SOURCE: H & R Block

H & R Block

December 06, 2012 05:00 ET

H&R Block's Net Loss From Continuing Operations Improves 18 Percent; 11 Percent Improvement on Adjusted Basis

KANSAS CITY, MO--(Marketwire - Dec 6, 2012) - H&R Block, Inc. (NYSE: HRB) today announced financial results for its fiscal second quarter ended Oct. 31, 2012. Due to the seasonality of its U.S. tax business, the company typically reports a second quarter operating loss.

Second Quarter 2013 Highlights1

  • Total revenues grew 6 percent to $137 million due primarily to a strong tax season in Australia
  • Net loss from continuing operations improved 18 percent to $101 million, or $0.37 per share2
  • Adjusted net loss from continuing operations improved 11 percent to $100 million, or $0.37 per share
  • The company remains on pace to deliver $85 to $100 million of pretax earnings from cost reduction initiatives in fiscal 2013

Second Quarter Results From Continuing Operations

         
    Actual   Adjusted*
in millions, except EPS   Q2
FY13
  Q2
FY12
  Change   Q2
FY13
  Q2
FY12
  Change
Revenue   $137   $129   6%   $137   $129   6%
EBITDA*   ($117)   ($159)   26%   ($117)   ($141)   17%
Pretax Income (Loss)   ($162)   ($204)   20%   ($163)   ($186)   13%
Net Income (Loss)   ($101)   ($123)   18%   ($100)   ($112)   11%
Shares Outstanding   271.1   299.9   -10%   271.1   299.9   -10%
EPS   ($0.37)   ($0.41)   10%   ($0.37)   ($0.37)   0%
                         

*Adjusted amounts and EBITDA (earnings before interest, taxes, depreciation and amortization) are non-GAAP financial measures. See "About Non-GAAP Financial Measures" below for more information regarding financial measures not prepared in accordance with generally accepted accounting principles (GAAP). 

Company Perspective

"I'm very pleased with the improvement in our second quarter results, which reflect savings from our cost reduction initiatives and a strong tax season in Australia," said Bill Cobb, H&R Block's President and CEO. "The U.S. tax season is right around the corner and we believe we're on pace to deliver significant earnings and margin expansion in fiscal 2013."

Business Segment Results and Highlights

Tax Services

  • Revenues grew by $9 million, or 7 percent, to $130 million, primarily due to an 8 percent increase in tax returns prepared in Australia
  • Pretax loss improved by 25 percent or $44 million, to $130 million
  • Adjusted pretax loss improved by 17 percent or $26 million, to $130 million primarily due to lower field wages and occupancy costs resulting from the company's cost reduction initiatives

Corporate

  • Revenues declined by $1 million due to lower interest income from H&R Block Bank's shrinking mortgage loan portfolio
  • Pretax loss increased by $2 million, or 7 percent, to $32 million

Second Quarter Results from Discontinued Operations

  • Net loss improved by $15 million to $4 million, as prior year results included a $12 million after-tax provision for estimated losses on representation and warranty claims at Sand Canyon Corporation (SCC), a separate legal entity from H&R Block, Inc.
  • SCC received new claims during the quarter for alleged breaches of representations and warranties in the principal amount of $10 million
  • SCC reviewed claims in the principal amount of $257 million during the quarter; no losses were charged against SCC's accrual for contingent losses related to representations and warranties during the quarter
  • $28 million of claims remained subject to review at Oct. 31, 2012
  • SCC's accrual for contingent losses related to representations and warranties remained essentially unchanged at $129 million

Dividend

A previously announced quarterly cash dividend of 20 cents per share is payable on Jan. 2, 2013 to shareholders of record as of Dec. 10, 2012. The Jan. 2 payment marks the company's 201st consecutive quarterly dividend.

Investor Conference

At 8:15 a.m. EST today, 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. 

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 at approximately 1:30 p.m. EST on Dec. 6 and continuing until Feb. 28, 2013.

About H&R Block
H&R Block, Inc. (NYSE: HRB) is the world's largest tax services provider, having prepared more than 600 million tax returns worldwide since 1955. In fiscal 2012, H&R Block had revenues of $2.9 billion and prepared 25.6 million tax returns worldwide. Tax return preparation services are provided in company-owned and franchise retail tax offices by nearly 100,000 professional tax preparers, and through H&R Block At Home™ digital products. H&R Block Bank provides affordable banking products and services. For more information, visit the H&R Block Online Press Center.

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, 2012 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. 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 Unless otherwise noted, all growth rates refer to the current period compared to the prior year period.

2 All per share amounts are based on fully diluted shares.

   
H&R BLOCK  
KEY OPERATING RESULTS  
Unaudited, amounts in thousands, except per share data  
                     
    Three months ended October 31,  
    Revenues   Income (loss)  
    2012   2011   2012     2011  
                     
Tax Services   $ 129,819   $ 121,018   $ (130,109 )   $ (173,966 )
Corporate and Eliminations     7,444     8,176     (32,179 )     (29,963 )
    $ 137,263   $ 129,194     (162,288 )     (203,929 )
Income tax benefit                 (61,089 )     (80,916 )
Net loss from continuing operations                 (101,199 )     (123,013 )
Net loss from discontinued operations                 (4,044 )     (18,711 )
Net loss               $ (105,243 )   $ (141,724 )
                             
Basic and diluted loss per share:                            
  Net loss from continuing operations               $ (0.37 )   $ (0.41 )
  Net loss from discontinued operations                 (0.02 )     (0.06 )
  Net loss               $ (0.39 )   $ (0.47 )
                             
Basic and diluted shares                 271,145       299,895  
                             
    Six months ended October 31,  
    Revenues   Income (loss)  
    2012   2011   2012     2011  
                             
Tax Services   $ 220,072   $ 212,443   $ (271,014 )   $ (343,449 )
Corporate and Eliminations     13,680     17,374     (60,543 )     (61,081 )
    $ 233,752   $ 229,817     (331,557 )     (404,530 )
Income tax benefit                 (124,708 )     (162,362 )
Net loss from continuing operations                 (206,849 )     (242,168 )
Net loss from discontinued operations                 (5,835 )     (74,654 )
Net loss               $ (212,684 )   $ (316,822 )
                             
Basic and diluted loss per share:                            
  Net loss from continuing operations               $ (0.76 )   $ (0.80 )
  Net loss from discontinued operations                 (0.02 )     (0.25 )
  Net loss               $ (0.78 )   $ (1.05 )
                             
Basic and diluted shares                 274,150       302,693  
                             

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Basic earnings per share is computed using the two-class method and is based on the weighted average number of shares outstanding.  The dilutive effect of potential common shares is included in diluted earnings per share, except in those periods with a loss from continuing operations. 

On October 25, 2012, we issued $500.0 million of 5.50% Senior Notes. The Senior Notes are due November 1, 2022, and are not redeemable by the bondholders prior to maturity. On October 25, 2012, we provided notice to the trustee of our intention to redeem the entire principal amount of the $600.0 million Senior Notes due in January 2013. The redemption settled on November 26, 2012 at a price of $623.0 million. Proceeds of the $500.0 million Senior Notes and other cash balances were used to repay the $600.0 million Senior Notes.

                 
H&R BLOCK                
CONSOLIDATED BALANCE SHEETS                
Unaudited, amounts in thousands, except per share data                
                 
  October 31,     October 31,     April 30,  
  2012     2011     2012  
ASSETS                
Current assets:                
  Cash and cash equivalents $ 1,260,901     $ 572,611     $ 1,944,334  
  Cash and cash equivalents - restricted   38,667       37,524       48,100  
  Receivables, net   124,511       128,062       193,858  
  Prepaid expenses and other current assets   282,874       218,054       314,702  
  Assets of discontinued operations, held for sale   -       729,153       -  
    Total current assets   1,706,953       1,685,404       2,500,994  
                       
  Mortgage loans held for investment, net   370,850       450,137       406,201  
  Investments in available-for-sale securities   388,640       306,310       371,315  
  Property and equipment, net   285,335       257,870       252,985  
  Intangible assets, net   262,296       262,106       264,451  
  Goodwill   434,492       438,403       427,566  
  Other assets   448,164       576,283       426,055  
Total assets $ 3,896,730     $ 3,976,513     $ 4,649,567  
                       
LIABILITIES AND STOCKHOLDERS' EQUITY                      
Current liabilities:                      
  Customer banking deposits $ 790,106     $ 723,318     $ 827,549  
  Accounts payable, accrued expenses and other current liabilities   406,447       581,069       567,079  
  Accrued salaries, wages and payroll taxes   39,345       46,588       163,992  
  Accrued income taxes   95,126       135,858       336,374  
  Commercial paper borrowings   -       39,990       -  
  Current portion of long-term debt   600,678       30,735       631,434  
  Federal Home Loan Bank borrowings   -       25,000       -  
  Liabilities of discontinued operations, held for sale   -       199,030       -  
    Total current liabilities   1,931,702       1,781,588       2,526,428  
                       
  Long-term debt   906,125       1,009,196       409,115  
  Other noncurrent liabilities   365,970       322,907       388,132  
    Total liabilities   3,203,797       3,113,691       3,323,675  
                       
Stockholders' equity:                      
  Common stock, no par, stated value $.01 per share   3,166       3,994       3,979  
  Additional paid-in capital   748,298       799,270       796,784  
  Accumulated other comprehensive income   8,685       4,359       12,145  
  Retained earnings   795,707       2,080,162       2,523,997  
  Less treasury shares, at cost   (862,923 )     (2,024,963 )     (2,011,013 )
    Total stockholders' equity   692,933       862,822       1,325,892  
Total liabilities and stockholders' equity $ 3,896,730     $ 3,976,513     $ 4,649,567  
                       
   
H&R BLOCK  
CONSOLIDATED STATEMENTS OF OPERATIONS  
Unaudited, amounts in thousands, except per share data  
                   
    Three months ended
October 31,
    Six months ended
October 31,
    Three months ended
July 31,
 
    2012     2011     2012     2011     2012     2011  
Revenues:                                                
  Service revenues   $ 116,438     $ 109,983     $ 196,334     $ 193,003     $ 79,896     $ 83,020  
  Product and other revenues     10,966       9,290       17,686       16,553       6,720       7,263  
  Interest income     9,859       9,921       19,732       20,261       9,873       10,340  
      137,263       129,194       233,752       229,817       96,489       100,623  
                                                 
Expenses:                                                
  Cost of revenues:                                                
    Compensation and benefits     54,764       61,438       94,349       108,659       39,585       47,221  
    Occupancy and equipment     82,398       86,551       162,349       170,054       79,951       83,503  
    Depreciation and amortization of property and equipment     17,927       16,652       34,232       33,124       16,305       16,472  
    Provision for bad debt and loan losses     3,725       8,200       8,370       15,491       4,645       7,291  
    Interest     23,390       22,873       45,467       45,809       22,077       22,936  
    Other     29,807       31,899       60,668       67,060       30,861       35,161  
      212,011       227,613       405,435       440,197       193,424       212,584  
  Impairment of goodwill     -       4,257       -       4,257       -       -  
  Selling, general and administrative expenses     90,327       103,755       165,805       196,408       75,478       92,653  
      302,338       335,625       571,240       640,862       268,902       305,237  
                                                 
Operating loss     (165,075 )     (206,431 )     (337,488 )     (411,045 )     (172,413 )     (204,614 )
Other income, net     2,787       2,502       5,931       6,515       3,144       4,013  
                                                 
Loss from continuing operations before tax benefit     (162,288 )     (203,929 )     (331,557 )     (404,530 )     (169,269 )     (200,601 )
Income tax benefit     (61,089 )     (80,916 )     (124,708 )     (162,362 )     (63,619 )     (81,446 )
                                                 
Net loss from continuing operations     (101,199 )     (123,013 )     (206,849 )     (242,168 )     (105,650 )     (119,155 )
Net loss from discontinued operations     (4,044 )     (18,711 )     (5,835 )     (74,654 )     (1,791 )     (55,943 )
                                                 
Net loss   $ (105,243 )   $ (141,724 )   $ (212,684 )   $ (316,822 )   $ (107,441 )   $ (175,098 )
                                                 
Basic and diluted loss per share:                                                
  Net loss from continuing operations   $ (0.37 )   $ (0.41 )   $ (0.76 )   $ (0.80 )   $ (0.38 )   $ (0.39 )
  Net loss from discontinued operations     (0.02 )     (0.06 )     (0.02 )     (0.25 )     (0.01 )     (0.18 )
  Net loss   $ (0.39 )   $ (0.47 )   $ (0.78 )   $ (1.05 )   $ (0.39 )   $ (0.57 )
                                                 
  Basic and diluted shares     271,145       299,895       274,150       302,693       277,155       305,491  
                                                   
   
H&R BLOCK  
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  
Unaudited, amounts in thousands  
           
  Six months ended October 31,     
  2012     2011  
               
Net cash used in operating activities $ (567,036 )   $ (582,628 )
               
Cash flows from investing activities:              
  Purchases of available-for-sale securities   (67,474 )     (155,159 )
  Sales, maturities and payments received on available-for-sale securities   53,098       23,249  
  Principal repayments on mortgage loans held for investment, net   23,608       22,978  
  Purchases of property and equipment, net   (60,720 )     (40,510 )
  Payments made for acquisitions of businesses and intangibles, net   (10,442 )     (8,164 )
  Proceeds from sales of businesses, net   943       37,036  
  Franchise loans:              
    Loans funded   (20,670 )     (27,682 )
    Payments received   8,303       7,447  
  Other, net   9,275       13,685  
    Net cash used in investing activities   (64,079 )     (127,120 )
               
Cash flows from financing activities:              
  Repayments of commercial paper   -       (37,989 )
  Proceeds from commercial paper   -       77,979  
  Repayments of long-term debt   (30,831 )     -  
  Proceeds from issuance of long-term debt   497,185       -  
  Customer banking deposits, net   (37,913 )     (129,285 )
  Dividends paid   (108,428 )     (91,446 )
  Repurchase of common stock, including shares surrendered   (339,919 )     (180,222 )
  Proceeds from exercise of stock options, net   1,288       (430 )
  Other, net   (33,004 )     (28,057 )
    Net cash used in financing activities   (51,622 )     (389,450 )
               
Effects of exchange rates on cash   (696 )     (6,035 )
               
Net decrease in cash and cash equivalents   (683,433 )     (1,105,233 )
Cash and cash equivalents at beginning of the period   1,944,334       1,677,844  
Cash and cash equivalents at end of the period $ 1,260,901     $ 572,611  
               
Supplementary cash flow data:              
  Income taxes paid, net $ 48,201     $ 122,832  
  Interest paid on borrowings   42,106       27,748  
  Interest paid on deposits   2,683       3,323  
  Transfers of foreclosed loans to other assets   5,312       4,438  
  Accrued additions to property and equipment   10,273       10,798  
                         
                         
H&R BLOCK  
NON-GAAP FINANCIAL MEASURES  
Unaudited, amounts in thousands, except per share amounts  
                         
    Three months ended October 31,     Six months ended October 31,  
EBITDA (1)   2012     2011     2012     2011  
                         
Net loss from continuing operations - as reported   $ (101,199 )   $ (123,013 )   $ (206,849 )   $ (242,168 )
                                 
Add back :                                
  Income taxes     (61,089 )     (80,916 )     (124,708 )     (162,362 )
  Interest expense     23,390       22,873       45,467       45,809  
  Depreciation and amortization     22,053       22,089       42,604       43,621  
      (15,646 )     (35,954 )     (36,637 )     (72,932 )
                                 
EBITDA of continuing operations     (116,845 )     (158,967 )     (243,486 )     (315,100 )
                                 
Adjustments:                                
  Loss contingencies - litigation charges     (2,451 )     8,193       (4,753 )     23,357  
  Impairment of goodwill and intangibles     1,421       8,237       1,421       8,237  
  Severance     1,558       526       1,057       2,110  
  Loss (gain) on sales of tax offices     (754 )     806       (524 )     912  
      (226 )     17,762       (2,799 )     34,616  
                                 
Adjusted EBITDA of continuing operations   $ (117,071 )   $ (141,205 )   $ (246,285 )   $ (280,484 )
                                 
Non-GAAP Pretax Results                                
                                 
Pretax loss from continuing operations - as reported   $ (162,288 )   $ (203,929 )   $ (331,557 )   $ (404,530 )
                                 
Add back :                                
  Loss contingencies - litigation charges     (2,451 )     8,193       (4,753 )     23,357  
  Impairment of goodwill and intangibles     1,421       8,237       1,421       8,237  
  Severance     1,558       526       1,057       2,110  
  Loss (gain) on sales of tax offices     (754 )     806       (524 )     912  
      (226 )     17,762       (2,799 )     34,616  
                                 
Pretax loss from continuing operations - as adjusted   $ (162,514 )   $ (186,167 )   $ (334,356 )   $ (369,914 )
                                 
Non-GAAP After-Tax Results                                
                                 
Net loss from continuing operations - as reported   $ (101,199 )   $ (123,013 )   $ (206,849 )   $ (242,168 )
                                 
Add back (net of tax) :                                
  Loss contingencies - litigation charges     (1,506 )     4,926       (2,906 )     14,124  
  Impairment of goodwill and intangibles     869       4,981       869       4,981  
  Severance     951       315       646       1,276  
  Loss (gain) on sales of tax offices     (460 )     487       (320 )     551  
  Discrete tax items     1,472       79       4,173       (2,451 )
      1,326       10,788       2,462       18,481  
                                 
Net loss from continuing operations - as adjusted   $ (99,873 )   $ (112,225 )   $ (204,387 )   $ (223,687 )
                                 
                                 
(1) Earnings before interest, taxes, depreciation and amortization.                                
                                 
      Three months ended October 31,       Six months ended October 31,  
Non-GAAP EPS     2012       2011       2012       2011  
                                 
EPS from continuing operations - as reported   $ (0.37 )   $ (0.41 )   $ (0.76 )   $ (0.80 )
                                 
Add back :                                
  Loss contingencies - litigation charges     (0.01 )     0.02       (0.01 )     0.05  
  Impairment of goodwill and intangibles     -       0.02       -       0.02  
  Severance     -       -       -       -  
  Loss (gain) on sales of tax offices     -       -       -       -  
  Discrete tax items     0.01       -       0.02       (0.01 )
      -       0.04       0.01       0.06  
                                 
EPS from continuing operations - as adjusted   $ (0.37 )   $ (0.37 )   $ (0.75 )   $ (0.74 )
                                 
Non-GAAP Pretax Results - Tax Services segment                                
                                 
Pretax loss - as reported   $ (130,109 )   $ (173,966 )   $ (271,014 )   $ (343,449 )
                                 
Add back :                                
  Loss contingencies - litigation charges     (2,451 )     8,192       (4,753 )     23,356  
  Impairment of goodwill and intangibles     1,421       8,237       1,421       8,237  
  Severance     1,593       526       1,092       2,110  
  Loss (gain) on sales of tax offices     (754 )     806       (524 )     912  
      (191 )     17,761       (2,764 )     34,615  
                                 
Pretax loss - as adjusted   $ (130,300 )   $ (156,205 )   $ (273,778 )   $ (308,834 )
                                 
                                 
Supplemental Information                                
                                 
Stock-based compensation expense:                                
  Pretax   $ 5,384     $ 4,486     $ 7,737     $ 7,824  
  After-tax     3,299       2,706       4,730       4,731  
Amortization of intangible assets:                                
  Pretax   $ 4,126     $ 5,435     $ 8,372     $ 10,497  
  After-tax     2,536       3,277       5,118       6,348  

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