DST Systems, Inc. Announces Second Quarter 2008 Financial Results

KANSAS CITY, Mo., July 22 /PRNewswire-FirstCall/ -- Consolidated net
income for DST Systems, Inc. (NYSE: DST) was $49.9 million ($0.86 per diluted
share) for second quarter 2008 compared to $72.8 million ($1.01 per diluted
share) for second quarter 2007. Consolidated net income for the six months
ended June 30, 2008 was $122.1 million ($2.00 per diluted share) compared to
$138.2 million ($1.91 per diluted share) for the six months ended June 30,
2007. Taking into account certain non-GAAP adjustments explained herein,
consolidated net income was $53.7 million ($0.93 per diluted share) for second
quarter 2008 compared to $58.7 million ($0.81 per diluted share) for second
quarter 2007, and $108.9 million ($1.78 per diluted share) for the six months
ended June 30, 2008 compared to $121.3 million ($1.67 per diluted share) for
the six months ended June 30, 2007.
Second quarter 2008 financial highlights were as follows:
-- Consolidated operating revenues increased $9.4 million or 2.3% to
$426.6 million as compared to $417.2 million for second quarter 2007 primarily
due to increases in mutual fund shareowner processing revenues, AWD software
license fees, and AWD and DST Health Solutions professional services,
partially offset by lower Output Solutions operating revenues.
-- Consolidated income from operations decreased $6.9 million or 7.7% to
$83.0 million as compared to $89.9 million for second quarter 2007. Taking
into account certain non-GAAP adjustments, income from operations increased
$4.0 million or 5.1% as compared to second quarter 2007, primarily from an
increase in Financial Services income from operations of $4.1 million.
Increased contributions from higher mutual fund shareowner processing and AWD
software license fee revenues were partially offset by lower international
contributions.
-- Equity in earnings of unconsolidated affiliates declined $10.9
million. No equity in earnings of Asurion were recorded in 2008 versus $10.5
million in second quarter 2007, and lower equity in earnings of BFDS and Argus
were recorded.
Share-related activity during second quarter 2008 was as follows:
-- On May 12, 2008, DST's Board of Directors authorized the repurchase of
an additional 5 million shares under the existing share repurchase
authorization plan. During second quarter 2008, the Company repurchased
1,998,421 shares of DST common stock for $121.7 million or approximately
$60.90 per share. At June 30, 2008, there were approximately 4.2 million
shares remaining under the existing share repurchase authorization plan.
-- The Company had approximately 53.3 million shares outstanding at June
30, 2008, a decrease of 10.1 million shares from June 30, 2007. Shares
outstanding at June 30, 2008 include approximately 2.6 million unvested
restricted shares which are excluded from the determination of average common
shares outstanding used in the calculation of basic earnings per share. The
net effect of share repurchases and shares issued from stock option exercises
during second quarter 2008 resulted in a net decrease in shares outstanding of
approximately 1.9 million shares from March 31, 2008.
-- Diluted shares outstanding for second quarter 2008 were 58.0 million
shares, a decrease of 13.8 million shares or 19.2% from second quarter 2007,
and a decrease of 6.3 million shares or 9.8% from first quarter 2008. Diluted
shares outstanding at June 30, 2008 include an aggregate 6.4 million shares
comprised of the dilutive effects of 3.5 million shares from convertible
debentures, 1.2 million shares from outstanding stock options and 1.7 million
shares from restricted stock. The aggregate dilutive effect of these items
decreased by approximately 1.9 million shares from first quarter 2008 from
decreases in the Company's average share price, while the aggregate dilutive
effect of these items decreased by approximately 3.8 million shares from
second quarter 2007 due to decreases in the Company's average stock prices and
lower stock options outstanding.
-- Total stock options and restricted stock ("equity units") outstanding
at June 30, 2008 were 8.6 million, a decrease of 100,000 equity units or 1.1%
from March 31, 2008 and a decrease of 1.2 million equity units or 12.2% from
June 30, 2007.
Use of Non-GAAP Financial Information
In addition to reporting operating income, pretax income, net income and
earnings per share on a GAAP basis, DST has also made certain non-GAAP
adjustments which are described in the attached schedule titled "Description
of Non-GAAP Adjustments" and are reconciled to the corresponding GAAP measures
in the attached financial schedules titled "Reconciliation of Reported Results
to Income Adjusted for Certain Non-GAAP Items" that accompany this earnings
release. In making these non-GAAP adjustments, the Company takes into account
the impact of items that are not necessarily ongoing in nature, that do not
have a high level of predictability associated with them or that are 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. 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 recurring comparative operating performance for the periods presented.
DST's management uses each of these non-GAAP financial measures in its own
evaluation of the Company's performance, particularly when comparing
performance to past periods. DST's non-GAAP measures may differ from similar
measures by other companies, even if similar terms are used to identify such
measures. Although DST's management believes non-GAAP measures are useful in
evaluating the performance of its business, DST acknowledges that items
excluded from such measures may have a material impact on the Company's income
from operations, pretax income, net income and earnings per share calculated
in accordance with GAAP. Therefore, management typically uses non-GAAP
measures in conjunction with GAAP results. Investors and users of our
financial information should also consider the above factors when evaluating
DST's results.
Detailed Review of Financial Results
The following discussion of financial results takes into account the non-
GAAP adjustments described in the section entitled "Use of Non-GAAP Financial
Information" and detailed in the attached schedule titled "Description of Non-
GAAP Adjustments."
Segment Results
Financial Services Segment
Operating revenues for the Financial Services segment excluding out-of-
pocket reimbursements ("OOP") for second quarter 2008 increased $14.3 million
or 5.1% to $294.5 million as compared to second quarter 2007. The increase in
Financial Services operating revenues is attributable to increases in mutual
fund shareowner processing services, AWD software license fees, and AWD and
DST Health Solutions professional services.
The following table summarizes mutual fund shareowner accounts serviced
(in millions):

June 30, March 31, December 31, June 30,
2008 2008 2007 2007
--------- --------- --------- --------

Registered accounts:
Non tax-advantaged 67.0 68.1 71.0 66.6
Tax-advantaged 47.4 46.9 46.2 42.1
--------- --------- --------- --------
114.4 115.0 117.2 108.7

Subaccounts 5.4 4.9 1.9 1.5
--------- --------- --------- --------
Total 119.8 119.9 119.1 110.2
========= ========= ========= ========

Total accounts serviced at June 30, 2008 were 119.8 million, a decrease of
100,000 accounts as compared to March 31, 2008, an increase of 700,000
accounts or 0.6% from December 31, 2007 and an increase of 9.6 million
accounts or 8.7% as compared to June 30, 2007.
Registered accounts represent individually registered shareowner accounts
(both tax-advantaged and non tax-advantaged) on the books of the transfer
agent. Total registered accounts decreased 600,000 accounts or 0.5% from the
comparable amount at March 31, 2008, comprised of conversions to non-DST
subaccounting platforms of 1.6 million and conversions to DST's subaccounting
platform of 200,000, partially offset by net account growth of existing
clients of 1.1 million and new client account conversions of 100,000.
Tax-advantaged accounts are comprised of accounts used for individual and
corporate retirement savings plans and for individual education savings plans,
including IRAs, defined contribution retirement accounts, and Educational
Savings Plan Accounts, which include both Coverdell and Section 529 college
plan savings accounts. Tax-advantaged accounts were 47.4 million at June 30,
2008, an increase of 500,000 or 1.1% as compared to March 31, 2008. The
increase is primarily attributable to net account growth from existing
clients. Tax-advantaged accounts represent 41.4% of total registered accounts
serviced at June 30, 2008.
Subaccounts represent individual mutual fund account positions maintained
on behalf of broker/dealers using DST's subaccounting platform ("TA2000
Subaccounting"). Subaccounts serviced were 5.4 million at June 30, 2008, an
increase of 500,000 subaccounts or 10.2% as compared to March 31, 2008. The
500,000 increase in subaccounts serviced during the three months ended June
30, 2008 is comprised of conversions of new subaccounting clients of 200,000
from non-DST platforms, conversions of 200,000 registered accounts from TA2000
and net account growth from existing subaccounting clients of 100,000.
During the quarter, DST received two new client commitments totaling
approximately 200,000 registered accounts and 300,000 subaccounts, based on
current levels. The Company anticipates that 1.9 million new registered
accounts will convert to TA2000 in third quarter 2008 and 200,000 new
registered accounts will convert in first quarter 2009. The Company also
anticipates that 1.3 million registered accounts will convert to subaccounting
platforms during the remainder of 2008, of which 800,000 will convert to
TA2000 Subaccounting and 500,000 will convert to non-DST subaccounting
platforms. The Company also expects that 3.7 million new subaccounts will
convert to TA2000 Subaccounting from non-DST platforms in 2008 and 300,000 new
client subaccounts will convert during 2009 and 2010.
In summary, based on accounts serviced at June 30, 2008 and the conversion
activity previously described (and without taking into account any other
changes in accounts serviced during the remainder of 2008), total accounts
serviced at December 31, 2008 are estimated to be 124.9 million, which are
comprised of 115.0 million registered accounts and 9.9 million subaccounts.
The actual number of accounts estimated to convert to and from various DST
systems, as well as the timing of those events, is dependent upon a number of
factors. Actual results could differ from the Company's estimates.
Defined contribution ("DC") participants represent the number of active
participants processed on DST's TA2000/TRAC platform. DC participants were
4.5 million at June 30, 2008, a decrease of 400,000 or 8.2% compared to March
31, 2008 and an increase of 300,000 or 7.1% from June 30, 2007. The decline
in participants during second quarter 2008 represents a seasonal movement of
terminated participants and new participant enrollments. The Company has also
received notice that an existing TRAC client will internalize its participant
accounting which will result in the loss of approximately 1.0 million
participants in third quarter 2008.
Financial Services segment software license fee revenues are derived
principally from DST International (investment management systems), DST Health
Solutions (medical claims processing systems) and AWD (workflow management and
CRM solutions). Operating revenues include approximately $15.6 million of
software license fee revenues for second quarter 2008, an increase of $2.9
million or 22.8% over the same period in 2007. Increases in AWD software
license fees were partially offset by lower investment management software
license fees. While license fee revenues are not a significant percentage of
DST's total operations, they can significantly impact earnings in the period
in which they are recognized. Revenues and operating results from individual
license sales depend heavily on the timing, size and nature of the contract.
Financial Services segment income from operations for second quarter 2008
totaled $74.5 million as compared to $70.4 million in second quarter 2007, an
increase of $4.1 million or 5.8%. Increased contributions from mutual fund
shareowner processing and AWD were partially offset by lower contributions
from international operations. The lower international contributions are
attributable to decreased demand for AWD and investment management software
and services and higher personnel costs. Consolidated costs and expenses for
second quarter 2008 were $218.7 million, an increase of $12.9 million or 6.3%
from the same period in 2007. Excluding reimbursable operating costs of $19.0
million in second quarter 2008 and $15.2 million in second quarter 2007, costs
and expenses increased $9.1 million or 4.8% to $199.7 million, mostly
attributable to increased personnel costs. Depreciation and amortization
costs increased $1.1 million in the second quarter 2008 compared to the same
period in 2007, principally due to depreciation on new asset additions.
Operating margin for second quarter 2008 was 25.3% as compared to 25.1% for
second quarter 2007.

Output Solutions Segment

Segment Reporting Change
In first quarter 2008, the Company changed the measurement of certain cost
components of its Output Solutions Segment. The Output Solutions Segment
leases its Connecticut, Missouri and California production facilities from the
Investments and Other Segment. Beginning in 2008, the Company began reporting
financial results for the Output Solutions Segment on the basis that the
Output Solutions Segment owned (instead of leased) these three production
facilities. Management believes this action will improve its ability to
analyze the Output Solutions Segment operating results taking into
consideration the special purpose nature of the production plants. Reported
results for the Output Solutions Segment and the Elimination Adjustments for
periods prior to 2008 have been restated to reflect this change. The
Company's restated segment results for the three and six months ended June 30,
2007 have been included in the attached schedules that accompany this earnings
release. The Investments and Other Segment continues to present rental
revenues from the Output Solutions Segment along with the related depreciation
expense associated with the properties, while the elimination of the inter-
segment activity is included in the Elimination Adjustments. The impact of
this change increased Output Solutions income from operations by $2.0 million
and $1.9 million for the three months ended June 30, 2008 and 2007,
respectively, and correspondingly increased the Segment Eliminations loss from
operations by $2.0 million and $1.9 million for the three months ended June
30, 2008 and 2007, respectively. The impact of this change increased Output
Solutions income from operations by $3.7 million for the six months ended June
30, 2008 and 2007, and correspondingly increased the Segment Eliminations loss
from operations by $3.7 million for the six months ended June 30, 2008 and
2007.
Segment Financial Results
Output Solutions segment operating revenues (excluding OOP reimbursements)
for second quarter 2008 were $131.1 million, a decrease of $4.7 million or
3.5% as compared to second quarter 2007, principally from lower U.S. images
produced.
Images produced during second quarter 2008 were 3.4 billion, a decrease of
20.9% as compared to second quarter 2007. The decrease in images is due to
certain telecommunications clients reducing the amount of transaction
information included on invoices thereby lowering total images produced.
Operating revenue per image increased 23.9% from second quarter 2007. Items
mailed during second quarter 2008 were 575.2 million, an increase of 3.8% as
compared to the prior year quarter, primarily due to the conversion of a new
telecommunications client during fourth quarter 2007 and higher volumes from
other existing clients.
Output Solutions segment income from operations for second quarter 2008
totaled $7.4 million, a decrease of $100,000 or 1.3%, as compared to second
quarter 2007. Decreases in operating revenues during the quarter were
substantially offset by lower costs and expenses and lower depreciation and
amortization expense. Costs and expenses for second quarter 2008 were $241.5
million, a decrease of $10.6 million or 4.2% from the same period in 2007.
Excluding reimbursable operating costs of $127.3 million in second quarter
2008 and $134.5 million in second quarter 2007, costs and expenses decreased
$3.4 million or 2.9% to $114.2 million from lower material costs and lower
leased equipment costs resulting from the implementation of owned digital
print technologies, partially offset by higher compensation and benefit
related costs. Depreciation and amortization decreased $1.2 million as
compared to second quarter 2007. The lower revenues and cost reductions
described above resulted in operating margin for second quarter 2008 of 5.6%
as compared to 5.5% for second quarter 2007.
Investments and Other Segment
Investments and Other segment operating revenues, primarily rental income,
were $15.1 million for second quarter 2008, a decrease of $600,000 from second
quarter 2007 primarily due to reduced rental income resulting from the sale of
office buildings in early June 2007. Income from operations for second
quarter 2008 was $3.1 million, an increase of $100,000 as compared to second
quarter 2007. Lower operating costs and depreciation expense associated with
the sold properties and other cost improvements during second quarter 2008
more than offset the decrease in rental income associated with the sold
properties.
Other Financial Results
Equity in earnings (losses) of unconsolidated affiliates
The following table summarizes the Company's equity in earnings (losses)
of unconsolidated affiliates:

Three months ended Six months ended
June 30, June 30,
------------------ -----------------
(in millions) 2008 2007 2008 2007
------ ------ ------ ------

BFDS $ 4.7 $ 8.1 $10.6 $16.0
IFDS 4.8 4.0 8.3 9.9
Argus 0.1 0.7 0.4 1.9
Other 2.0 (0.8) 1.0 (2.4)
Asurion 10.5 21.9
------ ------ ------ ------
$11.6 $22.5 $20.3 $47.3
====== ====== ====== ======

Certain of the Company's joint ventures derive investment earnings related
to cash balances maintained on behalf of customers. Average daily balances
invested by the joint ventures were $1.4 billion during the second quarter of
2008 and 2007. Average interest rates earned on the balances declined from
4.94% in second quarter 2007 to 2.09% in second quarter 2008. The net effect
of these fluctuations resulted in an approximate $10.5 million decline in
interest earnings by the joint ventures, which resulted in a decrease of DST's
equity of earnings of unconsolidated affiliates of $3.2 million.
DST's equity in BFDS earnings for second quarter 2008 decreased $3.4
million as compared to second quarter 2007 primarily from lower investment
earnings resulting from lower interest rates on cash balances maintained by
BFDS on behalf of customers and costs associated with a reduction in staffing
levels during second quarter 2008.
DST's equity in IFDS earnings for second quarter 2008 increased $800,000
as compared to second quarter 2007. The increase in equity in earnings is
attributable to increased operating revenues associated with higher shareowner
accounts serviced, partially offset by costs associated with new customer
conversions, higher compensation costs and higher income taxes. Shareowner
accounts serviced by IFDS U.K. were 5.8 million at June 30, 2008, unchanged
from March 31, 2008 and June 30, 2007. Shareowner accounts serviced by IFDS
Canada were 10.7 million at June 30, 2008, a decrease of 200,000 from March
31, 2008 and an increase of 3.3 million accounts from June 30, 2007, primarily
from the January 2008 conversion of a new remote mutual fund client with
approximately 3.2 million accounts.
Equity in earnings of Argus Health Systems for second quarter 2008
decreased $600,000 as compared to second quarter 2007 primarily from lower
investment earnings from lower interest rates on cash balances maintained by
Argus on behalf of customers.
The Other category in the table above includes principally various real
estate joint ventures. The increase in equity in earnings of other
unconsolidated affiliates is due to a gain from early extinguishment of debt
at a real estate joint venture and higher rental revenues and cost
efficiencies on various other real estate ventures.
As previously announced, DST sold the majority of its equity interest in
Asurion on July 3, 2007 and now accounts for this investment under the cost
basis.
Other income, net
Other income was $3.5 million in second quarter 2008, a decrease of $4.2
million as compared to second quarter 2007 primarily due to unrealized losses
on marketable securities designated as trading and higher program fees for the
account receivable securitization program initiated during second quarter
2007.
Interest expense
Interest expense was $13.8 million for second quarter 2008, a decrease of
$5.6 million from second quarter 2007, primarily from lower average interest
rates and lower average debt balances. Costs associated with the accounts
receivable securitization program are included in other income, as mentioned
above.
Income taxes
The Company's tax rate was 36.3% for second quarter 2008 compared to 34.6%
for the second quarter 2007, an increase of 1.7% from 2007 primarily due to a
change in the relative proportions of domestic, international and corporate
joint venture income. The Company expects its tax rate to be approximately
35.5% for the remainder of 2008.
Accounting Standards
Accounting for Convertible Debt Instruments
In May 2008, the FASB issued FASB Staff Position ("FSP") No. APB 14-1,
"Accounting for Convertible Debt Instruments that may be Settled in Cash upon
Conversion (Including Partial Cash Settlement)." This FSP clarifies that
issuers of convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) should separately account for
the liability and equity components in a manner that will reflect the entity's
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. The FSP would be effective for financial statements
issued for fiscal years beginning after December 15, 2008, and early adoption
is not permitted. This FSP would be applied retrospectively to all periods
presented. DST is still evaluating the impact of this FSP and currently
believes that the adoption of this proposed standard would result in higher
interest expense on DST's senior convertible debentures and may cause the
separation of the debt and equity components of the senior convertible
debentures on the Condensed Consolidated Balance Sheet.
Earnings Per Share
The FASB has previously issued an exposure draft on a proposed accounting
standard that would amend SFAS 128, Earnings per Share, to clarify guidance
for mandatorily convertible instruments, the treasury stock method,
contingently issuable shares, and contracts that may be settled in cash or
shares. The final statement has yet to be issued. DST is currently
evaluating the impact of this proposed accounting standard and currently
believes that this proposed amendment would impact the way the Company treats
the 17.1 million incremental shares to be issued from the assumed conversion
of the $840 million of convertible debentures issued in August 2003 in
calculating diluted earnings per share. The proposed amendment would require
the use of the "if-converted" method from the date of issuance of the
convertible debentures. The proposed amendment would remove the ability of a
company to support the presumption that the convertible securities will be
satisfied in cash and not converted into shares of common stock. Under this
"if converted" method, GAAP diluted earnings per share would have been $0.77
and $0.94 (versus GAAP reported earnings of $0.86 and $1.01) for the three
months ended June 30, 2008 and 2007, respectively, and $1.79 and $1.77 (versus
GAAP reported earnings of $2.00 and $1.91) for the six months ended June 30,
2008 and 2007, respectively. The above pro-forma information presents only
the effect on diluted earnings per share of the "if converted" method included
in the exposure draft, but does not include any other computational changes
(e.g., treasury stock method considerations) discussed in the exposure draft.
DST is continuing to monitor the FASB's progress towards finalizing this
proposed accounting standard.
The proposed change in accounting principles would affect the calculation
of diluted earnings per share during the period the debentures are
outstanding, but would not affect DST's ability to ultimately settle the
convertible debentures in cash, shares or any combination thereof.
The information and comments in this press release may include forward-
looking statements respecting DST and its businesses. Such information and
comments are based on DST's views as of today, and actual actions or results
could differ. There could be a number of factors, risks, uncertainties or
contingencies that could affect future actions or results, including but not
limited to those set forth in DST's periodic reports (Form 10-K or 10-Q) filed
from time to time with the Securities and Exchange Commission. All such
factors should be considered in evaluating any forward-looking statements.
The Company will not update any forward-looking statements in this press
release to reflect future events.

DST SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(Unaudited)

Three months ended Six months ended
June 30, June 30,
---------------- ----------------
2008 2007 2008 2007
------ ------ ------- ------

Operating revenues $426.6 $417.2 $857.4 $843.4
Out-of-pocket reimbursements 146.3 149.8 303.3 308.9
------ ------ ------- ------
Total revenues 572.9 567.0 1,160.7 1,152.3

Costs and expenses 458.9 445.5 931.7 921.3
Depreciation and amortization 31.0 31.6 61.6 61.5
------ ------ ------- ------

Income from operations 83.0 89.9 167.4 169.5

Interest expense (13.8) (19.4) (26.5) (37.6)
Other income (expense), net (2.5) 13.9 (6.9) 26.7
Equity in earnings of
unconsolidated affiliates 11.6 22.5 20.3 47.3
------ ------ ------- ------

Income before income taxes 78.3 106.9 154.3 205.9
Income taxes 28.4 34.1 32.2 67.7
------ ------ ------- ------

Net income $49.9 $72.8 $122.1 $138.2
====== ====== ======= ======

Average common shares outstanding 51.6 61.6 53.8 62.4
Average diluted shares outstanding 58.0 71.8 61.1 71.8

Basic earnings per share $0.97 $1.18 $2.27 $2.22
Diluted earnings per share $0.86 $1.01 $2.00 $1.91

DST SYSTEMS, INC.
STATEMENT OF REVENUES BY SEGMENT
(In millions)
(Unaudited)

Three months ended Six months ended
June 30, June 30,
---------------- ---------------
2008 2007 2008 2007
------ ------ ------ ------
Revenues
Financial Services
Operating $294.5 $280.2 $581.3 $555.7
OOP reimbursements 19.0 15.2 36.8 31.5
------ ------ ------ ------
$313.5 $295.4 $618.1 $587.2
====== ====== ======= ======

Output Solutions
Operating $131.1 $135.8 $273.8 $285.0
OOP reimbursements 127.3 134.5 266.5 277.3
------ ------ ------ ------
$258.4 $270.3 $540.3 $562.3
====== ====== ======= ======

Investments and Other
Operating $ 15.1 $ 15.7 $ 30.1 $ 31.5
OOP reimbursements 0.1 0.1 0.2 0.2
------ ------ ------ ------
$ 15.2 $ 15.8 $ 30.3 $ 31.7
====== ====== ======= ======

Eliminations
Operating $(14.1) $(14.5) $(27.8) $(28.8)
OOP reimbursements (0.1) (0.2) (0.1)
------ ------ ------ ------
$(14.2) $(14.5) $(28.0) $(28.9)
====== ====== ======= ======

Total Revenues
Operating $426.6 $417.2 $857.4 $843.4
OOP reimbursements 146.3 149.8 303.3 308.9
------ ------ ------ ------
$572.9 $567.0 $1,160.7 $1,152.3
====== ====== ======= ======

DST SYSTEMS, INC.
STATEMENT OF INCOME FROM OPERATIONS BY SEGMENT
(In millions)
(Unaudited)

Three months ended Six months ended
June 30, June 30,
---------------- ---------------
2008 2007* 2008 2007*
------ ------ ------ ------
Income (loss) from operations
Financial Services $74.5 $68.9 $143.9 $132.7
Output Solutions 7.4 7.5 21.2 21.6
Investments and Other 3.1 15.4 6.0 18.9
Elimination Adjustments (2.0) (1.9) (3.7) (3.7)
------ ------ ------ ------
$83.0 $89.9 $167.4 $169.5
====== ====== ======= ======

* The historical Output Solutions and Elimination Adjustments Segment
information has been revised to reflect a 2008 change in presentation of
certain cost components of the Output Solutions Segment, as described in the
Output Solutions Segment results above.

DST SYSTEMS, INC.
OTHER SELECTED FINANCIAL INFORMATION
(In millions)
(Unaudited)

June 30, December 31,
Selected Balance Sheet Information 2008 2007
----------- -------------

Cash and cash equivalents $115 $109
Debt 1,417 1,061

Six months ended
June 30,
---------------------
Capital Expenditures, by Segment 2008 2007
------ ------

Financial Services $21 $31
Output Solutions 10 12
Investments and Other 7 7

Segment Information
Three Months Ended June 30, 2008
-------------------------------------------------
Elimin- Consol-
Financial Output Investments/ ation idated
Services Solutions Other Adjustments Total
-------- --------- --------- --------- -------

Operating revenues $292.3 $131.1 $3.2 $ $426.6
Intersegment operating
revenues 2.2 11.9 (14.1)
Out-of-pocket
reimbursements 19.0 127.3 0.1 (0.1) 146.3
-------- --------- --------- --------- -------
Total revenues 313.5 258.4 15.2 (14.2) 572.9

Costs and expenses 218.7 241.5 10.1 (11.4) 458.9
Depreciation and
amortization 20.3 9.5 2.0 (0.8) 31.0
-------- --------- --------- --------- -------

Income from operations 74.5 7.4 3.1 (2.0) 83.0
Other income (expense),
net (2.2) (0.2) (0.1) (2.5)
Equity in earnings of
unconsolidated affiliates 10.0 1.6 11.6
-------- --------- --------- --------- -------

Earnings before interest
and income taxes $82.3 $7.2 $4.6 $(2.0) $92.1
======== ========= ========= ========= =======

Three Months Ended June 30, 2007
-------------------------------------------------
Elimin- Consol-
Financial Output Investments/ ation idated
Services Solutions Other Adjustments Total
-------- --------- --------- --------- -------

Operating revenues $278.2 $135.8 $3.2 $ $417.2
Intersegment operating
revenues 2.0 12.5 (14.5)
Out-of-pocket
reimbursements 15.2 134.5 0.1 149.8
-------- --------- --------- --------- -------
Total revenues 295.4 270.3 15.8 (14.5) 567.0

Costs and expenses 207.3 252.1 (1.9) (12.0) 445.5
Depreciation and
amortization 19.2 10.7 2.3 (0.6) 31.6
-------- --------- --------- --------- -------

Income from operations 68.9 7.5 15.4 (1.9) 89.9
Other income, net 3.3 10.6 13.9
Equity in earnings
(losses) of
unconsolidated affiliates 24.1 (1.6) 22.5
-------- --------- --------- --------- -------

Earnings before interest
and income taxes $96.3 $7.5 $24.4 $(1.9) $126.3
======== ========= ========= ========= =======

Note: The historical Output Solutions and Elimination Adjustments Segment
information has been revised to reflect a 2008 change in presentation of
certain cost components of the Output Solutions Segment, as described in the
Output Solutions Segment results above.

Six Months Ended June 30, 2008
-------------------------------------------------
Elimin- Consol-
Financial Output Investments/ ation idated
Services Solutions Other Adjustments Total
-------- --------- --------- --------- -------

Operating revenues $577.2 $273.8 $6.4 $ $857.4
Intersegment operating
revenues 4.1 23.7 (27.8)
Out-of-pocket
reimbursements 36.8 266.5 0.2 (0.2) 303.3
-------- --------- --------- --------- -------
Total revenues 618.1 540.3 30.3 (28.0) 1,160.7

Costs and expenses 434.0 500.4 20.2 (22.9) 931.7
Depreciation and
amortization 40.2 18.7 4.1 (1.4) 61.6
-------- --------- --------- --------- -------

Income from operations 143.9 21.2 6.0 (3.7) 167.4
Other income (expense),
net (6.7) (0.4) 0.2 (6.9)
Equity in earnings of
unconsolidated affiliates 19.2 1.1 20.3
-------- --------- --------- --------- -------

Earnings before interest
and income taxes $156.4 $20.8 $7.3 $(3.7) $180.8
======== ========= ========= ========= =======

Six Months Ended June 30, 2007
-------------------------------------------------
Elimin- Consol-
Financial Output Investments/ ation idated
Services Solutions Other Adjustments Total
-------- --------- --------- --------- -------

Operating revenues $551.9 $285.0 $6.5 $ $843.4
Intersegment operating
revenues 3.8 25.0 (28.8)
Out-of-pocket
reimbursements 31.5 277.3 0.2 (0.1) 308.9
-------- --------- --------- --------- -------
Total revenues 587.2 562.3 31.7 (28.9) 1,152.3

Costs and expenses 416.9 520.2 8.1 (23.9) 921.3
Depreciation and
amortization 37.6 20.5 4.7 (1.3) 61.5
-------- --------- --------- --------- -------

Income from operations 132.7 21.6 18.9 (3.7) 169.5
Other income, net 6.5 20.2 26.7
Equity in earnings
(losses) of
unconsolidated affiliates 50.8 (3.5) 47.3
-------- --------- --------- --------- -------

Earnings before interest
and income taxes $190.0 $21.6 $35.6 $(3.7) $243.5
======== ========= ========= ========= =======

Note: The historical Output Solutions and Elimination Adjustments Segment
information has been revised to reflect a 2008 change in presentation of
certain cost components of the Output Solutions Segment, as described in the
Output Solutions Segment results above.

DST Systems, Inc.
Description of Non-GAAP Adjustments

In addition to reporting operating income, pretax income, net income and
earnings per share on a GAAP basis, DST has also made certain non-GAAP
adjustments that are described below and are reconciled to the corresponding
GAAP measures in the attached financial schedules titled "Reconciliation of
Reported Results to Income Adjusted for Certain Non-GAAP Items" that accompany
this earnings release. DST's use of non-GAAP adjustments is further described
in the section entitled "Use of Non-GAAP Financial Information."
The following items, which occurred during the quarter ended June 30,
2008, have been treated as non-GAAP adjustments:
-- Other net losses, in the amount of $6.0 million, associated with
realized and unrealized gains (losses) related to securities and other
investments, which are included in other income (expense), net. The income
tax benefit associated with these losses was approximately $2.2 million.
In addition to the items which occurred in the quarter ended June 30, 2008
as described above, the following items which occurred during the three months
ended March 31, 2008 have been previously reported as non-GAAP adjustments:
-- Other net losses, in the amount of $10.5 million, associated with
realized and unrealized gains (losses) related to securities and other
investments, which are included in other income (expense), net. The income
tax benefit associated with these losses was approximately $4.0 million.
-- An income tax benefit of approximately $23.6 million resulting from a
reduction in the Company's liabilities for FIN 48, "Accounting for Uncertainty
in Income Taxes - an Interpretation of FASB No. 109." The decrease in FIN 48
liabilities is principally related to the resolution of an IRS examination
matter that was resolved in DST's favor.
The following items, which occurred during the quarter ended June 30,
2007, have been treated as non-GAAP adjustments:
-- Merger integration costs incurred with the acquisition of Amisys
Synertech, Inc. ("ASI"), in the amount of $1.5 million, included in Financial
Services costs and expenses. The income tax benefit associated with these
costs was approximately $600,000.
-- Net gain resulting from the sale of office buildings in California, in
the amount of $12.4 million, which is included in Investments and Other as a
reduction to costs and expenses. The income tax expense associated with this
gain was approximately $4.9 million.
-- Other net gains, in the amount of $4.7 million, associated with
realized and unrealized gains (losses) related to securities and other
investments, which are included in other income (expense), net. The income
tax expense associated with these gains was approximately $1.9 million.
-- Non-operating gain resulting principally from the settlement of a
dispute related to a prior business acquisition, in the amount of $1.5
million, which is included in other income (expense), net. The income tax
expense associated with this gain was approximately $600,000.
-- Favorable resolution of an international income tax issue that
resulted in a $3.8 million reduction in income tax expense.
In addition to the items which occurred in the quarter ended June 30, 2007
as described above, the following items which occurred during the three months
ended March 31, 2007 have been previously reported as non-GAAP adjustments:
-- Merger integration costs incurred with the acquisition of ASI, in the
amount of $2.8 million, included in Financial Services costs and expenses.
The income tax benefit associated with these costs was approximately $1.1
million.
-- A contract termination fee, in the amount of $3.1 million, included in
Output Solutions operating revenues. The income tax expense associated with
this income was approximately $1.2 million.
-- Other net gains, in the amount of $3.3 million, associated with
realized and unrealized gains (losses) related to securities and other
investments, which are included in other income (expense), net. The income
tax expense associated with these gains was approximately $1.3 million.
-- A gain related to the recovery in a non-operating Chapter 11
bankruptcy claim of an amount due from a previous client, in the amount of
$1.0 million, included in other income (expense), net. The income tax expense
associated with this gain was approximately $400,000.

DST SYSTEMS, INC.
RECONCILIATION OF REPORTED RESULTS TO INCOME ADJUSTED FOR CERTAIN NON-GAAP
ITEMS
For the Three Months Ended June 30,
(Unaudited - in millions, except per share amounts)

2008
------------------------------------
Operating Pretax Net Diluted
Income Income Income EPS
--------- -------- ------- --------

Reported GAAP income $83.0 $78.3 $49.9 $0.86

Adjusted to remove:

Included in non-operating income:

Net losses on securities and other
investments 6.0 3.8 0.07
--------- -------- ------- --------

Adjusted Non-GAAP income $83.0 $84.3 $53.7 $0.93
========= ======== ======= ========

2007
------------------------------------
Operating Pretax Net Diluted
Income Income Income EPS
--------- -------- ------- --------

Reported GAAP income $89.9 $106.9 $72.8 $1.01

Adjusted to remove:
Included in operating income:

ASI merger integration costs -
Financial Services 1.5 1.5 0.9 0.01
Gain on sale of real property -
Investments and Other (12.4) (12.4) (7.5) (0.11)

Included in non-operating income:

Net gains on securities and other
investments (4.7) (2.8) (0.04)
Favorable settlement of a prior
business acquisition dispute (1.5) (0.9) (0.01)
Favorable income tax resolution (3.8) (0.05)
--------- -------- ------- --------

Adjusted Non-GAAP income $79.0 $89.8 $58.7 $0.81
========= ======== ======= ========

Note: See the Description of Non-GAAP Adjustments section for a
description of each of the above adjustments and see the Use of Non-GAAP
Financial Information section for management's reasons for providing non-GAAP
financial information.

DST SYSTEMS, INC.
RECONCILIATION OF REPORTED RESULTS TO INCOME ADJUSTED FOR CERTAIN NON-
GAAP ITEMS
For the Six Months Ended June 30,
(Unaudited - in millions, except per share amounts)

2008
------------------------------------
Operating Pretax Net Diluted
Income Income Income EPS
--------- -------- ------- --------

Reported GAAP income $167.4 $154.3 $122.1 $2.00

Adjusted to remove:
Included in non-operating income:

Net losses on securities and other
investments 16.5 10.4 0.17
Reduction in FIN 48 liabilities (23.6) (0.39)
--------- -------- ------- --------

Adjusted Non-GAAP income $167.4 $170.8 $108.9 $1.78
========= ======== ======= ========

2007
------------------------------------
Operating Pretax Net Diluted
Income Income Income EPS
--------- -------- ------- --------

Reported GAAP income $169.5 $205.9 $138.2 $1.91

Adjusted to remove:
Included in operating income:

ASI merger integration costs -
Financial Services 4.3 4.3 2.6 0.03
Contract termination fee - Output
Solutions (3.1) (3.1) (1.9) (0.03)
Gain on sale of real property -
Investments and Other (12.4) (12.4) (7.5) (0.11)

Included in non-operating income:

Net gains on securities and other
investments (8.0) (4.8) (0.06)
Favorable settlement of a prior
business acquisition dispute (1.5) (0.9) (0.01)
Recovery of Chapter 11 bankruptcy
claim (1.0) (0.6) (0.01)
Favorable income tax resolution (3.8) (0.05)
--------- -------- ------- --------

Adjusted Non-GAAP income $158.3 $184.2 $121.3 $1.67
========= ======== ======= ========

Note: See the Description of Non-GAAP Adjustments section for a
description of each of the above adjustments and see the Use of Non-GAAP
Financial Information section for management's reasons for providing non-GAAP
financial information.
SOURCE DST Systems, Inc.

Thomas A. McDonnell, President and Chief Executive Officer, +1-816-435-8684,
or Kenneth V. Hager, Vice President and Chief Financial Officer,
+1-816-435-8603, both of DST Systems, Inc.