H&R Block, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended September 30, 2021. The company changed its fiscal year-end to June 30; FY2022 began July 1, 2021. Results are unaudited. H&R Block provides assisted and DIY tax preparation, related financial products, and small-business services through Wave. Its business is highly seasonal, with peak revenues typically in February through April.
Financial results and liquidity
| Metric | Q1 FY2022 | Prior-year quarter |
|---|---|---|
| Revenue | $192.6 million | $417.3 million |
| Operating expenses | $367.4 million | $418.1 million |
| Loss from continuing operations before taxes | $197.3 million | $32.9 million |
| Income tax benefit / (expense) | $47.4 million benefit | $28.0 million expense |
| Net loss from continuing operations | $149.9 million | $60.9 million |
| Net loss, including discontinued operations | $151.6 million | $62.3 million |
| Diluted loss per share | $0.85 | $0.32 |
| EBITDA from continuing operations (non-GAAP) | $(138.8) million | $40.0 million |
Revenue less operating expenses implies an operating loss of approximately $174.8 million, or a negative operating margin of approximately 90.8%; these are calculated from reported figures, not separately presented measures. Adjusted diluted loss per share, a non-GAAP measure, was $0.78 versus $0.24. The filing does not provide a formal revenue or earnings outlook.
- Cash flow: Operating activities used $312.6 million, investing activities used $19.5 million, and financing activities used $217.3 million. Cash, cash equivalents, and restricted cash decreased $553.4 million to $1.031 billion. Capital expenditures were $15.6 million.
- Cash and debt: Unrestricted cash was $891.7 million at September 30. Long-term debt was $1.985 billion, with no current portion reported. The $1.5 billion revolving credit facility had no borrowings; covenant limitations left approximately $1.2 billion available. The company reported compliance with its credit facility covenants.
- Balance sheet: Total assets were $3.368 billion and total liabilities were $3.352 billion; stockholders’ equity was $15.5 million, down from $388.1 million at June 30. Current assets were $1.496 billion and current liabilities $753.0 million.
- Capital returns: The company repurchased $165.8 million of common stock and paid $49.0 million in dividends. Remaining share repurchase authorization was approximately $398.1 million through June 2022. The quarterly dividend declared was $0.27 per share.
Changes versus the prior-year quarter
- Revenue fell $224.7 million, or 53.8%, and pretax loss widened by $164.4 million. The filing attributes the comparison primarily to the prior-year extension of the 2019 U.S. individual tax filing deadline to July 15, 2020, which shifted tax-season activity into that quarter. The 2021 filing deadline did not extend into the current quarter.
- U.S. assisted and DIY return volumes were substantially lower: total U.S. returns were 285,000 versus 2.220 million. Field wages fell $36.5 million as volumes declined; total operating expenses fell only 12.1%, less than revenue.
- Emerald Card revenue rose 127.2% to $28.3 million, attributed to higher activity after monthly Child Tax Credit payments were loaded to cards. Wave revenue increased 39.3% to $19.1 million on higher small-business payment-processing volumes. International revenue was broadly unchanged at $58.3 million.
- Cash used in operations increased to $312.6 million from $98.6 million, primarily reflecting higher payments on accrued liabilities and the larger net loss. Financing cash use was much lower than the prior-year $2.147 billion, which included repayment of a $2.0 billion credit-line draw.
Outlook, risks, and notable items
- Management stated that existing capital sources were expected to be sufficient for operating, investing, and financing needs absent unexpected developments. The company expects its first-quarter pretax loss to be offset by income in the third and fourth quarters, consistent with its seasonal pattern; interim results are not indicative of full-year results.
- The effective tax rate was 24.0%, versus negative 84.9% a year earlier, with prior-year discrete tax items driving much of the difference. The company had $264.3 million of gross unrecognized tax benefits and said approximately $67.9 million could reasonably possibly decrease within 12 months.
- Free File-related litigation and governmental inquiries remain ongoing. The company had not concluded that losses in the described Free File matters were probable and had not accrued liabilities for them. A California city attorney case has a November 2022 trial date; other claims have varying procedural status.
- Discontinued mortgage-business claims include appealed dismissals in two Homeward cases. The company has not accrued liabilities for those matters; it warns that an unfavorable outcome or claims against the parent could have a material adverse effect. Total accrued litigation liabilities were $1.8 million; the estimated aggregate reasonably possible losses in excess of accruals, where estimable, were described as not material.
- The timing and form of the CFPB Payday Rule remain uncertain. Management did not currently expect a material adverse effect on Emerald Advance or the company, but said it would continue monitoring developments.
- The company applied for employee-retention tax credits related to 2020; any benefit is uncertain and will be recorded only upon receipt and resolution of uncertainties. Management also noted that actual results may differ from estimates for contingencies, taxes, and other matters.
Important facts for investors to verify
- Separate the unusually high prior-year comparison from underlying operating trends, and monitor tax-preparation volumes and pricing as the next tax season progresses.
- Assess seasonal cash needs against the current cash balance, operating cash burn, debt maturities, and the covenant-limited availability of the revolving facility.
- Track the pace of share repurchases and dividends relative to cash generation, particularly given the substantial decline in reported stockholders’ equity.
- Follow Free File litigation, discontinued mortgage claims, tax examinations, and developments in the CFPB Payday Rule; potential outcomes and exposure may change.
- Review non-GAAP measures alongside GAAP results and the company’s reconciliation, and confirm any future guidance in subsequent filings.