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DST Systems, Inc. Announces Second Quarter 2011 Financial Results

KANSAS CITY, Mo. July 26, 2011 $55.2 million $1.17 $94.0 million $2.00 June 30, 2011 $108.6 million $2.31 $170.9 million $3.57 June 30, 2010 $49.4 million $1.05 $57.6 million $1.23 $100.1 million $2.13 June 30, 2011 $111.4 million $2.33 June 30, 2010

The diluted EPS impact of non-GAAP adjustments for second quarter 2011 is summarized as follows:

Reported GAAP diluted EPS

$ 1.17

Business development expenses (professional fees)

0.01

Net gain on the disposition of securities and other investments

(0.14)

Net loss on repurchase of senior convertible debentures

0.01

Adjusted Non-GAAP diluted EPS

$ 1.05

Second quarter 2011 financial and operational highlights, taking into account non-GAAP adjustments, were as follows:

  • $21.5 million $424.1 million $9.2 million $30.6 million July 2010 May 2011
  • June 30, 2011 March 31, 2011 June 30, 2011 March 31, 2011
  • $12.2 million $12.1 million $65.0 million $600,000 $9.1 million
  • April 8, 2011 $0.35 $0.05 $16.2 million

Debt and share-related activity during second quarter 2011 was as follows:

  • June 30, 2011 July 1, 2015 $600 million $630 million
  • May 19, 2011 $150 million May 17, 2012
  • $7.9 million $8.8 million $900,000 June 30, 2011 $88.1 million
  • June 30, 2011 $1,164.1 million $21.7 million March 31, 2011
  • June 30, 2011 $6.1 million $49.39 May 10, 2011 December 31, 2012 June 30, 2011
  • Average diluted shares outstanding for second quarter 2011 were 47.2 million shares, an increase of 200,000 shares, or 0.4%, from both first quarter 2011 and second quarter 2010.    
  • June 30, 2011 March 31, 2011 June 30, 2010 March 31, 2011 June 30, 2010

Business development activities

$165 million

July 19, 2011 $0.06

June 20, 2011 Canada

April 29, 2011

$50 to $60 million $0.70 to $0.85

July 1, 2011

May 2, 2011

Use of Non-GAAP Financial Information

In addition to reporting operating income, pretax income, net income attributable to DST Systems, Inc. and earnings per share on a GAAP basis, DST has also made certain non-GAAP adjustments which are described in the attached schedule titled "Description of Non-GAAP Adjustments" and are reconciled to the corresponding GAAP measures in the attached financial schedules titled "Reconciliation of Reported Results to Income Adjusted for Certain Non-GAAP Items" that accompany this earnings release.  In making these nonGAAP adjustments, 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 nonoperational in nature.  Generally, these items include net gains on dispositions of business units, net gains (losses) associated with securities and other investments, restructuring and impairment costs and other similar items.  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 income from operations, pretax income, net income and earnings per share calculated in accordance with GAAP.  Therefore, management typically uses nonGAAP measures in conjunction with GAAP results.  Investors and users of our financial information should also consider the above factors when evaluating DST’s results.

Use of EBITDA

DST defines EBITDA as earnings from operations before interest expense, income taxes, depreciation and amortization.  This supplemental non-GAAP liquidity measure is provided in addition to, but not as a substitute for, cash flow from operations.  As a measure of liquidity, the Company believes EBITDA is useful as an indicator of its ability to generate cash flow.  EBITDA, as calculated by the Company, may not be consistent with computation of EBITDA by other companies.  The Company believes a useful measure of Output Solutions’ contribution to DST’s results is to focus on cash flow and DST’s management believes EBITDA is useful for this purpose.  A reconciliation of Output Solutions Segment income from operations to EBITDA is included in a schedule that accompanies this earnings release.  The non-GAAP adjustments to this reconciliation are described in the attached schedule titled "Description of Non-GAAP Adjustments".

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 "Description of Non-GAAP Adjustments."

Segment Results

Financial Services Segment

$9.2 million $281.0 million

$4.0 million

$9.4 million $3.0 million

$5.1 million $197.7 million $4.3 million $3.0 million

$8.0 to $9.0 million $0.10 to $0.12 $2.1 million $3.1 million June 30, 2011

$18.3 million $2.2 million

$65.0 million $77.1 million $12.1 million $3.0 million $9.1 million

Financial Services Segment Account Statistics:

June 30, 2011

Three months

ended

June 30, 2011

Six months

ended

June 30, 2011

Registered Accounts

Beginning balance

97.4

99.4

New client conversions

0.1

0.1

Subaccounting conversions to DST platforms

(0.2)

(0.7)

Subaccounting conversions to non-DST platforms

(2.5)

(5.0)

Conversions to non-DST platforms

(0.3)

(0.3)

Organic growth

0.7

1.7

Ending balance

95.2

95.2

Subaccounts

Beginning balance

15.4

14.3

Conversions from non-DST registered platforms

0.2

0.7

Conversions from DST’s registered accounts

0.2

0.7

Conversions to non-DST platforms

(0.6)

Organic growth

0.8

1.5

Ending balance

16.6

16.6

Total accounts

111.8

111.8

June 30, 2011 March 31, 2011 June 30, 2011 March 31, 2011

During second quarter 2011, the Company was advised by two of its existing clients that they intend to convert approximately 700,000 new registered accounts to DST’s platforms by the end of 2011.

September 2011

The actual number of registered accounts and subaccounts estimated to convert to and from various DST platforms, as well as the timing of those events, is dependent upon a number of factors.  Actual results could differ from the Company’s estimates.

June 30, 2011

Three months

ended

June 30, 2011

Six months

ended

June 30, 2011

Defined Contribution Participants

Beginning balance

4.7

4.5

Organic decline

(0.4)

(0.2)

Ending balance

4.3

4.3

June 30, 2011 March 31, 2011 June 30, 2010

June 30, 2011 March 31, 2011 June 30, 2010

June 30, 2011 March 31, 2011

Output Solutions Segment

$144.3 million $30.6 million July 2010 May 2011 $9.8 million $148.6 million

$400,000 $96.1 million

$31.0 million $48.2 million

During second quarter 2011, Output Solutions received three new client commitments representing, when fully transitioned, approximately 58 million of aggregate packages annually, based on current volume levels.  Full conversion activities related to these new clients is expected to be completed in the first half of 2012.

$272.8 million $38.9 million $148.6 million $138.8 million $29.1 million $124.2 million July 2010

$11.0 million $900,000

$9.1 million $600,000 $20.1 million $1.5 million

Investments and Other Segment

$1.0 million $13.7 million $700,000 $2.4 million

Other Financial Results

Equity in earnings (losses) of unconsolidated affiliates

The following table summarizes the Company’s equity in earnings (losses) of unconsolidated affiliates (in millions):

Three Months Ended

Six Months Ended

June 30,

June 30,

2011

2010

2011

2010

BFDS

$ 3.1

$ 4.1

$   6.3

$   7.7

IFDS

3.8

5.8

9.6

10.5

Other

0.3

(0.1)

(0.3)

(0.1)

$ 7.2

$ 9.8

$ 15.6

$ 18.1

$3.1 million $1.0 million $1.0 billion $910 million

$2.0 million June 30, 2011 March 31, 2011 June 30, 2010 June 30, 2011 March 31, 2011 June 30, 2010

Other income, net

$3.9 million $3.9 million $0.18 $0.01

Interest expense

$12.0 million $300,000 August 2010

Income taxes

The Company’s tax rate was 34.0% for second quarter 2011, an increase of 1.9% from second quarter 2010.  Excluding the effect of discrete period items, the Company expects its tax rate to be approximately 34.5% in 2011, but this rate will likely vary on a quarterly basis depending on the timing of estimated 2011 sources of taxable income (e.g. domestic consolidated, international, and/or joint venture).  

*****

The information and comments in this press release 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, risks, uncertainties or contingencies that could affect future actions or results, including but not limited to those set forth in DST’s periodic reports (Form 10-K or 10-Q) filed from time to time with the Securities and Exchange Commission.  All such factors should be considered in evaluating any forward-looking statements.  The Company undertakes no obligation to update any forward-looking statements in this press release to reflect future events. The brand, service or product names or marks referred to in this press release are trademarks or service marks, registered or otherwise, of DST Systems, Inc. or its subsidiaries or affiliates or of vendors to the Company.

DST SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(In millions, except per share amounts)

(Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

2011

2010

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