H&R Block posts wider 1Q loss, takes big charge

AP News
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Posted: Sep 01, 2011 5:35 PM
H&R Block posts wider 1Q loss, takes big charge

H&R Block Inc. on Thursday said that its fiscal first-quarter loss widened, largely because of a charge taken as part of its plans to sell its business consulting subsidiary.

The nation's largest tax preparer, which typically reports a loss in the first three months of its fiscal year, posted a net loss for the period ended July 31 of $175.1 million, or 57 cents per share. That compares with a loss of $130.7 million, or 41 cents per share, in the year-ago period.

The results included charges of 20 cents per share, mainly related to the sale, announced last month, of its RSM McGladrey unit. Excluding those charges, the adjusted loss was 37 cents per share.

Analysts, on average, expected a loss of 40 cents per share, according to data provided by FactSet.

Revenue fell 2 percent, to $267.6 million, from $274.5 million last year. That missed Wall Street expectations for revenue of $276.3 million.

Block, based in Kansas City, Mo., is gearing up for the 2012 tax season, which begins in January. "We had a lot of momentum that we came out of last season with, and we're looking to build on that," said Chief Financial Officer Jeff Brown in an interview.

Block announced in late August that it plans to sell RSM McGladrey back to McGladrey & Pullen LLP for about $610 million, 12 years after buying the consulting business. Since 1999, McGladrey & Pullen has operated under an alternative practice structure with RSM McGladrey. Under that arrangement, RSM McGladrey has provided nonpublic accounting services, including most tax and consulting services, while McGladrey & Pullen provided clients with public accounting services such as audits.

"We think it's the right strategy to exit the business now," Brown said. "It's good for Block, good for shareholders and good for the partners of McGladrey as well."

The deal, which still needs various approvals, is expected to close by the end of the year.

The conclusion of another deal for the company is a bigger question.

Brown said Block expects to appear Tuesday at a hearing related to the Justice Department's move to nix the company's acquisition of 2S Holdings Inc., the parent of the software company that created TaxAct. Block announced plans in October to buy TaxAct for $287.5 million, but the government is concerned about reduced competition in the market if the two companies combine.

"We continue to believe TaxAct would be a good strategic fit for the company," Brown said.

During a conference call to discuss the results, the issue of market share growth in the digital, do-it-yourself category was raised, with one analyst noting that rival Intuit Inc. recently claimed it gained market share during the 2011 tax season. Block has also made such claims.

"They did mention that they gained share," said CEO William Cobb. "We gained share. It's hard to speculate, since the only information we have is IRS data and the public filings of our competitors. And essentially I think we gained share, clients and share."

Oppennheimer analyst Scott Schneeberger asked what that means for TaxAct and other players. "I think it's implied that if both you and they took share. the smaller players including TaxACT probably lost a little."

Block executives declined to speculate if that is the case.

The company said its Sand Canyon Corp., the remnants of its former Option One Mortgage business, received claims of about $35 million during the quarter for alleged breaches of representation from investors trying to hold the company responsible for investment losses related to soured mortgages. It reviewed about $48 million in prior claims during the quarter and recorded losses of about $500,000. The small amount of losses means the reserves set aside to cover such claims remain essentially unchanged, Brown said.

The fear that Block might have to buy back bad mortgages made by Option One that were used to back investments has repeatedly come up, and some analysts say it has weighed on the stock. Block executives continue to maintain that the reserves set aside are adequate for any putbacks.

In light aftermarket trading, H&R Block shares slid 83 cents, or 5.5 percent, to $14.35, after closing up 6 cents at $15.18.