H&R Block, Inc. — Q2 FY2023 Form 10-Q
Business context and period: The filing covers the quarter and six months ended December 31, 2022. H&R Block provides assisted and DIY tax preparation, financial services, international tax services, and small-business solutions through Wave. Its business is highly seasonal, with peak revenue and cash generation typically in February–April; interim losses are therefore not indicative of full-year results. Amounts below are in U.S. dollars and millions unless noted.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2022 | Six months ended Dec. 31, 2022 |
|---|---|---|
| Revenue | $166.4; +4.8% year over year | $346.4; −1.4% year over year |
| Net loss from continuing operations | $220.9, compared with $189.1 loss | $388.2, compared with $339.0 loss |
| Net loss, including discontinued operations | $223.6, compared with $190.6 loss | $392.0, compared with $342.2 loss |
| Basic and diluted loss per share | $1.45, compared with $1.10 | $2.50, compared with $1.95 |
| Adjusted diluted loss per share (non-GAAP, continuing operations) | $1.37, compared with $1.02 | $2.36, compared with $1.80 |
| Operating cash flow | Not separately reported for the quarter | Cash used: $780.5, versus $913.6 |
| Investing cash flow | Not separately reported for the quarter | Cash used: $99.1, versus $57.4 |
| Financing cash flow | Not separately reported for the quarter | Cash provided: $128.8, versus $149.9 used |
- Revenue mix: For the six months, U.S. tax preparation and related services rose 10.4% to $177.3 million, while financial-services revenue fell 43.0% to $37.6 million. Emerald Card and Spruce revenue declined $29.0 million, primarily because the prior-year period benefited from monthly IRS Child Tax Credit deposits to Emerald Cards. Wave revenue increased 15.4% to $44.6 million.
- Expenses and earnings: Six-month operating expenses rose 4.4% to $838.7 million, exceeding revenue. Compensation and benefits increased $37.3 million; bad-debt expense increased $8.0 million, driven by Emerald Card losses and higher Emerald Advance volumes. Interest expense fell $11.1 million, mainly following repayment of $500 million of 5.500% notes in May 2022, partly offset by interest on credit-line borrowings.
- Balance sheet at Dec. 31: Cash and cash equivalents were $264.5 million, plus $27.7 million restricted cash. Current assets were $775.9 million and current liabilities $645.8 million. Long-term debt and line-of-credit borrowings totaled $2.068 billion, including $580 million drawn on the revolving credit facility. Stockholders’ equity was a deficit of $643.5 million.
- Debt and capital returns: The company’s committed revolving credit facility has $1.5 billion capacity and matures in June 2026; H&R Block said it was in compliance with its covenants and borrowings were not limited by the debt-to-EBITDA covenant at period end. Six-month dividends paid were $89.2 million. The company repurchased $350.1 million of shares at an average $42.86 per share; $900 million remained under the $1.25 billion authorization, effective through June 2025.
Material changes, outlook, and risks
- Management attributed higher assisted and DIY tax-preparation revenue to increased volumes and higher average charges. Wave growth reflected higher small-business payment-processing volumes. The prior-year financial-services comparison was affected by Child Tax Credit card activity.
- Cash used in operations improved year over year, primarily because of income-tax receivables received in the current period, partly offset by a larger net loss. Investing cash use increased mainly because business-acquisition payments rose to $39.8 million from $19.3 million.
- Management stated that existing capital sources were expected to be sufficient for operating, investing, and financing needs absent unexpected developments. The filing provides no specific earnings or revenue guidance. Management emphasized that seasonal operating losses and working-capital needs are typical before tax season.
- Litigation and contingencies: In the California Free File case, the court denied H&R Block’s summary-judgment motion on December 1, 2022; trial was scheduled for August 14, 2023. The company had not concluded a loss was probable and had recorded no related liability. It also disclosed discontinued mortgage-business indemnification and litigation exposures; some potential losses cannot currently be estimated. The aggregate reasonably possible loss estimate, where estimable and in excess of accruals, was described as not material.
- Other risks: The IRS began examining the company’s 2020 return and carryback claims in November 2022. Gross unrecognized tax benefits were $221.3 million; the company said approximately $34 million could decrease within 12 months. The CFPB Payday Rule’s status remained uncertain after an appellate ruling vacating it and a CFPB petition for Supreme Court review; management did not then expect a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
- The company received $12.1 million of employee-retention credits during the six-month period and recognized $3.2 million as an expense offset; it said future recognition depends on receipt and resolution of uncertainties.
Important facts for investors to verify
- Whether peak tax-season volumes, average charges, and margins support full-year performance, given the seasonality of interim results.
- Whether the sharp decline in Emerald Card and Spruce revenue and the increase in bad-debt expense persist during the tax season.
- Cash needs and borrowing levels through the seasonal working-capital cycle, including covenant compliance and revolving-credit availability.
- Progress and potential financial exposure from the Free File litigation, discontinued mortgage matters, tax examinations, and employee-retention-credit uncertainties.
- Capital allocation relative to liquidity: continued share repurchases, dividends, and acquisitions while the company reports a stockholders’ equity deficit.