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HRB > SEC Filings for HRB > Form 10-K on 19-Jun-2014All Recent SEC Filings

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Form 10-K for H&R BLOCK INC


19-Jun-2014

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 prepared and filed by our clients through H&R Block tax software, either online or using our software or mobile applications.
RECENT DEVELOPMENTS
In April 2014, our subsidiaries, HRB Bank and Block Financial, entered into a P&A Agreement with BofI. Pursuant to the P&A Agreement, HRB Bank will sell certain assets and assign certain liabilities, including all of HRB Bank's deposit liabilities, to BofI, subject to various closing conditions, including the receipt of certain required approvals, entry into certain additional agreements, and the fulfillment of various other customary conditions. See Item 1, under "Business," and below under "Financial Condition - HRB Bank" for additional information.
The obligations of the parties to complete the P&A Transaction are subject to the fulfillment of numerous conditions including regulatory approval. We cannot be certain when or if the conditions to and other components of the P&A Transaction will be satisfied, or whether the P&A Transaction will be completed. In addition, there may be changes to the terms and conditions of the P&A Agreement and other contemplated agreements as part of the regulatory approval process.
In connection with the additional agreements being entered into upon the closing of the P&A Transaction, BofI will offer H&R Block-branded financial products distributed by the Company to the Company's clients. An operating subsidiary of the Company will provide certain marketing, servicing and operational support for such financial services and products. We expect the net, ongoing annual financial impact of these agreements to be dilutive by approximately $0.07 to $0.09 per share beginning in fiscal year 2015, based on current fully diluted shares outstanding. Results will vary based upon the volume of financial services products sold and the actual closing date.

H&R Block, Inc. | 2014 Form 10-K 23


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OVERVIEW
A summary of our fiscal year 2014 results is as follows:
? Revenues for the fiscal year were just over $3.0 billion, up 4.1% from the prior year, driven by improved return mix and other pricing changes in retail locations, digital tax software product enhancements and increases in paid federal returns, and increased financial product revenues.

? Pretax earnings grew $65.1 million, or 9.3%.

? Diluted earnings per share from continuing operations increased 7.1% from the prior year to $1.81.

? Adjusted earnings from continuing operations before interest, taxes, depreciation and amortization (EBITDA) increased $48.4 million, or 5.5%, to $932.6 million. See "Non-GAAP Financial Information" at the end of this item for a reconciliation of non-GAAP measures.

Consolidated Results of Operations Data                             (in 000s, except per share amounts)
Year ended April 30,                               2014                   2013                     2012
REVENUES:
Tax Services                              $   2,999,460     $        2,877,967       $        2,862,378
Corporate and eliminations                       24,835                 27,976                   31,393
                                          $   3,024,295     $        2,905,943       $        2,893,771
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE TAXES:
Tax Services                              $     866,367     $          821,143       $          704,002
Corporate and eliminations                      (99,251 )             (119,132 )               (127,932 )
                                                767,116                702,011                  576,070
Income taxes                                    267,019                236,853                  230,102
Net income from continuing operations           500,097                465,158                  345,968
Net loss from discontinued operations           (24,940 )              (31,210 )                (80,036 )
Net income                                $     475,157     $          433,948       $          265,932
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations                     $        1.82     $             1.70       $             1.16
Discontinued operations                           (0.09 )                (0.11 )                  (0.27 )
Consolidated                              $        1.73     $             1.59       $             0.89
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations                     $        1.81     $             1.69       $             1.16
Discontinued operations                           (0.09 )                (0.11 )                  (0.27 )
Consolidated                              $        1.72     $             1.58       $             0.89

EBITDA FROM CONTINUING OPERATIONS (1)     $     940,108     $          874,375       $          757,316
EBITDA FROM CONTINUING OPERATIONS -
ADJUSTED (1)                                    932,606                884,245                  807,539

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

24 2014 Form 10-K | H&R Block, Inc.


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RESULTS OF OPERATIONS

TAX SERVICES
This segment primarily consists of our assisted and DIY income tax preparation
offerings - in-person, online, software and mobile applications - 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 our
U.S. tax preparation business.
Tax Services - Operating Statistics
Year ended April 30,                             2014      2013      2012
TAX RETURNS PREPARED : (in 000s)
United States:
Company-owned operations                        8,342     8,907     9,207
Franchise operations                            5,268     5,598     5,693
Total assisted returns                         13,610    14,505    14,900
Desktop (1)                                     2,026     2,055     2,124
Online (1)                                      4,389     4,356     3,932
Free File Alliance (1)                            767       663       721
Total tax software (1)                          7,182     7,074     6,777
Total U.S. returns                             20,792    21,579    21,677
International operations:
Canada (2)                                      2,642     2,517     2,545
Australia                                         746       741       671
Total international operations                  3,388     3,258     3,216
Tax returns prepared worldwide                 24,180    24,837    24,893

TAX OFFICES (at the peak of the tax season):
U.S. offices:
Company-owned offices                           6,012     5,734     5,787
Company-owned shared locations (3)                 74       477       734
Total company-owned offices                     6,086     6,211     6,521
Franchise offices                               4,266     4,384     4,296
Franchise shared locations (3)                     26       123       175
Total franchise offices                         4,292     4,507     4,471
Total U.S. offices                             10,378    10,718    10,992
International offices:
Canada                                          1,179     1,139     1,223
Australia                                         409       410       404
Total international offices                     1,588     1,549     1,627
Tax offices worldwide                          11,966    12,267    12,619

(1) Tax software return counts for fiscal years 2013 and 2012 have been restated to primarily reflect accepted e-files. No changes were made to previously reported assisted return counts.

(2) In fiscal year 2014, the end of the Canadian tax season was extended from April 30 to May 5, 2014. Tax returns prepared in Canada in fiscal year 2014 includes approximately 141 thousand returns in both company-owned and franchise offices which were accepted by the client after April 30. The revenues related to these returns will be recognized in fiscal year 2015.

(3) Shared locations included offices located within Walmart and Sears stores in fiscal years 2013 and 2012.

H&R Block, Inc. | 2014 Form 10-K 25


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Tax Services - Financial Results                                            (dollars in 000s)
Year ended April 30,                                   2014             2013             2012
Tax preparation fees:
U.S.                                           $  1,794,043     $  1,712,319     $  1,749,032
International                                       200,152          220,870          205,466
                                                  1,994,195        1,933,189        1,954,498
Royalties                                           316,153          318,386          308,561
Fees from refund anticipation checks                181,394          158,176          132,361
Fees from Emerald Card                              103,730           98,896          104,143
Fees from Peace of MindŽ guarantees                  89,685           71,355           75,603
Interest and fee income on Emerald Advance           56,877           59,657           59,660
Other                                               257,426          238,308          227,552
Total revenues                                    2,999,460        2,877,967        2,862,378

Compensation and benefits:
Field wages                                         702,312          654,794          691,680
Other wages                                         169,583          150,306          150,908
Benefits and other compensation                     158,203          148,492          183,037
                                                  1,030,098          953,592        1,025,625
Occupancy and equipment                             363,590          354,430          381,572
Marketing and advertising                           237,214          270,240          278,231
Depreciation and amortization                       115,488           92,004           88,836
Bad debt                                             71,733           77,402           68,082
Supplies                                             36,454           40,131           44,236
Impairment of goodwill and intangible assets            277            3,581           11,389
Other, net                                          278,239          265,444          260,405
                                                  2,133,093        2,056,824        2,158,376
Pretax income                                  $    866,367     $    821,143     $    704,002

Pretax margin 28.9 % 28.5 % 24.6 %

FISCAL 2014 COMPARED TO FISCAL 2013 - Tax Services' revenues increased $121.5 million, or 4.2%, compared to the prior year primarily due to an increase in U.S. tax preparation fees of $81.7 million, or 4.8%. Elimination in virtually all markets of a prior year offer to prepare certain 1040EZ tax returns at no charge (resulting in a one-time increase of over $30 million), a shift to more complex returns, and other pricing changes resulted in higher revenues. Other pricing changes primarily related to targeted changes to our pricing strategy for a limited number of clients who were receiving significant discounts and beginning to charge for tax return extensions. This increase was partially offset by a 6.3% decline in returns prepared driven primarily by our decision to discontinue the free 1040EZ offer.
International tax preparation fees decreased $20.7 million, or 9.4%, due primarily to unfavorable exchange rates and extension of the Canadian tax season to May 5th.
Fees earned on RACs increased $23.2 million, or 14.7%, primarily due to elimination of certain price discounts and higher volumes for our online clients.
Revenue from fees for our POM guarantees is initially deferred, and recognized over the term of the guarantee based on actual claims paid in relation to projected claims. Revenue increased in fiscal year 2014 primarily due to improving claim experience and lower estimates of projected claims. Other revenue increased $19.1 million, or 8.0%, primarily due to an increase in online tax preparation revenues.
Total expenses increased $76.3 million, or 3.7%, from the prior year primarily due to increases in compensation and benefits, depreciation and amortization, and partially offset by a planned reduction in marketing and advertising spend of $33.0 million.

26 2014 Form 10-K | H&R Block, Inc.


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Total compensation and benefits increased $76.5 million primarily due to higher variable field wages resulting from increased revenues and increases to in-office customer service support staff. Occupancy and equipment expenses increased $9.2 million, or 2.6%, primarily due to a 4.8% increase in company-owned offices. Marketing and advertising expensed declined $33.0 million due to a planned reduction in national advertising spend. Depreciation and amortization expense increased $23.5 million, or 25.5%, primarily due to office upgrades and competitor acquisitions. Other expenses increased $12.8 million, or 4.8%, primarily due to foreign currency losses in the current year. Pretax income for fiscal year 2014 increased $45.2 million, or 5.5%, over the prior year. The pretax margin for the segment increased to 28.9% in fiscal year 2014 from 28.5% in fiscal year 2013.
FISCAL 2013 COMPARED TO FISCAL 2012 - Tax Services' revenues increased $15.6 million, or 0.5%, compared to fiscal year 2012. 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.
Total expenses decreased $101.6 million, or 4.7%, from fiscal year 2012. Total compensation and benefits decreased $72.0 million primarily due to lower field wages in fiscal year 2013 resulting from workforce reductions and severance costs of $31.1 million recorded in fiscal year 2012. 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 fiscal year 2013.
Pretax income for fiscal year 2013 increased $117.1 million, or 16.6%, over fiscal year 2012. The pretax margin for the segment increased to 28.5% from 24.6% in fiscal year 2012.

CORPORATE AND ELIMINATIONS
Corporate operating results include net interest income and gains or losses
relating to mortgage loans held for investment and residual interests in
securitizations, interest expense on borrowings, other corporate expenses, and
eliminations of intercompany activities.
Corporate - Operating Results                                 (in 000s)
Year ended April 30,                 2014           2013           2012
Total revenues                  $  24,835     $   27,976     $   31,393

Interest expense                   53,611         73,649         83,658
Compensation and benefits          36,302         29,555         23,487
Other, net                         34,173         43,904         52,180
                                  124,086        147,108        159,325
Pretax loss                     $ (99,251 )   $ (119,132 )   $ (127,932 )

H&R Block, Inc. | 2014 Form 10-K 27


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FISCAL YEAR 2014 COMPARED TO FISCAL YEAR 2013 - Interest expense declined $20.0 million, or 27.2%, due to lower interest rates on our long-term debt, coupled with lower principal balances outstanding. Other expenses decreased $9.7 million, or 22.2%, primarily due to a gain of $18.3 million recognized on the sale of residual interests in mortgage securitizations.
FISCAL YEAR 2013 COMPARED TO FISCAL YEAR 2012 - Interest expense declined $10.0 million, or 12.0%, due to lower interest rates on our Senior Notes, coupled with lower principal balances outstanding. Other expenses decreased $8.3 million, or 15.9%, primarily due to a $10.8 million decline in our provision for loan losses, partially offset by the $5.8 million loss on extinguishment of debt we incurred on the redemption of our $600.0 million Senior Notes.
DISCONTINUED OPERATIONS
Discontinued operations include our previously reported Business Services segment and discontinued mortgage operations.
FISCAL YEAR 2014 COMPARED TO FISCAL YEAR 2013 - The net loss from our discontinued operations totaled $24.9 million for the current year, compared to a net loss of $31.2 million in the prior year.
Pretax losses of mortgage operations totaled $38.5 million, compared to $52.1 million in the prior year, and resulted primarily from incremental loss provisions related to SCC's estimated contingent losses for representation and warranty claims of $25.0 million and $40.0 million for fiscal years 2014 and 2013, respectively.
FISCAL YEAR 2013 COMPARED TO FISCAL YEAR 2012 - The net loss from our discontinued operations totaled $31.2 million for fiscal year 2013, compared to a net loss of $80.0 million in fiscal year 2012.
Fiscal year 2012 losses included a $99.7 million pretax goodwill impairment related to the sales of RSM McGladrey, Inc. (RSM) and McGladrey Capital Markets LLC (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 for fiscal year 2013 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.
CONTINGENT LOSSES - SCC has accrued a liability as of April 30, 2014 for estimated contingent losses arising from representation and warranty claims of $183.8 million. The estimate of accrued loss is based on the best information currently available, significant management judgment, and a number of factors that are subject to change, including developments in case law and the factors, mentioned in "Critical Accounting Estimates" below. Changes in any one of these factors could significantly impact the estimate.
Losses may also be incurred with respect to various indemnification claims by underwriters and depositors in securitization transactions in which SCC participated. SCC has not concluded that a loss is probable or reasonably estimable related to these indemnification claims, therefore there is no accrued liability for these contingent losses as of April 30, 2014.
See additional discussion in Item 1A, "Risk Factors," "Critical Accounting Estimates" below and in Item 8, note 18 to the consolidated financial statements.
CRITICAL ACCOUNTING ESTIMATES
We consider the estimates discussed below to be critical to understanding our financial statements, as they require the use of significant judgment and estimation in order to measure, at a specific point in time, matters that are inherently uncertain. Specific methods and assumptions 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 policies we have selected when there are acceptable alternatives and new or proposed accounting standards that may affect our financial reporting in the future.

28 2014 Form 10-K | H&R Block, Inc.


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LOSSES ARISING FROM REPRESENTATIONS AND WARRANTIES -
Nature of Estimates Required. SCC accrues a liability for losses related to representation and warranty claims when those losses are believed to be both probable and reasonably estimable. Development of loss estimates is subject to significant management judgment, and estimates may vary significantly period to period.
Assumptions and Approach Used. SCC has entered into tolling agreements with the counterparties that initiated the majority of claims received by SCC. Beginning in the fourth quarter of fiscal year 2013 and continuing in fiscal year 2014, SCC has been 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 resolution process, will be needed to resolve all of the representation and warranty and other claims that are the subject of these discussions. In the event that current efforts to settle are not successful, SCC believes claim volumes may increase or litigation may result. SCC will continue to vigorously contest any request for repurchase when it has concluded that a valid basis for repurchase does not exist. SCC's decision whether to engage in bulk settlement discussions is based on factors that vary by counterparty or type of counterparty and include the considerations used by SCC in determining its loss estimate.
SCC's loss estimate for representation and warranty claims is based on the best information currently available, significant management judgment, and a number of factors that are subject to change, including developments in case law and the factors mentioned below. These factors include the terms of prior bulk settlements, the terms expected to result from ongoing bulk settlement discussions, 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 claims and other relevant facts and circumstances when developing its estimate of probable loss. SCC believes that the most significant of these factors are the terms of prior bulk settlements and the terms expected to result from ongoing bulk settlement discussions, which have been primarily influenced by the anticipated pro-rata realization of the claims of particular counterparties as compared to the anticipated realization if all claims and litigation were resolved together with payment of SCC's related administration and legal expense. Changes in any one of the factors mentioned above could significantly impact the estimate.
Sensitivity of Estimate to Change. It is reasonably possible that future representation and warranty losses may vary from the amounts accrued for these exposures. SCC currently estimates that the range of reasonably possible loss could be up to approximately $16 million in excess of amounts accrued. This estimated range is based on the best information currently available, significant management judgment and a number of factors that are subject to change, including developments in case law and the factors listed above in this Item 7. The actual loss that may be incurred could differ materially from our accrual or the estimate of reasonably possible losses.
SCC has accrued a liability as of April 30, 2014 for estimated contingent losses arising from representation and warranty claims of $183.8 million. SCC accrued incremental loss provisions of $25 million in fiscal year 2014 and $40 million in fiscal year 2013.
If future losses are in excess of SCC's accrued liability, those losses could have a material adverse effect on our business and our consolidated financial position, results of operations and cash flows, as SCC's financial condition, operating results and cash flows are included in our consolidated financial statements. The accrued liability does not include potential losses related to litigation matters discussed in Item 1A, "Risk Factors" and in Item 8, note 17 to the consolidated financial statements. Also see Item 8, note 18 to the consolidated financial statements.
LITIGATION AND RELATED CONTINGENCIES -
Nature of Estimates Required. We have accrued liabilities related to certain legal matters for which we believe it is probable that a loss will be incurred and the range of such loss can be reasonably estimated. Assessing the likely outcome of pending or threatened litigation, including the amount of potential loss, if any, is highly subjective.
Assumptions and Approach Used. We are subject to pending or threatened litigation claims and indemnification claims, which are described in Item 8, note 17 to the consolidated financial statements. It is our policy to routinely assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the liability required to be accrued, if any, for these contingencies is made

H&R Block, Inc. | 2014 Form 10-K 29


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after analysis of each known issue and an analysis of historical experience. In cases where we have concluded that a loss is only reasonably possible or remote, or is not reasonably estimable, no liability is accrued.
Sensitivity of Estimate to Change. It is reasonably possible that future litigation and related contingent losses may vary from the amounts accrued. For some matters where a liability has not been accrued, we are able to estimate a reasonably possible range of loss. Those matters for which an estimate is not reasonably possible are not included within this estimated range. Therefore, this estimated range of reasonably possible loss represents what we believe to be an estimate of reasonably possible loss only for certain matters meeting . . .

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