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, 2015 | ||
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, 2015: 275,248,147 shares.
Form 10-Q for the Period Ended January 31, 2015
Table of Contents
Consolidated Statements of Operations and Comprehensive Income (Loss) | ||
Three and nine months ended January 31, 2015 and 2014 | 1 | |
Consolidated Balance Sheets | ||
As of January 31, 2015, January 31, 2014 and April 30, 2014 | ||
Condensed Consolidated Statements of Cash Flows | ||
Nine months ended January 31, 2015 and 2014 | ||
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 LOSS | (unaudited, in 000s, except per share amounts) | |||||||||||||||
Three months ended January 31, | Nine months ended January 31, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
REVENUES: | ||||||||||||||||
Service revenues | $ | 406,441 | $ | 138,613 | $ | 637,356 | $ | 358,845 | ||||||||
Royalty, product and other revenues | 63,335 | 23,788 | 81,905 | 43,268 | ||||||||||||
Interest income | 39,298 | 37,369 | 58,027 | 59,192 | ||||||||||||
509,074 | 199,770 | 777,288 | 461,305 | |||||||||||||
OPERATING EXPENSES: | ||||||||||||||||
Cost of revenues: | ||||||||||||||||
Compensation and benefits | 186,656 | 160,830 | 307,892 | 267,668 | ||||||||||||
Occupancy and equipment | 92,303 | 88,387 | 263,235 | 249,481 | ||||||||||||
Provision for bad debt and loan losses | 39,283 | 31,420 | 44,032 | 45,760 | ||||||||||||
Depreciation and amortization | 29,181 | 25,267 | 82,695 | 65,982 | ||||||||||||
Other | 47,255 | 43,761 | 116,247 | 124,087 | ||||||||||||
394,678 | 349,665 | 814,101 | 752,978 | |||||||||||||
Selling, general and administrative: | ||||||||||||||||
Marketing and advertising | 87,569 | 77,943 | 108,227 | 98,667 | ||||||||||||
Compensation and benefits | 60,380 | 60,211 | 175,697 | 168,076 | ||||||||||||
Depreciation and amortization | 14,110 | 6,544 | 33,211 | 15,371 | ||||||||||||
Other selling, general and administrative | 27,488 | 29,750 | 66,991 | 83,123 | ||||||||||||
189,547 | 174,448 | 384,126 | 365,237 | |||||||||||||
Total operating expenses | 584,225 | 524,113 | 1,198,227 | 1,118,215 | ||||||||||||
Other expense, net | 6,666 | 9,610 | 9,629 | 13,295 | ||||||||||||
Interest expense on borrowings | 9,048 | 13,872 | 36,686 | 41,476 | ||||||||||||
Loss from continuing operations before income tax benefit | (90,865 | ) | (347,825 | ) | (467,254 | ) | (711,681 | ) | ||||||||
Income tax benefit | (55,554 | ) | (135,074 | ) | (209,865 | ) | (282,645 | ) | ||||||||
Net loss from continuing operations | (35,311 | ) | (212,751 | ) | (257,389 | ) | (429,036 | ) | ||||||||
Net income (loss) from discontinued operations, net of tax (benefits) of $(1,016), ($1,164), $(4,814) and ($3,591) | (1,637 | ) | (1,960 | ) | (7,789 | ) | (5,805 | ) | ||||||||
NET LOSS | $ | (36,948 | ) | $ | (214,711 | ) | $ | (265,178 | ) | $ | (434,841 | ) | ||||
BASIC AND DILUTED LOSS PER SHARE: | ||||||||||||||||
Continuing operations | $ | (0.13 | ) | $ | (0.78 | ) | $ | (0.94 | ) | $ | (1.57 | ) | ||||
Discontinued operations | — | — | (0.03 | ) | (0.02 | ) | ||||||||||
Consolidated | $ | (0.13 | ) | $ | (0.78 | ) | $ | (0.97 | ) | $ | (1.59 | ) | ||||
DIVIDENDS DECLARED PER SHARE | $ | 0.20 | $ | 0.20 | $ | 0.60 | $ | 0.60 | ||||||||
COMPREHENSIVE INCOME (LOSS): | ||||||||||||||||
Net loss | $ | (36,948 | ) | $ | (214,711 | ) | $ | (265,178 | ) | $ | (434,841 | ) | ||||
Unrealized gains (losses) on securities, net of taxes: | ||||||||||||||||
Unrealized holding gains (losses) arising during the period | 2,147 | (2,926 | ) | 6,917 | (9,503 | ) | ||||||||||
Reclassification adjustment for gains included in income | — | — | (15 | ) | — | |||||||||||
Change in foreign currency translation adjustments | (9,987 | ) | (3,313 | ) | (13,342 | ) | (5,823 | ) | ||||||||
Other comprehensive loss | (7,840 | ) | (6,239 | ) | (6,440 | ) | (15,326 | ) | ||||||||
Comprehensive loss | $ | (44,788 | ) | $ | (220,950 | ) | $ | (271,618 | ) | $ | (450,167 | ) | ||||
See accompanying notes to consolidated financial statements.
H&R Block, Inc. | Q3 FY2015 Form 10-Q | 1 |
CONSOLIDATED BALANCE SHEETS | (unaudited, in 000s, except share and per share amounts) | |||||||||||
As of | January 31, 2015 | January 31, 2014 | April 30, 2014 | |||||||||
ASSETS | ||||||||||||
Cash and cash equivalents | $ | 1,321,134 | $ | 437,404 | $ | 2,185,307 | ||||||
Cash and cash equivalents - restricted | 51,085 | 44,855 | 115,319 | |||||||||
Receivables, less allowance for doubtful accounts of $49,859, $42,716 and $52,578 | 777,453 | 677,221 | 191,618 | |||||||||
Prepaid expenses and other current assets | 260,802 | 345,231 | 198,267 | |||||||||
Investments in available-for-sale securities | 367,845 | — | 423,495 | |||||||||
Total current assets | 2,778,319 | 1,504,711 | 3,114,006 | |||||||||
Mortgage loans held for investment, less allowance for loan losses of $9,375, $11,563 and $11,272 | 245,663 | 282,149 | 268,428 | |||||||||
Investments in available-for-sale securities | 7,883 | 443,770 | 4,329 | |||||||||
Property and equipment, at cost less accumulated depreciation and amortization of $509,039, $469,733 and $446,049 | 308,805 | 314,565 | 304,911 | |||||||||
Intangible assets, net | 443,329 | 318,719 | 355,622 | |||||||||
Goodwill | 442,961 | 437,386 | 436,117 | |||||||||
Other assets | 151,981 | 213,987 | 210,116 | |||||||||
Total assets | $ | 4,378,941 | $ | 3,515,287 | $ | 4,693,529 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
LIABILITIES: | ||||||||||||
Commercial paper borrowings | $ | 591,486 | $ | 194,984 | $ | — | ||||||
Customer banking deposits | 1,286,216 | 806,887 | 769,785 | |||||||||
Accounts payable, accrued expenses and other current liabilities | 472,490 | 520,121 | 569,007 | |||||||||
Accrued salaries, wages and payroll taxes | 118,512 | 108,583 | 167,032 | |||||||||
Accrued income taxes | 1,619 | 23,375 | 406,655 | |||||||||
Current portion of long-term debt | 781 | 400,570 | 400,637 | |||||||||
Total current liabilities | 2,471,104 | 2,054,520 | 2,313,116 | |||||||||
Long-term debt | 505,460 | 505,959 | 505,837 | |||||||||
Other noncurrent liabilities | 255,992 | 268,049 | 318,027 | |||||||||
Total liabilities | 3,232,556 | 2,828,528 | 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 | 778,845 | 762,102 | 766,654 | |||||||||
Accumulated other comprehensive income (loss) | (1,263 | ) | (4,776 | ) | 5,177 | |||||||
Retained earnings | 1,158,376 | 734,233 | 1,589,297 | |||||||||
Less treasury shares, at cost | (792,739 | ) | (807,966 | ) | (807,745 | ) | ||||||
Total stockholders' equity | 1,146,385 | 686,759 | 1,556,549 | |||||||||
Total liabilities and stockholders' equity | $ | 4,378,941 | $ | 3,515,287 | $ | 4,693,529 | ||||||
See accompanying notes to consolidated financial statements.
2 | Q3 FY2015 Form 10-Q | H&R Block, Inc. |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | (unaudited, in 000s) | |||||||
Nine months ended January 31, | 2015 | 2014 | ||||||
NET CASH USED IN OPERATING ACTIVITIES | $ | (1,247,200 | ) | $ | (1,120,322 | ) | ||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of available-for-sale securities | (100 | ) | (45,158 | ) | ||||
Maturities of and payments received on available-for-sale securities | 68,013 | 72,502 | ||||||
Principal payments on mortgage loans held for investment, net | 18,098 | 35,320 | ||||||
Capital expenditures | (98,876 | ) | (125,654 | ) | ||||
Payments made for business acquisitions, net of cash acquired | (112,163 | ) | (37,865 | ) | ||||
Proceeds received on notes receivable | — | 64,865 | ||||||
Franchise loans: | ||||||||
Loans funded | (48,013 | ) | (62,039 | ) | ||||
Payments received | 34,164 | 17,893 | ||||||
Other, net | 6,179 | 12,227 | ||||||
Net cash used in investing activities | (132,698 | ) | (67,909 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Repayments of commercial paper and other short-term borrowings | (457,576 | ) | (80,930 | ) | ||||
Proceeds from issuance of commercial paper and other short-term borrowings | 1,049,062 | 275,914 | ||||||
Repayments of long-term debt | (400,000 | ) | — | |||||
Customer banking deposits, net | 515,015 | (124,947 | ) | |||||
Dividends paid | (164,905 | ) | (164,134 | ) | ||||
Proceeds from exercise of stock options | 16,026 | 28,083 | ||||||
Other, net | (26,348 | ) | (35,919 | ) | ||||
Net cash provided by (used in) financing activities | 531,274 | (101,933 | ) | |||||
Effects of exchange rate changes on cash | (15,549 | ) | (20,016 | ) | ||||
Net decrease in cash and cash equivalents | (864,173 | ) | (1,310,180 | ) | ||||
Cash and cash equivalents at beginning of the period | 2,185,307 | 1,747,584 | ||||||
Cash and cash equivalents at end of the period | $ | 1,321,134 | $ | 437,404 | ||||
SUPPLEMENTARY CASH FLOW DATA: | ||||||||
Income taxes paid, net of refunds received | $ | 201,374 | $ | 87,672 | ||||
Interest paid on borrowings | 43,561 | 43,297 | ||||||
Interest paid on deposits | 523 | 1,696 | ||||||
Transfers of foreclosed loans to other assets | 3,240 | 6,389 | ||||||
Accrued additions to property and equipment | 1,986 | 4,113 | ||||||
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. | Q3 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 January 31, 2015 and 2014, the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended January 31, 2015 and 2014, and the condensed consolidated statements of cash flows for the nine months ended January 31, 2015 and 2014 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 January 31, 2015 and 2014 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 January 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). As previously disclosed, the parties to the P&A Agreement entered into a Letter Agreement, effective October 23, 2014 (October 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 October Letter Agreement was filed as an exhibit to our Current Report on Form 8-K on October 23, 2014. The parties to the P&A Agreement entered into another Letter Agreement, effective February 12, 2015 (February Letter Agreement), which, among other things, extended the date after which any party is permitted to terminate the P&A Agreement from May 31, 2015 to July 31, 2015 and set the date of closing as June 30, 2015, unless otherwise agreed by the parties. The February Letter Agreement was filed as an exhibit to our Current Report on Form 8-K on February 13, 2015.
Due to the lack of regulatory approval, we continue to offer financial services products to our clients through HRB Bank during the 2015 tax season.
4 | Q3 FY2015 Form 10-Q | H&R Block, Inc. |
Upon the closing of the P&A Transaction, we will make 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. 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. Pursuant to the February Letter Agreement, the parties have set the date of closing as June 30, 2015, unless otherwise agreed by the parties. Due to the seasonality of our business, the timing of any closing of the P&A Transaction will impact the amount of deposit liabilities transferred. Assuming the P&A Transaction closes on June 30, 2015, we estimate that our cash payment to BofI will equal approximately $425 million to $575 million. In connection with the closing we intend to liquidate the available-for-sale (AFS) securities held by HRB Bank, which totaled $368 million at January 31, 2015.
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 5.3 million shares for the three and nine months ended January 31, 2015, and 5.7 million shares for the three and nine months ended January 31, 2014, as the effect would be antidilutive due to the net loss from continuing operations during those periods.
H&R Block, Inc. | Q3 FY2015 Form 10-Q | 5 |
The computations of basic and diluted earnings per share from continuing operations are as follows:
(in 000s, except per share amounts) | ||||||||||||||||
Three months ended January 31, | Nine months ended January 31, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net loss from continuing operations attributable to shareholders | $ | (35,311 | ) | $ | (212,751 | ) | $ | (257,389 | ) | $ | (429,036 | ) | ||||
Amounts allocated to participating securities | (105 | ) | (88 | ) | (291 | ) | (242 | ) | ||||||||
Net loss from continuing operations attributable to common shareholders | $ | (35,416 | ) | $ | (212,839 | ) | $ | (257,680 | ) | $ | (429,278 | ) | ||||
Basic weighted average common shares | 275,190 | 274,110 | 274,957 | 273,699 | ||||||||||||
Potential dilutive shares | — | — | — | — | ||||||||||||
Dilutive weighted average common shares | 275,190 | 274,110 | 274,957 | 273,699 | ||||||||||||
Loss per share from continuing operations attributable to common shareholders: | ||||||||||||||||
Basic | $ | (0.13 | ) | $ | (0.78 | ) | $ | (0.94 | ) | $ | (1.57 | ) | ||||
Diluted | (0.13 | ) | (0.78 | ) | (0.94 | ) | (1.57 | ) | ||||||||
STOCK-BASED COMPENSATION – During the nine months ended January 31, 2015, we acquired 0.3 million shares of our common stock at an aggregate cost of $10.4 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, 2014, we acquired 0.2 million shares at an aggregate cost of $6.0 million for similar purposes.
During the nine months ended January 31, 2015 and 2014, we issued 1.3 million and 1.8 million shares of common stock, respectively, due to the vesting or exercise of stock-based awards.
During the nine months ended January 31, 2015, 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 $6.1 million and $20.7 million for the three and nine months ended January 31, 2015, respectively, and $4.7 million and $15.5 million for the three and nine months ended January 31, 2014, respectively. As of January 31, 2015, unrecognized compensation cost for stock options totaled $0.3 million, and for nonvested shares and units totaled $37.2 million.
6 | Q3 FY2015 Form 10-Q | H&R Block, Inc. |
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 | (13,342 | ) | 11,389 | (1,953 | ) | |||||||
Income taxes | — | 4,472 | 4,472 | |||||||||
(13,342 | ) | 6,917 | (6,425 | ) | ||||||||
Amounts reclassified to net income: | ||||||||||||
Gross amount reclassified | — | (24 | ) | (24 | ) | |||||||
Income taxes | — | (9 | ) | (9 | ) | |||||||
— | (15 | ) | (15 | ) | ||||||||
Net other comprehensive income (loss) | (13,342 | ) | 6,902 | (6,440 | ) | |||||||
Balances as of January 31, 2015 | $ | (10,008 | ) | $ | 8,745 | $ | (1,263 | ) | ||||
Balances as of May 1, 2013 | $ | 6,809 | $ | 3,741 | $ | 10,550 | ||||||
Other comprehensive income (loss) before reclassifications: | ||||||||||||
Gross losses arising during the year | (5,823 | ) | (15,709 | ) | (21,532 | ) | ||||||
Income taxes | — | (6,206 | ) | (6,206 | ) | |||||||
Net other comprehensive loss | (5,823 | ) | (9,503 | ) | (15,326 | ) | ||||||
Balances as of January 31, 2014 | $ | 986 | $ | (5,762 | ) | $ | (4,776 | ) | ||||
Gross amounts reclassified out of accumulated other comprehensive income are included in other expense, net in the consolidated statements of operations.
NOTE 4: RECEIVABLES
Receivables consist of the following:
(in 000s) | ||||||||||||||||||||||||
As of | January 31, 2015 | January 31, 2014 | April 30, 2014 | |||||||||||||||||||||
Short-term | Long-term | Short-term | Long-term | Short-term | Long-term | |||||||||||||||||||
Loans to franchisees | $ | 71,420 | $ | 84,770 | $ | 104,841 | $ | 114,676 | $ | 63,716 | $ | 90,747 | ||||||||||||
Receivables for tax preparation and related fees | 234,056 | — | 73,575 | — | 45,619 | — | ||||||||||||||||||
Cash Back® receivables | 7,130 | — | 10,099 | — | 48,812 | — | ||||||||||||||||||
Emerald Advance lines of credit | 370,041 | 2,254 | 444,590 | 5,555 | 20,577 | 3,862 | ||||||||||||||||||
Royalties from franchisees | 68,486 | — | 30,309 | — | 9,978 | — | ||||||||||||||||||
Other | 76,179 | 15,404 | 56,523 | 23,384 | 55,494 | 17,186 | ||||||||||||||||||
827,312 | 102,428 | 719,937 | 143,615 | 244,196 | 111,795 | |||||||||||||||||||
Allowance for doubtful accounts | (49,859 | ) | — | (42,716 | ) | (2,531 | ) | (52,578 | ) | — | ||||||||||||||
$ | 777,453 | $ | 102,428 | $ | 677,221 | $ | 141,084 | $ | 191,618 | $ | 111,795 | |||||||||||||
We recognize revenue for tax preparation services when tax returns are electronically filed. As of January 31, 2014, we did not recognize revenue and related receivables for 1.8 million tax returns. 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 January 31, 2015 and 2014 and April 30, 2014, consisted of $100.3 million, $132.3 million and $109.1 million, respectively, in term loans made primarily to finance the purchase
H&R Block, Inc. | Q3 FY2015 Form 10-Q | 7 |
of franchises and $55.9 million, $87.2 million and $45.4 million, respectively, in revolving lines of credit primarily for the purpose of funding off-season working capital needs.
As of January 31, 2015 and 2014, loans with a principal balance of $1.4 million and $0.6 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 January 31, 2015 and 2014 and April 30, 2014, $0.3 million, $0.5 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 January 31, 2015, by year of origination, are as follows:
(in 000s) | ||||
Credit Quality Indicator – Year of origination: | ||||
2015 | $ | 342,461 | ||
2014 | 3,374 | |||
2013 | 1,472 | |||
2012 and prior | 4,171 | |||
Revolving loans | 20,817 | |||
$ | 372,295 | |||
As of January 31, 2015 and 2014 and April 30, 2014, $19.5 million, $25.7 million and $20.7 million of EAs were on non-accrual status and classified as impaired, or more than 60 days past due, respectively.
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, 2015 and 2014 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 | 28,521 | — | 199 | 12,944 | 41,664 | |||||||||||||||
Charge-offs | — | — | (1,521 | ) | (42,862 | ) | (44,383 | ) | ||||||||||||
Balances as of January 31, 2015 | $ | 36,051 | $ | — | $ | 1,680 | $ | 12,128 | $ | 49,859 | ||||||||||
Balances as of May 1, 2013 | $ | 7,390 | $ | — | $ | 2,769 | $ | 47,544 | $ | 57,703 | ||||||||||
Provision | 24,787 | 42 | 248 | 12,202 | 37,279 | |||||||||||||||
Charge-offs | — | (2 | ) | (1,667 | ) | (48,066 | ) | (49,735 | ) | |||||||||||
Balances as of January 31, 2014 | $ | 32,177 | $ | 40 | $ | 1,350 | $ | 11,680 | $ | 45,247 | ||||||||||
8 | Q3 FY2015 Form 10-Q | H&R Block, Inc. |
NOTE 5: MORTGAGE LOANS HELD FOR INVESTMENT
The composition of our mortgage loan portfolio is as follows:
(dollars in 000s) | |||||||||||||||||||||
As of | January 31, 2015 | January 31, 2014 | April 30, 2014 | ||||||||||||||||||
Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||||||||||
Adjustable-rate loans | $ | 135,481 | 54 | % | $ | 158,369 | 54 | % | $ | 149,480 | 54 | % | |||||||||
Fixed-rate loans | 117,484 | 46 | % | 132,956 | 46 | % | 127,943 | 46 | % | ||||||||||||
252,965 | 100 | % | 291,325 | 100 | % | 277,423 | 100 | % | |||||||||||||
Unamortized deferred fees and costs | 2,073 | 2,387 | 2,277 | ||||||||||||||||||
Less: Allowance for loan losses | (9,375 | ) | (11,563 | ) | (11,272 | ) | |||||||||||||||
$ | 245,663 | $ | 282,149 | $ | 268,428 | ||||||||||||||||
Our loan loss allowance as a percent of mortgage loans was 3.7% as of January 31, 2015, compared to 4.0% as of January 31, 2014 and 4.1% as of April 30, 2014.
Activity in the allowance for loan losses for the nine months ended January 31, 2015 and 2014 is as follows:
(in 000s) | ||||||||
Nine months ended January 31, | 2015 | 2014 | ||||||
Balance at beginning of the period | $ | 11,272 | $ | 14,314 | ||||
Provision | 1,090 | 7,224 | ||||||
Recoveries | 1,155 | 3,250 | ||||||
Charge-offs | (4,142 | ) | (13,225 | ) | ||||
Balance at end of the period | $ | 9,375 | $ | 11,563 | ||||
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, 2015 | January 31, 2014 | April 30, 2014 | |||||||||||||||||||||
Portfolio Balance | Related Allowance | Portfolio Balance | Related Allowance | Portfolio Balance | Related Allowance | |||||||||||||||||||
Pooled (less than 60 days past due) | $ | 144,144 | $ | 3,629 | $ | 169,404 | $ | 4,979 | $ | 158,496 | $ | 4,508 | ||||||||||||
Impaired: | ||||||||||||||||||||||||
Individually (TDRs) | 38,782 | 4,083 | 44,635 | 4,371 | 43,865 | 4,346 | ||||||||||||||||||
Individually (60 days or more past due) | 70,039 | 1,663 | 77,286 | 2,213 | 75,062 | 2,418 | ||||||||||||||||||
$ | 252,965 | $ | 9,375 | $ | 291,325 | $ | 11,563 | $ | 277,423 | $ | 11,272 | |||||||||||||
Detail of our mortgage loans held for investment and the related allowance as of January 31, 2015 is as follows:
(dollars in 000s) | ||||||||||||||
Outstanding Principal Balance | Loan Loss Allowance | % 30+ Days Past Due | ||||||||||||
Amount | % of Principal | |||||||||||||
Purchased from SCC | $ | 145,812 | $ | 7,292 | 5.0 | % | 28.4 | % | ||||||
All other | 107,153 | 2,083 | 1.9 | % | 6.8 | % | ||||||||
$ | 252,965 | $ | 9,375 | 3.7 | % | 19.2 | % | |||||||
H&R Block, Inc. | Q3 FY2015 Form 10-Q | 9 |
Credit quality indicators as of January 31, 2015 include the following:
(in 000s) | ||||||||||||
Credit Quality Indicators | Purchased from SCC | All Other | Total Portfolio | |||||||||
Occupancy status: | ||||||||||||
Owner occupied | $ | 107,581 | $ | 70,670 | $ | 178,251 | ||||||
Non-owner occupied | 38,231 | 36,483 | 74,714 | |||||||||
$ | 145,812 | $ | 107,153 | $ | 252,965 | |||||||
Documentation level: | ||||||||||||
Full documentation | $ | 47,314 | $ | 76,095 | $ | 123,409 | ||||||
Limited documentation | 4,607 | 11,745 | 16,352 | |||||||||
Stated income | 82,252 | 11,857 | 94,109 | |||||||||
No documentation | 11,639 | 7,456 | 19,095 | |||||||||
$ | 145,812 | $ | 107,153 | $ | 252,965 | |||||||
Internal risk rating: | ||||||||||||
High | $ | 41,216 | $ | — | $ | 41,216 | ||||||
Medium | 104,596 | — | 104,596 | |||||||||
Low | — | 107,153 | 107,153 | |||||||||
$ | 145,812 | $ | 107,153 | $ | 252,965 | |||||||
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 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 January 31, 2015 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 | $ | 11,305 | $ | 238 | $ | 45,864 | $ | 57,407 | $ | 88,405 | $ | 145,812 | ||||||||||||
All other | 5,416 | 302 | 7,408 | 13,126 | 94,027 | 107,153 | ||||||||||||||||||
$ | 16,721 | $ | 540 | $ | 53,272 | $ | 70,533 | $ | 182,432 | $ | 252,965 | |||||||||||||
(1) | We do not accrue interest on loans past due 90 days or more. |
10 | Q3 FY2015 Form 10-Q | H&R Block, Inc. |
Information related to our non-accrual loans is as follows:
(in 000s) | ||||||||||||
As of | January 31, 2015 | January 31, 2014 | April 30, 2014 | |||||||||
Loans: | ||||||||||||
Purchased from SCC | $ | 59,452 | $ | 64,573 | $ | 61,767 | ||||||
Other | 11,117 | 12,325 | 12,528 | |||||||||
70,569 | 76,898 | 74,295 | ||||||||||
TDRs: | ||||||||||||
Purchased from SCC | 4,928 | 4,221 | 4,648 | |||||||||
Other | 817 | 957 | 951 | |||||||||
5,745 | 5,178 | 5,599 | ||||||||||
Total non-accrual loans | $ | 76,314 | $ | 82,076 | $ | 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 January 31, 2015: | ||||||||||||||||
Purchased from SCC | $ | 24,318 | $ | 67,320 | $ | 91,638 | $ | 4,772 | ||||||||
Other | 3,388 | 13,797 | 17,185 | 974 | ||||||||||||
$ | 27,706 | $ | 81,117 | $ | 108,823 | $ | 5,746 | |||||||||
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 April 30, 2014: | ||||||||||||||||
Purchased from SCC | $ | 27,924 | $ | 71,075 | $ | 98,999 | $ | 3,239 | ||||||||
Other | 5,176 | 14,752 | 19,928 | 3,525 | ||||||||||||
$ | 33,100 | $ | 85,827 | $ | 118,927 | $ | 6,764 | |||||||||
Information related to the allowance for impaired loans is as follows:
(in 000s) | ||||||||||||
As of | January 31, 2015 | January 31, 2014 | April 30, 2014 | |||||||||
Portion of total allowance for loan losses allocated to impaired loans and TDR loans: | ||||||||||||
Based on collateral value method | $ | 1,663 | $ | 2,213 | $ | 2,418 | ||||||
Based on discounted cash flow method | 4,083 | 4,371 | 4,346 | |||||||||
$ | 5,746 | $ | 6,584 | $ | 6,764 | |||||||
Information related to activities of our non-performing assets is as follows:
(in 000s) | ||||||||
Nine months ended January 31, | 2015 | 2014 | ||||||
Average impaired loans: | ||||||||
Purchased from SCC | $ | 96,767 | $ | 116,061 | ||||
All other | 18,683 | 22,607 | ||||||
$ | 115,450 | $ | 138,668 | |||||
H&R Block, Inc. | Q3 FY2015 Form 10-Q | 11 |
NOTE 6: INVESTMENTS
The amortized cost and fair value of securities classified as AFS are summarized below:
(in 000s) | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
As of January 31, 2015: | ||||||||||||||||
Mortgage-backed securities | $ | 352,179 | $ | 15,566 | $ | — | $ | 367,745 | ||||||||
Municipal bonds | 4,077 | 135 | (17 | ) | 4,195 | |||||||||||
Common stock | 5,000 | — | (1,312 | ) | 3,688 | |||||||||||
U.S. treasury bills | 100 | — | — | 100 | ||||||||||||
$ | 361,356 | $ | 15,701 | $ | (1,329 | ) | $ | 375,728 | ||||||||
As of January 31, 2014: | ||||||||||||||||
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 April 30, 2014: | ||||||||||||||||
Mortgage-backed securities | $ | 420,697 | $ | 2,798 | $ | — | $ | 423,495 | ||||||||
Municipal bonds | 4,120 | 209 | — | 4,329 | ||||||||||||
$ | 424,817 | $ | 3,007 | $ | — | $ | 427,824 | |||||||||
Substantially all AFS debt securities held as of January 31, 2015 mature after five years.
NOTE 7: GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill of our Tax Services segment for the nine months ended January 31, 2015 and 2014 are as follows:
(in 000s) | ||||||||||||
Goodwill | Accumulated Impairment Losses | Net | ||||||||||
Balances as of April 30, 2014 | $ | 468,414 | $ | (32,297 | ) | $ | 436,117 | |||||
Acquisitions | 9,614 | — | 9,614 | |||||||||
Disposals and foreign currency changes, net | (2,770 | ) | — | (2,770 | ) | |||||||
Impairments | — | — | — | |||||||||
Balances as of January 31, 2015 | $ | 475,258 | $ | (32,297 | ) | $ | 442,961 | |||||
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 | |||||
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.
12 | Q3 FY2015 Form 10-Q | H&R Block, Inc. |
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, 2015: | ||||||||||||
Reacquired franchise rights | $ | 294,587 | $ | (39,954 | ) | $ | 254,633 | |||||
Customer relationships | 169,058 | (71,799 | ) | 97,259 | ||||||||
Internally-developed software | 114,447 | (78,063 | ) | 36,384 | ||||||||
Noncompete agreements | 30,546 | (23,171 | ) | 7,375 | ||||||||
Franchise agreements | 19,201 | (7,894 | ) | 11,307 | ||||||||
Purchased technology | 54,700 | (18,329 | ) | 36,371 | ||||||||
$ | 682,539 | $ | (239,210 | ) | $ | 443,329 | ||||||
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 | ||||||||
$ | 511,316 | $ | (192,597 | ) | $ | 318,719 | ||||||
As of April 30, 2014: | ||||||||||||
Reacquired franchise rights | $ | 233,749 | $ | (26,136 | ) | $ | 207,613 | |||||
Customer relationships | 123,110 | (59,521 | ) | 63,589 | ||||||||
Internally-developed software | 101,162 | (72,598 | ) | 28,564 | ||||||||
Noncompete agreements | 24,694 | (22,223 | ) | 2,471 | ||||||||
Franchise agreements | 19,201 | (6,934 | ) | 12,267 | ||||||||
Purchased technology | 54,900 | (13,782 | ) | 41,118 | ||||||||
$ | 556,816 | $ | (201,194 | ) | $ | 355,622 | ||||||
Amortization of intangible assets for the three and nine months ended January 31, 2015 was $16.7 million and $41.2 million, respectively. Amortization of intangible assets for the three and nine months ended January 31, 2014 was $8.8 million and $21.4 million, respectively. Estimated amortization of intangible assets for fiscal years 2015, 2016, 2017, 2018 and 2019 is $58.8 million, $60.2 million, $51.0 million, $44.2 million and $36.0 million, respectively.
The increase in intangible assets resulted primarily from acquired franchisee and competitor businesses during the period. The weighted-average life of the acquired assets is as follows: