STOCK-BASED COMPENSATION

We utilize the fair value method to account for stock-based awards. Stock-based compensation expense of $15.3 million, $15.0 million and $14.5 million was recorded in fiscal years 2013, 2012 and 2011, respectively, net of related tax benefits of $5.8 million, $5.4 million and $5.4 million, respectively. Stock-based compensation expense of our continuing operations totaled $15.3 million, $14.2 million and $10.5 million in fiscal years 2013, 2012 and 2011, respectively.

Accounting standards require excess tax benefits from stock-based compensation to be included as a financing activity in the statements of cash flows. As a result, we classified $0.4 million, $0.1 million and $0.5 million as cash inflows from financing activities for fiscal years 2013, 2012 and 2011, respectively. We realized tax benefits of $5.0 million, $4.4 million and $4.4 million in fiscal years 2013, 2012 and 2011, respectively.

As of April 30, 2013, we had 11.3 million shares reserved for future awards under stock-based compensation plans. We issue shares from our treasury stock to satisfy the exercise or release of stock-based awards and believe we have adequate treasury stock balances available for future issuances.

We measure the fair value of options on the grant date or modification date using the Black-Scholes-Merton (Black-Scholes) option valuation model based upon the expected term of the options. We measure the fair value of nonvested shares and share units based on the closing price of our common stock on the grant date, discounted for non-receipt of dividends, as necessary. We measure the fair value of performance-based share units based on the Monte Carlo valuation model, taking into account as necessary those provisions of the performance-based nonvested share units that are characterized as market conditions.

We generally expense the grant-date fair value, net of estimated forfeitures, over the vesting period on a straight-line basis. We expense awards to employees who are of retirement age or early retirement age (as defined in the plans), or who reach retirement age or early retirement age before the end of the service period of the awards, over the longer of one year from the grant date or the date upon which the employees reach retirement age or early retirement age, as applicable.

Our 2013 Long Term Incentive Plan (2013 Plan) became effective January 1, 2013. The 2013 Plan replaced our 2003 Long-Term Executive Compensation Plan (2003 Plan), which terminated effective December 31, 2012, except for outstanding awards thereunder. Like the 2003 Plan, the 2013 Plan provides for awards of options (both incentive and nonqualified), nonvested shares, nonvested share units, performance-based nonvested share units and other stock-based awards. These awards entitle the holder to receive or purchase shares of common stock as the awards vest. Options, nonvested shares and nonvested share units typically vest based upon service over a three-year or four-year period with a portion vesting each year. Performance-based nonvested share units typically cliff vest at the end of a three-year period based upon satisfaction of both service-based and performance-based requirements. For grants made prior to April 2013, nonvested share units did not receive dividends or dividend equivalents. For grants made beginning in April 2013, nonvested share units receive cumulative dividend equivalents at the time of distribution. Performance-based nonvested share units receive cumulative dividend equivalents at the time of distribution. We grant options from the 2013 Plan or 2003 Plan at a price equal to the fair market value of our common stock on the grant date. Awards granted under the 2013 Plan or 2003 Plan have a maximum contractual term of ten years.

Our 2008 Deferred Stock Unit Plan for Outside Directors (DSU Plan) provides vested stock units that are settled after the director separates from services as a director of the Company. The number of deferred stock units credited to an outside director's account pursuant to an award is determined by dividing the dollar amount of the award by the average current market value per share of common stock for the ten consecutive trading dates ending on the date the deferred stock units are granted to the outside directors. Each deferred stock unit granted is vested upon award and the settlement of shares occurs on the earlier of six months after the director's separation of service from the Board of Directors, or within 90 days after the director's death. The vested stock units receive dividend equivalents prior to settlement, which are reinvested and settled in shares at the time of settlement. We measure the fair value of the deferred stock units based on the closing price of our common stock on the grant date. The DSU Plan replaced the 1989 Stock Option Plan for Outside Directors, which was terminated effective June 11, 2008 except for outstanding awards thereunder. After January 1, 2013 awards of deferred stock units will be granted under the 2013 Plan. No deferred stock units were granted under the 2013 Plan during the 2013 fiscal year.

Our 2000 Employee Stock Purchase Plan (ESPP) provides employees the option to purchase shares of our common stock through payroll deductions. The purchase price of the stock is 85% of the fair market value of our common stock on the last trading day of the Option Period. The Option Periods are six-month periods beginning on January 1 and July 1 each year. We measure the fair value of options on the grant date utilizing the Black-Scholes option valuation model. The fair value of the option includes the value of the 15% discount. We expense the grant-date fair value over the six-month vesting period. Prior to January 1, 2013, this plan offered a purchase price of the stock of 90% of the lower of either the fair market value of our common stock on the first trading day of the Option Period or on the last trading day of the Option Period.

A summary of options for the fiscal year ended April 30, 2013, is as follows:



(in 000s, except per share amounts)
	Shares		Weighted–Average Exercise Price		Weighted–Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding, beginning of the year	7,308		$	18.02
Granted	979		17.95
Exercised	(1,414	)	18.08
Forfeited or expired	(2,369	)	19.22
Outstanding, end of the year	4,504		$	17.53	7 years	$	46,202
Exercisable, end of the year	2,646		$	18.33	5 years	$	25,119
Exercisable and expected to vest	4,340		17.58		7 years	44,326

The total intrinsic value of options exercised during fiscal years 2013, 2012 and 2011 was $6.0 million, $1.0 million and $1.8 million, respectively. As of April 30, 2013, we had $3.6 million of total unrecognized compensation cost related to these options. The cost is expected to be recognized over a weighted-average period of one year.

We utilize the Black-Scholes option valuation model to value our options on the grant date. We typically estimate the expected volatility using our historical stock price data, unless historical volatility is not representative of expected volatility. We also use historical exercise and forfeiture behaviors to estimate the options expected term and our forfeiture rate. The dividend yield is calculated based on the current dividend and the market price of our common stock on the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve in effect on the grant date. Both expected volatility and the risk-free interest rate are based on a period that approximates the expected term.

The following assumptions were used to value options during the periods:



Year ended April 30,	2013		2012		2011
Options – management and director:
Expected volatility	29.69% - 31.43%		31.75% - 32.34%		28.98% - 30.20%
Expected term	4 - 5 years		5 years		5 years
Dividend yield	4.18% - 5.21%		3.43% - 4.80%		4.18% - 5.17%
Risk–free interest rate	0.61% - 0.75%		0.79% - 1.95%		1.26% - 1.92%
Weighted–average fair value	$	2.79	$	3.31	$	2.25
ESPP options:
Expected volatility	22.32% - 27.39%		24.27% - 33.07%		22.75% - 23.31%
Expected term	0.5 years		0.5 years		0.5 years
Dividend yield	4.20% - 5.00%		3.68% - 4.93%		3.86% - 4.80%
Risk–free interest rate	0.11% - 0.15%		0.06% - 0.10%		0.19% - 0.23%
Weighted–average fair value	$	2.60	$	2.78	$	2.16

A summary of nonvested shares and nonvested share units for the year ended April 30, 2013, is as follows:



(shares in 000s)
	Shares		Weighted–Average Grant Date Fair Value
Outstanding, beginning of the year	1,454		$	15.10
Granted	1,047		14.38
Released	(446	)	15.57
Forfeited	(249	)	14.59
Outstanding, end of the year	1,806		$	14.64

The total fair value of shares and units vesting during fiscal years 2013, 2012 and 2011 was $6.9 million, $11.9 million and $13.0 million, respectively. Upon the grant of nonvested shares and nonvested share units, unearned compensation cost is recorded as an offset to additional paid-in capital and is amortized as compensation expense over the vesting period. As of April 30, 2013, we had $14.7 million of total unrecognized compensation cost related to these shares. This cost is expected to be recognized over a weighted-average period of two years. Nonvested shares were not granted during fiscal years 2013 or 2012.

A summary of performance-based nonvested share units for the year ended April 30, 2013, is as follows:



(shares in 000s)
	Shares		Weighted–Average Grant Date Fair Value
Outstanding, beginning of the year	187		$	17.36
Granted	513		16.72
Released	(17	)	16.89
Forfeited	(25	)	16.72
Outstanding, end of the year	658		$	16.89

The total fair value of performance-based share units vesting during fiscal year 2013 was $0.3 million, compared to zero in fiscal years 2012 and 2011. Upon the grant of performance-based nonvested share units, unearned compensation cost is recorded as an offset to additional paid-in capital and is amortized as compensation expense over the vesting period. As of April 30, 2013, we had $7.0 million of total unrecognized compensation cost related to these units. This cost is expected to be recognized over a weighted-average period of two years.

For performance-based units, the number of units to be earned will depend on the performance against one of the following metrics, as applicable to the grant: (1) H&R Block, Inc.'s achievement of specified earnings before interest, taxes, depreciation and amortization (EBITDA) and revenue targets and H&R Block, Inc.'s total shareholder return (TSR) ranked against that of other companies that are included in the Standard & Poor's 500 Index during the three-year performance period; (2) H&R Block, Inc.'s achievement of specified average return on equity and H&R Block, Inc.'s stock price during the three-year performance period; or (3) H&R Block, Inc.'s achievement of specified earnings on cumulative three-year pretax earnings from continuing operations and H&R Block, Inc.'s total TSR ranked against that of other companies included in the Standard & Poor's 500 Index during the three-year performance period. Compensation expense for performance-based shares is initially estimated based on target performance and is adjusted as appropriate through the performance period. Performance-based units cliff vest three years from the date of grant. Employees who are of retirement age or early retirement age (age 60, or age 55 with five years of service) before the end of the three-year performance period who retire at least one year after the grant date may be eligible to vest in a pro rata portion of their performance-based units, if the market condition for the award is satisfied. Satisfaction of the market condition is determined at the end of the three-year performance period. Shares are not distributed until the end of the three-year performance period.

We utilize the Monte Carlo valuation model to value performance-based nonvested share units on the grant date. We typically estimate the expected volatility using historical volatility for H&R Block, Inc. and selected comparable companies. The dividend yield is calculated based on the current dividend and the market price of our common stock on the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve in effect on the grant date. Both expected volatility and the risk-free interest rate are based on a period that approximates the expected term. The following assumptions were used to value performance-based nonvested share units using the Monte Carlo valuation model during fiscal years 2013 and 2012:



Year ended April 30,	2013			2012
Expected volatility	12.61% – 71.96%			20.68% – 143.12%
Expected term	3 years			3 years
Dividend yield ⁽¹⁾	0% – 5.01%			—		%
Risk–free interest rate	0.40		%	0.75		%
Weighted–average fair value	$	16.72		$	17.46


⁽¹⁾	The valuation model assumes that dividends are reinvested by the issuing entity on a continuous basis.