UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
October 26, 2005 (October 25, 2005)
DST SYSTEMS, INC.
(Exact Name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
1-14036 43-1581814
(Commission File Number) (IRS Employer Identification No.)
333 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
(816) 435-1000
(Registrant's telephone number,
including area code)
Not Applicable
(Former name or former address, if changed since last report).
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2.):
Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 2.02 Results of Operations and Financial Condition
See attached as Exhibit 99.1 to this Form 8-K a News Release dated
October 25, 2005 ("Earnings Press Release") concerning the announcement of
financial results for the quarter ended September 30, 2005.
The information in this Item 2.02, and Exhibit 99.1 to this Current
Report on Form 8-K, shall not be deemed "filed" for the purposes of or otherwise
subject to the liabilities under Section 18 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Unless expressly incorporated into a
filing of DST under the Securities Act of 1933, as amended (the "Securities
Act"), or the Exchange Act made after the date hereof, the information contained
in this Item 2.02 and Exhibit 99.1 hereto shall not be incorporated by reference
into any filing of DST, whether made before or after the date hereof, regardless
of any general incorporation language in such filing.
ITEM 7.01 Regulation FD Disclosure
The Earnings Press Release attached as Exhibit 99.1 to this Form 8-K
announces a new Share Repurchase Program to purchase 6,000,000 shares of common
stock between October 25, 2005 and through and including July 31, 2008.
The information in this Item 7.01, shall not be deemed "filed" for the
purposes of or otherwise subject to the liabilities under Section 18 of the
Exchange Act. Unless expressly incorporated into a filing of DST under the
Securities Act or the Exchange Act made after the date hereof, the information
contained in this Item 7.01 shall not be incorporated by reference into any
filing of DST, whether made before or after the date hereof, regardless of any
general incorporation language in such filing. The furnishing of information
under this Item 7.01 is not an indication that this Item 7.01 contains material
information that is not otherwise publicly available.
ITEM 9.01 Financial Statements and Exhibits
(c). Exhibits.
Exhibit
Number Description
99.1 News Release dated October 25, 2005
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized on this 26th day of October, 2005.
DST SYSTEMS, INC.
By: /s/ Randall D. Young
Name: Randall D. Young
Title: Vice President, General Counsel, Secretary
Exhibit 99.1
DST SYSTEMS, INC. ANNOUNCES THIRD QUARTER 2005 FINANCIAL RESULTS AND EXPANSION
OF SHARE REPURCHASE PROGRAM
KANSAS CITY, MO. (October 25, 2005) - Consolidated net income for DST Systems,
Inc. (NYSE: DST) for the third quarter 2005 was $154.3 million ($1.97 per
diluted share) compared to third quarter 2004 net income of $52.5 million ($0.61
per diluted share). On July 1, 2005, DST completed the sale of the capital stock
of its wholly-owned subsidiaries DST Interactive, Inc. and DST Innovis, Inc.
(collectively "Innovis Entities") to Amdocs Ltd. (NYSE: DOX) and recognized a
pretax gain of $153.8 million. The Innovis Entities essentially comprised DST's
Customer Management segment. In conjunction with this transaction, DST incurred
$6.9 million of compensation related costs associated with the vesting of
restricted stock previously granted to employees of the Innovis Entities. In
addition, DST sold an office building that was leased by EquiServe during the
third quarter of 2005 and recorded an impairment charge on certain real-estate
properties not used in DST operations, resulting in a net pretax gain of $20.5
million. Third quarter 2005 results also include a pretax gain on the sale of
securities of $2.8 million.
The following table summarizes the net income effect of the above mentioned
items:
Net Income / (Loss) Diluted
(in millions) EPS
-----------------------------------
2005 2004 2005 2004
-------- ------ -------- -----
Gain on sale of Innovis Entities $ 91.1 $ $ 1.16 $
Innovis Entities restricted stock vesting (4.4) (0.05)
Net gain on real estate transactions 12.0 0.15
Net gains on securities 1.8 0.3 0.02
-------- ------ -------- -----
$ 100.5 $ 0.3 $ 1.28 $
======== ====== ======== =====
The management of DST analyzes historical results adjusted for certain 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 (losses) on dispositions of business
units, net gains (losses) associated with securities, restructuring costs and
other similar items. Management believes the exclusion of these items provides a
better basis for evaluating underlying business unit performance.
Excluding the above mentioned items recorded in both the third quarters of 2005
and 2004, DST's consolidated net income for the quarter ended September 30, 2005
was $53.8 million ($0.69 per diluted share) compared to third quarter 2004 net
income of $52.2 million ($0.61 per diluted share), a 3.1% increase in net income
and a 13.1% increase in diluted earnings per share.
Year to date, DST's consolidated net income was $373.8 million ($4.67 per
diluted share) in 2005 compared to $155.9 million ($1.80 per diluted share) in
2004. DST had previously completed the sale of EquiServe to Computershare Ltd.
(AUS: CPU) and completed the exchange transaction with Computer Sciences
Corporation (NYSE: CSC) in which DST exchanged its shares of CSC for CSC Health
Plan Solutions, Inc., now known as DST Health Solutions, Inc. Year to date
results for 2005 and 2004 include the following items:
Net Income / (Loss) Diluted
(in millions) EPS
-----------------------------------
2005 2004 2005 2004
-------- ------ -------- -----
Gain on sale of EquiServe $ 70.0 $ $ 0.87 $
BFDS deferred gain on EquiServe 7.0 0.09
Gain on sale of Innovis Entities 91.1 1.14
Innovis Entities restricted stock vesting (4.4) (0.05)
Net gains on securities, principally
CSC in 2005 46.3 4.1 0.58 0.05
Costs directly related to transactions (4.5) (0.06)
Net gain on real estate transactions 13.9 0.17
Facility and other consolidation costs (0.4) (0.01)
-------- ------ -------- -----
$ 219.4 $ 3.7 $ 2.74 $0.04
======== ===== ======== =====
Excluding the above mentioned items recorded in both 2005 and 2004, DST's
consolidated net income for the nine months ended September 30, 2005 was
$154.4 million ($1.93 per diluted share) compared to 2004 net income for the
same period of $152.2 million ($1.76 per diluted share), a 1.4% increase in
net income and a 9.7% increase in diluted earnings per share.
Share Repurchases and New Share Repurchase Program Authorization
In the third quarter and through early October 2005, DST purchased
11,714,000 shares of its common stock at an aggregate cost of $613.9 million
and an average per share price of $52.41. These repurchases completed the
previous share repurchase authorization. The share repurchases resulted in
an average number of diluted shares outstanding for the quarter of 78.5
million, which increased diluted earnings per share (excluding one-time
items listed above) by approximately $0.03. At September 30, 2005, actual
shares outstanding were 72.2 million.
Effective October 25, 2005, DST's Board of Directors authorized a new
6,000,000 share repurchase plan through July 31, 2008. The plan allows, but
does not require, the repurchase of common stock in open market and private
transactions. Since DST went public in 1995, DST has repurchased 74.3
million shares.
Financial Overview
Revenues
The following table summarizes the Company's revenues by segment (in
millions):
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- ---------
Revenues
Financial Services
Operating $ 287.0 $ 281.5 $ 879.7 $ 833.1
OOP reimbursements 35.9 38.9 134.6 115.7
-------- -------- -------- ---------
$ 322.9 $ 320.4 $1,014.3 $ 948.8
======== ======== ======== =========
Output Solutions
Operating $ 120.7 $ 108.5 $ 368.3 $ 340.0
OOP reimbursements 153.2 141.1 457.3 426.0
-------- -------- -------- ---------
$ 273.9 $ 249.6 $ 825.6 $ 766.0
======== ======== ======== =========
Customer Management
Operating $ $ 49.1 $ 96.6 $ 145.7
OOP reimbursements 13.4 26.4 40.9
-------- -------- -------- ---------
$ $ 62.5 $ 123.0 $ 186.6
======== ======== ======== =========
Investments and Other
Operating $ 16.3 $ 17.1 $ 51.9 $ 48.8
OOP reimbursements 0.1 0.1 0.3 0.3
-------- -------- -------- ---------
$ 16.4 $ 17.2 $ 52.2 $ 49.1
======== ======== ======== =========
Eliminations
Operating $ (12.4) $ (29.3) $ (78.5) $ (85.2)
OOP reimbursements (20.9) (37.2) (63.0)
-------- -------- -------- ---------
$ (12.4) $ (50.2) $ (115.7) $ (148.2)
======== ======== ======== =========
Total Revenues
Operating 411.6 $ 426.9 $1,318.0 $1,282.4
OOP reimbursements 189.2 172.6 581.4 519.9
-------- -------- -------- ---------
$ 600.8 $ 599.5 $1,899.4 $1,802.3
======== ======== ======== =========
Consolidated operating revenues for the third quarter decreased $15.3 million
over the prior year quarter to $411.6 million. Consolidated operating revenues
during the third quarter were negatively impacted by the sale of the EquiServe
and the Innovis Entities businesses, which recorded operating revenues of $66.7
million and $47.6 million, respectively, during the third quarter 2004.
Operating revenues were positively impacted by the inclusion of revenues from
DST Health Solutions, higher Output Solutions revenues and from lower
consolidated revenue eliminations on sales by Output Solutions to the Innovis
Entities. Consolidated Out-of-Pocket ("OOP") reimbursements increased $16.6
million or 9.6% from the prior year quarter, principally from higher Output
Solutions volumes.
Consolidated operating revenues include approximately $15.4 million of software
license revenues in the third quarter 2005, an increase of $6.0 million over
comparable business unit license revenues in the third quarter 2004. These
revenues are principally from DST International (investment management systems),
DST Health Solutions (medical claims processing systems), and AWD (workflow
management and CRM solutions). While license revenues are not a significant
percentage of DST's total operations, they can significantly impact earnings in
the period in which they are recognized. Revenues and operating results from
individual license sales depend heavily on the timing and size of the contract.
Consolidated operating revenues for the nine months ended September 30, 2005
increased $35.6 million or 2.0% over the comparable prior year period to $1.318
billion. Lower revenues resulting from the sale of EquiServe and the Innovis
Entities were offset by higher revenues from the inclusion of DST Health
Solutions, increased lock\line related revenues, increased U.S. mutual fund
servicing revenues, higher Output Solutions operating revenues and from lower
consolidated revenue eliminations on sales by Output Solutions to the Innovis
Entities.
Income from operations
The following table summarizes the Company's income from operations by segment
(in millions):
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- ---------
Income (loss) from operations
Financial Services $ 70.9 $ 62.3 $ 182.6 $ 185.1
Output Solutions 7.5 4.5 25.9 17.7
Customer Management (6.9) 9.3 10.7 27.2
Investments and Other 23.2 3.5 34.4 11.0
-------- -------- -------- ---------
$ 94.7 $ 79.6 $ 253.6 $ 241.0
======== ======== ======== =========
Consolidated income from operations for the quarter increased $15.1 million or
19.0% over the prior year quarter primarily from the sale of an office building
that was leased by EquiServe, offset by an impairment charge on certain
real-estate properties, which resulted in a net pretax gain of $20.5 million.
Furthermore, consolidated income from operations during the third quarter was
negatively impacted by the sale of the EquiServe and the Innovis Entities
businesses and the restricted stock vesting at the Innovis Entities, but was
positively impacted by increased financial services revenues, operational
efficiencies, the inclusion of DST Health Solutions and improved operating
results from the Output Solutions segment. For the nine months ended September
30, 2005, income from operations increased $12.6 million or 5.2% over the
comparable prior year period, primarily from the net pretax gains related to
DST's real estate transactions, higher Output Solutions segment income and from
the inclusion of DST Health Solutions, offset by the sale of the Innovis
Entities and EquiServe.
In November 2004, the Company adopted the use of restricted stock for its equity
compensation plan. The Company made five year grants which had the effect of
fixing the cost over that period. For the three and nine month periods ended
September 30, 2005, this expense was $14.1 million ($0.18 per share) and $27.2
million ($0.34 per share), respectively, including approximately $6.9 million in
the third quarter 2005 associated with accelerated vesting in connection with
the sale of the Innovis Entities. No similar equity compensation charges were
recorded in the income statement during the three and nine months ended
September 30, 2004.
Segment Results
Financial Services Segment
Financial Services segment operating revenues (excluding OOP reimbursements) for
the third quarter 2005 were $287.0 million, an increase of $5.5 million or 2.0%
over the third quarter 2004.
U.S. Financial Services segment operating revenues in the third quarter 2005
increased $1.8 million over the prior year quarter. The increase in U.S.
revenues resulted from the inclusion of DST Health Solutions revenues, higher
lock\line related servicing revenues, higher software license and maintenance
fee revenue and higher U.S. mutual fund servicing revenues, offset by a decrease
of $66.7 million in EquiServe revenues as a result of the sale of this business.
U.S. mutual fund open shareowner accounts processed totaled 101.5 million at
September 30, 2005, a net increase of 1.3 million or 1.3% since June 30, 2005
and an increase of 9.3 million or 10.1% from the 92.2 million serviced at
December 31, 2004. During the quarter, approximately 400,000 shareowner accounts
converted from a new client. For the nine months ended September 30, 2005,
approximately 5.6 million shareowner accounts converted from new clients.
Tax-advantaged retirement and educational savings accounts serviced (which
include 529 and Coverdell savings plan accounts) totaled 38.6 million at
September 30, 2005, an increase of 500,000 or 1.3% for the quarter and an
increase of 2.3 million or 6.3% from the 36.3 million serviced at December 31,
2004. The increase in tax-advantaged accounts serviced during the quarter
resulted primarily from increased IRAs and Section 529 savings plan accounts.
During the quarter, DST received no new client commitments. The Company
currently has a commitment from one new insurance client with 200,000 401(k)
participants. This new client will be converted in the fourth quarter of 2005.
DST is actively pursuing approximately 15 potential new clients with a combined
total of approximately 22 million accounts.
International Financial Services segment operating revenues totaled $32.4
million for the third quarter 2005, an increase of $3.7 million or 12.9% from
the prior year quarter, primarily from higher software license revenues.
Financial Services segment income from operations for the third quarter 2005
increased $8.6 million or 13.8% from the prior year quarter to $70.9 million,
primarily from higher lock\line related, mutual fund and AWD revenues and
operational efficiencies partially offset by the loss of income from the
EquiServe business. Costs and expenses (including OOP costs) decreased $2.1
million compared to the prior year quarter, primarily from the absence of the
EquiServe business offset by the inclusion of Health Solutions. Depreciation and
amortization costs decreased $4.0 million or 14.1% compared to the prior year
quarter, primarily attributable to the absence of Fairway software amortization,
partially offset by amortization of intangible assets acquired in the
acquisition of DST Health Solutions. Operating margin for the quarter increased
from 22.1% in the prior year quarter to 24.7% principally from the reasons
mentioned above.
Financial Services segment operating revenues for the nine months ended
September 30, 2005 were $879.7 million, an increase of $46.6 million or 5.6%
over the prior year nine month period, principally from the inclusion of DST
Health Solutions, higher lock\line servicing revenues, higher U.S. mutual fund
servicing revenues and higher software licensing revenue, offset by a decrease
in revenues from EquiServe. EquiServe operating revenues for the year to date
period through the date of sale were $99.9 million. Financial Services segment
income from operations for the nine months ended September 30, 2005 decreased
$2.5 million or 1.4% over the prior year period to $182.6 million. Costs and
expenses (including OOP costs) increased 10.8% in the nine months ended
September 30, 2005 from higher lock\line related costs to support the revenue
growth, the inclusion of DST Health Solutions and transaction costs related to
the EquiServe and Innovis Entities sale transactions. Depreciation and
amortization decreased 7.5% in the nine months ended September 30, 2005,
primarily attributable to the absence of Fairway software amortization,
partially offset by amortization related to intangible assets obtained in the
DST Health Solutions acquisition. The operating margin for the year decreased
from 22.2% in the prior year period to 20.8%, principally from the reasons
mentioned above and restricted stock amortization costs.
Output Solutions Segment
Total revenues for the Output Solutions segment during the third quarter 2005
were $273.9 million, an increase of $24.3 million or 9.7% over third quarter
2004. Output Solutions segment operating revenues for the quarter ended
September 30, 2005 were $120.7 million, an increase of $12.2 million or 11.2%
from third quarter 2004, principally from higher telecommunications, video
service, brokerage and mutual fund industry revenues. Items mailed increased
6.7% to 428 million compared to third quarter 2004.
Output Solutions segment income from operations for the third quarter increased
$3.0 million over the prior year quarter to $7.5 million, primarily from higher
revenues. Costs and expenses (including OOP costs) increased $21.6 million or
9.0% from the third quarter 2004, reflecting higher personnel and other costs
associated with the increase in operating revenues and higher OOP costs
associated with higher volumes. Depreciation and amortization decreased $200,000
compared to the prior year quarter.
Output Solutions segment operating revenues for the nine months ended September
30, 2005 were $368.3 million, an increase of $28.3 million or 8.3% from the
prior year period, principally from higher telecommunications, banking, video
service and mutual fund revenues, partially offset by lower brokerage industry
revenues. Segment income from operations for the nine months ended September 30,
2005 increased $8.2 million or 46.3% from the prior year period to $25.9
million, primarily from higher revenues. 2004 results include $600,000 of costs
associated with facility and other consolidations.
Customer Management Segment
DST sold the Customer management business to Amdocs on July 1, 2005. In
conjunction with the closing of this transaction, DST incurred approximately
$6.9 million of compensation related costs associated with accelerated vesting
of restricted stock previously granted to employees of the Innovis Entities.
Investments and Other Segment
Investments and Other segment operating revenues, primarily rental income for
facilities leased to the Company's operating segments, were $16.3 million for
the quarter ended September 30, 2005, a decrease of $0.8 million from the prior
year quarter, primarily from lower rent revenue due to the previously mentioned
sale of an office building. Investments and Other segment income from operations
for the quarter ended September 30, 2005 increased $19.7 million over the prior
year quarter, primarily from the sale of an office building, offset by an
impairment charge on certain real-estate properties not used for DST operations,
which resulted in a net pretax gain of $20.5 million.
Equity in earnings of unconsolidated affiliates
The following table summarizes the Company's equity in earnings (losses) of
unconsolidated affiliates (in millions):
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- ---------
BFDS $ 4.6 $ 3.3 $ 24.2 $ 11.4
IFDS 4.0 2.4 11.8 5.9
Other 0.1 0.5 (0.8)
-------- -------- -------- ---------
$ 8.6 $ 5.8 $ 36.5 $ 16.5
======== ======== ======== =========
DST's share of Boston Financial Data Services ("BFDS") earnings for the third
quarter 2005 were $1.3 million higher than the same period of the prior year due
to increased mutual fund accounts serviced. BFDS earnings for the nine months
ended September 30, 2005 increased also from the recognition by DST in the
second quarter of an $11.2 million gain, previously recognized by BFDS but
required to be deferred by DST, as a result of the EquiServe sale. International
Financial Data Services ("IFDS") earnings for the quarter increased primarily
due to higher professional service fees associated with the implementation of
new regulatory requirements. Accounts serviced by IFDS U.K. were 5.3 million at
September 30, 2005, a decrease of 100,000 or 1.9% compared to June 30, 2005 and
unchanged compared to December 31, 2004 levels. Accounts serviced by IFDS Canada
were 6.3 million at September 30, 2005, an increase of 100,000 million or 1.6%
from June 30, 2005 and December 31, 2004.
Other income, net
Other income was $12.1 million for the third quarter 2005, compared to $5.7
million for the third quarter 2004. Third quarter 2005 results include dividend
and interest income of $8.8 million and net gains on security transactions of
approximately $2.8 million. Third quarter 2004 results include dividend and
interest income of $4.5 million and net gains on security transactions of
approximately $0.5 million. The increase in dividend and interest income during
the third quarter of 2005 is due to a semi-annual dividend on Computershare
common stock and from the investment of cash received in conjunction with the
sales of EquiServe and the Innovis Entities and the CSC exchange.
Other income was $101.9 million for the nine months ended September 30, 2005,
compared to $20.6 million for the prior year period. Year to date 2005 results
include $20.6 million primarily related to interest and dividend income, $76.3
million from the exchange of CSC shares when DST Health Solutions was acquired,
and other net gains on securities transactions. Year to date 2004 results
include $12.3 million related to interest and dividend income and $6.2 million
primarily related to net gains on securities transactions.
Gain on sale of businesses
During the three months ended September 30, 2005, DST sold the Innovis Entities
and recognized a pretax gain of $153.8 million. During the nine months ended
September 30, 2005, DST sold the Innovis Entities business and the EquiServe
business and recorded total pretax gains of $274.2 million.
Interest expense
Interest expense was $14.3 million for the quarter ended September 30, 2005, an
increase of $200,000 from the prior year quarter, principally from higher
average interest rates. Interest expense was $49.0 million for the nine months
ended September 30, 2005, compared to $40.8 million in the prior year period due
to higher average interest rates, the recognition of $1.2 million of unamortized
debt issuance costs as a result of the replacement of the Company's syndicated
line of credit facility in the second quarter of 2005 and interest expense
associated with the forward stock purchase agreement in 2005.
Income taxes
DST's effective tax rate was 39.5% for the quarter and 39.4% for the nine months
ended September 30, 2005. For the quarter and nine months ended September 30,
2004, the effective tax rate was 31.8% and 34.3%, respectively. The effective
tax rates for 2005 are higher principally due to higher effective tax rates
relating to the CSC exchange transaction, the EquiServe sale, the Innovis
Entities sale and the office building sale. The Company expects its recurring
effective tax rate for the remainder of 2005 to be 34.9%.
Sale of Customer Management Business
On July 1, 2005, the Company completed the sale of the capital stock of the
Innovis Entities to Amdocs Limited. The Innovis Entities business, which
essentially represented the Company's customer management segment, had
approximately 700 employees and recorded operating revenues of $183 million for
the year ended December 31, 2004. The Company recorded operating revenues
related to the Innovis Entities of $0 and $93.9 million for the three and nine
months ended September 30, 2005, respectively.
After taxes, deferrals, and other expenses, the Company recorded a net after-tax
gain of approximately $91.1 million in the third quarter of 2005. In conjunction
with the closing of this transaction, certain compensation charges were
incurred, including the vesting of restricted stock granted to employees of
Innovis Entities. This resulted in $6.9 million of compensation charges during
the three months ended September 30, 2005.
Accounting Standards
On September 30, 2005, the FASB issued an exposure draft on a proposed
accounting standard that would amend SFAS 128, Earnings per Share, to clarify
guidance for mandatorily convertible instruments, the treasury stock method,
contingently issuable shares, and contracts that may be settled in cash or
shares. DST is currently evaluating the impact of this proposed accounting
standard. DST currently believes that this proposed amendment would impact the
way the Company treats the incremental shares to be issued from the assumed
conversion of the $840 million of convertible debentures issued in August 2003
in calculating diluted earnings per share. The proposed amendment, which is
designed for convergence with international accounting standards, would require
the use of the "if-converted" method from the date of issuance of the
convertible debentures. The proposed amendment would remove the ability of a
company to support the presumption that the convertible securities will be
satisfied in cash and not converted into shares of common stock. Accordingly,
the Company's stated intention to settle the conversions with cash for the
principal and accrued and unpaid interest and issue common stock for any
conversion value amount over the principal and accrued and unpaid interest
amounts would no longer be accepted under SFAS 128. Comments to the FASB on this
exposure draft are due by November 30, 2005, and the final statement is expected
to be issued in the first quarter of 2006. The statement would be effective for
interim and annual periods ending after June 15, 2006. Retrospective application
would be required for all changes to SFAS 128, except that retrospective
application would be prohibited for contracts that were either settled in cash
prior to adoption or modified prior to adoption to require cash settlement. For
DST, this would require retroactive restatement of the Company's diluted
earnings per share calculations subsequent to the issuance of the convertible
debentures. Under the revised SFAS 128 "if converted" method included in the
exposure draft, in calculating diluted earnings per share the Company would need
to increase net income for the interest expense associated with the convertible
debentures, net of tax, and increase the incremental shares assumed to be issued
upon conversion by 17.1 million shares, the amount of shares that would be
issued if all $840 million of convertible debentures would be converted to
equity. Under this method, diluted earnings per share would have been $1.67 and
$0.57 for the three months ended September 30, 2005 and 2004, respectively, and
$4.02 and $1.68 for the nine months ended September 30, 2005 and 2004,
respectively. The above pro-forma information presents only the effect on
diluted earnings per share of the "if converted" method included in the exposure
draft, but does not include any other computational changes (i.e. treasury stock
method considerations) discussed in the exposure draft. DST is still evaluating
the remaining aspects of this proposed accounting standard.
The proposed change in accounting principles would affect the calculation of
diluted earnings per share during the period the debentures are outstanding, but
does not affect DST's ability to ultimately settle the convertible debentures in
cash, shares or any combination thereof.
* * * * *
The information and comments above may include forward-looking statements
respecting DST and its businesses. Such information and comments are based on
DST's views as of today, and actual actions or results could differ. There could
be a number of factors affecting future actions or results, including those set
forth in DST's latest periodic report (Form 10-K or 10-Q) filed with the
Securities and Exchange Commission. All such factors should be considered in
evaluating any forward-looking comment. The Company will not update any
forward-looking statements in this press release to reflect future events.
DST SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(Unaudited)
For the Three Months For the Nine Months
ended September 30, ended September 30,
2005 2004 2005 2004
-------- -------- --------- ---------
Operating revenues $ 411.6 $ 426.9 $1,318.0 $1,282.4
Out-of-pocket reimbursements 189.2 172.6 581.4 519.9
-------- -------- --------- ---------
Total revenues 600.8 599.5 1,899.4 1,802.3
Costs and expenses 470.2 478.7 1,535.7 1,445.0
Depreciation and amortization 35.9 41.2 110.1 116.3
-------- -------- --------- ---------
Income from operations 94.7 79.6 253.6 241.0
Interest expense (14.3) (14.1) (49.0) (40.8)
Other income, net 12.1 5.7 101.9 20.6
Gain on sale of businesses 153.8 274.2
Equity in earnings of
unconsolidated affiliates 8.6 5.8 36.5 16.5
-------- -------- --------- ---------
Income before income taxes 254.9 77.0 617.2 237.3
Income taxes 100.6 24.5 243.4 81.4
-------- -------- --------- ---------
Net income $ 154.3 $ 52.5 $ 373.8 $ 155.9
======== ======== ========= =========
Average common shares outstanding 74.8 83.9 77.3 84.1
Diluted shares outstanding 78.5 86.1 80.1 86.4
Basic earnings per share $ 2.06 $ 0.63 $ 4.84 $ 1.85
Diluted earnings per share $ 1.97 $ 0.61 $ 4.67 $ 1.80
DST SYSTEMS, INC.
OTHER SELECTED FINANCIAL INFORMATION
(In millions)
(Unaudited)
September 30, December 31,
Selected Balance Sheet Information 2005 2004
-----------------------------------------
Cash $ 190 $ 107
Total debt 1,383 1,483
For the Nine Months
Ended September 30,
Selected Cash Flow Information 2005 2004
--------------------- -------------------
Capital expenditures
Operating segments $ 96 $ 96
Investments and Other segment 10 41
DST Systems, Inc.
333 West 11th Street
Kansas City, MO
64105-1594
Contact:
Thomas A. McDonnell (816) 435-8684
President and Chief Executive Officer
Kenneth V. Hager (816) 435-8603
Vice President and Chief Financial Officer