Business Context and Reporting Period
Company: H&R Block, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: September 20, 2007 (Earliest event reported)
Reporting Period: Fiscal year ending April 30, 2008 (in progress)
Key Financial Metrics and Obligations
- Debt Obligation: Block Financial Corporation (BFC), a wholly-owned subsidiary, drew a combined $250.0 million under existing credit facilities on September 24, 2007.
- Facility Details: The draw is against two $1.0 billion Five-Year Credit and Guarantee Agreements (BFC Credit Facilities) dated August 10, 2005.
- Maturity: The borrowed amounts are due and payable on August 10, 2010.
- Interest Rate: Eurodollar Rate plus an applicable margin, subject to adjustments.
- Liquidity Covenant: The Company must maintain an Adjusted Net Worth of at least $650.0 million at the end of any fiscal quarter.
- Revenue/Profit/Cash Flow: The filing text does not provide specific values for revenue, profit, cash flow, or margins for the current period.
Material Changes and Events
- Change in Certifying Accountant: The Company dismissed KPMG LLP as its independent registered public accounting firm effective September 20, 2007. KPMG served from July 10, 2003, through September 20, 2007.
- Reason for Dismissal: The decision was recommended and approved by the Audit Committee. No disagreements on accounting principles or practices were reported.
- Historical Audit Issues: KPMG previously reported a material weakness in internal control related to the valuation of residual interests in securitizations (reported in the 10-Q for the quarter ended January 31, 2007). This weakness was remediated as of April 30, 2007, and KPMG issued an unqualified report on internal controls for that date.
- Debt Drawdown: The $250.0 million draw was executed to support short-term needs due to recent market conditions negatively impacting the availability and term of commercial paper.
Outlook, Risks, and Management Commentary
- Successor Accountant: The Audit Committee has begun selecting a new independent registered public accounting firm for the fiscal year ending April 30, 2008. A selection is expected during the fiscal quarter ending October 31, 2007.
- Covenant Restrictions: The BFC Credit Facilities include covenants restricting the Company's ability to incur additional debt, incur liens, merge, consolidate, sell assets, liquidate, make investments, or engage in certain affiliate transactions.
- Default Risk: In the event of a default, the Administrative Agent may terminate the Credit Facility and declare all outstanding loans, accrued interest, and fees immediately due and payable.
- Market Conditions: Management cites recent market conditions as the driver for shifting from commercial paper to the credit facility for short-term funding.
Key Facts for Investor Verification
- Verify the identity and appointment date of the new independent registered public accounting firm.
- Confirm the Company's compliance with the $650.0 million Adjusted Net Worth covenant in the upcoming fiscal quarter.
- Monitor the Company's ability to repay the $250.0 million draw by August 10, 2010, or refinance it.
- Review the press release (Exhibit 99.1) for additional details on the rationale for dismissing KPMG.
- Assess the impact of commercial paper market conditions on the Company's future liquidity strategy.