NEW YORK (Reuters) - H&R Block Inc. (NYSE:HRB - news), the largest U.S. tax preparer, posted a fourth-quarter loss on Thursday, as the deterioration of the U.S. subprime market hurt the value of its mortgage business.
The company also said the value of its subprime unit Option One Mortgage Corp. fell to $1.1 billion as of April 30. H&R Block agreed on April 20 to sell Option One to Cerberus Capital Management for a price tied to its closing date value. The deal is expected to be finished in the quarter ending October 31.
Block posted a net loss of $85.6 million, or 26 cents a share, reflecting $678 million in losses attributed to Option One, its UK tax business and other units up for sale.
Excluding discontinued operations, income rose 9 percent to $591.2 million, or $1.81 a share, in the quarter ended April 30, from $541.7 million, or $1.63, a year earlier. Even on this basis, Block fell short of the average forecast by 7 cents.
The shortfall and the depressed value of Option One sent shares of H&R Block down 4 percent.
"Missing their number didn't help," said FTN Midwest business services analyst Kartik Mehta, who has a "buy" rating on Block shares. "I think investors wanted them to buy back more shares and add leverage, but getting a bank charter has hindered them."
FTN's Mehta said Block earnings fell short because its tax rate was higher than expected, while development spending squeezed profit margins in the tax preparation business.
BEYOND TAX
The Kansas City-based company has tried for years to expand from once-a-year tax accountants to a full service banking, loans and advice company. Some moves, such as expanding into mortgages, have backfired, while its promotion of refund anticipation loans prompted regulatory action and lawsuits.
Among its latest efforts is building a consumer bank, for which Block seeks a federal charter. H&R Block expects that by offering savings accounts, credit cards and financial advice that will generate revenue even after tax season.
During a conference call with analysts, the company said it would not buy back stock until it meets regulatory capital requirements for the bank unit. Chief Executive Mark Ernst said Block likely won't be able to repurchase shares until the fiscal fourth quarter.
The company repeated it expects to complete its sale of Option One to Cerberus during the October quarter. Block said the unit's net asset value fell by roughly $300 million to $1.1 billion as of April 30.
Under the Cerberus agreement, which calls for a $300 million discount, H&R Block will receive $800 million in cash upfront plus up to $300 million in Option One profit over following 18 months.
Block also will retain about $300 million in tax loss benefits, which will help offset any losses.
For the quarter, revenue rose 8 percent to $2.4 billion, also falling shy of expectations. Tax services revenue rose 8 percent to $1.9 billion, as clients served through U.S. branch offices and online rose 4.4 percent to a record 20.3 million.
Operations in Canada and Australia also boosted results, with 22.9 million clients served. Consumer financial services revenue rose 57 percent to $120.2 million.
Looking ahead, Block said it expects earnings from continuing operations of $1.25 to $1.45 per share in fiscal 2008, below the current average forecast of $1.47.
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