HRB 2013.7.31 10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended July 31, 2013
 
 
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from             to             
Commission file number 1-6089
H&R Block, Inc.
(Exact name of registrant as specified in its charter)
MISSOURI
 
44-0607856
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
One H&R Block Way, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 854-3000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ 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 þ          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  þ
The number of shares outstanding of the registrant’s Common Stock, without par value, at the close of business on August 31, 2013: 273,863,581 shares.
 


Table of Contents

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

Table of Contents

 
 
Consolidated Balance Sheets
 
 
As of July 31, 2013, July 31, 2012 and April 30, 2013
 
 
 
 
Consolidated Statements of Operations and Comprehensive Loss
 
 
Three months ended July 31, 2013 and 2012
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
Three months ended July 31, 2013 and 2012
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legal Proceedings
 
 
 
Risk Factors
 
 
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
 
Exhibits
 
 
 
 


Table of Contents

PART I    FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
 
(in 000s, except share and 
per share amounts)
 
As of
 
July 31, 2013

 
July 31, 2012

 
April 30, 2013

 
 
(unaudited)

 
(unaudited)

 
 
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,163,876

 
$
939,871

 
$
1,747,584

Cash and cash equivalents — restricted
 
55,477

 
43,109

 
117,837

Receivables, less allowance for doubtful accounts of $52,606, $43,477 and $50,399
 
121,309

 
116,357

 
206,835

Prepaid expenses and other current assets
 
356,662

 
318,262

 
390,087

Mortgage loans held for sale
 
7,608

 

 

Total current assets
 
1,704,932

 
1,417,599

 
2,462,343

Mortgage loans held for investment, less allowance for loan losses of $15,514, $22,185 and $14,314
 
309,681

 
386,759

 
338,789

Investments in available-for-sale securities
 
487,033

 
380,765

 
486,876

Property and equipment, at cost less accumulated depreciation and amortization of $432,681, $542,144 and $420,318
 
286,584

 
242,585

 
267,880

Intangible assets, net
 
280,455

 
271,533

 
284,439

Goodwill
 
435,667

 
431,101

 
434,782

Other assets
 
258,536

 
463,935

 
262,670

Total assets
 
$
3,762,888

 
$
3,594,277

 
$
4,537,779

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
Customer banking deposits
 
$
757,929

 
$
648,378

 
$
936,464

Accounts payable, accrued expenses and other current liabilities
 
443,065

 
414,604

 
523,921

Accrued salaries, wages and payroll taxes
 
32,926

 
35,234

 
134,970

Accrued income taxes
 
215,834

 
278,539

 
416,128

Current portion of long-term debt
 
730

 
600,642

 
722

Total current liabilities
 
1,450,484

 
1,977,397

 
2,012,205

Long-term debt
 
905,902

 
408,992

 
905,958

Other noncurrent liabilities
 
301,187

 
362,215

 
356,069

Total liabilities
 
2,657,573

 
2,748,604

 
3,274,232

COMMITMENTS AND CONTINGENCIES
 


 


 


STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, shares issued of 316,628,110
 
3,166

 
3,166

 
3,166

Convertible preferred stock, no par, stated value $0.01 per share, 500,000 shares authorized
 

 

 

Additional paid-in capital
 
753,209

 
744,616

 
752,483

Accumulated other comprehensive income (loss)
 
(257
)
 
7,350

 
10,550

Retained earnings
 
1,163,651

 
955,873

 
1,333,445

Less treasury shares, at cost
 
(814,454
)
 
(865,332
)
 
(836,097
)
Total stockholders’ equity
 
1,105,315

 
845,673

 
1,263,547

Total liabilities and stockholders’ equity
 
$
3,762,888

 
$
3,594,277

 
$
4,537,779

 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
 
(unaudited, in 000s, except 
per share amounts)
 
Three months ended July 31,
 
2013

 
2012

 
 
 
 
 
REVENUES:
 
 
 
 
Service revenues
 
$
107,800

 
$
79,896

Product and other revenues
 
8,198

 
6,720

Interest income
 
11,197

 
9,873

 
 
127,195

 
96,489

OPERATING EXPENSES:
 
 
 
 
Cost of revenues:
 
 
 
 
Compensation and benefits
 
46,312

 
39,585

Occupancy and equipment
 
78,736

 
79,951

Provision for bad debt and loan losses
 
11,491

 
4,645

Interest
 
14,446

 
22,077

Depreciation and amortization of property and equipment
 
16,804

 
14,534

Other
 
42,264

 
32,632

 
 
210,053

 
193,424

Selling, general and administrative
 
96,697

 
75,478

 
 
306,750

 
268,902

Operating loss
 
(179,555
)
 
(172,413
)
Other income (expense), net
 
(4,939
)
 
3,144

Loss from continuing operations before income tax benefit
 
(184,494
)
 
(169,269
)
Income tax benefit
 
(71,224
)
 
(63,619
)
Net loss from continuing operations
 
(113,270
)
 
(105,650
)
Net loss from discontinued operations
 
(1,917
)
 
(1,791
)
NET LOSS
 
$
(115,187
)
 
$
(107,441
)
 
 
 
 
 
BASIC AND DILUTED LOSS PER SHARE:
 
 
 
 
Continuing operations
 
$
(0.42
)
 
$
(0.38
)
Discontinued operations
 

 
(0.01
)
Consolidated
 
$
(0.42
)
 
$
(0.39
)
 
 
 
 
 
DIVIDENDS PER SHARE
 
$
0.20

 
$
0.20

 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
Net loss
 
$
(115,187
)
 
$
(107,441
)
Unrealized gains (losses) on available-for-sale securities, net of taxes:
 
 
 
 
Unrealized holding gains (losses) arising during the period,
net of taxes (benefit) of ($5,065) and $152
 
(7,715
)
 
170

Reclassification adjustment for gains included in income,
net of taxes
 

 

Change in foreign currency translation adjustments
 
(3,092
)
 
(4,965
)
Other comprehensive loss
 
(10,807
)
 
(4,795
)
Comprehensive loss
 
$
(125,994
)
 
$
(112,236
)
 
 
 
 
 
See accompanying notes to consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited, in 000s)
 
Three months ended July 31,
 
2013

 
2012

 
 
 
 
 
NET CASH USED IN OPERATING ACTIVITIES
 
$
(318,742
)
 
$
(373,140
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchases of available-for-sale securities
 
(45,158
)
 
(28,990
)
Maturities of and payments received on available-for-sale securities
 
32,061

 
21,129

Principal payments on mortgage loans held for investment, net
 
11,707

 
12,652

Purchases of property and equipment
 
(34,386
)
 
(13,273
)
Franchise loans:
 
 
 
 
Loans funded
 
(6,657
)
 
(5,062
)
Payments received
 
7,164

 
5,154

Other, net
 
6,179

 
1,675

Net cash used in investing activities
 
(29,090
)
 
(6,715
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Repayments of long-term debt
 

 
(30,831
)
Customer banking deposits, net
 
(179,364
)
 
(179,519
)
Dividends paid
 
(54,550
)
 
(54,201
)
Repurchase of common stock, including shares surrendered
 
(4,201
)
 
(339,088
)
Proceeds from exercise of stock options
 
21,953

 
468

Other, net
 
(13,093
)
 
(19,939
)
Net cash used in financing activities
 
(229,255
)
 
(623,110
)
 
 
 
 
 
Effects of exchange rates on cash
 
(6,621
)
 
(1,498
)
 
 
 
 
 
Net decrease in cash and cash equivalents
 
(583,708
)
 
(1,004,463
)
Cash and cash equivalents at beginning of the period
 
1,747,584

 
1,944,334

Cash and cash equivalents at end of the period
 
$
1,163,876

 
$
939,871

 
 
 
 
 
SUPPLEMENTARY CASH FLOW DATA:
 
 
 
 
Income taxes paid, net of refunds received
 
$
106,467

 
$
19,747

Interest paid on borrowings
 
15,883

 
13,494

Interest paid on deposits
 
640

 
1,336

Transfers of foreclosed loans to other assets
 
2,100

 
3,074

Accrued additions to property and equipment
 
8,048

 
7,107

Transfer of mortgage loans held for investment to held for sale
 
7,608

 

 
 
 
 
 
See accompanying notes to consolidated financial statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                  (unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated balance sheets as of July 31, 2013 and 2012, the consolidated statements of operations and comprehensive income (loss) for the three months ended July 31, 2013 and 2012, and the condensed consolidated statements of cash flows for the three months ended July 31, 2013 and 2012 have been prepared by the Company, without audit. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows at July 31, 2013 and 2012 and for all periods presented have been made. See note 14 for discussion of our presentation of discontinued operations.
“H&R Block,” “the Company,” “we,” “our” and “us” are used interchangeably to refer to H&R Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our April 30, 2013 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of April 30, 2013 or for the year then ended, are derived from our April 30, 2013 Annual Report to Shareholders on Form 10-K.
Management Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions and judgments are applied in the determination of contingent losses arising from our discontinued mortgage business, contingent losses associated with pending claims and litigation, allowance for loan losses, valuation allowances based on future taxable income, reserves for uncertain tax positions and related matters. Estimates have been prepared on the basis of the most current and best information available as of each balance sheet date. As such, actual results could differ materially from those estimates.
Seasonality of Business - Our operating revenues are seasonal in nature with peak revenues occurring in the months of January through April. Therefore, results for interim periods are not indicative of results to be expected for the full year.
Recently Issued or Newly Adopted Accounting Standards - In February 2013, the Financial Accounting Standards Board issued guidance which expands disclosure requirements for other comprehensive income. The guidance requires the reporting of the effect of the reclassification of items out of accumulated other comprehensive income on each affected net income line item. The guidance is effective for interim and annual periods beginning on or after December 15, 2012 and is to be applied prospectively. This guidance, which we adopted as of May 1, 2013, did not have a material impact on our financial statements, as we had no reclassifications of items out of accumulated other comprehensive income for the first quarter of fiscal 2014.
NOTE 2: H&R BLOCK BANK
On July 11, 2013, H&R Block Bank (HRB Bank) and Block Financial LLC (Block Financial) entered into a definitive Purchase and Assumption Agreement (P&A Agreement) with Republic Bank & Trust Company (Republic Bank). Pursuant to the P&A Agreement, HRB Bank will, among other matters, transfer all of its deposit liabilities, ($759.7 million if the closing were effective July 31, 2013) to Republic Bank with a cash payment of approximately the same amount, subject to several conditions, including the finalization of various operating agreements and regulatory approval (P&A Transaction). If the respective parties receive regulatory approval on or before September 30, 2013, this transaction will have a closing date of not later than November 15, 2013. If regulatory approval is received after September 30, 2013 but on or before March 31, 2014, this transaction will have a closing date between April 30, 2014 and June 18, 2014. Simultaneously with any closing, HRB Bank will convert into a national banking association, merge with and into Block Financial, surrender its bank charter, and cease to operate as a separate legal entity. At that time, H&R Block, Inc. and Block Financial would no longer be savings and loan holding companies subject to regulatory oversight of the Federal Reserve or related regulatory capital requirements. Prior to entering into this agreement, Republic Bank filed

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H&R Block Q1 FY2014 Form 10-Q

Table of Contents

an application with its regulators to convert to a national bank charter which is being processed concurrently with the review of the transaction between H&R Block and Republic Bank. We have received indications that additional time is needed for Republic Bank’s regulators to process their applications. We, therefore, expect to continue offering our financial products and services to our clients through HRB Bank for the 2014 tax season.
We plan to continue to offer financial products and services to our clients subsequent to HRB Bank ceasing operations and we are currently negotiating additional agreements with Republic Bank, including a Joint Marketing Master Services Agreement (MSA Agreement) and a related Receivables Participation Agreement (RPA Agreement), under which Republic Bank will serve as the bank offering H&R Block-branded financial services and products, and we will service and administer such financial services and products for Republic Bank.
We incurred certain fees for professional advisors and accrued employee termination benefits in connection with this pending transaction. Those costs totaled $7.5 million for the quarter ended July 31, 2013.
The obligations of the parties to complete the P&A Transaction are subject to the fulfillment of numerous conditions including regulatory approval and agreement upon, execution and delivery of the MSA Agreement and the RPA Agreement. We cannot be certain when or if these conditions will be satisfied, and therefore we cannot predict the timing or the likelihood of completing the P&A Transaction and ceasing to be regulated as an SLHC.
NOTE 3: LOSS PER SHARE AND STOCKHOLDERS' EQUITY
Basic and diluted loss per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period. The dilutive effect of potential common shares is included in diluted earnings per share except in those periods with a loss from continuing operations. Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 6.3 million shares and 9.2 million shares for the three months ended July 31, 2013 and 2012, respectively, as the effect would be antidilutive due to the net loss from continuing operations during those periods.
The computations of basic and diluted earnings per share from continuing operations are as follows:
(in 000s, except per share amounts)
 
Three months ended July 31,
 
2013

 
2012

Net loss from continuing operations attributable to shareholders
 
$
(113,270
)
 
$
(105,650
)
Net loss allocated to participating securities
 
(62
)
 
(73
)
Net loss from continuing operations attributable to common shareholders
 
$
(113,332
)
 
$
(105,723
)
 
 
 
 
 
Basic weighted average common shares
 
273,080

 
277,155

Potential dilutive shares
 

 

Dilutive weighted average common shares
 
273,080

 
277,155

 
 
 
 
 
Loss per share from continuing operations attributable to common shareholders:
 
 
 
 
Basic
 
$
(0.42
)
 
$
(0.38
)
Diluted
 
(0.42
)
 
(0.38
)
The weighted average shares outstanding for the three months ended July 31, 2013 decreased to 273.1 million from 277.2 million for the three months ended July 31, 2012, primarily due to share repurchases completed during fiscal year 2013. During the three months ended July 31, 2012, we purchased and immediately retired 21.3 million shares of our common stock at a cost of $315.0 million.
During the three months ended July 31, 2013, we acquired 0.2 million shares of our common stock at an aggregate cost of $4.2 million. These shares represent shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. During the three months ended July 31, 2012, we acquired 0.1 million shares at an aggregate cost of $1.6 million for similar purposes.

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During the three months ended July 31, 2013 and 2012, we issued 1.4 million and 0.3 million shares of common stock, respectively, due to the vesting or exercise of stock-based awards.
During the three months ended July 31, 2013, we granted 0.8 million nonvested units under our stock-based compensation plans. Nonvested units granted generally either vest over a three year period with one-third vesting each year or cliff vest at the end of a three-year period. Stock-based compensation expense of our continuing operations totaled $4.6 million and $2.4 million for the three months ended July 31, 2013 and 2012, respectively. As of July 31, 2013, unrecognized compensation cost for options totaled $2.7 million, and for nonvested shares and units totaled $39.2 million.
NOTE 4: RECEIVABLES
Short-term receivables consist of the following:
(in 000s)
 
As of
 
July 31, 2013

 
July 31, 2012

 
April 30, 2013

Loans to franchisees
 
$
64,041

 
$
60,459

 
$
65,413

Receivables for tax preparation and related fees
 
37,547

 
35,194

 
49,356

Canadian CashBack receivables
 
2,412

 
6,601

 
47,658

Emerald Advance lines of credit
 
22,649

 
24,215

 
23,218

Royalties from franchisees
 
4,070

 
2,096

 
10,722

Credit cards
 
7,309

 

 
7,733

Other
 
35,887

 
31,269

 
53,134

 
 
173,915

 
159,834

 
257,234

Allowance for doubtful accounts
 
(52,606
)
 
(43,477
)
 
(50,399
)
 
 
$
121,309

 
$
116,357

 
$
206,835

 
 
 
 
 
 
 
The short-term portion of Emerald Advance lines of credit (EAs), loans made to franchisees, CashBack balances and credit card balances is included in receivables, while the long-term portion is included in other assets in the consolidated balance sheets. These amounts are as follows:
(in 000s)
 
 
 
EAs

 
Loans
to Franchisees

 
CashBack

 
Credit Cards

As of July 31, 2013:
 
 
 
 
 
 
 
 
Short-term
 
$
22,649

 
$
64,041

 
$
2,412

 
$
7,309

Long-term
 
6,906

 
106,119

 

 
15,446

 
 
$
29,555

 
$
170,160

 
$
2,412

 
$
22,755

As of July 31, 2012:
 
 
 
 
 
 
 
 
Short-term
 
$
24,215

 
$
60,459

 
$
6,601

 
$

Long-term
 
11,689

 
112,810

 

 

 
 
$
35,904

 
$
173,269

 
$
6,601

 
$

As of April 30, 2013:
 
 
 
 
 
 
 
 
Short-term
 
$
23,218

 
$
65,413

 
$
47,658

 
$
7,733

Long-term
 
9,819

 
103,047

 

 
15,538

 
 
$
33,037

 
$
168,460

 
$
47,658

 
$
23,271

 
 
 
 
 
 
 
 
 
EAs - We review the credit quality of our EA receivables based on pools, which are segregated by the year of origination, with older years being deemed more unlikely to be repaid. These amounts as of July 31, 2013, by year of origination, are as follows:

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(in 000s)
 
Credit Quality Indicator – Year of origination:
 
 
2013
 
$
8,657

2012
 
1,177

2011
 
2,083

2010 and prior
 
6,297

Revolving loans
 
11,341

 
 
$
29,555

 
 
 
As of July 31, 2013 and 2012 and April 30, 2013, $26.8 million, $30.3 million and $30.0 million of EAs were on non-accrual status and classified as impaired, or more than 60 days past due, respectively.
Loans to Franchisees - Loans made to franchisees as of July 31, 2013 and 2012 and April 30, 2013, consisted of $124.2 million, $129.3 million and $121.2 million, respectively, in term loans made primarily to finance the purchase of franchises and $46.0 million, $44.0 million and $47.3 million, respectively, in revolving lines of credit primarily for the purpose of funding off-season working capital needs.
As of July 31, 2013 and 2012 and April 30, 2013, loans with a principal amount of $2.5 million, $0.5 million and $0.1 million, respectively, were more than 30 days past due, however we had no loans to franchisees on non-accrual status.
Canadian CashBack Program - During the tax season our Canadian operations advance refunds due to certain clients from the Canada Revenue Agency for a fee (the CashBack program). Refunds advanced under the CashBack program are not subject to credit approval, therefore the primary indicator of credit quality is the age of the receivable amount. CashBack amounts are generally received within 60 days of filing the client's return. As of July 31, 2013 and 2012 and April 30, 2013, $0.8 million, $2.6 million and $1.8 million of CashBack balances were more than 60 days old, respectively.
Credit Cards - We utilize a four-tier underwriting approach at origination. Each of the four tiers, with Tier 4 representing the most risk, is comprised of a combination of FICO scores ranging from 521 to 680, generic and custom credit bureau based risk scores and client attributes. The criteria in the tiers are not subsequently updated. The population also includes certain clients which are “un-scorable.” Although we utilize the borrower's credit score for underwriting, we do not consider the credit score to be a primary measure of credit quality, since it tends to be a lagging indicator. Credit card receivable balances as of July 31, 2013, by credit tier, are as follows:
(in 000s)
 
Tier 1
 
$
5,127

Tier 2
 
9,532

Tier 3
 
2,815

Tier 4
 
5,281

 
 
$
22,755

 
 
 
An aging of our credit card receivable balances as of July 31, 2013 is as follows :
(in 000s)
 
Current
 
$
13,740

Less than 30 days past due
 
1,778

30 - 59 days past due
 
1,262

60 - 89 days past due
 
1,312

90 days or more past due
 
4,663

 
 
$
22,755

 
 
 

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As of July 31, 2013 and April 30, 2013, a total of $1.1 million and $2.1 million in unamortized deferred fees and costs were capitalized related to our credit card balances, respectively.
Long-Term Note Receivable - We have a long-term note receivable in the amount of $54.0 million due from McGladrey & Pullen LLP (M&P) related to the sale of RSM McGladrey, Inc. (RSM) in November 2011. This note is unsecured and bears interest at a rate of 8.0%, with all principal and accrued interest due in May 2017. As of July 31, 2013, there is no allowance recorded related to this note. We continue to monitor publicly available information relevant to the financial condition of M&P to assess future collectibility. This note is included in other assets on the consolidated balance sheet, with a total of $61.6 million, $56.9 million and $60.4 million in principal and accrued interest recorded as of July 31, 2013 and 2012 and April 30, 2013, respectively.
Allowance for Doubtful Accounts - Activity in the allowance for doubtful accounts for our short-term and long-term receivables for the three months ended July 31, 2013 and 2012 is as follows:
(in 000s)
 
 
 
EAs

 
Loans
to Franchisees

 
CashBack

 
Credit Cards

 
All Other

 
Total

Balance as of May 1, 2013
 
$
7,390

 
$

 
$
2,769

 
$
7,304

 
$
40,240

 
$
57,703

Provision
 

 

 
158

 
2,367

 
534

 
3,059

Charge-offs
 

 

 
(673
)
 
(2,523
)
 
(688
)
 
(3,884
)
Balance as of July 31, 2013
 
$
7,390

 
$

 
$
2,254

 
$
7,148

 
$
40,086

 
$
56,878

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of May 1, 2012
 
$
6,200

 
$

 
$
2,279

 
$

 
$
36,110

 
$
44,589

Provision
 

 

 
225

 

 
72

 
297

Charge-offs
 

 

 
(972
)
 

 
(437
)
 
(1,409
)
Balance as of July 31, 2012
 
$
6,200

 
$

 
$
1,532

 
$

 
$
35,745

 
$
43,477

 
 
 
 
 
 
 
 
 
 
 
 
 
There were no changes to our methodology related to the calculation of our allowance for doubtful accounts during fiscal year 2014.
NOTE 5: MORTGAGE LOANS HELD FOR INVESTMENT AND RELATED ASSETS
The composition of our mortgage loan portfolio is as follows:
(dollars in 000s)
 
As of
 
July 31, 2013
 
July 31, 2012
 
April 30, 2013
 
 
Amount

 
% of Total

 
Amount

 
% of Total

 
Amount

 
% of Total

Adjustable-rate loans
 
$
174,481

 
54
%
 
$
222,474

 
55
%
 
$
191,093

 
55
%
Fixed-rate loans
 
147,973

 
46
%
 
183,196

 
45
%
 
159,142

 
45
%
 
 
322,454

 
100
%
 
405,670

 
100
%
 
350,235

 
100
%
Unamortized deferred fees and costs
 
2,741

 
 
 
3,274

 
 
 
2,868

 
 
Less: Allowance for loan losses
 
(15,514
)
 
 
 
(22,185
)
 
 
 
(14,314
)
 
 
 
 
$
309,681

 
 
 
$
386,759

 
 
 
$
338,789

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Our loan loss allowance as a percent of mortgage loans was 4.8% as of July 31, 2013, compared to 5.5% as of July 31, 2012 and 4.1% as of April 30, 2013.

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Table of Contents

Activity in the allowance for loan losses for the three months ended July 31, 2013 and 2012 is as follows:
(in 000s)
 
Three months ended July 31,
 
2013

 
2012

Balance at beginning of the period
 
$
14,314

 
$
26,540

Provision
 
7,603

 
4,000

Recoveries
 
767

 
1,186

Charge-offs
 
(7,170
)
 
(9,541
)
Balance at end of the period
 
$
15,514

 
$
22,185

 
 
 
 
 
As of July 31, 2013, we had $7.6 million of mortgage loans which were transferred into the held-for-sale portfolio from the held-for-investment portfolio. At the time of the transfer, the amount by which cost exceeded fair value totaled $2.9 million. This write-down to fair value was recorded as a provision during the three months ended July 31, 2013 and subsequently charged-off.
When determining our allowance for loan losses, we evaluate loans less than 60 days past due on a pooled basis, while loans we consider impaired, including those loans more than 60 days past due or modified as TDRs, are evaluated individually. The balance of these loans and the related allowance is as follows:
(in 000s)
 
As of
 
July 31, 2013
 
July 31, 2012
 
April 30, 2013
 
 
Portfolio 
Balance

 
Related 
Allowance

 
Portfolio 
Balance

 
Related 
Allowance

 
Portfolio 
Balance

 
Related 
Allowance

Pooled (less than 60 days past due)
 
$
186,082

 
$
5,734

 
$
238,999

 
$
7,701

 
$
207,319

 
$
5,628

Impaired:
 
 
 
 
 
 
 
 
 
 
 
 
Individually (TDRs)
 
50,136

 
4,866

 
67,587

 
6,931

 
55,061

 
4,924

Individually (60 days or more past due)
 
86,236

 
4,914

 
99,084

 
7,553

 
87,855

 
3,762

 
 
$
322,454

 
$
15,514

 
$
405,670

 
$
22,185

 
$
350,235

 
$
14,314

 
 
 
 
 
 
 
 
 
 
 
 
 
Detail of our mortgage loans held for investment and the related allowance as of July 31, 2013 is as follows:
(dollars in 000s)
 
 
 
Outstanding Principal Balance

 
Loan Loss Allowance
 
% 30+ Days
Past Due

 
 
 
Amount

 
% of Principal

 
Purchased from SCC
 
$
183,551

 
$
11,912

 
6.5
%
 
32.7
%
All other
 
138,903

 
3,602

 
2.6
%
 
9.2
%
 
 
$
322,454

 
$
15,514

 
4.8
%
 
22.6
%
 
 
 
 
 
 
 
 
 

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Credit quality indicators as of July 31, 2013 include the following:
(in 000s)
 
Credit Quality Indicators
 
Purchased from SCC

 
All Other

 
Total Portfolio

Occupancy status:
 
 
 
 
 
 
Owner occupied
 
$
134,582

 
$
88,841

 
$
223,423

Non-owner occupied
 
48,969

 
50,062

 
99,031

 
 
$
183,551

 
$
138,903

 
$
322,454

Documentation level:
 
 
 
 
 
 
Full documentation
 
$
60,826

 
$
101,226

 
$
162,052

Limited documentation
 
6,069

 
14,132

 
20,201

Stated income
 
101,995

 
14,443

 
116,438

No documentation
 
14,661

 
9,102

 
23,763

 
 
$
183,551

 
$
138,903

 
$
322,454

Internal risk rating:
 
 
 
 
 
 
High
 
$
56,475

 
$

 
$
56,475

Medium
 
127,076

 

 
127,076

Low
 

 
138,903

 
138,903

 
 
$
183,551

 
$
138,903

 
$
322,454

 
 
 
 
 
 
 
Loans given our internal risk rating of “high” were originated by Sand Canyon Corporation, formerly known as Option One Mortgage Corporation, and its subsidiaries (SCC), and generally had no documentation or were based on stated income. Loans given our internal risk rating of “medium” were generally full documentation or based on stated income, with loan-to-value ratios at origination of more than 80%, and were made to borrowers with credit scores below 700 at origination. Loans given our internal risk rating of “low” were generally obtained from parties other than SCC, with loan-to-value ratios at origination of less than 80% and were made to borrowers with credit scores greater than 700 at origination.
Our mortgage loans held for investment include concentrations of loans to borrowers in certain states, which may result in increased exposure to loss as a result of changes in real estate values and underlying economic or market conditions related to a particular geographical location. Approximately 59% of our mortgage loan portfolio consists of loans to borrowers located in the states of Florida, California, New York and Wisconsin.
Detail of the aging of the mortgage loans in our portfolio as of July 31, 2013 is as follows:
(in 000s)
 
 
 
Less than 60
Days Past Due

 
60 – 89 Days
Past Due

 
90+ Days
Past Due(1)

 
Total
Past Due

 
Current

 
Total

Purchased from SCC
 
$
11,890

 
$
2,724

 
$
61,237

 
$
75,851

 
$
107,700

 
$
183,551

All other
 
5,266

 

 
12,311

 
17,577

 
121,326

 
138,903

 
 
$
17,156

 
$
2,724

 
$
73,548

 
$
93,428

 
$
229,026

 
$
322,454

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

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Table of Contents

Information related to our non-accrual loans is as follows:
(in 000s)
 
As of
 
July 31, 2013

 
July 31, 2012

 
April 30, 2013

Loans:
 
 
 
 
 
 
Purchased from SCC
 
$
68,740

 
$
81,539

 
$
70,327

Other
 
14,860

 
16,178

 
14,906

 
 
83,600

 
97,717

 
85,233

TDRs:
 
 
 
 
 
 
Purchased from SCC
 
3,247

 
3,398

 
3,719

Other
 
500

 
509

 
502

 
 
3,747

 
3,907

 
4,221

Total non-accrual loans
 
$
87,347

 
$
101,624

 
$
89,454

 
 
 
 
 
 
 
Information related to impaired loans is as follows:
(in 000s)
 
 
 
Balance
With Allowance

 
Balance
With No Allowance

 
Total
Impaired Loans

 
Related Allowance

As of July 31, 2013:
 
 
 
 
 
 
 
 
Purchased from SCC
 
$
33,088

 
$
80,132

 
$
113,220

 
$
7,396

Other
 
6,603

 
16,549

 
23,152

 
2,384

 
 
$
39,691

 
$
96,681

 
$
136,372

 
$
9,780

As of July 31, 2012:
 
 
 
 
 
 
 
 
Purchased from SCC
 
$
45,719

 
$
94,184

 
$
139,903

 
$
11,653

Other
 
8,199

 
18,569

 
26,768

 
2,831

 
 
$
53,918

 
$
112,753

 
$
166,671

 
$
14,484

As of April 30, 2013:
 
 
 
 
 
 
 
 
Purchased from SCC
 
$
33,791

 
$
84,592

 
$
118,383

 
$
6,573

Other
 
7,601

 
16,932

 
24,533

 
2,113

 
 
$
41,392

 
$
101,524

 
$
142,916

 
$
8,686

 
 
 
 
 
 
 
 
 
Information related to the allowance for impaired loans is as follows:
(in 000s)
 
As of
 
July 31, 2013

 
July 31, 2012

 
April 30, 2013

Portion of total allowance for loan losses allocated to impaired loans and TDR loans:
 
 
 
 
 
 
Based on collateral value method
 
$
4,914

 
$
7,553

 
$
3,762

Based on discounted cash flow method
 
4,866

 
6,931

 
4,924

 
 
$
9,780

 
$
14,484

 
$
8,686

 
 
 
 
 
 
 

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Information related to activities of our non-performing assets is as follows:
(in 000s)
 
As of
 
July 31, 2013

 
July 31, 2012

 
April 30, 2013

Average impaired loans:
 
 
 
 
 
 
Purchased from SCC
 
$
130,287

 
$
147,555

 
$
133,936

All other
 
25,328

 
26,841

 
25,425

 
 
$
155,615

 
$
174,396

 
$
159,361

Interest income on impaired loans:
 
 
 
 
 
 
Purchased from SCC
 
$
848

 
$
1,011

 
$
3,825

All other
 
73

 
82

 
305

 
 
$
921

 
$
1,093

 
$
4,130

Interest income on impaired loans recognized on a cash basis on non-accrual status:
 
 
 
 
 
 
Purchased from SCC
 
$
820

 
$
994

 
$
3,746

All other
 
73

 
73

 
279

 
 
$
893

 
$
1,067

 
$
4,025

 
 
 
 
 
 
 
Activity related to our real estate owned (REO) is as follows:
(in 000s)
 
Three months ended July 31,
 
2013

 
2012

Balance, beginning of the period
 
$
13,968

 
$
14,972

Additions
 
2,100

 
3,074

Sales
 
(1,664
)
 
(1,801
)
Impairments
 
(487
)
 
(788
)
Balance, end of the period
 
$
13,917

 
$
15,457

 
 
 
 
 



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NOTE 6: INVESTMENTS
AVAILABLE-FOR-SALE – The amortized cost and fair value of securities classified as available-for-sale (AFS) are summarized below:
(in 000s)
 
 
 
Amortized
Cost

 
Gross
Unrealized
Gains

 
Gross
Unrealized
Losses
(1)

 
Fair Value

As of July 31, 2013:
 
 
 
 
 
 
 
 
Long-term:
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
489,401

 
$
3,825

 
$
(10,623
)
 
$
482,603

Municipal bonds
 
4,164

 
266

 

 
4,430

 
 
$
493,565

 
$
4,091

 
$
(10,623
)
 
$
487,033

As of July 31, 2012:
 
 
 
 
 
 
 
 
Short-term:
 
 
 
 
 
 
 
 
Municipal bonds
 
$
1,006

 
$
20

 
$

 
$
1,026

Long-term:
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
370,318

 
5,898

 
(78
)
 
376,138

Municipal bonds
 
4,221

 
406

 

 
4,627

 
 
374,539

 
6,304

 
(78
)
 
380,765

 
 
$
375,545

 
$
6,324

 
$
(78
)
 
$
381,791

As of April 30, 2013
 
 
Long-term:
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
476,450

 
$
6,592

 
$
(664
)
 
$
482,378

Municipal bonds
 
4,178

 
320

 

 
4,498

 
 
$
480,628

 
$
6,912

 
$
(664
)
 
$
486,876

 
 
 
 
 
 
 
 
 
(1) 
As of July 31, 2013 and April 30, 2013, we had no securities that had been in a continuous loss position for more than twelve months. As of July 31, 2012, mortgage-backed securities with a cost of $7.9 million and gross unrealized losses of $5 thousand had been in a continuous loss position for more than twelve months.
We did not sell any AFS securities during the three months ended July 31, 2013 and 2012. We did not record any other-than-temporary impairments of AFS securities during the three months ended July 31, 2013 and 2012.
Contractual maturities of AFS debt securities at July 31, 2013, occur at varying dates over the next 30 years, and are set forth in the table below.
(in 000s)
 
 
 
Amortized Cost

 
Fair Value

Maturing in:
 
 
 
 
Two to five years
 
$
4,164

 
$
4,430

Beyond
 
489,401

 
482,603

 
 
$
493,565

 
$
487,033

 
 
 
 
 


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NOTE 7: GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill of our Tax Services segment for the three months ended July 31, 2013 and 2012 are as follows:
(in 000s)
 
 
 
Goodwill

 
Accumulated Impairment Losses

 
Net

Balances as of April 30, 2013
 
$
467,079

 
$
(32,297
)
 
$
434,782

Acquisitions
 
2,155

 

 
2,155

Disposals and foreign currency changes, net
 
(1,270
)
 

 
(1,270
)
Impairments
 

 

 

Balances as of July 31, 2013
 
$
467,964

 
$
(32,297
)
 
$
435,667

 
 
 
 
 
 
 
Balances as of April 30, 2012
 
$
459,863

 
$
(32,297
)
 
$
427,566

Acquisitions
 
3,651

 

 
3,651

Disposals and foreign currency changes, net
 
(116
)
 

 
(116
)
Impairments
 

 

 

Balances as of July 31, 2012
 
$
463,398

 
$
(32,297
)
 
$
431,101

 
 
 
 
 
 
 
We test goodwill for impairment annually or more frequently if events occur or circumstances change which would, more likely than not, reduce the fair value of a reporting unit below its carrying value.

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Components of the intangible assets of our Tax Services segment are as follows:
(in 000s)
 
 
 
Gross
Carrying
Amount

 
Accumulated
Amortization

 
Net

As of July 31, 2013:
 
 
 
 
 
 
Reacquired franchise rights
 
$
214,330

 
$
(19,235
)
 
$
195,095

Customer relationships
 
100,688

 
(51,007
)
 
49,681

Internally-developed software
 
93,739

 
(74,572
)
 
19,167

Noncompete agreements
 
23,024

 
(21,789
)
 
1,235

Franchise agreements
 
19,201

 
(5,974
)
 
13,227

Purchased technology
 
14,800

 
(12,750
)
 
2,050

Trade name
 
300

 
(300
)
 

 
 
$
466,082

 
$
(185,627
)
 
$
280,455

As of July 31, 2012:
 
 
 
 
 
 
Reacquired franchise rights
 
$
214,330

 
$
(15,113
)
 
$
199,217

Customer relationships
 
89,839

 
(48,298
)
 
41,541

Internally-developed software
 
105,648

 
(94,240
)
 
11,408

Noncompete agreements
 
22,225

 
(21,443
)
 
782

Franchise agreements
 
19,201

 
(4,694
)
 
14,507

Purchased technology
 
14,700

 
(11,080
)
 
3,620

Trade name
 
1,300

 
(842
)
 
458

 
 
$
467,243

 
$
(195,710
)
 
$
271,533

As of April 30, 2013
 
 
 
 
 
 
Reacquired franchise rights
 
$
214,330

 
$
(18,204
)
 
$
196,126

Customer relationships
 
100,719

 
(48,733
)
 
51,986

Internally-developed software
 
91,745

 
(72,764
)
 
18,981

Noncompete agreements
 
23,058

 
(21,728
)
 
1,330

Franchise agreements
 
19,201

 
(5,654
)
 
13,547

Purchased technology
 
14,800

 
(12,331
)
 
2,469

Trade name
 
300

 
(300
)
 

 
 
$
464,153

 
$
(179,714
)
 
$
284,439

 
 
 
 
 
 
 
Amortization of intangible assets of continuing operations for the three months ended July 31, 2013 and 2012 was $6.1 million and $6.0 million, respectively. Estimated amortization of intangible assets for fiscal years 2014, 2015, 2016, 2017 and 2018 is $23.2 million, $19.4 million, $16.0 million, $13.2 million and $12.2 million, respectively.
NOTE 8: FAIR VALUE
FAIR VALUE MEASUREMENT
We use the following classification of financial instruments pursuant to the fair value hierarchy methodologies for assets measured at fair value:
Level 1 - inputs to the valuation are quoted prices in an active market for identical assets.
Level 2 - inputs to the valuation include quoted prices for similar assets in active markets utilizing a third-party pricing service to determine fair value.
Level 3 - valuation is based on significant inputs that are unobservable in the market and our own estimates of assumptions that we believe market participants would use in pricing the asset.
Financial instruments are presented in the tables that follow by recurring or nonrecurring measurement status. Recurring assets are initially measured at fair value and are required to be remeasured at fair value in the financial

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statements at each reporting date. Assets measured on a nonrecurring basis are assets that, as a result of an event or circumstance, were required to be remeasured at fair value after initial recognition in the financial statements at some time during the reporting period.
The following table presents the assets that were remeasured at fair value on a recurring basis during the three months ended July 31, 2013 and 2012:
(dollars in 000s)
 
 
 
Total

 
Level 1

 
Level 2

 
Level 3

 
Gains (losses)

As of July 31, 2013:
 
 
 
 
 
 
 
 
 
 
Mortgage–backed securities
 
$
482,603

 
$

 
$
482,603

 
$

 
$
(6,798
)
Municipal bonds
 
4,430

 

 
4,430

 

 
266

Mortgage loans held for sale
 
7,608

 

 

 
7,608

 
(2,916
)
 
 
$
494,641

 
$

 
$