H&R BLOCK INC 10-Q

ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS: (unaudited, in 000s, except per share amounts) Three months ended September 30, 2024 2023 REVENUES: Service revenues $ 181,771 $ 171,726 Royalty, product and other revenues 12,039 12,074 193,810 183,800 OPERATING EXPENSES: Costs of revenues 269,581 259,358 Selling, general and administrative 152,560 130,768 Total operating expenses 422,141 390,126 Other income (expense), net 11,917 9,836 Interest expense on borrowings ( 15,847 ) ( 15,870 ) Loss from continuing operations before income tax benefit ( 232,261 ) ( 212,360 ) Income tax benefit ( 60,840 ) ( 49,487 ) Net loss from continuing operations ( 171,421 ) ( 162,873 ) Net loss from discontinued operations, net of tax benefits of $ 345 and $ 182 ( 1,155 ) ( 609 ) NET LOSS $ ( 172,576 ) $ ( 163,482 ) BASIC AND DILUTED LOSS PER SHARE: Continuing operations $ ( 1.23 ) $ ( 1.11 ) Discontinued operations ( 0.01 ) ( 0.01 ) Consolidated $ ( 1.24 ) $ ( 1.12 ) DIVIDENDS DECLARED PER SHARE $ 0.375 $ 0.32 COMPREHENSIVE LOSS: Net loss $ ( 172,576 ) $ ( 163,482 ) Change in foreign currency translation adjustments 6,117 ( 10,914 ) Other comprehensive income (loss) 6,117 ( 10,914 ) Comprehensive loss $ ( 166,459 ) $ ( 174,396 ) See accompanying notes to consolidated financial statements. H&R Block, Inc. |Q1 FY2025 Form 10-Q 1 Table of Contents CONSOLIDATED BALANCE SHEETS (unaudited, in 000s, except share and per share amounts) As of September 30, 2024 June 30, 2024 ASSETS Cash and cash equivalents $ 415,860 $ 1,053,326 Cash and cash equivalents - restricted 23,157 21,867 Receivables, less allowance for credit losses of $ 57,978 and $ 61,182 69,929 69,075 Prepaid expenses and other current assets 102,657 95,208 Total current assets 611,603 1,239,476 Property and equipment, at cost, less accumulated depreciation and amortization of $ 840,343 and $ 838,814 135,533 131,319 Operating lease right of use assets 426,990 461,986 Intangible assets, net 256,053 264,102 Goodwill 792,195 785,226 Deferred tax assets and income taxes receivable 261,384 271,658 Other noncurrent assets 66,209 65,043 Total assets $ 2,549,967 $ 3,218,810 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable and accrued expenses $ 161,620 $ 155,830 Accrued salaries, wages and payroll taxes 58,294 105,548 Accrued income taxes and reserves for uncertain tax positions 205,470 318,830 Operating lease liabilities 189,432 206,070 Deferred revenue and other current liabilities 181,069 191,050 Total current liabilities 795,885 977,328 Long-term debt 1,491,621 1,491,095 Deferred tax liabilities and reserves for uncertain tax positions 296,370 291,063 Operating lease liabilities 247,062 265,373 Deferred revenue and other noncurrent liabilities 87,094 103,357 Total liabilities 2,918,032 3,128,216 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, no par, stated value $ 0.01 per share, 800,000,000 shares authorized, shares issued of 167,615,221 and 170,915,771 1,676 1,709 Additional paid-in capital 744,076 762,583 Accumulated other comprehensive loss ( 42,728 ) ( 48,845 ) Retained earnings (deficit) ( 424,548 ) 12,654 Less treasury shares, at cost, of 30,572,921 and 31,324,609 ( 646,541 ) ( 637,507 ) Total stockholders' equity (deficiency) ( 368,065 ) 90,594 Total liabilities and stockholders' equity $ 2,549,967 $ 3,218,810 See accompanying notes to consolidated financial statements. 2 Q1 FY2025 Form 10-Q| H&R Block, Inc. Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in 000s) Three months ended September 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 172,576 ) $ ( 163,482 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 28,831 30,225 Provision for credit losses 1,024 1,098 Deferred taxes 19,006 ( 37,757 ) Stock-based compensation 8,727 7,550 Changes in assets and liabilities, net of acquisitions: Receivables 1,029 4,981 Prepaid expenses, other current and noncurrent assets 8,836 6,396 Accounts payable, accrued expenses, salaries, wages and payroll taxes ( 66,017 ) ( 71,202 ) Deferred revenue, other current and noncurrent liabilities ( 27,025 ) ( 42,657 ) Income tax receivables, accrued income taxes and income tax reserves ( 129,397 ) ( 70,301 ) Other, net ( 1,019 ) 160 Net cash used in operating activities ( 328,581 ) ( 334,989 ) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 18,735 ) ( 12,916 ) Payments made for business acquisitions, net of cash acquired ( 5,901 ) ( 6,919 ) Franchise loans funded ( 7,109 ) ( 5,380 ) Payments from franchisees 211 937 Other, net 5,140 388 Net cash used in investing activities ( 26,394 ) ( 23,890 ) CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid ( 44,653 ) ( 42,953 ) Repurchase of common stock, including shares surrendered ( 238,376 ) ( 150,442 ) Other, net ( 1,421 ) ( 1,803 ) Net cash used in financing activities ( 284,450 ) ( 195,198 ) Effects of exchange rate changes on cash 3,249 ( 3,679 ) Net decrease in cash and cash equivalents, including restricted balances ( 636,176 ) ( 557,756 ) Cash, cash equivalents and restricted cash, beginning of period 1,075,193 1,015,316 Cash, cash equivalents and restricted cash, end of period $ 439,017 $ 457,560 SUPPLEMENTARY CASH FLOW DATA: Income taxes paid, net (includes payments for purchased investment tax credits) $ 48,343 $ 58,337 Interest paid on borrowings 19,792 19,792 Accrued additions to property and equipment 6,341 3,316 New operating right of use assets and related lease liabilities 21,861 38,468 Accrued dividends payable to common shareholders 52,307 46,901 Accrued purchase of common stock 7,131 10,003 See accompanying notes to consolidated financial statements. H&R Block, Inc. | Q1 FY2025 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 Loss (1) Retained Earnings (Deficit) Treasury Stock Total Stockholders’ Equity Shares Amount Shares Amount Balances as of July 1, 2024 170,916 $ 1,709 $ 762,583 $ ( 48,845 ) $ 12,654 ( 31,325 ) $ ( 637,507 ) $ 90,594 Net loss — — — — ( 172,576 ) — — ( 172,576 ) Other comprehensive income — — — 6,117 — — — 6,117 Stock-based compensation — — 7,463 — — — — 7,463 Stock-based awards exercised or vested — — ( 23,990 ) — ( 2,611 ) 1,319 26,848 247 Acquisition of treasury shares (2) — — — — — ( 567 ) ( 35,882 ) ( 35,882 ) Repurchase and retirement of common shares ( 3,301 ) ( 33 ) ( 1,980 ) — ( 209,708 ) — — ( 211,721 ) Cash dividends declared - $ 0.375 per share — — — — ( 52,307 ) — — ( 52,307 ) Balances as of September 30, 2024 167,615 $ 1,676 $ 744,076 $ ( 42,728 ) $ ( 424,548 ) ( 30,573 ) $ ( 646,541 ) $ ( 368,065 ) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss (1) Retained Earnings (Deficit) Treasury Stock Total Stockholders’ Equity Shares Amount Shares Amount Balances as of July 1, 2023 178,936 $ 1,789 $ 770,376 $ ( 37,099 ) $ ( 48,677 ) ( 32,786 ) $ ( 654,325 ) $ 32,064 Net loss — — — — ( 163,482 ) — — ( 163,482 ) Other comprehensive loss — — — ( 10,914 ) — — — ( 10,914 ) Stock-based compensation — — 6,211 — — — — 6,211 Stock-based awards exercised or vested — — ( 34,226 ) — ( 3,220 ) 1,867 37,348 ( 98 ) Acquisition of treasury shares (2) — — — — — ( 823 ) ( 28,464 ) ( 28,464 ) Repurchase and retirement of common shares ( 3,265 ) ( 32 ) ( 1,927 ) — ( 131,341 ) — — ( 133,300 ) Cash dividends declared - $ 0.32 per share — — — — ( 46,901 ) — — ( 46,901 ) Balances as of September 30, 2023 175,671 $ 1,757 $ 740,434 $ ( 48,013 ) $ ( 393,621 ) ( 31,742 ) $ ( 645,441 ) $ ( 344,884 ) (1) The balance of our accumulated other comprehensive 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 Q1 FY2025 Form 10-Q| H&R Block, Inc. 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 September 30, 2024 and June 30, 2024, the consolidated statements of operations and comprehensive loss for the three months ended September 30, 2024 and 2023, the consolidated statements of cash flows for the three months ended September 30, 2024 and 2023, and the consolidated statements of stockholders' equity for the three months ended September 30, 2024 and 2023 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 September 30, 2024 and 2023 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, 2024 Annual Report on Form 10-K. All amounts presented herein as of June 30, 2024 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 associated with pending claims and litigation, reserves for uncertain tax positions, and fair value of reporting units. Estimates have been prepared based on the best information available as of each balance sheet date. As such, actual results could differ materially from those estimates. 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, which exited its mortgage business in fiscal year 2008. H&R Block, Inc. |Q1 FY2025 Form 10-Q 5 Table of Contents NOTE 2: REVENUE RECOGNITION The majority of our revenues are from our United States (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 September 30, 2024 2023 Revenues: U.S. assisted tax preparation $ 42,963 $ 39,263 U.S. royalties 5,852 5,701 U.S. DIY tax preparation 3,236 3,848 Refund Transfers 860 1,142 Peace of Mind® Extended Service Plan 23,097 24,847 Tax Identity Shield® 3,909 4,580 Emerald Card® and Spruce SM 8,826 8,633 Interest and fee income on Emerald Advance® — 298 International 64,855 60,565 Wave 26,403 23,943 Other 13,809 10,980 Total revenues $ 193,810 $ 183,800 Changes in the balances of deferred revenue and wages for our Peace of Mind® Extended Service Plan (POM) are as follows: (in 000s) POM Deferred Revenue Deferred Wages Three months ended September 30, 2024 2023 2024 2023 Balance, beginning of the period $ 156,610 $ 167,257 $ 20,212 $ 21,828 Amounts deferred 1,563 1,450 15 6 Amounts recognized on previous deferrals ( 27,450 ) ( 28,772 ) ( 3,629 ) ( 3,323 ) Balance, end of the period $ 130,723 $ 139,935 $ 16,598 $ 18,511 As of September 30, 2024, deferred revenue related to POM was $ 130.7 million. We expect that $ 87.5 million will be recognized over the next twelve months , while the remaining balance will be recognized over the following five years . As of September 30, 2024 and 2023, Tax Identity Shield® (TIS) deferred revenue was $ 17.7 million and $ 20.8 million, respectively. Deferred revenue related to TIS was $ 21.4 million and $ 25.2 million as of June 30, 2024 and 2023, respectively. All deferred revenue related to TIS will be recognized by April 2025 . 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 2.7 million and 3.5 million shares for the three months ended September 30, 2024 and 2023, respectively, as the effect would be antidilutive due to the net loss from continuing operations during the periods. 6 Q1 FY2025 Form 10-Q| H&R Block, Inc. Table of Contents The computations of basic and diluted earnings (loss) per share from continuing operations are as follows: (in 000s, except per share amounts) Three months ended September 30, 2024 2023 Net loss from continuing operations attributable to shareholders $ ( 171,421 ) $ ( 162,873 ) Amounts allocated to participating securities ( 229 ) ( 177 ) Net loss from continuing operations attributable to common shareholders $ ( 171,650 ) $ ( 163,050 ) Basic weighted average common shares 139,154 146,273 Potential dilutive shares — — Dilutive weighted average common shares 139,154 146,273 Loss per share from continuing operations attributable to common shareholders: Basic $ ( 1.23 ) $ ( 1.11 ) Diluted ( 1.23 ) ( 1.11 ) 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 1.0 million and 1.6 million shares, including adjustments for performance achievement and dividend equivalents, under our stock-based compensation plans during the three months ended September 30, 2024 and 2023, respectively. Stock-based compensation expense of our continuing operations totaled $ 8.7 million and $ 7.6 million for the three months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, unrecognized compensation cost for nonvested shares and units totaled $ 67.9 million. NOTE 4: RECEIVABLES Receivables, net of their related allowance, consist of the following: (in 000s) As of September 30, 2024 June 30, 2024 Short-term Long-term Short-term Long-term Loans to franchisees $ 11,133 $ 18,958 $ 5,917 $ 16,498 Receivables for U.S. assisted and DIY tax preparation and related fees 14,899 5,162 18,440 5,332 H&R Block's Instant Refund® receivables 1,880 135 2,947 207 Emerald Advance® 15,879 23,993 17,867 21,360 Software receivables from retailers 111 — 1,029 — Royalties and other receivables from franchisees 8,339 — 5,808 — Wave payment processing receivables 728 — 1,078 — Other 16,960 404 15,989 427 Total $ 69,929 $ 48,652 $ 69,075 $ 43,824 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 September 30, 2024 and June 30, 2024, loans with a principal balance more than 90 days past due or on non-accrual status were $ 2.3 million and $ 1.1 million, respectively. H&R Block, Inc. |Q1 FY2025 Form 10-Q 7 Table of Contents H&R BLOCK'S INSTANT REFUND ® – H&R Block's Instant Refund® 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 and the related allowance to an amount we believe represents the net realizable value. B alances and amounts on non-accrual status, classified as impaired, or more than 60 days past due, by tax return year of origination, as of September 30, 2024 are as foll ows: (in 000s) Tax return year of origination Balance More Than 60 Days Past Due 2023 $ 1,649 $ 1,617 2022 and prior 1,390 1,390 3,039 $ 3,007 Allowance ( 1,024 ) Net balance $ 2,015 EMERALD ADVANCE ® – We review the credit quality of our purchased participation interests in 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. Typically, in December of each year, we charge-off the receivables and the related allowance for EAs to an amount we believe represents the net realizable value. Balances and amounts on non-accrual status, classified as impaired, or more than 60 days past due, by fiscal year of origination, as of September 30, 2024 are as follows: (in 000s) Fiscal year of origination Balance Non-Accrual 2024 $ 65,608 $ 65,608 2023 and prior 7,800 7,800 73,408 $ 73,408 Allowance ( 33,536 ) Net balance $ 39,872 8 Q1 FY2025 Form 10-Q| H&R Block, Inc. 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 three months ended September 30, 2024 and 2023 is as follows: (in 000s) EAs All Other Total Balances as of July 1, 2024 $ 33,536 $ 45,327 $ 78,863 Provision for credit losses — 1,024 1,024 Charge-offs, recoveries and other — ( 1,462 ) ( 1,462 ) Balances as of September 30, 2024 $ 33,536 $ 44,889 $ 78,425 Balances as of July 1, 2023 $ 27,386 $ 35,108 $ 62,494 Provision for credit losses 328 770 1,098 Charge-offs, recoveries and other ( 27,714 ) ( 409 ) ( 28,123 ) Balances as of September 30, 2023 $ — $ 35,469 $ 35,469 There were no gross charge-offs of EAs for the three months ended September 30, 2024. NOTE 5: GOODWILL AND INTANGIBLE ASSETS Changes in the carrying amount of goodwill for the three months ended September 30, 2024 are as follows: (in 000s) Goodwill Accumulated Impairment Losses Net Balances as of July 1, 2024 $ 923,523 $ ( 138,297 ) $ 785,226 Acquisitions (1) 3,243 — 3,243 Disposals and foreign currency changes, net 3,726 — 3,726 Impairments — — — Balances as of September 30, 2024 $ 930,492 $ ( 138,297 ) $ 792,195 (1) All goodwill added during the period is expected to be tax-deductible for federal income tax reporting. We test goodwill for impairment annually as of February 1, 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. H&R Block, Inc. |Q1 FY2025 Form 10-Q 9 Table of Contents Components of intangible assets are as follows: (in 000s) Gross Carrying Amount Accumulated Amortization Net As of September 30, 2024: Reacquired franchise rights $ 406,195 $ ( 232,023 ) $ 174,172 Customer relationships 334,067 ( 275,742 ) 58,325 Internally-developed software 122,731 ( 121,407 ) 1,324 Noncompete agreements 22,070 ( 19,705 ) 2,365 Purchased technology 70,100 ( 52,988 ) 17,112 Trade name 5,800 ( 3,045 ) 2,755 $ 960,963 $ ( 704,910 ) $ 256,053 As of June 30, 2024: Reacquired franchise rights $ 403,955 $ ( 228,157 ) $ 175,798 Customer relationships 331,435 ( 270,245 ) 61,190 Internally-developed software 122,673 ( 119,610 ) 3,063 Noncompete agreements 21,977 ( 19,494 ) 2,483 Purchased technology 70,100 ( 51,432 ) 18,668 Trade name 5,800 ( 2,900 ) 2,900 $ 955,940 $ ( 691,838 ) $ 264,102 We made payments to acquire businesses totaling $ 5.9 million and $ 6.9 million during the three months ended September 30, 2024 and 2023, respectively. The amounts and weighted-average lives of intangible assets acquired during the three months e nded September 30, 2024 a re as follows: (dollars in 000s) Amount Weighted-Average Life (in years) Customer relationships $ 2,500 5 Reacquired franchise rights 2,191 5 Noncompete agreements 84 5 Total $ 4,775 5 Amortization of intangible assets for the three months ended September 30, 2024 was $ 12.9 million compared to $ 15.8 million for the three months ended September 30, 2023. Estimated amortization of intangible assets for fiscal years ending June 30, 2025, 2026, 2027, 2028, and 2029 is $ 44.1 million, $ 34.6 million, $ 27.9 million, $ 20.1 million and $ 12.0 million, respectively. 10 Q1 FY2025 Form 10-Q| H&R Block, Inc. Table of Contents NOTE 6: LONG-TERM DEBT The components of long-term debt are as follows: (in 000s) As of September 30, 2024 June 30, 2024 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 ( 8,379 ) ( 8,905 ) Total long-term debt 1,491,621 1,491,095 Less: Current portion — — Long-term portion $ 1,491,621 $ 1,491,095 Estimated fair value of long-term debt $ 1,434,000 $ 1,391,000 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 September 30, 2024. We had no outst anding balance under our CLOC and amounts available to borrow were not limited by the debt-to-EBITDA covenant as of September 30, 2024. 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. We had gross unrecognized tax benefits of $ 251.4 million and $ 251.8 million as of September 30, 2024 and June 30, 2024, respectively. The gross unrecognized tax benefits decreased by $ 0.4 million during the three months ended September 30, 2024. We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $ 144.4 million within the next twelve months. The anticipated decrease is due to the expiration of statutes of limitations, anticipated closure of various tax matters currently under examination, and settlements with tax authorities. For such matters where a change in the balance of unrecognized tax benefits is not yet deemed reasonably possible, no estimate has been included. Our effective tax rate for continuing operations, including the effects of discrete tax items, was 26.2 % and 23.3 % for the three months ended September 30, 2024 and 2023, respectively. H&R Block, Inc. |Q1 FY2025 Form 10-Q 11 Table of Contents Consistent with prior years, our pretax loss for the three months ended September 30, 2024 is expected to be offset by income in our third and fourth quarters due to the established pattern of seasonality in our primary business operations. As such, management has determined that it is more-likely-than-not that realization of tax benefits recorded in our financial statements will occur within our fiscal year. The amount of tax benefit recorded for the three months ended September 30, 2024 reflects management’s estimate of the annual effective tax rate applied to year-to-date loss from continuing operations adjusted for the tax impact of discrete items for the periods presented. NOTE 8: COMMITMENTS AND CONTINGENCIES Our U.S. and Canadian businesses offer our 100% accuracy guarantee. 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 respective taxing authority that a client would otherwise not have been required to pay. Our liability related to estimated losses under the 100% accuracy guarantee was $ 12.0 million and $ 14.1 million as of September 30, 2024 and June 30, 2024, 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 $ 28.0 million and $ 26.9 million as of September 30, 2024 and June 30, 2024 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 short-term lines of credit for the purpose of meeting their seasonal working capital needs. Our total obligation under these lines of credit was $ 15.7 million at September 30, 2024, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $ 10.0 million. During the three months ended September 30, 2024, the Company entered into an agreement to purchase federal investment tax credits (“ITC”), if certain conditions are met. During the three months ended September 30, 2024, we paid $ 22.9 million for ITCs. As of September 30, 2024, the Company has a remaining commitment to purchase additional ITCs, estimated to be $ 74.0 million if certain conditions set forth in the agreement are satisfied, with the final payment anticipated to occur by June 30, 2025. 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. 12 Q1 FY2025 Form 10-Q| H&R Block, Inc. Table of Contents 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 September 30, 2024. 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 accrued liabilities were $ 11.1 million and $ 7.2 million as of September 30, 2024 and June 30, 2024, 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 September 30, 2024, 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. 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. H&R Block, Inc. |Q1 FY2025 Form 10-Q 13 Table of Contents We have received and are responding to certain governmental inquiries, class actions and mass arbitrations relating to the IRS Free File Program and other aspects of our DIY tax preparation services, including the use of pixels. Related to one of these matters, on February 23, 2024, the Federal Trade Commission (FTC) filed an administrative complaint before the FTC alleging unfair or deceptive business acts or practices in connection with certain aspects of our DIY tax preparation services. A hearing before an administrative law judge (ALJ) of the FTC was scheduled to begin on October 23, 2024. We filed a complaint in federal court in the Western District of Missouri challenging the constitutionality of the ALJ’s removal protections and seeking to enjoin the ALJ’s participation in the adjudication of the matter. The federal court denied our motion for a preliminary injunction on August 1, 2024. We filed an appeal with the Eighth Circuit Court of Appeals. On October 21, 2024, we entered into a proposed Consent Agreement to resolve the allegations of the complaint through a proposed Decision and Order, which is subject to final approval by the Commission. If approved, the proposed Decision and Order will fully resolve the claims. Proceedings before the ALJ are stayed pending a determination by the Commission. An accrual related to these matters is included in our loss contingency accrual. 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.