DBRS Comments on Various H&R Block Announcements, at BBB (high); Trend Stable

DBRS has today commented that the ratings of H&R Block, Inc. (Block or the Company) and its subsidiaries, Block Financial LLC and H&R Block Canada, Inc. including its long-term ratings of BBB (high), are unaffected by the Company’s recent SEC form 8-K filing indicating that H&R Block, Inc. and certain of its subsidiaries filed a complaint in the United States District Court for injunctive relief against HSBC Bank USA, National Association (HSBC) and certain of its affiliates seeking to require HSBC to perform its contractual obligations under the HSBC Retail Settlement Products Distribution Agreement. The trend on all ratings is Stable.

While DBRS is not commenting on the pending litigation or projecting the outcome of any such litigation, DBRS can envision several outcomes from the legal proceedings, one of which includes the potential loss of RAL product. In isolation, however, at this time, DBRS does not see the potential loss of the RAL business as having a meaningful impact on the Company’s earnings generation ability. Indeed, in fiscal year 2010, RAL related revenue, at $146.2 million, represented just 3.8% of total revenues. More importantly, however, should the pending litigation result in the discontinuation of the RAL product, DBRS will look for the longer-term impact on the Company’s franchise, its competitive advantage, and ultimately its ability to protect its core retail tax client base. During the 2010 tax season, a sizable 16.8%, or 3.4 million filers purchased a RAL from Block, as such, the potential removal of this product offering, may have a negative impact on client retention. This concern is further exacerbated by the erosion in the Company’s core Retail Tax client base experienced over the last two tax seasons and the challenge the Company faces to stabilize the client base in the uncertain macroeconomic environment. DBRS will watch developments in the case and will provide further comment or may taking rating action as warranted.

Separately, last week, Block announced that it has agreed to acquire 2SS Holdings, Inc., the developer of TaxACT digital tax preparation solutions. The acquisition is valued at $287.5 million and will be paid with cash. Completion of the transaction is subject to various regulatory conditions. The transaction is expected to close by the end of the current calendar year. Block expects the acquisition to be accretive to earnings. In tax season 2010, TaxACT served more than 5 million tax filers through its broad range of distribution channels, including online, desktop download and professional software.

While DBRS views this acquisition positively, it has no immediate impact on the rating. Importantly, however, this transaction provides the intellectual capital and deepens the Company’s presence in the high growth digital market, where Block has historically underperformed. Going forward, DBRS will look to Block’s ability and success in applying the skill sets gained through this transaction for the benefit of its existing digital franchise. While DBRS does not expect that the full benefits of this transaction will be realized in the 2011 tax season, DBRS will look to the upcoming tax season’s results for indications that Block is capturing incremental benefits of the acquisition, including an increase in digital market share.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable rating methodology is Rating Finance Companies Operating in the United States, which can be found on our website under methodologies.