H&R Block Reports Record Annual Revenues and Earnings; Company Announces Dividend and Share Repurchase Authorization Increases
KANSAS CITY, Mo.--(BUSINESS WIRE)--June 9, 2004--H&R Block Inc. (NYSE: HRB) today reported record revenues and net income for both its fourth quarter and fiscal year ended April 30.
Fourth quarter revenues totaled $2.2 billion, a 14.8 percent increase over the fourth quarter last year. Consolidated net income for the quarter increased 16.4 percent to $575.6 million. Fourth quarter earnings per diluted share increased 19.2 percent to $3.23.
Fiscal year revenues increased 12.3 percent to $4.2 billion. Consolidated net income for the fiscal year increased 20.3 percent to $697.9 million. Earnings per diluted share increased 23.8 percent to $3.90, excluding a change in accounting principle. After the change in accounting principle, earnings per share increased 22.5 percent to $3.86. The company adopted Emerging Issues Task Force No. 00-21 (EITF 00-21) in its second quarter.
"Fourth quarter results completed a year that saw record revenues, record earnings and balanced growth from our mix of businesses," said H&R Block Chairman and Chief Executive Officer Mark A. Ernst. "We experienced improved results across all business lines in our fourth quarter.
"H&R Block's combined annual growth rate for earnings per share has increased 29 percent in the past five years. Our mix of businesses has generated solid results, even in challenging business environments," Ernst said.
H&R Block began to expense the costs of all stock-based compensation at the beginning of fiscal year 2004. The fiscal year results include $25.7 million, or 9 cents per diluted share, in stock-based compensation expense, compared with $2.1 million last year.
Fiscal 2005 Outlook
"Next year, we expect earnings per share in the range of $4.00 to $4.25 per share. We expect solid growth in our mix of businesses. We continue to believe that, over the long-term, the company's mix of businesses can generate earnings consistent with our long-term guidance of earnings per share growth in the range of 13 to 18 percent per year," Ernst said.
"A changing interest rate environment will likely result in a flattening or slight decline in mortgage earnings, which will partially offset solid earnings growth in our other businesses," he said.
Board Actions
Reflecting the company's strong financial condition and continuing performance, H&R Block's board of directors approved an increase of the quarterly cash dividend from 20 cents to 22 cents per share, a ten percent increase, effective with the quarterly dividend payment on Oct. 1, 2004 to shareholders of record on Sept. 10, 2004. This payment will be the company's 168th consecutive quarterly dividend.
Also, the board authorized the company to repurchase up to 15 million of its shares, in addition to the 11.3 million shares remaining at year end on its previous repurchase authorization from June 11, 2003.
"In the past year, the company has returned significant value to shareholders by repurchasing $518.5 million, or 10.6 million, of its shares," Ernst said. "The new repurchase authorization reflects the confidence that the board of directors has in H&R Block's future. Given our strong cash position, share repurchase continues to be a great way for us to enhance shareholder value."
During the fourth quarter, the company repurchased 2.8 million shares at an average cost of $52.77 per share.
U.S Tax Operations
For the fiscal year, U.S. tax operations reported pretax income of $627.6 million, an increase of 14.7 percent from pretax income of $547.1 million in fiscal 2003.
U.S. tax operations reported a 3.2 percent increase in fourth quarter pretax income, which totaled $783.5 million, up from $759.3 million in the fourth quarter of fiscal 2003.
The segment's revenues for the year increased 12.5 percent to $2.1 billion. The increase was driven by an 8 percent increase in the average fee per client served, the acquisition of former major franchise territories during fiscal year 2004, and a change from last year's contractual agreement with Household Taxmasters Inc. that resulted in increased revenues from refund anticipation loan (RAL) participation.
The segment reported $1.5 billion in revenues for the fourth quarter, an increase of 10.1 percent compared with last year's fourth quarter.
"We improved client satisfaction with our combination of financial information and tax services, which is a unique value of the H&R Block brand. And we made solid progress with our multi-channel strategy. The number of software and online clients increased 12.2 percent to 3.2 million, with the fastest growth in tax solutions that blend the services of a tax professional with software and online products," Ernst said.
"While we're disappointed in the 0.8 percent decline in clients served, we understand the factors behind the decline and are taking steps to strengthen our market position. We will open 500 to 600 new offices in underserved areas where we could not provide the convenience clients wanted. And we are reviewing our marketing plans to identify the best mix of messages, products and services to drive client growth in the early part of tax season."
Mortgage Operations
Mortgage operations, which includes Option One Mortgage Corp. and H&R Block Mortgage Corp., reported fourth quarter pretax income of $175.9 million, a 34.4 percent increase, compared with $130.9 million in the fourth quarter last year.
For fiscal 2004, the mortgage segment reported pretax income of $678.3 million, a 2.3 percent decrease compared with $694.0 million in pretax income in fiscal 2003.
Fourth quarter revenues grew 28.4 percent to $344.3 million, up from $268.3 million the prior year. Fiscal 2004 revenues increased 10 percent to $1.3 billion, up from $1.2 billion in fiscal 2003.
For fiscal 2004, gains on sales of mortgage loans increased 8 percent to $716.7 million, compared with $663.6 million in fiscal 2003. In fiscal year 2003, the company reported a $130.9 million gain on the sale of previously securitized residual interests, compared to $40.7 million in the current year. Net of $30.7 million in impairments of older residuals, compared with $54.1 million in 2003, the mortgage segment's total gains on sales were $726.7 million for fiscal 2004, compared to $740.3 million in the prior year.
Loan production increased to $23.3 billion in fiscal 2004, a 40.3 percent increase over the previous year. An increase in the number of loan specialists, improvements in the company's closing ratio, and a 4.9 percent increase in the average loan size all contributed to this growth.
Included within these results, H&R Block Mortgage Corp., H&R Block's retail mortgage subsidiary, originated 6.4 percent more loans, 48.9 percent of which were made to retail clients of other H&R Block businesses.
"The mortgage business performed as we expected it would. We saw continued growth in mortgage originations and lower margins due to the anticipated increase in interest rates," Ernst said.
"Originations have been strong across all of our origination channels, and loan performance has exceeded modeled expectations. We continue to manage our mortgage business to optimize cash earnings, and we remain confident that mortgage operations will continue to perform well," he said.
Option One's mortgage servicing business increased the number of loans serviced 31.6 percent to 324,364. The servicing portfolio at year-end increased 44.7 percent to $45.3 billion, compared with last year's portfolio.
The segment's residual interests continued to perform better than expected, primarily due to better than modeled credit losses and interest rates. Consequently, the company realized a net write-up to residual balances of $167.1 million during fiscal year 2004, including $67.1 million in the fourth quarter, which was recorded in other comprehensive income on the balance sheet, net of deferred taxes.
Business Services
RSM McGladrey Business Services, Inc. reported fourth quarter pretax earnings of $26.8 million, compared with a net loss of $1.9 million in the same quarter last year. For fiscal 2004, the segment reported pretax earnings of $19.3 million, compared with a net loss of $14.1 million in 2003.
In the fourth quarter, the business services segment reported revenues of $179.4 million, an increase of 28 percent. For the fiscal year, revenues increased 15 percent to $499.2 million.
"We are beginning to realize the potential that exists in this business segment. Our capital markets business enjoyed a strong year, and an improving economic environment for our middle market clients resulted in higher revenues in our core accounting and tax services," Ernst said.
Fiscal year 2003 includes a goodwill impairment charge of $11.8 million related to the segment's payroll and benefits processing company. The segment wrote off $576,000 in intangible assets in the fourth quarter of 2004.
Investment Services
Investment services reported a fourth quarter pretax loss of $22.5 million, an improvement of $13.3 million from a fourth quarter loss last year of $35.8 million. For the fiscal year, investment services recorded a pretax loss of $64.4 million, an improvement of $63.8 million compared with a loss of $128.3 million in fiscal 2003. Fiscal year 2003 results include $24 million of goodwill impairment charges.
Investment services reported fourth quarter revenues of $62 million, a 40.8 percent increase from the same quarter last year. Revenues for the fiscal year increased 14.3 percent to $229.5 million.
"We see continued improvement in H&R Block Financial Advisors' results. We believe that this business has been restructured in a way that allows us to compete effectively as the investment climate improves," Ernst said.
"The retention and recruitment of experienced advisors continues to be a key initiative in the upcoming year, along with building stronger links between financial advisors and tax professionals in our U.S. tax operations."
Other
The company will host a conference call for analysts and institutional investors at 5 p.m. EDT (4 p.m. CDT) June 9. Ernst and Jeff Yabuki, executive vice president and chief operating officer, will discuss the quarter and year-end results and future expectations, as well as respond to analysts' questions. To access the call, please dial the number approximately five to 10 minutes prior to the scheduled starting time:
U.S./Canada (888) 425-2715
International (706) 679-8257
The call will be Webcast in a listen-only format for the media and public. The link to the Webcast can be obtained at www.hrblock.com. Supplemental slides will be available in connection with the Webcast, or can be accessed directly on H&R Block's Investor Relations website at www.hrblock.com/about/investor following market close.
A replay of the call will be available beginning at 8 p.m. EDT June 9 until 8 p.m. EDT June 23, by dialing 800-642-1687 (U.S./Canada) or 706-645-9291 (International). The replay access code is 6540535. A replay of the Webcast will also be available on the company's Web site at www.hrblock.com through June 30.
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 uncertainty that the company will achieve or exceed its revenue, earnings, and earnings per share growth goals or expectations for fiscal year 2005; the uncertainty of the company's ability to purchase shares of its common stock pursuant to the board's authorization; the uncertainty of the effect of any share repurchases upon the company and its shareholders; changes in interest rates; changes in economic, political or regulatory environments; changes in competition; litigation involving the company and its subsidiaries; 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. (www.hrblock.com) is a diversified company with subsidiaries that deliver tax services and financial advice, investment and mortgage products and services, and business accounting and consulting services. The world's largest tax preparation company, H&R Block in fiscal year 2004 served 21.6 million clients at more than 11,000 retail offices worldwide and with software and online services. H&R Block is the only major tax preparation and financial services company that focuses primarily on helping middle-income Americans achieve their financial objectives. 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 Corp. offers retail mortgage products. Option One Mortgage Corp offers wholesale mortgage products and a range of mortgage services. RSM McGladrey Inc. serves mid-sized businesses with accounting, tax and consulting services.
H&R BLOCK, INC.
KEY OPERATING RESULTS
Unaudited, amounts in thousands, except per share data
Three months ended
April 30,
-----------------------
2004 2003
-----------------------
Revenues $2,191,793 $1,909,755
-----------------------
Income before taxes 952,074 842,294
Net income $575,635 $494,642
=======================
Basic earnings per share $3.30 $2.76
=======================
Basic shares outstanding 174,300 179,314
Diluted earnings per share $3.23 $2.71
=======================
Diluted shares outstanding 178,194 182,615
Year ended April 30,
-----------------------
2004 2003
-----------------------
Revenues $4,205,570 $3,746,457
-----------------------
Income before taxes 1,164,157 987,077
Net income before change in accounting
principle 704,256 580,064
Cumulative effect of change in accounting
principle, net of taxes (6,359) -
Net income $697,897 $580,064
=======================
Basic earnings per share:
Before change in accounting principle $3.98 $3.23
Net income $3.94 $3.23
=======================
Basic shares outstanding 177,076 179,638
Diluted earnings per share:
Before change in accounting principle $3.90 $3.15
Net income $3.86 $3.15
=======================
Diluted shares outstanding 180,802 184,078
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------
In the second quarter of fiscal year 2004, the Company adopted
Emerging Issues Task Force Issue No. 00-21, "Revenue Arrangements with
Multiple Deliverables" (EITF 00-21) as of May 1, 2003. As a result of
the adoption of EITF 00-21, the Company recorded a cumulative effect
of a change in accounting principle of $6.4 million, net of taxes of
$4.0 million.
Basic earnings per share is based on the weighted average number of
shares outstanding. The dilutive effect of potential common shares is
included in diluted earnings per share.
Certain reclassifications have been made to prior year amounts to
conform to the current period presentation. These reclassifications
had no effect on the results of operations or stockholders' equity as
previously reported.
H&R BLOCK, INC.
SEGMENT FINANCIAL RESULTS
Unaudited, amounts in thousands
Three months ended April 30,
-------------------------------------
Revenues Income (loss)
---------------- ---------------
2004 2003 2004 2003
----------------------------------------------------------------------
U.S. Tax Operations $1,542,260 $1,401,120 $783,466 $759,270
Mortgage Operations 344,347 268,285 175,930 130,879
Business Services 179,394 140,202 26,777 (1,863)
Investment Services 62,027 44,057 (22,542) (35,804)
International Tax
Operations 62,157 56,694 23,359 22,900
Corporate Operations 1,608 (603) (34,916) (33,088)
----------------------- --------------------
$2,191,793 $1,909,755 952,074 842,294
=======================
Income taxes 376,439 347,652
--------------------
Net income $575,635 $494,642
====================
Year ended April 30,
---------------------------------------
Revenues Income (loss)
------------------ ----------------
2004 2003 2004 2003
----------------------------------------------------------------------
U.S. Tax Operations $2,093,617 $1,861,681 $627,592 $547,078
Mortgage Operations 1,281,399 1,165,411 678,261 693,950
Business Services 499,210 434,140 19,321 (14,118)
Investment Services 229,470 200,794 (64,446) (128,292)
International Tax
Operations 97,560 85,082 11,097 10,464
Corporate Operations 4,314 (651) (107,668) (122,005)
----------------------- --------------------
$4,205,570 $3,746,457 1,164,157 987,077
=======================
Income taxes 459,901 407,013
--------------------
Net income before change in
accounting principle 704,256 580,064
Cumulative effect of change in accounting
principle, net of taxes (6,359) -
--------------------
Net income $697,897 $580,064
====================
H&R BLOCK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share data
April 30, April 30,
2004 2003
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $1,071,676 $875,353
Cash and cash equivalents - restricted 545,428 438,242
Receivables from customers, brokers,
dealers and clearing
organizations, net 625,076 517,037
Receivables, net 347,910 403,197
Prepaid expenses and other current assets 371,209 391,402
----------- -----------
Total current assets 2,961,299 2,625,231
----------- -----------
Residual interests in securitizations -
available-for-sale 210,973 264,337
Beneficial interest in Trust - trading 137,757 122,130
Mortgage servicing rights 113,821 99,265
Property and equipment, net 279,220 288,594
Intangible assets, net 325,829 341,865
Goodwill, net 959,418 714,215
Other 391,709 148,268
----------- -----------
Total assets $5,380,026 $4,603,905
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $275,669 $55,678
Accounts payable to customers, brokers
and dealers 1,065,793 862,694
Accounts payable, accrued expenses and
other 456,167 468,933
Accrued salaries, wages and payroll taxes 268,747 210,629
Accrued income taxes 405,667 299,262
----------- -----------
Total current liabilities 2,472,043 1,897,196
----------- -----------
Long-term debt 545,811 822,302
Other non-current liabilities 465,163 220,698
----------- -----------
Total liabilities 3,483,017 2,940,196
----------- -----------
Stockholders' equity:
Common stock, no par, stated value $.01
per share 2,179 2,179
Additional paid-in capital 545,065 496,393
Accumulated other comprehensive income 57,953 36,862
Retained earnings 2,781,368 2,221,868
Less cost of 44,849,128 and 38,343,944
shares of
common stock in treasury (1,489,556) (1,093,593)
----------- -----------
Total stockholders' equity 1,897,009 1,663,709
----------- -----------
Total liabilities and stockholders' equity $5,380,026 $4,603,905
=========== ===========
H&R BLOCK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, amounts in thousands
Year ended April 30,
-------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $697,897 $580,064
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 172,038 161,821
Accretion of residual interests in
securitizations (168,029) (145,165)
Impairment of residual interests in
securitizations 30,661 54,111
Additions to trading securities - residual
interests in securitizations (327,996) (542,544)
Proceeds from net interest margin
transactions 310,358 541,791
Realized gain on sale of previously
securitized residuals (40,689) (130,881)
Additions to mortgage servicing rights (84,274) (65,345)
Amortization of mortgage servicing rights 69,718 47,107
Net change in beneficial interest in
Trust (15,627) (69,529)
Cumulative effect of change in accounting
principle 6,359 -
Impairment of goodwill - 35,777
Mortgage loans held for sale:
Originations and purchases (23,256,013) (16,577,621)
Sales and principal repayments 23,227,547 16,587,116
Other net changes in working capital, net
of acquisitions 304,857 214,123
------------ ------------
Net cash provided by operating activities 926,807 690,825
------------ ------------
Cash flows from investing activities:
Available-for-sale securities:
Purchases of available-for-sale securities (11,434) (14,614)
Cash received from residual interests in
securitizations 193,606 140,795
Cash received from sale of previously
securitized residuals 53,391 142,486
Sales of other available-for-sale
securities 14,377 14,081
Purchases of property and equipment, net (112,153) (150,897)
Payments made for business acquisitions, net
of cash acquired (280,865) (26,408)
Other, net 11,945 19,896
------------ ------------
Net cash provided by (used in) investing
activities (131,133) 125,339
------------ ------------
Cash flows from financing activities:
Repayments of notes payable (4,618,853) (9,925,516)
Proceeds from issuance of notes payable 4,618,853 9,925,516
Payments on acquisition debt (59,003) (57,469)
Dividends paid (138,397) (125,898)
Payments to acquire treasury shares (519,862) (317,570)
Proceeds from issuance of common stock 119,956 126,325
Other, net (2,045) (2,344)
------------ ------------
Net cash used in financing activities (599,351) (376,956)
------------ ------------
Net increase in cash and cash equivalents 196,323 439,208
Cash and cash equivalents at beginning of
the period 875,353 436,145
------------ ------------
Cash and cash equivalents at end of the
period $1,071,676 $875,353
============ ============
Supplementary cash flow data:
Income taxes paid $329,752 $247,057
Interest paid 84,551 84,094
H&R BLOCK, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
Unaudited, amounts in thousands, except per share data
Three Months Ended Year Ended
April 30, April 30,
----------------------- -----------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues:
Service revenues $1,694,888 $1,487,807 $2,740,983 $2,398,081
Gain on sale of
mortgage assets 193,750 162,342 726,718 740,343
Interest income 102,602 69,009 379,064 297,185
Product sales 58,361 52,260 157,417 123,510
Royalties 135,472 131,577 184,882 174,659
Other income 6,720 6,760 16,506 12,679
----------- ----------- ----------- -----------
2,191,793 1,909,755 4,205,570 3,746,457
----------- ----------- ----------- -----------
Operating expenses:
Employee compensation
and benefits 751,272 605,841 1,610,103 1,387,731
Occupancy and
equipment 131,393 122,318 384,622 345,960
Depreciation and
amortization 49,541 47,083 172,038 161,821
Marketing and
advertising 88,551 65,512 188,317 150,847
Interest 20,099 22,855 84,556 92,644
Supplies, freight and
postage 37,839 33,276 89,189 88,748
Impairment of goodwill - 11,777 - 35,777
Other 166,403 161,058 522,442 502,687
----------- ----------- ----------- -----------
1,245,098 1,069,720 3,051,267 2,766,215
----------- ----------- ----------- -----------
Operating income 946,695 840,035 1,154,303 980,242
Other income, net 5,379 2,259 9,854 6,835
----------- ----------- ----------- -----------
Income before taxes 952,074 842,294 1,164,157 987,077
Income taxes 376,439 347,652 459,901 407,013
----------- ----------- ----------- -----------
Net income before
cumulative effect of
change in accounting
principle 575,635 494,642 704,256 580,064
Cumulative effect of
change in accounting
principle
for multiple deliverable revenue
arrangements,
less income taxes of
$4,031 - - (6,359) -
----------- ----------- ----------- -----------
Net income $575,635 $494,642 $697,897 $580,064
=========== =========== =========== ===========
Basic earnings per
share:
Before change in
accounting principle $3.30 $2.76 $3.98 $3.23
Cumulative effect of
change in accounting - - (0.04) -
----------- ----------- ----------- -----------
Net income $3.30 $2.76 $3.94 $3.23
=========== =========== =========== ===========
Basic shares
outstanding 174,300 179,314 177,076 179,638
Diluted earnings per
share:
Before change in
accounting principle $3.23 $2.71 $3.90 $3.15
Cumulative effect of
change in accounting - - (0.04) -
----------- ----------- ----------- -----------
Net income $3.23 $2.71 $3.86 $3.15
=========== =========== =========== ===========
Diluted shares
outstanding 178,194 182,615 180,802 184,078
H&R BLOCK, INC.
SELECTED OPERATING DATA
Unaudited
Option
One Mortgage
Corporation Year ended Three months ended
---------- -----------------------------------------
4/30/ 4/30/ 4/30/ % 1/31/
2004 2004 2003 change 2004
----------------------------------------------------------------------
Number of
loans
originated:
Wholesale
(non-prime) 130,356 34,951 26,126 33.8% 30,678
Retail:
Prime 9,763 2,523 3,813 -33.8% 1,291
Non-prime 15,220 4,281 2,566 66.8% 3,826
------------ ----------- ----------- ------- -----------
Total 155,339 41,755 32,505 28.5% 35,795
============ =========== =========== ======= ===========
Volume of
loans
originated
(000's):
Wholesale
(non-prime) $20,150,992 $5,410,469 $3,981,480 35.9% $4,732,182
Retail:
Prime 1,258,347 312,923 503,130 -37.8% 157,438
Non-prime 1,846,674 523,438 305,841 71.1% 464,926
------------ ----------- ----------- ------- -----------
Total $23,256,013 $6,246,830 $4,790,451 30.4% $5,354,546
============ =========== =========== ======= ===========
Loan sales $23,234,935 $6,294,346 $4,813,186 30.8% $5,308,800
============ =========== =========== ======= ===========
Servicing
portfolio:
Number of
loans
serviced 324,364 324,364 246,463 31.6% 308,305
Servicing
portfolio
($ bn's) $45.3 $45.3 $31.3 44.7% $42.2
H&R Block
Financial
Advisors,
Inc. Year ended Three months ended
---------- -----------------------------------------
4/30/ 4/30/ 4/25/ % 1/31/
2004 2004 2003 change 2004
----------------------------------------------------------------------
Customer
trades 1,514,969 390,750 244,843 59.6% 413,338
Customer
daily
average
trades 5,918 6,202 4,221 46.9% 6,776
Average
revenue per
trade $119.36 $121.58 $128.89 -5.7% $113.61
Number of
active
accounts 863,116 863,116 752,903 14.6% 741,824
Ending
balance
of assets
under
adminis-
tration
($ bn's) $26.7 $26.7 $22.3 19.7% $27.5
Average
assets per
active
account $30,970 $30,970 $29,616 4.6% $37,122
Ending
customer
margin
balances
($ millions) $608 $608 $486 25.1% $594
Ending
payables
to
customers
($ millions) $1,007 $1,007 $848 18.8% $1,076
CONTACT: H&R Block Inc.
Media Relations:
Bob Schneider, 816-932-4835
bschneider@hrblock.com
or
Investor Relations:
Mark Barnett, 816-701-4443
marbarnett@hrblock.com
SOURCE: H&R Block Inc.