SOURCE: H & R Block

H & R Block

December 10, 2013 16:05 ET

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

KANSAS CITY, MO--(Marketwired - Dec 10, 2013) - 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.

Contact Information

  • For Further Information
    Investor Relations:

    Colby Brown
    (816) 854-4559
    Email Contact

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