Jackson Hewitt Reports Fiscal 2010 Annual Results

PARSIPPANY, N.J. July 14 /PRNewswire-FirstCall/ -- Jackson Hewitt Tax Service Inc. (“Jackson Hewitt”) (NYSE: JTX), today reported results for the 2010 fiscal year ended April 30, 2010.  Jackson Hewitt reported a net loss of $272.3 million, or $9.52 per basic and diluted share for the 2010 fiscal year, versus net income of $19.5 million, or $0.68 per basic and diluted share for the 2009 fiscal year.  On an adjusted basis, Jackson Hewitt’s net income in the 2010 fiscal year was $7.5 million, or $0.26 per basic and diluted share, versus adjusted net income of $29.0 million, or $1.02 per basic and diluted share for the 2009 fiscal year.  Jackson Hewitt’s 2010 fiscal year reported results reflect the impact of a non-cash goodwill impairment charge of $274.1 million, and a non-cash tax valuation charge of $11.5 million.  A schedule entitled Adjusted Results of Operations, which reconciles the reported and adjusted results, accompanies this earnings release.

“The 2010 tax season was a challenging one for Jackson Hewitt, as the loss of 50% of our refund anticipation loan (“RAL”) product created an impediment that we could not fully overcome,” said Harry W. Buckley, Jackson Hewitt’s president and chief executive officer.  “Despite the solid efforts of our dedicated employees and franchisees and cost control measures implemented during the year, the RAL issue, coupled with a soft economy, high unemployment and increased competition, resulted in a year of declining tax returns prepared, revenues and earnings.”

“The 2010 fiscal year is behind us and we are squarely focused on the future,” continued Buckley.  “We have already completed a new Strategic Plan aimed at improving our operating and financial performance beginning in 2011. Over the past couple of months, representatives from our franchise community, along with Jackson Hewitt corporate staff and field operations personnel, have worked diligently and collaboratively to develop our plan.  The plan spells out several critical must have actions for the 2011 tax season, including reduced costs, resolution of our RAL product issue and the completion of a new franchise agreement renewal program, as well as several foundational and growth initiatives that can drive enhanced operational and financial performance in this upcoming tax season.  Consistent with our plan, we began the 2011 fiscal year in May by announcing an organizational restructuring, which will incrementally reduce our 2011 fiscal year pre-tax expenses by approximately $5 million, while increasing our overall efficiency and accountability.”  

“Underpinning all that we do going forward will be a continued emphasis on overall client satisfaction.  Specifically, that emphasis will be on delivering the products, services and value that will improve client retention and attract new clients to the Jackson Hewitt brand,” concluded Buckley.

2010 Full Year Consolidated Results

Total reported revenues for the 2010 fiscal year were $213.8 million, consistent with previous guidance and versus $248.3 million for the 2009 full year.  The 13.9% revenue decline resulted from a lower number of tax returns prepared and reduced financial product fees in connection with the limited RAL program, offset in part by slightly higher average revenue per return.

As previously reported, Jackson Hewitt’s national network of franchised and company-owned offices prepared 2.530 million tax returns in 2010, a decline of 14.4% compared to 2.955 million tax returns prepared in the prior fiscal year.  Average revenues per tax return across all of Jackson Hewitt’s operations were $208.14, reflecting a year-over-year increase of 1.0%.  The network facilitated 2.191 million financial products, a decrease of 20.3% versus the prior year, primarily as a result of the smaller RAL program.  Financial products facilitated include refund anticipation loans, assisted refunds and Gold Guarantee® products.  

Royalties and Marketing and Advertising revenues for the 2010 fiscal year were $89.0 million, versus $104.6 million in the 2009 fiscal year, due primarily to the decline in tax returns prepared by franchisees in connection with the RAL program issue, slightly offset by higher average revenue per return.  Financial product fees for the 2010 fiscal year were $46.3 million, versus $59.9 million in the prior year, a decline of 22.6%, which resulted from lower aggregate economics with Santa Barbara Tax Products Group, given that they were not providing the RAL product, and the effect of somewhat lower overall negotiated economics with our bank product providers in 2010.

Other revenues were $5.1 million in the 2010 fiscal year, down from $6.2 million a year ago due to lower revenues from the sales of new territories and lower electronic filing fees resulting from the decline in the number of tax returns prepared.  Service revenues from company-owned office operations were $73.3 million in 2010, versus $77.7 million in 2009, due primarily to the loss of 50% of the RAL program and its impact on the number of tax returns prepared.              

Total reported expenses for the 2010 fiscal year were $465.6 million, including the effect of a 2010 third quarter non-cash goodwill impairment charge of $274.1 million, and compared to total reported expenses of $202.4 million in the 2009 fiscal year.  Excluding the expense related adjustments detailed in the Adjusted Results of Operations schedule in the attached financial tables, total expenses would have been $181.1 million in fiscal 2010, versus $186.3 million in the 2009 fiscal year, a decline of $5.2 million, or 2.8%.  The year-over-year decline in adjusted expenses resulted from a reduced overall headcount, as well as improved expense controls in both marketing and company-owned operations.

Total debt outstanding at year-end was $274 million.  Under Jackson Hewitt’s Amended and Restated Credit Facility, debt now consists of a $200 million term loan, a $70 million non-revolving credit commitment and a $105 million revolving credit facility, which had $4 million drawn down at April 30, 2010.  This facility has monthly borrowing limits, which generally track off season cash funding requirements.  The entire $105 million revolving credit facility will be available to us by January 2011.  The complete Amendment was filed with the Securities and Exchange Commission on May 3, 2010 as an 8-K attachment.

Consolidated 2010 Fiscal Year Metrics: RAL Markets Versus Non-RAL Markets

In Jackson Hewitt markets where the RAL product was available, total tax returns prepared in 2010 were down 8% in the 2010 tax season, and customer retention improved by approximately 1 percentage point to approximately 58%, versus last year.  Correspondingly, in Jackson Hewitt markets where the RAL product was unavailable, total tax returns prepared were down 21% in the 2010 tax season, and customer retention declined by over 5 percentage points to approximately 51%, versus the prior year, reflecting the uneven competitive landscape with respect to RALs.  

2010 Fourth Quarter Consolidated Results

For the 2010 fourth quarter, total revenues were $125.6 million, versus $141.2 million in the 2009 fourth quarter, reflecting a decline of 11.0% due primarily to the loss of 50% of the RAL program and its resulting reduction in the number of tax returns prepared versus last year’s fourth quarter, offset in part by increased revenues per tax return.

The 2010 fourth quarter reported net income was $48.1 million, reflecting reported diluted earnings per share (“EPS”) of $1.67, versus reported net income of $41.3 million and reported diluted EPS of $1.45 in the 2009 fourth quarter.  On an adjusted basis, the 2010 fourth quarter diluted EPS were $1.14, versus $1.69 in the 2009 fourth quarter, as reflected in attached schedule entitled Adjusted Results of Operations.

Franchise Operations

Franchise operations revenues for the 2010 fiscal year were $140.4 million, versus $170.7 million in the prior year.  The 17.8% revenue decline resulted primarily from the limited RAL program and its resulting effect on the number of tax returns prepared, which declined 15.4%, offset in part by increased revenues per tax return versus the prior year.  Royalty revenues decreased by $10.8 million to $61.8 million and Marketing and Advertising revenues decreased by $4.8 million to $27.2 million.  The average royalty, marketing and advertising rate was 19.63% in the 2010 fiscal year, versus 19.65% in the prior year.

Financial product fees were $46.3 million, versus $59.9 million in the prior year, reflecting decreased financial product counts resulting from the limited RAL program, as well as the aforementioned lower revenue associated with products offered through Santa Barbara Tax Products Group, given their inability to provide RALs, and the effect of somewhat lower overall negotiated economics with our bank product providers in 2010.

Other revenues declined by $1.1 million, to $5.1 million in fiscal 2010, reflecting lower fees generated from the sale of territories during the year, as well as reduced electronic filing fees collected from franchisees given the fewer number of tax returns prepared.  In the 2010 fiscal year, Jackson Hewitt recorded sales of 164 new territories, versus 70 new territory sales in the same period a year ago.  The majority of new territory sales in 2010 was related to Jackson Hewitt’s Walmart expansion activities and was completed under a special lower cost incentive program.  Territory sales are reported in the “Other” revenue line item.  

Cost of franchise operations expenses were $37.8 million in fiscal 2010, versus $35.1 million in the prior year.  Marketing and advertising expenses were $28.4 million, versus $36.6 million in the prior year.  The 2010 fiscal year loss before income taxes was $160.8 million, including the effect of a 2010 third quarter $223.7 million goodwill impairment charge, as compared to income before income taxes of $86.8 million in the 2009 fiscal year.  Excluding the effect of expenses reflected in the attached schedule entitled Adjusted Results of Operations, the franchise operations income before income taxes in the 2010 fiscal year would have been $63.5 million, versus adjusted income before income taxes of $92.3 million in the 2009 fiscal year.  

Company-Owned Office Operations

Service revenues from company-owned office operations were $73.3 million in the 2010 fiscal year, a decline of $4.3 million, or 5.6%, versus the prior year.  This revenue decline resulted primarily from the limited RAL program, which further resulted in a 7.6% year-over-year reduction in the number of tax returns prepared, offset in part by increased revenues per tax return versus the prior year.  Total reported expenses in the company-owned office operations were $121.9 million, including a 2010 third quarter pre-tax goodwill impairment charge of $50.4 million, versus total reported expenses of $84.6 million in the 2009 fiscal year.  Loss before income taxes for the 2010 fiscal year was $48.6 million, including the effect of the goodwill impairment charge, versus a loss of $6.9 million in the 2009 fiscal year.  Excluding the effect of expenses reflected in the attached schedule entitled Adjusted Results of Operations, the company-owned office operations income before income taxes in the 2010 fiscal year would have been $2.8 million, versus adjusted income before income taxes of $0.7 million in the 2009 fiscal year.  

Corporate and Other

Reported loss before income taxes was $62.0 million in fiscal 2010, versus a loss of $46.9 million in the 2009 fiscal year.  The increased 2010 fiscal year reported corporate and other loss included $2.6 million of non-recurring expenses incurred in connection with certain corporate advisory fees and our efforts to find alternative RAL funding prior to the 2010 tax season, as well as increased non-recurring employee termination and related expenses of $4.3 million, and increased interest expense of $7.6 million, versus the prior year.  Excluding the effect of expenses reflected in the attached schedule entitled Adjusted Results of Operations, the corporate and other loss before income taxes in the 2010 fiscal year would have been $53.3 million, versus an adjusted loss before income taxes of $44.0 million in the 2009 fiscal year.  

Analyst Conference Call

Harry Buckley, president and chief executive officer, and Dan O’Brien, executive vice president and chief financial officer, will host an analyst conference call today, Wednesday, July 14, 2010, at 8:30 a.m. (EDT), to discuss the results from the 2010 fiscal year and initiatives already underway for next tax season.  Please visit the investor relations tab of Jackson Hewitt’s website, www.jacksonhewitt.com, at least 10 minutes prior to the beginning of the call in order to access the webcast.  If you are unable to listen to the live webcast, a replay will be available on this website.  

About Jackson Hewitt Tax Service Inc.

Jackson Hewitt Tax Service Inc. (NYSE: JTX), with more than 6,400 franchised and company-owned offices throughout the United States in the 2010 tax season, is an industry leader providing full service individual federal and state income tax return preparation.  Most offices are independently owned and operated.  Jackson Hewitt also offers Jackson Hewitt® Online, an online tax preparation product available at www.jacksonhewittonline.com.  The company is based in Parsippany, New Jersey.  More information may be obtained at www.jacksonhewitt.com.  To locate the Jackson Hewitt Tax Service® office nearest to you, call 1-800-234-1040.

Forward-Looking Statements

This press release contains statements, including, without limitation, those statements related to Jackson Hewitt’s resolution of its RAL funding issue and the completion of a new franchise agreement renewal program, which are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Because these forward-looking statements involve risks and uncertainties, actual results may differ materially from those expressed or implied in the forward-looking statements due to a number of factors, including but not limited to: Jackson Hewitt’s ability to execute on Jackson Hewitt’s strategic plan and reverse Jackson Hewitt’s declining profitability, improve Jackson Hewitt’s distribution system; government legislation and regulation of the tax return preparation industry and related financial products, including refund anticipation loans, and the failure by us, or the financial institutions which provide financial products to Jackson Hewitt’s customers, to comply with such legal and regulatory requirements; the success of Jackson Hewitt’s franchised offices; Jackson Hewitt’s customers’ ability to obtain financial products through Jackson Hewitt’s tax return preparation offices; changes in Jackson Hewitt’s relationship with Wal-Mart or other large retailers and shopping malls that could affect Jackson Hewitt’s growth and profitability; Jackson Hewitt’s compliance with credit facility covenants; compliance with the NYSE’s continued listing standards; Jackson Hewitt’s ability to continue to operate as a going concern; Jackson Hewitt’s ability to reduce Jackson Hewitt’s cost structure; Jackson Hewitt’s ability to successfully attract and retain key personnel; government initiatives that simplify tax return preparation or reduce the need for a third party tax return preparer, improve the timing and efficiency of processing tax returns or decrease the number of tax returns filed; delays in the passage of tax laws and their implementation; Jackson Hewitt’s responsibility to third parties, regulators or courts for the acts of, or failures to act by, Jackson Hewitt’s franchisees or their employees; the effectiveness of Jackson Hewitt’s tax return preparation compliance program; increased regulation of tax return preparers; Jackson Hewitt’s exposure to litigation; the failure of Jackson Hewitt’s insurance to cover all the risks associated with Jackson Hewitt’s business; Jackson Hewitt’s ability to protect Jackson Hewitt’s customers’ personal and financial information; the effectiveness of Jackson Hewitt’s marketing and advertising programs and franchisee support of these programs; disruptions in Jackson Hewitt’s relationships with Jackson Hewitt’s franchisees; changes in Jackson Hewitt’s relationships with financial product providers that could reduce the revenues we derive from Jackson Hewitt’s agreements with these financial institutions as well as affect;; the seasonality of Jackson Hewitt’s business and its effect on Jackson Hewitt’s stock price; competition from tax return preparation service providers, volunteer organizations and the government; Jackson Hewitt’s reliance on technology systems and electronic communications to perform the core functions of Jackson Hewitt’s business; Jackson Hewitt’s ability to protect Jackson Hewitt’s intellectual property rights or defend against any third party allegations of infringement by us; Jackson Hewitt’s reliance on cash flow from subsidiaries; Jackson Hewitt’s exposure to increases in prevailing market interest rates; Jackson Hewitt’s quarterly results not being indicative of Jackson Hewitt’s performance as a result of tax season being relatively short and straddling two quarters; certain provisions that may hinder, delay or prevent third party takeovers; Jackson Hewitt’s ability to maintain an effective system of internal controls; impairment charges related to goodwill; the credit market crisis; and the effect of market conditions, general conditions in the tax return preparation industry or general economic conditions.

Additional information concerning these and other risks that could impact Jackson Hewitt’s business can be found in Jackson Hewitt’s Annual Report on Form 10- K for the fiscal year ended April 30, 2009, and other public filings with the Securities and Exchange Commission (“SEC”).  Copies are available from the SEC or Jackson Hewitt’s website.  Jackson Hewitt assumes no obligation, and Jackson Hewitt expressly disclaims any obligation, to update or alter any forward-looking statements.

SOURCE Jackson Hewitt Tax Service Inc.