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 inSeptember 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     Adjusted 3  
(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  
EPS 2   $ (0.55 )   $ (0.35 )   $ (0.55 )   $ (0.35 )
EBITDA 3   $ (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 inSeptember 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 theSecurities 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 untilSeptember 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 athttp://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.

1All 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.
3The 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          
                         

SOURCE H & R Block

Contacts:

Colby Brown
Investor Relations:
(816) 854-4559

Gene King
Media Relations
(816) 854-4672

###

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