DST Systems, Inc. (
Q3 2010 Earnings Call Transcript
October 27, 2010 11:00 am ET
Tom McDonnell – CEO
Steve Hooley – President and COO
Ken Hager – VP, Treasurer and CFO
Jim Kissane – Bank of America
Dave Koning – Robert W Baird
Dave Togut – Evercore Partners
Greg Smith – Duncan Williams
Peggy Corcillo – Iridian Asset Management
Previous Statements by DST
» DST Systems, Inc. Q2 2010 Earnings Call Transcript
» DST Systems, Inc. Q1 2010 Earnings Call Transcript
» DST Systems, Inc. Q4 2009 Earnings Call Transcript
» DST Systems Q3 2009 Earnings Transcript
Ladies and gentlemen, thank you for standing by. Welcome to the DST Systems Inc third quarter earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) As a reminder, today’s conference is being recorded.
I would now like to turn the conference over to Mr Tom McDonnell. Please go ahead.
Good morning. Before we start, I need to make the following comments. If in the course of our conference call today, we make forward-looking statements with respect to DST and its businesses, such statements would be based on our views as of today and actual results could differ.
There could be a number of factors affecting future results including those set forth in the latest periodic report we filed with the SEC. All such factors should be considered in evaluating any forward-looking statements that we make today.
All the participants on the call have had access to our detailed earnings release, so we're going to focus our comments on the items that we believe that are particularly significant for the quarter.
During the quarter, we completed a number of actions. We completed the merger of the dsicmm Group into our UK operating business, created a new entity called Innovative Output Solutions, and that now is one of the largest third-party print mail providers in the UK. As a result of that merger, DST’s ownership will be 70.5% of IOS.
We also placed a $370 million of private debt with a weighted average interest rate of 5.06%, and an average life of approximately eight and a quarter years. During the period, we completed the redemption of the remaining Series A and Series B convertible debentures for a total of $252.6 million. As a result, there are no Series A or B convertible debentures outstanding. Also during the quarter, we repurchased $35 million of principal amount of our Series C convertible debentures, so that leaves $143.6 million of Series C debentures outstanding at the end of the quarter.
We also repurchased 515,000 shares of our common stock that was at an average price of $41.17 a share. Under our current share repurchase authorization, there are 499,000 shares still remaining. We did sign a new defined contribution customer during the quarter that is going to result ultimately in the conversion of about 1.4 million new participants. During the nature of those types of businesses, the conversions will be over a period of time from 2011 through 2013.
During the quarter or on October 6 actually, our Board of Directors declared a $0.37 per share dividend that is payable November 5 of this year. Subsequent to the quarter, on October 25, we received a $49.5 million cash dividend from a private equity investment. For income tax purposes, a portion of that dividend may actually qualify for the dividend receive deduction, which would result in a lower tax rate than the normal Federal statutory rate of 35%. At this point we are not in a position to estimate the portion qualifying for the dividends, and therefore we really cannot estimate its impact on the fourth quarter tax rate yet.
For the third quarter, our GAAP reported diluted earnings per share were $1.16. As we look at it on a non-GAAP basis, diluted EPS was $1.03 per share that is an increase of $0.09 or 9.6% over the third quarter of last year. In our press release, we listed several non-GAAP adjustments to the diluted earnings that take you from the $1.16 to $1.03; obviously the net positive impact of those was $0.13. The biggest piece of that was attributable to contract termination payments received in connection with the previously announced large client termination at Output.
Operating revenues for the quarter excluding the contract termination payments and revenues from the acquisition of dsicmm were $386.6 million that is a decrease of $9 million or 2.3% from ’09. Operating income on a non-GAAP basis increased by $5.8 million over the third quarter of last year, and that was primarily from higher revenues and lower cost in the Financial Services segment. Also equity in unconsolidated affiliates increased by $1.1 million over the third quarter last year.
Our non-GAAP income tax rate for the quarter was 35.2% that compared to 34.8% third quarter last year. If we exclude the effect of the private equity dividend, we currently estimate our tax rate for the fourth quarter 2010 will be approximately 36%, but again that excludes the impact of that dividend. The average diluted shares outstanding for the quarter were 3.3 million shares lower than the third quarter of 2009 that reflects a share purchase as we made year to date.
Financial Services’ operating revenues increased by $5 million or 1.8% over the third quarter of 2009. We experienced some higher revenues at DST Global Solutions and Argus. Income from operations increased by $10.4 million or 18.7% that reflects higher revenues and lower compensation costs.