H&R Block Reports Fiscal 2009 Second Quarter Results
"Over the last twelve months, the company has moved quickly to refocus on its core business and to restore its financial strength and resilience. We are pursuing a variety of initiatives seeking to boost the rate of growth in our tax business, while increasing efficiency and profit margins in all our activities. We are heading into tax season in a stronger position than last year, and we are excited about opportunities in the business," said Richard C. Breeden, Chairman of the Board of H&R Block. "We have the largest and most highly trained group of tax professionals, and our ability to deliver excellence to clients has never been higher," he added.
Results from discontinued operations for the second quarter improved significantly to a net loss of $2.7 million compared to a net loss of $367.3 million in the prior-year period, reflecting the Company's exit from the subprime mortgage business. Beginning in the second quarter, discontinued operations include the results of H&R Block Financial Advisors, which was sold to Ameriprise Financial effective Nov. 1, 2008. As a result of lower losses in discontinued operations, the fiscal second quarter consolidated net loss of $135.9 million, or 41 cents per share, was also much lower than the loss of $502.3 million, or $1.55 per share, in the second quarter a year ago.
"We saw continued positive momentum in Tax Services and Business Services in our second quarter. Tax Services reported solid top-line growth during the pre-season period while also achieving meaningful expense control. RSM McGladrey improved its bottom line, again reflecting good cost management," said Russ Smyth, President and Chief Executive Officer of H&R Block. "While our Bank's mortgage loan portfolio continues to be negatively impacted by the depressed housing market, we are encouraged by early results from initiatives we have taken to keep people in their homes and paying what they can afford," added Smyth.
For the six months ended Oct. 31, 2008, H&R Block reported a consolidated net loss of $268.6 million, or 82 cents per share, compared with a loss of $804.9 million, or $2.48 per share, for the same period of fiscal 2008. Six month revenues were $623.4 million in fiscal 2009 versus $650.7 million in the prior-year period. Discontinued operations in the first half of fiscal 2009 recorded a net loss of $7.0 million, or 2 cents per share, compared with a year-ago loss of $557.7 million, or $1.72 per share.
Tax Services
Second quarter Tax Services revenues rose 9.1 percent year-over-year to $99.1 million, driven by a 6 percent increase in core U.S. retail clients served, or an increase of 12 percent including one-time Economic Stimulus Act filers.
The segment reported a pretax loss of $184.6 million for the quarter, a 7.3 percent improvement year-over-year, largely due to the Company's ongoing cost reduction efforts, fewer new office openings and lower bad debt.
For the first six months of fiscal 2009, Tax Services revenues of $174.4 million were up 8.5 percent from $160.7 million last year. The pretax loss of $348.5 million was improved compared with a loss of $371.4 million in the prior-year period.
Business Services
RSM McGladrey achieved an 11 percent year-over-year improvement in fiscal second quarter pretax income despite a 2.5 percent decline in revenues. Core accounting, tax and consulting revenues increased 8 percent over the prior-year period. Those gains were offset by a decline in capital markets revenues stemming from fewer transactions, and an operational change whereby amounts previously reported as leased-employee revenue have been eliminated in the current year. The latter change had no impact on earnings, as related costs were also eliminated. Excluding this change, revenues would have been up nearly 2 percent year-over-year.
Pretax income for the fiscal second quarter was $13.1 million compared with $11.8 million a year ago, reflecting savings in ongoing operating expenses and earlier reductions made to costs.
Six-month segment revenues were $407.7 million, down 5.6 percent from $431.9 million a year ago. Pretax income for the first six months of fiscal 2009 rose 29.5 percent to $12.8 million compared with income of $9.9 million in the prior-year period.
Consumer Financial Services
Consumer Financial Services, now comprised only of H&R Block Bank, reported a fiscal second quarter pretax off-season loss of $18.6 million compared to a pretax loss of $4.4 million in the second quarter a year ago. Higher losses were driven by a $13.3 million increase in current-quarter loan loss reserves as compared with the prior-year period, primarily reflecting ongoing declines in housing values.
For the first six months of fiscal 2009, Bank revenues declined 29 percent to $35.8 million compared with $50.3 million in the prior-year period. The pretax off-season loss of $32.7 million compares with pretax income of $0.4 million a year ago. The increase is primarily due to a $32 million increase in loan losses and reserves.
Outlook
The Company is reaffirming its fiscal 2009 earnings guidance of $1.60 to $1.70 per share from continuing operations. It is important to note that the Company is only halfway through its fiscal year and it generates nearly all of its earnings in its fiscal fourth quarter. The Company looks forward to sharing more information regarding the tax season as well as longer term plans for accelerated business growth at its Investment Community Conference on Jan. 13.
Conference Call
At 5:00 p.m. EST today, the Company will host a conference call for analysts, institutional investors and shareholders. Richard Breeden, chairman of the board, Russ Smyth, president, Becky Shulman, chief financial officer, and Tim Gokey, president of retail tax services will discuss quarterly results and future expectations, as well as respond to analysts' questions. To access the call, please dial the number below approximately five to 10 minutes prior to the scheduled starting time:
U.S./Canada (877) 247-6355 - Access Code: 75298862
International (706) 679-0371 - Access Code: 75298862
The call also will be webcast in a listen-only format for the media and public. The link to the webcast and a supporting slide presentation can be accessed directly at http://investor-relations.hrblock.com.
A replay of the call will be available beginning at 7:00 p.m. EST December 8, 2008, and continuing until December 22, 2008, by dialing (800) 642-1687 (U.S./Canada) or (706) 645-9291 (international). The conference id is 75298862. The webcast will be available for replay on the Company's Investor Relations Web site at http://investor-relations.hrblock.com.
Forward-Looking Statements
This announcement may contain forward-looking statements, which are any statements that are not historical facts. These forward-looking statements, as well as the Company's guidance, are based upon the Company's current expectations and there can be no assurance that such expectations will prove to be correct. Because forward-looking statements involve risks and uncertainties and speak only as of the date on which they are made, the Company's actual results could differ materially from these statements. These risks and uncertainties relate to, among other things, uncertainties and potential contingent liabilities arising from our former mortgage loan origination and servicing business; uncertainties in the residential mortgage market and its impact on loan loss provisions; uncertainties pertaining to the commercial debt market; competitive factors; the Company's effective income tax rate; litigation; and changes in market, economic, political or regulatory conditions. Information concerning these risks and uncertainties is contained in Item 1A of the Company's 2008 annual report on Form 10-K and in other filings by the Company with the Securities and Exchange Commission.
About H&R Block
H&R Block Inc. (NYSE: HRB) is the world's preeminent tax services provider, having served more than 400 million clients since 1955 and generating annual revenues of $4.1 billion in fiscal year 2008. H&R Block provides income tax return preparation and related services and products via a nationwide network of approximately 13,000 Company-owned and franchised offices and through TaxCut(R) online and software solutions. The Company also provides business services through RSM McGladrey. For more information visit our Online Press Center at www.hrblock.com.
H&R BLOCK
KEY OPERATING RESULTS
Unaudited, amounts in thousands, except per share data
Three months ended October 31,
----------------------------------------------
Revenues Income (loss)
----------------------- ----------------------
2008 2007 2008 2007
----------- ----------- ---------- ----------
Tax Services $ 99,104 $ 90,804 $ (184,565) $ (199,149)
Business Services 233,045 239,048 13,081 11,781
Consumer Financial Services 16,835 23,122 (18,629) (4,409)
Corporate and Eliminations 2,485 3,718 (37,340) (30,046)
----------- ----------- ---------- ----------
$ 351,469 $ 356,692 (227,453) (221,823)
=========== ===========
Income tax benefit (94,292) (86,890)
---------- ----------
Net loss from continuing
operations (133,161) (134,933)
Net loss from discontinued
operations (2,713) (367,338)
---------- ----------
Net loss $ (135,874) $ (502,271)
========== ==========
Basic and diluted loss per share:
Net loss from continuing
operations $ (0.40) $ (0.42)
Net loss from discontinued
operations (0.01) (1.13)
---------- ----------
Net loss $ (0.41) $ (1.55)
========== ==========
Basic and diluted shares
outstanding 329,810 324,694
Six months ended October 31,
----------------------------------------------
Revenues Income (loss)
----------------------- ----------------------
2008 2007 2008 2007
----------- ----------- ---------- ----------
Tax Services $ 174,369 $ 160,667 $ (348,488) $ (371,438)
Business Services 407,696 431,871 12,786 9,875
Consumer Financial Services 35,785 50,303 (32,746) 433
Corporate and Eliminations 5,528 7,869 (71,975) (48,192)
----------- ----------- ---------- ----------
$ 623,378 $ 650,710 (440,423) (409,322)
=========== ===========
Income tax benefit (178,839) (162,219)
---------- ----------
Net loss from continuing
operations (261,584) (247,103)
Net loss from discontinued
operations (7,009) (557,748)
---------- ----------
Net loss $ (268,593) $ (804,851)
========== ==========
Basic and diluted loss per share:
Net loss from continuing
operations $ (0.80) $ (0.76)
Net loss from discontinued
operations (0.02) (1.72)
---------- ----------
Net loss $ (0.82) $ (2.48)
========== ==========
Basic and diluted shares
outstanding 328,475 324,279
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 from continuing operations.
On August 12, 2008, we announced the signing of a definitive agreement to sell H&R Block Financial Advisors, Inc. (HRBFA) to Ameriprise Financial, Inc. (Ameriprise). Effective November 1, 2008, we sold HRB Financial Corporation, including our securities brokerage business formerly conducted through HRBFA, to Ameriprise. We received cash proceeds of approximately $312 million, plus repayment of net intercompany liabilities of approximately $46 million, subject to post-closing adjustments. We expect to record a gain of less than $10 million as a result of this transaction, which will be reported in our results for the quarter ending January 31, 2009. At October 31, 2008, we met the criteria requiring us to present the results of operations of HRBFA and its direct corporate parent as discontinued operations, and the related assets and liabilities as held for sale in the condensed consolidated financial statements. All periods presented have been reclassified to reflect our discontinued operations.
Discontinued operations also include mortgage businesses historically engaged in the origination of non-prime and prime mortgage loans, the sale and securitization of mortgage loans and residual interests, and the servicing of non-prime loans. During fiscal year 2008, we terminated all origination activities and sold the loan servicing operations. Also included in the prior year are the results of three smaller lines of business previously reported in our Business Services segment.
H&R BLOCK
CONDENSED CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share data
October 31, April 30,
2008 2008
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 693,626 $ 664,897
Cash and cash equivalents - restricted 814 7,031
Receivables, net 537,751 534,229
Prepaid expenses and other current assets 387,675 420,738
Assets of discontinued operations, held for
sale 1,039,683 987,592
----------- -----------
Total current assets 2,659,549 2,614,487
Mortgage loans held for investment, net 811,732 966,301
Property and equipment, net 377,687 363,664
Intangible assets, net 136,542 147,368
Goodwill, net 832,294 831,314
Other assets 606,943 700,291
----------- -----------
Total assets $ 5,424,747 $ 5,623,425
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Customer banking deposits $ 748,469 $ 785,624
Accounts payable, accrued expenses and other
current liabilities 636,050 739,887
Accrued salaries, wages and payroll taxes 100,027 365,712
Accrued income taxes 100,857 439,380
Current portion of long-term debt 6,257 7,286
Federal Home Loan Bank borrowings 104,000 129,000
Liabilities of discontinued operations, held
for sale 745,419 644,446
----------- -----------
Total current liabilities 2,441,079 3,111,335
Long-term debt 1,727,510 1,031,784
Other noncurrent liabilities 423,496 492,488
----------- -----------
Total liabilities 4,592,085 4,635,607
----------- -----------
Stockholders' equity:
Common stock, no par, stated value $.01 per
share 4,442 4,359
Additional paid-in capital 837,912 695,959
Accumulated other comprehensive income (loss) (11,236) 2,486
Retained earnings 2,019,301 2,384,449
Less treasury shares, at cost (2,017,757) (2,099,435)
----------- -----------
Total stockholders' equity 832,662 987,818
----------- -----------
Total liabilities and stockholders' equity $ 5,424,747 $ 5,623,425
=========== ===========
H&R BLOCK
CONDENSED CONSOLIDATED INCOME STATEMENTS
Unaudited, amounts in thousands, except per share data
Three months ended Six months ended
October 31, October 31,
---------------------- ----------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
Revenues:
Service revenues $ 316,337 $ 305,401 $ 557,057 $ 557,674
Other revenues:
Interest income 17,047 26,745 34,894 54,248
Product and other
revenues 18,085 24,546 31,427 38,788
---------- ---------- ---------- ----------
351,469 356,692 623,378 650,710
---------- ---------- ---------- ----------
Operating expenses:
Cost of services 376,153 379,863 699,908 712,073
Cost of other revenues 62,612 57,229 105,177 98,695
Selling, general and
administrative 138,036 151,278 255,240 267,083
---------- ---------- ---------- ----------
576,801 588,370 1,060,325 1,077,851
---------- ---------- ---------- ----------
Operating loss (225,332) (231,678) (436,947) (427,141)
Other income (expense), net (2,121) 9,855 (3,476) 17,819
---------- ---------- ---------- ----------
Loss from continuing
operations before tax
benefit (227,453) (221,823) (440,423) (409,322)
Income tax benefit (94,292) (86,890) (178,839) (162,219)
---------- ---------- ---------- ----------
Net loss from continuing
operations (133,161) (134,933) (261,584) (247,103)
Net loss of discontinued
operations (2,713) (367,338) (7,009) (557,748)
---------- ---------- ---------- ----------
Net loss $ (135,874) $ (502,271) $ (268,593) $ (804,851)
========== ========== ========== ==========
Basic and diluted loss per
share:
Net loss from continuing
operations $ (0.40) $ (0.42) $ (0.80) $ (0.76)
Net loss from
discontinued operations (0.01) (1.13) (0.02) (1.72)
---------- ---------- ---------- ----------
Net loss $ (0.41) $ (1.55) $ (0.82) $ (2.48)
========== ========== ========== ==========
Basic and diluted shares
outstanding 329,810 324,694 328,475 324,279
H&R BLOCK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, amounts in thousands
Six months ended
October 31,
----------------------
2008 2007
---------- ----------
Cash flows from operating activities:
Net loss $ (268,593) $ (804,851)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 59,314 54,229
Stock-based compensation expense 13,505 15,500
Changes in assets and liabilities of
discontinued operations 94,624 294,685
Other changes in working capital, net of
acquisitions (564,781) (498,981)
---------- ----------
Net cash used in operating activities (665,931) (939,418)
---------- ----------
Cash flows from investing activities:
Mortgage loans originated or purchased for
investment, net 54,501 76,889
Purchases of property and equipment (58,586) (46,200)
Payments made for business acquisitions, net of
cash acquired (4,709) (21,037)
Investing cash flows provided by (used in)
discontinued operations (48,917) 8,214
Other, net 8,910 4,865
---------- ----------
Net cash provided by (used in) investing
activities (48,801) 22,731
---------- ----------
Cash flows from financing activities:
Repayments of commercial paper - (5,125,279)
Proceeds from issuance of commercial paper - 4,133,197
Repayments of lines of credit borrowings (100,000) (1,005,000)
Proceeds from lines of credit borrowings 768,625 2,555,000
Customer banking deposits (40,595) (243,030)
Dividends paid (96,555) (90,495)
Purchase of treasury shares (4,467) (5,672)
Proceeds from exercise of stock options 61,699 13,434
Proceeds from issuance of common stock, net 141,558 -
Financing cash flows provided by discontinued
operations 4,783 191,546
Other, net 8,413 (39,230)
---------- ----------
Net cash provided by financing activities 743,461 384,471
---------- ----------
Net increase (decrease) in cash and cash
equivalents 28,729 (532,216)
Cash and cash equivalents at beginning of the
period 664,897 816,917
---------- ----------
Cash and cash equivalents at end of the period $ 693,626 $ 284,701
========== ==========
Supplementary cash flow data:
Income taxes paid (net of income tax refunds
received) $ 99,910 $ (52,360)
Interest paid on borrowings 38,713 73,998
Interest paid on deposits 10,441 28,039
For Further Information
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Nancy Mays
816.854.4537
Email Contact
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816. 854.4513
SOURCE: H & R Block