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H&R Block Reports Fiscal 2014 Second Quarter Earnings; Focuses on Tax Season 2014 Readiness

KANSAS CITY, MO -- (Marketwired) -- 12/10/13 -- H&R Block, Inc. (NYSE: HRB) today announced financial results for its fiscal 2014 second quarter ended October 31, 2013. The company typically reports a second quarter operating loss due to the seasonality of the tax business.

Fiscal 2014 Second Quarter Highlights1

  • Revenues decreased 2 percent, or $3 million, to $134 million2
  • Seasonal adjusted net loss from continuing operations increased 12 percent to $112 million, or $(0.42) per share
  • Net loss from continuing operations increased 2 percent to $103 million, or $(0.38) per share
  • Company continues the process of divesting its Bank
  • Declares 205th consecutive quarterly dividend

CEO Perspective
"I'm pleased with the initiatives we have in place for the upcoming tax season and am confident that we are well positioned to again deliver strong results this year," said Bill Cobb, H&R Block's president and chief executive officer. "We've also made progress in the process of divesting our bank, and remain committed to continue offering best-in-class financial products," added Cobb.

Fiscal 2014 Second Quarter Results From Continuing Operations3

Actual Adjusted
(in millions, except EPS) Fiscal Year 2014 Fiscal Year 2013 Fiscal Year 2014 Fiscal Year 2013
Revenue $ 134 $ 137 $ 134 $ 137
EBITDA $ (138 ) $ (117 ) $ (142 ) $ (117 )
Pretax Loss $ (179 ) $ (162 ) $ (183 ) $ (162 )
Net Loss $ (103 ) $ (101 ) $ (112 ) $ (100 )
Weighted-Avg. Shares - Diluted 273.9 271.1 273.9 271.1
EPS $ (0.38 ) $ (0.37 ) $ (0.42 ) $ (0.37 )

CFO Perspective
"Given the seasonality of our business, our offseason results are not indicative of our performance for the full year," said Greg Macfarlane, H&R Block's chief financial officer. "While expenses have increased modestly year to date, we continue to expect EBITDA margins to be generally consistent with last year's results."

Business Segment Results and Highlights

Tax Services

  • Revenues decreased $2 million to $128 million, primarily due to timing differences in our Australian operations, partially offset by increased Emerald Card fee revenue from increased year-round usage
  • Operating expenses increased $27 million to $287 million due to timing of seasonal compensation, higher legal fees, and depreciation expense
  • Pretax loss increased $29 million to $159 million

Corporate

  • Total operating expenses declined $13 million to $26 million, primarily due to lower interest expense and mortgage loan loss provisions
  • Pretax loss decreased $12 million to $20 million

Discontinued Operations

  • Net loss of $2 million improved by $2 million from the prior year
  • Sand Canyon Corporation (SCC), a separate legal entity of H&R Block, Inc., received new claims for alleged breaches of representations and warranties in the principal amount of less than $1 million
  • SCC's accrual for contingent losses relating to representations and warranties remained unchanged at $159 million

Dividend
A previously announced quarterly cash dividend of 20 cents per share is payable on January 2, 2014 to shareholders of record as of December 9, 2013. The January 2 payment marks the company's 205th consecutive quarterly dividend since the company went public in 1962.

Investor Conference
At 8:30 a.m. EST on Wednesday, December 11, the company will hold its investor conference in New York City. H&R Block's senior leaders will outline the company's growth strategies and outlook, and provide a general business update including discussion of fiscal 2014 second quarter results.

The event will be broadcast live in a listen-only format for the media and public on H&R Block's investor relations website at http://investors.hrblock.com. A replay will be available on the company's website two hours after the conference ends and continuing until February 28, 2014.

About H&R Block
H&R Block, Inc. (NYSE: HRB) is the world's largest consumer tax services provider. More than 625 million tax returns have been prepared worldwide by and through H&R Block since 1955. In fiscal 2013, H&R Block had annual revenues of $2.9 billion with 25.4 million tax returns prepared worldwide. Tax return preparation services are provided in company-owned and franchise retail tax offices by over 80,000 professional tax preparers and associates worldwide, and through H&R Block digital products. H&R Block Bank provides affordable banking products and services. For more information, visit the H&R Block Newsroom.

About Non-GAAP Financial Measures
This press release and the accompanying tables include non-GAAP financial measures. 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 "About Non-GAAP Financial Measures."

Forward-Looking Statements
This press release may contain 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," "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, capital expenditures, dividends, 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 and which are described in our Annual Report on Form 10-K for the fiscal year ended April 30, 2013 in the section entitled "Risk Factors," as well as additional factors we may describe from time to time in other filings with the Securities and Exchange Commission. In addition, there can be no assurances regarding the ability to obtain all required regulatory and other approvals, the ability of the parties to negotiate and execute the additional required agreements as expected, or the terms and conditions of the additional agreements. 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 per share amounts are based on fully diluted shares.
2 Unless otherwise noted, all comparisons, including those made to the "prior year," refer to the current period compared to the prior year period.
3 EBITDA (earnings before interest, taxes, depreciation and amortization) is a non-GAAP financial measure, which the company finds relevant when measuring its performance. The company also reports adjusted financial performance, which it believes is a better indication of the company's recurring operations. See "About Non-GAAP Financial Measures" below for more information regarding financial measures not prepared in accordance with generally accepted accounting principles (GAAP).

TABLES FOLLOW

KEY OPERATING RESULTS (unaudited, amounts in thousands, except per share data)
Three months ended October 31,
Revenues Income (loss)
2013 2012 2013 2012
Tax Services $ 128,040 $ 129,819 $ (159,314 ) $ (130,109 )
Corporate and Eliminations 6,300 7,444 (20,048 ) (32,179 )
$ 134,340 $ 137,263 (179,362 ) (162,288 )
Income tax benefit (76,347 ) (61,089 )
Net loss from continuing operations (103,015 ) (101,199 )
Net loss from discontinued operations (1,928 ) (4,044 )
Net loss $ (104,943 ) $ (105,243 )
Basic and diluted loss per share:
Continuing operations $ (0.38 ) $ (0.37 )
Discontinued operations (0.01 ) (0.02 )
Consolidated $ (0.39 ) $ (0.39 )
Basic and diluted shares 273,907 271,145
Six months ended October 31,
Revenues Income (loss)
2013 2012 2013 2012
Tax Services $ 249,731 $ 220,072 $ (303,708 ) $ (271,014 )
Corporate and Eliminations 11,804 13,680 (60,148 ) (60,543 )
$ 261,535 $ 233,752 (363,856 ) (331,557 )
Income tax benefit (147,571 ) (124,708 )
Net loss from continuing operations (216,285 ) (206,849 )
Net loss from discontinued operations (3,845 ) (5,835 )
Net loss $ (220,130 ) $ (212,684 )
Basic and diluted loss per share:
Continuing operations $ (0.79 ) $ (0.76 )
Discontinued operations (0.01 ) (0.02 )
Consolidated $ (0.80 ) $ (0.78 )
Basic and diluted shares 273,494 274,150
CONSOLIDATED BALANCE SHEETS (amounts in thousands, except per share data)
As of October 31, 2013 October 31, 2012 April 30, 2013
(unaudited) (unaudited)
ASSETS
Cash and cash equivalents $ 790,772 $ 1,260,901 $ 1,747,584
Cash and cash equivalents -- restricted 47,521 38,667 117,837
Receivables, net 131,701 124,511 206,835
Prepaid expenses and other current assets 225,660 282,874 390,087
Total current assets 1,195,654 1,706,953 2,462,343
Mortgage loans held for investment, net 295,907 370,850 338,789
Investments in available-for-sale securities 465,344 388,640 486,876
Property and equipment, net 311,157 272,438 267,880
Intangible assets, net 296,213 275,193 284,439
Goodwill 442,812 434,492 434,782
Other assets 267,426 448,164 262,670
Total assets $ 3,274,513 $ 3,896,730 $ 4,537,779
LIABILITIES AND STOCKHOLDERS'EQUITY
LIABILITIES:
Customer banking deposits $ 655,129 $ 790,106 $ 936,464
Accounts payable, accrued expenses and other current liabilities 426,994 406,447 523,921
Accrued salaries, wages and payroll taxes 41,584 39,345 134,970
Accrued income taxes 22,475 95,126 416,128
Current portion of long-term debt 400,503 600,678 722
Total current liabilities 1,546,685 1,931,702 2,012,205
Long-term debt 506,078 906,125 905,958
Other noncurrent liabilities 266,775 365,970 356,069
Total liabilities 2,319,538 3,203,797 3,274,232
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS'EQUITY:
Common stock, no par, stated value $.01 per share 3,166 3,166 3,166
Additional paid-in capital 757,828 748,298 752,483
Accumulated other comprehensive income 1,463 8,685 10,550
Retained earnings 1,003,842 795,707 1,333,445
Less treasury shares, at cost (811,324 ) (862,923 ) (836,097 )
Total stockholders' equity 954,975 692,933 1,263,547
Total liabilities and stockholders' equity $ 3,274,513 $ 3,896,730 $ 4,537,779
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in 000s, except per share amounts)
Three months ended Six months ended
October 31, October 31,
2013 2012 2013 2012
REVENUES:
Service revenues $ 112,432 $ 116,438 $ 220,232 $ 196,334
Product and other revenues 11,282 10,966 19,480 17,686
Interest income 10,626 9,859 21,823 19,732
134,340 137,263 261,535 233,752
OPERATING EXPENSES:
Cost of revenues:
Compensation and benefits 60,526 54,764 106,838 94,349
Occupancy and equipment 82,358 82,398 161,094 162,349
Provision for bad debt and loan losses 2,849 3,725 14,340 8,370
Interest 14,314 23,390 28,760 45,467
Depreciation of property and equipment 20,144 16,196 36,948 30,730
Other 40,673 31,538 82,937 64,170
220,864 212,011 430,917 405,435
Selling, general and administrative 94,092 90,327 190,789 165,805
314,956 302,338 621,706 571,240
Operating loss (180,616 ) (165,075 ) (360,171 ) (337,488 )
Other income (expense), net 1,254 2,787 (3,685 ) 5,931
Loss from continuing operations before income tax benefit (179,362 ) (162,288 ) (363,856 ) (331,557 )
Income tax benefit (76,347 ) (61,089 ) (147,571 ) (124,708 )
Net loss from continuing operations (103,015 ) (101,199 ) (216,285 ) (206,849 )
Net loss from discontinued operations (1,928 ) (4,044 ) (3,845 ) (5,835 )
NET LOSS $ (104,943 ) $ (105,243 ) $ (220,130 ) $ (212,684 )
BASIC AND DILUTED LOSS PER SHARE:
Continuing operations $ (0.38 ) $ (0.37 ) $ (0.79 ) $ (0.76 )
Discontinued operations (0.01 ) (0.02 ) (0.01 ) (0.02 )
Consolidated $ (0.39 ) $ (0.39 ) $ (0.80 ) $ (0.78 )
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in 000s)
Six months ended October 31, 2013 2012
NET CASH USED IN OPERATING ACTIVITIES $ (492,373 ) $ (567,036 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (45,158 ) (67,474 )
Maturities of and payments received on available-for-sale securities 55,615 53,098
Principal payments on mortgage loans held for investment, net 24,340 23,608
Purchases of property and equipment (86,926 ) (60,720 )
Payments made for business acquisitions, net of cash acquired (20,927 ) (10,442 )
Franchise loans:
Loans funded (22,114 ) (20,670 )
Payments received 15,883 8,303
Other, net 15,255 10,218
Net cash used in investing activities (64,032 ) (64,079 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt -- (30,831 )
Proceeds from issuance of long-term debt -- 497,185
Customer banking deposits, net (275,800 ) (37,913 )
Dividends paid (109,324 ) (108,428 )
Repurchase of common stock, including shares surrendered (5,329 ) (339,919 )
Proceeds from exercise of stock options 24,536 1,288
Other, net (26,619 ) (33,004 )
Net cash used in financing activities (392,536 ) (51,622 )
Effects of exchange rates on cash (7,871 ) (696 )
Net decrease in cash and cash equivalents (956,812 ) (683,433 )
Cash and cash equivalents at beginning of the period 1,747,584 1,944,334
Cash and cash equivalents at end of the period $ 790,772 $ 1,260,901
SUPPLEMENTARY CASH FLOW DATA:
Income taxes paid, net of refunds received $ 116,099 $ 48,201
Interest paid on borrowings 27,804 42,106
Interest paid on deposits 1,180 2,683
Transfers of foreclosed loans to other assets 3,889 5,312
Accrued additions to property and equipment 6,729 10,273
Transfer of mortgage loans held for investment to held for sale 7,608 --
TAX SERVICES - FINANCIAL RESULTS (unaudited, amounts in 000s)
Three months ended Six months ended
October 31, October 31,
2013 2012 2013 2012
Tax preparation fees:
U.S. $ 29,011 $ 23,805 $ 51,037 $ 42,640
International 41,568 51,525 73,662 65,583
70,579 75,330 124,699 108,223
Royalties 9,527 9,630 16,089 15,481
Fees from Emerald Card 9,999 8,281 24,610 20,337
Fees from Peace of Mind® guarantees 19,151 18,572 46,977 45,555
Other 18,784 18,006 37,356 30,476
Total revenues 128,040 129,819 249,731 220,072
Compensation and benefits:
Field wages 49,531 45,290 89,435 77,698
Other wages 35,665 34,592 70,400 68,959
Benefits and other compensation 22,178 18,765 38,115 33,539
107,374 98,647 197,950 180,196
Occupancy and equipment 83,634 82,267 162,184 162,118
Marketing and advertising 12,566 11,386 19,583 18,838
Depreciation and amortization 26,632 23,393 49,434 43,864
Other 57,148 44,235 124,288 86,070
Total expenses 287,354 259,928 553,439 491,086
Pretax loss $ (159,314 ) $ (130,109 ) $ (303,708 ) $ (271,014 )
NON-GAAP FINANCIAL MEASURES (unaudited, amounts in thousands, except per share amounts)
Three months ended October 31, 2013
Revenues Expenses EBITDA Pretax income (loss) Net income (loss) EPS
As reported - from continuing operations $ 134,340 $ 314,956 $ (138,380 ) $ (179,362 ) $ (103,015 ) $ (0.38 )
Adjustments:
Loss contingencies - litigation -- 350 350 350 214 --
Severance -- 1,828 1,828 1,828 1,122 --
Professional fees related to HRB Bank transaction -- (5,217 ) (5,217 ) (5,217 ) (3,198 ) (0.01 )
Gain on sales of tax offices -- (599 ) (599 ) (599 ) (367 ) --
Discrete tax items -- -- -- -- (7,061 ) (0.03 )
-- (3,638 ) (3,638 ) (3,638 ) (9,290 ) (0.04 )
As adjusted - from continuing operations $ 134,340 $ 311,318 $ (142,018 ) $ (183,000 ) $ (112,305 ) $ (0.42 )
Three months ended October 31, 2012
Revenues Expenses EBITDA Pretax income (loss) Net income (loss) EPS
As reported - from continuing operations $ 137,263 $ 302,338 $ (116,845 ) $ (162,288 ) $ (101,199 ) $ (0.37 )
Adjustments:
Loss contingencies - litigation -- (2,451 ) (2,451 ) (2,451 ) (1,506 ) (0.01 )
Impairment of goodwill and intangible assets -- 1,421 1,421 1,421 869 --
Severance -- 1,558 1,558 1,558 951 --
Professional fees related to HRB Bank transaction -- 47 47 47 29 --
Gain on sales of tax offices -- (754 ) (754 ) (754 ) (460 ) --
Discrete tax items -- -- -- -- 1,472 0.01
-- (179 ) (179 ) (179 ) 1,355 --
As adjusted - from continuing operations $ 137,263 $ 302,159 $ (117,024 ) $ (162,467 ) $ (99,844 ) $ (0.37 )
Six months ended October 31, 2013
Revenues Expenses EBITDA Pretax income (loss) Net income (loss) EPS
As reported - from continuing operations $ 261,535 $ 621,706 $ (285,554 ) $ (363,856 ) $ (216,285 ) $ (0.79 )
Adjustments:
Loss contingencies - litigation -- 723 723 723 443 --
Severance -- 2,933 2,933 2,933 1,799 0.01
Professional fees related to HRB Bank transaction -- 1,807 1,807 1,807 1,108 --
Gain on sales of tax offices -- (599 ) (599 ) (599 ) (367 ) --
Discrete tax items -- -- -- -- (6,904 ) (0.03 )
-- 4,864 4,864 4,864 (3,921 ) (0.02 )
As adjusted - from continuing operations $ 261,535 $ 626,570 $ (280,690 ) $ (358,992 ) $ (220,206 ) $ (0.81 )
Six months ended October 31, 2012
Revenues Expenses EBITDA Pretax income (loss) Net income (loss) EPS
As reported - from continuing operations $ 233,752 $ 571,240 $ (243,486 ) $ (331,557 ) $ (206,849 ) $ (0.76 )
Adjustments:
Loss contingencies - litigation -- (4,753 ) (4,753 ) (4,753 ) (2,906 ) (0.01 )
Impairment of goodwill and intangible assets -- 1,421 1,421 1,421 869 --
Severance -- 1,057 1,057 1,057 646 --
Professional fees related to HRB Bank transaction -- 47 47 47 29 --
Gain on sales of tax offices -- (524 ) (524 ) (524 ) (320 ) --
Discrete tax items -- -- -- -- 4,173 0.02
-- (2,752 ) (2,752 ) (2,752 ) 2,491 0.01
As adjusted - from continuing operations $ 233,752 $ 568,488 $ (246,238 ) $ (334,309 ) $ (204,358 ) $ (0.75 )
Three months ended Six months ended
October 31, October 31,
EBITDA 2013 2012 2013 2012
Net loss from continuing operations - as reported $ (103,015 ) $ (101,199 ) $ (216,285 ) $ (206,849 )
Add back :
Income taxes (76,347 ) (61,089 ) (147,571 ) (124,708 )
Interest expense 14,314 23,390 28,760 45,467
Depreciation and amortization 26,668 22,053 49,542 42,604
(35,365 ) (15,646 ) (69,269 ) (36,637 )
EBITDA from continuing operations $ (138,380 ) $ (116,845 ) $ (285,554 ) $ (243,486 )
Three months ended Six months ended
October 31, October 31,
Supplemental Information 2013 2012 2013 2012
Stock-based compensation expense:
Pretax $ 6,210 $ 5,384 $ 10,762 $ 7,737
After-tax 3,810 3,299 6,601 4,730
Amortization of intangible assets:
Pretax $ 6,523 $ 5,857 $ 12,594 $ 11,874
After-tax 4,003 3,599 7,725 7,259

ABOUT NON-GAAP FINANCIAL MEASURES

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 in other companies.

We consider non-GAAP financial measures to be a useful metric for management and investors to evaluate and compare the ongoing operating performance of our business on a consistent basis across reporting periods, as it eliminates the effect of items that are not indicative of our core operating performance.

The following are descriptions of adjustments we make for our non-GAAP financial measures:

  • We exclude from our non-GAAP financial measures litigation charges we incur and favorable reserve adjustments. This does not include legal defense costs.
  • We exclude from our non-GAAP financial measures non-cash charges to adjust the carrying values of goodwill, intangible assets, other long-lived assets and investments to their estimated fair values.
  • We exclude from our non-GAAP financial measures severance and other restructuring charges in connection with the termination of personnel, closure of tax offices and related costs.
  • We exclude from our non-GAAP financial measures the gains and losses on business dispositions, including investment banking, legal and accounting fees.
  • We exclude from our non-GAAP financial measures the gains and losses on extinguishment of debt.
  • We exclude from our non-GAAP financial measures the effects of discrete income tax reserve and related adjustments recorded in a specific quarter.

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

We measure the performance of our business using a variety of metrics, including EBITDA, adjusted EBITDA, adjusted pretax and net income (loss) of continuing operations, adjusted EPS and adjusted pretax results of our Tax Services segment. We also use EBITDA and pretax income of continuing operations as performance metrics in incentive compensation plans for our employees. These adjusted results eliminate the impact of items that we do not consider indicative of our core operating performance and, we believe, provide meaningful information to assist in understanding our financial results, analyzing trends in our underlying business, and assessing our prospects for future performance.

For Further Information
Investor Relations:

Colby Brown
(816) 854-4559
Email Contact

Media Relations:
Gene King
(816) 854-4672
Email Contact

Source: H & R Block