(Source: PRNewswire-FirstCall)
KANSAS CITY, Mo., July 22 /PRNewswire-FirstCall/ -- Consolidated net income for DST Systems, Inc. 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.
