H&R Block, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended January 31, 2021. Figures below are in millions of dollars unless otherwise noted. H&R Block’s tax business is highly seasonal, with peak revenues generally in February through April; interim results are not indicative of full-year results.
Financial results and liquidity
- Quarter revenue: $308.2, down 40.6% from $519.2 a year earlier. The pretax loss was $283.5 (prior year: $177.0); net loss was $233.0 (prior year: $129.7), or $1.27 per diluted share (prior year: $0.67 loss).
- Nine-month revenue: $1,085.8, up 30.8% from $830.4. The pretax loss narrowed to $396.5 from $645.5; net loss narrowed to $365.5 from $467.9, or $1.94 per diluted share versus $2.36 loss.
- Operating costs and interest: Nine-month operating expenses were $1,401.7, down 1.3%. Interest expense increased 24.2% to $85.3, primarily due to higher credit-line borrowings and the 2030 notes.
- Cash flow: Nine-month operating cash use was $908.7, compared with $1,467.8 in the prior-year period. Investing used $74.1; financing used $1,442.8, largely reflecting repayment of credit-line borrowings. Cash, cash equivalents and restricted cash ended at $461.4.
- Debt and liquidity: Long-term debt and line borrowings totaled $2,369.6, including $880.0 drawn on the $2.0 billion revolving credit facility. Borrowing availability was limited by the debt-to-EBITDA covenant to approximately $520 million. The company reported compliance with facility covenants. Unrestricted cash was $280.2; current assets were $1,220.6 and current liabilities $691.5.
- Capital and equity: Dividends declared were $0.26 per share for the quarter and $0.78 for nine months. Nine-month dividends paid were $147.9; share repurchases totaled $150.1. Stockholders’ equity was a deficit of $534.6 at January 31, 2021.
Changes versus the prior comparable periods
- The COVID-19-related extension of the 2020 tax filing season shifted revenue and expenses into the first half of FY2021, boosting nine-month comparisons. Conversely, the delayed start to the 2021 tax season sharply reduced the January-quarter comparison.
- U.S. returns prepared in the quarter fell 39.3% to 1.86 million. Returns from January 1 through February 28, 2021 were down 15.0% year over year, which management attributed to the delayed tax-season start.
- The IRS began accepting 2020 individual returns on February 12, later than historically; $18.7 million of electronic-filing revenue was deferred at January 31 until returns could be filed.
- Fiscal 2021 nine-month revenue benefited from the extended prior tax season, including higher assisted and DIY preparation and international revenue. Wave revenue also rose, partly because the current period included two additional months versus the prior-year comparison.
Outlook, risks and unusual items
- Management said the year-to-date pretax loss is expected to be offset by fourth-quarter income in line with the business’s usual seasonality. It considered available capital sources sufficient for operating, investing and financing needs absent unexpected developments; no specific earnings guidance was provided in the supplied filing text.
- Management cited COVID-19, tax-filing and IRS-processing delays, Economic Impact Payment timing, office restrictions and changing customer behavior as sources of uncertainty. It cautioned that seasonal results through January and February may not indicate full tax-season results.
- The company issued $650 million of 3.875% senior notes due 2030 and used proceeds to repay $650 million of notes maturing in October 2020. It repaid a prior $2.0 billion credit-line draw in September 2020 and subsequently had $880 million outstanding at period-end.
- The CARES Act net operating loss carryback is expected to generate a refund of previously paid federal taxes; the carryback also affects the effective tax rate and may reopen the 2015 tax return to examination. The nine-month effective tax rate was 9.0%, versus 29.2% in the prior year.
- 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. Legacy discontinued mortgage claims also remain; two Homeward cases were dismissed on statute-of-limitations grounds, but appeals were pending. The company reported $5.5 million of total accrued litigation liabilities and said its estimable aggregate reasonably possible losses in excess of accruals were not material, while noting that some exposures cannot be estimated and adverse outcomes could be material.
- The company changed its U.S. financial-products bank provider to MetaBank in August 2020. At January 31, purchased participation interests in current-year Emerald Advance loans had a principal balance of $303.2 million. The company also disclosed guarantees, including one capped at $18.0 million and another with no stated maximum exposure; no amount was accrued under the latter.
Important facts for investors to verify
- Whether the delayed 2021 tax-season start and the $18.7 million deferred filing revenue translated into the expected fourth-quarter revenue and earnings recovery.
- Tax-return volumes, average charges and customer mix through the full tax season, given the sharply lower quarter volumes and the company’s seasonality.
- Credit-line covenant headroom, borrowing availability and liquidity needs during the seasonal cash-use period.
- Developments in Free File inquiries and litigation, the Homeward appeals, and other discontinued mortgage claims and guarantees.
- The realization and timing of CARES Act tax refunds, and changes in uncertain tax benefits, which were $233.7 million at January 31, 2021.