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H&R Block Inc.’s (HRB - Analyst Report) income from continuing operations of $2.01 per share in the fourth quarter of fiscal 2012, ending April 30, modestly surpassed the Zacks Consensus Estimate by 2 cents. This missed the year-ago quarter’s earnings of $2.09 by almost 4%. Net income from continuing operations for the quarter was $591.7 million, comparing unfavorably with $642.8 million reported in the fourth quarter of fiscal 2011.

Including income from discontinued operations of $5.6 million or 2 cents a share, the company reported a net income of $586.1 million or $1.99 per share in the quarter under review, compared with $658.6 million or $2.14 a share earned in the fourth quarter of fiscal 2011.

For fiscal 2012, H&R Block’s adjusted income came in at $1.06 per share, falling short of the Zacks Consensus Estimate by 15 cents.

Including after-tax charges of $30.8 million or 10 cents per share, largely related to a previously announced strategic realignment and litigation expenses and net loss from discontinued operations of $80 million or 27 cents a share, the company reported net income of $265.9 million or 89 cents per share in fiscal 2012. This compares unfavorably with $406.1 million or $1.31 per share in fiscal 2011.

Operational Performance

Revenue in the quarter under review was $2 billion, down 2.2% year over year. Reported revenue was almost in line with the Zacks Consensus Estimate.

Revenues for fiscal 2012 grossed $2.9 billion, down 1.7% year over year, though almost in line with the Zacks Consensus Estimate.

Total expense in the quarter totaled $1.02 billion, higher by 1.6% over the prior-year quarter. Total expense for the year inched down 0.04% over fiscal 2011.

The company reported an operating income of $981 million in the fourth quarter, a decline of 5.8% year over year.  Operating income for fiscal 2012 declined 8.1% year over year.

Segment Performance

Tax Services revenue was $1.99 billion in the fourth quarter of fiscal 2012, reflecting a decline of 2.1%.

Fiscal revenue was $2.9 billion, down 1.7% year over year. Lower financial product revenues more than offset tax preparation and related revenues that increased 1.2%, leading to the overall decline.

Pre-tax income for the segment was $1.01 billion, declining 7% year over year.

Pre-tax income for the fiscal declined 8.3% year over year to $704 million. The decline was due to lower revenues from financial products, higher marketing expense, and a decline in gains from the sale of company-owned offices. However, lower credit losses were a partial offset.

Corporate and Eliminations posted revenue of $6.4 million, down 22% from the prior-year quarter. Fiscal revenue also declined 3.7% over the previous year.

Segment’s pre-tax loss in the quarter was $34 million, narrowed from the loss of $48 million in the year-ago quarter. Pre-tax loss of the fiscal also improved to $127.9 million from $139.8 million in fiscal 2011.

Financial Position

H&R Block ended fiscal 2012 with cash and cash equivalents of $1.99 billion, nearly 15% lower from $1.73 billion at the end of fiscal 2011. Total outstanding long-term debt at the reported quarter end was $0.41 billion, a 60% drop from lower than $1.04 billion at the end of fiscal 2011.

Net cash provided by operating activities in fiscal 2012 was $362 million, down 29% from $512 million in fiscal 2011.

Share repurchase and Dividend

In fiscal 2012, H&R Block spent $200.0 million to buyback 14.6 million shares at a cost of $13.74 per share. During fiscal fourth quarter, the company bought back 1.5 million shares.

Till date, in the first quarter of fiscal 2013, H&R Block spent $315.0 million to buyback 21.3 million shares at a cost of $14.82 per share.

On July 2, the company will pay a dividend of 20 cents per share to the shareholders of record as of June 11, 2012.

Peer Comparison

Intuit Inc. (INTU - Snapshot Report), which competes with H&R Block, reported third quarter fiscal 2012 adjusted earnings $2.43 per share, beating the Zacks Consensus Estimate of $2.39.


Revenues of $1.95 billion in the third quarter were up 5.2% from $1.85 billion in the prior-year quarter. Reported revenue was in line with the lower end of management’s guidance range of $1.95 billion to $1.99 billion and slightly below the Zacks Consensus Estimate of $1.96 billion.

Our Take

H&R Block’s leading position in the tax preparer market, its strategic initiatives to grow its business by gaining and retaining customers augur well for long-term growth. The company’s effort to return more value to its shareholders will also help retain investor confidence in the stock. H&R Block is also increasing its share in the digital and assisted space.

H&R Block scores strongly with the credit rating agencies. Standard & Poors’ affirmed the 'BBB' issuer credit rating based on its solid liquidity.

We retain our 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.
 

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