Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
HRB > SEC Filings for HRB > Form 10-K on 26-Jun-2013All Recent SEC Filings

Show all filings for H&R BLOCK INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for H&R BLOCK INC


26-Jun-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our subsidiaries provide tax preparation and retail banking services. Tax returns are either prepared by H&R Block tax professionals (in company-owned or franchise offices or virtually via the internet or mobile applications) or prepared and filed by our clients through H&R Block At HomeŽ, either online or using our software or mobile applications. We are the only major company offering a full range of DIY - online, software and mobile applications - and professional assisted tax preparation solutions to individual tax clients.

OVERVIEW
A summary of our fiscal year 2013 results is as follows:
? U.S. tax returns prepared by and through us decreased 0.7% from the prior year primarily due to a decline in overall filings with the IRS, which fell 0.6%.

? Revenues for the fiscal year were $2.9 billion, up 0.4% from the prior year, primarily as a result of discontinuation of our free RAC offer, growth in international and digital, partially offset by declines in U.S. assisted return volume.

? Pretax earnings grew $125.9 million, or 21.9%, primarily due to our cost saving initiatives in the current year.

? Net earnings from continuing operations increased 34.5% from the prior year to $465.2 million.

? Diluted earnings per share from continuing operations increased 45.7% from the prior year to $1.69, due to higher earnings and lower shares outstanding.

? Adjusted EBITDA increased $75.1 million, or 9.3%, due primarily to cost reduction efforts.

? We recorded discrete tax benefits of $33.3 million during fiscal year 2013, which was primarily due to the settlement of the majority of the issues related to the examination of our 1999 through 2007 U.S. consolidated federal tax returns.

H&R Block 2013 Form 10K 19


--------------------------------------------------------------------------------
  Table of Contents

Consolidated Results of Operations Data                   (in 000s, except per share amounts)
Year ended April 30,                                     2013            2012            2011
REVENUES:
Tax Services                                     $  2,877,967     $ 2,862,378     $ 2,912,361
Corporate and eliminations                             27,976          31,393          32,619
                                                 $  2,905,943     $ 2,893,771     $ 2,944,980
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAXES:
Tax Services                                     $    821,143     $   704,002     $   767,498
Corporate and eliminations                           (119,132 )      (127,932 )      (139,795 )
                                                      702,011         576,070         627,703
Income taxes                                          236,853         230,102         235,156
Net income from continuing operations                 465,158         345,968         392,547
Net income (loss) from discontinued operations        (31,210 )       (80,036 )        13,563
Net income                                       $    433,948     $   265,932     $   406,110
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations                            $       1.70     $      1.16     $      1.27
Discontinued operations                                 (0.11 )         (0.27 )          0.04
Consolidated                                     $       1.59     $      0.89     $      1.31
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations                            $       1.69     $      1.16     $      1.27
Discontinued operations                                 (0.11 )         (0.27 )          0.04
Consolidated                                     $       1.58     $      0.89     $      1.31

EBITDA FROM CONTINUING OPERATIONS (1)            $    874,375     $   757,316     $   812,988
EBITDA FROM CONTINUING OPERATIONS - ADJUSTED
(1)                                                   882,680         807,539         836,199

(1) See "Non-GAAP Financial Information" at the end of this item for a reconciliation of non-GAAP measures.

20 H&R Block 2013 Form 10K


Table of Contents

RESULTS OF OPERATIONS

TAX SERVICES
This segment consists of our income tax preparation offerings - assisted, online
and software, including tax operations primarily in the U.S. and its
territories, Canada, and Australia. This segment also includes the activities of
HRB Bank that primarily support the tax network.
Tax Services - Operating Statistics
Year ended April 30,                             2013      2012      2011
TAX RETURNS PREPARED : (in 000s)
United States:
Company-owned operations                        8,907     9,207     9,168
Franchise operations                            5,598     5,693     5,588
Total retail operations                        14,505    14,900    14,756
Software                                        2,004     2,158     2,201
Online                                          4,892     4,419     3,722
Free File Alliance                                774       861       767
Total digital tax solutions                     7,670     7,438     6,690
Total U.S. operations                          22,175    22,338    21,446
International operations:
Canada (1)                                      2,517     2,545     2,411
Australia                                         741       671       644
Total international operations                  3,258     3,216     3,055
Tax returns prepared worldwide                 25,433    25,554    24,501

TAX OFFICES (at the peak of the tax season):
U.S. offices:
Company-owned offices                           5,734     5,787     5,921
Company-owned shared locations (2)                477       734       572
Total company-owned offices                     6,211     6,521     6,493
Franchise offices                               4,384     4,296     4,178
Franchise shared locations (2)                    123       175       397
Total franchise offices                         4,507     4,471     4,575
Total U.S. offices                             10,718    10,992    11,068
International offices:
Canada                                          1,139     1,223     1,324
Australia                                         410       404       384
Total international offices                     1,549     1,627     1,708
Tax offices worldwide                          12,267    12,619    12,776

(1) In fiscal year 2011, the end of the Canadian tax season was extended from April 30 to May 2, 2011. Tax returns prepared in Canada in fiscal year 2011 includes 51,000 returns in both company-owned and franchise offices which were accepted by the client on May 1 or 2. The revenues related to these returns were recognized in fiscal year 2012.

(2) Shared locations include offices located within Walmart and other third-party businesses. Our U.S. Walmart license agreement expired in April 2013.

H&R Block 2013 Form 10K 21


--------------------------------------------------------------------------------
  Table of Contents

Tax Services - Financial Results                                          (dollars in 000s)
Year ended April 30,                                   2013            2012            2011
Tax preparation fees:
U.S.                                            $ 1,712,319     $ 1,749,032     $ 1,750,768
International                                       220,870         205,466         180,256
                                                  1,933,189       1,954,498       1,931,024
Royalties                                           318,386         308,561         304,194
Fees from refund anticipation checks                158,176         132,361         181,661
Fees from Emerald Card                               98,896         104,143          90,451
Fees from Peace of MindŽ guarantees                  71,355          75,603          78,413
Interest and fee income on Emerald Advance           59,657          59,660          94,300
Other                                               238,308         227,552         232,318
Total revenues                                    2,877,967       2,862,378       2,912,361
Compensation and benefits:
Field wages                                         654,794         691,680         692,561
Other wages                                         150,306         150,908         155,165
Benefits and other compensation                     148,492         183,037         174,254
                                                    953,592       1,025,625       1,021,980
Occupancy and equipment                             354,430         381,572         385,130
Marketing and advertising                           270,240         278,231         242,538
Depreciation and amortization                        92,004          88,836          90,672
Bad debt                                             77,402          68,082         139,059
Supplies                                             40,131          44,236          42,300
Impairment of goodwill and intangible assets          3,581          11,389          22,700
Other                                               265,444         260,405         200,484
Total expenses                                    2,056,824       2,158,376       2,144,863
Pretax income                                   $   821,143     $   704,002     $   767,498

Pretax margin                                          28.5 %          24.6 %          26.4 %

FISCAL 2013 COMPARED TO FISCAL 2012 - Tax Services' revenues increased $15.6 million, or 0.5%, compared to the prior year. U.S. tax preparation fees decreased $36.7 million, or 2.1% primarily due to a 3.3% decline in returns prepared, partially offset by a 1.2% increase in our average charge. Total assisted tax returns processed by the IRS in the 2013 tax season fell 1.0%. International tax preparation fees increased $15.4 million, or 7.5%, due primarily to a 10.4% increase in Australian tax returns prepared, partially offset by unfavorable exchange rates.
Royalties increased $9.8 million, or 3.2%, primarily due to a 2.7% increase in the average charge, partially offset by a 1.7% decrease in returns prepared in franchise offices.
Fees earned on RACs increased $25.8 million, or 19.5%, primarily due to our decision to discontinue a promotion for free RACs offered last year, partially offset by lower RAC volumes.
Emerald Card fees decreased $5.2 million, or 5.0%, primarily due to lower transaction volumes resulting from a decrease of approximately 14% in prepaid debit cards issued.
Other revenue increased $10.8 million, or 4.7%, primarily due to an increase in online tax preparation revenues.
In connection with our evaluation of alternative means of ceasing to be an SLHC, we are exploring all options, including a variety of ways to structure any such transaction. Any such transaction may negatively impact our financial services revenues and profitability within the Tax Services segment.
Total expenses decreased $101.6 million, or 4.7%, from the prior year. Total compensation and benefits decreased $72.0 million primarily due to lower field wages in the current year resulting from workforce reductions and severance costs of $31.1 million recorded in the prior year. Occupancy and equipment expenses decreased $27.1 million primarily due to a 4.8% reduction in company-owned offices and other cost-saving initiatives. Bad debt expense increased $9.3 million, or 13.7%, primarily due to credit losses associated with the initial offering of credit cards to our clients. Other expenses increased $5.0 million, or 1.9%, primarily due to lower gains on the sale of tax offices, which declined $15.3 million, partially offset by a reduction in litigation expenses in the current year.

22 H&R Block 2013 Form 10K


Table of Contents

Pretax income for fiscal year 2013 increased $117.1 million, or 16.6%, over the prior year. The pretax margin for the segment increased to 28.5% from 24.6% in fiscal year 2012.
FISCAL 2012 COMPARED TO FISCAL 2011 - Tax Services' revenues decreased $50.0 million, or 1.7%, compared to the prior year. U.S. tax preparation fees were essentially flat compared to fiscal year 2011, as return volume and pricing in U.S. company-owned offices were relatively unchanged from fiscal year 2011. International tax preparation fees increased $25.2 million, or 14.0%, due primarily to an extension of the Canadian tax season and favorable exchange rates.
Royalties increased $4.4 million, or 1.4%, primarily due to a 1.9% increase in returns prepared in franchise offices.
Fees earned on RACs decreased $49.3 million, or 27.1%, due to a promotional offering, whereby clients were eligible to receive a RAC at no charge through February 4, if they elected to have their refund direct deposited onto an Emerald Card.
Emerald Card fees increased $13.7 million, or 15.1%, primarily due to higher transaction volumes resulting from an increase of approximately 24% in prepaid debit cards issued.
Interest income earned on EAs decreased $34.6 million, or 36.7%, as a result of lower EA volumes principally resulting from changes in underwriting criteria in fiscal year 2012.
Other revenue decreased $4.8 million, or 2.1%, primarily due to the last of our RAL revenues ($17.2 million) recognized in the prior year, partially offset by an increase in online tax preparation revenues.
Total expenses increased $13.5 million, or 0.6%, compared to fiscal year 2011. Benefits and other compensation increased $8.8 million, or 5.0%, primarily due to incremental severance costs. Marketing and advertising increased $35.7 million, or 14.7%, as we expanded our marketing efforts, primarily in television and online. Bad debt expense decreased $71.0 million, or 51.0%, primarily as a result of lower EA volumes and better collection rates in the current year. Other expenses increased $59.9 million, or 29.9%, primarily due to incremental litigation expenses recorded in fiscal year 2012 and a decline in gains on the sale of tax offices of $28.5 million, as we sold 83 offices in fiscal year 2012 compared to 280 in fiscal year 2011.
Pretax income for fiscal year 2012 decreased $63.5 million, or 8.3%, from fiscal year 2011.

CORPORATE, ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS
Corporate operating results include net interest margin and gains or losses
relating to mortgage loans held for investment, real estate owned and residual
interests in securitizations, along with interest expense on borrowings, other
corporate expenses and eliminations of intercompany activities.
Corporate - Operating Results                                                     (in 000s)
Year ended April 30,                              2013              2012               2011
Interest income on mortgage loans held
for investment                           $      16,556     $      20,322     $       24,693
Other                                           11,420            11,071              7,926
Total revenues                                  27,976            31,393             32,619
Interest expense                                73,649            83,658             84,288
Provision for loan losses                       13,283            24,075             35,567
Other, net                                      60,176            51,592             52,559
Total expense                                  147,108           159,325            172,414
Pretax loss                              $    (119,132 )   $    (127,932 )   $     (139,795 )

FISCAL YEAR 2013 COMPARED TO FISCAL YEAR 2012
Pretax results. Interest income earned on mortgage loans held for investment decreased $3.8 million, or 18.5%, from the prior year, primarily as a result of declining balances and non-performing loans. Interest expense declined $10.0 million, or 12.0%, due to lower interest rates on our Senior Notes, coupled with lower principal balances outstanding. Our provision for loan losses decreased $10.8 million, or 44.8%, from the prior year as a result of the continued run-off of our portfolio. Other expenses increased $8.6 million, or 16.6%, primarily due to the $5.8 million loss on extinguishment of debt we incurred on the redemption of our $600.0 million Senior Notes.

H&R Block 2013 Form 10K 23


Table of Contents

Income Taxes on Continuing Operations. Our effective tax rate for continuing operations in fiscal year 2013 was 33.7% compared to 39.9% in the prior year. The lower effective tax rate was primarily due to reserve releases related to the settlement of tax years 1999-2007 with the IRS. The IRS settlement decreased the effective tax rate by 6.2%.
FISCAL YEAR 2012 COMPARED TO FISCAL YEAR 2011 Pretax results. Interest income earned on mortgage loans held for investment decreased $4.4 million, or 17.7%, from fiscal year 2011, primarily as a result of declining rates and non-performing loans. Our provision for loan losses decreased $11.5 million, or 32.3%, from fiscal year 2011 as a result of the continued run-off of our portfolio.
Income Taxes on Continuing Operations. Our effective tax rate for continuing operations in fiscal year 2012 was 39.9% compared to 37.5% in fiscal year 2011. The higher effective tax rate was primarily due to increased tax expense related to changes in the value of investments held within company-owned life insurance (COLI) policies. A portion of the increase related to COLI resulted from the decision to surrender COLI policies no longer required to support our deferred compensation liabilities. This decision triggered a one-time tax expense related to prior period gains. In addition to the impact of COLI, changes in tax items including valuation allowances, income tax reserves and other discrete tax adjustments caused a small net increase to tax expense.

DISCONTINUED OPERATIONS
Discontinued operations include our previously reported Business Services
segment and discontinued mortgage operations.
Discontinued Operations - Operating Results                                  (in 000s)
Year ended April 30,                                  2013          2012          2011
Revenues                                         $       -     $ 417,168     $ 828,725
Pretax income (loss) from operations:
RSM and related businesses                       $   1,205     $  14,441     $  48,021
Mortgage                                           (52,077 )     (59,702 )     (20,644 )
                                                   (50,872 )     (45,261 )      27,377
Income taxes (benefit)                             (19,662 )     (13,329 )      13,814
Net income (loss) from operations                  (31,210 )     (31,932 )      13,563
Pretax loss on sales of businesses                       -      (109,719 )        -
Income tax benefit                                       -       (61,615 )        -
Net loss on sales of businesses                          -       (48,104 )        -
Net income (loss) from discontinued operations   $ (31,210 )   $ (80,036 )   $  13,563

FISCAL YEAR 2013 COMPARED TO FISCAL YEAR 2012
Results of operations. The net loss from our discontinued operations totaled $31.2 million for the current year, compared to a net loss of $80.0 million in the prior year.
Prior year losses included a $99.7 million pretax goodwill impairment related to the sales of RSM and MCM, as well as operating income of $14.4 million earned by those businesses prior to the sale.
Pretax losses of mortgage operations totaled $52.1 million in the current year and resulted primarily from incremental loss provisions of $40.0 million related to SCC's estimated contingent losses for representation and warranty claims. Pretax losses of mortgage operations totaled $59.7 million in fiscal year 2012 and resulted primarily from loss provisions relating to representation and warranty claims totaling $20.0 million and settlement charges totaling $28.0 million.
Income Taxes. Our effective tax rate for discontinued operations was 38.6% for the fiscal year ended April 30, 2013, compared to 48.4% the prior year. The prior year rate was higher due to the disposition of RSM which produced increased tax benefits from the loss.
FISCAL YEAR 2012 COMPARED TO FISCAL YEAR 2011 Results of operations. The net loss from our discontinued operations totaled $80.0 million compared to income of $13.6 million for fiscal year 2011. The loss on the sale of RSM and related businesses includes a $99.7 million goodwill impairment recorded in the first quarter related to the sales of RSM and MCM. Additionally, fiscal year 2011 includes twelve months of RSM operating results while fiscal year 2012 includes only seven months.

24 H&R Block 2013 Form 10K


Table of Contents

The loss related to the mortgage business increased due to a settlement with the SEC of approximately $28 million, coupled with $20.0 million in incremental loss provisions related to an increase in SCC's estimated contingent losses for representation and warranty claims.
Income Taxes. The sale of RSM resulted in a pretax financial statement loss, but a gain for tax purposes. The tax gain resulted primarily from larger amortization deductions taken for tax purposes than for financial statement purposes. A portion of the gain from the sale of intangible assets is capital in nature and was offset by utilization of capital loss carry-forwards, resulting in an incremental tax benefit reported for financial statement purposes.
REPRESENTATION AND WARRANTY CLAIMS
SCC records a liability for losses related to representation and warranty claims when those losses are believed to be both probable and reasonably estimable. SCC considers the experience gained through discussions with counterparties, and an assessment of, among other things, historical claim results, threatened claims, terms and provisions of related agreements, counterparty willingness to pursue a settlement, legal standing of counterparties to provide a comprehensive settlement, the potential pro-rata realization of the claims as compared to all similar claims and other relevant facts and circumstances when developing its estimate of probable loss.
Loss payments totaled $11.3 million, $16.2 million and $61.9 million for fiscal years 2013, 2012 and 2011, respectively. These amounts were recorded as reductions of SCC's accrued representation and warranty liability. SCC recorded a $40.0 million incremental provision to its liability for estimated contingent losses during the fourth quarter of fiscal year 2013, and a $20.0 million provision in fiscal year 2012. The fiscal year 2013 provision was the result of events occurring during the fourth quarter, including tolling agreements SCC entered into with certain counterparties and bulk settlement discussions related to previously denied and potential future claims.
SCC has accrued a liability as of April 30, 2013 for estimated contingent losses arising from representation and warranty claims of $158.8 million. The estimate of accrued loss is based on the best information currently available, significant management judgment, and a number of factors, including developments in case law and those factors mentioned above, that are subject to change. Changes in any one of these factors could significantly impact the estimate. However, it is reasonably possible that future representation and warranty losses may vary from the amounts recorded for these exposures. SCC currently estimates that the range of reasonably possible loss could be up to $30 million in excess of amounts accrued. This estimated range is based on currently available information, significant judgment and a number of assumptions that are subject to change. The actual loss that may be incurred could be more or less than our accrual or the estimate of reasonably possible losses. See additional discussion in Item 1A, "Risk Factors," "Critical Accounting Estimates" below and in Item 8, note 19 to the consolidated financial statements.

CRITICAL ACCOUNTING ESTIMATES
We consider the estimates discussed below to be critical to understanding our financial statements, as they require the use of significant judgment and estimation in order to measure, at a specific point in time, matters that are inherently uncertain. Specific risks for these critical accounting estimates are described in the following paragraphs. We have reviewed and discussed each of these estimates with the Audit Committee of our Board of Directors. For all of these estimates, we caution that future events rarely develop precisely as forecasted and estimates routinely require adjustment and may require material adjustment.
See Item 8, note 1 to the consolidated financial statements, which discusses accounting estimates we have selected when there are acceptable alternatives and new or proposed accounting standards that may affect our financial reporting in the future.
LOSSES ARISING FROM REPRESENTATIONS AND WARRANTIES - 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. SCC believes it would have an obligation to repurchase a loan or indemnify certain parties with respect to a claim for a breach of a representation and warranty only if such breach materially and adversely affects the value of the mortgage loan, or a securitization insurer's or certificate holder's interest in the mortgage loan, and the mortgage loan has not been liquidated, although there is limited and conflicting case law on the liquidated loan defense issue. Such claims together with any settlement arrangements related to these losses are collectively referred to as "representation and warranty claims."

H&R Block 2013 Form 10K 25


Table of Contents

During the latter-half of fiscal year 2013, SCC entered into tolling agreements with the counterparties from whom SCC has received a significant majority of its asserted claims. These tolling agreements toll the running of any applicable statute of limitations related to potential representation and warranty claims and other claims against SCC. During the fourth quarter, SCC engaged in discussions with these counterparties regarding the bulk settlement of previously denied and potential future claims. Based on settlement discussions with these counterparties, SCC believes a bulk settlement approach, rather than the loan-by-loan claim process, will be needed to achieve settlement with these counterparties with respect to all of their representation and warranty and other claims. SCC has experienced a decline in claims on a loan-by-loan basis . . .

  Add HRB to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for HRB - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.