H&R Block, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended April 30, 2019. Although the request metadata refers to 2018 Q4, this filing reports FY2019; it also includes the seasonally significant quarter ended April 30, 2019. Unless noted otherwise, amounts below are in U.S. dollars.
Business context
H&R Block provides assisted, do-it-yourself (DIY), and virtual tax preparation, plus related financial products, primarily in the U.S., Canada, and Australia. The company operates as one segment. Its business is highly seasonal, with most revenue generated from February through April and losses generally incurred during the first three fiscal quarters.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $3.095 billion | $3.160 billion | Down 2.1% |
| Income from continuing operations before tax | $545.2 million | $668.7 million | Down 18.5% |
| Net income from continuing operations | $445.3 million | $626.9 million | Down 29.0% |
| Net income | $422.5 million | $613.1 million | Down 31.1% |
| Diluted EPS from continuing operations | $2.15 | $2.98 | Down 27.9% |
| EBITDA from continuing operations (non-GAAP) | $798.9 million | $941.4 million | Down 15.1% |
| EBITDA margin from continuing operations (non-GAAP) | 25.8% | 29.8% | Down 4.0 percentage points |
| Net cash from operating activities | $606.5 million | $850.0 million | Down $243.5 million |
Revenue fell mainly because the company lowered prices for millions of U.S. assisted-preparation clients. U.S. assisted revenue declined 4.5% to $1.859 billion; U.S. DIY revenue rose 7.0% to $260.1 million, supported by online volume growth. Operating expenses increased 3.0% to $2.479 billion, including higher compensation, marketing, and technology costs.
The effective tax rate rose to 18.3% from 6.3%. FY2018 benefited unusually from the Tax Cuts and Jobs Act rate change, amplified by the company’s fiscal and tax-year timing. Discontinued mortgage operations generated a $22.7 million net loss in FY2019, primarily associated with litigation expenses.
In the quarter ended April 30, 2019, revenue was $2.332 billion versus $2.393 billion a year earlier; continuing-operations net income was $884.8 million versus $1.146 billion. The company’s seasonal pattern makes this quarter’s results substantially larger than those in the preceding quarters.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $1.572 billion at April 30, 2019; restricted cash was an additional $135.6 million. The company reported total current assets of $1.993 billion and current liabilities of $923.0 million.
- Long-term debt was $1.493 billion, consisting primarily of senior notes; no balance was outstanding on the revolving credit facility at year-end. Approximately $1.2 billion was available to borrow under the facility, subject to covenants.
- Operating cash flow declined to $606.5 million. Investing cash use was $155.1 million and financing cash use was $403.7 million; year-end cash and restricted cash totaled $1.708 billion.
- Dividends paid were $205.5 million, or $1.00 per share for the year. The company repurchased $184.8 million of shares at an average $23.51 per share. Approximately $1.0 billion remained under the repurchase authorization, extended through June 2022.
- Contractual cash obligations totaled $2.355 billion, including $1.769 billion of debt and future interest and $573.3 million of operating leases.
Material changes, outlook, and risks
- Worldwide tax returns prepared increased 1.2% to 23.6 million; U.S. returns increased 1.5% to 20.3 million. U.S. paid DIY returns rose 5.9%, while assisted returns fell 1.7%. Peak-season U.S. offices declined 4.8% to 9,504.
- The lower-price strategy was implemented beginning January 2019 and reduced assisted net average charge in company-owned operations by 4.0%. Management identified the resulting revenue decline as expected; no quantified FY2020 earnings or revenue guidance is provided in the filing.
- On June 10, 2019, after year-end, H&R Block agreed to acquire Wave Financial for $405 million, funded with available cash and subject to customary closing conditions and regulatory approval.
- Management cited intense competition, including free tax filing, potential changes or simplification of tax laws, privacy and cybersecurity threats, technology and seasonal operating risks, reliance on key vendors, and regulation of financial products. The CFPB’s Payday Rule remained uncertain and could affect Emerald Advance.
- Two California matters filed in May 2019 challenged aspects of H&R Block’s IRS Free File practices; the company had not accrued a liability. Discontinued Sand Canyon mortgage-related representation-and-warranty, indemnification, and contribution claims also remained unresolved. No liability was accrued for these claims as management had not concluded a loss was probable; a material outcome could adversely affect results.
- The company estimated that adoption of the new lease standard effective May 1, 2019 would add more than $500 million of assets and liabilities to the balance sheet.
Important facts for investors to verify
- Whether lower assisted pricing can retain or grow client volumes and whether DIY growth can offset pressure on assisted revenue and margins.
- Trends in operating cash flow, seasonal borrowing needs, and compliance with revolving-credit covenants as the business moves through the off-season.
- The earnings, cash, and integration effects of the proposed $405 million Wave acquisition and its closing conditions.
- Developments and potential financial exposure in the Free File litigation and inquiries, and in Sand Canyon’s legacy mortgage claims and guarantees.
- The actual balance-sheet effect of lease-standard adoption and any material changes in tax, privacy, cybersecurity, or consumer-finance regulation.