NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
– Our operating subsidiaries provide assisted and do-it-yourself (DIY) tax return preparation solutions through multiple channels (including in-person, online and mobile applications, and desktop software) and distribute H&R Block-branded financial products and services, including those of our financial partners, to the general public primarily in the United States (U.S.), Canada, Australia, and their respective territories.
PRINCIPLES OF CONSOLIDATION
– The consolidated financial statements include the accounts of the Company and our 100% owned subsidiaries. Intercompany transactions and balances have been eliminated.
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
13
and
14
for additional information on litigation, claims, and other loss contingencies related to our discontinued operations.
MANAGEMENT ESTIMATES
– The preparation of financial statements in conformity with accounting principles generally accepted in the U. S. (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.
CASH AND CASH EQUIVALENTS
– All non-restricted highly liquid instruments purchased with an original maturity of three months or less are considered to be cash equivalents.
Outstanding checks in excess of funds on deposit (book overdrafts) included in accounts payable totaled
$29.6 million
and
$43.1 million
as of April 30,
2017
and
2016
, respectively.
CASH AND CASH EQUIVALENTS
–
RESTRICTED
– Cash and cash equivalents – restricted consists primarily of cash held by our captive insurance subsidiary.
RECEIVABLES AND RELATED ALLOWANCES
– Our trade receivables consist primarily of accounts receivable from tax clients for tax return preparation. The allowance for doubtful accounts for these receivables requires management's judgment regarding collectibility and current economic conditions to establish an amount considered by management to be adequate to cover estimated losses as of the balance sheet date. Credit losses from tax clients for tax return preparation are not specifically identified and charged off; instead they are evaluated on a pooled basis. At the end of each tax season the outstanding balances on these receivables are evaluated based on collections received and expected collections over subsequent tax seasons.
Our financing receivables consist primarily of participations in H&R Block Emerald Advance
®
lines of Credit (EAs), loans made to franchisees, and amounts due under our Instant Cash Back® program in Canada.
H&R Block Emerald Advance® lines of credit
. EAs are typically offered to clients in our offices from late November through December, currently in an amount not to exceed
$1,000
. If the borrower meets certain criteria as agreed in the loan terms, the line of credit can be utilized year-round. EA balances require an annual paydown on February 15
th
, and any amounts unpaid are placed on non-accrual status as of March 1
st
. Payments on past due amounts are applied to principal. Beginning in fiscal year 2016, we no longer originate EAs. These lines of credit are offered by BofI Federal Bank, a federal savings bank (BofI). We purchase participation interests in their loans, as discussed further in
note 12
.
Credit losses from EAs are not specifically identified and charged off; instead we review the credit quality of these receivables on a pooled basis, segregated by the year of origination. Credit losses are based on an analysis of collections received and expected collections over subsequent tax seasons. We charge-off receivables to an amount we believe represents the net realizable value.
Loans made to franchisees.
The credit quality of these receivables is assessed at origination at an individual franchisee level. Payment history is monitored on a regular basis. Based upon our internal analysis and underwriting
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H&R Block, Inc.
| 2017 Form 10-K
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41
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activities, we believe all loans to franchisees are of similar credit quality. Loans are evaluated for collectibility when they become delinquent. Amounts deemed to be uncollectible are written off to bad debt expense and bad debt related to these loans has typically been immaterial. Additionally, the franchise territory serves as additional protection in the event a franchisee defaults on the loan, as we may revoke franchise rights, write off the remaining balance of the loan and refranchise the territory or begin operating it as company-owned.
Instant Cash Back® receivables.
Our Canadian operations advance refunds due to certain clients from the Canada Revenue Agency (CRA), in exchange for a fee. The total fee we charge for this service is mandated by legislation which is administered by the CRA. Interest is not charged on these balances, in accordance with CRA regulations. The client assigns to us the full amount of the tax refund to be issued by the CRA and the refund is then sent by the CRA directly to us. The amount we advance to clients under this program is the amount of their estimated refund, less our fees, any amounts expected to be withheld by the CRA for amounts the client may owe to government authorities and any amounts owed to us from prior years. The CRA's system for tracking amounts due to various government agencies also indicates if the client has already filed a return, does not exist in the CRA's records, or is bankrupt. This serves to greatly reduce the amounts of uncollectible receivables and the risk of fraudulent returns.
We do not specifically identify credit losses for these receivables; instead we determine our allowance for these receivables based on a review of receipts taking into consideration historical experience. In September of each fiscal year, any balances remaining from the previous tax season are charged-off against the related allowance.
PROPERTY AND EQUIPMENT
– Buildings and equipment are initially recorded at cost and are depreciated over the estimated useful life of the assets using the straight-line method. Leasehold improvements are initially recorded at cost and are amortized over the lesser of the remaining term of the respective lease or the estimated useful life, using the straight-line method. Estimated useful lives are
15
to
40
years for buildings,
three
to
five
years for computers and other equipment,
three
years for purchased software and up to
eight
years for leasehold improvements.
Substantially all of the operations of our subsidiaries are conducted in leased premises. For all lease agreements, including those with escalating rent payments or rent holidays, we recognize rent expense on a straight-line basis.
GOODWILL AND INTANGIBLE ASSETS
– Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill is not amortized, but rather is tested for impairment annually, or more frequently if indications of potential impairment exist.
Intangible assets with finite lives are amortized over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The weighted-average life of intangible assets with finite lives is
18
years. Intangible assets are typically amortized over the estimated useful life of the assets using the straight-line method.
We capitalize certain allowable costs associated with software developed for internal use. These costs are typically amortized over
three
to
five years
using the straight-line method.
TREASURY SHARES
– We record shares of common stock repurchased by us as treasury shares, at cost, resulting in a reduction of stockholders' equity. Periodically, we may retire shares held in treasury as determined by our Board of Directors. We typically reissue treasury shares as part of our stock-based compensation programs. When shares are reissued, we determine the cost using the average cost method.
REVENUE RECOGNITION
– We recognize revenue for our services when each of the following four criteria is met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the selling price is fixed or determinable; and collectibility is reasonably assured.
Service revenues consist primarily of fees for preparation and filing of tax returns, both in offices and through our online programs, fees earned on refund transfers (RTs), interchange income associated with our H&R Block Emerald Prepaid MasterCard
®
program and fees associated with our Peace of Mind
®
Extended Service Plan (POM). Service revenues are recognized in the period in which the service is performed as follows:
|
|
▪
|
Assisted and online tax preparation revenues are recorded when a completed return is electronically filed or accepted by the customer.
|
|
|
▪
|
Fees related to RTs are recognized when Internal Revenue Service (IRS) acknowledgment is received and the bank account is established at BofI.
|
|
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2017 Form 10-K |
H&R Block, Inc.
|
|
|
▪
|
Revenues associated with our H&R Block Emerald Prepaid MasterCard
®
program consist of interchange income from the use of debit cards and fees from the use of ATM networks, net of volume-based amounts retained by BofI in connection with our agreement. Interchange income is a fee paid by a merchant bank to BofI th
r
ough the interchange network. Net revenue associated with our H&R Block Prepaid Mastercard® is recognized based on cardholder transactions.
|
|
|
▪
|
POM revenues are deferred and recognized over the term of the plan, based on actual claims paid in relation to projected claims.
|
Royalty, product and other revenues include royalties from franchisees and sales of desktop software products, and are recognized as follows:
|
|
▪
|
Franchise royalties, which are based on contractual percentages of franchise revenues, are recorded in the period in which the services are provided to the customer.
|
|
|
▪
|
Revenue from the sale of desktop software is recognized when the product is sold to the end user. Rebates, slotting fees and other incentives paid in connection with these sales are recorded as a reduction of revenue.
|
|
|
▪
|
Participation revenue on EAs is recorded over the life of the underlying loan.
|
|
|
▪
|
Interest on loans to franchisees is calculated using the average daily balance method and is recognized based on the principal amount outstanding until the outstanding balance is paid or becomes delinquent.
|
Sales tax we collect and remit to taxing authorities is recorded net in the consolidated statements of income.
ADVERTISING EXPENSE
– Advertising costs for radio and television ads are expensed over the course of the tax season, with print and mailing advertising expensed as incurred.
EMPLOYEE BENEFIT PLANS
– We have a 401(k) defined contribution plan covering eligible full-time and seasonal employees following the completion of an eligibility period. Contributions to this plan are discretionary and totaled
$13.8 million
,
$14.3 million
and
$14.8 million
for continuing operations in fiscal years
2017
,
2016
and
2015
, respectively.
We have severance plans covering executives and eligible regular full-time or part-time active employees of a participating employer who incur a qualifying termination. Expenses related to severance benefits of continuing operations totaled
$5.6 million
,
$12.0 million
and
$6.7 million
in fiscal years
2017
,
2016
and
2015
, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
–
Interest.
On May 1, 2016 we adopted Accounting Standards Update No. 2015-3, "Interest - Imputation of Interest," (ASU 2015-3) which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance must be applied retrospectively to all periods presented. Prior periods have been retrospectively adjusted to conform to the current period presentation. Debt issuance costs related to our Senior Notes previously reported as other current assets and other noncurrent assets have been reclassified to long-term debt. This guidance did not have a material effect on our consolidated financial statements.
Stock-based compensation.
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-9, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" (ASU 2016-9), to reduce complexity in accounting standards involving several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We will adopt this guidance as of May 1, 2017 and do not believe it will have a material impact on our consolidated financial statements.
Leases.
In February 2016, the FASB issued Accounting Standards Update No. 2016-2, "Leases" (ASU 2016-2), which will require the recognition of lease assets and lease liabilities by lessees for leases previously classified as operating leases. ASU 2016-2 also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. This guidance will be effective for us on May 1, 2019, with early adoption permitted, and requires the use of a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. We are currently evaluating the impact of ASU 2016-2 on our consolidated financial statements, however we expect the impact of this guidance on our consolidated financial statements could be significant.
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H&R Block, Inc.
| 2017 Form 10-K
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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 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 U.S. 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 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: EARNINGS PER SHARE
Basic and diluted earnings 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 from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period.
The computations of basic and diluted earnings per share from continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per share amounts)
|
|
Year ended April 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net income from continuing operations attributable to shareholders
|
|
$
|
420,917
|
|
|
$
|
383,553
|
|
|
$
|
486,744
|
|
Amounts allocated to participating securities
|
|
(1,005
|
)
|
|
(718
|
)
|
|
(774
|
)
|
Net income from continuing operations attributable to common shareholders
|
|
$
|
419,912
|
|
|
$
|
382,835
|
|
|
$
|
485,970
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
212,809
|
|
|
249,009
|
|
|
275,033
|
|
Potential dilutive shares
|
|
1,286
|
|
|
1,809
|
|
|
2,103
|
|
Dilutive weighted average common shares
|
|
214,095
|
|
|
250,818
|
|
|
277,136
|
|
Earnings per share from continuing operations attributable to common shareholders:
|
|
|
|
|
|
|
Basic
|
|
$
|
1.97
|
|
|
$
|
1.54
|
|
|
$
|
1.77
|
|
Diluted
|
|
1.96
|
|
|
1.53
|
|
|
1.75
|
|
|
|
|
|
|
|
|
Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase
0.3 million
,
0.1 million
and
0.1 million
shares of stock for fiscal years
2017
,
2016
and
2015
, respectively, as the effect would be antidilutive.
|
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|
44
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2017 Form 10-K |
H&R Block, Inc.
|
NOTE 3: RECEIVABLES
Receivables consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
As of April 30,
|
|
2017
|
|
2016
|
|
|
Short-term
|
|
|
Long-term
|
|
|
Short-term
|
|
|
Long-term
|
|
Loans to franchisees
|
|
$
|
39,911
|
|
|
$
|
36,614
|
|
|
$
|
50,000
|
|
|
$
|
46,284
|
|
Receivables for tax preparation and related fees
|
|
54,506
|
|
|
6,316
|
|
|
52,327
|
|
|
5,528
|
|
Instant Cash Back
®
receivables
|
|
37,150
|
|
|
—
|
|
|
37,663
|
|
|
—
|
|
H&R Block Emerald Advance
®
lines of credit
|
|
26,325
|
|
|
5,069
|
|
|
25,092
|
|
|
869
|
|
Software receivables from retailers
|
|
16,715
|
|
|
—
|
|
|
8,940
|
|
|
—
|
|
Royalties and other receivables from franchisees
|
|
13,275
|
|
|
1,585
|
|
|
9,997
|
|
|
—
|
|
Other
|
|
30,189
|
|
|
3,314
|
|
|
26,108
|
|
|
7,726
|
|
|
|
218,071
|
|
|
52,898
|
|
|
210,127
|
|
|
60,407
|
|
Allowance for doubtful accounts
|
|
(55,296
|
)
|
|
—
|
|
|
(57,011
|
)
|
|
—
|
|
|
|
$
|
162,775
|
|
|
$
|
52,898
|
|
|
$
|
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 April 30,
2017
consisted of
$49.5 million
in term loans made primarily to finance the purchase of franchises and
$27.0 million
in revolving lines of credit primarily for the purpose of funding off-season working capital needs. Loans made to franchisees as of April 30,
2016
consisted of
$61.2 million
in term loans and
$35.1 million
in revolving lines of credit.
As of April 30,
2017
, we had
$0.1 million
of loans more than 90 days past due, while we had
no
such loans, as of April 30,
2016
. We had no loans to franchisees on non-accrual status as of April 30,
2017
or
2016
.
Canadian Instant Cash Back® Program.
Refunds advanced under the Instant Cash Back program 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 April 30,
2017
and
2016
, we had
$1.5 million
of Instant Cash Back balances were more than 60 days old.
H&R Block Emerald Advance® lines of credit.
Beginning in fiscal year 2016, we no longer originate EAs. These lines of credit are originated by 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 April 30,
2017
, by year of origination, are as follows:
|
|
|
|
|
|
(in 000s)
|
|
Credit Quality Indicator – Year of origination:
|
|
|
2017
|
|
$
|
10,160
|
|
2016
|
|
4,527
|
|
2015 and prior
|
|
2,709
|
|
Revolving loans
|
|
13,998
|
|
|
|
$
|
31,394
|
|
|
|
|
As of April 30,
2017
and
2016
,
$28.0 million
and
$21.1 million
of EAs were on non-accrual status and classified as impaired, or more than
60
days past due, respectively.
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H&R Block, Inc.
| 2017 Form 10-K
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45
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Allowance for Doubtful Accounts.
Activity in the allowance for doubtful accounts for our receivables is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
EAs
|
|
|
All Other
|
|
|
Total
|
|
Balances as of May 1, 2014
|
|
$
|
7,530
|
|
|
$
|
45,048
|
|
|
$
|
52,578
|
|
Provision
|
|
27,065
|
|
|
44,002
|
|
|
71,067
|
|
Charge-offs, net of recoveries
|
|
(27,242
|
)
|
|
(41,876
|
)
|
|
(69,118
|
)
|
Balances as of April 30, 2015
|
|
7,353
|
|
|
47,174
|
|
|
54,527
|
|
Provision
|
|
24,939
|
|
|
48,743
|
|
|
73,682
|
|
Charge-offs, net of recoveries
|
|
(23,285
|
)
|
|
(47,913
|
)
|
|
(71,198
|
)
|
Balances as of April 30, 2016
|
|
9,007
|
|
|
48,004
|
|
|
57,011
|
|
Provision
|
|
12,713
|
|
|
40,063
|
|
|
52,776
|
|
Charge-offs, net of recoveries
|
|
(11,597
|
)
|
|
(42,894
|
)
|
|
(54,491
|
)
|
Balances as of April 30, 2017
|
|
$
|
10,123
|
|
|
$
|
45,173
|
|
|
$
|
55,296
|
|
|
|
|
|
|
|
|
In fiscal year
2017
, we recorded recoveries of
$6.8 million
on EAs against our allowance, compared to none in fiscal years
2016
and
2015
.
NOTE 4: PROPERTY AND EQUIPMENT
The components of property and equipment, net of accumulated depreciation and amortization, are as follows:
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
As of April 30,
|
|
2017
|
|
|
2016
|
|
Buildings
|
|
$
|
69,904
|
|
|
$
|
76,289
|
|
Computers and other equipment
|
|
111,618
|
|
|
128,815
|
|
Leasehold improvements
|
|
74,112
|
|
|
77,712
|
|
Purchased software
|
|
6,570
|
|
|
9,126
|
|
Land and other non-depreciable assets
|
|
1,623
|
|
|
1,623
|
|
|
|
$
|
263,827
|
|
|
$
|
293,565
|
|
|
|
|
|
|
Depreciation and amortization expense of property and equipment for continuing operations for fiscal years
2017
,
2016
and
2015
was
$103.2 million
,
$100.8 million
and
$101.3 million
, respectively.
NOTE 5: GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the years ended April 30,
2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
Goodwill
|
|
|
Accumulated Impairment Losses
|
|
|
Net
|
|
Balances as of May 1, 2015
|
|
$
|
474,128
|
|
|
$
|
(32,297
|
)
|
|
$
|
441,831
|
|
Acquisitions
|
|
27,765
|
|
|
—
|
|
|
27,765
|
|
Disposals and foreign currency changes, net
|
|
1,161
|
|
|
—
|
|
|
1,161
|
|
Impairments
|
|
—
|
|
|
—
|
|
|
—
|
|
Balances as of April 30, 2016
|
|
503,054
|
|
|
(32,297
|
)
|
|
470,757
|
|
Acquisitions
|
|
19,261
|
|
|
—
|
|
|
19,261
|
|
Disposals and foreign currency changes, net
|
|
1,189
|
|
|
—
|
|
|
1,189
|
|
Impairments
|
|
—
|
|
|
—
|
|
|
—
|
|
Balances as of April 30, 2017
|
|
$
|
523,504
|
|
|
$
|
(32,297
|
)
|
|
$
|
491,207
|
|
|
|
|
|
|
|
|
We tested goodwill for impairment in the fourth quarter of fiscal year
2017
, and did not identify any impairment.
|
|
|
46
|
2017 Form 10-K |
H&R Block, Inc.
|
Components of intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
As of April 30,
|
|
2017
|
|
2016
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Reacquired franchise rights
|
|
$
|
331,150
|
|
|
$
|
(90,877
|
)
|
|
$
|
240,273
|
|
|
$
|
319,354
|
|
|
$
|
(68,284
|
)
|
|
$
|
251,070
|
|
Customer relationships
|
|
234,603
|
|
|
(133,207
|
)
|
|
101,396
|
|
|
206,607
|
|
|
(104,072
|
)
|
|
102,535
|
|
Internally-developed software
|
|
139,709
|
|
|
(108,379
|
)
|
|
31,330
|
|
|
131,161
|
|
|
(95,768
|
)
|
|
35,393
|
|
Noncompete agreements
|
|
32,408
|
|
|
(27,559
|
)
|
|
4,849
|
|
|
31,499
|
|
|
(25,572
|
)
|
|
5,927
|
|
Franchise agreements
|
|
19,201
|
|
|
(10,774
|
)
|
|
8,427
|
|
|
19,201
|
|
|
(9,494
|
)
|
|
9,707
|
|
Purchased technology
|
|
54,700
|
|
|
(31,973
|
)
|
|
22,727
|
|
|
54,700
|
|
|
(25,909
|
)
|
|
28,791
|
|
Acquired assets pending final allocation
(1)
|
|
362
|
|
|
—
|
|
|
362
|
|
|
462
|
|
|
—
|
|
|
462
|
|
|
|
$
|
812,133
|
|
|
$
|
(402,769
|
)
|
|
$
|
409,364
|
|
|
$
|
762,984
|
|
|
$
|
(329,099
|
)
|
|
$
|
433,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents recent business acquisitions for which final purchase price allocations have not yet been determined.
The increase in the gross carrying amount of intangible assets resulted primarily from the acquisition of approximately
230
offices to our company-owned network. The amounts and weighted-average lives of assets acquired or added during fiscal year
2017
are as follows:
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
Amount
|
|
|
Weighted-Average Life (in years)
|
Reacquired franchise rights
|
|
$
|
12,681
|
|
|
5
|
Customer relationships
|
|
29,470
|
|
|
6
|
Internally-developed software
|
|
9,661
|
|
|
3
|
Noncompete agreements
|
|
1,065
|
|
|
5
|
Total
|
|
$
|
52,877
|
|
|
5
|
|
|
|
|
|
Amortization of intangible assets of continuing operations for the years ended April 30,
2017
,
2016
and
2015
was
$78.9 million
,
$72.8 million
and
$58.5 million
, respectively. Estimated amortization of intangible assets for fiscal years
2018
,
2019
,
2020
,
2021
and
2022
is
$74.8 million
,
$60.0 million
,
$43.7 million
,
$30.3 million
and
$20.1 million
, respectively.
NOTE 6: LONG-TERM DEBT
The components of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
As of April 30,
|
|
2017
|
|
|
2016
|
|
Senior Notes, 4.125%, due October 2020
|
|
$
|
650,000
|
|
|
$
|
650,000
|
|
Senior Notes, 5.500%, due November 2022
|
|
500,000
|
|
|
500,000
|
|
Senior Notes, 5.250%, due October 2025
|
|
350,000
|
|
|
350,000
|
|
Capital lease obligation, due over the next 6 years
|
|
6,610
|
|
|
7,435
|
|
Debt issuance costs and discounts
|
|
(12,612
|
)
|
|
(15,234
|
)
|
|
|
1,493,998
|
|
|
1,492,201
|
|
Less: Current portion
|
|
(981
|
)
|
|
(826
|
)
|
|
|
$
|
1,493,017
|
|
|
$
|
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.
|
|
|
H&R Block, Inc.
| 2017 Form 10-K
|
47
|
UNSECURED COMMITTED LINE OF CREDIT
– 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. Proceeds under the 2016 CLOC may be used for working capital needs or for other general corporate purposes. 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 (EBITDA-to-interest expense) ratio 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. We were in compliance with these requirements as of April 30,
2017
. As of April 30,
2017
, amounts available to borrow under the 2016 CLOC were limited by the debt-to-EBITDA covenant to approximately
$1.6 billion
, however, our cash needs at April 30 generally do not require us to borrow on our CLOC at that time. We had no balance outstanding under the 2016 CLOC as of April 30,
2017
.
SENIOR NOTES
– On September 25, 2015, we issued
$650.0 million
of
4.125%
Senior Notes due October 1, 2020, and
$350.0 million
of
5.250%
Senior Notes due October 1, 2025. The Senior Notes are not redeemable by the bondholders prior to maturity, although we have the right to redeem some or all of these notes at any time, at specified redemption prices. Proceeds of the Senior Notes issued in September 2015, along with cash on hand, were used to repurchase shares, as discussed in
note 8
.
On October 25, 2012, we issued
$500.0 million
of
5.50%
Senior Notes due November 1, 2022. The Senior Notes are not redeemable by the bondholders prior to maturity.
The interest rates on our Senior Notes are subject to adjustment based upon our credit ratings.
OTHER INFORMATION
– The aggregate payments required to retire long-term debt are
$1.0 million
,
$1.0 million
,
$1.1 million
,
$651.1 million
,
$1.2 million
and
$851.2 million
in fiscal years
2018
,
2019
,
2020
,
2021
,
2022
and beyond, respectively.
NOTE 7: FAIR VALUE
FAIR VALUE MEASUREMENT
– We use the following classification of financial instruments pursuant to the fair value hierarchy methodologies for assets measured at fair value:
|
|
▪
|
Level 1
–
inputs to the valuation are quoted prices in an active market for identical assets.
|
|
|
▪
|
Level 2
–
inputs to the valuation include quoted prices for similar assets in active markets utilizing a third-party pricing service to determine fair value.
|
|
|
▪
|
Level 3
–
valuation is based on significant inputs that are unobservable in the market and our own estimates of assumptions that we believe market participants would use in pricing the asset.
|
Assets measured on a recurring basis are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date. There were no transfers between hierarchy levels during the fiscal years ended April 30,
2017
and
2016
.
|
|
|
48
|
2017 Form 10-K |
H&R Block, Inc.
|
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
– The carrying amounts and estimated fair values of our financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
As of April 30,
|
|
2017
|
|
2016
|
|
Fair Value
Hierarchy
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,011,331
|
|
|
$
|
1,011,331
|
|
|
$
|
896,801
|
|
|
$
|
896,801
|
|
|
Level 1
|
Cash and cash equivalents - restricted
|
|
106,208
|
|
|
106,208
|
|
|
104,110
|
|
|
104,110
|
|
|
Level 1
|
Receivables, net - short-term
|
|
162,775
|
|
|
162,775
|
|
|
153,116
|
|
|
153,116
|
|
|
Level 1
|
Receivables, net - long-term
|
|
52,898
|
|
|
52,898
|
|
|
60,407
|
|
|
60,407
|
|
|
Level 1 and 3
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (excluding debt issuance costs)
|
|
1,502,735
|
|
|
1,569,033
|
|
|
1,502,751
|
|
|
1,566,098
|
|
|
Level 2
|
Contingent consideration
|
|
10,428
|
|
|
10,428
|
|
|
8,657
|
|
|
8,657
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Fair value estimates, methods and assumptions are set forth below. The 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.
|
|
|
▪
|
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.
|
|
|
▪
|
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.
|
|
|
▪
|
Contingent consideration - Fair value approximates the carrying amount.
|
NOTE 8: STOCKHOLDERS' EQUITY
During fiscal year
2017
, we repurchased and immediately retired
14.0 million
shares of stock at an aggregate cost of
$317.0 million
, or an average price of
$22.61
per share. During fiscal year
2016
, we repurchased and immediately retired
56.4 million
shares of stock at an aggregate cost of
$2.0 billion
, or an average price of
$35.46
per share. We had no similar repurchases or retirements of common stock in fiscal year
2015
.
As of April 30, 2017 and 2016, substantially all of the balance of our accumulated comprehensive loss consisted of foreign currency translation adjustments.
NOTE 9: STOCK-BASED COMPENSATION
We have a stock-based Long Term Incentive Plan (Plan), under which we can grant stock options, restricted shares, performance-based share units, restricted share units, deferred stock units and other forms of equity to employees, non-employee directors and consultants. Stock-based compensation expense of our continuing operations totaled
$19.3 million
,
$23.5 million
and
$26.1 million
in fiscal years
2017
,
2016
and
2015
, respectively, net of related tax benefits of
$6.0 million
,
$9.5 million
and
$9.9 million
, respectively. We realized tax benefits of
$5.9 million
,
$20.9 million
and
$12.5 million
in fiscal years
2017
,
2016
and
2015
, respectively.
As of April 30,
2017
, we had
8.2 million
shares reserved for future awards under our Plan. We issue shares from our treasury stock to satisfy the exercise or vesting of stock-based awards and believe we have adequate treasury stock balances available for future issuances.
We measure the fair value of options on the grant date or modification date using the Black-Scholes-Merton (Black-Scholes) option valuation model based upon the expected term of the options. We measure the fair value of nonvested shares and share units based on the closing price of our common stock on the grant date. We measure the fair value of performance-based share units based on the Monte Carlo valuation model, taking into account as necessary those provisions of the performance-based nonvested share units that are characterized as market conditions. We generally expense the grant-date fair value, net of estimated forfeitures, over the vesting period on a straight-line basis.
|
|
|
H&R Block, Inc.
| 2017 Form 10-K
|
49
|
Options, nonvested shares and nonvested share units (other than performance-based nonvested share units) granted to employees typically vest pro-rata based upon service over a
three
-year period with a portion vesting each year. Performance-based nonvested share units granted to employees typically cliff vest at the end of a
three
-year period based upon satisfaction of both service-based and performance-based requirements. The number of performance-based share units that ultimately vest can range from zero up to 250 percent of the number granted, based on the form of the award, which can vary by year of grant. The performance metrics for these awards typically consist of earnings before interest, taxes, depreciation and amortization (EBITDA), EBITDA growth, return on equity, return on invested capital, total shareholder return or our stock price. Deferred stock units granted to non-employee directors vest when they are granted and are settled six months after the director separates from service as a director of the Company, except in the case of death.
All share units granted to employees and non-employee directors receive cumulative dividend equivalents to the extent of the units ultimately vesting at the time of distribution. Options granted under our Plan have a maximum contractual term of ten years.
STOCK OPTIONS
–
A summary of options for the fiscal year ended April 30,
2017
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per share amounts)
|
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
Outstanding, beginning of the year
|
|
1,976
|
|
|
$
|
18.76
|
|
|
|
|
|
Granted
|
|
23
|
|
|
20.29
|
|
|
|
|
|
Exercised
|
|
(162
|
)
|
|
16.03
|
|
|
|
|
|
Forfeited or expired
|
|
(135
|
)
|
|
31.98
|
|
|
|
|
|
Outstanding, end of the year
|
|
1,702
|
|
|
$
|
17.99
|
|
|
4 years
|
|
$
|
11,651
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of the year
|
|
1,675
|
|
|
$
|
17.93
|
|
|
4 years
|
|
$
|
11,549
|
|
Exercisable and expected to vest
|
|
1,699
|
|
|
$
|
17.99
|
|
|
4 years
|
|
$
|
11,640
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during fiscal years
2017
,
2016
and
2015
was
$1.0 million
,
$11.7 million
and
$8.4 million
, respectively. As of April 30,
2017
, we had
$0.1 million
of total unrecognized compensation cost related to outstanding options. The cost is expected to be recognized over a weighted-average period of
two
years.
When valuing our options on the grant date, we typically estimate the expected volatility using our historical stock price data. We also use historical exercise and forfeiture behaviors to estimate the options expected term and our forfeiture rate. The dividend yield is calculated based on the current dividend and the market price of our common stock on the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve in effect on the grant date. Both expected volatility and the risk-free interest rate are based on a period that approximates the expected term.
The following assumptions were used to value options during the periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended April 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Options - management and director:
|
|
|
|
|
|
|
Expected volatility
|
|
29.43%
|
|
|
22.95%-24.87%
|
|
|
26.25%
|
|
Expected term
|
|
4 years
|
|
|
4 years
|
|
|
4 years
|
|
Dividend yield
|
|
3.94%
|
|
|
2.26%-2.69%
|
|
|
2.62%
|
|
Risk-free interest rate
|
|
1.18%
|
|
|
1.29%-1.43%
|
|
|
1.43%
|
|
Weighted-average fair value
|
|
$
|
3.31
|
|
|
$
|
5.28
|
|
|
$
|
5.18
|
|
|
|
|
|
|
|
|
|
|
|
50
|
2017 Form 10-K |
H&R Block, Inc.
|
OTHER AWARDS
– A summary of nonvested shares, nonvested share units and deferred stock units, including those that are performance-based, for the year ended April 30,
2017
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(shares in 000s)
|
|
|
|
Nonvested Shares and Nonvested Share Units
|
|
Performance-Based Nonvested Share Units
|
|
|
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
|
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Outstanding, beginning of the year
|
|
1,513
|
|
|
$
|
26.21
|
|
|
1,099
|
|
|
$
|
31.86
|
|
Granted
|
|
716
|
|
|
23.61
|
|
|
462
|
|
|
25.38
|
|
Released
|
|
(411
|
)
|
|
30.65
|
|
|
(270
|
)
|
|
28.55
|
|
Forfeited
|
|
(202
|
)
|
|
29.80
|
|
|
(192
|
)
|
|
30.12
|
|
Outstanding, end of the year
|
|
1,616
|
|
|
$
|
23.50
|
|
|
1,099
|
|
|
$
|
30.22
|
|
|
|
|
|
|
|
|
|
|
The total fair value of shares and units vesting during fiscal years
2017
,
2016
and
2015
was
$20.3 million
,
$28.8 million
and
$14.3 million
, respectively. As of April 30,
2017
, we had
$25.0 million
of total unrecognized compensation cost related to these shares. This cost is expected to be recognized over a weighted-average period of
two
years.
When valuing our performance-based nonvested share units on the grant date, we typically estimate the expected volatility using historical volatility for H&R Block, Inc. and selected comparable companies. The dividend yield is calculated based on the current dividend and the market price of our common stock on the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve in effect on the grant date. Both expected volatility and the risk-free interest rate are based on a period that approximates the expected term. The following assumptions were used to value performance-based nonvested share units using the Monte Carlo valuation model during the periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended April 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Expected volatility
|
|
13.92% - 74.53%
|
|
|
12.85% - 55.27%
|
|
|
12.28% - 78.42%
|
|
Expected term
|
|
3 years
|
|
|
3 years
|
|
|
3 years
|
|
Dividend yield
(1)
|
|
0% - 3.68%
|
|
|
0% - 2.70%
|
|
|
0% - 2.39%
|
|
Risk-free interest rate
|
|
0.84
|
%
|
|
0.95
|
%
|
|
0.81
|
%
|
Weighted-average fair value
|
|
$
|
25.38
|
|
|
$
|
30.00
|
|
|
$
|
37.17
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The valuation model assumes that dividends are reinvested by the Company on a continuous basis.
|
NOTE 10: INCOME TAXES
The components of income from continuing operations upon which domestic and foreign income taxes have been provided are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
Year ended April 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Domestic
|
|
$
|
535,378
|
|
|
$
|
513,746
|
|
|
$
|
682,744
|
|
Foreign
|
|
93,909
|
|
|
55,733
|
|
|
60,061
|
|
|
|
$
|
629,287
|
|
|
$
|
569,479
|
|
|
$
|
742,805
|
|
|
|
|
|
|
|
|
Foreign income consists principally of intercompany transactions and our tax operations in Canada and Australia.
|
|
|
H&R Block, Inc.
| 2017 Form 10-K
|
51
|
The components of income tax expense (benefit) for continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
Year ended April 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
147,961
|
|
|
$
|
167,233
|
|
|
$
|
245,473
|
|
State
|
|
15,118
|
|
|
(26,980
|
)
|
|
31,501
|
|
Foreign
|
|
10,678
|
|
|
8,735
|
|
|
9,788
|
|
|
|
173,757
|
|
|
148,988
|
|
|
286,762
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
39,299
|
|
|
19,937
|
|
|
(30,181
|
)
|
State
|
|
(5,064
|
)
|
|
13,801
|
|
|
(4,040
|
)
|
Foreign
|
|
378
|
|
|
3,200
|
|
|
3,520
|
|
|
|
34,613
|
|
|
36,938
|
|
|
(30,701
|
)
|
Total income taxes for continuing operations
|
|
$
|
208,370
|
|
|
$
|
185,926
|
|
|
$
|
256,061
|
|
|
|
|
|
|
|
|
The reconciliation between the income tax provision and the amount computed by applying the statutory federal tax rate of
35%
to income taxes of continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended April 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
U.S. statutory tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Change in tax rate resulting from:
|
|
|
|
|
|
|
State income taxes, net of federal income tax benefit
|
|
1.6
|
%
|
|
2.2
|
%
|
|
3.5
|
%
|
Earnings taxed in foreign jurisdictions
|
|
(4.6
|
)%
|
|
(2.0
|
)%
|
|
(1.8
|
)%
|
Permanent differences
|
|
(0.4
|
)%
|
|
(0.2
|
)%
|
|
(0.3
|
)%
|
Uncertain tax positions
|
|
4.3
|
%
|
|
2.8
|
%
|
|
(1.0
|
)%
|
Change in valuation allowance
|
|
0.2
|
%
|
|
(0.5
|
)%
|
|
0.2
|
%
|
Currency loss on previously taxed income
|
|
(1.6
|
)%
|
|
—
|
%
|
|
—
|
%
|
Significant state apportionment changes
|
|
—
|
%
|
|
(4.3
|
)%
|
|
—
|
%
|
Other
|
|
(1.4
|
)%
|
|
(0.3
|
)%
|
|
(1.1
|
)%
|
Effective tax rate
|
|
33.1
|
%
|
|
32.7
|
%
|
|
34.5
|
%
|
|
|
|
|
|
|
|
The effective tax rate for fiscal year
2017
increased
0.4%
compared to the prior year. This increase was primarily caused by two items. The tax rate increased
4.3%
due to a one-time material state apportionment benefit in the prior year that was not present in the current year. The tax rate increased another
1.5%
due to increased income tax reserves related to state apportionment and transfer pricing of intercompany transactions. These items were largely offset by a tax benefit from a foreign currency loss on a distribution of previously taxed income and a moderate shift of our income mix generated in lower tax jurisdictions.
The net loss from discontinued operations for fiscal years
2017
,
2016
and
2015
totaled
$12.0 million
,
$9.3 million
and
$13.1 million
, respectively, and was net of tax benefits of
$7.0 million
,
$5.4 million
and
$8.1 million
, respectively.
|
|
|
52
|
2017 Form 10-K |
H&R Block, Inc.
|
The significant components of deferred tax assets and liabilities are reflected in the following table:
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
As of April 30,
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
Accrued expenses
|
|
$
|
4,491
|
|
|
$
|
7,919
|
|
Deferred revenue
|
|
36,305
|
|
|
35,066
|
|
Allowance for credit losses and related reserves
|
|
39,243
|
|
|
69,347
|
|
Internally-developed software
|
|
55,253
|
|
|
51,998
|
|
Deferred and stock-based compensation
|
|
17,919
|
|
|
19,075
|
|
Net operating loss carry-forward
|
|
28,049
|
|
|
26,992
|
|
Federal tax benefits related to state unrecognized tax benefits
|
|
36,265
|
|
|
31,123
|
|
Other
|
|
—
|
|
|
10,187
|
|
Valuation allowance
|
|
(22,844
|
)
|
|
(21,515
|
)
|
Total deferred tax assets
|
|
194,681
|
|
|
230,192
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Prepaid expenses and other
|
|
(12,104
|
)
|
|
(3,225
|
)
|
Property and equipment
|
|
(10,024
|
)
|
|
(19,913
|
)
|
Intangibles
|
|
(95,385
|
)
|
|
(93,406
|
)
|
Total deferred tax liabilities
|
|
(117,513
|
)
|
|
(116,544
|
)
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
77,168
|
|
|
$
|
113,648
|
|
|
|
|
|
|
Our valuation allowance on deferred tax assets increased
$1.3 million
during the current period. The increase in valuation allowance primarily related to foreign net operating losses generated in the current fiscal year.
Certain of our subsidiaries file stand-alone returns in various states and foreign jurisdictions, and others join in filing consolidated or combined returns in such jurisdictions. As of April 30,
2017
, we had net operating losses (NOLs) in various states and foreign jurisdictions. The amount of state NOLs vary by taxing jurisdiction. We maintain a valuation allowance of
$22.7 million
for the portion of such losses that, more likely than not, will not be realized. If not used, the NOLs will expire in varying amounts during fiscal years
2018
through 2034.
We intend to indefinitely reinvest the earnings of our foreign subsidiaries; therefore, no provision has been made for income taxes that might be payable upon remittance of such earnings. The amount of unrecognized tax liability on these foreign earnings, net of expected foreign tax credits, is approximately
$10 million
as of April 30,
2017
.
Changes in unrecognized tax benefits for fiscal years
2017
,
2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
Year ended April 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Balance, beginning of the year
|
|
$
|
111,514
|
|
|
$
|
86,268
|
|
|
$
|
111,491
|
|
Additions based on tax positions related to prior years
|
|
14,743
|
|
|
29,294
|
|
|
15,510
|
|
Reductions based on tax positions related to prior years
|
|
(8,469
|
)
|
|
(25,413
|
)
|
|
(38,783
|
)
|
Additions based on tax positions related to the current year
|
|
33,264
|
|
|
27,220
|
|
|
22,319
|
|
Reductions related to settlements with tax authorities
|
|
(293
|
)
|
|
(450
|
)
|
|
(10,450
|
)
|
Expiration of statute of limitations
|
|
(989
|
)
|
|
(8,922
|
)
|
|
(11,423
|
)
|
Other
|
|
173
|
|
|
3,517
|
|
|
(2,396
|
)
|
Balance, end of the year
|
|
$
|
149,943
|
|
|
$
|
111,514
|
|
|
$
|
86,268
|
|
|
|
|
|
|
|
|
The total gross unrecognized tax benefit ending balance as of April 30,
2017
,
2016
and
2015
, includes
$118.2 million
,
$82.3 million
and
$55.3 million
, respectively, which if recognized, would impact our effective tax rate. The difference results from adjusting the gross balances for such items as federal, state and foreign deferred items, interest and deductible taxes. We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease
|
|
|
H&R Block, Inc.
| 2017 Form 10-K
|
53
|
by approximately
$14 million
within the next twelve months due to settlements of audit issues and expiration of statutes of limitations.
Interest and penalties, if any, accrued on the unrecognized tax benefits are reflected in income tax expense. The total gross interest and penalties accrued as of April 30,
2017
,
2016
and
2015
totaled
$21.0 million
,
$22.3 million
and
$24.7 million
, respectively.
We file a consolidated federal income tax return in the United States with the 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. As of April 30,
2017
, the Company did not have a U.S. federal income tax return under examination. Our U.S. federal returns for 2012 and all 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. In May of 2017, we received notice from the IRS of their intent to audit our 2014 federal income tax return. 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 tax audits is always uncertain, we believe that adequate amounts of tax, interest and penalties have been provided for in the accompanying consolidated financial statements for any adjustments that might be incurred due to federal, state, local or foreign audits.
NOTE 11: OTHER INCOME AND OTHER EXPENSES
The following table shows the components of other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
Year ended April 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Mortgage loans and real estate owned, net
|
|
$
|
2,644
|
|
|
$
|
4,914
|
|
|
$
|
—
|
|
Interest income
|
|
3,642
|
|
|
3,962
|
|
|
272
|
|
Interest and gains on available-for-sale securities
|
|
188
|
|
|
8,548
|
|
|
—
|
|
Foreign currency losses
|
|
(1
|
)
|
|
(7,807
|
)
|
|
(5,878
|
)
|
Impairment of investments
|
|
—
|
|
|
(2,500
|
)
|
|
(1,368
|
)
|
Other, net
|
|
(219
|
)
|
|
(1,868
|
)
|
|
359
|
|
|
|
$
|
6,254
|
|
|
$
|
5,249
|
|
|
$
|
(6,615
|
)
|
|
|
|
|
|
|
|
In connection with our deregistration as a savings and loan holding company in fiscal year 2016, 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 approximated carrying value.
NOTE 12: COMMITMENTS AND CONTINGENCIES
We offer POM to tax clients whereby we (1) represent our clients if they are audited by the IRS, and (2) assume the cost, up to a cumulative per client limit of
$6,000
, of additional taxes owed by a client resulting from errors attributable to H&R Block. We defer all revenues and direct costs associated with these service plans, recognizing these amounts over the term of the service plan based on actual claims paid in relation to projected claims. The related short-term asset is included in prepaid expenses and other current assets. The related liability is included in deferred revenue and other current liabilities in the consolidated balance sheets. The related long-term asset and liability are included in other noncurrent assets and deferred revenue and other noncurrent liabilities, respectively, in the consolidated balance sheets. A loss on POM would be recognized if the sum of expected costs for services exceeded unearned revenue. Changes in the related balance of deferred revenue for both company-owned and franchise POM are as follows:
|
|
|
54
|
2017 Form 10-K |
H&R Block, Inc.
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
Year ended April 30,
|
|
2017
|
|
|
2016
|
|
Balance, beginning of the year
|
|
$
|
204,342
|
|
|
$
|
189,779
|
|
Amounts deferred for new extended service plans issued
|
|
120,691
|
|
|
119,915
|
|
Revenue recognized on previous deferrals
|
|
(113,810
|
)
|
|
(105,352
|
)
|
Balance, end of the year
|
|
$
|
211,223
|
|
|
$
|
204,342
|
|
|
|
|
|
|
We accrued
$6.8 million
and
$7.0 million
as of April 30,
2017
and
2016
, respectively, related to estimated losses under our standard guarantee, which is included with our standard in-office 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
$10.4 million
and
$8.7 million
as of April 30,
2017
and
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
$53.0 million
as of April 30,
2017
, and net of amounts drawn and outstanding, our remaining commitment to fund totaled
$26.0 million
.
We are self-insured for certain risks, including, employer provided medical benefits, workers' compensation, property and casualty, professional liability and claims related to POM. These programs maintain various self-insured retentions. In all but POM in company-owned offices, commercial insurance is purchased in excess of the self-insured retentions. We accrue estimated losses for self-insured retentions using actuarial models and assumptions based on historical loss experience.
We have a deferred compensation plan that permits certain employees to defer portions of their compensation and accrue income on the deferred amounts. Included in deferred revenue and other liabilities is
$25.2 million
and
$29.0 million
as of April 30,
2017
and
2016
, respectively, reflecting our obligation under these plans.
On October 25, 2016, we entered into a Refund Advance Program Agreement and certain ancillary agreements with certain third parties, pursuant to which they originated and funded Refund Advance loans, and provided technology, software, and underwriting support services related to such loans during the 2017 tax season. The Refund Advance loans were offered to eligible assisted U.S. tax preparation clients, based on client eligibility as determined by the loan originator. We paid loan origination fees based on volume and customer type. The loan origination fees were intended to cover expected loan losses and payments to capital providers, among other items. In addition, we provided limited guaranties 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 guaranties will be called upon under anticipated loss scenarios. At April 30,
2017
we had accrued an estimated liability of
$0.7 million
related to the RA program.
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.
|
|
|
H&R Block, Inc.
| 2017 Form 10-K
|
55
|
Substantially all of the operations of our subsidiaries are conducted in leased premises. Most of the operating leases are for periods ranging from
three years
to
five years
, with renewal options, and provide for fixed monthly rentals. Future minimum operating lease commitments as of April 30,
2017
, are as follows:
|
|
|
|
|
(in 000s)
|
|
2018
|
$
|
249,813
|
|
2019
|
192,260
|
|
2020
|
137,255
|
|
2021
|
71,665
|
|
2022
|
29,621
|
|
2023 and beyond
|
27,214
|
|
|
$
|
707,828
|
|
|
|
Rent expense of continuing operations for fiscal years
2017
,
2016
and
2015
totaled
$236.2 million
,
$228.5 million
and
$213.1 million
, respectively.
See note
13
to the consolidated financial statements for additional discussion regarding guarantees and indemnifications.
NOTE 13: LITIGATION AND OTHER RELATED CONTINGENCIES
We are a defendant in numerous litigation matters, arising both in the ordinary course of business and otherwise, including as described below. The matters described below are not all of the lawsuits to which we are subject. In some of the matters, very large or indeterminate amounts, including punitive damages, are sought. U.S. jurisdictions permit considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. We believe that the monetary relief which may be specified in a lawsuit or a claim bears little relevance to its merits or disposition value due to this variability in pleadings and our experience in litigating or resolving through settlement of numerous claims over an extended period of time.
The outcome of a litigation matter and the amount or range of potential loss at particular points in time may be difficult to ascertain. Among other things, uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.
In addition to litigation matters, we are also subject to claims and other loss contingencies arising out of our business activities, including as described below.
We accrue liabilities for litigation, claims, including indemnification and contribution claims, and other related loss contingencies and any related settlements (each referred to, individually, as a "matter" and, collectively, as "matters") when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. 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 April 30,
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 April 30,
2017
and
2016
, our total accrued liabilities were
$2.3 million
for matters addressed in this note.
|
|
|
56
|
2017 Form 10-K |
H&R Block, Inc.
|
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 April 30,
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 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
|
|
|
H&R Block, Inc.
| 2017 Form 10-K
|
57
|
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 14
, is related to 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
$4 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.
|
|
|
58
|
2017 Form 10-K |
H&R Block, Inc.
|
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
April 30, 2017
, total approximately
$318 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 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, which was denied. The parties subsequently reached an agreement to resolve the plaintiff’s claims in the case. A portion of our loss contingency accrual is related to this matter.
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. The parties subsequently reached an agreement to resolve the plaintiff’s claims in the case. A portion of our loss contingency accrual is 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.
|
|
|
H&R Block, Inc.
| 2017 Form 10-K
|
59
|
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 14: 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 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, 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. To the extent that any remaining repurchase obligations exist, 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 bulk settlements of previously denied and potential future representation and warranty and other claims against SCC. Settlement payments were made during fiscal year 2017 in the amount of
$61.0 million
pursuant to settlement agreements entered into in fiscal years 2016 and 2017. The amounts paid under these settlement agreements were fully covered by prior accruals.
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. SCC's loss estimate as of April 30,
2017
is based on the best information currently available, management judgment, developments in relevant case law and the terms of bulk settlements.
|
|
|
60
|
2017 Form 10-K |
H&R Block, Inc.
|
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)
|
|
Year ended April 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Balance, beginning of the year
|
|
$
|
65,265
|
|
|
$
|
149,765
|
|
|
$
|
183,765
|
|
Loss provisions
|
|
235
|
|
|
4,000
|
|
|
16,000
|
|
Payments
|
|
(61,000
|
)
|
|
(88,500
|
)
|
|
(50,000
|
)
|
Balance, end of the year
|
|
$
|
4,500
|
|
|
$
|
65,265
|
|
|
$
|
149,765
|
|
|
|
|
|
|
|
|
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 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.
See
note 13
, 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 15: SEGMENT INFORMATION
Our subsidiaries provide assisted and DIY tax return preparation solutions through multiple channels (including in-person, online and mobile applications, and desktop software) and distribute the H&R Block-branded financial products and services, including those of our financial partners. Tax returns are either prepared by H&R Block tax professionals (in company-owned or franchise offices or virtually via the internet) or prepared and filed by our clients through our DIY tax solutions.
We operate as a single segment that includes all of our continuing operations, which are designed to enable clients to obtain tax preparation services seamlessly.
|
|
|
H&R Block, Inc.
| 2017 Form 10-K
|
61
|
Revenues of our continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
Year ended April 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
REVENUES :
|
|
|
|
|
|
|
U.S. assisted tax preparation fees
|
|
$
|
1,902,212
|
|
|
$
|
1,890,175
|
|
|
$
|
1,865,438
|
|
U.S. royalties
|
|
250,270
|
|
|
249,433
|
|
|
273,250
|
|
U.S. DIY tax preparation fees
|
|
219,123
|
|
|
234,341
|
|
|
231,854
|
|
International revenues
|
|
210,320
|
|
|
213,400
|
|
|
236,552
|
|
Revenues from Refund Transfers
|
|
148,212
|
|
|
162,560
|
|
|
167,787
|
|
Revenues from Emerald Card®
|
|
95,221
|
|
|
92,608
|
|
|
103,300
|
|
Revenues from Peace of Mind® Extended Service Plan
|
|
92,820
|
|
|
86,830
|
|
|
81,551
|
|
Interest and fee income on Emerald Advance
|
|
57,022
|
|
|
57,268
|
|
|
57,202
|
|
Other
|
|
61,114
|
|
|
51,538
|
|
|
61,724
|
|
|
|
$
|
3,036,314
|
|
|
$
|
3,038,153
|
|
|
$
|
3,078,658
|
|
|
|
|
|
|
|
|
The carrying value of long-lived assets held outside the U.S. totaled
$21.0 million
,
$17.5 million
and
$16.7 million
as of April 30,
2017
,
2016
and
2015
, respectively.
NOTE 16: QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per share amounts)
|
|
|
|
Fiscal Year 2017
|
|
|
Apr 30, 2017
|
|
|
Jan 31, 2017
|
|
|
Oct 31, 2016
|
|
|
Jul 31, 2016
|
|
Revenues
|
|
$
|
3,036,314
|
|
|
$
|
2,327,915
|
|
|
$
|
451,882
|
|
|
$
|
131,332
|
|
|
$
|
125,185
|
|
Income (loss) from continuing operations before taxes (benefit)
|
|
$
|
629,287
|
|
|
$
|
1,211,903
|
|
|
$
|
(150,598
|
)
|
|
$
|
(228,469
|
)
|
|
$
|
(203,549
|
)
|
Income taxes (benefit)
|
|
208,370
|
|
|
425,333
|
|
|
(49,386
|
)
|
|
(85,054
|
)
|
|
(82,523
|
)
|
Net income (loss) from continuing operations
|
|
420,917
|
|
|
786,570
|
|
|
(101,212
|
)
|
|
(143,415
|
)
|
|
(121,026
|
)
|
Net loss from discontinued operations
|
|
(11,972
|
)
|
|
(3,218
|
)
|
|
(3,302
|
)
|
|
(2,805
|
)
|
|
(2,647
|
)
|
Net income (loss)
|
|
$
|
408,945
|
|
|
$
|
783,352
|
|
|
$
|
(104,514
|
)
|
|
$
|
(146,220
|
)
|
|
$
|
(123,673
|
)
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.97
|
|
|
$
|
3.79
|
|
|
$
|
(0.49
|
)
|
|
$
|
(0.67
|
)
|
|
$
|
(0.55
|
)
|
Discontinued operations
|
|
(0.05
|
)
|
|
(0.02
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
Consolidated
|
|
$
|
1.92
|
|
|
$
|
3.77
|
|
|
$
|
(0.50
|
)
|
|
$
|
(0.68
|
)
|
|
$
|
(0.56
|
)
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.96
|
|
|
$
|
3.76
|
|
|
$
|
(0.49
|
)
|
|
$
|
(0.67
|
)
|
|
$
|
(0.55
|
)
|
Discontinued operations
|
|
(0.05
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
Consolidated
|
|
$
|
1.91
|
|
|
$
|
3.75
|
|
|
$
|
(0.50
|
)
|
|
$
|
(0.68
|
)
|
|
$
|
(0.56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
2017 Form 10-K |
H&R Block, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s, except per share amounts)
|
|
|
|
Fiscal Year 2016
|
|
|
Apr 30, 2016
|
|
|
Jan 31, 2016
|
|
|
Oct 31, 2015
|
|
|
Jul 31, 2015
|
|
Revenues
|
|
$
|
3,038,153
|
|
|
$
|
2,297,477
|
|
|
$
|
474,543
|
|
|
$
|
128,415
|
|
|
$
|
137,718
|
|
Income (loss) from continuing operations before taxes (benefit)
|
|
$
|
569,479
|
|
|
$
|
1,140,807
|
|
|
$
|
(146,500
|
)
|
|
$
|
(237,719
|
)
|
|
$
|
(187,109
|
)
|
Income taxes (benefit)
|
|
185,926
|
|
|
439,582
|
|
|
(67,851
|
)
|
|
(95,201
|
)
|
|
(90,604
|
)
|
Net income (loss) from continuing operations
|
|
383,553
|
|
|
701,225
|
|
|
(78,649
|
)
|
|
(142,518
|
)
|
|
(96,505
|
)
|
Net loss from discontinued operations
|
|
(9,286
|
)
|
|
(563
|
)
|
|
(3,080
|
)
|
|
(2,489
|
)
|
|
(3,154
|
)
|
Net income (loss)
|
|
$
|
374,267
|
|
|
$
|
700,662
|
|
|
$
|
(81,729
|
)
|
|
$
|
(145,007
|
)
|
|
$
|
(99,659
|
)
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.54
|
|
|
$
|
3.15
|
|
|
$
|
(0.34
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.35
|
)
|
Discontinued operations
|
|
(0.04
|
)
|
|
—
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
Consolidated
|
|
$
|
1.50
|
|
|
$
|
3.15
|
|
|
$
|
(0.35
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(0.36
|
)
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.53
|
|
|
$
|
3.13
|
|
|
$
|
(0.34
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.35
|
)
|
Discontinued operations
|
|
(0.04
|
)
|
|
—
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
Consolidated
|
|
$
|
1.49
|
|
|
$
|
3.13
|
|
|
$
|
(0.35
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Because most of our clients file their tax returns during the period from January through April of each year, substantially all of our revenues from income tax return preparation and related services and products are earned during this period. As a result, we generally operate at a loss through a majority of the fiscal year.
The accumulation of four quarters in fiscal years
2017
and
2016
for earnings per share may not equal the related per share amounts for the years ended April 30,
2017
and
2016
due to the timing of the exercise of stock options and lapse of certain restrictions on nonvested shares and share units and deferred stock units and the antidilutive effect of stock options and nonvested shares and share units in the first three quarters for those years.
Information regarding H&R Block's common stock prices and dividends for fiscal years
2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Fourth Quarter
|
|
|
Third Quarter
|
|
|
Second Quarter
|
|
|
First Quarter
|
|
Fiscal Year 2017:
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share
|
|
$
|
0.88
|
|
|
$
|
0.22
|
|
|
$
|
0.22
|
|
|
$
|
0.22
|
|
|
$
|
0.22
|
|
Stock price range:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
24.95
|
|
|
$
|
24.82
|
|
|
$
|
24.06
|
|
|
$
|
24.95
|
|
|
$
|
24.53
|
|
Low
|
|
19.18
|
|
|
19.85
|
|
|
20.91
|
|
|
20.58
|
|
|
19.18
|
|
Fiscal Year 2016:
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share
|
|
$
|
0.80
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
Stock price range:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
37.53
|
|
|
$
|
35.14
|
|
|
$
|
37.53
|
|
|
$
|
37.50
|
|
|
$
|
34.62
|
|
Low
|
|
19.75
|
|
|
19.75
|
|
|
31.00
|
|
|
31.03
|
|
|
29.15
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 17: CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
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.
|
|
|
H&R Block, Inc.
| 2017 Form 10-K
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING INCOME STATEMENTS
|
|
(in 000s)
|
|
Year ended April 30, 2017
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Total revenues
|
|
$
|
—
|
|
|
$
|
186,659
|
|
|
$
|
2,877,265
|
|
|
$
|
(27,610
|
)
|
|
$
|
3,036,314
|
|
Cost of revenues
|
|
—
|
|
|
71,661
|
|
|
1,580,425
|
|
|
(7,709
|
)
|
|
1,644,377
|
|
Selling, general and administrative
|
|
—
|
|
|
24,201
|
|
|
671,653
|
|
|
(19,901
|
)
|
|
675,953
|
|
Total operating expenses
|
|
—
|
|
|
95,862
|
|
|
2,252,078
|
|
|
(27,610
|
)
|
|
2,320,330
|
|
Other income (expense), net
|
|
399,996
|
|
|
25,361
|
|
|
9,330
|
|
|
(428,433
|
)
|
|
6,254
|
|
Interest expense on external borrowings
|
|
—
|
|
|
(92,263
|
)
|
|
(688
|
)
|
|
—
|
|
|
(92,951
|
)
|
Income from continuing operations before taxes
|
|
399,996
|
|
|
23,895
|
|
|
633,829
|
|
|
(428,433
|
)
|
|
629,287
|
|
Income tax (benefit)
|
|
(8,949
|
)
|
|
6,472
|
|
|
210,847
|
|
|
—
|
|
|
208,370
|
|
Net income from continuing operations
|
|
408,945
|
|
|
17,423
|
|
|
422,982
|
|
|
(428,433
|
)
|
|
420,917
|
|
Net income (loss) from discontinued operations
|
|
—
|
|
|
(12,705
|
)
|
|
733
|
|
|
—
|
|
|
(11,972
|
)
|
Net income
|
|
408,945
|
|
|
4,718
|
|
|
423,715
|
|
|
(428,433
|
)
|
|
408,945
|
|
Other comprehensive loss
|
|
(4,066
|
)
|
|
—
|
|
|
(4,066
|
)
|
|
4,066
|
|
|
(4,066
|
)
|
Comprehensive income
|
|
$
|
404,879
|
|
|
$
|
4,718
|
|
|
$
|
419,649
|
|
|
$
|
(424,367
|
)
|
|
$
|
404,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended April 30, 2016
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Total revenues
|
|
$
|
—
|
|
|
$
|
192,698
|
|
|
$
|
2,868,343
|
|
|
$
|
(22,888
|
)
|
|
$
|
3,038,153
|
|
Cost of revenues
|
|
—
|
|
|
102,707
|
|
|
1,588,450
|
|
|
(5,605
|
)
|
|
1,685,552
|
|
Selling, general and administrative
|
|
2,537
|
|
|
30,780
|
|
|
703,375
|
|
|
(17,283
|
)
|
|
719,409
|
|
Total operating expenses
|
|
2,537
|
|
|
133,487
|
|
|
2,291,825
|
|
|
(22,888
|
)
|
|
2,404,961
|
|
Other income (expense), net
|
|
375,136
|
|
|
21,473
|
|
|
(9,965
|
)
|
|
(381,395
|
)
|
|
5,249
|
|
Interest expense on external borrowings
|
|
—
|
|
|
(68,531
|
)
|
|
(431
|
)
|
|
—
|
|
|
(68,962
|
)
|
Income from continuing operations before taxes
|
|
372,599
|
|
|
12,153
|
|
|
566,122
|
|
|
(381,395
|
)
|
|
569,479
|
|
Income taxes (benefit)
|
|
(1,668
|
)
|
|
1,411
|
|
|
186,183
|
|
|
—
|
|
|
185,926
|
|
Net income from continuing operations
|
|
374,267
|
|
|
10,742
|
|
|
379,939
|
|
|
(381,395
|
)
|
|
383,553
|
|
Net loss from discontinued operations
|
|
—
|
|
|
(9,286
|
)
|
|
—
|
|
|
—
|
|
|
(9,286
|
)
|
Net income
|
|
374,267
|
|
|
1,456
|
|
|
379,939
|
|
|
(381,395
|
)
|
|
374,267
|
|
Other comprehensive loss
|
|
(12,973
|
)
|
|
(8,444
|
)
|
|
(12,973
|
)
|
|
21,417
|
|
|
(12,973
|
)
|
Comprehensive income (loss)
|
|
$
|
361,294
|
|
|
$
|
(6,988
|
)
|
|
$
|
366,966
|
|
|
$
|
(359,978
|
)
|
|
$
|
361,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
2017 Form 10-K |
H&R Block, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended April 30, 2015
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Total revenues
|
|
$
|
—
|
|
|
$
|
226,285
|
|
|
$
|
2,858,474
|
|
|
$
|
(6,101
|
)
|
|
$
|
3,078,658
|
|
Cost of revenues
|
|
—
|
|
|
96,493
|
|
|
1,540,091
|
|
|
(6,094
|
)
|
|
1,630,490
|
|
Selling, general and administrative
|
|
—
|
|
|
19,053
|
|
|
634,456
|
|
|
(7
|
)
|
|
653,502
|
|
Total operating expenses
|
|
—
|
|
|
115,546
|
|
|
2,174,547
|
|
|
(6,101
|
)
|
|
2,283,992
|
|
Other income (expense), net
|
|
475,336
|
|
|
1,773
|
|
|
35,458
|
|
|
(519,182
|
)
|
|
(6,615
|
)
|
Interest expense on external borrowings
|
|
—
|
|
|
(44,884
|
)
|
|
(362
|
)
|
|
—
|
|
|
(45,246
|
)
|
Income from continuing operations before taxes
|
|
475,336
|
|
|
67,628
|
|
|
719,023
|
|
|
(519,182
|
)
|
|
742,805
|
|
Income taxes
|
|
1,673
|
|
|
2,602
|
|
|
251,786
|
|
|
—
|
|
|
256,061
|
|
Net income from continuing operations
|
|
473,663
|
|
|
65,026
|
|
|
467,237
|
|
|
(519,182
|
)
|
|
486,744
|
|
Net income (loss) from discontinued operations
|
|
—
|
|
|
(16,725
|
)
|
|
3,644
|
|
|
—
|
|
|
(13,081
|
)
|
Net income
|
|
473,663
|
|
|
48,301
|
|
|
470,881
|
|
|
(519,182
|
)
|
|
473,663
|
|
Other comprehensive income (loss)
|
|
(3,437
|
)
|
|
6,738
|
|
|
(3,437
|
)
|
|
(3,301
|
)
|
|
(3,437
|
)
|
Comprehensive income
|
|
$
|
470,226
|
|
|
$
|
55,039
|
|
|
$
|
467,444
|
|
|
$
|
(522,483
|
)
|
|
$
|
470,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block, Inc.
| 2017 Form 10-K
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING BALANCE SHEETS
|
|
(in 000s)
|
|
As of April 30, 2017
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Cash & cash equivalents
|
|
$
|
—
|
|
|
$
|
4,486
|
|
|
$
|
1,006,845
|
|
|
$
|
—
|
|
|
$
|
1,011,331
|
|
Cash & cash equivalents - restricted
|
|
—
|
|
|
8,060
|
|
|
98,148
|
|
|
—
|
|
|
106,208
|
|
Receivables, net
|
|
—
|
|
|
61,250
|
|
|
101,525
|
|
|
—
|
|
|
162,775
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
2,280
|
|
|
63,445
|
|
|
—
|
|
|
65,725
|
|
Total current assets
|
|
—
|
|
|
76,076
|
|
|
1,269,963
|
|
|
—
|
|
|
1,346,039
|
|
Property and equipment, net
|
|
—
|
|
|
78
|
|
|
263,749
|
|
|
—
|
|
|
263,827
|
|
Intangible assets, net
|
|
—
|
|
|
—
|
|
|
409,364
|
|
|
—
|
|
|
409,364
|
|
Goodwill
|
|
—
|
|
|
—
|
|
|
491,207
|
|
|
—
|
|
|
491,207
|
|
Deferred tax assets and income taxes receivable
|
|
5,587
|
|
|
30,743
|
|
|
47,398
|
|
|
—
|
|
|
83,728
|
|
Investments in subsidiaries
|
|
2,158,234
|
|
|
—
|
|
|
113,714
|
|
|
(2,271,948
|
)
|
|
—
|
|
Amounts due from affiliates
|
|
—
|
|
|
1,493,195
|
|
|
2,194,294
|
|
|
(3,687,489
|
)
|
|
—
|
|
Other noncurrent assets
|
|
—
|
|
|
51,829
|
|
|
48,114
|
|
|
—
|
|
|
99,943
|
|
Total assets
|
|
$
|
2,163,821
|
|
|
$
|
1,651,921
|
|
|
$
|
4,837,803
|
|
|
$
|
(5,959,437
|
)
|
|
$
|
2,694,108
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
2,086
|
|
|
$
|
14,218
|
|
|
$
|
200,724
|
|
|
$
|
—
|
|
|
$
|
217,028
|
|
Accrued salaries, wages and payroll taxes
|
|
—
|
|
|
851
|
|
|
183,005
|
|
|
—
|
|
|
183,856
|
|
Accrued income taxes and reserves for uncertain tax positions
|
|
—
|
|
|
—
|
|
|
348,199
|
|
|
—
|
|
|
348,199
|
|
Current portion of long-term debt
|
|
—
|
|
|
—
|
|
|
981
|
|
|
—
|
|
|
981
|
|
Deferred revenue and other current liabilities
|
|
—
|
|
|
26,759
|
|
|
162,457
|
|
|
—
|
|
|
189,216
|
|
Total current liabilities
|
|
2,086
|
|
|
41,828
|
|
|
895,366
|
|
|
—
|
|
|
939,280
|
|
Long-term debt
|
|
—
|
|
|
1,487,389
|
|
|
5,628
|
|
|
—
|
|
|
1,493,017
|
|
Deferred tax liabilities and reserves for uncertain tax positions
|
|
28,324
|
|
|
8,037
|
|
|
122,724
|
|
|
—
|
|
|
159,085
|
|
Deferred revenue and other noncurrent liabilities
|
|
—
|
|
|
953
|
|
|
162,656
|
|
|
—
|
|
|
163,609
|
|
Amounts due to affiliates
|
|
2,194,294
|
|
|
—
|
|
|
1,493,195
|
|
|
(3,687,489
|
)
|
|
—
|
|
Total liabilities
|
|
2,224,704
|
|
|
1,538,207
|
|
|
2,679,569
|
|
|
(3,687,489
|
)
|
|
2,754,991
|
|
Stockholders' equity (deficiency)
|
|
(60,883
|
)
|
|
113,714
|
|
|
2,158,234
|
|
|
(2,271,948
|
)
|
|
(60,883
|
)
|
Total liabilities and stockholders' equity
|
|
$
|
2,163,821
|
|
|
$
|
1,651,921
|
|
|
$
|
4,837,803
|
|
|
$
|
(5,959,437
|
)
|
|
$
|
2,694,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
2017 Form 10-K |
H&R Block, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
—
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block, Inc.
| 2017 Form 10-K
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
(in 000s)
|
|
Year ended April 30, 2017
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Net cash provided by (used in) operating activities:
|
|
$
|
—
|
|
|
$
|
(45,555
|
)
|
|
$
|
595,648
|
|
|
$
|
—
|
|
|
$
|
550,093
|
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
Sales, maturities and payments received on AFS securities
|
|
—
|
|
|
144
|
|
|
1,000
|
|
|
—
|
|
|
1,144
|
|
Principal payments and sales of mortgage loans and real estate owned, net
|
|
—
|
|
|
207,174
|
|
|
—
|
|
|
—
|
|
|
207,174
|
|
Capital expenditures
|
|
—
|
|
|
(32
|
)
|
|
(89,223
|
)
|
|
—
|
|
|
(89,255
|
)
|
Payments for business acquisitions, net of cash acquired
|
|
—
|
|
|
—
|
|
|
(54,816
|
)
|
|
—
|
|
|
(54,816
|
)
|
Franchise loans funded
|
|
—
|
|
|
(34,136
|
)
|
|
(337
|
)
|
|
—
|
|
|
(34,473
|
)
|
Payments received on franchise loans
|
|
—
|
|
|
61,102
|
|
|
335
|
|
|
—
|
|
|
61,437
|
|
Intercompany borrowings (payments)
|
|
—
|
|
|
(194,782
|
)
|
|
(507,594
|
)
|
|
702,376
|
|
|
—
|
|
Other, net
|
|
—
|
|
|
1,546
|
|
|
6,562
|
|
|
—
|
|
|
8,108
|
|
Net cash provided by (used in) investing activities
|
|
—
|
|
|
41,016
|
|
|
(644,073
|
)
|
|
702,376
|
|
|
99,319
|
|
Cash flows from financing:
|
|
|
|
|
|
|
|
|
|
|
Repayments of line of credit borrowings
|
|
—
|
|
|
(1,700,000
|
)
|
|
—
|
|
|
—
|
|
|
(1,700,000
|
)
|
Proceeds from line of credit borrowings
|
|
—
|
|
|
1,700,000
|
|
|
—
|
|
|
—
|
|
|
1,700,000
|
|
Dividends paid
|
|
(187,115
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(187,115
|
)
|
Repurchase of common stock, including shares surrendered
|
|
(322,850
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(322,850
|
)
|
Proceeds from exercise of stock options
|
|
2,371
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,371
|
|
Intercompany borrowings (payments)
|
|
507,594
|
|
|
—
|
|
|
194,782
|
|
|
(702,376
|
)
|
|
—
|
|
Other, net
|
|
—
|
|
|
—
|
|
|
(22,830
|
)
|
|
—
|
|
|
(22,830
|
)
|
Net cash provided by (used in) financing activities
|
|
—
|
|
|
—
|
|
|
171,952
|
|
|
(702,376
|
)
|
|
(530,424
|
)
|
Effects of exchange rate changes on cash
|
|
—
|
|
|
—
|
|
|
(4,458
|
)
|
|
—
|
|
|
(4,458
|
)
|
Net increase (decrease) in cash
|
|
—
|
|
|
(4,539
|
)
|
|
119,069
|
|
|
—
|
|
|
114,530
|
|
Cash - beginning of the year
|
|
—
|
|
|
9,025
|
|
|
887,776
|
|
|
—
|
|
|
896,801
|
|
Cash - end of the year
|
|
$
|
—
|
|
|
$
|
4,486
|
|
|
$
|
1,006,845
|
|
|
$
|
—
|
|
|
$
|
1,011,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
2017 Form 10-K |
H&R Block, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended April 30, 2016
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Net cash provided by (used in) operating activities:
|
|
$
|
—
|
|
|
$
|
(55,689
|
)
|
|
$
|
588,083
|
|
|
$
|
—
|
|
|
$
|
532,394
|
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
Sales, maturities and payments received on AFS securities
|
|
—
|
|
|
430,460
|
|
|
6,011
|
|
|
—
|
|
|
436,471
|
|
Principal payments and sales of mortgage loans and real estate owned, net
|
|
—
|
|
|
38,481
|
|
|
—
|
|
|
—
|
|
|
38,481
|
|
Capital expenditures
|
|
—
|
|
|
(21
|
)
|
|
(99,902
|
)
|
|
—
|
|
|
(99,923
|
)
|
Payments for business acquisitions, net of cash acquired
|
|
—
|
|
|
—
|
|
|
(88,776
|
)
|
|
—
|
|
|
(88,776
|
)
|
Franchise loans funded
|
|
—
|
|
|
(22,479
|
)
|
|
(341
|
)
|
|
—
|
|
|
(22,820
|
)
|
Payments received on franchise loans
|
|
—
|
|
|
54,613
|
|
|
394
|
|
|
—
|
|
|
55,007
|
|
Intercompany borrowings (payments)
|
|
—
|
|
|
(1,147,985
|
)
|
|
(2,197,954
|
)
|
|
3,345,939
|
|
|
—
|
|
Other, net
|
|
—
|
|
|
2,192
|
|
|
8,883
|
|
|
—
|
|
|
11,075
|
|
Net cash provided by (used in) investing activities
|
|
—
|
|
|
(644,739
|
)
|
|
(2,371,685
|
)
|
|
3,345,939
|
|
|
329,515
|
|
Cash flows from financing:
|
|
|
|
|
|
|
|
|
|
|
Repayments of line of credit borrowings
|
|
—
|
|
|
(1,465,000
|
)
|
|
—
|
|
|
—
|
|
|
(1,465,000
|
)
|
Proceeds from line of credit borrowings
|
|
—
|
|
|
1,465,000
|
|
|
—
|
|
|
—
|
|
|
1,465,000
|
|
Proceeds from long-term debt
|
|
—
|
|
|
996,831
|
|
|
—
|
|
|
—
|
|
|
996,831
|
|
Transfer of HRB Bank deposits
|
|
—
|
|
|
(419,028
|
)
|
|
—
|
|
|
—
|
|
|
(419,028
|
)
|
Customer banking deposits, net
|
|
—
|
|
|
(327,145
|
)
|
|
—
|
|
|
440
|
|
|
(326,705
|
)
|
Dividends paid
|
|
(201,688
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(201,688
|
)
|
Repurchase of common stock, including shares surrendered
|
|
(2,018,338
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,018,338
|
)
|
Proceeds from exercise of stock options
|
|
25,775
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,775
|
|
Intercompany borrowings (payments)
|
|
2,197,954
|
|
|
—
|
|
|
1,147,985
|
|
|
(3,345,939
|
)
|
|
—
|
|
Other, net
|
|
(3,703
|
)
|
|
(19,282
|
)
|
|
4,409
|
|
|
—
|
|
|
(18,576
|
)
|
Net cash provided by (used in) financing activities
|
|
—
|
|
|
231,376
|
|
|
1,152,394
|
|
|
(3,345,499
|
)
|
|
(1,961,729
|
)
|
Effects of exchange rate changes on cash
|
|
—
|
|
|
—
|
|
|
(10,569
|
)
|
|
—
|
|
|
(10,569
|
)
|
Net decrease in cash
|
|
—
|
|
|
(469,052
|
)
|
|
(641,777
|
)
|
|
440
|
|
|
(1,110,389
|
)
|
Cash - beginning of the year
|
|
—
|
|
|
478,077
|
|
|
1,529,553
|
|
|
(440
|
)
|
|
2,007,190
|
|
Cash - end of the year
|
|
$
|
—
|
|
|
$
|
9,025
|
|
|
$
|
887,776
|
|
|
$
|
—
|
|
|
$
|
896,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block, Inc.
| 2017 Form 10-K
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended April 30, 2015
|
|
H&R Block, Inc.
(Guarantor)
|
|
|
Block Financial
(Issuer)
|
|
|
Other
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
H&R Block
|
|
Net cash provided by operating activities:
|
|
$
|
—
|
|
|
$
|
15,456
|
|
|
$
|
611,152
|
|
|
$
|
—
|
|
|
$
|
626,608
|
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
Purchases of AFS securities
|
|
—
|
|
|
(90,381
|
)
|
|
(200
|
)
|
|
—
|
|
|
(90,581
|
)
|
Sales, maturities and payments received on AFS securities
|
|
—
|
|
|
87,922
|
|
|
3,956
|
|
|
—
|
|
|
91,878
|
|
Principal payments and sales of mortgage loans and real estate owned, net
|
|
—
|
|
|
32,090
|
|
|
—
|
|
|
—
|
|
|
32,090
|
|
Capital expenditures
|
|
—
|
|
|
(224
|
)
|
|
(122,934
|
)
|
|
—
|
|
|
(123,158
|
)
|
Payments for business acquisitions, net of cash acquired
|
|
—
|
|
|
—
|
|
|
(113,252
|
)
|
|
—
|
|
|
(113,252
|
)
|
Franchise loans funded
|
|
—
|
|
|
(49,220
|
)
|
|
(475
|
)
|
|
—
|
|
|
(49,695
|
)
|
Payments received on franchise loans
|
|
—
|
|
|
90,199
|
|
|
437
|
|
|
—
|
|
|
90,636
|
|
Intercompany borrowings (payments)
|
|
—
|
|
|
134,094
|
|
|
(285,049
|
)
|
|
150,955
|
|
|
—
|
|
Other, net
|
|
—
|
|
|
3,807
|
|
|
9,343
|
|
|
—
|
|
|
13,150
|
|
Net cash provided by (used in) investing activities
|
|
—
|
|
|
208,287
|
|
|
(508,174
|
)
|
|
150,955
|
|
|
(148,932
|
)
|
Cash flows from financing:
|
|
|
|
|
|
|
|
|
|
|
Repayments of short-term borrowings
|
|
—
|
|
|
(1,049,136
|
)
|
|
—
|
|
|
—
|
|
|
(1,049,136
|
)
|
Proceeds from short-term borrowings
|
|
—
|
|
|
1,049,136
|
|
|
—
|
|
|
—
|
|
|
1,049,136
|
|
Repayments of long-term debt
|
|
—
|
|
|
(400,000
|
)
|
|
—
|
|
|
—
|
|
|
(400,000
|
)
|
Customer banking deposits, net
|
|
—
|
|
|
(29,204
|
)
|
|
—
|
|
|
660
|
|
|
(28,544
|
)
|
Dividends paid
|
|
(219,960
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(219,960
|
)
|
Repurchase of common stock, including shares surrendered
|
|
(10,449
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,449
|
)
|
Proceeds from exercise of stock options
|
|
16,522
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,522
|
|
Intercompany borrowings (payments)
|
|
213,887
|
|
|
71,162
|
|
|
(134,094
|
)
|
|
(150,955
|
)
|
|
—
|
|
Other, net
|
|
—
|
|
|
—
|
|
|
(3,376
|
)
|
|
—
|
|
|
(3,376
|
)
|
Net cash used in financing activities
|
|
—
|
|
|
(358,042
|
)
|
|
(137,470
|
)
|
|
(150,295
|
)
|
|
(645,807
|
)
|
Effects of exchange rate changes on cash
|
|
—
|
|
|
—
|
|
|
(9,986
|
)
|
|
—
|
|
|
(9,986
|
)
|
Net decrease in cash
|
|
—
|
|
|
(134,299
|
)
|
|
(44,478
|
)
|
|
660
|
|
|
(178,117
|
)
|
Cash - beginning of the year
|
|
—
|
|
|
612,376
|
|
|
1,574,031
|
|
|
(1,100
|
)
|
|
2,185,307
|
|
Cash - end of the year
|
|
$
|
—
|
|
|
$
|
478,077
|
|
|
$
|
1,529,553
|
|
|
$
|
(440
|
)
|
|
$
|
2,007,190
|
|
|
|
|
|
|
|
|
|
|
|
|