H&R Block, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended January 31, 2014 (fiscal 2014). Amounts below are in millions of dollars, except per-share data and where noted. The filing is unaudited.
Business context and reporting period
H&R Block provides tax preparation services and retail banking services. Results are highly seasonal, with peak tax-preparation revenue generally occurring from January through April; interim results are therefore not indicative of full-year results.
The IRS delayed accepting and processing returns until January 31, 2014, following the U.S. government closure. H&R Block recognized tax-preparation revenue when returns were electronically filed, leaving revenue from many completed but unfiled returns for the fourth quarter.
Financial performance and liquidity
| Metric | Three months ended Jan. 31, 2014 | Prior-year quarter | Nine months ended Jan. 31, 2014 | Prior-year period |
|---|---|---|---|---|
| Revenue | $199.8 | $472.0 | $461.3 | $705.7 |
| Operating loss | $(338.2) | $(92.6) | $(698.4) | $(430.1) |
| Loss from continuing operations | $(212.8) | $(16.9) | $(429.0) | $(223.8) |
| Net loss | $(214.7) | $(17.7) | $(434.8) | $(230.4) |
| Diluted loss per share | $(0.78) | $(0.06) | $(1.59) | $(0.84) |
| Adjusted EBITDA from continuing operations | $(300.6) | $(47.2) | $(581.3) | $(293.4) |
For the nine-month period, operating cash use was $1,120.3, investing cash use was $67.9, and financing cash use was $101.9. Cash declined by $1,310.2 to $437.4. Capital expenditures were $125.7; dividends paid were $164.1.
At January 31, cash and cash equivalents were $437.4, with a further $44.9 of restricted cash. Current assets were $1,504.7 and current liabilities $2,054.5. Commercial paper borrowings were $195.0; current and long-term debt totaled $906.5, for reported borrowings of approximately $1,101.5 including commercial paper. The company cited its $1.5 billion committed credit line and commercial-paper access as liquidity sources and said existing sources were expected to meet operating needs absent unexpected developments.
Material changes versus the prior comparable period
- Third-quarter revenue fell $272.2, primarily because $276.7 of revenue related to completed but unfiled returns was not recognized. The company reported approximately 1.8 million such returns at January 31, versus approximately 0.2 million in the prior year; it expected the related revenue to be recognized in the fourth quarter.
- U.S. returns prepared through January 31 declined to 3.408 million from 3.911 million. Through February 28, assisted returns were down 9.1% year over year, while tax-software returns were up 1.2%; management cautioned that delayed season timing could distort these trends.
- Nine-month Tax Services revenue declined 35.2% to $443.7, while segment pretax loss widened to $625.8 from $335.2. Higher compensation, depreciation and amortization, and other expenses contributed; lower marketing expense partly offset increases.
- Cash used in operating activities improved by $191.6 versus the prior-year period, chiefly due to restricted-cash movements and lower severance, borrowing-interest and income-tax payments. Investing cash use also declined, including because of lower purchases of available-for-sale securities and receipt of $64.9 from repayment of a note receivable.
- Cash was $437.4 versus $418.4 a year earlier, while commercial paper borrowings were $195.0 versus $425.0. Long-term debt was $506.0, down from $906.0 a year earlier; the current portion of long-term debt was $400.6, compared with $0.7.
Outlook, management commentary, risks and unusual items
- Outlook: No numerical full-year earnings or revenue guidance is provided in the supplied filing text. Management expected revenue for the completed but unfiled returns to be recognized in Q4 and emphasized that the delayed tax-season start makes interim results and early return counts potentially unrepresentative of the full year.
- Banking strategy: The company was evaluating ways to cease being a savings and loan holding company and alternatives for continuing to provide customer financial services. It could not predict the timing or likelihood of leaving Federal Reserve SLHC regulation. Customer deposits declined in part as accounts were closed in anticipation of a possible HRB Bank divestiture.
- Mortgage-related contingencies: The discontinued mortgage business had a $158.8 accrual for representation-and-warranty claims, with reasonably possible additional losses estimated up to $40.0. The estimate excludes certain indemnification claims for which a loss was not judged probable and a range could not be estimated; unfavorable outcomes could be material.
- Other litigation: Accrued litigation liabilities were $20.9. For specified matters, the estimated reasonably possible loss was up to $33.0 in excess of accruals; this is not a maximum exposure, and some matters could not be estimated.
- Other risks and items: Mortgage loans held for investment were $282.1 net, with $82.1 of non-accrual loans; approximately 59% of the portfolio was concentrated in Florida, California, New York and Wisconsin. The company reported $12.9 of gross unrealized losses on available-for-sale securities, but no other-than-temporary impairment. It received $64.9 in December 2013 to settle a note receivable, including principal and accrued interest.
- Capital and shareholder returns: Dividends were $0.20 per share for the quarter. There were no open-market share repurchases during the nine months; the company reported $857.5 remaining under its repurchase authorization. Management said it planned to continue dividends but gave no assurance they would continue.
- Controls: Management concluded disclosure controls and procedures were effective at period-end and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of the $276.7 of deferred tax-season revenue was actually recognized in Q4, and whether filed-return volumes and pricing subsequently recovered.
- Whether the deterioration in reported losses reflects mainly tax-season timing or a more persistent change in Tax Services costs, customer demand or returns prepared.
- Available liquidity, seasonal borrowing needs and debt maturities, including the $400.6 current portion of long-term debt and access to the committed credit line.
- Developments in the HRB Bank/SLHC strategy, customer deposits and any resulting regulatory or operational effects.
- Changes in mortgage representation-and-warranty claims, litigation accruals and unquantified indemnification exposure.