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General | People (141) | Filings (1866) | Annual reports (7) | Stock | News

H&R BLOCK INC SEC Filing Form 10-K Annual report 2/2017, submited: 2017-06-16

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Form 10-K

A 10-K is a comprehensive summary report of a company's performance that must be submitted annually to the Securities and Exchange Commission. Typically, the 10-K contains much more detail than the annual report. It includes information such as company history, organizational structure, equity, holdings, earnings per share, subsidiaries, etc.

The 10-K must be filed within 60 days (it used to be 90 days) after the end of the fiscal year.

10-K 1 hrb2017043010k.htm 10-K Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
 
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended April 30, 2017
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from             to             
Commission file number 1-06089
H&R Block, Inc.
(Exact name of registrant as specified in its charter)
MISSOURI
 
44-0607856
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
One H&R Block Way, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 854-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, without par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No  þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ     Accelerated filer ¨     Non-accelerated filer ¨      Smaller reporting company ¨ Emerging growth company ¨
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No  þ
The aggregate market value of the registrant's Common Stock (all voting stock) held by non-affiliates of the registrant, computed by reference to the price at which the stock was sold on October 31, 2016, was $4,806,004,628.
Number of shares of the registrant's Common Stock, without par value, outstanding on May 31, 2017: 207,178,139.
Documents incorporated by reference
The definitive proxy statement for the registrant's Annual Meeting of Shareholders, to be held September 14, 2017, is incorporated by reference in Part III to the extent described therein.
 



 
2017 FORM 10-K AND ANNUAL REPORT
TABLE OF CONTENTS

 
 
INTRODUCTION AND FORWARD-LOOKING STATEMENTS
1
 
 
 
 
 
ITEM 1.
BUSINESS
1
ITEM 1A.
RISK FACTORS
7
ITEM 1B.
UNRESOLVED STAFF COMMENTS
18
ITEM 2.
PROPERTIES
18
ITEM 3.
LEGAL PROCEEDINGS
18
ITEM 4.
MINE SAFETY DISCLOSURES
18
 
 
 
 
 
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
18
ITEM 6.
SELECTED FINANCIAL DATA
20
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
20
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
33
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
34
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
70
ITEM 9A.
CONTROLS AND PROCEDURES
70
ITEM 9B.
OTHER INFORMATION
71
 
 
 
 
 
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
71
ITEM 11.
EXECUTIVE COMPENSATION
71
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
72
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
72
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
72
 
 
 
 
 
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
72
 
SIGNATURES
73
 
EXHIBIT INDEX
74
 




INTRODUCTION
"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.
Specified portions of our proxy statement are "incorporated by reference" in response to certain items. Our proxy statement will be made available to shareholders no later than 120 days after April 30, 2017, and will also be available on our website at www.hrblock.com.
FORWARD-LOOKING STATEMENTS
This report and other documents filed with the Securities and Exchange Commission (SEC) may contain forward-looking statements. In addition, our senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words or variation of words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "projects," "forecasts," "targets," "would," "will," "should," "could," "may" or other similar expressions. Forward-looking statements provide management's current expectations or predictions of future conditions, events or results. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. They may include estimates of revenues, income, earnings per share, capital expenditures, dividends, stock repurchase, liquidity, capital structure, market share, industry volumes or other financial items, descriptions of management's plans or objectives for future operations, services or products, or descriptions of assumptions underlying any of the above. All forward-looking statements speak only as of the date they are made and reflect the Company's good faith beliefs, assumptions and expectations, but they are not guarantees of future performance or events. Furthermore, the Company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions, factors, or expectations, new information, data or methods, future events or other changes, except as required by law.
By their nature, forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Factors that might cause such differences include, but are not limited to, a variety of economic, competitive, operational and regulatory factors, many of which are beyond the Company's control. Investors should understand that it is not possible to predict or identify all such factors and, consequently, should not consider any such list to be a complete set of all potential risks or uncertainties.
Details about risks, uncertainties and assumptions that could affect various aspects of our business are included throughout this Form 10-K. Investors should carefully consider all of these risks, and should pay particular attention to Item 1A, "Risk Factors," and Item 7 under "Critical Accounting Estimates" of this Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
H&R Block, Inc. was organized as a corporation in 1955 under the laws of the State of Missouri and has subsidiaries that provide tax preparation and other services. A complete list of our subsidiaries as of April 30, 2017 can be found in Exhibit 21.
We provide assisted income tax return preparation, digital do-it-yourself (DIY) tax solutions and other services and products related to income tax return preparation to the general public primarily in the United States (U.S.), Canada, Australia, and their respective territories.
RECENT DEVELOPMENTS
Refund Advance Loans. We began offering interest-free Refund Advance loans (RAs) during the 2017 tax season. RAs were available to eligible assisted U.S. tax preparation clients of the Company and participating franchise locations. On October 25, 2016, subsidiaries of the Company entered into a Refund Advance Program Agreement with MetaBank, a federal savings bank (MetaBank), and Specialty Consumer Services, L.P., a Texas limited partnership (SCS), pursuant to which MetaBank originated RAs and SCS provided technology, software, and underwriting support services.

H&R Block, Inc. | 2017 Form 10-K
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MetaBank and BofI Federal Bank (BofI) provided funding for the loans, with BofI also performing certain disbursement and repayment services.
RAs were offered in amounts of $500, $750 or $1,250, based on client eligibility as determined by the loan originator. We paid loan origination fees of $28.6 million to MetaBank based on volume and customer type which is approximately $32 to $36 on average for each funded loan. The loan origination fees were intended to cover expected loan losses and payments to capital providers, among other items. In addition, Block Financial LLC (Block Financial) provided MetaBank and BofI with limited guaranties up to $73 million in the aggregate, subject to specified thresholds, which would cover certain incremental loan losses. At April 30, 2017, we had accrued an estimated liability of $0.7 million related to the RA program.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
We operate as a single segment that includes all of our continuing operations, which are designed to enable clients to obtain tax preparation services seamlessly. See discussion below and in Item 8, note 15 to the consolidated financial statements.
DESCRIPTION OF BUSINESS
GENERAL – We provide assisted and DIY tax return preparation solutions through multiple channels (including in-person, online and mobile applications, and desktop software) and distribute H&R Block-branded financial products and services, including those of our financial partners, to the general public primarily in the U.S., Canada, Australia, and their respective territories. Major revenue sources include fees earned for tax preparation and related services performed at company-owned retail tax offices, royalties from franchisees, sales of desktop tax preparation software, fees for online tax preparation services and fees from complementary services and products. By offering assisted and DIY tax solutions through multiple channels, we seek to serve our clients in the manner they choose to be served.
Tax Returns Prepared. During fiscal year 2017, 23.0 million tax returns were prepared by and through H&R Block worldwide, a decline of 0.6% from 23.1 million in fiscal year 2016 and 24.1 million in fiscal year 2015. In the U.S., 19.5 million tax returns were prepared by and through H&R Block during fiscal year 2017, compared to 19.7 million in 2016 and 20.6 million in 2015.
U.S. tax returns prepared by and through us during the 2017 tax season, including those prepared by our franchisees and through our DIY solutions, constituted approximately 14% of an Internal Revenue Service (IRS) estimate of total individual income tax returns filed during the 2017 tax season, compared to approximately 14% in the prior year. See Item 7, under "Results of Operations," for further discussion of changes in the number of tax returns prepared.
ASSISTED – Assisted income tax return preparation and related services are provided by tax professionals via a system of retail offices operated directly by us or our franchisees or virtually via the internet.
Offices. During the 2017 tax season, we, together with our franchisees, operated in 10,036 offices across the U.S. at the peak of the tax season, compared to 10,213 in the prior year. A summary of our company-owned and franchise offices is included in Item 7, under "Operating Statistics."
Franchises. We offer franchises as a way to expand our presence in certain geographic areas. Our franchise arrangements provide us with certain rights designed to protect our brand. Most of our franchisees receive, among other things, the right to use our trademarks and software, access to product offerings and expertise, signs, specialized forms, advertising, and initial and ongoing training and advisory services. Our franchisees pay us approximately 30% of gross tax return preparation and related service revenues as a franchise royalty in the U.S. Our franchise arrangements typically include a ten-year term and do not provide for automatic renewal.
From time to time, we have sold certain company-owned offices to existing franchisees or have acquired the assets of existing franchisees and other tax return preparation businesses, and may continue to do so if future conditions warrant and satisfactory terms can be negotiated.
DO-IT-YOURSELF – We develop and market DIY income tax preparation software. We offer a comprehensive range of DIY tax services, including preparation of federal and state income tax returns, review of tax returns by a tax professional, access to tax tips, advice and tax-related news, use of calculators for tax planning, error checking and electronic filing. Our online software may be accessed through our website at www.hrblock.com, while our desktop software may be purchased online, through third-party retail stores or via direct mail.

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2017 Form 10-K | H&R Block, Inc.


We are a member of Free File, Inc. (FF), formerly known as the Free File Alliance. This organization was created by the tax return preparation industry and the IRS, and allows qualified filers with an adjusted gross income of $64,000 or less to prepare and file their federal return online at no charge. We believe this program provides a valuable public service and increases our visibility with new clients.
We develop and offer applications for mobile devices which provide tax return preparation solutions and related services and products to clients, including tools that complement our other tax preparation services and products.
OTHER OFFERINGS – In addition to our tax services and products, we also offer U.S. clients a number of additional services, including refund transfers (RTs), H&R Block Emerald Advance® lines of credit (EAs), H&R Block Emerald Prepaid MasterCard®, our Peace of Mind® Extended Service Plan (POM), Tax Identity Shield® (TIS), RAs and, for our Canadian clients, an Instant Cash Back® refund option.
Refund Transfers. RTs enable clients to receive their tax refunds by their chosen method of disbursement and include a feature enabling clients to deduct tax preparation and service fees from their tax refunds. Clients may choose to receive their RT proceeds by direct deposit to a deposit account, by a load to their H&R Block Emerald Prepaid MasterCard® or by receiving a check. RTs are available to U.S. clients and are frequently obtained by those who (1) do not have bank accounts into which the IRS can direct deposit their refunds; (2) like the convenience and benefits of a temporary account for receipt of their refund; or (3) prefer to have their tax preparation fees paid directly out of their refunds. RTs are offered through our relationship with BofI. We offer a similar program to our Canadian clients, referred to as H&R Block Pay With Refund®.
H&R Block Emerald Advance® Lines of Credit. EAs are lines of credit offered to clients in our offices, typically from late November through December, currently in an amount not to exceed $1,000. If the borrower meets certain criteria as agreed in the loan terms, the line of credit can be utilized year-round. In addition to the required monthly payments, borrowers may elect to pay down balances on EAs with their tax refunds. These lines of credit are offered by BofI, and we subsequently purchase a participation interest in the outstanding balances.
H&R Block Emerald Prepaid Mastercard®. The H&R Block Emerald Prepaid MasterCard® enables clients to receive their tax refunds from the IRS directly on a prepaid debit card, or to direct RT or EA proceeds to the card. The card can be used for everyday purchases, bill payments and ATM withdrawals anywhere MasterCard® (MasterCard is a registered trademark of MasterCard International Incorporated) is accepted. Additional funds can be added to the card year-round through direct deposit or at participating retail locations. We distribute the H&R Block Emerald Prepaid MasterCard® issued by BofI.
Peace of Mind® Extended Service Plan. In addition to our standard guarantee, we offer POM to U.S. and Canadian clients, whereby we (1) represent our clients if they are audited by the IRS or Canada Revenue Agency (CRA), and (2) assume the cost, subject to certain limits, of additional taxes owed by a client resulting from errors attributable to H&R Block. The additional taxes paid under POM have a cumulative limit of $6,000 for U.S. clients and $3,000CAD for Canadian clients with respect to the federal, state and local tax returns we prepared for applicable clients during the taxable year protected by POM.
Tax Identity Shield®. This service program offers clients assistance obtaining additional IRS identity protection, when eligible, to better protect against unauthorized third parties filing a fraudulent tax return with their information. TIS also includes a pre-tax season identity theft risk assessment, notification if their information is detected on a tax return filed through H&R Block and access to services to help restore their tax identity if necessary.
Refund Advance Loans. RAs are interest-free loans available to eligible assisted U.S. tax preparation clients in company-owned and participating franchise locations. In tax season 2017, RAs were offered in amounts of $500, $750 or $1,250, based on client eligibility as determined by MetaBank.
Instant Cash Back®. Our Canadian operations advance refunds due to certain clients from the CRA, for a fee. The fee charged for this service is mandated by federal legislation which is administered by the CRA. The client assigns to us the full amount of the tax refund to be issued by the CRA and the refund amount is then sent by the CRA directly to us.
SEASONALITY OF BUSINESS – Because most of our clients file their tax returns during the period from January through April of each year, a substantial majority of our revenues from income tax return preparation and related

H&R Block, Inc. | 2017 Form 10-K
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services and products are earned during this period. As a result, we generally operate at a loss through a majority of the fiscal year.
COMPETITIVE CONDITIONS – We provide both assisted and DIY tax preparation services and products and face substantial competition in and across each category. There are a substantial number of tax return preparation firms and accounting firms offering tax return preparation services, and we face significant competition from independent tax preparers and certified public accountants. Many tax return preparation firms are involved in providing electronic filing services and RTs or similar services to the public. Tax return preparation firms are highly competitive with regard to price and service, and many firms offer services that may include preparation of tax returns at no charge. Our assisted tax preparation business also faces competition from firms offering DIY tax preparation services and products.
Our DIY tax solutions include various forms of digital electronic assistance, including online and mobile applications and desktop software. Many other companies offer digital and online tax preparation services, including Intuit Inc., our largest competitor offering such services. Like all tax return preparation services and products, price and marketing competition for digital tax preparation services is intense among value and premium product offerings and many firms offer digital services and products at no charge. Our DIY tax solutions also compete with in-office tax preparation services. U.S. federal and certain state and foreign taxing authorities also currently offer, or facilitate the offering of, tax return preparation and filing options to taxpayers at no charge.
In terms of the number of offices and revenues, we believe we are the largest single provider of tax return preparation solutions and electronic filing services in the U.S. In terms of the number of tax returns prepared, we believe we are the second largest provider in the U.S. We also believe we operate the largest tax return preparation businesses in Canada and Australia.
GOVERNMENT REGULATIONTAX PREPARERS – Our tax preparation business is subject to various forms of government regulation, including the following:
U.S. Federal Tax Preparer Regulations. U.S. federal legislation requires income tax return preparers to, among other things, set forth their signatures and identification numbers, including their Preparer Tax Identification Number (PTIN), on all tax returns prepared by them and retain all tax returns prepared by them for three years. U.S. federal laws also subject income tax return preparers to accuracy-related penalties in connection with the preparation of income tax returns. Preparers may be prohibited from continuing to act as income tax return preparers if they repeatedly engage in specified misconduct.
The U.S. federal government regulates the electronic filing of income tax returns in part by requiring electronic filers to comply with all publications and notices of the IRS applicable to electronic filing. We are required to provide certain electronic filing information to taxpayers and comply with advertising standards for electronic filers. We are also subject to possible monitoring by the IRS, and if deemed appropriate, the IRS could impose various penalties, including penalties for improper disclosure or use of taxpayer information, other preparer penalties or suspension from the IRS electronic filing program.
Financial Consumer Protection and Privacy Regulations. The Gramm-Leach-Bliley Act and related Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) regulations require income tax preparers to (1) adopt and disclose consumer privacy notices, (2) provide consumers a reasonable opportunity to control (via "opt-out") whether their nonpublic personal information is disclosed to unaffiliated third-parties (subject to certain exceptions), and (3) implement reasonable safeguards to protect the security and confidentiality of nonpublic personal information. In addition, the IRS generally prohibits the use or disclosure of taxpayer information by tax return preparers for purposes other than tax return preparation without the prior written consent of the taxpayer. The CFPB may issue regulations that apply to our subsidiaries, or certain of our third party service providers that provide consumer financial services and products. The CFPB may examine, and take enforcement actions against, our subsidiaries or our third party service providers. See Item 1A, "Risk Factors," for further information on the CFPB and its recent actions.
State Regulations. Certain states have privacy laws and regulations in addition to the U.S. federal regulations described above. Most states also have data security breach notice laws which may require notice to impacted individuals and others if there is unauthorized access to certain sensitive personal information. Several states require income tax return preparers to, among other things, register as a return preparer and comply with certain registration requirements such as testing and continuing education requirements. State regulations may also subject income tax

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2017 Form 10-K | H&R Block, Inc.


return preparers to accuracy-related penalties in connection with the preparation of income tax returns, and may prohibit preparers from continuing to act as income tax return preparers if they engage in specified misconduct. Certain states have regulations and requirements relating to offering income tax courses. These requirements may include licensing, bonding and certain restrictions on advertising.
Franchise Regulations. Many of the income tax return preparation offices operating in the U.S. under the name "H&R Block" are operated by franchisees. Our franchising activities are subject to the rules and regulations of the FTC, potential enforcement by the CFPB, and various state laws regulating the offer and sale of franchises. The FTC and various state laws require us to furnish to prospective franchisees a franchise disclosure document containing certain prescribed information. A number of states in which we are currently franchising regulate the sale of franchises and require registration of the franchise disclosure document with certain state authorities. We are currently operating under exemptions from registration in several of these states based on our net worth and experience. Substantive state laws regulating the franchisor/franchisee relationship presently exist in a large number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the franchisor/franchisee relationship in certain respects. The state laws often limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply. From time to time, we may make appropriate amendments to our franchise disclosure document to comply with our disclosure obligations under U.S. federal and state laws.
FOREIGN REGULATIONS – We are also subject to a variety of other regulations in various foreign markets, including anti-corruption laws, and regulations concerning privacy, data protection and data retention. Foreign regulations and laws potentially affecting our business are evolving rapidly. We rely on external and internal counsel in the countries in which we do business to advise us regarding compliance with applicable laws and regulations. As our international operations grow, we continue to develop and enhance our internal legal and operational compliance programs that guide our businesses in complying with laws and regulations applicable in the countries in which we do business.
SERVICE MARKS, TRADEMARKS AND PATENTS
We have made a practice of offering our services and products under service marks and trademarks and of securing registration for many of these marks in the U.S. and other countries where our services and products are marketed. We consider these service marks and trademarks, in the aggregate, to be of material importance to our business, particularly our businesses providing services and products under the "H&R Block" brand. The initial duration of U.S. federal trademark registrations is 10 years. Most U.S. federal registrations can be renewed perpetually at 10-year intervals and remain enforceable so long as the marks continue to be used.
We hold a small but growing patent portfolio that we believe is important to our overall competitive position, although we are not materially dependent on any one patent or particular group of patents in our portfolio at this time. Our patents have remaining terms generally ranging from one to 20 years.
EMPLOYEES AND EXECUTIVE OFFICERS
We had approximately 2,300 regular full-time employees as of April 30, 2017. Our business is dependent on the availability of a seasonal workforce, including tax professionals, and our ability to hire, train, and supervise these employees. The highest number of persons we employed during the fiscal year ended April 30, 2017, including these seasonal employees, was approximately 87,500.

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Information about our executive officers is as follows:
Name, age
 
Current position
 
Business experience since May 1, 2012
William C. Cobb,
age 60
 
President and Chief Executive Officer
 
President and Chief Executive Officer since May 2011 (retiring effective July 31, 2017); retired from eBay, Inc. in 2008, having worked there from November 2000 to March 2008, where he most recently served as President of eBay Marketplaces North America for four years; before that, he held several senior management positions, including Senior Vice President and General Manager of eBay International and Senior Vice President of Global Marketing.
Tony G. Bowen,
age 42
 
Chief Financial Officer
 
Chief Financial Officer since May 2016; Vice President, U.S. Tax Services Finance from May 2013 through April 2016; Vice President, Digital GM from May 2012 until May 2013; Vice President, Digital CFO from July 2011 until May 2012; Assistant Vice President of Corporate Development from October 2009 until July 2011.
Kellie J. Logerwell,
age 47
 
Chief Accounting Officer
 
Chief Accounting Officer since July 2016; Vice President of Corporate and Field Accounting from December 2014 until July 2016; Assistant Controller from December 2010 until December 2014.
Kathryn M. Collins,
age 53
 
Senior Vice President and Chief Marketing Officer
 
Senior Vice President and Chief Marketing Officer since May 2016; Chief Marketing Officer from October 2013 through April 2016; Vice President, Retail Marketing from July 2012 until October 2013; Vice President, Marketing Communications and Brand Management from January 2006 until July 2012. Prior to 2006, Ms. Collins held various positions at Lee Jeans, a division of VF Corporation.
Thomas A. Gerke,
age 61
 
General Counsel and Chief Administrative Officer
 
General Counsel and Chief Administrative Officer since May 2016; Chief Legal Officer (formerly titled Senior Vice President and General Counsel) from January 2012 through April 2016; Executive Vice President, General Counsel and Secretary of YRC Worldwide from January 2011 until April 2011; Executive Vice Chairman, Century Link, Inc. from July 2009 until December 2010; President and Chief Executive Officer, Embarq Corporation (in an interim capacity from December 2007 until March 2008 and by appointment from March 2008 until June 2009). Mr. Gerke will serve as President and Chief Executive Officer (in an interim capacity) beginning August 1, 2017, until the position is filled permanently.
AVAILABILITY OF REPORTS AND OTHER INFORMATION
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed with or furnished to the SEC are available, free of charge, through our website at www.hrblock.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov containing reports, proxy and information statements and other information regarding issuers who file electronically with the SEC.
The following corporate governance documents are posted on our website at www.hrblock.com:
The Amended and Restated Articles of Incorporation of H&R Block, Inc.;
The Amended and Restated Bylaws of H&R Block, Inc.;
The H&R Block, Inc. Corporate Governance Guidelines;
The H&R Block, Inc. Code of Business Ethics and Conduct;
The H&R Block, Inc. Board of Directors Independence Standards;
The H&R Block, Inc. Audit Committee Charter;
The H&R Block, Inc. Compensation Committee Charter;
The H&R Block, Inc. Finance Committee Charter; and
The H&R Block, Inc. Governance and Nominating Committee Charter.
If you would like a printed copy of any of these corporate governance documents, please send your request to H&R Block, Inc., One H&R Block Way, Kansas City, Missouri 64105, Attention: Corporate Secretary.
Information contained on our website does not constitute any part of this report.

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2017 Form 10-K | H&R Block, Inc.


ITEM 1A. RISK FACTORS
Our business activities expose us to a variety of risks. Identification, monitoring and management of these risks are essential to the success of our operations and the financial soundness of H&R Block. Senior management and the Board of Directors, acting as a whole and through its committees, take an active role in our risk management process and have delegated certain activities related to the oversight of risk management to the Company's Risk Committee, which is comprised of senior managers of major businesses and control functions. The Risk Committee is responsible for identifying and monitoring risk exposures and leading the continued development of our risk management policies and practices.
An investment in our securities involves risk, including the risk that the value of that investment may decline or that returns on that investment may fall below expectations. There are a number of significant factors that could cause actual conditions, events or results to differ materially from those described in forward-looking statements, many of which are beyond management's control or its ability to accurately estimate or predict, or that could adversely affect our financial position, results of operations, cash flows and the value of an investment in our securities.
RISKS RELATING TO CONTINUING OPERATIONS
Increased competition for tax preparation clients could adversely affect our current market share and profitability. Offers of free tax preparation services could adversely affect our revenues and profitability.
We provide both assisted and DIY tax preparation services and products and face substantial competition throughout our businesses. All categories in the tax return preparation industry are highly competitive and additional competitors have entered, and in the future may enter, the market to provide tax preparation products or services. In the assisted tax services category, there are a substantial number of tax return preparation firms and accounting firms offering tax return preparation services. Commercial tax return preparers are highly competitive with regard to price and service. In the DIY category, options include various forms of digital electronic assistance, including online and mobile applications, and desktop software, all of which we offer. Our DIY services and products compete with a number of online and software companies, primarily on price and functionality. Individual tax filers may elect to change their tax preparation method, choosing from among various assisted and DIY offerings. Technology advances quickly and in new and unexpected ways, and it is difficult to predict the manner in which these changes will impact the tax return preparation industry, the problems we may encounter in enhancing our products and services or the time and resources we may need to devote to the creation, support, and maintenance of technological enhancements. If we are slow to enhance our products, services, or technologies, if our competitors are able to achieve results more quickly than us, or if there are new and unexpected entrants into the industry, we may fail to capture, or lose, a significant share of the market. Additionally, we and many other tax return preparation firms are involved in providing one or more of RTs, other financial products and services, and other tax-related services and products, many of which are subject to regulatory scrutiny, litigation, and other risks. We can make no assurances that we will be able to offer, or continue to offer, all of these services and a failure to do so could negatively impact our financial results and ability to compete. Intense competition could result in a reduction of our market share, lower revenues, lower margins and lower profitability.
U.S. federal, state and foreign governmental authorities in certain jurisdictions in which we operate currently offer, or facilitate the offering of, tax return preparation and electronic filing options to taxpayers at no charge, and certain volunteer organizations also prepare tax returns at no charge for low-income taxpayers. In addition, many of our competitors offer certain tax preparation services and products at no charge. In order to compete, we have offered certain, and may in the future offer additional, tax preparation services and related products at no charge. There can be no assurance that we will be able to attract clients or effectively ensure the migration of clients from our free tax service offerings to those for which we receive fees, and clients who have formerly paid for our tax service offerings may elect to use free offerings instead. These competitive factors may diminish our revenue and profitability, or harm our ability to acquire and retain clients.
Government tax authorities, volunteer organizations, and our competitors may also elect to implement or expand free offerings in the future. From time to time, U.S. federal and state governments have considered various proposals (often referred to as "Return-Free Filing" or "Pre-Populated Returns") through which the respective governmental taxing authorities would use taxpayer information provided by employers, financial institutions, and other payers to "pre-populate," prepare and calculate tax returns and distribute them to taxpayers. Under this approach, the taxpayer

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could then review and contest the return or sign and return it. While the FF and other free options that are currently offered, or may be offered in the future, may reduce the perceived need for government tax service offerings, they foster additional online competition and may cause us to lose significant revenue opportunities. We believe that governmental encroachment at both the U.S. federal and state levels, as well as comparable government levels in foreign jurisdictions in which we operate, could present a continued competitive threat to our business for the foreseeable future.
Failure to comply with laws and regulations that protect our clients' and employees' personal information could harm our brand and reputation and could result in significant fines, penalties, and damages.
In the course of our business, we collect, use, and retain large amounts of personal client information and data, including tax return information, financial account information, and social security numbers. In addition, we collect and maintain personal information of our employees in the ordinary course of our business. Our third-party vendors may hold some personal information and third parties may execute transactions utilizing this information. We use security and business controls to limit access to and use of personal information, but unauthorized individuals or third parties may be able to circumvent these security and business measures, which could cause us to determine that it is required or advisable for us to notify affected clients or employees under applicable privacy laws and regulations. In the normal course of their duties, some full-time and temporary employees, as well as some contractors and third-party vendors, may have access to the personal information of clients and employees or execute transactions requiring sensitive information. While we conduct employee background checks, as allowed by law, and limit access to systems and data, it is possible that one or more of these controls could be circumvented. In addition, though we impose certain requirements and controls on our third-party vendors, it is possible that our third-party vendors may not appropriately employ the controls that we require of them. Improper disclosure or use of our clients' or employees' personal information could result in damage to our brand and reputation, and actions required to remediate improper disclosures could be costly. Additionally, we may be subject to claims and litigation by clients, employees, or governmental agencies, which could have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows.
We are subject to laws, rules, and regulations relating to the collection, use, disclosure, and security of consumer and employee personal information, which have drawn increased attention from U.S. federal, state, and foreign governmental authorities in jurisdictions in which we operate. In the U.S., the IRS generally requires a tax return preparer to obtain the prior written consent of the taxpayer to use or disclose the taxpayer's information for certain purposes other than tax return preparation. In addition, other regulations require financial institutions to adopt and disclose their consumer privacy notice and generally provide consumers with a reasonable opportunity to "opt-out" of having nonpublic personal information disclosed to unaffiliated third parties. Numerous jurisdictions have passed, and may in the future pass, new laws related to the use and retention of consumer information and this area continues to be an area of interest for U.S. federal, state, and foreign governmental authorities. These laws may be interpreted and applied inconsistently from jurisdiction to jurisdiction, and our current data protection policies and practices may not be consistent with all of those interpretations and applications. In addition, changes in U.S. federal and state regulatory requirements, as well as requirements imposed by governmental authorities in foreign jurisdictions in which we operate, could result in more stringent requirements and in a need to change business practices, including the types of information we can use and the manner in which we can use such information. Establishing systems and processes to achieve compliance with these new requirements may increase our costs or limit our ability to pursue certain business opportunities.
A security breach of our systems, or third party systems on which we rely, resulting in unauthorized access to personal client information, may adversely affect the demand for our services and products, our reputation, and financial performance.
We offer a range of services and products to our clients, including assisted and DIY tax return preparation solutions, and financial products and services. Due to the nature of these services and products, we use multiple digital technologies to collect, transmit, and store high volumes of personal client information. Information security risks to companies that use digital technologies continue to increase due in part to the increased adoption of and reliance upon these technologies by companies and consumers. Our risk and exposure to these matters remain heightened due to a variety of factors including, among other things, the evolving nature of these threats and related regulation, the increased sophistication of organized crime, cyber criminals and hackers, the prominence of our brand, our and

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our franchisees' extensive office footprint, our plans to continue to implement strategies for our online and mobile applications and our desktop software, and our use of third-party vendors.
Cybersecurity risks may result from fraud or malice (a cyber attack), human error, or accidental technological failure. Cyber attacks are designed to electronically circumvent network security for malicious purposes such as unlawfully obtaining personal client information, disrupting our ability to offer services, damaging our brand and reputation, stealing our intellectual property, and advancing social or political agendas. We face a variety of cyber attack threats including computer viruses, malicious codes, worms, phishing attacks, social engineering, denial of service attacks, ransomware, and other sophisticated attacks.
We maintain multiple levels of protection in order to address or otherwise mitigate the risk of a security breach. We regularly test our systems to discover and address potential vulnerabilities, and we rely on training and testing of our employees regarding heightened phishing and social engineering threats. Due to the structure of our business model, we also rely on our franchisees and other private and governmental third parties to maintain secure systems and respond to cybersecurity risks. Cybersecurity and the continued development and enhancement of our controls, processes, and practices designed to protect our systems, computers, software, data, and networks from attack, damage, or unauthorized access remain a high priority for us. As risks and regulations continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. Notwithstanding these efforts, there can be no assurance that a security breach, intrusion, or loss or theft of personal client information will not occur.
A breach of our security measures or those of our franchisees or third parties on whom we rely, or other fraudulent activity, could result in unauthorized access to personal client information. If such an event were to occur, it could have serious short and long term negative consequences. Security breach remediation could require us to expend significant resources to notify or assist impacted clients, repair damaged systems, implement improved information security measures, and maintain client and business relationships. Other consequences could include reduced client demand for our services and products, loss of valuable intellectual property, reduced growth and profitability and negative impacts to future financial results, loss of our ability to deliver one or more services or products (e.g., inability to provide financial transaction services or to accept and process client credit card orders or tax returns), litigation, harm to our reputation and brands, fines, penalties, and other damages, and further regulation and oversight by U.S. federal, state, or foreign governmental authorities.
A security breach or other unauthorized access to our systems could have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows.
Stolen identity refund fraud could impede our clients' ability to timely and successfully file their tax returns and receive their tax refunds, and could diminish consumers' perceptions of the security and reliability of our products and services, resulting in negative publicity. Increased governmental regulation to attempt to combat that fraud could adversely affect our revenues and profitability.
Companies offering tax preparation services (especially those offering DIY solutions) have seen a rise in instances of criminals utilizing stolen information obtained through hacking, phishing, and other means of identity theft in order to electronically file fraudulent federal and state tax returns. As a result, impacted taxpayers must complete additional forms and go through additional steps in order to report to appropriate authorities that their identities have been stolen and their tax returns were filed fraudulently. Though we offer assistance in the refund recovery process and offer our Tax Identity Shield® product to help protect clients, stolen identity refund fraud could impede our clients' ability to timely and successfully file their returns and receive their tax refunds, and could diminish consumers' perceptions of the security and reliability of our products and services, resulting in negative publicity, despite there having been no breach in the security of our systems. In addition, if stolen identity refund fraud is perpetrated at a material level through our products or services, state, federal or foreign tax authorities may refuse to allow us to continue to process our clients' tax returns electronically. As a result, stolen identity refund fraud could harm our revenue, results of operations, and reputation.
Federal, state, and foreign governmental authorities in jurisdictions in which we operate have taken action, and may in the future take additional action, in an attempt to combat stolen identity refund fraud, which may require changes to our systems and business practices, in ways that we cannot anticipate. These actions may have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows.

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Our clients may access our services and products from personal or public computers and mobile devices and may install and use our DIY desktop software on their computers. Those computers and other devices may have outdated systems, may run software that is no longer supported, or may not have security patches installed on a timely basis. As a result, a person with malicious intent could obtain user account and password information from our clients through hacking, phishing, or other means of cyber attack, in order to perpetrate stolen identity refund fraud and otherwise cause losses for our clients. It has been reported that a number of companies, including some in the tax return preparation industry, have experienced instances where criminals gained unauthorized and illegal access to their systems by using stolen identity information obtained from sources other than those companies. The unauthorized and illegal access to those systems was used by criminals to perpetrate a variety of crimes, including stolen identity refund fraud. We could experience this form of unauthorized and illegal access to our systems, despite there having been no breach in the security of our systems, which could negatively impact our clients and harm our revenue, results of operations and reputation. Additionally, if such unauthorized or illegal access occurs, we may be subject to claims and litigation by clients, non-clients, or governmental agencies.
An interruption in our information systems, or those of our franchisees or a third party on which we rely, or an interruption in the internet, could have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows.
We and our franchisees rely heavily upon communications, networks, and information systems and the internet to conduct our business. These networks, systems, and operations are potentially vulnerable to damage or interruption from upgrades and maintenance, network failure, hardware failure, software failure, power or telecommunications failures, cyber attacks involving the penetration of our network by hackers or other unauthorized users (e.g., through computer viruses and worms, malicious code, phishing attacks, denial of service attacks, information security breaches, or other negative disruptions to the operation of the internet), human error and natural disasters. As our businesses are seasonal, our systems must be capable of processing high volumes during our peak periods. Therefore, any failure or interruption in our information systems, or information systems of our franchisees or a private or government third party on which we rely, or an interruption in the internet or other critical business capability, could negatively impact our business operations and increase our risk of loss.
There can be no assurance that system or internet failures, or interruptions in critical business capabilities will not occur, or, if they do occur, that we, our franchisees or the private or governmental third parties on whom we rely, will adequately address them. The precautionary measures that we have implemented to avoid systems outages and to minimize the effects of any data or communication systems interruptions or failures may not be adequate in all circumstances, and we may not have anticipated or addressed all of the potential events that could threaten or undermine our information systems or other critical business capabilities.
The occurrence of any systems or internet failure, or business interruption could negatively impact our ability to serve our clients, which in turn could have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows.
Government tax reform initiatives that simplify or otherwise modify tax return preparation requirements or expedite refunds could have a material effect on our business and our consolidated financial position, results of operations, and cash flows.
Tax reform is a focus of the federal government, but it is not clear what form tax reform proposals or related legislation or regulatory action may take, or whether any such legislation or regulatory action will ultimately be adopted and passed into law. There are various initiatives seeking to simplify or otherwise modify the preparation and filing of federal tax returns, including preparation of tax returns directly by the IRS, and to provide additional assistance with respect to preparing and filing such tax returns or expediting refunds. H&R Block is a member of Free File, which provides the ability for low-income taxpayers to prepare and file their own federal tax returns online for free.
The IRS has in the past explored the possibility of allowing taxpayers to allocate a portion of their tax refunds to pay tax preparation fees, which could reduce the demand for RTs, but the IRS has not advanced this initiative. Taxing authorities in various state, local, and foreign jurisdictions in which we operate have also introduced measures seeking to simplify or otherwise modify the preparation and filing of tax returns in their respective jurisdictions.
The adoption or expansion of any measures that significantly modify the Internal Revenue Code, simplify tax return preparation, expedite refunds, or otherwise reduce the need for third-party tax return preparation services could

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reduce demand for our services and products and could have a material adverse effect on our business and our consolidated financial position, results of operations and cash flows.
The Dodd-Frank Act created the CFPB to administer and, in some cases, enforce U.S. federal financial consumer protection laws and expanded the role of state regulators with respect to consumer protection laws. Regulations promulgated by the CFPB or other regulators may affect our financial services businesses in ways we cannot predict, which may require changes to our financial products, services, and contracts.
The Dodd-Frank Act created the CFPB and gave it broad powers to administer, investigate compliance with, and, in some cases, enforce U.S. federal financial consumer protection laws. The CFPB has broad rule-making authority for a wide range of financial consumer protection laws that apply to banks and other financial services companies, including the authority to prohibit "unfair, deceptive, or abusive" acts and practices.
The CFPB may examine, investigate, and take enforcement actions against our subsidiaries that provide consumer financial services and products, as well as financial institutions and service providers upon which our subsidiaries rely to provide consumer financial services and products. The Dodd-Frank Act also expanded the role of state regulators in enforcing and promulgating financial consumer protection laws, the results of which could be states issuing new and broader financial consumer protection laws, some of which could be more comprehensive than existing U.S. federal regulations. Currently proposed or new CFPB and state regulations may require changes to our financial products, services and contracts, and this could have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows. Examples of recent CFPB action include the following:
On May 5, 2016, the CFPB issued a request for comments on its proposal to prohibit mandatory consumer arbitration clauses in consumer financial product contracts. We, and certain of our third party service providers, utilize consumer arbitration clauses in connection with all of our consumer financial services products. It is not clear when the CFPB will publish the final version of these rules, or what their content will be. It is possible that, if the CFPB issues final rules that prohibit our use of consumer arbitration clauses, the risk of litigation involving our consumer financial products could increase, and the revenue that we derive from our consumer financial products could decline, as the result of adverse outcomes of litigation, increased volume of litigation, and the expense of defending such litigation.
On June 2, 2016, the CFPB issued proposed rules that would change the regulation of many forms of consumer credit. It is not clear when the CFPB will publish the final version of these rules, or what their content will be. It is possible that the final rules, when enacted, could impact EAs and RAs. It is also possible that, depending on the form of the final rules, changes would be necessary to EAs and RAs to comply with the final rules, and that such changes could have a material adverse effect on the revenue that we derive from EAs.
On October 5, 2016, the CFPB released its final rules regulating prepaid products (Final Rules). The Final Rules are scheduled to take effect on April 1, 2018, with certain provisions phased in over time following that date. If the Final Rules become effective as released, they will apply to the H&R Block Emerald Prepaid MasterCard®, but we do not believe they will apply to EAs or RA loans due to their nature as non-covered separate credit products. The Final Rules, among other things: (i) establish required consumer disclosures to be made prior to acquiring a prepaid account in most situations; (ii) require periodic statements or online access to specified account information; and (iii) require online posting of the Cardholder Agreement and submission of new and revised Cardholder Agreements to the CFPB. We are continuing to assess the impact of these changes on the H&R Block Emerald Prepaid MasterCard® and our consolidated financial statements.
The nature of our tax service and product offerings requires timely product launches. Any significant delays in launching our tax service and product offerings, changes in government regulations or processes that affect how we provide such offerings to our clients, or significant problems with such offerings or the manner in which we provide them to our clients may harm our revenue, results of operations, and reputation.
Tax laws and tax forms are subject to change each year, and the nature and timing of such changes are unpredictable. As a part of our business, we must incorporate any changes to tax laws and tax forms into our tax service and product offerings, including our online and mobile applications and desktop software. The unpredictable nature and timing of changes to tax laws and tax forms can result in condensed development cycles for our tax service and product offerings because our clients expect high levels of accuracy and a timely launch of such offerings to prepare and file their taxes by the tax filing deadline and, in turn, receive any tax refund amounts on a timely basis. In addition,

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governmental authorities regularly change their processes for accepting tax filings and related tax forms. Further, changes in governmental administrations or regulations could result in a delay of the start of the tax season or in further and unanticipated changes in requirements or processes. Changes in governmental regulations and processes that affect how we provide services and products to our clients may require us to make corresponding changes to our client service systems and procedures. Furthermore, unanticipated changes in governmental processes for accepting tax filings and related forms, or the ability of taxing authorities to accept electronic tax return filings, may result in delays in our processing of our clients' tax filings, or delays in tax authorities accepting electronic tax return filings, and, in turn, delay any tax refund amounts to which such clients may be entitled. From time to time, we review and enhance our quality controls for preparing accurate tax returns, but there can be no assurance that we will be able to prevent all inaccuracies. Any significant delays in launching our tax service and product offerings, changes in government regulations or processes that affect how we provide such offerings to our clients, or significant problems with such offerings or the manner in which we provide them to our clients may harm our revenue, results of operations, and reputation.
If we encounter development challenges or discover errors in our systems, services or products, we may elect to delay or suspend our offerings. Any major defects or launch delays, or failure to anticipate changes in governmental processes for accepting tax filings and related forms, may lead to loss of clients and revenue, negative publicity, client and employee dissatisfaction, a deterioration in our business relationships with our franchisees, reduced retailer shelf space and promotions, exposure to litigation, and increased operating expenses. Any of the risks described above could have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows.
Regulatory actions could have an adverse effect on our business and our consolidated financial position, results of operations, and cash flows.
The Company is subject to additional federal, state, local, and foreign laws and regulations that affect the Company, including, without limitation, in the areas of franchise, labor, immigration, advertising, consumer protection, financial services and products, payment processing, privacy, anti-competition, environmental, health and safety, insurance, and healthcare. There have been significant new regulations and heightened focus by the government in some of these areas, including, for example, healthcare, consumer financial services and products, and labor, including overtime and exemption regulations and state and local laws on minimum wage and other labor-related issues. There may be additional regulatory actions or enforcement priorities, or new interpretations of existing requirements that differ from ours. These developments could impose unanticipated limitations or require changes to our business, which may make elements of our business more expensive, less efficient, or impossible to conduct, and may require us to modify our current or future services or products, which effects may be heightened given the nature, broad geographic scope, and seasonality of our business.
We rely on a single vendor or a limited number of vendors to provide certain key services or products, and the inability of these key vendors to meet our needs could have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows.
Historically, we have contracted, and in the future we will likely continue to contract, with a single vendor or a limited number of vendors to provide certain key services or products for our tax, financial, and other services and products. Two examples of this type of reliance are our relationships with Fidelity National Information Services, Inc. (FIS), for data processing and card production services, and BofI, as discussed in Item 1. In certain instances, we are vulnerable to vendor error, service inefficiencies, service interruptions, or service delays. Our sensitivity to any of these issues may be heightened (1) due to the seasonality of our business, (2) with respect to any vendor that we utilize for the provision of any product or service that has specialized expertise, (3) with respect to any vendor that is a sole or exclusive provider, or (4) with respect to any vendor whose indemnification obligations are limited or that does not have the financial capacity to satisfy its indemnification obligations. Some of our vendors are subject to the oversight of regulatory bodies and, as a result, our product or service offerings may be affected by the actions or decisions of such regulatory bodies. Vendor failures could occur in various ways including (1) vendor error, (2) inability to meet our needs in a timely manner, or (3) termination or delay in the services or products provided by a vendor because the vendor fails to perform adequately, is no longer in business, experiences shortages, or discontinues a certain product or service that we utilize. If our vendors are unable to meet our needs and we are not able to develop

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alternative sources for these services and products quickly and cost-effectively, it could result in a material and adverse impact on our business and our consolidated financial position, results of operations, and cash flows.
The specialized and highly seasonal nature of our business presents financial risks and operational challenges, which, if not satisfactorily addressed, could materially affect our business and our consolidated financial position, results of operations, and cash flows.
Our business is highly seasonal, with the substantial portion of our revenue earned in the fourth quarter of our fiscal year. Success in our industry depends on our ability to attract, develop, motivate, and retain key personnel in a timely manner, including members of our executive team, and those in seasonal tax preparation positions or with other required specialized expertise, including technical positions. The market for such personnel is extremely competitive, and there can be no assurance that we will be successful in our efforts to attract and retain the required personnel within necessary timeframes. If we are unable to attract, develop, motivate, and retain key personnel, our business, operations, and financial results could be negatively impacted.
The concentration of our revenue-generating activity during this relatively short period presents a number of additional challenges for us, including (1) cash and resource management during the first nine months of our fiscal year, when we generally operate at a loss and incur fixed costs and costs of preparing for the upcoming tax season, (2) ensuring compliance with financial covenants under our First Amended and Restated Credit and Guarantee Agreement (2016 CLOC), particularly if the timing of our revenue generation deviates from this seasonal period, (3) responding to changes in competitive conditions, including marketing, pricing, and new product offerings, which could affect our position during the tax season, (4) disruptions in a tax season, including any customer dissatisfaction issues, which may not be timely discovered or satisfactorily addressed, and (5) ensuring optimal uninterrupted operations and service delivery during the tax season. If we experience significant business disruptions during the tax season or if we are unable to satisfactorily address the challenges described above and related challenges associated with a seasonal business, we could experience a loss of business, which could have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows.
We face litigation in connection with our various business activities, and current or future litigation may damage our reputation, impair our product offerings, or result in material liabilities and losses.
We have been named, and from time to time will likely continue to be named, in various legal actions, including arbitrations, class or representative actions, actions or inquiries by state attorneys general, and other litigation arising in connection with our various business activities, including relating to our various service and product offerings. We also grant our franchisees a limited license to use our registered trademarks and, accordingly, there is risk that one or more of the franchisees may be alleged to be controlled by us. Third parties, regulators or courts may seek to hold us responsible for the actions or failures to act by our franchisees. Adverse outcomes related to litigation could result in substantial damages and could cause our earnings to decline. Negative public opinion could also result from our subsidiaries' or franchisees' actual or alleged conduct in such claims, possibly damaging our reputation, which, in turn, could adversely affect our business prospects and cause the market price of our securities to decline.
In addition, we have been sued, and certain of our competitors have been sued, in connection with the offering of different types of RT products. Further, we have received an inquiry from the California Attorney General requesting information regarding our RT product. In a case involving one of our competitors, a California appellate court affirmed a trial court's ruling that the competitor's specific version of a RT product was subject to truth-in-lending and other related laws. Following the appellate court's ruling, the case was denied further appellate review. We believe there are differences that distinguish our RT product from the product that was the subject of the competitor's case described above. Revenues from our RT product totaled $148 million in fiscal year 2017; any requirement that materially alters our offering of RTs, including limitations on the fees we charge or disclosure requirements that could reduce the demand for these products, could have a material adverse impact on our business and our consolidated financial position, results of operations, and cash flows.
Our access to liquidity may be negatively impacted as disruptions in credit markets occur, if credit rating downgrades occur, or if we fail to meet certain covenants. Funding costs may increase, leading to reduced earnings.
We need liquidity to meet our off-season working capital requirements, to service debt obligations including refinancing of maturing obligations, and for general corporate purposes. Our access to and the cost of liquidity could

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be negatively impacted in the event of credit rating downgrades or if we fail to meet existing financial covenants. In addition, events could occur which could increase our need for liquidity above current levels.
If rating agencies downgrade our credit rating, the cost of debt under our existing financing arrangements, as well as future financing arrangements, could increase and capital market access could decrease or become unavailable. Our 2016 CLOC is subject to various covenants, and a violation of a covenant could impair our access to liquidity currently available through the 2016 CLOC. The 2016 CLOC includes provisions that allow for the issuance of equity to comply with the financial covenant calculations as a means to avoid a shortfall. If current sources of liquidity were to become unavailable, we would need to obtain additional sources of funding, which may not be available or may only be available under less favorable terms. This could have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows.
The continued payment of dividends on our common stock and repurchases of our common stock are dependent on a number of factors, and future payments and repurchases cannot be assured.
We need liquidity sufficient to fund payments of dividends on our common stock and repurchases of our common stock. In addition, holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments, and our Board of Directors may only authorize the Company to repurchase shares of our common stock with funds legally available for such repurchases. The payment of future dividends and future repurchases will depend upon our earnings, economic conditions, liquidity and capital requirements, and other factors, including our debt leverage. Accordingly, we cannot make any assurance that future dividends will be paid, or future repurchases will be made, at levels comparable to our historical practices, if at all. Due to the seasonal nature of our business and the fact that our business is not asset-intensive, there may be periods of time during our fiscal year in which the payment of dividends or stock repurchases may cause us to have a negative net worth under accounting principles generally accepted in the U.S. (GAAP).
Our businesses may be adversely affected by difficult economic conditions, in particular, high unemployment levels.
Difficult economic conditions are frequently characterized by high unemployment levels and declining consumer and business spending. These poor economic conditions may negatively affect demand and pricing for our services and products. In the event of difficult economic conditions that include high unemployment levels, especially within client segments we serve, clients may elect not to file tax returns or seek lower cost preparation and filing alternatives. Sustained levels of high unemployment may negatively impact our ability to increase or retain tax preparation clients.
Our business depends on our strong reputation and the value of our brands.
Developing and maintaining awareness of our brands is critical to achieving widespread acceptance of our existing and future services and products and is an important element in attracting new clients. In addition, our franchisees may operate their businesses under our brands. Adverse publicity (whether or not justified) relating to events or activities involving or attributed to us, our franchisees, employees, or agents or our services or products, which may be enhanced due to the nature of social media, may tarnish our reputation and reduce the value of our brands. Damage to our reputation and loss of brand equity may reduce demand for our services and products and thus have an adverse effect on our future financial results, as well as require additional resources to rebuild our reputation and restore the value of our brands.
Failure to protect our intellectual property rights may harm our competitive position and litigation to protect our intellectual property rights or defend against third party allegations of infringement may be costly.
Despite our efforts to protect our intellectual property and proprietary information, we may be unable to do so effectively in all cases. Our intellectual property could be wrongfully acquired as a result of a cyber attack or other wrongful conduct by employees or third parties. To the extent that our intellectual property is not protected effectively by trademarks, copyrights, patents, or other means, other parties with knowledge of our intellectual property, including former employees, may seek to exploit our intellectual property for their own or others' advantage. Competitors may also misappropriate our trademarks, copyrights or other intellectual property rights or duplicate our technology and products. Any significant impairment or misappropriation of our intellectual property or proprietary information could harm our business and our brand, and may adversely affect our ability to compete.
In addition, third parties may allege we are infringing their intellectual property rights, and we may face intellectual property challenges from other parties. We may not be successful in defending against any such challenges or in

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obtaining licenses to avoid or resolve any intellectual property disputes and, in that event, we could lose significant revenues, incur significant license, royalty, or technology development expenses, suffer harm to our reputation, or pay significant monetary damages.
Failure to maintain sound business relationships with our franchisees may have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows.
Our financial success depends in significant part on our ability to maintain sound business relationships with our franchisees. The support of our franchisees is also critical for the success of our marketing programs and any new strategic initiatives we seek to undertake. Deterioration in our relationships with our franchisees or the failure of our franchisees to support our marketing programs and strategic initiatives could have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows.
Our international operations are subject to risks which may harm our business and our consolidated financial position, results of operations, and cash flows.
We have international operations, including in Canada and Australia, and may consider expansion opportunities in additional countries in the future. There is uncertainty about our ability to generate revenues from new or emerging foreign operations and expand into other international markets. Additionally, there are risks inherent in doing business internationally, including: (1) changes in trade regulations; (2) difficulties in managing foreign operations as a result of distance, language, and cultural differences; (3) profit repatriation restrictions, and fluctuations in foreign currency exchange rates; (4) geopolitical events, including acts of war and terrorism, and economic and political instability; (5) compliance with U.S. laws such as the Foreign Corrupt Practices Act and other applicable foreign anti-corruption laws; (6) compliance with U.S. and international laws and regulations, including those concerning privacy, and data protection and retention; and (7) risks related to other government regulation or required compliance with local laws. These risks inherent in our international operations and expansion could increase our costs of doing business internationally and could have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows.
In addition, we prepare tax returns for taxpayers residing in foreign jurisdictions, including the European Union (EU), and we operate and have franchisees who operate in foreign jurisdictions. As a result, certain aspects of our operations are subject to the laws, regulations, and policies of those jurisdictions that regulate the collection, use, and transfer of personal data, and in the future we may be subject to additional, more stringent requirements, including those found in the EU General Data Protection Regulation. Costs for us to comply with such laws, regulations, and policies that are applicable to us could be significant.  We may also face audits or investigations by one or more foreign government agencies relating to these laws, regulations, and policies that could result in the imposition of penalties or fines.
We may be adversely impacted by changes in corporate tax rates, the adoption of new tax legislation in the jurisdictions in which we operate, and exposure to additional tax liabilities.
As a multinational corporation, we are subject to taxes in the U.S. and numerous foreign jurisdictions where our subsidiaries are organized and conduct their operations. Significant judgment is required in determining our worldwide provision for income taxes and other tax liabilities. Tax rates in the various jurisdictions in which our subsidiaries are organized and conduct their operations may change significantly as a result of political or economic factors beyond our control. Additionally, our future effective tax rates could be adversely affected by changes in the valuation of deferred tax assets and liabilities or changes in tax laws or their interpretation. Our tax returns and other tax matters are periodically examined by tax authorities and governmental bodies, including the IRS, which may disagree with positions taken by us in determining our tax liability. There can be no assurance as to the outcome of these examinations. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for taxes.
As described above, tax reform is a focus of the federal government, and there are competing proposals regarding changes to the corporate tax rate. If enacted, corporate tax reform may significantly change the U.S. corporate tax rate and the tax rules to which we are subject. In addition, projects undertaken by international organizations may change international tax norms relating to each country’s jurisdiction to tax cross-border international trade. Given the unpredictability of these and other possible changes to tax laws and related regulations, it is difficult to assess

H&R Block, Inc. | 2017 Form 10-K
15


the overall effect of such potential changes, but any such changes could, if adopted and applicable to us, adversely impact our effective tax rates.
If our effective tax rates were to increase, or if the ultimate determination of our taxes owed is for an amount in excess of amounts previously accrued, our operating results, cash flows, and financial condition could be adversely affected.
RISKS RELATING TO DISCONTINUED OPERATIONS
Sand Canyon Corporation, previously known as Option One Mortgage Corporation (including its subsidiaries, collectively, SCC) is subject to potential contingent losses related to representation and warranty claims, which may have an adverse effect on our business and our consolidated financial condition, results of operations, and cash flows. SCC has accrued, and may in the future accrue, an estimated liability related to these contingent losses, which may not be adequate.
SCC exited its mortgage business in fiscal year 2008. SCC remains exposed to losses relating to mortgage loans it previously originated. Mortgage loans originated by SCC were sold either as whole loans to single third-party buyers or in the form of residential mortgage-backed securities (RMBSs).
In connection with the sale of loans or RMBSs, SCC made certain representations and warranties. Claims under these representations and warranties together with any settlement arrangements related to these losses are collectively referred to as "representation and warranty claims." These representations and warranties varied based on the nature of the transaction and the buyer's or insurer's requirements, but generally pertained to the ownership of the loan, the validity of the lien securing the loan, borrower fraud, the loan's compliance with the criteria for inclusion in the transaction, including compliance with SCC's underwriting standards or loan criteria established by the buyer, ability to deliver required documentation, and compliance with applicable laws. Representations and warranties related to borrower fraud in whole loan sale transactions to institutional investors, which were generally securitized by such investors and represented approximately 68% of the disposal of loans originated in calendar years 2005, 2006 and 2007, included a "knowledge qualifier" limiting SCC's liability to those instances where SCC had knowledge of the fraud at the time the loans were sold. Representations and warranties made in other sale transactions effectively did not include a knowledge qualifier as to borrower fraud. To the extent that any remaining repurchase obligations exist, SCC believes it would have an obligation to repurchase a loan only if it breached a representation and warranty and such breach materially and adversely affects the value of the mortgage loan or certificate holder's interest in the mortgage loan.
The statute of limitations for a contractual claim to enforce a representation and warranty obligation is generally six years or such shorter limitations period that may apply under the law of a state where the economic injury occurred. On June 11, 2015, the New York Court of Appeals, New York's highest court, held in ACE Securities Corp. v. DB Structured Products, Inc., that the six-year statute of limitations under New York law starts to run at the time the representations and warranties are made, not the date when the repurchase demand was denied. This decision applies to claims and lawsuits brought against SCC where New York law governs. New York law governs many, though not all, of the transactions into which SCC entered. However, this decision would not affect representation and warranty claims and lawsuits SCC has received or may receive, for example, where the statute of limitations has been tolled by agreement or a suit was timely filed.
In response to the statute of limitations rulings in the ACE case and similar rulings in other state and federal courts, parties seeking to pursue representation and warranty claims or lawsuits have sought, and may in the future seek, to distinguish certain aspects of the ACE decision, pursue alternate legal theories of recovery, or assert claims against other contractual parties such as securitization trustees.
For example, a 2016 ruling by a New York intermediate appellate court allowed a counterparty to pursue litigation on additional loans in the same trust even though only some of the loans complied with the condition precedent of timely pre-suit notice and opportunity to cure or repurchase. Additionally, plaintiffs in litigation to which SCC is not party have alleged breaches of an independent contractual duty to provide notice of material breaches of representations and warranties, and pursued separate claims to which, they argue, the statute of limitations ruling in the ACE case does not apply. The impact on SCC, if any, from alternative legal theories seeking to avoid or distinguish the ACE decision, or judicial limitations on the ACE decision, is unclear.

16
2017 Form 10-K | H&R Block, Inc.


SCC has concluded that a loss related to certain representation and warranty claims is probable and has accrued a liability as of April 30, 2017, of $4.5 million. If SCC were required to pay material amounts with respect to contingent losses arising from representation and warranty claims, it could have a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows, as SCC's financial condition, results of operations and cash flows are included in our consolidated financial statements. Except where specified, the accrued liability does not include potential losses related to litigation matters discussed in the risk factor below and in Item 8, note 13 to the consolidated financial statements. Also see Item 8, note 14 to the consolidated financial statements.
SCC is subject to potential contingent losses related to securitization transactions in which SCC participated as a depositor or loan originator, which may result in significant financial losses.
Between January 2005 and November 2007, SCC originated mortgage loans totaling approximately $80 billion. Mortgage loans originated by SCC were sold either as whole loans to single third-party buyers, who generally securitized such loans, or in the form of RMBSs. SCC estimates approximately 90% of the loans it originated in 2005, 2006, and 2007 were securitized in approximately 110 securitization transactions. In most of these securitization transactions, SCC agreed, subject to certain conditions and limitations, to indemnify the underwriters or depositors for certain losses and expenses that the underwriters or depositors may incur as a result of certain claims made against them relating to loans originated by SCC, including certain legal expenses the underwriters or depositors incur in their defense of such claims. Some of those underwriters and depositors are defendants in lawsuits where various other parties allege a variety of claims, including violations of U.S. federal and state securities law and common law fraud based on alleged materially inaccurate or misleading disclosures, arising out of the activities of such underwriters or depositors in their sale of RMBSs or mortgage loans. Based on information currently available to SCC, it believes that the 21 lawsuits in which notice of a claim for indemnification has been made involve 39 securitization transactions with original investments of approximately $14 billion (of which the outstanding principal amount is approximately $4 billion). Certain of the notices received included, and future notices may include, a reservation of rights to assert claims for contribution, which are referred to herein as "contribution claims." Contribution claims may become operative if indemnification is unavailable or insufficient to cover all of the losses and expenses involved. These indemnification and contribution claims are frequently not subject to a contractual term or limit.
In addition, securitization trustees 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.
Additional lawsuits against the underwriters, depositors, or securitization trustees may be filed in the future, and SCC may receive additional notices of claims for indemnification or contribution from underwriters, depositors, or securitization trustees with respect to existing or new lawsuits or settlements of such lawsuits.
In addition, other counterparties to the securitization transactions, including certificate holders and monoline insurance companies, have filed or may file lawsuits, or may assert indemnification claims, directly against depositors and loan originators in securitization transactions alleging a variety of claims, including U.S. federal and state securities law violations, common law torts and fraud and breach of contract claims, among others. Additional or new lawsuits or claims may be filed or asserted against SCC in the future.
We have not concluded that a loss related to any of these indemnification or contribution claims is probable and have not accrued a liability for these claims. However, if SCC were required to pay material amounts with respect to these matters, it could have a material adverse effect on our business and our consolidated financial position, results of operations and cash flows, as SCC's financial condition, results of operations, and cash flows are included in our consolidated financial statements. See Item 8, note 13 to the consolidated financial statements for additional information.
H&R Block has guaranteed the payment of certain limited claims against SCC.
SCC is subject to representation and warranty claims by counterparties to SCC whole loan sales and securitization transactions, including certificate holders, securitization trustees, monoline insurance companies, and subsequent purchasers of whole loans. In certain limited circumstances described below, H&R Block guaranteed payment if claims are successfully asserted by such counterparties.

H&R Block, Inc. | 2017 Form 10-K
17


These guarantees include representation and warranty claims with respect to a limited number of whole loan sales by SCC with an aggregate outstanding principal and liquidated amount of approximately $1.0 billion as of April 30, 2017, based on the data available to SCC. There have been a total of approximately $41 million of representation and warranty claims with respect to these whole loan sales.
These guarantees also cover limited representation and warranty claims on other outstanding securitization transactions, with a potential claims exposure of less than $200 million. In addition, as is customary in divestiture transactions, H&R Block guaranteed the payment of any indemnification claims from the purchaser of SCC's servicing business, including claims relating to pre-closing services (closing occurred in 2008).
We could be subject to claims by the creditors of SCC.
As discussed above, SCC is subject to representation and warranty claims, indemnification and contribution claims, and other claims and litigation related to its past sales and securitizations of mortgage loans. Additional claims and litigation may be asserted in the future. If the amount that SCC is ultimately required to pay with respect to these claims and litigation, together with related administration and legal expense, exceeds its net assets, the creditors of SCC, 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 have also attempted, and may in the future attempt, to assert claims or seek payment directly from the Company even if SCC's assets exceed its liabilities. SCC's principal assets, as of April 30, 2017, total approximately $318 million and consist primarily 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. In addition, in certain limited instances, H&R Block guaranteed amounts as outlined in the above risk factor.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Most of our tax offices are operated under leases or similar agreements throughout the U.S., Canada and Australia.
We own our corporate headquarters, which is located in Kansas City, Missouri. Our Canadian executive offices are located in a leased office in Calgary, Alberta. Our Australian executive offices are located in a leased office in Thornleigh, New South Wales.
All current leased and owned facilities are in reasonably good repair and adequate to meet our needs.
ITEM 3. LEGAL PROCEEDINGS
For a description of our material pending legal proceedings, see discussion in Item 8, note 13 to the consolidated financial statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION AND HOLDERS - H&R Block's common stock is traded on the New York Stock Exchange (NYSE) under the symbol HRB. On May 31, 2017, there were 16,917 shareholders of record and the closing stock price on the NYSE was $26.54 per share.
QUARTERLY STOCK PRICES AND DIVIDENDS - The quarterly information regarding H&R Block's common stock prices and dividends appears in Item 8, note 16 to the consolidated financial statements. Although we have historically paid dividends and plan to continue to do so, there can be no assurances that circumstances will not change in the future that could affect our ability or decisions to pay dividends.

18
2017 Form 10-K | H&R Block, Inc.


PURCHASES OF EQUITY SECURITIES BY THE ISSUER - A summary of our purchases of H&R Block common stock during the fourth quarter of fiscal year 2017 is as follows:
(in 000s, except per share amounts)
 
 
 
Total Number of
Shares Purchased (1)

 
Average
Price Paid
per Share

 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (2)

 
Maximum Dollar Value of
Shares that May be Purchased
Under the Plans or Programs (2)

February 1 – February 28
 
1

 
$
21.10

 

 
$
1,183,190

March 1 – March 31
 
2

 
$
20.66

 

 
$
1,183,190

April 1 – April 30
 

 
$
23.25

 

 
$
1,183,190

 
 
3

 
$
21.13

 

 
 
 
 
 
 
 
 
 
 
 
(1) 
We purchased approximately 3 thousand shares in connection with funding employee income tax withholding obligations arising upon the lapse of restrictions on restricted shares and restricted share units.
(2) 
In September 2015, we announced that our Board of Directors approved a $3.5 billion share repurchase program, effective through June 2019.
PERFORMANCE GRAPH – The following graph compares the cumulative five-year total return provided to shareholders on H&R Block, Inc.'s common stock relative to the cumulative total returns of the S&P 500 index and a selected peer group. The peer group used is based on companies with similar market capitalization or public companies in the tax return preparation industry.
An investment of $100, with reinvestment of all dividends, is assumed to have been made in our common stock and in each of the indexes on April 30, 2012, and its relative performance is tracked through April 30, 2017.
Note:
The peer group includes the following companies: Intuit Inc., Blucora, Inc., Liberty Tax, Inc., CBIZ, Inc., Resources Connection, Inc., ICF International, Inc., Willis Towers Watson PLC, Navigant Consulting, Inc., and Huron Consulting Group Inc.

H&R Block, Inc. | 2017 Form 10-K
19


ITEM 6. SELECTED FINANCIAL DATA
We derived the selected consolidated financial data presented below from our audited consolidated financial statements as of and for each of the five annual periods ending April 30, 2017. Results of operations of fiscal years 2017, 2016 and 2015 are discussed in Item 7. The data set forth below should be read in conjunction with Item 7 and the consolidated financial statements in Item 8.
(in 000s, except per share amounts)
 
April 30,
 
2017

 
2016

 
2015

 
2014

 
2013

Revenues
 
$
3,036,314

 
$
3,038,153

 
$
3,078,658

 
$
3,024,295

 
$
2,905,943

Net income from continuing operations
 
420,917

 
383,553

 
486,744

 
500,097

 
465,158

Net income
 
408,945

 
374,267

 
473,663

 
475,157

 
433,948

Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
1.97

 
$
1.54

 
$
1.77

 
$
1.82

 
$
1.70

Net income
 
1.92

 
1.50

 
1.72

 
1.73

 
1.59

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
$
1.96

 
$
1.53

 
$
1.75

 
$
1.81

 
$
1.69

Net income
 
1.91

 
1.49

 
1.71

 
1.72

 
1.58

Total assets (1)
 
$
2,694,108

 
$
2,847,225

 
$
4,512,071

 
$
4,689,590

 
$
4,533,107

Long-term debt (1) (2)
 
1,493,998

 
1,492,201

 
502,739

 
902,535

 
902,008

Stockholders’ equity (deficiency)
 
(60,883
)
 
23,103

 
1,832,949

 
1,556,549

 
1,263,547

Shares outstanding
 
207,171

 
220,517

 
275,275

 
274,228

 
272,635

Dividends per share
 
$
0.88

 
$
0.80

 
$
0.80

 
$
0.80

 
$
0.80

 
 
 
 
 
 
 
 
 
 
 
(1) 
Amounts have been restated for the adoption of Accounting Standards Update No. 2015-3, "Interest - Imputation of Interest," (ASU 2015-3) which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.
(2) 
Includes current portion of long-term debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL OVERVIEW
A summary of our fiscal year 2017 results is as follows:
Revenues decreased $1.8 million, or 0.1%, compared to the prior year. Revenues were negatively impacted by a 2.5% decline in assisted tax returns prepared (company-owned and franchise offices combined), coupled with our H&R Block More ZeroSM and Free 1040EZ promotions, which also reduced demand for RTs. These negative impacts were partially offset by favorable pricing and mix changes on our assisted tax returns and better performance of our financial products.
Operating expenses declined $84.6 million, or 3.5%, due to a combination of lower marketing spend, lower consulting costs, and lower compensation and bad debt expense.
Pretax earnings increased $59.8 million, or 10.5%, due primarily to the expense savings mentioned above.
Net income from continuing operations increased $37.4 million or 9.7% compared with the prior year. Diluted earnings per share from continuing operations increased 28.1% from the prior year to $1.96 due to a 14.6% decline in diluted weighted average shares outstanding and higher net income.
Earnings from continuing operations before interest, taxes, depreciation and amortization (EBITDA) increased $92.2 million, or 11.4%, to $904.4 million. Adjusted EBITDA increased $66.3 million, or 7.9%, to $904.9 million. See "Non-GAAP Financial Information" at the end of this item for a reconciliation of non-GAAP measures.

RESULTS OF OPERATIONS
Our subsidiaries provide assisted and DIY tax return preparation solutions through multiple channels (including in-person, online and mobile applications, and desktop software) and distribute the H&R Block-branded financial

20
2017 Form 10-K | H&R Block, Inc.


products and services, including those of our financial partners to the general public primarily in the U.S., Canada, Australia, and their respective territories. Tax returns are either prepared by H&R Block tax professionals (in company-owned or franchise offices or virtually via the internet) or prepared and filed by our clients through our DIY tax solutions. We operate as a single segment that includes all of our continuing operations, which are designed to enable clients to obtain tax preparation services seamlessly.
Operating Statistics
 
 
 
 
 
 
Year ended April 30,
 
2017

 
2016

 
2015

TAX RETURNS PREPARED : (in 000s) (1)
 
 
 
 
 
 
United States:
 
 
 
 
 
 
Company-owned operations
 
7,999

 
8,079

 
8,311

Franchise operations
 
3,908

 
4,139

 
4,672

Total assisted returns
 
11,907

 
12,218

 
12,983

Desktop
 
2,003

 
2,085

 
2,168

Online
 
4,988

 
4,670

 
4,765

Free File
 
588

 
678

 
676

Total DIY tax software
 
7,579

 
7,433

 
7,609

Total U.S. returns
 
19,486

 
19,651

 
20,592

International operations:
 
 
 
 
 
 
Canada (2)
 
2,460

 
2,551

 
2,658

Australia
 
750

 
769

 
768

Other
 
293

 
153

 
115

Total international operations
 
3,503

 
3,473

 
3,541

Tax returns prepared worldwide
 
22,989

 
23,124

 
24,133

 
 
 
 
 
 
 
NET AVERAGE CHARGE (U.S. ONLY): (3)
 
 
 
 
 
 
Company-owned operations
 
$
237.29

 
$
233.84

 
$
224.51

Franchise operations (4)
 
$
207.43

 
$
201.47

 
$
196.07

Total DIY tax software
 
$
31.34

 
$
34.69

 
$
33.44

 
 
 
 
 
 
 
TAX OFFICES (at the peak of the tax season):
 
 
 
 
 
 
U.S. offices:
 
 
 
 
 
 
Total company-owned offices
 
6,650

 
6,614

 
6,365

Total franchise offices
 
3,386

 
3,599

 
3,921

Total U.S. offices
 
10,036

 
10,213

 
10,286

International offices:
 
 
 
 
 
 
Canada
 
1,216

 
1,282

 
1,231

Australia
 
449

 
438

 
433

Total international offices
 
1,665

 
1,720

 
1,664

Tax offices worldwide
 
11,701

 
11,933

 
11,950

 
 
 
 
 
 
 
(1)  
An assisted tax return is defined as a current or prior year individual tax return that has been accepted and paid for by the client.  Also included are business returns. The count methodology has been adjusted in the current and prior year periods to exclude extensions and to recognize the corresponding individual tax returns when filed. A DIY software return is defined as a return that has been electronically filed and accepted by the IRS.  Also included are online returns paid and printed.
(2) 
In fiscal years 2017, 2016 and 2015, the end of the Canadian tax season was extended from April 30 into May. Tax returns prepared in Canada in fiscal years 2017, 2016 and 2015 includes approximately 59 thousand, 93 thousand and 131 thousand returns, respectively, in both company-owned and franchise offices which were accepted by the client after April 30. The revenues related to these returns were recognized in fiscal years 2018, 2017 and 2016, respectively.
(3) 
Net average charge is calculated as total revenue divided by total returns. For DIY tax software, net average charge excludes Free File.
(4) 
Net average charge related to H&R Block Franchise Operations represents tax preparation fee revenues collected by H&R Block franchisees divided by returns filed in franchise offices. H&R Block will recognize a portion of franchise revenues as franchise royalties based on the terms of franchise agreements.

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


H&R Block, Inc. | 2017 Form 10-K
21


Consolidated – Financial Results
 
 
 
 
 
(in 000s, except per share amounts)
 
Year ended April 30,
 
2017
 
2016
 
$ Change
 
% Change
Revenues:
 
 
 
 
 
 
 
 
U.S. assisted tax preparation fees
 
$
1,902,212

 
$
1,890,175

 
$
12,037

 
0.6
 %
U.S. royalties
 
250,270

 
249,433

 
837

 
0.3
 %
U.S. DIY tax preparation fees
 
219,123

 
234,341

 
(15,218
)
 
(6.5
)%
International revenues
 
210,320

 
213,400

 
(3,080
)
 
(1.4
)%
Revenues from Refund Transfers
 
148,212

 
162,560

 
(14,348
)
 
(8.8
)%
Revenues from Emerald Card®
 
95,221

 
92,608

 
2,613

 
2.8
 %
Revenues from Peace of Mind® Extended Service Plan
 
92,820

 
86,830

 
5,990

 
6.9
 %
Interest and fee income on Emerald Advance
 
57,022

 
57,268

 
(246
)
 
(0.4
)%
Other
 
61,114

 
51,538

 
9,576

 
18.6
 %
Total revenues
 
3,036,314

 
3,038,153

 
(1,839
)
 
(0.1
)%
 
 
 
 
 
 
 
 
 
Compensation and benefits:
 
 
 
 
 
 
 
 
Field wages
 
702,518

 
724,019

 
(21,501
)
 
(3.0
)%
Other wages
 
181,735

 
166,445

 
15,290

 
9.2
 %
Benefits and other compensation
 
163,368

 
183,512

 
(20,144
)
 
(11.0
)%
 
 
1,047,621

 
1,073,976

 
(26,355
)
 
(2.5
)%
Occupancy and equipment
 
415,002

 
405,493

 
9,509

 
2.3
 %
Marketing and advertising
 
261,281

 
297,762

 
(36,481
)
 
(12.3
)%
Depreciation and amortization
 
182,168

 
173,598

 
8,570

 
4.9
 %
Bad debt
 
52,776

 
75,395

 
(22,619
)
 
(30.0
)%
Supplies
 
33,847

 
36,340

 
(2,493
)
 
(6.9
)%
Other
 
327,635

 
342,397

 
(14,762
)
 
(4.3
)%
Total operating expenses
 
2,320,330

 
2,404,961

 
(84,631
)
 
(3.5
)%
Other income (expense), net
 
6,254

 
5,249

 
1,005

 
19.1
 %
Interest expense on borrowings
 
(92,951
)
 
(68,962
)
 
(23,989
)
 
(34.8
)%
Pretax income
 
629,287

 
569,479

 
59,808

 
10.5
 %
Income taxes
 
208,370

 
185,926

 
22,444

 
12.1
 %
Net income from continuing operations
 
420,917

 
383,553

 
37,364

 
9.7
 %
Net loss from discontinued operations
 
(11,972
)
 
(9,286
)
 
(2,686
)
 
(28.9
)%
Net income
 
$
408,945

 
$
374,267

 
$
34,678

 
9.3
 %
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
1.97

 
$
1.54

 
$
0.43

 
27.9
 %
Discontinued operations
 
(0.05
)
 
(0.04
)
 
(0.01
)
 
(25.0
)%
Consolidated
 
$
1.92

 
$
1.50

 
$
0.42

 
28.0
 %
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
Continuing operations
 
$
1.96

 
$
1.53

 
$
0.43

 
28.1
 %
Discontinued operations
 
(0.05
)
 
(0.04
)
 
(0.01
)
 
(25.0
)%
Consolidated
 
$
1.91

 
$
1.49

 
$
0.42

 
28.2
 %
 
 
 
 
 
 
 
 
 
EBITDA from continuing operations (1)
 
$
904,406

 
$
812,218

 
$
92,188

 
11.4
 %
EBITDA from continuing operations - adjusted (1)
 
904,922

 
838,654

 
66,268

 
7.9
 %
 
 
 
 
 
 
 
 
 
(1) 
See "Non-GAAP Financial Information" at the end of this item for a reconciliation of non-GAAP measures.
FISCAL 2017 COMPARED TO FISCAL 2016
Revenues decreased $1.8 million, or 0.1%, compared to the prior year.
U.S. assisted tax preparation fees increased $12.0 million, or 0.6%, primarily due to a more favorable net average charge and mix, offset by a decline in tax returns prepared in company-owned offices. Although franchise returns were down 5.6% primarily due to our acquisition of franchise businesses during the year, royalties related to our new Refund Advance offering offset the lower volumes.

22
2017 Form 10-K | H&R Block, Inc.


U.S. DIY tax preparation fees declined $15.2 million, or 6.5%, due to our H&R Block More ZeroSM promotion, which offered free online tax preparation for certain forms. This decrease was partially offset by a 3.5% increase in returns.
Fees earned on RTs decreased $14.3 million, or 8.8%, primarily due to lower attach rates due to our H&R Block More ZeroSM and Free 1040EZ promotions and the offering of state RTs at no cost.
Revenue from POM increased $6.0 million, or 6.9%, primarily due to an increase in units sold in prior years and favorable changes in the timing of forecasted claims. This revenue is initially deferred, and recognized over the term of the service plan based on actual claims paid in relation to projected claims.
Other revenues increased $9.6 million, or 18.6%, primarily due to the fees earned on our TIS product, partially offset by a decline in income on our mortgage loan portfolio and investments in available-for-sale (AFS) securities recorded as other income in the current year rather than as revenue for a portion of the prior year. See Item 8, note 11 to the consolidated financial statements.
Total operating expenses decreased $84.6 million, or 3.5%, from the prior year. Total compensation and benefits decreased $26.4 million primarily due to lower headcount in our field and corporate operations and lower commission-based wages due to lower return volumes. These declines were partially offset by an increase in short-term incentive compensation. Occupancy and equipment expenses increased $9.5 million, or 2.3%, primarily due to higher rental rates on tax offices. Marketing and advertising expenses decreased $36.5 million, or 12.3%, primarily due to our prior year sweepstakes campaign. Depreciation and amortization expense increased $8.6 million, or 4.9%, primarily due to amortization resulting from acquisitions of franchisee and competitor businesses. Bad debt expense decreased $22.6 million, or 30.0%, primarily due to favorable collections on prior year EAs and RTs, and a reduction in overall bad debt rate on current year balances.
Other expenses decreased $14.8 million, or 4.3%, primarily due to prior year costs associated with capital transactions and the divestiture of HRB Bank and cost savings initiatives. These were partially offset by higher fees paid to our bank partners in the current year for products and services they offer to our clients, including program costs related to our RA offering introduced in the current year. The components of other expenses are as follows:
Year ended April 30,
 
2017
 
2016
 
$ Change
 
% Change
Consulting and outsourced services
 
$
104,995

 
$
140,052

 
$
(35,057
)
 
(25.0
)%
Bank partner fees
 
47,479

 
16,980

 
30,499

 
179.6
 %
Client claims and refunds
 
42,618

 
39,782

 
2,836

 
7.1
 %
Employee travel and related expenses
 
38,719

 
46,665

 
(7,946
)
 
(17.0
)%
Credit card/bank charges
 
28,658

 
28,618

 
40

 
0.1
 %
Insurance
 
13,320

 
12,167

 
1,153

 
9.5
 %
Legal fees and settlements
 
12,589

 
18,707

 
(6,118
)
 
(32.7
)%
Other
 
39,257

 
39,426

 
(169
)
 
(0.4
)%
 
 
$
327,635

 
$
342,397

 
$
(14,762
)
 
(4.3
)%
 
 
 
 
 
 
 
 
 
Interest expense increased $24.0 million, or 34.8%, due primarily to issuance of our Senior Notes during fiscal year 2016 in the aggregate principal amount of $1.0 billion.
Pretax income for fiscal year 2017 increased $59.8 million, or 10.5%, while our pretax margin increased to 20.7% from 18.7% in fiscal year 2016. Net income from continuing operations increased $37.4 million, or 9.7%, over the prior year. Diluted earnings per share from continuing operations increased 28.1% from the prior year to $1.96 due to a 14.6% decline in diluted weighted average shares outstanding and higher net income.
Losses of our discontinued mortgage operations resulted primarily from litigation expenses. See the discussion of the risk of contingent losses related to our discontinued operations in Item 1A, "Risk Factors" and in Item 8, notes 13 and 14 to the consolidated financial statements.

H&R Block, Inc. | 2017 Form 10-K
23


Consolidated – Financial Results
 
 
 
 
 
(in 000s, except per share amounts)
 
Year ended April 30,
 
2016
 
2015
 
$ Change
 
% Change
Revenues:
 
 
 
 
 
 
 
 
U.S. assisted tax preparation fees
 
$
1,890,175

 
$
1,865,438

 
$
24,737

 
1.3
 %
U.S. royalties
 
249,433

 
273,250

 
(23,817
)
 
(8.7
)%
U.S. DIY tax preparation fees
 
234,341

 
231,854

 
2,487

 
1.1
 %
International revenues
 
213,400

 
236,552

 
(23,152
)
 
(9.8
)%
Revenues from Refund Transfers
 
162,560

 
167,787

 
(5,227
)
 
(3.1
)%
Revenues from Emerald Card®
 
92,608

 
103,300

 
(10,692
)
 
(10.4
)%
Revenues from Peace of Mind® Extended Service Plan
 
86,830

 
81,551

 
5,279

 
6.5
 %
Interest and fee income on Emerald Advance
 
57,268

 
57,202

 
66

 
0.1
 %
Other
 
51,538

 
61,724

 
(10,186
)
 
(16.5
)%
Total revenues
 
3,038,153

 
3,078,658

 
(40,505
)
 
(1.3
)%
 
 
 
 
 
 
 
 
 
Compensation and benefits:
 
 
 
 
 
 
 
 
Field wages
 
724,019

 
731,309

 
(7,290
)
 
(1.0
)%
Other wages
 
166,445

 
176,697

 
(10,252
)
 
(5.8
)%
Benefits and other compensation
 
183,512

 
183,001

 
511

 
0.3
 %
 
 
1,073,976

 
1,091,007

 
(17,031
)
 
(1.6
)%
Occupancy and equipment
 
405,493

 
375,743

 
29,750

 
7.9
 %
Marketing and advertising
 
297,762

 
273,682

 
24,080

 
8.8
 %
Depreciation and amortization
 
173,598

 
159,804

 
13,794

 
8.6
 %
Bad debt
 
75,395

 
74,993

 
402

 
0.5
 %
Supplies
 
36,340

 
42,872

 
(6,532
)
 
(15.2
)%
Other
 
342,397

 
265,891

 
76,506

 
28.8
 %
Total operating expenses
 
2,404,961

 
2,283,992

 
120,969

 
5.3
 %
Other income (expense), net
 
5,249

 
(6,615
)
 
11,864

 
**

Interest expense on borrowings
 
(68,962
)
 
(45,246
)
 
(23,716
)
 
(52.4
)%
Pretax income
 
569,479

 
742,805

 
(173,326
)
 
(23.3
)%
Income taxes
 
185,926

 
256,061

 
(70,135
)
 
(27.4
)%
Net income from continuing operations
 
383,553

 
486,744

 
(103,191
)
 
(21.2
)%
Net loss from discontinued operations
 
(9,286
)
 
(13,081
)
 
3,795

 
29.0
 %
Net income
 
$
374,267

 
$
473,663

 
$
(99,396
)
 
(21.0
)%
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
1.54

 
$
1.77

 
$
(0.23
)
 
(13.0
)%
Discontinued operations
 
(0.04
)
 
(0.05
)
 
0.01

 
20.0
 %
Consolidated
 
$
1.50

 
$
1.72

 
$
(0.22
)
 
(12.8
)%
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
1.53

 
$
1.75

 
$
(0.22
)
 
(12.6
)%
Discontinued operations
 
(0.04
)
 
(0.04
)
 

 
 %
Consolidated
 
$
1.49

 
$
1.71

 
$
(0.22
)
 
(12.9
)%
 
 
 
 
 
 
 
 
 
EBITDA from continuing operations (1)
 
$
812,218

 
$
948,537

 
$
(136,319
)
 
(14.4
)%
EBITDA from continuing operations - adjusted (1)
 
838,654

 
951,006

 
(112,352
)
 
(11.8
)%
 
 
 
 
 
 
 
 
 
(1) 
See "Non-GAAP Financial Information" at the end of this item for a reconciliation of non-GAAP measures.
FISCAL 2016 COMPARED TO FISCAL 2015
Revenues decreased $40.5 million, or 1.3%, compared to fiscal year 2015.
U.S. assisted tax preparation fees increased $24.7 million, or 1.3%, while U.S. royalty revenues declined $23.8 million, or 8.7%. We acquired a number of franchisee businesses during the year, and declines in royalty revenues are due primarily to the associated loss of royalties when those businesses are acquired, and to a lesser extent, a decline in client volumes served by franchise offices. Return counts in our company-owned offices, excluding the impact of returns prepared in those offices resulting from acquired franchisee businesses, declined 6.2% from fiscal year 2015.

24
2017 Form 10-K | H&R Block, Inc.


Tax preparation fees from our U.S. DIY business increased $2.5 million, or 1.1%, as improved monetization for new and existing clients coupled with an increase in product attach rates were partially offset by a 2.6% decrease in returns.
International revenues decreased $23.2 million, or 9.8%. The decrease was driven by a $26.8 million decline resulting from unfavorable changes in foreign currency exchange rates, partially offset by favorable volume and price changes.
Fees earned on RTs decreased $5.2 million, or 3.1%, primarily due to lower assisted return volumes.
Revenues from H&R Block Emerald Prepaid MasterCard® transactions decreased $10.7 million, or 10.4%, primarily due to our agreement with BofI and lower assisted return volumes.
Revenue from POM increased $5.3 million, or 6.5%, in fiscal year 2016 primarily due to a change in projected claims.
Other revenues declined $10.2 million, or 16.5%, primarily due to the presentation of income from our mortgage loan portfolio and investments in AFS securities as other income beginning in fiscal year 2016, rather than as revenue in fiscal year 2015.
Total operating expenses increased $121.0 million, or 5.3%, from fiscal year 2015. Total compensation and benefits decreased $17.0 million primarily due to a decline in short-term incentive compensation and the impact of changes in foreign currency exchange rates. Occupancy and equipment expenses increased $29.8 million, or 7.9%, primarily due to a 4.0% increase in company-owned offices resulting from acquisitions of franchisee and competitor businesses. Marketing and advertising expenses increased $24.1 million due to planned increases in tax season spend, including our sweepstakes campaign. Depreciation and amortization expense increased $13.8 million, or 8.6%, primarily due to amortization resulting from acquisitions of franchisee and competitor businesses.
Other expenses increased $76.5 million, or 28.8%, primarily due to costs associated with capital transactions and the divestiture of HRB Bank, and fees paid to BofI for products and services they offer to our clients. The components of other expenses are as follows:
Year ended April 30,
 
2016
 
2015
 
$ Change
 
% Change
Consulting and outsourced services
 
$
140,052

 
$
113,616

 
$
26,436

 
23.3
%
Bank partner fees
 
16,980

 

 
16,980

 
**

Client claims and refunds
 
39,782

 
28,337

 
11,445

 
40.4
%
Employee travel and related expenses
 
46,665

 
44,660

 
2,005

 
4.5
%
Credit card/bank charges
 
28,618

 
23,668

 
4,950

 
20.9
%
Insurance
 
12,167

 
11,330

 
837

 
7.4
%
Legal fees and settlements
 
18,707

 
7,185

 
11,522

 
160.4
%
Other
 
39,426

 
37,095

 
2,331

 
6.3
%
 
 
$
342,397

 
$
265,891

 
$
76,506

 
28.8
%
 
 
 
 
 
 
 
 
 
Other income (expense) improved $11.9 million, primarily due to the inclusion of interest income on our mortgage loan portfolio and AFS securities (reported as revenue in fiscal year 2015), as discussed above and in Item 8, note 11 to the consolidated financial statements. Interest expense increased $23.7 million, or 52.4%, due primarily to issuance of our Senior Notes in September 2015 in the aggregate principal amount of $1.0 billion.
Pretax income for fiscal year 2016 decreased $173.3 million, or 23.3%, from the prior year. The pretax margin decreased to 18.7% in fiscal year 2016 from 24.1% in fiscal year 2015. Net income from continuing operations declined $103.2 million or 21.2% compared with the prior year. Diluted earnings per share from continuing operations decreased 12.6% from the prior year to $1.53 due to the decline in net income, partially offset by a 9.5% decline in weighted average shares outstanding.
Pretax losses of our discontinued mortgage operations totaled $18.6 million, compared to $27.1 million in fiscal year 2015, and resulted primarily from loss provisions related to SCC's estimated contingent losses for representation and warranty claims of $4.0 million and $16.0 million for fiscal years 2016 and 2015, respectively.

H&R Block, Inc. | 2017 Form 10-K
25


CRITICAL ACCOUNTING ESTIMATES
We consider the estimates discussed below to be critical to understanding our financial statements, as they require the use of significant judgment and estimation in order to measure, at a specific point in time, matters that are inherently uncertain. Specific methods and assumptions for these critical accounting estimates are described in the following paragraphs. We have reviewed and discussed each of these estimates with the Audit Committee of our Board of Directors. For all of these estimates, we caution that future events rarely develop precisely as forecasted and estimates routinely require adjustment and may require material adjustment.
See Item 8, note 1 to the consolidated financial statements, which discusses accounting policies and new or proposed accounting standards that may affect our financial reporting in the future.
LITIGATION AND OTHER RELATED CONTINGENCIES
Nature of Estimates Required. We accrue liabilities related to certain legal matters for which we believe it is probable that a loss has been incurred and the amount of such loss can be reasonably estimated. Assessing the likely outcome of pending or threatened litigation, indemnification and contribution claims, and other related loss contingencies, including the amount of potential loss, if any, is highly subjective. 
Assumptions and Approach Used. We are subject to pending or threatened litigation claims and claims for indemnification and contribution, and other related loss contingencies, which are described in Item 8, note 13 to the consolidated financial statements. It is our policy to routinely assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the liability required to be accrued, if any, for these contingencies is made after analysis of each known issue and an analysis of historical experience. In cases where we have concluded that a loss is only reasonably possible or remote, or is not reasonably estimable, no liability is accrued.
Sensitivity of Estimate to Change. It is reasonably possible that future litigation and other related loss contingencies may vary from the amounts accrued. Our 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 loss is believed to be reasonably possible, but a liability has not been accrued. This aggregate range represents only 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. As of April 30, 2017, we believe the aggregate range of reasonably possible losses in excess of amounts accrued is not material.
However, our judgments on whether a loss is probable, reasonably possible, or remote, and our estimates of probable loss amounts may differ from actual results due to difficulties in predicting the outcome of jury trials, arbitration hearings, settlement discussions and related activity, predicting the outcome of class certification actions, and numerous other uncertainties. Due to the number of claims which are periodically asserted against us, and the magnitude of damages sought in those claims, actual losses in the future may significantly differ from our current estimates.
INCOME TAXESUNCERTAIN TAX POSITIONS
Nature of Estimates Required. The income tax laws of jurisdictions in which we operate are complex and subject to different interpretations by the taxpayer and applicable government taxing authorities. Income tax returns filed by us are based on our interpretation of these rules. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which may result in proposed assessments, including interest or penalties. We accrue a liability for unrecognized tax benefits arising from uncertain tax positions reflecting our judgment as to the ultimate resolution of the applicable issues.
Assumptions and Approach Used. Differences between a tax position taken or expected to be taken in our tax returns and the amount of benefit recorded in our financial statements result in unrecognized tax benefits. Unrecognized tax benefits are recorded in the balance sheet as either a liability or reductions to recorded tax assets, as applicable. Our uncertain tax positions arise from items such as apportionment of income for state purposes, transfer pricing, and the deductibility of related party transactions. We evaluate each uncertain tax position based on its technical merits. For each position, we consider all applicable information including relevant tax laws, the taxing authorities potential position, our tax return position, and the possible settlement outcomes to determine the amount

26
2017 Form 10-K | H&R Block, Inc.


of liability to record. In making this determination, we assume the tax authority has all relevant information at its disposal.
Sensitivity of Estimate to Change. Our assessment of the technical merits and measurement of tax benefits associated with uncertain tax positions is subject to a high degree of judgment and estimation. Actual results may differ from our current judgments due to a variety of factors, including changes in law, interpretations of law by taxing authorities that differ from our assessments, changes in the jurisdictions in which we operate and results of routine tax examinations. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, or when statutes of limitation on potential assessments expire. As a result, our effective tax rate may fluctuate on a quarterly basis.
As of April 30, 2017, we accrued liabilities for unrecognized tax benefits on uncertain tax positions of approximately $150 million. Of the total gross unrecognized tax benefits as of April 30, 2017, approximately $118 million would impact our effective tax rate if ultimately recognized.
NEW ACCOUNTING PRONOUNCEMENTS
See Item 8, note 1 to the consolidated financial statements for a discussion of recently issued accounting pronouncements.
FINANCIAL CONDITION
These comments should be read in conjunction with the consolidated balance sheets and consolidated statements of cash flows included in Item 8.
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW – Our primary sources of capital and liquidity include cash from operations (including changes in working capital), draws on our 2016 CLOC, and issuances of debt. We use our sources of liquidity primarily to fund working capital, service and repay debt, pay dividends, repurchase shares of our common stock, and acquire businesses.
Our operations are highly seasonal and substantially all of our revenues and cash flow are generated during the period from February through April. Therefore, we require the use of cash to fund losses and working capital needs from May through January, and typically rely on available cash balances from the prior tax season and borrowings to meet our off-season liquidity needs.
Given the likely availability of a number of liquidity options discussed herein, we believe that, in the absence of any unexpected developments, our existing sources of capital as of April 30, 2017 are sufficient to meet our future operating and financing needs.
DISCUSSION OF CONSOLIDATED STATEMENTS OF CASH FLOWS – The following table summarizes our statements of cash flows for fiscal years 2017, 2016 and 2015. See Item 8 for the complete consolidated statements of cash flows for these periods.
 
 
 
 
 
 
(in 000s)

Year ended April 30,
 
2017

 
2016

 
2015

Net cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
550,093

 
$
532,394

 
$
626,608

Investing activities
 
99,319

 
329,515

 
(148,932
)
Financing activities
 
(530,424
)
 
(1,961,729
)
 
(645,807
)
Effects of exchange rate changes on cash
 
(4,458
)
 
(10,569
)
 
(9,986
)
Net change in cash and cash equivalents
 
$
114,530

 
$
(1,110,389
)
 
$
(178,117
)
 
 
 
 
 
 
 
Operating Activities. Cash provided by operating activities increased $17.7 million from fiscal year 2016. The increase from the prior year was primarily due to higher net income and changes in tax balances, partially offset by declines in payables balances.
Investing Activities. Cash provided by investing activities totaled $99.3 million compared to $329.5 million in the prior year. This decrease is principally due to the sale of our AFS securities in the prior year, partially offset by the sale of our portfolio of mortgage loans in the current year, a decrease of $34.0 million in payments for business acquisitions, and a decrease of $10.7 million in capital expenditures.

H&R Block, Inc. | 2017 Form 10-K
27


Financing Activities. Cash used in financing activities decreased $1.4 billion. Changes in cash from financing activities resulted primarily from lower share repurchase activity and prior year customer deposit activity, partially offset by the issuance of debt in the prior year.
CASH REQUIREMENTS
Dividends and Share Repurchase. Returning capital to shareholders in the form of dividends and the repurchase of outstanding shares has historically been a significant component of our capital allocation plan.
We have consistently paid quarterly dividends. Dividends paid totaled $187.1 million, $201.7 million and $220.0 million in fiscal years 2017, 2016 and 2015, respectively. The decline from the prior years is due to lower outstanding
shares as a result of share repurchase activity. Although we have historically paid dividends and plan to continue to do so, there can be no assurances that circumstances will not change in the future that could affect our ability or decisions to pay dividends.
In September 2015, we announced that our Board of Directors approved a $3.5 billion share repurchase program, effective through June 2019. As a part of the repurchase program, in the current year, we purchased $317.0 million of our common stock at an average price of $22.61 per share. See Item 8, note 8 to the consolidated financial statements for additional information. Although we may continue to repurchase shares, there is no assurance that we will purchase up to the full Board authorization.
Capital Investment. Our business is not capital intensive. Capital expenditures totaled $89.3 million and $99.9 million in fiscal years 2017 and 2016, respectively. Our capital expenditures relate primarily to recurring improvements to retail offices, as well as investments in computers, software and related assets. In addition, we expended net cash totaling $54.8 million and $88.8 million in fiscal years 2017 and 2016, respectively, in connection with acquired businesses. We routinely acquire competitor tax businesses and franchisees, and recurring capital allocated to acquisitions consists primarily of this activity.
FINANCING RESOURCES – Our 2016 CLOC has capacity up to $2.0 billion, and is scheduled to expire in September
2021. Proceeds under the 2016 CLOC may be used for working capital needs or for other general corporate purposes. We were in compliance with our 2016 CLOC covenants as of April 30, 2017. As of April 30, 2017, amounts available to borrow under the 2016 CLOC were limited by the debt-to-EBITDA covenant to approximately $1.6 billion, however, our cash needs at April 30 generally do not require us to borrow on our CLOC at that time. We had no balance outstanding under the 2016 CLOC as of April 30, 2017. See Item 8, note 6 to the consolidated financial statements for discussion of the Senior Notes and our 2016 CLOC.
The following table provides ratings for debt issued by Block Financial as of April 30, 2017 and 2016:
As of
 
April 30, 2017
 
April 30, 2016
 
 
Short-term
 
Long-term
 
Outlook
 
Short-term
 
Long-term
 
Outlook
Moody's
 
P-3
 
Baa3
 
Stable
 
P-3
 
Baa3
 
Stable
S&P (1)
 
A-2
 
BBB
 
Negative
 
A-2
 
BBB
 
Stable
(1) Outlook of Stable effective June 14, 2017.
CASH AND OTHER ASSETS – As of April 30, 2017, we held cash and cash equivalents of $1.0 billion, including $63.4 million held by our foreign subsidiaries.
In December 2016 we sold our portfolio of mortgage loans and real estate owned. Cash proceeds received approximated carrying value.
Foreign Operations. Seasonal borrowing needs of our Canadian operations are typically funded by our U.S. operations. To mitigate foreign currency risk, we sometimes enter into foreign exchange forward contracts. There was one forward contract outstanding as of April 30, 2017, which had a book value of $0.5 million.
While our Canadian operations made a one-time distribution of previously taxed income to their U.S. parent in fiscal year 2017, we do not currently intend to repatriate any additional non-borrowed funds held by our foreign subsidiaries.

28
2017 Form 10-K | H&R Block, Inc.


The impact of changes in foreign exchange rates during the period on our international cash balances resulted in a decrease of $4.5 million during fiscal year 2017 compared to decreases of $10.6 million and $10.0 million in fiscal years 2016 and 2015, respectively. This change resulted primarily from a decline in Canadian exchange rates.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS – A summary of our borrowings and known or estimated contractual obligations as of April 30, 2017, and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods is as follows:
(in 000s)
 
 
 
Total

 
Less Than
1 Year

 
1 - 3 Years

 
4 - 5 Years

 
After 5 Years

Long-term debt (including interest)
 
$
1,914,574

 
$
72,688

 
$
145,375

 
$
755,156

 
$
941,355

Contingent acquisition payments
 
10,428

 
7,104

 
3,324

 

 

Capital lease obligations
 
6,610

 
981

 
2,100

 
2,299

 
1,230

Operating leases
 
707,828

 
249,813

 
329,515

 
101,286

 
27,214

Guaranty on Refund Advance loans
 
720

 
720

 

 

 

Total contractual cash obligations
 
$
2,640,160

 
$
331,306

 
$
480,314

 
$
858,741

 
$
969,799

 
 
 
 
 
 
 
 
 
 
 
The table above does not reflect unrecognized tax benefits of approximately $150 million due to the high degree of uncertainty regarding the future cash flows associated with these amounts.     
In connection with our agreement with BofI, we are required to purchase a 90% participation interest, at par, in all EAs originated by our lending partner.
See discussion of contractual obligations and commitments in Item 8, within the notes to the consolidated financial statements.
REGULATORY ENVIRONMENT – The federal government, various state, local, provincial and foreign governments, and some self-regulatory organizations have enacted statutes and ordinances, or adopted rules and regulations, regulating aspects of our business. These aspects include, but are not limited to, commercial income tax return preparers, income tax courses, the electronic filing of income tax returns, the offering of RTs, privacy, consumer protection, franchising, sales methods and banking. We determine the applicability of such statutes, ordinances, rules and regulations (collectively, Laws) and work to comply with those Laws that are applicable to us or our services or products.
On October 5, 2016, the CFPB released its Final Rules regulating prepaid products. The Final Rules are scheduled to take effect on April 1, 2018, with certain provisions phased in over time following that date. Once effective, the Final Rules will apply to the H&R Block Emerald Prepaid MasterCard®, but we do not believe they will apply to EAs or RAs due to their nature as non-covered separate credit products. The Final Rules, among other things: (i) establish required consumer disclosures to be made prior to acquiring a prepaid account in most situations; (ii) require periodic statements or online access to specified account information; and (iii) require online posting of the Cardholder Agreement and submission of new and revised Cardholder Agreements to the CFPB.
We are continuing to assess the impact of these changes on the H&R Block Emerald Prepaid MasterCard® and our
consolidated financial statements.
From time to time in the ordinary course of business, we receive inquiries from governmental and self-regulatory agencies regarding the applicability of Laws to our services and products. In response to past inquiries, we have demonstrated that we comply with such Laws, convinced the authorities that such Laws were not applicable or that compliance already exists, or modified our activities in the applicable jurisdiction to avoid the application of all or certain parts of such Laws. We believe the past resolution of such inquiries and our ongoing compliance with Laws has not had a material effect on our consolidated financial statements. We cannot predict what effect future Laws, changes in interpretations of existing Laws or the results of future regulatory inquiries with respect to the applicability of Laws may have on our consolidated financial position, results of operations and cash flows. See additional discussion of legal matters in Item 8, note 13 to the consolidated financial statements.
Tax Reform. As a multinational corporation, we are subject to taxes in both U.S. and non-U.S. jurisdictions. Due to economic and political factors, tax laws, regulations and rates of the jurisdictions in which we operate are subject to

H&R Block, Inc. | 2017 Form 10-K
29


significant change. The federal government has indicated its desire to pursue comprehensive tax reform and is currently proposing a variety of changes. Additionally, various foreign countries are evaluating their tax systems. Many changes have been proposed.
Among the U.S. tax reform proposals are a reduction in corporate income tax rate, a border adjustment tax, elimination of many currently available deductions and changes to how foreign earnings are taxed. Any of these proposals, among others, could significantly impact the amount of tax due in the U.S. We cannot predict whether, or in what form, changes in tax laws will be made. If comprehensive tax reform occurs, we would benefit from a significant reduction in U.S. tax rates, however without understanding the full context of tax reform, it is difficult to estimate or provide guidance on the overall impact of potential U.S. tax reform on our organization.
NON-GAAP FINANCIAL INFORMATION
Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Because these measures are not measures of financial performance under GAAP and are susceptible to varying calculations, they may not be comparable to similarly titled measures for other companies.
We consider our non-GAAP financial measures to be performance measures and a useful metric for management and investors to evaluate and compare the ongoing operating performance of our business on a consistent basis across reporting periods, as it eliminates the effect of items that are not indicative of our core operating performance.
The following are descriptions of adjustments we make for our non-GAAP financial measures:
We exclude losses from settlements and estimated contingent losses from litigation and favorable reserve adjustments. This does not include legal defense costs.
We exclude material non-cash charges to adjust the carrying values of goodwill, intangible assets, other long-lived assets and investments to their estimated fair values.
We exclude material severance and other restructuring charges in connection with the termination of personnel, closure of offices and related costs.
We exclude the material gains and losses on business dispositions, including investment banking, legal and accounting fees from both business dispositions and acquisitions.
We exclude the gains and losses on extinguishment of debt.
We may consider whether other significant items that arise in the future should also be excluded from our non-GAAP financial measures.
We measure the performance of our business using a variety of metrics, including earnings before interest, taxes, depreciation and amortization (EBITDA) from continuing operations and adjusted EBITDA and EBITDA margin from continuing operations, adjusted pretax and net income of continuing operations, and adjusted diluted earnings per share from continuing operations. Adjusted EBITDA and EBITDA margin from continuing operations, adjusted pretax and net income from continuing operations, and adjusted diluted earnings per share from continuing operations eliminate the impact of items that we do not consider indicative of our core operating performance and, we believe, provide meaningful information to assist in understanding our financial results, analyzing trends in our underlying business, and assessing our prospects for future performance. We also use EBITDA from continuing operations and pretax income of continuing operations, each subject to permitted adjustments, as performance metrics in incentive compensation calculations for our employees.

30
2017 Form 10-K | H&R Block, Inc.


The following is a reconciliation of EBITDA from continuing operations to net income:
 
 
 
 
 
 
(in 000s)

Year ended April 30,
 
2017

 
2016

 
2015

Net income - as reported
 
$
408,945

 
$
374,267

 
$
473,663

Discontinued operations, net
 
11,972

 
9,286

 
13,081

Net income from continuing operations - as reported
 
420,917

 
383,553

 
486,744

Add back:
 
 
 
 
 
 
Income taxes of continuing operations
 
208,370

 
185,926

 
256,061

Interest expense of continuing operations
 
92,951

 
69,141

 
45,928

Depreciation and amortization of continuing operations
 
182,168

 
173,598

 
159,804

 
 
483,489

 
428,665

 
461,793

EBITDA from continuing operations
 
$
904,406

 
$
812,218

 
$
948,537

 
 
 
 
 
 
 

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31


The following is a reconciliation of our results from continuing operations to our adjusted results from continuing operations, which are non-GAAP financial measures:
 
 
(in 000s, except per share amounts)
 
Year ended April 30,
 
2017
 
 
Pretax Income
 
Net Income
 
EBITDA
 
 
 
 
 
 
 
From continuing operations
 
$
629,287

 
$
420,917

 
$
904,406

 
 
 
 
 
 
 
Adjustments (pretax):
 
 
 
 
 
 
Loss contingencies - litigation
 
516

 
516

 
516

Tax effect of adjustments (1)
 

 
(186
)
 

 
 
516

 
330

 
516

As adjusted - from continuing operations
 
$
629,803

 
$
421,247

 
$
904,922

 
 
 
 
 
 
 
 
 
 
 
Diluted EPS
 
EBITDA Margin (2)
 
 
 
 
 
 
 
From continuing operations
 
 
 
$
1.96

 
29.8
%
Impact of adjustments
 
 
 

 
%
Adjusted
 
 
 
$
1.96

 
29.8
%
 
 
 
 
 
 
 
Year ended April 30,
 
2016
 
 
Pretax Income
 
Net Income
 
EBITDA
 
 
 
 
 
 
 
From continuing operations
 
$
569,479

 
$
383,553

 
$
812,218

 
 
 
 
 
 
 
Adjustments (pretax):
 
 
 
 
 
 
Loss contingencies - litigation
 
1,978

 
1,978

 
1,978

Severance
 
12,001

 
12,001

 
12,001

Costs related to HRB Bank and recapitalization transactions
 
20,722

 
20,722

 
20,722

Losses (gains) on AFS securities
 
(8,138
)
 
(8,138
)
 
(8,138
)
Gain on sales of tax offices/businesses
 
(127
)
 
(127
)
 
(127
)
Tax effect of adjustments (1)
 

 
(10,176
)
 

 
 
26,436

 
16,260

 
26,436

As adjusted - from continuing operations
 
$
595,915

 
$
399,813

 
$
838,654

 
 
 
 
 
 
 
 
 
 
 
Diluted EPS
 
EBITDA Margin (2)
 
 
 
 
 
 
 
From continuing operations
 
 
 
$
1.53

 
26.7
%
Impact of adjustments
 
 
 
0.06

 
0.9
%
Adjusted
 
 
 
$
1.59

 
27.6
%
 
 
 
 
 
 
 
Year ended April 30,
 
2015
 
 
Pretax Income
 
Net Income
 
EBITDA
 
 
 
 
 
 
 
From continuing operations
 
$
742,805

 
$
486,744

 
$
948,537

 
 
 
 
 
 
 
Adjustments (pretax):
 
 
 
 
 
 
Loss contingencies - litigation
 
(3,936
)
 
(3,936
)
 
(3,936
)
Severance
 
6,699

 
6,699

 
6,699

Costs related to HRB Bank transaction
 
238

 
238

 
238

Losses (gains) on AFS securities
 
124

 
124

 
124

Gain on sales of tax offices/businesses
 
(656
)
 
(656
)
 
(656
)
Tax effect of adjustments (1)
 

 
(963
)
 

 
 
2,469

 
1,506

 
2,469

As adjusted - from continuing operations
 
$
745,274

 
$
488,250

 
$
951,006

 
 
 
 
 
 
 
 
 
 
 
Diluted EPS
 
EBITDA Margin (2)
 
 
 
 
 
 
 
From continuing operations
 
 
 
$
1.75

 
30.8
%
Impact of adjustments
 
 
 

 
0.1
%
Adjusted
 
 
 
$
1.75

 
30.9
%
 
 
 
 
 
 
 
1
Tax effect of adjustments is computed as the pretax effect of the adjustments multiplied by our effective tax rate before discrete items.
2
EBITDA margin from continuing operations is computed as EBITDA from continuing operations divided by revenues from continuing operations.

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2017 Form 10-K | H&R Block, Inc.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
GENERAL – We have a formal investment policy that strives to minimize the market risk exposure of our cash equivalents, which are primarily affected by credit quality and movements in interest rates. The guidelines in our investment policy focus on managing liquidity and preserving principal and earnings.
Our cash equivalents are primarily held for liquidity purposes and are comprised of high quality, short-term investments, including money market funds. Because our cash and cash equivalents have a short maturity, our portfolio's market value is relatively insensitive to interest rate changes.
As our CLOC borrowings are generally seasonal, interest rate risk typically increases through our third fiscal quarter and declines to zero by fiscal year-end. While the market value of our CLOC borrowings is relatively insensitive to interest rate changes, interest expense on CLOC borrowings will increase and decrease with changes in the underlying short-term interest rates. We had no balance outstanding under the 2016 CLOC as of April 30, 2017.
Our long-term debt as of April 30, 2017, consists primarily of fixed-rate Senior Notes; therefore, a change in interest rates would have no impact on consolidated pretax earnings until these notes mature or are refinanced. The fixed-rate interest payable on our Senior Notes is subject to adjustment based upon our credit ratings. See Item 8, note 6 to the consolidated financial statements.
FOREIGN EXCHANGE RATE RISK
Our operations in international markets are exposed to movements in currency exchange rates. The currencies primarily involved are the Canadian dollar and the Australian dollar. We translate revenues and expenses related to these operations at the average of exchange rates in effect during the period. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates prevailing at the end of the year. Translation adjustments are recorded as a separate component of other comprehensive income in stockholders' equity. Translation of financial results into U.S. dollars does not presently materially affect, and has not historically materially affected, our consolidated financial results, although such changes do affect the year-to-year comparability of the operating results in U.S. dollars of our international businesses. The impact of changes in foreign exchange rates during the period on our international cash balances resulted in a decrease of $4.5 million during fiscal year 2017 compared to a decrease of $10.6 million and $10.0 million in fiscal years 2016 and 2015, respectively. This change resulted primarily from a decline in Canadian exchange rates. We estimate a 10% change in foreign exchange rates by itself would impact consolidated pretax income in fiscal years 2017 and 2016 by $2.2 million and $2.5 million, respectively, and cash balances as of April 30, 2017 and 2016 by $3.6 million and $8.9 million, respectively.
We generally use foreign exchange forward contracts to mitigate foreign currency exchange rate risk for seasonal loans we advance to our Canadian operations. At April 30, 2017 we had one forward contract outstanding with a fair value of $0.5 million, compared with none in the prior year.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DISCUSSION OF FINANCIAL RESPONSIBILITY
H&R Block's management is responsible for the integrity and objectivity of the information contained in this document. Management is responsible for the consistency of reporting this information and for ensuring that accounting principles generally accepted in the U.S. are properly applied. In discharging this responsibility, management maintains an extensive program of internal audits and requires members of management to certify financial information within their scope of management. Our system of internal control over financial reporting also includes formal policies and procedures, including a Code of Business Ethics and Conduct that reinforces our commitment to ethical business conduct and is designed to encourage our employees and directors to act with high standards of integrity in all that they do.
The Audit Committee of the Board of Directors, composed solely of independent outside directors, meets periodically with management, the independent auditor and the Vice President, Audit Services (our chief internal auditor) to review matters relating to our financial statements, internal audit activities, internal accounting controls and non-audit services provided by the independent auditors. The independent auditor and the Vice President, Audit Services have full access to the Audit Committee and meet with the committee, both with and without management present, to discuss the scope and results of their audits, including internal controls and financial matters.
Deloitte & Touche LLP audited our consolidated financial statements for fiscal years 2017, 2016 and 2015. The audits were conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States).
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 12a-15(f). Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), using the 2013 framework, as of April 30, 2017.
Based on our assessment, management concluded that as of April 30, 2017, the Company's internal control over financial reporting was effective based on the criteria set forth by COSO, using the 2013 framework. The Company's external auditor, Deloitte & Touche LLP, an independent registered public accounting firm, has issued an audit report on the effectiveness of the Company's internal control over financial reporting.
/s/ William C. Cobb
 
/s/ Tony G. Bowen
William C. Cobb
 
Tony G. Bowen
President and Chief Executive Officer
 
Chief Financial Officer

34
2017 Form 10-K | H&R Block, Inc.


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
H&R Block, Inc.
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of H&R Block, Inc. and subsidiaries (the "Company") as of April 30, 2017 and 2016, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended April 30, 2017. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of H&R Block, Inc. and subsidiaries as of April 30, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of April 30, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 16, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
June 16, 2017

H&R Block, Inc. | 2017 Form 10-K
35


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
H&R Block, Inc.
Kansas City, Missouri
We have audited the internal control over financial reporting of H&R Block, Inc. and subsidiaries (the "Company") as of April 30, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended April 30, 2017 of the Company and our report dated June 16, 2017 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
June 16, 2017

36
2017 Form 10-K | H&R Block, Inc.


CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
 
(in 000s, except per share amounts)
 
Year ended April 30,
 
2017

 
2016

 
2015

REVENUES:
 
 
 
 
 
 
Service revenues
 
$
2,648,349

 
$
2,653,936

 
$
2,651,057

Royalty, product and other revenues
 
387,965

 
384,217

 
427,601