Significant Business Transactions and Events

Significant Business Acquisitions

Acquisition of the remaining interest in BFDS

On March 27, 2017, we entered into a series of definitive agreements to acquire State Street’s equity interest in our BFDS joint venture, which provides shareholder recordkeeping, intermediary and investor services, and regulatory compliance solutions to financial services clients in the United States. We also acquired an investment in a privately-held company and the equity interest in IFDS Realty, LLC, which holds the real estate assets used in BFDS’ operations, through a distribution from IFDS L.P., our 50/50 joint venture with State Street. As a result of these transactions, we expect to enhance the strategic value we can provide to our clients through full service capabilities while also realizing internal synergies through increased scale and operational efficiencies.

The BFDS transaction, which closed on March 30, 2017, was structured as a non–taxable exchange under Section 355 of the Internal Revenue Code. At closing, DST delivered to State Street approximately 2.0 million shares of State Street common stock with a closing date fair value of $163.4 million (with a cost basis for tax purposes of approximately $1.1 million and a cost basis for book purposes of approximately $16.8 million) in exchange for State Street’s equity interest in BFDS. The number of shares delivered at closing was calculated using the negotiated fair value of $157.6 million and the closing price of State Street’s stock at signing. BFDS is included within the Domestic Financial Services segment.

The acquisition of State Street’s 50% equity interest in BFDS was accounted for as a step-acquisition. Accordingly, we remeasured our previously held non-controlling equity interest in BFDS to the estimated fair value of $151.1 million, resulting in a gain of $56.0 million recorded at the acquisition date, within Other income, net in the Consolidated Statement of Income. The fair value of the previously held equity interest in BFDS was determined using various valuation techniques, including market comparable transactions and discounted cash flow analysis adjusted for a control premium. These fair value measurements are based on significant inputs, such as forecasted cash flows and discount rates, that are not observable in the market (Level 3). In addition, we recognized a $146.6 million gain in Other income, net in the Consolidated Statement of Income related to the State Street shares exchanged in the transaction.

The factors described above, combined with the synergies expected from combining our operations with the acquired entity and the resulting enhanced clarity in the service offerings available to our clients, are the basis for the acquisition price paid resulting in $68.7 million of goodwill included in total assets of the Domestic Financial Services segment, none of which is expected to be deductible for tax purposes.

The transaction was accounted for using the acquisition method of accounting, and as such, assets acquired, liabilities assumed, and consideration transferred were recorded at their estimated fair values on the acquisition date. Subsequent to the acquisition date, our initial purchase price allocation and estimate of fair value for certain intangible assets and related income tax effects were adjusted based on facts and circumstances existing at the acquisition date. Future adjustments to the purchase price allocation could be significant as valuations for tangible, intangible assets and contingent liabilities are finalized and the associated income tax impacts are determined.

The following table summarizes the aggregate acquisition-date fair value of the consideration transferred for the acquisition of BFDS and the amounts recognized as of the acquisition date for the assets acquired and liabilities assumed (in millions):



Consideration
Fair value of common stock used to acquire the remaining equity interests in BFDS, certain investments and real estate	$	163.4
Estimated fair value of DST’s previously-held equity interests (1)	151.1
Effective settlement of pre-existing relationships	(5.9		)
Total consideration transferred	$	308.6

Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents	$	96.8
Accounts receivable	81.6
Other current assets	3.6
Investments (2)	35.8
Properties (3)	22.6
Intangible assets	57.2
Goodwill	68.7
Deferred income taxes	2.2
Other assets	3.2
Total assets	371.7

Accounts payable	5.2
Accrued compensation and benefits	15.4
Deferred revenue	2.1
Other current liabilities	7.4
Other liabilities	33.0
Total liabilities	63.1
Net assets acquired	$	308.6

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(1)

Equals the estimated fair value of DST’s previously-held equity interest in BFDS valued at $151.1 million, which represents an approximate 7.5% discount to the acquisition price for State Street’s equity interests in BFDS prior to the acquisition date. The difference between the fair value of State Street common stock transferred of $163.4 million and the $151.1 million represents an estimate of a control premium, which has not been included in the valuation of DST’s previous non-controlling interest.

(2)

As a result of the acquisition of the remaining interests in BFDS, we acquired certain investments associated with active deferred compensation plans for senior management and certain highly compensated employees. Approximately $3.7 million of the underlying investments were in DST common stock. As a result, the common stock was considered effectively repurchased at the acquisition date and reclassified to Treasury stock in the Consolidated Balance Sheet.

(3) Includes $2.0 million of acquired software with a weighted-average useful life of 5 years.

The following table summarizes the intangible assets acquired and estimated weighted-average useful lives as of the acquisition date (in millions):



	Fair Value		Weighted-Average Useful Life
Client relationships	$	57.2	13 years

The operating results of BFDS were combined with our operating results subsequent to the acquisition date. Approximately $206.9 million of total revenues, net of intercompany eliminations, and $28.8 million of pretax income of the acquired business is included in the Consolidated Statement of Income for the year ended December 31, 2017.

Acquisition of the remaining interests in IFDS U.K.

On March 27, 2017, we acquired State Street’s ownership of our IFDS U.K. joint venture, an investor and policy holder administrative services and technology provider to the collective funds, insurance, and retirement industries, for $141.0 million. Additionally, we acquired from our IFDS L.P. joint venture both the equity interest in IFDS Realty U.K. LLC (“IFDS Realty U.K.”), which holds certain real estate utilized by the U.K. business, and the equity interest in IFDS Percana Group Ltd. (“IFDS Percana”) for total cash consideration of $68.0 million. As a result of DST’s 50% ownership in IFDS L.P., approximately half of the cash consideration DST paid to IFDS L.P. was distributed to DST in the form of a distribution, resulting in net cash paid for the acquisition, after cash distributions of approximately $175.0 million. The acquisition was funded through cash on hand and our existing debt facilities. In addition, concurrent with the acquisition of the remaining interests in IFDS U.K., we also purchased State Street’s notes receivable from IFDS U.K. for cash consideration of $25.9 million, which approximated the fair value of the note at the acquisition date. We will continue to service offshore and cross-border markets in Canada, Ireland and Luxembourg through IFDS L.P., our 50/50 joint venture with State Street. IFDS U.K., IFDS Realty U.K. and IFDS Percana are included within the International Financial Services segment. As a result of these transactions, we expect to enhance the strategic value we can provide to our clients through full service capabilities while also realizing internal synergies through increased scale and operational efficiencies.

The acquisition of State Street’s 50% equity interest in IFDS U.K. was accounted for as a step-acquisition. Accordingly, we remeasured our previously held non-controlling equity interest in IFDS U.K. to the estimated fair value of $136.8 million, resulting in a loss of $12.2 million at the acquisition date, which is included in Other income, net in the Consolidated Statement of Income. The fair value of the previously held equity interest in IFDS U.K. was determined using various valuation techniques, including market comparable transactions and discounted cash flow analysis adjusted for a control premium. These fair value measurements are based on significant inputs, such as forecasted cash flows and discount rates, that are not observable in the market (Level 3).

The factors described above, combined with the benefits expected from the opportunities for enhanced efficiencies in our delivery model, are the basis for the acquisition price paid resulting in $196.7 million of goodwill included in total assets of the International Financial Services segment, of which $18.9 million is expected to be deductible for tax purposes.

The transaction was accounted for using the acquisition method of accounting, and as such, assets acquired, liabilities assumed, and consideration transferred were recorded at their estimated fair values on the acquisition date. Subsequent to the acquisition date, our initial purchase price allocation and estimate of fair value for certain intangible assets and related income tax effects were adjusted based on facts and circumstances existing at the acquisition date. Future adjustments to the purchase price allocation could be significant as valuations for certain tangible assets, intangible assets and contingent liabilities are finalized and associated income tax impacts are determined.

The following table summarizes the aggregate acquisition-date fair value of the consideration transferred for the acquisition of the remaining interests in IFDS U.K., IFDS Realty U.K. and IFDS Percana and the amounts recognized as of the acquisition date for the assets acquired and liabilities assumed (in millions):



Consideration
Cash paid to acquire the remaining equity interests in IFDS U.K. and other related interests (1)	$	234.9
Estimated fair value of previously-held equity interests (2)	136.8
Effective net settlement of pre-existing relationships	54.5
Total consideration transferred	$	426.2

Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents	$	99.2
Accounts receivable	101.7
Other current assets	14.4
Properties (3)	94.7
Intangible assets	104.0
Goodwill	196.7
Deferred income taxes	11.6
Other assets	2.1
Total assets	624.4

Current portion of long-term debt	2.8
Accounts payable	29.1
Accrued compensation and benefits	23.6
Deferred revenue	31.1
Other current liabilities	61.7
Long-term debt	26.3
Other liabilities	23.6
Total liabilities	198.2
Net assets acquired	$	426.2

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(1)	Cash paid is comprised of cash payments to acquire State Street’s equity interest in IFDS U.K. and a note receivable from IFDS U.K., as well as IFDS L.P.’s equity interests in IFDS Percana and IFDS Realty U.K.

(2)

Equals the estimated fair value of DST’s previously-held equity interest in IFDS U.K. valued at $136.8 million, which represents an approximate 3.0% discount to the acquisition price for State Street’s equity interests in IFDS U.K. prior to the acquisition date. The difference between the $141.0 million of cash paid to acquire State Street’s equity interests in IFDS U.K. and the $136.8 million represents an estimate of a control premium, which has not been included in the valuation of DST’s previous non-controlling interest.

(3) Includes $21.0 million of acquired software with a weighted-average useful life of 6 years.

The following table summarizes the intangible assets acquired and estimated weighted-average useful lives as of the acquisition date (in millions):



	Fair Value		Weighted-Average Useful Life
Client relationships	$	104.0	10 years

The operating results of IFDS U.K. were combined with our operating results subsequent to the acquisition date. Approximately $436.7 million of total revenues, net of intercompany eliminations, and $79.0 million of pretax income of the acquired business is included in the Consolidated Statement of Income for the year ended December 31, 2017. These amounts include the financial impact of a formal termination agreement that was reached with a wealth management platform client for whom we were completing multi-year development and implementation efforts. As a result of this agreement, during 2017, DST recognized previously deferred revenue and termination payments received totaling $93.2 million as incremental operating revenue. DST also incurred bad debt expense of $34.5 million for previously invoiced services for which payment will now not be collected and $5.2 million of other termination-related charges.

In April 2017, we signed an amendment to an existing servicing agreement, which extends in excess of ten years, with a U.K. wealth management platform client. As part of this amendment, we made up-front payments totaling £60.0 million to the client during 2017 which have been classified within Other assets on the Consolidated Balance Sheet. These payments are expected to be recovered over the term of the revised contractual arrangement.

The following table summarizes the unaudited pro forma results of operations for the years ended December 31, 2017 and 2016 as if the BFDS and IFDS U.K. acquisitions had occurred on January 1, 2016 (in millions, except per share amounts):



	Year Ended December 31,
	2017		2016
Total revenues	$	2,366.3	$	2,327.0
Net income attributable to DST Systems, Inc.	273.0		386.3
Diluted earnings per share	4.40		5.79

The pro forma financial information adjusts the actual combined results for items that are recurring in nature and directly attributable to the acquisitions of the remaining interests in BFDS and IFDS U.K., including intangible asset amortization and fair value adjustments for property, plant and equipment, deferred revenue and other transaction related items. The year ended December 31, 2017 pro forma information was reduced by the net gains resulting from the transaction of $188.6 million. The unaudited pro forma amounts have been prepared based on estimates and assumptions, which we believe are reasonable, and are not indicative of what actual consolidated results of operations might have been if the acquisitions had been effective at the beginning of 2016, nor is it reflective of our expected actual results of operations for any future period.

We incurred approximately $5.1 million of pretax costs from 2015 through the year ended December 31, 2017 in connection with our acquisitions of the remaining interests in BFDS and IFDS U.K., which are included in Costs and expenses in our Consolidated Statement of Income.

Acquisition of Kaufman Rossin Fund Services LLC

On February 24, 2016, we acquired all of the membership interests of Kaufman Rossin Fund Services LLC (“KRFS”), for $94.7 million in cash. DST financed the acquisition through cash-on-hand and available lines of credit. KRFS is an independent, full-service provider of specialized hedge fund administration services to the global financial community. KRFS’ hedge fund services include accounting and valuation, back-office outsourcing, investor services, treasury services, and customized reporting. We expect the acquisition to provide us with additional opportunities within the alternative investment marketplace and expand our asset administration service offerings.

The factors described above, combined with the synergies expected from combining our operations with the acquired entity and the resulting expansion of the service offerings available to our clients, are the basis for the acquisition price paid resulting in $61.0 million of goodwill recorded, all of which is expected to be deductible for tax purposes. KRFS is included within the Domestic Financial Services segment. The transaction was accounted for using the acquisition method of accounting, and as such, assets acquired, liabilities assumed, and consideration transferred were recorded at their estimated fair values on the acquisition date.

The following table summarizes the aggregate acquisition-date fair value of the consideration transferred for the acquisition of KRFS and the amounts recognized as of the acquisition date for the assets acquired and liabilities assumed (in millions):



Consideration
Cash paid	$	94.7

Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents	$	1.0
Accounts receivable	2.9
Other current assets	0.1
Investments	0.5
Properties (1)	6.8
Intangible assets	23.4
Goodwill	61.0
Total assets	95.7

Deferred revenue	0.6
Other current liabilities	0.4
Total liabilities	1.0
Net assets acquired	$	94.7

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(1) Includes $6.5 million of acquired software with a weighted-average useful life of 6 years.

The following table summarizes the intangible assets acquired and estimated weighted-average useful lives as of the acquisition date (in millions):



	Fair Value		Weighted-Average Useful Life
Client relationships	$	22.5	10 years
Other	0.9		3 years
	$	23.4

The operating results of KRFS were combined with our operating results subsequent to the acquisition date. Approximately $20.9 million of revenues and $1.1 million of pretax income of the acquired business are included in the Consolidated Statement of Income for the year ended December 31, 2016. Pro-forma results of operations, assuming this acquisition was made at the beginning of the earliest period presented, have not been presented as the effect of this acquisition is not material to our results.

The following acquisitions during 2015 are included within the Domestic Financial Services segment:

Acquisition of kasina LLC

On January 1, 2015, we acquired all of the membership interests of kasina LLC, a strategic advisory firm to the asset management industry for $9.0 million of upfront cash consideration and up to $2.1 million of performance-related contingent consideration, based on the terms of the agreement, which were amended during 2016. The contingent consideration requires, subject to certain exceptions, future employment over the course of the performance period. The acquisition provides us with additional opportunities to provide a combination of advisory, research, technology and analytics to asset managers.

Acquisition of Red Rocks Capital LLC

On July 31, 2015, we acquired all of the membership interests of asset manager Red Rocks Capital LLC, which focuses on listed private equity and other private asset investments, for $45.0 million of upfront cash consideration and up to $20.0 million of performance-related contingent consideration. The performance-related contingent consideration is based on the achievement of certain annual revenue targets of the acquired business over an approximate four year period from the closing date and requires, subject to certain exceptions, future employment over the course of the performance period. As of December 31, 2017, the annual revenue targets for the first two performance periods and the continuing employment conditions for certain individuals were not achieved resulting in $1.0 million of remaining contingent consideration available to be earned. We expect the acquisition to provide us with additional opportunities within the alternative investment marketplace to enhance our ongoing asset management strategy.

Acquisition of Wealth Management Systems Inc.

On August 21, 2015, we acquired all of the outstanding common stock of Wealth Management Systems Inc., a provider of technology-based rollover services, for cash consideration of $65.1 million, which includes a $1.1 million adjustment agreed upon in December 2015 to settle working capital under the provisions of the purchase agreement. A post-closing settlement amount of $0.2 million was received in January 2016. Wealth Management Systems Inc. automates the migration of assets from retirement plans to investment management platforms. We expect the acquisition to provide us with additional opportunities to expand rollover service options to new and existing clients and enhance our ongoing retirement and asset management strategies.

The factors described above, combined with the synergies expected from combining our operations with each of the acquired entities and the resulting expansion of the service offerings available to our clients, are the basis for the acquisition prices paid resulting in $75.8 million of goodwill recorded, of which approximately $40.0 million is expected to be deductible for tax purposes. The transactions were accounted for using the acquisition method of accounting, with assets acquired, liabilities assumed, and consideration transferred recorded at their estimated fair values on the acquisition dates.

The following table summarizes the aggregate acquisition-date fair value of the consideration transferred for the acquisitions of kasina LLC, Red Rocks Capital LLC, and Wealth Management Systems Inc. and the amounts recognized as of the acquisition date for the assets acquired and liabilities assumed (in millions):



Consideration
Cash paid	$	118.8
Fair value of contingent consideration	0.8
Fair value of total consideration transferred	$	119.6

Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents	$	1.6
Accounts receivable	4.2
Other current assets	0.2
Properties (1)	3.3
Intangible assets	49.5
Goodwill	75.8
Total assets	134.6

Accounts payable	0.2
Accrued compensation and benefits	0.4
Deferred revenue	5.5
Other current liabilities	0.7
Deferred income tax liabilities	8.2
Total liabilities	15.0
Net assets acquired	$	119.6

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(1) Includes $3.0 million of acquired software.

The following table summarizes the intangible assets acquired and estimated weighted average useful lives as of the acquisition dates (in millions):



	Fair Value		Weighted Average Useful Life
Client relationships	$	48.0	17 years
Other	1.5		7 years
	$	49.5

The operating results of kasina LLC, Red Rocks Capital LLC, and Wealth Management Systems Inc. were combined with our operating results subsequent to the acquisition dates. Approximately $10.4 million of revenues and $9.3 million of pretax losses of the acquired businesses are included in the Consolidated Statement of Income for the year ended December 31, 2015. Pro-forma results of operations, assuming these acquisitions were made at the beginning of the earliest period presented, have not been presented as the effect of these acquisitions are not material to our results.

Restructuring Initiatives

As a result of changes in our business environment, from time to time we will restructure one or more of our businesses to enhance operational efficiency.

During the year ended December 31, 2017, we incurred pretax restructuring charges related to employee terminations of $16.3 million within the Domestic Financial Services segment, $2.7 million in International Financial Services and $4.4 million within the Healthcare Services segment.

During the year ended December 31, 2016, we incurred pretax restructuring charges related to employee termination costs of $9.9 million and lease termination costs of $0.5 million within the Domestic Financial Services segment.

During the year ended December 31, 2015, we incurred $3.4 million of pretax charges related to employee termination costs as a result of a restructuring initiative within the Healthcare Services segment which includes the closure of an operating location at the end of the existing lease term in mid-2016.

As of December 31, 2017, 2016 and 2015, we had a remaining liability of $2.8 million, $0.6 million and $4.1 million, respectively, associated with these restructuring activities.