QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-06089
H&R Block, Inc.
(Exact name of registrant as specified in its charter)
Missouri
44-0607856
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
One H&R Block Way, Kansas City, Missouri64105
(Address of principal executive offices, including zip code)
(816) 854-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, without par value
HRB
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐No ☑
The number of shares outstanding of the registrant's Common Stock, without par value, at the close of business on April 29, 2022: 159,594,159 shares.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION – The consolidated balance sheets as of March 31, 2022 and June 30, 2021, the consolidated statements of operations and comprehensive income for the three and nine months ended March 31, 2022 and 2021, the consolidated statements of cash flows for the nine months ended March 31, 2022 and 2021, and the consolidated statements of stockholders' equity for the three and nine months ended March 31, 2022 and 2021 have been prepared by the Company, without audit. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations, and cash flows as of March 31, 2022 and 2021 and for all periods presented, have been made.
"H&R Block," "the Company," "we," "our," and "us" are used interchangeably to refer to H&R Block, Inc., to H&R Block, Inc. and its subsidiaries, or to H&R Block, Inc.'s operating subsidiaries, as appropriate to the context.
On June 9, 2021, the Board of Directors approved a change of the Company's fiscal year end from April 30 to June 30. The Company's 2022 fiscal year began on July 1, 2021 and will end on June 30, 2022. As a result of this change, the Company filed a Transition Report on Form 10-Q that included the financial information for the transition period from May 1, 2021 to June 30, 2021 (Transition Period). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our April 30, 2021 Annual Report to Shareholders on Form 10-K and our June 30, 2021 Transition Report filed on Form 10-Q.
MANAGEMENT ESTIMATES – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions and judgments are applied in the evaluation of contingent losses arising from our discontinued mortgage business, contingent losses associated with pending claims and litigation, reserves for uncertain tax positions, fair value of reporting units, and related matters. Estimates have been prepared based on the best information available as of each balance sheet date. As such, actual results could differ materially from those estimates.
SEASONALITY OF BUSINESS – Our operating revenues are seasonal in nature with peak revenues typically occurring in the months of February through April. Therefore, results for interim periods are not indicative of results to be expected for the full year.
On March 21, 2020, the federal tax filing deadline in the U.S. for individual 2019 tax returns was extended from April 15, 2020 to July 15, 2020, shifting a portion of revenues and expenses from that tax season into the nine months ended March 31, 2021. This extension impacted the typical seasonality of our business and the comparability of our financial results.
DISCONTINUED OPERATIONS – Our discontinued operations include the results of operations of Sand Canyon Corporation, previously known as Option One Mortgage Corporation (including its subsidiaries, collectively, SCC), which exited its mortgage business in fiscal year 2008. See note 9 for additional information on litigation, claims, and other loss contingencies related to our discontinued operations.
The majority of our revenues are from our U.S. tax services business. The following table disaggregates our U.S. tax services revenues by major service line, with revenues from our international tax services businesses and from Wave included as separate lines:
(in 000s)
Three months ended March 31,
Nine months ended March 31,
2022
2021
2022
2021
Revenues:
U.S. assisted tax preparation
$
1,392,142
$
1,290,892
$
1,456,594
$
1,532,079
U.S. royalties
158,786
150,117
169,548
178,126
U.S. DIY tax preparation
175,184
181,294
188,455
234,871
International
65,232
62,869
151,464
148,282
Refund Transfers
132,223
134,799
134,665
141,309
Emerald Card®
50,660
73,647
103,748
96,045
Peace of Mind® Extended Service Plan
17,222
17,668
59,373
63,430
Tax Identity Shield®
9,078
8,643
19,431
22,446
Interest and fee income on Emerald AdvanceSM
30,535
38,247
43,438
52,812
Wave
20,111
16,082
58,745
44,656
Other
10,584
9,306
27,736
28,819
Total revenues
$
2,061,757
$
1,983,564
$
2,413,197
$
2,542,875
Changes in the balances of deferred revenue and wages for our Peace of Mind® Extended Service Plan (POM) are as follows:
(in 000s)
POM
Deferred Revenue
Deferred Wages
Nine months ended March 31,
2022
2021
2022
2021
Balances as of July 1,
$
172,759
$
167,827
$
17,867
$
18,707
Amounts deferred
80,801
87,175
9,006
8,712
Amounts recognized on previous deferrals
(69,075)
(73,683)
(6,786)
(8,068)
Balances as of March 31,
$
184,485
$
181,319
$
20,087
$
19,351
As of March 31, 2022, deferred revenue related to POM was $184.5 million. We expect that $101.2 million will be recognized over the next twelve months, while the remaining balance will be recognized over the following five years.
As of March 31, 2022 and 2021, Tax Identity Shield® (TIS) deferred revenue was $37.4 million and $38.2 million, respectively. Deferred revenue related to TIS was $28.3 million and $28.8 million as of June 30, 2021 and June 30, 2020, respectively. All deferred revenue related to TIS will be recognized by April 2023.
NOTE 3: EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY
EARNINGS PER SHARE – Basic and diluted earnings (loss) per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income (loss) from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period. Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 0.3 million and 0.6 million shares for the three and nine months ended March 31, 2022, respectively, and 0.6 million and 0.9 million shares for the three and nine months ended March 31, 2021, respectively, as the effect would be antidilutive.
The computations of basic and diluted earnings per share from continuing operations are as follows:
(in 000s, except per share amounts)
Three months ended March 31,
Nine months ended March 31,
2022
2021
2022
2021
Net income from continuing operations attributable to shareholders
$
674,973
$
759,672
$
335,955
$
444,773
Amounts allocated to participating securities
(3,061)
(3,374)
(1,543)
(1,908)
Net income from continuing operations attributable to common shareholders
$
671,912
$
756,298
$
334,412
$
442,865
Basic weighted average common shares
162,777
182,204
171,481
186,162
Potential dilutive shares
2,835
2,701
2,661
1,971
Dilutive weighted average common shares
165,612
184,905
174,142
188,133
Earnings per share from continuing operations attributable to common shareholders:
Basic
$
4.13
$
4.15
$
1.95
$
2.38
Diluted
4.06
4.09
1.92
2.35
The decrease in the weighted average shares outstanding is due to share repurchases completed in the current and prior fiscal years.
STOCK-BASED COMPENSATION – During the nine months ended March 31, 2022, we granted 1.6 million shares under our stock-based compensation plan. We granted awards of 0.7 million shares under our stock-based compensation plans during the nine months ended March 31, 2021. The increase in shares granted compared to the prior year is a result of the change in timing of grants due to the change in our fiscal year. Stock-based compensation expense of our continuing operations totaled $6.8 million and $20.0 million for the three and nine months ended March 31, 2022, respectively, and $7.8 million and $21.2 million for the three and nine months ended March 31, 2021, respectively. As of March 31, 2022, unrecognized compensation cost for stock options totaled $0.5 million, and for nonvested shares and units totaled $44.9 million.
NOTE 4: RECEIVABLES
Receivables, net of their related allowance, consist of the following:
(in 000s)
As of
March 31, 2022
June 30, 2021
Short-term
Long-term
Short-term
Long-term
Loans to franchisees
$
14,499
$
26,411
$
9,497
$
28,026
Receivables for U.S. assisted and DIY tax preparation and related fees
Balances presented above as short-term are included in receivables, while the long-term portions are included in other noncurrent assets in the consolidated balance sheets.
LOANS TO FRANCHISEES –Franchisee loan balances consist of term loans made primarily to finance the purchase of franchises and revolving lines of credit primarily for the purpose of funding working capital needs. As of March 31, 2022 and June 30, 2021, loans with a principal balance more than 90 days past due, or on non-accrual status, are not material.
H&R BLOCK INSTANT REFUNDTM PROGRAM –H&R Block Instant RefundTM amounts are generally received from the Canada Revenue Agency within 60 days of filing the client's return, with the remaining balance collectible from the client.
We review the credit quality of our Instant Refund receivables based on pools, which are segregated by the tax return year of origination, with older years being deemed more unlikely to be repaid. We establish an allowance for doubtful accounts at an amount that we believe represents the net realizable value. In December of each year we charge-off the receivables to an amount we believe represents the net realizable value.
Balances and amounts on non-accrual status and classified as impaired, or more than 60 days past due, by tax return year of origination, as of March 31, 2022 are as follows:
(in 000s)
Tax return year of origination:
Balance
Non-Accrual
2021
$
40,565
$
—
2020 and prior
266
266
40,831
$
266
Allowance
(1,071)
Net balance
$
39,760
H&R BLOCK EMERALD ADVANCE® LINES OF CREDIT –We review the credit quality of our purchased participation interests in Emerald AdvanceSM (EA) receivables based on pools, which are segregated by the fiscal year of origination, with older years being deemed more unlikely to be repaid. We establish an allowance for doubtful accounts at an amount that we believe represents the net realizable value. In December of each year we charge-off the receivables to an amount we believe represents the net realizable value.
Balances and amounts on non-accrual status and classified as impaired, or more than 60 days past due, by fiscal year of origination, as of March 31, 2022 are as follows:
ALLOWANCE FOR CREDIT LOSSES –Activity in the allowance for credit losses for our EA and all other short-term and long-term receivables for the nine months ended March 31, 2022 and 2021 is as follows:
(in 000s)
EAs
All Other
Total
Balances as of July 1, 2021
$
27,704
$
60,272
$
87,976
Provision
13,797
45,981
59,778
Charge-offs, recoveries and other
(16,377)
(60,343)
(76,720)
Balances as of March 31, 2022
$
25,124
$
45,910
$
71,034
Balances as of July 1, 2020
$
32,034
$
52,166
$
84,200
Provision
13,411
47,017
60,428
Charge-offs, recoveries and other
(18,650)
(54,092)
(72,742)
Balances as of March 31, 2021
$
26,795
$
45,091
$
71,886
NOTE 5: GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the nine months ended March 31, 2022 are as follows:
(in 000s)
Goodwill
Accumulated Impairment Losses
Net
Balances as of July 1, 2021
$
892,818
$
(138,297)
$
754,521
Acquisitions
12,667
—
12,667
Disposals and foreign currency changes, net
(2,760)
—
(2,760)
Impairments
—
—
—
Balances as of March 31, 2022
$
902,725
$
(138,297)
$
764,428
In conjunction with our annual impairment test, we tested goodwill for impairment during the quarter and did not identify any impairment.
We made payments to acquire businesses totaling $25.5 million and $15.5 million during the nine months ended March 31, 2022 and 2021, respectively. The amounts and weighted-average lives of intangible assets acquired during the nine months ended March 31, 2022, including amounts capitalized related to internally-developed software, are as follows:
(dollars in 000s)
Amount
Weighted-Average Life (in years)
Internally-developed software
$
9,427
3
Customer relationships
13,029
5
Reacquired franchise rights
8,130
5
Noncompete agreements
496
5
Total
$
31,082
4
Amortization of intangible assets for the three and nine months ended March 31, 2022 was $19.5 million and $58.7 million, respectively, compared to $20.7 million and $62.1 million for the three and nine months ended March 31, 2021, respectively. Estimated amortization of intangible assets for fiscal years ending June 30, 2022, 2023, 2024, 2025 and 2026 is $77.3 million, $64.2 million, $44.6 million, $23.9 million and $16.3 million, respectively.
UNSECURED COMMITTED LINE OF CREDIT – Our unsecured committed line of credit (CLOC) provides for an unsecured senior revolving credit facility in the aggregate principal amount of $1.5 billion, which includes a $175.0 million sublimit for swingline loans and a $50.0 million sublimit for standby letters of credit. We may request increases in the aggregate principal amount of the revolving credit facility of up to $500.0 million, subject to obtaining commitments from lenders and meeting certain other conditions. The CLOC will mature on June 11, 2026, unless extended pursuant to the terms of the CLOC, at which time all outstanding amounts thereunder will be due and payable. Our CLOC includes an annual facility fee, which will vary depending on our then current credit ratings.
The CLOC is subject to various conditions, triggers, events or occurrences that could result in earlier termination and contains customary representations, warranties, covenants and events of default, including, without limitation: (1) a covenant requiring the Company to maintain a debt-to-EBITDA ratio, as defined by the CLOC agreement, calculated on a consolidated basis of no greater than (a) 3.50 to 1.00 as of the last day of each fiscal quarter ending on March 31, June 30, and September 30 of each year and (b) 4.50 to 1.00 as of the last day of each fiscal quarter ending on December 31 of each year; (2) a covenant requiring us to maintain an interest coverage ratio (EBITDA-to-interest expense) calculated on a consolidated basis of not less than 2.50 to 1.00 as of the last date of any fiscal quarter; and (3) covenants restricting our ability to incur certain additional debt, incur liens, merge or consolidate with other companies, sell or dispose of assets (including equity interests), liquidate or dissolve, engage in certain transactions with affiliates or enter into certain restrictive agreements. The CLOC includes provisions for an equity cure which could potentially allow us to independently cure certain defaults. Proceeds under the CLOC may be used for working capital needs or for other general corporate purposes. We were in compliance with these requirements as of March 31, 2022.
We had no outstanding balance under our CLOC and amounts available to borrow were limited by the debt-to-EBITDA covenant to approximately $427.5 million as of March 31, 2022.
SUBSEQUENT EVENT –On April 1, 2022, we sent a notice of redemption to the trustee to fully redeem our outstanding $500 million 5.500% Senior Notes originally due in November 2022 (2022 Senior Notes). The redemption price is equal to 100% of the outstanding principal amount of the 2022 Senior Notes, plus accrued and unpaid interest up to, but not including, the redemption date. The 2022 Senior Notes were redeemed on May 2, 2022.
NOTE 7: INCOME TAXES
We file a consolidated federal income tax return in the U.S. with the Internal Revenue Service (IRS) and file tax returns in various state, local, and foreign jurisdictions. Tax returns are typically examined and either settled upon completion of the examination or through the appeals process. On July 14, 2021 we filed a U.S. federal income tax form 1139 carryback claim to utilize net operating losses against income earned in tax years 2015 and 2016. Filing this carryback claim has opened our 2015 and 2016 tax years to examination. Consequently, our U.S. federal
income tax returns for 2015, 2016, 2018 and later years remain open for examination. Our U.S. federal income tax returns for 2017, 2014 and all years prior to 2014 are closed. With respect to state and local jurisdictions and countries outside of the U.S., we are typically subject to examination for three to six years after the income tax returns have been filed. Although the outcome of tax audits is always uncertain, we believe that adequate amounts of tax, interest, and penalties have been provided for in the accompanying consolidated financial statements for any adjustments that might be incurred due to federal, state, local or foreign audits.
We had gross unrecognized tax benefits of $225.9 million as of March 31, 2022 and $264.3 million as of June 30, 2021. The gross unrecognized tax benefits decreased $38.4 million during the nine months ended March 31, 2022. The decrease is related to federal and state statute of limitation periods expiring in the current year. We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $33.3 million within the next twelve months. The anticipated decrease is due to the expiration of statutes of limitations and anticipated closure of various state matters currently under examination. For such matters where a change in the balance of unrecognized tax benefits is not yet deemed reasonably possible, no estimate has been included.
Our effective tax rate for continuing operations, including the effects of discrete tax items, was 8.1% and 10.3% for the nine months ended March 31, 2022 and 2021, respectively. Discrete items decreased the effective tax rate by 14.4% and 2.3% for the nine months ended March 31, 2022 and 2021, respectively. A discrete income tax benefit of $52.6 million and $11.4 million were recorded in the nine months ended March 31, 2022 and 2021, respectively. The discrete tax benefit recorded in the current period primarily resulted from federal and state statute of limitations expirations. The discrete tax benefit recorded in the prior period primarily resulted from settlements with taxing authorities and statute of limitations expirations. The impact discrete tax items have on our tax rate through the third quarter are slightly exaggerated versus the impact discrete tax items have on the full fiscal year tax rate.
NOTE 8: COMMITMENTS AND CONTINGENCIES
Assisted tax returnsare covered by our 100% accuracy guarantee, whereby we will reimburse a client for penalties and interest attributable to an H&R Block error on a return. DIY tax returns are covered by our 100% accuracy guarantee, whereby we will reimburse a client up to a maximum of $10,000 if our software makes an arithmetic error that results in payment of penalties and/or interest to the IRS that a client would otherwise not have been required to pay. Our liability related to estimated losses under the 100% accuracy guarantee was $13.8 million and $12.6 million as of March 31, 2022 and June 30, 2021, respectively. The short-term and long-term portions of this liability are included in deferred revenue and other liabilities in the consolidated balance sheets.
Liabilities related to acquisitions for (1) estimated contingent consideration based on expected financial performance of the acquired business and economic conditions at the time of acquisition and (2) estimated accrued compensation related to continued employment of key employees were $13.9 million and $17.3 million as of March 31, 2022 and June 30, 2021, respectively, with amounts recorded in deferred revenue and other liabilities. Should actual results differ from our estimates, future payments made will differ from the above estimate and any differences will be recorded in results from continuing operations.
We have contractual commitments to fund certain franchises with approved revolving lines of credit. Our total obligation under these lines of credit was $25.5 million at March 31, 2022, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $16.1 million.
In March 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide economic and other relief as a result of the COVID-19 pandemic. The CARES Act includes, among other items, provisions relating to refundable employee retention payroll tax credits. During the first quarter, we applied for employee retention credits related to calendar year 2020. Due to the complex nature of the employee retention credit computations, any benefits we may receive are uncertain and may significantly differ from our current estimates. We plan to record any benefit related to these credits upon both the receipt of the benefit and the resolution of the uncertainties, which could include the completion of any potential audit or examination, or the expiration of the related statute of limitations.
Emerald AdvanceSM lines of credit (EAs) are originated by MetaBank®, N.A. (Meta). We purchase a 90% participation interest, at par, in all EAs originated by Meta in accordance with our participation agreement. At
March 31, 2022, the principal balance of purchased participation interests for the current year totaled $256.5 million.
Refund Advance loans are originated by Meta and offered to certain assisted U.S. tax preparation clients, based on client eligibility as determined by Meta. We pay fees primarily based on loan size and customer type. We have provided a guarantee up to $18.0 million related to certain loans to clients prior to the IRS accepting electronic filing. At March 31, 2022, we accrued an estimated liability of $0.6 million related to this guarantee, compared to $2.4 million at March 31, 2021.
NOTE 9: LITIGATION AND OTHER RELATED CONTINGENCIES
We are a defendant in numerous litigation matters, arising both in the ordinary course of business and otherwise, including as described below. The matters described below are not all of the lawsuits to which we are subject. In some of the matters, very large or indeterminate amounts, including punitive damages, are sought. U.S. jurisdictions permit considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. We believe that the monetary relief which may be specified in a lawsuit or a claim bears little relevance to its merits or disposition value due to this variability in pleadings and our experience in litigating or resolving through settlement of numerous claims over an extended period of time.
The outcome of a litigation matter and the amount or range of potential loss at particular points in time may be difficult to ascertain. Among other things, uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.
In addition to litigation matters, we are also subject to claims and other loss contingencies arising out of our business activities, including as described below.
We accrue liabilities for litigation, claims, including indemnification and contribution claims, and other related loss contingencies and any related settlements (each referred to, individually, as a "matter" and, collectively, as "matters") when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. If a range of loss is estimated, and some amount within that range appears to be a better estimate than any other amount within that range, then that amount is accrued. If no amount within the range can be identified as a better estimate than any other amount, we accrue the minimum amount in the range.
For such matters where a loss is believed to be reasonably possible, but not probable, or the loss cannot be reasonably estimated, no accrual has been made. It is possible that such matters could require us to pay damages or make other expenditures or accrue liabilities in amounts that could not be reasonably estimated as of March 31, 2022. While the potential future liabilities could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known, we do not believe any such liabilities are likely to have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows. As of March 31, 2022 and June 30, 2021 our total accrued liabilities were $1.7 million and $1.6 million, respectively.
Our estimate of the aggregate range of reasonably possible losses includes (1) matters where a liability has been accrued and there is a reasonably possible loss in excess of the amount accrued for that liability, and (2) matters where a liability has not been accrued but we believe a loss is reasonably possible. This aggregate range only represents those losses as to which we are currently able to estimate a reasonably possible loss or range of loss. It does not represent our maximum loss exposure.
Matters for which we are not currently able to estimate the reasonably possible loss or range of loss are not included in this range. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the reasonably possible loss or range of loss, such as precise information about the amount of damages or other remedies being asserted, the
defenses to the claims being asserted, discovery from other parties and investigation of factual allegations, rulings by courts on motions or appeals, analysis by experts, or the status or terms of any settlement negotiations.
The estimated range of reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, as well as known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. As of March 31, 2022, we believe the estimate of the aggregate range of reasonably possible losses in excess of amounts accrued, where the range of loss can be estimated, is not material.
At the end of each reporting period, we review relevant information with respect to litigation and other loss contingencies and update our accruals, disclosures, and estimates of reasonably possible loss or range of loss based on such reviews. Costs incurred with defending matters are expensed as incurred. Any receivable for insurance recoveries is recorded separately from the corresponding liability, and only if recovery is determined to be probable and reasonably estimable.
We believe we have meritorious defenses to the claims asserted in the various matters described in this note, and we intend to defend them vigorously. The amounts claimed in the matters are substantial, however, and there can be no assurances as to their outcomes. In the event of unfavorable outcomes, it could require modifications to our operations; in addition, the amounts that may be required to be paid to discharge or settle the matters could be substantial and could have a material adverse impact on our business and our consolidated financial position, results of operations, and cash flows.
LITIGATION, CLAIMS OR OTHER LOSS CONTINGENCIES PERTAINING TO CONTINUING OPERATIONS –
Free File Litigation. On May 6, 2019, the Los Angeles City Attorney filed a lawsuit on behalf of the People of the State of California in the Superior Court of California, County of Los Angeles (Case No. 19STCV15742). The case is styled The People of the State of California v. HRB Digital LLC, et al. The complaint alleges that H&R Block, Inc. and HRB Digital LLC engaged in unfair, fraudulent and deceptive business practices and acts in connection with the IRS Free File Program in violation of the California Unfair Competition Law, California Business and Professions Code §§17200 et seq. The complaint seeks injunctive relief, restitution of monies paid to H&R Block by persons in the State of California who were eligible to file under the IRS Free File Program for the time period starting four years prior to the date of the filing of the complaint, pre-judgment interest, civil penalties and costs. The City Attorney subsequently dismissed H&R Block, Inc. from the case and amended its complaint to add HRB Tax Group, Inc. We filed a motion to stay the case based on the primary jurisdiction doctrine, which was denied. A trial date is set for November 8, 2022. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter.
On September 26, 2019, a putative class action complaint was filed against H&R Block, Inc., HRB Tax Group, Inc., HRB Digital LLC and Free File, Inc. in the United States District Court for the Western District of Missouri (Case No. 4:19-cv-00788-GAF) styled Swanson v. H&R Block, Inc., et al. The plaintiff sought to represent both a nationwide class and a California subclass of all persons eligible for the IRS Free File Program who paid to use an H&R Block product to file an online tax return for the 2002 through 2018 tax filing years. The plaintiff generally alleged unlawful, unfair, fraudulent and deceptive business practices and acts in connection with the IRS Free File Program in violation of the California Consumers Legal Remedies Act, California Civil Code §§1750, et seq., California False Advertising Law, California Business and Professions Code §§17500, et seq., California Unfair Competition Law, California Business and Professions Code §§17200, et seq., in addition to breach of contract and fraud. The plaintiff sought injunctive relief, disgorgement, compensatory damages, statutory damages, punitive damages, interest, attorneys’ fees and costs. The court granted a motion to dismiss filed by defendant Free File, Inc. for lack of personal jurisdiction. The court subsequently granted our motion to compel arbitration and stayed the case pending the outcome of individual arbitration. The plaintiff filed a claim in arbitration, which was dismissed on February 7, 2022. The plaintiff’s lawsuit was dismissed on March 2, 2022. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter.
We have also received and are responding to certain governmental inquiries relating to the IRS Free File Program.
LITIGATION, CLAIMS, INCLUDING INDEMNIFICATION AND CONTRIBUTION CLAIMS, OR OTHER LOSS CONTINGENCIES PERTAINING TO DISCONTINUED MORTGAGE OPERATIONS – Although SCC ceased its mortgage loan origination activities in December 2007 and sold its loan servicing business in April 2008, SCC or the Company has been, remains, and may in the future be, subject to litigation, claims, including indemnification and contribution claims, and other loss contingencies pertaining to SCC's mortgage business activities that occurred prior to such termination and sale. These lawsuits, claims, and other loss contingencies include actions by regulators, third parties seeking indemnification or contribution, including depositors, underwriters, and securitization trustees, individual plaintiffs, and cases in which plaintiffs seek to represent a class of others alleged to be similarly situated. Among other things, these lawsuits, claims, and contingencies allege or may allege discriminatory or unfair and deceptive loan origination and servicing (including debt collection, foreclosure, and eviction) practices, other common law torts, rights to indemnification or contribution, breach of contract, violations of securities laws, and violations of a variety of federal statutes, including the Truth in Lending Act (TILA), Equal Credit Opportunity Act, Fair Housing Act, Real Estate Settlement Procedures Act (RESPA), Home Ownership & Equity Protection Act (HOEPA), as well as similar state statutes. It is difficult to predict either the likelihood of new matters being initiated or the outcome of existing matters. In many of these matters it is not possible to estimate a reasonably possible loss or range of loss due to, among other things, the inherent uncertainties involved in these matters, some of which are beyond the Company's control, and the indeterminate damages sought in some of these matters.
Mortgage loans originated by SCC were sold either as whole loans to single third-party buyers, who generally securitized such loans, or in the form of residential mortgage-backed securities (RMBSs). In connection with the sale of loans and/or RMBSs, SCC made certain representations and warranties. Claims under these representations and warranties together with any settlement arrangements related to these losses are collectively referred to as "representation and warranty claims." The statute of limitations for a contractual claim to enforce a representation and warranty obligation is generally six years or such shorter limitations period that may apply under the law of a state where the economic injury occurred. On June 11, 2015, the New York Court of Appeals, New York’s highest court, held in ACE Securities Corp. v. DB Structured Products, Inc., that the six-year statute of limitations under New York law starts to run at the time the representations and warranties are made, not the date when the repurchase demand was denied. This decision applies to claims and lawsuits brought against SCC where New York law governs. New York law governs many, though not all, of the RMBS transactions into which SCC entered. However, this decision would not affect representation and warranty claims and lawsuits SCC has received or may receive, for example, where the statute of limitations has been tolled by agreement or a suit was timely filed.
In response to the statute of limitations rulings in the ACE case and similar rulings in other state and federal courts, parties seeking to pursue representation and warranty claims or lawsuits have sought, and may in the future seek, to distinguish certain aspects of the ACE decision, pursue alternate legal theories of recovery, or assert claims against other contractual parties such as securitization trustees. For example, a 2016 ruling by a New York intermediate appellate court, followed by the federal district court in the second Homeward case described below, allowed a counterparty to pursue litigation on additional loans in the same trust even though only some of the loans complied with the condition precedent of timely pre-suit notice and opportunity to cure or repurchase. Additionally, plaintiffs in litigation to which SCC is not party have alleged breaches of an independent contractual duty to provide notice of material breaches of representations and warranties and pursued separate claims to which, they argue, the statute of limitations ruling in the ACE case does not apply. The impact on SCC from alternative legal theories seeking to avoid or distinguish the ACE decision, or judicial limitations on the ACE decision, is unclear. SCC has not accrued liabilities for claims not subject to a tolling arrangement or not relating back to timely filed litigation.
On May 31, 2012, a lawsuit was filed by Homeward Residential, Inc. (Homeward) in the Supreme Court of the State of New York, County of New York, against SCC styled Homeward Residential, Inc. v. Sand Canyon Corporation (Index No. 651885/2012). SCC removed the case to the United States District Court for the Southern District of New York on June 28, 2012 (Case No. 12-cv-5067). The plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2006-2 and for the benefit of the trustee and the certificate holders of such trust, asserted claims for breach of contract, anticipatory breach, indemnity, and declaratory judgment in connection with alleged losses incurred as a result of the breach of representations and warranties relating to SCC and to loans sold to the trust. The trust was originally collateralized with approximately 7,500 loans. The plaintiff sought specific
performance of alleged repurchase obligations or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses, as well as a repurchase of all loans due to alleged misrepresentations by SCC as to itself and as to the loans' compliance with its underwriting standards and the value of underlying real estate. In response to a motion filed by SCC, the court dismissed the plaintiff's claims for breach of the duty to cure or repurchase, anticipatory breach, indemnity, and declaratory judgment. The case proceeded on the remaining claims. Representatives of a holder of certificates in the trust filed a motion to intervene to add H&R Block, Inc. to the lawsuit and assert claims against H&R Block, Inc. based on alter ego, corporate veil-piercing, and agency law. On February 12, 2018, the court denied the motion to intervene. Discovery in the case closed on September 30, 2019, with motions for summary judgment filed on December 6, 2019. On November 9, 2020, the court granted SCC's motion for summary judgment and dismissed Homeward's claims in their entirety as untimely under the applicable statute of limitations. Homeward filed an appeal to the Second Circuit Court of Appeals, which was denied on February 10, 2022. Homeward subsequently filed a petition for panel rehearing with the Second Circuit, which was denied on March 15, 2022. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter.
On September 28, 2012, a second lawsuit was filed by Homeward in the United States District Court for the Southern District of New York against SCC styled Homeward Residential, Inc. v. Sand Canyon Corporation (Case No. 12-cv-7319). The plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2006-3 and for the benefit of the trustee and the certificate holders of such trust, asserted claims for breach of contract and indemnity in connection with losses allegedly incurred as a result of the breach of representations and warranties relating to 96 loans sold to the trust. The trust was originally collateralized with approximately 7,500 loans. The plaintiff sought specific performance of alleged repurchase obligations or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses. In response to a motion filed by SCC, the court dismissed the plaintiff's claims for breach of the duty to cure or repurchase and for indemnification of its costs associated with the litigation. On September 30, 2016, the court granted a motion allowing the plaintiff to file a second amended complaint to include breach of contract claims with respect to 649 additional loans in the trust and to allow such claims with respect to other loans in the trust proven to be in material breach of SCC’s representations and warranties. SCC filed a motion for reconsideration, followed by a motion for leave to appeal the ruling, both of which were denied. On October 6, 2016, the plaintiff filed its second amended complaint. In response to a motion filed by SCC, the court dismissed the plaintiff's claim for breach of one of the representations. The case proceeded on the remaining claims. Representatives of a holder of certificates in the trust filed a motion to intervene to add H&R Block, Inc. to the lawsuit and assert claims against H&R Block, Inc. based on alter ego, corporate veil-piercing, and agency law. On February 12, 2018, the court denied the motion to intervene. The settlement payments that were made in fiscal year 2018 for representation and warranty claims related to some of the loans in this case. Discovery in the case closed on September 30, 2019, with motions for summary judgment filed on December 6, 2019. On November 9, 2020, the court granted SCC's motion for summary judgment and dismissed Homeward's claims in their entirety as untimely under the applicable statute of limitations. Homeward filed an appeal to the Second Circuit Court of Appeals, which was denied on February 10, 2022. Homeward subsequently filed a petition for panel rehearing with the Second Circuit, which was denied on March 15, 2022. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter.
Parties, including underwriters, depositors, and securitization trustees, are, or have been, involved in multiple lawsuits, threatened lawsuits, and settlements related to securitization transactions in which SCC participated. A variety of claims are alleged in these matters, including violations of federal and state securities laws and common law fraud, based on alleged materially inaccurate or misleading disclosures, that originators, depositors, securitization trustees, or servicers breached their representations and warranties or otherwise failed to fulfill their obligations, or that securitization trustees violated statutory requirements by failing to properly protect the certificate holders’ interests. SCC has received notices of claims for indemnification or potential indemnification obligations relating to such matters, including lawsuits or settlements to which underwriters, depositors, or securitization trustees are party. Additional lawsuits against the parties to the securitization transactions may be filed in the future, and SCC may receive additional notices of claims for indemnification, contribution or similar obligations with respect to existing or new lawsuits or settlements of such lawsuits or other claims. Certain of the notices received included, and future notices may include, a reservation of rights to assert claims for contribution, which are referred to herein as "contribution claims." Contribution claims may become operative if indemnification
is unavailable or insufficient to cover all of the losses and expenses involved. We have not concluded that a loss related to any of these indemnification or contribution claims is probable, nor have we accrued a liability related to any of these claims.
If the amount that SCC is ultimately required to pay with respect to claims and litigation related to its past sales and securitizations of mortgage loans, together with payment of SCC's related administration and legal expense, exceeds SCC's net assets, the creditors of SCC, other potential claimants, or a bankruptcy trustee if SCC were to file or be forced into bankruptcy, may attempt to assert claims against us for payment of SCC's obligations. Claimants may also attempt to assert claims against or seek payment directly from the Company even if SCC's assets exceed its liabilities. SCC's principal assets, as of March 31, 2022, total approximately $265 million and consist of an intercompany note receivable. We believe our legal position is strong on any potential corporate veil-piercing arguments; however, if this position is challenged and not upheld, it could have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows.
OTHER – We are from time to time a party to litigation, claims and other loss contingencies not discussed herein arising out of our business operations. These matters may include actions by state attorneys general, other state regulators, federal regulators, individual plaintiffs, and cases in which plaintiffs seek to represent others who may be similarly situated.
While we cannot provide assurance that we will ultimately prevail in each instance, we believe the amount, if any, we are required to pay to discharge or settle these other matters will not have a material adverse impact on our business and our consolidated financial position, results of operations, and cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On December 20, 2021, we entered into a First Amendment to our August 2020 Program Management Agreement (PMA) with MetaBank®, N.A. (Meta), which among other things, extends the PMA through June 30, 2025, and adds Spruce℠ accounts to the program.
In January 2022, we launched the Spruce℠ mobile banking platform as a part of the Financial Products imperative of our previously-announced Block Horizons 2025 strategic plan. The Spruce℠ solution, built by H&R Block with banking products powered by Meta, includes a spending account with a debit card, along with a connected savings account that allows for budgeting for specific goals.
On April 1, 2022, we sent a notice of redemption to the trustee to fully redeem our outstanding $500 million 5.500% Senior Notes originally due in November 2022 (2022 Senior Notes). The redemption price is equal to 100% of the outstanding principal amount of the 2022 Senior Notes, plus accrued and unpaid interest up to, but not including, the redemption date. The 2022 Senior Notes were redeemed on May 2, 2022.
FINANCIAL OVERVIEW
On March 21, 2020, the federal tax filing deadline in the U.S. for individual 2019 tax returns was extended from April 15, 2020 to July 15, 2020, shifting a portion of revenues and expenses from that tax season into the nine months ended March 31, 2021. This extension impacted the typical seasonality of our business and the comparability of our financial results.
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 partner, 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 financial solutions through our company-owned and franchise offices and online through Wave. We report a single segment that includes all of our continuing operations.
U.S. Operating Statistics
Nine months ended March 31,
2022
2021(1)
Change
% Change
Tax returns prepared: (in 000s) (2)
Company-owned operations
6,209
6,925
(716)
(10.3)
%
Franchise operations
2,300
2,674
(374)
(14.0)
%
Total assisted
8,509
9,599
(1,090)
(11.4)
%
Desktop
1,043
1,405
(362)
(25.8)
%
Online
4,457
5,459
(1,002)
(18.4)
%
Total DIY
5,500
6,864
(1,364)
(19.9)
%
Total U.S. Returns
14,009
16,463
(2,454)
(14.9)
%
Net Average Charge:(3)
Company-owned operations
$
234.59
$
221.25
$
13.34
6.0
%
Franchise operations (4)
$
229.64
$
210.56
$
19.08
9.1
%
Online
$
32.53
$
34.36
$
(1.83)
(5.3)
%
(1) Represents a partial 2019 individual tax filing season, which was extended until July 15, 2020.
(2) An assisted tax return is defined as a current or prior year individual or business tax return that has been accepted by the client. A DIY online return is defined as a current year individual or business tax return that has been accepted by the client. A DIY desktop return is defined as a current year individual or business tax return that has been electronically submitted to the IRS.
(3) Net average charge is calculated as total tax preparation fees divided by tax returns prepared.
(4) Net average charge related to H&R Block Franchise operations represents tax preparation fees collected by H&R Block franchisees divided by returns prepared in franchise offices. H&R Block will recognize a portion of franchise revenues as franchise royalties based on the terms of franchise agreements.
We provide Net Average Charge as a key operating metric because we consider it an important supplemental measure useful to analysts, investors, and other interested parties as it provides insights into pricing and tax return mix relative to our customer base, which are significant drivers of revenue. Our definition of Net Average Charge may not be comparable to similarly titled measures of other companies.
(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 March 31, 2022 compared to March 31, 2021
Revenues increased $78.2 million, or 3.9%, from the prior year. Revenues for U.S. assisted tax preparation increased $101.3 million, or 7.8%, largely due to a higher net average charge in the current year combined with higher tax return volumes. U.S. royalties revenues increased $8.7 million, or 5.8%, due to an increase in tax preparation fees. U.S. DIY tax preparation revenues decreased $6.1 million, or 3.4%, due to lower tax return volumes. Emerald Card® revenues decreased $23.0 million, or 31.2%, due to lower card activity in the current
quarter as some stimulus payments were loaded on to Emerald Cards in the prior year. Interest and fees on Emerald Advances decreased $7.7 million, or 20.2%, due to a decline in Emerald AdvancesSM in the current year. Wave revenues increased $4.0 million, or 25.1%, due to higher small business payments processing volumes.
Total operating expenses increased $44.1 million, or 3.9%, from the prior year. Field wages increased $25.6 million, or 6.2%, due to higher hourly wage rates. Marketing expense increased $13.5 million, or 7.4%, due to higher online advertising and agency fees. Depreciation and amortization expense decreased $3.0 million, or 7.6%, due to lower amortization on acquired intangibles and depreciation on equipment.
Other expenses increased $12.7 million, or 7.5%. The components of other expenses are as follows:
(in 000s)
Three months ended March 31,
2022
2021
$ Change
% Change
Consulting and outsourced services
$
46,402
$
48,845
$
2,443
5.0
%
Bank partner fees
23,686
22,981
(705)
(3.1)
%
Client claims and refunds
10,730
10,057
(673)
(6.7)
%
Employee and travel expenses
9,515
5,523
(3,992)
(72.3)
%
Technology-related expenses
26,373
23,425
(2,948)
(12.6)
%
Credit card/bank charges
30,770
27,906
(2,864)
(10.3)
%
Insurance
4,099
3,135
(964)
(30.7)
%
Legal fees and settlements
7,125
3,311
(3,814)
(115.2)
%
Supplies
14,243
14,551
308
2.1
%
Other
9,315
9,812
497
5.1
%
$
182,258
$
169,546
$
(12,712)
(7.5)
%
Employee and travel expenses increased $4.0 million, or 72.3%, due to less travel in the prior year as a result of COVID-19 restrictions. Technology-related expenses increased $2.9 million, or 12.6%, due to increased investments in information technology. Credit card and bank charges increased $2.9 million, or 10.3%, due to higher Wave small business payment processing fees. Legal fees and settlements increased $3.8 million, or 115.2%, due to higher fees attributable to certain pending litigation matters.
We recorded an income tax expense of $186.9 million in the current year compared to $69.5 million in the prior year. The effective tax rate for the three months ended March 31, 2022, and 2021 was 21.7% and 8.4%, respectively. The lower rate in prior year is a result of tax benefits recorded related to our net operating loss carrybacks to 35% tax years.
The U.S. federal tax filing deadline for 2021 individual income tax returns was April 18, 2022, the deadline for 2020 tax returns was May 17, 2021 and the deadline for 2019 tax returns was July 15, 2020. Therefore, the year-over-year periods are not directly comparable. Our business is highly seasonal and results for the three months ended March 31 may not be indicative of results for the entire tax season.
(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.
Nine months ended March 31, 2022 compared to March 31, 2021
Revenues decreased $129.7 million, or 5.1%, from the prior year. The decrease in revenue is due to lower tax return volumes in the current year as the 2019 tax season was extended to July 15, 2020 in the prior year period, whereas the 2020 tax season deadline of May 17, 2021 did not extend into the nine month period ended March 31, 2022. This resulted in a decrease in U.S. tax preparation, royalty and Refund Transfer revenues.
Emerald Card® revenues increased $7.7 million, or 8.0%, due to higher card activity which is a result of the IRS loading Child Tax Credits monthly to Emerald Cards® in July through December 2021. Interest and fees on Emerald Advances decreased $9.4 million, or 17.7%, due to a decline in Emerald Advances. Wave revenues increased $14.1 million, or 31.6%, due to higher small business payments processing volumes.
Total operating expenses increased $8.0 million, or 0.4%, from the prior year period. Field wages decreased $7.1 million, or 1.3%, due to lower tax preparation volumes in the current year as a result of the tax season extension in the prior year. Benefits and other compensation decreased $7.6 million, or 4.9%, due to lower payroll taxes as a result of lower wages. Marketing and advertising expense increased $9.7 million, or 4.5%, due to higher online advertising and agency fees in the current year. Depreciation and amortization expense decreased $9.6 million, or 8.2%, due primarily to lower amortization of acquired intangibles.
Other expenses increased $33.1 million, or 9.7%. The components of other expenses are as follows:
(in 000s)
Nine months ended March 31,
2022
2021
$ Change
% Change
Consulting and outsourced services
$
99,870
$
91,888
$
(7,982)
(8.7)
%
Bank partner fees
26,344
21,916
(4,428)
(20.2)
%
Client claims and refunds
22,945
20,930
(2,015)
(9.6)
%
Employee and travel expenses
23,222
17,504
(5,718)
(32.7)
%
Technology-related expenses
69,998
61,596
(8,402)
(13.6)
%
Credit card/bank charges
63,441
53,788
(9,653)
(17.9)
%
Insurance
11,780
9,359
(2,421)
(25.9)
%
Legal fees and settlements
14,227
15,653
1,426
9.1
%
Supplies
22,161
26,463
4,302
16.3
%
Other
19,470
21,231
1,761
8.3
%
$
373,458
$
340,328
$
(33,130)
(9.7)
%
Consulting and outsourced services expense increased $8.0 million, or 8.7%, due to higher call center expenses and data processing fees related to higher activity on Emerald Cards®. Technology-related expenses increased $8.4 million, or 13.6%, due to increased investments in information technology. Credit card and bank charges increased $9.7 million, or 17.9%, due to higher Wave small business payment processing fees and fees related to Emerald Cards®.
Interest expense on borrowings decreased $9.0 million, or 11.4%, primarily due to higher CLOC borrowings in the prior year.
We recorded an income tax expense of $29.7 million in the current year compared to $51.0 million in the prior year, the decrease is primarily related to lower pretax income in the current year. The effective tax rate for the nine months ended March 31, 2022, and 2021 was 8.1% and 10.3%, respectively. See Item 1, note 7 to the consolidated financial statements for additional discussion.
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.
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 March 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 nine months ended March 31, 2022 and 2021. See Item 1 for the complete consolidated statements of cash flows for these periods.
(in 000s)
Nine months ended March 31,
2022
2021
Net cash provided by (used in):
Operating activities
$
373,128
$
501,356
Investing activities
(71,106)
(50,014)
Financing activities
(707,466)
(2,356,266)
Effects of exchange rates on cash
(1,666)
10,370
Net decrease in cash, cash equivalents and restricted cash
$
(407,110)
$
(1,894,554)
Operating Activities. Cash provided by operations totaled $373.1 million for the nine months ended March 31, 2022 compared to $501.4 million in the prior year period. The change is primarily due to higher bonus and payroll tax payments and a decrease in net income in the current year, partially offset by the timing of receivables collections in the current year.
Investing Activities. Cash used in investing activities totaled $71.1 million for the nine months ended March 31, 2022 compared to $50.0 million in the prior year period. The change is primarily due to an increase in capital expenditures and payments to acquire businesses in the current year.
Financing Activities. Cash used in financing activities totaled $707.5 million for the nine months ended March 31, 2022 compared to $2.4 billion in the prior year period. The change is primarily due to the repayment of the $2.0 billion draw on our CLOC in the prior year, partially offset by 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 $143.4 million and $147.9 million for the nine months ended March 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.
During the nine months ended March 31, 2022, we repurchased $550.3 million of our common stock at an average price of $23.84 per share. In the prior year period, we repurchased $188.2 million of our common stock at an average price of $16.29 per share. Our current share repurchase program has remaining authorization of $13.8 million which is effective through June 2022.
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 $52.7 million and $44.2 million for the nine months ended March 31, 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 $25.5 million and $15.5 million during the nine months ended March 31, 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 $427.5 million as of March 31, 2022.
On April 1, 2022, we sent a notice of redemption to the trustee to fully redeem our outstanding 2022 Senior Notes originally due in November 2022. The redemption price is equal to 100% of the outstanding principal amount of the 2022 Senior Notes, plus accrued and unpaid interest up to, but not including, the redemption date. The 2022 Senior Notes were redeemed on May 2, 2022.
The following table provides ratings for debt issued by Block Financial LLC (Block Financial) as of March 31, 2022 and June 30, 2021:
As of
March 31, 2022
June 30, 2021
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 in our April 30, 2021 Annual Report to Shareholders on Form 10-K or our June 30, 2021 Transition Report filed on Form 10-Q.
CASH AND OTHER ASSETS – As of March 31, 2022, we held cash and cash equivalents, excluding restricted amounts, of $1.0 billion, including $131.8 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 March 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 an decrease of $1.7 million during the nine months ended March 31, 2022 and in an increase of $10.4 million during the nine months ended March 31, 2021.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS – Except as described in Recent Developments related to our amended PMA agreement with Meta, there have been no material changes in our contractual obligations and commercial commitments from those reported in our April 30, 2021 Annual Report to Shareholders on Form 10-K or our June 30, 2021 Transition Report filed on Form 10-Q.
SUMMARIZED GUARANTOR FINANCIAL STATEMENTS –Block Financial is a 100% owned subsidiary of H&R Block, Inc. 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 STATEMENTS OF OPERATIONS - GUARANTOR AND ISSUER
(in 000s)
Nine months ended March 31, 2022
Two months ended June 30, 2021
Total revenues
$
169,944
$
22,978
Income from continuing operations before income taxes
39,127
2,504
Net income from continuing operations
34,745
2,953
Net income
29,760
1,444
The table above reflects $2.1 billion of non-current intercompany receivables due to the Issuer from non-guarantor subsidiaries as of March 31, 2022 and June 30, 2021.
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.
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 AdvanceSM, 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 April 30, 2021 Annual Report to Shareholders on Form 10-K or our June 30, 2021 Transition Report filed on Form 10-Q.
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, EBITDA margin from continuing operations, adjusted EBITDA margin from continuing operations, adjusted diluted earnings per share from continuing operations and free cash flow. 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.
The following is a reconciliation of net income to EBITDA from continuing operations, which is a non-GAAP financial measure:
(in 000s)
Three months ended March 31,
Nine months ended March 31,
2022
2021
2022
2021
Net income - as reported
$
673,177
$
758,247
$
330,971
$
440,240
Discontinued operations, net
1,796
1,425
4,984
4,533
Net income from continuing operations - as reported
674,973
759,672
335,955
444,773
Add back:
Income taxes
186,884
69,543
29,666
50,997
Interest expense
23,746
22,471
69,661
78,657
Depreciation and amortization
36,116
39,100
107,462
117,036
246,746
131,114
206,789
246,690
EBITDA from continuing operations
$
921,719
$
890,786
$
542,744
$
691,463
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 March 31,
Nine months ended March 31,
2022
2021
2022
2021
Net income from continuing operations - as reported
$
674,973
$
759,672
$
335,955
$
444,773
Adjustments:
Amortization of intangibles related to acquisitions (pretax)
13,979
16,229
43,141
50,398
Tax effect of adjustments (1)
(4,545)
(11,699)
(10,102)
(11,467)
Adjusted net income from continuing operations
$
684,407
$
764,202
$
368,994
$
483,704
Diluted earnings per share from continuing operations - as reported
$
4.06
$
4.09
$
1.92
$
2.35
Adjustments, net of tax
0.05
0.02
0.19
0.21
Adjusted diluted earnings per share from continuing operations
$
4.11
$
4.11
$
2.11
$
2.56
(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.
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 April 30, 2021 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 April 30, 2021.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risks from those reported in our April 30, 2021 Annual Report to Shareholders on Form 10-K or our June 30, 2021 Transition Report filed on Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES – As of the end of the period covered by this Form 10-Q, management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING – There were no changes during the three months ended March 31, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of our material pending legal proceedings, see discussion in Part I, Item 1, note 9 to the consolidated financial statements.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those reported in our April 30, 2021 Annual Report to Shareholders on Form 10-K or our June 30, 2021 Transition Report filed on Form 10-Q.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
A summary of our purchases of H&R Block common stock during the three months ended March 31, 2022 is as follows:
(in 000s, except per share amounts)
Total Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
January 1 - January 31
4,566
$
22.14
4,566
$
138,342
February 1 - February 28
5,129
$
24.29
5,128
$
13,797
March 1 - March 31
—
$
—
—
$
13,797
9,695
$
23.28
9,694
(1)We purchased approximately 1 thousand shares in connection with funding employee income tax withholding obligations arising upon the lapse of restrictions on restricted share units.
(2)In September 2015, we announced that our Board of Directors approved a $3.5 billion share repurchase program, effective through June 2019. In June 2019, our Board of Directors extended the share repurchase program through June 2022.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
On May 9, 2022, the Compensation Committee of the Company’s Board of Directors approved certain amendments to the Company’s Executive Severance Plan (as amended and restated, the Plan) to provide for the same severance benefits that an eligible participant would currently receive under the Plan in the case of a “Qualifying Termination,” but under circumstances constituting a “Good Reason Termination” outside of a change in control. The “Good Reason Termination” definition has also been updated to clarify that changes in the Company’s policy regarding remote or hybrid work are not grounds for a “Good Reason Termination.” All benefits and payments under the Plan remain subject to a participant's execution (and non-revocation) of a release of claims against the Company and other released parties.
The Company’s named executive officers, other than Jeffrey J. Jones II, the Company’s President and Chief Executive Officer, participate in the Executive Severance Plan. Mr. Jones would only participate in the Executive Severance Plan if and to the extent that the benefits related to equity awards thereunder exceeded those contained in his employment agreement.
The foregoing summary of the changes to the Plan is qualified in its entirety by reference to the full text of the Plan, a copy of which is filed as Exhibit 10.1 hereto and incorporated herein by reference.
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
