H&R Block, Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2009, the first quarter of fiscal 2010. Amounts below are in millions unless stated otherwise. H&R Block’s business is highly seasonal, with peak tax-preparation revenues in January through April; interim results are not indicative of full-year results.
Financial performance
| Metric | Q1 FY2010 | Q1 FY2009 |
|---|---|---|
| Revenue | $275.5 | $271.9 |
| Operating loss | $(214.2) | $(211.6) |
| Loss from continuing operations | $(130.6) | $(128.4) |
| Net loss | $(133.6) | $(132.7) |
| Basic and diluted loss per share | $(0.40) | $(0.41) |
| Cash used in operating activities | $(454.6) | $(364.9) |
| Cash and cash equivalents at period end | $1,006.3 | $245.5 |
- Revenue increased 1.3%, while operating expenses rose to $489.7 million from $483.5 million. The reported operating loss widened modestly.
- Tax Services revenue grew 7.7% to $88.0 million, primarily reflecting favorable Australian tax operations; its pretax loss widened to $172.0 million. Business Services revenue rose 1.7% to $177.6 million and moved to pretax income of $1.3 million from a small loss.
- Corporate revenue declined to $9.9 million from $15.6 million, while its pretax loss narrowed to $40.2 million from $49.0 million. Lower prior-year impairment expense helped, partly offset by reduced mortgage-loan interest income.
- Cash used in operations increased mainly because of higher income-tax payments. Investing activities provided $15.4 million; financing activities used $216.2 million, including $143.2 million of net customer-deposit outflows and $50.3 million of dividends.
- Cash fell $648.4 million from April 30, 2009. Current assets were $1.83 billion versus current liabilities of $1.82 billion at July 31.
Balance sheet, debt and liquidity
- Total assets were $4.55 billion and stockholders’ equity was $1.19 billion at July 31, down from $5.36 billion and $1.41 billion, respectively, at April 30.
- Long-term debt was $1.032 billion, with a further $6.1 million current portion. Federal Home Loan Bank borrowings totaled $100 million. No borrowings were outstanding under the company’s revolving credit facilities.
- The company maintained $2.0 billion in revolving credit facilities, but a lender in bankruptcy was not honoring its $50 million commitment, reducing effective availability to $1.95 billion. Management said existing capital sources were expected to meet operating needs absent unexpected developments.
- H&R Block Bank reported a 13.8% leverage ratio at July 31, above the stated 5.0% well-capitalized threshold.
Material changes, outlook and risks
- The allowance for mortgage loan losses increased to $91.7 million, or 11.56% of the portfolio, from $84.1 million, or 10.23%, at April 30. Nonperforming assets rose to $367.4 million from $348.4 million. Delinquencies were particularly high in loans purchased from Sand Canyon Corporation (SCC); about 51% of the overall mortgage portfolio was concentrated in Florida, California and New York.
- SCC’s loan repurchase liability was $202.4 million at July 31. The filing warns that claims and litigation relating to discontinued mortgage operations may increase and could materially affect results.
- McGladrey & Pullen gave notice of intent to terminate its administrative services agreement with RSM McGladrey, potentially ending their alternative practice structure on February 16, 2010. Arbitration and negotiations were ongoing. Management’s interim goodwill assessment found the RSM reporting unit’s fair value above carrying value, but adverse developments or changed assumptions could lead to impairment.
- Other material legal exposures include Peace of Mind, Express IRA, RSM EquiCo and refund-anticipation-loan litigation. The company stated that some claims are substantial and outcomes uncertain; accrued litigation and related obligations totaled $25.3 million.
- Management expected a full-year FY2010 effective tax rate of approximately 40%. The filing provides no specific full-year revenue or earnings guidance. Management also noted that weak middle-market acquisition financing could keep capital-markets revenue below expectations and potentially prompt review of $29.3 million of related goodwill.
- Cash dividends were $0.15 per share for the quarter, versus $0.14 a year earlier. Disclosure controls were deemed effective, with no material changes in internal control reported.
Important facts for investors to verify
- Whether cash generation and liquidity remain adequate through the company’s seasonal operating-loss period, including the availability and terms of the $1.95 billion effective revolver.
- Whether mortgage delinquencies, nonperforming assets and required loan-loss reserves continue to rise, especially for loans acquired from SCC.
- The outcome of the RSM–M&P arbitration and negotiations, and any effect on RSM revenue, costs, client retention or goodwill impairment.
- Developments in SCC repurchase and indemnification obligations and in the disclosed litigation, including possible effects beyond recorded accruals.
- Whether operating performance outside tax season, the approximately 40% tax-rate expectation and the continuing dividend remain consistent with management’s expectations.