Thursday, June 21, 2007

H&R Block, Hurt by Mortgages, Posts $86 Million Loss

By Yalman Onaran

June 21 (Bloomberg) -- H&R Block Inc., the largest U.S. tax preparer, posted a fiscal fourth-quarter loss after reducing the value of its unprofitable mortgage unit and forecasting that profit for 2008 will be less than some analysts estimated.

Net loss for the quarter ended April 30 was $85.6 million, or 26 cents a share, compared with a profit of $588 million, or $1.77, a year earlier, Kansas City, Missouri-based H&R Block said today in a statement. Profit excluding the mortgage unit was $591 million, or $1.81 a share, missing the $1.88 average estimate of seven analysts compiled by Bloomberg.

Chief Executive Officer Mark Ernst, who's been trying to stem the defection of customers to rival tax preparers, agreed in April to sell Option One Mortgage Corp. to hedge-fund manager Cerberus Capital Management LP. While Cerberus may pay as much as $800 million, the final price is tied to Option One's performance until the sale is completed, which may take until October. For now, the writedown has forced Ernst to postpone a stock buyback.

``The Option One story is the dominant issue at H&R Block until the deal is completed,'' said Scott Schneeberger, an analyst at CIBC World Markets Inc. in New York who has a ``sector perform'' rating on the stock.

Shares of H&R Block fell 74 cents, or 3.3 percent, to $22.04 at 4:21 p.m. in New York Stock Exchange composite trading. They've lost 4.3 percent this year.

Subprime Lending

The mortgage unit posted a net loss of $677 million in the fourth quarter, the company said. That included pretax losses of $389 million for bad loans and $517 million of impairment charges taken before the sale of the unit.

The unit's losses were worse than expected, strengthening the possibility of the sale price falling ``at low end of our $400-800 million target range,'' said UBS AG analyst Kelly Flynn in a note to investors. The good news, Flynn said, is that the sale to Cerberus ``is on track and should close by Oct. 31.''

Option One, based in Irvine, California, was the eighth- biggest purveyor in the U.S. last year of subprime mortgages, offered to people with the worst credit records. Such loans typically default about six times more often than conventional mortgages. H&R Block had already written down about $250 million linked to bad home loans before the sale to Cerberus was announced as U.S. defaults hit four-year highs.

Cerberus knew the mortgage market faced turmoil in the fiscal fourth quarter and understood the impact on Option One as the sale was being negotiated, Ernst said.

Sale Affirmed

``There's nothing in these numbers that would affect our ability to close'' the transaction, Ernst said in a conference call with analysts.

Revenue from continuing operations, which excludes Option One, rose 8 percent to $2.4 billion, the company said. Clients served at H&R Block offices nationwide increased 0.9 percent during the fiscal year, the company said today.

For the full year, H&R Block lost $433.7 million, or $1.33 a share, compared with a profit of $490.4 million, or $1.47 a share, in fiscal 2006. Revenue rose 12.5 percent to $4.02 billion.

The company said it aims to earn $1.25 to $1.45 a share in fiscal 2008 from continuing operations, compared with $1.47 in a Bloomberg survey of eight analysts. Discontinued operations will post ``modest losses'' in the first two quarters. ``We are intent on aggressively managing our operations for better performance,'' Ernst said in the statement.

H&R Block won't be able to buy back any shares until the fiscal fourth quarter of 2008 because charges tied to Option One depleted its capital, Chief Financial Officer Bill Trubeck said. The company had promised to use about $700 million from the sale to buy back shares.

The charges mean H&R Block's capital has fallen below regulatory requirements, Trubeck said. The firm is negotiating with the Treasury's Office of Thrift Supervision on capital requirements and expects the

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