DST Systems, Inc. Announces Second Quarter 2015 Financial Results

KANSAS CITY, Mo., July 23, 2015 /PRNewswire/ -- DST Systems, Inc. (NYSE: DST) reported consolidated net income of $107.5 million ($2.91 per diluted share) for the second quarter 2015 compared to $137.8 million ($3.34 per diluted share) for the second quarter 2014. Consolidated net income for the six months ended June 30, 2015 was $215.3 million ($5.78 per diluted share) compared to $238.2 million ($5.70 per diluted share) for the six months ended June 30, 2014.

Taking into account certain non-GAAP adjustments, consolidated net income was $51.4 million ($1.39 per diluted share) for second quarter 2015 compared to $49.5 million ($1.20 per diluted share) for second quarter 2014, and $104.0 million ($2.79 per diluted share) for the six months ended June 30, 2015 compared to $97.0 million ($2.33 per diluted share) for the six months ended June 30, 2014.

"During the quarter, we continued to significantly invest in critical aspects of our business that protect the integrity and security of the data on our systems, as well as maintain full regulatory compliance for DST and our customers," said Steve Hooley, Chairman, CEO and President of DST. "These investments will be on-going and will be matched to the regulatory environment and security challenges being faced by the industry. While these investments, combined with industry headwinds and foreign exchange, continue to pressure our results, we maintain a strong balance sheet that provides us the leverage necessary to support our continued growth and value creation. We are moving forward cautious about our outlook for the remainder of 2015, however, we are confident that the talented teams across our organization will continue to support the successful execution of our strategic plan, enhance our client service offerings and create value for shareholders."

Consolidated Financial Highlights

Operating Results

Second quarter 2015 diluted earnings per share, after non-GAAP adjustments, was $1.39, an increase of $0.19 or 15.8% from second quarter 2014. Significant items impacting the quarterly results include the following:

• Consolidated operating revenues (excluding out-of-pocket reimbursements) decreased $9.2 million or 1.8% to $500.4 million, as compared to second quarter 2014 primarily due to the sale of DST Global Solutions Ltd. ("Global Solutions") in fourth quarter 2014 and $9.8 million of negative foreign currency movements. Excluding Global Solutions second quarter 2014 operating revenues and foreign currency impacts, consolidated operating revenues increased $16.0 million or 3.2% in second quarter 2015 as compared to 2014.
• Consolidated income from operations decreased $6.5 million or 8.6% to $69.1 million, as compared to second quarter 2014.
• Equity in earnings of unconsolidated affiliates increased $8.9 million to $12.8 million, as compared to second quarter 2014.
• Weighted average diluted shares outstanding for second quarter 2015 were 37.0 million, a decrease of 4.2 million shares or 10.2% from second quarter 2014, primarily as a result of share repurchases during 2015 and throughout 2014.

Monetization and Share Repurchase Activity

• DST received $100.3 million of pretax cash proceeds from the monetization of investment assets during second quarter 2015, consisting of $95.6 million from sales of marketable securities (including $94.5 million from the sale of 1.2 million shares of State Street Corporation), $0.6 million from the sale of real estate assets and $4.1 million from private equity investment distributions.
• During the second quarter 2015, the Company spent $75.0 million to repurchase approximately 600,000 shares of DST common stock. At June 30, 2015, DST had $150.0 million remaining under the existing share repurchase plan.

Recent Business Acquisition

On July 9, 2015, DST agreed to acquire Wealth Management Systems Inc., a leading provider of technology-based rollover services, for $64.0 million, subject to regulatory approvals and other closing conditions. Wealth Management Systems Inc. automates the migration of assets from retirement plans to investment management platforms helping asset managers and broker-dealers grow and retain assets in the retirement marketplace. The closing of this transaction is expected to occur before the end of 2015.

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 Non-GAAP Results."

Segment Results

Financial Services Segment

Operating revenues for the Financial Services segment (excluding out-of-pocket reimbursements) for second quarter 2015 decreased $10.3 million or 3.7% to $271.1 million as compared to second quarter 2014. The operating revenue decline is primarily due to the sale of Global Solutions in fourth quarter 2014 and approximately $4.0 million of negative foreign currency movements. Global Solutions contributed $15.4 million of operating revenue in second quarter 2014. Excluding Global Solutions 2014 results and the negative foreign currency impact during 2015, Financial Services operating revenue increased by $9.1 million, or 3.4%, in second quarter 2015 as compared to 2014 primarily driven from organic and new client growth within Brokerage Solutions, growth within ALPS due to higher assets under management and increased development revenue at Bluedoor. These increases were partly offset by a decline in mutual fund registered shareowner account processing revenue due to lower registered accounts, primarily as a result of subaccounting conversions. Additionally, software license revenues (excluding Global Solutions) of $8.3 million in second quarter 2015 were $3.1 million lower as compared to second quarter 2014 primarily from decreased international business process solutions software revenues.

Financial Services segment income from operations decreased $14.9 million or 26.0% during second quarter 2015 to $42.5 million as compared to second quarter 2014. Global Solutions incurred a loss from operations of $0.5 million in second quarter 2014. Excluding Global Solutions, income from operations decreased $15.4 million or 26.6% as compared to second quarter 2014. The decrease in income from operations resulted primarily from increased technology, security and regulatory compliance costs, as well as other costs incurred to enhance the network infrastructure utilized across all of our operating businesses. Additionally, we have higher costs associated with new business initiatives as we expand our Bluedoor wealth management platform into the U.K. market and make investments to further develop the ALPS, Applied Analytics and Brokerage Solutions service offerings. Operating margin for second quarter 2015 was 15.7% as compared to 20.4% in 2014.

Total mutual fund shareowner accounts decreased by 0.5 million to 97.4 million accounts during second quarter 2015. Registered shareowner accounts processed at June 30, 2015 were 67.4 million, a decrease of 1.1 million accounts from March 31, 2015 and a decrease of 3.5 million accounts from June 30, 2014. For the six months ended June 30, 2015, 1.5 million registered accounts have converted to subaccounts, of which 0.9 million converted to DST's subaccounting platform. Conversions of registered accounts to subaccounts for full year 2015 are currently estimated to be at the low end or slightly below the Company's previous guidance of four to five million accounts in 2015. The number of accounts estimated to convert from various DST platforms is based upon information obtained from clients. There are a variety of factors that could affect the number and timing of registered accounts converting to subaccounts. Subaccounts processed at June 30, 2015 were 30.0 million, an increase of 0.6 million accounts from March 31, 2015 and an increase of 2.4 million accounts from June 30, 2014.

Healthcare Services Segment 

Healthcare Services segment operating revenues (excluding out-of-pocket reimbursements) of $92.1 million during second quarter 2015 were down slightly as compared to second quarter 2014 results of $92.9 million. Lower pharmacy claims processing revenues resulting from a previously announced partial client deconversion on January 1, 2015 were partially offset by organic growth at existing clients. Also positively impacting the change in operating revenues were increased medical claims transaction volumes from existing and new clients, higher business process outsourcing revenues and higher software license revenues.

Healthcare Services segment income from operations increased $3.5 million or 52.2% during second quarter 2015 to $10.2 million primarily due an incremental $5.7 million liability recorded during second quarter 2014 that did not recur in 2015, partially offset by increased staffing costs incurred to expand our clinical, network, and analytic capabilities and enhance client service offerings in order to more effectively compete in the broader competitive pharmacy benefit manager ("PBM") market. Staffing costs were also higher in order to service the increased medical transaction volumes due to growth in business process outsourcing services which generally require a higher level of support. Operating margin for second quarter 2015 was 11.1% as compared to 7.2% in the second quarter 2014.

Customer Communications Segment

Customer Communications segment operating revenues (excluding out-of-pocket reimbursements) were $154.8 million in second quarter 2015, an increase of $2.3 million from second quarter 2014. Excluding $5.8 million of negative foreign currency impacts, Customer Communications segment operating revenues increased by $8.1 million or 5.3%. North America operating revenues increased $4.8 million or 4.7% to $106.8 million in second quarter 2015 primarily from incremental volumes as we continue to convert previously announced new clients, partially offset by unfavorable foreign currency exchange rate movements of $1.1 million related to our Canadian operations. U.K. operating revenues decreased $2.5 million or 5.0% to $48.0 million in second quarter 2015, primarily from $4.7 million of unfavorable foreign currency exchange rates movements, partially offset by revenue growth from new and existing clients.

Customer Communications segment income from operations increased $5.2 million during second quarter 2015 to $16.3 million. North America operating income increased $4.1 million to $13.4 million compared to 2014 and U.K. operating income increased $1.1 million to $2.9 million. Higher operating revenues combined with cost savings achieved from the closure of certain facilities in North America contributed to the growth in North America operating income. The increase in U.K. operating income is the result of revenue growth partially offset by higher operating costs. Customer Communications segment operating margin for second quarter 2015 was 10.5% as compared to 7.3% in 2014. North America operating margin was 12.5% in second quarter 2015 as compared to 9.1% in second quarter 2014, while the U.K. operating margin was 6.0% in second quarter 2015 as compared to 3.6% in second quarter 2014.

Investments and Other Segment

Investments and Other segment operating revenues for second quarter 2015 decreased $1.6 million as compared to second quarter 2014 to $0.7 million. Investments and Other segment income from operations decreased $0.3 million during second quarter 2015 to $0.1 million primarily due to the cumulative impact of the sale of real estate assets occupied by third parties.

Other Financial Results

Equity in earnings of unconsolidated affiliates

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

DST's equity in earnings of unconsolidated affiliates increased primarily from increased earnings from IFDS. The increase in IFDS equity in earnings from second quarter 2014 is primarily the result of higher revenues recognized related to the ongoing conversion activities of the previously announced new wealth management clients in the U.K. In addition, IFDS had higher revenues from organic growth at existing customers and new client processing revenue.

The multi-year implementation efforts for the two new clients are continuing to progress and are expected to be completed in phases. Earnings will continue to be impacted by the rate of progress related to the conversions and therefore may not be consistent period to period throughout the implementation and conversion process. IFDS continues to incur significant costs to develop the new wealth management platform for the U.K. market and expand its infrastructure to prepare for the addition of these new clients and associated services offerings. Beginning in third quarter 2014, IFDS began capitalizing a significant portion of the software development costs which will not begin to be amortized until the underlying modules are placed into production over the next couple of years. Partially offsetting the higher IFDS operating results was negative foreign currency impacts in both the U.K. and Canada.

Use of Non-GAAP Financial Information

In addition to reporting financial information on a GAAP basis, DST has disclosed non-GAAP financial information which has been reconciled to the corresponding GAAP measures in the following financial schedules titled "Reconciliation of Reported Results to Non-GAAP Results." In making these adjustments to determine the non-GAAP results, 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 financial information calculated in accordance with GAAP. Therefore, management typically uses non-GAAP measures in conjunction with GAAP results. These factors should be considered 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.