H&R Block, Inc. — Form 10-Q summary
Reporting period: Quarter ended March 31, 2023 (fiscal Q3 FY2023), filed May 9, 2023. The filing covers both the three- and nine-month periods ended March 31, 2023, compared with the same periods in 2022. Although the request metadata says “2022 Q3,” the filing itself is for FY2023 Q3.
H&R Block provides assisted and DIY tax preparation, related financial services, international tax services, and small-business services through Wave. It reports one continuing-operations segment. The business is highly seasonal, with peak revenue and cash generation typically occurring February through April.
Key financial results
| Metric | Three months ended March 31, 2023 | Change year over year | Nine months ended March 31, 2023 | Change year over year |
|---|---|---|---|---|
| Revenue | $2,093.6 million | +1.5% | $2,440.0 million | +1.1% |
| Operating expenses | $1,229.1 million | +4.5% | $2,067.9 million | +4.4% |
| Income from continuing operations | $646.1 million | -4.3% | $257.8 million | -23.2% |
| Net income | $643.4 million | -4.4% | $251.4 million | -24.0% |
| Diluted EPS, continuing operations | $4.14 | +2.0% | $1.62 | -15.6% |
| Adjusted diluted EPS, continuing operations (non-GAAP) | $4.20 | +2.2% | $1.80 | -14.7% |
| EBITDA, continuing operations (non-GAAP) | $910.0 million | -1.3% | $491.9 million | -9.4% |
Operating margins, calculated from reported revenue and operating expenses, were approximately 41.3% for the quarter versus 42.9% a year earlier, and 15.3% for the nine-month period versus 18.0%. EPS comparisons reflect lower earnings as well as fewer weighted-average shares following repurchases.
Revenue and cost drivers
- Quarterly U.S. assisted-preparation revenue rose 4.4%, reflecting a 3.7% increase in net average charge and higher return volumes; total assisted return volume nevertheless fell 2.0%.
- For the nine-month period, assisted-preparation revenue increased 5.1%, while total assisted return volume decreased 1.6%. Management attributed revenue growth in part to higher average charges and acquired franchise offices.
- DIY preparation revenue declined 4.7% in the quarter and 3.3% year to date, primarily due to lower software sales and fewer paid online returns. Refund Transfer revenue fell 11.2% and 10.7%, respectively.
- Financial-services revenue declined 3.8% in the quarter and 21.4% year to date. Emerald Card and Spruce revenue was lower, including because the prior-year period benefited from monthly Child Tax Credit deposits to Emerald Cards. Wave revenue grew 13.5% year to date.
- Operating expenses rose faster than revenue, chiefly due to field wages, benefits and compensation, occupancy, and advertising. Nine-month compensation and benefits increased 9.6%.
Cash flow, balance sheet, and capital
| Measure | March 31, 2023 / nine months ended | Comparable figure |
|---|---|---|
| Operating cash flow | $498.4 million | $373.1 million in prior-year nine months |
| Capital expenditures | $56.7 million | $52.7 million in prior-year nine months |
| Cash used in investing | $101.3 million | $71.1 million in prior-year nine months |
| Cash used in financing | $505.6 million | $707.5 million in prior-year nine months |
| Cash, including restricted cash | $934.3 million | $1,050.7 million at June 30, 2022 |
| Cash and cash equivalents, excluding restricted amounts | $909.1 million | $885.0 million at June 30, 2022 |
| Long-term debt | $1,488.5 million | $1,486.9 million at June 30, 2022 |
| Stockholders’ equity (deficiency) | $(36.4) million | $211.6 million at June 30, 2022 |
Operating cash flow improved mainly due to receipt of income tax receivables, partly offset by lower net income. The company repurchased $350.1 million of shares during the nine months at an average $42.86 per share and paid $133.8 million in dividends. The August 2022 repurchase authorization was $1.25 billion through June 2025; $900 million remained authorized at March 31, 2023.
Senior notes total $1.5 billion face value, with maturities in 2025, 2028, and 2030. There were no borrowings under the $1.5 billion revolving credit facility; covenant-limited borrowing availability was approximately $1.4 billion. H&R Block reported compliance with its debt covenants. Management said existing liquidity sources were sufficient for operating, investing, and financing needs absent unexpected developments.
Outlook, risks, and unusual items
- Outlook: The filing provides no specific full-year revenue, earnings, or EPS guidance. Management cautioned that interim results may not indicate full-year performance because of seasonality. Total U.S. return volume from July 1, 2022 through April 30, 2023 decreased 1.3% year over year.
- Tax expense: The nine-month effective tax rate was 23.3%, versus 8.1% in the prior year, when discrete tax benefits were substantially larger. The company reported a $4.2 million discrete tax benefit in the current period versus $52.6 million a year earlier.
- Legal and regulatory exposure: The California IRS Free File-related case is scheduled for trial August 14, 2023; the company has not deemed a loss probable or accrued a liability. In February 2023, the FTC issued a demand and draft complaint concerning DIY tax preparation; discussions toward resolution were ongoing, with litigation possible. The filing also describes legacy discontinued-mortgage contingencies. Management said the estimable aggregate range of reasonably possible litigation losses in excess of accruals was not material, while noting some exposures cannot currently be estimated.
- Other contingencies: Unrecognized tax benefits were $256.3 million; management said approximately $53.5 million could decrease within twelve months. Potential employee-retention tax-credit benefits remain uncertain; $13.2 million was received during the nine months, of which $3.7 million was recognized as an expense offset.
- Unusual income: Other income increased, including income from a legal settlement and higher interest income. The filing does not provide a clear settlement amount in the supplied text.
- Credit risk: The Emerald Advance receivables had a $28.0 million allowance at March 31, 2023; $49.6 million of balances were classified as non-accrual. These balances are seasonal and are assessed for collectibility.
Important facts for investors to verify
- Whether peak-season return volumes and average charges support sustained growth, particularly given declines in DIY, Refund Transfers, and total assisted returns.
- Whether higher labor, benefits, occupancy, and marketing costs continue to pressure operating margins.
- How much of the year-to-date earnings decline reflects the higher effective tax rate and the prior-year tax benefits, versus underlying operating performance.
- Developments and potential financial exposure in the FTC matter, the California Free File litigation, and discontinued-mortgage claims.
- Seasonal liquidity needs, covenant headroom, and the sustainability of dividends and share repurchases alongside the reported stockholders’ equity deficiency.