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 January 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 February 28, 2014: 274,217,420 shares.
Form 10-Q for the Period Ended January 31, 2014
Table of Contents
Consolidated Balance Sheets | ||
As of January 31, 2014, January 31, 2013 and April 30, 2013 | ||
Consolidated Statements of Operations and Comprehensive Income (Loss) | ||
Three and nine months ended January 31, 2014 and 2013 | ||
Condensed Consolidated Statements of Cash Flows | ||
Nine months ended January 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 BALANCE SHEETS | (in 000s, except share and per share amounts) | |||||||||||
As of | January 31, 2014 | January 31, 2013 | April 30, 2013 | |||||||||
(unaudited) | (unaudited) | |||||||||||
ASSETS | ||||||||||||
Cash and cash equivalents | $ | 437,404 | $ | 418,385 | $ | 1,747,584 | ||||||
Cash and cash equivalents — restricted | 44,855 | 37,958 | 117,837 | |||||||||
Receivables, less allowance for doubtful accounts of $42,716, $44,829 and $50,399 | 677,221 | 949,160 | 206,835 | |||||||||
Prepaid expenses and other current assets | 345,231 | 331,046 | 390,087 | |||||||||
Total current assets | 1,504,711 | 1,736,549 | 2,462,343 | |||||||||
Mortgage loans held for investment, less allowance for loan losses of $11,563, $17,256 and $14,314 | 282,149 | 357,887 | 338,789 | |||||||||
Investments in available-for-sale securities | 443,770 | 396,312 | 486,876 | |||||||||
Property and equipment, at cost less accumulated depreciation and amortization of $469,733, $510,052 and $420,318 | 314,565 | 273,450 | 267,880 | |||||||||
Intangible assets, net | 318,719 | 288,238 | 284,439 | |||||||||
Goodwill | 437,386 | 435,256 | 434,782 | |||||||||
Other assets | 213,987 | 444,804 | 262,670 | |||||||||
Total assets | $ | 3,515,287 | $ | 3,932,496 | $ | 4,537,779 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
LIABILITIES: | ||||||||||||
Commercial paper borrowings | $ | 194,984 | $ | 424,967 | $ | — | ||||||
Customer banking deposits | 806,887 | 1,036,968 | 936,464 | |||||||||
Accounts payable, accrued expenses and other current liabilities | 520,121 | 479,660 | 523,921 | |||||||||
Accrued salaries, wages and payroll taxes | 108,583 | 103,538 | 134,970 | |||||||||
Accrued income taxes | 23,375 | 17,348 | 416,128 | |||||||||
Current portion of long-term debt | 400,570 | 713 | 722 | |||||||||
Total current liabilities | 2,054,520 | 2,063,194 | 2,012,205 | |||||||||
Long-term debt | 505,959 | 906,012 | 905,958 | |||||||||
Other noncurrent liabilities | 268,049 | 328,402 | 356,069 | |||||||||
Total liabilities | 2,828,528 | 3,297,608 | 3,274,232 | |||||||||
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 | 762,102 | 747,398 | 752,483 | |||||||||
Accumulated other comprehensive income (loss) | (4,776 | ) | 9,055 | 10,550 | ||||||||
Retained earnings | 734,233 | 723,676 | 1,333,445 | |||||||||
Less treasury shares, at cost | (807,966 | ) | (848,407 | ) | (836,097 | ) | ||||||
Total stockholders’ equity | 686,759 | 634,888 | 1,263,547 | |||||||||
Total liabilities and stockholders’ equity | $ | 3,515,287 | $ | 3,932,496 | $ | 4,537,779 | ||||||
See accompanying notes to consolidated financial statements.
H&R Block Q3 FY2014 Form 10-Q | 1 |
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) | (unaudited, in 000s, except per share amounts) | |||||||||||||||
Three months ended | Nine months ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
REVENUES: | ||||||||||||||||
Service revenues | $ | 138,613 | $ | 362,194 | $ | 358,845 | $ | 558,528 | ||||||||
Product and other revenues | 23,788 | 71,485 | 43,268 | 89,171 | ||||||||||||
Interest income | 37,369 | 38,300 | 59,192 | 58,032 | ||||||||||||
199,770 | 471,979 | 461,305 | 705,731 | |||||||||||||
OPERATING EXPENSES: | ||||||||||||||||
Cost of revenues: | ||||||||||||||||
Compensation and benefits | 160,830 | 160,081 | 267,668 | 254,430 | ||||||||||||
Occupancy and equipment | 88,387 | 84,710 | 249,481 | 247,059 | ||||||||||||
Provision for bad debt and loan losses | 31,420 | 43,028 | 45,760 | 51,398 | ||||||||||||
Interest | 14,443 | 19,428 | 43,203 | 64,895 | ||||||||||||
Depreciation of property and equipment | 23,054 | 18,381 | 60,002 | 49,111 | ||||||||||||
Other | 45,403 | 51,990 | 128,340 | 116,160 | ||||||||||||
363,537 | 377,618 | 794,454 | 783,053 | |||||||||||||
Selling, general and administrative | 174,448 | 186,997 | 365,237 | 352,802 | ||||||||||||
537,985 | 564,615 | 1,159,691 | 1,135,855 | |||||||||||||
Operating loss | (338,215 | ) | (92,636 | ) | (698,386 | ) | (430,124 | ) | ||||||||
Other income (expense), net | (9,610 | ) | (3,632 | ) | (13,295 | ) | 2,299 | |||||||||
Loss from continuing operations before income tax benefit | (347,825 | ) | (96,268 | ) | (711,681 | ) | (427,825 | ) | ||||||||
Income tax benefit | (135,074 | ) | (79,353 | ) | (282,645 | ) | (204,061 | ) | ||||||||
Net loss from continuing operations | (212,751 | ) | (16,915 | ) | (429,036 | ) | (223,764 | ) | ||||||||
Net loss from discontinued operations | (1,960 | ) | (793 | ) | (5,805 | ) | (6,628 | ) | ||||||||
NET LOSS | $ | (214,711 | ) | $ | (17,708 | ) | $ | (434,841 | ) | $ | (230,392 | ) | ||||
BASIC AND DILUTED LOSS PER SHARE: | ||||||||||||||||
Continuing operations | $ | (0.78 | ) | $ | (0.06 | ) | $ | (1.57 | ) | $ | (0.82 | ) | ||||
Discontinued operations | — | (0.01 | ) | (0.02 | ) | (0.02 | ) | |||||||||
Consolidated | $ | (0.78 | ) | $ | (0.07 | ) | $ | (1.59 | ) | $ | (0.84 | ) | ||||
DIVIDENDS PER SHARE | $ | 0.20 | $ | 0.20 | $ | 0.60 | $ | 0.60 | ||||||||
COMPREHENSIVE INCOME (LOSS): | ||||||||||||||||
Net loss | $ | (214,711 | ) | $ | (17,708 | ) | $ | (434,841 | ) | $ | (230,392 | ) | ||||
Unrealized gains (losses) on available-for-sale securities, net of taxes: | ||||||||||||||||
Unrealized holding losses arising during the period, net of tax benefit of $(1,869), $(405), $(6,206) and $(122) | (2,926 | ) | (605 | ) | (9,503 | ) | (248 | ) | ||||||||
Reclassification adjustment for gains included in income, net of taxes of $ -, $ - , $ - and $71 | — | — | — | (104 | ) | |||||||||||
Change in foreign currency translation adjustments | (3,313 | ) | 975 | (5,823 | ) | (2,738 | ) | |||||||||
Other comprehensive income (loss) | (6,239 | ) | 370 | (15,326 | ) | (3,090 | ) | |||||||||
Comprehensive loss | $ | (220,950 | ) | $ | (17,338 | ) | $ | (450,167 | ) | $ | (233,482 | ) | ||||
See accompanying notes to consolidated financial statements.
2 | H&R Block Q3 FY2014 Form 10-Q |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | (unaudited, in 000s) | |||||||
Nine months ended January 31, | 2014 | 2013 | ||||||
NET CASH USED IN OPERATING ACTIVITIES | $ | (1,120,322 | ) | $ | (1,311,926 | ) | ||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of available-for-sale securities | (45,158 | ) | (108,351 | ) | ||||
Maturities of and payments received on available-for-sale securities | 72,502 | 86,808 | ||||||
Principal payments on mortgage loans held for investment, net | 35,320 | 31,205 | ||||||
Capital expenditures | (125,654 | ) | (96,063 | ) | ||||
Payments made for business acquisitions, net of cash acquired | (37,865 | ) | (20,662 | ) | ||||
Proceeds received on notes receivable | 64,865 | — | ||||||
Franchise loans: | ||||||||
Loans funded | (62,039 | ) | (68,874 | ) | ||||
Payments received | 17,893 | 9,594 | ||||||
Other, net | 12,227 | (13,973 | ) | |||||
Net cash used in investing activities | (67,909 | ) | (180,316 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Repayments of commercial paper and other short-term borrowings | (80,930 | ) | (789,271 | ) | ||||
Proceeds from issuance of commercial paper and other short-term borrowings | 275,914 | 1,214,238 | ||||||
Repayments of long-term debt | — | (636,621 | ) | |||||
Proceeds from issuance of long-term debt | — | 497,185 | ||||||
Customer banking deposits, net | (124,947 | ) | 208,753 | |||||
Dividends paid | (164,134 | ) | (162,692 | ) | ||||
Repurchase of common stock, including shares surrendered | (6,047 | ) | (340,298 | ) | ||||
Proceeds from exercise of stock options | 28,083 | 11,529 | ||||||
Other, net | (29,872 | ) | (36,113 | ) | ||||
Net cash used in financing activities | (101,933 | ) | (33,290 | ) | ||||
Effects of exchange rate changes on cash | (20,016 | ) | (417 | ) | ||||
Net decrease in cash and cash equivalents | (1,310,180 | ) | (1,525,949 | ) | ||||
Cash and cash equivalents at beginning of the period | 1,747,584 | 1,944,334 | ||||||
Cash and cash equivalents at end of the period | $ | 437,404 | $ | 418,385 | ||||
SUPPLEMENTARY CASH FLOW DATA: | ||||||||
Income taxes paid, net of refunds received | $ | 87,672 | $ | 104,986 | ||||
Interest paid on borrowings | 43,297 | 62,160 | ||||||
Interest paid on deposits | 1,696 | 4,377 | ||||||
Transfers of foreclosed loans to other assets | 6,389 | 7,208 | ||||||
Accrued additions to property and equipment | 4,113 | 1,001 | ||||||
Transfer of mortgage loans held for investment to held for sale | 7,608 | — | ||||||
See accompanying notes to consolidated financial statements.
H&R Block Q3 FY2014 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 January 31, 2014 and 2013, the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended January 31, 2014 and 2013, and the condensed consolidated statements of cash flows for the nine months ended January 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 at January 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 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 typically 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.
NOTE 2: 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 5.7 million shares for the three and nine months ended January 31, 2014, and 7.7 million shares for the three and nine months ended January 31, 2013, as the effect would be antidilutive due to the net loss from continuing operations during those periods.
4 | H&R Block Q3 FY2014 Form 10-Q |
The computations of basic and diluted earnings per share from continuing operations are as follows:
(in 000s, except per share amounts) | ||||||||||||||||
Three months ended | Nine months ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net loss from continuing operations attributable to shareholders | $ | (212,751 | ) | $ | (16,915 | ) | $ | (429,036 | ) | $ | (223,764 | ) | ||||
Amounts allocated to participating securities | (88 | ) | (62 | ) | (242 | ) | (199 | ) | ||||||||
Net loss from continuing operations attributable to common shareholders | $ | (212,839 | ) | $ | (16,977 | ) | $ | (429,278 | ) | $ | (223,963 | ) | ||||
Basic weighted average common shares | 274,110 | 271,542 | 273,699 | 273,281 | ||||||||||||
Potential dilutive shares | — | — | — | — | ||||||||||||
Dilutive weighted average common shares | 274,110 | 271,542 | 273,699 | 273,281 | ||||||||||||
Loss per share from continuing operations attributable to common shareholders: | ||||||||||||||||
Basic | $ | (0.78 | ) | $ | (0.06 | ) | $ | (1.57 | ) | $ | (0.82 | ) | ||||
Diluted | (0.78 | ) | (0.06 | ) | (1.57 | ) | (0.82 | ) | ||||||||
During the nine months ended January 31, 2013, we purchased and immediately retired 21.3 million shares of our common stock at a cost of $315.0 million.
During the nine months ended January 31, 2014, we acquired 0.2 million shares of our common stock at an aggregate cost of $6.0 million. These shares represent shares swapped or surrendered to us in connection with the vesting or exercise of stock-based awards. During the nine months ended January 31, 2013, we acquired 0.2 million shares at an aggregate cost of $2.8 million for similar purposes.
During the nine months ended January 31, 2014 and 2013, we issued 1.8 million and 1.3 million shares of common stock, respectively, due to the vesting or exercise of stock-based awards.
During the nine months ended January 31, 2014, we granted equity awards equivalent to 0.9 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 $4.7 million and $15.5 million for the three and nine months ended January 31, 2014, respectively, and $3.7 million and $11.5 million for the three and nine months ended January 31, 2013, respectively. As of January 31, 2014, unrecognized compensation cost for stock options totaled $1.4 million, and for nonvested shares and units totaled $28.2 million.
H&R Block Q3 FY2014 Form 10-Q | 5 |
NOTE 3: RECEIVABLES
Short-term receivables consist of the following:
(in 000s) | ||||||||||||
As of | January 31, 2014 | January 31, 2013 | April 30, 2013 | |||||||||
Loans to franchisees | $ | 104,841 | $ | 110,560 | $ | 65,413 | ||||||
Receivables for tax preparation and related fees | 60,162 | 250,566 | 49,356 | |||||||||
Canadian CashBack receivables | 10,099 | 13,052 | 47,658 | |||||||||
Emerald Advance lines of credit | 444,590 | 462,576 | 23,218 | |||||||||
Royalties from franchisees | 30,309 | 69,627 | 10,722 | |||||||||
RAC fees receivable | 13,413 | 31,680 | — | |||||||||
Credit cards | 5,610 | 4,220 | 7,733 | |||||||||
Other | 50,913 | 51,708 | 53,134 | |||||||||
719,937 | 993,989 | 257,234 | ||||||||||
Allowance for doubtful accounts | (42,716 | ) | (44,829 | ) | (50,399 | ) | ||||||
$ | 677,221 | $ | 949,160 | $ | 206,835 | |||||||
We recognize revenue for tax preparation services when tax returns are electronically filed. We did not recognize revenue and related receivables for 1.8 million tax returns in our fiscal third quarter.
The short-term portions of Emerald Advance lines of credit (EAs), loans made to franchisees, CashBack balances (as discussed below) 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:
(in 000s) | ||||||||||||||||
EAs | Loans to Franchisees | CashBack | Credit Cards | |||||||||||||
As of January 31, 2014: | ||||||||||||||||
Short-term | $ | 444,590 | $ | 104,841 | $ | 10,099 | $ | 5,610 | ||||||||
Long-term | 5,555 | 114,676 | — | 11,378 | ||||||||||||
$ | 450,145 | $ | 219,517 | $ | 10,099 | $ | 16,988 | |||||||||
As of January 31, 2013: | ||||||||||||||||
Short-term | $ | 462,576 | $ | 110,560 | $ | 13,052 | $ | 4,220 | ||||||||
Long-term | 10,465 | 127,274 | — | 16,045 | ||||||||||||
$ | 473,041 | $ | 237,834 | $ | 13,052 | $ | 20,265 | |||||||||
As of April 30, 2013: | ||||||||||||||||
Short-term | $ | 23,218 | $ | 65,413 | $ | 47,658 | $ | 7,733 | ||||||||
Long-term | 9,819 | 103,047 | — | 15,538 | ||||||||||||
$ | 33,037 | $ | 168,460 | $ | 47,658 | $ | 23,271 | |||||||||
6 | H&R Block Q3 FY2014 Form 10-Q |
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 January 31, 2014, by year of origination, are as follows:
(in 000s) | ||||
Credit Quality Indicator – Year of origination: | ||||
2014 | $ | 415,081 | ||
2013 | 7,295 | |||
2012 | 1,006 | |||
2011 | 1,912 | |||
2010 and prior | 6,199 | |||
Revolving loans | 18,652 | |||
$ | 450,145 | |||
As of January 31, 2014 and 2013 and April 30, 2013, $25.7 million, $30.7 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 January 31, 2014 and 2013 and April 30, 2013, consisted of $132.3 million, $144.5 million and $121.2 million, respectively, in term loans made primarily to finance the purchase of franchises and $87.2 million, $93.3 million and $47.3 million, respectively, in revolving lines of credit primarily for the purpose of funding off-season working capital needs.
As of January 31, 2014 and April 30, 2013, loans with a principal amount of $0.6 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 January 31, 2013. 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 January 31, 2014 and 2013 and April 30, 2013, $0.5 million, $1.3 million and $1.8 million of CashBack balances were more than 60 days old, respectively.
Long-Term Note Receivable – We had a 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 was scheduled to mature in May 2017, along with all accrued interest. In December 2013, we received full payment in cash totaling $64.9 million, which included outstanding principal and accrued interest.
Allowance for Doubtful Accounts – Activity in the allowance for doubtful accounts for our short-term and long-term receivables for the nine months ended January 31, 2014 and 2013 is as follows:
(in 000s) | ||||||||||||||||||||||||
EAs | Loans to Franchisees | CashBack | Credit Cards | All Other | Total | |||||||||||||||||||
Balances as of May 1, 2013 | $ | 7,390 | $ | — | $ | 2,769 | $ | 7,304 | $ | 40,240 | $ | 57,703 | ||||||||||||
Provision | 24,787 | 42 | 248 | 6,785 | 5,417 | 37,279 | ||||||||||||||||||
Charge-offs | — | (2 | ) | (1,667 | ) | (8,654 | ) | (39,412 | ) | (49,735 | ) | |||||||||||||
Balances as of January 31, 2014 | $ | 32,177 | $ | 40 | $ | 1,350 | $ | 5,435 | $ | 6,245 | $ | 45,247 | ||||||||||||
Balances as of May 1, 2012 | $ | 6,200 | $ | — | $ | 2,279 | $ | — | $ | 36,110 | $ | 44,589 | ||||||||||||
Provision | 25,519 | 42 | 385 | 4,255 | 10,281 | 40,482 | ||||||||||||||||||
Charge-offs | — | — | (1,292 | ) | — | (38,950 | ) | (40,242 | ) | |||||||||||||||
Balances as of January 31, 2013 | $ | 31,719 | $ | 42 | $ | 1,372 | $ | 4,255 | $ | 7,441 | $ | 44,829 | ||||||||||||
H&R Block Q3 FY2014 Form 10-Q | 7 |
There have been no changes to our methodology for estimating our allowance for doubtful accounts during fiscal year 2014.
NOTE 4: MORTGAGE LOANS HELD FOR INVESTMENT AND RELATED ASSETS
The composition of our mortgage loan portfolio is as follows:
(dollars in 000s) | |||||||||||||||||||||
As of | January 31, 2014 | January 31, 2013 | April 30, 2013 | ||||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||
Adjustable-rate loans | $ | 158,369 | 54 | % | $ | 203,624 | 55 | % | $ | 191,093 | 55 | % | |||||||||
Fixed-rate loans | 132,956 | 46 | % | 168,515 | 45 | % | 159,142 | 45 | % | ||||||||||||
291,325 | 100 | % | 372,139 | 100 | % | 350,235 | 100 | % | |||||||||||||
Unamortized deferred fees and costs | 2,387 | 3,004 | 2,868 | ||||||||||||||||||
Less: Allowance for loan losses | (11,563 | ) | (17,256 | ) | (14,314 | ) | |||||||||||||||
$ | 282,149 | $ | 357,887 | $ | 338,789 | ||||||||||||||||
Our loan loss allowance as a percent of mortgage loans was 4.0% as of January 31, 2014, compared to 4.6% as of January 31, 2013 and 4.1% as of April 30, 2013.
Activity in the allowance for loan losses for the nine months ended January 31, 2014 and 2013 is as follows:
(in 000s) | ||||||||
Nine months ended January 31, | 2014 | 2013 | ||||||
Balance at beginning of the period | $ | 14,314 | $ | 26,540 | ||||
Provision | 7,224 | 10,250 | ||||||
Recoveries | 3,250 | 2,745 | ||||||
Charge-offs | (13,225 | ) | (22,279 | ) | ||||
Balance at end of the period | $ | 11,563 | $ | 17,256 | ||||
During 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 nine months ended January 31, 2014 and subsequently charged-off. These loans were sold during fiscal year 2014.
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 | January 31, 2014 | January 31, 2013 | April 30, 2013 | |||||||||||||||||||||
Portfolio Balance | Related Allowance | Portfolio Balance | Related Allowance | Portfolio Balance | Related Allowance | |||||||||||||||||||
Pooled (less than 60 days past due) | $ | 169,404 | $ | 4,979 | $ | 219,345 | $ | 6,670 | $ | 207,319 | $ | 5,628 | ||||||||||||
Impaired: | ||||||||||||||||||||||||
Individually (TDRs) | 44,635 | 4,371 | 59,295 | 5,013 | 55,061 | 4,924 | ||||||||||||||||||
Individually (60 days or more past due) | 77,286 | 2,213 | 93,499 | 5,573 | 87,855 | 3,762 | ||||||||||||||||||
$ | 291,325 | $ | 11,563 | $ | 372,139 | $ | 17,256 | $ | 350,235 | $ | 14,314 | |||||||||||||
8 | H&R Block Q3 FY2014 Form 10-Q |
Detail of our mortgage loans held for investment and the related allowance as of January 31, 2014 is as follows:
(dollars in 000s) | ||||||||||||||
Outstanding Principal Balance | Loan Loss Allowance | % 30+ Days Past Due | ||||||||||||
Amount | % of Principal | |||||||||||||
Purchased from SCC | $ | 166,265 | $ | 9,343 | 5.6 | % | 29.6 | % | ||||||
All other | 125,060 | 2,220 | 1.8 | % | 7.6 | % | ||||||||
$ | 291,325 | $ | 11,563 | 4.0 | % | 20.1 | % | |||||||
Credit quality indicators as of January 31, 2014 include the following:
(in 000s) | ||||||||||||
Credit Quality Indicators | Purchased from SCC | All Other | Total Portfolio | |||||||||
Occupancy status: | ||||||||||||
Owner occupied | $ | 121,743 | $ | 81,619 | $ | 203,362 | ||||||
Non-owner occupied | 44,522 | 43,441 | 87,963 | |||||||||
$ | 166,265 | $ | 125,060 | $ | 291,325 | |||||||
Documentation level: | ||||||||||||
Full documentation | $ | 55,477 | $ | 90,345 | $ | 145,822 | ||||||
Limited documentation | 5,059 | 13,281 | 18,340 | |||||||||
Stated income | 91,796 | 13,265 | 105,061 | |||||||||
No documentation | 13,933 | 8,169 | 22,102 | |||||||||
$ | 166,265 | $ | 125,060 | $ | 291,325 | |||||||
Internal risk rating: | ||||||||||||
High | $ | 49,226 | $ | — | $ | 49,226 | ||||||
Medium | 117,039 | — | 117,039 | |||||||||
Low | — | 125,060 | 125,060 | |||||||||
$ | 166,265 | $ | 125,060 | $ | 291,325 | |||||||
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 originated by SCC and 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.
H&R Block Q3 FY2014 Form 10-Q | 9 |
Detail of the aging of the mortgage loans in our portfolio as of January 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 | $ | 14,721 | $ | 923 | $ | 51,663 | $ | 67,307 | $ | 98,958 | $ | 166,265 | ||||||||||||
All other | 6,054 | 437 | 8,915 | 15,406 | 109,654 | 125,060 | ||||||||||||||||||
$ | 20,775 | $ | 1,360 | $ | 60,578 | $ | 82,713 | $ | 208,612 | $ | 291,325 | |||||||||||||
(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 | January 31, 2014 | January 31, 2013 | April 30, 2013 | |||||||||
Loans: | ||||||||||||
Purchased from SCC | $ | 64,573 | $ | 76,235 | $ | 70,327 | ||||||
Other | 12,325 | 15,761 | 14,906 | |||||||||
76,898 | 91,996 | 85,233 | ||||||||||
TDRs: | ||||||||||||
Purchased from SCC | 4,221 | 3,460 | 3,719 | |||||||||
Other | 957 | 504 | 502 | |||||||||
5,178 | 3,964 | 4,221 | ||||||||||
Total non-accrual loans | $ | 82,076 | $ | 95,960 | $ | 89,454 | ||||||
Information related to impaired loans is as follows:
(in 000s) | ||||||||||||||||
Balance With Allowance | Balance With No Allowance | Total Impaired Loans | Related Allowance | |||||||||||||
As of January 31, 2014: | ||||||||||||||||
Purchased from SCC | $ | 28,037 | $ | 73,873 | $ | 101,910 | $ | 5,341 | ||||||||
Other | 5,030 | 14,982 | 20,012 | 1,243 | ||||||||||||
$ | 33,067 | $ | 88,855 | $ | 121,922 | $ | 6,584 | |||||||||
As of January 31, 2013: | ||||||||||||||||
Purchased from SCC | $ | 38,938 | $ | 88,671 | $ | 127,609 | $ | 8,470 | ||||||||
Other | 6,757 | 18,428 | 25,185 | 2,116 | ||||||||||||
$ | 45,695 | $ | 107,099 | $ | 152,794 | $ | 10,586 | |||||||||
As of April 30, 2013: | ||||||||||||||||
Purchased from SCC | $ | 33,791 | $ | 84,592 | $ | 118,383 | $ | 6,573 | ||||||||
Other | 7,601 | 16,932 | 24,533 | 2,113 | ||||||||||||
$ | 41,392 | $ | 101,524 | $ | 142,916 | $ | 8,686 | |||||||||
Information related to the allowance for impaired loans is as follows:
(in 000s) | ||||||||||||
As of | January 31, 2014 | January 31, 2013 | April 30, 2013 | |||||||||
Portion of total allowance for loan losses allocated to impaired loans and TDR loans: | ||||||||||||
Based on collateral value method | $ | 2,213 | $ | 5,573 | $ | 3,762 | ||||||
Based on discounted cash flow method | 4,371 | 5,013 | 4,924 | |||||||||
$ | 6,584 | $ | 10,586 | $ | 8,686 | |||||||
10 | H&R Block Q3 FY2014 Form 10-Q |
Information related to activities of our non-performing assets is as follows:
(in 000s) | ||||||||
Nine months ended January 31, | 2014 | 2013 | ||||||
Average impaired loans: | ||||||||
Purchased from SCC | $ | 116,061 | $ | 137,703 | ||||
All other | 22,607 | 25,879 | ||||||
$ | 138,668 | $ | 163,582 | |||||
Interest income on impaired loans: | ||||||||
Purchased from SCC | $ | 2,496 | $ | 2,940 | ||||
All other | 224 | 232 | ||||||
$ | 2,720 | $ | 3,172 | |||||
Interest income on impaired loans recognized on a cash basis on non-accrual status: | ||||||||
Purchased from SCC | $ | 2,438 | $ | 2,881 | ||||
All other | 220 | 214 | ||||||
$ | 2,658 | $ | 3,095 | |||||
Activity related to our real estate owned (REO) is as follows:
(in 000s) | ||||||||
Nine months ended January 31, | 2014 | 2013 | ||||||
Balance, beginning of the period | $ | 13,968 | $ | 14,972 | ||||
Additions | 6,389 | 7,208 | ||||||
Sales | (10,975 | ) | (6,652 | ) | ||||
Impairments | (1,152 | ) | (1,676 | ) | ||||
Balance, end of the period | $ | 8,230 | $ | 13,852 | ||||
H&R Block Q3 FY2014 Form 10-Q | 11 |
NOTE 5: INVESTMENTS
AVAILABLE-FOR-SALE – The amortized cost and fair value of securities classified as available-for-sale (AFS) are summarized below:
(in 000s) | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses (1) | Fair Value | |||||||||||||
As of January 31, 2014: | ||||||||||||||||
Long-term: | ||||||||||||||||
Mortgage-backed securities | $ | 449,097 | $ | 3,201 | $ | (12,903 | ) | $ | 439,395 | |||||||
Municipal bonds | 4,134 | 241 | — | 4,375 | ||||||||||||
$ | 453,231 | $ | 3,442 | $ | (12,903 | ) | $ | 443,770 | ||||||||
As of January 31, 2013: | ||||||||||||||||
Short-term: | ||||||||||||||||
Municipal bonds | $ | 1,000 | $ | 1 | $ | — | $ | 1,001 | ||||||||
Long-term: | ||||||||||||||||
Mortgage-backed securities | 386,741 | 5,825 | (780 | ) | 391,786 | |||||||||||
Municipal bonds | 4,192 | 334 | — | 4,526 | ||||||||||||
390,933 | 6,159 | (780 | ) | 396,312 | ||||||||||||
$ | 391,933 | $ | 6,160 | $ | (780 | ) | $ | 397,313 | ||||||||
As of April 30, 2013: | ||||||||||||||||
Long-term: | ||||||||||||||||
Mortgage-backed securities | $ | 476,450 | $ | 6,592 | $ | (664 | ) | $ | 482,378 | |||||||
Municipal bonds | 4,178 | 320 | — | 4,498 | ||||||||||||
$ | 480,628 | $ | 6,912 | $ | (664 | ) | $ | 486,876 | ||||||||
(1) | As of January 31, 2014, mortgage-backed securities with a cost of $25.8 million and gross unrealized losses of $2.8 million had been in a continuous loss position for more than twelve months. As of January 31, 2013 and April 30, 2013, we had no securities that had been in a continuous loss position for more than twelve months. |
We did not sell any AFS securities during the nine months ended January 31, 2014. During the nine months ended January 31, 2013, we received proceeds of $5.2 million from the sale of AFS securities and recorded a gross realized gain of $0.2 million on this sale.
We did not record any other-than-temporary impairments of AFS securities during the nine months ended January 31, 2014 and 2013. Unrealized losses on our AFS securities have not been recognized into income because the securities include an explicit guarantee of the U. S. Government or an implied guarantee of a government-sponsored enterprise, management does not have the intent to sell and it is not more likely than not it will be required to sell the AFS securities before their anticipated recovery, and the decline in fair value is largely due to changes in market interest rates.
Contractual maturities of AFS debt securities at January 31, 2014, occur at varying dates over the next 29 years, and are set forth in the table below.
(in 000s) | ||||||||
Amortized Cost | Fair Value | |||||||
Maturing in: | ||||||||
Two to five years | $ | 4,134 | $ | 4,375 | ||||
Beyond | 449,097 | 439,395 | ||||||
$ | 453,231 | $ | 443,770 | |||||
12 | H&R Block Q3 FY2014 Form 10-Q |
NOTE 6: GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill of our Tax Services segment for the nine months ended January 31, 2014 and 2013 are as follows:
(in 000s) | ||||||||||||
Goodwill | Accumulated Impairment Losses | Net | ||||||||||
Balances as of April 30, 2013 | $ | 467,079 | $ | (32,297 | ) | $ | 434,782 | |||||
Acquisitions | 5,206 | — | 5,206 | |||||||||
Disposals and foreign currency changes, net | (2,602 | ) | — | (2,602 | ) | |||||||
Impairments | — | — | — | |||||||||
Balances as of January 31, 2014 | $ | 469,683 | $ | (32,297 | ) | $ | 437,386 | |||||
Balances as of April 30, 2012 | $ | 459,863 | $ | (32,297 | ) | $ | 427,566 | |||||
Acquisitions | 7,650 | — | 7,650 | |||||||||
Disposals and foreign currency changes, net | 40 | — | 40 | |||||||||
Impairments | — | — | — | |||||||||
Balances as of January 31, 2013 | $ | 467,553 | $ | (32,297 | ) | $ | 435,256 | |||||
We test goodwill for impairment annually or more frequently if events occur or circumstances change which would, more likely than not, reduce the fair value of a reporting unit below its carrying value.
H&R Block Q3 FY2014 Form 10-Q | 13 |
Components of the intangible assets of our Tax Services segment are as follows:
(in 000s) | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||
As of January 31, 2014: | ||||||||||||
Reacquired franchise rights | $ | 233,675 | $ | (23,120 | ) | $ | 210,555 | |||||
Customer relationships | 121,055 | (56,283 | ) | 64,772 | ||||||||
Internally-developed software | 98,012 | (70,964 | ) | 27,048 | ||||||||
Noncompete agreements | 24,573 | (22,028 | ) | 2,545 | ||||||||
Franchise agreements | 19,201 | (6,614 | ) | 12,587 | ||||||||
Purchased technology | 14,800 | (13,588 | ) | 1,212 | ||||||||
Trade name | 300 | (300 | ) | — | ||||||||
$ | 511,616 | $ | (192,897 | ) | $ | 318,719 | ||||||
As of January 31, 2013: | ||||||||||||
Reacquired franchise rights | $ | 214,330 | $ | (17,174 | ) | $ | 197,156 | |||||
Customer relationships | 108,596 | (52,820 | ) | 55,776 | ||||||||
Internally-developed software | 87,909 | (71,194 | ) | 16,715 | ||||||||
Noncompete agreements | 23,054 | (21,627 | ) | 1,427 | ||||||||
Franchise agreements | 19,201 | (5,334 | ) | 13,867 | ||||||||
Purchased technology | 14,800 | (11,911 | ) | 2,889 | ||||||||
Trade name | 1,300 | (892 | ) | 408 | ||||||||
$ | 469,190 | $ | (180,952 | ) | $ | 288,238 | ||||||