HR Block 2010 Annual Report Download - page 24

ITEM 1A. RISK FACTORS
An investment in our common stock involves risk, including the risk that the value of an investment may decline or
that returns on that investment may fall below expectations. There are a number of significant factors which could
cause actual conditions, events or results to differ materially from those described in forward-looking statements,
many of which are beyond management’s control or its ability to accurately forecast or predict, or could adversely
affect our operating results and the value of any investment in our stock. Other factors besides those listed below
or discussed in reports filed with the SEC could adversely affect our results.
Our businesses may be adversely affected by economic conditions generally, including the current
economic recession and lower employment levels.
Due in part to poor economic conditions and high unemployment, U.S. tax returns prepared by us declined
1.0 million and 0.7 million in fiscal years 2010 and 2009, respectively.
An economic recession as we are currently experiencing, is frequently characterized by lower employment and
declining consumer and business spending. Poor economic conditions may negatively affect demand and pricing
for our services. Lower employment levels, especially within client segments we serve, may result in clients no
longer being required to file tax returns, electing not to file tax returns, or clients seeking lower cost preparation
and filing alternatives. Continued lower employment levels may negatively impact our ability to increase tax
preparation clients.
In addition, the downturn in the residential housing market and increase in mortgage defaults has negatively
impacted our operating results and may continue to do so. An economic recession will likely reduce the ability of
our borrowers to repay mortgage loans, and declining home values could increase the severity of loss we may
incur in the event of default. In addition to mortgage loans, we also extend secured and unsecured credit to other
customers, including RALs and Emerald Advance lines of credit to our tax clients. We may incur significant losses
on credit we extend, which in turn could reduce our profitability.
Our access to liquidity may be negatively impacted if disruptions in credit markets occur, if credit rating
downgrades occur or if we fail to meet certain covenants. Funding costs may increase, leading to
reduced earnings.
We need liquidity to meet our off-season working capital requirements, to service debt obligations including
refinancing of maturing obligations, to purchase RAL participations and for other related activities. Although we
believe we have sufficient liquidity to meet our current needs, our access to and the cost of liquidity could be
negatively impacted in the event of credit-rating downgrades or if we fail to meet existing debt covenants. In
addition, events could occur which could increase our need for liquidity above current levels.
If rating agencies downgrade our credit rating, the cost of debt would likely increase and capital market access
could decrease or become unavailable. Our CLOC is subject to various covenants, including a covenant requiring
that we maintain minimum net worth equal to $650.0 million and a requirement that we reduce the aggregate
outstanding principal amount of short-term debt (as defined) to $200.0 million or less for a minimum period of
thirty consecutive days during the period from March 1 to June 30 of each year. Violation of a covenant could
impair our access to liquidity currently available through the CLOC. If current sources of liquidity were to become
unavailable, we would need to obtain additional sources of funding, which may not be possible or may be available
under less favorable terms.
The lines of business in which we operate face substantial litigation, and such litigation may damage our
reputation or result in material liabilities and losses.
We have been named, from time to time, as a defendant in various legal actions, including arbitrations, class
actions and other litigation arising in connection with our various business activities. Adverse outcomes related to
litigation could result in substantial damages and could cause our earnings to decline. Negative public opinion can
also result from our actual or alleged conduct in such claims, possibly damaging our reputation and could cause
the market price of our stock to decline. See Item 3, “Legal Proceedings” for additional information.
Failure to comply with laws and regulations that protect our customers’ personal and financial
information could result in significant fines, penalties and damages and could harm our brand and
reputation.
Privacy concerns relating to the disclosure of consumer financial information have drawn increased attention
from federal and state governments. The IRS generally prohibits the use or disclosure by tax return preparers of
taxpayers’ information without the prior written consent of the taxpayer. In addition, other regulations require
financial service providers to adopt and disclose consumer privacy policies and provide consumers with a
reasonable opportunity to “opt-out” of having personal information disclosed to unaffiliated third-parties for
8H&R BLOCK 2010 Form 10K