H&R BLOCK INC 10-Q

ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME: (unaudited, in 000s, except per share amounts) Three months ended March 31, Nine months ended March 31, 2023 2022 2023 2022 REVENUES: Service revenues $ 1,885,035 $ 1,841,122 $ 2,191,794 $ 2,151,824 Royalty, product and other revenues 208,614 220,635 248,245 261,373 2,093,649 2,061,757 2,440,039 2,413,197 OPERATING EXPENSES: Costs of revenues 883,686 831,455 1,442,693 1,362,310 Selling, general and administrative 345,461 344,937 625,158 617,594 Total operating expenses 1,229,147 1,176,392 2,067,851 1,979,904 Other income (expense), net 13,224 238 21,020 1,989 Interest expense on borrowings ( 22,298 ) ( 23,746 ) ( 57,107 ) ( 69,661 ) Income from continuing operations before income taxes 855,428 861,857 336,101 365,621 Income taxes 209,351 186,884 78,254 29,666 Net income from continuing operations 646,077 674,973 257,847 335,955 Net loss from discontinued operations, net of tax benefits of $ 792 , $ 539 , $ 1,920 and $ 1,495 ( 2,648 ) ( 1,796 ) ( 6,418 ) ( 4,984 ) NET INCOME $ 643,429 $ 673,177 $ 251,429 $ 330,971 BASIC EARNINGS PER SHARE: Continuing operations $ 4.22 $ 4.13 $ 1.65 $ 1.95 Discontinued operations ( 0.01 ) ( 0.01 ) ( 0.04 ) ( 0.03 ) Consolidated $ 4.21 $ 4.12 $ 1.61 $ 1.92 DILUTED EARNINGS PER SHARE: Continuing operations $ 4.14 $ 4.06 $ 1.62 $ 1.92 Discontinued operations ( 0.02 ) ( 0.01 ) ( 0.04 ) ( 0.03 ) Consolidated $ 4.12 $ 4.05 $ 1.58 $ 1.89 DIVIDENDS DECLARED PER SHARE $ 0.29 $ 0.27 $ 0.87 $ 0.81 COMPREHENSIVE INCOME: Net income $ 643,429 $ 673,177 $ 251,429 $ 330,971 Change in foreign currency translation adjustments 402 5,595 ( 22,636 ) ( 3,926 ) Other comprehensive income (loss) 402 5,595 ( 22,636 ) ( 3,926 ) Comprehensive income $ 643,831 $ 678,772 $ 228,793 $ 327,045 See accompanying notes to consolidated financial statements. H&R Block, Inc. |Q3 FY2023 Form 10-Q 1 Table of Contents CONSOLIDATED BALANCE SHEETS (unaudited, in 000s, except share and per share amounts) As of March 31, 2023 June 30, 2022 ASSETS Cash and cash equivalents $ 909,075 $ 885,015 Cash and cash equivalents - restricted 25,270 165,698 Receivables, less allowance for credit losses of $ 56,003 and $ 65,351 249,150 58,447 Income taxes receivable 32,584 202,838 Prepaid expenses and other current assets 86,736 72,460 Total current assets 1,302,815 1,384,458 Property and equipment, at cost, less accumulated depreciation and amortization of $ 892,820 and $ 857,468 136,132 123,912 Operating lease right of use assets 372,175 427,783 Intangible assets, net 293,447 309,644 Goodwill 769,557 760,401 Deferred tax assets and income taxes receivable 226,527 208,948 Other noncurrent assets 57,254 54,012 Total assets $ 3,157,907 $ 3,269,158 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable and accrued expenses $ 236,388 $ 160,929 Accrued salaries, wages and payroll taxes 208,560 154,764 Accrued income taxes and reserves for uncertain tax positions 284,124 280,115 Operating lease liabilities 179,415 206,898 Deferred revenue and other current liabilities 207,095 196,107 Total current liabilities 1,115,582 998,813 Long-term debt 1,488,457 1,486,876 Deferred tax liabilities and reserves for uncertain tax positions 256,119 226,362 Operating lease liabilities 199,086 228,820 Deferred revenue and other noncurrent liabilities 135,055 116,656 Total liabilities 3,194,299 3,057,527 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, no par, stated value $ 0.01 per share, 800,000,000 shares authorized, shares issued of 185,403,081 and 193,571,309 1,854 1,936 Additional paid-in capital 775,269 772,182 Accumulated other comprehensive loss ( 44,281 ) ( 21,645 ) Retained earnings (deficit) ( 109,384 ) 120,405 Less treasury shares, at cost, of 33,119,705 and 33,640,988 ( 659,850 ) ( 661,247 ) Total stockholders' equity (deficiency) ( 36,392 ) 211,631 Total liabilities and stockholders' equity $ 3,157,907 $ 3,269,158 See accompanying notes to consolidated financial statements. 2 Q3 FY2023 Form 10-Q| H&R Block, Inc. Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in 000s) Nine months ended March 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 251,429 $ 330,971 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 98,660 107,462 Provision 49,174 59,778 Deferred taxes 6,685 ( 85,122 ) Stock-based compensation 26,785 19,988 Changes in assets and liabilities, net of acquisitions: Receivables ( 237,395 ) ( 233,362 ) Prepaid expenses, other current and noncurrent assets ( 17,438 ) ( 16,525 ) Accounts payable, accrued expenses, salaries, wages and payroll taxes 122,025 122,112 Deferred revenue, other current and noncurrent liabilities 22,054 36,960 Income tax receivables, accrued income taxes and income tax reserves 179,692 36,244 Other, net ( 3,285 ) ( 5,378 ) Net cash provided by operating activities 498,386 373,128 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 56,661 ) ( 52,718 ) Payments made for business acquisitions, net of cash acquired ( 47,740 ) ( 25,465 ) Franchise loans funded ( 21,566 ) ( 18,468 ) Payments from franchisees 14,963 17,714 Other, net 9,717 7,831 Net cash used in investing activities ( 101,287 ) ( 71,106 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of line of credit borrowings ( 970,000 ) ( 705,000 ) Proceeds from line of credit borrowings 970,000 705,000 Dividends paid ( 133,762 ) ( 143,435 ) Repurchase of common stock, including shares surrendered ( 365,852 ) ( 555,247 ) Proceeds from exercise of stock options 1,427 4,605 Other, net ( 7,400 ) ( 13,389 ) Net cash used in financing activities ( 505,587 ) ( 707,466 ) Effects of exchange rate changes on cash ( 7,880 ) ( 1,666 ) Net decrease in cash and cash equivalents, including restricted balances ( 116,368 ) ( 407,110 ) Cash, cash equivalents and restricted cash, beginning of period 1,050,713 1,584,164 Cash, cash equivalents and restricted cash, end of period $ 934,345 $ 1,177,054 SUPPLEMENTARY CASH FLOW DATA: Income taxes paid (received), net $ ( 110,028 ) $ 76,894 Interest paid on borrowings 59,429 58,009 Accrued additions to property and equipment 4,378 1,336 New operating right of use assets and related lease liabilities 131,949 126,726 Accrued dividends payable to common shareholders 44,163 43,041 See accompanying notes to consolidated financial statements. H&R Block, Inc. | Q3 FY2023 Form 10-Q 3 Table of Contents CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (amounts in 000s, except per share amounts) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) (1) Retained Earnings (Deficit) Treasury Stock Total Stockholders’ Equity Shares Amount Shares Amount Balances as of July 1, 2022 193,571 $ 1,936 $ 772,182 $ ( 21,645 ) $ 120,405 ( 33,641 ) $ ( 661,247 ) $ 211,631 Net loss — — — — ( 168,421 ) — — ( 168,421 ) Other comprehensive loss — — — ( 32,345 ) — — — ( 32,345 ) Stock-based compensation — — 5,630 — — — — 5,630 Stock-based awards exercised or vested — — ( 15,276 ) — ( 742 ) 805 15,839 ( 179 ) Acquisition of treasury shares (2) — — — — — ( 341 ) ( 15,432 ) ( 15,432 ) Repurchase and retirement of common shares ( 4,927 ) ( 49 ) ( 2,907 ) — ( 216,813 ) — — ( 219,769 ) Cash dividends declared - $ 0.29 per share — — — — ( 46,100 ) — — ( 46,100 ) Balances as of September 30, 2022 188,644 $ 1,887 $ 759,629 $ ( 53,990 ) $ ( 311,671 ) ( 33,177 ) $ ( 660,840 ) $ ( 264,985 ) Net loss — — — — ( 223,579 ) — — ( 223,579 ) Other comprehensive income — — — 9,307 — — — 9,307 Stock-based compensation — — 9,544 — — — — 9,544 Stock-based awards exercised or vested — — 421 — ( 209 ) 52 1,023 1,235 Acquisition of treasury shares (2) — — — — — ( 2 ) ( 79 ) ( 79 ) Repurchase and retirement of common shares ( 3,241 ) ( 33 ) ( 1,911 ) — ( 128,409 ) — — ( 130,353 ) Cash dividends declared - $ 0.29 per share — — — — ( 44,569 ) — — ( 44,569 ) Balances as of December 31, 2022 185,403 $ 1,854 $ 767,683 $ ( 44,683 ) $ ( 708,437 ) ( 33,127 ) $ ( 659,896 ) $ ( 643,479 ) Net income — — — — 643,429 — — 643,429 Other comprehensive income — — — 402 — — — 402 Stock-based compensation — — 7,830 — — — — 7,830 Stock-based awards exercised or vested — — ( 244 ) — ( 213 ) 13 265 ( 192 ) Acquisition of treasury shares (2) — — — — — ( 6 ) ( 219 ) ( 219 ) Cash dividends declared - $ 0.29 per share — — — — ( 44,163 ) — — ( 44,163 ) Balances as of March 31, 2023 185,403 $ 1,854 $ 775,269 $ ( 44,281 ) $ ( 109,384 ) ( 33,120 ) $ ( 659,850 ) $ ( 36,392 ) (1) The balance of our accumulated other comprehensive income (loss) consists of foreign currency translation adjustments. (2) Represents shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. See accompanying notes to consolidated financial statements. 4 Q3 FY2023 Form 10-Q| H&R Block, Inc. Table of Contents (amounts in 000s, except per share amounts) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) (1) Retained Earnings (Deficit) Treasury Stock Total Stockholders’ Equity Shares Amount Shares Amount Balances as of July 1, 2021 216,656 $ 2,167 $ 779,465 $ 88 $ 286,694 ( 34,842 ) $ ( 680,356 ) $ 388,058 Net loss — — — — ( 151,601 ) — — ( 151,601 ) Other comprehensive loss — — — ( 11,177 ) — — — ( 11,177 ) Stock-based compensation — — 5,627 — — — — 5,627 Stock-based awards exercised or vested — — ( 10,328 ) — ( 291 ) 705 13,765 3,146 Acquisition of treasury shares (2) — — — — — ( 205 ) ( 4,817 ) ( 4,817 ) Repurchase and retirement of common shares ( 6,802 ) ( 68 ) ( 4,081 ) — ( 161,619 ) — — ( 165,768 ) Cash dividends declared - $ 0.27 per share — — — — ( 47,940 ) — — ( 47,940 ) Balances as of September 30, 2021 209,854 $ 2,099 $ 770,683 $ ( 11,089 ) $ ( 74,757 ) ( 34,342 ) $ ( 671,408 ) $ 15,528 Net loss — — — — ( 190,605 ) — — ( 190,605 ) Other comprehensive income — — — 1,656 — — — 1,656 Stock-based compensation — — 5,640 — — — — 5,640 Stock-based awards exercised or vested — — ( 1,709 ) — ( 219 ) 122 2,400 472 Acquisition of treasury shares (2) — — — — — ( 2 ) ( 52 ) ( 52 ) Repurchase and retirement of common shares ( 6,589 ) ( 66 ) ( 3,953 ) — ( 154,778 ) — — ( 158,797 ) Cash dividends declared - $ 0.27 per share — — — — ( 46,497 ) — — ( 46,497 ) Balances as of December 31, 2021 203,265 $ 2,033 $ 770,661 $ ( 9,433 ) $ ( 466,856 ) ( 34,222 ) $ ( 669,060 ) $ ( 372,655 ) Net income — — — — 673,177 — — 673,177 Other comprehensive income — — — 5,595 — — — 5,595 Stock-based compensation — — 5,619 — — — — 5,619 Stock-based awards exercised or vested — — ( 2,595 ) — ( 201 ) 244 4,771 1,975 Acquisition of treasury shares (2) — — — — — ( 1 ) ( 32 ) ( 32 ) Repurchase and retirement of common shares ( 9,694 ) ( 97 ) ( 5,816 ) — ( 219,868 ) — — ( 225,781 ) Cash dividends declared - $ 0.27 per share — — — — ( 43,042 ) — — ( 43,042 ) Balances as of March 31, 2022 193,571 $ 1,936 $ 767,869 $ ( 3,838 ) $ ( 56,790 ) ( 33,979 ) $ ( 664,321 ) $ 44,856 (1) The balance of our accumulated other comprehensive income (loss) consists of foreign currency translation adjustments. (2) Represents shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. See accompanying notes to consolidated financial statements. H&R Block, Inc. |Q3 FY2023 Form 10-Q 5 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION – The consolidated balance sheets as of March 31, 2023 and June 30, 2022, the consolidated statements of operations and comprehensive income for the three and nine months ended March 31, 2023 and 2022, the consolidated statements of cash flows for the nine months ended March 31, 2023 and 2022, and the consolidated statements of stockholders' equity for the three and nine months ended March 31, 2023 and 2022 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 March 31, 2023 and 2022 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., to H&R Block, Inc. and its subsidiaries, or to H&R Block, Inc.'s operating subsidiaries, as appropriate to the context. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our June 30, 2022 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of June 30, 2022 or for the year then ended are derived from our Annual Report on Form 10-K. MANAGEMENT ESTIMATES – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions and judgments are applied in the evaluation of contingent losses arising from our discontinued mortgage business, contingent losses associated with pending claims and litigation, reserves for uncertain tax positions, fair value of reporting units, and related matters. Estimates have been prepared based on the best information available as of each balance sheet date. As such, actual results could differ materially from those estimates. SEASONALITY OF BUSINESS – Our operating revenues are seasonal in nature with peak revenues typically occurring in the months of February through April. Therefore, results for interim periods are not indicative of results to be expected for the full year. DISCONTINUED OPERATIONS – Our discontinued operations include the results of operations of Sand Canyon Corporation, previously known as Option One Mortgage Corporation (including its subsidiaries, collectively, SCC), which exited its mortgage business in fiscal year 2008. See note 9 for additional information on loss contingencies related to our discontinued operations. 6 Q3 FY2023 Form 10-Q| H&R Block, Inc. Table of Contents NOTE 2: REVENUE RECOGNITION The majority of our revenues are from our U.S. tax services business. The following table disaggregates our U.S. revenues by major service line, with revenues from our international tax services businesses and from Wave included as separate lines: (in 000s) Three months ended March 31, Nine months ended March 31, 2023 2022 2023 2022 Revenues: U.S. assisted tax preparation $ 1,453,049 $ 1,392,142 $ 1,530,577 $ 1,456,594 U.S. royalties 150,163 158,786 161,337 169,548 U.S. DIY tax preparation 167,022 175,184 182,330 188,455 Refund Transfers 117,384 132,223 120,210 134,665 Peace of Mind® Extended Service Plan 16,750 17,222 58,840 59,373 Tax Identity Shield® 8,720 9,078 19,237 19,431 Emerald Card® and Spruce SM 44,358 50,660 68,448 103,748 Interest and fee income on Emerald Advance SM 33,750 30,535 47,267 43,438 International 69,417 65,232 156,297 151,464 Wave 22,064 20,111 66,651 58,745 Other 10,972 10,584 28,845 27,736 Total revenues $ 2,093,649 $ 2,061,757 $ 2,440,039 $ 2,413,197 Changes in the balances of deferred revenue and wages for our Peace of Mind® Extended Service Plan (POM) are as follows: (in 000s) POM Deferred Revenue Deferred Wages Nine months ended March 31, 2023 2022 2023 2022 Balance, beginning of the period $ 173,486 $ 172,759 $ 19,495 $ 17,867 Amounts deferred 76,231 80,801 8,451 9,006 Amounts recognized on previous deferrals ( 67,276 ) ( 69,075 ) ( 7,084 ) ( 6,786 ) Balance, end of the period $ 182,441 $ 184,485 $ 20,862 $ 20,087 As of March 31, 2023, deferred revenue related to POM was $ 182.4 million. We expect that $ 103.3 million will be recognized over the next twelve months , while the remaining balance will be recognized over the following five years . As of March 31, 2023 and 2022, Tax Identity Shield® (TIS) deferred revenue was $ 33.3 million and $ 37.4 million, respectively. Deferred revenue related to TIS was $ 25.8 million and $ 28.3 million as of June 30, 2022 and June 30, 2021, respectively. All deferred revenue related to TIS will be recognized by April 2024 . NOTE 3: EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY 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 computed by dividing net income (loss) from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period. 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 0.7 million and 0.6 million shares for the three and nine months ended March 31, 2023, H&R Block, Inc. |Q3 FY2023 Form 10-Q 7 Table of Contents respectively, and 0.3 million and 0.6 million shares for the three and nine months ended March 31, 2022, respectively, as the effect would be antidilutive. The computations of basic and diluted earnings per share from continuing operations are as follows: (in 000s, except per share amounts) Three months ended March 31, Nine months ended March 31, 2023 2022 2023 2022 Net income from continuing operations attributable to shareholders $ 646,077 $ 674,973 $ 257,847 $ 335,955 Amounts allocated to participating securities ( 2,822 ) ( 3,061 ) ( 1,064 ) ( 1,543 ) Net income from continuing operations attributable to common shareholders $ 643,255 $ 671,912 $ 256,783 $ 334,412 Basic weighted average common shares 152,281 162,777 155,249 171,481 Potential dilutive shares 3,280 2,835 3,239 2,661 Dilutive weighted average common shares 155,561 165,612 158,488 174,142 Earnings per share from continuing operations attributable to common shareholders: Basic $ 4.22 $ 4.13 $ 1.65 $ 1.95 Diluted 4.14 4.06 1.62 1.92 The decrease in the weighted average shares outstanding is due to share repurchases completed in the current and prior fiscal years. STOCK-BASED COMPENSATION – We granted 1.1 million and 1.6 million shares under our stock-based compensation plans during the nine months ended March 31, 2023 and March 31, 2022, respectively. Stock-based compensation expense of our continuing operations totaled $ 8.9 million and $ 26.8 million for the three and nine months ended March 31, 2023, respectively, and $ 6.8 million and $ 20.0 million for the three and nine months ended March 31, 2022, respectively. As of March 31, 2023, unrecognized compensation cost for stock options totaled $ 0.2 million, and for nonvested shares and units totaled $ 56.6 million. NOTE 4: RECEIVABLES Receivables, net of their related allowance, consist of the following: (in 000s) As of March 31, 2023 June 30, 2022 Short-term Long-term Short-term Long-term Loans to franchisees $ 13,841 $ 23,570 $ 6,194 $ 22,036 Receivables for U.S. assisted and DIY tax preparation and related fees 104,954 6,477 18,893 2,560 H&R Block's Instant Refund SM receivables 41,537 1,687 3,491 198 H&R Block Emerald Advance® lines of credit 15,976 6,166 6,691 8,825 Software receivables from retailers 8,882 — 3,992 — Royalties and other receivables from franchisees 42,443 — 3,682 73 Wave payment processing receivables 935 — 1,393 — Other 20,582 1,365 14,111 1,172 Total $ 249,150 $ 39,265 $ 58,447 $ 34,864 8 Q3 FY2023 Form 10-Q| H&R Block, Inc. Table of Contents 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 March 31, 2023 and June 30, 2022, loans with a principal balance more than 90 days past due, or on non-accrual status, are not material. H&R BLOCK'S INSTANT REFUND SM – H&R Block's Instant Refund SM amounts are generally received from the Canada Revenue Agency within 60 days of filing the client's return, with the remaining balance collectible from the client. We review the credit quality of our Instant Refund receivables based on pools, which are segregated by the tax return year of origination, with older years being deemed more unlikely to be repaid. We establish an allowance for credit losses at an amount that we believe reflects the receivable at net realizable value. In December of each year, we charge-off the receivables to an amount we believe represents the net realizable value. B alances and amounts on non-accrual status and classified as impaired, or more than 60 days past due, by tax return year of origination, as of March 31, 2023 are as foll ows: (in 000s) Tax return year of origination Current Balance More Than 60 Days Past Due 2022 $ 44,063 $ — 2021 and prior 451 451 44,514 $ 451 Allowance ( 1,290 ) Net balance $ 43,224 H&R BLOCK EMERALD ADVANCE ® LINES OF CREDIT – We review the credit quality of our purchased participation interests in Emerald Advance SM (EA) receivables based on pools, which are segregated by the fiscal year of origination, with older years being deemed more unlikely to be repaid. We establish an allowance for credit losses at an amount that we believe reflects the receivable at net realizable value. In December of each year, we charge-off the receivables to an amount we believe represents the net realizable value. Balances and amounts on non-accrual status and classified as impaired, or more than 60 days past due, by fiscal year of origination, as of March 31, 2023 are as follows: (in 000s) Fiscal year of origination Current Balance Non-Accrual 2023 $ 33,096 $ 33,096 2022 and prior 3,757 3,757 Revolving loans 13,318 12,743 50,171 $ 49,596 Allowance ( 28,029 ) Net balance $ 22,142 H&R Block, Inc. |Q3 FY2023 Form 10-Q 9 Table of Contents ALLOWANCE FOR CREDIT LOSSES – Activity in the allowance for credit losses for our EA and all other short-term and long-term receivables for the nine months ended March 31, 2023 and 2022 is as follows: (in 000s) EAs All Other Total Balances as of July 1, 2022 $ 26,141 $ 51,126 $ 77,267 Provision 16,702 32,472 49,174 Charge-offs, recoveries and other ( 14,814 ) ( 51,081 ) ( 65,895 ) Balances as of March 31, 2023 $ 28,029 $ 32,517 $ 60,546 Balances as of July 1, 2021 $ 27,704 $ 60,272 $ 87,976 Provision 13,797 45,981 59,778 Charge-offs, recoveries and other ( 16,377 ) ( 60,343 ) ( 76,720 ) Balances as of March 31, 2022 $ 25,124 $ 45,910 $ 71,034 NOTE 5: GOODWILL AND INTANGIBLE ASSETS Changes in the carrying amount of goodwill for the nine months ended March 31, 2023 are as follows: (in 000s) Goodwill Accumulated Impairment Losses Net Balances as of July 1, 2022 $ 898,698 $ ( 138,297 ) $ 760,401 Acquisitions 23,829 — 23,829 Disposals and foreign currency changes, net ( 14,673 ) — ( 14,673 ) Impairments — — — Balances as of March 31, 2023 $ 907,854 $ ( 138,297 ) $ 769,557 In conjunction with our annual impairment test, we tested goodwill for impairment during the quarter and did not identify any impairment. 10 Q3 FY2023 Form 10-Q| H&R Block, Inc. Table of Contents Components of intangible assets are as follows: (in 000s) Gross Carrying Amount Accumulated Amortization Net As of March 31, 2023: Reacquired franchise rights $ 392,274 $ ( 208,401 ) $ 183,873 Customer relationships 351,427 ( 295,094 ) 56,333 Internally-developed software 140,268 ( 123,125 ) 17,143 Noncompete agreements 42,575 ( 39,099 ) 3,476 Franchise agreements 19,201 ( 18,348 ) 853 Purchased technology 122,700 ( 94,556 ) 28,144 Trade name 5,800 ( 2,175 ) 3,625 $ 1,074,245 $ ( 780,798 ) $ 293,447 As of June 30, 2022: Reacquired franchise rights $ 379,114 $ ( 197,068 ) $ 182,046 Customer relationships 331,020 ( 278,717 ) 52,303 Internally-developed software 137,638 ( 107,111 ) 30,527 Noncompete agreements 41,789 ( 37,684 ) 4,105 Franchise agreements 19,201 ( 17,388 ) 1,813 Purchased technology 122,700 ( 87,910 ) 34,790 Trade name 5,800 ( 1,740 ) 4,060 $ 1,037,262 $ ( 727,618 ) $ 309,644 We made payments to acquire businesses totaling $ 47.7 million and $ 25.5 million during the nine months ended March 31, 2023 and 2022, respectively. The amounts and weighted-average lives of intangible assets acquired during the nine months e nded March 31, 2023, including amounts capitalized related to internally-developed software, a re as follows: (dollars in 000s) Amount Weighted-Average Life (in years) Internally-developed software $ 2,822 2 Customer relationships 22,015 5 Reacquired franchise rights 13,460 4 Noncompete agreements 833 5 Total $ 39,130 5 Amortization of intangible assets for the three and nine months ended March 31, 2023 was $ 17.8 million and $ 54.7 million, respectively, compared to $ 19.5 million and $ 58.7 million for the three and nine months ended March 31, 2022, respectively. Estimated amortization of intangible assets for fiscal years ending June 30, 2023, 2024, 2025, 2026, and 2027 is $ 71.9 million, $ 55.2 million, $ 32.6 million, $ 23.6 million and $ 17.8 million, respectively. H&R Block, Inc. |Q3 FY2023 Form 10-Q 11 Table of Contents NOTE 6: LONG-TERM DEBT The components of long-term debt are as follows: (in 000s) As of March 31, 2023 June 30, 2022 Senior Notes, 5.250 %, due October 2025 $ 350,000 $ 350,000 Senior Notes, 2.500 %, due July 2028 500,000 500,000 Senior Notes, 3.875 %, due August 2030 650,000 650,000 Debt issuance costs and discounts ( 11,543 ) ( 13,124 ) Total long-term debt 1,488,457 1,486,876 Less: Current portion — — Long-term portion $ 1,488,457 $ 1,486,876 Estimated fair value of long-term debt $ 1,337,000 $ 1,377,000 Our unsecured committed line of credit (CLOC) provides for an unsecured senior revolving credit facility in the aggregate principal amount of $ 1.5 billion, which includes a $ 175.0 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 June 11, 2026, 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, as defined by the CLOC agreement, 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 March 31, June 30, and September 30 of each year and (b) 4.50 to 1.00 as of the last day of each fiscal quarter ending on December 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 pu rposes. We were in compliance with these requirements as of March 31, 2023. We had no outst anding balance under our CLOC and amounts available to borrow were limited by the debt-to-EBITDA covenant to approximately $ 1.4 billion of March 31, 2023. NOTE 7: INCOME TAXES We file a consolidated federal income tax return in the U.S. with the Internal Revenue Service (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. With respect to federal, 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. On November 7, 2022, the IRS commenced their examination of our 2020 tax return and related carryback claims to tax years 2015 through 2018. Although the outcome of tax audits is always uncertain, we believe that adequate amounts of tax, interest, and penalties have been provided for in the accompanying consolidated financial statements for any adjustments that might be incurred due to federal, state, local or foreign audits. We had gross unrecognized tax benefits of $ 256.3 million and $ 232.0 million as of March 31, 2023 and June 30, 2022, respectively. The gross unrecognized tax benefits increased by $ 24.3 million during the nine months ended 12 Q3 FY2023 Form 10-Q| H&R Block, Inc. Table of Contents March 31, 2023. We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $ 53.5 million within the next twelve months. The anticipated decrease is due to the expiration of statutes of limitations and anticipated closure of various matters currently under examination or in appeals. For such matters where a change in the balance of unrecognized tax benefits is not yet deemed reasonably possible, no estimate has been included. Our effective tax rate for continuing operations, including the effects of discrete tax items, was 23.3 % and 8.1 % for the nine months ended March 31, 2023 and 2022, respectively. Discrete items decreased the effective tax rate by 1.3 % and 14.4 % for the nine months ended March 31, 2023, and 2022, respectively. A discrete income tax benefit of $ 4.2 million and $ 52.6 million were recorded in the nine months ended March 31, 2023 and 2022, respectively. The discrete tax benefit recorded in the current period primarily resulted from state statute of limitations expirations. The discrete tax benefit recorded in the prior period primarily resulted from federal and state statute of limitations expirations. The impact discrete tax items have on our tax rate through the third quarter are slightly exaggerated versus the impact discrete tax items have on the full fiscal year tax rate. NOTE 8: COMMITMENTS AND CONTINGENCIES 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 $ 14.6 million and $ 14.0 million as of March 31, 2023 and June 30, 2022, 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 $ 19.9 million and $ 12.9 million as of March 31, 2023 and June 30, 2022, respectively, with amounts recorded in deferred revenue and other liabilities. Should actual results differ from our estimates, future payments made will differ from the above estimate and any differences will be recorded in results from continuing operations. We have contractual commitments to fund certain franchises with approved revolving lines of credit. Our total obligation under these lines of credit was $ 20.4 million at March 31, 2023, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $ 9.6 million. In March 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide economic and other relief as a result of the COVID-19 pandemic. The CARES Act includes, among other items, provisions relating to refundable employee retention payroll tax credits. Due to the complex nature of the employee retention credit computations, any benefits we may receive are uncertain and may significantly differ from our current estimates. We plan to record any benefit related to these credits upon both the receipt of the benefit and the resolution of the uncertainties, including, but not limited to, the completion of any potential audit or examination, or the expiration of the related stat ute of limitations. During the nine months ended March 31, 2023, we received $ 13.2 million related to these credits and recognized $ 3.7 million as an offset to related operating expenses. As of March 31, 2023 and June 30, 2022, we had deferre d balances of $ 14.6 million and $ 5.1 million, respectively, which is recorded in deferred revenue and other current liabilities. Emerald Advance SM lines of credit (EAs) are originated by Pathward TM N.A. (Pathward). We purchase a 90 % participation interest, at par, in all EAs originated by Pathward in accordance with our participation agreement. At March 31, 2023, the principal balance of purchased participation interests for the current year totaled $ 277.9 million. Refund Advance loans are originated by Pathward and offered to certain assisted U.S. tax preparation clients, based on client eligibility as determined by Pathward. We pay fees primarily based on loan size and customer type. We have provided a guarantee up to $ 18.0 million related to certain loans to clients prior to the IRS accepting electronic filing. At March 31, 2023, we accrued an estimated liability of $ 0.8 million related to this guarantee, compared to $ 0.6 million at March 31, 2022. H&R Block, Inc. |Q3 FY2023 Form 10-Q 13 Table of Contents NOTE 9: LITIGATION AND OTHER RELATED CONTINGENCIES We are a defendant in numerous litigation and arbitration 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 or arbitrations to which we are subject. In some of the matters, very large or indeterminate amounts, including punitive damages, may be 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. 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 claim bears little relevance to its merits or disposition value due to this variability in pleadings and our experience in handling and resolving numerous claims over an extended period of time. The outcome of a 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 courts and arbitrators will apply the law. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will view the relevant evidence and applicable law. In addition to litigation and arbitration matters, we are also subject to other loss contingencies arising out of our business activities, including as described below. We accrue liabilities for litigation, arbitration, and other related loss contingencies and any related settlements 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 March 31, 2023. 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. Our total accrued liabilities were $ 4.0 million and $ 1.7 million as of March 31, 2023 and June 30, 2022, 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 or arbitrators on motions or appeals, analyses 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 March 31, 2023, 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. 14 Q3 FY2023 Form 10-Q| H&R Block, Inc. Table of Contents At the end of each reporting period, we review relevant information with respect to litigation, arbitration, and other related loss contingencies and update our accruals, disclosures, and estimates of reasonably possible loss or range of loss based on such reviews. Costs incurred with defending matters are expensed as incurred. Any receivable for insurance recoveries is recorded separately from the corresponding liability, and only if recovery is determined to be probable and reasonably estimable. We believe we have meritorious defenses to the claims asserted in the various matters described in this note, and we intend to defend them vigorously. The amounts claimed in the matters are substantial, however, and there can be no assurances as to their outcomes. In the event of unfavorable outcomes, it could require modifications to our operations; in addition, the amounts that may be required to be paid to discharge or settle the matters could be substantial and could have a material adverse impact on our business and our consolidated financial position, results of operations, and cash flows. LITIGATION, CLAIMS OR OTHER LOSS CONTINGENCIES PERTAINING TO CONTINUING OPERATIONS – 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 for summary judgment, which was denied. A trial date is set for August 14, 2023. 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 received and are responding to certain governmental inquiries relating to the IRS Free File Program and our DIY tax preparation services. In February 2023, we received a demand and draft complaint from the Federal Trade Commission (FTC) relating to our DIY tax preparation services. The Company has been discussing potential resolution of the matter with the FTC. If we are not able to reach a resolution, the FTC may seek resolution through litigation. We have not concluded that a loss related to these matters is probable, nor have we accrued a liability related to these matters. 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 and may in the future be, subject to litigation and other loss contingencies, including indemnification and contribution claims, pertaining to SCC's mortgage business activities that occurred prior to such termination and sale. Parties, including underwriters, depositors, and securitization trustees, have been, remain, or may in the future be, involved in lawsuits, threatened lawsuits, or 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, breaches of representations and warranties, or violations of statutory requirements. SCC has received notices of potential indemnification or contribution obligations relating to such matters. Additional lawsuits against the parties to the securitization transactions may be filed in the future, and SCC may receive additional notices of potential indemnification, contribution or similar obligations with respect to existing or new lawsuits or settlements of such lawsuits or other claims. An accrual related to these matters is included in our loss contingency accrual. 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 and the indeterminate damages sought. If the amount that SCC is ultimately required to pay with respect to loss contingencies, 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 also may 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 March 31, 2023, total H&R Block, Inc. |Q3 FY2023 Form 10-Q 15 Table of Contents approximately $ 266 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, arbitration 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.