Annual Reports

 
Quarterly Reports

  • 10-Q (Dec 7, 2017)
  • 10-Q (Sep 1, 2017)
  • 10-Q (Mar 8, 2017)
  • 10-Q (Dec 8, 2016)
  • 10-Q (Sep 1, 2016)
  • 10-Q (Mar 11, 2016)

 
8-K

 
Other

H&R Block 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Graphic
  7. Graphic
HRB 2014.10.31 10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended October 31, 2014
 
 
OR
¨

 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from             to             
Commission file number 1-6089
H&R Block, Inc.
(Exact name of registrant as specified in its charter)
MISSOURI
 
44-0607856
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
One H&R Block Way, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 854-3000
(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, 2014: 275,168,156 shares.
 



Form 10-Q for the Period Ended October 31, 2014

Table of Contents

 
 
 
 
 
Consolidated Statements of Operations and Comprehensive Income (Loss)
 
 
Three and six months ended October 31, 2014 and 2013
1
 
 
 
 
Consolidated Balance Sheets
 
 
As of October 31, 2014, October 31, 2013 and April 30, 2014
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
Six months ended October 31, 2014 and 2013
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legal Proceedings
 
 
 
Risk Factors
 
 
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
 
Exhibits
 
 
 
 



PART I    FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(unaudited, in 000s, except 
per share amounts)
 
 
 
Three months ended October 31,
 
Six months ended October 31,
 
 
2014

 
2013

 
2014

 
2013

 
 
 
 
 
 
 
 
 
REVENUES:
 
 
 
 
 
 
 
 
Service revenues
 
$
115,442

 
$
112,432

 
$
230,915

 
$
220,232

Royalty, product and other revenues
 
9,756

 
11,282

 
18,570

 
19,480

Interest income
 
9,430

 
10,626

 
18,729

 
21,823

 
 
134,628

 
134,340

 
268,214

 
261,535

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
Cost of revenues:
 
 
 
 
 
 
 
 
Compensation and benefits
 
69,381

 
60,526

 
121,236

 
106,838

Occupancy and equipment
 
87,626

 
82,358

 
170,932

 
161,094

Provision for bad debt and loan losses
 
385

 
2,849

 
4,749

 
14,340

Depreciation and amortization
 
28,429

 
22,095

 
53,514

 
40,715

Other
 
35,876

 
39,235

 
68,992

 
80,326

 
 
221,697

 
207,063

 
419,423

 
403,313

Selling, general and administrative:
 
 
 
 
 
 
 
 
Marketing and advertising
 
12,513

 
13,601

 
20,658

 
20,724

Compensation and benefits
 
54,353

 
54,818

 
115,317

 
107,865

Depreciation and amortization
 
10,500

 
4,573

 
19,101

 
8,827

Other selling, general and administrative
 
20,013

 
21,100

 
39,503

 
53,373


 
97,379

 
94,092

 
194,579

 
190,789

Total operating expenses
 
319,076

 
301,155

 
614,002

 
594,102

 
 
 
 
 
 
 
 
 
Other income (expense), net
 
(2,282
)
 
1,254

 
(2,963
)
 
(3,685
)
Interest expense on borrowings
 
13,843

 
13,801

 
27,638

 
27,604

Loss from continuing operations before income tax benefit
 
(200,573
)
 
(179,362
)
 
(376,389
)
 
(363,856
)
Income tax benefit
 
(87,346
)
 
(76,347
)
 
(154,311
)
 
(147,571
)
Net loss from continuing operations
 
(113,227
)
 
(103,015
)
 
(222,078
)
 
(216,285
)
Net income (loss) from discontinued operations,
net of tax (benefits) of $766 and ($1,218),
($3,798) and $(2,427)
 
1,229

 
(1,928
)
 
(6,152
)
 
(3,845
)
NET LOSS
 
$
(111,998
)
 
$
(104,943
)
 
$
(228,230
)
 
$
(220,130
)
 
 
 
 
 
 
 
 
 
BASIC AND DILUTED LOSS PER SHARE:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.41
)
 
$
(0.38
)
 
$
(0.81
)
 
$
(0.79
)
Discontinued operations
 

 
(0.01
)
 
(0.02
)
 
(0.01
)
Consolidated
 
$
(0.41
)
 
$
(0.39
)
 
$
(0.83
)
 
$
(0.80
)
 
 
 
 
 
 
 
 
 
DIVIDENDS DECLARED PER SHARE
 
$
0.20

 
$
0.20

 
$
0.40

 
$
0.40

 
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
 
Net loss
 
$
(111,998
)
 
$
(104,943
)
 
$
(228,230
)
 
$
(220,130
)
Unrealized gains (losses) on securities, net of taxes:
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
 
5,493

 
1,138

 
4,770

 
(6,577
)
Reclassification adjustment for gains included in income
 
(589
)
 

 
(15
)
 

Change in foreign currency translation adjustments
 
(3,810
)
 
582

 
(3,355
)
 
(2,510
)
Other comprehensive income (loss)
 
1,094

 
1,720

 
1,400

 
(9,087
)
Comprehensive loss
 
$
(110,904
)
 
$
(103,223
)
 
$
(226,830
)
 
$
(229,217
)
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

H&R Block, Inc. | Q2 FY2015 Form 10-Q
1


CONSOLIDATED BALANCE SHEETS
 
(unaudited, in 000s, except 
share and per share amounts)
 
As of
 
October 31, 2014

 
October 31, 2013

 
April 30, 2014

 
 


 


 
 
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
627,490

 
$
790,772

 
$
2,185,307

Cash and cash equivalents - restricted
 
55,543

 
47,521

 
115,319

Receivables, less allowance for doubtful accounts of $51,746, $52,969 and $52,578
 
107,705

 
131,701

 
191,618

Prepaid expenses and other current assets
 
285,463

 
225,660

 
198,267

Investments in available-for-sale securities
 
381,180

 

 
423,495

Total current assets
 
1,457,381

 
1,195,654

 
3,114,006

Mortgage loans held for investment, less allowance for loan losses of $9,761, $12,704 and $11,272
 
251,092

 
295,907

 
268,428

Investments in available-for-sale securities
 
9,774

 
465,344

 
4,329

Property and equipment, at cost less accumulated depreciation and amortization of $491,153, $449,738 and $446,049
 
318,225

 
311,157

 
304,911

Intangible assets, net
 
414,045

 
296,213

 
355,622

Goodwill
 
464,182

 
442,812

 
436,117

Other assets
 
176,591

 
267,426

 
210,116

Total assets
 
$
3,091,290

 
$
3,274,513

 
$
4,693,529

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
Customer banking deposits
 
$
454,860

 
$
655,129

 
$
769,785

Accounts payable, accrued expenses and other current liabilities
 
436,830

 
426,994

 
569,007

Accrued salaries, wages and payroll taxes
 
36,215

 
41,584

 
167,032

Accrued income taxes
 
147,000

 
22,475

 
406,655

Current portion of long-term debt
 
772

 
400,503

 
400,637

Total current liabilities
 
1,075,677

 
1,546,685

 
2,313,116

Long-term debt
 
505,588

 
506,078

 
505,837

Other noncurrent liabilities
 
271,349

 
266,775

 
318,027

Total liabilities
 
1,852,614

 
2,319,538

 
3,136,980

COMMITMENTS AND CONTINGENCIES
 


 


 


STOCKHOLDERS' EQUITY:
 
 
 
 
 
 
Common stock, no par, stated value $.01 per share, 800,000,000 shares authorized, shares issued of 316,628,110
 
3,166

 
3,166

 
3,166

Convertible preferred stock, no par, stated value $0.01 per share, 500,000 shares authorized
 

 

 

Additional paid-in capital
 
772,662

 
757,828

 
766,654

Accumulated other comprehensive income
 
6,577

 
1,463

 
5,177

Retained earnings
 
1,250,465

 
1,003,842

 
1,589,297

Less treasury shares, at cost
 
(794,194
)
 
(811,324
)
 
(807,745
)
Total stockholders' equity
 
1,238,676

 
954,975

 
1,556,549

Total liabilities and stockholders' equity
 
$
3,091,290

 
$
3,274,513

 
$
4,693,529

 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

2
Q2 FY2015 Form 10-Q | H&R Block, Inc.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited, in 000s)
 
Six months ended October 31,
 
2014

 
2013

 
 
 
 
 
NET CASH USED IN OPERATING ACTIVITIES
 
$
(627,577
)
 
$
(492,373
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchases of available-for-sale securities
 
(100
)
 
(45,158
)
Maturities of and payments received on available-for-sale securities
 
49,013

 
55,615

Principal payments on mortgage loans held for investment, net
 
13,451

 
24,340

Capital expenditures
 
(70,927
)
 
(86,926
)
Payments made for business acquisitions, net of cash acquired
 
(94,230
)
 
(20,927
)
Franchise loans:
 
 
 
 
Loans funded
 
(18,251
)
 
(22,114
)
Payments received
 
29,637

 
15,883

Other, net
 
10,685

 
15,255

Net cash used in investing activities
 
(80,722
)
 
(64,032
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Repayments of long-term debt
 
(400,000
)
 

Customer banking deposits, net
 
(316,269
)
 
(275,800
)
Dividends paid
 
(109,871
)
 
(109,324
)
Proceeds from exercise of stock options
 
14,477

 
24,536

Other, net
 
(33,639
)
 
(31,948
)
Net cash used in financing activities
 
(845,302
)
 
(392,536
)
 
 
 
 
 
Effects of exchange rate changes on cash
 
(4,216
)
 
(7,871
)
 
 
 
 
 
Net decrease in cash and cash equivalents
 
(1,557,817
)
 
(956,812
)
Cash and cash equivalents at beginning of the period
 
2,185,307

 
1,747,584

Cash and cash equivalents at end of the period
 
$
627,490

 
$
790,772

 
 
 
 
 
SUPPLEMENTARY CASH FLOW DATA:
 
 
 
 
Income taxes paid, net of refunds received
 
$
157,680

 
$
116,099

Interest paid on borrowings
 
27,379

 
27,804

Interest paid on deposits
 
341

 
1,180

Transfers of foreclosed loans to other assets
 
3,155

 
3,889

Accrued additions to property and equipment
 
3,243

 
6,729

Conversion of investment in preferred stock to available-for-sale common stock
 
5,000

 

Transfer of mortgage loans held for investment to held for sale
 

 
7,608

 
 
 
 
 
See accompanying notes to consolidated financial statements.



H&R Block, Inc. | Q2 FY2015 Form 10-Q
3


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                  (unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated balance sheets as of October 31, 2014 and 2013, the consolidated statements of operations and comprehensive income (loss) for the three and six months ended October 31, 2014 and 2013, and the condensed consolidated statements of cash flows for the six months ended October 31, 2014 and 2013 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 as of October 31, 2014 and 2013 and for all periods presented have been made.
"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 accounting principles generally accepted in the U. S. (GAAP) 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, 2014 Annual Report to Shareholders on Form 10-K. All amounts presented herein as of April 30, 2014 or for the year then ended are derived from our April 30, 2014 Annual Report to Shareholders on Form 10-K.
MANAGEMENT ESTIMATES The preparation of financial statements in conformity with GAAP 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, valuation allowances on deferred tax assets, reserves for uncertain tax positions and related matters. Estimates have been prepared based on the 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 typically occurring in the months of February through April. Therefore, results for interim periods are not indicative of results to be expected for the full year.
DISCONTINUED OPERATIONS – Our discontinued operations include the results of operations of Sand Canyon Corporation, previously known as Option One Mortgage Corporation (including its subsidiaries, collectively, SCC), which exited its mortgage business in fiscal year 2008. See notes 13 and 14 for additional information on litigation, claims and other loss contingencies related to our discontinued operations.
NOTE 2: H&R BLOCK BANK
In April 2014, our subsidiaries, H&R Block Bank (HRB Bank) and Block Financial LLC, the sole shareholder of HRB Bank (Block Financial), entered into a definitive Purchase and Assumption Agreement (P&A Agreement) with BofI Federal Bank, a federal savings bank (BofI). The P&A Agreement is subject to various closing conditions, including the receipt of certain required approvals, entry into certain additional agreements, and the fulfillment of various other customary conditions. If the closing conditions (including regulatory approvals) are satisfied, we will complete a transaction in which we will sell assets and assign certain liabilities, including all of HRB Bank's deposit liabilities, to BofI (P&A Transaction). The parties to the P&A Agreement entered into a Letter Agreement, effective October 23, 2014 (Letter Agreement), which, among other things, extended the date after which any party is permitted to terminate the P&A Agreement from October 31, 2014 to May 31, 2015. The Letter Agreement was filed as an exhibit to our current report on Form 8-K on October 23, 2014.
Due to the lack of regulatory approval, we do not expect to consummate the P&A Transaction this calendar year. Therefore, we will continue offering financial services products to our clients through HRB Bank for the upcoming tax season.
If a closing had occurred as of October 31, 2014, we would have made a cash payment to BofI for the difference in the carrying value of assets sold and the carrying value of liabilities (including deposit liabilities) transferred of approximately $437 million. The amount of the cash payment made at closing will primarily be equal to the carrying value of the liabilities to be transferred since the carrying value of the assets to be transferred is immaterial. Due to

4
Q2 FY2015 Form 10-Q | H&R Block, Inc.


the seasonality of our business, the timing of any closing of the P&A Transaction will impact the amount of deposit liabilities transferred. In connection with the closing we intend to liquidate the available-for-sale (AFS) securities held by HRB Bank, which totaled $381 million at October 31, 2014.
In connection with the additional agreements expected to be entered into upon the closing of the P&A Transaction, BofI would offer H&R Block-branded financial products distributed by the Company to the Company's clients. An operating subsidiary of the Company would provide certain marketing, servicing and operational support to BofI with respect to such financial products.
The P&A Transaction is part of a three-step transaction pursuant to which the Company plans to divest HRB Bank (Divestiture Transaction), including: (1) the conversion of HRB Bank from a federal savings bank to a national bank; (2) the sale of certain HRB Bank assets to and assignment of certain liabilities (including all deposit liabilities) to BofI in the P&A Transaction; and (3) the merger of HRB Bank with and into Block Financial.
H&R Block, Inc., H&R Block Group, Inc. and Block Financial (our Holding Companies) are savings and loan holding companies (SLHCs) because they control HRB Bank. By consummating the Divestiture Transaction, our Holding Companies would cease to be SLHCs and would no longer be subject to regulation by the Board of Governors of the Federal Reserve System (Federal Reserve) as SLHCs or to the regulatory capital requirements applicable to SLHCs.
The obligations of the parties to complete the P&A Transaction are subject to the fulfillment of numerous conditions, including regulatory approval. We cannot be certain when or if the conditions to the P&A Transaction will be satisfied, or whether the P&A Transaction will be completed. In addition, there may be changes to the terms and conditions of the P&A Agreement and other contemplated agreements as part of the regulatory approval process.
NOTE 3: LOSS PER SHARE AND STOCKHOLDERS' EQUITY
LOSS PER SHARE – 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 5.4 million shares for the three and six months ended October 31, 2014, and 6.0 million shares for the three and six months ended October 31, 2013, 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:
(in 000s, except per share amounts)
 
 
 
Three months ended October 31,
 
Six months ended October 31,
 
 
2014

 
2013

 
2014

 
2013

Net loss from continuing operations attributable to shareholders
 
$
(113,227
)
 
$
(103,015
)
 
$
(222,078
)
 
$
(216,285
)
Amounts allocated to participating securities
 
(97
)
 
(92
)
 
(186
)
 
(154
)
Net loss from continuing operations attributable to common shareholders
 
$
(113,324
)
 
$
(103,107
)
 
$
(222,264
)
 
$
(216,439
)
 
 
 
 
 
 
 
 
 
Basic weighted average common shares
 
275,106

 
273,907

 
274,841

 
273,494

Potential dilutive shares
 

 

 

 

Dilutive weighted average common shares
 
275,106

 
273,907

 
274,841

 
273,494

 
 
 
 
 
 
 
 
 
Loss per share from continuing operations attributable to common shareholders:
 
 
 
 
 
 
 
 
Basic
 
$
(0.41
)
 
$
(0.38
)
 
$
(0.81
)
 
$
(0.79
)
Diluted
 
(0.41
)
 
(0.38
)
 
(0.81
)
 
(0.79
)

H&R Block, Inc. | Q2 FY2015 Form 10-Q
5


STOCK-BASED COMPENSATION – During the six months ended October 31, 2014, we acquired 0.3 million shares of our common stock at an aggregate cost of $10.2 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, 2013, we acquired 0.2 million shares at an aggregate cost of $5.3 million for similar purposes.
During the six months ended October 31, 2014 and 2013, we issued 1.2 million and 1.6 million shares of common stock, respectively, due to the vesting or exercise of stock-based awards.
During the six months ended October 31, 2014, we granted equity awards equivalent to 1.0 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 $7.1 million and $14.6 million for the three and six months ended October 31, 2014, respectively, and $6.2 million and $10.8 million for the three and six months ended October 31, 2013, respectively. As of October 31, 2014, unrecognized compensation cost for stock options totaled $0.4 million, and for nonvested shares and units totaled $43.2 million.
OTHER COMPREHENSIVE INCOME Components of other comprehensive income include foreign currency translation adjustments and the change in net unrealized gains or losses on AFS marketable securities, and are as follows:
(in 000s)
 
 
 
Foreign Currency
Translation Adjustments

 
Unrealized Gain (Loss)
on AFS Securities

 
Total

Balances as of May 1, 2014
 
$
3,334

 
$
1,843

 
$
5,177

Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
Gross gains (losses) arising during the year
 
(3,355
)
 
7,483

 
4,128

Income taxes
 

 
2,713

 
2,713

 
 
(3,355
)
 
4,770

 
1,415

Amounts reclassified to net income:
 
 
 
 
 
 
Gross amount reclassified
 

 
(24
)
 
(24
)
Income taxes
 

 
(9
)
 
(9
)
 
 

 
(15
)
 
(15
)
Net other comprehensive income (loss)
 
(3,355
)
 
4,755

 
1,400

Balances as of October 31, 2014
 
$
(21
)
 
$
6,598

 
$
6,577

 
 
 
 
 
 
 
Balances as of May 1, 2013
 
$
6,809

 
$
3,741

 
$
10,550

Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
Gross losses arising during the year
 
(2,510
)
 
(10,914
)
 
(13,424
)
Income taxes
 

 
(4,337
)
 
(4,337
)
Net other comprehensive loss
 
(2,510
)
 
(6,577
)
 
(9,087
)
Balances as of October 31, 2013
 
$
4,299

 
$
(2,836
)
 
$
1,463

 
 
 
 
 
 
 
Gross amounts reclassified out of accumulated other comprehensive income are included in other income (expense), net in the consolidated statements of operations.

6
Q2 FY2015 Form 10-Q | H&R Block, Inc.


NOTE 4: RECEIVABLES
Receivables consist of the following:
(in 000s)
 
As of
 
October 31, 2014
 
October 31, 2013
 
April 30, 2014
 
 
Short-term

 
Long-term
 
Short-term

 
Long-term

 
Short-term

 
Long-term

Loans to franchisees
 
$
62,568

 
$
84,462

 
$
70,390

 
$
108,874

 
$
63,716

 
$
90,747

Receivables for tax preparation and related fees
 
36,369

 

 
35,927

 

 
45,619

 

Cash Back® receivables
 
1,955

 

 
2,036

 

 
48,812

 

Emerald Advance lines of credit
 
20,073

 
2,778

 
21,692

 
6,161

 
20,577

 
3,862

Royalties from franchisees
 
10,060

 

 
10,732

 

 
9,978

 

Note receivable
 

 

 

 
62,786

 

 

Other
 
28,426

 
14,565

 
43,893

 
23,868

 
55,494

 
17,186

 
 
159,451

 
101,805

 
184,670

 
201,689

 
244,196

 
111,795

Allowance for doubtful accounts
 
(51,746
)
 

 
(52,969
)
 
(3,092
)
 
(52,578
)
 

 
 
$
107,705

 
$
101,805

 
$
131,701

 
$
198,597

 
$
191,618

 
$
111,795

 
 
 
 
 
 
 
 
 
 
 
 
 
Balances presented above as short-term are included in receivables, while the long-term portions are included in other assets in the consolidated balance sheets.
LOANS TO FRANCHISEES Franchisee loan balances as of October 31, 2014 and 2013 and April 30, 2014, consisted of $100.6 million, $126.3 million and $109.1 million, respectively, in term loans made primarily to finance the purchase of franchises and $46.4 million, $53.0 million and $45.4 million, respectively, in revolving lines of credit primarily for the purpose of funding off-season working capital needs.
As of October 31, 2014 and 2013, loans with a principal balance of $2.4 million and $0.1 million, respectively, were more than 30 days past due, while we had no loans more than 30 days past due at April 30, 2014. We had no loans to franchisees on non-accrual status.
CANADIAN CASH BACK® PROGRAM Refunds advanced under the Cash Back program are not subject to credit approval, therefore the primary indicator of credit quality is the age of the receivable amount. Cash Back amounts are generally received within 60 days of filing the client's return. As of October 31, 2014 and 2013 and April 30, 2014, $27 thousand, $0.1 million and $1.9 million of Cash Back balances were more than 60 days old, respectively.
H&R BLOCK EMERALD ADVANCE® LINES OF CREDIT We review the credit quality of our H&R Block Emerald Advance® lines of credit (EA) receivables based on pools, which are segregated by the year of origination, with older years being deemed more unlikely to be repaid. These amounts as of October 31, 2014, by year of origination, are as follows:
(in 000s)
 
Credit Quality Indicator – Year of origination:
 
 
2014
 
$
3,802

2013
 
1,553

2012 and prior
 
4,412

Revolving loans
 
13,084

 
 
$
22,851

 
 
 
As of October 31, 2014 and 2013 and April 30, 2014, $20.0 million, $26.2 million and $20.7 million of EAs were on non-accrual status and classified as impaired, or more than 60 days past due, respectively.

H&R Block, Inc. | Q2 FY2015 Form 10-Q
7


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, 2014 and 2013 is as follows:
(in 000s)
 
 
 
EAs

 
Loans to 
Franchisees

 
Cash Back ®

 
All Other

 
Total

Balances as of May 1, 2014
 
$
7,530

 
$

 
$
3,002

 
$
42,046

 
$
52,578

Provision
 
380

 

 
149

 
2,195

 
2,724

Charge-offs
 

 

 
(1,074
)
 
(2,482
)
 
(3,556
)
Balances as of October 31, 2014
 
$
7,910

 
$

 
$
2,077

 
$
41,759

 
$
51,746

 
 
 
 
 
 
 
 
 
 
 
Balances as of May 1, 2013
 
$
7,390

 
$

 
$
2,769

 
$
47,544

 
$
57,703

Provision
 

 

 
188

 
5,923

 
6,111

Charge-offs
 

 

 
(479
)
 
(7,274
)
 
(7,753
)
Balances as of October 31, 2013
 
$
7,390

 
$

 
$
2,478

 
$
46,193

 
$
56,061

 
 
 
 
 
 
 
 
 
 
 
NOTE 5: MORTGAGE LOANS HELD FOR INVESTMENT
The composition of our mortgage loan portfolio is as follows:
(dollars in 000s)
 
As of
 
October 31, 2014
 
October 31, 2013
 
April 30, 2014
 
 
Amount

 
% of Total

 
Amount

 
% of Total

 
Amount

 
% of Total

Adjustable-rate loans
 
$
138,808

 
54
%
 
$
165,289

 
54
%
 
$
149,480

 
54
%
Fixed-rate loans
 
119,920

 
46
%
 
140,814

 
46
%
 
127,943

 
46
%
 
 
258,728

 
100
%
 
306,103

 
100
%
 
277,423

 
100
%
Unamortized deferred fees and costs
 
2,125

 
 
 
2,508

 
 
 
2,277

 
 
Less: Allowance for loan losses
 
(9,761
)
 
 
 
(12,704
)
 
 
 
(11,272
)
 
 
 
 
$
251,092

 
 
 
$
295,907

 
 
 
$
268,428

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Our loan loss allowance as a percent of mortgage loans was 3.8% as of October 31, 2014, compared to 4.2% as of October 31, 2013 and 4.1% as of April 30, 2014.
Activity in the allowance for loan losses for the six months ended October 31, 2014 and 2013 is as follows:
(in 000s)
 
Six months ended October 31,
 
2014

 
2013

Balance at beginning of the period
 
$
11,272

 
$
14,314

Provision
 
735

 
7,224

Recoveries
 
911

 
2,409

Charge-offs
 
(3,157
)
 
(11,243
)
Balance at end of the period
 
$
9,761

 
$
12,704

 
 
 
 
 

8
Q2 FY2015 Form 10-Q | H&R Block, Inc.


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:
(in 000s)
 
As of
 
October 31, 2014
 
October 31, 2013
 
April 30, 2014
 
 
Portfolio 
Balance

 
Related 
Allowance

 
Portfolio 
Balance

 
Related 
Allowance

 
Portfolio 
Balance

 
Related 
Allowance

Pooled (less than 60 days past due)
 
$
147,614

 
$
3,768

 
$
178,497

 
$
5,523

 
$
158,496

 
$
4,508

Impaired:
 
 
 
 
 
 
 
 
 
 
 
 
Individually (TDRs)
 
40,201

 
4,237

 
47,011

 
4,598

 
43,865

 
4,346

Individually (60 days or more past due)
 
70,913

 
1,756

 
80,595

 
2,583

 
75,062

 
2,418

 
 
$
258,728

 
$
9,761

 
$
306,103

 
$
12,704

 
$
277,423

 
$
11,272

 
 
 
 
 
 
 
 
 
 
 
 
 
Detail of our mortgage loans held for investment and the related allowance as of October 31, 2014 is as follows:
(dollars in 000s)
 
 
 
Outstanding Principal Balance

 
Loan Loss Allowance
 
% 30+ Days
Past Due

 
 
 
Amount

 
% of Principal

 
Purchased from SCC
 
$
148,833

 
$
7,847

 
5.3
%
 
27.9
%
All other
 
109,895

 
1,914

 
1.7
%
 
6.9
%
 
 
$
258,728

 
$
9,761

 
3.8
%
 
19.0
%
 
 
 
 
 
 
 
 
 
Credit quality indicators as of October 31, 2014 include the following:
(in 000s)
 
Credit Quality Indicators
 
Purchased from SCC

 
All Other

 
Total Portfolio

Occupancy status:
 
 
 
 
 
 
Owner occupied
 
$
109,069

 
$
72,767

 
$
181,836

Non-owner occupied
 
39,764

 
37,128

 
76,892

 
 
$
148,833

 
$
109,895

 
$
258,728

Documentation level:
 
 
 
 
 
 
Full documentation
 
$
49,157

 
$
77,974

 
$
127,131

Limited documentation
 
4,676

 
12,114

 
16,790

Stated income
 
83,074

 
12,305

 
95,379

No documentation
 
11,926

 
7,502

 
19,428

 
 
$
148,833

 
$
109,895

 
$
258,728

Internal risk rating:
 
 
 
 
 
 
High
 
$
41,758

 
$

 
$
41,758

Medium
 
107,075

 

 
107,075

Low
 

 
109,895

 
109,895

 
 
$
148,833

 
$
109,895

 
$
258,728

 
 
 
 
 
 
 
Loans given our internal risk rating of "high" generally had no documentation or were based on stated income. Loans given our internal risk rating of "medium" generally had full documentation or were 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" generally had 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

H&R Block, Inc. | Q2 FY2015 Form 10-Q
9


conditions related to a particular geographical location. Approximately 52% of our mortgage loan portfolio consists of loans to borrowers located in the states of Florida, California and New York.
Detail of the aging of the mortgage loans in our portfolio as of October 31, 2014 is as follows:
(in 000s)
 
 
 
Less than 60
Days Past Due

 
60 – 89 Days
Past Due

 
90+ Days
Past Due(1)

 
Total
Past Due

 
Current

 
Total

Purchased from SCC
 
$
11,199

 
$
324

 
$
47,514

 
$
59,037

 
$
89,796

 
$
148,833

All other
 
4,613

 
78

 
7,530

 
12,221

 
97,674

 
109,895

 
 
$
15,812

 
$
402

 
$
55,044

 
$
71,258

 
$
187,470

 
$
258,728

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
We do not accrue interest on loans past due 90 days or more.
Information related to our non-accrual loans is as follows:
(in 000s)
 
As of
 
October 31, 2014

 
October 31, 2013

 
April 30, 2014

Loans:
 
 
 
 
 
 
Purchased from SCC
 
$
60,254

 
$
67,641

 
$
61,767

Other
 
11,439

 
12,723

 
12,528

 
 
71,693

 
80,364

 
74,295

TDRs:
 
 
 
 
 
 
Purchased from SCC
 
5,059

 
3,832

 
4,648

Other
 
940

 
881

 
951

 
 
5,999

 
4,713

 
5,599

Total non-accrual loans
 
$
77,692

 
$
85,077

 
$
79,894

 
 
 
 
 
 
 
Information related to impaired loans is as follows:
(in 000s)
 
 
 
Balance
With Allowance

 
Balance
With No Allowance

 
Total
Impaired Loans

 
Related Allowance

As of October 31, 2014:
 
 
 
 
 
 
 
 
Purchased from SCC
 
$
25,494

 
$
68,138

 
$
93,632

 
$
4,984

Other
 
3,732

 
13,750

 
17,482

 
1,009

 
 
$
29,226

 
$
81,888

 
$
111,114

 
$
5,993

As of October 31, 2013:
 
 
 
 
 
 
 
 
Purchased from SCC
 
$
30,100

 
$
77,052

 
$
107,152

 
$
5,762

Other
 
5,196

 
15,258

 
20,454

 
1,419

 
 
$
35,296

 
$
92,310

 
$
127,606

 
$
7,181

As of April 30, 2014: