H&R Block Inc. (HRB) reported adjusted loss from continuing operations of 40 cents per share for the first quarter of fiscal 2014, ended Jul 31. Loss was wider than the Zacks Consensus Estimate expected loss of 35 cents and widened by 3% year over year.
Including professional fees related to pending HRB Bank transaction of 2 cents, H&R Block reported net loss of 42 cents per share, deteriorating 7% year over year.
Quarterly Operational Performance
H&R Block’s revenues stood at $127 billion, improving approximately 32% year over year. Revenues surpassed the Zacks Consensus Estimate of $98 million.
Total expense of H&R Block was $306.7 million, increasing 14.1% over the prior-year quarter, primarily driven by higher selling, general and administrative expenses, as well as higher compensation and benefits.
H&R Block’s operating loss in the reported quarter deteriorated 4.1% year over year to $179 million.
Segment Performance
Tax Services revenues in the reported quarter improved approximately 35% to $122 million.
The improvement stemmed from timing differences in Australian operations resulting in increase in revenues in international operations. Higher fees from financial services also added the upside.
Pre-tax loss widened 2.5% year over year to $144 million.
Corporate and Eliminations posted revenues of $5.5 million in the fourth quarter, down 11.7% year over year.
The segment’s pre-tax loss in the quarter was $40 million, wider than the loss of $28 million in the year-ago quarter.
Financial Position
H&R Block ended first quarter with cash and cash equivalents of $1.22 billion, 24.5% higher year-over-year. Total outstanding long-term debt of H&R Block at the end of the reported quarter was $0.9 billion, surging from the year-ago level of $0.4 billion at year-ago end.
Net cash used in operating activities in first quarter was $318 million, lower than $33 million used in the year-ago period.
Dividend Update
On Oct 1, 2013, H&R Block will pay a dividend of 20 cents per share to the shareholders of record as of Sep 10, 2013. The dividend will mark the 204th consecutive quarterly dividend paid since the company went public in 1962.
Update on H&R Block Bank Sale
On Jul 11, H&R Block inked an agreement with Republic Bank and Trust Company to divest the assets and transfer the liabilities of H&R Block Bank.
The divestiture will allow the company to be free from being subjected to regulations by the Federal Reserve Bank as a savings and loan holding company. In light of the proposed laws, which demand higher capital requirements for savings and loan holding companies like H&R Block Bank, H&R Block decided to go for the divestiture. These laws were proposed by the Federal Reserve to execute the changes as per the Dodd-Frank Act.
Following the divestiture, H&R Block will incur one-time cost of about 3–4 cents per share in fiscal 2014. H&R Block also estimates dilution of about 6–9 cents per share on an annualized basis, stemming from the service agreement with Republic.
Apart from regulatory approval, the transaction is subject to negotiation of additional agreements. Under these agreements, Republic Bank will act as the bank for H&R Block's core financial services products. The core financial services products include Refund Transfers, Emerald Advance lines of credit and the Emerald Prepaid MasterCard.
If regulatory approvals are obtained by Sep 30, 2013, the transaction will see light in 2013. If regulatory approvals are obtained after Sep 30, 2013 but before Apr 30, 2014, the deal will see light between Apr 30, 2014 and Jun 18, 2014.
Meanwhile, Republic filed an application with its regulators to convert to a national bank charter which is being processed.
Peer Comparison
Intuit Inc. (INTU) broke even in fourth-quarter 2013 on non-GAAP basis from continuous operations compared to the year-ago quarter's earnings per share of 1 cent.
Our Take
Shares of H&R Block slipped 0.1% to close at $27.88 on Tuesday after the tax preparer missed the expectation for the third time in a row.
Though the quarter experienced improved top-line, higher expenses limited the upside.
Nevertheless, H&R Block’s leading position in the tax preparer market along with its strategic initiatives to grow its business by gaining and retaining customers augur well for long-term growth. According to management, the company has successfully captured market share in the digital online category from Intuit. Its efforts to return value to its shareholders will also help retain investor confidence on the stock.
Additionally, to improve operational efficiency H&R Block announced an agreement with Sears Holdings Corporation (SHLD), to focus on 112 best performing Sears locations, while shutting down the rest. Likewise, it has not renewed its agreement with Wal-Mart (WMT) in the United States, as the performance and results from the channel failed to match its expectations.
H&R Block presently carries a Zacks Rank #3 (Hold).
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