H&R BLOCK INC annual report, FY2017

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H&R Block, Inc. — FY2017 Form 10-K

Reporting period: Fiscal year ended April 30, 2017. This is an annual filing; it does not provide a standalone fiscal fourth-quarter income statement.

Business context

H&R Block provides assisted and do-it-yourself tax preparation, primarily in the U.S., Canada, and Australia, alongside related financial products and services. The company reports one continuing-operations segment. Its business is highly seasonal, with most revenue and cash generation occurring from February through April.

Financial results and liquidity

  • Revenue: $3.036 billion, down 0.1% from $3.038 billion in FY2016.
  • Profit: Continuing-operations net income was $420.9 million, up 9.7%; consolidated net income was $408.9 million, up 9.3%. Diluted EPS from continuing operations increased 28.1% to $1.96, supported partly by a 14.6% decline in diluted weighted-average shares.
  • Margins and expenses: Pretax income rose 10.5% to $629.3 million, and pretax margin increased to 20.7% from 18.7%. Operating expenses declined 3.5% to $2.320 billion. EBITDA from continuing operations, a non-GAAP measure, rose 11.4% to $904.4 million.
  • Cash flow: Operating cash flow was $550.1 million, compared with $532.4 million in FY2016. Investing activities provided $99.3 million; financing activities used $530.4 million. Cash and cash equivalents ended the year at $1.011 billion.
  • Debt and liquidity: Long-term debt, including current portion, was $1.494 billion. The $2.0 billion revolving credit facility had no balance outstanding; availability was approximately $1.6 billion after covenant limits. The company reported compliance with its covenants.
  • Capital returns: Dividends paid totaled $187.1 million, and the company repurchased $317.0 million of shares at an average $22.61 per share. Stockholders’ equity was a deficit of $60.9 million at year-end.

Material changes versus FY2016

  • Worldwide tax returns prepared declined 0.6% to 23.0 million. U.S. assisted returns fell 2.5%; U.S. DIY returns increased 2.0% to 7.6 million.
  • Assisted fees increased 0.6%, helped by pricing and mix, while U.S. DIY fees fell 6.5% and Refund Transfer revenue fell 8.8%. Management attributed declines in some products to free-filing promotions and lower Refund Transfer attachment.
  • Expense reductions, including lower marketing, consulting, compensation, and bad-debt costs, more than offset higher interest expense. Interest expense increased 34.8%, primarily reflecting the $1.0 billion of Senior Notes issued in FY2016.
  • Cash increased by $114.5 million, versus a $1.110 billion decrease in FY2016, when substantial share repurchases and other financing outflows occurred.

Outlook, risks, and unusual items

  • The filing provides no specific FY2018 revenue or earnings guidance. Management said existing capital sources were expected to meet future operating and financing needs absent unexpected developments.
  • Management highlighted intense competition, including free tax-preparation alternatives; cybersecurity, privacy, and identity-refund fraud risks; regulatory and tax-law changes; seasonal operating demands; and reliance on key vendors and franchisee relationships.
  • The company launched interest-free Refund Advance loans in the 2017 tax season. It paid $28.6 million in origination fees and provided limited guarantees up to $73 million; the estimated year-end liability was $0.7 million.
  • Discontinued mortgage operations remain a significant contingent risk. Sand Canyon Corporation had $4.5 million accrued for representation-and-warranty claims at April 30, 2017, after $61.0 million in settlement payments during the year that were covered by prior accruals. Separate indemnification and contribution claims were not accrued because a loss was not deemed probable; outcomes and potential exposure remain uncertain.
  • CEO William C. Cobb planned to retire effective July 31, 2017; General Counsel Thomas A. Gerke was to serve as interim CEO beginning August 1, 2017.
  • The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded internal controls were effective.

Important facts for investors to verify

  • Whether tax-return volumes, especially assisted returns, stabilize and whether promotional pricing continues to pressure DIY and Refund Transfer monetization.
  • The sustainability of earnings growth given lower expenses, higher borrowing costs, and significant share repurchases.
  • Cash availability through the off-season, credit-facility covenant headroom, and the company’s capacity to maintain dividends and repurchases.
  • Developments in Sand Canyon mortgage litigation, indemnification claims, and any change in accruals or potential exposure.
  • The financial and operational effects of prepaid-card regulation, cybersecurity incidents, and other regulatory changes.