H&R Block reported a decline in its fiscal 2010 net income, attributing it to a drop in its tax season business as a result of the economy, while its rival Jackson Hewitt reported that it had received a warning about its listing on the NYSE, also brought on by tax season problems.

Block reported on Thursday that its consolidated net income for the fiscal year ended April 30, 2010 of $479.2 million, or $1.43 per share, was down 1.3 percent from the prior-year period of $485.7 million, or $1.45 per share. Net income from continuing operations fell 4.7 percent to $488.9 million, or $1.46 per share, compared to income of $513.1 million, or $1.53 per share in the prior-year period. Total revenues declined 5.1 percent to $3.9 billion.

"Our business results reflect the challenging economic conditions of this tax season, caused by record levels of sustained unemployment that led to fewer returns being filed by our core retail tax client base," said H&R Block's president and CEO Russ Smyth. "Despite these difficult conditions, we were able to minimize the impact on consolidated net income. At the same time we positioned our business for future success by improving the overall client experience, increasing client retention rates and optimizing our operating cost structure.”

Block’s tax services reported pretax income of $867.4 million, down 6.4 percent from $927.0 million in the prior year. Total segment revenues fell 5.0 percent year-over-year to $3.0 billion, primarily due to a 6.1 percent decline in total retail returns prepared, partially offset by an increase of 1.1 percent in net average fees per retail return. Same-office tax returns prepared in retail operations fell 3.9 percent over the prior tax season.

The company's continued focus on cost-control measures, including reductions in the size of its retail office network and renegotiation of lease payments, resulted in a declining fixed expense base during the fiscal year.

Total digital tax returns prepared by H&R Block increased 0.4 percent, driven by a 5.0 percent decline in software-based returns that was entirely due to the company's decision to exit two unprofitable distribution channels. Online returns grew by 4.3 percent, while returns prepared through the Free File Alliance increased 2.8 percent.

Overall, total tax returns prepared (including software and online) by H&R Block were down 4.3 percent compared to the prior year period. Volume declines were more pronounced in the early-season, as total tax returns prepared were down 7.8 percent from Jan. 1 - Feb. 28.

In tax season 2010, total industry-wide filings at the IRS fell by 1.7 percent to 129.3 million returns. This decline was the largest since 1971, primarily due to continued high levels of unemployment.

Block’s RSM McGladrey unit reported fiscal 2010 pretax income of $58.7 million, down nearly 39 percent from $96.1 million in the prior year. Revenues declined 4.2 percent to $860.3 million, primarily due to the impact of the overall weak economic environment, which continues to pressure billable rates and hours within the industry. Profitability was negatively impacted by costs associated with previously resolved arbitration proceedings involving McGladrey & Pullen and other costs of litigation totaling $14.5 million in the aggregate, as well as a $15.0 million goodwill impairment charge at our capital markets business unit.

Excluding these charges, pretax income would have been approximately $88 million and pretax margin for the segment would have been 10.3 percent, essentially flat with the prior year. The shortfall in revenues was partially mitigated by cost reduction efforts throughout the year. These efforts included headcount reductions to reflect lower client demand, as well as other non-client facing cost reduction initiatives.

RSM McGladrey is reportedly planning to acquire accounting firm Caturano & Co. (see McGladrey to Acquire Caturano).

Block’s main rival, Jackson Hewitt Tax Service Inc., announced Thursday that it has been notified by the New York Stock Exchange Regulation, Inc., that it had fallen below compliance with the NYSE’s continued listing standards.

Jackson Hewitt is considered below criteria established by the NYSE for continued listing standards because its average global equity market capitalization fell below $50 million on a trailing 30 consecutive trading-day period, and because its stockholders' equity was below $50 million in its most recent 10-Q filed with the Securities and Exchange Commission on March 17, 2010 for the period ended January 31, 2010.

Jackson Hewitt said it intends to notify the NYSE that it will submit a plan within 45 days from the receipt of the NYSE notice that demonstrates its ability to regain compliance within 18 months.

Upon receipt of the plan, the NYSE has 45 calendar days to review and determine whether Jackson Hewitt has made a reasonable demonstration of its ability to come into conformity with the relevant standards within the 18-month period. The NYSE will either accept the plan, at which time Jackson Hewitt will be subject to ongoing monitoring for compliance with this plan, or the NYSE will not accept the plan and Jackson Hewitt will be subject to suspension and delisting proceedings. During the 18-month cure period, Jackson Hewitt's shares will continue to be listed and traded on the NYSE, subject to its compliance with other NYSE continued listing standards.

Jackson Hewitt was hurt last tax season by problems in finding a banking partner to process its refund anticipation loans. Its main RAL provider, Santa Barbara Bank & Trust, informed Jackson Hewitt and other tax practitioners last December that it would not be able to originate the loans (see Jackson Hewitt RAL Business Remains Underfunded).

SBBT’s parent, Pacific Capital Bancorp., was told by banking regulators to that it needed to have stronger capital ratios in place. SBBT had been expected to provide 75 percent of Jackson Hewitt's business in RALs and anticipated refunds. The tax prep chain was able to sign an agreement with Republic Bank & Trust to fund 45 percent of its RAL and anticipated refund business for three years.

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