Business context and reporting period
H&R Block, Inc. provides assisted and do-it-yourself tax preparation, related financial products, and small-business services through Wave. This unaudited Form 10-Q covers the quarter and nine months ended March 31, 2022 (Q3 FY2022); the filing’s fiscal year runs July 1 through June 30. The request metadata labels the period “2021 Q3,” but the filing itself is for Q3 FY2022.
Results are highly seasonal, with peak revenue generally from February through April. Comparisons with the prior nine-month period are affected by the 2019 tax-filing deadline extension into July 2020, which shifted revenue and expenses into that prior period.
Financial performance and liquidity
| Metric | Three months ended March 31, 2022 | Nine months ended March 31, 2022 |
|---|---|---|
| Revenue | $2,061.8 million, up 3.9% | $2,413.2 million, down 5.1% |
| Net income | $673.2 million, down 11.2% | $331.0 million, down 24.8% |
| Diluted EPS | $4.05, versus $4.08 | $1.89, versus $2.33 |
| Adjusted diluted EPS (non-GAAP) | $4.11, unchanged | $2.11, versus $2.56 |
| EBITDA from continuing operations (non-GAAP) | $921.7 million, up 3.5% | $542.7 million, down 21.5% |
| Operating cash flow | Not presented for the quarter | $373.1 million, versus $501.4 million |
Quarterly revenue growth was led by U.S. assisted tax preparation, up 7.8%, as higher average charges combined with higher return volume. Quarterly net income fell despite revenue growth, primarily as income tax expense rose to $186.9 million from $69.5 million; the prior-year quarter benefited from tax items related to net operating loss carrybacks. For the nine months, lower U.S. tax-return volumes and related preparation, royalty, and Refund Transfer revenue drove the decline; Wave revenue increased 31.6%.
Operating expenses were $1,176.4 million for the quarter, up 3.9%, and $1,979.9 million for the nine months, up 0.4%. Nine-month interest expense declined 11.4% to $69.7 million, mainly reflecting higher CLOC borrowings in the prior-year period. The nine-month effective tax rate was 8.1%, including a $52.6 million discrete tax benefit primarily from statute-of-limitations expirations; management cautions that interim-period effects of discrete tax items may differ from the full-year effect.
At March 31, 2022, cash and cash equivalents were $1,041.7 million, plus $135.3 million restricted cash. Debt was $1,985.9 million, including $499.4 million classified as current. The company had no CLOC borrowings; covenant limitations left approximately $427.5 million available to borrow. Stockholders’ equity was $44.9 million, compared with $388.1 million at June 30, 2021. Nine-month financing cash outflow was $707.5 million, including $555.2 million of share repurchases and $143.4 million of dividends. Capital expenditures were $52.7 million.
Material changes, outlook, and risks
- U.S. returns prepared fell 14.9% year over year for the nine-month period: assisted returns declined 11.4% and DIY returns 19.9%. Net average charges increased 6.0% for company-owned offices and 9.1% for franchise offices; online average charge decreased 5.3%.
- Management said existing capital sources were sufficient for operating, investing, and financing needs absent unexpected developments. The filing provides no specific earnings or revenue guidance. Dividend continuation and additional repurchases are not assured; $13.8 million remained under the then-current repurchase authorization, which ran through June 2022.
- On April 1, 2022, the company notified the trustee of redemption of its $500 million 5.500% notes due November 2022; the notes were redeemed May 2, 2022. This was subsequent to quarter-end.
- H&R Block launched the Spruce mobile banking platform in January 2022 and extended its program-management agreement with Meta through June 30, 2025.
- Risks include seasonal working-capital needs, credit and covenant constraints, uncertainty in consumer-credit regulation, tax examinations and unrecognized tax benefits, and litigation. The Free File matter brought by the California City Attorney had a November 2022 trial date; the company had not accrued a loss. The filing says the estimated aggregate range of reasonably possible litigation losses above accruals was not material where estimable, but some exposures cannot be estimated. Discontinued mortgage-business claims also remain; outcomes could be material if unfavorable.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. It reported no material changes to the risk factors or market risks described in prior filings.
Important facts for investors to verify
- How tax-season return volumes and average charges developed after March 31, particularly given the distorted prior-year comparison.
- Whether earnings trends persist after separating recurring operating performance from discrete tax benefits and other non-GAAP adjustments.
- Post-quarter cash and debt levels following redemption of the $500 million notes, and continued compliance with credit-facility covenants and available borrowing capacity.
- Developments in Free File litigation, discontinued mortgage claims, tax audits, and other contingencies, including exposures that the company cannot currently estimate.
- Progress and economics of Spruce and Wave, and whether growth in these offerings offsets pressure in tax-preparation volumes and financial products.