H&R Block posts wider 1Q loss as expenses rise

Higher expenses contribute to wider 1st-quarter loss for tax preparer H&R Block

Associated Press

H&R Block Inc.'s loss widened by 7 percent in its fiscal first quarter, as the tax preparer booked higher operating expenses and other costs, offsetting a sharp rise in revenue.

The company, based in Kansas City, Mo., typically reports an operating loss in the May-July quarter, which follows the peak U.S. tax filing season.

In a conference call with Wall Street analysts on Tuesday, President and CEO Bill Cobb said he expects next year's tax season will be smoother than this year's, during which the company faced hurdles including last-minute tax law changes, a delayed start to the filing season and new fraud controls.

"We continue to believe that many of the challenges faced by the industry last season were an exception and we now expect IRS filings to grow around 1 percent in 2014," Cobb said.

The executive also noted that the company has asked its regulator over the past 12 months for permission to buy back shares, but has not received approval to do so.

Block's shares fell 3.4 percent in after-market trading.

The nation's largest tax prep company benefited in the latest quarter from growth in tax services revenue, primarily from its operations in Australia. Growth in revenue from products and interest income helped drive overall revenue 32 percent higher in the quarter.

But those gains were offset by operating expenses, which grew 14 percent due to higher variable costs, foreign exchange currency losses, higher legal fees and costs related to the company's divestiture of its banking unit.

Block agreed in July to sell its H&R Block Bank assets to Republic Bank and Trust Co. After the deal is complete, H&R Block Bank will close by surrendering its charter.

Republic has an application filed with regulators to convert into a national bank, but doesn't anticipate it will receive a decision before the end of this month.

As a result, Block said it expects to continue offering financial services through H&R Block Bank in the upcoming tax season.

"Though we are disappointed in this development, we are prepared for it," Cobb said, adding that the company remains focused on exiting the bank business.

While still aiming to leave banking, H&R Block plans to enter another business: providing assistance to customers looking to enroll into state health insurance exchanges due to open Oct. 1.

The exchanges, part of the federal Affordable Care Act, are designed to make it easier to obtain in health insurance.

Starting next year, the Internal Revenue Service will begin enforcing a requirement that most people have health insurance or face fines.

Block has inked a deal with online insurance company GoHealth to provide Block customers with the option of buying health insurance online. It also plans to launch a pilot program with licensed insurance agents at H&R Block offices in Arizona.

Cobb said that the health care insurance business will cut into Block's earnings by between 3 cents and 4 cents per share in fiscal 2014.

H&R Block reported Tuesday that it recorded a loss of $115.2 million, or 42 cents per share, for the quarter ended July 31. That compares with a loss of $107.4 million, or 39 cents per share, last year.

Excluding the impact of fees related to the proposed sale of its banking arm, Block's adjusted loss amounted to 40 cents per share, the company said.

Analysts polled by FactSet, on average, anticipated an adjusted loss of 37 cents per share.

Revenue increased 32 percent to $127.2 million, from $96.5 million.

Analysts had forecast $100 million in revenue.

Shares in H&R Block ended regular trading down 3 cents at $27.88. The stock fell 98 cents to $26.92 in after-market trading.

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