This summary is based on the second quarter fiscal 2009 earnings call conducted by H&R Block Inc. (HRB) on December 8, 2008.
Management:
-
Chairman of the Board: Richard C. Breeden
-
President, Chief Executive Officer: Russ Smyth
-
President of Retail Tax Services: Timothy C. Gokey
-
Senior Vice President, Chief Financial Officer: Becky S. Shulman
-
President, RSM McGladrey: Steve Tait
-
President, H&R Block Bank: Kathy Barney
-
President, Digital Tax Services: Sabrina Wiewel
-
Controller: Jeffrey T. Brown
-
Investor Relations: Scott Dudley
Key Investors Issues
- Revenues were down by 1.4% to $351 million from $356 million in the prior year.
- The firm had aloss of $133.2 million or 40 cents a share, a marginal imrpvemnet from a loss of $134.9 million, or 42 cents a share in 2007.
Half Year Highlights:
- The firm reported a consolidated net loss of $268.6 million, or 82 cents per share, compared with a loss of $804.9 million, or $2.48 per share in 2007.
- Revenues were $623.4 million, down 2.8% versus $650.7 million in the prior-year period.
Second Quarter Highlights
The loss of $133.2 million or 40 cents a share from continuing operations, which was better than prior year’s loss of $134.9 million, or 42 cents a share, by 2 cents per share and reflects improved results in both Tax Services and at RSM McGladrey.
- Partially offsetting these improvements was a larger loss in consumer financial services, which consists solely of the retail banking activities since the results of the former financial advisor business are now reported in discontinued operations.
- Banking results were negatively impacted by the continued decline in residential home prices.
- The firm recently initiated an enterprise wide review of its procurement and real estate programs in an effort to eliminate redundant and unnecessary expenses, and to reduce overall occupancy costs.
- Corporate expenses were $37 million compared with $30 million a year ago, with the increased expenses reflecting lower investment income and the inability to allocate expenses to discontinued operations.
- Revenues were down by 1.4% to $351 million from $356 million in the prior year.
The Bank ended the second quarter with $812 million of net mortgage loans held for investment.
- Underlying collateral values on the mortgage loan portfolio continued to decline, hence the firm increased its expected loss severity used to estimate loss reserves on loans less than 60 days past due to 37.5%.
- Loans more than 90 days delinquent increased to 7.2% in October from 5.2% in the prior quarter and the loan loss allowance was $64 million, representing 7.3% of total mortgage loan portfolio, up from 5.1% at the end of July.
- The firm made just $15 million of loan repurchases and indemnification payments and the unrestricted cash position in continuing operations was $694 million, up about $450 million from the prior quarter.
-
Business Services, RSM McGladrey achieved an 11% year-over-year improvement in pretax income, despite a 2.5% decline in revenues.
- Core accounting tax and consulting revenues increased 8% over the prior year quarter. Those gains were offset by declining capital markets revenues stemming from fewer transactions.
- Amounts previously reported as leased employee revenue have been eliminated in the current period due to an operational change.
- Pretax income was $13.1 million compared to $11.8 million a year ago, reflecting additional savings in ongoing operating expenses and previously committed cost reduction programs.
-
Consumer Financial Services, which is now comprised only of H&R Block Bank, the firm continued to expand the Bank’s role in supporting the growth of the tax business through the Emerald Platform.
- It enhanced its Emerald Advance line of credit product this tax season, making it available to both new and existing clients and increasing the amount available to existing clients up to $1,000.
- It also continues to work towards minimizing losses and managing the risks associated with the Bank’s mortgage loan portfolio which are held for investment.
The balance of the mortgage loan portfolio and related assets declined further, down 6.5% to $812 million, primarily due to net principal payments and further loan loss reserves.
- The Bank’s pretax loss increased to nearly $19 million, compared with the pretax loss of $4 million a year ago, mostly due to a $13 million increase in mortgage loan loss provisions.
- In Digital Tax, the market is approaching 32 million taxpayers providing a significant growth opportunity.
-
Tax operations revenues increased 9% over the prior year, driven by a 6% increase in core U.S. retail clients served or 12% including one time economic stimulus acts filers, as well as strong results from Australian operations.
- The pretax loss in the Tax Segment improved by $15 million or 7% over the prior year, due to increased revenue and a $6 million reduction in expenses.
- Expenses were lower due to cost reduction efforts initiated earlier this year, effective management of ongoing expenses, and lower bad debt, offset by one time expenses in the Digital business including an adverse litigation judgment.
- Looking into 2009, the segment expects to continue to deliver in three categories; growth in market share and tax clients served; growth in profits and margins; and other long term growth initiatives.
Operational Highlights:
- The firm completed the disposition of all of its sub-prime mortgage business through a combination of an immediate shutdown of lending and the subsequent sale last April of the mortgage servicing business.
- The debt load is more than $1.2 billion lower today than it was a year ago and that gap should increase over the next month, even though the firm spent nearly $280 million to enhance its tax market share through the acquisition of the Texas region.
- On November 3, the firm completed the disposition of H&R Block Financial Advisors, which is expected to improve the company’s return on invested capital while eliminating both risk and diversion of management attention.
It also completed the purchase of the Texas regional franchise and has already opened 30 new offices in Texas and is optimistic it will be able to increase market share in several previously underserved communities in that territory.
