New Oriental Education & Technology Group Inc. — Form 20-F Summary
Reporting period: The filing is the annual report for the fiscal year ended May 31, 2014, not a standalone 2013 fourth-quarter filing. Financial amounts below are in U.S. dollars unless noted.
Business context
New Oriental provides education services in China, including test preparation, K-12 tutoring, language training, schools, educational materials and online courses. The company reported more than 2.6 million student enrollments in FY2014 and operated 56 schools and 647 learning centers. Substantially all education operations are conducted through contractual arrangements with New Oriental China, a variable interest entity (VIE).
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total net revenue | $1,138.9 million | $959.9 million |
| Operating income | $197.6 million | $122.6 million |
| Net income | $215.7 million | $136.3 million |
| Diluted earnings per share | $1.37 | $0.87 |
| Net cash from operating activities | $361.3 million | $283.6 million |
| Cash and cash equivalents at year-end | $371.6 million | $417.2 million |
- Revenue grew 18.7%; educational programs and services rose 17.3% to $1,006.2 million, while books and other revenue rose 29.9% to $132.7 million.
- Operating margin was approximately 17.4%, up from 12.8%; net margin was approximately 18.9%, up from 14.2%. The FY2014 operating result included a $3.6 million gain on subsidiary disposals.
- Cost of revenue was $451.7 million, selling and marketing $169.1 million, and general and administrative expense $324.2 million. Smaller average class sizes—about nine students versus ten a year earlier—were noted as a potential margin pressure, though management said smaller classes remained profitable.
- Operating cash flow increased to $361.3 million, supported in part by $60.7 million of growth in deferred revenue. Investing activities used $344.4 million, including net purchases of short-term investments and $31.7 million of property and equipment. Financing activities used $54.1 million, including $54.5 million of dividends and $21.5 million of share repurchases.
- At May 31, 2014, current assets were $1,233.7 million and current liabilities $576.1 million (current ratio approximately 2.1). Total assets were $1,603.5 million; total liabilities $577.8 million; shareholders’ equity $1,025.8 million. The balance sheet lists no borrowings or debt securities; operating lease commitments totaled $437.0 million.
- Cash, term deposits and short-term investments totaled approximately $1.113 billion. Short-term investments were $643.4 million and term deposits $98.5 million. Cash and cash equivalents alone declined 10.9% year over year.
Material changes versus FY2013
- Net income increased 58.3%, substantially faster than revenue, reflecting higher operating income and interest income. Income tax expense rose 69.6% to $26.0 million, partly due to higher taxable income and dividend withholding tax.
- Operating expenses increased 12.9%, below revenue growth. General and administrative expense grew 4.2%, including share-based compensation of $20.1 million versus $27.2 million in FY2013; selling and marketing expense rose 19.0%.
- Language training and test preparation revenue increased 18.5% to $969.9 million. Books and other revenue grew faster, but remained a smaller part of total revenue.
- The company opened 45 learning centers and closed 68 in FY2014; year-end learning-center count fell from 669 to 647, and schools declined from 57 to 56.
- FY2014 included a $3.6 million gain from selling two subsidiaries to MaxEn, a joint venture in which New Oriental holds 65% but does not have control. Elite English was reported as discontinued operations; it had no FY2014 revenue or loss. The stated $5.5 million sale consideration is payable in installments through May 2016, but was not recognized as a receivable because collection was not assured.
Outlook, risks and unusual items
- Management expected available cash and operating cash flow to cover anticipated needs for the foreseeable future and planned to accelerate new school and learning-center openings, focusing on fast-growing, higher-margin cities. No specific revenue or earnings guidance was provided.
- Key operating risks include competition, student demand and pricing, teacher recruitment and retention, smaller classes, seasonality, and changes to Chinese or overseas admissions tests. Four cities—Beijing, Shanghai, Wuhan and Xi’an—generated 41.2% of FY2014 revenue.
- Structural risk is significant: the VIE and its schools and subsidiaries generated 98.4% of FY2014 revenue. The company does not directly own the VIE; it relies on contractual arrangements whose enforceability and regulatory treatment under PRC law remain uncertain. The VIE also holds operating licenses and key assets.
- The SEC investigation, opened in 2012 and concerning, among other matters, VIE consolidation and allegations raised by Muddy Waters, remained unresolved; the company said it was cooperating. SEC staff had made no further request since March 2013, but the filing could not predict the investigation’s outcome.
- Shareholder class actions reached a preliminary settlement in April 2014; court approval was not yet final as of the filing. The company recorded a $1.25 million loss, with $3.5 million of a proposed $4.75 million settlement expected to be covered by insurance. The filing states the company denied wrongdoing.
- Operating lease commitments were $437.0 million, including $103.4 million due in FY2015. PRC rules restrict transfers of certain net assets; $239.2 million was restricted at year-end. Currency controls, tax treatment and possible loss of preferential tax status may also affect cash remittances and earnings.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting as of May 31, 2014. It also notes that the auditor was not then subject to PCAOB inspection in China.
Most important facts for investors to verify
- Whether the SEC investigation concluded, and whether any subsequent action affected the company’s VIE consolidation or reporting.
- Whether the shareholder settlement received final court approval, was paid, and was covered by insurance as expected.
- Whether VIE contracts remain enforceable and service-fee arrangements provide the company practical access to operating cash and economic benefits.
- Whether enrollment growth, pricing and class sizes supported margins after FY2014, particularly as the learning-center network contracted.
- How much of the reported liquidity was readily available to the holding company, given PRC transfer restrictions and the composition of cash, deposits and investments.
- Whether lease commitments, tax incentives, withholding taxes and related-party transactions developed as disclosed, including the MaxEn disposals and Elite English consideration.