H&R Block, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Quarter and nine months ended January 31, 2020. The company provides assisted and DIY tax preparation and related financial services, and acquired small-business financial software provider Wave in June 2019. Results are unaudited. Tax activity is highly seasonal, with peak revenue and cash flow typically in February through April.
Key financial results
| Metric | Three months ended Jan. 31, 2020 | Nine months ended Jan. 31, 2020 |
|---|---|---|
| Revenue | $519.2 million | $830.4 million |
| Operating expenses | $671.8 million | $1,420.9 million |
| Net loss from continuing operations | $128.0 million | $457.3 million |
| Net loss, including discontinued operations | $129.7 million | $467.9 million |
| GAAP diluted loss per share | $0.67 | $2.36 |
| Cash used in operating activities | Not presented by quarter | $1,467.8 million |
At January 31, 2020, cash and cash equivalents were $192.3 million, plus $169.4 million of restricted cash. Total debt was $2.53 billion, including $649.0 million current; stockholders’ equity was negative $318.4 million. The company reported $1.04 billion outstanding under its revolving credit facility (CLOC), with approximately $751 million of additional borrowing availability under its debt-to-EBITDA covenant.
Changes versus prior comparable periods
- Quarterly revenue increased 10.9% to $519.2 million; nine-month revenue increased 8.9% to $830.4 million. Higher assisted and online DIY tax-return volumes were important contributors.
- Quarterly net loss widened to $129.7 million from $126.5 million; nine-month net loss widened to $467.9 million from $455.4 million. Nine-month continuing-operations loss per share increased to $2.31 from $2.13.
- Operating expenses rose 10.8% in the quarter and 9.5% over nine months. Management cited, among other items, higher wages, marketing, technology and consulting costs, and Wave-related costs.
- Nine-month cash used in operations increased to $1.47 billion from $1.35 billion, mainly reflecting working-capital timing and higher receivables. Investing cash use increased to $489.7 million, largely due to the $408.4 million Wave acquisition payment and other acquisitions.
- Nine-month financing cash provided rose to $611.9 million, primarily due to greater CLOC borrowings. Share repurchases, including shares surrendered, were $256.2 million versus $102.2 million; dividends paid were broadly unchanged at $154.8 million.
Outlook, liquidity, risks and unusual items
- Management said existing capital sources were sufficient for operating, investing and financing needs absent unexpected developments. It expected to arrange financing for the $650 million senior notes due October 2020, but noted that future financing availability and terms were not assured.
- The company stated that year-to-date losses are seasonal and expected to be offset by fourth-quarter income; interim results may not indicate full-year results. No specific full-year earnings or revenue guidance is provided in the supplied filing text.
- The Wave acquisition contributed $25.7 million of revenue and $36.3 million of pretax losses from acquisition through January 31. Goodwill increased to $838.8 million, including $300.6 million attributable to Wave.
- Quarterly return volumes through February 28 were mixed: total U.S. returns rose 1.4% year over year, driven by online DIY and IRS Free File, partly offset by lower assisted returns.
- Free File-related lawsuits and governmental inquiries are disclosed; the company had not concluded that losses were probable and had not accrued liabilities for those cases. Mortgage-related litigation and indemnification claims tied to discontinued operations remain unresolved; the company cautioned outcomes could be material, while stating its estimated aggregate reasonably possible losses in excess of accruals were not material where estimable.
- Refund Advance arrangements include limited guarantees of up to $7.5 million for certain pre-IRS-acceptance loans and up to $57 million in aggregate for certain incremental losses. The company said it did not expect a material payment under anticipated loss scenarios for the latter guarantee.
- Adoption of the new lease standard added operating lease assets and liabilities; reported lease liabilities totaled $477.2 million. Management said adoption did not materially affect the income statement or cash flows.
Investor verification priorities
- Track peak-season return volumes, average charges and conversion to revenue, especially whether volume gains persist despite lower average charges in company-owned offices.
- Review fourth-quarter operating results and cash generation against the seasonal expectation that year-to-date losses would be offset.
- Monitor the October 2020 note maturity, refinancing progress, CLOC usage and covenant-based borrowing capacity.
- Assess Wave’s operating performance and contribution relative to its acquisition cost, losses to date and recorded goodwill.
- Follow Free File litigation and discontinued mortgage-related claims, including any change in probability, estimated exposure or accruals.
- Reconcile cash and restricted cash, receivables and seasonal working-capital movements with liquidity needs and shareholder distributions.