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H&R Block posts lower 4Q, annual earnings

H&R Block Inc. says that fourth-quarter earnings fell 4.5 percent as the company began restructuring its mortgage business and settled litigation surrounding its use of refund-anticipation loans.
/ Source: The Associated Press

H&R Block Inc. said Wednesday that fourth-quarter earnings fell 4.5 percent as the company began restructuring its mortgage business and settled class-action litigation surrounding its use of refund-anticipation loans.

For the three quarters ending April 30, the nation's largest tax preparer reported earnings of $587.5 million, or $1.77 per share, compared with $614.9 million, or $1.83 per share, during the same period a year ago.

The results included an after-tax charge of $6.4 million, or 2 cents per share, to cover restructuring the mortgage business. Excluding the charge, H&R Block had earnings of $1.79 per share, meeting the expectations of analysts surveyed by Thomson Financial.

Revenue for the quarter increased 6 percent to $2.496 billion, about even with analyst expectations of $2.497 billion.

H&R Block makes the majority of its revenue in the fourth quarter, which covers most of the annual income tax filing season.

During the quarter, sales at the company's tax business rose 4 percent to $1.77 billion, the majority of the growth coming from taxpayers filing their taxes online or with the company's TaxCut software.

Bill Trubeck, the company's chief financial officer, said in an interview that despite growth in its digital tax-filing business, H&R Block plans to continue opening new offices for next year. He said the company plans to open between 300 and 400 new locations, down from the 1,000 new stores opened for this year and the 1,200 stores opened for 2005.

"We're moderating the growth somewhat, but we really believe if we're going to compete we need to offer clients all of the avenues (for filing taxes)," Trubeck said.

The company's mortgage business continued to disappoint as higher interest rates have cooled the housing market. Quarterly revenue declined 20 percent to $304 million.

H&R Block has announced plans to cut 1,200 positions in the division and reduce the number of offices.

RSM McGladrey, the company's business accounting arm, has done well, with fourth-quarter revenue increasing 72 percent to $347.8 million, partly thanks to the company acquiring American Express' business services arm last fall.

The company said that on Thursday it will announce plans to open RSM McGladrey offices in China, Russia, the United Kingdom, Germany and Eastern Europe.

Investment services also gained during the quarter, with revenue increasing 10 percent to $76.8 million and losses sinking 33 percent to $9.7 million.

For the full year, H&R Block reported earnings of $490.4 million, or $1.47 per share, compared with $623.9 million, or $1.85 per share, last year. Those results include $49.1 million, or 15 cents per share, in after-tax charges to cover settling the revenue anticipation loan lawsuits.

Analysts surveyed by Thomson Financial expected annual earnings of $1.61 per share.

Revenue for the year increased 10 percent to $4.87 billion, below Wall Street's expectation of $4.92 billion.

Looking ahead, the company said it expects annual per-share earnings in fiscal year 2007 to fall between $1.80 and $2.05. Analysts expect annual earnings of $1.88 per share.

In April, H&R Block and a banking partner agreed to settle a long-standing class-action lawsuit over the refund anticipation loans, which are short-term cash payments to customers who don't want to wait for their tax refunds. The plaintiffs had claimed the company failed to adequately explain the loans' high interest and fees.

The company had agreed in December to a separate settlement of more than two dozen class-action lawsuits over the refund loans for $62.5 million. That settlement covered 8 million customers.

H&R Block still faces a lawsuit filed in February by California Attorney General Bill Lockyer on behalf of 1.5 million state residents who have taken out refund loans since 2001.

The company also is fighting a $250 million lawsuit by New York Attorney General Eliot Spitzer that claims management threatened to fire employees who didn't push overpriced individual retirement accounts. Spitzer claims the company pushed 500,000 customers into IRAs that had hidden fees and low interest rates, which cost them millions of dollars.

The company said Spitzer ignored evidence that the IRAs helped thousands of customers save money on their income taxes.