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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One) | |
☑ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the quarterly period ended | October 31, 2020 |
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, Missouri 64105
(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 November 30, 2020: 183,418,345 shares.
Form 10-Q for the Period Ended October 31, 2020
Table of Contents
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Item 1. | Consolidated Statements of Operations and Comprehensive Loss | |
| Three and six months ended October 31, 2020 and 2019 | |
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| Consolidated Balance Sheets | |
| As of October 31, 2020, October 31, 2019 and April 30, 2020 | |
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| Consolidated Statements of Cash Flows | |
| Six months ended October 31, 2020 and 2019 | |
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| Consolidated Statements of Stockholders' Equity | |
| Three and six months ended October 31, 2020 and 2019 | |
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| Notes to Consolidated Financial Statements | |
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Item 4. | | |
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Item 1. | Legal Proceedings | |
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Item 1A. | Risk Factors | |
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| Unregistered Sales of Equity Securities and Use of Proceeds | |
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Item 3. | Defaults Upon Senior Securities | |
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Item 4. | Mine Safety Disclosures | |
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| Exhibits | |
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS | (unaudited, in 000s, except per share amounts) |
| | Three months ended October 31, | | Six months ended October 31, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | |
REVENUES: | | | | | | | | |
Service revenues | | $ | 160,962 | | | $ | 139,648 | | | $ | 711,913 | | | $ | 271,807 | |
Royalty, product and other revenues | | 15,588 | | | 21,153 | | | 65,667 | | | 39,356 | |
| | | | | | | | |
| | 176,550 | | | 160,801 | | | 777,580 | | | 311,163 | |
OPERATING EXPENSES: | | | | | | | | |
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Costs of revenues | | 245,055 | | | 253,206 | | | 560,091 | | | 482,598 | |
| | | | | | | | |
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| | | | | | | | |
| | | | | | | | |
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Selling, general and administrative | | 136,842 | | | 150,334 | | | 269,880 | | | 266,470 | |
Total operating expenses | | 381,897 | | | 403,540 | | | 829,971 | | | 749,068 | |
| | | | | | | | |
Other income (expense), net | | (819) | | | 2,739 | | | 2,392 | | | 11,862 | |
Interest expense on borrowings | | (30,861) | | | (21,306) | | | (62,986) | | | (42,377) | |
| | | | | | | | |
Loss from continuing operations before income taxes (benefit) | | (237,027) | | | (261,306) | | | (112,985) | | | (468,420) | |
Income taxes (benefit) | | (14,547) | | | (77,752) | | | 15,939 | | | (139,142) | |
Net loss from continuing operations | | (222,480) | | | (183,554) | | | (128,924) | | | (329,278) | |
Net loss from discontinued operations, net of tax benefits of $1,363, $1,327, $2,048 and $2,685 | | (1,246) | | | (4,445) | | | (3,543) | | | (8,968) | |
NET LOSS | | $ | (223,726) | | | $ | (187,999) | | | $ | (132,467) | | | $ | (338,246) | |
| | | | | | | | |
BASIC AND DILUTED LOSS PER SHARE: | | | | | | | | |
Continuing operations | | $ | (1.17) | | | $ | (0.93) | | | $ | (0.68) | | | $ | (1.65) | |
Discontinued operations | | (0.01) | | | (0.02) | | | (0.02) | | | (0.04) | |
Consolidated | | $ | (1.18) | | | $ | (0.95) | | | $ | (0.70) | | | $ | (1.69) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
DIVIDENDS DECLARED PER SHARE | | $ | 0.26 | | | $ | 0.26 | | | $ | 0.52 | | | $ | 0.52 | |
| | | | | | | | |
COMPREHENSIVE LOSS: | | | | | | | | |
Net loss | | $ | (223,726) | | | $ | (187,999) | | | $ | (132,467) | | | $ | (338,246) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Change in foreign currency translation adjustments | | 2,330 | | | 919 | | | 19,869 | | | (1,401) | |
Other comprehensive income (loss) | | 2,330 | | | 919 | | | 19,869 | | | (1,401) | |
Comprehensive loss | | $ | (221,396) | | | $ | (187,080) | | | $ | (112,598) | | | $ | (339,647) | |
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See accompanying notes to consolidated financial statements.
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H&R Block, Inc. | Q2 FY2021 Form 10-Q | 1 |
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CONSOLIDATED BALANCE SHEETS | | (unaudited, in 000s, except share and per share amounts) |
As of | | October 31, 2020 | | October 31, 2019 | | April 30, 2020 |
| | | | | | |
ASSETS | | | | | | |
Cash and cash equivalents | | $ | 208,956 | | | $ | 245,312 | | | $ | 2,661,914 | |
Cash and cash equivalents - restricted | | 178,368 | | | 176,332 | | | 211,106 | |
Receivables, less allowance for credit losses of $66,808, $65,815 and $64,648 | | 71,253 | | | 74,710 | | | 133,197 | |
| | | | | | |
Prepaid expenses and other current assets | | 134,336 | | | 105,058 | | | 80,519 | |
| | | | | | |
| | | | | | |
Total current assets | | 592,913 | | | 601,412 | | | 3,086,736 | |
| | | | | | |
| | | | | | |
Property and equipment, at cost, less accumulated depreciation and amortization of $832,080, $784,535 and $796,192 | | 164,742 | | | 206,216 | | | 184,367 | |
Operating lease right of use asset | | 445,727 | | | 475,969 | | | 494,788 | |
Intangible assets, net | | 390,371 | | | 425,377 | | | 414,976 | |
Goodwill | | 727,483 | | | 815,331 | | | 712,138 | |
Deferred tax assets and income taxes receivable | | 172,842 | | | 145,807 | | | 151,195 | |
Other noncurrent assets | | 62,351 | | | 86,629 | | | 67,847 | |
Total assets | | $ | 2,556,429 | | | $ | 2,756,741 | | | $ | 5,112,047 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | |
LIABILITIES: | | | | | | |
| | | | | | |
| | | | | | |
Accounts payable and accrued expenses | | $ | 108,805 | | | $ | 111,439 | | | $ | 203,103 | |
Accrued salaries, wages and payroll taxes | | 62,122 | | | 57,602 | | | 116,375 | |
Accrued income taxes and reserves for uncertain tax positions | | 8,662 | | | 106,125 | | | 209,816 | |
Current portion of long-term debt | | — | | | 648,651 | | | 649,384 | |
Operating lease liabilities | | 191,114 | | | 162,897 | | | 195,537 | |
Deferred revenue and other current liabilities | | 181,900 | | | 177,243 | | | 201,401 | |
| | | | | | |
Total current liabilities | | 552,603 | | | 1,263,957 | | | 1,575,616 | |
Long-term debt and line of credit borrowings | | 1,559,093 | | | 980,299 | | | 2,845,873 | |
Deferred tax liabilities and reserves for uncertain tax positions | | 353,751 | | | 180,362 | | | 182,441 | |
Operating lease liabilities | | 268,312 | | | 326,691 | | | 312,566 | |
Deferred revenue and other noncurrent liabilities | | 102,636 | | | 81,179 | | | 124,510 | |
Total liabilities | | 2,836,395 | | | 2,832,488 | | | 5,041,006 | |
COMMITMENTS AND CONTINGENCIES | | | | | | |
STOCKHOLDERS' EQUITY: | | | | | | |
Common stock, no par, stated value $0.01 per share, 800,000,000 shares authorized, shares issued of 218,719,439, 231,024,069 and 228,206,684 | | 2,187 | | | 2,310 | | | 2,282 | |
Additional paid-in capital | | 773,691 | | | 765,220 | | | 775,387 | |
Accumulated other comprehensive loss | | (31,707) | | | (21,817) | | | (51,576) | |
Retained earnings (deficit) | | (335,617) | | | (122,535) | | | 42,965 | |
Less treasury shares, at cost, of 35,301,097, 35,778,404 and 35,731,376 | | (688,520) | | | (698,925) | | | (698,017) | |
Total stockholders' equity (deficiency) | | (279,966) | | | (75,747) | | | 71,041 | |
Total liabilities and stockholders' equity | | $ | 2,556,429 | | | $ | 2,756,741 | | | $ | 5,112,047 | |
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See accompanying notes to consolidated financial statements.
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2 | Q2 FY2021 Form 10-Q | H&R Block, Inc. |
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CONSOLIDATED STATEMENTS OF CASH FLOWS | | (unaudited, in 000s) | | | | | | | | | | | | | | | | | | | | | | |
Six months ended October 31, | | 2020 | | 2019 | | | | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (132,467) | | | $ | (338,246) | | | | | | | | | | | | | | | | | | | | | | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | 77,307 | | | 81,262 | | | | | | | | | | | | | | | | | | | | | | | |
Provision | | 4,578 | | | 1,890 | | | | | | | | | | | | | | | | | | | | | | | |
Deferred taxes | | 7,855 | | | 12,595 | | | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | | 14,935 | | | 16,094 | | | | | | | | | | | | | | | | | | | | | | | |
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Changes in assets and liabilities, net of acquisitions: | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Receivables | | 51,584 | | | 71,859 | | | | | | | | | | | | | | | | | | | | | | | |
Prepaid expenses, other current and noncurrent assets | | (16,271) | | | 13,889 | | | | | | | | | | | | | | | | | | | | | | | |
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Accounts payable, accrued expenses, salaries, wages and payroll taxes | | (141,905) | | | (267,257) | | | | | | | | | | | | | | | | | | | | | | | |
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Deferred revenue, other current and noncurrent liabilities | | (41,855) | | | (74,996) | | | | | | | | | | | | | | | | | | | | | | | |
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Income tax receivables, accrued income taxes and income tax reserves | | (87,333) | | | (206,278) | | | | | | | | | | | | | | | | | | | | | | | |
Other, net | | 833 | | | (4,128) | | | | | | | | | | | | | | | | | | | | | | | |
Net cash used in operating activities | | (262,739) | | | (693,316) | | | | | | | | | | | | | | | | | | | | | | | |
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CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Capital expenditures | | (26,584) | | | (42,854) | | | | | | | | | | | | | | | | | | | | | | | |
Payments made for business acquisitions, net of cash acquired | | (3,674) | | | (416,925) | | | | | | | | | | | | | | | | | | | | | | | |
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Franchise loans funded | | (11,922) | | | (16,021) | | | | | | | | | | | | | | | | | | | | | | | |
Payments from franchisees | | 18,321 | | | 7,902 | | | | | | | | | | | | | | | | | | | | | | | |
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Other, net | | 427 | | | 50,839 | | | | | | | | | | | | | | | | | | | | | | | |
Net cash used in investing activities | | (23,432) | | | (417,059) | | | | | | | | | | | | | | | | | | | | | | | |
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CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Repayments of line of credit borrowings | | (2,000,000) | | | — | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from line of credit borrowings | | 70,000 | | | 135,000 | | | | | | | | | | | | | | | | | | | | | | | |
Repayments of long-term debt | | (650,000) | | | — | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from issuance of long-term debt | | 647,965 | | | — | | | | | | | | | | | | | | | | | | | | | | | |
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Dividends paid | | (100,198) | | | (104,063) | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase of common stock, including shares surrendered | | (153,154) | | | (190,369) | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from exercise of stock options | | 1,133 | | | 1,215 | | | | | | | | | | | | | | | | | | | | | | | |
Other, net | | (21,691) | | | (18,544) | | | | | | | | | | | | | | | | | | | | | | | |
Net cash used in financing activities | | (2,205,945) | | | (176,761) | | | | | | | | | | | | | | | | | | | | | | | |
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Effects of exchange rate changes on cash | | 6,420 | | | 1,053 | | | | | | | | | | | | | | | | | | | | | | | |
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Net decrease in cash and cash equivalents, including restricted balances | | (2,485,696) | | | (1,286,083) | | | | | | | | | | | | | | | | | | | | | | | |
Cash, cash equivalents and restricted cash, beginning of period | | 2,873,020 | | | 1,707,727 | | | | | | | | | | | | | | | | | | | | | | | |
Cash, cash equivalents and restricted cash, end of period | | $ | 387,324 | | | $ | 421,644 | | | | | | | | | | | | | | | | | | | | | | | |
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SUPPLEMENTARY CASH FLOW DATA: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income taxes paid, net of refunds received | | $ | 94,066 | | | $ | 54,109 | | | | | | | | | | | | | | | | | | | | | | | |
Interest paid on borrowings | | 61,183 | | | 39,952 | | | | | | | | | | | | | | | | | | | | | | | |
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Accrued additions to property and equipment | | 3,092 | | | 3,409 | | | | | | | | | | | | | | | | | | | | | | | |
New operating right of use assets and related lease liabilities | | 71,537 | | | 204,962 | | | | | | | | | | | | | | | | | | | | | | | |
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See accompanying notes to consolidated financial statements.
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H&R Block, Inc. | Q2 FY2021 Form 10-Q | 3 |
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | | (amounts in 000s, except per share amounts) |
| | Common Stock | | | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Deficit) | | Treasury Stock | | Total Stockholders’ Equity |
| | Shares | | Amount | | | | | | | | | Shares | | Amount | |
Balances as of May 1, 2020 | | 228,207 | | | $ | 2,282 | | | | | | | $ | 775,387 | | | $ | (51,576) | | | $ | 42,965 | | | (35,731) | | | $ | (698,017) | | | $ | 71,041 | |
Net income | | — | | | — | | | | | | | — | | | — | | | 91,259 | | | — | | | — | | | 91,259 | |
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Other comprehensive income | | — | | | — | | | | | | | — | | | 17,539 | | | — | | | — | | | — | | | 17,539 | |
Stock-based compensation | | — | | | — | | | | | | | 7,422 | | | — | | | — | | | — | | | — | | | 7,422 | |
Stock-based awards exercised or vested | | — | | | — | | | | | | | (10,027) | | | — | | | (1,247) | | | 627 | | | 12,247 | | | 973 | |
Acquisition of treasury shares(1) | | — | | | — | | | | | | | — | | | — | | | — | | | (204) | | | (2,913) | | | (2,913) | |
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Cash dividends declared - $0.26 per share | | — | | | — | | | | | | | — | | | — | | | (50,044) | | | — | | | — | | | (50,044) | |
Balances as of July 31, 2020 | | 228,207 | | | $ | 2,282 | | | | | | | $ | 772,782 | | | $ | (34,037) | | | $ | 82,933 | | | (35,308) | | | $ | (688,683) | | | $ | 135,277 | |
Net loss | | — | | | — | | | | | | | — | | | — | | | (223,726) | | | — | | | — | | | (223,726) | |
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Other comprehensive income | | — | | | — | | | | | | | — | | | 2,330 | | | — | | | — | | | — | | | 2,330 | |
Stock-based compensation | | — | | | — | | | | | | | 6,768 | | | — | | | — | | | — | | | — | | | 6,768 | |
Stock-based awards exercised or vested | | — | | | — | | | | | | | (262) | | | — | | | (220) | | | 13 | | | 262 | | | (220) | |
Acquisition of treasury shares(1) | | — | | | — | | | | | | | — | | | — | | | — | | | (6) | | | (99) | | | (99) | |
Repurchase and retirement of common shares | | (9,488) | | | (95) | | | | | | | (5,597) | | | — | | | (144,450) | | | — | | | — | | | (150,142) | |
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Cash dividends declared - $0.26 per share | | — | | | — | | | | | | | — | | | — | | | (50,154) | | | — | | | — | | | (50,154) | |
Balances as of October 31, 2020 | | 218,719 | | | $ | 2,187 | | | | | | | $ | 773,691 | | | $ | (31,707) | | | $ | (335,617) | | | (35,301) | | | $ | (688,520) | | | $ | (279,966) | |
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(1) Represents shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards.
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4 | Q2 FY2021 Form 10-Q | H&R Block, Inc. |
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | | (amounts in 000s, except per share amounts) |
| | Common Stock | | | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Deficit) | | Treasury Stock | | Total Stockholders’ Equity |
| | Shares | | Amount | | | | | | | | | Shares | | Amount | |
Balances as of May 1, 2019 | | 238,337 | | | $ | 2,383 | | | | | | | $ | 767,636 | | | $ | (20,416) | | | $ | 499,386 | | | (36,377) | | | $ | (707,462) | | | $ | 541,527 | |
Net loss | | — | | | — | | | | | | | — | | | — | | | (150,247) | | | — | | | — | | | (150,247) | |
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Other comprehensive loss | | — | | | — | | | | | | | — | | | (2,320) | | | — | | | — | | | — | | | (2,320) | |
Stock-based compensation | | — | | | — | | | | | | | 6,557 | | | — | | | — | | | — | | | — | | | 6,557 | |
Stock-based awards exercised or vested | | — | | | — | | | | | | | (13,789) | | | — | | | (2,786) | | | 906 | | | 17,631 | | | 1,056 | |
Acquisition of treasury shares(1) | | — | | | — | | | | | | | — | | | — | | | — | | | (314) | | | (9,185) | | | (9,185) | |
Repurchase and retirement of common shares | | (1,593) | | | (16) | | | | | | | (955) | | | — | | | (43,101) | | | — | | | — | | | (44,072) | |
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Cash dividends declared - $0.26 per share | | — | | | — | | | | | | | — | | | — | | | (52,512) | | | — | | | — | | | (52,512) | |
Balances as of July 31, 2019 | | 236,744 | | | $ | 2,367 | | | | | | | $ | 759,449 | | | $ | (22,736) | | | $ | 250,740 | | | (35,785) | | | $ | (699,016) | | | $ | 290,804 | |
Net loss | | — | | | — | | | | | | | — | | | — | | | (187,999) | | | — | | | — | | | (187,999) | |
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Other comprehensive income | | — | | | — | | | | | | | — | | | 919 | | | — | | | — | | | — | | | 919 | |
Stock-based compensation | | — | | | — | | | | | | | 9,331 | | | — | | | — | | | — | | | — | | | 9,331 | |
Stock-based awards exercised or vested | | — | | | — | | | | | | | (127) | | | — | | | (276) | | | 13 | | | 264 | | | (139) | |
Acquisition of treasury shares(1) | | — | | | — | | | | | | | — | | | — | | | — | | | (6) | | | (173) | | | (173) | |
Repurchase and retirement of common shares | | (5,720) | | | (57) | | | | | | | (3,433) | | | — | | | (133,449) | | | — | | | — | | | (136,939) | |
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Cash dividends declared - $0.26 per share | | — | | | — | | | | | | | — | | | — | | | (51,551) | | | — | | | — | | | (51,551) | |
Balances as of October 31, 2019 | | 231,024 | | | $ | 2,310 | | | | | | | $ | 765,220 | | | $ | (21,817) | | | $ | (122,535) | | | (35,778) | | | $ | (698,925) | | | $ | (75,747) | |
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(1) Represents shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards.
See accompanying notes to consolidated financial statements.
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H&R Block, Inc. | Q2 FY2021 Form 10-Q | 5 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION – The consolidated balance sheets as of October 31, 2020 and 2019, the consolidated statements of operations and comprehensive loss for the three and six months ended October 31, 2020 and 2019, the consolidated statements of cash flows for the six months ended October 31, 2020 and 2019, and the consolidated statements of stockholders' equity for the three and six months ended October 31, 2020 and 2019 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 October 31, 2020 and 2019 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. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context.
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, 2020 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of April 30, 2020 or for the year then ended are derived from our Annual Report on Form 10-K.
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 – Because the majority of our clients file their tax returns during the period from February through April in a typical year, a substantial majority of our revenues from income tax return preparation and related services and products are earned during this period. As a result, we generally operate at a loss through the first three quarters of our fiscal year. As a result of the COVID-19 pandemic, on March 21, 2020, the federal tax filing deadline in the United States (U.S.) for individual 2019 tax returns was extended from April 15, 2020 to July 15, 2020. Substantially all U.S. states with an April 15 individual state income tax filing requirement extended their respective deadlines. In Canada, the deadline for individuals to file was extended to June 1, 2020. These extensions impacted the typical seasonality of our business and the comparability of our financial results. Consequently, a portion of revenues and expenses that would have normally been recognized in our fourth quarter of fiscal year 2020 shifted to the first two quarters of fiscal year 2021. Results for interim periods are not indicative of results to be expected for the full fiscal year.
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 10 for additional information on litigation, claims, and other loss contingencies related to our discontinued operations.
NEW ACCOUNTING PRONOUNCEMENTS –
Current Expected Credit Losses. In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13 (ASU 2016-13), "Measurement of Credit Losses on Financial Instruments," which replaces the existing incurred credit loss model for an expected credit loss model. We adopted ASU 2016-13 as of May 1, 2020, which did not have a material impact on our consolidated financial statements.
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6 | Q2 FY2021 Form 10-Q | H&R Block, Inc. |
NOTE 2: REVENUE RECOGNITION
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:
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| | | | | | | | (in 000s) |
| | Three months ended October 31, | | Six months ended October 31, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Revenues: | | | | | | | | |
U.S. assisted tax preparation | | $ | 48,922 | | | $ | 41,226 | | | $ | 386,650 | | | $ | 74,218 | |
U.S. royalties | | 7,576 | | | 7,820 | | | 43,525 | | | 14,679 | |
U.S. DIY tax preparation | | 5,055 | | | 4,541 | | | 72,650 | | | 7,951 | |
International | | 48,858 | | | 44,926 | | | 116,676 | | | 85,507 | |
Refund Transfers | | 1,192 | | | 791 | | | 11,745 | | | 2,300 | |
Emerald Card® | | 9,795 | | | 8,616 | | | 26,850 | | | 22,471 | |
Peace of Mind® Extended Service Plan | | 24,775 | | | 25,660 | | | 56,770 | | | 58,497 | |
Tax Identity Shield® | | 4,835 | | | 4,648 | | | 14,202 | | | 9,170 | |
Interest and fee income on Emerald AdvanceTM | | 501 | | | 485 | | | 1,164 | | | 1,039 | |
Wave | | 14,327 | | | 10,902 | | | 26,394 | | | 14,527 | |
Other | | 10,714 | | | 11,186 | | | 20,954 | | | 20,804 | |
Total revenues | | $ | 176,550 | | | $ | 160,801 | | | $ | 777,580 | | | $ | 311,163 | |
| | | | | | | | |
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 |
Six months ended October 31, | | 2020 | | 2019 | | 2020 | | 2019 |
Balance, beginning of the period | | $ | 183,685 | | | $ | 212,511 | | | $ | 21,618 | | | $ | 27,306 | |
Amounts deferred | | 20,954 | | | 4,222 | | | 139 | | | 29 | |
Amounts recognized on previous deferrals | | (66,088) | | | (68,088) | | | (7,541) | | | (9,430) | |
Balance, end of the period | | $ | 138,551 | | | $ | 148,645 | | | $ | 14,216 | | | $ | 17,905 | |
| | | | | | | | |
As of October 31, 2020, deferred revenue related to POM was $138.6 million. We expect that $96.7 million will be recognized over the next twelve months, while the remaining balance will be recognized over the following sixty months.
As of October 31, 2020 and 2019, Tax Identity Shield® (TIS) deferred revenue was $20.3 million and $21.0 million, respectively. Deferred revenue related to TIS was $30.8 million and $29.7 million at April 30, 2020 and 2019, respectively. All deferred revenue related to TIS will be recognized within the next six months.
NOTE 3: EARNINGS (LOSS) PER SHARE AND STOCKHOLDERS' EQUITY
EARNINGS (LOSS) 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 or loss from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period. The dilutive effect of potential common shares is included in diluted earnings per share except in those periods with a loss from continuing operations. 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 5.1 million shares for the three and six months ended October 31, 2020 and 3.7 million shares for the three and six months ended October 31, 2019, as the effect would be antidilutive due to the net loss from continuing operations during those periods.
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H&R Block, Inc. | Q2 FY2021 Form 10-Q | 7 |
The computations of basic and diluted loss per share from continuing operations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in 000s, except per share amounts) |
| | Three months ended October 31, | | Six months ended October 31, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Net loss from continuing operations attributable to shareholders | | $ | (222,480) | | | $ | (183,554) | | | $ | (128,924) | | | $ | (329,278) | |
Amounts allocated to participating securities | | (207) | | | (150) | | | (381) | | | (299) | |
Net loss from continuing operations attributable to common shareholders | | $ | (222,687) | | | $ | (183,704) | | | $ | (129,305) | | | $ | (329,577) | |
| | | | | | | | |
Basic weighted average common shares | | 189,607 | | | 198,079 | | | 191,103 | | | 200,058 | |
Potential dilutive shares | | — | | | — | | | — | | | — | |
Dilutive weighted average common shares | | 189,607 | | | 198,079 | | | 191,103 | | | 200,058 | |
| | | | | | | | |
Loss per share from continuing operations attributable to common shareholders: |
Basic | | $ | (1.17) | | | $ | (0.93) | | | $ | (0.68) | | | $ | (1.65) | |
Diluted | | (1.17) | | | (0.93) | | | (0.68) | | | (1.65) | |
| | | | | | | | |
The weighted average shares outstanding for the three and six months ended October 31, 2020 decreased to 189.6 million and 191.1 million, respectively, from 198.1 million and 200.1 million, respectively, for the three and six months ended October 31, 2019. The decrease is due to share repurchases completed in the current and prior fiscal years.
STOCK-BASED COMPENSATION – During the six months ended October 31, 2020, we granted awards equivalent to 2.1 million shares under our stock-based compensation plans, consisting primarily of nonvested units. Stock-based compensation expense of our continuing operations totaled $7.3 million and $14.9 million for the three and six months ended October 31, 2020, respectively, and $9.4 million and $16.1 million for the three and six months ended October 31, 2019, respectively. As of October 31, 2020, unrecognized compensation cost for nonvested shares and units totaled $47.3 million.
NOTE 4: RECEIVABLES
Receivables, net of their related allowance, consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in 000s) |
As of | | October 31, 2020 | | October 31, 2019 | | April 30, 2020 |
| | Short-term | | Long-term | | Short-term | | Long-term | | Short-term | | Long-term |
Loans to franchisees | | $ | 15,147 | | | $ | |