H&R Block, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended January 31, 2018; comparative periods ended January 31, 2017. Amounts below are in U.S. dollars. H&R Block provides assisted and do-it-yourself tax preparation and related financial products. Its business is highly seasonal, with most revenue and cash flow typically generated from February through April.
Financial results and liquidity
| Metric | Three months ended Jan. 31, 2018 | Nine months ended Jan. 31, 2018 |
|---|---|---|
| Revenue | $488.4 million, up 8.1% | $767.1 million, up 8.3% |
| Operating expenses | $585.7 million, up 1.6% | $1,265.5 million, up 3.2% |
| Operating loss | $97.3 million | $498.4 million |
| Net loss | $245.6 million; $1.18 per diluted share | $529.8 million; $2.54 per diluted share |
| EBITDA from continuing operations, non-GAAP | $(47.8) million | $(358.3) million |
| Cash used in operating activities | Not presented for the quarter | $1,357.7 million |
Revenue growth reflected higher assisted-return volumes and average charges, growth in online DIY returns, and increased fees or volumes from Refund Transfers, Emerald Card and Peace of Mind plans. For the nine-month period, U.S. assisted returns increased 3.8% and total U.S. returns increased 4.3%. Results remain seasonally weighted to the fourth quarter.
At January 31, 2018, cash and cash equivalents were $187.4 million, including $94.4 million held by foreign subsidiaries; restricted cash was an additional $83.0 million. Long-term debt and line-of-credit borrowings totaled $2.284 billion, including $790 million drawn on the $2.0 billion revolving facility. The company reported compliance with its credit covenants. Stockholders’ equity was a deficit of $698.1 million.
For the nine months, investing activities used $122.6 million, including $77.9 million in capital expenditures and $39.4 million for acquisitions. Financing activities provided $631.3 million, including $830 million in credit-facility proceeds; dividends paid were $150.3 million. Cash, cash equivalents and restricted cash decreased by $847.1 million to $270.4 million.
Changes versus the prior comparable period
- Quarterly revenue rose $36.5 million, while operating expenses increased $9.0 million. The operating loss narrowed from $124.8 million to $97.3 million.
- Quarterly net loss widened to $245.6 million from $104.5 million, principally reflecting a $122.1 million tax expense versus a $49.4 million tax benefit a year earlier. The company recorded $149.4 million of tax expense related to the Tax Cuts and Jobs Act in the quarter.
- For nine months, revenue rose $58.7 million and operating loss narrowed by $19.1 million, but net loss increased to $529.8 million from $374.4 million. The income-tax benefit fell to $43.2 million from $217.0 million, with the Tax Act and seasonal tax-rate effects driving the change.
- Nine-month operating cash use improved by $52.2 million year over year. Investing cash flow shifted from $64.7 million provided to $122.6 million used, partly because the prior-year period included proceeds from mortgage loans and real estate owned.
- Long-term debt and line-of-credit borrowings were $2.284 billion, down from $2.593 billion a year earlier but up from $1.493 billion at April 30, 2017. The company extended the revolving facility’s maturity to September 2022.
Outlook, risks and unusual items
- Management estimated a fiscal 2018 annual effective tax rate of approximately 6%–9%. Tax Act accounting amounts were provisional and could change as the company completes its analysis and receives additional guidance.
- Management said existing capital sources were expected to meet operating, investing and financing needs absent unexpected developments. The filing does not provide a revenue or earnings forecast. Management cautioned that interim results are not indicative of full-year results because of seasonality.
- The Tax Act reduced the U.S. federal corporate tax rate from 35% to 21%. The company said individual tax-law changes were not expected to have a material fiscal 2018 impact, but their effects in fiscal 2019 and beyond could be material.
- Potential regulation of consumer credit products is a risk: depending on the CFPB rulemaking outcome, the Payday Rule could materially affect the Emerald Advance product. The prepaid-card rule’s effective date was extended to April 1, 2019; management did not then expect a material adverse effect.
- H&R Block faces legacy litigation and indemnification or contribution claims related to its discontinued mortgage business. It had $2.5 million of accrued liabilities for the litigation matters discussed, and said the aggregate reasonably possible losses above accruals were not material where estimable; some exposures could not be estimated. The company stated unfavorable outcomes could be material.
- The company purchased 90% participation interests in partner-originated Emerald Advance loans; the current-year purchased principal balance was $345.0 million. It also provided limited guarantees of up to $10 million for certain pre-e-filing Refund Advance losses and up to $57 million for specified incremental losses.
Important facts for investors to verify
- Whether the fourth-quarter tax season delivers the expected seasonal revenue and cash generation, and how return volumes and average charges develop.
- How final Tax Act interpretations affect the provisional tax estimates, the fiscal 2018 effective tax rate and future periods.
- Credit-facility borrowing, covenant headroom and liquidity through the seasonal cash-use period; distinguish unrestricted from restricted and foreign-held cash.
- Emerald Advance credit performance, bad-debt trends, Refund Advance guarantee exposure and the eventual impact of CFPB rules.
- Developments in discontinued-mortgage litigation and indemnification claims, including exposures the company said it could not reasonably estimate.