H&R Block Reports Fiscal 2014 First Quarter Earnings

KANSAS CITY, MO - (Marketwired - Sep 3, 2013) - H&R Block, Inc. (NYSE: HRB) today announced financial results for its fiscal 2014 first quarter ended July 31, 2013. The company typically reports a first quarter operating loss due to the seasonality of its core U.S. tax business.

First Quarter 2014 Highlights1

  • Revenues increased 32 percent, or $31 million, to $127 million
  • Adjusted net loss from continuing operations increased 3 percent to $108 million, or $0.40 per share2
  • Net loss from continuing operations increased 7 percent to $113 million, or $0.42 per share

First Quarter Results From Continuing Operations3

                 
    Actual   Adjusted
in millions, except Earnings Per Share   Fiscal Year
2014
  Fiscal Year
2013
  Fiscal Year
2014
  Fiscal Year
2013
Revenue   $127   $96   $127   $96
EBITDA   ($147)   ($127)   ($139)   ($129)
Pretax Loss   ($184)   ($169)   ($176)   ($172)
Net Loss   ($113)   ($106)   ($108)   ($105)
Weighted-Avg. Shares - Diluted   273.1   277.2   273.1   277.2
Earnings Per Share   ($0.42)   ($0.38)   ($0.40)   ($0.38)
                 
 

H&R Block Bank Update

On July 11, 2013 the company announced that H&R Block Bank had reached an agreement to sell its assets and liabilities to Republic Bank & Trust Company ("Republic"). The transaction is subject to various closing conditions, including the finalization of various operating agreements, on which the company and Republic continue to make progress. The transaction is also subject to the receipt of regulatory approvals from each party's respective regulators. In order for the transaction to occur in 2013, the agreement requires all regulatory approvals to be received by September 30. If regulatory approvals are obtained after September 30, 2013, but on or before March 31, 2014, the agreement provides for the transaction to occur between April 30, 2014 and June 18, 2014.
Prior to entering into this agreement, Republic filed an application with its regulators to convert to a national bank charter which is being processed concurrently with the review of the transaction between H&R Block Bank and Republic. Republic has indicated to the company that Republic does not believe it will receive a decision from the OCC regarding its applications before September 30, 2013. The company, therefore, expects to continue offering its financial services products to its clients through H&R Block Bank for the upcoming tax season.

CEO Perspective

"While we're disappointed that it is not likely that we'll be able to complete the bank transaction in time for this tax season, we remain focused on exiting our bank and continue to believe it is in the best interests of our shareholders," said Bill Cobb, H&R Block's President and CEO. "Our overall strategy has not changed, and we're well positioned to continue growing our business profitably and to continue providing significant shareholder returns," added Cobb.
Business Segment Results and Highlights

Tax Services

  • Revenues increased $31 million to $122 million, primarily due to timing differences in our Australian operations. Additionally, increased fees from financial services contributed to the increase
  • Operating expenses increased $35 million to $266 million due to increased variable costs on the increase in revenues, foreign exchange currency losses, and higher legal fees
  • Pretax loss increased $3 million to $144 million

Corporate

  • Total operating expenses increased $11 million to $46 million, primarily due to professional fees related to the H&R Block Bank divestiture transaction and mortgage loan loss provisions, partially offset by lower interest expense
  • Pretax loss increased $12 million to $40 million

Discontinued Operations

  • Net loss of $2 million essentially flat to 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 $69 million
  • SCC's accrual for contingent losses relating to representations and warranties remained unchanged at $159 million

Dividends

A previously announced quarterly cash dividend of 20 cents per share is payable on October 1, 2013 to shareholders of record as of September 10, 2013. The October 1 payment marks the company's 204th consecutive quarterly dividend since the company went public in 1962.

Conference Call

At 4:30 p.m. Eastern on September 3, 2013, the company will host a conference call for analysts, institutional investors and shareholders to discuss the fiscal 2014 first quarter results, fiscal year 2014 outlook and a general business update. To access the call, please dial the number below approximately 10 minutes prior to the scheduled starting time:
U.S./Canada (877) 809-6980 or International (706) 758-0071

Conference ID: 31098974

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 6:30 p.m. Eastern on September 3, 2013, continuing until October 3, 2013, by dialing (855) 859-2056 (U.S./Canada) or (404) 537-3406 (International). The conference ID is 31098974. The webcast will be available for replay beginning September 4, 2013 at http://investors.hrblock.com.

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, 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 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 including our Form 8-K filed July 11, 2013. In addition, with respect to the agreement to sell the assets of H&R Block Bank, 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 Unless otherwise noted, all growth rates refer to the current period compared to the corresponding prior year period.

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

3 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).

                     
KEY OPERATING RESULTS  
Unaudited, amounts in thousands, except per share data  
   
    Three months ended July 31,  
    Revenues   Income (loss)  
    2013   2012   2013     2012  
                             
Tax Services   $ 121,691   $ 90,253   $ (144,394 )   $ (140,905 )
Corporate and Eliminations     5,504     6,236     (40,100 )     (28,364 )
    $ 127,195   $ 96,489     (184,494 )     (169,269 )
Income tax benefit                 (71,224 )     (63,619 )
Net loss from continuing operations           (113,270 )     (105,650 )
Net loss from discontinued operations           (1,917 )     (1,791 )
Net loss               $ (115,187 )   $ (107,441 )
                             
Basic and diluted loss per share:                      
  Continuing operations               $ (0.42 )   $ (0.38 )
  Discontinued operations                 -       (0.01 )
  Consolidated               $ (0.42 )   $ (0.39 )
                             
Basic and diluted shares                 273,080       277,155  
                             
NOTES TO FINANCIAL RESULTS                      
  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. 
   
   
                   
CONSOLIDATED BALANCE SHEETS  
Unaudited, amounts in thousands, except per share data  
                   
    July 31,
2013
    July 31,
2012
    April 30,
2013
 
ASSETS                        
Current assets:                        
  Cash and cash equivalents   $ 1,163,876     $ 939,871     $ 1,747,584  
  Cash and cash equivalents - restricted     55,477       43,109       117,837  
  Receivables, net     121,309       116,357       206,835  
  Prepaid expenses and other current assets     356,662       318,262       390,087  
  Mortgage loans held for sale     7,608       -       -  
    Total current assets     1,704,932       1,417,599       2,462,343  
                         
  Mortgage loans held for investment, net     309,681       386,759       338,789  
  Investments in available-for-sale securities     487,033       380,765       486,876  
  Property and equipment, net     286,584       242,585       267,880  
  Intangible assets, net     280,455       271,533       284,439  
  Goodwill     435,667       431,101       434,782  
  Other assets     258,536       463,935       262,670  
Total assets   $ 3,762,888     $ 3,594,277     $ 4,537,779  
                         
LIABILITIES AND STOCKHOLDERS' EQUITY                        
Current liabilities:                        
  Customer banking deposits   $ 757,929     $ 648,378     $ 936,464  
  Accounts payable, accrued expenses and other current liabilities     443,065       414,604       523,921  
  Accrued salaries, wages and payroll taxes     32,926       35,234       134,970  
  Accrued income taxes     215,834       278,539       416,128  
  Current portion of long-term debt     730       600,642       722  
    Total current liabilities     1,450,484       1,977,397       2,012,205  
                         
  Long-term debt     905,902       408,992       905,958  
  Other noncurrent liabilities     301,187       362,215       356,069  
    Total liabilities     2,657,573       2,748,604       3,274,232  
                         
Stockholders' equity:                        
  Common stock, no par, stated value $.01 per share     3,166       3,166       3,166  
  Additional paid-in capital     753,209       744,616       752,483  
  Accumulated other comprehensive income (loss)     (257 )     7,350       10,550  
  Retained earnings     1,163,651       955,873       1,333,445  
  Less treasury shares, at cost     (814,454 )     (865,332 )     (836,097 )
    Total stockholders' equity     1,105,315       845,673       1,263,547  
Total liabilities and stockholders' equity   $ 3,762,888     $ 3,594,277     $ 4,537,779  
                         
                         
             
CONSOLIDATED STATEMENTS OF OPERATIONS  
Unaudited, amounts in thousands, except per share data  
             
    Three months ended July 31,  
    2013     2012  
Revenues:                
  Service revenues   $ 107,800     $ 79,896  
  Product and other revenues     8,198       6,720  
  Interest income     11,197       9,873  
      127,195       96,489  
                 
Expenses:                
  Cost of revenues:                
    Compensation and benefits     46,312       39,585  
    Occupancy and equipment     78,736       79,951  
    Provision for bad debt and loan losses     11,491       4,645  
    Interest     14,446       22,077  
    Depreciation and amortization of property and equipment     16,804       14,534  
    Other     42,264       32,632  
      210,053       193,424  
  Selling, general and administrative expenses     96,697       75,478  
      306,750       268,902  
                 
Operating loss     (179,555 )     (172,413 )
Other income (expense), net     (4,939 )     3,144  
                 
Loss from continuing operations before taxes     (184,494 )     (169,269 )
Income tax benefit     (71,224 )     (63,619 )
                 
Net loss from continuing operations     (113,270 )     (105,650 )
Net loss from discontinued operations     (1,917 )     (1,791 )
                 
Net loss   $ (115,187 )   $ (107,441 )
                 
Basic and diluted loss per share:                
  Continuing operations   $ (0.42 )   $ (0.38 )
  Discontinued operations     -       (0.01 )
  Consolidated   $ (0.42 )   $ (0.39 )
                 
  Basic and diluted shares     273,080       277,155  
                   
                 
         
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        
Unaudited, amounts in thousands            
             
    Three months ended July 31,  
    2013     2012  
                 
Net cash used in operating activities   $ (318,742 )   $ (373,140 )
                 
Cash flows from investing activities:                
  Purchases of available-for-sale securities     (45,158 )     (28,990 )
  Maturities of and payments received on available-for-sale securities     32,061       21,129  
  Principal repayments on mortgage loans held for investment, net     11,707       12,652  
  Purchases of property and equipment     (34,386 )     (13,273 )
  Franchise loans:                
    Loans funded     (6,657 )     (5,062 )
    Payments received     7,164       5,154  
  Other, net     6,179       1,675  
    Net cash used in investing activities     (29,090 )     (6,715 )
                 
Cash flows from financing activities:                
  Repayments of long-term debt     -       (30,831 )
  Customer banking deposits, net     (179,364 )     (179,519 )
  Dividends paid     (54,550 )     (54,201 )
  Repurchase of common stock, including shares surrendered     (4,201 )     (339,088 )
  Proceeds from exercise of stock options, net     21,953       468  
  Other, net     (13,093 )     (19,939 )
    Net cash used in financing activities     (229,255 )     (623,110 )
                 
Effects of exchange rates on cash     (6,621 )     (1,498 )
                 
Net decrease in cash and cash equivalents     (583,708 )     (1,004,463 )
Cash and cash equivalents at beginning of the period     1,747,584       1,944,334  
Cash and cash equivalents at end of the period   $ 1,163,876     $ 939,871  
                 
Supplementary cash flow data:                
  Income taxes paid, net of refunds received   $ 106,467     $ 19,747  
  Interest paid on borrowings     15,883       13,494  
  Interest paid on deposits     640       1,336  
  Transfers of foreclosed loans to other assets     2,100       3,074  
  Accrued additions to property and equipment     8,048       7,107  
  Transfer of mortgage loans held for investment to held for sale     7,608       -  
                 
                 
             
Tax Services Income Statement  
Unaudited, amounts in thousands  
             
    Three months ended July 31,  
    2013     2012  
Tax preparation fees:                
  U.S.   $ 22,026     $ 18,835  
  International     32,094       14,058  
      54,120       32,893  
Royalties     6,562       5,851  
Fees from Emerald Card     14,611       12,056  
Fees from POM guarantees     27,826       26,983  
Other     18,572       12,470  
  Total revenues     121,691       90,253  
                 
Compensation & benefits:                
  Field wages     39,904       32,408  
  Other wages     34,735       34,367  
  Benefits and other compensation     15,937       14,774  
      90,576       81,549  
Occupancy and equipment     78,550       79,851  
Marketing and advertising     7,017       7,452  
Depreciation and amortization     22,802       20,471  
Other     67,140       41,835  
  Total expenses     266,085       231,158  
Pretax loss   $ (144,394 )   $ (140,905 )
                 
                 
             
NON-GAAP FINANCIAL MEASURES  
Unaudited, amounts in thousands, except per share amounts  
             
    Three months ended July 31,  
EBITDA and Adjusted EBITDA (1)   2013     2012  
                 
Net loss from continuing operations - as reported   $ (113,270 )   $ (105,650 )
                 
Add back:                
  Income taxes     (71,224 )     (63,619 )
  Interest expense     14,446       22,077  
  Depreciation and amortization     22,874       20,551  
      (33,904 )     (20,991 )
                 
EBITDA from continuing operations     (147,174 )     (126,641 )
                 
Adjustments:                
  Loss contingencies - litigation     373       (2,302 )
  Severance     1,105       (501 )
  Professional fees related to pending HRB Bank transaction     7,024       -  
  Loss on sales of tax offices     -       230  
      8,502       (2,573 )
                 
Adjusted EBITDA from continuing operations   $ (138,672 )   $ (129,214 )
                 
Non-GAAP Pretax Results                
                 
Pretax loss from continuing operations - as reported   $ (184,494 )   $ (169,269 )
                 
Add back:                
  Loss contingencies - litigation     373       (2,302 )
  Severance     1,105       (501 )
  Professional fees related to pending HRB Bank transaction     7,024       -  
  Loss on sales of tax offices     -       230  
      8,502       (2,573 )
                 
Pretax loss from continuing operations - as adjusted   $ (175,992 )   $ (171,842 )
                 
Non-GAAP After-Tax Results                
                 
Net loss from continuing operations - as reported   $ (113,270 )   $ (105,650 )
                 
Add back (net of tax):                
  Loss contingencies - litigation     229       (1,400 )
  Severance     677       (305 )
  Professional fees related to pending HRB Bank transaction     4,306       -  
  Loss on sales of tax offices     -       140  
  Discrete tax items     157       2,701  
      5,369       1,136  
                 
Net loss from continuing operations - as adjusted   $ (107,901 )   $ (104,514 )
                 
                 
(1) Earnings before interest, taxes, depreciation and amortization.  
             
    Three months ended July 31,  
Non-GAAP EPS   2013     2012  
                 
EPS from continuing operations - as reported   $ (0.42 )   $ (0.38 )
                 
Add back:                
  Loss contingencies - litigation     -       (0.01 )
  Severance     -       -  
  Professional fees related to pending HRB Bank transaction     0.02       -  
  Loss on sales of tax offices     -       -  
  Discrete tax items     -       0.01  
      0.02       -  
                 
EPS from continuing operations - as adjusted   $ (0.40 )   $ (0.38 )
                 
Non-GAAP Pretax Results - Tax Services segment                
                 
Pretax loss - as reported   $ (144,394 )   $ (140,905 )
                 
Add back:                
  Loss contingencies - litigation     373       (2,302 )
  Severance     1,105       (501 )
  Loss on sales of tax offices     -       230  
      1,478       (2,573 )
                 
Pretax loss - as adjusted   $ (142,916 )   $ (143,478 )
                 
                 
Supplemental Information                
                 
Stock-based compensation expense:                
  Pretax   $ 4,552     $ 2,353  
  After-tax     2,791       1,431  
Amortization of intangible assets:                
  Pretax   $ 6,071     $ 6,017  
  After-tax     3,722       3,660  
                   
                   

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 accounting principles generally accepted in the United States (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 facilities 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 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 factors in incentive compensation calculations 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.

Contacts:

Investor Relations
Colby Brown
(816) 854-4559

Media Relations
Gene King
(816) 854-4672

###

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