H&R Block, Inc. — Q3 FY2017 Form 10-Q
Reporting period: Quarter and nine months ended January 31, 2017; filed March 8, 2017. The company provides assisted and do-it-yourself tax preparation and related financial products. Results are highly seasonal, with peak revenue and cash flow generally occurring January through April.
Financial results and liquidity
| Metric | Three months ended Jan. 31, 2017 | Prior-year quarter | Nine months ended Jan. 31, 2017 | Prior-year period |
|---|---|---|---|---|
| Revenue | $451.9 million | $474.5 million | $708.4 million | $740.7 million |
| Operating loss | $124.8 million | $119.8 million | $517.5 million | $527.7 million |
| Net loss | $104.5 million | $81.7 million | $374.4 million | $326.4 million |
| Diluted loss per share | $0.50 | $0.35 | $1.75 | $1.27 |
| Operating margin | (27.6)% | (25.3)% | (73.0)% | (71.2)% |
| Net margin | (23.1)% | (17.2)% | (52.9)% | (44.1)% |
Margins are calculated from reported revenue and operating or net loss. Nine-month operating cash use was $1.376 billion, compared with $1.427 billion in the prior-year period. Investing provided $64.7 million and financing provided $638.5 million; cash declined $675.6 million to $221.2 million. Cash flow is seasonally negative during much of the off-season.
At January 31, 2017, total assets were $2.578 billion, current assets $1.203 billion, and current liabilities $554.6 million (current ratio about 2.17). Cash plus restricted cash was $291.3 million. Debt and line-of-credit borrowings totaled approximately $2.594 billion, including $1.1 billion drawn under a $2.0 billion revolving facility; the company reported covenant compliance and approximately $900 million of remaining capacity. Stockholders’ equity was negative $800.8 million.
Dividends declared were $0.22 per share for the quarter and $0.66 year to date. The company repurchased 14.0 million shares for $317.0 million during the nine-month period.
Material changes versus comparable periods
- Quarterly revenue fell 4.8%; nine-month revenue fell 4.4%. For the nine months, U.S. assisted returns declined 6.7%, DIY software returns 4.2%, and total U.S. returns 6.4%. DIY net average charge fell 16.4%.
- Quarterly net loss widened by $22.8 million; nine-month net loss widened by $48.0 million. Lower revenue and higher interest expense weighed on results, partly offset by lower operating expenses.
- Nine-month interest expense rose $23.7 million to $70.0 million, reflecting the 2015 Senior Notes issuance and revolving-credit borrowing. Operating expenses declined 3.3%, including lower compensation, marketing and bad-debt expense, partly offset by higher occupancy and equipment costs.
- Share repurchases were substantially lower than the prior-year period, when the company bought back $1.9 billion of shares. The nine-month decline in cash use from financing also reflects prior-year banking-deposit and borrowing activity.
Outlook, commentary and risks
- Management stated that existing capital sources were expected to meet operating and financing needs absent unexpected developments. The filing gives no specific earnings or revenue guidance and cautions that interim results are not indicative of the full year because of seasonality. Tax returns prepared in company-owned and franchise offices through February 28 were down 3.3% year over year.
- The company sold its mortgage-loan and real-estate-owned portfolio in December 2016 for $188.2 million, approximately its carrying value. This was a discontinued legacy business activity.
- The new Refund Advance program includes limited guarantees of up to $73 million in aggregate, subject to thresholds; $0.6 million was accrued. H&R Block also had $349.9 million of purchased participation interests in Emerald Advance loans.
- Legacy mortgage representation-and-warranty claims had a $4.5 million accrued liability. The company said the estimated reasonably possible excess loss for certain matters was not material, but it could not estimate potential losses on some indemnification or contribution claims; unfavorable outcomes could be substantial.
- Pending litigation includes legacy mortgage matters and consumer class actions concerning compliance fees. The company reported $1.7 million of total accrued liabilities for litigation and other matters, while noting that some potential losses could not be reasonably estimated.
- New CFPB prepaid-product rules were scheduled to take effect October 1, 2017, with phased implementation. H&R Block was assessing their impact on the Emerald prepaid card. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether tax-return volume and average-charge trends improved during the peak filing season, and how they affected full-year results.
- Seasonal liquidity, revolving-credit utilization, debt covenant compliance, and the company’s ability to manage its negative stockholders’ equity.
- Refund Advance economics, including third-party costs, loan performance, and any claims under the $73 million guarantee.
- Developments in mortgage-related litigation and indemnification claims, including whether estimated exposures or accruals change.
- The implementation costs and business effects of CFPB prepaid-card rules and the sustainability of dividends and share repurchases.