H&R Block Reports Second Quarter Financial Results; Lower Full-Year Earnings Guidance on Mortgage Outlook
KANSAS CITY, Mo., Nov 23, 2004 (BUSINESS WIRE) -- H&R Block Inc. (NYSE: HRB) today reported a $52.2 million net loss for the second quarter of its 2005 fiscal year, compared with earnings of $10.4 million in the second quarter last year. Revenues totaled $539.3 million, a 5.2 percent decline from last year. The company reported a loss of 32 cents per diluted share, compared with 6 cents of earnings last year.
The decline in earnings was due primarily to decreased income in the mortgage segment. An asset write-down in investment services and corporate development spending associated with new business initiatives also contributed to the earnings decline. Historically, H&R Block has reported second quarter losses because of the seasonal nature of its tax and accounting businesses, although the company reported a profit in the second quarter of fiscal 2004.
"The competitive environment in the mortgage industry limited our pricing flexibility in the face of rising interest rates in the secondary market," said Chairman and Chief Executive Officer Mark A. Ernst. "In view of industry-wide trends, we were satisfied with our levels of loan originations, which grew 2.7 percent compared with the second quarter last year, although operating margins did not improve as much as we had anticipated.
"We will begin deploying a series of technology enabled service enhancements to our mortgage broker clients during the fourth quarter. We believe that these will improve productivity and position our mortgage business for success as we transition to a higher rate environment. Primarily due to the current mortgage pricing environment and investments in support of these technology enhancements, we are lowering our current fiscal year earnings guidance to the range of $3.50 to $4.00 per share," Ernst said.
In the second quarter, H&R Block acquired 3.8 million shares of its common stock at an aggregate cost of $182.2 million, or an average price of $47.81 per share. Over the past year, the number of H&R Block shares outstanding has decreased 8 percent to 163.5 million shares outstanding.
The second quarter results include $7.9 million in stock-based compensation expense, compared with $3.1 million last year. H&R Block began to expense the costs of all stock-based compensation at the beginning of fiscal year 2004.
For the six months ended Oct. 31, H&R Block reported a net loss of $96.3 million, or 58 cents per diluted share, compared with earnings of $15.5 million last year, or 9 cents per diluted share. Revenues for the six-month period decreased 4 percent to $1 billion, from $1.1 billion last year.
The prior year results include a change in accounting principle related to the adoption of Emerging Issues Task Force No. 00-21 (EITF 00-21) as of May 1, 2003. This change reduced last year's first quarter net income by $6.4 million, or 3 cents per diluted share.
Tax Services
Tax services revenues increased 11.8 percent to $74.1 million. The segment reported a pretax loss of $134 million, which was 2.8 percent higher than the pretax loss of $130.4 million in the second quarter of fiscal 2004.
For the six-month period, revenues were $124.6 million, up $12.3 million from $112.3 million last year, a 10.9 percent increase. The pretax loss for the six-month period was $247 million, $17 million, or 7.4 percent, higher than last year.
"We continue on pace to open more than 600 new offices and 400 additional Wal-Mart locations. This investment in expanding our office network will make our tax services more accessible and convenient to a greater number of tax filers, which we expect will drive client growth this tax season. Our off-season costs remain in line with our expectations," Ernst said.
Mortgage Services
Mortgage services, which include Option One Mortgage Corp. and H&R Block Mortgage Corp., reported second quarter pretax income of $106.2 million, a 42.3 percent decline, compared with $184 million in the second quarter last year.
Loan production increased to $6.5 billion for the quarter, a 2.7 percent increase over the previous year's quarter.
Included within these results, H&R Block Mortgage Corp., H&R Block's retail mortgage subsidiary, reported a 32.9 percent increase in originations. Retail clients of other H&R Block businesses generated 32 percent of H&R Block Mortgage's loan activity during the quarter.
Second quarter revenues declined 17.2 percent to $281.6 million, from $340.2 million the prior year. For the six-month period, revenues decreased 13.1 percent to $549.8 million from $632.8 million last year.
The mortgage segment's total gain on sales was $184.6 million for the second quarter, a 26.3 percent decline compared with $250.6 million in the prior year's second quarter. The decline in gain on sales is primarily due to increased price competition.
"We have seen increased costs this quarter due to investments we have made to expand distribution capacity, upgrade technology and improve our processes at Option One and H&R Block Mortgage. We believe these investments will drive increased productivity and position us for lower operating costs in the future," Ernst said.
The segment's residual interests continued to perform better than expected. Consequently, the company realized a net write-up to residual balances of $35.4 million during the second quarter of fiscal year 2005, which was recorded as other comprehensive income, net of deferred taxes.
Business Services
Business services reported second quarter revenue of $129 million, representing growth of 18.4 percent over the same quarter last year. The second quarter pretax loss was $4.9 million compared with a pretax loss of $2.7 million in the same quarter last year.
For the six-month period, revenues increased 14.8 percent to $238.1 million from $207.5 million last year. The pretax loss was $15 million, an increase of $5.6 million, or 59.2 percent compared to a loss of $9.4 million for the first six months of fiscal year 2004.
"Our accounting and consulting businesses enjoyed strong off-season revenue growth in all of our core service lines, and benefited from strong demand for consulting and risk management services," Ernst said. "The development and implementation of our marketing and sales infrastructure is going well. We're well-positioned to capitalize on the opportunity this market presents to us."
Investment Services
Investment services reported a second quarter pretax loss of $24.6 million, an increase of $9.2 million compared with last year's $15.3 million loss. The second quarter loss included a $6 million write-down of a branch office facility. Investment services reported second quarter revenues of $53.8 million, a 2 percent increase from the same quarter last year.
The pretax loss for the second quarter increased 34.5 percent, or $6.3 million compared with the first quarter of fiscal year 2005. Revenues improved slightly, up .3 percent compared with first quarter revenues of $53.6 million.
For the six-month period, revenues decreased 2.1 percent to $107.3 million from $109.7 million last year. The pretax loss increased $13.7 million, or 47.2 percent compared with a loss of $29.1 million for the first six months of fiscal year 2004.
"The general market climate for investment services remained very weak during the early months of the quarter, though we began to see improvement in October and into November," Ernst said.
Dividend declared
H&R Block's board of directors declared a quarterly cash dividend of 22 cents per share, payable Jan. 3, 2005, to shareholders of record Dec. 13, 2004. This payment will be the company's 169th consecutive quarterly dividend.
Other
On Nov. 23 at 5 p.m. EST, the company will host a conference call for analysts, institutional investors and shareholders. Ernst, Jeff Yabuki, executive vice president and chief operating officer, and William Trubeck, executive vice president and chief financial officer, will discuss the quarter and future expectations, as well as respond to analysts' questions. To access the call, please dial the number approximately 5 to 10 minutes prior to the scheduled starting time:
U.S./Canada (888) 425-2715 - Access Code: 1169962
International (706) 679-8257 - Access Code: 1169962
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 financial and statistical information 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 6:00 p.m. EST Nov. 23 and continuing until 12:00 a.m. EST Nov. 30, by dialing (800) 642-1687 (U.S./Canada) or (706) 645-9291 (International). The replay access code is 1169962. A replay of the webcast will also be available on the company's Web site at www.hrblock.com through Dec. 31, 2004.
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 services, and business accounting and consulting services. H&R Block empowers clients to make tax and financial decisions by providing a unique combination of tax services, financial information and advice, and related products and services. The company's mission is to help clients achieve their tax and financial objectives by serving as their tax and financial partner.
As the world's largest tax services company, in 2004 H&R Block served more than 21 million clients in the U.S. and 12 countries. H&R Block Financial Advisors Inc. offers investment services and securities products. With approximately 1,000 financial advisors serving clients at approximately 360 branch offices, H&R Block Financial Advisors Inc. is a member NYSE, SIPC, a registered broker-dealer and investment advisor. H&R Block Inc. is not a registered broker-dealer and is not a registered investment advisor. H&R Block Mortgage Corp. offers a full range of retail mortgage services. Option One Mortgage Corp. provides mortgage services and offers wholesale mortgages through large financial institutions and a network of 24,000 independent mortgage brokers. RSM McGladrey Business Services Inc. and its subsidiaries serve mid-sized businesses and their owners with tax, accounting and business consulting services, as well as personal wealth management services.
H&R BLOCK, INC.
KEY OPERATING RESULTS
Unaudited, amounts in thousands, except per share data
Three months ended
October 31,
----------------------------------------------------------------------
2004 2003
----------------------------------------------------------------------
Revenues $539,255 $568,872
------------------------
Income (loss) before taxes (85,924) 17,134
Net income (loss) $(52,199) $10,376
========================
Basic earnings (loss) per share $(0.32) $0.06
========================
Basic shares outstanding 164,686 177,828
Diluted earnings (loss) per share $(0.32) $0.06
========================
Diluted shares outstanding 164,686 181,111
----------------------------------------------------------------------
Six months ended
October 31,
----------------------------------------------------------------------
2004 2003
----------------------------------------------------------------------
Revenues $1,021,966 $1,064,256
------------------------
Income (loss) before taxes (158,488) 35,963
Net income (loss) before change in accounting
principle (96,282) 21,895
Cumulative effect of change in accounting
principle, net of taxes - (6,359)
Net income (loss) $(96,282) $15,536
========================
Basic earnings (loss) per share:
Before change in accounting principle $(0.58) $0.12
Net income (loss) $(0.58) $0.09
========================
Basic shares outstanding 166,721 178,616
Diluted earnings (loss) per share:
Before change in accounting principle $(0.58) $0.12
Net income (loss) $(0.58) $0.09
========================
Diluted shares outstanding 166,721 181,965
----------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------
On October 26, 2004, we issued $400.0 million in 5.125% Senior Notes,
due in 2014. The proceeds from the notes will be used to repay our
$250.0 million in 6 3/4% Senior Notes, which are due on November 1,
2004. The remaining proceeds will be used for working capital, capital
expenditures, repayment of other debt and other general corporate
purposes. The proceeds are included in cash and cash equivalents on
the condensed consolidated balance sheet.
We 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, we recorded the
cumulative effect of a change in accounting principle of $6.4 million,
net of tax benefit 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 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.
In the first quarter of fiscal year 2005, we redefined our reportable
segments. The previously reported International Tax Operations and
U.S. Tax Operations segments will now be reported as the Tax Services
segment.
H&R BLOCK, INC.
SEGMENT FINANCIAL RESULTS
Unaudited, amounts in thousands
Three months ended October 31,
----------------------------------------------------------------------
Revenues Income (loss)
----------------------- ---------------------
2004 2003 2004 2003
----------------------------------------------------------------------
Tax Services $74,106 $66,284 $(133,972) $(130,383)
Mortgage Services 281,634 340,173 106,200 184,026
Business Services 129,047 109,024 (4,913) (2,732)
Investment Services 53,761 52,703 (24,566) (15,336)
Corporate 707 688 (28,673) (18,441)
----------------------- ---------------------
$539,255 $568,872 (85,924) 17,134
=======================
Income taxes (benefit) (33,725) 6,758
---------------------
Net income (loss) $(52,199) $10,376
=====================
----------------------------------------------------------------------
Six months ended October 31,
----------------------------------------------------------------------
Revenues Income (loss)
----------------------- ---------------------
2004 2003 2004 2003
----------------------------------------------------------------------
Tax Services $124,553 $112,265 $(246,961) $(229,963)
Mortgage Services 549,767 632,762 199,740 347,855
Business Services 238,149 207,523 (14,984) (9,411)
Investment Services 107,342 109,690 (42,837) (29,093)
Corporate 2,155 2,016 (53,446) (43,425)
----------------------- ---------------------
$1,021,966 $1,064,256 (158,488) 35,963
=======================
Income taxes (benefit) (62,206) 14,068
---------------------
Net income (loss) before change in accounting
principle (96,282) 21,895
Cumulative effect of change in accounting
principle, net of taxes - (6,359)
---------------------
Net income (loss) $(96,282) $15,536
=====================
H&R BLOCK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share data
----------- -----------
October 31, April 30,
2004 2004
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $575,796 $1,071,676
Cash and cash equivalents - restricted 496,798 545,428
Receivables from customers, brokers, dealers
and clearing
organizations, net 610,039 625,076
Receivables, net 368,072 347,910
Prepaid expenses and other current assets 432,335 371,209
----------- -----------
Total current assets 2,483,040 2,961,299
----------- -----------
Residual interests in securitizations -
available-for-sale 261,503 210,973
Beneficial interest in Trusts - trading 108,624 137,757
Mortgage servicing rights 134,062 113,821
Property and equipment, net 275,688 279,220
Intangible assets, net 299,851 325,829
Goodwill, net 964,548 959,418
Other assets 369,542 391,709
----------- -----------
Total assets $4,896,858 $5,380,026
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Commercial paper $316,056 $-
Current portion of long-term debt 277,546 275,669
Accounts payable to customers, brokers and
dealers 1,000,083 1,065,793
Accounts payable, accrued expenses and other 483,996 456,167
Accrued salaries, wages and payroll taxes 115,249 268,747
Accrued income taxes 88,784 405,667
----------- -----------
Total current liabilities 2,281,714 2,472,043
----------- -----------
Long-term debt 931,781 545,811
Other noncurrent liabilities 368,696 465,163
----------- -----------
Total liabilities 3,582,191 3,483,017
----------- -----------
Stockholders' equity:
Common stock, no par, stated value $.01 per
share 2,179 2,179
Additional paid-in capital 558,770 545,065
Accumulated other comprehensive income 99,589 57,953
Retained earnings 2,615,089 2,781,368
Less cost of 54,469,436 and 44,849,128
shares of common stock in treasury (1,960,960) (1,489,556)
Total stockholders' equity 1,314,667 1,897,009
----------- -----------
Total liabilities and stockholders' equity $4,896,858 $5,380,026
=========== ===========
H&R BLOCK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, amounts in thousands
---------------------
Six months ended
October 31,
---------------------
2004 2003
----------- ---------
Cash flows from operating activities:
Net income (loss) $(96,282) $15,536
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 76,768 76,010
Accretion of residual interests in
securitizations (57,835) (70,906)
Impairment of residual interests in
securitizations 3,469 11,106
Additions to trading securities - residual
interests in securitizations (68,618) (199,021)
Proceeds from net interest margin
transactions 53,348 147,107
Additions to mortgage servicing rights (58,894) (48,002)
Amortization of mortgage servicing rights 38,653 35,307
Net change in beneficial interest in Trusts 29,133 (62,823)
Other net changes in working capital, net
of acquisitions (594,829) (367,664)
----------- ---------
Net cash used in operating activities (675,087) (463,350)
----------- ---------
Cash flows from investing activities:
Cash received from residual interests in
securitizations 73,477 68,850
Purchases of property and equipment, net (55,249) (43,591)
Payments made for business acquisitions, net
of cash acquired (5,472) (123,337)
Other, net 12,138 6,691
----------- ---------
Net cash provided by (used in) investing
activities 24,894 (91,387)
----------- ---------
Cash flows from financing activities:
Repayments of commercial paper (1,376,877) (499,771)
Proceeds from issuance of commercial paper 1,692,933 624,401
Proceeds from issuance of long-term debt 395,221 -
Dividends paid (69,997) (68,087)
Acquisition of treasury shares (529,558) (178,847)
Proceeds from issuance of common stock 53,933 59,851
Other, net (11,342) 3,167
----------- ---------
Net cash provided by (used in) financing
activities 154,313 (59,286)
----------- ---------
Net decrease in cash and cash equivalents (495,880) (614,023)
Cash and cash equivalents at beginning of the
period 1,071,676 875,353
----------- ---------
Cash and cash equivalents at end of the period $575,796 $261,330
=========== =========
Supplementary cash flow data:
Income taxes paid $316,764 $170,826
Interest paid 37,320 42,724
H&R BLOCK, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
Unaudited, amounts in thousands, except per share data
------------------- ---------------------
Three Months Ended Six Months Ended
October 31, October 31,
------------------- ---------------------
2004 2003 2004 2003
--------- --------- ---------- ----------
Revenues:
Service revenues $277,289 $247,740 $517,046 $462,698
Gains on sales of mortgage
assets, net 184,555 250,558 366,648 459,955
Interest income 45,889 46,615 82,593 90,503
Other 31,522 23,959 55,679 51,100
--------- --------- ---------- ----------
539,255 568,872 1,021,966 1,064,256
--------- --------- ---------- ----------
Operating expenses:
Cost of services 318,833 282,926 608,035 534,577
Interest 21,063 19,899 40,153 43,096
Selling, general and
administrative 286,793 250,077 535,784 453,479
--------- --------- ---------- ----------
626,689 552,902 1,183,972 1,031,152
--------- --------- ---------- ----------
Operating income (loss) (87,434) 15,970 (162,006) 33,104
Other income, net 1,510 1,164 3,518 2,859
--------- --------- ---------- ----------
Income (loss) before taxes (85,924) 17,134 (158,488) 35,963
Income taxes (benefit) (33,725) 6,758 (62,206) 14,068
--------- --------- ---------- ----------
Net income (loss) before
cumulative effect of change
in accounting principle (52,199) 10,376 (96,282) 21,895
Cumulative effect of change
in accounting principle for
multiple deliverable revenue
arrangements, less income
tax benefit of $4,031 - - - (6,359)
Net income (loss) $(52,199) $10,376 $(96,282) $15,536
========= ========= ========== ==========
Basic earnings (loss) per
share:
Before change in
accounting principle $(0.32) $0.06 $(0.58) $0.12
Cumulative effect of
change in accounting - - - (0.03)
--------- --------- ---------- ----------
Net income (loss) $(0.32) $0.06 $(0.58) $0.09
========= ========= ========== ==========
Basic shares outstanding 164,686 177,828 166,721 178,616
Diluted earnings (loss) per
share:
Before change in
accounting principle $(0.32) $0.06 $(0.58) $0.12
Cumulative effect of
change in accounting - - - (0.03)
--------- --------- ---------- ----------
Net income (loss) $(0.32) $0.06 $(0.58) $0.09
========= ========= ========== ==========
Diluted shares outstanding 164,686 181,111 166,721 181,965
H&R BLOCK, INC.
SELECTED OPERATING DATA
Unaudited
----------------------------------------------------------------------
------------------------------------------------------
Mortgage
Services Three months ended
------------------------------------------------------
10/31/2004 10/31/2003 % change 7/31/2004 % change
----------------------------------------------------------------------
Number of loans
originated:
Wholesale
(non-prime) 34,385 36,233 -5.1% 37,487 -8.3%
Retail: Prime 1,365 1,944 -29.8% 1,697 -19.6%
Non-
prime 5,672 4,110 38.0% 4,742 19.6%
----------- ----------- -------- ----------- ---------
7,037 6,054 16.2% 6,439 9.3%
----------- ----------- -------- ----------- ---------
Total 41,422 42,287 -2.0% 43,926 -5.7%
=========== =========== ======== =========== =========
Volume of loans
originated
(000s):
Wholesale
(non-prime) $5,528,361 $5,603,118 -1.3% $5,981,104 -7.6%
Retail: Prime 183,647 247,661 -25.8% 215,287 -14.7%
Non-
prime 800,975 492,977 62.5% 620,126 29.2%
----------- ----------- -------- ----------- ---------
984,622 740,638 32.9% 835,413 17.9%
----------- ----------- -------- ----------- ---------
Total $6,512,983 $6,343,756 2.7% $6,816,517 -4.5%
=========== =========== ======== =========== =========
Loan sales
(000s) $6,560,780 $6,330,449 3.6% $6,744,056 -2.7%
=========== =========== ======== =========== =========
Servicing
portfolio:
Number of
loans
serviced 362,430 295,636 22.6% 344,659 5.2%
Servicing
portfolio
($ bns) $53.6 $40.1 33.7% $49.4 8.5%
----------------------------------------------------------------------
----------------------------------------------------------------------
------------------------------------------------------
Investment
Services Three months ended
------------------------------------------------------
10/31/2004 10/31/2003 % change 7/31/2004 % change
----------------------------------------------------------------------
Customer
trades(1) 192,909 232,293 -17.0% 205,948 -6.3%
Customer daily
average trades 3,014 3,574 -15.7% 3,269 -7.8%
Average revenue
per trade $125.13 $116.22 7.7% $119.71 4.5%
Number of
active
accounts:
Traditional
brokerage 444,770 474,289 -6.2% 454,147 -2.1%
Express IRAs 334,928 228,110 46.8% 337,583 -0.8%
----------- ----------- -----------
779,698 702,399 11.0% 791,730 -1.5%
=========== =========== ===========
Ending balance
of assets under
administration
($ bns) $27.2 $25.7 5.8% $26.6 2.3%
Average assets
per active
account $34,924 $36,589 -4.6% $33,592 4.0%
Average customer
margin balances
($ millions) $590 $514 14.8% $598 -1.3%
Average
payables to
customers
($ millions) $962 $959 0.3% $1,012 -4.9%
Advisors 982 928 5.8% 997 -1.5%
----------------------------------------------------------------------
(1) Includes only trades on which commissions are earned
("commissionable trades").
SOURCE: H&R Block H&R Block
H&R Block
Media Relations:
Bob Schneider, 816-932-4835
bschneider@hrblock.com
or
Investor Relations:
Pam Kearney, 816-932-1967
pkearney@hrblock.com