SOURCE: H & R Block

H & R Block

March 08, 2010 16:05 ET

H&R Block Reports Fiscal 2010 Third Quarter Results

KANSAS CITY, MO--(Marketwire - March 8, 2010) - H&R Block, Inc. (NYSE: HRB)

-- Consolidated net income up 6.9% to $50.6 million, or $0.15 per share

-- Net income from continuing operations of $0.16 per share, down $0.04 to
   prior year

-- Total revenues decline 5.9% to $934.9 million

H&R Block, Inc. (NYSE: HRB) today reported consolidated net income for the fiscal third quarter ended Jan. 31, 2010 of $50.6 million, or 15 cents per share, up 6.9 percent from the prior period of $47.4 million. Third quarter revenues declined 5.9 percent to $934.9 million, primarily driven by fewer tax returns prepared. Income from continuing operations of $53.6 million, or $0.16 per share(1), fell 19.8 percent from $66.8 million, or $0.20 per share, in the prior year period.

"While we are disappointed with our early results this tax season, we remain committed to improving our performance as the remainder of the season unfolds. We expect to outperform our competitors regardless of the external factors like unemployment rates, but we have not done so to-date," said Russ Smyth, President and Chief Executive Officer of H&R Block. "We continue to believe that our focus on increasing client satisfaction, improving the quality of our service, enhancing our value perception and continuing to reduce our cost structure is the right formula for success," added Mr. Smyth.

Tax Services

Total segment revenues fell 6.2 percent year-over-year to $747.7 million, primarily reflecting a 7.1 percent decline in total retail tax returns prepared. Pretax income of $131.2 million for the third quarter was essentially flat compared with pretax income of $133.5 million a year ago, despite the decline in revenues.

Interim Tax Results through Feb. 28

Based upon various industry-wide sources, the company believes that total IRS filings are down 4 to 5 percent through Feb. 28, partially due to weather-related slowness in February. The company anticipates that by the end of the tax season total IRS filings will decline approximately 2.5 to 3.5 percent over the prior year, or only approximately half the rate of decline seen in the period through Feb. 28. However, this decline would nonetheless be nearly double the company's original estimate of lower returns.

The shift from assisted preparation to internet based or other do-it-yourself (DIY) tax preparation methods has accelerated in the early part of this tax season compared with previous years. Historically late season filers, who tend to have higher incomes, have shifted to DIY at a slower rate than early season filers.

For the fiscal 2010 tax season through Feb. 28, the company's same-office tax returns prepared in retail operations fell 6.8 percent compared to the prior-year period. Total retail tax returns prepared through Feb. 28 were down 9.4 percent.

Digital returns(2) prepared by H&R Block were down 4.4 percent, although online returns grew 2.5 percent. The aggregate number of digital returns including the Free File Alliance fell 3.8 percent. Software-based returns declined by 12.1 percent due to the company's decision to exit two unprofitable distribution channels.

Total tax preparation revenues through Feb. 28 fell $124.1 million, or 7.1 percent over the comparable period in 2009. This reflects a 9.4 percent decline in total retail returns prepared, partially offset by the impact of an increase of 2.4 percent in net average fees per retail return.

"Our initiatives to improve service levels have resulted in stabilizing client retention levels through February after years of steady declines. However, our efforts to drive new client growth so far this year have not met our expectations," said Mr. Smyth. "We are focused on improving our top line results for the remainder of the year, while we continue to reduce expenses. We have already demonstrated an ability to reduce our cost structure without negatively affecting client experience, and we believe we can continue to do even more in the future," added Mr. Smyth.

RSM McGladrey

RSM McGladrey ("RSM") reported a third quarter pretax loss of $11.2 million compared to pretax income of $10.7 million a year ago. The largest component of this change was due to a $15.0 million goodwill impairment related to RSM's capital markets business.

Third quarter revenues fell $6.7 million, or 3.6 percent, compared to the prior year period. The drop in revenues mainly stems from the impact of the overall weak economic environment, which continues to pressure billable rates and hours within the industry.

In February, RSM and McGladrey & Pullen, LLP entered into new definitive agreements concerning their alternative practice structure, which renewed the long-standing business relationship between these two firms. This ends an uncertain period that had adversely affected RSM's ability to participate in proposals for new client engagements. RSM also incurred legal and consulting expenses related to these negotiations of $3.3 million in the third quarter and $6.2 million fiscal year-to-date.

Corporate

Corporate operations includes 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 declining mortgage portfolio. For the third quarter ended Jan. 31, 2010, Corporate operations reported a pretax loss of $22.5 million, compared to a loss of $42.4 million in the prior year. This represented an improvement of nearly 47 percent. Reduced expenses in the fiscal third quarter included reductions in self-insured liabilities, lower interest expense on corporate borrowings and reduced loss provisions on mortgage loans held for investment.

Share Repurchases and Financing Developments

The company repurchased and retired 6.8 million shares during the third quarter at an aggregate price of $150.0 million. On March 4, the Company closed a new $1.7 billion committed line of credit ("CLOC") with a consortium of banks led by Bank of America, N.A., Wells Fargo Bank, N.A. and BNP Paribas. This facility replaces the company's prior aggregate $2 billion CLOCs and will mature in July, 2013. The $650 million quarter-end net worth covenant remains unchanged. Full details concerning the terms of the new CLOC will be included in the company's Form 10-Q for the third quarter of fiscal 2010.

Conference Call

At 4:30 p.m. EST today, the company will host its fiscal third quarter conference call for analysts, institutional investors and shareholders. 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

     Conference ID: 57298613

The call also will be webcast in a listen-only format for the media and public. The link to the webcast can be accessed directly at http://investor-relations.hrblock.com.

A replay of the call will be available beginning at 6 p.m. EST on March 8, and continuing until March 30, by dialing (800) 642-1687 (U.S./Canada) or (706) 645-9291 (international). The conference ID is 57298613. The webcast will be available for replay beginning on March 9 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. The Company does not undertake any duty to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

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, through H&R Block At Home™ online and desktop software products, 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.

(1) All per share amounts are based on fully diluted shares
(2) "Digital returns" consist of online and desktop software products,
    excluding Free File Alliance returns.

H&R BLOCK
KEY OPERATING RESULTS
Unaudited, amounts in thousands, except per share data


                                    Three months ended January 31,
                            ----------------------------------------------
                                   Revenues             Income (loss)
                            ----------------------- ----------------------
                               2010        2009        2010        2009
                            ----------- ----------- ----------  ----------

Tax Services                $   747,685 $   796,866 $  131,189  $  133,473
Business Services               178,482     185,177    (11,222)     10,695
Corporate and Eliminations        8,685      11,403    (22,516)    (42,429)
                            ----------- ----------- ----------  ----------
                            $   934,852 $   993,446     97,451     101,739
                            =========== ===========
Income tax                                              43,848      34,909
                                                    ----------  ----------
Net income from continuing
 operations                                             53,603      66,830
Net loss from discontinued
 operations                                             (2,968)    (19,467)
                                                    ----------  ----------
Net income                                          $   50,635  $   47,363
                                                    ==========  ==========

Basic earnings (loss) per
 share:
  Net income from
   continuing operations                            $     0.16  $     0.20
  Net loss from
   discontinued operations                               (0.01)      (0.06)
                                                    ----------  ----------
  Net income                                        $     0.15  $     0.14
                                                    ==========  ==========

Basic shares outstanding                               332,999     337,338

Diluted earnings (loss) per
 share:
  Net income from
   continuing operations                            $     0.16  $     0.20
  Net loss from
   discontinued operations                               (0.01)      (0.06)
                                                    ----------  ----------
  Net income                                        $     0.15  $     0.14
                                                    ==========  ==========

Diluted shares outstanding                             334,297     338,687

                                     Nine months ended January 31,
                            ----------------------------------------------
                                   Revenues             Income (loss)
                            ----------------------- ----------------------
                               2010        2009        2010        2009
                            ----------- ----------- ----------  ----------

Tax Services                $   944,953 $   983,300 $ (212,973) $ (218,309)
Business Services               562,702     592,873     (9,727)     23,481
Corporate and Eliminations       28,783      40,651   (103,575)   (143,856)
                            ----------- ----------- ----------  ----------
                            $ 1,536,438 $ 1,616,824   (326,275)   (338,684)
                            =========== ===========
Income tax benefit                                    (122,789)   (143,930)
                                                    ----------  ----------
Net loss from continuing
 operations                                           (203,486)   (194,754)
Net loss from discontinued
 operations                                             (8,100)    (26,476)
                                                    ----------  ----------
Net loss                                            $ (211,586) $ (221,230)
                                                    ==========  ==========

Basic and diluted loss per
 share:
  Net loss from continuing
   operations                                       $    (0.61) $    (0.59)
  Net loss from
   discontinued operations                               (0.02)      (0.08)
                                                    ----------  ----------
  Net loss                                          $    (0.63) $    (0.67)
                                                    ==========  ==========

Basic and diluted shares
 outstanding                                           334,293     331,429



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 per share data


                                     January 31,  January 31,   April 30,
                                         2010         2009         2009
                                     -----------  -----------  -----------
ASSETS
Current assets:
  Cash and cash equivalents          $ 1,727,677  $ 1,269,203  $ 1,654,663
  Cash and cash equivalents -
   restricted                             85,313       75,893       51,656
  Receivables, net                     2,566,830    2,642,951      512,814
  Prepaid expenses and other current
   assets                                344,922      425,042      351,947
                                     -----------  -----------  -----------
    Total current assets               4,724,742    4,413,089    2,571,080

  Mortgage loans held for
   investment, net                       641,157      781,755      744,899
  Property and equipment, net            362,170      383,704      368,289
  Intangible assets, net                 371,951      394,106      385,998
  Goodwill                               843,054      848,443      850,230
  Other assets                           467,055      480,795      439,226
                                     -----------  -----------  -----------
Total assets                         $ 7,410,129  $ 7,301,892  $ 5,359,722
                                     ===========  ===========  ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Short-term borrowings              $ 1,675,094  $   690,485  $         -
  Customer banking deposits            2,220,501    2,115,708      854,888
  Accounts payable, accrued expenses
   and other current liabilities         756,501      734,755      705,945
  Accrued salaries, wages and
   payroll taxes                         182,151      206,959      259,698
  Accrued income taxes                   118,079      143,791      543,967
  Current portion of long-term debt        2,576        9,030        8,782
  Current Federal Home Loan Bank
   borrowings                             25,000      104,000       25,000
                                     -----------  -----------  -----------
    Total current liabilities          4,979,902    4,004,728    2,398,280

Long-term debt                         1,032,800    2,002,647    1,032,122
Long-term Federal Home Loan Bank
 borrowings                               75,000            -       75,000
Other noncurrent liabilities             385,960      454,512      448,461
                                     -----------  -----------  -----------
      Total liabilities                6,473,662    6,461,887    3,953,863
                                     -----------  -----------  -----------

Stockholders' equity:
  Common stock, no par, stated value
   $.01 per share                          4,374        4,442        4,442
  Additional paid-in capital             826,503      835,329      836,477
  Accumulated other comprehensive
   income (loss)                           1,086      (16,614)     (11,639)
  Retained earnings                    2,162,406    2,015,650    2,671,437
  Less treasury shares, at cost       (2,057,902)  (1,998,802)  (2,094,858)
                                     -----------  -----------  -----------
      Total stockholders' equity         936,467      840,005    1,405,859
                                     -----------  -----------  -----------
Total liabilities and stockholders'
 equity                              $ 7,410,129  $ 7,301,892  $ 5,359,722
                                     ===========  ===========  ===========




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


                           Three months ended         Nine months ended
                              January 31,               January 31,
                        ------------------------  ------------------------
                            2010         2009         2010         2009
                        -----------  -----------  -----------  -----------
Revenues:
  Service revenues      $   744,327  $   799,687  $ 1,287,270  $ 1,356,744
  Product and other
   revenues                 142,179      135,155      176,422      166,582
  Interest income            48,346       58,604       72,746       93,498
                        -----------  -----------  -----------  -----------
                            934,852      993,446    1,536,438    1,616,824
                        -----------  -----------  -----------  -----------

Operating expenses:
  Cost of revenues          645,747      684,567    1,443,146    1,489,652
  Selling, general and
   administrative           194,661      208,814      427,563      464,054
                        -----------  -----------  -----------  -----------
                            840,408      893,381    1,870,709    1,953,706
                        -----------  -----------  -----------  -----------

Operating income (loss)      94,444      100,065     (334,271)    (336,882)
Other income (expense),
 net                          3,007        1,674        7,996       (1,802)
                        -----------  -----------  -----------  -----------

Income (loss) from
 continuing operations
 before taxes (benefit)      97,451      101,739     (326,275)    (338,684)
Income taxes (benefit)       43,848       34,909     (122,789)    (143,930)
                        -----------  -----------  -----------  -----------

Net income (loss) from
 continuing operations       53,603       66,830     (203,486)    (194,754)
Net loss from
 discontinued
 operations                  (2,968)     (19,467)      (8,100)     (26,476)
                        -----------  -----------  -----------  -----------

Net income (loss)       $    50,635  $    47,363  $  (211,586) $  (221,230)
                        ===========  ===========  ===========  ===========

Basic earnings (loss)
 per share:
  Net income (loss)
   from continuing
   operations           $      0.16  $      0.20  $     (0.61) $     (0.59)
  Net loss from
   discontinued
   operations                 (0.01)       (0.06)       (0.02)       (0.08)
                        -----------  -----------  -----------  -----------
  Net income (loss)     $      0.15  $      0.14  $     (0.63) $     (0.67)
                        ===========  ===========  ===========  ===========

  Basic shares
   outstanding              332,999      337,338      334,293      331,429

Diluted earnings (loss)
 per share:
  Net income (loss)
   from continuing
   operations           $      0.16  $      0.20  $     (0.61) $     (0.59)
  Net loss from
   discontinued
   operations                 (0.01)       (0.06)       (0.02)       (0.08)
                        -----------  -----------  -----------  -----------
  Net income (loss)     $      0.15  $      0.14  $     (0.63) $     (0.67)
                        ===========  ===========  ===========  ===========

  Diluted shares
   outstanding              334,297      338,687      334,293      331,429





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


                                              Nine months ended January 31,
                                              ----------------------------
                                                  2010           2009
                                              -------------  -------------

Net cash used in operating activities         $  (2,729,047) $  (2,423,562)
                                              -------------  -------------

Cash flows from investing activities:
  Principal payments on mortgage loans held
   for investment, net                               56,114         72,150
  Purchases of property and equipment               (63,242)       (73,913)
  Payments made for business acquisitions,
   net of cash acquired                             (10,828)      (290,868)
  Proceeds from sale of businesses, net              66,760         11,556
  Net cash provided by investing activities
   of discontinued operations                             -        255,066
  Other, net                                         22,370         12,283
                                              -------------  -------------
    Net cash provided by (used in) investing
     activities                                      71,174        (13,726)
                                              -------------  -------------

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 short-term borrowings              (982,774)      (888,983)
  Proceeds from short-term borrowings             2,657,436      2,550,281
  Customer banking deposits                       1,365,163      1,326,584
  Dividends paid                                   (151,317)      (147,569)
  Repurchase of common stock, including
   shares surrendered                              (154,201)        (7,387)
  Proceeds from exercise of stock options            15,678         69,891
  Proceeds from issuance of common stock, net             -        141,450
  Net cash provided by financing activities
   of discontinued operations                             -          4,783
  Other, net                                        (29,434)        17,544
                                              -------------  -------------
    Net cash provided by financing activities     2,720,551      3,041,594
                                              -------------  -------------

Effects of exchange rates on cash                    10,336              -

Net increase in cash and cash equivalents            73,014        604,306
Cash and cash equivalents at beginning of the
 period                                           1,654,663        664,897
                                              -------------  -------------
Cash and cash equivalents at end of the
 period                                       $   1,727,677  $   1,269,203
                                              =============  =============

Supplementary cash flow data:
  Income taxes paid (refunds received), net   $     269,774  $     (13,006)
  Interest paid on borrowings                        61,118         70,891
  Interest paid on deposits                           8,654         11,484
  Transfers of loans to foreclosed assets            12,689         62,774




H&R BLOCK
Interim U.S. Tax Operating Data
(amounts in thousands, except net average fee)



                        YTD      YTD   Percent     YTD        YTD   Percent
                      1/31/10  1/31/09  change   2/28/10    2/28/09  change
                      -------- -------- -----  ---------- ---------- -----
Net tax preparation
 fees - retail: (2)
  Company-owned
   operations         $469,911 $498,470  -5.7% $1,060,980 $1,159,444  -8.5%
  Franchise
   operations          244,184  251,818  -3.0%    554,908    580,539  -4.4%
                      -------- -------- -----  ---------- ---------- -----
    Total retail
     operations       $714,095 $750,288  -4.8% $1,615,888 $1,739,983  -7.1%
                      ======== ======== =====  ========== ========== =====

Total returns
 prepared: (1)
  Company-owned
   operations            2,292    2,467  -7.1%      5,380      5,995 -10.3%
  Franchise
   operations            1,347    1,451  -7.2%      3,186      3,455  -7.8%
                      -------- -------- -----  ---------- ---------- -----
    Total retail
     operations          3,639    3,918  -7.1%      8,566      9,450  -9.4%
                      -------- -------- -----  ---------- ---------- -----

  Digital software         635      780 -18.6%      1,364      1,551 -12.1%
  Digital online           719      643  11.8%      1,786      1,743   2.5%
                      -------- -------- -----  ---------- ---------- -----
    Sub-total            1,354    1,423  -4.8%      3,150      3,294  -4.4%
  Digital Free File
   Alliance                201      178  12.9%        501        502  -0.2%
                      -------- -------- -----  ---------- ---------- -----
    Total digital tax
     solutions           1,555    1,601  -2.9%      3,651      3,796  -3.8%
                      -------- -------- -----  ---------- ---------- -----
                         5,194    5,519  -5.9%     12,217     13,246  -7.8%
                      ======== ======== =====  ========== ========== =====
Net average fee -
 retail: (1,3)
  Company-owned
   operations         $ 205.06 $ 202.15   1.4% $   197.21 $   193.60   1.9%
  Franchise
   operations           181.20   173.60   4.4%     174.17     168.08   3.6%
                      -------- -------- -----  ---------- ---------- -----
    Total retail
     operations       $ 196.23 $ 191.58   2.4% $   188.64 $   184.26   2.4%
                      ======== ======== =====  ========== ========== =====

Same-office tax
 preparation fees:
 (1,4)
  Company-owned
   operations         $466,519 $482,530  -3.3% $1,048,437 $1,106,147  -5.2%
  Franchise
   operations          235,255  241,323  -2.5%    531,652    551,339  -3.6%
                      -------- -------- -----  ---------- ---------- -----
    Total retail
     operations       $701,774 $723,853  -3.1% $1,580,089 $1,657,486  -4.7%
                      ======== ======== =====  ========== ========== =====

Same-office returns
 prepared: (1,4)
  Company-owned
   operations            2,249    2,335  -3.7%      5,306      5,692  -6.8%
  Franchise
   operations            1,292    1,376  -6.1%      3,055      3,278  -6.8%
                      -------- -------- -----  ---------- ---------- -----
    Total retail
     operations          3,541    3,711  -4.6%      8,361      8,970  -6.8%
                      ======== ======== =====  ========== ========== =====

(1) Prior year numbers have been reclassified between company-owned and
    franchise operations for offices which were refranchised during either
    year.
(2) Amounts include gross tax preparation fees less coupons and discounts.
(3) Amounts are calculated as net retail tax preparation fees divided by
    retail tax returns.
(4) Same-office returns represent returns prepared at 6,978 company and
    3,871 franchise offices open in both fiscal year 2010 and fiscal year
    2009.


Contact Information

  • For Further Information
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