The company's mortgage business saw quarterly revenues decline 4 percent to $296.5 million, as rising interest rates have cut into margins.
H&R Block Gets Its Own Taxes Wrong
By Alistair Barr, Dow Jones
San Francisco (Feb. 24) - H&R Block Inc., the nation's largest tax preparer, said the costs of settling a number of class-action lawsuits and slower-than-expected business in its tax and mortgage arms caused its third-quarter profit to drop 68 percent and forced the company to lower annual revenue estimates.
In addition, H&R Block said Thursday it will restate earnings for fiscal years 2004 and 2005, as well as the first two quarters of this year, to correct accounting errors it said led to the company understating its income tax liability last year by $32 million.
For the three months ending Jan. 31, the Kansas City-based company reported earnings of $28.9 million, or 9 cents per share, compared with $92.3 million, or 28 cents per share, during the same period a year ago. Analysts surveyed by Thomson Financial had expected earnings of 26 cents per share.
Shares for H&R Block, which released its earnings after the markets closed Thursday, fell 31 cents, or 1.2 percent, to close at $25.19 on the New York Stock Exchange. The stock was down $1.87, or more than 7 percent, to $23.32 in after-hours trading. It had traded in a 52-week range of $23.01 to $30.
The company said it recorded an after-tax charge of $31.7 million, or 10 cents per share, in litigation expenses.
H&R Block announced Dec. 21 that it had agreed to pay $62.5 million to settle four class-action suits filed in West Virginia, Ohio, Alabama and Maryland, as well as to resolve claims pending in 22 other states and the District of Columbia.
All the cases involved loans that allow customers to borrow against expected tax refunds. Consumer advocates say the loans take advantage of low-income customers who don't understand the steep fees charged for the service or their alternatives.
California Attorney General Bill Lockyer last week filed another lawsuit against Block's loan program, with similar claims, and the company is scheduled to defend the program from federal racketeering charges in May.
Quarterly revenues increased 11 percent to $1.16 billion, but missed analyst predictions of $1.21 billion.
The company's tax business saw quarterly revenues increase 3.2 percent to $548.5 million. But H&R Block said its retail offices have seen 4.1 percent fewer clients through the first month-and-a-half of the U.S. tax season, eking out a slight increase in revenue from a 6.1 percent increase in average fees per client.
During a conference call with analysts, company chairman and chief executive Mark Ernst said software problems during the first half of January likely prevented the company from serving an estimated 250,000 clients.
"While we have recovered from these problems and have since then seen performance in line with our expectations for the year, those early weeks have created a hole out of which we are working to climb," he said, estimating it will reduce client traffic for the year by 2 percent.
H&R Block, trying to ward off competitors such as Jackson Hewitt Tax Service and Liberty Tax Service, this year expanded the number of retail offices and department store kiosks by 9 percent to 12,165.
The company's mortgage business saw quarterly revenues decline 4 percent to $296.5 million, as rising interest rates have cut into margins. Ernst said the company has consolidated branch offices and regional call centers for its Option One subsidiary and will cut its work force by 600 positions, actions that will require a fourth-quarter charge of between $10 million and $12 million.
"The changes we're making will help ensure the long-term competitiveness of our mortgage businesses," Ernst said in a written statement.
Still, the combination of slow tax and mortgage businesses forced the company to lower its annual earnings guidance to between $1.65 to $1.85 per share, down from earlier guidance of $1.90 to $2.15 per share. Analysts expected annual earnings of $1.86 per share.
"We believe that it is prudent to take a cautious view of the fourth quarter," Ernst said.
H&R Block's business accounting arm saw revenues rise 77 percent to $235.8 million, while its investment business increased sales 18 percent to $73.2 million.
For the second time in six months, H&R Block said it will have to restate past earnings because of accounting problems.
In the latest case, the company said it plans to reduce fiscal year 2005 earnings by 7 cents per share and reduce 2004 earnings by 2 cents. Officials said the mistakes had to do with estimating the company's state effective income tax rate.
Last August, H&R Block disclosed it had to raise 2004 earnings by 6 cents per share and lower 2003 earnings by 8 cents per share because of tax accounting problems surrounding its 2000 acquisition of Olde Financial Corp.
Chief Financial Officer Bill Trubeck said the company will likely request an extension to file its quarterly report with securities officials to give it more time to determine the full impact of restating earnings.
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