H&R Block, Inc. — Form 10-Q Summary
Business context and period: This filing covers the quarter and six months ended October 31, 2020 (H&R Block fiscal Q2 FY2021), compared with the corresponding 2019 periods. The company provides assisted and DIY tax preparation, related financial products, and small-business services through Wave. Results are highly seasonal. COVID-19-related tax-filing deadline extensions shifted activity normally recorded in FY2020’s fourth quarter into FY2021’s first half, making year-over-year comparisons unusually difficult.
Financial performance
| Metric | Three months ended Oct. 31, 2020 | Six months ended Oct. 31, 2020 |
|---|---|---|
| Revenue | $176.6 million, up 9.8% | $777.6 million, up 149.9% |
| Net loss | $223.7 million, versus $188.0 million | $132.5 million, versus $338.2 million |
| Loss per diluted share | $1.18, versus $0.95 | $0.70, versus $1.69 |
| EBITDA from continuing operations (non-GAAP) | $(168.4) million, versus $(197.3) million | $27.3 million, versus $(344.8) million |
| Cash used in operating activities | Not presented for the quarter | $262.7 million, versus $693.3 million |
Quarter revenue growth was led by U.S. assisted tax preparation, international services, and Wave. For the six-month period, U.S. assisted revenue was $386.7 million versus $74.2 million, largely reflecting the shifted tax season; Wave revenue was $26.4 million versus $14.5 million, including two additional months in the current period. The company recorded $829.97 million of operating expenses against $777.58 million of revenue for the six months. The filing does not provide a clear consolidated operating-margin figure; substantial losses through the first three fiscal quarters are described as typical because of seasonality.
For the six months, investing activities used $23.4 million, compared with $417.1 million, which included the prior-year Wave acquisition. Financing activities used $2.21 billion, principally reflecting repayment of the $2.0 billion credit-line balance. The company paid $100.2 million in dividends and repurchased $150.1 million of shares in the six-month period.
Balance sheet, debt, and liquidity
- At October 31, 2020, cash and cash equivalents were $209.0 million, plus $178.4 million of restricted cash. Total current assets were $592.9 million and current liabilities were $552.6 million.
- Debt and line-of-credit borrowings totaled $1.56 billion, net of issuance costs and discounts. The company issued $650 million of 3.875% senior notes due 2030 and used the proceeds to repay $650 million of notes that matured in October 2020.
- The revolving credit facility had $70 million outstanding at quarter-end. Borrowing availability was limited by the debt-to-EBITDA covenant to approximately $1.0 billion. The company reported compliance with its credit-facility requirements.
- Stockholders’ equity was a deficit of $280.0 million, compared with positive equity of $71.0 million at April 30, 2020. Management stated that, absent unexpected developments, available capital sources were sufficient for operating, investing, and financing needs.
Material changes, outlook, and risks
- COVID-19 and seasonality: Tax-filing extensions and operating restrictions affected the timing and cost of tax-season activity. Management reported more returns in the first half than in a typical year, while still serving fewer clients than it would typically serve during tax season. These interim results are not considered indicative of the full fiscal year.
- Taxes: The company expects to carry back tax losses under the CARES Act and seek refunds of previously paid federal income taxes. The six-month period included $15.9 million of income tax expense despite a pretax loss; the filing attributes the unusual effective tax rate to annual-rate estimates and discrete tax items, including uncertainty related to the anticipated carryback.
- Financial products: H&R Block terminated its bank program agreement with Axos and entered a new agreement with MetaBank to provide branded products, including Emerald Advance, Emerald Card, Refund Advance, and Refund Transfer.
- Legal and regulatory matters: The company faces Free File-related litigation and governmental inquiries, including requests for information and subpoenas. It had not concluded that a loss was probable or accrued a liability for the described Free File cases. In discontinued mortgage matters, two Homeward lawsuits were dismissed as untimely, but appeals were pending. The company cautions that unfavorable legal outcomes could be material.
- Guidance: The filing provides no numerical earnings or revenue guidance. Management’s liquidity assessment is conditional, and dividends and share repurchases are not assured at historical levels.
Most important facts for investors to verify
- How much FY2021 first-half revenue and expense reflects tax-season activity shifted from FY2020, and how that affects full-year comparability.
- Whether seasonal cash requirements, covenant limits, and debt service remain manageable as the next tax season progresses.
- The timing and amount of any CARES Act tax refund, and potential changes in tax reserves or examinations.
- Developments in Free File inquiries and litigation, the Homeward appeals, and other discontinued-mortgage contingencies.
- Whether the MetaBank relationship and financial products perform as expected, and whether dividends or share repurchases change.