H&R Block, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the three months ended July 31, 2012. Unless otherwise noted, dollar amounts below are in millions. The filing is unaudited. H&R Block’s business is highly seasonal, with peak revenue from January through April; interim results are not indicative of full-year results.
Key financial metrics
| Metric | Quarter ended July 31, 2012 | Prior-year quarter |
|---|---|---|
| Revenue | $96.5 | $100.6 |
| Operating loss | $(172.4) | $(204.6) |
| Continuing-operations net loss | $(105.7) | $(119.2) |
| Discontinued-operations net loss | $(1.8) | $(55.9) |
| Net loss and diluted loss per share | $(107.4); $(0.39) | $(175.1); $(0.57) |
| Cash used in operating activities | $(373.1) | $(394.5) |
Revenue fell 4.1% year over year, while expenses declined 11.9%. The operating loss was about 179% of revenue, compared with about 203% in the prior-year quarter. Dividends paid were $0.20 per share, versus $0.15.
At July 31, cash and cash equivalents were $939.9, down from $1,944.3 at April 30; current assets were $1,417.6 and current liabilities were $1,977.4. Total assets were $3,594.3 and stockholders’ equity was $845.7. Debt was approximately $1,009.6, comprising $600.6 current and $409.0 long-term. Cash fell substantially amid seasonal operating outflows, customer-deposit reductions, debt repayment, dividends, and share repurchases. Restricted cash of $43.1 and foreign-subsidiary cash and short-term investments of $107.5 were not freely available for general domestic use.
Material changes versus the prior comparable period
- Tax Services revenue decreased 1.3% to $90.3; its pretax loss narrowed to $140.9 from $169.5. Management attributed the improvement principally to lower compensation, rent and other expenses, including lower prior-year legal charges and savings from office closures and workforce reductions.
- Corporate pretax loss narrowed to $28.4 from $31.1, partly because mortgage-loan loss provisions and consulting expenses declined.
- Discontinued-operations loss decreased to $1.8 from $55.9. The prior-year result included a $99.7 pretax impairment related to the sales of RSM and MCM.
- The company repurchased and immediately retired 21.3 million shares for $315.0 during the quarter; weighted-average shares declined to 277.2 million from 305.5 million. The board extended its $2.0 billion repurchase authorization through June 2015; $857.5 remained available at quarter-end.
Liquidity, outlook, risks and unusual items
- Management stated that existing capital sources, including borrowing capacity, were expected to meet operating needs absent unexpected developments. In August 2012, the company entered a new five-year, $1.5 billion committed credit facility. The agreement includes leverage and interest-coverage covenants and other restrictions; the filing does not state that the facility had been drawn.
- No numerical revenue or earnings guidance is provided. Management emphasized seasonal cash needs from May through mid-January and that the first-quarter results are not representative of the full year.
- Proposed Dodd-Frank and Basel III-related holding-company capital rules could require additional capital and restrict dividends, share repurchases, or strategic plans. The rules were not final; H&R Block said it was assessing their potential effect.
- Mortgage credit remains a significant risk. The mortgage portfolio was $405.7, of which $234.0 was acquired from Sand Canyon Corporation (SCC); 34.9% of the SCC portion was at least 30 days past due. Total non-accrual mortgage loans were $101.6. The company noted greater delinquency and loss exposure in the SCC portfolio and geographic concentration in Florida, California, New York and Wisconsin.
- SCC’s accrued liability for mortgage representations-and-warranties claims was $129.3. Claims received in the quarter totaled $142, mainly from a securitization trustee. The company said reasonably possible losses beyond amounts accrued across specified litigation matters were estimated at $0–$132, about 70% related to discontinued operations. AIG had threatened claims of approximately $650; no liability was accrued for those threatened claims.
- Gross unrecognized tax benefits were $208.0; management said approximately $66 could decrease by April 30, 2013 through statute expirations and anticipated settlements. The filing also describes multiple pending lawsuits and regulatory matters, with some outcomes and potential losses not reasonably estimable.
Important facts for investors to verify
- Whether seasonal operating cash outflows and planned capital returns remain supportable under the company’s liquidity and covenant capacity.
- Developments in the proposed holding-company capital rules and their potential effect on dividends and repurchases.
- Mortgage delinquency, non-accrual, recovery and allowance trends, particularly for SCC-originated loans and representation-and-warranty claims.
- Updates to litigation and contingent-loss estimates, including SCC claims, the threatened AIG matter, and employment and tax-product class actions.
- Whether the August 2012 credit facility remains available on its stated terms and whether any covenant or other restriction becomes material.