(HRB) H&R Block’s Earnings Report Beats

H&R Block’s (HRB) fiscal fourth-quarter 2011 adjusted income came in at $2.20 per share, 5 cents ahead of the Zacks Consensus Estimate. The results also compare favorably with $2.11 per share earned in the year-ago period. Adjusted income for the quarter was $658 million, down 5% from $692 million reported in fourth-quarter 2010.

H&R Block incurred an after-tax litigation charge of $17.0 million or 6 cents per share in the quarter under review. Adjusting for the charge, earnings came in at $2.14 in the quarter under review.

For fiscal 2011, the company reported an adjusted income of $1.52 per share, 14 cents above the Zacks Consensus Estimate and 10 cents above the year ago earnings of $1.42 per share.  Adjusted income came in at $470.6 million, a year-over-year decline of 0.7%.

Adjusting for litigation and arbitration charge of 9 cents, incremental Emerald Advance credit loss of 8 cents, severance charge of 6 cents, asset impairment charge of 5 cents, gain on sale of tax offices to franchisees of 9 cents, other gains of 2 cents and loss from discontinued operation of 4 cents, the company reported net income of $1.31 cents per share, down 8.4% from $1.43 earned in fiscal 2010. The prior year had a one-time benefit of 1 cent.

Operational Performance

Revenue for the reported quarter was $2.33 billion, down 0.5% from $2.34 billion recorded in the year-ago quarter. Lower revenues at Business Services as well as at Tax Services led to the year-over-year decline. Full year 2011 revenue grossed $3.78 billion, down 2.6% year over year.

Total operating cost increased 1.8% year over year to $1.25 billion in the quarter under review. Higher selling, general and administrative expenses led to the increase. Full year operating cost increased 0.3% over 2010 to total $3.11 billion.

The company reported an operating income of $1.07 billion down 3.1% year over year while full year 2011 operating income totaled $665 million, down 14% over 2010.

Segment Performance

Tax Services revenue was $2.04 billion in the fourth quarter of 2011, an increase of 0.3% from $2.03 billion in the year-ago period. Full year revenue decreased 2.1% year over year to $2.9 billion attributable to the sale of 280 company owned locations to franchisees and lower revenues stemming from the company’s inability to offer refund anticipation loans this tax season.

The segment reported a pretax income of $1.09 billion, slightly higher than $1.08 billion in the prior year quarter. Full year 2011 pretax income was $767 million, substantially lower than $867 million in 2010.

Business Service revenue totaled $280 million for the quarter, down 5.8% from $297 million in the year-ago quarter. Full year revenue declined 3.6% year over year to $829 million.

Pretax income reported by the segment was $32 million considerably lower than the pretax income of $68 million a year ago. Full year 2011 pretax income was $49 million, lower than $58 million in 2010.

Corporate and Eliminations posted revenue of $8.1 million compared with $9.9 million in the prior-year quarter. Full year 2011 revenue was $32.1 million compared with $38.7 million in 2010.

Segment pretax loss in the quarter was $47.9 million, wider from a loss of $38.4 million in the year ago quarter.  Full year 2011 pretax loss was $139 million, which narrowed from a loss of $142 million in the prior year.

Financial Position

H&R Block ended 2011 with cash and cash equivalents of $1.7 billion lower from $1.8 billion at the end of 2010. Total outstanding long-term debt at 2011 end was $1.04 billion, a trifle higher than $1.03 billion at the end of 2010.

Net cash from operating activities during fiscal 2011 was $512.2 million, down13% from $587.5 million in the year ago period.

Dividend

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

Peer Comparison

Intuit Inc. (INTU), which competes with H&R Block, reported third -quarter 2011 earnings of $2.33 per share, surpassing the Zacks Consensus Estimate of $2.19 per share.

Our Take

The company’s realignment initiatives remain on track. The company also remains focused on increasing its client retention rate. The reported quarter marked the attainment of the highest level of U.S. client growth since 2001. The acquisition of 2SS Holdings Inc. will further expand 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.

We remain Neutral on H&R Block. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

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