SOURCE: H & R Block

H & R Block

December 07, 2015 16:20 ET

H&R Block Announces Fiscal 2016 Second Quarter Results

KANSAS CITY, MO--(Marketwired - December 07, 2015) - 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 Highlights1

  • H&R Block Bank divestiture transaction closed; H&R Block no longer regulated as a savings and loan holding company2
  • 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 credit2
  • 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 $0.54due 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   Adjusted4  
(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 Highlights5

  • 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.

Contact Information

  • For Further Information
    Investor Relations:
    Colby Brown
    (816) 854-4559
    Email contact
    Media Relations:
    Gene King
    (816) 854-4672
    Email contact