H&R Block, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended July 31, 2019. Unaudited results; dollar amounts below are in millions unless otherwise noted. H&R Block provides assisted, DIY and virtual tax-preparation services, related financial products, and small-business financial solutions. Its business is highly seasonal, with peak revenue typically in February through April, so this quarter is not indicative of full-year results.
Financial results and liquidity
- Revenue: $150.4, up 3.6% from $145.2. Growth included higher U.S. assisted preparation, DIY and international revenue, plus $3.6 from Wave, acquired June 28. Peace of Mind revenue fell $3.7, principally due to changes in the claims pattern used for revenue recognition.
- Expenses and profit: Operating expenses rose 5.6% to $345.5, faster than revenue. Pretax loss widened to $207.1 from $198.8. Income tax benefit was $61.4 versus $50.0; continuing-operations net loss improved to $145.7 from $148.8. Including discontinued operations, net loss was $150.2 versus $152.7. Basic and diluted loss per share remained $0.74. The derived operating loss was approximately $195.2, or 129.8% of revenue.
- Non-GAAP measure: EBITDA from continuing operations was negative $147.4, compared with negative $137.1 a year earlier. The filing cautions that this non-GAAP measure is not a substitute for GAAP results.
- Cash flow: Operating cash outflow was $483.8, compared with $375.6, mainly reflecting the timing of payments for payables, accrued expenses and payroll. Investing cash outflow was $358.8, including $394.4 for acquisitions. Financing cash outflow was $100.2, including $52.5 of dividends and $36.5 of share repurchases. Cash, cash equivalents and restricted cash fell $942.3 to $765.5.
- Balance sheet and debt: At July 31, cash and cash equivalents were $607.7, including $157.8 restricted; current assets were $946.7 and current liabilities $733.0. Long-term debt was $1.493 billion, largely unchanged year over year. There were no borrowings under the $2.0 billion revolving credit facility; covenant limitations left approximately $1.1 billion available. The company reported compliance with facility covenants.
- Shareholder returns: Quarterly dividend declared was $0.26 per share, up from $0.25. The share-repurchase program had $954.4 remaining authorization and was extended through June 2022.
Material changes and notable items
- Wave acquisition: Completed for $407.0 in cash. Wave provides financial software and services for small businesses. Its post-acquisition period contributed $3.6 of revenue and a $5.3 pretax loss. The provisional purchase allocation included $303.4 of goodwill and $87.8 of identifiable intangible assets; valuation and allocation were not final.
- Leases: Adoption of the new lease standard on May 1, 2019 resulted in recognition of $486.1 of operating lease right-of-use assets and $479.2 of lease liabilities. Management said adoption did not materially affect the income statement or cash flows.
- Cost trends: Compensation and benefits increased 11.1%; technology-related expenses rose 48.0%, reflecting investment in cloud-based technology. These increases contributed to operating expenses growing faster than revenue.
Outlook, risks and contingencies
- Management gave no specific numerical earnings or revenue guidance in this filing. It said existing capital sources were sufficient for operating, investing and financing needs absent unexpected developments, while noting the seasonal need to fund off-season losses and working capital.
- H&R Block faces California litigation and governmental inquiries concerning its participation in the IRS Free File Program. The company had not concluded a loss was probable and had not accrued a related liability.
- Discontinued mortgage operations remain subject to legacy litigation and indemnification or contribution claims. The company had not accrued liabilities for the described claims where loss was not considered probable; it cautioned that unfavorable outcomes could be material. The estimated aggregate range of reasonably possible losses in excess of accruals, where estimable, was described as not material, but does not represent maximum exposure.
- Gross unrecognized tax benefits were $179.2. The company considered a decrease of approximately $24.3 reasonably possible within the next twelve months, mainly due to expiring statutes of limitation and anticipated tax matter closures.
- Management cited seasonality, competitive, operational, regulatory and economic factors as risks to forward-looking expectations. It reported no material changes in risk factors or market risks from its most recent Form 10-K.
Key facts for investors to verify
- Whether Wave’s final purchase-price allocation, acquired asset values and operating performance differ materially from the provisional estimates.
- Whether off-season operating cash use, working-capital timing and cash balances develop as management expects.
- Whether the company maintains revolving-credit covenant compliance and access to the stated borrowing capacity.
- Developments in Free File litigation and legacy mortgage claims, including any change in the probability or estimability of losses.
- How expense growth, especially compensation and technology spending, compares with revenue growth in subsequent quarters.