TAL Education Group — Form 20-F Summary
Business context and reporting period. This is an annual report for the fiscal year ended February 29, 2016, prepared under U.S. GAAP and audited by Deloitte. It is not a standalone 2015 Q4 filing; the filing presents annual results and comparative fiscal years ended February 28, 2014 and 2015. TAL provides K-12 tutoring in China through classroom-based small classes, personalized tutoring and online courses. Most China operations are conducted through contractual variable interest entity (VIE) arrangements.
Financial and operating metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net revenue | $619.9 million | $434.0 million | +42.9% |
| Gross profit / margin | $316.3 million / 51.0% | $230.9 million / 53.2% | Profit +37.0%; margin down 2.2 percentage points |
| Operating income / margin | $85.1 million / 13.7% | $67.2 million / 15.5% | Income +26.5%; margin down 1.8 points |
| Net income | $102.8 million | $67.1 million | +53.0% |
| Net income attributable to TAL shareholders | $102.9 million | $67.2 million | +53.1% |
| Operating cash flow | $187.7 million | $147.6 million | +27.2% |
| Cash and cash equivalents at year-end | $434.0 million | $470.2 million | Down $36.1 million |
- Student enrollments increased 54.6% to approximately 2.31 million. Average selling price per enrollment fell to $268 from $290, which management attributed to a greater mix of online and small-class enrollments and foreign-exchange effects, partly offset by higher small-class hourly rates.
- Operating cash flow benefited in part from a $66.4 million increase in deferred revenue as course fees were collected in advance. Investing cash outflow was $215.4 million, including $140.4 million for acquisitions and long-term investments and $35.1 million for property and equipment. Cash declined despite positive operating cash flow.
- At year-end, the company reported $17.3 million in term deposits and $27.5 million in short-term investments, in addition to cash; total assets were $1.06 billion and total liabilities were $620.6 million. Current assets were $515.9 million against current liabilities of $383.2 million.
- Debt included $230 million principal of 2.50% convertible notes due May 2019; carrying value was $227.8 million. No bank borrowings were reported. Noteholders may require cash repurchase on May 15, 2017 or after certain fundamental changes.
- Operating lease commitments totaled $408.3 million, including $94.3 million due within one year. Deferred revenue was $289.3 million, reflecting advance tuition collections and course obligations rather than conventional borrowing.
Material changes and unusual items
- Revenue growth was driven primarily by enrollment growth and expansion of the small-class network and online courses. Learning centers increased to 363 across 25 cities; the company reported about 2.31 million enrollments, up from 1.49 million.
- Gross margin declined as teacher compensation and facility costs rose with expansion. Cost of revenue increased 49.5%, faster than revenue; teacher fees and bonuses rose to $146.1 million and facility rental costs to $84.4 million.
- Net income included a $50.4 million gain from disposal of business components, principally the transfer of the Guangzhou one-on-one tutoring business in exchange for a noncontrolling equity interest. The transaction also contributed to a one-off income-tax expense of about $12.5 million. Net income growth therefore includes a material nonrecurring gain.
- The company recorded $7.5 million of impairment losses on long-term investments, citing deteriorating investee operations and going-concern concerns. Share-based compensation rose to $25.8 million; $187.0 million of unrecognized compensation cost remained, expected to be recognized over a weighted-average four years.
- FY2016 included acquisitions of Firstleap, an English tutoring provider, and Yinghe Youshi, an online English-test preparation business. Goodwill increased to $87.0 million, primarily reflecting acquisitions. Cash used in investing activities also included substantial minority investments.
Outlook, risks and contingencies
- Management expects demand for K-12 tutoring to continue growing, plans further geographic and learning-center expansion, and intends to develop online offerings. It provided no specific numeric revenue or earnings guidance. Management said existing cash, term deposits and expected operating cash flow should cover anticipated needs for at least 12 months.
- Liquidity at the holding-company level is subject to restrictions: most operations and a substantial share of cash are in China-based VIEs or subsidiaries, and transfers depend on contractual arrangements, PRC distribution rules and foreign-exchange controls. Management reported $23.0 million of net assets restricted from distribution in its liquidity discussion; the notes separately report $58.9 million of restricted net assets including paid-in capital and statutory reserves.
- VIE enforceability and regulatory treatment remain major risks. A draft PRC Foreign Investment Law could affect contractual-control structures; the filing notes uncertainty about its enactment and application. The company does not directly own most operating VIEs.
- As of April 30, 2016, 66 learning centers had not completed required permit or registration filings; those centers represented 7% of FY2016 revenue. The company was pursuing filings and permits but did not expect to complete all in the near term. Possible consequences include fines, confiscation of gains or suspension of operations.
- Other material exposures include evolving PRC education and tutoring rules, licensing uncertainty for personalized tutoring and online audio-video services, competition, teacher recruitment and wage inflation, rental commitments, RMB exchange-rate movements, and limits on insurance coverage. The filing reports no material litigation pending or threatened as of its date.
- The company reported effective disclosure controls and internal control over financial reporting as of February 29, 2016; Deloitte issued unqualified audit opinions on the financial statements and internal controls. The filing also notes that the PCAOB could not inspect its China-based auditor at that time.
Most important facts for investors to verify
- Separate recurring operating performance from the $50.4 million disposal gain, associated tax expense and investment impairment when assessing FY2016 earnings growth.
- Confirm the status and financial exposure of the 66 learning centers with incomplete filings, including any regulator actions or remediation after the filing date.
- Review where cash is held and how much is practically transferable from VIEs and PRC subsidiaries to the parent; reconcile the filing’s different restricted-net-asset figures and definitions.
- Assess the 2017 put right, 2019 maturity and potential dilution from the $230 million convertible notes, alongside the $408.3 million lease commitments.
- Track VIE regulatory developments, online-service licensing requirements, teacher and rent cost growth, and the performance and impairment risk of the company’s acquisitions and minority investments.