H&R BLOCK INC 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 partners, 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 solutions through our company-owned and franchise offices and online through Wave. We report a single segment that includes all of our continuing operations. 14 Q1 FY2023 Form 10-Q| H&R Block, Inc. Table of Contents Consolidated – Financial Results (in 000s, except per share amounts) Three months ended September 30, 2022 2021 $ Change % Change Revenues: U.S. tax preparation and related services: Assisted tax preparation $ 36,312 $ 33,607 $ 2,705 8.0 % Royalties 6,228 7,358 (1,130) (15.4) % DIY tax preparation 3,158 4,061 (903) (22.2) % Refund Transfers 1,284 1,665 (381) (22.9) % Peace of Mind® Extended Service Plan 24,770 24,836 (66) (0.3) % Tax Identity Shield® 5,167 5,153 14 0.3 % Other 9,360 9,745 (385) (4.0) % Total U.S. tax preparation and related services: 86,279 86,425 (146) (0.2) % Financial services: Emerald Card® and Spruce SM 11,612 28,258 (16,646) (58.9) % Interest and fee income on Emerald Advance SM 614 479 135 28.2 % Total financial services 12,226 28,737 (16,511) (57.5) % International 58,834 58,325 509 0.9 % Wave 22,646 19,137 3,509 18.3 % Total revenues $ 179,985 $ 192,624 $ (12,639) (6.6) % Compensation and benefits: Field wages 61,673 56,079 (5,594) (10.0) % Other wages 63,753 58,064 (5,689) (9.8) % Benefits and other compensation 34,832 25,450 (9,382) (36.9) % 160,258 139,593 (20,665) (14.8) % Occupancy 97,590 95,822 (1,768) (1.8) % Marketing and advertising 10,649 10,073 (576) (5.7) % Depreciation and amortization 33,624 35,715 2,091 5.9 % Bad debt 329 1,043 714 68.5 % Other 86,646 85,150 (1,496) (1.8) % Total operating expenses 389,096 367,396 (21,700) (5.9) % Other income (expense), net 3,611 284 3,327 1,171.5 % Interest expense on borrowings (15,824) (22,830) 7,006 30.7 % Pretax loss (221,324) (197,318) (24,006) (12.2) % Income tax benefit (53,957) (47,373) 6,584 13.9 % Net loss from continuing operations (167,367) (149,945) (17,422) (11.6) % Net loss from discontinued operations (1,054) (1,656) 602 36.4 % Net loss $ (168,421) $ (151,601) $ (16,820) (11.1) % BASIC AND DILUTED LOSS PER SHARE: Continuing operations $ (1.05) $ (0.84) $ (0.21) (25.0) % Discontinued operations (0.01) (0.01) — — % Consolidated $ (1.06) $ (0.85) $ (0.21) (24.7) % Adjusted diluted EPS (1) $ (0.99) $ (0.78) $ (0.21) (26.9) % EBITDA (1) $ (171,876) $ (138,773) $ (33,103) (23.9) % (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, 2022 compared to September 30, 2021 Revenues decreased $12.6 million, or 6.6%, from the prior year. U.S. assisted tax preparation revenues increased $2.7 million, or 8.0%, primarily due to a higher net average charge and slightly higher return volume in the current year. U.S. royalty revenue decreased $1.1 million, or 15.4%, due to the timing of royalty incentives. H&R Block, Inc. |Q1 FY2023 Form 10-Q 15 Table of Contents Emerald Card and Spruce revenues decreased $16.6 million, or 58.9%, due to the IRS loading Child Tax Credits monthly to Emerald Cards® in the prior year. International tax preparation volumes increased in Australia, which was largely offset by the impacts of foreign currency exchange rates compared to the prior year. Wave revenues increased $3.5 million, or 18.3%, due to higher small business payments processing volumes. Total operating expenses increased $21.7 million, or 5.9%, from the prior year. Field wages increased $5.6 million, or 10%, due to higher field management wages and a bonus accrual adjustment in the prior year. Other wages increased $5.7 million, or 9.8%, due to higher corporate wages in the current year. Benefits and other compensation increased $9.4 million, or 36.9%, due to higher employee insurance costs and higher payroll taxes as a result of the increase in wages. Occupancy expense increased $1.8 million, or 1.8%, due to higher office rent rates in the current year. Depreciation and amortization expense decreased $2.1 million, or 5.9%, due to lower amortization of acquired intangibles. Other operating expenses increased $1.5 million, or 1.8%. The components of other expenses are as follows: (in 000s) Three months ended September 30, 2022 2021 $ Change % Change Consulting and outsourced services $ 18,053 $ 25,857 $ 7,804 30.2 % Bank partner fees (19) 108 127 ** Client claims and refunds 6,770 6,015 (755) (12.6) % Employee and travel expenses 6,068 4,290 (1,778) (41.4) % Technology-related expenses 25,915 20,325 (5,590) (27.5) % Credit card/bank charges 16,201 14,961 (1,240) (8.3) % Insurance 3,718 3,331 (387) (11.6) % Legal fees and settlements 2,286 3,042 756 24.9 % Supplies 3,395 2,823 (572) (20.3) % Other 4,259 4,398 139 3.2 % $ 86,646 $ 85,150 $ (1,496) (1.8) % Consulting and outsourced services expense decreased $7.8 million, or 30.2%, due to lower call center expenses and data processing fees related to lower activity on Emerald Cards. Employee and travel expenses increased $1.8 million, or 41.4%, due to more travel in the current year. Technology-related expenses increased $5.6 million, or 27.5%, due to increased investments in information technology. Credit card and bank charges increased $1.2 million, or 8.3%, due to higher Wave small business payment processing fees. Other income (expense), net increased $3.3 million primarily due to higher interest income as a result of higher interest rates. Interest expense on borrowings decreased $7.0 million, or 30.7%, due to the repayment of our $500 million 5.500% Senior Notes in May 2022. We recorded an income tax benefit of $54.0 million in the current year compared to $47.4 million in the prior year. The effective tax rate for the three months ended September 30, 2022, and 2021 was 24.4% and 24.0%, respectively. 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. 16 Q1 FY2023 Form 10-Q| H&R Block, Inc. Table of Contents 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. 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, 2022 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, 2022 and 2021. See Item 1 for the complete consolidated statements of cash flows for these periods. (in 000s) Three months ended September 30, 2022 2021 Net cash used in: Operating activities $ (321,666) $ (312,624) Investing activities (37,358) (19,453) Financing activities (246,893) (217,322) Effects of exchange rates on cash (13,422) (3,959) Net decrease in cash and cash equivalents, including restricted balances $ (619,339) $ (553,358) Operating Activities. Cash used in operations totaled $321.7 million for the three months ended September 30, 2022 compared to $312.6 million in the prior year period. The change is primarily due to the timing of receivables collections and an increase in our net loss, partially offset by the receipt of an income tax receivable in the current year. Investing Activities. Cash used in investing activities totaled $37.4 million for the three months ended September 30, 2022 compared to $19.5 million in the prior year period. The change is primarily due to payments to acquire businesses in the current year. Financing Activities. Cash used in financing activities totaled $246.9 million for the three months ended September 30, 2022 compared to $217.3 million in the prior year period. The change is due to higher share repurchases in the current 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 $43.1 million and $49.0 million for the three months ended September 30, 2022 and 2021, 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. In August 2022, the Board of Directors approved a $1.25 billion share repurchase program, effective through fiscal year 2025. During the three months ended September 30, 2022, we repurchased $219.8 million of our common stock at an average price of $44.60 per share. In the prior year period, we repurchased $165.8 million of our common stock at an average price of $24.37 per share. Our current share repurchase program has remaining authorization of $1.03 billion which is effective through June 2025. 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. H&R Block, Inc. |Q1 FY2023 Form 10-Q 17 Table of Contents Capital Investment. Capital expenditures totaled $16.2 million and $15.6 million for the three months ended September 30, 2022 and 2021, 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 $16.5 million and $4.3 million during the three months ended September 30, 2022 and 2021, respectively. See Item 1, note 5 for additional information on our acquisitions. FINANCING RESOURCES – The CLOC has capacity 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 had no outstanding balance under our CLOC and amounts available to borrow were limited by the debt-to-EBITDA covenant to approximately $1.47 billion as of September 30, 2022. The following table provides ratings for debt issued by Block Financial LLC (Block Financial) as of September 30, 2022 and June 30, 2022: As of September 30, 2022 June 30, 2022 Short-term Long-term Outlook Short-term Long-term Outlook Moody's P-3 Baa3 Positive 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 as of June 30, 2022 in our Annual Report to Shareholders on Form 10-K. CASH AND OTHER ASSETS – As of September 30, 2022, we held cash and cash equivalents, excluding restricted amounts, of $322.8 million, including $127.4 million held by our foreign subsidiaries. We received $100.6 million of our federal income tax receivable subsequent to September 30, 2022. 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, 2022. 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 a decrease of $13.4 million during the three months ended September 30, 2022 and in a decrease of $4.0 million during the three months ended September 30, 2021. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS – There have been no material changes in our contractual obligations and commercial commitments from those reported in our June 30, 2022 Annual Report to Shareholders on Form 10-K. 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, 2022 June 30, 2022 Current assets $ 50,399 $ 38,922 Noncurrent assets 1,682,102 1,698,242 Current liabilities 106,679 75,855 Noncurrent liabilities 1,497,818 1,495,732 18 Q1 FY2023 Form 10-Q| H&R Block, Inc. Table of Contents SUMMARIZED STATEMENTS OF OPERATIONS - GUARANTOR AND ISSUER (in 000s) Three months ended September 30, 2022 Twelve months ended June 30, 2022 Total revenues $ 13,420 $ 199,683 Income from continuing operations before income taxes 771 44,404 Net income from continuing operations 3,490 41,979 Net income 2,437 35,007 The table above reflects $1.6 billion of non-current intercompany receivables due to the Issuer from non-guarantor subsidiaries as of September 30, 2022 and June 30, 2022. 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. On October 19, 2022, the appellate court found that the funding mechanism for the CFPB was unconstitutional and vacated the Payday Rule; however, the CFPB may take further action to challenge this ruling. 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 June 30, 2022 Annual Report to Shareholders on Form 10-K. 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, adjusted diluted earnings per share from continuing operations, free cash flow and free cash flow yield. 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. H&R Block, Inc. |Q1 FY2023 Form 10-Q 19 Table of Contents The following is a reconciliation of net loss to EBITDA from continuing operations, which is a non-GAAP financial measure: (in 000s) Three months ended September 30, 2022 2021 Net loss - as reported $ (168,421) $ (151,601) Discontinued operations, net 1,054 1,656 Net loss from continuing operations - as reported (167,367) (149,945) Add back: Income tax benefit (53,957) (47,373) Interest expense 15,824 22,830 Depreciation and amortization 33,624 35,715 (4,509) 11,172 EBITDA from continuing operations $ (171,876) $ (138,773) 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, 2022 2021 Net loss from continuing operations - as reported $ (167,367) $ (149,945) Adjustments: Amortization of intangibles related to acquisitions (pretax) 12,696 14,870 Tax effect of adjustments (1) (3,221) (3,635) Adjusted net loss from continuing operations $ (157,892) $ (138,710) Diluted loss per share from continuing operations - as reported $ (1.05) $ (0.84) Adjustments, net of tax 0.06 0.06 Adjusted diluted loss per share from continuing operations $ (0.99) $ (0.78) (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. 20 Q1 FY2023 Form 10-Q| H&R Block, Inc. 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 June 30, 2022 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 June 30, 2022. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in our market risks from those reported in our June 30, 2022 Annual Report to Shareholders on Form 10-K.