H&R Block, Inc. — FY2015 Form 10-K
Period clarification: The filing covers the fiscal year ended April 30, 2015, not a standalone “2014 Q4” period. H&R Block’s business is highly seasonal, with most tax-related revenue generated from January through April. Figures below are in U.S. dollars unless noted.
Business context and reporting period
The company provides assisted and do-it-yourself tax preparation services and related products, principally in the U.S., Canada and Australia. Its Tax Services segment also included retail banking through H&R Block Bank (HRB Bank). Discontinued operations include legacy mortgage operations at Sand Canyon Corporation (SCC) and the former Business Services segment.
H&R Block prepared 24.2 million tax returns worldwide in FY2015, essentially flat with FY2014. U.S. returns declined to 20.6 million from 20.8 million.
Financial results and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $3.079 billion | $3.024 billion |
| Income from continuing operations before tax | $742.8 million | $767.1 million |
| Net income from continuing operations | $486.7 million | $500.1 million |
| Net income | $473.7 million | $475.2 million |
| Diluted EPS, continuing operations | $1.75 | $1.81 |
| Operating cash flow | $626.6 million | $809.6 million |
| Cash and cash equivalents at year-end | $2.007 billion | $2.185 billion |
| Long-term debt, including current portion | $506.1 million | $906.5 million |
| Stockholders’ equity | $1.833 billion | $1.557 billion |
Revenue rose 1.8%, while continuing-operations net income declined 2.7% and diluted continuing-operations EPS fell 3.3%. Adjusted EBITDA from continuing operations, a non-GAAP measure, increased 2.0% to $951.0 million. The Tax Services pretax margin declined to 26.9% from 28.9%.
Operating cash flow fell $183.0 million, primarily reflecting $80.9 million of higher income tax payments and a $50.0 million settlement payment related to representations and warranties. Investing activities used $148.9 million, including $113.3 million for acquisitions and $123.2 million of capital expenditures. Financing activities used $645.8 million, including repayment of $400.0 million of notes that matured in October 2014 and $220.0 million of dividends paid.
Year-end cash included $474.9 million held by HRB Bank, which was not available for general corporate purposes without regulatory approval, and $155.5 million held by foreign subsidiaries. The company had a $1.5 billion committed credit line, no outstanding commercial paper at year-end, and reported peak commercial paper borrowings of $718.6 million during the year. It stated that available capital and liquidity sources were sufficient for operating and financing needs absent unexpected developments.
Material changes versus FY2014
- Tax Services revenue increased $56.8 million, or 1.9%. U.S. assisted preparation fees rose 4.0%; U.S. DIY fees rose 12.3%, supported by an 8.1% increase in paid DIY returns. Refund-transfer revenue fell 5.7% and royalties fell 7.4%, with the royalty decline largely attributed to franchisee acquisitions.
- Tax Services operating expenses increased 5.1%. Higher marketing spending and depreciation and amortization—including acquisition-related costs—contributed to the lower segment pretax margin.
- The company’s $400.0 million 5.125% Senior Notes matured and were repaid from cash. Long-term debt consequently declined substantially.
- Net loss from discontinued operations narrowed to $13.1 million from $24.9 million, including lower SCC representation-and-warranty provisions and favorable legal settlement adjustments in the former Business Services segment.
- FY2015 results included a $16.0 million SCC provision for representation-and-warranty claims; FY2014 included a $25.0 million provision. SCC paid $50.0 million in settlements during FY2015, covered by prior accruals.
Outlook, risks, contingencies and unusual items
- HRB Bank divestiture: The proposed sale and transfer of HRB Bank assets and liabilities, including deposits, to BofI Federal Bank remained subject to regulatory approvals and other conditions. As of the filing date, June 17, 2015, formal regulatory approval had not been received, and the company did not expect the previously contemplated June 30 closing. Completion and timing were uncertain. H&R Block expected the related ongoing arrangements to dilute annual FY2016 earnings by approximately $0.07–$0.09 per share, depending on product volumes and closing timing.
- Regulatory capital and shareholder returns: While the company remained a savings and loan holding company, new capital requirements could constrain capital allocation, particularly share repurchases. The company had historically paid dividends but gave no assurance that future dividends or repurchases would continue at prior levels.
- SCC legacy exposure: SCC had accrued $149.8 million for estimated representation-and-warranty losses. The filing warns that indemnification and contribution claims connected with mortgage securitizations were not accrued because loss was not considered probable or reasonably estimable; potential payments could nevertheless be material. SCC’s principal assets were approximately $480 million. H&R Block also disclosed limited guarantees and the possibility that creditors or claimants could seek recovery from the parent.
- Other risks: Intense competition, including free tax-preparation offerings; cybersecurity, data privacy and stolen-identity refund fraud; system availability during peak season; regulatory changes; seasonal staffing and cash-management demands; litigation; foreign exchange exposure; and mortgage-loan credit risk. Mortgage loans held for investment had a $239.3 million carrying value versus $190.2 million estimated fair value.
- Tax and legal estimates: Unrecognized tax benefits were $86.3 million, of which $55.3 million would affect the effective tax rate if recognized. The company reported $8.9 million accrued for litigation matters and said its estimated aggregate reasonably possible losses in excess of accruals were not material, while noting that some exposures could not be estimated.
Important facts for investors to verify
- Check subsequent filings for whether, when and on what final terms the HRB Bank divestiture closed, and compare actual financial-services economics with the stated FY2016 per-share dilution estimate.
- Track U.S. assisted and DIY return counts, paid-return mix, pricing, and whether higher marketing and acquisition-related costs are generating sustainable growth.
- Assess seasonal liquidity, cash accessibility—including bank and foreign-held balances—credit-line capacity, debt maturities and dividend sustainability.
- Monitor SCC representation-and-warranty accruals, settlements, litigation, indemnification claims and any developments affecting potential parent-company exposure.
- Review the audited statements and notes for updates to mortgage-loan valuations and delinquencies, tax reserves, litigation accruals, and the assumptions underlying non-GAAP adjusted results.