Company Reports Net Loss From Continuing Operations of $0.40 per Share Compared to Prior Period Loss of $0.34 per Share; Consolidated Loss Improves to $0.41 per Share; Loss From Discontinued Operations Improves Significantly
KANSAS CITY, MO -- (Marketwire) -- 09/03/08 -- H&R Block, Inc. (NYSE: HRB) today reported
a net loss from continuing operations for the fiscal 2009 first quarter
ended July 31, 2008 of $129.4 million, or 40 cents per share compared to a
loss of $109.8 million, or 34 cents in the first quarter a year ago.
Improved off-season results from Tax Services were offset by a loss in the
Consumer Financial Services segment, mainly due to an approximately $20.4
million increase in loss reserves and asset write-downs at H&R Block Bank.
The company typically reports a first-quarter operating loss primarily
because of seasonality within its Tax Services and Business Services
segments.
"Compared with a year ago, operating results have improved, and losses from
discontinued operations have diminished significantly. The decision to
take additional loss reserves against the Bank's mortgage portfolio lowered
performance slightly from what it would otherwise have been, but the
company intends to maintain appropriate financial reserves while this
portfolio runs off," said Richard C. Breeden, Chairman of the Board of H&R
Block. "Our Texas acquisition increases opportunities to grow the client
base and to use franchising more aggressively in that market. Selling our
securities brokerage unit should enhance returns on invested capital while
reducing operating risks. These and other strategic steps improve
opportunities to grow earnings and shareholder value," added Breeden.
Results from discontinued operations improved significantly, to a net loss
of $3.4 million compared to a net loss of $192.8 million in the first
quarter a year ago, reflecting the company's exit from the subprime
mortgage business. There were only $7 million in loan repurchases for
representation and warranty claims in the current year quarter.
Consolidated net loss for the quarter was $132.7 million, or 41 cents per
share, much lower than the loss of $302.6 million, or 93 cents per share,
in the first quarter a year ago.
"We saw continued positive momentum in Tax Services and Business Services
in our first quarter. Tax Services reported solid top-line growth during
the pre-season period while also achieving meaningful expense control. RSM
McGladrey improved its bottom line, again reflecting good cost management,"
said Russ Smyth, president and chief executive officer of H&R Block.
"Meanwhile, results from Consumer Financial Services were negatively
impacted by difficult conditions in the housing and financial markets."
Tax Services
First quarter Tax Services revenues rose 7.7 percent year-over-year to
$75.3 million, primarily due to a 16 percent increase in U.S. retail
clients served. About 7 percentage points of the increase in clients
stemmed from one-time Economic Stimulus Act filers. The success of H&R
Block's Second Look product also contributed to client growth.
The segment reported a pretax loss of $163.9 million, a 4.9 percent
improvement year-over-year largely due to more efficient management of
expenses including the company's recent cost reduction program.
International operations also contributed to the improved results with
Canada achieving 13 percent growth in volume and 5 percent growth in
pricing. For the full year of fiscal 2009, Tax Services is expected to
achieve a pretax margin improvement of more than 200 basis points
reflecting growth and cost control.
Business Services
RSM McGladrey saw a slight earnings improvement year-over-year, despite a
9.4 percent decline in revenues to $174.7 million. The decline in reported
revenue is largely due to a change in the manner of recording leased
employee revenues related to the TBS business acquired from American
Express. This change had no impact on earnings.
The pretax loss for the fiscal first quarter was $0.3 million compared to a
loss of $1.9 million last year, reflecting savings in ongoing operating
expenses and earlier reductions made to costs. The company expects these
trends to continue and result in significant margin improvement for RSM
McGladrey in fiscal 2009.
Consumer Financial Services
Consumer Financial Services, which includes H&R Block Bank and H&R Block
Financial Advisors, reported a pretax loss of $17.7 million compared with
pretax income of $6.2 million a year ago. The loss was driven by an
increase in mortgage loan loss reserves at the Bank and poor financial
market conditions impacting HRBFA's business.
H&R Block Bank reported a pretax loss of $14.1 million versus pretax income
of $4.8 million in the first quarter last year, primarily due to a $15.0
million loan loss reserve recorded in the current-year period and a $5.4
million write down of other real estate owned. Increases in loan loss
reserves reflect both increased foreclosures and ongoing declines in
housing values.
The Bank ended the first quarter with $869 million of net mortgage loans
held for investment, down $98 million from fiscal year end. The decline in
the mortgage loan balance resulted from net principal repayments of $31.6
million, the aforementioned increase in loan loss reserves and transfers of
loans to other real estate owned.
H&R Block Financial Advisors reported a pretax loss of $3.6 million for the
fiscal first quarter compared with pretax income of $1.4 million for the
same period a year ago. H&R Block signed an agreement to sell HRBFA to
Ameriprise Financial for $315 million. The transaction is expected to
close in three to six months. Beginning in its fiscal second quarter, the
company will report HRBFA's results in discontinued operations.
Corporate
The Corporate segment's pretax loss in the first quarter of fiscal 2009
increased by $17.1 million compared to the prior-year period primarily due
to $11.7 million in incremental net interest expense and a $5.0 million net
impairment of residual interests in securitizations related to former
mortgage operations of Option One. This segment includes some interest
costs and overhead expenses that are not allocated to the company's
operating segments. The bulk of the positive benefit from the company's
cost reduction efforts are reflected in the operating results of the
business segments through reduced allocation of overhead expenses. The
company remains on track to achieve more than $125 million in annual
savings in fiscal 2009 as a result of these cost reduction efforts.
The incremental net interest expense reported in Corporate operations
results from the segment absorbing current-year financing costs for all
long-term debt. In the prior year, financing costs were primarily related
to borrowings incurred to cover losses of the company's mortgage business,
and were therefore reported in discontinued operations.
Guidance
On Sept. 3, 2008, the company announced that it plans to acquire the
operator of H&R Block franchises in Texas, Oklahoma and Arkansas. This
acquisition is expected to add approximately $0.05 to earnings per share
for FY09. The company is maintaining its previous FY09 earnings guidance
of $1.60 - $1.70 per share at this time in light of the fact that it
generates its earnings almost entirely in the fiscal fourth quarter. This
decision also reflects consideration of other factors including higher loss
reserves for H&R Block Bank in the first quarter and an assumed earnings
contribution from HRBFA that will now be reported in discontinued
operations starting in the fiscal second quarter.
Conference Call
At 4:30 p.m. EDT today, the company will host a conference call for
analysts, institutional investors and shareholders.
