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H&R Block Inc.’s (HRB - Free Report) third quarter 2013, ended Jan 1, adjusted loss from continuing operations came in at 22 cents per share, much wider than the Zacks Consensus Estimate loss of 3 cents. H&R Block broke even in the year-ago period.

Including favorable adjustments from discrete tax items of 16 cents, H&R Block reported net loss of 6 cents, wider than a loss of 1 cent incurred in the year-ago quarter.

Decline in revenue induced weaker numbers in the reported quarter. However, cost reduction initiatives and income tax benefit resulting from a settlement with the IRS limited the downside.

Quarterly Operational Performance

H&R Block’s revenue stood at $472 million, down 29% year over year. The decline was largely attributable to timing issues from the IRS opening its e-file system on Jan 30 and thereafter deferral to the commencement of the U.S. tax season. Revenue lagged the Zacks Consensus Estimate of $534 million.

Total expense of H&R Block was $564.6 million, waning 15.3% over the prior-year quarter, primarily driven by lower selling, general and administrative expenses, decline in interest expense, lower compensation and benefits as well as lower occupancy and equipment costs.

H&R Block’s operating loss in the quarter widened to $92.6 million from $3.7 million incurred in the third quarter of fiscal 2012.

Total U.S. tax returns prepared by and through H&R Block declined 5.8% year over year through Feb 28. The company expects industry-wide U.S. filings to increase 1% to 2% by the end of the tax season.

Segment Performance

Tax Services revenue was $464 million in the reported quarter, down 29%, primarily due to delay in commencement of the U.S. tax season.

Pre-tax loss for the segment was $64 million, compared with income of $3 million in the year-ago quarter.

Corporate and Eliminations posted revenue of $7 million, flat year over year.

The segment’s pre-tax loss in the quarter was $32 million, narrower than the loss of $33 million in the year-ago quarter.

Financial Position

H&R Block ended the third quarter of fiscal 2013 with cash and cash equivalents of $456 million, significantly lower from $1.2 billion reported at the end of the third quarter of fiscal 2012. 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, due to issuance of $0.5 billion senior notes.

Net cash used in operating activities by H&R Block in the first nine months of fiscal 2013 was $180 million, compared with $323 million provided in the year-ago period.


On Apr 1, 2013, H&R Block will pay a dividend of 20 cents per share to the shareholders of record as of Mar 18, 2013.

Guidance Affirmed

H&R Block expects cost reduction initiatives to help it deliver $85–$100 million of pretax earnings in fiscal 2013.

Peer Comparison

Intuit Inc. (INTU - Free Report) reported second-quarter 2013 adjusted earnings per share (EPS) of 23 cents, missing the Zacks Consensus Estimate of 28 cents.

Performance of another consumer service provider

Coinstar Inc. (CSTR - Free Report) reported its fourth-quarter earnings of 93 cents, 29% above the Zacks Consensus Estimate.

Our Take

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. Though the company experienced lower tax preparation, it was better than the industry average of a decline of 8%.

Its efforts to return value to its shareholders will also help retain investors’ confidence in the stock.

With cost reduction initiatives bearing fruit and successful tax seasons in Brazil and India, we believe H&R Block remains well positioned. According to H&R Block’s agreement with Sears Holdings Corporation , the company will focus on 112 best performing Sears locations, while shutting down the rest. H&R Block expects this move to be slightly accretive to fiscal 2013 earnings. The agreement also entails it to establish temporary offices in other Sears locations during the peak tax season.

H&R Block presently carries a Zacks Rank #3 (Hold).

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