H&R Block, Inc. (HRB)

[OptionMonster]

H&R Block Reports Fiscal 2009 First Quarter Results

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. Richard Breeden, chairman of the board, Russ Smyth, president and chief executive officer, Becky Shulman, chief financial officer, and Tim Gokey, president of retail tax services will discuss the results and future expectations, as well as respond to analysts' questions. To access the call, please dial the number below approximately five to 10 minutes prior to the scheduled starting time:

U.S./Canada [phone]- Access Code: 77315620
International [phone]- Access Code: 77315620