What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-02-07 compared with 2022-11-03 · 146 added, 60 removed, 181 unchanged (53% of the section changed)

5 unchanged sentences

We report a single segment that includes all of our continuing operations.

Q1 FY2023 Form 10-Q| H&R Block, Inc.

H&R Block, Inc.

|Q2 FY2023 Form 10-Q

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

Three months ended September 30, 2022 2021 $ Change % Change

Three months ended December 31, 2022 2021 $ Change % Change

tax preparation and related services:

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tax preparation and related services 91,037 74,158 16,879 22.8 %

86,279 86,425 (146) (0.2) %

Financial services:

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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.

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.

royalty revenue decreased $1.1 million, or 15.4%, due to the timing of royalty incentives.

Q2 FY2023 Form 10-Q| H&R Block, Inc.

Three months ended December 31, 2022 compared to December 31, 2021

Revenues increased $7.6 million, or 4.8%, from the prior year.

assisted tax preparation revenues increased $10.4 million, or 33.6%, primarily due to higher volumes and a higher net average charge in the current year.

royalty revenue increased $1.5 million, or 45.3%, due to the timing of royalty incentives.

DIY tax preparation revenues increased $2.9 million, or 31.9%, primarily due to higher volumes in the current year.

Emerald Card revenues decreased $12.4 million, or 49.7%, due to higher card activity in the prior year, which is a result of the IRS loading Child Tax Credits monthly to Emerald Cards®.

Wave revenues increased $2.4 million, or 12.5%, due to higher small business payments processing volumes.

Total operating expenses increased $13.5 million, or 3.1%, from the prior year.

Field wages increased $6.1 million, or 8.8%, due to higher tax professional and field management wages due to increased volumes and higher hourly rates in the current period.

Other wages increased $6.5 million, or 10.1%, due to higher corporate wages in the current year.

Benefits and other compensation increased $4.1 million, or 13.5%, due to higher stock based compensation.

Bad debt expense increased $8.8 million, or 64%, due to higher Emerald Card® losses and higher Emerald Advance SM volumes compared to the prior year.

Other operating expenses decreased $8.9 million, or 8.4%.

The components of other expenses are as follows:

Three months ended December 31, 2022 2021 $ Change % Change

Consulting and outsourced services $ 22,452 $ 27,611 $ 5,159 18.7 %

Bank partner fees (778) 2,550 3,328 **

Client claims and refunds 5,445 6,200 755 12.2 %

Employee and travel expenses 14,701 9,417 (5,284) (56.1) %

Technology-related expenses 24,489 23,300 (1,189) (5.1) %

Credit card/bank charges 17,322 17,710 388 2.2 %

Insurance (349) 4,350 4,699 **

Legal fees and settlements 2,184 4,060 1,876 46.2 %

Supplies 3,940 5,095 1,155 22.7 %

Other 7,737 5,757 (1,980) (34.4) %

$ 97,143 $ 106,050 $ 8,907 8.4 %

Consulting and outsourced services expense decreased $5.2 million, or 18.7%, due to lower call center expenses and lower data processing fees related to lower activity on Emerald Cards®.

Employee and travel expenses increased $5.3 million, or 56.1%, due to more travel in the current year.

Insurance expense decreased $4.7 million due to favorable developments in insurance loss reserves.

Interest expense on borrowings decreased $4.1 million, or 17.8%, due to the repayment of our $500 million 5.500% Senior Notes in May 2022, partially offset by higher interest expense on our CLOC borrowings in the current year.

We recorded an income tax benefit of $77.1 million in the current year compared to $109.8 million in the prior year.

The effective tax rate for the three months ended December 31, 2022, and 2021 was 25.9% and 36.7%, respectively.

H&R Block, Inc.

|Q2 FY2023 Form 10-Q

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.

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

Six months ended December 31, 2022 2021 $ Change % Change

tax preparation and related services:

Assisted tax preparation $ 77,528 $ 64,452 $ 13,076 20.3 %

Royalties 11,174 10,762 412 3.8 %

DIY tax preparation 15,308 13,271 2,037 15.3 %

Refund Transfers 2,826 2,442 384 15.7 %

Peace of Mind® Extended Service Plan 42,090 42,151 (61) (0.1) %

Tax Identity Shield® 10,517 10,353 164 1.6 %

Other 17,873 17,152 721 4.2 %

tax preparation and related services 177,316 160,583 16,733 10.4 %

Financial services:

Emerald Card® and Spruce SM

24,090 53,088 (28,998) (54.6) %

Interest and fee income on Emerald Advance SM

13,517 12,903 614 4.8 %

Total financial services 37,607 65,991 (28,384) (43.0) %

International 86,880 86,232 648 0.8 %

Wave 44,587 38,634 5,953 15.4 %

Total revenues $ 346,390 $ 351,440 $ (5,050) (1.4) %

Compensation and benefits:

Field wages 137,877 126,137 (11,740) (9.3) %

Other wages 134,283 122,131 (12,152) (9.9) %

Benefits and other compensation 69,109 55,657 (13,452) (24.2) %

341,269 303,925 (37,344) (12.3) %

Occupancy 198,763 195,118 (3,645) (1.9) %

Marketing and advertising 25,791 27,214 1,423 5.2 %

Depreciation and amortization 66,347 71,346 4,999 7.0 %

Bad debt 22,745 14,709 (8,036) (54.6) %

Other 183,789 191,200 7,411 3.9 %

Total operating expenses 838,704 803,512 (35,192) (4.4) %

Other income (expense), net 7,796 1,751 6,045 345.2 %

Interest expense on borrowings (34,809) (45,915) 11,106 24.2 %

Pretax loss (519,327) (496,236) (23,091) (4.7) %

Income tax benefit (131,097) (157,218) (26,121) (16.6) %

Net loss from continuing operations (388,230) (339,018) (49,212) (14.5) %

Net loss from discontinued operations (3,770) (3,188) (582) (18.3) %

Net loss $ (392,000) $ (342,206) $ (49,794) (14.6) %

BASIC AND DILUTED LOSS PER SHARE:

Continuing operations $ (2.48) $ (1.93) $ (0.55) 28.5 %

Discontinued operations (0.02) (0.02) — — %

Consolidated $ (2.50) $ (1.95) $ (0.55) 28.2 %

Adjusted diluted EPS (1)

$ (2.36) $ (1.80) $ (0.56) 31.1 %

$ (418,171) $ (378,975) $ (39,196) (10.3) %

(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.

Q2 FY2023 Form 10-Q| H&R Block, Inc.

Six months ended December 31, 2022 compared to December 31, 2021

Revenues decreased $5.1 million, or 1.4%, from the prior year.

assisted tax preparation revenues increased $13.1 million, or 20.3%, due to higher volumes and a higher net average charge in the current year.

Emerald Card® revenues decreased $29.0 million, or 54.6%, due to higher card activity in the prior year, which is a result of the IRS loading Child Tax Credits monthly to Emerald Cards®.

Wave revenues increased $6.0 million, or 15.4%, 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.

Total operating expenses increased $35.2 million, or 4.4%, from the prior year period.

Field wages increased $11.7 million, or 9.3%, due to higher tax professional and field management wages due to increased volumes and higher hourly rates in the current period.

Other wages increased $12.2 million, or 9.9%, 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.

Benefits and other compensation increased $13.5 million, or 24.2%, due to higher stock based compensation, employee insurance and payroll taxes.

Depreciation and amortization expense decreased $5.0 million, or 7.0%, due to lower amortization of acquired intangibles.

Other operating expenses increased $1.5 million, or 1.8%.

Bad debt expense increased $8.0 million, or 54.6%, due to higher Emerald Card® losses and higher Emerald Advance SM volumes compared to the prior year.

Other expenses decreased $7.4 million, or 3.9%.

The components of other expenses are as follows:

Three months ended September 30, 2022 2021 $ Change % Change

Six months ended December 31, 2022 2021 $ Change % Change

Consulting and outsourced services $ 40,505 $ 53,468 $ 12,963 24.2 %

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$ 183,789 $ 191,200 $ 7,411 3.9 %

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.

Consulting and outsourced services expense decreased $13.0 million, or 24.2%, due to lower call center expenses and lower data processing fees related to lower activity on Emerald Cards®.

Employee and travel expenses increased $7.1 million, or 51.5%, due to more travel in the current year.

Technology-related expenses increased $6.8 million, or 15.5%, 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.

Other income (expense) increased $6.0 million, or 345.2%, primarily due to higher interest income as a result of higher interest rates.

Interest expense on borrowings decreased $11.1 million, or 24.2%, due to the repayment of our $500 million 5.500% Senior Notes in May 2022, partially offset by higher interest expense on our CLOC borrowings in the current year.

We recorded an income tax benefit of $131.1 million in the current year compared to $157.2 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.

The effective tax rate for the six months ended December 31, 2022, and 2021 was 25.2% and 31.7%, respectively.

FINANCIAL CONDITION

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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.

Q1 FY2023 Form 10-Q| H&R Block, Inc.

H&R Block, Inc.

|Q2 FY2023 Form 10-Q

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.

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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.

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, 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 six months ended December 31, 2022 and 2021.

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

Three months ended September 30, 2022 2021

Net cash used in:

Six months ended December 31, 2022 2021

Net cash provided by (used in):

Operating activities $ (780,458) $ (913,571)

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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.

Cash used in operations totaled $780.5 million for the six months ended December 31, 2022 compared to $913.6 million in the prior year period.

The change is primarily due to the receipt of income tax receivables in the current year, partially offset by an increase in our net loss 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.

Cash used in investing activities totaled $99.1 million for the six months ended December 31, 2022 compared to $57.4 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 provided by financing activities totaled $128.8 million for the six months ended December 31, 2022 compared to cash used in financing activities of $149.9 million in the prior year period.

The change is primarily due to higher draws on our CLOC in the current year.

CASH REQUIREMENTS –

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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.

Dividends paid totaled $89.2 million and $96.9 million for the six months ended December 31, 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.

During the six months ended December 31, 2022, we repurchased $350.1 million of our common stock at an average price of $42.86 per share.

In the prior year period, we repurchased $324.6 million of our common stock at an average price of $24.24 per share.

Our current share repurchase program has remaining authorization of $1.03 billion which is effective through June 2025.

Our current share repurchase program has remaining authorization of $900.0 million, 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.

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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

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.

Capital expenditures totaled $41.5 million and $39.4 million for the six months ended December 31, 2022 and 2021, respectively.

Our capital expenditures relate primarily to recurring improvements to

Q2 FY2023 Form 10-Q| H&R Block, Inc.

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.

We acquired franchisee and competitor businesses totaling $39.8 million and $19.3 million during the six months ended December 31, 2022 and 2021, respectively.

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

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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

We had an outstanding balance of $580.0 million under our CLOC as of December 31, 2022.

Amounts available to borrow were not limited by the debt-to-EBITDA covenant as of December 31, 2022.

The following table provides ratings for debt issued by Block Financial LLC (Block Financial) as of December 31, 2022 and June 30, 2022:

As of December 31, 2022 June 30, 2022

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

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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.

CASH AND OTHER ASSETS – As of December 31, 2022, we held cash and cash equivalents, excluding restricted amounts, of $264.5 million, including $113.7 million held by our foreign subsidiaries.

Foreign Operations.

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

There were no forward contracts outstanding as of September 30, 2022.

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

The impact of changes in foreign exchange rates during the period on our international cash balances resulted in a decrease of $7.8 million and $3.3 million during the six months ended December 31, 2022 and 2021, respectively.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS – Emerald Advance SM lines of credit (EAs) are originated by Pathward TM N.A.

We purchase a 90% participation interest, at par, in all EAs originated by Pathward in accordance with our participation agreement.

At December 31, 2022, the principal balance of purchased participation interests totaled $270.4 million.

There have been no other 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.

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

As of September 30, 2022 June 30, 2022

As of December 31, 2022 June 30, 2022

Current assets $ 312,211 $ 38,922

2 unchanged sentences

Noncurrent liabilities 2,073,780 1,495,732

Q1 FY2023 Form 10-Q| H&R Block, Inc.

H&R Block, Inc.

|Q2 FY2023 Form 10-Q

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

Three months ended September 30, 2022 Twelve months ended June 30, 2022

Six months ended December 31, 2022 Twelve months ended June 30, 2022

Total revenues $ 40,288 $ 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.

Income (loss) from continuing operations before income taxes (53,653) 44,404

Net income (loss) from continuing operations (53,364) 41,979

Net income (loss) (57,134) 35,007

The table above reflects $1.9 billion and $1.6 billion of non-current intercompany receivables due to the Issuer from non-guarantor subsidiaries as of December 31, 2022 and June 30, 2022, respectively.

REGULATORY ENVIRONMENT

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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.

On November 14, 2022, the CFPB filed a petition for review with the United States Supreme Court.

We are unsure whether, when, or in what form the Payday Rule will go into effect.

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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

Q2 FY2023 Form 10-Q| H&R Block, Inc.

The following is a reconciliation of net 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,

2022 2021 2022 2021

Net loss - as reported $ (223,579) $ (190,605) $ (392,000) $ (342,206)

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(in 000s, except per share amounts)

Three months ended September 30,

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

2022 2021 2022 2021

Net loss from continuing operations - as reported $ (220,863) $ (189,073) $ (388,230) $ (339,018)

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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.

Q1 FY2023 Form 10-Q| H&R Block, Inc.

They may also include the expected impact of the coronavirus (COVID–19) pandemic, including, without limitation, the impact on economic

H&R Block, Inc.

|Q2 FY2023 Form 10-Q

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.

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