10-K 1 dst10k2014.htm 10-K DST 10K 2014
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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-14036

DST Systems, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
43-1581814
(I.R.S. Employer
identification no.)
 
 
 
333 West 11th Street, Kansas City, Missouri
(Address of principal executive offices)
 
64105
(Zip code)
(816) 435-1000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each Exchange on which registered
Common Stock, $0.01 Per Share Par Value
 
New York Stock Exchange
Preferred Stock Purchase Rights
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x    NO ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨    NO x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x    NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web-site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x    NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 (Do not check if a
smaller reporting company)
 
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨    NO x
Aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant as of June 30, 2014:
Common Stock, $0.01 par value—$3,582,472,593
Number of shares outstanding of the Registrant’s common stock as of January 31, 2015:
Common Stock, $0.01 par value—37,103,728
Documents incorporated by reference: Proxy Statement for the annual meeting of stockholders on May 12, 2015 (Part III)




DST Systems, Inc.
2014 Form 10-K Annual Report
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The brand, service or product names or marks referred to in this Annual Report are trademarks or services marks, registered or otherwise, of DST Systems, Inc. or its subsidiaries or affiliates or of vendors to the Company.

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CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING COMMENTS
The discussions set forth in this Annual Report on Form 10-K contain statements concerning potential future events. Such forward-looking statements are based upon assumptions by the Company’s management, as of the date of this Annual Report, including assumptions about risks and uncertainties faced by the Company. In addition, management may make forward-looking statements orally or in other writings, including, but not limited to, in press releases, in the Annual Report and in the Company’s other filings with the Securities and Exchange Commission (the “SEC”). Readers can identify these forward-looking statements by the use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. If any of management’s assumptions prove incorrect or should unanticipated circumstances arise, the Company’s actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in Item 1A, Risk Factors of this Form 10-K. Readers are strongly encouraged to consider those factors when evaluating any forward-looking statements concerning the Company. The Company undertakes no obligation to update any forward-looking statement in this Annual Report to reflect future events or developments.
PART I
Item 1.    Business
DST Systems, Inc. is a global provider of technology-based information processing and servicing solutions. References below to “DST”, “the Company,” “we,” “us” and “our” may refer to DST Systems, Inc. exclusively or to one or more of our subsidiaries. We provide business solutions through a unique blend of industry knowledge and experience, technological expertise and service excellence to clients in the asset management, brokerage, retirement, healthcare and other markets. The Company was originally established in 1969. Through a reorganization in August 1995, we are now a corporation organized in the State of Delaware.
NARRATIVE DESCRIPTION OF BUSINESS
DST uses our proprietary software applications to provide sophisticated information processing and servicing solutions through strategically unified data management, business processing and customer communications solutions to clients globally within the asset management, brokerage, retirement and healthcare markets. Our wholly-owned data centers provide the secure technology infrastructure support necessary to support our solutions offerings.
We manage our business through three operating segments, Financial Services, Healthcare Services and Customer Communications. Our investments in equity securities, private equity investments, real estate and certain financial interests have been aggregated into an Investments and Other segment. During 2014, we sold our wholly-owned United Kingdom (“U.K.”) subsidiary, DST Global Solutions Limited, and certain related affiliates (together, “Global Solutions”). Global Solutions provides post-trade, middle-, and back-office investment management software applications, implementation and other professional services.
For the year ended December 31, 2014, DST’s operating revenues were $2,042.0 million. The Financial Services segment contributed 49.2% of consolidated operating revenues (excluding intersegment revenues), followed by the Customer Communications segment with 31.4%, the Healthcare Services segment with 18.7% and the Investments and Other segment with 0.7%.
FINANCIAL SERVICES SEGMENT
Through the Financial Services segment, we provide investor and asset distribution services to companies within the Financial Services industry. Utilizing our proprietary software applications, we provide our customers information processing solutions such as tracking of purchases, redemptions, exchanges and transfers of shares; maintaining investor identification and ownership records; reconciling cash and share activity; processing dividends; reporting sales; performing tax and other compliance functions; and providing information for printing of investor trade confirmations, statements and year-end tax forms.
Services are provided either under a software as a service (“SaaS”) model or on a business process outsourcing (“BPO”) basis either directly by DST or through Boston Financial Data Services, Inc. (“BFDS”), our domestic joint venture with State Street Corporation (“State Street”) utilizing our proprietary software applications, including our TA 2000 and TRAC systems. Our BPO service offerings are enhanced by AWD, our proprietary workflow software, which is also licensed separately to third parties.

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In the United States (“U.S.”), we provide services to mutual funds, brokerage firms, retirement plans and alternative investment funds (such as real estate investment trusts “REITs”). In Australia and the U.K., DST licenses software solutions to funds and fund managers, who perform participant accounting and recordkeeping for the wealth management and retirement savings market. We also provide investor services on a SaaS and BPO basis internationally (U.K., Canada, Ireland and Luxembourg) solely through International Financial Data Services, U.K. (“IFDS U.K.”) and International Financial Data Services, L.P. (“IFDS L.P.”), (collectively, “IFDS”), which are joint ventures with State Street.
Accounts serviced under shareowner recordkeeping arrangements with the mutual fund and alternative investment sponsors are referred to as “registered accounts.” Registered accounts include both tax-advantaged and non tax-advantaged accounts on the books of the transfer agent. We also contract directly with broker/dealers to manage brokerage subaccounts.
Through ALPS Holdings, Inc. (“ALPS”), a wholly-owned subsidiary, we are also a provider of a comprehensive suite of asset servicing, asset gathering and distribution solutions for open-end mutual funds, closed-end funds, exchange-traded funds and alternative investment funds. Focusing on the needs of small- to medium- sized funds that require a broad set of customizable services, ALPS provides compliance, creative services, medallion distribution, fund administration, fund accounting, legal, tax administration, transfer agency and asset management services. ALPS’ distribution services include marketing and wholesaling services, closed-end funds IPO launch platform services, and proprietary open-end mutual funds, closed-end funds and exchange-traded funds under ALPS Advisors. ALPS’ distribution services range from consulting to active wholesaling and marketing. ALPS provides asset management services through the utilization of sub-advisors and index providers.
For our Australian and U.K. markets, we use our Bluedoor proprietary softwares applications to provide solutions related to participant accounting and recordkeeping for wealth management, “wrap platforms” and retirement savings (“superannuation”) industries/markets. Our primary customers are funds and fund managers.
We offer data analytics and consulting services in both the U.S. and U.K. to help our clients gain actionable insights into the needs and preferences of their customers. We also offer products designed to assist clients in meeting the expanding needs associated with distributing U.S. investment products through financial intermediaries.
Financial Services’ fees are primarily charged to the client based on the number of accounts, participants or transactions processed. For subaccounts, a portion of the services we provide for registered accounts are provided directly by the broker/dealer. As a result, our revenue per account is generally higher for registered accounts than for subaccounts. On a more limited basis, we also generate revenue through asset-based fee arrangements and from investment earnings related to cash balances maintained in our full service transfer agency bank accounts. We typically have multi-year agreements with our clients.
The Financial Services segment’s largest customer accounted for 10.4% of the segment’s operating revenues in 2014 and the five largest Financial Services customers collectively accounted for 29.7% of the segment’s operating revenues in 2014. Financial Services’ customers include our joint ventures, BFDS (the segment’s second largest customer) and IFDS (the segment’s fourth largest customer). Collectively, these joint ventures accounted for approximately 12.7% of the segment’s operating revenues in 2014.

Sources of new business for the Financial Services segment include (i) existing clients, particularly with respect to complementary and new products and services, (ii) companies relying on their own in-house capabilities and not using outside vendors, (iii) companies using competitors’ systems, and (iv) new entrants into the markets served by Financial Services. We consider our existing client base to be one of our best sources of new business. We believe that competition in the markets in which the Financial Services segment operates is based largely on price, quality of service, features offered, the ability to handle rapidly changing volumes, product innovation, and responsiveness. Our competitors are primarily financial institutions and in-house systems. Our financial institution competitors may have an advantage because they can take into consideration the value of their clients’ funds on deposit or under management when pricing their services. We believe there is significant competition in our markets and our ability to compete effectively is dependent in part on access to capital.
HEALTHCARE SERVICES SEGMENT
The Healthcare Services segment uses our proprietary software applications to provide healthcare organizations a variety of medical and pharmacy benefit solutions to satisfy their information processing, quality of care, cost management and payment integrity needs. Our healthcare solutions include claims adjudication, benefit management, care management, business intelligence and other ancillary services. The Healthcare Services segment’s five largest customers accounted for 49.3% of segment operating revenues in 2014, including 17.1% from its largest customer. During 2013, one of our top five customers notified us that it would not renew its contract with us. Effective January 2015, this customer deconverted approximately 40% of their business with us. The remainder of the deconversion is expected to occur in stages over the next two years.

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Pharmacy Claim Solutions
Our pharmacy solution provider, Argus Health Systems, Inc. (“Argus”), uses our proprietary software applications to provide pharmacy health management solutions supporting commercial, Medicaid and Medicare Part D plans. These services include pharmacy and member reimbursements, call center, pharmacy network management, clinical programs and information services, member correspondence, and rebate processing. RxNova, our proprietary claims processing system, is a highly scalable and comprehensive system for the administration of pharmacy benefits, prescription claims adjudication, eligibility, pharmacy management, and related activities. This benefit management solution provides substantial flexibility to accommodate varying provider requirements, allows point-of-sale monitoring, and control of pharmacy plan benefits with on-line benefit authorization.
We generally derive revenue from our pharmacy-solutions business on a transactional fee basis. Fees are earned on pharmacy claims processing and payments services, pharmacy and member call center services, pharmaceutical rebate administration, administration or management of clinical programs, pharmacy network management, member and plan web services and management information and reporting.
Our pharmacy claims processing services and pharmacy health management solutions customers primarily consist of managed care organizations. Pharmacy claims processing services compete with other third-party providers, including companies that perform their services in-house with licensed or internally developed systems and processes. We believe that we compete effectively in the market due to our ongoing investment in our products and the development of new products to meet the evolving business requirements of our customers.
Medical Claim Solutions
Our medical claims benefit manager, DST Health Solutions, LLC (“DSTHS”), uses our proprietary and third-party software applications to provide claim administration services, integrated care management applications, professional services and payment integrity services for payers and providers in the domestic healthcare industry.  Medical claim processing services are offered on a software license, SaaS or BPO basis. Our solutions are offered as stand-alone component solutions to complement health plans, existing operations or systems, or as an integrated core administration package of solutions.
Claims administration services include claims processing, benefit plan management, eligibility and enrollment management, mail receipt and processing, imaging/data capture and retention, fulfillment, utilization management, case management and customer service.
Our Integrated Care Management solution is a real-time, intuitive, workflow driven solution suite that assists customers to improve member outcomes and manage costs. In addition to our proprietary systems, we are the exclusive distributor of Johns Hopkins’ Adjusted Clinical Groups (“ACG”), a patient classification system developed by Johns Hopkins University. The ACG System is a software tool that provides health plans the ability to easily identify their at-risk population and stratify them into the optimal care management program for both the member’s needs and the health plan’s goals for that member.
Professional services include business and industry consulting, risk adjustment, compliance and regulatory consulting, healthcare quality management, medical management, managed information technology, software engineering, operations process engineering and management consulting.
Payment integrity services include retrospective review of claims submissions that accurately capture members’ health status through proper hierarchical condition categories.
Medical claim processing revenues are generally derived from fees charged based on a per member/per month basis and transactional basis. We also realize revenue from fixed-fee license agreements that include provisions for ongoing support and maintenance and for additional license payments in the event that usage or members increase. Additionally, we derive professional service revenues from fees for implementation services, custom programming and data center operations.
Our medical claims solutions are marketed to health insurance companies, health plans, benefits administrators, private physician practices and hospital-based physician groups. Customers include managed care organizations, preferred provider organizations, third-party administrators, dental, vision, and behavioral health organizations operating commercial and government sponsored programs such as the Health Insurance Exchanges that operate under the Affordable Care Act, Medicare Advantage, Medicare Part D and Medicaid.
Our competitors’ medical claim solutions are primarily based on complete replacement of a payer’s core system. We believe that a component application approach shifts the focus away from core application replacement to one in which clients have more alternatives for modernization of the business operation. With a component approach, health payer clients can still choose core application replacement if warranted, or adopt component applications that address only those areas of the business that

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offer the most opportunity of improvement for the customer, resulting in protection of the client’s current IT investment and reduced disruption to its business operation.
CUSTOMER COMMUNICATIONS SEGMENT
Within our Customer Communications segment, we offer a full range of integrated print, mail, and electronic solutions to companies in the U.S., Canada and the U.K. We use proprietary and third-party software applications to provide the formatting, printing, mailing, electronic presentment and archiving for a company’s individualized communications.
In North America we provide digital print, electronic solutions, direct marketing, and fulfillment services directly to clients and through relationships in which our services are combined with, or offered concurrently through, providers of data processing services. We produce customized communications for our client’s customers such as investment fund statements, explanation of health benefit statements, and monthly utility bills. We also provide participant enrollment communications; compliance solutions, including compliance document delivery; and archival and retrieval solutions. Our electronic and mobile communications offerings also enable clients to connect with customers digitally using the same data stream as used for print.
As one of the largest First-Class mailers in the U.S., we also provide a range of postal services to help clients optimize mail efficiencies and control postage expenses. Our North America business has three primary operating facilities in the U.S. and one in Canada, and is among the largest users of continuous, high-speed, full-color inkjet printing.
Our U.K. business is oriented to data driven marketing communication. The services and products offer integrated communications through print and e-solutions. In the U.K., we have five production facilities to deliver a range of output types, including offset litho printing, high-quality digital laser printing, and inkjet printing.
Revenues in this segment are derived from presentation and delivery (either print or digital), mailing fees and archiving of customer documents. Results generally are based on the number of images processed or packages processed and the range of customization and personalization options chosen by the client.
Approximately half of the services provided by this segment are for customers in the financial services and healthcare industries, including clients within our Financial Services and Healthcare Services segments. Additionally, services are provided to the retail banking, insurance, consumer finance, video/broadband, telecommunications, utilities, retail and other service industries. The Customer Communications segment’s five largest clients accounted for 21.5% of segment operating revenues in 2014, including 10.2% from its largest client. In North America, the service arrangements we negotiate with Customer Communications segment clients are typically multi-year agreements. In the U.K., contracts are generally short-term in nature.
In North America, the most significant competitors for print, mail and electronic delivery of transactional, marketing and compliance documents are (i) those companies that provide these services on an in-house basis, (ii) local companies in the cities where the segment’s printing operations are located and (iii) national competitors. The key competitive factors for the Customer Communications segment in North America are the ability to offer (i) single-source print and electronic transactional, marketing and compliance customer communication solutions, (ii) postage capabilities allowing more efficient delivery and potential cost savings, (iii) the range of customization options available for personalizing communications and their ease of application, (iv) the quality and speed of services provided, (v) the multi-channel delivery capability based on customer preference, (vi) the quality of customer support and (vii) the ability to handle large volumes efficiently and cost effectively. In the U.K., the market remains competitive with a mature print management model, a smaller number of multi-site print providers and smaller competitors operating in niches.
INVESTMENTS AND OTHER SEGMENT
The Investments and Other segment is comprised of our investments in equity securities, private equity investments, real estate and other financial interests. The assets held are primarily passive in nature.
The Investments and Other segment holds investments in available-for-sale equity securities with a market value of approximately $471.6 million, including approximately 4.5 million shares of State Street Corporation (“State Street”) with a market value of $350.7 million based on closing exchange values at December 31, 2014.
We own and operate real estate mostly in North America and the U.K., primarily for lease to our other business segments. We also own partnership interests in certain real estate joint ventures that lease office space to us, certain of our unconsolidated affiliates and unrelated third parties. We also own a number of parking facilities, various developed and undeveloped properties and an underground storage facility.

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The following table summarizes the square footage of U.S. real estate facilities wholly-owned by DST or owned through unconsolidated affiliates of DST as of December 31, 2014 (in millions):
 
DST wholly-owned (1)
 
Joint venture-owned (1)
Occupied by DST and related affiliates
1.7

 
0.5

Occupied by third parties and vacant
0.9

(2) 
2.3

Total
2.6

 
2.8

_______________________________________________________________________
(1)
Amounts exclude square footage of wholly-owned data centers and related property and a joint venture-owned 1,000 room convention hotel.
(2)
Includes 0.5 million square feet of an underground storage facility which is located below one of our data centers.
We consider our data centers and surrounding property to be specialized operational assets and do not consider them to be real estate assets. Therefore, our data centers are not included in our real estate operations, but rather in the Financial Services segment.
SOFTWARE DEVELOPMENT AND MAINTENANCE
DST’s software development and maintenance efforts are focused on introducing new products and services, as well as enhancing our existing products and services. The software development, maintenance and enhancements costs, including capitalized software development costs, were $150.4 million, $152.1 million and $159.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.
INTELLECTUAL PROPERTY
We hold U.S. patents, U.S. copyrights and trademarks covering various aspects of the information processing and computer software services and products provided by the Financial Services and Healthcare Services segments and the statement and mail processing services and technology provided by the Customer Communications segment. The duration of the patent term is generally 20 years from its earliest application filing date. The patent term is not renewable. The durations of the copyrights depend on a number of factors, such as who created the work and whether he or she was employed by us at the time. The trademark rights generally will continue for as long as we maintain usage of the trademarks. We believe our copyrights are adequate to protect our original works of authorship. We believe that although the patents, trademarks and copyrights related to the segments are valuable, our success primarily depends upon our product and service quality, marketing and service skills. Despite patent, trademark and copyright protection, we may be vulnerable to competitors who attempt to imitate our systems or processes. In addition, other companies and inventors may receive patents that contain claims applicable to our systems and processes.
EMPLOYEES
The following table summarizes the number of our employees, as well as the number of employees at our significant unconsolidated affiliates, as of December 31, 2014:
 
U.S.
 
International
 
Total
Financial Services segment
3,800

 
2,700

 
6,500

Healthcare Services segment
2,200

 

 
2,200

Customer Communications segment
2,600

 
1,600

 
4,200

Investments and Other segment
25

 

 
25

Total, excluding unconsolidated affiliates
8,625

 
4,300

 
12,925

Unconsolidated affiliates
2,100

 
5,500

 
7,600

Total, including unconsolidated affiliates
10,725

 
9,800

 
20,525

Except for certain employees of DST Output (Nottingham) Limited, a U.K. subsidiary reported in the Customer Communications segment, none of our employees are represented by a labor union or covered by a collective bargaining agreement. We consider our employee relations to be good.

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SEGMENT, GEOGRAPHIC AREA AND OTHER FINANCIAL INFORMATION
This discussion of the business of DST Systems, Inc. should be read in conjunction with, and is qualified by reference to, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) under Item 7 herein. In addition, pursuant to Rule 12b-23 under the Securities Exchange Act of 1934, as amended, the information set forth in the first paragraph and under the headings “Introduction” and “Seasonality” in the MD&A and the segment and geographic information included in Item 8, Note 17 are incorporated herein by reference in partial response to this Item 1.
AVAILABLE INFORMATION
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports will be made available free of charge on or through our Internet website (www.dstsystems.com) as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. In addition, our corporate governance guidelines and the charters of the Audit Committee, the Corporate Governance/Nominating Committee, Compensation Committee and Finance Committee of the DST Board of Directors are available in the “Investor Center” on our Internet website. These guidelines and charters are available in print to any stockholder who requests them. Written requests may be made to the DST Corporate Secretary, 333 West 11th Street, Kansas City, Missouri 64105, and oral requests may be made by calling the DST Corporate Secretary’s Office at (816) 435-8655. An individual may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E. Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Item 1A.    Risk Factors
COMPANY-SPECIFIC TRENDS AND RISKS
There are many risks and uncertainties that could affect our future business, financial condition, operating results or share price. Many of these are beyond our control. A description follows of some of the important factors that could have a material negative impact on our future business, operating and financial results, cash flows, financial condition, prospects or share price. This discussion includes a number of forward-looking statements. You should refer to the description of the qualifications and limitations on forward-looking statements in the first paragraph under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2014.
Unless otherwise indicated or the context otherwise requires, reference in this section to “we,” “ours,” “us” or similar terms means the Company, together with our subsidiaries. The level of importance of each of the following trends and risks may vary from time to time, and the trends and risks are not listed in any specific order of importance. These risks are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, operating results or share price.
Trends or events affecting our clients or their industries could decrease the demand for our products and services and the loss of, reduction of business with, or less favorable terms with any of our significant customers could materially harm our business and results of operations.
We derive our revenues from the delivery of products and services to clients in the mutual fund, brokerage, investment management, healthcare, telecommunications, video and utilities, other financial service (i.e. insurance, banking and financial planning) and other industries. Demand for our products and services among companies in those industries could decline for many reasons. If demand for our products decreases or any of the industries we serve decline or fail or consolidate, reducing the number of potential clients, our business and our operating results could be adversely affected.
On a consolidated basis, for the year ended December 31, 2014, our five largest customers (excluding Boston Financial Data Services, our 50%-owned joint venture with State Street) accounted for approximately 17% of our consolidated operating revenues. For the same period, the Healthcare Services segment’s five largest customers accounted for approximately 49% of our revenue in that segment, including 17.1% from its largest customer. Because of our significant customer concentration, particularly in the Healthcare Services segment, our revenue could fluctuate significantly due to changes in economic conditions, the use of competitive products, or the loss of, reduction of business with, or less favorable terms with any of our significant customers, and a delay or default in payment by any significant customer could materially harm our business and results of operations.
Events that adversely affect our clients’ businesses, rates of growth or numbers of customers they serve could decrease demand for our products and services and the number of transactions we process. Events that could adversely affect our clients’

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businesses include decreased demand for our customers’ products and services, adverse conditions in our customers’ markets or adverse economic conditions generally. We may be unsuccessful in predicting the needs of changing industries and whether potential customers will accept our products or services. We also may invest in technology or infrastructure for specific customers and not realize additional revenue from such investments. If trends or events do not occur as we expect, our business could be negatively impacted.
Mergers or acquisitions of or consolidations among our customers could reduce the number of our customers and potential customers. This could adversely affect our revenues even if these events do not reduce the aggregate number of customers or the activities of the consolidated entities. If our customers merge with or are acquired by other entities that are not our customers, or that use fewer of our services, they may discontinue or reduce their use of our services. The adverse effects of consolidation could be greater in sectors that we are particularly dependent upon, such as in the financial services or healthcare services sectors. Any of these developments could materially and adversely affect our business, financial condition, operating results and cash flows.
The Securities and Exchange Commission may issue regulations impacting third-party distributors of mutual funds, which could adversely affect our business.
The SEC may issue regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) or other legislative authority that would require brokers and financial intermediaries that distribute mutual funds to make more detailed fee disclosures at the point-of-sale. Additionally, brokers and financial intermediaries may become subject to new fiduciary standards-of-care that could cause them to alter their methods of distribution. We cannot predict the requirements the SEC may propose and finally adopt. Regulations that would cause current distribution channels or interest in mutual fund investing to change could decrease the number of accounts on our systems as a result of changes in client offerings or the attractiveness of offerings to customers of our clients. This could adversely affect our business and operating results. Additionally, to the extent the Dodd-Frank Act impacts the operations, financial condition, liquidity and capital requirements of unaffiliated financial institutions with whom we transact business, those institutions may seek to pass on increased costs, reduce their capacity to transact, or otherwise present inefficiencies in their interactions with us.
We depend on information technology, and any failures of or damage to, attack on or unauthorized access to our information technology systems could result in significant costs and reputational damage.
We have developed and maintained, and our businesses depend on, information technology infrastructure, including elements both internal and external, to record and process a large volume of complex transactions and other data, including personally identifiable information regarding financial and health matters. In certain circumstances, vendors have access to such data in order to assist us with responsibilities, such as producing benefit plan identification cards, maintaining software we license on our own behalf or resell to others, or helping clients comply with anti-money laundering regulations. A breach of our security systems and procedures or those of our vendors could result in significant data losses or theft of our customers’ or our employees’ intellectual property, proprietary business information or personally identifiable information. In recent years several financial services firms were victims of computer systems hacking attacks, resulting in the disruption of services to clients, loss or misappropriation of sensitive or private data, and reputational harm. Rapid advances in technology, and the limits and costs of technology, skills and manpower, may prevent us from anticipating, identifying, preventing or addressing all potential security threats and breaches. Any interruptions, delays, breakdowns or breach, including as a result of cybersecurity breaches, of our, or of our vendors’, information technology infrastructure, including improper employee actions, could result in the loss of confidential, personal or proprietary information. A cybersecurity breach could negatively affect our reputation as a trusted product and service provider by adversely affecting the market’s perception of the security or reliability of our products or services. In addition, a system breach could result in other negative consequences, including remediation costs, disruption of internal operations, increased cybersecurity protection costs, lost revenues, regulatory penalties, and litigation.
An increase in subaccounting services performed by brokerage firms has and will continue to adversely impact our revenues.
We service mutual fund and other accounts under shareowner recordkeeping arrangements which we refer to as registered accounts. These arrangements are distinguished from broker subaccounts, which are serviced under contract with a broker/dealer. Our clients may adopt the broker subaccount structure. We offer subaccounting services to brokerage firms that perform shareowner subaccounting. As the recordkeeping functions in connection with subaccounting are more limited than traditional shareowner accounting, the fees charged are generally lower on a per unit basis. Brokerage firms that obtain agreements from our clients to use a broker subaccount structure cause accounts currently on our traditional recordkeeping system to convert to our subaccounting system, or to the subaccounting systems of other service providers, which generally results in lower revenues. While subaccounting conversions have generally been limited to our non tax-advantaged mutual fund accounts, such conversions have begun to extend to the tax-advantaged accounts (such as retirement and Section 529 accounts) we service, which could adversely affect our business and operating results.

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The demand for our products and services could decrease if we do not continually address our clients’ technology and capacity requirements.
Our clients use technology-based products and services in the complex and rapidly changing markets in which they operate. We must substantially invest in technology and systems to meet customer requirements for technology and capacity. If we do not meet clients’ technology and capacity requirements in advance of our competitors or if the investments we make are not cost-effective or do not result in successful products or services, our business could be adversely affected.
The quality or availability of postal system services could decrease, reducing the volume of printed customer communications and negatively impacting our business.
We are dependent on postal delivery systems for final delivery of printed customer communications. Postal delivery systems are facing economic pressures from the reduction in First-Class mail and certain postal delivery systems have experienced work stoppages and other interruptions. Accuracy and speed of delivery are important factors for clients using printed communications in their businesses. Changes in the timeliness and quality of postal delivery could negatively impact the level of printed communications delivered by our customers to their clients. A decrease in such communications could adversely affect our business and our operating results.
Decreasing demand for traditional printed and mailed communications may continue to adversely affect our business, depending on the extent to which our customers’ and their clients’ acceptance of electronic alternatives continues to grow.
To the extent our clients’ customers select electronic presentment and delivery of communications, the demand for our services for production and distribution of printed documents has decreased and could continue to decrease. We provide electronic presentment and delivery solutions, but they are priced differently and require different capabilities than print-mail solutions. Customers may choose to perform electronic hosting and distribution of communications to customers internally or select electronic solution providers other than us. In particular, clients have terminated their services or moved production in-house. This has and could continue to adversely affect our business and our operating results.
Damage to our facilities could impact our operations or financial condition.
The performance of our services also depends upon facilities that house central computer operations or operating centers or in which we process information, images, bills or statements. Significant damage to any of our operating facilities could interrupt the operations at those facilities and interfere with our ability to serve customers.
We may be unable to attract and retain capable technical personnel for our processing businesses or quality executives to manage the complex structure of our business.
Our success depends on recruiting and retaining adept management and personnel with expertise in software and systems development and the types of computer hardware and software we utilize. If we are unable to hire or retain qualified personnel, our operations could be materially adversely affected. Companies in our industry compete fiercely for qualified management and technical personnel. We cannot guarantee that we will be able to adequately compete for or keep qualified personnel. If we lack qualified management, there is an increased risk that we will adopt unfavorable business strategies, especially in a complex business like ours with multiple segments and operating entities. If we lack qualified technical personnel, our ability to develop the systems and services our clients demand may also be negatively affected.
Our businesses are subject to substantial competition.
We are subject to intense competition from other established service providers in all industries we serve. Some of our competitors are able to bundle service offerings and offer more appealing pricing structures. Some of our clients, or the clients they serve, may develop, have developed or are developing the in-house capacity to perform the transaction processing, recordkeeping and output services they have paid us to perform. Additionally, some of our competitors and clients have greater financial and human resources and access to capital than we do.
Our failure to successfully compete in any of our material operating businesses could have a material adverse effect on our operating results. Competition could also affect the revenue mix of services we provide, resulting in decreased revenues in lines of business with higher profit margins.

10


We and our unconsolidated affiliates are subject to regulation. Any regulatory violations, changes or uncertainties could adversely affect our business.
A number of our businesses are subject to U.S. or foreign regulation, including privacy, licensing, processing, recordkeeping, investment adviser, broker/dealer, reporting and related regulations. Such regulations cover all aspects of our businesses including, but not limited to, sales and trading methods, trade practices among broker/dealers, use and safekeeping of customers’ funds and securities, capital structure of securities firms, net capital, anti-money laundering efforts, record keeping and the conduct of directors, officers and employees. Any violation of applicable regulations could expose us or those businesses to civil or criminal liability, significant fines or sanctions, damage our reputation, the revocation of licenses, censures, or a temporary suspension or permanent bar from conducting business, which could adversely affect our business or our financial results. Governmental changes and uncertainties surrounding services we provide could increase our costs of business or diminish business, which could materially and adversely affect our financial results.
Our clients are subject to regulation that could affect our business.
Our clients are subject to extensive regulation, including investment adviser, broker/dealer and privacy regulations applicable to services we provide to the financial services industry and insurance, privacy and other regulations applicable to services we provide to the healthcare industry. Changes in, and any violation by our clients of, applicable laws and regulations (whether related to the services we provide or otherwise) could diminish their business or financial condition and thus their demand for our products and services or could increase our cost of continuing to provide services to such industries. Demand could also decrease if we do not continue to offer products and services that help our clients comply with regulations. For example, our accounts in our Healthcare Services segment are impacted by the Patient Protection and Affordable Care Act (“ACA”), including the Health Insurance Marketplace. The implementation the ACA is still in its early stages, and we cannot predict the impact it will have on our customers and their demand for our services.
We operate internationally and are thus exposed to currency fluctuations and foreign political, economic and other conditions that could adversely affect our revenues from or support by foreign operations.
Inherent risks in our international business activities could decrease our international sales and also could adversely affect our ability to receive important support from our international operations, which could have a material adverse effect on our overall financial condition, operating results, and cash flow. These risks include potentially unfavorable foreign economic conditions, political conditions or national priorities, foreign government regulation, potential expropriation of assets by foreign governments, changes in intellectual property legal protections and remedies, the failure to bridge cultural differences, and limited or prohibited access to our foreign operations and the support they provide. We may also have difficulty repatriating any profits or be adversely affected by currency fluctuations in our international business.
Various events may cause our financial results to fluctuate from quarter-to-quarter or year-to-year. The nature of these events might inhibit our ability to anticipate and act in advance to counter them.
We may be unsuccessful in determining or controlling when and whether events occur that could cause varying financial results. Unfavorable results may occur that we did not anticipate or take advance action to address. The various reasons our quarterly and annual results may fluctuate include unanticipated economic conditions, and costs for starting up significant client operations, for hiring staff, and for developing products. Our results may also vary as a result of pricing pressures, increased cost of supplies, timing of license fees, the evolving and unpredictable markets in which our products and services are sold, changes in accounting principles, and competitors’ new products or services.
Investment decisions with respect to cash balances, market returns or losses on investments, and limits on insurance applicable to cash balances held in bank and brokerage accounts, including those held by us and as agent on behalf of our clients, could expose us to losses of such cash balances and adversely affect revenues attributable to cash balance deposit investments.
As part of our transaction processing and other services, we maintain and manage large bank and investment accounts containing client funds, which we hold as agent, as well as operational funds. Our revenues include investment earnings related to client fund cash balances. Our choices in selecting investments, or market conditions that affect the rate of return on or the availability of investments, could have an adverse effect on the level of such revenues. The amounts held in our operational and client deposit accounts could exceed the limits of government insurance programs of organizations such as the Federal Deposit Insurance Corporation and the Securities Investors Protection Corporation, exposing us to the risk of loss. Any such loss would have an adverse impact on our business and our financial condition.

11


Our revenues could decrease if client contracts are terminated or fail to renew or if clients renegotiate contracts or utilize our services at lower than anticipated levels.
We derive most of our revenue by selling products and services under long-term contracts, many of which contain terms and conditions based on anticipated levels of utilization of our services. We cannot unilaterally extend the terms of our client contracts when they expire. Contracts can terminate during the term of agreement for various reasons, including through “termination for convenience” clauses in some contracts that enable clients to cancel by written notice. Our revenues could decrease as a result of terminations or non-renewals of client contracts; extensions of client contracts under, or contract re-negotiations resulting in, less favorable terms; or utilization of services at less than anticipated levels.
Our businesses expose us to risks of claims and losses that could be significant and damage our reputation and business prospects.
Our proprietary applications and related consulting and other services include the processing or clearing of financial and healthcare transactions for our clients and their customers and the design of benefit plans and compliance programs. The dollar amount of transactions processed or cleared is vastly higher than the revenues we derive from providing these services. In the event we make transaction processing or operational errors, or mismanage any process, we could be exposed to claims for any resulting processing delays, disclosure of protected information, miscalculations, mishandling of pass-through disbursements or other processes, and failure to follow a client’s instructions or meet specifications. Additionally, we may be subject to claims or liability resulting from a failure of third parties (including regulatory authorities) to recognize the limitations of our role as our clients’ agent or consultant, and we may be subject to claims or liability resulting from fraud committed by third parties. We may be exposed to the risk of counterparty breaches or failure to perform. We may be subject to claims, including class actions, for reimbursements, losses or damages arising from any transaction processing or operational error, or from process mismanagement. Because of the sensitive nature of the financial and healthcare transactions we process, our liability and any alleged damages may significantly exceed the fees we receive for performing the service at issue. Litigation could include class action claims based, among other theories, upon various regulatory requirements and consumer protection and privacy laws that class action plaintiffs may attempt to use to assert private rights of action. Any of these claims and related settlements or judgments could affect our operating results, damage our reputation, decrease demand for our services, or cause us to make costly operating changes.
We are substantially dependent on our intellectual property rights, and a claim for infringement or a requirement to indemnify a client for infringement could adversely affect us.
We have made substantial investments in software and other intellectual property on which our business is highly dependent. Businesses we acquire also often involve intellectual property portfolios, which increase the challenges we face in protecting our strategic advantage. Any disclosure, loss, invalidity of, or failure to protect our intellectual property could negatively impact our competitive position, and ultimately, our business. Our protection of our intellectual property rights in the U.S. or abroad may not be adequate and others, including our competitors, may use our proprietary technology without our consent. Furthermore, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources and could harm our business, financial condition, results of operations and cash flows.
To the extent available, we rely on patent, trade secret and copyright laws; however, significant portions of our proprietary intellectual property is not protected by patents. We also utilize nondisclosure and other contractual agreements and security measures to protect our proprietary technology. We cannot guarantee these measures will be effective. Our products and services rely on technology developed by others, including open source software, and we have no control over possible infringement of someone else’s intellectual property rights by the provider of this technology. The owner of the rights could seek damages from us rather than or in addition to the persons who provide the technology to us. We could be subject at any time to intellectual property infringement claims that are costly to evaluate and defend. Our clients may also face infringement claims, allege that such claims relate to our products and services, and seek indemnification from us. Any loss of our intellectual property rights, or any significant claim of infringement or indemnity for violation of the intellectual property rights, or any significant claim of infringement or indemnity for violation of the intellectual property rights of others, could have a material adverse effect on our financial condition, operating results, and cash flows.

12


We do not control certain businesses in which we have significant ownership.
We invest in joint ventures and other unconsolidated affiliates as part of our business strategy, and part of our net income is derived from our pro rata share of the earnings of those businesses. Despite owning significant equity interests in those companies and having directors on their boards, we do not control their operations, strategies or financial decisions. The other owners may have economic, business or legal interests or goals that are inconsistent with our goals or the goals of the businesses we co-own. Our pro rata share of any losses due to unfavorable performance of those companies could negatively impact our financial results.
Some of our joint venture investments are subject to buy-sell agreements, which could, among other things, restrict us from selling our interests even if we were to determine it would be prudent to do so.
We own interests in unconsolidated entities including Boston Financial Data Services, International Financial Data Services Limited Partnership, International Financial Data Services Limited, and various real estate joint ventures. Our interests in such unconsolidated entities are subject to buy/sell arrangements, which could restrict our ability to sell our interests even if we were to determine it would be prudent to do so. These arrangements could also allow us to purchase the other owners’ interests to prevent someone else from acquiring them and we cannot control the timing of occasions to do so. The businesses or other owners may encourage us to increase our investment in or make contributions to the businesses at an inopportune time.
Our investments in funds and in other companies could decline in value.
We hold significant investments in available-for-sale equity securities of other companies, primarily State Street Corporation, and other financial interests that are subject to fluctuations in market prices. A significant decline in the value of our equity investments could have a material adverse effect on our financial condition or operating results. We may not always be able to sell those investments at higher prices than we paid for them or than the value of the consideration used to acquire them.
From time to time ALPS adds new investment strategies to its investment product offerings by providing the initial cash investments as “seed capital.” The seed capital investments may decline in value. A significant decline in their value could have a material adverse effect on our financial condition or operating results.
We are a limited partner in various private equity funds and have future capital commitments related to certain private equity fund investments. These investments are illiquid. Generally, private equity fund securities are non-transferable or are subject to long holding periods, and withdrawals from the private equity firm partnerships are typically not permitted. Even when transfer restrictions do not apply, there is generally no public market for the securities. Therefore, we may not be able to sell the securities at a time when we desire to do so. We may not always be able to sell those investments at higher prices than we paid for them.
Various plans, agreements, laws and organizational documents may have anti-takeover effects.
Provisions in our Certificate of Incorporation, Bylaws, certain plans and agreements, and applicable laws could make it more difficult for a party to make a tender offer for our shares or complete a takeover, which is not approved by our Board of Directors. The provisions include:
super-majority stockholder approval required for certain actions;
staggered terms for directors;
specific procedures for stockholders to nominate new directors;
the Board’s authority to issue and set the terms of preferred stock;
a stockholders’ rights plan that would cause substantial dilution to a person or group that acquires 15% or more of our outstanding common stock (as determined pursuant to the rights plan) without the approval of our Board of Directors;
various rights of joint venture co-owners, lenders and certain customers and executives in the event of a change in control;
public reporting of ownership and of changes in ownership by stockholders with at least a 5% interest in us; and
legal restrictions on business combinations with certain stockholders.
Because of contractual commitments, a change in control could affect our operating results and weaken our management retention and incentive tools.
A change in control of the Company would trigger various rights and obligations in service agreements with our customers and in agreements governing our joint ventures. A change in control could also allow some clients to terminate their agreements with us or to obtain rights to use our processing software. We are parties to joint venture agreements that allow other co-owners to buy our equity interests if we undergo a change in control. Under certain executive equity-based and other incentive compensation awards, benefit programs and employment agreements with our management, a change in control by itself, or an individual’s termination of employment without “cause” or resignation for “good reason” (each as defined in applicable

13


agreements) after a change in control could accelerate funding, payment or vesting of equity grants, as applicable, under such agreements and programs. This accelerated funding, vesting or payment may decrease an employee’s incentive to continue employment with us. We have adopted an executive severance plan which, among other things, provides benefits to participating senior officers and executives who are terminated in connection with a change of control. Certain other executive officers have agreements with us that require us to continue to employ them for three years after a change in control or to pay certain amounts if we terminate their employment without cause or they resign for good reason following a change in control. The executives might not be incented to achieve desired results for the new owners of our business, and the cost of keeping the executives on the payroll might deter potential new owners from acquiring us or hinder new owners from hiring replacement management.
Our equity incentive and stockholders’ rights plans could have a dilutive effect on our common stock.
Our directors, officers and certain managers have received restricted stock units and options to purchase our common stock as part of their compensation. These equity grants could have a dilutive effect on our common stock. The rights plan would cause substantial dilution to a person or group that acquires 15% or more of our outstanding common stock (as determined pursuant to the rights plan) without the approval of our Board of Directors. A triggering of the rights plan could in some circumstances be dilutive in value to common stockholders who do not exercise their rights.
We may not pay cash dividends on our common stock in the future.
Future cash dividends will depend upon our financial condition, earnings and other factors deemed relevant by our Board of Directors. Payment of dividends is subject to applicable laws and to restrictions in applicable debt agreements.
If we cannot successfully complete acquisitions or integrate acquired businesses, our growth may be limited and our financial condition adversely affected.
Our business strategy anticipates that we will supplement internal growth by pursuing acquisitions of complementary businesses. We may be unable to identify suitable businesses to acquire. We compete with other potential buyers for the acquisition of other complementary businesses. Information we obtain about an acquisition target may be limited and there can be no assurance that an acquisition will perform as expected or positively impact our financial performance. Potential acquisitions involve risk, including the risk we would be unable to effectively integrate the acquired technologies, operations and personnel into our business, and the risk that management’s attention and our capital would be diverted from other areas of our business. The anticipated benefits of our acquisitions may not materialize. Future acquisitions or dispositions could result in the issuance of capital stock, incurrence of debt, contingent liabilities or expenses, or write-offs of goodwill and other intangible assets, any of which could harm our financial condition. If we cannot complete acquisitions, our growth may be limited and our financial condition may be adversely affected.
If our new investments and business initiatives are not successful, our financial condition and prospects could be adversely affected.
We are investing heavily in our technology, including hardware and software, to improve existing products and services and add new products and services to address the needs of existing or new clients. Our investments may not lead to successful deployment or increases in the number of accounts or transactions. If we are not successful in creating value from our investments by increasing sales or reducing expenses, our financial condition and prospects could be harmed.
We have restrictive covenants in our debt agreements, which may restrict our flexibility to operate our business.  If we do not comply with these restrictive covenants, our failure could result in material and adverse effects on our operating results and our financial condition.
Our debt agreements contain customary restrictive covenants, including limitations on consolidated indebtedness, liens, investments, subsidiary investments, and asset dispositions, and require us to maintain certain leverage and interest coverage ratios.  Failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in reduced liquidity for the Company and could have a material adverse effect on our operating results and financial condition. 
Item 1B.    Unresolved Staff Comments
None.

14


Item 2.        Properties
The following table provides certain summary information with respect to the principal properties owned or leased by the Company. We believe the facilities, office space and other properties owned or leased are adequate for our current operations.
Location
 
Use (1)
 
Owned/
Leased (2)
 
Square
Feet
Financial Services Segment (3)
 
 
 
 
 
 
Kansas City, MO
 
Office Space
 
Owned
 
455,000

Kansas City, MO
 
Office Space
 
Leased
 
334,000

Kansas City, MO
 
Data Center
 
Owned
 
162,000

St. Louis, MO
 
Data Center
 
Owned
 
109,000

Denver, CO
 
Office Space
 
Leased
 
97,000

Hyderabad, India
 
Office Space
 
Leased
 
111,000

Pune, India
 
Office Space
 
Leased
 
52,000

Bangkok, Thailand
 
Office Space
 
Leased
 
88,000

Melbourne, Australia
 
Office Space
 
Leased
 
38,000

London, United Kingdom
 
Office Space
 
Owned
 
20,000

Fifteen other locations
 
Office Space
 
Leased
 
50,000

Healthcare Services Segment (3)
 
 
 
 
 
 
Kansas City, MO
 
Office Space
 
Leased
 
158,000

Harrisburg, PA
 
Office Space
 
Leased
 
209,000

Birmingham, AL
 
Office Space
 
Leased
 
98,000

Two other locations
 
Office Space
 
Leased
 
18,000

Customer Communications Segment (3)
 
 
 
 
 
 
El Dorado Hills, CA
 
Production
 
Owned
 
580,000

Kansas City, MO
 
Production
 
Owned
 
261,000

Kansas City, MO
 
Office Space
 
Owned
 
66,000

Hartford, CT
 
Production
 
Owned
 
302,000

Albany, NY
 
Production
 
Leased
 
136,000

Bristol, United Kingdom
 
Production
 
Owned
 
126,000

Dagenham, United Kingdom
 
Production
 
Leased
 
175,000

Nottingham, United Kingdom
 
Production
 
Leased
 
138,000

Jarrow, United Kingdom
 
Production
 
Leased
 
100,000

Peterborough, United Kingdom
 
Production
 
Leased
 
50,000

Toronto, Canada
 
Production
 
Owned
 
232,000

Ottawa, Canada
 
Production
 
Leased
 
13,000

Six other locations
 
Office Space
 
Leased
 
22,000

Investments and Other Segment (4)
 
 
 
 
 
 
Kansas City, MO
 
Office Space
 
Owned
 
344,000

Kansas City, MO
 
Retail
 
Owned
 
11,000

Kansas City, MO
 
Office Space
 
Leased
 
4,000

El Dorado Hills, CA
 
Office Space
 
Owned
 
48,000

London, United Kingdom
 
Office Space
 
Owned
 
35,000

London, United Kingdom
 
Retail
 
Owned
 
9,000

_______________________________________________________________________________
(1)
Property specified as being used for production includes space used for manufacturing operations and warehouse space.
(2)
In addition, but not included in the above table, we own a number of surface parking facilities, an underground storage facility with 538,000 square feet located in Kansas City, Missouri, and approximately 200 acres of undeveloped land adjacent to our buildings in El Dorado Hills, California.
(3)
Includes approximately 2.0 million square feet of property owned or leased by our real estate subsidiaries, which are part of the Investments and Other segment. These properties are primarily leased to our other segments, including approximately 800,000 square

15


feet in the Financial Services segment and 1.2 million square feet in the Customer Communications segment. The Financial Services segment has sub-leased 8,000 square feet of office space to a third party. The Healthcare Services segment has sub-leased 65,000 square feet of office space to third-parties. The Customer Communications segment has sub-leased 73,000 square feet of office and production space to third-parties.
(4)
We lease, through our real estate subsidiaries, office and production space to various third-party tenants in Kansas City, Missouri, and the U.K. The number of square footage leased to third-parties in office and retail facilities is 191,000, plus approximately 485,000 square feet leased to third parties at the underground storage facility.
Item 3.        Legal Proceedings
We are involved in various legal proceedings arising in the normal course of our businesses. While the ultimate outcome of such legal proceedings cannot be predicted with certainty, management believes, after consultation with legal counsel, that the final outcome in such proceedings, in the aggregate, would not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
Item 4.        Mine Safety Disclosures
None.
Executive Officers of the Company
Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to paragraph (b) of Item 401 of Regulation S-K, the following list is included as an unnumbered Item in Part I of this Annual Report on Form 10-K in lieu of being included in our Definitive Proxy Statement in connection with our annual meeting of stockholders scheduled for May 12, 2015.
All executive officers are elected by and serve at the discretion of the Company’s Board of Directors. Certain of the executive officers have employment agreements with the Company. There are no arrangements or understandings between the executive officers and any other person pursuant to which he was or is to be selected as an officer, except with respect to the executive officers who have entered into employment agreements, which agreements designate the position or positions to be held by the executive officer. None of the executive officers are related to one another or to any of the members of the Board of Directors.
Stephen C. Hooley, age 51, is our Chairman of the Board, Chief Executive Officer and President. He became Chief Executive Officer on September 12, 2012. He joined the Company in mid‑2009 as President and Chief Operating Officer. He served from 2004 through mid‑2009 as President and Chief Executive Officer of Boston Financial Data Services (“BFDS”). He served from 2009 through April 2013 as non‑executive Chairman of BFDS. From 2007 through March 2013, he served as Chief Executive Officer of IFDS L.P.
Manoochehr “Mike” Abbaei, age 54, became in March 2014 our Executive Vice President and Head of Customer Communications leading our Customer Communications business in North America. He joined the Company in April 2011 as President of DST Brokerage Solutions, LLC, a Financial Services segment business serving broker‑dealers. He had been, since July 2009, managing partner at Finix Business Strategies and CEO of Finix Converge LLC, each of which we acquired in April 2011. The Finix businesses engage in financial services consulting and social networking for corporations. As of March 19, 2014, Mr. Abbaei is no longer responsible for DST Brokerage Solutions but continues to lead the Finix businesses.
Jonathan J. Boehm, age 54, is our Executive Vice President and Head of Healthcare Businesses. He re‑joined the Company in 1997 after prior service in the early 1980s. Prior to becoming an Executive Vice President managing our healthcare businesses in 2009, he served as Group Vice President - Mutual Funds Full Service. He is responsible for our Healthcare Services segment, including DST HealthCare Holdings, Inc. and its subsidiaries DST Health Solutions and Argus Health Systems.
Edmund J. Burke, age 54, is our Executive Vice President and President of ALPS. ALPS includes the Corporation’s investment management and asset servicing businesses. ALPS Holdings, Inc. became a wholly‑owned subsidiary of the Company during 2011. Mr. Burke joined ALPS in 1991 and has served as President since 2000. As part of his responsibilities for the ALPS group of companies, Mr. Burke is President and Trustee of Clough Global Allocation Fund, Clough Global Equity Fund and Clough Global Opportunities Fund; Trustee of Liberty All‑Star Equity Fund; Director of Liberty All‑Star Growth Fund, Inc., and Chairman of the Board and President of Financial Investors Trust. Each of these funds operates as a registered investment company pursuant to the Investment Company Act of 1940.
Simon N. Hudson‑Lund, age 53, became in March 2014 our Executive Vice President and CEO of DST International Holdings. He joined the Company in February 2013 as Chief Executive Officer of DST International Holdings, which owns DST Bluedoor Pty Ltd, DST Process Solutions Limited and DST Output Limited, and as the Global Executive Chairman of

16


IFDS U.K. and IFDS L.P. He has served in numerous positions with IFDS U.K., including as Chief Executive Officer (February 2008 through January 2013), Head of European Transfer Agent Operations (January 2011 through January 2013), Chief Operating Officer (July 2005 through January 2008), and Managing Director Administration Services‑Client Finance and Transfer Agent Operations (June 2003 through June 2005). In March 2013, he became Chief Executive Officer of IFDS L.P.
Steven J. Towle, age 57, became in March 2014 our Executive Vice President and Head of Financial Services. He had served since 2004 as President and Chief Executive Officer of our U.S. Customer Communications business. Prior to joining the Company, he was BFDS’s President and Chief Operating Officer during 2000 through 2003 and its Senior Vice President during 1997 through September 2000.
Gregg Wm. Givens, age 54, is our Senior Vice President, Chief Financial Officer and Treasurer. He assumed the role of Chief Financial Officer in January of 2014. He joined the Company in 1996 as an officer and served as Vice President and Chief Accounting Officer from 1999 through 2013.
Vercie Lark, age 52, is Executive Vice President and Chief Information Officer. He joined the Company as Vice President and Chief Information Officer in June 2010 and assumed his current title in March 2014. He is responsible for our global information technology infrastructure and architecture functions, global information privacy and security, and global information technology sourcing. Mr. Lark previously served since July 2009 as Vice President and Chief Information Officer of CenturyLink, Inc., a provider of voice, broadband and video services. He had served since 2008 as the Chief Information Officer of Embarq Corporation, which was acquired in 2009 by CenturyLink.
M. Elizabeth Sweetman, age 51, is Senior Vice President and Chief Human Resources Officer. She joined the Company in June 2013 as a vice president and assumed her current title in March 2014. Prior to joining the Company, she had served since 2007 as Senior Vice President Human Resources for Furniture Brands International, a home furnishings designer and manufacturer that, following her departure from that company, filed for bankruptcy in September 2013.
Randall D. Young, age 58, became Senior Vice President, General Counsel and Secretary in mid‑2013. Since 2002, he had served as Vice President, General Counsel and Secretary. He joined the Company as a Vice President in 1995.


17


PART II
Item 5.        Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock trades under the symbol “DST” on the New York Stock Exchange (“NYSE”). As of February 19, 2015, there were approximately 35,000 beneficial owners of our common stock.
In 2010, we began paying cash dividends on our common stock. Future cash dividends will depend upon financial condition, earnings and other factors deemed relevant by DST’s Board of Directors. Payment of dividends is subject to applicable laws and to restrictions in applicable debt agreements. The Board of Directors of DST unanimously determined to increase our dividend frequency from a semi-annual basis to a quarterly basis beginning in the first quarter of 2013. On January 28, 2015, the DST Board of Directors declared a quarterly cash dividend of $0.30 per share on DST’s common stock. The dividend will be payable on March 13, 2015, to shareholders of record at the close of business on February 27, 2015.
 
Dividend
 
High
 
Low
2014
 
 
 
 
 
1st Quarter
$
0.30

 
$
98.21

 
$
85.82

2nd Quarter
0.30

 
95.71

 
84.77

3rd Quarter
0.30

 
92.90

 
83.67

4th Quarter
0.30

 
99.67

 
82.26

2013
 
 
 
 
 
1st Quarter
$
0.30

 
$
70.42

 
$
60.75

2nd Quarter
0.30

 
70.88

 
63.80

3rd Quarter
0.30

 
76.56

 
65.80

4th Quarter
0.30

 
91.04

 
74.70

The prices set forth above do not include commissions and do not necessarily represent actual transactions. The closing price of our common stock on the NYSE on December 31, 2014 was $94.15.
Stock Repurchases
The following table sets forth information with respect to shares of our common stock purchased by us during the quarter ended December 31, 2014.
Period
Total Number
of Shares
Purchased
 
 
Average Price
Paid Per Share
 
Total $ Amount of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
 
Maximum Amount
That May Yet
Be Purchased Under
the Plans or Programs
 
October 1 - October 31
672,233

(1) 
 
$
85.73

 
$
57,622,806

 
$
100,235,777

 
November 1 - November 30
476,902

(1) 
 
98.01

 
46,572,373

 
53,663,404

 
December 1 - December 31
37,395

(1) 
 
99.26

 
3,663,393

 
50,000,011

 
Total
1,186,530

 
 
$
91.10

 
$
107,858,572

 
$
50,000,011

(2) 
_______________________________________________________________________
(1)
For the three months ended December 31, 2014, we purchased, in accordance with the 2005 Equity Incentive Plan (formerly the 1995 Stock Option and Performance Award Plan), 2,347 shares of our common stock for participant income tax withholding in conjunction with stock option exercises or from the vesting of restricted stock shares, as requested by the participants or from shares surrendered in satisfaction of option exercise price. These purchases were not made under the publicly-announced repurchase plans or programs, but were allowed by the rules of the Compensation Committee of the DST Board of Directors. Of these shares, 133 shares were purchased in October 2014, 1,702 shares were purchased in November 2014, and 512 shares were purchased in December 2014.
(2)
During January 2015, we spent $50.0 million to purchase 525,000 shares which completed the existing share repurchase plan. On January 28, 2015, the DST Board of Directors authorized a new $250.0 million share repurchase plan. The plan allows, but does not require, the repurchase of common stock in open market and private transactions. We may enter into one or more plans with our brokers or banks for pre-authorized purchases within defined limits pursuant to Rule 10b5-1 to affect all or a portion of such share repurchases.


18


Stock Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.
The following graph shows the changes in value since December 31, 2009 of an assumed investment of $100 in: (i) DST Common Stock; (ii) the stocks that comprise the S&P 400 MidCap index(1); and (iii) the stocks that comprise a peer group of companies (“Peer Group”)(2). The table following the graph shows the dollar value of those investments as of December 31, 2014 and as of December 31 for each of the five preceding years. The value for the assumed investments depicted on the graph and in the table has been calculated assuming that cash dividends, if any, are reinvested at the end of each quarter in which they are paid.
Comparison of Cumulative Five Year Total Return
 
As of December 31,
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
DST Systems, Inc
$
100.00

 
$
103.29

 
$
107.46

 
$
145.12

 
$
220.89

 
$
232.12

S&P MidCap 400 Index
100.00

 
126.64

 
124.45

 
146.69

 
195.84

 
214.97

Peer Group
100.00

 
111.83

 
122.71

 
145.09

 
219.32

 
245.92

_______________________________________________________________________
(1)
Standard & Poor’s Corporation, an independent company, prepares the S&P 400 MidCap Index.
(2)
The companies included in the Peer Group are Alliance Data Systems Corp, Automatic Data Processing, Inc., Broadridge Financial Solutions, Inc., Convergys Corp, CSG Systems International, Inc., Fiserv, Inc., NCR Corp, Paychex, Inc., SEI Investments Co., TeleTech Holdings, Inc. and Total System Services, Inc.
DST selected the Peer Group based on comparable company information for DST’s industry developed by an independent compensation consultant with the input of the CFO.

19


Item 6.        Selected Financial Data
The following table sets forth selected consolidated financial data of the Company. The selected consolidated financial data should be read in conjunction with and are qualified by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Annual Report on Form 10-K and our audited consolidated financial statements, including the notes thereto, and the report of the independent registered public accounting firm thereon and the other financial information included in Item 8 of this Form 10-K.
 
Year Ended December 31,
 
2014 (1)
 
2013 (2)
 
2012 (3)
 
2011 (4)
 
2010 (5)
Income Statement Data:
(dollars in millions, except per share amounts)
Operating revenues (excluding out-of-pockets)
$
2,042.0

 
$
1,960.6

 
$
1,892.4

 
$
1,744.0

 
$
1,713.6

Income from operations
308.9

 
313.2

 
157.3

 
260.1

 
344.6

Other income, net
373.5

 
243.2

 
373.5

 
38.7

 
141.7

Income before income taxes and non-controlling interest
791.7

 
544.9

 
519.5

 
274.0

 
476.6

Net income attributable to DST Systems, Inc. 
593.3

 
352.6

 
324.0

 
183.1

 
318.5

Basic earnings per share
14.82

 
8.15

 
7.22

 
4.01

 
6.78

Diluted earnings per share
14.66

 
8.00

 
7.08

 
3.95

 
6.73

Non-GAAP diluted earnings per share (6)
5.55

 
4.57

 
3.98

 
4.09

 
4.43

Cash dividends per share of common stock
1.20

 
1.20

 
0.80

 
0.70

 
0.60

 
 
 
 
 
 
 
 
 
 
 
 December 31,
 
2014 (1)
 
2013 (2)
 
2012 (3)
 
2011 (4)
 
2010 (5)
Balance Sheet Data:
(dollars in millions)
Total assets
$
2,942.9

 
$
3,090.5

 
$
3,392.5

 
$
3,428.6

 
$
3,339.4

Total debt
552.9

 
683.0

 
1,011.6

 
1,380.3

 
1,209.4

_______________________________________________________________________
(1)
In 2014, we recorded a pretax gain of $100.5 million on the sale of the wholly-owned subsidiary, DST Global Solutions, Ltd, which is included in Gain on sale of business in the Consolidated Statement of Income. In addition, we recorded net gains on securities and other investments of $343.5 million, which were included in Other income, net on the Consolidated Statement of Income.
(2)
In 2013, we recorded net gains on securities and other investments of $222.8 million, which were included in Other income, net on the Consolidated Statement of Income.
(3)
In 2012, we recorded a goodwill impairment charge of $60.8 million associated with our U.K. Customer Communications business, which is included in Depreciation and amortization expense in the Consolidated Statement of Income. In addition, we recorded net gains on securities and other investments of $293.7 million and dividend income from a private company investment of $48.4 million, both of which are included in Other income, net, in the Consolidated Statement of Income.
(4)
In 2011, we acquired the following businesses: ALPS Holdings, Inc., Newkirk Products, Inc., Lateral Group Limited, Intellisource Healthcare Solutions, Finix Business Strategies, LLC, Finix Converge, LLC and Subserveo, Inc. Additionally, we recorded net gains on securities and other investments of $17.2 million, which is included in Other income, net, in the Consolidated Statement of Income.
(5)
In 2010, we recognized $73.4 million of contract termination payment operating revenues resulting from the early termination of two client processing agreements. We recorded $70.8 million of net gains on securities and other investments and dividend income from a private equity investment of $54.7 million, both of which are included in Other income, net, in the Consolidated Statement of Income.
(6)
Non-GAAP diluted earnings per share have been calculated by taking into account the impact of certain items that are not necessarily ongoing in nature, do not have a high level of predictability associated with them or are non-operational 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. A description of the use of non-GAAP financial information and a reconciliation of diluted earnings per share and non-GAAP diluted earnings per share is below.

20


Use of Non-GAAP Financial Information
In addition to reporting financial information on a GAAP basis, we have disclosed non-GAAP financial information which has been reconciled to the corresponding GAAP measures in the following financial schedules titled “Reconciliation of Reported Diluted Earnings per Share to Non-GAAP Diluted Earnings per Share.”  In making these adjustments to determine the non-GAAP results, we take 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 our financial trends and “operational run-rate,” as well as making financial comparisons to prior periods presented on a similar basis.  We believe that providing such adjusted results allows investors and other users of our financial statements to better understand our comparative operating performance for the periods presented. 
DST’s management uses each of these non-GAAP financial measures in its own evaluation of our performance, particularly when comparing performance to past periods.  Our non-GAAP measures may differ from similar measures by other companies, even if similar terms are used to identify such measures.  Although our management believes non-GAAP measures are useful in evaluating the performance of our business, we acknowledge that items excluded from such measures may have a material impact on our 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 our results.
Reconciliation of Reported Diluted Earnings per Share to Non-GAAP Diluted Earnings per Share
 
Year Ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
GAAP Diluted Earnings per Share
$
14.66

 
$
8.00

 
$
7.08

 
$
3.95

 
$
6.73

Net gains on securities and other investments
(5.26
)
 
(3.14
)
 
(4.54
)
 
(0.23
)
 
(1.76
)
Equity in earnings of unconsolidated affiliates items
(0.09
)
 
(0.10
)
 
(0.20
)
 
0.06

 

Restructuring charges
0.26

 
0.03

 
0.51

 
0.08

 
0.27

Loss accruals (loss accrual reversal)
(0.12
)
 
0.06

 
0.04

 
0.08

 

Income tax items
(0.91
)
 
(0.24
)
 
(0.40
)
 

 
(0.03
)
Charitable contribution of securities
0.01

 

 
(0.06
)
 

 

Business development/advisory expenses
0.09

 

 
0.02

 
0.06

 

Net gain on sale of business
(2.64
)
 

 

 

 

Gain on contract to repurchase common stock
(0.45
)
 

 

 

 

Contract termination payments received, net

 
(0.08
)
 

 
(0.03
)
 
(0.87
)
Net losses on real estate assets

 
0.04

 
0.09

 

 

Goodwill impairment

 

 
1.33

 

 

Insurance Solutions asset impairment and other costs

 

 
0.11

 

 

Restructuring cost to amend sales/marketing agreements

 

 

 
0.10

 

Loss on repurchase of convertible debentures

 

 

 
0.02

 
0.09

Non-GAAP Diluted Earnings per Share
$
5.55

 
$
4.57

 
$
3.98

 
$
4.09

 
$
4.43



21


Item 7.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussions set forth in this Annual Report on Form 10-K contain statements concerning potential future events. Such forward-looking statements are based upon assumptions by the Company’s management, as of the date of this Annual Report, including assumptions about risks and uncertainties faced by the Company. In addition, management may make forward-looking statements orally or in other writings, including, but not limited to, in press releases, in the Annual Report and in the Company’s other filings with the Securities and Exchange Commission. Forward-looking statements include, but are not limited to, (i) all statements, other than statements of historical fact, 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. If any of management’s assumptions prove incorrect or should unanticipated circumstances arise, the Company’s actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in Item 1A, “Risk Factors” of this Form 10-K. Readers are strongly encouraged to consider those factors when evaluating any forward-looking statements concerning the Company. The Company undertakes no obligation to update any forward-looking statements in this Annual Report on Form 10-K to reflect new information, future events or developments, or otherwise.
Introduction
DST Systems, Inc. (“we”, “our”, “us”, the “Company” or “DST”) uses proprietary software applications to provide sophisticated information processing and servicing solutions through strategically unified business processing, data management, and customer communications solutions to clients globally within the asset management, brokerage, retirement, insurance and healthcare markets. Our wholly-owned data centers provide the secure technology infrastructure support necessary to support our solutions offerings.
We manage our business through three operating segments, Financial Services, Healthcare Services and Customer Communications. Our investments in equity securities, private equity investments, real estate and certain financial interests have been aggregated into an Investments and Other segment. During 2014, we sold our wholly-owned U.K. subsidiary, DST Global Solutions Limited and certain related affiliates (“Global Solutions”). Global Solutions provides post-trade, middle-, and back-office investment management software applications, implementation and other professional services.
Financial Services Segment
DST’s proprietary software applications enable us to offer our customers information processing solutions that enable them to capture, analyze and report their investors’ transactions. Examples of the services we provide include tracking of purchases, redemptions, exchanges and transfers of shares; maintaining investor identification and ownership records; reconciling cash and share activity; processing dividends; reporting sales; performing tax and other compliance functions; and providing information for printing of investor trade confirmations, statements and year-end tax forms.
Services are provided either under a software as a service (“SaaS”) model or on a business process outsourcing (“BPO”) basis either directly by DST or through BFDS, our domestic joint venture with State Street Corporation (“State Street”). Our BPO service offerings are enhanced by our proprietary workflow software, AWD, which is also licensed separately to third parties.
In the U.S. we provide services to mutual funds, brokerage firms, retirement plans and alternative investment funds (such as real estate investment trusts). In Australia and the U.K., we license software solutions to funds and fund managers, who perform participant accounting and recordkeeping for the wealth management and retirement savings market. We also provide investor services on a SaaS and BPO basis internationally (U.K., Canada, Ireland and Luxembourg) solely through IFDS U.K. and IFDS L.P. which are joint ventures with State Street.
Financial Services fees are primarily charged to the client based on the number of accounts, participants or transactions processed. For subaccounts, a portion of the services we provide for registered accounts are provided directly by the broker/dealer. As a result, our revenue per account is generally higher for registered accounts than for subaccounts. On a more limited basis, we also generate revenue through asset-based fee arrangements and from investment earnings related to cash balances maintained in our full service transfer agency bank accounts. We typically have multi-year agreements with our clients. We receive revenues for processing services and products provided under various agreements with unconsolidated affiliates. We

22


believe that the terms of our contracts with unconsolidated affiliates are fair to us and are no less favorable to us than those obtained from unaffiliated parties. Our operating revenues derived from sales to unconsolidated affiliates were $166.6 million, $170.5 million, and $171.5 million for the years ended December 31, 2014, 2013, and 2012, respectively.
Healthcare Services Segment
The Healthcare Services segment uses our proprietary software applications to provide healthcare organizations a variety of medical and pharmacy benefit solutions to satisfy their information processing, quality of care, cost management concerns and payment integrity programs, while achieving compliance and improving operational efficiencies. Our healthcare solutions include claims adjudication, benefit management, care management, business intelligence and other ancillary services.
We generally derive revenue from our pharmacy-solutions business on a transactional fee basis. Fees are earned on pharmacy claims processing and payments services, pharmacy and member call center services, pharmaceutical rebate administration, administration or management of clinical programs, pharmacy network management, member and plan web services and management information and reporting. Further, revenues include investment earnings related to client cash balances maintained in our bank accounts. Medical claim processing revenues are generally derived from fees charged based on a per member/per month basis and transactional basis. We also realize revenue from fixed-fee license agreements that include provisions for ongoing support and maintenance and for additional license payments in the event that usage or members increase. Additionally, we derive professional service revenues from fees for implementation services, custom programming and data center operations.
Customer Communications Segment
Within our Customer Communications segment, we offer a full range of integrated print, mail, and electronic solutions to customers in the U.S., Canada and the U.K. We produce customized communications for our client’s customers such as investment fund statements, explanation of health benefit statements, and monthly utility bills. We use proprietary and third- party software applications to provide the formatting, printing, mailing, electronic presentment and archiving of these types of communications. As one of the largest First-Class mailers in the U.S., we also provide a range of postal services to help clients optimize mail efficiencies and control postage expenses.
Revenues in this segment are derived from presentation and delivery (either print or digital), mailing fees and archiving of customer documents, and are generally based on the number of images processed or packages mailed and the range of customization and personalization options chosen by the client.
Investments and Other Segment
The Investments and Other segment is comprised of our real estate subsidiaries and joint ventures, investments in equity securities, private equity investments and other financial interests. The assets held by this segment are primarily passive in nature.
The Investments and Other segment’s revenues are derived from rental income from Company-owned and third-party real estate leases. Rental income from Company-owned real estate is recorded as revenue when, based on lease terms, it is earned. The Investments and Other segment records investment income (dividends, interest and net gains (losses) on investment securities) within Other income, net. The Investments and Other segment derives part of its income from its pro rata share in the earnings (losses) of certain unconsolidated affiliates. We pay lease payments to certain real estate joint ventures.
Seasonality
Generally, we do not have significant seasonal fluctuations in our business operations. Processing volumes for mutual fund customers within our Financial Services and Customer Communications segment are usually highest during the quarter ended March 31 due primarily to processing year-end transactions and printing and mailing of year-end statements and tax forms during January. We have historically added operating equipment in the last half of the year in preparation for processing year-end transactions, which has the effect of increasing costs for the second half of the year. Revenues and operating results from individual license sales vary depending on the timing and size of the contracts.
New Authoritative Accounting Guidance
In February 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update, “Consolidated (Topic 810) - Amendments to the Consolidation Analysis.” The new consolidation guidance changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (“VIE”), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities.

23


The guidance is effective for us for fiscal years and interim periods beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the standard and the impact it will have on our consolidated financial statements.
In May 2014, the FASB issued an accounting standard, “Revenue from Contracts with Customers.” This standard will replace the existing accounting standard for revenue recognition and is effective for annual and interim periods beginning after December 15, 2016. Early application of this standard is not permitted. This standard permits two transition approaches, either the retrospective transition method or the cumulative effect transition method. We are currently evaluating the standard, including which transition approach will be applied and the impact it will have on our consolidated financial statements.
In April 2014, the FASB issued an accounting standard update, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This standard changes the requirements for reporting discontinued operations and modifies the disclosure requirements. This standard is effective prospectively for annual and interim periods after December 15, 2014. Early adoption of the standard is permitted for disposals that have not been reported in financial statements previously issued. We elected to early adopt this standard beginning in the third quarter 2014. The adoption of this standard did not have a significant impact on our consolidated financial statements.
In July 2013, the FASB issued an accounting standard update, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists.” This standard requires netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. This standard was effective prospectively for annual and interim periods beginning after December 15, 2013. The adoption of this guidance did not have a significant effect on our consolidated financial statements.
In March 2013, the FASB issued an accounting standard update, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” This standard requires the release of any cumulative translation adjustment into net income only upon complete or substantially complete liquidation of a controlling interest in a subsidiary or a group of assets within a foreign entity. Also, it requires the release of all or a pro rata portion of the cumulative translation adjustment to net income in the case of a sale of an equity-method investment that is a foreign entity. This standard was effective prospectively beginning January 1, 2014. The adoption of this standard did not have a significant impact on our consolidated financial statements.
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition, results of operations and cash flows are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: revenue recognition; software capitalization and amortization; depreciation of fixed assets; valuation of long-lived and intangible assets and goodwill; accounting for investments; and accounting for income taxes.
Revenue recognition
We recognize revenue when it is realized or realizable and it is earned. The majority of our revenues are derived from computer processing and services and are recognized upon completion of the services provided. Software license fees, maintenance fees and other ancillary fees are recognized as services are provided or delivered and all customer obligations have been met. We generally do not have payment terms from customers that extend beyond one year. Revenue from operating leases is recognized monthly as the rent accrues. Billing for services in advance of performance is recorded as deferred revenue.
We recognize revenue when the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) the sales price is fixed or determinable; and 4) collectibility is reasonably assured. If there is a customer-specific acceptance provision in a contract or if there is uncertainty about customer acceptance, the associated revenue is deferred until we have evidence of customer acceptance.

24


Revenue arrangements with multiple deliverables are evaluated to determine if the deliverables (items) can be divided into more than one unit of accounting. An item can generally be considered a separate unit of accounting if both of the following criteria are met: 1) the delivered item(s) has value to the customer on a standalone basis and 2) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. Once separate units of accounting are determined, the arrangement consideration should be allocated at the inception of the arrangement to all deliverables using the relative selling price method. Relative selling price is obtained from sources such as vendor-specific objective evidence (“VSOE”), which is based on the separate selling price for that or a similar item or from third-party evidence (“TPE”) such as how competitors have priced similar items. If such evidence is unavailable, we use our best estimate of the selling price (“BESP”), which includes various internal factors such as our pricing strategy and market factors.
We derive over 90% of our revenues as a result of providing processing and services under contracts. The majority of the amount is billed on a monthly basis, generally with thirty-day collection terms. Revenues are recognized for monthly processing and services upon performance of the services. In the event a portion of the arrangement fees are due 12 months or more from the invoice date, we have concluded that the fees do not meet the criteria for being fixed or determinable. In these cases, we recognize the revenue as the fees become due.
Our standard business practice is to bill monthly for development, consulting and training services on a time and materials basis. In some cases we bill a fixed fee for development and consulting services. For fixed fee arrangements, we recognize revenue on a “proportionate performance” basis.
We derive less than 10% of our revenues from licensing products. We license our wealth management products, AWD products, healthcare administration processing software solutions and customer billing software solution products. Perpetual software license revenues are recognized at the time the contract is signed, the software is delivered and no future software obligations exist. Deferral of software license revenue billed results from delayed payment provisions, disproportionate discounts between the license and other services or the inability to unbundle certain services. Term software license revenues are recognized ratably over the term of the license agreement. While license fee revenues are not a significant percentage of our total operations, they can significantly impact earnings in the period in which they are recognized. Revenues from individual license sales depend heavily on the timing, size and nature of the contract. We recognize revenues for maintenance services ratably over the contract term, after collectibility has been reasonably assured.
DST, through our wholly-owned subsidiary ALPS, may enter into arrangements with broker/dealers or other third parties to sell or market closed-end fund shares. Depending on the arrangement, ALPS may earn distribution fees for marketing and selling the underlying fund shares. Conversely, ALPS may incur distribution expenses, including structuring fees, finders’ fees and referral fees paid to unaffiliated broker/dealers or introducing parties for marketing and selling underlying fund shares of a closed-end fund sponsored by ALPS. While distribution revenues and expenses are not significant percentages of our operating revenues or costs and expenses, they can significantly impact operations and earnings in the period in which they are recognized.
We have entered into various agreements with related parties, principally unconsolidated affiliates, to utilize our data processing facilities and computer software systems. We believe that the terms of our contracts with related parties are fair to us and are no less favorable than those obtained from unaffiliated parties.
We assess collection based on a variety of factors, including past collection history with the customer and the credit-worthiness of the customer. We generally do not request collateral from our customers. If we determine that collection of revenues is not reasonably assured, revenue is deferred and is recognized at the time it becomes reasonably assured, which is generally upon receipt of cash. Allowances for billing adjustments and doubtful account expense are estimated as revenues are recognized. Allowances for billing adjustments are recorded as reductions in revenues and doubtful account expense is recorded within Costs and expenses. The annual amounts for these items are immaterial to our consolidated financial statements.
Software capitalization and amortization
We make substantial investments in software to enhance the functionality and facilitate the delivery of our processing services as well as our sale of licensed products. Purchased software is recorded at cost and is amortized on a straight-line basis over the estimated economic life, which is generally three to five years. We also develop a large portion of our software internally. We capitalize software development costs for computer software developed or obtained for internal use after the preliminary project phase has been completed and management has committed to funding the project. For computer software to be sold, leased or otherwise marketed to third parties, we capitalize software development costs which are incurred after the products reach technological feasibility but prior to the general release of the product to customers. The capitalized software development costs are generally amortized on a straight-line basis over the estimated economic life, which is generally three to five years.

25


Significant management judgment is required in determining what projects and costs associated with software development will be capitalized and in assigning estimated economic lives to the completed projects. Management specifically analyzes software development projects and analyzes the percentage of completion as compared to the initial plan and subsequent forecasts, milestones achieved and the commitment to continue funding the projects. Significant changes in any of these items may result in discontinuing capitalization of development costs, as well as immediately expensing previously capitalized costs. We review, on a quarterly basis, our capitalized software for possible impairment.
Depreciation of fixed assets
Our approach on personal property, specifically technology equipment, printing and inserting equipment, is to own the property as opposed to leasing it where practicable. We believe this approach provides us with better flexibility for disposing or redeploying the asset as it nears the completion of its economic life. We depreciate technology equipment using accelerated depreciation methods over the following lives: (1) non-mainframe equipment—three years; (2) mainframe central processing unit—four years; and (3) mainframe direct access storage devices and tape devices—five years. We depreciate furniture and fixtures over estimated useful lives, principally three to five years, using accelerated depreciation methods. We depreciate large printing and inserting equipment used by the Customer Communications segment over a five to seven year life using accelerated depreciation methods. We depreciate leasehold improvements using the straight-line method over the lesser of the term of the lease or life of the improvements. Management judgment is required in assigning economic lives to fixed assets. Management specifically analyzes fixed asset additions, remaining net book values and gain/loss upon disposition of fixed assets to determine the appropriateness of assigned economic lives. Significant changes in any of these items may result in changes in the economic life assigned and the resulting depreciation expense.
Valuation of long-lived and intangible assets and goodwill
Goodwill and intangible assets that have indefinite useful lives are not amortized but are evaluated for impairment. We evaluate the impairment of goodwill at least annually (as of October 1) and evaluate identifiable intangibles, long-lived assets and related assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that could trigger an impairment review include the following: significant under-performance relative to expected historical or projected future operating results; significant changes in the manner of our use of the acquired assets or our strategy for the overall business; and significant negative industry or economic trends. When it is determined that the carrying value of intangibles, long-lived assets or goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we assess actual impairment based on gross cash flows.
Our assessment of goodwill for impairment includes comparing the fair value to the net book value of our reporting units. We estimate fair value using a combination of discounted cash flow models and market approaches. If the fair value of a reporting unit exceeds its net book value, goodwill is not impaired and no further testing is necessary. If the net book value of a reporting unit exceeds its fair value, we perform a second test to measure the amount of impairment loss, if any. To measure the amount of any impairment loss, we determine the implied fair value of goodwill in the same manner as if the affected reporting unit was being acquired in a business combination. Specifically, we allocate the fair value of the affected reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill is less than the goodwill recorded on our balance sheet, an impairment charge is recorded for the difference.
Our 2014 annual goodwill impairment test determined that the estimated fair value of each of our reporting units substantially exceeds its carrying value.
Accounting for investments
We have three significant types of investments: 1) investments in available-for-sale securities, the largest of which is our investment in State Street common stock; 2) investments in unconsolidated affiliates, which is comprised principally of BFDS, IFDS U.K., IFDS L.P. and certain real estate joint ventures; and 3) investments in private equity funds and other investments accounted for under the cost method.
We account for investments in entities in which we own less than 20% and do not have significant influence, in accordance with authoritative guidance related to accounting for certain investments in debt and equity securities, which requires us to designate our investments as trading or available-for-sale. Available-for-sale securities are reported at fair value with unrealized gains and losses excluded from earnings and recorded net of deferred taxes directly to Accumulated other comprehensive income within Stockholders’ equity.
We record an investment impairment charge for an investment with a gross unrealized holding loss resulting from a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an

26


investment’s current carrying value, thereby possibly requiring an impairment charge in the future, which could have a material effect on our financial position.
The equity method of accounting is used for investments in entities, partnerships and similar interests (including investments in private equity funds where we are the limited partner) in which we have significant influence but do not control. We classify these investments as unconsolidated affiliates. Under the equity method, we recognize income or losses from our pro-rata share of these unconsolidated affiliates’ net income or loss, which changes the carrying value of the investment of the unconsolidated affiliate. In certain cases, pro-rata losses are recognized only to the extent of our investment and advances to the unconsolidated affiliate.
The cost method of accounting is used for these investments when we have a de-minimus ownership percentage and do not have significant influence. Our cost method investments are held at the lower of cost or market.
Accounting for income taxes
We account for income taxes in accordance with authoritative accounting guidance. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns (e.g., realization of deferred tax assets, changes in tax laws or interpretations thereof).
In addition, we are subject to examination of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. In accordance with authoritative accounting guidance related to accounting for uncertainty in income taxes, we recognize liabilities for potential tax exposures based on our estimate of whether, and the extent to which, additional taxes may be required. If we ultimately determine that payment of these amounts is unnecessary, then we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained if challenged by the taxing authorities. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective tax rate in a given period may be materially affected. An unfavorable tax settlement would require cash payments and may result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution. We report interest and penalties related to uncertain income tax positions as income taxes.

27


Results of Operations
The following table summarizes our consolidated operating results (millions, except per share amounts). Additional information regarding our segments is included below under the caption, “Year to Year Business Segment Comparisons.”
 
 
 
 
 
 
 
Change
 
Year Ended December 31,
 
2014 vs 2013
 
2013 vs 2012
 
2014
 
2013
 
2012
 
$
 
%
 
$
 
%
Operating revenues
$
2,042.0

 
$
1,960.6

 
$
1,892.4

 
$
81.4

 
4.2
 %
 
$
68.2

 
3.6
 %
Out-of-pocket reimbursements
707.3

 
698.0

 
684.2

 
9.3

 
1.3
 %
 
13.8

 
2.0
 %
     Total revenues
2,749.3

 
2,658.6

 
2,576.6

 
90.7

 
3.4
 %
 
82.0

 
3.2
 %
 

 
 
 
 
 
 
 
 
 
 
 
 
Costs and expenses
2,309.4

 
2,202.1

 
2,202.9

 
107.3

 
4.9
 %
 
(0.8
)
 
 %
Depreciation and amortization (including goodwill impairment)
131.0

 
143.3

 
216.4

 
(12.3
)
 
(8.6
)%
 
(73.1
)
 
(33.8
)%
     Income from operations
308.9

 
313.2

 
157.3

 
(4.3
)
 
(1.4
)%
 
155.9

 
99.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(26.6
)
 
(34.5
)
 
(43.5
)
 
(7.9
)
 
(22.9
)%
 
(9.0
)
 
(20.7
)%
Gain on sale of business
100.5

 

 

 
100.5

 
100.0
 %
 

 
 %
Other income, net
373.5

 
243.2

 
373.5

 
130.3

 
53.6
 %
 
(130.3
)
 
(34.9
)%
Equity in earnings of unconsolidated affiliates
35.4

 
23.0

 
32.2

 
12.4

 
53.9
 %
 
(9.2
)
 
(28.6
)%
     Income before income taxes
791.7

 
544.9

 
519.5

 
246.8

 
45.3
 %
 
25.4

 
4.9
 %
Income taxes
198.4

 
192.3

 
195.5

 
6.1

 
3.2
 %
 
(3.2
)
 
(1.6
)%
     Net income
$
593.3

 
$
352.6

 
$
324.0

 
$
240.7

 
68.3
 %
 
$
28.6

 
8.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
Consolidated total revenues (including out-of-pocket (“OOP”) reimbursements) increased $90.7 million or 3.4% during the year ended December 31, 2014 as compared to December 31, 2013 and increased $82.0 million or 3.2% during the year ended December 31, 2013 as compared to December 31, 2012. Consolidated operating revenues increased $81.4 million or 4.2% in 2014 as compared to 2013 and increased $68.2 million or 3.6% in 2013 as compared to 2012.
The operating revenue growth in 2014 compared to 2013 was primarily attributable to increased operating revenues in the Financial Services and Healthcare Services segments, partially offset by a slight decline in operating revenues in the Customer Communications segment. The operating revenue growth in 2013 compared to 2012 was attributable to increased operating revenues in all three of our operating segments.
Consolidated OOP reimbursements increased $9.3 million or 1.3% in 2014 as compared to 2013 and increased $13.8 million or 2.0% in 2013 as compared to 2012. The net increase in consolidated OOP reimbursements in 2014 is primarily attributable to new clients in the Customer Communications segment. The net increase in consolidated OOP reimbursements in 2013 was attributable to higher volumes from new customers in the Customer Communications segment, partially offset by a decrease in the Financial Services segment attributable to lower registered accounts serviced.
Costs and expenses
Consolidated costs and expenses (including OOP reimbursements) increased $107.3 million or 4.9% during the year ended December 31, 2014 as compared to December 31, 2013 and decreased $0.8 million during the year ended December 31, 2013 as compared to December 31, 2012. Reimbursable operating expenses included in costs and expenses were $707.3 million in 2014, an increase of $9.3 million as compared to 2013 and $698.0 million in 2013, an increase of $13.8 million as compared to 2012.
Excluding reimbursable operating expenses, costs and expenses increased $98.0 million in 2014 as compared to 2013 and decreased $14.6 million in 2013 as compared to 2012. On this basis, the increase in 2014 compared to 2013 was primarily attributable to increased costs and expenses in the Financial Services and Healthcare Services segments, partially offset by decreased costs and expenses in the Customer Communications segment.


28


As a result of market changes which have impacted our service offerings to clients, including lower registered account processing, we have implemented a restructuring initiative to reduce our workforce and consolidate certain facilities to enhance operational efficiency within the Financial Services and Customer Communications segments. As a result of this restructuring initiative, we incurred pretax charges during 2014 of $12.7 million ($8.5 million in Financial Services and $4.2 million in Customer Communications). We anticipate this restructuring initiative will result in annual pretax operating cost savings of approximately $13.0 million to $15.0 million, of which approximately 75% is expected to be realized in the Financial Services segment operations and the remaining will be realized within the Customer Communications segment.
Excluding reimbursable operating expenses, the decrease in costs and expenses in 2013 as compared to 2012 was primarily related to decreased costs and expenses in the Customer Communication segment, partially offset by increased costs and expenses in the Financial Services and Healthcare Services Segments.
Depreciation and amortization (including goodwill impairment)
Consolidated deprecation and amortization decreased $12.3 million or 8.6% during the year ended December 31, 2014 as compared to December 31, 2013 and decreased $73.1 million or 33.8% during the year ended December 31, 2013 as compared to December 31, 2012. The decrease in 2014 was primarily attributable to a decline within the Customer Communications segment, partially offset by increases in Financial Services and Healthcare Services Segment. The decrease in 2013 was primarily attributable to the 2012 goodwill impairment in the Customer Communications - U.K. reporting unit and other charges that did not recur in 2013.
Income from operations
Consolidated income from operations decreased $4.3 million or 1.4% to $308.9 million during the year ended December 31, 2014 as compared to 2013 and increased $155.9 million or 99.1% to $313.2 million during the year ended December 31, 2013 as compared to 2012. The decrease in 2014 was primarily attributable to a decline within the Financial Services segment, partially offset by increases in the Healthcare Services, Customer Communications and Investments and Other segments. The increase in 2013 was primarily attributable to the 2012 goodwill impairment in the Customer Communications - U.K. reporting unit and other charges that did not recur in 2013.
Interest expense
Interest expense was $26.6 million, $34.5 million and $43.5 million during the years ended December 31, 2014, 2013 and 2012, respectively. Interest expense decreased 22.9% during 2014 as compared to 2013 primarily from lower weighted-average debt balances outstanding. Interest expense decreased during 2013 as compared to 2012 primarily from lower weighted-average debt balances outstanding, as well as lower weighted-average interest rates.
Gain on sale of business
Effective November 30, 2014, we sold our wholly-owned subsidiary, Global Solutions for cash consideration of $95.0 million, subject to customary working capital post-closing adjustments. We recorded a pretax gain of $100.5 million on the sale during 2014. Operating revenues generated from the Global Solutions businesses sold were approximately $61.4 million, $71.3 million and $76.9 million for the years ended December 31, 2014, 2013 and 2012, respectively. Operating income generated from the Global Solutions businesses sold were approximately $6.9 million, $10.0 million and $7.0 million for the years ended December 31, 2014, 2013 and 2012, respectively. Our pretax gain exceeded our sale proceeds primarily from the reclassification of cumulative translation adjustments due to the substantial liquidation of the foreign entities, partially offset by transaction costs. The carrying value of the entities sold was minimal.

29


Other income, net
The components of other income, net are as follows (in millions):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Net realized gains from the disposition of available-for-sale securities
$
181.4

 
$
193.0

 
$
148.1

Net gains on private equity funds and other investments
27.8

 
31.2

 
9.3

Gain on sale of private company investment
103.6

 

 
138.7

Private company investment dividend
33.2

 

 
48.4

Gain on contract to repurchase shares of DST Common Stock
18.1

 

 

Dividend income
11.4

 
13.1

 
18.2

Interest income
1.8

 
3.6

 
4.1

Foreign currency gains (losses)
(2.6
)
 
(6.6
)
 
3.7

Miscellaneous items
(1.2
)
 
8.9

 
3.0

Other income, net
$
373.5

 
$
243.2

 
$
373.5

Included in the $181.4 million of net realized gains from the disposition of available for sale securities during 2014 is a $169.3 million gain from the sale of approximately 2.6 million shares of State Street Corporation. The 2013 net realized gains of $193.0 million includes gains of $130.3 million from the sale of approximately 2.3 million shares of State Street Corporation. The 2012 net realized gains of $148.1 million includes gains of $53.6 million from the sale of Computershare Ltd. shares, $38.0 million from the disposition of State Street Corporation shares and $31.3 million from the sale of Euronet Worldwide shares.
We recorded a net gain on private equity funds and other investments of $27.8 million, $31.2 million and $9.3 million during the years ended December 31, 2014, 2013 and 2012, respectively, primarily due to distributions received from certain of our private equity fund investments resulting in realized gains. We recorded $2.2 million, $0.6 million and $8.3 million of net impairments on private equity funds and other investments related to adverse market conditions and poor performance of the underlying investments during the years ended December 31, 2014, 2013 and 2012, respectively. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments and may require an impairment charge in the future, which could have a material effect on our net income.
We recorded gains of $103.6 million and $138.7 million on the sales of our investment in a privately-held company during the years ended December 31, 2014 and 2012, respectively. We also received cash dividends of $33.2 million and $48.4 million from the private company investment during the years ended December 31, 2014 and 2012, respectively. We have no remaining investment in this private company at December 31, 2014.
We repurchased $200.0 million of our common stock from a group of stockholders including George L. Argyros, Julia A. Argyros, and certain of their affiliates (collectively, “the Argyros Group” or “Argyros”) during 2014. The price paid per share was determined in connection with the secondary offering of Argyros’ DST common stock in May 2014. In connection with this share repurchase, we recorded a non-cash gain of $18.1 million during the year ended December 31, 2014 resulting from the change in stock price between the date the share repurchase price became fixed and the settlement date.
We receive dividend income from certain investments held. Dividends received from State Street common stock were $6.6 million, $8.4 million and $9.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. State Street Corporation quarterly dividend per common share was $0.24 per share in 2012, and then increased to $0.26 per share in 2013, and had a further increase to $0.30 per share in 2014.

30


Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates, is as follows (in millions):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Boston Financial Data Services, Inc. 
$
5.1

 
$
8.2

 
$
10.2

International Financial Data Services (U.K. and L.P.)
19.1

 
9.7

 
21.9

Other unconsolidated affiliates
11.2

 
5.1

 
0.1

Total
$
35.4

 
$
23.0

 
$
32.2

Equity in earnings of BFDS decreased $3.1 million during the year ended December 31, 2014 as compared to 2013. The decrease was primarily attributable to lower shareowner processing revenues associated with reduced levels of accounts serviced, partially offset by higher revenues from ancillary services. Favorable reductions in BFDS operating expenses were largely offset by investments in ancillary product offerings and severance costs incurred as a result of actions taken during 2014. Equity in earnings of BFDS decreased $2.0 million during the year ended December 31, 2013 as compared to 2012. The decrease was primarily from lower revenues associated with reduced levels of accounts serviced and lower interest income, partially offset by the recognition of a deferred gain from the 2013 sale of an investment in Cofunds, Ltd. of $1.1 million.
Equity in earnings of IFDS increased $9.4 million during the year ended December 31, 2014, as compared to 2013 primarily attributable to revenues recognized related to the ongoing conversion activities of the previously announced new wealth management clients in the U.K. These multi-year implementation efforts for the two new clients are continuing to progress and are expected to be completed in phases. Earnings will continue to be impacted by the rate of progress related to the conversions and therefore may not be consistent period to period throughout the implementation and conversion process. IFDS continues to incur significant costs to develop the new wealth management platform for the U.K. market and expand its infrastructure to prepare for the addition of these new clients and associated service offerings. Equity in earnings of IFDS decreased $12.2 million during the year ended December 31, 2013, as compared to 2012, primarily attributable to the $14.8 million gain (DST’s share) on IFDS Canada’s sale of a real estate partnership in 2012, partially offset by the recognition of a $6.3 million gain (DST’s share) on IFDS U.K.’s sale of an equity method investment in Cofunds, Ltd. in 2013. The remaining decline is primarily due to costs associated with the establishment of new service offerings, which include the development and build-out of a wealth management platform for the U.K. marketplace utilizing our Bluedoor technology, partially offset by higher revenues from increased accounts serviced.
IFDS shareowner accounts serviced were 23.8 million at December 31, 2014, an increase of 2.0 million accounts or 9.2% as compared to December 31, 2013. The increase was primarily due to new client conversions, including a client in Canada that converted approximately 650,000 new accounts during 2014. IFDS shareowner accounts serviced were 21.8 million at December 31, 2013, an increase of 1.1 million accounts or 5.3% as compared to December 31, 2012.
Our equity in earnings of other unconsolidated affiliates was $11.2 million during the year ended December 31, 2014, an increase of $6.1 million as compared to 2013. The increase was primarily due to the sale of our investment in an unconsolidated affiliate which resulted in a gain of $5.7 million. Our equity in earnings of other unconsolidated affiliates was $5.1 million during the year ended December 31, 2013, an increase of $5.0 million as compared to 2012. Our other unconsolidated affiliates recorded $4.1 million of real estate impairments in 2012.
Additional condensed financial information of our significant operating unconsolidated affiliates, BFDS and IFDS, is presented below (in millions):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Total revenues
$
1,111.0

 
$
912.7

 
$
862.1

Costs and expenses
1,009.7

 
855.1

 
795.7

Depreciation and amortization
39.1

 
30.4

 
27.5

Income from operations
62.2

 
27.2

 
38.9

Non-operating income
3.4

 
23.1

 
48.0

Income before income taxes
65.6

 
50.3

 
86.9

Income taxes
17.0

 
14.7

 
22.6

Net income
$
48.6

 
$
35.6

 
$
64.3


31


Income taxes
Our effective tax rate was 25.1%, 35.3% and 37.6% for the years ended December 31, 2014, 2013 and 2012, respectively. The effective tax rates in each of the three years ended December 31, 2014 were affected by tax benefits relating to certain international operations and recognition of state tax benefits associated with income apportionment rules. In addition, our income tax rate for 2014 was favorably impacted by the reversal of $30.3 million of uncertain tax position liabilities, net of additions, primarily related to statute expirations.
Our effective income tax rate for 2013 was favorably impacted by a $16.1 million benefit from the completion of the IRS examination of previously filed federal income tax refund claims for Domestic Manufacturing Deductions under Internal Revenue Code Section 199 and research and experimentation credits for the periods 2006 through 2009. The 2013 effective tax rate also included a tax expense of $7.5 million relating to an increase in the overall incremental U.S. tax expected to be imposed upon the repatriation of unremitted foreign earnings previously considered permanently reinvested.
Our income tax rate for 2012 included benefits from the favorable IRS resolution of certain research and experimentation credits and domestic manufacturing deduction of $18.3 million and the charitable contribution of appreciated securities of approximately $5.0 million, partially offset by lower tax credits.
Excluding the effect of discrete period items, we expect our tax rate to be approximately 36% in 2015. The 2015 tax rate can be affected as a result of variances among the estimates and amounts of 2015 sources of taxable income (e.g., domestic consolidated, joint venture and/or international), the realization of tax credits, adjustments which may arise from the resolution of tax matters under review and our assessment of our liability for uncertain tax positions.

32


YEAR TO YEAR BUSINESS SEGMENT COMPARISONS
FINANCIAL SERVICES SEGMENT
The following table presents the financial results of the Financial Services segment (in millions):
 
 
 
 
 
 
 
Change
 
Year Ended December 31,
 
2014 vs. 2013
 
2013 vs. 2012
 
2014
 
2013
 
2012
 
$
 
%
 
$
 
%
Operating revenues
$
1,054.2

 
$
1,004.3

 
$
978.6

 
$
49.9

 
5.0
 %
 
$
25.7

 
2.6
 %
Out-of-pocket reimbursements
51.5

 
44.4

 
49.7

 
7.1

 
16.0
 %
 
(5.3
)
 
(10.7
)%
Total revenues
1,105.7

 
1,048.7

 
1,028.3

 
57.0

 
5.4
 %
 
20.4

 
2.0
 %
Costs and expenses
847.5

 
772.8

 
777.0

 
74.7

 
9.7
 %
 
(4.2
)
 
(0.5
)%
Depreciation and amortization
68.2

 
65.1

 
74.3

 
3.1

 
4.8
 %
 
(9.2
)
 
(12.4
)%
Income from operations
$
190.0

 
$
210.8

 
$
177.0

 
$
(20.8
)
 
(9.9
)%
 
$
33.8

 
19.1
 %
 
 
 
 
 
 
 

 

 

 

Operating margin
18.0
%
 
21.0
%
 
18.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following table summarizes the Financial Services segment’s statistical metrics (in millions, except as noted):
 
 
December 31,
 
 
2014
 
2013
 
2012
U.S. mutual fund shareowner accounts processed:
 
 
 
 
 
 
Registered accounts - non tax-advantaged
 
29.6

 
30.6

 
34.3

IRA mutual fund accounts
 
22.3

 
23.0

 
23.5

Other retirement accounts
 
8.1

 
8.3

 
8.5

Section 529 and Educational IRAs
 
8.8

 
9.3

 
9.4

Registered accounts - tax-advantaged
 
39.2

 
40.6

 
41.4

Total registered accounts
 
68.8

 
71.2

 
75.7

Subaccounts
 
28.6

 
25.7

 
12.4

Total
 
97.4

 
96.9

 
88.1

 
 
 
 
 
 
 
International mutual fund shareowner accounts processed:
 
 
 
 
 
 
IFDS U.K.
 
11.3

 
10.2

 
9.4

IFDS L.P. (Canada)
 
12.5

 
11.6

 
11.3

Total
 
23.8

 
21.8

 
20.7

 
 
 
 
 
 
 
Defined contribution participant accounts
 
7.2

 
6.9

 
6.1

 
 
 
 
 
 
 
ALPS (in billions of U.S. dollars):
 
 
 
 
 
 
Assets Under Management
 
$
15.3

 
$
11.8

 
$
8.3

Assets Under Administration
 
$
176.9

 
$
147.7

 
$
101.9

 
 
 
 
 
 
 
Automatic Work Distributor workstations (in thousands)
 
212.5

 
209.7

 
207.6




33


 
 
Year Ended December 31,
 
 
2014
 
2013
 
2012
Changes in registered accounts:
 
 
 
 
 
 
Beginning balance
 
71.2

 
75.7

 
85.1

New client conversions
 

 
0.4

 
0.5

Subaccounting conversions to DST platforms
 
(0.6
)
 
(1.6
)
 
(2.8
)
Subaccounting conversions to non-DST platforms
 
(1.9
)
 
(3.5
)
 
(6.3
)
Conversions to non-DST platforms
 
(1.0
)
 
(0.2
)
 
(0.9
)
Organic growth
 
1.1

 
0.4

 
0.1

Ending balance
 
68.8

 
71.2

 
75.7

 
 
 
 
 
 
 
Changes in subaccounts:
 
 
 
 
 
 
Beginning balance
 
25.7

 
12.4

 
14.6

New client conversions
 

 
5.7

 
0.1

Conversions from non-DST registered platforms
 
0.7

 
1.5

 
0.3

Conversions from DST’s registered accounts
 
0.6

 
1.6

 
2.8

Conversions to non-DST platforms
 

 

 
(6.1
)
Organic growth
 
1.6

 
4.5

 
0.7

Ending balance
 
28.6

 
25.7

 
12.4

 
 
 
 
 
 
 
Changes in defined contribution participant accounts:
 
 
 
 
 
 
Beginning balance
 
6.9

 
6.1

 
5.1

New client conversions
 
0.3

 
1.3

 
0.9

Client losses
 

 

 
(0.1
)
Organic growth (decline)
 

 
(0.5
)
 
0.2

Ending balance
 
7.2

 
6.9

 
6.1

Comparison of 2014 versus 2013 results
Revenues
Financial Services segment total revenues for the year ended December 31, 2014 were $1,105.7 million, an increase of $57.0 million or 5.4% as compared to 2013. Financial Services segment operating revenues of $1,054.2 million reflect an increase of $49.9 million or 5.0% in 2014 as compared to 2013. Financial Services segment OOP reimbursement revenues for the year ended December 31, 2014 were $51.5 million, an increase of $7.1 million as compared to 2013.
The increase in operating revenues during the year ended December 31, 2014 was primarily from higher operating revenues within our ALPS business. ALPS operating revenues increased over the comparable prior year periods as a result of net positive funds flow and favorable market conditions which have contributed to the growth of assets under management within the ALPS proprietary funds and increases in other ALPS distribution and services revenues. Also contributing to the increased operating revenues was an increase in subaccounts processed as a result of organic growth from existing clients and new clients. Excluding a $6.0 million contract termination payment received in 2013, our operating revenues from retirement solutions increased during the year ended December 31, 2014 as compared to 2013 principally from higher professional services fee revenue and higher participants as a result of the conversion of new clients. Operating revenues also increased in 2014 due to higher professional services revenue from the implementation and configuration of new wealth management clients. The increase in Financial Services operating revenues were partially offset by unfavorable changes in foreign currency exchange rates between the U.S. Dollar and other foreign currencies. Financial Services operating revenues included approximately $41.2 million of software license fee revenues for the year ended December 31, 2014, an increase of $3.1 million as compared to 2013.
The growth in operating revenues was partially offset by the sale of Global Solutions on November 30, 2014. Global Solutions operating revenue decreased $9.9 million during the year ended December 31, 2014 as compared to 2013, primarily due to one less month of operations in 2014. We also experienced decreased revenue from our U.S. registered shareowner account processing due to lower registered accounts primarily as a result of subaccounting conversions. Registered accounts serviced at December 31, 2014 decreased 2.4 million or 3.4% from December 31, 2013. We estimate that an additional four to five million registered accounts will convert to subaccounts during 2015. We have been informed that certain broker/dealers may convert

34


certain tax-advantaged accounts to a subaccounting platform, however, the timing and number of accounts is not currently known. The number of accounts estimated to convert from various DST platforms is based upon information obtained from clients. There are a variety of factors that will affect the number and timing of registered accounts converted to subaccounts.
Costs and expenses
Financial Services segment costs and expenses for the year ended December 31, 2014 were $847.5 million, an increase of $74.7 million as compared to 2013. Costs and expenses in the Financial Services segment are primarily comprised of compensation and benefit costs, but also include technology related expenditures and reimbursable operating expenses. Reimbursable operating expenses included in costs and expenses were $51.5 million in 2014, an increase of $7.1 million as compared to 2013.
Excluding reimbursable operating expenses, costs and expenses were $796.0 million for 2014, an increase of $67.6 million as compared to 2013. On this basis, the increase in costs and expenses during 2014 was primarily from increased costs to support higher revenues, higher costs associated with the new business initiatives associated with the growth of ALPS asset gathering business, and investments to further develop the Applied Analytics and brokerage solutions service offerings. In addition, costs increased due to enhancing our regulatory, compliance and security programs. We also incurred higher restructuring charges and advisory and other transaction costs during 2014, primarily as a result of a $13.0 million charge resulting primarily from the restructuring event implemented during 2014 to reduce our workforce and consolidate certain facilities to enhance operational efficiency within the Financial Services segment and $5.6 million of advisory and other transaction costs incurred in connection with the agreement reached with Argyros in 2014. These increases in costs and expenses were partially offset by lower mark-to-market losses on deferred compensation liabilities (the effect of which is offset within other income), changes in foreign currency exchange rates between the U.S. Dollar and other foreign currencies and lower expenses associated with the fund launched by ALPS of $2.8 million in 2013 that did not recur in 2014.
Depreciation and amortization
Financial Services segment depreciation and amortization costs for the year ended December 31, 2014 were $68.2 million, an increase of $3.1 million or 4.8% as compared to 2013. The increase in 2014 was primarily from higher capital expenditures.
Income from operations
Financial Services segment income from operations for 2014 was $190.0 million, a decrease of $20.8 million or 9.9% as compared to 2013. The decrease in Financial Services income from operations was primarily from higher operating expenses to support incremental revenues and new business initiatives as well as increased risk, compliance and security costs, partially offset by higher operating revenues and $11.0 million of lower mark-to-market losses. Global Solutions, which was sold as of November 30, 2014, had $3.0 million less operating income in 2014 than during the full year 2013. Additionally, income from operations during 2013 included a $6.0 million contract termination payment that did not recur in 2014.
Comparison of 2013 versus 2012 results
Revenues
Financial Services segment total revenues for the year ended December 31, 2013 were $1,048.7 million, an increase of $20.4 million or 2.0% as compared to 2012. Financial Services segment operating revenues of $1,004.3 million increased $25.7 million or 2.6% in 2013 as compared to 2012.
The increase in operating revenues during the year ended December 31, 2013 was primarily attributable to increased operating revenues from ALPS, brokerage solutions, retirement solutions, and wealth management, partially offset by lower operating revenues from our U.S. registered shareowner account processing and lower software license revenues. Operating revenues also decreased from changes in foreign currency exchange rates between the U.S. Dollar and other foreign currencies.
The increased revenue at ALPS was due to organic growth at existing clients, favorable market conditions and revenues from new clients during 2013. Revenues also increased from brokerage solutions’ conversions of new clients and organic growth from existing clients along with higher wealth management solutions’ software license sales and professional services revenue associated with the expansion into the U.K. market.
Retirement solutions’ operating revenues during 2013 increased as compared to 2012 primarily from higher defined contribution participants processed as new clients were converted, partially offset by reductions in participants serviced due to the annual removal of prior year terminated participants. Operating revenues were also favorably impacted by a $6.0 million contract termination payment received from partial termination of a retirement solutions’ client during 2013.

35


Operating revenues from Global Solutions and our business process and document management businesses, including AWD, decreased during 2013 as compared to 2012 primarily from lower software license revenues and professional services. Global Solutions had higher perpetual software license sales and associated professional service revenue in 2012 that did not recur in 2013. Financial Services operating revenues included approximately $38.1 million of software license fee revenues for the year ended December 31, 2013, a decrease of $5.0 million as compared to 2012.
Registered accounts serviced at December 31, 2013 decreased 4.5 million accounts or 5.9% from December 31, 2012. During 2013, approximately 5.1 million registered accounts converted to subaccounting platforms of which 1.6 million converted to DST’s platform.
Costs and expenses
Financial Services segment costs and expenses for the year ended December 31, 2013 were $772.8 million, a decrease of $4.2 million as compared to 2012. Reimbursable operating expenses included in costs and expenses were $44.4 million for the year ended December 31, 2013, a decrease of $5.3 million as compared to 2012. Excluding reimbursable operating expenses, costs and expenses were $728.4 million for 2013, an increase of $1.1 million as compared to 2012. On this basis, the increase in costs and expenses during 2013 was primarily from higher costs to support the increased revenues, increased deferred compensation (offset as unrealized gains on trading securities in other income) and $2.8 million incurred for the launch of a new closed-end fund at ALPS, which were partially offset by lower employee termination expenses and lower costs as a result of exiting the insurance processing solutions business in 2012. Costs and expenses also decreased from changes in foreign currency exchange rates between the U.S. Dollar and other foreign currencies.
Depreciation and amortization
Financial Services segment depreciation and amortization costs for the year ended December 31, 2013 were $65.1 million, a decrease of $9.2 million or 12.4% as compared to 2012. The decrease in 2013 was primarily the result of a $5.8 million asset impairment charge incurred in 2012 which did not recur in 2013 and lower capitalized software costs.
Income from operations
Financial Services segment income from operations for 2013 was $210.8 million, an increase of $33.8 million or 19.1% as compared to 2012. The increase in Financial Services income from operations was from higher operating revenues including the receipt of a $6.0 million partial contract termination payment, partially offset by increased deferred compensation plan costs and ALPS fund launch expenses during 2013. The increase was also the result of employee termination costs and other costs in 2012 that did not recur in 2013.
HEALTHCARE SERVICES SEGMENT
The following table presents the financial results of the Healthcare Services segment (in millions):
 
 
 
 
 
 
 
Change
 
Year Ended December 31,
 
2014 vs. 2013
 
2013 vs. 2012
 
2014
 
2013
 
2012
 
$
 
%
 
$
 
%
Operating revenues
$
382.2

 
$
333.3

 
$
300.6

 
$
48.9

 
14.7
%
 
$
32.7

 
10.9
%
Out-of-pocket reimbursements
6.8

 
6.2

 
5.1

 
0.6

 
9.7
%
 
1.1

 
21.6
%
Total revenues
389.0

 
339.5

 
305.7

 
49.5

 
14.6
%
 
33.8

 
11.1
%
Costs and expenses
308.5

 
270.5

 
255.9

 
38.0

 
14.0
%
 
14.6

 
5.7
%
Depreciation and amortization
19.5

 
19.3

 
17.7

 
0.2

 
1.0
%
 
1.6

 
9.0
%
Income from operations
$
61.0

 
$
49.7

 
$
32.1

 
$
11.3

 
22.7
%
 
$
17.6

 
54.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating margin
16.0
%
 
14.9
%
 
10.7
%
 
 
 
 
 
 
 
 

36


The following tables summarize the Healthcare Services segment’s statistical metrics (in millions):
 
 
December 31,
 
 
2014
 
2013
 
2012
DST Health Solutions covered lives
 
24.2

 
23.5

 
23.3

 
 
 Year Ended December 31,
 
 
2014
 
2013
 
2012
Argus pharmacy paid claims
 
486.6

 
444.0

 
400.7

Comparison of 2014 versus 2013 results
Revenues
Healthcare Services segment total revenues of $389.0 million during the year ended December 31, 2014 reflect an increase of $49.5 million or 14.6% as compared to 2013. Healthcare Services segment operating revenues of $382.2 million reflect an increase of $48.9 million or 14.7% in 2014 compared to 2013. Healthcare Services segment OOP reimbursement revenues for the year ended December 31, 2014 were $6.8 million, an increase of $0.6 million or 9.7% as compared to 2013. The increase in operating revenue during the year ended December 31, 2014 was primarily from increased pharmacy claims processing revenues principally due to growth in Medicare, Medicaid and healthcare exchange members at existing clients. The continued increase in Medicare Part D members is primarily the result of more eligible members as more individuals are reaching age 65 than in the past. Membership is also positively impacted as individuals are generally living longer and the government is offering tax incentives for companies to promote participation in healthcare plans. Revenues were also higher than in the prior year as a result of increases in discount card services and higher service level incentives earned. Operating revenues also increased from medical claims transaction volume growth from new and existing clients, higher medical claim business process outsourcing revenues and increased software license sales. Operating revenues included approximately $8.6 million of software license fee revenues for the year ended December 31, 2014, an increase of $1.0 million as compared to 2013.
During 2013, one of our top five customers notified us that it would not renew its contract with us. Effective January 2015, this customer deconverted approximately 40% of their business with us. The remainder of the deconversion is expected to occur in stages over the next two years.
Costs and expenses
Healthcare Services segment costs and expenses for the year ended December 31, 2014 were $308.5 million, an increase of $38.0 million as compared to 2013. Costs and expenses are primarily comprised of compensation and benefits costs but also include technology-related expenditures. Reimbursable operating expenses included in costs and expenses were $6.8 million in 2014, an increase of $0.6 million as compared to 2013. Excluding reimbursable operating expenses, costs and expenses were $301.7 million for 2014, an increase of $37.4 million as compared to 2013. On this basis, the increase in costs and expenses during 2014 was primarily from increased staffing costs, higher client conversion and implementation costs and higher claim processing costs due to the increased volume and complexity of transactions processed. The increase in costs was also impacted by an incremental $6.4 million estimated liability recorded during 2014 related to processing errors identified for certain pharmacy claim transactions. Additionally, the year ended December 31, 2014 was impacted by the resolution of a regulatory inquiry which resulted in the reversal of $4.0 million previously accrued in excess of the final settlement amount of $2.0 million. During 2013, the loss accrual for this matter was increased by $2.5 million based upon our best estimate of the potential liability at that time.
Depreciation and amortization
Healthcare Services segment depreciation and amortization costs for the year ended December 31, 2014 were $19.5 million, an increase of $0.2 million or 1.0% as compared to 2013.
Income from operations
Healthcare Services segment income from operations for 2014 was $61.0 million, an increase of $11.3 million or 22.7% as compared to 2013. The increase in income from operations was primarily attributable to higher revenues and the $6.5 million impact year-over-year from the resolution of a regulatory inquiry, partially offset by increased staffing costs incurred to complete new client implementations and to service the increased transaction volumes. The increase in operating income was also partially offset by a $6.4 million increase in processing error costs in 2014 as compared with 2013.

37


Comparison of 2013 versus 2012 results
Revenues
Healthcare Services segment total revenues of $339.5 million for the year ended December 31, 2013 increased $33.8 million or 11.1% as compared to 2012. Healthcare Services segment operating revenues of $333.3 million increased $32.7 million or 10.9% as compared to 2012. Healthcare Services segment OOP reimbursement revenues for the year ended December 31, 2013 were $6.2 million, an increase of $1.1 million or 21.6% as compared to 2012. The increase in operating revenues for the year ended December 31, 2013 was primarily attributable to a 10.8% increase in pharmacy claims paid associated with increased Medicare and Medicaid members and higher pharmacy discount card services. Operating revenues also increased as a result of organic growth at existing clients and new full service clients that successfully converted to our medical claims processing platform during 2013. Operating revenues included approximately $7.6 million of software license fee revenues for the year ended December 31, 2013, an increase of $1.8 million as compared to 2012, principally from new healthcare exchange software licenses sold in 2013.
Costs and expenses
Healthcare Services segment costs and expenses for the year ended December 31, 2013 were $270.5 million, an increase of $14.6 million as compared to 2012. Reimbursable operating expenses included in costs and expenses were $6.2 million in 2013, an increase of $1.1 million as compared to 2012. Excluding reimbursable operating expenses, costs and expenses were $264.3 million for 2013, an increase of $13.5 million as compared to 2012. On this basis, the increase in costs and expenses during 2013 was primarily from increased personnel costs to support higher volumes of revenue and higher costs associated with new business initiatives, partially offset by lower employee termination costs. The increase was also due to a $2.5 million loss accrual recorded during 2013 related to a regulatory inquiry into the processing of certain pharmacy claims from 2006 to 2009.
Depreciation and amortization
Healthcare Services segment depreciation and amortization costs for the year ended December 31, 2013 were $19.3 million, an increase of $1.6 million or 9.0% as compared to 2012. The increase in 2013 was primarily the result of higher internally developed capitalized software.
Income from operations
Healthcare Services segment income from operations for 2013 was $49.7 million, an increase of $17.6 million or 54.8% as compared to 2012. The increase in Healthcare Services income from operations was from higher pharmacy claims paid associated with increased Medicare and Medicaid members and higher medical claim processing revenues from new and existing clients, partially offset by increased personnel costs to support the higher volumes of revenue.

38


CUSTOMER COMMUNICATIONS SEGMENT
The following tables present the financial results of the Customer Communications segment (in millions):
 
 
 
 
 
 
 
Change
 
Year Ended December 31,
 
2014 vs. 2013
 
2013 vs. 2012
 
2014
 
2013
 
2012
 
$
 
%
 
$
 
%
Operating revenues
$
650.5

 
$
660.5

 
$
650.0

 
$
(10.0
)
 
(1.5
)%
 
$
10.5

 
1.6
 %
Out-of-pocket reimbursements
659.1

 
654.7

 
636.7

 
4.4

 
0.7
 %
 
18.0

 
2.8
 %
Total revenues
1,309.6

 
1,315.2

 
1,286.7

 
(5.6
)
 
(0.4
)%
 
28.5

 
2.2
 %
Costs and expenses
1,218.7

 
1,220.2

 
1,214.9

 
(1.5
)
 
(0.1
)%
 
5.3

 
0.4
 %
Depreciation and amortization (including goodwill impairment)
37.6

 
44.0

 
107.4

 
(6.4
)
 
(14.5
)%
 
(63.4
)
 
(59.0
)%
Income (loss) from operations
$
53.3

 
$
51.0

 
$
(35.6
)
 
$
2.3

 
4.5
 %
 
$
86.6

 
(243.3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating margin
8.2
%
 
7.7
%
 
(5.5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change
 
Year Ended December 31,
 
2014 vs. 2013
 
2013 vs. 2012
 
2014
 
2013
 
2012
 
$
 
%
 
$
 
%
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
$
454.8

 
$
470.7

 
$
455.2

 
$
(15.9
)
 
(3.4
)%
 
$
15.5

 
3.4
 %
United Kingdom
195.7

 
189.8

 
194.8

 
5.9

 
3.1
 %
 
(5.0
)
 
(2.6
)%
Customer Communications segment
$
650.5

 
$
660.5

 
$
650.0

 
$
(10.0
)
 
(1.5
)%
 
$
10.5

 
1.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (Loss) from Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
$
48.1

 
$
48.2

 
$
43.5

 
$
(0.1
)
 
(0.2
)%
 
$
4.7

 
10.8
 %
United Kingdom
5.2

 
2.8

 
(79.1
)
 
2.4

 
85.7
 %
 
81.9

 
(103.5
)%
Customer Communications segment
$
53.3

 
$
51.0