TAL Education Group — Form 20-F Summary
Period: Fiscal year ended February 29, 2020, compared with fiscal year ended February 28, 2019. This is an annual filing, not a standalone 2019 Q4 report; it says Q4 FY2020 results were weaker than expected but does not provide a clear standalone quarterly financial table. Figures below are U.S. dollars unless noted.
Business context and operating performance
TAL is a China-focused K-12 after-school tutoring provider, with small-class, personalized tutoring and online courses. At year-end it had 871 learning centers and 767 service centers in 70 cities. Average quarterly enrollments in normal-priced long-term courses rose 55.2%, from over 1.9 million to approximately 3.0 million. Online courses through xueersi.com contributed 18.9% of FY2020 revenue, up from 13.3%.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $3,273.3 million | $2,563.0 million |
| Gross profit / gross margin | $1,804.7 million / 55.1% | $1,398.5 million / 54.6% |
| Operating income / margin | $137.4 million / 4.2% | $341.6 million / 13.4% |
| Net income (loss) attributable to TAL shareholders | $(110.2) million | $367.2 million |
| Operating cash flow | $855.9 million | $194.4 million |
| Investing cash flow | $(338.8) million | $(166.6) million |
| Financing cash flow | $131.2 million | $475.0 million |
| Cash and cash equivalents | $1,873.9 million | $1,247.1 million |
| Short-term investments | $345.5 million | $268.4 million |
| Total assets / total liabilities | $5,571.2 million / $3,027.0 million | $3,735.1 million / $1,204.6 million |
Year-end long-term debt was $262.0 million, representing a $270 million three-year term loan net of debt issuance costs. A separate RMB1.8 billion facility for the Zhenjiang construction project had not been drawn. Operating lease liabilities were $1,254.9 million, including $305.0 million current. Management said cash and expected operating cash flow should cover anticipated needs for at least 12 months.
Material changes and unusual items
- Revenue rose 27.7%, but operating expenses increased 57.6%. Selling and marketing expense grew 76.2% to $852.8 million, or 26.1% of revenue, and G&A rose 37.1% to $795.0 million.
- Operating margin declined to 4.2% from 13.4%; TAL moved from attributable net income of $367.2 million to an attributable net loss of $110.2 million. Results included $154.0 million of long-term investment impairments, $95.3 million of other expense, and $29.0 million of goodwill and intangible-asset impairment. Other expense primarily reflected fair-value changes in investments.
- Employees’ misconduct in the Light Class business inflated transactions. TAL corrected its unaudited first-three-quarter FY2020 statements, reversing $86.1 million of revenue and $26.6 million of net income attributable to TAL; Light Class was less than 1% of FY2020 revenue after correction.
- Operating cash flow rebounded from FY2019, helped in part by a $343.6 million increase in deferred revenue and non-cash add-backs, including investment impairments and share-based compensation. It should not be read as equivalent to reported earnings.
Outlook, risks and contingencies
COVID-19 closures disrupted offline classes; TAL shifted offerings online and expected online growth to partially offset offline weakness. Management said FY2020 Q4 results were weaker than expected, and it could not reasonably estimate the pandemic’s financial impact or FY2021 effects. No specific revenue or earnings guidance was provided. Expansion plans and construction projects were delayed, with potential cost overruns and asset impairments.
A material weakness in financial reporting controls related to Light Class transactions conducted through agents resulted in restatements. Management and the auditor concluded controls were not effective as of February 29, 2020; the independent auditor nevertheless gave an unqualified opinion on the financial statements. Remediation was underway, with no assurance it would be effective.
The SEC was investigating matters including prior allegations and Light Class; the company said it was cooperating and could not predict the outcome. A shareholder class action had been dismissed, but plaintiffs appealed. The filing also highlights regulatory and licensing uncertainty in China, dependence on contractual VIE arrangements for most operations, limits on moving funds from China, and the possibility of further tutoring-sector restrictions. Approximately 93.4% of FY2020 revenue came from consolidated VIEs.
Important facts for investors to verify
- Review the Light Class corrections, full-year audited figures, and status of the internal-control remediation and audit committee review.
- Track SEC investigation developments and the shareholder litigation appeal, including potential costs or liabilities.
- Assess whether COVID-related offline disruption, online-course growth and later operating trends support recovery in margins and profitability.
- Check investment valuations and impairment exposure, especially Level 3 holdings, and the assumptions underlying the $29.0 million goodwill impairment.
- Evaluate liquidity alongside lease commitments, construction obligations, debt maturities and restrictions on accessing PRC subsidiary and VIE cash.
- Monitor tutoring regulations, required licenses and VIE enforceability, which could affect the company’s ability to operate or consolidate substantially all of its China business.