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 in September 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								Adjusted3
(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
EPS2		$	(0.55	)		$	(0.35	)		$	(0.55	)		$	(0.35	)
EBITDA3		$	(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 in September 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 the Securities 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 [phone] or International [phone]
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 until September 30, 2016, by dialing [phone] (U.S./Canada) or [phone] (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 at http://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.

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 All per share amounts are based on fully diluted shares at the end of the corresponding period.
³ The 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

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