Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2013

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

 

LOGO

H&R Block, Inc.

(Exact name of registrant as specified in its charter)

 

MISSOURI   44-0607856

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One H&R Block Way

Kansas City, Missouri 64105

(Address of principal executive offices, including zip code)

(816) 854-3000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes     Ö      No             

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes     Ö      No             

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

  Large accelerated filer      Ö        Accelerated filer     Non-accelerated filer     Smaller reporting company  
        (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes          No     Ö    

The number of shares outstanding of the registrant’s Common Stock, without par value, at the close of business on February 28, 2013 was 272,319,178 shares.


 

 

LOGO

Form 10-Q for the Period Ended January 31, 2013

 

 

Table of Contents

 

 

 

          Page  

PART I

   Financial Information   

Item 1.

  

Consolidated Balance Sheets
As of January 31, 2013 and April 30, 2012

     1   
  

Consolidated Statements of Operations and
Comprehensive Income (Loss)
Three and nine months ended January 31, 2013 and 2012

     2   
  

Condensed Consolidated Statements of Cash Flows
Nine months ended January 31, 2013 and 2012

     3   
  

Notes to Consolidated Financial Statements

     4   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     34   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     44   

Item 4.

  

Controls and Procedures

     45   

PART II

  

Other Information

  

Item 1.

  

Legal Proceedings

     45   

Item 1A.

  

Risk Factors

     45   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     47   

Item 5.

  

Other Information

     47   

Item 6.

  

Exhibits

     48   

SIGNATURES

     49   

 

 

 


 

 

LOGO

 

 

CONSOLIDATED BALANCE SHEETS    (amounts in 000s, except share and per share amounts)  
As of    January 31, 2013     April 30, 2012  
     (Unaudited)        

ASSETS

    

Cash and cash equivalents

     $     418,385        $1,944,334   

Cash and cash equivalents – restricted

     37,958        48,100   

Receivables, less allowance for doubtful accounts
of $44,829 and $44,589

     949,160        193,858   

Prepaid expenses and other current assets

     331,046        314,702   
  

 

 

   

 

 

 

Total current assets

     1,736,549        2,500,994   
    

Mortgage loans held for investment, less allowance for
loan losses of $17,256 and $26,540

     357,887        406,201   

Investments in available-for-sale securities

     396,312        371,315   

Property and equipment, at cost, less accumulated depreciation and amortization of $581,246 and $622,313

     290,165        252,985   

Intangible assets, net

     271,523        264,451   

Goodwill

     435,256        427,566   

Other assets

     444,804        426,055   
  

 

 

   

 

 

 

Total assets

     $3,932,496        $4,649,567   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Commercial paper borrowings

     $     424,967        $              –   

Customer banking deposits

     1,036,968        827,549   

Accounts payable, accrued expenses and other current liabilities

     479,660        567,079   

Accrued salaries, wages and payroll taxes

     103,538        163,992   

Accrued income taxes

     17,348        336,374   

Current portion of long-term debt

     713        631,434   
  

 

 

   

 

 

 

Total current liabilities

     2,063,194        2,526,428   

Long-term debt

     906,012        409,115   

Other noncurrent liabilities

     328,402        388,132   
  

 

 

   

 

 

 

Total liabilities

     3,297,608        3,323,675   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, shares issued of 316,628,110 and 397,886,599

     3,166        3,979   

Additional paid-in capital

     747,398        796,784   

Accumulated other comprehensive income

     9,055        12,145   

Retained earnings

     723,676        2,523,997   

Less treasury shares, at cost

     (848,407     (2,011,013
  

 

 

   

 

 

 

Total stockholders’ equity

     634,888        1,325,892   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

     $  3,932,496        $4,649,567   
  

 

 

   

 

 

 

 

  

 

 

See Notes to Consolidated Financial Statements

 

-1-


 

LOGO

 

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS    

(Unaudited, amounts in 000s,

except per share amounts)

 

 
AND COMPREHENSIVE INCOME (LOSS)    
     
    Three months ended
January 31,
    Nine months ended
January 31,
 
     2013     2012     2013     2012  

Revenues:

       

Service revenues

  $ 362,194      $ 524,240      $ 558,528      $ 717,243   

Product and other revenues

    71,485        99,564        89,171        116,117   

Interest income

    38,300        39,476        58,032        59,737   
 

 

 

   

 

 

   

 

 

   

 

 

 
    471,979        663,280        705,731        893,097   
 

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

       

Cost of revenues:

       

Compensation and benefits

    160,081        207,480        254,430        316,139   

Occupancy and equipment

    84,710        93,024        247,059        263,078   

Depreciation/amortization of property and equipment

    20,067        17,770        54,299        50,894   

Provision for bad debt and loan losses

    43,028        52,932        51,398        68,423   

Interest

    19,428        23,543        64,895        69,352   

Other

    50,304        60,491        110,972        127,551   
 

 

 

   

 

 

   

 

 

   

 

 

 
    377,618        455,240        783,053        895,437   

Impairment of goodwill

                         4,257   

Selling, general and administrative expenses

    186,997        211,736        352,802        408,144   
 

 

 

   

 

 

   

 

 

   

 

 

 
    564,615        666,976        1,135,855        1,307,838   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (92,636     (3,696     (430,124     (414,741

Other income (expense), net

    (3,632     2,670        2,299        9,185   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before taxes (benefit)

    (96,268     (1,026     (427,825     (405,556

Income taxes (benefit)

    (79,353     2,541        (204,061     (159,821
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from continuing operations

    (16,915     (3,567     (223,764     (245,735

Net income (loss) from discontinued operations

    (793     218        (6,628     (74,436
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (17,708   $ (3,349   $ (230,392   $ (320,171
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted loss per share:

       

Net loss from continuing operations

  $ (0.06   $ (0.01   $ (0.82   $ (0.82

Net income (loss) from discontinued operations

    (0.01            (0.02     (0.25
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (0.07   $ (0.01   $ (0.84   $ (1.07
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted shares

    271,542        292,963        273,281        299,450   
 

 

 

   

 

 

   

 

 

   

 

 

 

Dividends paid per share

  $ 0.20      $ 0.20      $ 0.60      $ 0.50   
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss):

       

Net loss

  $ (17,708   $ (3,349   $ (230,392   $ (320,171

Unrealized gains (losses) on securities, net of taxes:

       

Unrealized holding gains (losses) arising during the period, net of taxes (benefit) of $(405), $(199), $(122) and $1,113

    (605     (291     (248     1,682   

Reclassification adjustment for gains included in income, net of taxes of $ –, $ –, $71 and $58

                  (104     (93

Change in foreign currency translation adjustments

    975        3,341        (2,738     (5,413
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    370        3,050        (3,090     (3,824
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

  $ (17,338   $ (299   $ (233,482   $ (323,995
 

 

 

   

 

 

   

 

 

   

 

 

 
   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

-2-


 

LOGO

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS    (unaudited, amounts in 000s)  
Nine months ended January 31,    2013      2012  

Net cash used in operating activities

   $ (1,311,926    $ (1,382,771
  

 

 

    

 

 

 

Cash flows from investing activities:

     

Purchases of available-for-sale securities

     (108,351      (178,014

Sales, maturities and payments received on available-for-sale securities

     86,808         40,473   

Principal repayments on mortgage loans held for investment, net

     31,205         35,460   

Purchases of property and equipment, net

     (96,063      (71,549

Payments made for acquisitions of businesses and intangibles, net

     (20,662      (16,022

Proceeds from sales of businesses, net

     1,212         533,055   

Franchise loans:

     

Loans funded

     (68,874      (43,649

Payments received

     9,594         8,455   

Other, net

     (15,185      15,321   
  

 

 

    

 

 

 

Net cash provided by (used in) investing activities

     (180,316      323,530   
  

 

 

    

 

 

 

Cash flows from financing activities:

     

Repayments of commercial paper

     (789,271      (413,221

Proceeds from commercial paper

     1,214,238         644,168   

Repayments of long-term debt

     (636,621        

Proceeds from issuance of long-term debt

     497,185           

Customer banking deposits, net

     208,753         735,252   

Dividends paid

     (162,692      (150,058

Repurchase of common stock, including shares surrendered

     (340,298      (180,566

Proceeds from exercise of stock options, net

     11,529         (324

Other, net

     (36,113      (31,424
  

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     (33,290      603,827   
  

 

 

    

 

 

 

Effects of exchange rates on cash

     (417      (3,446

Net decrease in cash and cash equivalents

     (1,525,949      (458,860

Cash and cash equivalents at beginning of the period

     1,944,334         1,677,844   
  

 

 

    

 

 

 

Cash and cash equivalents at end of the period

   $ 418,385       $ 1,218,984   
  

 

 

    

 

 

 

Supplementary cash flow data:

     

Income taxes paid, net

   $ 104,986       $ 163,471   

Interest paid on borrowings

     62,160         55,266   

Interest paid on deposits

     4,377         5,170   

Transfers of foreclosed loans to other assets

     7,208         6,521   

See Notes to Consolidated Financial Statements

 

-3-


 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      (unaudited

 

 

1. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated balance sheet as of January 31, 2013, the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended January 31, 2013 and 2012, and the condensed consolidated statements of cash flows for the nine months ended January 31, 2013 and 2012 have been prepared by the Company, without audit. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows at January 31, 2013 and for all periods presented have been made. See note 14 for discussion of our presentation of discontinued operations.

“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 consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our April 30, 2012 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of April 30, 2012 or for the year then ended, are derived from our April 30, 2012 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 contingent losses arising from our discontinued mortgage business, contingent losses associated with pending claims and litigation, allowance for loan losses, fair value of reporting units, valuation allowances based on future taxable income, reserves for uncertain tax positions 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. 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. 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 7.7 million shares for the three and nine months ended January 31, 2013, and 9.6 million shares for the three and nine months ended January 31, 2012, as the effect would be antidilutive due to the net loss from continuing operations during those periods.

 

-4-


The computations of basic and diluted loss per share from continuing operations are as follows:

 

             (in 000s, except per share amounts)  
      Three months ended
January 31,
    Nine months ended
January 31,
 
      2013     2012     2013     2012  

Net loss from continuing operations attributable to shareholders

   $ (16,915   $ (3,567   $ (223,764   $ (245,735

Income (loss) allocated to participating securities (nonvested shares)

     62        (24     199        152   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from continuing operations attributable to common shareholders

   $ (16,977   $ (3,543   $ (223,963   $ (245,887
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average common shares

     271,542        292,963        273,281        299,450   

Potential dilutive shares

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Dilutive weighted average common shares

     271,542        292,963        273,281        299,450   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share from continuing operations:

        

Basic

   $ (0.06   $ (0.01   $ (0.82   $ (0.82

Diluted

     (0.06     (0.01     (0.82     (0.82

The weighted average shares outstanding for the three and nine months ended January 31, 2013 decreased to 271.5 million and 273.3 million, respectively, from 293.0 million and 299.5 million for the three and nine months ended January 31, 2012, respectively, primarily due to share repurchases completed during fiscal years 2013 and 2012. During the nine months ended January 31, 2013, we purchased and immediately retired 21.3 million shares of our common stock at a cost of $315.0 million. During the nine months ended January 31, 2012, we purchased and immediately retired 13.0 million shares of our common stock at a cost of $177.5 million. The cost of shares retired during each period was allocated to the components of stockholders’ equity as follows:

 

     

(in 000s)

 
Nine months ended January 31,    2013      2012  

Common stock

   $ 213       $ 130   

Additional paid-in capital

     12,542         7,826   

Retained earnings

     302,245         169,548   
  

 

 

    

 

 

 
   $ 315,000       $ 177,504   
  

 

 

    

 

 

 
    

 

 

    

 

 

 

In addition to the shares we repurchased as described above, during the nine months ended January 31, 2013, we acquired 0.2 million shares of our common stock at an aggregate cost of $2.8 million. These shares represent shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. During the nine months ended January 31, 2012, we acquired 0.2 million shares at an aggregate cost of $3.1 million for similar purposes.

We also retired 60.0 million shares of treasury stock during the nine months ended January 31, 2013. This retirement of treasury stock had no impact on our total consolidated stockholders’ equity. The cost of treasury shares retired during the current period was allocated to the following components of stockholders’ equity:

 

     

(in 000s)

Common stock

   $ 600     

Additional paid-in capital

     35,400     

Retained earnings

     1,104,797     
  

 

 

   

Total cost allocated

     1,140,797     

Less cost of treasury shares retired

     (1,140,797  
  

 

 

   

Net impact on consolidated stockholders’ equity

   $     
  

 

 

   
    

 

 

     

 

-5-


During the nine months ended January 31, 2013 and 2012, we issued 1.3 million and 1.0 million shares of common stock, respectively, due to the vesting or exercise of stock-based awards.

During the nine months ended January 31, 2013, we granted 1.0 million stock options and 1.5 million nonvested units under our stock-based compensation plans. The weighted average fair value of options granted was $2.79. Stock options or nonvested units granted generally either vest over a three year period with one-third vesting each year or cliff vest at the end of a three-year period. Stock-based compensation expense of our continuing operations totaled $3.7 million and $11.5 million for the three and nine months ended January 31, 2013, respectively, and $2.0 million and $11.0 million for the three and nine months ended January 31, 2012, respectively. At January 31, 2013, unrecognized compensation cost for options totaled $4.6 million, and for nonvested shares and units totaled $25.4 million.

 

3. Receivables

Short-term receivables of our continuing operations consist of the following:

 

      (in 000s)  
As of    January 31, 2013     January 31, 2012     April 30, 2012  

Emerald Advance lines of credit

   $ 462,576      $ 443,717      $ 23,717   

Receivables for tax preparation and related fees

     250,566        333,636        42,286   

Loans to franchisees

     110,560        81,415        61,252   

Royalties from franchisees

     69,627        88,597        5,781   

RAC fees receivable

     31,680        28,942          

Receivable from McGladrey & Pullen LLP

            32,342          

Other

     68,980        91,392        105,411   
  

 

 

   

 

 

   

 

 

 
     993,989        1,100,041        238,447   

Allowance for doubtful accounts

     (44,829     (64,139     (44,589
  

 

 

   

 

 

   

 

 

 
   $ 949,160      $ 1,035,902      $ 193,858   
  

 

 

   

 

 

   

 

 

 
    

 

 

   

 

 

   

 

 

 

The short-term portion of Emerald Advance lines of credit (EAs), loans made to franchisees and credit card balances is included in receivables, while the long-term portion is included in other assets in the consolidated balance sheets. These amounts are as follows:

 

              (in 000s)  
      Emerald Advance
Lines of Credit
     Loans
to Franchisees
     Credit Cards  

As of January 31, 2013:

        

Short-term

   $ 462,576       $ 110,560       $ 4,220   

Long-term

     10,465         127,274         16,045   
  

 

 

    

 

 

    

 

 

 
   $ 473,041       $ 237,834       $ 20,265   
  

 

 

    

 

 

    

 

 

 

As of January 31, 2012:

        

Short-term

   $ 443,717       $ 81,415       $   

Long-term

     15,001         134,136           
  

 

 

    

 

 

    

 

 

 
   $ 458,718       $ 215,551       $   
  

 

 

    

 

 

    

 

 

 

As of April 30, 2012:

        

Short-term

   $ 23,717       $ 61,252       $   

Long-term

     13,007         109,837           
  

 

 

    

 

 

    

 

 

 
   $  36,724       $ 171,089       $   
  

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

 

 

-6-


Emerald Advance Lines of Credit. We review the credit quality of our EA receivables 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 January 31, 2013, by year of origination, are as follows:

 

              (in 000s)

2013

   $ 435,117      

2012

     6,936      

2011

     5,992      

2010

     3,493      

2009 and prior

     5,073      

Revolving loans

     16,430      
  

 

 

    
   $ 473,041      
  

 

 

    
    

 

 

      

As of January 31, 2013, January 31, 2012 and April 30, 2012, $30.7 million, $41.4 million and $31.4 million, respectively, of EAs were on non-accrual status and classified as impaired, or more than 60 days past due.

Loans to Franchisees. Loans made to franchisees at January 31, 2013 totaled $237.8 million, and consisted of $144.5 million in term loans and $93.3 million in revolving lines of credit made to existing franchisees primarily for the purpose of funding off-season working capital needs. Loans made to franchisees at January 31, 2012 totaled $215.6 million, and consisted of $150.4 million in term loans and $65.2 million in revolving lines of credit. Loans made to franchisees at April 30, 2012 totaled $171.1 million, and consisted of $127.0 million in term loans and $44.1 million in revolving lines of credit. As of January 31, 2013, we had no loans to franchisees that were past due or on non-accrual status.

Credit Cards. In November 2012, H&R Block Bank, (HRB Bank) began offering unsecured credit cards. These credit cards are offered to selected customers, primarily previous H&R Block clients, based on their credit profile and have a maximum available credit limit of $2,500. Interest income on credit cards is calculated using the average daily balance method and is recognized based on the principal amount outstanding until the outstanding balance is paid or becomes delinquent.

We believe that delinquency rates are the primary indictor of credit quality; however, we also utilize a four-tier approach with Tier 4 representing the most risk. Each tier is comprised of a combination of FICO, Vantage and industry predictive loss models. We do not consider the borrower’s credit score to be a primary indicator since it tends to be a lagging indicator of credit quality. All criteria are evaluated at the time of origination, and are not subsequently updated. Credit card receivable balances as of January 31, 2013, by credit tier, are as follows:

 

              (in 000s)

Tier 1

   $ 3,779      

Tier 2

     8,818      

Tier 3

     2,660      

Tier 4

     5,008      
  

 

 

    
     $20,265      
  

 

 

    
    

 

 

      

Credit card receivables are evaluated for impairment when they become delinquent. Amounts deemed to be uncollectible are charged off against the related allowance. As of January 31, 2013, none of these credit card balances were on non-accrual status and classified as impaired, or more than 60 days past due. Payments on past due amounts are recorded as a reduction in the receivable balance.

 

-7-


Allowance for Doubtful Accounts. Activity in the allowance for doubtful accounts for the nine months ended January 31, 2013 and 2012 is as follows:

 

      (in 000s)  
      Balance as of
April 30, 2012
     Provision      Charge-offs      Balance as of
January 31, 2013
 

Emerald Advance lines of credit

   $ 6,200       $ 25,519       $       $ 31,719   

Loans to franchisees

             42                 42   

Credit cards

             4,255                 4,255   

All other receivables

     38,389         10,666         (40,242      8,813   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,589       $ 40,482       $ (40,242    $ 44,829   
  

 

 

    

 

 

    

 

 

    

 

 

 
         
      Balance as of
April 30, 2011
     Provision      Charge-offs      Balance as of
January 31, 2012
 

Emerald Advance lines of credit

   $ 4,400       $ 33,570       $       $ 37,970   

Loans to franchisees

                               

Credit cards

                               

All other receivables

     43,543         17,062         (34,436      26,169   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 47,943       $ 50,632       $ (34,436    $ 64,139   
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

We recorded an allowance for credit card receivables equal to 21% of amounts outstanding, based on industry information for similar credit cards. We will adjust our allowance in the future as payment and delinquency trends become available.

There were no changes to our methodology related to the calculation of our allowance for doubtful accounts during the nine months ended January 31, 2013.

 

4. Mortgage Loans Held for Investment and Related Assets

The composition of our mortgage loan portfolio as of January 31, 2013 and April 30, 2012 is as follows:

 

     

(dollars in 000s)

 
As of    January 31, 2013      April 30, 2012  
      Amount     % of Total      Amount      % of Total  

Adjustable-rate loans

   $ 203,624        55%       $ 238,442         56%   

Fixed-rate loans

     168,515        45%         190,870         44%   
  

 

 

   

 

 

    

 

 

    

 

 

 
     372,139        100%         429,312         100%   

Unamortized deferred fees and costs

     3,004           3,429      

Less: Allowance for loan losses

     (17,256        (26,540)      
  

 

 

      

 

 

    
     $357,887         $ 406,201      
  

 

 

      

 

 

    
    

 

 

            

 

 

          

Our loan loss allowance as a percent of mortgage loans was 4.6% at January 31, 2013, compared to 6.2% at April 30, 2012.

Activity in the allowance for loan losses for the nine months ended January 31, 2013 and 2012 is as follows:

 

      (in 000s)  
Nine months ended January 31,    2013     2012  

Balance, beginning of the period

   $ 26,540      $ 92,087   

Provision

     10,250        17,275   

Recoveries

     2,745        160   

Charge-offs

     (22,279     (19,573
  

 

 

   

 

 

 

Balance, end of the period

   $ 17,256      $ 89,949   
  

 

 

   

 

 

 
    

 

 

   

 

 

 

 

 

-8-


Our allowance decreased significantly from the prior year primarily due to a change in the fourth quarter of fiscal year 2012, whereby we now charge-off loans 180 days past due to the value of the collateral less costs to sell. This change did not have a significant impact on our provision recorded during the nine months ended January 31, 2013.

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 modified as troubled debt restructurings (TDRs), are evaluated individually. The balance of these loans and the related allowance is as follows:

 

      (in 000s)  
As of    January 31, 2013      April 30, 2012  
      Portfolio Balance      Related Allowance      Portfolio Balance      Related Allowance  

Pooled

     $    219,345         $      6,670         $    248,772         $      9,237   

Impaired:

           

Individually (TDRs)

     59,295         5,013         71,949         7,752   

Individually

     93,499         5,573         108,591         9,551   
  

 

 

    

 

 

    

 

 

    

 

 

 
     $    372,139         $    17,256         $    429,312         $    26,540   
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

Our portfolio includes loans originated by Sand Canyon Corporation, previously known as Option One Mortgage Corporation, and its subsidiaries (SCC) and purchased by HRB Bank, which constitute 57% of the total loan portfolio at January 31, 2013. We have experienced higher rates of delinquency and believe that we have greater exposure to loss with respect to this segment of our loan portfolio. Our remaining loan portfolio is characteristic of a prime loan portfolio, and we believe therefore subject to a lower loss exposure. Detail of our mortgage loans held for investment and the related allowance at January 31, 2013 is as follows:

      (dollars in 000s)  
     Outstanding      Loan Loss Allowance     % 30+ Days  
      Principal Balance      Amount      % of Principal     Past Due  

Purchased from SCC

   $ 212,250       $ 13,596         6.4     34.5

All other

     159,889         3,660         2.3     9.2
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 372,139       $ 17,256         4.6     23.6
  

 

 

    

 

 

    

 

 

   

 

 

 
    

 

 

    

 

 

    

 

 

   

 

 

 

Credit quality indicators at January 31, 2013 include the following:

 

      (in 000s)  
Credit Quality Indicators    Purchased from SCC        All Other        Total Portfolio  

Occupancy status:

            

Owner occupied

   $ 154,470         $ 102,180         $ 256,650   

Non-owner occupied

     57,780           57,709           115,489   
  

 

 

      

 

 

      

 

 

 
   $ 212,250         $ 159,889         $ 372,139   
  

 

 

      

 

 

      

 

 

 

Documentation level:

            

Full documentation

   $ 68,413         $ 116,591         $ 185,004   

Limited documentation

     6,889           16,775           23,664   

Stated income

     118,100           16,385           134,485   

No documentation

     18,848           10,138           28,986   
  

 

 

      

 

 

      

 

 

 
   $ 212,250         $ 159,889         $ 372,139   
  

 

 

      

 

 

      

 

 

 

Internal risk rating:

            

High

   $ 68,645         $         $ 68,645   

Medium

     143,605                     143,605   

Low

               159,889           159,889   
  

 

 

      

 

 

      

 

 

 
   $ 212,250         $ 159,889         $ 372,139   
  

 

 

      

 

 

      

 

 

 
    

 

 

      

 

 

      

 

 

 

 

 

-9-


Loans given our internal risk rating of “high” were originated by SCC, and generally had no documentation or were based on stated income. Loans given our internal risk rating of “medium” were generally full documentation or based on stated income, with loan-to-value ratios at origination of more than 80%, and were made to borrowers with credit scores below 700 at origination. Loans given our internal risk rating of “low” were generally full documentation, with loan-to-value ratios at origination of less than 80% and were made to borrowers with credit scores greater than 700 at origination.

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 58% of our mortgage loan portfolio consists of loans to borrowers located in the states of Florida, California, New York and Wisconsin.

Detail of the aging of the mortgage loans in our portfolio as of January 31, 2013 is as follows:

 

      (in 000s)  
      Less than 60
Days Past Due
     60–89 Days
Past Due
     90+ Days
Past Due 
(1)
     Total
Past Due
     Current      Total  

Purchased from SCC

     $16,752         $3,084         $69,905       $ 89,741       $ 122,509       $ 212,250   

All other

     7,168         1,089         12,931         21,188         138,701         159,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     $23,920         $4,173         $82,836       $ 110,929       $ 261,210       $ 372,139   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(1)      We do not accrue interest on loans past due 90 days or more.

         

Information related to our non-accrual loans is as follows:

 

      (in 000s)  
As of    January 31, 2013      April 30, 2012  

Loans:

     

Purchased from SCC

   $ 76,235       $ 88,347   

Other

     15,761         16,626   
  

 

 

    

 

 

 
     91,996         104,973   
  

 

 

    

 

 

 

TDRs:

     

Purchased from SCC

     3,460         3,166   

Other

     504         1,270   
  

 

 

    

 

 

 
     3,964         4,436   
  

 

 

    

 

 

 

Total non-accrual loans

   $ 95,960       $ 109,409   
  

 

 

    

 

 

 
    

 

 

    

 

 

 

Information related to impaired loans is as follows:

 

                              (in 000s)  
      Balance With
Allowance
     Balance With
No Allowance
     Total
Impaired Loans
     Related
Allowance
 

As of January 31, 2013:

           

Purchased from SCC

     $38,938         $  88,671         $127,609         $  8,470   

Other

     6,757         18,428         25,185         2,116   
  

 

 

    

 

 

    

 

 

    

 

 

 
     $45,695         $107,099         $152,794         $10,586   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of April 30, 2012:

           

Purchased from SCC

     $56,128         $  97,591         $153,719         $14,917   

Other

     7,137         19,684         26,821         2,386   
  

 

 

    

 

 

    

 

 

    

 

 

 
     $63,265         $117,275         $180,540         $17,303   
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

 

-10-


Information related to the allowance for impaired loans is as follows:

 

              (in 000s)  
As of    January 31, 2013      April 30, 2012  

Portion of total allowance for loan losses allocated
to impaired loans and TDR loans:

     

Based on collateral value method

     $  5,573         $  9,551   

Based on discounted cash flow method

     5,013         7,752   
  

 

 

    

 

 

 
     $10,586         $17,303   
  

 

 

    

 

 

 
    

 

 

    

 

 

 

Information related to activities of our non-performing assets is as follows:

 

              (in 000s)  
Nine months ended January 31,    2013      2012  

Average impaired loans:

     

Purchased from SCC

   $ 137,703       $ 224,002   

All other

     25,879         35,421   
  

 

 

    

 

 

 
   $ 163,582       $ 259,423   
  

 

 

    

 

 

 

Interest income on impaired loans:

     

Purchased from SCC

   $ 2,940       $ 4,340   

All other

     232         348   
  

 

 

    

 

 

 
   $ 3,172       $ 4,688   
  

 

 

    

 

 

 

Interest income on impaired loans recognized on a
cash basis on non-accrual status:

     

Purchased from SCC

   $ 2,881       $ 4,182   

All other

     214         324   
  

 

 

    

 

 

 
   $ 3,095       $ 4,506   
  

 

 

    

 

 

 
    

 

 

    

 

 

 

Activity related to our real estate owned (REO) is as follows:

 

             (in 000s)  
Nine months ended January 31,    2013     2012  

Balance, beginning of the period

   $ 14,972      $ 19,532   

Additions

     7,208        6,521   

Sales

     (6,652     (7,933

Writedowns

     (1,676     (2,193
  

 

 

   

 

 

 

Balance, end of the period

   $ 13,852      $ 15,927   
  

 

 

   

 

 

 
    

 

 

   

 

 

 

 

-11-


5. Investments in Available-for-Sale Securities

The amortized cost and fair value of securities classified as available-for-sale (AFS) held at January 31, 2013 and April 30, 2012 are summarized below:

 

                                                      (in 000s)  
As of   January 31, 2013     April 30, 2012  
     Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
(1)
    Fair Value     Amortized
Cost
   

Gross

Unrealized
Gains

   

Gross

Unrealized
Losses
(1)

    Fair Value  

Short-term:

               

Municipal bonds

  $ 1,000      $ 1      $      $ 1,001      $ 1,008      $ 29      $      $ 1,037   

Long-term:

               

Mortgage-backed securities

    386,741        5,825        (780     391,786        361,184        5,620        (121     366,683   

Municipal bonds

    4,192        334               4,526        4,236        396               4,632   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    390,933        6,159        (780     396,312        365,420        6,016        (121     371,315   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 391,933      $ 6,160      $ (780   $ 397,313      $ 366,428      $ 6,045      $ (121   $ 372,352   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)      At January 31, 2013, we had no securities that had been in a continuous loss position for more than twelve months. At April 30, 2012, mortgage-backed securities with a cost of $8.1 million and gross unrealized losses of $21 thousand had been in a continuous loss position for more than twelve months.

           

During the nine months ended January 31, 2013, we received proceeds from the sale of AFS securities of $5.2 million and recorded a gross realized gain of $0.2 million on this sale. We had no sales of AFS securities during the nine months ended January 31, 2012.

Contractual maturities of AFS debt securities at January 31, 2013, occur at varying dates over the next 30 years, and are set forth in the table below.

 

              (in 000s)  
As of January 31, 2013    Cost Basis      Fair Value  

Maturing in:

     

Less than one year

   $ 1,000       $ 1,001   

Two to five years

     4,192         4,526   

More than five years

     386,741         391,786   
  

 

 

    

 

 

 
   $ 391,933       $ 397,313   
  

 

 

    

 

 

 
    

 

 

    

 

 

 

 

6. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the nine months ended January 31, 2013 consist of the following:

 

      (in 000s)  
      Tax Services  

Balance at April 30, 2012:

  

Goodwill

     $459,863   

Accumulated impairment losses

     (32,297
  

 

 

 
     427,566   
  

 

 

 

Changes:

  

Acquisitions

     7,650   

Disposals and foreign currency changes, net

     40   
  

 

 

 

Balance at January 31, 2013:

  

Goodwill

     467,553   

Accumulated impairment losses

     (32,297
  

 

 

 
     $435,256   
  

 

 

 
    

 

 

 

 

-12-


We test goodwill 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.

Intangible assets of our Tax Services segment consist of the following:

 

                                            (in 000s)  
As of    January 31, 2013      April 30, 2012  
      Gross
Carrying
Amount
     Accumulated
Amortization
    Net      Gross
Carrying
Amount
    

Accumulated

Amortization

    Net  

Reacquired franchise rights

   $ 214,330         $(17,174   $ 197,156       $ 214,330         $(14,083   $ 200,247   

Customer relationships

     108,596         (52,820     55,776         90,433         (46,504     43,929   

Noncompete agreements

     23,054         (21,627     1,427         22,337         (21,425     912   

Franchise agreements

     19,201         (5,334     13,867         19,201         (4,373     14,828   

Purchased technology

     14,800         (11,911     2,889         14,700         (10,665     4,035   

Trade name

     1,300         (892     408         1,300         (800     500   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 381,281         $(109,758   $ 271,523       $ 362,301         $(97,850   $ 264,451   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization of intangible assets of our continuing operations for the three and nine months ended January 31, 2013 totaled $4.6 and $14.4 million, respectively. Amortization of intangible assets of our continuing operations for the three and nine months ended January 31, 2012 totaled $4.7 and $15.2 million, respectively. Additionally, we recorded an impairment of customer relationships of $4.0 million during the prior year period related to the discontinuation of the ExpressTax brand. Estimated amortization of intangible assets for fiscal years 2013 through 2017 is $17.6 million, $17.1 million, $13.7 million, $13.1 million and $12.4 million, respectively.

 

7. Borrowings

Borrowings consist of the following:

 

                    (in 000s)  
As of    January 31, 2013     January 31, 2012     April 30, 2012  

Commercial paper outstanding

   $ 424,967      $ 230,947      $            –   

Senior Notes, 5.500%, due November 2022

   $ 497,260      $            –      $            –   

Senior Notes, 5.125%, due October 2014

     399,588        399,364        399,412   

Senior Notes, 7.875%, due January 2013

            599,871        599,913   

Other

     9,877        41,002        41,224   
  

 

 

   

 

 

   

 

 

 

Total long-term debt

     906,725        1,040,237        1,040,549   

Less: Current portion

     (713     (630,996     (631,434
  

 

 

   

 

 

   

 

 

 
   $ 906,012      $ 409,241      $ 409,115   
  

 

 

   

 

 

   

 

 

 
    

 

 

   

 

 

   

 

 

 

We had commercial paper borrowings of $425.0 million at January 31, 2013, compared to $230.9 million at the same time last year. These borrowings were used to fund our off-season losses and cover our seasonal working capital needs.

On October 25, 2012, we issued $500.0 million of 5.50% Senior Notes. The Senior Notes are due November 1, 2022, and are not redeemable by the bondholders prior to maturity, although we have the right to redeem some or all of these notes at any time, at specified redemption prices. On October 25, 2012, we provided notice to the trustee of our intention to redeem the entire principal amount of the $600.0 million Senior Notes due in January 2013. The redemption settled on November 26, 2012 at a price of $623.0 million, which included full payment of principal, a make-whole premium of $5.8 million and interest accrued up to the redemption date of $17.2 million. Proceeds of the $500.0 million Senior Notes and other cash balances were used to repay the $600.0 million Senior Notes. We recognized a loss on the extinguishment of this debt of $5.8 million during the three months ended January 31, 2013, which primarily represents the interest that would have been paid on these notes if they had not been redeemed prior to maturity. This loss is included in other income (expense), net on our consolidated statements of operations.

 

-13-


In August 2012, we terminated our previous committed line of credit (CLOC) agreement and we entered into a new five-year, $1.5 billion Credit and Guarantee Agreement (2012 CLOC). Funds available under the 2012 CLOC may be used for general corporate purposes or for working capital needs. The 2012 CLOC bears interest at an annual rate of LIBOR plus an applicable rate ranging from 0.750% to 1.45% or PRIME plus an applicable rate ranging from 0.000% to 0.450% (depending on the type of borrowing and our then current credit ratings) and includes an annual facility fee ranging from 0.125% to 0.300% of the committed amounts (also depending on our then current credit ratings). The 2012 CLOC is subject to various conditions, triggers, events or occurrences that could result in earlier termination and contains customary representations, warranties, covenants and events of default, including, without limitation: (1) a covenant requiring the Company to maintain a debt-to-EBITDA ratio calculated on a consolidated basis of no greater than (a) 3.50 for the fiscal quarters ending on April 30, July 31, and October 31 of each year and (b) 3.75 for the fiscal quarter ending on January 31 of each year; (2) a covenant requiring us to maintain an interest coverage (EBITDA-to-interest expense) ratio calculated on a consolidated basis of not less than 2.50 as of the last date of any fiscal quarter; and (3) covenants restricting our ability to incur additional debt, incur liens, merge or consolidate with other companies, sell or dispose of their respective assets (including equity interests), liquidate or dissolve, make investments, loans, advances, guarantees and acquisitions, and engage in certain transactions with affiliates or certain restrictive agreements. The 2012 CLOC includes provisions for an equity cure which could potentially allow us to independently cure a default. We had no balances outstanding under the 2012 CLOC at January 31, 2013. However, we may borrow amounts under the 2012 CLOC from time to time in the future to support working capital requirements or for other general corporate purposes.

 

8. Fair Value

Fair Value Measurement

We use the following classification of financial instruments pursuant to the fair value hierarchy methodologies for assets measured at fair value:

   

Level 1 – inputs to the valuation are quoted prices in an active market for identical assets.

   

Level 2 – inputs to the valuation include quoted prices for similar assets in active markets utilizing a third–party pricing service to determine fair value.

   

Level 3 – valuation is 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.

Financial instruments are broken down in the tables that follow by recurring or nonrecurring measurement status. Recurring assets are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date. Assets measured on a nonrecurring basis are assets that, as a result of an event or circumstance, were required to be remeasured at fair value after initial recognition in the financial statements at some time during the reporting period.

The following table presents the assets that were remeasured at fair value on a recurring basis during the nine months ended January 31, 2013 and 2012 and the unrealized gains on those remeasurements:

 

      (dollars in 000s)  
      Total     Level 1     Level 2     Level 3     Gain  

January 31, 2013:

          

Mortgage-backed securities

   $ 391,786      $   –      $ 391,786        $    –      $ 5,045   

Municipal bonds

     5,527               5,527               335   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 397,313      $   –      $ 397,313        $    –      $ 5,380   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a percentage of total assets

     10.1%        –%        10.1%        –%     

January 31, 2012:

          

Mortgage-backed securities

   $ 306,475      $   –      $ 306,475        $    –      $ 2,956   

Municipal bonds

     7,712               7,712               451   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 314,187      $   –      $ 314,187        $    –      $ 3,407   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a percentage of total assets

     6.5         6.5            

 

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These AFS securities are carried at fair value on a recurring basis. These include certain agency and agency-sponsored mortgage-backed securities and municipal bonds. Quoted market prices are not available for these securities. As a result, 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 for similar securities. The fair values provided by third-party pricing service are reviewed and validated by management of HRB Bank. There were no transfers of AFS securities between hierarchy levels during the nine months ended January 31, 2013 and 2012.

The following table presents the assets that were remeasured at fair value on a non-recurring basis during the nine months ended January 31, 2013 and 2012 and the realized losses on those remeasurements:

 

      (dollars in 000s)  
      Total     Level 1     Level 2     Level 3     Loss  

January 31, 2013:

          

REO

   $ 14,683      $   –      $   –      $ 14,683      $ (350

Impaired mortgage loans held for investment

     87,949                      87,949        (8,509
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 102,632      $   –      $   –      $ 102,632      $ (8,859
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a percentage of total assets

     2.6%        –%        –%        2.6%     

January 31, 2012:

          

REO

     16,883                      16,883        (772

Impaired mortgage loans held for investment

     103,509                      103,509        (6,986
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 120,392      $   –      $   –      $ 120,392      $ (7,758
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a percentage of total assets

     2.5             2.5        

The following methods were used to estimate the fair value of each class of financial instrument above:

   

Real estate owned – REO includes foreclosed properties securing mortgage loans. Foreclosed assets are recorded at estimated fair value, generally based on independent market prices or appraised values of the collateral, less costs to sell upon foreclosure. The assets are remeasured quarterly based on independent appraisals or broker price opinions. Subsequent holding period gains and losses arising from the sale of REO are reported when realized. 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. Impaired and TDR loans are required to be evaluated at least annually, based on HRB Bank’s Loan Policy. Impaired loans are typically remeasured every nine months, while TDRs are evaluated quarterly. These loans are classified as Level 3.

We have established various controls and procedures to ensure that the unobservable inputs used in the fair value measurement of these instruments are appropriate. Appraisals are obtained from certified appraisers and reviewed internally by HRB Bank’s asset management group. The inputs and assumptions used in our discounted cash flow model for TDRs are reviewed and approved by HRB Bank’s management team each time the balances are remeasured. Significant changes in fair value from the previous measurement are presented to HRB Bank management for approval. There were no changes to the unobservable inputs used in determining the fair values of our Level 3 financial assets.

 

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The following table presents the quantitative information about our Level 3 fair value measurements:

 

                      (dollars in 000s)
     Fair Value at
January 31, 2013
    Valuation
Technique
  Unobservable Input  

Range

(Weighted Average)

REO

    $13,852      Third party   Cost to list/sell   5% - 50% (6%)
    pricing   Loss severity   0% - 100% (52%)

Impaired mortgage loans held for investment – non-TDRs

    $87,926      Collateral- based   Cost to list/sell Time to sell (months)  

0% - 45% (7%)

24 (24)

      Collateral depreciation   (24%) - 100% (45%)
      Loss severity   0% - 100% (58%)

Impaired mortgage loans held for investment – TDRs

    $54,282      Discounted cash flow   Aged default performance Loss severity  

30% - 50% (41%)

0% - 21% (4%)

Estimated Fair Value of Financial Instruments

The carrying amounts and estimated fair values of our financial instruments are as follows:

 

                                      (in 000s)  
As of    January 31, 2013              April 30, 2012  
      Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
     Fair Value
Hierarchy
 

Assets:

              

Cash and cash equivalents

   $ 418,385       $ 418,385       $ 1,944,334       $ 1,944,334         Level 1   

Cash and cash equivalents – restricted

     37,958         37,958         48,100         48,100         Level 1   

Receivables, net – short-term

     949,160         949,160         193,858         193,858         Level 1   

Mortgage loans held for investment, net

     357,887         217,019         406,201         248,535         Level 3   

Investments in available-for-sale securities

     397,313         397,313         372,352         372,352         Level 2   

Receivables, net – long-term

     158,228         158,228         127,468         127,468         Level 1 & 3   

Note receivable (including interest)

     59,213         67,048         55,444         55,444         Level 3   

Liabilities:

              

Deposits

     1,041,942         1,042,282         833,047         831,251         Level 1 & 3   

Long-term debt

     906,725         946,793         1,040,549         1,077,223         Level 3   

Fair value estimates, methods and assumptions are set forth below. The fair value was not estimated for assets and liabilities that are not considered financial instruments.

   

Cash and cash equivalents, including restricted – Fair value approximates the carrying amount.

   

Receivables – short-term – For short-term balances, the carrying values reported in the balance sheet approximate fair market value due to the relative short-term nature of the respective instruments.

   

Mortgage loans held for investment, net – The fair value of mortgage loans held for investment is determined using market pricing sources based on projected future cash flows of each individual asset, and loan characteristics including channel and performance characteristics.

   

Investments in available-for-sale securities – We use a third-party pricing service to determine fair value. The service’s pricing model is based on market data and utilizes available trade, bid and other market information for similar securities.

   

Receivables – long-term – The carrying values for the long-term portion of loans to franchisees approximate fair market value due to the variable interest rates (Level 1). Long-term EA receivables are carried at net realizable value which approximates fair value (Level 3). Net realizable value is determined based on historical collection rates. Credit card balances bear interest at a rate similar to available market rates and have been outstanding for less than three months, therefore carrying value approximates fair market value (Level 1).

   

Note receivable – The fair value of the long-term note receivable from McGladrey & Pullen LLP (M&P) assumes no prepayment and is determined using market pricing sources for similar instruments based on projected future cash flows.

   

Deposits – The fair value of deposits with no stated maturity such as non-interest-bearing demand deposits, checking, money market and savings accounts is equal to the amount payable on demand

 

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(Level 1). The 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 (Level 3).

   

Long-term debt – 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.

 

9. Income Taxes

We file a consolidated federal income tax return in the United States with the Internal Revenue Service (IRS) and file tax returns in various state and foreign jurisdictions. Tax returns are typically examined and settled upon completion of the exam, with tax controversies settled through an appeal process.

In November 2012, we received written approval from the IRS Joint Committee on Taxation of the settlement of a majority of the issues related to the examination of our 1999 through 2007 U.S. federal consolidated tax returns. In the third quarter, we recorded the impact of the settlement which reduced uncertain tax benefits by $59.0 million, with $33.3 million of the total resulting in an income tax benefit in the quarter. Also reducing our tax expense is a further benefit of $10.0 million primarily related to interest adjustments, bringing the total tax benefit from the settlement to $43.3 million.

Except for three issues for which we are pursuing refund claims for tax years 2002 through 2007, which will remain open until resolved, these years are closed. In addition, U.S. federal consolidated tax returns for 2008 through 2010 are currently under examination.

We had gross unrecognized tax benefits of $146.6 million and $206.4 million at January 31, 2013 and April 30, 2012, respectively. The gross unrecognized tax benefits decreased $59.8 million net in the current year, due primarily to the settlement with the IRS during the third quarter. We believe it is reasonably possible that the balance of unrecognized tax benefits could decrease by approximately $18 million before January 31, 2014. This anticipated decrease is due primarily to the expiration of statutes of limitations and anticipated settlements of state audit issues. This amount is included in accrued income taxes in our consolidated balance sheet. The remaining amount is classified as long-term and is included in other noncurrent liabilities in the consolidated balance sheet.

 

10. Interest Income and Expense

The following table shows the components of interest income and expense of our continuing operations:

 

                              (in 000s)  
     Three months ended January 31,      Nine months ended January 31,  
              2013              2012              2013              2012  

Interest income:

           

Emerald Advance lines of credit

   $ 29,314       $ 30,062       $ 30,074       $ 30,297   

Mortgage loans, net

     4,120         4,948         12,705         15,760   

Loans to franchisees

     2,651         2,694         7,397         7,561   

AFS securities

     1,713         1,283         5,105         3,006   

Other

     502         489         2,751         3,113   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 38,300       $ 39,476       $ 58,032       $ 59,737   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Borrowings

   $ 17,642       $ 21,382       $ 60,391       $ 63,625   

Deposits

     1,786         2,011         4,504         5,275   

FHLB advances

             150                 452   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 19,428       $ 23,543       $ 64,895       $ 69,352   
  

 

 

    

 

 

    

 

 

    

 

 

 
    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 consolidated balance sheets, are as follows:

 

             (in 000s)  
Nine months ended January 31,    2013     2012  

Balance, beginning of period

   $ 141,080      $ 140,603   

Amounts deferred for new guarantees issued

     14,202        19,471   

Revenue recognized on previous deferrals

     (57,505     (57,254
  

 

 

   

 

 

 

Balance, end of period

   $ 97,777      $ 102,820   
  

 

 

   

 

 

 
    

 

 

   

 

 

 

In addition to amounts accrued for our POM guarantee, we had accrued $14.9 million and $16.3 million at January 31, 2013 and April 30, 2012, respectively, related to our standard guarantee, which is included with our in-office tax preparation services. The current portion of this liability is included in accounts payable, accrued expenses and other current liabilities and the long-term portion is included in other noncurrent liabilities in the consolidated balance sheets,

We have accrued estimated contingent payments totaling $10.9 million and $6.8 million as of January 31, 2013 and April 30, 2012, respectively, related to 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. Estimates of contingent payments are typically based on expected financial performance of the acquired business and economic conditions at the time of acquisition. Should actual results differ materially from our assumptions, future payments made will differ from the above estimate and any differences will be recorded in our results from continuing operations.

We have contractual commitments to fund certain franchisees requesting revolving lines of credit. Our total obligation under these lines of credit was $90.0 million at January 31, 2013, and net of amounts drawn and outstanding, our remaining commitment to fund totaled $13.5 million.

We have contractual commitments to fund our credit card customers on their approved revolving lines of credit. Our total obligation under the credit card agreements was $30.5 million at January 31, 2013, and net of amounts outstanding, our remaining commitment to fund totaled $7.4 million.

We maintain compensating balances related to the 2012 CLOC, which are not legally restricted as to withdrawal. These balances totaled $0.4 million as of January 31, 2013.

We routinely enter into contracts that include embedded indemnifications that have characteristics similar to guarantees. Other guarantees and indemnifications of the Company and its subsidiaries include obligations to protect counterparties from losses arising from the following: (1) tax, legal and other risks related to the purchase or disposition of businesses; (2) penalties and interest assessed by federal and state taxing authorities in connection with tax returns prepared for clients; (3) indemnification of our directors and officers; and (4) third-party claims relating to various arrangements in the normal course of business. Typically, there is no stated maximum payment related to these indemnifications, and the terms of the indemnities may vary and in many cases 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 values of guarantees and indemnifications relating to our continuing operations are not material as of January 31, 2013.

Variable Interests

We evaluated our financial interests in variable interest entities (VIEs) as of January 31, 2013 and determined that there have been no significant changes related to those financial interests.

 

12. Litigation and Related Contingencies

We are a defendant in a large number of litigation matters, arising both in the ordinary course of business and otherwise, including as described below. The matters described below are not all of the

 

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lawsuits to which we are subject. In some of the matters, very large and/or indeterminate amounts, including punitive damages, are sought. U.S. jurisdictions permit considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. We believe that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value due to this variability in pleadings and our experience in litigating or resolving through settlement numerous claims over an extended period of time.

The outcome of a litigation matter and the amount or range of potential loss at particular points in time may be difficult to ascertain. Among other things, uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.

In addition to litigation matters, we are also subject to other claims and regulatory investigations arising out of our business activities, including as described below.

We accrue liabilities for litigation and regulatory loss contingencies when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Liabilities have been accrued for a number of the matters noted below. If a range of loss is estimated, and some amount within that range appears to be a better estimate than any other amount within that range, then that amount is accrued. If no amount within the range can be identified as a better estimate than any other amount, we accrue the minimum amount in the range.

For such matters where a loss is believed to be reasonably possible, but not probable, or the loss cannot be reasonably estimated, no accrual has been made. It is possible that litigation and regulatory matters could require us to pay damages or make other expenditures or accrue liabilities in amounts that could not be reasonably estimated at January 31, 2013. While the potential future liabilities could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known, we do not believe any such liabilities are likely to have a material effect on our consolidated financial position, results of operations and cash flows. As of January 31, 2013, we accrued liabilities of $18.9 million, compared to $79.0 million at April 30, 2012. In addition, there are certain SCC contingencies described below and in note 13, which relate to representation and warranty claims that may be resolved through settlement or litigation and any resulting payment charged as a reduction to the accrual for representation and warranty claims.

For some matters where a liability has not been accrued, we are able to estimate a reasonably possible range of loss. For those matters, and for matters where a liability has been accrued, as of January 31, 2013, we estimate the aggregate range of reasonably possible losses in excess of amounts accrued to be approximately $0 to $119 million, of which approximately 78% relates to our discontinued operations.

For other matters, we are not currently able to estimate the reasonably possible loss or range of loss. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. On a quarterly and annual basis, we review relevant information with respect to litigation and related contingencies and update our accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews.

Litigation and Other Claims, Including Indemnification Claims, Pertaining to Discontinued Mortgage Operations. Although SCC ceased its mortgage loan origination activities in December 2007 and sold its loan servicing business in April 2008, SCC and the Company have been, remain, and may in the future be subject to regulatory investigations, claims, including indemnification 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 regulators, third party indemnitees including depositors and underwriters, individual plaintiffs, and cases in which plaintiffs seek to represent a class of

 

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others alleged to be similarly situated. Among other things, these investigations, claims and lawsuits allege discriminatory or unfair and deceptive loan origination and servicing practices, fraud and other common law torts, rights to indemnification and violations of securities laws, the Truth in Lending Act (TILA), Equal Credit Opportunity Act and the Fair Housing Act. Given the impact of the financial crisis on the non-prime mortgage environment, the aggregate number of these investigations, claims and lawsuits has increased over time and is expected to continue to increase further. 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 in many cases 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 financial position, results of operations and cash flows. Certain of these matters are described in more detail below.

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. SCC subsequently filed a motion to decertify the class, which the court granted. Plaintiffs’ petition for appeal was denied. A portion of our loss contingency accrual is related to this lawsuit for the amount of loss that we consider probable and reasonably estimable. We believe SCC has meritorious defenses to the claims in this case and it intends to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

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 not paying severance benefits to employees when their employment transitioned to American Home Mortgage Servicing, Inc. (now known as Homeward Residential, Inc. (Homeward)) in connection with the sale of certain assets and operations of SCC. 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. On September 2, 2011, the court granted summary judgment in favor of the defendants on all claims. Plaintiffs filed an appeal, which remains pending. 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 financial position, results of operations and cash flows.

On October 15, 2010, the Federal Home Loan Bank (FHLB) 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, H&R Block, Inc. and other entities, arising out of FHLB’s purchase of RMBSs. The plaintiff seeks 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 $40 million remains outstanding. The plaintiff agreed to voluntarily dismiss H&R Block, Inc. from the suit. The remaining defendants, including SCC, filed motions to dismiss, which the court denied. Defendants moved for leave to appeal and the circuit court denied the motion. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter. We believe SCC has meritorious defenses to the claims in this case and intends to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

 

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On February 22, 2012, a lawsuit was filed by SCC against Homeward in the Supreme Court of the State of New York, County of New York, styled Sand Canyon Corporation v. American Home Mortgage Servicing, Inc. (Index No. 650504/2012), alleging breach of contract and breach of the implied covenant of good faith and fair dealing in connection with the Cooperation Agreement entered into with SCC in connection with SCC’s sale of its mortgage loan servicing business to the defendant in 2008. SCC is seeking relief to, among other things, require the defendant to provide loan files only by the method prescribed in applicable agreements. The court denied the defendant’s motion to dismiss. The defendant subsequently filed an appeal, which remains pending.

On May 31, 2012, a lawsuit was filed by Homeward in the Supreme Court of the State of New York, County of New York, against SCC styled Homeward Residential, Inc. v. Sand Canyon Corporation (Index No. 651885/2012). SCC removed the case to the United States District Court for the Southern District of New York on June 28, 2012 (Case No. 1:12-cv-05067-PGG). Plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2006-2 and for the benefit of the trustee and the certificate holders of such trust, asserts claims for breach of contract, anticipatory breach, indemnity and declaratory judgment in connection with alleged losses incurred as a result of the breach of representations and warranties relating to loans sold to the trust and representation and warranties related to SCC. Plaintiff seeks specific performance of alleged repurchase obligations and/or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses, as well as a repurchase of all loans due to alleged misrepresentations by SCC as to itself and representations given as to the loans’ compliance with its underwriting standards and the value of underlying real estate. SCC is seeking leave to file a motion to dismiss. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter. We believe SCC has meritorious defenses to the claims in this case and intends to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

On September 28, 2012, a second lawsuit was filed by Homeward in the District Court for the Southern District of New York against SCC styled Homeward Residential, Inc. v. Sand Canyon Corporation (Case No. 12-cv-7319). Plaintiff, in its capacity as the master servicer for Option One Mortgage Loan Trust 2006-3 and for the benefit of the trustee and the certificate holders of such trust, asserts claims for breach of contract and indemnity in connection with losses allegedly incurred as a result of the breach of representations and warranties relating to 96 loans sold to the trust. Plaintiff seeks specific performance of alleged repurchase obligations and/or damages to compensate the trust and its certificate holders for alleged actual and anticipated losses. SCC is seeking leave to file a motion to dismiss. We have not concluded that a loss related to this matter is probable, nor have we accrued a liability related to this matter. We believe SCC has meritorious defenses to the claims in this case and intends to defend the case vigorously, but there can be no assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.

As of January 31, 2013, underwriters and depositors were involved in multiple lawsuits related to securitization transactions in which SCC participated. These lawsuits allege a variety of claims, including violations of federal and state securities law and common law fraud, based on alleged materially inaccurate or misleading disclosures. Based on information currently available to SCC, it believes that the 14 lawsuits in which notice of a claim for indemnification has been made involve original investments of approximately $14 billion. Because SCC is not party to these lawsuits (with the exception of the Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation case discussed above) and does not have control of this litigation, SCC does not have precise information about the amount of damages or other remedies being asserted or the defenses to the claims in such lawsuits. Additional lawsuits against the underwriters or depositors may be filed in the future, and SCC may receive additional notices of claims for indemnification from underwriters or depositors with respect to existing or new lawsuits. We have not concluded that a loss related to any of these indemnification claims is probable, nor have we accrued a liability related to any of these claims. We believe SCC has meritorious defenses to these indemnification claims and intends to defend them vigorously, but there can be no assurance as to their outcome or their impact on our consolidated financial position, results of operations and cash flows.

 

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On April 3, 2012, the Nevada Attorney General issued a subpoena to SCC indicating it was conducting an investigation concerning “the alleged commission of a practice declared to be unlawful under the Nevada Deceptive Trade Practices Act.” A majority of the documents requested in the subpoena involve SCC’s lending to minority (African American and Latino) borrowers. No complaint has been filed to date. SCC plans to continue to cooperate with the Nevada Attorney General.

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 and failure to compensate for all hours worked and to provide meal periods to office managers in California); Delana Ugas, et al. 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, et al. 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). The plaintiffs in these lawsuits seek actual damages, pre-judgment interest, statutory penalties and attorneys’ fees.

A class was certified in the Williams case in March 2011 (consisting of office managers who worked in company-owned offices in California from 2004 to 2011). To avoid the cost and inherent risk associated with litigation, we reached an agreement to settle the case in February 2012, subject to approval by the court. The settlement provided for a maximum payment of $7.5 million, with the actual cost of the settlement dependent on the number of valid claims submitted by class members. The court granted final approval of the settlement on November 8, 2012. An appeal was filed, but subsequently withdrawn, rendering the settlement final. We previously recorded a liability for our estimate of the expected loss under the settlement.

In the Ugas case, the court initially certified a class on the claim for failure to provide meal periods (consisting of tax professionals who worked in company-owned offices in California from 2006 to 2011), but subsequently decertified the class in a ruling dated July 9, 2012. The Ninth Circuit Court of Appeals declined to hear an appeal. The court also certified a class on the claim for failure to compensate tax professionals for all hours worked (consisting of tax professionals who worked in company-owned offices in one district in California from 2006-2009). That class remains pending. A trial date has been set for October 21, 2013. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter. We believe we have meritorious defenses to the claims in this case and intend to defend them vigorously, but there can be no assurances as to the outcome of the case or its impact on our consolidated financial position, results of operations and cash flows.

In the Petroski case, a conditional class was certified under the Fair Labor Standards Act 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). Two classes were also certified under state laws in California and New York (consisting of tax professionals who worked in company-owned offices in those states). We filed motions to decertify the classes, along with motions for summary judgment, which remain pending. A trial date has been set for June 10, 2013. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter. We believe we have meritorious defenses to the claims in this matter and intend to defend them vigorously, but there can be no assurances as to the outcome of the matter or its impact on our consolidated financial position, results of operations and cash flows.

RAL and RAC Litigation. We have been named in 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 refund anticipation loan (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 TILA. 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. The intermediate appellate court subsequently reversed the decertification decision. On September 7, 2012, the Pennsylvania Supreme Court reversed the

 

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decision of the intermediate appellate court, thereby allowing the trial court’s decertification ruling to stand. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter. We believe we have meritorious defenses to this case and intend to defend the case vigorously, but there can be no assurances as to the outcome of this case or its impact on our consolidated financial position, results of operations and cash flows.

A series of class action lawsuits were filed against us in various federal courts beginning on November 17, 2011 concerning the RAL and refund anticipation check (RAC) products. The plaintiffs generally allege we engaged in unfair, deceptive and/or fraudulent acts in violation of various state consumer protection laws by facilitating RALs that were accompanied by allegedly inaccurate TILA disclosures, and by offering RACs without any TILA disclosures. Certain plaintiffs also allege violation of disclosure requirements of various state statutes expressly governing RALs and provisions of those statutes prohibiting tax preparers from charging or retaining certain fees. Collectively, the plaintiffs seek to represent clients who purchased RAL or RAC products in up to forty-two states and the District of Columbia during timeframes ranging from 2007 to the present. The plaintiffs seek equitable relief, disgorgement of profits, compensatory and statutory damages, restitution, civil penalties, attorneys’ fees and costs. These cases were consolidated by the Judicial Panel on Multidistrict Litigation into a single proceeding in the United States District Court for the Northern District of Illinois for coordinated pretrial proceedings, styled IN RE: H&R Block Refund Anticipation Loan Litigation (MDL No. 2373). We filed a motion to compel arbitration, which remains pending. We have not concluded that a loss related to this matter is probable, nor have we accrued a loss contingency related to this matter. We believe we have meritorious defenses to the claims in these cases and intend to defend the cases vigorously, but there can be no assurances as to the outcome of these cases or their impact on our consolidated financial position, results of operations and cash flows.

Compliance Fee Litigation. On April 16, 2012 and April 19, 2012, putative class action lawsuits were filed against us in Missouri state and federal courts, respectively, concerning a compliance fee charged to retail tax clients in the 2011 and 2012 tax seasons. These cases are styled Manuel H. Lopez III v. H&R Block, Inc., et al., in the Circuit Court of Jackson County, Missouri (Case # 1216CV12290), and Ronald Perras v. H&R Block, Inc., et al., in the United States District Court for the Western District of Missouri (Case No. 4:12-cv-00450-DGK). Taken together, the plaintiffs seek to represent all retail tax clients nationwide who were charged the compliance fee, and assert claims of violation of state consumer laws, money had and received, and unjust enrichment. We are seeking to compel arbitration on certain claims. We have not concluded that a loss related to these lawsuits is probable, nor have we accrued a liability related to either of these lawsuits. We believe we have meritorious defenses to the claims in these cases and intend to defend the cases vigorously, but there can be no assurances as to the outcome of these cases or their impact on our consolidated financial position, results of operations and cash flows.

Express IRA Litigation. On January 2, 2008, the Mississippi Attorney General in the Chancery Court of Hinds County, Mississippi First Judicial District (Case No. G 2008 6 S 2) filed a lawsuit regarding our former Express IRA product that 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 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 financial position, results of operations and cash flows.

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.

Litigation and Claims Pertaining to the Discontinued Operations of RSM McGladrey. On April 17, 2009, a shareholder derivative complaint was filed by Brian Menezes, derivatively and on behalf of nominal defendant International Textile Group, Inc. against McGladrey Capital Markets LLC (MCM) in the Court of Common Pleas, Greenville County, South Carolina (C.A. No. 2009-CP-23-3346) styled Brian P. Menezes, Derivatively on Behalf of Nominal Defendant, International Textile Group, Inc. (f/k/a Safety Components International, Inc.) v. McGladrey Capital Markets, LLC (f/k/a RSM EquiCo Capital

 

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Markets, LLC), et al. Plaintiffs filed an amended complaint in October 2011 styled In re International Textile Group Merger Litigation, adding a putative class action claim. Plaintiffs allege claims of aiding and abetting, civil conspiracy, gross negligence and breach of fiduciary duty against MCM in connection with a fairness opinion MCM provided to the Special Committee of Safety Components International, Inc. (SCI) in 2006 regarding the merger between International Textile Group, Inc. and SCI. Plaintiffs seek actual and punitive damages, pre-judgment interest, attorneys’ fees and costs. On February 8, 2012, the court dismissed plaintiffs’ civil conspiracy claim against all defendants. A class was certified on the remaining claims on November 20, 2012. 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 financial position, results of operations and cash flows.

In connection with the sale of RSM McGladrey, Inc. (RSM) and MCM, we indemnified the buyers against certain litigation matters. The indemnities are not subject to a stated term or limit. A portion of our accrual is related to these indemnity obligations.

Other. We are from time to time a party to investigations, claims and lawsuits not discussed herein arising out of our business operations. These investigations, claims and lawsuits may include actions by state attorneys general, other state regulators, federal 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 financial position, results of operations and cash flows.

We are also a party to claims and lawsuits that we consider to be ordinary, routine litigation incidental to our business, including, but not limited to, claims and lawsuits concerning the preparation of customers’ income tax returns, the fees charged customers for various products and services, relationships with franchisees, intellectual property disputes, marketing and other competitor disputes, employment matters and contract disputes (Other Claims). 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 from liabilities in, or settlements of, these Other Claims will not have a material impact on our consolidated financial position, results of operations and cash flows.

 

13. Loss Contingencies Arising From Representations and Warranties of Our Discontinued Mortgage Operations Overview. SCC 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.

Mortgage loans originated by SCC were sold either as whole loans to single third-party buyers or in the form of residential mortgage-backed securities (RMBSs). In connection with the sale of loans and/or RMBSs, SCC made certain representations and warranties. These representations and warranties varied based on the nature of the transaction and the buyer’s or insurer’s requirements, but generally pertained to the ownership of the loan, the validity of the lien securing the loan, borrower fraud, the loan’s compliance with the criteria for inclusion in the transaction, including compliance with SCC’s underwriting standards or loan criteria established by the buyer, ability to deliver required documentation, and compliance with applicable laws. Representations and warranties related to borrower fraud in whole loan sale transactions to institutional investors, which represented approximately 68% of the disposal of loans originated in calendar years 2005, 2006 and 2007, included a “knowledge qualifier” limiting SCC’s liability to those instances where SCC had knowledge of the fraud at the time the loans were sold. Representations and warranties made in other sale transactions effectively did not include a knowledge qualifier as to borrower fraud. 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 or a securitization insurer’s or bondholder’s interest in the mortgage loan and, as discussed below, the mortgage has not been liquidated, SCC may be obligated to repurchase the loan, may be obligated to indemnify certain parties, or may enter into settlement arrangements related to losses, collectively referred to as “representation and warranty claims.”

 

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Claim History. Representation and warranty 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 and borrower fraud. Claims received since May 1, 2008 are as follows:

 

                                                        (in millions)  
Received in Fiscal Year      2009        2010        2011        2012        2013      Total  

Loan Origination Year:

                           

2005

     $ 62         $ 15         $ 8         $ 4         $ 22         $   111   

2006

       217           108           194           325           133         977   

2007

       153           22           16           763           13         967   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Total

     $ 432         $ 145         $ 218         $ 1,092         $ 168         $2,055   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 
      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

 

 

 

Note:The table above excludes amounts related to indemnity agreements.

  

Approximately 95% of claims relate to loans originated in calendar years 2006 and 2007. During calendar years 2006 and 2007, SCC originated approximately $42 billion in loans, of which approximately 1% were sold directly to government sponsored entities. Government sponsored entities also purchased bonds backed by SCC-originated mortgage loans and, with respect to these bonds, have the same rights as other certificate holders in private label securitizations. Due to a variety of substantive defenses and other reasons, SCC may not be subject to representation and warranty losses on loans, including without limitation loans that have been paid in full, liquidated, repurchased, or were sold without recourse.

Based on its experiences to date, 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, and the less likely that SCC will have a contractual payment obligation with respect to such loan. The majority of claims asserted since May 1, 2008 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. However, a loan that defaults within the first two years following the origination of the mortgage loan does not necessarily default due to a breach of a representation and warranty. Exclusive of loans that have been paid in full, repurchased or sold without recourse, loans originated in 2006 and 2007 that defaulted in the first two years totaled $6.1 billion and $2.7 billion, respectively.

SCC received $168 million in claims during the nine months ended January 31, 2013, most of which were asserted by a private-label securitization trustee or servicer on behalf of certificate holders ($144 million), with the remainder asserted by monoline insurers ($15 million) and Fannie Mae ($9 million). During the fiscal year ended April 30, 2012, SCC received claims totaling $1.1 billion. The amount of claims received varies from period to period, and these variances have been and could continue to fluctuate substantially.

During fiscal year 2013, SCC has either entered into, or is in discussions with several parties for tolling agreements to extend any applicable statute of limitations related to potential representation and warranty claims and other claims against SCC involving substantial amounts. SCC has experienced a recent decline in representation and warranty claims, which it believes may be partially attributable to the existence of these tolling agreements, and this may continue until the tolling agreements are terminated.

Liability for Estimated Contingent Losses. SCC estimates probable losses arising from representations and warranties on loans it originated by assessing, among other things, claim activity, both known and projected. Projections of future claims are based on an analysis that includes a review of the terms and provisions of related agreements, the historical claim and validity rate experience and inquiries from various third-parties. SCC’s methodology for calculating this liability also includes an assessment of the probability that individual counterparties (private label securitization trustees on behalf of certificate holders, monoline insurers and whole-loan purchasers) will assert future claims. SCC also considers the potential for bulk settlements when determining its estimated accrual for probable losses related to representations and warranties.

SCC has accrued a liability as of January 31, 2013 for estimated contingent losses arising from representations and warranties on loans it originated of $118.8 million, which represents SCC’s estimate of the probable loss that may occur. While SCC uses what it believes to be the best information available to it in estimating its liability, assessing the likelihood that claims will be asserted in the future and estimating

 

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probable losses are inherently subjective and require considerable management judgment. To the extent that the volume of claims, the level of claims (including whether the loan has been liquidated), the level of disputed claims, the level of threatened claims, the counterparties asserting claims, the nature and severity of claims, the outcome of various litigation related to claims, or the value of residential home prices, among other factors, differ in the future from current estimates, future losses may differ from the current estimates and those differences may be significant. Because of these numerous uncertainties, SCC is not able to estimate reasonably possible loss outcomes in excess of its current accrual. However, such possible loss outcomes may be significant. A 1% increase in loss severities and a 1% decrease in assumed denial rates would result in losses beyond SCC’s accrual of approximately $27 million. This sensitivity is hypothetical and is intended to provide an indication of the impact of a change in key assumptions on this loss contingency. In reality, changes in one assumption may result in changes in other assumptions, which could affect the sensitivity and the amount of losses.

A rollforward of SCC’s accrued liability for these loss contingencies is as follows:

 

             (in 000s)  
Nine months ended January 31,    2013     2012  

Balance at beginning of period

   $ 130,018      $ 126,260   

Provisions

           20,000   

Payments

     (11,253     (3,337
  

 

 

   

 

 

 

Balance at end of period

   $ 118,765      $ 142,923   
  

 

 

   

 

 

 
    

 

 

   

 

 

 

The recent federal court decision styled MASTR Asset Backed Securities Trust 2006-HE3 v. WMC Mortgages (Case No. 11-CV-2542 (JRT/TNL), 2012 WL 4511065 (D. Minn.), the “WMC Decision”), decided on October 1, 2012, recognizes the liquidation of a mortgage loan in a foreclosure sale as a defense to representation and warranty claims and related litigation. Specifically, the court noted that under the law of many states, including New York (which was applicable in the case at hand and governs most of SCC’s purchase agreements for mortgage loans), a foreclosure decree operates to merge the interest of the mortgagor and mortgagee and, consequently, foreclosure on the properties securing the mortgage loan extinguishes it and renders it unavailable for repurchase. Consistent with this approach, SCC is taking the legal position where appropriate, for both contractual representation and warranty claims and similar claims in litigation, that a valid representation and warranty claim cannot be made with respect to a mortgage loan that has been liquidated. However, the WMC Decision is subject to appeal and it is anticipated that the liquidated mortgage loan defense will be the subject of future judicial decisions. Until the liquidated mortgage loan defense is further validated in the courts or other developments occur, SCC’s estimated accrual for representation and warranty claims will continue to be determined using its prior methodology, which does not take this defense into account.

Settlement Actions. SCC has vigorously contested any request for repurchase when it has concluded that a valid basis for repurchase does not exist and will continue to do so in the future.

American International Group, Inc. (AIG) had threatened to assert claims of various types in the approximate amount of $650 million in connection with the sale and securitization of SCC-originated mortgage loans. On December 21, 2012, SCC and AIG entered into an agreement to resolve all of AIG’s claims, except that AIG retained the right to benefit from payments for representation and warranty claims by third parties, without AIG’s assistance or encouragement, that are made to securitization trusts in which AIG has a continuing interest.

SCC may enter into other bulk settlements it believes to be advantageous in lieu of a loan-by-loan review process. In addition, there are certain SCC contingencies described in note 12 that include representation and warranty claims that may be resolved through settlement or litigation. Any resulting payment from such settlements would be charged as a reduction to the accrual for representation and warranty claims.

Indemnification obligations. Losses may also be incurred with respect to various indemnification claims related to loans and securities SCC originated and sold. Losses from indemnification obligations can be significant and are frequently not subject to a stated term or limit. SCC believes it is not probable that it will be required to perform under its indemnification obligations; however, there can be no assurances as to the outcome or impact on our consolidated financial position, results of operations and cash flows related to claims which may arise from those indemnification obligations.

 

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Reviewed Claims. Since May 2008, SCC has denied approximately 94% of all claims reviewed, excluding loans covered by other settlements. Of the denied claims, 1% related to loans that have been paid in full and 1% of claims were denied because they related to loans which have been liquidated. Paid claim loss severity rates have approximated 64% and SCC has not observed any material trends related to average losses. Repurchased loans are considered held for sale and are included in prepaid expenses and other current assets on the consolidated balance sheets.

SCC generally has 60 to 120 days to respond to a claimed breach of a representation and warranty and performs a loan-by-loan review of all claims during this time. Counterparties are able to reassert claims that SCC has denied. Claims totaling approximately $42 million remained subject to review as of January 31, 2013, of which, approximately $20 million represent a reassertion of previously denied claims.

 

14. Discontinued Operations

Our discontinued operations consist of our former Business Services segment and SCC. We sold RSM and MCM in fiscal year 2012. SCC exited its mortgage business in fiscal year 2008.

The results of operations of our discontinued operations are as follows:

 

                           (in 000s)  
     Three months
ended January 31,
    Nine months ended
January 31,
 
      2013     2012     2013     2012  

Revenues

   $      $ 50,508      $      $ 416,436   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pretax income (loss) from operations:

        

RSM and related businesses

   $ (511   $ 1,117      $ (204   $ 18,831   

Mortgage

     (765     (27,385     (10,639     (54,019
  

 

 

   

 

 

   

 

 

   

 

 

 
     (1,276     (26,268     (10,843     (35,188

Income tax benefit

     (483     (6,462     (4,215     (10,268
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from operations

     (793     (19,806     (6,628     (24,920
  

 

 

   

 

 

   

 

 

   

 

 

 

Pretax loss on sales of businesses

            (236            (109,485

Income tax benefit

            (20,260            (59,969
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gain (loss) on sales of businesses

            20,024               (49,516
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations

   $ (793   $ 218      $ (6,628   $ (74,436
  

 

 

   

 

 

   

 

 

   

 

 

 
    

 

 

   

 

 

   

 

 

   

 

 

 

 

15. Regulatory Requirements – HRB Bank

The following table sets forth HRB Bank’s regulatory capital requirements calculated in its Call Report, as filed with the Federal Financial Institutions Examination Council (FFIEC):

 

                                    (dollars in 000s)  
      Actual     Minimum Capital
Requirement
    Minimum to be
Well Capitalized
 
      Amount      Ratio     Amount      Ratio     Amount      Ratio  

As of December 31, 2012:

               

Total risk-based capital ratio (1)

   $ 469,979         61.9   $ 60,747         8.0   $ 75,934         10.0

Tier 1 risk-based capital ratio (2)

     460,341         60.6     N/A         N/A        45,561         6.0

Tier 1 capital ratio (leverage) (3)

     460,341         29.7     62,041         4.0 %(5)      77,551         5.0

Tangible equity ratio (4)

     460,341         29.7     23,265         1.5     N/A         N/A   

As of March 31, 2012:

               

Total risk-based capital ratio (1)

   $ 458,860         120.3   $ 30,513         8.0   $ 38,141         10.0

Tier 1 risk-based capital ratio (2)

     453,800         119.0     N/A         N/A        22,885         6.0

Tier 1 capital ratio (leverage) (3)

     453,800         29.4     185,252         12.0     77,188         5.0

Tangible equity ratio (4)

     453,800         29.4     23,157         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.

(5)      Effective April 5, 2012, the minimum capital requirement was changed to 4% by the OCC, although HRB Bank plans to maintain a minimum of 12.0% leverage capital at the end of each calendar quarter.

         

         

          

          

           

 

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As of January 31, 2013, HRB Bank’s leverage ratio was 30.4%.

 

16. Segment Information

Results of our continuing operations by reportable operating segment are as follows:

 

                           (in 000s)  
     Three months ended
January 31,
    Nine months ended
January 31,
 
      2013     2012     2013     2012  

Revenues:

        

Tax Services

   $ 464,634      $ 655,701      $ 684,706      $ 868,144   

Corporate and eliminations

     7,345        7,579        21,025        24,953   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 471,979      $ 663,280      $ 705,731      $ 893,097   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pretax income (loss):

        

Tax Services

   $ (64,189   $ 31,716      $ (335,203   $ (311,733

Corporate and eliminations

     (32,079     (32,742     (92,622     (93,823
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before tax benefit

   $ (96,268   $ (1,026   $ (427,825   $ (405,556
  

 

 

   

 

 

   

 

 

   

 

 

 
    

 

 

   

 

 

   

 

 

   

 

 

 

 

17. New Accounting Standards

In September 2011, the FASB issued Accounting Standards Update 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” Under the amendments in this guidance, an entity may consider qualitative factors before applying Step 1 of the goodwill impairment assessment, but may no longer be permitted to carry forward estimates of a reporting unit’s fair value from a prior year when specific criteria are met. These amendments were effective for us as the beginning of our current fiscal year. We adopted this guidance as of May 1, 2012, and this new guidance did not have a material effect on our consolidated financial statements.

 

18. Condensed Consolidating Financial Statements

Block Financial LLC (Block Financial) is an indirect, wholly-owned subsidiary of the Company. Block Financial is the Issuer and the Company is the full and unconditional Guarantor of the Senior Notes issued on October 25, 2012 and October 26, 2004, our 2012 CLOC, 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.

 

-28-


Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)     (in 000s)  
Three months ended
January 31, 2013
   H&R Block, Inc.
(Guarantor)
    Block Financial
(Issuer)
    Other
Subsidiaries
    Eliminations    

Consolidated

H&R Block

 

Total revenues

   $      $ 58,616      $ 414,858      $ (1,495   $ 471,979   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

            68,333        310,776        (1,491     377,618   

Selling, general and administrative

            11,327        175,674        (4     186,997   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

            79,660        486,450        (1,495     564,615   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

            (21,044     (71,592            (92,636

Other income (expense), net

     (96,268     (4,938     1,306        96,268        (3,632
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before tax benefit

     (96,268     (25,982     (70,286     96,268        (96,268

Income tax benefit

     (79,353     (31,416     (47,937     79,353        (79,353
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     (16,915     5,434        (22,349     16,915        (16,915

Net loss from discontinued operations

     (793     (483     (310     793        (793
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (17,708     4,951        (22,659     17,708        (17,708

Other comprehensive income (loss)

     370        (569     939        (370     370   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (17,338   $ 4,382      $ (21,720   $ 17,338      $ (17,338
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Three months ended
January 31, 2012
   H&R Block, Inc.
(Guarantor)
    Block Financial
(Issuer)
    Other
Subsidiaries
    Eliminations     Consolidated
H&R Block
 

Total revenues

   $      $ 65,604      $ 597,837      $ (161   $ 663,280   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

            77,965        377,436        (161     455,240   

Selling, general and administrative

            9,705        202,031               211,736   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

            87,670        579,467        (161     666,976   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

            (22,066     18,370               (3,696

Other income (expense), net

     (1,026     1,301        1,369        1,026        2,670   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before tax (benefit)

     (1,026     (20,765     19,739        1,026        (1,026

Income tax (benefit)

     2,541        12,036        (9,495     (2,541     2,541   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     (3,567     (32,801     29,234        3,567        (3,567

Net income (loss) from discontinued operations

     218        (15,695     15,913        (218     218   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (3,349     (48,496     45,147        3,349        (3,349

Other comprehensive income (loss)

     3,050        (335     3,385        (3,050     3,050   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (299   $ (48,831   $ 48,532      $ 299      $ (299
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

-29-


Nine months ended

January 31, 2013

   H&R Block, Inc.
(Guarantor)
    Block Financial
(Issuer)
    Other
Subsidiaries
    Eliminations    

Consolidated

H&R Block

 

Total revenues

   $      $ 98,531      $ 608,773      $ (1,573   $ 705,731   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

           137,146        647,476        (1,569     783,053   

Selling, general and administrative

           26,288        326,518        (4     352,802   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

           163,434        973,994        (1,573     1,135,855   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

           (64,903     (365,221           (430,124

Other income (expense), net

     (427,825     (2,428     4,727        427,825        2,299   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before tax benefit

     (427,825     (67,331     (360,494     427,825        (427,825

Income tax benefit

     (204,061     (46,374     (157,687     204,061        (204,061
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from continuing operations

     (223,764     (20,957     (202,807     223,764        (223,764

Net loss from discontinued operations

     (6,628     (6,503     (125     6,628        (6,628
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (230,392     (27,460     (202,932     230,392        (230,392

Other comprehensive loss

     (3,090     (315     (2,775     3,090        (3,090
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (233,482   $ (27,775   $ (205,707   $ 233,482      $ (233,482
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Nine months ended

January 31, 2012

   H&R Block, Inc.
(Guarantor)
    Block Financial
(Issuer)
    Other
Subsidiaries
    Eliminations     Consolidated
H&R Block
 

Total revenues

   $      $ 104,937      $ 788,321      $ (161   $ 893,097   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

           152,605        742,993        (161     895,437   

Selling, general and administrative

           24,044        388,357              412,401   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

           176,649        1,131,350        (161     1,307,838   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

           (71,712     (343,029           (414,741

Other income (expense), net

     (405,556     7,647        1,538        405,556        9,185   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before tax benefit

     (405,556     (64,065     (341,491     405,556        (405,556

Income tax benefit

     (159,821     (4,877     (154,944     159,821        (159,821
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from continuing operations

     (245,735     (59,188     (186,547     245,735        (245,735

Net loss from discontinued operations

     (74,436     (36,398     (38,038     74,436        (74,436
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (320,171     (95,586     (224,585     320,171        (320,171

Other comprehensive income (loss)

     (3,824     1,430        (5,254     3,824        (3,824
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (323,995   $ (94,156   $ (229,839   $ 323,995      $ (323,995
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

-30-


Condensed Consolidating Balance Sheets             (in 000s)  
As of January 31, 2013   

H&R Block, Inc.

(Guarantor)

    

Block Financial

(Issuer)

   

Other

Subsidiaries

     Eliminations    

Consolidated

H&R Block

 

Cash & cash equivalents

   $       $ 294,816      $ 124,102       $ (533   $ 418,385   

Cash & cash equivalents – restricted

             1,613        36,345                37,958   

Receivables, net

     963         555,418        392,779                949,160   

Mortgage loans held for investment

             357,887                       357,887   

Intangible assets and goodwill, net

                    706,779                706,779   

Investments in subsidiaries

     2,834,612         556                (2,834,612     556   

Amounts due from affiliates

     62         496,760        2,208,626         (2,705,448       

Other assets

     8,244         630,999        822,528                1,461,771   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,843,881       $ 2,338,049      $ 4,291,159       $ (5,540,593   $ 3,932,496   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Customer deposits

   $       $ 1,037,501      $       $ (533   $ 1,036,968   

Commercial paper borrowings

             424,967                       424,967   

Long-term debt

             896,848        9,877                906,725   

Other liabilities

     367         251,833        676,748                928,948   

Amounts due to affiliates

     2,208,626         -        496,822         (2,705,448       

Stockholders’ equity

     634,888         (273,100     3,107,712         (2,834,612     634,888   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,843,881       $ 2,338,049      $ 4,291,159       $ (5,540,593   $ 3,932,496   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

As of January 31, 2013   

H&R Block, Inc.

(Guarantor)

    

Block Financial

(Issuer)

   

Other

Subsidiaries

     Eliminations    

Consolidated

H&R Block

 

Cash & cash equivalents

   $       $ 515,147      $ 1,430,030       $ (843   $ 1,944,334   

Cash & cash equivalents – restricted

             8,814        39,286                48,100   

Receivables, net

             90,755        103,103                193,858   

Mortgage loans held for investment, net

             406,201                       406,201   

Intangible assets and goodwill, net

                    692,017                692,017   

Investments in subsidiaries

     2,525,473                715         (2,525,473     715   

Amounts due from affiliates (1)

     188         492,851        1,430,782         (1,923,821       

Other assets

     8,887         623,032        732,423                1,364,342   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets (1)

   $ 2,534,548       $ 2,136,800      $ 4,428,356       $ (4,450,137   $ 4,649,567   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Customer deposits

   $       $ 828,392      $       $ (843   $ 827,549   

Long-term debt

             999,325        41,224                1,040,549   

Other liabilities (1)

     22,690         277,160        1,155,727                1,455,577   

Amounts due to affiliates (1)

     1,185,966         244,816        493,039         (1,923,821       

Stockholders’ equity

     1,325,892         (212,893     2,738,366         (2,525,473     1,325,892   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity (1)

   $ 2,534,548       $ 2,136,800      $ 4,428,356       $ (4,450,137   $ 4,649,567