HR Block 2006 Annual Report Download - page 7

of difference has enabled us to move well ahead in the emerging market for blended
channel services, through which we offer digital do-it-yourselfers the safety net of
professional support. When a digital user’s tax situation calls for full professional assistance,
the H&R Block brand has the recognition and trust to win that business.
Underlying all of these efforts is the need to satisfy our clients. Improvements in client
satisfaction scores confirm that clients continue to find our services valuable and
appropriately priced.
FOCUSING ON COST EFFICIENCY IN MORTGAGE
A cyclical change is occurring in the non-prime mortgage industry. Rising interest rates have
slowed the housing market and reduced mortgage originations from record volumes to
what appears to be a more sustainable level. The industry can no longer count on rising
volume to improve results. Now cost competitiveness and service quality will distinguish
winners from losers. Option One Mortgage and H&R Block Mortgage are both striving to
improve their cost competitiveness among leading mortgage lenders. We are working to
reduce costs through expanded use of technology, aligning staffing with origination
volume, and adjusting our retail service model from offices to centralized service centers.
In 2006, we consolidated mortgage locations and reduced staffing by about 22 percent. As
we manage costs, we remain committed to protect our reputation for superior quality of
service both to mortgage broker clients and the borrowers whose loans we service.
Our record $40.8 billion in loan originations offset compressed loan profitability, resulting
in fiscal 2006 revenues of $1.2 billion, while pretax income fell to $322 million (including a
$13 million charge for restructuring). We are selective about our areas of participation in
the mortgage market and manage the business to generate strong cash flows and a high
return on invested capital. We are fortunate to have the financial strength and flexibility
to accommodate industry volatility – and manage for long-term value creation.
ATTAINING MIDDLE-MARKET LEADERSHIP
RSM McGladrey emerged this year as the leading accounting, tax and business consulting
firm serving middle-market clients. The combination of continued strong organic growth,
along with our strategic acquisition of the American Express Tax and Business Services unit
(Amex TBS), has established us as a clear middle-market leader and alternative to the Big 4
accounting firms.
The Amex TBS acquisition also strengthened our presence in key geographic markets and
brought us a group of skilled industry professionals who share our culture and values. The
acquisition offers financial returns that meet our high expectations for return on
investment. And, with our greater size, investments we have begun in brand recognition
and other initiatives can now create even greater value for shareholders.
We acted on growth through acquisition at RSM McGladrey only after demonstrating
strong organic growth in our core business as well as a growing payoff from investments in
extended business opportunities. In June 2006, we took a first step to expand our global
capabilities, in eight countries initially. We announced a new wholly owned international
subsidiary and a related staffing agreement with another member (based in Germany) of
the RSM International network of independent companies.
In fiscal 2006, revenues for Business Services increased 53 percent to $877 million, and
pretax income climbed 79 percent to $53 million. The segment is beginning to demonstrate
the earnings potential we knew was there, and I expect it to become a noticeably larger
contributor to H&R Block’s results.
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DEBT TO TOTAL CAPITAL
DEBT DIVIDED BY DEBT PLUS STOCKHOLDERS’ EQUITY
2002 2003 2004 2005 2006
40.3% 35.6% 31.3% 32.7% 30.1%
STOCKHOLDERS’ EQUITY
TANGIBLE EQUITY (Stockholders’ Equity less
goodwill and intangibles)
$165
$1,375
$828
$2,148
$524
$1,589
$518
$1,805
$686
$1,949
2002 2003 2004 2005 2006
STOCKHOLDERS’ EQUITY AND
TANGIBLE EQUITY
(IN MILLIONS)