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H&R BLOCK INC - Quarter Report: 2019 July (Form 10-Q)

Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
 
 
☑
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended
July 31, 2019
 
 
OR
☐
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from             to             
Commission file number 1-06089

H&R Block, Inc.
(Exact name of registrant as specified in its charter)
Missouri
 
44-0607856
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
One H&R Block Way, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 854-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, without par value
HRB
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑     No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☑     No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer ☑           Accelerated filer ☐         Non-accelerated filer ☐          Smaller reporting company ☐     Emerging growth company ☐
    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐    No  ☑
The number of shares outstanding of the registrant's Common Stock, without par value, at the close of business on August 31, 2019: 200,720,054 shares.
 


Table of Contents

Form 10-Q for the Period Ended July 31, 2019
Table of Contents
 
 
 
 
 
Consolidated Statements of Operations and Comprehensive Loss
 
 
Three months ended July 31, 2019 and 2018
 
 
 
 
Consolidated Balance Sheets
 
 
As of July 31, 2019, July 31, 2018 and April 30, 2019
 
 
 
 
Consolidated Statements of Cash Flows
 
 
Three months ended July 31, 2019 and 2018
 
 
 
 
Consolidated Statements of Stockholders' Equity
 
 
Three months ended July 31, 2019 and the fiscal year ended April 30, 2019
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legal Proceedings
 
 
 
Risk Factors
 
 
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
 
Exhibits
 
 
 
 



Table of Contents

PART I    FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(unaudited, in 000s, except 
per share amounts)
 
Three months ended July 31,
 
2019

 
2018

 
 
 
 
 
REVENUES:
 
 
 
 
Service revenues
 
$
132,159

 
$
126,860

Royalty, product and other revenues
 
18,203

 
18,323

 
 
150,362

 
145,183

OPERATING EXPENSES:
 
 
 
 
Costs of revenues
 
229,392

 
221,560

Selling, general and administrative
 
116,136

 
105,740

Total operating expenses
 
345,528

 
327,300

 
 
 
 
 
Other income (expense), net
 
9,123

 
4,542

Interest expense on borrowings
 
(21,071
)
 
(21,190
)
Loss from continuing operations before income tax benefit
 
(207,114
)
 
(198,765
)
Income tax benefit
 
(61,390
)
 
(49,968
)
Net loss from continuing operations
 
(145,724
)
 
(148,797
)
Net loss from discontinued operations, net of tax benefits of $1,358 and $1,162
 
(4,523
)
 
(3,873
)
NET LOSS
 
$
(150,247
)
 
$
(152,670
)
 
 
 
 
 
BASIC AND DILUTED LOSS PER SHARE:
 
 
 
 
Continuing operations
 
$
(0.72
)
 
$
(0.72
)
Discontinued operations
 
(0.02
)
 
(0.02
)
Consolidated
 
$
(0.74
)
 
$
(0.74
)
 
 
 
 
 
DIVIDENDS DECLARED PER SHARE
 
$
0.26

 
$
0.25

 
 
 
 
 
COMPREHENSIVE LOSS:
 
 
 
 
Net loss
 
$
(150,247
)
 
$
(152,670
)
Unrealized gains on securities, net of taxes
 
—

 
3

Change in foreign currency translation adjustments
 
(2,320
)
 
(1,734
)
Other comprehensive loss
 
(2,320
)
 
(1,731
)
Comprehensive loss
 
$
(152,567
)
 
$
(154,401
)
 
 
 
 
 
See accompanying notes to consolidated financial statements.

H&R Block, Inc. | Q1 FY2020 Form 10-Q
1
Table of Contents

CONSOLIDATED BALANCE SHEETS
 
(unaudited, in 000s, except 
share and per share amounts)
 
As of
 
July 31, 2019

 
July 31, 2018

 
April 30, 2019

 
 


 


 
 
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
607,668

 
$
979,116

 
$
1,572,150

Cash and cash equivalents - restricted
 
157,786

 
131,376

 
135,577

Receivables, less allowance for doubtful accounts of $66,652, $65,445 and $67,228
 
76,128

 
70,576

 
138,965

Prepaid expenses and other current assets
 
105,123

 
101,055

 
146,667

Total current assets
 
946,705

 
1,282,123

 
1,993,359

Property and equipment, at cost, less accumulated depreciation and amortization of $764,891, $768,302 and $745,761
 
199,679

 
227,003

 
212,092

Operating lease right of use asset
 
486,147

 
—

 
—

Intangible assets, net
 
419,391

 
354,831

 
342,493

Goodwill
 
821,278

 
507,941

 
519,937

Deferred tax assets and income taxes receivable
 
142,416

 
131,683

 
141,979

Other noncurrent assets
 
94,384

 
101,457

 
90,085

Total assets
 
$
3,110,000

 
$
2,605,038

 
$
3,299,945

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
122,156

 
$
145,471

 
$
249,525

Accrued salaries, wages and payroll taxes
 
48,166

 
37,468

 
196,527

Accrued income taxes and reserves for uncertain tax positions
 
182,928

 
178,313

 
271,973

Operating lease liabilities
 
186,355

 
—

 
—

Deferred revenue and other current liabilities
 
193,364

 
202,744

 
204,976

Total current liabilities
 
732,969

 
563,996

 
923,001

Long-term debt
 
1,493,289

 
1,495,006

 
1,492,629

Deferred tax liabilities and reserves for uncertain tax positions
 
199,714

 
231,292

 
197,906

Operating lease liabilities
 
292,818

 
—

 
—

Deferred revenue and other noncurrent liabilities
 
100,406

 
122,735

 
144,882

Total liabilities
 
2,819,196

 
2,413,029

 
2,758,418

COMMITMENTS AND CONTINGENCIES
 


 


 


STOCKHOLDERS' EQUITY:
 
 
 
 
 
 
Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, shares issued of 236,744,360, 242,026,278 and 238,336,760
 
2,367

 
2,420

 
2,383

Additional paid-in capital
 
759,449

 
752,109

 
767,636

Accumulated other comprehensive loss
 
(22,736
)
 
(16,034
)
 
(20,416
)
Retained earnings
 
250,740

 
163,567

 
499,386

Less treasury shares, at cost, of 35,785,391, 36,517,685 and 36,377,441
 
(699,016
)
 
(710,053
)
 
(707,462
)
Total stockholders' equity
 
290,804

 
192,009

 
541,527

Total liabilities and stockholders' equity
 
$
3,110,000

 
$
2,605,038

 
$
3,299,945

 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

2
Q1 FY2020 Form 10-Q | H&R Block, Inc.
Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited, in 000s)
 
Three months ended July 31,
 
2019

 
2018

CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net loss
 
$
(150,247
)
 
$
(152,670
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
38,605

 
40,432

Provision for bad debt
 
552

 
1,617

Deferred taxes
 
6,825

 
9,595

Stock-based compensation
 
6,674

 
4,359

Changes in assets and liabilities, net of acquisitions:
 
 
 
 
Receivables
 
60,519

 
66,202

Prepaid expenses, other current and noncurrent assets
 
(9,917
)
 
(12,161
)
Accounts payable, accrued expenses, salaries, wages and payroll taxes
 
(284,643
)
 
(203,482
)
Deferred revenue, other current and noncurrent liabilities
 
(45,769
)
 
(40,760
)
Income tax receivables, accrued income taxes and income tax reserves
 
(99,929
)
 
(89,661
)
Other, net
 
(6,499
)
 
966

Net cash used in operating activities
 
(483,829
)
 
(375,563
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Capital expenditures
 
(15,181
)
 
(12,057
)
Payments made for business acquisitions, net of cash acquired
 
(394,411
)
 
(1,449
)
Franchise loans funded
 
(2,806
)
 
(1,805
)
Payments from franchisees
 
2,647

 
5,104

Other, net
 
50,944

 
3,645

Net cash used in investing activities
 
(358,807
)
 
(6,562
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Dividends paid
 
(52,512
)
 
(52,104
)
Repurchase of common stock, including shares surrendered
 
(36,456
)
 
(101,665
)
Proceeds from exercise of stock options
 
1,206

 
1,355

Other, net
 
(12,431
)
 
(17,494
)
Net cash used in financing activities
 
(100,193
)
 
(169,908
)
 
 
 
 
 
Effects of exchange rate changes on cash
 
556

 
(1,153
)
 
 
 
 
 
Net decrease in cash and cash equivalents, including restricted balances
 
(942,273
)
 
(553,186
)
Cash, cash equivalents and restricted cash, beginning of period
 
1,707,727

 
1,663,678

Cash, cash equivalents and restricted cash, end of period
 
$
765,454

 
$
1,110,492

 
 
 
 
 
SUPPLEMENTARY CASH FLOW DATA:
 
 
 
 
Income taxes paid, net of refunds received
 
$
36,138

 
$
31,969

Interest paid on borrowings
 
15,519

 
15,519

Accrued additions to property and equipment
 
127

 
9,974

Accrued purchase of common stock
 
16,801

 
—

 
 
 
 
 
See accompanying notes to consolidated financial statements.

H&R Block, Inc. | Q1 FY2020 Form 10-Q
3
Table of Contents

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
(amounts in 000s, except per share amounts)
 
 
 
Common Stock
 
Additional
Paid-in
Capital

 
Accumulated Other
Comprehensive
Income (Loss)

 
Retained
Earnings

 
Treasury Stock
 
Total
Stockholders’
Equity

 
 
Shares

 
Amount

 
 
 
 
Shares

 
Amount

 
Balances as of May 1, 2019
 
238,337

 
$
2,383

 
$
767,636

 
$
(20,416
)
 
$
499,386

 
(36,377
)
 
$
(707,462
)
 
$
541,527

Net loss
 
—

 
—

 
—

 
—

 
(150,247
)
 
—

 
—

 
(150,247
)
Other comprehensive loss
 
—

 
—

 
—

 
(2,320
)
 
—

 
—

 
—

 
(2,320
)
Stock-based compensation
 
—

 
—

 
6,557

 
—

 
—

 
—

 
—

 
6,557

Stock-based awards exercised or vested
 
—

 
—

 
(13,789
)
 
—

 
(2,786
)
 
906

 
17,631

 
1,056

Acquisition of treasury shares
 
—

 
—

 
—

 
—

 
—

 
(314
)
 
(9,185
)
 
(9,185
)
Repurchase and retirement of common shares
 
(1,593
)
 
(16
)
 
(955
)
 
—

 
(43,101
)
 
—

 
—

 
(44,072
)
Cash dividends declared - $0.26 per share
 
—

 
—

 
—

 
—

 
(52,512
)
 
—

 
—

 
(52,512
)
Balances as of July 31, 2019
 
236,744

 
$
2,367

 
$
759,449

 
$
(22,736
)
 
$
250,740

 
(35,785
)
 
$
(699,016
)
 
$
290,804

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.


















4
Q1 FY2020 Form 10-Q | H&R Block, Inc.
Table of Contents

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
(amounts in 000s, except per share amounts)
 
 
 
Common Stock
 
Additional
Paid-in
Capital

 
Accumulated
Other
Comprehensive
Income (Loss)

 
Retained
Earnings (Deficit)

 
Treasury Stock
 
Total
Stockholders’
Equity (Deficiency)

 
 
Shares

 
Amount

 
 
 
 
Shares

 
Amount

 
Balances as of May 1, 2018
 
246,199

 
$
2,462

 
$
760,250

 
$
(14,303
)
 
$
362,980

 
(36,945
)
 
$
(717,678
)
 
$
393,711

Net loss
 
—

 
—

 
—

 
—

 
(152,670
)
 
—

 
—

 
(152,670
)
Cumulative effect of ASU 2016-16 (1)
 
—

 
—

 
—

 
—

 
100,950

 
—

 
—

 
100,950

Other comprehensive loss
 
—

 
—

 
—

 
(1,731
)
 
—

 
—

 
—

 
(1,731
)
Stock-based compensation
 
—

 
—

 
4,307

 
—

 
—

 
—

 
—

 
4,307

Stock-based awards exercised or vested
 
—

 
—

 
(9,945
)
 
—

 
(1,029
)
 
627

 
12,185

 
1,211

Acquisition of treasury shares
 
—

 
—

 
—

 
—

 
—

 
(200
)
 
(4,560
)
 
(4,560
)
Repurchase and retirement of common shares
 
(4,173
)
 
(42
)
 
(2,503
)
 
—

 
(94,560
)
 
—

 
—

 
(97,105
)
Cash dividends declared - $0.25 per share
 
—

 
—

 
—

 
—

 
(52,104
)
 
—

 
—

 
(52,104
)
Balances as of July 31, 2018
 
242,026

 
$
2,420

 
$
752,109

 
$
(16,034
)
 
$
163,567

 
(36,518
)
 
$
(710,053
)
 
$
192,009

Net loss
 
—

 
—

 
—

 
—

 
(176,276
)
 
—

 
—

 
(176,276
)
Other comprehensive loss
 
—

 
—

 
—

 
(2,846
)
 
—

 
—

 
—

 
(2,846
)
Stock-based compensation
 
—

 
—

 
7,352

 
—

 
—

 
—

 
—

 
7,352

Stock-based awards exercised or vested
 
—

 
—

 
(226
)
 
—

 
(202
)
 
35

 
675

 
247

Acquisition of treasury shares
 
—

 
—

 
—

 
—

 
—

 
(16
)
 
(431
)
 
(431
)
Cash dividends declared - $0.25 per share
 
—

 
—

 
—

 
—

 
(51,380
)
 
—

 
—

 
(51,380
)
Balances as of October 31, 2018
 
242,026

 
$
2,420

 
$
759,235

 
$
(18,880
)
 
$
(64,291
)
 
(36,499
)
 
$
(709,809
)
 
$
(31,325
)
Net loss
 
—

 
—

 
—

 
—

 
(126,454
)
 
—

 
—

 
(126,454
)
Other comprehensive income
 
—

 
—

 
—

 
1,238

 
—

 
—

 
—

 
1,238

Stock-based compensation
 
—

 
—

 
6,067

 
—

 
—

 
—

 
—

 
6,067

Stock-based awards exercised or vested
 
—

 
—

 
(5
)
 
—

 
(169
)
 
41

 
796

 
622

Acquisition of treasury shares
 
—

 
—

 
—

 
—

 
—

 
(2
)
 
(56
)
 
(56
)
Repurchase and retirement of common shares
 
(525
)
 
(5
)
 
(315
)
 
—

 
(11,981
)
 
—

 
—

 
(12,301
)
Cash dividends declared - $0.25 per share
 
—

 
—

 
—

 
—

 
(51,382
)
 
—

 
—

 
(51,382
)
Balances as of January 31, 2019
 
241,501

 
$
2,415

 
$
764,982

 
$
(17,642
)
 
$
(254,277
)
 
(36,460
)
 
$
(709,069
)
 
$
(213,591
)
Net income
 
—

 
—

 
—

 
—

 
877,909

 
—

 
—

 
877,909

Other comprehensive loss
 
—

 
—

 
—

 
(2,774
)
 
—

 
—

 
—

 
(2,774
)
Stock-based compensation
 
—

 
—

 
5,784

 
—

 
—

 
—

 
—

 
5,784

Stock-based awards exercised or vested
 
—

 
—

 
(1,231
)
 
—

 
(150
)
 
84

 
1,634

 
253

Acquisition of treasury shares
 
—

 
—

 
—

 
—

 
—

 
(1
)
 
(27
)
 
(27
)
Repurchase and retirement of common shares
 
(3,164
)
 
(32
)
 
(1,899
)
 
—

 
(73,501
)
 
—

 
—

 
(75,432
)
Cash dividends declared - $0.25 per share
 
—

 
—

 
—

 
—

 
(50,595
)
 
—

 
—

 
(50,595
)
Balances as of April 30, 2019
 
238,337

 
$
2,383

 
$
767,636

 
$
(20,416
)
 
$
499,386

 
(36,377
)
 
$
(707,462
)
 
$
541,527

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
ASU 2016-16 was effective on May 1, 2018 and we adopted using the modified retrospective transition method. We recognized a $101.0 million cumulative effect adjustment to increase the opening balance of retained earnings and increase deferred tax assets resulting from intra-entity transfers of intellectual property in fiscal year 2018.

H&R Block, Inc. | Q1 FY2020 Form 10-Q
5
Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                  (unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION – The consolidated balance sheets as of July 31, 2019 and 2018, the consolidated statements of operations and comprehensive loss for the three months ended July 31, 2019 and 2018, the consolidated statements of cash flows for the three months ended July 31, 2019 and 2018, and the consolidated statements of stockholders' equity for the three months ended July 31, 2019 and the quarterly periods within the fiscal year ended April 30, 2019 have been prepared by the Company, without audit. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations, and cash flows as of July 31, 2019 and 2018 and for all periods presented, have been made.
"H&R Block," "the Company," "we," "our," and "us" are used interchangeably to refer to H&R Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our April 30, 2019 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of April 30, 2019 or for the year then ended are derived from our Annual Report on Form 10-K.
MANAGEMENT ESTIMATES – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions and judgments are applied in the evaluation of contingent losses arising from our discontinued mortgage business, contingent losses associated with pending claims and litigation, reserves for uncertain tax positions, and related matters. Estimates have been prepared based on the best information available as of each balance sheet date. As such, actual results could differ materially from those estimates.
SEASONALITY OF BUSINESS – Our operating revenues are seasonal in nature with peak revenues typically occurring in the months of February through April. Therefore, results for interim periods are not indicative of results to be expected for the full year.
DISCONTINUED OPERATIONS – Our discontinued operations include the results of operations of Sand Canyon Corporation, previously known as Option One Mortgage Corporation (including its subsidiaries, collectively, SCC), which exited its mortgage business in fiscal year 2008. See notes 9 and 11 for additional information on litigation, claims, and other loss contingencies related to our discontinued operations.
WAVE ACQUISITION – On June 28, 2019, we completed our acquisition of Wave HQ Inc. (formerly known as Wave Financial Inc.) and its subsidiaries (collectively, "Wave") for $407.0 million, subject to customary post-closing adjustments for working capital. The acquisition was funded with available cash. Wave is a provider of software solutions and related services specifically designed to help small business owners manage their finances. Major revenue sources include fees earned by providing payment processing, payroll services, and bookkeeping services. We believe the acquisition of Wave enhances our position in the small business market.
Included in the transaction price is $11.4 million of amounts held in escrow, of which $8.2 million will be treated as compensation expense over the next two years as certain key employees are required to remain employees to receive payment. Amounts held in escrow are included in restricted cash in the consolidated balance sheet at July 31, 2019. Additionally, key employees are participating in a management incentive program consisting of cash performance incentives and stock-based compensation which will be earned over the next three years and is not considered part of the purchase price.
Given the proximity of the closing of the transaction to the end of the current reporting period, the valuation of identified intangible assets is still in progress and the allocation of the purchase price between intangible assets and goodwill is incomplete. As of July 31, 2019, the Company has recorded a provisional estimate of identified intangible assets and goodwill. The Company expects to finalize the valuation and useful life determination for the acquired intangible assets and the related income tax impacts during the fiscal year, and therefore, the purchase price allocation is subject to change.

6
Q1 FY2020 Form 10-Q | H&R Block, Inc.
Table of Contents

The assets acquired, net of liabilities assumed on the acquisition date, and the provisional estimates of identified intangible assets and goodwill, are as follows:
(in 000s)
 
Assets acquired and liabilities assumed, net
 
$
4,495

Cash held in escrow
 
3,212

Identifiable intangible assets
 
87,760

Goodwill
 
303,359

Total identifiable assets and goodwill
 
$
398,826

 
 
 

Revenues of $3.6 million and pretax losses of $5.3 million were recognized by Wave from the period of June 28, 2019 through July 31, 2019, which are included in our consolidated statement of operations for the three-month period ended July 31, 2019. Had we acquired Wave as of May 1, 2018, we would have reported consolidated revenues of $156.9 million and $152.0 million for the three months ended July 31, 2019 and 2018, respectively, and consolidated pretax losses from continuing operations of $218.1 million and $211.2 million for the three months ended July 31, 2019 and 2018, respectively. Pro-forma adjustments primarily include provisional estimates of amortization of intangible assets and certain compensation expenses.
NEW ACCOUNTING PRONOUNCEMENTS – 
Leases. In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases” (ASU 2016-02), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for leases previously classified as operating leases. We adopted this guidance and related amendments as of May 1, 2019 using the alternative transition method, which allows companies the option of using the effective date of the new standard as the initial application date (at the beginning of the period in which it adopted, rather than at the beginning of the earliest comparative period).
At July 31, 2019, the Company has recognized $486.1 million and $479.2 million of operating lease right-of-use (ROU) assets and operating lease liabilities, respectively. As part of adopting the standard, pre-existing liabilities for deferred rent and various lease incentives were reclassified as a component of the lease assets. We elected the package of practical expedients which allows us to not reassess historical lease classification, initial direct costs or contracts related to leases. For leases with an initial term of twelve months or less we have elected to only recognize retail office leases on our balance sheet. We elected the practical expedient to account for lease and non-lease components (such as common area maintenance, utilities, insurance and taxes) as a single lease component for all classes of underlying assets. We also elected the practical expedient to not reassess whether land easement contracts meet the definition of a lease. We did not elect the practical expedient of hindsight when determining the lease term of existing contracts at the effective date.
The adoption of the new standard did not materially affect our consolidated statement of operations or cash flows. See note 10, Leases, for additional information.
NOTE 2: REVENUE RECOGNITION
The majority of our revenues are from our U.S. Tax Services business. The following table disaggregates our U.S. Tax Services revenues by major service line, with revenues from our international Tax Services businesses and from Wave included as separate lines:

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(in 000s)

Three months ended July 31,
 
2019
 
2018
Revenues:
 
 
 
 
U.S. assisted tax preparation
 
$
32,992

 
$
31,104

U.S. royalties
 
6,859

 
7,571

U.S. DIY tax preparation
 
3,410

 
2,781

International
 
40,581

 
39,179

Refund Transfers
 
1,509

 
1,424

Emerald Card®
 
13,855

 
14,246

Peace of Mind® Extended Service Plan
 
32,837

 
36,577

Tax Identity Shield®
 
4,522

 
4,741

Interest and fee income on Emerald AdvanceTM
 
554

 
447

Wave
 
3,625

 
—

Other
 
9,618

 
7,113

Total revenues
 
$
150,362

 
$
145,183

 
 
 
 
 

Wave revenues primarily consist of fees received to process payment transactions and are generally calculated as a percentage of the transaction amounts processed. Revenues are recognized upon authorization of the transaction.
Changes in the balances of deferred revenue and wages for Peace of Mind® Extended Service Plan (POM) are as follows:
 
 
 
 
 
 
 
 
(in 000s)

POM
 
Deferred Revenue
 
Deferred Wages
Three months ended July 31,
 
2019

 
2018

 
2019

 
2018

Balance, beginning of the period
 
$
212,511

 
$
218,274

 
$
27,306

 
$
32,683

Amounts deferred
 
1,723

 
1,392

 
23

 
62

Amounts recognized on previous deferrals
 
(38,212
)
 
(40,857
)
 
(5,324
)
 
(5,917
)
Balance, end of the period
 
$
176,022

 
$
178,809

 
$
22,005

 
$
26,828

 
 
 
 
 
 
 
 
 

As of July 31, 2019, deferred revenue related to POM was $176.0 million. We expect that $110.7 million will be recognized over the next twelve months, while the remaining balance will be recognized over the following sixty months.
As of July 31, 2019 and 2018, Tax Identity Shield® (TIS) deferred revenue was $25.4 million and $31.9 million, respectively. Deferred revenue related to TIS was $29.7 million and $36.4 million at April 30, 2019 and 2018, respectively. All deferred revenue related to TIS will be recognized within the next nine months.
NOTE 3: LOSS PER SHARE AND STOCKHOLDERS' EQUITY
LOSS PER SHARE – Basic and diluted loss per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income or loss from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period. The dilutive effect of potential common shares is included in diluted earnings per share except in those periods with a loss from continuing operations. Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 3.7 million shares for the three months ended July 31, 2019, and 3.4 million shares for the three months ended July 31, 2018, as the effect would be antidilutive due to the net loss from continuing operations during those periods.

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The computations of basic and diluted loss per share from continuing operations are as follows:
(in 000s, except per share amounts)
 
Three months ended July 31,
 
2019

 
2018

Net loss from continuing operations attributable to shareholders
 
$
(145,724
)
 
$
(148,797
)
Amounts allocated to participating securities
 
(149
)
 
(142
)
Net loss from continuing operations attributable to common shareholders
 
$
(145,873
)
 
$
(148,939
)
 
 
 
 
 
Basic weighted average common shares
 
202,037

 
207,673

Potential dilutive shares
 
—

 
—

Dilutive weighted average common shares
 
202,037

 
207,673

 
 
 
 
 
Loss per share from continuing operations attributable to common shareholders:
Basic
 
$
(0.72
)
 
$
(0.72
)
Diluted
 
(0.72
)
 
(0.72
)
 
 
 
 
 

The weighted average shares outstanding for the three months ended July 31, 2019 decreased to 202.0 million from 207.7 million for the three months ended July 31, 2018. The decrease is due to share repurchases completed in the current quarter and in the prior year.
STOCK-BASED COMPENSATION – During the three months ended July 31, 2019, we also acquired 0.3 million shares of our common stock at an aggregate cost of $9.2 million, which represent shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. During the three months ended July 31, 2018, we acquired 0.2 million shares at an aggregate cost of $4.6 million for similar purposes.
During the three months ended July 31, 2019 and 2018, we issued 0.9 million and 0.6 million shares of common stock, respectively, due to the vesting or exercise of stock-based awards.
During the three months ended July 31, 2019, we granted equity awards equivalent to 1.3 million shares under our stock-based compensation plans, consisting primarily of nonvested units. Stock-based compensation expense of our continuing operations totaled $6.7 million and $4.4 million for the three months ended July 31, 2019 and 2018, respectively. As of July 31, 2019, unrecognized compensation cost for stock options totaled $0.5 million, and for nonvested shares and units totaled $55.9 million.
NOTE 4: RECEIVABLES
Receivables, net of their related allowance, consist of the following:
(in 000s)
 
As of
 
July 31, 2019
 
July 31, 2018
 
April 30, 2019
 
 
Short-term
 
Long-term
 
Short-term
 
Long-term
 
Short-term
 
Long-term
Loans to franchisees
 
$
12,301

 
$
45,542

 
$
28,250

 
$
35,776

 
$
22,427

 
$
35,325

Receivables for U.S. assisted and DIY tax preparation and related fees
 
19,686

 
3,716

 
9,084

 
5,503

 
34,284

 
3,716

H&R Block Instant RefundTM receivables
 
880

 
1,780

 
1,306

 
2,031

 
37,319

 
1,701

H&R Block Emerald AdvanceTM lines of credit
 
8,136

 
10,249

 
7,694

 
11,800

 
8,546

 
12,418

Software receivables from retailers
 
1,395

 
—

 
3,372

 
—

 
9,354

 
—

Royalties and other receivables from franchisees
 
7,834

 
99

 
4,257

 
—

 
11,888

 
97

Wave payment processing receivables
 
3,041

 
—

 
—

 
—

 
—

 
—

Other
 
22,855

 
2,251

 
16,613

 
3,665

 
15,147

 
2,382

Total
 
$
76,128

 
$
63,637

 
$
70,576

 
$
58,775

 
$
138,965

 
$
55,639

 
 
 
 
 
 
 
 
 
 
 
 
 


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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 consist of term loans made primarily to finance the purchase of franchises and revolving lines of credit primarily for the purpose of funding off-season working capital needs. As of July 31, 2019 and 2018, loans with a principal balance of $2.0 million and $1.2 million, respectively, were more than 90 days past due. We had no loans to franchisees on non-accrual status.
H&R BLOCK INSTANT REFUNDTM PROGRAM – H&R Block Instant RefundTM (formerly Instant Cash Back®) amounts are generally received from the Canada Revenue Agency (CRA) within 60 days of filing the client's return, with the remaining balance collectible from the client.
We review the credit quality of our Instant Refund receivables based on pools, which are segregated by the year of origination, with older years being deemed more unlikely to be repaid. Current balances and amounts on non-accrual status and classified as impaired, or more than 60 days past due, by year of origination, as of July 31, 2019 are as follows:
 
 
 
 
(in 000s)

Year of Origination
 
Current Balance
 
Non-Accrual
 
 
 
 
 
2019
 
$
4,431

 
$
2,795

2018 and prior
 
455

 
455

 
 
4,886

 
$
3,250

Allowance
 
(2,226
)
 
 
Net balance
 
$
2,660

 
 
 
 
 
 
 

H&R BLOCK EMERALD ADVANCETM LINES OF CREDIT – We review the credit quality of our purchased participation interests in Emerald AdvanceTM (EA) receivables based on pools, which are segregated by the year of origination, with older years being deemed more unlikely to be repaid. Balances and amounts on non-accrual status and classified as impaired, or more than 60 days past due, as of July 31, 2019, by year of origination, are as follows:
(in 000s)
 
Year of origination:
 
Balance

 
Non-Accrual

2019
 
$
25,002

 
$
25,002

2018 and prior
 
6,941

 
6,941

Revolving loans
 
13,977

 
11,888

 
 
45,920

 
$
43,831

Allowance
 
(27,535
)
 
 
Net balance
 
$
18,385

 
 
 
 
 
 
 

ALLOWANCE FOR DOUBTFUL ACCOUNTS – Activity in the allowance for doubtful accounts for our EA and all other short-term and long-term receivables for the three months ended July 31, 2019 and 2018 is as follows:
(in 000s)
 
 
 
EAs

 
All Other

 
Total

Balances as of April 30, 2019
 
$
27,535

 
$
53,938

 
$
81,473

Provision
 
—

 
552

 
552

Charge-offs, recoveries and other
 
—

 
(322
)
 
(322
)
Balances as of July 31, 2019
 
$
27,535

 
$
54,168

 
$
81,703

 
 
 
 
 
 
 
Balances as of April 30, 2018
 
$
26,622

 
$
55,191

 
$
81,813

Provision
 
—

 
1,617

 
1,617

Charge-offs, recoveries and other
 
—

 
(4,630
)
 
(4,630
)
Balances as of July 31, 2018
 
$
26,622

 
$
52,178

 
$
78,800

 
 
 
 
 
 
 


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NOTE 5: GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the three months ended July 31, 2019 and 2018 are as follows:
(in 000s)
 
 
 
Goodwill

 
Accumulated Impairment Losses

 
Net

Balances as of April 30, 2019
 
$
552,234

 
$
(32,297
)
 
$
519,937

Acquisition of Wave (1)
 
303,359

 
$
—

 
303,359

Other Acquisitions
 
1,083

 
—

 
1,083

Disposals and foreign currency changes, net
 
(3,101
)
 
—

 
(3,101
)
Impairments
 
—

 
—

 
—

Balances as of July 31, 2019
 
$
853,575

 
$
(32,297
)
 
$
821,278

 
 
 
 
 
 
 
Balances as of April 30, 2018
 
$
540,168

 
$
(32,297
)
 
$
507,871

Acquisitions
 
651

 
—

 
651

Disposals and foreign currency changes, net
 
(581
)
 
—

 
(581
)
Impairments
 
—

 
—

 
—

Balances as of July 31, 2018
 
$
540,238

 
$
(32,297
)
 
$
507,941

 
 
 
 
 
 
 

(1)    The fair value of the acquired goodwill related to our acquisition of Wave is provisional pending the final purchase price allocation.
We test goodwill for impairment annually in our fourth quarter, or more frequently if events occur or circumstances change which would, more likely than not, reduce the fair value of a reporting unit below its carrying value.

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

 
Accumulated
Amortization

 
Net

As of July 31, 2019: (1)
 
 
 
 
 
 
Reacquired franchise rights
 
$
350,679

 
$
(141,954
)
 
$
208,725

Customer relationships
 
300,156

 
(203,283
)
 
96,873

Internally-developed software
 
144,768

 
(111,892
)
 
32,876

Noncompete agreements
 
40,358

 
(31,980
)
 
8,378

Franchise agreements
 
19,201

 
(13,654
)
 
5,547

Purchased technology
 
104,700

 
(45,166
)
 
59,534

Trade name
 
5,800

 
(48
)
 
5,752

Acquired assets pending final allocation (2)
 
1,706

 
—

 
1,706

 
 
$
967,368

 
$
(547,977
)
 
$
419,391

As of July 31, 2018:
 
 
 
 
 
 
Reacquired franchise rights
 
$
339,747

 
$
(119,386
)
 
$
220,361

Customer relationships
 
256,858

 
(171,542
)
 
85,316

Internally-developed software
 
137,914

 
(114,622
)
 
23,292

Noncompete agreements
 
32,888

 
(30,144
)
 
2,744

Franchise agreements
 
19,201

 
(12,374
)
 
6,827

Purchased technology
 
54,700

 
(39,210
)
 
15,490

Acquired assets pending final allocation (2)
 
801

 
—

 
801

 
 
$
842,109

 
$
(487,278
)
 
$
354,831

As of April 30, 2019:
 
 
 
 
 
 
Reacquired franchise rights
 
$
350,410

 
$
(136,345
)
 
$
214,065

Customer relationships
 
274,838

 
(195,174
)
 
79,664

Internally-developed software
 
139,239

 
(109,885
)
 
29,354

Noncompete agreements
 
33,376

 
(31,446
)
 
1,930

Franchise agreements
 
19,201

 
(13,334
)
 
5,867

Purchased technology
 
54,700

 
(43,518
)
 
11,182

Acquired assets pending final allocation (2)
 
431

 
—

 
431

 
 
$
872,195

 
$
(529,702
)
 
$
342,493

 
 
 
 
 
 
 

(1)    The fair value of the acquired intangible assets related to our acquisition of Wave is provisional pending the final purchase price allocation.
(2)    Represents franchisee and competitor business acquisitions for which final purchase price allocations have not yet been determined.
We made payments to acquire franchisee and competitor businesses totaling $1.4 million during the three months ended July 31, 2019 and 2018. These payments do not include the payments made to acquire Wave as discussed in note 1.
Amortization of intangible assets for the three months ended July 31, 2019 and 2018 was $18.2 million and $18.1 million, respectively. Estimated amortization of intangible assets, excluding provisional amounts related to the Wave acquisition, for fiscal years 2020, 2021, 2022, 2023 and 2024 is $62.1 million, $45.4 million, $32.1 million, $18.5 million and $11.8 million, respectively.

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NOTE 6: LONG-TERM DEBT
The components of long-term debt are as follows:
 
 
 
 
 
 
(in 000s)

As of
 
July 31, 2019

 
July 31, 2018

 
April 30, 2019

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

 
$
650,000

 
$
650,000

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

 
500,000

 
500,000

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

 
350,000

 
350,000

Capital lease obligation
 
—

 
5,376

 
—

Debt issuance costs and discounts
 
(6,711
)
 
(9,332
)
 
(7,371
)
 
 
1,493,289

 
1,496,044

 
1,492,629

Less: Current portion
 
—

 
(1,038
)
 
—

 
 
$
1,493,289

 
$
1,495,006

 
$
1,492,629

 
 
 
 
 
 
 

UNSECURED COMMITTED LINE OF CREDIT – Our unsecured committed line of credit (CLOC) provides for an unsecured senior revolving credit facility in the aggregate principal amount of $2.0 billion, which includes a $200.0 million sublimit for swingline loans and a $50.0 million sublimit for standby letters of credit. We may request increases in the aggregate principal amount of the revolving credit facility of up to $500.0 million, subject to obtaining commitments from lenders and meeting certain other conditions. The CLOC will mature on September 21, 2023, unless extended pursuant to the terms of the CLOC, at which time all outstanding amounts thereunder will be due and payable. Our CLOC includes an annual facility fee, which will vary depending on our then current credit ratings.
The CLOC is subject to various conditions, triggers, events or occurrences that could result in earlier termination and contains customary representations, warranties, covenants and events of default, including, without limitation: (1) a covenant requiring the Company to maintain a debt-to-EBITDA ratio calculated on a consolidated basis of no greater than (a) 3.50 to 1.00 as of the last day of each fiscal quarter ending on April 30, July 31, and October 31 of each year and (b) 4.50 to 1.00 as of the last day of each fiscal quarter ending on January 31 of each year; (2) a covenant requiring us to maintain an interest coverage ratio (EBITDA-to-interest expense) calculated on a consolidated basis of not less than 2.50 to 1.00 as of the last date of any fiscal quarter; and (3) covenants restricting our ability to incur certain additional debt, incur liens, merge or consolidate with other companies, sell or dispose of assets (including equity interests), liquidate or dissolve, engage in certain transactions with affiliates or enter into certain restrictive agreements. The CLOC includes provisions for an equity cure which could potentially allow us to independently cure certain defaults. Proceeds under the CLOC may be used for working capital needs or for other general corporate purposes. We were in compliance with these requirements as of July 31, 2019.
We had no outstanding balance under the CLOC as of July 31, 2019, and amounts available to borrow were limited by the debt-to-EBITDA covenant to approximately $1.1 billion as of July 31, 2019.
The estimated fair value of our long-term debt as of July 31, 2019 and 2018 and April 30, 2019 totaled $1.6 billion, $1.5 billion and $1.6 billion, respectively.
NOTE 7: INCOME TAXES
We file a consolidated federal income tax return in the U.S. with the IRS and file tax returns in various state, local, and foreign jurisdictions. Tax returns are typically examined and either settled upon completion of the examination or through the appeals process. Our U.S. federal income tax returns for 2015 and 2017 remain open for examination. Our U.S. federal income tax returns for 2016 along with 2014 and all prior periods are closed. With respect to state and local jurisdictions and countries outside of the U.S., 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.
We had gross unrecognized tax benefits of $179.2 million, $204.5 million and $185.1 million as of July 31, 2019 and 2018 and April 30, 2019, respectively. The gross unrecognized tax benefits decreased $5.9 million and increased $18.4 million during the three months ended July 31, 2019 and 2018, respectively. The decrease in unrecognized tax benefits during the three months ending July 31, 2019 is related to favorable audit settlements as well as state statute

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of limitation periods ending in the current quarter. We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $24.3 million within the next twelve months. The anticipated decrease is due to the expiration of statutes of limitations and anticipated closure of various state tax matters currently under examination. For such matters where a change in the balance of unrecognized tax benefits is not yet deemed reasonably possible, no estimate has been included. The portion of unrecognized benefits expected to be cash settled within the next twelve months amounts to $6.5 million and is included in accrued income taxes on our consolidated balance sheet.
Consistent with prior years, our pretax loss for the three months ended July 31, 2019 is expected to be offset by income in the fourth quarter due to the established pattern of seasonality in our primary business operations. As such, management has determined that it is more-likely-than-not that realization of tax benefits recorded in our financial statements will occur within our fiscal year. The amount of tax benefit recorded for the three months ended July 31, 2019 reflects management’s estimate of the annual effective tax rate applied to the year-to-date loss from continuing operations adjusted for the tax impact of items discrete to the quarter.
A discrete income tax benefit of $8.3 million was recorded in the three months ended July 31, 2019 compared to a discrete tax benefit of $0.5 million in the same period of the prior year. The discrete tax benefit recorded in the current period primarily resulted from audit settlements in various state jurisdictions and valuation allowance changes related to utilization of foreign losses.
Our effective tax rate from continuing operations, including the effects of discrete income tax items, was 29.6% and 25.1% for the three months ended July 31, 2019 and 2018, respectively. Discrete items increased the effective tax rate for the three months ended July 31, 2019 and 2018 by 4.0% and 0.2%, respectively. Due to the loss in both periods, a discrete tax benefit in either period increases the tax rate while an item of discrete tax expense decreases the tax rate. The impact of discrete tax items combined with the seasonal nature of our business can cause the effective tax rate through our first quarter to be significantly different than the rate for our full fiscal year.
NOTE 8: OTHER INCOME AND OTHER EXPENSES
The following table shows the components of other income (expense), net:
(in 000s)
 
Three months ended July 31,
 
2019

 
2018

Interest income
 
$
8,026

 
$
4,497

Foreign currency gains (losses), net
 
9

 
(3
)
Other, net
 
1,088

 
48

 
 
$
9,123

 
$
4,542

 
 
 
 
 

NOTE 9: COMMITMENTS AND CONTINGENCIES
Assisted tax returns, as well as services provided under Tax Pro GoSM and Tax Pro ReviewSM, are covered by our 100% accuracy guarantee, whereby we will reimburse a client for penalties and interest attributable to an H&R Block error on a return. DIY tax returns are covered by our 100% accuracy guarantee, whereby we will reimburse a client up to a maximum of $10,000 if our software makes an arithmetic error that results in payment of penalties and/or interest to the IRS that a client would otherwise not have been required to pay. Our liability related to estimated losses under the 100% accuracy guarantee was $8.8 million, $8.6 million and $9.9 million as of July 31, 2019 and 2018 and April 30, 2019, respectively. The short-term and long-term portions of this liability are included in deferred revenue and other liabilities in the consolidated balance sheets.
Our liability related to acquisitions for estimated contingent consideration was $9.6 million, $10.6 million and $11.1 million as of July 31, 2019 and 2018 and April 30, 2019, respectively, 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.

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We have contractual commitments to fund certain franchises with approved revolving lines of credit. Our total obligation under these lines of credit was $6.0 million at July 31, 2019, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $4.2 million.
LOSS CONTINGENCIES PERTAINING TO DISCONTINUED MORTGAGE OPERATIONS – SCC ceased originating mortgage loans in December 2007 and, in April 2008, sold its servicing assets and discontinued its remaining operations. Mortgage loans originated by SCC were sold either as whole loans to single third-party buyers, who generally securitized such loans, or in the form of residential mortgage-backed securities (RMBSs). In connection with the sale of loans and/or RMBSs, SCC made certain representations and warranties. Claims under these representations and warranties together with any settlement arrangements related to these losses are collectively referred to as "representation and warranty claims."
SCC accrues a liability for losses related to representation and warranty claims when those losses are believed to be both probable and reasonably estimable. SCC’s loss estimate is based on the best information currently available, management judgment, developments in relevant case law, and the terms of bulk settlements. In periods when a liability is accrued for such loss contingencies, the liability is included in deferred revenue and other current liabilities on the consolidated balance sheets. SCC had no liability accrued for these losses as of July 31, 2019 and 2018 or April 30, 2019.
See note 11, which addresses contingent losses that may be incurred with respect to various indemnification or contribution claims by underwriters, depositors, and securitization trustees in securitization transactions in which SCC participated.
NOTE 10: LEASES
As discussed in note 1, we adopted ASU 2016-02 on May 1, 2019. The majority of our lease portfolio consists of retail office space in the U.S., Canada, and Australia. The contract terms for these retail offices generally are from May 1 to April 30. We record operating lease right of use (ROU) assets and operating lease liabilities based on the discounted future minimum lease payments over the term of the lease. We generally do not include renewal options in the term of the lease. As the rates implicit in our leases are not readily determinable, we used our incremental borrowing rate based on the lease term and geographic location in calculating the discounted future minimum lease payments.
We recognize lease expenses for our operating leases on a straight-line basis. For lease payments that are subject to adjustments based on indexes or rates, the most current index or rate adjustments were included in the measurement of our ROU assets and lease liabilities at adoption. Variable lease costs, including non-lease components (such as common area maintenance, utilities, insurance and taxes) and certain index-based changes in lease payments, are expensed as incurred.
For the three months ended July 31, 2019, our lease costs consist of the following:
 
 
(in 000s)

Operating lease costs
 
$
60,171

Variable lease costs
 
14,761

Subrental income
 
(349
)
Total lease costs
 
$
74,583

 
 
 


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Other information related to operating leases for the three months ended July 31, 2019 is as follows:
 
 
(dollars in 000s)

Cash paid for operating lease costs
 
$
58,881

Operating lease right of use assets obtained in exchange for operating lease liabilities (1)
 
$
157,216

Weighted-average remaining operating lease term (years)
 
3

Weighted-average operating lease discount rate
 
3.5
%
 
 
 
(1)    This balance excludes the initial impacts of the adoption of ASU 2016-02.
Aggregate operating lease maturities as of July 31, 2019 are as follows:
 
 
(in 000s)

Remainder of 2020
 
$
158,893

2021
 
164,760

2022
 
104,983

2023
 
50,061

2024
 
20,145

2025 and thereafter
 
8,701

Total future undiscounted operating lease payments
 
507,543

Less imputed interest
 
(28,370
)
Total operating lease liabilities
 
$
479,173

 
 
 

As disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019, our future undiscounted operating lease commitments under the previous accounting standard was $573.3 million.
NOTE 11: 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. 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

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make other expenditures or accrue liabilities in amounts that could not be reasonably estimated as of July 31, 2019. While the potential future liabilities could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known, we do not believe any such liabilities are likely to have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows. As of July 31, 2019 and 2018 and April 30, 2019, our total accrued liabilities were $1.6 million, $2.8 million and $1.9 million, respectively.
Our estimate of the 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 liability has not been accrued but we believe a loss is reasonably possible. 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.
Matters for which we are not currently able to estimate the reasonably possible loss or range of loss are not included in this range. 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.
The estimated range of reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, as well as known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. As of July 31, 2019, we believe the estimate of the aggregate range of reasonably possible losses in excess of amounts accrued, where the range of loss can be estimated, is not material.
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 OR OTHER LOSS CONTINGENCIES PERTAINING TO CONTINUING OPERATIONS –
Free File Litigation. On May 6, 2019, the Los Angeles City Attorney filed a lawsuit on behalf of the People of the State of California in the Superior Court of California, County of Los Angeles (Case No. 19STCV15742) styled The People of the State of California v. H&R Block, Inc., et al. The complaint alleges that H&R Block, Inc. and HRB Digital LLC engaged in unfair, fraudulent and deceptive business practices and acts in connection with the IRS Free File Program in violation of the California Unfair Competition Law, Business and Professions Code §§17200 et seq. The complaint seeks injunctive relief, restitution of monies paid to H&R Block by persons in the State of California who were eligible to file under the IRS Free File Program for the time period starting 4 years prior to the date of the filing of the complaint, pre-judgment interest, civil penalties and costs. The case was removed to the United States District Court for the Central District of California on June 6, 2019 (Case No. 2:19-cv-04933-ODW-AS). A motion to remand is pending. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter.
On May 17, 2019, a putative class action complaint was filed against H&R Block, Inc., HRB Tax Group, Inc. and HRB Digital LLC in the Superior Court of the State of California, County of San Francisco (Case No. CGC-19576093) styled Olosoni and Snarr v. H&R Block, Inc., et al. The case was removed to the United States District Court for the Northern District of California on June 21, 2019 (Case No. 3:19-cv-03610-SK). The plaintiffs filed a first amended complaint on August 9, 2019, dropping H&R Block, Inc. from the case. In their amended complaint, the plaintiffs seek to represent classes of all persons, between May 17, 2015 and the present, who (1) paid to file one or more federal tax returns through H&R Block’s internet-based filing system, (2) were eligible to file those tax returns for free through the H&R

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Block Free File offer of the IRS Free File Program, and (3) resided in and were citizens of California at the time of the payments. The plaintiffs generally allege unlawful, unfair, fraudulent and deceptive business practices and acts in connection with the IRS Free File Program in violation of the California Consumers Legal Remedies Act, California Civil Code §§1750, et seq., False Advertising, Business and Professions Code §§17500, et seq., and Unfair Competition Law, Business and Professions Code §§17200 et seq. The plaintiffs seek declaratory and injunctive relief, restitution, compensatory damages, punitive damages, interest, attorneys’ fees and costs. We filed a motion to stay the proceedings based on the primary jurisdiction doctrine and a motion to compel arbitration, both of which remain pending. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter.
We have also received and are responding to certain governmental inquiries relating to the IRS Free File Program.
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 lawsuits, claims, and other loss contingencies 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 lawsuits, claims, and contingencies allege or may allege discriminatory or unfair and deceptive loan origination and servicing (including debt collection, foreclosure, and eviction) practices, other common law torts, rights to indemnification or contribution, breach of contract, violations of securities laws, and violations of a variety of federal statutes, including the Truth in Lending Act (TILA), Equal Credit Opportunity Act, Fair Housing Act, Real Estate Settlement Procedures Act (RESPA), Home Ownership & Equity Protection Act (HOEPA), as well as similar state statutes. It is difficult to predict either the likelihood of new matters being initiated or the outcome of existing matters. In many of these matters it is not possible to estimate a reasonably possible loss or range of loss due to, among other things, the inherent uncertainties involved in these matters, some of which are beyond the Company's control, and the indeterminate damages sought in some of these matters.
Mortgage loans originated by SCC were sold either as whole loans to single third-party buyers, who generally securitized such loans, or in the form of RMBSs. In connection with the sale of loans and/or RMBSs, SCC made certain representations and warranties. The statute of limitations for a contractual claim to enforce a representation and warranty obligation is generally six years or such shorter limitations period that may apply under the law of a state where the economic injury occurred. On June 11, 2015, the New York Court of Appeals, New York’s highest court, held in ACE Securities Corp. v. DB Structured Products, Inc., that the six-year statute of limitations under New York law starts to run at the time the representations and warranties are made, not the date when the repurchase demand was denied. This decision applies to claims and lawsuits brought against SCC where New York law governs. New York law governs many, though not all, of the RMBS transactions into which SCC entered. However, this decision would not affect representation and warranty claims and lawsuits SCC has received or may receive, for example, where the statute of limitations has been tolled by agreement or a suit was timely filed.
In response to the statute of limitations rulings in the ACE case and similar rulings in other state and federal courts, parties seeking to pursue representation and warranty claims or lawsuits have sought, and may in the future seek, to distinguish certain aspects of the ACE decision, pursue alternate legal theories of recovery, or assert claims against other contractual parties such as securitization trustees. For example, a 2016 ruling by a New York intermediate appellate court, followed by the federal district court in the second Homeward case described below, allowed a counterparty to pursue litigation on additional loans in the same trust even though only some of the loans complied with the condition precedent of timely pre-suit notice and opportunity to cure or repurchase. Additionally, plaintiffs in litigation to which SCC is not party have alleged breaches of an independent contractual duty to provide notice of material breaches of representations and warranties and pursued separate claims to which, they argue, the statute of limitations ruling in the ACE case does not apply. The impact on SCC from alternative legal theories seeking to avoid or distinguish the ACE decision, or judicial limitations on the ACE decision, is unclear. SCC has not accrued liabilities for claims not subject to a tolling arrangement or not relating back to timely filed litigation.

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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 trust was originally collateralized with approximately 7,500 loans. The plaintiff seeks specific performance of alleged repurchase obligations or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses, as well as a repurchase of all loans due to alleged misrepresentations by SCC as to itself and as to the loans' compliance with its underwriting standards and the value of underlying real estate. In response to a motion filed by SCC, the court dismissed the plaintiff's claims for breach of the duty to cure or repurchase, anticipatory breach, indemnity, and declaratory judgment. The case is proceeding on the remaining claims. Representatives of a holder of certificates in the trust filed a motion to intervene to add H&R Block, Inc. to the lawsuit and assert claims against H&R Block, Inc. based on alter ego, corporate veil-piercing, and agency law. On February 12, 2018, the court denied the motion to intervene. Discovery in the case is currently scheduled to close on September 30, 2019, with motions for summary judgment due on December 6, 2019. The parties have selected a mediator and are in the process of selecting a mediation date. A trial date has not yet been set. 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 trust was originally collateralized with approximately 7,500 loans. 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 the 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, followed by a motion for leave to appeal the ruling, both of which were denied. On October 6, 2016, the plaintiff filed its second amended complaint. In response to a motion filed by SCC, the court dismissed the plaintiff's claim for breach of one of the representations. The case is proceeding on the remaining claims. Representatives of a holder of certificates in the trust filed a motion to intervene to add H&R Block, Inc. to the lawsuit and assert claims against H&R Block, Inc. based on alter ego, corporate veil-piercing, and agency law. On February 12, 2018, the court denied the motion to intervene. The settlement payments that were made in fiscal year 2018 for representation and warranty claims are related to some of the loans in this case. Discovery in the case is currently scheduled to close on September 30, 2019, with motions for summary judgment due on December 6, 2019. The parties have selected a mediator and are in the process of selecting a mediation date. A trial date has not yet been set. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter.
Underwriters and depositors are, or have been, involved in multiple lawsuits related to securitization transactions in which SCC participated. These lawsuits allege or alleged a variety of claims, including violations of federal and state securities laws and common law fraud, based on alleged materially inaccurate or misleading disclosures. SCC has received notices of claims for indemnification relating to lawsuits to which underwriters or depositors are party. Based on information currently available to SCC, it believes that the 21 lawsuits in which notice of a claim has been made involve 39 securitization transactions with original investments of approximately $14 billion (of which the outstanding principal amount is approximately $3.0 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

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to any of these indemnification or contribution claims is probable, nor have we accrued a liability related to any of these claims.
Securitization trustees also are, or have been, involved in lawsuits related to securitization transactions in which SCC participated. Plaintiffs in these lawsuits allege, among other things, that originators, depositors, servicers, or other parties breached their representations and warranties or otherwise failed to fulfill their obligations, including that securitization trustees breached their contractual obligations, breached their fiduciary duties, or violated statutory requirements by failing to properly protect the certificate holders’ interests. SCC has received notices from securitization trustees of potential indemnification obligations, and may receive additional notices with respect to existing or new lawsuits or settlements of such lawsuits, in its capacity as originator, depositor, or servicer. We have not concluded that a loss related to any of these indemnification claims is probable, nor have we accrued a liability related to any of these claims.
If the amount that SCC is ultimately required to pay with respect to claims and litigation related to its past sales and securitizations of mortgage loans, together with payment of SCC's related administration and legal expense, exceeds SCC's net assets, the creditors of SCC, other potential claimants, or a bankruptcy trustee if SCC were to file or be forced into bankruptcy, may attempt to assert claims against us for payment of SCC's obligations. Claimants may also attempt to assert claims against or seek payment directly from the Company even if SCC's assets exceed its liabilities. SCC's principal assets, as of July 31, 2019, total approximately $283 million and consist 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.
OTHER – We are from time to time a party to litigation, claims and other loss contingencies not discussed herein arising out of our business operations. These matters may include actions by state attorneys general, other state regulators, federal regulators, individual plaintiffs, and cases in which plaintiffs seek to represent others who may be similarly situated.
While we cannot provide assurance that we will ultimately prevail in each instance, we believe the amount, if any, we are required to pay to discharge or settle these other matters will not have a material adverse impact on our business and our consolidated financial position, results of operations, and cash flows.
We believe we have meritorious defenses to the claims asserted in the various matters described in this note, and we intend to defend them vigorously. The amounts claimed in the matters are substantial, however, and there can be no assurances as to their outcomes. In the event of unfavorable outcomes, it could require modifications to our operations; in addition, the amounts that may be required to be paid to discharge or settle the matters could be substantial and could have a material adverse impact on our business and our consolidated financial position, results of operations, and cash flows.
NOTE 12: CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Block Financial LLC (Block Financial) is a 100% owned subsidiary of the Company. Block Financial is the Issuer and the Company is the full and unconditional Guarantor of the Senior Notes, our 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.

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 
(in 000s)

Three months ended July 31, 2019
 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 
Eliminations

 
Consolidated
H&R Block

Total revenues
 
$
—

 
$
16,534

 
$
137,059

 
$
(3,231
)
 
$
150,362

Cost of revenues
 
—

 
5,216

 
224,698

 
(522
)
 
229,392

Selling, general and administrative
 
—

 
2,897

 
115,948

 
(2,709
)
 
116,136

Total operating expenses
 
—

 
8,113

 
340,646

 
(3,231
)
 
345,528

Other income (expense), net
 
(151,752
)
 
10,497

 
13,868

 
136,510

 
9,123

Interest expense on external borrowings
 
—

 
(21,056
)
 
(15
)
 
—

 
(21,071
)
Loss from continuing operations before income tax benefit
 
(151,752
)
 
(2,138
)
 
(189,734
)
 
136,510

 
(207,114
)
Income tax benefit
 
(1,505
)
 
(178
)
 
(59,707
)
 
—

 
(61,390
)
Net loss from continuing operations
 
(150,247
)
 
(1,960
)
 
(130,027
)
 
136,510

 
(145,724
)
Net loss from discontinued operations
 
—

 
(4,523
)
 
—

 
—

 
(4,523
)
Net loss
 
(150,247
)
 
(6,483
)
 
(130,027
)
 
136,510

 
(150,247
)
Other comprehensive loss
 
(2,320
)
 
—

 
(2,320
)
 
2,320

 
(2,320
)
Comprehensive loss
 
$
(152,567
)
 
$
(6,483
)
 
$
(132,347
)
 
$
138,830

 
$
(152,567
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(in 000s)

Three months ended July 31, 2018
 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 
Eliminations

 
Consolidated
H&R Block

Total revenues
 
$
—

 
$
16,832

 
$
131,477

 
$
(3,126
)
 
$
145,183

Cost of revenues
 
—

 
5,033

 
217,118

 
(591
)
 
221,560

Selling, general and administrative
 
—

 
3,250

 
105,025

 
(2,535
)
 
105,740

Total operating expenses
 
—

 
8,283

 
322,143

 
(3,126
)
 
327,300

Other income (expense), net
 
(153,616
)
 
9,827

 
7,048

 
141,283

 
4,542

Interest expense on external borrowings
 
—

 
(21,123
)
 
(67
)
 
—

 
(21,190
)
Loss from continuing operations before income tax benefit
 
(153,616
)
 
(2,747
)
 
(183,685
)
 
141,283

 
(198,765
)
Income tax benefit
 
(946
)
 
(3,701
)
 
(45,321
)
 
—

 
(49,968
)
Net income (loss) from continuing operations
 
(152,670
)
 
954

 
(138,364
)
 
141,283

 
(148,797
)
Net loss from discontinued operations
 
—

 
(3,873
)
 
—

 
—

 
(3,873
)
Net loss
 
(152,670
)
 
(2,919
)
 
(138,364
)
 
141,283

 
(152,670
)
Other comprehensive loss
 
(1,731
)
 
—

 
(1,731
)
 
1,731

 
(1,731
)
Comprehensive loss
 
$
(154,401
)
 
$
(2,919
)
 
$
(140,095
)
 
$
143,014

 
$
(154,401
)
 
 
 
 
 
 
 
 
 
 
 



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CONDENSED CONSOLIDATING BALANCE SHEETS
 
(in 000s)

As of July 31, 2019
 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 
Eliminations

 
Consolidated
H&R Block

Cash & cash equivalents
 
$
—

 
$
4,641

 
$
603,027

 
$
—

 
$
607,668

Cash & cash equivalents - restricted
 
—

 
—

 
157,786

 
—

 
157,786

Receivables, net
 
—

 
26,392

 
49,736

 
—

 
76,128

Prepaid expenses and other current assets
 
2,811

 
1,682

 
100,630

 
—

 
105,123

Total current assets
 
2,811

 
32,715

 
911,179

 
—

 
946,705

Property and equipment, net
 
—

 
470

 
199,209

 
—

 
199,679

Operating lease right of use asset
 
—

 
334

 
485,813

 
—

 
486,147

Intangible assets, net
 
—

 
—

 
419,391

 
—

 
419,391

Goodwill
 
—

 
—

 
821,278

 
—

 
821,278

Deferred tax assets and income taxes receivable
 
464

 
15,953

 
125,999

 
—

 
142,416

Investments in subsidiaries
 
3,245,662

 
—

 
131,249

 
(3,376,911
)
 
—

Amounts due from affiliates
 
—

 
1,547,959

 
2,914,289

 
(4,462,248
)
 
—

Other noncurrent assets
 
—

 
62,455

 
31,929

 
—

 
94,384

Total assets
 
$
3,248,937

 
$
1,659,886

 
$
6,040,336

 
$
(7,839,159
)
 
$
3,110,000

 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
19,221

 
6,093

 
96,842

 
—

 
122,156

Accrued salaries, wages and payroll taxes
 
—

 
1,787

 
46,379

 
—

 
48,166

Accrued income taxes and reserves for uncertain tax positions
 
—

 
1,060

 
181,868

 
—

 
182,928

Operating lease liabilities
 
—

 
134

 
186,221

 
—

 
186,355

Deferred revenue and other current liabilities
 
—

 
23,861

 
169,503

 
—

 
193,364

Total current liabilities
 
19,221

 
32,935

 
680,813

 
—

 
732,969

Long-term debt
 
—

 
1,493,289

 
—

 
—

 
1,493,289

Deferred tax liabilities and reserves for uncertain tax positions
 
24,623

 
1,486

 
173,605

 
—

 
199,714

Operating lease liabilities
 
—

 
187

 
292,631

 
—

 
292,818

Deferred revenue and other noncurrent liabilities
 
—

 
740

 
99,666

 
—

 
100,406

Amounts due to affiliates
 
2,914,289

 
—

 
1,547,959

 
(4,462,248
)
 
—

Total liabilities
 
2,958,133

 
1,528,637

 
2,794,674

 
(4,462,248
)
 
2,819,196

Stockholders' equity
 
290,804

 
131,249

 
3,245,662

 
(3,376,911
)
 
290,804

Total liabilities and stockholders' equity
 
$
3,248,937

 
$
1,659,886

 
$
6,040,336

 
$
(7,839,159
)
 
$
3,110,000

 
 
 
 
 
 
 
 
 
 
 


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CONDENSED CONSOLIDATING BALANCE SHEETS
 
(in 000s)

As of July 31, 2018
 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 
Eliminations

 
Consolidated
H&R Block

Cash & cash equivalents
 
$
—

 
$
3,759

 
$
975,357

 
$
—

 
$
979,116

Cash & cash equivalents - restricted
 
—

 
—

 
131,376

 
—

 
131,376

Receivables, net
 
—

 
40,457

 
30,119

 
—

 
70,576

Prepaid expenses and other current assets
 
2,811

 
1,954

 
96,290

 
—

 
101,055

Total current assets
 
2,811

 
46,170

 
1,233,142

 
—

 
1,282,123

Property and equipment, net
 
—

 
418

 
226,585

 
—

 
227,003

Intangible assets, net
 
—

 
—

 
354,831

 
—

 
354,831

Goodwill
 
—

 
—

 
507,941

 
—

 
507,941

Deferred tax assets and income taxes receivable
 
—

 
17,941

 
113,742

 
—

 
131,683

Investments in subsidiaries
 
2,762,660

 
—

 
128,396

 
(2,891,056
)
 
—

Amounts due from affiliates
 
—

 
1,538,119

 
2,560,781

 
(4,098,900
)
 
—

Other noncurrent assets
 
—

 
56,004

 
45,453

 
—

 
101,457

Total assets
 
$
2,765,471

 
$
1,658,652

 
$
5,170,871

 
$
(6,989,956
)
 
$
2,605,038

 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
2,216

 
$
7,511

 
$
135,744

 
$
—

 
$
145,471

Accrued salaries, wages and payroll taxes
 
—

 
1,423

 
36,045

 
—

 
37,468

Accrued income taxes and reserves for uncertain tax positions
 
—

 
1,060

 
177,253

 
—

 
178,313

Deferred revenue and other current liabilities
 
—

 
24,952

 
177,792

 
—

 
202,744

Total current liabilities
 
2,216

 
34,946

 
526,834

 
—

 
563,996

Long-term debt
 
—

 
1,490,668

 
4,338

 
—

 
1,495,006

Deferred tax liabilities and reserves for uncertain tax positions
 
10,465

 
3,989

 
216,838

 
—

 
231,292

Deferred revenue and other noncurrent liabilities
 
—

 
653

 
122,082

 
—

 
122,735

Amounts due to affiliates
 
2,560,781

 
—

 
1,538,119

 
(4,098,900
)
 
—

Total liabilities
 
2,573,462

 
1,530,256

 
2,408,211

 
(4,098,900
)
 
2,413,029

Stockholders' equity
 
192,009

 
128,396

 
2,762,660

 
(2,891,056
)
 
192,009

Total liabilities and stockholders' equity
 
$
2,765,471

 
$
1,658,652

 
$
5,170,871

 
$
(6,989,956
)
 
$
2,605,038

 
 
 
 
 
 
 
 
 
 
 





H&R Block, Inc. | Q1 FY2020 Form 10-Q
23
Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEETS
 
(in 000s)

As of April 30, 2019
 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 
Eliminations

 
Consolidated
H&R Block

Cash & cash equivalents
 
$
—

 
$
4,109

 
$
1,568,041

 
$
—

 
$
1,572,150

Cash & cash equivalents - restricted
 
—

 
—

 
135,577

 
—

 
135,577

Receivables, net
 
—

 
35,901

 
103,064

 
—

 
138,965

Prepaid expenses and other current assets
 
2,812

 
1,695

 
142,160

 
—

 
146,667

Total current assets
 
2,812

 
41,705

 
1,948,842

 
—

 
1,993,359

Property and equipment, net
 
—

 
552

 
211,540

 
—

 
212,092

Intangible assets, net
 
—

 
—

 
342,493

 
—

 
342,493

Goodwill
 
—

 
—

 
519,937

 
—

 
519,937

Deferred tax assets and income taxes receivable
 
3,218

 
15,953

 
122,808

 
—

 
141,979

Investments in subsidiaries
 
3,378,009

 
—

 
137,733

 
(3,515,742
)
 
—

Amounts due from affiliates
 
—

 
1,562,958

 
2,815,617

 
(4,378,575
)
 
—

Other noncurrent assets
 
—

 
54,976

 
35,109

 
—

 
90,085

Total assets
 
$
3,384,039

 
$
1,676,144

 
$
6,134,079

 
$
(7,894,317
)
 
$
3,299,945

 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
2,272

 
$
19,735

 
$
227,518

 
$
—

 
$
249,525

Accrued salaries, wages and payroll taxes
 
—

 
1,564

 
194,963

 
—

 
196,527

Accrued income taxes and reserves for uncertain tax positions
 
—

 
1,060

 
270,913

 
—

 
271,973

Deferred revenue and other current liabilities
 
—

 
21,144

 
183,832

 
—

 
204,976

Total current liabilities
 
2,272

 
43,503

 
877,226

 
—

 
923,001

Long-term debt
 
—

 
1,492,629

 
—

 
—

 
1,492,629

Deferred tax liabilities and reserves for uncertain tax positions
 
24,623

 
1,486

 
171,797

 
—

 
197,906

Deferred revenue and other noncurrent liabilities
 
—

 
793

 
144,089

 
—

 
144,882

Amounts due to affiliates
 
2,815,617

 
—

 
1,562,958

 
(4,378,575
)
 
—

Total liabilities
 
2,842,512

 
1,538,411

 
2,756,070

 
(4,378,575
)
 
2,758,418

Stockholders' equity
 
541,527

 
137,733

 
3,378,009

 
(3,515,742
)
 
541,527

Total liabilities and stockholders' equity
 
$
3,384,039

 
$
1,676,144

 
$
6,134,079

 
$
(7,894,317
)
 
$
3,299,945

 
 
 
 
 
 
 
 
 
 
 


24
Q1 FY2020 Form 10-Q | H&R Block, Inc.
Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 
(in 000s)

Three months ended July 31, 2019
 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 
Eliminations

 
Consolidated
H&R Block

Net cash used in operating activities
 
$
—

 
$
(13,442
)
 
$
(470,387
)
 
$
—

 
$
(483,829
)
Cash flows from investing:
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
—

 
—

 
(15,181
)
 
—

 
(15,181
)
Payments made for business acquisitions, net of cash acquired
 
—

 
—

 
(394,411
)
 
—

 
(394,411
)
Franchise loans funded
 
—

 
(2,689
)
 
(117
)
 
—

 
(2,806
)
Payments from franchisees
 
—

 
2,352

 
295

 
—

 
2,647

Intercompany borrowings (payments)
 
—

 
14,999

 
(87,762
)
 
72,763

 
—

Other, net
 
—

 
(688
)
 
51,632

 
—

 
50,944

Net cash provided by (used in) investing activities
 
—

 
13,974

 
(445,544
)
 
72,763

 
(358,807
)
Cash flows from financing:
 
 
 
 
 
 
 
 
 
 
Dividends paid
 
(52,512
)
 
—

 
—

 
—

 
(52,512
)
Repurchase of common stock, including shares surrendered
 
(36,456
)
 
—

 
—

 
—

 
(36,456
)
Proceeds from exercise of stock options
 
1,206

 
—

 
—

 
—

 
1,206

Intercompany borrowings (payments)
 
87,762

 
—

 
(14,999
)
 
(72,763
)
 
—

Other, net
 
—

 
—

 
(12,431
)
 
—

 
(12,431
)
Net cash used in financing activities
 
—

 
—

 
(27,430
)
 
(72,763
)
 
(100,193
)
Effects of exchange rates on cash
 
—

 
—

 
556

 
—

 
556

Net increase (decrease) in cash, including restricted balances
 
—

 
532

 
(942,805
)
 
—

 
(942,273
)
Cash, cash equivalents and restricted cash, beginning of period
 
—

 
4,109

 
1,703,618

 
—

 
1,707,727

Cash, cash equivalents and restricted cash, end of period
 
$
—

 
$
4,641

 
$
760,813

 
$
—

 
$
765,454

 
 
 
 
 
 
 
 
 
 
 

H&R Block, Inc. | Q1 FY2020 Form 10-Q
25
Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 
(in 000s)

Three months ended July 31, 2018
 
H&R Block, Inc.
(Guarantor)

 
Block Financial
(Issuer)

 
Other
Subsidiaries

 
Eliminations

 
Consolidated
H&R Block

Net cash used in operating activities
 
$
—

 
$
(6,335
)
 
$
(369,228
)
 
$
—

 
$
(375,563
)
Cash flows from investing:
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
—

 
—

 
(12,057
)
 
—

 
(12,057
)
Payments made for business acquisitions, net of cash acquired
 
—

 
—

 
(1,449
)
 
—

 
(1,449
)
Franchise loans funded
 
—

 
(1,791
)
 
(14
)
 
—

 
(1,805
)
Payments from franchisees
 
—

 
5,006

 
98

 
—

 
5,104

Intercompany borrowings (payments)
 
—

 
2,718

 
(152,414
)
 
149,696

 
—

Other, net
 
—

 
(185
)
 
3,830

 
—

 
3,645

Net cash provided by (used in) investing activities
 
—

 
5,748

 
(162,006
)
 
149,696

 
(6,562
)
Cash flows from financing:
 
 
 
 
 
 
 
 
 
 
Dividends paid
 
(52,104
)
 
—

 
—

 
—

 
(52,104
)
Repurchase of common stock, including shares surrendered
 
(101,665
)
 
—

 
—

 
—

 
(101,665
)
Proceeds from exercise of stock options
 
1,355

 
—

 
—

 
—

 
1,355

Intercompany borrowings (payments)
 
152,414

 
—

 
(2,718
)
 
(149,696
)
 
—

Other, net
 
—

 
—

 
(17,494
)
 
—

 
(17,494
)
Net cash used in financing activities
 
—

 
—

 
(20,212
)
 
(149,696
)
 
(169,908
)
Effects of exchange rates on cash
 
—

 
—

 
(1,153
)
 
—

 
(1,153
)
Net decrease in cash, including restricted balances
 
—

 
(587
)
 
(552,599
)
 
—

 
(553,186
)
Cash, cash equivalents and restricted cash, beginning of period
 
—

 
4,346

 
1,659,332

 
—

 
1,663,678

Cash, cash equivalents and restricted cash, end of period
 
$
—

 
$
3,759

 
$
1,106,733

 
$
—

 
$
1,110,492

 
 
 
 
 
 
 
 
 
 
 


26
Q1 FY2020 Form 10-Q | H&R Block, Inc.
Table of Contents

ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our subsidiaries provide assisted, DIY, and virtual tax preparation solutions through multiple channels (including in-person, online and mobile applications, virtual, and desktop software) and distribute H&R Block-branded products and services, including those of our financial partners, to the general public primarily in the U.S., Canada, Australia, and their respective territories. Tax returns are either prepared by H&R Block tax professionals (in company-owned or franchise offices, virtually or via an internet review) or prepared and filed by our clients through our DIY tax solutions. We also offer small business financial solutions through our company-owned or franchise offices and online through Wave. We report a single segment that includes all of our continuing operations.
RECENT DEVELOPMENTS
On June 28, 2019, we completed our acquisition of Wave HQ Inc. (formerly known as Wave Financial Inc.) and its subsidiaries (collectively, "Wave") for $407.0 million, subject to customary post-closing adjustments for working capital. The acquisition was funded with available cash. See additional discussion in Item 1, note 1.


H&R Block, Inc. | Q1 FY2020 Form 10-Q
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Table of Contents

RESULTS OF OPERATIONS
Consolidated - Financial Results
 
 
 
(in 000s, except per share amounts)
 
Three months ended July 31,
 
2019
 
2018
 
$ Change
 
% Change

Revenues:
 
 
 
 
 
 
 
 
U.S. assisted tax preparation
 
$
32,992

 
$
31,104

 
$
1,888

 
6.1
 %
U.S. royalties
 
6,859

 
7,571

 
(712
)
 
(9.4
)%
U.S. DIY tax preparation
 
3,410

 
2,781

 
629

 
22.6
 %
International
 
40,581

 
39,179

 
1,402

 
3.6
 %
Refund Transfers
 
1,509

 
1,424

 
85

 
6.0
 %
Emerald Card®
 
13,855

 
14,246

 
(391
)
 
(2.7
)%
Peace of Mind® Extended Service Plan
 
32,837

 
36,577

 
(3,740
)
 
(10.2
)%
Tax Identity Shield®
 
4,522

 
4,741

 
(219
)
 
(4.6
)%
Interest and fee income on Emerald AdvanceTM
 
554

 
447

 
107

 
23.9
 %
Wave
 
3,625

 
—

 
3,625

 
**

Other
 
9,618

 
7,113

 
2,505

 
35.2
 %
Total revenues
 
150,362

 
145,183

 
5,179

 
3.6
 %
 
 
 
 
 
 
 
 
 
Compensation and benefits:
 
 
 
 
 
 
 
 
Field wages
 
53,803

 
49,932

 
3,871

 
7.8
 %
Other wages
 
53,837

 
47,822

 
6,015

 
12.6
 %
Benefits and other compensation
 
26,474

 
22,931

 
3,543

 
15.5
 %
 
 
134,114

 
120,685

 
13,429

 
11.1
 %
Occupancy
 
92,152

 
90,726

 
1,426

 
1.6
 %
Marketing and advertising
 
6,779

 
6,894

 
(115
)
 
(1.7
)%
Depreciation and amortization
 
38,605

 
40,432

 
(1,827
)
 
(4.5
)%
Bad debt
 
(968
)
 
(858
)
 
(110
)
 
(12.8
)%
Other (1)
 
74,846

 
69,421

 
5,425

 
7.8
 %
Total operating expenses
 
345,528

 
327,300

 
18,228

 
5.6
 %
Other income (expense), net
 
9,123

 
4,542

 
4,581

 
100.9
 %
Interest expense on borrowings
 
(21,071
)
 
(21,190
)
 
119

 
0.6
 %
Pretax loss
 
(207,114
)
 
(198,765
)
 
(8,349
)
 
(4.2
)%
 
 
 
 
 
 
 
 
 
Income tax benefit
 
(61,390
)
 
(49,968
)
 
(11,422
)
 
22.9
 %
Net Loss from continuing operations
 
(145,724
)
 
(148,797
)
 
3,073

 
(2.1
)%
Net loss from discontinued operations
 
(4,523
)
 
(3,873
)
 
(650
)
 
16.8
 %
Net Loss
 
$
(150,247
)
 
$
(152,670
)
 
$
2,423

 
(1.6
)%
 
 
 
 
 
 
 
 
 
BASIC AND DILUTED LOSS PER SHARE:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.72
)
 
$
(0.72
)
 
$
—

 
—
 %
Discontinued operations
 
(0.02
)
 
(0.02
)
 
—

 
—
 %
Consolidated
 
$
(0.74
)
 
$
(0.74
)
 
$
—

 
—
 %
 
 
 
 
 
 
 
 


EBITDA from continuing operations (2)
 
$
(147,438
)
 
$
(137,143
)
 
(10,295
)
 
7.5
 %
 
 
 
 
 
 
 
 
 
(1) 
We reclassified $2.2 million of supplies expense from its own financial statement line to other expenses for fiscal year 2019 to conform to the current year presentation.
(2) See "Non-GAAP FInancial Information" at the end of this item for a reconciliation of non-GAAP measures.
Three months ended July 31, 2019 compared to July 31, 2018
Revenues increased $5.2 million, or 3.6%, from the prior year period. U.S. assisted tax preparation fees increased $1.9 million, or 6.1%, primarily due to higher off-season tax return volumes, slightly offset by lower net average charge.
International revenues increased $1.4 million, or 3.6%, primarily due to higher Australian tax preparation fees, offset by unfavorable exchange rates.

28
Q1 FY2020 Form 10-Q | H&R Block, Inc.
Table of Contents

Revenues from POM decreased $3.7 million, or 10.2%, due to changes in the claims pattern used to recognize revenue.
Revenues of $3.6 million were recognized by Wave, which we acquired on June 28, 2019, and therefore were not included in our results of operations in the prior year period.
Total operating expenses increased $18.2 million, or 5.6%, from the prior year period. Field wages increased $3.9 million, or 7.8%, primarily due to higher wages due to the increase in return volumes. Other wages increased $6.0 million, or 12.6%, primarily due to higher information technology wages and the acquisition of Wave. Benefits and other compensation increased $3.5 million, or 15.5% primarily due to higher retirement savings plan contributions and stock-based compensation expenses.
Other expenses increased $5.4 million, or 7.8%. The components of other expenses are as follows:
Three months ended July 31,
 
2019
 
2018
 
$ Change
 
% Change
Consulting and outsourced services
 
$
18,189

 
$
20,815

 
$
(2,626
)
 
(12.6
)%
Bank partner fees
 
1,482

 
1,465

 
17

 
1.2
 %
Client claims and refunds
 
9,244

 
12,622

 
(3,378
)
 
(26.8
)%
Employee travel and related expenses
 
8,425

 
6,829

 
1,596

 
23.4
 %
Technology-related expenses
 
17,410

 
11,766

 
5,644

 
48.0
 %
Credit card/bank charges
 
3,992

 
2,403

 
1,589

 
66.1
 %
Insurance
 
4,394

 
3,389

 
1,005

 
29.7
 %
Legal fees and settlements
 
3,273

 
2,573

 
700

 
27.2
 %
Supplies
 
3,286

 
2,204

 
1,082

 
49.1
 %
Other
 
5,151

 
5,355

 
(204
)
 
(3.8
)%
 
 
$
74,846

 
$
69,421

 
$
5,425

 
7.8
 %
 
 
 
 
 
 
 
 
 
The increase in technology-related expenses of $5.6 million or 48.0% is due to increased investments in cloud-based technology.
FINANCIAL CONDITION
These comments should be read in conjunction with the consolidated balance sheets and consolidated statements of cash flows included in Part 1, Item 1.
CAPITAL RESOURCES AND LIQUIDITY –
OVERVIEW – Our primary sources of capital and liquidity include cash from operations (including changes in working capital), draws on our CLOC, and issuances of debt. We use our sources of liquidity primarily to fund working capital, service and repay debt, pay dividends, repurchase shares of our common stock, and acquire businesses.
Our operations are highly seasonal and substantially all of our revenues and cash flow are generated during the period from February through April. Therefore, we require the use of cash to fund losses and working capital needs from May through January, and typically rely on available cash balances from the prior tax season and borrowings to meet our off-season liquidity needs.
Given the likely availability of a number of liquidity options discussed herein, we believe that, in the absence of any unexpected developments, our existing sources of capital as of July 31, 2019 are sufficient to meet our operating, investing and financing needs.

H&R Block, Inc. | Q1 FY2020 Form 10-Q
29
Table of Contents

DISCUSSION OF CONSOLIDATED STATEMENTS OF CASH FLOWS – The following table summarizes our statements of cash flows for the three months ended July 31, 2019 and 2018. See Item 1 for the complete consolidated statements of cash flows for these periods.
 
 
(in 000s)
 
Three months ended July 31,
 
2019

 
2018

Net cash used in:
 
 
 
 
Operating activities
 
$
(483,829
)
 
$
(375,563
)
Investing activities
 
(358,807
)
 
(6,562
)
Financing activities
 
(100,193
)
 
(169,908
)
Effects of exchange rates on cash
 
556

 
(1,153
)
Net change in cash, cash equivalents and restricted cash
 
$
(942,273
)
 
$
(553,186
)
 
 
 
 
 
Operating Activities. Cash used in operations increased, primarily due to the timing of payments for accounts payable, accrued expenses, salaries, wages and payroll taxes.
Investing Activities. Cash used in investing activities totaled $358.8 million for the three months ended July 31, 2019 compared to $6.6 million in the prior year period. This change resulted primarily from the acquisition of Wave, partially offset by the receipt of cash on an available-for-sale debt security in the current year.
Financing Activities. Cash used in financing activities totaled $100.2 million for the three months ended July 31, 2019 compared to $169.9 million in the prior year period. This change resulted primarily from lower share repurchases completed in the current year.
CASH REQUIREMENTS –
Dividends and Share Repurchases. Returning capital to shareholders in the form of dividends and the repurchase of outstanding shares has historically been a significant component of our capital allocation plan.
We have consistently paid quarterly dividends. Dividends paid totaled $52.5 million and $52.1 million for the three months ended July 31, 2019 and 2018, respectively. Although we have historically paid dividends and plan to continue to do so, there can be no assurances that circumstances will not change in the future that could affect our ability or decisions to pay dividends.
Our current share repurchase program has remaining authorization of $954.4 million which is effective through June 2022. Although we may continue to repurchase shares, there is no assurance that we will purchase up the full Board authorization.
Capital Investment. Capital expenditures totaled $15.2 million and $12.1 million for the three months ended July 31, 2019 and 2018, respectively. Our capital expenditures relate primarily to recurring improvements to retail offices, as well as investments in computers, software and related assets. In addition to our capital expenditures, we also made payments to acquire businesses. We acquired Wave and franchisee and competitor businesses totaling $394.4 million in the current year compared to franchisee and competitor businesses totaling $1.4 million in the prior year. See Item 1, note 1 and note 5 for additional information on our acquisitions.
FINANCING RESOURCES – We had no outstanding balance under the CLOC as of July 31, 2019. Amounts available to borrow were limited by the debt-to-EBITDA covenant to approximately $1.1 billion as of July 31, 2019. See Item 1, note 6 to the consolidated financial statements.
The following table provides ratings for debt issued by Block Financial as of July 31, 2019 and April 30, 2019:
As of
 
July 31, 2019
 
April 30, 2019
 
 
Short-term
 
Long-term
 
Outlook
 
Short-term
 
Long-term
 
Outlook
Moody's
 
P-3
 
Baa3
 
Negative
 
P-3
 
Baa3
 
Negative
S&P
 
A-2
 
BBB
 
Stable
 
A-2
 
BBB
 
Stable
There have been no material changes in our borrowings from those reported as of April 30, 2019 in our Annual Report on Form 10-K.

30
Q1 FY2020 Form 10-Q | H&R Block, Inc.
Table of Contents

CASH AND OTHER ASSETS – As of July 31, 2019, we held cash and cash equivalents, excluding restricted amounts, of $607.7 million, including $140.0 million held by our foreign subsidiaries.
Foreign Operations. When necessary, our international businesses are funded by our U.S. operations. To mitigate foreign currency exchange rate risk, we sometimes enter into foreign exchange forward contracts. There were no forward contracts outstanding as of July 31, 2019.
We do not currently intend to repatriate any non-borrowed funds held by our foreign subsidiaries.
The impact of changes in foreign exchange rates during the period on our international cash balances resulted in an increase of $0.6 million during the three months ended July 31, 2019 compared to an decrease of $1.2 million in the prior year.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS – There have been no material changes in our contractual obligations and commercial commitments from those reported as of April 30, 2019 in our Annual Report on Form 10-K.
REGULATORY ENVIRONMENT
There have been no material changes in our regulatory environment from what was reported as of April 30, 2019 in our Annual Report on Form 10-K.
NON-GAAP FINANCIAL INFORMATION
Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Because these measures are not measures of financial performance under GAAP and are susceptible to varying calculations, they may not be comparable to similarly titled measures for other companies.
We consider our non-GAAP financial measures to be performance measures and a useful metric for management and investors to evaluate and compare the ongoing operating performance of our business.
We may consider whether other significant items that arise in the future should be excluded from our non-GAAP financial measures.
We measure the performance of our business using a variety of metrics, including earnings before interest, taxes, depreciation and amortization (EBITDA) from continuing operations, EBITDA margin from continuing operations, and free cash flow. We also use EBITDA from continuing operations and pretax income of continuing operations, each subject to permitted adjustments, as performance metrics in incentive compensation calculations for our employees.
The following is a reconciliation of EBITDA from continuing operations to net loss:
 
 
 
 
(in 000s)


 
Three months ended July 31,
 
 
2019

 
2018

Net loss - as reported
 
$
(150,247
)
 
$
(152,670
)
Discontinued operations, net
 
4,523

 
3,873

Net loss from continuing operations - as reported
 
(145,724
)
 
(148,797
)
Add back:
 
 
 
 
Income taxes of continuing operations
 
(61,390
)
 
(49,968
)
Interest expense of continuing operations
 
21,071

 
21,190

Depreciation and amortization of continuing operations
 
38,605

 
40,432

 
 
(1,714
)
 
11,654

EBITDA from continuing operations
 
$
(147,438
)
 
$
(137,143
)
 
 
 
 
 
 
 
 
 
 


H&R Block, Inc. | Q1 FY2020 Form 10-Q
31
Table of Contents

FORWARD-LOOKING INFORMATION
This report and other documents filed with the SEC may contain forward-looking statements. In addition, our senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words or variation of words such as "expects," "anticipates," "intends," "plans," "believes," "commits," "seeks," "estimates," "projects," "forecasts," "targets," "would," "will," "should," "goal," "could," "may" or other similar expressions. Forward-looking statements provide management's current expectations or predictions of future conditions, events or results. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. They may include estimates of revenues, client trajectory, income, effective tax rate, earnings per share, cost savings, capital expenditures, dividends, share repurchases, liquidity, capital structure, market share, industry volumes or other financial items, descriptions of management's plans or objectives for future operations, services or products, or descriptions of assumptions underlying any of the above. All forward-looking statements speak only as of the date they are made and reflect the Company's good faith beliefs, assumptions and expectations, but they are not guarantees of future performance or events. Furthermore, the Company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions, factors, or expectations, new information, data or methods, future events or other changes, except as required by law.
By their nature, forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Factors that might cause such differences include, but are not limited to, a variety of economic, competitive, operational and regulatory factors, many of which are beyond the Company's control. In addition, factors that may cause the Company’s actual effective tax rate to differ from estimates include the Company’s actual results from operations compared to current estimates, future discrete items, changes in interpretations and assumptions the Company has made, and future actions of the Company. Investors should understand that it is not possible to predict or identify all such factors and, consequently, should not consider any such list to be a complete set of all potential risks or uncertainties.
Details about risks, uncertainties and assumptions that could affect various aspects of our business are included throughout our Annual Report on Form 10-K for the fiscal year ended April 30, 2019 and are also described from time to time in other filings with the SEC. Investors should carefully consider all of these risks, and should pay particular attention to Item 1A, "Risk Factors," and Item 7 under "Critical Accounting Policies" of our Annual Report on Form 10-K for the fiscal year ended April 30, 2019.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risks from those reported at April 30, 2019 in our Annual Report on Form 10-K.
ITEM 4.     CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES – As of the end of the period covered by this Form 10-Q, management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING – There were no changes during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II    OTHER INFORMATION
ITEM 1.     LEGAL PROCEEDINGS
For a description of our material pending legal proceedings, see discussion in Part I, Item 1, note 11 to the consolidated financial statements.

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Q1 FY2020 Form 10-Q | H&R Block, Inc.
Table of Contents

ITEM 1A.    RISK FACTORS
There have been no material changes in our risk factors from those reported at April 30, 2019 in our Annual Report on Form 10-K.
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
A summary of our purchases of H&R Block common stock during the first quarter of fiscal year 2020 is as follows:
(in 000s, except per share amounts)
 
 
 
Total Number of
Shares Purchased (1)

 
Average
Price Paid
per Share

 
Total Number of Shares
Purchased as Part of
Publicly Announced Plans 
or Programs (2)

 
Maximum Dollar Value of
Shares that May Yet Be
Purchased Under the Plans 
or Programs (2)

May 1 - May 31
 
1

 
$
26.65

 
—

 
$
998,470

June 1 - June 30
 
132

 
$
29.30

 
—

 
$
998,470

July 1 - July 31
 
1,774

 
$
27.83

 
1,593

 
$
954,421

 
 
1,907

 
$
27.93

 
1,593

 
 
 
 
 
 
 
 
 
 
 
(1) 
We purchased approximately 314 thousand shares in connection with funding employee income tax withholding obligations arising upon the lapse of restrictions on restricted shares and restricted share units.
(2) 
In September 2015, we announced that our Board of Directors approved a $3.5 billion share repurchase program, effective through June 2019. In June 2019, our Board of Directors extended the share repurchase program through June 2022.
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.    OTHER INFORMATION
None.
ITEM 6.     EXHIBITS
The following exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K:

10.1
10.2
10.3
10.4
10.5
10.6

H&R Block, Inc. | Q1 FY2020 Form 10-Q
33
Table of Contents

10.7
10.8
31.1
31.2
32.1
32.2
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema
101.CAL
Inline XBRL Extension Calculation Linkbase
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

34
Q1 FY2020 Form 10-Q | H&R Block, Inc.
Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
H&R BLOCK, INC.
 
/s/ Jeffrey J. Jones II
Jeffrey J. Jones II
President and Chief Executive Officer
September 6, 2019
 
/s/ Tony G. Bowen
Tony G. Bowen
Chief Financial Officer
September 6, 2019
 
/s/ Kellie J. Logerwell
Kellie J. Logerwell
Chief Accounting Officer
September 6, 2019

H&R Block, Inc. | Q1 FY2020 Form 10-Q
35