H&R Block - 10-Q quarterly report FY2021 Q1

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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, 2020
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

Commission file number 1-06089

H&R Block, Inc.

(Exact name of registrant as specified in its charter)



Missouri		44-0607856
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

One H&R Block Way, Kansas City, Missouri 64105

(Address of principal executive offices, including zip code)

(816) 854-3000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, without par value	HRB	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

The number of shares outstanding of the registrant's Common Stock, without par value, at the close of business on August 31, 2020: 192,898,471 shares.

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

Table of Contents



	PART I

Item 1.	Consolidated Statements of Operations and Comprehensive Income(Loss)
	Three months ended July 31, 2020 and 2019	1

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

	Consolidated Statements of Cash Flows
	Three months ended July 31, 2020 and 2019	3

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

	Notes to Consolidated Financial Statements	5

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	26

	PART II
Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.	Defaults Upon Senior Securities	27

Item 4.	Mine Safety Disclosures	27

Item 5.	Other Information	27

Item 6.	Exhibits	27

	Signatures	29

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PART I FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS



CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)	(unaudited, in 000s, except per share amounts)
	Three months ended July 31,
	2020			2019

REVENUES:
Service revenues	$	550,951		$	132,159
Royalty, product and other revenues	50,079			18,203
	601,030			150,362
OPERATING EXPENSES:
Costs of revenues	315,036			229,392
Selling, general and administrative	133,038			116,136
Total operating expenses	448,074			345,528

Other income (expense), net	3,211			9,123
Interest expense on borrowings	(32,125		)	(21,071		)
Income (loss) from continuing operations before income taxes (benefit)	124,042			(207,114		)
Income taxes (benefit)	30,486			(61,390		)
Net income (loss) from continuing operations	93,556			(145,724		)
Net loss from discontinued operations, net of tax benefits of $685 and $1,358	(2,297		)	(4,523		)
NET INCOME (LOSS)	$	91,259		$	(150,247	)

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations	$	0.48		$	(0.72	)
Discontinued operations	(0.01		)	(0.02		)
Consolidated	$	0.47		$	(0.74	)

DIVIDENDS DECLARED PER SHARE	$	0.26		$	0.26

COMPREHENSIVE INCOME (LOSS):
Net income (loss)	$	91,259		$	(150,247	)
Change in foreign currency translation adjustments	17,539			(2,320		)
Other comprehensive income (loss)	17,539			(2,320		)
Comprehensive income (loss)	$	108,798		$	(152,567	)

See accompanying notes to consolidated financial statements.



H&R Block, Inc. \| Q1 FY2021 Form 10-Q	1

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CONSOLIDATED BALANCE SHEETS	(unaudited, in 000s, except share and per share amounts)
As of	July 31, 2020			July 31, 2019			April 30, 2020

ASSETS
Cash and cash equivalents	$	2,598,570		$	607,668		$	2,661,914
Cash and cash equivalents - restricted	208,015			157,786			211,106
Receivables, less allowance for credit losses of $67,636, $66,652 and $64,648	97,222			76,128			133,197
Prepaid expenses and other current assets	93,538			105,123			80,519
Total current assets	2,997,345			946,705			3,086,736
Property and equipment, at cost, less accumulated depreciation and amortization of $817,280, $764,891 and $796,192	168,830			199,679			184,367
Operating lease right of use asset	492,195			486,147			494,788
Intangible assets, net	400,025			419,391			414,976
Goodwill	724,288			821,278			712,138
Deferred tax assets and income taxes receivable	153,274			142,416			151,195
Other noncurrent assets	61,479			94,384			67,847
Total assets	$	4,997,436		$	3,110,000		$	5,112,047
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses	$	128,690		$	122,156		$	203,103
Accrued salaries, wages and payroll taxes	69,346			48,166			116,375
Accrued income taxes and reserves for uncertain tax positions	156,557			182,928			209,816
Current portion of long-term debt	—			—			649,384
Operating lease liabilities	209,556			186,355			195,537
Deferred revenue and other current liabilities	201,809			193,364			201,401
Total current liabilities	765,958			732,969			1,575,616
Long-term debt and line of credit borrowings	3,495,918			1,493,289			2,845,873
Deferred tax liabilities and reserves for uncertain tax positions	185,687			199,714			182,441
Operating lease liabilities	297,518			292,818			312,566
Deferred revenue and other noncurrent liabilities	117,078			100,406			124,510
Total liabilities	4,862,159			2,819,196			5,041,006
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, shares issued of 228,206,684, 236,744,360 and 228,206,684	2,282			2,367			2,282
Additional paid-in capital	772,782			759,449			775,387
Accumulated other comprehensive loss	(34,037		)	(22,736		)	(51,576		)
Retained earnings	82,933			250,740			42,965
Less treasury shares, at cost, of 35,308,213, 35,785,391 and 35,731,376	(688,683		)	(699,016		)	(698,017		)
Total stockholders' equity	135,277			290,804			71,041
Total liabilities and stockholders' equity	$	4,997,436		$	3,110,000		$	5,112,047

See accompanying notes to consolidated financial statements.



2	Q1 FY2021 Form 10-Q \| H&R Block, Inc.

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CONSOLIDATED STATEMENTS OF CASH FLOWS	(unaudited, in 000s)
Three months ended July 31,	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	91,259		$	(150,247	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization	39,508			38,605
Provision	2,809			552
Deferred taxes	(1,368		)	6,825
Stock-based compensation	7,597			6,674
Changes in assets and liabilities, net of acquisitions:
Receivables	26,052			60,519
Prepaid expenses, other current and noncurrent assets	(8,460		)	(9,917		)
Accounts payable, accrued expenses, salaries, wages and payroll taxes	(123,011		)	(284,643		)
Deferred revenue, other current and noncurrent liabilities	(7,136		)	(45,769		)
Income tax receivables, accrued income taxes and income tax reserves	(46,964		)	(99,929		)
Other, net	(786		)	(6,499		)
Net cash used in operating activities	(20,500		)	(483,829		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(8,311		)	(15,181		)
Payments made for business acquisitions, net of cash acquired	(13		)	(394,411		)
Franchise loans funded	(128		)	(2,806		)
Payments from franchisees	14,150			2,647
Other, net	(1,318		)	50,944
Net cash provided by (used in) investing activities	4,380			(358,807		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid	(50,044		)	(52,512		)
Repurchase of common stock, including shares surrendered	(2,913		)	(36,456		)
Proceeds from exercise of stock options	1,147			1,206
Other, net	(4,910		)	(12,431		)
Net cash used in financing activities	(56,720		)	(100,193		)

Effects of exchange rate changes on cash	6,405			556

Net decrease in cash and cash equivalents, including restricted balances	(66,435		)	(942,273		)
Cash, cash equivalents and restricted cash, beginning of period	2,873,020			1,707,727
Cash, cash equivalents and restricted cash, end of period	$	2,806,585		$	765,454

SUPPLEMENTARY CASH FLOW DATA:
Income taxes paid, net of refunds received	$	79,138		$	36,138
Interest paid on borrowings	26,457			15,519
Accrued purchase of common stock	—			16,801
Accrued additions to property and equipment	1,716			127
New operating right of use assets and related lease liabilities	52,171			157,216

See accompanying notes to consolidated financial statements.



H&R Block, Inc. \| Q1 FY2021 Form 10-Q	3

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY										(amounts in 000s, except per share amounts)
	Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock					Total Stockholders’ Equity
	Shares	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Shares		Amount			Total Stockholders’ Equity
Balances as of May 1, 2020	228,207	$	2,282	$	775,387		$	(51,576	)	$	42,965		(35,731	)	$	(698,017	)	$	71,041
Net income	—	—		—			—			91,259			—		—			91,259
Other comprehensive income	—	—		—			17,539			—			—		—			17,539
Stock-based compensation	—	—		7,422			—			—			—		—			7,422
Stock-based awards exercised or vested	—	—		(10,027		)	—			(1,247		)	627		12,247			973
Acquisition of treasury shares	—	—		—			—			—			(204	)	(2,913		)	(2,913		)
Cash dividends declared - $0.26 per share	—	—		—			—			(50,044		)	—		—			(50,044		)
Balances as of July 31, 2020	228,207	$	2,282	$	772,782		$	(34,037	)	$	82,933		(35,308	)	$	(688,683	)	$	135,277



	Common Stock					Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock					Total Stockholders’ Equity
	Shares		Amount			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Shares		Amount			Total Stockholders’ Equity
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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION – The consolidated balance sheets as of July 31, 2020 and 2019, the consolidated statements of operations and comprehensive income (loss) for the three months ended July 31, 2020 and 2019, the consolidated statements of cash flows for the three months ended July 31, 2020 and 2019, and the consolidated statements of stockholders' equity for the three months ended July 31, 2020 and 2019 have been prepared by the Company, without audit. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations, and cash flows as of July 31, 2020 and 2019 and for all periods presented, have been made.

"H&R Block," "the Company," "we," "our," and "us" are used interchangeably to refer to H&R Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our April 30, 2020 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of April 30, 2020 or for the year then ended are derived from our Annual Report on Form 10-K.

MANAGEMENT ESTIMATES – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions and judgments are applied in the evaluation of contingent losses arising from our discontinued mortgage business, contingent losses associated with pending claims and litigation, reserves for uncertain tax positions, fair value of reporting units, and related matters. Estimates have been prepared based on the best information available as of each balance sheet date. As such, actual results could differ materially from those estimates.

SEASONALITY OF BUSINESS – Because the majority of our clients file their tax returns during the period from February through April in a typical year, a substantial majority of our revenues from income tax return preparation and related services and products are earned during this period. As a result, we generally operate at a loss through the first three quarters of our fiscal year. As a result of the COVID-19 pandemic, on March 21, 2020, the federal tax filing deadline in the United States (U.S.) for individual 2019 tax returns was extended from April 15, 2020 to July 15, 2020. Substantially all U.S. states with an April 15 individual state income tax filing requirement extended their respective deadlines. In Canada, the deadline for individuals to file was extended to June 1, 2020. These extensions have impacted the typical seasonality of our business and the comparability of our financial results. Consequently, a portion of revenues and expenses that would have normally been recognized in our fourth quarter of fiscal year 2020 shifted to the first quarter of fiscal year 2021. Results for interim periods are not indicative of results to be expected for the full fiscal year.

DISCONTINUED OPERATIONS – Our discontinued operations include the results of operations of Sand Canyon Corporation, previously known as Option One Mortgage Corporation (including its subsidiaries, collectively, SCC), which exited its mortgage business in fiscal year 2008. See note 10 for additional information on litigation, claims, and other loss contingencies related to our discontinued operations.

NEW ACCOUNTING PRONOUNCEMENTS –

Current Expected Credit Losses. In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13), "Measurement of Credit Losses on Financial Instruments," which replaces the existing incurred credit loss model for an expected credit loss model. We adopted ASU 2016-13 as of May 1, 2020, which did not have a material impact on our consolidated financial statements.



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NOTE 2: REVENUE RECOGNITION

The majority of our revenues are from our U.S. Tax Services business. The following table disaggregates our U.S. Tax Services revenues by major service line, with revenues from our international tax services businesses and from Wave included as separate lines:



			(in 000s)
	Three months ended July 31,
	2020		2019
Revenues:
U.S. assisted tax preparation	$	337,728	$	32,992
U.S. royalties	35,949		6,859
U.S. DIY tax preparation	67,595		3,410
International	67,818		40,581
Refund Transfers	10,553		1,509
Emerald Card®	17,055		13,855
Peace of Mind® Extended Service Plan	31,995		32,837
Tax Identity Shield®	9,367		4,522
Interest and fee income on Emerald Advance^TM	663		554
Wave	12,067		3,625
Other	10,240		9,618
Total revenues	$	601,030	$	150,362

Changes in the balances of deferred revenue and wages for our Peace of Mind® Extended Service Plan (POM) are as follows:



										(in 000s)
POM	Deferred Revenue						Deferred Wages
Three months ended July 31,	2020			2019			2020			2019
Balance, beginning of the period	$	183,685		$	212,511		$	21,618		$	27,306
Amounts deferred	18,217			1,723			128			23
Amounts recognized on previous deferrals	(37,205		)	(38,212		)	(4,348		)	(5,324		)
Balance, end of the period	$	164,697		$	176,022		$	17,398		$	22,005

As of July 31, 2020, deferred revenue related to POM was $164.7 million. We expect that $102.4 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, 2020 and 2019, Tax Identity Shield® (TIS) deferred revenue was $24.8 million and $25.4 million, respectively. Deferred revenue related to TIS was $30.8 million and $29.7 million at April 30, 2020 and 2019, respectively. All deferred revenue related to TIS will be recognized within the next nine months.

NOTE 3: EARNINGS (LOSS) PER SHARE AND STOCKHOLDERS' EQUITY

EARNINGS (LOSS) PER SHARE – Basic and diluted earnings (loss) per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income or loss from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period. The dilutive effect of potential common shares is included in diluted earnings per share except in those periods with a loss from continuing operations. Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 1.3 million shares for the three months ended July 31, 2020 as the effect would be antidilutive, and 3.7 million shares for the three months ended July 31, 2019, as the effect would be antidilutive due to the net loss from continuing operations during the period.



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The computations of basic and diluted earnings (loss) per share from continuing operations are as follows:



(in 000s, except per share amounts)
	Three months ended July 31,
	2020			2019
Net earnings (loss) from continuing operations attributable to shareholders	$	93,556		$	(145,724	)
Amounts allocated to participating securities	(327		)	(149		)
Net earnings (loss) from continuing operations attributable to common shareholders	$	93,229		$	(145,873	)

Basic weighted average common shares	192,598			202,037
Potential dilutive shares	1,469			—
Dilutive weighted average common shares	194,067			202,037

Earnings (loss) per share from continuing operations attributable to common shareholders:
Basic	$	0.48		$	(0.72	)
Diluted	0.48			(0.72		)

The weighted average shares outstanding for the three months ended July 31, 2020 decreased to 192.6 million from 202.0 million for the three months ended July 31, 2019. The decrease is due to share repurchases completed in the prior year.

STOCK-BASED COMPENSATION – During the three months ended July 31, 2020, we acquired 0.2 million shares of our common stock at an aggregate cost of $2.9 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, 2019, we acquired 0.3 million shares at an aggregate cost of $9.2 million for similar purposes.

During the three months ended July 31, 2020 and 2019, we issued 0.6 million and 0.9 million shares of common stock, respectively, due to the vesting or exercise of stock-based awards.

During the three months ended July 31, 2020, we granted awards equivalent to 1.8 million shares under our stock-based compensation plans, consisting of nonvested units. Stock-based compensation expense of our continuing operations totaled $7.6 million for the three months ended July 31, 2020 and $6.7 million for the three months ended July 31, 2019. As of July 31, 2020, unrecognized compensation cost for nonvested shares and units totaled $53.8 million.



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NOTE 4: RECEIVABLES

Receivables, net of their related allowance, consist of the following:



(in 000s)
As of	July 31, 2020				July 31, 2019				April 30, 2020
	Short-term		Long-term		Short-term		Long-term		Short-term		Long-term
Loans to franchisees	$	10,981	$	31,360	$	12,301	$	45,542	$	25,397	$	31,329
Receivables for U.S. assisted and DIY tax preparation and related fees	34,586		3,112		19,686		3,716		47,030		3,112
H&R Block Instant Refund^TM receivables	1,129		1,596		880		1,780		15,031		1,325
H&R Block Emerald Advance® lines of credit	9,372		10,478		8,136		10,249		10,001		14,081
Software receivables from retailers	2,004		—		1,395		—		7,341		—
Royalties and other receivables from franchisees	20,135		39		7,834		99		9,861		42
Wave payment processing receivables	2,324		—		3,041		—		3,200		—
Other	16,691		1,646		22,855		2,251		15,336		1,828
Total	$	97,222	$	48,231	$	76,128	$	63,637	$	133,197	$	51,717

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 working capital needs. As of July 31, 2020 loans with a principal balance of $0.1 million were more than 90 days past due. As of July 31, 2019, loans with a principal balance of $2.0 million were more than 90 days past due. We had no loans to franchisees on non-accrual status.

H&R BLOCK INSTANT REFUND^TM PROGRAM – H&R Block Instant Refund^TM 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, 2020 are as follows:



				(in 000s)
Year of Origination	Balance			Non-Accrual

2020	$	4,737		$	366
2019 and prior	241			241
	4,978			$	607
Allowance	(2,253		)
Net balance	$	2,725



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H&R BLOCK EMERALD ADVANCE® LINES OF CREDIT – We review the credit quality of our purchased participation interests in Emerald Advance^TM (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, 2020, by year of origination, are as follows:



(in 000s)
Year of origination:	Balance			Non-Accrual
2020	$	29,176		$	29,176
2019 and prior	4,886			4,886
Revolving loans	14,962			13,729
	49,024			$	47,791
Allowance	(29,174		)
Net balance	$	19,850

ALLOWANCE FOR CREDIT LOSSES – Activity in the allowance for credit losses for our EA and all other short-term and long-term receivables for the three months ended July 31, 2020 and 2019 is as follows:



(in 000s)
	EAs			All Other			Total
Balances as of April 30, 2020	$	32,034		$	50,446		$	82,480
Provision	(2,860		)	5,669			2,809
Charge-offs, recoveries and other	—			(2,214		)	(2,214		)
Balances as of July 31, 2020	$	29,174		$	53,901		$	83,075

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

NOTE 5: GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the three months ended July 31, 2020 and 2019 are as follows:



(in 000s)
	Goodwill			Accumulated Impairment Losses			Net
Balances as of April 30, 2020	$	850,435		$	(138,297	)	$	712,138
Acquisitions	—			—			—
Disposals and foreign currency changes, net	12,150			—			12,150
Impairments	—			—			—
Balances as of July 31, 2020	$	862,585		$	(138,297	)	$	724,288

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


⁽¹⁾	At July 31, 2019, the fair value of the acquired goodwill related to our acquisition of Wave was 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, 2020:
Reacquired franchise rights	$	365,506	$	(165,721	)	$	199,785
Customer relationships	314,920		(235,645		)	79,275
Internally-developed software	159,195		(115,976		)	43,219
Noncompete agreements	41,112		(34,193		)	6,919
Franchise agreements	19,201		(14,934		)	4,267
Purchased technology	122,700		(61,313		)	61,387
Trade name	5,800		(627		)	5,173
	$	1,028,434	$	(628,409	)	$	400,025
As of July 31, 2019:
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 ⁽¹⁾	1,706		—			1,706
	$	967,368	$	(547,977	)	$	419,391
As of April 30, 2020:
Reacquired franchise rights	$	365,062	$	(159,754	)	$	205,308
Customer relationships	314,191		(227,445		)	86,746
Internally-developed software	154,083		(113,698		)	40,385
Noncompete agreements	41,072		(33,639		)	7,433
Franchise agreements	19,201		(14,614		)	4,587
Purchased technology	122,700		(57,548		)	65,152
Trade name	5,800		(483		)	5,317
Acquired assets pending final allocation ⁽¹⁾	48		—			48
	$	1,022,157	$	(607,181	)	$	414,976

⁽¹⁾ Represents franchisee and competitor business acquisitions for which final purchase price allocations have not yet been determined.

We made payments to acquire businesses totaling $13 thousand and $394.4 million during the three months ended July 31, 2020 and 2019, respectively. The three months ended July 31, 2019 included the acquisition of Wave HQ Inc. (formerly known as Wave Financial Inc.) and its subsidiaries (collectively, "Wave").

Amortization of intangible assets for the three months ended July 31, 2020 was $20.9 million compared to $18.2 million for the three months ended July 31, 2019. Estimated amortization of intangible assets for fiscal years 2021, 2022, 2023, 2024 and 2025 is $76.1 million, $59.8 million, $41.9 million, $31.0 million and $17.9 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, 2020			July 31, 2019			April 30, 2020
Senior Notes, 4.125%, due October 2020	$	650,000		$	650,000		$	650,000
Senior Notes, 5.500%, due November 2022	500,000			500,000			500,000
Senior Notes, 5.250%, due October 2025	350,000			350,000			350,000
Committed line of credit borrowings	2,000,000			—			2,000,000
Debt issuance costs and discounts	(4,082		)	(6,711		)	(4,743		)
	3,495,918			1,493,289			3,495,257
Less: Current portion	—			—			(649,384		)
	$	3,495,918		$	1,493,289		$	2,845,873

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, 2020.

In order to strengthen our liquidity and ensure maximum flexibility, during the fourth quarter of fiscal year 2020, we drew the full amount of our $2.0 billion CLOC. We had $2.0 billion outstanding on our CLOC as of July 31, 2020, which we expect to repay in full in September 2020.

The estimated fair value of our long-term debt, including the current portion of long-term debt, as of July 31, 2020 and 2019 and April 30, 2020 totaled $3.6 billion, $1.6 billion and $3.5 billion, respectively.

On August 7, 2020, we issued $650.0 million of 3.875% Senior Notes due August 15, 2030 (2030 Senior Notes). The 2030 Senior Notes are not redeemable by the bondholders prior to maturity, although we have the right to redeem some or all of these notes at any time, at specified redemption prices. As of April 30, 2020, our $650.0 million notes due in October 2020 (October 2020 Senior Notes) were classified as a current liability. As we intend to use the net proceeds from the 2030 Senior Notes to repay our October 2020 Senior Notes, our October 2020 Senior Notes have been reclassified to long-term as of July 31, 2020.

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 2017 and later years remain open for examination. Our U.S. federal income tax returns for 2016 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



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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.

A discrete income tax expense of $0.6 million was recorded in the three months ended July 31, 2020 compared to a discrete tax benefit of $8.3 million in the same period of the prior year. The discrete tax expense recorded in the current period primarily resulted from interest recorded on existing uncertain tax benefits. The discrete tax benefit recorded in the prior year resulted primarily from favorable audit settlements and valuation allowance changes related to utilization of foreign losses.

Our effective tax rate for continuing operations, including the effects of discrete tax items, was 24.6% and 29.6% for the three months ended July 31, 2020 and 2019, respectively. Discrete items increased the effective tax rate for the three months ended July 31, 2020 and 2019 by 0.5% and 4.0%, respectively. 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.

We had gross unrecognized tax benefits of $171.6 million, $179.2 million and $168.1 million as of July 31, 2020 and 2019 and April 30, 2020, respectively. The gross unrecognized tax benefits increased $3.5 million and decreased$5.9 million during the three months ended July 31, 2020 and 2019, respectively. We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $12.1 million within the next twelve months. The anticipated decrease is due to the expiration of statutes of limitations and anticipated closure of various tax matters currently under exam. For such matters where a change in the balance of unrecognized tax benefits is not yet deemed reasonably possible, no estimate has been included.

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,
	2020		2019
Interest income	$	1,159	$	8,026
Foreign currency gains (losses), net	392		9
Other, net	1,660		1,088
	$	3,211	$	9,123

NOTE 9: COMMITMENTS AND CONTINGENCIES

Assisted tax returns, as well as services provided under Tax Pro Go^SMand Tax Pro Review®,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 $10.1 million, $8.8 million and $9.4 million as of July 31, 2020 and 2019 and April 30, 2020, respectively. The short-term and long-term portions of this liability are included in deferred revenue and other liabilities in the consolidated balance sheets.

Liabilities related to acquisitions for (1) estimated contingent consideration based on expected financial performance of the acquired business and economic conditions at the time of acquisition and (2) estimated accrued compensation related to continued employment of key employees were $13.3 million, $9.6 million and $14.2 million as of July 31, 2020 and 2019 and April 30, 2020, respectively, with amounts recorded in deferred revenue and other liabilities. Should actual results differ from our estimates, future payments made will differ from the above estimate and any differences will be recorded in results from continuing operations.

We have contractual commitments to fund certain franchises with approved revolving lines of credit. Our total obligation under these lines of credit was $41.1 million at July 31, 2020, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $38.6 million.



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We have provided two limited guarantees related to our 2020 tax season Refund Advance Program Agreement. We have provided a limited guarantee up to $7.5 million related to loans to clients prior to the IRS accepting electronic filing. We accrued an estimated liability of $2.5 million at April 30, 2020 related to this guarantee. As of July 31, 2020, we have accrued $2.2 million related to this guarantee. Additionally, we provided a limited guarantee for the remaining loans, up to $57 million in the aggregate, which would cover certain incremental loan losses. We accrued an estimated liability of $2.9 million at April 30, 2020 related to this guarantee. We have no amounts accrued related to this guarantee as of July 31, 2020 as collections exceeded our expectations during the extended tax season.

Both the U.S. and Canada implemented emergency economic relief programs as a way of minimizing the economic impact of the global COVID-19 pandemic. In the U.S., the Coronavirus Aid, Relief, and Economic Security (CARES) Act includes, among other items, provisions relating to refundable payroll tax credits and deferment of certain tax payments through the end of calendar 2020. In Canada the COVID-19 Economic Response Plan includes the Canada Emergency Wage Subsidy (CEWS). For our U.S. businesses we have elected to defer the employer-paid portion of social security taxes and are evaluating the employee retention credit, and in Canada we have received $14.6 million in wage subsidies during the quarter ended July 31, 2020 which has been treated as a government subsidy to offset related operating expenses.

NOTE 10: LITIGATION AND OTHER RELATED CONTINGENCIES

We are a defendant in numerous litigation matters, arising both in the ordinary course of business and otherwise, including as described below. The matters described below are not all of the lawsuits to which we are subject. In some of the matters, very large or indeterminate amounts, including punitive damages, are sought. U.S. jurisdictions permit considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. We believe that the monetary relief which may be specified in a lawsuit or a claim bears little relevance to its merits or disposition value due to this variability in pleadings and our experience in litigating or resolving through settlement of numerous claims over an extended period of time.

The outcome of a litigation matter and the amount or range of potential loss at particular points in time may be difficult to ascertain. Among other things, uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.

In addition to litigation matters, we are also subject to claims and other loss contingencies arising out of our business activities, including as described below.

We accrue liabilities for litigation, claims, including indemnification and contribution claims, and other related loss contingencies and any related settlements (each referred to, individually, as a "matter" and, collectively, as "matters") 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 make other expenditures or accrue liabilities in amounts that could not be reasonably estimated as of July 31, 2020. 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, 2020 and 2019 and April 30, 2020, our total accrued liabilities were $1.6 million, $1.6 million and $1.6 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



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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, 2020, 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. 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.

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). The case is styled The People of the State of California v. HRB Digital LLC, 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, California 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 City Attorney subsequently dismissed H&R Block, Inc. from the case and amended its complaint to add HRB Tax Group, Inc. We filed a motion to stay the case based on the primary jurisdiction doctrine, which remains 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). The case is styled Snarr v. HRB Tax Group, 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 the 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 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., California False Advertising Law, California Business and Professions Code §§17500, et seq., and California Unfair Competition Law, California Business and Professions Code §§17200 et seq. The plaintiffs seek declaratory and injunctive relief, restitution, compensatory damages, punitive damages, interest, attorneys’ fees and



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costs. We filed a motion to stay the proceedings based on the primary jurisdiction doctrine and a motion to compel arbitration, both of which were denied. An appeal of the denial of the motion to compel arbitration is pending. We filed a motion to stay the claims pending the outcome of the appeal, as well as a motion to dismiss the claims, which also were denied. We filed an answer to the amended complaint on April 7, 2020. The parties filed a stipulation of voluntary dismissal of the claims of plaintiff Olosoni, without prejudice, and the termination of plaintiff Olosoni as a named plaintiff in the action on July 21, 2020. A trial date has been set for October 18, 2022. 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 26, 2019, a putative class action complaint was filed against H&R Block, Inc., HRB Tax Group, Inc., HRB Digital LLC and Free File, Inc. in the United States District Court for the Western District of Missouri (Case No. 4:19-cv-00788-GAF) styled Swanson v. H&R Block, Inc., et al. The plaintiff seeks to represent both a nationwide class and a California subclass of all persons eligible for the IRS Free File Program who paid to use an H&R Block product to file an online tax return for the 2002 through 2018 tax filing years. The plaintiff generally alleges 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., California False Advertising Law, California Business and Professions Code §§17500, et seq., California Unfair Competition Law, California Business and Professions Code §§17200, et seq., in addition to breach of contract and fraud. The plaintiff seeks injunctive relief, disgorgement, compensatory damages, statutory damages, punitive damages, interest, attorneys’ fees and costs. The court granted a motion to dismiss filed by defendant Free File, Inc. for lack of personal jurisdiction. We filed a motion to stay the proceedings based on the primary jurisdiction doctrine and a motion to compel arbitration. The court granted our motion to compel arbitration on July 27, 2020 and stayed the case pending the outcome of arbitration. 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 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." 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



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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.

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 closed on September 30, 2019. Motions for summary judgment were filed on December 6, 2019 and remain pending, with briefing on the motions concluded in March 2020. A mediation session between the parties was held on January 28, 2020, which did not result in resolution of the case. 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



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warranty claims are related to some of the loans in this case. Discovery in the case closed on September 30, 2019. Motions for summary judgment were filed on December 6, 2019 and remain pending, with briefing on the motions concluded in March 2020. A mediation session between the parties was held on January 28, 2020, which did not result in resolution of the case. 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.

Parties, including underwriters, depositors, and securitization trustees, are, or have been, involved in multiple lawsuits, threatened lawsuits, and settlements related to securitization transactions in which SCC participated. A variety of claims are alleged in these matters, including violations of federal and state securities laws and common law fraud, based on alleged materially inaccurate or misleading disclosures, that originators, depositors, securitization trustees, or servicers breached their representations and warranties or otherwise failed to fulfill their obligations, or that securitization trustees violated statutory requirements by failing to properly protect the certificate holders’ interests. SCC has received notices of claims for indemnification or potential indemnification obligations relating to such matters, including lawsuits or settlements to which underwriters, depositors, or securitization trustees are party. Additional lawsuits against the parties to the securitization transactions may be filed in the future, and SCC may receive additional notices of claims for indemnification, contribution or similar obligations with respect to existing or new lawsuits or settlements of such lawsuits or other claims. Certain of the notices received included, and future notices may include, a reservation of rights to assert claims for contribution, which are referred to herein as "contribution claims." Contribution claims may become operative if indemnification is unavailable or insufficient to cover all of the losses and expenses involved. We have not concluded that a loss related to any of these indemnification or contribution claims is probable, nor have we accrued a liability related to any of these claims.

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, 2020, total approximately $274 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.



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ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RECENT DEVELOPMENTS

On July 1, 2020, we provided written notice to Axos Bank ("Axos") of the termination of the Program Management Agreement by and between Emerald Financial Services, LLC , a wholly–owned indirect subsidiary of the Company, and Axos, effective July 1, 2020. On August 5, 2020, we entered into a Program Management Agreement with MetaBank, N.A. (“Meta”), a wholly-owned subsidiary of Meta Financial Group, Inc. Under the Meta Program Management Agreement and its ancillary agreements and related product schedules, Meta will act as the bank provider of H&R Block-branded financial products, including Emerald Advance^TM, Emerald Card, Emerald Savings, Refund Advance, and Refund Transfer in the United States.

On August 7, 2020, we issued $650.0 million of 3.875% Senior Notes due August 15, 2030 (2030 Senior Notes). The 2030 Senior Notes are not redeemable by the bondholders prior to maturity, although we have the right to redeem some or all of these notes at any time, at specified redemption prices. We intend to use the net proceeds from the 2030 Senior Notes to repay, at maturity, the $650.0 million in principal outstanding of our 4.125% notes due 2020, which mature on October 1, 2020, and for general corporate purposes.

FINANCIAL OVERVIEW

As a result of the COVID-19 pandemic, on March 21, 2020, the federal tax filing deadline in the U.S. for individual 2019 tax returns was extended from April 15, 2020 to July 15, 2020, and substantially all U.S. states with an April 15 individual state income tax filing requirement extended their respective deadlines. In Canada, the deadline for individuals to file was extended to June 1, 2020. In addition, governments around the world have taken a variety of actions to contain the spread of COVID-19. Jurisdictions in which we operate imposed, and continue to impose, various restrictions on our business, including capacity and other operational limitations, social distancing requirements, and in limited instances required us to close certain offices. One of our top priorities has been providing for the health and safety of our clients, associates, and franchisees, while still providing taxpayers access to help in getting their refunds during this difficult economic time. These events have impacted the typical seasonality of our business and the comparability of our financial results. Consequently, a portion of revenues and expenses that would have normally been recognized in our fourth quarter of fiscal year 2020 shifted to the first quarter of fiscal year 2021.

As we continued to finish out the tax season in our first quarter of fiscal year 2021, we had more offices open, increased office hours, and had more tax professionals than we would typically have in the first quarter. However, this was less than we would typically have during a tax season to serve clients.

Due to the extension of the tax season, our revenues increased $450.7 million, or 299.7% and we recorded pretax income during the quarter of $124.0 million compared to a loss of $207.1 million in the prior year.

For more detail on the entire U.S. individual 2019 tax filing season volumes see our Form 8-K filed on July 28, 2020.

RESULTS OF OPERATIONS

Our subsidiaries provide assisted, DIY, and digital 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.



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U.S. Operating Statistics
Three months ended July 31,	2020		2019		Change			% Change
Tax returns prepared: (in 000s) ⁽¹⁾
Company-owned operations	1,439		136		1,303			958.1	%
Franchise operations	548		74		474			640.5	%
Total assisted	1,987		210		1,777			846.2	%

Desktop	489		19		470			2,473.7	%
Online	1,019		51		968			1,898.0	%
Total DIY	1,508		70		1,438			2,054.3	%

Total U.S. Returns	3,495		280		3,215			1,148.2	%

Net Average Charge: ⁽²⁾
Company-owned operations	$	234.82	$	254.53	$	(19.71	)	(7.7	)%
Franchise operations ⁽³⁾	220.78		244.06		(23.28		)	(9.5	)%
DIY	44.83		48.31		(3.48		)	(7.2	)%

⁽¹⁾

An assisted tax return is defined as a current or prior year individual tax return that has been accepted and paid for by the client. Also included are Tax Pro Go^SM, Tax Pro Review®, and business returns. A DIY return is defined as a return that has been electronically filed and accepted by the IRS, including online returns paid and printed. Returns of 193 thousand and 11 thousand for the periods ending July 31, 2020 and 2019, respectively, filed using the IRS Free File program have been excluded as we will no longer participate in the program after October 2020.


⁽²⁾	Net average charge is calculated as tax preparation fees divided by tax returns prepared.


⁽³⁾	Net average charge related to H&R Block Franchise operations represents tax preparation fees collected by H&R Block franchisees divided by returns prepared in franchise offices. H&R Block will recognize a portion of franchise revenues as franchise royalties based on the terms of franchise agreements.

We provide net average charge as a key operating metric because we consider it an important supplemental measure useful to analysts, investors, and other interested parties as it provides insights into pricing and tax return mix relative to our customer base, which are significant drivers of revenue. Our definition of net average charge may not be comparable to similarly titled measures of other companies.



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Consolidated - Financial Results				(in 000s, except per share amounts)
Three months ended July 31,	2020			2019			$ Change			% Change
Revenues:
U.S. assisted tax preparation	$	337,728		$	32,992		$	304,736		923.7	%
U.S. royalties	35,949			6,859			29,090			424.1	%
U.S. DIY tax preparation	67,595			3,410			64,185			1,882.3	%
International	67,818			40,581			27,237			67.1	%
Refund Transfers	10,553			1,509			9,044			599.3	%
Emerald Card®	17,055			13,855			3,200			23.1	%
Peace of Mind® Extended Service Plan	31,995			32,837			(842		)	(2.6	)%
Tax Identity Shield®	9,367			4,522			4,845			107.1	%
Interest and fee income on Emerald Advance^TM	663			554			109			19.7	%
Wave	12,067			3,625			8,442			232.9	%
Other	10,240			9,618			622			6.5	%
Total revenues	601,030			150,362			450,668			299.7	%

Compensation and benefits:
Field wages	118,542			53,803			64,739			120.3	%
Other wages	60,694			53,837			6,857			12.7	%
Benefits and other compensation	33,798			26,474			7,324			27.7	%
	213,034			134,114			78,920			58.8	%
Occupancy	99,300			92,152			7,148			7.8	%
Marketing and advertising	18,811			6,779			12,032			177.5	%
Depreciation and amortization	39,508			38,605			903			2.3	%
Bad debt	1,856			(968		)	2,824			**
Other	75,565			74,846			719			1.0	%
Total operating expenses	448,074			345,528			102,546			29.7	%
Other income (expense), net	3,211			9,123			(5,912		)	(64.8	)%
Interest expense on borrowings	(32,125		)	(21,071		)	(11,054		)	(52.5	)%
Pretax income (loss)	124,042			(207,114		)	331,156			**
Income taxes (benefit)	30,486			(61,390		)	(91,876		)	**
Net income (loss) from continuing operations	93,556			(145,724		)	239,280			**
Net loss from discontinued operations	(2,297		)	(4,523		)	2,226			49.2	%
Net income (loss)	$	91,259		$	(150,247	)	$	241,506		**

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations	$	0.48		$	(0.72	)	$	1.20		**
Discontinued operations	(0.01		)	(0.02		)	0.01			50.0	%
Consolidated	$	0.47		$	(0.74	)	$	1.21		**

EBITDA from continuing operations ⁽¹⁾	$	195,675		$	(147,438	)	$	343,113		**

⁽¹⁾See "Non-GAAP FInancial Information" at the end of this item for a reconciliation of non-GAAP measures.

Three months ended July 31, 2020 compared to July 31, 2019

Due to the extension of the tax season related to the COVID-19 pandemic, we had significant increases in the number of tax returns prepared in all categories compared to the prior year. This resulted in increases in almost all categories of our revenues, with total revenues increasing $450.7 million, or 299.7% International revenues increased $27.2 million, or 67.1% due to higher tax returns prepared in our Canadian operations due to the extension of the Canadian tax season as described above.

Wave revenues increased $8.4 million, or 232.9%. We acquired Wave on June 28, 2019, and Wave's results have been included in our results of operations since that date.



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Total operating expenses increased $102.5 million, or 29.7%, from the prior year period. Field wages increased $64.7 million, or 120.3%, primarily due to the increase in tax return volumes, which was partially offset by Canadian wage subsidies. Other wages increased $6.9 million, or 12.7%, primarily due to higher bonus accruals based on the results of the extended tax season and the acquisition of Wave. Benefits and other compensation increased $7.3 million, or 27.7% primarily due to higher payroll taxes as a result of higher wages. Occupancy expenses increased $7.1 million, or 7.8%, due to additional office related expenses as a result of the extension of the tax season and higher rent due to an increase in the number of offices over the prior year. Marketing expense increased $12.0 million, or 177.5%, due to the extension of the tax season.

Other expenses increased $0.7 million, or 1.0%. The components of other expenses are as follows:



Three months ended July 31,	2020			2019		$ Change			% Change
Consulting and outsourced services	$	20,365		$	18,189	$	2,176		12.0	%
Bank partner fees	(1,039		)	1,482		(2,521		)	**
Client claims and refunds	5,727			9,244		(3,517		)	(38.0	)%
Employee travel and related expenses	2,713			8,425		(5,712		)	(67.8	)%
Technology-related expenses	16,607			17,410		(803		)	(4.6	)%
Credit card/bank charges	14,226			3,992		10,234			256.4	%
Insurance	3,899			4,394		(495		)	(11.3	)%
Legal fees and settlements	4,061			3,273		788			24.1	%
Supplies	3,694			3,286		408			12.4	%
Other	5,312			5,151		161			3.1	%
	$	75,565		$	74,846	$	719		1.0	%

Bank partner fees decreased $2.5 million due to a reduction in the credit loss guarantee related to Refund Advances. Credit card and bank charges increased $10.2 million as a result of higher transaction volumes for assisted tax preparation and DIY tax preparation and higher Wave payment processing fees resulting from the acquisition of Wave.

We recorded income taxes in the current year of $30.5 million compared to income tax benefits of $61.4 million in the prior year. See Item 1, note 7 to the consolidated financial statements for additional discussion.

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 in a typical year. Therefore, we normally require the use of cash to fund losses and working capital needs, periodically resulting in a working capital deficit, from May through January. We typically have relied on available cash balances from the prior tax season and borrowings to meet liquidity needs in our first three quarters. As a result of the COVID-19 pandemic, on March 21, 2020, the federal tax filing deadline for individual 2019 tax returns was extended from April 15, 2020 to July 15, 2020, and substantially all U.S. states with an April 15 individual state income tax filing requirement extended their respective deadlines. In Canada, the deadline for individuals to file was extended to June 1, 2020. These extensions have impacted the typical seasonality of our business and the comparability of our financial results.

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, 2020 are sufficient to meet our operating, investing and financing needs.



H&R Block, Inc. \| Q1 FY2021 Form 10-Q	21

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DISCUSSION OF CONSOLIDATED STATEMENTS OF CASH FLOWS – The following table summarizes our statements of cash flows for the three months ended July 31, 2020 and 2019. See Item 1 for the complete consolidated statements of cash flows for these periods.



	(in 000s)
Three months ended July 31,	2020			2019
Net cash provided by (used in):
Operating activities	$	(20,500	)	$	(483,829	)
Investing activities	4,380			(358,807		)
Financing activities	(56,720		)	(100,193		)
Effects of exchange rates on cash	6,405			556
Net change in cash, cash equivalents and restricted cash	$	(66,435	)	$	(942,273	)

Operating Activities. Cash used in operations decreased, primarily due to the extension of the 2019 tax season into our fiscal first quarter due to COVID-19.

Investing Activities. Cash provided by investing activities totaled $4.4 million for the three months ended July 31, 2020 compared to cash used in investing activities of $358.8 million in the prior year period. This change is due to the prior year acquisition of Wave.

Financing Activities. Cash used in financing activities totaled $56.7 million for the three months ended July 31, 2020 compared to $100.2 million in the prior year period. This change resulted primarily from share repurchases in the prior 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 $50.0 million and $52.5 million for the three months ended July 31, 2020 and 2019, 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 $751.8 million which is effective through June 2022. We did not repurchase any shares during the current year period. In the prior year period, we repurchased $44.1 million of our common stock at an average price of $27.68 per share.

Share repurchases may be effectuated through open market transactions, some of which may be effectuated under SEC Rule 10b5-1. The Company may cancel, suspend, or extend the period for the purchase of shares at any time. Any repurchases will be funded primarily through available cash and cash from operations. Although we may continue to repurchase shares, there is no assurance that we will purchase up to the full Board authorization.

Capital Investment. Capital expenditures totaled $8.3 million and $15.2 million for the three months ended July 31, 2020 and 2019, 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 franchisee and competitor businesses totaling $13 thousand in the current year compared to Wave and franchisee and competitor businesses totaling $394.4 million in the prior year. See Item 1, note 5 for additional information on our acquisitions.

FINANCING RESOURCES – In the fourth quarter of fiscal year 2020, we drew down the full $2.0 billion available under our CLOC to increase our cash position and maximize flexibility in light of the uncertainty surrounding the impact of the COVID-19 pandemic, which we expect to repay in full in September 2020.

On August 7, 2020, we issued the 2030 Senior Notes. As of April 30, 2020, our $650.0 million notes due in October 2020 (October 2020 Senior Notes) were classified as a current liability. As we intend to use the net proceeds from the 2030 Senior Notes to repay our October 2020 Senior Notes, our October 2020 Senior Notes have been reclassified to long-term as of July 31, 2020.



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The following table provides ratings for debt issued by Block Financial as of July 31, 2020 and April 30, 2020:

As of

July 31, 2020

April 30, 2020

Short-term

Long-term

Outlook

Short-term

Long-term

Outlook

Moody's

P-3

Baa3

Stable

P-3

Baa3

Negative

S&P

A-2

BBB

Negative

A-2

BBB

Negative

Other than described above, there have been no material changes in our borrowings from those reported as of April 30, 2020 in our Annual Report on Form 10-K.

CASH AND OTHER ASSETS – As of July 31, 2020, we held cash and cash equivalents, excluding restricted amounts, of $2.6 billion, including $152.7 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, 2020.

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 a increase of $6.4 million during the three months ended July 31, 2020 compared to a increase of $0.6 million in the prior year.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS – Except as described in Recent Developments related to the Axos Program Management Agreement, Meta Program Management Agreement, and 2030 Senior Notes issuance, there have been no material changes in our contractual obligations and commercial commitments from those reported as of April 30, 2020 in our Annual Report on Form 10-K.

SUMMARIZED GUARANTOR FINANCIAL STATEMENTS – Block Financial is a 100% owned subsidiary of H&R Block, Inc. Block Financial is the Issuer and H&R Block, Inc. is the full and unconditional Guarantor of our Senior Notes, CLOC and other indebtedness issued from time to time.

The following table presents summarized financial information for H&R Block, Inc. (Guarantor) and Block Financial (Issuer) on a combined basis after intercompany eliminations and excludes investments in and equity earnings in non-guarantor subsidiaries.



SUMMARIZED BALANCE SHEET	(in 000s)
As of July 31, 2020	Guarantor and Issuer

Current assets	$	52,836
Noncurrent assets	3,632,226
Current liabilities	48,854
Noncurrent liabilities	3,504,209



SUMMARIZED STATEMENTS OF OPERATIONS	(in 000s)
Three months ended July 31, 2020	Guarantor and Issuer

Total revenues	$	21,015
Loss from continuing operations before income taxes	(12,725		)
Net loss from continuing operations	(9,793		)
Net loss	(12,090		)

The table above reflects $3.6 billion of non-current intercompany receivables due to the Issuer from non-guarantor subsidiaries.



H&R Block, Inc. \| Q1 FY2021 Form 10-Q	23

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REGULATORY ENVIRONMENT

On November 17, 2017, the CFPB published its final rule changing the regulation of certain consumer credit products, including payday loans, vehicle title loans, and high-cost installment loans (Payday Rule). Certain limited provisions of the Payday Rule became effective on January 16, 2018, but most provisions were scheduled to go into effect on August 19, 2019. On November 6, 2018, a judge from the U.S. District Court for the Western District of Texas issued a stay of the Payday Rule's August 19, 2019 compliance date, which stay remains in effect until further notice from the Court. On July 7, 2020, the CFPB issued a final rule revoking the mandatory underwriting provisions of the Payday Rule.

Given these developments, we are unsure whether, when, or in what form the Payday Rule will go into effect. The timing to resolve the litigation is unclear. We do not currently expect the Payday Rule to have a material adverse impact on the Emerald Advance^TM product, our business, or our consolidated financial position, results of operations, and cash flows. We will continue to monitor and analyze the potential impact of any further Payday Rule developments on the Company.

There have been no other material changes in our regulatory environment from what was reported as of April 30, 2020 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 make adjustments for certain non-GAAP financial measures related to amortization of intangibles from acquisitions and goodwill impairments. We believe removing the impacts of amortization of acquired intangibles and goodwill impairments provides a more meaningful indicator of performance and will assist in understanding our financial results.

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, adjusted EBITDA from continuing operations, EBITDA margin from continuing operations, adjusted EBITDA margin from continuing operations, adjusted diluted earnings per share 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.



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The following is a reconciliation of net income (loss) to EBITDA from continuing operations, which is a non-GAAP financial measure:



			(in 000s)
	Three months ended July 31,
	2020		2019
Net income (loss) - as reported	$	91,259	$	(150,247	)
Discontinued operations, net	2,297		4,523
Net income (loss) from continuing operations - as reported	93,556		(145,724		)
Add back:
Income taxes (benefit) of continuing operations	30,486		(61,390		)
Interest expense of continuing operations	32,125		21,071
Depreciation and amortization of continuing operations	39,508		38,605
	102,119		(1,714		)
EBITDA from continuing operations	$	195,675	$	(147,438	)

The following is a reconciliation of our results from continuing operations to our adjusted results from continuing operations, which are non-GAAP financial measures:



(in 000s, except per share amounts)
	Three months ended July 31,
	2020			2019

Net income (loss) from continuing operations - as reported	$	93,556		$	(145,724	)

Adjustments:
Amortization of intangibles related to acquisitions (pretax)	18,577			16,239
Tax effect of adjustments ⁽¹⁾	(4,400		)	(4,162		)
Adjusted net income (loss) from continuing operations	$	107,733		$	(133,647	)

Diluted earnings (loss) per share - as reported	$	0.48		$	(0.72	)
Adjustments, net of tax	0.07			0.06
Adjusted earnings (loss) per share	$	0.55		$	(0.66	)

⁽¹⁾Tax effect of adjustments is the difference between the tax provision calculated on a GAAP basis and on an adjusted non-GAAP basis.

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. They may also include the expected impact of the coronavirus (COVID–19) pandemic, including, without limitation, the impact on economic and financial markets, the Company's capital resources and financial condition, future expenditures, potential regulatory actions, such as extensions of tax filing deadlines or other related relief, changes in consumer behaviors and modifications to the Company's operations relating thereto.

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,



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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, 2020 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, 2020.


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, 2020 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 10 to the consolidated financial statements.

ITEM 1A. RISK FACTORS

We face legal actions in connection with our various business activities, and current or future legal actions may damage our reputation, impair our product offerings, or result in material liabilities and losses.

We have been named, and from time to time will likely continue to be named, in various legal actions, including arbitrations, class or representative actions, actions or inquiries by state attorneys general and other regulators, and other litigation arising in connection with our various business activities, including relating to our various service and product offerings. For example, as previously reported, we are subject to litigation and have received and are responding to certain governmental inquiries relating to the IRS Free File program. These inquiries include requests for information and, in some cases, subpoenas from regulators and state attorneys general. On July 15, 2020, the New York State Department of Financial Services issued a press release and report on its investigation of certain tax preparers, including us, related to the IRS Free File program. We cannot predict whether this report or other inquiries could lead to further inquiries, further litigation, fines, injunctions or other regulatory or legislative actions or impacts on our brand, reputation and business. See discussion in Part I, Item 1, note 10 to the consolidated financial statements, and Item 8, note 13 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended April 30, 2020. We also grant our franchisees a limited license to use our registered trademarks and, accordingly,



26	Q1 FY2021 Form 10-Q \| H&R Block, Inc.

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there is risk that one or more of the franchisees may be alleged to be controlled by us. Third parties, regulators or courts may seek to hold us responsible for the actions or failures to act by our franchisees. Adverse outcomes related to legal actions could result in substantial damages and could cause our earnings to decline. Negative public opinion could also result from our or our franchisees’ actual or alleged conduct in such claims, possibly damaging our reputation, which, in turn, could adversely affect our business prospects and cause the market price of our securities to decline.

Except as indicated above, there have been no material changes in our risk factors from those reported at April 30, 2020 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 2021 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	—	$	—	—	$	751,837
June 1 - June 30	166	$	14.28	—	$	751,837
July 1 - July 31	38	$	14.25	—	$	751,837
	204	$	14.28	—


⁽¹⁾	We purchased approximately 204 thousand shares in connection with funding employee income tax withholding obligations arising upon the lapse of restrictions on 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:

4.1

Third Supplemental Indenture, dated August 7, 2020, among H&R Block, Inc., Block Financial LLC (formerly known as Block Financial Corporation), Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company) and U.S. Bank National Association, as separate trustee, filed as Exhibit 4.1 to the Company's current report on Form 8–K filed August 7, 2020, file number 1–06089, is incorporated herein by reference.


4.2	Officers’ Certificate, dated August 7, 2020, of Block Financial LLC (including the Form of the 3.875% Notes due 2030), filed as Exhibit 4.2 to the Company's current report on Form 8–K filed August 7, 2020, file number 1–06089, is incorporated herein by reference.


10.1	Program Management Agreement, dated August 5, 2020, by and between Emerald Financial Services, LLC and MetaBank, N.A.


31.1	Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.2	Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.


32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.



H&R Block, Inc. \| Q1 FY2021 Form 10-Q	27

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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


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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)



28	Q1 FY2021 Form 10-Q \| H&R Block, Inc.

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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 3, 2020

/s/ Tony G. Bowen

Tony G. Bowen

Chief Financial Officer

September 3, 2020

/s/ Kellie J. Logerwell

Kellie J. Logerwell

Chief Accounting Officer

September 3, 2020



H&R Block, Inc. \| Q1 FY2021 Form 10-Q	29

H&R Block - 10-Q quarterly report FY2021 Q1

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