H&R Block, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended September 30, 2022, compared with the three months ended September 30, 2021. H&R Block provides assisted and DIY tax preparation, financial services, international tax services, and small-business solutions including Wave. Results are highly seasonal; peak revenue is typically February through April, so this quarter’s results are not indicative of the full year.
Financial results
| Metric | Q1 FY2023 | Prior period |
|---|---|---|
| Revenue | $180.0 million | $192.6 million |
| Operating expenses | $389.1 million | $367.4 million |
| Net loss from continuing operations | $167.4 million | $149.9 million |
| Net loss | $168.4 million | $151.6 million |
| Diluted loss per share | $1.06 | $0.85 |
| Cash used in operating activities | $321.7 million | $312.6 million |
- Revenue declined 6.6%. The largest decrease was in Emerald Card and Spruce revenue, down $16.6 million, primarily because Child Tax Credits had been loaded monthly to Emerald Cards in the prior-year period. Wave revenue rose 18.3% to $22.6 million, and U.S. assisted tax preparation revenue increased 8.0% to $36.3 million.
- Operating expenses increased 5.9%, led by higher wages, benefits and technology costs. The operating loss was $209.1 million, compared with $174.8 million; the implied operating margin was approximately negative 116% versus negative 91%.
- Non-GAAP EBITDA from continuing operations was a loss of $171.9 million, versus a loss of $138.8 million. Adjusted diluted loss per share was $0.99, versus $0.78.
- Interest expense fell $7.0 million to $15.8 million, mainly following repayment of $500 million of 5.500% Senior Notes in May 2022. The effective tax rate was 24.4%, versus 24.0%.
- Cash, cash equivalents and restricted cash totaled $431.4 million at quarter-end, including $322.8 million of unrestricted cash. Cash declined $619.3 million during the quarter. Current assets were $724.4 million and current liabilities were $790.2 million.
- Long-term debt was $1.487 billion. No amounts were drawn on the $1.5 billion revolving credit facility; availability was approximately $1.47 billion, limited by the debt-to-EBITDA covenant. The company reported compliance with its credit-facility requirements.
- Cash used in investing activities was $37.4 million, including $16.5 million for acquisitions and $16.2 million in capital expenditures. Cash used in financing was $246.9 million, including $43.1 million in dividends. The company repurchased $219.8 million of shares during the quarter; cash-flow statement repurchases were $202.8 million.
Changes, outlook and notable matters
- The net loss widened by $16.8 million year over year, as lower revenue and higher operating costs outweighed reduced interest expense and higher other income.
- Management stated that seasonal working-capital needs normally use cash from May through January and that, absent unexpected developments, available capital sources were sufficient for operating, investing and financing needs. No specific revenue or earnings guidance was provided in the filing.
- The board approved a $1.25 billion share-repurchase program in August 2022, effective through June 2025. Approximately $1.03 billion remained authorized at September 30, 2022. The company said it intends to continue paying dividends, but gave no assurance that dividends or repurchases will continue at current levels.
- The IRS notified the company on October 4, 2022 that it plans to audit the 2020 federal tax return and related carryback claims. Gross unrecognized tax benefits were $231.7 million; management said approximately $33.1 million could reasonably possibly decrease within 12 months.
- The company described pending Free File litigation and potential claims related to discontinued mortgage operations. It had not accrued liabilities for those matters because losses were not concluded to be probable; the estimated aggregate range of reasonably possible litigation losses in excess of accruals was not material where estimable. Outcomes could nevertheless be material, and some exposures could not be estimated.
- The CFPB Payday Rule was vacated by an appellate court on October 19, 2022, but further challenge was possible. Management was uncertain whether, when or in what form the rule might take effect and did not expect a material impact at that time.
- Foreign-exchange movements reduced cash by $13.4 million during the quarter. Goodwill declined to $746.7 million, primarily reflecting disposals and foreign-currency changes; no impairment was recorded.
Important facts for investors to verify
- Whether tax-season volumes, pricing and revenue recover from the year-over-year declines, and whether elevated compensation and technology costs persist.
- Liquidity through the seasonal low-cash period, including the effect of working-capital outflows and the covenant-limited availability of the credit facility.
- The pace and funding of share repurchases and dividends relative to cash needs and debt covenants.
- Developments in the IRS audit, unrecognized tax benefits, Free File litigation, discontinued-mortgage contingencies and CFPB rulemaking.
- How foreign exchange, acquisitions and Wave’s growth affect future revenue, cash flow and goodwill or intangible-asset valuations.