KANSAS CITY, Mo., Oct. 23 MO-DST-System-Inc-ERN
KANSAS CITY, Mo., Oct. 23 /PRNewswire-FirstCall/ -- Consolidated net
income for DST Systems, Inc. (NYSE: DST) was $50.2 million ($0.91 per diluted
share) for third quarter 2008 compared to $672.8 million ($9.62 per diluted
share) for third quarter 2007. Consolidated net income for the nine months
ended September 30, 2008 was $172.3 million ($2.91 per diluted share) compared
to $811.0 million ($11.37 per diluted share) for the nine months ended
September 30, 2007. Taking into account certain non-GAAP adjustments
explained herein, consolidated net income was $53.2 million ($0.97 per diluted
share) for third quarter 2008 compared to $61.5 million ($0.88 per diluted
share) for third quarter 2007, and $162.1 million ($2.74 per diluted share)
for the nine months ended September 30, 2008 compared to $182.8 million ($2.55
per diluted share) for the nine months ended September 30, 2007.
Third quarter 2008 financial highlights were as follows:
-- Consolidated operating revenues decreased $5.3 million or 1.3% to
$414.2 million as compared to $419.5 million for third quarter 2007 primarily
due to lower Output Solutions operating revenues, partially offset by
increases in mutual fund shareowner processing revenues, professional services
provided by DST Health Solutions and AWD license fee revenues.
-- Consolidated income from operations increased $3.6 million or 4.8% to
$78.9 million as compared to $75.3 million for third quarter 2007. Taking
into account certain non-GAAP adjustments affecting the 2007 results, income
from operations decreased $700,000 or 0.9% as compared to third quarter 2007.
Output Solutions income from operations decreased $2.1 million from lower
revenues. Financial Services income from operations increased $1.4 million as
increased contributions from DST Health Solutions and AWD were partially
offset by lower contributions from international financial services
operations.
-- DST converted approximately 3.6 million subaccounts during third
quarter 2008. In early October 2008, DST converted approximately 2.0 million
registered mutual fund shareowner accounts.
-- Equity in earnings of unconsolidated affiliates decreased $1.3 million
as compared to third quarter 2007. Lower equity in earnings of BFDS and
Argus, primarily due to lower investment earnings on cash balances maintained
on behalf of customers, were partially offset by higher equity in earnings of
IFDS and higher contributions from real estate joint ventures.
-- Other income decreased $12.1 million to $2.8 million as compared to
third quarter 2007. Taking into account certain non-GAAP adjustments, other
income decreased $7.2 million as compared to third quarter 2007. In July
2007, the Company received approximately $980 million from the sale of Asurion
Corporation. The majority of the proceeds from the Asurion transaction were
used to pay down debt. The remainder of the proceeds was invested in cash and
short-term investments and was used in December 2007 to satisfy tax
obligations associated with the Asurion sale. The decrease in other income
(primarily interest income) as compared to third quarter 2007 is attributable
to lower amounts of short-term investments. Interest expense increased $2.2
million to $13.8 million as compared to third quarter 2007. The increase in
interest expense as compared to third quarter 2007 is primarily attributable
to the higher levels of indebtedness.
Share-related activity during third quarter 2008 was as follows:
-- During third quarter 2008, the Company repurchased 3,011,587 shares of
DST common stock for $175.1 million or approximately $58.14 per share. At
September 30, 2008, there were approximately 1.2 million shares remaining
under the existing share repurchase authorization plan.
-- The Company had approximately 50.3 million shares outstanding at
September 30, 2008, a decrease of 11.2 million shares from September 30, 2007.
Shares outstanding at September 30, 2008 include approximately 2.6 million
unvested restricted shares which are excluded from the determination of
average common shares outstanding used in the calculation of basic earnings
per share. The net effect of share repurchases and shares issued from stock
option exercises during third quarter 2008 resulted in a net decrease in
shares outstanding of approximately 3.0 million shares from June 30, 2008.
-- Diluted shares outstanding for third quarter 2008 were 55.2 million
shares, a decrease of 14.7 million shares or 21.0% from third quarter 2007,
and a decrease of 2.8 million shares or 4.8% from second quarter 2008.
Diluted shares outstanding at September 30, 2008 include an aggregate
5.9 million shares comprised of the dilutive effects of 3.1 million shares
from convertible debentures, 1.7 million shares from restricted stock and
1.1 million shares from outstanding stock options. The aggregate dilutive
effect of these items decreased by approximately 500,000 shares from second
quarter 2008 from decreases in the Company's average share price, while the
aggregate dilutive effect of these items decreased by approximately
4.1 million shares from third quarter 2007 due to decreases in the Company's
average stock price and lower stock options outstanding.
-- Total stock options and restricted stock ("equity units") outstanding
at September 30, 2008 were 8.5 million, a decrease of 100,000 equity units or
1.2% from June 30, 2008 and a decrease of 700,000 equity units or 7.6% from
September 30, 2007.
Use of Non-GAAP Financial Information
In addition to reporting operating income, pretax income, net income and
earnings per share on a GAAP basis, DST has also made certain non-GAAP
adjustments which are described in the attached schedule titled "Description
of Non-GAAP Adjustments" and are reconciled to the corresponding GAAP measures
in the attached financial schedules titled "Reconciliation of Reported Results
to Income Adjusted for Certain Non-GAAP Items" that accompany this earnings
release. In making these non-GAAP adjustments, the Company takes into account
the impact of items that are not necessarily ongoing in nature, that do not
have a high level of predictability associated with them or that are
non-operational in nature. Generally, these items include net gains on
dispositions of business units, net gains (losses) associated with securities
and other investments, restructuring and impairment costs and other similar
items. Management believes the exclusion of these items provides a useful
basis for evaluating underlying business unit performance, but should not be
considered in isolation and is not in accordance with, or a substitute for,
evaluating business unit performance utilizing GAAP financial information.
Management uses non-GAAP measures in its budgeting and forecasting processes
and to further analyze its financial trends and "operational run-rate," as
well as making financial comparisons to prior periods presented on a similar
basis. The Company believes that providing such adjusted results allows
investors and other users of DST's financial statements to better understand
DST's recurring comparative operating performance for the periods presented.
DST's management uses each of these non-GAAP financial measures in its own
evaluation of the Company's performance, particularly when comparing
performance to past periods. DST's non-GAAP measures may differ from similar
measures by other companies, even if similar terms are used to identify such
measures. Although DST's management believes non-GAAP measures are useful in
evaluating the performance of its business, DST acknowledges that items
excluded from such measures may have a material impact on the Company's income
from operations, pretax income, net income and earnings per share calculated
in accordance with GAAP. Therefore, management typically uses non-GAAP
measures in conjunction with GAAP results. Investors and users of our
financial information should also consider the above factors when evaluating
DST's results.
Detailed Review of Financial Results
The following discussion of financial results takes into account the
non-GAAP adjustments described in the section entitled "Use of Non-GAAP
Financial Information" and detailed in the attached schedule titled
"Description of Non-GAAP Adjustments."
Segment Results
Financial Services Segment
Operating revenues for the Financial Services segment excluding
out-of-pocket reimbursements ("OOP") for third quarter 2008 increased
$3.3 million or 1.2% to $284.4 million as compared to third quarter 2007. The
increase in Financial Services operating revenues is attributable to increases
in mutual fund shareowner processing services, DST Health Solutions
professional services and AWD software license fees, partially offset by lower
international professional services revenue and lower data processing support
revenues. The increase in mutual fund shareowner processing services is
attributable to higher levels of accounts serviced principally from new client
conversions since second quarter 2007. The increase in DST Health Solutions
operating revenues for the quarter was primarily due to the recognition of
$2.5 million of previously deferred professional services revenues. The
decrease in international professional services is attributable to lower
software implementation services associated with weak market conditions. Data
processing support revenues decreased by approximately $2.5 million due to the
expiration of a contract in June 2008.
The following table summarizes mutual fund shareowner accounts serviced (in
millions):
September 30, June 30, December 31, September 30,
2008 20082007 2007
-------------- --------- ------------- -------------
Registered accounts:
Non tax-advantaged 65.5 67.071.0 70.6
Tax-advantaged 47.0 47.446.2 45.9
-------------- --------- ------------- -------------
112.5114.4 117.2116.5
Subaccounts9.4 5.4 1.9 1.7
-------------- --------- ------------- -------------
Total121.9119.8 119.1118.2
============== ========= ============= =============
Total accounts serviced at September 30, 2008 were 121.9 million, an
increase of 2.1 million accounts or 1.8% as compared to June 30, 2008, an
increase of 2.8 million accounts or 2.4% from December 31, 2007 and an
increase of 3.7 million accounts or 3.1% as compared to September 30, 2007.
Total registered accounts decreased 1.9 million accounts or 1.7% from the
comparable amount at June 30, 2008, comprised of net declines in existing
client accounts of 1.1 million, conversions to DST's subaccounting platform of
600,000, and conversions to non-DST subaccounting platforms of 200,000.
Tax-advantaged accounts were 47.0 million at September 30, 2008, a decrease of
400,000 or 0.8% as compared to June 30, 2008. The decrease is primarily
attributable to net declines in existing client accounts. Tax-advantaged
accounts represent 41.8% of total registered accounts serviced at
September 30, 2008 as compared to 39.4% at September 30, 2007.
Subaccounts serviced were 9.4 million at September 30, 2008. The increase
of 4.0 million subaccounts serviced during the three months ended September
30, 2008 is comprised of conversions of new subaccounting clients of
3.6 million from non-DST platforms and conversions of 600,000 registered
accounts from TA2000, partially offset by net declines in existing client
subaccounts of 200,000.
During the quarter, DST received new client commitments totaling
approximately 450,000 registered accounts, based on current levels. As
mentioned above, in early October 2008, the Company converted approximately
2.0 million new registered accounts to TA2000. The Company anticipates that
650,000 new registered accounts will convert to TA2000 in 2009. The Company
also anticipates that 700,000 registered accounts will convert to
subaccounting platforms during the remainder of 2008, of which 400,000 will
convert to TA2000 Subaccounting and 300,000 will convert to non-DST
subaccounting platforms. The Company also expects that 400,000 new
subaccounts will convert to TA2000 Subaccounting from non-DST platforms of
which 100,000 will convert in 2008 and 300,000 will convert in 2009 and 2010.
In summary, based on accounts serviced at September 30, 2008 and the
conversion activity previously described (and without taking into account any
other changes in accounts serviced during the remainder of 2008), total
accounts serviced at December 31, 2008 are estimated to be 123.7 million,
which are comprised of 113.8 million registered accounts and 9.9 million
subaccounts. The actual number of accounts estimated to convert to and from
various DST systems, as well as the timing of those events, is dependent upon
a number of factors. Actual results could differ from the Company's
estimates.
Defined contribution ("DC") participants represent the number of active
participants processed on DST's TA2000/TRAC platform. DC participants were
3.7 million at September 30, 2008, a decrease of 800,000 or 17.8% compared to
June 30, 2008 and a decrease of 700,000 or 15.9% from September 30, 2007. As
previously announced, an existing TRAC client internalized its participant
accounting during third quarter 2008 resulting in the loss of approximately
1.0 million participants.
In October 2008, DST announced the formation of DST Retirement Solutions
LLC ("DSTRS"), a wholly-owned subsidiary of DST, to meet the needs of defined
contribution service providers. The new entity combines DST's TRAC technology
solution with BFDS's defined contribution full plan administration and
recordkeeping unit. From application service provider ("ASP") to full
outsourcing, DSTRS offers a variety of selective outsourcing options,
including front- and back-office technology solutions for financial service
organizations offering retirement plan recordkeeping for plans of any size.
Financial Services segment software license fee revenues are derived
principally from DST International (investment management systems), DST Health
Solutions (medical claims processing systems) and AWD (workflow management and
CRM solutions). Operating revenues include approximately $11.9 million of
software license fee revenues for third quarter 2008, an increase of
$2.0 million or 20.2% over the same period in 2007. The increase is primarily
due to higher AWD software license fees and, to a lesser extent, higher
investment management software license fees. While license fee revenues are
not a significant percentage of DST's total operations, they can significantly
impact earnings in the period in which they are recognized. Revenues and
operating results from individual license sales depend heavily on the timing,
size and nature of the contract.
Financial Services segment income from operations for third quarter 2008
totaled $70.0 million as compared to $68.6 million in third quarter 2007, an
increase of $1.4 million or 2.0%. Increased contributions from DST Health
Solutions and AWD were partially offset by lower contributions from
international operations, primarily attributable to lower professional
services revenue and higher personnel costs, and lower data processing support
revenues. Costs and expenses for third quarter 2008 were $211.4 million, an
increase of $4.0 million or 1.9% from the same period in 2007. Excluding
reimbursable operating costs of $17.5 million in third quarter 2008 and
$16.5 million in third quarter 2007, costs and expenses increased $3.0 million
or 1.6% to $193.9 million attributable to costs associated with reductions in
international staffing levels, compensation costs related to the achievement
of goals from a prior business acquisition incurred in third quarter 2008 and
higher costs related to the new client subaccount conversion. Depreciation
and amortization costs decreased $1.1 million in the third quarter 2008
compared to the same period in 2007 attributable to lower internally developed
software amortization and certain assets becoming fully depreciated in 2008.
Operating margin for third quarter 2008 was 24.6% as compared to 24.4% for
third quarter 2007.
Output Solutions Segment
Output Solutions segment operating revenues (excluding OOP reimbursements)
for third quarter 2008 were $128.8 million, a decrease of $7.6 million or 5.6%
as compared to third quarter 2007, principally from lower U.S. images
produced. Images produced during third quarter 2008 were 3.4 billion, a
decrease of 22.7% as compared to third quarter 2007. The decrease in images
is due to certain telecommunications clients reducing the amount of
transaction information included on invoices thereby lowering total images
produced. Items mailed during third quarter 2008 were 577.0 million, an
increase of 1.9% as compared to the prior year quarter, primarily due to the
conversion of a new telecommunications client during fourth quarter 2007 and
higher volumes from other existing clients, partially offset by certain
privacy mailings that did not occur in third quarter 2008.
Output Solutions segment income from operations for third quarter 2008
totaled $7.4 million, a decrease of $2.1 million or 22.1%, as compared to
third quarter 2007. Decreases in operating revenues during the quarter were
partially offset by lower costs and expenses and lower depreciation and
amortization expense. Costs and expenses for third quarter 2008 were $239.8
million, a decrease of $13.4 million or 5.3% from the same period in 2007.
Excluding reimbursable operating costs of $128.6 million in third quarter 2008
and $136.9 million in third quarter 2007, costs and expenses decreased $5.1
million or 4.4% to $111.2 million from lower leased equipment costs resulting
from the implementation of owned digital print technologies, lower material
costs and lower compensation and benefit related costs. Depreciation and
amortization decreased $400,000 as compared to third quarter 2007. Operating
margin for third quarter 2008 was 5.7% as compared to 7.0% for third quarter
2007.
Segment Reporting Change
In first quarter 2008, the Company changed the measurement of certain
occupancy cost components of its Output Solutions Segment. The Output
Solutions Segment leases its Connecticut, Missouri and California production
facilities from the Investments and Other Segment. Beginning in 2008, the
Company began reporting financial results for the Output Solutions Segment on
the basis that the Output Solutions Segment owned (instead of leased) these
three production facilities. Management believes this action will improve its
ability to analyze the Output Solutions Segment operating results taking into
consideration the special purpose nature of the production plants. Reported
results for the Output Solutions Segment and the Elimination Adjustments for
periods prior to 2008 have been restated to reflect this change. The
Company's restated segment results for the three and nine months ended
September 30, 2007 have been included in the attached schedules that accompany
this earnings release. The Investments and Other Segment continues to present
rental revenues from the Output Solutions Segment along with the related
depreciation expense associated with the properties, while the elimination of
the inter-segment activity is included in the Elimination Adjustments. The
impact of this change increased Output Solutions income from operations by
$1.9 million for the three months ended September 30, 2008 and 2007, and
correspondingly increased the Segment Eliminations loss from operations by
$1.9 million for the three months ended September 30, 2008 and 2007. The
impact of this change increased Output Solutions income from operations by
$5.6 million for the nine months ended September 30, 2008 and 2007, and
correspondingly increased the Segment Eliminations loss from operations by
$5.6 million for the nine months ended September 30, 2008 and 2007.
Investments and Other Segment
Investments and Other segment operating revenues, primarily rental income,
were $16.1 million for third quarter 2008, a decrease of $500,000 from third
quarter 2007 primarily due to lower rental activity. Income from operations
for third quarter 2008 was $3.4 million, unchanged from third quarter 2007.
Lower depreciation expense during third quarter 2008, primarily resulting from
an asset impairment in third quarter 2007, offset the decrease in rental
income.
Other Financial Results
Equity in earnings (losses) of unconsolidated affiliates
The following table summarizes the Company's equity in earnings (losses)
of unconsolidated affiliates:
Three months ended Nine months ended
September 30,September 30,
-------------------- --------------------
20082007 20082007
---------------- ----------------
BFDS $4.6 $7.6 $15.2$23.6
IFDS 5.03.4 13.3 13.3
Argus 0.01.5 0.4 3.4
Asurion21.9
Other(0.6) (2.2) 0.4 (4.6)
---------------- ----------------
$9.0 $10.3 $29.3$57.6
================ ================
Certain of the Company's joint ventures derive investment earnings related
to cash balances maintained on behalf of customers. Average daily balances
invested by the joint ventures were $1.3 billion during third quarter 2008 and
$1.4 billion during third quarter 2007. Average interest rates earned on the
balances declined from 4.81% in third quarter 2007 to 1.93% in third quarter
2008. The net effect of these fluctuations resulted in an approximate $11.3
million decline in interest earnings by the joint ventures, which resulted in
a decrease of DST's equity of earnings of unconsolidated affiliates of $3.4
million.
DST's equity in BFDS earnings for third quarter 2008 decreased
$3.0 million as compared to third quarter 2007 primarily from lower investment
earnings resulting from lower interest rates on cash balances maintained by
BFDS on behalf of customers and lower operating revenues from lower client
volumes. Decreases in investment earnings and client revenues were partially
offset by lower compensation and benefit costs due to lower headcount
resulting from staff reductions in second quarter 2008.
DST's equity in IFDS earnings for third quarter 2008 increased
$1.6 million as compared to third quarter 2007. The increase in equity in
earnings is primarily attributable to increased contributions from higher
levels of shareowner accounts serviced. Shareowner accounts serviced by IFDS
U.K. were 5.9 million at September 30, 2008, an increase of 100,000 accounts
from June 30, 2008 and September 30, 2007. Shareowner accounts serviced by
IFDS Canada were 10.7 million at September 30, 2008, unchanged from June 30,
2008 and an increase of 3.3 million accounts from September 30, 2007,
primarily from the January 2008 conversion of a new remote mutual fund client
with approximately 3.2 million accounts.
Equity in earnings of Argus Health Systems for third quarter 2008
decreased $1.5 million as compared to third quarter 2007 from lower investment
earnings as a result of lower interest rates on cash balances maintained by
Argus on behalf of customers and from lower processing revenue.
The Other category in the table above principally includes various real
estate joint ventures. The increase in equity in earnings of other
unconsolidated affiliates is primarily due to lower depreciation expense in
third quarter 2008.
Other income (expense), net
Other income was $7.7 million in third quarter 2008, a decrease of
$7.2 million as compared to third quarter 2007 primarily due to higher
interest income in 2007. As mentioned above, the decrease in interest income
is primarily attributable to lower levels of short-term investments as a
portion of the July 2007 Asurion sales proceeds were invested until December
2007. In addition, other income decreased during third quarter 2008 as
compared to third quarter 2007 from unrealized losses on marketable securities
designated as trading and from higher accounts receivable securitization
program costs associated with higher levels of accounts receivable sold.
Interest expense
Interest expense was $13.8 million for third quarter 2008, an increase of
$2.2 million from third quarter 2007, primarily from higher average debt
balances during 2008. As mentioned above, the Company used proceeds from the
Asurion sale in July 2007 to pay down debt. Increased share repurchase
activity during 2008 has resulted in higher average debt balances.
Income taxes
The Company's tax rate was 35.0% for third quarter 2008 compared to 34.0%
for third quarter 2007. The third quarter 2008 tax rate was affected by
favorable international income tax items and changes in the relative
proportions of domestic, international and corporate joint venture income.
The Company expects its tax rate to be approximately 36.4% for the year ending
December 31, 2008.
Accounting Standards
Earnings Per Share
In August 2008, the FASB issued a revised exposure draft on a proposed
accounting standard that would amend SFAS 128, Earnings per Share, to clarify
guidance for mandatorily convertible instruments, the treasury stock method,
contingently issuable shares, and contracts that may be settled in cash or
shares. The final statement has yet to be issued. DST is currently
evaluating the impact of this proposed accounting standard and currently
believes that this proposed amendment would impact the way the Company treats
the incremental shares to be issued from the assumed conversion of the
convertible debentures issued in August 2003 in calculating diluted earnings
per share. The proposed amendment would require the use of the "if-converted"
method from the date of issuance of the convertible debentures. The proposed
amendment would remove the ability of a company to support the presumption
that the convertible securities will be satisfied in cash and not converted
into shares of common stock. Under this "if converted" method, GAAP diluted
earnings per share would have been $0.80 and $8.42 (versus GAAP reported
earnings of $0.91 and $9.62) for the three months ended September 30, 2008 and
2007, respectively, and $2.59 and $10.04 (versus GAAP reported earnings of
$2.91 and $11.37) for the nine months ended September 30, 2008 and 2007,
respectively. The above information presents only the effect on diluted
earnings per share of the "if converted" method included in the exposure
draft, but does not include any other computational changes (e.g., treasury
stock method considerations) discussed in the exposure draft. DST is
continuing to monitor the FASB's progress towards finalizing this proposed
accounting standard.
The proposed change in accounting principles would affect the calculation
of diluted earnings per share during the period the debentures are
outstanding, but would not affect DST's ability to ultimately settle the
convertible debentures in cash, shares or any combination thereof.
* * * * *
The information and comments in this press release may include
forward-looking statements respecting DST and its businesses. Such
information and comments are based on DST's views as of today, and actual
actions or results could differ. There could be a number of factors, risks,
uncertainties or contingencies that could affect future actions or results,
including but not limited to those set forth in DST's periodic reports (Form
10-K or 10-Q) filed from time to time with the Securities and Exchange
Commission. All such factors should be considered in evaluating any
forward-looking statements. The Company will not update any forward-looking
statements in this press release to reflect future events.
DST SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(Unaudited)
For the Three MonthsFor the Nine Months
Ended September 30, Ended September 30,
----------------------- ------------------------
2008 20072008 2007
----------- ---------- ------------ ----------
Operating revenues $414.2 $419.5 $1,271.6 $1,262.9
Out-of-pocket
reimbursements 146.2153.3449.5462.2
----------- ---------- ------------ ----------
Total revenues 560.4572.8 1,721.1 1,725.1
Costs and expenses 449.3463.4 1,381.0 1,384.7
Depreciation and
amortization 32.2 34.1 93.8 95.6
----------- ---------- ------------ ----------
Income from operations78.9 75.3246.3244.8
Interest expense (13.8) (11.6) (40.3) (49.2)
Other income (expense),
net 2.8 14.9(4.1) 41.6
Gain on sale of
Asurion 996.3 996.3
Equity in earnings
of unconsolidated
affiliates9.0 5.4 29.3 52.7
----------- ---------- ------------ ----------
Income before income
taxes76.9 1,080.3231.2 1,286.2
Income taxes 26.7407.5 58.9475.2
----------- ---------- ------------ ----------
Net income $50.2 $672.8 $172.3 $811.0
=========== ========== ============ ==========
Average common shares
outstanding 49.3 59.9 52.3 61.5
Average diluted shares
outstanding 55.2 69.9 59.2 71.2
Basic earnings
per share $1.02 $11.24$3.30 $13.18
Diluted earnings
per share $0.91$9.62$2.91 $11.37
DST SYSTEMS, INC.
STATEMENT OF REVENUES BY SEGMENT
(In millions)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
200820072008 2007
---------- --------- --------- --------
Revenues
Financial Services
Operating $284.4 $281.1 $865.7$836.8
OOP reimbursements17.516.554.3 48.0
---------- --------- --------- --------
$301.9 $297.6 $920.0$884.8
========== ========= ========= ========
Output Solutions
Operating $128.8 $136.4 $402.6$421.4
OOP reimbursements 128.6 136.9 395.1 414.2
---------- --------- --------- --------
$257.4 $273.3 $797.7$835.6
========== ========= ========= ========
Investments and Other
Operating$16.1 $16.6 $46.2 $48.1
OOP reimbursements 0.2 0.4 0.2
---------- --------- --------- --------
$16.3 $16.6 $46.6 $48.3
========== ========= ========= ========
Eliminations
Operating $(15.1) $(14.6) $(42.9) $(43.4)
OOP reimbursements(0.1) (0.1) (0.3) (0.2)
---------- --------- --------- --------
$(15.2) $(14.7) $(43.2) $(43.6)
========== ========= ========= ========
Total Revenues
Operating $414.2 $419.5$1,271.6 $1,262.9
OOP reimbursements 146.2 153.3 449.5 462.2
---------- --------- --------- --------
$560.4 $572.8$1,721.1 $1,725.1
========== ========= ========= ========
DST SYSTEMS, INC.
STATEMENT OF INCOME FROM OPERATIONS BY SEGMENT
(In millions)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
2008 2007 2008 2007
--------- --------- --------- ---------
Income from operations
Financial Services$70.0$65.3 $213.9 $198.0
Output Solutions7.4 8.7 28.6 30.3
Investments and Other 3.4 3.29.4 22.1
Segment Eliminations (1.9)(1.9) (5.6)(5.6)
--------- --------- --------- ---------
$78.9$75.3 $246.3 $244.8
========= ========= ========= =========
* The historical Output Solutions and Elimination Adjustments Segment
information has been revised to reflect a 2008 change in presentation of
certain occupancy cost components of the Output Solutions Segment, as
described in the Output Solutions Segment results above.
DST SYSTEMS, INC.
OTHER SELECTED FINANCIAL INFORMATION
(In millions)
(Unaudited)
September 30, December 31,
Selected Balance Sheet Information2008 2007
-------------- -------------
Cash and cash equivalents $100 $109
Debt 1,542 1,061
Nine months ended
September 30,
------------------------
Capital Expenditures, by Segment 2008 2007
----------- -----------
Financial Services $38 $54
Output Solutions 1820
Investments and Other 29 4
Segment Information
Three Months Ended September 30, 2008
----------------------------------------------------------
Financial Output Investments/ Elimination Consolidated
Services SolutionsOther AdjustmentsTotal
--------- --------- ------------ ----------- ------------
Operating
revenues $282.2 $128.8 $3.2 $ $414.2
Intersegment
operating
revenues 2.2 12.9 (15.1)
Out-of-pocket
reimbursements 17.5 128.6 0.2 (0.1) 146.2
--------- --------- ------------ ----------- ------------
Total revenues 301.9 257.4 16.3 (15.2) 560.4
Costs and
expenses 211.4 239.8 10.7 (12.6) 449.3
Depreciation
and
amortization20.5 10.2 2.2 (0.7)32.2
--------- --------- ------------ ----------- ------------
Income from
operations 70.07.4 3.4 (1.9)78.9
Other income
(expense), net 0.2 (0.1) 2.72.8
Equity in
earnings of
unconsolidated
affiliates 9.0 9.0
--------- --------- ------------ ----------- ------------
Earnings
before
interest
and income
taxes $79.2 $7.3 $6.1 $(1.9) $90.7
========= ========= ============ =========== ============
Three Months Ended September 30, 2007
----------------------------------------------------------
Financial Output Investments/ Elimination Consolidated
Services SolutionsOther AdjustmentsTotal
--------- --------- ------------ ----------- ------------
Operating
revenues $279.5 $136.4 $3.6 $ $419.5
Intersegment
operating
revenues 1.6 13.0 (14.6)
Out-of-pocket
reimbursements 16.5 136.9 (0.1) 153.3
--------- --------- ------------ ----------- ------------
Total revenues 297.6 273.3 16.6 (14.7) 572.8
Costs and
expenses 210.7 254.0 10.8 (12.1) 463.4
Depreciation
and
amortization21.6 10.6 2.6 (0.7) 34.1
--------- --------- ------------ ----------- ------------
Income from
operations 65.38.7 3.2 (1.9) 75.3
Other income,
net 1.0 13.9 14.9
Gain on sale
of Asurion 996.3 996.3
Equity in
earnings
(losses) of
unconsolidated
affiliates 12.7 (7.3) 5.4
--------- --------- ------------ ----------- ------------
Earnings
before
interest
and income
taxes $1,075.3 $8.7 $9.8 $(1.9)$1,091.9
========== ========= ============ =========== ============
Note: The historical Output Solutions and Elimination Adjustments Segment
information has been revised to reflect a 2008 change in
presentation of certain occupancy cost components of the Output
Solutions Segment, as described in the Output Solutions Segment
results above.
Nine Months Ended September 30, 2008
------------------------------------------------------------
Financial Output Investments/ Elimination Consolidated
Services SolutionsOther AdjustmentsTotal
---------- --------- ------------ ----------- -------------
Operating
revenues $859.4 $402.6 $9.6 $$1,271.6
Intersegment
operating
revenues 6.3 36.6 (42.9)
Out-of-pocket
reimbursements 54.3 395.1 0.4 (0.3) 449.5
---------- --------- ------------ ----------- -------------
Total revenues 920.0 797.7 46.6 (43.2) 1,721.1
Costs and
expenses 645.4 740.2 30.9 (35.5) 1,381.0
Depreciation
and
amortization60.7 28.9 6.3 (2.1)93.8
---------- --------- ------------ ----------- -------------
Income from
operations 213.9 28.6 9.4 (5.6) 246.3
Other income
(expense), net (6.5) (0.5) 2.9 (4.1)
Equity in
earnings of
unconsolidated
affiliates 28.2 1.1 29.3
---------- --------- ------------ ----------- -------------
Earnings before
interest and
income taxes $235.6 $28.1 $13.4 $(5.6) $271.5
========== ========= ============ =========== =============
Nine Months Ended September 30, 2007
------------------------------------------------------------
Financial Output Investments/ Elimination Consolidated
Services SolutionsOther AdjustmentsTotal
---------- --------- ------------ ----------- -------------
Operating
revenues $831.4 $421.4$10.1 $$1,262.9
Intersegment
operating
revenues 5.438.0 (43.4)
Out-of-pocket
reimbursements 48.0 414.2 0.2 (0.2) 462.2
---------- --------- ------------ ----------- -------------
Total revenues 884.8 835.6 48.3 (43.6) 1,725.1
Costs and
expenses 627.6 774.2 18.9 (36.0) 1,384.7
Depreciation
and
amortization59.2 31.1 7.3 (2.0)95.6
---------- --------- ------------ ----------- -------------
Income from
operations 198.0 30.3 22.1 (5.6) 244.8
Other income,
net 7.534.141.6
Gain on sale
of Asurion 996.3 996.3
Equity in
earnings
(losses) of
unconsolidated
affiliates 63.5 (10.8) 52.7
---------- --------- ------------ ----------- -------------
Earnings
before
interest
and income
taxes $1,265.3 $30.3$45.4 $(5.6)$1,335.4
========== ========= ============ =========== =============
Note: The historical Output Solutions and Elimination Adjustments Segment
information has been revised to reflect a 2008 change in
presentation of certain occupancy cost components of the Output
Solutions Segment, as described in the Output Solutions Segment
results above.
DST Systems, Inc.
Description of Non-GAAP Adjustments
In addition to reporting operating income, pretax income, net income and
earnings per share on a GAAP basis, DST has also made certain non-GAAP
adjustments that are described below and are reconciled to the corresponding
GAAP measures in the attached financial schedules titled "Reconciliation of
Reported Results to Income Adjusted for Certain Non-GAAP Items" that accompany
this earnings release. DST's use of non-GAAP adjustments is further described
in the section entitled "Use of Non-GAAP Financial Information."
The following item, which occurred during the quarter ended September 30,
2008, has been treated as a non-GAAP adjustment:
-- Other net losses, in the amount of $4.9 million, associated with
realized and unrealized gains (losses) related to securities and other
investments, which are included in other income (expense), net. The income
tax benefit associated with these losses was approximately $1.9 million.
In addition to the items which occurred in the quarter ended September 30,
2008 as described above, the following items which occurred during the six
months ended June 30, 2008 have been previously reported as non-GAAP
adjustments:
-- Other net losses, in the amount of $16.5 million, associated with
realized and unrealized gains (losses) related to securities and other
investments, which are included in other income (expense), net. The income
tax benefit associated with these losses was approximately $6.1 million.
-- An income tax benefit of approximately $23.6 million resulting from a
reduction in the Company's liabilities for FIN 48, "Accounting for Uncertainty
in Income Taxes -- an Interpretation of FASB No. 109." The decrease in FIN 48
liabilities is principally related to the resolution of an IRS examination
matter that was resolved in DST's favor.
The following items, which occurred during the quarter ended September 30,
2007, have been treated as non-GAAP adjustments:
-- Costs associated with the partial termination of a non-qualified
deferred compensation plan in the amount of $4.3 million. The $4.3 million
cost (included in costs and expenses) was allocated to the Financial Services
($3.3 million), Output Solutions ($800,000) and Investments and Other segments
($200,000). The income tax benefit associated with this cost is approximately
$1.6 million.
-- Non-operating gain related to the sale of Asurion, an equity
investment, in the amount of $996.3 million. The income tax expense
associated with this gain is approximately $381.0 million if calculated on a
discrete period basis. However, the tax effect was required to be recorded
through the effective tax rate, which resulted in approximately $379.3 million
being recognized in third quarter 2007 and the remaining amount of
approximately $1.7 million to be recognized in fourth quarter 2007.
-- Decreased equity in earnings of unconsolidated real estate affiliates
associated with impairment charges on real estate held for sale in the amount
of $4.9 million. The income tax benefit associated with this these impairment
charges is approximately $1.9 million.
In addition to the items which occurred in the quarter ended September 30,
2007 as described above, the following items which occurred during the six
months ended June 30, 2007 have been previously reported as non-GAAP
adjustments:
-- A contract termination fee, in the amount of $3.1 million, included in
Output Solutions operating revenues. The income tax expense associated with
this income was approximately $1.2 million.
-- Other net gains, in the amount of $8.0 million, associated with
realized and unrealized gains (losses) related to securities and other
investments, which are included in other income (expense), net. The income
tax expense associated with these gains was approximately $3.2 million.
-- A gain related to the recovery in a non-operating Chapter 11 bankruptcy
claim of an amount due from a previous client, in the amount of $1.0 million,
included in other income (expense), net. The income tax expense associated
with this gain was approximately $400,000.
-- Merger integration costs incurred with the acquisition of ASI, in the
amount of $4.3 million, included in Financial Services costs and expenses.
The income tax benefit associated with these costs was approximately $1.7
million.
-- Net gain resulting from the sale of office buildings in California, in
the amount of $12.4 million, which is included in Investments and Other as a
reduction to costs and expenses. The income tax expense associated with this
gain was approximately $4.9 million.
-- Non-operating gain resulting principally from the settlement of a
dispute related to a prior business acquisition, in the amount of
$1.5 million, which is included in other income (expense), net. The income
tax expense associated with this gain was approximately $600,000.
-- Favorable resolution of an international income tax issue that resulted
in a $3.8 million reduction in income tax expense.
DST SYSTEMS, INC.
RECONCILIATION OF REPORTED RESULTS TO INCOME ADJUSTED FOR CERTAIN
NON-GAAP ITEMS
For the Three Months Ended September 30,
(Unaudited - in millions, except per share amounts)
2008
---------------------------------------
OperatingPretax Net Diluted
Income IncomeIncome EPS
------------ --------- ------- --------
Reported GAAP income $78.9 $76.9$50.2 $0.91
Adjusted to remove:
Included in non-operating
income:
Net losses on securities
and other investments4.9 3.00.06
------------ --------- ------- --------
Adjusted Non-GAAP income $78.9 $81.8$53.2 $0.97
============ ========= ======= ========
2007
---------------------------------------
OperatingPretax Net Diluted
Income IncomeIncome EPS
------------ --------- ------- --------
Reported GAAP income $75.3 $1,080.3 $672.8 $9.62
Adjusted to remove:
Included in operating income:
Non-qualified deferred comp.
plan costs - Financial
Services 3.33.3 2.00.03
Non-qualified deferred comp.
plan costs - Output
Solutions 0.80.8 0.50.01
Non-qualified deferred comp.
plan costs - Investments
and Other 0.20.2 0.2
Included in non-operating
income:
Asurion gain (996.3) (617.0) (8.82)
Real estate impairments at
unconsolidated affiliates4.9 3.00.04
------------ --------- ------- --------
Adjusted Non-GAAP income $79.6 $93.2$61.5 $0.88
============ ========= ======= ========
Note: See the Description of Non-GAAP Adjustments section for a
description of each of the above adjustments and see the Use of
Non-GAAP Financial Information section for management's reasons for
providing non-GAAP financial information.
DST SYSTEMS, INC.
RECONCILIATION OF REPORTED RESULTS TO INCOME ADJUSTED FOR CERTAIN
NON-GAAP ITEMS
For the Nine Months Ended September 30,
(Unaudited - in millions, except per share amounts)
2008
---------------------------------------
OperatingPretax Net Diluted
Income IncomeIncome EPS
------------ --------- ------- --------
Reported GAAP income $246.3 $231.2 $172.3 $2.91
Adjusted to remove:
Included in non-operating income:
Net losses on securities and other
investments 21.4 13.40.23
Reduction in FIN 48 liabilities (23.6) (0.40)
------------ --------- ------- --------
Adjusted Non-GAAP income $246.3 $252.6 $162.1 $2.74
============ ========= ======= ========
2007
---------------------------------------
OperatingPretax Net Diluted
Income IncomeIncome EPS
------------ --------- ------- --------
Reported GAAP income $244.8 $1,286.2 $811.0 $11.37
Adjusted to remove:
Included in operating income:
ASI merger integration costs -
Financial Services4.34.3 2.60.03
Contract termination fee -
Output Solutions (3.1) (3.1)(1.9) (0.03)
Gain on sale of real
property - Investments
and Other (12.4) (12.4)(7.5) (0.11)
Non-qualified deferred comp.
plan costs - Financial
Services 3.33.3 2.00.03
Non-qualified deferred comp.
plan costs - Output
Solutions 0.80.8 0.50.01
Non-qualified deferred comp.
plan costs - Investments
and Other 0.20.2 0.2
Included in non-operating
income:
Net gains on securities and
other investments (8.0) (4.8) (0.06)
Favorable settlement of a
prior business acquisition
dispute (1.5) (0.9) (0.01)
Recovery of Chapter 11
bankruptcy claim(1.0) (0.6) (0.01)
Favorable income tax
resolution (3.8) (0.05)
Asurion gain (996.3) (617.0) (8.66)
Real estate impairments at
unconsolidated affiliates4.9 3.00.04
------------ --------- ------- --------
Adjusted Non-GAAP income $237.9 $277.4 $182.8 $2.55
============ ========= ======= ========
Note: See the Description of Non-GAAP Adjustments section for a
description of each of the above adjustments and see the Use of
Non-GAAP Financial Information section for management's reasons for
providing non-GAAP financial information.
SOURCE DST Systems, Inc.
