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| HRB > SEC Filings for HRB > Form 10-Q on 6-Mar-2009 | All Recent SEC Filings |
6-Mar-2009
Quarterly Report
RESULTS OF OPERATIONS
H&R Block provides tax services, banking services and business and consulting
services. Our Tax Services segment provides income tax return preparation
services, electronic filing services and other services and products related to
income tax return preparation to the general public primarily in the United
States, Canada and Australia. Our Business Services segment consists of RSM
McGladrey, Inc. (RSM), a national accounting, tax and business consulting firm
primarily serving mid-sized businesses. Our Consumer Financial Services segment
offers retail banking through H&R Block Bank (HRB Bank).
On August 12, 2008, we announced the signing of a definitive agreement to sell H&R Block Financial Advisors, Inc. (HRBFA) to Ameriprise Financial, Inc. (Ameriprise), and completed the disposition of this business effective November 1, 2008. As of January 31, 2009, the results of operations of HRBFA and its direct corporate parent are presented as discontinued operations in the condensed consolidated financial statements. All periods presented have been reclassified to reflect our discontinued operations. See additional discussion in note 17 to our condensed consolidated financial statements.
TAX SERVICES
This segment primarily consists of our income tax preparation businesses -
retail, online and software. Additionally, this segment includes commercial tax
businesses, which provide tax preparation software to CPAs and other tax
preparers.
Tax Services - Operating Statistics (U.S. only)
Period November 1 through January 31, 2009 2008
Tax returns prepared (in 000s):
Company-owned operations (1) 2,579 2,430
Franchise operations 1,339 1,427
Total retail operations 3,918 3,857
Software 780 799
Online 643 396
Free File Alliance 178 306
Total digital tax solutions 1,601 1,501
5,519 5,358
Net average fee per tax return prepared: (2)
Company-owned operations $ 202.07 $ 181.19
Franchise operations 171.67 157.91
$ 191.68 $ 172.58
Offices:
Company-owned 7,029 6,835
Company-owned shared locations (3) 1,542 1,478
Total company-owned offices 8,571 8,313
Franchise 3,565 3,812
Franchise shared locations (3) 787 913
Total franchise offices 4,352 4,725
12,923 13,038
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(1) Fiscal year 2009 returns include approximately 139,000 returns prepared in
offices of our last major independent franchise operator, which we acquired in
November 2008. Tax returns prepared by this franchise operator in fiscal year
2008 are presented within franchise operations for that year.
(2) Calculated as net tax preparation fees divided by retail tax returns prepared.
(3) Shared locations include offices located within Wal-Mart, Sears and other
third-party businesses.
Tax Services - Operating Results (in 000s)
Three Months Ended January 31, Nine Months Ended January 31,
2009 2008 2009 2008
Service revenues:
Tax preparation fees $ 534,389 $ 455,036 $ 620,728 $ 529,423
Other services 75,435 65,766 146,719 134,693
609,824 520,802 767,447 664,116
Royalties 72,980 61,350 81,963 69,111
Loan participation and
related fees 36,123 40,584 36,123 41,737
Other 42,808 39,051 50,571 47,490
Total revenues 761,735 661,787 936,104 822,454
Cost of services:
Compensation and benefits 251,578 236,048 359,459 343,661
Occupancy 93,474 90,818 253,761 245,886
Depreciation 9,758 9,399 25,963 26,009
Other 73,753 74,943 166,828 176,410
428,563 411,208 806,011 791,966
Cost of other revenues,
selling,
general and administrative 202,729 204,700 348,138 356,047
Total expenses 631,292 615,908 1,154,149 1,148,013
Pretax income (loss) $ 130,443 $ 45,879 $ (218,045 ) $ (325,559 )
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Three months ended January 31, 2009 compared to January 31, 2008
Tax Services' revenues increased $99.9 million, or 15.1%, for the three months
ended January 31, 2009 compared to the prior year. Tax preparation fees
increased $79.4 million, or 17.4%, primarily due to a 6.1% increase in
U.S. retail tax returns prepared in company-owned offices and an 11.5% increase
in the net average fee per U.S. retail tax return. The increase in returns
prepared in company-owned offices is primarily due to the November 2008
acquisition of our last major independent franchise operator. See note 3 to the
condensed consolidated financial statements for additional information.
Excluding operating results attributable to the acquired franchise operator, tax
returns prepared in company-owned offices increased 0.5% over the prior year and
tax preparation fees increased $52.5 million. Increases in our net average fee
are due to a combination of planned pricing increases, higher tax return
complexity and lower discounts.
The business of our Tax Services segment is highly seasonal and results for our
third quarter represent only a small portion of the tax season. Results reported
in our third quarter were positively impacted by a shift of two peak days of tax
preparation volume, as compared to prior year results, from February to January.
Therefore, third quarter results may not be indicative of the results we expect
for the entire fiscal year. We do not expect to maintain this level of revenue
or tax return growth throughout the remainder of the tax season. Tax returns
prepared in company-owned and franchise offices through February 28, 2009
decreased 3.9% from the prior year, adjusted to exclude the effects of leap year
in fiscal 2008. We also expect the increase in the net average fee to moderate
throughout the remainder of the tax season.
Other service revenue increased $9.7 million, or 14.7%, primarily due to
$8.7 million in additional license fees earned from bank products, mainly refund
anticipation checks (RACs). Revenues from our online tax preparation and
e-filing services were essentially flat, as an increase in clients was offset by
the elimination of separate e-filing fees related to our software units.
Royalty revenue increased $11.6 million, or 19.0%, from the prior year primarily
due to an increase in franchise revenues and an increase in royalty rates at
sub-franchises of the acquired franchise operator.
Loan participation and related fees decreased $4.5 million, or 11.0%, due to a
decline in refund anticipation loan (RAL) volume, as more clients elected to
receive RACs.
Other revenues increased $3.8 million, or 9.6%, primarily due to an increase of
$12.6 million in fees earned in connection with the Emerald Advance loan
program, under which, this segment shares in the revenues and expenses
associated with the program. This increase was partially offset by a decline in
software sales.
Total expenses increased $15.4 million, or 2.5%, for the three months ended
January 31, 2009. Cost of services increased $17.4 million, or 4.2%, from the
prior year, due to higher compensation and benefits. Compensation and benefits
increased $15.5 million, or 6.6%, primarily due to a 9.9% increase in
commission-based wages resulting from a corresponding increase in tax
preparation revenues. Cost of other revenues, selling, general and
administrative expenses decreased slightly from the prior year, as declines in
corporate wages and corporate shared services were offset by a $14.7 million
increase in marketing expenses. Bad debt expense related to lending products was
essentially flat compared to the prior year, as the negative impact of the
elimination of cross-collect practices by lending banks in the prior year was
offset in the current year by higher bad debt expense due to higher numbers of
Emerald Advance lines of credit.
Pretax income for the three months ended January 31, 2009 was $130.4 million,
compared to income of $45.9 million in the prior year.
Nine months ended January 31, 2009 compared to January 31, 2008
Tax Services' revenues increased $113.7 million, or 13.8%, for the nine months
ended January 31, 2009 compared to the prior year. Tax preparation fees
increased $91.3 million, or 17.2%, primarily due to a 6.6% increase in our
U.S. retail tax returns prepared in company-owned offices and an 11.2% increase
in the net average fee per U.S. retail tax return. The increase in tax returns
prepared is primarily due to the acquisition of our last major independent
franchise operator, as discussed above. Excluding operating results attributable
to the acquired franchise operator, tax returns prepared increased 1.3% over the
prior year.
Other service revenue increased $12.0 million, or 8.9%, primarily due to
$9.1 million in additional license fees earned from bank products, mainly RACs.
Additionally, we earned $4.8 million in connection with an agreement with HRB
Bank for the H&R Block Emerald Prepaid MasterCard®, under which, this segment
shares in the revenues and expenses associated with this program.
Royalty revenue increased $12.9 million, or 18.6%, from the prior year primarily
due to an increase in franchisee revenues and certain royalty rates, as
discussed above.
Loan participation and related fees decreased $5.6 million, or 13.5%, due to a
decline in RAL volume, as more clients elected to receive RACs.
Other revenues increased $3.1 million, or 6.5%, primarily due to $13.1 million
in incremental fees earned in connection with the Emerald Advance loan program.
This increase was partially offset by a decline in software sales.
Total expenses increased $6.1 million, or 0.5%, for the nine months ended
January 31, 2009. Cost of services increased $14.0 million, or 1.8%, over the
prior year, due to higher compensation and benefits and occupancy expenses,
partially offset by declines in other expenses. Compensation and benefits
increased $15.8 million, or 4.6%, primarily as a result of an 8.9% increase in
commission-based wages. Occupancy expenses increased $7.9 million, or 3.2%,
primarily as a result of higher rent and utilities expenses due to a 3.1%
increase in company-owned offices under lease and a 2.9% increase in the average
rent. Other cost of services decreased $9.6 million, or 5.4%, primarily due to a
$6.5 million decline in supplies expenses as our tax training schools move to
more computer-based training. Cost of other revenues, selling, general and
administrative expenses decreased $7.9 million from the prior year, as declines
in RAL bad debt expense, corporate wages and corporate shared services were
partially offset by a $17.4 million increase in marketing expenses. Bad debt
expense related to our RAL program declined primarily due to the elimination of
cross-collect practices by lending banks and changes implemented by the IRS in
the prior year, both of which resulted in higher expenses in the prior year.
The pretax loss for the nine months ended January 31, 2009 was $218.0 million,
compared to a loss of $325.6 million in the prior year.
BUSINESS SERVICES
This segment offers accounting, tax and consulting services to middle-market
companies.
Business Services - Operating Statistics
Three Months Ended January 31, Nine Months Ended January 31,
2009 2008 2009 2008
Accounting, tax and consulting:
Chargeable hours 923,321 984,851 3,075,623 3,297,153
Chargeable hours per person 301 319 905 918
Net billed rate per hour $ 150 $ 144 $ 147 $ 145
Average margin per person $ 22,556 $ 23,463 $ 66,162 $ 67,695
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Business Services - Operating Results (in 000s)
Three Months Ended January 31, Nine Months Ended January 31,
2009 2008 2009 2008
Tax services $ 78,267 $ 76,222 $ 265,137 $ 256,048
Business consulting 60,366 59,369 187,123 175,461
Accounting services 13,904 12,513 40,285 42,198
Capital markets 4,762 9,770 15,545 33,717
Leased employee revenue 2 3,581 52 25,077
Reimbursed expenses 5,883 3,356 14,418 13,923
Other 21,993 27,073 70,313 77,331
Total revenues 185,177 191,884 592,873 623,755
Cost of revenues:
Compensation and benefits 99,498 107,093 341,540 364,388
Occupancy 20,423 19,138 60,017 54,814
Other 15,969 16,166 46,290 59,723
135,890 142,397 447,847 478,925
Amortization of intangible
assets 3,177 3,372 9,946 10,572
Selling, general and
administrative 35,415 39,501 111,599 117,769
Total expenses 174,482 185,270 569,392 607,266
Pretax income $ 10,695 $ 6,614 $ 23,481 $ 16,489
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Three months ended January 31, 2009 compared to January 31, 2008
Business Services' revenues for the three months ended January 31, 2009 declined
$6.7 million, or 3.5% from the prior year.
Revenues from core tax, consulting and accounting services increased
$4.4 million, or 3.0%, over the prior year, however, these increases were offset
by declines in other revenues.
Capital markets revenues decreased $5.0 million, or 51.3%, primarily due to a
68.8% decline in the number of transactions closed in the current year.
Leased employee revenue decreased $3.6 million primarily due to a change in
organizational structure between the businesses we acquired from American
Express Tax and Business Services, Inc. (AmexTBS) and the attest firms that,
while not affiliates of our company, also serve our clients. Employees we
previously leased to the attest firms were transferred to the separate attest
practices in the prior fiscal year. As a result, we no longer record the
revenues and expenses associated with leasing these employees.
Other revenue declined $5.1 million, or 18.8%, primarily due to a decrease in
outside contractor services performed for our clients.
Total expenses decreased $10.8 million, or 5.8%, from the prior year.
Compensation and benefits decreased $7.6 million, or 7.1%, due to lower
commissions related to capital markets and the change in organizational
structure with AmexTBS discussed above. Selling, general and administrative
expenses decreased $4.1 million primarily as a result of our cost reduction
program.
Pretax income for the three months ended January 31, 2009 was $10.7 million
compared to $6.6 million in the prior year.
Nine months ended January 31, 2009 compared to January 31, 2008
Business Services' revenues for the nine months ended January 31, 2009 declined
$30.9 million, or 5.0% from the prior year.
Tax revenues increased $9.1 million due to increases in net billed rate per
hour. Business consulting revenues increased $11.7 million primarily due to a
large one-time financial institutions engagement. Capital markets revenues
decreased $18.2 million, or 53.9%, primarily due to a 43.2% decline in the
number of transactions closed in the current year.
Leased employee revenue decreased $25.0 million primarily due to a change in
organizational structure with AmexTBS, as discussed above.
Other revenue declined $7.0 million, or 9.1%, primarily due to a decrease in
outside contractor services performed for our clients.
Total expenses decreased $37.9 million, or 6.2%, from the prior year.
Compensation and benefits and other cost of revenues decreased primarily due to
reductions in commissions related to capital markets and the change in
organizational structure with AmexTBS as discussed above. Selling, general and
administrative expenses decreased $6.2 million primarily as a result of our cost
reduction program.
Pretax income for the nine months ended January 31, 2009 was $23.5 million
compared to $16.5 million in the prior year.
CONSUMER FINANCIAL SERVICES
This segment is engaged in providing retail banking offerings to Tax Services
clients through HRB Bank. HRB Bank offers traditional banking services including
prepaid debit card accounts, checking and savings accounts, individual
retirement accounts and certificates of deposit. This segment previously
included HRBFA, which has been presented as a discontinued operation in the
accompanying condensed consolidated financial statements.
Consumer Financial Services - Operating Statistics
Three Months Ended January 31, Nine Months Ended January 31,
2009 2008 2009 2008
Annualized net interest
margin (1) 6.32% 4.65% 4.56% 3.09%
Annualized pretax return on
average assets (2) (0.72)% 3.47% (3.65)% 1.23%
Total assets (in 000s) $ 2,610,019 $ 2,395,156 $ 2,610,019 $ 2,395,156
Mortgage loans held for
investment:
Loan loss reserve as a% of
mortgage loans 8.82% 1.49% 8.82% 1.49%
Delinquency rate (30+ days) 16.29% 7.13% 16.29% 7.13%
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(1) Defined as annualized net interest revenue divided by average bank earning assets. See "Reconciliation of Non-GAAP Financial Information" at the end of
Consumer Financial Services - Operating Results (in 000s)
Three Months Ended January 31, Nine Months Ended January 31,
2009 2008 2009 2008
Interest income:
Mortgage loans $ 11,131 $ 17,198 $ 36,494 $ 60,140
Other 21,193 11,881 23,467 13,913
32,324 29,079 59,961 74,053
Interest expense:
Deposits 3,719 11,464 11,646 37,928
FHLB advances 1,326 1,349 3,981 4,709
5,045 12,813 15,627 42,637
Net interest income 27,279 16,266 44,334 31,416
Provision for loan loss
reserves (13,870 ) (419 ) (51,953 ) (12,345 )
Other 12,871 10,225 21,019 15,555
Total revenues (1) 26,280 26,072 13,400 34,626
Non-interest expenses 29,548 13,754 49,414 21,875
Pretax income (loss) $ (3,268 ) $ 12,318 $ (36,014 ) $ 12,751
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(1) Total revenues, less provision for loan loss reserves on mortgage loans held for investment and interest expense.
Three months ended January 31, 2009 compared to January 31, 2008
Consumer Financial Services' revenues, net of interest expense and provision for
loan loss reserves, for the three months ended January 31, 2009 was essentially
flat compared to the prior year.
Net interest income increased $11.0 million, or 67.7%, over the prior year,
primarily due to an $11.2 million increase in interest income received on our
Emerald Advance loan program resulting from higher volumes. Interest income on
mortgage loans held for investment and interest expense on deposits declined
$6.1 million and $7.7 million, respectively, due to lower interest rates and
lower average balances in the corresponding asset or liability. Interest income
on mortgage loans held for investment is also declining due to an increase in
non-accrual loans from $44.8 million at January 31, 2008 to $258.2 million at
January 31, 2009. The following table summarizes the key drivers of net interest
income:
(dollars in 000s)
Average Balance Average Rate Earned (Paid)
Three Months Ended January 31, 2009 2008 2009 2008
Loans $ 870,060 $ 1,089,566 5.12 % 6 .31%
Emerald Advance lines of credit 375,255 171,925 36.00 % 36 .00%
Investments 545,825 154,498 0.21 % 4 .20%
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Deposits 1,311,362 989,113 (1.13 %) (4 .60%)
Our non-performing assets consist of the following:
(in 000s)
January 31, April 30,
Balance at 2009 2008
Impaired loans $ 258,157 $ 128,941
Real estate owned (1) 51,919 350
Total non-performing assets $ 310,076 $ 129,291
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(1) Includes loans accounted for as in-substance foreclosures of $39.7 million at January 31, 2009.
Detail of our mortgage loans held for investment and the related allowance at January 31, 2009 and April 30, 2008 is as follows:
(dollars in 000s)
Outstanding Loan Loss %30+Days
Principal Balance Allowance Past Due Average FICO
As of January 31, 2009:
Purchased from SCC $ 547,832 $ 71,880 23.39 % 639
All other 303,370 3,735 3.07 % 717
$ 851,202 $ 75,615 16.29 % 667
As of April 30, 2008:
Purchased from SCC $ 683,889 $ 43,769 17.53 % 664
All other 320,751 1,632 2.07 % 721
. . .
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