Oct. 21, 2009 (PR Newswire) -- KANSAS CITY, Mo., Oct. 21 /PRNewswire-FirstCall/ -- Consolidated net income for DST Systems, Inc. (NYSE: DST) was $60.9 million ($1.21 per diluted share) for third quarter 2009 compared to $50.2 million ($0.90 per diluted share) for third quarter 2008. Consolidated net income for the nine months ended September 30, 2009 was $182.8 million ($3.65 per diluted share) compared to $172.3 million ($2.86 per diluted share) for the nine months ended September 30, 2008. Taking into account certain non-GAAP adjustments explained herein, consolidated net income was $47.2 million ($0.94 per diluted share) for third quarter 2009 compared to $53.2 million ($0.95 per diluted share) for third quarter 2008, and $133.6 million ($2.67 per diluted share) for the nine months ended September 30, 2009 compared to $162.1 million ($2.69 per diluted share) for the nine months ended September 30, 2008.
Third quarter 2009 financial and operational highlights were as follows:
-- Consolidated operating revenues (excluding out-of-pocket reimbursements)
decreased $18.6 million or 4.5% to $395.6 million as compared to third
quarter 2008 primarily from a $8.5 million decline in Output Solutions
and a $8.1 million decline in Financial Services. The Output Solutions
operating revenue decline reflects lower revenue per item mailed and
image produced during third quarter 2009 as compared to 2008. The
Financial Services decline resulted from lower international revenues
from decreased demand for professional services and changes in foreign
currency exchange rates, lower DST Health Solutions professional
services revenues, reductions in mutual fund shareowner processing
service revenues and lower AWD software license revenues, partially
offset by the inclusion of $22.2 million of incremental operating
revenues resulting from the consolidation of Argus Health Systems, Inc.
("Argus").
-- Total mutual fund shareowner accounts serviced at September 30, 2009
increased 1.4 million accounts or 1.2% from June 30, 2009 to 120.3
million accounts. Registered accounts and subaccounts serviced by DST
at September 30, 2009 were 109.7 million and 10.6 million, respectively.
-- Consolidated income from operations decreased $16.3 million or 20.7% to
$62.6 million as compared to third quarter 2008. Financial Services
income from operations decreased $14.4 million during third quarter 2009
attributable to an increase in deferred compensation costs of
approximately $6.5 million (the effect of which is offset as unrealized
appreciation on trading securities in other income, net), consolidation
of losses incurred by Argus, and lower revenues from mutual fund
shareowner processing, international operations, DST Health Solutions
and AWD. Output Solutions income from operations decreased
approximately $400,000 during third quarter 2009 primarily from lower
operating revenues. Income from operations for Investments and Other
decreased $1.5 million from third quarter 2008, principally from a real
estate impairment recorded in third quarter 2009.
-- Equity in earnings of unconsolidated affiliates decreased $1.2 million
or 13.3% to $7.8 million as compared to third quarter 2008 attributable
to lower equity in earnings of BFDS and IFDS, partially offset by
improved results in other unconsolidated affiliates.
-- Reported other income, net reflected income of $33.2 million in third
quarter 2009 as compared to $2.8 million in third quarter 2008, an
increase of $30.4 million. Taking into account certain non-GAAP
adjustments affecting both third quarter 2009 and 2008 results, other
income was $10.8 million in third quarter 2009, an increase of $3.1
million as compared to third quarter 2008. On this basis, the increase
in other income as compared to third quarter 2008 is derived from
unrealized appreciation on trading securities (the effect of which is
offset as increased deferred compensation costs included in costs and
expenses in the Financial Services Segment), partially offset by lower
dividend income and interest income. Dividend income during third
quarter 2009 decreased $3.4 million as compared to third quarter 2008
primarily from a $2.6 million decline in dividend income from State
Street Corporation ("State Street") primarily from State Street lowering
its quarterly dividend rate to $0.01 per share in first quarter 2009.
The components of other income (expense), net are as follows (in millions):
Three Months Ended
September 30,
---------
2009 2008
---- ----
Adjusted non-GAAP other income, net $10.8 $7.7
Net gains (losses) on securities and other
investments 22.3 (4.9)
Gain on extinguishment of senior convertible
debentures 0.1
----- ----
Reported GAAP other income, net $33.2 $2.8
===== ====
The $22.3 million of net gains on securities and other investments for third quarter 2009 is comprised of net realized gains from sales of available-for-sale securities of $22.5 million and net losses on private equity funds and other investments of $0.2 million. Included in the $22.5 million of net realized gains is a $17.6 million gain from the sale of approximately 4.6 million shares of Computershare Ltd.
The Company repurchased $9.7 million in principal amount of the original $540 million 4.125% Series A senior convertible debentures during third quarter 2009. The outstanding amount of the Series A and Series B senior convertible debentures were $408.8 million and $171.3 million at September 30, 2009, respectively.
As previously announced, on October 1, 2009 DST entered into separate privately negotiated exchange agreements under which it exchanged $190.4 million in aggregate principal of the Company's outstanding 4.125% Series A senior convertible debentures due 2023 for an equal amount of 4.125% Series C senior convertible debentures due 2023. The terms of the Series C senior convertible debentures are in most material respects substantially consistent with the terms of the Series A senior convertible debentures, with two differences being that the Series C debenture holders do not have the option to require the Company to purchase the debentures until August 15, 2014 and the Company has the right to redeem the Series C debentures beginning August 15, 2013.
Share-related activity during third quarter 2009 was as follows:
-- The Company had 49.7 million shares outstanding at September 30, 2009.
During third quarter 2009, the Company used proceeds and income tax
benefits from stock option exercises to repurchase 55,000 shares of DST
common stock for $2.4 million or approximately $43.64 per share. At
September 30, 2009, there were approximately 2.4 million shares
remaining under the existing share repurchase authorization plan.
-- Diluted shares outstanding for third quarter 2009 were 50.2 million
shares, a decrease of 6.0 million shares or 10.7% from third quarter
2008, and an increase of 200,000 shares or 0.4% from second quarter
2009. The decrease from third quarter 2008 is primarily attributable to
shares repurchased after September 30, 2008, the absence of dilutive
effects of the convertible debentures in 2009 and lower dilutive effects
of outstanding stock options. The increase from second quarter 2009
resulted from higher dilutive effects of outstanding stock options.
-- Total stock options and restricted stock ("equity units") outstanding at
September 30, 2009 were 8.1 million, of which 5.6 million were stock
options and 2.5 million were restricted stock. Equity units decreased
100,000 units or 1.2% from June 30, 2009 and decreased 400,000 units or
4.7% from September 30, 2008. Approximately 1.6 million and 700,000
shares of restricted stock are scheduled to vest by November 2009 and
January 2010, respectively.
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 third quarter 2009 decreased $8.1 million or 2.8% to $276.3 million as compared to third quarter 2008. Absent $22.2 million net incremental operating revenues resulting from the consolidation of Argus, Financial Services operating revenues decreased $30.3 million or 10.7% during third 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 DST Health Solutions professional services revenues, lower mutual fund shareowner processing service revenues and lower AWD software license revenues.
Professional services provided to international financial services clients decreased from continued lower demand for these services. 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 $2.0 million as compared to third quarter 2008. The decrease in DST Health Solutions professional services is attributable to lower client demand for professional services and the 2008 recognition of $2.5 million of previously deferred professional services revenues. 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 at the end of third quarter 2008), which were partially offset by higher levels of subaccounts serviced. The decline in software license fees is primarily attributable to lower demand in 2009.
The following table summarizes mutual fund shareowner accounts serviced (in millions):
September 30, June 30, December 31, September 30,
2009 2009 2008 2008
---- ---- ---- ----
Registered accounts:
Non tax-advantaged 63.4 63.7 65.4 65.5
Tax-advantaged 46.3 46.3 45.8 47.0
---- ---- ---- ----
109.7 110.0 111.2 112.5
Subaccounts 10.6 8.9 8.9 9.4
---- --- --- ---
Total 120.3 118.9 120.1 121.9
===== ===== ===== =====
Registered accounts serviced decreased 300,000 accounts or 0.3% from the comparable amount at June 30, 2009, comprised of conversions to non-DST subaccounting platforms of 800,000 accounts and conversions to DST's subaccounting platform of 500,000 accounts, partially offset by net increases in existing client accounts of 700,000 and new client conversions of 300,000 accounts. Tax-advantaged accounts were 46.3 million at September 30, 2009, unchanged as compared to June 30, 2009. Tax-advantaged accounts represent 42.2% of total registered accounts serviced at September 30, 2009 as compared to 41.8% at September 30, 2008.
Subaccounts serviced were 10.6 million at September 30, 2009, an increase of 1.7 million subaccounts as compared to June 30, 2009. The increase of 1.7 million subaccounts serviced during third quarter 2009 is due to new client conversions of 900,000 subaccounts, conversions of 500,000 registered accounts from TA2000 and increases in existing client subaccounts of 300,000.
The Company anticipates that 300,000 new registered accounts will be converted to TA2000 in fourth quarter 2009. DST's subaccounting clients have indicated they plan to convert 100,000 new subaccounts to TA2000 Subaccounting from non-DST platforms during fourth quarter 2009. In addition, the Company expects 1.3 million registered accounts will convert to subaccounting platforms during fourth quarter 2009 of which 400,000 accounts will convert to TA2000 Subaccounting.
In summary, based on accounts serviced at September 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 119.8 million, which would be comprised of 108.7 million registered accounts and 11.1 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.
A subaccounting client with approximately 5.0 million subaccounts at September 30, 2009 has notified DST that it intends to terminate its processing agreement with DST. The conversion of these subaccounts to non-DST subaccounting platforms is estimated to occur in the last half of 2010.
