H&R BLOCK INC
10-Qs and 10-Ks
PROXIES
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 July 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)
(816) 854-3000
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
July 31, 2011 was 305,766,188 shares.
Form 10-Q
for the Period Ended July 31, 2011
Table of
Contents
| Page | ||||||||
|
PART I
|
Financial Information
|
|||||||
| 1 | ||||||||
| 2 | ||||||||
| 3 | ||||||||
| 4 | ||||||||
| 26 | ||||||||
| 30 | ||||||||
| 30 | ||||||||
| PART II |
Other Information
|
|||||||
| 30 | ||||||||
| 34 | ||||||||
| 34 | ||||||||
| 35 | ||||||||
| 36 | ||||||||
|
|
||||||||
| EX-10.1 | ||||||||
| EX-10.2 | ||||||||
| EX-10.3 | ||||||||
| EX-10.4 | ||||||||
| EX-10.5 | ||||||||
| 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
CONDENSED
CONSOLIDATED BALANCE SHEETS
(amounts
in 000s, except share and per share amounts)
| As of | July 31, 2011 | April 30, 2011 | ||||||
|
|
||||||||
| (Unaudited) | ||||||||
|
ASSETS
|
||||||||
|
Cash and cash equivalents
|
$ | 1,012,709 | $ | 1,677,844 | ||||
|
Cash and cash equivalents – restricted
|
44,402 | 48,383 | ||||||
|
Receivables, less allowance for doubtful accounts of $67,582 and
$67,466
|
329,388 | 492,290 | ||||||
|
Prepaid expenses and other current assets
|
281,326 | 259,214 | ||||||
|
Total current assets
|
1,667,825 | 2,477,731 | ||||||
|
Mortgage loans held for investment, less allowance for loan
losses of $91,303 and $92,087
|
466,663 | 485,008 | ||||||
|
Property and equipment, at cost, less accumulated depreciation
and amortization of $694,321 and $677,220
|
295,220 | 307,320 | ||||||
|
Intangible assets, net
|
360,035 | 367,919 | ||||||
|
Goodwill
|
742,611 | 846,245 | ||||||
|
Other assets
|
775,698 | 723,738 | ||||||
|
Total assets
|
$ | 4,308,052 | $ | 5,207,961 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
Liabilities:
|
||||||||
|
Customer banking deposits
|
$ | 666,268 | $ | 852,220 | ||||
|
Accounts payable, accrued expenses and other current liabilities
|
522,130 | 618,070 | ||||||
|
Accrued salaries, wages and payroll taxes
|
83,257 | 257,038 | ||||||
|
Accrued income taxes
|
275,639 | 458,910 | ||||||
|
Current portion of long-term debt
|
30,940 | 3,437 | ||||||
|
Federal Home Loan Bank borrowings
|
25,000 | 25,000 | ||||||
|
Total current liabilities
|
1,603,234 | 2,214,675 | ||||||
|
Long-term debt
|
1,019,431 | 1,049,754 | ||||||
|
Other noncurrent liabilities
|
451,510 | 493,958 | ||||||
|
Total liabilities
|
3,074,175 | 3,758,387 | ||||||
|
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
|
4,124 | 4,124 | ||||||
|
Additional paid-in capital
|
808,668 | 812,666 | ||||||
|
Accumulated other comprehensive income
|
12,692 | 11,233 | ||||||
|
Retained earnings
|
2,437,011 | 2,658,103 | ||||||
|
Less treasury shares, at cost
|
(2,028,618 | ) | (2,036,552 | ) | ||||
|
Total stockholders’ equity
|
1,233,877 | 1,449,574 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 4,308,052 | $ | 5,207,961 | ||||
See Notes to
Condensed Consolidated Financial Statements
1
Table of Contents
|
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME (LOSS) |
(Unaudited,
amounts in 000s,
except per share amounts) |
|
|
||||||||
| Three Months Ended July 31, | 2011 | 2010 | ||||||
|
|
||||||||
|
Revenues:
|
||||||||
|
Service revenues
|
$ | 240,563 | $ | 247,419 | ||||
|
Product and other revenues
|
16,638 | 16,753 | ||||||
|
Interest income
|
10,433 | 10,302 | ||||||
| 267,634 | 274,474 | |||||||
|
Expenses:
|
||||||||
|
Cost of revenues:
|
||||||||
|
Compensation and benefits
|
160,255 | 168,047 | ||||||
|
Occupancy and equipment
|
94,045 | 94,702 | ||||||
|
Depreciation and amortization of property and equipment
|
21,048 | 23,065 | ||||||
|
Provision for bad debt and loan losses
|
8,823 | 10,049 | ||||||
|
Interest
|
23,301 | 22,962 | ||||||
|
Other
|
49,528 | 49,191 | ||||||
| 357,000 | 368,016 | |||||||
|
Impairment of goodwill
|
99,697 | – | ||||||
|
Selling, general and administrative expenses
|
108,166 | 117,029 | ||||||
| 564,863 | 485,045 | |||||||
|
Operating loss
|
(297,229 | ) | (210,571 | ) | ||||
|
Other income, net
|
4,087 | 3,254 | ||||||
|
Loss from continuing operations before tax benefit
|
(293,142 | ) | (207,317 | ) | ||||
|
Income tax benefit
|
(119,699 | ) | (79,679 | ) | ||||
|
Net loss from continuing operations
|
(173,443 | ) | (127,638 | ) | ||||
|
Net loss from discontinued operations
|
(1,655 | ) | (3,043 | ) | ||||
|
Net loss
|
$ | (175,098 | ) | $ | (130,681 | ) | ||
|
Basic and diluted loss per share:
|
||||||||
|
Net loss from continuing operations
|
$ | (0.57 | ) | $ | (0.40 | ) | ||
|
Net loss from discontinued operations
|
– | (0.01 | ) | |||||
|
Net loss
|
$ | (0.57 | ) | $ | (0.41 | ) | ||
|
Basic and diluted shares
|
305,491 | 319,690 | ||||||
|
Dividends paid per share
|
$ | 0.15 | $ | 0.15 | ||||
|
Comprehensive income (loss):
|
||||||||
|
Net loss
|
$ | (175,098 | ) | $ | (130,681 | ) | ||
|
Change in unrealized gain on
available-for-sale
securities, net
|
975 | (306 | ) | |||||
|
Change in foreign currency translation adjustments
|
484 | (4,020 | ) | |||||
|
Comprehensive loss
|
$ | (173,639 | ) | $ | (135,007 | ) | ||
See Notes to
Condensed Consolidated Financial Statements
2
Table of Contents
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | (unaudited, amounts in 000s) |
| Three Months Ended July 31, | 2011 | 2010 | ||||||
|
|
||||||||
|
Net cash used in operating activities
|
$ | (394,549 | ) | $ | (348,251 | ) | ||
|
Cash flows from investing activities:
|
||||||||
|
Purchases of
available-for-sale
securities
|
(39,275 | ) | – | |||||
|
Principal repayments on mortgage loans held for investment, net
|
11,192 | 17,618 | ||||||
|
Purchases of property and equipment, net
|
(10,953 | ) | (8,634 | ) | ||||
|
Payments made for business acquisitions, net
|
(3,457 | ) | (33,226 | ) | ||||
|
Proceeds from sale of businesses, net
|
21,230 | 26,387 | ||||||
|
Franchise loans:
|
||||||||
|
Loans funded
|
(16,477 | ) | (33,720 | ) | ||||
|
Payments received
|
5,320 | 6,724 | ||||||
|
Other, net
|
18,167 | 18,848 | ||||||
|
Net cash used in investing activities
|
(14,253 | ) | (6,003 | ) | ||||
|
Cash flows from financing activities:
|
||||||||
|
Customer banking deposits, net
|
(186,245 | ) | (121,401 | ) | ||||
|
Dividends paid
|
(45,894 | ) | (48,692 | ) | ||||
|
Repurchase of common stock, including shares surrendered
|
(2,002 | ) | (164,369 | ) | ||||
|
Proceeds from exercise of stock options
|
1,762 | 1,500 | ||||||
|
Other, net
|
(24,916 | ) | (15,987 | ) | ||||
|
Net cash used in financing activities
|
(257,295 | ) | (348,949 | ) | ||||
|
Effects of exchange rates on cash
|
962 | (2,232 | ) | |||||
|
Net decrease in cash and cash equivalents
|
(665,135 | ) | (705,435 | ) | ||||
|
Cash and cash equivalents at beginning of the period
|
1,677,844 | 1,804,045 | ||||||
|
Cash and cash equivalents at end of the period
|
$ | 1,012,709 | $ | 1,098,610 | ||||
|
Supplementary cash flow data:
|
||||||||
|
Income taxes paid
|
$ | 99,357 | $ | 64,651 | ||||
|
Interest paid on borrowings
|
37,634 | 27,265 | ||||||
|
Interest paid on deposits
|
1,820 | 1,915 | ||||||
|
Transfers of foreclosed loans to other assets
|
1,573 | 6,527 | ||||||
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 July 31,
2011, the condensed consolidated statements of operations and
comprehensive income (loss) for the three months ended
July 31, 2011 and 2010, and the condensed consolidated
statements of cash flows for the three months ended
July 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 July 31, 2011 and for all periods presented
have been made.
“H&R Block,” “the Company,”
“we,” “our” and “us” are used
interchangeably to refer to H&R Block, Inc. 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, 2011
Annual Report to Shareholders on
Form 10-K.
All amounts presented herein as of April 30, 2011 or for
the year then ended, are derived from our April 30, 2011
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, valuation allowances based on future taxable
income, reserves for uncertain tax positions, credit losses on
receivable balances and related matters. Estimates have been
prepared on the basis of the most current and best information
available as of each balance sheet date. As such, actual results
could differ materially from those estimates.
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.
| 2. | Subsequent Event |
In August 2011, our Board of Directors approved a non-binding
letter of intent to sell substantially all assets of RSM
McGladrey Business Services, Inc. (RSM) to McGladrey &
Pullen LLP (M&P) which is described in a recently issued
Form 8-K.
The sale is dependent on, among other factors, the ability of
M&P to raise financing for the purchase, and is expected to
be completed by calendar year end. We also announced we are
evaluating strategic alternatives for RSM EquiCo, Inc. (EquiCo).
We recorded a $99.7 million impairment of goodwill in the
first quarter for reporting units in our Business Services
segment based on these events. These amounts related to the sale
of RSM may fluctuate based on adjustments to the purchase price
at closing as well as the additional realization of tax benefits
related to the sale. M&P will also assume substantially all
liabilities, including contingent payments and lease obligations.
| 3. | Loss Per Share and Stockholders’ Equity |
Basic and diluted 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.
4
Table of Contents
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
14.5 million shares and 14.7 million shares for the
three months ended July 31, 2011 and 2010, respectively, as
the effect would be antidilutive due to the net loss from
continuing operations during each period.
The computations of basic and diluted loss per share from
continuing operations are as follows:
| (in 000s, except per share amounts) | ||||||||
| Three Months Ended July 31, | 2011 | 2010 | ||||||
|
Net loss from continuing operations attributable to shareholders
|
$ | (173,443 | ) | $ | (127,638 | ) | ||
|
Amounts allocated to participating securities (nonvested shares)
|
(114 | ) | (20 | ) | ||||
|
Net loss from continuing operations attributable to common
shareholders
|
$ | (173,557 | ) | $ | (127,658 | ) | ||
|
Basic weighted average common shares
|
305,491 | 319,690 | ||||||
|
Potential dilutive shares
|
- | - | ||||||
|
Dilutive weighted average common shares
|
305,491 | 319,690 | ||||||
|
Loss per share from continuing operations:
|
||||||||
|
Basic
|
$ | (0.57 | ) | $ | (0.40 | ) | ||
|
Diluted
|
(0.57 | ) | (0.40 | ) | ||||
The weighted average shares outstanding for the three months
ended July 31, 2011 decreased to 305.5 million from
319.7 million for the three months ended July 31, 2010
primarily due to share repurchases completed in the prior year.
During the three months ended July 31, 2010, we purchased
and immediately retired 15.5 million shares of our common
stock at a cost of $235.7 million.
During the three months ended July 31, 2011 and 2010, we
issued 0.5 million and 0.9 million shares of common
stock, respectively, due to the exercise of stock options,
employee stock purchases and vesting of nonvested shares.
During the three months ended July 31, 2011, we acquired
0.1 million shares of our common stock at an aggregate cost
of $2.0 million, and during the three months ended
July 31, 2010, we acquired 0.2 million shares at an
aggregate cost of $3.4 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 three months ended July 31, 2011, we granted
2.3 million stock options and 0.9 million nonvested
shares and units in accordance with our stock-based compensation
plans. The weighted average fair value of options granted was
$3.37 for management options. These awards vest over a three
year period with one-third vesting each year. Stock-based
compensation expense of our continuing operations totaled
$4.1 million and $3.4 million for the three months
ended July 31, 2011 and 2010, respectively. At
July 31, 2011, unrecognized compensation cost for options
totaled $9.6 million, and for nonvested shares and units
totaled $22.5 million.
5
Table of Contents
| 4. | Receivables |
Our short-term receivables consist of the following:
| (in 000s) | ||||||||
| As of | July 31, 2011 | April 30, 2011 | ||||||
|
Business Services receivables
|
$ | 224,631 | $ | 281,847 | ||||
|
Loans to franchisees
|
62,313 | 62,181 | ||||||
|
Receivables for tax preparation and related fees
|
36,203 | 38,930 | ||||||
|
Emerald Advance lines of credit
|
30,699 | 31,645 | ||||||
|
Royalties from franchisees
|
707 | 11,645 | ||||||
|
Tax client receivables related to RALs
|
1,971 | 2,412 | ||||||
|
Other
|
40,446 | 131,096 | ||||||
| 396,970 | 559,756 | |||||||
|
Allowance for doubtful accounts
|
(67,582 | ) | (67,466 | ) | ||||
| $ | 329,388 | $ | 492,290 | |||||
The short-term portion of Emerald Advance lines of credit (EAs),
tax client receivables related to refund anticipation loans
(RALs) and loans made to franchisees is included in receivables,
while the long-term portion is included in other assets in the
condensed consolidated financial statements. These amounts are
as follows:
| (in 000s) | ||||||||||||
|
Emerald Advance
|
Tax Client
|
Loans
|
||||||||||
| Lines of Credit | Receivables - RALs | to Franchisees | ||||||||||
|
As of July 31, 2011:
|
||||||||||||
|
Short-term
|
$ | 30,699 | $ | 1,971 | $ | 62,313 | ||||||
|
Long-term
|
18,539 | 5,271 | 123,962 | |||||||||
| $ | 49,238 | $ | 7,242 | $ | 186,275 | |||||||
|
As of April 30, 2011:
|
||||||||||||
|
Short-term
|
$ | 31,645 | $ | 2,412 | $ | 62,181 | ||||||
|
Long-term
|
21,619 | 5,855 | 110,420 | |||||||||
| $ | 53,264 | $ | 8,267 | $ | 172,601 | |||||||
We review the credit quality of our EA receivables and tax
client receivables related to RALs based on pools, which are
segregated by the year of origination, with older years being
deemed more unlikely to be repaid. These amounts as of
July 31, 2011, by year of origination, are as follows:
| (in 000s) | ||||||||
|
Emerald Advance
|
Tax Client
|
|||||||
| Lines of Credit | Receivables - RALs | |||||||
|
Credit Quality Indicator – Year of origination:
|
||||||||
|
2011
|
$ | 25,738 | $ | - | ||||
|
2010
|
5,006 | 86 | ||||||
|
2009
|
4,953 | 2,124 | ||||||
|
2008 and prior
|
2,082 | 5,032 | ||||||
|
Revolving loans
|
11,459 | - | ||||||
| $ | 49,238 | $ | 7,242 | |||||
As of July 31, 2011 and April 30, 2011,
$44.6 million and $46.8 million, respectively, of EAs
were on non-accrual status and classified as impaired, or more
than 60 days past due. All tax client receivables related
to RALs are considered impaired.
Loans made to franchisees totaled $186.3 million at
July 31, 2011, and consisted of $140.0 million in term
loans made to finance the purchase of franchises and
$46.3 million in revolving lines of credit made to existing
franchisees primarily for the purpose of funding their
off-season needs.
6
Table of Contents
Our allowance for doubtful accounts consists of the following:
| (in 000s) | ||||||||
| As of | July 31, 2011 | April 30, 2011 | ||||||
|
Allowance related to:
|
||||||||
|
Emerald Advance lines of credit
|
$ | 5,350 | $ | 4,400 | ||||
|
Tax client receivables related to RALs
|
- | - | ||||||
|
Loans to franchisees
|
- | - | ||||||
|
All other receivables
|
62,232 | 63,066 | ||||||
| $ | 67,582 | $ | 67,466 | |||||
Activity in the allowance for doubtful accounts for the three
months ended July 31, 2011 and 2010 is as follows:
| (in 000s) | ||||||||||||||||||||
|
Emerald Advance
|
Tax Client
|
Loans
|
All
|
|||||||||||||||||
| Lines of Credit | Receivables - RALs | to Franchisees | Other | Total | ||||||||||||||||
|
Balance as of April 30, 2011
|
$ | 4,400 | $ | - | $ | - | $ | 63,066 | $ | 67,466 | ||||||||||
|
Provision
|
950 | - | - | 1,955 | 2,905 | |||||||||||||||
|
Recoveries
|
- | - | - | 51 | 51 | |||||||||||||||
|
Charge-offs
|
- | - | - | (2,840 | ) | (2,840 | ) | |||||||||||||
|
Balance as of July 31, 2011
|
$ | 5,350 | $ | - | $ | - | $ | 62,232 | $ | 67,582 | ||||||||||
|
Balance as of April 30, 2010
|
$ | 35,239 | $ | 12,191 | $ | 4 | $ | 65,041 | $ | 112,475 | ||||||||||
|
Provision
|
710 | 2 | - | 1,078 | 1,790 | |||||||||||||||
|
Recoveries
|
- | - | - | 128 | 128 | |||||||||||||||
|
Charge-offs
|
- | - | (4 | ) | (2,015 | ) | (2,019 | ) | ||||||||||||
|
Balance as of July 31, 2010
|
$ | 35,949 | $ | 12,193 | $ | - | $ | 64,232 | $ | 112,374 | ||||||||||
There were no changes to our methodology related to the
calculation of our allowance for doubtful accounts during the
three months ended July 31, 2011.
| 5. | Mortgage Loans Held for Investment and Related Assets |
The composition of our mortgage loan portfolio as of
July 31, 2011 and April 30, 2011 is as follows:
| (dollars in 000s) | ||||||||||||||||
| July 31, 2011 | April 30, 2011 | |||||||||||||||
| As of | Amount | % of Total | Amount | % of Total | ||||||||||||
|
Adjustable-rate loans
|
$ | 320,539 | 58 | % | $ | 333,828 | 58 | % | ||||||||
|
Fixed-rate loans
|
233,452 | 42 | % | 239,146 | 42 | % | ||||||||||
| 553,991 | 100 | % | 572,974 | 100 | % | |||||||||||
|
Unamortized deferred fees and costs
|
3,975 | 4,121 | ||||||||||||||
|
Less: Allowance for loan losses
|
(91,303 | ) | (92,087 | ) | ||||||||||||
| $ | 466,663 | $ | 485,008 | |||||||||||||
Our loan loss allowance as a percent of mortgage loans was 16.5%
at July 31, 2011, compared to 16.1% at April 30, 2011.
Activity in the allowance for loan losses for the three months
ended July 31, 2011 and 2010 is as follows:
| (in 000s) | ||||||||||
| Three Months Ended July 31, | 2011 | 2010 | ||||||||
|
Balance, beginning of the period
|
$ | 92,087 | $ | 93,535 | ||||||
|
Provision
|
5,625 | 8,000 | ||||||||
|
Recoveries
|
49 | 33 | ||||||||
|
Charge-offs
|
(6,458 | ) | (13,172 | ) | ||||||
|
Balance, end of the period
|
$ | 91,303 | $ | 88,396 | ||||||
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, including those loans more than
60 days past due or
7
Table of Contents
modified as troubled debt restructurings (TDRs), are evaluated
individually. The balance of these loans and the related
allowance is as follows:
| (in 000s) | ||||||||||||||||
| July 31, 2011 | April 30, 2011 | |||||||||||||||
| As of | Portfolio Balance | Related Allowance | Portfolio Balance | Related Allowance | ||||||||||||
|
Pooled (less than 60 days past due)
|
$ | 290,762 | $ | 10,914 | $ | 304,325 | $ | 11,238 | ||||||||
|
Impaired:
|
||||||||||||||||
|
Individually (TDRs)
|
95,417 | 9,499 | 106,328 | 11,056 | ||||||||||||
|
Individually (60 days or more past due)
|
167,812 | 70,890 | 162,321 | 69,793 | ||||||||||||
| $ | 553,991 | $ | 91,303 | $ | 572,974 | $ | 92,087 | |||||||||
Our portfolio includes loans originated by Sand Canyon
Corporation (SCC) and purchased by H&R Block Bank (HRB
Bank) which constitute 63% of the total loan portfolio at
July 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 $207.3 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 July 31, 2011 is as follows:
| (dollars in 000s) | ||||||||||||||||
|
Outstanding
|
Loan Loss Allowance |
% 30+ Days
|
||||||||||||||
| Principal Balance | Amount | % of Principal | Past Due | |||||||||||||
|
Purchased from SCC
|
$ | 346,695 | $ | 80,640 | 23.3 | % | 44.8 | % | ||||||||
|
All other
|
207,296 | 10,663 | 5.1 | % | 12.4 | % | ||||||||||
| $ | 553,991 | $ | 91,303 | 16.5 | % | 32.7 | % | |||||||||
Credit quality indicators at July 31, 2011 include the
following:
| (in 000s) | ||||||||||||
| Credit Quality Indicators | Purchased from SCC | All Other | Total Portfolio | |||||||||
|
Occupancy status:
|
||||||||||||
|
Owner occupied
|
$ | 244,259 | $ | 132,132 | $ | 376,391 | ||||||
|
Non-owner occupied
|
102,436 | 75,164 | 177,600 | |||||||||
| $ | 346,695 | $ | 207,296 | $ | 553,991 | |||||||
|
Documentation level:
|
||||||||||||
|
Full documentation
|
$ | 105,547 | $ | 150,972 | $ | 256,519 | ||||||
|
Limited documentation
|
10,447 | 22,411 | 32,858 | |||||||||
|
Stated income
|
198,898 | 21,168 | 220,066 | |||||||||
|
No documentation
|
31,803 | 12,745 | 44,548 | |||||||||
| $ | 346,695 | $ | 207,296 | $ | 553,991 | |||||||
|
Internal risk rating:
|
||||||||||||
|
High
|
$ | 143,931 | $ | 357 | $ | 144,288 | ||||||
|
Medium
|
202,764 | - | 202,764 | |||||||||
|
Low
|
- | 206,939 | 206,939 | |||||||||
| $ | 346,695 | $ | 207,296 | $ | 553,991 | |||||||
Loans given our internal risk rating of “high” are
generally originated by SCC, have no documentation or are stated
income and are non-owner occupied. Loans given our internal risk
rating of “medium” are generally full documentation or
stated income, with
loan-to-value
at origination of more than 80% and have credit scores at
origination below 700. Loans given our internal risk rating of
“low” are generally full documentation, with
loan-to-value
at origination of less than 80% and have credit scores greater
than 700.
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 52% of our
8
Table of Contents
mortgage loan portfolio consists of loans to borrowers located
in the states of Florida, California and New York.
Detail of the aging of the mortgage loans in our portfolio that
are past due as of July 31, 2011 is as follows:
| (in 000s) | ||||||||||||||||||||||||
|
Less than 60
|
60-89 Days
|
90+Days
|
Total
|
|||||||||||||||||||||
| Days Past Due | Past Due | Past Due (1) | Past Due | Current | Total | |||||||||||||||||||
|
Purchased from SCC
|
$ | 35,960 | $ | 8,886 | $ | 133,767 | $ | 178,613 | $ | 168,082 | $ | 346,695 | ||||||||||||
|
All other
|
10,470 | 1,735 | 20,479 | 32,684 | 174,612 | 207,296 | ||||||||||||||||||
| $ | 46,430 | $ | 10,621 | $ | 154,246 | $ | 211,297 | $ | 342,694 | $ | 553,991 | |||||||||||||
| (1) | No loans past due 90 days or more are still accruing interest. |
Information related to our non-accrual loans is as follows:
| (in 000s) | ||||||||
|
July 31,
|
||||||||
| As of | 2011 | April 30, 2011 | ||||||
|
Loans:
|
||||||||
|
Purchased from SCC
|
$ | 138,277 | $ | 143,358 | ||||
|
Other
|
22,964 | 14,106 | ||||||
| 161,241 | 157,464 | |||||||
|
TDRs:
|
||||||||
|
Purchased from SCC
|
3,767 | 2,849 | ||||||
|
Other
|
178 | 329 | ||||||
| 3,945 | 3,178 | |||||||
|
Total non-accrual loans
|
$ | 165,186 | $ | 160,642 | ||||
Information related to impaired loans is as follows:
| (in 000s) | ||||||||||||||||
|
Portfolio Balance
|
Portfolio Balance
|
Total
|
||||||||||||||
| With Allowance | With No Allowance | Portfolio Balance | Related Allowance | |||||||||||||
|
As of July 31, 2011:
|
||||||||||||||||
|
Purchased from SCC
|
$ | 180,494 | $ | 47,081 | $ | 227,575 | $ | 70,964 | ||||||||
|
Other
|
27,954 | 7,700 | 35,654 | 9,425 | ||||||||||||
| $ | 208,448 | $ | 54,781 | $ | 263,229 | $ | 80,389 | |||||||||
|
As of April 30, 2011:
|
||||||||||||||||
|
Purchased from SCC
(1)
|
$ | 180,387 | $ | 51,674 | $ | 232,061 | $ | 71,733 | ||||||||
|
Other
(1)
|
29,027 | 7,561 | 36,588 | 9,116 | ||||||||||||
| $ | 209,414 | $ | 59,235 | $ | 268,649 | $ | 80,849 | |||||||||
| (1) | Classification of amounts as of April 30, 2011 have been restated to conform to the current period presentation. |
Information related to the allowance for impaired loans is as
follows:
| (in 000s) | ||||||||
| As of | July 31, 2011 | April 30, 2011 | ||||||
|
Portion of total allowance for loan losses allocated to impaired
loans and TDR loans:
|
||||||||
|
Based on collateral value method
|
$ | 70,890 | $ | 69,794 | ||||
|
Based on discounted cash flow method
|
9,499 | 11,055 | ||||||
| $ | 80,389 | $ | 80,849 | |||||
9
Table of Contents
Information related to activities of our non-performing assets
is as follows:
| (in 000s) | ||||||||
| Three Months Ended July 31, | 2011 | 2010 | ||||||
|
Average impaired loans:
|
||||||||
|
Purchased from SCC
|
$ | 230,150 | ||||||
|
All other
|
36,477 | |||||||
| $ | 266,627 | $ | 303,767 | |||||
|
Interest income on impaired loans:
|
||||||||
|
Purchased from SCC
|
$ | 1,556 | ||||||
|
All other
|
119 | |||||||
| $ | 1,675 | $ | 1,749 | |||||
|
Interest income on impaired loans recognized on a cash basis on
non-accrual status:
|
||||||||
|
Purchased from SCC
|
$ | 1,498 | ||||||
|
All other
|
114 | |||||||
| $ | 1,612 | $ | 1,636 | |||||
Our real estate owned includes loans accounted for as
in-substance foreclosures of $7.2 million and
$7.7 million at July 31, 2011 and April 30, 2011,
respectively. Activity related to our real estate owned is as
follows:
| (in 000s) | ||||||||
| Three Months Ended July 31, | 2011 | 2010 | ||||||
|
Balance, beginning of the period
|
$ | 19,532 | $ | 29,252 | ||||
|
Additions
|
1,573 | 6,527 | ||||||
|
Sales
|
(3,722 | ) | (8,827 | ) | ||||
|
Writedowns
|
(793 | ) | (643 | ) | ||||
|
Balance, end of the period
|
$ | 16,590 | $ | 26,309 | ||||
| 6. | Assets and Liabilities Measured at Fair Value |
We use the following valuation methodologies for assets and
liabilities measured at fair value and the general
classification of these instruments pursuant to the fair value
hierarchy.
| • | Available-for-sale securities – Available-for-sale securities are carried at fair value on a recurring basis. When available, fair value is based on quoted prices in an active market and as such, would be classified as Level 1. If quoted market prices are not available, we use a third-party pricing service to determine fair value and classify the securities as Level 2. The service’s pricing model is based on market data and utilizes available trade, bid and other market information. Available-for-sale securities that we classify as Level 2 include certain agency and non-agency mortgage-backed securities, U.S. states and political subdivisions debt securities and other debt and equity securities. | |
| • | Real estate owned – REO includes foreclosed properties securing mortgage loans. Foreclosed assets are adjusted to fair value less costs to sell upon transfer of the loans to REO. Fair value is generally based on independent market prices or appraised values of the collateral. Subsequent holding period losses and losses arising from the sale of REO are expensed as incurred. Because our REO is valued based on significant inputs that are unobservable in the market and our own estimates of assumptions that we believe market participants would use in pricing the asset, these assets are classified as Level 3. | |
| • | Impaired mortgage loans held for investment – The fair value of impaired mortgage loans held for investment is generally based on the net present value of discounted cash flows for TDR loans or the appraised value of the underlying collateral for all other loans. These loans are classified as Level 3. |
10
Table of Contents
The following table presents for each hierarchy level the assets
that were remeasured at fair value on both a recurring and
non-recurring basis during the three months ended July 31,
2011 and 2010 and the gains (losses) on those remeasurements:
| (dollars in 000s) | ||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Gain (loss) | ||||||||||||||||
|
As of July 31, 2011:
|
||||||||||||||||||||
|
Recurring:
|
||||||||||||||||||||
|
Mortgage-backed securities
|
$ | 192,491 | $ | - | $ | 192,491 | $ | - | $ | 1,936 | ||||||||||
|
Municipal bonds
|
7,758 | - | 7,758 | - | 449 | |||||||||||||||
|
Non-recurring:
|
||||||||||||||||||||
|
REO
|
3,446 | - | - | 3,446 | (482) | |||||||||||||||
|
Impaired mortgage loans held for investment
|
61,997 | - | - | 61,997 | (1,473) | |||||||||||||||
| $ | 265,692 | $ | - | $ | 200,249 | $ | 65,443 | $ | 430 | |||||||||||
|
As a percentage of total assets
|
6.2% | -% | 4.7% | 1.5% | ||||||||||||||||
|
As of July 31,
2010:
(1)
|
||||||||||||||||||||
|
Recurring:
|
||||||||||||||||||||
|
Mortgage-backed securities
|
$ | 21,893 | $ | - | $ | 21,893 | $ | - | $ | (20) | ||||||||||
|
Municipal bonds
|
8,981 | - | 8,981 | - | 566 | |||||||||||||||
|
Trust preferred security
|
32 | - | 32 | - | (1,618) | |||||||||||||||
|
Non-recurring:
|
||||||||||||||||||||
|
REO
|
3,321 | - | - | 3,321 | (589) | |||||||||||||||
|
Impaired mortgage loans held for investment
|
69,467 | - | - | 69,467 | (2,227) | |||||||||||||||
| $ | 103,694 | $ | - | $ | 30,906 | $ | 72,788 | $ | (3,888) | |||||||||||
|
As a percentage of total assets
|
2.3% | -% | 0.7% | 1.6% | ||||||||||||||||
| (1) | Amounts have been restated to conform to the current period presentation. |
There were no changes to the unobservable inputs used in
determining the fair values of our level 2 and level 3
financial assets.
The following methods were used to determine the fair values of
our other financial instruments:
| • | Cash equivalents, accounts receivable, investment in FHLB stock, accounts payable, accrued liabilities, commercial paper borrowings and the current portion of long-term debt – The carrying values reported in the balance sheet for these items approximate fair market value due to the relative short-term nature of the respective instruments. | |
| • | Mortgage loans held for investment – The fair value of mortgage loans held for investment is generally determined using market pricing sources based on origination channel and performance characteristics. | |
| • | Deposits – The estimated fair value of demand deposits is the amount payable on demand at the reporting date. The estimated fair value of IRAs and other time deposits is estimated by discounting the future cash flows using the rates currently offered by HRB Bank for products with similar remaining maturities. | |
| • | Long-term borrowings and FHLB borrowings – The fair value of borrowings is based on rates currently available to us for obligations with similar terms and maturities, including current market yields on our Senior Notes. |
The carrying amounts and estimated fair values of our financial
instruments at July 31, 2011 are as follows:
(in
000s)
|
Carrying
|
Estimated
|
|||||||||
| Amount | Fair Value | |||||||||
|
Mortgage loans held for investment
|
$ | 466,663 | $ | 282,546 | ||||||
|
Deposits
|
678,071 | 678,352 | ||||||||
|
Long-term borrowings
|
1,050,371 | 1,105,686 | ||||||||
|
FHLB advances
|
25,000 | 24,998 | ||||||||
11
Table of Contents
| 7. | Goodwill and Intangible Assets |
Changes in the carrying amount of goodwill for the three months
ended July 31, 2011 consist of the following:
| (in 000s) | ||||||||||||
| Tax Services | Business Services | Total | ||||||||||
|
Balance at April 30, 2011:
|
||||||||||||
|
Goodwill
|
$ | 459,039 | $ | 427,094 | $ | 886,133 | ||||||
|
Accumulated impairment losses
|
(24,888 | ) | (15,000 | ) | (39,888 | ) | ||||||
| 434,151 | 412,094 | 846,245 | ||||||||||
|
Changes:
|
||||||||||||
|
Acquisitions
|
3,478 | 34 | 3,512 | |||||||||
|
Disposals and foreign currency changes
|
112 | (7,561 | ) | (7,449 | ) | |||||||
|
Impairments
|
- | (99,697 | ) | (99,697 | ) | |||||||
|
Balance at July 31, 2011:
|
||||||||||||
|
Goodwill
|
462,629 | 419,567 | 882,196 | |||||||||
|
Accumulated impairment losses
|
(24,888 | ) | (114,697 | ) | (139,585 | ) | ||||||
| $ | 437,741 | $ | 304,870 | $ | 742,611 | |||||||
We test goodwill and other indefinite-life intangible assets for
impairment annually or more frequently if events occur or
circumstances change which would, more likely than not, reduce
the fair value of a reporting unit below its carrying value. In
August 2011, our Board of Directors approved a non-binding
letter of intent to sell substantially all assets of RSM to
M&P. The sale is dependent on, among other factors, the
ability of M&P to raise financing for the purchase. In
conjunction with this sale, we are also evaluating strategic
alternatives for EquiCo. Both of these businesses are separate
reporting units within the Business Services segment.
These decisions triggered an interim review of the goodwill for
our RSM and EquiCo reporting units. The fair values of both
reporting units were reviewed based on expected sale prices in
the market compared to book value. As a result of that review,
we recorded a goodwill impairment of $85.4 million related
to our RSM reporting unit, leaving a remaining goodwill balance
of approximately $304.9 million. We have also recorded a
goodwill impairment of $14.3 million related to our EquiCo
reporting unit, leaving no remaining goodwill balance.
Intangible assets consist of the following:
| (in 000s) | ||||||||||||||||||||||||
| As of | July 31, 2011 | April 30, 2011 | ||||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Accumulated
|
|||||||||||||||||||||
| Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
|
Tax Services:
|
||||||||||||||||||||||||
|
Customer relationships
|
$ | 86,678 | $ | (43,031 | ) | $ | 43,647 | $ | 87,624 | $ | (41,076 | ) | $ | 46,548 | ||||||||||
|
Noncompete agreements
|
23,451 | (22,278 | ) | 1,173 | 23,456 | (22,059 | ) | 1,397 | ||||||||||||||||
|
Reacquired franchise rights
|
214,330 | (10,991 | ) | 203,339 | 214,330 | (9,961 | ) | 204,369 | ||||||||||||||||
|
Franchise agreements
|
19,201 | (3,414 | ) | 15,787 | 19,201 | (3,093 | ) | 16,108 | ||||||||||||||||
|
Purchased technology
|
14,700 | (9,070 | ) | 5,630 | 14,700 | (8,505 | ) | 6,195 | ||||||||||||||||
|
Trade name
|
1,325 | (650 | ) | 675 | 1,325 | (600 | ) | 725 | ||||||||||||||||
|
Business Services:
|
||||||||||||||||||||||||
|
Customer relationships
|
147,208 | (125,848 | ) | 21,360 | 152,079 | (128,738 | ) | 23,341 | ||||||||||||||||
|
Noncompete agreements
|
35,551 | (25,101 | ) | 10,450 | 35,818 | (24,662 | ) | 11,156 | ||||||||||||||||
|
Attest firm affiliation
|
7,629 | (424 | ) | 7,205 | 7,629 | (318 | ) | 7,311 | ||||||||||||||||
|
Trade name –
amortizing
|
2,600 | (2,600 | ) | - | 2,600 | (2,600 | ) | - | ||||||||||||||||
|
Trade name –
non-amortizing
|
55,637 | (4,868 | ) | 50,769 | 55,637 | (4,868 | ) | 50,769 | ||||||||||||||||
| $ | 608,310 | $ | (248,275 | ) | $ | 360,035 | $ | 614,399 | $ | (246,480 | ) | $ | 367,919 | |||||||||||
Amortization of intangible assets for the three months ended
July 31, 2011 and 2010 was $7.7 and $6.9 million
respectively. Estimated amortization of intangible assets for
fiscal years 2012 through 2016 is $27.1 million,
$22.7 million, $19.2 million, $14.4 million and
$13.0 million, respectively.
12
Table of Contents
In connection with a prior acquisition, we have 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
$5.3 million at July 31, 2011.
| 8. | 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 2009 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 three months ended July 31, 2011, we reduced our
gross interest and penalties accrued by $3.1 million
related to our uncertain tax positions due to statute of
limitations expirations and settlements made with various taxing
authorities. We had gross unrecognized tax benefits of
$145.5 million and $154.8 million at July 31,
2011 and April 30, 2011, respectively. The gross
unrecognized tax benefits decreased $9.3 million net in the
current year, due to statute of limitations expirations and
settlements with taxing authorities, partially offset by
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 July 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
$16.9 million within twelve months of July 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.
| 9. | Interest Income and Expense |
The following table shows the components of interest income and
expense of our continuing operations:
| (in 000s) | ||||||||
| Three Months Ended July 31, | 2011 | 2010 | ||||||
|
Interest income:
|
||||||||
|
Mortgage loans, net
|
$ | 5,661 | $ | 6,323 | ||||
|
Other
|
4,772 | 3,979 | ||||||
| $ | 10,433 | $ | 10,302 | |||||
|
Interest expense:
|
||||||||
|
Borrowings
|
$ | 21,494 | $ | 20,643 | ||||
|
Deposits
|
1,656 | 1,923 | ||||||
|
FHLB advances
|
151 | 396 | ||||||
| $ | 23,301 | $ | 22,962 | |||||
| 10. | Regulatory Requirements |
HRB Bank files its regulatory Thrift Financial Report (TFR) on a
calendar quarter basis with the Office of Thrift Supervision
(OTS). In July 2011, as a result of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the Reform Act), the
responsibility and authority of the OTS moved to the Office of
the Comptroller of the Currency (OCC). HRB Bank will continue to
file TFR reports with the OCC through December 31, 2011.
Beginning March 31, 2012, HRB Bank will file Reports of
Condition and Income (Call Report) with the OCC quarterly.
13
Table of Contents
The following table sets forth HRB Bank’s regulatory
capital requirements, as calculated in its TFR:
| (dollars in 000s) | ||||||||||||||||||
|
To Be Well
|
||||||||||||||||||
|
Capitalized
|
||||||||||||||||||
|
Under Prompt
|
||||||||||||||||||
|
For Capital
Adequacy
|
Corrective
|
|||||||||||||||||
| Actual | Purposes | Action Provisions | ||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
|
As of June 30, 2011:
|
||||||||||||||||||
|
Total risk-based capital ratio
(1)
|
$ | 411,062 | 94.5% | $ | 34,813 | 8.0% | $ | 43,516 | 10.0% | |||||||||
|
Tier 1 risk-based capital ratio
(2)
|
$ | 405,333 | 93.1% | N/A | N/A | $ | 26,110 | 6.0% | ||||||||||
|
Tier 1 capital ratio (leverage)
(3)
|
$ | 405,333 | 35.0% | $ | 139,141 | 12.0% | $ | 57,975 | 5.0% | |||||||||
|
Tangible equity ratio
(4)
|
$ | 405,333 | 35.0% | $ | 17,393 | 1.5% | N/A | N/A | ||||||||||
|
As of March 31, 2011:
|
||||||||||||||||||
|
Total risk-based capital ratio
(1)
|
$ | 405,000 | 92.5% | $ | 35,019 | 8.0% | $ | 43,773 | 10.0% | |||||||||
|
Tier 1 risk-based capital ratio
(2)
|
$ | 399,187 | 91.2% | N/A | N/A | $ | 26,264 | 6.0% | ||||||||||
|
Tier 1 capital ratio (leverage)
(3)
|
$ | 399,187 | 22.8% | $ | 209,758 | 12.0% | $ | 87,399 | 5.0% | |||||||||
|
Tangible equity ratio
(4)
|
$ | 399,187 | 22.8% | $ | 26,220 | 1.5% | N/A | N/A | ||||||||||
| (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 July 31, 2011, HRB Bank’s leverage ratio was
35.3%.
| 11. | 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) | ||||||||
| Three Months Ended July 31, | 2011 | 2010 | ||||||
|
Balance, beginning of period
|
$ | 140,603 | $ | 141,542 | ||||
|
Amounts deferred for new guarantees issued
|
553 | 654 | ||||||
|
Revenue recognized on previous deferrals
|
(27,181) | (28,547) | ||||||
|
Balance, end of period
|
$ | 113,975 | $ | 113,649 | ||||
In addition to amounts accrued for our POM guarantee, we had
accrued $13.0 million and $14.7 million at
July 31, 2011 and April 30, 2011, 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 | July 31, 2011 | April 30, 2011 | ||||
|
Franchise Equity Lines of Credit –
undrawn
commitment
|
$ | 38,319 | $ | 37,695 | ||
|
Media advertising purchase obligation
|
9,690 | 9,498 | ||||
We have various contingent purchase price obligations for
acquisitions prior to May 2009. In many cases, contingent
payments to be made in connection with these acquisitions are
not subject to a stated limit. We estimate the potential
payments (undiscounted) for which we have not recorded a
liability totaling $1.4 million and $3.8 million as of
July 31, 2011 and April 30, 2011, respectively. We
have recorded liabilities totaling $10.2 million and
$11.0 million as of July 31, 2011 and April 30,
2011, respectively, in conjunction with contingent payments
related to more recent acquisitions, with the short-term amount
recorded in accounts payable, accrued expenses and deposits and
the long-term portion included in other noncurrent liabilities.
Our estimate is based on current financial conditions. Should
actual results differ materially from our assumptions, the
potential payments will differ from the above estimate.
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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 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 July 31, 2011.
Variable Interests
We evaluated our financial interests in variable interest
entities (VIEs) as of July 31, 2011 and determined that
there have been no significant changes related to those
financial interests. As of July 31, 2011, we believe
RSM’s maximum exposure to economic loss related to their
shared office space with McGladrey & Pullen, LLP from
operating leases under the administrative services agreement
totaled $95.2 million.
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 are as follows:
| (in millions) | |||||||||||||||||||||||||||||||||
| Fiscal Year | Fiscal Year 2010 | Fiscal Year 2011 | Fiscal Year 2012 | ||||||||||||||||||||||||||||||
| 2009 | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Q1 | Total | |||||||||||||||||||||||
|
Loan Origination Year:
|
|||||||||||||||||||||||||||||||||
|
2005
|
$ | 62 | $ | - | $ | 15 | $ | - | $ | - | $ | 6 | $ | 1 | $ | - | $ | 1 | $ | - | $ | 85 | |||||||||||
|
2006
|
217 | 2 | 57 | 4 | 45 | 100 | 15 | 29 | 50 | 29 | 548 | ||||||||||||||||||||||
|
2007
|
153 | 4 | 11 | 7 | - | 3 | 5 | 4 | 4 | 2 | 193 | ||||||||||||||||||||||
|
Total
|
$ | 432 | $ | 6 | $ | 83 | $ | 11 | $ | 45 | $ | 109 | $ | 21 | $ | 33 | $ | 55 | $ | 31 | $ | 826 | |||||||||||
Note: The table
above excludes amounts related to an indemnity agreement dated
April 2008, which is discussed below.
For claims received, reviewed and determined to be valid, SCC
has complied with its obligations by either repurchasing the
mortgage loans or REO properties, providing for the
reimbursement of losses in connection with liquidated REO
properties, or reaching other settlements. SCC has denied
approximately 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 22% resulted in loan
15
Table of Contents
repurchases, and 78% resulted in indemnification or settlement
payments. Losses on loan repurchase, indemnification and
settlement payments totaled approximately $117 million for
the period May 1, 2008 through July 31, 2011. Loss
severity rates on repurchases and indemnification have
approximated 57% and SCC has not observed any material trends
related to average losses. Repurchased loans are considered held
for sale and are included in prepaid expenses and other current
assets on the condensed consolidated balance sheets. The net
balance of all mortgage loans held for sale by SCC was
$11.9 million at July 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 $66 million, which remained subject
to review as of July 31, 2011. Of the claims still subject
to review, approximately $52 million are from private-label
securitizations, and $14 million are from monoline
insurers. Approximately $8 million of claims under review
represent requests by the counterparty for additional
information related to denied claims, or are a reassertion of
previously denied claims.
All claims asserted against SCC since May 1, 2008 relate to
loans originated during calendar years 2005 through 2007, of
which, approximately 89% relate to loans originated in calendar
years 2006 and 2007. During calendar year 2005 through 2007, SCC
originated approximately $84 billion in loans, of which
less than 1% were sold to government sponsored entities. SCC is
not subject to loss on loans that have been paid in full,
repurchased, or were sold without recourse.
The majority of claims asserted since May 1, 2008, which
have been determined by SCC to represent a valid breach of its
representations and warranties, relate to loans that became
delinquent within the first two years following the origination
of the mortgage loan. SCC believes the longer a loan performs
prior to an event of default, the less likely the default will
be related to a breach of a representation and warranty. The
balance of loans originated in 2005, 2006 and 2007 which
defaulted in the first two years is $4.0 billion,
$6.3 billion and $2.9 billion, respectively, at
July 31, 2011.
SCC has recorded a liability for estimated contingent losses
related to representation and warranty claims as of
July 31, 2011, of $125.8 million, which represents
SCC’s best estimate of the probable loss that may occur.
During the prior year, payments totaling $49.8 million were
made under an indemnity agreement dated April 2008 with a
specific counterparty in exchange for a full and complete
release of such party’s ability to assert representation
and warranty claims. The indemnity agreement was given as part
of obtaining the counterparty’s consent to SCC’s sale
of its mortgage servicing business in 2008. We have no remaining
payment obligations under this indemnity agreement.
The recorded liability represents SCC’s estimate of losses
from future claims where assertion of a claim and a related
contingent loss are both deemed probable. Because the rate at
which future claims may be deemed valid and actual loss severity
rates may differ significantly from historical experience, SCC
is not able to estimate reasonably possible loss outcomes in
excess of its current accrual. A 1% increase in both assumed
validity rates and loss severities would result in losses beyond
SCC’s accrual of approximately $16 million. This
sensitivity is hypothetical and is intended to provide an
indication of the impact of a change in key assumptions on the
representations and warranties liability. In reality, changes in
one assumption may result in changes in other assumptions, which
may or may not counteract the sensitivity.
While SCC uses the best information available to it in
estimating its liability, assessing the likelihood that claims
will be asserted in the future and estimating probable losses
are inherently difficult to estimate and require considerable
management judgment. Although net losses on settled claims since
May 1, 2008 have been within initial loss estimates, to the
extent that the volume of asserted claims, the level of valid
claims, the counterparties asserting claims, the nature of
claims, or the value of residential home prices differ in the
future from current estimates, future losses may be greater than
the current estimates and those differences may be significant.
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A rollforward of our liability for losses on repurchases for the
three months ended July 31, 2011 and 2010 is as follows:
| (in 000s) | ||||||||
| Three Months Ended July 31, | 2011 | 2010 | ||||||
|
Balance at beginning of period:
|
||||||||
|
Amount related to repurchase and indemnifications
|
$ | 126,260 | $ | 138,415 | ||||
|
Amount related to indemnity agreement dated April 2008
|
– | 49,785 | ||||||
| 126,260 | 188,200 | |||||||
|
Changes:
|
||||||||
|
Provisions
|
– | – | ||||||
|
Losses on repurchase and indemnifications
|
(485) | – | ||||||
|
Payments under indemnity agreement dated April 2008
|
– | (70) | ||||||
|
Balance at end of period:
|
||||||||
|
Amount related to repurchase and indemnifications
|
125,775 | 138,415 | ||||||
|
Amount related to indemnity agreement dated April 2008
|
– | 49,715 | ||||||
| $ | 125,775 | $ | 188,130 | |||||
| 12. | 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 $86.3 million and
$70.6 million at July 31, 2011 and April 30,
2011, 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.
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 SCC’s mortgage business activities
that occurred prior to such termination and sale. These
investigations, claims and lawsuits include actions by state and
federal regulators, municipalities, third party indemnitees,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others alleged to be similarly situated.
Among other things, these investigations, claims and lawsuits
allege discriminatory or unfair and deceptive loan origination
and servicing practices, fraud, rights to indemnification, and
violations of securities laws, the Truth in Lending Act, Equal
Credit Opportunity Act and the Fair Housing Act. Given the
non-prime mortgage environment, the number of these
investigations, claims and lawsuits has increased over
historical experience and is likely to continue to increase. 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 be paid in the discharge of liabilities
or settlements could be substantial and could have a material
impact on our consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a
lawsuit in the Superior Court of Suffolk County, Massachusetts
(Case
No. 08-2474-BLS)
styled
Commonwealth of Massachusetts v. H&R Block,
Inc., et al.
, alleging unfair, deceptive and discriminatory
origination and servicing of mortgage loans and seeking
equitable relief, disgorgement of profits, restitution and
statutory penalties. In November 2008, the court granted a
preliminary injunction limiting the ability of the owner of
SCC’s former loan servicing business to initiate or advance
foreclosure actions against certain loans originated by SCC or
its subsidiaries without (1) advance notice to the
Massachusetts Attorney General and (2) if the Attorney
General objects to foreclosure, approval by the court. An appeal
of the preliminary injunction was denied. To avoid the cost and
inherent risk associated with litigation, the parties have
reached an agreement to settle this case. The settlement
requires a cash payment from SCC to the Attorney General of
$9.8 million, in addition to certain loan modification
relief to Massachusetts borrowers estimated at $115 million
in benefits. The agreement also provides for a contingent cash
payment of up to $5 million in the event certain loan
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Table of Contents
modification relief is not available. We have a liability
recorded for our best estimate of the expected loss. 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.
On February 1, 2008, a class action lawsuit was filed in
the United States District Court for the District of
Massachusetts against SCC and other related entities styled
Cecil Barrett, et al. v. Option One Mortgage Corp., et
al.
(Civil Action
No. 08-10157-RWZ).
Plaintiffs allege discriminatory practices relating to the
origination of mortgage loans in violation of the Fair Housing
Act and Equal Credit Opportunity Act, and seek declaratory and
injunctive relief in addition to actual and punitive damages.
The court dismissed H&R Block, Inc. from the lawsuit for
lack of personal jurisdiction. In March 2011, the court issued
an order certifying a class, which defendants sought to appeal.
On August 24, 2011, the First Circuit Court of Appeals
declined to hear the appeal, noting that the district court
could reconsider its certification decision in light of a recent
ruling by the United States Supreme Court in an unrelated
matter. 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
believe we have meritorious defenses to the claims in this case
and intend to defend the case vigorously, but there can be no
assurances as to its outcome or its impact on our consolidated
results of operations.
On December 9, 2009, a putative class action lawsuit was
filed in the United States District Court for the Central
District of California against SCC and H&R Block, Inc.
styled
Jeanne Drake, et al. v. Option One Mortgage
Corp., et al.
(Case
No. SACV09-1450
CJC). Plaintiffs allege breach of contract, promissory fraud,
intentional interference with contractual relations, wrongful
withholding of wages and unfair business practices in connection
with the failure to pay severance benefits to employees when
their employment transitioned to American Home Mortgage
Servicing, Inc. in connection with the sale of certain assets
and operations of Option One. Plaintiffs seek to recover
severance benefits of approximately $8 million, interest
and attorney’s fees, in addition to penalties and punitive
damages on certain claims. Plaintiffs’ motion for class
certification is pending. All parties have filed motions for
summary judgment. The court has set a hearing on all pending
motions on August 29, 2011. 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 we have
meritorious defenses to the claims in this case and intend to
defend the case vigorously, but there can be no assurances 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 Federal Home Loan Bank’s (FHLB’s) purchase of
mortgage-backed securities. Plaintiff asserts claims for
rescission and damages under state securities law and for common
law negligent misrepresentation in connection with its purchase
of two securities originated and securitized by SCC. These two
securities had a total initial principal amount of approximately
$50 million, of which approximately $42 million
remains outstanding. We have not concluded that a loss related
to this matter is probable nor have we established a loss
contingency related to this matter. We believe the claims in
this case are without merit and we intend to defend them
vigorously. There can be no assurances, however, as to its
outcome or its impact on our consolidated results of operations.
Employment-Related
Claims and Litigation
We have been named in several wage and hour class action
lawsuits throughout the country, including
Alice
Williams v. H&R Block Enterprises LLC
, Case
No.RG08366506 (Superior Court of California, County of Alameda,
filed January 17, 2008) (alleging improper classification
of office managers in California);
Arabella Lemus v.
H&R Block Enterprises LLC, et al.,
Case
No. CGC-09-489251
(United States District Court, Northern District of California,
filed June 9, 2009) (alleging failure to timely pay
compensation to tax professionals in California and to include
itemized information on wage statements);
Delana Ugas v.
H&R Block Enterprises LLC, et al.,
Case
No. BC417700 (United States District Court, Central
District of California, filed July 13, 2009) (alleging
failure to compensate tax professionals in California 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-
18
Table of Contents
season training). A class was certified in the
Lemus
case
in December 2010 (consisting of tax professionals who worked in
company-owned offices in California from 2007 to 2010); in the
Williams
case in March 2011 (consisting of office
managers who worked in company-owned offices in California from
2004 to 2011); and in the
Ugas
case in August 2011
(consisting of tax professionals who worked in company-owned
offices in California from 2006 to 2011). A conditional class
was certified in the
Petroski
case in March 2011
(consisting of tax professionals nationwide who worked in
company-owned offices and who were not compensated for certain
training courses occurring on or after April 15, 2007).
The plaintiffs in the wage and hour class action lawsuits seek
actual damages, pre-judgment interest and attorneys’ fees,
in addition to statutory penalties under California and federal
law, which could equal up to 30 days of wages per tax
season for class members who worked in California. A portion of
our loss contingency accrual is related to these lawsuits for
the amount of loss that we consider probable and estimable. For
those wage and hour class action lawsuits for which we are able
to estimate a range of possible loss, the current estimated
range is $0 to $70 million in excess of the accrued
liability related to those matters. This estimated range of
possible loss is based upon currently available information and
is subject to significant judgment and a variety of assumptions
and uncertainties. The matters underlying the estimated range
will change from time to time, and actual results may vary
significantly from the current estimate. Because this estimated
range does not include matters for which an estimate is not
possible, the range does not represent our maximum loss exposure
for the wage and hour class action lawsuits. We believe we have
meritorious defenses to the claims in these lawsuits and intend
to defend them vigorously. The amounts claimed in these matters
are substantial in some instances and the ultimate liability
with respect to these matters is difficult to predict. There can
be no assurances as to the outcome of these cases or their
impact on our consolidated results of operations, individually
or in the aggregate.
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.
19
Table of Contents
Although we sold H&R Block Financial Advisors, Inc. (HRBFA)
effective November 1, 2008, we remain responsible for any
liabilities relating to the Express IRA litigation, among other
things, through an indemnification agreement. A portion of our
accrual is related to these indemnity obligations.
RSM McGladrey
Litigation
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 EquiCo, including allegations of
fraud, conversion and unfair competition. Plaintiffs seek
unspecified actual and punitive damages, in addition to
pre-judgment interest and attorneys’ fees. On
March 17, 2009, the court granted plaintiffs’ motion
for class certification on all claims. To avoid the cost and
inherent risk associated with litigation, the parties reached an
agreement to settle the case, subject to approval by the
California Superior Court. The settlement requires a maximum
payment of $41.5 million, although the actual cost of the
settlement will depend on the number of valid claims submitted
by class members. The California Superior Court preliminarily
approved the settlement on July 29, 2011. A final approval
hearing is set for October 20, 2011. The defendants believe
they have meritorious defenses to the claims in this case and,
if for any reason the settlement is not approved, they will
continue to defend the case vigorously. Although we have a
liability recorded for expected losses, there can be no
assurance regarding the outcome of this matter.
On December 7, 2009, a lawsuit was filed in the Circuit
Court of Cook County, Illinois (2010-L-014920) against M&P,
RSM and H&R Block styled
Ronald R. Peterson ex rel.
Lancelot Investors Fund, L.P., et al. v.
McGladrey & Pullen LLP, et al.
The case was
removed to the United States District Court for the Northern
District of Illinois on December 28, 2009 (Case
No. 1:10-CV-00274).
The complaint, which was filed by the trustee for certain
bankrupt investment funds, seeks unspecified damages and asserts
claims against RSM for vicarious liability and alter ego
liability and against H&R Block for equitable restitution
relating to audit work performed by M&P. The amount claimed
in this case is substantial. On November 3, 2010, the court
dismissed the case against all defendants in its entirety with
prejudice. The trustee has filed an appeal to the Seventh
Circuit Court of Appeals with respect to the claims against
M&P and RSM. No claims remain against H&R Block.
RSM and M&P operate in an alternative practice structure
(“APS”). Accordingly, certain claims and lawsuits
against M&P could have an impact on RSM. More specifically,
any judgments or settlements arising from claims and lawsuits
against M&P that exceed its insurance coverage could have a
direct adverse effect on M&P’s operations. Although
RSM is not responsible for the liabilities of M&P,
significant M&P litigation and claims could impair the
profitability of the APS and impair the ability to attract and
retain clients and quality professionals. This could, in turn,
have a material effect on RSM’s operations and impair the
value of our investment in RSM. There is no assurance regarding
the outcome of any claims or litigation involving M&P.
Other
In October 2010, we signed a definitive merger agreement to
acquire all of the outstanding shares of 2SS Holdings, Inc.
(“2SS”), developer of TaxACT digital tax preparation
solutions, for $287.5 million in cash. In May 2011, the
United States Department of Justice (DOJ) filed a civil
antitrust lawsuit in the U.S. district court in
Washington, D.C., (Case
No. 1:11-cv-00948)
against H&R Block and 2SS styled
United States v.
H&R Block, Inc., 2SS Holdings, Inc., and TA IX L.P.,
to
block our proposed acquisition of 2SS. A preliminary injunction
hearing is set to occur in September 2011. There are no
assurances that the DOJ’s lawsuit will be resolved in our
favor or that the transaction will be consummated.
In addition, we are from time to time party to investigations,
claims and lawsuits not discussed herein arising out of our
business operations. These investigations, claims and lawsuits
include actions by state attorneys general, other state
regulators, individual plaintiffs, and cases in which plaintiffs
seek to represent a class of others similarly situated. We
believe we have meritorious defenses to each of these
investigations, claims and lawsuits, and we are defending or
intend to defend them vigorously. The amounts claimed in these
matters are substantial in some instances, however, the ultimate
liability with respect to such matters is difficult to predict.
In the event of an unfavorable outcome, the amounts we may
20
Table of Contents
be required to pay in the discharge of liabilities or
settlements could have a material impact on our consolidated
results of operations.
We are also party to claims and lawsuits that we consider to be
ordinary, routine litigation incidental to our business,
including claims and lawsuits (collectively, “Other
Claims”) concerning the preparation of customers’
income tax returns, the fees charged customers for various
products and services, relationships with franchisees,
intellectual property disputes, employment matters and contract
disputes. While we cannot provide assurance that we will
ultimately prevail in each instance, we believe the amount, if
any, we are required to pay in the discharge of liabilities or
settlements in these Other Claims will not have a material
impact on our consolidated results of operations.
| 13. | Segment Information |
Results of our continuing operations by reportable operating
segment are as follows:
| (in 000s) | ||||||||
| Three Months Ended July 31, | 2011 | 2010 | ||||||
|
Revenues:
|
||||||||
|
Tax Services
|
$ | 91,425 | $ | 91,645 | ||||
|
Business Services
|
167,263 | 174,710 | ||||||
|
Corporate
|
8,946 | 8,119 | ||||||
| $ | 267,634 | $ | 274,474 | |||||
|
Pretax income (loss):
|
||||||||
|
Tax Services
|
$ | (169,483) | $ | (174,624) | ||||
|
Business Services
|
(92,541) | (433) | ||||||
|
Corporate
|
(31,118) | (32,260) | ||||||
|
Loss from continuing operations before tax benefit
|
$ | (293,142) | $ | (207,317) | ||||
| 14. | Accounting Pronouncements |
In June 2011, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update
2011-05,
“Comprehensive Income (Topic 220): Statement of
Comprehensive Income.” Under the amendments in this
guidance, an entity has the option to present the total of
comprehensive income, the components of net income, and the
components of other comprehensive income either in a single
continuous statement of comprehensive income or in two separate
but consecutive statements. This guidance eliminates the option
to present the components of other comprehensive income as part
of the statement of changes in stockholders’ equity. The
amendments in this guidance do not change the items that must be
reported in other comprehensive income or when an item of other
comprehensive income must be reclassified to net income. These
amendments are effective for fiscal years beginning after
December 15, 2011. Early adoption is permitted. We elected
to adopt this guidance as of May 1, 2011, and it did not
have an effect on our presentation of comprehensive income in
our condensed consolidated financial statements.
In April 2011, the FASB issued Accounting Standards Update
2011-02,
“Receivables (Topic 310) — A Creditor’s
Determination of Whether a Restructuring is a Troubled Debt
Restructuring.” This guidance assists in determining if a
loan modification qualifies as a TDR and requires that creditors
must determine that a concession has been made and the borrower
is having financial difficulties. We adopted this guidance as of
May 1, 2011. We did not identify any new TDRs attributable
to this new guidance and it did not have a material effect on
our condensed consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update
2009-13,
“Revenue Recognition (Topic 605) —
Multiple-Deliverable Revenue Arrangements.” This guidance
amends the criteria for separating consideration in
multiple-deliverable arrangements to enable vendors to account
for products or services (deliverables) separately rather than
as a combined unit. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable,
which is based on: (1) vendor-specific objective evidence;
(2) third-party evidence; or (3) estimates. This
guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the
inception of the arrangement to all deliverables using the
relative selling price method. In addition, this guidance
21
Table of Contents
significantly expands required disclosures related to a
vendor’s new multiple-deliverable revenue arrangements. We
adopted this guidance as of May 1, 2011 and it did not have
a material effect on our condensed 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. We adopted this
guidance as of May 1, 2011 and it did not have a material
effect on our condensed consolidated financial statements.
In December 2010, the FASB issued Accounting Standards Update
2010-29,
“Business Combinations (Topic 805): Disclosure of
Supplementary Pro Forma Information for Business
Combinations.” The amendments in this guidance specify that
if a public entity presents comparative financial statements,
the entity would disclose revenue and earnings of the combined
entity as though the business combination(s) that occurred
during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. Additionally,
disclosures should be accompanied by a narrative description
about the nature and amount of material, nonrecurring pro forma
adjustments. We adopted this guidance as of May 1, 2011 and
it did not have a material effect on our condensed consolidated
financial statements.
| 15. | 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
|
|||||||||||
| July 31, 2011 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | ||||||||||
|
Total revenues
|
$ | – | $ | 21,773 | $ | 245,861 | $ | – | $ | 267,634 | |||||
|
Cost of revenues
|
– | 37,662 | 319,338 | – | 357,000 | ||||||||||
|
Selling, general and administrative
|
– | 7,895 | 199,968 | – | 207,863 | ||||||||||
|
Total expenses
|
– | 45,557 | 519,306 | – | 564,863 | ||||||||||
|
Operating loss
|
– | (23,784) | (273,445) | – | (297,229) | ||||||||||
|
Other income (expense), net
|
(293,142) | 3,281 | 806 | 293,142 | 4,087 | ||||||||||
|
Loss from continuing operations before tax benefit
|
(293,142) | (20,503) | (272,639) | 293,142 | (293,142) | ||||||||||
|
Income tax benefit
|
(119,699) | (1,850) | (117,849) | 119,699 | (119,699) | ||||||||||
|
Net loss from continuing operations
|
(173,443) | (18,653) | (154,790) | 173,443 | (173,443) | ||||||||||
|
Net loss from discontinued operations
|
(1,655) | (1,637) | (18) | 1,655 | (1,655) | ||||||||||
|
Net loss
|
$ | (175,098) | $ | (20,290) | $ | (154,808) | $ | 175,098 | $ | (175,098) | |||||
22
Table of Contents
|
Three
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| July 31, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Total revenues
|
$ | – | $ | 21,000 | $ | 253,474 | $ | – | $ | 274,474 | ||||||||||
|
Cost of revenues
|
– | 39,028 | 328,988 | – | 368,016 | |||||||||||||||
|
Selling, general and administrative
|
– | 2,090 | 114,939 | – | 117,029 | |||||||||||||||
|
Total expenses
|
– | 41,118 | 443,927 | – | 485,045 | |||||||||||||||
|
Operating loss
|
– | (20,118 | ) | (190,453 | ) | – | (210,571 | ) | ||||||||||||
|
Other income (expense), net
|
(207,317 | ) | 382 | 2,872 | 207,317 | 3,254 | ||||||||||||||
|
Loss from continuing operations before tax benefit
|
(207,317 | ) | (19,736 | ) | (187,581 | ) | 207,317 | (207,317 | ) | |||||||||||
|
Income tax benefit
|
(79,679 | ) | (7,841 | ) | (71,838 | ) | 79,679 | (79,679 | ) | |||||||||||
|
Net loss from continuing operations
|
(127,638 | ) | (11,895 | ) | (115,743 | ) | 127,638 | (127,638 | ) | |||||||||||
|
Net loss from discontinued operations
|
(3,043 | ) | (3,004 | ) | (39 | ) | 3,043 | (3,043 | ) | |||||||||||
|
Net loss
|
$ | (130,681 | ) | $ | (14,899 | ) | $ | (115,782 | ) | $ | 130,681 | $ | (130,681 | ) | ||||||
| Condensed Consolidating Balance Sheets | (in 000s) | |||||||||||||||||||
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||
| July 31, 2011 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Cash & cash equivalents
|
$ | – | $ | 413,141 | $ | 599,595 | $ | (27 | ) | $ | 1,012,709 | |||||||||
|
Cash & cash equivalents – restricted
|
– | 849 | 43,553 | – | 44,402 | |||||||||||||||
|
Receivables, net
|
– | 224,573 | 104,815 | – | 329,388 | |||||||||||||||
|
Mortgage loans held for investment
|
– | 466,663 | – | – | 466,663 | |||||||||||||||
|
Intangible assets and goodwill, net
|
– | – | 1,102,646 | – | 1,102,646 | |||||||||||||||
|
Investments in subsidiaries
|
2,478,748 | – | 94 | (2,478,748 | ) | 94 | ||||||||||||||
|
Other assets
|
12,474 | 299,379 | 1,040,297 | – | 1,352,150 | |||||||||||||||
|
Total assets
|
$ | 2,491,222 | $ | 1,404,605 | $ | 2,891,000 | $ | (2,478,775 | ) | $ | 4,308,052 | |||||||||
|
Customer deposits
|
$ | – | $ | 666,295 | $ | – | $ | (27 | ) | $ | 666,268 | |||||||||
|
Long-term debt
|
– | 999,055 | 20,376 | – | 1,019,431 | |||||||||||||||
|
FHLB borrowings
|
– | 25,000 | – | – | 25,000 | |||||||||||||||
|
Other liabilities
|
214 | (132,742 | ) | 1,496,004 | – | 1,363,476 | ||||||||||||||
|
Net intercompany advances
|
1,257,131 | 40,201 | (1,297,332 | ) | – | – | ||||||||||||||
|
Stockholders’ equity
|
1,233,877 | (193,204 | ) | 2,671,952 | (2,478,748 | ) | 1,233,877 | |||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,491,222 | $ | 1,404,605 | $ | 2,891,000 | $ | (2,478,775 | ) | $ | 4,308,052 | |||||||||
23
Table of Contents
|
H&R Block,
Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||||||||
| April 30, 2011 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Cash & cash equivalents
|
$ | – | $ | 616,238 | $ | 1,061,656 | $ | (50 | ) | $ | 1,677,844 | |||||||||
|
Cash & cash equivalents – restricted
|
– | 9,522 | 38,861 | – | 48,383 | |||||||||||||||
|
Receivables, net
|
88 | 102,011 | 390,191 | – | 492,290 | |||||||||||||||
|
Mortgage loans held for investment, net
|
– | 485,008 | – | – | 485,008 | |||||||||||||||
|
Intangible assets and goodwill, net
|
– | – | 1,214,164 | – | 1,214,164 | |||||||||||||||
|
Investments in subsidiaries
|
2,699,555 | – | 32 | (2,699,555 | ) | 32 | ||||||||||||||
|
Other assets
|
13,613 | 469,461 | 807,166 | – | 1,290,240 | |||||||||||||||
|
Total assets
|
$ | 2,713,256 | $ | 1,682,240 | $ | 3,512,070 | $ | (2,699,605 | ) | $ | 5,207,961 | |||||||||
|
Customer deposits
|
$ | – | $ | 852,270 | $ | – | $ | (50 | ) | $ | 852,220 | |||||||||
|
Long-term debt
|
– | 998,965 | 50,789 | – | 1,049,754 | |||||||||||||||
|
FHLB borrowings
|
– | 25,000 | – | – | 25,000 | |||||||||||||||
|
Other liabilities
|
178 | (26,769 | ) | 1,858,004 | – | 1,831,413 | ||||||||||||||
|
Net intercompany advances
|
1,263,504 | 24,173 | (1,287,677 | ) | – | – | ||||||||||||||
|
Stockholders’ equity
|
1,449,574 | (191,399 | ) | 2,890,954 | (2,699,555 | ) | 1,449,574 | |||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,713,256 | $ | 1,682,240 | $ | 3,512,070 | $ | (2,699,605 | ) | $ | 5,207,961 | |||||||||
| Condensed Consolidating Statements of Cash Flows | (in 000s) | ||||||||||||||
|
Three
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
|||||||||||
| July 31, 2011 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | ||||||||||
|
Net cash provided by (used in) operating activities:
|
$ | 2,048 | $ | (22,900) | $ | (373,697) | $ | – | $ | (394,549) | |||||
|
Cash flows from investing:
|
|||||||||||||||
|
Purchases of
available-for-sale
securities
|
– | (39,275) | – | – | (39,275) | ||||||||||
|
Mortgage loans originated for investment, net
|
– | 11,192 | – | – | 11,192 | ||||||||||
|
Purchase property & equipment
|
– | (54) | (10,899) | – | (10,953) | ||||||||||
|
Payments made for business acquisitions, net
|
– | – | (3,457) | – | (3,457) | ||||||||||
|
Proceeds from sale of businesses, net
|
– | – | 21,230 | – | 21,230 | ||||||||||
|
Loans made to franchisees
|
– | (16,477) | – | – | (16,477) | ||||||||||
|
Repayments from franchisees
|
– | 5,320 | – | – | 5,320 | ||||||||||
|
Net intercompany advances
|
44,084 | – | – | (44,084) | – | ||||||||||
|
Other, net
|
– | 12,031 | 6,136 | – | 18,167 | ||||||||||
|
Net cash provided by (used in) investing activities
|
44,084 | (27,263) | 13,010 | (44,084) | (14,253) | ||||||||||
|
Cash flows from financing:
|
|||||||||||||||
|
Customer banking deposits
|
– | (186,268) | – | 23 | (186,245) | ||||||||||
|
Dividends paid
|
(45,894) | – | – | – | (45,894) | ||||||||||
|
Repurchase of common stock
|
(2,002) | – | – | – | (2,002) | ||||||||||
|
Proceeds from exercise of stock options
|
1,762 | – | – | – | 1,762 | ||||||||||
|
Net intercompany advances
|
– | 33,312 | (77,396) | 44,084 | – | ||||||||||
|
Other, net
|
2 | 22 | (24,940) | – | (24,916) | ||||||||||
|
Net cash used in financing activities
|
(46,132) | (152,934) | (102,336) | 44,107 | (257,295) | ||||||||||
|
Effects of exchange rates on cash
|
– | – | 962 | – | 962 | ||||||||||
|
Net decrease in cash
|
– | (203,097) | (462,061) | 23 | (665,135) | ||||||||||
|
Cash – beginning of period
|
– | 616,238 | 1,061,656 | (50) | 1,677,844 | ||||||||||
|
Cash –
end of period
|
$ | – | $ | 413,141 | $ | 599,595 | $ | (27) | $ | 1,012,709 | |||||
24
Table of Contents
|
Three
Months Ended
|
H&R
Block, Inc.
|
BFC
|
Other
|
Consolidated
|
||||||||||||||||
| July 31, 2010 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
|
Net cash provided by (used in) operating activities:
|
$ | 22,849 | $ | (43,301 | ) | $ | (327,799 | ) | $ | – | $ | (348,251 | ) | |||||||
|
Cash flows from investing:
|
||||||||||||||||||||
|
Mortgage loans originated for investment, net
|
– | 17,618 | – | – | 17,618 | |||||||||||||||
|
Purchase property & equipment
|
– | – | (8,634 | ) | – | (8,634 | ) | |||||||||||||
|
Payments made for business acquisitions, net
|
– | – | (33,226 | ) | – | (33,226 | ) | |||||||||||||
|
Proceeds from sale of businesses, net
|
– | – | 26,387 | – | 26,387 | |||||||||||||||
|
Loans made to franchisees
|
– | (33,720 | ) | – | – | (33,720 | ) | |||||||||||||
|
Repayments from franchisees
|
– | 6,724 | – | – | 6,724 | |||||||||||||||
|
Net intercompany advances
|
188,324 | – | – | (188,324 | ) | – | ||||||||||||||
|
Other, net
|
– | 40,668 | (21,820 | ) | – | 18,848 | ||||||||||||||
|
Net cash provided by (used in) investing activities
|
188,324 | 31,290 | (37,293 | ) | (188,324 | ) | (6,003 | ) | ||||||||||||
|
Cash flows from financing:
|
||||||||||||||||||||
|
Customer banking deposits
|
– | (121,166 | ) | – | (235 | ) | (121,401 | ) | ||||||||||||
|
Dividends paid
|
(48,692 | ) | – | – | – | (48,692 | ) | |||||||||||||
|
Repurchase of common stock
|
(164,369 | ) | – | – | – | (164,369 | ) | |||||||||||||
|
Proceeds from exercise of stock options
|
1,500 | – | – | – | 1,500 | |||||||||||||||
|
Net intercompany advances
|
– | 35,507 | (223,831 | ) | 188,324 | – | ||||||||||||||
|
Other, net
|
388 | 176 | (16,551 | ) | – | (15,987 | ) | |||||||||||||
|
Net cash used in financing activities
|
(211,173 | ) | (85,483 | ) | (240,382 | ) | 188,089 | (348,949 | ) | |||||||||||
|
Effects of exchange rates on cash
|
– | – | (2,232 | ) | – | (2,232 | ) | |||||||||||||
|
Net decrease in cash
|
– | (97,494 | ) | (607,706 | ) | (235 | ) | (705,435 | ) | |||||||||||
|
Cash –
beginning of
period
|
– | 702,021 | 1,102,135 | (111 | ) | 1,804,045 | ||||||||||||||
|
Cash –
end of period
|
$ | – | $ | 604,527 | $ | 494,429 | $ | (346 | ) | $ | 1,098,610 | |||||||||
25
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 major company offering a full range of software, online and
in-office tax preparation solutions to individual tax clients.
RECENT
EVENTS
In August 2011, we signed a non-binding letter of intent to sell
substantially all assets of RSM McGladrey Business Services, Inc
(RSM) to McGladrey & Pullen LLP (M&P) and began
an evaluation of strategic alternatives for RSM EquiCo, Inc.
(EquiCo). The RSM sale is dependent on, among other factors, the
ability of M&P to raise financing for the purchase. We
recorded a $99.7 million impairment of goodwill in the
first quarter for reporting units in our Business Services
segment based on these events. This loss was offset partially by
the sale of an ancillary business within the Business Services
segment during the quarter which resulted in a $9.9 million
gain. On an after-tax basis, the net result of these events is a
charge of $53.2 million, or $0.17 per share. These amounts
related to the sale of RSM may fluctuate based on adjustments to
the purchase price at closing as well as the additional
realization of tax benefits related to the sale. M&P will
also assume substantially all liabilities, including contingent
payments and lease obligations. See discussion in notes 2
and 7 to the condensed consolidated financial statements and in
the Business 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. and its
territories, 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, refund
anticipation checks, our prior participations in refund
anticipation loans, and our commercial tax business, which
provides tax preparation software to CPAs and other tax
preparers.
| Tax Services – Operating Results | (in 000s) | |||||||
| Three Months Ended July 31, | 2011 | 2010 | ||||||
|
Tax preparation fees
|
$ | 34,921 | $ | 34,545 | ||||
|
Fees from Peace of Mind guarantees
|
27,181 | 28,547 | ||||||
|
Fees from Emerald Card activities
|
11,241 | 10,575 | ||||||
|
Royalties
|
5,703 | 5,605 | ||||||
|
Other
|
12,379 | 12,373 | ||||||
|
Total revenues
|
91,425 | 91,645 | ||||||
|
Compensation and benefits:
|
||||||||
|
Field wages
|
36,847 | 39,249 | ||||||
|
Corporate wages
|
33,055 | 35,800 | ||||||
|
Benefits and other compensation
|
17,489 | 34,304 | ||||||
| 87,391 | 109,353 | |||||||
|
Occupancy and equipment
|
83,337 | 82,624 | ||||||
|
Depreciation and amortization
|
21,450 | 22,395 | ||||||
|
Marketing and advertising
|
6,721 | 8,413 | ||||||
|
Other
|
62,009 | 43,484 | ||||||
|
Total expenses
|
260,908 | 266,269 | ||||||
|
Pretax loss
|
$ | (169,483 | ) | $ | (174,624 | ) | ||
Three months
ended July 31, 2011 compared to July 31,
2010
Tax Services’ revenues were essentially flat compared to
the prior year, as declines in U.S. tax returns prepared
were offset by an increase in international tax returns due to
the extended filing season in Canada.
Total expenses decreased $5.4 million, or 2.0%, for the
three months ended July 31, 2011. Compensation and benefits
decreased $22.0 million, or 20.1%, primarily due to
severance costs recorded in the prior year. Other expenses
increased $18.5 million, or 42.6%, primarily due to
incremental legal charges recorded in the current year.
26
Table of Contents
The pretax loss for the three months ended July 31, 2011
and 2010 was $169.5 million and $174.6 million,
respectively.
BUSINESS
SERVICES
This segment consists of RSM McGladrey, Inc., 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 July 31, | 2011 | 2010 | ||||||
|
Tax services
|
$ | 88,329 | $ | 81,331 | ||||
|
Business consulting
|
58,111 | 61,678 | ||||||
|
Accounting services
|
3,675 | 10,842 | ||||||
|
Capital markets
|
3,072 | 2,390 | ||||||
|
Reimbursed expenses
|
2,914 | 6,331 | ||||||
|
Other
|
11,162 | 12,138 | ||||||
|
Total revenues
|
167,263 | 174,710 | ||||||
|
Compensation and benefits
|
126,245 | 127,113 | ||||||
|
Occupancy
|
10,719 | 11,930 | ||||||
|
Amortization of intangible assets
|
2,630 | 2,836 | ||||||
|
Impairment of goodwill
|
99,697 | — | ||||||
|
Other
|
20,513 | 33,264 | ||||||
|
Total expenses
|
259,804 | 175,143 | ||||||
|
Pretax loss
|
$ | (92,541 | ) | $ | (433 | ) | ||
Three months
ended July 31, 2011 compared to July 31,
2010
Business Services’ revenues for the three months ended
July 31, 2011 decreased $7.4 million, or 4.3% from the
prior year. Tax services revenues increased primarily as a
result of the acquisition of Caturano & Company, Inc.
Accounting services revenues declined $7.2 million, or
66.1%, primarily due to the sale of an ancillary business during
the current quarter.
Total expenses increased $84.7 million, or 48.3%, from the
prior year. During the quarter, we recorded goodwill impairments
of $85.4 million and $14.3 million in our RSM and
EquiCo reporting units, respectively, as discussed in
notes 2 and 7 to the condensed consolidated financial
statements. This loss was offset partially by the sale of an
ancillary business during the quarter which resulted in a
$9.9 million gain. On an after-tax basis, the net result of
these events is a charge of $53.2 million, or $0.17 per
share.
The pretax loss for the three months ended July 31, 2011
was $92.5 million compared to $0.4 million in the
prior year.
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.
| Corporate – Operating Results | (in 000s) | |||||||
| Three Months Ended July 31, | 2011 | 2010 | ||||||
|
Interest income on mortgage loans held for investment, net
|
$ | 5,661 | $ | 6,323 | ||||
|
Other
|
3,285 | 1,796 | ||||||
|
Total revenues
|
8,946 | 8,119 | ||||||
|
Interest expense
|
21,018 | 20,788 | ||||||
|
Compensation and benefits
|
6,765 | 5,071 | ||||||
|
Provision for loan losses
|
5,625 | 8,000 | ||||||
|
Other
|
6,656 | 6,520 | ||||||
|
Total expenses
|
40,064 | 40,379 | ||||||
|
Pretax loss
|
$ | (31,118 | ) | $ | (32,260 | ) | ||
Three months
ended July 31, 2011 compared to July 31,
2010
Results of our corporate operations were essentially flat
compared to the prior year.
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Income
Taxes
Our effective tax rate for continuing operations was 40.8% and
38.4% for the three months ended July 31, 2011 and 2010,
respectively. This increase resulted from losses in our
investments in company-owned life insurance assets for which we
do not receive a tax benefit, and an increase in the state
effective tax rate. This increase was partially offset by a
decrease in our reserve for uncertain tax positions.
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 $1.7 million and $3.0 million for the three
months ended July 31, 2011 and 2010, respectively.
In connection with the securitization and sale of mortgage
loans, SCC made certain representations and warranties. In the
event that there is a breach of a representation and warranty
and such breach materially and adversely affects the value of a
mortgage loan, SCC may be obligated to repurchase a loan or
otherwise indemnify certain parties for losses resulting from a
liquidation of loan collateral.
SCC has recorded a liability for estimated contingent losses
related to representation and warranty claims as of
July 31, 2011, of $125.8 million, which represents
SCC’s best estimate of the probable loss that may occur.
Losses on valid claims totaled $0.5 million and
$0.1 million for the three months ended July 31, 2011
and 2010, respectively. These amounts were recorded as
reductions of our loan repurchase liability.
While SCC uses the best information available to it in
estimating its liability, assessing the likelihood that claims
will be asserted in the future and estimating probable losses is
inherently difficult and requires considerable management
judgment. Although net losses on settled claims since
May 1, 2008 have been within initial loss estimates, to the
extent that the volume of asserted claims, the level of valid
claims, the counterparties asserting claims, the nature of
claims, or the value of residential home prices differ in the
future from current estimates, future losses may be greater than
the current estimates and those differences may be significant.
See additional discussion in note 11 to the condensed
consolidated financial statements.
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 July 31, 2011 are sufficient to meet our
operating needs.
CASH FROM
OPERATING
ACTIVITIES
–
Cash used in operations totaled $394.5 million for
the first three months of fiscal year 2012, compared with
$348.3 million for the same period last year.
CASH FROM
INVESTING
ACTIVITIES
–
Cash used in investing activities totaled
$14.3 million for the first three months of fiscal year
2012, compared to $6.0 million in the same period last year.
Purchases of
Available-for-Sale
Securities.
During
the three months ended July 31, 2011, HRB Bank purchased
$39.3 million in mortgage-backed securities. No such
purchases were made in the first quarter of the prior year.
Mortgage Loans
Held for
Investment.
We
received net payments of $11.2 million and
$17.6 million on our mortgage loans held for investment for
the first three months of fiscal years 2012 and 2011,
respectively. Cash payments declined primarily due to
non-performing loans and continued run-off of our portfolio.
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Purchases of
Property and
Equipment.
Total
cash paid for property and equipment was $11.0 million and
$8.6 million for the first three months of fiscal years
2012 and 2011, respectively.
Business
Acquisitions.
Total
cash paid for acquisitions was $3.5 million and
$33.2 million during the three months ended July 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.
In October 2010, we signed a definitive merger agreement to
acquire all of the outstanding shares of 2SS Holdings, Inc.
(2SS), developer of TaxACT digital tax preparation solutions,
for $287.5 million in cash. Completion of the transaction
is subject to the satisfaction of customary closing conditions,
including regulatory approval. In May 2011, the United States
Department of Justice (DOJ) filed a civil antitrust lawsuit to
block our proposed acquisition of 2SS, and a preliminary hearing
on this matter has been set for September 6, 2011. There
are no assurances that the DOJ’s lawsuit will be resolved
in our favor or that the transaction will be consummated.
Sales of
Businesses.
Proceeds
from the sales of businesses totaled $21.2 million and
$26.4 million for the three months ended July 31, 2011
and 2010, respectively. During the first quarter of fiscal year
2012, our Business Services segment sold one of their ancillary
businesses for $20.3 million. During the first three months
of fiscal year 2011, we sold 127 tax offices to franchisees. The
majority of these sales were financed through affiliate loans.
Loans Made to
Franchisees.
Loans
made to franchisees totaled $16.5 million and
$33.7 million for the three months ended July 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 used in financing activities totaled
$257.3 million for the first three months of fiscal year
2012, compared to $348.9 million in the same period last
year.
Customer Banking
Deposits.
Customer
banking deposits declined $186.2 million for the three
months ended July 31, 2011 compared to $121.4 million
in the prior year due to seasonal fluctuations in prepaid debit
card deposits.
Dividends.
We
have consistently paid quarterly dividends. Dividends paid
totaled $45.9 million and $48.7 million for the three
months ended July 31, 2011 and 2010, respectively.
Repurchase and
Retirement of Common
Stock.
During
the prior year, we purchased and immediately retired
15.5 million shares of our common stock at a cost of
$235.7 million. Cash payments of $161.0 million were
made during the three months ended July 31, 2010 for the
share purchases with settlement of the remaining
$74.7 million occurring in August 2010. We expect to
continue to repurchase and retire common stock or retire
treasury stock in the future.
Issuances of
Common
Stock.
Proceeds
from the issuance of common stock totaled $1.8 million for
the three months ended July 31, 2011 compared to
$1.5 million in the prior year, and is related to stock
option exercises and the related tax benefits.
BORROWINGS
The following chart provides the debt ratings for Block
Financial LLC (BFC) as of July 31, 2011:
| Short-term | Long-term | Outlook | ||||||||||||||
|
Moody’s
|
P-2 | Baa2 | Negative (1 | ) | ||||||||||||
|
S&P
|
A-2 | BBB | Negative | |||||||||||||
|
DBRS
|
R-2 (high | ) | BBB (high | ) | Stable | |||||||||||
| (1) | In August 2011, the outlook was changed to “Stable.” |
At July 31, 2011, we maintained a CLOC agreement to support
commercial paper issuances, general corporate purposes or for
working capital needs. This facility provides funding up to
$1.7 billion and matures July 31, 2013. This facility
bears interest at an annual rate of LIBOR plus 1.30% to 2.80% or
PRIME plus 0.30% to 1.80% (depending on the type of borrowing)
and includes an annual facility fee of 0.20% to 0.70% of the
committed amounts, based on our credit ratings. Covenants in 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
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30 of each year (“Clean-down requirement”). At
July 31, 2011, we were in compliance with these covenants
and had net worth of $1.2 billion. We had no balance
outstanding under the CLOCs at July 31, 2011.
There have been no material changes in our borrowings or debt
ratings from those reported at April 30, 2011 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, 2011 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, 2011 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, 2011 in our Annual Report on
Form 10-K.
ITEM 4. CONTROLS
AND PROCEDURES
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
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.
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 SCC’s mortgage business activities
that occurred prior to such termination and sale. These
investigations, claims and
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lawsuits include actions by state and federal regulators,
municipalities, third party indemnitees, individual plaintiffs,
and cases in which plaintiffs seek to represent a class of
others alleged to be similarly situated. Among other things,
these investigations, claims and lawsuits allege discriminatory
or unfair and deceptive loan origination and servicing
practices, fraud, rights to indemnification, and violations of
securities laws, the Truth in Lending Act, Equal Credit
Opportunity Act and the Fair Housing Act. Given the non-prime
mortgage environment, the number of these investigations, claims
and lawsuits has increased over historical experience and is
likely to continue to increase. 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 be
paid in the discharge of liabilities or settlements could be
substantial and could have a material impact on our consolidated
results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a
lawsuit in the Superior Court of Suffolk County, Massachusetts
(Case
No. 08-2474-BLS)
styled
Commonwealth of Massachusetts v. H&R Block,
Inc., et al.
, alleging unfair, deceptive and discriminatory
origination and servicing of mortgage loans and seeking
equitable relief, disgorgement of profits, restitution and
statutory penalties. In November 2008, the court granted a
preliminary injunction limiting the ability of the owner of
SCC’s former loan servicing business to initiate or advance
foreclosure actions against certain loans originated by SCC or
its subsidiaries without (1) advance notice to the
Massachusetts Attorney General and (2) if the Attorney
General objects to foreclosure, approval by the court. An appeal
of the preliminary injunction was denied. To avoid the cost and
inherent risk associated with litigation, the parties have
reached an agreement to settle this case. The settlement
requires a cash payment from SCC to the Attorney General of
$9.8 million, in addition to certain loan modification
relief to Massachusetts borrowers estimated at $115 million
in benefits. The agreement also provides for a contingent cash
payment of up to $5 million in the event certain loan
modification relief is not available. We have a liability
recorded for our best estimate of the expected loss. 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.
On February 1, 2008, a class action lawsuit was filed in
the United States District Court for the District of
Massachusetts against SCC and other related entities styled
Cecil Barrett, et al. v. Option One Mortgage Corp., et
al.
(Civil Action
No. 08-10157-RWZ).
Plaintiffs allege discriminatory practices relating to the
origination of mortgage loans in violation of the Fair Housing
Act and Equal Credit Opportunity Act, and seek declaratory and
injunctive relief in addition to actual and punitive damages.
The court dismissed H&R Block, Inc. from the lawsuit for
lack of personal jurisdiction. In March 2011, the court issued
an order certifying a class, which defendants sought to appeal.
On August 24, 2011, the First Circuit Court of Appeals
declined to hear the appeal, noting that the district court
could reconsider its certification decision in light of a recent
ruling by the United States Supreme Court in an unrelated
matter. 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
believe we have meritorious defenses to the claims in this case
and intend to defend the case vigorously, but there can be no
assurances as to its outcome or its impact on our consolidated
results of operations.
On December 9, 2009, a putative class action lawsuit was
filed in the United States District Court for the Central
District of California against SCC and H&R Block, Inc.
styled
Jeanne Drake, et al. v. Option One Mortgage
Corp., et al.
(Case
No. SACV09-1450
CJC). Plaintiffs allege breach of contract, promissory fraud,
intentional interference with contractual relations, wrongful
withholding of wages and unfair business practices in connection
with the failure to pay severance benefits to employees when
their employment transitioned to American Home Mortgage
Servicing, Inc. in connection with the sale of certain assets
and operations of Option One. Plaintiffs seek to recover
severance benefits of approximately $8 million, interest
and attorney’s fees, in addition to penalties and punitive
damages on certain claims. Plaintiffs’ motion for class
certification is pending. All parties have filed motions for
summary judgment. The court has set a hearing on all pending
motions on August 29, 2011. 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 we have
meritorious defenses to the claims in this case and intend to
defend the case vigorously, but there can be no assurances as to
its outcome or its impact on our consolidated results of
operations.
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On October 15, 2010, the Federal Home Loan Bank of Chicago
filed a lawsuit in the Circuit Court of Cook County, Illinois
(Case No. 10CH45033) styled
Federal Home Loan Bank of
Chicago v. Bank of America Funding Corporation, et al.
against multiple defendants, including various SCC related
entities and H&R Block, Inc. related entities, arising out
of Federal Home Loan Bank’s (FHLB’s) purchase of
mortgage-backed securities. Plaintiff asserts claims for
rescission and damages under state securities law and for common
law negligent misrepresentation in connection with its purchase
of two securities originated and securitized by SCC. These two
securities had a total initial principal amount of approximately
$50 million, of which approximately $42 million
remains outstanding. We have not concluded that a loss related
to this matter is probable nor have we established a loss
contingency related to this matter. We believe the claims in
this case are without merit and we intend to defend them
vigorously. There can be no assurances, however, as to its
outcome or its impact on our consolidated results of operations.
Employment-Related
Claims and Litigation
We have been named in several wage and hour class action
lawsuits throughout the country, including
Alice
Williams v. H&R Block Enterprises LLC
, Case
No.RG08366506 (Superior Court of California, County of Alameda,
filed January 17, 2008) (alleging improper classification
of office managers in California);
Arabella Lemus v.
H&R Block Enterprises LLC, et al.,
Case
No. CGC-09-489251
(United States District Court, Northern District of California,
filed June 9, 2009) (alleging failure to timely pay
compensation to tax professionals in California and to include
itemized information on wage statements);
Delana Ugas v.
H&R Block Enterprises LLC, et al.,
Case
No. BC417700 (United States District Court, Central
District of California, filed July 13, 2009) (alleging
failure to compensate tax professionals in California for all
hours worked and to provide meal periods); and
Barbara
Petroski v. H&R Block Eastern Enterprises, Inc., et
al.,
Case
No. 10-CV-00075
(United States District Court, Western District of Missouri,
filed January 25, 2010) (alleging failure to compensate tax
professionals nationwide for off-season training). A class was
certified in the
Lemus
case in December 2010 (consisting
of tax professionals who worked in company-owned offices in
California from 2007 to 2010); in the
Williams
case in
March 2011 (consisting of office managers who worked in
company-owned offices in California from 2004 to 2011); and in
the
Ugas
case in August 2011 (consisting of tax
professionals who worked in company-owned offices in California
from 2006 to 2011). A conditional class was certified in the
Petroski
case in March 2011 (consisting of tax
professionals nationwide who worked in company-owned offices and
who were not compensated for certain training courses occurring
on or after April 15, 2007).
The plaintiffs in the wage and hour class action lawsuits seek
actual damages, pre-judgment interest and attorneys’ fees,
in addition to statutory penalties under California and federal
law, which could equal up to 30 days of wages per tax
season for class members who worked in California. A portion of
our loss contingency accrual is related to these lawsuits for
the amount of loss that we consider probable and estimable. For
those wage and hour class action lawsuits for which we are able
to estimate a range of possible loss, the current estimated
range is $0 to $70 million in excess of the accrued
liability related to those matters. This estimated range of
possible loss is based upon currently available information and
is subject to significant judgment and a variety of assumptions
and uncertainties. The matters underlying the estimated range
will change from time to time, and actual results may vary
significantly from the current estimate. Because this estimated
range does not include matters for which an estimate is not
possible, the range does not represent our maximum loss exposure
for the wage and hour class action lawsuits. We believe we have
meritorious defenses to the claims in these lawsuits and intend
to defend them vigorously. The amounts claimed in these matters
are substantial in some instances and the ultimate liability
with respect to these matters is difficult to predict. There can
be no assurances as to the outcome of these cases or their
impact on our consolidated results of operations, individually
or in the aggregate.
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
32
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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
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 EquiCo, including allegations of
fraud, conversion and unfair competition. Plaintiffs seek
unspecified actual and punitive damages, in addition to
pre-judgment interest and attorneys’ fees. On
March 17, 2009, the court granted plaintiffs’ motion
for class certification on all claims. To avoid the cost and
inherent risk associated with litigation, the parties reached an
agreement to settle the case, subject to approval by the
California Superior Court. The settlement requires a maximum
payment of $41.5 million, although the actual cost of the
settlement will depend on the number of valid claims submitted
by class members. The California Superior Court preliminarily
approved the settlement on July 29, 2011. A final approval
hearing is set for October 20, 2011. The defendants believe
they have meritorious defenses to the claims in this case and,
if for any reason the settlement is not approved, they will
continue to defend the case vigorously. Although we have a
liability recorded for expected losses, there can be no
assurance regarding the outcome of this matter.
On December 7, 2009, a lawsuit was filed in the Circuit
Court of Cook County, Illinois (2010-L-014920) against M&P,
RSM and H&R Block styled
Ronald R. Peterson ex rel.
Lancelot Investors Fund, L.P., et al. v.
McGladrey & Pullen LLP, et al.
The case was
removed to the United States District Court for the Northern
District of Illinois on December 28, 2009 (Case
No. 1:10-CV-00274).
The complaint, which was filed by the trustee for certain
bankrupt investment funds, seeks unspecified damages and asserts
claims against RSM for vicarious liability and alter ego
liability and against H&R Block for equitable restitution
relating to audit work performed by M&P. The amount claimed
in this case is substantial. On November 3, 2010, the court
dismissed the case against all defendants in its entirety with
prejudice. The trustee has filed an appeal to the Seventh
Circuit Court of Appeals with respect to the claims against
M&P and RSM. No claims remain against H&R Block.
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
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Table of Contents
professionals. This could, in turn, have a material effect on
RSM’s operations and impair the value of our investment in
RSM. There is no assurance regarding the outcome of any claims
or litigation involving M&P.
Other
In October 2010, we signed a definitive merger agreement to
acquire all of the outstanding shares of 2SS Holdings, Inc.
(“2SS”), developer of TaxACT digital tax preparation
solutions, for $287.5 million in cash. In May 2011, the
United States Department of Justice (DOJ) filed a civil
antitrust lawsuit in the U.S. district court in
Washington, D.C., (Case
No. 1:11-cv-00948)
against H&R Block and 2SS styled
United States v.
H&R Block, Inc., 2SS Holdings, Inc., and TA IX L.P.,
to
block our proposed acquisition of 2SS. A preliminary injunction
hearing is set to occur in September 2011. There are no
assurances that the DOJ’s lawsuit will be resolved in our
favor or that the transaction will be consummated.
In addition, we are from time to time party to investigations,
claims and lawsuits not discussed herein arising out of our
business operations. These investigations, claims and lawsuits
include actions by state attorneys general, other state
regulators, individual plaintiffs, and cases in which plaintiffs
seek to represent a class of others similarly situated. We
believe we have meritorious defenses to each of these
investigations, claims and lawsuits, and we are defending or
intend to defend them vigorously. The amounts claimed in these
matters are substantial in some instances, however, the ultimate
liability with respect to such matters is difficult to predict.
In the event of an unfavorable outcome, the amounts we may be
required to pay in the discharge of liabilities or settlements
could have a material impact on our consolidated results of
operations.
We are also party to claims and lawsuits that we consider to be
ordinary, routine litigation incidental to our business,
including claims and lawsuits (collectively, “Other
Claims”) concerning the preparation of customers’
income tax returns, the fees charged customers for various
products and services, relationships with franchisees,
intellectual property disputes, employment matters and contract
disputes. While we cannot provide assurance that we will
ultimately prevail in each instance, we believe the amount, if
any, we are required to pay in the discharge of liabilities or
settlements in these Other Claims will not have a material
impact on our consolidated results of operations.
ITEM 1A. RISK
FACTORS
There have been no material changes in our risk factors from
those reported at April 30, 2011 in our Annual Report on
Form 10-K.
A summary of our purchases of H&R Block common stock during
the first quarter of fiscal year 2012 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 | |||||||||
|
May 1 – May 31
|
2 | $ | 17.16 | – | $ | 1,371,957 | ||||||
|
June 1 – June 30
|
14 | $ | 17.23 | – | $ | 1,371,957 | ||||||
|
July 1 – July 31
|
106 | $ | 16.31 | – | $ | 1,371,957 | ||||||
| (1) | We purchased the above 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. |
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Table of Contents
| 10 | .1* | Form of 2003 Long-Term Executive Compensation Plan Award Agreement for Restricted Shares. | ||
| 10 | .2* | Form of 2003 Long-Term Executive Compensation Plan Award Agreement for Stock Options. | ||
| 10 | .3* | Form of 2003 Long-Term Executive Compensation Plan Award Agreement for Performance Shares. | ||
| 10 | .4* | Grant Agreement between H&R Block, Inc. and William C. Cobb in connection with award of Restricted Shares as of May 2, 2011. | ||
| 10 | .5* | Grant Agreement between H&R Block, Inc. and William C. Cobb in connection with award of Stock Options as of May 2, 2011. | ||
| 10 | .6 | Amendment to Agreement and Plan of Merger dated June 21, 2011, among H&R Block, Inc., HRB Island Acquisition, Inc., 2SS Holdings, Inc., TA Associates Management, L.P. and Lance Dunn, filed as Exhibit 10.34 to the company’s annual report on Form 10-K for the fiscal year ended April 30, 2011, file number 1-6089, is incorporated herein by reference. | ||
| 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 | ||
| * | Indicates management contracts, compensatory plans or arrangements. |
35
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.
William
C. Cobb
President
and Chief Executive Officer
September 1,
2011
Jeffrey
T. Brown
Senior
Vice President and
Chief
Financial Officer
September 1,
2011
Colby
R. Brown
Vice
President and
Corporate
Controller
September 1,
2011
36
TABLE OF CONTENTS
Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 6. Exhibitsprint