HR Block 2012 Annual Report Download - page 35

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FISCAL 2011 COMPARED TO FISCAL 2010 – Tax Services’ revenues decreased $62.9 million, or 2.1%, compared
to the prior year. Tax preparation fees decreased $61.0 million, or 3.1%, due primarily to the sale of company-
owned offices to franchisees and the loss of certain clients as a result of not having a RAL offering in our tax
offices in fiscal year 2011. Although we gained clients through the free Federal EZ filing we began offering
during fiscal year 2011, that increase did not have a significant impact on our revenues.
Royalties increased $28.6 million, or 10.4%, primarily due to the conversion of 280 company-owned offices
into franchises.
Fees earned on RACs increased $94.1 million, or 107.5%, primarily due to an increase in the number of RACs
issued as a portion of our clients chose to receive their refunds via RAC, as an alternative to a RAL.
RALs were historically offered to our clients by HSBC Holdings plc (HSBC). In December 2010, HSBC
terminated its contract with us based on restrictions placed on HSBC by its regulator and, therefore, RALs were
not offered during the 2011 tax season. Revenues of $17.2 million include the recognition of net deferred fees
from HSBC. This compares with revenues resulting from loans participations and related fees in fiscal year 2010
of $146.2 million.
Interest income earned on EAs increased $16.4 million, or 21.1%, over fiscal year 2010 primarily due to an
increase in loan volume, which resulted from offering the product to a wider client base.
Total expenses increased $37.0 million, or 1.8%, compared to fiscal year 2010. Compensation and benefits
decreased $8.5 million, or 0.8%, primarily due to lower commission-based wages due to conversions to franchise
offices, reduced headcount and related payroll taxes. This decline was partially offset by severance costs and
related payroll taxes of $27.4 million. Occupancy costs declined $25.6 million, or 6.2%, due to office closures and
cost-saving initiatives. Bad debt expense increased $34.3 million, or 32.8%, primarily due to increased volumes
on EAs, as well as a decline in tax returns prepared for those clients. During fiscal year 2011, we recorded a
$22.7 million impairment of goodwill in an ancillary reporting unit, as discussed in Item 8, note 7 to the
consolidated financial statements. Other expenses increased $11.5 million, or 4.9%, primarily due to incremental
litigation expenses recorded in fiscal year 2011.
Pretax income for fiscal year 2011 decreased $99.9 million, or 11.5%, from 2010. As a result of the declines in
revenues and higher expenses, primarily bad debt expense and goodwill impairment, pretax margin for the
segment decreased to 26.4% from 29.2% in fiscal year 2010.
CORPORATE, ELIMINATIONS AND INCOME TAXES ON CONTINUING OPERATIONS
Corporate operating losses include net interest margin and gains or losses relating to mortgage loans held for
investment, real estate owned and residual interests in securitizations, along with interest expense on
borrowings and other corporate expenses.
Corporate – Operating Results (in 000s)
Year ended April 30, 2012 2011 2010
Interest income on mortgage loans held for investment $ 20,322 $ 24,693 $ 31,877
Other 11,071 7,926 7,706
Total revenues 31,393 32,619 39,583
Interest expense 83,658 84,288 79,929
Provision for loan losses 24,075 35,567 47,750
Other, net 51,592 52,559 55,852
Total expense 159,325 172,414 183,531
Pretax loss $ (127,932) $ (139,795) $ (143,948)
FISCAL YEAR 2012 COMPARED TO FISCAL YEAR 2011
Interest income earned on mortgage loans held for investment decreased $4.4 million, or 17.7%, from the prior
year, primarily as a result of declining rates and non-performing loans. Our provision for loan losses decreased
$11.5 million, or 32.3%, from the prior year as a result of the continued run-off of our portfolio.
Income Taxes on Continuing Operations
Our effective tax rate for continuing operations in fiscal year 2012 was 39.9% compared to 37.5% in the prior
year. The higher effective tax rate was primarily due to increased tax expense related to changes in the value of
investments held within company-owned life insurance (COLI) policies. A portion of the increase related to
COLI resulted from the decision to surrender COLI policies no longer required to support our deferred
H&R BLOCK 2012 Form 10K
21