H&R Block, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended July 31, 2018. H&R Block provides assisted and do-it-yourself tax preparation and related financial products in the U.S. and internationally. Results are highly seasonal; peak revenue is generally February through April, so this quarter’s results are not indicative of full-year performance. Unless noted, figures below are in millions of dollars.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $145.2 | $137.8 | +5.4% |
| Operating expenses | $327.3 | $323.0 | +1.3% |
| Loss before tax benefit | $(198.8) | $(205.2) | Loss narrowed $6.5 |
| Income tax benefit | $50.0 | $77.4 | Down $27.4 |
| Net loss from continuing operations | $(148.8) | $(127.8) | Loss widened $21.0 |
| Net loss, including discontinued operations | $(152.7) | $(130.6) | Loss widened $22.1 |
| Diluted loss per share | $(0.74) | $(0.63) | Worsened $0.11 |
| EBITDA from continuing operations, non-GAAP | $(137.1) | $(140.3) | Improved $3.2 |
Revenue growth reflected higher U.S. assisted tax preparation fees (+3.8%), Peace of Mind plan revenue (+14.5%) and Tax Identity Shield revenue ($4.7 versus $0.3). Management attributed changes in the latter two products primarily to claims-pattern and product-feature effects on revenue recognition. Offsetting declines included international revenue (−3.1%), DIY tax preparation (−13.8%), Refund Transfer revenue (−49.4%) and Emerald Card revenue (−4.9%).
Operating expenses rose mainly with wages, benefits, and software and IT maintenance costs. Bad-debt expense was a net benefit of $0.9 million, versus $2.5 million of expense a year earlier, primarily reflecting recoveries on Refund Transfer receivables. The lower tax benefit, which management attributed primarily to the U.S. corporate tax-rate reduction under the Tax Legislation, more than offset the improvement in pretax loss.
Cash flow, balance sheet and liquidity
- Operating cash use was $375.6 million, compared with $409.1 million in the prior-year quarter. Investing cash use was $6.6 million, versus $13.0 million.
- Financing cash use was $169.9 million, largely reflecting $101.7 million of share repurchases and $52.1 million of dividends paid. Cash, cash equivalents and restricted cash decreased $553.2 million during the quarter to $1.110 billion.
- At July 31, unrestricted cash and cash equivalents were $979.1 million; restricted cash was $131.4 million. Long-term debt was $1.495 billion, plus $1.0 million current portion. Senior notes comprise the principal debt; the company reported no revolver borrowings.
- The $2.0 billion unsecured revolving credit facility had approximately $1.7 billion available, limited by the debt-to-EBITDA covenant. The company reported compliance with facility covenants. Management said existing capital sources were sufficient for operating, investing and financing needs absent unexpected developments.
- Total assets were $2.605 billion and stockholders’ equity was $192.0 million. Current assets were $1.282 billion and current liabilities were $564.0 million.
- Quarterly dividend declared per share was $0.25, up from $0.24. The company repurchased and retired 4.2 million shares for $97.1 million, averaging $23.27 per share.
Material changes, outlook and notable items
- Revenue recognition standard adoption on May 1, 2018, using the full retrospective method, had no significant financial-statement impact. Adoption of the intra-entity asset transfer tax standard increased opening retained earnings and deferred tax assets by $101.0 million.
- Tax effects of the Tax Legislation remained provisional. Management recorded immaterial adjustments in the quarter and said final estimates could change, potentially materially, as analysis and regulatory guidance develop.
- The company expects seasonal operating cash needs from May through January and typically relies on cash from the prior tax season and borrowing capacity. It provided no specific earnings or revenue guidance in this filing.
- Operating leases were not yet recognized under the new lease standard, effective for the company May 1, 2019. The filing said adoption could have a significant impact; future minimum operating lease commitments were $820.9 million as of April 30, 2018.
- Unrecognized tax benefits totaled $204.5 million. The company said approximately $17.6 million could reasonably possibly decline within 12 months; $10.0 million was expected to be cash-settled within that period.
- Discontinued mortgage-business litigation and indemnification claims remain uncertain. No liability was accrued for the described representation-and-warranty or indemnification claims where management had not concluded loss was probable. The company said the aggregate estimated reasonably possible loss above accrued amounts was not material, while noting some exposures could not be estimated and unfavorable outcomes could be substantial.
- Moody’s long-term rating remained Baa3 but its outlook changed from stable at April 30 to negative at July 31; S&P’s BBB rating and stable outlook were unchanged.
Key facts for investors to verify
- Whether off-season revenue trends and product-related revenue-recognition timing translate into performance during the core February–April tax season.
- How the Tax Legislation’s final interpretation and tax accounting affect the effective tax rate, deferred taxes and unrecognized tax benefits.
- Liquidity and covenant headroom through the seasonal cash-use period, including the effect of the negative Moody’s outlook and the debt-to-EBITDA limit on revolver availability.
- Future share repurchases and dividends relative to cash needs, debt obligations and the remaining authorization under the repurchase program.
- Developments in discontinued mortgage litigation, other contingencies, and the expected balance-sheet impact of lease-standard adoption.