DST Systems, Inc. Announces Third Quarter 2017 Financial Results

KANSAS CITY, Mo., Oct. 20, 2017 /PRNewswire/ -- DST Systems, Inc. (NYSE: DST) reported consolidated net income attributable to DST of $48.5 million ($0.79 per diluted share) for the third quarter 2017 compared to $273.3 million ($4.13 per diluted share) for the third quarter 2016. Net income attributable to DST for the nine months ended September 30, 2017 was $370.3 million ($5.91 per diluted share) compared to $384.4 million ($5.72 per diluted share) for the nine months ended September 30, 2016.

Income from continuing operations attributable to DST Systems, Inc. ("DST Earnings"), which excludes discontinued operations, was $48.8 million ($0.79 per diluted share) for the third quarter 2017 compared to $50.5 million ($0.76 per diluted share) for the third quarter 2016. DST Earnings for the nine months ended September 30, 2017 was $365.8 million ($5.84 per diluted share) compared to $124.4 million ($1.85 per diluted share) for the nine months ended September 30, 2016.

Taking into account certain non-GAAP adjustments, DST Earnings were $46.5 million ($0.76 per diluted share) for the third quarter 2017 compared to $50.7 million ($0.77 per diluted share) for the third quarter 2016, and $140.3 million ($2.24 per diluted share) for the nine months ended September 30, 2017 compared to $137.0 million ($2.04 per diluted share) for the nine months ended September 30, 2016.     

"We are pleased with our third quarter results, which demonstrate the capabilities and strengths of our teams around the world as we continue to execute on our key initiatives to win business and grow organically in the face of an environment that continues to be challenging and competitive," said Steve Hooley, Chairman, CEO and President of DST. "Our third quarter results demonstrate strong execution on our organic growth initiatives, particularly in our Healthcare business which recorded double digit revenue growth absent the client migrations previously disclosed. We also continue to make progress on effectively integrating Boston Financial Data Services ("BFDS") and International Financial Data Services U.K. ("IFDS U.K."). The integration of people and systems are ahead of schedule and we are seeing the benefits of the synergy savings."

Consolidated Financial Highlights

Operating Results

Third quarter 2017 diluted earnings per share from continuing operations, after non-GAAP adjustments, was $0.76, a decrease of $0.01 or 1.3% from third quarter 2016. Significant items impacting the quarterly results include the following:

• Consolidated operating revenues increased $159.3 million or 43.6% to $524.8 million as compared to third quarter 2016, primarily as a result of the 2017 acquisitions of the remaining interests in BFDS and IFDS U.K. which contributed $161.6 million of incremental operating revenues during third quarter 2017.
    
• Consolidated operating income on a GAAP basis decreased $18.5 million to $55.8 million as compared to third quarter 2016. Consolidated operating income, after non-GAAP adjustments, decreased $1.1 million or 1.5% to $72.5 million as compared to third quarter 2016. The decrease in operating income was primarily due to increased performance-based stock compensation expense and higher information technology spend partially offset by the operating income from the acquisitions of the remaining interests in BFDS and IFDS U.K. in 2017.
    
• Equity in earnings of unconsolidated affiliates decreased $2.8 million to $4.2 million as compared to third 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 third quarter 2017 were 61.6 million, a decrease of 4.5 million shares or 6.8% from third quarter 2016, primarily as a result of share repurchases during 2016 and 2017.

Share Repurchase Activity

During the third quarter 2017, the Company spent $75.0 million to repurchase approximately 1.2 million shares of DST common stock resulting in $225.0 million remaining under the share repurchase plan that was approved in second quarter 2017.

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." On a GAAP basis, operating income for the third quarter 2017 for each segment was as follows: $35.6 million for the Domestic Financial Services segment, $1.8 million for the International Financial Services segment and $18.4 million for the Healthcare Services segment.

Segment Results

Domestic Financial Services Segment

Operating revenues for the Domestic Financial Services segment for third quarter 2017 increased $57.9 million or 23.4% to $305.3 million as compared to third quarter 2016. The operating revenue increase was primarily driven by operating revenues from BFDS, which contributed approximately $55.8 million of incremental revenues during the third quarter 2017. Excluding the BFDS operating revenues in 2017, operating revenues for the Domestic Financial Services segment increased $2.1 million or 0.8%. This additional increase in operating revenues was due to higher fund flows at ALPS as well as organic growth in ancillary products, partially offset by lower revenue resulting from the exit of certain product offerings and lower subaccounting and mutual fund registered shareowner account processing revenues. Also, software license revenues of $4.1 million in third quarter 2017 were $1.9 million lower as compared to third quarter 2016.

Domestic Financial Services segment operating income decreased $5.2 million or 10.1% during third quarter 2017 to $46.2 million as compared to third quarter 2016. The decrease in operating income was primarily due to higher non-cash stock compensation expense as a result of increasing the expected vesting of certain performance stock units coupled with lower software license revenue. Operating expense also increased as a result of additional spending to support our information technology transformation initiative, as well as higher run-rate costs for security and other infrastructure requirements. These decreases to operating income were partially offset by the operating income from the acquisition of the remaining interests in BFDS during 2017. Operating margin for third quarter 2017 was 15.1% as compared to 20.8% in 2016.

International Financial Services Segment

Operating revenues for the International Financial Services segment for third quarter 2017 increased $102.5 million to $129.4 million as compared to third quarter 2016. The operating revenue increase was primarily driven by the acquisition of the remaining interests in IFDS U.K., which contributed $105.8 million of incremental operating revenues during the third quarter 2017, partially offset by lower revenues as a result of the previously announced contract termination of a wealth management client. Software license revenues of $3.0 million in third quarter 2017 were $1.0 million higher as compared to third quarter 2016.

International Financial Services segment operating income increased $4.6 million or 184.0% during third quarter 2017 to $7.1 million as compared to third quarter 2016. The increase in operating income was primarily due to the acquisition of the remaining interest in IFDS U.K. and increased software license revenues, partially offset by operating costs associated with on-going development and implementation efforts for our wealth management platform clients. Operating margin for third quarter 2017 was 5.5% as compared to 9.3% in 2016.

Healthcare Services Segment

Healthcare Services segment operating revenues decreased $1.9 million or 1.8% during third quarter 2017 to $104.2 million as compared to third quarter 2016. The decrease was primarily attributable to the previously announced client migrations, which resulted in approximately $13.1 million lower revenues during the third quarter 2017. Excluding the customer migrations, Healthcare Services segment operating revenues increased $11.2 million or 12.0%. This increase in operating revenues was primarily the result of organic growth and the expansion of high-value services we are offering to clients in both the medical and pharmacy businesses, as well as a $0.3 million increase in software license revenue to $2.0 million in third quarter 2017. Operating revenues were also adversely impacted by lower consulting and professional services revenues in the medical business driven by continued uncertainty of healthcare regulations as compared to the prior year.

Healthcare Services segment operating income decreased $0.5 million or 2.5% during third quarter 2017 to $19.2 million. The decrease was primarily due to the client migrations partially 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. Operating margin for third quarter 2017 was 18.4% as compared to 18.6% in the third 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.