DST Systems, Inc. Announces First Quarter 2014 Financial Results

       DST Systems, Inc. Announces First Quarter 2014 Financial Results

PR Newswire

KANSAS CITY, Mo., April 24, 2014

KANSAS CITY, Mo., April 24, 2014 /PRNewswire/ --DST Systems, Inc. (NYSE: DST)
reported consolidated net income of $100.4 million ($2.37 per diluted share)
for the first quarter 2014 compared to $93.2 million ($2.04 per diluted share)
for the first quarter 2013. Taking into account certain non-GAAP adjustments,
consolidated net income was $47.5 million ($1.12 per diluted share) for first
quarter 2014 compared to $45.0 million ($0.99 per diluted share) for first
quarter 2013.

"I am encouraged by the positive operating results we are delivering and the
progress we are making on our strategic initiatives during the first quarter
of 2014. We have continued to effectively utilize our liquidity to advance our
business strategy, with a focus on investing in activities that drive
recurring revenue and support the expansion of our existing relationships in
our key vertical markets. We expect to continue to make investments in our
core operating businesses and maintain a disciplined approach of reviewing the
assets in our business portfolio," said Steve Hooley, President and CEO of
DST.

Consolidated Financial Highlights

Operating Results

First quarter 2014 diluted earnings per share increased $0.13 or 13.1% from
first quarter 2013, taking into account non-GAAP adjustments, principally from
the following:

  oConsolidated operating revenues (excluding out-of-pocket reimbursements)
    increased $16.0 million or 3.3% to $505.2 million, as compared to first
    quarter 2013.
  oConsolidated income from operations increased $1.6 million or 2.3% to
    $72.7 million, as compared to first quarter 2013.
  oOther non-operating income benefited from the absence of a foreign
    currency translation loss of $6.6 million ($0.09 per diluted share) that
    was recorded in 2013.
  oThe tax rate for first quarter 2014 was 36.8%, as compared to 33.8% in
    first quarter 2013, primarily from a higher mix of domestic earnings.
  oWeighted average diluted shares outstanding for first quarter 2014 were
    42.4 million, a decrease of 3.2 million shares or 7.0% from first quarter
    2013, primarily as a result of share repurchases during 2013.

Monetization Activity

  oDST received $109.4 million of pretax cash proceeds from the monetization
    of investment assets during first quarter 2014, consisting of $50.2
    million from sales of marketable securities (including $44.6 million from
    the sale of 600,000 shares of State Street Corporation) and $59.1 million
    of distributions/dividends from private equity funds and other private
    company investments.

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 "Reconciliation of
Reported Results to Income Adjusted for Certain Non-GAAP Items."

Segment Results

Financial Services Segment

Operating revenues for the Financial Services Segment (excluding out-of-pocket
reimbursements) for first quarter 2014 increased $13.6 million or 5.6% to
$256.4 million as compared to first quarter 2013. The increase in operating
revenues was primarily driven from increased revenues at ALPS due to organic
growth at existing clients and favorable market conditions. DST Brokerage
Solutions had increased revenues from conversions of new clients and organic
growth from existing clients. These revenue increases were partially offset by
declines in mutual fund registered shareowner account processing due to lower
registered accounts primarily as a result of subaccounting conversions.

Financial Services Segment income from operations increased $0.7 million or
1.7% during first quarter 2014 to $42.1 million primarily from increased
operating revenues, partially offset by increased costs at ALPS and DST
Brokerage Solutions to support higher revenues as well as higher costs
associated with new business initiatives. Operating margin for first quarter
2014 was 16.4% as compared to 17.1% in 2013. Excluding deferred compensation
costs (which are offset within other income), the operating margin was 16.7%
for first quarter 2014 as compared to 18.8% for first quarter 2013.

Total mutual fund shareowner accounts increased by 1.2 million to 98.1 million
accounts during first quarter 2014. Registered shareowner accounts processed
at March 31, 2014 were 71.1 million, a decrease of 0.1 million accounts from
December 31, 2013 and a decrease of 3.9 million accounts from March 31, 2013.
For the three months ended March 31, 2014, 0.5 million registered accounts
have converted to subaccounts. Consistent with our prior estimates,
conversions of registered accounts to subaccounts are currently estimated to
be four to five million accounts during 2014. The number of accounts estimated
to convert from various DST platforms is based upon information obtained from
clients. There are a number of factors that will affect the actual amount of
conversions and the timing of those conversions.

Healthcare Services Segment

Healthcare Services Segment operating revenues (excluding out-of-pocket
reimbursements) during first quarter 2014 increased $12.0 million or 15.0% to
$92.0 million as compared to first quarter 2013, primarily as a result of a
7.5% increase in pharmacy claims paid associated with increased Medicare and
Medicaid members and increased medical claims transaction volume from existing
clients as well as from new full service clients that successfully converted
to DST's medical claims processing platform since first quarter 2013.
Additionally, revenues increased from software services and support associated
with the implementation of the Affordable Care Act, and an increase in
discount card services and other ancillary services.

Healthcare Services Segment income from operations increased $2.1 million
during first quarter 2014 to $11.7 million. The increase in operating income
is primarily due to higher revenues. Costs and expenses increased from new
client conversion activities and increased staffing costs associated with
supporting the new and existing client growth. Operating margin for first
quarter 2014 was 12.7% as compared to 12.0% in 2013.

Customer Communications Segment

Customer Communications Segment operating revenues (excluding out-of-pocket
reimbursements) were $167.5 million in first quarter 2014, a decrease of $7.7
million from first quarter 2013. North America operating revenues decreased
$8.6 million, or 6.8%, to $118.2 million in first quarter 2014 primarily from
previously announced client losses, a client moving certain print production
in-house during 2014 and negative foreign currency impacts from the Canadian
business. U.K. operating revenues increased $0.9 million, or 1.9% to $49.3
million in first quarter 2014, as a result of the impact of foreign currency
exchange rates and higher volumes from new and existing clients.

Customer Communications Segment income from operations decreased $1.8 million
during first quarter 2014 to $17.4 million. Operating income in North America
decreased $1.3 million to $15.9 million and in the U.K. decreased $0.5 million
to $1.5 million as compared to the same period in 2013. Lower revenues,
partially offset by reduced operating costs contributed to lower North America
operating income. The U.K. operating income decline is the result of increased
operating costs from higher personnel costs to support the increased revenue,
partially offset by lower depreciation. Customer Communications Segment
operating margin for first quarter 2014 was 10.4% as compared to 11.0% in
2013. North America operating margin was 13.5% in first quarter 2014 as
compared to 13.6% in first quarter 2013, while the U.K. operating margin was
3.0% in first quarter 2014 and 4.1% in first quarter 2013.

Investments and Other Segment

Investments and Other Segment operating revenues for first quarter 2014
decreased $0.1 million or 0.7% as compared to first quarter 2013. Investments
and Other Segment income from operations increased $0.4 million during first
quarter 2014 to $3.4 million primarily from lower depreciation expense
attributable to real estate sold or held for sale.

Other Financial Results

Equity in earnings of unconsolidated affiliates

The following table summarizes the Company's equity in earnings of
unconsolidated affiliates (in millions):

       Three Months Ended
       March 31,
       2014        2013
BFDS   $  1.8      $ 1.8
IFDS   2.1         1.9
Other  1.5         1.9
       $  5.4      $ 5.6

BFDS equity in earnings remained consistent from first quarter 2013. Lower
shareowner processing revenues associated with reduced levels of accounts
serviced were offset by higher revenues from other ancillary services.

The increase in IFDS equity in earnings from first quarter 2013 is primarily
the result of higher revenues from increased accounts serviced and
reimbursements received for client conversion costs associated with previously
announced new wealth management clients. Increased revenues at IFDS were
partially offset by conversion-related expenses and reduced earnings from an
equity method investment (Cofunds Ltd.) that was sold by IFDS in second
quarter 2013. As previously mentioned, the expenses for the wealth management
conversion activities will be recognized as incurred, however the revenue
under these contracts will be recognized when various contractual milestones
are met.

The decrease in other equity in earnings is primarily the result of lower
earnings from real estate investments.

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 reported this information on
a non-GAAP basis. The non-GAAP measures are reconciled to the corresponding
GAAP measures in the attached financial schedules titled "Reconciliation of
Reported Results to Income Adjusted for Certain Non-GAAP Items" that accompany
this earnings release. In making these non-GAAP adjustments, the Company takes
into account the impact of items that are not necessarily ongoing in nature,
that do not have a high level of predictability associated with them or that
are non-operational in nature. Generally, these items include net gains on
dispositions of business units, net gains (losses) associated with securities
and other investments, restructuring and impairment costs and other similar
items. Management believes the exclusion of these items provides a useful
basis for evaluating underlying business unit performance, but should not be
considered in isolation and is not in accordance with, or a substitute for,
evaluating business unit performance utilizing GAAP financial information.

Management uses non-GAAP measures in its budgeting and forecasting processes
and to further analyze its financial trends and "operational run-rate," as
well as making financial comparisons to prior periods presented on a similar
basis. The Company believes that providing such adjusted results allows
investors and other users of DST's financial statements to better understand
DST's comparative operating performance for the periods presented.

DST's management uses each of these non-GAAP financial measures in its own
evaluation of the Company's performance, particularly when comparing
performance to past periods. DST's non-GAAP measures may differ from similar
measures by other companies, even if similar terms are used to identify such
measures. Although DST's management believes non-GAAP measures are useful in
evaluating the performance of its business, DST acknowledges that items
excluded from such measures may have a material impact on the Company's income
from operations, pretax income, net income and earnings per share calculated
in accordance with GAAP. Therefore, management typically uses non-GAAP
measures in conjunction with GAAP results. Investors and users of our
financial information should also consider the above factors when evaluating
DST's results.

* * * * *

Safe Harbor Statement

Certain material presented in the press release includes forward-looking
statements intended to qualify for the safe harbor from liability established
by the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not limited to, (i) all statements, other than
statements of historical fact, included in this press release that address
activities, events or developments that we expect or anticipate will or may
occur in the future or that depend on future events, or (ii) statements about
our future business plans and strategy and other statements that describe the
Company's outlook, objectives, plans, intentions or goals, and any discussion
of future operating or financial performance. Whenever used, words such as
"may," "will," "would," "should," "potential," "strategy," "anticipates,"
"estimates," "expects," "project," "predict," "intends," "plans," "believes,"
"targets" and other terms of similar meaning are intended to identify such
forward-looking statements. Forward-looking statements are uncertain and to
some extent unpredictable, and involve known and unknown risks, uncertainties
and other important factors that could cause actual results to differ
materially from those expressed or implied in, or reasonably inferred from,
such forward-looking statements. Factors that could cause results to differ
materially from those anticipated include, but are not limited to, the risk
factors and cautionary statements included in the Company's periodic and
current reports (Forms 10-K, 10-Q and 8-K) 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 new information, future events or otherwise.



DST SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(In millions, except per share amounts)

(Unaudited)
                                                Three Months Ended
                                                March 31,
                                                2014      2013
Operating revenues                              $ 505.2   $ 495.2
Out-of-pocket reimbursements                    178.6     187.2
Total revenues                                  683.8     682.4
Costs and expenses                              583.7     574.6
Depreciation and amortization                   32.0      33.2
Income from operations                          68.1      74.6
Interest expense                                (6.6)     (9.6)
Other income, net                               93.6      73.2
Equity in earnings of unconsolidated affiliates 5.4       5.6
Income before income taxes                      160.5     143.8
Income taxes                                    60.1      50.6
Net income                                      $ 100.4   $ 93.2
Weighted average common shares outstanding      42.0      44.3
Weighted average diluted shares outstanding     42.4      45.6
Basic earnings per share                        $ 2.39    $ 2.10
Diluted earnings per share                      $ 2.37    $ 2.04
Cash dividends per share of common stock        $ 0.30    $ 0.30





DST SYSTEMS, INC.

SEGMENT FINANCIAL INFORMATION

(In millions)

(Unaudited)
               Three Months Ended March 31, 2014
               Financial  Healthcare  Customer        Investments  Elimination  Consolidated
                                                      /
               Services   Services   Communications               Adjustments  Total
                                                      Other
Operating      $  244.3   $  92.0     $   165.4       $   3.5      $  —         $   505.2
revenues
Intersegment
operating      12.1       —           2.1             10.7         (24.9)       —
revenues
Out-of-pocket  13.7       1.4         166.0           —            (2.5)        178.6
reimbursements
Total revenues 270.1      93.4        333.5           14.2         (27.4)       683.8
Costs and      215.9      76.8        307.1           8.8          (24.9)       583.7
expenses
Depreciation
and            16.7       4.9         9.0             2.0          (0.6)        32.0
amortization
Income (loss)
from           $  37.5    $  11.7     $   17.4        $   3.4      $  (1.9)     $   68.1
operations
Capital        $  15.6    $  2.4      $   7.7         $   0.3      $  —         $   26.0
expenditures

               Three Months Ended March 31, 2013
               Financial  Healthcare  Customer        Investments  Elimination  Consolidated
                                                      /
               Services   Services    Communications               Adjustments  Total
                                                      Other
Operating      $  238.0   $  80.0     $   173.2       $   4.0      $  —         $   495.2
revenues
Intersegment
operating      10.8       —           2.0             10.3         (23.1)       —
revenues
Out-of-pocket  12.0       1.3         175.9           —            (2.0)        187.2
reimbursements
Total revenues 260.8      81.3        351.1           14.3         (25.1)       682.4
Costs and      197.6      69.5        321.1           8.8          (22.4)       574.6
expenses
Depreciation
and            15.8       4.7         10.8            2.5          (0.6)        33.2
amortization
Income (loss)
from           $  47.4    $  7.1      $   19.2        $   3.0      $  (2.1)     $   74.6
operations
Capital        $  13.4    $  2.3      $   6.4         $   1.7      $  —         $   23.8
expenditures





DST SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(In millions)

(Unaudited)
                                           March 31,   December 31,
                                           2014        2013
ASSETS
Current assets
Cash and cash equivalents                  $ 140.1     $  62.5
Funds held on behalf of clients            303.4       316.3
Client funding receivable                  42.0        50.2
Accounts receivable                        372.7       343.4
Other assets                               73.8        70.0
                                           932.0       842.4
Investments                                778.0       881.3
Unconsolidated affiliates                  291.9       288.1
Properties                                 413.5       445.2
Intangible assets                          133.6       137.4
Goodwill                                   423.7       423.7
Other assets                               103.3       72.4
Total assets                               $ 3,076.0   $  3,090.5
LIABILITIES AND EQUITY
Current liabilities
Current portion of debt                    $ 282.1     $  283.6
Client funds obligations                   345.4       366.5
Accounts payable                           83.2        86.7
Accrued compensation and benefits          102.1       154.3
Deferred revenues and gains                77.3        71.6
Income taxes payable                       36.0        —
Other liabilities                          124.3       110.1
                                           1,050.4     1,072.8
Long-term debt                             387.2       399.4
Income taxes payable                       130.1       124.2
Deferred income taxes                      227.3       255.4
Other liabilities                          37.8        54.9
Total liabilities                          1,832.8     1,906.7
Stockholders' equity                       1,243.2     1,183.8
Total liabilities and stockholders' equity $ 3,076.0   $  3,090.5
Common shares outstanding                  42.1        41.8





DST SYSTEMS, INC.

RECONCILIATION OF REPORTED RESULTS TO INCOME ADJUSTED FOR CERTAIN NON-GAAP
ITEMS

Three Months Ended March 31,

(Unaudited - in millions, except per share amounts)
                           2014
                           Operating      Pretax        Net           Diluted
                           Income         Income        Income        EPS
Reported GAAP income       $   68.1       $  160.5      $  100.4      $  2.37
    Adjusted to remove:
    Included in operating
    income:
    Employee termination
    expenses - Financial   2.5            2.5           1.6           0.04
    Services
    Advisory costs -       2.1            2.1           1.3           0.03
    Financial Services (1)
    Included in
    non-operating income:
    Net gain on securities
    and other investments  —              (90.0)        (55.8)        (1.32)
    (2)
Adjusted Non-GAAP income   $   72.7       $  75.1       $  47.5       $  1.12
                           2013
                           Operating      Pretax        Net           Diluted
                           Income         Income        Income        EPS
Reported GAAP income       $   74.6       $  143.8      $  93.2       $  2.04
    Adjusted to remove:
    Included in operating
    income:
    Contract termination
    payment - Financial    (6.0)          (6.0)         (3.7)         (0.08)
    Services
    Loss accrual -
    Healthcare Services    2.5            2.5           2.5           0.06
    (3)
    Included in
    non-operating income:
    Net gain on securities
    and other investments  —              (72.3)        (44.8)        (0.98)
    (2)
    Income tax items (4)   —              —             (2.2)         (0.05)
Adjusted Non-GAAP income   $   71.1       $  68.0       $  45.0       $  0.99
Note: See the Use of Non-GAAP Financial Information section for management's
reasons for providing non-GAAP financial information.



Descriptions of Non-GAAP Adjustments
    Advisory costs incurred in connection with a matter involving a
(1) significant shareholder (the Argyros Group) are recorded within Costs and
    expenses.
    Net gain on securities and other investments is comprised of net realized
(2) gains from sales of available-for-sale securities, other than temporary
    impairments on available-for-sale securities and net gains on private
    equity funds and other investments.
    Loss accruals are recorded within Costs and expenses. An incremental loss
(3) accrual was recorded in 2013 for a previously disclosed regulatory inquiry
    regarding the processing of certain pharmacy claims during the period 2006
    to 2009 in the Healthcare Services Segment.
(4) Income tax items relate to benefits resulting from the resolution of
    refund claims for historical research and experimentation credits.



DST SYSTEMS, INC.

STATISTICAL INFORMATION

(Unaudited - in millions, except as noted)
                                            March 31,  December 31,  March 31,
                                            2014       2013          2013
U.S. mutual fund shareowner accounts
processed:
Registered Accounts - non tax-advantaged    30.7       30.6          33.6
Registered Accounts - tax-advantaged        40.4       40.6          41.4
                                            71.1       71.2          75.0
Subaccounts                                 27.0       25.7          20.0
Total                                       98.1       96.9          95.0
International mutual fund shareowner
accounts processed:
IFDS U.K.                                   10.8       10.2          9.5
IFDS L.P. (Canada)                          12.5       11.6          11.5
Defined contribution participant accounts   7.1        6.9           7.1
ALPS (in billions of U.S. dollars):
Assets Under Management                     $  12.8    $   11.8      $  9.0
Assets Under Administration                 151.8      147.7         115.5
Automatic Work Distributor workstations     210.9      209.7         207.9
(in thousands)
DST Health Solutions covered lives          23.9       23.5          23.1



                                           Three Months Ended
                                           March 31,
                                           2014     2013
Argus pharmacy paid claims                 117.4    109.2
Customer Communications Images Produced:
              North America                2,254.6  2,598.0
              United Kingdom               555.1    543.5
              Total                        2,809.7  3,141.5
Customer Communications Packages Mailed:
              North America                488.6    600.6
              United Kingdom               196.6    192.5
              Total                        685.2    793.1

DST SYSTEMS, INC.

STATISTICAL INFORMATION

(Unaudited - in millions, except as noted)
                                                Three Months Ended
                                                March 31,
                                                2014     2013
Changes in Registered Accounts:
Beginning balance                               71.2     75.7
New client conversions                          —        0.3
Subaccounting conversions to DST platforms      —        (0.7)
Subaccounting conversions to non-DST platforms  (0.5)    (0.7)
Conversions to non-DST platforms                (0.1)    —
Organic growth                                  0.5      0.4
Ending balance                                  71.1     75.0
Changes in Subaccounts:
Beginning balance                               25.7     12.4
New client conversions                          —        5.7
Conversions from non-DST registered platforms   0.6      0.5
Conversions from DST's registered accounts      —        0.7
Organic growth                                  0.7      0.7
Ending balance                                  27.0     20.0
Defined contribution participant accounts:
Beginning balance                               6.9      6.1
New client conversions                          —        1.1
Organic growth (decline)                        0.2      (0.1)
Ending balance                                  7.1      7.1



Logo - http://photos.prnewswire.com/prnh/20131023/CG03088LOGO

SOURCE DST Systems, Inc.

Contact: Gregg Wm. Givens, Senior Vice President, Chief Financial Officer and
Treasurer, DST Systems, Inc., 333 West 11th Street, Kansas City, MO
64105-1594, (816) 435-5503
 
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