Four Seasons Education (Cayman) Inc. — FY2018 Form 20-F
Reporting period: Fiscal year ended February 28, 2018. This is an annual report, not a quarterly filing; the supplied filing text does not provide standalone 2017 Q4 results. Financial statements are prepared under U.S. GAAP. Unless stated otherwise, amounts below are RMB millions.
Business context
The company provides after-school education in China, primarily mathematics tutoring, through standard, personalized Ivy, and special programs. It reported 38 learning centers in six cities at year-end, including 31 in Shanghai. Its operating business is conducted through PRC subsidiaries and variable interest entities (VIEs), which generated all reported revenue.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | 300.5 | 203.2 |
| Gross profit / gross margin | 191.1 / 63.6% | 117.8 / 58.0% |
| Operating income / operating margin | 61.6 / 20.5% | 63.2 / 31.1% |
| Net income / net margin | 41.8 / 13.9% | 17.3 / 8.5% |
| Adjusted net income / adjusted net margin (non-GAAP) | 65.3 / 21.7% | 49.2 / 24.2% |
| Cash from operations | 96.0 | 119.5 |
| Cash and cash equivalents at year-end | 583.3 | 231.0 |
| Current assets / current liabilities | 595.0 / 134.3 | 282.6 / 124.7 |
| Total liabilities | 134.3 | 124.7 |
The filing reports no borrowings in the presented balance sheet; liabilities were current. FY2018 cash includes the effects of the IPO and a large cash dividend. Operating cash flow exceeded net income, but declined from FY2017. The filing reports a RMB158.2 million purchase of a fair-value fund-linked note and RMB23.1 million of property and equipment purchases. Financing cash flow included RMB580.2 million of IPO proceeds and RMB122.1 million of dividends paid.
Revenue rose 47.9%; standard programs contributed RMB201.9 million, Ivy programs RMB70.5 million, and special programs and others RMB29.7 million, before sales tax. The company reported 122,606 course enrollments, up 5.4% year over year. Net income attributable to the company was RMB44.4 million; consolidated net income was RMB41.8 million, reflecting losses attributable to non-controlling interests.
Material changes versus FY2017
- Revenue increased from RMB203.2 million to RMB300.5 million, supported by Ivy-program revenue growth, expanded learning-center operations, and course mix.
- Gross margin improved by 5.6 percentage points, which management attributed to higher enrollment in higher-priced classes, more efficient faculty management, and improved center utilization.
- Operating expenses rose substantially, from RMB54.6 million to RMB129.5 million. General and administrative expense more than doubled, including higher share-based compensation and IPO-related costs; sales and marketing expense rose partly due to the ECNU donation commitment and increased promotion.
- Operating income edged down despite revenue growth, and operating margin fell from 31.1% to 20.5%. Net income rose, while adjusted net margin declined; adjusted net income is a company-defined non-GAAP measure.
- Cash increased following the November 2017 NYSE listing and IPO. Preferred shares converted into ordinary shares upon the IPO; warrant fair-value expense was nil in FY2018 after the warrants were exercised in 2016.
Outlook, risks, and unusual items
- Liquidity and outlook: Management said available cash and cash equivalents should cover ordinary working-capital needs and capital expenditures for the next 12 months. No quantitative revenue or earnings guidance was provided. It expects costs to rise with expansion and public-company requirements.
- Permits and fire safety: As of year-end, 22 of 38 fully operational centers lacked required educational permits or business licenses; 11 lacked fire-safety permits, and 13 were above the third floor. The filing says the centers lacking educational permits or licenses represented 45.3% of FY2018 revenue, while the 13 above-third-floor centers represented 34.4%. Noncompliance could lead to fines, closure, or confiscation of profits; management said potential penalties were not considered probable, but amounts could not be reasonably estimated.
- Regulatory transition: New PRC private-education rules require school classification and re-registration, with implementation details and local requirements evolving. This could affect licensing, operations, and profit distribution.
- Geographic and structural concentration: Shanghai generated 96.2% of FY2018 gross billings. All revenue came through VIEs, which the company consolidates via contractual arrangements rather than equity ownership. Enforceability and regulatory treatment of these arrangements remain material risks.
- Controls and audit: Management concluded disclosure controls were ineffective at February 28, 2018. Two material weaknesses—insufficient U.S. GAAP/SEC reporting expertise and lack of formal accounting policies and procedures—had persisted from prior years. The auditor did not express an opinion on internal-control effectiveness; the filing also notes the auditor was not subject to PCAOB inspection in China.
- Dividend and commitments: The company declared a US$20 million dividend in January 2018, largely paid during FY2018, despite stating it did not expect regular dividends. Remaining ECNU donation commitments totaled RMB75 million; operating-lease commitments totaled RMB228.9 million.
- Other items: FY2018 included RMB23.5 million of share-based compensation and a RMB34.8 million foreign-currency translation loss in other comprehensive income. After year-end, the company agreed to acquire 90% of a Shanghai early-childhood education provider for RMB128.9 million; the transaction was substantially completed in May 2018.
Most important facts for investors to verify
- Progress and consequences of obtaining required education, business, and fire-safety permits, including the status of centers above the third floor.
- Whether the new private-education rules or local implementation materially change the company’s ability to operate, register schools, and receive economic benefits through its VIE arrangements.
- Underlying enrollment, tuition, and course-mix trends: revenue growth substantially exceeded reported enrollment growth, while operating margin contracted.
- Use and liquidity of IPO proceeds, performance and terms of the RMB158.2 million fund-linked note, and the company’s capital-allocation rationale for the US$20 million dividend.
- Remediation of the recurring internal-control material weaknesses and the effect of outstanding share awards, including RMB73.2 million of unrecognized compensation cost at year-end.
- Funding and integration of the post-year-end acquisition, and the company’s ability to manage lease, donation, and expansion commitments.