H&R Block’s (HRB) fiscal third-quarter 2011 adjusted income came in at 14 cents per share, a stark improvement from the Zacks Consensus Estimate of a loss of 1 cent. Result, however compares unfavorably with 16 cents per share earned in the year-ago period. Adjusted income for the quarter was $44 million, down 18% from $54 million reported in third-quarter 2010.

H&R Block deferred $11.9 million of revenue to its fiscal fourth quarter due to an IRS delay in accepting certain forms prior to February 14. The company also had to incur after-tax charges of $36.5 million principally related to goodwill impairment at its RedGear reporting unit, incremental credit losses on its Emerald Advance line of credit, and costs of litigation and net loss from discontinued operations of $8.3 million.

Adjusting for these one-time items, H&R Block reported net loss of $12.7 million or 4 cents a share, compared with income of $50.6 million or 15 cents a share in third quarter of 2010.

Operational Performance

Revenue for the reported quarter was $851.5 million, down 8.9% from $934.9 million recorded in the year-ago quarter. Lower revenues at Business Services as well as at Tax Services led to the year-over-year decline. Results however, were ahead of the Zacks Consensus Estimate of $849 million. Revenue in the quarter was almost in line with the company’s guidance.

Total operating cost increased 4% year over year to $871 million in the quarter under review. Higher selling, general and administrative expenses led to the increase.

The company reported an operating loss of $19.5 million compared with operating profit of $94.4 million reported in the prior-year quarter.

Segment Performance 

Tax Services revenue was $672.8 million in the third quarter of 2011, a decline of 10% from $747.7 million in the year-ago period. A 5.8% decrease in total retail tax returns prepared and a 5.9% decrease in the retail NAC per tax return prepared through Jauary 31, 2011 contributed to the revenue decline.

The segment reported a pretax income of $4.1 million, substantially lower from $131.2 million in the prior-year quarter.

Business Service revenue totaled $171.3 million for the quarter, down 4% from $206.6 million in the year-ago quarter.

Total expenses declined 14.2% year over year, largely due to $15.0 million impairment of goodwill and litigation costs incurred in the prior year period.

Pretax income reported by the segment was $8.6 million compared with a pretax loss of $11.2 million a year ago.

Corporate and Eliminations posted revenue of $7.4 million compared with $8.7 million in the prior-year quarter.

Segment pretax loss was $30.2 million, which widened from a loss of $22.5 million in the prior-year quarter.

Financial Position

 

H&R Block ended the quarter with cash and cash equivalents of $1.5 billion lower from $1.8 billion at the end of third-quarter 2010. Total outstanding long-term debt at third-quarter 2011 end was $1.04 billion, a trifle higher than $1.03 billion at the end of third-quarter 2010.

Net cash used in operating activities during the first nine months of 2011 was $36.1 million versus $8.9 million used in the year ago period.

Dividend

H&R Block will also pay a quarterly cash dividend of 15 cents per share on April 1, 2011 to shareholders of record on March 10, 2011.

Peer Comparison

Intuit Inc. (INTU), which competes with H&R Block, reported second -quarter 2011 earnings of 25 cents per share, missing the Zacks Consensus Estimate of 27 cents.

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.

Also, with the termination of H&R Block’s RAL Agreement, H&R Block can now enter into other contracts for financial products that were previously not allowed. However due to the termination, H&R Block thinks that taxpayers will be deprived of credit or might have to use higher-priced alternatives. The company is working on products to fill the gap created by the termination.

The quantitative Zacks #5 Rank (short-term Strong Sell rating) for the company indicates downward pressure on the shares over the near term.

 
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