H&R Block, Inc. — Form 10-Q summary
Business context and period. This filing covers the quarter and six months ended October 31, 2012, H&R Block’s fiscal 2013 second quarter. Continuing operations primarily comprise tax preparation and related banking services. The business is highly seasonal, with peak revenue in January through April; interim losses are therefore not indicative of full-year results. Former Business Services operations and the discontinued mortgage business are reported as discontinued operations.
Key financial results
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2011 period.
| Metric | Three months ended Oct. 31 | Six months ended Oct. 31 |
|---|---|---|
| Total revenue | $137.3, up 6.2% from $129.2 | $233.8, up 1.7% from $229.8 |
| Operating loss | $(165.1), versus $(206.4) | $(337.5), versus $(411.0) |
| Continuing-operations net loss | $(101.2), versus $(123.0) | $(206.8), versus $(242.2) |
| Net loss, including discontinued operations | $(105.2), versus $(141.7) | $(212.7), versus $(316.8) |
| Basic and diluted loss per share | $(0.39), versus $(0.47) | $(0.78), versus $(1.05) |
| Operating cash flow | Not separately presented | $(567.0), versus $(582.6) |
- Revenue and costs: Tax Services revenue was $129.8 million for the quarter and $220.1 million for six months. The six-month segment pretax loss narrowed to $271.0 million from $343.4 million, as expenses fell 11.7%, partly reflecting workforce reductions, office closures, and lower prior-year legal and intangible-asset charges.
- Margins: The filing reports operating losses and revenue but does not state operating-margin percentages.
- Cash and liquidity: Cash and cash equivalents were $1.261 billion at October 31, down from $1.944 billion at April 30; restricted cash was an additional $38.7 million. Current assets of $1.707 billion were below current liabilities of $1.932 billion. Management said available capital sources, including the committed credit line, were sufficient for operating needs absent unexpected developments.
- Debt: Long-term debt, including its current portion, was $1.507 billion, compared with $1.041 billion at April 30. The company issued $500 million of 5.50% notes due 2022 in October and, after quarter-end, redeemed $600 million of 7.875% notes due January 2013 for $623 million. It expected to record an approximately $6 million extinguishment loss in fiscal Q3. A new five-year $1.5 billion credit facility had no borrowings outstanding at October 31.
- Capital returns: The company repurchased and retired 21.3 million shares for $315.0 million during the six months and paid $108.4 million in dividends. The board had authorized repurchases of up to $2.0 billion through June 2015; $857.5 million remained under the authorization at October 31. Dividends paid per share were $0.40 for six months, up from $0.30.
Material changes versus the prior comparable period
- Six-month continuing-operations revenue rose modestly while operating and net losses narrowed, primarily as Tax Services expenses declined.
- Cash used in operations improved by $15.6 million year over year, but remained substantial, consistent with seasonal operating losses before tax season.
- Financing cash use was lower than in the prior period, which included significant net debt activity; this period included the $500 million note issuance and increased share repurchases and dividends.
- Mortgage loans held for investment declined to $370.9 million from $406.2 million at April 30. The allowance for loan losses fell to $18.1 million from $26.5 million; management attributed the year-over-year allowance reduction primarily to a prior-year change in charge-off practice.
- Discontinued-operations net loss improved to $5.8 million for six months from $74.7 million, which included a large prior-year loss on business sales. No discontinued-operations revenue was reported in the current period.
Outlook, commentary, risks and unusual items
- Outlook: No numerical earnings or revenue guidance is provided. Management cited seasonal cash needs from May through mid-January and said liquidity was adequate absent unexpected developments.
- Regulation: H&R Block was evaluating alternatives to cease being a savings and loan holding company (SLHC), while exploring ways to continue providing financial products and services. Proposed Federal Reserve capital rules could constrain dividends, share repurchases, acquisitions, and investment. Implementation was postponed beyond January 1, 2013, with timing unspecified; final requirements and their effects remained uncertain.
- Tax matters: In November 2012, the IRS approved settlement of most issues for tax years 1999–2007. The company estimated this would reduce unrecognized tax benefits by about $60 million, with most expected to produce a tax benefit in fiscal Q3. Gross unrecognized tax benefits were $207.4 million at October 31.
- Mortgage-related contingencies: Sand Canyon Corporation’s accrued estimated representation-and-warranty losses were $129.3 million. It received $152 million of claims in the six months, but recorded no provision in that period. Management said a hypothetical 1-percentage-point increase in loss severity combined with a 1-point decrease in assumed denial rates would imply approximately $27 million of losses beyond the accrual. Outcomes remain uncertain, including the effect of a court decision concerning claims on liquidated loans.
- Litigation: Accrued litigation liabilities were $20.8 million. For certain matters, estimated reasonably possible losses in excess of accruals ranged from $0 to $118 million, approximately 78% related to discontinued operations. H&R Block also disclosed threatened AIG claims of approximately $650 million; no liability was accrued for those threatened claims.
- Credit risk: About 57% of the mortgage loan portfolio was purchased from Sand Canyon; 33.9% of that segment was 30 or more days past due, compared with 8.7% for other loans. Approximately 58% of the overall portfolio was concentrated in Florida, California, New York, and Wisconsin.
Important facts for investors to verify
- Whether operating cash use and seasonal liquidity needs remain manageable through the next tax season, including the availability and covenant headroom of the $1.5 billion credit facility.
- The final cash, interest, and accounting effects of the November 2012 redemption of the 2013 notes and the expected debt-extinguishment loss.
- The outcome and timing of SLHC regulatory changes, and whether the company changes its regulatory status or capital-allocation plans.
- Developments in Sand Canyon representation-and-warranty claims, litigation, and the adequacy of the $129.3 million accrual.
- The realization and timing of the anticipated IRS settlement tax benefit, and changes in unrecognized tax benefits.
- Progress in mortgage-loan runoff, delinquencies, charge-offs, and allowance adequacy, particularly for loans acquired from Sand Canyon.