H&R Block Reports 5 Cents Per Share First Quarter Loss

Aug 27, 2002

Company Increases Fiscal 2003 Earnings Guidance to Range of $2.80 to $3 Per Share

KANSAS CITY, Mo., Aug 27, 2002 /PRNewswire-FirstCall via COMTEX/ -- H&R Block Inc. (NYSE: HRB) reported a first quarter loss of $9.5 million, or 5 cents per basic share, compared with a loss of $30.8 million, or 17 cents per share last year. The company typically reports a loss in its first quarter due to the seasonal nature of its tax service businesses.

The company's revenues increased 31.1 percent to $431.4 million for the quarter, up from last year's $329 million. The loss for the quarter includes an $18 million non-cash impairment charge in the company's investment services segment, reflecting the significant decline in market values at July 31 for comparable businesses. Excluding this charge, the company earned $1.3 million, or 1 cent per share.

"H&R Block enjoyed solid operating performance for the quarter, led by our mortgage operation's outstanding results," said Mark A. Ernst, president and chief executive officer.

Cash earnings improved $40 million over the prior year's quarter to $18.6 million, or 10 cents per basic and diluted share, compared with a net loss of $21.4 million, or 12 cents per basic share last year. The company defines cash earnings as net earnings from operations, excluding the after-tax effect of amortization expense of acquired intangible assets and the impairment charge.

"Based on the continued strength of our mortgage operations, expectations for a solid tax filing season and cost controls across our businesses, we expect that earnings per share for fiscal 2003 will be in the range of $2.80 to $3," Ernst said. "We expect overall annual revenue growth to be within our target range of 10 to 15 percent."

The company had previously estimated full year earnings per share to be in the range of $2.60 to $2.75. The expected results represent growth of 21 to 30 percent from fiscal 2002, when H&R Block earned $2.31 per diluted share.

U.S. Tax Operations

H&R Block's U.S. tax operations reported revenues of $23.3 million, an increase of $3.8 million, or 19.5 percent, compared with $19.5 million in the same quarter a year ago. Revenues from the company's Peace of Mind service and higher average fees from off-season tax preparation were primarily responsible for the increase.

The pretax loss for the segment increased $12.8 million to $94 million, an increase of 15.8 percent, compared with a pretax loss of $81.2 million last year. Most of the increase was driven by increased staff and occupancy costs in the field organization. The higher spending levels in the quarter, relative to first quarter last year, were consistent with the company's business plan and represent preparations for the upcoming tax season.

"Preparations for tax season are progressing well," Ernst said. "Spending is consistent with our full year margin improvement targets."

International Tax Operations

The pretax loss in international tax operations increased 14.1 percent or $798,000, to $6.5 million. The increased loss was the result of normal increases in operating expenses in Canadian operations. Revenues in international tax operations declined 10.7 percent, from $4.8 million in the prior year to $4.3 million.

Mortgage Operations

Mortgage operations, which include Option One Mortgage Corp. and H&R Block Mortgage Corp., reported pretax earnings of $147.1 million, up $80.3 million or 120.3 percent, compared with $66.8 million last year.

Revenues in mortgage operations increased 68.8 percent to $250.3 million, up $102 million from last year's $148.3 million. Higher loan origination and servicing volume, improved pricing on loans generated, and contributions from retail mortgage combined for an outstanding quarter.

Option One and H&R Block Mortgage originated $3.4 billion in loans during the first quarter, an increase of 28.6 percent over the previous year's first quarter. Option One's end of quarter servicing portfolio was $26.8 billion, compared with $19.2 billion at the end of first quarter last year.

Increased productivity and the interest rate environment contributed to a 113 basis point year-over-year improvement in operating profit margin. Operating profit margin for the first quarter was 3.68 percent compared with 2.55 percent in last year's first quarter. Operating profit margin is defined as pretax earnings before amortization and accretion on residual write-ups divided by mortgage fundings.

"Low interest rates, a strong secondary market and outstanding execution of the business resulted in great quarterly results," said Ernst. "While we continue to expect some slowdown in this business in our third and fourth quarters, the market environment remains very positive."

In addition to its operating results during the first quarter, the company recorded a $77.9 million pretax write-up of its interests in residuals through other comprehensive income. The write-up reflects the stronger than previously expected cash flows from the company's retained residual interests from past securitizations and the continued low interest rate environment.

Investment Services

As expected, the weak market environment negatively affected H&R Block's investment services operations, which consists of H&R Block Financial Advisors Inc. The segment reported a pretax loss of $32.8 million, which includes an $18 million impairment charge. It reported a loss of $27.3 million in the prior quarter and a loss of $6.1 million in last year's first quarter.

First quarter revenues were $58.7 million, compared with $55.8 million in the previous quarter and $68.9 in last year's first quarter.

Because of unsettled market conditions in the industry, the company elected to test the fair value of the goodwill in its investment services segment as of July 31, 2002, in accordance with Statement of Financial Accounting Standards (SFAS) no. 142. The first step of the test, performed by an independent valuation firm, indicated that the market value of the investment services segment, depressed by lower levels of activity by retail investors in this summer's bear market, was lower than its carrying value by $18 million.

The second step of the analysis is now being performed to calculate the fair value of goodwill for this segment and to determine the actual amount of the impairment, if any. The second step is expected to be completed during the company's second quarter and any adjustments to the $18 million estimate will be recorded in the second quarter.

"Although we haven't yet completed the full analysis, the current charge is our best estimate of the impairment," Ernst said. "Our decision to test for and record this charge reflects our commitment to provide investors with the most current information.

"Our management team continues to make solid progress toward H&R Block Financial Advisors' objective to better serve our clients," Ernst said. "Despite the challenging market environment, I am encouraged by the progress we're making."

Business Services

Business services, which primarily includes RSM McGladrey, reported that revenues rose 11.7 percent over last year to $95.3 million primarily as a result of the increase in revenues associated with the company's expansion into valuation, corporate finance and payroll processing. This was partially offset by declining revenues in consulting services for manufacturing clients, reflecting their cautious business climate.

The pretax loss was $4.3 million compared with $2.2 million last year. The increased operating loss was due to planned start-up losses related to corporate finance and payroll services, partially offset by increased earnings from tax and accounting services. The increase in tax and accounting earnings is largely attributable to operating efficiencies realized through improved productivity and decreased operating costs.

Other

In the first quarter, the company purchased 786,000 of its shares of common stock for approximately $36.6 million, or an average cost of $46.57 per share.

As announced in June, H&R Block's Board of Directors declared a quarterly dividend of 18 cents per share payable Oct. 1, 2002, to shareholders of record Sept. 10, 2002. A conference call with H&R Block management discussing first quarter results will be conducted live today at 5 p.m. EDT and may be accessed at www.hrblock.com .

Except for historical information contained herein, the matters set forth in this press release are forward-looking statements based upon current information and expectations. Such statements speak only as of the date on which they are made, are not guarantees of future performance, and involve certain risks, uncertainties and assumptions that could cause actual results to differ materially from what is expressed, implied or forecast in such forward-looking statements. Such differences could be caused by a number of factors, including, but not limited to, the uncertainties that the company will achieve its revenue, earnings and earnings per share goals for fiscal year 2003 and that actual financial results for fiscal year 2003 will fall within the guidance provided by the company; the uncertainty of the actual amount of impairment, if any, of goodwill within the investment services segment; 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. ( 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. As the world's largest tax services company, H&R Block served nearly 23 million clients during fiscal year 2002. Clients were served at the approximately 10,400 H&R Block retail offices worldwide and through the company's award-winning software, TaxCut(R), and its online tax 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 Corp. offers retail mortgage products. Option One Mortgage Corp. offers wholesale mortgage products and a wide range of mortgage services. RSM McGladrey Inc. serves mid-sized businesses with accounting, tax and consulting services.

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

                                               Three months ended July 31,
                                              2002        2001        2000

    Revenues                                $431,366    $328,981    $311,009

    Loss before income taxes                 (15,906)    (51,738)    (89,993)

    Net loss                                 $(9,544)   $(30,784)   $(51,746)

    Basic and diluted net loss per
     share:                                   $(0.05)     $(0.17)     $(0.28)

      Basic and diluted shares
       outstanding                           181,209     183,859     186,522


    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 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.

    Results for the three months ended July 31, 2001 and 2000 have been
    adjusted to reflect the implementation of Emerging Issues Task Force Issue
    No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer
    (Including a Reseller of the Vendor's Products)."  The effect of this
    change was to reduce revenues and expenses by $521,000 and $129,000 for
    the three months ended July 31, 2001 and 2000, respectively.  There was no
    impact on net earnings.

    Results for the three months ended July 31, 2001 and 2000 have been
    adjusted to reflect the implementation of Emerging Issues Task Force Issue
    No. 01-14, "Income Statement Characterization of Reimbursements Received
    for 'Out-of-Pocket' Expenses Incurred."  The effect of this change was to
    increase revenues and expenses by $5.4 million and $7.0 million for the
    three months ended July 31, 2001 and 2000, respectively.  There was no
    impact on net earnings.

    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."
    SFAS 142 addresses how intangible assets should be accounted for upon
    their acquisition and after they have been initially recognized in the
    financial statements.  The Company adopted both SFAS 141 & 142 on May 1,
    2001.  The implementation of these standards had the effect of reducing
    amortization expense of acquired intangible assets.

    In accordance with SFAS 142, the Company performed step one of the
    goodwill impairment test as of July 31, 2002 for the Investment services
    segment.  As this valuation indicated a potential impairment, step two of
    the impairment test will now be performed.  Although step two has not yet
    been completed as of the press release date, management has recorded an
    estimated impairment charge of $18.0 million, the excess of the carrying
    value over the estimated fair value yielded by step one.  This impairment
    charge is included as a separate line item in the consolidated statements
    of operations for the three months ended July 31, 2002 and is included in
    the Investment services segment where applicable.

    During the three months ended July 31, 2002, 2001 and 2000, the Company
    issued shares of its common stock pursuant to provisions for exercise of
    the Company's stock option plans as follows:  2002 - 556,500 shares;
    2001 - 1,528,611 shares; 2000 - 36,300 shares.  During the same periods,
    the Company reacquired shares of its common stock as follows:
    2002 - 796,900 shares at an aggregate cost of $37,108,000;
    2001 - 2,037,400 shares at an aggregate cost of $67,583,000;
    2000 - 13,063,000 shares at an aggregate cost of $213,107,000.


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

                                           Three months ended July 31,
                                          Revenues         Earnings (loss)
                                       2002      2001      2002      2001

    U.S. tax operations              $23,286   $19,493  $(94,030) $(81,168)
    International tax operations       4,283     4,797    (6,451)   (5,653)
    Mortgage operations              250,306   148,325   147,085    66,779
    Investment services               58,663    68,925   (32,797)   (6,098)
    Business services                 95,314    85,359    (4,273)   (2,171)
    Corporate operations                (486)    2,082   (10,829)   (5,439)
    Interest expense on acquisition
     debt                                -         -     (18,773)  (21,398)
                                    $431,366  $328,981   (20,068)  (55,148)
    Investment income, net                                 1,084     1,118
    Intercompany interest*                                 3,078     2,292
                                                         (15,906)  (51,738)
    Income tax benefit                                    (6,362)  (20,954)
    Net loss                                             $(9,544) $(30,784)

    * 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 Company's credit facility.


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

                                                            July 31,
                                                       2002          2001
                                     ASSETS
    CURRENT ASSETS:
      Cash and cash equivalents                      $377,992      $235,754
      Cash and cash equivalents - restricted          242,260        16,096
      Marketable securities -- available-for-sale        -            1,500
      Marketable securities -- trading                 24,507       176,352
      Receivables from customers, brokers, dealers
       and clearing organizations, less allowance
       for doubtful accounts of $1,722 and $1,735     680,364     1,262,193
      Receivables, less allowance for doubtful
       accounts of $64,024 and $42,877                310,227       277,977
      Prepaid expenses and other current assets       302,802       244,466
        Total current assets                        1,938,152     2,214,338

    OTHER ASSETS:
      Investments in available-for-sale marketable
       securities                                      17,878        16,269
      Residual interests in securitizations           397,775       233,983
      Intangible assets                               369,320       391,806
      Goodwill                                        708,046       651,527
      Property and equipment, at cost less
       accumulated depreciation and amortization      277,865       278,601
      Other                                           216,686       248,315
                                                   $3,925,722    $4,034,839

            LIABILITIES AND STOCKHOLDERS' EQUITY
    CURRENT LIABILITIES:
      Notes payable                                  $156,492      $373,335
      Accounts payable to customers, brokers and
       dealers                                        840,966     1,007,318
      Accounts payable, accrued expenses and
       deposits                                       261,503       248,693
      Accrued salaries, wages and payroll taxes       114,093        98,872
      Accrued taxes on earnings                       167,868       215,929
      Current portion of long-term debt                60,793        52,428
        Total current liabilities                   1,601,715     1,996,575

    LONG-TERM DEBT                                    868,702       870,549

    OTHER NONCURRENT LIABILITIES                      109,243        93,973

    STOCKHOLDERS' EQUITY:
      Common stock, no par, stated value $.01 per
       share                                            2,179         2,179
      Additional paid-in capital                      471,493       416,622
      Accumulated other comprehensive income (loss)    77,360       (43,654)
      Retained earnings                             1,729,154     1,390,578
      Less cost of 36,986,522 and 34,791,128 shares
       of common stock in treasury                   (934,124)     (691,983)
        Total stockholders' equity                  1,346,062     1,073,742
                                                   $3,925,722    $4,034,839


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

                                                   Three months ended July 31,
                                                       2002            2001
    Cash flows from operating activities:
      Net loss                                        $(9,544)      $(30,784)
      Adjustments to reconcile net loss to net cash
       used in operating activities:
        Depreciation and amortization                  35,573         34,599
        Provision for bad debt                          7,993         10,836
        Accretion of acquisition liabilities            2,851          3,585
        Accretion of residual interests in
         securitizations, net                         (38,761)        (4,844)
        Adjustments to fair value of residual
         interests in securitizations                  20,430            344
       Impairment of goodwill                          18,000            -
       Changes in:
         Cash and cash equivalents - restricted       (90,087)        68,101
         Receivables from customers, brokers, dealers
          and clearing organizations                  164,007         48,535
         Receivables                                   50,166        (48,808)
         Marketable securities - trading                3,800          3,635
         Prepaid expenses and other current assets     92,648         16,476
         Accounts payable to customers, brokers and
          dealers                                     (62,235)       (50,682)
         Accounts payable, accrued expenses and
          deposits                                   (147,789)      (112,517)
         Accrued salaries, wages and payroll taxes   (139,308)      (122,958)
         Accrued taxes on earnings                    (84,954)       (79,670)
         Other, net                                    (4,105)         3,549
       Net cash used in operating activities         (181,315)      (260,603)

    Cash flows from investing activities:
      Purchases of available-for-sale securities       (7,146)          (607)
      Maturities of available-for-sale securities      46,269         23,686
      Purchases of property and equipment, net        (16,331)       (13,776)
      Payments made for business acquisitions, net
       of cash acquired                                   (75)        (2,084)
      Other, net                                       (2,437)        (1,825)
        Net cash provided by investing activities      20,280          5,394

    Cash flows from financing activities:
      Repayments of notes payable                  (1,962,998)    (1,136,895)
      Proceeds from issuance of notes payable       2,119,490      1,510,230
      Payments on acquisition debt                        (22)        (1,769)
      Dividends paid                                  (29,004)       (27,660)
      Payments to acquire treasury shares             (37,108)       (67,583)
      Proceeds from issuance of common stock           13,214         26,915
      Other, net                                         (690)           109
        Net cash provided by financing activities     102,882        303,347

    Net increase(decrease) in cash and cash
     equivalents                                      (58,153)        48,138
    Cash and cash equivalents at beginning of the
     period                                           436,145        187,616
    Cash and cash equivalents at end of the period   $377,992       $235,754

    Supplementary cash flow data:
      Income taxes paid                               $82,386        $68,776
      Interest paid                                    13,179         19,844


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

                                                       Three Months Ended
                                                            July 31,
                                                     2002              2001
    Revenues:
        Service revenues                          $190,569          $167,971
        Gain on sale of mortgage loans             145,008            96,234
        Interest income                             78,220            44,220
        Product sales                               15,412            10,757
        Royalties                                    1,201             1,557
        Other income                                   956             8,242
                                                   431,366           328,981

    Operating expenses:
        Employee compensation and benefits         210,188           176,029
        Occupancy and equipment                     64,862            59,679
        Operating interest                           3,646             9,483
        Other interest                              18,628            20,322
        Depreciation and amortization               35,573            34,599
        Marketing and advertising                    9,186             6,471
        Supplies, freight and postage                8,466             6,573
        Bad debt                                     7,993            10,836
        Impairment of goodwill                      18,000               -
        Other                                       72,221            58,008
                                                   448,763           382,000

    Operating loss                                 (17,397)          (53,019)

    Other income:
        Investment income, net                       1,084             1,118
        Other, net                                     407               163
                                                     1,491             1,281

    Loss before income taxes                       (15,906)          (51,738)
    Income tax benefit                              (6,362)          (20,954)

    Net loss                                       $(9,544)         $(30,784)

    Basic and diluted net loss per share            $(0.05)           $(0.17)

    Basic and diluted shares outstanding           181,209           183,859


                               H&R BLOCK, INC.
                      FINANCIAL SERVICES OPERATING DATA
                                  Unaudited

    H&R Block Financial Advisors, Inc.
                                             For the three months ended
                                   07/26/2002   07/27/2001 % Change 4/26/2002

     Customer trades (000's)             374        389      -3.9%      279
     Customer daily average trades     5,940      6,180      -3.9%    5,849
     Average commission per trade     $57.80     $62.29      -7.2%   $60.70

     Number of active accounts
      (000's)                            731        621      17.8%      701
     Average trades per active
      account per quarter               0.51       0.63     -18.4%     0.40
     Average trades per active
      account per year (annualized)     2.05       2.51     -18.4%     1.59

     Ending balance of assets under
      administration ($ bn's)          $21.3      $30.1     -29.2%    $25.5
     Average assets per active
      account                        $29,116    $48,498     -40.0%  $36,672

     Ending debit balances ($ bn's)     $0.7       $1.2     -43.5%     $0.8
     Ending credit balances ($ bn's)    $0.8       $0.8       5.1%     $0.8


    Option One Mortgage Corporation
                                           For the three months ended
                                    07/31/2002 07/31/2001 % Change 04/30/2002

    Number of loans originated
      Wholesale                       20,774     17,999      15.4%   20,693
      Retail                           4,278      3,695      15.8%    4,022
        Total                         25,052     21,694      15.5%   24,715

    Volume of loans originated
     (000's)
      Wholesale                   $2,837,060 $2,120,528     33.8%$2,784,076
      Retail                         536,329    503,418       6.5%  505,154
        Total                     $3,373,389 $2,623,946     28.6%$3,289,230

      Loan sales                  $3,357,730 $2,618,446     28.2%$3,334,989

    Servicing portfolio
      Number of loans serviced
       (000's)                         232.7      180.5      28.9%    209.6
      Servicing portfolio ($ bn's)     $26.8      $19.2      39.6%    $23.8

                    
SOURCE H&R Block Inc.

CONTACT: Media relations, Robert Schneider, +1-816-932-4835, 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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