H&R Block Reports Continued Improvement in Financial Results for Fiscal 2010 Second Quarter
-- Net loss from continuing operations improves to $0.38 per share from
$0.40 per share a year ago
-- Better results in Tax Services and lower mortgage loan loss provisions
partially offset by lower profits from Business Services
-- Company reiterates fiscal 2010 earnings guidance of $1.60 - $1.80 per
share from continuing operations
H&R Block, Inc. (NYSE: HRB) today reported a net loss from continuing operations for the fiscal second quarter ended Oct. 31, 2009, of $126.5 million, or 38 cents per share compared to a loss of $133.2 million, or 40 cents per share in the second quarter a year ago. H&R Block typically reports a second quarter operating loss due to the seasonality of its business. A $15.9 million improvement in pre-season results from Tax Services and a $9.7 million reduction in mortgage loan loss provisions were partially offset by a $12.9 million decline in pretax income from Business Services.
"Overall, we are pleased with our financial results, which continue to benefit from our expense control efforts," said Russ Smyth, president and chief executive officer of H&R Block. "By targeting and taking out non-value added costs, we have been able to reinvest in important initiatives that we expect will drive better client attraction and retention. The combination of these initiatives will result in growing market share and profitability, both in fiscal 2010 and beyond," added Smyth.
Fiscal second quarter revenues declined $25.4 million, or 7.2%, to $326.1 million due to lower revenues from Business Services. Consolidated net loss for the quarter improved to $128.6 million, or 38 cents per share, compared to a loss of $135.9 million, or 41 cents per share a year ago.
Tax Services
Second quarter Tax Services revenues rose $4.6 million, or 4.4%, year-over-year reflecting an increase in tax preparation revenues and increased revenues from H&R Block Bank's Prepaid Emerald Mastercard products provided to tax clients. Tax preparation revenues increased $2.4 million reflecting increased return volume and the Company's acquisition of its major Southwest franchise operation last year.
The segment reported a pretax loss of $172.2 million compared to $188.1 million a year ago, an improvement of 8.5%. The better results are primarily due to revenue growth and an $11.4 million, or 3.9% decrease in overall expenses. The expense reduction was driven in part by more than $5 million of ongoing cost control initiatives. The remainder of the reduction is related to tax and legal expenses in the previous year that did not recur, partially offset by incremental expenses in the current quarter associated with the acquisition of the Southwest franchise operation.
For the first six months of fiscal 2010, Tax Services revenues of $197.3 million were up 5.8% from $186.4 million last year. The fiscal year-to-date pretax loss was $344.2 million, down from $351.8 million in the prior period.
The Company continues to expect that the Tax Services segment will deliver an increase in pretax margin totaling 100 basis points by the end of fiscal 2011.
Business Services
Second quarter segment revenues for Business Services (RSM McGladrey) declined $26.4 million or 11.3% year-over-year to $206.6 million. The drop in revenues mainly stems from the impact of the overall weaker economic environment. Core revenues, primarily tax and consulting, fell $22.8 million, or 11.6%, over the prior-year period and demand for capital markets activities was also reduced.
For the fiscal 2010 second quarter, RSM McGladrey reported pretax income of $0.2 million compared to $13.1 million a year ago. While revenues were down in the core business, this decline was offset by lower compensation and other cost control efforts. The decline in second quarter profit was a result of losses in our capital markets business and increased costs related to litigation.
Six-month segment revenues were $384.2 million, down 5.8% from $407.7 million in the first half of fiscal 2009. Pretax income for the first six months declined to $1.5 million from $12.8 million in the year-ago period driven mainly by the lower income in the second quarter.
RSM McGladrey (RSM) and McGladrey & Pullen LLP (M&P), an independent registered public accounting firm, collaborate to provide services to clients under an alternative practice structure. On July 21, 2009, M&P provided 210 days notice of its intent to terminate the administrative services agreement. The effect of the notice will be to terminate the alternative practice structure on February 16, 2010, unless revoked or modified prior to that time. On September 15, 2009, RSM also provided notice of its intent to terminate the administrative services agreement. The effect of this notice, unless it is revoked or modified, will be to terminate the alternative practice structure on April 13, 2010. RSM's notice was intended to make certain that mutual consent is required for any reconciliation between M&P and RSM.
Since July 23, 2009, RSM and M&P have engaged in arbitration to resolve disputes regarding their contractual relationship, including the scope and enforceability of restrictive covenants agreed to by M&P. A final, binding and confidential arbitration ruling regarding the enforcement of the restrictive covenants was issued on November 24, 2009. RSM and M&P are continuing their negotiations on mutually agreeable changes to the current arrangements that would allow the collaboration to continue.
Corporate
Corporate operations includes a portion of corporate support department costs, such as finance and legal, as well as net interest margin and other gains/losses associated with H&R Block Bank's static mortgage portfolio. For the second quarter ended Oct. 31, 2009, Corporate operations reported a pretax loss of $40.8 million, compared to a loss of $52.4 million in the prior year, an improvement of 22.1%. The improvement was mainly due to a $9.7 million decline in the provision for losses on mortgage loans held for investment at H&R Block Bank. The total allowance for loan loss reserves was $96.0 million at Oct. 31, 2009, compared to $63.7 million in the second quarter a year ago and $91.7 million at July 31, 2009.
Year-to-date through the fiscal second quarter ended Oct. 31, 2009, Corporate operations reported a pretax loss of $81.1 million, a 20.1% improvement from a loss of $101.4 million for the first six months of fiscal 2009.
Financial Position
The Company ended the second quarter of fiscal 2010 in a strong financial position with $1.4 billion in cash, double the level from a year ago, and $1.1 billion of stockholders' equity, up from $832.7 million at the end of the year-earlier period. There were no share repurchases during the fiscal 2010 second quarter. Long-term debt at Oct. 31, 2009 was $1.0 billion, down from $1.7 billion at the end of the fiscal 2009 second quarter.
Guidance
The Company continues to expect its fiscal 2010 earnings from continuing operations will be in the range of $1.60 to $1.80 per share.
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 regarding the Company's ability to attract and retain clients; meet its prepared returns targets; 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; potential termination of the alternative practice structure relationship between RSM McGladrey, Inc. and McGladrey & Pullen LLP; competitive factors; the Company's effective income tax rate; litigation; uncertainties regarding the level of share repurchases; and changes in market, economic, political or regulatory conditions. Information concerning these risks and uncertainties is contained in Item 1A of the Company's 2009 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 prepared more than 500 million tax returns since 1955. In fiscal 2009, H&R Block had annual revenues of $4.1 billion and prepared more than 24 million tax returns worldwide, utilizing more than 100,000 highly trained tax professionals. The Company provides tax return preparation services in person, online through H&R Block Online, through its H&R Block At Home(TM) software and through other channels. The Company is also one of the leading providers of 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)
----------------------- ----------------------
2009 2008 2009 2008
----------- ----------- ---------- ----------
Tax Services $ 109,305 $ 104,734 $ (172,188) $ (188,125)
Business Services 206,602 233,045 174 13,081
Corporate and Eliminations 10,174 13,690 (40,839) (52,409)
----------- ----------- ---------- ----------
$ 326,081 $ 351,469 (212,853) (227,453)
=========== ===========
Income tax benefit (86,381) (94,292)
---------- ----------
Net loss from continuing
operations (126,472) (133,161)
Net loss from discontinued
operations (2,115) (2,713)
---------- ----------
Net loss $ (128,587) $ (135,874)
========== ==========
Basic and diluted loss per
share:
Net loss from continuing
operations $ (0.38) $ (0.40)
Net loss from
discontinued operations - (0.01)
---------- ----------
Net loss $ (0.38) $ (0.41)
========== ==========
Basic and diluted shares
outstanding 335,346 329,810
Six months ended October 31,
----------------------------------------------
Revenues Income (loss)
----------------------- ----------------------
2009 2008 2009 2008
----------- ----------- ---------- ----------
Tax Services $ 197,268 $ 186,434 $ (344,162) $ (351,782)
Business Services 384,220 407,696 1,495 12,786
Corporate and Eliminations 20,098 29,248 (81,059) (101,427)
----------- ----------- ---------- ----------
$ 601,586 $ 623,378 (423,726) (440,423)
=========== ===========
Income tax benefit (166,637) (178,839)
---------- ----------
Net loss from continuing
operations (257,089) (261,584)
Net loss from discontinued
operations (5,132) (7,009)
---------- ----------
Net loss $ (262,221) $ (268,593)
========== ==========
Basic and diluted loss per
share:
Net loss from continuing
operations $ (0.77) $ (0.80)
Net loss from
discontinued operations (0.01) (0.02)
---------- ----------
Net loss $ (0.78) $ (0.82)
========== ==========
Basic and diluted shares
outstanding 334,939 328,475
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basic earnings per share is computed using the two-class method and 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.
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation. Effective May 1, 2009, we
realigned certain segments of our business to reflect a new management
reporting structure. The operations of H&R Block Bank, which were
previously reported as the Consumer Financial Services segment, have now
been reclassified, with activities that support our retail tax network
included in the Tax Services segment, and income and expenses of our static
portfolio of mortgage loans held for investment and related assets included
in Corporate. These reclassifications had no effect on our total operating
expenses, results of operations or stockholders' equity as previously
reported.
H&R BLOCK
CONDENSED CONSOLIDATED BALANCE SHEETS
Amounts in thousands, except share data
October 31, October 31, April 30,
2009 2008 2009
------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,432,243 $ 693,626 $ 1,654,663
Cash and cash equivalents
- restricted 46,072 814 51,656
Receivables, net 461,485 537,751 512,814
Prepaid expenses and other
current assets 361,186 387,675 351,947
Assets of discontinued
operations, held for sale - 1,039,683 -
------------ ------------ ------------
Total current assets 2,300,986 2,659,549 2,571,080
Mortgage loans held for
investment, net 671,049 811,732 744,899
Property and equipment, net 351,288 377,687 368,289
Intangible assets, net 378,112 136,542 385,998
Goodwill, net 856,880 832,294 850,230
Other assets 409,044 606,943 439,226
------------ ------------ ------------
Total assets $ 4,967,359 $ 5,424,747 $ 5,359,722
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Customer banking deposits $ 1,493,726 $ 748,469 $ 854,888
Accounts payable, accrued
expenses and other current
liabilities 608,149 636,050 705,945
Accrued salaries, wages and
payroll taxes 83,321 100,027 259,698
Accrued income taxes 169,004 100,857 543,967
Current portion of long-term
debt 3,667 6,257 8,782
Federal Home Loan Bank
borrowings 25,000 104,000 25,000
Liabilities of discontinued
operations, held for sale - 745,419 -
------------ ------------ ------------
Total current liabilities 2,382,867 2,441,079 2,398,280
Long-term debt 1,032,562 1,727,510 1,032,122
Federal Home Loan Bank borrowings 75,000 - 75,000
Other noncurrent liabilities 405,833 423,496 448,461
------------ ------------ ------------
Total liabilities 3,896,262 4,592,085 3,953,863
------------ ------------ ------------
Stockholders' equity:
Common stock, no par, stated
value $.01 per share 4,442 4,442 4,442
Additional paid-in capital 827,423 837,912 836,477
Accumulated other comprehensive
income (loss) 66 (11,236) (11,639)
Retained earnings 2,308,153 2,019,301 2,671,437
Less treasury shares, at cost (2,068,987) (2,017,757) (2,094,858)
------------ ------------ ------------
Total stockholders' equity 1,071,097 832,662 1,405,859
------------ ------------ ------------
Total liabilities and
stockholders' equity $ 4,967,359 $ 5,424,747 $ 5,359,722
============ ============ ============
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,
---------------------- ----------------------
2009 2008 2009 2008
---------- ---------- ---------- ----------
Revenues:
Service revenues $ 294,958 $ 316,337 $ 542,943 $ 557,057
Interest income 12,113 17,047 24,400 34,894
Product and other
revenues 19,010 18,085 34,243 31,427
---------- ---------- ---------- ----------
326,081 351,469 601,586 623,378
---------- ---------- ---------- ----------
Operating expenses:
Cost of revenues 410,949 438,765 797,399 805,085
Selling, general and
administrative 129,685 138,036 232,902 255,240
---------- ---------- ---------- ----------
540,634 576,801 1,030,301 1,060,325
---------- ---------- ---------- ----------
Operating loss (214,553) (225,332) (428,715) (436,947)
Other income (expense), net 1,700 (2,121) 4,989 (3,476)
---------- ---------- ---------- ----------
Loss from continuing
operations before tax
benefit (212,853) (227,453) (423,726) (440,423)
Income tax benefit (86,381) (94,292) (166,637) (178,839)
---------- ---------- ---------- ----------
Net loss from continuing
operations (126,472) (133,161) (257,089) (261,584)
Net loss from discontinued
operations (2,115) (2,713) (5,132) (7,009)
---------- ---------- ---------- ----------
Net loss $ (128,587) $ (135,874) $ (262,221) $ (268,593)
========== ========== ========== ==========
Basic and diluted loss per
share:
Net loss from
continuing operations $ (0.38) $ (0.40) $ (0.77) $ (0.80)
Net loss from
discontinued operations - (0.01) (0.01) (0.02)
---------- ---------- ---------- ----------
Net loss $ (0.38) $ (0.41) $ (0.78) $ (0.82)
========== ========== ========== ==========
Basic and diluted shares
outstanding 335,346 329,810 334,939 328,475
H&R BLOCK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, amounts in thousands
Six months ended
October 31,
------------------------
2009 2008
----------- -----------
Net cash used in operating activities $ (786,152) $ (665,931)
----------- -----------
Cash flows from investing activities:
Principal payments on mortgage loans held
for investment, net 38,693 54,501
Purchases of property and equipment (7,280) (58,586)
Payments made for business acquisitions,
net of cash acquired (6,606) (4,709)
Net cash used in investing activities
of discontinued operations - (48,917)
Other, net 18,473 8,910
----------- -----------
Net cash provided by (used in) investing
activities 43,280 (48,801)
----------- -----------
Cash flows from financing activities:
Repayments of Federal Home Loan Bank borrowings - (40,000)
Proceeds from Federal Home Loan Bank borrowings - 15,000
Repayments of other short-term borrowings - (60,000)
Proceeds from other short-term borrowings - 753,625
Customer banking deposits 638,466 (40,595)
Dividends paid (100,784) (96,555)
Acquisition of treasury shares (3,785) (4,467)
Proceeds from exercise of stock options 8,218 61,699
Proceeds from issuance of common stock, net - 141,558
Net cash provided by financing activities
of discontinued operations - 4,783
Other, net (30,884) 8,413
----------- -----------
Net cash provided by financing activities 511,231 743,461
----------- -----------
Effects of exchange rates on cash 9,221 -
Net increase (decrease) in cash and cash
equivalents (222,420) 28,729
Cash and cash equivalents at beginning of the
period 1,654,663 664,897
----------- -----------
Cash and cash equivalents at end of the period $ 1,432,243 $ 693,626
=========== ===========
Supplementary cash flow data:
Income taxes paid $ 196,427 $ 99,910
Interest paid on borrowings 37,304 38,713
Interest paid on deposits 4,134 10,441
Transfers of loans to foreclosed assets 9,212 62,578
For Further Information Media Relations Gene King 816.854.4672 Email Contact Investor Relations Derek Drysdale 816.854.4513 Email Contact
SOURCE: H & R Block
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