Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
This report contains “forward-looking statements”
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that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “will,” “would,” or “target.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain.
For us, particular risks and uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:
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the effects of competition in the businesses in which we operate;
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changes in client demand and our ability to provide products and services on terms that are favorable to us;
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changes in law, economic and financial conditions;
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the impacts of breaches or potential breaches of network, information technology or data security, natural disasters, terrorist attacks or acts of war or significant litigation and any resulting financial impact not covered by insurance;
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the effectiveness of our risk management framework;
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the impact of regulation and regulatory, investigative and legal proceedings and legal compliance risks, including the impact of financial services regulation and litigation and potential SEC or DOL regulations impacting third-party distributors of mutual funds;
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our investments in funds and other companies may decline;
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our ability to successfully complete acquisitions or integrate acquired businesses;
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the risk that the proposed Merger with SS&C will not be consummated within the expected time period or at all, including the risk that the Company may be unable to obtain stockholder approval as required for the Merger and conditions to the closing of the Merger may not be satisfied or waived on a timely basis or otherwise;
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the risk that a governmental entity or a regulatory body may prohibit, delay or refuse to grant approval for the consummation of the Merger and may require conditions, limitations or restrictions in connection with such approvals that can adversely affect the anticipated benefits of the proposed Merger or cause the parties to abandon the proposed Merger;
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the risk that the business of the Company may suffer as a result of uncertainty surrounding the Merger or the potential adverse changes to business relationships resulting from the proposed Merger;
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the risk that the Merger may involve unexpected costs, liabilities or delays;
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the risk that legal proceedings may be initiated related to the Merger and the outcome of any legal proceedings related to the Merger may be adverse to the Company; and
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the other factors that are described in Item 1A, “Risk Factors” of this Form 10-K.
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These or other uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. This document includes certain forward-looking projected financial information that is based on current estimates and forecasts. Actual results could differ materially.
Future economic and industry trends that could potentially impact
our financial statements or results of operations
are difficult to predict. These forward-looking statements are based on information as of the date of this report. We assume no obligation to publicly update or revise our forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized, except as may be required by law.
Introduction
DST Systems, Inc. and our consolidated subsidiaries use proprietary software applications to provide sophisticated information processing and servicing solutions through strategically unified data management and business process solutions to clients globally within the asset management, brokerage, retirement, healthcare and other markets. Our wholly-owned data centers provide the secure technology infrastructure necessary to support our solutions. In order to position the Company to take advantage of new and emerging technologies, we are embarking on an information technology transformation effort which will increase our operating expenses for the near term. We expect these investments will result in lower centralized infrastructure costs and a more agile platform on which to deliver future capabilities.
On January 11, 2018, we entered into a Merger Agreement wherein SS&C will acquire DST. Under the terms of the agreement, SS&C will purchase DST in an all-cash transaction for $84.00 per share plus the assumption of debt, equating to an enterprise value of approximately $5.4 billion. We have agreed to customary covenants in the Merger Agreement, including with respect to the operation of our business prior to the closing of the transaction or termination of the agreement, such as
restrictions on making certain acquisitions and divestitures, entering into certain contracts, incurring certain indebtedness and expenditures, paying dividends, repurchasing stock and taking other specified actions. The transaction is subject to DST stockholder approval, clearances by the relevant regulatory authorities and other customary closing conditions and is currently expected to close by the end of the second quarter 2018; however, there can be no assurances as to the actual closing or the timing of the closing. Consummation of the proposed Merger would constitute a change of control of DST under the partnership agreement of IFDS L.P. and, as a result, the other partner would have the option to purchase our interests in IFDS L.P. at a price equal to book value, unless another purchase provision in the partnership agreement was triggered prior to the change of control.
In March 2017, we acquired State Street’s ownership interests in our joint ventures BFDS and IFDS U.K., as well as other investments and real estate held by IFDS L.P. The BFDS acquisition was effectuated through a non-taxable exchange of our State Street common stock with a fair value of
$163.4 million
for State Street’s ownership interest in BFDS. We also acquired State Street’s ownership interest in IFDS U.K., and IFDS L.P.’s ownership in IFDS Percana and IFDS Realty U.K. for total cash consideration of
$234.9 million
.
In May 2017, we completed the sale of our U.K. Customer Communications business for cash consideration of
$43.6 million
. We recorded a pretax gain of
$2.6 million
on the sale during 2017. We sold our North American Customer Communications business for cash consideration of
$410.7 million
on July 1, 2016 and we recorded a pretax gain of
$341.5 million
on the sale in 2016. We have classified the results of the businesses sold as discontinued operations in our Consolidated Statements of Income for all periods presented. The net after-tax proceeds from these sales are being used in accordance with the Company’s capital plan, including investments in the business, share repurchases, strategic acquisitions, debt repayments and other corporate purposes, subject to the restrictions set forth in the Merger Agreement with SS&C.
Beginning in 2017, DST established a new reportable segment structure that reflects how management is now operating the business and making resource allocations following the acquisitions of IFDS U.K. and BFDS, as well as the recent reductions in non-core investment assets. The Company’s operating business units are now reported as three operating segments (Domestic Financial Services, International Financial Services and Healthcare Services). Prior periods have been revised to reflect the new reportable operating segments.
Domestic Financial Services Segment
Through the Domestic Financial Services segment, we provide investor, investment, advisor/intermediary and asset distribution services to companies within the U.S. financial services industry. Utilizing our proprietary software applications, we offer our clients information processing solutions that enable them to capture, analyze and report their investors’ transactions including direct and intermediary sales of mutual funds, alternative investments, securities brokerage accounts and retirement plans. Examples of the services we provide include tracking of purchases, redemptions, exchanges and transfers of shares; maintaining investor identification and ownership records; reconciling cash and share activity; processing dividends; reporting sales; and performing tax and other compliance functions. We also support full reporting to investors for confirmations, statements and tax forms, web access, and electronic delivery of documents.
Services are provided either on a Remote or BPO basis utilizing our proprietary software applications. Our BPO service offerings are enhanced by our proprietary workflow software, which is also licensed separately to third parties.
Domestic Financial Services fees are primarily charged to the client based on the number of accounts, participants or transactions processed. For subaccounts, a portion of the services we provide for registered accounts are provided directly by the broker/dealer. As a result, our revenue per account is generally higher for registered accounts than for subaccounts. On a more limited basis, we also generate revenue through asset-based fee arrangements and from investment earnings related to cash balances maintained in our full service transfer agency bank accounts. We typically have multi-year agreements with our clients. We are continuing to monitor changes in the financial services industry, including the shift from direct products to fee-based platforms which could reduce the number of direct mutual fund registered accounts we service.
In December 2017, we entered into a ten year contract with a new client to provide both mutual fund and retirement servicing solutions. Based on current volumes, the client is expected to convert approximately
2.0 million
registered accounts and
0.3 million
retirement accounts onto our platforms during mid to late 2019. This new client currently performs their processing in-house and in order to assist the new client with covering the costs to transition to our platforms we have agreed to pay them
$13.0 million
in transition assistance during the conversion, of which
$2.0 million
was paid in December 2017. The total amounts will be amortized as a reduction to revenue over the course of the ten year contractual term.
Additionally in December 2017, we renewed our largest Domestic Financial Services client to a new seven year contract. Based upon our new rate structure, we expect our operating revenue in 2018 associated with this client to be relatively consistent with the 2017 revenue.
As part of the continuing strategic review of our operations, we decided not to renew a long-term surety bond insurance agreement which expired in December 2017 as the proposed revised terms were no longer economically advantageous. This agreement historically generated approximately
$14.0 million
of annual revenue.
On February 24, 2016, we acquired all of the membership interests of Kaufman Rossin Fund Services LLC (“KRFS”), an independent, full-service provider of specialized hedge fund administration services to the global financial community. KRFS’ hedge fund services include accounting and valuation, back-office outsourcing, investor services, treasury services, and customized reporting.
During 2015, we acquired all of the membership interests of kasina LLC, a strategic advisory firm to the asset management industry, and Red Rocks Capital LLC, an asset manager which focuses on listed private equity and other private asset investments. In 2015, we also acquired all of the outstanding common stock of Wealth Management Systems Inc., a provider of technology-based rollover services in the retirement marketplace.
In December 2015, we entered into a ten year contract with a new client to provide both subaccounting and mutual fund servicing solutions. The client converted approximately 10.0 million subaccounts onto our platform during 2016 and converted approximately 2.6 million registered accounts onto our platform during the third quarter of 2017.
International Financial Services Segment
We offer investor and policyholder administration and technology services on a Remote and BPO basis in the U.K. and, through our joint venture IFDS L.P., in Canada, Ireland, and Luxembourg. Additionally, in Australia and in the U.K., we provide solutions related to participant accounting and recordkeeping for wealth management, “wrap platforms” and retirement savings (“superannuation”) industries/markets through use of our wealth management platform and our life and pension administration system.
Our primary clients are mutual fund managers, insurers and platform providers. International Financial Services fees are primarily charged to the client based on the number of accounts or transactions processed. We also realize revenues from fixed-fee license agreements that include provisions for ongoing support and maintenance and for additional license payments in the event that usage increases. Additionally, we derive professional service revenues from fees for implementation services, custom programming and data center operations. We typically have multi-year agreements with our clients.
In November 2016, we sold a wholly-owned foreign subsidiary that provides water billing software and services solutions for cash consideration of approximately
$6.1 million
. This business had approximately
$5.4 million
of operating revenue and
$1.2 million
of operating income on an annual basis. As these decisions were the result of a tactical review of our products and services, and not the result of a significant shift in strategic direction, the revenue and operating income from these products and services are included within our continuing operations.
During 2017, we reached a termination agreement with a wealth management platform client who had engaged us for a multi-year development and implementation effort as well as post-implementation services. The termination agreement resulted in incremental operating revenues of $93.2 million for the year ended
December 31, 2017
as we accelerated recognition of previously deferred revenue and recognized termination payments received. Additionally, our International Financial Services segment has been notified that two of our clients, which have collectively contributed approximately
$33.0 million
of annual revenue, will be migrating off our FAST platform in stages through the end of 2018.
Healthcare Services Segment
The Healthcare Services segment uses our proprietary software applications to provide healthcare organizations a variety of medical and pharmacy benefit solutions to satisfy their information processing, quality of care, cost management concerns and payment integrity programs, while achieving compliance and improving operational efficiencies. Our healthcare solutions include claims adjudication, benefit management, care management, business intelligence and other ancillary services. We also continue to expand and enhance our Healthcare Services’ offerings to ensure we are able to address the changing needs of our clients within the complex and highly regulated health industries which we serve. For example, our pharmacy management business continues to make investments to expand our clinical, network, and analytic capabilities to help our clients and prospective clients achieve the best possible outcomes for their members and to allow us to more effectively compete in the broader competitive pharmacy benefit manager (“PBM”) market. Historically, we have acted as an agent within our pharmacy-solutions business and, accordingly, recognized revenue on a net basis. As our enhanced products evolve and we expand our pharmacy-solutions service offerings, we will evaluate the provisions within our new pharmacy network and client contracts to determine whether we are acting as a principal or an agent in the transactions. If we determine that we are acting as a principal in the transactions, we will report the transactions on a gross basis, resulting in significantly higher revenues and costs reflected within our consolidated financial statements.
We generally derive revenue from our pharmacy-solutions business on a transactional fee basis. Fees are earned on pharmacy claims processing and payments services, pharmacy and member call center services, pharmaceutical rebate administration, administration or management of clinical programs, pharmacy network management, member and plan web services and management information and reporting. Further, revenues include investment earnings related to client cash balances maintained in our bank accounts. Medical claim processing revenues are generally derived from fees charged on a per member/per month basis or transactional basis. We also realize revenue from fixed-fee license agreements that include provisions for ongoing support and maintenance and for additional license payments in the event that usage or members increase. Additionally, we derive professional service revenues from fees for implementation services, custom programming and data center operations.
During 2017, we renewed our pharmacy services contract with our Healthcare Services segment’s third largest client extending the term of the contract through December 31, 2020. As previously announced, two of our Healthcare Services clients transitioned their services off our systems during 2017. Additionally, we have been notified that one of our largest Healthcare Services clients, which contributed approximately $50.0 million of annual revenue, will be migrating off our medical claims processing platform in stages through the end of 2019.
Seasonality
Generally, we do not have significant seasonal fluctuations in our business operations. Processing volumes for mutual fund clients within our Domestic and International Financial Services segment are usually highest during the quarter ended March 31 due primarily to processing year-end transactions during January. We have historically added operating equipment in the last half of the year in preparation for processing year-end transactions, which has the effect of increasing costs for the second half of the year. Revenues and operating results from individual license sales vary depending on the timing and size of the contracts.
New Authoritative Accounting Guidance
See Item 8, Financial Statements and Supplementary Data -
Note 2
, “Significant Accounting Policies - New authoritative accounting guidance.”
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition, results of operations and cash flows are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: revenue recognition; software capitalization and amortization; depreciation of fixed assets; valuation of long-lived and intangible assets and goodwill; accounting for investments; and accounting for income taxes.
Revenue recognition
We recognize revenue when it is realized or realizable and it is earned. The majority of our revenues are derived from computer processing and services and are recognized upon completion of the services provided. Software license fees, maintenance fees and other ancillary fees are recognized as services are provided or delivered and all client obligations have been met. We generally do not have payment terms from clients that extend beyond one year. Billing for services in advance of performance is recorded as deferred revenue.
We recognize revenue when the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) the sales price is fixed or determinable; and 4) collectability is reasonably assured. If there is a client-specific acceptance provision in a contract or if there is uncertainty about client acceptance, the associated revenue is deferred until we have evidence of client acceptance.
Revenue arrangements with multiple deliverables are evaluated to determine if the deliverables (items) can be divided into more than one unit of accounting. An item can generally be considered a separate unit of accounting if both of the following criteria are met: 1) the delivered item(s) has value to the client on a standalone basis and 2) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. Once separate units of accounting are determined, the arrangement consideration
should be allocated at the inception of the arrangement to all deliverables using the relative selling price method. Relative selling price is obtained from sources such as vendor-specific objective evidence, which is based on the separate selling price for that or a similar item or from third-party evidence such as how competitors have priced similar items. If such evidence is unavailable, we use our best estimate of the selling price, which includes various internal factors such as our pricing strategy and market factors.
We derive over 90% of our revenues as a result of providing processing and services under contracts. The majority of our fees are billed on a monthly basis, generally with thirty-day collection terms. Revenues are recognized for monthly processing and services upon performance of the services.
Our standard business practice is to bill monthly for development, consulting and training services on a time and materials basis. In some cases we bill a fixed fee for development and consulting services. For fixed fee arrangements, we recognize revenue on a “proportionate performance” basis. We periodically provide upfront cash payments to our clients to assist with the significant upfront costs associated with converting to new systems. Such payments are treated as a reduction of revenue over the term of the related contract.
We derive less than 10% of our revenues from licensing products. We license our wealth management products, life and pension administration system, AWD products and healthcare administration processing software solutions. Perpetual software license revenues are recognized at the time the contract is signed, the software is delivered and no future software obligations exist. Deferral of software license revenue billed results from delayed payment provisions, disproportionate discounts between the license and other services or the inability to unbundle certain services. Term software license revenues are recognized ratably over the term of the license agreement. While license fee revenues are not a significant percentage of our total operations, they can significantly impact earnings in the period in which they are recognized. Revenues from individual license sales depend heavily on the timing, size and nature of the contract. We recognize revenues for maintenance services ratably over the contract term, after collectability has been reasonably assured.
We may enter into arrangements with broker/dealers or other third parties to sell or market closed-end fund shares. Depending on the arrangement, we may earn distribution fees for marketing and selling the underlying fund shares. Conversely, we may incur distribution expenses, including structuring fees, finders’ fees and referral fees paid to unaffiliated broker/dealers or introducing parties for marketing and selling underlying fund shares of a closed-end fund we sponsor. While distribution revenues and expenses are not significant percentages of our operating revenues or costs and expenses, they can significantly impact operations and earnings in the period in which they are recognized.
We have entered into various agreements with related parties, principally unconsolidated affiliates, under which we have historically provided data processing and software services. We believe that the terms of our contracts with related parties are fair to us and are no less favorable than those obtained from unaffiliated parties.
We assess collection based on a variety of factors, including past collection history with the client and the credit-worthiness of the client. We generally do not request collateral from our client. If we determine that collection of revenues is not reasonably assured, revenue is deferred and is recognized at the time it becomes reasonably assured, which is generally upon receipt of cash. Allowances for billing adjustments and bad debt expense are estimated as revenues are recognized. Allowances for billing adjustments are recorded as reductions in revenues and bad debt expense is recorded within Costs and expenses. The annual amounts for these items are generally immaterial to our consolidated financial statements.
Software capitalization and amortization
We make substantial investments in software to enhance the functionality and facilitate the delivery of our processing services as well as our sale of licensed products. Purchased software is recorded at cost and is amortized on a straight-line basis over the estimated economic life, which is generally three to five years. We develop a large portion of our software internally. We capitalize software development costs for computer software developed or obtained for internal use after the preliminary project phase has been completed and management has committed to funding the project. For computer software to be sold, leased or otherwise marketed to third parties, we capitalize software development costs which are incurred after the products reach technological feasibility but prior to the general release of the product to clients. The capitalized software development costs are generally amortized on a straight-line basis over the estimated economic life, which is generally three to five years.
Significant management judgment is required in determining what projects and costs associated with software development will be capitalized and in assigning estimated economic lives to the completed projects. Management specifically evaluates software development projects and analyzes the percentage of completion as compared to the initial plan and subsequent forecasts, milestones achieved and the commitment to continue funding the projects. Significant changes in any of these items may result in discontinuing capitalization of development costs, as well as immediately expensing previously capitalized costs. We review, on a quarterly basis, our capitalized software for possible impairment.
Depreciation of fixed assets
For personal property, we generally prefer to own rather than lease the property when practicable. We believe this approach provides us with better flexibility for disposing or redeploying the asset as it nears the completion of its economic life. We depreciate technology equipment using accelerated depreciation methods over the following lives: (1) non-mainframe equipment—three years; (2) mainframe central processing unit—four years; and (3) mainframe direct access storage devices—five years. We depreciate furniture and fixtures over estimated useful lives, principally three to five years, using accelerated depreciation methods. We depreciate leasehold improvements using the straight-line method over the lesser of the term of the lease or life of the improvements. Management judgment is required in assigning economic lives to fixed assets. Management specifically analyzes fixed asset additions, remaining net book values and gain/loss upon disposition of fixed assets to determine the appropriateness of assigned economic lives. Significant changes in any of these items may result in changes in the economic life assigned and the resulting depreciation expense.
Valuation of long-lived and intangible assets and goodwill
Goodwill and indefinite-lived intangible assets are not amortized but are evaluated for impairment. We evaluate the impairment of goodwill at least annually (as of October 1) and evaluate identifiable intangibles, long-lived assets and related assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that could trigger an impairment review include the following: significant under-performance relative to expected historical or projected future operating results; significant changes in the manner of our use of the acquired assets or our strategy for the overall business; and significant negative industry or economic trends. When it is determined that the carrying value of intangibles, long-lived assets or goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we assess actual impairment based on cash flows.
Our assessment of goodwill for impairment may first include a qualitative assessment that considers various factors, including those described above as well as growth in operating revenues and income from operations of our reporting units since our last quantitative assessment. A quantitative assessment is performed if the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if a qualitative assessment is not performed.
Our quantitative assessment of goodwill for impairment includes comparing the fair value of a reporting unit with its net book value, including goodwill. We estimate fair value using a combination of discounted cash flow models and market approaches. If the fair value of a reporting unit exceeds its net book value, goodwill of the reporting unit is considered not impaired. If the net book value of a reporting unit exceeds its fair value, we recognize an impairment loss equal to the excess, limited to the total amount of goodwill allocated to that reporting unit. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill becomes its new accounting basis.
Our
2017
,
2016
and
2015
annual goodwill impairment tests determined that goodwill was not impaired, except during 2016 for the goodwill held at the Customer Communications U.K. reporting unit, which is included as a component of discontinued operations, as further described in Item 8, Financial Statements and Supplemental Data - Note 4, “Discontinued Operations.”
Accounting for investments
We have four significant types of investments: 1) investments in available-for-sale securities; 2) investments in unconsolidated affiliates, which are comprised principally of IFDS L.P. and certain real estate joint ventures; 3) investments in private equity funds and other investments accounted for under the cost method; and 4) seed capital investments accounted for at fair value.
We account for investments in entities in which we own less than 20% and do not have significant influence in accordance with authoritative guidance related to accounting for certain investments in debt and equity securities, which requires us to designate our investments as trading or available-for-sale. Available-for-sale securities are reported at fair value with unrealized gains and losses excluded from earnings and recorded net of deferred taxes directly to Accumulated other comprehensive income within Stockholders’ equity.
We regularly review investment securities for impairment based on both quantitative and qualitative criteria that include the extent to which cost exceeds fair value, the duration of any market decline, and the financial health of and specific prospects for the issuer. We record an investment impairment charge for an investment with a gross unrealized holding loss resulting from a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future, which could have a material effect on our financial position.
The equity method of accounting is used for investments in entities, partnerships and similar interests (including investments in private equity funds where we are the limited partner) in which we have significant influence but do not control. We classify
these investments as unconsolidated affiliates. Under the equity method, we recognize income or losses from our pro-rata share of these unconsolidated affiliates’ net income or loss, which changes the carrying value of the investment of the unconsolidated affiliate. In certain cases, pro-rata losses are recognized only to the extent of our investment and advances to the unconsolidated affiliate.
The cost method of accounting is used for these investments when we have a de minimis ownership percentage and do not have significant influence. Our cost method investments are held at the lower of cost or market.
Accounting for income taxes
We account for income taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns (e.g., realization of deferred tax assets, changes in tax laws or interpretations thereof).
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), resulting in significant modifications to existing U.S. tax law, including but not limited to, (1) lowering the corporate federal income tax rate from 35% to 21% effective January 1, 2018; (2) eliminating the domestic production activity deduction; (3) implementing a territorial tax system; and (4) imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries. The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”) which provides additional clarification in situations where we do not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act for the reporting period in which the Tax Act was enacted. We have recognized the provisional tax impacts, based on reasonable estimates, related to the one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits through the year ended December 31, 2017 (“Transition Tax”) and the revaluation of deferred tax assets and liabilities and has included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act. We intend to complete our accounting under the Tax Act within the measurement period set forth in SAB 118.
In addition, we are subject to examination of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for potential tax exposures based on our estimate of whether, and the extent to which, additional taxes may be required. If we ultimately determine that payment of these amounts is unnecessary, then we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained if challenged by the taxing authorities. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective tax rate in a given period may be materially affected. An unfavorable tax settlement would require cash payments and may result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution. We report interest and penalties related to uncertain income tax positions within income tax expense.
Results of Operations
The following table summarizes our consolidated operating results (in millions). Additional information regarding our segments is included below under the caption, “Year to Year Business Segment Comparisons.”
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Change
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Year Ended December 31,
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2017 vs 2016
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2016 vs 2015
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2017
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2016
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2015
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$
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%
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$
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%
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Operating revenues
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$
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2,086.7
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$
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1,474.4
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$
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1,405.0
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$
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612.3
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41.5
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%
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$
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69.4
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4.9
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%
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Out-of-pocket reimbursements
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131.5
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82.3
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69.0
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49.2
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59.8
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%
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13.3
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19.3
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%
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Total revenues
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2,218.2
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1,556.7
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1,474.0
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661.5
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42.5
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%
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82.7
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5.6
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%
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Costs and expenses
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1,805.0
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1,213.4
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1,150.2
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591.6
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48.8
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%
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63.2
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5.5
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%
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Depreciation and amortization
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128.0
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96.0
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|
91.1
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32.0
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33.3
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%
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|
4.9
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|
5.4
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%
|
Operating income
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285.2
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247.3
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232.7
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37.9
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15.3
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%
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14.6
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|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(26.8
|
)
|
|
(23.5
|
)
|
|
(23.8
|
)
|
|
(3.3
|
)
|
|
(14.0
|
)%
|
|
(0.3
|
)
|
|
(1.3
|
)%
|
Gain on sale of business
|
—
|
|
|
5.5
|
|
|
—
|
|
|
(5.5
|
)
|
|
(100.0
|
)%
|
|
5.5
|
|
|
100.0
|
%
|
Other income, net
|
219.0
|
|
|
22.7
|
|
|
204.5
|
|
|
196.3
|
|
|
864.8
|
%
|
|
(181.8
|
)
|
|
(88.9
|
)%
|
Equity in earnings of unconsolidated affiliates
|
54.5
|
|
|
27.2
|
|
|
45.4
|
|
|
27.3
|
|
|
100.4
|
%
|
|
(18.2
|
)
|
|
(40.1
|
)%
|
Income from continuing operations before income taxes and non-controlling interest
|
531.9
|
|
|
279.2
|
|
|
458.8
|
|
|
252.7
|
|
|
90.5
|
%
|
|
(179.6
|
)
|
|
(39.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
84.3
|
|
|
101.1
|
|
|
149.2
|
|
|
(16.8
|
)
|
|
(16.6
|
)%
|
|
(48.1
|
)
|
|
(32.2
|
)%
|
Net income from continuing operations before non-controlling interest
|
447.6
|
|
|
178.1
|
|
|
309.6
|
|
|
269.5
|
|
|
151.3
|
%
|
|
(131.5
|
)
|
|
(42.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax
|
4.5
|
|
|
248.3
|
|
|
48.5
|
|
|
(243.8
|
)
|
|
(98.2
|
)%
|
|
199.8
|
|
|
412.0
|
%
|
Net income
|
452.1
|
|
|
426.4
|
|
|
358.1
|
|
|
25.7
|
|
|
6.0
|
%
|
|
68.3
|
|
|
19.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (income) loss attributable to non-controlling interest
|
(0.6
|
)
|
|
0.9
|
|
|
0.1
|
|
|
(1.5
|
)
|
|
(166.7
|
)%
|
|
0.8
|
|
|
800.0
|
%
|
Net income attributable to DST Systems, Inc.
|
$
|
451.5
|
|
|
$
|
427.3
|
|
|
$
|
358.2
|
|
|
$
|
24.2
|
|
|
5.7
|
%
|
|
$
|
69.1
|
|
|
19.3
|
%
|
Revenues
Consolidated total revenues (including out-of-pocket (“OOP”) reimbursements)
increased
$661.5 million
or
42.5%
during the year ended
December 31, 2017
as compared to the year ended
December 31, 2016
and
increased
$82.7 million
or
5.6%
during the year ended
December 31, 2016
as compared to the year ended
December 31, 2015
. Consolidated operating revenues
increased
$612.3 million
or
41.5%
in
2017
as compared to
2016
primarily due to the acquisition of the remaining interests in BFDS and IFDS U.K. in 2017 which collectively contributed
$601.8 million
of incremental operating revenue during 2017. Consolidated operating revenues
increased
$69.4 million
or
4.9%
in
2016
as compared to
2015
primarily as a result of the acquisitions of KRFS in February 2016, Red Rocks Capital LLC in July 2015 and Wealth Management Systems Inc. in August 2015.
Prior to the acquisitions of BFDS and IFDS U.K., we received revenues for processing services and products provided under agreements with these entities. Our operating revenues derived from sales to these entities were
$138.5 million
and
$134.9 million
for the years ended December 31,
2016
, and
2015
, respectively, and $35.2 million in the first quarter of 2017. The operating results of BFDS and IFDS U.K. were consolidated within our operating results subsequent to the acquisition dates.
Consolidated OOP reimbursements
increased
$49.2 million
or
59.8%
in
2017
as compared to
2016
and
increased
$13.3 million
or
19.3%
in
2016
as compared to
2015
. The
increase
in consolidated OOP reimbursements in
2017
is primarily attributable to the acquisition of the remaining interests in BFDS and IFDS U.K. The
increase
in consolidated OOP reimbursements in
2016
is primarily attributable to increased client volumes in the Domestic Financial Services segment.
Costs and expenses
Consolidated costs and expenses (including OOP reimbursements)
increased
$591.6 million
or
48.8%
in
2017
as compared to
2016
and
increased
$63.2 million
or
5.5%
in
2016
as compared to
2015
. Costs and expenses are primarily comprised of compensation and benefit costs, reimbursable operating expenses, information technology spend and professional fees. Reimbursable operating expenses included in costs and expenses were
$131.5 million
,
$82.3 million
and
$69.0 million
in
2017
,
2016
and
2015
, respectively. Excluding reimbursable operating expenses, costs and expenses
increased
$542.4 million
in
2017
as compared to
2016
and
increased
$49.9 million
in
2016
as compared to
2015
.
The increase in costs and expenses in 2017, exclusive of reimbursable expenses, is primarily attributable to the consolidation of BFDS and IFDS U.K. following the acquisitions of the remaining interests in these entities during 2017. Share-based compensation expense
increased
$31.4 million
during the year ended December 31, 2017 primarily driven by the prior year reversal of accrued performance-related share-based compensation expense as 2015 PSUs were not expected to achieve the required performance criteria combined with increased share-based compensation expense in 2017 related to 2016 and 2017 PSUs that are currently expected to vest at a higher conversion rate than target. In addition, we recorded increased bad debt expense and a significant charitable contribution transaction in 2017.
As a result of changes in our business environment, including the transition of certain Health Services clients off of our systems, the termination of a wealth management client in the International Financial Services segment, and the acquisitions of the remaining interests in BFDS and IFDS U.K., we have implemented restructuring initiatives to right-size our organization and enhance operational efficiencies, as well as achieve synergies from our recent acquisitions. During the year ended
December 31, 2017
, we incurred pretax restructuring charges primarily related to employee terminations and related costs of $23.4 million in Costs and expenses. Annualized savings achieved from the actions taken from March 2017 through October 2017 are currently expected to be approximately $22.0 million within the Domestic Financial Services segment, approximately $7.0 million within the International Financial Services segment and approximately $13.0 million within the Healthcare Services segment.
During the years ended December 31, 2016 and 2015, we incurred
$10.4 million
and
$3.4 million
of pretax restructuring charges, respectively.
Depreciation and amortization
Consolidated depreciation and amortization
increased
$32.0 million
or
33.3%
during the year ended
December 31, 2017
as compared to the year ended
December 31, 2016
primarily as a result of the acquisitions of the remaining interests in BFDS and IFDS U.K. and
increased
$4.9 million
or
5.4%
during the year ended
December 31, 2016
as compared to the year ended
December 31, 2015
primarily as a result of the acquisition of KRFS.
Operating income
Consolidated operating income
increased
$37.9 million
or
15.3%
to
$285.2 million
during the year ended
December 31, 2017
as compared to
2016
and
increased
$14.6 million
or
6.3%
to
$247.3 million
during the year ended
December 31, 2016
as compared to
2015
.
Interest expense
Interest expense was
$26.8 million
,
$23.5 million
and
$23.8 million
during the years ended
December 31, 2017
,
2016
and
2015
, respectively. Interest expense
increased
14.0%
during
2017
as compared to
2016
primarily due to higher borrowings as a result of the acquisition of IFDS U.K. and higher borrowing rates on the $350.0 million of debt issued in the fourth quarter of 2017. Interest expense decreased
1.3%
during
2016
as compared to
2015
primarily from lower weighted average debt balances outstanding.
Gain on sale of business
On November 1, 2016, we sold DST Billing Solutions Limited (“Billing Solutions”) for cash consideration of approximately $6.1 million. Operating revenue and income generated for the Billing Solutions business sold was approximately $4.0 million and $0.7 million, respectively, for the year ended December 31, 2016. We recorded a pretax gain of $5.5 million on the sale of the business during 2016.
Other income, net
The components of other income, net are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net realized gains from the disposition of available-for-sale securities
|
$
|
155.9
|
|
|
$
|
2.3
|
|
|
$
|
168.4
|
|
Net gain on previously held equity interests
|
43.8
|
|
|
—
|
|
|
—
|
|
Net gain on private equity funds and other investments
|
15.4
|
|
|
16.5
|
|
|
35.7
|
|
Dividend income
|
3.5
|
|
|
5.8
|
|
|
8.3
|
|
Miscellaneous items
|
0.4
|
|
|
(1.9
|
)
|
|
(7.9
|
)
|
Other income, net
|
$
|
219.0
|
|
|
$
|
22.7
|
|
|
$
|
204.5
|
|
Included in the net realized gains from the disposition of available-for-sale securities during
2015
were gains of
$157.3 million
from the sale of approximately
2.3 million
shares of State Street common stock as compared to no sales of State Street shares during
2016
. We recognized a realized gain of
$145.1 million
from the exchange of State Street common stock for the remaining interests in BFDS in 2017. We also recognized a realized gain of
$10.4 million
from the charitable contribution of our remaining State Street shares in 2017. Additionally, as a result of the 2017 acquisitions, we recorded a net pretax gain of
$43.8 million
on the step-up of our previous 50% ownership interests in BFDS and IFDS U.K. during the year ended December 31, 2017.
We recorded a net gain on private equity funds and other investments of
$15.4 million
,
$16.5 million
and
$35.7 million
during the years ended
December 31, 2017
,
2016
and
2015
, respectively, primarily due to distributions received from certain of our private equity fund investments resulting in realized gains. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments and may require an impairment charge in the future, which could have a material effect on our net income.
We receive dividend income from certain investments held. The decline in dividend income for the year ended December 31, 2017 was primarily driven by our reduction of our investment in State Street common stock in March 2017. Dividends received from State Street common stock were
$0.1 million
,
$3.1 million
and
$3.2 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
International Financial Data Services U.K.
|
$
|
1.0
|
|
|
$
|
10.0
|
|
|
$
|
22.5
|
|
International Financial Data Services L.P.
|
18.3
|
|
|
2.2
|
|
|
7.4
|
|
Boston Financial Data Services, Inc.
|
3.6
|
|
|
8.3
|
|
|
5.3
|
|
Other unconsolidated affiliates
|
31.6
|
|
|
6.7
|
|
|
10.2
|
|
Total
|
$
|
54.5
|
|
|
$
|
27.2
|
|
|
$
|
45.4
|
|
Equity in earnings of IFDS U.K.
decreased
$9.0 million
during the year ended
December 31, 2017
, as compared to
2016
, primarily as a result of the discontinuation of equity method accounting subsequent to our acquisition of the remaining interests in IFDS U.K. Equity in earnings of IFDS U.K.
decreased
$12.5 million
during the year ended
December 31, 2016
, as compared to
2015
, primarily attributable to lower revenues recognized related to client conversion activities and higher operating costs as IFDS U.K. expanded its infrastructure to address increasing regulatory, compliance and security needs.
Equity in earnings of IFDS L.P.
increased
$16.1 million
during the year ended
December 31, 2017
, as compared to
2016
, primarily as a result of
$10.2 million
of realized gains on the step-up of certain investments and real estate assets that were distributed from the joint venture to DST and State Street immediately prior to the acquisitions by DST of the remaining interests in IFDS U.K. and BFDS. Equity in earnings of IFDS L.P.
decreased
$5.2 million
during the year ended
December 31, 2016
, as compared to
2015
.
Equity in earnings of BFDS
decreased
$4.7 million
during the year ended
December 31, 2017
as compared to
2016
. The
decrease
was primarily as a result of the discontinuation of equity method accounting subsequent to the acquisition of the remaining interests in BFDS in March 2017. Equity in earnings of BFDS
increased
$3.0 million
during the year ended
December 31, 2016
as compared to
2015
. The increase was primarily attributable to higher ancillary and non-operating revenues as well as a reduction in operating costs.
Our equity in earnings of other unconsolidated affiliates was
$31.6 million
during the year ended
December 31, 2017
, an
increase
of
$24.9 million
as compared to
2016
. The
increase
was primarily due to a $23.0 million increase resulting from a gain on the step-up of real estate distributed from Broadway Square Partners, LLP (“Broadway Square Partners”), an unconsolidated affiliate, during 2017. Our equity in earnings of other unconsolidated affiliates was
$6.7 million
during the year ended
December 31, 2016
, a
decrease
of
$3.5 million
as compared to
2015
. The
decrease
was primarily due to a $3.6 million gain resulting from the sale of real estate by an unconsolidated affiliate during 2015.
As of December 31, 2017, approximately $40.8 million of our consolidated retained earnings represents undistributed earnings in our unconsolidated affiliates accounted for by the equity method of accounting.
Income taxes
Our effective tax rate was
15.8%
,
36.2%
and
32.5%
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Our income tax rate for
2017
was lower than the statutory federal income tax rate of 35% primarily due to the non-taxable nature of the BFDS exchange transaction, the impacts of the Tax Act, the adoption of new accounting guidance issued for tax benefits on employee share-based compensation transactions, benefits realized from the settlement of uncertain tax positions, and a change in the proportional mix of domestic and international transactions. The 2017 impact of the Tax Act was a $13.7 million tax benefit, primarily from the net impact of the revaluation of our deferred tax assets and liabilities utilizing the enacted tax rate at the time they are anticipated to be realized less the estimated tax associated with the deemed mandatory repatriation of undistributed accumulated foreign earnings. This reflects our current estimate of the U.S. income tax effects of the Tax Act, however these are provisional amounts subject to adjustment during the one year measurement period provided pursuant to guidance in SAB 118.
Our effective income tax rate for
2016
was higher than the statutory federal income tax rate of 35% primarily attributable to state income taxes, transaction related taxes, and a change in the proportional mix of domestic and international income, partially offset by federal income tax credits for foreign income taxes and research and development costs.
Our effective income tax rate for
2015
was favorably impacted by an $11.9 million benefit from the completion of the IRS examination of previously filed federal income tax refund claims for Domestic Manufacturing Deductions, research and experimentation credits and capital losses for 2010 as well as other remeasurements during the period.
Excluding the effect of discrete period items, we currently expect our effective tax rate to be approximately 26.5% in
2018
. The
2018
tax rate can be affected as a result of variances among the estimates and amounts of
2018
sources of taxable income (e.g., domestic consolidated, joint venture and/or international), the realization of tax credits, adjustments which may arise from the resolution of tax matters under review, our assessment of our liability for uncertain tax positions, changes in interpretations and assumptions we have made, federal tax regulations and guidance that may be issued by the U.S. Department of the Treasury and actions we may take as a result of the Tax Act.
Income from discontinued operations, net of tax
Income from discontinued operations, net of tax decreased
$243.8 million
during the year ended
December 31, 2017
as compared to
2016
and increased
$199.8 million
during the year ended
December 31, 2016
as compared to
2015
. The decrease during the year ended
December 31, 2017
was primarily due to the sale of our North American Customer Communications business in July 2016, partially offset by the sale of our U.K. Customer Communications business in May 2017. The increase during the year ended
December 31, 2016
was primarily attributable to the
$234.7 million
gain, net of tax, on the sale of our North American Customer Communications business partially offset by $17.0 million of goodwill and asset impairments in our U.K. Customer Communications business.
YEAR TO YEAR BUSINESS SEGMENT COMPARISONS
DOMESTIC FINANCIAL SERVICES SEGMENT
The following table presents the financial results of the Domestic Financial Services segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
Year Ended December 31,
|
|
2017 vs 2016
|
|
2016 vs 2015
|
|
2017
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
$
|
|
%
|
Operating revenues
|
$
|
1,187.2
|
|
|
$
|
995.8
|
|
|
$
|
983.1
|
|
|
$
|
191.4
|
|
|
19.2
|
%
|
|
$
|
12.7
|
|
|
1.3
|
%
|
Out-of-pocket reimbursements
|
111.8
|
|
|
73.0
|
|
|
60.7
|
|
|
38.8
|
|
|
53.2
|
%
|
|
12.3
|
|
|
20.3
|
%
|
Total revenues
|
1,299.0
|
|
|
1,068.8
|
|
|
1,043.8
|
|
|
230.2
|
|
|
21.5
|
%
|
|
25.0
|
|
|
2.4
|
%
|
Costs and expenses
|
1,072.2
|
|
|
829.0
|
|
|
792.3
|
|
|
243.2
|
|
|
29.3
|
%
|
|
36.7
|
|
|
4.6
|
%
|
Depreciation and amortization
|
86.8
|
|
|
77.3
|
|
|
67.7
|
|
|
9.5
|
|
|
12.3
|
%
|
|
9.6
|
|
|
14.2
|
%
|
Operating income
|
$
|
140.0
|
|
|
$
|
162.5
|
|
|
$
|
183.8
|
|
|
$
|
(22.5
|
)
|
|
(13.8
|
)%
|
|
$
|
(21.3
|
)
|
|
(11.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
11.8
|
%
|
|
16.3
|
%
|
|
18.7
|
%
|
|
|
|
|
|
|
|
|
The following table summarizes the Domestic Financial Services segment’s statistical metrics (in millions, except as noted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Domestic mutual fund shareowner accounts processed:
|
|
|
|
|
|
|
Registered accounts - non tax-advantaged
|
|
24.2
|
|
|
25.3
|
|
|
27.0
|
|
IRA mutual fund accounts
|
|
20.5
|
|
|
21.1
|
|
|
21.8
|
|
Other retirement accounts
|
|
7.8
|
|
|
8.0
|
|
|
8.2
|
|
Section 529 and Educational IRAs
|
|
7.8
|
|
|
7.5
|
|
|
8.4
|
|
Registered accounts - tax-advantaged
|
|
36.1
|
|
|
36.6
|
|
|
38.4
|
|
Total registered accounts
|
|
60.3
|
|
|
61.9
|
|
|
65.4
|
|
Subaccounts
|
|
46.2
|
|
|
42.1
|
|
|
31.3
|
|
Total domestic mutual fund shareowner accounts processed
|
|
106.5
|
|
|
104.0
|
|
|
96.7
|
|
|
|
|
|
|
|
|
Defined contribution participant accounts
|
|
7.2
|
|
|
6.8
|
|
|
7.0
|
|
|
|
|
|
|
|
|
ALPS
(in billions of U.S. dollars)
:
|
|
|
|
|
|
|
Assets Under Management
|
|
$
|
18.4
|
|
|
$
|
17.2
|
|
|
$
|
14.7
|
|
Assets Under Administration
|
|
$
|
225.9
|
|
|
$
|
179.1
|
|
|
$
|
140.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Changes in registered accounts:
|
|
|
|
|
|
|
Beginning balance
|
|
61.9
|
|
|
65.4
|
|
|
68.8
|
|
New client conversions
|
|
3.0
|
|
|
0.1
|
|
|
—
|
|
Subaccounting conversions to DST platforms
|
|
(0.9
|
)
|
|
(0.9
|
)
|
|
(1.8
|
)
|
Subaccounting conversions to non-DST platforms
|
|
(1.0
|
)
|
|
(0.5
|
)
|
|
(1.1
|
)
|
Conversions to non-DST platforms
|
|
(0.3
|
)
|
|
(0.7
|
)
|
|
(0.3
|
)
|
Organic decline
|
|
(2.4
|
)
|
|
(1.5
|
)
|
|
(0.2
|
)
|
Ending balance
|
|
60.3
|
|
|
61.9
|
|
|
65.4
|
|
|
|
|
|
|
|
|
Changes in subaccounts:
|
|
|
|
|
|
|
Beginning balance
|
|
42.1
|
|
|
31.3
|
|
|
28.6
|
|
New client conversions
|
|
0.3
|
|
|
10.7
|
|
|
—
|
|
Conversions from non-DST registered platforms
|
|
1.6
|
|
|
—
|
|
|
1.1
|
|
Conversions from DST’s registered accounts
|
|
0.9
|
|
|
0.9
|
|
|
1.8
|
|
Conversions to non-DST platforms
|
|
(0.4
|
)
|
|
—
|
|
|
—
|
|
Organic growth (decline)
|
|
1.7
|
|
|
(0.8
|
)
|
|
(0.2
|
)
|
Ending balance
|
|
46.2
|
|
|
42.1
|
|
|
31.3
|
|
|
|
|
|
|
|
|
Changes in defined contribution participant accounts:
|
|
|
|
|
|
|
Beginning balance
|
|
6.8
|
|
|
7.0
|
|
|
7.2
|
|
New client conversions
|
|
0.5
|
|
|
—
|
|
|
0.1
|
|
Organic decline
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
(0.3
|
)
|
Ending balance
|
|
7.2
|
|
|
6.8
|
|
|
7.0
|
|
Comparison of
2017
versus
2016
results
Operating revenues
Domestic Financial Services segment operating revenues of
$1,187.2 million
reflect
an increase
of
$191.4 million
or
19.2%
in
2017
as compared to
2016
. The
increase
in operating revenues during the year ended
December 31, 2017
was primarily attributable to the acquisition of the remaining interest in BFDS, which contributed
$176.6 million
of incremental operating revenues. Excluding the BFDS operating revenues in 2017, operating revenues for the Domestic Financial Services segment for the year ended
December 31, 2017
increased
$14.8 million
or
1.5%
. This
increase
in operating revenues for the year ended
December 31, 2017
was partially due to a $5.0 million increase in revenue at ALPS resulting from an insurance claim reimbursement of $2.0 million received in fourth quarter 2017 as compared to a reduction to ALPS revenue of $3.0 million during 2016 for the processing error that generated the insurance claim. In addition, operating revenues were higher as a result of increased fund flows and higher market performance at ALPS, partially offset by decreased revenues resulting from the exit of certain product offerings and lower subaccounting and mutual fund registered shareowner account processing revenues. Additionally, software license revenues were
$17.7 million
for the year ended
December 31, 2017
,
a decrease
of
$3.9 million
as compared to
2016
.
Costs and expenses
Domestic Financial Services segment costs and expenses for the year ended
December 31, 2017
were
$1,072.2 million
,
an increase
of
$243.2 million
as compared to
2016
. Reimbursable operating expenses included in costs and expenses were
$111.8 million
in
2017
,
an increase
of
$38.8 million
as compared to
2016
.
Excluding reimbursable operating expenses, Domestic Financial Services costs and expenses
increased
$204.4 million
or
27.0%
for the year ended
December 31, 2017
as compared to
2016
. This increase was primarily attributable to $176.3 million of incremental costs and expenses from the consolidation of BFDS following the acquisition of the remaining interest in that entity in 2017 and higher share-based compensation expense which increased $25.2 million during the year ended December 31, 2017 as compared to the prior year.
In addition, costs and expenses increased from higher integration and restructuring costs related to our BFDS acquisition and higher information technology transformation spend partially offset by the non-recurrence of a software impairment recorded in 2016. We recorded restructuring charges of $16.3 million and $10.4 million during the years ended December 31, 2017 and 2016, respectively. During the year ended
December 31, 2017
, we also recognized $11.6 million of expense related to a charitable contribution of our remaining State Street stock.
Depreciation and amortization
Domestic Financial Services segment depreciation and amortization costs for the year ended
December 31, 2017
were
$86.8 million
,
an increase
of
$9.5 million
or
12.3%
as compared to
2016
. The
increase
in
2017
was primarily attributable to incremental amortization associated with acquired intangibles from the recent acquisitions as well as increased depreciation from capitalized costs incurred to enhance our network infrastructure, security and regulatory compliance.
Operating income
Domestic Financial Services segment operating income for
2017
was
$140.0 million
,
a decrease
of
$22.5 million
or
13.8%
as compared to
2016
. The
decrease
in Domestic Financial Services operating income was primarily due to higher share-based compensation expense, higher advisory and restructuring costs due to the integration activities for the recently acquired BFDS business and increased depreciation and amortization expense. Operating income also decreased due to an increase in information technology transformation spend, partially offset by higher revenues.
Comparison of
2016
versus
2015
results
Operating revenues
Domestic Financial Services segment operating revenues of
$995.8 million
increased
$12.7 million
or
1.3%
in
2016
as compared to
2015
. The
increase
in operating revenues during the year ended
December 31, 2016
as compared to the year ended
December 31, 2015
was primarily driven from businesses acquired during 2015 and 2016, which contributed
$31.8 million
of incremental operating revenues. During 2016, we also completed the conversion of approximately 10.0 million subaccounts associated with a previously announced new client, which resulted in incremental revenues. These increases were partly offset by a decline in mutual fund registered shareowner account processing revenue due to lower registered accounts, primarily as a result of subaccounting conversions, and lower revenue due to extending certain long-term contracts with lower pricing. Additionally, software license revenues were
$21.6 million
for the year ended
December 31, 2016
,
a decrease
of
$0.9 million
as compared to
2015
.
Costs and expenses
Domestic Financial Services segment costs and expenses for the year ended
December 31, 2016
were
$829.0 million
,
an increase
of
$36.7 million
as compared to
2015
. Reimbursable operating expenses included in costs and expenses were
$73.0 million
for the year ended
December 31, 2016
,
an increase
of
$12.3 million
as compared to
2015
.
Excluding reimbursable operating expenses, Domestic Financial Services costs and expenses
increased
$24.4 million
or
3.3%
for the year ended
December 31, 2016
as compared to
2015
. On this basis, the
increase
in costs and expenses during
2016
was primarily from acquisitions completed during 2015 and 2016, which included approximately
$33.7 million
of incremental expenses. Also, contributing to the increase in costs and expenses were the restructuring activities, which resulted in
$10.4 million
of employee and lease termination costs during the year ended
December 31, 2016
to enhance operational efficiency within the Domestic Financial Services segment. We also incurred increased costs to enhance the network infrastructure utilized across all of our operating businesses and incremental costs to service new and existing clients. During the year ended
December 31, 2016
, we also recognized a $6.0 million software impairment. These costs and expenses were partially offset by the reversal of accrued performance-related share-based compensation expense as 2015 PSUs were not expected to achieve the required performance criteria required for vesting and further savings realized from cost containment initiatives.
Depreciation and amortization
Domestic Financial Services segment depreciation and amortization costs for the year ended
December 31, 2016
were
$77.3 million
,
an increase
of
$9.6 million
or
14.2%
as compared to
2015
. The
increase
in
2016
was primarily attributable to incremental amortization associated with acquired intangibles from the acquisitions completed in 2015 and 2016 as well as increased depreciation from capitalized costs incurred to enhance our network infrastructure and increase security and regulatory compliance. The increase in 2016 was also attributable to the acceleration of depreciation on certain capitalized software during 2016.
Operating income
Domestic Financial Services segment operating income for
2016
was
$162.5 million
,
a decrease
of
$21.3 million
or
11.6%
as compared to
2015
. The
decrease
in Domestic Financial Services operating income was primarily due to restructuring costs incurred during 2016, a software impairment charge, and increased costs incurred to enhance our network infrastructure, maintain security and regulatory compliance. These decreases were partially offset by the reversal of accrued performance-related share-based compensation expense, higher operating revenues and cost containment efforts during 2016.
INTERNATIONAL FINANCIAL SERVICES SEGMENT
The following table presents the financial results of the International Financial Services segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
Year Ended December 31,
|
|
2017 vs 2016
|
|
2016 vs 2015
|
|
2017
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
$
|
|
%
|
Operating revenues
|
$
|
538.4
|
|
|
$
|
110.9
|
|
|
$
|
93.4
|
|
|
$
|
427.5
|
|
|
385.5
|
%
|
|
$
|
17.5
|
|
|
18.7
|
%
|
Out-of-pocket reimbursements
|
12.2
|
|
|
1.2
|
|
|
1.7
|
|
|
11.0
|
|
|
916.7
|
%
|
|
(0.5
|
)
|
|
(29.4
|
)%
|
Total revenues
|
550.6
|
|
|
112.1
|
|
|
95.1
|
|
|
438.5
|
|
|
391.2
|
%
|
|
17.0
|
|
|
17.9
|
%
|
Costs and expenses
|
449.3
|
|
|
98.2
|
|
|
86.1
|
|
|
351.1
|
|
|
357.5
|
%
|
|
12.1
|
|
|
14.1
|
%
|
Depreciation and amortization
|
30.7
|
|
|
3.1
|
|
|
4.8
|
|
|
27.6
|
|
|
890.3
|
%
|
|
(1.7
|
)
|
|
(35.4
|
)%
|
Operating income
|
$
|
70.6
|
|
|
$
|
10.8
|
|
|
$
|
4.2
|
|
|
$
|
59.8
|
|
|
553.7
|
%
|
|
$
|
6.6
|
|
|
157.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
13.1
|
%
|
|
9.7
|
%
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
The following table summarizes the International Financial Services segment’s statistical metrics (in millions, except as noted):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
International mutual fund shareowner accounts processed:
|
|
|
|
|
|
|
IFDS U.K.
|
|
8.6
|
|
|
8.9
|
|
|
8.8
|
|
IFDS L.P. (Unconsolidated affiliate principally based in Canada)
|
|
14.5
|
|
|
13.7
|
|
|
13.3
|
|
Total international mutual fund shareowner accounts processed
|
|
23.1
|
|
|
22.6
|
|
|
22.1
|
|
|
|
|
|
|
|
|
Comparison of
2017
versus
2016
results
Operating revenues
International Financial Services segment operating revenues of
$538.4 million
reflect
an increase
of
$427.5 million
or
385.5%
in
2017
as compared to
2016
. The
increase
in operating revenues during the year ended
December 31, 2017
was primarily driven by the acquisition of the remaining interest in IFDS U.K., which contributed
$425.2 million
of incremental operating revenues, including the financial impacts resulting from the termination of a wealth management client agreement. The termination agreement resulted in incremental operating revenues of $93.2 million for the year ended
December 31, 2017
as DST accelerated recognition of previously deferred revenue and recognized termination payments received. Additionally, software license revenues were
$12.5 million
for the year ended
December 31, 2017
,
an increase
of
$2.6 million
as compared to
2016
. These increases were partly offset by lower revenues as a result of the previously discussed client termination in mid-2017 as well as the sale of DST Billing Solutions during 2016.
Costs and expenses
International Financial Services segment costs and expenses for the year ended
December 31, 2017
were
$449.3 million
,
an increase
of
$351.1 million
as compared to
2016
. Costs and expenses in the International Financial Services segment are primarily comprised of compensation and benefit costs as well as technology-related expenditures. Reimbursable operating expenses included in costs and expenses were
$12.2 million
in
2017
,
an increase
of
$11.0 million
as compared to
2016
.
Excluding reimbursable operating expenses, International Financial Services costs and expenses
increased
$340.1 million
for the year ended
December 31, 2017
as compared to
2016
primarily due to the acquisition of the remaining interests in IFDS U.K. Additionally, in connection with the termination agreement described above, we incurred bad debt expense of $34.5 million for previously invoiced services performed prior to the termination and $5.2 million of other termination-related charges.
Depreciation and amortization
International Financial Services segment depreciation and amortization costs for the year ended
December 31, 2017
were
$30.7 million
,
an increase
of
$27.6 million
as compared to
2016
. The
increase
in
2017
was primarily attributable to incremental amortization of intangible assets and depreciation of fixed assets from the acquisition of the remaining interests in IFDS U.K.
Operating income
International Financial Services segment operating income for
2017
was
$70.6 million
,
an increase
of
$59.8 million
or
553.7%
as compared to
2016
. The
increase
in International Financial Services operating income was primarily due to the impact of the termination of the wealth management client agreement of $53.5 million, including the recognition of previously deferred revenue and termination payments received as described above. The
increase
in operating income was also due to the higher revenues resulting from the acquisition of the remaining interest in IFDS U.K., partially offset by higher costs and expenses due to on-going development and implementation efforts for wealth management platform clients, share-based compensation expense, and restructuring charges.
Comparison of
2016
versus
2015
results
Operating revenues
International Financial Services segment operating revenues of
$110.9 million
increased
$17.5 million
or
18.7%
in
2016
as compared to
2015
. The
increase
in operating revenues during the year ended
December 31, 2016
as compared to the year ended
December 31, 2015
was primarily due to the increased professional services revenues associated with our international wealth management platform business. Software license revenues were
$9.9 million
for the year ended
December 31, 2016
,
a decrease
of
$1.1 million
as compared to
2015
.
Costs and expenses
International Financial Services segment costs and expenses for the year ended
December 31, 2016
were
$98.2 million
,
an increase
of
$12.1 million
as compared to
2015
. Reimbursable operating expenses included in costs and expenses were
$1.2 million
for the year ended
December 31, 2016
,
a decrease
of
$0.5 million
as compared to
2015
.
Excluding reimbursable operating expenses, International Financial Services costs and expenses
increased
$12.6 million
or
14.9%
for the year ended
December 31, 2016
as compared to
2015
. On this basis, the
increase
in costs and expenses during
2016
was primarily from higher staffing costs to support the increase in professional services revenues.
Depreciation and amortization
International Financial Services segment depreciation and amortization costs for the year ended
December 31, 2016
were
$3.1 million
,
a decrease
of
$1.7 million
or
35.4%
as compared to
2015
. The
decrease
in
2016
was primarily attributable to lower depreciation from lower capital expenditures.
Operating income
International Financial Services segment operating income for
2016
was
$10.8 million
,
an increase
of
$6.6 million
or
157.1%
as compared to
2015
. The
increase
in International Financial Services operating income was primarily due to the increased professional services revenues associated with our international wealth management platform business.
HEALTHCARE SERVICES SEGMENT
The following table presents the financial results of the Healthcare Services segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
Year Ended December 31,
|
|
2017 vs 2016
|
|
2016 vs 2015
|
|
2017
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
$
|
|
%
|
Operating revenues
|
$
|
418.5
|
|
|
$
|
426.2
|
|
|
$
|
376.4
|
|
|
$
|
(7.7
|
)
|
|
(1.8
|
)%
|
|
$
|
49.8
|
|
|
13.2
|
%
|
Out-of-pocket reimbursements
|
7.5
|
|
|
8.5
|
|
|
8.2
|
|
|
(1.0
|
)
|
|
(11.8
|
)%
|
|
0.3
|
|
|
3.7
|
%
|
Total revenues
|
426.0
|
|
|
434.7
|
|
|
384.6
|
|
|
(8.7
|
)
|
|
(2.0
|
)%
|
|
50.1
|
|
|
13.0
|
%
|
Costs and expenses
|
340.9
|
|
|
345.1
|
|
|
321.3
|
|
|
(4.2
|
)
|
|
(1.2
|
)%
|
|
23.8
|
|
|
7.4
|
%
|
Depreciation and amortization
|
10.5
|
|
|
15.6
|
|
|
18.6
|
|
|
(5.1
|
)
|
|
(32.7
|
)%
|
|
(3.0
|
)
|
|
(16.1
|
)%
|
Operating income
|
$
|
74.6
|
|
|
$
|
74.0
|
|
|
$
|
44.7
|
|
|
$
|
0.6
|
|
|
0.8
|
%
|
|
$
|
29.3
|
|
|
65.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
17.8
|
%
|
|
17.4
|
%
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
The following tables summarize the Healthcare Services segment’s statistical metrics (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
DST Health Solutions covered lives
|
|
21.8
|
|
|
22.8
|
|
|
26.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Argus pharmacy paid claims
|
|
500.0
|
|
|
507.0
|
|
|
494.4
|
|
Comparison of
2017
versus
2016
results
Operating revenues
Healthcare Services segment operating revenues of
$418.5 million
decreased
$7.7 million
or
1.8%
in
2017
compared to
2016
. The
decrease
in operating revenue during the year ended
December 31, 2017
was primarily due to the previously announced client transitions off of our systems, which resulted in approximately
$46.5 million
of lower revenues. Excluding client migrations, Healthcare Services operating revenues
increased
by
$38.8 million
or
10.2%
. On this basis, the increase in operating revenues primarily resulted from organic growth and the expansion of the high-value services that we are offering to existing clients in both the medical and pharmacy businesses. These increases were partially offset by reductions in membership related to exchanges and lower consulting and development revenues which we believe is the result of a decline in healthcare technology spending due to the ongoing uncertainty around government policy changes. Additionally, operating revenues included approximately
$9.8 million
of software license fee revenues for the year ended
December 31, 2017
,
an increase
of
$1.8 million
as compared to
2016
.
Costs and expenses
Healthcare Services segment costs and expenses for the year ended
December 31, 2017
were
$340.9 million
,
a decrease
of
$4.2 million
as compared to
2016
. Reimbursable operating expenses included in costs and expenses were
$7.5 million
in
2017
,
a decrease
of
$1.0 million
as compared to
2016
. Excluding reimbursable operating expenses, costs and expenses were
$333.4 million
for
2017
,
a decrease
of
$3.2 million
as compared to
2016
. On this basis, the
decrease
in costs and expenses during
2017
was primarily due to lower staffing needs resulting from the previously announced client migrations, partially offset by increased restructuring charges and increased share-based compensation expense. We recorded $4.4 million of restructing charges in 2017, as compared to none in 2016.
Depreciation and amortization
Healthcare Services segment depreciation and amortization costs for the year ended
December 31, 2017
were
$10.5 million
,
a decrease
of
$5.1 million
or
32.7%
as compared to
2016
. The decrease is attributable to lower capital expenditures and an intangible asset becoming fully amortized during 2017.
Operating income
Healthcare Services segment operating income for
2017
was
$74.6 million
,
an increase
of
$0.6 million
or
0.8%
as compared to
2016
. The slight
increase
in operating income was primarily attributable to organic growth and the expansion of the high-value services that we are offering to existing clients in both the medical and pharmacy businesses and decreases in depreciation and amortization. These increases were partially offset by the negative impact of client migrations, restructuring charges, and increased share-based compensation expenses.
Comparison of
2016
versus
2015
results
Operating revenues
Healthcare Services segment operating revenues of
$426.2 million
increased
$49.8 million
or
13.2%
in
2016
as compared to
2015
. The
increase
in operating revenues for the year ended
December 31, 2016
was primarily from new medical claims processing clients implemented during 2016, organic growth and the expansion of high-value services we are offering to existing clients in both the medical and pharmacy businesses. Operating revenues included approximately
$8.0 million
of software license fee revenues for the year ended
December 31, 2016
,
a decrease
of
$1.1 million
as compared to
2015
.
Costs and expenses
Healthcare Services segment costs and expenses for the year ended
December 31, 2016
were
$345.1 million
,
an increase
of
$23.8 million
as compared to
2015
. Reimbursable operating expenses included in costs and expenses were
$8.5 million
in
2016
,
an increase
of
$0.3 million
as compared to
2015
. Excluding reimbursable operating expenses, costs and expenses were
$336.6 million
for
2016
,
an increase
of
$23.5 million
as compared to
2015
. On this basis, the
increase
in costs and expenses during
2016
was primarily attributable to increased staffing costs incurred to support the higher medical transaction volumes due to the growth in BPO services. These costs and expenses were partially offset by restructuring costs that occurred during 2015 that did not recur during 2016 and a $2.4 million reduction of share-based compensation expense as certain PSUs were no longer expected to vest.
Depreciation and amortization
Healthcare Services segment depreciation and amortization costs for the year ended
December 31, 2016
were
$15.6 million
,
a decrease
of
$3.0 million
or
16.1%
as compared to
2015
primarily due to lower capital expenditures.
Operating income
Healthcare Services segment operating income for
2016
was
$74.0 million
,
an increase
of
$29.3 million
or
65.5%
as compared to
2015
. The
increase
in operating income was primarily attributable to higher revenues from organic growth and new medical claims processing clients implemented in 2016, resulting in enhanced economies of scale as clients were converted as well as a reduction of share-based compensation expense as certain PSUs were no longer expected to vest. These increases were partially offset by increased staffing costs incurred to support the higher medical transaction volumes due to the growth in BPO services.
LIQUIDITY AND CAPITAL RESOURCES
Company’s Assessment of Short-term and Long-term Liquidity
We believe that our existing cash balances and other current assets, together with cash provided by operating activities and, as necessary, our revolving credit facilities, are sufficient to meet our operating and debt service requirements and other current liabilities for at least the next 12 months. Further, we believe that our longer term liquidity and capital requirements will also be met through cash provided by operating activities, bank credit facilities and other investments.
At
December 31, 2017
, total cash and cash equivalents were
$80.5 million
, of which
$46.0 million
was held outside of the U.S. Although the amounts held outside the U.S. have been taxed through the Transition Tax, these amounts could be subject to other taxes such as withholding taxes and local taxes. We have accrued for withholding taxes and local taxes on the earnings of our international subsidiaries except when the earnings are considered indefinitely reinvested outside of the U.S. The repatriation of these earnings could result in additional withholding and local tax payments in future years. We utilize a variety of funding strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed.
At
December 31, 2017
, we had approximately
$990.7 million
of availability under our domestic revolving credit facilities, including our accounts receivable securitization program. Debt obligations, classified as long-term when originally issued, existing as of
December 31, 2017
that are scheduled to mature in 2018 include
$65.0 million
of Series C 2010 Senior Notes that are scheduled to mature in August 2018 and $3.7 million of payments related to outstanding mortgages. We are scheduled
to issue
$65.0 million
of Series C 2017 Senior Notes in August 2018 which are expected to be utilized to repay the Series C 2010 Senior Notes.
We may need to access debt and equity markets in the future if unforeseen costs or opportunities arise, to fund acquisitions or investments or to repay indebtedness. If we need to obtain new debt or equity financing in the future, the terms and availability of such financing may be impacted by economic and financial market conditions as well as our financial condition and results of operations at the time we seek additional financing. We currently have $585.0 million of additional capacity pursuant to the master note purchase agreement dated November 14, 2017 that could be utilized for future debt issuances.
Sources and Uses of Cash
We had
$80.5 million
,
$195.5 million
and
$79.5 million
of cash and cash equivalents at
December 31, 2017
,
2016
and
2015
, respectively. Our primary source of liquidity has historically been cash provided by operations. In addition, we have used proceeds from the sale of investments to fund other investing and financing activities. Principal uses of cash are operations, reinvestment in our proprietary technologies, capital expenditures, investment purchases, business acquisitions, payments on debt, stock repurchases and dividend payments. Additionally, we expect to incur significant transaction costs associated with the completion of the Merger. Information on our consolidated cash flows for the years ended
December 31, 2017
,
2016
and
2015
is presented in the Consolidated Statement of Cash Flows, categorized by operating activities, investing activities, and financing activities.
The sale of our North American Customer Communications business on July 1, 2016 and our U.K. Customer Communications business on May 4, 2017 resulted in cash consideration of approximately
$410.7 million
and
$43.6 million
, respectively, net of tax. The after-tax proceeds from the sales were used in accordance with the Company’s capital plan, including investments in the business, share repurchases, strategic acquisitions, debt repayments and other corporate purposes.
Operating Activities
Cash flows provided from continuing operating activities were
$164.0 million
during the year ended
December 31, 2017
. Operating cash flows from continuing operating activities during
2017
resulted principally from income from continuing operations of
$447.6 million
, adjusted for non-cash or non-operating items of
$108.2 million
including depreciation and amortization, equity in earnings of unconsolidated affiliates, net gains on investments and gains recognized on the step up of the carrying value of our previously held equity interests in unconsolidated affiliates as a result of the acquisitions of the remaining interests in BFDS and IFDS U.K., and a use of cash due to changes in operating assets and liabilities of
$175.4 million
. Significant changes in operating assets and liabilities include a
$127.9 million
use of cash related to other assets primarily due to up-front payments made to clients which are expected to be recovered over the clients’ contractual arrangements and higher prepaid software costs, a
$39.9 million
use of cash for accounts payable and accrued liabilities, and a
$29.6 million
use of cash related to deferred revenue and gains primarily as a result of the wealth management platform client termination.
Cash flows provided from continuing operating activities were
$162.7 million
for the year ended
December 31, 2016
. Operating cash flows from continuing operations during
2016
resulted principally from income from continuing operations of
$178.1 million
, adjusted for non-cash or non-operating items of
$90.4 million
including depreciation and amortization and equity in earnings from unconsolidated affiliates, and a use of cash due to changes in operating assets and liabilities of
$105.8 million
. Significant changes in operating assets and liabilities include a
$26.9 million
use of cash related to accrued compensation and benefits, a
$16.6 million
source of cash resulting from accounts payable and accrued liabilities, a
$16.0 million
use of cash related to accounts receivable, and a
$67.9 million
use of cash related to timing of income tax payments.
Cash flows provided from continuing operating activities were
$135.7 million
for the year ended
December 31, 2015
. Operating cash flows from continuing operating activities during
2015
resulted principally from income from continuing operations of
$309.6 million
, adjusted for non-cash or non-operating items of
$110.3 million
including depreciation and amortization, equity in earnings of unconsolidated affiliates and net gains on investments, and a use of cash due to changes in operating assets and liabilities of
$63.6 million
. Significant changes in operating assets and liabilities include a
$10.6 million
use of cash related to accounts receivable, and a
$31.6 million
use of cash related to timing of income tax payments.
Investing Activities
Cash flows used in continuing investing activities were
$0.7 million
for the year ended
December 31, 2017
. Sources of our cash inflows were net investment activities (proceeds from investment sales, net of investments in securities) of
$39.8 million
, fluctuations in funds held on behalf of clients of $
43.3 million
and distributions received from unconsolidated affiliates of
$32.7 million
, primarily from IFDS L.P in connection with the acquisition of the remaining interests in BFDS and IFDS U.K., offset by cash used to acquire IFDS U.K. (net of cash acquired) of
$38.9 million
and capital expenditures of
$78.8 million
.
Cash flows used in continuing investing activities during
2016
of
$117.3 million
were primarily attributable to net investment activities (proceeds from investment sales, net of investments in securities) of
$59.5 million
, offset by cash used to acquire KRFS of
$93.5 million
, capital expenditures of
$60.4 million
, fluctuations in funds held on behalf of clients of $20.3 million, as well as approximately
$28.0 million
of cash loaned to IFDS U.K. during 2016.
Cash flows used in continuing investing activities were
$102.4 million
for the year ended December 31,
2015
, primarily attributable to net investment activities (proceeds from investment sales, net of investments in securities) of
$192.2 million
, which includes
$176.1 million
of pretax proceeds from the sale of State Street stock. These sources of cash were offset by $117.4 million of cash used to acquire kasina LLC, Red Rocks Capital LLC and Wealth Management Systems, Inc. during 2015,
$88.9 million
used to purchase capital assets, as well as $113.5 million due to fluctuations in funds held on behalf of clients.
Capital Expenditures
The following table summarizes capital expenditures by segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Domestic Financial Services segment
|
$
|
63.3
|
|
|
$
|
52.4
|
|
|
$
|
79.0
|
|
International Financial Services segment
|
8.8
|
|
|
2.6
|
|
|
3.8
|
|
Healthcare Services segment
|
6.7
|
|
|
5.4
|
|
|
6.1
|
|
|
$
|
78.8
|
|
|
$
|
60.4
|
|
|
$
|
88.9
|
|
During
2017
,
2016
and
2015
, we capitalized software development costs of
$24.1 million
,
$21.5 million
and
$23.3 million
, respectively, which are included within the capital expenditures listed above. Capital expenditures using debt are treated as non-cash transactions and are not included in the annual capital expenditure amounts above.
Financing Activities
Cash flows used in continuing financing activities totaled
$317.4 million
,
$374.8 million
and
$278.7 million
during the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Common Stock Issuances and Repurchases
We received cash proceeds of
$2.8 million
,
$5.3 million
and
$11.8 million
from the issuance of common stock from the exercise of employee stock options during the years ended
December 31, 2017
,
2016
and
2015
, respectively. The value of shares received in exchange for satisfaction of the exercise price and for tax-withholding obligations arising from the exercise of options to purchase our stock or from the vesting of restricted shares are included in Common stock repurchased in the Consolidated Statement of Cash Flows.
As of December 31, 2016, we had
$150.0 million
of capacity remaining under our share repurchase plan authorized in 2016. On May 9, 2017, our Board of Directors authorized a new
$300.0 million
share repurchase plan, which allows, but does not require, the repurchase of common stock in open market and private transactions. We repurchased the equivalent of
5.0 million
shares of our common stock on a post stock split basis for
$300.0 million
during the year ended
December 31, 2017
, which left approximately
$150.0 million
remaining under our share repurchase plan authorized in
2017
. The 2017 share repurchase plan does not have an expiration date, however we are currently precluded from executing additional stock repurchases pursuant to the Merger Agreement with SS&C. Under previous share repurchase plans, we expended
$300.0 million
for approximately
5.4 million
shares on a post stock split basis and
$400.0 million
for approximately
7.2 million
shares on a post stock split basis during the years ended December 31,
2016
and
2015
, respectively.
Dividends
We paid cash dividends of
$0.72
,
$0.66
and
$0.60
per common share in
2017
,
2016
and
2015
, respectively. The total cash paid for dividends in
2017
,
2016
and
2015
was
$43.7 million
,
$43.4 million
and
$43.1 million
, respectively. We are currently precluded from declaring dividends pursuant to the Merger Agreement with SS&C.
Client Funds Obligations
Client funds obligations represent our contractual obligations to remit funds to satisfy client pharmacy claim obligations and are recorded on the balance sheet when incurred, generally after a claim has been processed by us. In addition, client funds obligations include transfer agency client balances invested overnight. Our contractual obligations to remit funds to satisfy client obligations are primarily sourced by funds held on behalf of clients. We had
$504.2 million
,
$564.6 million
and $
533.4 million
of client funds obligations at
December 31, 2017
,
2016
and
2015
, respectively.
Debt Activity
During
2017
, we had the following primary sources of debt financing: our syndicated revolving credit facility; accounts receivable securitization program; and privately placed senior notes (the “2010 Senior Notes” and “2017 Senior Notes”). We had
$620.8 million
,
$508.2 million
and
$562.1 million
of debt outstanding at
December 31, 2017
,
2016
and
2015
, respectively,
an increase
of
$112.6 million
during
2017
and
a decrease
of
$53.9 million
during
2016
.
The
increase
in debt outstanding during
2017
resulted primarily from issuing $350.0 million of 2017 Senior Notes in November 2017, the assumption of a mortgage as a result of the acquisition of the remaining interests in IFDS U.K. and the assumption of a mortgage associated with a real estate distribution from Broadway Square Partners, partially offset by a reduction in amounts outstanding under our accounts receivable securitization program and revolving credit facilities. Proceeds from the 2017 Senior Notes were primarily used to pay down our revolving credit facilities. The decrease in debt outstanding during
2016
resulted primarily from the utilization of the proceeds from the sale of our North American Customer Communications business to pay down outstanding balances, partially offset by borrowings to fund the KRFS business acquisition, share repurchases and working capital uses.
Our debt agreements contain customary restrictive covenants, including limitations on consolidated indebtedness, liens, investments, subsidiary indebtedness, asset dispositions and require certain consolidated leverage and interest coverage ratios to be maintained. We are currently in compliance with these covenants. A default under certain of our borrowings could trigger defaults under certain of our other debt obligations, which in turn could result in their maturities being accelerated. Our debt arrangements are further described in Item 8, Financial Statements and Supplementary Data -
Note 10
, “Debt.”
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations and commercial commitments as of
December 31, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
Total
|
|
Less than
1 Year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
More than
5 Years
|
Debt obligations
|
$
|
623.3
|
|
|
$
|
83.7
|
|
|
$
|
187.3
|
|
|
$
|
1.5
|
|
|
$
|
350.8
|
|
Operating lease obligations
|
104.0
|
|
|
23.8
|
|
|
35.5
|
|
|
27.2
|
|
|
17.5
|
|
Software license agreements
|
135.0
|
|
|
34.9
|
|
|
63.6
|
|
|
36.5
|
|
|
—
|
|
Other
|
39.2
|
|
|
18.9
|
|
|
15.8
|
|
|
4.5
|
|
|
—
|
|
|
$
|
901.5
|
|
|
$
|
161.3
|
|
|
$
|
302.2
|
|
|
$
|
69.7
|
|
|
$
|
368.3
|
|
Interest obligations on our outstanding debt are not included in the table above. The syndicated revolving credit facility contains grid schedules that adjust borrowing costs up or down based upon our consolidated leverage ratio. The grid schedules may result in fluctuations in borrowing costs ranging from
1.00%
to
1.70%
over
Eurodollar
and
0.00%
to
0.70%
over
base rate
, as defined. The 2010 Senior Notes outstanding have fixed interest rates and are comprised of $65.0 million of 5.06% Series C Senior Notes and $160.0 million of 5.42% Series D Senior Notes. The $350.0 million of 2017 Senior Notes outstanding have an average fixed interest rate of approximately 4.0%. In addition to the financial instruments listed above, the program fees incurred on proceeds from the sale of receivables under our accounts receivable securitization program are determined based on variable interest rates associated with LIBOR plus an applicable margin.
We have liabilities for income tax uncertainties of
$67.7 million
at
December 31, 2017
. These obligations are classified as non-current on our Consolidated Balance Sheet as resolution of these matters is expected to take more than a year; however, the ultimate timing of resolution is uncertain. As we are unable to make a reasonably reliable estimate as to when payments may occur for our unrecognized tax benefits, our liability for income tax uncertainties is not included in the table above.
Due to the enactment of the Tax Act, we recorded a provisional income tax payable related to the Transition Tax of $8.4 million, of which $7.3 million is reported as noncurrent as it is not expected to be paid within one year. As permitted by the Tax Act, the Transition Tax will be paid over an eight-year period, beginning in 2018, and will not accrue interest. This
provisional amount, as well as the current estimated timing of payments, is subject to change based on additional guidance from and interpretations by U.S. regulatory and standard-setting bodies and changes in assumptions.
Other Commercial Commitments
In the normal course of business, to facilitate transactions of services and products and other business assets, we have agreed to indemnify certain parties with respect to certain matters. We have agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made by third parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. At
December 31, 2017
, except for certain immaterial items, there were no liabilities for guarantees or indemnifications as it is not possible to determine either the maximum potential amount under these indemnification agreements or the timing of any such payments due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made under these agreements have not had a material impact on our consolidated financial position, results of operations or cash flows.
SS&C Merger Agreement
Under certain circumstances, we would be required to pay a termination fee of $165.0 million to SS&C in the event the Merger Agreement with SS&C is terminated.
Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, or that engages in leasing, hedging or research and development arrangements with the company.
We believe that our guarantee arrangements will not have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, capital expenditures, capital resources, liquidity or results of operations. These arrangements are described above and in Item 8, Financial Statements and Supplementary Data -
Note 16
, “Commitments and Contingencies.”
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The operation of our businesses and our financial results can be affected by changes in interest rates and currency exchange rates. Changes in interest rates and exchange rates have not materially impacted our consolidated financial position, results of operations or cash flows.
Interest rate risk
We derive service revenues from investment earnings related to cash balances maintained in bank accounts on which we are the agent for clients. The balances maintained in the bank accounts will fluctuate. For the year ended
December 31, 2017
, DST had average daily cash balances of approximately
$2.0 billion
maintained in such accounts. We estimate that a 100 basis point change in the short-term interest earnings rate would equal approximately
$8.6 million
of net income (loss).
At
December 31, 2017
, we had
$620.8 million
of debt, of which
$14.9 million
was subject to variable interest rates (LIBOR rates). We estimate that a 10% increase in interest rates would not have a significant impact to our consolidated pretax earnings or to the fair value of our debt.
The effect of changes in interest rates on our variable rate debt is mitigated by changes in interest rates attributable to balance earnings.
Foreign currency exchange rate risk
The operation of our subsidiaries in international markets results in our exposure to movements in currency exchange rates. The principal currencies involved are the British pound, Canadian dollar, Australian dollar, Thai baht and Indian rupee. Our international subsidiaries use the local currency as the functional currency. We translate our assets and liabilities at year-end exchange rates and translate income and expense accounts at average rates during the year. Currency exchange rate fluctuations have not historically significantly affected our consolidated financial results.
At
December 31, 2017
, our international subsidiaries for our continuing operations had approximately
$758.1 million
in total assets and for the year ended
December 31, 2017
, these international subsidiaries recorded net income of approximately
$70.4 million
. We estimate that a 10% change in exchange rates would have changed total consolidated assets by approximately
$75.8 million
. Furthermore, a 10% change in exchange rates based upon historical earnings in international operations would have changed consolidated net income for
2017
by approximately
$7.0 million
.
We have entered into foreign currency cash flow and economic hedging programs to mitigate the impact of movements in foreign currency (principally British pound, Australian dollar, Thai baht and Indian rupee) on our operations. The total notional value of our foreign currency derivatives was
$101.1 million
at
December 31, 2017
. The fair value of the contracts that qualify for hedge accounting resulted in an asset of
$0.2 million
at
December 31, 2017
. We estimate that a 10% change in exchange rates would result in a
$0.9 million
change in other comprehensive income. The fair value of the contracts that do not qualify for hedge accounting resulted in a liability of
$0.3 million
at
December 31, 2017
. We estimate a 10% change in exchange rates on these contracts would result in a
$4.8 million
change to consolidated net income. Gains and losses on the derivative instruments are largely offset by changes in the underlying hedged items, resulting in a minimal impact on earnings.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of DST Systems, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of DST Systems, Inc. and its subsidiaries as of December 31, 2017
and December 31, 2016,
and the related consolidated statements of income, of comprehensive income, of changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,
including the related notes (collectively referred to as the “consolidated financial statements”).
We also have audited the Company’s internal control over financial reporting as of
December 31, 2017,
based on criteria established in
Internal Control - Integrated Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and December 31, 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017
in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,
based on criteria established in
Internal Control - Integrated Framework
(2013)
issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated
financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated
financial statements included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in the Report of Management on Internal Control over Financial Reporting, management has excluded Boston Financial Data Services, Inc. (“BFDS”) and International Financial Data Services Limited (“IFDS UK”) from its assessment of internal control over financial reporting as of December 31, 2017 because the entities were acquired by the Company in a purchase business combination during 2017. We have also excluded BFDS and IFDS UK from our audit of internal control over financial reporting. BFDS is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 15% and 13%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2017. IFDS UK is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 25% and 22%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2017.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Kansas City, Missouri
February 28, 2018
We have served as the Company’s auditor since 1969.
DST Systems, Inc.
Consolidated Balance Sheet
(dollars in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Assets
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
$
|
80.5
|
|
|
$
|
195.5
|
|
Funds held on behalf of clients
|
454.5
|
|
|
500.5
|
|
Client funding receivable
|
47.0
|
|
|
64.1
|
|
Accounts receivable (includes related party receivables of $6.7 and $19.7)
|
363.8
|
|
|
215.5
|
|
Other assets
|
91.9
|
|
|
70.0
|
|
Current assets held for sale
|
—
|
|
|
72.6
|
|
|
1,037.7
|
|
|
1,118.2
|
|
|
|
|
|
Investments
|
199.7
|
|
|
377.4
|
|
Unconsolidated affiliates
|
94.0
|
|
|
331.2
|
|
Properties, net
|
349.8
|
|
|
235.7
|
|
Intangible assets, net
|
283.1
|
|
|
142.6
|
|
Goodwill
|
799.1
|
|
|
516.4
|
|
Other assets
|
174.8
|
|
|
50.3
|
|
Total assets
|
$
|
2,938.2
|
|
|
$
|
2,771.8
|
|
|
|
|
|
Liabilities
|
|
|
|
Current liabilities
|
|
|
|
Current portion of debt
|
$
|
83.7
|
|
|
$
|
208.5
|
|
Client funds obligations
|
504.2
|
|
|
564.6
|
|
Accounts payable
|
101.2
|
|
|
62.9
|
|
Accrued compensation and benefits
|
137.9
|
|
|
101.7
|
|
Deferred revenues and gains
|
28.3
|
|
|
23.5
|
|
Income taxes payable
|
5.0
|
|
|
22.0
|
|
Other liabilities
|
111.0
|
|
|
78.1
|
|
Current liabilities held for sale
|
—
|
|
|
30.1
|
|
|
971.3
|
|
|
1,091.4
|
|
|
|
|
|
Long-term debt
|
537.1
|
|
|
299.7
|
|
Income taxes payable
|
75.0
|
|
|
69.8
|
|
Deferred income taxes
|
62.0
|
|
|
151.5
|
|
Other liabilities
|
51.6
|
|
|
22.9
|
|
Total liabilities
|
1,697.0
|
|
|
1,635.3
|
|
|
|
|
|
Commitments and contingencies (Note 16)
|
|
|
|
|
|
|
|
Redeemable Non-controlling Interest
|
—
|
|
|
21.3
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
Preferred stock, $0.01 par, 10 million shares authorized and unissued
|
—
|
|
|
—
|
|
Common stock, $0.01 par, 400 million shares authorized, and 64.4 million and 82.0 million shares issued, respectively
|
0.6
|
|
|
0.8
|
|
Additional paid-in capital
|
112.7
|
|
|
129.2
|
|
Retained earnings
|
1,489.3
|
|
|
2,379.2
|
|
Treasury stock, at cost
|
(362.8
|
)
|
|
(1,410.6
|
)
|
Accumulated other comprehensive income
|
1.4
|
|
|
16.6
|
|
Total stockholders’ equity
|
1,241.2
|
|
|
1,115.2
|
|
Total liabilities, redeemable non-controlling interest and stockholders’ equity
|
$
|
2,938.2
|
|
|
$
|
2,771.8
|
|
The accompanying notes are an integral part of these financial statements.
DST Systems, Inc.
Consolidated Statement of Income
(in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Operating revenues
|
$
|
2,086.7
|
|
|
$
|
1,474.4
|
|
|
$
|
1,405.0
|
|
Out-of-pocket reimbursements
|
131.5
|
|
|
82.3
|
|
|
69.0
|
|
Total revenues (includes related party revenues of $58.5, $150.7 and $150.3)
|
2,218.2
|
|
|
1,556.7
|
|
|
1,474.0
|
|
|
|
|
|
|
|
Costs and expenses
|
1,805.0
|
|
|
1,213.4
|
|
|
1,150.2
|
|
Depreciation and amortization
|
128.0
|
|
|
96.0
|
|
|
91.1
|
|
Operating income
|
285.2
|
|
|
247.3
|
|
|
232.7
|
|
|
|
|
|
|
|
Interest expense
|
(26.8
|
)
|
|
(23.5
|
)
|
|
(23.8
|
)
|
Gain on sale of business
|
—
|
|
|
5.5
|
|
|
—
|
|
Other income, net
|
219.0
|
|
|
22.7
|
|
|
204.5
|
|
Equity in earnings of unconsolidated affiliates
|
54.5
|
|
|
27.2
|
|
|
45.4
|
|
Income from continuing operations before income taxes and non-controlling interest
|
531.9
|
|
|
279.2
|
|
|
458.8
|
|
|
|
|
|
|
|
Income taxes
|
84.3
|
|
|
101.1
|
|
|
149.2
|
|
Income from continuing operations before non-controlling interest
|
447.6
|
|
|
178.1
|
|
|
309.6
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax
|
4.5
|
|
|
248.3
|
|
|
48.5
|
|
Net income
|
452.1
|
|
|
426.4
|
|
|
358.1
|
|
|
|
|
|
|
|
Net (income) loss attributable to non-controlling interest
|
(0.6
|
)
|
|
0.9
|
|
|
0.1
|
|
Net income attributable to DST Systems, Inc.
|
$
|
451.5
|
|
|
$
|
427.3
|
|
|
$
|
358.2
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
61.4
|
|
|
66.0
|
|
|
72.0
|
|
Weighted average diluted shares outstanding
|
62.1
|
|
|
66.6
|
|
|
72.9
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
Continuing operations attributable to DST Systems, Inc.
|
$
|
7.28
|
|
|
$
|
2.71
|
|
|
$
|
4.30
|
|
Discontinued operations
|
0.07
|
|
|
3.76
|
|
|
0.67
|
|
Basic earnings per share
|
$
|
7.35
|
|
|
$
|
6.47
|
|
|
$
|
4.97
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
Continuing operations attributable to DST Systems, Inc.
|
$
|
7.20
|
|
|
$
|
2.68
|
|
|
$
|
4.25
|
|
Discontinued operations
|
0.07
|
|
|
3.73
|
|
|
0.67
|
|
Diluted earnings per share
|
$
|
7.27
|
|
|
$
|
6.41
|
|
|
$
|
4.92
|
|
|
|
|
|
|
|
Cash dividends per share of common stock
|
$
|
0.72
|
|
|
$
|
0.66
|
|
|
$
|
0.60
|
|
The accompanying notes are an integral part of these financial statements.
DST Systems, Inc.
Consolidated Statement of Comprehensive Income
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net income attributable to DST Systems, Inc.
|
$
|
451.5
|
|
|
$
|
427.3
|
|
|
$
|
358.2
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax (Note 13):
|
|
|
|
|
|
Available-for-sale securities
|
(93.2
|
)
|
|
10.1
|
|
|
(123.2
|
)
|
Cash flow hedges
|
0.2
|
|
|
—
|
|
|
0.2
|
|
Defined benefit pension
|
4.1
|
|
|
—
|
|
|
—
|
|
Foreign currency translation
|
73.7
|
|
|
(35.4
|
)
|
|
(22.0
|
)
|
Other comprehensive loss, net of tax
|
(15.2
|
)
|
|
(25.3
|
)
|
|
(145.0
|
)
|
|
|
|
|
|
|
Comprehensive income
|
$
|
436.3
|
|
|
$
|
402.0
|
|
|
$
|
213.2
|
|
The accompanying notes are an integral part of these financial statements.
DST Systems, Inc.
Consolidated Statement of Changes in Stockholders’ Equity
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
|
Shares
Outstanding
|
|
Par
Value
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
|
Total Stockholders
’
Equity
|
December 31, 2014
|
75.2
|
|
|
$
|
0.8
|
|
|
$
|
114.1
|
|
|
$
|
1,682.9
|
|
|
$
|
(748.3
|
)
|
|
$
|
186.9
|
|
|
$
|
1,236.4
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to DST Systems, Inc.
|
—
|
|
|
—
|
|
|
—
|
|
|
358.2
|
|
|
—
|
|
|
—
|
|
|
358.2
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(145.0
|
)
|
|
(145.0
|
)
|
Dividends
|
—
|
|
|
—
|
|
|
1.4
|
|
|
(44.5
|
)
|
|
—
|
|
|
—
|
|
|
(43.1
|
)
|
Amortization of share-based compensation
|
—
|
|
|
—
|
|
|
27.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27.9
|
|
Issuance of common stock
|
0.6
|
|
|
—
|
|
|
(5.2
|
)
|
|
—
|
|
|
23.9
|
|
|
—
|
|
|
18.7
|
|
Repurchase of common stock
|
(7.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(405.3
|
)
|
|
—
|
|
|
(405.3
|
)
|
Other
|
—
|
|
|
—
|
|
|
(1.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.8
|
)
|
December 31, 2015
|
68.6
|
|
|
0.8
|
|
|
136.4
|
|
|
1,996.6
|
|
|
(1,129.7
|
)
|
|
41.9
|
|
|
1,046.0
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to DST Systems, Inc.
|
—
|
|
|
—
|
|
|
—
|
|
|
427.3
|
|
|
—
|
|
|
—
|
|
|
427.3
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25.3
|
)
|
|
(25.3
|
)
|
Dividends
|
—
|
|
|
—
|
|
|
1.3
|
|
|
(44.7
|
)
|
|
—
|
|
|
—
|
|
|
(43.4
|
)
|
Amortization of share-based compensation
|
—
|
|
|
—
|
|
|
16.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16.3
|
|
Issuance of common stock
|
0.8
|
|
|
—
|
|
|
(24.5
|
)
|
|
—
|
|
|
34.9
|
|
|
—
|
|
|
10.4
|
|
Repurchase of common stock
|
(5.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(315.8
|
)
|
|
—
|
|
|
(315.8
|
)
|
Other
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
December 31, 2016
|
64.0
|
|
|
0.8
|
|
|
129.2
|
|
|
2,379.2
|
|
|
(1,410.6
|
)
|
|
16.6
|
|
|
1,115.2
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to DST Systems, Inc.
|
—
|
|
|
—
|
|
|
—
|
|
|
451.5
|
|
|
—
|
|
|
—
|
|
|
451.5
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15.2
|
)
|
|
(15.2
|
)
|
Dividends
|
—
|
|
|
—
|
|
|
1.0
|
|
|
(44.7
|
)
|
|
—
|
|
|
—
|
|
|
(43.7
|
)
|
Amortization of share-based compensation
|
—
|
|
|
—
|
|
|
44.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
44.2
|
|
Issuance of common stock
|
0.4
|
|
|
—
|
|
|
(21.2
|
)
|
|
—
|
|
|
24.2
|
|
|
—
|
|
|
3.0
|
|
Repurchase of common stock
|
(5.1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(314.3
|
)
|
|
—
|
|
|
(314.3
|
)
|
Distribution of treasury stock for stock split
|
—
|
|
|
(0.2
|
)
|
|
(40.5
|
)
|
|
(1,297.2
|
)
|
|
1,337.9
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
December 31, 2017
|
59.3
|
|
|
$
|
0.6
|
|
|
$
|
112.7
|
|
|
$
|
1,489.3
|
|
|
$
|
(362.8
|
)
|
|
$
|
1.4
|
|
|
$
|
1,241.2
|
|
The accompanying notes are an integral part of these financial statements.
DST Systems, Inc.
Consolidated Statement of Cash Flows
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Cash flows—operating activities:
|
|
|
|
|
|
Net income
|
$
|
452.1
|
|
|
$
|
426.4
|
|
|
$
|
358.1
|
|
Less: income from discontinued operations
|
4.5
|
|
|
248.3
|
|
|
48.5
|
|
Income from continuing operations
|
447.6
|
|
|
178.1
|
|
|
309.6
|
|
Depreciation and amortization
|
128.0
|
|
|
96.0
|
|
|
91.1
|
|
Net gains on investments
|
(153.8
|
)
|
|
(2.4
|
)
|
|
(163.6
|
)
|
Gain recognized on step-up of unconsolidated affiliates
|
(43.8
|
)
|
|
—
|
|
|
—
|
|
Gains on sale of properties and businesses
|
(0.6
|
)
|
|
(5.6
|
)
|
|
(4.5
|
)
|
Amortization of share-based compensation
|
43.6
|
|
|
12.2
|
|
|
24.1
|
|
Equity in earnings of unconsolidated affiliates
|
(54.5
|
)
|
|
(27.2
|
)
|
|
(45.4
|
)
|
Cash dividends from unconsolidated affiliates
|
—
|
|
|
0.4
|
|
|
3.5
|
|
Deferred income taxes
|
(27.1
|
)
|
|
17.0
|
|
|
(15.5
|
)
|
Changes in accounts receivable
|
13.9
|
|
|
(16.0
|
)
|
|
(10.6
|
)
|
Changes in other assets
|
(127.9
|
)
|
|
(0.8
|
)
|
|
(9.4
|
)
|
Changes in client funds obligations
|
(17.1
|
)
|
|
10.9
|
|
|
9.9
|
|
Changes in client funding receivable
|
17.1
|
|
|
(10.9
|
)
|
|
(9.9
|
)
|
Changes in accounts payable and accrued liabilities
|
(39.9
|
)
|
|
16.6
|
|
|
(1.8
|
)
|
Changes in income taxes payable
|
12.1
|
|
|
(67.9
|
)
|
|
(31.6
|
)
|
Changes in deferred revenues and gains
|
(29.6
|
)
|
|
(4.6
|
)
|
|
(2.1
|
)
|
Changes in accrued compensation and benefits
|
(10.2
|
)
|
|
(26.9
|
)
|
|
(7.7
|
)
|
Other, net
|
6.2
|
|
|
(6.2
|
)
|
|
(0.4
|
)
|
Net cash provided from continuing operating activities
|
164.0
|
|
|
162.7
|
|
|
135.7
|
|
Net cash provided from (used in) discontinued operating activities
|
(12.1
|
)
|
|
26.4
|
|
|
84.5
|
|
Net cash provided from operating activities
|
151.9
|
|
|
189.1
|
|
|
220.2
|
|
Cash flows—investing activities:
|
|
|
|
|
|
Cash paid for capital expenditures
|
(78.8
|
)
|
|
(60.4
|
)
|
|
(88.9
|
)
|
Investments in securities
|
(62.8
|
)
|
|
(258.3
|
)
|
|
(166.4
|
)
|
Proceeds from (investments in and advances to) unconsolidated affiliates, net
|
32.7
|
|
|
(23.8
|
)
|
|
11.1
|
|
Proceeds from sale / maturities of investments
|
102.6
|
|
|
317.8
|
|
|
358.6
|
|
Net increase (decrease) in restricted cash and cash equivalents held to satisfy client funds obligations
|
43.3
|
|
|
(20.3
|
)
|
|
(113.5
|
)
|
Proceeds from sale of properties
|
—
|
|
|
5.7
|
|
|
6.1
|
|
Acquisition of businesses, net of cash and cash equivalents acquired
|
(38.9
|
)
|
|
(93.5
|
)
|
|
(117.4
|
)
|
Proceeds from sale of businesses, net of cash and cash equivalents sold
|
1.2
|
|
|
14.5
|
|
|
7.9
|
|
Other, net
|
—
|
|
|
1.0
|
|
|
0.1
|
|
Net cash used in continuing investing activities
|
(0.7
|
)
|
|
(117.3
|
)
|
|
(102.4
|
)
|
Net cash provided from discontinued investing activities
|
40.6
|
|
|
412.9
|
|
|
104.9
|
|
Net cash provided from investing activities
|
39.9
|
|
|
295.6
|
|
|
2.5
|
|
Cash flows—financing activities:
|
|
|
|
|
|
Proceeds from issuance of common stock
|
2.8
|
|
|
5.3
|
|
|
11.8
|
|
Principal payments on debt
|
(108.2
|
)
|
|
(5.1
|
)
|
|
(46.4
|
)
|
Proceeds from issuance of senior notes
|
350.0
|
|
|
—
|
|
|
—
|
|
Net proceeds (repayments) on accounts receivable securitization program
|
(88.3
|
)
|
|
103.2
|
|
|
(120.0
|
)
|
Net borrowings (repayments) on revolving credit facilities
|
(75.0
|
)
|
|
(151.1
|
)
|
|
181.8
|
|
Net increase (decrease) in client funds obligations
|
(43.3
|
)
|
|
20.3
|
|
|
124.0
|
|
Receipt of third party capital in investment fund
|
0.8
|
|
|
7.1
|
|
|
15.0
|
|
Common stock repurchased
|
(310.6
|
)
|
|
(315.8
|
)
|
|
(405.3
|
)
|
Payment of cash dividends
|
(43.7
|
)
|
|
(43.4
|
)
|
|
(43.1
|
)
|
The accompanying notes are an integral part of these financial statements.
|
DST Systems, Inc.
Consolidated Statement of Cash Flows, continued
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
2015
|
Excess tax benefits from share-based compensation
|
—
|
|
|
4.7
|
|
|
5.6
|
|
Other, net
|
(1.9
|
)
|
|
—
|
|
|
(2.1
|
)
|
Net cash used for continuing financing activities
|
(317.4
|
)
|
|
(374.8
|
)
|
|
(278.7
|
)
|
Net cash used for discontinued financing activities
|
(0.2
|
)
|
|
—
|
|
|
(6.1
|
)
|
Net cash used for financing activities
|
(317.6
|
)
|
|
(374.8
|
)
|
|
(284.8
|
)
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
6.8
|
|
|
—
|
|
|
—
|
|
Net increase (decrease) in cash and cash equivalents, including cash within assets held for sale
|
(119.0
|
)
|
|
109.9
|
|
|
(62.1
|
)
|
Cash and cash equivalents, beginning of year
|
199.5
|
|
|
89.6
|
|
|
151.7
|
|
Cash and cash equivalents, end of year
|
80.5
|
|
|
199.5
|
|
|
89.6
|
|
|
|
|
|
|
|
Less: cash and cash equivalents held for sale
|
—
|
|
|
4.0
|
|
|
10.1
|
|
Cash and cash equivalents of continuing operations, end of year
|
$
|
80.5
|
|
|
$
|
195.5
|
|
|
$
|
79.5
|
|
The accompanying notes are an integral part of these financial statements.
DST Systems, Inc.
Notes to Consolidated Financial Statements
1.
Description of Business
DST Systems, Inc. and consolidated subsidiaries (“we,” “our,” “us,” the “Company” or “DST”) use proprietary software applications to provide sophisticated information processing and servicing solutions, through strategically unified business processing and data management, to clients globally within the asset management, brokerage, retirement, healthcare and other markets. Our wholly-owned data centers provide the secure technology infrastructure necessary to support our solutions.
On January 11, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) wherein SS&C Technologies Holdings, Inc. (“SS&C”) will acquire DST (the “Merger”). Under the terms of the agreement, SS&C will purchase DST in an all-cash transaction for
$84.00
per share plus the assumption of debt, equating to an enterprise value of approximately
$5.4 billion
. The Company has agreed to customary covenants in the Merger Agreement, including with respect to the Company’s operation of its business prior to the closing of the transaction or termination of the agreement, such as restrictions on making certain acquisitions and divestitures, entering into certain contracts, incurring certain indebtedness and expenditures, paying dividends, repurchasing stock and taking other specified actions. The transaction is subject to DST stockholder approval, clearances by the relevant regulatory authorities and other customary closing conditions and is currently expected to close by the end of the second quarter 2018; however, there can be no assurances as to the actual closing or the timing of the closing. Under certain circumstances, we would be required to pay a termination fee of
$165.0 million
to SS&C in the event the Merger Agreement with SS&C is terminated.
In March 2017, we acquired State Street Corporation’s (“State Street”) ownership interest in our joint ventures Boston Financial Data Services, Inc. (“BFDS”) and International Financial Data Services U.K. Limited (“IFDS U.K.”), as well as other investments and real estate held by International Financial Data Services, L.P. (“IFDS L.P.”). BFDS and IFDS U.K. were consolidated in our financial results from the date control of these entities was obtained. See Note 3, “Significant Business Transactions,” for additional information.
Beginning in 2017, DST established a new reportable segment structure that separates the previously reported Financial Services segment into
two
new segments, Domestic Financial Services and International Financial Services, based upon the geographical location of the revenue-generating business. The activity within the previously reported Investments and Other segment has now been included in either the Domestic or International Financial Services segments based on the business supported. The Healthcare Services segment remains unchanged. The new segment presentation is reflective of how management is now operating the business and making resource allocations following the acquisitions of the remaining interests in BFDS and IFDS U.K., as well as the recent reductions in non-core investment assets. The Company’s operating business units are now reported as
three
operating segments (Domestic Financial Services, International Financial Services and Healthcare Services). Prior periods have been revised to reflect the new reportable operating segments.
In May 2017, our Board of Directors declared a
two
-for-one stock split of DST’s outstanding common stock effected in the form of a stock dividend, which was paid on June 8, 2017 to shareholders of record at the close of business on May 26, 2017. In connection with the stock split,
16.5 million
treasury shares were used to settle a portion of the distribution. All share and per share data, excluding treasury shares, have been retroactively adjusted for all periods presented to reflect the stock split, as if the stock split had occurred at the beginning of the earliest period presented.
We sold our North American Customer Communications business on July 1, 2016 and sold our United Kingdom (“U.K.”) Customer Communications business on May 4, 2017. We have classified the results of the Customer Communications businesses sold as discontinued operations in our consolidated financial statements for all periods presented. See
Note 4
, “
Discontinued Operations
,” for additional information.
2.
Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include all majority-owned subsidiaries of the Company. Intercompany balances and transactions have been eliminated. Certain amounts in the
2016
and
2015
consolidated financial statements have been reclassified to conform to the
2017
presentation. The adjustments to prior years relate to the 2017 stock split and segment realignment.
We consolidate any entity in which we have a controlling financial interest. Under the voting interest model, generally the investor that has voting control (usually more than
50%
of an entity’s voting interests) consolidates the entity. Under the variable interest entity (“VIE”) model, the party that has the power to direct the entity’s most significant economic activities
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
and the ability to participate in the entity’s economics consolidates the entity. An entity is considered a VIE if it possesses one of the following characteristics: 1) the entity is thinly capitalized; 2) residual equity holders do not control the entity; 3) equity holders are shielded from economic losses; 4) equity holders do not participate fully in an entity’s residual economics; and 5) the entity was established with non-substantive voting interests.
For consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as non-controlling interests. Non-controlling interests that are redeemable or convertible for cash or other assets at the option of the holder are classified separate from stockholders’ equity on the Consolidated Balance Sheet. The portion of net income (loss) attributable to the non-controlling interest for such subsidiaries is presented as net income (loss) attributable to non-controlling interest in the Consolidated Statement of Income.
We had the following significant operating joint ventures prior to March 2017: BFDS; IFDS U.K.; and IFDS L.P. We did not have a controlling financial interest in these entities and therefore accounted for the financial results of these operating joint ventures using the equity method of accounting. In March 2017, we acquired State Street’s ownership in both BFDS and IFDS U.K., which resulted in control of the entities. As such, they were consolidated in our financial results from the date control was obtained. We continue to account for IFDS L.P. as an equity method investment.
We are the lessee in a series of operating leases covering a large portion of our Kansas City, Missouri-based leased office facilities. The lessors are generally joint ventures (in which we have a
50%
ownership) that have been established specifically to purchase, finance and engage in leasing activities with the joint venture partners and unrelated third parties. Our analysis of our real estate joint ventures for all periods presented indicate that none qualified as a VIE and, accordingly, they have not been consolidated.
We provide investment management services to, and have transactions with, various exchange traded funds, mutual funds and other investment products sponsored by the Company in the normal course of business. We generally are considered to have a controlling financial interest in a fund when we own a majority of the outstanding controlling shares, which may arise as a result of seed capital investments in newly launched investment products from the time of initial launch to the time that the fund becomes majority-held by third-party investors.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates.
Revenue recognition
We recognize revenue when it is realized or realizable and it is earned. The majority of our revenues are derived from computer processing and services and are recognized upon completion of the services provided. Software license fees, maintenance fees and other ancillary fees are recognized as services are provided or delivered and all client obligations have been met. We periodically provide upfront cash payments to our clients to assist with the significant upfront costs associated with converting to new systems. Such payments are initially recorded within Other assets on the Consolidated Balance Sheet and treated as a reduction of revenue over the term of the related contract. We generally do not have payment terms from clients that extend beyond
one
year. Revenue from operating leases is recognized monthly as the rent accrues. Billing for services in which cash is collected in advance of performance is recorded as deferred revenue. Allowances for billing adjustments and bad debt expense are estimated as revenues are recognized. Allowances for billing adjustments are recorded as reductions in revenues and bad debt expense is recorded within Costs
and expenses.
The annual amounts for these items are generally immaterial to our consolidated financial st
a
tements, however in 2017 we had
$37.5 million
of bad debt expense, which is reflected in Costs and expenses, primarily as a result of a client termination agreement.
We recognize revenue when the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) the sales price is fixed or determinable; and 4) collectability is reasonably assured. If there is a client-specific acceptance provision in a contract or if there is uncertainty about client acceptance, the associated revenue is deferred until we have evidence of client acceptance.
Revenue arrangements with multiple deliverables are evaluated to determine if the deliverables (items) can be divided into more than
one
unit of accounting. An item can generally be considered a separate unit of accounting if both of the following criteria are met: 1) the delivered item(s) has value to the client on a standalone basis and 2) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
probable and substantially in our control. Once separate units of accounting are determined, the arrangement consideration is allocated at the inception of the arrangement to all deliverables using the relative selling price method. Relative selling price is obtained from sources such as vendor-specific objective evidence, which is based on the separate selling price for that or a similar item or from third-party evidence such as how competitors have priced similar items. If such evidence is unavailable, we use our best estimate of the selling price, which includes various internal factors such as our pricing strategy and market factors.
Software license revenues are recognized at the time the contract is signed, the software is delivered and no future software obligations exist. Deferral of software license revenue results from delayed payment provisions, disproportionate discounts between the license and other services or the inability to unbundle certain services. We recognize revenues for maintenance services ratably over the contract term, after collectability has been reasonably assured.
Reimbursements received for “out-of-pocket” (“OOP”) expenses, such as postage and telecommunications charges, are recorded as revenue on an accrual basis. Because these additional revenues are offset by the reimbursable expenses incurred, there is minimal impact on income from operations and net income. For each segment, total revenues are reported in
two
categories, operating revenues and OOP reimbursements. OOP expenses are included in costs and expenses.
Costs and expenses
Costs and expenses include all costs, excluding depreciation and amortization, incurred to produce revenues. We believe that the nature of our business as well as our organizational structure, in which virtually all officers and associates have operational responsibilities, does not allow for a meaningful segregation of selling, general and administrative costs. These costs, which we believe to be immaterial, are also included in costs and expenses. Substantially all depreciation and amortization is directly associated with the production of revenues.
Cash equivalents
Short-term liquid investments with original maturities of
90
days or less are considered cash equivalents. Due to the short-term nature of these investments, carrying value approximates market value.
Client funds/obligations
Funds held on behalf of clients
In connection with providing data processing services for our clients, we may hold client funds on behalf of transfer agency clients and pharmacy processing clients. End-of-day available client bank balances for full service mutual fund transfer agency clients are invested overnight. Invested balances are returned to the full service mutual fund transfer agency client accounts the following business day. Funds received from clients for the payment of pharmacy claims incurred by its members are invested until the claim payments are presented to the bank. These amounts are included in funds held on behalf of clients in the Consolidated Balance Sheet and represent assets that are restricted for use.
Client funding receivable
Client funding receivables represent amounts due to us for pharmacy claims paid in advance of receiving client funding and for pharmacy claims processed for which client funding requests have not been made.
Client funds obligations
Client funds obligations represent our contractual obligations to remit funds to satisfy client pharmacy claim obligations and are recorded on the balance sheet when incurred, generally after a claim has been processed by us. In addition, client funds obligations include transfer agency client balances invested overnight.
We have reported the cash flows related to the purchases of investment funds (available-for-sale securities) held on behalf of clients and the cash flows related to the proceeds from the sales/maturities of investment funds held on behalf of clients on a gross basis in the investing section of the Consolidated Statement of Cash Flows. We have reported the cash inflows and outflows related to client fund investments on a net basis within net (increase) decrease in restricted cash and cash equivalents held to satisfy client funds obligations in the investing section of the Consolidated Statement of Cash Flows. We have reported the cash flows related to client funds used in investing activities on a net basis within net increase (decrease) in client funds obligations in the financing section of the Consolidated Statement of Cash Flows.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
Investments
The equity method of accounting is used for investments in entities, partnerships and similar interests (including investments in private equity funds where we are the limited partner) in which we have significant influence but do not control. Under the equity method, we recognize income or losses from our pro-rata share of these unconsolidated affiliates’ net income or loss, which changes the carrying value of the investment of the unconsolidated affiliate. In certain cases, pro-rata losses are recognized only to the extent of our investment in and advances to the unconsolidated affiliate.
The cost method of accounting is used for these investments when we have a de minimis ownership percentage and do not have significant influence. Our cost method investments are held at the lower of cost or market. These investments do not have readily determinable fair values and the fair value of a cost-method investment is not required to be estimated unless there are identifiable events or changes in circumstances that may have a significant adverse effect on the fair value of the investment.
Investments classified as available-for-sale securities are reported at fair value with unrealized gains and losses excluded from earnings and recorded net of deferred taxes directly to stockholders’ equity as accumulated other comprehensive income. Investments in trading securities are reported at fair value with unrealized gains and losses included in earnings. Investments classified as held-to-maturity securities are recorded at amortized cost, which approximates fair value. Fair value adjustments and realized gains and losses are determined on a specific identification basis.
We regularly review investment securities for impairment based on both quantitative and qualitative criteria that include the extent to which cost exceeds fair value, the duration of any market decline, and the financial health of and specific prospects for the issuer. We record an investment impairment charge for an investment with a gross unrealized holding loss resulting from a decline in value that is other than temporary.
Investment funds which are consolidated as a result of our seed capital investment are considered investment companies and therefore we retain the specialized industry accounting principles of these investment products in our consolidated financial statements. Upon consolidation of a fund, the underlying securities of the fund are reflected at fair value with gains and losses included in Other income, net in the Consolidated Statement of Income.
Security transactions and investment income
Security transactions are accounted for on the trade date. Security gains and losses are calculated on the specific identification method. Dividend income is recorded on the ex-dividend date. Interest income, adjusted for discounts and premiums, is recorded on the accrual basis.
Property and equipment
Property and equipment are recorded at cost with major additions and improvements capitalized. Cost includes the amount of interest cost associated with significant capital additions. Depreciation of buildings is recorded using the straight-line method over
30
to
40
years. Technology equipment, furniture, fixtures and other equipment are depreciated using accelerated methods over the estimated useful lives, principally
three
to
five
years. Software is depreciated using the straight-line method over the estimated useful lives, generally
three
to
five
years. Leasehold improvements are depreciated using the straight-line method over the lesser of the term of the lease or life of the improvements. We review, on a quarterly basis, our property and equipment for possible impairment.
Purchased software is recorded at cost and is amortized over the estimated economic life, which is generally
three
to
five
years. We capitalize costs for the development of internal use software, including coding and software configuration costs and costs of upgrades and enhancements, after the preliminary project phase has been completed and management has committed to funding the project. These costs are amortized on a straight-line basis, depending on the nature of the project, generally over a
three
to
five
year period. We review, on a quarterly basis, our capitalized software for possible impairment.
Development costs for software that will be sold or licensed to third parties, prior to the achievement of technological feasibility, are expensed as incurred. We capitalize software development costs for software that will be sold or licensed to third parties which are incurred after the products reach technological feasibility but prior to the general release of the product to clients. These capitalized development costs are amortized on a product-by-product basis using the greater of the amount computed by taking the ratio of current year’s gross revenues to current and anticipated future gross revenues or the amount computed by the straight-line method over the estimated useful life of the product, which is generally
three
to
five
years. We evaluate the net realizable value of capitalized software development costs on a product-by-product basis.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
Goodwill and intangible assets
We have recorded goodwill and intangible assets in connection with various acquisitions of businesses. Intangible assets at
December 31, 2017
and
2016
primarily represent client relationships and other definite lived intangible assets (trade names, non-compete agreements, etc.) acquired. The estimated useful life on these intangible assets ranges from
3
to
19
years. The weighted average amortization period at
December 31, 2017
for client relationships and other intangible assets is
13.0
and
8.7
years, respectively.
We assess the impairment of goodwill at least annually (as of October 1) and assess identifiable intangibles, long-lived assets and related assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets that have finite lives will continue to be amortized over their useful lives.
Our assessments of goodwill for impairment for 2017 and 2016 included a quantitative assessment that compared the fair value to the net book value of our reporting units. The fair value of the reporting units was estimated using the present value of expected future cash flows. For 2015, we performed a qualitative assessment that considered various factors, including growth in operating revenues and income from operations of our reporting units since our last quantitative assessment in 2014. Our
2017
,
2016
and
2015
annual goodwill impairment tests determined that goodwill was not impaired, except during 2016 for the goodwill held at the Customer Communications U.K. reporting unit, which was included as a component of discontinued operations as of December 31, 2016, as further described in
Note 4
, “
Discontinued Operations
.”
Income taxes
We recognize the amount of income taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. Deferred income tax effects of transactions reported in different periods for financial reporting and income tax return purposes are recorded by the liability method. This method gives consideration to the future tax consequences of deferred income or expense items and differences between the income tax and financial accounting statement bases of assets and liabilities and immediately recognizes changes in income tax laws upon enactment. The income statement effect is generally derived from changes in deferred income taxes on the balance sheet.
From time to time, we enter into transactions for which the tax treatment under the Internal Revenue Code or applicable state tax laws is uncertain. We provide federal and/or state income taxes on such transactions, together with related interest, net of income tax benefit, and any applicable penalties in accordance with accounting guidance for income tax uncertainties. We record income tax uncertainties that are estimated to take more than 12 months to resolve as non-current. Interest and penalties related to unrecognized tax benefits, if any, are recorded in income tax expense.
Foreign currency translation
Our international subsidiaries use the local currency as the functional currency. We translate our assets and liabilities at period-end exchange rates. Income and expense accounts are translated at average rates during the period.
Earnings per share
Basic earnings per share are determined by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share are determined by including the dilutive effect of all potential common shares outstanding during the year. See
Note 13
, “
Equity
,” for additional details regarding our earnings per share computation.
Derivative and hedging activities
We recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value and the changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. From time to time, we utilize derivatives to manage interest rate and foreign currency risks. We do not enter into derivative arrangements for speculative purposes. At
December 31, 2017
and
2016
, we had derivative instruments outstanding as described in
Note 11
, “
Hedging Transactions and Derivative Financial Instruments
.” We include cash flows related to derivative instruments qualifying for hedge accounting and economic hedges in the same category as the item being hedged in the Consolidated Statement of Cash Flows.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
Comprehensive income
Our comprehensive income consists of net income and unrealized gains or losses on available-for-sale securities, our proportional share of unconsolidated affiliates’ other comprehensive income (limited by the carrying value of the investment), unrealized gains or losses on our cash flow hedges, changes in defined benefit pension items and foreign currency translation adjustments, which are presented in the Consolidated Statement of Comprehensive Income, net of tax and reclassifications to earnings.
Share-based compensation
We have share-based compensation plans covering our employees and our non-employee directors and have outstanding share awards (primarily in the form of stock options, restricted stock units and performance stock units) under each of these plans. We recognize the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those awards. For share-based awards that contain a service feature, we expense the grant date fair value of these awards using the straight-line method over the service period. For share-based awards containing both service and performance features, amortization of expense depends on our judgments whether the performance conditions will be achieved and is incurred over the expected period to achieve the required performance criteria. We account for forfeitures as they occur rather than using an estimated forfeiture rate.
Contingencies
Loss contingencies from legal proceedings and claims may occur from government investigations, shareholder lawsuits, contractual claims, tax and other matters. Accruals are recognized when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. Gain contingencies (including contingent proceeds related to business divestitures) are not recognized until realized. Legal fees are expensed as incurred.
New authoritative accounting guidance
Recently Adopted Accounting Pronouncements
In January 2017, the
Financial Accounting Standards Board (“FASB”)
issued guidance which simplifies goodwill impairment testing including eliminating the requirement to calculate the implied fair value of goodwill in determining the existence and value of a goodwill impairment. The
guidance was adopted by us on January 1, 2017 and effective for our annual goodwill impairment assessment for 2017.
In March 2016, the FASB issued guidance which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The guidance was adopted by us on January 1, 2017 and resulted in approximately
$3.0 million
of excess tax benefits being recognized in Income taxes in the Consolidated Statement of Income for the year ended December 31, 2017. We also elected to account for forfeitures as they occur rather than using an estimated forfeiture rate. The impact to our consolidated financial statements was not material.
Accounting Pronouncements Pending Adoption
In August 2017, the FASB issued guidance which simplifies the hedge accounting model and includes new permitted methodologies for measuring changes in the fair value of hedged risks and new presentation and disclosure requirements. The guidance is effective January 1, 2019 and requires a modified retrospective application for existing hedges on the date of adoption. Early adoption is permitted. We are currently evaluating the standard and the impact it will have on our consolidated financial statements, however we do not expect it to have a material impact on our consolidated financial statements.
In November 2016, the
FASB issued guidance which requires the statement of cash flows to explain changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective January 1, 2018 and requires retrospective application. Early adoption is permitted. Beginning January 1, 2018, we will include restricted cash and restricted cash equivalents associated with funds held on behalf of clients, as a component of cash, cash equivalents, restricted cash and restricted cash equivalents in the Consolidated Statement of Cash Flows. The impact on our consolidated financial statements will be limited to cash flows from investing activities.
In October 2016, the
FASB issued guidance which requires the recognition of income tax consequences for intra-entity transfers of assets other than inventory. The guidance is effective January 1, 2018 and requires modified retrospective application. Early adoption is permitted. We have evaluated the standard and concluded it will not impact our consolidated financial statements and related disclosures.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
In February 2016, the FASB issued guidance which requires lessees to reflect most leases on their balance sheet as assets and obligations. The guidance is effective January 1, 2019 with early adoption permitted. The standard will be applied under the modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented. We are currently evaluating the standard and the impact it will have on our consolidated financial statements and related disclosures, however we currently expect that the most significant changes will be related to the recognition of right-of-use assets and lease liabilities in our Consolidated Balance Sheet, with no material impact to our Consolidated Statement of Income.
In January 2016, the FASB issued guidance which updates the reporting model for certain financial instruments, including the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The guidance is effective January 1, 2018 and requires a cumulative-effective adjustment as of the beginning of the fiscal year of adoption. Beginning January 1, 2018, our private equity funds and other investments currently accounted for under the cost method, as well as our available-for-sale securities, will be measured at fair value each reporting period resulting in increased volatility in our Consolidated Statement of Income. We expect to record a
$34.7 million
pre-tax increase to Investments and Stockholders’ Equity upon adoption of this guidance.
In May 2014, the FASB issued guidance which requires companies to recognize revenue to depict the transfer of promised goods or services to clients in an amount that reflects the consideration it expects to be entitled in exchange for those goods or services. The new standard and subsequently issued amendments is effective January 1, 2018. We will adopt the guidance using the modified retrospective transition approach. We continue to evaluate the impacts of the application of the new standard to our client contracts and expect the adoption of the standard will change the timing of when revenue is recognized for certain revenue streams. We currently anticipate that the majority of our contracts with clients that include account- and/or transaction-based processing fees will be accounted for under the series deliverable guidance in the new standard which will likely result in minimal changes as compared to our historical revenue recognition. These revenues will continue to be recognized over time as a single stand-ready performance obligation. As such, we do not currently anticipate significant changes in current systems or processes and do not believe there will be a material impact of adopting the new revenue standard on our consolidated financial statements.
3.
Significant Business Transactions and Events
Significant Business Acquisitions
Acquisition of the remaining interest in BFDS
On March 27, 2017, we entered into a series of definitive agreements to acquire State Street’s equity interest in our BFDS joint venture, which provides shareholder recordkeeping, intermediary and investor services, and regulatory compliance solutions to financial services clients in the United States. We also acquired an investment in a privately-held company and the equity interest in IFDS Realty, LLC, which holds the real estate assets used in BFDS’ operations, through a distribution from IFDS L.P., our
50
/50 joint venture with State Street. As a result of these transactions, we expect to enhance the strategic value we can provide to our clients through full service capabilities while also realizing internal synergies through increased scale and operational efficiencies.
The BFDS transaction, which closed on March 30, 2017, was structured as a non–taxable exchange under Section 355 of the Internal Revenue Code. At closing, DST delivered to State Street approximately
2.0 million
shares of State Street common stock with a closing date fair value of
$163.4 million
(with a cost basis for tax purposes of approximately
$1.1 million
and a cost basis for book purposes of approximately
$16.8 million
) in exchange for State Street’s equity interest in BFDS. The number of shares delivered at closing was calculated using the negotiated fair value of
$157.6 million
and the closing price of State Street’s stock at signing. BFDS is included within the Domestic Financial Services segment.
The acquisition of State Street’s
50%
equity interest in BFDS was accounted for as a step-acquisition. Accordingly, we remeasured our previously held non-controlling equity interest in BFDS to the estimated fair value of
$151.1 million
, resulting in a gain of
$56.0 million
recorded at the acquisition date, within Other income, net in the Consolidated Statement of Income. The fair value of the previously held equity interest in BFDS was determined using various valuation techniques, including market comparable transactions and discounted cash flow analysis adjusted for a control premium. These fair value measurements are based on significant inputs, such as forecasted cash flows and discount rates, that are not observable in the market (Level 3). In addition, we recognized a
$146.6 million
gain in Other income, net in the Consolidated Statement of Income related to the State Street shares exchanged in the transaction.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
The factors described above, combined with the synergies expected from combining our operations with the acquired entity and the resulting enhanced clarity in the service offerings available to our clients, are the basis for the acquisition price paid resulting in
$68.7 million
of goodwill included in total assets of the Domestic Financial Services segment,
none
of which is expected to be deductible for tax purposes.
The transaction was accounted for using the acquisition method of accounting, and as such, assets acquired, liabilities assumed, and consideration transferred were recorded at their estimated fair values on the acquisition date. Subsequent to the acquisition date, our initial purchase price allocation and estimate of fair value for certain intangible assets and related income tax effects were adjusted based on facts and circumstances existing at the acquisition date. Future adjustments to the purchase price allocation could be significant as valuations for tangible, intangible assets and contingent liabilities are finalized and the associated income tax impacts are determined.
The following table summarizes the aggregate acquisition-date fair value of the consideration transferred for the acquisition of BFDS and the amounts recognized as of the acquisition date for the assets acquired and liabilities assumed (in millions):
|
|
|
|
|
Consideration
|
|
Fair value of common stock used to acquire the remaining equity interests in BFDS, certain investments and real estate
|
$
|
163.4
|
|
Estimated fair value of DST’s previously-held equity interests (1)
|
151.1
|
|
Effective settlement of pre-existing relationships
|
(5.9
|
)
|
Total consideration transferred
|
$
|
308.6
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed
|
|
Cash and cash equivalents
|
$
|
96.8
|
|
Accounts receivable
|
81.6
|
|
Other current assets
|
3.6
|
|
Investments (2)
|
35.8
|
|
Properties (3)
|
22.6
|
|
Intangible assets
|
57.2
|
|
Goodwill
|
68.7
|
|
Deferred income taxes
|
2.2
|
|
Other assets
|
3.2
|
|
Total assets
|
371.7
|
|
|
|
Accounts payable
|
5.2
|
|
Accrued compensation and benefits
|
15.4
|
|
Deferred revenue
|
2.1
|
|
Other current liabilities
|
7.4
|
|
Other liabilities
|
33.0
|
|
Total liabilities
|
63.1
|
|
Net assets acquired
|
$
|
308.6
|
|
_____________________________________________________
|
|
(1)
|
Equals the estimated fair value of DST’s previously-held equity interest in BFDS valued at
$151.1 million
, which represents an approximate
7.5%
discount to the acquisition price for State Street’s equity interests in BFDS prior to the acquisition date. The difference between the fair value of State Street common stock transferred of
$163.4 million
and the
$151.1 million
represents an estimate of a control premium, which has not been included in the valuation of DST’s previous non-controlling interest.
|
|
|
(2)
|
As a result of the acquisition of the remaining interests in BFDS, we acquired certain investments associated with active deferred compensation plans for senior management and certain highly compensated employees. Approximately
$3.7 million
of the underlying investments were in DST common stock. As a result, the common stock was considered effectively repurchased at the acquisition date and reclassified to Treasury stock in the Consolidated Balance Sheet.
|
(3) Includes
$2.0 million
of acquired software with a weighted-average useful life of
5
years.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
The following table summarizes the intangible assets acquired and estimated weighted-average useful lives as of the acquisition date (in millions):
|
|
|
|
|
|
|
|
Fair Value
|
|
Weighted-Average Useful Life
|
Client relationships
|
$
|
57.2
|
|
|
13 years
|
The operating results of BFDS were combined with our operating results subsequent to the acquisition date. Approximately
$206.9 million
of total revenues, net of intercompany eliminations, and
$28.8 million
of pretax income of the acquired business is included in the Consolidated Statement of Income for the year ended
December 31, 2017
.
Acquisition of the remaining interests in IFDS U.K.
On March 27, 2017, we acquired State Street’s ownership of our IFDS U.K. joint venture, an investor and policy holder administrative services and technology provider to the collective funds, insurance, and retirement industries, for
$141.0 million
. Additionally, we acquired from our IFDS L.P. joint venture both the equity interest in IFDS Realty U.K. LLC (“IFDS Realty U.K.”), which holds certain real estate utilized by the U.K. business, and the equity interest in IFDS Percana Group Ltd. (“IFDS Percana”) for total cash consideration of
$68.0 million
. As a result of DST’s
50%
ownership in IFDS L.P., approximately half of the cash consideration DST paid to IFDS L.P. was distributed to DST in the form of a distribution, resulting in net cash paid for the acquisition, after cash distributions of approximately
$175.0 million
. The acquisition was funded through cash on hand and our existing debt facilities. In addition, concurrent with the acquisition of the remaining interests in IFDS U.K., we also purchased State Street’s notes receivable from IFDS U.K. for cash consideration of
$25.9 million
, which approximated the fair value of the note at the acquisition date. We will continue to service offshore and cross-border markets in Canada, Ireland and Luxembourg through IFDS L.P., our
50
/50 joint venture with State Street. IFDS U.K., IFDS Realty U.K. and IFDS Percana are included within the International Financial Services segment. As a result of these transactions, we expect to enhance the strategic value we can provide to our clients through full service capabilities while also realizing internal synergies through increased scale and operational efficiencies.
The acquisition of State Street’s
50%
equity interest in IFDS U.K. was accounted for as a step-acquisition. Accordingly, we remeasured our previously held non-controlling equity interest in IFDS U.K. to the estimated fair value of
$136.8 million
, resulting in a loss of
$12.2 million
at the acquisition date, which is included in Other income, net in the Consolidated Statement of Income. The fair value of the previously held equity interest in IFDS U.K. was determined using various valuation techniques, including market comparable transactions and discounted cash flow analysis adjusted for a control premium. These fair value measurements are based on significant inputs, such as forecasted cash flows and discount rates, that are not observable in the market (Level 3).
The factors described above, combined with the benefits expected from the opportunities for enhanced efficiencies in our delivery model, are the basis for the acquisition price paid resulting in
$196.7 million
of goodwill included in total assets of the International Financial Services segment, of which
$18.9 million
is expected to be deductible for tax purposes.
The transaction was accounted for using the acquisition method of accounting, and as such, assets acquired, liabilities assumed, and consideration transferred were recorded at their estimated fair values on the acquisition date. Subsequent to the acquisition date, our initial purchase price allocation and estimate of fair value for certain intangible assets and related income tax effects were adjusted based on facts and circumstances existing at the acquisition date. Future adjustments to the purchase price allocation could be significant as valuations for certain tangible assets, intangible assets and contingent liabilities are finalized and associated income tax impacts are determined.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
The following table summarizes the aggregate acquisition-date fair value of the consideration transferred for the acquisition of the remaining interests in IFDS U.K., IFDS Realty U.K. and IFDS Percana and the amounts recognized as of the acquisition date for the assets acquired and liabilities assumed (in millions):
|
|
|
|
|
Consideration
|
|
Cash paid to acquire the remaining equity interests in IFDS U.K. and other related interests (1)
|
$
|
234.9
|
|
Estimated fair value of previously-held equity interests (2)
|
136.8
|
|
Effective net settlement of pre-existing relationships
|
54.5
|
|
Total consideration transferred
|
$
|
426.2
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed
|
|
Cash and cash equivalents
|
$
|
99.2
|
|
Accounts receivable
|
101.7
|
|
Other current assets
|
14.4
|
|
Properties (3)
|
94.7
|
|
Intangible assets
|
104.0
|
|
Goodwill
|
196.7
|
|
Deferred income taxes
|
11.6
|
|
Other assets
|
2.1
|
|
Total assets
|
624.4
|
|
|
|
Current portion of long-term debt
|
2.8
|
|
Accounts payable
|
29.1
|
|
Accrued compensation and benefits
|
23.6
|
|
Deferred revenue
|
31.1
|
|
Other current liabilities
|
61.7
|
|
Long-term debt
|
26.3
|
|
Other liabilities
|
23.6
|
|
Total liabilities
|
198.2
|
|
Net assets acquired
|
$
|
426.2
|
|
______________________________________________
|
|
(1)
|
Cash paid is comprised of cash payments to acquire State Street’s equity interest in IFDS U.K. and a note receivable from IFDS U.K., as well as IFDS L.P.’s equity interests in IFDS Percana and IFDS Realty U.K.
|
|
|
(2)
|
Equals the estimated fair value of DST’s previously-held equity interest in IFDS U.K. valued at
$136.8 million
, which represents an approximate
3.0%
discount to the acquisition price for State Street’s equity interests in IFDS U.K. prior to the acquisition date. The difference between the
$141.0 million
of cash paid to acquire State Street’s equity interests in IFDS U.K. and the
$136.8 million
represents an estimate of a control premium, which has not been included in the valuation of DST’s previous non-controlling interest.
|
(3) Includes
$21.0 million
of acquired software with a weighted-average useful life of
6
years.
The following table summarizes the intangible assets acquired and estimated weighted-average useful lives as of the acquisition date (in millions):
|
|
|
|
|
|
|
|
Fair Value
|
|
Weighted-Average Useful Life
|
Client relationships
|
$
|
104.0
|
|
|
10 years
|
The operating results of IFDS U.K. were combined with our operating results subsequent to the acquisition date. Approximately
$436.7 million
of total revenues, net of intercompany eliminations, and
$79.0 million
of pretax income of the acquired business is included in the Consolidated Statement of Income for the year ended
December 31, 2017
. These amounts include the financial impact of a formal termination agreement that was reached with a wealth management platform client for whom we were completing multi-year development and implementation efforts. As a result of this agreement, during 2017, DST recognized previously deferred revenue and termination payments received totaling
$93.2 million
as incremental operating
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
revenue. DST also incurred bad debt expense of
$34.5 million
for previously invoiced services for which payment will now not be collected and
$5.2 million
of other termination-related charges.
In April 2017, we signed an amendment to an existing servicing agreement, which extends in excess of ten years, with a U.K. wealth management platform client. As part of this amendment, we made up-front payments totaling
£60.0 million
to the client during 2017 which have been classified within Other assets on the Consolidated Balance Sheet. These payments are expected to be recovered over the term of the revised contractual arrangement.
The following table summarizes the unaudited pro forma results of operations for the years ended
December 31, 2017
and
2016
as if the BFDS and IFDS U.K. acquisitions had occurred on January 1, 2016 (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
Total revenues
|
$
|
2,366.3
|
|
|
$
|
2,327.0
|
|
Net income attributable to DST Systems, Inc.
|
273.0
|
|
|
386.3
|
|
Diluted earnings per share
|
4.40
|
|
|
5.79
|
|
The pro forma financial information adjusts the actual combined results for items that are recurring in nature and directly attributable to the acquisitions of the remaining interests in BFDS and IFDS U.K., including intangible asset amortization and fair value adjustments for property, plant and equipment, deferred revenue and other transaction related items. The year ended
December 31, 2017
pro forma information was reduced by the net gains resulting from the transaction of
$188.6 million
. The unaudited pro forma amounts have been prepared based on estimates and assumptions, which we believe are reasonable, and are not indicative of what actual consolidated results of operations might have been if the acquisitions had been effective at the beginning of 2016, nor is it reflective of our expected actual results of operations for any future period.
We incurred approximately
$5.1 million
of pretax costs from 2015 through the year ended
December 31, 2017
in connection with our acquisitions of the remaining interests in BFDS and IFDS U.K., which are included in Costs and expenses in our Consolidated Statement of Income.
Acquisition of Kaufman Rossin Fund Services LLC
On February 24, 2016, we acquired all of the membership interests of Kaufman Rossin Fund Services LLC (“KRFS”), for
$94.7 million
in cash. DST financed the acquisition through cash-on-hand and available lines of credit. KRFS is an independent, full-service provider of specialized hedge fund administration services to the global financial community. KRFS’ hedge fund services include accounting and valuation, back-office outsourcing, investor services, treasury services, and customized reporting. We expect the acquisition to provide us with additional opportunities within the alternative investment marketplace and expand our asset administration service offerings.
The factors described above, combined with the synergies expected from combining our operations with the acquired entity and the resulting expansion of the service offerings available to our clients, are the basis for the acquisition price paid resulting in
$61.0 million
of goodwill recorded, all of which is expected to be deductible for tax purposes. KRFS is included within the Domestic Financial Services segment. The transaction was accounted for using the acquisition method of accounting, and as such, assets acquired, liabilities assumed, and consideration transferred were recorded at their estimated fair values on the acquisition date.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
The following table summarizes the aggregate acquisition-date fair value of the consideration transferred for the acquisition of KRFS and the amounts recognized as of the acquisition date for the assets acquired and liabilities assumed (in millions):
|
|
|
|
|
Consideration
|
|
Cash paid
|
$
|
94.7
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed
|
|
Cash and cash equivalents
|
$
|
1.0
|
|
Accounts receivable
|
2.9
|
|
Other current assets
|
0.1
|
|
Investments
|
0.5
|
|
Properties (1)
|
6.8
|
|
Intangible assets
|
23.4
|
|
Goodwill
|
61.0
|
|
Total assets
|
95.7
|
|
|
|
Deferred revenue
|
0.6
|
|
Other current liabilities
|
0.4
|
|
Total liabilities
|
1.0
|
|
Net assets acquired
|
$
|
94.7
|
|
______________________________________________
(1) Includes
$6.5 million
of acquired software with a weighted-average useful life of
6
years.
The following table summarizes the intangible assets acquired and estimated weighted-average useful lives as of the acquisition date (in millions):
|
|
|
|
|
|
|
|
Fair Value
|
|
Weighted-Average Useful Life
|
Client relationships
|
$
|
22.5
|
|
|
10 years
|
Other
|
0.9
|
|
|
3 years
|
|
$
|
23.4
|
|
|
|
The operating results of KRFS were combined with our operating results subsequent to the acquisition date. Approximately
$20.9 million
of revenues and
$1.1 million
of pretax income of the acquired business are included in the Consolidated Statement of Income for the year ended December 31, 2016. Pro-forma results of operations, assuming this acquisition was made at the beginning of the earliest period presented, have not been presented as the effect of this acquisition is not material to our results.
The following acquisitions during 2015 are included within the Domestic Financial Services segment:
Acquisition of kasina LLC
On January 1, 2015, we acquired all of the membership interests of kasina LLC, a strategic advisory firm to the asset management industry for
$9.0 million
of upfront cash consideration and up to
$2.1 million
of performance-related contingent consideration, based on the terms of the agreement, which were amended during 2016. The contingent consideration requires, subject to certain exceptions, future employment over the course of the performance period. The acquisition provides us with additional opportunities to provide a combination of advisory, research, technology and analytics to asset managers.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
Acquisition of Red Rocks Capital LLC
On July 31, 2015, we acquired all of the membership interests of asset manager Red Rocks Capital LLC, which focuses on listed private equity and other private asset investments, for
$45.0 million
of upfront cash consideration and up to
$20.0 million
of performance-related contingent consideration. The performance-related contingent consideration is based on the achievement of certain annual revenue targets of the acquired business over an approximate four year period from the closing date and requires, subject to certain exceptions, future employment over the course of the performance period. As of December 31, 2017, the annual revenue targets for the first two performance periods and the continuing employment conditions for certain individuals were not achieved resulting in
$1.0 million
of remaining contingent consideration available to be earned. We expect the acquisition to provide us with additional opportunities within the alternative investment marketplace to enhance our ongoing asset management strategy.
Acquisition of Wealth Management Systems Inc.
On August 21, 2015, we acquired all of the outstanding common stock of Wealth Management Systems Inc., a provider of technology-based rollover services, for cash consideration of
$65.1 million
, which includes a
$1.1 million
adjustment agreed upon in December 2015 to settle working capital under the provisions of the purchase agreement. A post-closing settlement amount of
$0.2 million
was received in January 2016. Wealth Management Systems Inc. automates the migration of assets from retirement plans to investment management platforms. We expect the acquisition to provide us with additional opportunities to expand rollover service options to new and existing clients and enhance our ongoing retirement and asset management strategies.
The factors described above, combined with the synergies expected from combining our operations with each of the acquired entities and the resulting expansion of the service offerings available to our clients, are the basis for the acquisition prices paid resulting in
$75.8 million
of goodwill recorded, of which approximately
$40.0 million
is expected to be deductible for tax purposes. The transactions were accounted for using the acquisition method of accounting, with assets acquired, liabilities assumed, and consideration transferred recorded at their estimated fair values on the acquisition dates.
The following table summarizes the aggregate acquisition-date fair value of the consideration transferred for the acquisitions of kasina LLC, Red Rocks Capital LLC, and Wealth Management Systems Inc. and the amounts recognized as of the acquisition date for the assets acquired and liabilities assumed (in millions):
|
|
|
|
|
Consideration
|
|
Cash paid
|
$
|
118.8
|
|
Fair value of contingent consideration
|
0.8
|
|
Fair value of total consideration transferred
|
$
|
119.6
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed
|
|
Cash and cash equivalents
|
$
|
1.6
|
|
Accounts receivable
|
4.2
|
|
Other current assets
|
0.2
|
|
Properties (1)
|
3.3
|
|
Intangible assets
|
49.5
|
|
Goodwill
|
75.8
|
|
Total assets
|
134.6
|
|
|
|
Accounts payable
|
0.2
|
|
Accrued compensation and benefits
|
0.4
|
|
Deferred revenue
|
5.5
|
|
Other current liabilities
|
0.7
|
|
Deferred income tax liabilities
|
8.2
|
|
Total liabilities
|
15.0
|
|
Net assets acquired
|
$
|
119.6
|
|
_____________________________________________
(1) Includes
$3.0 million
of acquired software.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
The following table summarizes the intangible assets acquired and estimated weighted average useful lives as of the acquisition dates (in millions):
|
|
|
|
|
|
|
|
Fair Value
|
|
Weighted Average Useful Life
|
Client relationships
|
$
|
48.0
|
|
|
17 years
|
Other
|
1.5
|
|
|
7 years
|
|
$
|
49.5
|
|
|
|
The operating results of kasina LLC, Red Rocks Capital LLC, and Wealth Management Systems Inc. were combined with our operating results subsequent to the acquisition dates. Approximately
$10.4 million
of revenues and
$9.3 million
of pretax losses of the acquired businesses are included in the Consolidated Statement of Income for the year ended December 31, 2015. Pro-forma results of operations, assuming these acquisitions were made at the beginning of the earliest period presented, have not been presented as the effect of these acquisitions are not material to our results.
Restructuring Initiatives
As a result of changes in our business environment, from time to time we will restructure one or more of our businesses to enhance operational efficiency.
During the year ended December 31, 2017, we incurred pretax restructuring charges related to employee terminations of
$16.3 million
within the Domestic Financial Services segment,
$2.7 million
in International Financial Services and
$4.4 million
within the Healthcare Services segment.
During the year ended December 31, 2016, we incurred pretax restructuring charges related to employee termination costs of
$9.9 million
and lease termination costs of
$0.5 million
within the Domestic Financial Services segment.
During the year ended December 31, 2015, we incurred
$3.4 million
of pretax charges related to employee termination costs as a result of a restructuring initiative within the Healthcare Services segment which includes the closure of an operating location at the end of the existing lease term in mid-2016.
As of December 31, 2017, 2016 and 2015, we had a remaining liability of
$2.8 million
,
$0.6 million
and
$4.1 million
, respectively, associated with these restructuring activities.
4.
Discontinued Operations
On July 1, 2016, we completed the sale of our North American Customer Communications business for cash consideration of
$410.7 million
, after giving effect to a
$0.7 million
adjustment agreed upon in December 2016 to settle working capital and other matters under the terms of the agreement. We recorded an estimated pretax gain of
$341.5 million
on the sale during 2016. In 2015, we entered into a sale and leaseback of our four North American Customer Communications’ production facilities which had resulted in a deferred gain. This remaining lease obligation was included in the sale of North American Customer Communications and the unamortizaed deferred gain was included within the pretax gain recorded on the sale.
In April 2016, we completed the sale of our U.K. Customer Communications’ Bristol production facilities for pretax proceeds totaling approximately
$16.0 million
. Concurrent with this sale, we leased back approximately two-thirds of the facilities under a
12
-year lease. The rent payments and associated rent expense of the Bristol production facilities are approximately
$0.7 million
per year over the
12
-year lease term.
In February 2017, we updated our impairment analysis utilizing new information received (level 3 in the fair value hierarchy) regarding our U.K. Customer Communications business which indicated the carrying value exceeded the fair value of the business. As a result, we recorded an impairment charge of
$17.0 million
, which is included as a component of discontinued operations for the year ended December 31, 2016. The impairment resulted in the write-down of goodwill and long-lived assets of the business based on the estimated fair value. There was no tax benefit recognized for this impairment charge as it is not expected to be deductible for tax purposes.
On May 4, 2017, we completed the sale of our U.K. Customer Communications business for cash consideration of approximately
$43.6 million
, after giving effect to a
$0.3 million
adjustment agreed upon in October 2017 to settle working capital and other matters under the terms of the agreement. We recorded a pretax gain of
$2.6 million
on the sale. The
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
remaining lease obligation related to the sale and leaseback of the Bristol production facilities was included in the sale of U.K. Customer Communications.
We have classified the results of the two businesses sold as well as the gain realized upon sale as discontinued operations in our Consolidated Statement of Income and Consolidated Statement of Cash Flows for all periods presented. Additionally, the related assets and liabilities associated with our U.K. Customer Communications discontinued operations were classified as held for sale in our Consolidated Balance Sheet at December 31, 2016.
Pursuant to the terms of the North American transaction, we have provided certain information technology and operations processing activities to the North American Customer Communications business post-transaction and we expect to continue providing limited services for the next
3
years. Additionally, we will continue to incur costs for certain print-related services provided by the disposed business for an estimated period of
3
to
5
years following the transaction. The information technology and operations processing activities we performed after the sale of the business resulted in approximately
$28.1 million
of continuing cash inflows from the business sold and the costs incurred for certain print-related services provided by the business sold resulted in continuing cash outflows of approximately
$50.3 million
for the year ended December 31, 2017.
The revenues previously eliminated in consolidation that have continued post-transaction were approximately
$25.9 million
,
$19.3 million
and
$13.8 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. The expenses previously eliminated in consolidation that have continued post-transaction were approximately
$51.3 million
,
$34.8 million
and
$19.3 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. The revenues and expenses associated with these continued activities have been classified within continuing operations for all periods presented. The offsetting costs and revenues previously recorded within Customer Communications and eliminated in consolidation have been reclassified to discontinued operations for all periods presented.
As of December 31, 2017, all assets and liabilities previously classified as held for sale in our Consolidated Balance Sheet had been sold. The following table summarizes the assets and liabilities classified as held for sale in our Consolidated Balance Sheet as of December 31, 2016 (in millions):
|
|
|
|
|
|
December 31,
|
|
2016
|
Assets
|
|
|
Cash and cash equivalents
|
$
|
4.0
|
|
Accounts receivable
|
38.9
|
|
Unconsolidated affiliates
|
0.2
|
|
Properties, net
|
9.9
|
|
Intangible assets, net
|
11.2
|
|
Other assets
|
8.4
|
|
Total assets held for sale
|
$
|
72.6
|
|
|
|
Liabilities
|
|
|
Current portion of debt
|
$
|
0.4
|
|
Accounts payable
|
13.2
|
|
Accrued compensation and benefits
|
3.8
|
|
Deferred revenues and gains
|
0.8
|
|
Long-term debt
|
1.7
|
|
Income taxes payable
|
1.0
|
|
Other liabilities
|
9.2
|
|
Total liabilities held for sale
|
$
|
30.1
|
|
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
The following table summarizes the comparative financial results of discontinued operations which are presented as Income from discontinued operations, net of tax on our Consolidated Statement of Income (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Operating revenues
|
$
|
53.4
|
|
|
$
|
389.0
|
|
|
$
|
608.0
|
|
Out-of-pocket reimbursements
|
12.8
|
|
|
409.0
|
|
|
743.1
|
|
Total revenues
|
66.2
|
|
|
798.0
|
|
|
1,351.1
|
|
|
|
|
|
|
|
Costs and expenses
|
63.8
|
|
|
747.6
|
|
|
1,247.3
|
|
Depreciation and amortization (including goodwill impairment)
|
—
|
|
|
28.9
|
|
|
30.9
|
|
Operating income
|
2.4
|
|
|
21.5
|
|
|
72.9
|
|
|
|
|
|
|
|
Interest expense
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
Equity in earnings of unconsolidated affiliates
|
0.2
|
|
|
0.3
|
|
|
0.4
|
|
Net gain on business disposition
|
2.6
|
|
|
341.5
|
|
|
—
|
|
Income before income taxes
|
5.2
|
|
|
363.3
|
|
|
73.0
|
|
|
|
|
|
|
|
Income taxes
|
0.7
|
|
|
115.0
|
|
|
24.5
|
|
Income from discontinued operations, net of tax
|
$
|
4.5
|
|
|
$
|
248.3
|
|
|
$
|
48.5
|
|
5.
Investments
Investments are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
December 31,
2017
|
|
December 31,
2016
|
Available-for-sale securities:
|
|
|
|
State Street Corporation
|
$
|
—
|
|
|
$
|
169.6
|
|
Other available-for-sale securities
|
11.8
|
|
|
10.9
|
|
|
11.8
|
|
|
180.5
|
|
Other:
|
|
|
|
Trading securities
|
33.6
|
|
|
7.9
|
|
Seed capital investments, at fair value
|
12.1
|
|
|
61.0
|
|
Cost method, private equity and other investments
|
142.2
|
|
|
128.0
|
|
|
187.9
|
|
|
196.9
|
|
Total investments
|
$
|
199.7
|
|
|
$
|
377.4
|
|
Certain information related to our available-for-sale securities is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Book cost basis
|
$
|
8.6
|
|
|
$
|
28.4
|
|
Gross unrealized gains
|
3.2
|
|
|
152.1
|
|
Market value
|
$
|
11.8
|
|
|
$
|
180.5
|
|
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
At
December 31, 2017
and
2016
, our carrying value of available-for-sale investments was
$11.8 million
and
$180.5 million
, respectively, based on the closing price on the New York Stock Exchange at the respective year end. The balance as of December 31, 2016 primarily consisted of the ownership of
2.2 million
shares of State Street. In 2017, we transferred approximately
2.0 million
shares of State Street common stock as part of the non-taxable exchange transaction to acquire State Street’s
50%
interest in BFDS. Our remaining shares of State Street were transferred in a non-monetary charitable contribution recognized at market value. The majority of the
$62.2 million
of the deferred tax liabilities associated with the available-for-sale investments as of December 31,
2016
were derecognized during the year ended
December 31, 2017
as a result of the non-taxable exchange of the State Street shares for State Street’s ownership interest in BFDS.
During the years ended
December 31, 2017
,
2016
and
2015
, we received
$4.2 million
,
$61.2 million
and
$303.5 million
, respectively, from the sale of investments in available-for-sale securities. Gross realized gains of
$170.2 million
,
$6.1 million
and
$175.1 million
and gross realized losses of
$14.3 million
,
$3.8 million
and
$6.7 million
, were recorded in
2017
,
2016
and
2015
, respectively, from the disposal of available-for-sale securities. Gross realized gains in 2017 included a net gain of
$145.1 million
from the exchange of State Street shares for State Street’s
50%
interest in BFDS and a gain of
$10.4 million
from the charitable contribution of our remaining shares in State Street. We recorded
no
losses on available-for-sale securities related to other-than-temporary investments impairments for the year ended
December 31, 2017
. We recorded losses on available-for-sale securities of
$0.2 million
and
$4.8 million
related to other-than-temporary investment impairments for the years ended December 31,
2016
and
2015
, respectively. These gains and losses are included as a component of Other income, net in the Consolidated Statement of Income. We had no securities in an unrealized loss position as of
December 31, 2017
. The fair value and gross unrealized losses of securities in a continuous loss position at December 31, 2016 were not significant.
We consolidate the investments of open-end funds in which we own a controlling interest as a result of our seed capital investments. At December 31, 2016, we had a controlling interest in seed capital investments of
$53.6 million
which is comprised primarily of equity securities as well as
$8.4 million
of cash collateral deposited with a broker for securities sold short. In March 2017, we reduced our ownership interest in a substantial portion of our seed capital investments, resulting in the deconsolidation of the respective fund. We held non-controlling interests in certain seed capital investments of
$12.1 million
and
$7.4 million
at
December 31, 2017
and
2016
, respectively.
We are a limited partner in various private equity funds. Our involvement in the financing operations of the private equity fund investments is generally limited to our investments in the entities. At
December 31, 2017
and
2016
, our carrying value of these private equity fund investments was approximately
$91.3 million
and
$111.2 million
, respectively. At
December 31, 2017
, we had future capital commitments related to these private equity fund investments of approximately
$3.0 million
. Additionally, we have other investments with a carrying value of
$50.9 million
and
$16.8 million
at
December 31, 2017
and
2016
, respectively. We account for private equity funds and other investments primarily under the cost method as we do not have a controlling interest or the ability to exercise significant influence over these companies and these investments do not have readily determinable fair values, except for certain other investments which are measured using net asset value as a practical expedient for fair value. At December 31, 2017 and 2016, we held approximately
$7.6 million
and
$11.5 million
, respectively, of pooled funds measured using net asset value within our other investments.
We record lower of cost or market valuation adjustments on cost method and other investments when impairment conditions, such as adverse market conditions or poor performance of the underlying investments, are present. During the years ended
December 31, 2017
and
2015
, we recorded
$4.5 million
and
$0.2 million
, respectively, of impairments on cost method investments. During the year ended December 31, 2016, we recorded
no
impairments on cost method investments.
Our investments in private equity funds meet the definition of a variable interest entity (“VIE”); however, the private equity fund investments were not consolidated as we do not have the power to direct the entities’ most significant economic activities. The maximum risk of loss related to our private equity fund investments is limited to the carrying value of our investments in the entities plus any future capital commitments. At
December 31, 2017
and
2016
, our maximum risk of loss associated with these VIE’s, which is comprised of our investment and required future capital commitments, was
$94.3 million
and
$115.0 million
, respectively.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
6.
Unconsolidated Affiliates
Unconsolidated affiliates are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Ownership
Percentage (1)
|
|
December 31,
2017
|
|
December 31,
2016
|
Unconsolidated affiliates:
|
|
|
|
|
|
International Financial Data Services U.K.
|
—
|
|
$
|
—
|
|
|
$
|
133.3
|
|
Boston Financial Data Services, Inc.
|
—
|
|
—
|
|
|
91.2
|
|
International Financial Data Services L.P.
|
50%
|
|
45.7
|
|
|
73.2
|
|
Other unconsolidated affiliates
|
|
|
48.3
|
|
|
33.5
|
|
Total
|
|
|
$
|
94.0
|
|
|
$
|
331.2
|
|
_____________________________________________________
|
|
(1)
|
DST’s ownership percentage in IFDS U.K. and BFDS was
50%
prior to the respective acquisitions in March 2017, at which time the businesses became wholly-owned subsidiaries.
|
In March 2017, we acquired State Street’s
50%
ownership interests in BFDS and IFDS U.K., which resulted in control and consolidation of the entities. Our investment balances in these joint ventures were eliminated through the acquisition method of accounting on the date of acquisition, which resulted in a gain of
$56.0 million
related to BFDS and a loss of
$12.2 million
related to IFDS U.K, which are included in Other income, net in the Consolidated Statement of Income.
Immediately prior to our acquisitions of the remaining interests in IFDS U.K. and BFDS, IFDS L.P. made cash and asset distributions to both DST and State Street, which resulted in realized gains on the step-up of certain investments and real estate assets. Our proportionate share of the realized gains was
$10.2 million
and is included in Equity in earnings of unconsolidated affiliates in the Consolidated Statement of Income. Through such distributions, we acquired an investment in a privately-held company and 100% of the equity interest in IFDS Realty, LLC, which holds the real estate assets used in BFDS’ operations.
Our investments in other unconsolidated affiliates are primarily comprised of various joint ventures which own and lease real estate to our operating businesses as well as other third parties. One of these investments is a
50%
ownership of Pershing Road Development Company, LLC, a limited special purpose real estate joint venture which leases approximately
1.1 million
square feet of office space to the U.S. government. This investment has a
zero
carrying value at
December 31, 2017
and
2016
as a result of losses incurred on an interest rate swap which is held by the joint venture. We received a
$0.8 million
cash distribution from Pershing Road Development Company, LLC for each of the years ended December 31, 2017, 2016, and 2015.
In December 2017, we received a distribution of real estate and the related debt from Broadway Square Partners, LLP (“Broadway Square Partners”), a
50%
owned real estate joint venture included within other unconsolidated affiliates. Broadway Square Partners recognized a gain of
$46.0 million
on the step-up to fair value of the distributed real estate and debt, of which
$23.0 million
is included in our equity in earnings of unconsolidated affiliates. We recorded
$19.2 million
of real estate and
$4.4 million
of debt with a corresponding
$14.8 million
net reduction to our investment in Broadway Square Partners based on the assessed fair values on the date of distribution.
Equity in earnings of unconsolidated affiliates, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
International Financial Data Services U.K. (1)
|
$
|
1.0
|
|
|
$
|
10.0
|
|
|
$
|
22.5
|
|
Boston Financial Data Services, Inc. (1)
|
3.6
|
|
|
8.3
|
|
|
5.3
|
|
International Financial Data Services L.P.
|
18.3
|
|
|
2.2
|
|
|
7.4
|
|
Other unconsolidated affiliates
|
31.6
|
|
|
6.7
|
|
|
10.2
|
|
Total
|
$
|
54.5
|
|
|
$
|
27.2
|
|
|
$
|
45.4
|
|
_______________________________________________________________________
|
|
(1)
|
Equity in earnings related to BFDS and IFDS U.K. represent earnings prior to our acquisition of the remaining interests of these entities in March 2017, at which time the businesses became wholly-owned subsidiaries.
|
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
Certain condensed financial information of our unconsolidated affiliates is presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Income Statement Data: (1)
|
2017
|
|
2016
|
|
2015
|
Revenues
|
$
|
590.1
|
|
|
$
|
1,248.6
|
|
|
$
|
1,225.7
|
|
Costs and expenses
|
477.1
|
|
|
1,192.4
|
|
|
1,132.7
|
|
Net income
|
113.0
|
|
|
56.2
|
|
|
93.0
|
|
_______________________________________________________________________
|
|
(1)
|
Income Statement data for the year ended December 31, 2017 includes BFDS and IFDS U.K. activity for the period prior to our acquisition of the remaining interests of these entities in March 2017, at which time the businesses became wholly-owned subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Balance Sheet Data: (1)
|
2017
|
|
2016
|
Current assets
|
$
|
156.2
|
|
|
$
|
570.2
|
|
Noncurrent assets
|
358.6
|
|
|
823.8
|
|
Current liabilities
|
98.7
|
|
|
423.0
|
|
Noncurrent liabilities
|
286.3
|
|
|
396.6
|
|
Partners’ and stockholders’ equity
|
129.8
|
|
|
574.4
|
|
_______________________________________________________________________
(1) Balance Sheet data as of December 31, 2017 excludes BFDS and IFDS U.K.
The following tables summarize related party transactions and balances outstanding with our related parties, primarily comprised of transactions with our unconsolidated affiliates (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Operating revenues from related parties
|
$
|
55.4
|
|
|
$
|
138.5
|
|
|
$
|
134.9
|
|
Amounts paid to related parties (1)
|
42.7
|
|
|
36.8
|
|
|
27.3
|
|
Distributions received from related parties
|
18.6
|
|
|
3.5
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Outstanding advances/loans to related parties
|
$
|
6.1
|
|
|
$
|
31.4
|
|
Trade accounts receivable from related parties
|
6.7
|
|
|
19.7
|
|
Total amounts receivable from related parties
|
$
|
12.8
|
|
|
$
|
51.1
|
|
|
|
|
|
Amounts payable to related parties
|
$
|
0.6
|
|
|
$
|
3.4
|
|
_______________________________________________________________________
|
|
(1)
|
Excludes amounts paid to our unconsolidated joint ventures related to loans, advancements, and other capital investments. In addition, this excludes amounts paid on the BFDS installment loan which had an outstanding balance of
$1.5 million
at December 31, 2015 and was fully repaid in 2016.
|
Operating revenues from related parties were primarily generated from services provided to BFDS for the use of our proprietary software and software development services provided to IFDS U.K., which have been eliminated from consolidated operating revenues subsequent to the date of acquisition. Payments to our related parties primarily included payments for rent and other facility and maintenance costs pursuant to the properties we lease from our unconsolidated real estate joint ventures and staffing services. Distributions received from related parties were primarily related to distributions from our real estate joint ventures.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
During 2016, we and State Street each provided subordinate loans of approximately
$28.0 million
to IFDS U.K. In February 2017, DST provided an additional subordinate loan of approximately
$12.5 million
to IFDS U.K. In connection with the acquisitions, DST effectively settled all of IFDS U.K.’s outstanding note payables, including those owed to State Street, which were considered part of the total cash paid to acquire State Street’s interests in IFDS U.K.
In December 2017, we made an additional
$1.2 million
investment in Broadway Square Partners prior to the real estate distribution discussed above.
7.
Fair Value Measurements
Authoritative accounting guidance on fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of
December 31, 2017
and
2016
, we held certain investment assets and liabilities that are required to be measured at fair value on a recurring basis. These investments include money market funds, available-for-sale equity securities, trading securities, seed capital investments and securities sold short whereby fair value is determined using quoted prices in active markets. Accordingly, the fair value measurements of these investments have been classified as Level 1 in the tables below. Fair value for deferred compensation liabilities that are credited with deemed gains or losses of the underlying hypothetical investments, primarily equity securities, has been classified as Level 1 in the tables below. In addition, we have foreign currency derivative instruments that are required to be reported at fair value. Fair value for the derivative instruments was determined using inputs from quoted prices for similar assets and liabilities in active markets that are directly or indirectly observable. Accordingly, our derivative instruments have been classified as Level 2 in the tables below.
The following tables present assets and liabilities measured at fair value on a recurring basis (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date Using
|
|
December 31,
2017
|
|
Quoted prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Money market funds (1)
|
$
|
180.0
|
|
|
$
|
180.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities (2)
|
45.4
|
|
|
45.4
|
|
|
—
|
|
|
—
|
|
Seed capital investments (2)
|
12.1
|
|
|
12.1
|
|
|
—
|
|
|
—
|
|
Deferred compensation liabilities (3)
|
(33.6
|
)
|
|
(33.6
|
)
|
|
—
|
|
|
—
|
|
Derivative instruments (3)
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
Total
|
$
|
203.8
|
|
|
$
|
203.9
|
|
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date Using
|
|
December 31,
2016
|
|
Quoted prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Money market funds (1)
|
$
|
437.0
|
|
|
$
|
437.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities (2)
|
188.4
|
|
|
188.4
|
|
|
—
|
|
|
—
|
|
Seed capital investments (2)
|
61.0
|
|
|
61.0
|
|
|
—
|
|
|
—
|
|
Deferred compensation liabilities (3)
|
(7.9
|
)
|
|
(7.9
|
)
|
|
—
|
|
|
—
|
|
Securities sold short (3)
|
(8.2
|
)
|
|
(8.2
|
)
|
|
—
|
|
|
—
|
|
Derivative instruments (3)
|
(0.4
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
Total
|
$
|
669.9
|
|
|
$
|
670.3
|
|
|
$
|
(0.4
|
)
|
|
$
|
—
|
|
_______________________________________________________________________
(1) Included in Cash and cash equivalents, Funds held on behalf of clients, and Other current assets on our Consolidated Balance Sheet.
(2) Included in Investments on our Consolidated Balance Sheet.
(3) Included in Other current assets and Other liabilities on our Consolidated Balance Sheet.
At
December 31, 2017
and
2016
, we held approximately
$7.6 million
and
$11.5 million
, respectively, of investments in pooled funds, which are measured using net asset value as a practical expedient for fair value and therefore excluded from the table above. The investments in pooled funds are included within the
$142.2 million
and
$128.0 million
of cost method and other investments at
December 31, 2017
and
2016
, respectively, disclosed within
Note 5
, “
Investments
.”
8.
Property and Equipment
Property and equipment and related accumulated depreciation are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Land
|
$
|
52.9
|
|
|
$
|
34.2
|
|
Buildings
|
198.0
|
|
|
160.3
|
|
Technology equipment
|
248.4
|
|
|
213.0
|
|
Software
|
591.4
|
|
|
508.2
|
|
Furniture, fixtures and other equipment
|
151.6
|
|
|
122.1
|
|
Leasehold improvements
|
91.6
|
|
|
76.4
|
|
Construction-in-progress
|
12.1
|
|
|
18.3
|
|
|
1,346.0
|
|
|
1,132.5
|
|
Less accumulated depreciation and amortization
|
996.2
|
|
|
896.8
|
|
Properties, net
|
$
|
349.8
|
|
|
$
|
235.7
|
|
At December 31, 2016, there was approximately
$2.5 million
of assets under capital lease, net of accumulated depreciation of
$2.2 million
, included in the above table. We had minimal assets under capital lease as of December 31, 2017.
Software assets are comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
Internally developed software
|
$
|
324.0
|
|
|
$
|
287.9
|
|
|
$
|
296.4
|
|
|
$
|
266.0
|
|
Purchased software
|
183.8
|
|
|
159.5
|
|
|
155.3
|
|
|
143.0
|
|
Software from business acquisitions
|
83.6
|
|
|
52.8
|
|
|
56.5
|
|
|
44.5
|
|
Total
|
$
|
591.4
|
|
|
$
|
500.2
|
|
|
$
|
508.2
|
|
|
$
|
453.5
|
|
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
During the years ended
December 31, 2017
,
2016
and
2015
, we capitalized software costs of
$24.1 million
,
$21.5 million
and
$23.3 million
, respectively. Construction-in-progress as of
December 31, 2017
and
2016
includes internally developed software costs of
$11.5 million
and
$14.9 million
, respectively, which have not yet been put into service.
Depreciation expense for the years ended
December 31, 2017
,
2016
and
2015
, was
$99.8 million
,
$78.2 million
and
$77.6 million
, respectively.
In December 2014, we entered into a transaction under which Industrial Revenue Bonds (“IRBs”) were issued by a municipality to finance the purchase and/or construction of certain real and personal property. Pursuant to the terms of the IRBs, we transferred title of certain fixed assets to the municipality. Tax benefits associated with the IRBs include a provision for a 10-year property tax abatement and sales tax exemption on the property financed with the proceeds of the IRBs. The municipality holds legal title to the bond financed assets and leases them to us subject to an option to purchase for nominal consideration, which we may exercise at any time. We are the bondholder as well as the lessee of the property purchased with the IRBs proceeds. We record the property on our Consolidated Balance Sheet as all risks and benefits remain with us, along with a capital lease obligation to repay the proceeds of the IRBs. Moreover, as holder of the bonds, we have the right to offset the amounts due under the leases with the amounts due to us from the bonds. Accordingly, no net debt associated with the IRBs is reflected in our Consolidated Balance Sheet. Upon maturity or redemption of the bonds, which is within our sole control, title to the leased property reverts back to us. At
December 31, 2017
and
2016
, we held IRBs with an aggregate principal amount of
$103.9 million
and
$87.6 million
, respectively.
9.
Intangible Assets and Goodwill
Intangible Assets
The following table summarizes intangible assets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
Client relationships
|
$
|
373.3
|
|
|
$
|
97.3
|
|
|
$
|
203.6
|
|
|
$
|
71.0
|
|
Other
|
28.3
|
|
|
21.2
|
|
|
28.5
|
|
|
18.5
|
|
Total
|
$
|
401.6
|
|
|
$
|
118.5
|
|
|
$
|
232.1
|
|
|
$
|
89.5
|
|
Amortization expense of intangible assets for the years ended
December 31, 2017
,
2016
and
2015
was
$28.2 million
,
$16.6 million
and
$12.5 million
, respectively. Annual amortization for intangible assets recorded as of
December 31, 2017
is estimated to be (in millions):
|
|
|
|
|
2018
|
$
|
32.3
|
|
2019
|
31.2
|
|
2020
|
28.8
|
|
2021
|
28.4
|
|
2022
|
27.3
|
|
Thereafter
|
135.1
|
|
Total
|
$
|
283.1
|
|
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
Goodwill
The following tables summarize the changes in the carrying amount of goodwill for the years ended
December 31, 2017
and
2016
, by segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Acquisitions
|
|
Impairments
|
|
Other (1)
|
|
December 31, 2017
|
Domestic Financial Services
|
$
|
345.8
|
|
|
$
|
68.7
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
|
$
|
415.4
|
|
International Financial Services
|
15.6
|
|
|
196.7
|
|
|
—
|
|
|
16.4
|
|
|
228.7
|
|
Healthcare Services
|
155.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
155.0
|
|
Total
|
$
|
516.4
|
|
|
$
|
265.4
|
|
|
$
|
—
|
|
|
$
|
17.3
|
|
|
$
|
799.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Acquisitions
|
|
Impairments
|
|
Other (1)
|
|
December 31, 2016
|
Domestic Financial Services
|
$
|
286.5
|
|
|
$
|
61.0
|
|
|
$
|
—
|
|
|
$
|
(1.7
|
)
|
|
$
|
345.8
|
|
International Financial Services
|
16.8
|
|
|
—
|
|
|
—
|
|
|
(1.2
|
)
|
|
15.6
|
|
Healthcare Services
|
155.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
155.0
|
|
Total
|
$
|
458.3
|
|
|
$
|
61.0
|
|
|
$
|
—
|
|
|
$
|
(2.9
|
)
|
|
$
|
516.4
|
|
______________________________________________________________________
|
|
(1)
|
Other changes primarily consists of the impacts of foreign currency translation
|
We test goodwill for impairment on an annual basis as of October 1 and at other times if a significant change in circumstances indicates it is more likely than not that the fair value of these assets has been reduced. The valuation of goodwill requires assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples and discount rates. Our
2017
annual goodwill impairment test determined that the estimated fair value of each of our reporting units substantially exceeds the carrying value of the reporting units.
10.
Debt
The Company is obligated under notes and other indebtedness as follows (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Accounts receivable securitization program
|
$
|
14.9
|
|
|
$
|
103.2
|
|
Revolving credit facilities
|
—
|
|
|
75.0
|
|
Senior notes
|
575.0
|
|
|
330.0
|
|
Other indebtedness, net of unamortized debt issuance costs
|
30.9
|
|
|
—
|
|
|
620.8
|
|
|
508.2
|
|
Less current portion of debt
|
83.7
|
|
|
208.5
|
|
Long-term debt
|
$
|
537.1
|
|
|
$
|
299.7
|
|
Accounts receivable securitization program
We securitize certain of our domestic accounts receivable through an accounts receivable securitization program with a third-party bank. The maximum amount that can be outstanding under this program is
$150.0 million
. In November 2017, we renewed and modified the accounts receivable securitization program resulting in an extended maturity date of November 14, 2020 and the addition of the BFDS receivables to the program.
Under the terms of the accounts receivable securitization program, (a) we periodically acquire accounts receivable originated by certain of our domestic subsidiaries, including, but not limited to, DST Health Solutions, DST Technologies, BFDS, and DST Pharmacy Solutions (the “Subsidiary Originators”), (b) we transfer receivables originated by us and receivables acquired from the Subsidiary Originators, on a periodic basis, to a wholly-owned bankruptcy remote special purpose subsidiary of DST (the “SPE”), and (c) the SPE then sells undivided interests in the receivables to the bank. We retain servicing responsibility over the receivables. The program contains customary restrictive covenants as well as customary events of default.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
We have continuing involvement with the transferred assets because we maintain servicing responsibilities for the accounts receivable assets included in the accounts receivable securitization program. Accounts receivable assets transferred from us to our wholly-owned, bankruptcy remote special purpose subsidiary contain restrictions because they are not available to satisfy the creditors of any other person, including DST or any of our subsidiaries or affiliates. Further, neither we nor the SPE guarantees collectability of the receivables or the creditworthiness of obligors. The SPE retains an interest in the receivables in excess of the amount transferred to the conduit, and such receivables continue to be recognized on the Consolidated Balance Sheet. The carrying value of the retained interest approximates its estimated fair value at the balance sheet date. We believe increases in the level of assumed interest rates and/or credit losses compared to assumptions in effect at the balance sheet date by
10%
or
20%
would not materially affect the fair value of the retained interest at the reporting date.
The outstanding amount under the program was
$14.9 million
and
$103.2 million
at
December 31, 2017
and
2016
, respectively. During the years ended
December 31, 2017
,
2016
and
2015
total proceeds from the accounts receivable securitization program were approximately
$555.9 million
,
$895.5 million
and
$1,037.7 million
, respectively, and total repayments were approximately
$644.2 million
,
$792.3 million
and
$1,157.7 million
, respectively, which comprise the net cash flow in the financing section of the Consolidated Statement of Cash Flows.
Aggregate transfers of undivided interests in the receivables from the SPE to the bank were
$1,171.2 million
and
$1,459.9 million
for the years ended
December 31, 2017
and
2016
, respectively. The impact on net income stemming from these transfers was not material. Costs associated with the accounts receivable securitization program are included in interest expense in the Consolidated Statement of Income. The program costs applicable to the outstanding amount of undivided interests in the receivables are generally based on
LIBOR
plus an applicable margin.
Revolving credit facilities
On October 1, 2014, we entered into a syndicated credit facility (“Credit Facility”). The Credit Facility provides for a revolving unsecured line in an aggregate principal amount of up to
$850.0 million
. The interest rates applicable to loans under the Credit Facility are generally based on
Eurodollar, Federal Funds or prime rates
plus applicable margins as defined in the agreement. The Credit Facility contains grid schedules that adjust borrowing costs up or down based upon our consolidated leverage ratio. The grid schedules may result in fluctuations in borrowing costs ranging from
1.00%
to
1.70%
over
Eurodollar
and
0.00%
to
0.70%
over
base rate
, as defined. Additionally, we pay an annual facility fee of
0.125%
to
0.30%
. Among other provisions, the Credit Facility requires certain leverage and interest coverage ratios to be maintained. If any event of default occurs and is continuing, all amounts payable under the credit agreement may be declared immediately due and payable. The Credit Facility also contains customary restrictive covenants and cross-default provisions. The maturity date for the Credit Facility is October 1, 2019. At
December 31, 2017
, there were
no
borrowings under the Credit Facility. Amounts borrowed on the Credit Facility were
$75.0 million
at December 31,
2016
.
We also have an unsecured revolving line of credit to support our subsidiaries’ operations that provides total borrowings of up to
$10.0 million
. Borrowings on this line of credit are available at the bank’s
Prime
rate and mature during 2018. At
December 31, 2017
and
2016
, there were no borrowings under this line of credit.
During the years ended
December 31, 2017
,
2016
and
2015
, total proceeds from our revolving credit facilities were approximately
$1,194.1 million
,
$977.1 million
and
$1,053.6 million
, respectively, and total repayments were approximately
$1,269.1 million
,
$1,128.2 million
and
$871.8 million
respectively, which comprise the net cash flows presented within the financing section of the Consolidated Statement of Cash Flows.
Senior notes
During 2010, we issued
$370.0 million
of aggregate principal of privately placed senior notes (collectively, the “2010 Senior Notes”) pursuant to a note purchase agreement dated August 9, 2010. The 2010 Senior Notes were comprised of
$40.0 million
of
4.19%
Series A Senior Notes due August 9, 2015,
$105.0 million
of
4.86%
Series B Senior Notes due August 9, 2017,
$65.0 million
of
5.06%
Series C Senior Notes due August 9, 2018 and
$160.0 million
of
5.42%
Series D Senior Notes due August 9, 2020. We repaid the Series A Senior Notes and Series B Senior Notes at maturity during 2015 and 2017, respectively.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
During 2017, we agreed to issue
$415.0 million
of privately placed senior notes (collectively, the “2017 Senior Notes”) pursuant to a note purchase agreement dated November 14, 2017. The 2017 Senior Notes are comprised of
$35.0 million
of
3.55%
Series A Senior Notes due January 9, 2023,
$105.0 million
of
3.82%
Series B Senior Notes due January 9, 2025,
$65.0 million
of
4.02%
Series C Senior Notes due August 6, 2025,
$105.0 million
of
4.04%
Series D Senior Notes due January 9, 2028,
$50.0 million
of
4.14%
Series E Senior Notes due January 9, 2030, and
$55.0 million
of
4.29%
Series F Senior Notes due January 9, 2033. The 2017 Senior Notes were issued in November 2017, with the exception of the Series C Senior Notes which are scheduled to be issued on August 6, 2018. The November 2017 proceeds were primarily used to pay down our revolving credit facility.
Interest on our 2010 Senior Notes is payable semi-annually in February and August of each year. Interest on our outstanding 2017 Senior Notes is payable semi-annually in January and July of each year, beginning in July 2018. We may prepay the senior notes at any time, in an amount not less than
10%
of the aggregate principal amount of such notes then outstanding, at a price equal to
100%
of the principal amount being prepaid, plus accrued and unpaid interest and a “make-whole” prepayment premium.
Pursuant to terms of our senior note agreements, any Company subsidiary required to become a party to or otherwise guarantee the syndicated line of credit facility or other indebtedness in excess of
$100.0 million
, or in the case of the 2017 Senior Notes, certain other indebtedness in excess of
$150.0 million
, must also guarantee our obligations under the senior notes. The senior note agreements contain customary restrictive covenants, as well as certain customary events of default, including cross-default provisions. Among other provisions, the agreements limit our ability to incur or create liens, sell assets, issue priority indebtedness and change lines of business. The agreements also require certain leverage and interest coverage ratios to be maintained. We were in compliance with all debt covenants as of December 31, 2017.
Other indebtedness
In connection with the acquisition of the remaining interests in IFDS U.K. during 2017, we assumed a mortgage with a principal amount of
£23.0 million
which matures in October 2020 (“U.K. mortgage”). The outstanding amount under the mortgage was
$28.4 million
at
December 31, 2017
with a fixed interest rate of
3.1%
. Principal payments of
£1.0 million
are payable semi-annually in April and October of each year and accrued interest is payable quarterly, with the outstanding balance due at maturity.
Other indebtedness as of December 31, 2017 also included a
$4.4 million
mortgage acquired through a distribution of real estate and the related debt from Broadway Square Partners in December 2017 and
$0.6 million
of capital leases, offset by
$2.5 million
of unamortized debt issuance costs.
Future principal payments of indebtedness at
December 31, 2017
are as follows (in millions):
|
|
|
|
|
2018
|
$
|
83.7
|
|
2019
|
3.6
|
|
2020
|
183.7
|
|
2021
|
0.7
|
|
2022
|
0.8
|
|
Thereafter
|
350.8
|
|
Total
|
$
|
623.3
|
|
The weighted average interest rates on our short-term borrowings were
2.72%
and
2.36%
for the years ended
December 31, 2017
and
2016
, respectively. Based upon the borrowing rates currently available to us for indebtedness with similar terms and average maturities, the carrying value of long-term debt, with the exception of the senior notes and U.K. mortgage, is considered to approximate fair value at
December 31, 2017
and
2016
. The estimated fair values of the senior notes and U.K. mortgage were derived principally from quoted prices (level 2 in the fair value hierarchy).
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
The carrying and estimated fair values of our fixed rate debt were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
2010 Senior notes—Series B
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
105.0
|
|
|
$
|
106.7
|
|
2010 Senior notes—Series C
|
65.0
|
|
|
65.7
|
|
|
65.0
|
|
|
67.5
|
|
2010 Senior notes—Series D
|
160.0
|
|
|
167.4
|
|
|
160.0
|
|
|
172.1
|
|
2017 Senior notes—Series A
|
35.0
|
|
|
34.6
|
|
|
—
|
|
|
—
|
|
2017 Senior notes—Series B
|
105.0
|
|
|
104.0
|
|
|
—
|
|
|
—
|
|
2017 Senior notes—Series D
|
105.0
|
|
|
104.5
|
|
|
—
|
|
|
—
|
|
2017 Senior notes—Series E
|
50.0
|
|
|
49.6
|
|
|
—
|
|
|
—
|
|
2017 Senior notes—Series F
|
55.0
|
|
|
54.1
|
|
|
—
|
|
|
—
|
|
U.K. mortgage
|
28.4
|
|
|
28.8
|
|
|
—
|
|
|
—
|
|
U.S. mortgage
|
4.4
|
|
|
4.4
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
607.8
|
|
|
$
|
613.1
|
|
|
$
|
330.0
|
|
|
$
|
346.3
|
|
11.
Hedging Transactions and Derivative Financial Instruments
We are directly and indirectly affected by changes in certain market conditions. When determined appropriate, we use derivative instruments as a risk management tool to mitigate the potential impact of certain market risks. The primary market risks managed by us through the use of derivative instruments are foreign currency exchange rate risk and interest rate risk. We may use various types of derivative instruments including, but not limited to, forward contracts, option contracts and swaps. We do not enter into derivative arrangements for speculative purposes.
We determine the fair values of our derivatives based on quoted market prices that are directly or indirectly observable as further described within
Note 7
, “
Fair Value Measurements
.” The fair value of our derivative instruments is reflected on a gross, rather than net, basis and is not significant to the consolidated financial statements as of
December 31, 2017
or
2016
.
Cash flow hedging strategy
We use cash flow hedges to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in foreign currency exchange rates or interest rates. The changes in the fair values of derivatives designated as cash flow hedges are recorded in Accumulated Other Comprehensive Income (“AOCI”) and are reclassified into the line item in the Consolidated Statement of Income in which the hedged items are recorded in the same period the hedged items affect earnings. The changes in fair values of hedges that are determined to be ineffective are immediately reclassified from AOCI into earnings. The length of time for which we hedge our exposure to future cash flows is typically
one
year.
We have entered into a foreign currency cash flow hedging program to reduce the risk that our net cash outflows from intercompany purchases of services from our international subsidiaries could be adversely affected by fluctuations in foreign currency exchange rates. We entered into forward foreign currency contracts (Thai baht and India rupee) to hedge certain portions of forecasted cash flows denominated in foreign currencies. The total notional values of derivatives that were designated and qualified for our foreign currency cash flow hedging program were
$40.7 million
and
$14.3 million
as of
December 31, 2017
and
2016
, respectively.
We monitor the mix of short-term debt and long-term debt regularly. From time to time, we manage our risk to interest rate fluctuations through the use of derivative financial instruments. We did not enter into interest rate swap agreements during the years ended
December 31, 2017
and
2016
.
The pretax impact that changes in the fair values of derivatives designated as cash flow hedges had on AOCI and earnings was not significant during the years ended
December 31, 2017
,
2016
, and
2015
. There were no gains or losses recognized into income as a result of hedge ineffectiveness during the years ended
December 31, 2017
,
2016
or
2015
. As of
December 31, 2017
, we estimate that amounts to be reclassified into earnings during the next 12 months are
$0.2 million
.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
Economic (nondesignated) hedging strategy
In addition to derivative instruments that are designated and qualify for hedge accounting, we also use certain derivatives as economic hedges of foreign currency exposure. Although these derivatives were not designated for hedge accounting, they are effective economic hedges. The changes in fair values of economic hedges are immediately recognized into earnings.
We use foreign currency economic hedges to offset the earnings impact that fluctuations in foreign currency exchange rates have on certain intercompany loans and other payables denominated in nonfunctional currencies, primarily the British pound and Australian dollar. The foreign currency economic hedging program consists of rolling, monthly forward foreign currency contracts which generally settle on the last day of each month. As a result, there are minimal unrealized gains or losses at the end of the period related to these contracts. The total notional values of derivatives related to our foreign currency economic hedges were
$60.4 million
and
$91.6 million
as of
December 31, 2017
and
2016
, respectively.
12.
Income Taxes
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), resulting in significant modifications to existing U.S. tax law, including but not limited to, (1) lowering the corporate federal income tax rate from 35% to 21% effective January 1, 2018; (2) eliminating the domestic production activity deduction; (3) implementing a territorial tax system; and (4) imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries.
Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities as measured by the enacted tax rates that are expected to be in effect when these differences reverse. Deferred tax expense (benefit) is generally the result of changes in the assets or liabilities for deferred taxes. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Act, we revalued our ending net deferred tax liabilities at December 31, 2017 and recognized a provisional
$22.1 million
tax benefit in the Consolidated Statement of Income for the year ended December 31, 2017.
The Tax Act provides for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits through the year ended December 31, 2017 (“Transition Tax”). We have estimated a provisional Transition Tax of
$8.4 million
, recorded to income tax expense in the Consolidated Statement of Income for the year ended December 31, 2017. The Transition Tax is payable over eight years and thus
$7.3 million
of the Transition Tax is reported as noncurrent on the Consolidated Balance Sheet.
The Tax Act provides for a new requirement, beginning in 2018, that certain income earned by controlled foreign corporations in excess of an allowable return on foreign subsidiary’s tangible assets is subject to U.S. income tax (the global intangible low-taxed income or “GILTI” provision). Also beginning in 2018, the Tax Act provides for a new base erosion and anti-abuse tax provision (“BEAT”) which eliminates the deduction of certain base-erosion payments made to related foreign corporations and imposes a minimum tax if greater than regular tax. We do not expect the GILTI or BEAT provisions to have a material impact to our financial statements and therefore, have not provided any tax impacts in our consolidated financial statements for the year ended December 31, 2017.
The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”) which provides additional clarification regarding situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act for the reporting period in which the Tax Act was enacted. We have recognized the provisional tax impacts, based on reasonable estimates, related to the Transition Tax and the revaluation of deferred tax assets and liabilities and have included these amounts in our consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act. We intend to complete our accounting under the Tax Act within the measurement period set forth in SAB 118
.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
The following summarizes pretax income from continuing operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
U.S.
|
$
|
451.8
|
|
|
$
|
248.2
|
|
|
$
|
451.9
|
|
International
|
80.1
|
|
|
31.0
|
|
|
6.9
|
|
Total
|
$
|
531.9
|
|
|
$
|
279.2
|
|
|
$
|
458.8
|
|
Provision for income taxes (benefits) from continuing operations consists of the following components (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Current
|
|
|
|
|
|
Federal
|
$
|
93.7
|
|
|
$
|
57.7
|
|
|
$
|
147.4
|
|
State and local
|
4.0
|
|
|
11.4
|
|
|
10.2
|
|
International
|
13.7
|
|
|
15.0
|
|
|
7.1
|
|
Total current
|
111.4
|
|
|
84.1
|
|
|
164.7
|
|
Deferred
|
|
|
|
|
|
Federal
|
(34.2
|
)
|
|
19.9
|
|
|
(13.5
|
)
|
State and local
|
2.4
|
|
|
(1.9
|
)
|
|
0.5
|
|
International
|
4.7
|
|
|
(1.0
|
)
|
|
(2.5
|
)
|
Total deferred
|
(27.1
|
)
|
|
17.0
|
|
|
(15.5
|
)
|
Total provision for income taxes
|
$
|
84.3
|
|
|
$
|
101.1
|
|
|
$
|
149.2
|
|
Following are the reconciliations of our effective income tax rates and the U.S. federal income tax statutory rate (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Provision for income taxes using the statutory rate in effect
|
$
|
186.2
|
|
|
$
|
97.7
|
|
|
$
|
160.6
|
|
Tax effect of:
|
|
|
|
|
|
State and local income taxes, net
|
4.5
|
|
|
5.9
|
|
|
4.3
|
|
International income taxes, net
|
(9.5
|
)
|
|
2.5
|
|
|
(1.0
|
)
|
Earnings of U.S. unconsolidated affiliates
|
(1.0
|
)
|
|
(2.3
|
)
|
|
(1.5
|
)
|
Valuation allowance (reversal), net
|
(1.3
|
)
|
|
(0.9
|
)
|
|
1.2
|
|
Tax credits
|
(1.0
|
)
|
|
(5.0
|
)
|
|
(7.7
|
)
|
Uncertain tax positions (reversal), net
|
(2.8
|
)
|
|
1.7
|
|
|
(7.9
|
)
|
Dividend received deduction
|
(0.1
|
)
|
|
(0.8
|
)
|
|
(1.2
|
)
|
Domestic production activities deduction
|
(2.5
|
)
|
|
(1.7
|
)
|
|
(0.1
|
)
|
Repatriation
|
1.0
|
|
|
1.0
|
|
|
1.9
|
|
Tax Cuts and Jobs Act impact
|
(13.7
|
)
|
|
—
|
|
|
—
|
|
Tax impact of transactions
|
(71.4
|
)
|
|
—
|
|
|
—
|
|
Other
|
(4.1
|
)
|
|
3.0
|
|
|
0.6
|
|
Total provision for income taxes
|
$
|
84.3
|
|
|
$
|
101.1
|
|
|
$
|
149.2
|
|
Effective tax rate
|
15.8
|
%
|
|
36.2
|
%
|
|
32.5
|
%
|
Statutory federal tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
The federal and state deferred tax assets (liabilities) recorded on the Consolidated Balance Sheet are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Liabilities:
|
|
|
|
Deferred cancellation of debt income
|
$
|
(11.7
|
)
|
|
$
|
(36.4
|
)
|
Investments in available-for-sale securities
|
(0.6
|
)
|
|
(62.2
|
)
|
Unconsolidated affiliates and investments
|
(19.7
|
)
|
|
(27.9
|
)
|
Accumulated depreciation and amortization
|
(62.8
|
)
|
|
(65.3
|
)
|
Prepaid expenses
|
—
|
|
|
(5.5
|
)
|
Other
|
(3.5
|
)
|
|
—
|
|
Total deferred tax liabilities
|
(98.3
|
)
|
|
(197.3
|
)
|
Assets:
|
|
|
|
Deferred compensation and other employee benefits
|
24.4
|
|
|
23.2
|
|
Net operating loss
|
14.9
|
|
|
8.5
|
|
Accrued liabilities
|
16.2
|
|
|
26.9
|
|
Prepaid expenses
|
4.4
|
|
|
—
|
|
Other
|
—
|
|
|
1.4
|
|
Total deferred tax assets
|
59.9
|
|
|
60.0
|
|
Valuation allowance
|
(7.1
|
)
|
|
(6.0
|
)
|
Net deferred tax liability
|
$
|
(45.5
|
)
|
|
$
|
(143.3
|
)
|
We have approximately
$4.1 million
of federal net operating losses as of
December 31, 2017
as a result of prior year business combinations. These net operating losses begin to expire in 2034 and are available to reduce future income taxes. Since these net operating losses were generated by an entity prior to its acquisition by DST, our utilization is subject to certain limitations imposed by the Internal Revenue Code. We do not anticipate that such limitations will prohibit the utilization of the federal net operating loss carryforwards prior to their expiration. We have approximately
$48.4 million
of state net operating losses as of
December 31, 2017
. These net operating losses begin to expire in 2023.
We have approximately
$53.9 million
of net operating loss carryforwards in foreign jurisdictions as of
December 31, 2017
. The carryforwards of
$23.4 million
in the U.K. do not expire but their utilization may be limited to offset only income with certain characteristics. The carryforwards of
$13.1 million
and
$13.0 million
in Ireland and Australia, respectively, do not expire. The carryforwards of
$4.4 million
in Canada begin to expire in 2032.
A valuation allowance is recorded against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the realizability of certain international net deferred tax assets, we also anticipate that limitations may result in the benefit of these amounts not being realized and have established corresponding valuation allowances as of
December 31, 2017
and
2016
of
$6.9 million
and
$5.7 million
, respectively. In evaluating certain state net operating losses, we anticipate that limitations may result in the benefit of these amounts not being realized and have established a corresponding valuation allowance as of
December 31, 2017
and 2016 of
$0.2 million
and
$0.3 million
, respectively.
We provide deferred taxes for unremitted earnings of U.S. unconsolidated affiliates net of the
80%
dividends received deduction provided for under current tax law. In connection with the acquisition of the remaining interest in BFDS during March 2017, the corresponding deferred tax balance related to unremitted earnings of U.S. unconsolidated affiliates was reduced and
no
balance remains as of December 31, 2017. Deferred taxes provided on unremitted earnings through December 31, 2016 were
$6.5 million
.
We record U.S. tax on the undistributed earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside the U.S. Distributions in
2017
,
2016
, and
2015
resulted in incremental taxes of
$1.0 million
,
$1.0 million
and
$1.9 million
, respectively. We recorded approximately
$2.3 million
and
$2.6 million
of related income tax liability, net of credits, on unremitted earnings in
2017
and
2016
, respectively.
We intend to indefinitely reinvest the earnings in the businesses of our other foreign subsidiaries. As of
December 31, 2017
, accumulated undistributed earnings considered indefinitely reinvested were
$186.2 million
. The Tax Act generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries after December 31, 2017. As a result, the accumulated
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
undistributed earnings would only be subject to other taxes, such as withholding taxes and local taxes, on distribution of such earnings. Due to the uncertainty of the manner in which the undistributed earnings would be brought back to the U.S. and the withholding and local tax laws in effect at that time, it is not practicable for us to determine the income tax we would incur, if any, if such earnings were distributed.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Balance at beginning of year
|
$
|
57.6
|
|
|
$
|
60.3
|
|
|
$
|
69.8
|
|
Additions based on tax positions related to the current year
|
3.0
|
|
|
3.5
|
|
|
9.0
|
|
Additions for tax positions of prior years
|
8.0
|
|
|
2.7
|
|
|
2.2
|
|
Reductions for tax positions of prior years
|
(5.3
|
)
|
|
(7.7
|
)
|
|
(19.5
|
)
|
Settlements
|
(0.2
|
)
|
|
(1.2
|
)
|
|
(0.4
|
)
|
Statute expirations
|
(10.7
|
)
|
|
—
|
|
|
(0.8
|
)
|
Balance at end of year
|
$
|
52.4
|
|
|
$
|
57.6
|
|
|
$
|
60.3
|
|
Included in the net unrecognized tax benefit at
December 31, 2017
,
2016
and
2015
were
$43.6 million
,
$40.9 million
and
$42.0 million
, respectively, of tax positions which, if recognized, would affect the effective tax rate. We recognize interest and penalties accrued related to unrecognized tax benefits in income taxes, which is consistent with the recognition of these items in prior reporting periods. The liability for interest and penalties associated with unrecognized tax benefits
increased
$2.7 million
during the year ended
December 31, 2017
to
$13.1 million
. The liability for interest and penalties
decreased
$1.1 million
during the year ended
December 31, 2016
.
Although it is difficult to predict when all uncertain tax positions will reverse due to the unknown timing of the completion of examination periods, it is possible that aggregate income tax amounts of approximately
$5.0 million
to
$7.0 million
may reverse during 2017.
We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. An IRS examination for the tax year ended December 31, 2010 was completed in September 2015. Federal tax years 2012 through 2017 are subject to examination while various years from 2007 through 2017 are under or are subject to various state, local, and foreign income tax examinations by taxing authorities. We do not believe that the outcome of any examination will have a material impact on our financial statements.
During 2015, the IRS completed its examination of the previously filed federal income tax refund claims for Domestic Manufacturing Deductions, research and experimentation credits and capital losses for the period 2010. As a result, during 2015 we recognized income tax benefits of
$11.9 million
, resulting from the reversal of previously reserved tax positions related to these matters as well as other remeasurements during the period.
An IRS examination for the tax year ended December 31, 2014 began during 2017. An IRS examination of BFDS for the tax year ended December 31, 2015 (when BFDS was an unconsolidated affiliate) began during 2017.
13.
Equity
On May 9, 2017, our Board of Directors declared a
two
-for-one stock split of DST’s outstanding common stock effected in the form of a stock dividend, which was paid on June 8, 2017 to shareholders of record at the close of business on May 26, 2017. In connection with the stock split,
16.5 million
treasury shares were used to settle a portion of the distribution. The distribution of treasury shares during the year ended
December 31, 2017
reduced Additional paid in capital by
$40.5 million
, Retained earnings by
$1,297.2 million
and Treasury stock by
$1,337.9 million
. All share and per share data, excluding treasury shares, have been retroactively adjusted for all periods presented to reflect the stock split as if the stock split had occurred at the beginning of the earliest period presented.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
Earnings per share
The computation of basic and diluted earnings per share is as follows (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Income from continuing operations attributable to DST Systems, Inc.
|
$
|
447.0
|
|
|
$
|
179.0
|
|
|
$
|
309.7
|
|
Income from discontinued operations, net of tax
|
4.5
|
|
|
248.3
|
|
|
48.5
|
|
Net income attributable to DST Systems, Inc.
|
$
|
451.5
|
|
|
$
|
427.3
|
|
|
$
|
358.2
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
61.4
|
|
|
66.0
|
|
|
72.0
|
|
Incremental shares from restricted stock units and stock options
|
0.7
|
|
|
0.6
|
|
|
0.9
|
|
Weighted average diluted shares outstanding
|
62.1
|
|
|
66.6
|
|
|
72.9
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
Continuing operations attributable to DST Systems, Inc.
|
$
|
7.28
|
|
|
$
|
2.71
|
|
|
$
|
4.30
|
|
Discontinued operations
|
0.07
|
|
|
3.76
|
|
|
0.67
|
|
Basic earnings per share
|
$
|
7.35
|
|
|
$
|
6.47
|
|
|
$
|
4.97
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
Continuing operations attributable to DST Systems, Inc.
|
$
|
7.20
|
|
|
$
|
2.68
|
|
|
$
|
4.25
|
|
Discontinued operations
|
0.07
|
|
|
3.73
|
|
|
0.67
|
|
Diluted earnings per share
|
$
|
7.27
|
|
|
$
|
6.41
|
|
|
$
|
4.92
|
|
We had approximately
59.3 million
and
64.0 million
shares outstanding at
December 31, 2017
and
2016
, respectively. There were
no
shares from options to purchase common stock excluded from the diluted earnings per share calculation because they were anti-dilutive for the years ended
December 31, 2017
and
2016
.
We have authorized
10.0 million
shares of preferred stock, of which
no
shares are currently issued or outstanding.
Other comprehensive income (loss)
AOCI balances, net of tax, consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities
|
|
Cash Flow Hedges
|
|
Defined Benefit Pension
|
|
Foreign Currency
Translation
|
|
Accumulated Other
Comprehensive
Income
|
Balance, December 31, 2015
|
$
|
84.0
|
|
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
|
$
|
(42.0
|
)
|
|
$
|
41.9
|
|
Net current period other comprehensive income (loss)
|
10.1
|
|
|
—
|
|
|
—
|
|
|
(35.4
|
)
|
|
(25.3
|
)
|
Balance, December 31, 2016
|
94.1
|
|
|
(0.1
|
)
|
|
—
|
|
|
(77.4
|
)
|
|
16.6
|
|
Net current period other comprehensive income (loss)
|
(93.2
|
)
|
|
0.2
|
|
|
4.1
|
|
|
73.7
|
|
|
(15.2
|
)
|
Balance, December 31, 2017
|
$
|
0.9
|
|
|
$
|
0.1
|
|
|
$
|
4.1
|
|
|
$
|
(3.7
|
)
|
|
$
|
1.4
|
|
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
Additions to and reclassifications out of AOCI (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
Pretax
|
|
Net of Tax
|
|
Pretax
|
|
Net of Tax
|
|
Pretax
|
|
Net of Tax
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on available-for-sale securities
|
$
|
7.0
|
|
|
$
|
4.5
|
|
|
$
|
18.1
|
|
|
$
|
11.4
|
|
|
$
|
(35.6
|
)
|
|
$
|
(21.8
|
)
|
Reclassification of (gains) losses into net earnings on available-for-sale securities
(1)
|
(155.9
|
)
|
|
(97.7
|
)
|
|
(2.1
|
)
|
|
(1.3
|
)
|
|
(163.5
|
)
|
|
(101.4
|
)
|
Net change in available-for-sale securities
|
(148.9
|
)
|
|
(93.2
|
)
|
|
16.0
|
|
|
10.1
|
|
|
(199.1
|
)
|
|
(123.2
|
)
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on cash flow hedges
|
(0.2
|
)
|
|
(0.1
|
)
|
|
0.1
|
|
|
—
|
|
|
0.4
|
|
|
0.4
|
|
Reclassification of losses (gains) into net earnings on foreign currency cash flow hedges
(2)
|
0.6
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
|
(0.5
|
)
|
|
(0.3
|
)
|
Reclassification of losses (gains) into net earnings on interest rate cash flow hedges
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
0.1
|
|
Net change in cash flow hedges
|
0.4
|
|
|
0.2
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
0.2
|
|
Defined benefit pension:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net gains (losses) on defined benefit pension plan
|
5.2
|
|
|
4.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net change in defined benefit pension
|
5.2
|
|
|
4.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translation
(4)
:
|
|
|
|
|
|
|
|
|
|
|
|
Current period translation adjustments
|
36.0
|
|
|
36.0
|
|
|
(34.9
|
)
|
|
(34.9
|
)
|
|
(22.0
|
)
|
|
(22.0
|
)
|
Reclassification into net earnings upon liquidation of foreign entities
(5)
|
(3.3
|
)
|
|
(3.3
|
)
|
|
(0.5
|
)
|
|
(0.5
|
)
|
|
—
|
|
|
—
|
|
Reclassification into net earnings upon step-up acquisition of foreign entities
(6)
|
41.0
|
|
|
41.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net change in foreign currency translation
|
73.7
|
|
|
73.7
|
|
|
(35.4
|
)
|
|
(35.4
|
)
|
|
(22.0
|
)
|
|
(22.0
|
)
|
Total other comprehensive loss
|
$
|
(69.6
|
)
|
|
$
|
(15.2
|
)
|
|
$
|
(19.3
|
)
|
|
$
|
(25.3
|
)
|
|
$
|
(221.0
|
)
|
|
$
|
(145.0
|
)
|
_______________________________________________________________________
|
|
(1)
|
Realized (gains)/losses on available-for-sale securities are recognized in Other income, net in the Consolidated Statement of Income. See Note 5, “Investments,” for additional information.
|
|
|
(2)
|
Reclassification to net earnings of derivatives qualifying as effective foreign currency cash flow hedges are recognized in Costs and expenses in the Consolidated Statement of Income.
|
|
|
(3)
|
Reclassification to net earnings of derivatives qualifying as effective interest rate cash flow hedges are recognized in Interest expense in the Consolidated Statement of Income.
|
|
|
(4)
|
Cumulative translation adjustments are inclusive of amounts derived from assets and liabilities held for sale.
|
|
|
(5)
|
Reclassification to net earnings upon disposition of net assets classified as held for sale are recognized in Income from discontinued operations, net of tax in the Consolidated Statement of Income. See Note 4, “Discontinued Operations,” for additional information.
|
|
|
(6)
|
Reclassification to net earnings upon step-acquisition of previously-held equity interests in foreign entities are recognized in Other income, net in the Consolidated Statement of Income. See Note 3, “Significant Business Transactions,” for additional information.
|
One
of our unconsolidated affiliates has an interest rate swap liability with a fair market value of
$25.5 million
,
$33.1 million
and
$44.7 million
at
December 31, 2017
,
2016
and
2015
, respectively. The unconsolidated affiliate used inputs from quoted prices for similar assets and liabilities in active markets that are directly or indirectly observable relating to the measurement of the interest rate swap. Our
50%
proportionate share of this interest rate swap liability was
$12.8 million
,
$16.5 million
and
$22.4 million
at
December 31, 2017
,
2016
and
2015
, respectively. We record in investments and AOCI our proportionate share of this liability in an amount not to exceed the carrying value of our investment in this unconsolidated affiliate. Because the carrying value of this unconsolidated affiliate investment balance was zero at
December 31, 2017
,
2016
, and 2015, no interest rate swap liability or change in AOCI was recorded for these periods.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
Stock repurchases and retirements
As of December 31, 2016, we had
$150.0 million
of capacity remaining under our share repurchase plan authorized in 2016. On May 9, 2017, our Board of Directors authorized a new
$300.0 million
share repurchase plan, which allows, but does not require, the repurchase of common stock in open market and private transactions. We repurchased the equivalent of
5.0 million
shares of our common stock on a post stock split basis for
$300.0 million
during the year ended
December 31, 2017
, which left approximately
$150.0 million
remaining under our share repurchase plan authorized in
2017
. The 2017 share repurchase plan does not have an expiration date, however we are currently precluded from executing additional stock repurchases pursuant to the Merger Agreement with SS&C, as further described in Note 1, “Description of Business.” Under previous share repurchase plans, we expended
$300.0 million
for approximately
5.4 million
shares on a post stock split basis and
$400.0 million
for approximately
7.2 million
shares on a post stock split basis during the years ended December 31,
2016
and
2015
, respectively.
Shares received in exchange for tax withholding obligations and payment of the exercise price arising from the exercise of options to purchase our stock or from the vesting of equity awards are included in common stock repurchased in the Consolidated Statement of Cash Flows. The amounts of such share withholdings and exchanges were
$10.6 million
,
$15.8 million
and
$5.3 million
during the years ended
December 31, 2017
,
2016
and
2015
, respectively. In addition, in connection with the non-cash acquisition of the remaining interest in BFDS, DST acquired
$3.7 million
of DST common stock that was held by BFDS.
We had
5.1 million
and
18.0 million
shares of common stock held in treasury at
December 31, 2017
and
2016
, respectively.
Dividends
In
2017
,
2016
and
2015
, we paid cash dividends per common share of
$0.72
,
$0.66
and
$0.60
, respectively. The total dividends paid for the years ended
December 31, 2017
,
2016
and
2015
were
$44.7 million
,
$44.7 million
and
$44.5 million
, respectively. The cash paid for dividends in
2017
,
2016
and
2015
was
$43.7 million
,
$43.4 million
, and
$43.1 million
, respectively. The remaining amount of the dividends represent dividend equivalent shares of restricted stock units (“RSUs”) in lieu of the cash dividend. We are currently precluded from declaring dividends pursuant to the Merger Agreement with SS&C, as further described in Note 1, “Description of Business.”
Share-based compensation
The DST Systems, Inc. 2015 Equity and Incentive Plan (the “Employee Plan”) became effective on May 12, 2015. The Employee Plan amends, restates, and renames the DST Systems, Inc. 2005 Equity Incentive Plan in order to, among other things, combine (for all future grants) the DST Systems, Inc. 2005 Non-Employee Directors’ Award Plan (the “Directors’ Plan”) with the Employee Plan. The term of the Employee Plan, subject to the right of the Board of Directors to amend or terminate the Employee Plan at any time, is from May 12, 2015 until the earlier of May 11, 2025 or the date on which all shares subject to the Employee Plan have been delivered and the restrictions on all awards granted under the plan have lapsed, according to the Employee Plan’s provisions. All awards granted pursuant to the Directors’ Plan before May 9, 2015 remain subject to the terms and conditions of the Directors’ Plan. We have outstanding share awards (primarily in the form of stock options and non-vested restricted stock awards) under each of the plans. The Employee Plan has been approved by our Board of Directors and shareholders.
The number of shares of common stock reserved for delivery under the Employee Plan, subject to certain limitations and adjustments, is the sum of (a)
5.2 million
shares, on a post stock-split basis, plus (b) any shares required to satisfy substitute awards, as defined by the Employee Plan. If any shares subject to an award granted after May 12, 2015 are forfeited or such awards terminate or lapse without the delivery of such shares, those shares shall become available for grant under the Employee Plan. As of
December 31, 2017
, approximately
3.5 million
shares were available under the Employee Plan. The Employee Plan provides for the availability of shares of our common stock for the grant of awards to employees, consultants and non-employee directors, its consolidated subsidiaries, and its unconsolidated affiliates and joint ventures. Awards under the Employee Plan may take the form of shares, dividend equivalents, options, stock appreciation rights, performance units, restricted stock, restricted stock units, annual incentive awards, service awards and substitute awards (each as defined in the plan).
Stock Options
Options under the Employee Plan vest and generally become fully exercisable over
three years
of continued employment, depending upon the grant type. Options generally have a 10-year contractual term. The fair value of each option grant is estimated on the date of grant using a Black-Scholes option pricing model. There were no stock options granted or canceled during
2017
,
2016
or
2015
. All outstanding options were fully vested at
December 31, 2017
and
2016
. The total aggregate
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
intrinsic values of stock options exercised for all plans during the years ended
December 31, 2017
,
2016
and
2015
were
$3.3 million
,
$5.8 million
and
$15.4 million
, respectively.
A summary of stock option activity is presented in the table below (shares in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
(in millions)
|
Outstanding at December 31, 2016
|
|
0.7
|
|
|
$
|
22.71
|
|
|
|
|
|
|
Exercised
|
|
(0.1
|
)
|
|
22.72
|
|
|
|
|
$
|
3.3
|
|
Outstanding at December 31, 2017
|
|
0.6
|
|
|
22.71
|
|
|
2.8
|
|
23.4
|
|
Exercisable at December 31, 2017
|
|
0.6
|
|
|
$
|
22.71
|
|
|
2.8
|
|
$
|
23.4
|
|
Non-vested Restricted Stock Unit Awards
Non-vested restricted stock awards, consisting of RSUs and performance-based stock units (“PSUs”), are valued based on the value of DST’s common stock at the date of grant. RSUs contain service features and convert to DST shares on a one to one basis upon vesting. RSUs do not confer full stockholder rights such as voting rights and cash dividends, but provide for additional dividend equivalent RSU awards in lieu of cash dividends.
PSUs contain service and performance features in which the number of restricted shares to be awarded depends on the attainment of defined company-wide performance goals. PSUs are granted at a target number of shares and generally vest at the end of a
3
-year requisite service and performance period. The number of shares ultimately earned will range from
zero
to
200%
of the target award based on actual attainment.
Non-vested shares of restricted stock awards may be forfeited upon termination of employment from DST depending on the circumstances of the termination, or become forfeited upon failure to achieve the required performance condition, if applicable. Forfeitures are recognized as they occur rather than using an estimated forfeiture rate.
A summary of non-vested restricted stock award activity is presented in the table below (units in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested Restricted Stock Unit Awards
|
|
RSUs
|
|
Weighted
Average
Grant Date
Fair Value
|
Weighted
Average
Conversion Ratio
|
|
PSUs
|
|
Weighted
Average
Grant Date
Fair Value
|
Weighted
Average
Conversion Ratio
|
Non-vested at December 31, 2016
|
|
0.5
|
|
|
$
|
52.79
|
|
1.0
|
|
0.7
|
|
|
$
|
51.11
|
|
0.6
|
Granted
|
|
0.3
|
|
|
59.27
|
|
|
|
0.3
|
|
|
58.90
|
|
|
Vested
|
|
(0.3
|
)
|
|
52.39
|
|
|
|
(0.2
|
)
|
|
46.54
|
|
|
Forfeited
|
|
—
|
|
|
56.45
|
|
|
|
(0.3
|
)
|
|
54.13
|
|
|
Non-vested at December 31, 2017
|
|
0.5
|
|
|
$
|
56.76
|
|
1.0
|
|
0.5
|
|
|
$
|
54.79
|
|
1.6
|
Forfeitures during the year ended December 31, 2017 include all remaining PSUs granted in 2015 as the performance criteria was not achieved as of December 31, 2017.
The weighted-average grant-date fair value of non-vested restricted stock awards units granted during the years ended
December 31, 2017
,
2016
and
2015
was
$59.10
,
$53.75
, and
$54.42
. The fair value of restricted stock which vested during the years ended
December 31, 2017
,
2016
and
2015
was
$22.6 million
,
$30.2 million
and
$9.6 million
, respectively.
At
December 31, 2017
, we had
$22.7 million
of total unrecognized compensation expense (included in Additional paid-in capital on the Consolidated Balance Sheet) related to share-based compensation arrangements. Based on awards currently outstanding, we estimate that compensation expense attributable to the restricted stock grants will be approximately
$15.7 million
for
2018
,
$6.0 million
for
2019
, and
$1.0 million
for
2020
.
The Consolidated Statement of Income for the years ended
December 31, 2017
,
2016
and
2015
reflects share-based compensation expense of
$44.2 million
,
$16.3 million
and
$27.9 million
, respectively, within Costs and expenses and Discontinued operations. The total tax benefit recognized in earnings from share-based compensation arrangements for the years ended
December 31, 2017
,
2016
and
2015
, were approximately
$17.2 million
,
$6.4 million
and
$10.9 million
, respectively. Excess tax benefits of
$3.0 million
were classified as operating cash inflows during the year ended
December 31,
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
2017
. Excess tax benefits of
$4.7 million
and
$5.6 million
were classified as financing cash inflows during the years ended
December 31, 2016
and
2015
, respectively. Cash proceeds from options exercised for the years ended
December 31, 2017
,
2016
and
2015
were
$2.8 million
,
$5.3 million
and
$11.8 million
, respectively, and were classified as financing cash inflows. We generally issue shares out of treasury to satisfy stock option exercises.
Stock purchase plan
The 2000 DST Systems, Inc. Employee Stock Purchase Plan (“ESPP”), which provided employees the right to purchase DST shares at a discount, was suspended effective January 1, 2006.
Redeemable non-controlling interest
As a result of our seed capital investment during 2015, there is a non-controlling investor group which owned approximately
47%
of a consolidated open-end fund as of
December 31, 2016
. The amount included on the Consolidated Balance Sheet at
December 31, 2016
associated with the redeemable non-controlling interest was
$21.3 million
. In March 2017, we reduced our ownership interest in a substantial portion of our seed capital investments, resulting in the deconsolidation of the respective fund. The net income attributable to the non-controlling interest was
$0.6 million
during the year ended
December 31, 2017
and the net loss attributable to the non-controlling interest was
$0.9 million
and
$0.1 million
during the years ended
December 31, 2016
and 2015, respectively.
14.
Benefit Plans
We sponsor defined contribution plans that cover domestic and non-domestic employees following the completion of an eligibility period. Employer contribution expenses from continuing operations under these plans totaled
$46.0 million
,
$35.0 million
and
$33.9 million
during the years ended
December 31, 2017
,
2016
and
2015
, respectively. Additionally, through the acquisition of IFDS U.K., we now sponsor a defined benefit pension plan which has a net benefit asset as of December 31, 2017 of
$0.9 million
.
We have active and non-active non-qualified deferred compensation plans for senior management, certain highly compensated employees and directors. Certain of the active plans permit existing participants to defer a portion of their compensation until termination of their employment, at which time payment of amounts deferred is made in a lump sum or annual installments. Deferred amounts earn interest at a rate determined by the Board of Directors or are credited with deemed gains or losses of the underlying hypothetical investments. Amounts deferred under these plans were approximately
$39.9 million
and
$12.7 million
at
December 31, 2017
and
2016
, respectively. Changes in the liability are recorded as adjustments to compensation expense. The underlying investments, which are classified as trading securities, are recorded at fair market value with changes recorded as adjustments to Other income, net.
15.
Supplemental Cash Flow Information
Supplemental disclosure of cash flow information is shown in the following table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Cash payments:
|
|
|
|
|
|
Interest paid during the year
|
$
|
26.3
|
|
|
$
|
22.9
|
|
|
$
|
24.3
|
|
Income taxes paid during the year
|
115.3
|
|
|
164.5
|
|
|
217.4
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
Changes in accrued capital expenditures
|
1.6
|
|
|
2.0
|
|
|
4.0
|
|
Charitable contribution of marketable securities
|
13.6
|
|
|
2.0
|
|
|
—
|
|
Deposits with broker for securities sold short
|
6.9
|
|
|
8.4
|
|
|
10.8
|
|
Securities sold short
|
5.3
|
|
|
8.2
|
|
|
10.7
|
|
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
16.
Commitments and Contingencies
The following table sets forth our contractual cash obligations for our continuing operations including debt obligations, minimum rentals for the non-cancelable term of all operating leases and obligations under software license and other agreements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
Operating
Leases
|
|
Software
License
Agreements
|
|
Other
|
|
Total
|
2018
|
$
|
83.7
|
|
|
$
|
23.8
|
|
|
$
|
34.9
|
|
|
$
|
18.9
|
|
|
$
|
161.3
|
|
2019
|
3.6
|
|
|
19.1
|
|
|
33.6
|
|
|
12.1
|
|
|
68.4
|
|
2020
|
183.7
|
|
|
16.4
|
|
|
30.0
|
|
|
3.7
|
|
|
233.8
|
|
2021
|
0.7
|
|
|
14.7
|
|
|
28.9
|
|
|
2.4
|
|
|
46.7
|
|
2022
|
0.8
|
|
|
12.5
|
|
|
7.6
|
|
|
2.1
|
|
|
23.0
|
|
Thereafter
|
350.8
|
|
|
17.5
|
|
|
—
|
|
|
—
|
|
|
368.3
|
|
Total
|
$
|
623.3
|
|
|
$
|
104.0
|
|
|
$
|
135.0
|
|
|
$
|
39.2
|
|
|
$
|
901.5
|
|
Debt includes the accounts receivable securitization program, 2010 Senior Notes, 2017 Senior Notes, revolving credit facilities and other indebtedness as described in
Note 10
, “
Debt
.” We also have letters of credit of
$5.3 million
and
$5.9 million
outstanding for
December 31, 2017
and
2016
, respectively. Letters of credit are provided by our debt facility.
We have future obligations under certain operating leases. The operating leases, which include facilities, data processing and other equipment, have remaining lease terms ranging from
1
to
10
years excluding options to extend the leases for various lengths of time. Certain leases have clauses that call for the annual rents to be increased during the term of the lease. Such lease payments are expensed on a straight-line basis. We also lease certain facilities from unconsolidated real estate affiliates.
The following rental costs were incurred (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Rent expense
|
$
|
28.6
|
|
|
$
|
22.2
|
|
|
$
|
23.6
|
|
Occupancy expenses included in above amounts that were charged by unconsolidated real estate affiliates
|
6.0
|
|
|
5.9
|
|
|
6.8
|
|
Obligations under software license agreements generally relate to purchase obligations under maintenance agreements that support the software license.
We have entered into agreements with certain officers whereby upon defined circumstances constituting a change in control of the Company, certain benefit entitlements are automatically funded and such officers are entitled to specific cash payments upon termination of employment. Additionally, we have adopted the DST Systems, Inc. Executive Severance Plan which provides certain benefits to participants in the event of a qualifying termination under the plan.
Other contractual commitments
In the normal course of business, to facilitate transactions of services and products and other business assets, we have agreed to indemnify certain parties with respect to certain matters. We have agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, data and confidentiality obligations, or out of intellectual property infringement or other claims made by third parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. At
December 31, 2017
, except for certain immaterial items, there were no liabilities for guarantees or indemnifications as it is not possible to determine either the maximum potential amount under these indemnification agreements or the timing of any such payments due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made under these agreements have not had a material impact on our consolidated financial position, results of operations or cash flows.
Legal Proceedings
A putative class action suit was filed against the Company, the Compensation Committee of our Board of Directors, the Advisory Committee of our 401(k) Profit Sharing Plan (the “Plan”) and certain of our present and/or former officers and directors, alleging breach of fiduciary duties and other violations of the Employee Retirement Income Security Act. On
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
September 1, 2017, a complaint was filed purportedly on behalf of the Plan in the Southern District of New York, captioned
Ferguson, et al v. Ruane Cunniff & Goldfarb Inc, et al.,
naming as defendants the Company, the Compensation Committee of our Board of Directors, the Advisory Committee of the Plan and certain of our present and/or former officers and directors. We intend to defend this case vigorously, and, because it is still in its preliminary stages, we have not yet determined what effect this lawsuit will have, if any, on our financial position or results of operations.
In connection with an investigation of the Plan and the activities of its fiduciaries, the U.S. Department of Labor through its Employee Benefits Security Administration issued a letter dated February 23, 2018 stating that, based on facts gathered, it appeared that certain fiduciaries of the Plan may have breached their fiduciary obligations and violated certain provisions of the Employee Retirement Income Security Act in connection with the administration of the Plan. The letter stated that if the fiduciaries fail to take corrective action, the matter may be referred to the Office of the Solicitor of Labor for possible legal action. The letter further stated that if the fiduciaries take proper corrective action based on a settlement agreement with the Department of Labor, it will not bring a lawsuit with regard to these issues, and close its investigation without further action. We have not yet determined what effect this letter will have, if any, on our financial position or results of operations.
On February 20, 2018, a putative class action complaint was filed against DST and the members of our board of directors in the United States District Court for the District of Delaware under the caption
Scott v. DST Systems, Inc., et al
. The complaint alleges that the preliminary proxy statement issued in connection with the Merger omitted material information in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Specifically, the complaint alleges that the preliminary proxy statement does not disclose the line items used to calculate certain measures that do not comply with Generally Accepted Accounting Principles (“non-GAAP”) or a reconciliation of such non-GAAP measures to our most comparable GAAP measures, and also does not disclose actual projected values of unlevered free cash flow (“UFCF”) or the values of the line items utilized to calculate UFCF, rendering the preliminary proxy statement false and misleading. The complaint seeks an order (1) declaring that the action is properly maintainable as a class action and certifying the plaintiff as class representative and his counsel as class counsel; (2) enjoining us from proceeding with the shareholder vote on the Merger or consummating the Merger, unless and until we issue additional disclosures; (3) awarding damages; (4) awarding costs and disbursements of this action, including reasonable attorneys’ and expert fees and expenses; and (5) granting such other and further relief as the Court may deem just and proper. We believe the lawsuit is without merit and intend to defend vigorously against these allegations, and, because it is still in its preliminary stages, we have not yet determined what effect this lawsuit will have, if any, on our financial position or results of operations.
On February 21, 2018, a putative class action complaint was filed against DST and the members of our board of directors in the United States District Court for the Western District of Missouri under the caption
Pratt v. DST Systems, Inc., et al
. The complaint alleges that the preliminary proxy statement issued in connection with the Merger omitted material information in violation of Sections 14(a) and 20(a) of the Exchange Act. Specifically, the complaint alleges that the preliminary proxy statement does not disclose the line items used to calculate certain non-GAAP measures or a reconciliation of such non-GAAP measures to our most comparable GAAP measures; does not disclose actual projected values of unlevered free cash flow (“UFCF”), the values of the line items utilized to calculate UFCF, the terminal values for DST, or the inputs for the perpetuity growth rates and discount rates; does not disclose the multiples and metrics for the Publicly Traded Companies Analyses; and does not disclose the multiples and metrics for the Selected Precedent Transactions Analyses, rendering the preliminary proxy statement false and misleading. The complaint seeks an order (1) declaring that the action is properly maintainable as a class action and certifying the plaintiff as class representative and his counsel as class counsel; (2) enjoining us from proceeding with the shareholder vote on the Merger or consummating the Merger, unless and until we issue additional disclosures; (3) directing us to disseminate a materially complete and accurate proxy statement; (4) awarding damages; (5) awarding costs and disbursements of this action, including reasonable attorneys’ and expert fees and expenses; (6) declaring that we violated Sections 14(a) and/or 20(a) of the Exchange Act, as well as Rule 14a-9; and (7) granting such other and further relief as the Court may deem just and proper. We believe the lawsuit is without merit and intend to defend vigorously against these allegations, and, because it is still in its preliminary stages, we have not yet determined what effect this lawsuit will have, if any, on our financial position or results of operations.
On February 27, 2018, a complaint was filed against DST and the members of its board of directors in the United States District Court for the District of Delaware under the caption
Williams v. DST Systems, Inc., et al
., (D. Del.). The complaint alleges that the preliminary proxy statement issued in connection with the Merger omitted material information in violation of Sections 14(a) and 20(a) of the Exchange Act. Specifically, the complaint alleges that the preliminary proxy statement does not disclose DST's unlevered free cash flows, the individual metrics that the financial advisor calculated for the Selected Publicly Traded Companies Analysis and Selected Precedent Transactions Analysis, and, with respect to the Discounted Cash Flow Analysis, the inputs and assumptions used in calculating the selection of the discount rates and terminal multiple range. The complaint seeks an order (1) declaring that the "Registration Statement" is materially misleading and contains omissions of fact in violation of
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
Section 14(a); (2) enjoining DST from proceeding with the shareholder vote on the Merger or consummating the Merger, unless and until DST issues additional disclosures; (3) awarding damages; (4) awarding costs, including reasonable attorneys’ and expert fees and expenses; and (5) granting such other and further relief as the Court may deem just and proper. The defendants believe the lawsuit is without merit and intend to defend vigorously against these allegations, and, because it is still in its preliminary stages, we have not yet determined what effect this lawsuit will have, if any, on our financial position or results of operations.
We are involved in various other legal proceedings arising in the normal course of our business. At this time, we do not believe any material losses under these claims to be probable. While the ultimate outcome of these legal proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with legal counsel, that the final outcome in such proceedings, in the aggregate, would not have a material adverse effect on our consolidated financial condition, results of operations and cash flows.
17.
Segment and Geographic Information
Our operating business units offer sophisticated information processing and software services and products. As discussed in
Note 1
, “
Description of Business
,” we established a new reportable segment structure during first quarter 2017. We now present our businesses as
three
operating segments, Domestic Financial Services, International Financial Services and Healthcare Services. Prior periods have been adjusted to be consistent with the current presentation.
Domestic Financial Services
Our Domestic Financial Services segment provides investor, investment, advisor/intermediary and asset distribution products and services to clients within the U.S. to support direct and intermediary sales of mutual funds, alternative investments, securities brokerage accounts and retirement plans on a remote processing or business process outsourcing basis utilizing our proprietary software applications. This includes transaction processing, account opening and maintenance, reconciliation of trades, positions and cash, corporate actions, regulatory reporting and compliance functions and tax reporting.
International Financial Services
Our International Financial Services segment provides investor and policyholder administration and technology products and services to mutual fund managers, insurers, and platform providers within the U.K., Canada, Ireland and Luxembourg on a remote processing or business process outsourcing basis. In Australia and the U.K., we also provide solutions related to participant accounting and recordkeeping for clients in the wealth management and retirement savings industries/markets.
Healthcare Services
Our Healthcare Services segment uses our proprietary software applications to provide healthcare organizations with pharmacy, healthcare administration, and health outcomes optimization solutions to satisfy their information processing, quality of care, cost management and payment integrity needs. Our healthcare solutions include claims adjudication, benefit management, care management, business intelligence and other ancillary services.
We evaluate the performance of our segments based on income before interest expense, income taxes, and non-controlling interest. Intersegment revenues are reflected at rates prescribed by us and may not be reflective of market rates.
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
Summarized financial information concerning our segments is shown in the following tables (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
Domestic Financial
Services
|
|
International Financial
Services
|
|
Healthcare
Services
|
|
Elimination
Adjustments
|
|
Consolidated
Total
|
Operating revenues
|
$
|
1,130.3
|
|
|
$
|
537.9
|
|
|
$
|
418.5
|
|
|
$
|
—
|
|
|
$
|
2,086.7
|
|
Intersegment operating revenues
|
56.9
|
|
|
0.5
|
|
|
—
|
|
|
(57.4
|
)
|
|
—
|
|
Out-of-pocket reimbursements
|
111.8
|
|
|
12.2
|
|
|
7.5
|
|
|
—
|
|
|
131.5
|
|
Total revenues
|
1,299.0
|
|
|
550.6
|
|
|
426.0
|
|
|
(57.4
|
)
|
|
2,218.2
|
|
Costs and expenses
|
1,072.2
|
|
|
449.3
|
|
|
340.9
|
|
|
(57.4
|
)
|
|
1,805.0
|
|
Depreciation and amortization
|
86.8
|
|
|
30.7
|
|
|
10.5
|
|
|
—
|
|
|
128.0
|
|
Operating income
|
140.0
|
|
|
70.6
|
|
|
74.6
|
|
|
—
|
|
|
285.2
|
|
Other income (loss), net
|
234.2
|
|
|
(15.5
|
)
|
|
0.3
|
|
|
—
|
|
|
219.0
|
|
Equity in earnings of unconsolidated affiliates
|
34.7
|
|
|
19.3
|
|
|
0.5
|
|
|
—
|
|
|
54.5
|
|
Earnings from continuing operations before interest, income taxes and non-controlling interest
|
$
|
408.9
|
|
|
$
|
74.4
|
|
|
$
|
75.4
|
|
|
$
|
—
|
|
|
$
|
558.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Domestic Financial
Services
|
|
International Financial
Services
|
|
Healthcare
Services
|
|
Elimination
Adjustments
|
|
Consolidated
Total
|
Operating revenues
|
$
|
937.7
|
|
|
$
|
110.5
|
|
|
$
|
426.2
|
|
|
$
|
—
|
|
|
$
|
1,474.4
|
|
Intersegment operating revenues
|
58.1
|
|
|
0.4
|
|
|
—
|
|
|
(58.5
|
)
|
|
—
|
|
Out-of-pocket reimbursements
|
73.0
|
|
|
1.2
|
|
|
8.5
|
|
|
(0.4
|
)
|
|
82.3
|
|
Total revenues
|
1,068.8
|
|
|
112.1
|
|
|
434.7
|
|
|
(58.9
|
)
|
|
1,556.7
|
|
Costs and expenses
|
829.0
|
|
|
98.2
|
|
|
345.1
|
|
|
(58.9
|
)
|
|
1,213.4
|
|
Depreciation and amortization
|
77.3
|
|
|
3.1
|
|
|
15.6
|
|
|
—
|
|
|
96.0
|
|
Operating income
|
162.5
|
|
|
10.8
|
|
|
74.0
|
|
|
—
|
|
|
247.3
|
|
Other income, net
|
13.9
|
|
|
8.7
|
|
|
0.1
|
|
|
—
|
|
|
22.7
|
|
Gain on sale of business
|
—
|
|
|
5.5
|
|
|
—
|
|
|
—
|
|
|
5.5
|
|
Equity in earnings of unconsolidated affiliates
|
14.3
|
|
|
12.4
|
|
|
0.5
|
|
|
—
|
|
|
27.2
|
|
Earnings from continuing operations before interest, income taxes and non-controlling interest
|
$
|
190.7
|
|
|
$
|
37.4
|
|
|
$
|
74.6
|
|
|
$
|
—
|
|
|
$
|
302.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
Domestic Financial
Services
|
|
International Financial
Services
|
|
Healthcare
Services
|
|
Elimination
Adjustments
|
|
Consolidated
Total
|
Operating revenues
|
$
|
936.8
|
|
|
$
|
91.8
|
|
|
$
|
376.4
|
|
|
$
|
—
|
|
|
$
|
1,405.0
|
|
Intersegment operating revenues
|
46.3
|
|
|
1.6
|
|
|
—
|
|
|
(47.9
|
)
|
|
—
|
|
Out-of-pocket reimbursements
|
60.7
|
|
|
1.7
|
|
|
8.2
|
|
|
(1.6
|
)
|
|
69.0
|
|
Total revenues
|
1,043.8
|
|
|
95.1
|
|
|
384.6
|
|
|
(49.5
|
)
|
|
1,474.0
|
|
Costs and expenses
|
792.3
|
|
|
86.1
|
|
|
321.3
|
|
|
(49.5
|
)
|
|
1,150.2
|
|
Depreciation and amortization
|
67.7
|
|
|
4.8
|
|
|
18.6
|
|
|
—
|
|
|
91.1
|
|
Operating income
|
183.8
|
|
|
4.2
|
|
|
44.7
|
|
|
—
|
|
|
232.7
|
|
Other income (loss), net
|
207.2
|
|
|
(2.6
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
204.5
|
|
Equity in earnings of unconsolidated affiliates
|
23.8
|
|
|
21.3
|
|
|
0.3
|
|
|
—
|
|
|
45.4
|
|
Earnings from continuing operations before interest, income taxes and non-controlling interest
|
$
|
414.8
|
|
|
$
|
22.9
|
|
|
$
|
44.9
|
|
|
$
|
—
|
|
|
$
|
482.6
|
|
Earnings from continuing operations before interest, income taxes and non-controlling interest in the segment reporting information above less interest expense of
$26.8 million
,
$23.5 million
and
$23.8 million
for the years ended
December 31,
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
2017
,
2016
and
2015
, respectively, are equal to income from continuing operations before income taxes and non-controlling interest on a consolidated basis for the corresponding year.
Information concerning the revenues of principal geographic areas is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Revenues:
(1)
|
|
|
|
|
|
U.S.
|
$
|
1,641.1
|
|
|
$
|
1,417.2
|
|
|
$
|
1,350.6
|
|
International
|
|
|
|
|
|
U.K.
|
504.6
|
|
|
78.1
|
|
|
65.6
|
|
Canada
|
19.4
|
|
|
19.3
|
|
|
21.7
|
|
Australia
|
28.4
|
|
|
25.4
|
|
|
20.5
|
|
Others
|
24.7
|
|
|
16.7
|
|
|
15.6
|
|
Total international
|
577.1
|
|
|
139.5
|
|
|
123.4
|
|
Total revenues
|
$
|
2,218.2
|
|
|
$
|
1,556.7
|
|
|
$
|
1,474.0
|
|
_______________________________________________________________________
|
|
(1)
|
Revenues are attributed to countries based on location of the client.
|
Information concerning total assets by reporting segment is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
2015
|
Domestic Financial Services
|
$
|
2,212.2
|
|
|
$
|
2,234.9
|
|
|
$
|
2,438.6
|
|
International Financial Services
|
756.1
|
|
|
430.0
|
|
|
217.6
|
|
Healthcare Services
|
524.5
|
|
|
552.2
|
|
|
405.3
|
|
Assets held for sale
|
—
|
|
|
72.6
|
|
|
295.2
|
|
Elimination Adjustments
|
(554.6
|
)
|
|
(517.9
|
)
|
|
(543.5
|
)
|
Total assets
|
$
|
2,938.2
|
|
|
$
|
2,771.8
|
|
|
$
|
2,813.2
|
|
Information concerning the long-lived assets (properties and other non-current assets) of principal geographic areas is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
2015
|
Long-lived assets:
|
|
|
|
|
|
U.S.
|
$
|
318.1
|
|
|
$
|
249.9
|
|
|
$
|
274.7
|
|
International
|
|
|
|
|
|
U.K.
|
192.8
|
|
|
25.9
|
|
|
29.1
|
|
Australia
|
8.6
|
|
|
8.0
|
|
|
2.6
|
|
Others
|
5.1
|
|
|
2.2
|
|
|
7.3
|
|
Total international
|
206.5
|
|
|
36.1
|
|
|
39.0
|
|
Total long-lived assets
|
$
|
524.6
|
|
|
$
|
286.0
|
|
|
$
|
313.7
|
|
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
18.
Quarterly Financial Data (Unaudited)
(in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
|
Operating revenues
|
$
|
379.8
|
|
|
$
|
629.4
|
|
|
$
|
524.8
|
|
|
$
|
552.7
|
|
|
$
|
2,086.7
|
|
|
Out-of-pocket reimbursements
|
25.7
|
|
|
26.8
|
|
|
37.8
|
|
|
41.2
|
|
|
131.5
|
|
|
Total revenues
|
405.5
|
|
|
656.2
|
|
|
562.6
|
|
|
593.9
|
|
|
2,218.2
|
|
|
Costs and expenses
|
326.4
|
|
|
525.2
|
|
|
472.1
|
|
|
481.3
|
|
|
1,805.0
|
|
|
Depreciation and amortization
|
23.2
|
|
|
34.8
|
|
|
34.7
|
|
|
35.3
|
|
|
128.0
|
|
|
Operating income
|
55.9
|
|
|
96.2
|
|
|
55.8
|
|
|
77.3
|
|
|
285.2
|
|
|
Interest expense
|
(5.9
|
)
|
|
(6.9
|
)
|
|
(6.9
|
)
|
|
(7.1
|
)
|
|
(26.8
|
)
|
|
Other income, net
|
193.0
|
|
|
15.5
|
|
|
8.7
|
|
|
1.8
|
|
|
219.0
|
|
|
Equity in earnings of unconsolidated affiliates
|
19.2
|
|
|
3.9
|
|
|
4.2
|
|
|
27.2
|
|
|
54.5
|
|
|
Income from continuing operations before income taxes and non-controlling interest
|
262.2
|
|
|
108.7
|
|
|
61.8
|
|
|
99.2
|
|
|
531.9
|
|
|
Income taxes
|
18.1
|
|
|
35.2
|
|
|
13.0
|
|
|
18.0
|
|
|
84.3
|
|
|
Income from continuing operations before non-controlling interest
|
244.1
|
|
|
73.5
|
|
|
48.8
|
|
|
81.2
|
|
|
447.6
|
|
|
Income (loss) from discontinued operations, net of tax
|
2.9
|
|
|
1.9
|
|
|
(0.3
|
)
|
|
—
|
|
|
4.5
|
|
|
Net income
|
247.0
|
|
|
75.4
|
|
|
48.5
|
|
|
81.2
|
|
|
452.1
|
|
|
Net (income) loss attributable to non-controlling interest
|
(0.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.6
|
)
|
|
Net income attributable to DST Systems, Inc.
|
$
|
246.4
|
|
|
$
|
75.4
|
|
|
$
|
48.5
|
|
|
$
|
81.2
|
|
|
$
|
451.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
63.1
|
|
|
61.9
|
|
|
60.7
|
|
|
59.9
|
|
|
61.4
|
|
|
Weighted average diluted shares outstanding
|
63.9
|
|
|
62.5
|
|
|
61.6
|
|
|
60.6
|
|
|
62.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations attributable to DST Systems, Inc.
|
$
|
3.86
|
|
|
$
|
1.19
|
|
|
$
|
0.81
|
|
|
$
|
1.36
|
|
|
$
|
7.28
|
|
(1)
|
Discontinued operations
|
0.05
|
|
|
0.03
|
|
|
(0.01
|
)
|
|
—
|
|
|
0.07
|
|
(1)
|
Basic earnings per share
|
$
|
3.91
|
|
|
$
|
1.22
|
|
|
$
|
0.80
|
|
|
$
|
1.36
|
|
|
$
|
7.35
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations attributable to DST Systems, Inc.
|
$
|
3.81
|
|
|
$
|
1.18
|
|
|
$
|
0.79
|
|
|
$
|
1.34
|
|
|
$
|
7.20
|
|
(1)
|
Discontinued operations
|
0.04
|
|
|
0.03
|
|
|
—
|
|
|
—
|
|
|
0.07
|
|
(1)
|
Diluted earnings per share
|
$
|
3.85
|
|
|
$
|
1.21
|
|
|
$
|
0.79
|
|
|
$
|
1.34
|
|
|
$
|
7.27
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share of common stock
|
$
|
0.18
|
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
|
$
|
0.72
|
|
|
________________________________________________________________
|
|
(1)
|
Earnings per share are computed independently for each of the quarters presented. Accordingly, the accumulation of quarterly earnings per share may not equal the total computed for the year.
|
DST Systems, Inc.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
|
Operating revenues
|
$
|
361.3
|
|
|
$
|
373.9
|
|
|
$
|
365.5
|
|
|
$
|
373.7
|
|
|
$
|
1,474.4
|
|
|
Out-of-pocket reimbursements
|
19.4
|
|
|
16.6
|
|
|
21.2
|
|
|
25.1
|
|
|
82.3
|
|
|
Total revenues
|
380.7
|
|
|
390.5
|
|
|
386.7
|
|
|
398.8
|
|
|
1,556.7
|
|
|
Costs and expenses
|
306.9
|
|
|
320.4
|
|
|
289.6
|
|
|
296.5
|
|
|
1,213.4
|
|
|
Depreciation and amortization
|
22.1
|
|
|
24.2
|
|
|
22.8
|
|
|
26.9
|
|
|
96.0
|
|
|
Operating income
|
51.7
|
|
|
45.9
|
|
|
74.3
|
|
|
75.4
|
|
|
247.3
|
|
|
Interest expense
|
(6.1
|
)
|
|
(6.5
|
)
|
|
(5.4
|
)
|
|
(5.5
|
)
|
|
(23.5
|
)
|
|
Gain on sale of business
|
—
|
|
|
—
|
|
|
—
|
|
|
5.5
|
|
|
5.5
|
|
|
Other income, net
|
6.3
|
|
|
7.0
|
|
|
6.7
|
|
|
2.7
|
|
|
22.7
|
|
|
Equity in earnings of unconsolidated affiliates
|
6.7
|
|
|
10.2
|
|
|
7.0
|
|
|
3.3
|
|
|
27.2
|
|
|
Income from continuing operations before income taxes and non-controlling interest
|
58.6
|
|
|
56.6
|
|
|
82.6
|
|
|
81.4
|
|
|
279.2
|
|
|
Income taxes
|
20.1
|
|
|
22.1
|
|
|
31.6
|
|
|
27.3
|
|
|
101.1
|
|
|
Income from continuing operations before non-controlling interest
|
38.5
|
|
|
34.5
|
|
|
51.0
|
|
|
54.1
|
|
|
178.1
|
|
|
Income (loss) from discontinued operations, net of tax
|
18.5
|
|
|
18.7
|
|
|
222.8
|
|
|
(11.7
|
)
|
|
248.3
|
|
|
Net income
|
57.0
|
|
|
53.2
|
|
|
273.8
|
|
|
42.4
|
|
|
426.4
|
|
|
Net (income) loss attributable to non-controlling interest
|
1.1
|
|
|
(0.2
|
)
|
|
(0.5
|
)
|
|
0.5
|
|
|
0.9
|
|
|
Net income attributable to DST Systems, Inc.
|
$
|
58.1
|
|
|
$
|
53.0
|
|
|
$
|
273.3
|
|
|
$
|
42.9
|
|
|
$
|
427.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
67.6
|
|
|
66.6
|
|
|
65.4
|
|
|
64.2
|
|
|
66.0
|
|
|
Weighted average diluted shares outstanding
|
68.5
|
|
|
67.2
|
|
|
66.1
|
|
|
65.0
|
|
|
66.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations attributable to DST Systems, Inc.
|
$
|
0.59
|
|
|
$
|
0.52
|
|
|
$
|
0.77
|
|
|
$
|
0.85
|
|
|
$
|
2.71
|
|
(1)
|
Discontinued operations
|
0.27
|
|
|
0.28
|
|
|
3.41
|
|
|
(0.18
|
)
|
|
3.76
|
|
(1)
|
Basic earnings per share
|
$
|
0.86
|
|
|
$
|
0.80
|
|
|
$
|
4.18
|
|
|
$
|
0.67
|
|
|
$
|
6.47
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations attributable to DST Systems, Inc.
|
$
|
0.59
|
|
|
$
|
0.51
|
|
|
$
|
0.76
|
|
|
$
|
0.84
|
|
|
$
|
2.68
|
|
(1)
|
Discontinued operations
|
0.26
|
|
|
0.28
|
|
|
3.37
|
|
|
(0.18
|
)
|
|
3.73
|
|
(1)
|
Diluted earnings per share
|
$
|
0.85
|
|
|
$
|
0.79
|
|
|
$
|
4.13
|
|
|
$
|
0.66
|
|
|
$
|
6.41
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share of common stock
|
$
|
0.16
|
|
|
$
|
0.17
|
|
|
$
|
0.17
|
|
|
$
|
0.16
|
|
|
$
|
0.66
|
|
|
_______________________________________________________________________
|
|
(1)
|
Earnings per share are computed independently for each of the quarters presented. Accordingly, the accumulation of quarterly earnings per share may not equal the total computed for the year.
|