H&R Block’s Net Loss From Continuing Operations Improves 18 Percent; 11 Percent Improvement on Adjusted Basis

H&R Block, Inc. (NYSE: HRB) today announced financial results for its fiscal second quarter ended Oct. 31, 2012. Due to the seasonality of its U.S. tax business, the company typically reports a second quarter operating loss.

Second Quarter 2013 Highlights1

  • Total revenues grew 6 percent to $137 million due primarily to a strong tax season in Australia
  • Net loss from continuing operations improved 18 percent to $101 million, or $0.37 per share2
  • Adjusted net loss from continuing operations improved 11 percent to $100 million, or $0.37 per share
  • The company remains on pace to deliver $85 to $100 million of pretax earnings from cost reduction initiatives in fiscal 2013

Second Quarter Results From Continuing Operations

Actual Adjusted*
in millions, except EPS Q2
FY13
Q2
FY12
Change Q2
FY13
Q2
FY12
Change
Revenue $137 $129 6% $137 $129 6%
EBITDA* ($117) ($159) 26% ($117) ($141) 17%
Pretax Income (Loss) ($162) ($204) 20% ($163) ($186) 13%
Net Income (Loss) ($101) ($123) 18% ($100) ($112) 11%
Shares Outstanding 271.1 299.9 -10% 271.1 299.9 -10%
EPS ($0.37) ($0.41) 10% ($0.37) ($0.37) 0%

*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).

Company Perspective

“I’m very pleased with the improvement in our second quarter results, which reflect savings from our cost reduction initiatives and a strong tax season in Australia,” said Bill Cobb, H&R Block’s President and CEO. “The U.S. tax season is right around the corner and we believe we’re on pace to deliver significant earnings and margin expansion in fiscal 2013.”

Business Segment Results and Highlights

Tax Services

  • Revenues grew by $9 million, or 7 percent, to $130 million, primarily due to an 8 percent increase in tax returns prepared in Australia
  • Pretax loss improved by 25 percent or $44 million, to $130 million
  • Adjusted pretax loss improved by 17 percent or $26 million, to $130 million primarily due to lower field wages and occupancy costs resulting from the company’s cost reduction initiatives

Corporate

  • Revenues declined by $1 million due to lower interest income from H&R Block Bank’s shrinking mortgage loan portfolio
  • Pretax loss increased by $2 million, or 7 percent, to $32 million

Second Quarter Results from Discontinued Operations

  • Net loss improved by $15 million to $4 million, as prior year results included a $12 million after-tax provision for estimated losses on representation and warranty claims at Sand Canyon Corporation (SCC), a separate legal entity from H&R Block, Inc.
  • SCC received new claims during the quarter for alleged breaches of representations and warranties in the principal amount of $10 million
  • SCC reviewed claims in the principal amount of $257 million during the quarter; no losses were charged against SCC’s accrual for contingent losses related to representations and warranties during the quarter
  • $28 million of claims remained subject to review at Oct. 31, 2012
  • SCC’s accrual for contingent losses related to representations and warranties remained essentially unchanged at $129 million

Dividend

A previously announced quarterly cash dividend of 20 cents per share is payable on Jan. 2, 2013 to shareholders of record as of Dec. 10, 2012. The Jan. 2 payment marks the company’s 201st consecutive quarterly dividend.

Investor Conference

At 8:15 a.m. EST today, the company will hold its investor conference in New York City. H&R Block’s senior leaders will outline the company’s growth strategies and outlook.

The event will be broadcast live in a listen-only format for the media and public on H&R Block’s investor relations website at http://investors.hrblock.com. A replay will be available on the company’s website at approximately 1:30 p.m. EST on Dec. 6 and continuing until Feb. 28, 2013.

About H&R Block
H&R Block, Inc. (NYSE: HRB) is the world’s largest tax services provider, having prepared more than 600 million tax returns worldwide since 1955. In fiscal 2012, H&R Block had revenues of $2.9 billion and prepared 25.6 million tax returns worldwide. Tax return preparation services are provided in company-owned and franchise retail tax offices by nearly 100,000 professional tax preparers, 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 Online Press Center.

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, 2012 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. 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 prior year period.

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

H&R BLOCK
KEY OPERATING RESULTS
Unaudited, amounts in thousands, except per share data
Three months ended October 31,
Revenues Income (loss)
2012 2011 2012 2011
Tax Services $ 129,819 $ 121,018 $ (130,109 ) $ (173,966 )
Corporate and Eliminations 7,444 8,176 (32,179 ) (29,963 )
$ 137,263 $ 129,194 (162,288 ) (203,929 )
Income tax benefit (61,089 ) (80,916 )
Net loss from continuing operations (101,199 ) (123,013 )
Net loss from discontinued operations (4,044 ) (18,711 )
Net loss $ (105,243 ) $ (141,724 )
Basic and diluted loss per share:
Net loss from continuing operations $ (0.37 ) $ (0.41 )
Net loss from discontinued operations (0.02 ) (0.06 )
Net loss $ (0.39 ) $ (0.47 )
Basic and diluted shares 271,145 299,895
Six months ended October 31,
Revenues Income (loss)
2012 2011 2012 2011
Tax Services $ 220,072 $ 212,443 $ (271,014 ) $ (343,449 )
Corporate and Eliminations 13,680 17,374 (60,543 ) (61,081 )
$ 233,752 $ 229,817 (331,557 ) (404,530 )
Income tax benefit (124,708 ) (162,362 )
Net loss from continuing operations (206,849 ) (242,168 )
Net loss from discontinued operations (5,835 ) (74,654 )
Net loss $ (212,684 ) $ (316,822 )
Basic and diluted loss per share:
Net loss from continuing operations $ (0.76 ) $ (0.80 )
Net loss from discontinued operations (0.02 ) (0.25 )
Net loss $ (0.78 ) $ (1.05 )
Basic and diluted shares 274,150 302,693

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

On October 25, 2012, we issued $500.0 million of 5.50% Senior Notes. The Senior Notes are due November 1, 2022, and are not redeemable by the bondholders prior to maturity. On October 25, 2012, we provided notice to the trustee of our intention to redeem the entire principal amount of the $600.0 million Senior Notes due in January 2013. The redemption settled on November 26, 2012 at a price of $623.0 million. Proceeds of the $500.0 million Senior Notes and other cash balances were used to repay the $600.0 million Senior Notes.

H&R BLOCK
CONSOLIDATED BALANCE SHEETS
Unaudited, amounts in thousands, except per share data
October 31, October 31, April 30,
2012 2011 2012
ASSETS
Current assets:
Cash and cash equivalents $ 1,260,901 $ 572,611 $ 1,944,334
Cash and cash equivalents – restricted 38,667 37,524 48,100
Receivables, net 124,511 128,062 193,858
Prepaid expenses and other current assets 282,874 218,054 314,702
Assets of discontinued operations, held for sale - 729,153 -
Total current assets 1,706,953 1,685,404 2,500,994
Mortgage loans held for investment, net 370,850 450,137 406,201
Investments in available-for-sale securities 388,640 306,310 371,315
Property and equipment, net 285,335 257,870 252,985
Intangible assets, net 262,296 262,106 264,451
Goodwill 434,492 438,403 427,566
Other assets 448,164 576,283 426,055
Total assets $ 3,896,730 $ 3,976,513 $ 4,649,567
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Customer banking deposits $ 790,106 $ 723,318 $ 827,549
Accounts payable, accrued expenses and other current liabilities 406,447 581,069 567,079
Accrued salaries, wages and payroll taxes 39,345 46,588 163,992
Accrued income taxes 95,126 135,858 336,374
Commercial paper borrowings - 39,990 -
Current portion of long-term debt 600,678 30,735 631,434
Federal Home Loan Bank borrowings - 25,000 -
Liabilities of discontinued operations, held for sale - 199,030 -
Total current liabilities 1,931,702 1,781,588 2,526,428
Long-term debt 906,125 1,009,196 409,115
Other noncurrent liabilities 365,970 322,907 388,132
Total liabilities 3,203,797 3,113,691 3,323,675
Stockholders’ equity:
Common stock, no par, stated value $.01 per share 3,166 3,994 3,979
Additional paid-in capital 748,298 799,270 796,784
Accumulated other comprehensive income 8,685 4,359 12,145
Retained earnings 795,707 2,080,162 2,523,997
Less treasury shares, at cost (862,923 ) (2,024,963 ) (2,011,013 )
Total stockholders’ equity 692,933 862,822 1,325,892
Total liabilities and stockholders’ equity $ 3,896,730 $ 3,976,513 $ 4,649,567
H&R BLOCK
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited, amounts in thousands, except per share data
Three months ended
October 31,
Six months ended
October 31,
Three months ended
July 31,
2012 2011 2012 2011 2012 2011
Revenues:
Service revenues $ 116,438 $ 109,983 $ 196,334 $ 193,003 $ 79,896 $ 83,020
Product and other revenues 10,966 9,290 17,686 16,553 6,720 7,263
Interest income 9,859 9,921 19,732 20,261 9,873 10,340
137,263 129,194 233,752 229,817 96,489 100,623
Expenses:
Cost of revenues:
Compensation and benefits 54,764 61,438 94,349 108,659 39,585 47,221
Occupancy and equipment 82,398 86,551 162,349 170,054 79,951 83,503
Depreciation and amortization of property and equipment 17,927 16,652 34,232 33,124 16,305 16,472
Provision for bad debt and loan losses 3,725 8,200 8,370 15,491 4,645 7,291
Interest 23,390 22,873 45,467 45,809 22,077 22,936
Other 29,807 31,899 60,668 67,060 30,861 35,161
212,011 227,613 405,435 440,197 193,424 212,584
Impairment of goodwill - 4,257 - 4,257 - -
Selling, general and administrative expenses 90,327 103,755 165,805 196,408 75,478 92,653
302,338 335,625 571,240 640,862 268,902 305,237
Operating loss (165,075 ) (206,431 ) (337,488 ) (411,045 ) (172,413 ) (204,614 )
Other income, net 2,787 2,502 5,931 6,515 3,144 4,013
Loss from continuing operations before tax benefit (162,288 ) (203,929 ) (331,557 ) (404,530 ) (169,269 ) (200,601 )
Income tax benefit (61,089 ) (80,916 ) (124,708 ) (162,362 ) (63,619 ) (81,446 )
Net loss from continuing operations (101,199 ) (123,013 ) (206,849 ) (242,168 ) (105,650 ) (119,155 )
Net loss from discontinued operations (4,044 ) (18,711 ) (5,835 ) (74,654 ) (1,791 ) (55,943 )
Net loss $ (105,243 ) $ (141,724 ) $ (212,684 ) $ (316,822 ) $ (107,441 ) $ (175,098 )
Basic and diluted loss per share:
Net loss from continuing operations $ (0.37 ) $ (0.41 ) $ (0.76 ) $ (0.80 ) $ (0.38 ) $ (0.39 )
Net loss from discontinued operations (0.02 ) (0.06 ) (0.02 ) (0.25 ) (0.01 ) (0.18 )
Net loss $ (0.39 ) $ (0.47 ) $ (0.78 ) $ (1.05 ) $ (0.39 ) $ (0.57 )
Basic and diluted shares 271,145 299,895 274,150 302,693 277,155 305,491
H&R BLOCK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, amounts in thousands
Six months ended October 31,
2012 2011
Net cash used in operating activities $ (567,036 ) $ (582,628 )
Cash flows from investing activities:
Purchases of available-for-sale securities (67,474 ) (155,159 )
Sales, maturities and payments received on available-for-sale securities 53,098 23,249
Principal repayments on mortgage loans held for investment, net 23,608 22,978
Purchases of property and equipment, net (60,720 ) (40,510 )
Payments made for acquisitions of businesses and intangibles, net (10,442 ) (8,164 )
Proceeds from sales of businesses, net 943 37,036
Franchise loans:
Loans funded (20,670 ) (27,682 )
Payments received 8,303 7,447
Other, net 9,275 13,685
Net cash used in investing activities (64,079 ) (127,120 )
Cash flows from financing activities:
Repayments of commercial paper - (37,989 )
Proceeds from commercial paper - 77,979
Repayments of long-term debt (30,831 ) -
Proceeds from issuance of long-term debt 497,185 -
Customer banking deposits, net (37,913 ) (129,285 )
Dividends paid (108,428 ) (91,446 )
Repurchase of common stock, including shares surrendered (339,919 ) (180,222 )
Proceeds from exercise of stock options, net 1,288 (430 )
Other, net (33,004 ) (28,057 )
Net cash used in financing activities (51,622 ) (389,450 )
Effects of exchange rates on cash (696 ) (6,035 )
Net decrease in cash and cash equivalents (683,433 ) (1,105,233 )
Cash and cash equivalents at beginning of the period 1,944,334 1,677,844
Cash and cash equivalents at end of the period $ 1,260,901 $ 572,611
Supplementary cash flow data:
Income taxes paid, net $ 48,201 $ 122,832
Interest paid on borrowings 42,106 27,748
Interest paid on deposits 2,683 3,323
Transfers of foreclosed loans to other assets 5,312 4,438
Accrued additions to property and equipment 10,273 10,798
H&R BLOCK
NON-GAAP FINANCIAL MEASURES
Unaudited, amounts in thousands, except per share amounts
Three months ended October 31, Six months ended October 31,
EBITDA (1) 2012 2011 2012 2011
Net loss from continuing operations – as reported $ (101,199 ) $ (123,013 ) $ (206,849 ) $ (242,168 )
Add back :
Income taxes (61,089 ) (80,916 ) (124,708 ) (162,362 )
Interest expense 23,390 22,873 45,467 45,809
Depreciation and amortization 22,053 22,089 42,604 43,621
(15,646 ) (35,954 ) (36,637 ) (72,932 )
EBITDA of continuing operations (116,845 ) (158,967 ) (243,486 ) (315,100 )
Adjustments:
Loss contingencies – litigation charges (2,451 ) 8,193 (4,753 ) 23,357
Impairment of goodwill and intangibles 1,421 8,237 1,421 8,237
Severance 1,558 526 1,057 2,110
Loss (gain) on sales of tax offices (754 ) 806 (524 ) 912
(226 ) 17,762 (2,799 ) 34,616
Adjusted EBITDA of continuing operations $ (117,071 ) $ (141,205 ) $ (246,285 ) $ (280,484 )
Non-GAAP Pretax Results
Pretax loss from continuing operations – as reported $ (162,288 ) $ (203,929 ) $ (331,557 ) $ (404,530 )
Add back :
Loss contingencies – litigation charges (2,451 ) 8,193 (4,753 ) 23,357
Impairment of goodwill and intangibles 1,421 8,237 1,421 8,237
Severance 1,558 526 1,057 2,110
Loss (gain) on sales of tax offices (754 ) 806 (524 ) 912
(226 ) 17,762 (2,799 ) 34,616
Pretax loss from continuing operations – as adjusted $ (162,514 ) $ (186,167 ) $ (334,356 ) $ (369,914 )
Non-GAAP After-Tax Results
Net loss from continuing operations – as reported $ (101,199 ) $ (123,013 ) $ (206,849 ) $ (242,168 )
Add back (net of tax) :
Loss contingencies – litigation charges (1,506 ) 4,926 (2,906 ) 14,124
Impairment of goodwill and intangibles 869 4,981 869 4,981
Severance 951 315 646 1,276
Loss (gain) on sales of tax offices (460 ) 487 (320 ) 551
Discrete tax items 1,472 79 4,173 (2,451 )
1,326 10,788 2,462 18,481
Net loss from continuing operations – as adjusted $ (99,873 ) $ (112,225 ) $ (204,387 ) $ (223,687 )
(1) Earnings before interest, taxes, depreciation and amortization.
Three months ended October 31, Six months ended October 31,
Non-GAAP EPS 2012 2011 2012 2011
EPS from continuing operations – as reported $ (0.37 ) $ (0.41 ) $ (0.76 ) $ (0.80 )
Add back :
Loss contingencies – litigation charges (0.01 ) 0.02 (0.01 ) 0.05
Impairment of goodwill and intangibles - 0.02 - 0.02
Severance - - - -
Loss (gain) on sales of tax offices - - - -
Discrete tax items 0.01 - 0.02 (0.01 )
- 0.04 0.01 0.06
EPS from continuing operations – as adjusted $ (0.37 ) $ (0.37 ) $ (0.75 ) $ (0.74 )
Non-GAAP Pretax Results – Tax Services segment
Pretax loss – as reported $ (130,109 ) $ (173,966 ) $ (271,014 ) $ (343,449 )
Add back :
Loss contingencies – litigation charges (2,451 ) 8,192 (4,753 ) 23,356
Impairment of goodwill and intangibles 1,421 8,237 1,421 8,237
Severance 1,593 526 1,092 2,110
Loss (gain) on sales of tax offices (754 ) 806 (524 ) 912
(191 ) 17,761 (2,764 ) 34,615
Pretax loss – as adjusted $ (130,300 ) $ (156,205 ) $ (273,778 ) $ (308,834 )
Supplemental Information
Stock-based compensation expense:
Pretax $ 5,384 $ 4,486 $ 7,737 $ 7,824
After-tax 3,299 2,706 4,730 4,731
Amortization of intangible assets:
Pretax $ 4,126 $ 5,435 $ 8,372 $ 10,497
After-tax 2,536 3,277 5,118 6,348

 

Investor Relations:
Derek Drysdale 816-854-4513 derek.drysdale@hrblock.com

Media Relations:
Gene King 816.854.4287 gene.king@hrblock.com


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