H&R Block’s (HRB) reported an adjusted loss of 37 cents per share in fiscal first-quarter 2012 ending July 31, narrower than the Zacks Consensus Estimate of a loss of 39 cents. Results however, compare unfavorably with the loss of 35 cents incurred in the year-ago period. Adjusted loss for the quarter was $111.2 million, wider than $110.8 million reported in fiscal first-quarter 2011.
H&R Block incurred a goodwill impairment charge of $59.2 million or 19 cents per share, litigation charge of $9 million or 3 cents per share and recognized gain on sale of business of $6 million or 2 cents per share in the quarter under review. Adjusting for the items, loss came in at 57 cents in the reported quarter, compared with a loss of 41 cents in the year-ago quarter.
Operational Performance
Revenue for the reported quarter was $267.6 million, down 2.5% from $274.5 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. Reported revenue also lagged the Zacks Consensus Estimate of $276 million.
The company reported an operating loss of $297.2 million, wider than the loss of $210.6 million in the fiscal first quarter of 2011.
Segment Performance
Tax Services revenue was $91.4 million in the fiscal first quarter of 2012, inching down 0.2% from $91.6 million in the year-ago period.
The segment reported a pretax loss of $169.5 million, narrower than $174.6 million in the prior year quarter. Results include a pretax litigation charge of $15.0 million.
Business Service revenue totaled $167.3 million for the quarter, down 4.3% from $174.7 million in the year ago quarter.
Pretax income reported by the segment was $92.5 million wider than the loss of $0.4 million a year ago. Results include a non-cash pretax charge of $89.7 million.
In August, H&R Block decided to divest RSM McGladrey to McGladrey & Pullen, LLP for a consideration of $610 million. The transaction is expected to close by the end of 2011.
Corporate and Eliminations posted revenue of $8.9 million compared with $8.1 million in the prior-year quarter.
Segment pretax loss in the quarter was $31.1 million, narrower than a loss of $32.3 million in the year ago quarter.
Financial Position
H&R Block ended fiscal first quarter 2012 with cash and cash equivalents of $1.06 billion lower than $1.73 billion at the end of fiscal 2011. Total outstanding long-term debt at the reported quarter end was $1.02 billion, a trifle lower than $1.05 billion at the end of fiscal 2011.
Net cash used in operating activities during the quarter was $394.5 million, compared with $348.3 million in the year-ago period.
Peer Comparison
Intuit Inc. (INTU), which competes with H&R Block, reported a fourth quarter 2011 adjusted loss of 11 cents per share, wider than the Zacks Consensus Estimate of a loss of 10 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.
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.
The quantitative Zacks #1 Rank (short-term Strong Buy rating) for the company indicates upward pressure on the shares over the near term.
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