H&R BLOCK INC - Quarter Report: 2009 January (Form 10-Q)
Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
(Mark One) | ||
[X]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended January 31, 2009 | ||
OR
|
||
[ ]
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the transition period from to |
Commission file
number 1-6089
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095013709001604/c49780c4978001.gif)
H&R
BLOCK, Inc.
(Exact name of registrant as
specified in its charter)
MISSOURI (State or other jurisdiction of incorporation or organization) |
44-0607856 (I.R.S. Employer Identification No.) |
One
H&R Block Way
Kansas
City, Missouri 64105
(Address of principal executive
offices, including zip code)
(816) 854-3000
(Registrants 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 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 registrants Common
Stock, without par value, at the close of business on
February 28, 2009 was 339,666,500 shares.
Table of Contents
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095013709001604/c49780c4978002.gif)
Form 10-Q
for the Period Ended January 31, 2009
Table of
Contents
Page | ||||||||
PART I
|
Financial Information
|
|||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
25 | ||||||||
37 | ||||||||
37 | ||||||||
PART II | ||||||||
38 | ||||||||
41 | ||||||||
42 | ||||||||
42 | ||||||||
43 | ||||||||
EX-10.1 | ||||||||
EX-10.2 | ||||||||
EX-10.3 | ||||||||
EX-10.4 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
Table of Contents
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095013709001604/c49780c4978002.gif)
CONDENSED
CONSOLIDATED BALANCE
SHEETS (amounts
in 000s, except share and per share amounts)
January 31, 2009 | April 30, 2008 | |||||||
(Unaudited) | ||||||||
ASSETS
|
||||||||
Cash and cash equivalents
|
$ | 1,269,203 | $ | 664,897 | ||||
Cash and cash equivalents restricted
|
75,893 | 7,031 | ||||||
Receivables, less allowance for doubtful accounts
of $85,327 and $120,155 |
2,642,951 | 534,229 | ||||||
Prepaid expenses and other current assets
|
425,042 | 420,738 | ||||||
Assets of discontinued operations, held for sale
|
- | 987,592 | ||||||
Total current assets
|
4,413,089 | 2,614,487 | ||||||
Mortgage loans held for investment, less allowance
for loan losses of $75,615 and $45,401 |
781,755 | 966,301 | ||||||
Property and equipment, at cost, less accumulated depreciation
and amortization of $642,220 and $620,460
|
383,704 | 363,664 | ||||||
Intangible assets, net
|
394,106 | 147,368 | ||||||
Goodwill
|
848,443 | 831,314 | ||||||
Other assets
|
480,795 | 700,291 | ||||||
Total assets
|
$ | 7,301,892 | $ | 5,623,425 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Liabilities:
|
||||||||
Short-term borrowings
|
$ | 690,485 | $ | - | ||||
Customer banking deposits
|
2,115,708 | 785,624 | ||||||
Accounts payable, accrued expenses and other current liabilities
|
734,755 | 739,887 | ||||||
Accrued salaries, wages and payroll taxes
|
206,959 | 365,712 | ||||||
Accrued income taxes
|
143,791 | 439,380 | ||||||
Current portion of long-term debt
|
9,030 | 7,286 | ||||||
Federal Home Loan Bank borrowings
|
104,000 | 129,000 | ||||||
Liabilities of discontinued operations, held for sale
|
- | 644,446 | ||||||
Total current liabilities
|
4,004,728 | 3,111,335 | ||||||
Long-term debt
|
2,002,647 | 1,031,784 | ||||||
Other noncurrent liabilities
|
454,512 | 492,488 | ||||||
Total liabilities
|
6,461,887 | 4,635,607 | ||||||
Commitments and contingencies
|
||||||||
Stockholders equity:
|
||||||||
Common stock, no par, stated value $.01 per share,
800,000,000 shares authorized, shares issued of 444,176,510 and 435,890,796 |
4,442 | 4,359 | ||||||
Additional paid-in capital
|
835,329 | 695,959 | ||||||
Accumulated other comprehensive income (loss)
|
(16,614 | ) | 2,486 | |||||
Retained earnings
|
2,015,650 | 2,384,449 | ||||||
Less treasury shares, at cost
|
(1,998,802 | ) | (2,099,435 | ) | ||||
Total stockholders equity
|
840,005 | 987,818 | ||||||
Total liabilities and stockholders equity
|
$ | 7,301,892 | $ | 5,623,425 | ||||
See Notes to
Condensed Consolidated Financial Statements
1
Table of Contents
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095013709001604/c49780c4978002.gif)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) |
(unaudited,
amounts in 000s, except per share amounts) |
Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues:
|
||||||||||||||||
Service revenues
|
$ | 799,687 | $ | 710,250 | $ | 1,356,744 | $ | 1,267,924 | ||||||||
Other revenues:
|
||||||||||||||||
Product and other revenues
|
135,155 | 137,444 | 166,582 | 176,232 | ||||||||||||
Interest income
|
58,604 | 47,110 | 93,498 | 101,358 | ||||||||||||
993,446 | 894,804 | 1,616,824 | 1,545,514 | |||||||||||||
Operating expenses:
|
||||||||||||||||
Cost of services
|
572,854 | 552,807 | 1,272,762 | 1,264,880 | ||||||||||||
Cost of other revenues
|
111,713 | 96,234 | 216,890 | 194,929 | ||||||||||||
Selling, general and administrative
|
208,814 | 247,320 | 464,054 | 514,403 | ||||||||||||
893,381 | 896,361 | 1,953,706 | 1,974,212 | |||||||||||||
Operating income (loss)
|
100,065 | (1,557 | ) | (336,882 | ) | (428,698 | ) | |||||||||
Other income (expense), net
|
1,674 | 1,973 | (1,802 | ) | 19,792 | |||||||||||
Income (loss) from continuing operations before income taxes
(benefit)
|
101,739 | 416 | (338,684 | ) | (408,906 | ) | ||||||||||
Income taxes (benefit)
|
34,909 | (6,674 | ) | (143,930 | ) | (168,893 | ) | |||||||||
Net income (loss) from continuing operations
|
66,830 | 7,090 | (194,754 | ) | (240,013 | ) | ||||||||||
Net loss from discontinued operations
|
(19,467 | ) | (54,448 | ) | (26,476 | ) | (612,196 | ) | ||||||||
Net income (loss)
|
$ | 47,363 | $ | (47,358 | ) | $ | (221,230 | ) | $ | (852,209 | ) | |||||
Basic earnings (loss) per share:
|
||||||||||||||||
Net income (loss) from continuing operations
|
$ | 0.20 | $ | 0.02 | $ | (0.59 | ) | $ | (0.74 | ) | ||||||
Net loss from discontinued operations
|
(0.06 | ) | (0.17 | ) | (0.08 | ) | (1.89 | ) | ||||||||
Net income (loss)
|
$ | 0.14 | $ | (0.15 | ) | $ | (0.67 | ) | $ | (2.63 | ) | |||||
Basic shares
|
337,338 | 325,074 | 331,429 | 324,544 | ||||||||||||
Diluted earnings (loss) per share:
|
||||||||||||||||
Net income (loss) from continuing operations
|
$ | 0.20 | $ | 0.02 | $ | (0.59 | ) | $ | (0.74 | ) | ||||||
Net loss from discontinued operations
|
(0.06 | ) | (0.16 | ) | (0.08 | ) | (1.89 | ) | ||||||||
Net income (loss)
|
$ | 0.14 | $ | (0.14 | ) | $ | (0.67 | ) | $ | (2.63 | ) | |||||
Diluted shares
|
338,687 | 327,202 | 331,429 | 324,544 | ||||||||||||
Dividends per share
|
$ | 0.15 | $ | 0.14 | $ | 0.44 | $ | 0.42 | ||||||||
Comprehensive income (loss):
|
||||||||||||||||
Net income (loss)
|
$ | 47,363 | $ | (47,358 | ) | $ | (221,230 | ) | $ | (852,209 | ) | |||||
Change in unrealized gain on available-for-sale securities, net
|
(1,707 | ) | 381 | (4,271 | ) | 1,544 | ||||||||||
Change in foreign currency translation adjustments
|
(3,671 | ) | (1,860 | ) | (14,829 | ) | (572 | ) | ||||||||
Comprehensive income (loss)
|
$ | 41,985 | $ | (48,837 | ) | $ | (240,330 | ) | $ | (851,237 | ) | |||||
See Notes to
Condensed Consolidated Financial Statements
2
Table of Contents
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095013709001604/c49780c4978002.gif)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | (unaudited, amounts in 000s) |
Nine Months Ended January 31, | 2009 | 2008 | ||||||
Cash flows from operating activities:
|
||||||||
Net loss
|
$ | (221,230 | ) | $ | (852,209 | ) | ||
Adjustments to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation and amortization
|
90,455 | 82,710 | ||||||
Stock-based compensation
|
20,364 | 30,131 | ||||||
Change in participation in tax client loans receivable
|
(1,048,993 | ) | (1,693,506 | ) | ||||
Operating cash flows of discontinued operations
|
99,425 | (34,297 | ) | |||||
Other, net of business acquisitions
|
(1,363,583 | ) | (872,946 | ) | ||||
Net cash used in operating activities
|
(2,423,562 | ) | (3,340,117 | ) | ||||
Cash flows from investing activities:
|
||||||||
Principal repayments on mortgage loans held for investment, net
|
72,150 | 106,721 | ||||||
Purchases of property and equipment, net
|
(73,913 | ) | (77,226 | ) | ||||
Payments made for business acquisitions, net of cash acquired
|
(290,868 | ) | (23,835 | ) | ||||
Net cash provided by (used in) investing activities of
discontinued operations:
|
||||||||
Proceeds from sale of operating unit, net
|
303,983 | - | ||||||
Other
|
(48,917 | ) | (1,675 | ) | ||||
Other, net
|
23,839 | 7,382 | ||||||
Net cash provided by (used in) investing activities
|
(13,726 | ) | 11,367 | |||||
Cash flows from financing activities:
|
||||||||
Repayments of commercial paper
|
- | (5,125,279 | ) | |||||
Proceeds from issuance of commercial paper
|
- | 4,133,197 | ||||||
Repayments of other short-term borrowings
|
(928,983 | ) | (2,161,177 | ) | ||||
Proceeds from other short-term borrowings
|
2,565,281 | 5,097,662 | ||||||
Proceeds from issuance of Senior Notes
|
- | 599,376 | ||||||
Customer deposits, net
|
1,326,584 | 828,872 | ||||||
Dividends paid
|
(147,569 | ) | (137,049 | ) | ||||
Acquisition of treasury shares
|
(7,387 | ) | (7,237 | ) | ||||
Proceeds from exercise of stock options
|
69,891 | 14,527 | ||||||
Proceeds from issuance of common stock, net
|
141,450 | - | ||||||
Net cash provided by financing activities of discontinued
operations
|
4,783 | 634,208 | ||||||
Other, net
|
17,544 | (32,331 | ) | |||||
Net cash provided by financing activities
|
3,041,594 | 3,844,769 | ||||||
Net increase in cash and cash equivalents
|
604,306 | 516,019 | ||||||
Cash and cash equivalents at beginning of the period
|
664,897 | 816,917 | ||||||
Cash and cash equivalents at end of the period
|
$ | 1,269,203 | $ | 1,332,936 | ||||
Supplementary cash flow data:
|
||||||||
Income taxes paid, net of refunds received of $156,522 and
$89,865
|
$ | (13,006 | ) | $ | (55,975 | ) | ||
Interest paid on borrowings
|
70,891 | 129,694 | ||||||
Interest paid on deposits
|
11,484 | 39,498 | ||||||
Non-cash investing activities:
|
||||||||
Foreclosed assets
|
62,774 | - |
See Notes to
Condensed Consolidated Financial Statements
3
Table of Contents
![(H & R BLOCK LOGO)](https://www.sec.gov/Archives/edgar/data/0000012659/000095013709001604/c49780c4978002.gif)
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY |
(unaudited,
amounts in 000s, except per share amounts) |
Accumulated |
||||||||||||||||||||||||||||||||||||||||
Convertible |
Additional |
Other |
||||||||||||||||||||||||||||||||||||||
Common Stock | Preferred Stock |
Paid-in |
Comprehensive |
Retained |
Treasury Stock |
Total |
||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Income (Loss) | Earnings | Shares | Amount | Equity | |||||||||||||||||||||||||||||||
Balances at April 30, 2007
|
435,891 | $ | 4,359 | - | $ | - | $ | 676,766 | $ | (1,320 | ) | $ | 2,886,440 | (112,672 | ) | $ | (2,151,746 | ) | $ | 1,414,499 | ||||||||||||||||||||
Remeasurement of uncertain tax positions upon adoption of
FIN 48
|
- | - | - | - | - | - | (9,716 | ) | - | - | (9,716 | ) | ||||||||||||||||||||||||||||
Net loss
|
- | - | - | - | - | - | (852,209 | ) | - | - | (852,209 | ) | ||||||||||||||||||||||||||||
Unrealized translation loss
|
- | - | - | - | - | (572 | ) | - | - | - | (572 | ) | ||||||||||||||||||||||||||||
Change in net unrealized gain on available-for-sale securities
|
- | - | - | - | - | 1,544 | - | - | - | 1,544 | ||||||||||||||||||||||||||||||
Stock-based compensation
|
- | - | - | - | 37,150 | - | - | - | - | 37,150 | ||||||||||||||||||||||||||||||
Shares issued for:
|
||||||||||||||||||||||||||||||||||||||||
Option exercises
|
- | - | - | - | (8,815 | ) | - | - | 1,072 | 20,478 | 11,663 | |||||||||||||||||||||||||||||
Nonvested shares
|
- | - | - | - | (20,058 | ) | - | - | 938 | 17,917 | (2,141 | ) | ||||||||||||||||||||||||||||
ESPP
|
- | - | - | - | (65 | ) | - | - | 412 | 7,872 | 7,807 | |||||||||||||||||||||||||||||
Acquisitions
|
- | - | - | - | 35 | - | - | 8 | 158 | 193 | ||||||||||||||||||||||||||||||
Acquisition of treasury shares
|
- | - | - | - | - | - | - | (325 | ) | (7,237 | ) | (7,237 | ) | |||||||||||||||||||||||||||
Cash dividends paid $0.42 per share
|
- | - | - | - | - | - | (137,049 | ) | - | - | (137,049 | ) | ||||||||||||||||||||||||||||
Balances at January 31, 2008
|
435,891 | $ | 4,359 | - | $ | - | $ | 685,013 | $ | (348 | ) | $ | 1,887,466 | (110,567 | ) | $ | (2,112,558 | ) | $ | 463,932 | ||||||||||||||||||||
Balances at April 30, 2008
|
435,891 | $ | 4,359 | - | $ | - | $ | 695,959 | $ | 2,486 | $ | 2,384,449 | (109,880 | ) | $ | (2,099,435 | ) | $ | 987,818 | |||||||||||||||||||||
Net loss
|
- | - | - | - | - | - | (221,230 | ) | - | - | (221,230 | ) | ||||||||||||||||||||||||||||
Unrealized translation loss
|
- | - | - | - | - | (14,829 | ) | - | - | - | (14,829 | ) | ||||||||||||||||||||||||||||
Change in net unrealized gain on available-for-sale securities
|
- | - | - | - | - | (4,271 | ) | - | - | - | (4,271 | ) | ||||||||||||||||||||||||||||
Proceeds from common stock issuance, net of expenses
|
8,286 | 83 | - | - | 141,367 | - | - | - | - | 141,450 | ||||||||||||||||||||||||||||||
Stock-based compensation-
|
- | - | - | 25,769 | - | - | - | - | 25,769 | |||||||||||||||||||||||||||||||
Shares issued for:
|
||||||||||||||||||||||||||||||||||||||||
Option exercises
|
- | - | - | - | (7,023 | ) | - | - | 4,341 | 82,954 | 75,931 | |||||||||||||||||||||||||||||
Nonvested shares
|
- | - | - | - | (20,345 | ) | - | - | 1,011 | 19,326 | (1,019 | ) | ||||||||||||||||||||||||||||
ESPP
|
- | - | - | - | (423 | ) | - | - | 292 | 5,577 | 5,154 | |||||||||||||||||||||||||||||
Acquisitions
|
- | - | - | - | 25 | - | - | 9 | 163 | 188 | ||||||||||||||||||||||||||||||
Acquisition of treasury shares
|
- | - | - | - | - | - | - | (355 | ) | (7,387 | ) | (7,387 | ) | |||||||||||||||||||||||||||
Cash dividends paid $0.44 per share
|
- | - | - | - | - | - | (147,569 | ) | - | - | (147,569 | ) | ||||||||||||||||||||||||||||
Balances at January 31, 2009
|
444,177 | $ | 4,442 | - | $ | - | $ | 835,329 | $ | (16,614 | ) | $ | 2,015,650 | (104,582 | ) | $ | (1,998,802 | ) | $ | 840,005 | ||||||||||||||||||||
See Notes to
Condensed Consolidated Financial Statements
4
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | (unaudited) |
1. | Summary of Significant Accounting Policies |
Basis of Presentation
The condensed consolidated balance sheet as of January 31,
2009, the condensed consolidated statements of operations and
comprehensive income (loss) for the three and nine months ended
January 31, 2009 and 2008, the condensed consolidated
statements of cash flows for the nine months ended
January 31, 2009 and 2008, and the condensed consolidated
statements of stockholders equity for the nine months
ended January 31, 2009 and 2008 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, cash flows and changes in stockholders equity
at January 31, 2009 and for all periods presented have been
made.
H&R Block, the Company,
we, our and us are used
interchangeably to refer to H&R Block, Inc. or to H&R
Block, Inc. and its subsidiaries, as appropriate to the context.
Certain reclassifications have been made to prior year amounts
to conform to the current year presentation. These
reclassifications had no effect on our results of operations or
stockholders equity as previously reported. Effective
November 1, 2008, we sold H&R Block Financial
Advisors, Inc. (HRBFA) to Ameriprise Financial, Inc.
(Ameriprise). As of January 31, 2009, HRBFA and its direct
corporate parent are presented as discontinued operations in the
condensed consolidated financial statements. All periods
presented have been reclassified to reflect our discontinued
operations. See additional discussion in note 17.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with
U.S. generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial
statements and notes thereto included in our April 30, 2008
Annual Report to Shareholders on
Form 10-K.
All amounts presented herein as of April 30, 2008 or for
the year then ended, are derived from our April 30, 2008
Annual Report to Shareholders on
Form 10-K.
Management Estimates
The preparation of financial statements in conformity with
U.S. 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. Actual results could differ from
those estimates.
Seasonality of
Business
Our operating revenues are seasonal in nature with peak revenues
occurring in the months of January through April. Therefore,
results for interim periods are not indicative of results to be
expected for the full year.
Concentrations of
Risk
Cash deposits in bank accounts in excess of insured or
guaranteed limits are exposed to loss in the event of
nonperformance by the financial institution. We had cash
deposits in excess of these limits of approximately
$30 million at January 31, 2009. We have not
historically experienced any losses on bank deposits. In
addition to cash deposits with financial institutions, we had
investments totaling approximately $1 billion and $110
million in federal funds sold and money market funds,
respectively, at January 31, 2009.
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 50% of our
mortgage loan portfolio consists of loans to borrowers located
in the states of Florida, California and New York.
5
Table of Contents
2. | Earnings (Loss) Per Share and Stockholders Equity |
Basic and diluted loss per share is computed using 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. The computations of basic and diluted
earnings (loss) per share from continuing operations are as
follows:
(in 000s, except |
||||||||||||||||
per share amounts) | ||||||||||||||||
Three Months
Ended |
Nine Months Ended |
|||||||||||||||
January 31, | January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income (loss) from continuing operations
|
$ | 66,830 | $ | 7,090 | $ | (194,754 | ) | $ | (240,013 | ) | ||||||
Basic weighted average common shares
|
337,338 | 325,074 | 331,429 | 324,544 | ||||||||||||
Potential dilutive shares from stock options and nonvested shares
|
1,347 | 2,126 | - | - | ||||||||||||
Convertible preferred stock
|
2 | 2 | - | - | ||||||||||||
Dilutive weighted average common shares
|
338,687 | 327,202 | 331,429 | 324,544 | ||||||||||||
Earnings (loss) per share from continuing operations:
|
||||||||||||||||
Basic
|
$ | 0.20 | $ | 0.02 | $ | (0.59 | ) | $ | (0.74 | ) | ||||||
Diluted
|
0.20 | 0.02 | (0.59 | ) | (0.74 | ) | ||||||||||
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 16.0 million shares and
18.0 million shares for the three months ended
January 31, 2009 and 2008, respectively, as the effect
would be antidilutive. Diluted earnings per share excludes the
impact of shares of common stock issuable upon the lapse of
certain restrictions or the exercise of options to purchase
20.2 million shares and 24.8 million shares for the
nine months ended January 31, 2009 and 2008, respectively,
as the effect would be antidilutive due to the net loss from
continuing operations during each period.
The weighted average shares outstanding for the three and nine
months ended January 31, 2009 increased to
337.3 million and 331.4 million, respectively, from
325.1 million and 324.5 million for the three and nine
months ended January 31, 2008, respectively, primarily due
to the issuance of shares of our common stock in October 2008.
On October 27, 2008, we sold 8.3 million shares of our
common stock, without par value, at a price of $17.50 per share
in a registered direct offering through subscription agreements
with selected institutional investors. We received net proceeds
of $141.5 million, after deducting placement agent fees and
other offering expenses.
During the nine months ended January 31, 2009 and 2008, we
issued 5.7 million and 2.4 million shares of common
stock, respectively, due to the exercise of stock options,
employee stock purchases and vesting of nonvested shares.
During the nine months ended January 31, 2009, we acquired
0.4 million shares of our common stock, which represent
shares swapped or surrendered to us in connection with the
vesting of nonvested shares and the exercise of stock options,
at an aggregate cost of $7.4 million. During the nine
months ended January 31, 2008, we acquired 0.3 million
shares of our common stock, which represent shares swapped or
surrendered to us in connection with the vesting of nonvested
shares and the exercise of stock options, at an aggregate cost
of $7.2 million.
During the nine months ended January 31, 2009, we granted
5.1 million stock options and 1.0 million nonvested
shares and units in accordance with our stock-based compensation
plans. The weighted average fair value of options granted was
$3.80 for manager options and $2.83 for options granted to our
seasonal associates. At January 31, 2009, the total
unrecognized compensation cost for options and nonvested shares
and units was $12.2 million and $17.5 million,
respectively.
3. | Business Combinations |
Effective November 3, 2008, we acquired the assets and
franchise rights of our last major independent franchise
operator for an aggregate purchase price of $278.6 million.
Results related to the acquired business have been included in
our condensed consolidated financial statements since
November 3, 2008. Pro forma results of operations have not
been presented as the effects of this acquisition were not
material
6
Table of Contents
to our results. The accompanying balance sheet reflects a
preliminary allocation of the purchase price to assets acquired
and liabilities assumed as follows:
(in 000s) | ||||||
Property and equipment
|
$ | 6,169 | ||||
Goodwill
|
16,062 | |||||
Reacquired franchise rights
|
177,386 | |||||
Franchise agreements
|
54,977 | |||||
Customer relationships
|
24,264 | |||||
Noncompete agreements
|
756 | |||||
Other
|
735 | |||||
Liabilities
|
(1,740 | ) | ||||
$ | 278,609 | |||||
Goodwill recognized in this transaction is included in the Tax
Services segment and is deductible for tax purposes.
4. | Receivables |
Receivables related to our continuing operations consist of the
following:
(in 000s) | ||||||||||||
January 31, 2009 | January 31, 2008 | April 30, 2008 | ||||||||||
Participation in tax client loans
|
$ | 1,122,347 | $ | 1,763,030 | $ | 73,354 | ||||||
Emerald Advance lines of credit
|
688,663 | 361,263 | 5,115 | |||||||||
Business Services accounts receivable
|
335,893 | 257,010 | 320,377 | |||||||||
Receivables for tax-related fees
|
309,379 | 117,328 | 47,301 | |||||||||
Royalties from franchisees
|
80,603 | 68,573 | 1,784 | |||||||||
Loans to franchisees
|
66,317 | 71,349 | 53,536 | |||||||||
Other
|
125,076 | 119,740 | 152,917 | |||||||||
2,728,278 | 2,758,293 | 654,384 | ||||||||||
Allowance for doubtful accounts
|
(85,327 | ) | (78,847 | ) | (120,155 | ) | ||||||
$ | 2,642,951 | $ | 2,679,446 | $ | 534,229 | |||||||
5. | Mortgage Loans Held for Investment |
The composition of our mortgage loan portfolio as of
January 31, 2009 and April 30, 2008 is as follows:
(dollars in 000s) | ||||||||||||||||
January 31, 2009 | April 30, 2008 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
Adjustable-rate loans
|
$ | 566,475 | 67 | % | $ | 715,919 | 71 | % | ||||||||
Fixed-rate loans
|
284,727 | 33 | % | 288,721 | 29 | % | ||||||||||
851,202 | 100 | % | 1,004,640 | 100 | % | |||||||||||
Unamortized deferred fees and costs
|
6,168 | 7,062 | ||||||||||||||
Less: Allowance for loan losses
|
(75,615 | ) | (45,401 | ) | ||||||||||||
$ | 781,755 | $ | 966,301 | |||||||||||||
Activity in the allowance for mortgage loan losses for the nine
months ended January 31, 2009 and 2008 is as follows:
(in
000s)
Nine Months Ended January 31, | 2009 | 2008 | ||||||||
Balance at beginning of the period
|
$ | 45,401 | $ | 3,448 | ||||||
Provision
|
51,953 | 12,345 | ||||||||
Recoveries
|
50 | 999 | ||||||||
Charge-offs
|
(21,789 | ) | (932 | ) | ||||||
Balance at end of the period
|
$ | 75,615 | $ | 15,860 | ||||||
7
Table of Contents
The loan loss provision increased significantly during the
current period as a result of declining collateral values due to
a decline in residential home prices, and increasing
delinquencies occurring in our portfolio. Our loan loss reserve
as a percent of mortgage loans was 8.82% at January 31,
2009, compared to 4.49% at April 30, 2008.
In cases where we modify a loan and in so doing grant a
concession to a borrower experiencing financial difficulty, the
modification is considered a troubled debt restructuring (TDR).
TDR loans totaled $153.7 million and $37.2 million at
January 31, 2009 and April 30, 2008, respectively.
Loans 60 days past due are considered impaired. Impaired
and TDR loans at January 31, 2009 and April 30, 2008
totaled $258.2 million and $128.9 million,
respectively.
6. | Goodwill and Intangible Assets |
Changes in the carrying amount of goodwill of continuing
operations for the nine months ended January 31, 2009
consist of the following:
(in
000s)
April 30, 2008 | Additions | Impairment | Other | January 31, 2009 | ||||||||||||||||
Tax Services
|
$ | 431,981 | $ | 19,820 | $ | (2,188 | ) | $ | (3,506 | ) | $ | 446,107 | ||||||||
Business Services
|
399,333 | 3,003 | - | - | 402,336 | |||||||||||||||
Total
|
$ | 831,314 | $ | 22,823 | $ | (2,188 | ) | $ | (3,506 | ) | $ | 848,443 | ||||||||
We test goodwill for impairment annually at the beginning of our
fourth quarter, or more frequently if events occur indicating it
is more likely than not the fair value of a reporting
units net assets has been reduced below its carrying value.
During the nine months ended January 31, 2009, we recorded
a $2.2 million impairment in our Tax Services segment
relating to the goodwill of a small digital business acquired in
fiscal year 2005. No other events indicating possible impairment
of goodwill were identified during the nine months ended
January 31, 2009.
Intangible assets of continuing operations consist of the
following:
(in 000s) | ||||||||||||||||||||||||
January 31, 2009 | April 30, 2008 | |||||||||||||||||||||||
Gross |
Gross |
|||||||||||||||||||||||
Carrying |
Accumulated |
Carrying |
Accumulated |
|||||||||||||||||||||
Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
Tax Services:
|
||||||||||||||||||||||||
Customer relationships
|
$ | 72,535 | $ | (24,462 | ) | $ | 48,073 | $ | 46,479 | $ | (22,007 | ) | $ | 24,472 | ||||||||||
Noncompete agreements
|
23,261 | (20,587 | ) | 2,674 | 22,966 | (19,981 | ) | 2,985 | ||||||||||||||||
Reacquired franchise rights
|
177,386 | - | 177,386 | - | - | - | ||||||||||||||||||
Franchise agreements
|
54,977 | (611 | ) | 54,366 | - | - | - | |||||||||||||||||
Purchased technology
|
12,500 | (3,751 | ) | 8,749 | 12,500 | (2,283 | ) | 10,217 | ||||||||||||||||
Trade name
|
1,025 | (192 | ) | 833 | 1,025 | (117 | ) | 908 | ||||||||||||||||
Business Services:
|
||||||||||||||||||||||||
Customer relationships
|
146,040 | (108,508 | ) | 37,532 | 143,402 | (100,346 | ) | 43,056 | ||||||||||||||||
Noncompete agreements
|
33,068 | (19,344 | ) | 13,724 | 32,303 | (17,589 | ) | 14,714 | ||||||||||||||||
Trade name amortizing
|
2,600 | (2,600 | ) | - | 3,290 | (3,043 | ) | 247 | ||||||||||||||||
Trade name
non-amortizing
|
55,637 | (4,868 | ) | 50,769 | 55,637 | (4,868 | ) | 50,769 | ||||||||||||||||
$ | 579,029 | $ | (184,923 | ) | $ | 394,106 | $ | 317,602 | $ | (170,234 | ) | $ | 147,368 | |||||||||||
Amortization of intangible assets of continuing operations for
the three and nine months ended January 31, 2009 was
$6.8 million and $20.4 million, respectively, and
$5.5 million and $17.7 million for the three and nine
months ended January 31, 2008, respectively. Estimated
amortization of intangible assets for fiscal years 2009 through
2013 is $26.8 million, $29.9 million,
$28.0 million, $25.2 million and $21.1 million,
respectively.
8
Table of Contents
7. | Borrowings |
Borrowings of continuing operations consist of the following:
(in
000s)
January 31, 2009 | January 31, 2008 | April 30, 2008 | ||||||||||
Short-term borrowings:
|
||||||||||||
HSBC credit facility
|
$ | 690,485 | $ | 1,683,317 | $ | - | ||||||
Other credit facilities
|
- | 28,168 | - | |||||||||
$ | 690,485 | $ | 1,711,485 | $ | - | |||||||
Long-term borrowings:
|
||||||||||||
CLOC borrowings, due August 2010
|
$ | 970,813 | $ | 1,800,000 | $ | - | ||||||
Senior Notes, 7.875%, due January 2013
|
599,507 | 599,383 | 599,414 | |||||||||
Senior Notes, 5.125%, due October 2014
|
398,648 | 398,412 | 398,471 | |||||||||
Other
|
42,709 | 23,948 | 41,185 | |||||||||
2,011,677 | 2,821,743 | 1,039,070 | ||||||||||
Less: Current portion
|
(9,030 | ) | (8,332 | ) | (7,286 | ) | ||||||
$ | 2,002,647 | $ | 2,813,411 | $ | 1,031,784 | |||||||
At January 31, 2009, we maintained $2.0 billion in
revolving credit facilities to support commercial paper issuance
and for general corporate purposes. These unsecured committed
lines of credit (CLOCs), and outstanding borrowings thereunder,
have a maturity date of August 2010 and an annual facility fee
in a range of six to fifteen basis points per annum, based on
our credit ratings. We had $970.8 million outstanding as of
January 31, 2009 to support working capital requirements
primarily arising from off-season operating losses, to pay
dividends and acquire businesses. These borrowings are included
in long-term debt on our condensed consolidated balance sheet
due to their contractual maturity date. The CLOCs, among other
things, require we maintain at least $650.0 million of net
worth on the last day of any fiscal quarter. We had net worth of
$840.0 million at January 31, 2009.
Lehman Brothers Bank, FSB (Lehman) is a participating lender in
our $2.0 billion CLOCs, with a $50.0 million credit
commitment. In September 2008, Lehmans parent company
declared bankruptcy. Since then, Lehman has not honored any
funding requests under these facilities, thereby effectively
reducing our available liquidity under our CLOCs to
$1.95 billion. We do not expect this change to have a
material impact on our liquidity.
We entered into a committed line of credit agreement with HSBC
Finance Corporation (HSBC) effective January 14, 2009 for
use as a funding source for the purchase of refund anticipation
loan (RAL) participations. This line provides funding totaling
$2.5 billion through March 30, 2009 and
$120.0 million thereafter through June 30, 2009. This
line is subject to various covenants that are similar to our
primary CLOCs, and is secured by our RAL participations. At
January 31, 2009, there was $690.5 million outstanding
on this facility. Our contract with HSBC provides for them to
fund RALs through 2011, with an option to renew, at our
discretion, through 2013. We have also had a contract each of
the last two years under which HSBC has funded our participation
interest in RALs.
H&R Block Bank (HRB Bank) is a member of the Federal Home
Loan Bank (FHLB) of Des Moines, which extends credit to member
banks based on eligible collateral. At January 31, 2009,
HRB Bank had total FHLB advance capacity of $434.1 million.
There was $104.0 million outstanding on this facility,
leaving remaining availability of $330.1 million. Mortgage
loans held for investment of $698.6 million serve as
eligible collateral and are used to determine total capacity.
8. | Income Taxes |
We file a consolidated federal income tax return in the United
States and file tax returns in various state and foreign
jurisdictions. Consolidated tax returns for the years 1999
through 2007 are currently under examination by the Internal
Revenue Service (IRS). Tax years prior to 1999 are closed by
statute. Historically, tax returns in various foreign and state
jurisdictions are examined and settled upon completion of the
exam.
9
Table of Contents
During the three and nine months ended January 31, 2009, we
accrued an additional $2.9 million and $6.9 million,
respectively, of interest and penalties related to our uncertain
tax positions. We had unrecognized tax benefits of
$128.3 million and $137.6 million at January 31,
2009 and April 30, 2008, respectively. The unrecognized tax
benefits decreased $9.3 million in the current year, due
primarily to settlement payments. We have classified the
liability for unrecognized tax benefits, including corresponding
accrued interest, as long-term at January 31, 2009, which
is included in other noncurrent liabilities on the condensed
consolidated balance sheet. Amounts that we expect to pay, or
for which statutes expire, within the next twelve months have
been included in accounts payable, accrued expenses and other
current liabilities on the condensed consolidated balance sheet.
During the third quarter of fiscal year 2009 we received tax
refunds of $156.5 million, the majority of which was
recorded as a receivable included in other assets on our
condensed consolidated financial statements as of April 30,
2008.
Based upon the expiration of statutes of limitations, payments
of tax and other factors in several jurisdictions, we believe it
is reasonably possible that the total amount of previously
unrecognized tax benefits may decrease by approximately $6 to
$7 million within twelve months of January 31, 2009.
9. | Interest Income and Expense |
The following table shows the components of interest income and
expense of our continuing operations. Operating interest expense
is included in cost of other revenues, and interest expense on
acquisition debt is included in other income (expense), net on
our condensed consolidated statements of operations.
(in
000s)
Three Months
Ended |
Nine Months Ended |
|||||||||||||||
January 31, | January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Interest income:
|
||||||||||||||||
Mortgage loans, net
|
$ | 11,131 | $ | 17,198 | $ | 36,494 | $ | 60,140 | ||||||||
Emerald Advance lines of credit
|
43,311 | 19,516 | 44,539 | 19,516 | ||||||||||||
Other
|
4,162 | 10,396 | 12,465 | 21,702 | ||||||||||||
$ | 58,604 | $ | 47,110 | $ | 93,498 | $ | 101,358 | |||||||||
Operating interest expense:
|
||||||||||||||||
Borrowings
|
$ | 21,623 | $ | 21,014 | $ | 60,849 | $ | 41,674 | ||||||||
Deposits
|
3,719 | 11,464 | 11,646 | 37,928 | ||||||||||||
FHLB advances
|
1,326 | 1,349 | 3,981 | 4,709 | ||||||||||||
26,668 | 33,827 | 76,476 | 84,311 | |||||||||||||
Interest expense acquisition debt
|
392 | 624 | 1,221 | 1,871 | ||||||||||||
Total interest expense
|
$ | 27,060 | $ | 34,451 | $ | 77,697 | $ | 86,182 | ||||||||
10. | Fair Value |
On May 1, 2008, we adopted Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value and
expands disclosure requirements for fair value measurements. We
elected to defer the application of SFAS 157 for
nonfinancial assets and nonfinancial liabilities until fiscal
year 2010, as provided for by FASB Staff Position
FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2).
The adoption of SFAS 157 did not have an impact on our
consolidated results of operations or financial position.
Fair Value Hierarchy
SFAS 157 establishes a fair value hierarchy that
prioritizes the inputs used to measure fair value into three
broad levels, considering the relative reliability of the
inputs, as follows:
n | Level 1 Quoted prices in active markets for identical assets or liabilities. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
10
Table of Contents
n | Level 2 Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market. | |
n | Level 3 Valuation is modeled using significant inputs that are unobservable in the market. These unobservable inputs reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. |
Estimation of Fair
Value
The following is a description of the valuation methodologies
used for assets and liabilities measured at fair value and the
general classification of these instruments pursuant to the fair
value hierarchy.
n | Available-for-sale securities Available-for-sale securities are carried at fair value on a recurring basis. When available, fair value is based on quoted prices in an active market and as such, would be classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted prices of securities with similar characteristics, discounted cash flows or other pricing models. Available-for-sale securities that we classify as Level 2 include certain agency and non-agency mortgage-backed securities, U.S. states and political subdivisions debt securities and other debt and equity securities. | |
n | Mortgage loans held for sale The fair values of loans held for sale are generally based on observable market prices of securities that have loan collateral or interests in loans that are similar to the held-for-sale loans, or whole loan sale prices if formally committed. These loans are classified as Level 2. | |
n | Residual interests in securitizations Determination of the fair value of residual interests in securitizations requires the use of unobservable inputs. We value these securities using a discounted cash flow approach that incorporates expectations of prepayment speeds and expectations of delinquencies and losses. Risk-adjusted discount rates are based on quotes from third party sources. These assets are classified as Level 3. |
Assets and
Liabilities Measured at Fair Value on a Recurring Basis
The following table presents for each hierarchy level the
financial assets of our continuing operations that are measured
at fair value on a recurring basis at January 31, 2009:
(dollars
in 000s)
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Available-for-sale securities
|
$ | 45,640 | $ | 2,975 | $ | 42,665 | $ | - | ||||||||
Mortgage loans held for sale
|
9,596 | - | 9,596 | - | ||||||||||||
Residual interests in securitizations
|
5,122 | - | - | 5,122 | ||||||||||||
$ | 60,358 | $ | 2,975 | $ | 52,261 | $ | 5,122 | |||||||||
As a percentage of total assets
|
0.8% | 0.0% | 0.7% | 0.1% | ||||||||||||
The following table presents changes in Level 3 financial
assets measured at fair value on a recurring basis:
(in
000s)
Three Months
Ended |
Nine Months Ended |
|||||||||
January 31, 2009 | January 31, 2009 | |||||||||
Fair value, beginning of period
|
$ | 9,487 | $ | 16,678 | ||||||
Losses:
|
||||||||||
Included in earnings
|
(931 | ) | (6,153 | ) | ||||||
Included in other comprehensive income (loss)
|
(2,604 | ) | (2,920 | ) | ||||||
Cash received
|
(830 | ) | (2,483 | |||||||
Fair value, end of period
|
$ | 5,122 | $ | 5,122 | ||||||
Mortgage loans held for sale are included in prepaid expenses
and other current assets, and available-for-sale securities and
residual interests in securitizations are included in other
assets on our condensed consolidated balance sheets.
Fair Value Option
We adopted Statement of Financial Accounting Standards
No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159) on
May 1, 2008. SFAS 159 permits an instrument by
11
Table of Contents
instrument irrevocable election to account for selected
financial assets and financial liabilities at fair value. We did
not elect to apply the fair value option to any eligible
financial assets or financial liabilities on May 1, 2008 or
during the nine months ended January 31, 2009. Subsequent
to the initial adoption, we may elect to account for selected
financial assets and financial liabilities at fair value. Such
an election could be made at the time an eligible financial
asset, financial liability or firm commitment is recognized or
when certain specified reconsideration events occur.
11. | Other Noncurrent Assets and Liabilities |
We have deferred compensation plans that permit directors and
certain employees to defer portions of their compensation and
accrue income on the deferred amounts. Included in other
noncurrent liabilities is $122.3 million and
$155.1 million at January 31, 2009 and April 30,
2008, respectively, reflecting our obligation under these plans.
We may purchase whole-life insurance contracts on certain
director and employee participants to recover distributions made
or to be made under the plans. The cash surrender value of the
policies and other assets held by the Deferred Compensation
Trust is recorded in other noncurrent assets and totaled
$112.9 million and $163.1 million at January 31,
2009 and April 30, 2008, respectively. These assets are
restricted, as they are only available to fund the related
liability. The decrease in value of these assets and liabilities
are primarily due to current market conditions. Losses on
certain invested assets are not deductible for income taxes and
therefore have had an impact on our income tax rates in the
current fiscal year.
12. | Regulatory Requirements |
HRB Bank and the Company are subject to various regulatory
requirements, including capital guidelines for HRB Bank,
administered by federal banking agencies. Failure to meet
minimum capital requirements can trigger certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on HRB Bank and
our consolidated financial statements. All savings associations
are subject to the capital adequacy guidelines and the
regulatory framework for prompt corrective action. HRB Bank must
meet specific capital guidelines that involve quantitative
measures of HRB Banks assets, liabilities and certain
off-balance sheet items, as calculated under regulatory
accounting practices. HRB Banks capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
HRB Bank files its regulatory Thrift Financial Report (TFR) on a
calendar quarter basis with the Office of Thrift Supervision
(OTS).
Quantitative measures established by regulation to ensure
capital adequacy require HRB Bank to maintain minimum amounts
and ratios of tangible equity, total risk-based capital and
Tier 1 capital, as set forth in the table below. In
addition to these minimum ratio requirements, HRB Bank is
required to continually maintain a 12.0% minimum leverage ratio
as a condition of its charter-approval order through fiscal year
2009. This condition was extended through fiscal year 2012 as a
result of a Supervisory Directive issued on May 29, 2007.
As of January 31, 2009, HRB Banks leverage ratio was
13.8%.
As of December 31, 2008, our most recent TFR filing, HRB
Bank was a well capitalized institution under the
prompt corrective action provisions of the Federal Deposit
Insurance Corporation (FDIC). The five capital categories are:
(1) well capitalized (total risk-based capital
ratio of 10%, Tier 1 Risk-based capital ratio of 6% and
leverage ratio of 5%); (2) adequately
capitalized (3) undercapitalized
(4) significantly undercapitalized and
(5) critically undercapitalized. There are no
conditions or events since December 31, 2008 that
management believes have changed HRB Banks category.
12
Table of Contents
The following table sets forth HRB Banks regulatory
capital requirements at December 31, 2008, as calculated in
the most recently filed TFR:
(dollars in 000s) | ||||||||||||||||||||||||
To Be Well |
||||||||||||||||||||||||
Capitalized |
||||||||||||||||||||||||
For Capital
Adequacy |
Under Prompt |
|||||||||||||||||||||||
Actual | Purposes | Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Total risk-based capital
ratio(1)
|
$ | 268,259 | 22.1% | $ | 97,294 | 8.0% | $ | 121,617 | 10.0% | |||||||||||||||
Tier 1 risk-based capital
ratio(2)
|
$ | 252,471 | 20.8% | n/a | n/a | $ | 72,970 | 6.0% | ||||||||||||||||
Tier 1 capital ratio
(leverage)(3)
|
$ | 252,471 | 13.3% | $ | 228,368 | 12.0% | $ | 95,153 | 5.0% | |||||||||||||||
Tangible equity
ratio(4)
|
$ | 252,471 | 13.3% | $ | 28,546 | 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. |
Block Financial LLC (BFC) made an additional capital
contribution to HRB Bank of $245.0 million during the nine
months ended January 31, 2009. This contribution was
necessary for HRB Bank to meet its capital requirements due to
seasonal fluctuations in its balance sheet. During the three
months ended January 31, 2009, we submitted an application
to the OTS requesting that HRB Bank be allowed to pay dividends
to BFC in an amount that will not exceed the capital necessary
to continuously maintain HRB Banks required 12.0% leverage
ratio. The OTS approved our application on January 12, 2009.
13. | Commitments and Contingencies |
Changes in the deferred revenue liability related to our Peace
of Mind (POM) program, the current portion of which is included
in accounts payable, accrued expenses and other current
liabilities and the long-term portion of which is included in
other noncurrent liabilities in the condensed consolidated
balance sheets, are as follows:
(in 000s) | ||||||||||
Nine Months Ended January 31, | 2009 | 2008 | ||||||||
Balance, beginning of period
|
$ | 140,583 | $ | 142,173 | ||||||
Amounts deferred for new guarantees issued
|
23,480 | 19,672 | ||||||||
Revenue recognized on previous deferrals
|
(56,375 | ) | (56,881 | ) | ||||||
Balance, end of period
|
$ | 107,688 | $ | 104,964 | ||||||
The following table summarizes certain of our other contractual
obligations and commitments:
(in 000s) | ||||||||||
As of | January 31, 2009 | April 30, 2008 | ||||||||
Franchise Equity Lines of Credit
|
$ | 83,863 | $ | 79,134 | ||||||
Contingent business acquisition obligations
|
29,103 | 24,288 | ||||||||
Media advertising purchase obligation
|
59,715 | 19,043 | ||||||||
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
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such claims are asserted, we believe the fair value of
guarantees and indemnifications relating to our continuing
operations is not material as of January 31, 2009.
Discontinued
Operations
Sand Canyon Corporation (SCC), formerly Option One Mortgage
Corporation, maintains recourse with respect to loans previously
sold or securitized under indemnification of loss provisions
relating to breach of representations and warranties made to
purchasers or insurers. As a result, SCC may be required to
repurchase loans or otherwise indemnify third-parties for
losses. These representations and warranties and corresponding
repurchase obligations generally are not subject to stated
limits or a stated term and, therefore, may continue for the
foreseeable future. SCC has established a liability related to
potential losses under these indemnifications and monitors the
adequacy of the repurchase liability on an ongoing basis. To the
extent that future claim volumes differ from current estimates,
or the value of mortgage loans and residential home prices
change, future losses may be different than these estimates and
those differences may be significant.
The following table summarizes SCCs loan repurchase and
indemnification activity:
(in 000s) | ||||||||||||||
Nine Months Ended |
Year Ended |
|||||||||||||
January 31, 2009 | January 31, 2008 | April 30, 2008 | ||||||||||||
Loan repurchase and indemnification
liability at end of period |
$ | 213,120 | $ | 68,969 | $ | 243,066 | ||||||||
Loans repurchased and indemnification payments during the period
|
38,290 | 480,943 | 515,370 | |||||||||||
Reserves added during the period
|
- | 379,440 | 582,373 | |||||||||||
As described more fully in note 17, we entered into
indemnifications in connection with our November 2008 sale of
HRBFA and recorded a liability with an estimated fair value of
$15.5 million at January 31, 2009.
We have recorded a restructuring liability which primarily
relates to estimated lease obligations for vacant space
resulting from office closings and employee severance costs for
our discontinued mortgage businesses. These liabilities are
included in accounts payable, accrued expenses and other current
liabilities and accrued salaries, wages and payroll taxes on our
condensed consolidated balance sheet, respectively. Actual
results could differ from these estimates. Changes in our
restructuring liability during the nine months ended
January 31, 2009 are as follows:
(in 000s) | ||||||||||||||||
Accrual Balance as
of |
Cash |
Other |
Accrual Balance as
of |
|||||||||||||
April 30, 2008 | Payments | Adjustments | January 31, 2009 | |||||||||||||
Employee severance costs
|
$ | 4,807 | $ | (4,871 | ) | $ | 428 | $ | 364 | |||||||
Contract termination costs
|
23,113 | (12,054 | ) | 1,779 | 12,838 | |||||||||||
$ | 27,920 | $ | (16,925 | ) | $ | 2,207 | $ | 13,202 | ||||||||
14. | Litigation and Related Contingencies |
We are party to investigations, legal claims and lawsuits
arising out of our business operations. We accrue our best
estimate of the probable loss upon resolution of investigations,
legal claims and lawsuits, which totaled $10.5 million and
$11.5 million at January 31, 2009 and April 30,
2008, respectively. With respect to most of the matters
described below, we have concluded that a loss is not probable
and therefore no liability has been recorded.
RAL Litigation
We have been named as a defendant in numerous lawsuits
throughout the country regarding our refund anticipation loan
programs (collectively, RAL Cases). The RAL Cases
have involved a variety of legal theories asserted by
plaintiffs. These theories include allegations that, among other
things: disclosures in the RAL applications were inadequate,
misleading and untimely; the RAL interest rates were usurious
and unconscionable; we did not disclose that we would receive
part of the finance charges paid by the customer for such loans;
untrue, misleading or deceptive statements in marketing RALs;
breach of state
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laws on credit service organizations; breach of contract, unjust
enrichment, unfair and deceptive acts or practices; violations
of the federal Racketeer Influenced and Corrupt Organizations
Act; violations of the federal Fair Debt Collection Practices
Act and unfair competition regarding debt collection activities;
and that we owe, and breached, a fiduciary duty to our customers
in connection with the RAL program.
The amounts claimed in the RAL Cases have been very substantial
in some instances, with one settlement resulting in a pretax
expense of $43.5 million in fiscal year 2003 (the
Texas RAL Settlement) and other settlements
resulting in a combined pretax expense in fiscal year 2006 of
$70.2 million. On December 31, 2008, we reached a
settlement with the California attorney general in the case
entitled The People of California v. H&R Block,
Inc., H&R Block Services, Inc., H&R Block Enterprises,
Inc., H&R Block Tax Services, Inc., Block Financial
Corporation, HRB Royalty, Inc., and Does 1 through 50, Case
No., CGC-06-449461, in the California Superior Court,
San Francisco County (the California AG Case).
Pursuant to the terms of the settlement, we agreed to pay
$2.45 million in restitution to certain clients who
obtained a refund anticipation loan or a refund anticipation
check, $500,000 in civil penalties and $1.9 million in fees
and costs.
Following settlement of the California AG Case, we have one
remaining putative RAL class action. We believe we have
meritorious defenses to this RAL Case and we intend to defend it
vigorously. There can be no assurances, however, as to the
outcome of the pending RAL Case or regarding the impact of the
pending RAL Case on our financial statements. There were no
other significant developments regarding the RAL Cases during
the three months ended January 31, 2009.
Peace of Mind
Litigation
We are defendants in lawsuits regarding our Peace of Mind
program (collectively, the POM Cases), under which
our applicable tax return preparation subsidiary assumes
liability for additional tax assessments attributable to tax
return preparation error. The POM Cases are described below.
Lorie J. Marshall, et al. v. H&R Block Tax Services,
Inc., et al., Case
No. 08-CV-591
in the U.S. District Court for the Southern District of
Illinois, is a class action case originally filed in the Circuit
Court of Madison County, Illinois on January 18, 2002, in
which class certification was granted on August 27, 2003.
The plaintiffs allege that the sale of POM guarantees
constitutes (1) statutory fraud by selling insurance
without a license, (2) an unfair trade practice, by
omission and by cramming (i.e., charging customers
for the guarantee even though they did not request it or want
it), and (3) a breach of fiduciary duty. The court has
certified plaintiff classes consisting of all persons who reside
in 13 specified states and who from January 1, 1997 to
final judgment (1) were charged a separate fee for POM by
H&R Block (2) were charged a separate fee
for POM by an H&R Block entity not licensed to
sell insurance; or (3) had an unsolicited charge for POM
posted to their bills by H&R Block. Persons who
received the POM guarantee through an H&R Block Premium
office were excluded from the plaintiff class. In August 2008,
we removed the case from state court in Madison County, Illinois
to the U.S. District Court for the Southern District of
Illinois. On December 17, 2008, the case was remanded back
to state court. We have filed a petition to appeal this ruling.
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case is pending
before the same judge that presided over the Texas RAL
Settlement, involves the same plaintiffs attorneys that
are involved in the Marshall litigation in Illinois, and
contains allegations similar to those in the Marshall case. No
class has been certified in this case.
We believe we have meritorious defenses to the claims in the POM
Cases, and we intend to defend them vigorously. The amounts
claimed in the POM Cases are substantial, and there can be no
assurances as to the outcome of these pending actions
individually or in the aggregate.
Express IRA
Litigation
On March 15, 2006, the New York Attorney General filed a
lawsuit in the Supreme Court of the State of New York, County of
New York (Index No. 06/401110) entitled The People of
New York v. H&R Block, Inc. and H&R Block
Financial Advisors, Inc. et al. The complaint alleged
fraudulent business practices, deceptive acts and practices,
common law fraud and breach of fiduciary duty with respect to
the Express IRA product and sought equitable relief,
disgorgement of profits, damages and restitution, civil
penalties and punitive damages. On July 12, 2007, the
Supreme Court of the State of New York issued a ruling that
dismissed all defendants other than HRBFA and the claims of
common law fraud. The intermediate
15
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appellate court reversed this ruling on January 6, 2009. We
filed a petition for appeal with the highest state appellate
court on January 30, 2009. We believe we have meritorious
defenses to the claims in this case, and we intend to defend
this case vigorously, but there are no assurances as to its
outcome.
On January 2, 2008, the Mississippi Attorney General filed
a lawsuit in the Chancery Court of Hinds County, Mississippi
First Judicial District (Case No. G 2008 6 S
2) entitled Jim Hood, Attorney for the State of
Mississippi v. H&R Block, Inc., et al. The
complaint alleged fraudulent business practices, deceptive acts
and practices, common law fraud and breach of fiduciary duty
with respect to the Express IRA product and sought equitable
relief, disgorgement of profits, damages and restitution, civil
penalties and punitive damages. The defendants have filed a
motion to dismiss. We believe we have meritorious defenses to
the claims in this case, and we intend to defend this case
vigorously, but there are no assurances as to its outcome.
In addition to the New York and Mississippi Attorney General
actions, a number of civil actions were filed against HRBFA and
us concerning the Express IRA product, the first of which was
filed on March 17, 2006. Except for two cases pending in
state court, all of the civil actions have been consolidated by
the panel for Multi-District Litigation into a single action
styled In re H&R Block, Inc. Express IRA Marketing
Litigation in the United States District Court for the
Western District of Missouri.
Although we sold HRBFA effective November 1, 2008, we
remain responsible for the Express IRA litigation through an
indemnification agreement with Ameriprise. See additional
discussion in note 17. The amounts claimed in these cases
are substantial. We believe we have meritorious defenses to the
claims in these cases, and we intend to defend these cases
vigorously, but there are no assurances as to their outcome.
Securities Litigation
On April 6, 2007, a putative class action styled In re
H&R Block Securities Litigation was filed against the
Company and certain of its officers in the United States
District Court for the Western District of Missouri. The
complaint alleges, among other things, deceptive, material and
misleading financial statements and failure to prepare financial
statements in accordance with generally accepted accounting
principles. The complaint sought unspecified damages and
equitable relief. The court dismissed the complaint on
February 19, 2008, and plaintiffs appealed the dismissal on
March 18, 2008. In addition, plaintiffs in a shareholder
derivative action that was consolidated into the securities
litigation filed a separate appeal on March 18, 2008,
contending that the derivative action was improperly
consolidated. The derivative action is Iron Workers Local 16
Pension Fund v. H&R Block, et al., in the United
States District Court for the Western District of Missouri, Case
No.06-cv-00466-ODS (instituted on June 8, 2006) and
was brought against certain of our directors and officers
purportedly on behalf of the Company. The derivative action
alleges breach of fiduciary duty, abuse of control, gross
mismanagement, waste, and unjust enrichment pertaining to
(1) our restatement of financial results in fiscal year
2006 due to errors in determining our state effective income tax
rate and (2) certain of our products and business
activities. We believe we have meritorious defenses to the
claims in these cases and intend to defend this litigation
vigorously. We currently do not believe that we will incur a
material loss with respect to this litigation.
RSM McGladrey
Litigation
RSM McGladrey Business Services, Inc. and certain of its
subsidiaries are parties to a putative class action filed on
July 11, 2006 and entitled Do Rights Plant
Growers, et al. v. RSM EquiCo, Inc., et al. Case
No. 06 CC00137, in the California Superior Court, Orange
County. The complaint contains allegations regarding business
valuation services provided by RSM EquiCo, Inc., including
fraud, negligent misrepresentation, breach of contract, breach
of implied covenant of good faith and fair dealing, breach of
fiduciary duty and unfair competition and seeks unspecified
damages, restitution and equitable relief. A hearing on
plaintiffs motion for class certification is scheduled for
March 6, 2009. We intend to defend this case vigorously.
The amount claimed in this action is substantial and there can
be no assurance regarding the outcome and resolution of this
matter. It is reasonably possible that we could incur losses
with respect to this litigation, although an estimate of such
losses cannot be made in light of the early stage of the
litigation.
RSM McGladrey, Inc. (RSM) has a relationship with certain public
accounting firms (collectively, the Attest Firms)
pursuant to which (1) some RSM employees are also partners
or employees of the Attest Firms, (2) many clients of the
Attest Firms are also RSM clients, and (3) our RSM
McGladrey brand is
16
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closely linked to the Attest Firms. The Attest Firms are parties
to claims and lawsuits (collectively, Attest Firm
Claims) arising in the normal course of business.
Judgments or settlements arising from Attest Firm Claims
exceeding the Attest Firms insurance coverage could have a
direct adverse effect on Attest Firm operations and could impair
RSMs ability to attract and retain clients and quality
professionals. For example, accounting and auditing firms
(including one of the Attest Firms) recently have become subject
to claims based on losses their clients suffered from
investments in investment funds managed by third parties.
Although RSM may not have a direct liability for significant
Attest Firm Claims, such Attest Firm Claims could have a
material adverse effect on RSMs operations and impair the
value of our investment in RSM. There is no assurance regarding
the outcome of the Attest Firm Claims.
Litigation and
Claims Pertaining to Discontinued Mortgage Operations
Although mortgage loan origination activities were terminated
and the loan servicing business was sold during fiscal year
2008, SCC remains subject to investigations, claims and lawsuits
pertaining to its loan origination and servicing activities that
occurred prior to such termination and sale. These
investigations, claims and lawsuits include actions by state
attorneys general, other state regulators, municipalities,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others alleged to be similarly situated.
Among other things, these investigations, claims and lawsuits
allege discriminatory or unfair and deceptive loan origination
and servicing practices, public nuisance, fraud, and violations
of the Truth in Lending Act, Equal Credit Opportunity Act and
the Fair Housing Act. In the current non-prime mortgage
environment, the number of these investigations, claims and
lawsuits has increased over historical experience and is likely
to continue at increased levels. The amounts claimed in these
investigations, claims and lawsuits are substantial in some
instances, and the ultimate resulting liability is difficult to
predict. In the event of unfavorable outcomes, the amounts SCC
may be required to pay in the discharge of liabilities or
settlements could be substantial and, because SCCs
operating results are included in our consolidated financial
statements, could have a material adverse impact on our
consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a
lawsuit in the Superior Court of Suffolk County, Massachusetts
(Case
No. 08-2474-BLS)
entitled Commonwealth of Massachusetts v. H&R
Block, Inc., et al., alleging unfair, deceptive and
discriminatory origination and servicing of mortgage loans and
seeking equitable relief, disgorgement of profits, restitution
and statutory penalties. On November 10, 2008, the court
granted a preliminary injunction limiting the ability of the
owner of SCCs former loan servicing business to initiate
or advance foreclosure actions against certain loans originated
by SCC or its subsidiaries without (1) advance notice to
the Massachusetts Attorney General and (2) if the Attorney
General objects to foreclosure, approval by the court. The
preliminary injunction generally applies to loans meeting all of
the following four characteristics: (1) adjustable rate
mortgages with an introductory period of three years or less,
(2) the borrower has a debt-to-income ratio generally
exceeding 50 percent, (3) an introductory interest
rate at least 2 percent lower than the fully indexed rate
(unless the debt-to-income ratio is 55% or greater) and
(4) loan-to-value ratio of 97 percent or certain
prepayment penalties. We have appealed this preliminary
injunction. We believe we have meritorious defenses to the
claims in this case, and we intend to defend this case
vigorously, but there are no assurances as to its outcome.
SCC also remains subject to potential claims for indemnification
and loan repurchases pertaining to loans previously sold. In the
current non-prime mortgage environment, it is likely that the
frequency of repurchase and indemnification claims may increase
over historical experience and give rise to additional
litigation. In some instances, H&R Block, Inc. was required
to guarantee SCCs obligations. The amounts involved in
these potential claims may be substantial, and the ultimate
resulting liability is difficult to predict. In the event of
unfavorable outcomes, the amounts SCC may be required to pay in
the discharge or settlement of these claims could be substantial
and, because SCCs operating results are included in our
consolidated financial statements, could have a material adverse
impact on our consolidated results of operations.
Other Claims and
Litigation
We are from time to time party to investigations, claims and
lawsuits not discussed herein arising out of our business
operations. These investigations, claims and lawsuits include
actions by state attorneys
17
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general, other state regulators, individual plaintiffs, and
cases in which plaintiffs seek to represent a class of others
similarly situated. Some of these investigations, claims and
lawsuits pertain to RALs, the electronic filing of
customers income tax returns, the POM guarantee program,
wage and hour claims and investment products. We believe we have
meritorious defenses to each of these claims, and we are
defending or intend to defend them vigorously. The amounts
claimed in these claims and lawsuits are substantial in some
instances, and the ultimate liability with respect to such
litigation and claims 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 be material.
In addition to the aforementioned types of cases, we are party
to claims and lawsuits that we consider to be ordinary, routine
litigation incidental to our business, including claims and
lawsuits (collectively, Other Claims) concerning the
preparation of customers income tax returns, the fees
charged customers for various products and services,
relationships with franchisees, intellectual property disputes,
employment matters and contract disputes. While we cannot
provide assurance that we will ultimately prevail in each
instance, we believe the amount, if any, we are required to pay
in the discharge of liabilities or settlements in these Other
Claims will not have a material adverse effect on our
consolidated operating results, financial position or cash flows.
15. | Segment Information |
Results of our continuing operations by reportable operating
segment are as follows:
(in 000s) | ||||||||||||||||
Three Months
Ended |
Nine Months Ended |
|||||||||||||||
January 31, | January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues:
|
||||||||||||||||
Tax Services
|
$ | 761,735 | $ | 661,787 | $ | 936,104 | $ | 822,454 | ||||||||
Business Services
|
185,177 | 191,884 | 592,873 | 623,755 | ||||||||||||
Consumer Financial Services
|
45,195 | 39,305 | 80,980 | 89,608 | ||||||||||||
Corporate
|
1,339 | 1,828 | 6,867 | 9,697 | ||||||||||||
$ | 993,446 | $ | 894,804 | $ | 1,616,824 | $ | 1,545,514 | |||||||||
Pretax income (loss):
|
||||||||||||||||
Tax Services
|
$ | 130,443 | $ | 45,879 | $ | (218,045 | ) | $ | (325,559 | ) | ||||||
Business Services
|
10,695 | 6,614 | 23,481 | 16,489 | ||||||||||||
Consumer Financial Services
|
(3,268 | ) | 12,318 | (36,014 | ) | 12,751 | ||||||||||
Corporate
|
(36,131 | ) | (64,395 | ) | (108,106 | ) | (112,587 | ) | ||||||||
Income (loss) from continuing operations before income taxes
(benefit)
|
$ | 101,739 | $ | 416 | $ | (338,684 | ) | $ | (408,906 | ) | ||||||
As of January 31, 2009, the financial results of HRBFA are
presented as discontinued operations. Accordingly, all periods
presented above for our Consumer Financial Services segment have
been revised to exclude results for discontinued businesses, and
now reflect only the results of HRB Bank.
16. | Accounting Pronouncements |
In June 2008, FASB Staff Position on
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities
(FSP 03-6-1)
was issued.
FSP 03-6-1
addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and,
therefore, should be included in the process of allocating
earnings for purposes of computing earnings per share. This
guidance is effective for financial statements issued for fiscal
years and the related interim periods beginning after
December 15, 2008. Early application is not permitted. The
provisions of
FSP 03-6-1
are effective for our first fiscal quarter of 2010. We are
currently evaluating what effect
FSP 03-6-1
will have on our consolidated financial statements.
In December 2007, Statement of Financial Accounting Standards
No. 141(R), Business Combinations,
(SFAS 141R), and Statement of Financial Accounting
Standards No. 160, Non-Controlling Interests in
Consolidated Financial Statements An Amendment of
ARB No. 51 (SFAS 160) were issued. These
18
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standards will require an acquiring entity to recognize all the
assets acquired and liabilities assumed in a transaction,
including non-controlling interests, at the acquisition-date
fair value with limited exceptions. SFAS 141R will require
acquisition-related expenses to be expensed and will generally
require contingent consideration to be recorded as a liability
at the time of acquisition. Under SFAS 141R, subsequent
changes to deferred tax valuation allowances relating to
acquired businesses and acquired liabilities for uncertain tax
positions will no longer be applied to goodwill but will instead
be typically recognized as an adjustment to income tax expense.
The provisions of these standards are effective as of the
beginning of our fiscal year 2010.
We are currently evaluating what effect the adoption of
SFAS 141R and SFAS 160 will have on our consolidated
financial statements.
As discussed in note 10, we adopted SFAS 157 and
SFAS 159 as of May 1, 2008.
17. | Discontinued Operations |
Effective November 1, 2008, we sold HRB Financial
Corporation, including our securities brokerage business
formerly conducted through HRBFA, to Ameriprise. As a result of
this transaction, we received cash proceeds, net of selling
costs, of $304.0 million, plus repayment of net
intercompany liabilities of $46.6 million. The carrying
value of our investment in this business at the date of
disposition was $293.7 million. We deferred recognition of
a portion of the sale proceeds totaling $7.0 million, which
represents the estimated value of an ongoing collaboration
arrangement with our Tax Services businesses.
In connection with the sale, we indemnified Ameriprise against
certain losses relating to pre-acquisition contingencies,
including matters involving compliance with ERISA and the Fair
Labor Standards Act, tax matters, and certain pending
litigation. Certain indemnities are subject to a maximum
aggregate payment of $31.5 million, while other indemnities
are not subject to any stated limit. The indemnities are not
subject to a stated term. FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, requires that we recognize a liability for the
estimated fair value of guarantee and indemnification
obligations at the inception of the arrangement. We have
estimated an aggregate fair value of $15.5 million relating
to the Ameriprise indemnifications and recorded a liability in
that amount as of the date of sale. Subsequent changes in the
estimated fair value of these indemnification obligations will
be recorded in discontinued operations.
The transaction resulted in a capital loss for income tax
purposes and, with the exception of benefits of approximately
$10 million recorded during the quarter ended
October 31, 2008, is not currently expected to result in a
tax benefit. Net of selling expenses, deferrals, and
indemnification liabilities, we recorded a loss during the
quarter ended January 31, 2009 in connection with the
disposition of this business totaling $12.2 million.
At January 31, 2009, HRBFA had $21.2 million invested
in the Reserve Primary Fund (Reserve Fund), a money market fund.
That balance was reduced to $14.5 million at
February 20, 2009, reflecting an additional fund
distribution as of that date. The Reserve Fund is currently in
orderly liquidation under the supervision of the Securities and
Exchange Commission (SEC) and its net asset value has fallen
below its stated value of $1.00 per share. The most recent net
asset values communicated by the Reserve Fund were $0.97 per
share as of February 26, 2009. However, the Reserve Fund
has indicated that it has established a special
reserve for contingent damages and defense costs relating
to pending litigation and, accordingly, fund distributions are
currently being made at $0.917 per share. This asset was sold to
Ameriprise in connection with the sale of HRBRA at a
contractually agreed to value of $0.92 per share. Although this
investment is no longer reported in our balance sheet we are
subject to contingent gains or losses, through post-closing
purchase price adjustments, to the extent ultimate redemptions
from the Reserve Fund are greater or less than $0.92 per share.
Assuming HRBFA recovered its invested principal in full, we
would recognize a gain at that time of approximately
$8 million. Assuming HRBFA received no further
distributions from the Reserve Fund, we would ultimately record
additional losses of approximately $7 million.
As of January 31, 2009, the results of operations of HRBFA
and its direct corporate parent are presented as discontinued
operations in the condensed consolidated financial statements.
All periods presented reflect our discontinued operations.
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Overhead costs which would have previously been allocated to
discontinued businesses totaled $4.6 million for the nine
months ended January 31, 2009 and $4.0 million and
$11.6 million for the three and nine months ended
January 31, 2008, respectively. These amounts are included
in continuing operations.
The financial results of discontinued operations are as follows:
(in 000s) | ||||||||||||||||||
Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||
Net revenue
|
$ | 609 | $ | 109,363 | $ | 130,205 | $ | (52,777 | ) | |||||||||
Pretax loss
|
$ | (20,054 | ) | $ | (93,440 | ) | $ | (47,443 | ) | $ | (978,000 | ) | ||||||
Income tax benefit
|
(587 | ) | (38,992 | ) | (20,967 | ) | (365,804 | ) | ||||||||||
Net loss from discontinued operations
|
$ | (19,467 | ) | $ | (54,448 | ) | $ | (26,476 | ) | $ | (612,196 | ) | ||||||
During fiscal year 2008, we exited the mortgage business
operated through a subsidiary and sold the related loan
servicing business. Our discontinued operations include pretax
losses related to our mortgage business of $7.9 million and
$17.5 million for the three and nine months ended
January 31, 2009, respectively, compared to
$97.0 million and $977.9 million, respectively, in the
prior year.
18. | Condensed Consolidating Financial Statements |
BFC is an indirect, wholly-owned consolidated subsidiary of the
Company. BFC is the Issuer and the Company is the Guarantor of
the Senior Notes issued on January 11, 2008 and
October 26, 2004, our CLOCs, the $500.0 million credit
facility entered into in April 2007 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 Companys investment in subsidiaries
account. The elimination entries eliminate investments in
subsidiaries, related stockholders equity and other
intercompany balances and transactions.
Condensed Consolidating Income Statements | (in 000s) | |||||||||||||||||||
Three
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
January 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues
|
$ | - | $ | 85,044 | $ | 908,466 | $ | (64 | ) | $ | 993,446 | |||||||||
Cost of services
|
- | 10,615 | 562,233 | 6 | 572,854 | |||||||||||||||
Cost of other revenues
|
- | 69,128 | 42,586 | (1 | ) | 111,713 | ||||||||||||||
Selling, general and administrative
|
- | 44,125 | 164,791 | (102 | ) | 208,814 | ||||||||||||||
Total expenses
|
- | 123,868 | 769,610 | (97 | ) | 893,381 | ||||||||||||||
Operating income (loss)
|
- | (38,824 | ) | 138,856 | 33 | 100,065 | ||||||||||||||
Other income (expense), net
|
101,739 | (1,968 | ) | 3,610 | (101,707 | ) | 1,674 | |||||||||||||
Income (loss) from continuing operations before taxes (benefit)
|
101,739 | (40,792 | ) | 142,466 | (101,674 | ) | 101,739 | |||||||||||||
Income taxes (benefit)
|
34,909 | (16,013 | ) | 50,942 | (34,929 | ) | 34,909 | |||||||||||||
Net income (loss) from continuing operations
|
66,830 | (24,779 | ) | 91,524 | (66,745 | ) | 66,830 | |||||||||||||
Net loss from discontinued operations
|
(19,467 | ) | (20,113 | ) | - | 20,113 | (19,467 | ) | ||||||||||||
Net income (loss)
|
$ | 47,363 | $ | (44,892 | ) | $ | 91,524 | $ | (46,632 | ) | $ | 47,363 | ||||||||
20
Table of Contents
Three
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
January 31, 2008 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues
|
$ | - | $ | 133,343 | $ | 774,765 | $ | (13,304 | ) | $ | 894,804 | |||||||||
Cost of services
|
- | 18,742 | 534,018 | 47 | 552,807 | |||||||||||||||
Cost of other revenues
|
- | 77,067 | 19,167 | - | 96,234 | |||||||||||||||
Selling, general and administrative
|
- | 114,620 | 144,566 | (11,866 | ) | 247,320 | ||||||||||||||
Total expenses
|
- | 210,429 | 697,751 | (11,819 | ) | 896,361 | ||||||||||||||
Operating income (loss)
|
- | (77,086 | ) | 77,014 | (1,485 | ) | (1,557 | ) | ||||||||||||
Other income, net
|
416 | 9 | 1,964 | (416 | ) | 1,973 | ||||||||||||||
Income (loss) from continuing operations before taxes (benefit)
|
416 | (77,077 | ) | 78,978 | (1,901 | ) | 416 | |||||||||||||
Income taxes (benefit)
|
(6,674 | ) | (33,637 | ) | 27,299 | 6,338 | (6,674 | ) | ||||||||||||
Net income (loss) from continuing operations
|
7,090 | (43,440 | ) | 51,679 | (8,239 | ) | 7,090 | |||||||||||||
Net loss from discontinued
|
||||||||||||||||||||
operations
|
(54,448 | ) | (54,589 | ) | (2,622 | ) | 57,211 | (54,448 | ) | |||||||||||
Net income (loss)
|
$ | (47,358 | ) | $ | (98,029 | ) | $ | 49,057 | $ | 48,972 | $ | (47,358 | ) | |||||||
Nine
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
January 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues
|
$ | - | $ | 124,145 | $ | 1,495,472 | $ | (2,793 | ) | $ | 1,616,824 | |||||||||
Cost of services
|
- | 17,886 | 1,254,854 | 22 | 1,272,762 | |||||||||||||||
Cost of other revenues
|
- | 154,301 | 62,621 | (32 | ) | 216,890 | ||||||||||||||
Selling, general and administrative
|
- | 74,669 | 389,669 | (284 | ) | 464,054 | ||||||||||||||
Total expenses
|
- | 246,856 | 1,707,144 | (294 | ) | 1,953,706 | ||||||||||||||
Operating loss
|
- | (122,711 | ) | (211,672 | ) | (2,499 | ) | (336,882 | ) | |||||||||||
Other income (expense), net
|
(338,684 | ) | (5,858 | ) | 4,024 | 338,716 | (1,802 | ) | ||||||||||||
Loss from continuing operations before tax benefit
|
(338,684 | ) | (128,569 | ) | (207,648 | ) | 336,217 | (338,684 | ) | |||||||||||
Income tax benefit
|
(143,930 | ) | (50,553 | ) | (92,329 | ) | 142,882 | (143,930 | ) | |||||||||||
Net loss from continuing operations
|
(194,754 | ) | (78,016 | ) | (115,319 | ) | 193,335 | (194,754 | ) | |||||||||||
Net loss from discontinued operations
|
(26,476 | ) | (28,577 | ) | - | 28,577 | (26,476 | ) | ||||||||||||
Net loss
|
$ | (221,230 | ) | $ | (106,593 | ) | $ | (115,319 | ) | $ | 221,912 | $ | (221,230 | ) | ||||||
Nine
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
January 31, 2008 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Total revenues
|
$ | - | $ | 260,871 | $ | 1,301,716 | $ | (17,073 | ) | $ | 1,545,514 | |||||||||
Cost of services
|
- | 33,652 | 1,231,236 | (8 | ) | 1,264,880 | ||||||||||||||
Cost of other revenues
|
- | 160,703 | 34,226 | - | 194,929 | |||||||||||||||
Selling, general and administrative
|
- | 148,423 | 377,934 | (11,954 | ) | 514,403 | ||||||||||||||
Total expenses
|
- | 342,778 | 1,643,396 | (11,962 | ) | 1,974,212 | ||||||||||||||
Operating loss
|
- | (81,907 | ) | (341,680 | ) | (5,111 | ) | (428,698 | ) | |||||||||||
Other income (expense), net
|
(408,906 | ) | (12 | ) | 19,804 | 408,906 | 19,792 | |||||||||||||
Loss from continuing operations before tax benefit
|
(408,906 | ) | (81,919 | ) | (321,876 | ) | 403,795 | (408,906 | ) | |||||||||||
Income tax benefit
|
(168,893 | ) | (36,432 | ) | (130,398 | ) | 166,830 | (168,893 | ) | |||||||||||
Net loss from continuing operations
|
(240,013 | ) | (45,487 | ) | (191,478 | ) | 236,965 | (240,013 | ) | |||||||||||
Net loss from discontinued operations
|
(612,196 | ) | (609,192 | ) | (6,212 | ) | 615,404 | (612,196 | ) | |||||||||||
Net loss
|
$ | (852,209 | ) | $ | (654,679 | ) | $ | (197,690 | ) | $ | 852,369 | $ | (852,209 | ) | ||||||
21
Table of Contents
Condensed Consolidating Balance Sheets | (in 000s) | |||||||||||||||||||
H&R Block,
Inc. |
BFC |
Other |
Consolidated |
|||||||||||||||||
January 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Cash & cash equivalents
|
$ | - | $ | 1,014,130 | $ | 255,411 | $ | (338 | ) | $ | 1,269,203 | |||||||||
Cash & cash equivalents restricted
|
- | 66,070 | 9,823 | - | 75,893 | |||||||||||||||
Receivables, net
|
1,175 | 1,866,003 | 775,773 | - | 2,642,951 | |||||||||||||||
Mortgage loans held for investment
|
- | 781,755 | - | - | 781,755 | |||||||||||||||
Intangible assets and goodwill, net
|
- | - | 1,242,549 | - | 1,242,549 | |||||||||||||||
Investments in subsidiaries
|
2,633,648 | - | 254 | (2,633,648 | ) | 254 | ||||||||||||||
Other assets
|
- | 364,244 | 925,006 | 37 | 1,289,287 | |||||||||||||||
Total assets
|
$ | 2,634,823 | $ | 4,092,202 | $ | 3,208,816 | $ | (2,633,949 | ) | $ | 7,301,892 | |||||||||
Short-term borrowings
|
$ | - | $ | 690,485 | $ | - | $ | - | $ | 690,485 | ||||||||||
Customer deposits
|
- | 2,116,046 | - | (338 | ) | 2,115,708 | ||||||||||||||
Long-term debt
|
- | 1,968,967 | 42,710 | - | 2,011,677 | |||||||||||||||
FHLB borrowings
|
- | 104,000 | - | - | 104,000 | |||||||||||||||
Other liabilities
|
245 | 163,894 | 1,375,840 | 38 | 1,540,017 | |||||||||||||||
Net intercompany advances
|
1,794,573 | (1,083,579 | ) | (710,993 | ) | (1 | ) | - | ||||||||||||
Stockholders equity
|
840,005 | 132,389 | 2,501,259 | (2,633,648 | ) | 840,005 | ||||||||||||||
Total liabilities and stockholders equity
|
$ | 2,634,823 | $ | 4,092,202 | $ | 3,208,816 | $ | (2,633,949 | ) | $ | 7,301,892 | |||||||||
H&R Block,
Inc. |
BFC |
Other |
Consolidated |
|||||||||||||||||
April 30, 2008 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Cash & cash equivalents
|
$ | - | $ | 34,611 | $ | 630,933 | $ | (647 | ) | $ | 664,897 | |||||||||
Cash & cash equivalents restricted
|
- | 6,214 | 817 | - | 7,031 | |||||||||||||||
Receivables, net
|
139 | 122,756 | 411,334 | - | 534,229 | |||||||||||||||
Mortgage loans held for investment
|
- | 966,301 | - | - | 966,301 | |||||||||||||||
Intangible assets and goodwill, net
|
- | - | 978,682 | - | 978,682 | |||||||||||||||
Investments in subsidiaries
|
4,131,345 | - | 322 | (4,131,345 | ) | 322 | ||||||||||||||
Assets of discontinued operations
|
- | 987,592 | - | - | 987,592 | |||||||||||||||
Other assets
|
- | 514,463 | 969,896 | 12 | 1,484,371 | |||||||||||||||
Total assets
|
$ | 4,131,484 | $ | 2,631,937 | $ | 2,991,984 | $ | (4,131,980 | ) | $ | 5,623,425 | |||||||||
Customer deposits
|
$ | - | $ | 786,271 | $ | - | $ | (647 | ) | $ | 785,624 | |||||||||
Long-term debt
|
- | 997,885 | 41,185 | - | 1,039,070 | |||||||||||||||
FHLB borrowings
|
- | 129,000 | - | - | 129,000 | |||||||||||||||
Liabilities of discontinued operations
|
- | 644,446 | - | - | 644,446 | |||||||||||||||
Other liabilities
|
2 | 466,236 | 1,571,178 | 51 | 2,037,467 | |||||||||||||||
Net intercompany advances
|
3,143,664 | (632,522 | ) | (2,511,103 | ) | (39 | ) | - | ||||||||||||
Stockholders equity
|
987,818 | 240,621 | 3,890,724 | (4,131,345 | ) | 987,818 | ||||||||||||||
Total liabilities and stockholders equity
|
$ | 4,131,484 | $ | 2,631,937 | $ | 2,991,984 | $ | (4,131,980 | ) | $ | 5,623,425 | |||||||||
22
Table of Contents
Condensed Consolidating Statements of Cash Flows | (in 000s) | |||||||||||||||||||
Nine
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
January 31, 2009 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Net cash used in operating activities:
|
$ | (3,360 | ) | $ | (1,868,531 | ) | $ | (551,671 | ) | $ | - | $ | (2,423,562 | ) | ||||||
Cash flows from investing:
|
||||||||||||||||||||
Mortgage loans originated for investment, net
|
- | 72,150 | - | - | 72,150 | |||||||||||||||
Purchase property & equipment
|
- | (5,366 | ) | (68,547 | ) | - | (73,913 | ) | ||||||||||||
Payments for business acquisitions
|
- | - | (290,868 | ) | - | (290,868 | ) | |||||||||||||
Net intercompany advances
|
(71,691 | ) | - | - | 71,691 | - | ||||||||||||||
Investing cash flows of discontinued operations
|
- | 255,066 | - | - | 255,066 | |||||||||||||||
Other, net
|
- | 7,483 | 16,356 | - | 23,839 | |||||||||||||||
Net cash provided by (used in) investing activities
|
(71,691 | ) | 329,333 | (343,059 | ) | 71,691 | (13,726 | ) | ||||||||||||
Cash flows from financing:
|
||||||||||||||||||||
Repayments of short-term borrowings
|
- | (928,983 | ) | - | - | (928,983 | ) | |||||||||||||
Proceeds from short-term borrowings
|
- | 2,565,281 | - | - | 2,565,281 | |||||||||||||||
Customer deposits
|
- | 1,326,275 | - | 309 | 1,326,584 | |||||||||||||||
Dividends paid
|
(147,569 | ) | - | - | - | (147,569 | ) | |||||||||||||
Acquisition of treasury shares
|
(7,387 | ) | - | - | - | (7,387 | ) | |||||||||||||
Proceeds from stock options
|
69,891 | - | - | - | 69,891 | |||||||||||||||
Proceeds from issuance of stock
|
141,450 | - | - | - | 141,450 | |||||||||||||||
Net intercompany advances
|
- | (448,639 | ) | 520,330 | (71,691 | ) | - | |||||||||||||
Financing cash flows of discontinued operations
|
- | 4,783 | - | - | 4,783 | |||||||||||||||
Other, net
|
18,666 | - | (1,122 | ) | - | 17,544 | ||||||||||||||
Net cash provided by financing activities
|
75,051 | 2,518,717 | 519,208 | (71,382 | ) | 3,041,594 | ||||||||||||||
Net increase (decrease) in cash
|
- | 979,519 | (375,522 | ) | 309 | 604,306 | ||||||||||||||
Cash beginning of period
|
- | 34,611 | 630,933 | (647 | ) | 664,897 | ||||||||||||||
Cash end of period
|
$ | - | $ | 1,014,130 | $ | 255,411 | $ | (338 | ) | $ | 1,269,203 | |||||||||
23
Table of Contents
Nine
Months Ended |
H&R
Block, Inc. |
BFC |
Other |
Consolidated |
||||||||||||||||
January 31, 2008 | (Guarantor) | (Issuer) | Subsidiaries | Elims | H&R Block | |||||||||||||||
Net cash provided by (used in) operating activities:
|
$ | 35,374 | $ | (2,786,795 | ) | $ | (588,696 | ) | $ | - | $ | (3,340,117 | ) | |||||||
Cash flows from investing:
|
||||||||||||||||||||
Mortgage loans originated for investment, net
|
- | 106,721 | - | - | 106,721 | |||||||||||||||
Purchase property & equipment
|
- | 3,007 | (80,233 | ) | - | (77,226 | ) | |||||||||||||
Payments for business acquisitions
|
- | - | (23,835 | ) | - | (23,835 | ) | |||||||||||||
Net intercompany advances
|
89,728 | - | - | (89,728 | ) | - | ||||||||||||||
Investing cash flows from discontinued operations
|
- | (5,424 | ) | 3,749 | - | (1,675 | ) | |||||||||||||
Other, net
|
- | 7,046 | 336 | - | 7,382 | |||||||||||||||
Net cash provided by (used in) investing activities
|
89,728 | 111,350 | (99,983 | ) | (89,728 | ) | 11,367 | |||||||||||||
Cash flows from financing:
|
||||||||||||||||||||
Repayments of commercial paper
|
- | (5,125,279 | ) | - | - | (5,125,279 | ) | |||||||||||||
Proceeds from commercial paper
|
- | 4,133,197 | - | - | 4,133,197 | |||||||||||||||
Repayments of other borrowings
|
- | (2,161,177 | ) | - | - | (2,161,177 | ) | |||||||||||||
Proceeds from other borrowings
|
- | 5,097,662 | - | - | 5,097,662 | |||||||||||||||
Proceeds from issuance of LT debt
|
- | 599,376 | - | - | 599,376 | |||||||||||||||
Customer deposits
|
- | 828,872 | - | - | 828,872 | |||||||||||||||
Dividends paid
|
(137,049 | ) | - | - | - | (137,049 | ) | |||||||||||||
Acquisition of treasury shares
|
(7,237 | ) | - | - | - | (7,237 | ) | |||||||||||||
Proceeds from stock options
|
14,527 | - | - | - | 14,527 | |||||||||||||||
Net intercompany advances
|
- | (469,856 | ) | 380,128 | 89,728 | - | ||||||||||||||
Financing cash flows of discontinued operations
|
- | 634,208 | - | - | 634,208 | |||||||||||||||
Other, net
|
4,657 | (4,428 | ) | (32,560 | ) | - | (32,331 | ) | ||||||||||||
Net cash provided by (used in) financing activities
|
(125,102 | ) | 3,532,575 | 347,568 | 89,728 | 3,844,769 | ||||||||||||||
Net increase (decrease) in cash
|
- | 857,130 | (341,111 | ) | - | 516,019 | ||||||||||||||
Cash beginning of period
|
- | 60,197 | 756,720 | - | 816,917 | |||||||||||||||
Cash end of period
|
$ | - | $ | 917,327 | $ | 415,609 | $ | - | $ | 1,332,936 | ||||||||||
24
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
RESULTS OF
OPERATIONS
H&R Block provides tax services, banking services and
business and consulting services. Our Tax Services segment
provides income tax return preparation services, electronic
filing services and other services and products related to
income tax return preparation to the general public primarily in
the United States, Canada and Australia. Our Business Services
segment consists of RSM McGladrey, Inc. (RSM), a national
accounting, tax and business consulting firm primarily serving
mid-sized businesses. Our Consumer Financial Services segment
offers retail banking through H&R Block Bank (HRB Bank).
On August 12, 2008, we announced the signing of a
definitive agreement to sell H&R Block Financial Advisors,
Inc. (HRBFA) to Ameriprise Financial, Inc. (Ameriprise), and
completed the disposition of this business effective
November 1, 2008. As of January 31, 2009, the results
of operations of HRBFA and its direct corporate parent are
presented as discontinued operations in the condensed
consolidated financial statements. All periods presented have
been reclassified to reflect our discontinued operations. See
additional discussion in note 17 to our condensed
consolidated financial statements.
TAX
SERVICES
This segment primarily consists of our income tax preparation
businesses retail, online and software.
Additionally, this segment includes commercial tax businesses,
which provide tax preparation software to CPAs and other tax
preparers.
Tax Services Operating Statistics (U.S. only) | ||||||||
Period November 1 through January 31, | 2009 | 2008 | ||||||
Tax returns prepared (in 000s):
|
||||||||
Company-owned operations
(1)
|
2,579 | 2,430 | ||||||
Franchise operations
|
1,339 | 1,427 | ||||||
Total retail operations
|
3,918 | 3,857 | ||||||
Software
|
780 | 799 | ||||||
Online
|
643 | 396 | ||||||
Free File Alliance
|
178 | 306 | ||||||
Total digital tax solutions
|
1,601 | 1,501 | ||||||
5,519 | 5,358 | |||||||
Net average fee per tax return prepared:
(2)
|
||||||||
Company-owned operations
|
$ | 202.07 | $ | 181.19 | ||||
Franchise operations
|
171.67 | 157.91 | ||||||
$ | 191.68 | $ | 172.58 | |||||
Offices:
|
||||||||
Company-owned
|
7,029 | 6,835 | ||||||
Company-owned shared locations
(3)
|
1,542 | 1,478 | ||||||
Total company-owned offices
|
8,571 | 8,313 | ||||||
Franchise
|
3,565 | 3,812 | ||||||
Franchise shared locations
(3)
|
787 | 913 | ||||||
Total franchise offices
|
4,352 | 4,725 | ||||||
12,923 | 13,038 | |||||||
(1) | Fiscal year 2009 returns include approximately 139,000 returns prepared in offices of our last major independent franchise operator, which we acquired in November 2008. Tax returns prepared by this franchise operator in fiscal year 2008 are presented within franchise operations for that year. | |
(2) | Calculated as net tax preparation fees divided by retail tax returns prepared. | |
(3) | Shared locations include offices located within Wal-Mart, Sears and other third-party businesses. |
25
Table of Contents
Tax Services Operating Results | (in 000s) | |||||||||||||||
Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Service revenues:
|
||||||||||||||||
Tax preparation fees
|
$ | 534,389 | $ | 455,036 | $ | 620,728 | $ | 529,423 | ||||||||
Other services
|
75,435 | 65,766 | 146,719 | 134,693 | ||||||||||||
609,824 | 520,802 | 767,447 | 664,116 | |||||||||||||
Royalties
|
72,980 | 61,350 | 81,963 | 69,111 | ||||||||||||
Loan participation and related fees
|
36,123 | 40,584 | 36,123 | 41,737 | ||||||||||||
Other
|
42,808 | 39,051 | 50,571 | 47,490 | ||||||||||||
Total revenues
|
761,735 | 661,787 | 936,104 | 822,454 | ||||||||||||
Cost of services:
|
||||||||||||||||
Compensation and benefits
|
251,578 | 236,048 | 359,459 | 343,661 | ||||||||||||
Occupancy
|
93,474 | 90,818 | 253,761 | 245,886 | ||||||||||||
Depreciation
|
9,758 | 9,399 | 25,963 | 26,009 | ||||||||||||
Other
|
73,753 | 74,943 | 166,828 | 176,410 | ||||||||||||
428,563 | 411,208 | 806,011 | 791,966 | |||||||||||||
Cost of other revenues, selling,
general and administrative |
202,729 | 204,700 | 348,138 | 356,047 | ||||||||||||
Total expenses
|
631,292 | 615,908 | 1,154,149 | 1,148,013 | ||||||||||||
Pretax income (loss)
|
$ | 130,443 | $ | 45,879 | $ | (218,045 | ) | $ | (325,559 | ) | ||||||
Three months
ended January 31, 2009 compared to January 31,
2008
Tax Services revenues increased $99.9 million, or
15.1%, for the three months ended January 31, 2009 compared
to the prior year. Tax preparation fees increased
$79.4 million, or 17.4%, primarily due to a 6.1% increase
in U.S. retail tax returns prepared in company-owned
offices and an 11.5% increase in the net average fee per
U.S. retail tax return. The increase in returns prepared in
company-owned offices is primarily due to the November 2008
acquisition of our last major independent franchise operator.
See note 3 to the condensed consolidated financial
statements for additional information. Excluding operating
results attributable to the acquired franchise operator, tax
returns prepared in company-owned offices increased 0.5% over
the prior year and tax preparation fees increased
$52.5 million. Increases in our net average fee are due to
a combination of planned pricing increases, higher tax return
complexity and lower discounts.
The business of our Tax Services segment is highly seasonal and
results for our third quarter represent only a small portion of
the tax season. Results reported in our third quarter were
positively impacted by a shift of two peak days of tax
preparation volume, as compared to prior year results, from
February to January. Therefore, third quarter results may not be
indicative of the results we expect for the entire fiscal year.
We do not expect to maintain this level of revenue or tax return
growth throughout the remainder of the tax season. Tax returns
prepared in company-owned and franchise offices through
February 28, 2009 decreased 3.9% from the prior year,
adjusted to exclude the effects of leap year in fiscal 2008. We
also expect the increase in the net average fee to moderate
throughout the remainder of the tax season.
Other service revenue increased $9.7 million, or 14.7%,
primarily due to $8.7 million in additional license fees
earned from bank products, mainly refund anticipation checks
(RACs). Revenues from our online tax preparation and
e-filing
services were essentially flat, as an increase in clients was
offset by the elimination of separate
e-filing
fees related to our software units.
Royalty revenue increased $11.6 million, or 19.0%, from the
prior year primarily due to an increase in franchise revenues
and an increase in royalty rates at sub-franchises of the
acquired franchise operator.
Loan participation and related fees decreased $4.5 million,
or 11.0%, due to a decline in refund anticipation loan (RAL)
volume, as more clients elected to receive RACs.
Other revenues increased $3.8 million, or 9.6%, primarily
due to an increase of $12.6 million in fees earned in
connection with the Emerald Advance loan program, under which,
this segment shares in the revenues and expenses associated with
the program. This increase was partially offset by a decline in
software sales.
26
Table of Contents
Total expenses increased $15.4 million, or 2.5%, for the
three months ended January 31, 2009. Cost of services
increased $17.4 million, or 4.2%, from the prior year, due
to higher compensation and benefits. Compensation and benefits
increased $15.5 million, or 6.6%, primarily due to a 9.9%
increase in commission-based wages resulting from a
corresponding increase in tax preparation revenues. Cost of
other revenues, selling, general and administrative expenses
decreased slightly from the prior year, as declines in corporate
wages and corporate shared services were offset by a
$14.7 million increase in marketing expenses. Bad debt
expense related to lending products was essentially flat
compared to the prior year, as the negative impact of the
elimination of cross-collect practices by lending banks in the
prior year was offset in the current year by higher bad debt
expense due to higher numbers of Emerald Advance lines of credit.
Pretax income for the three months ended January 31, 2009
was $130.4 million, compared to income of
$45.9 million in the prior year.
Nine months ended
January 31, 2009 compared to January 31,
2008
Tax Services revenues increased $113.7 million, or
13.8%, for the nine months ended January 31, 2009 compared
to the prior year. Tax preparation fees increased
$91.3 million, or 17.2%, primarily due to a 6.6% increase
in our U.S. retail tax returns prepared in company-owned
offices and an 11.2% increase in the net average fee per
U.S. retail tax return. The increase in tax returns
prepared is primarily due to the acquisition of our last major
independent franchise operator, as discussed above. Excluding
operating results attributable to the acquired franchise
operator, tax returns prepared increased 1.3% over the prior
year.
Other service revenue increased $12.0 million, or 8.9%,
primarily due to $9.1 million in additional license fees
earned from bank products, mainly RACs. Additionally, we earned
$4.8 million in connection with an agreement with HRB Bank
for the H&R Block Emerald Prepaid
MasterCard®,
under which, this segment shares in the revenues and expenses
associated with this program.
Royalty revenue increased $12.9 million, or 18.6%, from the
prior year primarily due to an increase in franchisee revenues
and certain royalty rates, as discussed above.
Loan participation and related fees decreased $5.6 million,
or 13.5%, due to a decline in RAL volume, as more clients
elected to receive RACs.
Other revenues increased $3.1 million, or 6.5%, primarily
due to $13.1 million in incremental fees earned in
connection with the Emerald Advance loan program. This increase
was partially offset by a decline in software sales.
Total expenses increased $6.1 million, or 0.5%, for the
nine months ended January 31, 2009. Cost of services
increased $14.0 million, or 1.8%, over the prior year, due
to higher compensation and benefits and occupancy expenses,
partially offset by declines in other expenses. Compensation and
benefits increased $15.8 million, or 4.6%, primarily as a
result of an 8.9% increase in commission-based wages. Occupancy
expenses increased $7.9 million, or 3.2%, primarily as a
result of higher rent and utilities expenses due to a 3.1%
increase in company-owned offices under lease and a 2.9%
increase in the average rent. Other cost of services decreased
$9.6 million, or 5.4%, primarily due to a $6.5 million
decline in supplies expenses as our tax training schools move to
more computer-based training. Cost of other revenues, selling,
general and administrative expenses decreased $7.9 million
from the prior year, as declines in RAL bad debt expense,
corporate wages and corporate shared services were partially
offset by a $17.4 million increase in marketing expenses.
Bad debt expense related to our RAL program declined primarily
due to the elimination of cross-collect practices by lending
banks and changes implemented by the IRS in the prior year, both
of which resulted in higher expenses in the prior year.
The pretax loss for the nine months ended January 31, 2009
was $218.0 million, compared to a loss of
$325.6 million in the prior year.
27
Table of Contents
BUSINESS
SERVICES
This segment offers accounting, tax and consulting services to
middle-market companies.
Business Services Operating Statistics | ||||||||||||||||
Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Accounting, tax and consulting:
|
||||||||||||||||
Chargeable hours
|
923,321 | 984,851 | 3,075,623 | 3,297,153 | ||||||||||||
Chargeable hours per person
|
301 | 319 | 905 | 918 | ||||||||||||
Net billed rate per hour
|
$ | 150 | $ | 144 | $ | 147 | $ | 145 | ||||||||
Average margin per person
|
$ | 22,556 | $ | 23,463 | $ | 66,162 | $ | 67,695 | ||||||||
Business Services Operating Results | (in 000s) | |||||||||||||||
Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Tax services
|
$ | 78,267 | $ | 76,222 | $ | 265,137 | $ | 256,048 | ||||||||
Business consulting
|
60,366 | 59,369 | 187,123 | 175,461 | ||||||||||||
Accounting services
|
13,904 | 12,513 | 40,285 | 42,198 | ||||||||||||
Capital markets
|
4,762 | 9,770 | 15,545 | 33,717 | ||||||||||||
Leased employee revenue
|
2 | 3,581 | 52 | 25,077 | ||||||||||||
Reimbursed expenses
|
5,883 | 3,356 | 14,418 | 13,923 | ||||||||||||
Other
|
21,993 | 27,073 | 70,313 | 77,331 | ||||||||||||
Total revenues
|
185,177 | 191,884 | 592,873 | 623,755 | ||||||||||||
Cost of revenues:
|
||||||||||||||||
Compensation and benefits
|
99,498 | 107,093 | 341,540 | 364,388 | ||||||||||||
Occupancy
|
20,423 | 19,138 | 60,017 | 54,814 | ||||||||||||
Other
|
15,969 | 16,166 | 46,290 | 59,723 | ||||||||||||
135,890 | 142,397 | 447,847 | 478,925 | |||||||||||||
Amortization of intangible assets
|
3,177 | 3,372 | 9,946 | 10,572 | ||||||||||||
Selling, general and administrative
|
35,415 | 39,501 | 111,599 | 117,769 | ||||||||||||
Total expenses
|
174,482 | 185,270 | 569,392 | 607,266 | ||||||||||||
Pretax income
|
$ | 10,695 | $ | 6,614 | $ | 23,481 | $ | 16,489 | ||||||||
Three months
ended January 31, 2009 compared to January 31,
2008
Business Services revenues for the three months ended
January 31, 2009 declined $6.7 million, or 3.5% from
the prior year.
Revenues from core tax, consulting and accounting services
increased $4.4 million, or 3.0%, over the prior year,
however, these increases were offset by declines in other
revenues.
Capital markets revenues decreased $5.0 million, or 51.3%,
primarily due to a 68.8% decline in the number of transactions
closed in the current year.
Leased employee revenue decreased $3.6 million primarily
due to a change in organizational structure between the
businesses we acquired from American Express Tax and Business
Services, Inc. (AmexTBS) and the attest firms that, while not
affiliates of our company, also serve our clients. Employees we
previously leased to the attest firms were transferred to the
separate attest practices in the prior fiscal year. As a result,
we no longer record the revenues and expenses associated with
leasing these employees.
Other revenue declined $5.1 million, or 18.8%, primarily
due to a decrease in outside contractor services performed for
our clients.
Total expenses decreased $10.8 million, or 5.8%, from the
prior year. Compensation and benefits decreased
$7.6 million, or 7.1%, due to lower commissions related to
capital markets and the change in organizational structure with
AmexTBS discussed above. Selling, general and administrative
expenses decreased $4.1 million primarily as a result of
our cost reduction program.
Pretax income for the three months ended January 31, 2009
was $10.7 million compared to $6.6 million in the
prior year.
28
Table of Contents
Nine months ended
January 31, 2009 compared to January 31,
2008
Business Services revenues for the nine months ended
January 31, 2009 declined $30.9 million, or 5.0% from
the prior year.
Tax revenues increased $9.1 million due to increases in net
billed rate per hour. Business consulting revenues increased
$11.7 million primarily due to a large one-time financial
institutions engagement. Capital markets revenues decreased
$18.2 million, or 53.9%, primarily due to a 43.2% decline
in the number of transactions closed in the current year.
Leased employee revenue decreased $25.0 million primarily
due to a change in organizational structure with AmexTBS, as
discussed above.
Other revenue declined $7.0 million, or 9.1%, primarily due
to a decrease in outside contractor services performed for our
clients.
Total expenses decreased $37.9 million, or 6.2%, from the
prior year. Compensation and benefits and other cost of revenues
decreased primarily due to reductions in commissions related to
capital markets and the change in organizational structure with
AmexTBS as discussed above. Selling, general and administrative
expenses decreased $6.2 million primarily as a result of
our cost reduction program.
Pretax income for the nine months ended January 31, 2009
was $23.5 million compared to $16.5 million in the
prior year.
CONSUMER
FINANCIAL SERVICES
This segment is engaged in providing retail banking offerings to
Tax Services clients through HRB Bank. HRB Bank offers
traditional banking services including prepaid debit card
accounts, checking and savings accounts, individual retirement
accounts and certificates of deposit. This segment previously
included HRBFA, which has been presented as a discontinued
operation in the accompanying condensed consolidated financial
statements.
Consumer Financial Services Operating Statistics | ||||||||||||||||
Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Annualized net interest margin
(1)
|
6.32% | 4.65% | 4.56% | 3.09% | ||||||||||||
Annualized pretax return on
average assets (2) |
(0.72)% | 3.47% | (3.65)% | 1.23% | ||||||||||||
Total assets (in 000s)
|
$ | 2,610,019 | $ | 2,395,156 | $ | 2,610,019 | $ | 2,395,156 | ||||||||
Mortgage loans held for investment:
|
||||||||||||||||
Loan loss reserve as a% of mortgage loans
|
8.82% | 1.49% | 8.82% | 1.49% | ||||||||||||
Delinquency rate (30+ days)
|
16.29% | 7.13% | 16.29% | 7.13% | ||||||||||||
(1) | Defined as annualized net interest revenue divided by average bank earning assets. See Reconciliation of Non-GAAP Financial Information at the end of Part I, Item 2. | |
(2) | Defined as annualized pretax banking income divided by average bank assets. See Reconciliation of Non-GAAP Financial Information at the end of Part I, Item 2. |
29
Table of Contents
Consumer Financial Services Operating Results | (in 000s) | |||||||||||||||
Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Interest income:
|
||||||||||||||||
Mortgage loans
|
$ | 11,131 | $ | 17,198 | $ | 36,494 | $ | 60,140 | ||||||||
Other
|
21,193 | 11,881 | 23,467 | 13,913 | ||||||||||||
32,324 | 29,079 | 59,961 | 74,053 | |||||||||||||
Interest expense:
|
||||||||||||||||
Deposits
|
3,719 | 11,464 | 11,646 | 37,928 | ||||||||||||
FHLB advances
|
1,326 | 1,349 | 3,981 | 4,709 | ||||||||||||
5,045 | 12,813 | 15,627 | 42,637 | |||||||||||||
Net interest income
|
27,279 | 16,266 | 44,334 | 31,416 | ||||||||||||
Provision for loan loss reserves
|
(13,870 | ) | (419 | ) | (51,953 | ) | (12,345 | ) | ||||||||
Other
|
12,871 | 10,225 | 21,019 | 15,555 | ||||||||||||
Total revenues
(1)
|
26,280 | 26,072 | 13,400 | 34,626 | ||||||||||||
Non-interest expenses
|
29,548 | 13,754 | 49,414 | 21,875 | ||||||||||||
Pretax income (loss)
|
$ | (3,268 | ) | $ | 12,318 | $ | (36,014 | ) | $ | 12,751 | ||||||
(1) | Total revenues, less provision for loan loss reserves on mortgage loans held for investment and interest expense. |
Three months
ended January 31, 2009 compared to January 31,
2008
Consumer Financial Services revenues, net of interest
expense and provision for loan loss reserves, for the three
months ended January 31, 2009 was essentially flat compared
to the prior year.
Net interest income increased $11.0 million, or 67.7%, over
the prior year, primarily due to an $11.2 million increase
in interest income received on our Emerald Advance loan program
resulting from higher volumes. Interest income on mortgage loans
held for investment and interest expense on deposits declined
$6.1 million and $7.7 million, respectively, due to
lower interest rates and lower average balances in the
corresponding asset or liability. Interest income on mortgage
loans held for investment is also declining due to an increase
in non-accrual loans from $44.8 million at January 31,
2008 to $258.2 million at January 31, 2009. The
following table summarizes the key drivers of net interest
income:
(dollars in 000s) | ||||||||||||||||
Average Balance | Average Rate Earned (Paid) | |||||||||||||||
Three Months Ended January 31, | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Loans
|
$ | 870,060 | $ | 1,089,566 | 5.12 | % | 6 | .31% | ||||||||
Emerald Advance lines of credit
|
375,255 | 171,925 | 36.00 | % | 36 | .00% | ||||||||||
Investments
|
545,825 | 154,498 | 0.21 | % | 4 | .20% | ||||||||||
Deposits
|
1,311,362 | 989,113 | (1.13 | %) | (4 | .60%) | ||||||||||
Our non-performing assets consist of the following:
(in 000s) | ||||||
January 31, |
April 30, |
|||||
Balance at | 2009 | 2008 | ||||
Impaired loans
|
$ | 258,157 | $ | 128,941 | ||
Real estate owned
(1)
|
51,919 | 350 | ||||
Total non-performing assets
|
$ | 310,076 | $ | 129,291 | ||
(1) | Includes loans accounted for as in-substance foreclosures of $39.7 million at January 31, 2009. |
30
Table of Contents
Detail of our mortgage loans held for investment and the related
allowance at January 31, 2009 and April 30, 2008 is as
follows:
(dollars in 000s) | ||||||||||||||||
Outstanding |
Loan Loss |
%30+Days |
||||||||||||||
Principal Balance | Allowance | Past Due | Average FICO | |||||||||||||
As of January 31, 2009:
|
||||||||||||||||
Purchased from SCC
|
$ | 547,832 | $ | 71,880 | 23.39 | % | 639 | |||||||||
All other
|
303,370 | 3,735 | 3.07 | % | 717 | |||||||||||
$ | 851,202 | $ | 75,615 | 16.29 | % | 667 | ||||||||||
As of April 30, 2008:
|
||||||||||||||||
Purchased from SCC
|
$ | 683,889 | $ | 43,769 | 17.53 | % | 664 | |||||||||
All other
|
320,751 | 1,632 | 2.07 | % | 721 | |||||||||||
$ | 1,004,640 | $ | 45,401 | 11.71 | % | 682 | ||||||||||
Mortgage loans held for investment include loans originated by
our affiliate, Sand Canyon Corporation (SCC), and purchased by
HRB Bank totaling $547.8 million, or approximately 64% of
the total loan portfolio at January 31, 2009. Loans
originated by and purchased from SCC have characteristics which
are representative of Alt-A loans loans to customers
who have credit ratings above sub-prime, but may not conform to
government-sponsored standards. As such, we have experienced
higher rates of delinquency and have greater exposure to loss
with respect to this segment of our loan portfolio. Cumulative
losses on our original loan portfolio purchased from SCC and
retained for investment, including losses on loans now
classified as other real estate, totaled approximately 15% at
January 31, 2009. Our remaining loan portfolio totaled
$303.4 million and is characteristic of a prime loan
portfolio, and we believe subject to a lower loss exposure.
We recorded a provision for loan losses on our mortgage loans
held for investment of $13.9 million during the current
quarter, compared to $0.4 million in the prior year. Our
loan loss provision increased as a result of continued declines
in residential home prices, particularly in certain states where
we have a higher concentration of loans, as well as reserves on
modified loans. Our allowance for loan losses as a percent of
mortgage loans was 8.82%, or $75.6 million, at
January 31, 2009, compared to 4.49%, or $45.4 million,
at April 30, 2008. This allowance represents our best
estimate of credit losses inherent in the loan portfolio as of
the balance sheet dates.
We record a specific loss allowance for each loan greater than
60 days past due based upon the estimated value of the
underlying collateral. Our specific loan loss allowance
reflected an average loss severity of 36% at January 31,
2009.
We record a loan loss allowance for loans less than 60 days
past due on a pooled basis. In estimating our loan loss
allowance for all remaining loans, we stratify the loan
portfolio based on our view of risk associated with various
elements of the pool and assign estimated loss rates based on
those risks. Loss rates are based primarily on historical
experience and our assessment of economic and market conditions.
Loss rates consider both the rate at which loans will become
delinquent (frequency) and the amount of loss that will
ultimately be realized upon occurrence of a liquidation of
collateral (severity). At January 31, 2009 and
April 30, 2008 our weighted average frequency assumption
was approximately 13% and 14%, respectively, and included a
frequency assumption of approximately 17% relating to the SCC
segment of our portfolio. Our weighted average severity
assumption increased to 40% at January 31, 2009 from 37.5%
at October 31, 2008 and 22% at April 30, 2008, due to
declining collateral values during the current year.
For modified loans that we determine meet the definition of a
troubled debt restructuring, we record impairment equal to the
difference between the principal balance of the loan and the
present value of expected future cash flows discounted at the
loans effective interest rate. However, if we assess that
foreclosure of a modified loan is probable, we record impairment
based upon the estimated fair value of the underlying collateral.
Residential real estate markets are experiencing significant
declines in property values and mortgage default rates are
increasing. If adverse market trends continue, including trends
within our portfolio specifically, we may be required to record
additional loan loss provisions, and those losses may be
significant.
Non-interest expenses increased $15.8 million from the
prior year, primarily due to increases in expenses related to
our Emerald Advance loan program.
31
Table of Contents
The pretax loss for the three months ended January 31, 2009
was $3.3 million compared to prior year income of
$12.3 million.
Nine months ended
January 31, 2009 compared to January 31,
2008
Consumer Financial Services revenues, net of interest
expense and provision for loan loss reserves, for the nine
months ended January 31, 2009 decreased $21.2 million
from the prior year.
Net interest income increased $12.9 million from the prior
year primarily due to an $11.9 million increase in interest
income received on our Emerald Advance loan program resulting
from higher volumes. Interest income on mortgage loans held for
investment and interest expense on deposits declined
$23.6 million and $26.3 million, respectively, due to
lower interest rates and lower average balances in the
corresponding asset or liability. The following table summarizes
the key drivers of net interest income:
(dollars in 000s) | ||||||||||||||||
Average Balance | Average Rate Earned (Paid) | |||||||||||||||
Nine Months Ended January 31, | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Loans
|
$ | 918,803 | $ | 1,207,583 | 5.30% | 6.64% | ||||||||||
Emerald Advance lines of credit
|
128,352 | 57,930 | 36.00% | 36.00% | ||||||||||||
Investments
|
246,698 | 103,979 | 0.72% | 4.77% | ||||||||||||
Deposits
|
908,671 | 991,127 | (1.69%) | (5.06%) | ||||||||||||
We recorded a provision for loan losses on our mortgage loans
held for investment of $52.0 million during the current
year, compared to $12.3 million in the prior year. Our loan
loss provision increased primarily as a result of steep and
abrupt declines in residential home prices, as well as
increasing delinquencies occurring in our portfolio.
Non-interest expenses increased $27.5 million from the
prior year, primarily due to a $5.7 million write-down to
fair value recorded on real estate owned and increases in
expenses related to our Emerald Advance loan program.
The pretax loss for the nine months ended January 31, 2009
was $36.0 million compared to prior year income of
$12.8 million.
Mortgage Loans
Held for Investment and Related Assets
State
Concentrations
Concentrations of loans to borrowers located in a single state
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. The
table below presents outstanding loans by certain state
concentrations for our mortgage loans held for investment
portfolio:
(dollars in 000s) | ||||||||||||||||||||
Loans Purchased |
Loans Purchased |
Percent |
Delinquency |
|||||||||||||||||
From SCC | From Others | Total | of Total | Rate (30+ Days) | ||||||||||||||||
Florida
|
$ | 70,259 | $ | 93,094 | $ | 163,353 | 19 | % | 17.09 | % | ||||||||||
California
|
128,582 | 15,130 | 143,712 | 17 | % | 25.71 | % | |||||||||||||
New York
|
104,792 | 8,555 | 113,347 | 13 | % | 16.78 | % | |||||||||||||
Wisconsin
|
2,247 | 72,352 | 74,599 | 9 | % | 1.77 | % | |||||||||||||
All others
|
241,952 | 114,239 | 356,191 | 42 | % | 14.97 | % | |||||||||||||
Total
|
$ | 547,832 | $ | 303,370 | $ | 851,202 | 100 | % | 16.29 | % | ||||||||||
32
Table of Contents
Real Estate
Owned
Amounts classified as real estate owned as of January 31,
2009 and April 30, 2008 totaled $51.9 million and
$0.3 million, respectively. The table below presents
activity related to our real estate owned:
(in 000s) | ||||
Nine Months Ended January 31, | 2009 | |||
Balance, beginning of the period
|
$ | 350 | ||
Additions
|
62,774 | |||
Sales
|
(5,506 | ) | ||
Writedowns
|
(5,699 | ) | ||
Balance, end of the period
|
$ | 51,919 | ||
CORPORATE,
ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS
Three months
ended January 31, 2009 compared to January 31,
2008
The pretax loss recorded in our corporate operations for the
three months ended January 31, 2009 was $36.1 million
compared to $64.4 million in the prior year. The decreased
loss is primarily due to severance-related costs of
$20.4 million recorded in the prior year, coupled with
benefits resulting from the cost reduction program implemented
in fiscal year 2008.
Our effective tax rate for continuing operations was 34.3% for
the three months ended January 31, 2009. The rate for the
current quarter was lower than expected primarily due to
benefits recorded as a result of adjustments of our prior year
estimated tax provision to actual federal and state returns
filed, as well as a net benefit recorded in the quarter
resulting from adjustments to our estimated annual effective tax
rate. We expect our effective tax rate for full fiscal year 2009
to be approximately 40%. In the prior year, we also recorded
certain discrete tax benefits, resulting in a net tax benefit of
$6.7 million on pretax income of $0.4 million.
Nine months ended
January 31, 2009 compared to January 31,
2008
The pretax loss recorded in our corporate operations for the
nine months ended January 31, 2009 was $108.1 million
compared to $112.6 million in the prior year. The decreased
loss is primarily due to severance-related costs recorded in the
prior year and benefits resulting from the cost reduction
program implemented in fiscal year 2008. These improvements were
partially offset by lower investment income and increased
interest expense, as our corporate operations absorbed current
year financing costs for all long-term debt.
Our effective tax rate for continuing operations was 42.5% and
41.3% for the nine months ended January 31, 2009 and 2008,
respectively. Our effective tax rate increased primarily due to
changes in our estimated state tax rate and non-deductible
investment losses. We expect our effective tax rate for full
fiscal year 2009 to be approximately 40%.
DISCONTINUED
OPERATIONS
On August 12, 2008, we announced the signing of a
definitive agreement to sell HRBFA to Ameriprise. The
disposition of this business was completed effective
November 1, 2008. As of January 31, 2009, the results
of operations of HRBFA and its direct corporate parent are
presented as discontinued operations in the condensed
consolidated financial statements. All periods presented have
been reclassified to reflect our discontinued operations. See
additional discussion in note 17 to our condensed
consolidated financial statements.
Discontinued operations also includes the wind-down of our
mortgage loan origination business and the sale of our mortgage
loan servicing business in the prior year. Also included in the
prior year are the results of three smaller lines of business
previously reported in our Business Services segment.
Three months
ended January 31, 2009 compared to January 31,
2008
The pretax loss of our discontinued operations for the three
months ended January 31, 2009 was $20.1 million
compared to a loss of $93.4 million in the prior year. The
loss from discontinued operations for the prior year period
included significant losses from our former mortgage loan
businesses, including impairments of residual interests of
$14.7 million and losses relating to loan repurchase
obligations of $49.5 million.
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Losses from discontinued operations in the current quarter
consist primarily of a $15.5 million charge relating to the
estimated fair value of indemnification obligations undertaken
in connection with the disposition of HRBFA, as discussed in
note 17 to the condensed consolidated financial statements,
and ongoing wind-down costs associated with our former mortgage
businesses.
As discussed below, the disposition of HRBFA resulted in a
capital loss for income tax purposes, and therefore, we recorded
no tax benefit on reported losses during the quarter incurred in
connection with the sale. As such, our effective tax rate for
discontinued operations was 2.9% for the three months ended
January 31, 2009 compared with 41.7% for the three months
ended January 31, 2008.
Nine months ended
January 31, 2009 compared to January 31,
2008
The pretax loss of our discontinued operations for the nine
months ended January 31, 2009 was $47.4 million
compared to a loss of $978.0 million in the prior year. The
loss from discontinued operations for the prior year period
resulted from significant losses from our former mortgage loan
businesses, including impairments of residual interests of
$125.9 million, losses relating to loan repurchase
obligations of $379.4 million and losses on the sale of
mortgage loans totaling $118.9 million.
Losses from discontinued operations in the current year consist
primarily of the $15.5 million indemnification obligation,
as discussed above, and ongoing wind-down costs associated with
our former mortgage businesses.
During the current year, we recorded a deferred tax asset
totaling $165 million, representing the difference between
the tax and book basis in the stock of our brokerage business
sold to Ameriprise in November. For tax purposes, we incurred a
capital loss upon disposition of that business, which generally
can only be utilized to the extent we realize capital gains
within five years subsequent to the date of the loss. We
dont currently expect to be able to realize a tax benefit
for substantially all of this loss and, therefore, recorded a
valuation allowance of $155 million, resulting in a net tax
benefit during our second fiscal quarter of approximately
$10 million.
Our effective tax rate for discontinued operations was 44.2% and
37.4% for the nine months ended January 31, 2009 and 2008,
respectively. As discussed above, our effective tax rate
increased primarily due to second quarter tax benefits of
$10 million recognized in connection with the disposition
of HRBFA.
FINANCIAL
CONDITION
These comments should be read in conjunction with the condensed
consolidated balance sheets, condensed consolidated statements
of cash flows and condensed consolidated statements of
stockholders equity found on pages 1, 3 and 4,
respectively.
CAPITAL
RESOURCES & LIQUIDITY BY SEGMENT
Our sources of capital include cash from operations, issuances
of common stock and debt. We use capital primarily to fund
working capital, pay dividends, acquire businesses and
repurchase treasury shares. Our operations are highly seasonal
and therefore generally require the use of cash to fund
operating losses during the period May through December.
Given the likely availability of a number of liquidity options
discussed herein, including borrowing capacity under our
unsecured committed lines of credit (CLOCs), we believe, that in
the absence of any unexpected developments, our existing sources
of capital at January 31, 2009 are sufficient to meet our
operating needs.
Cash From
Operations. Cash used in operating activities for the
first nine months of fiscal year 2009 totaled $2.4 billion,
compared with $3.3 billion for the same period last year.
The decline was due primarily to lower losses and reduced
working capital requirements of our discontinued businesses.
Debt.
We borrow under our CLOCs to support working capital
requirements primarily arising from off-season operating losses
in our Tax Services and Business Services segments, pay
dividends, acquire businesses and repurchase treasury shares. We
had $970.8 million outstanding under our CLOCs at
January 31, 2009 compared to $1.8 billion at
January 31, 2008. See additional discussion in
Borrowings.
We entered into a committed line of credit agreement with HSBC
Finance Corporation (HSBC) effective January 14, 2009 for
use as a funding source for the purchase of RAL participations.
This line provides funding totaling $2.5 billion through
March 30, 2009 and $120.0 million thereafter through
June 30, 2009. This line is
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subject to various covenants that are similar to our primary
CLOCs, and is secured by our RAL participations. At
January 31, 2009, there was $690.5 million outstanding
on this facility.
Issuance of
Common Stock. On October 27, 2008, we sold
8.3 million shares of our common stock, without par value,
at a price of $17.50 per share in a registered direct offering
through subscription agreements with selected institutional
investors. We received net proceeds of $141.5 million,
after deducting placement agent fees and other offering
expenses. The purpose of the equity offering was to ensure we
maintained adequate equity levels, as a condition of our CLOCs,
during our off-season. Proceeds were used for general corporate
purposes.
Proceeds from the issuance of common stock in accordance with
our stock-based compensation plans totaled $80.1 million
and $17.4 million for the nine months ended
January 31, 2009 and 2008, respectively.
Dividends.
Dividends paid totaled $147.6 million and
$137.0 million for the nine months ended January 31,
2009 and 2008, respectively.
Share
Repurchases. In June 2008, our Board of Directors
rescinded previous authorizations to repurchase shares of our
common stock, and approved an authorization to purchase up to
$2.0 billion of our common stock over the next four years.
We did not repurchase shares during the nine months ended
January 31, 2009.
Restricted
Cash. We hold certain cash balances that are
restricted as to use. Cash and cash equivalents
restricted totaled $75.9 million at January 31, 2009
compared to $7.0 million at April 30, 2008. At
January 31, 2009, our corporate operations held
$69.4 million of this total, primarily as a requirement of
our $2.5 billion line with HSBC Finance Corporation.
Segment Cash
Flows. A condensed consolidating statement of cash
flows by segment for the nine months ended January 31, 2009
is as follows:
(in 000s) | ||||||||||||||||||||||||
Consumer |
||||||||||||||||||||||||
Tax |
Business |
Financial |
Discontinued |
Consolidated |
||||||||||||||||||||
Services | Services | Services | Corporate | Operations | H&R Block | |||||||||||||||||||
Cash provided by (used in):
|
||||||||||||||||||||||||
Operations
|
$ | (1,824,397 | ) | $ | (21,612 | ) | $ | (647,605 | ) | $ | (2,897 | ) | $ | 72,949 | $ | (2,423,562 | ) | |||||||
Investing
|
(313,389 | ) | (21,009 | ) | 77,116 | (11,510 | ) | 255,066 | (13,726 | ) | ||||||||||||||
Financing
|
(9,807 | ) | 809 | 1,300,875 | 1,744,934 | 4,783 | 3,041,594 | |||||||||||||||||
Net intercompany
|
2,137,931 | 31,080 | 261,992 | (2,098,205 | ) | (332,798 | ) | | ||||||||||||||||
Tax
Services. Tax Services has historically been our
largest provider of annual operating cash flows. The seasonal
nature of Tax Services generally results in a large positive
operating cash flow in our fourth quarter. Tax Services used
$1.8 billion in its current nine-month operations for
off-season working capital requirements, including the purchase
of participation interests in RALs. This segment also used
$313.4 million in investing activities primarily related to
the acquisition of our last major franchise operator.
Business
Services. Business Services funding requirements are
largely related to receivables for completed work and work
in process. We provide funding sufficient to cover this
segments working capital needs. This segment used
$21.6 million in operating cash flows during the first nine
months of the year for off-season working capital requirements.
Business Services used $21.0 million in investing
activities primarily related to capital expenditures.
Consumer
Financial Services. In the first nine months of
fiscal year 2009, Consumer Financial Services used
$647.6 million in operating cash flows primarily relating
to advances under Emerald Advance lines of credit. This segment
also provided $77.1 million in investing activities
primarily from principal payments received on mortgage loans
held for investment and provided $1.3 billion in financing
activities due to Emerald Card deposits relating to tax client
refunds.
HRB Bank is a member of the Federal Home Loan Bank (FHLB) of Des
Moines, which extends credit to member banks based on eligible
collateral. At January 31, 2009, HRB Bank had total FHLB
advance capacity of $434.1 million. There was
$104.0 million outstanding on this facility, leaving
remaining availability of $330.1 million. Mortgage loans
held for investment of $698.6 million serve as eligible
collateral and are used to determine total capacity.
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BORROWINGS
The following chart provides the debt ratings for Block
Financial LLC (BFC) as of January 31, 2009 and
April 30, 2008:
January 31, 2009 | April 30, 2008 | |||||||||||||||||||||||
Short-term | Long-term | Outlook | Short-term | Long-term | Outlook | |||||||||||||||||||
Moodys
|
P-2 | Baa1 | Stable | P-2 | Baa1 | Negative | ||||||||||||||||||
S&P
|
A-2 | BBB | Positive | A-3 | BBB- | Negative | ||||||||||||||||||
Fitch
|
F2 | BBB | Stable | F3 | BBB | Negative | ||||||||||||||||||
DBRS
|
R-2 (high | ) | BBB (high | ) | Positive | R-2 (high | ) | BBB (high | ) | Negative | ||||||||||||||
At January 31, 2009, we maintained $2.0 billion in
revolving credit facilities to support commercial paper issuance
and for general corporate purposes. These CLOCs, and outstanding
borrowings thereunder, have a maturity date of August 2010 and
an annual facility fee in a range of six to fifteen basis points
per annum, based on our credit ratings. We had
$970.8 million outstanding as of January 31, 2009 to
support working capital requirements primarily arising from
off-season operating losses, to pay dividends and acquire
businesses. These borrowings are included in long-term debt on
our condensed consolidated balance sheet due to their
contractual maturity date. The CLOCs, among other things,
require we maintain at least $650.0 million of net worth on
the last day of any fiscal quarter. We had net worth of
$840.0 million at January 31, 2009.
Lehman Brothers Bank, FSB (Lehman) is a participating lender in
our $2.0 billion CLOCs, with a $50.0 million credit
commitment. In September 2008, Lehmans parent company
declared bankruptcy. Since then, Lehman has not honored any
funding requests under these facilities, thereby effectively
reducing our available liquidity under our CLOCs to
$1.95 billion. We do not expect this change to have a
material impact on our liquidity.
We entered into a committed line of credit agreement with HSBC
effective January 14, 2009 for use as a funding source for
the purchase of RAL participations. This line provides funding
totaling $2.5 billion through March 30, 2009 and
$120.0 million thereafter through June 30, 2009. This
line is subject to various covenants that are similar to our
primary CLOCs, and is secured by our RAL participations. At
January 31, 2009, there was $690.5 million outstanding
on this facility. Our contract with HSBC provides for them to
fund RALs through 2011, with an option to renew, at our
discretion, through 2013. We have also had a contract each of
the last two years under which HSBC has funded our participation
interest in RALs.
Other than the changes outlined above, there have been no
material changes in our borrowings from those reported at
April 30, 2008 in our Annual Report on
Form 10-K.
CONTRACTUAL
OBLIGATIONS AND COMMERCIAL COMMITMENTS
There have been no material changes in our contractual
obligations and commercial commitments from those reported at
April 30, 2008 in our Annual Report on
Form 10-K.
REGULATORY
ENVIRONMENT
Effective October 27, 2008, the Financial Industry
Regulatory Authority approved our request to sell HRBFA to
Ameriprise, and that disposition was completed effective
November 1, 2008.
There have been no other material changes in our regulatory
environment from those reported at April 30, 2008 in our
Annual Report on
Form 10-K.
FORWARD-LOOKING
INFORMATION
This report and other documents filed with the Securities and
Exchange Commission (SEC) may contain forward-looking
statements. In addition, our senior management may make
forward-looking statements orally to analysts, investors, the
media and others. Forward-looking statements can be identified
by the fact that they do not relate strictly to historical or
current facts. They often include words such as
expects, anticipates,
intends, plans, believes,
seeks, estimates, will,
would, should, could or
may. Forward-looking statements provide
managements current expectations or predictions of future
conditions, events or results. They may include projections of
revenues, income, earnings per share, capital expenditures,
dividends, liquidity, capital structure or other financial
items, descriptions of managements plans or objectives for
future operations, products or services, or descriptions of
assumptions underlying any of the above. They are not guarantees
of future performance. By their nature, forward-looking
statements are subject to risks and
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Table of Contents
uncertainties. These statements speak only as of the date made
and management does not undertake to update them to reflect
changes or events occurring after that date except as required
by federal securities laws.
RECONCILIATION OF
NON-GAAP FINANCIAL INFORMATION
We report our financial results in accordance with generally
accepted accounting principles (GAAP). However, we believe
certain non-GAAP performance measures and ratios used in
managing the business may provide additional meaningful
comparisons between current year results and prior periods.
Reconciliations to GAAP financial measures are provided below.
These non-GAAP financial measures should be viewed in addition
to, not as an alternative for, our reported GAAP results.
Banking Ratios | (dollars in 000s) |
Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Net Interest Margin annualized:
|
||||||||||||
Net interest revenue
|
$ | 27,279 | $ | 16,266 | $ | 44,334 | $ | 31,416 | ||||
Net interest revenue annualized
|
$ | 109,116 | $ | 65,064 | $ | 59,112 | $ | 41,888 | ||||
Divided by average earning assets
|
$ | 1,724,636 | $ | 1,398,583 | $ | 1,297,427 | $ | 1,357,562 | ||||
6.32% | 4.65% | 4.56% | 3.09% | |||||||||
Return on Average Assets annualized:
|
||||||||||||
Pretax income (loss)
|
$ | (3,268) | $ | 12,318 | $ | (36,014) | $ | 12,751 | ||||
Pretax income (loss) annualized
|
$ | (13,072) | $ | 49,272 | $ | (48,019) | $ | 17,001 | ||||
Divided by average assets
|
$ | 1,810,957 | $ | 1,420,599 | $ | 1,314,452 | $ | 1,379,865 | ||||
(0.72%) | 3.47% | (3.65%) | 1.23% |
There have been no material changes in our market risks from
those reported at April 30, 2008 in our Annual Report on
Form 10-K.
EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this
Form 10-Q,
we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures. The controls evaluation
was done under the supervision and with the participation of
management, including our Chief Executive Officer and Chief
Financial Officer. Based on this evaluation, we have concluded
that our disclosure controls and procedures were effective as of
the end of the period covered by this Quarterly Report on
Form 10-Q.
CHANGES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes that materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
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The information below should be read in conjunction with the
information included in note 14 to our condensed
consolidated financial statements.
RAL Litigation
We have been named as a defendant in numerous lawsuits
throughout the country regarding our refund anticipation loan
programs (collectively, RAL Cases). The RAL Cases
have involved a variety of legal theories asserted by
plaintiffs. These theories include allegations that, among other
things: disclosures in the RAL applications were inadequate,
misleading and untimely; the RAL interest rates were usurious
and unconscionable; we did not disclose that we would receive
part of the finance charges paid by the customer for such loans;
untrue, misleading or deceptive statements in marketing RALs;
breach of state laws on credit service organizations; breach of
contract, unjust enrichment, unfair and deceptive acts or
practices; violations of the federal Racketeer Influenced and
Corrupt Organizations Act; violations of the federal Fair Debt
Collection Practices Act and unfair competition regarding debt
collection activities; and that we owe, and breached, a
fiduciary duty to our customers in connection with the RAL
program.
The amounts claimed in the RAL Cases have been very substantial
in some instances, with one settlement resulting in a pretax
expense of $43.5 million in fiscal year 2003 (the
Texas RAL Settlement) and other settlements
resulting in a combined pretax expense in fiscal year 2006 of
$70.2 million. On December 31, 2008, we reached a
settlement with the California attorney general in the case
entitled The People of California v. H&R Block,
Inc., H&R Block Services, Inc., H&R Block Enterprises,
Inc., H&R Block Tax Services, Inc., Block Financial
Corporation, HRB Royalty, Inc., and Does 1 through 50, Case
No., CGC-06-449461, in the California Superior Court,
San Francisco County (the California AG Case).
Pursuant to the terms of the settlement, we agreed to pay
$2.5 million in restitution to certain clients who obtained
a refund anticipation loan or a refund anticipation check,
$0.5 million in civil penalties and $1.9 million in
fees and costs.
Following settlement of the California AG Case, we have one
remaining putative RAL class action. We believe we have
meritorious defenses to this RAL Case and we intend to defend it
vigorously. There can be no assurances, however, as to the
outcome of the pending RAL Case or regarding the impact of the
pending RAL Case on our financial statements. There were no
other significant developments regarding the RAL Cases during
the three months ended January 31, 2009.
Peace of Mind
Litigation
We are defendants in lawsuits regarding our Peace of Mind
program (collectively, the POM Cases), under which
our applicable tax return preparation subsidiary assumes
liability for additional tax assessments attributable to tax
return preparation error. The POM Cases are described below.
Lorie J. Marshall, et al. v. H&R Block Tax
Services, Inc., et al., Case
No. 08-CV-591
in the U.S. District Court for the Southern District of
Illinois, is a class action case originally filed in the Circuit
Court of Madison County, Illinois on January 18, 2002, in
which class certification was granted on August 27, 2003.
The plaintiffs allege that the sale of POM guarantees
constitutes (1) statutory fraud by selling insurance
without a license, (2) an unfair trade practice, by
omission and by cramming (i.e., charging customers
for the guarantee even though they did not request it or want
it), and (3) a breach of fiduciary duty. The court has
certified plaintiff classes consisting of all persons who reside
in 13 specified states and who from January 1, 1997 to
final judgment (1) were charged a separate fee for POM by
H&R Block (2) were charged a separate fee
for POM by an H&R Block entity not licensed to
sell insurance; or (3) had an unsolicited charge for POM
posted to their bills by H&R Block. Persons who
received the POM guarantee through an H&R Block Premium
office were excluded from the plaintiff class. In August 2008,
we removed the case from state court in Madison County, Illinois
to the U.S. District Court for the Southern District of
Illinois. On December 17, 2008, the case was remanded back
to state court. We have filed a petition to appeal this ruling.
There is one other putative class action pending against us in
Texas that involves the POM guarantee. This case is pending
before the same judge that presided over the Texas RAL
Settlement, involves the same plaintiffs attorneys that
are involved in the Marshall litigation in Illinois, and
contains allegations similar to those in the Marshall case. No
class has been certified in this case.
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We believe we have meritorious defenses to the claims in the POM
Cases, and we intend to defend them vigorously. The amounts
claimed in the POM Cases are substantial, and there can be no
assurances as to the outcome of these pending actions
individually or in the aggregate.
Express IRA
Litigation
On March 15, 2006, the New York Attorney General filed a
lawsuit in the Supreme Court of the State of New York, County of
New York (Index No. 06/401110) entitled The People of
New York v. H&R Block, Inc. and H&R Block
Financial Advisors, Inc. et al. The complaint alleged
fraudulent business practices, deceptive acts and practices,
common law fraud and breach of fiduciary duty with respect to
the Express IRA product and sought equitable relief,
disgorgement of profits, damages and restitution, civil
penalties and punitive damages. On July 12, 2007, the
Supreme Court of the State of New York issued a ruling that
dismissed all defendants other than HRBFA and the claims of
common law fraud. The intermediate appellate court reversed this
ruling on January 6, 2009. We filed a petition for appeal
with the highest state appellate court on January 30, 2009.
We believe we have meritorious defenses to the claims in this
case, and we intend to defend this case vigorously, but there
are no assurances as to its outcome.
On January 2, 2008, the Mississippi Attorney General filed
a lawsuit in the Chancery Court of Hinds County, Mississippi
First Judicial District (Case No. G 2008 6 S
2) entitled Jim Hood, Attorney for the State of
Mississippi v. H&R Block, Inc., et al. The
complaint alleged fraudulent business practices, deceptive acts
and practices, common law fraud and breach of fiduciary duty
with respect to the Express IRA product and sought equitable
relief, disgorgement of profits, damages and restitution, civil
penalties and punitive damages. The defendants have filed a
motion to dismiss. We believe we have meritorious defenses to
the claims in this case, and we intend to defend this case
vigorously, but there are no assurances as to its outcome.
In addition to the New York and Mississippi Attorney General
actions, a number of civil actions were filed against HRBFA and
us concerning the Express IRA product, the first of which was
filed on March 17, 2006. Except for two cases pending in
state court, all of the civil actions have been consolidated by
the panel for Multi-District Litigation into a single action
styled In re H&R Block, Inc. Express IRA Marketing
Litigation in the United States District Court for the
Western District of Missouri.
Although we sold HRBFA effective November 1, 2008, we
remain responsible for the Express IRA litigation through an
indemnification agreement with Ameriprise. The amounts claimed
in these cases are substantial. We believe we have meritorious
defenses to the claims in these cases, and we intend to defend
these cases vigorously, but there are no assurances as to their
outcome.
Securities Litigation
On April 6, 2007, a putative class action styled In re
H&R Block Securities Litigation was filed against the
Company and certain of its officers in the United States
District Court for the Western District of Missouri. The
complaint alleges, among other things, deceptive, material and
misleading financial statements and failure to prepare financial
statements in accordance with generally accepted accounting
principles. The complaint sought unspecified damages and
equitable relief. The court dismissed the complaint on
February 19, 2008, and plaintiffs appealed the dismissal on
March 18, 2008. In addition, plaintiffs in a shareholder
derivative action that was consolidated into the securities
litigation filed a separate appeal on March 18, 2008,
contending that the derivative action was improperly
consolidated. The derivative action is Iron Workers Local 16
Pension Fund v. H&R Block, et al., in the United
States District Court for the Western District of Missouri, Case
No. 06-cv-00466-ODS
(instituted on June 8, 2006) and was brought against
certain of our directors and officers purportedly on behalf of
the Company. The derivative action alleges breach of fiduciary
duty, abuse of control, gross mismanagement, waste, and unjust
enrichment pertaining to (1) our restatement of financial
results in fiscal year 2006 due to errors in determining our
state effective income tax rate and (2) certain of our
products and business activities. We believe we have meritorious
defenses to the claims in these cases and intend to defend this
litigation vigorously. We currently do not believe that we will
incur a material loss with respect to this litigation.
RSM McGladrey
Litigation
RSM McGladrey Business Services, Inc. and certain of its
subsidiaries are parties to a putative class action filed on
July 11, 2006 and entitled Do Rights Plant
Growers, et al. v. RSM EquiCo, Inc., et al. Case
No. 06 CC00137, in the California Superior Court, Orange
County. The complaint contains allegations regarding
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business valuation services provided by RSM EquiCo, Inc.,
including fraud, negligent misrepresentation, breach of
contract, breach of implied covenant of good faith and fair
dealing, breach of fiduciary duty and unfair competition and
seeks unspecified damages, restitution and equitable relief. A
hearing on plaintiffs motion for class certification is
scheduled for March 6, 2009. We intend to defend this case
vigorously. The amount claimed in this action is substantial and
there can be no assurance regarding the outcome and resolution
of this matter. It is reasonably possible that we could incur
losses with respect to this litigation, although an estimate of
such losses cannot be made in light of the early stage of the
litigation.
RSM McGladrey, Inc. (RSM) has a relationship with certain public
accounting firms (collectively, the Attest Firms)
pursuant to which (1) some RSM employees are also partners
or employees of the Attest Firms, (2) many clients of the
Attest Firms are also RSM clients, and (3) our RSM
McGladrey brand is closely linked to the Attest Firms. The
Attest Firms are parties to claims and lawsuits (collectively,
Attest Firm Claims) arising in the normal course of
business. Judgments or settlements arising from Attest Firm
Claims exceeding the Attest Firms insurance coverage could
have a direct adverse effect on Attest Firm operations and could
impair RSMs ability to attract and retain clients and
quality professionals. For example, accounting and auditing
firms (including one of the Attest Firms) recently have become
subject to claims based on losses their clients suffered from
investments in investment funds managed by third parties.
Although RSM may not have a direct liability for significant
Attest Firm Claims, such Attest Firm Claims could have a
material adverse effect on RSMs operations and impair the
value of our investment in RSM. There is no assurance regarding
the outcome of the Attest Firm Claims.
Litigation and
Claims Pertaining to Discontinued Mortgage Operations
Although mortgage loan origination activities were terminated
and the loan servicing business was sold during fiscal year
2008, SCC remains subject to investigations, claims and lawsuits
pertaining to its loan origination and servicing activities that
occurred prior to such termination and sale. These
investigations, claims and lawsuits include actions by state
attorneys general, other state regulators, municipalities,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others alleged to be similarly situated.
Among other things, these investigations, claims and lawsuits
allege discriminatory or unfair and deceptive loan origination
and servicing practices, public nuisance, fraud, and violations
of the Truth in Lending Act, Equal Credit Opportunity Act and
the Fair Housing Act. In the current non-prime mortgage
environment, the number of these investigations, claims and
lawsuits has increased over historical experience and is likely
to continue at increased levels. The amounts claimed in these
investigations, claims and lawsuits are substantial in some
instances, and the ultimate resulting liability is difficult to
predict. In the event of unfavorable outcomes, the amounts SCC
may be required to pay in the discharge of liabilities or
settlements could be substantial and, because SCCs
operating results are included in our consolidated financial
statements, could have a material adverse impact on our
consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a
lawsuit in the Superior Court of Suffolk County, Massachusetts
(Case
No. 08-2474-BLS)
entitled Commonwealth of Massachusetts v. H&R
Block, Inc., et al., alleging unfair, deceptive and
discriminatory origination and servicing of mortgage loans and
seeking equitable relief, disgorgement of profits, restitution
and statutory penalties. On November 10, 2008, the court
granted a preliminary injunction limiting the ability of the
owner of SCCs former loan servicing business to initiate
or advance foreclosure actions against certain loans originated
by SCC or its subsidiaries without (i) advance notice to
the Massachusetts Attorney General and (ii) if the Attorney
General objects to foreclosure, approval by the court. The
preliminary injunction generally applies to loans meeting all of
the following four characteristics: (1) adjustable rate
mortgages with an introductory period of three years or less,
(2) the borrower has a debt-to-income ratio generally
exceeding 50 percent, (3) an introductory interest
rate at least 2 percent lower than the fully indexed rate
(unless the debt-to-income ratio is 55% or greater) and
(4) loan-to-value ratio of 97 percent or certain
prepayment penalties. We have appealed this preliminary
injunction. We believe we have meritorious defenses to the
claims in this case, and we intend to defend this case
vigorously, but there are no assurances as to its outcome.
SCC also remains subject to potential claims for indemnification
and loan repurchases pertaining to loans previously sold. In the
current non-prime mortgage environment, it is likely that the
frequency of repurchase and indemnification claims may increase
over historical experience and give rise to additional
litigation. In some instances, H&R Block, Inc. was required
to guarantee SCCs obligations. The amounts involved in
these
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potential claims may be substantial, and the ultimate resulting
liability is difficult to predict. In the event of unfavorable
outcomes, the amounts SCC may be required to pay in the
discharge or settlement of these claims could be substantial
and, because SCCs operating results are included in our
consolidated financial statements, could have a material adverse
impact on our consolidated results of operations.
Other Claims and
Litigation
We are from time to time party to investigations, claims and
lawsuits not discussed herein arising out of our business
operations. These investigations, claims and lawsuits include
actions by state attorneys general, other state regulators,
individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others similarly situated. Some of these
investigations, claims and lawsuits pertain to RALs, the
electronic filing of customers income tax returns, the POM
guarantee program, wage and hour claims and investment products.
We believe we have meritorious defenses to each of these claims,
and we are defending or intend to defend them vigorously. The
amounts claimed in these claims and lawsuits are substantial in
some instances, and the ultimate liability with respect to such
litigation and claims 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 be material.
In addition to the aforementioned types of cases, we are party
to claims and lawsuits that we consider to be ordinary, routine
litigation incidental to our business, including claims and
lawsuits (collectively, Other Claims) concerning the
preparation of customers income tax returns, the fees
charged customers for various products and services,
relationships with franchisees, intellectual property disputes,
employment matters and contract disputes. While we cannot
provide assurance that we will ultimately prevail in each
instance, we believe the amount, if any, we are required to pay
in the discharge of liabilities or settlements in these Other
Claims will not have a material adverse effect on our
consolidated operating results, financial position or cash flows.
Our businesses
may be adversely affected by conditions in the global financial
markets and economic conditions generally.
Our business may be materially affected by conditions in the
global financial markets and economic conditions generally, and
these conditions may change suddenly and dramatically. For
example, the capital and credit markets have been experiencing
extreme volatility and disruption, which have reached
unprecedented levels this year. Difficulties in the mortgage and
broader credit markets in the United States and elsewhere
resulted in a relatively sudden and substantial decrease in the
availability of credit and a corresponding increase in funding
costs. We cannot predict how long these conditions will exist or
how our business or financial statements may be affected.
Increases in interest rates or credit spreads, as well as
limitations on the availability of credit, such as has occurred
recently, may affect our ability to borrow in excess of our
current commitments on a secured or unsecured basis, which may
adversely affect our liquidity and results of operations. This
could increase our cost of funding, which could reduce our
profitability.
In addition, the downturn in the residential housing market,
rising unemployment and an increase in mortgage defaults has,
and may continue, to negatively impact our operating results. An
economic recession will likely reduce the ability of our
borrowers to repay mortgage loans, and declining home values
would increase the severity of loss we may incur in the event of
default.
In response to the current financial markets, legislation has
been proposed to allow mortgage loan cram-downs,
which would empower courts to modify the terms of mortgage loans
including a reduction in the principal amount to reflect lower
underlying property values. This could result in our writing
down the balance of those mortgage loans in bankruptcy to
reflect their current collateral values. The availability of
principal reductions or other mortgage loan modifications could
make bankruptcy a more attractive option for troubled borrowers,
leading to increased bankruptcy filings and accelerated defaults.
In addition to mortgage loans, we also extend secured and
unsecured credit to other customers, including refund
anticipation loans and Emerald Advance lines of credit to our
tax preparation customers. We may incur significant losses on
credit we extend, which in turn could reduce our profitability.
Other than the item discussed above, there have been no material
changes in our risk factors from those reported at
April 30, 2008 in our Annual Report on
Form 10-K.
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A summary of our purchases of H&R Block common stock during
the third quarter of fiscal year 2009 is as follows:
(in 000s, except per share amounts) | ||||||||||||
Total Number of
Shares |
Maximum $Value |
|||||||||||
Total |
Average |
Purchased as Part
of |
of Shares that
May |
|||||||||
Number of Shares |
Price Paid |
Publicly
Announced |
Be Purchased
Under |
|||||||||
Purchased (1) | per Share | Plans or Programs (2) | the Plans or Programs (2) | |||||||||
November 1 November 30
|
147 | $ | 19.35 | - | $ | 2,000,000 | ||||||
December 1 December 31
|
- | $ | - | - | $ | 2,000,000 | ||||||
January 1 January 31
|
4 | $ | 22.41 | - | $ | 2,000,000 | ||||||
(1) | We purchased 150,358 shares in connection with the funding of employee income tax withholding obligations arising upon the exercise of stock options or the lapse of restrictions on nonvested shares. | |
(2) | In June 2008, our Board of Directors rescinded previous authorizations to repurchase shares of our common stock, and approved an authorization to purchase up to $2.0 billion of our common stock over the next four years. |
10 | .1 | Third Amendment to Program Contracts dated as of December 5, 2008 by and among HSBC Bank USA, HSBC Trust Company (Delaware), N.A., HSBC Taxpayer Financial Services Inc., Beneficial Franchise Company Inc., HRB Tax Group, Inc., H&R Block Tax Services LLC, H&R Block Enterprises LLC, H&R Block Eastern Enterprises, Inc., HRB Digital LLC, Block Financial LLC, HRB Innovations, Inc., HSBC Finance Corporation, and H&R Block, Inc.* | ||
10 | .2 | Credit and Guarantee Agreement dated as of January 14, 2009, among Block Financial LLC, H&R Block, Inc. and HSBC Finance Corporation. | ||
10 | .3 | Separation and Release Agreement dated January 21, 2009 between RSM McGladrey Business Services and Steven Tait.** | ||
10 | .4 | H&R Block, Inc. Deferred Compensation Plan for Executives (amended and restated effective December 31, 2008).** | ||
31 | .1 | Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31 | .2 | Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32 | .1 | Certification by Chief Executive Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32 | .2 | Certification by Chief Financial Officer furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. | ||
* | Confidential information has been omitted from this exhibit and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2. | |
** | Indicates management contracts, compensatory plans or arrangements. |
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Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
H&R BLOCK, INC.
/s/ Russell
P. Smyth
|
Russell P. Smyth
President and Chief Executive Officer
March 6, 2009
/s/ Becky
S. Shulman
Becky S. Shulman
Senior Vice President, Treasurer and
Chief Financial Officer
March 6, 2009
/s/ Jeffrey
T. Brown
Jeffrey T. Brown
Vice President and
Corporate Controller
March 6, 2009
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