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) April 24, 2002
(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 1 CHANGES IN CONTROL OF REGISTRANT
Not applicable.
ITEM 2 ACQUISITION OR DISPOSITION OF ASSETS
Not applicable.
ITEM 3 BANKRUPTCY OR RECEIVERSHIP
Not applicable.
ITEM 4 CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 5 OTHER EVENTS
Not applicable.
ITEM 6 RESIGNATIONS OF REGISTRANT'S DIRECTORS
Not applicable.
ITEM 7 FINANCIAL STATEMENTS AND EXHIBITS
Not applicable.
ITEM 8 CHANGE IN FISCAL YEAR
Not applicable.
ITEM 9 REGULATION FD DISCLOSURE
See attached as an Exhibit to this Form 8-K a News Release released April 24,
2002 concerning the announcement of financial results.
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/ Robert C. Canfield
Senior Vice President, General Counsel,
Secretary
Date: April 25, 2002
DST SYSTEMS, INC. ANNOUNCES FIRST QUARTER 2002 FINANCIAL RESULTS
KANSAS CITY, MO. (April 24, 2002) - Excluding non-recurring items recorded in
the first quarters of 2002 and 2001, DST's consolidated net income for the
quarter ended March 31, 2002 was $56.2 million ($0.46 per diluted share)
compared to first quarter 2001 net income of $52.4 million ($0.41 per diluted
share), a 7.3% increase in net income and a 12.2% increase in diluted earnings
per share. First quarter 2002 and 2001 results include net non-recurring after
tax income of $2.6 million and $2.1 million, respectively, primarily related to
net gains on securities. Including these non-recurring items, DST's consolidated
net income for the first quarter 2002 was $58.8 million ($0.48 per diluted
share) compared to first quarter 2001 net income of $54.5 million ($0.42 per
diluted share).
Reported revenues, beginning January 1, 2002, are affected by the Company's
required adoption of EITF Topic No. D-103 ("EITF D-103"), Income Statement
Characterization of Reimbursements received for "Out-of-Pocket" ("OOP") Expenses
Incurred. Prior to the issuance of EITF D-103, the Company netted the OOP
expense reimbursements from customers with the applicable OOP expenditures. The
Company's significant OOP expenses at the consolidated level include postage and
telecommunication expenditures and at the Segment level include print mail
services between the Financial Services Segment and the Output Solutions
Segment. Under EITF D-103, the Company is required to record the reimbursements
received for OOP expenses as revenue on an accrual basis. Because these
additional revenues are offset by the reimbursable expenses incurred, adoption
of EITF Topic No. D-103 did not impact income from operations or net income.
Comparative financial statements for prior periods have been reclassified to
comply with the new guidance. For each segment, total revenues are reported in
two categories, operating revenues (which correspond to amounts previously
reported) and OOP reimbursements. OOP expenses are included in costs and
expenses.
The following table summarizes the Company's operating revenues, OOP
reimbursements and income from operations by segment (dollars in millions):
Three months ended
March 31,
--------------------------------
2002 2001
--------------- ---------------
Revenues
Financial Services
Operating $ 237.2 $ 167.5
OOP reimbursements 45.3 19.2
--------------- ---------------
$ 282.5 $ 186.7
=============== ===============
Output Solutions
Operating $ 154.6 $ 165.5
OOP reimbursements 157.1 158.8
--------------- ---------------
$ 311.7 $ 324.3
=============== ===============
Customer Management
Operating $ 50.1 $ 48.5
OOP reimbursements 15.5 17.7
--------------- ---------------
$ 65.6 $ 66.2
=============== ===============
Investments and Other
Operating $ 13.0 $ 9.1
OOP reimbursements 0.1 0.1
--------------- ---------------
$ 13.1 $ 9.2
=============== ===============
Eliminations
Operating $ (28.3) $ (21.0)
OOP reimbursements (23.7) (26.8)
--------------- ---------------
$ (52.0) $ (47.8)
=============== ===============
Total Revenue
Operating $ 426.6 $ 369.6
OOP reimbursements 194.3 169.0
--------------- ---------------
$ 620.9 $ 538.6
=============== ===============
Income from operations
Financial Services $ 55.6 $ 47.7
Output Solutions 16.4 24.7
Customer Management 7.2 3.7
Investments and Other 2.1 1.6
--------------- ---------------
$ 81.3 $ 77.7
=============== ===============
Consolidated total revenues for the quarter were $620.9 million, an increase of
$82.3 million or 15.3% over the prior year quarter. Consolidated operating
revenues for the quarter were $426.6 million, an increase of $57.0 million or
15.4% over the prior year quarter, principally from higher Financial Services
Segment revenues, which includes revenues from EquiServe, Inc. ("EquiServe"), in
which DST acquired controlling ownership on March 30, 2001. Consolidated income
from operations totaled $81.3 million for the quarter, an increase of $3.6
million or 4.6% over the first quarter 2001, primarily from increased operating
earnings in the Financial Services Segment and Customer Management Segment,
partially offset by a decline in operating earnings in the Output Solutions
Segment.
Financial Services Segment
Financial Services Segment total revenues (including OOP reimbursements) for the
first quarter 2002 were $282.5 million, an increase of $95.8 million over the
first quarter 2001. Financial Services Segment operating revenues (excluding OOP
reimbursements) for the first quarter 2002 were $237.2 million, an increase of
$69.7 million or 41.6% over the first quarter 2001. Financial Services revenues
in 2002 were affected by the inclusion of revenues from EquiServe. Financial
Services first quarter 2001 operating revenues also include operating revenues
from DST's Portfolio Accounting Systems ("PAS") business, which was sold on June
29, 2001. Adjusting for the effect of EquiServe and the PAS business, operating
revenues decreased $3.9 million or 2.4% over the prior year quarter.
U.S. Financial Services Segment operating revenues increased $73.8 million in
the first quarter 2002 or 51.9% over the prior year quarter, primarily from the
inclusion of EquiServe revenues and increases in mutual fund shareowner accounts
processed. Excluding EquiServe from the 2002 quarter and the PAS business from
the 2001 quarter, U.S. revenues increased $0.2 million or 0.1% over the prior
year quarter. U.S. mutual fund shareowner accounts processed totaled 78.4
million at March 31, 2002, an increase of 2.8 million or 3.7% from the 75.6
million serviced at December 31, 2001. During the quarter, approximately 1.7
million accounts of the Evergreen funds were converted to TA2000.
Retirement plan accounts (which also include 529 savings plan accounts) totaled
28.0 million at March 31, 2002, an increase of 1.4 million or 5.3% from the 26.6
million serviced at December 31, 2001. Net new IRA accounts for the first
quarter 2002 were 0.6 million. 401(k) accounts serviced increased 0.5 million or
6.8% during the quarter to 7.9 million accounts at March 31, 2002. 529 savings
plan accounts increased 0.3 million or 42.9% during the quarter to 1.0 million
at March 31, 2002.
For the period April 1-19, 2002, which generally coincides with the end of the
U.S. IRA investment season, mutual fund shareowner accounts serviced increased
an estimated 0.7 million, of which approximately 66% were IRA accounts and 529
savings plans.
DST has preliminary commitments from a total of four prospective clients to
convert approximately 8.7 million mutual fund shareowner accounts to TA2000, of
which 2.2 million are scheduled to convert in the second half of 2002 and 6.5
million are scheduled to convert in the first quarter 2003. There continues to
be activity in requests for proposals from potential new U.S. and international
mutual fund customers.
EquiServe shareowner accounts serviced totaled 26.5 million at March 31, 2002, a
decrease of 0.7 million accounts from December 31, 2001, primarily from clients
offering "odd-lot" redemption programs for small investors. U.S. AWD(R)
workstations licensed were 60,000 at March 31, 2002, an increase of 3.8% from
December 31, 2001.
International Financial Services Segment operating revenues totaled $21.3
million for the first quarter 2002, a decrease of $4.1 million or 16.1% over the
prior year quarter. The decrease is attributable to a decrease in investment
management license revenues and consulting and development revenues.
International AWD workstations licensed were 28,100 at March 31, 2002, an
increase of 1.4% from December 31, 2001.
Financial Services Segment income from operations for the first quarter 2002
increased $7.9 million or 16.6% over the prior year quarter to $55.6 million,
resulting in a controllable operating margin (income from operations divided by
operating revenues) of 23.4% compared to 28.5% for the prior year quarter.
Controllable operating margin was affected by the inclusion of EquiServe and the
absence of the PAS business in 2002. Costs and expenses increased 68.8%,
primarily from the addition of EquiServe. Depreciation and amortization costs
increased $3.4 million or 21.0%, primarily as a result of the EquiServe
acquisition.
Output Solutions Segment
Output Solutions Segment total revenues for the first quarter 2002 totaled
$311.7 million, a decrease of $12.6 million over the first quarter 2001. Output
Solutions Segment operating revenues for the quarter ended March 31, 2002 were
$154.6 million, a decrease of $10.9 million or 6.6% from first quarter 2001. The
revenue decline resulted from the loss of a telecommunications customer in the
fourth quarter 2001, declines in brokerage related marketing fulfillment and
trade confirmation volumes and changes in statement presentation formats from
existing customers which result in lower revenues, partially offset by increased
volumes from the insurance and transportation industries. Output Solutions
Segment images produced in the first quarter 2002 increased 5.0% to 2.1 billion
and items mailed decreased 6.9% to 473 million compared to first quarter 2001.
Output Solutions Segment income from operations for the first quarter decreased
$8.3 million or 33.6% over the prior year quarter to $16.4 million, resulting in
a controllable operating margin (income from operations divided by operating
revenues) of 10.6% compared to 14.9% in the prior year quarter. Costs and
expenses decreased 1.4% principally due to decreased personnel and purchased
material costs. Depreciation and amortization decreased 1.1% to $8.8 million in
the first quarter 2002.
In the first quarter of 2002, the Segment relocated its Kansas City, Missouri
operations from a 70,000 square foot production facility to a new
state-of-the-art 225,000 square foot facility. This new facility is the model
for the Company's strategy of establishing high volume state-of-the art
production facilities. In connection with this strategy, the Company is in the
process of finalizing plans to consolidate the operations of certain other
smaller facilities, which the Company believes will result in operational
efficiencies. Although the plans have not been finalized, the Company expects to
incur charges in future periods related to facility consolidations. The costs
associated with facility consolidations could range from $5 million to $7
million in the second quarter of 2002 and an additional $6 million to $8 million
in periods following the second quarter of 2002. The estimated impact of the
facility consolidations reflect the Company's current views. There may be
material differences between these estimates and the actual costs.
Customer Management Segment
Customer Management Segment total revenues for the first quarter 2002 totaled
$65.6 million, a decrease of $0.6 million over the first quarter 2001. Customer
Management Segment operating revenues for the quarter ended March 31, 2002 were
$50.1 million, an increase of $1.6 million or 3.3% over the 2001 quarter.
Processing and software service revenues for the quarter decreased $0.6 million
or 1.3% and equipment sales increased $2.2 million or 137.5% compared to first
quarter 2001. Total cable and satellite subscribers serviced were 40.9 million
at March 31, 2002. Subscribers serviced were unchanged compared to year end 2001
levels, principally from an increase in U.S. cable subscribers offset by lower
international cable subscribers serviced.
Customer Management Segment income from operations for the first quarter
increased $3.5 million or 94.6% over the prior year quarter to $7.2 million,
resulting in a controllable operating margin (income from operations divided by
operating revenues) of 14.4% compared to 7.6% in the prior year quarter. Costs
and expenses decreased $1.7 million or 2.9% from the first quarter 2001,
primarily attributable to lower personnel costs and out-of-pocket expenses
partially offset by higher costs of equipment sales. Depreciation and
amortization decreased $2.4 million or 57.1%, primarily from lower capitalized
software amortization and the required exclusion of goodwill amortization.
Investments and Other
Investments and Other Segment operating revenues, primarily rental income for
facilities leased to the Company's operating segments, were $13.0 million for
the quarter ended March 31, 2002, an increase of $3.9 million from the prior
year quarter, primarily from increased real estate leasing activity. Investments
and Other Segment income from operations increased $0.5 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 (dollars in millions):
Three months ended
March 31,
--------------
2002 2001
----- -----
Boston Financial Data Services, Inc.("BFDS") $ 1.9 $ 1.6
International Financial Data Services, U.K.("IFDS U.K.") (0.2) (0.2)
International Financial Data Services LP ("IFDS Canada") 0.2 0.9
Other 0.6 (1.4)
----- -----
$ 2.5 $ 0.9
===== =====
Increased earnings at BFDS resulted from lower operating expenses obtained
through a focus on reducing costs. IFDS U.K. losses were unchanged as revenue
growth from higher account service levels were offset by higher costs related to
the relocation to new facilities. Accounts serviced at IFDS U.K. increased to
3.2 million at March 31, 2002, which is 0.1 million or 3.2% above year end 2001
levels and 0.4 million or 14.3% over March 31, 2001 levels. IFDS Canada earnings
decreased from lower revenues from development work and increased costs from
operations.
Other income, net
Other income was $8.1 million for the first quarter 2002, compared to $6.6
million for the first quarter 2001. First quarter 2002 results include $4.2
million primarily related to interest and dividend income and $3.9 million
related primarily to net gains on securities. First quarter 2001 results include
$3.3 million primarily related to interest and dividend income and $3.3 million
related primarily to net gains on securities.
Interest expense
Interest expense was $2.8 million for the quarter ended March 31, 2002, an
increase of $1.6 million from the prior year quarter. Average debt balances were
higher in 2002 compared to 2001, primarily as a result of common stock
repurchases and the EquiServe acquisition.
Income taxes
DST's effective tax rate was 34.0% for the quarter ended March 31, 2002,
compared to 35.1% for the prior year quarter. The 2002 and 2001 tax rates were
affected by tax benefits relating to certain international operations and
recognition of state tax benefits associated with income apportionment rules.
Other Actions
Stock Repurchase Program
During the quarter ended March 31, 2002, DST purchased 23,682 shares of its
common stock under previously announced share repurchase programs. The shares
were purchased in a private transaction at an average price of $41.25 per share.
As of March 31, 2002, the cost to settle a remaining forward purchase agreement,
which expires in September 2002, would be approximately $55.4 million for
approximately 1.3 million shares. The agreement allows the Company to elect net
cash or net share settlement in lieu of physical settlement of the shares. As of
March 31, 2002, DST had purchased 13.4 million shares since the share repurchase
programs commenced and had 120.8 million shares outstanding. Subsequent to March
31, 2002, the Company acquired the shares in the remaining forward purchase
agreement.
Proforma Earnings Per Share
Effective January 1, 2002, the Company adopted, as required, SFAS No. 142,
Goodwill and Other Intangible Assets. This statement addresses, among other
things, how goodwill and other intangible assets should be accounted for after
they have been initially recognized in the financial statements. Under SFAS No.
142, goodwill and intangible assets that have indefinite useful lives will not
be amortized but rather will be tested at least annually for impairment. If SFAS
142 would have been adopted at January 1, 2001, the Company would have reported
net income and diluted earnings per share as follows:
Three months ended
March 31,
-------------------
2002 2001
------ ------
Reported net income (in millions) $ 58.8 $ 54.5
Add goodwill amortization (net of tax) 1.4
------ ------
Adjusted net income $ 58.8 $ 55.2
====== ======
Diluted earnings per share
Reported net income $ 0.48 $ 0.42
Add goodwill amortization (net of tax) 0.01
------ ------
Adjusted net income $ 0.48 $ 0.43
====== ======
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 results could differ. There could be a
number of factors affecting future results, including those set forth in Form
8-K/A dated March 19, 2002 filed by DST 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 ended
March 31,
2002 2001
------- -------
Operating revenues $ 426.6 $ 369.6
Out-of-pocket reimbursements 194.3 169.1
------- -------
Total revenues 620.9 538.7
Costs and expenses 507.0 429.7
Depreciation and amortization 32.6 31.3
------- -------
Income from operations 81.3 77.7
Interest expense (2.8) (1.2)
Other income, net 8.1 6.6
Equity in earnings of unconsolidated affiliates 2.5 0.9
------- -------
Income before income taxes 89.1 84.0
Income taxes 30.3 29.5
------- -------
Net income $ 58.8 $ 54.5
======= =======
Average common shares outstanding 120.6 124.2
Diluted shares outstanding 122.6 128.5
Basic earnings per share $ 0.49 $ 0.44
Diluted earnings per share $ 0.48 $ 0.42
* * * * * *
Net income before non-recurring items $ 56.2 $ 52.4
Diluted earnings per share before non-recurring items $ 0.46 $ 0.41
DST Systems, Inc.
333 West 11th Street
Kansas City, MO
64105-1594
NYSE & CHX 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