H&R Block Reports Second Quarter Financial Results; Full-Year Earnings Guidance Lowered on Mortgage Outlook
KANSAS CITY, Mo.--(BUSINESS WIRE)--Nov. 17, 2005--H&R Block Inc. (NYSE:HRB) today reported a net loss of $72.2 million, or 22 cents per share, for the second quarter of fiscal 2006 compared with a loss of $49.9 million, or 15 cents per share, in the year-ago quarter. Revenues in the quarter rose 14 percent to $620.4 million from $542.0 million in the prior-year period, with all business segments contributing to top-line growth.
"Good performance in our Tax Services, RSM McGladrey and Financial Advisors businesses was offset by weak mortgage earnings," said Mark A. Ernst, chairman and chief executive officer. "Though mortgage originations and revenues were up during the second quarter, industry pricing pressure and rising funding rates combined to limit mortgage earnings."
- Highlights of the 2006 second quarter include:
- Solid execution by Tax Services in expanding retail locations
in preparation for the upcoming tax filing season. The company
now expects that an additional 1,000 H&R Block locations will
be operating this tax season.
- A ninth straight quarter of double-digit organic revenue
growth for RSM McGladrey, along with successful early
integration of the newly acquired American Express Tax &
Business Services division.
- A 30 percent increase in revenues for H&R Block Financial Advisors and a 62 percent reduction in pretax loss versus the prior-year quarter.
"Despite the mortgage rate increases we put into effect during the second quarter, rising funding costs in the secondary market limited our ability to realize margin improvement during the quarter," Ernst said. "The further rate increases we have put into place and expect to achieve in the coming two months should help us restore our margins meaningfully in our third quarter and to acceptable levels by the fourth quarter."
"Given the risk associated with the unsettled market dynamics and the pace of secondary market rate increases in the past three months, we now expect that fiscal 2006 company earnings are likely to range from $1.90 to $2.15 per share," Ernst said. The new guidance compares with a previous range of $2.12 to $2.32 per share established in June 2005.
"This change in earnings outlook is entirely associated with mortgage expectations and is partially offset by improving results in our other lines of business," Ernst concluded.
For the six months ended Oct. 31, 2005, H&R Block reported a net loss of $100.5 million, or 31 cents per share, compared with a loss of $86.6 million, or 26 cents per share, for the same period of fiscal 2005. Six-month revenues rose 20 percent to $1.2 billion in fiscal 2006 from $1.0 billion last year.
Tax Services
Second quarter 2006 revenues increased 9 percent to $80.8 million from $74.1 million in the prior-year period. A pretax loss of $142.9 million in the fiscal 2006 quarter was 7 percent greater than the $133.9 million loss posted last year, due to incremental costs associated with retail office expansion from offices opened in the last year as well as current-year additions.
For the first six months of fiscal 2006, revenues of $138.0 million were up 11 percent from $124.6 million last year. The pretax loss of $287.4 million compares with a loss of $246.6 million in the year-ago period.
"Our plans for the 2006 tax season are in place, and we're focusing now on final implementation," Ernst said. "In particular, our program to add approximately 1,000 retail locations is on target." The company expects to meet or exceed the top of its 500 to 700 range for additional retail offices and estimates it will open approximately 300 more shared locations in Wal-Mart, Sears and other retail stores.
"We believe these locations will contribute to business growth this year by offering greater convenience and enhancing our ability to serve clients quickly and efficiently," Ernst said. "We expect incremental client growth both this year and for several years to come as a result of adding these new service locations."
Mortgage Services
Pretax income in mortgage services declined 44 percent in the fiscal 2006 second quarter to $61.0 million from $108.5 million last year. Revenues rose 6 percent to $301.5 million in the current quarter from $284.3 million a year ago.
For the first six months of fiscal 2006, revenues of $662.0 million were 19 percent ahead of last year's $556.3 million, and pretax income of $195.5 million was 10 percent under last year's $217.5 million.
"We went into the second quarter knowing that conditions would be challenging in the mortgage business," Ernst said. "However, secondary market funding costs rose sharply, offsetting the increased coupon rates we had begun to generate."
"As we start the third quarter, our coupon rate increases have started to outpace the increases in our funding costs. As a result we are optimistic that we can increase origination margin in the third quarter and again in the fourth, benefiting as well from successful cost-discipline measures," Ernst said.
Loan origination volume continued to climb in the quarter, reaching a record $12.6 billion versus $10.9 billion in the first quarter of fiscal 2006. "Thanks to the quality of client service we deliver, our production volume held up even as we led the industry in raising rates," Ernst said. "We expect originations to remain in the range of $10 billion to $11 billion in each of the next two quarters."
Loan origination costs improved to 1.79 percent in the second quarter of 2006 from 1.94 percent in the year's first quarter and 2.47 percent a year ago.
Total gain on sale for Mortgage Services was $162.6 million for the current quarter, 12 percent lower than $184.1 million in last year's period. The decrease is due primarily to declining margins, partially offset by growth in loan originations, a net gain on disposition of residual interests and higher gains from interest-rate hedging activities.
Option One increased its mortgage servicing portfolio 54 percent to $82.4 billion at the end of this year's second quarter, versus $53.6 billion a year ago. Servicing revenues advanced 60 percent to $100.4 million in the quarter from $62.6 million in the year-ago period.
Overall, the segment's residual interests performed as expected, as the effect of lower than previously modeled credit losses was mostly offset by higher interest rates. Consequently, the company realized a net write-up to residuals of $12.8 million in the quarter, which was recorded in other comprehensive income, net of deferred taxes. The company also realized a write-up of $2.4 million on trading residuals. This write-up, and $9.7 million in write-downs, was recorded in gains on sales of mortgage assets in the income statement.
Business Services
In the 2006 second quarter, Business Services revenues rose 29 percent to $166.8 million from $129.0 million a year earlier. Revenues rose 13 percent excluding the impact of the American Express Tax & Business Services division acquired effective Oct. 1. The segment's pretax loss improved 56 percent to $2.1 million versus $4.9 million last year. The business is highly seasonal and typically loses money outside the third and fourth quarters.
Six-month 2006 revenues of $293.7 million were 23 percent greater than $238.1 million in last year's period, and a pretax loss of $8.9 million was 40 percent better than last year's loss of $14.9 million.
"RSM McGladrey continues to perform exceptionally well," Ernst said, "and we are delighted with the expanded presence the acquisition gives us in providing tax, accounting and business services to mid-sized companies. We welcome our new colleagues formerly with American Express. The integration has been going well. We're now focused on serving clients and capturing growth opportunities in the coming busy season," Ernst noted.
Investment Services
Revenues for H&R Block Financial Advisors in the quarter increased 30 percent to $70.0 million from $53.8 million in the prior-year period. The pretax loss of $7.9 million in the quarter was 62 percent better than a loss of $20.8 million last year. Included in the quarterly loss in both years is $9.2 million of intangible amortization.
For the first six months of fiscal 2006, revenues increased 29 percent to $138.0 million from $107.3 million in the prior-year period, and pretax loss declined 62 percent to $15.5 million from $41.1 million. Intangible amortization was $18.3 million in each period.
"We were looking for significant performance improvement at Financial Advisors this year, and so far that expectation is being met," Ernst said. "There's work to be done to achieve the level of performance we need to sustain this business, but the trend of improvement is clearly encouraging."
Dividend Declared
H&R Block's board of directors declared a quarterly cash dividend of 12.5 cents per share, payable Jan. 3, 2006, to shareholders of record Dec. 13, 2005. The payment will be the company's 173rd consecutive quarterly dividend.
Other
During the second quarter of fiscal 2006, the company reacquired 4.6 million shares of its common stock at an average purchase price of $27.98 per share.
Conference Call
H&R Block will host a conference call for analysts and institutional investors at 5:00 p.m. EST (4:00 p.m. CST) Nov. 17. Mark Ernst, chairman and chief executive officer; Bill Trubeck, executive vice president and chief financial officer; Tim Gokey, president of H&R Block Tax Services; and Bob Dubrish, president and chief executive officer of Option One Mortgage Corp., will discuss the quarter's results and future expectations, as well as respond to analyst 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
Access Code: 1305947
International: 706-679-8257
Access Code: 1305947
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 Web site at www.hrblock.com/about/investor following market close.
A replay of the call will be available beginning at 8:00 p.m. EST Nov. 17 until 12:00 a.m. EST Nov. 25, by dialing 800-642-1687 (U.S./Canada) or 706-645-9291 (international). The replay access code is 1305947. A replay of the webcast will also be available on the company's Web site at www.hrblock.com through Dec. 17.
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 2006; 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. (NYSE:HRB) is a leading provider of tax, financial, mortgage, accounting and business consulting products and services. H&R Block is the world's largest tax services provider, having prepared more than 400 million tax returns since 1955. The company and its subsidiaries generated revenues of $4.4 billion and net income of $636 million in fiscal year 2005 from operations in four principal business segments: tax preparation and advice via in-office, online and software solutions; investment and financial advisory services; retail and wholesale mortgage services; and tax/accounting/business consulting services for mid-sized businesses. Headquartered in Kansas City, Mo., H&R Block markets its services and products under three leading brands -- H&R Block, Option One and RSM McGladrey. For more information, visit our Online Press Center at www.hrblock.com.
H&R BLOCK
KEY OPERATING RESULTS
Preliminary and unaudited, amounts in thousands, except per share data
Three months ended October 31,
--------------------------------------
Revenues Income (loss)
---------------- ---------------
2005 2004 2005 2004
---- ---- ---- ----
Restated Restated
-------- --------
Tax Services $80,813 $74,106 $(142,864) $(133,932)
Mortgage Services 301,514 284,332 60,992 108,472
Business Services 166,805 129,047 (2,143) (4,892)
Investment Services 70,018 53,761 (7,906) (20,764)
Corporate 1,256 707 (26,455) (28,702)
----------------------- ---------------------
$620,406 $541,953 (118,376) (79,818)
=======================
Income tax benefit (46,198) (29,946)
---------------------
Net loss $(72,178) $(49,872)
=====================
Basic and diluted loss per share $(0.22) $(0.15)
=====================
Basic and diluted shares outstanding 326,047 329,372
Six months ended October 31,
--------------------------------------
Revenues Income (loss)
---------------- ---------------
2005 2004 2005 2004
---- ---- ---- ----
Restated Restated
-------- --------
Tax Services $138,004 $124,553 $(287,370) $(246,578)
Mortgage Services 661,952 556,305 195,460 217,497
Business Services 293,651 238,149 (8,908) (14,937)
Investment Services 138,001 107,342 (15,458) (41,107)
Corporate 3,791 2,155 (47,969) (53,493)
----------------------- ---------------------
$1,235,399 $1,028,504 (164,245) (138,618)
=======================
Income tax benefit (63,743) (52,004)
---------------------
Net loss $(100,502) $(86,614)
=====================
Basic and diluted loss per share $(0.31) $(0.26)
=====================
Basic and diluted shares outstanding 328,381 333,442
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Financial statement amounts reflect the restatement of results for the
three and six months ended October 31, 2004, as detailed previously in
our Form 10-K/A filed for the year ended April 30, 2005.
On June 8, 2005, our Board of Directors declared a two-for-one stock
split of the Company's Common Stock in the form of a 100% stock
distribution, effective August 22, 2005, to shareholders of record as
of the close of business on August 1, 2005. All share and per share
amounts have been adjusted to reflect the retroactive effect of the
stock split.
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 except in those periods with a
loss.
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
CONDENSED CONSOLIDATED BALANCE SHEETS
Preliminary and unaudited, amounts in thousands, except share data
October 31, April 30,
2005 2005
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $392,490 $1,100,213
Cash and cash equivalents - restricted 464,480 516,909
Marketable securities - trading 115,573 11,790
Receivables from customers, brokers, dealers
and clearing organizations, net 577,506 590,226
Receivables, net 696,367 418,788
Prepaid expenses and other current assets 464,005 432,708
----------- -----------
Total current assets 2,710,421 3,070,634
----------- -----------
Residual interests in securitizations -
available-for-sale 144,259 205,936
Beneficial interest in Trusts - trading 169,378 215,367
Mortgage servicing rights 254,702 166,614
Property and equipment, net 362,041 330,150
Intangible assets, net 247,849 247,092
Goodwill, net 1,087,587 1,015,947
Other assets 335,695 287,543
----------- -----------
Total assets $5,311,932 $5,539,283
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Commercial paper $498,175 $-
Current portion of long-term debt 16,946 25,545
Accounts payable to customers, brokers and
dealers 846,913 950,684
Accounts payable, accrued expenses and other 639,812 564,749
Accrued salaries, wages and payroll taxes 170,056 318,644
Accrued income taxes 205,381 349,298
----------- -----------
Total current liabilities 2,377,283 2,208,920
----------- -----------
Long-term debt 917,884 923,073
Other noncurrent liabilities 428,395 430,919
----------- -----------
Total liabilities 3,723,562 3,562,912
----------- -----------
Stockholders' equity:
Common stock, no par, stated value $.01 per
share 4,359 4,359
Additional paid-in capital 612,207 598,388
Accumulated other comprehensive income 44,463 68,718
Retained earnings 3,010,902 3,188,785
Less cost of 110,565,669 and 104,649,850
shares of common stock in treasury (2,083,561) (1,883,879)
----------- -----------
Total stockholders' equity 1,588,370 1,976,371
----------- -----------
Total liabilities and stockholders' equity $5,311,932 $5,539,283
=========== ===========
H&R BLOCK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Preliminary and unaudited, amounts in thousands
Six months ended
October 31,
-----------------------
2005 2004
----------- -----------
Restated
-----------
Cash flows from operating activities:
Net loss $(100,502) $(86,614)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 90,173 80,267
Accretion of residual interests in
securitizations (64,341) (63,514)
Impairment of residual interests in
securitizations 22,108 2,609
Additions to trading securities -
residual interests in securitizations (191,469) (68,618)
Proceeds from net interest margin
transactions 85,472 53,348
Realized gain on sale of residual
interests (28,675) -
Additions to mortgage servicing rights (145,678) (58,894)
Amortization and impairment of mortgage
servicing rights 57,590 38,653
Net change in beneficial interest in
Trusts 45,989 25,524
Other net changes in working capital,
net of acquisitions (483,420) (590,035)
----------- -----------
Net cash used in operating activities (712,753) (667,274)
----------- -----------
Cash flows from investing activities:
Cash received from residual interests in
securitizations 72,271 73,477
Cash received from sale of residual
interests in securitizations 30,497 -
Purchases of property and equipment, net (77,635) (60,598)
Payments made for business acquisitions, net
of cash acquired (200,309) (5,472)
Other, net 13,151 12,138
----------- -----------
Net cash provided by (used in)
investing activities (162,025) 19,545
----------- -----------
Cash flows from financing activities:
Repayments of commercial paper (1,101,729) (1,376,877)
Proceeds from issuance of commercial
paper 1,599,904 1,692,933
Proceeds from issuance of long-term debt - 395,221
Dividends paid (77,381) (69,997)
Acquisition of treasury shares (259,745) (529,558)
Proceeds from issuance of common stock 48,001 53,933
Other, net (41,995) (24,600)
----------- -----------
Net cash provided by financing activities 167,055 141,055
----------- -----------
Net decrease in cash and cash equivalents (707,723) (506,674)
Cash and cash equivalents at beginning of the
period 1,100,213 1,072,745
----------- -----------
Cash and cash equivalents at end of the
period $392,490 $566,071
=========== ===========
Supplementary cash flow data:
Income taxes paid $169,223 $316,764
Interest paid 50,098 37,320
H&R BLOCK
CONDENSED CONSOLIDATED INCOME STATEMENTS
Preliminary and unaudited, amounts in thousands, except per share data
Three months ended Six months ended
October 31, October 31,
------------------- ---------------------
2005 2004 2005 2004
--------- --------- ---------- ----------
Restated Restated
--------- ----------
Revenues:
Service revenues $384,263 $290,232 $699,391 $538,820
Other revenues:
Gains on sales of mortgage
assets, net 162,630 184,148 399,061 367,508
Interest income 55,010 48,552 104,263 88,272
Product and other revenues 18,503 19,021 32,684 33,904
--------- --------- ---------- ----------
620,406 541,953 1,235,399 1,028,504
--------- --------- ---------- ----------
Operating expenses:
Cost of service revenues 387,827 324,084 731,045 615,059
Cost of other revenues 134,864 96,249 258,221 174,644
Selling, general and
administrative 206,549 184,867 395,801 345,063
--------- --------- ---------- ----------
729,240 605,200 1,385,067 1,134,766
--------- --------- ---------- ----------
Operating loss (108,834) (63,247) (149,668) (106,262)
Interest expense 12,385 18,081 24,820 35,874
Other income, net 2,843 1,510 10,243 3,518
--------- --------- ---------- ----------
Loss before taxes (118,376) (79,818) (164,245) (138,618)
Income tax benefit (46,198) (29,946) (63,743) (52,004)
--------- --------- ---------- ----------
Net loss $(72,178) $(49,872) $(100,502) $(86,614)
========= ========= ========== ==========
Basic and diluted loss per
share $(0.22) $(0.15) $(0.31) $(0.26)
========= ========= ========== ==========
Basic and diluted shares
outstanding 326,047 329,372 328,381 333,442
H&R BLOCK SELECTED OPERATING DATA
Unaudited
Mortgage Services Three months ended
-----------------------------------------------------
10/31/2005 10/31/2004 % change 7/31/2005 % change
----------------------------------------------------------------------
Volume of loans
originated
(thousands):
Wholesale (non-
prime) $11,078,960 $5,528,361 100.4% $9,537,227 16.2%
Retail: Non-
prime 1,111,924 800,975 38.8% 950,806 16.9%
Prime 429,924 183,647 134.1% 399,596 7.6%
----------- ----------- -------- ------------ -------
1,541,848 984,622 56.6% 1,350,402 14.2%
----------- ----------- -------- ------------ -------
Total $12,620,808 $6,512,983 93.8% $10,887,629 15.9%
=========== =========== ======== ============ =======
Loan
characteristics:
Average loan
size
(thousands) $188 $157 19.7% $165 13.9%
Weighted average
interest rate
(WAC)(1) 7.48% 7.46% 0.02% 7.52% -0.04%
Weighted average
FICO score(1) 629 609 623
Loan sales
(thousands) $12,497,526 $6,560,780 90.5% $10,843,006 15.3%
=========== =========== ======== ============ =======
Servicing
portfolio:
Number of loans
serviced 500,935 362,430 38.2% 451,310 11.0%
Servicing
portfolio
(billions) $82.4 $53.6 53.7% $70.5 16.9%
(1) Represents non-prime production only.
Investment Services Three months ended
-----------------------------------------------------
10/31/2005 10/31/2004 % change 7/31/2005 % change
----------------------------------------------------------------------
Customer
trades(2) 233,262 192,909 20.9% 226,378 3.0%
Customer daily
average trades 3,589 3,014 19.1% 3,593 -0.1%
Average revenue
per trade(3) $123.16 $125.13 -1.6% $126.71 -2.8%
Customer
accounts:(4)
Traditional
brokerage 428,543 444,770 -3.6% 431,046 -0.6%
Express IRAs 378,200 334,928 12.9% 379,432 -0.3%
----------- ----------- -----------
806,743 779,698 3.5% 810,478 -0.5%
=========== =========== ===========
Ending balance of
assets under
administration
(billions) $29.8 $27.2 9.6% $30.0 -0.7%
Average assets per
traditional
brokerage account $68,837 $60,225 14.3% $68,870 - %
Average customer
margin balances
(millions) $560 $590 -5.1% $573 -2.3%
Average payables
to customers
(millions) $794 $962 -17.5% $841 -5.6%
Advisors 995 982 1.3% 985 1.0%
(2) Includes only trades on which revenues are earned ("revenue
trades"). Revenues, defined as trading revenues, are earned on
both transactional and annuitized trades.
(3) Calculated as trading revenues divided by revenue trades.
(4) Includes only accounts with a positive period-end balance.
CONTACT: H&R Block Inc.
Media Relations:
Nick Iammartino, 816-932-4835
nick.iammartino@hrblock.com
or
Investor Relations:
Scott Dudley, 816-932-8342
scott.dudley@hrblock.com
SOURCE: H&R Block Inc.