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H&R Block Inc. (NYSE:HRB) reported fiscal third quarter 2010 (ended Jan 31, 2010) net income of $50.6 million or 15 cents, up from $47.4 million or 14 cents in the year-ago period. However, income from continuing operations was 16 cents, down 4 cents from the prior-year period. Results were slightly ahead of the Zacks Consensus Estimate of 14 cents, primarily driven by cost cuts.

However, revenues were down 5.9% from the prior-year period to $934.9 million as the company prepared fewer tax returns. This was partially offset by a 5.9% decrease in operating expenses from the prior-year period to $840.4 million. The decrease reflects the benefits from the company’s cost cutting initiatives.

Revenue from the Tax Service decreased 6.2% year-over-year to $747.7 million. The decrease stemmed from a 7.1% decrease in total retail tax returns prepared. Pre-tax income was $131.2 million compared with $133.5 million in the year-ago quarter.

RSM McGladrey (RSM) reported a 3.6% year-over-year drop in revenues to $6.7 million. The decrease reflects the weak economic environment. However, the company posted a pre-tax loss of $11.2 million compared with a pre-tax income of $10.7 million a year ago, primarily due to a $15.0 million goodwill impairment related to RSM's capital markets business.

RSM and McGladrey & Pullen LLP entered into new definitive agreements in February concerning their alternative practice structure. As a result, RSM incurred $3.3 million of legal and consulting expenses related to these negotiations in the reported quarter.

Corporate operations reported a pre-tax loss of $22.5 million compared with a loss of $42.4 million in the prior-year quarter. The decrease in loss reflects a decrease in expenses. This stemmed from reductions in self-insured liabilities, lower interest expense on corporate borrowings and a decrease in loss provisions on mortgage loans held for investment.

Interim Tax Results

For the fiscal 2010 tax season through Feb 28, H&R Block’s same-office tax returns prepared in retail operations dropped 6.8% from the prior-year period while the total retail tax returns prepared decreased 9.4%.

Digital returns prepared by the company were down 4.4%, though online returns grew 2.5%. Software-based returns were down 12.1% as the company decided to exit two unprofitable distribution channels.

Total tax preparation revenues were down $124.1 million or 7.1% from the comparable period in 2009. While the company reported a 9.4% decrease in total retail returns prepared, it was partially offset by a 2.4% increase in net average fees per retail return.

The company expects Internal Revenue Service tax return to be down 2.5% to 3.5% year-over-year by the end of the tax season. This is nearly double the company had previously projected for lower returns. The company also said that though the company had funding for refund anticipation loans (RALs), it did not experience any meaningful client growth driven by RAL availability.

No Specific Earnings Guidance

No specific earnings guidance was provided for the fiscal fourth quarter or the fiscal year. In fact, the company has recently announced that it would not be able to meet its previously announced fiscal 2010 guidance as it is preparing fewer tax returns than it had earlier expected.

The tax filing market is experiencing a shrinkage due to the rise in unemployment. Also, there is a continued shift from assisted tax preparation to the digital space, where the company’s growth is not yet satisfactory. The increased price sensitivity of consumers and the loss of market share remain other headwinds.

Shares of H&R Block were down 44 cents or 2.63% to $16.30 from a close of $16.74 in Monday's regular session on the New York Stock Exchange.

Source: H&R Block: Income Up, Revenues Down