|
|
|
4
|
Q3 FY2017 Form 10-Q |
H&R Block, Inc.
|
The computations of basic and diluted earnings per share from continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per share amounts)
|
|
|
|
Three months ended January 31,
|
|
Nine months ended January 31,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net loss from continuing operations attributable to shareholders
|
|
$
|
(101,212
|
)
|
|
$
|
(78,649
|
)
|
|
$
|
(365,653
|
)
|
|
$
|
(317,672
|
)
|
Amounts allocated to participating securities
|
|
(143
|
)
|
|
(112
|
)
|
|
(410
|
)
|
|
(316
|
)
|
Net loss from continuing operations attributable to common shareholders
|
|
$
|
(101,355
|
)
|
|
$
|
(78,761
|
)
|
|
$
|
(366,063
|
)
|
|
$
|
(317,988
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
207,862
|
|
|
231,904
|
|
|
214,627
|
|
|
257,979
|
|
Potential dilutive shares
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dilutive weighted average common shares
|
|
207,862
|
|
|
231,904
|
|
|
214,627
|
|
|
257,979
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations attributable to common shareholders:
|
Basic
|
|
$
|
(0.49
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(1.71
|
)
|
|
$
|
(1.23
|
)
|
Diluted
|
|
(0.49
|
)
|
|
(0.34
|
)
|
|
(1.71
|
)
|
|
(1.23
|
)
|
|
|
|
|
|
|
|
|
|
The weighted average shares outstanding for the
three and nine
months ended
January 31, 2017
decreased to
207.9 million
and
214.6 million
, respectively, from
231.9 million
and
258.0 million
for the
three and nine
months ended
January 31, 2016
, respectively, primarily due to share repurchases completed in the prior and current year. During the
nine
months ended
January 31, 2017
, we purchased and immediately retired
14.0 million
shares at an aggregate cost of
$317.0 million
(average price of
$22.61
per share). During the
nine
months ended
January 31, 2016
, we purchased and immediately retired
52.5 million
shares at an aggregate cost of
$1.9 billion
(average price of
$36.02
per share). The cost of shares retired was allocated to the components of stockholders’ equity as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
Nine months ended January 31,
|
|
2017
|
|
|
2016
|
|
Common stock
|
|
$
|
140
|
|
|
$
|
525
|
|
Additional paid-in-capital
|
|
8,412
|
|
|
31,506
|
|
Retained earnings
|
|
308,468
|
|
|
1,859,807
|
|
Total
|
|
$
|
317,020
|
|
|
$
|
1,891,838
|
|
|
|
|
|
|
STOCK-BASED COMPENSATION
– In addition to the shares repurchased as discussed above, during the
nine
months ended
January 31, 2017
, we acquired
0.3 million
shares of our common stock at an aggregate cost of
$5.8 million
. These shares represent shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. During the
nine
months ended
January 31, 2016
, we acquired
0.6 million
shares at an aggregate cost of
$17.9 million
for similar purposes.
During the
nine
months ended
January 31, 2017
and
2016
, we issued
0.9 million
and
2.2 million
shares of common stock, respectively, due to the vesting or exercise of stock-based awards.
During the
nine
months ended
January 31, 2017
, we granted equity awards equivalent to
1.2 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
$4.5 million
and
$16.9 million
for the
three and nine
months ended
January 31, 2017
, respectively, and
$7.2 million
and
$21.1 million
for the
three and nine
months ended
January 31, 2016
, respectively. As of
January 31, 2017
, unrecognized compensation cost for stock options totaled
$0.1 million
, and for nonvested shares and units totaled
$33.5 million
.
|
|
|
H&R Block, Inc.
| Q3 FY2017 Form 10-Q
|
5
|
NOTE 3: RECEIVABLES
Receivables consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
As of
|
|
January 31, 2017
|
|
January 31, 2016
|
|
April 30, 2016
|
|
|
Short-term
|
|
Long-term
|
|
Short-term
|
|
Long-term
|
|
Short-term
|
|
Long-term
|
Loans to franchisees
|
|
$
|
62,603
|
|
|
$
|
50,021
|
|
|
$
|
63,093
|
|
|
$
|
62,431
|
|
|
$
|
50,000
|
|
|
$
|
46,284
|
|
Receivables for tax preparation and related fees
|
|
258,981
|
|
|
5,528
|
|
|
278,735
|
|
|
6,103
|
|
|
52,327
|
|
|
5,528
|
|
Cash Back® receivables
|
|
6,279
|
|
|
—
|
|
|
5,427
|
|
|
—
|
|
|
37,663
|
|
|
—
|
|
H&R Block Emerald Advance®
lines of credit
|
|
385,513
|
|
|
6,398
|
|
|
402,946
|
|
|
268
|
|
|
25,092
|
|
|
869
|
|
Royalties and other receivables from franchisees
|
|
64,929
|
|
|
—
|
|
|
60,182
|
|
|
—
|
|
|
9,997
|
|
|
—
|
|
Other
|
|
57,291
|
|
|
4,304
|
|
|
66,625
|
|
|
7,669
|
|
|
35,048
|
|
|
7,726
|
|
|
|
835,596
|
|
|
66,251
|
|
|
877,008
|
|
|
76,471
|
|
|
210,127
|
|
|
60,407
|
|
Allowance for doubtful accounts
|
|
(47,731
|
)
|
|
—
|
|
|
(47,234
|
)
|
|
—
|
|
|
(57,011
|
)
|
|
—
|
|
|
|
$
|
787,865
|
|
|
$
|
66,251
|
|
|
$
|
829,774
|
|
|
$
|
76,471
|
|
|
$
|
153,116
|
|
|
$
|
60,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
January 31, 2017
and
2016
and
April 30, 2016
, consisted of
$48.4 million
,
$48.6 million
and
$35.1 million
, respectively, in revolving lines of credit primarily for the purpose of funding off-season working capital needs and
$64.3 million
,
$76.9 million
and
$61.2 million
, respectively, in term loans made primarily to finance the purchase of franchises.
As of
January 31, 2017
and
2016
and
April 30, 2016
, loans with a principal balance of
$0.1 million
,
$0.1 million
and
$0.3 million
, respectively, were more than 30 days past due. We had no loans to franchisees on non-accrual status.
CANADIAN CASH BACK® PROGRAM
–
Refunds advanced under the Cash Back® program are not subject to credit approval, therefore the primary indicator of credit quality is the age of the receivable amount. Cash Back® amounts are generally received within 60 days of filing the client's return. As of
January 31, 2017
and
2016
and
April 30, 2016
,
$26 thousand
,
$0.3 million
and
$1.5 million
of Cash Back® balances were more than 60 days old, respectively.
H&R BLOCK EMERALD ADVANCE® LINES OF CREDIT
–
Beginning in fiscal year 2016, we no longer originate H&R Block Emerald Advance® lines of credit (EAs). These lines of credit are originated by BofI Federal Bank, a federal savings bank (BofI), and we purchase a participation interest in them.
We review the credit quality of our 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
January 31, 2017
, by year of origination, are as follows:
|
|
|
|
|
|
(in 000s)
|
|
Credit Quality Indicator – Year of origination:
|
|
|
2017
|
|
$
|
354,235
|
|
2016 and prior
|
|
12,839
|
|
Revolving loans
|
|
24,837
|
|
|
|
$
|
391,911
|
|
|
|
|
As of
January 31, 2017
and
2016
and
April 30, 2016
,
$25.3 million
,
$18.2 million
and
$21.1 million
of EAs were on non-accrual status and classified as impaired, or more than
60
days past due, respectively.
|
|
|
6
|
Q3 FY2017 Form 10-Q |
H&R Block, Inc.
|
ALLOWANCE FOR DOUBTFUL ACCOUNTS
–
Activity in the allowance for doubtful accounts for our EA and all other short-term receivables for the
nine
months ended
January 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
EAs
|
|
|
All Other
|
|
|
Total
|
|
Balances as of May 1, 2016
|
|
$
|
9,007
|
|
|
$
|
48,004
|
|
|
$
|
57,011
|
|
Provision
|
|
22,479
|
|
|
7,155
|
|
|
29,634
|
|
Charge-offs
|
|
—
|
|
|
(38,914
|
)
|
|
(38,914
|
)
|
Balances as of January 31, 2017
|
|
$
|
31,486
|
|
|
$
|
16,245
|
|
|
$
|
47,731
|
|
|
|
|
|
|
|
|
Balances as of May 1, 2015
|
|
$
|
7,353
|
|
|
$
|
47,174
|
|
|
$
|
54,527
|
|
Provision
|
|
22,851
|
|
|
14,135
|
|
|
36,986
|
|
Charge-offs
|
|
—
|
|
|
(44,279
|
)
|
|
(44,279
|
)
|
Balances as of January 31, 2016
|
|
$
|
30,204
|
|
|
$
|
17,030
|
|
|
$
|
47,234
|
|
|
|
|
|
|
|
|
NOTE 4: GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the
nine
months ended
January 31, 2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
Goodwill
|
|
|
Accumulated Impairment Losses
|
|
|
Net
|
|
Balances as of April 30, 2016
|
|
$
|
503,054
|
|
|
$
|
(32,297
|
)
|
|
$
|
470,757
|
|
Acquisitions
|
|
13,346
|
|
|
—
|
|
|
13,346
|
|
Disposals and foreign currency changes, net
|
|
(783
|
)
|
|
—
|
|
|
(783
|
)
|
Impairments
|
|
—
|
|
|
—
|
|
|
—
|
|
Balances as of January 31, 2017
|
|
$
|
515,617
|
|
|
$
|
(32,297
|
)
|
|
$
|
483,320
|
|
|
|
|
|
|
|
|
Balances as of April 30, 2015
|
|
$
|
474,128
|
|
|
$
|
(32,297
|
)
|
|
$
|
441,831
|
|
Acquisitions
|
|
4,025
|
|
|
—
|
|
|
4,025
|
|
Disposals and foreign currency changes, net
|
|
(2,438
|
)
|
|
—
|
|
|
(2,438
|
)
|
Impairments
|
|
—
|
|
|
—
|
|
|
—
|
|
Balances as of January 31, 2016
|
|
$
|
475,715
|
|
|
$
|
(32,297
|
)
|
|
$
|
443,418
|
|
|
|
|
|
|
|
|
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.
| Q3 FY2017 Form 10-Q
|
7
|
Components of intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
As of January 31, 2017:
|
|
|
|
|
|
|
Reacquired franchise rights
|
|
$
|
328,321
|
|
|
$
|
(85,127
|
)
|
|
$
|
243,194
|
|
Customer relationships
|
|
216,449
|
|
|
(124,771
|
)
|
|
91,678
|
|
Internally-developed software
|
|
142,571
|
|
|
(108,047
|
)
|
|
34,524
|
|
Noncompete agreements
|
|
31,821
|
|
|
(27,033
|
)
|
|
4,788
|
|
Franchise agreements
|
|
19,201
|
|
|
(10,454
|
)
|
|
8,747
|
|
Purchased technology
|
|
54,700
|
|
|
(30,457
|
)
|
|
24,243
|
|
Acquired assets pending final allocation
(1)
|
|
27,546
|
|
|
—
|
|
|
27,546
|
|
|
|
$
|
820,609
|
|
|
$
|
(385,889
|
)
|
|
$
|
434,720
|
|
As of January 31, 2016:
|
|
|
|
|
|
|
Reacquired franchise rights
|
|
$
|
338,242
|
|
|
$
|
(63,812
|
)
|
|
$
|
274,430
|
|
Customer relationships
|
|
201,197
|
|
|
(96,043
|
)
|
|
105,154
|
|
Internally-developed software
|
|
126,980
|
|
|
(91,655
|
)
|
|
35,325
|
|
Noncompete agreements
|
|
34,454
|
|
|
(25,240
|
)
|
|
9,214
|
|
Franchise agreements
|
|
19,201
|
|
|
(9,174
|
)
|
|
10,027
|
|
Purchased technology
|
|
54,700
|
|
|
(24,393
|
)
|
|
30,307
|
|
Acquired assets pending final allocation
(1)
|
|
9,275
|
|
|
—
|
|
|
9,275
|
|
|
|
$
|
784,049
|
|
|
$
|
(310,317
|
)
|
|
$
|
473,732
|
|
As of April 30, 2016:
|
|
|
|
|
|
|
Reacquired franchise rights
|
|
$
|
319,354
|
|
|
$
|
(68,284
|
)
|
|
$
|
251,070
|
|
Customer relationships
|
|
206,607
|
|
|
(104,072
|
)
|
|
102,535
|
|
Internally-developed software
|
|
131,161
|
|
|
(95,768
|
)
|
|
35,393
|
|
Noncompete agreements
|
|
31,499
|
|
|
(25,572
|
)
|
|
5,927
|
|
Franchise agreements
|
|
19,201
|
|
|
(9,494
|
)
|
|
9,707
|
|
Purchased technology
|
|
54,700
|
|
|
(25,909
|
)
|
|
28,791
|
|
Acquired assets pending final allocation
(1)
|
|
462
|
|
|
—
|
|
|
462
|
|
|
|
$
|
762,984
|
|
|
$
|
(329,099
|
)
|
|
$
|
433,885
|
|
|
|
|
|
|
|
|
(1)
Represents business acquisitions for which final purchase price allocations have not yet been determined.
Amortization of intangible assets for the
three and nine
months ended
January 31, 2017
was
$19.3 million
and
$57.3 million
, respectively. Amortization of intangible assets for the
three and nine
months ended
January 31, 2016
was
$20.2 million
and
$54.6 million
, respectively. Estimated amortization of intangible assets for fiscal years
2017
,
2018
,
2019
,
2020
and
2021
is
$71.6 million
,
$70.1 million
,
$55.0 million
,
$39.0 million
and
$26.5 million
, respectively.
|
|
|
8
|
Q3 FY2017 Form 10-Q |
H&R Block, Inc.
|
NOTE 5: LONG-TERM DEBT
The components of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
As of
|
|
January 31, 2017
|
|
|
January 31, 2016
|
|
|
April 30, 2016
|
|
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
|
|
Committed line of credit borrowings
|
|
1,100,000
|
|
|
1,125,000
|
|
|
—
|
|
Capital lease obligation
|
|
6,820
|
|
|
7,637
|
|
|
7,435
|
|
Debt issuance costs and discounts
|
|
(13,256
|
)
|
|
(15,997
|
)
|
|
(15,234
|
)
|
|
|
2,593,564
|
|
|
2,616,640
|
|
|
1,492,201
|
|
Less: Current portion
|
|
(942
|
)
|
|
(817
|
)
|
|
(826
|
)
|
|
|
$
|
2,592,622
|
|
|
$
|
2,615,823
|
|
|
$
|
1,491,375
|
|
|
|
|
|
|
|
|
Effective May 1, 2016, we adopted the provisions of ASU 2015-3 on a retrospective basis. Accordingly, debt issuance costs related to our Senior Notes are included in long-term debt in the consolidated balance sheets. Amounts for prior periods have been retrospectively adjusted to conform to the current period presentation. See
note 1
for additional information.
On September 22, 2016, we entered into a First Amended and Restated Credit and Guarantee Agreement (2016 CLOC), which amended our Credit and Guarantee Agreement (2015 CLOC), extending the scheduled maturity date from September 21, 2020 to September 22, 2021 and decreasing the sublimit for standby letters of credit. Other material terms remain unchanged from our 2015 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
January 31, 2017
.
We had an outstanding balance of
$1.1 billion
under the 2016 CLOC as of
January 31, 2017
, and may borrow up to the full capacity of
$2.0 billion
.
|
|
|
H&R Block, Inc.
| Q3 FY2017 Form 10-Q
|
9
|
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
|
|
January 31, 2017
|
|
January 31, 2016
|
|
April 30, 2016
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
221,172
|
|
|
$
|
221,172
|
|
|
$
|
189,511
|
|
|
$
|
189,511
|
|
|
$
|
896,801
|
|
|
$
|
896,801
|
|
Cash and cash equivalents - restricted
|
|
70,166
|
|
|
70,166
|
|
|
69,649
|
|
|
69,649
|
|
|
104,110
|
|
|
104,110
|
|
Receivables, net - short-term
|
|
787,865
|
|
|
787,865
|
|
|
829,774
|
|
|
829,774
|
|
|
153,116
|
|
|
153,116
|
|
Receivables, net - long-term
|
|
66,251
|
|
|
66,251
|
|
|
76,471
|
|
|
76,471
|
|
|
60,407
|
|
|
60,407
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and line of credit borrowings
|
|
2,593,564
|
|
|
2,672,370
|
|
|
2,616,640
|
|
|
2,709,807
|
|
|
1,492,201
|
|
|
1,566,098
|
|
Contingent consideration
|
|
9,332
|
|
|
9,332
|
|
|
13,903
|
|
|
13,903
|
|
|
8,657
|
|
|
8,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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). For outstanding balances on the 2016 CLOC, fair value approximates the carrying amount (Level 1).
|
|
|
▪
|
Contingent consideration - Fair value approximates the carrying amount (Level 3).
|
NOTE 7: INCOME TAXES
We file a consolidated federal income tax return in the United States (U.S.) with the Internal Revenue Service (IRS) and file tax returns in various state and foreign jurisdictions. Tax returns are typically examined and settled upon completion of the examination, with tax controversies settled either at the exam level or through the appeals process. The Company currently does not have a U.S. federal income tax return under examination. Our U.S. federal returns for 2012 and prior periods have been audited by the IRS and are closed. Our U.S. federal returns for 2013 and after have not been audited and remain open to examination. With respect to state and local jurisdictions and countries outside the United States, we and our subsidiaries are typically subject to examination for three to six years after the income tax returns have been filed. Although the outcome of any audit is 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 state, local or foreign audits.
We had gross unrecognized tax benefits of
$97.1 million
,
$75.2 million
and
$111.5 million
as of
January 31, 2017
and
2016
and
April 30, 2016
, respectively. The gross unrecognized tax benefits
decreased
$14.4 million
and
$11.0 million
during the
nine
months ended
January 31, 2017
and
2016
, respectively. The
decrease
in unrecognized tax benefits during the
nine
months ending
January 31, 2017
is primarily related to state audit settlements and the expiration of statutes of limitations in multiple states. We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately
$12.8 million
within the next twelve months. The anticipated decrease is due to the expiration of statutes of limitations and anticipated closure of state matters currently under exam. The portion of unrecognized benefits expected to be cash settled within the next twelve months amounts
|
|
|
10
|
Q3 FY2017 Form 10-Q |
H&R Block, Inc.
|
to
$7.7 million
and is included in accrued income taxes on 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
nine
months ended
January 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
$8.9 million
was recorded in the
nine
months ended
January 31, 2017
, compared to a discrete tax benefit of
$36.2 million
in the same period of the prior year. The discrete tax benefit recorded in the current period resulted primarily from settlements of state audits. The discrete tax benefit recorded in the prior year resulted primarily from a law change enacted in the state of Missouri.
Our effective tax rate for continuing operations, including the effects of discrete income tax items was
37.2%
and
44.4%
for the
nine
months ended
January 31, 2017
and
2016
, respectively. Discrete items increased management's estimate of the annualized effective tax rate for the
nine
months ended
January 31, 2017
and
2016
by
1.5%
and
6.3%
, 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
third
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 and other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
Three months ended January 31,
|
|
Nine months ended January 31,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Other income, net:
|
|
|
|
|
|
|
|
|
Mortgage loans and real estate owned, net
|
|
$
|
(377
|
)
|
|
$
|
2,186
|
|
|
$
|
2,668
|
|
|
$
|
2,220
|
|
Interest and gains on available-for-sale (AFS) securities
|
|
51
|
|
|
36
|
|
|
134
|
|
|
8,804
|
|
Foreign currency gains
|
|
80
|
|
|
—
|
|
|
80
|
|
|
—
|
|
Other
|
|
76
|
|
|
833
|
|
|
2,096
|
|
|
2,969
|
|
|
|
$
|
(170
|
)
|
|
$
|
3,055
|
|
|
$
|
4,978
|
|
|
$
|
13,993
|
|
Other expenses, net:
|
|
|
|
|
|
|
|
|
Foreign currency losses
|
|
$
|
—
|
|
|
$
|
(3,516
|
)
|
|
$
|
(27
|
)
|
|
$
|
(8,138
|
)
|
Impairment of investments
|
|
—
|
|
|
(2,500
|
)
|
|
—
|
|
|
(2,500
|
)
|
Other
|
|
304
|
|
|
(124
|
)
|
|
(3
|
)
|
|
(697
|
)
|
|
|
$
|
304
|
|
|
$
|
(6,140
|
)
|
|
$
|
(30
|
)
|
|
$
|
(11,335
|
)
|
|
|
|
|
|
|
|
|
|
In connection with our deregistration as a savings and loan holding company, we no longer present interest income on mortgage loans and various other investments as revenues. Effective September 1, 2015, these amounts are prospectively reported in other income on the consolidated statements of operations and comprehensive loss. Additionally, in December 2016 we sold our portfolio of mortgage loans and related real estate owned. Cash proceeds received during the period totaled
$188.2 million
and approximated carrying value.
|
|
|
H&R Block, Inc.
| Q3 FY2017 Form 10-Q
|
11
|
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)
|
|
Nine months ended January 31,
|
|
2017
|
|
|
2016
|
|
Balance, beginning of the period
|
|
$
|
204,342
|
|
|
$
|
189,779
|
|
Amounts deferred for new extended service plans issued
|
|
28,391
|
|
|
30,564
|
|
Revenue recognized on previous deferrals
|
|
(80,651
|
)
|
|
(75,009
|
)
|
Balance, end of the period
|
|
$
|
152,082
|
|
|
$
|
145,334
|
|
|
|
|
|
|
We accrued
$5.7 million
,
$6.2 million
and
$7.0 million
as of
January 31, 2017
and
2016
and
April 30, 2016
, respectively, related to estimated losses under the standard guarantee, which is included with 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.
We have accrued estimated contingent consideration totaling
$9.3 million
,
$13.9 million
and
$8.7 million
as of
January 31, 2017
and
2016
and
April 30, 2016
, respectively, related to acquisitions, with amounts recorded in deferred revenue and 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
$53.6 million
at
January 31, 2017
, and net of amounts drawn and outstanding, our remaining commitment to fund totaled
$17.6 million
.
In connection with our agreement with BofI, we are required to purchase a
90%
participation interest, at par, in all EAs originated by our lending partner. At
January 31, 2017
, the principal balance of purchased participation interests totaled
$349.9 million
.
On October 25, 2016, we entered into a Refund Advance Program Agreement and certain ancillary agreements with certain third parties, pursuant to which they originate and fund Refund Advance loans, and provide technology, software, and underwriting support services related to such loans during the 2017 tax season. The Refund Advance loans are offered to eligible assisted U.S. tax preparation clients, based on client eligibility as determined by the loan originator. We pay loan origination fees based on volume and customer type. The loan origination fees are intended to cover expected loan losses and payments to capital providers, among other items. In addition, we have provided limited guarantees up to
$73 million
in the aggregate, subject to specified thresholds, which would cover certain incremental loan losses. We expect that only an immaterial amount of the guarantees will be called upon under anticipated loss scenarios. At
January 31, 2017
we had accrued an estimated liability of
$0.6 million
related to these guarantees.
NOTE 10: LITIGATION AND 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.
|
|
|
12
|
Q3 FY2017 Form 10-Q |
H&R Block, Inc.
|
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, and other loss contingencies, and any related settlements (each referred to, individually, as a "matter" and, collectively, as "matters") when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. 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
January 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
January 31, 2017
and
2016
and
April 30, 2016
, our total accrued liabilities were
$1.7 million
,
$6.2 million
and
$2.3 million
, respectively, for matters addressed in this note.
For some matters where a liability has not been accrued, we are able to estimate a reasonably possible loss or range of loss. This 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. Those matters for which an estimate is not reasonably possible are not included within this estimated range. Therefore, this estimated range of reasonably possible loss represents what we believe to be an estimate of reasonably possible loss only for certain matters meeting these criteria. It does not represent our maximum loss exposure. For those matters, and for matters where a liability has been accrued, as of
January 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 quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by courts on motions or appeals, analysis by experts, or the status 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 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,
|
|
|
H&R Block, Inc.
| Q3 FY2017 Form 10-Q
|
13
|
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 and contribution, breach of contract, violations of securities laws, and 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. Given the impact of the financial crisis on the non-prime mortgage environment, the aggregate volume of these matters is substantial although it is difficult to predict either the likelihood of new matters being initiated or the outcome of existing matters. In many of these matters, including certain of the lawsuits and claims described below, 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.
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 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 and a motion for leave to appeal the ruling, both of which remain pending. On October 6, 2016, plaintiff filed its second amended complaint. SCC filed a motion to dismiss, which also remains pending. 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. A portion of the accrual for representation and warranty claims, as discussed in
note 11
, is related to some of the loans included in the original complaint 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.
On April 5, 2013, a third lawsuit was filed by Homeward in the United States District Court for the Southern District of New York against SCC. The suit, styled
Homeward Residential, Inc. v. Sand Canyon Corporation
(Case No. 13-cv-2107),
|
|
|
14
|
Q3 FY2017 Form 10-Q |
H&R Block, Inc.
|
was filed as a related matter to the September 2012 Homeward suit mentioned above. In this April 2013 lawsuit, the plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2007-4 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
159
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 associated with the litigation. As discussed in
note 11
, SCC entered into an agreement to settle certain representation and warranty claims, including claims relating to the loans at issue in this case. The lawsuit was voluntarily dismissed by the parties on February 14, 2017.
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
22
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
$4 billion
). Because SCC has not been a party to these lawsuits (with the exception of
Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation, et al.
, filed in the Circuit Court of Cook County, Illinois (Case No. 10CH45033) and settled as to SCC in August 2015), and has not had control of this litigation or any settlements thereof, SCC does not have complete information about the amount of damages or other remedies being asserted, the defenses to the claims in such lawsuits, or the terms of settlements of such lawsuits. SCC therefore cannot reasonably estimate the amount of potential losses or associated fees and expenses that may be incurred in connection with such lawsuits, which may be material. Additional lawsuits against the underwriters or depositors may be filed in the future, and SCC may receive additional notices of claims for indemnification 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, which are referred to as "reserved contribution rights," that encompasses a right of contribution, which 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 claims or reserved contribution rights is probable, nor have we accrued a liability related to any of these claims or rights.
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 may receive notices for indemnification 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 indemnification claims by securitization trustees is probable, nor have we accrued a liability for such claims.
LITIGATION, CLAIMS OR OTHER LOSS CONTINGENCIES PERTAINING TO CONTINUING OPERATIONS
–
Compliance Fee Litigation.
On April 16, 2012, a putative class action lawsuit was filed against us in the Circuit Court of Jackson County, Missouri styled
Manuel H. Lopez III v. H&R Block, Inc., et al.
(Case # 1216CV12290) concerning a compliance fee charged to retail tax clients in the 2011 and 2012 tax seasons. The plaintiff seeks to represent all Missouri citizens who were charged the compliance fee, and asserts claims of violation of the Missouri Merchandising Practices Act, money had and received, and unjust enrichment. We filed a motion to compel arbitration of the 2011 claims. The court denied the motion. We filed an appeal. On May 6, 2014, the Missouri Court of Appeals, Western District, reversed the ruling of the trial court and remanded the case for further consideration of the motion. On March 12, 2015, the trial court denied the motion on remand. We filed an additional appeal. On March 8, 2016, the appellate court affirmed the decision of the trial court. We filed an application for transfer of the appeal in the Supreme Court of Missouri, which was denied. We subsequently filed a petition for writ of certiorari with the United States Supreme Court, which was also denied. Plaintiff filed a motion for class certification, which remains pending. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter.
|
|
|
H&R Block, Inc.
| Q3 FY2017 Form 10-Q
|
15
|
On April 19, 2012, a putative class action lawsuit was filed against us in the United States District Court for the Western District of Missouri styled
Ronald Perras v. H&R Block, Inc., et al.
(Case No. 4:12-cv-00450-DGK)
concerning a compliance fee charged to retail tax clients in the 2011 and 2012 tax seasons. The plaintiff originally sought to represent all persons nationwide (excluding citizens of Missouri) who were charged the compliance fee, and asserted claims of violation of various state consumer laws, money had and received, and unjust enrichment. In November 2013, the court compelled arbitration of the 2011 claims and stayed all proceedings with respect to those claims. In June 2014, the court denied class certification of the remaining 2012 claims. The plaintiff filed an appeal with the Eighth Circuit Court of Appeals, which was denied on June 18, 2015. In January 2016, the plaintiff filed an amended complaint asserting claims of violation of Missouri and California state consumer laws, money had and received, and unjust enrichment, along with a motion to certify a class of all persons (excluding citizens of Missouri) who were charged the compliance fee in the state of California. We subsequently filed a motion for summary judgment on all claims. On April 29, 2016, the court granted our motion for summary judgment on all claims and denied the plaintiff's motion for class certification as moot. The plaintiff filed an appeal with the Eighth Circuit Court of Appeals, which remains pending. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter.
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, 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 a class of others 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: LOSS CONTINGENCIES ARISING FROM REPRESENTATIONS AND WARRANTIES OF OUR 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." These representations and warranties varied based on the nature of the transaction and the buyer's or insurer's requirements, but generally pertained to the ownership of the loan, the validity of the lien securing the loan, borrower fraud, the loan's compliance with the criteria for inclusion in the transaction,
|
|
|
16
|
Q3 FY2017 Form 10-Q |
H&R Block, Inc.
|
including compliance with SCC's underwriting standards or loan criteria established by the buyer, ability to deliver required documentation, and compliance with applicable laws. Representations and warranties related to borrower fraud in whole loan sale transactions to institutional investors, which were generally securitized by such investors and represented approximately
68%
of the disposal of loans originated in calendar years 2005, 2006 and 2007, included a "knowledge qualifier" limiting SCC's liability to those instances where SCC had knowledge of the fraud at the time the loans were sold. Representations and warranties made in other sale transactions effectively did not include a knowledge qualifier as to borrower fraud. SCC believes it would have an obligation to repurchase a loan only if it breached a representation and warranty and such breach materially and adversely affects the value of the mortgage loan or certificate holder's interest in the mortgage loan.
Representation and warranty claims received by SCC have primarily related to alleged breaches of representations and warranties related to a loan's compliance with the underwriting standards established by SCC at origination and borrower fraud for loans originated in calendar years 2006 and 2007. SCC has received claims representing an original principal amount of
$2.6 billion
since May 1, 2008, of which
$1.9 billion
were received prior to fiscal year 2013.
SETTLEMENT ACTIONS
–
SCC has entered into tolling agreements with counterparties that have made a significant portion of previously denied representation and warranty claims. While tolling agreements remain in effect, they toll the running of any applicable statute of limitations related to potential lawsuits regarding representation and warranty claims and other claims against SCC.
SCC has engaged in discussions with counterparties since fiscal year 2013 regarding the bulk settlement of previously denied and potential future representation and warranty and other claims against SCC. Based on settlement discussions with counterparties, SCC believes a bulk settlement approach, rather than the loan-by-loan resolution process, will be needed to resolve all of the claims that are the subject of these discussions. SCC has utilized that approach to resolve certain of these claims. On July 13, 2016, SCC entered into a settlement agreement with an additional counterparty to resolve certain additional claims. Settlement payments were made during this fiscal quarter pursuant to settlement agreements entered into in fiscal year 2016. The amounts paid under these settlement agreements were fully covered by prior accruals. In the event that the ongoing efforts to settle are not successful, SCC believes claim volumes may increase or litigation may result.
SCC will continue to vigorously contest any request for repurchase when it has concluded that a valid basis for repurchase does not exist. SCC's decision whether to engage in bulk settlement discussions is based on factors that vary by counterparty or type of counterparty and include the considerations used by SCC in determining its loss estimate, described below under "Liability for Estimated Contingent Losses."
LIABILITY FOR ESTIMATED CONTINGENT LOSSES
–
SCC accrues a liability for losses related to representation and warranty claims when those losses are believed to be both probable and reasonably estimable. Development of loss estimates is subject to a high degree of management judgment and estimates may vary significantly period to period. SCC's loss estimate as of
January 31, 2017
, is based on the best information currently available, significant management judgment, and a number of factors that are subject to change, including developments in case law and the factors mentioned below. These factors include the terms of prior bulk settlements, the terms expected to result from ongoing bulk settlement discussions, and an assessment of, among other things, historical claim results, threatened claims, terms and provisions of related agreements, counterparty willingness to pursue a settlement, legal standing of counterparties to provide a comprehensive settlement, bulk settlement methodologies used and publicly disclosed by other market participants, the potential pro-rata realization of the claims as compared to all claims and other relevant facts and circumstances when developing its estimate of probable loss. SCC believes that the most significant of these factors are the terms expected to result from ongoing bulk settlement discussions, which have been primarily influenced by the bulk settlement methodologies used and publicly disclosed by other market participants and the anticipated pro-rata realization of the claims of particular counterparties as compared to the anticipated realization if all claims and litigation were resolved together with payment of SCC's related administration and legal expense. Changes in any one of the factors mentioned above could significantly impact the estimate.
|
|
|
H&R Block, Inc.
| Q3 FY2017 Form 10-Q
|
17
|
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)
|
|
Nine months ended January 31,
|
|
2017
|
|
|
2016
|
|
Balance, beginning of the period
|
|
$
|
65,265
|
|
|
$
|
149,765
|
|
Provisions
|
|
235
|
|
|
4,000
|
|
Payments
|
|
(61,000
|
)
|
|
(88,500
|
)
|
Balance, end of the period
|
|
$
|
4,500
|
|
|
$
|
65,265
|
|
|
|
|
|
|
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 with respect to trusts where the statute of limitations for representation and warranty claims against the originator has run, 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 recent ruling by a New York intermediate appellate court 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. The trial court in the second Homeward lawsuit against SCC, discussed above in
note 10
, followed that ruling and permitted the plaintiff to amend its 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. The trial court held that claims with respect to the additional loans sufficiently relate back to the timely-asserted claims and therefore are not barred by the statute of limitations. SCC is seeking reconsideration of, and leave to appeal, that ruling. 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.
SCC believes it is reasonably possible that future losses related to representation and warranty claims may vary from amounts accrued for these exposures. SCC currently believes the aggregate range of reasonably estimable possible losses in excess of amounts accrued is not material. This estimated range is based on the best information currently available, significant management judgment and a number of factors that are subject to change, including developments in case law and the factors mentioned above. The actual loss that may be incurred could differ materially from our accrual or the estimate of reasonably possible losses.
As described more fully in
note 10
, losses may also be incurred with respect to various indemnification claims or reserved contribution rights by underwriters, depositors, and securitization trustees in securitization transactions in which SCC participated. These indemnification claims or reserved contribution rights are frequently not subject to a stated term or limit. We have not concluded that a loss related to any of these indemnification claims or reserved contribution rights is probable, have not accrued a liability for these claims or rights, and are not able to estimate a reasonably possible loss or range of loss for these claims or rights. Accordingly, neither the accrued liability described above totaling
$4.5 million
, nor the estimated range of reasonably possible losses in excess of the amount accrued described above, includes any possible losses which may arise from these indemnification claims or reserved contribution rights. There can be no assurances as to the outcome or impact of these indemnification claims or reserved contribution rights. In the event of unfavorable outcomes on these claims or rights, the amount required to discharge or settle them could be substantial and could have a material adverse impact on our business and our consolidated financial position, results of operations, and cash flows.
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,
|
|
|
18
|
Q3 FY2017 Form 10-Q |
H&R Block, Inc.
|
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
January 31, 2017
, total approximately
$321 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.
NOTE 12: 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 January 31, 2017
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Total revenues
|
|
$
|
—
|
|
|
$
|
53,990
|
|
|
$
|
411,099
|
|
|
$
|
(13,207
|
)
|
|
$
|
451,882
|
|
Cost of revenues
|
|
—
|
|
|
33,242
|
|
|
364,286
|
|
|
(8,751
|
)
|
|
388,777
|
|
Selling, general and administrative
|
|
—
|
|
|
10,693
|
|
|
181,660
|
|
|
(4,456
|
)
|
|
187,897
|
|
Total operating expenses
|
|
—
|
|
|
43,935
|
|
|
545,946
|
|
|
(13,207
|
)
|
|
576,674
|
|
Other income, net
|
|
—
|
|
|
12,237
|
|
|
12,194
|
|
|
(24,601
|
)
|
|
(170
|
)
|
Interest expense on external borrowings
|
|
—
|
|
|
(25,858
|
)
|
|
(82
|
)
|
|
—
|
|
|
(25,940
|
)
|
Other expenses, net
|
|
(106,332
|
)
|
|
2,741
|
|
|
(13,971
|
)
|
|
117,866
|
|
|
304
|
|
Loss from continuing operations before tax benefit
|
|
(106,332
|
)
|
|
(825
|
)
|
|
(136,706
|
)
|
|
93,265
|
|
|
(150,598
|
)
|
Income tax benefit
|
|
(1,818
|
)
|
|
(2,939
|
)
|
|
(44,629
|
)
|
|
—
|
|
|
(49,386
|
)
|
Net income(loss) from continuing operations
|
|
(104,514
|
)
|
|
2,114
|
|
|
(92,077
|
)
|
|
93,265
|
|
|
(101,212
|
)
|
Net loss from discontinued operations
|
|
—
|
|
|
(3,282
|
)
|
|
(20
|
)
|
|
—
|
|
|
(3,302
|
)
|
Net loss
|
|
(104,514
|
)
|
|
(1,168
|
)
|
|
(92,097
|
)
|
|
93,265
|
|
|
(104,514
|
)
|
Other comprehensive income
|
|
1,759
|
|
|
—
|
|
|
1,759
|
|
|
(1,759
|
)
|
|
1,759
|
|
Comprehensive loss
|
|
$
|
(102,755
|
)
|
|
$
|
(1,168
|
)
|
|
$
|
(90,338
|
)
|
|
$
|
91,506
|
|
|
$
|
(102,755
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block, Inc.
| Q3 FY2017 Form 10-Q
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
|
|
(in 000s)
|
|
Three months ended January 31, 2016
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Total revenues
|
|
$
|
—
|
|
|
$
|
52,500
|
|
|
$
|
423,610
|
|
|
$
|
(1,567
|
)
|
|
$
|
474,543
|
|
Cost of revenues
|
|
—
|
|
|
37,557
|
|
|
356,521
|
|
|
(1,565
|
)
|
|
392,513
|
|
Selling, general and administrative
|
|
120
|
|
|
1,097
|
|
|
200,657
|
|
|
(2
|
)
|
|
201,872
|
|
Total operating expenses
|
|
120
|
|
|
38,654
|
|
|
557,178
|
|
|
(1,567
|
)
|
|
594,385
|
|
Other income, net
|
|
1
|
|
|
6,343
|
|
|
3,278
|
|
|
(6,567
|
)
|
|
3,055
|
|
Interest expense on external borrowings
|
|
—
|
|
|
(23,467
|
)
|
|
(106
|
)
|
|
—
|
|
|
(23,573
|
)
|
Other expenses, net
|
|
(78,609
|
)
|
|
(3,212
|
)
|
|
8,482
|
|
|
67,199
|
|
|
(6,140
|
)
|
Loss from continuing operations before tax benefit
|
|
(78,728
|
)
|
|
(6,490
|
)
|
|
(121,914
|
)
|
|
60,632
|
|
|
(146,500
|
)
|
Income tax (benefit)
|
|
3,001
|
|
|
(25,161
|
)
|
|
(45,691
|
)
|
|
—
|
|
|
(67,851
|
)
|
Net income(loss) from continuing operations
|
|
(81,729
|
)
|
|
18,671
|
|
|
(76,223
|
)
|
|
60,632
|
|
|
(78,649
|
)
|
Net loss from discontinued operations
|
|
—
|
|
|
(3,078
|
)
|
|
(2
|
)
|
|
—
|
|
|
(3,080
|
)
|
Net income(loss)
|
|
(81,729
|
)
|
|
15,593
|
|
|
(76,225
|
)
|
|
60,632
|
|
|
(81,729
|
)
|
Other comprehensive loss
|
|
(4,641
|
)
|
|
—
|
|
|
(4,641
|
)
|
|
4,641
|
|
|
(4,641
|
)
|
Comprehensive income(loss)
|
|
$
|
(86,370
|
)
|
|
$
|
15,593
|
|
|
$
|
(80,866
|
)
|
|
$
|
65,273
|
|
|
$
|
(86,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended January 31, 2017
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Total revenues
|
|
$
|
—
|
|
|
$
|
80,428
|
|
|
$
|
641,322
|
|
|
$
|
(13,351
|
)
|
|
$
|
708,399
|
|
Cost of revenues
|
|
—
|
|
|
47,514
|
|
|
786,946
|
|
|
(8,895
|
)
|
|
825,565
|
|
Selling, general and administrative
|
|
—
|
|
|
14,905
|
|
|
389,923
|
|
|
(4,456
|
)
|
|
400,372
|
|
Total operating expenses
|
|
—
|
|
|
62,419
|
|
|
1,176,869
|
|
|
(13,351
|
)
|
|
1,225,937
|
|
Other income, net
|
|
—
|
|
|
18,172
|
|
|
18,517
|
|
|
(31,711
|
)
|
|
4,978
|
|
Interest expense on external borrowings
|
|
—
|
|
|
(69,420
|
)
|
|
(606
|
)
|
|
—
|
|
|
(70,026
|
)
|
Other expenses, net
|
|
(379,767
|
)
|
|
(1,161
|
)
|
|
(43,118
|
)
|
|
424,016
|
|
|
(30
|
)
|
Loss from continuing operations before tax benefit
|
|
(379,767
|
)
|
|
(34,400
|
)
|
|
(560,754
|
)
|
|
392,305
|
|
|
(582,616
|
)
|
Income tax benefit
|
|
(5,360
|
)
|
|
(14,695
|
)
|
|
(196,908
|
)
|
|
—
|
|
|
(216,963
|
)
|
Net loss from continuing operations
|
|
(374,407
|
)
|
|
(19,705
|
)
|
|
(363,846
|
)
|
|
392,305
|
|
|
(365,653
|
)
|
Net loss from discontinued operations
|
|
—
|
|
|
(8,733
|
)
|
|
(21
|
)
|
|
—
|
|
|
(8,754
|
)
|
Net loss
|
|
(374,407
|
)
|
|
(28,438
|
)
|
|
(363,867
|
)
|
|
392,305
|
|
|
(374,407
|
)
|
Other comprehensive loss
|
|
(4,130
|
)
|
|
—
|
|
|
(4,130
|
)
|
|
4,130
|
|
|
(4,130
|
)
|
Comprehensive loss
|
|
$
|
(378,537
|
)
|
|
$
|
(28,438
|
)
|
|
$
|
(367,997
|
)
|
|
$
|
396,435
|
|
|
$
|
(378,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
Q3 FY2017 Form 10-Q |
H&R Block, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
|
|
(in 000s)
|
|
Nine months ended January 31, 2016
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Total revenues
|
|
$
|
—
|
|
|
$
|
91,239
|
|
|
$
|
651,125
|
|
|
$
|
(1,688
|
)
|
|
$
|
740,676
|
|
Cost of revenues
|
|
—
|
|
|
59,122
|
|
|
774,985
|
|
|
(1,685
|
)
|
|
832,422
|
|
Selling, general and administrative
|
|
3,535
|
|
|
18,847
|
|
|
413,532
|
|
|
(3
|
)
|
|
435,911
|
|
Total operating expenses
|
|
3,535
|
|
|
77,969
|
|
|
1,188,517
|
|
|
(1,688
|
)
|
|
1,268,333
|
|
Other income, net
|
|
1,731
|
|
|
17,878
|
|
|
4,734
|
|
|
(10,350
|
)
|
|
13,993
|
|
Interest expense on external borrowings
|
|
—
|
|
|
(45,988
|
)
|
|
(341
|
)
|
|
—
|
|
|
(46,329
|
)
|
Other expenses, net
|
|
(326,631
|
)
|
|
(3,956
|
)
|
|
(16,939
|
)
|
|
336,191
|
|
|
(11,335
|
)
|
Loss from continuing operations before tax benefit
|
|
(328,435
|
)
|
|
(18,796
|
)
|
|
(549,938
|
)
|
|
325,841
|
|
|
(571,328
|
)
|
Income tax benefit
|
|
(2,040
|
)
|
|
(25,922
|
)
|
|
(225,694
|
)
|
|
—
|
|
|
(253,656
|
)
|
Net income (loss) from continuing operations
|
|
(326,395
|
)
|
|
7,126
|
|
|
(324,244
|
)
|
|
325,841
|
|
|
(317,672
|
)
|
Net loss from discontinued operations
|
|
—
|
|
|
(8,721
|
)
|
|
(2
|
)
|
|
—
|
|
|
(8,723
|
)
|
Net loss
|
|
(326,395
|
)
|
|
(1,595
|
)
|
|
(324,246
|
)
|
|
325,841
|
|
|
(326,395
|
)
|
Other comprehensive loss
|
|
(22,589
|
)
|
|
(8,444
|
)
|
|
(22,589
|
)
|
|
31,033
|
|
|
(22,589
|
)
|
Comprehensive loss
|
|
$
|
(348,984
|
)
|
|
$
|
(10,039
|
)
|
|
$
|
(346,835
|
)
|
|
$
|
356,874
|
|
|
$
|
(348,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block, Inc.
| Q3 FY2017 Form 10-Q
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING BALANCE SHEETS
|
|
(in 000s)
|
|
As of January 31, 2017
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Cash & cash equivalents
|
|
$
|
—
|
|
|
$
|
4,272
|
|
|
$
|
216,900
|
|
|
$
|
—
|
|
|
$
|
221,172
|
|
Cash & cash equivalents - restricted
|
|
—
|
|
|
8,052
|
|
|
62,114
|
|
|
—
|
|
|
70,166
|
|
Receivables, net
|
|
—
|
|
|
422,034
|
|
|
365,831
|
|
|
—
|
|
|
787,865
|
|
Income taxes receivable
|
|
—
|
|
|
—
|
|
|
38,032
|
|
|
—
|
|
|
38,032
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
3,217
|
|
|
82,382
|
|
|
—
|
|
|
85,599
|
|
Total current assets
|
|
—
|
|
|
437,575
|
|
|
765,259
|
|
|
—
|
|
|
1,202,834
|
|
Property and equipment, net
|
|
—
|
|
|
81
|
|
|
282,277
|
|
|
—
|
|
|
282,358
|
|
Intangible assets, net
|
|
—
|
|
|
—
|
|
|
434,720
|
|
|
—
|
|
|
434,720
|
|
Goodwill
|
|
—
|
|
|
—
|
|
|
483,320
|
|
|
—
|
|
|
483,320
|
|
Deferred tax assets and income taxes receivable
|
|
3,330
|
|
|
54,777
|
|
|
13,532
|
|
|
—
|
|
|
71,639
|
|
Investments in subsidiaries
|
|
1,370,585
|
|
|
—
|
|
|
80,699
|
|
|
(1,451,284
|
)
|
|
—
|
|
Amounts due from affiliates
|
|
—
|
|
|
2,168,620
|
|
|
2,166,873
|
|
|
(4,335,493
|
)
|
|
—
|
|
Other noncurrent assets
|
|
—
|
|
|
67,619
|
|
|
35,141
|
|
|
—
|
|
|
102,760
|
|
Total assets
|
|
$
|
1,373,915
|
|
|
$
|
2,728,672
|
|
|
$
|
4,261,821
|
|
|
$
|
(5,786,777
|
)
|
|
$
|
2,577,631
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,941
|
|
|
$
|
15,051
|
|
|
$
|
222,093
|
|
|
$
|
—
|
|
|
$
|
239,085
|
|
Accrued salaries, wages and payroll taxes
|
|
—
|
|
|
461
|
|
|
122,996
|
|
|
—
|
|
|
123,457
|
|
Accrued income taxes and reserves for uncertain tax positions
|
|
—
|
|
|
—
|
|
|
7,537
|
|
|
—
|
|
|
7,537
|
|
Current portion of long-term debt
|
|
—
|
|
|
—
|
|
|
942
|
|
|
—
|
|
|
942
|
|
Deferred revenue and other current liabilities
|
|
—
|
|
|
33,872
|
|
|
149,744
|
|
|
—
|
|
|
183,616
|
|
Total current liabilities
|
|
1,941
|
|
|
49,384
|
|
|
503,312
|
|
|
—
|
|
|
554,637
|
|
Long-term debt and line of credit borrowings
|
|
—
|
|
|
2,586,744
|
|
|
5,878
|
|
|
—
|
|
|
2,592,622
|
|
Deferred tax liabilities and reserves for uncertain tax positions
|
|
5,917
|
|
|
10,786
|
|
|
92,854
|
|
|
—
|
|
|
109,557
|
|
Deferred revenue and other noncurrent liabilities
|
|
—
|
|
|
1,059
|
|
|
120,572
|
|
|
—
|
|
|
121,631
|
|
Amounts due to affiliates
|
|
2,166,873
|
|
|
—
|
|
|
2,168,620
|
|
|
(4,335,493
|
)
|
|
—
|
|
Total liabilities
|
|
2,174,731
|
|
|
2,647,973
|
|
|
2,891,236
|
|
|
(4,335,493
|
)
|
|
3,378,447
|
|
Stockholders' equity (deficiency)
|
|
(800,816
|
)
|
|
80,699
|
|
|
1,370,585
|
|
|
(1,451,284
|
)
|
|
(800,816
|
)
|
Total liabilities and stockholders' equity
|
|
$
|
1,373,915
|
|
|
$
|
2,728,672
|
|
|
$
|
4,261,821
|
|
|
$
|
(5,786,777
|
)
|
|
$
|
2,577,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
Q3 FY2017 Form 10-Q |
H&R Block, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING BALANCE SHEETS
|
|
(in 000s)
|
|
As of January 31, 2016
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Cash & cash equivalents
|
|
$
|
—
|
|
|
$
|
10,415
|
|
|
$
|
179,096
|
|
|
$
|
—
|
|
|
$
|
189,511
|
|
Cash & cash equivalents - restricted
|
|
—
|
|
|
29,000
|
|
|
40,649
|
|
|
—
|
|
|
69,649
|
|
Receivables, net
|
|
1
|
|
|
446,367
|
|
|
383,406
|
|
|
—
|
|
|
829,774
|
|
Income taxes receivable
|
|
—
|
|
|
—
|
|
|
79,631
|
|
|
(50,220
|
)
|
|
29,411
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
8,800
|
|
|
91,704
|
|
|
—
|
|
|
100,504
|
|
Total current assets
|
|
1
|
|
|
494,582
|
|
|
774,486
|
|
|
(50,220
|
)
|
|
1,218,849
|
|
Mortgage loans held for investment, net
|
|
—
|
|
|
212,106
|
|
|
—
|
|
|
—
|
|
|
212,106
|
|
Property and equipment, net
|
|
—
|
|
|
160
|
|
|
290,042
|
|
|
—
|
|
|
290,202
|
|
Intangible assets, net
|
|
—
|
|
|
—
|
|
|
473,732
|
|
|
—
|
|
|
473,732
|
|
Goodwill
|
|
—
|
|
|
—
|
|
|
443,418
|
|
|
—
|
|
|
443,418
|
|
Deferred tax assets and income taxes receivable
|
|
3,736
|
|
|
60,588
|
|
|
49,563
|
|
|
—
|
|
|
113,887
|
|
Investments in subsidiaries
|
|
1,024,842
|
|
|
—
|
|
|
105,943
|
|
|
(1,130,785
|
)
|
|
—
|
|
Amounts due from affiliates
|
|
—
|
|
|
2,045,204
|
|
|
1,535,377
|
|
|
(3,580,581
|
)
|
|
—
|
|
Other noncurrent assets
|
|
—
|
|
|
76,979
|
|
|
33,763
|
|
|
—
|
|
|
110,742
|
|
Total assets
|
|
$
|
1,028,579
|
|
|
$
|
2,889,619
|
|
|
$
|
3,706,324
|
|
|
$
|
(4,761,586
|
)
|
|
$
|
2,862,936
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
23,583
|
|
|
$
|
12,466
|
|
|
$
|
169,932
|
|
|
$
|
—
|
|
|
$
|
205,981
|
|
Accrued salaries, wages and payroll taxes
|
|
—
|
|
|
1,515
|
|
|
121,774
|
|
|
—
|
|
|
123,289
|
|
Accrued income taxes and reserves for uncertain tax positions
|
|
4,092
|
|
|
54,227
|
|
|
—
|
|
|
(50,220
|
)
|
|
8,099
|
|
Current portion of long-term debt
|
|
—
|
|
|
—
|
|
|
817
|
|
|
—
|
|
|
817
|
|
Deferred revenue and other current liabilities
|
|
—
|
|
|
98,490
|
|
|
152,356
|
|
|
—
|
|
|
250,846
|
|
Total current liabilities
|
|
27,675
|
|
|
166,698
|
|
|
444,879
|
|
|
(50,220
|
)
|
|
589,032
|
|
Long-term debt and line of credit borrowings
|
|
—
|
|
|
2,609,003
|
|
|
6,820
|
|
|
—
|
|
|
2,615,823
|
|
Deferred tax liabilities and reserves for uncertain tax positions
|
|
2,261
|
|
|
6,814
|
|
|
79,302
|
|
|
—
|
|
|
88,377
|
|
Deferred revenue and other noncurrent liabilities
|
|
—
|
|
|
1,161
|
|
|
105,277
|
|
|
—
|
|
|
106,438
|
|
Amounts due to affiliates
|
|
1,535,377
|
|
|
—
|
|
|
2,045,204
|
|
|
(3,580,581
|
)
|
|
—
|
|
Total liabilities
|
|
1,565,313
|
|
|
2,783,676
|
|
|
2,681,482
|
|
|
(3,630,801
|
)
|
|
3,399,670
|
|
Stockholders' equity (deficiency)
|
|
(536,734
|
)
|
|
105,943
|
|
|
1,024,842
|
|
|
(1,130,785
|
)
|
|
(536,734
|
)
|
Total liabilities and stockholders' equity
|
|
$
|
1,028,579
|
|
|
$
|
2,889,619
|
|
|
$
|
3,706,324
|
|
|
$
|
(4,761,586
|
)
|
|
$
|
2,862,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block, Inc.
| Q3 FY2017 Form 10-Q
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING BALANCE SHEETS
|
|
(in 000s)
|
|
As of April 30, 2016
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Cash & cash equivalents
|
|
$
|
—
|
|
|
$
|
9,025
|
|
|
$
|
887,776
|
|
|
$
|
—
|
|
|
$
|
896,801
|
|
Cash & cash equivalents - restricted
|
|
—
|
|
|
29,004
|
|
|
75,106
|
|
|
—
|
|
|
104,110
|
|
Receivables, net
|
|
—
|
|
|
71,882
|
|
|
81,234
|
|
|
—
|
|
|
153,116
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
6,925
|
|
|
59,649
|
|
|
—
|
|
|
66,574
|
|
Total current assets
|
|
—
|
|
|
116,836
|
|
|
1,103,765
|
|
|
—
|
|
|
1,220,601
|
|
Mortgage loans held for investment, net
|
|
—
|
|
|
202,385
|
|
|
—
|
|
|
—
|
|
|
202,385
|
|
Property and equipment, net
|
|
—
|
|
|
136
|
|
|
293,429
|
|
|
—
|
|
|
293,565
|
|
Intangible assets, net
|
|
—
|
|
|
—
|
|
|
433,885
|
|
|
—
|
|
|
433,885
|
|
Goodwill
|
|
—
|
|
|
—
|
|
|
470,757
|
|
|
—
|
|
|
470,757
|
|
Deferred tax assets and income taxes receivable
|
|
5,917
|
|
|
77,270
|
|
|
36,936
|
|
|
—
|
|
|
120,123
|
|
Investments in subsidiaries
|
|
1,738,643
|
|
|
—
|
|
|
108,995
|
|
|
(1,847,638
|
)
|
|
—
|
|
Amounts due from affiliates
|
|
—
|
|
|
1,307,612
|
|
|
1,714,009
|
|
|
(3,021,621
|
)
|
|
—
|
|
Other noncurrent assets
|
|
—
|
|
|
62,806
|
|
|
43,103
|
|
|
—
|
|
|
105,909
|
|
Total assets
|
|
$
|
1,744,560
|
|
|
$
|
1,767,045
|
|
|
$
|
4,204,879
|
|
|
$
|
(4,869,259
|
)
|
|
$
|
2,847,225
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,531
|
|
|
$
|
18,596
|
|
|
$
|
239,459
|
|
|
$
|
—
|
|
|
$
|
259,586
|
|
Accrued salaries, wages and payroll taxes
|
|
—
|
|
|
1,766
|
|
|
160,020
|
|
|
—
|
|
|
161,786
|
|
Accrued income taxes and reserves for uncertain tax positions
|
|
—
|
|
|
52,976
|
|
|
320,778
|
|
|
—
|
|
|
373,754
|
|
Current portion of long-term debt
|
|
—
|
|
|
—
|
|
|
826
|
|
|
—
|
|
|
826
|
|
Deferred revenue and other current liabilities
|
|
—
|
|
|
87,982
|
|
|
155,671
|
|
|
—
|
|
|
243,653
|
|
Total current liabilities
|
|
1,531
|
|
|
161,320
|
|
|
876,754
|
|
|
—
|
|
|
1,039,605
|
|
Long-term debt and line of credit borrowings
|
|
—
|
|
|
1,484,766
|
|
|
6,609
|
|
|
—
|
|
|
1,491,375
|
|
Deferred tax liabilities and reserves for uncertain tax positions
|
|
5,917
|
|
|
10,786
|
|
|
116,257
|
|
|
—
|
|
|
132,960
|
|
Deferred revenue and other noncurrent liabilities
|
|
—
|
|
|
1,178
|
|
|
159,004
|
|
|
—
|
|
|
160,182
|
|
Amounts due to affiliates
|
|
1,714,009
|
|
|
—
|
|
|
1,307,612
|
|
|
(3,021,621
|
)
|
|
—
|
|
Total liabilities
|
|
1,721,457
|
|
|
1,658,050
|
|
|
2,466,236
|
|
|
(3,021,621
|
)
|
|
2,824,122
|
|
Stockholders' equity
|
|
23,103
|
|
|
108,995
|
|
|
1,738,643
|
|
|
(1,847,638
|
)
|
|
23,103
|
|
Total liabilities and stockholders' equity
|
|
$
|
1,744,560
|
|
|
$
|
1,767,045
|
|
|
$
|
4,204,879
|
|
|
$
|
(4,869,259
|
)
|
|
$
|
2,847,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
Q3 FY2017 Form 10-Q |
H&R Block, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
(in 000s)
|
|
Nine months ended January 31, 2017
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Net cash used in operating activities:
|
|
$
|
—
|
|
|
$
|
(399,367
|
)
|
|
$
|
(976,550
|
)
|
|
$
|
—
|
|
|
$
|
(1,375,917
|
)
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
Sales, maturities of and payments received on AFS securities
|
|
—
|
|
|
144
|
|
|
—
|
|
|
—
|
|
|
144
|
|
Principal payments and sales of mortgage loans and real estate owned, net
|
|
—
|
|
|
207,174
|
|
|
—
|
|
|
—
|
|
|
207,174
|
|
Capital expenditures
|
|
—
|
|
|
(14
|
)
|
|
(73,910
|
)
|
|
—
|
|
|
(73,924
|
)
|
Payments made for business acquisitions, net of cash acquired
|
|
—
|
|
|
—
|
|
|
(52,825
|
)
|
|
—
|
|
|
(52,825
|
)
|
Loans made to franchisees
|
|
—
|
|
|
(31,568
|
)
|
|
(220
|
)
|
|
—
|
|
|
(31,788
|
)
|
Repayments from franchisees
|
|
—
|
|
|
20,605
|
|
|
211
|
|
|
—
|
|
|
20,816
|
|
Intercompany borrowings (payments)
|
|
—
|
|
|
(891,350
|
)
|
|
(461,916
|
)
|
|
1,353,266
|
|
|
—
|
|
Other, net
|
|
—
|
|
|
(10,377
|
)
|
|
5,522
|
|
|
—
|
|
|
(4,855
|
)
|
Net cash provided by (used in) investing activities
|
|
—
|
|
|
(705,386
|
)
|
|
(583,138
|
)
|
|
1,353,266
|
|
|
64,742
|
|
Cash flows from financing:
|
|
|
|
|
|
|
|
|
|
|
Repayments of line of credit borrowings
|
|
—
|
|
|
(445,000
|
)
|
|
—
|
|
|
—
|
|
|
(445,000
|
)
|
Proceeds from line of credit borrowings
|
|
—
|
|
|
1,545,000
|
|
|
—
|
|
|
—
|
|
|
1,545,000
|
|
Dividends paid
|
|
(141,537
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(141,537
|
)
|
Repurchase of common stock, including shares surrendered
|
|
(322,782
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(322,782
|
)
|
Proceeds from exercise of stock options
|
|
2,403
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,403
|
|
Intercompany borrowings (payments)
|
|
461,916
|
|
|
—
|
|
|
891,350
|
|
|
(1,353,266
|
)
|
|
—
|
|
Other, net
|
|
—
|
|
|
—
|
|
|
373
|
|
|
—
|
|
|
373
|
|
Net cash provided by financing activities
|
|
—
|
|
|
1,100,000
|
|
|
891,723
|
|
|
(1,353,266
|
)
|
|
638,457
|
|
Effects of exchange rates on cash
|
|
—
|
|
|
—
|
|
|
(2,911
|
)
|
|
—
|
|
|
(2,911
|
)
|
Net decrease in cash and cash equivalents
|
|
—
|
|
|
(4,753
|
)
|
|
(670,876
|
)
|
|
—
|
|
|
(675,629
|
)
|
Cash and cash equivalents at beginning of the period
|
|
—
|
|
|
9,025
|
|
|
887,776
|
|
|
—
|
|
|
896,801
|
|
Cash and cash equivalents at end of the period
|
|
$
|
—
|
|
|
$
|
4,272
|
|
|
$
|
216,900
|
|
|
$
|
—
|
|
|
$
|
221,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block, Inc.
| Q3 FY2017 Form 10-Q
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
(in 000s)
|
|
Nine months ended January 31, 2016
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Net cash used in operating activities:
|
|
$
|
—
|
|
|
$
|
(403,132
|
)
|
|
$
|
(1,023,817
|
)
|
|
$
|
—
|
|
|
$
|
(1,426,949
|
)
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
Sales, maturities of and payments received on AFS securities
|
|
—
|
|
|
430,460
|
|
|
5,920
|
|
|
—
|
|
|
436,380
|
|
Principal payments on mortgage loans and sale of real estate owned, net
|
|
—
|
|
|
28,004
|
|
|
—
|
|
|
—
|
|
|
28,004
|
|
Capital expenditures
|
|
—
|
|
|
(24
|
)
|
|
(66,394
|
)
|
|
—
|
|
|
(66,418
|
)
|
Payments made for business acquisitions, net of cash acquired
|
|
—
|
|
|
—
|
|
|
(85,329
|
)
|
|
—
|
|
|
(85,329
|
)
|
Loans made to franchisees
|
|
—
|
|
|
(20,940
|
)
|
|
(437
|
)
|
|
—
|
|
|
(21,377
|
)
|
Repayments from franchisees
|
|
—
|
|
|
22,006
|
|
|
228
|
|
|
—
|
|
|
22,234
|
|
Intercompany borrowings (payments)
|
|
—
|
|
|
(1,871,617
|
)
|
|
(2,024,025
|
)
|
|
3,895,642
|
|
|
—
|
|
Other, net
|
|
—
|
|
|
(8,795
|
)
|
|
9,342
|
|
|
—
|
|
|
547
|
|
Net cash provided by (used in) investing activities
|
|
—
|
|
|
(1,420,906
|
)
|
|
(2,160,695
|
)
|
|
3,895,642
|
|
|
314,041
|
|
Cash flows from financing:
|
|
|
|
|
|
|
|
|
|
|
Repayments of line of credit borrowings
|
|
—
|
|
|
(225,000
|
)
|
|
—
|
|
|
—
|
|
|
(225,000
|
)
|
Proceeds from line of credit borrowings
|
|
—
|
|
|
1,350,000
|
|
|
—
|
|
|
—
|
|
|
1,350,000
|
|
Proceeds from long-term debt
|
|
—
|
|
|
996,831
|
|
|
—
|
|
|
—
|
|
|
996,831
|
|
Customer banking deposits, net
|
|
—
|
|
|
(327,145
|
)
|
|
—
|
|
|
440
|
|
|
(326,705
|
)
|
Transfer of HRB Bank deposits
|
|
—
|
|
|
(419,028
|
)
|
|
—
|
|
|
—
|
|
|
(419,028
|
)
|
Dividends paid
|
|
(157,530
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(157,530
|
)
|
Repurchase of common stock, including shares surrendered
|
|
(1,888,595
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,888,595
|
)
|
Proceeds from exercise of stock options
|
|
25,803
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,803
|
|
Intercompany borrowings (payments)
|
|
2,024,025
|
|
|
—
|
|
|
1,871,617
|
|
|
(3,895,642
|
)
|
|
—
|
|
Other, net
|
|
(3,703
|
)
|
|
(19,282
|
)
|
|
(20,987
|
)
|
|
—
|
|
|
(43,972
|
)
|
Net cash provided by (used in) financing activities
|
|
—
|
|
|
1,356,376
|
|
|
1,850,630
|
|
|
(3,895,202
|
)
|
|
(688,196
|
)
|
Effects of exchange rates on cash
|
|
—
|
|
|
—
|
|
|
(16,575
|
)
|
|
—
|
|
|
(16,575
|
)
|
Net decrease in cash and cash equivalents
|
|
—
|
|
|
(467,662
|
)
|
|
(1,350,457
|
)
|
|
440
|
|
|
(1,817,679
|
)
|
Cash and cash equivalents at beginning of the period
|
|
—
|
|
|
478,077
|
|
|
1,529,553
|
|
|
(440
|
)
|
|
2,007,190
|
|
Cash and cash equivalents at end of the period
|
|
$
|
—
|
|
|
$
|
10,415
|
|
|
$
|
179,096
|
|
|
$
|
—
|
|
|
$
|
189,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
Q3 FY2017 Form 10-Q |
H&R Block, Inc.
|