H&R Block Announces Fiscal 2016 Third Quarter Results

H&R Block, Inc. (NYSE: HRB), the world’s largest consumer tax services provider, today released its financial results for the fiscal 2016 third quarter ended January 31, 2016 and key operating data through February 28, 2016. The company typically reports a third quarter operating loss due to the seasonality of its tax business.

Third Quarter 2016 Highlights¹

• Significant delays seen in U.S. tax industry as consumers modify tax filing behaviors and federal and state governments take new actions to combat tax fraud
• Total revenues decreased $34.5 million to $474.5 million primarily due to lower client volumes in U.S. assisted offices, the impact of the divestiture of H&R Block Bank, and the impact of foreign currency exchange rate fluctuations, partially offset by increased pricing and improved form mix
• Non-GAAP adjusted loss per share from continuing operations of $0.34 ^{2, 3}
• Repurchased approximately 12.0 million shares during the quarter, at an average price of $32.72; fiscal year-to-date repurchases through January 31, 2016 total 52.5 million shares, or approximately 19% of outstanding shares

“This tax season has been marked by the continued impact of fraud on the industry, the continuing trend of taxpayers filing their returns later in the season and tax refunds taking longer to process,” said Bill Cobb, H&R Block’s president and chief executive officer. “Significant initiatives by both federal and state governments to combat tax fraud are creating material changes in the industry. While we believe that there are additional efforts that need to be taken, such as EITC form parity and minimum standards for tax return preparers, we fully support the efforts being made this season.”

The company reported a decrease in revenues of $34.5 million to $474.5 million, primarily due to lower client volumes in its U.S. assisted tax offices, the impact of the divestiture of H&R Block Bank, and the impact of foreign currency exchange rate fluctuations. The decline in volume was offset by improved pricing and form mix in both assisted and DIY categories. A majority of the company’s revenues and all of its fiscal 2016 earnings will occur during its fiscal fourth quarter, and thus fiscal third quarter financial results are not indicative of expected performance for the full year.

The decline in the company’s U.S. tax return volumes followed the industry-wide decline in filings through mid-February, which the company believes are primarily the result of the ongoing impact of tax fraud and related prevention measures, delayed refunds, and the effect of the Affordable Care Act (ACA). Total returns prepared by and through H&R Block declined 6.1% percent through February 28, 2016, to 10.6 million, which represented a 0.3% point improvement from the decline as of January 31, 2016, indicating positive momentum in the effort to reduce early season client loss. Additionally, the improved pricing and form mix noted in the fiscal third quarter continued through February 28.

“Despite the impact these challenges have had on our early season volumes, I’m pleased with our monetization efforts as we’ve seen improvements in both form mix and price. Turning the early season client loss around will take time, but our results are starting to indicate that our efforts are working,” said Cobb. “There is still a significant amount of the tax season remaining and we are focused on executing our Tax Plus strategy to help deliver a strong second half.”

CFO Perspective

“As we are no longer regulated as a savings and loan holding company, we have been able to return to our historical practice of repurchasing shares opportunistically to create shareholder value,” said Greg Macfarlane, H&R Block’s chief financial officer. “In the last two fiscal quarters, we repurchased 52.5 million shares, or $1.9 billion of H&R Block stock, representing 19 percent of total outstanding shares. We are confident in the future of H&R Block and look forward to continuing as the leading tax preparation company for years to come.”

“Additionally, Sand Canyon took significant steps toward the resolution of its representation and warranty obligations by settling with some of the counterparties that asserted claims against them,” added Macfarlane. “While we believe the wind-down of Sand Canyon will continue to take time, it’s positive to see progress.” ⁴

Financial Results and Highlights

• Revenues decreased 6.8% to $475 million, due primarily to lower tax preparation volumes, the impact of the divestiture of H&R Block Bank, and the impact of foreign currency exchange rate fluctuations. These decreases were partially offset by improved price and return mix in both assisted and DIY categories.
• Total operating expenses increased $10.2 million, or 1.7%. The increase was primarily due to occupancy costs and amortization expense which increased due to current year acquisitions of independent tax preparation and franchise businesses as well as the annualization of expenses related to acquisitions in the prior year and increased marketing expenses. These increases were partially offset by a decrease in field compensation resulting from lower tax preparation volume.
• Other income increased $2.8 million primarily due to the accounting changes related to the divestiture of H&R Block Bank discussed above.
• Interest expense increased $14.5 million from the prior year due to $1 billion of long-term debt issued in September 2015, and an increase in borrowings under the company’s line of credit during the fiscal third quarter.
• Pretax loss increased 61.2% to $147 million.

Discontinued Operations

• Sand Canyon Corporation (SCC), a separate legal entity from H&R Block, Inc., continued to engage in constructive settlement discussions with counterparties that have made a significant majority of previously denied and possible future representation and warranty claims.
• SCC’s accrual for contingent losses related to representation and warranty claims decreased $89 million from the prior quarter to $65 million as a result of settlements with counterparties. The settlements were fully covered by prior accruals.

Balance Sheet

• Cash balances decreased from January 31, 2015 mainly due to the net cash payment to the company’s bank partner for the transfer of deposit liabilities related to the divestiture of H&R Block Bank and the net impact of capital structure changes, including share repurchases totaling $1.9 billion during the fiscal year.
• Accounts receivable increased $52 million from January 31, 2015 due to the delayed timing of IRS funding of tax refunds.
• Upon divestiture of H&R Block Bank in the second quarter of fiscal 2016, available for sale securities, previously held to meet bank regulatory requirements, were liquidated for approximately $388 million. Additionally, certain liabilities, including all customer banking deposits, were transferred to the company’s bank partner.
• Long-term debt increased $1 billion from January 31, 2015 due to the issuance of $650 million of 4.125% Senior Notes and $350 million of 5.250% Senior Notes. Long-term debt also increased as a result of outstanding borrowings under the company’s line of credit, which at January 31, 2016 totaled $1.1 billion.
• Stockholders’ equity was impacted by repurchases and subsequent retirements of 52.5 million shares of common stock during the fiscal year for $1.9 billion, or an average price of $36.02 per share.
• Details regarding the bank divestiture and related agreements, capital structure transactions and share repurchase program can be found in previously filed press releases issued, as well as Forms 8-K filed with the Securities and Exchange Commission, in September and October of 2015.

Share Repurchases and Dividends

During the third quarter of fiscal 2016, the company repurchased and retired approximately 12.0 million shares at an aggregate price of $392 million, or $32.72 per share. As of January 31, 2016, 224.4 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. Under this program, the company has repurchased approximately 52.5 million shares of its common stock, or 19% of outstanding shares, for an aggregate purchase price of $1.9 billion.

As previously announced, a quarterly cash dividend of 20 cents per share is payable on April 1, 2016 to shareholders of record as of March 15, 2016. The April 1 dividend payment will be H&R Block’s 214^thconsecutive quarterly dividend since the company went public in 1962.

Conference Call

Discussion of the fiscal 2016 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 3, 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: 18401962

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 https://investors.hrblock.com.

A replay of the call will be available beginning at 7:30 p.m. Eastern time on March 3, 2016, and continuing until April 3, 2016, by dialing (855) 859-2056 (U.S./Canada) or (404) 537-3406 (International). The conference ID is 18401962. The webcast will be available for replay March 4, 2016 at https://investors.hrblock.com.

About H&R Block

H&R Block, Inc. (NYSE: HRB) is the world’s largest consumer tax services provider. More than 680 million tax returns have been prepared worldwide by and through H&R Block since 1955. In fiscal 2015, H&R Block had annual revenues of nearly $3.1 billion with 24.2 million tax returns prepared worldwide. 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. H&R Block also offers adjacent Tax Plus products and services. 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,” “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, 2015 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 https://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 The company reports adjusted financial performance, which it believes is a better indication of the company’s recurring operations. The company also reports EBITDA (earnings before interest, taxes, depreciation and amortization), a non-GAAP financial measure, which the company finds relevant when measuring its performance. See “About Non-GAAP Financial Information” below for more information regarding financial measures not prepared in accordance with generally accepted accounting principles (GAAP).

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

⁴ See the company’s most recent Forms 10-K and 10-Q filed with the Securities and Exchange Commission for more information regarding Sand Canyon Corporation and related loss contingencies.

Full release with tables available for download here