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H&R Block swings to a quarterly profit

H&R Block Inc., the nation’s largest tax preparer, said Monday it swung to a fourth-quarter profit, helped by a record-setting tax season and the sale of its troubled mortgage arm.
/ Source: The Associated Press

H&R Block Inc., the nation’s largest tax preparer, said Monday it swung to a fourth-quarter profit, helped by a record-setting tax season and the sale of its troubled mortgage arm.

The company offered earnings guidance for this year above what Wall Street is expecting, and its shares climbed on the news.

The Kansas City-based company earned $543.6 million, or $1.66 per share, in the three months ended April 30 compared with a loss of $85.6 million, or 26 cents per share, during the same period a year ago.

Excluding discontinued operations, including its Option One Mortgage Corp. subsidiary, the company said it earned $691.1 million, or $2.11 per share, compared with $591.2 million, or $1.81 per share, from continuing operations a year ago.

Discontinued operations contributed a loss of $147.6 million, or 45 cents per share, compared to a loss of $676.8 million, or $2.07 per share, during the fourth quarter of 2007. The losses included the company adding about $203 million to its reserves for repurchasing defaulted mortgage loans, writing down the value of residual interests and the costs incurred from the April 30 sale of Option One to an affiliate of billionaire investor Wilbur Ross.

H&R Block said revenue during the quarter rose 11 percent to $2.6 billion from $2.3 billion a year ago. It had a 1.9 percent increase in core customers using the company’s offices to file their income tax returns in the latest quarter.

Analysts surveyed by Thomson Financial expected adjusted earnings of $2.03 per share on $2.5 billion in revenue.

The company said it expects to earn between $1.60 and $1.70 per share for continuing operations in fiscal year 2009, which is above analysts’ predictions of $1.58 per share.

“While we are not providing earnings guidance beyond fiscal 2009, we are confident that for the three-year horizon through fiscal 2011, we can realize significant gains in earnings per share through unit growth, greater efficiency in our tax and other operations, and capital deployment, rather than relying solely on annual price increases for growth,” Interim Chief Executive Officer Alan Bennett said in a release.

Bennett was named CEO last fall after former Chairman and Chief Executive Mark Ernst stepped down, ousted by the election of dissident shareholder Richard Breeden and two others to the board.

For the full year, the company said it lost $308.6 million, or 94 cents per share, compared with a loss of $433.7 million, or $1.33 per share, in 2007.

Annual revenues rose 10 percent to $4.4 billion from $4.0 billion a year earlier.

Analysts were expecting annual earnings of $1.35 per share on $4.3 billion in revenue.

For the full year, tax revenues rose 11 percent to $2.99 billion as the company saw a 3.5 percent increase in customers from its network of retail offices, online services and tax preparation software as well as a 4.3 percent increase in average fees.

The company said the number of retail office clients rose 1.9 percent when adjusted to remove people who were filing tax forms only to receive federal stimulus checks from the government. Some lower-income people who generally don’t file tax returns had to this year to receive the tax rebate payments.

Digital clients who paid H&R Block a fee declined 4.3 percent as a boost in online filing was offset by a decline in software customers.

The company said it is making changes to improve profit margins in its tax offices over the next three years, including turning over some company-owned full-service operations to franchisees.

In the fourth quarter, revenues at the company’s business services division, which includes accounting firm RSM McGladrey, rose slightly to $317.9 million while revenues at its consumer financial services rose 6 percent to $127.2 million.

The H&R Block Bank reported a pretax loss of $1.3 million as it set aside $29.4 million to cover potential delinquent mortgage loans it holds separate from Option One. The company said mortgages held for investment by the bank fell 29 percent over the past year to $966.3 million, reflecting prepayments and other payments and said overall bank assets were down 28 percent for the year to $1.1 billion.

The company’s Option One subsidiary suffered from the meltdown that has swamped the rest of the mortgage industry in the past year. Its effects will continue to hurt H&R Block’s bottom line as the company is still responsible for some delinquent loans sold to investors, and the company said it boosted its reserve for loan repurchases in the fourth quarter by $203 million to $240 million. Officials said they believed this level was “adequate in current circumstances” but warned that further reserves may be required.