Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended July 31, 2017
 
 
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
https://cdn.kscope.io/53589d8571a09a4323c9fc82407d9715-hrbnewlogo.jpg
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)
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 þ     No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes þ     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 þ           Accelerated filer ¨         Non-accelerated filer ¨          Smaller reporting company ¨     Emerging growth company ¨
(Do not check if a smaller reporting 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  þ
The number of shares outstanding of the registrant's Common Stock, without par value, at the close of business on August 31, 2017: 209,059,957 shares.
 


Table of Contents

https://cdn.kscope.io/53589d8571a09a4323c9fc82407d9715-hrbnewlogo.jpg
Form 10-Q for the Period Ended July 31, 2017

Table of Contents

 
 
 
 
 
Consolidated Statements of Operations and Comprehensive Loss
 
 
Three months ended July 31, 2017 and 2016
1
 
 
 
 
Consolidated Balance Sheets
 
 
As of July 31, 2017, July 31, 2016 and April 30, 2017
 
 
 
 
Consolidated Statements of Cash Flows
 
 
Three months ended July 31, 2017 and 2016
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legal Proceedings
 
 
 
Risk Factors
 
 
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
 
Exhibits
 
 
 
 


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 July 31,
 
2017

 
2016

 
 
 
 
 
REVENUES:
 
 
 
 
Service revenues
 
$
124,695

 
$
112,384

Royalty, product and other revenues
 
13,107

 
12,801

 
 
137,802

 
125,185

OPERATING EXPENSES:
 
 
 
 
Cost of revenues:
 
 
 
 
Compensation and benefits
 
55,592

 
52,355

Occupancy and equipment
 
98,467

 
94,425

Provision for bad debt
 
2,459

 
1,417

Depreciation and amortization
 
28,616

 
27,467

Other
 
42,581

 
35,422

 
 
227,715

 
211,086

Selling, general and administrative:
 
 
 
 
Marketing and advertising
 
7,104

 
7,561

Compensation and benefits
 
56,373

 
57,522

Depreciation and amortization
 
14,982

 
13,815

Other selling, general and administrative
 
16,790

 
19,925


 
95,249

 
98,823

Total operating expenses
 
322,964

 
309,909

 
 
 
 
 
Other income (expense), net
 
1,220

 
2,641

Interest expense on borrowings
 
(21,277
)
 
(21,466
)
Loss from continuing operations before income tax benefit
 
(205,219
)
 
(203,549
)
Income tax benefit
 
(77,401
)
 
(82,523
)
Net loss from continuing operations
 
(127,818
)
 
(121,026
)
Net loss from discontinued operations, net of tax benefits of $1,605 and $1,557
 
(2,749
)
 
(2,647
)
NET LOSS
 
$
(130,567
)
 
$
(123,673
)
 
 
 
 
 
BASIC AND DILUTED LOSS PER SHARE:
 
 
 
 
Continuing operations
 
$
(0.62
)
 
$
(0.55
)
Discontinued operations
 
(0.01
)
 
(0.01
)
Consolidated
 
$
(0.63
)
 
$
(0.56
)
 
 
 
 
 
DIVIDENDS DECLARED PER SHARE
 
$
0.24

 
$
0.22

 
 
 
 
 
COMPREHENSIVE LOSS:
 
 
 
 
Net loss
 
$
(130,567
)
 
$
(123,673
)
Unrealized gains (losses) on securities, net of taxes:
 
 
 
 
Unrealized holding gains (losses) arising during the
period, net of tax benefits of $ - and $5
 
2

 
(11
)
Change in foreign currency translation adjustments
 
2,460

 
(3,560
)
Other comprehensive income (loss)
 
2,462

 
(3,571
)
Comprehensive loss
 
$
(128,105
)
 
$
(127,244
)
 
 
 
 
 
See accompanying notes to consolidated financial statements.

H&R Block, Inc. | Q1 FY2018 Form 10-Q
1

Table of Contents

CONSOLIDATED BALANCE SHEETS
 
(unaudited, in 000s, except 
share and per share amounts)
 
As of
 
July 31, 2017

 
July 31, 2016

 
April 30, 2017

 
 


 


 
 
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
551,566

 
$
306,871

 
$
1,011,331

Cash and cash equivalents - restricted
 
116,594

 
122,025

 
106,208

Receivables, less allowance for doubtful accounts of $54,924, $56,381 and $55,296
 
91,004

 
103,425

 
162,775

Prepaid expenses and other current assets
 
74,776

 
76,052

 
65,725

Total current assets
 
833,940

 
608,373

 
1,346,039

Mortgage loans held for investment, less allowance for loan losses of $ - , $5,310 and $ -
 

 
192,375

 

Property and equipment, at cost, less accumulated depreciation and amortization of $706,687, $622,937 and $678,161
 
253,255

 
284,114

 
263,827

Intangible assets, net
 
393,972

 
419,909

 
409,364

Goodwill
 
493,991

 
470,942

 
491,207

Deferred tax assets and income taxes receivable
 
54,348

 
90,498

 
83,728

Other noncurrent assets
 
102,742

 
97,331

 
99,943

Total assets
 
$
2,132,248

 
$
2,163,542

 
$
2,694,108

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
161,751

 
$
157,085

 
$
217,028

Accrued salaries, wages and payroll taxes
 
35,063

 
43,516

 
183,856

Accrued income taxes and reserves for uncertain tax positions
 
176,909

 
216,390

 
348,199

Current portion of long-term debt
 
992

 
864

 
981

Deferred revenue and other current liabilities
 
187,791

 
191,304

 
189,216

Total current liabilities
 
562,506

 
609,159

 
939,280

Long-term debt
 
1,493,422

 
1,491,790

 
1,493,017

Reserves for uncertain tax positions
 
159,233

 
116,709

 
159,085

Deferred revenue and other noncurrent liabilities
 
131,415

 
145,691

 
163,609

Total liabilities
 
2,346,576

 
2,363,349

 
2,754,991

COMMITMENTS AND CONTINGENCIES
 


 


 


STOCKHOLDERS' EQUITY:
 
 
 
 
 
 
Common stock, no par, stated value $.01 per share,
800,000,000 shares authorized, shares issued
of 246,198,878, 258,179,891 and 246,198,878
 
2,462

 
2,582

 
2,462

Additional paid-in capital
 
746,761

 
748,924

 
754,912

Accumulated other comprehensive loss
 
(12,837
)
 
(14,804
)
 
(15,299
)
Retained deficit
 
(229,647
)
 
(180,631
)
 
(48,206
)
Less treasury shares, at cost, of 37,141,486, 39,087,239 and 39,027,573
 
(721,067
)
 
(755,878
)
 
(754,752
)
Total stockholders' equity (deficiency)
 
(214,328
)
 
(199,807
)
 
(60,883
)
Total liabilities and stockholders' equity
 
$
2,132,248

 
$
2,163,542

 
$
2,694,108

 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

2
Q1 FY2018 Form 10-Q | H&R Block, Inc.

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited, in 000s)
 
Three months ended July 31,
 
2017

 
2016

CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net loss
 
$
(130,567
)
 
$
(123,673
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
43,598

 
41,282

Provision for bad debt
 
2,459

 
1,417

Deferred taxes
 
20,796

 
6,274

Stock-based compensation
 
4,816

 
5,541

Changes in assets and liabilities, net of acquisitions:
 
 
 
 
Receivables
 
64,985

 
49,220

Prepaid expenses and other current assets
 
(8,695
)
 
(9,173
)
Other noncurrent assets
 
5,499

 
4,059

Accounts payable and accrued expenses
 
(66,729
)
 
(98,785
)
Accrued salaries, wages and payroll taxes
 
(149,441
)
 
(118,040
)
Deferred revenue and other current liabilities
 
464

 
(38,022
)
Deferred revenue and other noncurrent liabilities
 
(32,510
)
 
(28,080
)
Income tax receivables, accrued income taxes and income tax reserves
 
(149,542
)
 
(144,249
)
Other, net
 
(14,248
)
 
(5,735
)
Net cash used in operating activities
 
(409,115
)
 
(457,964
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Principal payments and sales of mortgage loans and real estate owned, net
 

 
9,573

Capital expenditures
 
(13,094
)
 
(6,246
)
Payments made for business acquisitions, net of cash acquired
 
(1,440
)
 
(1,635
)
Franchise loans funded
 
(4,527
)
 
(2,219
)
Payments received on franchise loans
 
4,727

 
6,473

Other, net
 
1,371

 
(868
)
Net cash provided by (used in) investing activities
 
(12,963
)
 
5,078

 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Dividends paid
 
(49,905
)
 
(48,514
)
Repurchase of common stock, including shares surrendered
 
(7,508
)
 
(45,312
)
Proceeds from exercise of stock options
 
27,418

 
1,639

Other, net
 
2,545

 
(24,779
)
Net cash used in financing activities
 
(27,450
)
 
(116,966
)
 
 
 
 
 
Effects of exchange rate changes on cash
 
149

 
(2,163
)
 
 
 
 
 
Net decrease in cash, cash equivalents and restricted cash
 
(449,379
)
 
(572,015
)
Cash, cash equivalents and restricted cash, beginning of period
 
1,117,539

 
1,000,911

Cash, cash equivalents and restricted cash, end of period
 
$
668,160

 
$
428,896

 
 
 
 
 
SUPPLEMENTARY CASH FLOW DATA:
 
 
 
 
Income taxes paid, net of refunds received
 
$
57,901

 
$
61,289

Interest paid on borrowings
 
15,519

 
15,519

Accrued additions to property and equipment
 
4,757

 
10,147

Accrued purchase of common stock
 

 
8,895

 
 
 
 
 
See accompanying notes to consolidated financial statements.

H&R Block, Inc. | Q1 FY2018 Form 10-Q
3

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                  (unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated balance sheets as of July 31, 2017 and 2016, the consolidated statements of operations and comprehensive loss for the three months ended July 31, 2017 and 2016, and the consolidated statements of cash flows for the three months ended July 31, 2017 and 2016 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 July 31, 2017 and 2016 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, 2017 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of April 30, 2017 or for the year then ended are derived from our April 30, 2017 Annual Report to Shareholders 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 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.
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 notes 9 and 10 for additional information on litigation, claims and other loss contingencies related to our discontinued operations.
NEW ACCOUNTING PRONOUNCEMENTS – 
Restricted Cash in Statement of Cash Flows. In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-18, "Restricted Cash (a consensus of the FASB Emerging Issues Task Force)," (ASU 2016-18). This guidance requires that restricted cash be included with cash and cash equivalents when reconciling the beginning and end-of-period total amounts shown on the statement of cash flows. This guidance must be applied retrospectively to all periods presented. We adopted ASU 2016-18 effective May 1, 2017. All prior periods have been adjusted to conform to the current period presentation, which resulted in a decrease in cash used in operations of $17.7 million for the three months ended July 31, 2016.
Stock-Based Compensation. In March 2016, the FASB issued Accounting Standards Update No. 2016-09, "Improvements to Employee Share-Based Payment Accounting," (ASU 2016-09). This guidance requires that, among other things: (1) all excess tax benefits and tax deficiencies would be recognized as income tax expense or benefit in the income statement; and (2) excess tax benefits would not be separated from other income tax cash flows and, thus, would be classified along with other cash flows as an operating activity. The transition requirements for this guidance varies by component, but the changes applicable to us were applied prospectively. We adopted ASU 2016-09 effective May 1, 2017 and recorded a discrete tax benefit of $5.1 million during the three months ended July 31, 2017 as a result of this guidance.
Revenue recognition. In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers," (ASU 2014-09) which is a comprehensive new revenue recognition model that requires

4
Q1 FY2018 Form 10-Q | H&R Block, Inc.

Table of Contents

an entity to recognize the amount of revenue which reflects the consideration it expects to receive in exchange for the transfer of the promised goods or services to customers. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract, and clarifies guidance for multiple-element arrangements. This guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for us on May 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method.
We have substantially completed our evaluation of the impact of ASU 2014-09 on our United States (U.S.) assisted tax preparation fees and revenues from POM, and based on the preliminary results of our evaluation, we do not expect the application of this guidance to have a material impact on the recognition of revenue related to these services. Changes to our client agreements or service design before adoption of the new standard could change our preliminary conclusions. We are still evaluating the impact of this guidance as it relates to other revenue streams, as well as certain associated expenses. Depending on the results of our review, there could be changes to the classification and timing of recognition of revenues and expenses related to other revenue streams. We are continuing our assessment, including evaluating the standard's impact on our internal controls and selecting a transition method for adoption.
NOTE 2: LOSS PER SHARE AND STOCKHOLDERS' EQUITY
LOSS PER SHARE – Basic and diluted 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 2.8 million shares for the three months ended July 31, 2017, and 4.7 million shares for the three months ended July 31, 2016, as the effect would be antidilutive due to the net loss from continuing operations during those periods.
The computations of basic and diluted loss per share from continuing operations are as follows:
(in 000s, except per share amounts)
 
Three months ended July 31,
 
2017

 
2016

Net loss from continuing operations attributable to shareholders
 
$
(127,818
)
 
$
(121,026
)
Amounts allocated to participating securities
 
(160
)
 
(124
)
Net loss from continuing operations attributable to common shareholders
 
$
(127,978
)
 
$
(121,150
)
 
 
 
 
 
Basic weighted average common shares
 
207,935

 
220,484

Potential dilutive shares
 

 

Dilutive weighted average common shares
 
207,935

 
220,484

 
 
 
 
 
Loss per share from continuing operations attributable to common shareholders:
Basic
 
$
(0.62
)
 
$
(0.55
)
Diluted
 
(0.62
)
 
(0.55
)
 
 
 
 
 
The weighted average shares outstanding for the three months ended July 31, 2017 decreased to 207.9 million from 220.5 million for the three months ended July 31, 2016, primarily due to share repurchases completed in the prior year. We did not repurchase any shares during the three months ended July 31, 2017. During the three months ended July 31, 2016, we purchased and immediately retired 2.0 million shares at an aggregate cost of $48.6 million (average price of $23.84 per share).
STOCK-BASED COMPENSATION – During the three months ended July 31, 2017, we acquired 0.2 million shares of our common stock at an aggregate cost of $7.5 million. These shares represent shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. During the three months ended July 31, 2016, we acquired 0.2 million shares at an aggregate cost of $5.6 million for similar purposes.

H&R Block, Inc. | Q1 FY2018 Form 10-Q
5

Table of Contents

During the three months ended July 31, 2017 and 2016, we issued 2.1 million and 0.9 million shares of common stock, respectively, due to the vesting or exercise of stock-based awards.
During the three months ended July 31, 2017, we granted equity awards equivalent to 0.6 million shares under our stock-based compensation plans, consisting primarily of nonvested units. Nonvested units generally either vest over a three-year period with one-third vesting each year or cliff vest at the end of a three-year period, although the Compensation Committee may in limited circumstances approve grants with a modified vesting schedule. Stock-based compensation expense of our continuing operations totaled $4.8 million for the three months ended July 31, 2017, and $5.5 million for the three months ended July 31, 2016. As of July 31, 2017, unrecognized compensation cost for stock options totaled $0.1 million, and for nonvested shares and units totaled $40.3 million.
NOTE 3: RECEIVABLES
Receivables consist of the following:
(in 000s)
 
As of
 
July 31, 2017
 
July 31, 2016
 
April 30, 2017
 
 
Short-term
 
Long-term
 
Short-term
 
Long-term
 
Short-term
 
Long-term
Loans to franchisees
 
$
37,838

 
$
40,111

 
$
47,905

 
$
46,461

 
$
39,911

 
$
36,614

Receivables for tax preparation and related fees
 
39,031

 
6,316

 
39,115

 
5,528

 
54,506

 
6,316

Instant Cash Back® receivables
 
4,338

 

 
4,515

 

 
37,150

 

H&R Block Emerald Advance® lines of credit
 
21,755

 
9,711

 
24,857

 
111

 
26,325

 
5,069

Software receivables from retailers
 
8,178

 

 
4,696

 

 
16,715

 

Royalties and other receivables from franchisees
 
6,776

 
796

 
6,885

 

 
13,275

 
1,585

Other
 
28,012

 
4,011

 
31,833

 
4,414

 
30,189

 
3,314

 
 
145,928

 
60,945

 
159,806

 
56,514

 
218,071

 
52,898

Allowance for doubtful accounts
 
(54,924
)
 

 
(56,381
)
 

 
(55,296
)
 

 
 
$
91,004

 
$
60,945

 
$
103,425

 
$
56,514

 
$
162,775

 
$
52,898

 
 
 
 
 
 
 
 
 
 
 
 
 
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 as of July 31, 2017 and 2016 and April 30, 2017, consisted of $25.1 million, $31.5 million and $27.0 million, respectively, in revolving lines of credit primarily for the purpose of funding off-season working capital needs and $52.9 million, $62.8 million and $49.5 million, respectively, in term loans made primarily to finance the purchase of franchises.
As of July 31, 2017 and 2016 and April 30, 2017, loans with a principal balance of $0.9 million, $2.2 million and $0.1 million, respectively, were more than 90 days past due. We had no loans to franchisees on non-accrual status.
INSTANT CASH BACK® PROGRAM Refunds advanced under the Instant Cash Back® program in Canada are not subject to credit approval, therefore the primary indicator of credit quality is the age of the receivable amount. Instant Cash Back® amounts are generally received within 60 days of filing the client's return. As of July 31, 2017 and 2016 and April 30, 2017, $1.2 million, $0.6 million and $1.5 million of Instant Cash Back® balances were more than 60 days old, respectively.

6
Q1 FY2018 Form 10-Q | H&R Block, Inc.

Table of Contents

H&R BLOCK EMERALD ADVANCE® LINES OF CREDIT (EAs) We review the credit quality of our purchased participation interests in EA receivables based on pools, which are segregated by the year of origination, with older years being deemed more unlikely to be repaid. These amounts as of July 31, 2017, by year of origination, are as follows:
(in 000s)
 
Credit Quality Indicator – Year of origination:
 
 
2017
 
$
9,346

2016 and prior
 
6,898

Revolving loans
 
15,222

 
 
$
31,466

 
 
 
As of July 31, 2017 and 2016 and April 30, 2017, $28.1 million, $21.4 million and $28.0 million of EAs were on non-accrual status and classified as impaired, or more than 60 days past due, respectively.
ALLOWANCE FOR DOUBTFUL ACCOUNTS Activity in the allowance for doubtful accounts for our EA and all other short-term receivables for the three months ended July 31, 2017 and 2016 is as follows:
(in 000s)
 
 
 
EAs

 
All Other

 
Total

Balances as of May 1, 2017
 
$
10,123

 
$
45,173

 
$
55,296

Provision
 

 
2,459

 
2,459

Charge-offs, net of recoveries
 

 
(2,831
)
 
(2,831
)
Balances as of July 31, 2017
 
$
10,123

 
$
44,801

 
$
54,924

 
 
 
 
 
 
 
Balances as of May 1, 2016
 
$
9,007

 
$
48,004

 
$
57,011

Provision
 
451

 
966

 
1,417

Charge-offs, net of recoveries
 

 
(2,047
)
 
(2,047
)
Balances as of July 31, 2016
 
$
9,458

 
$
46,923

 
$
56,381

 
 
 
 
 
 
 
NOTE 4: GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the three months ended July 31, 2017 and 2016 are as follows:
(in 000s)
 
 
 
Goodwill

 
Accumulated Impairment Losses

 
Net

Balances as of April 30, 2017
 
$
523,504

 
$
(32,297
)
 
$
491,207

Acquisitions
 
252

 

 
252

Disposals and foreign currency changes, net
 
2,532

 

 
2,532

Impairments
 

 

 

Balances as of July 31, 2017
 
$
526,288

 
$
(32,297
)
 
$
493,991

 
 
 
 
 
 
 
Balances as of April 30, 2016
 
$
503,054

 
$
(32,297
)
 
$
470,757

Acquisitions
 
23

 

 
23

Disposals and foreign currency changes, net
 
162

 

 
162

Impairments
 

 

 

Balances as of July 31, 2016
 
$
503,239

 
$
(32,297
)
 
$
470,942

 
 
 
 
 
 
 
We test goodwill for impairment annually or more frequently if events occur or circumstances change which would, more likely than not, reduce the fair value of a reporting unit below its carrying value.

H&R Block, Inc. | Q1 FY2018 Form 10-Q
7

Table of Contents

Components of intangible assets are as follows:
(in 000s)
 
 
 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net

As of July 31, 2017:
 
 
 
 
 
 
Reacquired franchise rights
 
$
331,371

 
$
(96,600
)
 
$
234,771

Customer relationships
 
235,413

 
(140,881
)
 
94,532

Internally-developed software
 
143,206

 
(112,894
)
 
30,312

Noncompete agreements
 
32,498

 
(28,143
)
 
4,355

Franchise agreements
 
19,201

 
(11,094
)
 
8,107

Purchased technology
 
54,700

 
(33,444
)
 
21,256

Acquired assets pending final allocation (1)
 
639

 

 
639

 
 
$
817,028

 
$
(423,056
)
 
$
393,972

As of July 31, 2016:
 
 
 
 
 
 
Reacquired franchise rights
 
$
319,545

 
$
(72,977
)
 
$
246,568

Customer relationships
 
206,606

 
(110,696
)
 
95,910

Internally-developed software
 
132,897

 
(99,873
)
 
33,024

Noncompete agreements
 
31,492

 
(26,045
)
 
5,447

Franchise agreements
 
19,201

 
(9,814
)
 
9,387

Purchased technology
 
54,700

 
(27,425
)
 
27,275

Acquired assets pending final allocation (1)
 
2,298

 

 
2,298

 
 
$
766,739

 
$
(346,830
)
 
$
419,909

As of April 30, 2017:
 
 
 
 
 
 
Reacquired franchise rights
 
$
331,150

 
$
(90,877
)
 
$
240,273

Customer relationships
 
234,603

 
(133,207
)
 
101,396

Internally-developed software
 
139,709

 
(108,379
)
 
31,330

Noncompete agreements
 
32,408

 
(27,559
)
 
4,849

Franchise agreements
 
19,201

 
(10,774
)
 
8,427

Purchased technology
 
54,700

 
(31,973
)
 
22,727

Acquired assets pending final allocation (1)
 
362

 

 
362

 
 
$
812,133

 
$
(402,769
)
 
$
409,364

 
 
 
 
 
 
 
(1)    Represents business acquisitions for which final purchase price allocations have not yet been determined.
Amortization of intangible assets for the three months ended July 31, 2017 and 2016 was $19.2 million and $18.0 million, respectively. Estimated amortization of intangible assets for fiscal years 2018, 2019, 2020, 2021 and 2022 is $75.8 million, $61.0 million, $44.7 million, $30.5 million and $20.2 million, respectively.

8
Q1 FY2018 Form 10-Q | H&R Block, Inc.

Table of Contents

NOTE 5: LONG-TERM DEBT
The components of long-term debt are as follows:
 
 
 
 
 
 
(in 000s)

As of
 
July 31, 2017

 
July 31, 2016

 
April 30, 2017

Senior Notes, 4.125%, due October 2020
 
$
650,000

 
$
650,000

 
$
650,000

Senior Notes, 5.500%, due November 2022
 
500,000

 
500,000

 
500,000

Senior Notes, 5.250%, due October 2025
 
350,000

 
350,000

 
350,000

Capital lease obligation
 
6,368

 
7,229

 
6,610

Debt issuance costs and discounts
 
(11,954
)
 
(14,575
)
 
(12,612
)
 
 
1,494,414

 
1,492,654

 
1,493,998

Less: Current portion
 
(992
)
 
(864
)
 
(981
)
 
 
$
1,493,422

 
$
1,491,790

 
$
1,493,017

 
 
 
 
 
 
 
On September 22, 2016, we entered into a First Amended and Restated Credit and Guarantee Agreement (2016 CLOC). The 2016 CLOC provides for an unsecured senior revolving credit facility in the aggregate principal amount of $2.0 billion, which includes a $200.0 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 2016 CLOC will mature on September 22, 2021, unless extended pursuant to the terms of the 2016 CLOC, at which time all outstanding amounts thereunder will be due and payable. The 2016 CLOC includes an annual facility fee, which will vary depending on our then current credit ratings.
The 2016 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 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 April 30, July 31, and October 31 of each year and (b) 4.50 to 1.00 as of the last day of each fiscal quarter ending on January 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 2016 CLOC includes provisions for an equity cure which could potentially allow us to independently cure certain defaults. Proceeds under the 2016 CLOC may be used for working capital needs or for other general corporate purposes. We were in compliance with these requirements as of July 31, 2017.
We had no outstanding balance under the 2016 CLOC as of July 31, 2017, and amounts available to borrow were limited by the debt-to-EBITDA covenant to approximately $1.6 billion as of July 31, 2017.

H&R Block, Inc. | Q1 FY2018 Form 10-Q
9

Table of Contents

NOTE 6: FAIR VALUE
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS – The carrying amounts and estimated fair values of our financial instruments are as follows:
(in 000s)
 
As of
 
July 31, 2017
 
July 31, 2016
 
April 30, 2017
 
 
Carrying
Amount

 
Estimated
Fair Value

 
Carrying
Amount

 
Estimated
Fair Value

 
Carrying
Amount

 
Estimated
Fair Value

Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
551,566

 
$
551,566

 
$
306,871

 
$
306,871

 
$
1,011,331

 
$
1,011,331

Cash and cash equivalents - restricted
 
116,594

 
116,594

 
122,025

 
122,025

 
106,208

 
106,208

Receivables, net - short-term
 
91,004

 
91,004

 
103,425

 
103,425

 
162,775

 
162,775

Receivables, net - long-term
 
60,945

 
60,945

 
56,514

 
56,514

 
52,898

 
52,898

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt (excluding debt issuance costs)
 
1,502,694

 
1,595,945

 
1,502,747

 
1,606,364

 
1,502,735

 
1,569,033

Contingent consideration
 
9,125

 
9,125

 
8,347

 
8,347

 
10,428

 
10,428

 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value estimates, methods and assumptions are set forth below. Fair value was not estimated for assets and liabilities that are not considered financial instruments.
Cash and cash equivalents, including restricted - Fair value approximates the carrying amount (Level 1).
Receivables, net - short-term - For short-term balances the carrying values reported in the balance sheet approximate fair market value due to the relative short-term nature of the respective instruments (Level 1).
Receivables, net - long-term - The carrying values for the long-term portion of loans to franchisees approximate fair market value due to variable interest rates, low historical delinquency rates and franchise territories serving as collateral (Level 1). Long-term EA receivables and tax preparation receivables are carried at net realizable value which approximates fair value (Level 3). Net realizable value is determined based on historical collection rates.
Long-term debt - The fair value of our Senior Notes is based on quotes from multiple banks (Level 2).
Contingent consideration - Fair value approximates the carrying amount (Level 3).
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 and foreign jurisdictions. Tax returns are typically examined and either settled upon completion of the examination or through the appeals process. The Company’s U.S. federal income tax return for 2014 is currently under examination. Our U.S. federal returns for 2013 and 2015 have not been audited and remain open to examination. Our U.S. federal returns for 2012 and all prior periods have been audited by the IRS and are closed. With respect to state and local jurisdictions and countries outside of the United States, we are typically subject to examination for three to six years after the income tax returns have been filed. Although the outcome of a tax audit is always uncertain, we believe that adequate amounts of tax, interest and penalties have been provided for in the 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 $141.4 million, $106.0 million and $149.9 million as of July 31, 2017 and 2016 and April 30, 2017, respectively. The gross unrecognized tax benefits decreased $8.5 million and $5.5 million during the three months ended July 31, 2017 and 2016, respectively. The decrease in unrecognized tax benefits during the three months ending July 31, 2017 is largely related to favorable audit settlements in various states. We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $10.4 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 exam. The portion of unrecognized benefits expected to be cash settled within the next twelve months amounts to $4.2 million and is included in accrued income taxes on

10
Q1 FY2018 Form 10-Q | H&R Block, Inc.

Table of Contents

our consolidated balance sheet. The remaining liability for uncertain tax positions is classified as long-term and is included in other noncurrent liabilities in the consolidated balance sheet.
Consistent with prior years, our pretax loss for the three months ended July 31, 2017 is expected to be offset by income in the fourth quarter due to the established pattern of seasonality in our primary business operations. As such, management has determined that it is at least more-likely-than-not that realization of tax benefits recorded in our financial statements will occur within our fiscal year. The amount of tax benefit recorded reflects management’s estimate of the annual effective tax rate applied to the year-to-date loss from continuing operations. Certain discrete tax adjustments are also reflected in income tax expense for the periods presented.
A discrete income tax benefit of $5.2 million was recorded in the three months ended July 31, 2017, compared to a discrete tax benefit of $6.8 million in the same period of the prior year. The discrete tax benefit recorded in the current period resulted primarily from excess tax benefits recognized on the exercise of employee stock options. The excess tax benefit was recorded as a tax benefit in the income statement due to the adoption of ASU 2016-09 as of May 1, 2017 as discussed in note 1. The discrete tax benefit recorded in the prior year resulted primarily from favorable settlements of state audits.
Our effective tax rate for continuing operations, including the effects of discrete tax items was 37.7% and 40.5% for the three months ended July 31, 2017 and 2016, respectively. Discrete items increased the effective tax rate for the three months ended July 31, 2017 and 2016 by 2.5% and 3.3%, respectively. Due to the loss in both periods, a discrete tax benefit in either period increases the tax rate while an item of discrete tax expense decreases the tax rate. The impact of discrete tax items combined with the seasonal nature of our business can cause the effective tax rate through our first quarter to be significantly different than the rate for our full fiscal year.
NOTE 8: OTHER INCOME AND OTHER EXPENSES
The following table shows the components of other income (expense), net:
(in 000s)
 
Three months ended July 31,
 
2017

 
2016

Mortgage loans and real estate owned, net
 
$

 
$
1,537

Interest income
 
1,362

 
1,066

Interest and gains on available-for-sale (AFS) securities
 
82

 
31

Foreign currency gains (losses), net
 
131

 
(21
)
Other, net
 
(355
)
 
28

 
 
$
1,220

 
$
2,641

 
 
 
 
 
NOTE 9: COMMITMENTS AND CONTINGENCIES
Changes in deferred revenue balances related to our Peace of Mind® Extended Service Plan (POM) for both company-owned and franchise offices, which is included in deferred revenue and other liabilities in the consolidated balance sheets, are as follows:
(in 000s)
 
Three months ended July 31,
 
2017

 
2016

Balance, beginning of the period
 
$
211,223

 
$
204,342

Amounts deferred for new extended service plans issued
 
1,403

 
978

Revenue recognized on previous deferrals
 
(35,534
)
 
(31,650
)
Balance, end of the period
 
$
177,092

 
$
173,670

 
 
 
 
 
Our liability related to estimated losses under the standard guarantee was $4.5 million, $5.8 million and $6.8 million as of July 31, 2017 and 2016 and April 30, 2017, respectively, and is included as part of our assisted tax preparation services. The short-term and long-term portions of this liability are included in deferred revenue and other liabilities in the consolidated balance sheets.
Our liability related to acquisitions for estimated contingent consideration was $9.1 million, $8.3 million and $10.4 million as of July 31, 2017 and 2016 and April 30, 2017, respectively, with amounts recorded in deferred revenue and

H&R Block, Inc. | Q1 FY2018 Form 10-Q
11

Table of Contents

other liabilities. Estimates of contingent payments are typically based on expected financial performance of the acquired business and economic conditions at the time of acquisition. Should actual results differ from our assumptions, 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 $45.2 million at July 31, 2017, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $20.3 million.
LOSS CONTINGENCIES PERTAINING TO DISCONTINUED MORTGAGE OPERATIONS – SCC ceased originating mortgage loans in December 2007 and, in April 2008, sold its servicing assets and discontinued its remaining operations. 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.”
SCC accrues a liability for losses related to representation and warranty claims when those losses are believed to be both probable and reasonably estimable. SCC’s loss estimate as of July 31, 2017, is based on the best information currently available, management judgment, developments in relevant case law, and the terms of bulk settlements. The liability is included in deferred revenue and other current liabilities on the consolidated balance sheets. A rollforward of SCC’s accrued liability for these loss contingencies is as follows:
(in 000s)
 
Three months ended July 31,
 
2017

 
2016

Balance, beginning of the period
 
$
4,500

 
$
65,265

Loss provisions
 

 
235

Payments
 

 
(40,000
)
Balance, end of the period
 
$
4,500

 
$
25,500

 
 
 
 
 
See note 10, which addresses contingent losses that may be incurred with respect to various indemnification or contribution claims by underwriters, depositors, and securitization trustees in securitization transactions in which SCC participated.
NOTE 10: 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")

12
Q1 FY2018 Form 10-Q | H&R Block, Inc.

Table of Contents

when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities have been accrued for certain of the matters noted below. 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 July 31, 2017. 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 July 31, 2017 and 2016 and April 30, 2017, our total accrued liabilities were $1.7 million, $2.3 million and $2.3 million, respectively, for matters addressed in this note.
Our 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 loss is believed to be reasonably possible, but a liability has not been accrued. 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. 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 July 31, 2017, we believe the aggregate range of reasonably possible losses in excess of amounts accrued is not material.
For other matters, we are not currently able to estimate the reasonably possible loss or range of loss. 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.
On a quarterly and annual basis, 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, but 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, 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 contingencies, claims, and lawsuits 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 contingencies, claims, and lawsuits 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.

H&R Block, Inc. | Q1 FY2018 Form 10-Q
13

Table of Contents

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 RMBSs. In connection with the sale of loans and/or RMBSs, SCC made certain representations and warranties. 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, and 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, asserts 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 plaintiff seeks 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 is proceeding 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. SCC is opposing the motion to intervene, which remains pending. We believe H&R Block, Inc. has meritorious defenses to the extent the court allows any such claims to be asserted. 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, asserts 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 plaintiff seeks 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

14
Q1 FY2018 Form 10-Q | H&R Block, Inc.

Table of Contents

associated with the litigation. On September 30, 2016, the court granted a motion allowing 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, which was denied, and also filed a motion for leave to appeal the ruling, which remains pending. On October 6, 2016, 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 is proceeding 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. SCC is opposing the motion to intervene, which remains pending. We believe H&R Block, Inc. has meritorious defenses to the extent the court allows any such claims to be asserted. The accrual for representation and warranty claims, as discussed in note 9, is related to some of the loans in this case. We have not concluded that a loss related to this lawsuit is probable, nor have we accrued a liability related to this lawsuit.
Underwriters and depositors are, or have been, involved in multiple lawsuits related to securitization transactions in which SCC participated. These lawsuits allege or alleged a variety of claims, including violations of federal and state securities laws and common law fraud, based on alleged materially inaccurate or misleading disclosures. SCC has received notices of claims for indemnification relating to lawsuits to which underwriters or depositors are party. Based on information currently available to SCC, it believes that the 21 lawsuits in which notice of a claim has been made involve 39 securitization transactions with original investments of approximately $14 billion (of which the outstanding principal amount is approximately $3.6 billion). Additional lawsuits against the underwriters or depositors may be filed in the future, and SCC may receive additional notices of claims for indemnification or contribution from underwriters or depositors with respect to existing or new lawsuits or settlements of such lawsuits. 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.
Securitization trustees also are, or have been, involved in lawsuits related to securitization transactions in which SCC participated. Plaintiffs in these lawsuits allege, among other things, that originators, depositors, servicers, or other parties breached their representations and warranties or otherwise failed to fulfill their obligations, including that securitization trustees breached their contractual obligations, breached their fiduciary duties, or violated statutory requirements by failing to properly protect the certificate holders’ interests. SCC has received notices from securitization trustees of potential indemnification obligations, and may receive additional notices with respect to existing or new lawsuits or settlements of such lawsuits, in its capacity as originator, depositor, or servicer. We have not concluded that a loss related to any of these indemnification 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 July 31, 2017, total approximately $315 million and consist primarily 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.
LITIGATION, CLAIMS AND OTHER LOSS CONTINGENCIES PERTAINING TO OTHER DISCONTINUED OPERATIONS
Express IRA Litigation. On January 2, 2008, the Mississippi Attorney General in the Chancery Court of Hinds County, Mississippi First Judicial District (Case No. G 2008 6 S 2) filed a lawsuit regarding our former Express IRA product that is styled Jim Hood, Attorney for the State of Mississippi v. H&R Block, Inc., H&R Block Financial Advisors, Inc., et al. The complaint alleges fraudulent business practices, deceptive acts and practices, common law fraud and breach of fiduciary duty with respect to the sale of the product in Mississippi and seeks equitable relief, disgorgement of profits,

H&R Block, Inc. | Q1 FY2018 Form 10-Q
15

Table of Contents

damages and restitution, civil penalties and punitive damages. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter.
Although we sold H&R Block Financial Advisors, Inc. (HRBFA) effective November 1, 2008, we remain responsible for any liabilities relating to the Express IRA litigation through an indemnification agreement.
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.
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.
NOTE 11: CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Block Financial LLC (Block Financial) is a 100% owned subsidiary of the Company. Block Financial is the Issuer and the Company is the full and unconditional Guarantor of the Senior Notes, our 2016 CLOC and other indebtedness issued from time to time. These condensed consolidating financial statements have been prepared using the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Company's investment in subsidiaries account. The elimination entries eliminate investments in subsidiaries, related stockholders' equity and other intercompany balances and transactions.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 
(in 000s)

Three months ended July 31, 2017
 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 
Eliminations

 
Consolidated
H&R Block

Total revenues
 
$

 
$
17,556

 
$
123,094

 
$
(2,848
)
 
$
137,802

Cost of revenues
 

 
7,860

 
219,970

 
(115
)
 
227,715

Selling, general and administrative
 

 
3,206

 
94,776

 
(2,733
)
 
95,249

Total operating expenses
 

 
11,066

 
314,746

 
(2,848
)
 
322,964

Other income (expense), net
 
(132,264
)
 
6,073

 
(2,418
)
 
129,829

 
1,220

Interest expense on external borrowings
 

 
(21,204
)
 
(73
)
 

 
(21,277
)
Loss from continuing operations before tax benefit
 
(132,264
)
 
(8,641
)
 
(194,143
)
 
129,829

 
(205,219
)
Income tax benefit
 
(1,697
)
 
(4,623
)
 
(71,081
)
 

 
(77,401
)
Net loss from continuing operations
 
(130,567
)
 
(4,018
)
 
(123,062
)
 
129,829

 
(127,818
)
Net loss from discontinued operations
 

 
(2,748
)
 
(1
)
 

 
(2,749
)
Net loss
 
(130,567
)
 
(6,766
)
 
(123,063
)
 
129,829

 
(130,567
)
Other comprehensive income
 
2,462

 

 
2,462

 
(2,462
)
 
2,462

Comprehensive loss
 
$
(128,105
)
 
$
(6,766
)
 
$
(120,601
)
 
$
127,367

 
$
(128,105
)
 
 
 
 
 
 
 
 
 
 
 

16
Q1 FY2018 Form 10-Q | H&R Block, Inc.

Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 
(in 000s)

Three months ended July 31, 2016
 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 
Eliminations

 
Consolidated
H&R Block

Total revenues
 
$

 
$
15,504

 
$
109,800

 
$
(119
)
 
$
125,185

Cost of revenues
 

 
8,606

 
202,599

 
(119
)
 
211,086

Selling, general and administrative
 

 
2,480

 
96,343

 

 
98,823

Total operating expenses
 

 
11,086

 
298,942

 
(119
)
 
309,909

Other income (expense), net
 
(124,662
)
 
826

 
(9,630
)
 
136,107

 
2,641

Interest expense on external borrowings
 

 
(21,314
)
 
(152
)
 

 
(21,466
)
Loss from continuing operations before tax benefit
 
(124,662
)
 
(16,070
)
 
(198,924
)
 
136,107

 
(203,549
)
Income tax benefit
 
(989
)
 
(5,794
)
 
(75,740
)
 

 
(82,523
)
Net loss from continuing operations
 
(123,673
)
 
(10,276
)
 
(123,184
)
 
136,107

 
(121,026
)
Net loss from discontinued operations
 

 
(2,646
)
 
(1
)
 

 
(2,647
)
Net loss
 
(123,673
)
 
(12,922
)
 
(123,185
)
 
136,107

 
(123,673
)
Other comprehensive loss
 
(3,571
)
 

 
(3,571
)
 
3,571

 
(3,571
)
Comprehensive loss
 
$
(127,244
)
 
$
(12,922
)
 
$
(126,756
)
 
$
139,678

 
$
(127,244
)
 
 
 
 
 
 
 
 
 
 
 

H&R Block, Inc. | Q1 FY2018 Form 10-Q
17

Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEETS
 
(in 000s)

As of July 31, 2017
 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 
Eliminations

 
Consolidated
H&R Block

Cash & cash equivalents
 
$

 
$
7,480

 
$
544,086

 
$

 
$
551,566

Cash & cash equivalents - restricted
 

 
8,069

 
108,525

 

 
116,594

Receivables, net
 
16

 
54,187

 
36,801

 

 
91,004

Prepaid expenses and other current assets
 

 
2,280

 
72,496

 

 
74,776

Total current assets
 
16

 
72,016

 
761,908

 

 
833,940

Property and equipment, net
 

 
66

 
253,189

 

 
253,255

Intangible assets, net
 

 

 
393,972

 

 
393,972

Goodwill
 

 

 
493,991

 

 
493,991

Deferred tax assets and income taxes receivable
 
5,587

 
32,047

 
16,714

 

 
54,348

Investments in subsidiaries
 
2,037,691

 

 
106,948

 
(2,144,639
)
 

Amounts due from affiliates
 

 
1,477,940

 
2,227,052

 
(3,704,992
)
 

Other noncurrent assets
 

 
60,242

 
42,500

 

 
102,742

Total assets
 
$
2,043,294

 
$
1,642,311

 
$
4,296,274

 
$
(5,849,631
)
 
$
2,132,248

 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
2,246

 
$
6,870

 
$
152,635

 
$

 
$
161,751

Accrued salaries, wages and payroll taxes
 

 
1,070

 
33,993

 

 
35,063

Accrued income taxes and reserves for uncertain tax positions
 

 

 
176,909

 

 
176,909

Current portion of long-term debt
 

 

 
992

 

 
992

Deferred revenue and other current liabilities
 

 
30,412

 
157,379

 

 
187,791

Total current liabilities
 
2,246

 
38,352

 
521,908

 

 
562,506

Long-term debt and line of credit borrowings
 

 
1,488,046

 
5,376

 

 
1,493,422

Reserves for uncertain tax positions
 
28,324

 
8,037

 
122,872

 

 
159,233

Deferred revenue and other noncurrent liabilities
 

 
928

 
130,487

 

 
131,415

Amounts due to affiliates
 
2,227,052

 

 
1,477,940

 
(3,704,992
)
 

Total liabilities
 
2,257,622

 
1,535,363

 
2,258,583

 
(3,704,992
)
 
2,346,576

Stockholders' equity (deficiency)
 
(214,328
)
 
106,948

 
2,037,691

 
(2,144,639
)
 
(214,328
)
Total liabilities and stockholders' equity
 
$
2,043,294

 
$
1,642,311

 
$
4,296,274

 
$
(5,849,631
)
 
$
2,132,248

 
 
 
 
 
 
 
 
 
 
 


18
Q1 FY2018 Form 10-Q | H&R Block, Inc.

Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEETS
 
(in 000s)

As of July 31, 2016
 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 
Eliminations

 
Consolidated
H&R Block

Cash & cash equivalents
 
$

 
$
3,902

 
$
302,969

 
$

 
$
306,871

Cash & cash equivalents - restricted
 

 
29,000

 
93,025

 

 
122,025

Receivables, net
 

 
72,865

 
30,560

 

 
103,425

Prepaid expenses and other current assets
 

 
7,114

 
68,938

 

 
76,052

Total current assets
 

 
112,881

 
495,492

 

 
608,373

Mortgage loans held for investment, net
 

 
192,375

 

 

 
192,375

Property and equipment, net
 

 
116

 
283,998

 

 
284,114

Intangible assets, net
 

 

 
419,909

 

 
419,909

Goodwill
 

 

 
470,942

 

 
470,942

Deferred tax assets and income taxes receivable
 

 
60,312

 
30,186

 

 
90,498

Investments in subsidiaries
 
1,611,887

 

 
96,216

 
(1,708,103
)
 

Amounts due from affiliates
 

 
1,282,286

 
1,794,655

 
(3,076,941
)