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-Q
| (Mark One) | ||
|
[
X
]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended January 31, 2011 | ||
|
OR
|
||
|
[ ]
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission file
number 1-6089
H&R
Block, Inc.
(Exact name of registrant as
specified in its charter)
|
MISSOURI
(State or other jurisdiction of incorporation or organization) |
44-0607856
(I.R.S. Employer Identification No.) |
One
H&R Block Way
Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 854-3000
(Registrant’s telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
Ö
No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes
Ö
No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2
of the
Exchange Act. (Check one):
|
Large accelerated
filer
Ö
|
Accelerated filer | Non-accelerated filer | Smaller reporting company | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
No
Ö
The number of shares outstanding of the registrant’s Common
Stock, without par value, at the close of business on
February 28, 2011 was 305,250,229 shares.
Form 10-Q
for the Period Ended January 31, 2011
Table of
Contents
| Page | ||||||||
|
PART I
|
Financial Information
|
|||||||
| 1 | ||||||||
| 2 | ||||||||
| 3 | ||||||||
| 4 | ||||||||
| 28 | ||||||||
| 35 | ||||||||
| 35 | ||||||||
| PART II |
Other Information
|
|||||||
| 36 | ||||||||
| 39 | ||||||||
| 40 | ||||||||
| 40 | ||||||||
| 41 | ||||||||
|
|
||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
| EX-32.2 | ||||||||
| EX-101 INSTANCE DOCUMENT | ||||||||
| EX-101 SCHEMA DOCUMENT | ||||||||
| EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
| EX-101 LABELS LINKBASE DOCUMENT | ||||||||
| EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
| EX-101 DEFINITION LINKBASE DOCUMENT | ||||||||
Table of Contents
| January 31, 2011 | April 30, 2010 | |||||||
|
|
||||||||
| (Unaudited) | ||||||||
|
ASSETS
|
||||||||
|
Cash and cash equivalents
|
$ | 1,465,690 | $ | 1,804,045 | ||||
|
Cash and cash equivalents – restricted
|
36,113 | 34,350 | ||||||
|
Receivables, less allowance for doubtful accounts of $125,561
and $112,475
|
1,371,152 | 517,986 | ||||||
|
Prepaid expenses and other current assets
|
401,106 | 292,655 | ||||||
|
Total current assets
|
3,274,061 | 2,649,036 | ||||||
|
Mortgage loans held for investment, less allowance for loan
losses
of $87,876 and $93,535 |
513,192 | 595,405 | ||||||
|
Property and equipment, at cost, less accumulated depreciation
and amortization of $700,649 and $657,008
|
321,075 | 345,470 | ||||||
|
Intangible assets, net
|
375,644 | 367,432 | ||||||
|
Goodwill
|
849,028 | 840,447 | ||||||
|
Other assets
|
469,735 | 436,528 | ||||||
|
Total assets
|
$ | 5,802,735 | $ | 5,234,318 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
Liabilities:
|
||||||||
|
Customer banking deposits
|
$ | 1,855,195 | $ | 852,555 | ||||
|
Accounts payable, accrued expenses and other current liabilities
|
671,682 | 756,577 | ||||||
|
Accrued salaries, wages and payroll taxes
|
153,613 | 199,496 | ||||||
|
Accrued income taxes
|
95,990 | 459,175 | ||||||
|
Current portion of long-term debt
|
3,583 | 3,688 | ||||||
|
Commercial paper borrowings
|
632,566 | - | ||||||
|
Federal Home Loan Bank borrowings
|
50,000 | 50,000 | ||||||
|
Total current liabilities
|
3,462,629 | 2,321,491 | ||||||
|
Long-term debt
|
1,049,358 | 1,035,144 | ||||||
|
Federal Home Loan Bank borrowings
|
25,000 | 25,000 | ||||||
|
Other noncurrent liabilities
|
438,065 | 412,053 | ||||||
|
Total liabilities
|
4,975,052 | 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 | ||||||
|
Additional paid-in capital
|
809,733 | 832,604 | ||||||
|
Accumulated other comprehensive income
|
7,162 | 1,678 | ||||||
|
Retained earnings
|
2,045,447 | 2,658,586 | ||||||
|
Less treasury shares, at cost
|
(2,038,783 | ) | (2,056,552 | ) | ||||
|
Total stockholders’ equity
|
827,683 | 1,440,630 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 5,802,735 | $ | 5,234,318 | ||||
See Notes to
Condensed Consolidated Financial Statements
1
Table of Contents
|
OPERATIONS AND COMPREHENSIVE INCOME (LOSS) |
(Unaudited,
amounts in 000s,
except per share amounts) |
|
|
||||||||||||||||
| Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Service revenues
|
$ | 677,295 | $ | 744,327 | $ | 1,220,853 | $ | 1,287,270 | ||||||||
|
Interest income
|
56,109 | 48,346 | 77,046 | 72,746 | ||||||||||||
|
Product and other revenues
|
118,078 | 142,179 | 150,946 | 176,422 | ||||||||||||
| 851,482 | 934,852 | 1,448,845 | 1,536,438 | |||||||||||||
|
Operating expenses:
|
||||||||||||||||
|
Cost of revenues
|
635,163 | 645,747 | 1,396,129 | 1,443,146 | ||||||||||||
|
Selling, general and administrative
|
235,799 | 194,661 | 461,771 | 427,563 | ||||||||||||
| 870,962 | 840,408 | 1,857,900 | 1,870,709 | |||||||||||||
|
Operating income (loss)
|
(19,480 | ) | 94,444 | (409,055 | ) | (334,271 | ) | |||||||||
|
Other income, net
|
2,031 | 3,007 | 9,170 | 7,996 | ||||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
(17,449 | ) | 97,451 | (399,885 | ) | (326,275 | ) | |||||||||
|
Income taxes (benefit)
|
(13,074 | ) | 43,848 | (161,060 | ) | (122,789 | ) | |||||||||
|
Net income (loss) from continuing operations
|
(4,375 | ) | 53,603 | (238,825 | ) | (203,486 | ) | |||||||||
|
Net loss from discontinued operations
|
(8,346 | ) | (2,968 | ) | (13,626 | ) | (8,100 | ) | ||||||||
|
Net income (loss)
|
$ | (12,721 | ) | $ | 50,635 | $ | (252,451 | ) | $ | (211,586 | ) | |||||
|
Basic earnings (loss) per share:
|
||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | (0.01 | ) | $ | 0.16 | $ | (0.77 | ) | $ | (0.61 | ) | |||||
|
Net loss from discontinued operations
|
(0.03 | ) | (0.01 | ) | (0.04 | ) | (0.02 | ) | ||||||||
|
Net income (loss)
|
$ | (0.04 | ) | $ | 0.15 | $ | (0.81 | ) | $ | (0.63 | ) | |||||
|
Basic shares
|
305,144 | 332,999 | 310,546 | 334,293 | ||||||||||||
|
Diluted earnings (loss) per share:
|
||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | (0.01 | ) | $ | 0.16 | $ | (0.77 | ) | $ | (0.61 | ) | |||||
|
Net loss from discontinued operations
|
(0.03 | ) | (0.01 | ) | (0.04 | ) | (0.02 | ) | ||||||||
|
Net income (loss)
|
$ | (0.04 | ) | $ | 0.15 | $ | (0.81 | ) | $ | (0.63 | ) | |||||
|
Diluted shares
|
305,144 | 334,297 | 310,546 | 334,293 | ||||||||||||
|
Dividends paid per share
|
$ | 0.15 | $ | 0.15 | $ | 0.45 | $ | 0.45 | ||||||||
|
Comprehensive income (loss):
|
||||||||||||||||
|
Net income (loss)
|
$ | (12,721 | ) | $ | 50,635 | $ | (252,451 | ) | $ | (211,586 | ) | |||||
|
Change in unrealized gain on
available-for-sale
securities, net
|
646 | (464 | ) | 7 | (882 | ) | ||||||||||
|
Change in foreign currency translation adjustments
|
4,101 | 1,484 | 5,477 | 13,607 | ||||||||||||
|
Comprehensive income (loss)
|
$ | (7,974 | ) | $ | 51,655 | $ | (246,967 | ) | $ | (198,861 | ) | |||||
See Notes to
Condensed Consolidated Financial Statements
2
Table of Contents
|
|
(unaudited, amounts in 000s) |
| Nine Months Ended January 31, | 2011 | 2010 | ||||||
|
|
||||||||
|
Net cash used in operating activities
|
$ | (1,505,418 | ) | $ | (2,648,962 | ) | ||
|
Cash flows from investing activities:
|
||||||||
|
Principal repayments on mortgage loans held for investment, net
|
45,316 | 56,114 | ||||||
|
Purchases of property and equipment, net
|
(51,198 | ) | (63,242 | ) | ||||
|
Payments made for business acquisitions, net
|
(50,832 | ) | (10,828 | ) | ||||
|
Proceeds from sale of businesses, net
|
62,298 | 66,760 | ||||||
|
Loans made to franchisees
|
(90,304 | ) | (88,564 | ) | ||||
|
Other, net
|
48,577 | 30,849 | ||||||
|
Net cash used in investing activities
|
(36,143 | ) | (8,911 | ) | ||||
|
Cash flows from financing activities:
|
||||||||
|
Repayments of short-term borrowings
|
(2,654,653 | ) | (982,774 | ) | ||||
|
Proceeds from short-term borrowings
|
3,286,603 | 2,657,436 | ||||||
|
Customer banking deposits, net
|
1,002,274 | 1,365,163 | ||||||
|
Dividends paid
|
(140,926 | ) | (151,317 | ) | ||||
|
Repurchase of common stock, including shares surrendered
|
(283,494 | ) | (154,201 | ) | ||||
|
Proceeds from exercise of stock options
|
(866 | ) | 15,678 | |||||
|
Other, net
|
(10,062 | ) | (29,434 | ) | ||||
|
Net cash provided by financing activities
|
1,198,876 | 2,720,551 | ||||||
|
Effects of exchange rates on cash
|
4,330 | 10,336 | ||||||
|
Net increase (decrease) in cash and cash equivalents
|
(338,355 | ) | 73,014 | |||||
|
Cash and cash equivalents at beginning of the period
|
1,804,045 | 1,654,663 | ||||||
|
Cash and cash equivalents at end of the period
|
$ | 1,465,690 | $ | 1,727,677 | ||||
|
Supplementary cash flow data:
|
||||||||
|
Income taxes paid
|
$ | 159,916 | $ | 269,774 | ||||
|
Interest paid on borrowings
|
69,313 | 61,118 | ||||||
|
Interest paid on deposits
|
6,191 | 8,654 | ||||||
|
Transfers of loans to foreclosed assets
|
12,931 | 12,689 | ||||||
See Notes to
Condensed Consolidated Financial Statements
3
Table of Contents
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | (unaudited) |
| 1. | Summary of Significant Accounting Policies |
Basis of Presentation
The condensed consolidated balance sheet as of January 31,
2011, the condensed consolidated statements of operations and
comprehensive income (loss) for the three and nine months ended
January 31, 2011 and 2010, and the condensed consolidated
statements of cash flows for the nine months ended
January 31, 2011 and 2010 have been prepared by the
Company, without audit. In the opinion of management, all
adjustments, which include only normal recurring adjustments,
necessary to present fairly the financial position, results of
operations and cash flows at January 31, 2011 and for all
periods presented have been made.
A restatement was made to the historical condensed consolidated
statement of cash flows for the nine months ended
January 31, 2010. Loans made to franchisees and cash
receipts from franchise loans of $88.6 million and
$8.5 million, respectively, were previously reported in
cash flows from operating activities and are now reported in
cash flows from investing activities.
“H&R Block,” “the Company,”
“we,” “our” and “us” are used
interchangeably to refer to H&R Block, Inc. or to H&R
Block, Inc. and its subsidiaries, as appropriate to the context.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with
U.S. generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial
statements and notes thereto included in our April 30, 2010
Annual Report to Shareholders on
Form 10-K.
All amounts presented herein as of April 30, 2010 or for
the year then ended, are derived from our April 30, 2010
Annual Report to Shareholders on
Form 10-K.
Management Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles 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, reserves for uncertain tax positions, credit
losses on receivable balances and related matters. We revise our
estimates when facts and circumstances dictate. However, future
events and their effects cannot be determined with absolute
certainty. As such, actual results could differ materially from
those estimates.
Seasonality of
Business
Our operating revenues are seasonal in nature with peak revenues
occurring in the months of January through April. Therefore,
results for interim periods are not indicative of results to be
expected for the full year.
Concentrations of
Risk
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 51% of our
mortgage loan portfolio consists of loans to borrowers located
in the states of Florida, California and New York.
Financing
Receivables and Related Allowances
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. Policies related to our mortgage
loans held for investment and the related allowance are included
in our Annual Report on
Form 10-K.
4
Table of Contents
The current portion of EAs, tax client receivables and loans
made to franchisees is included in accounts receivable, while
the noncurrent portion is included in other assets in the
condensed consolidated financial statements. These amounts as of
January 31, 2011 are as follows:
| (in 000s) | ||||||||||||
|
Emerald Advance
|
Tax Client
|
Loans
|
||||||||||
| Lines of Credit | Receivables - RALs | to Franchisees | ||||||||||
|
Current
|
$ | 674,317 | $ | 4,874 | $ | 85,269 | ||||||
|
Noncurrent
|
13,608 | 5,856 | 131,340 | |||||||||
| $ | 687,925 | $ | 10,730 | $ | 216,609 | |||||||
Related allowance for doubtful accounts is detailed in
note 4.
Emerald Advance
lines of
credit.
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 are
placed on non-accrual status as soon as they become delinquent.
We review the credit quality of these receivables based on the
year the loans were originated, with different bad debt rates
applied to each year. As of January 31, 2011, we had EA
receivables of $648.1 million, $12.3 million and
$14.7 million which were originated in fiscal years 2011,
2010 and 2009 and prior, respectively. We also had receivables
of $12.8 million related to EA receivables of clients who
paid off their original EA and qualified to maintain their loan
year-round. As of January 31, 2011, $33.2 million of
EAs were on non-accrual status. Payments on past due amounts are
recorded as a reduction in the receivable balance.
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 the upcoming
tax season. 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 are not being 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 outstanding at January 31, 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 the
year the loans were originated, with different bad debt rates
applied to each year. As of January 31, 2011, we had tax
client receivables of $1.7 million, $2.7 million and
$6.4 million which were originated by HSBC in fiscal years
2010, 2009 and 2008 and prior, respectively. 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 the upcoming
tax season. 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 becomes delinquent. Loans made to franchisees totaled
$216.6 million at January 31, 2011, and consisted of
$145.4 million in term loans made to finance the purchase
of franchises and $71.2 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,
5
Table of Contents
loan-to-value
ratio and
debt-to-income
ratio are obtained at the time of underwriting. Payment history
is monitored on a regular basis. We believe all loans to
franchisees fall within the same credit quality category. 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. We had no loans to franchisees past due or on
non-accrual status as of January 31, 2011 and we had no
allowance for bad debts recorded related to loans to franchisees
at January 31, 2011.
| 2. | Business Combinations |
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 14 years. The following table summarizes the fair
value of identifiable assets acquired and liabilities assumed
and the resulting goodwill as of January 31, 2011:
| (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 $2.0 million under
these plans during the nine months ended January 31, 2011.
In October 2010, we signed a definitive merger agreement to
acquire all of the outstanding shares of 2SS Holdings, Inc.,
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.
| 3. | Earnings (Loss) Per Share and Stockholders’ Equity |
Basic and diluted earnings (loss) per share is computed using
the two-class method. The two-class method is an earnings
allocation formula that determines net income per share for each
class of common stock and participating security according to
dividends declared and participation rights in undistributed
earnings. Per share amounts are computed by dividing net income
from continuing operations attributable to common shareholders
by the weighted average shares outstanding during each period.
The dilutive effect of potential common shares is included in
diluted earnings per share except in those periods with a loss
from continuing operations. Diluted earnings per share excludes
the impact of shares of common stock issuable upon the lapse of
certain restrictions or the exercise of options to purchase
9.6 million shares for the three months ended
January 31, 2010, as the effect would be antidilutive.
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 12.6 million shares for
the three and nine months ended January 31,
6
Table of Contents
2011, and 16.8 million shares for the nine months ended
January 31, 2010, as the effect would be antidilutive due
to the net loss from continuing operations during each period.
The computations of basic and diluted earnings (loss) per share
from continuing operations are as follows:
| (in 000s, except per share amounts) | ||||||||||||||||
| Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Net earnings (loss) from continuing operations attributable to
shareholders
|
$ | (4,375 | ) | $ | 53,603 | $ | (238,825 | ) | $ | (203,486 | ) | |||||
|
Amounts allocated to participating securities (nonvested shares)
|
(148 | ) | (203 | ) | (142 | ) | (530 | ) | ||||||||
|
Net earnings (loss) from continuing operations attributable
to common shareholders |
$ | (4,523 | ) | $ | 53,400 | $ | (238,967 | ) | $ | (204,016 | ) | |||||
|
Basic weighted average common shares
|
305,144 | 332,999 | 310,546 | 334,293 | ||||||||||||
|
Potential dilutive shares
|
- | 1,298 | - | - | ||||||||||||
|
Dilutive weighted average common shares
|
305,144 | 334,297 | 310,546 | 334,293 | ||||||||||||
|
Earnings (loss) per share from continuing operations
attributable to common shareholders:
|
||||||||||||||||
|
Basic
|
$ | (0.01 | ) | $ | 0.16 | $ | (0.77 | ) | $ | (0.61 | ) | |||||
|
Diluted
|
(0.01 | ) | 0.16 | (0.77 | ) | (0.61 | ) | |||||||||
The weighted average shares outstanding for the three and nine
months ended January 31, 2011 decreased to
305.1 million and 310.5 million, respectively, from
333.0 million and 334.3 million for the three and nine
months ended January 31, 2010, respectively. During the
nine months ended January 31, 2011, we purchased and
immediately retired 19.0 million shares of our common stock
at a cost of $279.9 million. We may continue to repurchase
and retire common stock or retire shares held in treasury from
time to time in the future. The cost of shares retired during
the period was allocated to the components of stockholders’
equity as follows:
| (in 000s) | ||||
|
Common stock
|
$ | 190 | ||
|
Additional paid-in capital
|
11,370 | |||
|
Retained earnings
|
268,387 | |||
| $ | 279,947 | |||
During the nine months ended January 31, 2011 and 2010, we
issued 1.1 million and 2.2 million shares of common
stock, respectively, due to the exercise of stock options,
employee stock purchases and vesting of nonvested shares.
During the nine months ended January 31, 2011, we acquired
0.2 million shares of our common stock at an aggregate cost
of $3.5 million, and during the nine months ended
January 31, 2010, we acquired 0.2 million shares at an
aggregate cost of $4.2 million. Shares acquired during
these periods represented shares swapped or surrendered to us in
connection with the vesting of nonvested shares and the exercise
of stock options.
During the nine months ended January 31, 2011, we granted
2.1 million stock options and 0.8 nonvested shares and
units in accordance with our stock-based compensation plans. The
weighted average fair value of options granted was $2.25 for
management options. These awards vest over a four year period
with one-fourth vesting each year. Stock-based compensation
expense of our continuing operations totaled $4.4 million
and $10.6 million for the three and nine months ended
January 31, 2011, respectively, and $7.2 million and
$19.3 million for the three and nine months ended
January 31, 2010, respectively. At January 31, 2011,
unrecognized compensation cost for options totaled
$5.4 million, and for nonvested shares and units totaled
$13.8 million.
7
Table of Contents
| 4. | Receivables |
Current receivables consist of the following:
| (in 000s) | ||||||||||||||||
| As of | January 31, 2011 | January 31, 2010 | April 30, 2010 | |||||||||||||
|
Emerald Advance lines of credit
|
$ | 674,317 | $ | 667,859 | $ | 57,914 | ||||||||||
|
Business Services receivables
|
220,404 | 324,085 | 326,681 | |||||||||||||
|
Receivables for tax preparation and related fees
|
280,364 | 286,732 | 45,248 | |||||||||||||
|
Loans to franchisees
|
85,269 | 70,706 | 55,047 | |||||||||||||
|
Royalties from franchisees
|
84,049 | 82,943 | 3,845 | |||||||||||||
|
RAC fees receivable
|
51,704 | 19,850 | - | |||||||||||||
|
Tax client receivables related to RALs
|
4,874 | 1,109,795 | 21,646 | |||||||||||||
|
Other
|
95,732 | 91,713 | 120,080 | |||||||||||||
| 1,496,713 | 2,653,683 | 630,461 | ||||||||||||||
|
Allowance for doubtful accounts
|
(125,561 | ) | (86,853 | ) | (112,475 | ) | ||||||||||
| $ | 1,371,152 | $ | 2,566,830 | $ | 517,986 | |||||||||||
The decrease in tax client receivables from January 2010 is due
to the termination of our contract with HSBC to offer RALs
during the current tax season. See additional discussion in
note 1. The decrease in Business Services receivables from
January 2010 is primarily a result of the change in the
administrative services agreement between RSM and
McGladrey & Pullen, LLP (M&P) in February 2010.
Our allowance for doubtful accounts as of January 31, 2011
consists of the following:
| (in 000s) | ||||
|
Allowance related to:
|
||||
|
Emerald Advance lines of credit
|
$ | 73,645 | ||
|
Tax client receivables related to RALs
|
- | |||
|
Loans to franchisees
|
- | |||
|
All other receivables
|
51,916 | |||
| $ | 125,561 | |||
There were no changes to our methodology related to the
calculation of our allowance for doubtful accounts during the
quarter.
| 5. | Mortgage Loans Held for Investment and Related Assets |
The composition of our mortgage loan portfolio as of
January 31, 2011 and April 30, 2010 is as follows:
| (dollars in 000s) | ||||||||||||||||
| As of | January 31, 2011 | April 30, 2010 | ||||||||||||||
| Amount | % of Total | Amount | % of Total | |||||||||||||
|
Adjustable-rate loans
|
$ | 348,523 | 58 | % | $ | 411,122 | 60 | % | ||||||||
|
Fixed-rate loans
|
248,252 | 42 | % | 272,562 | 40 | % | ||||||||||
| 596,775 | 100 | % | 683,684 | 100 | % | |||||||||||
|
Unamortized deferred fees and costs
|
4,293 | 5,256 | ||||||||||||||
|
Less: Allowance for loan losses
|
(87,876 | ) | (93,535 | ) | ||||||||||||
| $ | 513,192 | $ | 595,405 | |||||||||||||
Activity in the allowance for loan losses for the nine months
ended January 31, 2011 and 2010 is as follows:
(in
000s)
| Nine Months Ended January 31, | 2011 | 2010 | ||||||||
|
Balance, beginning of the period
|
$ | 93,535 | $ | 84,073 | ||||||
|
Provision
|
24,100 | 36,050 | ||||||||
|
Recoveries
|
169 | 38 | ||||||||
|
Charge-offs
|
(29,928 | ) | (22,892 | ) | ||||||
|
Balance, end of the period
|
$ | 87,876 | $ | 97,269 | ||||||
8
Table of Contents
Our loan loss reserve as a percent of mortgage loans was 14.7%
at January 31, 2011 compared to 13.7% at April 30,
2010.
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 at January 31, 2011:
| (in 000s) | ||||||||||
| Portfolio Balance | Related Allowance | |||||||||
|
Pooled (less than 60 days past due)
|
$ | 319,424 | $ | 11,071 | ||||||
|
Individually (modified)
|
112,433 | 9,712 | ||||||||
|
Individually (60 days or more past due)
|
164,918 | 67,093 | ||||||||
| $ | 596,775 | $ | 87,876 | |||||||
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,
plus loan to value. These loan attributes are tested annually
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 by Sand Canyon
Corporation (SCC) and purchased by H&R Block Bank (HRB
Bank) which constitute approximately 63% of the total loan
portfolio at January 31, 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 $221.9 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 January 31, 2011 is as follows:
| (dollars in 000s) | ||||||||||||||||
|
Outstanding
|
Loan Loss Allowance |
%30+ Days
|
||||||||||||||
| Principal Balance | Amount | % of Principal | Past Due | |||||||||||||
|
Purchased from SCC
|
$ | 374,870 | $ | 73,900 | 19.7% | 41.5% | ||||||||||
|
All other
|
221,905 | 13,976 | 6.3% | 11.2% | ||||||||||||
| $ | 596,775 | $ | 87,876 | 14.7% | 30.3% | |||||||||||
Detail of the aging of the mortgage loans in our portfolio that
are past due as of January 31, 2011 is as follows:
| (in 000s) | ||||||||||||||||||||||||
|
Less than 60
|
60-89 Days
|
90+ Days
|
Total
|
|||||||||||||||||||||
| Days Past Due | Past Due | Past Due | Past Due | Current | Total | |||||||||||||||||||
|
Purchased from SCC
|
$ | 33,484 | $ | 6,647 | $ | 134,503 | $ | 174,634 | $ | 200,236 | $ | 374,870 | ||||||||||||
|
All other
|
12,146 | 1,843 | 18,610 | 32,599 | 189,306 | 221,905 | ||||||||||||||||||
| $ | 45,630 | $ | 8,490 | $ | 153,113 | $ | 207,233 | $ | 389,542 | $ | 596,775 | |||||||||||||
9
Table of Contents
Credit quality indicators at January 31, 2011 include the
following:
| (in 000s) | ||||
| Credit Quality Indicators | Portfolio Balance | |||
|
Occupancy status:
|
||||
|
Owner occupied
|
$ | 401,287 | ||
|
Non-owner occupied
|
195,488 | |||
| $ | 596,775 | |||
|
Documentation level:
|
||||
|
Full documentation
|
$ | 274,116 | ||
|
Limited documentation
|
35,200 | |||
|
Stated income
|
238,385 | |||
|
No documentation
|
49,074 | |||
| $ | 596,775 | |||
|
Internal risk rating:
|
||||
|
High
|
$ | 161,099 | ||
|
Medium
|
213,771 | |||
|
Low
|
221,905 | |||
| $ | 596,775 | |||
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).
TDR loans totaled $112.4 million and $145.0 million at
January 31, 2011 and April 30, 2010, respectively. The
principal balance of non-performing assets as of
January 31, 2011 and April 30, 2010 is as follows:
| (in 000s) | ||||||||||
| As of | January 31, 2011 | April 30, 2010 | ||||||||
|
Impaired loans:
|
||||||||||
|
30 – 59 days past due
|
$ | 1,094 | $ | 330 | ||||||
|
60 – 89 days past due
|
8,490 | 11,851 | ||||||||
|
90+ days past due, non-accrual
|
153,113 | 153,703 | ||||||||
|
TDR loans, accrual
|
108,075 | 113,471 | ||||||||
|
TDR loans, non-accrual
|
4,358 | 31,506 | ||||||||
| 275,130 | 310,861 | |||||||||
|
Real estate owned
(1)
|
21,841 | 29,252 | ||||||||
|
Total non-performing assets
|
$ | 296,971 | $ | 340,113 | ||||||
| (1) | Includes loans accounted for as in-substance foreclosures of $8.9 million and $12.5 million at January 31, 2011 and April 30, 2010, respectively. |
Activity related to our real estate owned (REO) is as follows:
(in
000s)
| Nine Months Ended January 31, | 2011 | 2010 | ||||||||
|
Balance, beginning of the period
|
$ | 29,252 | $ | 44,533 | ||||||
|
Additions
|
12,931 | 12,689 | ||||||||
|
Sales
|
(16,900 | ) | (17,528 | ) | ||||||
|
Writedowns
|
(3,442 | ) | (8,183 | ) | ||||||
|
Balance, end of the period
|
$ | 21,841 | $ | 31,511 | ||||||
| 6. | 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, fair values are estimated using quoted prices of securities with similar characteristics. Available-for-sale securities that we classify as Level 2 |
10
Table of Contents
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. REO is included in prepaid expenses and other current assets in the condensed consolidated balance sheets. 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. |
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 the nine months ended
January 31, 2011 and 2010:
| (dollars in 000s) | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
|
Nine months ended January 31, 2011:
|
||||||||||||||||
|
Recurring:
|
||||||||||||||||
|
Mortgage-backed securities
|
$ | 19,927 | $ | - | $ | 19,927 | $ | - | ||||||||
|
Municipal bonds
|
8,740 | - | 8,740 | - | ||||||||||||
|
Non-recurring:
|
||||||||||||||||
|
REO
|
19,532 | - | - | 19,532 | ||||||||||||
|
Impaired mortgage loans held for investment
|
174,062 | - | - | 174,062 | ||||||||||||
| $ | 222,261 | $ | - | $ | 28,667 | $ | 193,594 | |||||||||
|
As a percentage of total assets
|
3.8% | -% | 0.5% | 3.3% | ||||||||||||
|
Nine months ended January 31, 2010:
|
||||||||||||||||
|
Recurring:
|
||||||||||||||||
|
Mortgage-backed securities
|
$ | 24,259 | $ | - | $ | 24,259 | $ | - | ||||||||
|
Municipal bonds
|
9,966 | - | 9,966 | - | ||||||||||||
|
Non-recurring:
|
||||||||||||||||
|
REO
|
27,492 | - | - | 27,492 | ||||||||||||
|
Impaired mortgage loans held for investment
|
188,891 | - | - | 188,891 | ||||||||||||
| $ | 250,608 | $ | - | $ | 34,225 | $ | 216,383 | |||||||||
|
As a percentage of total assets
|
3.4% | -% | 0.5% | 2.9% | ||||||||||||
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, demand deposits, 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. | |
| • | IRAs and other time deposits – The fair value is calculated based on the discounted value of contractual cash flows. | |
| • | Long-term borrowings and Federal Home Loan Bank (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. |
11
Table of Contents
The carrying amounts and estimated fair values of our financial
instruments at January 31, 2011 are as follows:
(in
000s)
|
Carrying
|
Estimated
|
|||||||||
| Amount | Fair Value | |||||||||
|
Mortgage loans held for investment
|
$ | 513,192 | $ | 306,962 | ||||||
|
IRAs and other time deposits
|
669,786 | 672,614 | ||||||||
|
Long-term borrowings
|
1,052,941 | 1,085,456 | ||||||||
|
FHLB advances
|
75,000 | 75,417 | ||||||||
| 7. | Goodwill and Intangible Assets |
Changes in the carrying amount of goodwill for the nine months
ended January 31, 2011 consist of the following:
| (in 000s) | ||||||||||||
| Tax Services | Business Services | Total | ||||||||||
|
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
|
14,674 | 28,544 | 43,218 | |||||||||
|
Disposals and other
|
(8,681 | ) | (3,256 | ) | (11,937 | ) | ||||||
|
Impairments
|
(22,700 | ) | - | (22,700 | ) | |||||||
|
Balance at January 31, 2011:
|
||||||||||||
|
Goodwill
|
459,877 | 429,039 | 888,916 | |||||||||
|
Accumulated impairment losses
|
(24,888 | ) | (15,000 | ) | (39,888 | ) | ||||||
| $ | 434,989 | $ | 414,039 | $ | 849,028 | |||||||
We test goodwill for impairment annually at the beginning of our
fourth quarter, or more frequently if events occur which could,
more likely than not, reduce the fair value of a reporting
unit’s net assets below its carrying value.
The RedGear reporting unit within our Tax Services segment
experienced lower than expected settlement product 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 during the three months ended
January 31, 2011, leaving a remaining goodwill balance of
approximately $14 million. The impairment is included in
selling, general and administrative expenses on the condensed
consolidated statements of operations.
12
Table of Contents
Intangible assets consist of the following:
| (in 000s) | ||||||||||||||||||||||||
| As of | January 31, 2011 | April 30, 2010 | ||||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Accumulated
|
|||||||||||||||||||||
| Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
|
Tax Services:
|
||||||||||||||||||||||||
|
Customer relationships
|
$ | 88,311 | $ | (38,940 | ) | $ | 49,371 | $ | 67,705 | $ | (33,096 | ) | $ | 34,609 | ||||||||||
|
Noncompete agreements
|
23,461 | (21,859 | ) | 1,602 | 23,062 | (21,278 | ) | 1,784 | ||||||||||||||||
|
Reacquired franchise rights
|
214,330 | (8,983 | ) | 205,347 | 223,773 | (6,096 | ) | 217,677 | ||||||||||||||||
|
Franchise agreements
|
19,201 | (2,773 | ) | 16,428 | 19,201 | (1,813 | ) | 17,388 | ||||||||||||||||
|
Purchased technology
|
14,700 | (7,941 | ) | 6,759 | 14,500 | (6,266 | ) | 8,234 | ||||||||||||||||
|
Trade name
|
1,325 | (550 | ) | 775 | 1,325 | (400 | ) | 925 | ||||||||||||||||
|
Business Services:
|
||||||||||||||||||||||||
|
Customer relationships
|
152,082 | (126,723 | ) | 25,359 | 145,149 | (120,037 | ) | 25,112 | ||||||||||||||||
|
Noncompete agreements
|
35,818 | (24,001 | ) | 11,817 | 33,052 | (22,118 | ) | 10,934 | ||||||||||||||||
|
Attest firm affiliation
|
7,629 | (212 | ) | 7,417 | - | - | - | |||||||||||||||||
|
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 | ||||||||||||||||
| $ | 615,094 | $ | (239,450 | ) | $ | 375,644 | $ | 586,004 | $ | (218,572 | ) | $ | 367,432 | |||||||||||
Amortization of intangible assets for the three and nine months
ended January 31, 2011 was $7.4 and $21.6 million
respectively, and $7.1 million and $21.4 million for
the three and nine months ended January 31, 2010,
respectively. Estimated amortization of intangible assets for
fiscal years 2011 through 2015 is $30.7 million,
$29.1 million, $24.7 million, $21.1 million and
$15.7 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 $5.6 million at
January 31, 2011.
| 8. | Borrowings |
Borrowings consist of the following:
| As of | (in 000s) | |||||||||||
| January 31, 2011 | January 31, 2010 | April 30, 2010 | ||||||||||
|
Short-term borrowings:
|
||||||||||||
|
Commercial paper
|
$ | 632,566 | $ | 792,594 | $ | - | ||||||
|
HSBC credit facility
|
- | 882,500 | - | |||||||||
| $ | 632,566 | $ | 1,675,094 | $ | - | |||||||
|
Long-term borrowings:
|
||||||||||||
|
Senior Notes, 7.875%, due January 2013
|
$ | 599,758 | $ | 599,633 | $ | 599,664 | ||||||
|
Senior Notes, 5.125%, due October 2014
|
399,117 | 398,882 | 398,941 | |||||||||
|
Other
|
54,066 | 36,861 | 40,227 | |||||||||
| 1,052,941 | 1,035,376 | 1,038,832 | ||||||||||
|
Less: Current portion
|
(3,583 | ) | (2,576 | ) | (3,688 | ) | ||||||
| $ | 1,049,358 | $ | 1,032,800 | $ | 1,035,144 | |||||||
We had commercial paper borrowings of $632.6 million at
January 31, 2011, compared to $792.6 million at the
same time last year. These borrowings were used to fund our
off-season losses and cover our seasonal working capital needs.
We also had other short-term borrowings of $882.5 million
outstanding at January 31, 2010 to fund our participation
interests in RALs.
At January 31, 2011, we maintained 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 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
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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 January 31, 2011,
we were in compliance with these covenants and had net worth of
$827.7 million. We had no balance outstanding under the
CLOCs at January 31, 2011.
HRB Bank is a member of the FHLB of Des Moines, which extends
credit to member banks based on eligible collateral. At
January 31, 2011, HRB Bank had total FHLB advance capacity
of $226.2 million. There was $75.0 million outstanding
on this facility, leaving remaining availability of
$151.2 million. Mortgage loans held for investment of
$381.5 million serve as eligible collateral and are used to
determine total capacity.
| 9. | Income Taxes |
We file a consolidated federal income tax return in the United
States and file tax returns in various state and foreign
jurisdictions. The U.S. Federal consolidated tax returns
for the years 1999 through 2007 are currently under examination
by the Internal Revenue Service, with the
1999-2005 years
currently at the appellate level. Federal returns for 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 exam.
During the nine months ended January 31, 2011, we accrued
additional gross interest and penalties of $4.5 million
related to our uncertain tax positions. We had gross
unrecognized tax benefits of $131.5 million and
$129.8 million at January 31, 2011 and April 30,
2010, respectively. The gross unrecognized tax benefits
increased $1.7 million in the current year, due to accruals
of tax and interest on positions related to prior years. Except
as noted below, we have classified the liability for
unrecognized tax benefits, including corresponding accrued
interest, as long-term at January 31, 2011, and included
this amount in other noncurrent liabilities on the condensed
consolidated balance sheet.
Based upon the expiration of statutes of limitations, payments
of tax and other factors in several jurisdictions, we believe it
is reasonably possible that the gross amount of reserves for
previously unrecognized tax benefits may decrease by
approximately $16.5 million within twelve months of
January 31, 2011. This portion of our liability for
unrecognized tax benefits has been classified as current and is
included in accounts payable, accrued expenses and other current
liabilities on the condensed consolidated balance sheets.
| 10. | Interest Income and Expense |
The following table shows the components of interest income and
expense of our continuing operations:
| (in 000s) | ||||||||||||||||
| Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Interest income:
|
||||||||||||||||
|
Mortgage loans held for investment
|
$ | 5,923 | $ | 7,567 | $ | 18,771 | $ | 23,535 | ||||||||
|
Emerald Advance lines of credit
|
46,132 | 36,867 | 47,590 | 39,944 | ||||||||||||
|
Other
|
4,054 | 3,912 | 10,685 | 9,267 | ||||||||||||
| $ | 56,109 | $ | 48,346 | $ | 77,046 | $ | 72,746 | |||||||||
|
Interest expense:
|
||||||||||||||||
|
Borrowings
|
$ | 22,244 | $ | 19,617 | $ | 63,778 | $ | 57,088 | ||||||||
|
Deposits
|
2,587 | 3,340 | 6,457 | 7,673 | ||||||||||||
|
FHLB advances
|
397 | 509 | 1,189 | 1,526 | ||||||||||||
| $ | 25,228 | $ | 23,466 | $ | 71,424 | $ | 66,287 | |||||||||
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| 11. | Regulatory Requirements |
HRB Bank files its regulatory Thrift Financial Report (TFR) on a
calendar quarter basis with the Office of Thrift Supervision
(OTS). The following table sets forth HRB Bank’s regulatory
capital requirements at December 31, 2010, as calculated in
the most recently filed TFR:
| (dollars in 000s) | ||||||||||||||||||
|
To Be Well
|
||||||||||||||||||
|
Capitalized
|
||||||||||||||||||
|
Under Prompt
|
||||||||||||||||||
|
For Capital
Adequacy
|
Corrective
|
|||||||||||||||||
| Actual | Purposes | Action Provisions | ||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
|
Total risk-based capital ratio
(1)
|
$ | 426,848 | 36.4% | $ | 93,864 | 8.0% | $ | 117,330 | 10.0% | |||||||||
|
Tier 1 risk-based capital ratio
(2)
|
$ | 412,139 | 35.1% | N/A | N/A | $ | 70,398 | 6.0% | ||||||||||
|
Tier 1 capital ratio (leverage)
(3)
|
$ | 412,139 | 23.0% | $ | 215,244 | 12.0% | $ | 89,685 | 5.0% | |||||||||
|
Tangible equity ratio
(4)
|
$ | 412,139 | 23.0% | $ | 26,905 | 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. |
As of January 31, 2011, HRB Bank’s leverage ratio was
20.7%.
| 12. | Variable Interests |
In June 2009, the Financial Accounting Standards Board (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.
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 – The administrative services agreement with M&P and compensation arrangements between RSM McGladrey (RSM) and their managing directors represent a variable interest in M&P. These agreements are described more fully in our 2010 Annual Report to Shareholders on Form 10-K. |
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 condensed 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 approximately $112.4 million at January 31,
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 |
15
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| 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 January 31, 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 January 31, 2011, we had no significant assets or
liabilities included in our condensed consolidated balance
sheets related to SCC’s variable interests in the Trusts.
We have a liability, as discussed in note 13, and a
deferred tax asset recorded in our condensed 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
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.
| 13. | Commitments and Contingencies |
Changes in deferred revenue balances related to our Peace of
Mind (POM) program, the current portion of which is included in
accounts payable, accrued expenses and other current liabilities
and the long-term portion of which is included in other
noncurrent liabilities in the condensed consolidated balance
sheets, are as follows:
| (in 000s) | ||||||||
| Nine Months Ended January 31, | 2011 | 2010 | ||||||
|
Balance, beginning of period
|
$ | 141,542 | $ | 146,807 | ||||
|
Amounts deferred for new guarantees issued
|
19,376 | 21,139 | ||||||
|
Revenue recognized on previous deferrals
|
(59,882) | (58,122) | ||||||
|
Balance, end of period
|
$ | 101,036 | $ | 109,824 | ||||
In addition to amounts accrued for our POM guarantee, we had
accrued $11.9 million and $14.5 million at
January 31, 2011 and April 30, 2010, respectively,
related to our standard guarantee which is included with our
standard tax preparation services.
The following table summarizes certain of our other contractual
obligations and commitments:
| (in 000s) | ||||||||
| As of | January 31, 2011 | April 30, 2010 | ||||||
|
Franchise Equity Lines of Credit – undrawn commitment
|
$ | 13,828 | $ | 36,806 | ||||
|
Contingent business acquisition obligations
|
25,765 | 20,697 | ||||||
|
Media advertising purchase obligation
|
8,897 | 26,548 | ||||||
We routinely enter into contracts that include embedded
indemnifications that have characteristics similar to
guarantees. 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
16
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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 are 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 guarantees and indemnifications relating to our
continuing operations is not material as of January 31,
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.
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 | Total | |||||||||||||||||||||||||
|
Loan Origination Year:
|
||||||||||||||||||||||||||||||||||||
|
2005
|
$ | 40 | $ | 21 | $ | 1 | $ | - | $ | - | $ | 15 | $ | - | $ | - | $ | 6 | $ | 1 | $ | - | $ | 84 | ||||||||||||
|
2006
|
89 | 10 | 111 | 7 | 2 | 57 | 4 | 45 | 100 | 15 | 29 | 469 | ||||||||||||||||||||||||
|
2007
|
43 | 10 | 85 | 15 | 4 | 11 | 7 | - | 3 | 5 | 4 | 187 | ||||||||||||||||||||||||
|
Total
|
$ | 172 | $ | 41 | $ | 197 | $ | 22 | $ | 6 | $ | 83 | $ | 11 | $ | 45 | $ | 109 | $ | 21 | $ | 33 | $ | 740 | ||||||||||||
Note: The table above excludes amounts related to an indemnity
agreement dated April 2008, which is discussed below.
For those claims 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 85% 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 23% resulted in
loan repurchases, and 77% resulted in indemnification or
settlement payments. Losses on loan repurchase, indemnification
and settlement payments totaled approximately $88 million
for the period May 1, 2008 through January 31, 2011.
Loss severity rates on repurchases and indemnification have
approximated 60% and SCC has not observed any material trends
related to average losses by counterparty. Repurchased loans are
considered held for sale and are included in prepaid expenses
and other current assets on the condensed consolidated balance
sheets. The net balance of all mortgage loans held for sale by
SCC was $13.8 million at January 31, 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 $14 million, which remained subject
to review as of
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January 31, 2011. Of the claims still subject to review,
approximately $2 million are from private-label
securitizations related to rescissions of mortgage insurance,
and $10 million are from monoline insurers, with the
remainder from government sponsored entities.
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
January 31, 2011.
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 by counterparty, 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 probability that
individual counterparties (whole-loan purchasers, private label
securitization trustees and monoline insurers) will assert
future claims.
SCC has recorded a liability for estimated contingent losses
related to representation and warranty claims as of
January 31, 2011, of $155.0 million, which represents
SCC’s best estimate of the probable loss that may occur.
This overall liability amount includes $24.2 million that
was established 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. This indemnity agreement was given as part
of obtaining the counterparty’s consent to SCC’s sale
of its mortgage servicing business in 2008. During the current
year, payments totaling $25.6 million were made under this
agreement. We expect the remaining obligation of
$24.2 million to be paid in the fourth quarter of this
fiscal year.
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 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 above
SCC’s accrual of approximately $21 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 level of claims asserted, the level of valid
claim volumes, 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.
18
Table of Contents
A rollforward of our liability for losses on repurchases for the
nine months ended January 31, 2011 and 2010 is as follows:
| (in 000s) | ||||||||
| Nine Months Ended January 31, | 2011 | 2010 | ||||||
|
Balance, beginning of period:
|
||||||||
|
Amount related to repurchase and indemnifications
|
$ | 138,415 | $ | 156,659 | ||||
|
Amount related to indemnity agreement dated April 2008
|
49,785 | 49,936 | ||||||
| 188,200 | 206,595 | |||||||
|
Changes:
|
||||||||
|
Provisions
|
- | - | ||||||
|
Losses on repurchase and indemnifications
|
(7,652) | (8,234) | ||||||
|
Payments under indemnity agreement dated April 2008
|
(25,562) | (103) | ||||||
|
Balance, end of period:
|
||||||||
|
Amount related to repurchase and indemnifications
|
130,763 | 148,425 | ||||||
|
Amount related to indemnity agreement dated April 2008
|
24,223 | 49,833 | ||||||
| $ | 154,986 | $ | 198,258 | |||||
The repurchase liability is included in accounts payable,
accrued expenses and other current liabilities on our condensed
consolidated balance sheets. There have been no provisions for
additional losses included in the income statement since
April 30, 2008; however, loss provisions would be recorded
net of tax in discontinued operations.
| 14. | 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 $43.9 million and
$35.5 million at January 31, 2011 and April 30,
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
19
Table of Contents
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, 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, negligent misrepresentation, breach of contract,
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. The defendants filed two requests for interlocutory
review of the decision, the last of which was denied by the
Supreme Court of California on September 30, 2009. A trial
date has been set for May 2011.
The certified class consists of RSM EquiCo’s
U.S. clients who signed platform agreements and for whom
RSM EquiCo did not ultimately market their business for sale. A
portion of our loss contingency accrual is related to this
matter for the amount of loss that we consider probable and
estimable, although it is possible that our losses could exceed
the amount we have accrued. The fees paid to RSM EquiCo in
connection with these agreements total approximately
$185 million, a number which substantially exceeds the
equity of RSM EquiCo. Plaintiffs seek to recover restitution in
an amount equal to the fees paid, in addition to punitive
damages and attorney fees. We believe the RSM Parties have
meritorious defenses to the case and intend to defend the case
vigorously. The amount claimed in this action is substantial and
could have a material adverse impact on our consolidated results
of operations. 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, which 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 adverse 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 loan origination and servicing
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
20
Table of Contents
discriminatory or unfair and deceptive loan origination and
servicing practices, public nuisance, fraud, and violations of
securities laws, the Truth in Lending Act, Equal Credit
Opportunity Act and the Fair Housing Act. In the current
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, because
SCC’s operating results are included in our consolidated
financial statements, could have a material adverse 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 trial date has been
set for June 2011. 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 its outcome 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 FHLB’s purchase of mortgage-backed securities. Plaintiff
asserts claims for rescission and damages under Illinois
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, respectively styled
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 all tax professionals who worked in company-owned offices in
California from 2007 to 2010. 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. The potential loss related to the wage and
hour class action lawsuits cannot be reasonably estimated, but
our losses could
21
Table of Contents
exceed the amount we have accrued. We believe we have
meritorious defenses to the claims in these cases 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 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 adverse 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
adverse impact on our consolidated results of operations.
| 15. | Segment Information |
Results of our continuing operations by reportable operating
segment are as follows:
| (in 000s) | ||||||||||||||||
| Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Revenues:
|
||||||||||||||||
|
Tax Services
|
$ | 672,810 | $ | 747,685 | $ | 875,376 | $ | 944,953 | ||||||||
|
Business Services
|
171,309 | 178,482 | 549,445 | 562,702 | ||||||||||||
|
Corporate
|
7,363 | 8,685 | 24,024 | 28,783 | ||||||||||||
| $ | 851,482 | $ | 934,852 | $ | 1,448,845 | $ | 1,536,438 | |||||||||
|
Pretax income (loss):
|
||||||||||||||||
|
Tax Services
|
$ | 4,114 | $ | 131,189 | $ | (324,865) | $ | (212,973) | ||||||||
|
Business Services
|
8,587 | (11,222) | 16,551 | (9,727) | ||||||||||||
|
Corporate
|
(30,150) | (22,516) | (91,571) | (103,575) | ||||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
$ | (17,449) | $ | 97,451 | $ | (399,885) | $ | (326,275) | ||||||||
| 16. | Accounting Pronouncements |
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. We have included all required
disclosures in notes 1, 4 and 5. The requirements for
activity-based disclosures will be adopted as of April 30,
2011. The requirements for TDR disclosures will be adopted when
finalized by the FASB.
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
22
Table of Contents
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 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.
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.
| 17. | Condensed Consolidating Financial Statements |
Block Financial LLC (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, our 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 Statements of Operations | (in 000s) | ||||||||||||||
|
Three
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||
| January 31, 2011 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | ||||||||||
|
Total revenues
|
$ | - | $ | 74,103 | $ | 777,379 | $ | - | $ | 851,482 | |||||
|
Cost of revenues
|
- | 118,708 | 516,455 | - | 635,163 | ||||||||||
|
Selling, general and administrative
|
- | 10,220 | 225,579 | - | 235,799 | ||||||||||
|
Total expenses
|
- | 128,928 | 742,034 | - | 870,962 | ||||||||||
|
Operating income (loss)
|
- | (54,825) | 35,345 | - | (19,480) | ||||||||||
|
Other income (expense), net
|
(17,449) | (521) | 2,552 | 17,449 | 2,031 | ||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
(17,449) | (55,346) | 37,897 | 17,449 | (17,449) | ||||||||||
|
Income taxes (benefit)
|
(13,074) | (26,783) | 13,709 | 13,074 | (13,074) | ||||||||||
|
Net income (loss) from continuing operations
|
(4,375) | (28,563) | 24,188 | 4,375 | (4,375) | ||||||||||
|
Net loss from discontinued operations
|
(8,346) | (8,283) | (63) | 8,346 | (8,346) | ||||||||||
|
Net income (loss)
|
$ | (12,721) | $ | (36,846) | $ | 24,125 | $ | 12,721 | $ | (12,721) | |||||
23
Table of Contents
|
Three
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| January 31, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Total revenues
|
$ | – | $ | 83,291 | $ | 851,581 | $ | (20 | ) | $ | 934,852 | |||||||||
|
Cost of revenues
|
– | 86,020 | 559,799 | (72 | ) | 645,747 | ||||||||||||||
|
Selling, general and administrative
|
– | 2,881 | 191,800 | (20 | ) | 194,661 | ||||||||||||||
|
Total expenses
|
– | 88,901 | 751,599 | (92 | ) | 840,408 | ||||||||||||||
|
Operating income (loss)
|
– | (5,610 | ) | 99,982 | 72 | 94,444 | ||||||||||||||
|
Other income (expense), net
|
97,451 | (1,609 | ) | 4,688 | (97,523 | ) | 3,007 | |||||||||||||
|
Income (loss) from continuing operations before taxes (benefit)
|
97,451 | (7,219 | ) | 104,670 | (97,451 | ) | 97,451 | |||||||||||||
|
Income taxes (benefit)
|
43,848 | (2,721 | ) | 46,569 | (43,848 | ) | 43,848 | |||||||||||||
|
Net income (loss) from continuing operations
|
53,603 | (4,498 | ) | 58,101 | (53,603 | ) | 53,603 | |||||||||||||
|
Net loss from discontinued operations
|
(2,968 | ) | (2,968 | ) | – | 2,968 | (2,968 | ) | ||||||||||||
|
Net income (loss)
|
$ | 50,635 | $ | (7,466 | ) | $ | 58,101 | $ | (50,635 | ) | $ | 50,635 | ||||||||
|
Nine
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| January 31, 2011 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Total revenues
|
$ | – | $ | 112,423 | $ | 1,336,422 | $ | – | $ | 1,448,845 | ||||||||||
|
Cost of revenues
|
– | 193,695 | 1,202,434 | – | 1,396,129 | |||||||||||||||
|
Selling, general and administrative
|
– | 21,689 | 440,082 | – | 461,771 | |||||||||||||||
|
Total expenses
|
– | 215,384 | 1,642,516 | – | 1,857,900 | |||||||||||||||
|
Operating loss
|
– | (102,961 | ) | (306,094 | ) | – | (409,055 | ) | ||||||||||||
|
Other income (expense), net
|
(399,885 | ) | 4,751 | 4,419 | 399,885 | 9,170 | ||||||||||||||
|
Loss from continuing operations before tax benefit
|
(399,885 | ) | (98,210 | ) | (301,675 | ) | 399,885 | (399,885 | ) | |||||||||||
|
Income tax benefit
|
(161,060 | ) | (42,278 | ) | (118,782 | ) | 161,060 | (161,060 | ) | |||||||||||
|
Net loss from continuing operations
|
(238,825 | ) | (55,932 | ) | (182,893 | ) | 238,825 | (238,825 | ) | |||||||||||
|
Net loss from discontinued operations
|
(13,626 | ) | (12,617 | ) | (1,009 | ) | 13,626 | (13,626 | ) | |||||||||||
|
Net loss
|
$ | (252,451 | ) | $ | (68,549 | ) | $ | (183,902 | ) | $ | 252,451 | $ | (252,451 | ) | ||||||
|
Nine
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| January 31, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Total revenues
|
$ | – | $ | 127,513 | $ | 1,409,001 | $ | (76 | ) | $ | 1,536,438 | |||||||||
|
Cost of revenues
|
– | 177,441 | 1,265,777 | (72 | ) | 1,443,146 | ||||||||||||||
|
Selling, general and administrative
|
– | 7,836 | 419,803 | (76 | ) | 427,563 | ||||||||||||||
|
Total expenses
|
– | 185,277 | 1,685,580 | (148 | ) | 1,870,709 | ||||||||||||||
|
Operating loss
|
– | (57,764 | ) | (276,579 | ) | 72 | (334,271 | ) | ||||||||||||
|
Other income (expense), net
|
(326,275 | ) | (5,449 | ) | 13,517 | 326,203 | 7,996 | |||||||||||||
|
Loss from continuing operations before tax benefit
|
(326,275 | ) | (63,213 | ) | (263,062 | ) | 326,275 | (326,275 | ) | |||||||||||
|
Income tax benefit
|
(122,789 | ) | (25,707 | ) | (97,082 | ) | 122,789 | (122,789 | ) | |||||||||||
|
Net loss from continuing operations
|
(203,486 | ) | (37,506 | ) | (165,980 | ) | 203,486 | (203,486 | ) | |||||||||||
|
Net loss from discontinued operations
|
(8,100 | ) | (8,100 | ) | – | 8,100 | (8,100 | ) | ||||||||||||
|
Net loss
|
$ | (211,586 | ) | $ | (45,606 | ) | $ | (165,980 | ) | $ | 211,586 | $ | (211,586 | ) | ||||||
24
Table of Contents
| Condensed Consolidating Balance Sheets | (in 000s) | |||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||
| January 31, 2011 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Cash & cash equivalents
|
$ | – | $ | 1,289,689 | $ | 177,320 | $ | (1,319 | ) | $ | 1,465,690 | |||||||||
|
Cash & cash equivalents – restricted
|
- | 783 | 35,330 | – | 36,113 | |||||||||||||||
|
Receivables, net
|
27 | 707,713 | 663,412 | – | 1,371,152 | |||||||||||||||
|
Mortgage loans held for investment
|
- | 513,192 | – | – | 513,192 | |||||||||||||||
|
Intangible assets and goodwill, net
|
– | – | 1,224,672 | – | 1,224,672 | |||||||||||||||
|
Investments in subsidiaries
|
2,664,240 | – | 19 | (2,664,240 | ) | 19 | ||||||||||||||
|
Other assets
|
12,733 | 365,198 | 813,966 | – | 1,191,897 | |||||||||||||||
|
Total assets
|
$ | 2,677,000 | $ | 2,876,575 | $ | 2,914,719 | $ | (2,665,559 | ) | $ | 5,802,735 | |||||||||
|
Customer deposits
|
$ | – | $ | 1,856,514 | $ | – | $ | (1,319 | ) | $ | 1,855,195 | |||||||||
|
Long-term debt
|
– | 998,875 | 50,483 | – | 1,049,358 | |||||||||||||||
|
FHLB borrowings
|
– | 75,000 | – | – | 75,000 | |||||||||||||||
|
Short-term borrowings
|
– | 632,566 | – | – | 632,566 | |||||||||||||||
|
Other liabilities
|
160 | 35,406 | 1,327,367 | – | 1,362,933 | |||||||||||||||
|
Net intercompany advances
|
1,849,157 | (736,295 | ) | (1,112,862 | ) | – | – | |||||||||||||
|
Stockholders’ equity
|
827,683 | 14,509 | 2,649,731 | (2,664,240 | ) | 827,683 | ||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,677,000 | $ | 2,876,575 | $ | 2,914,719 | $ | (2,665,559 | ) | $ | 5,802,735 | |||||||||
|
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 | |||||||||
25
Table of Contents
| Condensed Consolidating Statements of Cash Flows | (in 000s) | |||||||||||||||||||
|
Nine
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| January 31, 2011 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Net cash used in operating activities:
|
$ | (43,026 | ) | $ | (725,197 | ) | $ | (737,195 | ) | $ | – | $ | (1,505,418 | ) | ||||||
|
Cash flows from investing:
|
||||||||||||||||||||
|
Mortgage loans originated for investment, net
|
– | 45,316 | – | – | 45,316 | |||||||||||||||
|
Purchase property & equipment
|
– | – | (51,198 | ) | – | (51,198 | ) | |||||||||||||
|
Payments made for business acquisitions, net
|
– | – | (50,832 | ) | – | (50,832 | ) | |||||||||||||
|
Proceeds from sale of businesses, net
|
– | – | 62,298 | – | 62,298 | |||||||||||||||
|
Loans made to franchisees
|
– | (90,304 | ) | – | – | (90,304 | ) | |||||||||||||
|
Net intercompany advances
|
467,873 | – | – | (467,873 | ) | – | ||||||||||||||
|
Other, net
|
– | 38,538 | 10,039 | – | 48,577 | |||||||||||||||
|
Net cash provided by (used in) investing activities
|
467,873 | (6,450 | ) | (29,693 | ) | (467,873 | ) | (36,143 | ) | |||||||||||
|
Cash flows from financing:
|
||||||||||||||||||||
|
Repayments of short-term borrowings
|
– | (2,654,653 | ) | – | – | (2,654,653 | ) | |||||||||||||
|
Proceeds from short-term borrowings
|
– | 3,286,603 | – | – | 3,286,603 | |||||||||||||||
|
Customer banking deposits
|
– | 1,003,482 | – | (1,208 | ) | 1,002,274 | ||||||||||||||
|
Dividends paid
|
(140,926 | ) | – | – | – | (140,926 | ) | |||||||||||||
|
Repurchase of common stock
|
(283,494 | ) | – | – | – | (283,494 | ) | |||||||||||||
|
Proceeds from exercise of stock options
|
(866 | ) | – | – | – | (866 | ) | |||||||||||||
|
Net intercompany advances
|
– | (315,752 | ) | (152,121 | ) | 467,873 | – | |||||||||||||
|
Other, net
|
439 | (365 | ) | (10,136 | ) | – | (10,062 | ) | ||||||||||||
|
Net cash provided by (used in) financing activities
|
(424,847 | ) | 1,319,315 | (162,257 | ) | 466,665 | 1,198,876 | |||||||||||||
|
Effects of exchange rates on cash
|
– | – | 4,330 | – | 4,330 | |||||||||||||||
|
Net increase (decrease) in cash
|
– | 587,668 | (924,815 | ) | (1,208 | ) | (338,355 | ) | ||||||||||||
|
Cash – beginning of period
|
– | 702,021 | 1,102,135 | (111 | ) | 1,804,045 | ||||||||||||||
|
Cash – end of period
|
$ | – | $ | 1,289,689 | $ | 177,320 | $ | (1,319 | ) | $ | 1,465,690 | |||||||||
26
Table of Contents
|
Nine
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| January 31, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Net cash provided by (used in) operating activities:
|
$ | 11,590 | $ | (1,788,487 | ) | $ | (872,065 | ) | $ | – | $ | (2,648,962 | ) | |||||||
|
Cash flows from investing:
|
||||||||||||||||||||
|
Mortgage loans originated for investment, net
|
– | 56,114 | – | – | 56,114 | |||||||||||||||
|
Purchase property & equipment
|
– | 616 | (63,858 | ) | – | (63,242 | ) | |||||||||||||
|
Payments made for business acquisitions, net of cash acquired
|
– | – | (10,828 | ) | – | (10,828 | ) | |||||||||||||
|
Proceeds from sale of businesses, net
|
– | – | 66,760 | – | 66,760 | |||||||||||||||
|
Loans made to franchisees
|
– | (88,564 | ) | – | – | (88,564 | ) | |||||||||||||
|
Net intercompany advances
|
276,743 | – | – | (276,743 | ) | – | ||||||||||||||
|
Other, net
|
– | 32,468 | (1,619 | ) | – | 30,849 | ||||||||||||||
|
Net cash provided by (used in) investing activities
|
276,743 | 634 | (9,545 | ) | (276,743 | ) | (8,911 | ) | ||||||||||||
|
Cash flows from financing:
|
||||||||||||||||||||
|
Repayments of short-term borrowings
|
– | (982,774 | ) | – | – | (982,774 | ) | |||||||||||||
|
Proceeds from short-term borrowings
|
– | 2,657,436 | – | – | 2,657,436 | |||||||||||||||
|
Customer banking deposits
|
– | 1,366,106 | – | (943 | ) | 1,365,163 | ||||||||||||||
|
Dividends paid
|
(151,317 | ) | – | – | – | (151,317 | ) | |||||||||||||
|
Repurchase of common stock
|
(154,201 | ) | – | – | – | (154,201 | ) | |||||||||||||
|
Proceeds from stock options
|
15,678 | – | – | – | 15,678 | |||||||||||||||
|
Net intercompany advances
|
– | (151,334 | ) | (125,409 | ) | 276,743 | – | |||||||||||||
|
Other, net
|
1,507 | (9,052 | ) | (21,889 | ) | – | (29,434 | ) | ||||||||||||
|
Net cash provided by (used in) financing activities
|
(288,333 | ) | 2,880,382 | (147,298 | ) | 275,800 | 2,720,551 | |||||||||||||
|
Effects of exchange rates on cash
|
– | – | 10,336 | – | 10,336 | |||||||||||||||
|
Net increase (decrease) in cash
|
– | 1,092,529 | (1,018,572 | ) | (943 | ) | 73,014 | |||||||||||||
|
Cash – beginning of period
|
– | 241,350 | 1,419,535 | (6,222 | ) | 1,654,663 | ||||||||||||||
|
Cash – end of period
|
$ | – | $ | 1,333,879 | $ | 400,963 | $ | (7,165 | ) | $ | 1,727,677 | |||||||||
27
Table of Contents
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
RESULTS OF
OPERATIONS
Our subsidiaries provide tax preparation, retail banking and
various business advisory and consulting services. We are the
only company offering a full range of software, online and
in-office tax preparation solutions to individual tax clients.
RECENT
EVENTS
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 HSBC by its regulator and,
therefore, RALs are not being 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 below.
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., Canada and Australia.
Additionally, this segment includes the product offerings and
activities of H&R Block Bank (HRB Bank) that primarily
support the tax network, our prior participations in refund
anticipation loans, and our commercial tax businesses, which
provide tax preparation software to CPAs and other tax preparers.
| Tax Services – Operating Statistics (U.S. only) | ||||||||
| Three Months Ended January 31, | ||||||||
| 2011 | 2010 | |||||||
|
Tax returns prepared (in 000s):
(1)
Company-owned operations |
2,046 | 2,292 | ||||||
|
Franchise operations
|
1,382 | 1,347 | ||||||
|
Total retail operations
|
3,428 | 3,639 | ||||||
|
Software
|
601 | 635 | ||||||
|
Online
|
942 | 719 | ||||||
|
Free File Alliance
|
167 | 201 | ||||||
|
Total digital tax solutions
|
1,710 | 1,555 | ||||||
| 5,138 | 5,194 | |||||||
|
Net average fee per tax return prepared:
(2)
Company-owned operations |
$ | 191.20 | 205.06 | |||||
|
Franchise operations
|
175.03 | 181.20 | ||||||
| $ | 184.68 | $ | 196.23 | |||||
|
Offices:
|
||||||||
|
Company-owned
|
5,921 | 6,431 | ||||||
|
Company-owned shared
locations
(3)
|
572 | 760 | ||||||
|
Total company-owned offices
|
6,493 | 7,191 | ||||||
|
Franchise
|
4,178 | 3,909 | ||||||
|
Franchise shared
locations
(3)
|
397 | 406 | ||||||
|
Total franchise offices
|
4,575 | 4,315 | ||||||
| 11,068 | 11,506 | |||||||
| (1) | Fiscal year 2011 returns include approximately 69,000 and 35,000 company-owned and franchise returns, respectively, which were completed and ready to file at January 31, 2011, but could not be filed due to delays by the IRS in processing returns including Schedule A. Revenue related to these returns was deferred at January 31, 2011 and will be recognized in our fourth quarter. Fiscal year 2010 returns |
28
Table of Contents
| include approximately 102,000 returns prepared in offices we sold or franchised in fiscal year 2011. Tax returns prepared in these offices are presented within company-owned operations for fiscal year 2010. | ||
| (2) | Calculated as net tax preparation fees divided by retail tax returns prepared. | |
| (3) | Shared locations include offices located within Sears and other third-party businesses. |
| Tax Services – Operating Results | (in 000s) | |||||||||||||||
| Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Tax preparation fees
|
$ | 387,558 | $ | 485,277 | $ | 485,693 | $ | 578,207 | ||||||||
|
Fees from refund anticipation checks
|
74,010 | 31,119 | 75,321 | 32,593 | ||||||||||||
|
Royalties
|
72,008 | 75,174 | 84,640 | 84,836 | ||||||||||||
|
Interest income on Emerald Advance
|
46,132 | 36,867 | 47,590 | 39,944 | ||||||||||||
|
Fees from Emerald Card activities
|
18,864 | 21,814 | 36,132 | 42,933 | ||||||||||||
|
Loan participation and related fees
|
16,252 | 38,163 | 17,144 | 38,463 | ||||||||||||
|
Fees from Peace of Mind guarantees
|
11,524 | 11,079 | 59,882 | 58,122 | ||||||||||||
|
Other
|
46,462 | 48,192 | 68,974 | 69,855 | ||||||||||||
|
Total revenues
|
672,810 | 747,685 | 875,376 | 944,953 | ||||||||||||
|
Compensation and benefits:
|
||||||||||||||||
|
Field wages
|
178,006 | 208,466 | 269,443 | 302,783 | ||||||||||||
|
Other wages
|
27,963 | 29,634 | 84,955 | 88,355 | ||||||||||||
|
Benefits and other compensation
|
39,475 | 44,023 | 91,872 | 85,134 | ||||||||||||
| 245,444 | 282,123 | 446,270 | 476,272 | |||||||||||||
|
Marketing and advertising
|
97,419 | 87,670 | 117,938 | 109,770 | ||||||||||||
|
Occupancy and equipment
|
90,211 | 98,625 | 260,977 | 279,568 | ||||||||||||
|
Bad debt
|
92,228 | 56,762 | 94,654 | 59,034 | ||||||||||||
|
Depreciation and amortization
|
22,450 | 23,226 | 67,413 | 67,952 | ||||||||||||
|
Supplies
|
11,049 | 15,409 | 18,273 | 23,255 | ||||||||||||
|
Goodwill impairment
|
22,700 | – | 22,700 | – | ||||||||||||
|
Other
|
86,122 | 64,676 | 176,079 | 155,659 | ||||||||||||
|
Loss (gain) on sale of tax offices, net
|
1,073 | (11,995 | ) | (4,063 | ) | (13,584 | ) | |||||||||
|
Total expenses
|
668,696 | 616,496 | 1,200,241 | 1,157,926 | ||||||||||||
|
Pretax income (loss)
|
$ | 4,114 | $ | 131,189 | $ | (324,865 | ) | $ | (212,973 | ) | ||||||
Three months
ended January 31, 2011 compared to January 31,
2010
Tax Services’ revenues decreased $74.9 million, or
10.0%, for the three months ended January 31, 2011 compared
to the prior year. Tax preparation fees decreased
$97.7 million, or 20.1%, primarily due to a decline of
10.7% in tax returns prepared in company-owned offices coupled
with a decline of 6.8% in our net average charge. Declines in
tax returns prepared were primarily the result of an
industry-wide slow start to the tax season, which resulted in
part from an IRS delay in processing returns including
Schedule A. Additionally, we deferred $17.4 million of
revenue related to tax returns prepared which we were unable to
file electronically with the IRS due to the processing delay.
This revenue will be recognized in our fourth quarter. Our net
average charge declined due to the IRS processing delay, which
primarily impacted more complex filings with higher fees, and
new client growth resulting from our promotion of a free Federal
EZ filing. We expect our net average charge for the full fiscal
year will be between 2% and 4% lower than the average in fiscal
year 2010. We also expect tax returns prepared for the full
fiscal year to increase 0.5% to 1.5%
The business of our Tax Services segment is highly seasonal and
results for our third quarter represent only a small portion of
the tax season. Third quarter results are not indicative of the
results we expect for the entire fiscal year. Tax returns
prepared in company-owned and franchise offices through
February 28, 2011 increased 3.2% from the prior year
compared with a 5.8% decrease through January 31.
Fees earned on refund anticipation checks (RACs) increased
$42.9 million, or 137.8%, 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 are not being offered this tax season. Current quarter
revenues include the recognition of net deferred fees from HSBC
of $16.3 million that
29
Table of Contents
would have normally been recognized over the 2011 tax season,
but was accelerated upon the termination of our contract with
HSBC. This compares with revenues resulting from loans
participations and related fees in the prior year of
$38.2 million. Termination of this contract could have
adverse effects on our operating results this fiscal year,
including declines in tax returns prepared as a result of
clients seeking alternate preparers who continue to offer RALs,
and declines in settlement product and related revenues 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.
Interest income earned on Emerald Advance lines of credit (EAs)
increased $9.3 million, or 25.1%, over the prior year
primarily due to an increase in loan volume, which resulted from
offering the product to a wider client base.
Total expenses increased $52.2 million, or 8.5%, for the
three months ended January 31, 2011. Compensation and
benefits decreased $36.7 million, or 13.0%, primarily due
to lower commission-based wages and related payroll taxes
resulting from the decline in the number of tax returns
prepared. Marketing and advertising expenses increased
$9.7 million, or 11.1%, as a result of additional media
spend focused on early-season clients. Occupancy and equipment
expenses decreased $8.4 million, or 8.5%, primarily due to
the decline in the number of offices. Bad debt expense increased
$35.5 million, or 62.5%, primarily due to increased volumes
on EAs and RACs, which typically have higher bad debt rates than
RALs. Additionally, bad debt was negatively impacted by a
decline in tax returns prepared for certain client segments.
During the current quarter, we recorded a $22.7 million
impairment of goodwill in an ancillary reporting unit, as
discussed in note 7 to the condensed consolidated financial
statements. Other expenses increased $21.4 million, or
33.2%, primarily due to $17.5 million in incremental legal
accruals recorded in the current quarter.
During the current quarter, we recognized net losses of
$1.1 million on the sale of certain company-owned offices
to franchises, compared to gains of $12.0 million in the
prior year.
Pretax income for the three months ended January 31, 2011
and 2010 was $4.1 million and $131.2 million,
respectively.
Nine months ended
January 31, 2011 compared to January 31,
2010
Tax Services’ revenues decreased $69.6 million, or
7.4%, for the nine months ended January 31, 2011 compared
to the prior year. Tax preparation fees decreased
$92.5 million, or 16.0%, primarily due to a decline in tax
returns prepared in company-owned offices coupled with a decline
in our net average charge. These declines were the result of an
industry-wide slow start to the tax season, which resulted in
part due to the IRS’ delay in accepting certain forms that
were updated for changes in tax laws. Additionally, we deferred
$17.4 million of revenue related to tax returns prepared
which were not filed electronically with the IRS due to the IRS
acceptance delay.
Fees earned on RACs increased $42.7 million, or 131.1%,
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.
As a result of RALs not being offered this tax season, revenue
related to RAL participations and related fees were
$21.3 million lower than in the prior year.
Emerald Card revenues declined $6.8 million, or 15.8%, as a
result of fewer income tax refunds funding directly to our
prepaid debit cards, primarily due to the decline in clients.
Interest income earned on EAs increased $7.6 million, or
19.1%, over the prior year primarily due to an increase in EAs,
which resulted from offering the product to a wider client base.
Total expenses increased $42.3 million, or 3.7%, for the
nine months ended January 31, 2011. Compensation and
benefits decreased $30.0 million, or 6.3%, primarily due to
lower commission-based wages resulting from the decline in the
number of tax returns prepared. This decline was partially
offset by severance costs and related payroll taxes recorded
during the first quarter of this year. Marketing and advertising
expenses increased $8.2 million, or 7.4%, as a result of
additional media spend focused on early-season clients.
Occupancy and equipment expenses decreased $18.6 million,
or 6.6%, primarily due to the decrease in the number of offices.
Bad debt expense increased $35.6 million, or 60.3%,
primarily due to increased volumes on RACs and EAs, which
typically have higher bad debt rates than RALs. During the
current year, we recorded a $22.7 million impairment of
goodwill in an ancillary reporting unit, as discussed in
note 7 to the condensed consolidated financial statements.
Other expenses increased $20.4 million, or 13.1%, primarily
due to $16.2 million in incremental legal accruals recorded
in the current year.
30
Table of Contents
During the current year, we recognized net gains of
$4.1 million on the sale of certain company-owned offices
to franchises, compared to $13.6 million in the prior year.
The pretax loss for the nine months ended January 31, 2011
and 2010 was $324.9 million and $213.0 million,
respectively.
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 | (in 000s) | |||||||||||||||
| Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Tax services
|
$ | 84,078 | $ | 79,707 | $ | 277,068 | $ | 269,988 | ||||||||
|
Business consulting
|
60,015 | 70,499 | 186,215 | 192,490 | ||||||||||||
|
Accounting services
|
9,143 | 11,716 | 29,238 | 35,123 | ||||||||||||
|
Capital markets
|
3,952 | 3,225 | 7,824 | 5,754 | ||||||||||||
|
Reimbursed expenses
|
3,920 | 5,658 | 16,047 | 16,011 | ||||||||||||
|
Other
|
10,201 | 7,677 | 33,053 | 43,336 | ||||||||||||
|
Total revenues
|
171,309 | 178,482 | 549,445 | 562,702 | ||||||||||||
|
Compensation and benefits
|
119,508 | 116,606 | 385,424 | 400,295 | ||||||||||||
|
Occupancy
|
9,805 | 14,678 | 34,376 | 33,601 | ||||||||||||
|
Depreciation
|
4,801 | 5,224 | 14,336 | 16,054 | ||||||||||||
|
Marketing and advertising
|
2,779 | 4,733 | 16,952 | 14,287 | ||||||||||||
|
Amortization of intangible assets
|
2,888 | 2,896 | 8,781 | 8,803 | ||||||||||||
|
Other
|
22,941 | 45,567 | 73,025 | 99,389 | ||||||||||||
|
Total expenses
|
162,722 | 189,704 | 532,894 | 572,429 | ||||||||||||
|
Pretax income (loss)
|
$ | 8,587 | $ | (11,222 | ) | $ | 16,551 | $ | (9,727 | ) | ||||||
Three months
ended January 31, 2011 compared to January 31,
2010
Business Services’ revenues for the three months ended
January 31, 2011 decreased $7.2 million, or 4.0% from
the prior year. Tax services revenues increased primarily as a
result of the acquisition of Caturano & Company, Inc.
(Caturano), as discussed in note 2 to the condensed
consolidated financial statements. Business consulting revenues
declined $10.5 million, or 14.9%, primarily due to the
slowdown of services performed on a large multi-year engagement
in our consulting practice.
Total expenses decreased $27.0 million, or 14.2%, from the
prior year. Other expenses declined $22.6 million, or
49.7%, primarily due to a $15.0 million impairment of
goodwill and litigation costs recorded in the prior year.
Pretax income for the three months ended January 31, 2011
was $8.6 million compared to a loss of $11.2 million
in the prior year.
Nine months ended
January 31, 2011 compared to January 31,
2010
Business Services’ revenues for the nine months ended
January 31, 2011 decreased $13.3 million, or 2.4% from
the prior year. Tax services revenues increased primarily as a
result of the acquisition of Caturano. Business consulting
revenues declined $6.3 million, or 3.3%, primarily due to
the slowdown of services performed on a large multi-year
engagement in our consulting practice. Other revenues declined
$10.3 million, or 23.7%, primarily as a result of a
reduction in management fees received related to the new
administrative services agreement with McGladrey &
Pullen LLP (M&P), as discussed in note 12 to the
condensed consolidated financial statements.
Total expenses decreased $39.5 million, or 6.9%, from the
prior year. Compensation and benefits decreased
$14.9 million, or 3.7%, primarily due to reduced spend on
employee insurance benefits and a reduction of costs directly
related to the large multi-year consulting engagement detailed
above.
Other expenses declined $26.4 million, or 26.5%, primarily
due to a $15.0 million impairment of goodwill and
litigation costs recorded in the prior year.
Pretax income for the nine months ended January 31, 2011
was $16.6 million compared to a loss of $9.7 million
in the prior year.
31
Table of Contents
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) | |||||||||||||||
| Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Interest income on mortgage loans held for investment
|
$ | 5,923 | $ | 7,567 | $ | 18,771 | $ | 23,535 | ||||||||
|
Other
|
1,440 | 1,118 | 5,253 | 5,248 | ||||||||||||
|
Total revenues
|
7,363 | 8,685 | 24,024 | 28,783 | ||||||||||||
|
Interest expense
|
21,715 | 19,762 | 63,364 | 58,636 | ||||||||||||
|
Provision for loan losses
|
7,800 | 9,050 | 24,100 | 36,050 | ||||||||||||
|
Compensation and benefits
|
6,643 | 11,805 | 29,307 | 38,592 | ||||||||||||
|
Other, net
|
1,355 | (9,416 | ) | (1,176 | ) | (920 | ) | |||||||||
|
Total expenses
|
37,513 | 31,201 | 115,595 | 132,358 | ||||||||||||
|
Pretax loss
|
$ | (30,150 | ) | $ | (22,516 | ) | $ | (91,571 | ) | $ | (103,575 | ) | ||||
Three months
ended January 31, 2011 compared to January 31,
2010
Compensation and benefits declined $5.2 million, or 43.7%,
primarily due to reductions in force during the current year.
Other expenses increased $10.8 million primarily due to a
gain of $9.5 million recorded in the prior year on the
transfer of liabilities relating to previously retained
insurance risk to a third-party, which is reported above as a
reduction of other expenses, net.
Nine months ended
January 31, 2011 compared to January 31,
2010
Interest income earned on mortgage loans held for investment
decreased $4.8 million, or 20.2%, from the prior year,
primarily as a result of declining rates and non-performing
loans. The provision for loan losses declined $12.0 million
from the prior year as a result of the continued run-off of our
portfolio. Compensation and benefits declined $9.3 million,
or 24.1%, primarily due to reductions in force.
Income Taxes
Our effective tax rate for continuing operations was 40.3% and
37.6% for the nine months ended January 31, 2011 and 2010,
respectively. 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. During the current quarter, the increase in our base
tax rate, coupled with a discrete adjustment to taxes for the
release of a valuation allowance due to changes in certain state
tax positions, resulted in a tax benefit of $13.1 million
on a consolidated pretax loss of $17.4 million. We expect
our effective tax rate for full fiscal year 2011 to be
approximately 39%.
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 $8.3 million and $13.6 million for the three
and nine months ended January 31, 2011 compared to
$3.0 million and $8.1 million for the three and nine
months ended January 31, 2010. Increased losses are
primarily attributable to higher litigation costs.
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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. Losses on valid claims totaled
$7.7 million and $8.2 million for the nine months
ended January 31, 2011 and 2010, respectively.
Additionally, SCC made payments of $25.6 million under its
indemnity obligation dated April 2008.
These amounts were recorded as reductions of our loan repurchase
liability. Claims received since May 1, 2008 are as follows:
| (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Fiscal Year 2009 | Fiscal Year 2010 | Fiscal Year 2011 | ||||||||||||||||||||||||||||||||||||||||||||||
| Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Total | |||||||||||||||||||||||||||||||||||||
|
Loan Origination Year:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
2005
|
$ | 40 | $ | 21 | $ | 1 | $ | – | $ | – | $ | 15 | $ | – | $ | – | $ | 6 | $ | 1 | $ | – | $ | 84 | ||||||||||||||||||||||||
|
2006
|
89 | 10 | 111 | 7 | 2 | 57 | 4 | 45 | 100 | 15 | 29 | 469 | ||||||||||||||||||||||||||||||||||||
|
2007
|
43 | 10 | 85 | 15 | 4 | 11 | 7 | – | 3 | 5 | 4 | 187 | ||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 172 | $ | 41 | $ | 197 | $ | 22 | $ | 6 | $ | 83 | $ | 11 | $ | 45 | $ | 109 | $ | 21 | $ | 33 | $ | 740 | ||||||||||||||||||||||||
Note: The table above excludes amounts related to an indemnity
agreement dated April 2008, which is discussed below.
SCC has recorded a liability for estimated contingent losses
related to representation and warranty claims as of
January 31, 2011, of $155.0 million, which represents
SCC’s best estimate of the probable loss that may occur.
This overall liability amount includes $24.2 million, which
was established 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. This indemnity agreement was given as part
of obtaining the counterparty’s consent to SCC’s sale
of its mortgage servicing business in 2008. During the current
quarter, payments totaling $25.6 million were made under
this agreement. We expect the remaining obligation of
$24.2 million to be paid in the fourth quarter of this
fiscal year.
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 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 above
SCC’s accrual of approximately $21 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 level of claims asserted, the level of valid
claim volumes, 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.
FINANCIAL
CONDITION
These comments should be read in conjunction with the condensed
consolidated balance sheets and condensed consolidated
statements of cash flows found on pages 1 and 3, respectively.
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 shares of common stock 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
unsecured committed lines of credit (CLOCs), we believe, that in
the absence of any unexpected developments, our existing sources
of capital at January 31, 2011 are sufficient to meet our
operating needs.
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CASH FROM
OPERATING
ACTIVITIES
–
Cash used in operations totaled $1.5 billion for the first
nine months of fiscal year 2011, compared with $2.6 billion
for the same period last year. The decrease was primarily due to
the lack of RAL participations purchased in the current year.
See discussion under Recent Events at the beginning of
Part I, Item 2.
CASH FROM
INVESTING
ACTIVITIES
–
Cash used in investing activities totaled
$36.1 million for the first nine months of fiscal year
2011, compared to $8.9 million in the same period last year.
Mortgage Loans
Held for
Investment.
We
received net payments of $45.3 million and
$56.1 million on our mortgage loans held for investment for
the first nine months of fiscal years 2011 and 2010,
respectively. Cash payments declined primarily due to
non-performing loans and continued run-off of our portfolio.
Purchases of
Property and
Equipment.
Total
cash paid for property and equipment was $51.2 million and
$63.2 million for the first nine months of fiscal years
2011 and 2010, respectively.
Business
Acquisitions.
Total
cash paid for acquisitions was $50.8 million and
$10.8 million during the nine months ended January 31,
2011 and 2010, respectively. In July 2010 our Business Services
segment acquired 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 note 2 to the condensed consolidated
financial statements.
In October 2010, we signed a definitive merger agreement to
acquire all of the outstanding shares of 2SS Holdings, Inc.,
developer of TaxACT digital tax preparation solutions, for
$287.5 million in cash. We expect this acquisition will be
funded by excess available liquidity from
cash-on-hand
or short-term borrowings. Completion of the transaction is
subject to the satisfaction of customary closing conditions,
including regulatory approval.
Sales of
Businesses.
Proceeds
from the sales of businesses totaled $62.3 million and
$66.8 million for the nine months ended January 31,
2011 and 2010, respectively. During the first nine months of
fiscal year 2011, we sold 280 tax offices to franchisees,
compared to the sale of 267 tax offices in the prior year. The
majority of these sales were financed through affiliate loans.
Loans Made to
Franchisees.
Loans
made to franchisees totaled $90.3 million and
$88.6 million for the nine months ended January 31,
2011 and 2010, respectively. These amounts included both the
financing of sales of tax offices and franchisee draws under our
Franchise Equity Lines of Credit (FELCs).
CASH FROM
FINANCING
ACTIVITIES
–
Cash provided by financing activities totaled
$1.2 billion for the first nine months of fiscal year 2011,
compared to $2.7 billion in the same period last year.
Short-Term
Borrowings.
We
had commercial paper borrowings of $632.6 million at
January 31, 2011, compared to $792.6 million at the
same time last year. These borrowings were used to fund our
off-season losses and cover our seasonal working capital needs.
We also had other short-term borrowings of $882.5 million
outstanding at January 31, 2010 to fund our participation
interests in RALs. Our commercial paper borrowings peaked at
$674.7 million in the current year.
Customer Banking
Deposits.
Customer
banking deposits increased $1.0 billion for the nine months
ended January 31, 2011 compared to an increase of
$1.4 billion in the prior year. We utilize cash provided by
deposit balances as a funding source for our Emerald Advance
lines of credit during the tax season.
Dividends.
We
have consistently paid quarterly dividends. Dividends paid
totaled $140.9 million and $151.3 million for the nine
months ended January 31, 2011 and 2010, respectively.
Repurchase and
Retirement of Common
Stock.
During
the nine months ended January 31, 2011, we purchased and
immediately retired 19.0 million shares of our common stock
at a cost of $279.9 million. We may continue to repurchase
and retire common stock or retire treasury stock in the future.
Issuances of
Common
Stock.
Cash
used for the issuance of common stock totaled $0.9 million
for the nine months ended January 31, 2011 compared to
proceeds of $15.7 million for the prior year. This decline
is due to a reduction in stock option exercises and the related
tax benefits.
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BORROWINGS
The following chart provides the debt ratings for Block
Financial LLC (BFC) as of January 31, 2011 and
April 30, 2010:
| January 31, 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
(1)
|
A-2 | BBB | Negative | A-2 | BBB | Positive | ||||||||||||||||||
|
DBRS
|
R-2 (high | ) | BBB (high | ) | Stable | R-2 (high | ) | BBB (high | ) | Positive | ||||||||||||||
At January 31, 2011, we maintained 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 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 the new facility are
substantially similar to those in the previous CLOCs including:
(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 January 31, 2011, we were in
compliance with these covenants and had net worth of
$827.7 million. We had no balance outstanding under the
CLOCs at January 31, 2011.
There have been no other material changes in our borrowings or
debt ratings from those reported at April 30, 2010 in our
Annual Report on
Form 10-K.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
There have been no material changes in our contractual
obligations and commercial commitments from those reported at
April 30, 2010 in our Annual Report on
Form 10-K.
REGULATORY
ENVIRONMENT
There have been no material changes in our regulatory
environment from those reported at April 30, 2010 in our
Annual Report on
Form 10-K.
FORWARD-LOOKING
INFORMATION
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 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.
There have been no material changes in our market risks from
those reported at April 30, 2010 in our Annual Report on
Form 10-K.
EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this
Form 10-Q,
we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e)
and
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Table of Contents
15d-15(e)).
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 that our disclosure controls and procedures were
effective as of the end of the period covered by this Quarterly
Report on
Form 10-Q.
CHANGES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes that materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
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.
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, negligent misrepresentation, breach of contract,
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. The defendants filed two requests for interlocutory
review
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of the decision, the last of which was denied by the Supreme
Court of California on September 30, 2009. A trial date has
been set for May 2011.
The certified class consists of RSM EquiCo’s
U.S. clients who signed platform agreements and for whom
RSM EquiCo did not ultimately market their business for sale. A
portion of our loss contingency accrual is related to this
matter for the amount of loss that we consider probable and
estimable, although it is possible that our losses could exceed
the amount we have accrued. The fees paid to RSM EquiCo in
connection with these agreements total approximately
$185 million, a number which substantially exceeds the
equity of RSM EquiCo. Plaintiffs seek to recover restitution in
an amount equal to the fees paid, in addition to punitive
damages and attorney fees. We believe the RSM Parties have
meritorious defenses to the case and intend to defend the case
vigorously. The amount claimed in this action is substantial and
could have a material adverse impact on our consolidated results
of operations. 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, which 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 adverse 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 loan origination and servicing
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, public
nuisance, fraud, and violations of securities laws, the Truth in
Lending Act, Equal Credit Opportunity Act and the Fair Housing
Act. In the current 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, because
SCC’s operating results are included in our consolidated
financial statements, could have a material adverse 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 trial date has been
set for June 2011. A portion of our loss contingency accrual is
related to this matter for the amount of loss that we consider
probable
37
Table of Contents
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 its outcome 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 FHLB’s purchase of mortgage-backed securities. Plaintiff
asserts claims for rescission and damages under Illinois
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, respectively styled
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 all tax professionals who worked in company-owned offices in
California from 2007 to 2010. 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. The potential loss related to the wage and
hour class action lawsuits cannot be reasonably estimated, but
our losses could exceed the amount we have accrued. We believe
we have meritorious defenses to the claims in these cases 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 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 adverse 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
adverse impact on our consolidated results of operations.
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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 upcoming 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 use when considering whether to loan money to taxpayers
who apply for a RAL, which is short term loan, secured by the
taxpayer’s federal tax refund.
On December 23, 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 this tax season. Subsequently, two other banks offering
RALs this 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 this tax season
through our competitors announced that it was appealing 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.
In addition, termination of the contract with HSBC could have
adverse effects on our operating results this fiscal year,
including declines in tax returns prepared as a result of
clients seeking alternate preparers who continue to offers RALs
this tax season, and declines in settlement product and related
revenues to the extent prior RAL clients do not purchase a
refund anticipation check 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.
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 Office of Thrift Supervision moves to the Office of the Comptroller of the Currency 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 |
| • | 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
39
Table of Contents
Reform Act and any related legislation or regulations could have
a material adverse effect on our business, results of operations
and financial condition.
There have been no other material changes in our risk factors
from those reported at April 30, 2010 in our Annual Report
on
Form 10-K.
A summary of our purchases of H&R Block common stock during
the third quarter of fiscal year 2011 is as follows:
| (in 000s, except per share amounts) | ||||||||||||
|
Total Number of
Shares
|
Maximum $Value
|
|||||||||||
|
Total
|
Average
|
Purchased as Part
of
|
of Shares that
May
|
|||||||||
|
Number of Shares
|
Price Paid
|
Publicly
Announced
|
Be Purchased
Under
|
|||||||||
| Purchased (1) | per Share | Plans or Programs (2) | the Plans or Programs | |||||||||
|
November 1 – November 30
|
1 | $ | 11.63 | - | $ | 1,371,957 | ||||||
|
December 1 – December 31
|
- | $ | - | - | $ | 1,371,957 | ||||||
|
January 1 – January 31
|
1 | $ | 11.91 | - | $ | 1,371,957 | ||||||
| (1) | We purchased 2,067 shares in connection with the funding of employee income tax withholding obligations arising upon the exercise of stock options or the lapse of restrictions on nonvested shares. | |
| (2) | In June 2008, our Board of Directors rescinded 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. |
| 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 furnished 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 furnished 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 | .REF | XBRL Taxonomy Extension Reference Linkbase | ||
40
Table of Contents
Pursuant to the requirements 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.
Alan
M. Bennett
President
and Chief Executive Officer
March 9,
2011
Jeffrey
T. Brown
Senior
Vice President and
Chief
Financial Officer
March 9,
2011
Colby
R. Brown
Vice
President and
Corporate
Controller
March 9,
2011
41
TABLE OF CONTENTS
Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits