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 one of our company-owned or franchise offices, virtually or via an online 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 (including in-person, online and virtual) and online through Wave. We report a single segment that includes all of our continuing operations. 14 Q1 FY2025 Form 10-Q| H&R Block, Inc. Table of Contents Consolidated – Financial Results (in 000s, except per share amounts) Three months ended September 30, 2024 2023 $ Change % Change Revenues: U.S. tax preparation and related services: Assisted tax preparation $ 42,963 $ 39,263 $ 3,700 9.4 % Royalties 5,852 5,701 151 2.6 % DIY tax preparation 3,236 3,848 (612) (15.9) % Refund Transfers 860 1,142 (282) (24.7) % Peace of Mind® Extended Service Plan 23,097 24,847 (1,750) (7.0) % Tax Identity Shield® 3,909 4,580 (671) (14.7) % Other 13,809 10,980 2,829 25.8 % Total U.S. tax preparation and related services 93,726 90,361 3,365 3.7 % Financial services: Emerald Card® and Spruce SM 8,826 8,633 193 2.2 % Interest and fee income on Emerald Advance® — 298 (298) (100.0) % Total financial services 8,826 8,931 (105) (1.2) % International 64,855 60,565 4,290 7.1 % Wave 26,403 23,943 2,460 10.3 % Total revenues $ 193,810 $ 183,800 $ 10,010 5.4 % Compensation and benefits: Field wages 68,094 62,435 (5,659) (9.1) % Other wages 77,335 72,098 (5,237) (7.3) % Benefits and other compensation 38,754 35,248 (3,506) (9.9) % 184,183 169,781 (14,402) (8.5) % Occupancy 101,318 99,285 (2,033) (2.0) % Marketing and advertising 9,972 5,481 (4,491) (81.9) % Depreciation and amortization 28,831 30,225 1,394 4.6 % Bad debt 2,730 4,798 2,068 43.1 % Other 95,107 80,556 (14,551) (18.1) % Total operating expenses 422,141 390,126 (32,015) (8.2) % Other income (expense), net 11,917 9,836 2,081 21.2 % Interest expense on borrowings (15,847) (15,870) 23 0.1 % Pretax loss (232,261) (212,360) (19,901) (9.4) % Income tax benefit (60,840) (49,487) 11,353 22.9 % Net loss from continuing operations (171,421) (162,873) (8,548) (5.2) % Net loss from discontinued operations (1,155) (609) (546) (89.7) % Net loss $ (172,576) $ (163,482) $ (9,094) (5.6) % BASIC AND DILUTED LOSS PER SHARE: Continuing operations $ (1.23) $ (1.11) $ (0.12) (10.8) % Discontinued operations (0.01) (0.01) — — % Consolidated $ (1.24) $ (1.12) $ (0.12) (10.7) % Adjusted diluted EPS (1) $ (1.17) $ (1.05) $ (0.12) (11.4) % EBITDA (1) $ (187,583) $ (166,265) $ (21,318) (12.8) % (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. H&R Block, Inc. |Q1 FY2025 Form 10-Q 15 Table of Contents Three months ended September 30, 2024 compared to September 30, 2023 Revenues increased $10.0 million, or 5.4%, from the prior year. U.S. assisted tax preparation revenues increased $3.7 million, or 9.4%, due to higher company-owned tax return volumes combined with an increase in net average charge in the current year. Other revenues increased $2.8 million, or 25.8%, primarily due to higher bookkeeping fees. International tax preparation revenues increased $4.3 million, or 7.1%, primarily due to higher tax return volumes in Australia combined with favorable foreign currency exchange rates. Wave revenues increased $2.5 million, or 10.3%, due to higher accounting, invoicing and receipts subscriptions and small business payments processing volumes. Total operating expenses increased $32.0 million, or 8.2%, from the prior year. Field wages increased $5.7 million, or 9.1%, due to higher U.S. and Australian tax professional wages due to higher volumes in the current year. Other wages increased $5.2 million, or 7.3%, due to higher corporate wages primarily due to higher headcount. Benefits and other compensation increased $3.5 million, or 9.9%, primarily due to higher stock-based compensation and severance pay in the current year. Marketing and advertising expense increased $4.5 million, or 81.9%, primarily due to lower vendor refunds for expired customer incentives and higher online advertising in the current year. Other operating expenses increased $14.6 million, or 18.1%. The components of other expenses are as follows: (in 000s) Three months ended September 30, 2024 2023 $ Change % Change Consulting and outsourced services $ 15,444 $ 13,134 $ (2,310) (17.6) % Bank partner fees 47 48 1 2.1 % Client claims and refunds 5,944 6,239 295 4.7 % Employee and travel expenses 6,117 5,686 (431) (7.6) % Technology-related expenses 24,501 23,078 (1,423) (6.2) % Credit card/bank charges 18,149 17,169 (980) (5.7) % Insurance 3,544 3,350 (194) (5.8) % Legal fees and settlements 14,462 3,008 (11,454) (380.8) % Supplies 2,907 2,763 (144) (5.2) % Other 3,992 6,081 2,089 34.4 % $ 95,107 $ 80,556 $ (14,551) (18.1) % Legal expenses increased $11.5 million primarily due to higher outside legal counsel spend. We recorded an income tax benefit of $60.8 million in the current year compared to $49.5 million in the prior year. The effective tax rate for the three months ended September 30, 2024, and 2023 was 26.2% and 23.3%, 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 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 16 Q1 FY2025 Form 10-Q| H&R Block, Inc. Table of Contents 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, 2024 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, 2024 and 2023. See Item 1 for the complete consolidated statements of cash flows for these periods. (in 000s) Three months ended September 30, 2024 2023 Net cash provided by (used in): Operating activities $ (328,581) $ (334,989) Investing activities (26,394) (23,890) Financing activities (284,450) (195,198) Effects of exchange rates on cash 3,249 (3,679) Net decrease in cash and cash equivalents, including restricted balances $ (636,176) $ (557,756) Operating Activities. Cash used in operations totaled $328.6 million for the three months ended September 30, 2024 compared to $335.0 million in the prior year period. The change is primarily due to changes in accrued liabilities compared to the prior year period. Investing Activities. Cash used in investing activities totaled $26.4 million for the three months ended September 30, 2024 compared to $23.9 million in the prior year period. The change is primarily due to higher capital expenditures in the current year. Financing Activities. Cash used in financing activities totaled $284.5 million for the three months ended September 30, 2024 compared to $195.2 million in the prior year period. The change is primarily due to higher 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 $44.7 million and $43.0 million for the three months ended September 30, 2024 and 2023, 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. On August 15, 2024, the Board of Directors approved a $1.5 billion share repurchase program. The repurchase program does not have an expiration date and replaced the previously existing share repurchase program. During the three months ended September 30, 2024, we repurchased $209.6 million of our common stock at an average price of $63.51 per share, excluding excise taxes in connection with such repurchases. In the prior year period, 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. Our current share repurchase program has remaining authorization of $1.3 billion and does not have an expiration date. 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 $18.7 million and $12.9 million for the three months ended September 30, 2024 and 2023, respectively. Our capital expenditures relate primarily to recurring improvements to H&R Block, Inc. |Q1 FY2025 Form 10-Q 17 Table of Contents 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 $5.9 million and $6.9 million during the three months ended September 30, 2024 and 2023, 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, 2024. The following table provides ratings for debt issued by Block Financial LLC (Block Financial) as of September 30, 2024 and June 30, 2024: As of September 30, 2024 June 30, 2024 Short-term Long-term Outlook Short-term Long-term Outlook Moody's P-3 Baa3 Stable P-3 Baa3 Stable S&P A-2 BBB Stable A-2 BBB Stable Other than described above, there have been no material changes in our borrowings from those reported as of June 30, 2024 in our Annual Report on Form 10-K. CASH AND OTHER ASSETS – As of September 30, 2024, we held cash and cash equivalents, excluding restricted amounts, of $415.9 million, including $183.5 million held by our foreign subsidiaries. Foreign Operations. Seasonal borrowing needs of our Canadian operations are typically funded by our U.S. operations. To mitigate foreign currency risk, we sometimes enter into foreign exchange forward contracts. There were no forward contracts outstanding as of September 30, 2024. We do not currently intend to repatriate non-borrowed funds held by our foreign subsidiaries in a manner that would trigger a tax liability. The impact of changes in foreign exchange rates during the period on our international cash balances resulted in an increase of $3.2 million during the three months ended September 30, 2024 and in a decrease of $3.7 million during the three months ended September 30, 2023. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS – The Company entered into an agreement to purchase federal Investment tax credits (“ITC”). During the three months ended September 30, 2024, we paid $22.9 million for ITCs. As of September 30, 2024, the Company has a remaining commitment to purchase additional ITCs, estimated to be $74.0 million, with the final closing payment anticipated to occur by June 30, 2025. Effective October 18, 2024, we amended our Program Management Agreement (PMA) with Pathward®, N.A to extend the term of the PMA for two years until June 30, 2027. There have been no other material changes in our contractual obligations and commercial commitments from those reported in our June 30, 2024 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. 18 Q1 FY2025 Form 10-Q| H&R Block, Inc. 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, 2024 June 30, 2024 Current assets $ 48,965 $ 44,423 Noncurrent assets 1,781,716 1,778,832 Current liabilities 89,972 77,848 Noncurrent liabilities 1,500,355 1,492,211 SUMMARIZED STATEMENTS OF OPERATIONS - GUARANTOR AND ISSUER (in 000s) Three months ended September 30, 2024 Twelve months ended June 30, 2024 Total revenues $ 9,758 $ 144,206 Income from continuing operations before income taxes 11,588 75,819 Net income from continuing operations 8,906 57,441 Net income 7,750 54,795 The table above reflects $1.7 billion of non-current intercompany receivables due to the Issuer from non-guarantor subsidiaries as of September 30, 2024 and June 30, 2024, respectively. REGULATORY ENVIRONMENT There have been no material changes in our regulatory environment from what was reported in our June 30, 2024 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. H&R Block, Inc. |Q1 FY2025 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, 2024 2023 Net loss - as reported $ (172,576) $ (163,482) Discontinued operations, net 1,155 609 Net loss from continuing operations - as reported (171,421) (162,873) Add back: Income tax benefit (60,840) (49,487) Interest expense 15,847 15,870 Depreciation and amortization 28,831 30,225 (16,162) (3,392) EBITDA from continuing operations $ (187,583) $ (166,265) 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, 2024 2023 Net loss from continuing operations - as reported $ (171,421) $ (162,873) Adjustments: Amortization of intangibles related to acquisitions (pretax) 11,128 12,555 Tax effect of adjustments (1) (2,645) (2,936) Adjusted net loss from continuing operations $ (162,938) $ (153,254) Diluted loss per share from continuing operations - as reported $ (1.23) $ (1.11) Adjustments, net of tax 0.06 0.06 Adjusted diluted loss per share from continuing operations $ (1.17) $ (1.05) (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, severe weather events, natural or manmade disasters, or changes in the regulatory environment in which we operate. 20 Q1 FY2025 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, 2024 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, 2024. 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, 2024 Annual Report on Form 10-K.