SOURCE: H & R Block

H & R Block

August 30, 2016 16:20 ET

H&R Block Announces Fiscal 2017 First Quarter Results

KANSAS CITY, MO--(Marketwired - August 30, 2016) - H&R Block, Inc. (NYSE: HRB) today released its financial results for the fiscal 2017 first quarter ended July 31, 2016. The company normally reports a first quarter operating loss due to the seasonality of its tax business. The fiscal first quarter typically represents less than 5% of annual revenues and less than 15% of annual expenses.

"Because of the highly seasonal nature of our business, the fiscal first quarter is not indicative of our full year results. That said, all of the company's efforts remain laser-focused on executing a successful tax season," said Bill Cobb, H&R Block's president and chief executive officer. "We will have compelling client offers and improvements to the client experience. I'm truly looking forward to the next tax season and demonstrating our ability to deliver strong results for the fiscal year."

First Quarter Financial Summary1

  • Fiscal first quarter financial results were largely in line with the company's expectations as revenues and net loss were impacted by the divestiture of H&R Block Bank (the "Bank") and changes to the company's capital structure in fiscal 2016.
  • Total operating expenses declined due to cost reduction efforts partially offset by increased occupancy and amortization expenses related to franchise acquisitions in the prior year.

The divestiture of the Bank had the largest impact on overall revenues, which decreased $12.5 million to $125.2 million. The Bank impact included payments to the company's third-party bank partner, the reclassification of certain revenue as other income, and lower investment income due to the sale of securities previously held by the Bank. Additionally, lower client volumes in the U.S. and foreign currency exchange rates contributed to the decline.

Total operating expenses declined 0.6% to the prior year. Savings resulting from the company's cost reduction efforts were partially offset by the impact of acquisitions of franchises in the prior year. In addition to operating expenses, interest expense increased $12.9 million due to the issuance of $1 billion of long term debt in September 2015.

"We are on target to execute our cost reduction plans. While expenses are down slightly this quarter, the majority of our planned reductions will occur after the first quarter," said Tony Bowen, H&R Block's chief financial officer. "These planned savings will enable us to continue to ensure strong free cash flow while also allowing us to make the appropriate investments to achieve our operational objectives for the upcoming tax season."

Fiscal 2017 First Quarter Results From Continuing Operations

   Actual   Adjusted3  
(in millions, except EPS)  Fiscal Year 2017   Fiscal Year 2016   Fiscal Year 2017   Fiscal Year 2016  
Revenue  $125   $138   $125   $138  
Pretax Loss  $(204 ) $(187 ) $(203 ) $(186 )
Net Loss  $(121 ) $(97 ) $(121 ) $(96 )
Weighted-Avg. Shares - Diluted   220.5    275.8    220.5    275.8  
EPS2  $(0.55 ) $(0.35 ) $(0.55 ) $(0.35 )
EBITDA3  $(141 ) $(138 ) $(140 ) $(137 )
                      

Income Statement

  • Total revenues decreased $12.5 million to $125.2 million due primarily to impacts from the divestiture of the Bank. This included the change in presentation of mortgage portfolio interest income from revenue to other income, the loss of available-for-sale securities investment income, and payments made to the company's third-party bank partner. Additionally, lower return volumes in the company's U.S. assisted tax business and currency exchange rates in its international business contributed to the decline.
  • Total operating expenses decreased $1.8 million to $309.9 million due to cost reduction efforts partially offset by increased occupancy and amortization expense related to franchise acquisitions in the prior year.
  • Interest expense increased $12.9 million to $21.5 million due to $1 billion of long-term debt issued in September 2015.
  • Pretax loss increased $16.4 million to $203.5 million driven primarily by increased interest expense and changes related to the divestiture of the Bank.
  • Loss per share from continuing operations increased $0.20 to $0.55. Approximately half of the increase was due to the reduction in share count, which will be accretive on a full year basis, but negatively impacts those quarters with a net loss. The remainder of the change in loss per share was due to the increase in pretax loss.

Balance Sheet

  • Cash balances decreased from July 31, 2015 due to the divestiture of the Bank and capital structure changes in fiscal 2016, including share repurchases totaling approximately $2.0 billion since July 31, 2015.
  • Long-term debt increased $1 billion from July 31, 2015 due to the issuance of $650 million of 4.125% Senior Notes and $350 million of 5.250% Senior Notes during the second quarter of fiscal 2016.
  • Stockholders' equity from July 31, 2015 was impacted by the aforementioned share repurchase and subsequent retirement of 58.4 million shares of common stock for approximately $2.0 billion.
  • Details regarding the divestiture of H&R Block Bank and related agreements, capital structure transactions and share repurchase program can be found in previously filed press releases, and Forms 8-K filed with the Securities and Exchange Commission, in September and October of 2015.

Discontinued Operations

The accrual for contingent losses related to representation and warranty claims at Sand Canyon Corporation, a separate legal entity from H&R Block, Inc., decreased $40 million from the prior quarter to $26 million as a result of a settlement with a counterparty. The settlement was fully covered by existing accruals.

Share Repurchases and Dividends

During the first quarter of fiscal 2017, the company repurchased and retired approximately 2.0 million shares at an aggregate price of $48.6 million, or $23.84 per share. As of July 31, 2016, 219.1 million shares were outstanding.

The company completed these share repurchases under a $3.5 billion share repurchase program approved by the company's board of directors in August 2015, which runs through June 2019. Under this program, the company has repurchased approximately 58.4 million shares of its common stock, or 21.1% of outstanding shares, for an aggregate purchase price of approximately $2.0 billion.

As previously announced, a quarterly cash dividend of 22 cents per share is payable on October 3, 2016 to shareholders of record as of September 14, 2016. H&R Block has paid quarterly dividends consecutively since the company went public in 1962.

Conference Call

Discussion of the fiscal 2017 first quarter results, future outlook and a general business update will occur during the company's previously announced fiscal first quarter earnings conference call for analysts, institutional investors, and shareholders. The call is scheduled for 4:30 p.m. Eastern time on August 30, 2016. To access the call, please dial the number below approximately 10 minutes prior to the scheduled starting time:

U.S./Canada (888) 895-5260 or International (443) 842-7595
Conference ID: 45100808

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

A replay of the call will be available beginning at 7:30 p.m. Eastern time on August 30, 2016, and continuing until September 30, 2016, by dialing (855) 859-2056 (U.S./Canada) or (404) 537-3406 (International). The conference ID is 45100808. The webcast will be available for replay August 31, 2016 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 Block tax software products for the DIY consumer. H&R Block also offers adjacent Tax Plus products and services. In fiscal 2016, H&R Block had annual revenues of over $3 billion with 23.2 million tax returns prepared worldwide.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," "goal," "could" or "may" or other similar expressions. Forward-looking statements provide management's current expectations or predictions of future conditions, events or results. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. They may include estimates of revenues, income, earnings per share, cost savings, capital expenditures, dividends, share repurchases, liquidity, capital structure or other financial items, descriptions of management's plans or objectives for future operations, products or services, or descriptions of assumptions underlying any of the above. All forward-looking statements speak only as of the date they are made and reflect the company's good faith beliefs, assumptions and expectations, but they are not guarantees of future performance or events. Furthermore, the company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions, factors, or expectations, new information, data or methods, future events or other changes, except as required by law. By their nature, forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Factors that might cause such differences include, but are not limited to, a variety of economic, competitive and regulatory factors, many of which are beyond the company's control, that are described in our Annual Report on Form 10-K for the fiscal year ended April 30, 2016 in the section entitled "Risk Factors" and additional factors we may describe from time to time in other filings with the Securities and Exchange Commission. You may get such filings for free at our website at http://investors.hrblock.com. You should understand that it is not possible to predict or identify all such factors and, consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

1 All amounts in this release are unaudited. Unless otherwise noted, all comparisons refer to the current period compared to the corresponding prior year period.
2 All per share amounts are based on fully diluted shares at the end of the corresponding period.
3 The company reports adjusted financial performance, and other non-GAAP financial measures, which it believes are a better indication of the company's core operations. See "About Non-GAAP Financial Information" below for more information regarding financial measures not prepared in accordance with generally accepted accounting principles (GAAP).

      
      
CONSOLIDATED STATEMENTS OF OPERATIONS  (unaudited, in 000s - except per share amounts)  
   Three months ended July 31,  
   2016   2015  
            
REVENUES:           
 Service revenues  $112,384   $118,434  
 Royalty, product and other revenues   12,801    19,284  
    125,185    137,718  
OPERATING EXPENSES:           
 Cost of revenues:           
  Compensation and benefits   52,355    55,789  
  Occupancy and equipment   94,425    89,855  
  Provision for bad debt and loan losses   1,417    2,005  
  Depreciation and amortization   27,467    27,084  
  Other   35,422    38,775  
    211,086    213,508  
 Selling, general and administrative:           
  Marketing and advertising   7,561    8,531  
  Compensation and benefits   57,522    54,669  
  Depreciation and amortization   13,815    13,010  
  Other selling, general and administrative   19,925    21,982  
    98,823    98,192  
   Total operating expenses   309,909    311,700  
            
Other income, net   2,968    433  
Interest expense on borrowings   (21,466 )  (8,575 )
Other expenses, net   (327 )  (4,985 )
Loss from continuing operations before income tax benefit   (203,549 )  (187,109 )
Income tax benefit   (82,523 )  (90,604 )
Net loss from continuing operations   (121,026 )  (96,505 )
Net loss from discontinued operations   (2,647 )  (3,154 )
NET LOSS  $(123,673 ) $(99,659 )
            
BASIC AND DILUTED LOSS PER SHARE:           
 Continuing operations  $(0.55 ) $(0.35 )
 Discontinued operations   (0.01 )  (0.01 )
 Consolidated  $(0.56 ) $(0.36 )
            
WEIGHTED AVERAGE BASIC AND DILUTED SHARES   220,484    275,765  
            
         
         
      
CONSOLIDATED BALANCE SHEETS  (unaudited, in 000s - except per share data)  
As of  July 31, 2016   July 31, 2015   April 30, 2016  
                 
ASSETS                
 Cash and cash equivalents  $306,871   $1,299,382   $896,801  
 Cash and cash equivalents - restricted   122,025    61,040    104,110  
 Receivables, net   103,425    103,194    153,116  
 Deferred tax assets and income taxes receivable   -    160,390    -  
 Prepaid expenses and other current assets   74,929    80,550    65,441  
 Investments in available-for-sale securities   1,123    406,360    1,133  
  Total current assets   608,373    2,110,916    1,220,601  
 Mortgage loans held for investment, net   192,375    230,130    202,385  
 Property and equipment, net   284,114    297,321    293,565  
 Intangible assets, net   419,909    417,009    433,885  
 Goodwill   470,942    454,394    470,757  
 Deferred tax assets and income taxes receivable   90,498    11,377    120,123  
 Other noncurrent assets   97,331    108,307    105,909  
  Total assets  $2,163,542   $3,629,454   $2,847,225  
LIABILITIES AND STOCKHOLDERS' EQUITY                
LIABILITIES:                
 Customer banking deposits  $-   $476,732   $-  
 Accounts payable and accrued expenses   157,085    116,855    259,586  
 Accrued salaries, wages and payroll taxes   43,516    33,447    161,786  
 Accrued income taxes and reserves for uncertain tax positions   216,390    245,541    373,754  
 Current portion of long-term debt   864    799    826  
 Deferred revenue and other current liabilities   191,304    316,880    243,653  
  Total current liabilities   609,159    1,190,254    1,039,605  
 Long-term debt   1,491,790    501,960    1,491,375  
 Deferred tax liabilities and reserves for uncertain tax positions   116,709    137,603    132,960  
 Deferred revenue and other noncurrent liabilities   145,691    130,210    160,182  
  Total liabilities   2,363,349    1,960,027    2,824,122  
COMMITMENTS AND CONTINGENCIES                
STOCKHOLDERS' EQUITY:                
 Common stock, no par, stated value $.01 per share   2,582    3,166    2,602  
 Additional paid-in capital   748,924    773,783    758,230  
 Accumulated other comprehensive loss   (14,804 )  (8,234 )  (11,233 )
 Retained earnings (deficit)   (180,631 )  1,679,234    40,347  
 Less treasury shares, at cost   (755,878 )  (778,522 )  (766,843 )
  Total stockholders' equity (deficiency)   (199,807 )  1,669,427    23,103  
   Total liabilities and stockholders' equity  $2,163,542   $3,629,454   $2,847,225  
                 

Note: Effective May 1, 2016, we adopted the provisions of Accounting Standards Update No. 2015-3, "Interest - Imputation of Interest," (ASU 2015-3) on a retrospective basis. Accordingly, debt issuance costs related to our Senior Notes are included in long-term debt in the consolidated balance sheets. Amounts for prior periods have been retrospectively adjusted to conform to the current period presentation.

      
      
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (unaudited, in 000s)  
Three months ended July 31,  2016   2015  
            
NET CASH USED IN OPERATING ACTIVITIES  $(475,675 ) $(378,246 )
            
CASH FLOWS FROM INVESTING ACTIVITIES:           
 Sales, maturities of and payments received on available-for-sale securities   58    32,103  
 Principal payments on mortgage loans held for investment, net   8,427    8,537  
 Capital expenditures   (6,246 )  (8,689 )
 Payments made for business acquisitions, net of cash acquired   (1,635 )  (12,271 )
 Franchise loans:           
  Loans funded   (2,219 )  (2,582 )
  Payments received   6,473    11,434  
 Other, net   220    3,562  
   Net cash provided by investing activities   5,078    32,094  
            
CASH FLOWS FROM FINANCING ACTIVITIES:           
 Customer banking deposits, net   -    (268,532 )
 Dividends paid   (48,514 )  (55,063 )
 Repurchase of common stock, including shares surrendered   (45,312 )  (17,756 )
 Proceeds from exercise of stock options   1,639    13,015  
 Other, net   (24,779 )  (22,413 )
   Net cash used in financing activities   (116,966 )  (350,749 )
            
Effects of exchange rate changes on cash   (2,367 )  (10,907 )
            
Net decrease in cash and cash equivalents   (589,930 )  (707,808 )
Cash and cash equivalents at beginning of the period   896,801    2,007,190  
Cash and cash equivalents at end of the period  $306,871   $1,299,382  
            
SUPPLEMENTARY CASH FLOW DATA:           
 Income taxes paid, net of refunds received  $61,289   $75,358  
 Interest paid on borrowings   15,519    15,381  
 Accrued additions to property and equipment   10,147    5,977  
 Accrued purchase of common stock   8,895    -  
            
         
      
      
FINANCIAL RESULTS  (unaudited, in 000s - except per share amounts)  
   Three months ended July 31,  
   2016   2015  
Revenues:           
 U.S. assisted tax preparation fees  $25,429   $27,285  
 U.S. royalties   6,525    6,726  
 U.S. DIY tax preparation fees   2,914    3,179  
 International revenues   38,875    40,594  
 Revenues from Refund Transfers   3,234    2,171  
 Revenues from Emerald Card®   13,065    15,689  
 Revenues from Peace of Mind® Extended Service Plan   27,031    27,703  
 Interest and fee income on Emerald Advance   804    314  
 Other   7,308    14,057  
    125,185    137,718  
Compensation and benefits:           
 Field wages   45,043    45,938  
 Other wages   42,100    41,869  
 Benefits and other compensation   22,734    22,651  
    109,877    110,458  
Occupancy and equipment   94,371    89,799  
Marketing and advertising   7,561    8,531  
Depreciation and amortization   41,282    40,094  
Bad debt   1,417    2,005  
Supplies   2,077    2,399  
Other   53,324    58,414  
  Total operating expenses   309,909    311,700  
            
Other income, net   2,968    433  
Interest expense on borrowings   (21,466 )  (8,575 )
Other expenses, net   (327 )  (4,985 )
Pretax loss   (203,549 )  (187,109 )
Income tax benefit   (82,523 )  (90,604 )
Net loss from continuing operations   (121,026 )  (96,505 )
Net loss from discontinued operations   (2,647 )  (3,154 )
Net loss  $(123,673 ) $(99,659 )
            
Basic and diluted loss per share:           
 Continuing operations  $(0.55 ) $(0.35 )
 Discontinued operations   (0.01 )  (0.01 )
 Consolidated  $(0.56 ) $(0.36 )
            
Weighted average basic and diluted shares   220,484    275,765  
            
         
NON-GAAP FINANCIAL MEASURES     
   Three months ended July 31,      
EBITDA  2016   2015      
                 
Net loss - as reported  $(123,673 ) $(99,659 )     
                 
Add back :                
 Discontinued operations, net   2,647    3,154       
 Income taxes of continuing operations   (82,523 )  (90,604 )     
 Interest expense of continuing operations   21,466    8,711       
 Depreciation and amortization of continuing operations   41,282    40,094       
    (17,128 )  (38,645 )     
                 
EBITDA from continuing operations  $(140,801 ) $(138,304 )     
                 
Three months ended July 31,  2016  
   Pretax loss   Net loss   EBITDA  
                 
From continuing operations  $(203,549 ) $(121,026 ) $(140,801 )
                 
Adjustments (pretax):                
 Loss contingencies - litigation   812    812    812  
 Tax effect of adjustments   -    (302 )  -  
     812    510    812  
                  
 As adjusted - from continuing operations  $(202,737 ) $(120,516 ) $(139,989 )
                 
Adjusted EPS       $(0.55 )     
                 
Three months ended July 31,  2015  
   Pretax loss   Net loss   EBITDA  
                 
From continuing operations  $(187,109 ) $(96,505 ) $(138,304 )
                 
Adjustments (pretax):                
 Loss contingencies - litigation   618    618    618  
 Costs related to HRB Bank and recapitalization transactions   52    52    52  
 Losses on AFS securities   288    288    288  
 Tax effect of adjustments   -    (358 )  -  
    958    600    958  
                 
 As adjusted - from continuing operations  $(186,151 ) $(95,905 ) $(137,346 )
                 
Adjusted EPS       $(0.35 )     
                 
   Three months ended July 31,       
Supplemental Information  2016   2015       
                 
Stock-based compensation expense:                
 Pretax  $5,541   $6,018       
 After-tax   3,479    3,767       
Amortization of intangible assets:                
 Pretax  $17,986   $16,614       
 After-tax   11,293    10,399       
                 

Contact Information

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