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First quarter 2009 financial and operational highlights were as follows:
- Consolidated operating revenues decreased
$35.2 million or 8.2% to$395.6 million as compared to first quarter 2008 attributable to a$19.1 million decline in Financial Services and a$15.7 million decline in Output Solutions. The Financial Services decline resulted from lower international professional service, software maintenance and license revenues and from changes in foreign currency exchange rates (principally changes between the U.S. Dollar and the British Pound), lower data processing support revenues, and lower mutual fund shareowner processing service revenues. The Output Solutions decline reflects lower items mailed and images produced. - Total mutual fund shareowner accounts serviced at
March 31, 2009 decreased 2.7 million accounts or 2.2% fromDecember 31, 2008 to 117.4 million accounts. The decrease in accounts serviced during first quarter 2009 is comprised of net shareowner account closures of approximately 2.1 million (1.8 million registered accounts and 300,000 subaccounts) and conversions of approximately 600,000 registered accounts to non-DST subaccounting platforms. - Consolidated income from operations decreased
$10.0 million or 11.8% to$74.4 million as compared to first quarter 2008, comprised of decreases of$6.6 million in Output Solutions and$3.4 million in Financial Services. The decrease in Output Solutions is from lower operating revenues. The decrease in Financial Services income from operations is attributable to reduced earnings from mutual fund shareowner processing, lower data processing support revenues and lower international revenues. - Equity in earnings of unconsolidated affiliates decreased
$3.0 million or 34.5% to$5.7 million as compared to first quarter 2008 attributable to lower equity in earnings of BFDS, IFDS and Argus, partially offset by improved results in other unconsolidated affiliates. - DST's dividend income from State Street Corporation ("State Street") was approximately
$2.5 million lower in first quarter 2009 as compared to first quarter 2008 from a previously announced reduction in State Street's quarterly dividend from$0.23 per share in first quarter 2008 to$0.01 per share in first quarter 2009. The reduction in the State Street dividend contributed to an approximate$0.04 reduction in DST's diluted earnings per share during first quarter 2009 and increased DST's effective tax rate as dividends received are taxed at a lower effective income tax rate. - Other income (expense), net reflected income of
$16.2 million in first quarter 2009 as compared to expense of$4.4 million in first quarter 2008, an increase of$20.6 million . Taking into account certain non-GAAP adjustments affecting both first quarter 2009 and 2008 results, other income reflected income of$1.6 million in first quarter 2009, a decrease of$4.5 million as compared to first quarter 2008. On this basis, the decrease in other income as compared to first quarter 2008 is primarily from lower dividend income.
The components of other income (expense), net are as follows (in millions):
For the Three Months Ended
March 31,
--------------------------
2009 2008
--------- ---------
Adjusted non-GAAP other income, net $1.6 $6.1
Gain on equity interest in Argus Health Systems 41.7
Net losses on securities and other investments (30.8) (10.5)
Gain on extinguishment of senior convertible
debentures 3.7
--------- ---------
Reported GAAP other income (expense), net $16.2 $(4.4)
========= =========
As previously announced, DST purchased the remaining 50% interest of Argus Health Systems, Inc. ("Argus") for
The
The Company recorded a
- The Company's income tax rate was 14.6% for first quarter 2009 as compared to 5.0% for first quarter 2008. Taking into account certain non-GAAP adjustments affecting both first quarter 2009 and 2008 results, the Company's income tax rate was 41.5% for first quarter 2009 as compared to 36.2% for first quarter 2008. On this basis, the Company expects its full year 2009 tax rate to be approximately 39.0%. The increase in the Company's income tax rate in 2009 is attributable to valuation allowances recorded against certain international operating losses during 2009 and lower dividend income in 2009 which is taxed at a lower effective tax rate.
Share-related activity during first quarter 2009 was as follows:
- During first quarter 2009, the Company repurchased 100,000 shares of DST common stock for
$2.8 million or approximately$28.00 per share. AtMarch 31, 2009 , there were approximately 2.4 million shares remaining under the existing share repurchase authorization plan. - The Company had approximately 49.7 million shares outstanding at
March 31, 2009 . - Diluted shares outstanding for first quarter 2009 were 49.9 million shares, a decrease of 15.6 million shares or 23.8% from first quarter 2008, and a decrease of 200,000 shares or 0.4% from fourth quarter 2008. The decrease from first quarter 2008 is primarily attributable to shares repurchased after
March 31, 2008 , the absence of dilutive effects of the convertible debentures in 2009 resulting from the Company's average share price during first quarter 2009 being less than$49.08 per share, and lower dilutive effects of outstanding stock options. Diluted shares outstanding atMarch 31, 2009 include approximately 200,000 shares from outstanding stock options. The aggregate dilutive effect of outstanding stock options and convertible debentures decreased by approximately 200,000 shares from fourth quarter 2008 and decreased by approximately 6.7 million shares from first quarter 2008, primarily from decreases in the Company's average share price and lower outstanding stock options. - Total stock options and restricted stock ("equity units") outstanding at
March 31, 2009 were 8.3 million, of which 5.7 million were stock options and 2.6 million were restricted stock. Equity units decreased 200,000 or 2.4% fromDecember 31, 2008 and decreased 400,000 or 4.6% fromMarch 31, 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 first quarter 2009 decreased
The following table summarizes mutual fund shareowner accounts serviced
(in millions):
March 31, December 31, March 31,
2009 2008 2008
--------- ------------ ---------
Registered accounts:
Non tax-advantaged 62.8 65.4 68.1
Tax-advantaged 45.9 45.8 46.9
--------- ------------ ---------
108.7 111.2 115.0
Subaccounts 8.7 8.9 4.9
--------- ------------ ---------
Total 117.4 120.1 119.9
========= ============ =========
Total shareowner accounts serviced at
Registered accounts serviced decreased 2.5 million accounts or 2.2% from the comparable amount at
Subaccounts serviced were 8.7 million at
The Company anticipates that 1.7 million new registered accounts will be converted to TA2000 in 2009 of which 500,000 represent six new client commitments received in first quarter 2009. As mentioned above, DST converted approximately 500,000 registered mutual fund shareowner accounts to TA2000 in early
In summary, based on accounts serviced at
Defined contribution ("DC") participants represent the number of active participants processed on DST's TA2000/TRAC platform. DC participants were 3.8 million at
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
Financial Services segment income from operations for first quarter 2009 totaled
Output Solutions Segment
Output Solutions segment operating revenues (excluding OOP reimbursements) for first quarter 2009 were
Items mailed during first quarter 2009 were 581.5 million, a decrease of 6.0% as compared to the same period in 2008. The decrease in items mailed is due to lower volumes from existing customers and from a special privacy notice completed in 2008 that did not recur in 2009. Images produced during first quarter 2009 were 3.2 billion, a decrease of 15.8% as compared to first quarter 2008. The decrease in images is due to certain telecommunications clients reducing the amount of transaction information included on invoices thereby lowering total images produced and lower volumes from other clients and the absence of the privacy mailing previously mentioned.
Output Solutions segment income from operations for first quarter 2009 totaled
CIO, CTO & Developer Resources
Investments and Other Segment
Investments and Other segment operating revenues, primarily rental income, were
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
March 31,
------------------
2009 2008
------ ------
BFDS $3.7 $5.9
IFDS 2.4 3.5
Argus (1.5) 0.3
Other 1.1 (1.0)
------ ------
$5.7 $8.7
====== ======
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
DST's equity in BFDS earnings for first quarter 2009 decreased
DST's equity in IFDS earnings for first quarter 2009 decreased
DST's equity in Argus losses for first quarter 2009 was
DST's equity in earnings of other unconsolidated affiliates was
Other income (expense), net
Other income, net was
Interest expense
Interest expense was
Income taxes
The Company's tax rate was 41.5% for first quarter 2009 as compared to 36.2% for first quarter 2008. The first quarter 2009 tax rate was negatively impacted from valuation allowances against international deferred tax assets and from lower dividend income, which is taxed at favorable rates. The Company expects its tax rate to be approximately 39.0% for the full year 2009. The 2009 expected tax rate assumes continued valuation allowances on certain international deferred tax assets 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
2008
------------------------------
As As
previously retrospectively
reported restated
---------- ---------------
First quarter $1.12 $1.10
Second quarter 0.86 0.85
Third quarter 0.91 0.90
Fourth quarter 1.43 1.41
Full year 4.28 4.21
Earnings Per Share Proposed Accounting Standard
In
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 Months
Ended March 31,
--------------------
2009 2008
------- -------
Operating revenues $395.6 $430.8
Out-of-pocket reimbursements 165.3 157.0
------- -------
Total revenues 560.9 587.8
Costs and expenses 458.2 472.8
Depreciation and amortization 28.3 30.6
------- -------
Income from operations 74.4 84.4
Interest expense (10.6) (12.7)
Other income (expense), net 16.2 (4.4)
Equity in earnings of unconsolidated
affiliates 5.7 8.7
------- -------
Income before income taxes 85.7 76.0
Income taxes 12.5 3.8
------- -------
Net income $73.2 $72.2
======= =======
Average common shares outstanding 49.7 58.6
Average diluted shares outstanding 49.9 65.5
Basic earnings per share $1.47 $1.23
Diluted earnings per share $1.47 $1.10
DST SYSTEMS, INC.
STATEMENT OF REVENUES BY SEGMENT
(In millions)
(Unaudited)
Three Months Ended
March 31,
------------------
2009 2008
------ ------
Revenues
Financial Services
Operating $267.7 $286.8
OOP reimbursements 17.1 17.8
------ ------
$284.8 $304.6
====== ======
Output Solutions
Operating $127.0 $142.7
OOP reimbursements 148.2 139.2
------ ------
$275.2 $281.9
====== ======
Investments and Other
Operating $15.2 $15.0
OOP reimbursements 0.1 0.1
------ ------
$15.3 $15.1
====== ======
Eliminations
Operating $(14.3) $(13.7)
OOP reimbursements (0.1) (0.1)
------ ------
$(14.4) $(13.8)
====== ======
Total Revenues
Operating $395.6 $430.8
OOP reimbursements 165.3 157.0
------ ------
$560.9 $587.8
====== ======
DST SYSTEMS, INC.
STATEMENT OF INCOME FROM OPERATIONS BY SEGMENT
(In millions)
(Unaudited)
Three Months Ended
March 31,
------------------
2009 2008
------ ------
Income from operations
Financial Services $66.0 $69.4
Output Solutions 7.2 13.8
Investments and Other 3.1 2.9
Elimination Adjustments (1.9) (1.7)
------ ------
$74.4 $84.4
====== ======
DST SYSTEMS, INC.
OTHER SELECTED FINANCIAL INFORMATION
(In millions)
(Unaudited)
March 31, December 31,
Selected Balance Sheet Information 2009 2008
--------- ------------
Cash and cash equivalents $49 $79
Debt 1,411 1,435
Three Months Ended
March 31,
------------------------------
Capital Expenditures, by Segment 2009 2008
--------- ------------
Financial Services $8 $13
Output Solutions 13 2
Investments and Other 1 2
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
- 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 onMarch 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") onJanuary 1, 2009 . In accordance with SFAS 141R, the acquisition of the remaining 50% of Argus will be 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 associate 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 inFebruary 2009 for the tax years endedDecember 31, 2002 through 2005.
The following items, which occurred during the quarter ended
- 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
For the Three Months Ended March 31,
(Unaudited - in millions, except per share amounts)
2009
------------------------------------
Operating Pretax Net Diluted
Income Income Income EPS
--------- ------- ------- -------
Reported GAAP income $74.4 $85.7 $73.2 $1.47
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 30.8 19.0 0.38
Gain on extinguishment
of senior convertible
debentures (3.7) (2.3) (0.05)
Reduction in income tax related
liabilities (5.7) (0.12)
--------- ------- ------- -------
Adjusted Non-GAAP income $74.4 $71.1 $41.6 $0.83
========= ======= ======= =======
2008
------------------------------------
Operating Pretax Net Diluted
Income Income Income EPS
--------- ------- ------- -------
Reported GAAP income $84.4 $76.0 $72.2 $1.10
Adjusted to remove:
Included in non-operating income:
Net losses on securities and
other investments 10.5 6.6 0.10
Reduction in income tax related
liabilities (23.6) (0.36)
--------- ------- ------- -------
Adjusted Non-GAAP income $84.4 $86.5 $55.2 $0.84
========= ======= ======= =======
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.
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