Business context and reporting period
H&R Block, Inc. filed this Form 10-K for the fiscal year ended April 30, 2012, not a standalone 2011 fourth-quarter report. The company provides assisted and digital tax preparation in the U.S., Canada and Australia, alongside related financial services through HRB Bank. Its business is highly seasonal, with most tax-preparation revenue earned from January through April.
Key financial results
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $2.894 billion | $2.945 billion |
| Operating income | $566.3 million | $616.3 million |
| Continuing-operations pretax income | $576.1 million | $627.7 million |
| Net income from continuing operations | $346.0 million | $392.5 million |
| Net income (loss), including discontinued operations | $265.9 million | $406.1 million |
| Diluted EPS from continuing operations | $1.16 | $1.27 |
| Operating cash flow | $362.0 million | $512.5 million |
Tax Services revenue was $2.862 billion, and segment pretax margin fell to 24.6% from 26.4%. Cash and cash equivalents were $1.944 billion, including $513.5 million held by HRB Bank that was subject to regulatory restrictions and unavailable for general corporate use. Long-term debt was $1.041 billion, including $631.4 million classified as current, principally due to $600 million of 7.875% notes maturing in January 2013. The company had no balance outstanding on its $1.7 billion committed credit facility at year-end and reported compliance with its covenants. Dividends declared were $0.70 per share; the company repurchased $200.0 million of shares during the year.
Material changes versus the prior comparable period
- Revenue declined 1.7%; operating income declined 8.1%, and continuing-operations net income declined 11.9%.
- Total net income fell 34.5%, reflecting a $80.0 million loss from discontinued operations versus $13.6 million of income in FY2011. This included a $48.1 million after-tax loss on business sales and losses from discontinued mortgage operations.
- Tax Services return volume increased: U.S. returns rose to 22.3 million from 21.4 million, led by online returns. Worldwide returns increased to 25.6 million from 24.5 million.
- Refund anticipation check fees fell $49.3 million, and Emerald Advance interest income fell $34.6 million. The RAC decline followed a promotional free offer; lower Emerald Advance volume reflected revised underwriting criteria.
- Operating cash flow decreased $150.5 million. Investing cash flow was $351.9 million provided, including $560.5 million in proceeds from business sales, principally RSM.
Outlook, commentary, risks and unusual items
- In November 2011, H&R Block sold RSM for $523.1 million net cash proceeds and a $54.0 million long-term note; it also sold MCM. The company indemnified buyers for certain litigation matters.
- A strategic realignment announced in April 2012 eliminated approximately 350 positions and closed approximately 200 underperforming offices. FY2012 included $31.2 million in severance costs and $5.5 million in lease termination and impairment charges. The company also recorded $7.4 million in Tax Services goodwill impairment and $4.0 million in customer-relationship impairment.
- Discontinued mortgage subsidiary SCC had a $130.0 million accrual for representation-and-warranty claims. The filing says additional losses could exceed the accrual and are difficult to estimate; a 1% increase in assumed claim validity and severity would imply approximately $31 million of losses beyond the accrual. Separate securitization indemnification exposures were not accrued because loss could not be reasonably estimated.
- SCC settled an SEC matter for approximately $28 million; payment was made in FY2013. The filing also reports aggregate reasonably possible litigation losses above accruals of approximately $0–$122 million, about 80% related to discontinued operations.
- Management said existing capital sources were expected to meet operating needs absent unexpected developments. It provided no quantified earnings or revenue guidance in the supplied filing text.
- Key risks include intense competition and free tax-filing offerings, data-security and service-interruption risks, seasonal staffing and execution demands, mortgage-credit and litigation exposures, and evolving banking regulation. Proposed Federal Reserve and OCC capital rules could affect capital needs, dividends, repurchases or strategy.
Important facts for investors to verify
- Confirm the 2013 refinancing or repayment plan for the $600 million notes due January 2013 and continued access to the committed credit facility.
- Track RAC and Emerald Advance volumes, pricing, underwriting, and whether growth in online returns translates into revenue and margin improvement.
- Monitor SCC claim activity, adequacy of the $130 million reserve, unaccrued indemnification exposure, and the outcomes of pending litigation.
- Assess the financial effects of the RSM/MCM disposals and restructuring, including indemnities, proceeds and any further costs.
- Check implementation and consequences of proposed holding-company and bank capital requirements, including possible constraints on shareholder distributions.