H&R Block, Inc. — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2014. Although the request metadata says “2013 Q4,” this filing is an annual report for FY2014; it includes the quarter ended April 30, 2014. H&R Block provides assisted and digital tax preparation, related financial products, and retail banking services. Results are highly seasonal, with most revenue and cash flow generated from February through April.
Key financial results
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $3.024 billion | $2.906 billion | +4.1% |
| Income from continuing operations | $500.1 million | $465.2 million | +7.5% |
| Net income, including discontinued operations | $475.2 million | $433.9 million | +9.5% |
| Diluted EPS from continuing operations | $1.81 | $1.69 | +7.1% |
| Net cash from operating activities | $809.6 million | $497.1 million | +$312.5 million |
| Total assets | $4.694 billion | $4.538 billion | +3.4% |
| Stockholders’ equity | $1.557 billion | $1.264 billion | +23.2% |
- Continuing-operations pretax income was $767.1 million, up from $702.0 million. Tax Services pretax margin improved to 28.9% from 28.5%.
- Adjusted continuing-operations EBITDA, a non-GAAP measure, was $932.6 million, up 5.5%; reported EBITDA was $940.1 million.
- Cash and cash equivalents were $2.185 billion, including $609.1 million held by HRB Bank and $119.6 million held by foreign subsidiaries. Restricted cash was another $115.3 million. The filing notes bank-held cash is subject to regulatory restrictions on distributions.
- Total long-term debt, including its current portion, was $906.5 million. Of this, $400.6 million was current, principally the 5.125% notes due October 2014. The company had no commercial paper outstanding at year-end and no borrowings on its $1.5 billion committed credit line, which expires in August 2017; it reported compliance with its covenants.
- Dividends paid were $219.0 million ($0.80 per share). There were no open-market share repurchases in FY2014. Capital expenditures were $147.0 million.
Material changes versus the prior year
- Worldwide returns prepared fell 2.6% to 24.18 million; U.S. returns declined to 20.79 million from 21.58 million. Management attributed much of the decline to discontinuing the free Federal 1040EZ offer. The change, higher average return complexity, and pricing actions helped increase U.S. preparation fees.
- RAC fee revenue rose 14.7% to $181.4 million, largely from fewer discounts and higher online-client volumes. Peace of Mind guarantee revenue also increased, reflecting improved claims experience and lower projected claims.
- Operating cash flow increased substantially, primarily due to higher net income and working-capital movements. Financing cash use declined, in part because of lower share repurchases; customer deposits also declined.
- Discontinued operations recorded a net loss of $24.9 million, compared with $31.2 million. Mortgage operations included a $25.0 million FY2014 provision for SCC representation-and-warranty claims, versus $40.0 million in FY2013.
Outlook, risks and unusual items
- Planned bank divestiture: In April 2014, HRB Bank and Block Financial agreed to transfer certain assets and liabilities, including all deposit liabilities, to BofI Federal Bank, subject to regulatory approvals and other closing conditions. The planned transaction also involves conversion and eventual merger of HRB Bank. H&R Block expected to continue distributing branded financial products, with an operating subsidiary providing support.
- Management estimated the related agreements would dilute ongoing annual earnings by approximately $0.07–$0.09 per share beginning in FY2015, depending on product volumes and closing timing. Had the transaction closed at April 30, 2014, the estimated cash payment to BofI would have been about $745 million; actual closing amounts could differ. The company expected to fund the payment mainly by liquidating available-for-sale securities and recorded a $12.4 million impairment related to its intent to sell them.
- Legacy mortgage exposure: SCC had accrued $183.8 million for representation-and-warranty claims; management estimated reasonably possible additional losses of up to approximately $16 million. Separate securitization indemnification claims were not accrued because loss was not deemed probable or estimable; the filing says potential exposure could be material. H&R Block also described limited guarantees and possible claims against the parent if SCC’s assets prove insufficient.
- Competition and execution: Free tax filing, aggressive pricing, digital competitors, government-supported filing options, tax-law or filing-process changes, and delays or defects in seasonal product launches could pressure client counts, revenue, or margins. Cybersecurity, data privacy, systems availability, seasonal staffing, and vendor concentration are also identified risks.
- Liquidity and regulation: The business generally operates at a loss during much of the first nine months of the fiscal year and relies on seasonal cash generation and borrowing capacity. Federal Reserve oversight and capital rules could constrain dividends, repurchases, acquisitions, and investment until the bank divestiture is completed. The transaction’s timing and completion were uncertain at filing.
- No broad earnings guidance was provided in the filing text. Management said available liquidity sources were sufficient for operating needs absent unexpected developments. The filing reported an unqualified audit opinion and effective internal control over financial reporting as of April 30, 2014.
Important facts for investors to verify
- Whether and when the BofI transaction closed, its final cash payment, continuing product economics, and the realized FY2015 earnings dilution.
- Refinancing or repayment of the $400.6 million notes due October 2014, along with ongoing covenant compliance and access to the credit facility.
- Subsequent developments in SCC representation-and-warranty claims, bulk-settlement discussions, securitization indemnifications, and any parent-level exposure.
- Whether lower return volumes persist and whether pricing, return mix, digital products, and financial-product fees can sustain revenue and margins.
- Cash availability by entity and jurisdiction, including regulatory restrictions on HRB Bank funds and potential costs of the bank divestiture.