H&R Block, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2021, the three months ended July 31, 2020. Financial statements are unaudited. Dollar amounts below are in millions except per-share data. H&R Block operates tax preparation and related financial services businesses; results are highly seasonal.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $601.0 | $150.4 |
| Operating expenses | $448.1 | $345.5 |
| Operating income (loss), calculated | $153.0 | $(195.2) |
| Operating margin, calculated | 25.4% | (129.8)% |
| Continuing-operations pretax income (loss) | $124.0 | $(207.1) |
| Continuing-operations net income (loss) | $93.6 | $(145.7) |
| Net income (loss), including discontinued operations | $91.3 | $(150.2) |
| Diluted EPS, continuing operations | $0.48 | $(0.72) |
| Dividends declared per share | $0.26 | $0.26 |
Revenue increased $450.7 million, or 299.7%. Management attributed the change primarily to COVID-19-related extensions of U.S. and Canadian tax filing deadlines, which shifted part of the usual fourth-quarter tax-season activity into this quarter. Tax return volumes rose sharply across assisted and DIY categories, while net average charges declined: 7.7% for company-owned offices, 9.5% for franchise offices, and 7.2% for DIY. The filing cautions that interim results are not indicative of full-year results.
Operating expenses rose 29.7%, less than revenue growth. Higher field wages, occupancy, marketing, and transaction costs reflected the extended tax season and higher volumes. Interest expense increased to $32.1 million from $21.1 million. The effective tax rate for continuing operations was 24.6%, versus 29.6% in the prior-year quarter. Adjusted diluted EPS, a non-GAAP measure, was $0.55 versus $(0.66); reported diluted EPS was $0.48 versus $(0.72).
Cash flow, debt and liquidity
- Operating cash flow used was $20.5 million, compared with $483.8 million used a year earlier; management cited the extended tax season.
- Investing activities provided $4.4 million, versus $358.8 million used, primarily reflecting the prior-year Wave acquisition. Financing activities used $56.7 million, including $50.0 million of dividends.
- Cash and cash equivalents were $2.599 billion at July 31, 2020, plus $208.0 million of restricted cash. Total debt was $3.496 billion, including $2.0 billion drawn on the revolving credit facility (CLOC).
- The company said it expected to repay the full $2.0 billion CLOC balance in September 2020 and believed existing liquidity sources were sufficient absent unexpected developments. It was in compliance with CLOC covenants at quarter-end.
- On August 7, 2020, after quarter-end, the company issued $650 million of 3.875% senior notes due 2030. It intended to use proceeds to repay $650 million of 4.125% notes due October 2020 and for general corporate purposes.
- Share repurchases under the public program were zero; 204,000 shares were acquired to meet employee tax-withholding obligations. Remaining repurchase authorization was $751.8 million.
Developments, outlook and risks
- H&R Block terminated its program management agreement with Axos effective July 1, 2020. On August 5, it entered into a new agreement with MetaBank to provide H&R Block-branded U.S. financial products.
- No numerical revenue or earnings guidance is provided in the supplied filing text. Management emphasized uncertainty around COVID-19, operating restrictions, customer behavior, and the tax season’s altered timing.
- Free File-related litigation and governmental inquiries remain ongoing. The company reported no accrual for the described Free File matters because it had not concluded a loss was probable. It noted potential reputational, regulatory, and financial consequences.
- Legacy litigation and indemnification claims related to discontinued mortgage operations remain unresolved; outcomes and possible losses are difficult to estimate. The company said the estimated aggregate range of reasonably possible losses in excess of accruals, where estimable, was not material, while cautioning that adverse outcomes could be material.
- Other contingencies include tax-return accuracy guarantees, franchise funding commitments, and limited guarantees tied to the Refund Advance program. The company received $14.6 million in Canadian wage subsidies during the quarter.
- Disclosure controls and procedures were judged effective at quarter-end; no material change in internal control over financial reporting was reported.
Most important facts to verify
- How much tax-season revenue and expense shifted from Q4 FY2020, and how comparable the unusually strong quarter is to normal operations.
- Whether the $2.0 billion CLOC was repaid as expected in September 2020 and the resulting debt, cash, and interest-cost position.
- Execution and terms of the $650 million 2030 notes and repayment of the October 2020 notes.
- Subsequent developments in Free File litigation and inquiries, including potential impacts on the business, reputation, or liabilities.
- Any changes in full-year outlook, operating conditions, tax filing patterns, or liquidity needs after the filing date.