H&R Block, Inc. — Form 10-Q summary
Business context and period: The filing covers the third quarter and nine months of fiscal 2016, ended January 31, 2016, compared with the same periods a year earlier. H&R Block operates one continuing-operations segment focused on tax preparation and related services and products. Results are highly seasonal, with most revenue and cash flow typically generated from January through April; interim losses are therefore not indicative of full-year results. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Three months ended Jan. 31, 2016 | Three months ended Jan. 31, 2015 | Nine months ended Jan. 31, 2016 | Nine months ended Jan. 31, 2015 |
|---|---|---|---|---|
| Revenue | $474.5 million | $509.1 million | $740.7 million | $777.3 million |
| Net loss from continuing operations | $78.6 million | $35.3 million | $317.7 million | $257.4 million |
| Consolidated net loss | $81.7 million | $36.9 million | $326.4 million | $265.2 million |
| Consolidated loss per share | $0.35 | $0.13 | $1.27 | $0.97 |
| Operating expenses | $594.4 million | $584.2 million | $1,268.3 million | $1,198.2 million |
| Cash used in operating activities | Not presented by quarter | $1,426.9 million | $1,247.2 million |
- Operating expenses exceeded revenue by $119.8 million in the quarter and $527.7 million for the nine-month period, calculated from the reported figures. The filing does not present a conventional operating margin metric.
- At January 31, 2016, cash and cash equivalents were $189.5 million, restricted cash was $69.6 million, and total debt was $2.628 billion. Long-term debt included $1.125 billion drawn on the revolving credit facility.
- Current assets were $1.221 billion and current liabilities $589.0 million. Stockholders’ equity was a deficit of $536.7 million.
- Nine-month investing activities provided $314.0 million, versus $132.7 million used in the prior year. Financing activities used $688.2 million, versus $531.3 million provided. Cash declined by $1.818 billion over the period.
- The quarterly dividend declared was $0.20 per share, unchanged from the prior-year quarter.
Material changes versus the prior comparable period
- Quarterly revenue fell 6.8%; nine-month revenue declined 4.7%. Lower tax-return volumes reduced assisted tax preparation fees and franchise royalties, partly offset by improved rate and mix and growth in U.S. digital tax preparation revenue.
- U.S. assisted returns prepared in company-owned and franchise offices fell 12.1% for the nine months; software returns increased 4.7%. Through February 28, management reported office-prepared returns down 7.9% and paid digital-product returns down 3.3% year over year.
- Nine-month operating expenses increased 5.9%, including higher occupancy, marketing, depreciation and amortization, and other costs. Management attributed some increases to acquired franchisee and competitor businesses, office improvements, capital-structure and bank-divestiture professional fees, consulting, and Peace of Mind-related claims.
- Interest expense increased to $46.3 million for nine months from $36.7 million, reflecting new senior notes and revolving-credit borrowings.
- The company completed the sale and transfer of H&R Block Bank in August 2015, paid BofI $419 million in net cash, and sold substantially all bank-held available-for-sale securities for $388 million, recording $8.4 million in gains. The company and its holding companies ceased to be subject to bank and savings-and-loan-holding-company regulatory capital requirements.
- The company issued $650 million of 4.125% senior notes due 2020 and $350 million of 5.250% senior notes due 2025. It repurchased 52.5 million shares for approximately $1.9 billion during the nine months, at an average $36.02 per share, under a $3.5 billion authorization effective through June 2019.
Outlook, commentary, risks and unusual items
- Outlook and liquidity: No specific revenue or earnings guidance is provided in the supplied filing text. Management said existing capital sources were sufficient for operating and financing needs absent unexpected developments, and anticipated repaying the current revolving-credit balance by fiscal year-end. These are expectations, not guarantees.
- Seasonality and cash needs: Management notes that the business uses cash to fund off-season losses from May through December and typically relies on prior-season cash and borrowings. Operating cash use rose year over year, partly due to higher operating losses, increased receivables from IRS funding delays, and representation-and-warranty claim payments.
- Bank-product transition: Under an agreement with BofI, H&R Block is required to purchase a 90% participation interest in all Emerald Advance loans originated by BofI. Purchased participation interests totaled $374.5 million at January 31, 2016. H&R Block no longer originates these lines itself.
- Legacy mortgage contingencies: The discontinued mortgage business had a $65.3 million accrued liability for representation-and-warranty claims, down from $149.8 million at the start of the period after $88.5 million of payments and $4.0 million of provisions. The company said some indemnification and contribution claims remain unestimable and could be material if resolved unfavorably; the recorded accrual does not include those exposures.
- Other legal and tax matters: Litigation includes consumer and tax-preparation claims, including a proposed settlement in Form 8863 litigation awaiting final court approval. The company reported $75.2 million of gross unrecognized tax benefits and said approximately $9.7 million could reasonably be released within 12 months.
- Other unusual items: Nine-month results included $20.7 million of professional fees related to the bank divestiture and recapitalization, and an $8.1 million gain on available-for-sale securities. A $36.2 million discrete tax benefit was recorded, primarily related to a Missouri tax-law change.
Important facts for investors to verify
- How tax-season return volumes, pricing and mix ultimately affect full-year revenue and profitability; management cautions that interim results are not representative of the full year.
- Whether the company repays the $1.125 billion revolving-credit balance by fiscal year-end and how seasonal borrowing affects liquidity and interest expense.
- Progress against the $3.5 billion share-repurchase authorization, the resulting debt and equity levels, and the company’s capacity to sustain dividends.
- Actual collections and credit performance of Emerald Advance participation interests, as well as the related BofI program obligations.
- Developments in discontinued-mortgage litigation and indemnification claims, including whether potential losses exceed recorded accruals.
- Final court approval and implementation of the Form 8863 settlement, and developments in other consumer and tax matters.