Skip to main content

Updated from 5:12 p.m. EST

Tax-preparation company

H&R Block

(HRB) - Get H&R Block, Inc. Report

said its loss widened in its fiscal second quarter, as the company took a charge to settle a class-action lawsuit in Texas.

The Kansas City, Mo.-based firm raised its earnings guidance for fiscal 2003, however, citing a solid tax-filing season, continued strength in its mortgage operations, a previously announced third-quarter gain from the sale of mortgage residual assets and cost controls across its businesses.

Block, which saw its shares fall earlier this month on concerns about potential legal liabilities, recorded a loss of 21 cents a share in the second quarter, compared with a loss of 15 cents in the same period a year ago.

The results included an after-tax charge of $25 million, or 14 cents a share, for settling a lawsuit related to the firm's controversial practice of charging excessive interest rates on loans that are secured by expected tax refunds.

Block's results also include a $6 million, or 3-cents per share charge, related to goodwill impairment in the company's investment services segment. Excluding charges, the firm lost 5 cents a share, in line with analysts' consensus estimates.

Looking ahead, Chairman and Chief Executive Mark Ernst said he expects GAAP earnings per share to be in the range of $2.90 to $3.10 for fiscal 2003. The company had previously projected earnings of between $2.80 and $3 a share. Thomson Financial/First Call pegs earnings per share at $3.08 for the full year. Block earned $2.31 a share in fiscal 2002.

TheStreet Recommends

Ernst said the estimates include a 23-cent net gain from a previously announced sale of mortgage assets, minus a 14-cent charge for the Texas litigation settlement and a 13-cent goodwill impairment charge to the investment services unit.

Excluding the impact of these gains and charges, the company expects cash earnings from operations to be in a range of $3.16 to $3.36 per share for the year. Meanwhile, revenue is expected to grow within the firm's target range of 10% to 15%

Although Block's shares have climbed recently on word of the Texas settlement, the stock is still down 13% for the month, as investors continue to worry about the firm's legal troubles. While a settlement has been reached in Texas, lawsuits in Maryland, Chicago, New York and other states are still pending.

Consumers are complaining about loans known as "rapid refunds" that involve interest rates of more than 100% on an annualized basis. Plaintiffs are suing because they say Block failed to disclose that it was receiving finders fees from Household International -- the bank extending the loans -- between 1992 and 1996. In a conference call, the company said it wouldn't speculate on its litigation strategy or any potential outcomes.

Other concerns also have surfaced recently. For example, analysts at Avalon Research have said the firm's mortgage business could be hurt if and when the housing market starts to slow. Block's mortgage business lends money to people with poor credit records and accounted for a majority of the firm's pretax income this year.

Also, a report in

The Wall Street Journal

sparked concerns about Block's use of gain-on-sale accounting. The technique allows Block to estimate profits from mortgage sales, which could force the company to take a charge if the expected income doesn't materialize. A company spokeswoman told the


that the gain-on-sale provides an "insignificant" part of the company's revenue. Block also says its assumptions underlying the valuation of its residual interests are appropriately conservative.

Ernst said Tuesday that the firm's mortgage operation "continues to deliver very strong performance." Indeed, the mortgage business saw earnings growth of 64% in the quarter, and the company said during a conference call that profit growth from this segment should be in a range of 50% and 75% for fiscal 2003.