SOURCE: H & R Block

September 04, 2009 06:00 ET

H&R Block Reports Fiscal 2010 First Quarter Results

Net Loss From Continuing Operations of $0.39 per Share Is Flat to Prior Year Despite Incremental Costs From Prior-Year Franchise Acquisition; Company Reiterates Fiscal 2010 Earnings Guidance of $1.60 - $1.80 per Share From Continuing Operations

KANSAS CITY, MO--(Marketwire - September 4, 2009) - H&R Block Inc. (NYSE: HRB) today reported a net loss from continuing operations for the fiscal first quarter ended July 31, 2009, of $130.6 million, or 39 cents per share compared to a loss of $128.4 million, or 39 cents per share in the first quarter a year ago. Improved pre-season results from Business Services and lower corporate expenses were partially offset by an expected larger loss in Tax Services. The increase in Tax Services expense reflects the anticipated inclusion of additional expense attributable to tax offices acquired as part of last year's acquisition of the Company's major Southwest franchise operation, severance costs and the timing of some planned expenses as part of the Company's preparation for tax season 2010.

"First quarter results were in-line with our expectations and reflected our continuing success in driving out non-value added costs while making the necessary investments to ensure our success in fiscal 2010 and beyond," said Russ Smyth, president and chief executive officer of H&R Block. "We are focused on efforts to enhance our field-level performance and marketing effectiveness to improve client attraction, retention and satisfaction," added Smyth.

Fiscal first quarter revenues from continuing operations grew 1.3% over the prior-year period to $275.5 million. Results from discontinued operations improved to a net loss of $3.0 million compared to a net loss of $4.3 million in the first quarter a year ago. Consolidated net loss for the quarter was $133.6 million, or 40 cents per share, essentially flat compared to a loss of $132.7 million, or 41 cents per share a year ago.

Segment Reporting Changes

The Company changed its segment reporting effective May 1, 2009. Net interest margin and other gains / losses associated with H&R Block Bank's mortgage portfolio and related assets are now reported in corporate operations. The remainder of the Bank's operations is reported in the Tax Services segment. The Bank, through its Emerald suite of products provided to tax clients, primarily supports H&R Block's tax network in growing its business. In making these changes, the Company eliminated its previous reporting of a Consumer Financial Services segment.

Tax Services

First quarter Tax Services revenues rose 7.7% year-over-year to $88.0 million. Tax preparation fees increased $4.2 million, or 14.2%, primarily due to favorable results in the Company's Australian tax operations.

The segment reported a pretax loss of $172.0 million compared to $163.7 million a year ago. This primarily reflects a net impact of $7.4 million due to the Southwest franchise acquisition that occurred in the fiscal third quarter of last year, $3.5 million of severance expense, and $2.9 million of incremental expenses for information technology projects to prepare for the upcoming tax season. Expense increases were partially offset by savings achieved through closing underperforming retail office locations and renegotiating leases.

The Company continues to expect that the Tax Services segment will deliver improved margins totaling 100 basis points over the next two fiscal years.

Business Services

First quarter segment revenues rose 1.7% year-over-year to $177.6 million. Core revenues, primarily tax and consulting, increased $8.3 million, or 5.8%, over the prior-year period. Those gains were partially offset by a decline in capital markets revenues.

The segment's fiscal first quarter pretax income was $1.3 million compared to a pretax loss of $0.3 million a year ago, reflecting revenue growth and continued cost reduction efforts.

Corporate

Corporate operations reported a pretax loss of $40.2 million for the first quarter ended July 31, 2009, compared to a loss of $49.0 million in the prior year. The improvement was due to prior-year impairments of residual interests in mortgage loan securitizations and other real estate owned totaling $9.1 million that did not recur. The total allowance for loan loss reserves was $91.7 million at July 31, 2009, compared to $84.1 million at fiscal 2009 year-end.

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.

Conference Call

At 8:30 a.m. Eastern time today, the Company will conduct a conference call for analysts and investors. 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 or International (706) 679-0371
     Access Code: 27388973

The call also will be webcast in a listen-only format for the media and public. The webcast link is http://investor-relations.hrblock.com. A replay of the call will be available beginning at 10:00 a.m. Eastern time Sept. 4, 2009, and continuing until Sept. 18, 2009, by dialing (800) 642-1687 (U.S./Canada) or (706) 645-9291 (international). The replay passcode is 27388973. The webcast will be available for replay 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 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; 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 120,000 highly trained tax professionals. The Company provides tax return preparation services in person, online through H&R Block Online, through its TaxCut® 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 July 31,
                            ----------------------------------------------
                                     Revenues           Income (loss)
                            ----------------------- ----------------------
                               2009        2008        2009        2008
                            ----------- ----------- ----------  ----------
Tax Services                $    87,963 $    81,700 $ (171,974) $ (163,657)
Business Services               177,618     174,651      1,321        (295)
Corporate and Eliminations        9,924      15,558    (40,220)    (49,018)
                            ----------- ----------- ----------  ----------
                            $   275,505 $   271,909   (210,873)   (212,970)
                            =========== ===========
Income tax benefit                                     (80,256)    (84,547)
                                                    ----------  ----------
Net loss from continuing
 operations                                           (130,617)   (128,423)
Net loss from discontinued
 operations                                             (3,017)     (4,296)
                                                    ----------  ----------
Net loss                                            $ (133,634) $ (132,719)
                                                    ==========  ==========
Basic and diluted earnings
 (loss) per share:
  Net loss from continuing
   operations                                       $    (0.39) $    (0.39)
  Net loss from
   discontinued operations                               (0.01)      (0.02)
                                                    ----------  ----------
  Net loss                                          $    (0.40) $    (0.41)
                                                    ==========  ==========
Basic and diluted shares
 outstanding                                           334,533     327,141


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.

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


                                                July 31,       April 30,
                                                  2009           2009
                                              -------------  -------------
                       ASSETS
Current assets:
  Cash and cash equivalents                   $   1,006,303  $   1,654,663
  Cash and cash equivalents - restricted             46,639         51,656
  Receivables, net                                  379,177        512,814
  Prepaid expenses and other current assets         396,027        351,947
                                              -------------  -------------
    Total current assets                          1,828,146      2,571,080

  Mortgage loans held for investment, net           707,712        744,899
  Property and equipment, net                       359,408        368,289
  Intangible assets, net                            379,622        385,998
  Goodwill                                          852,018        850,230
  Other assets                                      418,856        439,226
                                              -------------  -------------
Total assets                                  $   4,545,762  $   5,359,722
                                              =============  =============

       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Customer banking deposits                   $     712,008  $     854,888
  Accounts payable, accrued expenses and
   other current liabilities                        648,470        705,945
  Accrued salaries, wages and payroll taxes         101,410        259,698
  Accrued income taxes                              330,145        543,967
  Current portion of long-term debt                   6,093          8,782
  Federal Home Loan Bank borrowings                  25,000         25,000
                                              -------------  -------------
    Total current liabilities                     1,823,126      2,398,280

Long-term debt                                    1,032,395      1,032,122
Federal Home Loan Bank borrowings                    75,000         75,000
Other noncurrent liabilities                        424,527        448,461
                                              -------------  -------------
    Total liabilities                             3,355,048      3,953,863
                                              -------------  -------------

Stockholders' equity:
  Common stock, no par, stated value $.01 per
   share                                              4,442          4,442
  Additional paid-in capital                        824,212        836,477
  Accumulated other comprehensive income
   (loss)                                            (2,849)       (11,639)
  Retained earnings                               2,437,017      2,671,437
  Less treasury shares, at cost                  (2,072,108)    (2,094,858)
                                              -------------  -------------
    Total stockholders' equity                    1,190,714      1,405,859
                                              -------------  -------------
Total liabilities and stockholders' equity    $   4,545,762  $   5,359,722
                                              =============  =============






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


                                               Three Months Ended July 31,
                                              ----------------------------
                                                  2009           2008
                                              -------------  -------------
Revenues:
  Service revenues                            $     247,985  $     240,720
  Interest income                                    12,287         17,847
  Product and other revenues                         15,233         13,342
                                              -------------  -------------
                                                    275,505        271,909
                                              -------------  -------------
Operating expenses:
 Cost of revenues                                   386,450        360,138
 Selling, general and administrative                103,217        123,386
                                              -------------  -------------
                                                    489,667        483,524
                                              -------------  -------------

Operating loss                                     (214,162)      (211,615)
Other income (expense), net                           3,289         (1,355)
                                              -------------  -------------

Loss from continuing operations before tax
 benefit                                           (210,873)      (212,970)
Income tax benefit                                  (80,256)       (84,547)
                                              -------------  -------------

Net loss from continuing operations                (130,617)      (128,423)
Net loss from discontinued operations                (3,017)        (4,296)
                                              -------------  -------------

Net loss                                      $    (133,634) $    (132,719)
                                              =============  =============

Basic and diluted earnings (loss) per share:
  Net loss from continuing operations         $       (0.39) $       (0.39)
  Net loss from discontinued operations               (0.01)         (0.02)
                                              -------------  -------------
  Net loss                                    $       (0.40) $       (0.41)
                                              =============  =============

  Basic and diluted shares outstanding              334,533        327,141






H&R BLOCK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited, amounts in thousands


                                               Three Months Ended July 31,
                                              ----------------------------
                                                  2009           2008
                                              -------------  -------------

Net cash used in operating activities         $    (454,577) $    (364,923)
                                              -------------  -------------

Cash flows from investing activities:
  Principal payments on mortgage loans held
   for investment, net                               19,264         31,619
  Purchases of property and equipment                (8,760)       (14,648)
  Other, net                                          4,856           (901)
                                              -------------  -------------
    Net cash provided by investing activities        15,360         16,070
                                              -------------  -------------

Cash flows from financing activities:
  Repayments of Federal Home Loan Bank
   borrowings                                             -        (40,000)
  Proceeds from Federal Home Loan Bank
   borrowings                                             -         15,000
  Customer banking deposits                        (143,199)        (8,795)
  Dividends paid                                    (50,287)       (46,790)
  Acquisition of treasury shares                     (3,483)        (4,116)
  Proceeds from issuance of common stock, net         6,651         28,507
  Other, net                                        (25,888)       (14,387)
                                              -------------  -------------
    Net cash used in financing activities          (216,206)       (70,581)
                                              -------------  -------------

Effects of exchange rates on cash                     7,063              -

Net decrease in cash and cash equivalents          (648,360)      (419,434)
Cash and cash equivalents at beginning of the
 period                                           1,654,663        664,897
                                              -------------  -------------
Cash and cash equivalents at end of the
 period                                       $   1,006,303  $     245,463
                                              =============  =============

Supplementary cash flow data:
  Income taxes paid                           $     155,804  $      83,111
  Interest paid on borrowings                        26,168         27,258
  Interest paid on deposits                           1,318          4,048
  Transfers of loans to foreclosed assets             3,797         53,469

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