DST Systems, Inc. Announces Third Quarter 2016 Financial Results

• Consolidated operating revenues (excludes out-of-pocket reimbursements) increased $12.1 million or 3.4% to $365.5 million as compared to third quarter 2015, primarily due to new and existing client growth across a number of our service offerings and year-over-year growth from businesses acquired during 2015 and 2016, partially offset by lower revenue within the Financial Services segment as we extended customer contracts with lower pricing.
• Consolidated operating income increased $7.2 million or 10.8% to $73.6 million as compared to third quarter 2015. The increase in operating income is primarily due to growth within the Healthcare Services segment.
• Equity in earnings of unconsolidated affiliates decreased $4.8 million to $7.0 million as compared to third quarter 2015, primarily from lower earnings from IFDS.
• Weighted average diluted shares outstanding for third quarter 2016 were 33.0 million, a decrease of 3.2 million shares or 8.8% from third quarter 2015, primarily as a result of share repurchases during 2015 and 2016.

Recent Business Transactions

On July 1, 2016, DST completed the sale of our North American Customer Communications business for cash consideration of $410.0 million, subject to customary working capital and other adjustments pursuant to the terms of the transaction. The Company recorded an estimated pretax gain of $340.1 million on the sale during the third quarter 2016, which has been presented as a component of discontinued operations.

Monetization and Share Repurchase Activity

• DST monetized $5.0 million of investment assets during third quarter 2016, the two largest components being $1.8 million from the sale of marketable securities and $2.7 million from private equity investment distributions.
• During the third quarter 2016, the Company spent $75.0 million to repurchase approximately 630,000 shares of DST common stock. During October 2016, approximately $45.0 million has been spent thus far to repurchase approximately 400,000 shares of DST common stock, resulting in $180.0 million remaining under the existing share repurchase plan.

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."

Segment Results

Financial Services Segment

Operating revenues for the Financial Services segment (excluding out-of-pocket reimbursements) for third quarter 2016 increased $2.5 million or 0.9% to $270.2 million as compared to third quarter 2015. The operating revenue increase is primarily driven from the businesses acquired during 2015 and 2016, which contributed $9.0 million of incremental operating revenues during the third quarter 2016. In September 2016, we also completed the conversion of approximately 10.0 million subaccounts associated with the previously announced new client contract, which resulted in incremental revenue. 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, lower revenue due to extending certain long-term contracts with lower pricing, and approximately $0.6 million of negative foreign currency movements. Software license revenues of $6.9 million in third quarter 2016 were also $1.1 million lower as compared to third quarter 2015.

Financial Services segment operating income increased $3.3 million or 6.4% during third quarter 2016 to $54.6 million as compared to third quarter 2015. The increase in operating income is primarily due to higher revenues and increased cost savings resulting from previously implemented restructuring and other cost containment initiatives. Operating margin for third quarter 2016 was 20.2% as compared to 19.2% in 2015.

Healthcare Services Segment

Healthcare Services segment operating revenues (excluding out-of-pocket reimbursements) increased $12.1 million or 12.9% during third quarter 2016 to $106.1 million as compared to third quarter 2015. The increase is primarily attributable to new medical claims processing clients implemented during 2016, organic growth and expansion of the high-value services we are offering to existing clients in both the medical and pharmacy businesses, as well as a $0.4 million increase from higher software license revenue in third quarter 2016 as compared to third quarter 2015.

Healthcare Services segment operating income increased $4.9 million or 33.1% during third quarter 2016 to $19.7 million, primarily due to higher revenues. While costs and expenses increased from higher staffing costs associated with supporting the new and existing client growth, enhanced economies of scale were achieved as new clients were converted. Operating margin for third quarter 2016 was 18.6% as compared to 15.7% in the third quarter 2015.

Other Financial Results

Equity in earnings of unconsolidated affiliates

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

DST's equity in earnings of unconsolidated affiliates decreased primarily from lower earnings at IFDS. The decrease in IFDS equity in earnings from third quarter 2015 is primarily the result of lower revenues recognized related to the ongoing client conversion activities and higher operating costs as IFDS expands its infrastructure to address increasing regulatory, compliance and security needs.

The multi-year implementation efforts for the previously announced two IFDS wealth management platform clients are continuing to progress, however the scope and timing continues to be adjusted as client requirements evolve. As the projects are completed and the underlying modules are placed into production, we expect that IFDS' earnings will decrease due to the amortization of the capitalized software costs coupled with the decline in implementation revenue.

Use of Non-GAAP Financial Information

In addition to reporting financial information on a GAAP basis, DST has disclosed non-GAAP financial information which has been reconciled to the corresponding GAAP measures in the following financial schedules titled "Reconciliation of Reported Results to Non-GAAP Results."  In making these adjustments to determine the non-GAAP results, the Company takes into account the impact of items that are not necessarily ongoing in nature, that do not have a high level of predictability associated with them or that are non-operational in nature.  Generally, these items include net gains on dispositions of business units, net gains (losses) associated with securities and other investments, restructuring and impairment costs and other similar items. Beginning in first quarter 2016, we have also included acquired intangible asset amortization. Management believes the exclusion of these items provides a useful basis for evaluating underlying business unit performance, but should not be considered in isolation and is not in accordance with, or a substitute for, evaluating business unit performance utilizing GAAP financial information.  Management uses non-GAAP measures in its budgeting and forecasting processes and to further analyze its financial trends and "operational run-rate," as well as making financial comparisons to prior periods presented on a similar basis.  The Company believes that providing such adjusted results allows investors and other users of DST's financial statements to better understand DST's comparative operating performance for the periods presented.

DST's management uses each of these non-GAAP financial measures in its own evaluation of the Company's performance, particularly when comparing performance to past periods.  DST's non-GAAP measures may differ from similar measures by other companies, even if similar terms are used to identify such measures.  Although DST's management believes non-GAAP measures are useful in evaluating the performance of its business, DST acknowledges that items excluded from such measures may have a material impact on the Company's financial information calculated in accordance with GAAP.  Therefore, management typically uses non-GAAP measures in conjunction with GAAP results.  These factors should be considered when evaluating DST's results.

Safe Harbor Statement

Certain material presented in the press release includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, (i) all statements, other than statements of historical fact, included in this press release that address activities, events or developments that we expect or anticipate will or may occur in the future or that depend on future events, or (ii) statements about our future business plans and strategy and other statements that describe the Company's outlook, objectives, plans, intentions or goals, and any discussion of future operating or financial performance. Whenever used, words such as "may," "will," "would," "should," "potential," "strategy," "anticipates," "estimates," "expects," "project," "predict," "intends," "plans," "believes," "targets" and other terms of similar meaning are intended to identify such forward-looking statements. Forward-looking statements are uncertain and to some extent unpredictable, and involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such forward-looking statements. Factors that could cause results to differ materially from those anticipated include, but are not limited to, the risk factors and cautionary statements included in the Company's periodic and current reports (Forms 10-K, 10-Q and 8-K) filed from time to time with the Securities and Exchange Commission. All such factors should be considered in evaluating any forward-looking statements. The Company undertakes no obligation to update any forward-looking statements in this press release to reflect new information, future events or otherwise.

DST SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(Unaudited)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Operating revenues	$	365.5		$	353.4		$	1,100.7		$	1,042.7
Out-of-pocket reimbursements	21.2			18.2			57.2			48.1
Total revenues	386.7			371.6			1,157.9			1,090.8
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