H&R Block, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended January 31, 2019 (fiscal 2019); unaudited. Comparisons are to the same periods of fiscal 2018. H&R Block provides assisted and DIY tax preparation and related financial products. Results are highly seasonal, with peak revenue and cash generation generally occurring February through April.
Financial performance
| Metric | Three months ended Jan. 31, 2019 | Three months ended Jan. 31, 2018 | Nine months ended Jan. 31, 2019 | Nine months ended Jan. 31, 2018 |
|---|---|---|---|---|
| Revenue | $468.4 million | $488.4 million | $762.4 million | $767.1 million |
| Operating expenses | $606.5 million | $585.7 million | $1,297.9 million | $1,265.5 million |
| Loss from continuing operations | $119.8 million | $242.9 million | $439.5 million | $519.1 million |
| Net loss | $126.5 million | $245.6 million | $455.4 million | $529.8 million |
| Consolidated loss per share | $0.62 | $1.18 | $2.21 | $2.54 |
| EBITDA from continuing operations (non-GAAP) | $(91.7) million | $(47.8) million | $(398.2) million | $(358.3) million |
Quarter revenue declined 4.1%, while operating expenses rose 3.5%; the pretax loss widened to $158.7 million from $120.8 million. The smaller net loss primarily reflected a $38.9 million income tax benefit, compared with $122.1 million of tax expense in the prior-year quarter. For the nine months, revenue decreased 0.6% and expenses increased 2.6%; the smaller net loss likewise reflected a larger income tax benefit ($149.9 million versus $43.2 million). The filing does not present a conventional positive operating margin for these loss-making periods.
- Revenue and operating metrics: U.S. assisted preparation revenue was $256.8 million for the quarter, down 3.9%; U.S. DIY revenue was $31.9 million, up 1.8%. Nine-month U.S. assisted returns fell 8.9%, while DIY returns rose 1.2%. Through February 28, total U.S. return volume was down 1.2% year over year, as DIY growth was offset by lower assisted volume.
- Cash flow: Nine-month operating cash outflow was $1.347 billion, versus $1.358 billion a year earlier. Investing cash outflow was $119.3 million; financing provided $110.4 million. Cash, cash equivalents and restricted cash ended at $305.1 million, down from $1.664 billion at the start of the fiscal year.
- Liquidity and debt: Cash and cash equivalents excluding restricted cash were $203.2 million. Long-term debt and line borrowings were $1.877 billion, including $385 million drawn on a $2.0 billion revolving facility; the company reported covenant compliance. Current assets were $1.235 billion and current liabilities $587.6 million. Stockholders’ equity was negative $213.6 million.
- Shareholder returns: The company paid $154.9 million in dividends in the nine-month period and repurchased and retired 4.7 million shares for $109.4 million (average $23.29 per share). Dividends declared were $0.25 per share for the quarter.
Material changes and management commentary
- Management attributed lower revenue primarily to delays in overall industry tax filings. For the nine-month period, assisted return volume was down 8.0% and assisted net average charge was up 7.2%, partly reflecting discontinuation of the Free Federal 1040EZ promotion. Management said the charge increase for the quarter did not change its expectation of an overall decline in net average charge by fiscal year-end.
- H&R Block announced upfront, transparent pricing beginning January 2019, including lower prices for millions of assisted clients; management expects the pricing changes to reduce fiscal 2019 revenue. No quantified full-year revenue or earnings guidance is provided in this filing.
- Quarter expenses included increased marketing and advertising, bad debt, software/IT maintenance, insurance reserves, and legal fees and settlements. Nine-month software and IT maintenance expense rose $16.4 million, which management attributed to increased technology investment.
- Tax Identity Shield revenue rose 140.7% for the nine months, primarily due to product features affecting revenue-recognition timing. Peace of Mind revenue fell 16.9% in the quarter because of a change in the claims pattern used to recognize revenue.
- The company expects adoption of the new lease standard on May 1, 2019 to add more than $500 million to reported assets and liabilities; the ultimate amount remains dependent on lease portfolio and other factors.
Risks, contingencies and unusual items
- Seasonality and liquidity: The first nine months normally consume cash before the core tax season. Management believes available liquidity sources are sufficient absent unexpected developments, but interim results are not indicative of full-year performance.
- Consumer lending regulation: Court and CFPB actions left the timing and form of the Payday Rule uncertain. Depending on its final form, it could materially affect the Emerald Advance product and the company’s results and cash flows.
- Discontinued mortgage operations and litigation: H&R Block continues to face claims connected with former Sand Canyon mortgage operations, including representation-and-warranty and indemnification matters. No liability was accrued for specified major claims where management had not concluded a loss was probable. Total accrued litigation and related liabilities were $3.1 million; the company said the aggregate reasonably possible loss in excess of accruals was not material where estimable, while some exposures could not be estimated. Unfavorable outcomes could nevertheless be material.
- Refund Advance guarantees: Limited guarantees cover up to $7.5 million for certain pre-IRS-acceptance loans and up to $57 million in aggregate for certain incremental losses on other loans. An estimated $1.4 million liability was accrued for the first guarantee; management did not expect a material payment under anticipated scenarios for the second.
- Tax matters: Gross unrecognized tax benefits were $178.1 million; the company said approximately $46.7 million could reasonably possibly decrease within 12 months. Its federal 2016 return was under examination.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the tax-season filing delay and assisted-return declines persist, and whether DIY growth offsets them.
- Actual fiscal 2019 revenue and average-charge effects from the new pricing structure, compared with management’s stated expectation of lower overall average charge.
- Peak-season cash generation, borrowing needs, and continued compliance with revolving-credit covenants.
- The final regulatory treatment and potential economics of Emerald Advance and Refund Advance products.
- Developments in discontinued-mortgage litigation, other contingencies, and the timing and amount of any tax-benefit changes.
- The actual balance-sheet effect of lease-standard adoption and whether higher technology, marketing, and other costs produce expected operating benefits.