H&R BLOCK INC 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL OVERVIEW On March 21, 2020, the federal tax filing deadline in the U.S. for individual 2019 tax returns was extended from April 15, 2020 to July 15, 2020, shifting a portion of revenues and expenses from that tax season into the three months ended September 30, 2020. This extension impacted the typical seasonality of our business and the comparability of our financial results. Our revenues for the three months ended September 30, 2021 decreased $224.7 million, or 53.8%, when compared to the prior year period due to the extension of the 2019 tax season to July 15, 2020 in the prior year period. We recorded a pretax loss of $197.3 million in the current year compared to a pretax loss of $32.9 million in the prior year. RESULTS OF OPERATIONS Our subsidiaries provide assisted and DIY tax preparation solutions through multiple channels (including in-person, online and mobile applications, virtual, and desktop software) and distribute H&R Block-branded products and services, including those of our bank partner, to the general public primarily in the U.S., Canada and Australia. Tax returns are either prepared by H&R Block tax professionals (in company-owned or franchise offices, virtually or via an internet review) or prepared and filed by our clients through our DIY tax solutions. We also offer small business financial solutions through our company-owned and franchise offices and online through Wave. We report a single segment that includes all of our continuing operations. U.S. Operating Statistics Three months Ended September 30, 2021 2020 (1) Change % Change Tax returns prepared: (in 000s) (2) Company-owned operations 140 858 (718) (83.7) % Franchise operations 75 335 (260) (77.6) % Total assisted 215 1,193 (978) (82.0) % Desktop 17 326 (309) (94.8) % Online 53 701 (648) (92.4) % Total DIY 70 1,027 (957) (93.2) % Total U.S. Returns 285 2,220 (1,935) (87.2) % Net Average Charge: (3) Company-owned operations $ 239.31 $ 241.41 $ (2.10) (0.9) % Franchise operations (4) $ 244.23 $ 227.42 $ 16.81 7.4 % DIY $ 43.22 $ 46.21 $ (2.99) (6.5) % (1) Represents a partial 2019 individual tax filing season, which was extended until July 15, 2020. (2) An assisted tax return is defined as a current or prior year individual or business tax return that has been accepted by the client. A DIY online return is defined as a current year individual or business tax return that has been accepted by the client. A DIY desktop return is defined as a current year individual or business tax return that has been electronically submitted to the IRS. (3) Net average charge is calculated as total tax preparation fees divided by tax returns prepared. (4) Net average charge related to H&R Block Franchise operations represents tax preparation fees collected by H&R Block franchisees divided by returns prepared in franchise offices. H&R Block will recognize a portion of franchise revenues as franchise royalties based on the terms of franchise agreements. We provide Net Average Charge as a key operating metric because we consider it an important supplemental measure useful to analysts, investors, and other interested parties as it provides insights into pricing and tax return H&R Block, Inc. |Q1 FY2022 Form 10-Q 17 Table of Contents mix relative to our customer base, which are significant drivers of revenue. Our definition of Net Average Charge may not be comparable to similarly titled measures of other companies. RESULTS OF OPERATIONS Consolidated – Financial Results (in 000s, except per share amounts) Three months ended September 30, 2021 2020 $ Change % Change Revenues: U.S. assisted tax preparation $ 33,607 $ 207,167 $ (173,560) (83.8) % U.S. royalties 7,358 22,652 (15,294) (67.5) % U.S. DIY tax preparation 4,061 47,463 (43,402) (91.4) % International 58,325 58,776 (451) (0.8) % Refund Transfers 1,665 6,113 (4,448) (72.8) % Emerald Card® 28,258 12,436 15,822 127.2 % Peace of Mind® Extended Service Plan 24,836 27,192 (2,356) (8.7) % Tax Identity Shield® 5,153 8,994 (3,841) (42.7) % Interest and fee income on Emerald Advance SM 479 526 (47) (8.9) % Wave 19,137 13,737 5,400 39.3 % Other 9,745 12,290 (2,545) (20.7) % Total revenues 192,624 417,346 (224,722) (53.8) % Compensation and benefits: Field wages 56,079 92,545 36,466 39.4 % Other wages 58,064 63,068 5,004 7.9 % Benefits and other compensation 25,450 33,805 8,355 24.7 % 139,593 189,418 49,825 26.3 % Occupancy 95,822 96,850 1,028 1.1 % Marketing and advertising 10,073 15,492 5,419 35.0 % Depreciation and amortization 35,715 38,237 2,522 6.6 % Bad debt 1,043 520 (523) (100.6) % Other 85,150 77,582 (7,568) (9.8) % Total operating expenses 367,396 418,099 50,703 12.1 % Other income (expense), net 284 2,504 (2,220) (88.7) % Interest expense on borrowings (22,830) (34,697) 11,867 34.2 % Pretax loss (197,318) (32,946) (164,372) (498.9) % Income taxes (benefit) (47,373) 27,964 75,337 ** Net loss from continuing operations (149,945) (60,910) (89,035) (146.2) % Net loss from discontinued operations (1,656) (1,346) (310) (23.0) % Net loss $ (151,601) $ (62,256) $ (89,345) (143.5) % BASIC AND DILUTED LOSS PER SHARE: Continuing operations $ (0.84) $ (0.32) $ (0.52) (162.5) % Discontinued operations (0.01) — (0.01) ** Consolidated $ (0.85) $ (0.32) $ (0.53) (165.6) % Adjusted diluted EPS (1) $ (0.78) $ (0.24) $ (0.54) (225.0) % EBITDA (1) (138,773) 39,988 (178,761) ** (1) All non-GAAP measures are results from continuing operations. See " Non-GAAP Financial Information " at the end of this item for a reconciliation of non-GAAP measures . Three months ended September 30, 2021 compared to September 30, 2020 Revenues decreased $224.7 million, or 53.8%, from the prior year. The decrease in revenue is due to lower tax return volumes in the current year as the 2019 tax season was extended to July 15, 2020 in the prior year period, 18 Q1 FY2022 Form 10-Q| H&R Block, Inc. Table of Contents whereas the 2020 tax season deadline of May 17, 2021 did not extend into the three month period ended September 30, 2021. This resulted in a decrease in U.S. tax preparation, royalty and Refund Transfer revenues. Emerald Card® revenues increased $15.8 million, or 127.2%, due to higher card activity which is a result of the IRS loading Child Tax Credits monthly to Emerald Cards®. Wave revenues increased $5.4 million, or 39.3%, due to higher small business payments processing volumes. Total operating expenses decreased $50.7 million, or 12.1%, from the prior year. Field wages decreased $36.5 million, or 39.4%, due to lower tax preparation volumes in the current year as a result of the tax season extension in the prior year. Other wages decreased $5.0 million, or 7.9%, due to an adjustment to prior year bonus accruals in the current year. Benefits and other compensation decreased $8.4 million, or 24.7%, primarily due to lower payroll taxes as a result of lower wages. Marketing and advertising decreased $5.4 million, or 35.0%, due to advertising in the prior year related to the extension of the tax season. Other expenses increased $7.6 million, or 9.8%. The components of other expenses are as follows: (in 000s) Three months ended September 30, 2021 2020 $ Change % Change Consulting and outsourced services $ 25,857 $ 18,764 $ (7,093) (37.8) % Bank partner fees 108 (2,434) (2,542) ** Client claims and refunds 6,015 4,526 (1,489) (32.9) % Employee and travel expenses 4,290 3,471 (819) (23.6) % Technology-related expenses 20,325 18,725 (1,600) (8.5) % Credit card/bank charges 14,961 13,478 (1,483) (11.0) % Insurance 3,331 4,042 711 17.6 % Legal fees and settlements 3,042 7,272 4,230 58.2 % Supplies 2,823 3,581 758 21.2 % Other 4,398 6,157 1,759 28.6 % $ 85,150 $ 77,582 $ (7,568) (9.8) % Consulting and outsourced services expense increased $7.1 million, or 37.8%, due to our strategic imperatives and data processing fees related to higher activity on Emerald Cards. We recorded an income tax benefit of $47.4 million in the current year compared to an expense of $28.0 million in the prior year, due to discrete tax items in the prior year. The effective tax rate for the three months ended September 30, 2021, and 2020 was 24.0% and (84.9)%, respectively. See Item 1, note 7 to the consolidated financial statements for additional discussion. FINANCIAL CONDITION These comments should be read in conjunction with the consolidated balance sheets and consolidated statements of cash flows included in Part 1, Item 1 . CAPITAL RESOURCES AND LIQUIDITY – OVERVIEW – Our primary sources of capital and liquidity include cash from operations (including changes in working capital), draws on our CLOC, and issuances of debt. We use our sources of liquidity primarily to fund working capital, service and repay debt, pay dividends, repurchase shares of our common stock, and acquire businesses. Our operations are highly seasonal and substantially all of our revenues and cash flow are generated during the period from February through April in a typical year. Therefore, we normally require the use of cash to fund losses and working capital needs, periodically resulting in a working capital deficit, during the months of May through January. We typically have relied on available cash balances from the prior tax season and borrowings to meet liquidity needs. H&R Block, Inc. |Q1 FY2022 Form 10-Q 19 Table of Contents Given the likely availability of a number of liquidity options discussed herein, we believe that, in the absence of any unexpected developments, our existing sources of capital as of September 30, 2021 are sufficient to meet our operating, investing and financing needs. DISCUSSION OF CONSOLIDATED STATEMENTS OF CASH FLOWS – The following table summarizes our statements of cash flows for the three months ended September 30, 2021 and 2020. See Item 1 for the complete consolidated statements of cash flows for these periods. (in 000s) Three months ended September 30, 2021 2020 Net cash provided by (used in): Operating activities $ (312,624) $ (98,597) Investing activities (19,453) (11,993) Financing activities (217,322) (2,146,807) Effects of exchange rates on cash (3,959) 2,975 Net decrease in cash, cash equivalents and restricted cash $ (553,358) $ (2,254,422) Operating Activities. Cash used in operations totaled $312.6 million for the three months ended September 30, 2021 compared to $98.6 million in the prior year period. The change is primarily due to higher payments on accrued liabilities and an increase in our net loss in the current year as a result of the timing of the extended tax season in the prior year. Investing Activities. Cash used in investing activities totaled $19.5 million for the three months ended September 30, 2021 compared to $12.0 million in the prior year period. The change is primarily due to a decrease in payments from franchisees as a result of the timing of the extended tax season in the prior year. Financing Activities. Cash used in financing activities totaled $217.3 million for the three months ended September 30, 2021 compared to $2.1 billion in the prior year period. The change is primarily due to the repayment of the $2.0 billion draw on our CLOC in the prior year. CASH REQUIREMENTS – Dividends and Share Repurchases. Returning capital to shareholders in the form of dividends and the repurchase of outstanding shares is, and has historically been, a significant component of our capital allocation plan. We have consistently paid quarterly dividends. Dividends paid totaled $49.0 million and $50.0 million for the three months ended September 30, 2021 and 2020, respectively. Although we have historically paid dividends and plan to continue to do so, there can be no assurances that circumstances will not change in the future that could affect our ability or decisions to pay dividends. Our current share repurchase program has remaining authorization of $398.1 million which is effective through June 2022. During the three months ended September 30, 2021, we repurchased $165.8 million of our common stock at an average price of $24.37 per share. In the prior year period, we repurchased $88.5 million of our common stock at an average price of $14.85 per share. Share repurchases may be effectuated through open market transactions, some of which may be effectuated under SEC Rule 10b5-1. The Company may cancel, suspend, or extend the period for the purchase of shares at any time. Any repurchases will be funded primarily through available cash and cash from operations. Although we may continue to repurchase shares, there is no assurance that we will purchase up to the full Board authorization. Capital Investment. Capital expenditures totaled $15.6 million and $13.4 million for the three months ended September 30, 2021 and 2020, respectively. Our capital expenditures relate primarily to recurring improvements to retail offices, as well as investments in computers, software and related assets. In addition to our capital expenditures, we also made payments to acquire businesses. We acquired franchisee and competitor businesses totaling $4.3 million and $2.5 million during the three months ended September 30, 2021 and 2020, respectively. See Item 1, note 5 for additional information on our acquisitions. 20 Q1 FY2022 Form 10-Q| H&R Block, Inc. Table of Contents FINANCING RESOURCES – The CLOC has cap acity up to $1.5 billion and is scheduled to expire in June 2026. Proceeds under the CLOC may be used for working capital needs or for other general corporate purposes. We ha d no outstanding balance under the CLOC as of September 30, 2021 and amounts available to borrow were limited by the debt-to-EBITDA covenant to approximately $1.2 billion as of September 30, 2021. The following table provides ratings for debt issued by Block Financial LLC (Block Financial) as of September 30, 2021 and June 30, 2021: As of September 30, 2021 June 30, 2021 Short-term Long-term Outlook Short-term Long-term Outlook Moody's P-3 Baa3 Stable P-3 Baa3 Stable S&P A-2 BBB Stable A-2 BBB Stable Other than described above, there have been no material changes in our borrowings from those reported in our April 30, 2021 Annual Report to Shareholders on Form 10-K or our June 30, 2021 Transition Report filed on Form 10-Q. CASH AND OTHER ASSETS – As of September 30, 2021, we held cash and cash equivalents, excluding restricted amounts, of $891.7 million, including $178.5 million held by our foreign subsidiaries. Foreign Operations. Seasonal borrowing needs of our Canadian operations are typically funded by our U.S. operations. To mitigate foreign currency risk, we sometimes enter into foreign exchange forward contracts. There were no forward contracts outstanding as of September 30, 2021. We do not currently intend to repatriate non-borrowed funds held by our foreign subsidiaries in a manner that would trigger a material tax liability. The impact of changes in foreign exchange rates during the period on our international cash balances resulted in an decrease of $4.0 million during the three months ended September 30, 2021 and in an increase of $3.0 million during the three months ended September 30, 2020. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS – There have been no material changes in our contractual obligations and commercial commitments from those reported in our April 30, 2021 Annual Report to Shareholders on Form 10-K or our June 30, 2021 Transition Report filed on Form 10-Q. SUMMARIZED GUARANTOR FINANCIAL STATEMENTS – Block Financial is a 100% owned subsidiary of H&R Block, Inc. Block Financial is the Issuer and H&R Block, Inc. is the full and unconditional Guarantor of our Senior Notes, CLOC and other indebtedness issued from time to time. The following table presents summarized financial information for H&R Block, Inc. (Guarantor) and Block Financial (Issuer) on a combined basis after intercompany eliminations and excludes investments in and equity earnings in non-guarantor subsidiaries. SUMMARIZED BALANCE SHEET - GUARANTOR AND ISSUER (in 000s) As of September 30, 2021 June 30, 2021 Current assets $ 44,137 $ 50,737 Noncurrent assets 2,166,948 2,155,650 Current liabilities 93,272 81,388 Noncurrent liabilities 1,995,389 1,994,582 H&R Block, Inc. |Q1 FY2022 Form 10-Q 21 Table of Contents SUMMARIZED STATEMENTS OF OPERATIONS - GUARANTOR AND ISSUER (in 000s) Three months ended September 30, 2021 Two months ended June 30, 2021 Total revenues $ 29,841 $ 22,978 Income (loss) from continuing operations before income taxes (3,875) 2,504 Net income (loss) from continuing operations (1,320) 2,953 Net income (loss) (2,976) 1,444 The table above reflects $2.1 billion of non-current intercompany receivables due to the Issuer from non-guarantor subsidiaries as of September 30, 2021 and June 30, 2021. REGULATORY ENVIRONMENT As previously disclosed, in 2017 the Consumer Financial Protection Bureau (CFPB) published its final rule regulating certain consumer credit products (Payday Rule), which the CFPB later limited by removing the mandatory underwriting provisions. Certain limited provisions of the Payday Rule became effective in 2018, but most provisions were scheduled to go into effect in 2019. Litigation in a federal district court in Texas had stayed that effective date, but on August 31, 2021 the judge in that litigation ruled in favor of the CFPB. The plaintiffs appealed, and, on October 14, 2021, the United States Court of Appeals for the Fifth Circuit extended the compliance deadline until after the appeal is resolved. We are unsure whether, when, or in what form the Payday Rule will go into effect. Though we do not currently expect the Payday Rule to have a material adverse impact on Emerald Advance SM , our business, or our consolidated financial position, results of operations, and cash flows, we will continue to monitor and analyze the potential impact of any further developments on the Company. There have been no other material changes in our regulatory environment from what was reported in our April 30, 2021 Annual Report to Shareholders on Form 10-K or our June 30, 2021 Transition Report filed on Form 10-Q. NON-GAAP FINANCIAL INFORMATION Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Because these measures are not measures of financial performance under GAAP and are susceptible to varying calculations, they may not be comparable to similarly titled measures for other companies. We consider our non-GAAP financial measures to be performance measures and a useful metric for management and investors to evaluate and compare the ongoing operating performance of our business. We make adjustments for certain non-GAAP financial measures related to amortization of intangibles from acquisitions and goodwill impairments. We may consider whether other significant items that arise in the future should be excluded from our non-GAAP financial measures. We measure the performance of our business using a variety of metrics, including earnings before interest, taxes, depreciation and amortization (EBITDA) from continuing operations, adjusted EBITDA from continuing operations, EBITDA margin from continuing operations, adjusted EBITDA margin from continuing operations, adjusted diluted earnings per share from continuing operations and free cash flow. We also use EBITDA from continuing operations and pretax income of continuing operations, each subject to permitted adjustments, as performance metrics in incentive compensation calculations for our employees. 22 Q1 FY2022 Form 10-Q| H&R Block, Inc. Table of Contents The following is a reconciliation of net income (loss) to EBITDA from continuing operations, which is a non-GAAP financial measure: (in 000s) Three months ended September 30, 2021 2020 Net loss - as reported $ (151,601) $ (62,256) Discontinued operations, net 1,656 1,346 Net loss from continuing operations - as reported (149,945) (60,910) Add back: Income taxes (benefit) (47,373) 27,964 Interest expense 22,830 34,697 Depreciation and amortization 35,715 38,237 11,172 100,898 EBITDA from continuing operations $ (138,773) $ 39,988 The following is a reconciliation of our results from continuing operations to our adjusted results from continuing operations, which are non-GAAP financial measures: (in 000s, except per share amounts) Three months ended September 30, 2021 2020 Net loss from continuing operations - as reported $ (149,945) $ (60,910) Adjustments: Amortization of intangibles related to acquisitions (pretax) 14,870 17,638 Tax effect of adjustments (1) (3,635) (1,854) Adjusted net loss from continuing operations $ (138,710) $ (45,126) Diluted loss per share from continuing operations - as reported $ (0.84) $ (0.32) Adjustments, net of tax 0.06 0.08 Adjusted diluted loss per share from continuing operations $ (0.78) $ (0.24) (1) Tax effect of adjustments is the difference between the tax provision calculated on a GAAP basis and on an adjusted non-GAAP basis. FORWARD-LOOKING INFORMATION This report and other documents filed with the SEC may contain forward-looking statements. In addition, our senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words or variation of words such as "expects," "anticipates," "intends," "plans," "believes," "commits," "seeks," "estimates," "projects," "forecasts," "targets," "would," "will," "should," "goal," "could," "may" or other similar expressions. Forward-looking statements provide management's current expectations or predictions of future conditions, events or results. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. They may include estimates of revenues, client trajectory, income, effective tax rate, earnings per share, cost savings, capital expenditures, dividends, share repurchases, liquidity, capital structure, market share, industry volumes or other financial items, descriptions of management's plans or objectives for future operations, services or products, or descriptions of assumptions underlying any of the above. They may also include the expected impact of the coronavirus (COVID–19) pandemic, including, without limitation, the impact on economic and financial markets, the Company's capital resources and financial condition, future expenditures, potential regulatory actions, such as extensions of tax filing deadlines or other related relief, changes in consumer behaviors and modifications to the Company's operations relating thereto. H&R Block, Inc. |Q1 FY2022 Form 10-Q 23 Table of Contents All forward-looking statements speak only as of the date they are made and reflect the Company's good faith beliefs, assumptions and expectations, but they are not guarantees of future performance or events. Furthermore, the Company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions, factors, or expectations, new information, data or methods, future events or other changes, except as required by law. By their nature, forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Factors that might cause such differences include, but are not limited to, a variety of economic, competitive, operational and regulatory factors, many of which are beyond the Company's control. In addition, factors that may cause the Company’s actual effective tax rate to differ from estimates include the Company’s actual results from operations compared to current estimates, future discrete items, changes in interpretations and assumptions the Company has made, future actions of the Company, and increases in applicable tax rates in jurisdictions where the Company operates. Investors should understand that it is not possible to predict or identify all such factors and, consequently, should not consider any such list to be a complete set of all potential risks or uncertainties. Details about risks, uncertainties and assumptions that could affect various aspects of our business are included throughout our Annual Report on Form 10-K for the fiscal year ended April 30, 2021 and are also described from time to time in other filings with the SEC. Investors should carefully consider all of these risks, and should pay particular attention to Item 1A, "Risk Factors," and Item 7 under "Critical Accounting Policies" of our Annual Report on Form 10-K for the fiscal year ended April 30, 2021. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in our market risks from those reported in our April 30, 2021 Annual Report to Shareholders on Form 10-K or our June 30, 2021 Transition Report filed on Form 10-Q.