H&R Block, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2011. Unless stated otherwise, amounts below are in millions of dollars. Interim results are seasonal and not indicative of full-year results; revenue typically peaks from January through April.
Financial results and condition
- Quarter revenue: $129.2, up 8.0% from $119.6 in the prior-year quarter. Continuing-operations operating loss was $206.4 versus $187.4; continuing-operations net loss was $123.0 versus $111.4. Total net loss was $141.7 versus $109.0, including $18.7 of discontinued-operations losses. Basic and diluted loss per share was $0.47 versus $0.36.
- Six-month revenue: $229.8, up 4.7% from $219.4. Continuing-operations operating loss was $411.0 versus $397.8, and continuing-operations net loss was $242.2 versus $239.3. Total net loss was $316.8 versus $239.7, including $74.7 of discontinued-operations losses. Loss per share was $1.05 versus $0.77.
- Revenue mix and costs: Tax Services revenue was $212.4 for the six months, up 4.9%, mainly reflecting Australian volume and favorable exchange rates and two additional Canadian filing-season days. Tax Services pretax loss widened to $343.4 from $329.0, with higher legal charges and ExpressTax-related impairment costs among the factors.
- Cash flow: Six-month operating cash use was $582.6 versus $548.0; investing cash use was $127.1 versus $16.6; financing cash use was $389.5 versus $281.9. Cash and cash equivalents fell $1,105.2 to $572.6 from April 30, 2011.
- Liquidity and debt: At October 31, cash was $572.6. Long-term debt was $1,009.2, current long-term debt $30.7, commercial paper $40.0, and Federal Home Loan Bank borrowings $25.0. The company had no borrowings under its $1.7 billion committed credit lines and reported compliance with their covenants; net worth was $862.8 against a $650.0 minimum. Management said available capital sources were sufficient absent unexpected developments.
- Other balance-sheet items: Total assets were $3,976.5 versus $5,289.5 at April 30; stockholders’ equity was $862.8 versus $1,449.6. Customer banking deposits were $723.3, down from $852.2. Mortgage loans held for investment, net, were $450.1; the related allowance was $91.4, or 17.0% of the gross portfolio.
- Dividends and repurchases: Dividends were $0.15 per share for the quarter, unchanged year over year. In the six months, the company repurchased and retired 13.0 million shares for $177.5, versus 19.0 million shares for $279.9 in the prior-year period.
Material changes, outlook, and risks
- RSM divestiture: The sale of substantially all RSM assets closed November 30, 2011, after quarter-end. H&R Block received $475.0 cash, a $34.0 short-term receivable, and a $54.0 note; final consideration remains subject to adjustments. The buyer assumed substantially all RSM liabilities, while H&R Block retained specified indemnification obligations. The filing says the ultimate divestiture loss depends on purchase-price adjustments and realization of tax benefits.
- Discontinued operations and impairment: RSM and EquiCo were classified as discontinued operations and held for sale at October 31. The six-month discontinued-operations loss included a $99.7 pretax goodwill impairment associated with the businesses. SCC mortgage-related operations also remained in discontinued operations.
- Mortgage repurchase exposure: SCC recorded a $20.0 million provision in the six-month period after increased third-party activity. Its recorded representation-and-warranty liability was $142.9 at October 31; $537 million of claims remained under review, including $46 million of reasserted claims. The company cautioned that actual claims and losses could differ materially; it could not reasonably estimate possible losses above the accrual. A hypothetical 1% increase in both assumed claim validity and loss severity would imply approximately $28 million of losses beyond the accrual.
- Other contingencies: Litigation accruals, including indemnification obligations, were $84.4 at October 31. For matters with estimable ranges, reasonably possible losses above accrued amounts were estimated at $0–$104 million; other matters could not be estimated. The filing notes that adverse outcomes in mortgage-related and other litigation could materially affect results in particular periods.
- TaxACT transaction: A court permanently enjoined the proposed $287.5 million acquisition of 2SS Holdings (TaxACT) on October 31. The parties terminated the merger agreement November 14; H&R Block did not appeal.
- Near-term funding and seasonality: The company expected approximately $80 million of distributions to RSM employees from a deferred-compensation plan in December 2011. Management said customer-deposit funding for Emerald Advance was expected later than in the prior year. No specific earnings or revenue guidance was provided in the supplied filing text.
- Management commentary: The company attributed higher quarterly Tax Services revenue primarily to Australian volumes and favorable exchange rates. It cited incremental legal charges as a significant expense driver. Disclosure controls were assessed as effective, and no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Post-closing RSM purchase-price adjustments, the final divestiture loss, and any related tax benefit.
- Developments in SCC repurchase claims, the $142.9 million accrual, and the $537 million claims-under-review balance.
- Cash use, seasonal borrowing needs, customer-deposit timing, and compliance with credit-line covenants.
- Potential outcomes and accrual changes for litigation, including the disclosed $0–$104 million range of reasonably possible excess losses.
- Whether Tax Services revenue and expense trends persist through the peak tax season, particularly legal and technology-related costs.