of Japan and Nippon Kangyo Bank (presently Mizuho Financial Group, Inc.), and the Bank of Kobe (presently Sumitomo Mitsui Financial Group, Inc.). While we maintain business relationships with these companies, they now hold only a limited number of our Shares in the aggregate.
Our initial development occurred during the period of sustained economic growth in Japan during the 1960s and the early 1970s. During this time, strong capital spending by the corporate sector fueled demand for equipment, and led to the first wave of newly established leasing companies in Japan. Under the leadership of Tsuneo Inui, who served as President from 1967 to 1980, we capitalized on the growing demand in this period by expanding our portfolio of leasing assets.
It was also during this time that our marketing strategy shifted from a focus on using the established networks of the trading companies and other initial shareholders to one that concentrated on independent marketing as the number of our branches expanded. In April 1970, we listed our Shares on the second section of the Osaka Securities Exchange, which at the time was the fastest listing by a new company in post-World War II Japan. Since February 1973, the Shares have been listed on the first sections of the Tokyo Stock Exchange and the Osaka Securities Exchange. In September 1998, ORIX listed on the New York Stock Exchange, or NYSE, with the ticker symbol IX. ORIX was listed on the Nagoya Stock Exchange from February 1973 to October 2004.
The 1970s saw the gradual maturing of the Japanese leasing industry, and the Japanese economy was adversely affected by the two oil shocks of 1973 and 1979, resulting in reduced growth in capital spending and increased volatility in foreign exchange rates. Despite these difficulties, we continued to grow rapidly by expanding and diversifying our range of products and services to include ship and aircraft leasing along with real estate collateralized loans. Furthermore, in 1972, we established Orient Leasing Interior (now ORIX Alpha), which concentrated on leasing furnishings and fixtures to retailers, hotels, restaurants and other users. We subsequently set up a number of specialized leasing companies to tap promising new markets, including ORIX Auto Leasing Corporation (now ORIX Auto) in 1973, and Orient Instrument Rentals (now ORIX Rentec) in 1976. We established Family Consumer Credit (now ORIX Credit) in 1979, with the aim of entering the consumer finance sector.
During the 1970s, we expanded overseas, establishing our first overseas office in Hong Kong in 1971, followed by Singapore in 1972, Malaysia in 1973, the United States in 1974, Indonesia in 1975, South Korea in 1975, the Philippines in 1977 and Thailand in 1978.
Yoshihiko Miyauchi became President and CEO in 1980. During the 1980s, we continued to expand the range of our products and services, and placed increased emphasis on strengthening synergies among our group companies by emphasizing knowledge sharing and cooperation to make optimal use of corporate resources. This included a focus on cross-selling a variety of products and services to our customers, a focus that continues to this day.
During the 1980s, we began using mergers and acquisitions to expand operations, acquiring ORIX Securities Corporation (formerly Akane Securities K.K.), or ORIX Securities, and ORIX Estate Corporation (formerly OSAKA Ichioka Corporation), which is involved in real estate and leisure facility management, in order to expand our array of financial products and services.
In 1988, we acquired one of the twelve professional baseball teams in Japan, the ORIX Buffaloes (formerly the Hankyu Braves), which has helped raise our name recognition and promote our corporate image. In 1989, we introduced a corporate identity program and changed our name to ORIX Corporation from Orient Leasing Co., Ltd. to reflect our increasingly international profile and diversification into financial services other than leasing.
In the 1990s, the Japanese economy experienced a protracted period of industrial stagnation and, in the latter half of the decade, instability within the financial sector. Notwithstanding these adverse conditions, we continued to further develop and expand our financial activities and products and we began to focus our attention on retail operations. For example, in 1991 we entered the life insurance business by establishing ORIX Omaha Life Insurance (now ORIX Life Insurance), and, from 1997, we began to offer ORIX Direct Life Insurance, a new life insurance product offered directly to individual customers. In April 1998, we acquired Yamaichi Trust & Bank, Ltd. (now ORIX Trust and Banking), which has since concentrated primarily on housing loans. Furthermore, with the deregulation of brokerage commissions in May 1999, ORIX Securities began ORIX Online, an Internet-based brokerage aimed at individual investors. We also entered the loan servicing business overseas in 1997 through a joint venture with Bank One Corporation of the United States (this former joint venture is presently a subsidiary of ORIX USA).
In 1999, in order to increase the efficiency of our domestic real estate-related operations, we established our Real Estate Finance Headquarters, which is primarily engaged in real estate-related finance, and ORIX Real Estate Corporation, or ORIX Real Estate, which focuses on the development, operation and management of real estate in Japan. Subsequently, we expanded our real estate-related activities to include loan servicing, real estate investment trusts, CMBS, integrated facilities management and asset management in Japan.
We established our Investment Banking Headquarters in 1999, and have since been attempting to expand our investment banking activities, which include principal investments, corporate rehabilitation and consulting.
Since 2000, we have actively expanded our automobile-related operations by acquiring companies and assets. For example, in addition to our existing companies, ORIX Auto Leasing, ORIX Rent-A-Car and ORIX Rent-A-Car Hokkaido, we added Senko Lease and IFCO Ltd. in 2001, Nittetsu Leasing Auto Co., Ltd. in 2002 and JAPAREN in 2003. We combined these seven companies into ORIX Auto in January 2005.
In February 2005, in order to expand investments based mainly in the Asia region, we transferred control of certain operations from our Investment Banking Headquarters and Real Estate Finance Headquarters to the newly established Alternative Investment & Development Headquarters located in Japan.
In December 2005, as a part of our business restructuring in the United States, we sold part of our loan servicing business, including primary and master servicing departments and entrusted servicing assets. In January 2006, we entered the investment banking field in the U.S. with the acquisition of Houlihan Lokey Howard and Zukin (HLHZ). HLHZ established operations in Hong Kong and Japan in 2007, and is expanding its financial advisory services across a broad range of operations, including advisory operations and valuation support for cross-border M&A.
In June 2007, in order to expand our real estate-related business in Asia and the Middle East where medium- to long-term growth is expected, we established an International Real Estate Business Headquarters located in Japan, which was integrated into ORIX Real Estate Corporation in June 2008 to take advantage of opportunities both domestically and globally.
In January 2008, we integrated our Real Estate Finance Headquarters into our Investment Banking Headquarters.
In June 2008, to promote further diversification within ORIXs operations throughout Asia, Oceania, the Middle East and Europe, we consolidated our International Business Headquarters and our Alternative Investment and Development Headquarters to create the International Administrative Headquarters, which we subsequently converted into our Global Business Headquarters in January 2009.
In January 2009, we integrated our Sales Headquarters into our Domestic Sales Administrative Headquarters. The new division consists of the Eastern Japan unit, the Western Japan unit and specialist business units.
In June 2009, we consolidated our Corporate Planning Office, Treasury Department, Accounting Department and Investor Relations in the Office of the President to create the Corporate Planning and Financial Control Headquarters.
Target Performance Indicators, Medium- and Long-Term Corporate Management Strategies and Challenges to be Addressed
Our current business plan is focused on strengthening the corporate structure and operational realignment. Our objective is to improve our profitability and operational stability while simultaneously preserving liquidity and asset stability in response to the drastic changes in the economic environment and the effects of the credit crunch.
In strengthening the corporate structure, ORIX Group aims for improved financial stability by reducing overall levels of interest-bearing debt. ORIX Group aims to maintain sufficient funding and will maintain a high long-term debt ratio by controlling levels of commercial paper, or CP, in response to dysfunction in the capital markets.
In managing operational realignment, capital will be appropriately allocated through consideration of whether our various operations are asset-efficient, have sufficient market size and growth potential, and are able to control risk. At the same time, we seek to manage our portfolio by limiting risk to within the limits of shareholders equity. Furthermore, along with reducing investment in market-related products, each business unit involved in real estate related business will further increase its real estate-related expertise and seek to improve risk diversification and profitability. The Corporate Financial Services segment will reduce traditional corporate loans, and promote the provision of value-added services capitalizing on group expertise. The trust and banking operations will continue providing mortgages, in addition to expanding the corporate finance function. Furthermore, ORIX Group has initiated group-wide cost reduction programs. Along with the strategies outlined above, ORIX Group will proactively invest in and allocate personnel to promising fields to sow the seeds for medium- and long-term growth.
PROFILE OF BUSINESS BY SEGMENT
Our reportable segments are based on FASB Statement No. 131. They are mainly identified based on the nature of services for operations in Japan and on geographic area for overseas operations. For a discussion of the basis for the breakdown of segments, see Note 31 in Item 18. Financial Statements. The following table shows a breakdown of profits by segment for the years ended March 31, 2007, 2008 and 2009.
Each of our segments is briefly described below.
As of April 1, 2008, ORIX reorganized its businesses into six segments to facilitate formulating strategy, allocating resources and determining portfolio balance at the segment level. These six business segments are: Corporate Financial Services, Maintenance Leasing, Real Estate, Investment Banking, Retail and Overseas Business.
Management believes that organizing our business into these six segments addresses the significant changes in the ORIX Groups operations and lines of business over the preceding four to five years. Each segment is organized as a large strategic unit that allows us to maximize our corporate value by identifying and building strategic advantages vis-à-vis anticipated competitors in each area and by helping the ORIX Group obtain a competitive advantage.
An overview of operations, operating environment and operating strategy for each of the six segments follows below.
Corporate Financial Services
Overview of Operation
The Corporate Financial Services segment has its origin in the leasing business developed at the time of ORIXs establishment in 1964, and even today this segment serves as the foundation for the entire ORIX Group.
Operating through a nationwide network of 81 offices, we provide capital through loans and leasing for capital investment and other needs to our core customer base of domestic small and medium enterprises, or SMEs. In addition, the Corporate Financial Services segment serves as a central point of contact for the entire ORIX Group in responding to needs of other segments, including business succession and overseas business development.
This segments framework has recently been reorganized by merging the three Regional Divisions into one Headquarters consisting of two regional units, Eastern Japan and Western Japan. Specialist business units were also established within the Headquarters to seek new opportunities, such as environmental businesses. In addition, a specialist real estate loan recovery unit was established to pursue collection upon maturity and client maintenance.
The activities in this segment are conducted primarily through the Domestic Sales Administrative Headquarters. The number of employees working in this segment is 2,900.
The economic environment surrounding the core client base of SMEs in this segment has changed significantly and adversely since 2007, and has become increasingly uncertain. The effects of the financial crisis that originated in the United States have prompted domestic financial institutions to take a more cautious approach to real estate lending, which in turn has led to an increase in the number of companies with rapidly worsening cash flows, primarily in the construction and real estate sectors. In addition, the number of companies facing major job cuts and swelling inventories is increasing. With the worsening economy and a progressively stronger yen, the Japanese government has announced one of its largest economic stimulus policies ever, a package of measures designed to address the fiscal crisis that includes funding support for SMEs. However, it will be necessary to closely monitor whether these measures can improve the corporate fund-raising environment and the effect of these measures on business performance.
In an attempt to create new growth areas, the government is also announcing policies in environmental fields. For example, the government has already enacted policies to support the purchase of energy-efficient home appliances and to promote the purchase of vehicles with a smaller environmental impact. Given the increased awareness of environmental issues among both clients and society as a whole, this segment anticipates the expansion of its environmental businesses.
In the lending and leasing markets for SMEs, our primary competitors are banks and other leasing firms. While these companies are taking a more conservative approach to lending and other transactions, given worsening credit conditions among borrowers, competition continues to be stiff for business from blue-chip firms and in areas with future cash demands.
Sales personnel in the corporate financial services segment craft and deliver optimal solutions based on a deep understanding of this segments customers, their specific needs, and their management issues, gained in the course of day-to-day transactions, and, where necessary, supported by team efforts centered around the Groups high levels of expertise.
Moving forward, the segment will promote a back to basics approach by providing services to a wider range of clients in an expanded range of industries other than the real estate industry. Furthermore, the segment is seeking to position itself as a financial services expert capable of enhancing the competitiveness of SME customers, our core customer category. This entails gathering customer, product, and service information throughout the Group, and responding quickly, flexibly, and in detail to customer needs.
At the same time, given the increasingly uncertain environment faced by SMEs, and the heightened credit risks, the segment is also focusing on timely collections from existing transactions and improved transaction maintenance. In October 2008, the segment established a dedicated task force to monitor and manage major borrowers and real estate-related transactions, and this unit will work together with the risk management division, real estate development division, and loan servicing (asset recovery) operations to focus on ensuring timely collections from clients and improved transaction maintenance. The segment will work to ensure both profitability and financial soundness through detailed and prompt responsiveness to client needs and tight monitoring.
As an offshoot of its core end-of-lease asset collections and disposal business, the ORIX Group has been involved in the environmental business for more than ten years. Since June 2006, in a PFI partnership with Saitama Prefecture, we have operated one of the countrys largest private-sector waste disposal facilities capable of controlling dioxins while completely recycling waste.1
We will continue to focus on environmental businesses, which are expected to see growing demand from customers and society as a whole, mainly through ESCO operations and waste disposal proposals.2
Overview of Operation
This segment consists of our automobile operations and rental operations.
The automobile operations began with automobile leasing in 1973, and expanded to automobile rental in 1985. Since 2002, the ORIX Group has also operated a car sharing business. Our automobile leasing operations started by offering to corporate clients leases that included maintenance services, and today provide a complete range of specialized vehicle management outsourcing services. The segment also offers wide range of services to address the vehicle needs of both corporate and individual clients.
We entered the rental business in 1976 with leasing of precision measuring equipment to corporate clients. Today, the rental business covers a broad range of services, including IT-related equipment rentals, technical support, calibration, and asset management.
The activities in this segment are conducted primarily through ORIX Auto and ORIX Rentec. The number of employees working in this segment is 3,280.
In corporate automobile leasing operations, the operating environment has become increasingly difficult. Competition between the major leasing companies has intensified in recent years and the sudden tightening of credit and the worsening economy has suppressed demand from customers. There has also been drop in used car prices brought on by the yens rapid appreciation since autumn 2008.
At the same time, as companies look for ways to cut costs, we expect companies using automobiles in their operations to reduce vehicle costs and improve fleet operating efficiency. Furthermore, we expect that heightened awareness of environmental issues will also stimulate demand for leasing services as companies switch to hybrid and electric vehicles, and increase their use of car sharing.
We believe that the market in Japan for vehicle leases to individuals has ample room for expansion, with just over 125,000 vehicles under lease as of September 2008.
Our precision measuring equipment rental operation has comparatively high barriers to entry because of the need for significant initial investment in distribution centers and rental assets, and the difficulty of finding or training personnel with knowledge of calibration. As a result, the competitive landscape in the domestic measuring equipment rental market is relatively stable. However, the recent economic downturn and waning consumer confidence suppressed demand for rentals, particularly among the major electronics manufacturers, creating an even more difficult operating environment.
The Maintenance Leasing segment targets growth as a stable revenue base by continuously providing high value-added services and improving the cost structure through streamlining back office operations and integrating outsourced operations, while maintaining its top market share.
In the automobile leasing business, in addition to its own sales network, the segment utilizes the networks of the Corporate Financial Services segment and Group companies to deliver proposals that combine leasing, automobile rental, and car sharing to provide optimal vehicle solutions to the widest range of clients. As of March 31, 2009, automobiles under management by the ORIX Group totaled approximately 616,000 units.
The corporate automobile leasing operation aims to expand income from peripheral services by addressing outsourcing needs related to comprehensive vehicle management, and enhance earnings by increasing per-vehicle profitability. To achieve this, we are responding to the increasingly specialized and complex needs of our clients primarily by strengthening consulting services in the areas of compliance, environmental services, and consulting services related to vehicle management, while continuing to create systems that deliver high added value for clients. We will differentiate ourselves from competitors by actively showing clients how to realize cost reduction by optimizing vehicle management.
While used car prices have dropped due to adverse economic conditions and a stronger yen, we aim to maintain profitability in the sales of our used cars. We seek to reduce costs by switching from third-party auto auctions to an in-house bidding system, and to enhance sale prices chiefly by expanding the number of participating bidders.
In leasing automobiles to individual clients, we will continue to enhance awareness of products such as My Car Lease and Car Sharing as a new approach to vehicle use that is more appropriate to the changing social environment. We will work to enhance our brand recognition, while steadily creating a foundation for new businesses.
Our rental business will continue to expand the types of equipment it handles, while working to enhance ancillary services such as asset management. In addition, we will take advantage of our large market share to obtain favorable terms from equipment manufacturers and achieve a more efficient turnover of assets, with the aim of generating stable growth. As of March 31, 2009, the rental business owned more than 600,000 units of equipment spanning about 30,000 types.
Going forward, we will aggressively expand product and service offerings in new rental markets, such as the new energy market, in addition to current product offerings in the environmental analysis and medical equipment fields. We will also work to expand our IT equipment rental operations to meet information security needs and fee business from technical support services such as the operation and management of IT equipment, and will seek continued growth in our business of selling used rental equipment and other assets. We will also seek growth overseas by using expertise accumulated in the Japanese market to support our existing presence in overseas markets, including South Korea and Singapore in addition to China.
Overview of Operation
The Real Estate segment began with corporate dormitory rental operations in 1986, and started developing residential condominiums in 1993. Real estate operations gained momentum in 1999 with the establishment of ORIX Real Estate Corporation. Today, the ORIX Group is involved in:
The activities in this segment are conducted primarily through ORIX Real Estate. The number of employees working in this segment is 3,444.
The domestic real estate business is facing an increasingly challenging environment, defined by a sharp decrease in the volume of real estate transactions and a tightening of available credit, which affects investors both in Japan and overseas in the wake of the global financial crisis.
Vacancy rates in newly available office buildings have risen, a reflection of the economic environment and corporate performance. In light of this and the ongoing decline in rents, real estate companies will be called upon to demonstrate leasing and other operational capabilities that are crucial to maintaining cash flows from properties.
In the residential condominium market, a sharp rise in sales prices since the previous fiscal year generated a disconnect between consumer needs and the market. However, we are starting to see some positive signs, such as improvement in contract completion rates (as of March 2009) to the key benchmark level of 70% in the Tokyo metropolitan area. Falling sales prices due to lower construction costs, and government policies encouraging home buyingincluding an expansion of tax deductions on housing loans introduced as part of broader economic measures, and an expanded exemption on gift taxes on money received from certain family members that is used when buying a homeare expected to stimulate new demand.
Our facility operation business spans a diverse portfolio that includes hotels, golf courses, and training facilities. Although conditions are difficult due to corporate cost cutting and waning consumer confidence, we anticipate an improvement in capacity utilization due to government policies to stimulate consumer spending, such as a cash hand-out program and a new 1,000 yen ceiling on expressway tolls. Given these circumstances, the ORIX Group must work to provide high value-added services that stand apart from those of its competitors.
In this sluggish real estate market, the ORIX Group will work to increase the value of its real estate assets and maximize earnings. It will also focus on its facility operation and asset management businesses to build a stable earnings base. We will utilize our real estate development, asset management, property management, leasing, and similar functions to move from an expansion model based on boosting earnings from increasing assets, to a more balanced growth model that emphasizes control over our existing portfolio, and expansion of our diversified facilities operations businesses.
In our real estate operating lease business, we will work to improve occupancy rates of our existing asset holdings. We will thereby improve our current income, while holding properties for the foreseeable future, pending improvement in market prices for properties. We are seeking to time property deliveries to match demand to respond more proactively to mitigating vacancy rates. At the same time, we are crafting a stronger exit strategy that takes full advantage of our Group-wide capabilities. Through this exit strategy, we will seek to sell assets opportunistically in light of market conditions, with the aim of replacing properties in our portfolio with prime assets.
Using the highly specialized knowledge and broad expertise we have accumulated over the years, the ORIX Group will engage in risk management responsive to conditions in light of the real estate market downturn. The Real Estate segment works closely with ORIXs Risk Management Headquarters and other specialized departments to conduct regular monitoring of properties to optimize risk management. We also share the risks of
large-scale projects by working with business partners through joint ventures. Through such measures, we believe we are able to respond more flexibly to changing market conditions.
ORIX Real Estate Investment Advisors Corporation is expanding fee-based revenue in its asset management business not only by managing Group assets but also by addressing the fund management needs of investors outside the group. It does so mainly by forming private offering funds and using these funds to win large-scale property projects.
In the condominium development business, we face an increasingly challenging operating environment. In response, from the fall of 2007, we have suspended the pace of new land purchases. We have been proactive in writing down inventories, working to restore sound inventories at an early stage. Going forward, we will maintain a close watch on declining construction costs and overall market recovery, with the goal of building a more efficient residential condominium development business.
In our facilities operation business, we operate a diverse array of facilities, ranging from golf courses to nursing care facilities, training facilities, hotels, the Kyocera Dome Osaka and the Enoshima Aquarium. We continue to increase our focus on this business. We work to enhance facilities by clarifying targets for each facility and constantly responding to customer expectations. At the same time, we are working to attract individual customers by utilizing the Internet, as well as working to increase sales to corporate clients in order to diversify our customer base and enhance profitability.
Overview of Operation
This segment consists principally of the real estate-related finance business and the investment banking business that we began developing during the late 1990s and 2000s. Operations include:
The activities in this segment are conducted primarily through our Investment Banking Headquarters. The number of employees working in this segment is 2,505.
In light of the opacity in the financial and capital markets over the near term, we believe that it is imperative to respond with speed to the changing environment. The global tightening of credit has resulted in the successive pullout from the Japanese market of foreign and domestic funds and financial institutions. Nonetheless, these developments have also created opportunities for acquiring prime assets.
The domestic non-recourse loan market saw the risk tolerance of investors decrease in the wake of the global recession precipitated by the Lehman Brothers bankruptcy in September 2008, leading to a dramatic decline in the volume of real estate transactions and a contraction in the market. Financial institutions competing with the ORIX Group have begun to narrow the scope of their lending or withdraw completely, and the number of real estate businesses entering bankruptcy because of cash flow problems is increasing.
In the domestic securitization markets, an increase in credit-rating downgrades for CMBS and growing distrust of credit-ratings, combined with the already sluggish condition of the real estate market, have greatly reduced the number of new CMBS issues, and interest spreads are increasing.
In the market for non-performing loans, opportunities for investment have emerged due to increasing bankruptcies of real estate businesses and growing pressure on lenders to dispose of collateralized properties. Secondary markets are also seeing increased asset sales as investors close out previously formed funds and work to restore liquidity and realize profits.
Reflecting the uncertain economic outlook and the progression of the financial crisis, the domestic M&A market has seen a contraction in the number of mergers and acquisitions. Considering also the growing number of foreign corporate acquisition funds withdrawing from Japan, there are no signs of an upturn in the market environment.
However, with listed companies undertaking restructuring and engaging in strategic de-listing of subsidiaries, and SMEs undergoing business succession, we believe that the use of mergers and acquisitions as a corporate management strategy has become increasingly widespread in Japan, and see this as an opportunity for financial advisory and other engagements.
The Investment Banking segment is focusing on preserving and enhancing the value of existing loans and portfolio companies. While both foreign and domestic financial institutions downsize the business or withdraw from the market, we will capitalize on survivors merit, taking advantage of opportunities such as distressed asset related business. As the segment strengthens its relationships with financial institutions, it seeks to generate new sources of earnings by promoting joint ventures and establishing new funds, and by creating new services ancillary to existing assets.
New investments will center on assets being traded at distressed prices. In the secondary markets, we expect to see more disposal of assets from the restructuring of regional banks, further withdrawal of financial institutions, and business downsizing. Because business relating to distressed assets and restructuring takes full advantage of the extensive expertise accumulated by this segment, we will work hard to develop this business.
In light of the significant changes in the real estate market, our non-recourse loan business is focused on ensuring consistent collections from the existing portfolio. Specifically, we are monitoring individual transaction terms including loan caps, interest rate spreads, loan-to-value ratios, debt-service coverage ratios, and cash reserves, as well as the status of underlying assets, and otherwise moving proactively to maximize collections, while continuously reducing asset balances.
While further enhancing functions in existing investments, we seek to implement flexible organizational changes and allocate human resources promptly in response to business environment and strategies.
Overview of Operation
This segment consists of four businesses that primarily serve individual customers. The four businesses are:
The activities in this segment are conducted primarily through ORIX Trust and Banking, ORIX Credit, ORIX Life Insurance and ORIX Securities. The number of employees working in this segment is 1,623.
While individual funds continue to flow into deposits following a drop in investment confidence due to tumbling stock markets, ORIX Trust and Banking has steadily attracted deposits. Separately, the corporate lending business is expected to expand and become a driving force behind Japans financial markets as the value of indirect corporate financings is revaluated. Even in a declining real estate market, demand remains firm in the market for investment rental condominium units, a key engine behind the housing loan business, which continues to perform strongly.
The card loan market is in a period of dramatic change, due to the revision of the Moneylending Business Law in December 2006 and the laws ongoing enforcement. Specifically, the upper limit on interest rates set by the Investment Deposit and Interest Rates Law has been lowered, and a ceiling on total debt has been created. As a result, consumer finance companies are finding it difficult to maintain their conventional high-margin business models. The industry is therefore restructuring, with large firms forming alliances with banks.
In the life insurance market, the operating environment has rapidly worsened, and it is becoming difficult to secure investment yields. In the products side, diversification in medical insurance and other products in the so-called third sector of insurance is seen due to high customer needs, and intensifying competition.
In the securities market, since the Lehman Brothers bankruptcy filing, severe economic and market conditions have continued, and individual investor sentiment has yet to recover. Still, with governments around the world responding with measures to address the worsening economy, the markets indicate optimism for an early economic recovery.
In this segment, we will maintain our policy of developing new markets for individuals, by offering products and services that provide a high level of customer satisfaction, and increasing our unique expertise and efficiency in niche markets. In particular, ORIX Trust and Banking will work to expand its business through deposit-based funding and its corporate lending.
In line with this growth in business, ORIX Trust and Banking has begun handling deposits for corporate customers since May 2009, via the Internet. On the investment side, in addition to its housing loan business, it seeks to grow its corporate lending business, which started full-scale operations in March 2009. As the business grows, it will also work to raise the sophistication of risk management, and strengthen its internal control structure.
Over the past twenty years, ORIX Credit has concentrated on providing its VIP Loan Card at interest rates below the legal ceiling. We will continue to focus on the VIP Loan Card, utilizing our expertise in credit evaluation, screening, advertising, and marketing to provide customers with convenient card loans. With investment from the Sumitomo Mitsui Banking Corporation, we also will target a stable and increased operating base by attracting different types of customers via Group network, and greater diversification in its fund-raising options. As a result of the tie-up with Sumitomo Mitsui, ORIX Credit will become an equity method affiliate.
ORIX Life Insurance, which concentrates mainly on developing and selling products for individuals, has seen a substantial increase in the number of policies in force. In particular, we have received positive feedback from insurance agents, financial planners, and other specialists for Medical Insurance CURE, a product introduced to the market in September 2006. As other companies enter the market, competition has grown increasingly fierce, but by continuing to develop products that meet the needs of our customers, we will expand
our customer base and build a stable, profitable business. However, the worsening investment climate in the aftermath of the financial crisis has affected investment returns. In response, we are working toward the goal of a stable portfolio.
ORIX Securities is working to diversify our new customer acquisition channels through our alliance with ORIX Credit, providing stock collateral loans, night trading, online sales of bonds, and other services. Due to sluggish securities markets, our business performance is disappointing, but we expect growth when the securities markets recover. CFD (contract for difference) trading, which commenced in December 2008, has seen new accounts grow approximately five times faster than foreign exchange deposit trading, which started in February 2004. We are also building a solid track record in corporate services, including underwriting initial public offerings and structured bond sales.
Overview of Operation
Since expanding to Hong Kong in 1971, ORIX has built a broad overseas network spanning the United States, Asia, the Pacific, the Middle East, North Africa and Europe. Our main operations include equipment leasing, automobile leasing, corporate financial services, and ship and airplane-related operations. Recently, ORIX has also expanded into principal investment, investments in non-performing loans, real estate-related operations, and M&A advisory services.
Our activities in this segment are conducted primarily through ORIX USA, International Business Headquarters, Alternative Investment & Development Headquarters and other subsidiaries, as well as affiliates in Hong Kong, China, Singapore, Malaysia, Indonesia, the Philippines, Thailand, Sri Lanka, Taiwan, South Korea, Pakistan, India, Oman, Egypt, Saudi Arabia, UAE, Kazakhstan, Australia, New Zealand, Ireland and Poland. The number of employees working in this segment is 3,356.
In the United States, a succession of bankruptcies and the realignment of major financial institutions, including the collapse of the prominent investment bank Lehman Brothers, have dealt a tremendous blow to the nations financial and capital markets. The ensuing deterioration in global financial liquidity has triggered a sharp contraction in credit, leading to a significant decline in the operating environment. In response, the U.S. government has swiftly unveiled a series of policies to shore up liquidity in the financial system, as highlighted by passage of the Emergency Economic Stabilization Act. These efforts notwithstanding, consumer spending, the main engine behind the U.S. economy, fell sharply because of worsening employment levels, resulting in a sharp recession. With the effectiveness of the governments economic measures still uncertain, conditions are expected to remain difficult for the foreseeable future. Tightening of credit and general market turmoil also means that, in the U.S. financial markets, fewer major financial institutions, non-banks, and other entities are willing to take on risk.
In Asia and the Middle East, including ASEAN, where ORIX has major business operations, the effects of the economic downturn on operations in the first half of the fiscal year were relatively minor. However, economic conditions have further weakened since last fall due to the global financial crisis and the business environment is expected to continue to worsen going forward. China, which plays a particularly influential role in the Asian economic region, was not immune to the downturn, and has been affected by, among other things, a sharp drop in its stock markets. However, China is now seeing signs of economic recovery, thanks to government economic stimulus measures. While conditions vary from country to country, Asias latent strengths may make it possible for the region to recover relatively quickly.
In the United States, we are engaged in investment and financing operations, such as corporate finance and investments in CMBS and other marketable securities, and in investment banking operations, including advisory
services in the areas of mergers and acquisitions, corporate financial restructuring and enterprise valuation. In the United States, where the economic outlook remains uncertain, investment and financing operations will be scaled back to investments and loans aimed at replacing the portfolio with sounder and more profitable assets. For the time being, we seek to curb losses by focusing on more detailed management of existing assets, and by raising personnel efficiency.
Investment banking operations are carried out by Houlihan Lokey, which has maintained a strong reputation in the United States for decades. After joining the ORIX Group in 2006, Houlihan Lokey now has a global operating network spanning eight locations across the United States, three offices in Europe, and offices in Hong Kong, Tokyo, and Beijing. In the midst of the global recession, we believe Houlihan Lokey will find increased earnings opportunities in its corporate financial restructuring advisory operations, where it is a market leader.
We are operating our business cautiously in Asian, ASEAN and Middle Eastern countries, closely monitoring the effects and progression of the global recession. However from a long-term perspective, these regions have by no means lost their strong growth potential, and numerous opportunities remain in the financial services field. With recovering market conditions, in conjunction with our expansive business partner network spanning 26 countries, we will capitalize on our financial services and real estate development expertise to prepare for new business opportunities.
In Asia, Oceania, the Middle East, and Europe, we continue to focus on leasing, lending and other financial services closely tied to local communities. We will carefully monitor the existing asset portfolio of our principal investment, investments in non-performing loans, and real estate development-related businesses, while pursuing new investment opportunities, primarily in distressed assets. Moreover, we are working to enhance our resources for supporting Japanese companies looking to move into overseas markets, as well as foreign companies entering Japan.
DIVISIONS, MAJOR SUBSIDIARIES AND AFFILIATES
A list of major subsidiaries can be found in Exhibit 8.1.
CAPITAL EXPENDITURES AND MAJOR M&A ACTIVITIES
We are a financial services company with significant leasing, lending, real estate development and other operations based on investment in tangible assets. As such, we are continually acquiring and developing such assets as part of our business. A detailed discussion of these activities is presented elsewhere in this annual report, including in other parts of Item 4. Information on the Company and in Item 5. Operating and Financial Review and Prospects.
We also have made a number of acquisitions in other companies to expand our operations. Some of our recent acquisitions are described below.
In March 2005, we acquired an additional 42% of DAIKYO and preferred shares for approximately ¥47 billion. As a result of the acquisition, our stake in the company increased to 44%. During fiscal 2008, DAIKYO acquired a 100% stake in Fuso Lexel Incorporated through a share swap. As the Company and its subsidiaries had held shares of Fuso Lexel Incorporated, we acquired an additional interest in DAIKYO through this share swap. As a result, the interest of the third parties increased and our ownership in DAIKYO decreased to 41%. In June 2008, DAIKYO repurchased 20% of its preferred shares from ORIX at a purchase price of ¥10.4 billion. In March 2009, we acquired preferred shares of DAIKYO for ¥10 billion. Also in March 2009, we transferred our wholly owned subsidiary, ORIX Facilities Corporation, to DAIKYO through a share swap. This resulted in a further acquisition of ¥9.4 billion of preferred shares. See Item 7. Major Shareholders and Related Party TransactionsRelated Party Transactions.
In general, we seek to expand and deepen our product and service offerings and enhance our financial performance by pursuing acquisition opportunities. We are continually reviewing acquisition opportunities, and selectively pursuing several such opportunities. We have in the past deployed a significant amount of capital for acquisition activities, and expect to continue to make investments selectively in the future.
PROPERTY, PLANT AND EQUIPMENT
Because our main business is to provide diverse financial services to our clients, we do not own any material factories or facilities that manufacture products. We have no plans to build any factories that manufacture products.
The primary facilities we own include two office buildings, one training facility and one waste disposal facility. One office building is located in Shiba, Minato-ku, Tokyo with a book value of ¥37,512 million, and the other is located in Tachikawa, Tokyo with a book value of ¥23,707 million. Our training facility located in Funabashi, Chiba has a book value of ¥11,070 million, and our industrial waste disposal facility located in Yorii, Saitama has a book value of ¥14,313 million. In addition to these major facilities, we are building a new regional headquarters building in Osaka that will allow us to manage our Osaka operations from within a single location. Construction is expected to be completed by February 2011, and the current estimated costs for the project are ¥30 billion. Although there are presently no other material plans to construct or improve facilities, we may build or acquire additional offices or make improvements to existing facilities if we believe the expansion of our business so warrants.
Our operations are generally conducted in leased office space in cities throughout Japan and in other countries in which we operate. We believe our leased office space is suitable and adequate for our needs. We utilize, or expect to utilize in the near future, substantially all of our leased office space.
We own office buildings, apartment buildings and recreational facilities for our employees with an aggregate book value of ¥77,945 million as of March 31, 2009.
As of March 31, 2009, net book value of equipment held for operating leases amounted to ¥1,210,166 million, which consists of ¥582,104 million of transportation equipment, ¥178,062 million of measuring and information-related equipment, ¥788,749 million of real estate and ¥19,867 million for others. Accumulated depreciation on the operating leases was ¥358,616 million as of the same date.
Our business is not materially affected by seasonality.
Our business does not depend materially on the supply of raw materials.
ORIX is incorporated under the Company Law and its corporate activities are governed by the Company Law; its group companies in Japan are also so incorporated and governed.
There is no general regulatory regime which governs the conduct of our direct financing lease and operating lease businesses in Japan, although various laws regulate certain aspects of particular lease transactions, depending on the type of leased property.
The major regulations that govern our businesses are as follows:
ORIX and certain of our group companies, such as ORIX Credit, engage in the business of money lending in Japan. The business of money lending is regulated by the Interest Limitation Law, the Acceptance of Contributions, the Deposit and the Interest Law, and the Moneylending Business Law. The Moneylending Business Law requires that all companies register with the Prime Minister and relevant prefectural governors. Registered moneylenders are regulated by the FSA, and are required to report to or notify the FSA, providing such documents as their annual business reports. Accordingly, pursuant to the Moneylending Business Law, ORIX and certain of our group companies register with the Prime Minister or prefectural governors and provide the necessary reporting and notification to the FSA. The FSA has the power to issue a business improvement order to suspend all or part of a businesss activities, or to revoke the registration of a moneylender that has violated the law. In addition, in December 2006, laws related to the money lending business were amended for the purpose of enhancing borrower protection. The amendments tighten regulations by, among other things, reducing the maximum interest rate and introducing limits on the maximum amount of money that may be loaned to individuals. These amendments have come into effect.
Real Estate Business
ORIX and certain of our group companies, including ORIX Real Estate and ORIX Alpha, engage in the real estate business in Japan, including the buying and selling of land and buildings. ORIX and our relevant group companies are therefore required to be licensed by the Ministry of Land, Infrastructure and Transport, or the MoLIT, and relevant prefectural governors under the Building Lots and Building Transaction Law, and our operations are regulated by such laws, including the maintenance of registered real-estate transaction managers on staff and the provision and delivery of material information to counterparties.
Car Rental Business
ORIX Auto is registered with the MoLIT under the Road Transportation Law to engage in the car rental business in Japan and is subject to the requirements of such law and to inspection by the MoLIT.
ORIX Life Insurance is engaged in the life insurance business and has a license from the Prime Minister under the Insurance Business Law. The FSA has broad regulatory powers over the life insurance business of ORIX Life Insurance, including the authority to grant or, under certain conditions, revoke its operating license, to request information regarding its business or financial condition and to conduct onsite inspections of its books and records. ORIX Life Insurance generally must also receive FSA approval for the sale of new products and to set new pricing terms. In addition, under the Insurance Business Law regulations, any party attempting to acquire voting rights of an insurance company over or equal to a specified threshold must receive permission from the Prime Minister. We have received such permission as a major shareholder in ORIX Life Insurance and The Fuji Fire and Marine Insurance Company, Limited. Insurance solicitation, which we and our group companies conduct, is also governed by the Insurance Business Law. We and certain of our group companies, such as ORIX Alpha and ORIX Auto, are registered as life insurance agents with the Prime Minister.
Financial Instruments Exchange Business
The Financial Instruments and Exchange Law which became effective in September 2007 supplants the Securities and Exchange Law and includes significant changes. The Financial Instruments and Exchange Law expands its scope of control to cover many additional subjects (product, business, etc.) for the purpose of establishing comprehensive and cross-sectional protection for investors. Certain businesses conducted
by ORIX and our group companies in Japan are governed by the Financial Instruments and Exchange Law. Registered financial instruments traders are regulated by the FSA, and are required to file certain reports or notifications with the FSA. The FSA has the power to order improvement of a business, suspension of a part or the whole of a business, or to revoke the registration of a financial instruments trader that has violated the law. Business regulations to be applied to ORIX and our group companies are as follows:
(1) First Class Financial Instruments Exchange Business
ORIX Securities is engaged in the first class financial instruments exchange business and is registered with the Prime Minster under the Financial Instruments and Exchange Law. The first class financial instruments exchange business contains trading of high-liquid financial products such as sales and solicitation of listed securities. The Financial Instruments and Exchange Law regulates the business activities of securities companies and the conduct of securities companies related to securities transactions. In addition, under the Financial Instruments and Exchange Law, any entity possessing voting rights of a securities company (first class financial instruments trader) over or equal to a specified threshold is considered a major shareholder and must report this to the Prime Minister. ORIX has filed such a report as a major shareholder of ORIX Securities Corporation.
(2) Second Class Financial Instruments Exchange Business
ORIX and certain of our group companies are registered with the Prime Minister under the Financial Instruments and Exchange Law to conduct second class financial instruments exchange business. The second class financial instruments exchange business contains trading of low-liquid financial instruments, such as sales and solicitation of trust beneficiary interests and certain equity investment in partnerships.
(3) Financial Instruments Intermediary Business
The financial instruments intermediary business that we conduct is also regulated by the Financial Instruments and Exchange Law. ORIX is registered with the Prime Minister under the Financial Instruments and Exchange Law to conduct business as a financial instruments intermediary.
(4) Investment Management Business
ORIX Asset Management Corporation, a wholly owned subsidiary, is registered with the Prime Minister under the Financial Instruments and Exchange Law as an investment manager. ORIX Asset Management Corporation is responsible for the asset management of a real estate investment corporation, ORIX JREIT Inc., which is listed on the Tokyo Stock Exchange. In addition, ORIX Real Estate Investment Advisory Corporation and ORIX Investment Corporation are registered with the Prime Minister to conduct investment management businesses. Under the Financial Instruments and Exchange Law, any entity possessing the voting rights of an investment manager over or equal to a specified threshold is considered a major shareholder and must report this to the Prime Minister. ORIX has filed such a report as a major shareholder with regard to ORIX Asset Management Corporation and ORIX Investment Corporation.
(5) Investment Advisory and Agency Business
ORIX Investment Corporation and ORIX Real Estate Investment Advisory Corporation are registered with the Prime Minister under the Financial Instruments and Exchange Law to conduct an investment advisory and agency business.
Banking and Trust Business
ORIX Trust and Banking, or OTB, is licensed by the Prime Minister to engage in the banking and trust business, and is regulated under the Banking Law, the Law concerning Trust Business Concurrently Conducted by Financial Institutions and the Trust Business Law. The Banking Law governs the general banking business
and the Law concerning Trust Business Concurrently Conducted by Financial Institutions and the Trust Business Law govern the trust business. Our trust contract agency business is also governed by the Trust Business Law, and we are registered with the Prime Minister to engage in such business. In addition, under the Banking Law, any entity that attempts to hold voting rights of a bank in excess of or equal to a specified threshold must receive permission from the Prime Minister. ORIX has received such permission as a major shareholder of OTB.
Debt Management and Collection Business
ORIX Asset Management & Loan Services Corporation, or OAMLS, is engaged in the loan servicing business and the business of managing and collecting certain assets. Consequently, OAMLS is regulated under the Law for Special Measures Concerning the Debt Management and Collection Business. OAMLS is licensed by the Minister of Justice under such law to engage in the loan servicing business.
ORIX Environmental Resources Management Corporation, under the Waste Management and Public Cleansing Law, has permission for and to (i) the installation of an industrial waste disposal facility to act as an industrial waste disposal contractor and as a specially controlled industrial waste disposal contractor and the installation of a municipal solid waste disposal facility from the governor of Saitama Prefecture, and (ii) act as a municipal solid waste disposal contractor from the town mayor of Yorii Town.
Also, Funabashi Environmental Corporation, under the Waste Management and Public Cleansing Law, has permission to: (i) engage in the installation of an industrial waste disposal facility within Chiba Prefecture, (ii) act as an Collection and Transportation of an industrial waste disposal collector from each governor of Tokyo, Kanagawa, Chiba and Saitama Prefectures, and also from mayors of major 6 cities in Kanto region and (iii) engage in the business of industrial waste disposal contractor, by the authorization of mayor of Funabashi City.
ORIX Environmental Resources Management Corporation and Funabashi Environmental Corporation are engaged in the waste management service regulated by the Waste Management and Public Cleansing Law.
Regulation on Share Acquisitions
Certain of our activities and those of certain of ORIX group companies are regulated by the Foreign Exchange and Foreign Trade Law of Japan and the cabinet orders and ministerial ordinances thereunder, or the Foreign Exchange Regulations.
Under the Foreign Exchange Regulations, the Company and certain ORIX group companies in Japan are regulated as residents conducting capital transactions or foreign direct investments. Moreover, if the ratio of foreign shareholders of the Company is 50% or more, the Company and the relevant group companies in Japan will be regulated as foreign investors conducting inward direct investment.
To conduct such activities under the Foreign Exchange Regulations, notices or reports are required to be filed with the governing agency through the Bank of Japan. In certain cases, the Minister of Finance and any other competent Ministers have the power to recommend the cancellation or modification of activities specified in such notices and can order such cancellation or modification if their recommendation is not followed.
ORIX USA is incorporated under the laws of the state of Delaware, and its corporate activities are governed by the Delaware General Corporation Law.
The SEC and various state agencies regulate the issuance and sale of securities and the conduct of broker-dealers, investment companies and investment advisers in the United States. ORIX USAs majority owned
subsidiaries, Houlihan Lokey Howard & Zukin Capital, Inc. and Houlihan Lokey Howard & Zukin Financial Advisors, Inc., are a registered broker-dealer and a registered investment adviser, respectively, and as such, are regulated by the SEC. ORIX USA and its other subsidiaries are not subject to these regulations but must comply with US federal and state securities laws.
ORIX USAs corporate finance, real estate finance and development, equipment finance, public finance and special servicing businesses are subject to numerous state and federal laws and regulations. Commercial and real estate loans may be governed by the USA PATRIOT Act, the Equal Credit Opportunity Act and its Regulation B, the Flood Disaster Protection Act, the National Flood Insurance Reform Act of 1994 and state usury laws. Real estate transactions are also governed by state real property and foreclosure laws. ORIX USAs equipment finance transactions are governed by the Uniform Commercial Code, as adopted by the various states. ORIX USA is registered with or has obtained licenses from the various state agencies that regulate the activity of commercial lenders in such states.
Recent disruptions in the U.S. financial markets have caused lawmakers and regulators to evaluate the effectiveness of their oversight of the financial services industry, and a variety of regulatory initiatives are likely to be proposed by the Obama administration and Congress. It is increasingly probable that new regulations and laws, or significant changes to existing regulations and laws, affecting ORIX USA will be implemented.
Outside of the United States, ORIX USAs majority owned subsidiary, Houlihan Lokey Howard & Zukin (Europe) Limited, or HLHZE, is authorized and regulated by the Financial Services Authority in the UK, inter alia, to arrange deals in investments, to advise on investments by others and to deal in investments as a principal. HLHZE has also established branches in France and Germany under the provisions of the Investment Services Markets in Financial Instruments Directive and is regulated by the BaFin in Germany and the Autorité des marchés financiers in France in the conduct of the respective businesses of the branches located in those countries. Other such majority owned subsidiaries include Houlihan Lokey Howard & Zukin (China) Limited, which is licensed to conduct regulated activities by the Securities and Futures Commission in Hong Kong, and Blenheim Advisors Limited, which is authorized and regulated by the Financial Services Authority in the UK to advise on investments.
In other regions outside of Japan, our businesses are also subject to regulation and supervision in the jurisdictions in which they operate.
We are a plaintiff or a defendant in various lawsuits arising in the ordinary course of our business. We aggressively manage our pending litigation and assess appropriate responses to lawsuits in light of a number of factors, including potential impact of the actions on the conduct of our operations. In the opinion of management, none of the pending legal matters is expected to have a material adverse effect on our financial condition or results of operations. However, there can be no assurance that an adverse decision in one or more of these lawsuits will not have a material adverse effect.
Item 5. Operating and Financial Review and Prospects
Table of Contents for Item 5
The following discussion provides managements explanation of factors and events that have significantly affected our financial condition and results of operations. Also included is managements assessment of factors and trends which are anticipated to have a material effect on our financial condition and results of operations in the future. However, please be advised that financial conditions and results of operations in the future may also be affected by factors other than those discussed here. This discussion should be read in conjunction with Item 3. Key InformationRisk Factors and Item 18. Financial Statements included in this annual report.
During fiscal 2009, the effects of a significant credit crunch in global capital markets increasingly spilled over into the real economies of many countries, and in Japan, the real economic growth rate and the Bank of Japans short-term economic survey of enterprises (the Tankan) measuring businesses short-term sentiments revealed the bleakest outlook since the survey began. Furthermore, the concern surrounding enterprises continues to increase, as can be seen in the record-high number of listed companies that have filed for bankruptcy, particularly in the real estate sector. Under this operating environment, our net income was ¥21.9 billion, down 87% year on year, due to losses and impairments on equity method affiliates, write-downs on investment securities and increases in provisions for doubtful receivables and probable loan losses. We will pursue the current business plan of strengthening the corporate structure and operational realignment for fiscal year 2010 to improve profitability while securing financial liquidity and asset stability in order to adapt to the drastic changes in the economic environment and effects of the credit crunch.
The main factors underlying performance in fiscal 2009 are outlined below.
Profits decreased 87% year on year due to declines in all six of our business segments.
The Corporate Financial Services segment, the core business of the ORIX Group, recorded a loss due to continued increases in provisions for doubtful receivables and probable loan losses for real estate-related loans and impairment losses of goodwill in consolidated subsidiaries and equity-method affiliates.
The Maintenance Leasing Segment saw a decline in profits due to increases in expenses related to depreciation and maintenance parts and services, increases in provisions for doubtful receivables and probable loan losses and reductions in gains on sales of used automobiles due to a declining secondary market.
The Real Estate Segments profit decreased substantially due to declining gains on sales of real estate under operating leases and reduced profits from condominium operations due to a fall in profitability and an increase in write-downs on projects under development.
The Investment Banking Segment recorded significant losses including impairment losses due to the effects of a deterioration of results of domestic-based equity method affiliates, mainly DAIKYO INCORPORATED and The Fuji Fire and Marine Insurance Co., Ltd. Furthermore, a decline in profits of the loan servicing (asset recovery) and expanding of losses by private equity investment and alternative investment operations saw declines in profit for this segment.
The Retail Segments profits decreased. Profits from the life insurance business significantly decreased primarily due to a decline in related investment profit and increases in provisions for doubtful receivables and probable loan losses, as well as increased provisions in the card loan and trust and banking businesses and declines in commissions in the securities brokerage business.
The Overseas Segments profits declined due to increased losses from investment securities, caused by deterioration in the bond and equity markets, a decline in installment loan revenues, caused by the foreign exchange effects of an appreciated yen combined with a lowering of market interest rates. Nevertheless, the U.S. operations achieved profitability as a result of contributions from fee-based revenue of Houlihan Lokey Howard & Zukin Limited, strict risk control and the effects of cost reduction.
FAIR VALUE MEASUREMENTS
We adopted FASB Statement No. 157 (Fair Value Measurements). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
This Statement classifies and prioritizes inputs used in valuation techniques to measure fair value into the following three levels:
This Statement differentiates between those assets and liabilities required to be carried at fair value at every reporting period (recurring) and those assets and liabilities that are only required to be adjusted to fair value under certain circumstances (nonrecurring). We measure mainly cash equivalents, trading securities, available-for-sale securities, certain investment in affiliates and derivatives at fair value on a recurring basis.
We adopted FSP 157-2 (Effective Date of FASB Statement No. 157). This Staff Position defers the effective date of FASB Statement No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.
The following table presents recorded amounts of major financial assets measured at fair value on a recurring basis as of March 31, 2009:
Compared to financial assets classified as Level 1 and Level 2, measurements of financial assets classified as Level 3 are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting the fair value measurements may differ significantly from managements current measurements.
As of March 31, 2009, financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) and percentages to total assets in consolidated balance sheets are as follows:
The amount of financial assets classified as Level 3 is ¥455,739 million among financial assets that we measured at fair value on recurring basis in fiscal 2009. It represents 5.4% of total assets of ¥8,369,736 million.
Available for sale securities classified as Level 3 are mainly mortgage-backed and other asset-backed securities. Specified bonds issued by special purpose entities, or SPEs, classified as Level 3 available-for-sale securities were ¥300,765 million, which is 67% of Level 3 available-for-sale securities.
When re-evaluating the specified bonds issued by SPEs, we estimate the fair value by discounting future cash flows using a discount rate based on the market interest rate and a risk premium. The future cash flows for the specified bonds issued by the SPEs are estimated based on contractual principal and interest repayment schedules on each of the specified bond issued by the SPEs. The risk premium is estimated mainly based on the value of the real estate collateral of each specified bonds issued by SPEs and the seniority of the bonds. The fair value of the specified bonds issued by SPEs rises when the fair value of the collateral real estate rises and the market interest rate declines. The fair value of the specified bonds issued by SPEs declines when the fair value of the collateral real estate declines and the market interest rate rises. The difference between the carrying amount and the fair value of the specified bonds issued by SPEs is recorded in accumulated other comprehensive income.
When the fair value of the specified bonds issued by SPEs declines significantly below the acquisition cost and the decline is determined to be other than temporary, we recognize write-downs of the specified bonds issued by SPEs.
The following table presents the reconciliation for financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during fiscal 2009:
Net amount of ¥66,753 million of available-for-sale securities, mainly CMBS and RMBS in U.S., was transferred from other levels to Level 3 in fiscal 2009 due to a certain market becoming inactive.
For more information on fair value measurements, see Note 2 in Item 18. Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounting estimates are an integral part of the financial statements prepared by management and are based upon managements current judgments. Note 1 of the notes to the consolidated financial statements includes a summary of the significant accounting policies used in the preparation of our consolidated financial statements. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting the estimates may differ significantly from managements current judgments. We consider the accounting estimates discussed in this section to be critical accounting estimates for us for two reasons. First, the estimates require us to make assumptions about matters that are highly uncertain at the time the accounting estimates are made. Second, different estimates that we reasonably could have used in the relevant period, or changes in the accounting estimates that are reasonably likely to occur from period to period, could have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. We believe the following represents our critical accounting policies and estimates.
ALLOWANCE FOR DOUBTFUL RECEIVABLES ON DIRECT FINANCING LEASES AND PROBABLE LOAN LOSSES
The allowance for doubtful receivables on direct financing leases and probable loan losses represents managements estimate of probable losses inherent in the portfolio. This evaluation process is subject to numerous estimates and judgments. The estimate made in determining the allowance for doubtful receivables on direct financing leases and probable loan losses is a critical accounting estimate for all of our segments.
In developing the allowance for doubtful receivables on direct financing leases and probable loan losses, we consider, among other things, the following factors:
In particular, the valuation allowance for large balance non-homogeneous loans is individually evaluated based on the present value of expected future cash flows, the loans observable market price or the fair value of the collateral securing the loans if the loans are collateral-dependent. The allowance for losses on smaller-balance homogeneous loans, including individual housing loans and card loans which are not restructured, and lease receivables, is collectively evaluated, considering current economic conditions and trends, the value of the collateral and guarantees underlying the loans and leases, prior charge-off experience, delinquencies and non-accruals. If actual future economic conditions and trends, actual future value of underlying collateral and guarantees, and actual future cash flows are less favorable than those projected by management or the historical data we use to calculate these estimates do not reflect future loss experience, additional provisions may be required.
The allowance is increased by provisions charged to income and is decreased by charge-offs, net of recoveries.
We review delinquencies or other transactions exceeding a specified amount as frequently as three times a month in the case of transactions in Japan. Transactions with payments 90 days or more past-due are reported to the Head of the Risk Management Headquarters. We stop accruing revenues on direct financing leases and installment loans when principal or interest is past-due 90 days or more, or earlier if management determines that it is doubtful that we can collect on direct financing leases and installment loans. The decision to suspend accruing revenues on direct financing leases and installment loans is based on factors such as the general economic environment, individual clients creditworthiness and historical loss experience, delinquencies and accruals. After we have set aside provisions for a non-performing asset, we carefully monitor the quality of any underlying collateral, the status of management of the obligor and other important factors. When we determine that there is little likelihood of continued repayment by the borrower or lessee, we sell the leased equipment or loan collateral, and we record a charge-off for the portion of the lease or loan that remains outstanding.
Under our charge-off policy, we charge off doubtful receivables when it is determined that prospects for further recovery from the obligor are minimal. Our policy requires the exercise of management judgment in assessing when a customer receivable has become worthless and when charge-off is appropriate. In exercising such judgment, management considers criteria set forth in Japanese tax laws which focus on objective characteristics evidencing worthlessness, such as creditor-negotiated restructurings, legal extinguishment or extended suspension of transaction with the obligor beyond one year. These considerations may result in our charge-off of doubtful receivables later than might be the case for companies in other jurisdictions where regulatory or tax policies may not require that a worthlessness assessment be reached prior to charge-off of the receivable. This potential difference in application of charge-off policy may result in our recognizing lower recoveries from charged-off receivables than might be experienced by reporting entities in other jurisdictions.
IMPAIRMENT OF INVESTMENT IN SECURITIES
We recognize write-downs of securities in our consolidated statements of income when the fair value of a security has declined significantly below the acquisition cost and the decline has been determined to be other than temporary. We generally charge the losses related to investments in securities other than trading securities when the following conditions are met:
Determinations of whether a decline is other than temporary often involve estimating the outcome of future events that are highly uncertain at the time the estimates are made. Management judgment is required in determining whether factors exist that indicate that an impairment loss should be recognized at any balance sheet date, mainly based on objective factors. In view of the diversity and volume of our shareholdings, the highly volatile equity markets make it difficult to determine whether the declines are other than temporary.
If the financial condition of an investee deteriorates, its forecasted performance is not met or actual market conditions are less favorable than those projected by management, we may charge to income additional losses on investment in securities.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS NOT SUBJECT TO AMORTIZATION
We test for impairment of goodwill and any intangible assets that are not subject to amortization at least annually. Additionally, if events or changes in circumstances indicate that the asset might be impaired, we test for impairment when such events occur.
Goodwill impairment is determined using a two-step process either at the operating segment level or one level below the operating segments. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss. The second step of the goodwill impairment test compares implied fair value of reporting unit goodwill with the carrying value of that goodwill. If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner used to determine the amount of goodwill recognized in a business combination. Any intangible assets that are not subject to amortization are tested for impairment by comparing the fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
The fair value of a reporting unit under the first step and the second step is determined by estimating the outcome of future events and assumptions made by management. Similarly, estimates and assumptions are used in determining the fair value of any intangible asset that is not subject to amortization. When necessary, we refer to the evaluation by the third party in determining the fair value of a reporting unit, however, such determinations are often evaluated by discounted cash flows analysis performed by us. This approach uses numerous estimates and assumptions, including projected future cash flows of a reporting unit, discount rates reflecting the risk inherent and growth rate. If actual cash flows or any items which affect a fair value are less favorable than those projected by management due to economic conditions or own risk of reporting unit, we may charge additional losses to income.
IMPAIRMENT OF LONG-LIVED ASSETS
We periodically perform an impairment review for long-lived assets held and used in operation, including tangible assets, intangible assets being amortized and real estate development projects. The assets are tested for recoverability, whenever events or changes in circumstances indicate that those assets might be impaired, including, but not limited to, the following:
When we determine that assets might be impaired based upon the existence of one or more of the above factors or other factors, we estimate the future cash flows expected to be generated by those assets. Our estimates of the future cash flows are based upon historical trends adjusted to reflect our best estimate of future market and operating conditions. Also, our estimates include the expected future period in which future cash flows are expected. As a result of the recoverability test, when the sum of the estimated future undiscounted cash flows expected to be generated by those assets is less than its carrying amount, and when its fair value is less than its carrying amount, we determine the amount of impairment based on the fair value of those assets.
If the asset is considered impaired, an impairment charge is recorded for the amount by which the carrying amount of the asset exceeds fair value. We determine fair value based on appraisals prepared by independent third party appraisers or our own staff of qualified appraisers, based on recent transactions involving sales of similar assets, or other valuation techniques to estimate fair value. If actual market and operating conditions under which assets are operated are less favorable than those projected by management, resulting in lower expected future cash flows or shorter expected future periods to generate such cash flows, additional impairment charges may be required. In addition, changes in estimates resulting in lower fair values due to unanticipated changes in business or operating assumptions could adversely affect the valuations of long-lived assets.
The accounting estimates relating to impairment of long-lived assets could affect all segments.
UNGUARANTEED RESIDUAL VALUE FOR DIRECT FINANCING LEASES AND OPERATING LEASES
We estimate unguaranteed residual values of leased equipment except real estate, which is explained in Impairment of Long-lived Assets described above, when we calculate unearned lease income to be recognized as income over the lease term for direct financing leases and when we calculate depreciation amounts for operating leases which carry inherently higher obsolescence and resale risks. Our estimates are based upon current market values of used equipment and estimates of when and how much equipment will become obsolete. If actual future demand for re-lease or actual market conditions of used equipment is less favorable than that projected by management, write-downs of unguaranteed residual value may be required.
The accounting estimates relating to unguaranteed residual value for direct financing leases and operating leases affect mainly the Corporate Financial Services, Maintenance Leasing and Overseas Business segments.
INSURANCE POLICY LIABILITIES AND DEFERRED POLICY ACQUISITION COSTS
A subsidiary of ORIX writes life insurance policies to customers. Policy liabilities for future policy benefits are established by the net level premium method, based on actuarial estimates of the amount of future policyholder benefits. The policies are characterized as long-duration policies and mainly consist of whole life, term life, endowments, and medical insurance. Computation of policy liabilities and reserves necessarily includes assumptions about mortality, lapse rates and future yields on related investments and other factors applicable at the time the policies are written. The life insurance subsidiary continually evaluates the potential for changes in the estimates and assumptions applied in determining policy liabilities, both positive and negative, and uses the results of these evaluations both to adjust recorded liabilities and to adjust underwriting criteria and product offerings. If actual assumption data, such as mortality, lapse rates, investment returns and other factors, do not properly reflect future policyholder benefits, we may establish a premium deficiency reserve.
FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises, requires insurance companies to defer certain costs associated with writing insurances, or deferred policy acquisition costs, and amortize them over the respective policy periods in proportion to anticipated premium revenue. Deferred policy acquisition costs are the costs related to the acquisition of new and renewal insurance policies and consist primarily of first-year commissions in excess of recurring policy maintenance costs and certain variable costs and expenses for underwriting policies. Periodically, deferred policy acquisition costs are reviewed for whether relevant insurance and investment income are expected to recover the unamortized balance of the deferred acquisition costs. When such costs are expected to be unrecoverable, they are charged to income in that period. If the historical data, such as lapse rates, investment returns, mortality experience, expense margins and surrender charges, which we use to calculate these assumptions, do not properly reflect future profitability, additional amortization may be required.
The accounting estimates relating to insurance policy liabilities and deferred policy acquisition costs affect our Retail segment.
ASSESSING HEDGE EFFECTIVENESS AND MEASURING INEFFECTIVENESS
We use foreign currency swap agreements, interest rate swap agreements and foreign exchange contracts for hedging purposes and apply either fair value hedge, cash flow hedge or foreign currency hedge accounting to measure and account for subsequent changes in their fair value.
To qualify for hedge accounting, details of the hedging relationship are formally documented at the inception of the arrangement, including the risk management objective, hedging strategy, hedged item, specific risks that are to be hedged, the derivative instrument and how effectiveness is being assessed. The derivative for hedge purpose must be highly effective in offsetting either changes in fair value or cash flows, as appropriate, for the risk being hedged and effectiveness needs to be assessed at the inception of the relationship.
Hedge effectiveness is assessed quarterly on a retrospective and prospective basis. Ineffectiveness is also measured quarterly, with the results recognized in earnings. If specified criteria for the assumption of effectiveness are not met at hedge inception or upon the quarterly testing, then the hedge accounting is discontinued. To assess effectiveness and measure ineffectiveness, we use techniques including regression analysis and cumulative dollar offset method.
The determination of our projected benefit obligation and expense for our employee pension benefits is mainly dependent on the size of the employee population, actuarial assumptions, expected long-term rate of return on plan assets and the discount rate used in the accounting.
Pension expense is directly related to the number of employees covered by the plans. Increased employment through internal growth or acquisition would result in increased pension expense.
In estimating the projected benefit obligation, actuaries make assumptions regarding mortality rates, turnover rates, retirement rates and rates of compensation increase. In accordance with FASB Statement No. 87 (Employers Accounting for Pensions), actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, impact expense and the recorded obligations in future periods.
We determine the expected long-term rate of return on plan assets annually based on the composition of the pension asset portfolios and the expected long-term rate of return on these portfolios. The expected long-term rate of return is designed to approximate the long-term rate of return actually earned on the plans assets over time to ensure that funds are available to meet the pension obligations that result from the services provided by employees. We use a number of factors to determine the reasonableness of the expected rate of return, including actual historical returns on the asset classes of the plans portfolios and independent projections of returns of the various asset classes.
We use March 31 as a measurement date for our pension assets and projected benefit obligation balances under all of our material plans. If we were to assume a 1% increase or decrease in the expected long-term rate of return, holding the discount rate and other actuarial assumptions constant, pension expense would decrease or increase, respectively, by approximately ¥741 million.
Discount rates are used to determine the present value of our future pension obligations. The discount rates are reflective of rates available on long-term, high-quality fixed-income debt instruments with maturities that closely correspond to the timing of defined benefit payments. Discount rates are determined annually on the measurement date.
If we were to assume a 1% increase in the discount rate, and keep the expected long-term rate of return and other actuarial assumptions constant, pension expense would decrease by approximately ¥990 million. If we were to assume a 1% decrease in the discount rate, and keep other assumptions constant, pension expense would increase by approximately ¥1,097 million. The decrease to pension expense based on a 1% increase in discount rate differs from the increase to pension expense based on a 1% decrease in discount rate due to a 10% corridor.
While we believe the estimates and assumptions used in our pension accounting are appropriate, differences in actual results or changes in these assumptions or estimates could adversely affect our pension obligations and future expenses.
In preparing the consolidated financial statements, we make estimates relating to income taxes of ORIX and its subsidiaries in each of the jurisdictions in which we operate. The process involves estimating our actual current income tax position together with assessing temporary differences resulting from different treatment of items for income tax reporting and financial reporting purposes. Such differences result in deferred income tax assets and liabilities, which are included within the consolidated balance sheets. We must then assess the likelihood that our deferred income tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not more likely than not, we must establish a valuation allowance. When we establish a valuation allowance or increase this allowance during a period, we must include an expense within the income tax provision in the consolidated statements of income.
Significant management judgments are required in determining our provision for income taxes, current income taxes, deferred income tax assets and liabilities and any valuation allowance recorded against our deferred income tax assets. We file tax returns in Japan and certain foreign tax jurisdictions and recognize the financial statement effects of a tax position taken or expected to be taken in a tax return when it is more likely than not, based on the technical merits, that the position will be sustained upon tax examination, including resolution of any related appeals or litigation processes, and measure the tax position that meets the recognition threshold at the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement
with the taxing authority. Management judgments, including the interpretations about the application of the complex tax laws of Japan and certain foreign tax jurisdictions, are required in the process of evaluating tax positions; therefore, these judgments may differ from the actual results. We have recorded a valuation allowance due to uncertainties about our ability to utilize certain deferred income tax assets, primarily certain net operating loss carry forwards, before they expire. Although utilization of the net operating loss carry forwards is not assured, management believes it is more likely than not that all of the deferred income tax assets, net of the valuation allowance, will be realized. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred income tax assets will be recoverable. In the event that actual results differ from these estimates or if we adjust these estimates in future periods, we may need to establish additional valuation allowances, which could materially impact the consolidated financial position and results of operations.
DISCUSSION WITH AND REVIEW BY THE AUDIT COMMITTEE
Our management has discussed the development and selection of each critical accounting estimate with our Audit Committee in June 2009.
GUIDE TO OUR CONSOLIDATED STATEMENT OF INCOME
The following discussion and analysis provides information that management believes to be relevant to an understanding of our consolidated financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements, including the notes thereto, included in this annual report. See Item 18. Financial Statements.
Our consolidated results of operations are presented in the accompanying financial statements with sub-categorization of revenues and expenses designed to enable the reader to better understand the diversified operating activities contributing to our overall operating performance.
As further described in Item 4. Information on the Company, since we developed the leasing market in Japan in 1964, we have extended the scope of our operations into various types of businesses which have become significant contributors to our group operating results. Our initial leasing business has expanded into the provision of broader financial services, including direct lending to our lessees and other customers. Initial direct lending has broadened into diversified finance such as housing loans, loans secured by real estate, unsecured loans and non-recourse loans. Through our lending experience, we have developed a loan servicing business and a loan securitization business. Through experience gained by our focusing on real estate as collateral for loans, we have also developed our real estate leasing, development and management operations.
Furthermore, we also expanded our business by the addition of securities-related operations, aimed at capital gains and brokerage income. Thereafter, we established and acquired a number of subsidiaries and affiliates in Japan and overseas to expand our operations, such as a trust bank, a life insurance company and a real estate-related company. The Investment Banking Headquarters makes selective equity investments in companies and has been working to meet the needs of companies through recently expanding management buyouts (MBOs), sales of subsidiaries by large corporations, carve-outs and business successions, in addition to investments in rehabilitation companies, which they have continued over the past few years.
This diversified nature of our operations is reflected in our presentation of operating results through the categorization of our revenues and expenses to align with operating activities. Based on those diversified operating activities, we categorize our revenues as direct financing leases, operating leases, interest on loans and investment securities, brokerage commissions and net gains (losses) on investment securities, life insurance
premiums and related investment income, real estate sales, gains on sales of real estate under operating leases and other operating revenues, and these revenues are summarized into Total Revenues on the consolidated statements of income.
The following is an additional explanation for certain account captions on our consolidated statements of income to supplement the discussion above:
Interest on investment securities is combined with interest on loans because we believe that capital we deploy is fungible and, whether used to provide financing in the form of loans and leases or through investment in debt securities, the decision to deploy the capital is a banking-type operation that shares the common objective of managing earning assets to generate a positive spread over our cost of borrowings.
In addition, securities investment activities were originated by the Company and extended to group companies, such as our U.S. operations. As a result, gains on investment securities have grown and become one of our major revenue sources. We believed that the securities company subsidiary, which was acquired in the middle of the 1980s, would grow our securities-related operations and contribute to our revenues and earnings. Against this background, we determined to present gains on investment securities under a separate income statement caption, together with brokerage commissions, because we invest in securities as one of our core operations, and both the gains on investment securities and brokerage commissions are derived from our securities operations.
In our diversified operating activities including the corporate rehabilitation business, other operating revenues consist of revenues derived from our various operations which are considered a part of our recurring operating activities, such as integrated facilities management operations, vehicle maintenance and management services, management of golf courses, training facilities and hotels, real estate-related business and commissions for the sale of insurance and other financial products.
Furthermore, our expenses include mainly selling, general and administrative expenses, costs of operating leases, life insurance costs, costs of real estate sales, interest expenses, and other operating expenses.
Expenses reported by us within other operating expenses are directly associated with the sales and revenues separately reported within other operating revenues. Interest expense is based on funds borrowed mainly to purchase equipment for leases, extend loans and invest in securities and real estate operations, which are revenue-generating assets. We also consider the principal part of selling, general and administrative expenses to be directly related to the generation of revenues. Therefore, they have been included within our subtotal of operating expenses constituting our operating income. We similarly view the provision for doubtful receivables and probable loan losses to be directly related to our finance activities and accordingly have included it within our subtotal of operating income. As our principal operations consist of providing financial products and/or finance-related services to our customers, these expenses are directly related to the potential risks and changes in these products and services. See Year Ended March 31, 2009 compared to Year Ended March 31, 2008 and Year Ended March 31, 2008 compared to Year Ended March 31, 2007.
We have historically reflected write-downs of long-lived assets within our measure of operating income, as related assets, primarily real estate assets, represented significant operating assets under management or development, and accordingly the write-downs were considered to represent an appropriate component of the operating income derived from the related real estate investment activities. Similarly, as we have identified investment in securities to represent an operating component of our financing activities, write-downs of securities are also included within our measure of operating income.
We believe that our financial statement presentation, as explained in the paragraphs above, with the expanded presentation of revenues and expenses, aids in the comprehension of our diversified operating activities in Japan and overseas and demonstrates the fair presentation of our consolidated statements of income.
YEAR ENDED MARCH 31, 2009 COMPARED TO YEAR ENDED MARCH 31, 2008
Income Statement Data
Total revenues in fiscal 2009 decreased 7% to ¥1,075,811 million compared with the previous fiscal year. Revenues from direct financing leases decreased as a result of adverse economic conditions and our prudent selection of leasing assets, choosing only those assets where we felt the risk and return balance to be appropriate. Interest on loans and investment securities were down due to our more cautious approach for new transactions beginning in the latter half of the previous fiscal year, in addition to decline in revenues from the loan servicing (asset recovery) operations and commission revenues. We recorded a loss on brokerage commissions and net gains (losses) on investment securities compared to a gain in the previous fiscal year, due primarily to decline in revenues as a result of further deterioration in the bond and securities markets in the U.S. and losses in private equity funds since the second quarter of fiscal 2009. Real estate sales were down due to an absence of gains on sales of real estate in Oceania that had been recorded in the previous fiscal year, and the decline in revenues from sales of domestic condominiums.
Total expenses in fiscal 2009 increased 6% compared with the previous fiscal year to ¥1,021,072 million. Costs of operating leases were up primarily due to an increase in depreciation and related costs of automobile operating leases and real estate, despite the decrease in overseas expenses due to the foreign exchange effects of an appreciated yen. Provision for doubtful receivables and probable loan losses was up due primarily to increases made for loans to the real estate sector, reflecting the global economic recession. Write-downs of securities were up due primarily to market valuation losses recorded from equity investments both in Japan and overseas.
Operating Income, Income before Income Taxes, Minority Interests in Earnings of Subsidiaries, Discontinued Operations and Extraordinary Gain and Net Income
Operating income in fiscal 2009 decreased 71% to ¥54,739 million due to decreases in brokerage commissions and net gains on investment securities and interest on loans and investment securities, in addition to increases in provision for doubtful receivables and probable loan losses. Income before income taxes, minority interests in earnings of subsidiaries, discontinued operations and extraordinary gain decreased 96% to ¥10,071 million due to equity-method affiliates with net losses and impairment losses resulting from our judgment that the downward stock price movements of equity-method affiliates were other than temporary, in addition to the decrease in operating income.
Net income in fiscal 2009 decreased 87% to ¥21,924 million as a result of the decrease in income before income taxes, minority interests in earnings of subsidiaries, discontinued operations and extraordinary gain.
Basic and diluted earnings per share in fiscal 2009 were ¥246.59 and ¥233.81, respectively, compared to ¥1,860.63 and ¥1,817.81 in fiscal 2008.
Investment in operating leases increased compared to March 31, 2008. Conversely, investment in direct financing leases, installment loans, investment in securities and other operating assets decreased due to continued caution toward new transactions. As a result, operating assets were down 9% to ¥6,560,869 million compared to March 31, 2008.
Shareholders Equity, ROE and ROA
Shareholders equity declined 8% to ¥1,167,530 million in fiscal 2009 due to continued declines of accumulated other comprehensive income from a loss of ¥19,295 million to a loss of ¥92,384 million, and an increase of ¥17,041 million in treasury stock due to acquisitions of treasury stock.
As a result, the shareholders equity ratio declined year on year from 14.10% to 13.95%, and ROE and ROA declined from 13.78% to 1.80%, and from 1.97% to 0.25%, respectively.
Details of Operating Results
The following is a discussion of items in the consolidated statements of income, operating assets in the consolidated balance sheets and other selected financial information. See Item 4. Information on the CompanyProfile of Business by Segment.
Revenues, New Business Volumes and Operating Assets
Direct financing leases
Direct financing lease transactions have been decreasing as a result of our selective process for choosing only those assets where the risk and return balance was appropriate in an environment in which new equipment acquisitions have been on the decline in Japan. In the automobile leasing area, the volume of new equipment acquisitions has been shrinking in Japan due to our shift towards operating leases.
Overseas, the overall balance of direct financing leases has been decreasing as a result of our more stringent selection of new transaction in Asia due to the global recession and of a contraction in the leasing business in the U.S.
As a result, revenues from direct financing leases in fiscal 2009 decreased 19% compared to the previous fiscal year to ¥63,766 million. In Japan, revenues from direct financing leases were down 22% to ¥42,099 million compared to ¥53,683 million in the previous fiscal year. Overseas, revenues were down 13% to ¥21,667 million compared to ¥24,865 million in the previous fiscal year.
The average return we earned on direct financing leases in Japan, calculated on the basis of monthly balances, was up slightly at 5.25% in fiscal 2009 compared to 5.12% in fiscal 2008. The average return on overseas direct financing leases, calculated on the basis of monthly balances, decreased slightly to 8.37% in fiscal 2009 from 8.65% in fiscal 2008 due mainly to lower rates in Asia.
New equipment acquisitions related to direct financing leases decreased 37% to ¥364,734 million compared to the previous fiscal year. New equipment acquisitions for operations in Japan decreased 40% in fiscal 2009, as a result of our continuing selective approach to new projects. New equipment acquisitions for overseas operations decreased 30% in fiscal 2009 due primarily to decreases in the U.S. and our selective approach to choosing transactions in Asia.
Investment in direct financing leases as of March 31, 2009 decreased 17% to ¥914,444 million compared to the previous fiscal year. Investments in Japan decreased 15% due to declines in new equipment acquisitions, while overseas decreased 21% due to a contraction in the U.S. and a decrease in new equipment acquisitions in Asia. As a result, the balances of all categories of investment in direct financing leases declined.
As of March 31, 2009, no single lessee represented more than 2% of our total portfolio of direct financing leases. As of March 31, 2009, 77% of our direct financing leases were to lessees in Japan, while 23% were to lessees overseas. 6% of the direct financing leases were to lessees in Malaysia and 5% were to lessees in Indonesia. No other overseas country represented more than 5% of our total portfolio of direct financing leases.
Balances for investment in direct financing leases in the tables above do not include lease assets sold in securitizations. However, gains and losses from securitization are included in direct financing lease revenues. During fiscal 2008 and 2009, we sold ¥116,445 million and ¥37,889 million, respectively, of direct financing lease assets (all of which were in Japan) through securitizations that were treated as sales transactions. The securitization of these assets produced gains of ¥1,688 million and losses of ¥365 million for fiscal 2008 and
2009, respectively, which were included in direct financing lease revenues. The balance of direct financing lease assets treated as sales transactions amounted to ¥303,034 million as of March 31, 2008 and ¥222,945 million as of March 31, 2009. If assets sold in securitizations were included, the total balance of investment in direct financing lease assets would be ¥1,401,162 million as of March 31, 2008 and ¥1,137,389 million as of March 31, 2009. For more information on securitization, see Note 10 of Item 18. Financial Statements.
Asset quality of our owned direct financing leases
The balance of 90+ days past-due direct financing leases increased by ¥5,312 million to ¥27,949 million compared to the previous fiscal year due to the credit crunch. As a result, the ratio of 90+ days past-due direct financing leases increased by 1.00% from the previous fiscal year to 3.06%.
We believe that the ratio of allowance for doubtful receivables as a percentage of the balance of investment in direct financing leases is a reasonable indication that our allowance for doubtful receivables was adequate as of March 31, 2009 for the following reasons:
The ratio of charge-offs as a percentage of the average balance of investment in direct financing leases was 0.52%, 0.66% and 0.70% for fiscal 2007, 2008 and 2009, respectively.
Revenues from operating leases were flat at ¥291,352 million compared to the previous fiscal year. In Japan, revenues increased 5% to ¥223,656 million compared to ¥212,039 million in the previous fiscal year, due to an increase in real estate properties for rental operations and an increasing trend towards operating leases in the automobile leasing business, despite a decline of revenues from the car rental operations and the precision measuring and other equipment rental operations, in addition to decreased gains of sales of properties due to a decline of sales price in secondhand markets. Overseas, we engage in investment and sales of aircraft leases. Gains on sales of aircraft have declined slightly compared to the previous fiscal year, due to our continuous monitoring and responses to severe market trends. Also, in line with the slowdown in the economy, overseas operating lease revenues were down 11% to ¥67,696 million compared to ¥76,321 million for the previous fiscal year chiefly due to a decline in new automobile lease transactions and the foreign exchange effects of an appreciated yen. In fiscal 2008 and 2009, gains from the disposition of operating lease assets other than real estate were ¥15,217 million and ¥11,426 million, respectively, and are included in operating lease revenues.
New equipment acquisitions related to operating leases decreased 8% to ¥426,715 million compared to the previous fiscal year. New equipment acquisitions by operations in Japan were flat year on year at ¥366,336 million, as the result of a decrease in the purchase of automobiles, offset by an increase in purchases of real estate properties. New equipment acquisitions by overseas operations decreased 39% compared to the previous fiscal year to ¥60,379 million, due to a decrease in the purchase of transportation equipment and real estate properties, in addition to the foreign exchange effects of an appreciated yen.
Investment in operating leases increased 20% year on year to ¥1,226,624 million in fiscal 2009. These investments rose 28% year on year in Japan due primarily to an increase in investments in real estate properties for rental operations, despite a decrease of 18% year on year overseas due to declines of transportation equipment mainly including automobiles, in addition to the foreign exchange effects of an appreciated yen.
Investment in transportation equipment operating leases was flat year on year due to an increase in investment in automobile operating leases in Japan, despite a decrease in new equipment acquisitions in automobile and aircraft leases and the foreign exchange effects of an appreciated yen overseas. Investment in measuring and information-related equipment operating leases fell 8% year on year reflecting decreases in assets both in Japan and overseas. Investment in real estate operating leases rose 38% year on year primarily due to an increase in purchases of real estate properties in Japan which are sources of stable cash flows, reflecting a shift in emphasis from asset turnover to prioritizing income gains.
Installment loans and investment securities
Interest on installment loans decreased 16% compared with the previous fiscal year to ¥172,838 million in fiscal 2009. In Japan, although we have been focusing on loans to corporate clients in the Corporate Financial Services and Investment Banking segments, we adopted a more cautious approach for new transactions beginning in the latter half of fiscal 2008 due to uncertainty in the direction of the economy. As a result, revenues decreased due to the decrease in the amount of installment loans outstanding. Furthermore, revenues from the loan servicing (asset recovery) operations and commission revenues also decreased, and interest on installment loans in Japan decreased 14% compared to the previous fiscal year. Interest on overseas installment loans decreased 20% in fiscal 2009, due primarily to lower market interest rates in the U.S., a reduction in new transactions due to a more cautious approach to new transactions similar to the approach we adopted in Japan, and the foreign exchange effects of an appreciated yen.
The average interest rate earned on loans in Japan, calculated on the basis of monthly balances, decreased to 4.36% in fiscal 2009 compared to 4.69% in fiscal 2008 due primarily to a decrease in revenues from loan servicing operations. The average interest rate earned on overseas loans, calculated on the basis of monthly balances, decreased to 7.72% in fiscal 2009 from 9.49% in fiscal 2008 due primarily to a decline in prevailing market interest rates in the U.S.
New loans added decreased 55% compared with the previous fiscal year to ¥1,055,014 million in fiscal 2009, as we adopted a more cautious approach for new transactions in Japan and overseas, in addition to the foreign exchange effects of an appreciated yen.
The balance of installment loans as of March 31, 2009, decreased 12% to ¥3,304,101 million compared to the balance as of March 31, 2008. The balance of installment loans for borrowers in Japan fell by 13% due to a more cautious approach to new transactions, while the balance of installment loans for overseas customers decreased 6% due primarily to a more cautious approach to new transactions in the U.S., as well as the foreign exchange effects of an appreciated yen.
As of March 31, 2009, 90% of our installment loans were to borrowers in Japan, while 8% were to borrowers in the U.S.
The table below sets forth the balances as of March 31, 2008 and 2009 of our installment loans to borrowers in Japan and overseas, categorized by the type of borrower (i.e., consumer or corporate) in the case of borrowers in Japan. As of March 31, 2009, ¥141,332 million, or 5%, of our portfolio of installment loans to consumer and corporate borrowers in Japan related to our life insurance operations. We reflect income from these loans in our consolidated statements of income as life insurance premiums and related investment income.
As of March 31, 2009, ¥668,958 million, or 20%, of all installment loans were outstanding to real estate companies in Japan and overseas. Of this amount, ¥215,971 million, or 7% of all installment loans, was loans individually evaluated for impairment. We calculated an allowance of ¥47,592 million on these impaired loans. As of March 31, 2009, we had installment loans outstanding in the amount of ¥205,551 million, or 6% of all installment loans, to companies in the entertainment industry. Of this amount, ¥34,057 million, or 1% of all installment loans, was loans individually evaluated for impairment. We calculated an allowance of ¥3,592 million on these impaired loans.
The balance of loans to consumer borrowers in Japan as of March 31, 2009 increased by 2% to ¥1,085,272 million compared to the balance as of March 31, 2008, due to an increase in housing loans despite a decrease in margin transaction loans to customers of ORIX Securities that such loan balances are generally subject to stock market volatility. The balance of loans to corporate borrowers in Japan as of March 31, 2009 decreased by 20% to ¥1,748,683 million compared to the balance as of March 31, 2008, due primarily to decreased loans to real estate companies.
Balances of installment loans in the tables above do not include assets sold in securitizations. However, the amount of interest on installment loans includes gains from the securitization of installment loans. We sold ¥59,161 million and ¥5,258 million of installment loans through securitizations, which were treated as sales transactions, in fiscal 2008 and 2009, respectively. Gains from the securitization of loans of ¥1,155 million and ¥132 million were included in interest on installment loans in fiscal 2008 and 2009, respectively. The balance of
installment loans treated as sales transactions amounted to ¥152,208 million and ¥130,565 million as of March 31, 2008 and 2009, respectively. If loans sold in securitizations were included, the total balance of installment loans would be ¥3,918,518 million and ¥3,434,666 million as of March 31, 2008 and 2009, respectively. For more information on securitization, see Note 10 in Item 18. Financial Statements.
Asset quality of our owned installment loans
We classify past-due installment loans into two categories: installment loans individually evaluated for impairment and 90+ days past-due loans not individually evaluated for impairment.
New provision for probable loan losses was ¥13,664 million in fiscal 2008 and ¥55,140 million in fiscal 2009, and charge-off of impaired loans was ¥4,633 million in fiscal 2008 and ¥3,726 million in fiscal 2009. New provision for probable loan losses increased by ¥41,476 million compared to fiscal 2008 due to an increase in impaired corporate loans as a result of the credit crunch. Despite the increase in impaired loans, charge-off of impaired loans decreased by ¥907 million compared to fiscal 2008 because many of the impaired loans were still expected to recover and had not deteriorated to the point of requiring charge-offs as of March 31, 2009. Accordingly, there is a possibility that our charge-offs will increase during the year ending March 31, 2010.
The table below sets forth the outstanding balances of impaired loans by region and type of borrower. Consumer loans in Japan primarily consist of restructured smaller-balance homogeneous loans individually evaluated for impairment. Impaired loans increased in fiscal 2009 due mainly to an increase in impaired corporate loans for real estate companies in Japan due to the tighter credit markets.
The table below sets forth information as to past-due loans which are not individually significant and accordingly are evaluated for impairment as a homogeneous group.
The balance of 90+ days past-due loans not individually evaluated for impairment increased by 16% in fiscal 2009, principally due to increase in 90+ days past-due loans not individually evaluated for impairment in housing loans and in card loans.
We make provisions against losses for these homogenous loans by way of general reserves for installment loans included in the allowance for doubtful receivables. We make allowance for housing loans in Japan after careful evaluation of the value of collateral underlying the loans, past loss experience and any economic conditions that we believe may affect the default rate.
We determine the allowance for our card loans and other items on the basis of past loss experience, general economic conditions and the current portfolio composition.
We believe that the level of the allowance as of March 31, 2009 was adequate because we expect to recover a portion of the outstanding balance for 90+ days past-due loans not individually evaluated for impairment primarily because many of our 90+ days past-due loans are housing loans, which are ordinarily made to a diverse group of individuals who we believe generally have a higher credit rating than the population at-large.
The ratio of charge-offs as a percentage of the average balance of installment loans was 0.22%, 0.16% and 0.27% for fiscal 2007, 2008 and 2009, respectively. The ratio of charge-offs as a percentage of the average balance of installment loans for fiscal 2009 increased compared to that of fiscal 2008 due to an increase in charge-offs of card loans and a decrease in the balance of installment loans.
We maintain a sizeable portfolio of various investment securities. Our life insurance operations account for approximately 25% of our total investment in securities as of March 31, 2009, and those mainly consist of investments in yen-denominated and fixed-rate corporate debt securities.
We present income from investments in separate lines of our consolidated statements of income, depending upon whether the security is held in connection with our life insurance operations.
Interest we earn on interest-earning securities held in connection with operations other than life insurance is reflected in our consolidated statements of income as interest on loans and investment securities. All other non-interest income and losses (other than foreign currency transaction gains or losses) we recognize on securities held in connection with operations other than life insurance are reflected in our consolidated statements of income as brokerage commissions and net gains on investment securities. All income and losses we recognize on securities held in connection with life insurance operations are reflected in our consolidated statements of income as life insurance premiums and related investment income.
Interest on investment securities other than those held in connection with our life insurance operations in Japan increased 23% to ¥15,559 million in fiscal 2009 due primarily to a higher average balance of available-for-sale debt securities while our overseas income from similar investments decreased 16% to ¥8,204 million in fiscal 2009 primarily due to the foreign exchange effects of an appreciated yen. The average interest rate earned on investment securities in Japan, calculated on a monthly basis, was 2.83% in fiscal 2009 compared to 2.87% in fiscal 2008. The average interest rate earned on overseas investment securities, calculated on a monthly basis, declined to 8.73% in fiscal 2009 compared to 9.76% in fiscal 2008.
New securities added decreased 46% to ¥374,614 million in fiscal 2009 due primarily to the turmoil in financial and capital markets. New securities added in Japan decreased 55% in fiscal 2009. New securities added overseas increased 248% due primarily to increases in the U.S.
The balance of our investment in securities as of March 31, 2009 decreased 17% to ¥926,140 million compared to fiscal 2008. The balance of our investment in securities in Japan decreased 20% due primarily to sales from our life insurance investment portfolio and the overall market declines, while the balance of our investment in securities overseas increased 13% mainly due to newly purchased distressed assets in the U.S.
Investments in trading securities decreased to ¥7,410 million in fiscal 2009 primarily due to revaluation losses related to the market declines caused by the turmoil in financial and capital markets, as well as the influence of foreign exchange rates, in the U.S. Investments in available-for-sale securities decreased 18% in fiscal 2009 due primarily to lower balances of equity securities, corporate debt securities and specified bonds issued by SPEs. As of March 31, 2009, CMBS and RMBS in available-for-sale securities in the U.S. were ¥72,054 million. Other securities decreased 6% in fiscal 2009 due to a decline in the value of non-marketable equity securities and private equity funds.
The above table does not include assets sold in securitizations. We sold ¥10,851 million of investment securities through securitizations, which were treated as sales transactions in fiscal 2008. Gains from the securitization of investment securities of ¥638 million were included in net gains on investment securities in fiscal 2008. There were no sales of investment securities through securitizations in fiscal 2009. The balance of investment securities treated as sales transactions amounted to ¥46,707 million and ¥45,145 million in fiscal 2008 and 2009, respectively. For more information on securitization, see Note 10 in Item 18. Financial Statements.
For further information on investment in securities, see Note 9 of Item 18. Financial Statements.
Brokerage commissions and net gains (losses) on investment securities
All non-interest income and losses (other than foreign currency transaction gains or losses) that we recognize on securities held in connection with operations other than life insurance are reflected in our consolidated statements of income as brokerage commissions and net gains on investment securities.
Brokerage commissions and net gains (losses) on investment securities were losses of ¥12,330 million in fiscal 2009, compared to gains of ¥23,521 million in fiscal 2008. Our brokerage commissions decreased 27% due primarily to a decrease in revenues from our securities brokerage business as a decrease in retail trading transactions in connection with the turmoil of the financial and capital markets. Net gains (losses) on investment securities were losses of ¥22,088 million in fiscal 2009, compared to gains of ¥13,301 million in fiscal 2008, due primarily to losses from CMBS and RMBS, and losses in private equity funds. Dividends income, however, increased 42% to ¥4,733 million in fiscal 2009 compared to fiscal 2008, primarily due to an increase in distributions from real-estate investing SPEs.
As of March 31, 2009, gross unrealized gains on available-for-sale securities, including those held in connection with our life insurance operations, were ¥18,767 million, compared to ¥61,706 million as of March 31, 2008. As of March 31, 2009, gross unrealized losses on available-for-sale securities, including those held in connection with our life insurance operations, were ¥27,490 million, compared to ¥9,222 million as of March 31, 2008. These unrealized gains decreased primarily due to a decline in the domestic securities market in Japan and the deterioration of the credit market in the U.S. as a result of the turmoil in financial and capital markets.
Life insurance premiums and related investment income
We reflect all income and losses (other than provision for doubtful receivables and probable loan losses) that we recognize on securities, installment loans and other investments held in connection with life insurance operations in our consolidated statements of income as life insurance premiums and related investment income.
Life insurance premiums and related investment income decreased 8% to ¥117,751 million in fiscal 2009 compared to fiscal 2008. Life insurance premiums decreased 4%, and life insurance-related investment income decreased 69% in fiscal 2009.
The gross margin ratio increased to 8% in fiscal 2009 compared with 6% in fiscal 2008.
Investments in securities decreased to ¥229,182 million as the result of fewer acquisitions and declines in the market value of the securities. On the other hand, installment loans and other investments increased to ¥197,356 million mainly due to the acquisition of ¥46,231 million of real estate under operating leases.
Life insurance-related investments were down 69% compared to the previous fiscal year chiefly due to a decline in investment securities-related operating revenues caused by the deterioration in the markets.
For further information on life insurance operations, see Note 22 of Item 18. Financial Statements.
Real estate sales
The condominium market continues to stagnate as the real estate market has deteriorated as a result of the financial crisis. Real estate sales were down 20% year on year to ¥71,088 million due to an absence of gains on sales of real estate in Oceania that had been recorded in the previous fiscal year and a decline in the number of condominiums sold to buyers in Japan from 1,931 units in fiscal 2008 to 1,828 units in fiscal 2009.
Gains on sales of real estate under operating leases
Gains on sales of real estate under operating leases increased 45% year on year to ¥24,346 million in fiscal 2009 due primarily to the increase in real estate under operating leases that were sold but were not included in discontinued operations. Where we have continuing involvement with the cash flows from the real estate under operating leases which have been disposed of, the gains or losses arising from such disposition are separately disclosed as gains on sales of real estate under operating leases, while if we have no continuing involvement with the cash flows from such disposed real estate properties, the gains or losses are reported as income from discontinued operations. For discussion of accounting policy for discontinued operations, see Note 25 in Item 18. Financial Statements.
Other operating revenues increased 8% year on year to ¥323,237 million. In Japan, revenues were up 15% to ¥270,894 million compared to ¥236,253 million in the previous fiscal year due to contributions from the consolidated subsidiary Internet Research Institute, Inc. acquired during the previous fiscal year and increases in revenues associated with real estate management operations, including golf courses and training facilities. Overseas, revenues were down 18% to ¥52,343 million compared to ¥64,020 million from the previous fiscal year, due to reductions in revenues from advisory services in the U.S. and ship-related finance in Asia, which had been recorded in the previous fiscal year, along with the foreign exchange effects of an appreciated yen.
New assets added for other operating transactions were down 50% to ¥76,269 million in fiscal 2009 due to strict controls on the selection of new transactions. Other operating transactions include other operating assets and real estate for sale, such as residential condominiums and commercial real estate.
Other operating assets decreased 4% to ¥189,560 million.
Interest expense was flat year on year at ¥104,541 million. In Japan, the debt balance at the end of fiscal 2009 declined compared to the end of fiscal 2008, however the average debt levels for fiscal 2009 were higher than in fiscal 2008. Furthermore, interest expense in Japan increased 12% compared to fiscal 2008 due to increased funding costs resulting from a shift from short-term to long-term debt at higher interest rates in order to manage liquidity risk. Overseas, interest expense was down 26% compared to the fiscal 2008 due to reduced dollar interest rates and the foreign exchange effects of an appreciated yen.
The average interest rate on our short-term and long-term debt in Japan, calculated on the basis of average monthly balances, increased to 1.40% in fiscal 2009, compared to 1.33% in fiscal 2008, due to higher interest
rates following policy action by the Bank of Japan. The average interest rate on our short-term and long-term overseas debt, calculated on the basis of average monthly balances, decreased to 4.13% in fiscal 2009 from 5.41% in fiscal 2008 reflecting lower interest rates in the U.S. For information regarding interest rate risk, see Item 3. Key Information.Risk Factors
Costs of operating leases
Costs of operating leases were up 7% to ¥197,401 million compared to the previous fiscal year. In Japan, costs of operating leases increased 15% to ¥153,023 million compared to the previous fiscal year chiefly due to an increase in depreciation and related costs of automobile operating leases and real estate. Overseas, due to the foreign exchange effects of an appreciated yen, costs of operating leases decreased 13% to ¥44,378 million compared to the previous fiscal year.
Life insurance costs
Life insurance costs in fiscal 2009 decreased 6% to ¥105,899 million, corresponding to a decrease in life insurance premiums.
Costs of real estate sales
To minimize risk, new land purchases have been suspended since September 2007 and new projects have been rescheduled since the fiscal year ended March 31, 2008.
Costs of real estate sales decreased 2% to ¥79,060 million compared to the previous fiscal year due to costs of real estate in Oceania recorded in the previous fiscal year and the decrease in the number of condominiums sold to buyers in Japan, despite write-downs recorded on some projects under development. We also recorded ¥5,222 million and ¥10,911 million of write-downs for fiscal 2008 and 2009. Costs of real estate sales include the upfront costs associated with advertising and creating model rooms. Margins recorded a loss of ¥7,972 million in fiscal 2009 down from a profit of ¥7,389 million in fiscal 2008 due mainly to the recognition of write-downs and a fall in profitability.
Other operating expenses
Other operating expenses were up 9% year on year to ¥186,531 million resulting from the recognition of expenses from the beginning of the fiscal year from companies in which we invested in the previous fiscal year and correlate with the increase in other operating revenues.
Selling, general and administrative expenses
Employee salaries and other personnel expenses account for approximately 60% of selling, general and administrative expenses, and the remaining portion consists of general and administrative expenses such as rent for office spaces, communication expenses and travel expenses. Selling, general and administrative expenses in
fiscal 2009 decreased 6% year on year, due to the absence of one-off write-downs of intangible assets recorded in the previous fiscal year, despite the recognition of expenses from the beginning of this fiscal year from consolidated subsidiaries in which we invested in the previous fiscal year.
Provision for doubtful receivables and probable loan losses
We make provisions for doubtful receivables and probable loan losses for direct financing leases and installment loans. New provisions for doubtful receivables and probable loan losses in fiscal 2009 increased 132% as compared to the previous year. Provisions for direct financing leases increased 7%. Provisions for loans not individually evaluated for impairment increased 16% due to growth in provisions for card loans in Japan. Provisions for loans individually evaluated for impairment increased 304% due mainly to an increase in provisions for loans to real estate companies, reflecting a recent slowdown in the economy.
Write-downs of long-lived assets
In accordance with FASB Statement No. 144 (Accounting for the Impairment or Disposal of Long-Lived Assets), we performed an impairment review for long-lived assets in Japan and overseas such as golf courses, corporate dormitories, office buildings, hotel properties and commercial buildings, and condominiums. Write-downs totaling ¥3,829 million were made in fiscal 2009, an increase of 77% compared to fiscal 2008, which are reflected as write-down of long-lived assets and income from discontinued operations (¥3,782 million of which is reflected as write-down of long-lived assets). ¥3,590 million of write-downs in fiscal 2009 within the write-downs of long-lived assets were associated with five office buildings. Two of the buildings were written down because it was determined that their carrying value exceeded their estimated undiscounted cash flows, while three were written down to fair value when we reclassified them as held and used from held for sale upon our determination that we would not be able to sell the buildings due to the troubled financial condition of the customer.
In accordance with FASB Statement No. 144, an asset held for use is generally deemed to be impaired if the undiscounted future cash flows estimated to be generated by the asset are expected to be less than its carrying amount, and if its fair value is less than its carrying amount. If an asset is deemed to be impaired, the value of the asset is written down to fair value. The requirements of FASB Statement No. 144 potentially result in large charges being recorded in a given period as a result of relatively smaller changes in estimated future cash flows. An asset is generally not considered to be impaired so long as its estimated future cash flows exceed its carrying amount. However, once the estimated future cash flows are believed to be less than the carrying amount, the asset is written down to estimated fair value (which is in general the appraised value). A write-down to fair value prior to a determination of impairment is not permitted.
Our total investment in long-lived assets as of March 31, 2009 was ¥1,694,348 million. ¥1,464,275 million of long-lived assets were included in business segments in Japan, ¥143,458 million were included in overseas business segments, while the remaining assets mainly consist of office facilities that are regarded as corporate assets. Of the long-lived assets in business segments in Japan, ¥916,551 million were in the Real Estate segment. For a breakdown of long-lived assets by segment, see Note 31 of Item 18. Financial Statements.
Write-downs of securities
Write-downs for fiscal 2009 were in connection with a decline in the securities market. In fiscal 2009, write-downs increased 125% from ¥8,290 million in fiscal 2008 to ¥18,632 million in fiscal 2009. For information regarding the impairment of investment in securities, see Item 5. Operating and Financial Review and ProspectsCritical Accounting Policies and Estimates.
Foreign currency transaction loss (gain), net
We recognized a foreign currency transaction net gain in the amount of ¥1,307 million in fiscal 2009. For information on the impact of foreign currency fluctuations, see Item 11. Qualitative and Quantitative Disclosures about Market Risk.
Equity in net income (loss) of affiliates
Equity in net income (loss) of affiliates was a loss of ¥42,937 million down from a profit of ¥48,343 million for the previous fiscal year. The loss was recorded due to the absence in the fiscal year of the equity income recorded in the previous fiscal year as a result of the sale of Korea Life Insurance Co., Ltd. (KLI) in the previous fiscal year and the effects of weaker results from our domestic-based equity method affiliates, mainly DAIKYO INCORPORATED, during the fiscal year. In addition, impairment losses were recorded, since we determined that the downward stock price movements of a number of equity-method affiliates, chiefly The Fuji Fire and Marine Insurance Co., Ltd. (Fuji Fire), were other than temporary. Net income from residential condominiums developed through certain joint ventures in Japan decreased to ¥12,527 million from ¥19,127 million for the previous fiscal year. For discussion of investment in affiliates, see Note 12 of Item 18. Financial Statements.
Gains (losses) on sales of subsidiaries and affiliates and liquidation losses, net
Gains (losses) on sales of subsidiaries and affiliates and liquidation losses, net was a loss of ¥1,731 million in fiscal 2009, down from a profit of ¥12,222 million in the previous fiscal year, due chiefly to the losses on our shareholdings in Fuji Fire resulting from the dilution caused by the issuance and sale of shares to a third party, despite gains on sales of ORIX Facilities, as well as the absence of gains on the sales of domestic and Asia-based equity method affiliates (including KLI) involved in the corporate rehabilitation operations which were recorded in the previous fiscal year.
Provision for income taxes
Provision for income taxes in fiscal 2009 consisted of a reversal of ¥1,990 million compared to the provision of ¥98,487 million in fiscal 2008, mainly due to the effects of the 2009 revision of the taxation system.
In March 2009, the Japanese tax code was revised to reduce the taxes on dividends of foreign subsidiaries by 95%, which resulted in a substantial reduction of our taxes in fiscal 2009. Prior to the 2009 revision, dividends received from foreign subsidiaries were taxed at a rate based on the differences between the Japanese tax rate and applicable income tax rates in the foreign countries. Consequently, deferred tax liabilities related to such additional tax for undistributed earnings of foreign subsidiaries had been recognized except for those earnings designated as indefinitely reinvested. In fiscal 2009, we reversed deferred tax liabilities except for the amount which continued to be taxed under the revised tax code. As part of our capital allocation plans going forward, we made a decision that for certain foreign subsidiaries where we had not recognized deferred tax liabilities we will no longer reinvest undistributed earnings indefinitely. Accordingly, we recognized deferred tax liabilities for the relevant subsidiaries according to the revised tax code in fiscal 2009.
For discussion of income taxes, see Note 16 in Item 18. Financial Statements.
Minority interests in earnings of subsidiaries, net
Minority interests were mainly recorded as a result of the minority interests in earnings of Houlihan Lokey, which is engaged in investment banking including M&A and financial advisory. In fiscal 2009, minority interests decreased 52% year on year to ¥1,873 million.
We base disclosure of discontinued operations on FASB Statement No. 144. Under FASB Statement No. 144, the scope of discontinued operations includes operating results of any component of an entity with its own identifiable operations and cash flow and in which operations we will not have significant continuing involvement. Income from discontinued operations, net refers to net income from the sale or disposal by sale of subsidiaries, business units and real estate under operating leases in which we no longer have significant continuing involvement. Discontinued operations, net of applicable tax effect, decreased 48% compared to the previous fiscal year to ¥11,736 million in fiscal 2009 due primarily to lower gains on sales of real estate under operating leases in Japan.
As of April 1, 2008, the ORIX Group implemented changes to its internal organization to reorganize its business into six segments to facilitate strategy formulation, resource allocation and portfolio balance determination at the segment level. The six business segments are: Corporate Financial Services, Maintenance Leasing, Real Estate, Investment Banking, Retail and Overseas Business.
Management believes reorganizing its businesses into these six new segments addresses the significant changes in ORIX Groups operations and lines of business over the past four to five years. Each segment is organized as a large strategic unit that we believe will allow us to maximize our corporate value by identifying and building strategic advantages vis-à-vis anticipated competitors in each area and by helping the ORIX Group obtain a competitive advantage.
Financial information about our operating segments reported below is information that is separately available and evaluated regularly by management in deciding how to allocate resources and in assessing performance. We evaluate the performance of segments based on income before income taxes as well as results of discontinued operations, minority interests in earnings of subsidiaries and extraordinary gain, before applicable tax effect. Tax expenses are not included in segment profits.
For a description of segments, see Item 4. Information on the CompanyProfile of Business by Segment. See Note 31 in Item 18. Financial Statements for additional segment information, a discussion of how we prepare our segment information and the reconciliation of segment totals to consolidated financial statement amounts.
Corporate Financial Services
The operating environment has drastically changed since the latter half of the previous fiscal year, a trend that is expected to continue for the foreseeable future. In this fiscal year, financial institutions have not changed their conservative stance toward lending to the real estate sector and as a result, financial conditions in the construction and real estate industries have continued to deteriorate. In collaboration with Risk Management Headquarters, the segment has been scrutinizing the financial and operating conditions of each client, striving to continue maximizing the speed and amount of loan recovery.
Segment revenues were down 2% to ¥137,712 million compared to ¥139,874 million in the previous fiscal year as a result of the decline in revenues in line with decreases in installment loan assets and direct financing lease assets due to the more stringent criteria placed on new transactions. This decline was partially offset by an increase in revenues recorded from the beginning of the fiscal year from consolidated subsidiaries in which we invested in the previous fiscal year.
There were continued increases in provisions for doubtful receivables and probable loan losses for real estate-related loans due to the absence of buyers and to banks refusing to refinance. Therefore, to minimize secondary losses, we realigned the division structure of the segment and set up a specialist real estate-focused loan recovery unit. In addition, impairment losses of goodwill in consolidated subsidiaries and equity-method affiliates were recognized since we determined that the downward stock price movement was other than temporary. As a result, the segment recorded a loss of ¥10,451 million, down from a profit of ¥35,412 million in the previous fiscal year.
Segment assets decreased 21% to ¥1,583,571 million compared to the end of the previous fiscal year due to strict controls on the selection of new transactions resulting in a reduction in installment loans and direct financing lease assets.
The operating environment for the automobile leasing business continues to be severe due to the swift decline experienced by the automobile industry from the latter half of the fiscal year and due to a falloff in demand from corporate clients as a result of the deteriorating economy. Furthermore, our car rental operations have underperformed due to worsening of consumer sentiment. Similarly, our precision measuring and other equipment rental operations have seen a declining trend in operating results due to weaker demand in the contracting economy.
Segment revenues were flat year on year at ¥235,953 million due to a decrease of revenues from car rental operations and precision measuring and other equipment rental operations as a result of the severe operating environment, despite an increase in client demand for operating leases in automobile operations. Segment profits decreased 31% to ¥25,621 million compared to ¥37,235 million during the previous fiscal year due to increases in expenses related to depreciation and maintenance parts and services, increases in provisions for doubtful receivables and probable loan losses and reductions in gains on sales of used automobiles due to a declining secondary market.
Segment assets were flat year on year at ¥648,314 million compared to March 31, 2008 due to an increase in operating lease assets in the automobile leasing business, which were offset by a decline in direct financing lease assets.
The domestic real estate market has deteriorated as a result of the financial crisis, and from the latter half of the fiscal year our focus has shifted from an emphasis on asset turnover to prioritizing income gains and
enhancing the property leasing and facility operations businesses that are sources of stable cash flows. Furthermore, the condominium market continues to stagnate; however, reduced taxes on mortgages may stimulate demand.
Gains on sales of real estate under operating leases (including income from discontinued operations) have declined as a result of the present market conditions. Profits from condominium operations have greatly declined due to a fall in profitability and an increase in write-downs on projects under development. Furthermore, 3,038 units were delivered, a decrease from 3,710 units sold in the previous fiscal year, and write-downs of some projects under development were ¥11,560 million in this fiscal year.
As a result, segment revenues were down 6% to ¥270,027 million compared to the previous fiscal year and segment profits were down 39% to ¥50,508 million compared to ¥83,065 million during the previous fiscal year. Segment assets increased 9% to ¥1,175,437 million compared to March 31, 2008 due to increased levels of real estate under operating leases in line with strengthening of the rental property and management operations.
This segment is facing increasingly severe conditions as its business portfolio is being affected by the tightening of liquidity in the domestic real estate sector and deterioration in the capital and financial markets. In order to maintain asset stability in this environment, there is a need for enhanced risk management and monitoring of existing real estate-related finance transactions as well as companies in which we have invested.
Real estate-related finance business has seen a decline in installment loan levels and revenues due to stricter selection criteria for new transactions. Furthermore, provisions for doubtful receivables and probable loan losses have increased due to the credit crunch. Revenues have also declined in the loan servicing (asset recovery) business, due to the adverse economic environment. In our principal investment operations, there was a decline in equity in net income of affiliates, particularly due to the deterioration in the operating results of domestic equity method affiliates. Furthermore, we recorded impairment losses since we determined that the downward stock price movement of Fuji Fire was other than temporary. Revenues from private equity funds and alternative investments have also significantly decreased.
Under these circumstances, segment revenues decreased 26% to ¥94,645 m