H&R Block, Inc. — Q2 FY2018 Form 10-Q
Reporting period: Quarter and six months ended October 31, 2017. The company provides assisted and do-it-yourself tax preparation and related financial services. Results are highly seasonal, with peak revenue typically in February–April; interim losses are not indicative of full-year results. Financial amounts below are in millions except per-share data.
Financial results and liquidity
| Metric | Three months ended Oct. 31, 2017 | Six months ended Oct. 31, 2017 |
|---|---|---|
| Revenue | $140.9 (+7.3% year over year) | $278.7 (+8.6%) |
| Operating expenses | $356.9 | $679.8 |
| Loss from continuing operations | $148.3; $(0.71) per share | $276.1; $(1.33) per share |
| Net loss, including discontinued operations | $153.6; $(0.74) per share | $284.1; $(1.36) per share |
| EBITDA from continuing operations (non-GAAP) | $(170.2) | $(310.6) |
- Six-month revenue growth reflected higher U.S. assisted and DIY tax-preparation revenue, international volumes and favorable Australian exchange rates, Emerald Card revenue, and Peace of Mind (POM) plan revenue.
- Expenses rose year over year: six-month operating costs increased 4.7%, including higher wages, occupancy, bad-debt expense and legal fees. The six-month net loss increased 5.3% year over year.
- Cash used in operating activities was $648.5, versus $720.4 in the prior-year period. Investing activities used $79.4; financing activities used $106.9. Cash, cash equivalents and restricted cash fell by $835.9 to $281.7.
- At October 31, cash and cash equivalents were $181.0, including $80.2 held by foreign subsidiaries. Long-term debt and line-of-credit borrowings were $1,493.8; stockholders’ equity was a deficit of $412.8.
- The $2.0 billion unsecured revolving credit facility matures in September 2022. No balance was outstanding at October 31; covenant-limited availability was approximately $1.5 billion. The company began seasonal borrowing in November and reported compliance with covenants at quarter-end.
Changes versus the prior comparable period
- For the quarter, revenue increased $9.5, but net loss widened by $7.3. For the six months, revenue increased $22.1 while net loss widened by $14.2.
- Six-month cash used in operations improved by $71.9, primarily reflecting prior-year representation-and-warranty settlement payments and collections on receivables. Investing cash use increased, partly because the prior year included proceeds from mortgage-loan assets and current-year capital expenditures were higher.
- Financing cash flow shifted from $121.4 provided in the prior-year six-month period to $106.9 used, primarily because the prior period included credit-facility borrowings and share repurchases.
- Six-month dividends paid were $100.1, compared with $96.0. The company did not repurchase shares for retirement during the period; limited shares were acquired to satisfy employee tax-withholding obligations.
Outlook, commentary, risks and unusual items
- Management said existing capital sources were sufficient for operating, investing and financing needs absent unexpected developments. It expects the seasonal fourth-quarter income period to offset the year-to-date pretax loss; no specific full-year financial guidance is provided.
- The company renewed its revolving credit agreement, extending maturity by one year. Covenant limits include maximum debt-to-EBITDA ratios of 3.50x for specified quarters and 4.50x for the January quarter, and minimum interest coverage of 2.50x.
- Discontinued mortgage-business litigation and indemnification or contribution claims remain a material uncertainty. The company had $2.5 million accrued for matters described in its litigation note and said the estimated aggregate reasonably possible loss above accruals was not material, while noting some exposures could not be estimated. Potential claims involving SCC could have a material adverse effect if the company’s legal position were not upheld.
- Tax reform proposals were under consideration and their final terms and effects were unclear. The company was assessing a CFPB rule affecting certain consumer-credit products. The previously issued CFPB arbitration rule was disapproved by Congress and has no force or effect.
- Other notable items: six-month bad-debt expense rose by $3.0, primarily due to Canadian Instant Cash Back write-offs; legal fees and settlements increased by $3.2. A discrete tax benefit of $9.6 was recorded in the six-month period. The company adopted new restricted-cash and stock-compensation accounting guidance.
Important facts for investors to verify
- Whether peak tax-season performance and cash generation support management’s expectation that seasonal fourth-quarter income offsets the interim loss.
- Seasonal borrowing levels, covenant headroom and liquidity availability under the revolving credit facility.
- Developments in SCC mortgage litigation, indemnification claims and other contingencies, including exposures that cannot yet be estimated.
- Trends in operating costs, Canadian receivable write-offs, POM claims assumptions and the sustainability of revenue growth.
- The effects of final tax legislation and consumer-credit regulation on financial results and operations.