What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-02-04 compared with 2021-11-04 · 148 added, 57 removed, 205 unchanged (50% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RECENT DEVELOPMENTS

On December 20, 2021, we entered into a First Amendment to our August 2020 Program Management Agreement (PMA) with MetaBank®, N.A.

(Meta), which among other things, extends the PMA through June 30, 2025, and adds Spruce℠ accounts to the program.

In January 2022, we launched the Spruce℠ mobile banking platform as a part of the Financial Products imperative of our previously-announced Block Horizons 2025 strategic plan.

The Spruce℠ solution, built by H&R Block with banking products powered by Meta, includes a spending account with a debit card, along with a connected savings account that allows for budgeting for specific goals.

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.

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 six months ended December 31, 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.

Our revenues for the three months ended December 31, 2021 increased $16.9 million, or 11.9%, when compared to the prior year period, primarily due to higher Emerald Card® activity, and we recorded a pretax loss of $298.9 million compared to $300.5 million in the prior year.

Our revenues for the six months ended December 31, 2021 decreased $207.9 million, or 37.2%, when compared to the prior year, primarily due to the extension of the 2019 tax season to July 15, 2020 in the prior year period.

We recorded a pretax loss of $496.2 million compared to $333.4 million in the prior year.

H&R Block, Inc.

|Q2 FY2022 Form 10-Q

RESULTS OF OPERATIONS

4 unchanged sentences

Operating Statistics

Three months Ended September 30, 2021 2020 (1)

Six months ended December 31, 2021 2020 (1)

Change % Change

12 unchanged sentences

$ 256.48 $ 233.95 $ 22.53 9.6 %

DIY $ 43.22 $ 46.21 $ (2.99) (6.5) %

Online $ 48.82 $ 56.02 $ (7.20) (12.9) %

(1) Represents a partial 2019 individual tax filing season, which was extended until July 15, 2020.

5 unchanged sentences

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

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.

Q2 FY2022 Form 10-Q| H&R Block, Inc.

RESULTS OF OPERATIONS

Consolidated – Financial Results (in 000s, except per share amounts)

Three months ended September 30, 2021 2020 $ Change % Change

Three months ended December 31, 2021 2020 $ Change % Change

assisted tax preparation $ 30,845 $ 34,020 $ (3,175) (9.3) %

25 unchanged sentences

Pretax loss (298,918) (300,499) 1,581 0.5 %

Income taxes (benefit) (47,373) 27,964 75,337 **

Income tax benefit (109,845) (46,510) 63,335 136.2 %

Net loss from continuing operations (189,073) (253,989) 64,916 25.6 %

10 unchanged sentences

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,

Three months ended December 31, 2021 compared to December 31, 2020

Revenues increased $16.9 million, or 11.9%, from the prior year.

Emerald Card® revenues increased $14.9 million, or 149.2% due to higher card activity which is a result of the IRS loading Child Tax Credits monthly to Emerald Cards®.

Wave revenues increased $4.7 million, or 31.4%, due to higher small business payments processing volumes.

DIY tax preparation revenues increased $3.1 million, or 50.6%, due to higher desktop software

H&R Block, Inc.

|Q2 FY2022 Form 10-Q

volumes compared to the prior year.

assisted tax preparation revenues decreased $3.2 million, or 9.3%, due to lower off-season tax return volumes and lower net average charge.

Total operating expenses increased $14.6 million, or 3.5%, from the prior year.

Field wages increased $3.8 million, or 5.7%, due to Canadian wage subsidies received in the prior year and higher bonus accruals in our Australian tax operations.

Benefits and other compensation increased $2.6 million, or 9.2%, primarily due to higher employee insurance expenses.

Depreciation and amortization expense decreased $4.1 million, or 10.2%, due to lower amortization on acquired intangibles and depreciation on equipment.

Bad debt decreased $2.9 million , or 17.5%, due to lower Emerald Advance SM volumes compared to the prior year.

Other expenses increased $12.9 million, or 13.8%.

The components of other expenses are as follows:

Three months ended December 31, 2021 2020 $ Change % Change

Consulting and outsourced services $ 27,611 $ 24,279 $ (3,332) (13.7) %

Bank partner fees 2,550 1,369 (1,181) (86.3) %

Client claims and refunds 6,200 6,347 147 2.3 %

Employee and travel expenses 9,417 8,510 (907) (10.7) %

Technology-related expenses 23,300 19,446 (3,854) (19.8) %

Credit card/bank charges 17,710 12,404 (5,306) (42.8) %

Insurance 4,350 2,182 (2,168) (99.4) %

Legal fees and settlements 4,060 5,070 1,010 19.9 %

Supplies 5,095 8,331 3,236 38.8 %

Other 5,757 5,262 (495) (9.4) %

$ 106,050 $ 93,200 $ (12,850) (13.8) %

Consulting and outsourced services expense increased $3.3 million, or 13.7%, due to our strategic imperatives and data processing fees related to higher activity on Emerald Cards®.

Technology-related expenses increased $3.9 million, or 19.8%, due to increased investments in information technology.

Credit card and bank charges increased $5.3 million, or 42.8%, due to higher Wave small business payment processing fees and fees related to Emerald Cards ® .

Supplies expense decreased $3.2 million , or 38.8% , due to office supplies purchased in the prior year in response to the COVID-19 pandemic.

We recorded an income tax benefit of $109.8 million in the current year compared to a benefit of $46.5 million in the prior year, the increase is due to discrete tax items in the current year.

The effective tax rate for the three months ended December 31, 2021, and 2020 was 36.7% and 15.5%, respectively.

See Item 1, note 7 to the consolidated financial statements for additional discussion.

Q2 FY2022 Form 10-Q| H&R Block, Inc.

whereas the 2020 tax season deadline of May 17, 2021 did not extend into the three month period ended September 30, 2021.

Consolidated - Financial Results (in 000s, except per share amounts)

Six months ended December 31, 2021 2020 $ Change % Change

assisted tax preparation $ 64,452 $ 241,187 $ (176,735) (73.3) %

royalties 10,762 28,009 (17,247) (61.6) %

DIY tax preparation 13,271 53,577 (40,306) (75.2) %

International 86,232 85,413 819 1.0 %

Refund Transfers 2,442 6,510 (4,068) (62.5) %

Emerald Card® 53,088 22,398 30,690 137.0 %

Peace of Mind® Extended Service Plan 42,151 45,762 (3,611) (7.9) %

Tax Identity Shield® 10,353 13,803 (3,450) (25.0) %

Interest and fee income on Emerald Advance SM

12,903 14,565 (1,662) (11.4) %

Wave 38,634 28,574 10,060 35.2 %

Other 17,152 19,513 (2,361) (12.1) %

Total revenues 351,440 559,311 (207,871) (37.2) %

Compensation and benefits:

Field wages 126,137 158,852 32,715 20.6 %

Other wages 122,131 126,636 4,505 3.6 %

Benefits and other compensation 55,657 61,455 5,798 9.4 %

303,925 346,943 43,018 12.4 %

Occupancy 195,118 195,879 761 0.4 %

Marketing and advertising 27,214 30,982 3,768 12.2 %

Depreciation and amortization 71,346 77,936 6,590 8.5 %

Bad debt 14,709 17,090 2,381 13.9 %

Other 191,200 170,782 (20,418) (12.0) %

Total operating expenses 803,512 839,612 36,100 4.3 %

Other income (expense), net 1,751 3,042 (1,291) (42.4) %

Interest expense on borrowings (45,915) (56,186) 10,271 18.3 %

Pretax loss (496,236) (333,445) (162,791) (48.8) %

Income tax benefit (157,218) (18,546) 138,672 747.7 %

Net loss from continuing operations (339,018) (314,899) (24,119) (7.7) %

Net loss from discontinued operations (3,188) (3,108) (80) (2.6) %

Net loss $ (342,206) $ (318,007) $ (24,199) (7.6) %

BASIC AND DILUTED LOSS PER SHARE:

Continuing operations $ (1.93) $ (1.68) $ (0.25) (14.9) %

Discontinued operations (0.02) (0.01) (0.01) (100.0) %

Consolidated $ (1.95) $ (1.69) $ (0.26) (15.4) %

Adjusted diluted EPS (1)

$ (1.80) $ (1.49) $ 0.31 20.8 %

$ (378,975) $ (199,323) $ (179,652) (90.1) %

(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.

Six months ended December 31, 2021 compared to December 31, 2020

Revenues decreased $207.9 million, or 37.2%, 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, whereas the 2020 tax season deadline of May 17, 2021 did not extend into the six month period ended December 31, 2021.

This resulted in a decrease in U.S.

tax preparation, royalty and Refund Transfer revenues.

H&R Block, Inc.

|Q2 FY2022 Form 10-Q

Emerald Card® revenues increased $30.7 million, or 137.0%, due to higher card activity which is a result of the IRS loading Child Tax Credits monthly to Emerald Cards®.

Wave revenues increased $10.1 million, or 35.2% due to higher small business payments processing volumes.

Total operating expenses decreased $50.7 million, or 12.1%, from the prior year.

Total operating expenses decreased $36.1 million, or 4.3%, from the prior year period.

Field wages decreased $32.7 million, or 20.6%, 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 $4.5 million, or 3.6%, 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.

Benefits and other compensation decreased $5.8 million, or 9.4%, due to lower payroll taxes as a result of lower wages.

Depreciation and amortization expense decreased $6.6 million, or 8.5%, due primarily to lower amortization of acquired intangibles.

Other expenses increased $20.4 million, or 12.0%.

The components of other expenses are as follows:

Three months ended September 30, 2021 2020 $ Change % Change

Six months ended December 31, 2021 2020 $ Change % Change

Consulting and outsourced services $ 53,468 $ 43,043 $ (10,425) (24.2) %

10 unchanged sentences

Consulting and outsourced services expense increased $10.4 million, or 24.2%, 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.

Technology-related expenses increased $5.5 million, or 14.3%, due to increased investments in information technology.

Credit card and bank charges increased $6.8 million, or 26.2%, due to higher Wave small business payment processing fees and fees related to Emerald Cards ® .

Legal fees and settlements decreased $5.2 million, or 42.5%, due to a legal accrual in the prior year.

Interest expense on borrowings decreased $10.3 million, or 18.3%, primarily due to higher CLOC borrowings in the prior year.

We recorded an income tax benefit of $157.2 million in the current year compared to a benefit of $18.5 million in the prior year, the increase is due to discrete tax items in the current year.

The effective tax rate for the six months ended December 31, 2021, and 2020 was 31.7% and 5.6%, respectively.

See Item 1, note 7 to the consolidated financial statements for additional discussion.

7 unchanged sentences

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

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.

Q2 FY2022 Form 10-Q| H&R Block, Inc.

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 December 31, 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 six months ended December 31, 2021 and 2020.

See Item 1 for the complete consolidated statements of cash flows for these periods.

Three months ended September 30, 2021 2020

Six months ended December 31, 2021 2020

Net cash provided by (used in):

5 unchanged sentences

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.

Cash used in operations totaled $913.6 million for the six months ended December 31, 2021 compared to $702.8 million in the prior year period.

The change is primarily due to higher bonus payments, changes due to the expiration of tax statutes of limitations 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.

Cash used in investing activities totaled $57.4 million for the six months ended December 31, 2021 compared to $58.7 million in the prior year period.

The change is primarily due to a decrease in EA revolving loans funded and franchise loans funded.

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 used in financing activities totaled $149.9 million for the six months ended December 31, 2021 compared to $1.3 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, partially offset by new draws on our CLOC and the repurchase of shares in the current year.

CASH REQUIREMENTS –

2 unchanged sentences

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.

Dividends paid totaled $96.9 million and $100.2 million for the six months ended December 31, 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 $239.4 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.

During the six months ended December 31, 2021, we repurchased $324.6 million of our common stock at an average price of $24.24 per share.

In the prior year period, we repurchased $150.1 million of our common stock at an average price of $15.83 per share.

4 unchanged sentences

Capital Investment.

Capital expenditures totaled $15.6 million and $13.4 million for the three months ended September 30, 2021 and 2020, respectively.

Capital expenditures totaled $39.4 million and $34.8 million for the six months ended December 31, 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.

We acquired franchisee and competitor businesses totaling $19.3 million and $12.2 million during the six months ended December 31, 2021 and 2020, respectively.

See Item 1, note 5 for additional information on our acquisitions.

Q1 FY2022 Form 10-Q| H&R Block, Inc.

H&R Block, Inc.

|Q2 FY2022 Form 10-Q

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

We ha d an outstanding balance of $275.0 million under the CLOC as of December 31, 2021 and amounts available to borrow were not limited by the debt-to-EBITDA covenant as of December 31, 2021.

We intend to redeem the $500.0 million in principal outstanding of our 5.500% notes due November 2022 by the end of the fiscal year.

The following table provides ratings for debt issued by Block Financial LLC (Block Financial) as of December 31, 2021 and June 30, 2021:

As of December 31, 2021 June 30, 2021

Short-term Long-term Outlook Short-term Long-term Outlook

2 unchanged sentences

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.

CASH AND OTHER ASSETS – As of December 31, 2021, we held cash and cash equivalents, excluding restricted amounts, of $336.3 million, including $164.3 million held by our foreign subsidiaries.

Foreign Operations.

1 unchanged sentence

To mitigate foreign currency risk, we sometimes enter into foreign exchange forward contracts.

There were no forward contracts outstanding as of September 30, 2021.

There were no forward contracts outstanding as of December 31, 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.

The impact of changes in foreign exchange rates during the period on our international cash balances resulted in an decrease of $3.3 million during the six months ended December 31, 2021 and in an increase of $11.0 million during the six months ended December 31, 2020.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS – Except as described in Recent Developments related to our amended PMA agreement with Meta and in Item 1, note 8 related to the Emerald Advance℠ purchase participation interest, 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.

4 unchanged sentences

SUMMARIZED BALANCE SHEET - GUARANTOR AND ISSUER (in 000s)

As of September 30, 2021 June 30, 2021

As of December 31, 2021 June 30, 2021

Current assets $ 295,276 $ 50,737

2 unchanged sentences

Noncurrent liabilities 1,771,014 1,994,582

H&R Block, Inc.

|Q1 FY2022 Form 10-Q

Q2 FY2022 Form 10-Q| H&R Block, Inc.

SUMMARIZED STATEMENTS OF OPERATIONS - GUARANTOR AND ISSUER (in 000s)

Three months ended September 30, 2021 Two months ended June 30, 2021

Six months ended December 31, 2021 Two months ended June 30, 2021

Total revenues $ 68,095 $ 22,978

2 unchanged sentences

Net income (loss) (16,000) 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.

The table above reflects $2.1 billion of non-current intercompany receivables due to the Issuer from non-guarantor subsidiaries as of December 31, 2021 and June 30, 2021.

REGULATORY ENVIRONMENT

14 unchanged sentences

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.

Q1 FY2022 Form 10-Q| H&R Block, Inc.

H&R Block, Inc.

|Q2 FY2022 Form 10-Q

The following is a reconciliation of net income (loss) to EBITDA from continuing operations, which is a non-GAAP financial measure:

Three months ended September 30,

Three months ended December 31, Six months ended December 31,

2021 2020 2021 2020

Net loss - as reported $ (190,605) $ (255,751) $ (342,206) $ (318,007)

1 unchanged sentence

Net loss from continuing operations - as reported (189,073) (253,989) (339,018) (314,899)

Income taxes (benefit) (47,373) 27,964

Income tax benefit (109,845) (46,510) (157,218) (18,546)

Interest expense 23,085 21,489 45,915 56,186

2 unchanged sentences

EBITDA from continuing operations $ (240,202) $ (239,311) $ (378,975) $ (199,323)

The following is a reconciliation of our results from continuing operations to our adjusted results from continuing operations, which are non-GAAP financial measures:

The following is a reconciliation of our results from continuing operations to our adjusted results from continuing operations, which is a non-GAAP financial measure:

(in 000s, except per share amounts)

Three months ended September 30,

Three months ended December 31, Six months ended December 31,

2021 2020 2021 2020

Net loss from continuing operations - as reported $ (189,073) $ (253,989) $ (339,018) $ (314,899)

15 unchanged sentences

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

Q2 FY2022 Form 10-Q| H&R Block, Inc.

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.

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.

9 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis