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H&R Block Announces Strong Start to the Tax Season and Fiscal 2018 Third Quarter Results

KANSAS CITY, Mo., March 06, 2018 (GLOBE NEWSWIRE) -- H&R Block, Inc. (NYSE:HRB) today released U.S. tax return volume through February 28 and its financial results for the fiscal 2018 third quarter ended January 31, 2018.  The company normally reports a fiscal third quarter loss due to the seasonality of its tax business.

Tax Season and Fiscal Third Quarter Highlights1

  • H&R Block grows total U.S. returns through February 28.
  • Company reiterates financial outlook for full year.
  • Fiscal third quarter revenues increased $37 million, or 8%, to $488 million primarily due to increased return volumes in both Assisted and DIY tax preparation businesses.
  • Loss per share from continuing operations increased $0.67, from $0.49 to $1.16, solely due to changes in the company's effective tax rate resulting from the recently enacted federal corporate tax legislation.  The negative impact from these corporate tax rate changes is unique to the company's fiscal third quarter, as the impact will be favorable on a full fiscal year basis.

Tax Season Results2

H&R Block total U.S. return volume increased 3.4% through February 28, with Assisted returns increasing 0.7% and DIY returns increasing 8.2%.  Positive results in the Assisted business were due to the success of early-season promotions including the company's Refund Advance no-interest loan and Free Federal 1040EZ offer.  In DIY, continued product improvements, enhanced partnerships, and the H&R Block More Zero® promotion led to the strong performance.

CEO Perspective

"I'm proud of what we have accomplished so far this tax season, with strong results in both the Assisted and DIY tax preparation categories," said Jeff Jones, H&R Block's president and chief executive officer.  "As we look to the second half of the tax season, we'll continue to focus on execution as we leverage our products, partnerships and marketing to deliver on our financial outlook."

Fiscal 2018 Third Quarter Results From Continuing Operations

(in millions, except EPS)   Fiscal Year 2018   Fiscal Year 2017
Revenue   $ 488     $ 452  
Pretax Loss   $ (121 )   $ (151 )
Net Loss   $ (243 )   $ (101 )
Weighted-Avg. Shares - Diluted   209.1     207.9  
EPS3   $ (1.16 )   $ (0.49 )
EBITDA4   $ (48 )   $ (79 )
         

Key Financial Metrics

  • Total revenues increased $37 million, or 8%, to $488 million primarily due to increased return volumes.
  • Total operating expenses increased $9 million, or 2%, to $586 million primarily due to increases in compensation costs, partially offset by lower marketing and advertising expenses.
  • Pretax loss decreased $30 million to $121 million.
  • Loss per share from continuing operations increased $0.67, from $0.49 to $1.16, solely due to changes in the company's effective tax rate resulting from the recently enacted federal corporate tax legislation.  The negative impact from these corporate tax rate changes is unique to the company's fiscal third quarter, as the impact will be favorable on a full fiscal year basis.  The company expects its fiscal year effective tax rate to be 6%-9%, which is an update to the anticipated annual effective tax rate for fiscal 2018 disclosed in the company's Form 8-K filed with the Securities and Exchange Commission (SEC) on January 22, 2018.

CFO Perspective

"We are pleased with our performance during the first half of the tax season, which was in line with our expectations," said Tony Bowen, H&R Block's chief financial officer.  "Our expectations for revenue growth and margin are unchanged from the outlook we provided in December."

Dividends

As previously announced, a quarterly cash dividend of $0.24 per share is payable on April 2, 2018 to shareholders of record as of March 13, 2018.  H&R Block has paid quarterly dividends consecutively since the company went public in 1962.

Discontinued Operations

During the fiscal quarter, Sand Canyon Corporation made payments of $4.5 million pursuant to a settlement agreement entered into in fiscal 2016.  The full amount of the payments had been previously accrued by the company.  For additional information on Sand Canyon, please refer to disclosures in the company’s reports on Forms 10-K, 10-Q, and other filings with the SEC.

Conference Call

Discussion of the fiscal 2018 third quarter results, future outlook, and a general business update will occur during the company’s previously announced fiscal third quarter earnings conference call for analysts, institutional investors, and shareholders. The call is scheduled for 4:30 p.m. Eastern time on March 6, 2018. 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: 3876229

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 March 6, 2018, and continuing until April 6, 2018, by dialing (855) 859-2056 (U.S./Canada) or (404) 537-3406 (International). The conference ID is 3876229. The webcast will be available for replay beginning on March 7, 2018 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, client trajectory, income, effective tax rate, 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. In addition, factors that may cause the company’s actual estimated effective tax rate to differ from estimates include the company’s actual results from operations compared to current estimates, future discrete items, changes in interpretations and assumptions the company has made, guidance from the Internal Revenue Service, SEC, or the Financial Accounting Standards Board about the Tax Legislation, and future actions of the company. 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  Volume changes to prior year noted in this paragraph and in the table attached to this release are based on a date-to-date basis.
3  All per share amounts are based on fully diluted shares at the end of the corresponding period.
4  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).

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

         
CONSOLIDATED STATEMENTS OF OPERATIONS       (unaudited, in 000s -
except per share amounts)
    Three months ended January 31,   Nine months ended January 31,
    2018   2017   2018   2017
                 
REVENUES:                
Service revenues   $ 388,771     $ 361,397     $ 641,389     $ 592,721  
Royalty, product and other revenues   99,655     90,485     125,693     115,678  
    488,426     451,882     767,082     708,399  
OPERATING EXPENSES:                
Cost of revenues:                
Compensation and benefits   181,958     165,015     303,434     275,098  
Occupancy and equipment   107,981     104,094     311,752     297,586  
Provision for bad debt   29,191     28,348     33,429     29,634  
Depreciation and amortization   32,046     29,828     90,391     87,206  
Other   65,425     61,492     145,329     136,041  
    416,601     388,777     884,335     825,565  
Selling, general and administrative:                
Marketing and advertising   64,209     84,101     82,875     103,663  
Compensation and benefits   66,942     58,408     185,453     174,223  
Depreciation and amortization   16,442     15,332     46,487     44,986  
Other selling, general and administrative   21,505     30,056     66,378     77,500  
    169,098     187,897     381,193     400,372  
Total operating expenses   585,699     576,674     1,265,528     1,225,937  
                 
Other income (expense), net   1,028     134     3,259     4,948  
Interest expense on borrowings   (24,560 )   (25,940 )   (67,102 )   (70,026 )
Loss from continuing operations before income taxes (benefit)   (120,805 )   (150,598 )   (562,289 )   (582,616 )
Income taxes (benefit)   122,120     (49,386 )   (43,234 )   (216,963 )
Net loss from continuing operations   (242,925 )   (101,212 )   (519,055 )   (365,653 )
Net loss from discontinued operations   (2,720 )   (3,302 )   (10,723 )   (8,754 )
NET LOSS   $ (245,645 )   $ (104,514 )   $ (529,778 )   $ (374,407 )
                 
BASIC AND DILUTED LOSS PER SHARE:                
Continuing operations   $ (1.16 )   $ (0.49 )   $ (2.49 )   $ (1.71 )
Discontinued operations   (0.02 )   (0.01 )   (0.05 )   (0.04 )
Consolidated   $ (1.18 )   $ (0.50 )   $ (2.54 )   $ (1.75 )
                 
WEIGHTED AVERAGE BASIC AND DILUTED SHARES   209,080     207,862     208,693     214,627  
                 
                 


     
CONSOLIDATED BALANCE SHEETS   (unaudited, in 000s - except per share data)
As of   January 31, 2018   January 31, 2017   April 30, 2017
             
ASSETS            
Cash and cash equivalents   $ 187,366     $ 221,172     $ 1,011,331  
Cash and cash equivalents - restricted   83,033     70,166     106,208  
Receivables, net   791,618     787,865     162,775  
Income taxes receivable   72,775     38,032      
Prepaid expenses and other current assets   149,349     85,599     65,725  
Total current assets   1,284,141     1,202,834     1,346,039  
Property and equipment, net   249,911     282,358     263,827  
Intangible assets, net   390,993     434,720     409,364  
Goodwill   504,789     483,320     491,207  
Deferred tax assets and income taxes receivable   25,305     71,639     83,728  
Other noncurrent assets   106,161     102,760     99,943  
Total assets   $ 2,561,300     $ 2,577,631     $ 2,694,108  
LIABILITIES AND STOCKHOLDERS’ EQUITY            
LIABILITIES:            
Accounts payable and accrued expenses   $ 163,653     $ 239,085     $ 217,028  
Accrued salaries, wages and payroll taxes   135,626     123,457     183,856  
Accrued income taxes and reserves for uncertain tax positions   164,246     7,537     348,199  
Current portion of long-term debt   1,015     942     981  
Deferred revenue and other current liabilities   201,988     183,616     189,216  
Total current liabilities   666,528     554,637     939,280  
Long-term debt and line of credit borrowings   2,284,231     2,592,622     1,493,017  
Deferred tax liabilities and reserves for uncertain tax positions   201,384     109,557     159,085  
Deferred revenue and other noncurrent liabilities   107,226     121,631     163,609  
Total liabilities   3,259,369     3,378,447     2,754,991  
COMMITMENTS AND CONTINGENCIES            
STOCKHOLDERS’ EQUITY:            
Common stock, no par, stated value $.01 per share   2,462     2,462     2,462  
Additional paid-in capital   758,361     752,748     754,912  
Accumulated other comprehensive loss   (9,374 )   (15,363 )   (15,299 )
Retained deficit   (729,578 )   (785,823 )   (48,206 )
Less treasury shares, at cost   (719,940 )   (754,840 )   (754,752 )
Total stockholders' equity (deficiency)   (698,069 )   (800,816 )   (60,883 )
Total liabilities and stockholders' equity   $ 2,561,300     $ 2,577,631     $ 2,694,108  
             
             


     
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS   (unaudited, in 000s)
Nine months ended January 31,   2018   2017
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss   $ (529,778 )   $ (374,407 )
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization   136,878     132,192  
Provision for bad debt   33,429     29,634  
Deferred taxes   113,345     6,128  
Stock-based compensation   17,065     16,945  
Changes in assets and liabilities, net of acquisitions:        
Receivables   (651,200 )   (646,290 )
Prepaid expenses and other current assets   (83,201 )   (23,208 )
Other noncurrent assets   8,310     7,575  
Accounts payable and accrued expenses   (36,608 )   (33,560 )
Accrued salaries, wages and payroll taxes   (49,255 )   (37,978 )
Deferred revenue and other current liabilities   10,113     (44,243 )
Deferred revenue and other noncurrent liabilities   (58,695 )   (57,216 )
Income tax receivables, accrued income taxes and income tax reserves   (255,650 )   (378,987 )
Other, net   (12,454 )   (6,444 )
Net cash used in operating activities   (1,357,701 )   (1,409,859 )
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Principal payments and sales of mortgage loans and real estate owned, net       207,174  
Capital expenditures   (77,865 )   (73,924 )
Payments made for business acquisitions, net of cash acquired   (39,397 )   (52,825 )
Franchise loans funded   (20,226 )   (31,788 )
Payments received on franchise loans   13,391     20,816  
Other, net   1,524     (4,711 )
Net cash provided by (used in) investing activities   (122,573 )   64,742  
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Repayments of line of credit borrowings   (40,000 )   (445,000 )
Proceeds from line of credit borrowings   830,000     1,545,000  
Dividends paid   (150,258 )   (141,537 )
Repurchase of common stock, including shares surrendered   (7,746 )   (322,782 )
Proceeds from exercise of stock options   28,268     2,403  
Other, net   (28,922 )   373  
Net cash provided by financing activities   631,342     638,457  
         
Effects of exchange rate changes on cash   1,792     (2,913 )
         
Net decrease in cash, cash equivalents and restricted cash   (847,140 )   (709,573 )
Cash, cash equivalents and restricted cash, beginning of period   1,117,539     1,000,911  
Cash, cash equivalents and restricted cash, end of period   $ 270,399     $ 291,338  
         
SUPPLEMENTARY CASH FLOW DATA:        
Income taxes paid, net of refunds received   $ 102,755     $ 158,656  
Interest paid on borrowings   57,834     59,809  
Accrued additions to property and equipment   1,078     5,959  
         
         

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 January 31,   Nine months ended January 31,
    2018   2017   2018   2017
REVENUES:                
U.S. assisted tax preparation fees   $ 267,328     $ 245,262     $ 333,956     $ 306,030  
U.S. royalties   45,420     43,254     59,395     56,607  
U.S. DIY tax preparation fees   31,322     30,745     38,811     36,748  
International revenues   12,308     10,914     100,659     93,328  
Revenues from Refund Transfers   50,770     47,323     54,721     51,314  
Revenues from Emerald Card®   16,125     14,100     40,292     35,809  
Revenues from Peace of Mind® Extended Service Plan   19,967     18,135     76,495     67,855  
Interest and fee income on Emerald Advance   31,075     30,060     32,333     31,519  
Other   14,111     12,089     30,420     29,189  
    488,426     451,882     767,082     708,399  
Compensation and benefits:                
Field wages   156,027     142,084     261,866     237,223  
Other wages   50,717     45,172     140,637     129,479  
Benefits and other compensation   42,156     36,167     86,384     82,619  
    248,900     223,423     488,887     449,321  
Occupancy and equipment   107,731     103,867     311,335     297,275  
Marketing and advertising   64,209     84,101     82,875     103,663  
Depreciation and amortization   48,488     45,160     136,878     132,192  
Provision for bad debt   29,191     28,348     33,429     29,634  
Supplies   4,950     4,453     12,052     11,467  
Other   82,230     87,322     200,072     202,385  
Total operating expenses   585,699     576,674     1,265,528     1,225,937  
                 
Other income (expense), net   1,028     134     3,259     4,948  
Interest expense on borrowings   (24,560 )   (25,940 )   (67,102 )   (70,026 )
Pretax loss   (120,805 )   (150,598 )   (562,289 )   (582,616 )
Income taxes (benefit)   122,120     (49,386 )   (43,234 )   (216,963 )
Net loss from continuing operations   (242,925 )   (101,212 )   (519,055 )   (365,653 )
Net loss from discontinued operations   (2,720 )   (3,302 )   (10,723 )   (8,754 )
NET LOSS   $ (245,645 )   $ (104,514 )   $ (529,778 )   $ (374,407 )
                 
BASIC AND DILUTED LOSS PER SHARE:                
Continuing operations   $ (1.16 )   $ (0.49 )   $ (2.49 )   $ (1.71 )
Discontinued operations   (0.02 )   (0.01 )   (0.05 )   (0.04 )
Consolidated   $ (1.18 )   $ (0.50 )   $ (2.54 )   $ (1.75 )
                 
Weighted average basic and diluted shares   209,080     207,862     208,693     214,627  
                 
EBITDA from continuing operations (1)   $ (47,757 )   $ (79,498 )   $ (358,309 )   $ (380,398 )
                 
                 

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

                         
U.S. TAX OPERATING DATA                        
    Fiscal Year-to-Date       Fiscal Year-to-Date    
    January 31,       February 28,    
    2018   2017   % Change   2018   2017   % Change
                         
Tax Returns Prepared: (in 000s) (1) (2)                        
Company-Owned Operations   1,424     1,375     3.6 %   4,352     4,322     0.7 %
Franchise Operations   736     705     4.4 %   2,105     2,088     0.8 %
Total H&R Block Assisted   2,160     2,080     3.8 %   6,457     6,410     0.7 %
                         
Desktop   151     155     (2.6 )%   764     750     1.9 %
Online   1,126     1,056     6.6 %   3,170     2,887     9.8 %
Total H&R Block DIY Tax Software   1,277     1,211     5.5 %   3,934     3,637     8.2 %
                         
IRS Free File   94     96     (2.1 )%   306     298     2.7 %
Total H&R Block U.S. Returns   3,531     3,387     4.3 %   10,697     10,345     3.4 %
                         
Net Average Charge: (3)                        
Company-Owned Operations   $ 235.57     $ 226.89     3.8 %   $ 222.59     $ 217.50     2.3 %
Franchise Operations (4)   226.07     219.06     3.2 %   206.77     202.18     2.3 %
DIY Tax Software   30.39     30.35     0.1 %   27.71     26.79     3.4 %
                         
                         

(1)  An assisted tax return is defined as a current or prior year individual tax return that has been accepted and paid for by the client.  Also included are business returns, which account for less than 1% of assisted tax returns. A DIY tax software return is defined as a return that has been electronically filed and accepted by the IRS.  Also included are online returns paid and printed.
(2)  Amounts have been reclassified between company-owned and franchise for offices which were refranchised or repurchased by the company during the year.
(3)  Net average charge is calculated as tax preparation fees divided by tax returns prepared. For DIY Tax Software, net average charge excludes IRS Free File.
(4)  Net average charge related to H&R Block Franchise Operations represents tax preparation fees collected by H&R Block franchisees divided by returns prepared in franchise offices.  H&R Block will recognize a portion of franchise revenues as franchise royalties based on the terms of franchise agreements.

         
    Three months ended January 31,   Nine months ended January 31,
NON-GAAP FINANCIAL MEASURE - EBITDA   2018   2017   2018   2017
                 
Net loss - as reported   $ (245,645 )   $ (104,514 )   $ (529,778 )   $ (374,407 )
Discontinued operations, net   2,720     3,302     10,723     8,754  
Net loss from continuing operations - as reported   (242,925 )   (101,212 )   (519,055 )   (365,653 )
Add back:                
Income taxes of continuing operations   122,120     (49,386 )   (43,234 )   (216,963 )
Interest expense of continuing operations   24,560     25,940     67,102     70,026  
Depreciation and amortization of continuing operations   48,488     45,160     136,878     132,192  
    195,168     21,714     160,746     (14,745 )
                 
EBITDA from continuing operations   $ (47,757 )   $ (79,498 )   $ (358,309 )   $ (380,398 )
                 
    Three months ended January 31,   Nine months ended January 31,
Supplemental Information   2018   2017   2018   2017
                 
Stock-based compensation expense:                
Pretax   $ 5,438     $ 4,473     $ 17,065     $ 16,945  
After-tax   8,228     2,948     15,753     10,894  
Amortization of intangible assets:                
Pretax   $ 20,792     $ 19,287     $ 59,465     $ 57,324  
After-tax   29,863     12,621     54,892     36,854  
                 
                 

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.

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Source: HRB Tax Group, Inc.