H&R Block Announces Strong Start to the Tax Season and Fiscal 2018 Third Quarter Results

KANSAS CITY, Mo., March 06, 2018 (GLOBE NEWSWIRE) -- H&R Block, Inc. (NYSE:HRB) today released U.S. tax return volume through February 28 and its financial results for the fiscal 2018 third quarter ended January 31, 2018. The company normally reports a fiscal third quarter loss due to the seasonality of its tax business.

Tax Season and Fiscal Third Quarter Highlights1

  • H&R Block grows total U.S. returns through February 28.
  • Company reiterates financial outlook for full year.
  • Fiscal third quarter revenues increased $37 million, or 8%, to $488 million primarily due to increased return volumes in both Assisted and DIY tax preparation businesses.
  • Loss per share from continuing operations increased $0.67, from $0.49 to $1.16, solely due to changes in the company's effective tax rate resulting from the recently enacted federal corporate tax legislation. The negative impact from these corporate tax rate changes is unique to the company's fiscal third quarter, as the impact will be favorable on a full fiscal year basis.

Tax Season Results2

H&R Block total U.S. return volume increased 3.4% through February 28, with Assisted returns increasing 0.7% and DIY returns increasing 8.2%. Positive results in the Assisted business were due to the success of early-season promotions including the company's Refund Advance no-interest loan and Free Federal 1040EZ offer. In DIY, continued product improvements, enhanced partnerships, and the H&R Block More Zero® promotion led to the strong performance.

CEO Perspective

"I'm proud of what we have accomplished so far this tax season, with strong results in both the Assisted and DIY tax preparation categories," said Jeff Jones, H&R Block's president and chief executive officer. "As we look to the second half of the tax season, we'll continue to focus on execution as we leverage our products, partnerships and marketing to deliver on our financial outlook."

Fiscal 2018 Third Quarter Results From Continuing Operations

(in millions, except EPS) Fiscal Year 2018 Fiscal Year 2017
Revenue $488 $452
Pretax Loss $(121) $(151)
Net Loss $(243) $(101)
Weighted-Avg. Shares - Diluted 209.1 207.9
EPS3 $(1.16) $(0.49)
EBITDA4 $(48) $(79)

Key Financial Metrics

  • Total revenues increased $37 million, or 8%, to $488 million primarily due to increased return volumes.
  • Total operating expenses increased $9 million, or 2%, to $586 million primarily due to increases in compensation costs, partially offset by lower marketing and advertising expenses.
  • Pretax loss decreased $30 million to $121 million.
  • Loss per share from continuing operations increased $0.67, from $0.49 to $1.16, solely due to changes in the company's effective tax rate resulting from the recently enacted federal corporate tax legislation. The negative impact from these corporate tax rate changes is unique to the company's fiscal third quarter, as the impact will be favorable on a full fiscal year basis. The company expects its fiscal year effective tax rate to be 6%-9%, which is an update to the anticipated annual effective tax rate for fiscal 2018 disclosed in the company's Form 8-K filed with the Securities and Exchange Commission (SEC) on January 22, 2018.

CFO Perspective

"We are pleased with our performance during the first half of the tax season, which was in line with our expectations," said Tony Bowen, H&R Block's chief financial officer. "Our expectations for revenue growth and margin are unchanged from the outlook we provided in December."

Dividends

As previously announced, a quarterly cash dividend of $0.24 per share is payable on April 2, 2018 to shareholders of record as of March 13, 2018. H&R Block has paid quarterly dividends consecutively since the company went public in 1962.

Discontinued Operations

During the fiscal quarter, Sand Canyon Corporation made payments of $4.5 million pursuant to a settlement agreement entered into in fiscal 2016. The full amount of the payments had been previously accrued by the company. For additional information on Sand Canyon, please refer to disclosures in the company’s reports on Forms 10-K, 10-Q, and other filings with the SEC.

Conference Call

Discussion of the fiscal 2018 third quarter results, future outlook, and a general business update will occur during the company’s previously announced fiscal third quarter earnings conference call for analysts, institutional investors, and shareholders. The call is scheduled for 4:30 p.m. Eastern time on March 6, 2018. To access the call, please dial the number below approximately 10 minutes prior to the scheduled starting time:

U.S./Canada (855) 702-5257 or International (213) 358-0868
Conference ID: 3876229

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 March 6, 2018, and continuing until April 6, 2018, by dialing (855) 859-2056 (U.S./Canada) or (404) 537-3406 (International). The conference ID is 3876229. The webcast will be available for replay beginning on March 7, 2018 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 2017, H&R Block had annual revenues of over $3 billion with 23 million tax returns prepared worldwide. For more information, visit the H&R Block Newsroom.

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, client trajectory, income, effective tax rate, 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, 2017 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. In addition, factors that may cause the company’s actual estimated effective tax rate to differ from estimates include the company’s actual results from operations compared to current estimates, future discrete items, changes in interpretations and assumptions the company has made, guidance from the Internal Revenue Service, SEC, or the Financial Accounting Standards Board about the Tax Legislation, and future actions of the company. You should understand that it is not possible to predict or identify all such factors and, consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

1 All amounts in this release are unaudited. Unless otherwise noted, all comparisons refer to the current period compared to the corresponding prior year period.
2 Volume changes to prior year noted in this paragraph and in the table attached to this release are based on a date-to-date basis.
3 All per share amounts are based on fully diluted shares at the end of the corresponding period.
4 The company reports non-GAAP financial measures of performance, including earnings before interest, tax, depreciation, and amortization (EBITDA), which it considers to be useful metrics for management and investors to evaluate and compare the ongoing operating performance of the company. See "About Non-GAAP Financial Information" below for more information regarding financial measures not prepared in accordance with generally accepted accounting principles (GAAP).

For Further Information

Investor Relations: Colby Brown, (816) 854-4559, colby.brown@hrblock.com
Media Relations: Susan Waldron, (816) 854-5522, susan.waldron@hrblock.com

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in 000s -
except per share amounts)
Three months ended January 31, Nine months ended January 31,
2018 2017 2018 2017
REVENUES:
Service revenues $388,771 $361,397 $641,389 $592,721
Royalty, product and other revenues 99,655 90,485 125,693 115,678
488,426 451,882 767,082 708,399
OPERATING EXPENSES:
Cost of revenues:
Compensation and benefits 181,958 165,015 303,434 275,098
Occupancy and equipment 107,981 104,094 311,752 297,586
Provision for bad debt 29,191 28,348 33,429 29,634
Depreciation and amortization 32,046 29,828 90,391 87,206
Other 65,425 61,492 145,329 136,041
416,601 388,777 884,335 825,565
Selling, general and administrative:
Marketing and advertising 64,209 84,101 82,875 103,663
Compensation and benefits 66,942 58,408 185,453 174,223
Depreciation and amortization 16,442 15,332 46,487 44,986
Other selling, general and administrative 21,505 30,056 66,378 77,500
169,098 187,897 381,193 400,372
Total operating expenses 585,699 576,674 1,265,528 1,225,937
Other income (expense), net 1,028 134 3,259 4,948
Interest expense on borrowings (24,560) (25,940) (67,102) (70,026)
Loss from continuing operations before income taxes (benefit) (120,805) (150,598) (562,289) (582,616)
Income taxes (benefit) 122,120 (49,386) (43,234) (216,963)
Net loss from continuing operations (242,925) (101,212) (519,055) (365,653)
Net loss from discontinued operations (2,720) (3,302) (10,723) (8,754)
NET LOSS $(245,645) $(104,514) $(529,778) $(374,407)
BASIC AND DILUTED LOSS PER SHARE:
Continuing operations $(1.16) $(0.49) $(2.49) $(1.71)
Discontinued operations (0.02) (0.01) (0.05) (0.04)
Consolidated $(1.18) $(0.50) $(2.54) $(1.75)
WEIGHTED AVERAGE BASIC AND DILUTED SHARES 209,080 207,862 208,693 214,627


CONSOLIDATED BALANCE SHEETS (unaudited, in 000s - except per share data)
As of January 31, 2018 January 31, 2017 April 30, 2017
ASSETS
Cash and cash equivalents $187,366 $221,172 $1,011,331
Cash and cash equivalents - restricted 83,033 70,166 106,208
Receivables, net 791,618 787,865 162,775
Income taxes receivable 72,775 38,032
Prepaid expenses and other current assets 149,349 85,599 65,725
Total current assets 1,284,141 1,202,834 1,346,039
Property and equipment, net 249,911 282,358 263,827
Intangible assets, net 390,993 434,720 409,364
Goodwill 504,789 483,320 491,207
Deferred tax assets and income taxes receivable 25,305 71,639 83,728
Other noncurrent assets 106,161 102,760 99,943
Total assets $2,561,300 $2,577,631 $2,694,108
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Accounts payable and accrued expenses $163,653 $239,085 $217,028
Accrued salaries, wages and payroll taxes 135,626 123,457 183,856
Accrued income taxes and reserves for uncertain tax positions 164,246 7,537 348,199
Current portion of long-term debt 1,015 942 981
Deferred revenue and other current liabilities 201,988 183,616 189,216
Total current liabilities 666,528 554,637 939,280
Long-term debt and line of credit borrowings 2,284,231 2,592,622 1,493,017
Deferred tax liabilities and reserves for uncertain tax positions 201,384 109,557 159,085
Deferred revenue and other noncurrent liabilities 107,226 121,631 163,609
Total liabilities 3,259,369 3,378,447 2,754,991
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, no par, stated value $.01 per share 2,462 2,462 2,462
Additional paid-in capital 758,361 752,748 754,912
Accumulated other comprehensive loss (9,374) (15,363) (15,299)
Retained deficit (729,578) (785,823) (48,206)
Less treasury shares, at cost (719,940) (754,840) (754,752)
Total stockholders' equity (deficiency) (698,069) (800,816) (60,883)
Total liabilities and stockholders' equity $2,561,300 $2,577,631 $2,694,108


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in 000s)
Nine months ended January 31, 2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(529,778) $(374,407)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 136,878 132,192
Provision for bad debt 33,429 29,634
Deferred taxes 113,345 6,128
Stock-based compensation 17,065 16,945
Changes in assets and liabilities, net of acquisitions:
Receivables (651,200) (646,290)
Prepaid expenses and other current assets (83,201) (23,208)
Other noncurrent assets 8,310 7,575
Accounts payable and accrued expenses (36,608) (33,560)
Accrued salaries, wages and payroll taxes (49,255) (37,978)
Deferred revenue and other current liabilities 10,113 (44,243)
Deferred revenue and other noncurrent liabilities (58,695) (57,216)
Income tax receivables, accrued income taxes and income tax reserves (255,650) (378,987)
Other, net (12,454) (6,444)
Net cash used in operating activities (1,357,701) (1,409,859)
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments and sales of mortgage loans and real estate owned, net 207,174
Capital expenditures (77,865) (73,924)
Payments made for business acquisitions, net of cash acquired (39,397) (52,825)
Franchise loans funded (20,226) (31,788)
Payments received on franchise loans 13,391 20,816
Other, net 1,524 (4,711)
Net cash provided by (used in) investing activities (122,573) 64,742
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of line of credit borrowings (40,000) (445,000)
Proceeds from line of credit borrowings 830,000 1,545,000
Dividends paid (150,258) (141,537)
Repurchase of common stock, including shares surrendered (7,746) (322,782)
Proceeds from exercise of stock options 28,268 2,403
Other, net (28,922) 373
Net cash provided by financing activities 631,342 638,457
Effects of exchange rate changes on cash 1,792 (2,913)
Net decrease in cash, cash equivalents and restricted cash (847,140) (709,573)
Cash, cash equivalents and restricted cash, beginning of period 1,117,539 1,000,911
Cash, cash equivalents and restricted cash, end of period $270,399 $291,338
SUPPLEMENTARY CASH FLOW DATA:
Income taxes paid, net of refunds received $102,755 $158,656
Interest paid on borrowings 57,834 59,809
Accrued additions to property and equipment 1,078 5,959

Note: Effective May 1, 2017, we adopted the provisions of Accounting Standards Update No. 2016-18, "Restricted Cash (a consensus of the FASB Emerging Issues Task Force)," (ASU 2016-18) on a retrospective basis. Accordingly, the statements of cash flows explain the change in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents per ASU 2016-18. Amounts for prior periods have been retrospectively adjusted to conform to the current period presentation.

FINANCIAL RESULTS (unaudited, in 000s - except per share amounts)
Three months ended January 31, Nine months ended January 31,
2018 2017 2018 2017
REVENUES:
U.S. assisted tax preparation fees $267,328 $245,262 $333,956 $306,030
U.S. royalties 45,420 43,254 59,395 56,607
U.S. DIY tax preparation fees 31,322 30,745 38,811 36,748
International revenues 12,308 10,914 100,659 93,328
Revenues from Refund Transfers 50,770 47,323 54,721 51,314
Revenues from Emerald Card® 16,125 14,100 40,292 35,809
Revenues from Peace of Mind® Extended Service Plan 19,967 18,135 76,495 67,855
Interest and fee income on Emerald Advance 31,075 30,060 32,333 31,519
Other 14,111 12,089 30,420 29,189
488,426 451,882 767,082 708,399
Compensation and benefits:
Field wages 156,027 142,084 261,866 237,223
Other wages 50,717 45,172 140,637 129,479
Benefits and other compensation 42,156 36,167 86,384 82,619
248,900 223,423 488,887 449,321
Occupancy and equipment 107,731 103,867 311,335 297,275
Marketing and advertising 64,209 84,101 82,875 103,663
Depreciation and amortization 48,488 45,160 136,878 132,192
Provision for bad debt 29,191 28,348 33,429 29,634
Supplies 4,950 4,453 12,052 11,467
Other 82,230 87,322 200,072 202,385
Total operating expenses 585,699 576,674 1,265,528 1,225,937
Other income (expense), net 1,028 134 3,259 4,948
Interest expense on borrowings (24,560) (25,940) (67,102) (70,026)
Pretax loss (120,805) (150,598) (562,289) (582,616)
Income taxes (benefit) 122,120 (49,386) (43,234) (216,963)
Net loss from continuing operations (242,925) (101,212) (519,055) (365,653)
Net loss from discontinued operations (2,720) (3,302) (10,723) (8,754)
NET LOSS $(245,645) $(104,514) $(529,778) $(374,407)
BASIC AND DILUTED LOSS PER SHARE:
Continuing operations $(1.16) $(0.49) $(2.49) $(1.71)
Discontinued operations (0.02) (0.01) (0.05) (0.04)
Consolidated $(1.18) $(0.50) $(2.54) $(1.75)
Weighted average basic and diluted shares 209,080 207,862 208,693 214,627
EBITDA from continuing operations (1) $(47,757) $(79,498) $(358,309) $(380,398)

(1) See "Non-GAAP Financial Information" for a reconciliation of non-GAAP measures.

U.S. TAX OPERATING DATA
Fiscal Year-to-Date Fiscal Year-to-Date
January 31, February 28,
2018 2017 % Change 2018 2017 % Change
Tax Returns Prepared: (in 000s) (1) (2)
Company-Owned Operations 1,424 1,375 3.6% 4,352 4,322 0.7%
Franchise Operations 736 705 4.4% 2,105 2,088 0.8%
Total H&R Block Assisted 2,160 2,080 3.8% 6,457 6,410 0.7%
Desktop 151 155 (2.6)% 764 750 1.9%
Online 1,126 1,056 6.6% 3,170 2,887 9.8%
Total H&R Block DIY Tax Software 1,277 1,211 5.5% 3,934 3,637 8.2%
IRS Free File 94 96 (2.1)% 306 298 2.7%
Total H&R Block U.S. Returns 3,531 3,387 4.3% 10,697 10,345 3.4%
Net Average Charge: (3)
Company-Owned Operations $235.57 $226.89 3.8% $222.59 $217.50 2.3%
Franchise Operations (4) 226.07 219.06 3.2% 206.77 202.18 2.3%
DIY Tax Software 30.39 30.35 0.1% 27.71 26.79 3.4%

(1) An assisted tax return is defined as a current or prior year individual tax return that has been accepted and paid for by the client. Also included are business returns, which account for less than 1% of assisted tax returns. A DIY tax software return is defined as a return that has been electronically filed and accepted by the IRS. Also included are online returns paid and printed.
(2) Amounts have been reclassified between company-owned and franchise for offices which were refranchised or repurchased by the company during the year.
(3) Net average charge is calculated as tax preparation fees divided by tax returns prepared. For DIY Tax Software, net average charge excludes IRS Free File.
(4) Net average charge related to H&R Block Franchise Operations represents tax preparation fees collected by H&R Block franchisees divided by returns prepared in franchise offices. H&R Block will recognize a portion of franchise revenues as franchise royalties based on the terms of franchise agreements.

Three months ended January 31, Nine months ended January 31,
NON-GAAP FINANCIAL MEASURE - EBITDA 2018 2017 2018 2017
Net loss - as reported $(245,645) $(104,514) $(529,778) $(374,407)
Discontinued operations, net 2,720 3,302 10,723 8,754
Net loss from continuing operations - as reported (242,925) (101,212) (519,055) (365,653)
Add back:
Income taxes of continuing operations 122,120 (49,386) (43,234) (216,963)
Interest expense of continuing operations 24,560 25,940 67,102 70,026
Depreciation and amortization of continuing operations 48,488 45,160 136,878 132,192
195,168 21,714 160,746 (14,745)
EBITDA from continuing operations $(47,757) $(79,498) $(358,309) $(380,398)
Three months ended January 31, Nine months ended January 31,
Supplemental Information 2018 2017 2018 2017
Stock-based compensation expense:
Pretax $5,438 $4,473 $17,065 $16,945
After-tax 8,228 2,948 15,753 10,894
Amortization of intangible assets:
Pretax $20,792 $19,287 $59,465 $57,324
After-tax 29,863 12,621 54,892 36,854

NON-GAAP FINANCIAL INFORMATION

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 for other companies.

We consider our non-GAAP financial measures to be performance measures and a useful metric for management and investors to evaluate and compare the ongoing operating performance of our business.

We may consider whether significant items that arise in the future should be excluded from our non-GAAP financial measures.

We measure the performance of our business using a variety of metrics, including EBITDA from continuing operations. We also use EBITDA from continuing operations and pretax income of continuing operations, each subject to permitted adjustments, as performance metrics in incentive compensation calculations for our employees.

Source:HRB Tax Group, Inc.