KANSAS CITY, Mo., July 22 /PRNewswire-FirstCall/ -- Consolidated
net income for DST Systems, Inc. (NYSE:DST) was $48.7 million
($0.97 per diluted share) for second quarter 2009 compared to $49.9
million ($0.85 per diluted share) for second quarter 2008.
Consolidated net income for the six months ended June 30, 2009 was
$121.9 million ($2.44 per diluted share) compared to $122.1 million
($1.96 per diluted share) for the six months ended June 30, 2008.
Taking into account certain non-GAAP adjustments explained herein,
consolidated net income was $44.8 million ($0.90 per diluted share)
for second quarter 2009 compared to $53.7 million ($0.91 per
diluted share) for second quarter 2008, and $86.4 million ($1.73
per diluted share) for the six months ended June 30, 2009 compared
to $108.9 million ($1.75 per diluted share) for the six months
ended June 30, 2008. Second quarter 2009 financial and operational
highlights were as follows: -- Consolidated operating revenues
(excluding out-of-pocket reimbursements) decreased $22.1 million or
5.2% to $404.5 million as compared to second quarter 2008 primarily
from a $13.6 million decline in Output Solutions and a $6.8 million
decline in Financial Services. The Output Solutions decline
principally reflects lower items mailed and images produced. The
Financial Services decline resulted from lower international
revenues from decreased demand for professional services and
changes in foreign currency exchange rates (principally changes
between the U.S. Dollar and the British Pound), reductions in
mutual fund shareowner processing service revenues, data processing
support revenues and AWD software license revenues, partially
offset by the inclusion of $22.3 million of incremental operating
revenues resulting from the consolidation of Argus Health Systems,
Inc. ("Argus") on March 31, 2009. -- Total mutual fund shareowner
accounts serviced at June 30, 2009 increased 1.5 million accounts
or 1.3% from March 31, 2009 to 118.9 million accounts. Registered
accounts and subaccounts serviced by DST at June 30, 2009 were
110.0 million and 8.9 million, respectively. -- Consolidated income
from operations decreased $14.5 million or 17.5% to $68.5 million
as compared to second quarter 2008, comprised of decreases of $12.6
million in Financial Services and $1.5 million in Output Solutions.
The decrease in Financial Services is attributable to an increase
in deferred compensation costs of approximately $5.5 million (the
effect of which is offset as unrealized appreciation on trading
securities in other income, net), reduced earnings from
international operations resulting from declines in professional
service revenues and costs associated with reductions in staffing
levels, reduced earnings from mutual fund shareowner processing,
the consolidation of losses incurred by Argus since March 31, 2009,
lower AWD software license revenue and from lower data processing
support revenues. The decrease in Output Solutions resulted from
lower operating revenues. -- Equity in earnings of unconsolidated
affiliates decreased $1.1 million or 9.5% to $10.5 million as
compared to second quarter 2008 attributable to lower equity in
earnings of BFDS and IFDS, partially offset by improved results in
other unconsolidated affiliates. -- Reported GAAP other income
(expense), net reflected income of $11.2 million in second quarter
2009 as compared to expense of $2.5 million in second quarter 2008,
an increase of $13.7 million. Taking into account certain non-GAAP
adjustments affecting both second quarter 2009 and 2008 results,
other income reflected income of $4.8 million in second quarter
2009, an increase of $1.3 million as compared to second quarter
2008. On this basis, the increase in other income as compared to
second quarter 2008 is primarily from unrealized appreciation on
marketable securities designated as trading (the effect of which is
offset in Financial Services as an increase in costs and expenses),
partially offset by lower dividend income and interest income, and
higher accounts receivable securitization program costs associated
with renewal fees that were expensed as incurred upon entering a
new program with a new third-party, multi-seller, asset-backed
commercial paper conduit in May 2009. Dividend income during second
quarter 2009 decreased $2.9 million as compared to second quarter
2008 primarily from a $2.6 million decline in dividend income from
State Street Corporation ("State Street"). The decline in State
Street dividend income is attributable to a previously announced
reduction in the quarterly dividend from $0.24 per share in second
quarter 2008 to $0.01 per share in 2009 and, to a lesser extent, a
lower amount of State Street shares held as DST sold approximately
730,000 shares in fourth quarter 2008. The components of other
income (expense), net are as follows (in millions): Three Months
Ended June 30, ------------------- 2009 2008 ---- ---- Adjusted
non-GAAP other income, net $4.8 $3.5 Net gains (losses) on
securities and other investments 4.3 (6.0) Gain on extinguishment
of senior convertible debentures 2.1 --- --- Reported GAAP other
income (expense), net $11.2 $(2.5) ===== ===== The $4.3 million of
net gains on securities and other investments for second quarter
2009 is comprised of net realized gains from sales of
available-for-sale securities of $4.2 million, net unrealized gains
on private equity funds and other investments of $1.3 million and
other than temporary impairments on available-for-sale securities
of $1.2 million. The Company recorded a $2.1 million gain during
second quarter 2009 associated with the repurchase of a portion of
the Company's senior convertible debentures at a discount to
carrying value. During second quarter 2009, the Company repurchased
$61.4 million in principal amount of the original $540 million
4.125% Series A senior convertible debentures and approximately
$12.7 million in principal amount of the original $300 million
3.625% Series B senior convertible debentures. The outstanding
amount of the Series A and Series B senior convertible debentures
were $418.5 million and $168.3 million at June 30, 2009,
respectively. Share-related activity during second quarter 2009 was
as follows: -- The Company had 49.7 million shares outstanding at
June 30, 2009. During second quarter 2009, the Company repurchased
10,000 shares of DST common stock for $365,128 or approximately
$36.51 per share. At June 30, 2009, there were approximately 2.4
million shares remaining under the existing share repurchase
authorization plan. -- Diluted shares outstanding for second
quarter 2009 were 50.0 million shares, a decrease of 9.0 million
shares or 15.3% from second quarter 2008, and an increase of
100,000 shares or 0.2% from first quarter 2009. The decrease from
second quarter 2008 is primarily attributable to shares repurchased
after June 30, 2008, the absence of dilutive effects of the
convertible debentures in 2009 resulting from the Company's average
share price during second quarter 2009 being less than the
conversion price and lower dilutive effects of outstanding stock
options. -- Total stock options and restricted stock ("equity
units") outstanding at June 30, 2009 were 8.2 million, of which 5.7
million were stock options and 2.5 million were restricted stock.
Equity units decreased 100,000 units or 1.2% from March 31, 2009
and decreased 400,000 units or 4.7% from June 30, 2008. 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 nonGAAP
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
nonoperational 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 nonGAAP 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 second
quarter 2009 decreased $6.8 million or 2.3% to $287.7 million as
compared to second quarter 2008. As previously mentioned, DST
acquired the remaining 50% equity interest in Argus on March 31,
2009 and now consolidates Argus as a wholly-owned subsidiary. The
consolidation of Argus increased second quarter 2009 Financial
Services operating revenues by $27.3 million as compared to the
same period in 2008, but also resulted in the elimination of $5.0
million of data processing support services provided by DST to
Argus as these now represent intercompany revenues. Absent the
$22.3 million incremental increase in operating revenues resulting
from the consolidation of Argus, Financial Services operating
revenues decreased $29.1 million during second quarter 2009 as
compared to the same period in 2008. On this basis, the decrease in
Financial Services operating revenues is attributable to lower
volumes of international professional services, changes in foreign
currency exchange rates, lower mutual fund shareowner processing
service revenues, lower AWD software license revenues, lower data
processing support revenues and lower DST Health Solutions
professional services revenues. The volume of professional services
provided to international financial services clients decreased from
continued lower demand for these services amid difficult market
conditions. The effect on international financial services revenues
from the change in foreign currency exchange rates between the U.S.
Dollar, the British Pound and other foreign currencies reduced
operating revenues by approximately $4.3 million as compared to
second quarter 2008. The net decrease in mutual fund shareowner
processing service revenues resulted from lower levels of
registered accounts serviced and lower TRAC participants processed
(principally from a client internalizing its participant accounting
operations during third quarter 2008), which were partially offset
by 1) the recognition of a $2.1 million termination fee in
connection with a previously announced deconversion of a
full-service mutual fund client which occurred during the quarter
and 2) higher levels of subaccounts serviced. The decline in AWD
software license fees is primarily attributable to strong sales in
second quarter 2008 and lower demand in 2009. Data processing
support revenues decreased by approximately $2.5 million due to a
previously announced expiration of a contract in June 2008. The
decrease in DST Health Solutions professional services is
attributable to lower client demand for professional services. The
following table summarizes mutual fund shareowner accounts serviced
(in millions): June 30, March 31, December 31, June 30, 2009 2009
2008 2008 ---- ---- ---- ---- Registered accounts: Non
tax-advantaged 63.7 62.8 65.4 67.0 Tax-advantaged 46.3 45.9 45.8
47.4 ---- ---- ---- ---- 110.0 108.7 111.2 114.4 Subaccounts 8.9
8.7 8.9 5.4 --- --- --- --- Total 118.9 117.4 120.1 119.8 =====
===== ===== ===== Registered accounts serviced increased 1.3
million accounts or 1.2% from the comparable amount at March 31,
2009, comprised of net increases in existing client accounts of 1.4
million and new client conversions of 1.0 million accounts,
partially offset by conversions to non-DST platforms of 1.0 million
accounts (600,000 accounts to non-DST registered account platforms
and 400,000 accounts to non-DST subaccounting platforms) and
conversions to DST's subaccounting platform of 100,000 accounts.
Tax-advantaged accounts were 46.3 million at June 30, 2009, an
increase of 400,000 accounts or 0.9% as compared to March 31, 2009.
Tax-advantaged accounts represent 42.1% of total registered
accounts serviced at June 30, 2009 as compared to 41.4% at June 30,
2008. Subaccounts serviced were 8.9 million at June 30, 2009, an
increase of 200,000 subaccounts as compared to March 31, 2009. The
increase of 200,000 subaccounts serviced during second quarter 2009
is due to conversions of 100,000 registered accounts from TA2000
and increases in existing client subaccounts of 100,000. The
Company received three new client commitments during second quarter
2009 representing approximately 200,000 registered accounts which
are expected to convert to TA2000 in 2010. The Company anticipates
that 600,000 new registered accounts will be converted to TA2000 in
the second half of 2009. DST's subaccounting clients have indicated
they plan to convert 1.0 million new subaccounts to TA2000
Subaccounting from non-DST platforms during the second half of
2009. In addition, the Company expects 3.4 million registered
accounts will convert to subaccounting platforms during the second
half of 2009 of which 1.0 million will convert to TA2000
Subaccounting. In summary, based on accounts serviced at June 30,
2009 and the conversion activity previously described (and without
taking into account any other changes in accounts serviced during
2009), total accounts serviced at December 31, 2009 are estimated
to be 118.1 million, which would be comprised of 107.2 million
registered accounts and 10.9 million subaccounts. The actual number
of accounts estimated to convert to and from various DST platforms,
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 were 3.4
million at June 30, 2009, a decrease of 400,000 participants or
10.5% from March 31, 2009 and a decrease of 1.1 million
participants or 24.4% from June 30, 2008. As previously announced
and mentioned above, an existing TRAC client internalized its
participant accounting during third quarter 2008 resulting in the
loss of approximately 1.0 million participants. The decline in
participants during second quarter 2009 represents a seasonal
movement of terminated participants, partially offset by new
participant enrollments. As previously reported, the Company has
new client commitments for approximately 1.1 million new
participants, of which 200,000 are expected to convert in fourth
quarter 2009 and the remainder in 2010. Pharmacy claims paid by
Argus during second quarter 2009 were 94.8 million, a decline of
200,000 claims or 0.2% as compared to first quarter 2009 and a
decline of 12.7 million claims or 11.8% as compared to second
quarter 2008. The decline in pharmacy claims paid during 2009 as
compared to 2008 is attributable to decreased members covered by
Argus clients and from client deconversions in 2008. Financial
Services segment software license fee revenues are derived
principally from DST Global Solutions, formerly known as DST
International, (investment management systems), DST Health
Solutions (medical claims processing systems) and AWD (workflow
management and CRM solutions). Operating revenues include
approximately $10.8 million of software license fee revenues for
second quarter 2009, a decrease of $4.8 million or 30.8% over the
same period in 2008. The decrease is primarily due to lower AWD and
investment management software license fee revenues. 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. Costs and expenses for second quarter 2009
were $219.6 million, an increase of $900,000 or 0.4% from the same
period in 2008. Excluding reimbursable operating costs of $12.9
million in second quarter 2009 and $19.0 million in second quarter
2008, costs and expenses increased $7.0 million or 3.5% to $206.7
million. On this basis, the increase in costs and expenses is
attributable to the consolidation of Argus on March 31, 2009, an
increase in deferred compensation costs of approximately $5.5
million (the effect of which is offset as unrealized gains on
trading securities in other income, net), the inclusion of costs
from the acquisition of BlueDoor Technologies Pty Ltd. ("BlueDoor")
on November 14, 2008 and costs of approximately $2.7 million
associated with reductions in international staffing levels,
partially offset by the foreign currency exchange effects between
the U.S. Dollar and other currencies of $5.4 million, lower
compensation and benefit related costs at both international and
domestic operations principally from lower staffing levels and
lower travel related costs. Depreciation and amortization costs
decreased $1.2 million in second quarter 2009 as compared to the
same period in 2008 attributable to certain assets becoming fully
depreciated in 2009 and lower depreciation on capitalized software,
partially offset by $1.5 million of increased intangible asset
amortization expense from the acquisition of BlueDoor and Argus.
Financial Services segment income from operations for second
quarter 2009 totaled $61.9 million as compared to $74.5 million in
second quarter 2008, a decrease of $12.6 million or 16.9%. $5.5
million of this decrease is attributable to an increase in deferred
compensation costs (the effect of which is offset as unrealized
appreciation on trading securities in other income, net). Other
significant factors were reduced earnings from international
operations resulting from declines in professional service revenues
and costs associated with reductions in staffing levels, the
consolidation of losses incurred by Argus since March 31, 2009
resulting from lower paid claims processed, lower investment
earnings on cash balances maintained on behalf of Argus clients and
intangible amortization resulting from the purchase, lower AWD
software license revenue, lower data processing support revenues
and reduced earnings from mutual fund shareowner processing.
Operating margin for second quarter 2009 was 21.5% as compared to
25.3% for second quarter 2008. Excluding the effect of the deferred
compensation costs described above, operating margin would have
been 22.9% for second quarter 2009 as compared to 24.8% for second
quarter 2008. International operations and losses from the
consolidation of Argus were the primary reasons for the decline in
operating margin. Output Solutions Segment Output Solutions segment
operating revenues (excluding OOP reimbursements) for second
quarter 2009 were $117.5 million, a decrease of $13.6 million or
10.4% as compared to second quarter 2008, principally from lower
items mailed and images produced in the U.S. and foreign currency
exchange effects of approximately $2.5 million between the U.S.
Dollar and both the British Pound and Canadian Dollar, partially
offset by higher revenues from new Canadian clients. Out-of-pocket
reimbursements increased $10.5 million or 8.2% in second quarter
2009 to $137.8 million attributable to an increase in the number of
clients where Output Solutions procures postage on behalf of the
client, partially offset by lower volumes. Items mailed during
second quarter 2009 were 568.7 million, a decrease of 1.1% as
compared to the same period in 2008. The decrease in items mailed
is primarily due to lower volumes from existing customers, but
partially offset by volumes from new clients. Images produced
during second quarter 2009 were 3.1 billion, a decrease of 8.8% as
compared to second quarter 2008. The decrease in images is due to
lower volumes from existing clients and certain telecommunications
clients reducing the amount of transaction information included on
invoices thereby lowering total images produced partially offset by
new client volumes. During second quarter 2009, Output Solutions
received four new client commitments representing, when fully
transitioned, approximately 300 million of aggregate packages
annually (75 million packages quarterly), based on current volume
levels. Output Solutions began processing for two of the new
clients during second quarter 2009 and mailed approximately 21.9
million packages on behalf of these new clients during the quarter.
Full conversion activities related to these four clients is
expected to be completed during the third and fourth quarters of
2009. Costs and expenses for second quarter 2009 were $239.4
million, a decrease of $2.1 million or 0.9% from the same period in
2008. Excluding reimbursable operating costs of $137.8 million in
second quarter 2009 and $127.3 million in second quarter 2008,
costs and expenses decreased $12.6 million or 11.0% to $101.6
million. Lower personnel and material costs from lower processing
volumes, lower equipment costs from the implementation of owned
digital print technologies and lower costs related to the effect of
foreign currency exchange rates of approximately $2.3 million
contributed to the decrease in second quarter 2009 as compared to
2008. Depreciation and amortization increased $500,000 as compared
to second quarter 2008 attributable to increased depreciation from
equipment to support expanded postal processing offerings and new
clients. Output Solutions segment income from operations for second
quarter 2009 totaled $5.9 million, a decrease of $1.5 million or
20.3% as compared to second quarter 2008, primarily from lower
revenues. Operating margin for second quarter 2009 was 5.0% as
compared to 5.6% for second quarter 2008. Investments and Other
Segment Investments and Other segment operating revenues, primarily
rental income, were $14.7 million for second quarter 2009, a
decrease of $400,000 from second quarter 2008 primarily due to
lower rental activities. Income from operations for second quarter
2009 was $2.7 million, a decrease of $400,000 from second quarter
2008 attributable to lower revenues. Other Financial Results Equity
in earnings (losses) of unconsolidated affiliates The following
table summarizes the Company's equity in earnings (losses) of
unconsolidated affiliates (in millions): Three Months Ended Six
Months Ended* June 30, June 30, -------- -------- 2009 2008 2009
2008 ---- ---- ---- ---- BFDS $3.1 $4.7 $6.8 $10.6 IFDS 4.0 4.8 6.4
8.3 Argus 0.1 (1.5) 0.4 Other 3.4 2.0 4.5 1.0 --- --- --- --- $10.5
$11.6 $16.2 $20.3 ===== ===== ===== ===== * Equity in losses of
Argus Health Systems, Inc. is for the period January 1, 2009
through March 31, 2009, the date DST acquired the remaining 50%
equity interest and consolidated Argus. DST's equity in BFDS
earnings for second quarter 2009 decreased $1.6 million as compared
to second quarter 2008 primarily from lower investment earnings,
lower operating revenues resulting from lower shareowner accounts
processed, and lease abandonment costs incurred in second quarter
2009 associated with consolidating operational facilities,
partially offset by lower compensation and benefit related costs
from lower staffing levels. BFDS derives investment earnings
related to cash balances maintained on behalf of customers. Average
daily balances invested by BFDS were $0.8 billion during second
quarter 2009 as compared to $1.0 billion during second quarter
2008. Average interest rates earned on the balances declined from
1.85% in second quarter 2008 to 0.16% in second quarter 2009. The
aggregate effect of these fluctuations resulted in an approximate
$4.2 million decline in interest earnings by BFDS, which resulted
in a decrease in DST's equity in earnings of unconsolidated
affiliates of $1.3 million. DST's equity in IFDS earnings for
second quarter 2009 decreased $800,000 as compared to second
quarter 2008. The decrease in equity in earnings is primarily
attributable to the foreign currency exchange effects between the
U.S. dollar, the British Pound, the Canadian dollar and other
currencies. Higher revenues at IFDS UK from higher shareowner
accounts serviced were partially offset by higher costs to support
new clients. A decline in IFDS Canada shareowner processing
revenues during second quarter 2009, attributable to lower
shareowner accounts serviced, was more than offset by a reduction
in operating expenses resulting from client conversion costs
incurred in second quarter 2008. Shareowner accounts serviced by
IFDS U.K. were 6.1 million at June 30, 2009, an increase of 100,000
accounts from March 31, 2009 and an increase of 300,000 accounts
from June 30, 2008. Shareowner accounts serviced by IFDS Canada
were 10.5 million at June 30, 2009, a decrease of 100,000 accounts
from March 31, 2009 and a decrease of 200,000 accounts from June
30, 2008. As previously announced, DST acquired the remaining 50%
equity interest in Argus on March 31, 2009 and no longer records
equity in earnings of Argus, but consolidates Argus' results into
DST's consolidated financial statements. DST's equity in earnings
of other unconsolidated affiliates was $3.4 million, an increase of
$1.4 million primarily from improved results at certain other
unconsolidated affiliates, partially offset by the absence of a
gain recorded in second quarter 2008 related to the early
extinguishment of debt at a real-estate joint venture. Other
income, net Other income, net was $4.8 million in second quarter
2009, an increase of $1.3 million as compared to $3.5 million in
second quarter 2008. The increase in other income as compared to
second quarter 2008 is primarily from unrealized appreciation on
marketable securities designated as trading (the effect of which is
offset in Financial Services as an increase in costs and expenses),
partially offset by a $2.9 million decline in dividend income
(principally from State Street) and a decline in interest income.
State Street reduced its quarterly dividend in 2009 to $0.01 per
share as compared to $0.24 per share in 2008 and, when combined
with DST's sale of approximately 730,000 shares of State Street in
fourth quarter 2008, resulted in $2.6 million of lower dividend
income from State Street during second quarter 2009. In addition,
approximately $300,000 of lower dividend income was recorded in
second quarter 2009 reflecting a reduction of dividends in other
available-for-sale securities held. Accounts receivable
securitization program costs of approximately $800,000 associated
with renewal fees were incurred upon replacing the existing $200
million program with a new $175 million program with a new
third-party, multi-seller, asset-backed commercial paper conduit in
May 2009. Interest expense Interest expense was $9.5 million for
second quarter 2009, a decrease of $4.3 million from second quarter
2008, primarily from lower average interest rates. Income taxes The
Company's tax rate was 39.7% for second quarter 2009 as compared to
36.3% for second quarter 2008. The second quarter 2009 tax rate was
negatively impacted from valuation allowances against current year
international operating losses and from lower dividend income,
which is taxed at a lower effective tax rate. The Company expects
its tax rate to be approximately 39.4% for the full year 2009,
which is 0.4% higher than the Company's estimate after first
quarter 2009 because of higher international losses. The full year
2009 expected tax rate assumes continued valuation allowances on
certain international operating losses and lower dividend income.
Accounting Standards Earnings Per Share - Participating Securities
DST adopted FSP No. EITF 03-6-1, "Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities" ("FSP EITF 03-6-1") on January 1, 2009. Under FSP EITF
03-6-1, certain share-based payment awards that allow holders to
receive dividends before they vest should be treated as
participating securities. Although unvested share-based payment
awards with nonforfeitable rights to dividends have typically been
included in the calculation of diluted EPS using the treasury stock
method, these awards are now included in the calculation of basic
EPS using the two-class method. Because DST's existing restricted
stock awards allow holders the right to receive cash dividends, if
any, on a 1:1 basis, DST is required to treat these awards as
participating securities. Upon adoption of FSP EITF 03-6-1 on
January 1, 2009, DST applied this standard retrospectively to all
periods prior to 2009. The adoption of FSP EITF 03-6-1 resulted in
increases in previously reported average common and diluted shares
outstanding. The increase in average common and diluted shares
outstanding reduced previously reported basic and diluted earnings
per share in those prior periods. A comparison of diluted earnings
per share as previously reported and as retrospectively restated is
presented in the table below: As As previously retrospectively
reported restated -------- -------- For the three months ended
March 31, 2008 $1.12 $1.10 For the three months ended June 30, 2008
0.86 0.85 For the six months ended June 30, 2008 2.00 1.96 For the
three months ended September 30, 2008 0.91 0.90 For the nine months
ended September 30, 2008 2.91 2.86 For the three months ended
December 31, 2008 1.43 1.41 For the year ended December 31, 2008
4.28 4.21 Earnings Per Share Proposed Accounting Standard 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. In April 2009, the FASB decided to pause the Earnings
Per Share project and resume discussion towards the end of 2009.
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 $0.84 and $0.76 (versus GAAP reported earnings of $0.97 and
$0.85) for the three months ended June 30, 2009 and 2008,
respectively, and $2.05 and $1.76 (versus GAAP reported earnings of
$2.44 and $1.96) for the six months ended June 30, 2009 and 2008,
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 undertakes no obligation to 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) Three Months Ended
Six Months Ended June 30, June 30, -------- -------- 2009 2008 2009
2008 ---- ---- ---- ---- Operating revenues $404.5 $426.6 $800.1
$857.4 Out-of-pocket reimbursements 149.5 146.3 314.8 303.3 -----
----- ----- ----- Total revenues 554.0 572.9 1,114.9 1,160.7 Costs
and expenses 454.5 458.9 912.7 931.7 Depreciation and amortization
31.0 31.0 59.3 61.6 ---- ---- ---- ---- Income from operations 68.5
83.0 142.9 167.4 Interest expense (9.5) (13.8) (20.1) (26.5) Other
income (expense), net 11.2 (2.5) 27.4 (6.9) Equity in earnings of
unconsolidated affiliates 10.5 11.6 16.2 20.3 ---- ---- ---- ----
Income before income taxes 80.7 78.3 166.4 154.3 Income taxes 32.0
28.4 44.5 32.2 ---- ---- ---- ---- Net income $48.7 $49.9 $121.9
$122.1 ===== ===== ====== ====== Average common shares outstanding
49.7 54.2 49.7 56.4 Average diluted shares outstanding 50.0 59.0
49.9 62.2 Basic earnings per share $0.98 $0.92 $2.45 $2.16 Diluted
earnings per share $0.97 $0.85 $2.44 $1.96 DST SYSTEMS, INC.
STATEMENT OF REVENUES BY SEGMENT (In millions) (Unaudited) Three
Months Ended Six Months Ended June 30, June 30, -------- --------
2009 2008 2009 2008 ---- ---- ---- ---- Revenues Financial Services
Operating $287.7 $294.5 $555.4 $581.3 OOP reimbursements 12.9 19.0
30.0 36.8 ---- ---- ---- ---- $300.6 $313.5 $585.4 $618.1 ======
====== ====== ====== Output Solutions Operating $117.5 $131.1
$244.5 $273.8 OOP reimbursements 137.8 127.3 286.0 266.5 -----
----- ----- ----- $255.3 $258.4 $530.5 $540.3 ====== ====== ======
====== Investments and Other Operating $14.7 $15.1 $29.9 $30.1 OOP
reimbursements 0.2 0.1 0.3 0.2 --- --- --- --- $14.9 $15.2 $30.2
$30.3 ===== ===== ===== ===== Eliminations Operating $(15.4)
$(14.1) $(29.7) $(27.8) OOP reimbursements (1.4) (0.1) (1.5) (0.2)
---- ---- ---- ---- $(16.8) $(14.2) $(31.2) $(28.0) ====== ======
====== ====== Total Revenues Operating $404.5 $426.6 $800.1 $857.4
OOP reimbursements 149.5 146.3 314.8 303.3 ----- ----- ----- -----
$554.0 $572.9 $1,114.9 $1,160.7 ====== ====== ======== ======== DST
SYSTEMS, INC. STATEMENT OF INCOME FROM OPERATIONS BY SEGMENT (In
millions) (Unaudited) Three Months Ended Six Months Ended June 30,
June 30, -------- -------- 2009 2008 2009 2008 ---- ---- ---- ----
Income from operations Financial Services $61.9 $74.5 $127.9 $143.9
Output Solutions 5.9 7.4 13.1 21.2 Investments and Other 2.7 3.1
5.8 6.0 Elimination Adjustments (2.0) (2.0) (3.9) (3.7) ---- ----
---- ---- $68.5 $83.0 $142.9 $167.4 ===== ===== ====== ====== DST
SYSTEMS, INC. OTHER SELECTED FINANCIAL INFORMATION (In millions)
(Unaudited) June 30, December 31, Selected Balance Sheet
Information 2009 2008 ---- ---- Cash and cash equivalents $47 $79
Debt 1,331 1,435 Six Months Ended June 30, -------- Capital
Expenditures, by Segment 2009 2008 ---- ---- Financial Services $21
$21 Output Solutions 17 10 Investments and Other 3 7 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 NonGAAP Financial Information." The following items, which
occurred during the quarter ended June 30, 2009, have been treated
as non-GAAP adjustments: -- Other net gains, in the amount of $4.3
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 $1.7 million. The $4.3 million of net
gains on securities and other investments for second quarter 2009
is comprised of net realized gains from sales of available-for-sale
securities of $4.2 million, net unrealized gains on private equity
funds and other investments of $1.3 million and other than
temporary impairments on available-for-sale securities of $1.2
million. -- Gains in the amount of $2.1 million, associated with
the repurchase and extinguishment of senior convertible debentures.
The income tax expense associated with these gains was
approximately $800,000. In addition to the items that occurred in
the quarter ended June 30, 2009 as described above, the following
items, which occurred during the quarter ended March 31, 2009, have
been previously reported as non-GAAP adjustments: -- Gain on equity
interest in Argus, in the amount of $41.7 million, included in
other income, net associated with DST's purchase of the remaining
50% interest of Argus on March 31, 2009 for $57.0 million in cash.
As required by generally accepted accounting principles, the
Company adopted SFAS No. 141(R) Business Combinations ("SFAS 141R")
on January 1, 2009. In accordance with SFAS 141R, the acquisition
of the remaining 50% of Argus was treated as a step acquisition.
Accordingly, DST remeasured its previously held equity interest in
Argus to fair value and recorded a $41.7 million gain. In addition,
the Company recorded an income tax benefit associated with this
transaction of approximately $900,000 related to the elimination of
deferred tax liabilities previously established for equity in
earnings of Argus. In accordance with SFAS No. 109, "Accounting for
Income Taxes," ("SFAS 109"), no income taxes were recorded on the
$41.7 million gain on equity interest in Argus. -- Other net
losses, in the amount of $30.8 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
$11.8 million. The $30.8 million of net losses on securities and
other investments for first quarter 2009 is comprised of net
realized losses from sales of available-for-sale securities of
$800,000, other than temporary impairments on available-for-sale
securities of $25.6 million and net unrealized losses on private
equity funds and other investments of $4.4 million. -- Gains in the
amount of $3.7 million, associated with the repurchase and
extinguishment of senior convertible debentures. The income tax
expense associated with these gains was approximately $1.4 million.
-- An income tax benefit of approximately $5.7 million resulting
from a reduction in income tax related liabilities principally
associated with the completion of an IRS examination in February
2009 for the tax years ended December 31, 2002 through 2005. The
following items, which occurred during the quarter ended June 30,
2008, have been treated as non-GAAP adjustments: -- Other net
losses, in the amount of $6.0 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 benefit associated with these losses was approximately
$2.2 million. The $6.0 million of net losses on securities and
other investments for second quarter 2008 is comprised of net
realized gains from sales of available-for-sale securities of $9.8
million, other than temporary impairments on available-for-sale
securities of $10.0 million and net unrealized losses on private
equity funds and other investments of $5.8 million. In addition to
the items that occurred in the quarter ended June 30, 2008 as
described above, the following items, which occurred during the
quarter ended March 31, 2008, have been previously reported as
non-GAAP adjustments: -- Other net losses, in the amount of $10.5
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 $4.0 million. The $10.5 million of
net losses on securities and other investments for first quarter
2008 is comprised of net realized losses from sales of
available-for-sale securities of $300,000 and other than temporary
impairments on available-for-sale securities of $10.2 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"
("FIN 48"). The decrease in income tax related liabilities is
principally related to the resolution of an IRS examination matter
that was resolved in DST's favor. DST SYSTEMS, INC. RECONCILIATION
OF REPORTED RESULTS TO INCOME ADJUSTED FOR CERTAIN NON- GAAP ITEMS
Three Months Ended June 30, (Unaudited - in millions, except per
share amounts) 2009 ---- Operating Pretax Net Diluted Income Income
Income EPS ------ ------ ------ --- Reported GAAP income $68.5
$80.7 $48.7 $0.97 Adjusted to remove: Included in non-operating
income: Net gains on securities and other investments (4.3) (2.6)
(0.05) Gain on extinguishment of senior convertible debentures
(2.1) (1.3) (0.02) ----- ----- ----- ----- Adjusted Non-GAAP income
$68.5 $74.3 $44.8 $0.90 ===== ===== ===== ===== 2008 ---- Operating
Pretax Net Diluted Income Income Income EPS ------ ------ ------
--- Reported GAAP income $83.0 $78.3 $49.9 $0.85 Adjusted to
remove: Included in non-operating income: Net losses on securities
and other investments 6.0 3.8 0.06 ----- ----- ----- ----- Adjusted
Non-GAAP income $83.0 $84.3 $53.7 $0.91 ===== ===== ===== =====
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 Six Months Ended June 30, (Unaudited - in millions,
except per share amounts) 2009 ---- Operating Pretax Net Diluted
Income Income Income EPS ------ ------ ------ --- Reported GAAP
income $142.9 $166.4 $121.9 $2.44 Adjusted to remove: Included in
non-operating income: Gain on equity interest in Argus Health
Systems (41.7) (42.6) (0.85) Net losses on securities and other
investments 26.5 16.4 0.33 Gain on extinguishment of senior
convertible debentures (5.8) (3.6) (0.07) Reduction in income tax
related liabilities (5.7) (0.12) ------ ------ ----- ----- Adjusted
Non-GAAP income $142.9 $145.4 $86.4 $1.73 ====== ====== ===== =====
2008 ---- Operating Pretax Net Diluted Income Income Income EPS
------ ------ ------ --- Reported GAAP income $167.4 $154.3 $122.1
$1.96 Adjusted to remove: Included in non-operating income: Net
losses on securities and other investments 16.5 10.4 0.17 Reduction
in income tax related liabilities (23.6) (0.38) ------ ------
------ ----- Adjusted Non-GAAP income $167.4 $170.8 $108.9 $1.75
====== ====== ====== ===== 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. DATASOURCE: DST Systems, Inc. CONTACT: Thomas A.
McDonnell, President and Chief Executive Officer, +1-816-435-8684,
or Kenneth V. Hager, Vice President and Chief Financial Officer,
+1-816-435-8603, both of DST Systems, Inc.
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