DST Systems, Inc. Announces Second Quarter 2017 Financial Results

KANSAS CITY, Mo., July 27, 2017 /PRNewswire/ -- DST Systems, Inc. (NYSE: DST) reported consolidated net income attributable to DST of $75.4 million ($1.21 per diluted share) for the second quarter 2017 compared to $53.0 million ($0.79 per diluted share) for the second quarter 2016. Net income attributable to DST for the six months ended June 30, 2017 was $321.8 million ($5.09 per diluted share) compared to $111.1 million ($1.64 per diluted share) for the six months ended June 30, 2016.

Income from continuing operations attributable to DST Systems, Inc. ("DST Earnings"), which excludes discontinued operations, was $73.5 million ($1.18 per diluted share) for the second quarter 2017 compared to $34.3 million ($0.51 per diluted share) for the second quarter 2016. DST Earnings for the six months ended June 30, 2017 was $317.0 million ($5.01 per diluted share) compared to $73.9 million ($1.09 per diluted share) for the six months ended June 30, 2016.

Taking into account certain non-GAAP adjustments, DST Earnings were $47.3 million ($0.76 per diluted share) for the second quarter 2017 compared to $47.6 million ($0.71 per diluted share) for the second quarter 2016, and $93.8 million ($1.49 per diluted share) for the six months ended June 30, 2017 compared to $86.3 million ($1.27 per diluted share) for the six months ended June 30, 2016.

"Our second quarter results demonstrate execution on our organic growth initiatives and reflect the value potential of our acquisitions of Boston Financial Data Services, Inc. ("BFDS") and International Financial Data Services Limited ("IFDS U.K.") in their first full quarter of contribution as wholly-owned businesses. I am encouraged by the hard work and dedication that our teams are putting forth to effectively integrate these businesses and achieve meaningful synergies," said Steve Hooley, Chairman, CEO and President of DST. "We are navigating challenging and competitive markets and uncertain regulatory environments that are pressuring our outlook. We continue to balance our cost structure to ensure we are operating efficiently, however, we also recognize the need to support the growth outlook of our businesses with appropriate resources and investments. We are confident that, with our superior solutions and services and industry-leading position, we can continue to successfully win significant business, support our customers as a leader in our industry and create value for our shareholders."

Consolidated Financial Highlights

Operating Results

Second quarter 2017 diluted earnings per share from continuing operations, after non-GAAP adjustments, was $0.76, an increase of $0.05 or 7.0% from second quarter 2016. Significant items impacting the quarterly results include the following:

• Consolidated operating revenues increased $162.3 million or 43.4% to $536.2 million as compared to second quarter 2016, primarily as a result of the 2017 acquisition of the remaining interests in BFDS and IFDS U.K. which contributed $170.6 million of incremental operating revenues during second quarter 2017.
• Consolidated operating income increased $7.6 million or 11.0% to $76.5 million as compared to second quarter 2016. The increase in operating income was primarily due to the acquisition of the remaining interests in BFDS in 2017.
• Equity in earnings of unconsolidated affiliates decreased $6.3 million to $3.9 million as compared to second quarter 2016, primarily due to the 2017 acquisitions of the remaining interests in previously unconsolidated joint ventures, BFDS and IFDS U.K.
• Weighted average diluted shares outstanding for second quarter 2017 were 62.5 million, a decrease of 4.7 million shares or 7.0% from second quarter 2016, primarily as a result of share repurchases during 2016 and 2017.

Share Repurchase Activity and Stock Split

During the second quarter 2017, the Company spent $75.0 million to repurchase approximately 1.2 million shares of DST common stock exhausting our previous $300 million share repurchase program. In May 2017, the Board of Directors of DST approved a new $300 million share repurchase program. During July 2017, an additional $75.0 million was spent to repurchase approximately 1.2 million shares of DST common stock, resulting in $225.0 million remaining under the new share repurchase plan.

In addition, the Board declared a quarterly cash dividend on the Company's outstanding common stock of $0.18 per share that was paid on June 9, 2017, an approximate 3 percent increase over the previous quarterly rate.

The Board also approved a two-for-one split of DST's common stock. The stock split was in the form of a stock dividend that was paid on June 8, 2017 to shareholders of record at the close of business on May 26, 2017. All share and per share information provided herein has been adjusted to reflect the share split.

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

Domestic Financial Services Segment

Operating revenues for the Domestic Financial Services segment for second quarter 2017 increased $58.2 million or 22.9% to $312.0 million as compared to second quarter 2016. The operating revenue increase was primarily driven by operating revenues from BFDS, which contributed approximately $63.6 million of incremental revenues during the second quarter 2017. In addition, operating revenues increased from higher fund flows at ALPS as well as organic growth in ancillary products. These increases were partly offset by decreased revenues resulting from the exit of certain product offerings and lower subaccounting and mutual fund registered shareowner account processing revenue. Software license revenues of $4.3 million in second quarter 2017 were also $0.2 million lower as compared to second quarter 2016.

Domestic Financial Services segment operating income increased $11.4 million or 25.3% during second quarter 2017 to $56.5 million as compared to second quarter 2016. The increase in operating income was primarily due to higher revenues from BFDS and cost containment initiatives which have resulted in lower headcount. The increase was partially offset by an increase in spending to support our information technology transformation initiative. Operating margin for second quarter 2017 was 18.1% as compared to 17.8% in 2016.

International Financial Services Segment

Operating revenues for the International Financial Services segment for second quarter 2017 increased $106.7 million to $137.9 million as compared to second quarter 2016. The operating revenue increase was primarily driven by the acquisition of the remaining interests in IFDS U.K., which contributed $107.0 million of incremental operating revenues during the second quarter 2017, partially offset by lower revenues as a result of the sale of DST Billing Solutions in the fourth quarter of 2016. Software license revenues of $2.7 million in second quarter 2017 were $0.2 million higher as compared to second quarter 2016.

International Financial Services segment operating income decreased $3.0 million or 69.8% during second quarter 2017 to $1.3 million as compared to second quarter 2016. The decrease in operating income was primarily due to increased operating costs associated with development and implementation efforts for our wealth management platform clients in Australia and the U.K. Operating margin for second quarter 2017 was 0.9% as compared to 13.8% in 2016.

As previously disclosed, a wealth management platform client, for whom IFDS U.K. and Bluedoor were completing multi-year development and implementation efforts, notified us on May 2, 2017 of its intent to terminate for convenience certain of its agreements with us. On June 30, 2017, a formal termination agreement was agreed to by both parties. As a result of the termination, during the second quarter 2017, DST accelerated the recognition of previously deferred revenues and recognized contractual termination payments received totaling $93.2 million as incremental operating revenues. DST also incurred bad debt expense of $34.5 million for previously invoiced services performed prior to the termination and $5.2 million of other termination-related charges. These financial impacts, along with the associated tax effect, are included in the adjustments to determine non-GAAP results within our "Reconciliation of Reported Results to Non-GAAP Results - Continuing Operations." We have assessed the recoverability of goodwill and other identified acquired assets recorded in connection with the acquisition of the remaining interests in IFDS U.K. and determined the assets were not impaired.

Healthcare Services Segment 

Healthcare Services segment operating revenues decreased $2.7 million or 2.6% during second quarter 2017 to $101.3 million as compared to second quarter 2016. The decrease was primarily attributable to the previously announced client migrations, reductions in membership related to exchanges and lower consulting and development revenues due to a decline in healthcare technology spending resulting from the ongoing uncertainty around government policy changes. These reductions were substantially offset by organic growth and the expansion of the high-value services we are offering to existing clients in both the medical and pharmacy businesses, as well as $2.6 million of software license revenues, a $0.6 million increase from second quarter 2017 as compared to second quarter 2016.

Healthcare Services segment operating income decreased $0.8 million or 4.1% during second quarter 2017 to $18.7 million, primarily due to higher staffing costs supporting the new and existing client growth and lower consulting and development revenue partially offset by revenue growth from high-value services and lower depreciation. Operating margin for second quarter 2017 was 18.5% as compared to 18.8% in the second quarter 2016.

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 decreased as it discontinued recording equity in earnings of IFDS U.K. and BFDS on March 27, 2017 and March 30, 2017, respectively, as a result of the previously discussed acquisitions.

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 businesses, net gains (losses) associated with securities and other investments, acquired intangible asset amortization, restructuring and impairment costs and other similar items. Our non-GAAP DST Earnings and non-GAAP diluted earnings per share are also adjusted for the income tax impact of the above items, as applicable. The income tax impact of each item is calculated by applying the statutory rate and local tax regulations in the jurisdiction in which the item was incurred. 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. Any forward-looking statements made in this press release speak only as of the date of this press release. Except as may be required by applicable law, the Company undertakes no obligation to update any forward-looking statements in this press release to reflect new information, future events or otherwise.