DST Systems, Inc. (DST) reported consolidated net income attributable to DST ("DST Earnings") of $67.8 million ($1.94 per diluted share) for the fourth quarter 2015 compared to $255.1 million ($6.65 per diluted share) for the fourth quarter 2014.
DST Earnings for the year ended December 31, 2015 were $358.2 million ($9.83 per diluted share) compared to $593.3 million ($14.66 per diluted share) for the year ended December 31, 2014.
Taking into account certain non-GAAP adjustments, DST Earnings were $58.4 million ($1.67 per diluted share) for fourth quarter 2015 compared to $66.4 million ($1.73 per diluted share) for fourth quarter 2014, and $216.3 million ($5.94 per diluted share) for the year ended December 31, 2015 compared to $224.6 million ($5.55 per diluted share) for the year ended December 31, 2014.
"We are pleased with our 2015 operating results and believe a number of the significant client wins and renewals executed during the year position us well as we head into 2016," said Steve Hooley, Chairman, CEO and President of DST. "Notwithstanding the progress we are making across our business segments, early market indicators are showing a low growth environment for 2016 as continued global headwinds, market volatility and the impact of foreign exchange remain significant challenges. This operating environment, combined with the ongoing expense of security, regulatory compliance and other essential infrastructure enhancements, will pressure our performance. We remain confident in the ability of our team to execute, achieve increased benefits from our recent acquisitions, contain costs and develop innovative new service offerings for our clients to drive results and create additional shareholder value."
Consolidated Financial Highlights
Fourth quarter 2015 diluted earnings per share, after non-GAAP adjustments, was $1.67, a decrease of $0.06 or 3.5% from fourth quarter 2014. Significant items impacting the quarterly results include the following:
Consolidated operating revenues (excluding out-of-pocket reimbursements) decreased $2.4 million or 0.5% to $514.3 million as compared to fourth quarter 2014, primarily due to the sale of DST Global Solutions Ltd. ("Global Solutions") on November 30, 2014 and $7.9 million of negative foreign currency movements. Excluding Global Solutions fourth quarter 2014 operating revenues and foreign currency impacts, consolidated operating revenues increased $17.2 million or 3.4% in fourth quarter 2015 as compared to 2014 due to increased revenues associated with the acquisitions of kasina LLC, Red Rocks Capital LLC, and Wealth Management Systems, Inc. during 2015 (the "2015 Acquisitions") as well as organic and new client growth.
Consolidated income from operations decreased $7.9 million or 8.4% to $85.6 million as compared to fourth quarter 2014. The sale of Global Solutions resulted in a decline in income from operations of $3.6 million as compared to prior year results. The remaining decline in operating income is principally from increased costs incurred to expand the Company's service offerings, including costs incurred for acquired intangible assets and performance-related contingent consideration from the 2015 Acquisitions, as well as increased costs to enhance our infrastructure and service new clients.
Equity in earnings of unconsolidated affiliates decreased $3.9 million to $6.3 million, as compared to fourth quarter 2014, primarily from lower earnings from IFDS partially offset by higher BFDS earnings.
Weighted average diluted shares outstanding for fourth quarter 2015 were 35.0 million, a decrease of 3.4 million shares or 8.9% from fourth quarter 2014, primarily as a result of share repurchases.
Monetization, Share Repurchase and Dividend Activity
DST received $50.0 million of pretax cash proceeds from the monetization of investment assets during fourth quarter 2015, consisting of $30.4 million from the sale of marketable securities, $18.6 million from private equity investment distributions and $1.0 million from the sale of real estate assets.
During fourth quarter 2015, the Company completed the sale and leaseback of its four North American Customer Communications' production facilities for pretax proceeds totaling approximately $129.0 million. A pretax gain of approximately $39.9 million on the sale transactions will be deferred and amortized on a straight-line basis over the future lease terms.
During the fourth quarter 2015, the Company spent $75.0 million to repurchase approximately 650,000 shares of DST common stock. At December 31, 2015, DST had $150.0 million remaining under the existing share repurchase plan.
On January 27, 2016, the Board of Directors of DST declared a quarterly cash dividend of $0.33 per share on its common stock, an increase of $0.03 per share or 10.0% as compared to the prior quarterly dividends paid during 2015. The dividend is payable on March 15, 2016, to shareholders of record at close of business on March 2, 2016.
Recent Business Transactions
On December 23, 2015, DST entered into a definitive agreement to acquire Kaufman Rossin Fund Services LLC, an independent, full-service provider of specialized hedge fund administration services to the global financial community, for $95.0 million, subject to certain adjustments. We anticipate, subject to regulatory approval, that the transaction will close during first quarter of 2016.
Detailed Review of Financial Results
The following discussion of financial results takes into account the non-GAAP adjustments described in the section entitled "Use of Non-GAAP Financial Information" and detailed in the attached schedule titled "Reconciliation of Reported Results to Non-GAAP Results."
Financial Services Segment
Operating revenues for the Financial Services segment (excluding out-of-pocket reimbursements) of $281.8 million for fourth quarter 2015 were flat compared to fourth quarter 2014. Global Solutions contributed $11.7 million of operating revenue in fourth quarter 2014. Excluding Global Solutions 2014 results and the negative foreign currency impacts of $4.1 million during 2015, Financial Services operating revenues increased by $15.8 million or 5.8% in fourth quarter 2015 as compared to 2014, primarily driven from increased professional services revenues associated with our Bluedoor wealth management platform as well as organic and new client growth within our Brokerage Solutions business. In addition, the 2015 Acquisitions contributed $5.5 million of operating revenues during fourth quarter 2015. Software license revenues (excluding Global Solutions) of $8.7 million in fourth quarter 2015 were $0.8 million higher as compared to fourth quarter 2014. These operating revenue 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. Market volatility is also having a negative impact on our ALPS business.
Financial Services segment income from operations decreased $7.0 million or 12.0% during fourth quarter 2015 to $51.3 million as compared to fourth quarter 2014. Global Solutions contributed income from operations of $3.6 million in fourth quarter 2014. Excluding Global Solutions, income from operations decreased $3.4 million or 6.2% as compared to fourth quarter 2014. The decrease in income from operations resulted primarily from the impact of the 2015 Acquisitions which have resulted in approximately $3.2 million of incremental expenses related to amortization associated with acquired intangibles and performance-related contingent consideration in the fourth quarter. Additionally, costs increased to enhance our security, regulatory compliance and network infrastructure utilized across all of our operating segments. The decreases in operating income were partially offset by reduced costs achieved as a result of the restructuring activities undertaken in late 2014. Financial Services operating margin for fourth quarter 2015 was 18.2% as compared to 20.7% in 2014.
Registered shareowner accounts processed at December 31, 2015 were 65.4 million, a decrease of 1.1 million accounts from September 30, 2015 and a decrease of 3.4 million accounts from December 31, 2014. For the year ended December 31, 2015, 2.9 million registered accounts have converted to subaccounts, of which 1.8 million converted to DST's subaccounting platform. Subaccounts processed at December 31, 2015 were 31.3 million, an increase of 1.0 million accounts from September 30, 2015 and an increase of 2.7 million accounts from December 31, 2014.
In December 2015, we entered into a ten year contract with a new client to provide both subaccounting and mutual fund servicing solutions. Based on current volumes, the client is expected to convert approximately 10.0 million subaccounts onto our platform by the end of 2016 and approximately 2.3 million registered accounts onto our platform by the end of 2017. Implementation efforts will result in increased costs as we convert the client onto our platforms over the course of 2016 and 2017.
Healthcare Services Segment
Healthcare Services segment operating revenues (excluding out-of-pocket reimbursements) decreased $3.4 million or 3.3% during fourth quarter 2015 to $98.4 million, as compared to fourth quarter 2014, primarily due to lower pharmacy claims processing revenues resulting from a previously announced partial client deconversion on January 1, 2015, which were partially offset by organic growth at existing clients. Also impacting the change in operating revenues were increased medical claims transaction volumes due to organic growth as well as higher business process outsourcing revenues which were partially offset by $2.5 million in lower software license revenues.
Healthcare Services segment income from operations decreased $7.2 million or 31.3% during fourth quarter 2015 to $15.8 million, primarily due to decreased operating revenues from pharmacy claims processing and lower software license revenue. Additionally, operating income was impacted by increased staffing costs incurred to service growth in our business process outsourcing services as well as costs incurred to implement a number of new clients that are expected to transition onto our medical claims platform during 2016. Operating margin for fourth quarter 2015 was 16.1% as compared to 22.6% in the fourth quarter 2014.
Customer Communications Segment
Customer Communications segment operating revenues (excluding out-of-pocket reimbursements) were $158.8 million in fourth quarter 2015, an increase of $4.1 million from fourth quarter 2014. Excluding the effect of $3.8 million of unfavorable foreign currency movements, Customer Communications segment operating revenues increased by $7.9 million or 5.1%. North America operating revenues increased $5.5 million or 5.2% to $111.5 million in fourth quarter 2015 primarily from incremental volumes due to the conversion of previously announced new clients and higher professional services revenues, partially offset by a decline in volumes from certain existing customers and unfavorable foreign currency exchange rate movements of $1.8 million related to our Canadian operations. U.K. operating revenues decreased $1.4 million or 2.9% to $47.3 million in fourth quarter 2015, primarily from $2.0 million of unfavorable foreign currency exchange rate movements, partially offset by growth from new and existing clients.
Customer Communications segment income from operations increased $5.7 million during fourth quarter 2015 to $18.4 million. North America operating income increased $5.4 million to $16.4 million as compared to 2014 and U.K. operating income increased $0.3 million to $2.0 million. Higher operating revenues combined with cost savings achieved from the 2014 closure of certain facilities in North America contributed to the growth in North America operating income. The increase in U.K. operating income is the result of higher operating revenues from new and existing clients. Customer Communications segment operating margin for fourth quarter 2015 was 11.6% as compared to 8.2% in 2014. North America operating margin was 14.7% in fourth quarter 2015 as compared to 10.4% in fourth quarter 2014, while the U.K. operating margin was 4.2% in fourth quarter 2015 as compared to 3.5% in fourth quarter 2014.
Investments and Other Segment
Investments and Other segment operating revenues for fourth quarter 2015 increased $0.1 million as compared to fourth quarter 2014 to $0.8 million and income from operations increased $0.6 million to $0.1 million.
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