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H&R Block Earnings: A Narrower-Than-Expected Loss

H&R Block saw revenues decline in the second quarter, but still managed to post a narrower loss than analysts had expected.H&R Block (HRB) posted a narrower second-quarter loss on Tuesday despite lower revenue, as it cut expenses further during its slow season.

The tax preparation company also said its refund-anticipation-loan program for the approaching tax season is still in doubt.

CEO Alan Bennett said Block's negotiations with HSBC and its lawsuit against the bank regarding the funding of the loan program continue. He acknowledged that its ability to offer these short-term loans, commonly called "rapid refunds," may be in jeopardy.

Block had a contract with HSBC to fund the loans but the bank has balked at providing the funding because of a move by the Internal Revenue Service.

In August, the IRS said it will eliminate a code that let tax preparers know if their customers would get their entire refund, or if some would be held back to cover things like unpaid back taxes. The code in past years acted as a form of credit check for the loans, which are often taken by customers with spotty or no credit histories.

"It is a complex situation, and we are working hard to have refund-anticipation loans available this season," said Bennett during a conference call to discuss results.

Will Block's Rapid Refunds Disappear?

There are several scenarios still possible, he said, including that Block will not arrange funding and not have refund-anticipation loans available. That could mean customer losses to companies that still have loan funding available, he acknowledged.

"The thing I most worry about is that there's not a level playing field, if for some reason we're not able to secure RALs and others have them," Bennett said in an interview.

Even without the loans, Block may still have refund-anticipation checks available, Bennett said. That program involves setting up accounts for customers so that their cost for tax preparation is taken out of their refund. The company is hoping that if no loan funding is available, these accounts may take the place of refund anticipation loans for many customers.

About 45% of Block's customers in the 2010 tax season got either a refund-anticipation check or loan backed by their expected refunds. The company would not break down the portion that used each product.

Another issue Block tried to address before tax season is its lagging performance in the digital tax preparation market. The company said its planned acquisition of the company that makes the online tax prep software TaxAct is still under regulatory review and the closing date of the purchase is not yet set.

"Meantime, we continue to focus on growing our H&R Block at-home digital tax business," Bennett said. He noted the company has launched its redesigned website, which is expected to help convert more taxpayers who visit the site into customers. Block also plans a more aggressive marketing campaign for its digital products, Bennett said.

Lower Loss Than Expected

Block, which is based in Kansas City, Mo., lost $109 million, or 36 cents per share, for the three months ended Oct. 31. Adjusted for discontinued operations, the loss came in at 35 cents per share. That was narrower than the loss of $128.6 million, or 38 cents per share, posted a year ago. Block usually posts a loss for the period because the tax business is seasonal.

Revenue fell slightly to $322.9 million, from $326.1 million last year.

Analysts polled by Thomson Reuters, on average, expected a loss of 38 cents per share on revenue of $339.5 million.

Block's second-quarter expenses were 7% lower than in the same 2009 period, at $501.9 million. The company has closed offices and cut staff in the past year to reduce costs.

It said its Sand Canyon Corp. unit, which holds the remnants of its former Option One Mortgage Corp., received new claims for $21 million for alleged breaches of representations and warranties - commonly known as "mortgage putbacks," during the quarter. Since it stopped writing new mortgages in December 2007, the company has received total claims of $707 million in unpaid principal and incurred net losses of about $58 million. The company's reserve for estimated losses totals about $185 million. Claim activity and associated losses remain within expectations, the company said.

During the call, Chief Financial Officer Jeff Brown gave a lengthy explanation of the putback situation, and maintained that Block does not have reason to believe it faces any potential surge in claims.

The issue has weighed on Block's stock in recent months as investors and some analysts have worried that claims would rise.

Share Repurchases Remain High

Barrington Research analyst Alex Paris played down those concerns.

"All these great fears about putbacks and increases in loan-loss reserves, it continues to have less of an impact than feared," he said in an interview. While the situation could change if the economy worsens or the housing market takes another tumble, "I take them at their word that they believe that the reserves set aside for the legacy mortgage liability is adequate," Paris said.

Bennett said he thinks the company has addressed the current concerns, but if other companies have problems, the issue may resurface.

Paris noted that Block repurchased 3.5 million shares during the quarter, a larger-than-usual amount during its slow season.

"I guess the low stock price was just too much to pass up on, so they took advantage," he said. The stock has traded between $10.13 and $23.23 in the past 52 weeks, but spent the quarter at the low end of that range.

H&R Block shares closed Tuesday trading up 53 cents, or 4.1%, at $13.55. In aftermarket trading, the stock lost 10 cents to $13.45.


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