H&R Block (HRB) Announces New Capital Structure, Approves $3.5B Common Stock Buyback

H&R Block (NYSE: HRB) announced that it has successfully closed its transaction to divest H&R Block Bank, selling certain assets and transferring certain liabilities, including all of its deposits, to BofI Federal Bank ("BofI") a full month earlier than expected. At the time of the closing, the bank made a one-time cash payment to BofI of approximately $419 million, which is approximately equal to the carrying value of the liabilities (including all deposit liabilities) assumed by BofI. The bank merged into its parent company, surrendered its bank charter, and ceased to exist as a bank. The closing of the bank transaction represents the conclusion of a multi-year effort to refocus the company on its core tax business and to no longer be regulated as a savings and loan holding company.

In connection with the closing, and consistent with the description of the transaction in the company's previous public disclosures, the parties have entered into a program management agreement under which BofI will serve as the bank for H&R Block-branded financial services products: Emerald Prepaid MasterCard®, Refund Transfers and Emerald Advance® lines of credit offered through H&R Block's retail and digital channels.

H&R Block reaffirms it expects the ongoing annual net financial impact to be dilutive by approximately $0.08 to $0.10 per share beginning in fiscal year 2016. The company also expects to incur one-time charges for transaction and related costs of approximately $0.02 to $0.03 per share in fiscal year 2016. All per share amounts are based on fully diluted shares outstanding as of Aug. 31, 2015.

"We are very pleased that we were able to close our transaction with BofI in time to facilitate a smooth transition of our financial services products for the upcoming tax season," said Bill Cobb, H&R Block's president and chief executive officer. "We've selected a great partner in BofI, and we look forward to working with them on award winning value offerings to clients for many years to come. This closing is the final step in divesting our non-core assets and focusing our business back on what we do best, taxes."

Final terms and conditions of the program management agreement are consistent with previous disclosures. Additional information regarding the bank divestiture transaction is included in a Form 8-K filed with the Securities and Exchange Commission (SEC) today, as well as the company's previous public disclosures.

New Capital Structure
H&R Block intends to establish a new capital structure that it believes appropriately reflects the capital needs of the business and positions the company for continued shareholder value creation. Included in this plan is a $3.5 billion share repurchase program, a new committed line of credit ("CLOC"), and incremental debt. The new structure is intended to enable significant return of capital to shareholders in the form of dividends and share repurchases. The company has paid 211 consecutive quarterly dividends, which represents a dividend paid every quarter since the company went public in 1962. Additionally, since May 2011, the company has repurchased 12 percent of its total shares outstanding and has returned approximately $1.4 billion to shareholders in the form of dividends and share repurchases.

"We have a long tradition of returning capital to shareholders, and I'm pleased that we can now continue that tradition," said Bob Gerard, the company's Chairman of the Board. "Through a balanced and appropriate capital structure, we are positioned to consistently generate significant free cash flow, maintain seasonal access to liquidity, and continue to deliver reliable and meaningful shareholder returns."

Share Repurchase Program
Consistent with its long-standing philosophy on shareholder returns, the company announced today that its Board of Directors has approved a new $3.5 billion share repurchase program, effective through June 2019. The company currently intends to repurchase its shares over time through a combination of the tender offer referred to below and open market purchases, and may also repurchase shares through private transactions, exchange offers, additional tender offers or other means. The company intends to fund this program through available cash, borrowings and incremental debt as described below, and funds from ongoing business operations.

Overall Leverage Capacity
H&R Block believes it has capacity to increase its leverage while maintaining investment grade credit ratings metrics. The company currently believes that a ratio of adjusted debt to adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of approximately 2.5x to 3.0x would be consistent with the company's previously stated intention to maintain investment grade ratings metrics. The company calculates adjusted debt to adjusted EBITDA using a fiscal four-quarter rolling average of total outstanding gross debt (both short-term and long-term) and includes adjustments for items such as operating leases which are not capitalized on the company's balance sheet.

Near-Term Capital Structure Changes
As part of the new capital structure described above, the company intends to take near-term action to take on borrowings and incremental debt and repurchase shares of its common stock through a "modified Dutch auction" tender offer, which will be contingent upon, among other customary items, the company replacing its existing Committed Line of Credit with a new credit facility.

"Modified Dutch Auction" Tender Offer
Under the new share repurchase program, the company announced today that it plans to launch a "modified Dutch auction" tender offer to purchase up to $1.5 billion of its common stock, at a price per share of not less than $32.25 and not greater than $37.00. The tender offer will be contingent upon, among other customary items, the successful closing of a new Committed Line of Credit, as described below, and satisfaction of other customary conditions. Additional details regarding the pricing and other terms will be provided upon formal commencement of the tender offer.

"The planned tender offer announced today demonstrates our confidence in the future of our business and our long-standing commitment to create shareholder value," said Cobb.

As of Aug. 31, 2015, H&R Block had approximately 276.4 million shares outstanding. The company intends to use a combination of available cash, borrowings and incremental debt to fund the tender offer and related expenses.

New Committed Line of Credit
H&R Block also announced today that it intends to replace its existing five-year $1.5 billion Committed Line of Credit. The new CLOC facility amount and terms will be determined based on market conditions at the time of closing of the new CLOC. As described above, the tender offer will be contingent upon, among other customary items, the successful closing of the new CLOC and as such, the company intends to complete the new CLOC prior to the completion of the tender offer. It is also the company's intention to utilize the new CLOC to fund its future seasonal working capital needs rather than issuing commercial paper.

Incremental Debt
H&R Block also intends to incur incremental debt through other debt issuances as part of the capital structure changes announced today. The amount and composition of the incremental debt will be dependent on market conditions and capital allocation considerations at the time the debt is incurred. The company intends to use the incremental debt to fund stock repurchases under the share repurchase program announced today.

Information Regarding the Planned Tender Offer
This press release is for informational purposes only and is not an offer to buy or the solicitation of an offer to sell any shares of the company's common stock. The planned tender offer described in this press release has not yet commenced, and there can be no assurances that the company will commence the tender offer on the terms described in this press release or at all. If the company commences the tender offer, the tender offer will be made solely by an Offer to Purchase and the related Letter of Transmittal, as they may be amended or supplemented. Shareholders and investors are urged to read the company's Tender Offer Statement on Schedule TO, which is expected to be filed with the SEC in connection with the tender offer and will include as exhibits an Offer to Purchase, a related Letter of Transmittal and other offer materials, as well as any amendments or supplements to the Schedule TO when they become available, because they will contain important information. If the company commences the tender offer, it will file each of the documents referenced in this paragraph with the SEC, and, when available, investors may obtain them for free from the SEC at its website (www.sec.gov) or from the company's information agent in connection with the tender offer.

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