NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS – Our subsidiaries provide assisted and do-it-yourself (DIY) tax return preparation solutions through multiple channels (including in-person, online and mobile applications, virtual, and desktop software) and distribute H&R Block-branded services and products, including those of our bank partner, to the general public primarily in the United States (U.S.), Canada and Australia. 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.
"H&R Block," "the Company," "we," "our" and "us" are used interchangeably to refer to H&R Block, Inc., to H&R Block, Inc. and its subsidiaries, or to H&R Block, Inc.'s operating subsidiaries, as appropriate to the context.
PRINCIPLES OF CONSOLIDATION – The consolidated financial statements include the accounts of the Company and our subsidiaries. Intercompany transactions and balances have been eliminated.
DISCONTINUED OPERATIONS – Our discontinued operations include the results of operations of Sand Canyon Corporation, previously known as Option One Mortgage Corporation (including its subsidiaries, collectively, SCC), which exited its mortgage business in fiscal year 2008. See note 12 for additional information on litigation, claims, and other loss contingencies related to our discontinued operations.
SEGMENT INFORMATION – We report a single segment that includes all of our continuing operations.
MANAGEMENT ESTIMATES – The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions and judgments are applied in the evaluation of contingent losses arising from our discontinued mortgage business, contingent losses associated with pending claims and litigation, reserves for uncertain tax positions, and fair value of reporting units. Estimates have been prepared based on the best information available as of each balance sheet date. As such, actual results could differ materially from those estimates.
CASH AND CASH EQUIVALENTS – All non-restricted highly liquid instruments purchased with an original maturity of three months or less are considered to be cash equivalents.
Outstanding checks in excess of funds on deposit (book overdrafts) included in accounts payable totaled $2.9 million and $15.2 million as of April 30, 2021 and 2020, respectively.
CASH AND CASH EQUIVALENTS – RESTRICTED – Cash and cash equivalents – restricted consists primarily of cash held by our captive insurance subsidiary that is expected to be used to pay claims.
RECEIVABLES AND RELATED ALLOWANCES – Our trade receivables consist primarily of accounts receivable from tax clients for tax return preparation and related fees. The allowance for doubtful accounts for these receivables requires management's judgment regarding collectibility and current economic conditions to establish an amount considered by management to be adequate to cover estimated losses as of the balance sheet date. Losses from tax clients for tax return preparation and related fees are not specifically identified and charged off; instead they are evaluated on a pooled basis. At the end of the fiscal year the outstanding balances on these receivables are evaluated based on collections received and expected collections over subsequent tax seasons. We establish an allowance for doubtful accounts at an amount that we believe represents the net realizable value. In December of each year we charge-off the receivables to an amount we believe represents the net realizable value.
Our financing receivables consist primarily of participations in H&R Block Emerald Advance® lines of Credit (EAs), loans made to franchisees, and amounts due under H&R Block Instant RefundSM (Instant Refund).
Our accounting policies related to receivables and related allowances are discussed further in note 4.
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2021 Form 10-K | H&R Block, Inc.
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PROPERTY AND EQUIPMENT – Buildings and equipment are initially recorded at cost and are depreciated over the estimated useful life of the assets using the straight-line method. Leasehold improvements are initially recorded at cost and are amortized over the estimated useful life using the straight-line method. Estimated useful lives are generally 15 to 40 years for buildings, two to five years for computers and other equipment, three to five years for purchased software and up to eight years for leasehold improvements.
GOODWILL AND INTANGIBLE ASSETS – Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill is not amortized, but rather is tested for impairment annually during our fourth quarter, or more frequently if indications of potential impairment exist.
Intangible assets, including internally-developed software, with finite lives are amortized over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Intangible assets are typically amortized over the estimated useful life of the assets using the straight-line method.
We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative analysis. If the quantitative analysis indicates the carrying value of a reporting unit exceeds its fair value, we measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. See additional discussion in note 6.
LEASES – Operating lease right-of-use (ROU) assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. The majority of our lease portfolio consists of retail office space in the U.S., Canada, and Australia. The contract terms for these retail offices generally are from May 1 to April 30, and generally run three to five years.
We record operating lease ROU assets and operating lease liabilities based on the discounted future minimum lease payments over the term of the lease. We generally do not include renewal options in the term of the lease. As the rates implicit in our leases are not readily determinable, we use our incremental borrowing rate based on the lease term and geographic location in calculating the discounted future minimum lease payments.
We recognize lease expenses for our operating leases on a straight-line basis. For lease payments that are subject to adjustments based on indexes or rates, the most current index or rate adjustments were included in the measurement of our ROU assets and lease liabilities at adoption or commencement of the lease. Variable lease costs, including non-lease components (such as common area maintenance, utilities, insurance, and taxes) and certain index-based changes in lease payments, are expensed as incurred. Our ROU assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.
We adopted Accounting Standards Update No. 2016-02, "Leases" (ASU 2016-02) as of May 1, 2019 using the alternative transition method, which allows us to use the effective date of the new standard as the initial application date. Therefore our consolidated statement of operations and cash flows for the year ended April 30, 2019 are presented under the previous accounting standard.
FOREIGN CURRENCY – The financial statements of the Company’s foreign operations are translated into U.S. dollars. Assets and liabilities are translated at current exchange rates as of the balance sheet date, equity accounts at historical exchange rates, while income statement accounts are translated at the average rates in effect during the year. Translation adjustments are not included in net income, but are recorded as a separate component of other comprehensive income in stockholders' equity. Foreign currency gains and losses included in operating results for fiscal years 2021, 2020 and 2019 were not material.
TREASURY SHARES – We record shares of common stock repurchased by us as treasury shares, at cost, resulting in a reduction of stockholders' equity. Periodically, we may retire shares held in treasury as determined by our Board of Directors. We typically reissue treasury shares as part of our stock-based compensation programs. When shares are reissued, we determine the cost using the average cost method.
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H&R Block, Inc. | 2021 Form 10-K
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43
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FAIR VALUE MEASUREMENT – We use the following classification of financial instruments pursuant to the fair value hierarchy methodologies for assets measured at fair value:
▪Level 1 – inputs to the valuation are quoted prices in an active market for identical assets.
▪Level 2 – inputs to the valuation include quoted prices for similar assets in active markets utilizing a third-party pricing service to determine fair value.
▪Level 3 – valuation is based on significant inputs that are unobservable in the market and our own estimates of assumptions that we believe market participants would use in pricing the asset.
Assets measured on a recurring basis are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date.
Fair value estimates, methods and assumptions are set forth below. The fair value was not estimated for assets and liabilities that are not considered financial instruments.
▪Cash and cash equivalents, including restricted - Fair value approximates the carrying amount (Level 1).
▪Receivables, net - short-term - For short-term balances the carrying values reported in the balance sheet approximate fair market value due to the relative short-term nature of the respective instruments (Level 1).
▪Receivables, net - long-term - The carrying values for the long-term portion of loans to franchisees approximate fair market value due to variable interest rates, low historical delinquency rates and franchise territories serving as collateral (Level 1). Long-term EA, Refund Transfer (RT) and Instant Refund receivables are carried at net realizable value which approximates fair value (Level 3). Net realizable value is determined based on historical and projected collection rates.
▪Long-term debt - The fair value of our Senior Notes is based on quotes from multiple banks (Level 2). See note 7 for fair value.
▪Contingent consideration - Fair value approximates the carrying amount (Level 3). See note 10 for the carrying amount.
REVENUE RECOGNITION – Revenue is recognized upon satisfaction of performance obligations by the transfer of a product or service to the customer. Revenue is the amount of consideration we expect to receive for our services and products and excludes sales taxes. The majority of our services and products have multiple performance obligations. We have certain services for which, the various performance obligations are generally provided simultaneously at a point in time, and revenue is recognized at that time. We have certain services and products where we have multiple performance obligations that are provided at various points in time. For these services and products, we allocate the transaction price to the various performance obligations based on relative standalone selling prices and recognize the revenue when the respective performance obligations have been satisfied. We have determined that our contracts do not contain a significant financing component.
Service revenues consist of assisted and online tax preparation revenues, fees for electronic filing, revenues from RTs, Emerald Card, Peace of Mind® (POM), Tax Identity Shield (TIS) and Wave.
Assisted tax preparation services include tax preparation and electronic filing or printing of the completed tax return. Revenues from tax preparation services, including printing for clients that choose to print and mail their returns, are recognized when a completed return is accepted by the customer. Revenues for electronic filing are recognized when the return is electronically filed.
Royalties are based on contractual percentages of franchise gross receipts and are generally recorded in the period in which the services are provided by the franchisee to the customer.
DIY tax preparation includes fees for online and desktop tax preparation software and for electronic filing or printing. Revenues for online software, including printing for clients that choose to print and mail their returns, are recognized when the customer uses the software to complete a return and revenues for desktop software are recognized when the software is sold to the end user. Revenues for electronic filing are recognized when the return is electronically filed.
Refund Transfer revenues are recognized when the IRS filing acknowledgment is received and the bank account is established at our bank partner, MetaBank®, N.A. (Meta), a wholly-owned subsidiary of Meta Financial Group, Inc.
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2021 Form 10-K | H&R Block, Inc.
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Emerald Card® revenues consist of interchange income from the use of debit cards and fees related to the card, such as fees from the use of ATM networks. Interchange income is a fee paid by merchants to our bank partner through the interchange network. Revenue associated with our Emerald Card® is recognized based on authorization of cardholder transactions.
Peace of Mind® Extended Service Plan revenues are initially deferred and recognized over the term of the plan, based on the historical pattern of actual claims paid, as claims paid represent the transfer of POM services to the customer. The plan is effective for the life of the tax return, which can be up to six years; however, the majority of claims are incurred in years two and three after the sale of POM. POM has multiple performance obligations where we represent our clients if they are audited by a taxing authority, and assume the cost, subject to certain limits, of additional taxes owed by a client resulting from errors attributable to H&R Block. Incremental wages are also deferred and recognized over the term of the plan, in conjunction with the revenues earned.
Tax Identity Shield® revenues are initially deferred and are recognized as the various services are provided to the client, either by us or a third party, throughout the term of the contract, which generally ends on April 30th of the following year. TIS has multiple performance obligations where we provide clients assistance in helping protect their tax identity and access to services to help restore their tax identity, if necessary. Protection services include a daily scan of the dark web for personal information, a monthly scan for social security number in credit header data, notifying clients if their information is detected on a tax return filed through H&R Block, and obtaining additional IRS identity protections when eligible.
Interest and fee income on Emerald AdvanceSM lines of credit is recorded over the life of the underlying loan.
Wave revenues primarily consist of fees received to process payment transactions and are generally calculated as a percentage of the transaction amounts processed. Revenues are recognized upon authorization of the transaction.
MARKETING AND ADVERTISING – Advertising costs for radio and television ads are expensed over the course of the tax season, with online, print and mailing advertising expensed as incurred. Marketing and advertising expenses totaled $262.0 million, $255.1 million and $269.8 million in fiscal years 2021, 2020 and 2019, respectively.
EMPLOYEE BENEFIT PLANS – We have a 401(k) defined contribution plan covering eligible full-time and seasonal employees following the completion of an eligibility period. Employer contributions to this plan are discretionary and totaled $26.6 million, $18.8 million and $19.3 million for continuing operations in fiscal years 2021, 2020 and 2019, respectively.
We have severance plans covering executives and eligible regular full-time or part-time active employees who incur a qualifying termination. Expenses related to severance benefits of continuing operations totaled $8.4 million, $2.5 million and $5.0 million in fiscal years 2021, 2020 and 2019, respectively.
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H&R Block, Inc. | 2021 Form 10-K
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45
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NOTE 2: REVENUE RECOGNITION
The majority of our revenues are from our U.S. tax services business. The following table disaggregates our U.S. tax services revenues by major service line, with revenues from our international tax services businesses and from Wave included as separate lines:
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|
|
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|
|
|
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(in 000s)
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|
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Year ended April 30,
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2021
|
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2020
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2019
|
Revenues:
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|
|
|
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U.S. assisted tax preparation
|
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$
|
2,035,107
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|
|
$
|
1,533,303
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|
|
$
|
1,858,998
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U.S. royalties
|
|
226,253
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|
|
193,411
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|
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243,541
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U.S. DIY tax preparation
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|
313,055
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|
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208,901
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|
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261,413
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International
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|
249,868
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|
|
180,065
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|
|
220,562
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Refund Transfers
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|
163,329
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|
|
154,687
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|
|
169,985
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Emerald Card®
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136,717
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|
|
92,737
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|
|
98,256
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Peace of Mind® Extended Service Plan
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98,882
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105,185
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|
108,114
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Tax Identity Shield®
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40,624
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31,797
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35,661
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Interest and fee income on Emerald AdvanceSM
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53,430
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|
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60,867
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|
|
58,182
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Wave
|
|
58,277
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|
|
36,711
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|
|
—
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Other
|
|
38,445
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|
|
42,056
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|
|
40,169
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|
Total revenues
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|
$
|
3,413,987
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|
|
$
|
2,639,720
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|
|
$
|
3,094,881
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|
|
|
|
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Changes in the balances of deferred revenue and wages for POM are as follows:
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(in 000s)
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POM
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Deferred Revenue
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Deferred Wages
|
Year ended April 30,
|
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2021
|
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2020
|
|
2021
|
|
2020
|
Balance, beginning of the year
|
|
$
|
183,685
|
|
|
$
|
212,511
|
|
|
$
|
21,618
|
|
|
$
|
27,306
|
|
Amounts deferred
|
|
115,114
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|
|
95,032
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|
|
11,367
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|
|
10,708
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Amounts recognized on previous deferrals
|
|
(114,928)
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|
|
(123,858)
|
|
|
(12,816)
|
|
|
(16,396)
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|
Balance, end of the year
|
|
$
|
183,871
|
|
|
$
|
183,685
|
|
|
$
|
20,169
|
|
|
$
|
21,618
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2021, deferred revenue related to POM was $183.9 million. We expect that $101.9 million will be recognized over the next twelve months, while the remaining balance will be recognized over the following sixty months. The related liabilities are included in deferred revenue and other liabilities in the consolidated balance sheets. The related assets are included in prepaid expenses and other current assets or other noncurrent assets.
As of April 30, 2021, and 2020, TIS deferred revenue was $28.9 million and $30.8 million, respectively. The related liabilities are included in deferred revenue and other current liabilities in the consolidated balance sheets. All deferred revenue related to TIS as of April 30, 2021 will be recognized within the next twelve months.
A significant portion of our accounts receivable balances arise from services and products that we provide to our customers, with the exception of those related to EAs, which arise from purchased participation interests with our bank partner. The majority of our receivables are related to our RT product. Generally the prices of our services and products are fixed and determinable at the time of sale. For our RT product, we record a receivable for our fees which is then collected at the time the IRS issues the client’s refund. Our receivables from customers are generally collected on a periodic basis during and subsequent to the tax season. See note 4 for our accounts receivable balances.
NOTE 3: EARNINGS 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
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46
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2021 Form 10-K | H&R Block, Inc.
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computed by dividing net income (loss) from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period.
The computations of basic and diluted earnings (loss) per share from continuing operations are as follows:
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|
|
|
|
|
|
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|
|
|
(in 000s, except per share amounts)
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Year ended April 30,
|
|
2021
|
|
2020
|
|
2019
|
Net income from continuing operations attributable to shareholders
|
|
$
|
590,212
|
|
|
$
|
6,156
|
|
|
$
|
445,256
|
|
Amounts allocated to participating securities
|
|
(2,413)
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|
|
(639)
|
|
|
(1,040)
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|
Net income from continuing operations attributable to common shareholders
|
|
$
|
587,799
|
|
|
$
|
5,517
|
|
|
$
|
444,216
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
186,832
|
|
|
196,701
|
|
|
205,372
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|
Potential dilutive shares
|
|
1,945
|
|
|
1,407
|
|
|
1,352
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|
Dilutive weighted average common shares
|
|
188,777
|
|
|
198,108
|
|
|
206,724
|
|
Earnings per share from continuing operations attributable to common shareholders:
|
|
|
|
|
|
|
Basic
|
|
$
|
3.15
|
|
|
$
|
0.03
|
|
|
$
|
2.16
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Diluted
|
|
3.11
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|
|
0.03
|
|
|
2.15
|
|
|
|
|
|
|
|
|
Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 0.8 million, 0.9 million and 0.4 million shares of stock for fiscal years 2021, 2020 and 2019, respectively, as the effect would be antidilutive.
NOTE 4: RECEIVABLES
Receivables, net of their related allowance, consist of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
As of April 30,
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|
2021
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2020
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|
|
Short-term
|
|
Long-term
|
|
Short-term
|
|
Long-term
|
Loans to franchisees
|
|
$
|
16,666
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|
|
$
|
28,909
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|
|
$
|
25,397
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|
|
$
|
31,329
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|
Receivables for U.S. assisted and DIY tax preparation and related fees
|
|
92,531
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|
|
3,793
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|
|
47,030
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|
|
3,112
|
|
H&R Block Instant RefundSM receivables
|
|
35,665
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|
|
1,463
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|
|
15,031
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|
|
1,325
|
|
H&R Block Emerald Advance® lines of credit
|
|
9,210
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|
|
17,095
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|
|
10,001
|
|
|
14,081
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|
Software receivables from retailers
|
|
4,823
|
|
|
—
|
|
|
7,341
|
|
|
—
|
|
Royalties and other receivables from franchisees
|
|
16,136
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|
|
196
|
|
|
9,861
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|
|
42
|
|
Wave payment processing receivables
|
|
1,569
|
|
|
—
|
|
|
3,200
|
|
|
—
|
|
Other
|
|
21,276
|
|
|
1,233
|
|
|
15,336
|
|
|
1,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
197,876
|
|
|
$
|
52,689
|
|
|
$
|
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 April 30, 2021 and 2020, loans with a principal balance of $0.1 million and $0.2 million, respectively, were more than 90 days past due. We had no loans to franchisees on non-accrual status as of April 30, 2021 or 2020.
The credit quality of these receivables is assessed at origination at an individual franchisee level. Payment history is monitored on a regular basis. Based upon our internal analysis and underwriting activities, we believe all loans to franchisees are of similar credit quality. Loans are evaluated for collectibility when they become delinquent or more than 90 days past due. Amounts deemed to be uncollectible are written off to bad debt expense and bad debt related to these loans has typically been immaterial. Additionally, the franchise territory serves as additional protection in the event a franchisee defaults on the loan, as we may revoke franchise rights, write off the remaining balance of the loan and refranchise the territory or begin operating it as company-owned.
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H&R Block, Inc. | 2021 Form 10-K
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47
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H&R Block Instant RefundSM. Our Canadian operations advance refunds due to certain clients from the Canada Revenue Agency (CRA), in exchange for a fee. The total fee we charge for this service is mandated by legislation which is administered by the CRA. The client assigns to us the full amount of the tax refund to be issued by the CRA and the refund is then sent by the CRA directly to us. The amount we advance to clients under this program is the amount of their estimated refund, less our fees, any amounts expected to be withheld by the CRA for amounts the client may owe to government authorities and any amounts owed to us from prior years. The CRA system for tracking amounts due to various government agencies also indicates if the client has already filed a return, does not exist in CRA records, or is bankrupt. This serves to greatly reduce the amounts of uncollectible receivables and the risk of fraudulent returns. H&R Block Instant RefundSM amounts are generally received from the CRA within 60 days of filing the client's return, with the remaining balance collectible from the client.
Credit losses from these receivables are not specifically identified and charged off; instead we review the credit quality of these receivables on a pooled basis, segregated by the year of origination with older years being deemed more unlikely to be repaid. At the end of the fiscal year, the outstanding balances on these receivables are evaluated based on collections received and expected collections over subsequent tax seasons. We establish an allowance for doubtful accounts at an amount that we believe represents the net realizable value. In December of each year we charge-off the receivables to an amount we believe represents the net realizable value.
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 April 30, 2021 are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
Year of Origination
|
|
Current Balance
|
|
Non-Accrual
|
|
|
|
|
|
2021
|
|
$
|
38,086
|
|
|
$
|
561
|
|
2020 and prior
|
|
578
|
|
|
578
|
|
|
|
|
|
|
|
|
38,664
|
|
|
$
|
1,139
|
|
Allowance
|
|
(1,536)
|
|
|
|
Net balance
|
|
$
|
37,128
|
|
|
|
|
|
|
|
|
H&R Block Emerald Advance® lines of credit. EAs are typically offered to clients in our offices from mid-November through mid-January, in amounts up to $1,000. If the borrower meets certain criteria as agreed in the loan terms, the line of credit can be utilized year-round. EA balances require an annual paydown on February 15th, and any amounts unpaid are placed on non-accrual status as of March 1st. Payments on past due amounts are applied to principal. These lines of credit are offered by our bank partner. We purchase participation interests in their loans, as discussed further in note 10.
Credit losses from EAs are not specifically identified and charged off; instead we review the credit quality of these receivables on a pooled basis, segregated by the year of origination with older years being deemed more unlikely to be repaid. At the end of the fiscal year, the outstanding balances on these receivables are evaluated based on collections received and expected collections over subsequent tax seasons. We establish an allowance for doubtful accounts at an amount that we believe represents the net realizable value. In December of each year we charge-off the receivables to an amount we believe represents the net realizable value.
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 April 30, 2021, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
|
Year of Origination
|
|
Current Balance
|
|
Non-Accrual
|
|
|
|
|
|
2021
|
|
$
|
37,809
|
|
|
$
|
37,809
|
|
2020 and prior
|
|
3,239
|
|
|
3,239
|
|
|
|
|
|
|
Revolving loans
|
|
12,961
|
|
|
12,438
|
|
|
|
54,009
|
|
|
$
|
53,486
|
|
Allowance
|
|
(27,704)
|
|
|
|
Net balance
|
|
$
|
26,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
2021 Form 10-K | H&R Block, Inc.
|
Allowance for Doubtful Accounts. Activity in the allowance for doubtful accounts for EAs and all other short-term and long-term receivables for the years ended April 30, 2021 , 2020, and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
EAs
|
|
|
|
All Other
|
|
Total
|
Balances as of May 1, 2018
|
|
$
|
26,622
|
|
|
|
|
$
|
55,191
|
|
|
$
|
81,813
|
|
Provision
|
|
17,272
|
|
|
|
|
53,297
|
|
|
70,569
|
|
Charge-offs, recoveries and other
|
|
(16,359)
|
|
|
|
|
(54,550)
|
|
|
(70,909)
|
|
Balances as of April 30, 2019
|
|
27,535
|
|
|
|
|
53,938
|
|
|
81,473
|
|
Provision
|
|
21,771
|
|
|
|
|
54,850
|
|
|
76,621
|
|
Charge-offs, recoveries and other
|
|
(17,272)
|
|
|
|
|
(58,342)
|
|
|
(75,614)
|
|
Balances as of April 30, 2020
|
|
32,034
|
|
|
|
|
50,446
|
|
|
82,480
|
|
Provision
|
|
14,319
|
|
|
|
|
59,132
|
|
|
73,451
|
|
Charge-offs, recoveries and other
|
|
(18,649)
|
|
|
|
|
(53,774)
|
|
|
(72,423)
|
|
Balances as of April 30, 2021
|
|
$
|
27,704
|
|
|
|
|
$
|
55,804
|
|
|
$
|
83,508
|
|
|
|
|
|
|
|
|
|
|
NOTE 5: PROPERTY AND EQUIPMENT
The components of property and equipment, net of accumulated depreciation and amortization, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
As of April 30,
|
|
2021
|
|
2020
|
Buildings
|
|
$
|
44,121
|
|
|
$
|
50,308
|
|
Computers and other equipment
|
|
62,712
|
|
|
77,483
|
|
Leasehold improvements
|
|
37,772
|
|
|
52,631
|
|
Purchased software
|
|
2,508
|
|
|
2,569
|
|
|
|
|
|
|
Land and other non-depreciable assets
|
|
1,377
|
|
|
1,376
|
|
|
|
$
|
148,490
|
|
|
$
|
184,367
|
|
|
|
|
|
|
Depreciation expense of property and equipment for continuing operations for fiscal years 2021, 2020 and 2019 was $73.4 million, $85.9 million and $93.5 million, respectively.
The carrying value of long-lived assets held outside the U.S., which is comprised of property and equipment, totaled $18.9 million, $19.1 million and $23.6 million as of April 30, 2021, 2020 and 2019, respectively.
NOTE 6: GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the years ended April 30, 2021 and 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
Goodwill
|
|
Accumulated Impairment Losses
|
|
Net
|
Balances as of May 1, 2019
|
|
$
|
552,234
|
|
|
$
|
(32,297)
|
|
|
$
|
519,937
|
|
Acquisition of Wave
|
|
300,560
|
|
|
—
|
|
|
300,560
|
|
Other acquisitions
|
|
23,795
|
|
|
—
|
|
|
23,795
|
|
Disposals and foreign currency changes, net
|
|
(26,154)
|
|
|
—
|
|
|
(26,154)
|
|
Impairments
|
|
—
|
|
|
(106,000)
|
|
|
(106,000)
|
|
Balances as of April 30, 2020
|
|
850,435
|
|
|
(138,297)
|
|
|
712,138
|
|
Acquisitions
|
|
6,948
|
|
|
—
|
|
|
6,948
|
|
Disposals and foreign currency changes, net
|
|
38,573
|
|
|
—
|
|
|
38,573
|
|
Impairments
|
|
—
|
|
|
—
|
|
|
—
|
|
Balances as of April 30, 2021
|
|
$
|
895,956
|
|
|
$
|
(138,297)
|
|
|
$
|
757,659
|
|
|
|
|
|
|
|
|
We tested goodwill for impairment in the fourth quarter of fiscal year 2021, and did not identify any impairment. In fiscal year 2020, we recorded a goodwill impairment loss of $106.0 million related to Wave.
|
|
|
|
|
|
H&R Block, Inc. | 2021 Form 10-K
|
49
|
Components of intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
As of April 30,
|
|
2021
|
|
2020
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Reacquired franchise rights
|
|
$
|
370,112
|
|
|
$
|
(179,356)
|
|
|
$
|
190,756
|
|
|
$
|
365,062
|
|
|
$
|
(159,754)
|
|
|
$
|
205,308
|
|
Customer relationships
|
|
316,508
|
|
|
(251,160)
|
|
|
65,348
|
|
|
314,191
|
|
|
(227,445)
|
|
|
86,746
|
|
Internally-developed software
|
|
156,308
|
|
|
(116,126)
|
|
|
40,182
|
|
|
154,083
|
|
|
(113,698)
|
|
|
40,385
|
|
Noncompete agreements
|
|
41,212
|
|
|
(35,484)
|
|
|
5,728
|
|
|
41,072
|
|
|
(33,639)
|
|
|
7,433
|
|
Franchise agreements
|
|
19,201
|
|
|
(15,894)
|
|
|
3,307
|
|
|
19,201
|
|
|
(14,614)
|
|
|
4,587
|
|
Purchased technology
|
|
122,700
|
|
|
(72,609)
|
|
|
50,091
|
|
|
122,700
|
|
|
(57,548)
|
|
|
65,152
|
|
Trade name
|
|
5,800
|
|
|
(1,064)
|
|
|
4,736
|
|
|
5,800
|
|
|
(483)
|
|
|
5,317
|
|
Acquired assets pending final allocation (1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
48
|
|
|
—
|
|
|
48
|
|
|
|
$
|
1,031,841
|
|
|
$
|
(671,693)
|
|
|
$
|
360,148
|
|
|
$
|
1,022,157
|
|
|
$
|
(607,181)
|
|
|
$
|
414,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents recent business acquisitions for which final purchase price allocations have not yet been determined.
Amortization of intangible assets of continuing operations for the years ended April 30, 2021, 2020 and 2019 was $83.4 million, $83.6 million and $73.2 million, respectively. Estimated amortization of intangible assets for fiscal years 2022, 2023, 2024, 2025 and 2026 is $75.4 million, $57.7 million, $38.4 million, $20.3 million and $13.3 million, respectively.
We made payments to acquire businesses totaling $15.6 million, $450.2 million and $43.6 million during the fiscal years ended April 30, 2021, 2020 and 2019, respectively. The fiscal year ended April 30, 2020 included the acquisition of Wave. The amounts and weighted-average lives of assets acquired during fiscal year 2021, including amounts capitalized and placed in service related to internally-developed software, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
Amount
|
|
Weighted-Average Life (in years)
|
Internally-developed software
|
|
$
|
14,919
|
|
|
3
|
Customer relationships
|
|
8,987
|
|
|
5
|
Reacquired franchise rights
|
|
5,941
|
|
|
5
|
Noncompete agreements
|
|
348
|
|
|
5
|
Total
|
|
$
|
30,195
|
|
|
4
|
|
|
|
|
|
During the fiscal year ended April 30, 2020, we acquired Wave for $408.4 million. Included in the transaction price was $8.2 million which will be treated as compensation expense.
The assets acquired, net of liabilities assumed on the acquisition date, and the identified intangible assets and goodwill, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
|
|
Amount Acquired
|
|
Weighted-Average Life (in years)
|
Assets acquired and liabilities assumed, net
|
|
$
|
3,928
|
|
|
|
Deferred tax liability
|
|
(8,126)
|
|
|
|
Purchased technology
|
|
68,000
|
|
|
10
|
Customer relationships
|
|
23,000
|
|
|
5
|
Non-compete agreements
|
|
7,070
|
|
|
5
|
Trade name
|
|
5,800
|
|
|
10
|
Total identifiable net assets
|
|
99,672
|
|
|
|
Goodwill (1)
|
|
300,560
|
|
|
|
Total identifiable assets and goodwill
|
|
$
|
400,232
|
|
|
|
|
|
|
|
|
(1) See discussion of Wave's goodwill impairment of $106.0 million in fiscal year 2020 above.
|
|
|
|
|
|
50
|
2021 Form 10-K | H&R Block, Inc.
|
NOTE 7: LONG-TERM DEBT
The components of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
As of April 30,
|
|
2021
|
|
2020
|
|
|
Senior Notes, 4.125%, due October 2020 (1)
|
|
$
|
—
|
|
|
$
|
650,000
|
|
|
|
Senior Notes, 5.500%, due November 2022 (1)
|
|
500,000
|
|
|
500,000
|
|
|
|
Senior Notes, 5.250%, due October 2025 (1)
|
|
350,000
|
|
|
350,000
|
|
|
|
Senior Notes, 3.875%, due August 2030 (1)
|
|
650,000
|
|
|
—
|
|
|
|
Committed line of credit borrowings
|
|
—
|
|
|
2,000,000
|
|
|
|
Debt issuance costs and discounts
|
|
(9,961)
|
|
|
(4,743)
|
|
|
|
Total long-term debt
|
|
1,490,039
|
|
|
3,495,257
|
|
|
|
Less: Current portion
|
|
—
|
|
|
(649,384)
|
|
|
|
Long-term portion
|
|
$
|
1,490,039
|
|
|
$
|
2,845,873
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value of long-term debt
|
|
$
|
1,609,000
|
|
|
$
|
3,526,000
|
|
|
|
|
|
|
|
|
|
|
(1) The Senior Notes are not redeemable by the bondholders prior to maturity, although we have the right to redeem some or all of these notes at any time, at specified redemption prices. The interest rates on our Senior Notes are subject to adjustment based upon our credit ratings.
On August 7, 2020, we issued $650.0 million of 3.875% Senior Notes due August 15, 2030 (2030 Senior Notes). The proceeds of the 2030 Senior Notes were used to repay the $650 million Senior Notes that matured on October 1, 2020.
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 April 30, 2021.
In September 2020, we utilized our cash on hand to repay the outstanding $2.0 billion CLOC. We had no outstanding balance under our CLOC as of April 30, 2021 and amounts available to borrow were limited by the debt-to-EBITDA covenant to approximately $1.7 billion as of April 30, 2021.
See note 13 for discussion regarding an amendment to our CLOC effective June 11, 2021.
OTHER INFORMATION – The aggregate payments required to retire long-term debt are $500.0 million in fiscal year 2023, $350.0 million in fiscal year 2026 and $650.0 million in fiscal year 2031.
|
|
|
|
|
|
H&R Block, Inc. | 2021 Form 10-K
|
51
|
NOTE 8: STOCK-BASED COMPENSATION
We have a stock-based Long Term Incentive Plan (Plan), under which we can grant stock options, restricted shares, performance-based share units, restricted share units, deferred stock units and other forms of equity to employees, non-employee directors and consultants. Stock-based compensation expense and related tax items are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
Year ended April 30,
|
|
2021
|
|
2020
|
|
2019
|
Stock based compensation expense
|
|
$
|
28,271
|
|
|
$
|
28,045
|
|
|
$
|
23,767
|
|
Tax benefit
|
|
1,802
|
|
|
7,175
|
|
|
6,076
|
|
Realized tax benefit
|
|
1,690
|
|
|
5,856
|
|
|
3,416
|
|
|
|
|
|
|
|
|
As of April 30, 2021, we had 11.2 million shares reserved for future awards under our Plan. We issue shares from our treasury stock to satisfy the exercise or vesting of stock-based awards and believe we have adequate treasury stock balances available for future issuances.
We measure the fair value of restricted share units (other than performance-based share units) based on the closing price of our common stock on the grant date. We measure the fair value of performance-based share units based on the Monte Carlo valuation model, taking into account, as necessary, those provisions of the performance-based share units that are characterized as market conditions. We generally expense the grant-date fair value, net of estimated forfeitures, over the vesting period on a straight-line basis.
Options and restricted share units (other than performance-based share units) granted to employees typically vest pro-rata based upon service over a three-year period with a portion vesting each year. Performance-based share units granted to employees typically cliff vest at the end of a three-year period based upon satisfaction of both service-based and performance-based requirements. The number of performance-based share units that ultimately vest can range from zero up to 200 percent of the number granted, based on the form of the award, which can vary by year of grant. The performance metrics for these awards typically consist of earnings before interest, taxes, depreciation and amortization (EBITDA), EBITDA growth, return on invested capital, total shareholder return or our stock price. Deferred stock units granted to non-employee directors vest when they are granted and are settled six months after the director separates from service as a director of the Company, except in the case of death.
All share units granted to employees and non-employee directors receive cumulative dividend equivalents to the extent of the units ultimately vesting at the time of distribution. Options granted under our Plan have a maximum contractual term of ten years.
A summary of restricted share units and deferred stock units, including those that are performance-based, for the year ended April 30, 2021, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(shares in 000s)
|
|
|
Restricted Share Units and Deferred Stock Units
|
|
Performance-Based Share Units
|
|
|
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
Outstanding, beginning of the year
|
|
2,080
|
|
|
$
|
25.94
|
|
|
1,245
|
|
|
$
|
29.12
|
|
Granted
|
|
1,328
|
|
|
15.58
|
|
|
949
|
|
|
16.74
|
|
Released
|
|
(525)
|
|
|
27.13
|
|
|
(77)
|
|
|
24.19
|
|
Forfeited
|
|
(259)
|
|
|
21.83
|
|
|
(129)
|
|
|
19.16
|
|
Outstanding, end of the year
|
|
2,624
|
|
|
$
|
21.34
|
|
|
1,988
|
|
|
$
|
21.88
|
|
|
|
|
|
|
|
|
|
|
The total fair value of shares and units vesting during fiscal years 2021, 2020 and 2019 was $16.1 million, $22.1 million and $17.9 million, respectively. As of April 30, 2021, we had $37.9 million of total unrecognized
|
|
|
|
|
|
52
|
2021 Form 10-K | H&R Block, Inc.
|
compensation cost related to these shares. This cost is expected to be recognized over a weighted-average period of two years.
When valuing our performance-based share units on the grant date, we typically estimate the expected volatility using historical volatility for H&R Block, Inc. and selected comparable companies. The dividend yield is calculated based on the current dividend and the market price of our common stock on the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve in effect on the grant date. Both expected volatility and the risk-free interest rate are based on a period that approximates the expected term. The following assumptions were used to value performance-based share units using the Monte Carlo valuation model during the periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended April 30,
|
|
2021
|
|
2020
|
|
2019
|
Expected volatility
|
|
21.14% - 84.49%
|
|
13.47% - 66.33%
|
|
13.16% - 66.47%
|
Expected term
|
|
3 years
|
|
3 years
|
|
3 years
|
Dividend yield (1)
|
|
0% - 3.95%
|
|
0% - 3.55%
|
|
0%-4.39%
|
Risk-free interest rate
|
|
0.14% - 0.18%
|
|
1.70
|
%
|
|
2.61
|
%
|
Weighted-average fair value
|
|
$
|
16.74
|
|
|
$
|
32.01
|
|
|
$
|
24.48
|
|
|
|
|
|
|
|
|
(1)The valuation model assumes that dividends are reinvested by the Company on a continuous basis.
NOTE 9: 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 currently closed. With respect to state and local jurisdictions and countries outside of the U.S., we are typically subject to examination for three to six years after the income tax returns have been filed. Although the outcome of tax audits is always uncertain, we believe that adequate amounts of tax, interest, and penalties have been provided for in the accompanying consolidated financial statements for any adjustments that might be incurred due to federal, state, local or foreign audits.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law. The CARES Act includes, among other items, modifications to net operating loss carryback periods, net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act allows a five-year carryback of net operating losses generated between 2018 and 2021 to fully offset certain taxable income previously subject to a 35% statutory tax rate. As a result of the CARES Act and changes to our methods of accounting for items under the Internal Revenue Code, we generated a loss for tax purposes on our calendar 2020 tax return, will carry back the loss to two of the five preceding tax years, and obtain a refund of previously paid federal income taxes. The net operating loss carryback has reduced our effective tax rate and income taxes payable and increased our unrecognized tax benefits, income tax refund receivables, and deferred tax liabilities. The net operating loss carryback will reopen our 2015 tax return to examination.
The components of income (loss) from continuing operations upon which domestic and foreign income taxes have been provided are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
Year ended April 30,
|
|
2021
|
|
2020
|
|
2019
|
Domestic
|
|
$
|
489,499
|
|
|
$
|
56,121
|
|
|
$
|
389,319
|
|
Foreign
|
|
179,237
|
|
|
(59,495)
|
|
|
155,841
|
|
|
|
$
|
668,736
|
|
|
$
|
(3,374)
|
|
|
$
|
545,160
|
|
|
|
|
|
|
|
|
We operate in multiple income tax jurisdictions both within the United States and internationally. Accordingly, management must determine the appropriate allocation of income to each of these jurisdictions based on transfer pricing analyses of comparable companies and predictions of future economic conditions. Although these intercompany transactions reflect arm’s length terms and the proper transfer pricing documentation is in place,
|
|
|
|
|
|
H&R Block, Inc. | 2021 Form 10-K
|
53
|
transfer pricing terms and conditions may be scrutinized by local tax authorities during an audit and any resulting changes may impact our mix of earnings in countries with differing statutory tax rates.
The reconciliation between the income tax provision and the amount computed by applying the statutory U.S. federal tax rate to income taxes of continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended April 30,
|
|
2021
|
|
2020
|
|
2019
|
U.S. statutory tax rate
|
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
Change in tax rate resulting from:
|
|
|
|
|
|
|
State income taxes, net of federal income tax benefit
|
|
1.8
|
%
|
|
20.4
|
%
|
|
2.3
|
%
|
Earnings taxed in foreign jurisdictions
|
|
(1.2)
|
%
|
|
619.4
|
%
|
|
(2.7)
|
%
|
Permanent differences
|
|
0.5
|
%
|
|
(257.5)
|
%
|
|
0.3
|
%
|
Impairment of goodwill
|
|
—
|
%
|
|
(832.5)
|
%
|
|
—
|
%
|
Uncertain tax positions
|
|
7.5
|
%
|
|
508.3
|
%
|
|
(2.3)
|
%
|
U.S. tax on income from foreign affiliates
|
|
1.0
|
%
|
|
(247.4)
|
%
|
|
—
|
%
|
Remeasurement of deferred tax assets and liabilities
|
|
(0.1)
|
%
|
|
117.6
|
%
|
|
0.2
|
%
|
Changes in prior year estimates
|
|
(0.5)
|
%
|
|
55.5
|
%
|
|
—
|
%
|
Federal income tax credits
|
|
(0.9)
|
%
|
|
216.3
|
%
|
|
—
|
%
|
|
|
|
|
|
|
|
Tax impacts of stock-based compensation vesting
|
|
—
|
%
|
|
44.8
|
%
|
|
—
|
%
|
|
|
|
|
|
|
|
Tax benefit due to NOL carryback under CARES Act
|
|
(17.5)
|
%
|
|
—
|
%
|
|
—
|
%
|
Tax deductible write-down of foreign investment
|
|
(1.7)
|
%
|
|
—
|
%
|
|
—
|
%
|
|
|
|
|
|
|
|
Change in valuation allowance - domestic
|
|
(0.2)
|
%
|
|
37.1
|
%
|
|
0.4
|
%
|
Change in valuation allowance - foreign
|
|
1.7
|
%
|
|
20.6
|
%
|
|
(0.8)
|
%
|
|
|
|
|
|
|
|
Other
|
|
0.3
|
%
|
|
(41.2)
|
%
|
|
(0.1)
|
%
|
Effective tax rate
|
|
11.7
|
%
|
|
282.4
|
%
|
|
18.3
|
%
|
|
|
|
|
|
|
|
Our effective tax rate for continuing operations was 11.7% and 282.4% for fiscal year 2021 and 2020, respectively. The decrease in the effective tax rate in 2021 compared to 2020 is primarily due to the near break-even loss in 2020 of $3.4 million, which caused an exaggerated impact for nearly all adjustments impacting the rate. Our 2021 effective tax rate is also lower because of net operating loss carrybacks generated during the year, partially offset by uncertain tax positions recorded in the current year.
The increase in the effective tax rate in fiscal year 2020 compared to fiscal year 2019 is also primarily due to the near break-even loss in 2020 of $3.4 million, which caused an exaggerated impact for nearly all adjustments impacting the rate. For 2020, the largest increases in the effective tax rate over 2019 are tax benefits from statute of limitations expiring on certain uncertain tax positions and the mix of earnings in foreign jurisdictions, offset by the adverse tax impacts associated with the nondeductible goodwill impairment to the Wave reporting unit. Due to the pretax loss in 2020, the tax benefits increased the effective tax rate while tax expense decreased the effective tax rate.
|
|
|
|
|
|
54
|
2021 Form 10-K | H&R Block, Inc.
|
The components of income tax expense (benefit) for continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
|
|
Year ended April 30,
|
|
2021
|
|
2020
|
|
2019
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
58,834
|
|
|
$
|
18,048
|
|
|
$
|
74,993
|
|
|
|
State
|
|
12,000
|
|
|
(16,614)
|
|
|
12,345
|
|
|
|
Foreign
|
|
26,032
|
|
|
1,991
|
|
|
6,711
|
|
|
|
|
|
96,866
|
|
|
3,425
|
|
|
94,049
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
2,493
|
|
|
1,703
|
|
|
6,625
|
|
|
|
State
|
|
(11,368)
|
|
|
(1,516)
|
|
|
(1,070)
|
|
|
|
Foreign
|
|
(9,467)
|
|
|
(13,142)
|
|
|
300
|
|
|
|
|
|
(18,342)
|
|
|
(12,955)
|
|
|
5,855
|
|
|
|
Total income taxes (benefit) for continuing operations
|
|
$
|
78,524
|
|
|
$
|
(9,530)
|
|
|
$
|
99,904
|
|
|
|
|
|
|
|
|
|
|
|
|
The net loss from discontinued operations for fiscal years 2021, 2020 and 2019 totaled $6.4 million, $13.7 million and $22.7 million, respectively, and was net of tax benefits of $3.9 million, $4.1 million and $6.8 million, respectively.
The significant components of deferred tax assets and liabilities are reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
As of April 30,
|
|
2021
|
|
2020
|
Deferred tax assets:
|
|
|
|
|
Accrued expenses
|
|
$
|
3,576
|
|
|
$
|
4,646
|
|
Deferred revenue
|
|
10,445
|
|
|
11,082
|
|
Allowance for credit losses and related reserves
|
|
33,027
|
|
|
29,666
|
|
|
|
|
|
|
|
|
|
|
|
Deferred and stock-based compensation
|
|
24,712
|
|
|
6,669
|
|
Net operating loss carry-forward
|
|
104,013
|
|
|
86,213
|
|
Lease liabilities
|
|
112,249
|
|
|
126,505
|
|
Federal tax benefits related to state unrecognized tax benefits
|
|
16,682
|
|
|
16,729
|
|
Property and equipment
|
|
40,138
|
|
|
—
|
|
Intangibles - intellectual property
|
|
86,711
|
|
|
85,688
|
|
Valuation allowance
|
|
(55,401)
|
|
|
(45,124)
|
|
Total deferred tax assets
|
|
376,152
|
|
|
322,074
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Prepaid expenses and other
|
|
(11,927)
|
|
|
(5,189)
|
|
Lease right of use assets
|
|
(109,726)
|
|
|
(123,900)
|
|
Property and equipment
|
|
—
|
|
|
(12,221)
|
|
Income tax method change
|
|
(56,257)
|
|
|
—
|
|
Intangibles
|
|
(72,650)
|
|
|
(64,252)
|
|
Total deferred tax liabilities
|
|
(250,560)
|
|
|
(205,562)
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
125,592
|
|
|
$
|
116,512
|
|
|
|
|
|
|
|
|
|
|
|
|
H&R Block, Inc. | 2021 Form 10-K
|
55
|
A reconciliation of the deferred tax assets and liabilities and the corresponding amounts reported in the consolidated balance sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
As of April 30,
|
|
2021
|
|
2020
|
Deferred income tax assets
|
|
$
|
141,836
|
|
|
$
|
138,527
|
|
Deferred tax liabilities
|
|
(16,244)
|
|
|
(22,015)
|
|
Net deferred tax asset
|
|
$
|
125,592
|
|
|
$
|
116,512
|
|
|
|
|
|
|
Changes in our valuation allowance for fiscal years 2021, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
Year ended April 30,
|
|
2021
|
|
2020
|
|
2019
|
Balance, beginning of the year
|
|
$
|
45,124
|
|
|
$
|
47,070
|
|
|
$
|
49,215
|
|
|
|
|
|
|
|
|
Additions charged to costs and expenses
|
|
13,492
|
|
|
2,151
|
|
|
2,302
|
|
|
|
|
|
|
|
|
Deductions
|
|
(3,215)
|
|
|
(4,097)
|
|
|
(4,447)
|
|
Balance, end of the year
|
|
$
|
55,401
|
|
|
$
|
45,124
|
|
|
$
|
47,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our valuation allowance on deferred tax assets has a net increase of $10.3 million during the current period. The gross increase in valuation allowance of $13.5 million is related to net operating loss deferred tax assets generated by foreign losses that we do not expect to utilize in future years. This $13.5 million increase is offset by a $3.2 million decrease to our valuation allowance balance for adjustments to certain state and foreign net operating losses we now expect to utilize in future periods.
Certain of our subsidiaries file stand-alone returns in various state, local and foreign jurisdictions, and others join in filing consolidated or combined returns in such jurisdictions. As of April 30, 2021, we had net operating losses in various states and foreign jurisdictions. The amount of state and foreign net operating losses varies by taxing jurisdiction. We maintain a valuation allowance of $21.3 million on state net operating losses and $33.2 million on foreign net operating losses for the portion of such loses that, more likely than not, will not be realized. Of the $49.5 million of net operating loss deferred tax assets, $10.4 million will expire in varying amounts during fiscal years 2022 through 2041 and the remaining $39.1 million has no expiration.
We do not currently intend to repatriate non-borrowed funds held by our foreign subsidiaries in a manner that would trigger a material tax liability; therefore, no provision has been made for income taxes that might be payable upon remittance of such earnings. The amount of unrecognized tax liability on these foreign earnings, net of expected foreign tax credits, is immaterial as of April 30, 2021.
Changes in unrecognized tax benefits for fiscal years 2021, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
Year ended April 30,
|
|
2021
|
|
2020
|
|
2019
|
Balance, beginning of the year
|
|
$
|
168,062
|
|
|
$
|
185,144
|
|
|
$
|
186,061
|
|
Additions based on tax positions related to prior years
|
|
121,364
|
|
|
1,501
|
|
|
9,937
|
|
Reductions based on tax positions related to prior years
|
|
(34,470)
|
|
|
(10,128)
|
|
|
(42,647)
|
|
Additions based on tax positions related to the current year
|
|
43,800
|
|
|
12,093
|
|
|
38,611
|
|
Reductions related to settlements with tax authorities
|
|
(29,362)
|
|
|
(980)
|
|
|
(2,025)
|
|
Expiration of statute of limitations
|
|
(4,584)
|
|
|
(19,568)
|
|
|
(4,793)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of the year
|
|
$
|
264,810
|
|
|
$
|
168,062
|
|
|
$
|
185,144
|
|
|
|
|
|
|
|
|
The total gross unrecognized tax benefit ending balance as of April 30, 2021, 2020 and 2019, includes $214.9 million, $132.3 million and $122.5 million, respectively, which if recognized, would impact our effective tax rate. The difference results from adjusting the gross balances for such items as federal, state and foreign deferred items, interest and deductible taxes. The current year additions in unrecognized tax benefits related to prior years are primarily related to net operating loss carryback allowed by the CARES Act. Reductions from prior year are primarily related to settlements with taxing authorities and expirations of statute of limitations.
|
|
|
|
|
|
56
|
2021 Form 10-K | H&R Block, Inc.
|
We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $69.8 million within the next twelve months. The anticipated decrease is due to the expiration of statutes of limitations, anticipated closure of various tax matters currently under examination, and settlements with tax authorities. For such matters where a change in the balance of unrecognized tax benefits is not yet deemed reasonably possible, no estimate has been included.
Interest and penalties, if any, accrued on the unrecognized tax benefits are reflected in income tax expense. The total gross interest and penalties accrued as of April 30, 2021, 2020 and 2019 totaled $24.9 million, $22.0 million and $22.4 million, respectively.
NOTE 10: COMMITMENTS AND CONTINGENCIES
All assisted tax returns 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 $12.2 million and $9.4 million as of April 30, 2021 and 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 $17.6 million and $14.2 million as of April 30, 2021 and 2020, respectively, with amounts recorded in deferred revenue and other liabilities. These liabilities will be settled within the next ten years. 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 $14.2 million as of April 30, 2021, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $6.1 million.
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 CARES Act included, 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 $15.9 million in wage subsidies during the year ended April 30, 2021, which has been treated as a government subsidy to offset related operating expenses.
We are self-insured for certain risks, including, employer provided medical benefits, workers' compensation, property and casualty, tax errors and omissions, and claims related to POM. These programs maintain various self-insured retentions. For all but POM in company-owned offices, commercial insurance is purchased in excess of the self-insured retentions. We accrue estimated losses for self-insured retentions using actuarial models and assumptions based on historical loss experience.
We have a deferred compensation plan that permits certain employees to defer portions of their compensation and accrue income on the deferred amounts. Included in deferred revenue and other liabilities is $15.0 million and $15.1 million as of April 30, 2021 and 2020, respectively, reflecting our obligation under these plans.
On August 5, 2020, we entered into a Program Management Agreement with Meta. Under the Program Management Agreement and its ancillary agreements and related product schedules, Meta acts as the bank provider of H&R Block-branded financial products. EAs are originated by Meta, and pursuant to our participation agreement, we purchase a 90% participation interest in each advance made by Meta. See note 4 for additional information about these balances.
|
|
|
|
|
|
H&R Block, Inc. | 2021 Form 10-K
|
57
|
Refund Advance loans are originated by Meta and offered to certain assisted U.S. tax preparation clients, based on client eligibility as determined by Meta. We pay fees based on loan size and customer type. The fees are intended to cover expected loan losses and payments to capital providers, among other items. We have provided two guarantees related to this agreement. We have provided a guarantee up to $18.0 million related to certain loans to clients prior to the IRS accepting electronic filing. We accrued an estimated liability of $2.6 million at April 30, 2021 related to this guarantee. Additionally, we provided a guarantee for loans to virtual assisted clients. There is no maximum exposure under this guarantee. At April 30, 2021, we had no amounts accrued under this guarantee and we do not expect that a material amount will be paid for this guarantee under anticipated loss scenarios. As of April 30, 2020, we had accrued $5.4 million under the RA guarantee arrangements with our prior bank partner, and we paid $2.1 million, net of recoveries, related to that guarantee during the fiscal year ended April 30, 2021.
We offer POM to U.S. and Canadian clients, whereby we (1) represent our clients if they are audited by a taxing authority, and (2) assume the cost, subject to certain limits, of additional taxes owed by a client resulting from errors attributable to H&R Block. The additional taxes paid under POM have a cumulative limit of $6,000 for U.S. clients and $3,000 CAD for Canadian clients with respect to the federal, state/provincial and local tax returns we prepared for applicable clients during the taxable year protected by POM. A loss on POM would be recognized if the sum of expected costs for services exceeded unearned revenue.
NOTE 11: LEASES
For the year ended April 30, 2021, and 2020, our lease costs consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000s)
|
Year ended April 30,
|
|
2021
|
|
2020
|
Operating lease costs
|
|
$
|
239,357
|
|
|
$
|
242,314
|
|
Variable lease costs
|
|
77,758
|
|
|
71,319
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|
Subrental income
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|
(650)
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|
|
(1,277)
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|
Total lease costs
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|
$
|
316,465
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|
|
$
|
312,356
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|
|
|
|
|
|
As disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019, our rent expense for fiscal year 2019 totaled $255.0 million.
Other information related to operating leases for the fiscal years 2021 and 2020 are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in 000s)
|
Year ended April 30,
|
|
2021
|
|
2020
|
Cash paid for operating lease costs
|
|
$
|
240,299
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|
|
$
|
223,080
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|
New operating right of use assets and related lease liabilities(1)
|
|
$
|
167,827
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|
|
$
|
345,079
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|
Weighted-average remaining operating lease term (years)
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|
3
|
|
3
|
Weighted-average operating lease discount rate
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|
3.0
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%
|
|
3.3
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%
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|
|
|
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|
(1) The new operating right of use assets and related lease liabilities for the year ended April 30, 2020 excludes the initial impacts of the adoption of ASU 2016-02. The decrease from the prior year is due to the timing of the renegotiation of lease contracts approaching expiration.
Aggregate operating lease maturities as of April 30, 2021 are as follows:
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|
|
|
|
|
|
|
|
|
|
(in 000s)
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|
|
|
2022
|
|
$
|
215,610
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|
2023
|
|
137,824
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|
2024
|
|
73,066
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|
2025
|
|
27,219
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|
2026
|
|
3,713
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|
2027 and thereafter
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|
5,633
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|
Total future undiscounted operating lease payments
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|
463,065
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|
Less imputed interest
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|
(14,046)
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|
Total operating lease liabilities
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|
$
|
449,019
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|
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58
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2021 Form 10-K | H&R Block, Inc.
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NOTE 12: 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 April 30, 2021. While the potential future liabilities could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known, we do not believe any such liabilities are likely to have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows. As of April 30, 2021 and 2020, our total accrued liabilities were $5.5 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 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 April 30, 2021, 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
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H&R Block, Inc. | 2021 Form 10-K
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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 was denied. A trial date has been set for August 9, 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 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 plaintiff filed a first amended complaint on August 9, 2019, dropping H&R Block, Inc. from the case. In the amended complaint, the plaintiff seeks 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 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., and California Unfair Competition Law, California Business and Professions Code §§17200 et seq. The plaintiff seeks declaratory and injunctive relief, restitution, compensatory damages, punitive damages, interest, attorneys’ fees and costs. We filed a motion to stay the proceedings based on the primary jurisdiction doctrine and a motion to compel arbitration, both of which were denied. Our appeal of the court's order on the motion to compel arbitration was denied; we filed a petition for review with the United States Supreme Court. We filed an answer to the amended complaint. We filed a renewed motion to compel arbitration, which the court denied on May 13, 2021. We also filed a motion to dismiss the plaintiff's claim for public injunctive relief, which is pending. A trial date is set for June 6, 2023. 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
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60
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2021 Form 10-K | H&R Block, Inc.
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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. The court granted our motion to compel arbitration 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 not affect representation and warranty claims and lawsuits SCC has received or may receive, for example, where the statute of limitations has been tolled by agreement or a suit was timely filed.
In response to the statute of limitations rulings in the ACE case and similar rulings in other state and federal courts, parties seeking to pursue representation and warranty claims or lawsuits have sought, and may in the future seek, to distinguish certain aspects of the ACE decision, pursue alternate legal theories of recovery, or assert claims against other contractual parties such as securitization trustees. For example, a 2016 ruling by a New York intermediate appellate court, followed by the federal district court in the second Homeward case described below, allowed a counterparty to pursue litigation on additional loans in the same trust even though only some of the loans complied with the condition precedent of timely pre-suit notice and opportunity to cure or repurchase. Additionally, plaintiffs in litigation to which SCC is not party have alleged breaches of an independent contractual duty to provide notice of material breaches of representations and warranties and pursued separate claims to which, they argue, the statute of limitations ruling in the ACE case does not apply. The impact on SCC from alternative legal theories seeking to avoid or distinguish the ACE decision, or judicial limitations on the ACE decision, is unclear. SCC has not accrued liabilities for claims not subject to a tolling arrangement or not relating back to timely filed litigation.
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H&R Block, Inc. | 2021 Form 10-K
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On May 31, 2012, a lawsuit was filed by Homeward Residential, Inc. (Homeward) in the Supreme Court of the State of New York, County of New York, against SCC styled Homeward Residential, Inc. v. Sand Canyon Corporation (Index No. 651885/2012). SCC removed the case to the United States District Court for the Southern District of New York on June 28, 2012 (Case No. 12-cv-5067). The plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2006-2 and for the benefit of the trustee and the certificate holders of such trust, asserts claims for breach of contract, anticipatory breach, indemnity, and declaratory judgment in connection with alleged losses incurred as a result of the breach of representations and warranties relating to SCC and to loans sold to the trust. The trust was originally collateralized with approximately 7,500 loans. The plaintiff seeks specific performance of alleged repurchase obligations or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses, as well as a repurchase of all loans due to alleged misrepresentations by SCC as to itself and as to the loans' compliance with its underwriting standards and the value of underlying real estate. In response to a motion filed by SCC, the court dismissed the plaintiff's claims for breach of the duty to cure or repurchase, anticipatory breach, indemnity, and declaratory judgment. The case proceeded 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, with motions for summary judgment filed on December 6, 2019. On November 9, 2020, the court granted SCC's motion for summary judgment and dismissed Homeward's claims in their entirety as untimely under the applicable statute of limitations. Homeward appealed that ruling on December 4, 2020, and the appeal 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 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 proceeded on the remaining claims. Representatives of a holder of certificates in the trust filed a motion to intervene to add H&R Block, Inc. to the lawsuit and assert claims against H&R Block, Inc. based on alter ego, corporate veil-piercing, and agency law. On February 12, 2018, the court denied the motion to intervene. The settlement payments that were made in fiscal year 2018 for representation and warranty claims related to some of the loans in this case. Discovery in the case closed on September 30, 2019, with motions for summary judgment filed on December 6, 2019. On November 9, 2020, the court granted SCC's motion for summary judgment and dismissed Homeward's claims in their entirety as untimely under the applicable statute of limitations. Homeward appealed that ruling on December 4, 2020, and the appeal 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.
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
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62
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2021 Form 10-K | H&R Block, Inc.
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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 April 30, 2021, total approximately $270 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.
NOTE 13: SUBSEQUENT EVENTS
On June 9, 2021, the Board of Directors approved a change of the Company's fiscal year end from April 30 to June 30, effective immediately. The Company plans to file a transition report on Form 10-QT for the transition period of May 1, 2021 through June 30, 2021. The Company's 2022 fiscal year will begin on July 1, 2021 and end on June 30, 2022.
On June 11, 2021, we entered into a Fourth Amended and Restated Credit and Guarantee Agreement, which amended and restated the existing CLOC, extending the scheduled maturity date to June 11, 2026, decreasing the aggregate principal amount to $1.5 billion, revising the applicable rate table, and adjusting the covenant measurement dates due to our fiscal year end change. Other material terms remain substantially unchanged from our existing CLOC.