H&R Block, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended October 31, 2010 (the second quarter and first half of fiscal 2011). Amounts below are in millions, except per-share data. Results are unaudited. The business is highly seasonal, with peak tax-preparation revenue from January through April; interim losses are not indicative of full-year results.
Financial performance
| Metric | Three months ended Oct. 31, 2010 | Six months ended Oct. 31, 2010 | Prior-year comparison |
|---|---|---|---|
| Revenue | $322.9 | $597.4 | Down 1.0% and 0.7%, respectively |
| Operating loss | $(179.0) | $(389.6) | Improved from $(214.6) and $(428.7) |
| Continuing-operations net loss | $(106.8) | $(234.5) | Improved from $(126.5) and $(257.1) |
| Net loss | $(109.0) | $(239.7) | Improved from $(128.6) and $(262.2) |
| Net loss per share | $(0.36) | $(0.77) | Prior year: $(0.38) and $(0.78) |
| Operating margin | Approximately -55.4% | Approximately -65.2% | Prior year: approximately -65.8% and -71.3% |
For the six months, operating cash flow was a use of $548.0, versus a use of $786.2 in the prior year. Investing activities used $16.6, compared with $43.3 provided; financing activities used $281.9, versus $511.2 provided. Cash and cash equivalents fell to $959.7 from $1,804.0 at April 30, 2010.
At October 31, total assets were $4,307.8 and stockholders’ equity was $879.8. Current assets of $1,735.6 were below current liabilities of $1,916.7. Borrowings comprised approximately $1,159.0: long-term and current debt of $1,044.5, commercial paper of $39.5, and Federal Home Loan Bank borrowings of $75.0. The company had no balance drawn under its $1.7 billion committed credit facility and reported compliance with its covenants. It stated that available capital sources were sufficient for operating needs absent unexpected developments.
Material changes and business segments
- Tax Services revenue rose 2.7% to $202.6 for the six months, while its pretax loss narrowed to $329.0 from $344.2. Office closures and lower expenses helped; favorable foreign exchange contributed to higher tax-preparation fees. Office-sale gains were $5.1 for the half year.
- Business Services revenue declined 1.6% to $378.1, while pretax income rose to $8.0 from $1.5, reflecting lower expenses. Caturano acquisition revenue contributed to tax and consulting growth, partly offset by lower management fees.
- Corporate pretax loss narrowed to $61.4 from $81.1 for the six months, primarily due to lower loan-loss provisions and expense reductions. Interest income on mortgage loans declined.
- H&R Block repurchased and immediately retired 19.0 million shares for $279.9 during the half year. Dividends paid were $95.1; dividends remained $0.15 per share quarterly.
- Cash spending on property and equipment increased to $35.0 from $7.3; acquisition payments were $43.3 versus $6.6.
Outlook, risks and unusual items
- The IRS will discontinue providing the debt indicator used in refund anticipation loan (RAL) underwriting. Management expected lower RAL volumes and potentially higher default risk, and estimated a fiscal 2011 profitability reduction of approximately $0.05 per diluted share. Fiscal 2010 RAL participation revenue was $146.2; alternative products may have lower margins.
- H&R Block sued HSBC seeking to enforce its contractual obligation to offer RALs in retail offices. The outcome and effect on RAL availability and results were unknown at the filing date.
- Management expected a full-year fiscal 2011 effective tax rate of approximately 39%. No other specific earnings or revenue guidance is provided in the filing.
- The company agreed to acquire 2SS Holdings, developer of TaxACT tax-preparation solutions, for $287.5 in cash, subject to customary closing conditions, including regulatory approval. Caturano was acquired in July for a purchase price of $40.2, with part of the price deferred.
- Mortgage-loan credit remains a significant exposure: $537.2 net loans were held for investment, with a $87.6 allowance, or 14.1% of principal. Loans purchased from former mortgage subsidiary Sand Canyon had 39.3% of principal at least 30 days past due, versus 10.4% for other loans. Approximately 51% of the portfolio was concentrated in Florida, California and New York.
- Sand Canyon’s mortgage repurchase and indemnity liability was $184.7. Management cautioned that future claims and losses could materially exceed estimates and could not estimate the range of reasonably possible excess losses. Numerous mortgage-related investigations and lawsuits also remain; some outcomes could materially affect results.
- Other notable legal exposures include the certified RSM EquiCo class action, for which plaintiffs seek recovery of approximately $185 in fees plus other damages, and the Massachusetts mortgage case scheduled for trial in June 2011. The filing also reports the dismissal with prejudice of a separate lawsuit on November 3, 2010 and an agreement to settle two Peace of Mind cases for immaterial amounts.
Important facts for investors to verify
- Whether RAL products remain available through HSBC and how the IRS debt-indicator change affects volumes, credit losses and the estimated $0.05-per-share impact.
- Final approval, funding and integration outcomes for the proposed $287.5 TaxACT acquisition.
- Mortgage portfolio delinquency trends, adequacy of the loan-loss allowance and geographic concentration.
- Developments in Sand Canyon repurchase claims and litigation, including potential losses beyond the $184.7 recorded liability.
- Seasonal liquidity needs, customer-deposit funding, commercial paper usage, credit-facility availability and covenant compliance.
- Cash and equity effects of share repurchases, dividends and other capital commitments.