SEC Filing | H&R Block®

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hrb-20201031

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(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.

Table of Contents

Form 10-Q for the Period Ended October 31, 2020

Table of Contents


	PART I

Item 1.	Consolidated Statements of Operations and Comprehensive Loss
	Three and six months ended October 31, 2020 and 2019	1

	Consolidated Balance Sheets
	As of October 31, 2020, October 31, 2019 and April 30, 2020	2

	Consolidated Statements of Cash Flows
	Six months ended October 31, 2020 and 2019	3

	Consolidated Statements of Stockholders' Equity
	Three and six months ended October 31, 2020 and 2019	4

	Notes to Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	30

	PART II
Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	31

Item 4.	Mine Safety Disclosures	31

Item 5.	Other Information	31

Item 6.	Exhibits	32

	Signatures	33

Table of Contents

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:






Costs of revenues	245,055		253,206		560,091		482,598






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)

See accompanying notes to consolidated financial statements.


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

See accompanying notes to consolidated financial statements.


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

Changes in assets and liabilities, net of acquisitions:

Receivables	51,584		71,859
Prepaid expenses, other current and noncurrent assets	(16,271)		13,889

Accounts payable, accrued expenses, salaries, wages and payroll taxes	(141,905)		(267,257)

Deferred revenue, other current and noncurrent liabilities	(41,855)		(74,996)

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)

CASH FLOWS FROM INVESTING ACTIVITIES:



Capital expenditures	(26,584)		(42,854)
Payments made for business acquisitions, net of cash acquired	(3,674)		(416,925)



Franchise loans funded	(11,922)		(16,021)
Payments from franchisees	18,321		7,902

Other, net	427		50,839
Net cash used in investing activities	(23,432)		(417,059)

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		—


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)

Effects of exchange rate changes on cash	6,420		1,053

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

SUPPLEMENTARY CASH FLOW DATA:
Income taxes paid, net of refunds received	$	94,066	$	54,109
Interest paid on borrowings	61,183		39,952



Accrued additions to property and equipment	3,092		3,409
New operating right of use assets and related lease liabilities	71,537		204,962

See accompanying notes to consolidated financial statements.


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

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)



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)

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)


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)

(1) Represents shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards.


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)

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)


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)

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)


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)

(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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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.


6			Q2 FY2021 Form 10-Q \| H&R Block, Inc.

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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:


							(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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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