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EX-31.2 - EXHIBIT 31.2 - H&R BLOCK INChrb20160131exhibit312.htm
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EX-31.1 - EXHIBIT 31.1 - H&R BLOCK INChrb20160131exhibit311.htm
EX-12.2 - EXHIBIT 12.2 - H&R BLOCK INChrb20160131exhibit122.htm
EX-32.1 - EXHIBIT 32.1 - H&R BLOCK INChrb20160131exhibit321.htm
EX-12.1 - EXHIBIT 12.1 - H&R BLOCK INChrb20160131exhibit121.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended January 31, 2016
 
 
OR
¨

 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from             to             
Commission file number 1-6089
H&R Block, Inc.
(Exact name of registrant as specified in its charter)
MISSOURI
 
44-0607856
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
One H&R Block Way, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 854-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ     No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer þ          Accelerated filer ¨         Non-accelerated filer ¨         Smaller reporting company ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨    No  þ
The number of shares outstanding of the registrant's Common Stock, without par value, at the close of business on February 29, 2016: 224,405,675 shares.
 



Form 10-Q for the Period Ended January 31, 2016

Table of Contents

 
 
 
 
 
Consolidated Statements of Operations and Comprehensive Loss
 
 
Three and nine months ended January 31, 2016 and 2015
1
 
 
 
 
Consolidated Balance Sheets
 
 
As of January 31, 2016, January 31, 2015 and April 30, 2015
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
Nine months ended January 31, 2016 and 2015
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legal Proceedings
 
 
 
Risk Factors
 
 
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
 
Exhibits
 
 
 
 



PART I    FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(unaudited, in 000s, except 
per share amounts)
 
 
 
Three months ended January 31,
 
Nine months ended January 31,
 
 
2016

 
2015

 
2016

 
2015

 
 
 
 
 
 
 
 
 
REVENUES:
 
 
 
 
 
 
 
 
Service revenues
 
$
389,502

 
$
406,441

 
$
621,356

 
$
637,356

Royalty, product and other revenues
 
85,041

 
102,633

 
119,320

 
139,932

 
 
474,543

 
509,074

 
740,676

 
777,288

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
Cost of revenues:
 
 
 
 
 
 
 
 
Compensation and benefits
 
181,915

 
186,656

 
300,398

 
307,892

Occupancy and equipment
 
96,201

 
92,303

 
281,107

 
263,235

Provision for bad debt and loan losses
 
35,734

 
39,283

 
38,921

 
44,032

Depreciation and amortization
 
28,795

 
29,181

 
84,237

 
82,695

Other
 
49,868

 
47,255

 
127,759

 
116,247

 
 
392,513

 
394,678

 
832,422

 
814,101

Selling, general and administrative:
 
 
 
 
 
 
 
 
Marketing and advertising
 
93,708

 
87,569

 
115,204

 
108,227

Compensation and benefits
 
63,653

 
60,380

 
179,915

 
175,697

Depreciation and amortization
 
16,508

 
14,110

 
43,509

 
33,211

Other selling, general and administrative
 
28,003

 
27,488

 
97,283

 
66,991


 
201,872

 
189,547

 
435,911

 
384,126

Total operating expenses
 
594,385

 
584,225

 
1,268,333

 
1,198,227

 
 
 
 
 
 
 
 
 
Other income, net
 
3,055

 
304

 
13,993

 
827

Interest expense on borrowings
 
(23,573
)
 
(9,048
)
 
(46,329
)
 
(36,686
)
Other expenses, net
 
(6,140
)
 
(6,970
)
 
(11,335
)
 
(10,456
)
Loss from continuing operations before income tax benefit
 
(146,500
)
 
(90,865
)
 
(571,328
)
 
(467,254
)
Income tax benefit
 
(67,851
)
 
(55,554
)
 
(253,656
)
 
(209,865
)
Net loss from continuing operations
 
(78,649
)
 
(35,311
)
 
(317,672
)
 
(257,389
)
Net loss from discontinued operations, net of tax benefits of $1,776, $1,016, $5,085 and $4,814
 
(3,080
)
 
(1,637
)
 
(8,723
)
 
(7,789
)
NET LOSS
 
$
(81,729
)
 
$
(36,948
)
 
$
(326,395
)
 
$
(265,178
)
 
 
 
 
 
 
 
 
 
BASIC AND DILUTED LOSS PER SHARE:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.34
)
 
$
(0.13
)
 
$
(1.23
)
 
$
(0.94
)
Discontinued operations
 
(0.01
)
 

 
(0.04
)
 
(0.03
)
Consolidated
 
$
(0.35
)
 
$
(0.13
)
 
$
(1.27
)
 
$
(0.97
)
 
 
 
 
 
 
 
 
 
DIVIDENDS DECLARED PER SHARE
 
$
0.20

 
$
0.20

 
$
0.60

 
$
0.60

 
 
 
 
 
 
 
 
 
COMPREHENSIVE LOSS:
 
 
 
 
 
 
 
 
Net loss
 
$
(81,729
)
 
$
(36,948
)
 
$
(326,395
)
 
$
(265,178
)
Unrealized gains (losses) on securities, net of taxes:
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
 
(13
)
 
2,147

 
(3,523
)
 
6,917

Reclassification adjustment for gains included in income
 

 

 
(4,983
)
 
(15
)
Change in foreign currency translation adjustments
 
(4,628
)
 
(9,987
)
 
(14,083
)
 
(13,342
)
Other comprehensive loss
 
(4,641
)
 
(7,840
)
 
(22,589
)
 
(6,440
)
Comprehensive loss
 
$
(86,370
)
 
$
(44,788
)
 
$
(348,984
)
 
$
(271,618
)
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

H&R Block, Inc. | Q3 FY2016 Form 10-Q
1


CONSOLIDATED BALANCE SHEETS
 
(unaudited, in 000s, except 
share and per share amounts)
 
As of
 
January 31, 2016

 
January 31, 2015

 
April 30, 2015

 
 


 


 
 
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
189,511

 
$
1,321,134

 
$
2,007,190

Cash and cash equivalents - restricted
 
69,649

 
51,085

 
91,972

Receivables, less allowance for doubtful accounts of $47,234, $49,859 and $54,527
 
829,774

 
777,453

 
167,964

Deferred tax assets and income taxes receivable
 
29,411

 
167,826

 
174,267

Prepaid expenses and other current assets
 
101,169

 
92,976

 
70,283

Investments in available-for-sale securities
 
1,145

 
367,845

 
439,625

Total current assets
 
1,220,659

 
2,778,319

 
2,951,301

Mortgage loans held for investment, less allowance for loan losses of $6,931, $9,375 and $7,886
 
212,106

 
245,663

 
239,338

Property and equipment, at cost, less accumulated depreciation and amortization of $585,419, $509,039 and $518,797
 
290,202

 
308,805

 
311,387

Intangible assets, net
 
473,732

 
443,329

 
432,142

Goodwill
 
443,418

 
442,961

 
441,831

Deferred tax assets and income taxes receivable
 
113,887

 
13,441

 
13,461

Other noncurrent assets
 
120,042

 
146,423

 
125,960

Total assets
 
$
2,874,046

 
$
4,378,941

 
$
4,515,420

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
Commercial paper borrowings
 
$

 
$
591,486

 
$

Customer banking deposits
 

 
1,286,216

 
744,241

Accounts payable and accrued expenses
 
205,981

 
172,328

 
231,322

Accrued salaries, wages and payroll taxes
 
123,289

 
118,512

 
144,744

Accrued income taxes and reserves for uncertain tax positions
 
8,099

 
1,619

 
434,684

Current portion of long-term debt
 
817

 
781

 
790

Deferred revenue and other current liabilities
 
250,846

 
300,162

 
322,508

Total current liabilities
 
589,032

 
2,471,104

 
1,878,289

Long-term debt
 
2,626,933

 
505,460

 
505,298

Deferred tax liabilities and reserves for uncertain tax positions
 
88,377

 
144,036

 
142,586

Deferred revenue and other noncurrent liabilities
 
106,438

 
111,956

 
156,298

Total liabilities
 
3,410,780

 
3,232,556

 
2,682,471

COMMITMENTS AND CONTINGENCIES
 


 


 


STOCKHOLDERS' EQUITY:
 
 
 
 
 
 
Common stock, no par, stated value $.01 per share,
800,000,000 shares authorized, shares issued
of 264,117,966, 316,628,110 and 316,628,110
 
2,641

 
3,166

 
3,166

Additional paid-in capital
 
758,491

 
778,845

 
783,793

Accumulated other comprehensive income (loss)
 
(20,849
)
 
(1,263
)
 
1,740

Retained earnings (deficit)
 
(510,000
)
 
1,158,376

 
1,836,442

Less treasury shares, at cost, of 39,712,709, 41,384,132 and 41,353,479
 
(767,017
)
 
(792,739
)
 
(792,192
)
Total stockholders' equity (deficiency)
 
(536,734
)
 
1,146,385

 
1,832,949

Total liabilities and stockholders' equity
 
$
2,874,046

 
$
4,378,941

 
$
4,515,420

 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

2
Q3 FY2016 Form 10-Q | H&R Block, Inc.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited, in 000s)
 
Nine months ended January 31,
 
2016

 
2015

 
 
 
 
 
NET CASH USED IN OPERATING ACTIVITIES
 
$
(1,426,949
)
 
$
(1,247,200
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Sales, maturities of and payments received on available-for-sale securities
 
436,380

 
68,013

Principal payments on mortgage loans held for investment, net
 
24,664

 
18,098

Capital expenditures
 
(66,418
)
 
(98,876
)
Payments made for business acquisitions, net of cash acquired
 
(85,329
)
 
(112,163
)
Franchise loans:
 
 
 
 
Loans funded
 
(21,377
)
 
(48,013
)
Payments received
 
22,234

 
34,164

Other, net
 
3,887

 
6,079

Net cash provided by (used in) investing activities
 
314,041

 
(132,698
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Repayments of commercial paper and other short-term borrowings
 

 
(457,576
)
Proceeds from issuance of commercial paper and other short-term borrowings
 

 
1,049,062

Repayments of long-term debt
 
(225,000
)
 
(400,000
)
Proceeds from issuance of long-term debt
 
2,346,831

 

Customer banking deposits, net
 
(326,705
)
 
515,015

Transfer of HRB Bank deposits
 
(419,028
)
 

Dividends paid
 
(157,530
)
 
(164,905
)
Repurchase of common stock, including shares surrendered
 
(1,888,595
)
 
(10,355
)
Proceeds from exercise of stock options
 
25,803

 
16,026

Other, net
 
(43,972
)
 
(15,993
)
Net cash provided by (used in) financing activities
 
(688,196
)
 
531,274

 
 
 
 
 
Effects of exchange rate changes on cash
 
(16,575
)
 
(15,549
)
 
 
 
 
 
Net decrease in cash and cash equivalents
 
(1,817,679
)
 
(864,173
)
Cash and cash equivalents at beginning of the period
 
2,007,190

 
2,185,307

Cash and cash equivalents at end of the period
 
$
189,511

 
$
1,321,134

 
 
 
 
 
SUPPLEMENTARY CASH FLOW DATA:
 
 
 
 
Income taxes paid, net of refunds received
 
$
157,691

 
$
201,374

Interest paid on borrowings
 
32,772

 
43,561

Transfers of foreclosed loans to other assets
 
2,515

 
3,240

Accrued additions to property and equipment
 
4,385

 
1,986

Conversion of investment in preferred stock to available-for-sale common stock
 

 
5,000

Accrued purchase of common stock
 
21,167

 

 
 
 
 
 
See accompanying notes to consolidated financial statements.



H&R Block, Inc. | Q3 FY2016 Form 10-Q
3


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                  (unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated balance sheets as of January 31, 2016 and 2015, the consolidated statements of operations and comprehensive loss for the three and nine months ended January 31, 2016 and 2015, and the condensed consolidated statements of cash flows for the nine months ended January 31, 2016 and 2015 have been prepared by the Company, without audit. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows as of January 31, 2016 and 2015 and for all periods presented have been made.
"H&R Block," "the Company," "we," "our" and "us" are used interchangeably to refer to H&R Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U. S. (GAAP) have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our April 30, 2015 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of April 30, 2015 or for the year then ended are derived from our April 30, 2015 Annual Report to Shareholders on Form 10-K.
In connection with the deregistration of H&R Block, Inc., H&R Block Group, Inc. and Block Financial, LLC as savings and loan holding companies (SLHCs), as discussed further in note 2, we no longer present interest income on mortgage loans held for investment and various other investments as revenues. Effective September 1, 2015, these amounts are prospectively reported in other income on the consolidated statements of operations and comprehensive loss.
MANAGEMENT ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions and judgments are applied in the evaluation of contingent losses arising from our discontinued mortgage business, contingent losses associated with pending claims and litigation, valuation allowances on deferred tax assets, reserves for uncertain tax positions and related matters. Estimates have been prepared based on the best information available as of each balance sheet date. As such, actual results could differ materially from those estimates.
SEASONALITY OF BUSINESS Our operating revenues are seasonal in nature with peak revenues typically occurring in the months of January through April. Therefore, results for interim periods are not indicative of results to be expected for the full year.
DISCONTINUED OPERATIONS – Our discontinued operations include the results of operations of Sand Canyon Corporation, previously known as Option One Mortgage Corporation (including its subsidiaries, collectively, SCC), which exited its mortgage business in fiscal year 2008. See notes 12 and 13 for additional information on litigation, claims and other loss contingencies related to our discontinued operations.
NEW ACCOUNTING PRONOUNCEMENTS – In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-17, "Balance Sheet Classification of Deferred Taxes," (ASU 2015-17) which requires that deferred tax liabilities and assets be classified as noncurrent. The new standard is effective for us on May 1, 2017, with early adoption permitted. This guidance may be applied either prospectively, or retrospectively to all periods presented. We elected to adopt this guidance as of November 1, 2015, and applied it prospectively. As such, prior periods have not been adjusted. This guidance did not have a material effect on our consolidated financial statements.
NOTE 2: DIVESTITURE OF H&R BLOCK BANK
On August 4, 2015, H&R Block Bank (HRB Bank) , Block Financial LLC, the sole shareholder of HRB Bank (Block Financial), and BofI Federal Bank, a federal savings bank (BofI), received regulatory approvals for a definitive Amended and Restated Purchase and Assumption Agreement pursuant to which we agreed to sell certain assets and liabilities, including all of the deposit liabilities of HRB Bank, to BofI (P&A Transaction).
On August 31, 2015, we completed the P&A Transaction and made a net cash payment to BofI of $419 million, which was approximately equal to the carrying value of the liabilities (including all deposit liabilities) assumed by BofI.

4
Q3 FY2016 Form 10-Q | H&R Block, Inc.


In connection with the closing, we sold the available-for-sale (AFS) securities previously held by HRB Bank. We received proceeds of $388.0 million and recognized gains of $8.4 million on these sales.
On the closing date of the P&A Transaction, HRB Bank converted from a federal savings bank to a national banking association, merged with and into its parent company, Block Financial, surrendered its bank charter and ceased to exist as a bank. As a result, effective August 31, 2015, neither we nor any of our subsidiaries are subject to minimum regulatory capital requirements or to regulation as a bank by the Office of the Comptroller of the Currency (OCC). In addition, H&R Block, Inc., H&R Block Group, Inc. and Block Financial (collectively, our Holding Companies) were SLHCs because they controlled HRB Bank. As a result of the P&A Transaction and related actions, our Holding Companies have ceased to be SLHCs and have deregistered as SLHCs under Section 10(b) of the Home Owner's Loan Act. Effective August 31, 2015, our Holding Companies are no longer subject to regulatory capital requirements applicable to SLHCs or regulation by the Board of Governors of the Federal Reserve System (Federal Reserve).
NOTE 3: LOSS PER SHARE AND STOCKHOLDERS' EQUITY
LOSS PER SHARE – Basic and diluted loss per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period. The dilutive effect of potential common shares is included in diluted earnings per share except in those periods with a loss from continuing operations. Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 4.6 million shares for the three and nine months ended January 31, 2016, and 5.3 million shares for the three and nine months ended January 31, 2015, as the effect would be antidilutive due to the net loss from continuing operations during those periods.
The computations of basic and diluted earnings per share from continuing operations are as follows:
(in 000s, except per share amounts)
 
 
 
Three months ended January 31,
 
Nine months ended January 31,
 
 
2016

 
2015

 
2016

 
2015

 
 
 
 
 
 
 
 
 
Net loss from continuing operations attributable to shareholders
 
$
(78,649
)
 
$
(35,311
)
 
$
(317,672
)
 
$
(257,389
)
Amounts allocated to participating securities
 
(112
)
 
(105
)
 
(316
)
 
(291
)
Net loss from continuing operations attributable to common shareholders
 
$
(78,761
)
 
$
(35,416
)
 
$
(317,988
)
 
$
(257,680
)
 
 
 
 
 
 
 
 
 
Basic weighted average common shares
 
231,904

 
275,190

 
257,979

 
274,957

Potential dilutive shares
 

 

 

 

Dilutive weighted average common shares
 
231,904

 
275,190

 
257,979

 
274,957

 
 
 
 
 
 
 
 
 
Loss per share from continuing operations attributable to common shareholders:
Basic
 
$
(0.34
)
 
$
(0.13
)
 
$
(1.23
)
 
$
(0.94
)
Diluted
 
(0.34
)
 
(0.13
)
 
(1.23
)
 
(0.94
)
 
 
 
 
 
 
 
 
 
The weighted average shares outstanding for the three and nine months ended January 31, 2016 decreased to 231.9 million and 258.0 million, respectively, from 275.2 million and 275.0 million for the three and nine months ended January 31, 2015, respectively, primarily due to share repurchases completed in the current year. In September 2015, we announced that our Board of Directors approved a new $3.5 billion share repurchase program, effective through June 2019. During the nine months ended January 31, 2016, we purchased and immediately retired 52.5 million shares of our common stock at an aggregate cost of $1.9 billion (average price of $36.02 per share). The cost of shares retired during the current period was allocated to the components of stockholders’ equity as follows:

H&R Block, Inc. | Q3 FY2016 Form 10-Q
5


 
 
(in 000s)

 
 
 
Common stock
 
$
525

Additional paid-in-capital
 
31,506

Retained earnings
 
1,859,807

Total
 
$
1,891,838

 
 
 
STOCK-BASED COMPENSATION – In addition to the shares repurchased as discussed above, during the nine months ended January 31, 2016, we acquired 0.6 million shares of our common stock at an aggregate cost of $17.9 million. These shares represent shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. During the nine months ended January 31, 2015, we acquired 0.3 million shares at an aggregate cost of $10.4 million for similar purposes.
During the nine months ended January 31, 2016 and 2015, we issued 2.2 million and 1.3 million shares of common stock, respectively, due to the vesting or exercise of stock-based awards.
During the nine months ended January 31, 2016, we granted equity awards equivalent to 1.1 million shares under our stock-based compensation plans, consisting primarily of nonvested units. Nonvested units generally either vest over a three-year period with one-third vesting each year or cliff vest at the end of a three-year period, although the Compensation Committee may from time-to-time in limited circumstances approve grants with a modified vesting schedule as a special award. Stock-based compensation expense of our continuing operations totaled $7.2 million and $21.1 million for the three and nine months ended January 31, 2016, respectively, and $6.1 million and $20.7 million for the three and nine months ended January 31, 2015, respectively. As of January 31, 2016, unrecognized compensation cost for stock options totaled $0.5 million, and for nonvested shares and units totaled $38.8 million.

6
Q3 FY2016 Form 10-Q | H&R Block, Inc.


OTHER COMPREHENSIVE INCOME (LOSS) Components of other comprehensive income (loss) include foreign currency translation adjustments and the change in net unrealized gains or losses on AFS marketable securities, and are as follows:
(in 000s)
 
 
 
Foreign Currency
Translation Adjustments

 
Unrealized Gain (Loss) on AFS Securities

 
Total

Balances as of May 1, 2015
 
$
(6,789
)
 
$
8,529

 
$
1,740

Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
Gross losses arising during the period
 
(14,083
)
 
(5,790
)
 
(19,873
)
Income taxes
 

 
(2,267
)
 
(2,267
)
 
 
(14,083
)
 
(3,523
)
 
(17,606
)
Amounts reclassified to net income:
 
 
 
 
 
 
Gross amount reclassified
 

 
(8,196
)
 
(8,196
)
Income taxes
 

 
(3,213
)
 
(3,213
)
 
 

 
(4,983
)
 
(4,983
)
Net other comprehensive loss
 
(14,083
)
 
(8,506
)
 
(22,589
)
Balances as of January 31, 2016
 
$
(20,872
)
 
$
23

 
$
(20,849
)
 
 
 
 
 
 
 
Balances as of May 1, 2014
 
$
3,334

 
$
1,843

 
$
5,177

Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
Gross gains (losses) arising during the period
 
(13,342
)
 
11,389

 
(1,953
)
Income taxes
 

 
4,472

 
4,472

 
 
(13,342
)
 
6,917

 
(6,425
)
Amounts reclassified to net income:
 
 
 
 
 
 
Gross amount reclassified
 

 
(24
)
 
(24
)
Income taxes
 

 
(9
)
 
(9
)
 
 

 
(15
)
 
(15
)
Net other comprehensive income (loss)
 
(13,342
)
 
6,902

 
(6,440
)
Balances as of January 31, 2015
 
$
(10,008
)
 
$
8,745

 
$
(1,263
)
 
 
 
 
 
 
 
Gross gains and losses reclassified out of accumulated other comprehensive income are included in other income and other expense, respectively, in the consolidated statements of operations and comprehensive loss.
NOTE 4: RECEIVABLES
Receivables consist of the following:
(in 000s)
 
As of
 
January 31, 2016
 
January 31, 2015
 
April 30, 2015
 
 
Short-term
 
Long-term
 
Short-term
 
Long-term
 
Short-term
 
Long-term
Loans to franchisees
 
$
63,093

 
$
62,431

 
$
71,420

 
$
84,770

 
$
56,603

 
$
64,472

Receivables for tax preparation and related fees
 
278,735

 
6,103

 
234,056

 

 
48,864

 
6,103

Cash Back® receivables
 
5,427

 

 
7,130

 

 
42,680

 

Emerald Advance lines of credit
 
402,946

 
268

 
370,041

 
2,254

 
21,908

 
1,913

Royalties from franchisees
 
60,182

 

 
68,486

 

 
8,206

 

Other
 
66,625

 
7,669

 
76,179

 
15,404

 
44,230

 
8,379

 
 
877,008

 
76,471

 
827,312

 
102,428

 
222,491

 
80,867

Allowance for doubtful accounts
 
(47,234
)
 

 
(49,859
)
 

 
(54,527
)
 

 
 
$
829,774

 
$
76,471

 
$
777,453

 
$
102,428

 
$
167,964

 
$
80,867

 
 
 
 
 
 
 
 
 
 
 
 
 

H&R Block, Inc. | Q3 FY2016 Form 10-Q
7


Balances presented above as short-term are included in receivables, while the long-term portions are included in other noncurrent assets in the consolidated balance sheets.
LOANS TO FRANCHISEES Franchisee loan balances as of January 31, 2016 and 2015 and April 30, 2015, consisted of $48.6 million, $55.9 million and $40.3 million, respectively, in revolving lines of credit primarily for the purpose of funding off-season working capital needs and $76.9 million, $100.3 million and $80.8 million, respectively, in term loans made primarily to finance the purchase of franchises.
As of January 31, 2016 and 2015 and April 30, 2015, loans with a principal balance of $0.1 million, $1.4 million and $0.1 million, respectively, were more than 30 days past due. We had no loans to franchisees on non-accrual status.
CANADIAN CASH BACK® PROGRAM Refunds advanced under the Cash Back program are not subject to credit approval, therefore the primary indicator of credit quality is the age of the receivable amount. Cash Back amounts are generally received within 60 days of filing the client's return. As of January 31, 2016 and 2015 and April 30, 2015, $0.3 million, $0.3 million and $1.3 million of Cash Back balances were more than 60 days old, respectively.
H&R BLOCK EMERALD ADVANCE® LINES OF CREDIT Beginning in fiscal year 2016, we no longer originate H&R Block Emerald Advance® lines of credit (EAs). These lines of credit are originated by BofI, and we purchase a participation interest in their loans.
We review the credit quality of our EA receivables based on pools, which are segregated by the year of origination, with older years being deemed more unlikely to be repaid. These amounts as of January 31, 2016, by year of origination, are as follows:
(in 000s)
 
Credit Quality Indicator – Year of origination:
 
 
2016
 
$
372,360

2015
 
6,042

2014 and prior
 
1,216

Revolving loans
 
23,596

 
 
$
403,214

 
 
 
As of January 31, 2016 and 2015 and April 30, 2015, $18.2 million, $19.5 million and $18.7 million of EAs were on non-accrual status and classified as impaired, or more than 60 days past due, respectively.
ALLOWANCE FOR DOUBTFUL ACCOUNTS Activity in the allowance for doubtful accounts for our receivables for the nine months ended January 31, 2016 and 2015 is as follows:
(in 000s)
 
 
 
EAs

 
All Other

 
Total

Balances as of May 1, 2015
 
$
7,353

 
$
47,174

 
$
54,527

Provision
 
22,851

 
14,135

 
36,986

Charge-offs
 

 
(44,279
)
 
(44,279
)
Balances as of January 31, 2016
 
$
30,204

 
$
17,030

 
$
47,234

 
 
 
 
 
 
 
Balances as of May 1, 2014
 
$
7,530

 
$
45,048

 
$
52,578

Provision
 
28,521

 
13,143

 
41,664

Charge-offs
 

 
(44,383
)
 
(44,383
)
Balances as of January 31, 2015
 
$
36,051

 
$
13,808

 
$
49,859

 
 
 
 
 
 
 

8
Q3 FY2016 Form 10-Q | H&R Block, Inc.


NOTE 5: MORTGAGE LOANS HELD FOR INVESTMENT
The composition of our mortgage loan portfolio is as follows:
(dollars in 000s)
 
As of
 
January 31, 2016
 
January 31, 2015
 
April 30, 2015
 
 
Amount

 
% of Total

 
Amount

 
% of Total

 
Amount

 
% of Total

Adjustable-rate loans
 
$
113,617

 
52
%
 
$
135,481

 
54
%
 
$
130,182

 
53
%
Fixed-rate loans
 
103,632

 
48
%
 
117,484

 
46
%
 
115,034

 
47
%
 
 
217,249

 
100
%
 
252,965

 
100
%
 
245,216

 
100
%
Unamortized deferred fees and costs
 
1,788

 
 
 
2,073

 
 
 
2,008

 
 
Less: Allowance for loan losses
 
(6,931
)
 
 
 
(9,375
)
 
 
 
(7,886
)
 
 
 
 
$
212,106

 
 
 
$
245,663

 
 
 
$
239,338

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Our loan loss allowance as a percent of mortgage loans was 3.2% as of January 31, 2016, compared to 3.7% as of January 31, 2015 and 3.2% as of April 30, 2015.
Activity in the allowance for loan losses for the nine months ended January 31, 2016 and 2015 is as follows:
(in 000s)
 
Nine months ended January 31,
 
2016

 
2015

Balance at beginning of the period
 
$
7,886

 
$
11,272

Provision
 
(528
)
 
1,090

Recoveries
 
1,721

 
1,155

Charge-offs
 
(2,148
)
 
(4,142
)
Balance at end of the period
 
$
6,931

 
$
9,375

 
 
 
 
 
Detail of the aging of the mortgage loans in our portfolio as of January 31, 2016 is as follows:
(in 000s)
 
 
 
Less than 60
Days Past Due

 
60 – 89 Days
Past Due

 
90+ Days
Past Due(1)

 
Total
Past Due

 
Current

 
Total

Purchased from SCC
 
$
9,148

 
$
440

 
$
43,428

 
$
53,016

 
$
76,493

 
$
129,509

All other
 
2,649

 
51

 
6,306

 
9,006

 
78,734

 
87,740

 
 
$
11,797

 
$
491

 
$
49,734

 
$
62,022

 
$
155,227

 
$
217,249

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
We do not accrue interest on loans past due 90 days or more.

H&R Block, Inc. | Q3 FY2016 Form 10-Q
9


NOTE 6: GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the nine months ended January 31, 2016 and 2015 are as follows:
(in 000s)
 
 
 
Goodwill

 
Accumulated Impairment Losses

 
Net

Balances as of April 30, 2015
 
$
474,128

 
$
(32,297
)
 
$
441,831

Acquisitions
 
4,025

 

 
4,025

Disposals and foreign currency changes, net
 
(2,438
)
 

 
(2,438
)
Impairments
 

 

 

Balances as of January 31, 2016
 
$
475,715

 
$
(32,297
)
 
$
443,418

 
 
 
 
 
 
 
Balances as of April 30, 2014
 
$
468,414

 
$
(32,297
)
 
$
436,117

Acquisitions
 
9,614

 

 
9,614

Disposals and foreign currency changes, net
 
(2,770
)
 

 
(2,770
)
Impairments
 

 

 

Balances as of January 31, 2015
 
$
475,258

 
$
(32,297
)
 
$
442,961

 
 
 
 
 
 
 
We test goodwill for impairment annually or more frequently if events occur or circumstances change which would, more likely than not, reduce the fair value of a reporting unit below its carrying value.

10
Q3 FY2016 Form 10-Q | H&R Block, Inc.


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

 
Accumulated
Amortization

 
Net

As of January 31, 2016:
 
 
 
 
 
 
Reacquired franchise rights
 
$
338,242

 
$
(63,812
)
 
$
274,430

Customer relationships
 
201,197

 
(96,043
)
 
105,154

Internally-developed software
 
126,980

 
(91,655
)
 
35,325

Noncompete agreements
 
34,454

 
(25,240
)
 
9,214

Franchise agreements
 
19,201

 
(9,174
)
 
10,027

Purchased technology
 
54,700

 
(24,393
)
 
30,307

Acquired assets pending final allocation (1)
 
9,275

 

 
9,275

 
 
$
784,049

 
$
(310,317
)
 
$
473,732

As of January 31, 2015:
 
 
 
 
 
 
Reacquired franchise rights
 
$
294,587

 
$
(39,954
)
 
$
254,633

Customer relationships
 
169,058

 
(71,799
)
 
97,259

Internally-developed software
 
114,447

 
(78,063
)
 
36,384

Noncompete agreements
 
30,546

 
(23,171
)
 
7,375

Franchise agreements
 
19,201

 
(7,894
)
 
11,307

Purchased technology
 
54,700

 
(18,329
)
 
36,371

 
 
$
682,539

 
$
(239,210
)
 
$
443,329

As of April 30, 2015:
 
 
 
 
 
 
Reacquired franchise rights
 
$
294,647

 
$
(46,180
)
 
$
248,467

Customer relationships
 
170,851

 
(78,157
)
 
92,694

Internally-developed software
 
118,865

 
(80,689
)
 
38,176

Noncompete agreements
 
30,630

 
(23,666
)
 
6,964

Franchise agreements
 
19,201

 
(8,214
)
 
10,987

Purchased technology
 
54,700

 
(19,846
)
 
34,854

 
 
$
688,894

 
$
(256,752
)
 
$
432,142

 
 
 
 
 
 
 
(1)    Represents recent business acquisitions, for which final purchase price allocations have not yet been determined.
Amortization of intangible assets for the three and nine months ended January 31, 2016 was $20.2 million and $54.6 million, respectively. Amortization of intangible assets for the three and nine months ended January 31, 2015 was $16.7 million and $41.2 million, respectively. Estimated amortization of intangible assets for fiscal years 2016, 2017, 2018, 2019 and 2020 is $74.9 million, $71.3 million, $61.2 million, $48.4 million and $36.4 million, respectively.
The increase in intangible assets resulted primarily from acquired franchisee and competitor businesses during the period. The weighted-average life of the acquired assets is as follows:
Assets acquired
 
Weighted-Average Life (in years)
Reacquired franchise rights
 
7
Customer relationships
 
5
Internally-developed software
 
3
Noncompete agreements
 
5
Total
 
6
 
 
 

H&R Block, Inc. | Q3 FY2016 Form 10-Q
11


NOTE 7: LONG-TERM DEBT
The components of long-term debt are as follows:
 
 
 
 
 
 
(in 000s)

As of
 
January 31, 2016

 
January 31, 2015

 
April 30, 2015

Senior Notes, 4.125%, due October 2020
 
$
648,023

 
$

 
$

Senior Notes, 5.500%, due November 2022
 
498,105

 
497,823

 
497,894

Senior Notes, 5.250%, due October 2025
 
348,985

 

 

Committed line of credit borrowings
 
1,125,000

 

 

Capital lease obligation
 
7,637

 
8,418

 
8,194

 
 
2,627,750

 
506,241

 
506,088

Less: Current portion
 
(817
)
 
(781
)
 
(790
)
 
 
$
2,626,933

 
$
505,460

 
$
505,298

 
 
 
 
 
 
 
On September 25, 2015, we issued $650.0 million of 4.125% Senior Notes due October 1, 2020 (2020 Senior Notes), and $350.0 million of 5.250% Senior Notes due October 1, 2025 (2025 Senior Notes). The Senior Notes are not redeemable by the bondholders prior to maturity, although we have the right to redeem some or all of these notes at any time, at specified redemption prices. Proceeds of the 2020 Senior Notes and 2025 Senior Notes, along with cash on hand, were used to repurchase shares, as discussed in note 3.
In September 2015, we terminated our previous committed line of credit agreement and entered into a new Credit and Guarantee Agreement (2015 CLOC). The 2015 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 $100.0 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 therefor and meeting certain other conditions. The 2015 CLOC will mature on September 21, 2020, unless extended pursuant to the terms of the 2015 CLOC, at which time all outstanding amounts thereunder will be due and payable. The 2015 CLOC includes an annual facility fee, which will vary depending our then current credit ratings.
The 2015 CLOC is subject to various conditions, triggers, events or occurrences that could result in earlier termination and contains customary representations, warranties, covenants and events of default, including, without limitation: (1) a covenant requiring the Company to maintain a debt-to-EBITDA ratio calculated on a consolidated basis of no greater than (a) 3.50 to 1.00 as of the last day of each fiscal quarter ending on April 30, July 31, and October 31 of each year and (b) 4.50 to 1.00 as of the last day of each fiscal quarter ending on January 31 of each year; (2) a covenant requiring us to maintain an interest coverage (EBITDA-to-interest expense) ratio calculated on a consolidated basis of not less than 2.50 to 1.00 as of the last date of any fiscal quarter; and (3) covenants restricting our ability to incur 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 2015 CLOC includes provisions for an equity cure which could potentially allow us to independently cure certain defaults. Proceeds under the 2015 CLOC may be used for working capital needs or for other general corporate purposes. We had an outstanding balance of $1.1 billion under the 2015 CLOC as of January 31, 2016.

12
Q3 FY2016 Form 10-Q | H&R Block, Inc.


NOTE 8: FAIR VALUE
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS – The carrying amounts and estimated fair values of our financial instruments are as follows:
(in 000s)
 
As of
 
January 31, 2016
 
January 31, 2015
 
April 30, 2015
 
 
Carrying
Amount

 
Estimated
Fair Value

 
Carrying
Amount

 
Estimated
Fair Value

 
Carrying
Amount

 
Estimated
Fair Value

Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
189,511

 
$
189,511

 
$
1,321,134

 
$
1,321,134

 
$
2,007,190

 
$
2,007,190

Cash and cash equivalents - restricted
 
69,649

 
69,649

 
51,085

 
51,085

 
91,972

 
91,972

Receivables, net - short-term
 
829,774

 
829,774

 
777,453

 
777,453

 
167,964

 
167,964

Mortgage loans held for investment, net
 
212,106

 
174,813

 
245,663

 
190,422

 
239,338

 
190,196

Investments in AFS securities
 
1,145

 
1,145

 
375,728

 
375,728

 
441,709

 
441,709

Receivables, net - long-term
 
76,471

 
76,471

 
102,428

 
102,428

 
80,867

 
80,867

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Customer banking deposits
 

 

 
1,286,582

 
1,273,283

 
744,699

 
737,261

Long-term debt
 
2,627,750

 
2,709,807

 
506,241

 
558,693

 
506,088

 
556,769

Contingent consideration
 
13,903

 
13,903

 
12,848

 
12,848

 
10,667

 
10,667

 
 
 
 
 
 
 
 
 
 
 
 
 

H&R Block, Inc. | Q3 FY2016 Form 10-Q
13


Fair value estimates, methods and assumptions are set forth below. Fair value was not estimated for assets and liabilities that are not considered financial instruments.
Cash and cash equivalents, including restricted - Fair value approximates the carrying amount (Level 1).
Receivables, net - short-term - For short-term balances the carrying values reported in the balance sheet approximate fair market value due to the relative short-term nature of the respective instruments (Level 1).
Mortgage loans held for investment, net - The fair value of mortgage loans held for investment is estimated using a third-party pricing service. The fair value is determined using the present value of expected future cash flows at the asset level, assuming future prepayments and using discount factors determined by prices obtained for residential loans with similar characteristics in the secondary market, as discounted for illiquid assets. Quarterly, we perform analytics to assess the reasonableness of the fair value received from the third-party pricing service based on changes in the portfolio and changes in market conditions. We evaluate whether adjustments to third-party pricing is necessary and historically, we have not made adjustments to prices obtained from our third-party pricing service (Level 3).
Investments in AFS securities - For mortgage-backed securities, we historically used a third-party pricing service to determine fair value. The service's pricing model was based on market data and utilizes available trade, bid and other market information for similar securities (Level 2). The fair value of our investment in common stock was determined based on quoted market prices (Level 1).
Receivables, net - long-term - The carrying values for the long-term portion of loans to franchisees approximate fair market value due to variable interest rates, low historical delinquency rates and franchise territories serving as collateral (Level 1). Long-term EA receivables are carried at net realizable value which approximates fair value (Level 3). Net realizable value is determined based on historical collection rates.
Customer banking deposits - The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, checking, money market and savings accounts, was equal to the amount payable on demand (Level 1). The fair value of IRAs and other time deposits was estimated by discounting the future cash flows using the rates offered by HRB Bank for products with similar remaining maturities (Level 3).
Long-term debt - The fair value of our Senior Notes is based on quotes from multiple banks (Level 2). For outstanding balances on the 2015 CLOC, fair value approximates the carrying amount (Level 1).
Contingent consideration - Fair value approximates the carrying amount (Level 3).
NOTE 9: INCOME TAXES
We file a consolidated federal income tax return in the United States (U.S.) with the Internal Revenue Service (IRS) and file tax returns in various state and foreign jurisdictions. Tax returns are typically examined and settled upon completion of the examination, with tax controversies settled either at the exam level or through the appeals process. The Company currently does not have a U.S. federal return under examination; however, our U.S. federal return for calendar 2013 and future returns for all subsequent periods are open to examination. Additionally, the Company is either currently under examination or open to examination in all U.S. states that impose a corporate income tax.
We had gross unrecognized tax benefits of $75.2 million, $79.3 million and $86.3 million as of January 31, 2016 and 2015 and April 30, 2015, respectively. The gross unrecognized tax benefits decreased $11.0 million and $32.2 million during the nine months ended January 31, 2016 and 2015, respectively. The decrease in unrecognized tax benefits during the nine months ending January 31, 2016 is related to a law change enacted in the state of Missouri which resulted in a clarification of certain prior year state income tax positions, closure of audits with state taxing authorities and the expiration of statutes of limitations in multiple states. These decreases were partially offset by increases in uncertain tax positions attributable to various current and prior year federal and state tax positions taken or expected to be taken in our income tax returns.
We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $9.7 million within the next twelve months. The anticipated decrease is due to the expiration of statutes of limitations and anticipated closure of various state matters currently under exam. The portion of unrecognized benefits expected to be cash settled within the next twelve months is included in accrued income taxes and reserves for uncertain tax positions on our consolidated balance sheet. The remaining liability for uncertain tax positions is classified as long-

14
Q3 FY2016 Form 10-Q | H&R Block, Inc.


term and is included in deferred tax liabilities and reserves for uncertain tax positions on the consolidated balance sheet.
Consistent with prior years, our pretax loss for the nine months ended January 31, 2016 is expected to be offset by income in the fourth quarter due to the established pattern of seasonality in our primary business operations. As such, management has determined that it is more-likely-than-not that realization of tax benefits recorded in our financial statements will occur within our fiscal year. The amount of tax benefit recorded reflects management's estimate of the annual effective tax rate applied to the year-to-date loss from continuing operations. Certain discrete tax adjustments are also reflected in income tax expense for the periods presented.
A discrete income tax benefit of $36.2 million was recorded in the nine months ended January 31, 2016, compared to a discrete tax benefit of $30.9 million in the same period of the prior year. The discrete tax benefit recorded in the current fiscal year resulted primarily from a law change enacted in the State of Missouri which allows for the reduction of tax from our two prior fiscal years that was included on tax returns that were or will be timely filed for calendar years 2014 and 2015. The prior fiscal year discrete tax benefit was due largely to tax reserves released resulting from the expiration of statutory limitation periods.
Excluding discrete items, management's estimate of the annualized effective tax rate for the nine months ended January 31, 2016 and 2015 was 38.1% and 38.3%, respectively. Our effective tax rate for continuing operations, including the effects of discrete income tax items was 44.4% and 44.9% for the nine months ended January 31, 2016 and 2015, respectively. Due to the loss in both periods, a discrete tax benefit in either period increases the tax rate while an item of discrete tax expense decreases the tax rate. The impact of discrete tax items combined with the seasonal nature of our business can cause the effective tax rate through our third quarter to be significantly different than the rate for our full fiscal year.
NOTE 10: OTHER INCOME AND OTHER EXPENSES
The following table shows the components of other income and other expenses:
(in 000s)
 
 
 
Three months ended January 31,
 
Nine months ended January 31,
 
 
2016

 
2015

 
2016

 
2015

Other income, net:
 
 
 
 
 
 
 
 
Mortgage loans and real estate owned, net
 
$
2,186

 
$

 
$
2,220

 
$

Interest and gains on AFS securities
 
36

 

 
8,804

 

Other
 
833

 
304

 
2,969

 
827

 
 
$
3,055

 
$
304

 
$
13,993

 
$
827

Other expenses, net:
 
 
 
 
 
 
 
 
Foreign currency losses
 
$
(3,516
)
 
$
(6,883
)
 
$
(8,138
)
 
$
(8,690
)
Impairment of investments
 
(2,500
)
 

 
(2,500
)
 

Other
 
(124
)
 
(87
)
 
(697
)
 
(1,766
)
 
 
$
(6,140
)
 
$
(6,970
)
 
$
(11,335
)
 
$
(10,456
)
 
 
 
 
 
 
 
 
 
In connection with our deregistration as an SLHC, as discussed further in note 2, we no longer present interest income on mortgage loans held for investment and various other investments as revenues. Effective September 1, 2015, these amounts are prospectively reported in other income on the consolidated statements of operations and comprehensive loss.

H&R Block, Inc. | Q3 FY2016 Form 10-Q
15


NOTE 11: COMMITMENTS AND CONTINGENCIES
Changes in deferred revenue balances related to our Peace of Mind® Extended Service Plan (POM) issued in company-owned offices, which is included in deferred revenue and other liabilities in the consolidated balance sheets, are as follows:
(in 000s)
 
Nine months ended January 31,
 
2016

 
2015

Balance, beginning of the period
 
$
158,169

 
$
145,237

Amounts deferred for new extended service plans issued
 
18,751

 
17,658

Revenue recognized on previous deferrals
 
(62,764
)
 
(54,308
)
Balance, end of the period
 
$
114,156

 
$
108,587

 
 
 
 
 
We accrued $6.2 million, $9.0 million and $8.4 million as of January 31, 2016 and 2015 and April 30, 2015, respectively, related to estimated losses under our standard guarantee, which is included with our standard in-office tax preparation services. The short-term and long-term portions of this liability are included in deferred revenue and other liabilities in the consolidated balance sheets, respectively. For POM in franchise offices, we deferred revenue of $11.8 million, and recognized revenue of $12.2 million during the nine months ended January 31, 2016. At January 31, 2016, our deferred revenue related to POM in franchise offices totaled $31.2 million.
We have accrued estimated contingent consideration totaling $13.9 million, $12.8 million and $10.7 million as of January 31, 2016 and 2015 and April 30, 2015, respectively, related to acquisitions, with the short-term amount recorded in deferred revenue and other liabilities. Estimates of contingent payments are typically based on expected financial performance of the acquired business and economic conditions at the time of acquisition. Should actual results differ from our assumptions, future payments made will differ from the above estimate and any differences will be recorded in results from continuing operations.
We have contractual commitments to fund certain franchises with approved revolving lines of credit. Our total obligation under these lines of credit was $70.6 million at January 31, 2016, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $21.9 million.
In connection with the P&A Transaction we entered into an Emerald Advance Receivables Participation Agreement (RPA) dated August 31, 2015 with BofI. Pursuant to the RPA, we are required to purchase a 90% participation interest, at par, in all EAs originated by BofI throughout the term of the RPA. At January 31, 2016 the principal balance of purchased participation interests totaled $374.5 million.
NOTE 12: LITIGATION AND RELATED CONTINGENCIES
We are a defendant in numerous litigation matters, arising both in the ordinary course of business and otherwise, including as described below. The matters described below are not all of the lawsuits to which we are subject. In some of the matters, very large or indeterminate amounts, including punitive damages, are sought. U.S. jurisdictions permit considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. We believe that the monetary relief which may be specified in a lawsuit or a claim bears little relevance to its merits or disposition value due to this variability in pleadings and our experience in litigating or resolving through settlement of numerous claims over an extended period of time.
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.

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We accrue liabilities for litigation, claims and other loss contingencies and any related settlements (each referred to, individually, as a "matter" and, collectively, as "matters") when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities have been accrued for a number of the matters noted below. If a range of loss is estimated, and some amount within that range appears to be a better estimate than any other amount within that range, then that amount is accrued. If no amount within the range can be identified as a better estimate than any other amount, we accrue the minimum amount in the range.
For such matters where a loss is believed to be reasonably possible, but not probable, or the loss cannot be reasonably estimated, no accrual has been made. It is possible that such matters could require us to pay damages or make other expenditures or accrue liabilities in amounts that could not be reasonably estimated as of January 31, 2016. 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 consolidated financial position, results of operations and cash flows. As of January 31, 2016 and 2015 and April 30, 2015, we accrued liabilities of $6.2 million, $8.9 million and $8.9 million, respectively, for matters addressed in this note.
For some matters where a liability has not been accrued, we are able to estimate a reasonably possible loss or range of loss. This estimated range of reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, as well as known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. Those matters for which an estimate is not reasonably possible are not included within this estimated range. Therefore, this estimated range of reasonably possible loss represents what we believe to be an estimate of reasonably possible loss only for certain matters meeting these criteria. It does not represent our maximum loss exposure. For those matters, and for matters where a liability has been accrued, as of January 31, 2016, we believe the aggregate range of reasonably possible losses in excess of amounts accrued is not material.
For other matters, we are not currently able to estimate the reasonably possible loss or range of loss. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the reasonably possible loss or range of loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by courts on motions or appeals, analysis by experts, or the status of any settlement negotiations.
On a quarterly and annual basis, we review relevant information with respect to litigation and other loss contingencies and update our accruals, disclosures and estimates of reasonably possible loss or range of loss based on such reviews. Costs incurred with defending matters are expensed as incurred. Any receivable for insurance recoveries is recorded separately from the corresponding liability, and only if recovery is determined to be probable and reasonably estimable.
We believe we have meritorious defenses to the claims asserted in the various matters described in this note, and we intend to defend them vigorously, but there can be no assurances as to their outcomes. In the event of unfavorable outcomes, it could require modifications to our operations; in addition, the amounts that may be required to be paid to discharge or settle the matters could be substantial and could have a material adverse impact on our business and consolidated financial position, results of operations and cash flows.
LITIGATION, CLAIMS, INCLUDING INDEMNIFICATION CLAIMS, OR OTHER LOSS CONTINGENCIES PERTAINING TO DISCONTINUED MORTGAGE OPERATIONS – Although SCC ceased its mortgage loan origination activities in December 2007 and sold its loan servicing business in April 2008, SCC or the Company has been, remains, and may in the future be subject to litigation, claims, including indemnification and contribution claims, and other loss contingencies pertaining to SCC's mortgage business activities that occurred prior to such termination and sale. These contingencies, claims, and lawsuits include actions by regulators, third parties seeking indemnification, including depositors, underwriters, and securitization trustees, individual plaintiffs, and cases in which plaintiffs seek to represent a class of others alleged to be similarly situated. Among other things, these contingencies, claims, and lawsuits allege or may allege discriminatory or unfair and deceptive loan origination and servicing (including debt collection, foreclosure, and eviction) practices, other common law torts, rights to indemnification and contribution, breach of contract, violations of securities laws, and a variety of federal statutes, including the Truth in Lending Act (TILA), Equal Credit Opportunity Act, Fair Housing Act, Real Estate Settlement Procedures Act (RESPA), Home Ownership & Equity Protection Act (HOEPA), as well as similar state statutes. Given the impact of the financial crisis on the non-prime

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mortgage environment, the aggregate volume of these matters is substantial although it is difficult to predict either the likelihood of new matters being initiated or the outcome of existing matters. In many of these matters, including certain of the lawsuits and claims described below, it is not possible to estimate a reasonably possible loss or range of loss due to, among other things, the inherent uncertainties involved in these matters, some of which are beyond the Company's control, and the indeterminate damages sought in some of these matters.
On May 31, 2012, a lawsuit was filed by Homeward Residential, Inc. (Homeward) in the Supreme Court of the State of New York, County of New York, against SCC styled Homeward Residential, Inc. v. Sand Canyon Corporation (Index No. 651885/2012). SCC removed the case to the United States District Court for the Southern District of New York on June 28, 2012 (Case No. 12-cv-5067). The plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2006-2 and for the benefit of the trustee and the certificate holders of such trust, asserts claims for breach of contract, anticipatory breach, indemnity and declaratory judgment in connection with alleged losses incurred as a result of the breach of representations and warranties relating to SCC and to loans sold to the trust. The plaintiff seeks specific performance of alleged repurchase obligations or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses, as well as a repurchase of all loans due to alleged misrepresentations by SCC as to itself and as to the loans' compliance with its underwriting standards and the value of underlying real estate. In response to a motion filed by SCC, the court dismissed the plaintiff's claims for breach of the duty to cure or repurchase, anticipatory breach, indemnity, and declaratory judgment. The case is proceeding on the remaining claims. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter.
On September 28, 2012, a second lawsuit was filed by Homeward in the United States District Court for the Southern District of New York against SCC styled Homeward Residential, Inc. v. Sand Canyon Corporation (Case No. 12-cv-7319). The plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2006-3 and for the benefit of the trustee and the certificate holders of such trust, asserts claims for breach of contract and indemnity in connection with losses allegedly incurred as a result of the breach of representations and warranties relating to 96 loans sold to the trust. The plaintiff seeks specific performance of alleged repurchase obligations or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses. In response to a motion filed by SCC, the court dismissed the plaintiff's claims for breach of the duty to cure or repurchase and for indemnification of its costs associated with the litigation. The case is proceeding on the remaining claims. A portion of the accrual for representation and warranty claims, as discussed in note 13, is related to loans in this case. We have not concluded that a loss related to this lawsuit is probable, nor have we accrued a liability related to this lawsuit.
On April 5, 2013, a third lawsuit was filed by Homeward in the United States District Court for the Southern District of New York against SCC. The suit, styled Homeward Residential, Inc. v. Sand Canyon Corporation (Case No. 13-cv-2107), was filed as a related matter to the September 2012 Homeward suit mentioned above. In this April 2013 lawsuit, the plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2007-4 and for the benefit of the trustee and the certificate holders of such trust, asserts claims for breach of contract and indemnity in connection with losses allegedly incurred as a result of the breach of representations and warranties relating to 159 loans sold to the trust. The plaintiff seeks specific performance of alleged repurchase obligations or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses. In response to a motion filed by SCC, the court dismissed the plaintiff's claims for breach of the duty to cure or repurchase and for indemnification of its costs associated with the litigation. The case is proceeding on the remaining claims. A portion of the accrual for representation and warranty claims, as discussed in note 13, is related to loans in this case. We have not concluded that a loss related to this lawsuit is probable, nor have we accrued a liability related to this lawsuit.
Underwriters and depositors are, or have been, involved in multiple lawsuits related to securitization transactions in which SCC participated. These lawsuits allege or alleged a variety of claims, including violations of federal and state securities laws and common law fraud, based on alleged materially inaccurate or misleading disclosures. Based on information currently available to SCC, it believes that the 22 lawsuits in which notice of a claim has been made involve 39 securitization transactions with original investments of approximately $14 billion (of which the outstanding principal amount is approximately $4 billion). Because SCC has not been a party to these lawsuits (with the exception of Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation, et al., filed in the Circuit Court of Cook County, Illinois (Case No. 10CH45033) and settled as to SCC in August 2015), and has not had control of this litigation or any settlements thereof, SCC does not have precise information about the amount of damages or other remedies being asserted, the defenses to the claims in such lawsuits or the terms of any settlements of such lawsuits. SCC therefore cannot reasonably estimate the amount of potential losses or associated fees and expenses that may be incurred in

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connection with such lawsuits, which may be material. Additional lawsuits against the underwriters or depositors may be filed in the future, and SCC may receive additional notices of claims for indemnification from underwriters or depositors with respect to existing or new lawsuits or settlements of such lawsuits. Certain of the notices received included, and future notices may include, a reservation of rights, which are referred to as "reserved contribution rights," that encompasses a right of contribution which may become operative if indemnification is unavailable or insufficient to cover all of the losses and expenses involved. We have not concluded that a loss related to any of these indemnification claims or reserved contribution rights is probable, nor have we accrued a liability related to any of these claims or rights.
Securitization trustees also are, or have been, involved in lawsuits related to securitization transactions in which SCC participated. Plaintiffs in these lawsuits allege, among other things, that originators, depositors, servicers or other parties breached their representations and warranties or otherwise failed to fulfill their obligations, including that securitization trustees breached their contractual obligations, breached their fiduciary duties, or violated statutory requirements by failing to properly protect the certificate holders’ interests. In connection with one lawsuit against a securitization trustee, SCC received a notice of potential indemnification obligations for one securitization with alleged losses in the amount of approximately $91 million. SCC may receive additional notices for indemnification with respect to existing or new lawsuits or settlements of such lawsuits in its capacity as originator, depositor, or servicer. We have not concluded that a loss related to any indemnification claims by securitization trustees is probable, nor have we accrued a liability for such claims.
LITIGATION, CLAIMS OR OTHER LOSS CONTINGENCIES PERTAINING TO CONTINUING OPERATIONS
Compliance Fee Litigation. On April 16, 2012, a putative class action lawsuit was filed against us in the Circuit Court of Jackson County, Missouri styled Manuel H. Lopez III v. H&R Block, Inc., et al. (Case # 1216CV12290) concerning a compliance fee charged to retail tax clients in the 2011 and 2012 tax seasons. The plaintiff seeks to represent all Missouri citizens who were charged the compliance fee, and asserts claims of violation of the Missouri Merchandising Practices Act, money had and received, and unjust enrichment. We filed a motion to compel arbitration of the 2011 claims. The court denied the motion. We filed an appeal. On May 6, 2014, the Missouri Court of Appeals, Western District, reversed the ruling of the trial court and remanded the case for further consideration of the motion. On March 12, 2015, the trial court denied the motion on remand. We filed an additional appeal. On March 8, 2016, the appellate court affirmed the decision of the trial court. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter.
On April 19, 2012, a putative class action lawsuit was filed against us in the United States District Court for the Western District of Missouri styled Ronald Perras v. H&R Block, Inc., et al. (Case No. 4:12-cv-00450-DGK) concerning a compliance fee charged to retail tax clients in the 2011 and 2012 tax seasons. The plaintiff originally sought to represent all persons nationwide (excluding citizens of Missouri) who were charged the compliance fee, and asserted claims of violation of various state consumer laws, money had and received, and unjust enrichment. In November 2013, the court compelled arbitration of the 2011 claims and stayed all proceedings with respect to those claims. In June 2014, the court denied class certification of the remaining 2012 claims. The plaintiff filed an appeal with the Eighth Circuit Court of Appeals, which was denied on June 18, 2015. In January 2016, the plaintiff filed an amended complaint asserting claims of violation of Missouri and California state consumer laws, money had and received, and unjust enrichment, along with a motion to certify a class of all persons (excluding citizens of Missouri) who were charged the compliance fee in the state of California. We subsequently filed a motion for summary judgment on all claims. Both motions remain pending before the court. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter.
Form 8863 Litigation. A series of putative class action lawsuits were filed against us in various federal courts and one state court beginning on March 13, 2013. Taken together, the plaintiffs in these lawsuits purport to represent certain clients nationwide who filed Form 8863 during tax season 2013 through an H&R Block office or using H&R Block At Home® online tax services or desktop tax preparation software, and allege breach of contract, negligence and violation of state consumer laws in connection with transmission of the form. The plaintiffs seek damages, pre-judgment interest, attorneys' fees and costs. In August 2013, the plaintiff in the state court action voluntarily dismissed her case without prejudice. The Judicial Panel on Multidistrict Litigation subsequently granted our petition to consolidate the remaining federal lawsuits for coordinated pretrial proceedings in the United States District Court for the Western District of Missouri in a proceeding styled IN RE: H&R BLOCK IRS FORM 8863 LITIGATION (MDL No. 2474/

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Case No. 4:13-MD-02474-FJG). On July 11, 2014, the MDL court granted our motion to compel arbitration for those named plaintiffs who agreed to arbitrate their claims. Plaintiffs filed a consolidated class action