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 do-it-yourself (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 United States (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. H&R Block, Inc. |Q1 FY2024 Form 10-Q 15 Table of Contents Consolidated – Financial Results (in 000s, except per share amounts) Three months ended September 30, 2023 2022 $ Change % Change Revenues: U.S. tax preparation and related services: Assisted tax preparation $ 39,263 $ 36,312 $ 2,951 8.1 % Royalties 5,701 6,228 (527) (8.5) % DIY tax preparation 3,848 3,158 690 21.8 % Refund Transfers 1,142 1,284 (142) (11.1) % Peace of Mind® Extended Service Plan 24,847 24,770 77 0.3 % Tax Identity Shield® 4,580 5,167 (587) (11.4) % Other 10,980 9,360 1,620 17.3 % Total U.S. tax preparation and related services 90,361 86,279 4,082 4.7 % Financial services: Emerald Card® and Spruce SM 8,633 11,612 (2,979) (25.7) % Interest and fee income on Emerald Advance SM 298 614 (316) (51.5) % Total financial services 8,931 12,226 (3,295) (27.0) % International 60,565 58,834 1,731 2.9 % Wave 23,943 22,646 1,297 5.7 % Total revenues $ 183,800 $ 179,985 $ 3,815 2.1 % Compensation and benefits: Field wages 62,435 61,673 (762) (1.2) % Other wages 72,098 63,753 (8,345) (13.1) % Benefits and other compensation 35,248 34,832 (416) (1.2) % 169,781 160,258 (9,523) (5.9) % Occupancy 99,285 97,590 (1,695) (1.7) % Marketing and advertising 5,481 10,649 5,168 48.5 % Depreciation and amortization 30,225 33,624 3,399 10.1 % Bad debt 4,798 329 (4,469) (1,358.4) % Other 80,556 86,646 6,090 7.0 % Total operating expenses 390,126 389,096 (1,030) (0.3) % Other income (expense), net 9,836 3,611 6,225 172.4 % Interest expense on borrowings (15,870) (15,824) (46) (0.3) % Pretax loss (212,360) (221,324) 8,964 4.1 % Income tax benefit (49,487) (53,957) (4,470) (8.3) % Net loss from continuing operations (162,873) (167,367) 4,494 2.7 % Net loss from discontinued operations (609) (1,054) 445 42.2 % Net loss $ (163,482) $ (168,421) $ 4,939 2.9 % BASIC AND DILUTED LOSS PER SHARE: Continuing operations $ (1.11) $ (1.05) $ (0.06) (5.7) % Discontinued operations (0.01) (0.01) — — % Consolidated $ (1.12) $ (1.06) $ (0.06) (5.7) % Adjusted diluted EPS (1) $ (1.05) $ (0.99) $ (0.06) (6.1) % EBITDA (1) $ (166,265) $ (171,876) $ 5,611 3.3 % (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. 16 Q1 FY2024 Form 10-Q| H&R Block, Inc. Table of Contents Three months ended September 30, 2023 compared to September 30, 2022 Revenues increased $3.8 million, or 2.1%, from the prior year. U.S. assisted tax preparation revenues increased $3.0 million, or 8.1%, primarily due to a higher net average charge in the current year. Other revenues increased $1.6 million, or 17.3%, primarily due to higher extension filing fees and accounting and bookkeeping fees. Emerald Card® and Spruce SM revenues decreased $3.0 million, or 25.7%, primarily due to lower Emerald Card® activity in the current year as a result of less funds being loaded in the current year. International tax preparation revenues increased $1.7 million, or 2.9%, due to higher volumes in Australia, which was partially offset by the impacts of foreign currency exchange rates. Wave revenues increased $1.3 million, or 5.7%, due to higher small business payments processing volumes. Total operating expenses increased $1.0 million, or 0.3%, from the prior year. Other wages increased $8.3 million, or 13.1%, primarily due to higher corporate wages and a bonus accrual adjustment in the prior year. Marketing and advertising expense decreased $5.2 million, or 48.5%, primarily due to a vendor refund for expired customer incentives and lower online advertising. Depreciation and amortization expense decreased $3.4 million, or 10.1%, primarily due to lower amortization of acquired intangibles. Bad debt expense increased $4.5 million due to higher Emerald Card® losses in the current year. Other operating expenses decreased $6.1 million, or 7.0%. The components of other expenses are as follows: (in 000s) Three months ended September 30, 2023 2022 $ Change % Change Consulting and outsourced services $ 13,134 $ 18,053 $ 4,919 27.2 % Bank partner fees 48 (19) (67) ** Client claims and refunds 6,239 6,770 531 7.8 % Employee and travel expenses 5,686 6,068 382 6.3 % Technology-related expenses 23,078 25,915 2,837 10.9 % Credit card/bank charges 17,169 16,201 (968) (6.0) % Insurance 3,350 3,718 368 9.9 % Legal fees and settlements 3,008 2,286 (722) (31.6) % Supplies 2,763 3,395 632 18.6 % Other 6,081 4,259 (1,822) (42.8) % $ 80,556 $ 86,646 $ 6,090 7.0 % Consulting and outsourced services expense decreased $4.9 million, or 27.2%, primarily due to lower contract labor in the current year. Technology-related expenses decreased $2.8 million, or 10.9%, due to lower costs of technology in the current year. Other income (expense), net increased $6.2 million, or 172.4%, primarily due to higher interest income in the current year. We recorded an income tax benefit of $49.5 million in the current year compared to $54.0 million in the prior year. The effective tax rate for the three months ended September 30, 2023, and 2022 was 23.3% and 24.4%, respectively. Diluted loss per share from continuing operations increased 5.7% from the prior year due to fewer shares outstanding from share repurchases, partially offset by a lower net loss compared to the prior year. 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 . H&R Block, Inc. |Q1 FY2024 Form 10-Q 17 Table of Contents CAPITAL RESOURCES AND LIQUIDITY – OVERVIEW – Our primary sources of capital and liquidity include cash from operations (including changes in working capital), draws on our unsecured committed line of credit (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. 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, 2023 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, 2023 and 2022. See Item 1 for the complete consolidated statements of cash flows for these periods. (in 000s) Three months ended September 30, 2023 2022 Net cash used in: Operating activities $ (334,989) $ (321,666) Investing activities (23,890) (37,358) Financing activities (195,198) (246,893) Effects of exchange rates on cash (3,679) (13,422) Net decrease in cash and cash equivalents, including restricted balances $ (557,756) $ (619,339) Operating Activities. Cash used in operations totaled $335.0 million for the three months ended September 30, 2023 compared to $321.7 million in the prior year period. The change is primarily due to the receipt of income tax receivables in the prior year and changes in deferred tax assets in the current year, partially offset by lower bonus and payroll tax payments in the current year. Investing Activities. Cash used in investing activities totaled $23.9 million for the three months ended September 30, 2023 compared to $37.4 million in the prior year period. The change is primarily due to lower payments to acquire businesses in the current year. Financing Activities. Cash used in financing activities totaled $195.2 million for the three months ended September 30, 2023 compared to $246.9 million in the prior year period. The change is primarily due to lower repurchases of common stock 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 $43.0 million and $43.1 million for the three months ended September 30, 2023 and 2022, 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. During the three months ended September 30, 2023, we repurchased $132.0 million of our common stock at an average price of $40.43 per share, excluding excise taxes in connection with such repurchases. In the prior year period, we repurchased $219.8 million of our common stock at an average price of $44.60 per share. Our current share repurchase program has remaining authorization of $568.1 million, which is effective through June 2025. 18 Q1 FY2024 Form 10-Q| H&R Block, Inc. Table of Contents 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 $12.9 million and $16.2 million for the three months ended September 30, 2023 and 2022, 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 $6.9 million and $16.5 million during the three months ended September 30, 2023 and 2022, 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 outst anding balance under our CLOC and amounts available to borrow were not limited by the debt-to-EBITDA covenant as of September 30, 2023. The following table provides ratings for debt issued by Block Financial LLC (Block Financial) as of September 30, 2023 and June 30, 2023: As of September 30, 2023 June 30, 2023 Short-term Long-term Outlook Short-term Long-term Outlook Moody's P-3 Baa3 Stable P-3 Baa3 Positive 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, 2023 in our Annual Report on Form 10-K. CASH AND OTHER ASSETS – As of September 30, 2023, we held cash and cash equivalents, excluding restricted amounts, of $427.0 million, including $146.1 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, 2023. 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 $3.7 million and $13.4 million during the three months ended September 30, 2023 and 2022, respectively. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS – EAs are originated by Pathward. We purchase a 90% participation interest, at par, in all EAs originated by Pathward in accordance with our participation agreement. Effective October 20, 2023, we amended the Program Management Agreement and entered into a new participation agreement related to EAs originated by Pathward. There have been no other material changes in our contractual obligations and commercial commitments from those reported in our June 30, 2023 Annual Report 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. H&R Block, Inc. |Q1 FY2024 Form 10-Q 19 Table of Contents 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, 2023 June 30, 2023 Current assets $ 40,277 $ 37,407 Noncurrent assets 1,719,763 1,725,234 Current liabilities 85,643 78,259 Noncurrent liabilities 1,495,842 1,494,010 SUMMARIZED STATEMENTS OF OPERATIONS - GUARANTOR AND ISSUER (in 000s) Three months ended September 30, 2023 Twelve months ended June 30, 2023 Total revenues $ 9,952 $ 160,236 Income from continuing operations before income taxes 8,774 40,258 Net income from continuing operations 6,735 31,713 Net income 6,126 23,613 The table above reflects $1.7 billion of non-current intercompany receivables due to the Issuer from non-guarantor subsidiaries as of September 30, 2023 and June 30, 2023. REGULATORY ENVIRONMENT There have been no material changes in our regulatory environment from what was reported in our June 30, 2023 Annual Report 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 U.S. generally accepted accounting principles (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. 20 Q1 FY2024 Form 10-Q| H&R Block, Inc. 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, 2023 2022 Net loss - as reported $ (163,482) $ (168,421) Discontinued operations, net 609 1,054 Net loss from continuing operations - as reported (162,873) (167,367) Add back: Income tax benefit (49,487) (53,957) Interest expense 15,870 15,824 Depreciation and amortization 30,225 33,624 (3,392) (4,509) EBITDA from continuing operations $ (166,265) $ (171,876) 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, 2023 2022 Net loss from continuing operations - as reported $ (162,873) $ (167,367) Adjustments: Amortization of intangibles related to acquisitions (pretax) 12,555 12,696 Tax effect of adjustments (1) (2,936) (3,221) Adjusted net loss from continuing operations $ (153,254) $ (157,892) Diluted loss per share from continuing operations - as reported $ (1.11) $ (1.05) Adjustments, net of tax 0.06 0.06 Adjusted diluted loss per share from continuing operations $ (1.05) $ (0.99) (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 Securities and Exchange Commission (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," "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 external events beyond the Company's control, such as outbreaks of infectious disease (including the coronavirus (COVID-19) pandemic), severe weather events, natural or manmade disasters, or changes in the regulatory environment in which we operate. 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, H&R Block, Inc. |Q1 FY2024 Form 10-Q 21 Table of Contents 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, 2023 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, 2023. 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, 2023 Annual Report on Form 10-K.