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H&R Block's Loss Widens, Sells RSM - Analyst Blog

H&R Block Inc. 's ( HRB ) adjusted loss of 38 cents per share in fiscal second-quarter 2012 ending October 31 was wider than the Zacks Consensus Estimate of a loss of 35 cents. Results also compared unfavorably with the loss of 36 cents incurred in the year-ago period. Adjusted loss for the quarter was $115.0 million, wider than $111.4 million reported in fiscal second-quarter 2011.

H&R Block incurred after-tax charges of $8.0 million or 3 cents per share, related to the previously announced discontinuation of its ExpressTax business coupled with increased litigation costs in Tax Services. Adjusting for this loss as well as loss from discontinued operations of $18.7 million or 6 cents per share, the company reported a net loss of $141.7 million or 47 cents per share, wider than the loss of $109 million or 36 cents a share.

Operational Performance

Revenue in the quarter under review was $129.2 million, up 8% from $119.6 million recorded in the year-ago quarter. Reported revenue considerably lagged the Zacks Consensus Estimate of $328 million.

The company reported an operating loss of $206.4 million, wider than the loss of $187.4 million in the fiscal second quarter of 2011.

Segment Performance

Tax Services revenue was $121.0 million in the fiscal second quarter of 2012, reflecting an increase of 9.1% from $110.9 million in the year-ago period. The increase reflects strength in its Australian tax operations.

The segment reported a pre-tax loss of $174.0 million, narrower than $154.4 million in the prior-year quarter. Loss escalated due to $8 million increase in litigation costs and previously announced charges of approximately $9 million in connection with the discontinuation of ExpressTax.

Corporate and Eliminations posted revenue of $8.2 million compared with $8.7 million in the prior-year quarter.

Segment pre-tax loss in the quarter was $30 million, wider than the loss of $29.2 million in the year ago quarter.

Financial Position

H&R Block ended fiscal second quarter 2012 with cash and cash equivalents of $0.61 billion much below $1.73 billion at the end of fiscal 2011. Total outstanding long-term debt at the reported quarter end was $1.01 billion, a trifle lower than $1.04 billion at the end of fiscal 2011.

Net cash used in operating activities during the quarter was $582.6 million, compared with $548 million used in the year-ago period.

Share Repurchase

H&R Block spent $177.5 million to buy back 4.3% of its outstanding shares. The company is left with $1.2 billion under its share repurchase authorization.

Divestiture

H&R Block completed the divestiture of RSM McGladrey ("RSM") announced in August, to McGladrey & Pullen, LLP ("M&P") for $575 million. The proceeds include closing cash proceeds of $487 million (including $12 million of cash on RSM's closing balance sheet), a note for a principal a mount of $54 million, and $34 million of cash which H&R Block expects to receive by calendar-year end.

The difference of $35 million from the previously announced consideration of $610 million was already transferred to H&R Block prior to closing by RSM.

Peer Comparison

Intuit Inc. ( INTU ), which competes with H&R Block, reported a first quarter 2012 adjusted loss of 18 cents per share, narrower than the Zacks Consensus Estimate of a loss of 20 cents.

Our Take

The company's realignment initiatives remain on track. Furthermore, to augment the performance of its core tax business, it has divested RSM McGladrey. RSM McGladrey has not been able to post revenue growth over the past few quarters. As such, the company has decided to vend off RSM McGladrey as it believes the divestiture is in the best interest of H&R Block and its shareholders. The company also expects an improvement in its overall margin following the divestiture.

Also, H&R Block ceased services under its EXPRESSTAX brand as it believes that EXPRESSTAX no longer features in it s long-term growth strategy.

We believe the company's leading position in the tax preparer market, its strategic initiatives to grow its business by gaining and retaining customers and its cost containment measures augur well for long-term growth. Additionally, its focus on procuring and retaining clients will help it to grow its top line.

However, after a long wait, the company has dropped its plan to acquire 2SS Holdings, Inc, developer of TaxACT digital tax preparation solutions as the federal judge passed a ruling against it on antitrust grounds. The acquisition was intended to augment the company's digital tax offerings as well as performance. Had the acquisition materialized, H&R Block would have an enlarged client base. Also, the merger would have intensified competition in the digital mark et, which is presently dominated by Intuit Inc.

We retain our Outperform recommendation on H&R Block. The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates upward pressure on the shares over the near term.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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