H&R BLOCK INC
10-Ks and 10-Qs
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Table of Contents
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, 2011 | ||
|
OR
|
||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934 |
|
| For the transition period from to | ||
Commission file
number 1-6089
H&R Block,
Inc.
(Exact name of registrant as
specified in its charter)
| MISSOURI | 44-0607856 | |
|
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
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
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act. Yes
o
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
o
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.
o
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
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
|
Large accelerated
filer
þ
|
Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act). Yes
o
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, 2010, was $3,564,690,812.
Number of shares of the registrant’s Common Stock, without
par value, outstanding on May 31, 2011: 305,383,646.
Documents
incorporated by reference
The definitive proxy statement for the registrant’s Annual
Meeting of Shareholders, to be held September 14, 2011, is
incorporated by reference in Part III to the extent
described therein.
2011
FORM 10-K
AND ANNUAL REPORT
TABLE
OF CONTENTS
Table of Contents
Specified portions of our proxy statement are listed as
“incorporated by reference” in response to certain
items. Our proxy statement will be made available to
shareholders in August 2011, and will also be available on our
website at
www.hrblock.com
.
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 such as
“expects,” “anticipates,”
“intends,” “plans,” “believes,”
“seeks,” “estimates,” “will,”
“would,” “should,” “could” or
“may.” Forward-looking statements provide
management’s current expectations or predictions of future
conditions, events or results. They may include projections of
revenues, income, earnings per share, capital expenditures,
dividends, liquidity, capital structure or other financial
items, descriptions of management’s plans or objectives for
future operations, products or services, or descriptions of
assumptions underlying any of the above. They are not guarantees
of future performance. By their nature, forward-looking
statements are subject to risks and uncertainties. These
statements speak only as of the date they are made and
management does not undertake to update them to reflect changes
or events occurring after that date except as required by
federal securities laws.
GENERAL
DEVELOPMENT OF BUSINESS
H&R Block, Inc. has subsidiaries that provide tax, banking
and business and consulting services. Our Tax Services segment
provides income tax return preparation, electronic filing and
other services and products related to income tax return
preparation to the general public primarily in the United
States, and also in Canada and Australia. This segment also
offers the H&R Block Prepaid Emerald
MasterCard
®
and Emerald Advance lines of credit through H&R Block Bank
(HRB Bank), along with other retail banking services. Our
Business Services segment consists of RSM McGladrey, Inc. (RSM),
a national tax and consulting firm primarily serving mid-sized
businesses. Corporate operations include interest income from
U.S. passive investments, interest expense on borrowings,
net interest margin and gains or losses relating to mortgage
loans held for investment, real estate owned, residual interests
in securitizations and other corporate expenses, principally
related to finance, legal and other support departments.
H&R Block, Inc. was organized as a corporation in 1955
under the laws of the State of Missouri. “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. A complete list of
our subsidiaries can be found in Exhibit 21.
NEW
DEVELOPMENTS
–
Historically, refund anticipation loans (RALs) were
offered in our US retail tax offices through a contractual
relationship with HSBC Holdings plc (HSBC). We purchased a 49.9%
participation interest in all RALs obtained through our retail
offices. In December 2010, HSBC terminated its contract with us
based on restrictions placed on them by their regulator and RALs
were not offered in our tax offices this tax season. In
connection with the contract termination, we obtained the
remaining rights to collect on the outstanding balances of RALs
originated in years 2006 and later. The impact of this is
discussed in the Tax Services segment results in Item 7.
FINANCIAL
INFORMATION ABOUT INDUSTRY SEGMENTS
See discussion below and in Item 8, note 21 to our
consolidated financial statements.
DESCRIPTION OF
BUSINESS
TAX
SERVICES
GENERAL
–
Our Tax Services segment is primarily engaged in
providing tax return preparation and related services and
products in the U.S. and its territories, Canada, and
Australia. Major revenue sources include fees earned for tax
preparation services performed at company-owned retail tax
offices, royalties from franchise retail tax offices, fees for
tax-related services, sales of tax preparation software, online
tax preparation fees, refund anticipation checks (RACs), fees
from activities related to H&R Block Prepaid Emerald
MasterCard
®
,
and interest and fees from Emerald Advance lines of credit
(EAs). HRB Bank also offers traditional banking services
including checking and savings accounts, individual retirement
accounts and certificates of deposit. Segment revenues
constituted 77.2% of our consolidated revenues from continuing
operations for fiscal year 2011, 76.8% for 2010 and 76.7% for
2009.
H&R
BLOCK 2011
Form 10K
1
Table of Contents
Retail income tax return preparation and related services are
provided by tax professionals via a system of retail offices
operated directly by us or by franchisees. We also offer our
services through seasonal offices located inside major retailers.
TAX RETURNS
PREPARED
–
We, together with our franchisees, prepared
24.5 million tax returns worldwide during fiscal year 2011,
compared to 23.2 million in 2010 and 23.9 million in
2009. We prepared 21.4 million tax returns in the
U.S. during fiscal year 2011, up from 20.1 million in
2010 and 21.0 million in 2009. Our U.S. tax returns
prepared, including those prepared by our franchisees and those
prepared and filed at no charge, for the 2011 tax season
constituted 16.4% of an Internal Revenue Service (IRS) estimate
of total individual income tax returns filed during the fiscal
year 2011 tax season. This compares to 15.6% in the 2010 tax
season and 15.8% in the 2009 tax season. See Item 7 for
further discussion of changes in the number of tax returns
prepared.
FRANCHISES
–
We offer franchises as a way to expand our presence in
certain markets. Our franchise arrangements provide us with
certain rights designed to protect our brand. Most of our
franchisees receive use of our software, access to product
offerings and expertise, signs, specialized forms, advertising,
initial training and supervisory services, and pay us a
percentage, typically approximately 30%, of gross tax return
preparation and related service revenues as a franchise royalty
in the U.S.
During fiscal years 2011, 2010 and 2009 we sold certain offices
to existing franchisees for sales proceeds totaling
$65.6 million, $65.7 million and $16.9 million,
respectively. The net gain on these transactions totaled
$45.1 million, $49.0 million and $14.9 million in
fiscal years 2011, 2010 and 2009, respectively. The extent to
which we sell company-owned offices will depend upon ongoing
analysis regarding the optimal mix of offices for our network,
including geographic location, as well as our ability to
identify qualified franchisees.
From time to time, we have also acquired the territories 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. During fiscal
year 2009, we acquired the assets and franchise rights of our
last major independent franchise operator for an aggregate
purchase price of $279.2 million.
OFFICES
–
A summary of our company-owned and franchise offices is
as follows:
|
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| April 30, | 2011 | 2010 | 2009 | |||||||||
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||||||||||||
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U.S. OFFICES:
|
||||||||||||
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Company-owned offices
|
5,921 | 6,431 | 7,029 | |||||||||
|
Company-owned shared
locations
(1)
|
572 | 760 | 1,542 | |||||||||
|
|
||||||||||||
|
Total company-owned offices
|
6,493 | 7,191 | 8,571 | |||||||||
|
|
||||||||||||
|
Franchise offices
|
4,178 | 3,909 | 3,565 | |||||||||
|
Franchise shared
locations
(1)
|
397 | 406 | 787 | |||||||||
|
|
||||||||||||
|
Total franchise offices
|
4,575 | 4,315 | 4,352 | |||||||||
|
|
||||||||||||
| 11,068 | 11,506 | 12,923 | ||||||||||
|
|
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INTERNATIONAL OFFICES:
|
||||||||||||
|
Canada
|
1,324 | 1,269 | 1,193 | |||||||||
|
Australia
|
384 | 374 | 378 | |||||||||
|
|
||||||||||||
| 1,708 | 1,643 | 1,571 | ||||||||||
|
|
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|
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| (1) | Shared locations include offices located within Sears or other third-party businesses. In 2009, these locations also included offices within Wal-Mart stores. |
We sold 280, 267 and 76 company-owned offices to
franchisees in fiscal years 2011, 2010 and 2009, respectively.
We closed more than 1,700 offices in fiscal year 2010, including
over 1,000 offices in Wal-Mart stores.
The acquisition of our last major independent franchise operator
in fiscal year 2009 included a network of over 600 tax offices,
nearly two-thirds of which converted to company-owned offices
upon the closing of the transaction, as reflected in the table
above.
Offices in shared locations at April 30, 2011 and 2010
consist primarily of offices in Sears stores operated as
“H&R Block at Sears.” The Sears license agreement
expires in July 2012. Offices in shared locations at
April 30, 2009 included offices in Wal-Mart stores. The
Wal-Mart agreement expired in May 2009.
SERVICE AND
PRODUCT
OFFERINGS
–
In addition to our retail offices, we offer a number of
digital tax preparation alternatives. By offering professional
and do-it-yourself tax preparation options through multiple
channels, we seek to serve our clients in the manner they choose
to be served.
We also offer clients a number of options for receiving their
income tax refund, including a check directly from the IRS, an
electronic deposit directly to their bank account, a prepaid
debit card or a RAC.
Software
Products.
We
develop and market H&R Block At
Home
tm
income tax preparation software. H&R Block At
Home
tm
offers a simple
step-by-step
tax preparation interview, data imports from money management
2
H&R
BLOCK 2011 Form 10K
Table of Contents
software, calculations, completion of the appropriate tax forms,
error checking and electronic filing. Our software products may
be purchased online, through third-party retail stores or direct
mail.
Online Tax
Preparation.
We
offer a comprehensive range of online tax services, from tax
advice to complete professional and do-it-yourself tax return
preparation and electronic filing, through our website at
www.hrblock.com
. This website allows clients to prepare
their federal and state income tax returns using the H&R
Block At
Home
tm
Online Tax Program, access tax tips, advice and tax-related news
and use calculators for tax planning.
We participate in the Free File Alliance (FFA). This alliance
was created by the tax return preparation industry and the IRS,
and allows qualified filers with adjusted gross incomes less
than $58,000 to prepare and file their federal return online at
no charge. We feel this program provides a valuable public
service and increases our visibility with new clients, while
also providing an opportunity to offer our state return
preparation and other services to these clients.
RACs.
Refund
Anticipation Checks are offered to U.S. clients who would
like to either: (1) receive their refund faster and do not
have a bank account for the IRS to direct deposit their refund
or (2) have their tax preparation fees paid directly out of
their refund. A RAC is not a loan and is provided by HRB Bank.
Emerald Advance
Lines of
Credit.
EAs
are offered to clients in tax offices from late November through
early January, 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 increased and utilized year-round.
These lines of credit are offered by HRB Bank.
H&R Block
Prepaid Emerald
Mastercard
®
.
The
H&R Block Prepaid Emerald
MasterCard
®
allows a client to receive a tax refund from the IRS directly on
a prepaid debit card, or to direct RAC proceeds to the card to
avoid high-cost check-cashing fees. The card can be used for
everyday purchases, bill payments and ATM withdrawals anywhere
MasterCard
®
is accepted. Additional funds can be added to the card account
year-round through direct deposit or at participating retail
locations. The H&R Block Prepaid Emerald
MasterCard
®
is issued by HRB Bank.
Peace of Mind
Guarantee.
The
Peace of Mind (POM) guarantee is offered to U.S. clients,
in addition to our standard guarantee, whereby we
(1) represent our clients if audited by the IRS, and
(2) assume the cost, subject to certain limits, of
additional taxes owed by a client resulting from errors
attributable to one of our tax professionals’ work. The POM
program has a per client cumulative limit of $5,500 in
additional taxes assessed with respect to the federal, state and
local tax returns we prepared for the taxable year covered by
the program.
Tax Return
Preparation
Courses.
We
offer income tax return preparation courses to the public, which
teach students how to prepare income tax returns and provide us
with a source of trained tax professionals.
CashBack
Program.
We
offer a refund discount (CashBack) program to our customers in
Canada. In accordance with current Canadian regulations, if a
customer’s tax return indicates the customer is entitled to
a tax refund, we issue a check to the client in the amount of
the refund, less a discount. The client assigns to us the full
amount of the tax refund to be issued by the Canada Revenue
Agency (CRA) and the refund check is then sent by the CRA
directly to us. In accordance with the law, the discount is
deemed to include both the tax return preparation fee and the
fee for tax refund discounting. This program is financed by
short-term borrowings. The number of returns discounted under
the CashBack program in fiscal year 2011 was 821,000, compared
to 797,000 in 2010 and 782,000 in 2009.
LOAN
PARTICIPATIONS
–
Since July 1996, we have been a party to agreements with
HSBC and its predecessors to participate in RALs provided by a
lending bank to H&R Block tax clients. These agreements
were effective through June 2011, but were terminated by HSBC in
December 2010. The impact of this is discussed in Item 7,
under Tax Services operating results. During fiscal year 2006,
we signed new agreements with HSBC in which we obtained the
right to purchase a 49.9% participation interest in all RALs
obtained through our retail offices. We received a signing bonus
from HSBC during fiscal year 2006 in connection with these
agreements, which was recorded as deferred revenue and was
earned over the contract term. Our purchases of the
participation interests were financed through short-term
borrowings. Revenue from our participation was calculated as the
rate of participation multiplied by the fee paid by the borrower
to the lending bank. Our RAL participation revenue was
$146.2 million and $139.8 million in fiscal years 2010
and 2009, respectively.
SEASONALITY OF
BUSINESS
–
Because most of our clients file their tax returns during
the period from January through April of each year,
substantially all of our revenues from income tax return
preparation and related services and products are earned during
this period. As a result, this segment generally operates at a
loss through the first eight months of the fiscal year. Peak
revenues occur during the applicable tax season, as follows:
|
|
||||
|
United States and Canada
Australia |
January – April
July – October |
|||
|
|
||||
H&R
BLOCK 2011
Form 10K
3
Table of Contents
HRB Bank’s operating results are subject to seasonal
fluctuations primarily related to the offering of the H&R
Block Prepaid Emerald
MasterCard
®
and Emerald Advance lines of credit, and therefore peak in
January and February and taper off through the remainder of the
tax season.
COMPETITIVE
CONDITIONS
–
We provide both retail and do-it-yourself tax preparation
products and services and face substantial competition
throughout our businesses. The retail tax services business is
highly competitive. 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 CPAs. Certain firms are involved
in providing electronic filing services, RALs and RACs to the
public. Commercial tax return preparers and electronic filers
are highly competitive with regard to price and service and many
firms offer services that may include federal
and/or
state
returns at no charge. Additionally, certain tax return preparers
were able to offer RALs this tax season while we were not. In
terms of the number of offices and personal tax returns prepared
and electronically filed in offices, online and via our
software, we are one of the largest providers of tax return
preparation and electronic filing services in the U.S. We
also believe we operate the largest tax return preparation
businesses in Canada and Australia.
Do-it-yourself tax preparation options include use of
traditional paper forms, digital electronic forms and various
forms of digital electronic assistance, including online and
desktop software both of which we offer. Our digital tax
solutions businesses compete with a number of companies. Based
on tax return volumes, Intuit, Inc. is the largest supplier of
tax preparation software and online tax preparation services.
Many other companies offer digital and online services. Price
and marketing competition for digital tax preparation services
is intense among value and premium products and many firms offer
services that may include federal
and/or
state
returns at no charge.
HRB Bank provides banking services primarily to our tax clients,
both retail and digital, and for many of these clients, HRB Bank
is the only provider of banking services. HRB Bank does not seek
to compete broadly with regional or national retail banks.
GOVERNMENT
REGULATION
–
Federal legislation requires income tax return preparers
to, among other things, set forth their signatures and
identification numbers on all tax returns prepared by them and
retain all tax returns prepared by them for three years. 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 further
acting as income tax return preparers if they continuously and
repeatedly engage in specified misconduct.
The 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 the taxpayer and comply with advertising
standards for electronic filers. We are also subject to possible
monitoring by the IRS, penalties for improper disclosure or use
of income tax return preparation, other preparer penalties and
suspension from the electronic filing program.
The Gramm-Leach-Bliley Act and related Federal Trade Commission
(FTC) regulations require income tax preparers to adopt and
disclose consumer privacy policies, and provide consumers a
reasonable opportunity to “opt-out” of having personal
information disclosed to unaffiliated third-parties for
marketing purposes. Some states have adopted or proposed strict
“opt-in” requirements in connection with use or
disclosure of consumer information. In addition, the IRS
generally prohibits the use or disclosure by tax return
preparers of taxpayer information without the prior written
consent of the taxpayer.
Certain states have regulations and requirements relating to
offering income tax courses. These requirements include
licensing, bonding and certain restrictions on advertising.
The IRS published final regulations in September 2010 that:
(1) require all tax return preparers to use a Preparer Tax
Identification Number (PTIN) as their identifying number on
federal tax returns filed after December 31, 2010;
(2) require all tax return preparers to be authorized to
practice before the IRS as a prerequisite to obtaining or
renewing a PTIN; (3) caused all previously issued PTINs to
expire on December 31, 2010 unless properly renewed;
(4) allow the IRS to conduct tax compliance checks on tax
return preparers; (5) define the individuals who are
considered “tax return preparers” for the PTIN
requirement, and (6) set the amount of the PTIN user
registration fee at $64.25 per year. The IRS is also conducting
background checks on PTIN applicants. The IRS plans to review
the amount of the PTIN user registration fee in the summer of
2011 and may adjust the fee amount. The IRS also published final
regulations implementing the individual
e-file
mandate in March 2011.
Other changes are expected to be finalized in calendar year
2011. These include changes to: (1) establish a new class
of practitioners who are authorized to practice before the IRS
under Circular 230, called “registered tax return
preparers” who would be required to (a) pass a
competency examination as a prerequisite to becoming a
registered tax return preparer, (b) complete annual
continuing professional education requirements, and
(c) comply with ethical standards; (2) revise the
amount of the enrolled agent application and renewal fee;
(3) set the amount of a sponsor fee for qualified
continuing professional education sponsors; (4) set the
amount of
4
H&R
BLOCK 2011 Form 10K
Table of Contents
the competency examination user fee, and (5) set the amount
of the registered tax return preparer application and renewal
fee. The IRS also issued interim guidance for tax preparers,
which includes allowing certain supervised tax preparers to
obtain a PTIN and work on returns without passing a competency
exam.
As noted above under “Offices,” 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 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 offering circular
containing prescribed information. A number of states in which
we are currently franchising regulate the sale of franchises and
require registration of the franchise offering circular with
state authorities and the delivery of a franchise offering
circular to prospective franchisees. 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 substantial 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 offering circular to comply with our disclosure
obligations under federal and state law.
We also seek to determine the applicability of all government
and self-regulatory organization statutes, ordinances, rules and
regulations in the other countries in which we operate
(collectively, Foreign Laws) and to comply with these Foreign
Laws. In addition, the Canadian government regulates the
refund-discounting program in Canada. These laws have not
materially affected our international operations.
HRB Bank is subject to regulation, supervision and examination
by the Office of Thrift Supervision (OTS), the Federal Reserve
and the Federal Deposit Insurance Corporation (FDIC). All
savings associations are subject to the capital adequacy
guidelines and the regulatory framework for prompt corrective
action. HRB Bank must meet specific capital guidelines involving
quantitative measures of HRB Bank’s assets, liabilities and
certain off-balance sheet items as calculated under regulatory
accounting practices. HRB Bank’s capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk-weightings and other factors.
As a savings and loan holding company, H&R Block, Inc. is
also subject to regulation by the OTS.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Reform Act) was signed into law, which
contains a comprehensive set of provisions designed to govern
the practices and oversight of financial institutions and other
participants in the financial markets. The full impact of the
Reform Act is difficult to assess because many provisions
require federal agencies to adopt implementing regulations. In
addition, the Reform Act mandates multiple studies, which could
result in additional legislative or regulatory action. In July
2011, the responsibility and authority of the OTS moves to the
Office of the Comptroller of the Currency (OCC). The Reform Act,
as well as other legislative and regulatory changes, could have
a significant impact on us and on our subsidiary, HRB Bank.
See Item 7, “Regulatory Environment” and
Item 8, note 20 to the consolidated financial
statements for additional discussion of regulatory requirements.
See discussion in Item 1A, “Risk Factors” for
additional information.
BUSINESS
SERVICES
GENERAL
–
Our Business Services segment offers tax, consulting and
accounting services and capital markets services to
middle-market companies. Segment revenues constituted 22.0% of
our consolidated revenues from continuing operations for fiscal
year 2011, 22.2% for fiscal year 2010 and 22.0% for fiscal year
2009.
This segment consists primarily of RSM, which provides tax and
consulting services in 85 cities and 25 states and
offers services in 20 of the 25 top U.S. markets.
Effective July 20, 2010, our Business Services segment
acquired certain non-attest assets and liabilities of
Caturano & Company, Inc. (Caturano), a Boston-based
accounting firm, for an aggregate purchase price of
$40.2 million. We expect this acquisition to expand our
presence in the Boston market. We made cash payments of
$32.6 million, including $29.8 million at closing.
Payment of the remaining purchase price is deferred and will be
paid over the next 13 years. See additional discussion in
Item 8, note 2 to the consolidated financial
statements.
From time to time, we have acquired related businesses and may
continue to do so if future conditions warrant and satisfactory
terms can be negotiated.
ALTERNATIVE
PRACTICE STRUCTURE WITH McGLADREY & PULLEN
LLP
–
McGladrey & Pullen LLP (M&P) is a limited
liability partnership, owned 100% by certified public
accountants (CPAs), which provides attest services to
middle-market clients.
H&R
BLOCK 2011
Form 10K
5
Table of Contents
Under state accountancy regulations, a firm cannot provide
attest services unless it is properly licensed which requires
that the firm be majority-owned and controlled by licensed CPAs.
As such, RSM cannot be a licensed CPA firm and cannot provide
attest services. Since 1999, RSM and M&P have operated in
what is known as an “alternative practice structure”
(APS). Through the APS, RSM and M&P offer clients a full
range of attest and non-attest services in compliance with
applicable accountancy regulations. In fiscal year 2010, RSM and
M&P entered into new agreements related to the operation of
the APS.
An administrative services agreement between RSM and M&P
obligates RSM to provide M&P with administrative services,
information technology, office space, non-professional staff,
and other infrastructure in exchange for market rate fees from
M&P. In addition, the agreement allows for professional
staff to be
sub-contracted
between RSM and M&P at market rates.
All partners of M&P, with the exception of M&P’s
Managing Partner, are also managing directors employed by RSM.
Approximately 84% of RSM’s managing directors are also
partners in M&P. Certain other personnel are also employed
by both M&P and RSM. M&P partners receive
distributions of M&P’s earnings in their capacity as
partners, as well as compensation from RSM in their capacity as
managing directors. Distributions to M&P partners are based
on the profitability of M&P and are not capped by the APS.
Pursuant to the Governance and Operations Agreement, effective
May 1, 2010, the aggregate compensation payable to RSM
managing directors by RSM in any given year generally equals
67 percent of the combined profits of M&P and RSM less
any amounts paid in their capacity as M&P partners.
Historically, RSM followed a similar practice, except that the
compensation pool for managing directors was based on
65 percent of combined profits, less amounts paid to
M&P partners. In practice, this means that variability in
the amounts paid to RSM managing directors under these contracts
can cause variability in RSM’s operating results. RSM is
not entitled to any profits or residual interests of M&P,
nor is it obligated to fund losses or capital deficiencies of
M&P. Managing directors of RSM have historically
participated in stock-based compensation plans of H&R
Block. Beginning in fiscal 2011, participation in those plans
ceased and was replaced by a non-contributory, non-qualified
defined contribution plan.
See additional discussion in Item 8, note 17 to the
consolidated financial statements.
SEASONALITY OF
BUSINESS
–
Revenues for this segment are largely seasonal in nature,
with peak revenues occurring during January through April.
COMPETITIVE
CONDITIONS
–
The tax and consulting business is highly competitive.
The principal methods of competition are price, service and
reputation for quality. There are a substantial number of
accounting firms offering similar services at the international,
national, regional and local levels. As our focus is on
middle-market businesses, our principal competition is with
national and regional accounting firms.
GOVERNMENT
REGULATION
–
Many of the same federal and state regulations relating
to tax preparers and the information concerning tax reform and
tax preparer registration discussed previously in the Tax
Services segment apply to the Business Services segment as well.
RSM is not, and is not eligible to be, a licensed public
accounting firm and takes measures to ensure that it does not
provide any services that require a CPA license. In addition to
tax and consulting services, RSM provides wealth management
services and, through a separate subsidiary, capital market
services. Accordingly, RSM is subject to state and federal
regulations governing investment advisors and securities brokers
and dealers.
M&P and other accounting firms (collectively, the
“Attest Firms”) operate in an alternative practice
structure with RSM. Auditor independence rules of the SEC, the
Public Company Accounting Oversight Board (PCAOB) and various
states apply to the Attest Firms as public accounting firms. In
applying its auditor independence rules, the SEC views RSM and
its affiliates and the Attest Firms as a single entity and
requires that RSM and its affiliates be independent of any SEC
audit client of the Attest Firms. The SEC attributes any
financial interest or business relationship that RSM or its
affiliates has with a client of the Attest Firms as a financial
interest or business relationship between the Attest Firms and
the client, and applies its auditor independence rules
accordingly.
We and the Attest Firms have jointly developed and implemented
policies, procedures and controls designed to ensure the Attest
Firms’ independence is preserved in compliance with
applicable SEC regulations and professional responsibilities.
These policies, procedures and controls are designed to monitor
and prevent violations of applicable independence rules and
include, among other things: (1) informing our officers,
directors and other members of senior management concerning
auditor independence matters; (2) procedures for monitoring
securities ownership; (3) communicating with SEC audit
clients regarding the SEC’s interpretation and application
of relevant independence rules and guidelines; and
(4) requiring RSM employees to comply with the Attest
Firms’ independence and relationship policies (including
the Attest Firms’ independence compliance questionnaire
procedures).
See discussion in Item 1A, “Risk Factors” for
additional information.
6
H&R
BLOCK 2011 Form 10K
Table of Contents
SERVICE MARKS,
TRADEMARKS AND PATENTS
We have made a practice of selling our services and products
under service marks and trademarks and of obtaining protection
for these by all available means. Our service marks and
trademarks are protected by registration 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
business segments providing services and products under the
“H&R Block” brand.
We have no registered patents material to our business.
EMPLOYEES
We have approximately 7,900 regular full-time employees as of
April 30, 2011. The highest number of persons we employed
during the fiscal year ended April 30, 2011, including
seasonal employees, was approximately 107,200.
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.
Copies of the following corporate governance documents are
posted on our website:
| § | 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. Governance and Nominating Committee Charter; and | |
| § | The H&R Block, Inc. Compensation Committee Charter. |
If you would like a printed copy of any of these corporate
governance documents, please send your request to the Office of
the Secretary, H&R Block, Inc., One H&R Block Way,
Kansas City, Missouri 64105.
Information contained on our website does not constitute any
part of this report.
An investment in our common stock involves risk, including the
risk that the value of an investment may decline or that returns
on that investment may fall below expectations. There are a
number of significant factors which 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
forecast or predict, or could adversely affect our operating
results and the value of any investment in our stock.
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 other related activities. Our
access to and the cost of liquidity could be negatively impacted
in the event of credit-rating downgrades or if we fail to meet
existing debt 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
would likely increase and capital market access could decrease
or become unavailable. Our unsecured committed line of credit
(CLOC) is subject to various covenants, including a covenant
requiring that we maintain minimum net worth equal to
$650.0 million and a requirement that we reduce the
aggregate outstanding principal amount of short-term debt (as
defined) to $200.0 million or less for a minimum period of
thirty consecutive days during the period from March 1 to June
30 of each year. Violation of a covenant could impair our access
to liquidity currently available through the CLOC. If current
sources of liquidity were to become unavailable, we would need
to obtain additional sources of funding, which may not be
possible or may be available under less favorable terms.
H&R
BLOCK 2011
Form 10K
7
Table of Contents
We are subject to
potential contingent liabilities related to the loan repurchase
obligations of Sand Canyon Corporation, which may result in
significant financial losses.
Sand Canyon Corporation (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 a securitization.
In connection with the securitization and sale of mortgage
loans, SCC made certain representations and warranties. These
representations and warranties vary based on the nature of the
transaction and the buyer’s requirements but generally
pertain to the ownership of the loan, the property securing the
loan and compliance with applicable laws and SCC underwriting
guidelines. In the event that there is a breach of a
representation and warranty and such breach materially and
adversely affects the value of a mortgage loan, SCC may be
obligated to repurchase a loan or otherwise indemnify certain
parties for losses incurred as a result of loan liquidation. In
some instances, H&R Block, Inc. was required to guarantee
SCC’s obligations related to breaches of representations
and warranties. These representations and warranties and
corresponding repurchase obligations generally are not subject
to stated limits or a stated term, but would be subject to
statutes of limitations applicable to the contractual provisions.
SCC records a liability for contingent losses relating to
representation and warranty claims by estimating loan repurchase
and indemnification obligations for both known claims and
projections of future claims. To the extent that future valid
claim volumes exceed current estimates, or the value of mortgage
loans and residential home prices decline, future losses may be
greater than these estimates and those differences may be
significant. See Item 8, note 18 to the consolidated
financial statements for additional information.
SCC is subject to
potential investigations and lawsuits stemming from its
discontinued mortgage operations, which may result in
significant financial losses.
Although SCC terminated its mortgage loan origination activities
and sold its loan servicing business during fiscal year 2008, it
remains subject to investigations, claims and lawsuits
pertaining to its loan origination and servicing activities
prior to such termination and sale. The costs involved in
defending against
and/or
resolving these investigations, claims and lawsuits may be
substantial in some instances and the ultimate resulting
liability is difficult to predict. In the current non-prime
mortgage environment, the number and frequency of
investigations, claims and lawsuits has increased over
historical experience and is likely to continue at increased
levels. In the event of unfavorable outcomes, the amount SCC may
be required to pay in the discharge of liabilities or
settlements could be substantial and, because SCC’s
operating results are included in our consolidated financial
statements, could have a material adverse impact on our
consolidated results of operations.
Failure to comply
with laws and regulations that protect our customers’
personal and financial information could result in significant
fines, penalties and damages and could harm our brand and
reputation.
Privacy concerns relating to the disclosure of consumer
financial information have drawn increased attention from
federal and state governments. The IRS generally prohibits the
use or disclosure by tax return preparers of taxpayers’
information without the prior written consent of the taxpayer.
In addition, other regulations require financial service
providers to adopt and disclose consumer privacy policies and
provide consumers with a reasonable opportunity to
“opt-out” of having personal information disclosed to
unaffiliated third-parties for marketing purposes. Breaches of
our clients’ privacy may occur. To the extent the measures
we have taken prove to be insufficient or inadequate, we may
become subject to litigation or administrative sanctions, which
could result in significant fines, penalties or damages and harm
to our brand and reputation.
In addition, changes in these federal and state regulatory
requirements could result in more stringent requirements and
could result in a need to change business practices, including
how information is disclosed. Establishing systems and processes
to achieve compliance with these new requirements may increase
costs
and/or
limit our ability to pursue certain business opportunities.
The lines of
business in which we operate face substantial litigation, and
such litigation may damage our reputation or result in material
liabilities and losses.
We,
and/or
our subsidiaries, have been named, from time to time, as a
defendant in various legal actions, including arbitrations,
class actions and other litigation arising in connection with
our various business activities. Adverse outcomes related to
litigation could result in substantial damages and could cause
our earnings to decline. Negative public opinion can also result
from our actual or alleged conduct in such claims, possibly
damaging our reputation and could cause the market price of our
stock to decline. See Item 3, “Legal Proceedings”
for additional information.
8
H&R
BLOCK 2011 Form 10K
Table of Contents
We are subject to
operational risk and risks associated with our controls and
procedures, which may result in incurring financial and
reputational losses.
There is a risk of loss resulting from inadequate or failed
processes or systems, theft or fraud. These can occur in many
forms including, among others, errors, business interruptions
arising from natural disasters or other events, inadequate
design and development of products and services, inappropriate
behavior of or misconduct by our employees or those contracted
to perform services for us, and vendors that do not perform in
accordance with their contractual agreements. These events could
potentially result in financial losses or other damages. We
utilize internally developed processes, internal and external
information and technological systems to manage our operations.
We are exposed to risk of loss resulting from breaches in the
security or other failures of these processes and systems. Our
ability to recover or replace our major operational systems and
processes could have a significant impact on our core business
operations and increase our risk of loss due to disruptions of
normal operating processes and procedures that may occur while
re-establishing or implementing information and transaction
systems and processes. As our businesses are seasonal, our
systems must be capable of processing high volumes during peak
season. Therefore, service interruptions resulting from system
failures could negatively impact our ability to serve our
customers, which in turn could damage our brand and reputation,
or adversely impact our profitability. Additionally, due to the
seasonality of our tax business, we employ a substantial amount
of seasonal tax professionals on an annual basis. If we were
unable to hire a sufficient amount of seasonal tax
professionals, it could negatively impact our ability to serve
customers, which in turn could damage our brand and reputation,
or adversely impact our profitability.
We also face the risk that the design of our controls and
procedures may prove to be inadequate or that our controls and
procedures may be circumvented, thereby causing delays in
detection of errors or inaccuracies in data and information. It
is possible that any lapses in the effective operations of
controls and procedures could materially affect earnings or harm
our reputation. Lapses or deficiencies in internal control over
financial reporting could also be material to us.
Our businesses
may be adversely affected by difficult economic conditions,
particularly if unemployment levels do not improve or continue
to increase.
The difficult economic conditions we are currently experiencing
are frequently characterized by higher unemployment levels and
declining consumer and business spending. Poor economic
conditions may negatively affect demand and pricing for our
services. Higher unemployment levels, especially within client
segments we serve, may result in clients no longer being
required to file tax returns, electing not to file tax returns,
or clients seeking lower cost preparation and filing
alternatives. Continued higher unemployment levels may
negatively impact our ability to increase tax preparation
clients.
In addition to mortgage loans, we also extend secured and
unsecured credit to other customers, including EAs to our tax
clients. We may incur significant losses on credit we extend,
which in turn could reduce our profitability.
Economic
conditions that negatively affect housing prices and the job
market may result in deterioration in credit quality of our loan
portfolio primarily held by HRB Bank, and such deterioration
could have a negative impact on our business and
profitability.
The overall credit quality of mortgage loans held for investment
is impacted by the strength of the U.S. economy and local
economic conditions, including residential housing prices.
Economic trends that negatively affect housing prices and the
job market could result in deterioration in credit quality of
our mortgage loan portfolio and a decline in the value of
associated collateral. Future interest rate resets could also
lead to increased delinquencies in our mortgage loans held for
investment. Trends in the residential mortgage loan market
continue to reflect high loan delinquencies and lower collateral
values. As a result, we recorded loan loss provisions totaling
$35.6 million, $47.8 million and $63.9 million
during fiscal years 2011, 2010 and 2009, respectively.
Our loan portfolio is concentrated in the states of Florida,
California, New York and Wisconsin, which represented 20%, 14%,
17% and 8%, respectively, of our total mortgage loans held for
investment at April 30, 2011. No other state held more than
5% of our loan balances. If adverse trends in the residential
mortgage loan market continue, particularly in geographic areas
in which we own a greater concentration of mortgage loans, we
could incur additional significant loan loss provisions.
Mortgage loans purchased from SCC represent 62% of total loans
held for investment at April 30, 2011. These loans have
experienced higher delinquency rates than other loans in our
portfolio, and may expose us to greater risk of credit loss.
H&R
BLOCK 2011
Form 10K
9
Table of Contents
TAX
SERVICES
Government
initiatives that simplify tax return preparation or expedite
refunds could reduce the need for our services as a third-party
tax return preparer. In addition, changes in government
regulations or processes regarding the preparation and filing of
tax returns and funding of tax refunds may increase our
operating costs or reduce our revenues.
Many taxpayers seek assistance from paid tax return preparers
such as us not only because of the level of complexity involved
in the tax return preparation and filing process, but also
because of paid tax return preparers’ ability to expedite
refund proceeds under certain circumstances. From time to time,
government officials propose measures seeking to simplify the
preparation and filing of tax returns or to provide additional
assistance with respect to preparing and filing such tax returns
or expediting refunds. During tax season 2011, the
U.S. Department of the Treasury (the Treasury) introduced a
prepaid debit card pilot program designed to facilitate the
refund process. HRB Bank provides this service as well through
its H&R Block Prepaid Emerald
MasterCard
®
.
Additionally, during tax season 2011, the IRS increased its
emphasis on a process to allow taxpayers to allocate their
refund to multiple accounts. The adoption or expansion of any
measures that significantly simplify tax return preparation,
expedite refunds or otherwise reduce the need for a third-party
tax return preparer could reduce demand for our services,
causing our revenues or results of operations to decline.
Governmental regulations and processes affect how we provide
services to our clients. Changes in these regulations and
processes may require us to make corresponding changes to our
client service systems and procedures. The degree and timing of
changes in governmental regulations and processes may impair our
ability to serve our clients in an effective and cost-efficient
manner or reduce demand for our services, resulting in the loss
of a significant number of clients, causing our revenues or
results of operations to decline.
Certain regulators have alleged that some of our competitors are
lending tax preparation fees when they issue products similar to
a RAC to their clients. An adverse ruling in this area could
have a material impact on our offering of RACs resulting in the
loss of a significant number of clients, causing our revenues or
results of operations to decline.
Increased
competition for tax preparation clients in our retail offices
and our online and software channels could adversely affect our
current market share and profitability, and could limit our
ability to grow our client base. Offers of free tax preparation
services could adversely affect our revenues and
profitability.
We provide both retail and do-it-yourself tax preparation
products and services and face substantial competition
throughout our businesses. The retail tax services business is
highly competitive. There are a substantial number of tax return
preparation firms and accounting firms offering tax return
preparation services. Many tax return preparation firms and many
firms not otherwise in the tax return preparation business are
involved in providing electronic filing and other related
services to the public, and certain firms provide RALs and RACs.
Commercial tax return preparers and electronic filers are highly
competitive with regard to price and service, and many firms
offer services that may include federal
and/or
state
returns at no charge. Do-it-yourself tax preparation options
include use of traditional paper forms, digital electronic forms
and various forms of digital electronic assistance, including
online and desktop software, both of which we offer. Our digital
tax solutions businesses also compete with in-office tax
preparation services and a number of online and software
companies, primarily on the basis of price and functionality.
Federal and certain state taxing authorities currently offer, or
facilitate the offer of, tax return preparation and electronic
filing options to taxpayers at no charge. In addition, many of
our direct competitors offer certain free online tax preparation
and electronic filing options. We have free offerings as well
and prepared 767,000, 810,000 and 788,000 federal income tax
returns in fiscal years 2011, 2010 and 2009, respectively, at no
charge as part of the FFA. In addition, we have free online tax
preparation offerings and also provided free preparation of
Federal 1040EZ forms in fiscal year 2011. Government tax
authorities and direct competitors may elect to expand free
offerings in the future. Intense price competition, including
offers of free service, could result in a loss of market share,
lower revenues or lower margins.
See tax returns prepared statistics included in Item 7,
under “Tax Services.”
The elimination
of the IRS debt indicator has caused federal and state
regulators to scrutinize the RAL underwriting practices of
third-party financial institutions that provide RALs.
In August 2010, the Internal Revenue Service (IRS) announced
that, as of the beginning of the 2011 tax season, it would no
longer furnish the debt indicator (DI), to tax preparers or
financial institutions. The DI is an underwriting tool that
lenders have historically used when considering whether to loan
money to taxpayers who applied for a RAL, which is a short term
loan, secured by the taxpayer’s federal tax refund.
10
H&R
BLOCK 2011 Form 10K
Table of Contents
In December 2010, HSBC terminated its contract with us to
provide RALs in our retail tax offices based on restrictions
placed on HSBC by its regulators due to the DI no longer being
available. As a result, RALs were not offered in our retail tax
offices in the 2011 tax season. Subsequently, two other banks
offering RALs during the 2011 tax season through our competitors
announced that due to regulatory concerns they will not be
offering RALs next tax season. Additionally, a third bank
offering RALs during the 2011 tax season through our competitors
announced that it was requesting an administrative hearing
regarding a notice it had received from its regulator that its
practice of originating RALs without the DI is “unsafe and
unsound” and has recently filed a lawsuit in federal court
against its regulator. Based on these developments and the
overall limited amount of banks that offer RALs, there can be no
assurances as to the availability of RALs in our retail tax
offices in the future.
Termination of the contract with HSBC and our inability to
secure a RAL originator in the future could continue to have
adverse effects on our operating results, including declines in
tax returns prepared as a result of clients seeking alternate
preparers who may be able to offers RALs, to the extent prior
RAL clients do not purchase a RAC or change their refund
disbursement elections. A decline in clients could have other
adverse impacts, including increased credit losses on loan
balances with those clients.
We are subject to
extensive government regulation, including banking rules and
regulations. If we fail to comply with applicable banking laws,
rules and regulations, we could be subject to disciplinary
actions, damages, penalties or restrictions that could
significantly harm our business.
The OTS can, among other things, censure, fine, issue
cease-and-desist
orders or suspend or expel a bank or any of its officers or
employees with respect to banking activities. Similarly, the
attorneys general of each state could bring legal action on
behalf of the citizens of the various states to ensure
compliance with local laws.
HRB Bank is subject to various regulatory capital requirements
administered by the OTS. Failure to meet minimum capital
requirements may trigger actions by regulators that, if
undertaken, could have a direct material effect on HRB Bank, and
potentially us, as HRB Bank’s holding company. HRB Bank
must meet specific capital guidelines involving quantitative
measures of assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. A
bank’s capital amounts and classification are also subject
to qualitative judgments by the regulators about the strength of
components of its capital, risk-weightings of assets,
off-balance sheet transactions and other factors. Quantitative
measures established by regulation to ensure capital adequacy
require HRB Bank to maintain minimum amounts and ratios of
tangible equity, total risk-based capital and Tier 1
capital. In addition to these minimum ratio requirements, HRB
Bank is required to continually maintain a 12.0% minimum
leverage ratio.
In addition, the OTS may deem certain products offered by HRB
Bank, including EAs, to be “unsafe and unsound” and
thus require us to discontinue offering such products. To the
extent such products are instrumental in attracting clients to
our offices for tax preparation services, we could experience a
significant loss of clients should such products be
discontinued. This could cause our revenues or profitability to
decline. See Item 8, note 20 to the consolidated
financial statements for additional discussion of regulatory
capital requirements and classifications.
Recent
legislative and regulatory reforms may have a significant impact
on our business, results of operations and financial
condition.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Reform Act) was signed into law, which
contains a comprehensive set of provisions designed to govern
the practices and oversight of financial institutions and other
participants in the financial markets.
The full impact of the Reform Act is difficult to assess because
many provisions require federal agencies to adopt implementing
regulations. In addition, the Reform Act mandates multiple
studies, which could result in additional legislative or
regulatory action. The Reform Act, as well as other legislative
and regulatory changes, could have a significant impact on us
and on our subsidiary, HRB Bank, by, for example, requiring us
to change our business practices, requiring us to meet more
stringent capital, liquidity and leverage ratio requirements,
limiting our ability to pursue business opportunities, imposing
additional costs on us, limiting fees we can charge for
services, impacting the value of our assets, or otherwise
adversely affecting our businesses. Specific provisions of the
Reform Act include:
| § | changes to the thrift supervisory structure as the responsibility and authority of the OTS moves to the OCC in July 2011; | |
| § | changes which may require the Company, as a thrift holding company, to meet regulatory capital, liquidity, leverage or other standards; | |
| § | regulation of interchange fees charged by payment card issuers for transactions in which a person uses a debit or general-use prepaid card, and enforcement of a new statutory requirement that such fees be reasonable and proportional to the actual cost of the transaction to the issuer; and |
H&R
BLOCK 2011
Form 10K
11
Table of Contents
| § | establishment of a Consumer Financial Protection Bureau with broad authority to implement new consumer protection regulations. |
The effect of the Reform Act on our business and operations
could be significant, depending upon final implementation of
regulations, the actions of our competitors and the behavior of
other marketplace participants. In addition, we may be required
to invest significant management time and resources to address
the various provisions of the Reform Act and the numerous
regulations that are required to be issued under it. The Reform
Act and any related legislation or regulations could have a
material adverse effect on our business, results of operations
and financial condition.
BUSINESS
SERVICES
RSM receives a
significant portion of its revenues from clients that are also
clients of the Attest Firms. A termination of the alternative
practice structure between RSM and the Attest Firms could result
in a material loss of revenue to RSM and an impairment of our
investment in RSM.
Under the alternative practice structure, RSM and the Attest
Firms market their services and provide services to a
significant number of common clients under a common
brand – McGladrey. RSM also provides operational and
administrative support services to the Attest Firms, including
information technology, office space, non-professional staff,
and other infrastructure in exchange for market rate fees from
M&P. If the RSM/Attest Firms relationship under the
alternative practice structure were terminated, RSM could lose
key employees and clients. In addition, RSM may not be able to
recoup its costs associated with the infrastructure used to
provide the operational and administrative support services to
the Attest Firms. This in turn could result in reduced revenue,
increased costs and reduced earnings and, if sufficiently
significant, impairment of our investment in RSM.
The RSM
alternative practice structure involves relationships with
Attest Firms that are subject to regulatory restrictions and
other constraints. Failure to comply with these restrictions, or
operational difficulties or litigation involving the Attest
Firms, could damage our brand reputation, lead to reduced
earnings and impair our investment in RSM.
RSM’s relationship with the Attest Firms requires
compliance with applicable regulations related to the practice
of public accounting and auditor independence. Many of
RSM’s clients are also clients of the Attest Firms. In
addition, the relationship with the Attest Firms and the common
brand closely links RSM and the Attest Firms. If the Attest
Firms encounter regulatory or independence issues pertaining to
the alternative practice structure or if significant litigation
arose involving the Attest Firms or their services, such
developments could have an adverse effect on our reputation and
the mutual benefits of our relationship. In addition, a
significant judgment or settlement of a claim against an Attest
Firm could (1) impair the Attest Firm’s, particularly
M&P’s, ability to meet its payment obligations under
various service arrangements with RSM, (2) impair the
profitability of the APS, (3) impact RSM’s ability to
attract and retain clients and quality professionals,
(4) have a significant indirect adverse effect on RSM, as
the Attest Firm partners are also RSM employees and
(5) divert significant management attention. This, in turn,
could result in reduced revenue and earnings and, if
significant, impairment of our investment in RSM.
None.
Most of our tax offices, except those in shared locations, are
operated under leases throughout the U.S. Our Canadian
executive offices are located in a leased office in Calgary,
Alberta. Our Canadian tax offices are operated under leases
throughout Canada. Our Australian executive offices are located
in a leased office in Thornleigh, New South Wales. Our
Australian tax offices are operated under leases throughout
Australia. HRB Bank is headquartered and its single branch
location is located in our corporate headquarters.
RSM’s executive offices are located in leased offices in
Bloomington, Minnesota. Its administrative offices are located
in leased offices in Davenport, Iowa. RSM also leases office
space throughout the U.S.
We own our corporate headquarters, which is located in Kansas
City, Missouri. All current leased and owned facilities are in
good repair and adequate to meet our needs.
RAL
Litigation
We have been named in multiple lawsuits as defendants in
litigation regarding our refund anticipation loan program in
past years. All of those lawsuits have been settled or otherwise
resolved, except for one.
12
H&R
BLOCK 2011 Form 10K
Table of Contents
The sole remaining case is a putative class action styled
Sandra J. Basile, et al. v. H&R Block, Inc., et
al.
, April Term 1992 Civil Action No. 3246 in the Court
of Common Pleas, First Judicial District Court of Pennsylvania,
Philadelphia County, instituted on April 23, 1993. The
plaintiffs allege inadequate disclosures with respect to the RAL
product and assert claims for violation of consumer protection
statutes, negligent misrepresentation, breach of fiduciary duty,
common law fraud, usury, and violation of the Truth In Lending
Act. Plaintiffs seek unspecified actual and punitive damages,
injunctive relief, attorneys’ fees and costs. A
Pennsylvania class was certified, but later decertified by the
trial court in December 2003. An appellate court subsequently
reversed the decertification decision. We are appealing the
reversal. We have not concluded that a loss related to this
matter is probable nor have we accrued a loss contingency
related to this matter. Plaintiffs have not provided a dollar
amount of their claim and we are not able to estimate a possible
range of loss. We believe we have meritorious defenses to this
case and intend to defend it vigorously. There can be no
assurances, however, as to the outcome of this case or its
impact on our consolidated results of operations.
Express IRA
Litigation
We have been named defendants in lawsuits regarding our former
Express IRA product. All of those lawsuits have been settled or
otherwise resolved, except for one.
The one remaining case was filed on January 2, 2008 by the
Mississippi Attorney General in the Chancery Court of Hinds
County, Mississippi First Judicial District (Case No. G
2008 6 S 2) and is styled
Jim Hood, Attorney for the
State of Mississippi v. H&R Block, Inc., H&R
Block Financial Advisors, Inc
.,
et al.
The complaint
alleges fraudulent business practices, deceptive acts and
practices, common law fraud and breach of fiduciary duty with
respect to the sale of the product in Mississippi and seeks
equitable relief, disgorgement of profits, damages and
restitution, civil penalties and punitive damages. We are not
able to estimate a possible range of loss. We believe we have
meritorious defenses to the claims in this case, and we intend
to defend this case vigorously, but there can be no assurances
as to its outcome or its impact on our consolidated results of
operations.
Although we sold H&R Block Financial Advisors, Inc. (HRBFA)
effective November 1, 2008, we remain responsible for any
liabilities relating to the Express IRA litigation, among other
things, through an indemnification agreement. A portion of our
accrual is related to these indemnity obligations.
RSM McGladrey
Litigation
RSM EquiCo, Inc. (RSM Equico), its parent and certain of its
subsidiaries and affiliates, are parties to a class action filed
on July 11, 2006 and styled
Do Right’s Plant
Growers, et al. v. RSM EquiCo, Inc., et al. (the “RSM
Parties”),
Case No. 06 CC00137, in the California
Superior Court, Orange County. The complaint contains
allegations relating to business valuation services provided by
RSM EquiCo, including allegations of fraud, conversion and
unfair competition. Plaintiffs seek unspecified actual and
punitive damages, in addition to pre-judgment interest and
attorneys’ fees. On March 17, 2009, the court granted
plaintiffs’ motion for class certification on all claims.
To avoid the cost and inherent risk associated with litigation,
the parties have reached an agreement in principle to settle
this case, subject to approval by the California Superior Court.
The settlement would require a maximum payment of
$41.5 million, although the actual cost of the settlement
depends on the number of valid claims submitted by class
members. The defendants believe they have meritorious defenses
to the claims in this case and, if for any reason the settlement
is not approved, they will continue to defend the case
vigorously. Although we have recorded a liability for expected
losses, there can be no assurance regarding the outcome of this
matter.
On December 7, 2009, a lawsuit was filed in the Circuit
Court of Cook County, Illinois (2010-L-014920) against M&P,
RSM and H&R Block styled
Ronald R. Peterson ex rel.
Lancelot Investors Fund, L.P., et al. v.
McGladrey & Pullen LLP, et al.
The case was
removed to the United States District Court for the Northern
District of Illinois on December 28, 2009 (Case
No. 1:10-CV-00274).
The complaint, which was filed by the trustee for certain
bankrupt investment funds, seeks unspecified damages and asserts
claims against RSM for vicarious liability and alter ego
liability and against H&R Block for equitable restitution
relating to audit work performed by M&P. The amount claimed
in this case is substantial. On November 3, 2010, the court
dismissed the case against all defendants in its entirety with
prejudice. The trustee has filed an appeal to the Seventh
Circuit Court of Appeals with respect to the claims against
M&P and RSM. The appeal remains pending.
RSM and M&P operate in an alternative practice structure
(“APS”). Accordingly, certain claims and lawsuits
against M&P could have an impact on RSM. More specifically,
any judgments or settlements arising from claims and lawsuits
against M&P that exceed its insurance coverage could have a
direct adverse effect on M&P’s operations. Although
RSM is not responsible for the liabilities of M&P,
significant M&P litigation and claims could impair the
profitability of the APS and impair the ability to attract and
retain clients and quality professionals. This could, in turn,
have a material effect on RSM’s operations and impair the
value of our investment in RSM. There is no assurance regarding
the outcome of any claims or litigation involving M&P.
H&R
BLOCK 2011
Form 10K
13
Table of Contents
Litigation and
Claims Pertaining to Discontinued Mortgage Operations
Although mortgage loan origination activities were terminated
and the loan servicing business was sold during fiscal year
2008, SCC and HRB remain subject to investigations, claims and
lawsuits pertaining to its mortgage business activities that
occurred prior to such termination and sale. These
investigations, claims and lawsuits include actions by state
attorneys general, other state and federal regulators,
municipalities, individual plaintiffs, and cases in which
plaintiffs seek to represent a class of others alleged to be
similarly situated. Among other things, these investigations,
claims and lawsuits allege discriminatory or unfair and
deceptive loan origination and servicing practices, fraud, and
violations of securities laws, the Truth in Lending Act, Equal
Credit Opportunity Act and the Fair Housing Act. Given the
non-prime mortgage environment, the number of these
investigations, claims and lawsuits has increased over
historical experience and is likely to continue at increased
levels. The amounts claimed in these investigations, claims and
lawsuits are substantial in some instances, and the ultimate
resulting liability is difficult to predict and thus cannot be
reasonably estimated. In the event of unfavorable outcomes, the
amounts that may be required to pay in the discharge of
liabilities or settlements could be substantial and could have a
material impact on our consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a
lawsuit in the Superior Court of Suffolk County, Massachusetts
(Case
No. 08-2474-BLS)
styled
Commonwealth of Massachusetts v. H&R Block,
Inc., et al.,
alleging unfair, deceptive and discriminatory
origination and servicing of mortgage loans and seeking
equitable relief, disgorgement of profits, restitution and
statutory penalties. In November 2008, the court granted a
preliminary injunction limiting the ability of the owner of
SCC’s former loan servicing business to initiate or advance
foreclosure actions against certain loans originated by SCC or
its subsidiaries without (1) advance notice to the
Massachusetts Attorney General and (2) if the Attorney
General objects to foreclosure, approval by the court. An appeal
of the preliminary injunction was denied. A portion of our loss
contingency accrual is related to this matter for the amount of
loss that we consider probable and estimable. We do not believe
losses in excess of our accrual would be material to our
financial statements, although it is possible that our losses
could exceed the amount we have accrued. We and SCC believe we
have meritorious defenses to the claims presented and intend to
defend them vigorously. There can be no assurances, however, as
to the outcome of this matter or its impact on our consolidated
results of operations.
On October 15, 2010, the Federal Home Loan Bank of Chicago
filed a lawsuit in the Circuit Court of Cook County, Illinois
(Case No. 10CH45033) styled
Federal Home Loan Bank of
Chicago v. Bank of America Funding Corporation, et al.
against multiple defendants, including various SCC related
entities and H&R Block, Inc. related entities, arising out
of Federal Home Loan Bank’s (FHLB’s) purchase of
mortgage-backed securities. Plaintiff asserts claims for
rescission and damages under state securities law and for common
law negligent misrepresentation in connection with its purchase
of two securities originated and securitized by SCC. These two
securities had a total initial principal amount of approximately
$50 million, of which approximately $42 million
remains outstanding. We have not concluded that a loss related
to this matter is probable nor have we established a loss
contingency related to this matter. We believe the claims in
this case are without merit and we intend to defend them
vigorously. There can be no assurances, however, as to its
outcome or its impact on our consolidated results of operations.
Other Claims and
Litigation
We have been named in several wage and hour class action
lawsuits throughout the country, including
Alice
Williams v. H&R Block Enterprises LLC
, Case
No.RG08366506 (Superior Court of California, County of Alameda,
filed January 17, 2008) (alleging improper classification
of office managers in California);
Arabella Lemus v.
H&R Block Enterprises LLC, et al.,
Case
No. CGC-09-489251
(United States District Court, Northern District of California,
filed June 9, 2009) (alleging failure to timely pay
compensation to tax professionals in California and to include
itemized information on wage statements);
Delana Ugas v.
H&R Block Enterprises LLC, et al.,
Case
No. BC417700 (United States District Court, Central
District of California, filed July 13, 2009) (alleging
failure to compensate tax professionals in California and
eighteen other states for all hours worked and to provide meal
periods); and
Barbara Petroski v. H&R Block Eastern
Enterprises, Inc., et al.,
Case
No. 10-CV-00075
(United States District Court, Western District of Missouri,
filed January 25, 2010) (alleging failure to compensate tax
professionals nationwide for off-season training). A class was
certified in the
Lemus
case in December 2010 (consisting
of tax professionals who worked in company-owned offices in
California from 2007 to 2010) and in the
Williams
case in March 2011 (consisting of office managers who worked
in company-owned offices in California from 2004 to 2011). A
conditional class was certified in the
Petroski
case in
March 2011 (consisting of tax professionals who were not
compensated for certain training courses occurring on or after
April 15, 2007).
The plaintiffs in the wage and hour class action lawsuits seek
actual damages, pre-judgment interest and attorneys’ fees,
in addition to statutory penalties under California and federal
law, which could equal up to 30 days
14
H&R
BLOCK 2011 Form 10K
Table of Contents
of wages per tax season for class
members who worked in California. A portion of our loss
contingency accrual is related to these lawsuits for the amount
of loss that we consider probable and estimable. For those wage
and hour class action lawsuits for which we are able to estimate
a range of possible loss, the current estimated range is $0 to
$70 million in excess of the accrued liability related to
those matters. This estimated range of possible loss is based
upon currently available information and is subject to
significant judgment and a variety of assumptions and
uncertainties. The matters underlying the estimated range will
change from time to time, and actual results may vary
significantly from the current estimate. Because this estimated
range does not include matters for which an estimate is not
possible, the range does not represent our maximum loss exposure
for the wage and hour class action lawsuits. We believe we have
meritorious defenses to the claims in these lawsuits and intend
to defend them vigorously. The amounts claimed in these matters
are substantial in some instances and the ultimate liability
with respect to these matters is difficult to predict. There can
be no assurances as to the outcome of these cases or their
impact on our consolidated results of operations, individually
or in the aggregate.
In October 2010, we signed a definitive merger agreement to
acquire all of the outstanding shares of 2SS Holdings, Inc.
(“2SS”), developer of TaxACT digital tax preparation
solutions, for $287.5 million in cash. In May 2011, the
United States Department of Justice (the “DOJ”) filed
a civil antitrust lawsuit in the U.S. district court in
Washington, D.C., (Case
No. 1:11-cv-00948)
against H&R Block and 2SS styled
United States v.
H&R Block, Inc., 2SS Holdings, Inc., and TA IX L.P.,
to
block our proposed acquisition of 2SS. There are no assurances
that the DOJ’s lawsuit will be resolved in our favor or
that the transaction will be consummated.
In addition, we are from time to time party to investigations,
claims and lawsuits not discussed herein arising out of our
business operations. These investigations, claims and lawsuits
include actions by state attorneys general, other state
regulators, individual plaintiffs, and cases in which plaintiffs
seek to represent a class of others similarly situated. We
believe we have meritorious defenses to each of these
investigations, claims and lawsuits, and we are defending or
intend to defend them vigorously. The amounts claimed in these
matters are substantial in some instances, however, the ultimate
liability with respect to such matters is difficult to predict.
In the event of an unfavorable outcome, the amounts we may be
required to pay in the discharge of liabilities or settlements
could have a material impact on our consolidated results of
operations.
We are also party to claims and lawsuits that we consider to be
ordinary, routine litigation incidental to our business,
including claims and lawsuits (collectively, “Other
Claims”) concerning the preparation of customers’
income tax returns, the fees charged customers for various
products and services, relationships with franchisees,
intellectual property disputes, employment matters and contract
disputes. While we cannot provide assurance that we will
ultimately prevail in each instance, we believe the amount, if
any, we are required to pay in the discharge of liabilities or
settlements in these Other Claims will not have a material
impact on our consolidated results of operations.
H&R
BLOCK 2011
Form 10K
15
Table of Contents
| ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
H&R Block’s common stock is traded on the New York
Stock Exchange (NYSE) under the symbol HRB. On May 31,
2011, there were 22,982 shareholders of record and the
closing stock price on the NYSE was $16.20 per share.
The quarterly information regarding H&R Block’s common
stock prices and dividends appears in Item 8, note 22
to our consolidated financial statements.
A summary of our securities authorized for issuance under equity
compensation plans as of April 30, 2011 is as follows:
| (in 000s, except per share amounts) | ||||||||||||||
|
|
||||||||||||||
|
Number of
securities
|
Weighted-average
|
Number of securities
remaining
|
||||||||||||
|
to be issued upon
|
exercise price of
|
available for future
issuance under
|
||||||||||||
|
exercise of
options
|
outstanding
options
|
equity compensation
plans (excluding
|
||||||||||||
| warrants and rights | warrants and rights | securities reflected in the first column) | ||||||||||||
|
|
||||||||||||||
|
Equity compensation plans approved by security holders
|
10,650 | $ | 18.71 | 11,476 | ||||||||||
|
Equity compensation plans not approved by security holders
|
– | – | – | |||||||||||
|
Total
|
10,650 | $ | 18.71 | 11,476 | ||||||||||
|
|
||||||||||||||
The remaining information called for by this item relating to
“Securities Authorized for Issuance under Equity
Compensation Plans” is reported in Item 8,
note 14 to our consolidated financial statements.
A summary of our purchases of H&R Block common stock during
the fourth quarter of fiscal year 2011 is as follows:
| (in 000s, except per share amounts) | ||||||||||||||||||
|
|
||||||||||||||||||
|
Average
|
Total Number of
Shares
|
Maximum Dollar Value
of
|
||||||||||||||||
|
Total Number of
|
Price Paid
|
Purchased as Part of
Publicly
|
Shares that May be
Purchased
|
|||||||||||||||
| Shares Purchased (1) | per Share | Announced Plans or Programs (2) | Under the Plans or Programs (2) | |||||||||||||||
|
|
||||||||||||||||||
|
February 1 – February 28
|
1 | $ | 12.67 | – | $ | 1,371,957 | ||||||||||||
|
March 1 – March 31
|
– | $ | 14.70 | – | $ | 1,371,957 | ||||||||||||
|
April 1 – April 30
|
2 | $ | 17.31 | – | $ | 1,371,957 | ||||||||||||
|
|
||||||||||||||||||
| (1) | All share purchases above were purchased in connection with funding employee income tax withholding obligations arising upon the exercise of stock options or the lapse of restrictions on restricted shares. |
| (2) | In June 2008, our Board of Directors rescinded the previous authorizations to repurchase shares of our common stock, and approved an authorization to purchase up to $2.0 billion of our common stock through June 2012. |
16
H&R
BLOCK 2011 Form 10K
Table of Contents
PERFORMANCE
GRAPH –
The following graph compares the
cumulative five-year total return provided shareholders on
H&R Block, Inc.’s common stock relative to the
cumulative total returns of the S&P 500 index and the
S&P Diversified Commercial & Professional
Services index. 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, 2006, and its relative
performance is tracked through April 30, 2011.
| ITEM 6. | SELECTED FINANCIAL DATA |
We derived the selected consolidated financial data presented
below as of and for each of the five years in the period ended
April 30, 2011, from our audited consolidated financial
statements. Results of operations of fiscal years 2011, 2010 and
2009 are discussed in Item 7. Results of operations for
fiscal years 2008 and 2007 included significant losses of our
discontinued mortgage businesses. The data set forth below
should be read in conjunction with Item 7 and our
consolidated financial statements in Item 8.
| (in 000s, except per share amounts) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||
| April 30, | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||||
|
|
||||||||||||||||||||||
|
Revenues
|
$ | 3,774,296 | $ | 3,874,332 | $ | 4,083,577 | $ | 4,086,630 | $ | 3,710,362 | ||||||||||||
|
Net income from continuing operations
|
419,405 | 488,946 | 513,055 | 445,947 | 369,460 | |||||||||||||||||
|
Net income (loss)
|
406,110 | 479,242 | 485,673 | (308,647 | ) | (433,653 | ) | |||||||||||||||
|
Basic earnings (loss) per share:
|
||||||||||||||||||||||
|
Net income from continuing operations
|
$ | 1.35 | $ | 1.47 | $ | 1.53 | $ | 1.37 | $ | 1.14 | ||||||||||||
|
Net income (loss)
|
1.31 | 1.44 | 1.45 | (0.95 | ) | (1.35 | ) | |||||||||||||||
|
Diluted earnings (loss) per share:
|
||||||||||||||||||||||
|
Net income from continuing operations
|
$ | 1.35 | $ | 1.46 | $ | 1.53 | $ | 1.35 | $ | 1.13 | ||||||||||||
|
Net income (loss)
|
1.31 | 1.43 | 1.45 | (0.95 | ) | (1.33 | ) | |||||||||||||||
|
Total assets
|
$ | 5,207,961 | $ | 5,234,318 | $ | 5,359,722 | $ | 5,623,425 | $ | 7,544,050 | ||||||||||||
|
Long-term debt
|
1,049,754 | 1,035,144 | 1,032,122 | 1,031,784 | 537,134 | |||||||||||||||||
|
Dividends per
share
(1)
|
$ | 0.45 | $ | 0.75 | $ | 0.59 | $ | 0.56 | $ | 0.53 | ||||||||||||
|
|
||||||||||||||||||||||
| (1) | Amounts represent dividends declared. In fiscal year 2010, the dividend payable in July 2010 was declared in April. |
H&R
BLOCK 2011
Form 10K
17
Table of Contents
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Our subsidiaries provide tax preparation, retail banking and
various business advisory and consulting services. We are the
only major company offering a full range of software, online and
in-office tax preparation solutions to individual tax clients.
OVERVIEW
A summary of our fiscal year 2011 results is as follows:
| § | Revenues for the fiscal year were $3.8 billion, down 2.6% from prior year results. | |
| § | Diluted earnings per share from continuing operations decreased 7.5% from the prior year to $1.35. | |
| § | U.S. tax returns prepared by us increased 6.5% from the prior year primarily due to strong results in our retail offices related to a free Federal 1040 EZ offer during the first half of the season as well as improved results during the second half. Online results also improved due to enhancements to our client interface and improved traffic to our website. | |
| § | Revenues in our Tax Services segment decreased 2.1% from the prior year, primarily due to the sale of 280 company-owned offices to franchisees and a decline in revenues from RAL participations, which were partially offset by higher RAC fees. | |
| § | Pretax income for the Tax Services segment decreased $99.9 million, or 11.5%, due primarily to a $34.3 million increase in bad debt expense, goodwill impairment of $22.7 million and litigation charges of $15.0 million. | |
| § | Pretax income for the Business Services segment decreased $9.7 million, or 16.5%, primarily due to lower revenues and higher litigation expenses, partially offset by a goodwill impairment charge recorded in the prior year. |
|
|
||||||||||||||
| Consolidated Results of Operations Data | (in 000s, except per share amounts) | |||||||||||||
|
|
||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||
|
|
||||||||||||||
|
REVENUES:
|
||||||||||||||
|
Tax Services
|
$ | 2,912,361 | $ | 2,975,252 | $ | 3,132,077 | ||||||||
|
Business Services
|
829,794 | 860,349 | 897,809 | |||||||||||
|
Corporate and eliminations
|
32,141 | 38,731 | 53,691 | |||||||||||
|
|
||||||||||||||
| $ | 3,774,296 | $ | 3,874,332 | $ | 4,083,577 | |||||||||
|
|
||||||||||||||
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES:
|
||||||||||||||
|
Tax Services
|
$ | 767,498 | $ | 867,362 | $ | 927,048 | ||||||||
|
Business Services
|
49,003 | 58,714 | 96,097 | |||||||||||
|
Corporate and eliminations
|
(139,476 | ) | (141,941 | ) | (183,775 | ) | ||||||||
|
|
||||||||||||||
| 677,025 | 784,135 | 839,370 | ||||||||||||
|
Income taxes
|
257,620 | 295,189 | 326,315 | |||||||||||
|
|
||||||||||||||
|
Net income from continuing operations
|
419,405 | 488,946 | 513,055 | |||||||||||
|
Net loss of discontinued operations
|
(13,295 | ) | (9,704 | ) | (27,382 | ) | ||||||||
|
|
||||||||||||||
|
Net income
|
$ | 406,110 | $ | 479,242 | $ | 485,673 | ||||||||
|
|
||||||||||||||
|
BASIC EARNINGS (LOSS) PER SHARE:
|
||||||||||||||
|
Net income from continuing operations
|
$ | 1.35 | $ | 1.47 | $ | 1.53 | ||||||||
|
Net loss of discontinued operations
|
(0.04 | ) | (0.03 | ) | (0.08 | ) | ||||||||
|
|
||||||||||||||
|
Net income
|
$ | 1.31 | $ | 1.44 | $ | 1.45 | ||||||||
|
|
||||||||||||||
|
DILUTED EARNINGS (LOSS) PER SHARE:
|
||||||||||||||
|
Net income from continuing operations
|
$ | 1.35 | $ | 1.46 | $ | 1.53 | ||||||||
|
Net loss of discontinued operations
|
(0.04 | ) | (0.03 | ) | (0.08 | ) | ||||||||
|
|
||||||||||||||
|
Net income
|
$ | 1.31 | $ | 1.43 | $ | 1.45 | ||||||||
|
|
||||||||||||||
|
|
||||||||||||||
18
H&R
BLOCK 2011 Form 10K
Table of Contents
RESULTS OF
OPERATIONS
TAX
SERVICES
This segment primarily consists of our income tax preparation
businesses — retail, online and software. This segment
includes our tax operations in the U.S. and its
territories, Canada, and Australia. Additionally, this segment
includes the product offerings and activities of HRB Bank that
primarily support the tax network, RACs, our prior
participations in RALs, and our commercial tax business, which
provides tax preparation software to CPAs and other tax
preparers.
| Tax Services – Operating Statistics | ||||||||||||
|
|
||||||||||||
| (in 000s, except average fee) | ||||||||||||
|
|
||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||
|
|
||||||||||||
|
TAX RETURNS PREPARED :
|
||||||||||||
|
United States:
|
||||||||||||
|
Company-owned operations
|
9,168 | 9,182 | 10,231 | |||||||||
|
Franchise operations
|
5,588 | 5,064 | 4,936 | |||||||||
|
|
||||||||||||
|
Total retail operations
|
14,756 | 14,246 | 15,167 | |||||||||
|
|
||||||||||||
|
Software
|
2,201 | 2,193 | 2,309 | |||||||||
|
Online
|
3,722 | 2,893 | 2,775 | |||||||||
|
Free File Alliance
|
767 | 810 | 788 | |||||||||
|
|
||||||||||||
|
Total digital tax solutions
|
6,690 | 5,896 | 5,872 | |||||||||
|
|
||||||||||||
|
Total U.S. operations
|
21,446 | 20,142 | 21,039 | |||||||||
|
International operations
(1)
|
3,055 | 3,019 | 2,864 | |||||||||
|
|
||||||||||||
| 24,501 | 23,161 | 23,903 | ||||||||||
|
|
||||||||||||
|
NET AVERAGE FEE PER U.S. TAX RETURN PREPARED –
RETAIL OPERATIONS
(2)
:
|
||||||||||||
|
Company-owned operations
|
$ | 189.73 | $ | 197.42 | $ | 196.16 | ||||||
|
Franchise operations
|
171.86 | 174.32 | 169.04 | |||||||||
|
|
||||||||||||
| $ | 182.96 | $ | 189.21 | $ | 187.36 | |||||||
|
|
||||||||||||
|
|
||||||||||||
| (1) | In fiscal year 2011, the end of the Canadian tax season was extended from April 30 to May 2, 2011. Tax returns prepared in our international operations in fiscal year 2011 includes 51,000 returns in both company-owned and franchise offices which were accepted by the client on May 1 or 2. The revenues related to these returns will be recognized in fiscal year 2012. |
| (2) | Calculated as net tax preparation fees divided by retail tax returns prepared. |
|
|
||||||||||||
| Tax Services – Financial Results | (dollars in 000s) | |||||||||||
|
|
||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||
|
|
||||||||||||
|
Tax preparation fees
|
$ | 1,914,876 | $ | 1,991,989 | $ | 2,154,822 | ||||||
|
Royalties
|
304,194 | 275,559 | 255,536 | |||||||||
|
Fees from refund anticipation checks
|
181,661 | 87,541 | 100,021 | |||||||||
|
Interest income on Emerald Advance
|
94,300 | 77,882 | 91,010 | |||||||||
|
Fees from Emerald Card activities
|
90,451 | 99,822 | 98,031 | |||||||||
|
Fees from Peace of Mind guarantees
|
78,413 | 79,888 | 78,205 | |||||||||
|
Loan participation fees and related revenue
|
17,151 | 146,160 | 139,770 | |||||||||
|
Other
|
231,315 | 216,411 | 214,682 | |||||||||
|
|
||||||||||||
|
Total revenues
|
2,912,361 | 2,975,252 | 3,132,077 | |||||||||
|
|
||||||||||||
|
Compensation and benefits:
|
||||||||||||
|
Field wages
|
692,561 | 713,792 | 757,835 | |||||||||
|
Other wages
|
133,183 | 111,326 | 117,291 | |||||||||
|
Benefits and other compensation
|
162,544 | 175,904 | 167,005 | |||||||||
|
|
||||||||||||
| 988,288 | 1,001,022 | 1,042,131 | ||||||||||
|
Occupancy and equipment
|
385,130 | 410,709 | 412,335 | |||||||||
|
Marketing and advertising
|
242,538 | 233,748 | 226,483 | |||||||||
|
Bad debt
|
139,059 | 104,716 | 112,032 | |||||||||
|
Depreciation and amortization
|
90,672 | 93,424 | 79,543 | |||||||||
|
Supplies
|
42,300 | 49,781 | 52,438 | |||||||||
|
Goodwill impairment
|
22,700 | – | 2,188 | |||||||||
|
Other
|
279,277 | 263,556 | 292,795 | |||||||||
|
Gains on sale of tax offices
|
(45,101 | ) | (49,066 | ) | (14,916 | ) | ||||||
|
|
||||||||||||
|
Total expenses
|
2,144,863 | 2,107,890 | 2,205,029 | |||||||||
|
|
||||||||||||
|
Pretax income
|
$ | 767,498 | $ | 867,362 | $ | 927,048 | ||||||
|
|
||||||||||||
|
Pretax margin
|
26.4% | 29.2% | 29.6% | |||||||||
H&R
BLOCK 2011
Form 10K
19
Table of Contents
FISCAL 2011
COMPARED TO FISCAL
2010
–
Tax
Services’ revenues decreased $62.9 million, or 2.1%,
compared to the prior year. Tax preparation fees decreased
$77.1 million, or 3.9%, due primarily to the sale of
company-owned offices to franchisees and the loss of certain
clients as a result of not having a RAL offering in our tax
offices this year. Although we believe we gained clients through
the free Federal EZ filing we began offering this year, that
increase did not have a significant impact on our
revenues.
Royalties increased $28.6 million, or 10.4%, primarily due
to the conversion of 280 company-owned offices into
franchises.
Fees earned on RACs increased $94.1 million, or 107.5%,
primarily due to an increase in the number of RACs issued as a
portion of our clients chose to receive their refunds via RAC,
as an alternative to a RAL.
RALs were historically offered to our clients by HSBC. In
December 2010, HSBC terminated its contract with us based on
restrictions placed on HSBC by its regulator and, therefore,
RALs were not offered this tax season. Current year revenues of
$17.2 million include the recognition of net deferred fees
from HSBC. This compares with revenues resulting from loans
participations and related fees in the prior year of
$146.2 million.
Interest income earned on EAs increased $16.4 million, or
21.1%, over the prior year primarily due to an increase in loan
volume, which resulted from offering the product to a wider
client base.
Other revenue increased $14.9 million, or 6.9%, primarily
due to an increase in online revenues.
Total expenses increased $37.0 million, or 1.8%, compared
to the prior year. Compensation and benefits decreased
$12.7 million, or 1.3%, primarily due to lower
commission-based wages due to conversions to franchise offices,
reduced headcount and related payroll taxes. This decline was
partially offset by severance costs and related payroll taxes of
$27.4 million. Occupancy costs declined $25.6 million,
or 6.2%, due to office closures and cost-saving initiatives. Bad
debt expense increased $34.3 million, or 32.8%, primarily
due to increased volumes on EAs, as well as a decline in tax
returns prepared for those clients. During the current year, we
recorded a $22.7 million impairment of goodwill in our
RedGear reporting unit, as discussed in Item 8, note 9
to the consolidated financial statements. Other expenses
increased $15.7 million, or 6.0%, primarily due to
incremental litigation expenses recorded in the current year.
Pretax income for fiscal year 2011 decreased $99.9 million,
or 11.5%, from 2010. As a result of the declines in revenues and
higher expenses, primarily bad debt expense and goodwill
impairment, pretax margin for the segment decreased to 26.4%
from 29.2% in fiscal year 2010.
FISCAL 2010
COMPARED TO FISCAL
2009
–
Tax
Services’ revenues decreased $156.8 million, or 5.0%,
compared to fiscal year 2009. Tax preparation fees decreased
$162.8 million, or 7.6%, due to a 10.3% decrease in
U.S. retail tax returns prepared in company-owned offices,
partially offset by a 0.6% increase in the net average fee per
U.S. retail tax return. Adjusting for the effect of
company-owned offices sold to franchisees during fiscal year
2010, the decline in tax returns prepared in company-owned
offices was 6.7% from fiscal 2009 to 2010. The 6.7% decrease in
U.S. retail tax returns prepared in company-owned offices
is primarily due to the following factors:
| § | Tax returns filed with the IRS declined 1.7%. | |
| § | Lower employment levels disproportionately impacted our key client segments. Fourth quarter 2009 unemployment levels ranged from 15-30%, far in excess of national unemployment levels for key client segments. | |
| § | We closed certain under-performing offices and exited offices serving clients in Wal-Mart locations. We believe that tax returns prepared declined by approximately 1% (net of client retention through other office locations) as a result of these office closures. |
Royalties increased $20.0 million, or 7.8%, due to the
conversion of 267 company-owned offices into franchises,
partially offset by a decline in tax returns prepared in
existing franchise offices.
Interest income on EAs decreased $13.1 million, or 14.4%.
This decline was primarily a result of lower loan volumes due to
these lines of credit only being offered to prior year tax
clients in fiscal year 2010, while being offered to both prior
and new clients in fiscal year 2009.
Total expenses decreased $97.1 million, or 4.4%, compared
to fiscal year 2009. Total compensation and benefits decreased
$41.1 million, or 3.9%, primarily as a result of lower
commission-based wages due to the decline in the number of tax
returns prepared. Bad debt expense decreased $7.3 million,
or 6.5%, primarily as a result of lower EA and RAL volumes, and
more restrictive underwriting criteria. Depreciation and
amortization expenses increased $13.9 million, or 17.5%,
primarily as a result of amortization of intangible assets,
related to the November 2008 acquisition of our last major
independent franchise operator. Other expenses decreased
$31.4 million, or 10.7%, primarily as a result of lower
legal expenses. During fiscal year 2010 we recognized gains of
$49.1 million on the sale of certain company-owned offices
to franchisees, compared to $14.9 million in fiscal year
2009.
Pretax income for fiscal year 2010 decreased $59.7 million,
or 6.4%, from 2009. As a result of the declines in revenues,
pretax margin for the segment decreased from 29.6% in fiscal
year 2009, to 29.2% in fiscal year 2010.
20
H&R
BLOCK 2011 Form 10K
Table of Contents
BUSINESS
SERVICES
This segment consists of RSM McGladrey, Inc. (RSM), a national
firm offering tax, consulting and accounting services, and
capital market services to middle-market companies.
| Business Services – Operating Results | ||||||||||||
|
|
||||||||||||
| (dollars in 000s) | ||||||||||||
|
|
||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||
|
|
||||||||||||
|
Tax services
|
$ | 465,406 | $ | 454,551 | $ | 484,825 | ||||||
|
Business consulting
|
243,189 | 260,339 | 246,724 | |||||||||
|
Accounting services
|
38,903 | 47,706 | 52,496 | |||||||||
|
Capital markets
|
12,243 | 11,855 | 18,220 | |||||||||
|
Reimbursed expenses
|
19,910 | 22,929 | 19,863 | |||||||||
|
Other
|
50,143 | 62,969 | 75,681 | |||||||||
|
|
||||||||||||
|
Total revenues
|
829,794 | 860,349 | 897,809 | |||||||||
|
|
||||||||||||
|
Compensation and benefits
|
552,775 | 574,901 | 588,866 | |||||||||
|
Occupancy
|
48,274 | 49,154 | 49,070 | |||||||||
|
Depreciation
|
18,970 | 21,122 | 22,626 | |||||||||
|
Marketing and advertising
|
20,914 | 18,960 | 23,803 | |||||||||
|
Amortization of intangible assets
|
11,563 | 11,639 | 13,018 | |||||||||
|
Litigation
|
39,317 | 19,968 | 6,712 | |||||||||
|
Other
|
88,978 | 105,891 | 97,617 | |||||||||
|
|
||||||||||||
|
Total expenses
|
780,791 | 801,635 | 801,712 | |||||||||
|
|
||||||||||||
|
Pretax income
|
$ | 49,003 | $ | 58,714 | $ | 96,097 | ||||||
|
|
||||||||||||
|
Pretax margin
|
5.9% | 6.8% | 10.7% | |||||||||
|
|
||||||||||||
FISCAL 2011
COMPARED TO FISCAL 2010
– Business
Services’ revenues decreased $30.6 million, or 3.6%,
from the prior year. Tax services revenues increased primarily
as a result of the acquisition of Caturano, as discussed in
Item 8, note 2 to the consolidated financial
statements. Business consulting revenues declined
$17.2 million, or 6.6%, primarily due to a decline in
services performed on a large multi-year engagement in our
consulting practice.
Other revenues declined $12.8 million, or 20.4%, primarily
as a result of a reduction in management fees received related
to the new administrative services agreement with M&P, as
discussed in Item 8, note 17 to the consolidated
financial statements.
Total expenses decreased $20.8 million, or 2.6%, from the
prior year. Compensation and benefits decreased
$22.1 million, or 3.8%, primarily due to a reduction of
costs directly related to the large multi-year consulting
engagement discussed above and reduced spend on employee
insurance benefits. Litigation expenses increased
$19.3 million, or 96.9%, over the prior year. Other
expenses declined $16.9 million, or 16.0%, primarily due to
an impairment of goodwill recorded in the prior year.
Pretax income for the year ended April 30, 2011 of
$49.0 million compares to $58.7 million in the prior
year. Pretax margin for the segment decreased to 5.9% from 6.8%
in fiscal year 2010, primarily due to litigation costs.
FISCAL 2010
COMPARED TO FISCAL
2009
–
Business
Services’ revenues for fiscal year 2010 decreased
$37.5 million, or 4.2%, from fiscal year 2009. Revenues
from core tax, consulting and accounting services decreased
$21.4 million, or 2.7%, from fiscal year 2009. Tax and
accounting services revenues decreased $30.3 million and
$4.8 million, respectively, primarily due to decreases in
chargeable hours and pressures on billable rates. Business
consulting revenues increased $13.6 million, or 5.5%,
primarily due to a large engagement in our operational
consulting practice.
Continued weak economic conditions in recent years have severely
reduced investment and transaction activity. As a result,
revenues from our capital markets business have been declining
severely, including a decline of $6.4 million, or 34.9%,
from fiscal year 2009. As noted below, we recorded an impairment
of goodwill associated with this business during fiscal year
2010.
Other revenue declined $12.7 million, or 16.8%, primarily
due to lower management fee revenues and interest income
received from M&P.
Total expenses were essentially flat compared to fiscal year
2009. Compensation and benefits decreased $14.0 million, or
2.4%, primarily due to headcount reductions driven by reduced
client demand. Marketing and advertising costs decreased
$4.8 million, or 20.3%, primarily due to fewer sponsorships
and lower advertising costs. Litigation expenses increased
$13.3 million from fiscal year 2009. Other expenses
increased $8.3 million primarily due to a
$15.0 million impairment of goodwill at RSM EquiCo, as
discussed in Item 8, note 9 to the consolidated
financial statements.
H&R
BLOCK 2011
Form 10K
21
Table of Contents
Pretax income for the year ended April 30, 2010 of
$58.7 million compares to $96.1 million in fiscal year
2009. Pretax margin for the segment decreased from 10.7% in
fiscal year 2009, to 6.8% in fiscal year 2010, primarily due to
poor results in our capital markets business and a reduction of
revenue in our core businesses.
CORPORATE,
ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS
Corporate operating losses include interest income from
U.S. passive investments, interest expense on borrowings,
net interest margin and gains or losses relating to mortgage
loans held for investment, real estate owned, residual interests
in securitizations and other corporate expenses, principally
related to finance, legal and other support departments.
|
|
||||||||||||||||
| Corporate – Operating Results | (in 000s) | |||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
Interest income on mortgage loans held for investment
|
$ | 24,693 | $ | 31,877 | $ | 46,396 | ||||||||||
|
Other
|
7,448 | 6,854 | 7,295 | |||||||||||||
|
|
||||||||||||||||
|
Total revenues
|
32,141 | 38,731 | 53,691 | |||||||||||||
|
|
||||||||||||||||
|
Interest expense
|
84,288 | 79,929 | 92,945 | |||||||||||||
|
Provision for loan losses
|
35,567 | 47,750 | 63,897 | |||||||||||||
|
Compensation and benefits
|
49,463 | 53,607 | 48,973 | |||||||||||||
|
Other, net
|
2,299 | (614 | ) | 31,651 | ||||||||||||
|
|
||||||||||||||||
|
Total expense
|
171,617 | 180,672 | 237,466 | |||||||||||||
|
|
||||||||||||||||
|
Pretax loss
|
$ | (139,476 | ) | $ | (141,941 | ) | $ | (183,775 | ) | |||||||
|
|
||||||||||||||||
FISCAL YEAR 2011
COMPARED TO FISCAL YEAR 2010
Interest income earned on mortgage loans held for investment
decreased $7.2 million, or 22.5%, from the prior year,
primarily as a result of declining rates and non-performing
loans. Our provision for loan losses decreased
$12.2 million, or 25.5%, from the prior year as a result of
the continued run-off of our portfolio.
Income Taxes on
Continuing Operations
Our effective tax rate for continuing operations was 38.1% for
the fiscal year ended April 30, 2011, compared to 37.6% in
the prior year. This increase resulted from a decline in gains
from investments in company-owned life insurance assets which
are not subject to tax, an increase in the state effective tax
rate and other favorable net discrete adjustments booked in the
current year compared to unfavorable adjustments recorded in the
prior year.
FISCAL YEAR 2010
COMPARED TO FISCAL YEAR 2009
Interest income earned on mortgage loans held for investment for
the fiscal year ended April 30, 2010 decreased
$14.5 million, or 31.3%, from fiscal year 2009, primarily
as a result of non-performing loans. Interest expense decreased
$13.0 million, or 14.0%, due to lower funding costs related
to our mortgage loan portfolio and lower corporate borrowings.
Our provision for loan losses decreased $16.1 million from
fiscal year 2009.
Other expenses declined $32.3 million primarily due to
gains of $9.0 million on residual interests in fiscal year
2010, compared to impairments of $3.1 million recorded in
fiscal year 2009. Additionally, we transferred liabilities
relating to previously retained insurance risk to a third-party,
and recorded a gain of $9.5 million in fiscal year 2010.
Income Taxes on
Continuing Operations
Our effective tax rate for continuing operations was 37.6% for
the fiscal year ended April 30, 2010, compared to 38.9% in
fiscal year 2009. Our effective tax rates declined from fiscal
year 2009 due to a reduction in our valuation allowance related
to tax-planning strategies and favorable tax benefits related to
investment gains on our corporate owned life insurance
investments.
DISCONTINUED
OPERATIONS
Sand Canyon Corporation (“SCC”, previously known as
Option One Mortgage Corporation) ceased originating mortgage
loans in December of 2007 and, in April 2008, sold its servicing
assets and discontinued its remaining operations. The sale of
servicing assets did not include the sale of any mortgage loans.
SCC retained contingent liabilities that arose from the
operations of SCC prior to its disposal, including certain
mortgage loan repurchase obligations, contingent liabilities
associated with litigation and related claims, lease
commitments, and employee termination benefits. SCC also
retained residual interests in certain mortgage loan
securitization transactions prior to cessation of its
origination business. The net loss from discontinued operations
totaled $13.3 million, $9.7 million and
$27.4 million for the fiscal years ended April 30,
2011, 2010 and 2009, respectively.
In connection with the securitization and sale of mortgage
loans, SCC made certain representations and warranties. In the
event that there is a breach of a representation and warranty
and such breach materially and adversely affects the value of a
mortgage loan, SCC may be obligated to repurchase a loan or
otherwise indemnify certain parties for losses incurred as a
result of loan liquidation.
22
H&R
BLOCK 2011 Form 10K
Table of Contents
SCC has recorded a liability for estimated contingent losses
related to representation and warranty claims as of
April 30, 2011, of $126.3 million, which represents
SCC’s best estimate of the probable loss that may occur.
Losses on valid claims totaled $12.2 million,
$18.2 million and $36.4 million for fiscal years 2011,
2010 and 2009, respectively. These amounts were recorded as
reductions of our loan repurchase liability. During the current
year, payments totaling $49.8 million were made under an
indemnity agreement dated April 2008 with a specific
counterparty in exchange for a full and complete release of such
party’s ability to assert representation and warranty
claims. These payments were also recorded as a reduction in our
loan repurchase liability. The indemnity agreement was given as
part of obtaining the counterparty’s consent to SCC’s
sale of its mortgage servicing business in 2008. We have no
remaining payment obligations under this indemnity agreement.
While SCC uses the best information available to it in
estimating its liability, assessing the likelihood that claims
will be asserted in the future and estimating probable losses is
inherently difficult and requires considerable management
judgment. Although net losses on settled claims since
May 1, 2008 have been within initial loss estimates, to the
extent that the volume of asserted claims, the level of valid
claims, the counterparties asserting claims, the nature of
claims, or the value of residential home prices differ in the
future from current estimates, future losses may be greater than
the current estimates and those differences may be significant.
See additional discussion in Item 8, note 18 to the
consolidated financial statements.
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 risks 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 our consolidated financial
statements, which discusses accounting estimates we have
selected when there are acceptable alternatives and new or
proposed accounting standards that may affect our financial
reporting in the future.
ALLOWANCE FOR
LOAN LOSSES
– The principal amount of
mortgage loans held for investment totaled $573.0 million
at April 30, 2011. We are exposed to the risk that
borrowers may not repay amounts owed to us when they become
contractually due. We record an allowance representing our
estimate of credit losses inherent in the portfolio of loans
held for investment at the balance sheet date. Determination of
our allowance for loan losses is considered a critical
accounting estimate because loss provisions can be material to
our operating results, projections of loan delinquencies and
related matters are inherently subjective, and actual losses are
impacted by factors outside of our control including economic
conditions, unemployment rates and residential home
prices.
We record a loan loss allowance for loans less than 60 days
past due on a pooled basis. The aggregate principal balance of
these loans totaled $304.3 million at April 30, 2011,
and the portion of our allowance for loan losses allocated to
these loans totaled $11.2 million. In estimating our loan
loss allowance for these loans, we stratify the loan portfolio
based on our view of risk associated with various elements of
the pool and assign estimated loss rates based on those risks.
Loss rates are based primarily on historical experience and our
assessment of economic and market conditions. Loss rates
consider both the rate at which loans will become delinquent
(frequency) and the amount of loss that will ultimately be
realized upon occurrence of a liquidation of collateral
(severity). Frequency rates are based primarily on historical
migration analysis of loans to delinquent status. Severity rates
are based primarily on recent broker quotes or appraisals of
collateral. Because of imprecision and uncertainty inherent in
developing estimates of future credit losses, in particular
during periods of rapidly declining collateral values or
increasing delinquency rates, our estimation process includes
development of ranges of possible outcomes. Ranges were
developed by stressing initial estimates of both frequency and
severity rates. Stressing of frequency and severity assumptions
is intended to model deterioration in credit quality that is
difficult to predict during declining economic conditions.
Future deterioration in credit quality may exceed our modeled
assumptions.
Mortgage loans held for investment include loans originated by
our affiliate, SCC, and purchased by HRB Bank. We have greater
exposure to loss with respect to this segment of our loan
portfolio as a result of historically higher delinquency rates.
Therefore, we assign higher frequency rate assumptions to
SCC-originated loans compared with loans originated by other
third-party banks as we consider estimates of future losses. At
April 30, 2011 our weighted-average frequency assumption
was 9.4% for SCC-originated loans compared to 2.8% for remaining
loans in the portfolio.
Loans 60 days past due are considered impaired and are
reviewed individually. We record loss estimates typically based
on the value of the underlying collateral. Our specific loan
loss allowance for these impaired loans reflected an average
loss severity of 43% at April 30, 2011. The aggregate
principal balance of impaired loans
H&R
BLOCK 2011
Form 10K
23
Table of Contents
totaled $162.3 million at April 30, 2011, and the
portion of our allowance for loan losses allocated to these
loans totaled $69.8 million.
Modified loans that meet the definition of a troubled debt
restructuring (TDR) are also considered impaired and are
reviewed individually. We record impairment equal to the
difference between the principal balance of the loan and the
present value of expected future cash flows discounted at the
loan’s effective interest rate. However, if we assess that
foreclosure of a modified loan is probable, we record impairment
based on the estimated fair value of the underlying collateral.
The aggregate principal balance of TDR loans totaled
$106.3 million at April 30, 2011, and the portion of
our allowance for loan losses allocated to these loans totaled
$11.1 million.
The loan loss allowance as a percent of mortgage loans held for
investment was 16.1% at April 30, 2011, compared to 13.7%
at April 30, 2010. The increase during the current year is
primarily as a result of declining collateral values due to
lower residential home prices and modeled expectations for
future loan delinquencies in the portfolio. The residential
mortgage industry has experienced significant adverse trends for
an extended period. If adverse trends continue for a sustained
period or at rates worse than modeled by us, we may be required
to record additional loan loss provisions, and those losses may
be significant.
Determining the allowance for loan losses for loans held for
investment requires us to make estimates of losses that are
highly uncertain and requires a high degree of judgment. If our
underlying assumptions prove to be inaccurate, the allowance for
loan losses could be insufficient to cover actual losses. Our
mortgage loan portfolio is a static pool, as we are no longer
originating or purchasing new mortgage loans, and we believe
that factor, over time, will limit variability in our loss
estimates.
MORTGAGE LOAN
REPURCHASE OBLIGATION
– In connection
with the securitization and sale of loans, SCC made certain
representations and warranties, including, but not limited to,
representations relating to matters such as ownership of the
loan, validity of lien securing the loan, and the loan’s
compliance with SCC’s underwriting criteria.
Representations and warranties in whole loan sale transactions
to institutional investors included a “knowledge
qualifier” which limits SCC liability for borrower fraud to
those instances where SCC had knowledge of the fraud at the time
the loans were sold. In the event that there is a breach of a
representation and warranty and such breach materially and
adversely affects the value of a mortgage loan, SCC may be
obligated to repurchase a loan or otherwise indemnify certain
parties for losses incurred as a result of loan liquidation.
Generally, these representations and warranties are not subject
to a stated term, but would be subject to statutes of limitation
applicable to the contractual provisions.
SCC estimates losses relating to representation and warranty
claims by estimating loan repurchase and indemnification
obligations on both known claims and projections of future
claims. Projections of future claims are based on an analysis
that includes a combination of reviewing repurchase demands and
actual defaults and loss severities, inquiries from various
third-parties, the terms and provisions of related agreements
and the historical rate of repurchase and indemnification
obligations related to breaches of representations and
warranties. SCC’s methodology for calculating this
liability considers the likelihood that individual
counterparties will assert future claims.
SCC recorded a liability for estimated contingent losses related
to representation and warranty claims of $126.3 million as
of April 30, 2011. Actual losses charged against this
reserve during fiscal year 2011 totaled $61.9 million,
which included payments totaling $49.8 million made under
an indemnity agreement dated April 2008 with a specific
counterparty in exchange for a full and complete release of such
party’s ability to assert representation and warranty
claims. The recorded liability represents SCC’s estimate of
losses from future claims where assertion of a claim and a
related contingent loss are both deemed probable. Because the
rate at which future claims may be deemed valid and actual loss
severity rates may differ significantly from historical
experience, SCC is not able to estimate reasonably possible loss
outcomes in excess of its current accrual. A 1% increase in both
assumed validity rates and loss severities would result in
losses beyond SCC’s accrual of approximately
$16 million. This sensitivity is hypothetical and is
intended to provide an indication of the impact of a change in
key assumptions on the representations and warranties liability.
In reality, changes in one assumption may result in changes in
other assumptions, which may or may not counteract the
sensitivity.
While SCC uses the best information available to it in
estimating its liability, assessing the likelihood that claims
will be asserted in the future and estimating probable losses
are inherently difficult to estimate and require considerable
management judgment. Although net losses on settled claims since
May 1, 2008 have been within initial loss estimates, to the
extent that the volume of asserted claims, the level of valid
claims, the counterparties asserting claims, the nature of
claims, or the value of residential home prices differ in the
future from current estimates, future losses may be greater than
the current estimates and those differences may be significant.
See Item 8, note 18 to our consolidated financial
statements.
LITIGATION
– 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
reserves required, if any,
24
H&R
BLOCK 2011 Form 10K
Table of Contents
for these contingencies is made after analysis of each known
issue and an analysis of historical experience. Therefore, we
have recorded reserves related to certain legal matters for
which we believe it is probable that a loss will be incurred and
the range of such loss can be estimated. With respect to other
matters, we have concluded that a loss is only reasonably
possible or remote, or is not estimable and, therefore, no
liability is recorded.
Assessing the likely outcome of pending litigation, including
the amount of potential loss, if any, is highly subjective. Our
judgments regarding likelihood of loss 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 various 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 exceed our current estimates.
See Item 8, note 19 to our consolidated financial
statements.
VALUATION OF
GOODWILL
– The evaluation of goodwill
for impairment is a critical accounting estimate due both to the
magnitude of our goodwill balances, and the judgment involved in
determining the fair value of our reporting units. Goodwill
balances totaled $846.2 million as of April 30, 2011
and $840.4 million as of April 30, 2010.
We test goodwill and other indefinite-life intangible assets for
impairment annually or more frequently if events occur or
circumstances change which would, more likely than not, reduce
the fair value of a reporting unit below its carrying value. Our
goodwill impairment analysis is based on a discounted cash flow
approach and market comparables. This analysis, at the reporting
unit level, requires significant management judgment with
respect to revenue and expense forecasts, anticipated changes in
working capital and the selection and application of an
appropriate discount rate. Changes in projections or assumptions
could materially affect our estimate of reporting unit fair
values. The use of different assumptions would increase or
decrease estimated discounted future operating cash flows and
could affect our conclusions regarding the existence or amount
of potential impairment. Finally, strategic changes in our
outlook regarding reporting units or intangible assets may alter
our valuation approach and could result in changes to our
conclusions regarding impairment.
Future estimates of fair value may be adversely impacted by
declining economic conditions. In addition, if future operating
results of our reporting units are below our current modeled
expectations, fair value estimates may decline. Any of these
factors could result in future impairments, and those
impairments could be significant.
We recorded a goodwill impairment of $22.7 million related
to our RedGear reporting unit within our Tax Services segment in
the third quarter of fiscal year 2011, leaving a remaining
goodwill balance of approximately $14 million. Revenues for
this reporting unit have been below our estimates. Poor results
in future years could result in further impairment.
We recorded a goodwill impairment of $15.0 million related
to our RSM EquiCo reporting unit within our Business Services
segment in the third quarter of fiscal year 2010, leaving a
remaining goodwill balance of $14.3 million. Continued poor
results for this reporting unit could result in further
impairment.
See Item 8, note 9 to our consolidated financial
statements.
INCOME
TAXES
– Income taxes are accounted for
using the asset and liability approach under U.S. GAAP. We
calculate our current and deferred tax provision for the fiscal
year based on estimates and assumptions that could differ from
the actual results reflected in income tax returns filed during
the applicable calendar year. Adjustments based on filed returns
are recorded in the appropriate periods when identified. We file
a consolidated federal tax return on a calendar year basis,
generally in the second fiscal quarter of the subsequent year.
We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be
realized. We have considered taxable income in carry-back
periods, historical and forecasted earnings, future taxable
income, the mix of earnings in the jurisdictions in which we
operate, and tax planning strategies in determining the need for
a valuation allowance against our deferred tax assets.
Determination of a valuation allowance for deferred tax assets
requires that we make judgments about future matters that are
not certain, including projections of future taxable income and
evaluating potential tax-planning strategies. To the extent that
actual results differ from our current assumptions, the
valuation allowance will increase or decrease. In the event we
were to determine we would not be able to realize all or part of
our deferred tax assets in the future, an adjustment to the
deferred tax assets would be charged to earnings in the period
in which we make such determination. Likewise, if we later
determine it is more likely than not that the deferred tax
assets would be realized, we would reverse the applicable
portion of the previously provided valuation allowance.
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 assessments of interest
and/or
penalties. Our estimate for the potential outcome for any
uncertain tax issue is highly subjective and based on our best
judgments. Actual results may differ from our current judgments
due to a variety of factors, including changes
H&R
BLOCK 2011
Form 10K
25
Table of Contents
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.
REVENUE
RECOGNITION
– We have many different
revenue sources, each governed by specific revenue recognition
policies. Our revenue recognition policies can be found in
Item 8, note 1 to our consolidated financial
statements.
FINANCIAL
CONDITION
CAPITAL RESOURCES
AND LIQUIDITY
– Our sources of capital
include cash from operations, cash from customer deposits,
issuances of common stock and debt. We use capital primarily to
fund working capital, pay dividends, repurchase treasury shares
and acquire businesses. Our operations are highly seasonal and
therefore generally require the use of cash to fund operating
losses during the period May through mid-January.
Given the likely availability of a number of liquidity options
discussed herein, including borrowing capacity under our CLOC,
we believe, that in the absence of any unexpected developments,
our existing sources of capital at April 30, 2011 are
sufficient to meet our operating needs.
These comments should be read in conjunction with the
consolidated balance sheets and consolidated statements of cash
flows included in Item 8.
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
Net cash provided by (used in):
|
||||||||||||||||
|
Operating activities
|
$ | 512,503 | $ | 587,469 | $ | 1,024,439 | ||||||||||
|
Investing activities
|
(110,157 | ) | 31,353 | 5,560 | ||||||||||||
|
Financing activities
|
(534,391 | ) | (481,118 | ) | (40,233 | ) | ||||||||||
|
Effect of exchange rates on cash
|
5,844 | 11,678 | – | |||||||||||||
|
|
||||||||||||||||
|
Net change in cash and cash equivalents
|
$ | (126,201 | ) | $ | 149,382 | $ | 989,766 | |||||||||
|
|
||||||||||||||||
CASH FROM
OPERATING ACTIVITIES
– Cash provided
by operations, which consists primarily of cash received from
customers, decreased $75.0 million from fiscal year 2010.
Cash payments for representation and warranty obligations of our
discontinued mortgage business totaled $61.9 million in
fiscal year 2011, compared to $18.4 million in fiscal year
2010 and $36.5 million in fiscal year 2009.
Restricted
Cash.
We hold certain cash balances that are
restricted as to use. Cash and cash equivalents –
restricted totaled $48.4 million at April 30, 2011,
and primarily consisted of cash held by our captive insurance
subsidiary that will be used to pay claims.
CASH FROM
INVESTING ACTIVITIES
– Changes in cash
provided by investing activities primarily relate to the
following:
Purchases of
Available-for-Sale
Securities.
During fiscal year 2011, HRB Bank
purchased $138.8 million in mortgage-backed securities for
regulatory purposes. See additional discussion in Item 8,
note 4 to the consolidated financial statements.
Mortgage Loans
Held for Investment.
We received net proceeds of
$58.5 million, $72.8 million and $91.3 million on
our mortgage loans held for investment in fiscal years 2011,
2010 and 2009, respectively.
Purchases of
Property and Equipment.
Total cash paid for
property and equipment was $63.0 million,
$90.5 million and $97.9 million for fiscal years 2011,
2010 and 2009, respectively.
Business
Acquisitions.
Total cash paid for acquisitions
was $54.2 million, $10.5 million and
$293.8 million during fiscal years 2011, 2010 and 2009,
respectively. In July 2010 our Business Services segment
acquired Caturano, a Boston-based accounting firm, and cash used
in investing activities includes payments totaling
$32.6 million related to this acquisition. See additional
discussion in Item 8, note 2 to the consolidated
financial statements. In November 2008, we acquired our last
major independent franchise operator for an aggregate purchase
price of $279.2 million.
In October 2010, we signed a definitive merger agreement to
acquire all of the outstanding shares of 2SS Holdings, Inc.
(“2SS”), developer of TaxACT digital tax preparation
solutions, for $287.5 million in cash. Completion of the
transaction is subject to the satisfaction of customary closing
conditions, including regulatory approval. In May 2011, the
United States Department of Justice (the “DOJ”) filed
a civil antitrust lawsuit to block our proposed acquisition of
2SS. On June 21, 2011, the parties to the merger agreement
signed an amendment to the merger agreement, which is discussed
in Item 9B. There are no assurances that the DOJ’s
lawsuit will be resolved in our favor or that the transaction
will be consummated.
26
H&R
BLOCK 2011 Form 10K
Table of Contents
If the closing conditions are satisfied and this acquisition is
consummated, we expect this acquisition will be funded by excess
available liquidity from
cash-on-hand
or short-term borrowings.
Sales of
Businesses.
In fiscal year 2011, we sold 280 tax
offices to franchisees for proceeds of $65.6 million. In
fiscal year 2010, we sold 267 tax offices to franchisees for
proceeds of $65.7 million. In fiscal year 2009, we sold
certain tax offices to franchisees for proceeds of
$16.9 million. The majority of these sales were financed
through loans we made to our franchisees.
Loans Made to
Franchisees.
Loans made to franchisees totaled
$92.5 million and $89.7 million for fiscal years 2011
and 2010, respectively. We received payments from franchisees
totaling $57.6 million and $40.7 million,
respectively. These amounts include both the financing of sales
of tax offices and franchisee draws under our Franchise Equity
Lines of Credit (FELCs).
Discontinued
Operations.
In fiscal year 2009, we sold our
financial advisor business for proceeds of $304.0 million.
CASH FROM
FINANCING ACTIVITIES
– Changes in cash
used in financing activities primarily relate to the
following:
Short-Term
Borrowings.
We use commercial paper borrowings
to fund our off-season losses and cover our seasonal working
capital needs, however we had no commercial paper borrowings
outstanding as of April 30, 2011 or 2010. Our commercial
paper borrowings peaked at $674.7 million in the current
year. We had other short-term borrowings in prior years to fund
our participation interests in RALs.
FHLB
Borrowings.
HRB Bank obtains borrowings from the
FHLB in accordance with regulatory and capital requirements.
During fiscal years 2011, 2010 and 2009, we had net repayments
of $50.0 million, $25.0 million and
$29.0 million, respectively.
Customer Banking
Deposits.
Customer banking deposits used
$11.4 million in the current year compared to
$17.5 million provided in fiscal year 2010 and
$64.4 million in fiscal year 2009. These deposits are held
by HRB Bank
Dividends.
We
have consistently paid quarterly dividends. Dividends paid
totaled $186.8 million, $200.9 million and
$198.7 million in fiscal years 2011, 2010 and 2009,
respectively.
Repurchase and
Retirement of Common Stock.
During fiscal year
2011, we purchased and immediately retired 19.0 million
shares of our common stock at a cost of $279.9 million.
During fiscal year 2010, we purchased and immediately retired
12.8 million shares of our common stock at a cost of
$250.0 million. We may continue to repurchase and retire
common stock or retire treasury stock in the future.
In June 2008, our Board of Directors rescinded the previous
authorizations to repurchase shares of our common stock and
approved an authorization to purchase up to $2.0 billion of
our common stock through June 2012. There was $1.4 billion
remaining under this authorization at April 30, 2011.
Issuances of
Common Stock.
In October 2008, we sold
8.3 million shares of our common stock, without par value,
at a price of $17.50 per share in a registered direct offering
through subscription agreements with selected institutional
investors. We received net proceeds of $141.4 million,
after deducting placement agent fees and other offering
expenses. The purpose of the equity offering was to ensure we
maintained adequate equity levels, as a condition of our CLOC,
during our off-season. Proceeds were used for general corporate
purposes.
Proceeds from the issuance of common stock in accordance with
our stock-based compensation plans totaled $0.4 million,
$16.7 million and $71.6 million in fiscal years 2011,
2010 and 2009, respectively.
HRB
BANK
– Block Financial LLC (BFC)
typically makes capital contributions to HRB Bank to help it
meet its capital requirements. BFC made capital contributions to
HRB Bank of $235.0 million during fiscal years 2011 and
2010, and $245.0 million in fiscal year 2009.
Historically, capital contributions by BFC have been repaid as a
return of capital by HRB Bank as capital requirements decline. A
return of capital or dividend paid by HRB Bank must be approved
by the OTS. Although the OTS has approved such payments in the
past, there is no assurance that they will continue to do so in
the future, in particular if they determine that higher capital
levels at HRB Bank are necessary due to non-performing asset
levels. In addition, BFC may elect to maintain higher capital
levels at HRB Bank. HRB Bank paid dividends and returned of
capital of $262.5 million during fiscal year 2011,
comprised of $37.5 million in REO properties and loans and
$225.0 million in cash. At April 30, 2011, HRB Bank
had cash balances of $615.1 million. Distribution of those
cash balances would be subject to OTS approval and are therefore
not currently available for general corporate purposes.
H&R
BLOCK 2011
Form 10K
27
Table of Contents
See additional discussion of regulatory and capital requirements
of HRB Bank in “Regulatory Environment” below.
BORROWINGS
We continually monitor our funding requirements and execute
strategies to manage our overall asset and liability profile.
The following chart provides the debt ratings for BFC as of
April 30, 2011 and 2010:
|
|
||||||||||||||||||||||||
| As of | April 30, 2011 | April 30, 2010 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| Short-term | Long-term | Outlook | Short-term | Long-term | Outlook | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Moody’s
|
P-2 | Baa2 | Negative | P-2 | Baa1 | Stable | ||||||||||||||||||
|
S&P
|
A-2 | BBB | Negative | A-2 | BBB | Positive | ||||||||||||||||||
|
DBRS
|
R-2 (high | ) | BBB (high | ) | Stable | R-2 (high | ) | BBB (high | ) | Positive | ||||||||||||||
|
|
||||||||||||||||||||||||
At April 30, 2011, we maintained a CLOC agreement to
support commercial paper issuances, general corporate purposes
or for working capital needs. This facility provides funding up
to $1.7 billion and matures July 31, 2013. This
facility bears interest at an annual rate of LIBOR plus 1.30% to
2.80% or PRIME plus 0.30% to 1.80% (depending on the type of
borrowing) and includes an annual facility fee of 0.20% to 0.70%
of the committed amounts, based on our credit ratings. Covenants
in this facility include: (1) maintenance of a minimum net
worth of $650.0 million on the last day of any fiscal
quarter; and (2) reduction of the aggregate outstanding
principal amount of short-term debt, as defined in the
agreement, to $200.0 million or less for thirty consecutive
days during the period March 1 to June 30 of each year
(“Clean-down requirement”). At April 30, 2011, we
were in compliance with these covenants and had net worth of
$1.4 billion. We had no balance outstanding under the CLOCs
at April 30, 2011.
During fiscal years 2011, 2010 and 2009, borrowing needs in our
Canadian operations were funded by corporate borrowings in the
U.S. To mitigate the foreign currency exchange rate risk,
we used foreign exchange forward contracts. We do not enter into
forward contracts for speculative purposes. In estimating the
fair value of derivative positions, we utilize quoted market
prices, if available, or quotes obtained from external sources.
There were no forward contracts outstanding as of April 30,
2011.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
A summary of our obligations to make future payments as of
April 30, 2011, is as follows:
| (in 000s) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||
| Total | Less Than 1 Year | 1 - 3 Years | 4 - 5 Years | After 5 Years | ||||||||||||||||||
|
|
||||||||||||||||||||||
|
Long-term debt (including interest)
|
$ | 1,151,434 | $ | 67,750 | $ | 674,257 | $ | 409,427 | $ | – | ||||||||||||
|
Customer deposits
|
863,898 | 511,010 | 11,656 | 22 | 341,210 | |||||||||||||||||
|
FHLB borrowings
|
25,000 | 25,000 | – | – | – | |||||||||||||||||
|
Retirement plan contribution
|
50,000 | 10,000 | 20,000 | 20,000 | – | |||||||||||||||||
|
Acquisition payments
|
43,273 | 2,880 | 31,376 | 2,909 | 6,108 | |||||||||||||||||
|
Contingent acquisition payments
|
11,000 | 8,652 | 2,318 | 30 | – | |||||||||||||||||
|
Media advertising purchase obligation
|
9,498 | 6,665 | 2,833 | – | – | |||||||||||||||||
|
Capital lease obligations
|
10,953 | 557 | 1,411 | 1,545 | 7,440 | |||||||||||||||||
|
Operating leases
|
735,048 | 238,167 | 309,107 | 120,080 | 67,694 | |||||||||||||||||
|
|
||||||||||||||||||||||
|
Total contractual cash obligations
|
$ | 2,900,104 | $ | 870,681 | $ | 1,052,958 | $ | 554,013 | $ | 422,452 | ||||||||||||
|
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||
The amount of liabilities recorded in connection with
unrecognized tax positions that we reasonably expect to pay
within twelve months is $16.6 million at April 30,
2011 and is included in accrued income taxes on our consolidated
balance sheet. The remaining amount is included in other
noncurrent liabilities on our consolidated balance sheet.
Because the ultimate amount and timing of any future cash
settlements cannot be predicted with reasonable certainty, the
estimated unrecognized tax position liability has been excluded
from the table above. See Item 8, note 15 to the
consolidated financial statements for additional information.
See discussion of contractual obligations and commitments in
Item 8, within the notes to our consolidated financial
statements.
28
H&R
BLOCK 2011 Form 10K
Table of Contents
REGULATORY
ENVIRONMENT
HRB Bank is a federal savings bank and H&R Block, Inc. is a
savings and loan holding company. As a result, each is subject
to regulation by the OTS. Federal savings banks are subject to
extensive regulation and examination by the OTS, their primary
federal regulator, as well as the FDIC.
All savings associations are subject to the capital adequacy
guidelines and the regulatory framework for prompt corrective
action. HRB Bank must meet specific capital guidelines involving
quantitative measures of HRB Bank’s assets, liabilities and
certain off-balance sheet items as calculated under regulatory
accounting practices. HRB Bank’s capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk-weightings and other factors.
As of March 31, 2011, our most recent Thrift Financial
Report (TFR) filing with the OTS, HRB bank was a “well
capitalized” institution under the prompt corrective action
provisions of the FDIC. See Item 8, note 20 to the
consolidated financial statements for additional discussion of
regulatory capital requirements and classifications.
HRB Bank is an indirect wholly-owned subsidiary of H&R
Block, Inc. and its customer deposits are insured by the FDIC.
If an insured institution fails, claims for administrative
expenses of the receiver and for deposits in U.S. branches
(including claims of the FDIC as subrogee of the failed
institution) have priority over the claims of general unsecured
creditors. In addition, the FDIC has authority to require
H&R Block, Inc. to reimburse it for losses it incurs in
connection with the failure of HRB Bank or with the FDIC’s
provision of assistance to a banking subsidiary that is in
danger of failure.
H&R Block, Inc. is a legal entity separate and distinct
from its subsidiary, HRB Bank. Various federal and state
statutory provisions and regulations limit the amount of
dividends HRB Bank may pay without regulatory approval. The OTS
has authority to prohibit HRB Bank from engaging in unsafe or
unsound practices in conducting their business. The payment of
dividends, depending on the financial condition of the bank,
could be deemed an unsafe or unsound practice. The ability of
HRB Bank to pay dividends in the future is currently, and could
be further, influenced by bank regulatory policies and capital
guidelines.
The U.S., various state, local, provincial and foreign
governments and some self-regulatory organizations have enacted
statutes and ordinances,
and/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 RACs,
the facilitation of RALs, loan originations and assistance in
loan originations, mortgage lending, privacy, consumer
protection, franchising, sales methods, banking, accountants and
the accounting practice. We seek to determine the applicability
of such statutes, ordinances, rules and regulations
(collectively, “Laws”) and comply with those Laws.
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 agreed to
comply with such Laws, convinced the authorities that such Laws
were not applicable or that compliance already exists
and/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 regulator inquiries with respect to the applicability of
Laws may have on our consolidated financial statements. See
additional discussion of legal matters in Item 3,
“Legal Proceedings” and Item 8, note 19 to
our consolidated financial statements.
STATISTICAL
DISCLOSURE BY BANK HOLDING COMPANIES
This section presents information required by the SEC’s
Industry Guide 3, “Statistical Disclosure by Bank Holding
Companies.” The tables in this section include HRB Bank
information only.
H&R
BLOCK 2011
Form 10K
29
Table of Contents
DISTRIBUTION OF
ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
– The
following table presents average balance data and interest
income and expense data for our banking operations, as well as
the related interest yields and rates for fiscal years 2011,
2010 and 2009:
| (dollars in 000s) | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest
|
Average
|
Interest
|
Average
|
Interest
|
Average
|
|||||||||||||||||||||||||||||||
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
||||||||||||||||||||||||||||
| Balance | Expense | Cost | Balance | Expense | Cost | Balance | Expense | Cost | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest-earning assets:
|
||||||||||||||||||||||||||||||||||||
|
Mortgage loans, net
|
$ | 545,052 | $ | 24,693 | 4.53 | % | $ | 677,115 | $ | 31,877 | 4.12 | % | $ | 839,253 | $ | 46,396 | 5.14 | % | ||||||||||||||||||
|
Federal funds sold
|
2,649 | 3 | 0.10 | % | 9,471 | 9 | 0.09 | % | 311,138 | 801 | 0.26 | % | ||||||||||||||||||||||||
|
Emerald Advance
(1)
|
141,127 | 94,300 | 35.21 | % | 106,093 | 77,891 | 35.21 | % | 133,252 | 91,019 | 35.31 | % | ||||||||||||||||||||||||
|
Available-for-sale
investment securities
|
22,243 | 174 | 0.78 | % | 25,144 | 181 | 0.71 | % | 29,500 | 791 | 2.68 | % | ||||||||||||||||||||||||
|
FHLB stock
|
5,953 | 171 | 2.88 | % | 6,703 | 119 | 1.77 | % | 6,557 | 127 | 1.93 | % | ||||||||||||||||||||||||
|
Cash and due from banks
|
930,666 | 2,338 | 0.25 | % | 747,504 | 1,976 | 0.26 | % | 12,474 | 123 | 0.99 | % | ||||||||||||||||||||||||
| 1,647,690 | $ | 121,679 | 7.38 | % | 1,572,030 | $ | 112,053 | 7.00 | % | 1,332,174 | $ | 139,257 | 10.45 | % | ||||||||||||||||||||||
|
|
|
|
||||||||||||||||||||||||||||||||||
|
Non-interest-earning assets
|
57,899 | 94,499 | 71,759 | |||||||||||||||||||||||||||||||||
|
Total HRB Bank assets
|
$ | 1,705,589 | $ | 1,666,529 | $ | 1,403,933 | ||||||||||||||||||||||||||||||
|
|
|
|
||||||||||||||||||||||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Customer deposits
|
$ | 830,597 | $ | 8,488 | 1.02 | % | $ | 1,019,664 | $ | 10,174 | 1.00 | % | $ | 863,072 | $ | 14,069 | 1.63 | % | ||||||||||||||||||
|
FHLB borrowing
|
72,534 | 1,526 | 2.10 | % | 98,767 | 1,997 | 2.02 | % | 103,885 | 5,113 | 4.92 | % | ||||||||||||||||||||||||
| 903,131 | $ | 10,014 | 1.11 | % | 1,118,431 | $ | 12,171 | 1.09 | % | 966,957 | $ | 19,182 | 1.98 | % | ||||||||||||||||||||||
|
|
|
|
||||||||||||||||||||||||||||||||||
|
Non-interest-bearing liabilities
|
366,666 | 267,159 | 230,271 | |||||||||||||||||||||||||||||||||
|
Total liabilities
|
1,269,797 | 1,385,590 | 1,197,228 | |||||||||||||||||||||||||||||||||
|
Total shareholders’ equity
|
435,792 | 280,939 | 206,705 | |||||||||||||||||||||||||||||||||
|
Total liabilities and shareholders’ equity
|
$ | 1,705,589 | $ | 1,666,529 | $ | 1,403,933 | ||||||||||||||||||||||||||||||
|
|
|
|
||||||||||||||||||||||||||||||||||
|
Net yield on interest-earning assets
(1)
|
$ | 111,665 | 6.78 | % | $ | 99,882 | 6.23 | % | $ | 120,075 | 9.06 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| (1) | Includes all interest income related to Emerald Advance activities. Amounts recognized as interest income also include certain fees, which are amortized into interest income over the life of the loan, of $48.5 million, $39.2 million and $44.0 million for fiscal years 2011, 2010 and 2009, respectively. |
The following table
presents the rate/volume variance in interest income and expense
for the last two fiscal years:
| (in 000s) | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | ||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total Change
|
Change
|
Change
|
Change
|
Total Change
|
Change
|
Change
|
Change
|
|||||||||||||||||||||||||||||
|
in Interest
|
Due to
|
Due to
|
Due to
|
in Interest
|
Due to
|
Due to
|
Due to
|
|||||||||||||||||||||||||||||
| Income/Expense | Rate/Volume | Rate | Volume | Income/Expense | Rate/Volume | Rate | Volume | |||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||||||
|
Loans,
net
(1)
|
$ | 9,225 | $ | 4,485 | $ | (1,211 | ) | $ | 5,951 | $ | (27,646 | ) | $ | 1,233 | $ | (8,192 | ) | $ | (20,687 | ) | ||||||||||||||||
|
Available-for-sale
investment securities
|
(7 | ) | (2 | ) | 16 | (21 | ) | (611 | ) | 86 | (580 | ) | (117 | ) | ||||||||||||||||||||||
|
Federal funds sold
|
(6 | ) | (1 | ) | 1 | (6 | ) | (792 | ) | 500 | (515 | ) | (777 | ) | ||||||||||||||||||||||
|
FHLB stock
|
52 | (8 | ) | 73 | (13 | ) | (8 | ) | — | (11 | ) | 3 | ||||||||||||||||||||||||
|
Cash & due from banks
|
362 | 40 | (128 | ) | 450 | 1,853 | (5,305 | ) | (90 | ) | 7,248 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| $ | 9,626 | $ | 4,514 | $ | (1,249 | ) | $ | 6,361 | $ | (27,204 | ) | $ | (3,486 | ) | $ | (9,388 | ) | $ | (14,330 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest expense:
|
||||||||||||||||||||||||||||||||||||
|
Customer deposits
|
$ | (1,686 | ) | $ | (264 | ) | $ | 56 | $ | (1,478 | ) | $ | (3,895 | ) | $ | (573 | ) | $ | (5,457 | ) | $ | 2,135 | ||||||||||||||
|
FHLB borrowings
|
(471 | ) | (22 | ) | 81 | (530 | ) | (3,116 | ) | 149 | (3,013 | ) | (252 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| $ | (2,157 | ) | $ | (286 | ) | $ | 137 | $ | (2,008 | ) | $ | (7,011 | ) | $ | (424 | ) | $ | (8,470 | ) | $ | 1,883 | |||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| (1) | Non-accruing loans have been excluded. |
INVESTMENT
PORTFOLIO
–
The following table presents the cost basis and fair
value of HRB Bank’s investment portfolio at April 30,
2011, 2010 and 2009:
| (in 000s) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| April 30, | 2011 | 2010 | 2009 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| Cost Basis | Fair Value | Cost Basis | Fair Value | Cost Basis | Fair Value | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Mortgage-backed securities
|
$ | 157,970 | $ | 158,177 | $ | 23,026 | $ | 23,016 | $ | 27,466 | $ | 26,793 | ||||||||||||||||
|
Federal funds sold
|
8,727 | 8,727 | 2,338 | 2,338 | 157,326 | 157,326 | ||||||||||||||||||||||
|
FHLB stock
|
3,315 | 3,315 | 6,033 | 6,033 | 6,730 | 6,730 | ||||||||||||||||||||||
|
Trust preferred security
|
– | – | 1,854 | 31 | 3,454 | 292 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| $ | 170,012 | $ | 170,219 | $ | 33,251 | $ | 31,418 | $ | 194,976 | $ | 191,141 | |||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
30
H&R
BLOCK 2011 Form 10K
Table of Contents
The following table shows the cost basis, scheduled maturities
and average yields for HRB Bank’s investment portfolio at
April 30, 2011:
|
|
||||||||||||||||||||||||||||||
| (dollars in 000s) | ||||||||||||||||||||||||||||||
| Less Than One Year | After Ten Years | Total | ||||||||||||||||||||||||||||
|
Cost
|
Balance
|
Average
|
Balance
|
Average
|
Balance
|
Average
|
||||||||||||||||||||||||
| Basis | Due | Yield | Due | Yield | Due | Yield | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||
|
Mortgage-backed securities
|
$ | 157,970 | $ | – | – | % | $ | 157,970 | 2.32 | % | $ | 157,970 | 2.32 | % | ||||||||||||||||
|
Federal funds sold
|
8,727 | 8,727 | 0.08 | % | – | – | % | 8,727 | 0.08 | % | ||||||||||||||||||||
|
FHLB stock
|
3,315 | 3,315 | 2.88 | % | – | – | % | 3,315 | 2.88 | % | ||||||||||||||||||||
| $ | 170,012 | $ | 12,042 | $ | 157,970 | $ | 170,012 | |||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||
LOAN PORTFOLIO
AND SUMMARY OF LOAN LOSS
EXPERIENCE
–
The following table shows the composition of HRB
Bank’s mortgage loan portfolio as of April 30, 2011,
2010, 2009, 2008 and 2007, and information on delinquent loans:
| (in 000s) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| As of April 30, | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Residential real estate mortgages
|
$ | 569,610 | $ | 683,452 | $ | 821,583 | $ | 1,004,283 | $ | 1,350,612 | ||||||||||||||
|
Home equity lines of credit
|
183 | 232 | 254 | 357 | 280 | |||||||||||||||||||
| $ | 569,793 | $ | 683,684 | $ | 821,837 | $ | 1,004,640 | $ | 1,350,892 | |||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
|
Loans and TDRs on non-accrual
|
$ | 155,645 | $ | 185,209 | $ | 222,382 | $ | 110,759 | $ | 22,909 | ||||||||||||||
|
Loans past due 90 days or more
|
149,501 | 153,703 | 121,685 | 73,600 | 22,909 | |||||||||||||||||||
|
Total TDRs
|
106,328 | 144,977 | 160,741 | 37,159 | – | |||||||||||||||||||
|
|
||||||||||||||||||||||||
Concentrations of loans to borrowers located in a single state
may result in increased exposure to loss as a result of changes
in real estate values and underlying economic or market
conditions related to a particular geographical location. The
table below presents outstanding loans by state for our
portfolio of mortgage loans held for investment as of
April 30, 2011:
| (dollars in 000s) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Loans
|
||||||||||||||||||||||||
|
Loans
|
Purchased
|
|||||||||||||||||||||||
|
Purchased
|
from Other
|
Percent
|
Delinquency
|
|||||||||||||||||||||
| from SCC | Parties | Total | of Total | Rate (30+ Days) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Florida
|
$ | 47,378 | $ | 68,499 | $ | 115,877 | 20% | 33 | % | |||||||||||||||
|
California
|
67,662 | 12,219 | 79,881 | 14% | 32 | % | ||||||||||||||||||
|
New York
|
88,004 | 10,101 | 98,105 | 17% | 46 | % | ||||||||||||||||||
|
Wisconsin
|
1,998 | 44,551 | 46,549 | 8% | 8 | % | ||||||||||||||||||
|
All others
|
149,949 | 79,432 | 229,381 | 41% | 26 | % | ||||||||||||||||||
|
Total
|
$ | 354,991 | $ | 214,802 | $ | 569,793 | 100% | |||||||||||||||||
|
|
|
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||||
A rollforward of HRB Bank’s allowance for loss on mortgage
loans is as follows:
| (dollars in 000s) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at beginning of the year
|
$ | 93,535 | $ | 84,073 | $ | 45,401 | $ | 3,448 | $ | – | ||||||||||||||
|
Provision
|
35,200 | 47,750 | 63,897 | 42,004 | 3,622 | |||||||||||||||||||
|
Recoveries
|
272 | 88 | 54 | 999 | – | |||||||||||||||||||
|
Charge-offs and transfers
|
(38,520 | ) | (38,376 | ) | (25,279 | ) | (1,050 | ) | (174 | ) | ||||||||||||||
|
Balance at end of the year
|
$ | 90,487 | $ | 93,535 | $ | 84,073 | $ | 45,401 | $ | 3,448 | ||||||||||||||
|
Ratio of net charge-offs to average loans outstanding during the
year
|
5.96 | % | 4.95% | 2.80% | 0.09% | 0.02% | ||||||||||||||||||
|
|
||||||||||||||||||||||||
H&R
BLOCK 2011
Form 10K
31
Table of Contents
DEPOSITS
–
The following table shows HRB Bank’s average deposit
balances and the average rate paid on those deposits for fiscal
years 2011, 2010 and 2009:
| (dollars in 000s) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||
| Balance | Rate | Balance | Rate | Balance | Rate | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Money market and savings
|
$ | 279,162 | 0.81 | % | $ | 400,920 | 0.50 | % | $ | 467,864 | 1.37 | % | ||||||||||||
|
Interest-bearing checking accounts
|
10,782 | 0.87 | % | 13,677 | 0.61 | % | 13,579 | 2.25 | % | |||||||||||||||
|
IRAs
|
353,902 | 1.01 | % | 377,973 | 1.02 | % | 289,814 | 1.27 | % | |||||||||||||||
|
Certificates of deposit
|
186,742 | 1.36 | % | 227,094 | 1.86 | % | 91,815 | 3.98 | % | |||||||||||||||
| 830,588 | 1.02 | % | 1,019,664 | 1.00 | % | 863,072 | 1.63 | % | ||||||||||||||||
|
Non-interest-bearing deposits
|
310,781 | 233,717 | 212,607 | |||||||||||||||||||||
| $ | 1,141,369 | $ | 1,253,381 | $ | 1,075,679 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
RATIOS
–
The following table shows certain of HRB Bank’s key
ratios for fiscal years 2011, 2010 and 2009:
|
|
|||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | ||||||||
|
|
|||||||||||
|
Pretax return on assets
|
2.36% | 2.12% | (1.03 | )% | |||||||
|
Net return on equity
|
5.43% | 21.04% | (6.67 | )% | |||||||
|
Equity to assets ratio
|
30.81% | 28.83% | 12.44% | ||||||||
|
|
|||||||||||
During fiscal year 2009, HRB Bank shared the revenues and
expenses of the H&R Block Prepaid
MasterCard
®
program with an affiliate, and as a result, transferred revenues
and expenses of $49.4 million and $13.4 million,
respectively, to this affiliate. During fiscal year 2010, the
agreement with the affiliate was terminated and HRB Bank now
retains the revenues and expenses of the program.
SHORT-TERM
BORROWINGS
–
The following table shows HRB Bank’s short-term
borrowings for fiscal years 2011, 2010 and 2009:
| (dollars in 000s) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||
| Balance | Rate | Balance | Rate | Balance | Rate | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Ending balance of FHLB advances
|
$ | 25,000 | 2.36% | $ | 50,000 | 1.92% | $ | 25,000 | 1.76% | |||||||||||||||
|
Average balance of FHLB advances
|
72,534 | 2.10% | 98,767 | 2.07% | 103,885 | 4.92% | ||||||||||||||||||
|
|
||||||||||||||||||||||||
The maximum amount of FHLB advances outstanding during fiscal
years 2011, 2010 and 2009 was $75.0 million,
$100.0 million and $129.0 million, respectively.
NEW ACCOUNTING
PRONOUNCEMENTS
See Item 8, note 1 to our consolidated financial
statements for a discussion of recently issued accounting
pronouncements.
INTEREST RATE
RISK
GENERAL
–
We
have a formal investment policy that strives to minimize the
market risk exposure of our cash equivalents and
available-for-sale
(AFS) securities, which are primarily affected by credit quality
and movements in interest rates. These guidelines 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 qualified money market funds. Because our cash and
cash equivalents have a relatively short maturity, our
portfolio’s market value is relatively insensitive to
interest rate changes.
As our short-term 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 short-term borrowings is relatively insensitive to interest
rate changes, interest expense on short-term borrowings will
increase and decrease with changes in the underlying short-term
interest rates.
Our long-term debt at April 30, 2011, consists primarily of
fixed-rate Senior Notes; therefore, a change in interest rates
would have no impact on consolidated pretax earnings. See
Item 8, note 11 to our consolidated financial
statements.
HRB
BANK
–
At
April 30, 2011, residential mortgage loans held for
investment consisted of 42% fixed-rate loans and 58%
adjustable-rate loans. These loans are sensitive to changes in
interest rates as well as expected prepayment levels. As
interest rates increase, fixed-rate residential mortgages tend
to exhibit lower
32
H&R
BLOCK 2011 Form 10K
Table of Contents
prepayments. The opposite is true
in a falling rate environment. When mortgage loans prepay,
mortgage origination costs are written off. Depending on the
timing of the prepayment, the write-offs of mortgage origination
costs may result in lower than anticipated yields.
At April 30, 2011, HRB Bank’s other investments
consisted primarily of mortgage-backed securities and FHLB
stock. See table below for sensitivity analysis of our
mortgage-backed securities.
HRB Bank’s liabilities consist primarily of transactional
deposit relationships, such as prepaid debit card accounts and
checking accounts. Other liabilities include money market
accounts, certificates of deposit and collateralized borrowings
from the FHLB. Money market accounts re-price as interest rates
change. Certificates of deposit re-price over time depending on
maturities. FHLB advances generally have fixed rates ranging
from one day through multiple years.
Under criteria published by the OTS, HRB Bank’s overall
interest rate risk exposure at March 31, 2011, the most
recent date an evaluation was completed, was characterized as
“minimal.” We actively manage our interest rate risk
positions. As interest rates change, we will adjust our strategy
and mix of assets and liabilities to optimize our position.
EQUITY PRICE
RISK
We have limited exposure to the equity markets. Our primary
exposure is through our deferred compensation plans. Within the
deferred compensation plans, we have mismatches in asset and
liability amounts and investment choices (both fixed-income and
equity). At April 30, 2011 and 2010, the impact of a 10%
market value change in the combined equity assets held by our
deferred compensation plans and other equity investments would
be $10.9 million and $9.7 million, respectively,
assuming no offset for the liabilities.
FOREIGN EXCHANGE
RATE RISK
Our operations in international markets are exposed to movements
in currency exchange rates. The currencies 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. We estimate a 10% change in
foreign exchange rates by itself would impact consolidated net
income in fiscal years 2011 and 2010 by $3.7 million and
$5.1 million, respectively, and cash balances at
April 30, 2011 and 2010 by $7.6 million and
$7.1 million, respectively.
During fiscal year 2011, borrowing needs in our Canadian
operations were funded by corporate borrowings in the
U.S. To mitigate the foreign currency exchange rate risk,
we used forward foreign exchange contracts. We do not enter into
forward contracts for speculative purposes. In estimating the
fair value of derivative positions, we utilized quoted market
prices, if available, or quotes obtained from external sources.
When foreign currency financial instruments are outstanding,
exposure to market risk on these instruments results from
fluctuations in currency rates during the periods in which the
contracts are outstanding. The counterparties to our currency
exchange contracts consist of major financial institutions, each
of which is rated investment grade. We are exposed to credit
risk to the extent of potential non-performance by
counterparties on financial instruments. Any potential credit
exposure does not exceed the fair value. We believe the risk of
incurring losses due to credit risk is remote. At April 30,
2011 we had no forward exchange contracts outstanding.
SENSITIVITY
ANALYSIS
The sensitivities of certain financial instruments to changes in
interest rates as of April 30, 2011 and 2010 are presented
below. The following table represents hypothetical instantaneous
and sustained parallel shifts in interest rates and should not
be relied on as an indicator of future expected results. The
impact of a change in interest rates on other factors, such as
delinquency and prepayment rates, is not included in the
analysis below.
|
|
||||||||||||||||||||||||
| (in 000s) | ||||||||||||||||||||||||
|
Basis Point
Change
|
||||||||||||||||||||||||
|
Carrying Value at
|
|
|||||||||||||||||||||||
| April 30, 2011 | −300 | −200 | −100 | +100 | +200 | +300 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Mortgage loans held for investment
|
$ | 485,008 | $ | 53,949 | $ | 36,810 | $ | 18,844 | $ | (16,601) | $ | (31,228) | $ | (46,280) | ||||||||||
|
Mortgage-backed securities
|
158,177 | 640 | 611 | 1,161 | (5,325) | (11,700) | (17,978) | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Carrying Value at
|
Basis Point Change | |||||||||||||||||||||||
| April 30, 2010 | −300 | −200 | −100 | +100 | +200 | +300 |
|
|||||||||||||||||
|
|
||||||||||||||||||||||||
|
Mortgage loans held for investment
|
$ | 595,405 | $ | 60,251 | $ | 43,363 | $ | 20,780 | $ | (7,906) | $ | (12,525) | $ | (14,664) | ||||||||||
|
Mortgage-backed securities
|
23,016 | 123 | 125 | 134 | (272) | (411) | (510) | |||||||||||||||||
H&R
BLOCK 2011
Form 10K
33
Table of Contents
| 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 United States are used. In
discharging this responsibility, management maintains an
extensive program of internal audits and requires the management
teams of our individual subsidiaries to certify their respective
financial information. Our system of internal control over
financial reporting also includes formal policies and
procedures, including a Code of Business Ethics and Conduct
program designed to encourage and assist all employees and
directors in living up to high standards of integrity.
The Audit Committee of the Board of Directors, composed solely
of outside and independent directors, meets periodically with
management, the independent auditors and the 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 auditors and the chief internal auditor have full
access to the Audit Committee and meet, both with and without
management present, to discuss the scope and results of their
audits, including internal control, audit and financial matters.
Deloitte & Touche LLP audited our consolidated
financial statements for fiscal years 2011, 2010 and 2009. Their
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 framework
in “Internal Control — Integrated Framework”
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) as of April 30, 2011.
Based on our assessment, management concluded that as of
April 30, 2011, the Company’s internal control over
financial reporting was effective based on the criteria set
forth by COSO. The Company’s external auditors,
Deloitte & Touche LLP, an independent registered
public accounting firm, have issued an audit report on the
effectiveness of the Company’s internal control over
financial reporting.
William C. Cobb President and Chief Executive Officer |
Jeffrey T. Brown Senior Vice President and Chief Financial Officer |
34
H&R
BLOCK 2011 Form 10K
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
H&R Block, Inc.
Kansas City, Missouri
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, 2011 and 2010, 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, 2011. These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
financial statements 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, 2011
and 2010, and the results of their operations and their cash
flows for each of the three years in the period ended
April 30, 2011, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 17 to the consolidated financial
statements, the Company adopted an accounting standard related
to consolidation of variable interest entities effective
May 1, 2010.
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, 2011, based on the criteria established in
Internal Control – Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated June 23, 2011 expressed an
unqualified opinion on the Company’s internal control over
financial reporting.
Kansas City, Missouri
June 23, 2011
H&R
BLOCK 2011
Form 10K
35
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
H&R Block, Inc.
Kansas City, Missouri
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, 2011, based on criteria established in
Internal Control — Integrated Framework
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, 2011, based on the criteria established in
Internal Control — Integrated Framework
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 as of and for the year ended
April 30, 2011 of the Company and our report dated
June 23, 2011 expressed an unqualified opinion on those
financial statements and included an explanatory paragraph
regarding the Company’s adoption of an accounting standard
related to consolidation of variable interest entities on
May 1, 2010.
Kansas City, Missouri
June 23, 2011
36
H&R
BLOCK 2011 Form 10K
Table of Contents
|
AND
COMPREHENSIVE INCOME
|
(in 000s, except per share amounts) |
|
|
||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||
|
|
||||||||||||
|
REVENUES:
|
||||||||||||
|
Service revenues
|
$ | 3,225,861 | $ | 3,231,487 | $ | 3,437,906 | ||||||
|
Product and other revenues
|
414,282 | 520,440 | 491,155 | |||||||||
|
Interest income
|
134,153 | 122,405 | 154,516 | |||||||||
|
|
||||||||||||
| 3,774,296 | 3,874,332 | 4,083,577 | ||||||||||
|
|
||||||||||||
|
OPERATING EXPENSES:
|
||||||||||||
|
Cost of revenues
|
2,414,590 | 2,467,996 | 2,596,218 | |||||||||
|
Selling, general and administrative
|
694,136 | 631,499 | 648,490 | |||||||||
|
|
||||||||||||
| 3,108,726 | 3,099,495 | 3,244,708 | ||||||||||
|
|
||||||||||||
|
Operating income
|
665,570 | 774,837 | 838,869 | |||||||||
|
Other income, net
|
11,455 | 9,298 | 501 | |||||||||
|
|
||||||||||||
|
Income from continuing operations before income taxes
|
677,025 | 784,135 | 839,370 | |||||||||
|
Income taxes
|
257,620 | 295,189 | 326,315 | |||||||||
|
|
||||||||||||
|
Net income from continuing operations
|
419,405 | 488,946 | 513,055 | |||||||||
|
Net loss from discontinued operations
|
(13,295 | ) | (9,704 | ) | (27,382 | ) | ||||||
|
|
||||||||||||
|
NET INCOME
|
$ | 406,110 | $ | 479,242 | $ | 485,673 | ||||||
|
|
||||||||||||
|
BASIC EARNINGS (LOSS) PER SHARE:
|
||||||||||||
|
Net income from continuing operations
|
$ | 1.35 | $ | 1.47 | $ | 1.53 | ||||||
|
Net loss from discontinued operations
|
(0.04 | ) | (0.03 | ) | (0.08 | ) | ||||||
|
|
||||||||||||
|
Net income
|
$ | 1.31 | $ | 1.44 | $ | 1.45 | ||||||
|
|
||||||||||||
|
DILUTED EARNINGS (LOSS) PER SHARE:
|
||||||||||||
|
Net income from continuing operations
|
$ | 1.35 | $ | 1.46 | $ | 1.53 | ||||||
|
Net loss from discontinued operations
|
(0.04 | ) | (0.03 | ) | (0.08 | ) | ||||||
|
|
||||||||||||
|
Net income
|
$ | 1.31 | $ | 1.43 | $ | 1.45 | ||||||
|
|
||||||||||||
|
COMPREHENSIVE INCOME:
|
||||||||||||
|
Net income
|
$ | 406,110 | $ | 479,242 | $ | 485,673 | ||||||
|
Unrealized gains (losses) on securities, net of taxes:
|
||||||||||||
|
Unrealized holding gains (losses) arising during the year, net
of taxes of $58, $188 and $(1,736)
|
73 | 274 | (2,836 | ) | ||||||||
|
Reclassification adjustment for gains included in income, net of
taxes of ($133), $811 and $762
|
55 | (1,399 | ) | (1,164 | ) | |||||||
|
Change in foreign currency translation adjustments
|
9,427 | 14,442 | (10,125 | ) | ||||||||
|
|
||||||||||||
|
Comprehensive income
|
$ | 415,665 | $ | 492,559 | $ | 471,548 | ||||||
|
|
||||||||||||
|
|
||||||||||||
See
accompanying notes to consolidated financial statements.
H&R
BLOCK 2011
Form 10K
37
Table of Contents
|
|
(in 000s, except share and per share amounts) |
|
|
||||||||
| As of April 30, | 2011 | 2010 | ||||||
|
|
||||||||
|
ASSETS
|
||||||||
|
Cash and cash equivalents
|
$ | 1,677,844 | $ | 1,804,045 | ||||
|
Cash and cash equivalents — restricted
|
48,383 | 34,350 | ||||||
|
Receivables, less allowance for doubtful accounts of $67,466 and
$112,475
|
492,290 | 517,986 | ||||||
|
Prepaid expenses and other current assets
|
259,214 | 292,655 | ||||||
|
|
||||||||
|
Total current assets
|
2,477,731 | 2,649,036 | ||||||
|
Mortgage loans held for investment, less allowance for loan
losses of $92,087 and $93,535 |
485,008 | 595,405 | ||||||
|
Property and equipment, at cost less accumulated depreciation
and amortization of $677,220 and $657,008 |
307,320 | 345,470 | ||||||
|
Intangible assets, net
|
367,919 | 367,432 | ||||||
|
Goodwill
|
846,245 | 840,447 | ||||||
|
Other assets
|
723,738 | 436,528 | ||||||
|
|
||||||||
|
Total assets
|
$ | 5,207,961 | $ | 5,234,318 | ||||
|
|
||||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
LIABILITIES:
|
||||||||
|
Customer banking deposits
|
$ | 852,220 | $ | 852,555 | ||||
|
Accounts payable, accrued expenses and other current liabilities
|
618,070 | 756,577 | ||||||
|
Accrued salaries, wages and payroll taxes
|
257,038 | 199,496 | ||||||
|
Accrued income taxes
|
458,910 | 459,175 | ||||||
|
Current portion of long-term debt
|
3,437 | 3,688 | ||||||
|
Federal Home Loan Bank borrowings
|
25,000 | 50,000 | ||||||
|
|
||||||||
|
Total current liabilities
|
2,214,675 | 2,321,491 | ||||||
|
Long-term debt
|
1,049,754 | 1,035,144 | ||||||
|
Federal Home Loan Bank borrowings
|
– | 25,000 | ||||||
|
Other noncurrent liabilities
|
493,958 | 412,053 | ||||||
|
|
||||||||
|
Total liabilities
|
3,758,387 | 3,793,688 | ||||||
|
|
||||||||
|
COMMITMENTS AND CONTINGENCIES
|
||||||||
|
STOCKHOLDERS’ EQUITY:
|
||||||||
|
Common stock, no par, stated value $.01 per share,
800,000,000 shares authorized, shares issued of 412,440,599
and 431,390,599
|
4,124 | 4,314 | ||||||
|
Convertible preferred stock, no par, stated value $0.01 per
share,
500,000 shares authorized |
– | – | ||||||
|
Additional paid-in capital
|
812,666 | 832,604 | ||||||
|
Accumulated other comprehensive income
|
11,233 | 1,678 | ||||||
|
Retained earnings
|
2,658,103 | 2,658,586 | ||||||
|
Less treasury shares, at cost
|
(2,036,552 | ) | (2,056,552 | ) | ||||
|
|
||||||||
|
Total stockholders’ equity
|
1,449,574 | 1,440,630 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 5,207,961 | $ | 5,234,318 | ||||
|
|
||||||||
|
|
||||||||
See
accompanying notes to consolidated financial statements.
38
H&R
BLOCK 2011 Form 10K
Table of Contents
|
|
(in 000s) |
|
|
||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||||||
|
Net income
|
$ | 406,110 | $ | 479,242 | $ | 485,673 | ||||||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||||||
|
Depreciation and amortization
|
121,633 | 126,901 | 123,631 | |||||||||||||
|
Provision for bad debts and loan losses
|
180,951 | 161,296 | 181,829 | |||||||||||||
|
Provision for deferred taxes
|
9,432 | 170,566 | 73,213 | |||||||||||||
|
Stock-based compensation
|
14,500 | 29,369 | 26,557 | |||||||||||||
|
Net cash provided by discontinued operations
|
– | – | 97,578 | |||||||||||||
|
Changes in assets and liabilities, net of acquisitions:
|
||||||||||||||||
|
Cash and cash equivalents — restricted
|
(14,033 | ) | 2,497 | (44,625 | ) | |||||||||||
|
Receivables
|
(105,708 | ) | (87,889 | ) | (77,447 | ) | ||||||||||
|
Prepaid expenses and other current assets
|
(37,892 | ) | (2,320 | ) | 84,279 | |||||||||||
|
Other noncurrent assets
|
(98,818 | ) | (59,429 | ) | 176,864 | |||||||||||
|
Accounts payable, accrued expenses and
other current liabilities |
(111,727 | ) | (305 | ) | (36,024 | ) | ||||||||||
|
Accrued salaries, wages and payroll taxes
|
56,009 | (59,617 | ) | (106,014 | ) | |||||||||||
|
Accrued income taxes
|
5,962 | (77,254 | ) | 126,594 | ||||||||||||
|
Other noncurrent liabilities
|
119,428 | (65,261 | ) | (56,001 | ) | |||||||||||
|
Other, net
|
(33,344 | ) | (30,327 | ) | (31,668 | ) | ||||||||||
|
|
||||||||||||||||
|
Net cash provided by operating activities
|
512,503 | 587,469 | 1,024,439 | |||||||||||||
|
|
||||||||||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||
|
Available-for-sale
securities:
|
||||||||||||||||
|
Purchases of
available-for-sale
securities
|
(138,824 | ) | (5,365 | ) | (5,092 | ) | ||||||||||
|
Maturities of and payments received on
available-for-sale
securities
|
16,797 | 15,758 | 15,075 | |||||||||||||
|
Principal payments on mortgage loans held for investment, net
|
58,471 | 72,832 | 91,329 | |||||||||||||
|
Purchases of property and equipment
|
(62,959 | ) | (90,515 | ) | (97,880 | ) | ||||||||||
|
Payments made for business acquisitions, net of cash acquired
|
(54,171 | ) | (10,539 | ) | (293,805 | ) | ||||||||||
|
Proceeds from sale of businesses, net
|
71,083 | 66,623 | 18,865 | |||||||||||||
|
Franchise loans:
|
||||||||||||||||
|
Loans funded
|
(92,455 | ) | (89,664 | ) | – | |||||||||||
|
Payments received
|
57,552 | 40,710 | – | |||||||||||||
|
Net cash provided by investing activities of discontinued
operations
|
– | – | 255,066 | |||||||||||||
|
Other, net
|
34,349 | 31,513 | 22,002 | |||||||||||||
|
|
||||||||||||||||
|
Net cash provided by (used in) investing activities
|
(110,157 | ) | 31,353 | 5,560 | ||||||||||||
|
|
||||||||||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||
|
Repayments of commercial paper
|
(4,818,766 | ) | (1,406,013 | ) | – | |||||||||||
|
Proceeds from issuance of commercial paper
|
4,818,766 | 1,406,013 | – | |||||||||||||
|
Repayments of other borrowings
|
(50,000 | ) | (4,267,773 | ) | (4,762,294 | ) | ||||||||||
|
Proceeds from other borrowings
|
– | 4,242,727 | 4,733,294 | |||||||||||||
|
Customer banking deposits, net
|
(11,440 | ) | 17,539 | 64,357 | ||||||||||||
|
Dividends paid
|
(186,802 | ) | (200,899 | ) | (198,685 | ) | ||||||||||
|
Repurchase of common stock, including shares surrendered
|
(283,534 | ) | (254,250 | ) | (106,189 | ) | ||||||||||
|
Proceeds from issuance of common stock, net
|
– | – | 141,415 | |||||||||||||
|
Proceeds from exercise of stock options
|
424 | 16,682 | 71,594 | |||||||||||||
|
Net cash provided by financing activities of discontinued
operations
|
– | – | 4,783 | |||||||||||||
|
Other, net
|
(3,039 | ) | (35,144 | ) | 11,492 | |||||||||||
|
|
||||||||||||||||
|
Net cash used in financing activities
|
(534,391 | ) | (481,118 | ) | (40,233 | ) | ||||||||||
|
|
||||||||||||||||
|
Effects of exchange rates on cash
|
5,844 | 11,678 | – | |||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
(126,201 | ) | 149,382 | 989,766 | ||||||||||||
|
Cash and cash equivalents at beginning of the year
|
1,804,045 | 1,654,663 | 664,897 | |||||||||||||
|
|
||||||||||||||||
|
Cash and cash equivalents at end of the year
|
$ | 1,677,844 | $ | 1,804,045 | $ | 1,654,663 | ||||||||||
|
|
||||||||||||||||
|
SUPPLEMENTARY CASH FLOW DATA:
|
||||||||||||||||
|
Income taxes paid, net of refunds received
of $4,762, $12,587 and $158,862 |
$ | 244,917 | $ | 359,559 | $ | (1,593 | ) | |||||||||
|
Interest paid on borrowings
|
73,791 | 78,305 | 89,541 | |||||||||||||
|
Interest paid on deposits
|
8,541 | 10,156 | 14,004 | |||||||||||||
|
Transfers of foreclosed loans to other assets
|
16,463 | 19,341 | 65,171 | |||||||||||||
|
|
||||||||||||||||
See
accompanying notes to consolidated financial statements.
H&R
BLOCK 2011
Form 10K
39
Table of Contents
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(amounts
in 000s, except
per share amounts)
per share amounts)
|
|
||||||||||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||
|
Convertible
|
Additional
|
Other
|
Total
|
|||||||||||||||||||||||||||||||||||||
| Common Stock | Preferred Stock |
Paid-in
|
Comprehensive
|
Retained
|
Treasury Stock |
Stockholders’
|
||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Income (Loss) | Earnings | Shares | Amount | Equity | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Balances at May 1, 2008
|
435,891 | $ | 4,359 | – | $ | – | $ | 695,959 | $ | 2,486 | $ | 2,384,449 | (109,880 | ) | $ | (2,099,435 | ) | $ | 987,818 | |||||||||||||||||||||
|
Net income
|
– | – | – | – | – | – | 485,673 | – | – | 485,673 | ||||||||||||||||||||||||||||||
|
Unrealized translation loss
|
– | – | – | – | – | (10,125 | ) | – | – | – | (10,125 | ) | ||||||||||||||||||||||||||||
|
Change in net unrealized gain (loss) on
available-for-sale
securities
|
– | – | – | – | – | (4,000 | ) | – | – | – | (4,000 | ) | ||||||||||||||||||||||||||||
|
Proceeds from common stock Issuance, net of expenses
|
8,286 | 83 | – | – | 141,332 | – | – | – | – | 141,415 | ||||||||||||||||||||||||||||||
|
Stock-based compensation
|
– | – | – | – | 32,600 | – | – | – | – | 32,600 | ||||||||||||||||||||||||||||||
|
Shares issued for:
|
||||||||||||||||||||||||||||||||||||||||
|
Option exercises
|
– | – | – | – | (12,624 | ) | – | – | 4,481 | 85,624 | 73,000 | |||||||||||||||||||||||||||||
|
Nonvested shares
|
– | – | – | – | (20,392 | ) | – | – | 1,015 | 19,402 | (990 | ) | ||||||||||||||||||||||||||||
|
ESPP
|
– | – | – | – | (423 | ) | – | – | 292 | 5,577 | 5,154 | |||||||||||||||||||||||||||||
|
Acquisitions
|
– | – | – | – | 25 | – | – | 8 | 163 | 188 | ||||||||||||||||||||||||||||||
|
Acquisition of treasury shares
|
– | – | – | – | – | – | – | (5,991 | ) | (106,189 | ) | (106,189 | ) | |||||||||||||||||||||||||||
|
Cash dividends paid – $0.59 per share
|
– | – | – | – | – | – | (198,685 | ) | – | – | (198,685 | ) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Balances at April 30, 2009
|
444,177 | 4,442 | – | – | 836,477 | (11,639 | ) | 2,671,437 | (110,075 | ) | (2,094,858 | ) | 1,405,859 | |||||||||||||||||||||||||||
|
Net income
|
– | – | – | – | – | – | 479,242 | – | – | 479,242 | ||||||||||||||||||||||||||||||
|
Unrealized translation gain
|
– | – | – | – | – | 14,442 | – | – | – | 14,442 | ||||||||||||||||||||||||||||||
|
Change in net unrealized gain (loss) on
available-for-sale
securities
|
– | – | – | – | – | (1,125 | ) | – | – | – | (1,125 | ) | ||||||||||||||||||||||||||||
|
Stock-based compensation
|
– | – | – | – | 29,369 | – | – | – | – | 29,369 | ||||||||||||||||||||||||||||||
|
Shares issued for:
|
||||||||||||||||||||||||||||||||||||||||
|
Option exercises
|
– | – | – | – | (10,840 | ) | – | – | 1,293 | 24,616 | 13,776 | |||||||||||||||||||||||||||||
|
Nonvested shares/units
|
– | – | – | – | (13,806 | ) | – | (300 | ) | 677 | 12,879 | (1,227 | ) | |||||||||||||||||||||||||||
|
ESPP
|
– | – | – | – | (924 | ) | – | – | 266 | 5,058 | 4,134 | |||||||||||||||||||||||||||||
|
Acquisition of treasury shares
|
– | – | – | – | – | – | – | (246 | ) | (4,247 | ) | (4,247 | ) | |||||||||||||||||||||||||||
|
Retirement of common shares
|
(12,786 | ) | (128 | ) | – | – | (7,672 | ) | – | (242,203 | ) | – | – | (250,003 | ) | |||||||||||||||||||||||||
|
Cash dividends declared
|
– | – | – | – | – | – | (48,691 | ) | – | – | (48,691 | ) | ||||||||||||||||||||||||||||
|
Cash dividends paid – $0.60 per share
|
– | – | – | – | – | – | (200,899 | ) | – | – | (200,899 | ) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Balances at April 30, 2010
|
431,391 | 4,314 | – | – | 832,604 | 1,678 | 2,658,586 | (108,085 | ) | (2,056,552 | ) | 1,440,630 | ||||||||||||||||||||||||||||
|
Net income
|
– | – | – | – | – | – | 406,110 | – | – | 406,110 | ||||||||||||||||||||||||||||||
|
Unrealized translation gain
|
– | – | – | – | – | 9,427 | – | – | – | 9,427 | ||||||||||||||||||||||||||||||
|
Change in net unrealized gain (loss) on
available-for-sale
securities
|
– | – | – | – | – | 128 | – | – | – | 128 | ||||||||||||||||||||||||||||||
|
Stock-based compensation
|
– | – | – | – | 14,500 | – | – | – | – | 14,500 | ||||||||||||||||||||||||||||||
|
Shares issued for:
|
||||||||||||||||||||||||||||||||||||||||
|
Option exercises
|
– | – | – | – | (8,332 | ) | – | – | 339 | 6,439 | (1,893 | ) | ||||||||||||||||||||||||||||
|
Nonvested shares/units
|
– | – | – | – | (12,952 | ) | – | (95 | ) | 632 | 12,028 | (1,019 | ) | |||||||||||||||||||||||||||
|
ESPP
|
– | – | – | – | (1,784 | ) | – | – | 269 | 5,121 | 3,337 | |||||||||||||||||||||||||||||
|
Acquisition of treasury shares
|
– | – | – | – | – | – | – | (230 | ) | (3,588 | ) | (3,588 | ) | |||||||||||||||||||||||||||
|
Retirement of common shares
|
(18,950 | ) | (190 | ) | – | – | (11,370 | ) | – | (268,387 | ) | – | – | (279,947 | ) | |||||||||||||||||||||||||
|
Cash dividends declared – $0.45 per share
|
– | – | – | – | – | – | (138,111 | ) | – | – | (138,111 | ) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Balances at April 30, 2011
|
412,441 | $ | 4,124 | – | $ | – | $ | 812,666 | $ | 11,233 | $ | 2,658,103 | (107,075 | ) | $ | (2,036,552 | ) | $ | 1,449,574 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
See
accompanying notes to consolidated financial statements.
40
H&R
BLOCK 2011 Form 10K
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 1: | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
NATURE OF
OPERATIONS
–
Our
operating subsidiaries provide a variety of services to the
general public, principally in the United States (U.S.).
Specifically, we offer: tax return preparation; tax and
consulting services to business clients; certain retail banking
services and tax preparation and related software. Tax
preparation services are also provided in Canada and Australia.
Our Tax Services segment comprised 77.2% of our consolidated
revenues from continuing operations for fiscal year 2011.
PRINCIPLES OF
CONSOLIDATION
–
The
consolidated financial statements include the accounts of the
Company and our wholly-owned subsidiaries. Intercompany
transactions and balances have been eliminated.
Some of our subsidiaries operate in regulated industries and
their underlying accounting records reflect the policies and
requirements of these industries.
MANAGEMENT
ESTIMATES
–
The
preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Significant estimates, assumptions and judgments are
applied in the determination of our allowance for loan losses,
potential losses from loan repurchase and indemnity obligations
associated with our discontinued mortgage business, contingent
losses associated with pending litigation, fair value of
reporting units, valuation allowances based on future taxable
income, reserves for uncertain tax positions, credit losses on
receivable balances and related matters. Estimates have been
prepared on the basis of the most current and best information
available as of each balance sheet date. As such, actual results
could differ materially from those estimates.
CONCENTRATIONS OF
RISK
–
The
overall credit quality of our mortgage loans held for investment
is impacted by the strength of the U.S. economy and local
economies. Our mortgage loans held for investment include
concentrations of loans to borrowers in certain states, which
may result in increased exposure to loss as a result of changes
in real estate values and underlying economic or market
conditions related to a particular geographical location.
Approximately 59% of our mortgage loan portfolio consists of
loans to borrowers located in the states of Florida, California,
New York and Wisconsin.
CASH AND CASH
EQUIVALENTS
–
Cash
and cash equivalents include cash on hand, cash due from banks
and federal funds sold. For purposes of the consolidated balance
sheets and consolidated statements of cash flows, all
non-restricted highly liquid instruments purchased with an
original maturity of three months or less are considered to be
cash equivalents. We present cash flow activities utilizing the
indirect method. Book overdrafts included in accounts payable
totaled $38.8 million and $35.9 million at
April 30, 2011 and 2010, respectively.
CASH AND CASH
EQUIVALENTS –
RESTRICTED
–
Cash
and cash equivalents — restricted consists primarily
of cash held by H&R Block Bank (HRB Bank) required for
regulatory compliance and cash held by our captive insurance
subsidiary that will be used to pay claims.
RECEIVABLES AND
RELATED
ALLOWANCES
–
Receivables
consist primarily of accounts receivable from customers of our
Business Services segment and receivables from tax clients for
tax return preparation. The allowance for doubtful accounts for
these receivables requires management’s judgment regarding
collectibility and current economic conditions to establish an
amount considered by management to be adequate to cover
estimated losses as of the balance sheet date. Business Services
accounts receivable are charged-off primarily when we determine
that the specific customer does not have the ability to repay
the balance in full. Receivables from tax clients for tax return
preparation are not specifically identified and charged off, but
are evaluated on a pooled basis. At the end of each tax season
the outstanding balances on these receivables are evaluated
based on collections received and expected collections over
subsequent tax seasons.
Our financing receivables consist primarily of mortgage loans
held for investment, Emerald Advance lines of Credit (EAs), tax
client receivables related to refund anticipation loans (RALs)
and loans made to franchisees.
Emerald Advance
lines of credit.
EAs are offered to clients in tax
offices from late November through mid-January, 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
increased and utilized year-round. These lines of credit are
offered by HRB Bank.
Interest income on EAs is calculated using the average daily
balance method and is recognized based on the principal amount
outstanding until the outstanding balance is paid or becomes
delinquent. Loan commitment fees on EAs, net of related
expenses, are initially deferred and recognized as revenue over
the commitment period, which is typically two months. EAs
balances are due on February 15th, and any amounts unpaid by
that date are placed on non-accrual status. Payments on past due
amounts are recorded as a reduction in the receivable balance.
H&R
BLOCK 2011
Form 10K
41
Table of Contents
We review the credit quality of these receivables based on
pools, which are segregated by the year of origination. Specific
bad debt rates are applied to each pool, as well as to those who
maintain their loan year-round.
We determine our allowance for these receivables collectively,
based on a review of receipts taking into consideration
historical experience. These receivables are not specifically
identified and charged-off, but are evaluated on a pooled basis.
Initial bad debt rates also consider whether the loan was made
to a new or repeat client. At the end of each tax season the
outstanding balances on these receivables are evaluated based on
collections received and expected collections over subsequent
tax seasons. We adjust our allowance accordingly, with these
adjustments reflected as bad debt expense.
Tax client
receivables related to RALs.
Historically, RALs were
offered in our US retail tax offices through a contractual
relationship with HSBC Holdings plc (HSBC). We purchased a 49.9%
participation interest in all RALs obtained through our retail
offices. In December 2010, HSBC terminated its contract with us
based on restrictions placed on HSBC by its regulator and RALs
were not offered in our tax offices this tax season. In
connection with the contract termination, we obtained the
remaining rights to collect on the outstanding balances of RALs
originated in years 2006 and later. All tax client receivables
related to RALs outstanding at April 30, 2011 were
originated prior to fiscal year 2011 and are past due. We do not
accrue interest on these receivables. Payments on past due
amounts are recorded as a reduction in the receivable balance.
We review the credit quality of these receivables based on
pools, which are segregated by the year of origination, with
specific bad debt rates applied to each pool.
These receivables are not specifically identified and
charged-off, but are evaluated on a pooled basis. At the end of
each tax season the outstanding balances on these receivables
are evaluated based on collections received and expected
collections over subsequent tax seasons. We adjust our allowance
accordingly, with these adjustments reflected as bad debt
expense.
Loans made to
franchisees.
Interest income on loans made to
franchisees is calculated using the average daily balance method
and is recognized based on the principal amount outstanding
until the outstanding balance is paid or written off. Loans made
to franchisees totaled $172.6 million at April 30,
2011, and consisted of $125.1 million in term loans made to
finance the purchase of franchises and $47.5 million in
revolving lines of credit made to existing franchisees primarily
for the purpose of funding their off-season needs. The credit
quality of these receivables is determined on a specific
franchisee basis, taking into account the franchisee’s
credit score, their payment history on existing loans and
operational amounts due to us, the
loan-to-value
ratio and
debt-to-income
ratio. Credit scores,
loan-to-value
and
debt-to-income
ratios are obtained at the time of underwriting. Payment history
is monitored on a regular basis. We believe all loans to
franchisees are of similar credit quality. Loans are evaluated
for impairment when they become delinquent. Amounts deemed to be
uncollectible are written off to bad debt expense and bad debt
related to these loans has typically been insignificant.
Additionally, the franchise office serves as collateral for the
loan. In the event the franchisee is unable to repay the loans,
we revoke their franchise rights, write off the remaining
balance of the loans and assume control of the office. As of
April 30, 2011, loans totaling $0.1 million were past
due, however we had no loans to franchisees on non-accrual
status.
MORTGAGE LOANS
HELD FOR
INVESTMENT
–
Mortgage
loans held for investment represent loans originated or acquired
with the ability and current intent to hold to maturity. Loans
held for investment are carried at amortized cost adjusted for
charge-offs, net of allowance for loan losses, deferred fees or
costs on originated loans and unamortized premiums or discounts
on purchased loans. Loan fees and certain direct loan
origination costs are deferred and the net fee or cost is
recognized in interest income over the life of the related loan.
Unearned income, premiums and discounts on purchased loans are
amortized or accreted into income over the estimated life of the
loan using methods that approximate the interest method based on
assumptions regarding the loan portfolio, including prepayments
adjusted to reflect actual experience.
We record an allowance representing our estimate of credit
losses inherent in the loan portfolio at the balance sheet date.
Loan recoveries and the provision for credit losses increase the
allowance, while loan charge-offs decrease the allowance. A
current assessment of the value of the loan’s underlying
collateral is made when the loan is no later than 60 days
past due and any loan balance in excess of the value less costs
to sell the property is included in the provision for credit
losses.
We evaluate mortgage loans less than 60 days past due on a
pooled basis and record a loan loss allowance for those loans in
the aggregate. We stratify these loans based on our view of risk
associated with various elements of the pool and assign
estimated loss rates based on those risks. Loss rates consider
both the rate at which loans will become delinquent (frequency)
and the amount of loss that will ultimately be realized upon
occurrence of a liquidation of collateral (severity), and are
primarily based on historical experience and our assessment of
economic and market conditions.
Loans are considered impaired when we believe it is probable we
will be unable to collect all principal and interest due
according to the contractual terms of the note, or when the loan
is 60 days past due. Impaired loans are
42
H&R
BLOCK 2011 Form 10K
Table of Contents
reviewed individually and a specific loan loss allowance is
recorded based on the fair value of the underlying collateral.
We classify loans as non-accrual when full and timely collection
of interest or principal becomes uncertain, or when they are
90 days past due. Interest previously accrued, but not
collected, is reversed against current interest income when a
loan is placed on non-accrual status. Accretion of deferred fees
is discontinued for non-accrual loans. Payments received on
non-accrual loans are recognized as interest income when the
loan is considered collectible and applied to principal when it
is doubtful that all contractual payments will be collected.
Loans are not placed back on accrual status until collection of
principal and interest is reasonably assured as a result of the
borrower bringing the loan into compliance with the contractual
terms of the loan. Prior to restoring a loan to accrual status,
management considers a borrower’s prospects for continuing
future contractual payments.
From time to time, as part of our loss mitigation process, we
may agree to modify the contractual terms of a borrower’s
loan. We have developed loan modification programs designed to
help borrowers refinance adjustable-rate mortgage loans prior to
rate reset or who may otherwise have difficulty making their
payments. In cases where we modify a loan and in so doing grant
a concession to a borrower experiencing financial difficulty,
the modification is considered a troubled debt restructuring
(TDR). We may consider the borrower’s payment status and
history, the borrower’s ability to pay upon a rate reset on
an adjustable-rate mortgage, the size of the payment increase
upon a rate reset, the period of time remaining prior to the
rate reset and other relevant factors in determining whether a
borrower is experiencing financial difficulty. A borrower who is
current may be deemed to be experiencing financial difficulty in
instances where the evidence suggests an inability to pay based
on the original terms of the loan after the interest rate reset
and, in the absence of a modification, may default on the loan.
We evaluate whether the modification represents a concession we
would not otherwise consider, such as a lower interest rate than
what a new borrower of similar credit risk would be offered. A
loan modified in a troubled debt restructuring, including a loan
that was current at the time of modification, is placed on
non-accrual status until we determine future collection of
principal and interest is reasonably assured, which generally
requires the borrower to demonstrate a period of performance
according to the restructured terms. At the time of the
modification, we record impairment for TDR loans equal to the
difference between the principal balance of the loan and the
present value of expected future cash flows discounted at the
loan’s effective interest rate. However, if we later assess
that foreclosure of a modified loan is probable, we record
impairment based on the estimated fair value of the underlying
collateral.
REAL ESTATE
OWNED
–
Real
estate owned (REO) includes foreclosed properties securing
mortgage loans. Foreclosed assets are adjusted to fair value
less costs to sell upon transfer of the loans to REO.
Subsequently, REO is carried at the lower of carrying value or
fair value less costs to sell. Fair value is generally based on
independent market prices or appraised values of the collateral.
Subsequent holding period losses and losses arising from the
sale of REO are expensed as incurred. REO is included in prepaid
expenses and other current assets in the consolidated balance
sheets.
INVESTMENTS
–
Investments
include both
available-for-sale
marketable securities and investments
held-to-maturity.
These investments are included in other assets in the
consolidated balance sheets.
Available-for-Sale.
Marketable securities we hold are classified as
available-for-sale
(AFS) and are reported at fair value. Unrealized gains and
losses are calculated using the specific identification method
and reported, net of applicable taxes, as a component of
accumulated other comprehensive income. Realized gains and
losses on the sale of these securities are determined using the
specific identification method.
We monitor our AFS investment portfolio for impairment and
consider many factors in determining whether the impairment is
deemed to be
other-than-temporary.
These factors include, but are not limited to, the length of
time the security has had a market value less than the cost
basis, the severity of loss, our intent to sell, including
regulatory or contractual requirements to sell, recent events
specific to the issuer or industry, external credit ratings and
recent downgrades in such ratings.
For investments in mortgage-backed securities, amortization of
premiums and accretion of discounts are recognized in interest
income using the interest method, adjusted for anticipated
prepayments where applicable. We update our estimates of
expected cash flows periodically and recognize changes in
calculated effective yields as appropriate.
Held-to-Maturity.
Our investment in the stock of the Federal Home Loan Bank (FHLB)
is carried at cost, as it is a restricted security, which is
required to be maintained by HRB Bank for borrowing
availability. The cost of the stock represents its redemption
value, as there is no ready market value.
PROPERTY AND
EQUIPMENT
–
Buildings
and equipment are initially recorded at cost and are depreciated
over the estimated useful life of the assets using the
straight-line method. Leasehold improvements are initially
recorded at cost and are amortized over the lesser of the term
of the respective lease or the estimated useful life,
H&R
BLOCK 2011
Form 10K
43
Table of Contents
using the straight-line method. Estimated useful lives are 15 to
40 years for buildings, 3 to 5 years for computers and
other equipment and up to 8 years for leasehold
improvements.
We capitalize certain allowable costs associated with software
developed or purchased for internal use. These costs are
typically amortized over 36 months using the straight-line
method.
Substantially all of the operations of our subsidiaries are
conducted in leased premises. For all lease agreements,
including those with escalating rent payments or rent holidays,
we recognize rent expense on a straight-line basis.
INTANGIBLE ASSETS
AND
GOODWILL
–
We
test goodwill and other indefinite-life intangible assets for
impairment annually or more frequently, whenever events occur or
circumstances change which would, more likely than not, reduce
the fair value of a reporting unit below its carrying value. The
first step of the impairment test is to compare the estimated
fair value of the reporting unit to its carrying value. If the
carrying value is less than fair value, no impairment exists. If
the carrying value is greater than fair value, a second step is
performed to determine the fair value of goodwill and the amount
of impairment loss, if any.
In addition, long-lived assets, including intangible assets with
finite lives, are assessed for impairment whenever events or
circumstances indicate the carrying value may not be fully
recoverable by comparing the carrying value to future
undiscounted cash flows. Impairment is recorded for long-lived
assets determined not to be fully recoverable equal to the
excess of the carrying amount of the asset over its estimated
fair value.
We recorded a $22.7 million goodwill impairment related to
our RedGear reporting unit within our Tax Services segment in
fiscal year 2011. We recorded a $15.0 million goodwill
impairment related to our RSM EquiCo, Inc. (RSM EquiCo)
reporting unit within our Business Services segment in fiscal
year 2010 and a $2.2 million goodwill impairment for a
reporting unit within our Tax Services segment in fiscal year
2009. No material impairment adjustments to other intangible
assets or other long-lived assets of continuing operations were
made during the three-year period ended April 30, 2011.
The weighted-average life of intangible assets with finite lives
is 26 years. Intangible assets are typically amortized over
the estimated useful life of the assets using the straight-line
method.
COMMERCIAL
PAPER
–
During
the year we issued commercial paper to finance temporary
liquidity needs and various financial activities. There was no
commercial paper outstanding at April 30, 2011 or 2010.
MORTGAGE LOAN
REPURCHASE
LIABILITY
–
In
connection with the securitization and sale of loans, Sand
Canyon Corporation (SCC) made certain representations and
warranties, including, but not limited to, representations
relating to matters such as ownership of the loan, validity of
lien securing the loan, and the loan’s compliance with
SCC’s underwriting criteria. Representations and warranties
in whole loan sale transactions to institutional investors
included a “knowledge qualifier” which limits SCC
liability for borrower fraud to those instances where SCC had
knowledge of the fraud at the time the loans were sold. In the
event that there is a breach of a representation and warranty
and such breach materially and adversely affects the value of a
mortgage loan, SCC may be obligated to repurchase a loan or
otherwise indemnify certain parties for losses incurred as a
result of loan liquidation. Generally, these representations and
warranties are not subject to a stated term, but would be
subject to statutes of limitation applicable to the contractual
provisions.
SCC estimates losses relating to representation and warranty
claims by estimating loan repurchase and indemnification
obligations on both known claims and projections of future
claims. Projections of future claims are based on an analysis
that includes a combination of reviewing repurchase demands and
actual defaults and loss severities, inquiries from various
third-parties, the terms and provisions of related agreements
and the historical rate of repurchase and indemnification
obligations related to breaches of representations and
warranties. SCC’s methodology for calculating this
liability considers the likelihood that individual
counterparties will assert future claims. The repurchase
liability is included in accounts payable, accrued expenses and
other current liabilities on our consolidated balance sheets.
LITIGATION
–
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
reserves required, if any, for these contingencies is made after
analysis of each known issue and an analysis of historical
experience. We record reserves related to certain legal matters
for which we believe it is probable that a loss will be incurred
and the range of such loss can be estimated. With respect to
other matters, management has concluded that a loss is only
reasonably possible or remote, or not estimable and, therefore,
no liability is recorded. Management discloses the facts
regarding material matters, and potential exposure if
determinable, for losses assessed as reasonably possible to
occur. Costs incurred with defending claims are expensed as
incurred. Any receivable for insurance recoveries is recorded
separately from the corresponding litigation reserve, and only
if recovery is determined to be probable.
INCOME
TAXES
–
We
account for income taxes under the asset and liability method,
which requires us to record deferred income tax assets and
liabilities for future tax consequences attributable to
differences between the
44
H&R
BLOCK 2011 Form 10K
Table of Contents
financial statement carrying value of existing assets and
liabilities and their respective tax basis. Deferred taxes are
determined separately for each tax-paying component within each
tax jurisdiction based on provisions of enacted tax law.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. Our deferred tax assets include capital loss and
state and foreign tax loss carry-forwards and are reduced by a
valuation allowance if, based on available evidence, it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. Our current deferred tax assets are
included in prepaid expenses and other current assets in the
consolidated balance sheets. Noncurrent deferred tax assets are
included in other assets on our consolidated balance sheets.
Noncurrent deferred tax liabilities are included in other
noncurrent liabilities on our consolidated balance sheets.
We evaluate the sustainability of each uncertain tax position
based on its technical merits. If we determine it is more likely
than not a tax position will be sustained based on its technical
merits, we record the impact of the position in our consolidated
financial statements at the largest amount that is greater than
fifty percent likely of being realized upon ultimate settlement.
We record no tax benefit for tax positions where we have
concluded it is not more likely than not to be sustained.
Differences between a tax position taken or expected to be taken
in our tax returns and the amount of benefit recognized and
measured in the financial statements result in unrecognized tax
benefits, which are recorded in the balance sheet as either a
liability for unrecognized tax benefits or reductions to
recorded tax assets, as applicable.
We file a consolidated federal tax return on a calendar year
basis and state tax returns on a consolidated or combined basis,
as permitted by authorities. We report interest and penalties as
a component of income tax expense.
TREASURY
SHARES
–
Shares
of common stock repurchased by us are recorded, at cost, as
treasury shares and result in a reduction of stockholders’
equity. We reissue treasury shares as part of our stock-based
compensation programs or for acquisitions. When shares are
reissued, we determine the cost using the average cost method.
Periodically, we may permanently retire shares held in treasury
as determined by our Board of Directors.
REVENUE
RECOGNITION
–
Service
revenues consist primarily of fees for preparation and filing of
tax returns, both in offices and through our online programs,
fees associated with our Peace of Mind (POM) guarantee program
and fees for consulting services. Service revenues are
recognized in the period in which the service is performed as
follows:
| § | Retail and online tax preparation revenues are recorded when a completed return is filed or accepted by the customer. | |
| § | POM revenues are deferred and recognized over the term of the guarantee, based on historical and actual payment of claims. | |
| § | Revenues for services rendered in connection with the Business Services segment include fees based on time and materials, which are recognized as the services are performed and amounts are earned. | |
| § | Revenues associated with our H&R Block Prepaid Emerald MasterCard ® program consist of interchange income from the use of debit cards and fees from the use of ATM networks. Interchange income is a fee paid by a merchant bank to the card-issuing bank through the interchange network, and is based on cardholder purchase volumes. Interchange income is recognized as earned. |
Product and other revenues in the current year include royalties
from franchisees and sales of software products, and are
recognized as follows:
| § | Upon granting of a franchise, franchisees pay a refundable deposit generally in the amount of $2,500, but pay no initial franchise fee. We record the payment as a deposit liability and recognize no revenue in connection with the initial granting of a franchise. Franchise royalties, which are based on contractual percentages of franchise revenues, are recorded in the period in which the franchise provides the service. | |
| § | Software revenues consist mainly of tax preparation software. Revenue from the sale of software such as H&R Block At Home tm is recognized when the product is sold to the end user, either through retail, online or other channels. Rebates, slotting fees and other incentives paid in connection with these sales are recorded as a reduction of revenue. Revenue from the sale of TaxWorks ® software is deferred and recognized over the period for which upgrades and support are provided to the customer. | |
| § | In fiscal years 2010 and 2009, loan participation revenue was recognized over the life of the loan. |
Interest income consists primarily of interest earned on
mortgage loans held for investment and EAs and is recognized as
follows:
| § | Interest income on mortgage loans held for investment includes deferred origination fees and costs and purchase discounts and premiums, which are amortized to income over the life of the loan using the interest method. | |
| § | Interest income on EAs is calculated using the average daily balance method and is recognized based on the principal amount outstanding until the outstanding balance is paid or written-off. |
H&R
BLOCK 2011
Form 10K
45
Table of Contents
| § | Loan commitment fees, net of related expenses, are initially deferred and recognized as revenue over the commitment period. |
Revenue recognition is evaluated separately for each unit in
multiple-deliverable arrangements. Sales tax we collect and
remit to taxing authorities is recorded net in our consolidated
income statements.
ADVERTISING
EXPENSE
–
Advertising
costs for radio and television ads are expensed the first time
the advertisement takes place, with print and mailing
advertising expensed as incurred. Total advertising costs of
continuing operations for fiscal years 2011, 2010 and 2009
totaled $264.2 million, $254.8 million and
$249.2 million, respectively.
GAINS ON SALES OF
TAX
OFFICES
–
We
periodically sell company-owned tax offices to franchisees.
These sales can be financed by franchisees through loans offered
by an affiliated company, which we consolidate. Gains are
recorded upon determination that collection of the sales
proceeds is reasonably assured. Gains are initially deferred
when they are financed with these loans and are recognized after
minimum payments and equity thresholds are met. Gains are
reported in operating income due to their recurring nature, and
are included as a reduction of selling, general and
administrative expenses in our consolidated income statements.
EMPLOYEE BENEFIT
PLANS
–
We
have 401(k) defined contribution plans covering all full-time
and seasonal employees following the completion of an
eligibility period. Contributions of our continuing operations
to these plans are discretionary and totaled $22.3 million,
$24.0 million and $26.7 million for fiscal years 2011,
2010 and 2009, respectively.
We have a severance policy covering all regular full-time or
part-time active employees for involuntary separation from the
company. In May 2010 we announced plans to realign field and
support organizations. The realignment included approximately
400 staff reductions. Associated severance benefits were
recorded primarily during the first fiscal quarter of 2011 and
totaled $29.6 million.
FOREIGN CURRENCY
TRANSLATION
–
Assets
and liabilities of foreign subsidiaries are translated into
U.S. dollars at exchange rates prevailing at the end of the
year. Revenues and expenses of our foreign operations are
translated at the average exchanges rates in effect during the
fiscal year. Translation adjustments are recorded as a separate
component of other comprehensive income in stockholders’
equity.
COMPREHENSIVE
INCOME
–
Our
comprehensive income is comprised of net income, foreign
currency translation adjustments and the change in net
unrealized gains or losses on AFS marketable securities.
Included in stockholders’ equity at April 30, 2011 and
2010, the net unrealized holding gain on AFS securities was
$0.5 million and $0.3 million, respectively, and the
foreign currency translation adjustment was $10.8 million
and $1.3 million, respectively.
NEW ACCOUNTING
STANDARDS
–
In
April 2011, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update
2011-02,
“Receivables (Topic 310) — A Creditor’s
Determination of Whether a Restructuring is a Troubled Debt
Restructuring.” This guidance assists in determining if a
loan modification qualifies as a TDR and requires that creditors
must determine that a concession has been made and the borrower
is having financial difficulties. This guidance is effective
beginning with our fiscal year 2012. As a result of applying
this guidance, we may identify loans that are newly considered
impaired, however we believe this guidance will not have a
material effect on our consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update
2009-13,
“Revenue Recognition (Topic 605) —
Multiple-Deliverable Revenue Arrangements.” This guidance
amends the criteria for separating consideration in
multiple-deliverable arrangements to enable vendors to account
for products or services (deliverables) separately rather than
as a combined unit. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable,
which is based on: (1) vendor-specific objective evidence;
(2) third-party evidence; or (3) estimates. This
guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the
inception of the arrangement to all deliverables using the
relative selling price method. In addition, this guidance
significantly expands required disclosures related to a
vendor’s multiple-deliverable revenue arrangements. This
guidance is effective prospectively for revenue arrangements
entered into or materially modified beginning with our fiscal
year 2012. We believe this guidance will not have a material
effect on our consolidated financial statements.
In December 2010, the FASB issued Accounting Standards Update
2010-28,
“Intangibles — Goodwill and Other (Topic 350):
When to Perform Step 2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts.”
The amendments affect reporting units whose carrying amount is
zero or negative, and require performance of Step 2 of the
goodwill impairment test if it is more likely than not that a
goodwill impairment exists. In determining whether it is more
likely than not that a goodwill impairment exists, a reporting
unit would consider whether there are any adverse qualitative
factors indicating that an impairment may exist. The qualitative
factors are consistent with existing guidance. The reporting
unit would evaluate if an event occurs or circumstances change
that would more likely than not reduce the fair value of a
reporting unit below its
46
H&R
BLOCK 2011 Form 10K
Table of Contents
carrying amount. This guidance is effective beginning with our
fiscal year 2012. We believe this guidance will not have a
material effect on our consolidated financial statements.
STANDARDS
IMPLEMENTED
–
In
July 2010 the FASB issued Accounting Standards Update
2010-20,
“Disclosures About Credit Quality of Financing Receivables
and Allowance for Credit Losses.” This guidance requires
enhanced disclosures about the allowance for credit losses and
the credit quality of financing receivables and would apply to
financing receivables held by all creditors. The requirements
for period end disclosures are effective beginning with the
first interim or annual reporting period ending after
December 15, 2010. The requirements for activity-based
disclosures were effective for our fourth quarter. The new
disclosures are included in notes 1, 5 and 6. The
requirements for TDR disclosures are effective for our first
quarter of fiscal year 2012.
In June 2009, the FASB issued revised authoritative guidance
associated with the consolidation of variable interest entities
(VIEs). The revised guidance replaced the previous
quantitative-based assessment for determining whether an
enterprise is the primary beneficiary of a VIE and focuses
primarily on a qualitative assessment. This assessment requires
identifying the enterprise that has (1) the power to direct
the activities of the VIE that can most significantly impact the
entity’s performance; and (2) the obligation to absorb
losses and the right to receive benefits from the VIE that could
potentially be significant to such entity. The revised guidance
also requires that the enterprise continually reassess whether
it is the primary beneficiary of a VIE rather than conducting a
reassessment only upon the occurrence of specific events. We
implemented this guidance on May 1, 2010 and evaluated our
financial interests to determine if we had interests in VIEs and
if we are the primary beneficiary of the VIE. See note 17
for additional information on our VIEs.
In June 2009, the FASB issued guidance, under Topic
860 — Transfers and Servicing. This guidance requires
more disclosure about transfers of financial assets, including
securitization transactions, and where entities have continuing
exposure to the risks related to transferred financial assets.
It eliminates the concept of a qualifying special purpose entity
and changes the requirements for derecognizing financial assets.
We adopted this guidance as of May 1, 2010 and it did not
have a material effect on our consolidated financial statements.
Effective July 20, 2010, our Business Services segment
acquired certain non-attest assets and liabilities of
Caturano & Company, Inc. (Caturano), a Boston-based
accounting firm, for an aggregate purchase price of
$40.2 million. We expect this acquisition to expand our
presence in the Boston market. We made cash payments of
$32.6 million, including $29.8 million at closing.
Payment of the remaining purchase price is deferred and will be
paid over the next 13 years. The following table summarizes
the fair value of identifiable assets acquired and liabilities
assumed and the resulting goodwill:
| (in 000s) | ||||
|
|
||||
|
Customer
relationships
(1)
|
$ | 6,733 | ||
|
Non-compete
agreements
(2)
|
2,766 | |||
|
Attest firm
affiliation
(3)
|
7,629 | |||
|
Goodwill
|
27,289 | |||
|
Fixed assets
|
2,500 | |||
|
Other assets
|
831 | |||
|
Other liabilities
|
(1,640 | ) | ||
|
Unfavorable
leasehold
(2)
|
(5,890 | ) | ||
|
|
||||
|
Total purchase price
|
$ | 40,218 | ||
|
|
||||
|
|
||||
| (1) | Estimated life of 12 years. |
| (2) | Estimated life of 7 years. |
| (3) | Estimated life of 18 years. Represents the benefits to be received from the Alternative Practice Structure arrangement and affiliation with attest clients. |
In connection with the acquisition a deferred compensation plan,
an employee retention program and a performance bonus plan were
put in place for eligible employees. Expenses related to these
plans will be treated as compensation and will be expensed as
incurred. We incurred expenses totaling $2.6 million under
these plans during fiscal year 2011.
In October 2010, we signed a definitive merger agreement to
acquire all of the outstanding shares of 2SS Holdings, Inc.
(“2SS”), developer of TaxACT digital tax preparation
solutions, for $287.5 million in cash. Completion of the
transaction is subject to the satisfaction of customary closing
conditions, including regulatory approval. In May 2011, the
United States Department of Justice (the “DOJ”) filed
a civil antitrust lawsuit to block our proposed acquisition of
2SS. On June 21, 2011, the parties to the merger agreement
signed an
H&R
BLOCK 2011
Form 10K
47
Table of Contents
amendment to the merger agreement. There are no assurances that
the DOJ’s lawsuit will be resolved in our favor or that the
transaction will be consummated.
During fiscal years 2011, 2010 and 2009, we sold certain retail
tax offices to existing franchisees for cash proceeds of
$65.6 million, $65.7 million and $16.9 million,
respectively, and recorded gains on these sales of
$45.1 million, $49.0 million and $14.9 million,
respectively.
Effective November 3, 2008, we acquired the assets and
franchise rights of our last major independent franchise
operator for an aggregate purchase price of $279.2 million.
Goodwill recognized on this transaction is included in the Tax
Services segment and is deductible for tax purposes.
During fiscal years 2011, 2010 and 2009, we made other
acquisitions, which were accounted for as purchases with cash
payments totaling $19.1 million, $10.3 million and
$12.6 million, respectively. Operating results of the
acquired businesses, which are not material, are included in the
consolidated income statements since the date of acquisition.
During fiscal years 2011, 2010 and 2009 we also paid
$2.5 million, $0.2 million and $1.9 million,
respectively, for contingent payments on prior acquisitions.
Basic and diluted earnings per share is computed using the
two-class method. The two-class method is an earnings allocation
formula that determines net income per share for each class of
common stock and participating security according to dividends
declared and participation rights in undistributed earnings. Per
share amounts are computed by dividing net income from
continuing operations attributable to common shareholders by the
weighted average shares outstanding during each period. The
computations of basic and diluted earnings per share from
continuing operations are as follows:
| (in 000s, except per share amounts) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
Net income from continuing operations attributable to
shareholders
|
$ | 419,405 | $ | 488,946 | $ | 513,055 | ||||||||||
|
Amounts allocated to participating securities (nonvested shares)
|
(1,085 | ) | (1,888 | ) | (2,042 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income from continuing operations
attributable to common shareholders |
$ | 418,320 | $ | 487,058 | $ | 511,013 | ||||||||||
|
|
||||||||||||||||
|
Basic weighted average common shares
|
309,230 | 332,283 | 332,787 | |||||||||||||
|
Potential dilutive shares
|
547 | 953 | 1,752 | |||||||||||||
|
|
||||||||||||||||
|
Dilutive weighted average common shares
|
309,777 | 333,236 | 334,539 | |||||||||||||
|
|
||||||||||||||||
|
Earnings per share from continuing operations attributable to
common shareholders: |
||||||||||||||||
|
Basic
|
$ | 1.35 | $ | 1.47 | $ | 1.53 | ||||||||||
|
Diluted
|
1.35 | 1.46 | 1.53 | |||||||||||||
|
|
||||||||||||||||
Diluted earnings per share excludes the impact of shares of
common stock issuable upon the lapse of certain restrictions or
the exercise of options to purchase 12.8 million,
13.7 million and 15.7 million shares of stock for
fiscal years 2011, 2010 and 2009, respectively, as the effect
would be antidilutive.
AVAILABLE-FOR-SALE
–
The
amortized cost and fair value of securities classified as
available-for-sale
held at April 30, 2011 and 2010 are summarized below:
| (in 000s) | ||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| As of April 30, | 2011 | 2010 | ||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
Gross
|
|||||||||||||||||||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||||||||||||||||||
| Cost | Gains | Losses (1) | Value | Cost | Gains | Losses (1) | Value | |||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Mortgage-backed securities
|
$ | 157,970 | $ | 401 | $ | (194 | ) | $ | 158,177 | $ | 23,026 | $ | 39 | $ | (49 | ) | $ | 23,016 | ||||||||||||||||||
|
Municipal bonds
|
8,335 | 405 | – | 8,740 | 8,442 | 459 | – | 8,901 | ||||||||||||||||||||||||||||
|
Trust preferred security
|
– | – | – | – | 1,854 | – | (1,823 | ) | 31 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| $ | 166,305 | $ | 806 | $ | (194 | ) | $ | 166,917 | $ | 33,322 | $ | 498 | $ | (1,872 | ) | $ | 31,948 | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| (1) | At April 30, 2011, we had no investments that had been in a continuous loss position for more than twelve months. At April 30, 2010, investments with a cost of $15.7 million and gross unrealized losses of $1.9 million had been in a continuous loss position for more than twelve months. |
We did not sell any AFS securities in fiscal year 2011. Proceeds
from the sales of AFS securities were $2.1 million and
$8.3 million during fiscal years 2010 and 2009,
respectively. We recorded no gross realized gains or losses on
those sales during fiscal year 2010. Gross realized gains on
sales during fiscal year 2009 were $0.7 million; gross
realized losses were $1.3 million. During fiscal years
2011, 2010 and 2009, we recorded
other-than-temporary
48
H&R
BLOCK 2011 Form 10K
Table of Contents
impairments of AFS securities totaling $1.9 million,
$1.6 million and $1.5 million, respectively, as a
result of an assessment that it was probable we would not
collect all amounts due or an assessment that we would not be
able to hold the investments until potential recovery of market
value.
Contractual maturities of AFS debt securities at April 30,
2011, occur at varying dates over the next 30 years, and
are set forth in the table below.
| (in 000s) | ||||||||||||
|
|
||||||||||||
| Cost Basis | Fair Value | |||||||||||
|
|
||||||||||||
|
Maturing in:
|
||||||||||||
|
Less than one year
|
$ | 3,023 | $ | 3,081 | ||||||||
|
Two to five years
|
3,112 | 3,331 | ||||||||||
|
Six to ten years
|
2,200 | 2,328 | ||||||||||
|
Beyond
|
157,970 | 158,177 | ||||||||||
|
|
||||||||||||
| $ | 166,305 | $ | 166,917 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
HELD-TO-MATURITY
–
HRB
Bank is required to maintain a restricted investment in FHLB
stock for borrowing availability. The cost of this investment,
$3.3 million and $6.0 million at April 30, 2011
and 2010, respectively, represents its redemption value at each
balance sheet date, as these investments do not have a ready
market.
Short-term receivables consist of the following:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| As of April 30, | 2011 | 2010 | ||||||||||
|
|
||||||||||||
|
Business Services receivables
|
$ | 281,847 | $ | 326,681 | ||||||||
|
Loans to franchisees
|
62,181 | 55,047 | ||||||||||
|
Receivables for tax preparation and related fees
|
38,930 | 45,248 | ||||||||||
|
Emerald Advance lines of credit
|
31,645 | 57,914 | ||||||||||
|
Royalties from franchisees
|
11,645 | 3,845 | ||||||||||
|
Tax client receivables related to RALs
|
2,412 | 21,646 | ||||||||||
|
Other
|
131,096 | 120,080 | ||||||||||
|
|
||||||||||||
| 559,756 | 630,461 | |||||||||||
|
Allowance for doubtful accounts
|
(67,466 | ) | (112,475 | ) | ||||||||
|
|
||||||||||||
| $ | 492,290 | $ | 517,986 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
The short-term portion of EAs, tax client receivables related to
RALs and loans made to franchisees is included in receivables,
while the long-term portion is included in other assets in the
consolidated financial statements. These amounts as of
April 30, 2011 are as follows:
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
|
Emerald Advance
|
Tax Client
|
Loans
|
||||||||||||||
| Lines of Credit | Receivables - RALs | to Franchisees | ||||||||||||||
|
|
||||||||||||||||
|
Short-term
|
$ | 31,645 | $ | 2,412 | $ | 62,181 | ||||||||||
|
Long-term
|
21,619 | 5,855 | 110,420 | |||||||||||||
|
|
||||||||||||||||
| $ | 53,264 | $ | 8,267 | $ | 172,601 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
We review the credit quality of our EA receivables and tax
client receivables related to RALs based on pools, which are
segregated by the year of origination, with older years being
deemed more unlikely to be repaid. These amounts as of
April 30, 2011, by year of origination, are as follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
|
Emerald Advance
|
Tax Client
|
|||||||||||
| Lines of Credit | Receivables - RALs | |||||||||||
|
|
||||||||||||
|
Credit Quality Indicator – Year of origination:
|
||||||||||||
|
2011
|
$ | 28,800 | $ | – | ||||||||
|
2010
|
5,236 | 446 | ||||||||||
|
2009
|
4,443 | 2,270 | ||||||||||
|
2008 and prior
|
2,722 | 5,551 | ||||||||||
|
Revolving loans
|
12,063 | – | ||||||||||
|
|
||||||||||||
| $ | 53,264 | $ | 8,267 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
As of April 30, 2011, $46.8 million of EAs were on
non-accrual status and classified as impaired, or more than
60 days past due. All tax client receivables related to
RALs are considered impaired.
H&R
BLOCK 2011
Form 10K
49
Table of Contents
Our allowance for doubtful accounts consists of the following:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| As of April 30, | 2011 | 2010 | ||||||||||
|
|
||||||||||||
|
Allowance related to:
|
||||||||||||
|
Emerald Advance lines of credit
|
$ | 4,400 | $ | 35,239 | ||||||||
|
Tax client receivables related to RALs
|
– | 12,191 | ||||||||||
|
Loans to franchisees
|
– | 4 | ||||||||||
|
All other receivables
|
63,066 | 65,041 | ||||||||||
|
|
||||||||||||
| $ | 67,466 | $ | 112,475 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
Activity in the allowance for doubtful accounts for the years
ended April 30, 2011, 2010 and 2009 is as follows:
| (in 000s) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Emerald Advance
|
Tax Client
|
Loans
|
All
|
|||||||||||||||||||||
| Lines of Credit | Receivables - RALs | to Franchisees | Other | Total | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance as of May 1, 2008
|
$ | 31,393 | $ | 17,398 | $ | 4 | $ | 71,360 | $ | 120,155 | ||||||||||||||
|
Provision
|
42,875 | 14,144 | – | 59,155 | 116,174 | |||||||||||||||||||
|
Recoveries
|
– | – | – | 315 | 315 | |||||||||||||||||||
|
Charge-offs
|
(31,393 | ) | (17,406 | ) | – | (59,304 | ) | (108,103 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance as of April 30, 2009
|
$ | 42,875 | $ | 14,136 | $ | 4 | $ | 71,526 | $ | 128,541 | ||||||||||||||
|
Provision
|
33,919 | 12,193 | – | 65,642 | 111,754 | |||||||||||||||||||
|
Recoveries
|
– | – | – | 534 | 534 | |||||||||||||||||||
|
Charge-offs
|
(41,555 | ) | (14,138 | ) | – | (72,661 | ) | (128,354 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance as of April 30, 2010
|
$ | 35,239 | $ | 12,191 | $ | 4 | $ | 65,041 | $ | 112,475 | ||||||||||||||
|
Provision
|
91,546 | 2 | – | 52,716 | 144,264 | |||||||||||||||||||
|
Recoveries
|
– | – | – | 312 | 312 | |||||||||||||||||||
|
Charge-offs
|
(122,385 | ) | (12,193 | ) | (4 | ) | (55,003 | ) | (189,585 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance as of April 30, 2011
|
$ | 4,400 | $ | – | $ | – | $ | 63,066 | $ | 67,466 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
There were no changes to our methodology related to the
calculation of our allowance for doubtful accounts during fiscal
year 2011.
The composition of our mortgage loan portfolio as of
April 30, 2011 and 2010 is as follows:
| (dollars in 000s) | ||||||||||||||||||||
|
|
||||||||||||||||||||
| As of April 30, | 2011 | 2010 | ||||||||||||||||||
|
|
||||||||||||||||||||
| Amount | % of Total | Amount | % of Total | |||||||||||||||||
|
|
||||||||||||||||||||
|
Adjustable-rate loans
|
$ | 333,828 | 58 | % | $ | 411,122 | 60 | % | ||||||||||||
|
Fixed-rate loans
|
239,146 | 42 | % | 272,562 | 40 | % | ||||||||||||||
|
|
||||||||||||||||||||
| 572,974 | 100 | % | 683,684 | 100 | % | |||||||||||||||
|
Unamortized deferred fees and costs
|
4,121 | 5,256 | ||||||||||||||||||
|
Less: Allowance for loan losses
|
(92,087 | ) | (93,535 | ) | ||||||||||||||||
| $ | 485,008 | $ | 595,405 | |||||||||||||||||
|
|
||||||||||||||||||||
Activity in the allowance for loan losses for the years ended
April 30, 2011, 2010 and 2009 is as follows:
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
Balance at beginning of the year
|
$ | 93,535 | $ | 84,073 | $ | 45,401 | ||||||||||
|
Provision
|
35,567 | 47,750 | 63,897 | |||||||||||||
|
Recoveries
|
272 | 88 | 54 | |||||||||||||
|
Charge-offs
|
(37,287 | ) | (38,376 | ) | (25,279 | ) | ||||||||||
|
|
||||||||||||||||
|
Balance at end of the year
|
$ | 92,087 | $ | 93,535 | $ | 84,073 | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
Our loan loss allowance as a percent of mortgage loans was 16.1%
at April 30, 2011, compared to 13.7% at April 30, 2010.
50
H&R
BLOCK 2011 Form 10K
Table of Contents
When determining our allowance for loan losses, we evaluate
loans less than 60 days past due on a pooled basis, while
loans we consider impaired (which includes those loans more than
60 days past due or that have been modified) are evaluated
individually. The balance of these loans and the related
allowance is as follows:
| (in 000s) | ||||||||||||||||||||
|
|
||||||||||||||||||||
| As of April 30, | 2011 | 2010 | ||||||||||||||||||
|
|
||||||||||||||||||||
|
Portfolio
|
Related
|
Portfolio
|
Related
|
|||||||||||||||||
| Balance | Allowance | Balance | Allowance | |||||||||||||||||
|
|
||||||||||||||||||||
|
Pooled (less than 60 days past due)
|
$ | 304,325 | $ | 11,238 | $ | 372,823 | $ | 15,924 | ||||||||||||
|
Impaired:
|
||||||||||||||||||||
|
Individually (TDRs)
|
106,328 | 11,056 | 144,977 | 8,915 | ||||||||||||||||
|
Individually (60 days or more past due)
|
162,321 | 69,793 | 165,884 | 68,696 | ||||||||||||||||
|
|
||||||||||||||||||||
| $ | 572,974 | $ | 92,087 | $ | 683,684 | $ | 93,535 | |||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
We review the credit quality of our portfolio based on the
following criteria: (1) originator, (2) the level of
documentation obtained for loan at origination,
(3) occupancy status of property at origination,
(4) geography, and (5) credit score and loan to value
at origination. We specifically evaluate each loan and assign an
internal risk rating of high, medium or low to each loan. The
risk rating is based upon multiple loan characteristics that
correlate to delinquency and loss. These characteristics
include, but are not limited to, the five criteria listed above.
These loan attributes are evaluated quarterly against a variety
of additional characteristics to ensure the appropriate data is
being utilized to determine the level of risk within the
portfolio.
All criteria are obtained at the time of origination and are
only subsequently updated if the loan is refinanced.
Our portfolio includes loans originated SCC and purchased by HRB
Bank which constitute 62% of the total loan portfolio at
April 30, 2011. We have experienced higher rates of
delinquency and have greater exposure to loss with respect to
this segment of our loan portfolio. Our remaining loan portfolio
totaled $215.2 million and is characteristic of a prime
loan portfolio, and we believe subject to a lower loss exposure.
Detail of our mortgage loans held for investment and the related
allowance at April 30, 2011 is as follows:
| (dollars in 000s) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
Outstanding
|
Loan Loss Allowance |
% 30+ Days
|
||||||||||||||||||
| Principal Balance | Amount | % of Principal | Past Due | |||||||||||||||||
|
|
||||||||||||||||||||
|
Purchased from SCC
|
$ | 357,814 | $ | 81,396 | 22.7 | % | 41.7 | % | ||||||||||||
|
All other
|
215,160 | 10,691 | 5.0 | % | 11.0 | % | ||||||||||||||
| $ | 572,974 | $ | 92,087 | 16.1 | % | 30.2 | % | |||||||||||||
|
|
||||||||||||||||||||
Credit quality indicators at April 30, 2011 include the
following:
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Credit Quality Indicators | Purchased from SCC | All Other | Total Portfolio | |||||||||||||
|
|
||||||||||||||||
|
Occupancy status:
|
||||||||||||||||
|
Owner occupied
|
$ | 249,048 | $ | 136,380 | $ | 385,428 | ||||||||||
|
Non-owner occupied
|
108,766 | 78,780 | 187,546 | |||||||||||||
|
|
||||||||||||||||
| $ | 357,814 | $ | 215,160 | $ | 572,974 | |||||||||||
|
|
||||||||||||||||
|
Documentation level:
|
||||||||||||||||
|
Full documentation
|
$ | 108,509 | $ | 157,270 | $ | 265,779 | ||||||||||
|
Limited documentation
|
11,146 | 23,355 | 34,501 | |||||||||||||
|
Stated income
|
205,485 | 21,705 | 227,190 | |||||||||||||
|
No documentation
|
32,674 | 12,830 | 45,504 | |||||||||||||
|
|
||||||||||||||||
| $ | 357,814 | $ | 215,160 | $ | 572,974 | |||||||||||
|
|
||||||||||||||||
|
Internal risk rating:
|
||||||||||||||||
|
High
|
$ | 151,522 | $ | 357 | $ | 151,879 | ||||||||||
|
Medium
|
206,292 | – | 206,292 | |||||||||||||
|
Low
|
– | 214,803 | 214,803 | |||||||||||||
|
|
||||||||||||||||
| $ | 357,814 | $ | 215,160 | $ | 572,974 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
Loans given our internal risk rating of “high” are
generally originated by SCC, have no documentation or are stated
income and are non-owner occupied. Loans given our internal risk
rating of “medium” are generally full documentation or
stated income, with
loan-to-value
at origination of more than 80% and have credit scores at
H&R
BLOCK 2011
Form 10K
51
Table of Contents
origination below 700. Loans given our internal risk rating of
“low” are generally full documentation, with
loan-to-value
at origination of less than 80% and have credit scores greater
than 700.
Detail of the aging of the mortgage loans in our portfolio that
are past due as of April 30, 2011 is as follows:
| (in 000s) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Less than 60
|
60 - 89 Days
|
90 + Days
|
Total
|
|||||||||||||||||||||||||
| Days Past Due | Past Due | Past Due (1) | Past Due | Current | Total | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Purchased from SCC
|
$ | 37,371 | $ | 4,882 | $ | 132,326 | $ | 174,579 | $ | 183,235 | $ | 357,814 | ||||||||||||||||
|
All other
|
10,250 | 1,594 | 20,546 | 32,390 | 182,770 | 215,160 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| $ | 47,621 | $ | 6,476 | $ | 152,872 | $ | 206,969 | $ | 366,005 | $ | 572,974 | |||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| (1) | No loans past due 90 days or more are still accruing interest. |
Information related to our non-accrual loans is as follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| As of April 30, | 2011 | 2010 | ||||||||||
|
|
||||||||||||
|
Loans:
|
||||||||||||
|
Purchased from SCC
|
$ | 143,358 | ||||||||||
|
Other
|
14,106 | |||||||||||
| 157,464 | $ | 160,124 | ||||||||||
|
TDRs:
|
||||||||||||
|
Purchased from SCC
|
2,849 | |||||||||||
|
Other
|
329 | |||||||||||
| 3,178 | 31,506 | |||||||||||
|
|
||||||||||||
|
Total non-accrual loans
|
$ | 160,642 | $ | 191,630 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
Information related to impaired loans is as follows:
| (in 000s) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
Portfolio Balance
|
Portfolio Balance
|
Total
|
||||||||||||||||||
| With Allowance | With No Allowance | Portfolio Balance | Related Allowance | |||||||||||||||||
|
|
||||||||||||||||||||
|
As of April 30, 2011:
|
||||||||||||||||||||
|
Purchased from SCC
|
$ | 190,074 | $ | 54,000 | $ | 244,074 | $ | 75,373 | ||||||||||||
|
Other
|
19,340 | 5,235 | 24,575 | 5,476 | ||||||||||||||||
|
|
||||||||||||||||||||
| $ | 209,414 | $ | 59,235 | $ | 268,649 | $ | 80,849 | |||||||||||||
|
|
||||||||||||||||||||
|
As of April 30, 2010
|
$ | 288,309 | $ | 22,552 | $ | 310,861 | $ | 77,611 | ||||||||||||
|
|
||||||||||||||||||||
Information related to the allowance for impaired loans is as
follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| As of April 30, | 2011 | 2010 | ||||||||||
|
|
||||||||||||
|
Portion of total allowance for loan losses allocated
to impaired loans and TDR loans: |
||||||||||||
|
Based on collateral value method
|
$ | 69,794 | $ | 68,696 | ||||||||
|
Based on discounted cash flow method
|
11,055 | 8,915 | ||||||||||
|
|
||||||||||||
| $ | 80,849 | $ | 77,611 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
52
H&R
BLOCK 2011 Form 10K
Table of Contents
Information related to activities of our non-performing assets
is as follows:
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| For the Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
Average impaired loans:
|
||||||||||||||||
|
Purchased from SCC
|
$ | 252,673 | ||||||||||||||
|
All other
|
37,082 | |||||||||||||||
| $ | 289,755 | $ | 307,351 | $ | 216,391 | |||||||||||
|
Interest income on impaired loans:
|
||||||||||||||||
|
Purchased from SCC
|
$ | 5,795 | ||||||||||||||
|
All other
|
829 | |||||||||||||||
| $ | 6,624 | $ | 8,548 | $ | 5,964 | |||||||||||
|
Interest income on impaired loans recognized on a
cash basis on non-accrual status: |
||||||||||||||||
|
Purchased from SCC
|
$ | 5,567 | ||||||||||||||
|
All other
|
744 | |||||||||||||||
| $ | 6,311 | $ | 7,452 | $ | 4,927 | |||||||||||
|
|
||||||||||||||||
As of April 30, 2011 and 2010, accrued interest receivable
on mortgage loans held for investment totaled $2.1 million
and $2.6 million, respectively. At April 30, 2011, HRB
Bank had interest-only mortgage loans in its investment
portfolio totaling $3.7 million.
Our real estate owned includes loans accounted for as
in-substance foreclosures of $7.7 million and
$12.5 million at April 30, 2011 and 2010,
respectively. Activity related to our real estate owned is as
follows:
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
Balance, beginning of the period
|
$ | 29,252 | $ | 44,533 | $ | 350 | ||||||||||
|
Additions
|
16,463 | 19,341 | 65,171 | |||||||||||||
|
Sales
|
(21,889 | ) | (24,308 | ) | (9,072 | ) | ||||||||||
|
Impairments
|
(4,294 | ) | (10,314 | ) | (11,916 | ) | ||||||||||
|
|
||||||||||||||||
|
Balance, end of the period
|
$ | 19,532 | $ | 29,252 | $ | 44,533 | ||||||||||
|
|
||||||||||||||||
| NOTE 7: | ASSETS AND LIABILITIES MEASURED AT FAIR VALUE |
We use the following valuation methodologies for assets and
liabilities measured at fair value and the general
classification of these instruments pursuant to the fair value
hierarchy.
| § | Available-for-sale securities – Available-for-sale securities are carried at fair value on a recurring basis. When available, fair value is based on quoted prices in an active market and as such, would be classified as Level 1. If quoted market prices are not available, we use a third-party pricing service to determine fair value and classify the securities as Level 2. The service’s pricing model is based on market data and utilizes available trade, bid and other market information. Available-for-sale securities that we classify as Level 2 include certain agency and non-agency mortgage-backed securities, U.S. states and political subdivisions debt securities and other debt and equity securities. | |
| § | Real estate owned – REO includes foreclosed properties securing mortgage loans. Foreclosed assets are adjusted to fair value less costs to sell upon transfer of the loans to REO. Fair value is generally based on independent market prices or appraised values of the collateral. Subsequent holding period losses and losses arising from the sale of REO are expensed as incurred. Because our REO is valued based on significant inputs that are unobservable in the market and our own estimates of assumptions that market participants would use in pricing the asset, these assets are classified as Level 3. | |
| § | Impaired mortgage loans held for investment – The fair value of impaired mortgage loans held for investment is generally based on the net present value of discounted cash flows for TDR loans or the appraised value of the underlying collateral for all other loans. These loans are classified as Level 3. |
H&R
BLOCK 2011
Form 10K
53
Table of Contents
The following table presents for each hierarchy level the assets
that were remeasured at fair value on both a recurring and
non-recurring basis during fiscal years 2011 and 2010 and the
gains (losses) on those remeasurements:
| (dollars in 000s) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Gain (loss) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
As of April 30, 2011:
|
||||||||||||||||||||||||
|
Recurring:
|
||||||||||||||||||||||||
|
Mortgage-backed securities
|
$ | 158,177 | $ | – | $ | 158,177 | $ | – | $ | 207 | ||||||||||||||
|
Municipal bonds
|
8,740 | – | 8,740 | – | 405 | |||||||||||||||||||
|
Non-recurring:
|
||||||||||||||||||||||||
|
REO
|
12,366 | – | – | 12,366 | (1,920 | ) | ||||||||||||||||||
|
Impaired mortgage loans held for investment
|
90,628 | – | – | 90,628 | (11,390 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||
| $ | 269,911 | $ | – | $ | 166,917 | $ | 102,994 | $ | (12,698 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
As a percentage of total assets
|
5.2 | % | – | % | 3.2 | % | 2.0 | % | ||||||||||||||||
|
As of April 30, 2010:
|
||||||||||||||||||||||||
|
Recurring:
|
||||||||||||||||||||||||
|
Mortgage-backed securities
|
$ | 23,016 | $ | – | $ | 23,016 | $ | – | $ | (10 | ) | |||||||||||||
|
Municipal bonds
|
8,901 | – | 8,901 | – | 459 | |||||||||||||||||||
|
Trust preferred security
|
31 | – | 31 | – | (1,823 | ) | ||||||||||||||||||
|
Non-recurring:
|
||||||||||||||||||||||||
|
REO
|
16,291 | – | – | 16,291 | (4,430 | ) | ||||||||||||||||||
|
Impaired mortgage loans held for investment
|
88,456 | – | – | 88,456 | (9,453 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||
| $ | 136,695 | $ | – | $ | 31,948 | $ | 104,747 | $ | (15,257 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
As a percentage of total assets
|
2.6 | % | – | % | 0.6 | % | 2.0 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
There were no changes to the unobservable inputs used in
determining the fair values of our level 2 and level 3
financial assets.
The following methods were used to determine the fair values of
our other financial instruments:
| § | Cash equivalents, accounts receivable, investment in FHLB stock, accounts payable, accrued liabilities, commercial paper borrowings and the current portion of long-term debt – The carrying values reported in the balance sheet for these items approximate fair market value due to the relative short-term nature of the respective instruments. | |
| § | Mortgage loans held for investment – The fair value of mortgage loans held for investment is generally determined using market pricing sources based on origination channel and performance characteristics. | |
| § | Deposits – The estimated fair value of demand deposits is the amount payable on demand at the reporting date. The estimated fair value of IRAs and other time deposits is estimated by discounting the future cash flows using the rates currently offered by HRB Bank for products with similar remaining maturities. | |
| § | Long-term borrowings and FHLB borrowings – The fair value of borrowings is based on rates currently available to us for obligations with similar terms and maturities, including current market rates on our Senior Notes. |
The carrying amounts and estimated fair values of our financial
instruments at April 30, 2011 are as follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
|
Carrying
|
Estimated
|
|||||||||||
| Amount | Fair Value | |||||||||||
|
|
||||||||||||
|
Mortgage loans held for investment
|
$ | 485,008 | $ | 295,154 | ||||||||
|
Deposits
|
863,898 | 865,318 | ||||||||||
|
Long-term debt
|
1,053,191 | 1,112,886 | ||||||||||
|
FHLB advances
|
25,000 |
24,998
|
||||||||||
|
|
||||||||||||
54
H&R
BLOCK 2011 Form 10K
Table of Contents
| NOTE 8: | PROPERTY AND EQUIPMENT |
The components of property and equipment are as follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| As of April 30, | 2011 | 2010 | ||||||||||
|
|
||||||||||||
|
Land and other non-depreciable assets
|
$ | 2,245 | $ | 2,482 | ||||||||
|
Buildings
|
154,519 | 161,460 | ||||||||||
|
Computers and other equipment
|
475,351 | 488,160 | ||||||||||
|
Capitalized software
|
156,108 | 147,104 | ||||||||||
|
Leasehold improvements
|
191,943 | 199,370 | ||||||||||
|
Construction in process
|
4,374 | 3,902 | ||||||||||
|
|
||||||||||||
| 984,540 | 1,002,478 | |||||||||||
|
Less: Accumulated depreciation and amortization
|
(677,220 | ) | (657,008 | ) | ||||||||
|
|
||||||||||||
| $ | 307,320 | $ | 345,470 | |||||||||
During fiscal years 2011 and 2010, we received $6.5 million
and $10.3 million, respectively, for tax incentives from
certain government agencies related to our corporate
headquarters building, which was recorded as a reduction of
original cost.
Property and equipment included above and subject to capital
lease arrangements included the following:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| As of April 30, | 2011 | 2010 | ||||||||||
|
|
||||||||||||
|
Property and equipment under capital lease
|
$ | 47,842 | $ | 47,844 | ||||||||
|
Less accumulated amortization
|
(35,056 | ) | (31,418 | ) | ||||||||
|
|
||||||||||||
| $ | 12,786 | $ | 16,426 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
Depreciation and amortization expense of continuing operations
for fiscal years 2011, 2010 and 2009 was $92.2 million,
$96.9 million and $96.6 million, respectively.
Included in depreciation and amortization expense of continuing
operations is amortization of capitalized software of
$18.8 million, $21.8 million and $23.4 million,
respectively.
| NOTE 9: | GOODWILL AND INTANGIBLE ASSETS |
Changes in the carrying amount of goodwill by segment for the
years ended April 30, 2011 and 2010 are as follows:
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Tax Services | Business Services | Total | ||||||||||||||
|
|
||||||||||||||||
|
Balance at May 1, 2009:
|
||||||||||||||||
|
Goodwill
|
$ | 449,779 | $ | 402,639 | $ | 852,418 | ||||||||||
|
Accumulated impairment losses
|
(2,188 | ) | – | (2,188 | ) | |||||||||||
|
|
||||||||||||||||
| 447,591 | 402,639 | 850,230 | ||||||||||||||
|
|
||||||||||||||||
|
Changes:
|
||||||||||||||||
|
Acquisitions
|
5,136 | 1,112 | 6,248 | |||||||||||||
|
Disposals and foreign currency changes
|
(1,031 | ) | – | (1,031 | ) | |||||||||||
|
Impairments
|
– | (15,000 | ) | (15,000 | ) | |||||||||||
|
|
||||||||||||||||
|
Balance at April 30, 2010:
|
||||||||||||||||
|
Goodwill
|
453,884 | 403,751 | 857,635 | |||||||||||||
|
Accumulated impairment losses
|
(2,188 | ) | (15,000 | ) | (17,188 | ) | ||||||||||
|
|
||||||||||||||||
| 451,696 | 388,751 | 840,447 | ||||||||||||||
|
|
||||||||||||||||
|
Changes:
|
||||||||||||||||
|
Acquisitions
|
15,441 | 28,552 | 43,993 | |||||||||||||
|
Disposals and foreign currency changes
|
(10,286 | ) | (5,209 | ) | (15,495 | ) | ||||||||||
|
Impairments
|
(22,700 | ) | – | (22,700 | ) | |||||||||||
|
|
||||||||||||||||
|
Balance at April 30, 2011:
|
||||||||||||||||
|
Goodwill
|
459,039 | 427,094 | 886,133 | |||||||||||||
|
Accumulated impairment losses
|
(24,888 | ) | (15,000 | ) | (39,888 | ) | ||||||||||
|
|
||||||||||||||||
| $ | 434,151 | $ | 412,094 | $ | 846,245 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
Goodwill and other indefinite-life intangible assets were tested
for impairment in the fourth quarter of fiscal year 2011. Except
as discussed below, no impairment was identified.
H&R
BLOCK 2011
Form 10K
55
Table of Contents
The RedGear reporting unit within our Tax Services segment
experienced lower than expected revenues, and as a result, we
evaluated this reporting unit’s goodwill for impairment at
January 31, 2011. The measurement of impairment of goodwill
consists of two steps. In the first step, we compared the fair
value of this reporting unit, determined using discounted cash
flows, to its carrying value. As the results of the first test
indicated that the fair value was less than its carrying value,
we then performed the second step, which was to determine the
implied fair value of its goodwill and to compare that to its
carrying value. The second step included hypothetically valuing
all of the tangible and intangible assets of this reporting
unit. As a result, we recorded an impairment of the reporting
unit’s goodwill of $22.7 million, leaving a remaining
goodwill balance of approximately $14 million. The
impairment is included in selling, general and administrative
expenses on the consolidated statements of income.
We recorded a $15.0 million impairment in our Business
Services segment in fiscal year 2010, related to RSM EquiCo, due
to declining revenues and profitability.
We recorded a $2.2 million goodwill impairment in our Tax
Services segment in fiscal year 2009, which was a result of the
closure of a previously acquired business.
The components of intangible assets are as follows:
| (in 000s) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| As of April 30, | 2011 | 2010 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Accumulated
|
|||||||||||||||||||||||||
| Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Tax Services:
|
||||||||||||||||||||||||||||
|
Customer relationships
|
$ | 87,624 | $ | (41,076 | ) | $ | 46,548 | $ | 67,705 | $ | (33,096 | ) | $ | 34,609 | ||||||||||||||
|
Noncompete agreements
|
23,456 | (22,059 | ) | 1,397 | 23,062 | (21,278 | ) | 1,784 | ||||||||||||||||||||
|
Reacquired franchise rights
|
214,330 | (9,961 | ) | 204,369 | 223,773 | (6,096 | ) | 217,677 | ||||||||||||||||||||
|
Franchise agreements
|
19,201 | (3,093 | ) | 16,108 | 19,201 | (1,813 | ) | 17,388 | ||||||||||||||||||||
|
Purchased technology
|
14,700 | (8,505 | ) | 6,195 | 14,500 | (6,266 | ) | 8,234 | ||||||||||||||||||||
|
Trade name
|
1,325 | (600 | ) | 725 | 1,325 | (400 | ) | 925 | ||||||||||||||||||||
|
Business Services:
|
||||||||||||||||||||||||||||
|
Customer relationships
|
152,079 | (128,738 | ) | 23,341 | 145,149 | (120,037 | ) | 25,112 | ||||||||||||||||||||
|
Noncompete agreements
|
35,818 | (24,662 | ) | 11,156 | 33,052 | (22,118 | ) | 10,934 | ||||||||||||||||||||
|
Attest firm affiliation
|
7,629 | (318 | ) | 7,311 | – | – | – | |||||||||||||||||||||
|
Trade name – amortizing
|
2,600 | (2,600 | ) | – | 2,600 | (2,600 | ) | – | ||||||||||||||||||||
|
Trade name –
non-amortizing
|
55,637 | (4,868 | ) | 50,769 | 55,637 | (4,868 | ) | 50,769 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total intangible assets
|
$ | 614,399 | $ | (246,480 | ) | $ | 367,919 | $ | 586,004 | $ | (218,572 | ) | $ | 367,432 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
Amortization of intangible assets of continuing operations for
the years ended April 30, 2011, 2010 and 2009 was
$29.5 million, $30.0 million and $24.9 million,
respectively. Estimated amortization of intangible assets for
fiscal years 2012, 2013, 2014, 2015 and 2016 is
$27.3 million, $22.8 million, $19.3 million,
$14.5 million and $13.1 million, respectively.
In connection with the acquisition of Caturano, as discussed in
note 2, we recorded a liability related to unfavorable
operating lease terms in the amount of $5.9 million, which
will be amortized over the remaining contractual life of the
operating lease. The net balance was $5.5 million at
April 30, 2011.
56
H&R
BLOCK 2011 Form 10K
Table of Contents
The components of customer banking deposits at April 30,
2011 and 2010 and the related interest expense recorded during
the periods are as follows:
| (in 000s) | ||||||||||||||||||||
|
|
||||||||||||||||||||
| April 30, | 2011 | 2010 | ||||||||||||||||||
|
|
||||||||||||||||||||
|
Outstanding
|
Interest
|
Outstanding
|
Interest
|
|||||||||||||||||
| Balance | Expense | Balance | Expense | |||||||||||||||||
|
|
||||||||||||||||||||
|
Short-term:
|
||||||||||||||||||||
|
Money-market deposits
|
$ | 164,734 | $ | 2,168 | $ | 195,220 | $ | 1,871 | ||||||||||||
|
Savings deposits
|
11,030 | 107 | 12,460 | 128 | ||||||||||||||||
|
Checking deposits:
|
||||||||||||||||||||
|
Interest-bearing
|
6,947 | 94 | 24,190 | 83 | ||||||||||||||||
|
Non-interest-bearing
|
279,296 | – | 200,096 | – | ||||||||||||||||
|
|
||||||||||||||||||||
| 286,243 | 94 | 224,286 | 83 | |||||||||||||||||
|
|
||||||||||||||||||||
|
IRAs and other time deposits:
|
||||||||||||||||||||
|
Due in one year
|
49,003 | 60,349 | ||||||||||||||||||
|
IRAs
|
341,210 | 360,240 | ||||||||||||||||||
|
|
||||||||||||||||||||
| 390,213 | 6,119 | 420,589 | 8,092 | |||||||||||||||||
|
|
||||||||||||||||||||
| $ | 852,220 | $ | 8,488 | $ | 852,555 | $ | 10,174 | |||||||||||||
|
|
||||||||||||||||||||
|
Long-term:
|
||||||||||||||||||||
|
Due in two years
|
$ | 7,939 | $ | 12,479 | ||||||||||||||||
|
Due in three years
|
3,717 | 6,079 | ||||||||||||||||||
|
Due in four years
|
16 | 3,105 | ||||||||||||||||||
|
Due in five years
|
6 | 1 | ||||||||||||||||||
|
|
||||||||||||||||||||
| $ | 11,678 | $ | – | $ | 21,664 | $ | – | |||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
Accrued but unpaid interest on deposits totaled
$0.2 million at April 30, 2011 and 2010.
Time deposit accounts totaling $7.3 million were in excess
of Federal Deposit Insurance Corporation (FDIC) insured limits
at April 30, 2011, and mature as follows:
| (in 000s) | ||||
|
|
||||
|
Three months or less
|
$ | 480 | ||
|
Three to six months
|
2,929 | |||
|
Six to twelve months
|
2,011 | |||
|
Over twelve months
|
1,883 | |||
|
|
||||
| $ | 7,303 | |||
|
|
||||
The components of long-term debt are as follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| As of April 30, | 2011 | 2010 | ||||||||||
|
|
||||||||||||
|
Senior Notes, 7.875%, due January 2013
|
$ | 599,788 | $ | 599,664 | ||||||||
|
Senior Notes, 5.125%, due October 2014
|
399,177 | 398,941 | ||||||||||
|
Acquisition obligations, due from May 2011 to December 2022
|
43,273 | 28,701 | ||||||||||
|
Capital lease obligations
|
10,953 | 11,526 | ||||||||||
|
|
||||||||||||
| 1,053,191 | 1,038,832 | |||||||||||
|
Less: Current portion
|
(3,437 | ) | (3,688 | ) | ||||||||
|
|
||||||||||||
| $ | 1,049,754 | $ | 1,035,144 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
On March 4, 2010, we entered into a committed line of
credit (CLOC) agreement to support commercial paper issuances,
general corporate purposes or for working capital needs. This
facility provides funding up to $1.7 billion and matures
July 31, 2013. This facility bears interest at an annual
rate of LIBOR plus 1.30% to 2.80% or PRIME plus .30% to 1.80%
(depending on the type of borrowing) and includes an annual
facility fee of .20% to .70% of the committed amounts, based on
our credit ratings. Covenants in this facility include:
(1) maintenance of a minimum net worth of
$650.0 million on the last day of any fiscal quarter; and
(2) reduction of the aggregate outstanding principal amount
of short-term debt, as defined in the agreement, to
$200.0 million or less for thirty consecutive days during
the period March 1 to June 30 of each year (“Clean-down
requirement”). At April 30, 2011, we were in
H&R
BLOCK 2011
Form 10K
57
Table of Contents
compliance with these covenants and had net worth of
$1.4 billion. We had no balance outstanding under the CLOCs
at April 30, 2011 or 2010.
On January 11, 2008, we issued $600.0 million of
7.875% Senior Notes under our shelf registration. The
Senior Notes are due January 15, 2013 and are not
redeemable by the bondholders prior to maturity. The net
proceeds of this transaction were used to repay a
$500.0 million facility, with the remaining proceeds used
for working capital and general corporate purposes.
On October 26, 2004, we issued $400.0 million of
5.125% Senior Notes under our shelf registration. The
Senior Notes are due October 30, 2014 and are not
redeemable by the bondholders prior to maturity. The net
proceeds of this transaction were used to repay
$250.0 million in
6
3
/
4
% Senior
Notes that were due in November 2004. The remaining proceeds
were used for working capital, capital expenditures, repayment
of other debt and other general corporate purposes.
We have obligations related to various acquisitions of
$43.3 million and $28.7 million at April 30, 2011
and 2010, respectively, which are due from May 2011 to December
2022.
We have a capitalized lease obligation of $11.0 million at
April 30, 2011, that is collateralized by land and
buildings. The obligation is due in 12 years.
The aggregate payments required to retire long-term debt are
$3.4 million, $631.0 million, $1.6 million,
$400.9 million, $2.7 million and $13.5 million in
fiscal years 2012, 2013, 2014, 2015, 2016 and beyond,
respectively.
HRB Bank is a member of the FHLB of Des Moines, which extends
credit to member banks based on eligible collateral. At
April 30, 2011, HRB Bank had FHLB advance capacity of
$276.1 million. At April 30, 2011, we had
$25.0 million outstanding on this facility, leaving
remaining availability of $251.1 million. Mortgage loans
held for investment of $381.5 million serve as eligible
collateral and are used to determine total capacity. Our current
outstanding borrowings of $25.0 million are due in April
2012 and bear interest at a rate of 2.36%.
We have various compensation plans where we make contributions
to eligible participant accounts, which may also include
deferred compensation of the participant, with the participants
then accruing income on these amounts. Included in other
noncurrent liabilities is $152.7 million and
$135.5 million at April 30, 2011 and 2010,
respectively, reflecting our obligation under these plans. We
may purchase whole-life insurance contracts on certain employee
participants to recover distributions made or to be made under
the plans. The cash surrender value of the policies and other
assets held by the trusts are recorded in other noncurrent
assets and totaled $115.0 million and $112.4 million
at April 30, 2011 and 2010, respectively. These assets are
restricted, as they are only available to fund the related
liabilities.
During fiscal year 2011, we purchased and immediately retired
19.0 million shares of our common stock at a cost of
$279.9 million. During fiscal year 2010, we purchased and
immediately retired 12.8 million shares of our common stock
at a cost of $250.0 million. We may continue to repurchase
and retire common stock or retire shares held in treasury in the
future.
On October 27, 2008, we sold 8.3 million shares of our
common stock, without par value, at a price of $17.50 per share
in a registered direct offering through subscription agreements
with selected institutional investors. We received net proceeds
of $141.4 million, after deducting placement agent fees and
other offering expenses. Proceeds were used for general
corporate purposes.
We are authorized to issue 6.0 million shares of Preferred
Stock without par value. At April 30, 2011, we had
5.6 million shares of authorized but unissued Preferred
Stock. Of the unissued shares, 0.6 million shares have been
designated as Participating Preferred Stock.
We are authorized to issue 0.5 million shares of non-voting
Preferred Stock designated as Convertible Preferred Stock
without par value. At April 30, 2011, we had
0.5 million shares of authorized but unissued Convertible
Preferred Stock. The holders of the Convertible Preferred Stock
are not entitled to receive dividends paid in cash, property or
securities and, in the event of any dissolution, liquidation or
wind-up
of
the Company, will share ratably with the holders of Common Stock
then outstanding in the assets of the Company after any
distribution or payments are made to the holders of
Participating Preferred stock or the holders of any other class
or series of stock of the Company with preference over the
Common Stock.
We utilize the fair value method to account for stock-based
awards. Stock-based compensation expense of $14.5 million,
$29.4 million and $32.6 million was recorded in fiscal
years 2011, 2010 and 2009, respectively, net of related tax
benefits of $5.4 million, $10.5 million and
$12.2 million, respectively. Stock-based compensation
58
H&R
BLOCK 2011 Form 10K
Table of Contents
expense of our continuing operations totaled $14.5 million,
$29.3 million and $26.6 million in fiscal years 2011,
2010 and 2009, respectively.
Accounting standards require excess tax benefits from
stock-based compensation to be included as a financing activity
in the statements of cash flows. As a result, we classified
$0.5 million, $1.6 million and $8.6 million as
cash inflows from financing activities for fiscal years 2011,
2010 and 2009, respectively. We realized tax benefits of
$4.4 million, $6.6 million and $20.2 million in
fiscal years 2011, 2010 and 2009, respectively.
We have four stock-based compensation plans which have been
approved by our shareholders. As of April 30, 2011, we had
11.5 million shares reserved for future awards under
stock-based compensation plans. We issue shares from our
treasury stock to satisfy the exercise or release of stock-based
awards. We believe we have adequate treasury stock to issue for
the exercise or release of stock-based awards.
Our 2003 Long-Term Executive Compensation Plan provides for
awards of options (both incentive and nonqualified), nonvested
shares, performance nonvested share units and other stock-based
awards to employees. These awards entitle the holder to shares
or the right to purchase shares of common stock as the award
vests, typically over a three-year or four-year period with a
portion vesting each year. Historically, nonvested shares have
received dividends during the vesting period, however awards
granted after October 1, 2010 will no longer receive
dividends during the vesting period. Performance nonvested share
units receive cumulative dividends at the end of the vesting
period. We measure the fair value of options on the grant date
or modification date using the Black-Scholes option valuation
model. We measure the fair value of nonvested shares and
performance nonvested share units based on the closing price of
our common stock on the grant date. Generally, we expense the
grant-date fair value, net of estimated forfeitures, over the
vesting period on a straight-line basis. Awards granted to
employees who are of retirement age or early retirement age
(age 65 or age 55 and ten years of service) or reach
either retirement age prior to the end of the service period of
the awards, are expensed over the shorter of the two periods.
Options are generally granted at a price equal to the fair
market value of our common stock on the grant date and have a
contractual term of ten years.
Our 1999 Stock Option Plan for Seasonal Employees, which
provided for awards of nonqualified options to certain
employees, was terminated effective December 31, 2009,
except for outstanding awards thereunder. These awards were
granted to seasonal employees in our Tax Services segment and
entitled the holder to the right to purchase shares of common
stock as the award vests, typically over a two-year period. We
measured the fair value of options on the grant date using the
Black-Scholes option valuation model. We expensed the grant-date
fair value, net of estimated forfeitures, over the seasonal
service period. Options were granted at a price equal to the
fair market value of our common stock on the grant date, are
exercisable during September through November in each of the two
years following the calendar year of the grant, and have a
contractual term of 29 months.
Our 1989 Stock Option Plan for Outside Directors, which provided
for awards of nonqualified options to outside directors, was
terminated effective June 11, 2008, except for outstanding
awards thereunder. The plan was replaced by the 2008 Deferred
Stock Unit Plan for Outside Directors. The number of deferred
stock units credited to an outside director’s account
pursuant to an award is determined by dividing the dollar amount
of the award by the average current market value per share of
common stock for the ten consecutive trading dates ending on the
date the deferred stock units are granted to the outside
directors. Each deferred stock unit granted is vested upon award
and the settlement of shares occurs six months after separation
of service from the Board of Directors. The vested shares
receive dividends prior to settlement, which are reinvested and
settled in shares at the time of settlement.
Our 2000 Employee Stock Purchase Plan (ESPP) provides employees
the option to purchase shares of our common stock through
payroll deductions. The purchase price of the stock is 90% of
the lower of either the fair market value of our common stock on
the first trading day within the Option Period or on the last
trading day of the Option Period. The Option Periods are
six-month periods beginning on January 1 and July 1 each year.
We measure the fair value of options on the grant date utilizing
the Black-Scholes option valuation model. The fair value of the
option includes the value of the 10% discount and the look-back
feature. We expense the grant-date fair value over the six-month
vesting period.
H&R
BLOCK 2011
Form 10K
59
Table of Contents
A summary of options for the year ended April 30, 2011, is
as follows:
| (in 000s, except per share amounts) | ||||||||||||||||||||
|
|
||||||||||||||||||||
|
Weighted-Average
|
||||||||||||||||||||
|
Weighted-Average
|
Remaining
|
Aggregate
|
||||||||||||||||||
| Shares | Exercise Price | Contractual Term | Intrinsic Value | |||||||||||||||||
|
|
||||||||||||||||||||
|
Outstanding, beginning of the year
|
15,082 | $ | 20.58 | |||||||||||||||||
|
Granted
|
2,080 | 13.29 | ||||||||||||||||||
|
Exercised
|
(338 | ) | 10.64 | |||||||||||||||||
|
Forfeited or expired
|
(6,034 | ) | 22.17 | |||||||||||||||||
|
Outstanding, end of the year
|
10,790 | $ | 18.64 | 4 years | $ | 9,224 | ||||||||||||||
|
Exercisable, end of the year
|
8,122 | $ | 19.95 | 2 years | $ | 1,318 | ||||||||||||||
|
Exercisable and expected to vest
|
10,650 | 18.71 | 4 years |
8,666
|
||||||||||||||||
|
|
||||||||||||||||||||
The total intrinsic value of options exercised during fiscal
years 2011, 2010 and 2009 was $1.8 million,
$5.4 million and $33.0 million, respectively. As of
April 30, 2011, we had $3.2 million of total
unrecognized compensation cost related to these options. The
cost is expected to be recognized over a weighted-average period
of two years.
We utilize the Black-Scholes option valuation model to value our
options on the grant date. We typically estimate the expected
volatility using our historical stock price data, unless
historical volatility is not representative of expected
volatility. We also use historical exercise and forfeiture
behaviors to estimate the options expected term and our
forfeiture rate. The dividend yield is calculated based on the
current dividend and the market price of our common stock on the
grant date. The risk-free interest rate is based on the
U.S. Treasury zero-coupon yield curve in effect on the
grant date. Both expected volatility and the risk-free interest
rate are based on a period that approximates the expected term.
The following assumptions were used to value options during the
periods:
|
|
||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
Options – management and director:
|
||||||||||||||||
|
Expected volatility
|
28.98% - 30.20% | 27.11% - 27.27% | 23.41% - 25.20% | |||||||||||||
|
Expected term
|
5 years | 5 years | 4 years | |||||||||||||
|
Dividend yield
|
4.18% - 5.17% | 3.24% - 3.55% | 2.35% - 3.04% | |||||||||||||
|
Risk-free interest rate
|
1.26% - 1.92% | 2.38% - 2.75% | 2.54% - 3.26% | |||||||||||||
|
Weighted-average fair value
|
$ | 2.25 | $ | 3.27 | $ | 3.80 | ||||||||||
|
Options –
seasonal:
(1)
|
||||||||||||||||
|
Expected volatility
|
33.81% | 25.35% | ||||||||||||||
|
Expected term
|
2 years | 2 years | ||||||||||||||
|
Dividend yield
|
3.48% | 2.80% | ||||||||||||||
|
Risk-free interest rate
|
0.85% | 2.54% | ||||||||||||||
|
Weighted-average fair value
|
$ | 2.70 | $ | 2.83 | ||||||||||||
|
ESPP options:
|
||||||||||||||||
|
Expected volatility
|
22.75% - 23.31% | 23.68% - 43.20% | 29.13% - 43.82% | |||||||||||||
|
Expected term
|
0.5 years | 0.5 years | 0.5 years | |||||||||||||
|
Dividend yield
|
3.86% - 4.80% | 2.65% - 3.46% | 2.67% - 2.78% | |||||||||||||
|
Risk-free interest rate
|
0.19% - 0.23% | 0.20% - 0.33% | 0.27% - 2.13% | |||||||||||||
|
Weighted-average fair value
|
$ | 2.16 | $ | 3.66 | $ | 4.38 | ||||||||||
|
|
||||||||||||||||
| (1) | This plan was terminated in fiscal year 2010, except for outstanding awards thereunder. |
A summary of nonvested shares and performance nonvested share
units for the year ended April 30, 2011, is as follows:
| (shares in 000s) | ||||||||||||
|
|
||||||||||||
|
Weighted-Average
|
||||||||||||
|
Grant Date
|
||||||||||||
| Shares | Fair Value | |||||||||||
|
|
||||||||||||
|
Outstanding, beginning of the year
|
1,619 | $ | 19.55 | |||||||||
|
Granted
|
745 | 12.56 | ||||||||||
|
Released
|
(632 | ) | 20.20 | |||||||||
|
Forfeited
|
(232 | ) | 17.61 | |||||||||
|
|
||||||||||||
|
Outstanding, end of the year
|
1,500 | $ | 15.92 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
The total fair value of shares vesting during fiscal years 2011,
2010 and 2009 was $13.0 million, $15.5 million and
$21.1 million, respectively. Upon the grant of nonvested
shares and performance nonvested share units, unearned
60
H&R
BLOCK 2011 Form 10K
Table of Contents
compensation cost is recorded as an offset to additional paid-in
capital and is amortized as compensation expense over the
vesting period. As of April 30, 2011, we had
$11.5 million of total unrecognized compensation cost
related to these shares. This cost is expected to be recognized
over a weighted-average period of 2 years.
The components of income from continuing
operations upon which domestic and foreign income taxes have
been provided are as follows:
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
Domestic
|
$ | 639,914 | $ | 745,912 | $ | 815,614 | ||||||||||
|
Foreign
|
37,111 | 38,223 | 23,756 | |||||||||||||
|
|
||||||||||||||||
| $ | 677,025 | $ | 784,135 | $ | 839,370 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
The components of income tax expense (benefit) for continuing
operations are as follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||
|
|
||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 188,086 | $ | 92,992 | $ | 243,085 | ||||||
|
State
|
45,068 | 23,625 | 38,418 | |||||||||
|
Foreign
|
21,456 | 16,052 | 1,393 | |||||||||
|
|
||||||||||||
| 254,610 | 132,669 | 282,896 | ||||||||||
|
|
||||||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(799 | ) | 128,900 | 36,739 | ||||||||
|
State
|
3,521 | 33,448 | 6,582 | |||||||||
|
Foreign
|
288 | 172 | 98 | |||||||||
|
|
||||||||||||
| 3,010 | 162,520 | 43,419 | ||||||||||
|
|
||||||||||||
|
Total income taxes for continuing operations
|
$ | 257,620 | $ | 295,189 | $ | 326,315 | ||||||
|
|
||||||||||||
|
|
||||||||||||
The reconciliation between the income tax provision and the
amount computed by applying the statutory federal tax rate of
35% to income taxes of continuing operations is as follows:
|
|
||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
U.S. statutory tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||||||
|
Change in tax rate resulting from:
|
||||||||||||||||
|
State income taxes, net of federal income tax benefit
|
4.5 | % | 3.8 | % | 4.2 | % | ||||||||||
|
Permanent differences
|
(0.3 | )% | (0.5 | )% | 1.6 | % | ||||||||||
|
Uncertain tax positions
|
1.1 | % | 0.9 | % | 0.5 | % | ||||||||||
|
Net decrease in valuation allowance
|
(1.3 | )% | (1.0 | )% | (1.2 | )% | ||||||||||
|
Other
|
(0.9 | )% | (0.6 | )% | (1.2 | )% | ||||||||||
|
|
||||||||||||||||
|
Effective tax rate
|
38.1 | % | 37.6 | % | 38.9 | % | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
H&R
BLOCK 2011
Form 10K
61
Table of Contents
The significant components of deferred tax assets and
liabilities of continuing operations are reflected in the
following table:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| As of April 30, | 2011 | 2010 | ||||||||||
|
|
||||||||||||
|
Gross deferred tax assets:
|
||||||||||||
|
Accrued expenses
|
$ | 61,891 | $ | 17,554 | ||||||||
|
Allowance for credit losses and related reserves
|
102,587 | 164,783 | ||||||||||
|
Net operating loss carryovers
|
– | 200 | ||||||||||
|
Other
|
– | 237 | ||||||||||
|
Valuation allowance
|
(47,300 | ) | (1,745 | ) | ||||||||
|
|
||||||||||||
|
Current
|
117,178 | 181,029 | ||||||||||
|
|
||||||||||||
|
Deferred and stock-based compensation
|
73,398 | 71,970 | ||||||||||
|
Property and equipment
|
– | 9,071 | ||||||||||
|
Deferred revenue
|
23,166 | 25,595 | ||||||||||
|
Net operating loss carryovers
|
21,057 | 26,292 | ||||||||||
|
Accrued expenses
|
32,481 | 31,892 | ||||||||||
|
Capital loss carryover
|
150,876 | 144,507 | ||||||||||
|
Other
|
15,953 | 15,991 | ||||||||||
|
Valuation allowance
|
(94,261 | ) | (151,838 | ) | ||||||||
|
|
||||||||||||
|
Noncurrent
|
222,670 | 173,480 | ||||||||||
|
|
||||||||||||
| 339,848 | 354,509 | |||||||||||
|
Gross deferred tax liabilities:
|
||||||||||||
|
Prepaid expenses
|
(4,734 | ) | (6,337 | ) | ||||||||
|
|
||||||||||||
|
Current
|
(4,734 | ) | (6,337 | ) | ||||||||
|
|
||||||||||||
|
Property and equipment
|
(10,731 | ) | – | |||||||||
|
Basis difference in mortgage-related investment
|
(49,751 | ) | (81,118 | ) | ||||||||
|
Intangibles
|
(139,963 | ) | (124,918 | ) | ||||||||
|
|
||||||||||||
|
Noncurrent
|
(200,445 | ) | (206,036 | ) | ||||||||
|
|
||||||||||||
|
Net deferred tax assets
|
$ | 134,669 | $ | 142,136 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
The loss from discontinued operations for fiscal years 2011,
2010 and 2009 of $13.3 million, $9.7 million and
$27.4 million, respectively are net of tax benefits of
$8.7 million, $8.0 million and $20.3 million,
respectively. Our effective tax rate for discontinued operations
was 39.4%, 45.1% and 42.5% for fiscal years 2011, 2010 and 2009,
respectively.
As of April 30, 2011, we have a capital loss deferred tax
asset (DTA) of $147 million. The majority of this capital
loss DTA resulted from the sale of our brokerage business in
November 2008. Generally, for tax purposes, a capital loss can
only be utilized to the extent we realize capital gains within
five years of the end of the taxable year the capital loss was
incurred. We do not currently expect to be able to realize a tax
benefit for substantially all of this loss and, therefore,
recorded a valuation allowance of $126.3 million. We have
capital loss carryover of approximately $375 million which
will expire if not used to offset future capital gains before
December 31, 2013.
During fiscal year 2010, our current tax expense was reduced and
our deferred tax expense increased by offsetting amounts due to
the tax effects of a tax accounting change impacting the timing
of taxable income from certain mortgage related assets. Because
of this treatment we recorded a noncurrent deferred tax
liability of $81.1 million and a long-term receivable of
the same amount as a result of this change. During fiscal year
2011, we changed our measurement of the more-likely-than-not tax
basis of certain assets of a subsidiary as a result of new
information obtained from ongoing interactions with the IRS. The
result of this new information was to increase our noncurrent
deferred tax liability in the amount of $66.3 million and
to establish a long-term receivable for the same amount as it is
not expected that these matters will be settled within twelve
months.
Certain of our subsidiaries file stand-alone returns in various
states and foreign jurisdictions, and others join in filing
consolidated or combined returns in such jurisdictions. At
April 30, 2011, we had net operating losses (NOLs) in
various states and foreign jurisdictions. The amount of state
NOLs vary by taxing jurisdiction. We recorded deferred tax
assets of $21.1 million for the tax effects of such losses
and a valuation allowance of $10.3 million for the portion
of such losses that, more likely than not, will not be realized.
If not used, the NOLs will expire in varying amounts during
fiscal years 2012 through 2031.
We intend to indefinitely reinvest foreign earnings, therefore,
a provision has not been made for income taxes that might be
payable upon remittance of such earnings. Determination of the
amount of unrecognized deferred tax liability on unremitted
foreign earnings is not practicable.
62
H&R
BLOCK 2011 Form 10K
Table of Contents
A reconciliation of the beginning and ending amount of
unrecognized tax benefits for fiscal years 2011, 2010 and 2009
is as follows:
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
Balance, beginning of the year
|
$ | 129,767 | $ | 124,605 | $ | 137,608 | ||||||||||
|
Additions based on tax positions related to prior years
|
28,262 | 12,957 | 14,541 | |||||||||||||
|
Reductions based on tax positions related to prior years
|
(1,473 | ) | (2,427 | ) | (6,096 | ) | ||||||||||
|
Additions based on tax positions related to the current year
|
3,417 | 3,314 | 4,110 | |||||||||||||
|
Reductions related to settlements with tax authorities
|
(7,639 | ) | (8,545 | ) | (18,189 | ) | ||||||||||
|
Expiration of statute of limitations
|
(315 | ) | (1,061 | ) | (5,007 | ) | ||||||||||
|
Foreign currency translation
|
1,057 | 924 | (2,362 | ) | ||||||||||||
|
Other
|
1,772 | – | – | |||||||||||||
|
|
||||||||||||||||
|
Balance, end of the year
|
$ | 154,848 | $ | 129,767 | $ | 124,605 | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
Of the $154.8 million, $129.8 million and
$124.6 million ending gross unrecognized tax benefit
balance as of April 30, 2011, 2010 and 2009, respectively,
$117.6 million, $106.8 million and
$107.0 million, respectively, if recognized, would impact
the effective rate. This difference results from adjusting the
gross balances for such items as federal, state and foreign
deferred items, interest and deductible taxes. We believe it is
reasonably possible that the balance of unrecognized tax
benefits could decrease by approximately $17 million within
the next twelve months due to anticipated settlements of audit
issues and expiring statutes of limitations. This amount is
included in accrued income taxes in our consolidated balance
sheet. The remaining amount is classified as long-term and is
included in other noncurrent liabilities in the consolidated
balance sheet.
Interest and penalties, if any, accrued on the unrecognized tax
benefits are reflected in income tax expense. The amount of
gross interest and penalties accrued on uncertain tax positions
during fiscal years 2011, 2010 and 2009 totaled
$4.4 million, $4.1 million and $15.4 million,
respectively. The total gross interest and penalties accrued as
of April 30, 2011, 2010 and 2009 totaled
$44.1 million, $39.7 million and $42.4 million,
respectively.
We file a consolidated federal income tax return in the
U.S. and file tax returns in various state and foreign
jurisdictions. The consolidated tax returns for the years 2006
and 2007 are currently under examination by the IRS. The
consolidated tax returns for the years 1999 – 2005 are
at the IRS appellate level. Tax years prior to 1999 are closed
by statute. Historically, tax returns in various foreign and
state jurisdictions are examined and settled upon completion of
the examination.
| NOTE 16: | INTEREST INCOME AND INTEREST EXPENSE |
The following table shows the components of interest income and
expense of our continuing operations. Interest expense is
included in cost of revenues on our consolidated statements of
income.
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
Interest income:
|
||||||||||||||||
|
Mortgage loans, net
|
$ | 24,693 | $ | 31,877 | $ | 46,396 | ||||||||||
|
Emerald Advance lines of credit
|
94,300 | 77,891 | 91,019 | |||||||||||||
|
Investment securities
|
1,609 | 2,318 | 4,896 | |||||||||||||
|
Other
|
13,551 | 10,319 | 12,205 | |||||||||||||
|
|
||||||||||||||||
| $ | 134,153 | $ | 122,405 | $ | 154,516 | |||||||||||
|
|
||||||||||||||||
|
Interest expense:
|
||||||||||||||||
|
Borrowings
|
$ | 85,421 | $ | 78,398 | $ | 83,193 | ||||||||||
|
Deposits
|
8,488 | 10,174 | 14,069 | |||||||||||||
|
FHLB advances
|
1,526 | 1,997 | 5,113 | |||||||||||||
|
|
||||||||||||||||
| $ | 95,435 | $ | 90,569 | $ | 102,375 | |||||||||||
|
|
||||||||||||||||
| NOTE 17: | VARIABLE INTERESTS |
The following is a description of our financial interests in
VIEs which we consider significant or where we are the sponsor.
For these VIEs we have determined that we are not the primary
beneficiary and, therefore have not consolidated the VIEs. Prior
to implementation of this new guidance we did not consolidate
these entities.
McGladrey &
Pullen LLP
– McGladrey & Pullen
LLP (M&P) is a limited liability partnership, owned 100% by
certified public accountants (CPAs), which provides attest
services to middle market clients.
Under state accountancy regulations, a firm cannot provide
attest services unless it is properly licensed which requires
that the firm be majority-owned and controlled by licensed CPAs.
As such, RSM McGladrey, Inc. (RSM) cannot be a licensed CPA firm
and cannot provide attest services. Since 1999, RSM and M&P
have operated in what
H&R
BLOCK 2011
Form 10K
63
Table of Contents
is known as an “alternative
practice structure” (APS). Through the APS, RSM and
M&P offer clients a full range of attest and non-attest
services in compliance with applicable accountancy regulations.
An administrative services agreement between RSM and M&P
obligates RSM to provide M&P with administrative services,
information technology, office space, non-professional staff,
and other infrastructure in exchange for market rate fees from
M&P. In addition, the agreement allows for professional
staff to be
sub-contracted
between RSM and M&P at market rates. During fiscal years
2011 and 2010, we received $4.1 million and
$22.6 million, respectively, in management fee revenues
from M&P.
All partners of M&P, with the exception of M&P’s
Managing Partner, are also managing directors employed by RSM.
Approximately 84% of RSM’s managing directors are also
partners in M&P. Certain other personnel are also employed
by both M&P and RSM. M&P partners receive
distributions of M&P’s earnings in their capacity as
partners, as well as compensation from RSM in their capacity as
managing directors. Distributions to M&P partners are based
on the profitability of M&P and are not capped by the APS.
The aggregate compensation payable to RSM managing directors by
RSM in any given year generally equals 67 percent of the
combined profits of M&P and RSM less any amounts paid in
their capacity as M&P partners. In practice, this means
that variability in the amounts paid to RSM managing directors
under these contracts can cause variability in RSM’s
operating results. RSM is not entitled to any profits or
residual interests of M&P, nor is it obligated to fund
losses or capital deficiencies of M&P. Managing directors
of RSM have historically participated in stock-based
compensation plans of H&R Block. Beginning in fiscal 2011,
participation in those plans ceased and were replaced by a
non-contributory, non-qualified defined contribution plan. RSM
is required to pay $60.0 million over five years to fund
contributions to the retirement plan. The administrative
services agreement with M&P and compensation arrangements
between RSM and their managing directors represent a variable
interest in M&P.
We have concluded that RSM is not the primary beneficiary of
M&P and, therefore, we have not consolidated M&P. RSM
does not have an equity interest in M&P, nor does it have
the power to direct any activities of M&P and does not
receive any of its income. We have no assets or liabilities
included in our consolidated balance sheets related to our
variable interests. We believe RSM’s maximum exposure to
economic loss, resulting from various agreements with M&P,
relates primarily to shared office space from operating leases
under the administrative services agreement equal to
$94.8 million at April 30, 2011, and variability in
our operating results due to the compensation agreements with
RSM managing directors. We do not provide any support that is
not contractually required.
Securitization
Trusts
– SCC holds an interest in and is
the sponsor (issuer) of 56 REMIC Trusts and 14 NIM Trusts
(collectively, “Trusts”) related to previously
originated mortgage loans that were securitized. These Trusts
are variable interest entities. The REMIC Trusts hold static
pools of
sub-prime
residential mortgage loans. The NIM Trusts hold beneficial
interests in certain REMIC Trusts. The Trusts were designed to
collect and pass through to the beneficial interest holders the
cash flows of the underlying mortgage loans. The REMIC Trusts
were financed with bonds and equity. The NIM Trusts were
financed with notes and equity. All bonds and notes are held by
third-party investors.
Our identification of the primary beneficiary of the Trusts was
based on a determination that the servicer of the underlying
mortgage loans has the power to direct the most significant
activities of the Trusts because the servicer handles all of the
loss mitigation activities for the mortgage loans.
SCC is not the servicer of the mortgage loans underlying the
REMIC Trusts. Therefore, SCC is not the primary beneficiary of
the REMIC Trusts because it does not have the power to direct
the most significant activities of the REMIC Trusts, which is
the servicing of the underlying mortgage loans.
SCC does have the exclusive right to appoint a servicer when
certain conditions have been met for specific loans related to
two of the NIM Trusts. As of April 30, 2011, those
conditions have been met for a minority portion of the loans
underlying those Trusts. As this right pertains only to a
minority of the loans, we have concluded that SCC does not have
the power to direct the most significant activities of these two
NIM Trusts, as the servicer has the power to direct significant
activities over the majority of the mortgage loans. In the
remaining NIM Trusts, SCC has a shared right to appoint a
servicer under certain conditions. For these NIM Trusts, we have
concluded that SCC is not the primary beneficiary because the
power to direct the most significant activities, which is the
servicing of the underlying mortgage loans, is shared with other
unrelated parties.
At April 30, 2011, we had no significant assets or
liabilities included in our consolidated balance sheets related
to SCC’s variable interests in the Trusts. We have a
liability, as discussed in note 18, and a deferred tax
asset recorded in our consolidated balance sheets related to
obligations for representations and warranties SCC made in
connection with the transfer of mortgage loans, including
mortgage loans held by the securitization trusts. We have no
remaining exposure to economic loss arising from impairment of
SCC’s beneficial interest in the Trusts. If SCC receives
cash flows in the future as a holder of beneficial interests we
would record gains as other income in
64
H&R
BLOCK 2011 Form 10K
Table of Contents
our income statement. Neither we nor SCC has liquidity
arrangements, guarantees or other commitments for the Trusts,
nor has any support been provided that was not contractually
required.
| NOTE 18: | COMMITMENTS AND CONTINGENCIES |
We offer guarantees under our POM program to tax clients whereby
we will assume the cost of additional tax assessments, up to a
cumulative per client limit of $5,500, attributable to tax
return preparation error for which we are responsible. We defer
all revenues and direct costs associated with these guarantees,
recognizing these amounts over the term of the guarantee based
on historical and actual payment of claims. The related current
asset is included in prepaid expenses and other current assets.
The related liability is included in accounts payable, accrued
expenses and other current liabilities in the consolidated
balance sheets. The related noncurrent asset and liability are
included in other assets and other noncurrent liabilities,
respectively, in the consolidated balance sheets. A loss on
these POM guarantees would be recognized if the sum of expected
costs for services exceeded unearned revenue. The changes in the
deferred revenue liability for fiscal years 2011 and 2010 are as
follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| Year Ended April 30, | 2011 | 2010 | ||||||||||
|
|
||||||||||||
|
Balance, beginning of the year
|
$ | 141,542 | $ | 146,807 | ||||||||
|
Amounts deferred for new guarantees issued
|
77,474 | 74,889 | ||||||||||
|
Revenue recognized on previous deferrals
|
(78,413 | ) | (80,154 | ) | ||||||||
|
|
||||||||||||
|
Balance, end of the year
|
$ | 140,603 | $ | 141,542 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
In addition to amounts accrued for our POM guarantee, we had
accrued $14.7 million and $14.5 million at
April 30, 2011 and 2010, respectively, related to our
standard guarantee which is included with our standard tax
preparation services.
During fiscal year 2009, we entered into an agreement to
purchase $45.8 million in media advertising between
July 1, 2009 and June 30, 2013. At April 30,
2011, our remaining obligation totaled $9.5 million. We
expect to make payments totaling $6.7 million during fiscal
year 2012.
We have various contingent purchase price obligations for
acquisitions prior to May 2009. In many cases, contingent
payments to be made in connection with these acquisitions are
not subject to a stated limit. We estimate the potential
payments (undiscounted) for which we have not recorded a
liability total $3.8 million as of April 30, 2011. We
have recorded liabilities totaling $11.0 million in
conjunction with contingent payments related to more recent
acquisitions, with the short-term amount recorded in accounts
payable, accrued expenses and deposits and the long-term portion
included in other noncurrent liabilities. Our estimate is based
on current financial conditions. Should actual results differ
materially from our assumptions, the potential payments will
differ from the above estimate.
We have contractual commitments to fund certain franchises
requesting Franchise Equity Lines of Credit (FELCs). Our total
obligation under these lines of credit was $85.2 million at
April 30, 2011, and net of amounts drawn and outstanding,
our remaining commitment to fund totaled $37.7 million.
We are self-insured for certain risks, including, workers’
compensation, property and casualty, professional liability and
claims related to our POM program. These programs maintain
various self-insured retentions. In all but POM, commercial
insurance is purchased in excess of the self-insured retentions.
We accrue estimated losses for self-insured retentions using
actuarial models and assumptions based on historical loss
experience. The nature of our business may subject us to error
and omissions, casualty and professional liability lawsuits. To
the extent that we are subject to claims exceeding our insurance
coverage, such suits could have a material effect on our
financial position, results of operations or liquidity.
We issued three standby letters of credit to servicers paying
claims related to our POM, errors and omissions, and property
and casualty insurance policies. These letters of credit are for
amounts not to exceed $5.3 million in the aggregate. At
April 30, 2011, there were no balances outstanding on these
letters of credit.
Our self-insured health benefits plan provides medical benefits
to employees electing coverage under the plan. We maintain a
reserve for incurred but not reported medical claims and claim
development. The reserve is an estimate based on historical
experience and other assumptions, some of which are subjective.
We adjust our self-insured medical benefits reserve as our loss
experience changes due to medical inflation, changes in the
number of plan participants and an aging employee base.
During fiscal year 2006, we entered into a transaction with the
City of Kansas City, Missouri, to provide us with sales and
property tax savings on the furniture, fixtures and equipment
for our corporate headquarters facility. Under the transaction,
the City purchased equipment by issuing $31.0 million in
Industrial Revenue Bonds due in December 2015, and leased the
furniture, fixtures and equipment to us for an identical term
under a capital lease. The City’s bonds were purchased by
us. Because the City has assigned the lease to the bond trustee
for our benefit
H&R
BLOCK 2011
Form 10K
65
Table of Contents
as the sole bondholder, we, in effect, control enforcement of
the lease against ourselves. As a result of the capital lease
treatment, the furniture, fixtures and equipment will remain a
component of property, plant and equipment in our consolidated
balance sheets. As a result of the legal right of offset, the
capital lease obligation and the corresponding bond investments
have been eliminated in consolidation. The transaction provides
us with property tax exemptions for the leased furniture,
fixtures and equipment. As of April 30, 2011, we have
purchased $31.0 million in bonds in connection with this
arrangement.
Substantially all of the operations of our subsidiaries are
conducted in leased premises. Most of the operating leases are
for periods ranging from three years to five years, with renewal
options and provide for fixed monthly rentals. Future minimum
operating lease commitments of our continuing operations at
April 30, 2011, are as follows:
| (in 000s) | ||||||||
|
|
||||||||
|
2012
|
$ | 238,167 | ||||||
|
2013
|
181,044 | |||||||
|
2014
|
128,063 | |||||||
|
2015
|
84,138 | |||||||
|
2016
|
35,942 | |||||||
|
2017 and beyond
|
67,694 | |||||||
|
|
||||||||
| $ | 735,048 | |||||||
|
|
||||||||
|
|
||||||||
Rent expense of our continuing operations for fiscal years 2011,
2010 and 2009 totaled $272.1 million, $289.6 million
and $308.1 million, respectively.
In the regular course of business, we are subject to routine
examinations by federal, state and local taxing authorities. In
management’s opinion, the disposition of matters raised by
such taxing authorities, if any, would not have a material
impact on our consolidated financial statements.
We routinely enter into contracts that include embedded
indemnifications that have characteristics similar to
guarantees. Other guarantees and indemnifications of the Company
and its subsidiaries include obligations to protect
counterparties from losses arising from the following:
(1) tax, legal and other risks related to the purchase or
disposition of businesses; (2) penalties and interest
assessed by federal and state taxing authorities in connection
with tax returns prepared for clients; (3) indemnification
of our directors and officers; and (4) third-party claims
relating to various arrangements in the normal course of
business. Typically, there is no stated maximum payment related
to these indemnifications, and the terms of the indemnities may
vary and in many cases is limited only by the applicable statute
of limitations. The likelihood of any claims being asserted
against us and the ultimate liability related to any such
claims, if any, is difficult to predict. While we cannot provide
assurance we will ultimately prevail in the event any such
claims are asserted, we believe the fair value of these
guarantees and indemnifications is not material as of
April 30, 2011.
DISCONTINUED
OPERATIONS
– SCC, previously known as
Option One Mortgage Corporation, ceased originating mortgage
loans in December 2007 and, in April 2008, sold its servicing
assets and discontinued its remaining operations. The sale of
servicing assets did not include the sale of any mortgage loans.
In connection with the securitization and sale of loans, SCC
made certain representations and warranties, including, but not
limited to, representations relating to matters such as
ownership of the loan, validity of lien securing the loan, and
the loan’s compliance with SCC’s underwriting
criteria. Representations and warranties in whole loan sale
transactions to institutional investors included a
“knowledge qualifier” which limits SCC liability for
borrower fraud to those instances where SCC had knowledge of the
fraud at the time the loans were sold. In the event that there
is a breach of a representation and warranty and such breach
materially and adversely affects the value of a mortgage loan,
SCC may be obligated to repurchase a loan or otherwise indemnify
certain parties for losses incurred as a result of loan
liquidation. Generally, these representations and warranties are
not subject to a stated term, but would be subject to statutes
of limitation applicable to the contractual provisions.
66
H&R
BLOCK 2011 Form 10K
Table of Contents
Claims received by SCC have primarily related to alleged
breaches of representations and warranties related to a
loan’s compliance with the underwriting standards
established by SCC at origination, borrower fraud and credit
exceptions without sufficient compensating factors. Claims
received since May 1, 2008 follows:
| (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fiscal Year 2009 | Fiscal Year 2010 | Fiscal Year 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Total | ||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Loan Origination Year:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
2005
|
$ | 40 | $ | 21 | $ | 1 | $ | – | $ | – | $ | 15 | $ | – | $ | – | $ | 6 | $ | 1 | $ | – | $ | 1 | $ | 85 | ||||||||||||||||||||||||||
|
2006
|
89 | 10 | 111 | 7 | 2 | 57 | 4 | 45 | 100 | 15 | 29 | 50 | 519 | |||||||||||||||||||||||||||||||||||||||
|
2007
|
43 | 10 | 85 | 15 | 4 | 11 | 7 | – | 3 | 5 | 4 | 4 | 191 | |||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 172 | $ | 41 | $ | 197 | $ | 22 | $ | 6 | $ | 83 | $ | 11 | $ | 45 | $ | 109 | $ | 21 | $ | 33 | $ | 55 | $ | 795 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Note: The
table above excludes amounts related to an indemnity agreement
dated April 2008, which is discussed below.
For claims received, reviewed and determined to be valid, SCC
has complied with its obligations by either repurchasing the
mortgage loans or REO properties, providing for the
reimbursement of losses in connection with liquidated REO
properties, or reaching other settlements. SCC has denied
approximately 84% of all claims received, excluding resolution
reached under other settlements. Counterparties could reassert
claims that SCC has denied. Of claims determined to be valid,
approximately 22% resulted in loan repurchases, and 78% resulted
in indemnification or settlement payments. Losses on loan
repurchase, indemnification and settlement payments totaled
approximately $117 million for the period May 1, 2008
through April 30, 2011. Loss severity rates on repurchases
and indemnification have approximated 57% and SCC has not
observed any material trends related to average losses.
Repurchased loans are considered held for sale and are included
in prepaid expenses and other current assets on the consolidated
balance sheets. The net balance of all mortgage loans held for
sale by SCC was $12.3 million at April 30, 2011.
SCC generally has 60 to 120 days to respond to
representation and warranty claims and performs a
loan-by-loan
review of all repurchase claims during this time. SCC has
completed its review of all claims, with the exception of claims
totaling approximately $79 million, which remained subject
to review as of April 30, 2011. Of the claims still subject
to review, approximately $25 million are from private-label
securitizations, and $53 million are from monoline
insurers, with the remainder from government sponsored entities.
Approximately $30 million of claims under review represent
requests by the counterparty for additional information related
to denied claims, or are a reassertion of previously denied
claims.
All claims asserted against SCC since May 1, 2008 relate to
loans originated during calendar years 2005 through 2007, of
which, approximately 89% relate to loans originated in calendar
years 2006 and 2007. During calendar year 2005 through 2007, SCC
originated approximately $84 billion in loans, of which
less than 1% were sold to government sponsored entities. SCC is
not subject to loss on loans that have been paid in full,
repurchased, or were sold without recourse.
The majority of claims asserted since May 1, 2008, which
have been determined by SCC to represent a valid breach of its
representations and warranties, relate to loans that became
delinquent within the first two years following the origination
of the mortgage loan. SCC believes the longer a loan performs
prior to an event of default, the less likely the default will
be related to a breach of a representation and warranty. The
balance of loans originated in 2005, 2006 and 2007 which
defaulted in the first two years is $4.0 billion,
$6.3 billion and $2.9 billion, respectively, at
April 30, 2011.
SCC has recorded a liability for estimated contingent losses
related to representation and warranty claims as of
April 30, 2011, of $126.3 million, which represents
SCC’s best estimate of the probable loss that may occur.
During the current year, payments totaling $49.8 million
were made under an indemnity agreement dated April 2008 with a
specific counterparty in exchange for a full and complete
release of such party’s ability to assert representation
and warranty claims. The indemnity agreement was given as part
of obtaining the counterparty’s consent to SCC’s sale
of its mortgage servicing business in 2008. We have no remaining
payment obligations under this indemnity agreement.
The recorded liability represents SCC’s estimate of losses
from future claims where assertion of a claim and a related
contingent loss are both deemed probable. Because the rate at
which future claims may be deemed valid and actual loss severity
rates may differ significantly from historical experience, SCC
is not able to estimate reasonably possible loss outcomes in
excess of its current accrual. A 1% increase in both assumed
validity rates and loss severities would result in losses beyond
SCC’s accrual of approximately $16 million. This
sensitivity is hypothetical and is intended to provide an
indication of the impact of a change in key assumptions on the
representations and warranties liability. In reality, changes in
one assumption may result in changes in other assumptions, which
may or may not counteract the sensitivity.
H&R
BLOCK 2011
Form 10K
67
Table of Contents
While SCC uses the best information available to it in
estimating its liability, assessing the likelihood that claims
will be asserted in the future and estimating probable losses
are inherently difficult to estimate and require considerable
management judgment. Although net losses on settled claims since
May 1, 2008 have been within initial loss estimates, to the
extent that the volume of asserted claims, the level of valid
claims, the counterparties asserting claims, the nature of
claims, or the value of residential home prices differ in the
future from current estimates, future losses may be greater than
the current estimates and those differences may be significant.
A rollforward of our liability for losses on repurchases for
fiscal years 2011, 2010 and 2009 is as follows:
| (in 000s) | ||||||||||||
|
|
||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||
|
|
||||||||||||
|
Balance as of May 1:
|
||||||||||||
|
Amount related to repurchase and indemnifications
|
$ | 138,415 | $ | 156,659 | $ | 193,066 | ||||||
|
Amount related to indemnity agreement dated April 2008
|
49,785 | 49,936 | 50,000 | |||||||||
|
|
||||||||||||
| 188,200 | 206,595 | 243,066 | ||||||||||
|
|
||||||||||||
|
Changes:
|
||||||||||||
|
Provisions
|
– | – | – | |||||||||
|
Losses on repurchase and indemnifications
|
(12,155 | ) | (18,244 | ) | (36,407 | ) | ||||||
|
Payments under indemnity agreement dated April 2008
|
(49,785 | ) | (151 | ) | (64 | ) | ||||||
|
|
||||||||||||
|
Balance as of April 30:
|
||||||||||||
|
Amount related to repurchase and indemnifications
|
126,260 | 138,415 | 156,659 | |||||||||
|
Amount related to indemnity agreement dated April 2008
|
– | 49,785 | 49,936 | |||||||||
|
|
||||||||||||
| $ | 126,260 | $ | 188,200 | $ | 206,595 | |||||||
|
|
||||||||||||
|
|
||||||||||||
There have been no provisions for additional losses included in
the income statement since April 30, 2008.
| NOTE 19: | LITIGATION AND RELATED CONTINGENCIES |
We are party to investigations, legal claims and lawsuits
arising out of our business operations. As required, we accrue
our best estimate of loss contingencies when we believe a loss
is probable and we can reasonably estimate the amount of any
such loss. Amounts accrued, including obligations under
indemnifications, totaled $70.6 million and
$35.5 million at April 30, 2011 and 2010,
respectively. Litigation is inherently unpredictable and it is
difficult to project the outcome of particular matters with
reasonable certainty and, therefore, the actual amount of any
loss may prove to be larger or smaller than the amounts
reflected in our consolidated financial statements.
RAL
LITIGATION
– We have been named in multiple
lawsuits as defendants in litigation regarding our refund
anticipation loan program in past years. All of those lawsuits
have been settled or otherwise resolved, except for one.
The sole remaining case is a putative class action styled
Sandra J. Basile, et al. v. H&R Block, Inc., et
al.
, April Term 1992 Civil Action No. 3246 in the Court
of Common Pleas, First Judicial District Court of Pennsylvania,
Philadelphia County, instituted on April 23, 1993. The
plaintiffs allege inadequate disclosures with respect to the RAL
product and assert claims for violation of consumer protection
statutes, negligent misrepresentation, breach of fiduciary duty,
common law fraud, usury, and violation of the Truth In Lending
Act. Plaintiffs seek unspecified actual and punitive damages,
injunctive relief, attorneys’ fees and costs. A
Pennsylvania class was certified, but later decertified by the
trial court in December 2003. An appellate court subsequently
reversed the decertification decision. We are appealing the
reversal. We have not concluded that a loss related to this
matter is probable nor have we accrued a loss contingency
related to this matter. Plaintiffs have not provided a dollar
amount of their claim and we are not able to estimate a possible
range of loss. We believe we have meritorious defenses to this
case and intend to defend it vigorously. There can be no
assurances, however, as to the outcome of this case or its
impact on our consolidated results of operations.
EXPRESS IRA
LITIGATION
– We have been named defendants in
lawsuits regarding our former Express IRA product. All of those
lawsuits have been settled or otherwise resolved, except for one.
The one remaining case was filed on January 2, 2008 by the
Mississippi Attorney General in the Chancery Court of Hinds
County, Mississippi First Judicial District (Case No. G
2008 6 S 2) and is styled
Jim Hood, Attorney for the
State of Mississippi v. H&R Block, Inc., H&R
Block Financial Advisors, Inc
.,
et al.
The complaint
alleges fraudulent business practices, deceptive acts and
practices, common law fraud and breach of fiduciary duty with
respect to the sale of the product in Mississippi and seeks
equitable relief, disgorgement of profits, damages and
restitution, civil penalties and punitive damages. We are not
able to estimate a possible range of loss. We believe we have
meritorious defenses to the claims in this case, and we intend
to defend this case vigorously, but there can be no assurances
as to its outcome or its impact on our consolidated results of
operations.
68
H&R
BLOCK 2011 Form 10K
Table of Contents
Although we sold H&R Block Financial Advisors, Inc. (HRBFA)
effective November 1, 2008, we remain responsible for any
liabilities relating to the Express IRA litigation, among other
things, through an indemnification agreement. A portion of our
accrual is related to these indemnity obligations.
RSM McGLADREY
LITIGATION
– RSM EquiCo, its parent and certain
of its subsidiaries and affiliates, are parties to a class
action filed on July 11, 2006 and styled
Do Right’s
Plant Growers, et al. v. RSM EquiCo, Inc., et al. (the
“RSM Parties”),
Case No. 06 CC00137, in the
California Superior Court, Orange County. The complaint contains
allegations relating to business valuation services provided by
RSM EquiCo, including allegations of fraud, conversion and
unfair competition. Plaintiffs seek unspecified actual and
punitive damages, in addition to pre-judgment interest and
attorneys’ fees. On March 17, 2009, the court granted
plaintiffs’ motion for class certification on all claims.
To avoid the cost and inherent risk associated with litigation,
the parties have reached an agreement in principle to settle
this case, subject to approval by the California Superior Court.
The settlement would require a maximum payment of
$41.5 million, although the actual cost of the settlement
depends on the number of valid claims submitted by class
members. The defendants believe they have meritorious defenses
to the claims in this case and, if for any reason the settlement
is not approved, they will continue to defend the case
vigorously. Although we have recorded a liability for expected
losses, there can be no assurance regarding the outcome of this
matter.
On December 7, 2009, a lawsuit was filed in the Circuit
Court of Cook County, Illinois (2010-L-014920) against M&P,
RSM and H&R Block styled
Ronald R. Peterson ex rel.
Lancelot Investors Fund, L.P., et al. v.
McGladrey & Pullen LLP, et al.
The case was
removed to the United States District Court for the Northern
District of Illinois on December 28, 2009 (Case
No. 1:10-CV-00274).
The complaint, which was filed by the trustee for certain
bankrupt investment funds, seeks unspecified damages and asserts
claims against RSM for vicarious liability and alter ego
liability and against H&R Block for equitable restitution
relating to audit work performed by M&P. The amount claimed
in this case is substantial. On November 3, 2010, the court
dismissed the case against all defendants in its entirety with
prejudice. The trustee has filed an appeal to the Seventh
Circuit Court of Appeals with respect to the claims against
M&P and RSM. The appeal remains pending.
RSM and M&P operate in an alternative practice structure
(“APS”). Accordingly, certain claims and lawsuits
against M&P could have an impact on RSM. More specifically,
any judgments or settlements arising from claims and lawsuits
against M&P that exceed its insurance coverage could have a
direct adverse effect on M&P’s operations. Although
RSM is not responsible for the liabilities of M&P,
significant M&P litigation and claims could impair the
profitability of the APS and impair the ability to attract and
retain clients and quality professionals. This could, in turn,
have a material effect on RSM’s operations and impair the
value of our investment in RSM. There is no assurance regarding
the outcome of any claims or litigation involving M&P.
LITIGATION AND
CLAIMS PERTAINING TO DISCONTINUED MORTGAGE
OPERATIONS
– Although mortgage loan origination
activities were terminated and the loan servicing business was
sold during fiscal year 2008, SCC and HRB remain subject to
investigations, claims and lawsuits pertaining to its mortgage
business activities that occurred prior to such termination and
sale. These investigations, claims and lawsuits include actions
by state attorneys general, other state and federal regulators,
municipalities, individual plaintiffs, and cases in which
plaintiffs seek to represent a class of others alleged to be
similarly situated. Among other things, these investigations,
claims and lawsuits allege discriminatory or unfair and
deceptive loan origination and servicing practices, fraud, and
violations of securities laws, the Truth in Lending Act, Equal
Credit Opportunity Act and the Fair Housing Act. Given the
non-prime mortgage environment, the number of these
investigations, claims and lawsuits has increased over
historical experience and is likely to continue at increased
levels. The amounts claimed in these investigations, claims and
lawsuits are substantial in some instances, and the ultimate
resulting liability is difficult to predict and thus cannot be
reasonably estimated. In the event of unfavorable outcomes, the
amounts that may be required to pay in the discharge of
liabilities or settlements could be substantial and could have a
material impact on our consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a
lawsuit in the Superior Court of Suffolk County, Massachusetts
(Case
No. 08-2474-BLS)
styled
Commonwealth of Massachusetts v. H&R Block,
Inc., et al.,
alleging unfair, deceptive and discriminatory
origination and servicing of mortgage loans and seeking
equitable relief, disgorgement of profits, restitution and
statutory penalties. In November 2008, the court granted a
preliminary injunction limiting the ability of the owner of
SCC’s former loan servicing business to initiate or advance
foreclosure actions against certain loans originated by SCC or
its subsidiaries without (1) advance notice to the
Massachusetts Attorney General and (2) if the Attorney
General objects to foreclosure, approval by the court. An appeal
of the preliminary injunction was denied. A portion of our loss
contingency accrual is related to this matter for the amount of
loss that we consider probable and estimable. We do not believe
losses in excess of our accrual would be material to our
financial statements, although it is possible that our losses
could exceed the amount we have accrued. We and SCC believe we
have meritorious defenses to the claims presented and intend to
H&R
BLOCK 2011
Form 10K
69
Table of Contents
defend them vigorously. There can
be no assurances, however, as to the outcome of this matter or
its impact on our consolidated results of operations.
On October 15, 2010, the Federal Home Loan Bank of Chicago
filed a lawsuit in the Circuit Court of Cook County, Illinois
(Case No. 10CH45033) styled
Federal Home Loan Bank of
Chicago v. Bank of America Funding Corporation, et al.
against multiple defendants, including various SCC related
entities and H&R Block, Inc. related entities, arising out
of Federal Home Loan Bank’s (FHLB’s) purchase of
mortgage-backed securities. Plaintiff asserts claims for
rescission and damages under state securities law and for common
law negligent misrepresentation in connection with its purchase
of two securities originated and securitized by SCC. These two
securities had a total initial principal amount of approximately
$50 million, of which approximately $42 million
remains outstanding. We have not concluded that a loss related
to this matter is probable nor have we established a loss
contingency related to this matter. We believe the claims in
this case are without merit and we intend to defend them
vigorously. There can be no assurances, however, as to its
outcome or its impact on our consolidated results of operations.
OTHER CLAIMS AND
LITIGATION
– We have been named in several wage
and hour class action lawsuits throughout the country, including
Alice Williams v. H&R Block Enterprises LLC
,
Case No.RG08366506 (Superior Court of California, County of
Alameda, filed January 17, 2008) (alleging improper
classification of office managers in California);
Arabella
Lemus v. H&R Block Enterprises LLC, et al.,
Case
No. CGC-09-489251
(United States District Court, Northern District of California,
filed June 9, 2009) (alleging failure to timely pay
compensation to tax professionals in California and to include
itemized information on wage statements);
Delana Ugas v.
H&R Block Enterprises LLC, et al.,
Case
No. BC417700 (United States District Court, Central
District of California, filed July 13, 2009) (alleging
failure to compensate tax professionals in California and
eighteen other states for all hours worked and to provide meal
periods); and
Barbara Petroski v. H&R Block Eastern
Enterprises, Inc., et al.,
Case
No. 10-CV-00075
(United States District Court, Western District of Missouri,
filed January 25, 2010) (alleging failure to compensate tax
professionals nationwide for off-season training). A class was
certified in the
Lemus
case in December 2010 (consisting
of tax professionals who worked in company-owned offices in
California from 2007 to 2010) and in the
Williams
case in March 2011 (consisting of office managers who worked
in company-owned offices in California from 2004 to 2011). A
conditional class was certified in the
Petroski
case in
March 2011 (consisting of tax professionals who were not
compensated for certain training courses occurring on or after
April 15, 2007).
The plaintiffs in the wage and hour class action lawsuits seek
actual damages, pre-judgment interest and attorneys’ fees,
in addition to statutory penalties under California and federal
law, which could equal up to 30 days of wages per tax
season for class members who worked in California. A portion of
our loss contingency accrual is related to these lawsuits for
the amount of loss that we consider probable and estimable. For
those wage and hour class action lawsuits for which we are able
to estimate a range of possible loss, the current estimated
range is $0 to $70 million in excess of the accrued
liability related to those matters. This estimated range of
possible loss is based upon currently available information and
is subject to significant judgment and a variety of assumptions
and uncertainties. The matters underlying the estimated range
will change from time to time, and actual results may vary
significantly from the current estimate. Because this estimated
range does not include matters for which an estimate is not
possible, the range does not represent our maximum loss exposure
for the wage and hour class action lawsuits. We believe we have
meritorious defenses to the claims in these lawsuits and intend
to defend them vigorously. The amounts claimed in these matters
are substantial in some instances and the ultimate liability
with respect to these matters is difficult to predict. There can
be no assurances as to the outcome of these cases or their
impact on our consolidated results of operations, individually
or in the aggregate.
In October 2010, we signed a definitive merger agreement to
acquire all of the outstanding shares of 2SS Holdings, Inc.
(“2SS”), developer of TaxACT digital tax preparation
solutions, for $287.5 million in cash. In May 2011, the United
States Department of Justice (the “DOJ”) filed a civil
antitrust lawsuit in the U.S. district court in Washington,
D.C., (Case No. 1:11-cv-00948) against H&R Block and 2SS
styled
United States v. H&R Block, Inc., 2SS Holdings,
Inc., and TA IX L.P.
, to block our proposed acquisition of
2SS. There are no assurances that the DOJ’s lawsuit will be
resolved in our favor or that the transaction will be
consummated.
In addition, we are from time to time party to investigations,
claims and lawsuits not discussed herein arising out of our
business operations. These investigations, claims and lawsuits
include actions by state attorneys general, other state
regulators, individual plaintiffs, and cases in which plaintiffs
seek to represent a class of others similarly situated. We
believe we have meritorious defenses to each of these
investigations, claims and lawsuits, and we are defending or
intend to defend them vigorously. The amounts claimed in these
matters are substantial in some instances, however, the ultimate
liability with respect to such matters is difficult to predict.
In the event of an
70
H&R
BLOCK 2011 Form 10K
Table of Contents
unfavorable outcome, the amounts we may be required to pay in
the discharge of liabilities or settlements could have a
material impact on our consolidated results of operations.
We are also party to claims and lawsuits that we consider to be
ordinary, routine litigation incidental to our business,
including claims and lawsuits (collectively, “Other
Claims”) concerning the preparation of customers’
income tax returns, the fees charged customers for various
products and services, relationships with franchisees,
intellectual property disputes, employment matters and contract
disputes. While we cannot provide assurance that we will
ultimately prevail in each instance, we believe the amount, if
any, we are required to pay in the discharge of liabilities or
settlements in these Other Claims will not have a material
impact on our consolidated results of operations.
| NOTE 20: | REGULATORY REQUIREMENTS |
HRB Bank and the Company are subject to various regulatory
requirements, including capital guidelines for HRB Bank,
administered by federal banking agencies. Failure to meet
minimum capital requirements can trigger certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on HRB Bank and
our consolidated financial statements. All savings associations
are subject to the capital adequacy guidelines and the
regulatory framework for prompt corrective action. HRB Bank must
meet specific capital guidelines that involve quantitative
measures of HRB Bank’s assets, liabilities and certain
off-balance sheet items, as calculated under regulatory
accounting practices. HRB Bank’s capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
HRB Bank files its regulatory Thrift Financial Report (TFR) on a
calendar quarter basis.
Quantitative measures established by regulation to ensure
capital adequacy require HRB Bank to maintain minimum amounts
and ratios of tangible equity, total risk-based capital and
Tier 1 capital, as set forth in the table below. In
addition to these minimum ratio requirements, HRB Bank is
required to continually maintain a 12.0% minimum leverage ratio.
As of April 30, 2011, HRB Bank’s leverage ratio was
30.8%.
As of March 31, 2011, our most recent TFR filing with the
Office of Thrift Supervision (OTS), HRB Bank was a “well
capitalized” institution under the prompt corrective action
provisions of the FDIC. The five capital categories are:
(1) “well capitalized” (total risk-based capital
ratio of 10%, Tier 1 Risk-based capital ratio of 6% and
leverage ratio of 5%); (2) “adequately
capitalized;” (3) “undercapitalized;”
(4) “significantly undercapitalized;” and
(5) “critically undercapitalized.” There are no
conditions or events since March 31, 2011 that management
believes have changed HRB Bank’s category.
The following table sets forth HRB Bank’s regulatory
capital requirements, as calculated in its TFR:
| (dollars in 000s) | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
To Be Well
Capitalized
|
||||||||||||||||||||||||||||
|
For Capital
Adequacy
|
Under Prompt
Corrective
|
|||||||||||||||||||||||||||
| Actual | Purposes | Action Provisions | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
As of March 31, 2011:
|
||||||||||||||||||||||||||||
|
Total risk-based capital ratio
(1)
|
$ | 405,000 | 92.5% | $ | 35,019 | 8.0% | $ | 43,773 | 10.0% | |||||||||||||||||||
|
Tier 1 risk-based capital ratio
(2)
|
$ | 399,187 | 91.2% | N/A | N/A | $ | 26,264 | 6.0% | ||||||||||||||||||||
|
Tier 1 capital ratio (leverage)
(3)
|
$ | 399,187 | 22.8% | $ | 209,758 | 12.0% | $ | 87,399 | 5.0% | |||||||||||||||||||
|
Tangible equity ratio
(4)
|
$ | 399,187 | 22.8% | $ | 26,220 | 1.5% | N/A | N/A | ||||||||||||||||||||
|
As of March 31, 2010:
|
||||||||||||||||||||||||||||
|
Total risk-based capital ratio
(1)
|
$ | 420,401 | 75.7% | $ | 44,436 | 8.0% | $ | 55,545 | 10.0% | |||||||||||||||||||
|
Tier 1 risk-based capital ratio
(2)
|
$ | 413,074 | 74.4% | N/A | N/A | $ | 33,327 | 6.0% | ||||||||||||||||||||
|
Tier 1 capital ratio (leverage)
(3)
|
$ | 413,074 | 24.9% | $ | 199,272 | 12.0% | $ | 83,030 | 5.0% | |||||||||||||||||||
|
Tangible equity ratio
(4)
|
$ | 413,074 | 24.9% | $ | 24,909 | 1.5% | N/A | N/A | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| (1) | Total risk-based capital divided by risk-weighted assets. |
| (2) | Tier 1 (core) capital less deduction for low-level recourse and residual interest divided by risk-weighted assets. |
| (3) | Tier 1 (core) capital divided by adjusted total assets. |
| (4) | Tangible capital divided by tangible assets. |
Block Financial LLC (BFC) typically makes capital contributions
to HRB Bank to help it meet its capital requirements. BFC made
capital contributions to HRB Bank of $235.0 million during
fiscal years 2011 and 2010, and $245.0 million during
fiscal year 2009.
HRB Bank received approval from the OTS during fiscal year 2011
to pay cash and non-cash dividends. The dividend payments were
subject to HRB Bank maintaining a leverage capital ratio of 12%
immediately after payment and on a continual basis. HRB Bank
paid dividends and returned of capital of $262.5 million
during fiscal year 2011, comprised of $37.5 million in REO
properties and loans and $225.0 million in cash.
H&R
BLOCK 2011
Form 10K
71
Table of Contents
| NOTE 21: | SEGMENT INFORMATION |
Management has determined the reportable segments identified
below according to types of services offered and the manner in
which operational decisions are made. Operating results of our
reportable segments are all seasonal.
TAX
SERVICES
– Our Tax Services segment is
primarily engaged in providing tax return preparation and
related services and products in the U.S. and its
territories, Canada and Australia. Major revenue sources include
fees earned for tax preparation services performed at
company-owned retail tax offices, royalties from franchise
retail tax offices, fees for tax-related services, sales of tax
preparation software, online tax preparation fees, fees from
refund anticipation checks (RACs), prior year participation in
RALs, fees from activities related to H&R Block Prepaid
Emerald
MasterCard
®
,
and interest and fees from Emerald Advance lines of credit. HRB
Bank also offers traditional banking services including checking
and savings accounts, individual retirement accounts and
certificates of deposit.
Our international operations contributed $205.8 million,
$190.9 million and $160.7 million in revenues for
fiscal years 2011, 2010 and 2009, respectively, and
$46.2 million, $46.7 million and $31.6 million of
pretax income, respectively.
BUSINESS
SERVICES
– This segment offers tax and
consulting services, wealth management, and capital markets
services to middle-market companies in offices located
throughout the U.S.
CORPORATE
–
This segment’s operations include interest income from
U.S. passive investments, interest expense on borrowings,
net interest margin and gains or losses relating to mortgage
loans held for investment, real estate owned, residual interests
in securitizations and other corporate expenses, principally
related to finance, legal and other support departments.
IDENTIFIABLE
ASSETS
– Identifiable assets are those
assets, including goodwill and intangible assets, associated
with each reportable segment. The remaining assets are
classified as Corporate assets, which consist primarily of cash
and marketable securities. The carrying value of assets held
outside the U.S. totaled $206.3 million,
$166.8 million and $126.8 million at April 30,
2011, 2010 and 2009, respectively.
Information concerning the Company’s operations by
reportable segment is as follows:
| (in 000s) | ||||||||||||||||
|
|
||||||||||||||||
| Year Ended April 30, | 2011 | 2010 | 2009 | |||||||||||||
|
|
||||||||||||||||
|
REVENUES :
|
||||||||||||||||
|
Tax Services
|
$ | 2,912,361 | $ | 2,975,252 | $ | 3,132,077 | ||||||||||
|
Business Services
|
829,794 | 860,349 | 897,809 | |||||||||||||
|
Corporate
|
32,141 | 38,731 | 53,691 | |||||||||||||
|
|
||||||||||||||||
| $ | 3,774,296 | $ | 3,874,332 | $ | 4,083,577 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES :
|
||||||||||||||||
|
Tax Services
|
$ | 767,498 | $ | 867,362 | $ | 927,048 | ||||||||||
|
Business Services
|
49,003 | 58,714 | 96,097 | |||||||||||||
|
Corporate
|
(139,476 | ) | (141,941 | ) | (183,775 | ) | ||||||||||
|
|
||||||||||||||||
| $ | 677,025 | $ | 784,135 | $ | 839,370 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
DEPRECIATION AND AMORTIZATION :
|
||||||||||||||||
|
Tax Services
|
$ | 87,666 | $ | 88,523 | $ | 79,415 | ||||||||||
|
Business Services
|
30,692 | 33,064 | 36,748 | |||||||||||||
|
Corporate
|
3,275 | 5,314 | 7,468 | |||||||||||||
|
|
||||||||||||||||
| $ | 121,633 | $ | 126,901 | $ | 123,631 | |||||||||||
|
|
||||||||||||||||
|
CAPITAL EXPENDITURES :
|
||||||||||||||||
|
Tax Services
|
$ | 43,043 | $ | 78,108 | $ | 76,305 | ||||||||||
|
Business Services
|
19,873 | 12,318 | 21,185 | |||||||||||||
|
Corporate
|
43 | 89 | 390 | |||||||||||||
|
|
||||||||||||||||
| $ | 62,959 | $ | 90,515 | $ | 97,880 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
IDENTIFIABLE ASSETS :
|
||||||||||||||||
|
Tax Services
|
$ | 2,267,236 | $ | 2,279,161 | $ | 2,117,475 | ||||||||||
|
Business Services
|
851,764 | 806,688 | 897,250 | |||||||||||||
|
Corporate
|
2,088,961 | 2,148,469 | 2,344,997 | |||||||||||||
|
|
||||||||||||||||
| $ | 5,207,961 | $ | 5,234,318 | $ | 5,359,722 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
72
H&R
BLOCK 2011 Form 10K
Table of Contents
| NOTE 22: | QUARTERLY FINANCIAL DATA (UNAUDITED) |
| (in 000s, except per share amounts) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| Fiscal Year 2011 | Apr 30, 2011 | Jan 31, 2011 | Oct 31, 2010 | Jul 31, 2010 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Revenues
|
$ | 3,774,296 | $ | 2,325,451 | $ | 851,482 | $ | 322,889 | $ | 274,474 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
$ | 677,025 | $ | 1,076,910 | $ | (17,449 | ) | $ | (175,119 | ) | $ | (207,317 | ) | |||||||||||
|
Income taxes (benefit)
|
257,620 | 418,680 | (13,074 | ) | (68,307 | ) | (79,679 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
419,405 | 658,230 | (4,375 | ) | (106,812 | ) | (127,638 | ) | ||||||||||||||||
|
Net income (loss) from discontinued operations
|
(13,295 | ) | 331 | (8,346 | ) | (2,237 | ) | (3,043 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 406,110 | $ | 658,561 | $ | (12,721 | ) | $ | (109,049 | ) | $ | (130,681 | ) | |||||||||||
|
|
||||||||||||||||||||||||
|
Basic earnings (loss) per share:
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | 1.35 | $ | 2.15 | $ | (0.01 | ) | $ | (0.35 | ) | $ | (0.40 | ) | |||||||||||
|
Net loss from discontinued operations
|
(0.04 | ) | — | (0.03 | ) | (0.01 | ) | (0.01 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 1.31 | $ | 2.15 | $ | (0.04 | ) | $ | (0.36 | ) | $ | (0.41 | ) | |||||||||||
|
|
||||||||||||||||||||||||
|
Diluted earnings (loss) per share:
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | 1.35 | $ | 2.14 | $ | (0.01 | ) | $ | (0.35 | ) | $ | (0.40 | ) | |||||||||||
|
Net loss from discontinued operations
|
(0.04 | ) | — | (0.03 | ) | (0.01 | ) | (0.01 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 1.31 | $ | 2.14 | $ | (0.04 | ) | $ | (0.36 | ) | $ | (0.41 | ) | |||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
| Fiscal Year 2010 | Apr 30, 2010 | Jan 31, 2010 | Oct 31, 2009 | Jul 31, 2009 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Revenues
|
$ | 3,874,332 | $ | 2,337,894 | $ | 934,852 | $ | 326,081 | $ | 275,505 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
$ | 784,135 | $ | 1,110,410 | $ | 97,451 | $ | (212,853 | ) | $ | (210,873 | ) | ||||||||||||
|
Income taxes (benefit)
|
295,189 | 417,978 | 43,848 | (86,381 | ) | (80,256 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
488,946 | 692,432 | 53,603 | (126,472 | ) | (130,617 | ) | |||||||||||||||||
|
Net loss from discontinued operations
|
(9,704 | ) | (1,604 | ) | (2,968 | ) | (2,115 | ) | (3,017 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 479,242 | $ | 690,828 | $ | 50,635 | $ | (128,587 | ) | $ | (133,634 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Basic earnings (loss) per share:
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | 1.47 | $ | 2.11 | $ | 0.16 | $ | (0.38 | ) | $ | (0.39 | ) | ||||||||||||
|
Net loss from discontinued operations
|
(0.03 | ) | — | (0.01 | ) | — | (0.01 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 1.44 | $ | 2.11 | $ | 0.15 | $ | (0.38 | ) | $ | (0.40 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Diluted earnings (loss) per share:
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | 1.46 | $ | 2.11 | $ | 0.16 | $ | (0.38 | ) | $ | (0.39 | ) | ||||||||||||
|
Net loss from discontinued operations
|
(0.03 | ) | (0.01 | ) | (0.01 | ) | — | (0.01 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 1.43 | $ | 2.10 | $ | 0.15 | $ | (0.38 | ) | $ | (0.40 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
The accumulation of four quarters in fiscal years 2011 and 2010
for earnings per share may not equal the related per share
amounts for the years ended April 30, 2011 and 2010 due to
the timing of the exercise of stock options and
H&R
BLOCK 2011
Form 10K
73
Table of Contents
lapse of certain restrictions on nonvested shares and the
antidilutive effect of stock options and nonvested shares in the
first two quarters for those years, as well as the retirement of
treasury shares.
|
|
||||||||||||||||||||||||
| Fiscal Year | Fourth Quarter | Third Quarter | Second Quarter | First Quarter | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
FISCAL YEAR 2011:
|
||||||||||||||||||||||||
|
Dividends paid per share
|
$ | 0.60 | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | 0.15 | ||||||||||||||
|
Stock price range:
|
||||||||||||||||||||||||
|
High
|
$ | 18.99 | $ | 18.00 | $ | 13.79 | $ | 15.97 | $ | 18.99 | ||||||||||||||
|
Low
|
10.13 | 12.46 | 11.15 | 10.13 | 13.44 | |||||||||||||||||||
|
FISCAL YEAR 2010:
|
||||||||||||||||||||||||
|
Dividends paid per share
|
$ | 0.60 | $ | 0.15 | $ | 0.15 | $ | 0.15 | $ | 0.15 | ||||||||||||||
|
Stock price range:
|
||||||||||||||||||||||||
|
High
|
$ | 23.23 | $ | 21.84 | $ | 23.23 | $ | 20.00 | $ | 17.85 | ||||||||||||||
|
Low
|
13.73 | 15.90 | 18.10 | 16.41 | 13.73 | |||||||||||||||||||
| NOTE 23: | CONDENSED CONSOLIDATING FINANCIAL STATEMENTS |
BFC is an indirect, wholly-owned consolidated subsidiary of the
Company. BFC is the Issuer and the Company is the Guarantor of
the Senior Notes issued on January 11, 2008 and
October 26, 2004, the CLOCs and other indebtedness issued
from time to time. These condensed consolidating financial
statements have been prepared using the equity method of
accounting. Earnings of subsidiaries are, therefore, reflected
in the Company’s investment in subsidiaries account. The
elimination entries eliminate investments in subsidiaries,
related stockholders’ equity and other intercompany
balances and transactions.
CONDENSED
CONSOLIDATING INCOME STATEMENTS
(in
000s)
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| Year Ended April 30, 2011 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total revenues
|
$ | – | $ | 251,521 | $ | 3,522,775 | $ | – | $ | 3,774,296 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Cost of revenues
|
– | 277,099 | 2,137,491 | – | 2,414,590 | |||||||||||||||||||
|
Selling, general and administrative
|
– | 31,914 | 662,222 | – | 694,136 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total expenses
|
– | 309,013 | 2,799,713 | – | 3,108,726 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income (loss)
|
– | (57,492 | ) | 723,062 | – | 665,570 | ||||||||||||||||||
|
Other income, net
|
677,025 | 5,503 | 5,952 | (677,025 | ) | 11,455 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
677,025 | (51,989 | ) | 729,014 | (677,025 | ) | 677,025 | |||||||||||||||||
|
Income taxes (benefit)
|
257,620 | (27,774 | ) | 285,394 | (257,620 | ) | 257,620 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
419,405 | (24,215 | ) | 443,620 | (419,405 | ) | 419,405 | |||||||||||||||||
|
Net loss from discontinued operations
|
(13,295 | ) | (12,417 | ) | (878 | ) | 13,295 | (13,295 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 406,110 | $ | (36,632 | ) | $ | 442,742 | $ | (406,110 | ) | $ | 406,110 | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| Year Ended April 30, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total revenues
|
$ | – | $ | 271,704 | $ | 3,602,721 | $ | (93 | ) | $ | 3,874,332 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Cost of revenues
|
– | 257,245 | 2,210,868 | (117 | ) | 2,467,996 | ||||||||||||||||||
|
Selling, general and administrative
|
– | 36,946 | 594,646 | (93 | ) | 631,499 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total expenses
|
– | 294,191 | 2,805,514 | (210 | ) | 3,099,495 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income (loss)
|
– | (22,487 | ) | 797,207 | 117 | 774,837 | ||||||||||||||||||
|
Other income, net
|
784,135 | 5,644 | 3,771 | (784,252 | ) | 9,298 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
784,135 | (16,843 | ) | 800,978 | (784,135 | ) | 784,135 | |||||||||||||||||
|
Income taxes (benefit)
|
295,189 | (6,368 | ) | 301,557 | (295,189 | ) | 295,189 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
488,946 | (10,475 | ) | 499,421 | (488,946 | ) | 488,946 | |||||||||||||||||
|
Net loss from discontinued operations
|
(9,704 | ) | (5,276 | ) | (4,428 | ) | 9,704 | (9,704 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 479,242 | $ | (15,751 | ) | $ | 494,993 | $ | (479,242 | ) | $ | 479,242 | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
74
H&R
BLOCK 2011 Form 10K
Table of Contents
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| Year Ended April 30, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total revenues
|
$ | – | $ | 251,758 | $ | 3,834,880 | $ | (3,061 | ) | $ | 4,083,577 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Cost of revenues
|
– | 278,789 | 2,317,439 | (10 | ) | 2,596,218 | ||||||||||||||||||
|
Selling, general and administrative
|
– | 66,230 | 582,812 | (552 | ) | 648,490 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total expenses
|
– | 345,019 | 2,900,251 | (562 | ) | 3,244,708 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income (loss)
|
– | (93,261 | ) | 934,629 | (2,499 | ) | 838,869 | |||||||||||||||||
|
Other income (expense), net
|
839,370 | (5,992 | ) | 6,461 | (839,338 | ) | 501 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
839,370 | (99,253 | ) | 941,090 | (841,837 | ) | 839,370 | |||||||||||||||||
|
Income taxes (benefit)
|
326,315 | (40,386 | ) | 367,660 | (327,274 | ) | 326,315 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
513,055 | (58,867 | ) | 573,430 | (514,563 | ) | 513,055 | |||||||||||||||||
|
Net loss from discontinued operations
|
(27,382 | ) | (29,176 | ) | – | 29,176 | (27,382 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | 485,673 | $ | (88,043 | ) | $ | 573,430 | $ | (485,387 | ) | $ | 485,673 | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
CONDENSED
CONSOLIDATING BALANCE SHEETS
(in
000s)
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| April 30, 2011 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash & cash equivalents
|
$ | – | $ | 616,238 | $ | 1,061,656 | $ | (50 | ) | $ | 1,677,844 | |||||||||||||
|
Cash & cash equivalents – restricted
|
– | 9,522 | 38,861 | – | 48,383 | |||||||||||||||||||
|
Receivables, net
|
88 | 102,011 | 390,191 | – | 492,290 | |||||||||||||||||||
|
Mortgage loans held for investment, net
|
– | 485,008 | – | – | 485,008 | |||||||||||||||||||
|
Intangible assets and goodwill, net
|
– | – | 1,214,164 | – | 1,214,164 | |||||||||||||||||||
|
Investments in subsidiaries
|
2,699,555 | – | 32 | (2,699,555 | ) | 32 | ||||||||||||||||||
|
Other assets
|
13,613 | 469,461 | 807,166 | – | 1,290,240 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total assets
|
$ | 2,713,256 | $ | 1,682,240 | $ | 3,512,070 | $ | (2,699,605 | ) | $ | 5,207,961 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Customer deposits
|
$ | – | $ | 852,270 | $ | – | $ | (50 | ) | $ | 852,220 | |||||||||||||
|
Long-term debt
|
– | 998,965 | 50,789 | – | 1,049,754 | |||||||||||||||||||
|
FHLB borrowings
|
– | 25,000 | – | – | 25,000 | |||||||||||||||||||
|
Other liabilities
|
178 | (26,769 | ) | 1,858,004 | – | 1,831,413 | ||||||||||||||||||
|
Net intercompany advances
|
1,263,504 | 24,173 | (1,287,677 | ) | – | – | ||||||||||||||||||
|
Stockholders’ equity
|
1,449,574 | (191,399 | ) | 2,890,954 | (2,699,555 | ) | 1,449,574 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,713,256 | $ | 1,682,240 | $ | 3,512,070 | $ | (2,699,605 | ) | $ | 5,207,961 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| April 30, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash & cash equivalents
|
$ | – | $ | 702,021 | $ | 1,102,135 | $ | (111 | ) | $ | 1,804,045 | |||||||||||||
|
Cash & cash equivalents – restricted
|
– | 6,160 | 28,190 | – | 34,350 | |||||||||||||||||||
|
Receivables, net
|
57 | 105,192 | 412,737 | – | 517,986 | |||||||||||||||||||
|
Mortgage loans held for investment, net
|
– | 595,405 | – | – | 595,405 | |||||||||||||||||||
|
Intangible assets and goodwill, net
|
– | – | 1,207,879 | – | 1,207,879 | |||||||||||||||||||
|
Investments in subsidiaries
|
3,276,597 | – | 231 | (3,276,597 | ) | 231 | ||||||||||||||||||
|
Other assets
|
19,014 | 332,782 | 722,626 | – | 1,074,422 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total assets
|
$ | 3,295,668 | $ | 1,741,560 | $ | 3,473,798 | $ | (3,276,708 | ) | $ | 5,234,318 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Customer deposits
|
$ | – | $ | 852,666 | $ | – | $ | (111 | ) | $ | 852,555 | |||||||||||||
|
Long-term debt
|
– | 998,605 | 36,539 | – | 1,035,144 | |||||||||||||||||||
|
FHLB borrowings
|
– | 75,000 | – | – | 75,000 | |||||||||||||||||||
|
Other liabilities
|
48,775 | 153,154 | 1,629,060 | – | 1,830,989 | |||||||||||||||||||
|
Net intercompany advances
|
1,806,263 | (431,696 | ) | (1,374,567 | ) | – | – | |||||||||||||||||
|
Stockholders’ equity
|
1,440,630 | 93,831 | 3,182,766 | (3,276,597 | ) | 1,440,630 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 3,295,668 | $ | 1,741,560 | $ | 3,473,798 | $ | (3,276,708 | ) | $ | 5,234,318 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
H&R
BLOCK 2011
Form 10K
75
Table of Contents
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
(in
000s)
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| Year Ended April 30, 2011 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) operating activities:
|
$ | 9,683 | $ | (153,471 | ) | $ | 656,291 | $ | – | $ | 512,503 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Cash flows from investing:
|
||||||||||||||||||||||||
|
Purchases of AFS securities
|
– | (138,824 | ) | – | – | (138,824 | ) | |||||||||||||||||
|
Maturities and payments received on AFS securities
|
– | 16,690 | 107 | – | 16,797 | |||||||||||||||||||
|
Mortgage loans held for investment, net
|
– | 58,471 | – | – | 58,471 | |||||||||||||||||||
|
Purchases of property & equipment
|
– | (33 | ) | (62,926 | ) | – | (62,959 | ) | ||||||||||||||||
|
Payments for business acquisitions, net
|
– | – | (54,171 | ) | – | (54,171 | ) | |||||||||||||||||
|
Proceeds from sales of businesses, net
|
– | – | 71,083 | – | 71,083 | |||||||||||||||||||
|
Loans made to franchisees
|
– | (92,455 | ) | – | – | (92,455 | ) | |||||||||||||||||
|
Repayments from franchisees
|
– | 57,552 | – | – | 57,552 | |||||||||||||||||||
|
Net intercompany advances
|
459,755 | – | – | (459,755 | ) | – | ||||||||||||||||||
|
Other, net
|
– | 21,556 | 12,793 | – | 34,349 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) investing activities
|
459,755 | (77,043 | ) | (33,114 | ) | (459,755 | ) | (110,157 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash flows from financing:
|
||||||||||||||||||||||||
|
Repayments of commercial paper
|
– | (4,818,766 | ) | – | – | (4,818,766 | ) | |||||||||||||||||
|
Proceeds from commercial paper
|
– | 4,818,766 | – | – | 4,818,766 | |||||||||||||||||||
|
Repayments of other borrowings
|
– | (50,000 | ) | – | – | (50,000 | ) | |||||||||||||||||
|
Customer banking deposits, net
|
– | (11,501 | ) | – | 61 | (11,440 | ) | |||||||||||||||||
|
Dividends paid
|
(186,802 | ) | – | – | – | (186,802 | ) | |||||||||||||||||
|
Repurchase of common stock
|
(283,534 | ) | – | – | – | (283,534 | ) | |||||||||||||||||
|
Proceeds from stock options
|
424 | – | – | – | 424 | |||||||||||||||||||
|
Net intercompany advances
|
– | 206,722 | (666,477 | ) | 459,755 | – | ||||||||||||||||||
|
Other, net
|
474 | (490 | ) | (3,023 | ) | – | (3,039 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) financing activities
|
(469,438 | ) | 144,731 | (669,500 | ) | 459,816 | (534,391 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Effects of exchange rates on cash
|
– | – | 5,844 | – | 5,844 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net increase (decrease) in cash
|
– | (85,783 | ) | (40,479 | ) | 61 | (126,201 | ) | ||||||||||||||||
|
Cash – beginning of the year
|
– | 702,021 | 1,102,135 | (111 | ) | 1,804,045 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash – end of the year
|
$ | – | $ | 616,238 | $ | 1,061,656 | $ | (50 | ) | $ | 1,677,844 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
76
H&R
BLOCK 2011 Form 10K
Table of Contents
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| Year Ended April 30, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by operating activities:
|
$ | 21,252 | $ | 16,698 | $ | 549,519 | $ | – | $ | 587,469 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash flows from investing:
|
||||||||||||||||||||||||
|
Purchases of AFS securities
|
– | (365 | ) | (5,000 | ) | – | (5,365 | ) | ||||||||||||||||
|
Sales and maturities of AFS securities
|
– | 14,639 | 1,119 | – | 15,758 | |||||||||||||||||||
|
Mortgage loans held for investment, net
|
– | 72,832 | – | – | 72,832 | |||||||||||||||||||
|
Purchases of property & equipment
|
– | – | (90,515 | ) | – | (90,515 | ) | |||||||||||||||||
|
Payments for business acquisitions
|
– | – | (10,539 | ) | – | (10,539 | ) | |||||||||||||||||
|
Proceeds from sales of businesses, net
|
– | – | 66,623 | – | 66,623 | |||||||||||||||||||
|
Loans made to franchisees
|
– | (89,664 | ) | – | – | (89,664 | ) | |||||||||||||||||
|
Repayments from franchisees
|
– | 40,710 | – | – | 40,710 | |||||||||||||||||||
|
Net intercompany advances
|
415,591 | – | – | (415,591 | ) | – | ||||||||||||||||||
|
Other, net
|
– | 73,493 | (41,980 | ) | – | 31,513 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) investing activities
|
415,591 | 111,645 | (80,292 | ) | (415,591 | ) | 31,353 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash flows from financing:
|
||||||||||||||||||||||||
|
Repayments of commercial paper
|
– | (1,406,013 | ) | – | – | (1,406,013 | ) | |||||||||||||||||
|
Proceeds from commercial paper
|
– | 1,406,013 | – | – | 1,406,013 | |||||||||||||||||||
|
Repayments of other borrowings
|
– | (4,267,727 | ) | (46 | ) | – | (4,267,773 | ) | ||||||||||||||||
|
Proceeds from other borrowings
|
– | 4,242,727 | – | – | 4,242,727 | |||||||||||||||||||
|
Customer banking deposits, net
|
– | 11,428 | – | 6,111 | 17,539 | |||||||||||||||||||
|
Dividends paid
|
(200,899 | ) | – | – | – | (200,899 | ) | |||||||||||||||||
|
Repurchase of common stock
|
(254,250 | ) | – | – | – | (254,250 | ) | |||||||||||||||||
|
Proceeds from stock options
|
16,682 | – | – | – | 16,682 | |||||||||||||||||||
|
Net intercompany advances
|
– | 354,617 | (770,208 | ) | 415,591 | – | ||||||||||||||||||
|
Other, net
|
1,624 | (8,717 | ) | (28,051 | ) | – | (35,144 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) financing activities
|
(436,843 | ) | 332,328 | (798,305 | ) | 421,702 | (481,118 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Effects of exchange rates on cash
|
– | – | 11,678 | – | 11,678 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net increase (decrease) in cash
|
– | 460,671 | (317,400 | ) | 6,111 | 149,382 | ||||||||||||||||||
|
Cash – beginning of the year
|
– | 241,350 | 1,419,535 | (6,222 | ) | 1,654,663 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash – end of the year
|
$ | – | $ | 702,021 | $ | 1,102,135 | $ | (111 | ) | $ | 1,804,045 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
H&R
BLOCK 2011
Form 10K
77
Table of Contents
|
|
||||||||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||||||
| Year Ended April 30, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) operating activities:
|
$ | 3,835 | $ | (13,225 | ) | $ | 1,033,829 | $ | – | $ | 1,024,439 | |||||||||||||
|
|
||||||||||||||||||||||||
|
Cash flows from investing:
|
||||||||||||||||||||||||
|
Purchases of AFS securities
|
– | (875 | ) | (4,217 | ) | – | (5,092 | ) | ||||||||||||||||
|
Sales and maturities of AFS securities
|
– | 8,417 | 6,658 | – | 15,075 | |||||||||||||||||||
|
Mortgage loans held for investment, net
|
– | 91,329 | – | – | 91,329 | |||||||||||||||||||
|
Purchases of property & equipment
|
– | (43 | ) | (97,837 | ) | – | (97,880 | ) | ||||||||||||||||
|
Payments for business acquisitions
|
– | – | (293,805 | ) | – | (293,805 | ) | |||||||||||||||||
|
Proceeds from sales of businesses, net
|
– | – | 18,865 | – | 18,865 | |||||||||||||||||||
|
Net intercompany advances
|
73,820 | – | – | (73,820 | ) | – | ||||||||||||||||||
|
Investing cash flows of discontinued operations
|
– | 255,066 | – | – | 255,066 | |||||||||||||||||||
|
Other, net
|
– | 10,056 | 11,946 | – | 22,002 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) investing activities
|
73,820 | 363,950 | (358,390 | ) | (73,820 | ) | 5,560 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash flows from financing:
|
||||||||||||||||||||||||
|
Repayments of short-term borrowings
|
– | (4,762,294 | ) | – | – | (4,762,294 | ) | |||||||||||||||||
|
Proceeds from short-term borrowings
|
– | 4,733,294 | – | – | 4,733,294 | |||||||||||||||||||
|
Customer banking deposits, net
|
– | 69,932 | – | (5,575 | ) | 64,357 | ||||||||||||||||||
|
Dividends paid
|
(198,685 | ) | – | – | – | (198,685 | ) | |||||||||||||||||
|
Acquisition of treasury shares
|
(106,189 | ) | – | – | – | (106,189 | ) | |||||||||||||||||
|
Proceeds from issuance of common stock
|
141,415 | – | – | – | 141,415 | |||||||||||||||||||
|
Proceeds from stock options
|
71,594 | – | – | – | 71,594 | |||||||||||||||||||
|
Net intercompany advances
|
– | (199,032 | ) | 125,212 | 73,820 | – | ||||||||||||||||||
|
Financing cash flows of discontinued operations
|
– | 4,783 | – | – | 4,783 | |||||||||||||||||||
|
Other, net
|
14,210 | 9,331 | (12,049 | ) | – | 11,492 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net cash provided by (used in) financing activities
|
(77,655 | ) | (143,986 | ) | 113,163 | 68,245 | (40,233 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net increase in cash
|
– | 206,739 | 788,602 | (5,575 | ) | 989,766 | ||||||||||||||||||
|
Cash – beginning of the year
|
– | 34,611 | 630,933 | (647 | ) | 664,897 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cash – end of the year
|
$ | – | $ | 241,350 | $ | 1,419,535 | $ | (6,222 | ) | $ | 1,654,663 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
78
H&R
BLOCK 2011 Form 10K
Table of Contents
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
There were no disagreements or reportable events requiring
disclosure pursuant to Item 304(b) of
Regulation S-K.
| ITEM 9A. | CONTROLS AND PROCEDURES |
(a) EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
– We
have established disclosure controls and procedures (Disclosure
Controls) to ensure that information required to be disclosed in
the Company’s reports filed under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the
U.S. Securities and Exchange Commission’s rules and
forms. Disclosure Controls are also designed to ensure that such
information is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure. Our Disclosure Controls were designed to
provide reasonable assurance that the controls and procedures
would meet their objectives. Our management, including the Chief
Executive Officer and Chief Financial Officer, does not expect
that our Disclosure Controls will prevent all error and all
fraud. A control system, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
designed control objectives and management is required to apply
its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Because of the inherent
limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some
persons, by collusions of two or more people or by management
override of the control. Because of the inherent limitations in
a cost-effective, maturing control system, misstatements due to
error or fraud may occur and not be detected.
As of the end of the period covered by this
Form 10-K,
we evaluated the effectiveness of the design and operations of
our Disclosure Controls. The controls evaluation was done under
the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial
Officer. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded our Disclosure
Controls were effective as of the end of the period covered by
this Annual Report on
Form 10-K.
(b) MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
– Management is responsible for
establishing and maintaining adequate internal control over
financial reporting for the Company, as such term is defined in
Exchange Act
Rules 13a-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 framework
in “Internal Control – Integrated Framework”
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) as of April 30, 2011.
Based on our assessment, management concluded that, as of
April 30, 2011, the Company’s internal control over
financial reporting was effective based on the criteria set
forth by COSO.
The Company’s external auditors who audited the
consolidated financial statements included in Item 8,
Deloitte & Touche LLP, an independent registered
public accounting firm, have issued an audit report on the
effectiveness of the Company’s internal control over
financial reporting. This report appears near the beginning of
Item 8.
(c) CHANGES
IN INTERNAL CONTROL OVER FINANCIAL
REPORTING
– During the quarter ended
April 30, 2011, there were no changes that materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
On June 21, 2011, the Company and HRB Island Acquisition,
Inc. (the “Sub”), an indirect wholly owned subsidiary
of the Company, entered into an amendment (the
“Amendment”) to the previously disclosed Agreement and
Plan of Merger, dated as of October 13, 2010 (the
“Merger Agreement”), with 2SS Holdings, Inc.
(“2SS”), TA Associates Management, L.P., in its
capacity as a stockholder representative, and Lance Dunn, in his
capacity as a stockholder representative. 2SS owns
2nd Story Software, Inc., developer of TaxACT digital tax
preparation solutions.
The Amendment addresses, among other things, each party’s
respective obligations regarding the civil antitrust lawsuit
instituted by the United States Department of Justice (the
“DOJ”) to block the transaction (the “DOJ
Action”) and the extension of the date that either party
may terminate the Merger Agreement from May 31, 2011 to the
earlier of October 15, 2011 or the date on which an
applicable court in the DOJ Action enters a preliminary or
permanent injunction that prohibits the closing of the
transaction. The Amendment also provides that the external
H&R
BLOCK 2011
Form 10K
79
Table of Contents
costs and expenses of all parties that are incurred in
connection with the DOJ Action after the date of the Amendment
shall be the responsibility of 2SS (subject to the exceptions
set forth in the Amendment), but that, if the transaction
closes, the Company will reimburse 2SS for such costs and
expenses, up to a maximum of $5 million. Except as
specifically amended in the Amendment, the other terms of the
Merger Agreement remain unchanged.
The foregoing summary of the Amendment does not purport to be
complete and is subject to, and qualified in its entirety by,
the full text of such Amendment, which is filed herewith as
Exhibit
[10.34]
and incorporated herein by reference.
80
H&R
BLOCK 2011 Form 10K
Table of Contents
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The following information appearing in our definitive proxy
statement, to be filed no later than 120 days after
April 30, 2011, is incorporated herein by reference:
| § | Information appearing under the heading “Election of Directors,” | |
| § | Information appearing under the heading “Section 16(a) Beneficial Ownership Reporting Compliance,” | |
| § | Information appearing under the heading “Board of Directors’ Meetings and Committees” regarding identification of the Audit Committee and Audit Committee financial experts. |
We have adopted a code of business ethics and conduct that
applies to our directors, officers and employees, including our
chief executive officer, chief financial officer, principal
accounting officer and persons performing similar functions. A
copy of the code of business ethics and conduct is available on
our website at
www.hrblock.com
. We intend to provide
information on our website regarding amendments to or waivers
from the code of business ethics and conduct.
Information about our executive officers as of May 15,
2011, is as follows:
|
|
||||
| Name, age | Current position | Business experience since May 1, 2006 | ||
|
|
||||
|
William C. Cobb
,
age 54 |
President and Chief Executive Officer, effective May 16, 2011 | President and Chief Executive Officer since May 2011; 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. | ||
|
|
||||
|
Alan M. Bennett
,
age 60 |
President and Chief Executive Officer, until May 16, 2011 | President and Chief Executive Officer from July 2010 to May 2011; Interim Chief Executive Officer from November 2007 to August 2008; Senior Vice President and Chief Financial Officer of Aetna, Inc. from September 2001 until February 2007. | ||
|
|
||||
|
Jeffrey T. Brown
,
age 52 |
Senior Vice President and Chief Financial Officer | Senior Vice President and Chief Financial Officer since September 2010; Interim Chief Financial Officer from May 1, 2010 to September 2010; Vice President and Corporate Controller from March 2008 until May 2010; Assistant Vice President and Assistant Controller from August 2005 until March 2008; Director of Corporate Accounting, from September 2002 to August 2005. | ||
|
|
||||
|
C.E. Andrews
,
age 59 |
President and Chief Operating Officer, RSM McGladrey, Inc. | President and Chief Operating Officer, RSM McGladrey since June 2009; President of SLM Corporation (Sallie Mae) from May 2007 until September 2008; Chief Financial Officer of Sallie Mae from 2006 until 2007; Executive Vice President of Accounting and Risk of Sallie Mae from 2003 until 2005. | ||
|
|
||||
|
Philip L. Mazzini
,
age 45 |
President, Retail Tax Services of HRB Tax Group, Inc. | President, Retail Tax Services of HRB Tax Group since August 2010. Senior Vice President, Tax Operations of HRB Tax Group, Inc. from August 2008 through August 2010. Vice President, Managing Director of HRB Tax Group, Inc. from November 2004 through August 2008. | ||
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Robert J. Turtledove
,
age 51 |
Senior Vice President and Chief Marketing Officer | Senior Vice President and Chief Marketing Officer since August 2009; Chief Marketing Officer of TheLadders.com from June 2007 until June 2009; Chief Concept Officer of Metromedia Restaurant Group from January 2003 until February 2007. | ||
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H&R
BLOCK 2011
Form 10K
81
Table of Contents
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| Name, age | Current position | Business experience since May 1, 2006 | ||
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Colby R. Brown
,
age 37 |
Vice President and Corporate Controller | Vice President and Corporate Controller since September 2010; Assistant Vice President and Controller of HRB Tax Group, Inc. from December 2009 until September 2010; Division Controller, North America, for Fort Dodge Animal Health, a division of Wyeth, from July 2007 to December 2009; Director, Financial Reporting and Analysis, for Fort Dodge Animal Health from September 2002 to July 2007. | ||
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| ITEM 11. | EXECUTIVE COMPENSATION |
The information called for by this item is contained in our
definitive proxy statement filed pursuant to Regulation 14A
not later than 120 days after April 30, 2011, in the
sections entitled “Director Compensation” and
“Executive Compensation” and is incorporated herein by
reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information called for by this item is contained in
Part II, Item 5 of this
Form 10-K
and in our definitive proxy statement filed pursuant to
Regulation 14A not later than 120 days after
April 30, 2011, in the section titled “Equity
Compensation Plans” and in the section titled
“Information Regarding Security Holders” and is
incorporated herein by reference.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information called for by this item is contained in our
definitive proxy statement filed pursuant to Regulation 14A
not later than 120 days after April 30, 2011, in the
section titled “Employment Agreements,
Change-of-Control
and Other Arrangements,” in the section titled “Review
of Related Person Transactions,” and in the section titled
“Corporate Governance,” and is incorporated herein by
reference.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information called for by this item is contained in our
definitive proxy statement filed pursuant to Regulation 14A
not later than 120 days after April 30, 2011, in the
section titled “Audit Fees” and is incorporated herein
by reference.
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) Documents filed as part of this Report:
| 1. | The following financial statements appearing in Item 8: “Consolidated Statements of Income and Comprehensive Income (Loss),” “Consolidated Balance Sheets,” “Consolidated Statements of Cash Flows” and “Consolidated Statements of Stockholders’ Equity.” | |
| 2. | Exhibits – The list of exhibits in the Exhibit Index to this Report is incorporated herein by reference. |
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H&R
BLOCK 2011 Form 10K
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
| H&R BLOCK, INC. | ||
|
|
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William C. Cobb
|
Alan M. Bennett | |
|
President and Chief Executive Officer
(as of May 16, 2011) |
President and Chief Executive Officer
(until May 16, 2011) |
|
|
June 23, 2011
|
June 23, 2011 |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
date indicated on June 23, 2011.
|
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||
| William C. Cobb | Jeffrey T. Brown | Colby R. Brown | ||
|
President, Chief Executive Officer
|
Senior Vice President and | Vice President and Corporate | ||
|
and Director
|
Chief Financial Officer | Controller | ||
|
(principal executive officer)
|
(principal financial officer) | (principal accounting officer) | ||
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| Robert A. Gerard | Bruce C. Rohde | |||
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Director, Chairman of the Board
|
Director | |||
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| Alan M. Bennett | Tom D. Seip | |||
|
Director
|
Director | |||
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| Len J. Lauer | L. Edward Shaw, Jr. | |||
|
Director
|
Director | |||
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| David B. Lewis | Christianna Wood | |||
|
Director
|
Director |
H&R
BLOCK 2011
Form 10K
83
Table of Contents
The following
exhibits are numbered in accordance with the Exhibit Table
of Item 601 of
Regulation S-K:
| 3 | .1 | Amended and Restated Articles of Incorporation of H&R Block, Inc., as amended through September 30, 2010. | ||
| 3 | .2 | Amended and Restated Bylaws of H&R Block, Inc., as amended through September 30, 2010. | ||
| 4 | .1 | Indenture dated as of October 20, 1997, among H&R Block, Inc., Block Financial Corporation and Bankers Trust Company, as Trustee, filed as Exhibit 4(a) to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 1997, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .2 | First Supplemental Indenture, dated as of April 18, 2000, among H&R Block, Inc., Block Financial Corporation, Bankers Trust Company and the Bank of New York, filed as Exhibit 4(a) to the Company’s current report on Form 8-K filed April 17, 2000, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .3 | Officer’s Certificate, dated October 26, 2004, in respect of 5.125% Notes due 2014 of Block Financial Corporation, filed as Exhibit 4.1 to the Company’s current report on Form 8-K filed October 26, 2004, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .4 | Officer’s Certificate, dated January 11, 2008, in respect of 7.875% Notes due 2013 of Block Financial LLC, filed as Exhibit 4.1 to the Company’s current report on Form 8-K filed January 11, 2008, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .5 | Form of 5.125% Note due 2014 of Block Financial Corporation, filed as Exhibit 4.2 to the Company’s current report on Form 8-K filed October 26, 2004, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .6 | Form of 7.875% Note due 2013 of Block Financial LLC, filed as Exhibit 4.2 to the Company’s current report on Form 8-K filed January 11, 2008, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .7 | Form of Certificate of Designation, Preferences and Rights of Participating Preferred Stock of H&R Block, Inc., filed as Exhibit 4(e) to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 1995, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .8 | Form of Certificate of Amendment of Certificate of Designation, Preferences and Rights of Participating Preferred Stock of H&R Block, Inc., filed as Exhibit 4(j) to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 1998, file number 1-6089, is incorporated herein by reference. | ||
| 4 | .9 | Form of Certificate of Designation, Preferences and Rights of Delayed Convertible Preferred Stock of H&R Block, Inc., filed as Exhibit 4(f) to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 1995, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .1* | The Company’s 2003 Long-Term Executive Compensation Plan, as amended September 30, 2010, filed as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2010, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .2* | Form of 2003 Long-Term Executive Compensation Plan Award Agreement for Restricted Shares, filed as part of Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2010, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .3* | Form of 2003 Long-Term Executive Compensation Plan Award Agreement for Stock Options, filed as part of Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2010, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .4* | H&R Block Deferred Compensation Plan for Executives, as amended and restated effective July 27, 2010, filed as Exhibit 10.4 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2010, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .5* | Amendment No. 1 to the H&R Block Deferred Compensation Plan for Executives, as Amended and Restated, effective as of March 12, 2003, filed as Exhibit 10.5 to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 2003, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .6* | The H&R Block Executive Performance Plan, as amended July 27, 2010. | ||
| 10 | .7* | The H&R Block, Inc. 2000 Employee Stock Purchase Plan, as amended August 1, 2001, filed as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2001, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .8* | The H&R Block, Inc. Executive Survivor Plan (as Amended and Restated January 1, 2001) filed as Exhibit 10.4 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2000, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .9* | First Amendment to the H&R Block, Inc. Executive Survivor Plan (as Amended and Restated) effective as of July 1, 2002, filed as Exhibit 10.9 to the Company’s annual report on Form 10-K for the fiscal year ended April 30, 2002, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .10* | Second Amendment to the H&R Block, Inc. Executive Survivor Plan (as Amended and Restated), effective as of March 12, 2003, filed as Exhibit 10.12 to the company’s annual report on Form 10-K for the fiscal year ended April 30, 2003, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .11* | H&R Block Severance Plan, as amended and restated effective July 27, 2010, filed as Exhibit 10.3 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2010, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .12* | H&R Block Inc. Executive Severance Plan, as amended and restated effective July 27, 2010, filed as Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2010, file number 1-6089, is incorporated herein by reference. |
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H&R
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Table of Contents
| 10 | .13* | Employment Agreement dated July 19, 2008 between H&R Block Management, LLC and Russell P. Smyth, filed as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended July 31, 2008, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .14* | Separation and Release Agreement dated May 4, 2010, between H&R Block Management, LLC and Becky S. Shulman, filed as Exhibit 10.17 to the company’s annual report on Form 10-K for the fiscal year ended April 30, 2010, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .15* | Employment Agreement dated August 12, 2010, between H&R Block Management, LLC and Alan M. Bennett, filed as Exhibit 10.1 to the Company’s current report on Form 8-K filed August 12, 2010, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .16* | Transition Agreement dated April 27, 2011, between H&R Block Management, LLC and Alan M. Bennett, filed as Exhibit 10.1 to the Company’s current report on Form 8-K filed April 29, 2011, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .17* | Employment Agreement dated April 27, 2011, between H&R Block Management, LLC and William C. Cobb, filed as Exhibit 10.2 to the Company’s current report on Form 8-K filed April 29, 2011, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .18* | Form of Indemnification Agreement for directors, filed as Exhibit 10.1 to the Company’s current report on Form 8-K filed December 15, 2005, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .19* | 2008 Deferred Stock Unit Plan for Outside Directors, as amended and restated as of September 24, 2009, filed as Exhibit 10.19 to the company’s annual report on Form 10-K for the fiscal year ended April 30, 2010, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .20 | HSBC Retail Settlement Products Distribution Agreement dated as of September 23, 2005, among HSBC Bank USA, National Association, HSBC Taxpayer Financial Services Inc., Beneficial Franchise Company Inc., Household Tax Masters Acquisition Corporation, H&R Block Services, Inc., H&R Block Tax Services, Inc., H&R Block Enterprises, Inc., H&R Block Eastern Enterprises, Inc., H&R Block Digital Tax Solutions, LLC, H&R Block Associates, L.P., HRB Royalty, Inc., HSBC Finance Corporation and H&R Block, Inc., filed as Exhibit 10.14 to the quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .21 | HSBC Digital Settlement Products Distribution Agreement dated as of September 23, 2005, among HSBC Bank USA, National Association, HSBC Taxpayer Financial Services Inc., H&R Block Digital Tax Solutions, LLC, and H&R Block Services, Inc., filed as Exhibit 10.15 to the quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .22 | HSBC Program Appendix of Defined Terms and Rules of Construction, filed as Exhibit 10.18 to the quarterly report on Form 10-Q for the quarter ended October 31, 2005, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .23 | Joinder and First Amendment to Program Contracts dated as of November 10, 2006, among HSBC Bank USA, National Association, HSBC Trust Company (Delaware), N.A., HSBC Taxpayer Financial Services Inc., Beneficial Franchise Company Inc., Household Tax Masters Acquisition Corporation, H&R Block Services, Inc., H&R Block Tax Services, Inc., H&R Block Enterprises, Inc., H&R Block Eastern Enterprises, Inc., H&R Block Digital Solutions, LLC,, H&R Block and Associates, L.P., HRB Royalty, Inc., HSBC Finance Corporation, H&R Block, Inc. and Block Financial Corporation, filed as Exhibit 10.25 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2007, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .24 | Second Amendment to Program Contracts dated as of November 13, 2006, among HSBC Bank USA, National Association, HSBC Trust Company (Delaware), N.A., HSBC Taxpayer Financial Services, Inc., Beneficial Franchise Company Inc., H&R Block Services, Inc., H&R Block Tax Service, Inc., H&R Block Enterprises, Inc., H&R Block Eastern Enterprises, Inc., H&R Block Digital Solutions,, LLC, H&R Block and Associates, L.P., HRB Royalty, Inc., HSBC Finance Corporation, and H&R Block, Inc., filed as Exhibit 10.26 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2007, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .25 | Third Amendment to Program Contracts dated as of December 5, 2008, by and among HSBC Bank USA, HSBC Trust Company (Delaware), N.A., HSBC Taxpayer Financial Services Inc., Beneficial Franchise Company Inc., HRB Tax Group, Inc., H&R Block Tax Services LLC, H&R Block Enterprises LLC, H&R Block Eastern enterprises, Inc., HRB Digital LLC, Block Financial LLC, HRB Innovations, Inc., HSBC Finance Corporation, and H&R Block, Inc., filed as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2009, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .26 | Second Amended and Restated HSBC Refund Anticipation Loan Participation Agreement dated as of January 12, 2010 among Block Financial LLC, HSBC Bank USA, National Association, HSBC Trust Company (Delaware), National Association, and HSBC Taxpayer Financial Services Inc., filed as Exhibit 10.1 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2010, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .27 | First Amended and Restated HSBC Settlements Products Servicing Agreement dated as of November 13, 2006 among Block Financial Corporation, HSBC Bank USA, National Association, HSBC Trust Company (Delaware), National Association, and HSBC Taxpayer Financial Services, Inc., filed as Exhibit 10.28 to the Company’s quarterly report on Form 10-Q for the quarter ended January 31, 2007, file number 1-6089, is incorporated herein by reference.** | ||
| 10 | .28 | Credit and Guarantee Agreement dated as of March 4, 2010, among Block Financial LLC, H&R Block, Inc., each lender from time to time party thereto, and Bank of America, N.A., filed as Exhibit 10.36 to the company’s annual report on Form 10-K for the fiscal year ended April 30, 2010, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .29 | Advances, Pledge and Security Agreement dated April 17, 2006, between H&R Block Bank and the Federal Home Loan Bank of Des Moines, filed as Exhibit 10.11 to the Company’s quarterly report on Form 10-Q for the quarter ended October 31, 2007, file number 1-6089, is incorporated herein by reference.** |
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| 10 | .30 | Amended and Restated Administrative Services Agreement dated as of February 3, 2010 among RSM McGladrey, Inc., H&R Block, Inc. and McGladrey & Pullen, LLP, filed as Exhibit 10.42 to the company’s annual report on Form 10-K for the fiscal year ended April 30, 2010, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .31 | Governance and Operations Agreement dated as of February 3, 2010 among RSM McGladrey, Inc., H&R Block, Inc. and McGladrey & Pullen LLP, filed as Exhibit 10.43 to the company’s annual report on Form 10-K for the fiscal year ended April 30, 2010, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .32 | Agreement and Plan of Merger dated as of October 13, 2010, among H&R Block, Inc., HRB Island Acquisition, Inc., 2SS Holdings, Inc., TA Associates Management, L.P. and Lance Dunn, filed as Exhibit 10.1 to the Company’s current report on Form 8-K filed October 14, 2010, file number 1-6089, is incorporated herein by reference. | ||
| 10 | .33 | Agreement to Extend Outside Date dated March 4, 2011, among H&R Block, Inc., HRB Island Acquisition, Inc., 2SS Holdings, Inc., TA Associates Management, L.P. and Lance Dunn. | ||
| 10 | .34 | Amendment to Agreement and Plan of Merger dated June 21, 2011, among H&R Block, Inc., HRB Island Acquisition, Inc., 2SS Holdings, Inc., TA Associates Management, L.P. and Lance Dunn. | ||
| 12 | Computation of Ratio of Earnings to Fixed Charges for the five years ended April 30, 2011. | |||
| 21 | Subsidiaries of the Company. | |||
| 23 | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm. | |||
| 31 | .1 | Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31 | .2 | Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .1 | Certification by Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .2 | Certification by Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 101 | .INS | XBRL Instance Document | ||
| 101 | .SCH | XBRL Taxonomy Extension Schema | ||
| 101 | .CAL | XBRL Extension Calculation Linkbase | ||
| 101 | .LAB | XBRL Taxonomy Extension Label Linkbase | ||
| 101 | .PRE | XBRL Taxonomy Extension Presentation Linkbase | ||
| 101 | .DEF | XBRL Taxonomy Extension Definition Linkbase |
| * | Indicates management contracts, compensatory plans or arrangements. | |
| ** | Confidential Information has been omitted from this exhibit and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2. |
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TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsPart IIItem 5. Market For The Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1: Summary Of Significant Accounting PoliciesNote 2: Business Combinations and DisposalsNote 3: Earnings Per ShareNote 4: InvestmentsNote 5: ReceivablesNote 6: Mortgage Loans Held For Investment and Related AssetsNote 7: Assets and Liabilities Measured At Fair ValueNote 8: Property and EquipmentNote 9: Goodwill and Intangible AssetsNote 10: Customer Banking DepositsNote 11: Long-term DebtNote 12: Other Noncurrent Assets and LiabilitiesNote 13: Stockholders EquityNote 14: Stock-based CompensationNote 15: Income TaxesNote 16: Interest Income and Interest ExpenseNote 17: Variable InterestsNote 18: Commitments and ContingenciesNote 19: Litigation and Related ContingenciesNote 20: Regulatory RequirementsNote 21: Segment InformationNote 22: Quarterly Financial Data (unaudited)Note 23: Condensed Consolidating Financial StatementsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules