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 Act of 1934
Date of Report (Date of earliest event reported) July 21, 2004
(Exact name of registrant as specified in its charter)
DST Systems,Inc.
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
Delaware 1-14036 43-1581814
333 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (816) 435-1000
Not Applicable
(Former name or former address, if changed since last report.)
FORM 8-K
DST SYSTEMS, INC.
ITEM 7 FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits.
Exhibit No. Description of Document
99.1 News Release dated July 21, 2004
ITEM 12 RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS
See attached as an Exhibit to this Form 8-K a News Release dated July 21, 2004
concerning the announcement of financial results.
The information in this Current Report on Form 8-K, including the exhibit, 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, and shall
not be deemed to be incorporated by reference into the filings of the registrant
under the Securities Act of 1933.
SIGNATURE
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.
DST Systems, Inc.
/s/ Randall D. Young
Vice President, General Counsel and Secretary
Date: July 22, 2004
Exhibit 99.1
DST SYSTEMS, INC. ANNOUNCES SECOND QUARTER 2004 FINANCIAL RESULTS
KANSAS CITY, MO. (July 21, 2004) - Consolidated net income for DST Systems, Inc.
(NYSE: DST) for the second quarter 2004 was $51.8 million ($0.60 per diluted
share) compared to second quarter 2003 net income of $53.0 million ($0.44 per
diluted share). Second quarter 2004 results include $2.4 million of net after
tax gains on securities. Second quarter 2003 results include net after tax
income of $0.7 million primarily related to $1.2 million of net gains on
securities partially offset by $0.5 million of costs for facility and other
consolidations.
The management of DST analyzes historical results adjusted for certain items
that are not necessarily ongoing in nature, do not have a high level of
predictability associated with them or 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 second quarters of 2004
and 2003, DST's consolidated net income for the quarter ended June 30, 2004 was
$49.4 million ($0.57 per diluted share) compared to second quarter 2003 net
income of $52.3 million ($0.44 per diluted share), a 5.5% decrease in net income
and a 29.5% increase in diluted earnings per share.
Year to date, DST's consolidated net income was $103.4 million ($1.19 per
diluted share) in 2004 compared to $104.4 million ($0.87 per diluted share) in
2003. Year to date 2004 results include net after tax income of $3.3 million
primarily related to $3.7 million of net gains on securities, partially offset
by $0.4 million of costs for facility and other consolidations. Year to date
2003 results include net after tax income of $0.3 million primarily related to
$1.3 million of net gains on securities, partially offset by $1.0 million of
costs for facility and other consolidations. Excluding the above mentioned items
recorded in both 2004 and 2003, DST's consolidated net income for the six months
ended June 30, 2004 was $100.1 million ($1.16 per diluted share) compared to
2003 net income of $104.1 million ($0.87 per diluted share), a 3.8% decrease in
net income and a 33.3% increase in diluted earnings per share.
Financial Overview
Revenues
The following table summarizes the Company's revenues by segment (in millions):
Quarter ended Six months ended
June 30, June 30,
--------------------- ------------------------
2004 2003 2004 2003
-------- -------- --------- ---------
Revenues
Financial Services
Operating $ 280.0 $ 263.4 $ 551.6 $ 517.4
OOP reimbursements 39.0 39.3 76.8 76.5
-------- -------- --------- ---------
$ 319.0 $ 302.7 $ 628.4 $ 593.9
======== ======== ========= =========
Output Solutions
Operating $ 110.6 $ 134.9 $ 231.5 $ 279.0
OOP reimbursements 138.5 151.5 284.9 313.9
-------- -------- --------- ---------
$ 249.1 $ 286.4 $ 516.4 $ 592.9
======== ======== ========= =========
Customer Management
Operating $ 46.6 $ 43.7 $ 96.6 $ 89.9
OOP reimbursements 13.5 15.9 27.5 32.1
-------- -------- --------- ---------
$ 60.1 $ 59.6 $ 124.1 $ 122.0
======== ======== ========= =========
Investments and Other
Operating $ 16.3 $ 14.8 $ 31.7 $ 29.5
OOP reimbursements 0.1 0.1 0.2 0.2
-------- -------- --------- ---------
$ 16.4 $ 14.9 $ 31.9 $ 29.7
======== ======== ========= =========
Eliminations
Operating $ (28.0) $ (25.8) $ (55.9) $ (53.1)
OOP reimbursements (23.3) (20.8) (42.1) (48.6)
-------- -------- --------- ---------
$ (51.3) $ (46.6) $ (98.0) $(101.7)
======== ======== ========= =========
Total Revenues
Operating $ 425.5 $ 431.0 $ 855.5 $ 862.7
OOP reimbursements 167.8 186.0 347.3 374.1
-------- -------- --------- ---------
$ 593.3 $ 617.0 $1,202.8 $1,236.8
======== ======== ========= =========
Consolidated operating revenues for the quarter decreased $5.5 million or 1.3%
over the prior year quarter. Financial Services operating revenues increased
$16.6 million or 6.3% from higher U.S. mutual fund servicing, consumer risk
transfer program servicing and investment accounting software revenues,
partially offset by a decrease in EquiServe, Inc. ("EquiServe") shareowner and
corporate action servicing revenues. Output Solutions operating revenues
declined $24.3 million or 18.0% reflecting the absence of DST Output Marketing
Services, Inc. ("OMS") revenues subsequent to the exchange transaction with
Janus Capital Group Inc. ("Janus Exchange"), which was completed in December
2003. OMS operating revenues totaled $17.1 million in the second quarter 2003.
Customer Management operating revenues increased $2.9 million or 6.6% from
higher equipment sales and software development revenues, partially offset by
lower processing revenues. Consolidated Out-of-Pocket ("OOP") reimbursements
decreased $18.2 million or 9.8%.
Consolidated operating revenues for the six months ended June 30, 2004 decreased
$7.2 million or 0.8% over the comparable prior year period as lower Output
Solutions revenues resulting from the absence of OMS were essentially offset by
higher Financial Services and Customer Management revenues.
Income from operations
The following table summarizes the Company's income from operations by segment
(in millions):
Quarter ended Six months ended
June 30, June 30,
--------------------- ------------------------
2004 2003 2004 2003
-------- -------- --------- ---------
Income from operations
Financial Services $ 64.8 $ 59.6 $ 122.8 $ 115.4
Output Solutions 4.0 5.6 13.2 15.2
Customer Management 7.0 6.5 17.9 15.6
Investments and Other 3.7 2.1 7.5 5.0
-------- -------- --------- ---------
$ 79.5 $ 73.8 $ 161.4 $ 151.2
======== ======== ========= =========
Consolidated income from operations for the quarter increased $5.7 million or
7.7% over the prior year quarter and $10.2 million or 6.7% over the comparable
prior year period primarily from higher levels of Financial Services operating
income.
Segment Results
Financial Services Segment
Financial Services segment operating revenues (excluding OOP reimbursements) for
the second quarter 2004 were $280.0 million, an increase of $16.6 million or
6.3% over the second quarter 2003.
U.S. Financial Services segment operating revenues in the second quarter 2004
increased $7.5 million or 3.2% over the prior year quarter. The increase in U.S.
revenues resulted from higher U.S. mutual fund servicing and consumer risk
transfer program servicing revenues, partially offset by a decrease in EquiServe
shareowner servicing and corporate action servicing revenues.
U.S. mutual fund open shareowner accounts processed totaled 90.8 million at June
30, 2004, a net increase of 0.7 million or 0.8% for the quarter and an increase
of 2.9 million or 3.3% from the 87.9 million serviced at December 31, 2003.
During the quarter approximately 0.9 million shareowner accounts converted from
new clients, which was offset by the loss of 0.6 million accounts from a client
which was acquired by an organization with "in-house" processing facilities.
Tax-advantaged retirement and educational savings accounts serviced (which
include 529 and Coverdell savings plan accounts) totaled 35.6 million at June
30, 2004, an increase of 0.7 million or 2.0% for the quarter and an increase of
1.7 million or 5.0% from the 33.9 million serviced at December 31, 2003. The
increase in tax-advantaged accounts serviced during the quarter resulted
primarily from increased IRAs.
EquiServe shareowner accounts serviced totaled 19.7 million at June 30, 2004, a
decrease of 1.8 million during the quarter and a decrease of 2.6 million from
2003 year end levels, primarily from client losses resulting from corporate
mergers.
International Financial Services segment operating revenues totaled $35.1
million for the second quarter 2004, an increase of $9.1 million or 35.0% over
the prior year quarter, primarily from higher investment accounting software
license and maintenance revenues and higher foreign currency exchange rates.
Financial Services segment income from operations for the second quarter 2004
increased $5.2 million or 8.7% over the prior year quarter to $64.8 million.
Operating margin for the quarter increased 0.5% over the prior year quarter to
23.1%. Increases in revenues and corporate cost containment activities
contributed to the increase in income from operations and operating margins.
Costs and expenses increased 3.4% compared to the prior year quarter, primarily
from higher personnel costs. Depreciation and amortization costs increased 16.0%
compared to the prior year quarter, primarily attributable to depreciation of
capital costs for DST's recovery data center, which became operational during
the fourth quarter of 2003.
Financial Services segment operating revenues for the six months ended June 30,
2004 were $551.6 million, an increase of $34.2 million or 6.6% over the prior
year six month period, principally from increased U.S. mutual fund servicing,
consumer risk transfer program servicing and international software license and
maintenance revenues, partially offset by a decrease in EquiServe revenues.
Financial Services segment income from operations for the six months ended June
30, 2004 increased $7.4 million or 6.4% over the prior year period to $122.8
million for the same reasons as previously mentioned. Operating margin was
essentially unchanged from the prior year. Costs and expenses increased 4.7% in
the six months ended June 30, 2004, principally from increased personnel costs.
Depreciation and amortization increased 15.4% in the six months ended June 30,
2004, primarily attributable to depreciation of capital costs for DST's recovery
data center, which became operational during the fourth quarter of 2003.
Output Solutions Segment
Output Solutions segment operating revenues for the quarter ended June 30, 2004
were $110.6 million, a decrease of $24.3 million or 18.0% from second quarter
2003, reflecting the absence of OMS revenues in the current year quarter and
lower telecommunications revenues. OMS operating revenues totaled $17.1 million
in the second quarter 2003. Items mailed decreased 5.3% to 395 million compared
to second quarter 2003.
Output Solutions segment income from operations for the second quarter decreased
$1.6 million over the prior year quarter to $4.0 million, primarily from lower
revenues. Segment results include $0.8 million of costs in 2003 associated with
previously announced facility and other consolidations. Costs and expenses
decreased $33.9 million or 12.5% from the second quarter 2003, reflecting the
absence of OMS costs and expenses, cost containment activities and lower OOP
expenses. Depreciation and amortization decreased $1.8 million compared to the
prior year quarter, reflecting the exclusion of OMS and lower capital
expenditures.
Output Solutions segment operating revenues for the six months ended June 30,
2004 were $231.5 million, a decrease of $47.5 million or 17.0% from the prior
year period. OMS operating revenues for the six months ended June 30, 2003 were
$33.3 million. Segment income from operations for the six months ended June 30,
2004 decreased $2.0 million or 13.2% from the prior year period to $13.2
million.
Customer Management Segment
Customer Management segment operating revenues for the quarter ended June 30,
2004 were $46.6 million, an increase of $2.9 million or 6.6% over the 2003
quarter. Processing and software service revenues for the quarter decreased $1.2
million or 2.8% and equipment sales increased $4.1 million compared to second
quarter 2003. Processing and software service revenues decreased primarily as a
result of lower cable subscribers serviced, partially offset by higher software
development revenues. Total cable and satellite subscribers serviced were 37.2
million at June 30, 2004, unchanged for the quarter and a decrease of 5.3%
compared to year end 2003 levels, principally from a net decrease in
international cable subscribers serviced.
Customer Management segment income from operations for the second quarter 2004
increased $0.5 million over the prior year quarter to $7.0 million from higher
operating revenues. Costs and expenses increased 0.4% compared to the second
quarter 2003. Depreciation and amortization decreased $0.2 million compared to
the prior year quarter, primarily from lower capital expenditures.
Customer Management segment operating revenues for the six months ended June 30,
2004 were $96.6 million, an increase of $6.7 million or 7.5% over the prior year
period from higher processing and service revenues and higher equipment sales.
Customer Management segment income from operations for the six months ended June
30, 2004 increased $2.3 million or 14.7% over the prior year period to $17.9
million.
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 June 30, 2004, an increase of $1.5 million from the prior year
quarter, primarily from increased real estate leasing activity. Investments and
Other segment income from operations for the quarter ended June 30, 2004
increased $1.6 million over the prior year quarter.
Equity in earnings of unconsolidated affiliates
The following table summarizes the Company's equity in earnings (losses) of
unconsolidated affiliates (in millions):
Quarter ended Six months ended
June 30, June 30,
--------------------- ------------------------
2004 2003 2004 2003
-------- -------- --------- ---------
BFDS $ 4.9 $ 2.2 $ 8.1 $ 4.2
IFDS 1.6 0.4 3.5 (1.9)
Other (0.9) 1.1 (0.9) 1.1
-------- -------- --------- ---------
$ 5.6 $ 3.7 $ 10.7 $ 3.4
======== ======== ========= =========
BFDS earnings increased primarily from higher revenues from client additions and
improved operational efficiencies. On July 1, 2004, BFDS began performing
transfer agency services for Federated, which was previously a remote client of
DST. This change did not result in an increase in DST's mutual fund shareowner
accounts processed. IFDS earnings increased primarily due to higher levels of
accounts serviced. Accounts serviced by IFDS U.K. were 4.8 million at June 30,
2004, unchanged for the quarter and an increase of 200,000 or 4.3% from year end
2003 levels, primarily from new client conversions. An additional 650,000
accounts are scheduled to convert during 2004. Accounts serviced by IFDS Canada
were 2.8 million at June 30, 2004, unchanged for the quarter and an increase of
100,000 or 3.7% from year end 2003 levels. The reduction in earnings from Other
unconsolidated affiliates is principally related to pre-operating costs
associated with the formation of a real estate joint venture.
Other income, net
Other income was $8.4 million for the second quarter 2004, compared to $5.9
million for the second quarter 2003. Second quarter 2004 results primarily
include $4.1 million related to interest and dividend income and $3.7 million in
net gains on securities. Second quarter 2003 results include primarily $4.0
million of income related to interest and dividend income and $1.9 million in
net gains on securities.
Other income was $14.9 million for the six months ended June 30, 2004, compared
to $10.1 million for the prior year period. Year to date 2004 results include
$7.8 million primarily related to interest and dividend income and $5.7 million
primarily related to net gains on securities. Year to date 2003 results include
$8.1 million primarily related to interest and dividend income and $2.0 million
primarily related to net gains on securities.
Interest expense
Interest expense was $13.2 million for the quarter ended June 30, 2004, compared
to $3.1 million in the prior year quarter, principally from increased interest
expense of $9.1 million associated with the $840 million of convertible
debentures issued in August 2003. Interest expense was $26.7 million for the six
months ended June 30, 2004, compared to $6.5 million in the prior year period.
Average debt balances were higher in 2004 compared to 2003, primarily as a
result of the convertible debentures and higher borrowings on the syndicated
line of credit facility primarily to finance the Janus Exchange.
Income taxes
DST's effective tax rate was 35.5% for the quarter and six months ended June 30,
2004 and 34.0% for the quarter and six months ended June 30, 2003. The 2004 and
2003 tax rates were affected by tax aspects of certain international operations
and state tax income apportionment rules. The 2003 income tax rate was lower
than the 2004 rate primarily as a result of real estate related tax credits
realized in 2003.
Stock Repurchase Program
During the quarter, DST purchased 700,000 shares for $32.6 million and has
repurchased a total of 900,000 shares for $41.5 million under the six million
share repurchase program authorized in February 2004. At June 30, 2004, shares
outstanding were 84.1 million.
Proposed Accounting Standards
There are two proposed accounting standards that could potentially impact the
way the Company calculates diluted earnings per share regarding incremental
shares to be issued from the assumed conversion of the $840 million of
convertible debentures issued in August 2003. The first proposed standard is
EITF Topic 04-08, Accounting Issues Related to Certain Features of Contingently
Convertible Debt and the Effect on Diluted Earnings per Share. Under EITF 04-08,
a company would need to include the effects of contingently convertible bonds in
diluted earnings per share from the date of issuance. Under EITF 04-08, the
Company can still utilize the "net share settlement" method of calculating
shares for the conversion premium if it intends to settle the principal amount
of the bonds in cash and any excess value with shares of its common stock. The
Company has stated that it intends 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. The potential impact of EITF 04-08 to DST is that the calculation of
diluted earnings per share would begin to include an incremental amount of
shares assumed to be issued for the conversion spread for periods that the
Company's stock price exceeds $49.08 per share. Under current generally accepted
accounting principles, the Company's calculation of diluted earnings per share
would not include any incremental shares from assumed conversions of the
convertible debentures until such time that the Company's common stock exceeded
the contingent conversion price of $58 per share. EITF 04-08 is expected to be
issued in final form in the latter part of 2004, with a fourth quarter effective
date. The Company does not believe EITF 04-08 would have impacted the Company's
calculated diluted earnings per share for any historical periods. EITF 04-08
will only affect the Company's calculation of diluted earnings per share if the
Company's share price is between $49.08 and $58.00 per share.
The second proposed standard involves an amendment to SFAS 128 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 bond. 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.
The proposed amendment to SFAS 128 is expected to become effective in the first
quarter of 2005, and would require retroactive restatement of a company's
diluted earnings per share calculations. Under the proposed amended SFAS 128 "if
converted" method, 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 to 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 $0.56
and $1.11 for the three and six months ended June 30, 2004, respectively.
Diluted earnings per share would have been $2.69 for the year ended December 31,
2003 as compared to the reported amount of $2.77.
The proposed changes in accounting principles do not affect DST's ability to
ultimately settle the convertible debentures in cash, shares or any combination
thereof. They would affect the calculation of diluted earnings per share during
the period the debentures are outstanding.
* * * *
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 financial 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 Six Months
ended June 30, ended June 30,
2004 2003 2004 2003
-------- -------- --------- ---------
Operating revenues $ 425.5 $ 431.0 $ 855.5 $ 862.7
Out-of-pocket reimbursements 167.8 186.0 347.3 374.1
-------- -------- --------- ---------
Total revenues 593.3 617.0 1,202.8 1,236.8
Costs and expenses 475.1 506.6 966.3 1,013.9
Depreciation and amortization 38.7 36.6 75.1 71.7
-------- -------- --------- ---------
Income from operations 79.5 73.8 161.4 151.2
Interest expense (13.2) (3.1) (26.7) (6.5)
Other income, net 8.4 5.9 14.9 10.1
Equity in earnings of
unconsolidated affiliates 5.6 3.7 10.7 3.4
-------- -------- --------- ---------
Income before income taxes 80.3 80.3 160.3 158.2
Income taxes 28.5 27.3 56.9 53.8
-------- -------- --------- ---------
Net income $ 51.8 $ 53.0 $ 103.4 $ 104.4
======== ======== ========= =========
Average common shares outstanding 84.3 118.7 84.2 119.0
Diluted shares outstanding 86.8 119.6 86.6 120.2
Basic earnings per share $ 0.61 $ 0.45 $ 1.23 $ 0.88
Diluted earnings per share $ 0.60 $ 0.44 $ 1.19 $ 0.87
DST SYSTEMS, INC.
OTHER SELECTED FINANCIAL INFORMATION
(In millions)
(Unaudited)
June 30, December 31,
Selected Balance Sheet Information 2004 2003
------------------- -------------------
Cash $ 95 $ 102
Total assets 3,570 3,199
Total debt 1,480 1,465
Total stockholders' equity 775 684
For the Six Months
Ended June 30,
Selected Cash Flow Information 2004 2003
------------------- -------------------
Capital expenditures
Operating segments $ 68 $ 83
Investments and Other segment 34 47
DST Systems, Inc.
333 West 11th Street
Kansas City, MO
64105-1594
NYSE Symbol: DST
Contact:
Thomas A. McDonnell (816) 435-8684
President and Chief Executive Officer
Kenneth V. Hager (816) 435-8603
Vice President and Chief Financial Officer