H&R Block Narrows Loss Aided by Share Buyback

| About: H&R Block (HRB)

H&R Block’s (NYSE:HRB) fiscal second-quarter 2011 loss from continuing operations came in at 35 cents per share, an improvement from the Zacks Consensus Estimate of a loss of 38 cents a share. This also compares favorably with the loss of 38 cents per share incurred in the year-ago period. Net loss from continuing operations for the quarter was $106.8 million versus a loss of $126.5 million reported in second-quarter 2010.

The company’s lower expense coupled with share buyback helped it to report a lower loss in the quarter.

Including loss from discontinued operations of $2.3 million or 1 cent a share, the company reported a net loss of $109 million or 36 cents a share, compared with a loss of $128.6 million or 38 cents per share in the year-ago period.

Revenue for the reported quarter was $322.9 million, down 1% from $326.1 million recorded in the year-ago quarter. Lower revenues at Business Services, partially mitigated by higher revenues at Tax Services, led to the year-over-year decline. Results also lagged the Zacks Consensus Estimate of $338 million.

Total operating cost declined 7.2% year over year to $501.9 million in the second quarter of 2011. Realignment of field and support services announced in May aided the cost cut.

The company reported an operating loss of $179 million, narrower than $214.6 million reported in the prior-year quarter.

Segment Performance

Tax Services revenue was $110.9 million in the second quarter of 2011 compared with $109.5 million in the year-ago period, up 1.5% year over year.

Total expense in the quarter declined 5.8% year over year, largely attributable to staff reductions and the closing of certain underperforming retail office locations.

The segment reported a pretax loss of $154.4 million, narrower than the loss of $172.2 million incurred in the prior-year quarter.

Business Service revenue totaled $203.4 million for the quarter, down 1.5% from $206.6 million in the year-ago quarter.

Total expenses declined $11.4 million, or 5.5%, from the prior year, due primarily to lower compensation expense in the quarter.

Pretax income reported by the segment was $8.4 million compared with a pretax income of $0.2 million a year ago.

Corporate and Eliminations posted revenues of $8.5 million compared with $10.2 million in the prior-year quarter.

Segment pretax loss was $29.2 million, narrower than the loss of $40.8 million in the prior-year quarter. Lower loss provisions on mortgage loans held for investment and corporate expense reductions 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 $995.2 million compared with $1.5 billion at the end of second-quarter 2010. Total outstanding long-term debt at second-quarter 2011 end was $1.07 billion, lower than $1.11 billion at the end of second-quarter 2010.

Net cash used in operating activities during the first half of 2011 was $548.0 million versus $786.2 million in the first half of 2010.

Share Repurchase and Dividend

During the reported quarter, H&R Block repurchased and retired 3.5 million shares for $44.3 million.

H&R Block will also pay a quarterly cash dividend of 15 cents per share on January 3, 2010, to shareholders of record on December 13, 2010.

Peer Comparison

Intuit Inc. (NASDAQ:INTU), which competes with H&R Block, reported first-quarter 2011 adjusted loss of 19 cents per share, in line with the Zacks Consensus Estimate.

Our Take

The company’s realignment initiatives remain on track. The company also remains focused on increasing its client retention rate. The recently announced acquisition of 2SS Holdings Inc. will further boost the company’s digital space, a business that is seeing a shift from assisted tax preparation. However, a lackluster 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.