H&R BLOCK INC annual report, FY2020

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H&R Block, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended April 30, 2020. This is an annual report, not a 2019 Q4 filing; where relevant, fourth-quarter figures below refer to the quarter ended April 30, 2020. Amounts are U.S. dollars.

Business context and reporting period

H&R Block provides assisted, do-it-yourself (DIY), and virtual tax preparation, related financial products, and small-business services. It reports one continuing-operations segment. The business is highly seasonal, with most revenue normally earned from February through April.

COVID-19 tax-deadline extensions and office restrictions disrupted the 2020 filing season. U.S. individual filing deadlines moved to July 15, 2020, and Canada’s to June 1, 2020. Management said some revenue and expenses expected in fiscal 2020 would shift into fiscal 2021, but the company might not recover all lost returns.

Financial results and liquidity

  • Revenue: $2.640 billion, down $455.2 million (14.7%) from $3.095 billion. The decline was primarily attributed to the filing-season extension and lower tax-return volumes.
  • Earnings: Continuing-operations net income was $6.2 million, versus $445.3 million; diluted continuing-operations EPS was $0.03, versus $2.15. The company reported a $7.5 million consolidated net loss, including a $13.7 million loss from discontinued operations. Pretax continuing-operations loss was $3.4 million.
  • Operating costs and margins: Operating expenses rose 3.4% to $2.563 billion, including a $106.0 million Wave goodwill impairment. Adjusted EBITDA was $368.3 million, down 53.9%; adjusted EBITDA margin was 14.0%, versus 25.8%. These are non-GAAP measures.
  • Cash flow: Operating cash flow was $109.0 million, down from $606.5 million. Investing cash outflow was $470.2 million, including acquisitions; financing cash inflow was $1.532 billion, primarily reflecting the credit-line draw. Capital expenditures were $81.7 million.
  • Cash and debt: Unrestricted cash was $2.662 billion at year-end ($2.873 billion including restricted cash). Long-term debt and line-of-credit borrowings totaled $3.495 billion, including the full $2.0 billion committed line of credit (CLOC) draw; $649.4 million of debt was classified as current, including $650 million of Senior Notes due October 2020.
  • Liquidity and covenant: H&R Block breached its CLOC debt-to-EBITDA covenant as of April 30, 2020; lenders waived the breach on May 22, 2020. Management said available capital was sufficient through the next tax season and expected covenant compliance in each fiscal 2021 quarter. The company was evaluating refinancing options for the October 2020 notes.
  • Shareholder returns: Dividends were $1.04 per share for the year ($204.9 million paid). The company repurchased $246.8 million of shares; $751.8 million of authorization remained through June 2022. Future dividends and repurchases are not assured.

Material changes versus the prior comparable period

  • Worldwide tax returns prepared fell 14.0% to 20.3 million; U.S. returns fell 13.2% to 17.6 million. The filing cautions that fiscal 2020 volumes cover only a partial filing season and are not directly comparable with prior years.
  • Revenue declines included U.S. assisted preparation down 17.5%, U.S. royalties down 20.6%, U.S. DIY down 20.1%, and international revenue down 18.4%. Wave contributed $36.7 million of revenue after its acquisition.
  • Operating expenses increased despite lower compensation and marketing costs, due in part to the Wave impairment, higher credit-card and bank charges, and increased legal and consulting costs.
  • Interest expense rose 10.4% to $96.1 million. Total assets increased to $5.112 billion from $3.300 billion, while stockholders’ equity declined to $71.0 million from $541.5 million.
  • H&R Block acquired Wave for $408.4 million in June 2019, funded with cash. In response to COVID-19 effects on small businesses, it recorded a $106.0 million goodwill impairment; $169.8 million of Wave goodwill remained at year-end.

For the fourth quarter ended April 30, 2020, revenue was $1.809 billion versus $2.332 billion a year earlier; continuing-operations net income was $463.5 million versus $884.8 million. The filing attributes seasonality and COVID-19 deadline changes as important comparability factors.

Outlook, risks, contingencies, and unusual items

  • Management provided no specific fiscal 2021 revenue or earnings guidance in the supplied filing text. It anticipated elevated fiscal 2021 interest expense from the CLOC borrowing and additional first-quarter staffing, office hours, and marketing as the tax season continued.
  • Key risks include further COVID-19 disruption, changes in consumer behavior toward DIY or virtual services, competition and free tax-preparation offerings, seasonal operating demands, and the possibility of future CLOC covenant breaches or difficulty refinancing debt.
  • Wave’s small-business revenue and valuation depend on economic recovery; management warned that further goodwill impairment could occur if the market does not rebound as expected.
  • H&R Block announced its intent to terminate its Axos Bank agreement on or after July 1, 2020, and signed a non-binding letter of intent with MetaBank for a potential replacement financial-products program.
  • The company disclosed Free File-related lawsuits and government inquiries. It had not concluded a loss was probable or accrued liabilities for the described Free File matters. It also disclosed legacy Sand Canyon mortgage litigation and indemnification/contribution claims; no liability was accrued for those claims, which could nevertheless be material if adverse outcomes occur.
  • Lease accounting adoption added $494.8 million of operating lease assets and $508.1 million of lease liabilities to the balance sheet. The auditor issued unqualified opinions on the financial statements and internal controls; Wave goodwill impairment, uncertain tax positions, and legacy mortgage indemnification claims were identified as critical audit matters.

Important facts for investors to verify

  • Progress on refinancing the $650 million October 2020 notes, repayment of the $2.0 billion CLOC draw, and compliance with borrowing covenants.
  • How much deferred tax-season activity shifted into fiscal 2021 and whether lost client volumes were recovered.
  • Wave’s subsequent revenue performance, small-business customer recovery, and remaining goodwill impairment exposure.
  • Developments in Free File litigation and inquiries, and the potential exposure from Sand Canyon claims and guarantees.
  • Whether the planned transition from Axos to a new financial-services partner proceeds, and any effects on products, revenue, or client access.