H&R Block Beats Earnings Estimates

| About: H&R Block (HRB)

H&R Block’s (NYSE:HRB) fiscal first-quarter loss from continuing operations came in at 36 cents per share, lower than the Zacks Consensus Estimate for a loss of 41 cents a share as well as the year-ago loss of 39 cents per share. Net loss from continuing operations for the quarter was $114.8 million versus a loss of $130.6 million reported in first-quarter 2010.

Primarily, the realignment of field and support services announced in May along with share buyback helped the company to ameliorate loss during the quarter.

Including severance charges related to termination benefits in connection with the realignment of field and support services announced in May of $12.8 million, or 4 cents per share and loss from discontinued operations of $3.0 million or 1 cent per share, the company reported a loss of $130.7 million or 41 cents per share. The reported loss in the quarter was lower than the loss of $133.6 million or 40 cents per share a year ago.

Revenue for the reported quarter was $274.5 million, down 0.4% from $275.5 million recorded in the year-ago quarter. Lower revenues across all the segments resulted in the year-over-year decline. However, the result surpassed the Zacks Consensus estimate of $269 million.

Total operating cost declined 0.9% year over year to $485.0 million in the first quarter of 2011. Realignment of field and support services announced in May aided in the cost cut.

The company reported an operating loss of $210.6 million, down 0.5% from $214.2 million reported in the prior-year quarter.

Segment Performance

Tax Services revenue was $91.6 million in the first quarter of 2011 compared with $88 million in the year-ago period, up 4.2% year over year.

Excluding $19.2 million, the charge related to severance costs and related payroll taxes associated with staff reductions, total expenses declined by $12.8 million, or 4.9% year over year, to $247.1 million in the quarter.

The segment reported a pretax loss of $174.6 million, a wider loss than $172.0 million incurred in the prior-year quarter.

Business Service revenue totaled $174.7 million for the quarter, down 1.6% from $177.6 million in the year-ago quarter.

Total expenses declined $1.2 million, or 0.7%, from the prior year.

Pretax loss reported by the segment was $0.4 million compared with a pretax income of $1.3 million a year ago.

RSM McGladrey acquired the Boston-based accounting firm Caturano & Company in July. Though the acquisition is expected to add $30 million to the fiscal 2011 top line, it will have negligible impact on earnings for this fiscal year.

Corporate and Eliminations posted revenue of $8.1 million compared with $9.9 million in the prior-year quarter.

Segment pretax loss was $32.3 million, narrower than a loss of $40.2 million in the prior-year quarter. Decreased loss provisions on mortgage loans held for investment and gains on residual interest assets from the company's former mortgage business helped H&R Block to reduce the loss at the segment.

Financial Position

H&R Block ended the year with cash and cash equivalents of $1.14 billion compared with $1.05 billion at the end of first-quarter 2010. Total outstanding long-term debt at first-quarter 2011 end was $1.46 billion, lower than $1.53 billion at the end of first-quarter 2010.

Net cash provided by operating activities in the quarter under review was $348.3 million versus $454.6 million in the first quarter of 2010.

Share Repurchase and Dividend

During the reported quarter, H&R Block repurchased and retired 15.5 million shares at a cost of $235.7 million.

H&R Block will also pay a quarterly cash dividend of 15 cents per share on Oct 1, 2010, to shareholders of record on Sep 10, 2010.

The company’s realignment initiatives remain on track. Also, the company remains focused on increasing its client retention rate. However, a lackadaisical top-line keeps us on the sidelines.

We maintain a Neutral recommendation on H&R Block. The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward pressure on the shares over the near term.