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Tickers in this Article: HRB, INTU, AMP
After a disastrous multi-year strategy to diversify into ancillary businesses, H&R Block (NYSE:HRB) has been working to get its house in order and focus on the tax preparation services it originally made its name on. The subprime mortgage business was jettisoned last year at a hefty loss, while H&R Block Financial Advisors was officially sold to Ameriprise Financial (NYSE:AMP) on November 1, the day after the second quarter closed.

Auditing Q2
What remains are tax, business, and consumer financial services, which are being geared to support tax-preparation activities. H&R Block reported second fiscal quarter results on Thursday, with total sales falling 1% to $351.5 million as diluted earnings from continuing operations came in at a loss of $135.9 million, or 40 cents per share, which was slightly better than the 42 cent loss from last year. Losses are normal during the first through third fiscal quarters as H&R Block makes nearly all of its money during tax season in the fiscal fourth quarter. As a result, current trends don't properly reflect the underlying economics of H&R Blocks' business model, but management did offer plenty of details on how it is positioning itself for future growth. (Read how to take advantage of periodic trends in the equity markets with Capitalizing On Seasonal Effects.)

Distraction Subtraction
During the conference call, CEO Richard Breeden pointed out that the financial advisory business sold to Ameriprise had been a "drag on the company for nearly a decade" and had proved a drain on capital and distraction from the core tax business. In regard to the tax segment, also after quarter end, H&R Block completed the purchase of its Texas franchise and plans to open more offices to focus on the state's burgeoning Hispanic population and overall favorable demographic growth.

H&R Block Bank's key focus is to extend credit to tax filers interested in an advance on their tax refunds, and while this form of short-term credit has been criticized for being exorbitant, management downplayed the cost by stating that its annual percentage interest rate range of 9% to 36% is "a far more affordable option" than can be found at competing financial services firms. And returning to the tax business, Intuit's (Nasdaq:INTU) TurboTax products are clearly on management's mind, as H&R Block is now offering products the company believes are more affordable for households filing multiple tax returns.

Long Road Ahead
H&R Block still has an uphill battle as it returns to its roots. Debt has been reduced $1.2 billion over the past year, but net debt still stands at a hefty $1.7 billion, with close to $40 million in related interest expense over the past six months.

Management is sticking with its earlier earnings per share guidance of $1.60-1.70 for the full year, but there is still downside risk as the mortgage loan portfolio in its banking operations are fighting off foreclosures by modifying loan terms. So far, management has made offers to 25% of the loans in its portfolio, which it sees as encouraging, though it can't predict with certainty what near-term default rates will be. (For more on how to evaluate a company's debt and assets, check out Reading The Balance Sheet.)

Bottom Line
H&R Block has made considerable progress in correcting and focusing its scattered operations, but it still has a way to go to convince investors it can return to posting consistent, profitable growth.

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