TAL Education Group — Form 20-F Summary
Reporting period: Fiscal year ended February 28, 2018. This is an annual report, not a standalone fourth-quarter filing; the provided text does not give separate Q4 results. Financial amounts are in U.S. dollars unless noted.
Business context and reporting period
TAL provides K–12 after-school tutoring in China through small classes, personalized tutoring, online courses and related education services. At year-end it reported 594 learning centers and 465 service centers in 42 cities. Its results consolidate PRC affiliated entities operated through contractual variable-interest-entity (VIE) arrangements, rather than direct equity ownership.
Financial and operating metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net revenue | $1.715 billion | $1.043 billion |
| Gross profit / margin | $832.7 million / 48.6% | $520.8 million / 49.9% |
| Operating income / margin | $208.6 million / 12.2% | $134.6 million / 12.9% |
| Net income | $194.7 million | $112.5 million |
| Net income attributable to TAL shareholders | $198.4 million | $116.9 million |
| Diluted earnings per common share | $1.03 | $0.66 |
| Operating cash flow | $685.3 million | $379.0 million |
| Cash and cash equivalents at year-end | $711.5 million | $470.2 million |
| Short-term investments at year-end | $787.4 million | $229.5 million |
Year-end current assets were $1.662 billion and current liabilities were $1.133 billion. Total assets were $3.055 billion and total liabilities $1.414 billion. Balance-sheet debt included $225.0 million of long-term debt and $11.1 million of bond payable. The company also had $16.2 million of restricted cash, current and non-current combined.
Cash used in investing was $840.4 million, principally reflecting purchases of short-term and long-term investments and property and equipment. Financing cash flow was $428.2 million, including $500.0 million of private-placement proceeds, partly offset by a $41.2 million dividend and other financing outflows.
Material changes versus FY2017
- Revenue rose 64.4%, primarily on higher student enrollments in small classes and online courses. Average quarterly enrollments were approximately 1.9 million for FY2018, versus approximately 1.3 million in FY2017 implied by the reported growth history; the filing does not give a direct FY2017 enrollment figure in this comparison.
- Net income increased 73.0%. Gross margin declined from 49.9% to 48.6%, and operating margin from 12.9% to 12.2%, as expansion-related costs grew faster than revenue.
- Selling and marketing expense increased 92.1% to $242.1 million, or 14.1% of revenue. General and administrative expense rose 46.7% to $386.3 million, though it fell to 22.5% of revenue from 25.2%.
- Operating cash flow increased, with $323.1 million of the FY2018 cash-flow contribution coming from growth in deferred revenue, largely advance course-fee collections.
- In January 2018, TAL raised approximately $500 million through a private placement. It paid a $0.25-per-share special dividend, totaling $41.2 million, in May 2017.
Outlook, commentary, risks and unusual items
- Management said cash and expected operating cash flow should cover organic growth, working capital and capital expenditures for at least the next 12 months. It gave no quantified revenue or earnings guidance.
- Management cited enrollment growth, pricing, expansion, teacher hiring and costs as important drivers. It expected costs and general and administrative expenses to continue rising as the business and online initiatives expand, and warned margins could decline further.
- Regulatory exposure is significant. A February 2018 national enforcement circular restricted certain after-school training practices; TAL said it was adapting operations. Two institutions received notices in March 2018 and were taking corrective measures. As of May 31, 2018, 70 learning centers had not completed certain permit or filing requirements; those centers accounted for 3.8% of FY2018 revenue.
- Substantially all education revenue is conducted through VIE contractual arrangements. The filing cautions that PRC authorities or courts could challenge the structure, potentially affecting control, consolidation and access to operating cash. PRC rules also restrict transfers and distributions.
- Debt and commitments warrant attention: the $225 million term loan is priced at 250 basis points over LIBOR and matures in 2019; operating lease commitments totaled $1.138 billion, with additional property/equipment and investment commitments. The $230 million convertible notes due 2019 had substantial conversions during FY2018; the year-end balance-sheet bond payable was $11.1 million.
- After Muddy Waters issued allegations on June 13, 2018, TAL said its audit committee-directed internal review found no evidence supporting them. A putative securities class action filed June 18, 2018 remained preliminary; TAL said it would defend the case and could not estimate any potential loss.
- The auditor gave an unqualified opinion on the financial statements and internal controls, which management also assessed as effective. The filing nonetheless notes that the auditor was not subject to PCAOB inspection in China.
Most important facts for investors to verify
- Whether post-filing regulatory enforcement, licensing and school-classification requirements affect operations, enrollments, or the 70 centers with incomplete filings.
- Whether enrollment growth can continue without further margin compression, and how expansion, teacher costs and marketing spending affect profitability.
- The availability and location of cash, short-term investments and VIE cash, including restrictions on transfers, debt covenants and upcoming debt maturities.
- The status and outcome of the shareholder lawsuit and any subsequent developments concerning the allegations and internal review.
- Whether the VIE arrangements remain enforceable and whether the company can maintain relevant licenses and permits.