HR Block 2010 Annual Report Download - page 4

compared with $1.65 billion at the end of fiscal 2009 and
only $665 million at the end of fiscal 2008.
n Free Cash Flow: The business continues to generate high
levels of free cash flow. In 2010 we returned approximately
$450 million to shareholders in both dividends and share
repurchases, even after further work to clean up the balance
sheet. We have already repurchased 15.5 million shares in
FY 2011 at a cost of just over $235 million. The current share
price level allowed us to repurchase several million more
shares than we would otherwise have done. For the foresee-
able future, we expect to continue returning essentially all of
our free cash to shareholders.
n The Jewel in the Emerald Card: Our Emerald Card prepaid
debit card program is one of the largest in the country, with
2.5 million users and over $8 billion in annual deposits. Since
it is currently used by fewer than 20% of our retail tax clients,
we believe we have opportunities to expand its usage, and
our retail office network gives us more than 11,000 potential
reload locations. For our clients, many of whom do not have
traditional bank accounts, the Emerald Card can function as
a bank in their wallet by allowing direct deposits and money
transfers. Other prepaid debit card companies have recently
shown attractive levels of growth and potential market valua-
tions. We will be putting far more effort into expanding this
program in the future as a business in its own right, and not
just as an adjunct to our tax business.
n Renewal at RSM McGladrey: RSM McGladrey has
successfully restructured its strategic relationship with
McGladrey & Pullen LLP (“M&P”), and it has a strong new
leadership team led by C.E. Andrews. Now that its structural
issues are behind it, McGladrey has outstanding prospects
for growing earnings through both acquisitions into new
geographies, and raising its internal productivity. This is a
business where our access to capital can prove significant.
n Tax Preparation Opportunities: Last but certainly not
least, our tax business has demonstrated resiliency in a very
challenging economy. We have always had the best tax pro-
fessionals to serve our clients. With government hungry for
tax revenues, many tax changes are likely in Washington.
We firmly believe that our professionals can find meaningful
tax savings for clients that exceed what they can find for
themselves. While we need to do a better job tailoring our
programs to different levels of tax complexity, we believe
that face-to-face tax assistance from a trained professional
will continue to be highly desirable to millions of people.
There should not be any “ceiling” on what we can accom-
plish as we get it right.
Considered together, we have a strong balance sheet, abun-
dant liquidity, talented people, a large and relatively stable
market, and many growth opportunities.
Looking at Results 2001–2010
As noted, diluted earnings per share in 2010 of $1.43 per share
were down $0.02 per share from $1.45 in 2009. Diluted earn-
ings per share from continuing operations declined by $0.07
from $1.53 in 2009 to $1.46 in 2010, reflecting a revenue
decline of approximately 5%. Earnings per share have grown
approximately 90% since 2001, when they were $0.76 per
share. Tax Services pretax earnings have nearly doubled from
$440 million in 2001 to $867 million this year.
The Company’s ability to hold revenues and profits relatively
stable during the recent period of high unemployment demon-
strates considerable resiliency. Indeed, in some client income
segments, unemployment rates last year approached or
exceeded 20%, which excludes people who dropped out of
the job market entirely. All too many of these individuals who
were out of work stopped paying taxes, or tried to save money
by preparing their returns themselves. We could have per-
formed better, but at the same time the economy was a signifi-
cant drag on results.
During 2010, the Company continued to rebuild its net worth
and improve its overall financial condition. We secured a new,
three-year $1.7 billion liquidity facility, and we successfully
returned to the commercial paper market. Even after further
strengthening of our balance sheet, we returned approximately
$450 million to shareholders last year through dividends and
share repurchases. During the fiscal year, our total return to
shareholders, including dividend payments, was +25.2%,
compared with +38.8% for the S&P 500.
Tax Services Segment 2001–2010
Aggregate Tax Services segment revenues grew very strongly
over the decade, though they have been relatively flat for the
past three years. Tax revenues in 2010 of $2.975 billion were
2 n H&R Block 2010 Annual Report