H&R Block Announces Fiscal 2018 First Quarter Results

Aug 29, 2017

KANSAS CITY, Mo., Aug. 29, 2017 (GLOBE NEWSWIRE) -- H&R Block, Inc. (NYSE:HRB) today released its financial results for the fiscal 2018 first quarter ended July 31, 2017.  The company normally reports a fiscal first quarter loss due to the seasonality of its tax business.  The fiscal first quarter typically represents less than 5% of annual revenues and less than 15% of annual expenses.

Fiscal First Quarter Highlights1

  • Fiscal first quarter financial results were largely in line with expectations
  • Revenues increased $13 million, or 10%, to $138 million primarily due to increased U.S. Assisted tax preparation fees and revenues from the Peace of Mind® Extended Service Plan product
  • Year-over-year reduction in average outstanding shares and a lower effective tax rate, both of which negatively impact those quarters with a net loss, resulted in an increase in loss per share
  • Jeff Jones appointed president and CEO effective October 9, 2017

"We are building on our momentum from fiscal 2017 to deliver another successful tax season for both our clients and our shareholders," said Tom Gerke, H&R Block's interim president and chief executive officer.  "The management team has been hard at work to execute against our plans and we’re excited to have Jeff Jones, a strong and experienced leader, join us as our new CEO."

Fiscal 2018 First Quarter Results From Continuing Operations

(in millions, except EPS)   Fiscal Year 2018   Fiscal Year 2017
Revenue   $ 138     $ 125  
Pretax Loss   $ (205 )   $ (204 )
Net Loss   $ (128 )   $ (121 )
Weighted-Avg. Shares - Diluted   207.9     220.5  
EPS2   $ (0.62 )   $ (0.55 )
EBITDA3   $ (140 )   $ (141 )
         

"Our fiscal first quarter results were in line with expectations and reflect the seasonality of our business," said Tony Bowen, H&R Block's chief financial officer.  "Our preparation for the upcoming tax season is progressing well and we look forward to sharing more detail regarding our financial outlook during our second quarter earnings call."

Key Financial Metrics

  • Total revenues increased $13 million, or 10%, to $138 million primarily due to increased U.S. Assisted tax preparation fees and revenues from the Peace of Mind® Extended Service Plan product.
  • Total operating expenses increased $13 million, or 4%, to $323 million primarily due to occupancy, amortization, and compensation costs.
  • Pretax loss increased $2 million to $205 million. Increases in total revenues were offset by increases in total operating expenses, resulting in a pretax loss increase primarily due to a decline in other income related to the sale of the mortgage loan portfolio in fiscal 2017.
  • Loss per share from continuing operations increased $0.07 to $0.62.   Approximately half of the increase was due to the reduction in share count, which will be accretive on a full year basis, but negatively impacts those quarters with a net loss.  The remainder of the change in loss per share was due to the decrease in the income tax benefit.

Dividends

As previously announced, a quarterly cash dividend of $0.24 per share is payable on October 2, 2017 to shareholders of record as of September 13, 2017.  H&R Block has paid quarterly dividends consecutively since the company went public in 1962.

Discontinued Operations

Sand Canyon Corporation's accrual for contingent losses related to representation and warranty claims remained unchanged from the prior fiscal quarter at $4.5 million as of July 31, 2017.

Leadership Transition

On August 22, 2017, the company announced that Jeff Jones has been appointed H&R Block’s president and chief executive officer, effective October 9, 2017.  Details regarding his appointment were included in a press release on August 22, 2017 and in a Form 8-K filed with the Securities and Exchange Commission on the same day.

Conference Call

Discussion of the fiscal 2018 first quarter results, future outlook, and a general business update will occur during the company’s previously announced fiscal first quarter earnings conference call for analysts, institutional investors, and shareholders. The call is scheduled for 4:30 p.m. Eastern time on August 29, 2017. To access the call, please dial the number below approximately 10 minutes prior to the scheduled starting time:

U.S./Canada (855) 702-5257 or International (213) 358-0868
Conference ID: 46876633

The call will also be webcast in a listen-only format for the media and public. The link to the webcast can be accessed directly at http://investors.hrblock.com.

A replay of the call will be available beginning at 7:30 p.m. Eastern time on August 29, 2017, and continuing until September 29, 2017, by dialing (855) 859-2056 (U.S./Canada) or (404) 537-3406 (International). The conference ID is 46876633. The webcast will be available for replay August 30, 2017 at http://investors.hrblock.com.

About H&R Block

H&R Block, Inc. (NYSE:HRB) is a global consumer tax services provider. Tax return preparation services are provided by professional tax preparers in approximately 12,000 company-owned and franchise retail tax offices worldwide, and through H&R Blocktax software products for the DIY consumer. H&R Block also offers adjacent Tax Plus products and services. In fiscal 2017, H&R Block had annual revenues of over $3 billion with 23 million tax returns prepared worldwide. For more information, visit the H&R Block Newsroom.

About Non-GAAP Financial Information

This press release and the accompanying tables include non-GAAP financial information. For a description of these non-GAAP financial measures, including the reasons management uses each measure, and reconciliations of these non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with generally accepted accounting principles, please see the section of the accompanying tables titled "Non-GAAP Financial Information."

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the securities laws. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words or variation of words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "projects," "forecasts," "targets," "would," "will," "should," "goal," "could" or "may" or other similar expressions. Forward-looking statements provide management's current expectations or predictions of future conditions, events or results. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. They may include estimates of revenues, income, earnings per share, cost savings, capital expenditures, dividends, share repurchases, liquidity, capital structure or other financial items, descriptions of management’s plans or objectives for future operations, products or services, or descriptions of assumptions underlying any of the above. All forward-looking statements speak only as of the date they are made and reflect the company's good faith beliefs, assumptions and expectations, but they are not guarantees of future performance or events. Furthermore, the company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions, factors, or expectations, new information, data or methods, future events or other changes, except as required by law. By their nature, forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Factors that might cause such differences include, but are not limited to, a variety of economic, competitive and regulatory factors, many of which are beyond the company's control, that are described in our Annual Report on Form 10-K for the fiscal year ended April 30, 2017 in the section entitled "Risk Factors” and additional factors we may describe from time to time in other filings with the Securities and Exchange Commission. You may get such filings for free at our website at http://investors.hrblock.com.  You should understand that it is not possible to predict or identify all such factors and, consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

1  All amounts in this release are unaudited.  Unless otherwise noted, all comparisons refer to the current period compared to the corresponding prior year period.
2 All per share amounts are based on fully diluted shares at the end of the corresponding period.
3 The company reports non-GAAP financial measures of performance, including earnings before interest, tax, depreciation, and amortization (EBITDA), which it considers to be useful metrics for management and investors to evaluate and compare the ongoing operating performance of the company.  See "About Non-GAAP Financial Information" below for more information regarding financial measures not prepared in accordance with generally accepted accounting principles (GAAP).

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in 000s -
except per share amounts)
    Three months ended July 31,
    2017   2016
         
REVENUES:        
Service revenues   $ 124,695     $ 112,384  
Royalty, product and other revenues   13,107     12,801  
    137,802     125,185  
OPERATING EXPENSES:        
Cost of revenues:        
Compensation and benefits   55,592     52,355  
Occupancy and equipment   98,467     94,425  
Provision for bad debt   2,459     1,417  
Depreciation and amortization   28,616     27,467  
Other   42,581     35,422  
    227,715     211,086  
Selling, general and administrative:        
Marketing and advertising   7,104     7,561  
Compensation and benefits   56,373     57,522  
Depreciation and amortization   14,982     13,815  
Other selling, general and administrative   16,790     19,925  
    95,249     98,823  
Total operating expenses   322,964     309,909  
         
Other income (expense), net   1,220     2,641  
Interest expense on borrowings   (21,277 )   (21,466 )
Loss from continuing operations before income tax benefit   (205,219 )   (203,549 )
Income tax benefit   (77,401 )   (82,523 )
Net loss from continuing operations   (127,818 )   (121,026 )
Net loss from discontinued operations   (2,749 )   (2,647 )
NET LOSS   $ (130,567 )   $ (123,673 )
         
BASIC AND DILUTED LOSS PER SHARE:        
Continuing operations   $ (0.62 )   $ (0.55 )
Discontinued operations   (0.01 )   (0.01 )
Consolidated   $ (0.63 )   $ (0.56 )
         
WEIGHTED AVERAGE BASIC AND DILUTED SHARES   207,935     220,484  
         



CONSOLIDATED BALANCE SHEETS   (unaudited, in 000s - except per share data)
As of   July 31, 2017   July 31, 2016   April 30, 2017
             
ASSETS            
Cash and cash equivalents   $ 551,566     $ 306,871     $ 1,011,331  
Cash and cash equivalents — restricted   116,594     122,025     106,208  
Receivables, net   91,004     103,425     162,775  
Prepaid expenses and other current assets   74,776     76,052     65,725  
Total current assets   833,940     608,373     1,346,039  
Mortgage loans held for investment, net   —     192,375     —  
Property and equipment, net   253,255     284,114     263,827  
Intangible assets, net   393,972     419,909     409,364  
Goodwill   493,991     470,942     491,207  
Deferred tax assets and income taxes receivable   54,348     90,498     83,728  
Other noncurrent assets   102,742     97,331     99,943  
Total assets   $ 2,132,248     $ 2,163,542     $ 2,694,108  
LIABILITIES AND STOCKHOLDERS’ EQUITY            
LIABILITIES:            
Accounts payable and accrued expenses   $ 161,751     $ 157,085     $ 217,028  
Accrued salaries, wages and payroll taxes   35,063     43,516     183,856  
Accrued income taxes and reserves for uncertain tax positions   176,909     216,390     348,199  
Current portion of long-term debt   992     864     981  
Deferred revenue and other current liabilities   187,791     191,304     189,216  
Total current liabilities   562,506     609,159     939,280  
Long-term debt   1,493,422     1,491,790     1,493,017  
Reserves for uncertain tax positions   159,233     116,709     159,085  
Deferred revenue and other noncurrent liabilities   131,415     145,691     163,609  
Total liabilities   2,346,576     2,363,349     2,754,991  
COMMITMENTS AND CONTINGENCIES            
STOCKHOLDERS’ EQUITY:            
Common stock, no par, stated value $.01 per share   2,462     2,582     2,462  
Additional paid-in capital   746,761     748,924     754,912  
Accumulated other comprehensive loss   (12,837 )   (14,804 )   (15,299 )
Retained deficit   (229,647 )   (180,631 )   (48,206 )
Less treasury shares, at cost   (721,067 )   (755,878 )   (754,752 )
Total stockholders' equity (deficiency)   (214,328 )   (199,807 )   (60,883 )
   Total liabilities and stockholders' equity   $ 2,132,248     $ 2,163,542     $ 2,694,108  
             



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS   (unaudited, in 000s)
Three months ended July 31,   2017   2016
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss   $ (130,567 )   $ (123,673 )
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization   43,598     41,282  
Provision for bad debt   2,459     1,417  
Deferred taxes   20,796     6,274  
Stock-based compensation   4,816     5,541  
Changes in assets and liabilities, net of acquisitions:        
Receivables   64,985     49,220  
Prepaid expenses and other current assets   (8,695 )   (9,173 )
Other noncurrent assets   5,499     4,059  
Accounts payable and accrued expenses   (66,729 )   (98,785 )
Accrued salaries, wages and payroll taxes   (149,441 )   (118,040 )
Deferred revenue and other current liabilities   464     (38,022 )
Deferred revenue and other noncurrent liabilities   (32,510 )   (28,080 )
Income tax receivables, accrued income taxes and income tax reserves   (149,542 )   (144,249 )
Other, net   (14,248 )   (5,735 )
   Net cash used in operating activities   (409,115 )   (457,964 )
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Principal payments and sales of mortgage loans and real estate owned, net   —     9,573  
Capital expenditures   (13,094 )   (6,246 )
Payments made for business acquisitions, net of cash acquired   (1,440 )   (1,635 )
Franchise loans funded   (4,527 )   (2,219 )
Payments received on franchise loans   4,727     6,473  
Other, net   1,371     (868 )
Net cash provided by (used in) investing activities   (12,963 )   5,078  
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Dividends paid   (49,905 )   (48,514 )
Repurchase of common stock, including shares surrendered   (7,508 )   (45,312 )
Proceeds from exercise of stock options   27,418     1,639  
Other, net   2,545     (24,779 )
Net cash used in financing activities   (27,450 )   (116,966 )
         
Effects of exchange rate changes on cash   149     (2,163 )
         
Net decrease in cash, cash equivalents and restricted cash   (449,379 )   (572,015 )
Cash, cash equivalents and restricted cash, beginning of period   1,117,539     1,000,911  
Cash, cash equivalents and restricted cash, end of period   $ 668,160     $ 428,896  
         
SUPPLEMENTARY CASH FLOW DATA:        
Income taxes paid, net of refunds received   $ 57,901     $ 61,289  
Interest paid on borrowings   15,519     15,519  
Accrued additions to property and equipment   4,757     10,147  
Accrued purchase of common stock   —     8,895  
         

Note: Effective May 1, 2017, we adopted the provisions of Accounting Standards Update No. 2016-18,"Restricted Cash (a consensus of the FASB Emerging Issues Task Force)," (ASU 2016-18) on a retrospective basis. Accordingly, the statements of cash flows explain the change in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents per ASU 2016-18. Amounts for prior periods have been retrospectively adjusted to conform to the current period presentation.

FINANCIAL RESULTS   (unaudited, in 000s - except per share amounts)
    Three months ended July 31,
    2017   2016
REVENUES:        
U.S. assisted tax preparation fees   $ 29,963     $ 25,429  
U.S. royalties   6,967     6,525  
U.S. DIY tax preparation fees   3,226     2,914  
International revenues   40,417     38,875  
Revenues from Refund Transfers   2,816     3,234  
Revenues from Emerald Card®   14,987     13,065  
Revenues from Peace of Mind® Extended Service Plan   31,943     27,031  
Interest and fee income on Emerald Advance   664     804  
Other   6,819     7,308  
    137,802     125,185  
Compensation and benefits:        
Field wages   48,123     45,043  
Other wages   43,197     42,100  
Benefits and other compensation   20,645     22,734  
    111,965     109,877  
Occupancy and equipment   98,199     94,371  
Marketing and advertising   7,104     7,561  
Depreciation and amortization   43,598     41,282  
Bad debt   2,459     1,417  
Supplies   2,734     2,077  
Other   56,905     53,324  
Total operating expenses   322,964     309,909  
         
Other income (expense), net   1,220     2,641  
Interest expense on borrowings   (21,277 )   (21,466 )
Pretax loss   (205,219 )   (203,549 )
Income tax benefit   (77,401 )   (82,523 )
Net loss from continuing operations   (127,818 )   (121,026 )
Net loss from discontinued operations   (2,749 )   (2,647 )
NET LOSS   $ (130,567 )   $ (123,673 )
         
BASIC AND DILUTED LOSS PER SHARE:        
Continuing operations   $ (0.62 )   $ (0.55 )
Discontinued operations   (0.01 )   (0.01 )
Consolidated   $ (0.63 )   $ (0.56 )
         
Weighted average basic and diluted shares   207,935     220,484  
         
EBITDA from continuing operations (1)   $ (140,344 )   $ (140,801 )
         

(1) See "Non-GAAP Financial Information" for a reconciliation of non-GAAP measures.


    Three months ended July 31,
NON-GAAP FINANCIAL MEASURE - EBITDA   2017   2016
         
Net loss - as reported   $ (130,567 )   $ (123,673 )
Discontinued operations, net   2,749     2,647  
Net loss from continuing operations - as reported   (127,818 )   (121,026 )
Add back :        
Income taxes of continuing operations   (77,401 )   (82,523 )
Interest expense of continuing operations   21,277     21,466  
Depreciation and amortization of continuing operations   43,598     41,282  
    (12,526 )   (19,775 )
         
EBITDA from continuing operations   $ (140,344 )   $ (140,801 )
         
    Three months ended July 31,
Supplemental Information   2017   2016
         
Stock-based compensation expense:        
Pretax   $ 4,816     $ 5,541  
After-tax   3,123     3,479  
Amortization of intangible assets:        
Pretax   $ 19,235     $ 17,986  
After-tax   12,472     11,293  
         

NON-GAAP FINANCIAL INFORMATION

The accompanying press release contains non-GAAP financial measures.  Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Because these measures are not measures of financial performance under GAAP and are susceptible to varying calculations, they may not be comparable to similarly titled measures for other companies.

We consider our non-GAAP financial measures to be performance measures and a useful metric for management and investors to evaluate and compare the ongoing operating performance of our business.

We may consider whether significant items that arise in the future should be excluded from our non-GAAP financial measures.

We measure the performance of our business using a variety of metrics, including EBITDA from continuing operations. We also use EBITDA from continuing operations and pretax income of continuing operations, each subject to permitted adjustments, as performance metrics in incentive compensation calculations for our employees.

For Further Information
Investor Relations: Colby Brown, (816) 854-4559, colby.brown@hrblock.com
Media Relations:    Susan Waldron, (816) 854-5522, susan.waldron@hrblock.com

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