Equity

Preferred stock

The Company has authorized 10 million shares of preferred stock, of which no shares are currently issued or outstanding. However, 0.1 million shares of preferred stock have been designated as Series A Preferred Stock in connection with the Company's rights agreement, in certain circumstances the terms of which would entitle the holders of the Company's common stock to which the rights are attached to purchase 1/1000ths of a share of Series A Preferred Stock (or in some cases, shares of the Company's common stock, other securities, cash or other assets) at a purchase price of $225 per share, subject to certain adjustments.

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,
	2013		2012		2011
Net income attributable to DST Systems, Inc.	$	352.6	$	324.0	$	183.1

Weighted average common shares outstanding	43.2		44.9		45.7
Incremental shares from restricted stock units, stock options and convertible debentures	0.9		0.9		0.6
Weighted average diluted shares outstanding	44.1		45.8		46.3

Basic earnings per share	$	8.15	$	7.22	$	4.01
Diluted earnings per share	$	8.00	$	7.08	$	3.95

The Company had approximately 41.8 million and 44.3 million shares outstanding at December 31, 2013 and 2012, 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 year ended December 31, 2013 and 0.6 million shares were excluded for the year ended December 31, 2012.

The Company’s Convertible debentures would have had a potentially dilutive effect on the Company’s stock if converted into stock. The calculation of diluted earnings per share has historically included an incremental amount of shares assumed to be issued for the conversion spread when the Company’s average daily stock price exceeded the average accreted bond price per share. For the years ended December 31, 2013 and 2012, the dilutive effect of the Convertible debentures was 0.2 million and 0.1 million shares, respectively. As further described in Note 10 of these financial statements, the Company redeemed for cash the remaining Convertible debentures during the third quarter 2013. Since the Company settled the principal and conversion spread with cash, the redemption did not result in a dilutive effect on earnings per share upon settlement.

Other comprehensive income (loss)

Accumulated other comprehensive income (“AOCI”) balances, net of tax consist of the following (in millions):



	Unrealized Gains on Available-for-Sale Securities			Unrealized Loss on Cash Flow Hedges			Foreign Currency Translation Adjustments			Accumulated Other Comprehensive Income
Balance, December 31, 2011	$	264.1		$	(2.5	)	$	16.2		$	277.8
Net current period other comprehensive income (loss)	(10.4		)	1.1			(11.7		)	(21.0		)
Balance, December 31, 2012	253.7			(1.4		)	4.5			256.8
Net current period other comprehensive income	47.1			0.9			3.4			51.4
Balance, December 31, 2013	$	300.8		$	(0.5	)	$	7.9		$	308.2

Additions to and reclassifications out of Accumulated other comprehensive income attributable to the Company (in millions):



	Year Ended December 31,
	2013						2012						2011
	Pretax			Net of Tax			Pretax			Net of Tax			Pretax			Net of Tax
Available-for-sale securities:
Unrealized gains (losses) on available-for-sale securities	$	267.6		$	164.1		$	122.3		$	78.5		$	(103.3	)	$	(63.1	)
Reclassification of gains into net earnings on available-for-sale securities (1)	(191.6		)	(117.0		)	(145.7		)	(88.9		)	(18.0		)	(11.0		)
Net change in available-for-sale securities	76.0			47.1			(23.4		)	(10.4		)	(121.3		)	(74.1		)
Cash flow hedges:
Unrealized gains (losses) on cash flow hedges	(1.2		)	(1.0		)	(0.8		)	(0.5		)	0.7			0.4
Reclassification of losses into net earnings on foreign currency cash flow hedges (2)	0.4			0.4			—			—			—			—
Reclassification of losses into net earnings on interest rate cash flow hedges (3)	2.5			1.5			2.8			1.6			—			—
Net change in cash flow hedges	1.7			0.9			2.0			1.1			0.7			0.4
Proportional share of unconsolidated affiliates OCI:
Reclassification of losses into net earnings (4)	—			—			—			—			2.0			1.2
Cumulative translation adjustments	3.4			3.4			(20.1		)	(11.7		)	(1.1		)	(1.0		)
Total other comprehensive income (loss)	$	81.1		$	51.4		$	(41.5	)	$	(21.0	)	$	(119.7	)	$	(73.5	)

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(1) Realized (gains)/losses on available for sale securities are recognized in Other income, net.

(2) Reclassification to net earnings of derivatives qualifying as effective foreign currency cash flow hedges are recognized in Costs and expenses.

(3) Reclassification to net earnings of derivatives qualifying as effective interest rate cash flow hedges are recognized in Interest expense.

(4) Reclassification to net earnings of the Company's proportionate share of unconsolidated affiliates other comprehensive income are recognized in Equity in earnings.

One of DST's unconsolidated affiliates had an interest rate swap liability with a fair market value of $45.5 million, $73.5 million and $73.0 million at December 31, 2013, 2012 and 2011, respectively. DST's 50% proportionate share of this interest rate swap liability was $22.8 million, $36.8 million and $36.5 million at December 31, 2013, 2012 and 2011, respectively. The Company records in investments and AOCI its proportionate share of this liability in an amount not to exceed the carrying value of its investment in this unconsolidated affiliate. Because the carrying value of this unconsolidated affiliate investment balance was zero at both December 31, 2013 and 2012, no interest rate swap liability or change in AOCI was recorded.

Stock repurchases

On January 30, 2013, the Board of Directors authorized a $250.0 million share repurchase plan, which replaced the Company's existing share repurchase plan, under which DST had 715,700 shares remaining as of that date. During 2013, the Company spent $252.6 million to repurchase approximately 3.4 million shares of which $2.6 million was under the previous share repurchase plan which was replaced in January 2013. The remaining $250.0 million that was repurchased in 2013 fully utilized the existing share repurchase plan. Under the previous share repurchase plans, the Company expended $73.7 million for approximately 1.3 million shares and $135.4 million for approximately 3.0 million shares during the years ended December 31, 2012 and 2011, respectively. On January 29, 2014, the Board of Directors authorized a new $250.0 million share repurchase plan, which allows, but does not require, the repurchase of common stock in open market and private transactions.

Shares received in exchange for tax withholding obligations and payment of the exercise price arising from the exercise of options to purchase the Company's 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 $23.8 million, $30.8 million and $39.3 million during the years ended December 31, 2013, 2012 and 2011, respectively.

The Company had 53.5 million and 51.0 million shares of common stock held in treasury at December 31, 2013 and 2012, respectively.

Dividends

In 2013, 2012 and 2011, DST paid cash dividends of $1.20 per common share, $0.80 per common share, and $0.70 per common share, respectively. The total dividends paid for the years ended December 31, 2013, 2012 and 2011 were $52.6 million, $37.6 million and $31.6 million, respectively. The cash paid for dividends in 2013, 2012 and 2011 was $51.8 million, $36.0 million, $31.6 million, respectively. The remaining amount of the dividends represent dividend equivalent shares of restricted stock units in lieu of the cash dividend.

On January 29, 2014, the Board of Directors of DST declared a quarterly cash dividend of $0.30 per share on its common stock, payable on March 14, 2014, to shareholders of record at the close of business on February 28, 2014.

Share-based compensation

The DST Systems, Inc. 2005 Equity Incentive Plan (the “Employee Plan”) and the DST Systems, Inc. 2005 Non-Employee Directors' Award Plan (the “Directors' Plan”) became effective on May 10, 2005. The term of both the Employee Plan and the Directors' Plan is from May 10, 2005 through May 9, 2015. The Company has outstanding share awards (primarily in the form of stock options and restricted stock) under each of these plans. Both of these share-based compensation plans have been approved by the Company's Board of Directors and shareholders.

The Consolidated Statement of Income for the years ended December 31, 2013, 2012 and 2011 reflects share-based compensation costs of $16.9 million, $25.5 million and $20.5 million, respectively. The total tax benefits recognized in earnings from share-based compensation arrangements for the years ended December 31, 2013, 2012 and 2011, was approximately $6.6 million, $9.9 million and $8.0 million, respectively. Excess tax benefits of $11.4 million, $5.5 million and $1.4 million were classified as financing cash inflows during the years ended December 31, 2013, 2012 and 2011, respectively. Cash proceeds from options exercised for the years ended December 31, 2013, 2012 and 2011 were $30.6 million, $61.9 million and $64.8 million, respectively. The Company generally issues shares out of treasury to satisfy stock option exercises.

The Employee Plan amends, restates and renames the DST Systems, Inc. 1995 Stock Option and Performance Award Plan (“1995 Plan”). The number of shares of common stock reserved for delivery under the Employee Plan is the sum of (a) 4.0 million shares, plus (b) the number of shares remaining under the 1995 Plan (originally 30 million shares available) as of May 10, 2005 (not subject to outstanding Awards under the 1995 Plan and not delivered out of the Shares reserved thereunder), plus (c) shares that become available under the 1995 Plan after May 10, 2005 pursuant to forfeiture, termination, lapse or satisfaction of an award in cash or property other than shares of common stock, application as payment for an award, or, except with respect to restricted stock, to satisfy tax withholding, plus (d) any shares of common stock required to satisfy substitute awards. As of December 31, 2013, approximately 5.8 million shares were available under the Employee Plan. The Employee Plan provides for the availability of shares of the Company's common stock for the grant of awards to employees, prospective employees and consultants to the Company or an affiliate. Awards under the Employee Plan may take the form of shares, dividend equivalents, options, stock appreciation rights, limited stock appreciation rights, performance units, restricted stock, restricted stock units, deferred stock, annual incentive awards, service awards and substitute awards (each as defined in the plan).

The Directors' Plan replaced the component of the 1995 Plan that provided for equity awards to directors who are not employees of DST or any affiliate. Subject to adjustment, as provided in the Directors' Plan, the number of shares of common stock reserved for delivery under this plan is the sum of (a) 300,000 shares plus (b) any shares of common stock required to satisfy substitute awards, as defined in the Directors' Plan. As of December 31, 2013, 156,015 shares were available under the Directors' Plan. Awards under the Directors' Plan may take the form of shares, dividend equivalents, options, restricted stock, restricted stock units, deferred stock and substitute awards (each as defined in the plan).

Vesting terms for options granted under the Employee Plan and the Director Plan differ based on the grant made. Options vest and generally become fully exercisable over three years of continued employment, depending upon the grant type.

The Black-Scholes option valuation model was used in estimating the fair value of options granted. Option valuation models require the input of somewhat subjective assumptions, including expected stock price volatility. The Company estimates expected stock price volatility via observations of the historical (generally the last three years) volatility trends. In determining the expected life of the option grants, the Company applied the simplified method, which uses the weighted average of the vesting period and contractual term of each option granted. The risk-free interest rates used were actual U.S. Government zero-coupon rates for bonds matching the expected term of the option as of the option grant date.

The fair value of each option grant is estimated on the date of grant using a Black-Scholes option pricing model. The following table provides the ranges of assumptions and weighted-average assumptions used for grants made under the option plans during 2012 and 2011, as well as the range of fair values and weighted-average fair value of options granted. There were no option grants made during 2013.



	Year Ended December 31,
		2012	2011
Weighted average risk free interest rate		0.89%	1.25%
Range of risk free interest rates		0.8% - 1.15%	1.25%
Weighted average expected life of option (years)		6.0	6.0
Range of expected life of option (years)		6.0	6.0
Weighted average expected stock volatility		26.63%	30.75%
Range of expected stock volatilities		25.11% - 30.75%	30.75%
Weighted average expected dividend yield		1.95%	2.21%
Range of expected dividend yields		1.87% - 1.99%	2.21%
Weighted average stock option fair value		$11.11	$11.38
Range of stock option fair values		$10.73 - $12.97	$11.38

Summary stock option activity is presented in the table below (shares in millions):



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in millions)
Outstanding at December 31, 2010	5.1		$	41.39
Granted	0.8		47.51
Exercised	(1.5	)	41.15			$	13.2
Cancelled	(0.6	)	56.84
Outstanding at December 31, 2011	3.8		40.42
Granted	0.1		53.77
Exercised	(1.8	)	35.58			32.9
Cancelled	(0.4	)	44.68
Outstanding at December 31, 2012	1.7		45.08
Granted	—		—
Exercised	(0.7	)	43.56			20.7
Cancelled	—		—
Outstanding at December 31, 2013	1.0		46.03		7.0
Exercisable at December 31, 2013	0.7		45.32		6.8

The total aggregate intrinsic values of options exercised for all plans during the years ended December 31, 2013, 2012 and 2011 was $20.7 million, $32.9 million and $13.2 million, respectively.

Grants of restricted stock may consist of restricted stock awards (“RSAs”) or restricted stock units (“RSUs”). Grants of restricted stock are valued at the date of grant based on the value of DST's common stock and are expensed using the straight-line method over the service period or, in the case of performance based vesting awards, over the expected period to achieve the required performance criteria. Except for restrictions placed on the transferability of the restricted stock, holders of RSAs have full stockholders rights during the term of restriction, including voting rights and the right to receive cash dividends, if any. In 2010, the Company began issuing RSUs which 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. Unvested shares of restricted stock or RSUs may be forfeited upon termination of employment with the Company depending on the circumstances of the termination, or failure to achieve the required performance condition.

Included in the non-vested shares of outstanding RSUs at December 31, 2013 are approximately 0.3 million of restricted shares granted that contain both service and performance features (based on the achievement of certain operating performance measures). In addition, the non-vested shares of RSUs at December 31, 2013 contain 0.1 million of performance stock units (“PSUs”). Management judgment is required to estimate amortization expense during the service period associated with both PSUs and RSUs containing performance features. The Company will continue to monitor and evaluate its assumptions for its performance-based awards and PSUs over the applicable performance periods for these awards. During 2012, a portion of its U.K. performance-based equity awards were determined to be unlikely to achieve the required performance criteria applicable to these awards resulting in a reversal of total accumulated amortization of $2.5 million related to these awards.

Summary restricted stock activity is presented in the table below (shares in millions):



	Shares		Weighted Average Grant Date Fair Value
Non-vested at December 31, 2010	0.6		$	53.17
Granted	0.6		47.94
Non-vested at December 31, 2011	1.2		50.62
Granted	0.1		44.39
Vested	(0.2	)	52.89
Forfeited	(0.1	)	47.09
Non-vested at December 31, 2012	1.0		48.52
Granted	0.4		67.65
Vested	(0.7	)	42.34
Forfeited	(0.1	)	71.16
Non-vested at December 31, 2013	0.6		$	62.19

The fair values of RSAs and RSUs which vested during the years ended December 31, 2013, 2012 and 2011 was $31.5 million, $11.5 million and $2.1 million, respectively.

At December 31, 2013, the Company had $21.3 million of total unrecognized compensation expense (included in Additional paid-in capital on the Consolidated Balance Sheet) related to its share-based compensation arrangements, net of estimated forfeitures. The Company estimates that the amortized compensation expense attributable to the stock option and restricted stock grants will be approximately $10.1 million for 2014, $7.2 million for 2015, and $1.0 million in 2016, based on awards currently outstanding. Future amortization is not projected on approximately $3.0 million of unrecognized compensation expense as the related awards are not currently expected to achieve their required performance features and therefore are not expected to vest.

Stock purchase plans

The 2000 DST Systems, Inc. Employee Stock Purchase Plan (“ESPP”) provides the right to subscribe to 2.0 million shares of common stock to substantially all employees of the Company and participating subsidiaries, except those whose customary employment is less than 20 hours per week or is five months or less per calendar year, or those who are 5% or greater stockholders of DST. The purchase price for shares under any stock offering is to be 85% of the average market price on either the exercise date or the offering date, whichever is lower. At December 31, 2013, there were approximately 0.6 million shares available for future offerings. This ESPP plan was suspended effective January 1, 2006.

Rights plan

The Company is party to a Stockholders' Rights Agreement dated as of October 10, 2005, which was amended and restated on August 5, 2011 (the “Rights Plan”). By its terms, the Rights Plan will expire on October 10, 2015. Pursuant to the terms of the Rights Plan, each share of the Company's outstanding common stock has received one Right (as defined in the Rights Plan). Each Right entitles the registered holder to purchase from the Company 1/1000ths of a share of Series A Preferred Stock, or in some circumstances, shares of the Company's Common Stock, other securities, cash or other assets, at a purchase price of $225 per share, subject to certain adjustments. In the event a person or group becomes an Acquiring Person (as defined in the Rights Plan), the Rights will entitle each holder of a Right to purchase, for the purchase price, that number of common shares equivalent to the number of common shares which at the time of the transaction would have a market value of twice the purchase price. Any Rights that are at any time beneficially owned by an Acquiring Person (as defined in the Rights Plan) will be null and void and nontransferable and any holder of any such Right will be unable to exercise or transfer any such Right. At any time after any person or group becomes an Acquiring Person, but before a person or group becomes the beneficial owner of more than 50% of the common shares, the Board of Directors may elect to exchange each Right for consideration per Right consisting of one-half of the number of common shares that would be issuable at such time on the exercise of one Right and without payment of the purchase price. Under certain circumstances, the Company may redeem the rights in whole, but not in part, at a redemption price of $0.0025 per Right.

The Rights, which are automatically attached to common stock, are not exercisable or transferable separately from shares of common stock until upon the earlier of (i) ten (10) business days following a public announcement that a person or group of affiliated or associated persons, together with any person acting in concert therewith, has acquired beneficial ownership of fifteen percent (15%) or more of the then outstanding shares of Common Stock (as defined in greater detail in the Rights Plan); or (ii) ten (10) business days following the commencement of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person (as defined in the Rights Plan), unless the Board of Directors sets a later date in either event.

The Rights Plan is intended to encourage a potential acquiring person to negotiate directly with the Board of Directors, but may have certain anti-takeover effects. The Rights Plan could significantly dilute the interests in the Company of an Acquiring Person. The Rights Plan may therefore have the effect of delaying, deterring or preventing a change in control of the Company.

Non-controlling interest

As a result of the acquisition of dsicmm on July 30, 2010, the Company's Output U.K. subsidiary had a non-controlling investor group which initially owned approximately 29.5% of Output U.K. The exchange of a non-controlling interest in Output U.K. for a controlling interest in dsicmm was initially recorded at $22.2 million. In November 2011, the non-controlling investor group's ownership decreased to 27.3%, resulting from the contractual cancellation of shares associated with a provision in the acquisition agreement. The amount included in Equity on the Consolidated Balance Sheet at December 31, 2011 associated with the non-controlling interest was $15.7 million. In January 2012, DST repurchased the remaining shares held by the non-controlling investor group for $17.7 million, making Output U.K. a wholly-owned subsidiary. The $2.0 million difference between the amount paid and the amount recorded as Non-controlling interest was recorded in Additional paid-in capital in the Consolidated Balance Sheet. During the year ended December 31, 2011, the net losses attributable to the Output U.K. non-controlling interest were $4.9 million.