Investor Relations


Press Release Details

H&R Block Reports 17 Cent Per Share First Quarter Loss

August 28, 2001
KANSAS CITY, Mo., Aug 28, 2001 /PRNewswire/ --

Strong Mortgage Performance Leads Operating Results

H&R Block Inc. (NYSE: HRB) today reported a net loss of $30.8 million for the quarter ended July 31, 2001, or 17 cents per basic and diluted share, compared with $51.7 million, or 28 cents per basic and diluted share, last year, representing a 40.5 percent improvement. Revenues for the first quarter increased 6.6 percent to $324.1 million, compared with $304.1 million for the same period last year.

"This quarter's operating improvement is due primarily to outstanding performance in our mortgage operations," said Mark A. Ernst, H&R Block's president and chief executive officer. "Strength in all aspects of the business -- retail operations, servicing and wholesale origination -- drove record results in this business segment. In addition, the quality of the loans originated by our mortgage businesses resulted in exceptional sale proceeds in the secondary market.

"Prudent expense management within the U.S. tax segment also contributed to results this quarter," Ernst added. "Even with cautious expense management, we're highly focused on preparations for the upcoming tax season and have a number of strategic initiatives in development. Our alliance with AOL Time Warner, expansion of our successful Employer Solutions program, and increased ability to serve our clients' financial needs typify our efforts to deliver a good year across all of our business units."

Fiscal 2002 first quarter results reflect the company's previously announced early adoption of Statement of Financial Accounting Standards No. 141 and 142 (SFAS 141 and 142) related to business combinations, goodwill and other intangible assets, which resulted in the elimination of goodwill and certain other intangible asset amortization as of May 1, 2001. The adoption of SFAS 141 and 142 represents $11.4 million, or 6 cents per share, of the improvement over the prior year first quarter.

Cash earnings improved 31.4 percent over the prior year's quarter with a loss of $21.4 million, or 12 cents per basic and diluted share, compared with $31.1 million, or 17 cents per basic and diluted share last year. The company defines cash earnings as net losses from operations excluding the after-tax effect of amortization expense of acquired intangible assets.

In the first quarter, the company purchased 2.04 million of its shares of common stock for approximately $67.6 million, or an average cost of $33.17 per share.

In the quarter, the company's performance as measured by earnings before interest (including interest expense on acquisition debt, investment income and interest allocated to operating business units), taxes, depreciation and amortization (EBITDA), improved from a negative $19 million last year to a positive $849,000.

Tax Operations

H&R Block's U.S. tax operations reported revenues of $20 million, an increase of $8.6 million, or 76 percent, compared with $11.4 million in the same quarter a year ago. Higher volumes and average fees from off-season tax preparation, revenues from the company's Peace of Mind service, and growth in its e-commerce business drove the increased revenues.

The pretax loss for the segment decreased $4.4 million to $81.2 million, compared with a pretax loss of $85.6 million last year. The adoption of SFAS 141 and 142 represents $2.9 million of the improvement over last year. The segment's $1.5 million improvement in operating performance was driven by the higher revenues, partially offset by investment in technology and associate training for the upcoming tax season. Also contributing to the improved results was the company's efforts to control expenses across operations. EBITDA improved $862,000 to a negative $69.2 million, or 1.2 percent over the prior year.

The pretax loss in International tax operations improved 11 percent. The adoption of SFAS 141 and 142 represents $159,000 of the improvement. The improvement in operating results was driven primarily by better cost controls in Canada. International tax operations reported a 5.8 percent improvement in EBITDA to a negative $4.9 million compared with a negative $5.2 million last year.

Mortgage Operations

Mortgage operations, which primarily includes Option One Mortgage Corporation and H&R Block Mortgage Corporation, reported pretax earnings rose to $66.8 million, compared with $21.5 million last year. The adoption of SFAS 141 and 142 accounts for $3.4 million of the improvement over the prior year. Revenues rose 84 percent to $148.3 million.

Higher loan origination and servicing volume, improved pricing on loans generated, and contributions from retail mortgage combined for an outstanding quarter. In addition, higher volumes helped drive a 20 percent decline in the cost of origination, contributing to the 127 basis point year-over-year improvement in operating profit margin. Operating profit margin for the first quarter was 2.94 percent compared with 1.67 percent in last year's first quarter. Operating profit margin is defined as pretax earnings before amortization divided by mortgage fundings. EBITDA increased $42.9 million to $69.9 million, or 158.6 percent over the prior year.

"Option One benefited from outstanding management in a strong market environment and improved pricing for loan sales," Ernst said. "In addition, Option One's servicing business continues to grow, increasing revenues 41.6 percent over the prior year."

Option One and H&R Block Mortgage originated $2.6 billion in loans during the first quarter, an increase of 89.3 percent over the previous year's quarter. Option One's ending servicing portfolio was $19.2 billion, compared with $14.7 billion last year.

"Our retail mortgage business achieved its first profitable quarter, contributing 15 percent to the mortgage segment's year-over-year improvement," Ernst said. "H&R Block tax clients represented 61.2 percent of our retail mortgage loans, demonstrating that this client base delivers a unique competitive advantage and that our strategy of cross-selling products and services is working."

The company expects continued strength in its mortgage segment through the second quarter of this fiscal year.

Investment Services

As anticipated, the poor market environment negatively affected H&R Block's investment services operations, which consists primarily of H&R Block Financial Advisors Inc. First quarter revenues totaled $68.9 million compared with $130.7 million last year. The segment reported a pretax loss of $6.1 million compared with pretax earnings of $11.7 million last year. The adoption of SFAS 141 and 142 negatively impacted the change over the prior year by $4.3 million. Investment services reported a decline in EBITDA to $6.8 million from $27.5 million in the prior year.

"Despite a difficult market environment, we continue to make key investments in this business to develop the capabilities needed to execute our strategy," Ernst said.

Business Services

Business services, which primarily includes RSM McGladrey, reported a pretax loss of $2.2 million compared with $3.2 million last year. Revenues increased 5.1 percent to $80 million compared with $76.1 million last year. The adoption of SFAS 141 and 142 represents $4.2 million of the improvement over the prior year. The increased operating loss was due primarily to off- season losses from firms acquired during fiscal 2001 as well as normal operating cost increases. Business services reported a decline in EBITDA to $3.1 million, compared with $6 million last year.

Other

Interest expense on acquisition debt decreased $5.9 million due to lower interest rates. Effective May 1, 2001, the company adopted a new methodology for allocation of corporate services and support costs to business units. This change was made in an effort to more accurately reflect each business line's performance. Prior year results have been restated to reflect the new methodology.

"Based on the strength of mortgage operations, we currently expect that earnings per share growth for fiscal 2002, excluding the impact of accounting changes, will be within the middle to upper end of our guidance range of 13 to 18 percent," Ernst said. "We expect overall company revenue growth to reach the low end of our growth target range of 10 to 15 percent per year."

As announced in June, H&R Block's Board of Directors declared a quarterly dividend of 16 cents per share payable Oct. 1, 2001, to shareholders of record Sept. 10, 2001. A conference call with H&R Block management discussing first quarter results will be conducted live today at 5 p.m. EDT and may be accessed at www.hrblock.com .

Except for historical information contained herein, the matters set forth in this press release are forward-looking statements based upon current information and expectations. Such statements speak only as of the date on which they are made, are not guarantees of future performance, and involve certain risks, uncertainties and assumptions that could cause actual results to differ materially from what is expressed, implied or forecast in such forward-looking statements. Such differences could be caused by a number of factors, including, but not limited to, the uncertainties that the company will achieve its revenue, earnings and earnings per share goals for fiscal year 2002 and that actual financial results for fiscal year 2002 will fall within the guidance provided by the company; changes in economic, political or regulatory environments; changes in competition and the effects of such changes; litigation involving the company; and risks described from time to time in reports and registration statements filed by H&R Block Inc. and its subsidiaries with the Securities and Exchange Commission. Readers should take these factors into account in evaluating such forward-looking statements.

About H&R Block:

H&R Block Inc. is a diversified company with subsidiaries providing a wide range of financial products and services. In 2001, H&R Block served 19.2 million taxpayers -- more than any tax or accounting firm -- through its more than 10,400 offices located in the United States, Canada, Australia and the United Kingdom. H&R Block served another 2.3 million tax clients through its award-winning TaxCut(R) software program and through its online tax preparation services. Investment services and securities products are offered through H&R Block Financial Advisors Inc., member NYSE, SIPC. H&R Block, Inc. is not a registered broker-dealer. H&R Block Mortgage Corporation and Option One Mortgage Corporation offer a wide range of home mortgage products. RSM McGladrey Inc. is a national accounting, tax and consulting firm with 100 offices nationwide, as well as an affiliation with 550 offices in 75 countries as the U.S. member of RSM International. Additional information is available on the company's Web site at www.hrblock.com .

                                  H&R BLOCK, INC.
                       CONSOLIDATED STATEMENTS OF OPERATIONS
              Unaudited, amounts in thousands, except per share data

                                               Three months ended July 31,
                                               2001        2000        1999

     Revenues                                $324,125    $304,110    $121,560

     Loss before income tax benefit           (51,738)    (89,993)    (59,797)

     Net loss                                $(30,784)   $(51,746)   $(37,074)

     Basic net earnings (loss) per share:

      Net loss                                 $(0.17)     $(0.28)     $(0.19)

      Basic shares outstanding                183,859     186,522     195,426

     Notes to Consolidated Statements of Operations

     On June 20, 2001, the Company's Board of Directors declared a two-for-one
     stock split of its Common Stock in the form of a 100% stock distribution
     effective August 1, 2001, to shareholders of record as of the close of
     business on July 10, 2001.  Basic net earnings (loss) per share is based
     on the weighted average number of shares outstanding during each period.
     All quarters presented have been adjusted to reflect the stock split.

     Reclassifications have been made to prior years to conform with current
     period presentation.

     In July 2001, the Financial Accounting Standards Board issued Statement
     of Financial Accounting Standards No. 141, "Business Combinations," and
     No. 142, "Goodwill and Other Intangible Assets" (SFAS 141 & 142).  SFAS
     141 addresses financial accounting and reporting for business
     combinations and replaces APB Opinion No. 16, "Business Combinations"
     (APB 16).  SFAS 141 no longer allows the pooling of interests method of
     accounting for acquisitions, provides new recognition criteria for
     intangible assets and carries forward without reconsideration the
     guidance in APB 16 related to the application of the purchase method of
     accounting.  SFAS 142 addresses financial accounting and reporting for
     acquired goodwill and other intangible assets and replaces APB Opinion
     No. 17, "Intangible Assets" (APB 17).  SFAS 142 addresses how intangible
     assets should be accounted for upon their acquisition and after they have
     been initially recognized in the financial statements.  As of May 1,
     2001, the Company elected early adoption of both SFAS 141 & 142. The
     implementation of these standards had the effect of reducing amortization
     expense of acquired intangible assets by $15.6 million during the first
     quarter of fiscal year 2002.

     On December 1, 1999, the Company completed the acquisition of the
     outstanding capital stock of Olde Financial Corporation and Financial
     Marketing Services, Inc. (collectively, OLDE).  The purchase price was
     $850 million in cash plus net tangible book value payments of $48.5
     million.  The acquisition was accounted for as a purchase and,
     accordingly, OLDE's results are included since the date of the
     acquisition.  The acquisition was funded with short-term borrowings and
     the issuance of $500 million in Senior Notes in the fourth quarter of
     fiscal 2000.

     On August 2, 1999, the Company, through a subsidiary, RSM McGladrey,
     Inc., completed the purchase of substantially all of the non-attest
     assets of McGladrey & Pullen, LLP.  The purchase price was $240 million
     in cash payments over four years and the assumption of certain pension
     liabilities with a present value of $52.7 million.  The acquisition was
     accounted for as a purchase, and accordingly, results are included since
     the date of acquisition.

     During the three months ended July 31, 2001, 2000 and 1999, the Company
     issued shares of its common stock pursuant to provisions for exercise of
     the Company's stock option plans as follows:  2001 - 1,528,611 shares;
     2000 - 36,300 shares; 1999 - 392,086 shares.  During the same periods,
     the Company reacquired shares of its common stock as follows:
     2001 - 2,037,400 shares at an aggregate cost of $67,583,000;
     2000 - 13,063,000 shares at an aggregate cost of $213,107,000.


     H&R BLOCK, INC.
     SELECTED OPERATIONAL INFORMATION
     Unaudited, amounts in thousands

                                           Three months ended July 31,
                                           Revenues        Earnings (loss)
                                         2001      2000      2001      2000

      U.S. tax operations              $19,979   $11,350  $(81,168) $(85,562)
      International tax operations       4,832     4,899    (5,653)   (6,355)
      Mortgage operations              148,325    80,600    66,779    21,530
      Investment services               68,925   130,667    (6,098)   11,683
      Business services                 79,982    76,097    (2,171)   (3,234)
      Unallocated corporate              2,082       497    (5,439)   (4,541)
      Interest expense on acquisition
       debt                                -         -     (21,398)  (27,288)
                                      $324,125  $304,110   (55,148)  (93,767)
      Investment income, net                                 1,120     2,719
      Intercompany interest*                                 2,290     1,055
                                                           (51,738)  (89,993)
      Income tax benefit                                   (20,954)  (38,247)
      Net loss                                            $(30,784) $(51,746)

      * Intercompany interest represents net interest expense charged to
      financial related businesses for corporate cash that was borrowed to
      fund their operating activities and net unallocated interest expense
      attributable to commitment fees on the unused portion of the Company's
      $1.86 billion credit facility.


    H&R Block, Inc.
    Consolidated Balance Sheets
    Unaudited, amounts in thousands, except share data

                                                           July 31,
                                                    2001              2000
                                     ASSETS
    CURRENT ASSETS:
         Cash and cash equivalents                $251,850          $219,718
         Marketable securities --
          available-for-sale                         1,500            20,077
         Marketable securities -- trading          176,352            44,359
         Receivables from customers,
          brokers, dealers and clearing
          organizations, less allowance for
          doubtful accounts of $1,735 and $801
                                                 1,262,193         2,738,536
         Receivables, less allowance for
          doubtful accounts of
          $42,877 and $56,121                      277,977           342,446
         Prepaid expenses and other
          current assets                           244,466           196,404
            TOTAL CURRENT ASSETS                 2,214,338         3,561,540

    INVESTMENTS AND OTHER ASSETS:
         Investments in available-for-
          sale marketable securities               250,252           256,990
         Excess of cost over fair value
          of net tangible assets
          acquired, net of amortization          1,043,333         1,071,053
         Other                                     248,315           207,688
                                                 1,541,900         1,535,731
    PROPERTY AND EQUIPMENT, at cost less
     accumulated
     depreciation and amortization                 278,601           291,949
                                                $4,034,839        $5,389,220

                      LIABILITIES AND STOCKHOLDERS' EQUITY
    CURRENT LIABILITIES:
         Notes payable                            $373,335          $640,076
         Accounts payable to customers,
          brokers and dealers                    1,007,318         2,398,795
         Accounts payable, accrued
          expenses and deposits                    248,693           193,217
         Accrued salaries, wages and
          payroll taxes                             98,872            66,910
         Accrued taxes on earnings                 215,929           126,001
         Current portion of long-term
          debt                                      52,428            70,582
             TOTAL CURRENT LIABILITIES           1,996,575         3,495,581

    LONG-TERM DEBT                                 870,549           869,931

    OTHER NONCURRENT LIABILITIES                    93,973            91,660

    STOCKHOLDERS' EQUITY:
         Common stock, no par, stated
          value $.01 per share                       2,179             2,179
         Additional paid-in capital                416,622           421,601
         Retained earnings                       1,346,924         1,174,841
                                                 1,765,725         1,598,621
         Less cost of 34,791,128 and
          34,902,066 shares of common
           stock in treasury                       691,983           666,573
                                                 1,073,742           932,048
                                                $4,034,839        $5,389,220


    H&R Block, Inc.
    Consolidated Statements of Cash Flows
    Unaudited, amounts in thousands

                                                 Three months ended July 31,
                                                   2001               2000
    Cash flows from operating
     activities:
     Net loss                                    $(30,784)          $(51,746)
     Adjustments to reconcile net loss
      to net cash used in operating
      activities:
       Depreciation and amortization               34,599             47,457
       Provision for bad debt                      10,836              5,521
       Accretion of acquisition
        liabilities                                 3,585              3,234
       Changes in:
        Receivables from customers, brokers,
          dealers and clearing organizations       48,535            118,843
        Receivables                               (48,808)            32,989
        Marketable securities - trading             3,635              1,044
        Prepaid expenses and other
         current assets                            16,476            (50,663)
        Accounts payable to customers,
         brokers and dealers                      (50,682)          (171,405)
        Accounts payable, accrued
         expenses and deposits                   (112,517)           (29,145)
        Accrued salaries, wages and
         payroll taxes                           (122,958)          (106,423)
        Accrued taxes on earnings                 (79,670)           (90,297)
        Other, net                                 (2,045)            (3,043)
       Net cash used in operating
        activities                               (329,798)          (293,634)

    Cash flows from investing
     activities:
     Purchases of available-for-sale
      securities                                     (607)              (536)
     Maturities of available-for-sale
      securities                                   23,686              5,602
     Purchases of property and
      equipment, net                              (13,776)           (11,536)
     Payments made for business
      acquisitions,
      net of cash acquired                         (2,084)            (1,036)
     Other, net                                      (731)            25,295
       Net cash provided by investing
        activities                                  6,488             17,789

    Cash flows from financing
     activities:
     Repayments of notes payable               (1,136,895)        (4,536,830)
     Proceeds from issuance of notes
      payable                                   1,510,230          4,893,109
     Payments on acquisition debt                  (1,769)            (2,628)
     Dividends paid                               (27,660)           (26,305)
     Payments to acquire treasury
      shares                                      (67,583)          (213,107)
     Proceeds from stock options
      exercised                                    26,915                231
     Other, net                                       109              1,192
       Net cash provided by financing
        activities                                303,347            115,662

    Net decrease in cash and cash
     equivalents                                  (19,963)          (160,183)
    Cash and cash equivalents at
     beginning of the period                      271,813            379,901
    Cash and cash equivalents at end of
     the period                                  $251,850           $219,718

    Supplementary cash flow data:
     Income taxes paid                            $68,776            $51,737
     Interest paid                                 19,844             67,400


    H&R Block, Inc.
    Consolidated Statements of Operations
    Unaudited, amounts in thousands, except per share data

                                                     Three Months Ended
                                                           July 31,
                                                    2001              2000
    Revenues:
       Service revenues                           $205,568          $243,779
       Product sales                               112,856            51,200
       Royalties                                     1,557             1,316
       Other income                                  4,144             7,815
                                                   324,125           304,110

    Operating expenses:
       Employee compensation and benefits          176,029           146,540
       Occupancy and equipment                      59,679            60,224
       Interest                                     29,805            63,198
       Depreciation and amortization                34,599            47,457
       Marketing and advertising                     6,992             9,774
       Supplies, freight and postage                 6,573             7,579
       Bad debt                                     10,836             5,521
       Other                                        52,631            56,511
                                                   377,144           396,804

    Operating loss                                 (53,019)          (92,694)

    Other income:
       Investment income, net                        1,118             2,719
       Other, net                                      163               (18)
                                                     1,281             2,701

    Loss before income tax benefit                 (51,738)          (89,993)
    Income tax benefit                             (20,954)          (38,247)

    Net loss                                      $(30,784)         $(51,746)

    Basic net loss per share                        $(0.17)           $(0.28)

    Basic shares outstanding                       183,859           186,522


                                 H&R Block, Inc.
                        Financial Services Operating Data

    H&R Block Financial Advisors, Inc.
                                               For the three months ended
                                       7/27/01    7/28/00  % Change    4/27/01

     Customer trades (000's)              389        646    -39.8%        489
     Customer daily average trades      6,180     10,262    -39.8%      7,760
     Average commission per trade      $62.29     $63.31     -1.6%     $67.21

     Number of active accounts
      (000's)                             621        651     -4.7%        620
     Average trades per active
      account per quarter                0.63       0.99    -36.8%       0.79
     Average trades per active
      account per year (annualized)      2.51       3.97    -36.8%       3.15

     Ending balance of assets under
      administration ($ bn's)           $30.1      $42.2    -28.6%      $31.5
     Average assets per active
      account                         $48,498    $64,738    -25.1%    $50,817

     Ending debit balances ($ bn's)      $1.2       $2.7    -54.5%       $1.3
     Ending credit balances ($ bn's)     $0.8       $0.9    -18.5%       $0.8

     Ending balance of assets under
      management ($ bn's)                $3.5       $3.4      4.4%       $3.7
     (principally money market funds)


    Option One Mortgage Corporation
                                             For the three months ended
                                      7/31/01     7/31/00   % Change   4/30/01
    Number of loans originated
     Wholesale                         17,999      11,302     59.3%     14,160
     Retail                             3,695       2,155     71.5%      3,520
      Total                            21,694      13,457     61.2%     17,680

    Volume of loans originated
     (000's)
     Wholesale                     $2,120,528  $1,160,400     82.7% $1,579,171
     Retail                           503,418     225,941    122.8%    467,579
      Total                        $2,623,946  $1,386,341     89.3% $2,046,750


     Loan sales                    $2,618,446    $847,282    209.0% $2,127,493

    Servicing portfolio
     Number of loans serviced
      (000's)                           180.5       145.2     24.3%      173.9
     Servicing portfolio ($ bn's)       $19.2       $14.7     30.3%      $18.2

                    
SOURCE H&R Block, Inc.

CONTACT:

Media Relations, Linda McDougall, +1-816-932-7542, or Investor Relations, Mark Barnett, +1-816-701-4443, both of H&R Block, Inc.