Business Context and Reporting Period
Company: H&R Block, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: April 30, 2008
H&R Block operates three primary continuing segments: Tax Services (retail, online, and software), Business Services (accounting and consulting via RSM McGladrey), and Consumer Financial Services (brokerage and retail banking). The fiscal year was significantly impacted by the exit of its mortgage business (Option One Mortgage Corporation, or OOMC), which was reported as discontinued operations. The company also implemented a corporate cost reduction program targeting $110 million in annual savings.
Key Financial Metrics
| Metric | Fiscal 2008 | Fiscal 2007 |
|---|---|---|
| Total Revenues | $4.40 billion | $4.02 billion |
| Net Income from Continuing Operations | $454.5 million | $374.3 million |
| Net Loss from Discontinued Operations | $(763.1) million | $(808.0) million |
| Consolidated Net Loss | $(308.6) million | $(433.7) million |
| Diluted EPS (Continuing Ops) | $1.39 | $1.15 |
| Diluted EPS (Consolidated) | $(0.94) | $(1.33) |
| Total Assets | $5.62 billion | $7.54 billion |
| Long-Term Debt | $1.03 billion | $537.1 million |
| Cash from Operations | $215.8 million | $(584.7) million |
Material Changes vs. Prior Period
- Discontinued Operations: The company sold OOMC's loan servicing assets on April 30, 2008, realizing net cash proceeds of $232.4 million. While the pretax loss from discontinued operations remained significant at $1.18 billion, it was an improvement over the prior year's $1.23 billion loss, driven by the cessation of loan origination and the sale of servicing assets.
- Tax Services Growth: Revenues increased 11.3% to $2.99 billion, driven by a 5.2% increase in the net average fee per U.S. client and a 3.5% increase in clients served in company-owned offices. The Economic Stimulus Act of 2008 contributed to volume but had a minimal impact on profitability due to lower fees for rebate-only filers.
- Consumer Financial Services: Revenues increased 7.2% to $460.0 million. However, the segment recorded a significant $42.0 million provision for loan losses on mortgage loans held for investment, compared to $3.6 million in the prior year, due to declining collateral values and rising delinquencies.
- Debt Structure: Long-term debt increased to $1.03 billion following the issuance of $600 million in 7.875% Senior Notes in January 2008 to repay maturing facilities.
Guidance, Outlook, and Risks
- Outlook: Management expects the corporate cost reduction program to yield approximately $110 million in annual savings. The company anticipates borrowing on committed lines of credit during fiscal 2009 to fund off-season working capital requirements.
- Dividends: The Board approved an increase in the quarterly cash dividend to $0.15 per share, effective October 1, 2008.
- Share Repurchases: In June 2008, the Board rescinded previous share repurchase authorizations and approved a new authorization to purchase up to $2.0 billion of common stock over four years.
- Key Risks:
- Mortgage Repurchase Obligations: OOMC remains exposed to potential losses from repurchasing previously sold loans due to representation and warranty breaches. A liability of $243.1 million was recorded as of April 30, 2008.
- Loan Portfolio Quality: The mortgage loan portfolio held by HRB Bank faces deterioration due to declining housing prices. The loan loss reserve increased to 4.49% of the portfolio.
- Litigation: Significant pending litigation includes RAL (Refund Anticipation Loan) cases, Peace of Mind guarantee lawsuits, and claims related to discontinued mortgage operations. Management states it is unable to estimate the range of loss for many of these matters.
- Liquidity: Access to liquidity could be negatively impacted by credit rating downgrades or failure to meet debt covenants, though the company currently maintains sufficient liquidity.
Investor Verification Checklist
- Discontinued Operations Liability: Verify the adequacy of the $243.1 million reserve for mortgage loan repurchase obligations and the potential for future claims to exceed this estimate.
- Loan Loss Provisions: Monitor the delinquency rates and collateral values of the $1.0 billion mortgage loan portfolio held by HRB Bank for investment.
- Litigation Exposure: Track the status of pending RAL and Peace of Mind class action lawsuits, as outcomes could result in material liabilities.
- Debt Covenants: Confirm continued compliance with the minimum net worth covenant ($650 million) and the "clean down" requirement for short-term debt under the revolving credit facilities.
- Cost Reduction Execution: Assess the progress of the $110 million annual cost reduction initiative and its impact on operating margins.