H&R Block 10-Q 2013
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file number 1-6089
H&R Block, Inc.
(Exact name of registrant as specified in its charter)
One H&R Block Way, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
The number of shares outstanding of the registrant’s Common Stock, without par value, at the close of business on November 30, 2013: 274,046,273 shares.
Form 10-Q for the Period Ended October 31, 2013
Table of Contents
PART I FINANCIAL INFORMATION
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated balance sheets as of October 31, 2013 and 2012, the consolidated statements of operations and comprehensive income (loss) for the three and six months ended October 31, 2013 and 2012, and the condensed consolidated statements of cash flows for the six months ended October 31, 2013 and 2012 have been prepared by the Company, without audit. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows at October 31, 2013 and 2012 and for all periods presented have been made. See note 14 for discussion of our presentation of discontinued operations.
“H&R Block,” “the Company,” “we,” “our” and “us” are used interchangeably to refer to H&R Block, Inc. or to H&R Block, Inc. and its subsidiaries, as appropriate to the context.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our April 30, 2013 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of April 30, 2013 or for the year then ended, are derived from our April 30, 2013 Annual Report to Shareholders on Form 10-K.
Management Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions and judgments are applied in the evaluation of contingent losses arising from our discontinued mortgage business, contingent losses associated with pending claims and litigation, allowance for loan losses, valuation allowances based on future taxable income, reserves for uncertain tax positions and related matters. Estimates have been prepared on the basis of the most current and best information available as of each balance sheet date. As such, actual results could differ materially from those estimates.
Seasonality of Business - Our operating revenues are seasonal in nature with peak revenues occurring in the months of January through April. Therefore, results for interim periods are not indicative of results to be expected for the full year.
Recently Issued or Newly Adopted Accounting Standards - In February 2013, the Financial Accounting Standards Board issued guidance which expands disclosure requirements for other comprehensive income. The guidance requires the reporting of the effect of the reclassification of items out of accumulated other comprehensive income on each affected net income line item. The guidance is effective for interim and annual periods beginning on or after December 15, 2012 and is to be applied prospectively. This guidance, which we adopted as of May 1, 2013, did not have a material impact on our financial statements.
NOTE 2: H&R BLOCK BANK
In July 2013, H&R Block Bank (HRB Bank) and Block Financial LLC (Block Financial) entered into a definitive Purchase and Assumption Agreement (P&A Agreement) with Republic Bank & Trust Company (Republic Bank) subject to various closing conditions, including the finalization of various operating agreements and receipt of certain required approvals (P&A Transaction). Prior to entering into the P&A Agreement, Republic Bank, which currently operates under a state bank charter and is regulated primarily by the Federal Deposit Insurance Corporation (FDIC), filed an application with the Office of the Comptroller of the Currency (OCC) for approval to convert to a national banking association. Approval and completion of this conversion were conditions to closing the P&A Transaction.
In October 2013, Republic Bank informed us that it had withdrawn its application for the conversion and its application for approval of the P&A Transaction, which was contingent upon the approval of the conversion. As a result, HRB Bank and Block Financial provided notice to Republic Bank of termination of the P&A Agreement.
We plan to continue offering financial services and products to our clients through HRB Bank during the 2014 tax season. We continue to explore alternatives for delivering financial products and services to our customers while
ceasing to be regulated as a savings and loan holding company (SLHC); however, we cannot predict the timing or the likelihood of ceasing to be regulated as an SLHC.
NOTE 3: LOSS PER SHARE AND STOCKHOLDERS' EQUITY
Basic and diluted loss per share is computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income from continuing operations attributable to common shareholders by the weighted average shares outstanding during each period. The dilutive effect of potential common shares is included in diluted earnings per share except in those periods with a loss from continuing operations. Diluted earnings per share excludes the impact of shares of common stock issuable upon the lapse of certain restrictions or the exercise of options to purchase 6.0 million shares for the three and six months ended October 31, 2013, and 8.9 million shares for the three and six months ended October 31, 2012, as the effect would be antidilutive due to the net loss from continuing operations during those periods.
The computations of basic and diluted earnings per share from continuing operations are as follows:
During the six months ended October 31, 2012, we purchased and immediately retired 21.3 million shares of our common stock at a cost of $315.0 million.
During the six months ended October 31, 2013, we acquired 0.2 million shares of our common stock at an aggregate cost of $5.3 million. These shares represent shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. During the six months ended October 31, 2012, we acquired 0.1 million shares at an aggregate cost of $2.4 million for similar purposes.
During the six months ended October 31, 2013 and 2012, we issued 1.6 million and 0.5 million shares of common stock, respectively, due to the vesting or exercise of stock-based awards.
During the six months ended October 31, 2013, we granted equity awards equivalent to approximately 0.8 million shares under our stock-based compensation plans, consisting primarily of nonvested units. Nonvested units generally either vest over a three-year period with one-third vesting each year or cliff vest at the end of a three-year period. Stock-based compensation expense of our continuing operations totaled $6.2 million and $10.8 million for the three and six months ended October 31, 2013, respectively, and $5.4 million and $7.8 million for the three and six months ended October 31, 2012, respectively. As of October 31, 2013, unrecognized compensation cost for stock options totaled $2.0 million, and for nonvested shares and units totaled $33.3 million.
NOTE 4: RECEIVABLES
Short-term receivables consist of the following:
The short-term portions of Emerald Advance lines of credit (EAs), loans made to franchisees, CashBack balances and credit card balances are included in receivables, while the long-term portions are included in other assets in the consolidated balance sheets. These amounts are as follows:
EAs – We review the credit quality of our EA receivables based on pools, which are segmented by the year of origination, with older years being deemed more unlikely to be repaid. Amounts as of October 31, 2013, by year of origination, are as follows:
As of October 31, 2013 and 2012 and April 30, 2013, $26.2 million, $30.3 million and $30.0 million of EAs were on non-accrual status and classified as impaired, or more than 60 days past due, respectively.
Loans to Franchisees – Loans made to franchisees as of October 31, 2013 and 2012 and April 30, 2013, consisted of $126.3 million, $136.9 million and $121.2 million, respectively, in term loans made primarily to finance the purchase of franchises and $53.0 million, $51.3 million and $47.3 million, respectively, in revolving lines of credit primarily for the purpose of funding off-season working capital needs.
As of October 31, 2013 and 2012 and April 30, 2013, loans with a principal amount of $0.1 million, $0.0 million and $0.1 million, respectively, were more than 30 days past due, however we had no loans to franchisees on non-accrual status.
Canadian CashBack Program – During the tax season our Canadian operations advance refunds due to certain clients from the Canada Revenue Agency for a fee (the CashBack program). Refunds advanced under the CashBack program are not subject to credit approval, therefore the primary indicator of credit quality is the age of the receivable amount. CashBack amounts are generally received within 60 days of filing the client's return. In September of each fiscal year, any balances more than 90 days old are charged-off against the related allowance. As of October 31, 2013 and 2012 and April 30, 2013, $0.1 million, $0.4 million and $1.8 million of CashBack balances were more than 60 days old, respectively.
Credit Cards – We utilize a four-tier underwriting approach at origination. Each of the four tiers, with Tier 4 representing the most risk, is comprised of a combination of FICO scores ranging from 521 to 680, generic and custom credit bureau based risk scores and client attributes. The criteria in the tiers are not subsequently updated. The population also includes certain clients which are “unscorable.” Although we utilize the borrower's credit score for underwriting, we do not consider the credit score to be a primary measure of credit quality, since it tends to be a lagging indicator. Credit card receivable balances as of October 31, 2013, by credit tier, are as follows:
An aging of our credit card receivable balances as of October 31, 2013 is as follows:
As of October 31, 2013 and April 30, 2013, a total of $0.3 million and $2.1 million in unamortized deferred fees and costs were capitalized related to our credit card balances, respectively.
Long-Term Note Receivable – We have a long-term note receivable in the amount of $54.0 million due from McGladrey & Pullen LLP (M&P) related to the sale of RSM McGladrey, Inc. (RSM) in November 2011. This note is unsecured and bears interest at a rate of 8.0%, with all principal and accrued interest due in May 2017. As of October 31, 2013, there is no allowance recorded related to this note. We continue to monitor publicly available information relevant to the financial condition of M&P to assess future collectibility. This note is included in other assets on the consolidated balance sheet, with a total of $62.8 million, $58.0 million and $60.4 million in principal and accrued interest recorded as of October 31, 2013 and 2012 and April 30, 2013, respectively.
Allowance for Doubtful Accounts – Activity in the allowance for doubtful accounts for our short-term and long-term receivables for the six months ended October 31, 2013 and 2012 is as follows:
There were no changes to our methodology for estimating our allowance for doubtful accounts during fiscal year 2014.
NOTE 5: MORTGAGE LOANS HELD FOR INVESTMENT AND RELATED ASSETS
The composition of our mortgage loan portfolio is as follows:
Our loan loss allowance as a percent of mortgage loans was 4.2% as of October 31, 2013, compared to 4.7% as of October 31, 2012 and 4.1% as of April 30, 2013.
Activity in the allowance for loan losses for the six months ended October 31, 2013 and 2012 is as follows:
During the first quarter of fiscal year 2014, we transferred $7.6 million of mortgage loans into the held-for-sale portfolio from the held-for-investment portfolio. At the time of the transfer, the amount by which cost exceeded fair value totaled $2.9 million. This write-down to fair value was recorded as a provision during the six months ended October 31, 2013 and subsequently charged-off. These loans were sold during the three months ended October 31, 2013.
When determining our allowance for loan losses, we evaluate loans less than 60 days past due on a pooled basis, while loans we consider impaired, including those loans more than 60 days past due or modified as a troubled debt restructuring (TDR), are evaluated individually. The balance of these loans and the related allowance is as follows:
Detail of our mortgage loans held for investment and the related allowance as of October 31, 2013 is as follows:
Credit quality indicators as of October 31, 2013 include the following:
Loans given our internal risk rating of “high” were originated by Sand Canyon Corporation, formerly known as Option One Mortgage Corporation, and its subsidiaries (SCC), and generally had no documentation or were based on stated income. Loans given our internal risk rating of “medium” were generally full documentation or based on stated income, with loan-to-value ratios at origination of more than 80%, and were made to borrowers with credit scores below 700 at origination. Loans given our internal risk rating of “low” were generally obtained from parties other than SCC, with loan-to-value ratios at origination of less than 80% and were made to borrowers with credit scores greater than 700 at origination.
Our mortgage loans held for investment include concentrations of loans to borrowers in certain states, which may result in increased exposure to loss as a result of changes in real estate values and underlying economic or market conditions related to a particular geographical location. Approximately 59% of our mortgage loan portfolio consists of loans to borrowers located in the states of Florida, California, New York and Wisconsin.
Detail of the aging of the mortgage loans in our portfolio as of October 31, 2013 is as follows:
Information related to our non-accrual loans is as follows:
Information related to impaired loans is as follows: