H&R Block Announces Fiscal 2016 Second Quarter Results

Dec 7, 2015

KANSAS CITY, MO -- (Marketwired) -- 12/07/15 -- H&R Block, Inc. (NYSE: HRB), the world's largest consumer tax services provider, today released its financial results for the fiscal 2016 second quarter ended October 31, 2015. The company typically reports a second quarter operating loss due to the seasonality of its tax business.

Second Quarter 2016 Highlights 1

  • H&R Block Bank divestiture transaction closed; H&R Block no longer regulated as a savings and loan holding company 2
  • Company completed key elements of its previously announced new capital structure, including the approval of a $3.5 billion share repurchase program effective through June 2019, the repurchase of $1.5 billion of H&R Block stock, the issuance of $1 billion in long-term debt and the completion of a new $2 billion line of credit 2
  • Total revenues decreased $6 million, or 4.6%, to $128 million mainly due to the impact of foreign currency exchange rates
  • Loss per share from continuing operations of $0.54 3  due to the seasonality of the tax business

CEO Perspective

"We are excited about the upcoming tax season, with a focus on executing our Tax Plus strategy. Our tax professionals are ready to provide the expert advice expected by our clients and our DIY software offerings are the best they have ever been" said Bill Cobb, H&R Block's president and chief executive officer. "Additionally, with the divestiture of H&R Block Bank, we have completed the final step in a multi-year journey that now allows us to take positive steps towards the capital structure that is appropriate for our business. I'm also pleased that the H&R Block Bank transition to BofI has gone smoothly, positioning us to continue offering our clients the award-winning products they've come to expect."

Fiscal 2016 Second Quarter Results From Continuing Operations

    Actual     Adjusted 4  
(in millions, except EPS)   Fiscal Year 2016     Fiscal Year 2015     Fiscal Year 2016     Fiscal Year 2015  
Revenue   $ 128     $ 135     $ 128     $ 135  
EBITDA   $ (181 )   $ (148 )   $ (169 )   $ (149 )
Pretax Loss   $ (238 )   $ (201 )   $ (225 )   $ (202 )
Net Loss   $ (143 )   $ (113 )   $ (135 )   $ (114 )
Weighted-Avg. Shares - Diluted     266.3       275.1       266.3       275.1  
EPS   $ (0.54 )   $ (0.41 )   $ (0.51 )   $ (0.41 )
                                 

CFO Perspective

"Incurring a loss in the second quarter is typical for H&R Block," said Greg Macfarlane, H&R Block's chief financial officer. "This year we saw an elevated level of expenses driven by one time transaction costs related to the bank divestiture and capital structure actions, as well as increased amortization and other expenses related to last year's higher than normal acquisitions of independent tax preparation and franchise businesses."

Business Financial Results and Highlights 5

  • Revenues decreased 4.6% to $128 million, due primarily to the negative impact of foreign currency exchange rates in Australia and Canada.
  • Total operating expenses increased $43 million, or 13.5%, the largest contributor of which was $20.8 million in transaction costs related to the bank divestiture and capital structure actions described below. Additionally, occupancy costs and amortization expense increased due to the annualization of expenses related to acquisitions of independent tax preparation and franchise businesses in the prior year.
  • Pretax loss increased 18.5% to $238 million.

Discontinued Operations

  • Sand Canyon Corporation (SCC), a separate legal entity from H&R Block, Inc., continued to engage in constructive settlement discussions with counterparties that have made a significant majority of previously denied and possible future representation and warranty claims.
  • SCC's accrual for contingent losses related to representation and warranty claims increased $4 million from the prior quarter to $154 million.

Balance Sheet

  • Upon divestiture of H&R Block Bank, certain liabilities, including all customer banking deposits were successfully transferred to BofI Federal Bank (BofI). The bank's net cash payment to BofI equaled approximately $419 million, which was approximately equal to the carrying value of the liabilities (including all deposit liabilities) assumed by BofI.
  • Available for sale securities, previously held to meet regulatory requirements, were liquidated for approximately $388 million.
  • The Company's previous committed line of credit agreement was replaced with a new five-year, $2.0 billion Credit and Guarantee Agreement. There were no outstanding borrowings under this new line of credit at October 31, 2015.
  • Long-term debt increased due to the issuance of $650 million of 4.125% Senior Notes and $350 million of 5.250% Senior Notes.
  • Stockholder's equity was impacted by the repurchase and subsequent retirement of 40.5 million shares of common stock for $1.5 billion, or a price of $37.00 per share.
  • Details regarding the bank divestiture and related agreements, capital structure transactions and share repurchase program can be found in previously filed press releases issued, as well as Forms 8-K filed with the Securities and Exchange Commission in September and October of 2015.

Dividends

As previously announced, a quarterly cash dividend of 20 cents per share is payable on January 4, 2016 to shareholders of record as of December 7, 2015. The January 4 dividend payment will be H&R Block's 213th consecutive quarterly dividend since the company went public in 1962.

Investor Conference

At 8:30 a.m. EST on Tuesday, December 8, the company will hold its investor conference in New York City. H&R Block's senior leaders will outline the company's strategies and outlook, and provide a general business update including discussion of fiscal 2016 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.

About H&R Block

H&R Block, Inc. (NYSE: HRB) is the world's largest consumer tax services provider. More than 680 million tax returns have been prepared worldwide by and through H&R Block since 1955. In fiscal 2015, H&R Block had annual revenues of nearly $3.1 billion with 24.2 million tax returns prepared worldwide. 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 Block tax software products. H&R Block also offers adjacent Tax Plus products and services. For more information, visit the H&R Block Newsroom at http://newsroom.hrblock.com/.

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," "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, 2015 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 Details regarding the bank divestiture and related agreements, capital structure transactions and share repurchase program can be found in previously filed press releases issued, as well as Forms 8-K filed with the Securities and Exchange Commission in September and October of 2015.

3 All per share amounts are based on fully diluted shares at the end of the corresponding period.

4 The company reports adjusted financial performance, which it believes is a better indication of the company's recurring operations. See "About Non-GAAP Financial Information" below for more information regarding financial measures not prepared in accordance with generally accepted accounting principles (GAAP).

5 Following the divestiture of H&R Block Bank, we operate as a single segment offering tax preparation and related services and products to clients in our offices or through our tax software. Segment information for earlier periods has been consolidated into that single segment in this press release.

               
CONSOLIDATED STATEMENTS OF OPERATIONS           (unaudited, in 000s - except per share amounts)  
    Three months ended October 31,     Six months ended October 31,  
    2015     2014     2015     2014  
                                 
REVENUES:                                
  Service revenues   $ 113,420     $ 115,442     $ 231,854     $ 230,915  
  Royalty, product and other revenues     14,995       19,186       34,279       37,299  
      128,415       134,628       266,133       268,214  
OPERATING EXPENSES:                                
  Cost of revenues:                                
    Compensation and benefits     62,694       69,381       118,483       121,236  
    Occupancy and equipment     95,051       87,626       184,906       170,932  
    Provision for bad debt and loan losses     1,182       385       3,187       4,749  
    Depreciation and amortization     28,358       28,429       55,442       53,514  
    Other     39,116       35,876       77,891       68,992  
      226,401       221,697       439,909       419,423  
Selling, general and administrative:                                
  Marketing and advertising     12,965       12,513       21,496       20,658  
  Compensation and benefits     61,593       54,353       116,262       115,317  
  Depreciation and amortization     13,991       10,500       27,001       19,101  
  Other selling, general and administrative     47,298       20,013       69,280       39,503  
      135,847       97,379       234,039       194,579  
    Total operating expenses     362,248       319,076       673,948       614,002  
Other income, net     10,505       -       10,938       523  
Interest expense on borrowings     (14,181 )     (13,843 )     (22,756 )     (27,638 )
Other expenses, net     (210 )     (2,282 )     (5,195 )     (3,486 )
Loss from continuing operations before income tax benefit     (237,719 )     (200,573 )     (424,828 )     (376,389 )
Income tax benefit     (95,201 )     (87,346 )     (185,805 )     (154,311 )
Net loss from continuing operations     (142,518 )     (113,227 )     (239,023 )     (222,078 )
Net income (loss) from discontinued operations     (2,489 )     1,229       (5,643 )     (6,152 )
NET LOSS   $ (145,007 )   $ (111,998 )   $ (244,666 )   $ (228,230 )
                                 
BASIC AND DILUTED LOSS PER SHARE:                                
  Continuing operations   $ (0.54 )   $ (0.41 )   $ (0.88 )   $ (0.81 )
  Discontinued operations     (0.01 )     -       (0.02 )     (0.02 )
  Consolidated   $ (0.55 )   $ (0.41 )   $ (0.90 )   $ (0.83 )
                                 
WEIGHTED AVERAGE BASIC AND DILUTED SHARES     266,267       275,106       271,016       274,841  
                                 
                                 
                                 
                                 
CONSOLIDATED BALANCE SHEETS   (unaudited, in 000s - except per share data)  
As of   October 31, 2015     October 31, 2014     April 30, 2015  
                         
ASSETS                        
Cash and cash equivalents   $ 360,681     $ 627,490     $ 2,007,190  
Cash and cash equivalents - restricted     42,781       55,543       91,972  
Receivables, net     94,760       107,705       167,964  
Deferred tax assets and income taxes receivable     145,912       197,193       174,267  
Prepaid expenses and other current assets     80,458       88,270       70,283  
Investments in available-for-sale securities     2,116       381,180       439,625  
    Total current assets     726,708       1,457,381       2,951,301  
Mortgage loans held for investment, net     220,671       251,092       239,338  
Property and equipment, net     298,602       318,225       311,387  
Intangible assets, net     466,224       414,045       432,142  
Goodwill     442,068       464,182       441,831  
Deferred tax assets and income taxes receivable     11,264       37,937       13,461  
Other noncurrent assets     124,360       148,428       125,960  
    Total assets   $ 2,289,897     $ 3,091,290     $ 4,515,420  
LIABILITIES AND STOCKHOLDERS' EQUITY                        
LIABILITIES:                        
  Customer banking deposits   $ -     $ 454,860     $ 744,241  
  Accounts payable and accrued expenses     141,070       97,105       231,322  
  Accrued salaries, wages and payroll taxes     37,512       36,215       144,744  
  Accrued income taxes     67,732       147,000       434,684  
  Current portion of long-term debt     808       772       790  
  Deferred revenue and other current liabilities     319,426       339,725       322,508  
    Total current liabilities     566,548       1,075,677       1,878,289  
  Long-term debt     1,501,938       505,588       505,298  
  Deferred tax liabilities and reserves for uncertain tax positions     140,539       151,951       142,586  
  Deferred revenue and other noncurrent liabilities     108,115       119,398       156,298  
    Total liabilities     2,317,140       1,852,614       2,682,471  
COMMITMENTS AND CONTINGENCIES                        
STOCKHOLDERS' EQUITY:                        
  Common stock, no par, stated value $.01 per share     2,761       3,166       3,166  
  Additional paid-in capital     757,816       772,662       783,793  
  Accumulated other comprehensive income (loss)     (16,208 )     6,577       1,740  
  Retained earnings     3,573       1,250,465       1,836,442  
  Less treasury shares, at cost     (775,185 )     (794,194 )     (792,192 )
    Total stockholders' equity (deficiency)     (27,243 )     1,238,676       1,832,949  
      Total liabilities and stockholders' equity   $ 2,289,897     $ 3,091,290     $ 4,515,420  
                         
                         
                         
                         
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS   (unaudited, in 000s)  
Six months ended October 31,   2015     2014  
                 
NET CASH USED IN OPERATING ACTIVITIES   $ (602,713 )   $ (627,577 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
  Sales, maturities of and payments received on available-for-sale securities     434,261       49,013  
  Principal payments on mortgage loans held for investment, net     17,006       13,451  
  Capital expenditures     (38,779 )     (70,927 )
  Payments made for business acquisitions, net of cash acquired     (61,846 )     (94,230 )
  Franchise loans:                
    Loans funded     (10,281 )     (18,251 )
    Payments received     17,473       29,637  
  Other, net     7,246       10,585  
      Net cash provided by (used in) investing activities     365,080       (80,722 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
  Repayments of long-term debt     -       (400,000 )
  Proceeds from issuance of long-term debt     996,831       -  
  Customer banking deposits, net     (326,705 )     (316,269 )
  Transfer of HRB Bank deposits     (419,028 )     -  
  Dividends paid     (110,338 )     (109,871 )
  Repurchase of common stock, including shares surrendered     (1,517,786 )     (10,247 )
  Proceeds from exercise of stock options     16,875       14,477  
  Other, net     (37,820 )     (23,392 )
      Net cash used in financing activities     (1,397,971 )     (845,302 )
                 
Effects of exchange rate changes on cash     (10,905 )     (4,216 )
                 
Net decrease in cash and cash equivalents     (1,646,509 )     (1,557,817 )
Cash and cash equivalents at beginning of the period     2,007,190       2,185,307  
Cash and cash equivalents at end of the period   $ 360,681     $ 627,490  
                 
SUPPLEMENTARY CASH FLOW DATA:                
  Income taxes paid, net of refunds received   $ 132,096     $ 157,680  
  Interest paid on borrowings     15,606       27,379  
  Transfers of foreclosed loans to other assets     1,450       3,155  
  Accrued additions to property and equipment     4,573       3,243  
  Conversion of investment in preferred stock to available-for-sale common stock     -       5,000  
                 
                 
                 
                 
FINANCIAL RESULTS         (unaudited, in 000s - except per share amounts)  
    Three months ended October 31,     Six months ended October 31,  
    2015     2014     2015     2014  
Tax preparation fees:                                
  U.S. assisted   $ 36,403     $ 31,926     $ 63,688     $ 57,415  
  International     35,340       42,831       71,058       84,287  
  U.S. digital     3,469       2,892       6,648       5,824  
      75,212       77,649       141,394       147,526  
Royalties     9,163       8,582       18,858       16,224  
Revenues from Refund Transfers     1,948       2,154       5,363       5,573  
Revenues from Emerald Card®     9,808       11,524       25,497       25,569  
Revenues from Peace of Mind® Extended Service Plan     19,325       16,563       47,028       40,816  
Other     12,959       18,156       27,993       32,506  
    Total revenues     128,415       134,628       266,133       268,214  
Compensation and benefits:                                
  Field wages     53,525       56,904       99,463       102,901  
  Other wages     46,127       42,368       87,996       85,561  
  Benefits and other compensation     24,635       24,462       47,286       48,091  
      124,287       123,734       234,745       236,553  
Occupancy and equipment     94,997       84,267       184,796       167,376  
Marketing and advertising     12,965       12,513       21,496       20,658  
Depreciation and amortization     42,349       38,929       82,443       72,615  
Bad debt     1,182       385       3,187       4,749  
Supplies     4,728       7,528       7,127       10,601  
Other     81,740       51,720       140,154       101,450  
    Total operating expenses     362,248       319,076       673,948       614,002  
Other income, net     10,505       -       10,938       523  
Interest expense on borrowings     (14,181 )     (13,843 )     (22,756 )     (27,638 )
Other expenses, net     (210 )     (2,282 )     (5,195 )     (3,486 )
Pretax loss     (237,719 )     (200,573 )     (424,828 )     (376,389 )
Income tax benefit     (95,201 )     (87,346 )     (185,805 )     (154,311 )
Net loss from continuing operations     (142,518 )     (113,227 )     (239,023 )     (222,078 )
Net income (loss) from discontinued operations     (2,489 )     1,229       (5,643 )     (6,152 )
Net loss   $ (145,007 )   $ (111,998 )   $ (244,666 )   $ (228,230 )
                                 
Basic and diluted loss per share:                                
  Continuing operations   $ (0.54 )   $ (0.41 )   $ (0.88 )   $ (0.81 )
  Discontinued operations     (0.01 )     -       (0.02 )     (0.02 )
  Consolidated   $ (0.55 )   $ (0.41 )   $ (0.90 )   $ (0.83 )
                                 
Weighted average basic and diluted shares     266,267       275,106       271,016       274,841  
                                 
                                 
                                 
                                 
NON-GAAP FINANCIAL MEASURES      
Three months ended October 31,   2015     2014  
    EBITDA     Loss     EBITDA     Loss  
                                 
As reported - from continuing operations   $ (181,145 )   $ (142,518 )   $ (147,661 )   $ (113,227 )
                                 
Adjustments (pretax):                                
  Loss contingencies - litigation     71       71       44       44  
  Severance     -       -       238       238  
  Professional fees related to HRB Bank and recapitalization transactions     20,766       20,766       89       89  
  Gains on AFS securities, net     (8,426 )     (8,426 )     (965 )     (965 )
  Gain on sales of tax offices/businesses     (26 )     (26 )     (899 )     (899 )
  Tax effect of adjustments     -       (4,642 )     -       570  
      12,385       7,743       (1,493 )     (923 )
                                 
  As adjusted - from continuing operations   $ (168,760 )   $ (134,775 )   $ (149,154 )   $ (114,150 )
                         
Adjusted EPS           $ (0.51 )           $ (0.41 )
                                 
Six months ended October 31,   2015     2014  
    EBITDA     Loss     EBITDA     Loss  
                                 
As reported - from continuing operations   $ (319,449 )   $ (239,023 )   $ (275,851 )   $ (222,078 )
                                 
Adjustments (pretax):                                
  Loss contingencies - litigation     689       689       272       272  
  Severance     -       -       1,051       1,051  
  Professional fees related to HRB Bank and recapitalization transactions     20,818       20,818       114       114  
  Gains on AFS securities, net     (8,138 )     (8,138 )     (24 )     (24 )
  Gain on sales of tax offices/businesses     (26 )     (26 )     (899 )     (899 )
  Tax effect of adjustments     -       (5,000 )     -       (194 )
      13,343       8,343       514       320  
                                 
  As adjusted - from continuing operations   $ (306,106 )   $ (230,680 )   $ (275,337 )   $ (221,758 )
                         
Adjusted EPS           $ (0.85 )           $ (0.81 )
                                 
             
             
    Three months ended October 31,     Six months ended October 31,  
EBITDA   2015     2014     2015     2014  
                                 
Net loss - as reported   $ (145,007 )   $ (111,998 )   $ (244,666 )   $ (228,230 )
                                 
Add back :                                
  Discontinued operations     2,489       (1,229 )     5,643       6,152  
  Income taxes     (95,201 )     (87,346 )     (185,805 )     (154,311 )
  Interest expense     14,225       13,983       22,936       27,923  
  Depreciation and amortization     42,349       38,929       82,443       72,615  
      (36,138 )     (35,663 )     (74,783 )     (47,621 )
                                 
EBITDA from continuing operations   $ (181,145 )   $ (147,661 )   $ (319,449 )   $ (275,851 )
                                 
    Three months ended October 31,     Six months ended October 31,  
Supplemental Information   2015     2014     2015     2014  
                                 
Stock-based compensation expense:                                
  Pretax   $ 7,858     $ 7,140     $ 13,876     $ 14,599  
  After-tax     4,910       4,465       8,677       9,085  
Amortization of intangible assets:                                
  Pretax   $ 17,865     $ 13,219     $ 34,479     $ 24,463  
  After-tax     11,161       8,258       21,560       15,223  
                                 

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 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 losses from settlements and estimated contingent losses from litigation and favorable reserve adjustments. This does not include legal defense costs.
  • We exclude 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 severance and other restructuring charges in connection with the termination of personnel, closure of offices and related costs.
  • We exclude the gains and losses on business dispositions, including investment banking, legal and accounting fees from both business dispositions and acquisitions.
  • We exclude the gains and losses on extinguishment of debt.

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 and adjusted pretax income of continuing operations. Adjusted EBITDA and adjusted pretax income 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. We also use EBITDA 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
Email contact
Media Relations:
Gene King
(816) 854-4672
Email contact

Source: H & R Block