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Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549


FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (date of earliest event reported): August 24, 2004

H&R BLOCK, INC.

(Exact name of registrant as specified in charter)
         
Missouri
(State of Incorporation)
  1-6089
(Commission File Number)
  44-0607856
(I.R.S. Employer
Identification Number)
     
4400 Main Street, Kansas City, MO
(Address of Principal Executive Offices)
  64111
(Zip Code)

(816) 753-6900
(Registrant’s telephone number, including area code)

Not Applicable
(Former name or former address, if changed since last report)



 


TABLE OF CONTENTS

Item 9.01 Financial Statements and Exhibits
SIGNATURES
EXHIBIT INDEX
Press Release


Table of Contents

Item 9.01 Financial Statements and Exhibits

On August 24, 2004, H&R Block, Inc. (the “Company”) issued a press release regarding the Company’s results of operations for the first fiscal quarter ended July 31, 2004. A copy of the press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

 


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

         
  H&R BLOCK, INC.
 
 
Date: August 24, 2004  By:   /s/ Bret G. Wilson    
    Bret G. Wilson   
    Vice President and Secretary   
 

 


Table of Contents

EXHIBIT INDEX

     
Exhibit    
Number
  Description
99.1
  Press Release issued August 24, 2004.

 

exv99w1
 

Exhibit 99.1

(H&R BLOCK)

News Release

For Further Information

Media Relations:
Bob Schneider, 816.932.4835, bschneider@hrblock.com
Investor Relations:
Mark Barnett, 816.701.4443, marbarnett@hrblock.com

H&R BLOCK REPORTS FIRST QUARTER FINANCIAL RESULTS
Company affirms full-year earnings guidance of $4 to $4.25 per share

FOR RELEASE AUGUST 24, 2004 4 P.M. EDT

     KANSAS CITY, Mo. — H&R Block Inc. (NYSE: HRB) today reported a $44.1 million net loss for its first quarter, compared with earnings of $5.2 million last year. Revenues totaled $482.7 million, a 2.6 percent decline from last year. The company reported a loss of 26 cents per diluted share, compared to 3 cents of earnings last year.

     The decline in earnings was primarily due to decreased mortgage segment income and additional off-season costs associated with expanding the company’s tax business.

     “The first quarter loss is in line with our internal expectations, and consistent with our annual earnings guidance range of $4 to $4.25 per share,” said H&R Block Chairman and Chief Executive Officer Mark A. Ernst. “This quarter we also repurchased 7.5 million shares in accordance with our objective to return excess capital to shareholders.

     “In our mortgage unit, loan production increased more than 28 percent for the quarter, while margins declined because of the increase in market interest rates. We expected margin compression in the first two quarters of our fiscal year, with improved earnings performance in the second half of the year after adjusting to the higher rate environment. Our mortgage business is on track to meet our expectations for the year,” Ernst said.

     In its first quarter, H&R Block acquired 7.5 million shares of its common stock at an aggregate cost of $347.4 million, or an average price of $46.56 per share. Over the past year, the number of H&R Block shares outstanding has declined 6.8 percent to 166.2 million shares outstanding.

-more-


 

     The first quarter results include $4.6 million in stock-based compensation expense, compared with $1 million last year. H&R Block began to expense the costs of all stock-based compensation at the beginning of fiscal year 2004.

     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

     Beginning with the first quarter of fiscal year 2005, the company has aggregated its U.S and International tax services into one segment.

     Tax services revenues increased 9.7 percent to $50.4 million. The segment reported a pretax loss of $113 million, which was 13.5 percent higher than the pretax loss of $99.6 million in the first quarter of fiscal 2004. Results were negatively affected by an additional $9 million in off-season losses related to former major franchise territories acquired during the second quarter of fiscal year 2004.

     “We’re on pace to open 500 to 600 new offices in under-penetrated areas where we see growth opportunities. We also expect to add 400 more Wal-Mart locations,” Ernst said. “We are confident in the value that clients receive from H&R Block and are working to make our services even more accessible.”

Mortgage Services

     Mortgage services, which include Option One Mortgage Corp. and H&R Block Mortgage Corp., reported first quarter pretax income of $93.5 million, a 42.9 percent decrease, compared with $163.8 million in the first quarter last year.

     First quarter revenues declined 8.4 percent to $268.1 million, from $292.6 million the prior year.

     The mortgage segment’s total gains on sales were $137.5 million for the first quarter, a 24.6 percent decline compared with $182.3 million in the prior year’s first quarter.

     Loan production increased to a record $6.8 billion for the quarter, a 28.4 percent increase over the previous year’s quarter. An increase in the number of loan applications, improvements in the company’s closing ratio, and an increase in the average loan size all contributed to this growth.

     Included within these results, H&R Block Mortgage Corp., H&R Block’s retail mortgage subsidiary, reported a 7.8 percent decline in originations. About 48 percent of H&R Block Mortgage’s loans were made to retail clients of other H&R Block businesses.

     “I’m confident in the actions we have taken to position the business for success in this changing rate environment. We are increasing our distribution capability and improving our ability to serve clients and sustain our competitive

 


 

position as a service leader. We believe these investments, along with reduced interest rate volatility, will result in another year of strong mortgage financial results,” Ernst said.

     The segment’s residual interests continued to perform better than expected, primarily due to better than modeled credit losses. Consequently, the company realized a net write-up to residual balances of $53.5 million during the first quarter of fiscal year 2005, which was recorded as other comprehensive income, net of deferred taxes. The company did not realize any gains from the sale of residual assets in the quarter.

Business Services

     Business services reported a first quarter pretax loss of $10.1 million, compared with a pretax loss of $6.7 million in the same quarter last year. The segment reported revenues of $109.1 million, an increase of 10.8 percent.

     A significant backlog in the capital markets business at the end of fiscal year 2003 increased first quarter revenue and earnings last year, which affected the year to year comparison with the first quarter of 2005.

     “Our core accounting and tax services enjoyed a strong off-season quarter. It’s encouraging that most of our increased revenue is the result of our strategic growth initiatives, including the development and implementation of a marketing and sales infrastructure. We’re well-positioned to capitalize on the opportunity this market offers,” Ernst said.

Investment Services

     Investment services reported a first quarter pretax loss of $18.3 million, an increased loss of $4.5 million compared with last year’s $13.8 million loss.

     Investment services reported first quarter revenues of $53.6 million, a 6 percent decrease from the same quarter last year.

     “We’re disappointed with investment services’ first quarter results, which are consistent with the weak investment climate affecting the entire industry. However, I’m confident that our business has been positioned in a way that will allow us to grow in support of the investment needs of our clients,” Ernst said.

Other

     The company will host a conference call for analysts and institutional investors at 5 p.m. EDT (4 p.m. CDT) Aug. 24. Ernst and Jeff Yabuki, executive vice president and chief operating officer, will discuss the quarterly results and future expectations, as well as respond to analysts’ questions. To access the call, please dial the number approximately five to 10 minutes prior to the scheduled starting time:

U.S./Canada (888) 425-2715

International (706) 679-8257

 


 

     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 slides 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 p.m. EDT Aug. 24 until 12 a.m. EDT Sept. 7 by dialing 800-642-1687 (U.S./Canada) or 706-645-9291 (International). The replay access code is 8632498. A replay of the webcast will also be available on the company’s Web site at www.hrblock.com through Oct. 31.

###

     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 July 31,
    2004
  2003
Revenues
  $ 482,711     $ 495,384  
 
   
 
     
 
 
Income (loss) before taxes
    (72,564 )     18,829  
Net income (loss) before change in accounting principle
    (44,083 )     11,519  
Cumulative effect of change in accounting principle, net of taxes
          (6,359 )
Net income (loss)
  $ (44,083 )   $ 5,160  
 
   
 
     
 
 
Basic earnings (loss) per share:
               
Before change in accounting principle
  $ (0.26 )   $ 0.06  
Net income (loss)
  $ (0.26 )   $ 0.03  
 
   
 
     
 
 
Basic shares outstanding
    168,635       179,445  
Diluted earnings (loss) per share:
               
Before change in accounting principle
  $ (0.26 )   $ 0.06  
Net income (loss)
  $ (0.26 )   $ 0.03  
 
   
 
     
 
 
Diluted shares outstanding
    168,635       182,921  

SEGMENT FINANCIAL RESULTS

                                 
    Three months ended July 31,
    Revenues
  Income (loss)
    2004
  2003
  2004
  2003
Tax Services
  $ 50,447     $ 45,981     $ (112,989 )   $ (99,580 )
Mortgage Services
    268,133       292,589       93,540       163,829  
Business Services
    109,102       98,499       (10,071 )     (6,679 )
Investment Services
    53,581       56,987       (18,271 )     (13,757 )
Corporate
    1,448       1,328       (24,773 )     (24,984 )
 
   
 
     
 
     
 
     
 
 
 
  $ 482,711     $ 495,384       (72,564 )     18,829  
 
   
 
     
 
                 
Income taxes (benefit)     (28,481 )     7,310  
 
                   
 
     
 
 
Net income (loss) before change in accounting principle     (44,083 )     11,519  
Cumulative effect of change in accounting principle, net of taxes             (6,359 )
 
                   
 
     
 
 
Net income (loss)     $ (44,083 )   $ 5,160  
 
                   
 
     
 
 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.
CONDENSED CONSOLIDATED BALANCE SHEETS

Amounts in thousands, except share data

                 
    July 31,   April 30,
    2004
  2004
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 317,100     $ 1,071,676  
Cash and cash equivalents — restricted
    509,782       545,428  
Receivables from customers, brokers, dealers and clearing organizations, net
    626,215       625,076  
Receivables, net
    361,199       347,910  
Prepaid expenses and other current assets
    390,925       371,209  
 
   
 
     
 
 
Total current assets
    2,205,221       2,961,299  
 
   
 
     
 
 
Residual interests in securitizations — available-for-sale
    233,282       210,973  
Beneficial interest in Trusts — trading
    136,283       137,757  
Mortgage servicing rights
    123,980       113,821  
Property and equipment, net
    272,111       279,220  
Intangible assets, net
    312,506       325,829  
Goodwill, net
    960,275       959,418  
Other assets
    371,104       391,709  
 
   
 
     
 
 
Total assets
  $ 4,614,762     $ 5,380,026  
 
   
 
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Commercial paper
  $ 104,864     $  
Current portion of long-term debt
    275,970       275,669  
Accounts payable to customers, brokers and dealers
    1,022,542       1,065,793  
Accounts payable, accrued expenses and other
    401,004       456,167  
Accrued salaries, wages and payroll taxes
    108,514       268,747  
Accrued income taxes
    238,232       405,667  
 
   
 
     
 
 
Total current liabilities
    2,151,126       2,472,043  
 
   
 
     
 
 
Long-term debt
    546,196       545,811  
Other noncurrent liabilities
    402,334       465,163  
 
   
 
     
 
 
Total liabilities
    3,099,656       3,483,017  
 
   
 
     
 
 
Stockholders’ equity:
               
Common stock, no par, stated value $.01 per share
    2,179       2,179  
Additional paid-in capital
    543,897       545,065  
Accumulated other comprehensive income
    81,466       57,953  
Retained earnings
    2,703,649       2,781,368  
Less cost of 51,708,328 and 44,849,128 shares of common stock in treasury
    (1,816,085 )     (1,489,556 )
 
   
 
     
 
 
Total stockholders’ equity
    1,515,106       1,897,009  
 
   
 
     
 
 
Total liabilities and stockholders’ equity
  $ 4,614,762     $ 5,380,026  
 
   
 
     
 
 


 

H&R BLOCK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited, amounts in thousands

                 
    Three months ended July 31,
    2004
  2003
Cash flows from operating activities:
               
Net income (loss)
  $ (44,083 )   $ 5,160  
Adjustments to reconcile net income (loss) to net cash used in operating activities:
               
Depreciation and amortization
    37,137       35,930  
Accretion of residual interests in securitizations
    (25,663 )     (34,063 )
Impairment of residual interests in securitizations
    3,435       10,743  
Additions to trading securities — residual interests in securitizations
          (145,522 )
Proceeds from net interest margin transactions
          145,522  
Additions to mortgage servicing rights
    (28,493 )     (24,482 )
Amortization of mortgage servicing rights
    18,334       17,691  
Net change in beneficial interest in Trusts
    1,474       28,476  
Other net changes in working capital, net of acquisitions
    (476,205 )     (147,319 )
 
   
 
     
 
 
Net cash used in operating activities
    (514,064 )     (107,864 )
 
   
 
     
 
 
Cash flows from investing activities:
               
Cash received from residual interests in securitizations
    38,826       27,502  
Purchases of property and equipment, net
    (22,913 )     (12,749 )
Payments made for business acquisitions, net of cash acquired
    (806 )     (9,126 )
Other, net
    8,300       5,303  
 
   
 
     
 
 
Net cash provided by investing activities
    23,407       10,930  
 
   
 
     
 
 
Cash flows from financing activities:
               
Repayments of commercial paper
    (314,836 )      
Proceeds from issuance of commercial paper
    419,700        
Dividends paid
    (33,636 )     (32,362 )
Acquisition of treasury shares
    (345,347 )     (83,633 )
Other, net
    10,200       12,255  
 
   
 
     
 
 
Net cash used in financing activities
    (263,919 )     (103,740 )
 
   
 
     
 
 
Net decrease in cash and cash equivalents
    (754,576 )     (200,674 )
Cash and cash equivalents at beginning of the period
    1,071,676       875,353  
 
   
 
     
 
 
Cash and cash equivalents at end of the period
  $ 317,100     $ 674,679  
 
   
 
     
 
 
Supplementary cash flow data:
               
Income taxes paid
  $ 183,383     $ 73,122  
Interest paid
    12,545       16,788  


 

H&R BLOCK, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS

Unaudited, amounts in thousands, except per share data

                 
    Three Months Ended July 31,
    2004
  2003
Revenues:
               
Service revenues
  $ 239,757     $ 214,958  
Gains on sales of mortgage assets, net
    137,470       182,333  
Interest income
    81,327       70,952  
Other
    24,157       27,141  
 
   
 
     
 
 
 
    482,711       495,384  
 
   
 
     
 
 
Operating expenses:
               
Cost of services
    271,439       238,565  
Interest
    19,090       23,197  
Selling, general and administrative
    266,754       216,488  
 
   
 
     
 
 
 
    557,283       478,250  
 
   
 
     
 
 
Operating income (loss)
    (74,572 )     17,134  
Other income, net
    2,008       1,695  
 
   
 
     
 
 
Income (loss) before taxes
    (72,564 )     18,829  
Income taxes (benefit)
    (28,481 )     7,310  
 
   
 
     
 
 
Net income (loss) before cumulative effect of change in accounting principle
    (44,083 )     11,519  
Cumulative effect of change in accounting principle for multiple deliverable revenue arrangements, less income tax benefit of $4,031
          (6,359 )
 
   
 
     
 
 
Net income (loss)
  $ (44,083 )   $ 5,160  
 
   
 
     
 
 
Basic earnings (loss) per share:
               
Before change in accounting principle
  $ (0.26 )   $ 0.06  
Cumulative effect of change in accounting
          (0.03 )
 
   
 
     
 
 
Net income (loss)
  $ (0.26 )   $ 0.03  
 
   
 
     
 
 
Basic shares outstanding
    168,635       179,445  
Diluted earnings (loss) per share:
               
Before change in accounting principle
  $ (0.26 )   $ 0.06  
Cumulative effect of change in accounting
          (0.03 )
 
   
 
     
 
 
Net income (loss)
  $ (0.26 )   $ 0.03  
 
   
 
     
 
 
Diluted shares outstanding
    168,635       182,921  


 

H&R BLOCK, INC.
SELECTED OPERATING DATA

Unaudited

                                 
Option One Mortgage Corporation
  Three months ended
    7/31/2004
  7/31/2003
  % change
  4/30/2004
Number of loans originated:
                               
Wholesale (non-prime)
    37,487       28,494       31.6 %     34,951  
Retail: Prime
    1,697       4,005       -57.6 %     2,523  
Non-prime
    4,742       3,004       57.9 %     4,281  
 
   
 
     
 
     
 
     
 
 
Total
    43,926       35,503       23.7 %     41,755  
 
   
 
     
 
     
 
     
 
 
Volume of loans originated (000’s):
                               
Wholesale (non-prime)
  $ 5,981,104     $ 4,405,224       35.8 %   $ 5,410,469  
Retail: Prime
    215,287       540,326       -60.2 %     312,923  
Non-prime
    620,126       365,331       69.7 %     523,438  
 
   
 
     
 
     
 
     
 
 
Total
  $ 6,816,517     $ 5,310,881       28.4 %   $ 6,246,830  
 
   
 
     
 
     
 
     
 
 
Loan sales
  $ 6,744,056     $ 5,301,341       27.2 %   $ 6,294,346  
 
   
 
     
 
     
 
     
 
 
Servicing portfolio:
                               
Number of loans serviced
    344,659       261,344       31.9 %     324,364  
Servicing portfolio ($ bn’s)
  $ 49.4     $ 34.1       44.9 %   $ 45.3  
 
                                 
H&R Block Financial Advisors, Inc.
  Three months ended
    7/31/2004
  7/31/2003
  % change
  4/30/2004
Customer trades
    205,948       240,469       -14.4 %     259,470  
Customer daily average trades
    3,269       3,589       -8.9 %     4,119  
Average revenue per trade
  $ 119.71     $ 126.97       -5.7 %   $ 121.58  
Number of active accounts:
                               
Traditional brokerage
    394,852       462,549       -14.6 %     438,730  
Express IRAs
    396,878       247,847       60.1 %     391,046  
 
   
 
     
 
             
 
 
 
    791,730       710,396       11.4 %     829,776  
 
   
 
     
 
             
 
 
Ending balance of assets under administration ($ bn’s)
  $ 26.6     $ 24.3       9.5 %   $ 26.7  
Average assets per active account
  $ 33,592     $ 34,160       -1.7 %   $ 32,215  
Ending customer margin balances ($ millions)
  $ 604     $ 517       16.8 %   $ 608  
Ending payables to customers ($ millions)
  $ 973     $ 923       5.4 %   $ 1,007