H&R Block Reports Second Quarter Results, Raises Fiscal 2002 Earnings Guidance To $2.15 - $2.25 Per Share
Strong Mortgage Performance Drives 44 Percent Second Quarter ImprovementH&R Block Inc. (NYSE: HRB) today reported that its financial results improved 43.6 percent for the quarter ended Oct. 31, 2001, compared to the same period last year, resulting in a 15-cent per basic and diluted share loss. The company historically reports the majority of its profit during its fiscal fourth quarter. Today's reported net loss of $28 million for the second quarter compares with a net loss of $49.7 million, or 27 cents per basic and diluted share, last year. Revenues for the second quarter increased 12.2 percent to $378.7 million, compared with $337.5 million for the year-ago quarter.
"Once again, our mortgage operations delivered an outstanding quarter," said Mark A. Ernst, president and chief executive officer. "Option One and H&R Block Mortgage combined saw more than a 76 percent increase in loan originations from the previous year's quarter. Our retail channel, H&R Block Mortgage, continues to capitalize on the success of selling to our tax client base and at significantly lower acquisition costs."
Also during the second quarter, the company repurchased 7.7 million shares of its common stock for $284.3 million. In the current fiscal year, H&R Block has purchased a total of 9.7 million shares at a cost of $351.8 million, or an average price of $36.32.
"Our stock repurchase program is the leading component of our capital allocation plan," Ernst said. "We remain focused on allocating our capital in ways that create sustained shareholder value."
Fiscal 2002 second 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 $11.7 million, or 6 cents per share, of the improvement over the prior year second quarter.
Cash earnings improved 35.2 percent over the prior year's quarter with a loss of $18.5 million, or 10 cents per basic and diluted share, compared to a loss of $28.6 million, or 16 cents per basic and diluted share last year. The company defines cash earnings as net income or losses from operations excluding the after-tax effect of amortization expense of acquired intangible assets.
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 $14.1 million last year to a positive $5.9 million this year.
H&R Block's U.S. tax operations reported revenues of $28 million, an increase of $1.6 million, or 6.1 percent, compared with $26.4 million in the same quarter a year ago. Higher off-season tax preparation volumes and average fees drove the increase.
The pretax loss for the segment was $104.2 million, compared with a pretax loss of $85.7 million last year. The increased loss resulted primarily from: payroll taxes of $7.2 million associated with seasonal stock option exercises; increased technology development and marketing costs incurred earlier this year than in the previous year; somewhat higher rents; and increased field support wages related to the company's national tax training program.
"In anticipation of what we believe will be a good tax season, we have put key capabilities into place earlier in the year. This resulted in increased second-quarter spending, particularly related to some technology initiatives supporting our U.S. field operations," Ernst said. "However, the early preparation should result in reduced levels of spending during the third and fourth quarters and success in executing the upcoming tax season."
Amortization expense in the segment decreased by $2.9 million related to the adoption of SFAS 141 and 142. EBITDA declined by $21.3 million to a negative $92.3 million, or 30 percent over the prior year.
The pretax loss in International tax operations increased to $991,000 compared to $851,000 last year due primarily to an unfavorable Australian exchange rate. The company also experienced somewhat weaker than expected tax season results in Australia, offsetting an improved performance in Canada. EBITDA was a negative $229,000 compared with $508,000 last year.
Mortgage operations, which primarily include Option One Mortgage Corporation and H&R Block Mortgage Corporation, reported that pretax earnings rose to $93.2 million, compared with $20.4 million last year. The adoption of SFAS 141 and 142 accounts for $3.4 million of the improvement over the prior year. Revenues rose 113.5 percent to $180.8 million.
A 76.3 percent increase in loan originations, larger servicing volume, improved pricing on loans generated, and contributions from retail mortgage combined for an outstanding quarter. In addition, higher volumes and cost controls helped drive a 14 percent decline in the cost of origination, contributing to the 193 basis point year-over-year improvement in operating profit margin. Operating profit margin for the quarter was 3.52 percent compared with 1.59 percent in last year's second quarter. Operating profit margin is defined as pretax earnings before goodwill amortization divided by mortgage fundings. EBITDA increased $70.7 million to $96.9 million, or 270 percent over the prior year.
"The performance of our mortgage business has been simply outstanding," Ernst said. "In its second consecutive profitable quarter, H&R Block Mortgage contributed 11 percent of the segment's $72.8 million year-over-year improvement. Ten percent of all loans originated, and 62 percent of all retail loans, came from H&R Block tax clients."
Option One and H&R Block Mortgage originated $2.6 billion in loans during the second quarter. Option One's ending servicing portfolio was $20.9 billion, compared with $14.8 billion last year.
Based on current trends and market conditions, the company expects continued strength in its mortgage segment through the remainder of its fiscal year.
H&R Block's investment services operations, which consists primarily of H&R Block Financial Advisors Inc., continues to be adversely impacted by poor market conditions, which were exacerbated by the Sept. 11 tragedy. Second quarter revenues totaled $64.8 million compared with $131.6 million last year. The segment reported a pretax loss of $9.1 million compared with pretax earnings of $11.8 million last year. The adoption of SFAS 141 and 142 positively impacted the change over the prior year by $4.1 million. Investment services reported a decline in EBITDA to $3.6 million from $28.4 million in the prior year.
"The tragic events of Sept. 11 have created significant uncertainty for the retail investor," Ernst said. "Our business strategy of offering financial advice to our clients is more relevant than ever before."
Business services, which primarily includes RSM McGladrey, reported that acquisitions drove a 17.3 percent increase in revenues to $91.8 million, compared with $78.3 million last year. Pretax earnings of $2.6 million compared with a pretax loss of $1 million last year. Growth in consulting services slowed in late September, but rebounded strongly in October. Off- season losses from newly acquired firms and normal operating cost increases reduced results for the quarter. Business Services reports the bulk of its earnings in the fiscal fourth quarter of the year.
The adoption of SFAS 141 and 142 positively impacted results by $4.6 million compared to the second quarter last year. Business services reported a decline in EBITDA to $7.3 million, compared with $8.7 million last year.
"Based on the continued strength of our mortgage operations and expectations for a solid tax filing season, we expect that earnings per share for fiscal 2002 will be in the range of $2.15 to $2.25," Ernst said. "We expect overall revenue growth to be within our target range of 10 to 15 percent per year."
Interest expense on acquisition debt decreased $5.1 million primarily 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.
The Board of Directors of H&R Block declared a quarterly dividend of 16 cents per share payable Jan. 2, 2002, to shareholders of record Dec. 12, 2001.
A conference call with H&R Block management discussing second quarter results will be conducted live today at 5 p.m. EST (4 p.m. Central) and may be accessed at www.hrblock.com .
New Board Member Named
In other actions, Tom Decker Seip was elected to H&R Block's Board of Directors, filling the vacancy created by former Board member Robert E. Davis, who retired Sept. 12. Seip this year was named president and chief executive officer and director of Westaff Inc., a provider of temporary staffing and employment services. Prior to that, he worked more than 15 years at Charles Schwab Corporation in a variety of executive positions, including chief executive officer of Charles Schwab Investment Management Inc., the company's mutual fund subsidiary. Davis, a partner of Axess Corporation in Newark, Del., had been a member of H&R Block's Board of Directors for 20 years.
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 October 31, 2001 2000 1999 Revenues $378,729 $337,474 $209,946 Loss before income tax benefit (47,077) (86,356) (72,157) Net loss $(28,011) $(49,655) $(44,737) Basic net earnings (loss) per share: Net loss $(0.15) $(0.27) $(0.23) Basic shares outstanding 182,288 182,806 195,628 Six months ended October 31, 2001 2000 1999 Revenues $702,854 $641,584 $331,506 Loss before income tax benefit (98,815) (176,349) (131,954) Net loss $(58,795) $(101,401) $(81,811) Basic net earnings (loss) per share: Net loss $(0.32) $(0.55) $(0.42) Basic shares outstanding 183,073 184,664 195,528 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 periods 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 has the effect of reducing amortization expense of acquired intangible assets. 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 six months ended October 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 - 7,288,701 shares; 2000 - 119,338 shares; 1999 - 1,234,056 shares. During the same periods, the Company reacquired shares of its common stock as follows: 2001 - 9,688,400 shares at an aggregate cost of $351,845,000; 2000 - 13,628,400 shares at an aggregate cost of $222,816,000; 1999 - 1,443,600 shares at an aggregate cost of $32,366,000. H&R BLOCK, INC. SELECTED OPERATIONAL INFORMATION Unaudited, amounts in thousands Three months ended October 31, Revenues Earnings (loss) 2001 2000 2001 2000 U.S. tax operations $28,015 $26,403 $(104,225) $(85,724) International tax operations 13,709 14,899 (991) (851) Mortgage operations 180,821 84,690 93,191 20,433 Investment services 64,827 131,573 (9,135) 11,779 Business services 91,779 78,267 2,554 (1,030) Unallocated corporate (422) 1,642 (9,818) (7,359) Interest expense on acquisition debt - - (19,360) (24,484) $378,729 $337,474 (47,784) (87,236) Investment income, net 1,094 2,536 Intercompany interest* (387) (1,656) (47,077) (86,356) Income tax benefit (19,066) (36,701) Net loss $(28,011) $(49,655) Six months ended October 31, Revenues Earnings (loss) 2001 2000 2001 2000 U.S. tax operations $47,994 $37,753 $(185,393) $(171,286) International tax operations 18,541 19,798 (6,644) (7,206) Mortgage operations 329,146 165,290 159,970 41,963 Investment services 133,752 262,240 (15,233) 23,462 Business services 171,761 154,364 383 (4,264) Unallocated corporate 1,660 2,139 (15,257) (11,900) Interest expense on acquisition debt - - (40,758) (51,772) $702,854 $641,584 (102,932) (181,003) Investment income, net 2,212 5,255 Intercompany interest* 1,905 (601) (98,815) (176,349) Income tax benefit (40,020) (74,948) Net loss $(58,795) $(101,401) * 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 credit facility. H&R Block, Inc. Consolidated Balance Sheets Unaudited, amounts in thousands, except share data October 31, 2001 2000 ASSETS CURRENT ASSETS: Cash and cash equivalents $599,002 $247,679 Marketable securities -- available-for-sale 1,000 16,022 Marketable securities -- trading 36,591 39,060 Receivables from customers, brokers, dealers and clearing organizations, less allowance for doubtful accounts of $1,724 and $840 925,219 2,640,656 Receivables, less allowance for doubtful accounts of $48,875 and $46,075 323,251 354,207 Prepaid expenses and other current assets 415,414 153,733 TOTAL CURRENT ASSETS 2,300,477 3,451,357 INVESTMENTS AND OTHER ASSETS: Investments in available-for- sale marketable securities 300,727 304,952 Excess of cost over fair value of net tangible assets acquired, net of amortization 1,073,734 1,070,051 Other 248,686 210,245 1,623,147 1,585,248 PROPERTY AND EQUIPMENT, at cost less accumulated depreciation and amortization 276,007 285,414 $4,199,631 $5,322,019 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $881,697 $914,692 Accounts payable to customers, brokers and dealers 857,349 2,291,963 Accounts payable, accrued expenses and deposits 299,522 173,763 Accrued salaries, wages and payroll taxes 109,977 76,261 Accrued taxes on earnings 144,561 50,631 Current portion of long-term debt 50,750 43,308 TOTAL CURRENT LIABILITIES 2,343,856 3,550,618 LONG-TERM DEBT 849,283 840,073 OTHER NONCURRENT LIABILITIES 92,740 96,800 STOCKHOLDERS' EQUITY: Common stock, no par, stated value $.01 per share 2,179 2,179 Additional paid-in capital 458,019 420,003 Retained earnings 1,312,043 1,087,040 1,772,241 1,509,222 Less cost of 36,680,380 and 35,384,428 shares of common stock in treasury 858,489 674,694 913,752 834,528 $4,199,631 $5,322,019 H&R Block, Inc. Consolidated Statements of Cash Flows Unaudited, amounts in thousands Six months ended October 31, 2001 2000 Cash flows from operating activities: Net loss $(58,795) $(101,401) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 68,928 96,142 Provision for bad debt 17,099 14,254 Accretion of acquisition liabilities 6,187 5,604 Tax benefit from stock option exercises 41,805 - Changes in: Receivables from customers, brokers, dealers and clearing organizations 385,413 216,723 Receivables 23,180 (7,592) Marketable securities - trading 9,567 6,343 Prepaid expenses and other current assets (154,472) (8,792) Accounts payable to customers, brokers and dealers (200,651) (278,237) Accounts payable, accrued expenses and deposits (61,688) (48,599) Accrued salaries, wages and payroll taxes (111,853) (97,072) Accrued taxes on earnings (151,038) (175,786) Other, net (12,762) (1,169) Net cash used in operating activities (199,080) (379,582) Cash flows from investing activities: Purchases of available-for-sale securities (1,045) (2,432) Maturities of available-for-sale securities 27,498 10,090 Purchases of property and equipment, net (33,724) (23,821) Payments made for business acquisitions, net of cash acquired (23,468) (10,659) Other, net (13,028) (18,114) Net cash used in investing activities (43,767) (44,936) Cash flows from financing activities: Repayments of notes payable (3,916,323) (8,197,821) Proceeds from issuance of notes payable 4,798,020 8,828,716 Payments on acquisition debt (47,179) (63,993) Dividends paid (57,294) (53,764) Payments to acquire treasury shares (351,845) (222,816) Proceeds from stock options exercised 144,263 1,708 Other, net 394 266 Net cash provided by financing activities 570,036 292,296 Net increase (decrease) in cash and cash equivalents 327,189 (132,222) Cash and cash equivalents at beginning of the period 271,813 379,901 Cash and cash equivalents at end of the period $599,002 $247,679 Supplementary cash flow data: Income taxes paid $99,328 $88,836 Interest paid 52,107 118,715 H&R Block, Inc. Consolidated Statements of Operations Unaudited, amounts in thousands, except per share data Three Months Ended October 31, 2001 2000 Revenues: Service revenues $234,990 $265,982 Product sales 131,837 60,391 Royalties 2,886 3,877 Other income 9,016 7,224 378,729 337,474 Operating expenses: Employee compensation and benefits 200,687 172,900 Occupancy and equipment 61,749 56,234 Interest 29,785 63,973 Depreciation and amortization 34,329 48,685 Marketing and advertising 17,091 14,728 Supplies, freight and postage 9,470 10,005 Bad debt 6,263 8,733 Other 67,516 51,123 426,890 426,381 Operating loss (48,161) (88,907) Other income: Investment income, net 1,093 2,536 Other, net (9) 15 1,084 2,551 Loss before income tax benefit (47,077) (86,356) Income tax benefit (19,066) (36,701) Net loss $(28,011) $(49,655) Basic net loss per share $(0.15) $(0.27) Basic shares outstanding 182,288 182,806 H&R Block, Inc. Consolidated Statements of Operations Unaudited, amounts in thousands, except per share data Six months ended October 31, 2001 2000 Revenues: Service revenues $443,174 $512,714 Product sales 236,223 111,591 Royalties 4,443 5,193 Other income 19,014 12,086 702,854 641,584 Operating expenses: Employee compensation and benefits 376,716 319,440 Occupancy and equipment 121,428 116,458 Interest 59,590 127,171 Depreciation and amortization 68,928 96,142 Marketing and advertising 24,083 24,502 Supplies, freight and postage 16,043 17,584 Bad debt 17,099 14,254 Other 120,147 107,634 804,034 823,185 Operating loss (101,180) (181,601) Other income: Investment income, net 2,211 5,255 Other, net 154 (3) 2,365 5,252 Loss before income tax benefit (98,815) (176,349) Income tax benefit (40,020) (74,948) Net loss $(58,795) $(101,401) Basic net loss per share $(0.32) $(0.55) Basic shares outstanding 183,073 184,664 H&R Block, Inc. Financial Services Operating Data H&R Block Financial Advisors, Inc. For the three months ended 10/26/2001 10/27/2000 % change 07/27/2001 Customer trades (000's) 377 626 -39.8% 389 Customer daily average trades 6,285 9,788 -35.8% 6,180 Average commission per trade $63.17 $70.52 -10.4% $62.29 Number of active accounts (000's) 609 623 -2.3% 621 Average trades per active account per quarter 0.62 1.01 -38.4% 0.63 Average trades per active account per year (annualized) 2.48 4.02 -38.4% 2.51 Ending balance of assets under administration ($ bn's) $27.1 $39.0 -30.6% $ 30.1 Average assets per active account $44,448 $62,553 -28.9% $48,498 Ending debit balances ($ bn's) $0.9 $2.6 -66.6% $ 1.2 Ending credit balances ($ bn's) $0.8 $0.8 -6.9% $ 0.8 Option One Mortgage Corporation For the three months ended 10/31/2001 10/31/2000 % Change 07/31/2001 Number of loans originated Wholesale 18,172 11,900 52.7% 17,999 Retail 3,352 2,155 55.5% 3,695 Total 21,524 14,055 53.1% 21,694 Volume of loans originated (000's) Wholesale $2,206,041 $1,252,710 76.1% $2,120,528 Retail 438,158 247,424 77.1% 503,418 Total $2,644,199 $1,500,134 76.3% $2,623,946 Loan sales $2,618,065 $2,283,814 14.6% $2,618,446 Servicing portfolio Number of loans serviced (000's) 184.8 162.2 14.0% 180.5 Servicing portfolio ($ bn's) $20.9 $14.8 41.0% $19.2SOURCE H&R Block Inc.
Media Relations, Linda McDougall, +1-816-932-7542, or Investor Relations, Mark Barnett, +1-816-701-4443, both of H&R Block, Inc. URL: http://www.hrblock.com http://www.prnewswire.com
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