DST Systems Q3 2009 Earnings Transcript

DST Systems, Inc. (DST)

Q3 2009 Earnings Call

October 22, 2009 11:00 AM ET

Executives

Thomas A. McDonnell - Chief Executive Officer

Kenneth V. Hager - Chief Financial Officer, Vice President, Treasurer

Analysts

James Kissane - Bank of America/Merrill Lynch

David Koning - Robert W. Baird & Co., Inc.

Andrew Gundlak - ASB

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the DST Third Quarter Earnings Conference Call. At this time, all participants are on a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions).

As a reminder, this conference is being recorded. I would now like to the conference over to your host, CEO, Tom McDonnell. Please go ahead.

Thomas A. McDonnell

Hi, Good morning. Before we proceed today, I would like to make a statement under SEC procedures and rules.

Within the course of our conference call today, we make forward-looking statements respecting DST and its businesses. Such statements would be based on our views as of today and actual results could differ. There could be a number of factors affecting future results including those set forth in DST's latest periodic report, which we filed with the SEC.

All such factors should be considered in evaluating any forward-looking statements which we may make today. Our comments today on operating results are based on the results taking into account, the items set forth in the press release under the section description of non-GAAP adjustments.

A reconciliation of reported GAAP results to income adjusted for certain non-GAAP items accompanies the earnings release.

On the call today as usual, I am joined by Tom McCullough and Ken Hager and will give you an overview of the quarter and then open the call for questions.

Taking into account the non-GAAP adjustments, net income for the third quarter 2009 totaled $47.2 million or $0.94 per diluted share, versus 53.2 million or $0.95 per diluted share for the third quarter of 2008, a decrease of 11.3% in net income and a 1.1% decrease in diluted EPS.

Comparing the third quarters of '09 and '08, consolidated operating revenues decreased by $18.6 million or 4.5% to a level of 395.6 million and consolidated income from operations decreased by $16.3 million or 20.7% to $62.6 million.

During the third quarter of '09, DST sold 4.6 million shares of Computershare Limited and recorded a $17.6 gain. This gain is treated as a non-GAAP adjustment. As of September 30, 2009, DST continued to hold 25 million shares of Computershare.

Turning to the financial services area, operating revenues decreased by $8.1 million or 2.8% to 276.3 million. Excluding $22.2 million of incremental revenues that resulted from the consolidation of August, the Financial Services operating revenues decreased by $30.3 million.

The decrease in operating revenues primarily attributable to lower levels of professional services from international operations and foreign currency exchange rates. Lower levels of DST Health Solutions professional services from reduced client demand and the recognition in the 2008 quarter of a $2.5 million previously deferred professional service fee revenue.

Lower levels of mutual fund shareowner processing services -- servicing fees and decline in the registered accounts and track participants, principally from a client internalizing its participating accounting operations at the end of the third quarter 2008 also contributed to the lower revenues.

Results were approximately $1.5 million or 12.6%, lower software license fee revenue for the quarter. Excluding reimbursable operating costs and incremental costs associated with the Argus and BlueDoor acquisitions, costs and expenses decreased by $21.9 million or 11.3% to a $172 million.

Some of the details of the decrease in cost. There were lower compensation and benefit related costs from reduced staffing levels and lower incentive compensation accruals. These were partly offset by some higher deferred compensation costs of approximately $6.5 million that results from mark-to-market adjustments and the securities held behind those deferred compensation agreements.

This amount is a actually offset by a charge in other income. We had decreased travel and related costs. Also for foreign exchange effects between U.S. dollar and other currencies approximated $2.5 million.

2008 costs and expenses included costs associated with redundancy expense for reductions in international staffing levels. Some higher compensation costs related earn-out provisions of prior business acquisitions and higher costs related to a new client subaccounting conversion.

Depreciation and amortization expense increased by $400,000 to $20.9 million. Incremental depreciation and amortization costs attributable to the consolidation of Argus and the acquisition of BlueDoor were $2.2 million.

If you exclude these incremental costs from Argus and BlueDoor, depreciation and amortization decreased by $1.8 million to 18.7 million. That reflects lower depreciation from the use of accelerated depreciation methods.

Also certain assets became fully depreciated in 2009. Foreign currency exchange effects between U.S. dollar and other currencies also resulted in reduced depreciation and amortization expense.

Financial Services segment income from operations decreased by $14.4 million or 20.6% to 55.6 million. As previously mentioned, $6.5 million of this decrease is attributable to the increase in mark-to-market expense related to deferred compensation which actually has no net impact on income.

Other significant components affecting income from operations included the consolidation of losses incurred by Argus. And lower revenues kind of across the Board and the other financial services business operations.

The operating margin for the third quarter of '09 was 20.1%, as compared to 24.6% for the third quarter of '08. If you exclude the effect of the previously mentioned deferred comp costs, the operating margin would have been 22.1% for the third quarter of '09, as compared to 24.3 for the third quarter of '08. The consolidation of Argus and BlueDoor are the primary reasons for the decline in operating margin.

At Output Solutions, operating revenues increased by $8.5 million or 6.6% to 120.3 million. The revenue per item mailed, an image produced decreased in the third quarter of '09, principally from higher relative volumes from clients with lower unit pricing and the impact of foreign currency exchange effects FX of approximately $1.8 million.

Items mailed increase by 4.9% to 605.3 million, that reflects new client volumes. Images produced during the third quarter of '09 were 3.4 billion, pretty much unchanged as compared to the third quarter of '08.

Lower volumes from existing clients and reduced amount of transaction information included on invoices were generally offset by the new client volumes.

During the third quarter, Output Solutions received two new client commitments when fully transitioned will approximate 89 million aggregate packages annually.

The full conversion of these two clients is expected to be completed during the fourth quarter of this year.

Excluding the reimbursable operating cost, cost and expenses at output decline by $8.6 million or 7.7% to a 102.6 million, primarily were resulting from a lower material personnel and leased equipment cost, as we continue to implement own digital print technologies. And the affect of foreign currency exchange rates of approximately $1.5 million.

Depreciation and amortization increased by $500,000 attributable to increased depreciation from equipment to support expanded postal presort and commingling offerings and also to support the new client acquisitions.

Output Solutions' operating income from the quarter decreased by $400,000 to $7 million primarily from the impact of the lower revenues. The operating margin for the third quarter of '09 was 5.8% compared to 5.7% for the third quarter of '08.

DST's equity in earnings of unconsolidated affiliates decreased by $1.2 million to $7.8 million, that reflects a decline in BFDS and IFDS earnings partially offset by improved results in other unconsolidated affiliates.

DST's equity in BFDS earnings decreased by $2.4 million, that reflects a 152 basis point decline and average interest rates on cash balance is maintained by BFDS on behalf of it's customers. Also reflecting higher bank fees and a lease abandonment cost of $500,000 associated with consolidating operational facilities.

DST's equity in IFDS earnings decreased by $900,000 this decrease at IFDS is primarily the impact of foreign currency exchange rates.

In the other income area, it increased by $3.1 million to 10.8 million, that reflects unrealized depreciation on trading securities, the affect of which is offset by increased deferred compensation costs included in cost and expenses in the financial services segment. And lower accounts receivable securitization program costs that were not incurred this first quarter, in this quarter. These increases were again partially offset by lower dividend income of approximately $3.0 million from decrease in the State Street dividend and also reflects some lower interest income.

Our interest expense decreased by $5 million to 8.8 million that reflects both lower average debt levels and lower average interest rates.

Turning to income taxes, our tax rate was 34.8% for the third quarter of '09, that's a decrease of 0.2% from the third quarter of '08 and a decrease of 4.9% from the second quarter of '09. The decrease in the second quarter of '09 is primarily attributable to increased utilization of foreign tax credits, somewhat offset by increased valuation allowances for higher international loss carryforwards.

We expect that DST's tax rate will be approximately 39.6% for the remainder of '09. And that assumes continued valuation allowances on the international operating losses, lower dividend income and increased utilization of foreign tax spreads.

In the mutual fund area, total mutual fund shareowner accounts serviced were 120.3 million at quarter end of '09, an increase of 1.4 million accounts or 1.2% from June 30th of '09.

Registered shareowner accounts serviced totaled a 109.7 million at quarter end and that was a net decrease of 300,000 or 0.3% during the quarter that was -- reflects net increases in existing client accounts of 700,000.

New client conversions of 300,000. Conversions to DST subaccounting platform of 500,000 accounts and also 800,000 accounts converted off of our transfer agency system TA2000 to non-DST subaccounting platforms.

On the account mix, tax advantaged accounts were 46.3 million at September 30th of '09. It's pretty much unchanged as compared to June 30th. Tax advantage accounts represents 42.2% of the registered accounts at September 30th, as compared to 41.8% at September 30th of '08.

In the subaccounting area, subaccounts service totaled 10.6 million accounts at September 30th of '09, that's an increase of 1.7 million subaccounts since June 30th that reflects new client conversions of 900,000, increases in existing client subaccounts of 300,000 and conversions of 500,000 registered accounts from TA2000.

On a projected basis, account conversion activity for the fourth quarter of 2009 includes, we will be converting 300,000 new registered accounts. We should be converting a 100,000 new subaccounts to TA2000 from DST platforms.

On going the other direction, 400,000 registered accounts will convert to TA2000 subaccounting and 900,000 accounts, registered accounts will convert all from TA2000 to non-DST subaccounting platforms.

Based on the above projections and excluding organic increases or decreases in the accounts of existing clients, we project that accounts serviced at year 2009 will approximately be 119.8 million. And that will be made up of about a 108.7 million registered accounts and 11.1 million subaccounts.

A sub-accounting client of DST's with approximately 5 million subaccounts at September 30th has notified us that it intends to terminate its processing agreement with us. The conversion of these subaccounts to non-DST sub-accounting platforms is estimated to occur in the latter half of 2010.

Another subaccounting client has advised us that it will convert an additional 2.1 million subaccounts from another outside platform to DST's platform.

Under defined contribution area, participants stood at 3.5 million at September 30, 2009. That's an increase of a 100,000 participants or 2.9% from June 30th '09. And as previously announced, DST has new client commitments totaling approximately 1.1 million new participants, of which 200,000 are expected to convert in the fourth quarter of this year and the remainder in 2010.

The company, DST had 49.7 million shares outstanding at September 30, 2009. During the quarter, we used proceeds from stock option exercises to purchase 55,000 shares of our common stock at an aggregated cost of 2.4 million.

Diluted shares outstanding for the third quarter of '09 were 50.2 million, that's a decrease of 6 million shares or 10.7% in the third quarter of '08, but an increase of 200,000 shares or 0.4% from the second quarter of this year.

Our total stock options and restricted stock, equity units outstanding at September 30, 2009 were 8.1 million, of which 5.6 million were stock options and 2.5 million were restricted stock. Equity units decreased by a 100,000 or 1.2% from June 30th of '09 and by 400,000 or 4.7% from September 30th of '08. There is a approximately 1.6 million shares of restricted stock and 700,000 options that are scheduled to vest in -- I'm sorry, approximately 1.6 million shares of restricted stocks scheduled to vest in November of '09 and 700,000 scheduled to vest in January of 2010.

During the quarter, DST repurchased $9.7 million in principal amount and the original 540 million, 4.125% Series A debentures. At September 30th '09, the outstanding amount of Series A debentures was $408.8 million and the Series B debentures was a 171.3.

Subsequent to the quarter on October 1st, DST entered into a separately privately negotiated exchange agreements under which it exchanged a $190.4 million in aggregate principle of the outstanding Series A senior convertible debentures for an equal amount of 408% Series C senior convertible debentures.

The terms of the Series C senior convertible debentures are generally similar to terms of Series A debentures. Series C debenture holders cannot let the debentures to DST until August 15th of 2014, four years later than the series A bondholders and DST cannot call the debentures before August 15, 2013.

Operator with that we would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of James Kissane from Bank of America. Please go ahead.

James Kissane - Bank of America/Merrill Lynch

Hey Tom, can you give us a little bit more color or some of the rationale behind the loss of the subaccount client?

Thomas McDonnell

Well, basically one of our major subaccount client has had business in multiple occasion without proposal and they decided to opt out of our subaccount and in that conversion we anticipated all first -- second half next year -- like competitive loss, pretty hard they contest a bit a loss on the syndrome.

James Kissane - Bank of America/Merrill Lynch

Was it the result of a recent consolidation or--?

Thomas McDonnell

Yes, actually.

James Kissane - Bank of America/Merrill Lynch

Okay. And on that point so given some of the recent consolidation in the mutual fund space and some of the anticipated consolidation, how do you think DST is positioned?

Thomas McDonnell

Well, I mean generally with our client base, we would hope some of them would be the consolidated or in this particular case was not our client I mean is really sort of the reversed major book of business was on a different platform. I mean I think we by and enlarge of course anyone consolidation can go the wrong way but I think generally we feel that consolidation is generally constructive for us.

Kenneth Hager

The ones that have been announced to-date are both all in our platform.

James Kissane - Bank of America/Merrill Lynch

Okay. So assume given just increased volume from particular customers' pricing could come under some pressure?

Thomas McDonnell

Pricing has been under pressure for sometime. But I think overall a lot of that came from some of the -- sort of financial trauma that our clients were experiencing. I am not saying it's totally mitigated but I think it's got be leveling off here at some point.

James Kissane - Bank of America/Merrill Lynch

Okay. And on output, can you quantify the total revenue that you'd be getting say next year or just in 2010 from the -- I guess it's now five new clients signed in the past two quarters?

Thomas McDonnell

We don't have that in front of us. I mean most of that it'll be included in the fourth quarter so we couldn't be pretty well extrapolated from there. Hopefully with that volume coming on we'll see some operating leverage should help those margins too.

James Kissane - Bank of America/Merrill Lynch

Okay. And just the last question, prospects for the healthcare revenue and maybe margins over the next year or so?

Thomas McDonnell

Well, we have active sales going on in the healthcare and prescription business, of course we've look at them, we manage them together, we certainly have still a lot of pressure on the Argus side because it has a significant components of balance revenues that are tied into its pricing algorithm. That's how we're trying to address but it's not addressable on a short-term.

On the healthcare side, a lot of that's dependent upon incremental sales to existing clients, converting some clients from license clients to processing clients and take a lot on what's going to shake out over the next 12 to 18 months what do any changes in healthcare plans and so forth look like because usually, for baby ensures and so forward they looked to outside providers when their legacy systems don't hand over new product features and so forth, and that's one pretty hard to predict and we were reasonably comfortable to making some progress or June but I think in tell some of the clouds or whatever we want call them uncertainly around where healthcare legislation is going I'm not sure we'll see much activity.

James Kissane - Bank of America/Merrill Lynch

Okay, thanks, Tom.

Operator

Your next question comes from the line of David Koning from Robert. W. Baird. Please go ahead.

David Koning - Robert W. Baird & Co., Inc.

Yeah hey guys, I wanted to pursue the financial services margins a little bit in I know that the two main things that are dampening margins this year are the inclusion of the new acquisition Argus and BlueDoor and then some of the deferred comp I guess amount that pushed into other income is an offset, if I would excluding those two things would margins be pretty close to what they were last year does it feel like turns out to be pretty stable on the margin front?

Thomas McDonnell

I think that's an accurate assumption, yes.

David Koning - Robert W. Baird & Co., Inc.

Okay, okay good. And then I guess, on that same topic, next year would you expect that same deferred comp issue to keep margins here down and keep inflating the other income line or do we normalized that impact?

Thomas McDonnell

Well. I mean just to make that clear what that is we're, for instance part of our bonus structure requires that the bonus participant differ certain percentages of their bonus for a number of years. That's obviously one tied in the multiple year results, but also to retention factors.

Once they defer it, they are allowed to pick an investment option to put it in, now usually a mutual fund. So, if the deferred amounts are invested in a fund and the results for the quarter go down, our obligation that employee goes down. So, it reflected a change in the obligation and then you offset it in the other income side.

The reverse is true. So there is going to be a market movement every quarter, either up or down. So I think even from and that's why we really kind of look, break this out. Because I think you just kind of have to ignore it. I mean in effect, these are funded plans, the company's segregated assets, but they are still company assets. So we have to treat the gain or loss as a mark-to-market gain or loss from the company's standpoint. But then we adjust sort of a reversing entry for like of a better term or an incorrect accounting term that expands or gain expands for income by a change in the obligation to the employee.

So it's always going to be there. Obviously, with the recent market moves, describing more exaggerated this quarter, but it will be a function virtually of every quarter because of market activity.

David Koning - Robert W. Baird & Co., Inc.

Yeah, that's a great explanation. Thanks for that. And then on the Q4 seasonality, the last three years, we had EBIT within Financial Services being up, very close to 20 million sequentially each, I guess in Q4 from Q3. And I know that last year there are few moving parts in -- I guess I'm just wondering this year would you expect that pretty much the same seasonality or is there something different this year that could change?

Thomas McDonnell

Well, I think part of the seasonality every year has been sort of, kind of incidents in the fourth quarter of software licensees. Historically, you'll get most companies that have software license revenue. They tend to have better fourth quarters because customers that have budget will try and spend them by the end of the year. And in some cases companies are trying to get software commitments by year end.

I would say given the general state of the customers out there, they don't have those underspent budgets like they used to have, so I would be very -- I'd be inclined to say you're not going to get that kind of impact in the fourth quarter. Because I don't think you're going to see. And I'd like to be pleasantly surprised, but I am not -- I don't think we will.

But I don't think we're going to see license revenue do anything meaningful in the fourth quarter. So, I wouldn't look for that step up. And of course, license revenue when it hits in the quarter, that it's recorded has very little expense associated with it other than sales commissions and so forth. So that has always had that positive impact on Q4, but I wouldn't see it this year necessarily.

David Koning - Robert W. Baird & Co., Inc.

Thank you. And then just finally, on the share count you mentioned this quarter 50.2 million diluted shares. You talk a little bit about some restricted stock that's vesting over the next couple of quarters. Is that something that we just add to the diluted share counts when it does that?

Thomas McDonnell

Well I wouldn't add it directly. Basically, five years ago, we made a five year restricted stock grant, because we thought that put us and that brought back symmetry with shareowners where people had sort of long term horizons. The stock that vest over the two quarters, say roughly 2.5 million. Most of that will be in our, in the structure of our plan. The participants are allowed to use share withholding which will -- in effect the company takes a deduction for the whole amount then we will hold shares and then we'll satisfy their withholding with cash.

So I would think that periodic can anticipate that maybe out of that, maybe 60 to 70% will actually result in incremental shares.

David Koning - Robert W. Baird & Co., Inc.

Okay. Great, thank you.

Thomas McDonnell

Ken Hager want to add to that.

Kenneth Hager

Dave actually under new GAAP this year, those restricted shares are in the diluted number today, so if we won't see an increase in diluted shares outstanding from the best thing of that. Actually, you'll see a small decrease based on what Tom just said.

David Koning - Robert W. Baird & Co., Inc.

Okay, that's great thanks.

Operator

And your final question comes from Andrew Gundlak from ASB. Please go ahead.

Andrew Gundlak - ASB

Hi, good morning. If I just look at the balance sheet and look at the difference in cash and the difference in debt quarter-over-quarter, it looks like you have positive cash of $115 million and obviously some of that is computer share but that's well in excess of the net income plus depreciation minus CapEx. And I'm just curious if you could help me walk through why the cash flow was so high?

Thomas McDonnell

I'm not sure that.

Andrew Gundlak - ASB

Am I doing something wrong?

Thomas McDonnell

Ken what do you want to take a quick crack at that?

Kenneth Hager

Sure, well if you look at the net income and you add back depreciation amortization that's pretty much offset by CapEx and the primary driver of this was a net sale, really the primary driver was net sales of investments and other increase of working capital which is a positive and then we had and then we did use all of our cash flow to drive down debt. So when you kind of walk through the numbers really the principal driver why did it accelerated this quarter was really the proceeds from the sale of the investments which are higher than the gains.

Andrew Gundlak - ASB

I understand. And what's the -- why is the working capital suddenly short of cash?

Kenneth Hager

Well there is probably two or three things, the management of our receivables which we've been actively manage our receivables are actually down from the prior year -- from the prior quarter. And during the course of the year you'll have a little bit of built up and things like deferred compensation of current -- certain current compensation accrual which would -- which were increase on liabilities during the course of the year did pay that through year-end but from a cash standpoint, what we have a book expense from that we're not consuming any cash till year-end.

Andrew Gundlak - ASB

Okay. And just a housekeeping question on that accounts receivable is that around a 140 million like last quarter, they may that securitization program?

Kenneth Hager

Yeah we had a securitization so it's at 140 right now.

Andrew Gundlak - ASB

Okay. And it looks like you that paid down 50 million or so of bank debt is that correct?

Kenneth Hager

65 million.

Andrew Gundlak - ASB

65 million yeah and do you, I guess here is the bigger picture question, with your converts half termed out or 40% termed out in terms of the put and call where do you see yourselves with respect to your bank debt, share repurchase and perhaps getting the other 200 million or so converts to also term out. How do you, what's your financial strategy over the next nine months as you look at the August 2010 potential cash call?

Kenneth Hager

I think we're pretty comfortable with the 2010 potential cash call even it would occur with the exchange. We think we moved that out into manageable pieces over period of time between. If you look at the maturities now you got the 2010 piece, if it is put we think we can handle that, if it's not put it goes out five years. And then you got a 13 and 14 by extending half of that, roughly half of the remaining outstanding over the As next year.

It certainly makes it easier to refinance some of our other lines because if there is less concern about an incremental financing of the order magnitude of 400 million to take care of those. So I think by keeping debt in the air securitization and in the syndicated line or kind of in the order of magnitude and where it is, we would have the flexibility to generate sufficient cash either to pay those down and draw on the and to address a cash put in August or there is also the possibility that given the market conditions that the total amount occur.

Because of the nature of those convertible securities, the stock does not necessarily have to trade above strike price to make continual holding of the converts attractive to some of the holders out there that use them as part of investment strategies that include derivatives against those securities. So, I think our sense is by having taken half of those out we're pretty comfortable that we have a debt structure now but I think you would anticipate as to share repurchases that we will minimize, we will restrict those pretty much to utilization of cash from option exercises and the tax advantages that we pick up from that and concentrate on cash flows to reduce the debt side of the balance sheet.

Andrew Gundlak - ASB

Until what point?

Kenneth Hager

Well, at least until we see what happens next August.

Andrew Gundlak - ASB

I understand. Okay. One other question on sources of cash, computer shares, first of all the Australian dollars back to its all time high and computer share is back to its all time high and your sale is probably more timed and on the other hand you have another 25 million shares of computer shares, is this a core holding for you or could one see more sales?

Kenneth Hager

I think that our position has always been at, look at the holdings as core necessarily. We look at them as continuing interest in businesses that we use to be in, that we excited for a number of reasons, when we merged our stock transfer in the Computershare.

We felt that gave us the opportunity to participate in the global stock transfer of business that we could not achieve on our own. And the bulk of the stage three stock came from a merger of the Trust Company that we were 50% owner of in the stage three. And we like the stage three business model.

But we've always said those shares in both cases are ultimately utilized when we see more attractive alternatives and in the short-term, certainly compared to where Computershare have risen to and the strength of the Aussie dollar. We felt that applying some of that to reducing debt made sense.

We'll continue to look at that based on where the two sell and kind of where we want the debt balance to be. I wouldn't want you to categorize in this core holdings. We've never sell either one, but I think you'd anticipate that we'd only be selling them when we felt that the relative price compared to what we could utilize, the proceeds for is attractive.

And it could be that, if Computershare stays up in these levels and Australian dollar stays strong, than we have, we are pretty much committed to working some of the debt out on the balance sheet. So, we'll use any number of assets to do that.

Andrew Gundlak - ASB

I will encourage you, the multiple of your stock is substantially less than the multiple of Computershare's stock, obviously that's my last on you?

Thomas McDonnell

It has occurred to at least our CFO.

Andrew Gundlak - ASB

Thank you for your comments.

Operator

And you have follow-up from the line of James Kissane from Banc of America. Please go ahead.

James Kissane - Bank of America/Merrill Lynch

Thanks. And Tom just following up on that. Do you have an update on renewing your credit facility, and maybe the timing on that and some the cost, the funding cost implications? Thanks.

Thomas McDonnell

Well, we wanted to get this convert exchange out of the way. We had then having ongoing discussions with our syndicate. We'd anticipate with those will accelerate in the fourth quarter. We've gradable finalized some this year or early next. I think you can look for timeframe certainly probably by the end of first quarter next year Jim.

James Kissane - Bank of America/Merrill Lynch

Okay.

Thomas McDonnell

I think you got to feel that the overall cost would be up by 300 basis points or so, plus or minus. That's by the way, if you would ask us that what you maybe did, and you maybe decline to answer. I don't remember, if you ask us that last quarter, we said it might be up 450-500 basis points. So the markets have improved somewhat, but if you were to strike a deal today, I think you'd look at the 300, Ken, you agree to that?

Kenneth Hager

Yeah.

James Kissane - Bank of America/Merrill Lynch

And similar size or you'll expand it, give me a little more flexibility?

Thomas McDonnell

Well, I think some of the last discussions and some of the cash we've generated and some of the debt we paid down, and the free cash we anticipate over the next 12 months, I don't think will expand, we'd like to keep it at the same level though.

James Kissane - Bank of America/Merrill Lynch

Okay and Ken, last question. The tax rate of just say 40%, should we use that longer term or you're going to try work that down a little?

Kenneth Hager

Well Jim, that's going to depend on really the effect of our international operations to the extent that we can return those to profitability that would have a positive impact on us. And then the other thing, major thing that effects our tax rate is to the extent that we have dividend income. So it's stage three for example was to explore the dividend or increase at some level then we would have a positive impact on our tax rate, because those dividends come in on a very tax favorable basis.

Thomas McDonnell

I think Jim just -- I mean there is no -- I mean other than minor things, there is nothing we can proactively do to manage the tax rate per say, nothing that we're not already doing. The key thing is to get DST International in particular back to at least breakeven because given its particular situation, those losses give us no tax advantage at all, which is one of the reason this rate creeps up so much.

So, the real focus there is to improve that operation which has the sort of corollary effect of reducing the tax rate, but it's -- there's nothing we can do to manage the rate, we just have to manage the operation.

James Kissane - Bank of America/Merrill Lynch

Fine. Not for you'll to stop, but when can you see breakeven and some profits on the international side? You said you said yourself up.

Kenneth Hager

I didn't refer to that, I can see clearly now. But I think given the softness in the decline side. I would like to think we might get there third quarter next year.

James Kissane - Bank of America/Merrill Lynch

Okay and just one last question for Tom.

Kenneth Hager

And then by the way, we're getting there is not going to be a, from a loss. I think you'll see a improvement over the next couple of quarters which will show up in EPS because of less losses. But until you really get out loss period, you're not going to really see a material impact on the tax.

James Kissane - Bank of America/Merrill Lynch

Okay. And just final question. I know you're integrating some platforms on the healthcare side with semi-consolidations there, housing integration, and the consolidations going?

Thomas McDonnell

I think it's a little bit of an overstatement to say we're consolidating them.

James Kissane - Bank of America/Merrill Lynch

Okay.

Thomas McDonnell

We're certainly emphasizing certain platforms or the platforms that we believe are the viable ones going forward, where we have existing platforms that are owned by clients, who are trying to -- by integrating AWD with those on a sort of a processing basis.

We're trying to encourage them to move our own platforms, those platform won't get significant ongoing investment, but our experience in the software business is when people own platforms if they like and they stay around for a long time. So, we would see that being a source of maintenance revenue and -- but a positive cash contributor and earnings contributor. Over time, those have been the emphasized and certainly new clients and hopefully some migration of the existing clients go to the sort of the strategic platforms.

But I wouldn't want to mislead you to like where it's going to be five or six or two, three platforms so that you can go away. They'll be there, but they won't be continually invested in an aggressive fashion. They really be manage to support the client base that's on them. Does that's help you all?

James Kissane - Bank of America/Merrill Lynch

That's prefect. Thanks Tom. See you.

Operator

And you have another follow-up from the line of Andrew Gundlak from ASB. Please go ahead.

Andrew Gundlak - ASB

Yeah. Thanks for taking it Tom. Does that mean your answer to the precious question I'm assuming with Argus Health Solutions is not profitable from an EBIT standpoint maybe from a cash flow standpoint. And does that mean that the financial services' operating income 55.6 in this quarter is all earned by the domestic mutual fund processing and AWD businesses, is that what you think about the businesses today, and it is important of course to understand all this as there is so much movement going on and the type of account some things like that. Just trying to understand that.

Thomas McDonnell

Well, I'm going to able to give you exact numbers because we don't break those subsidiaries out directly but Argus because of their exposure which we -- I think generally quantified is around 350 to 400 million of balances. Historically, Argus pricing was a function of sort of a unitized pricing per transaction but it contemplated, there is certain level of balances from the clients and probably contemplated a 3.5-4% interest rate, okay?

So I think you could assume with Argus breaking out the numbers but if you took in all 4% of 350 or so that there's 40 million of -- a lack of income there which pretty much drives a substantial portion of the negative performance that Argus Health Solutions itself would offset a substantial portion of that. The two in combination, I think is probably correct to say in the short-term that in the aggregate the two of them are only contributing marginally until that interest rate situation improves or until we get some additional sales down there.

So, I think going to your sort of global assumption that a lot of the business is got to be driven by the mutual fund side. But we would also add the output side is correct but I think that we will see improvement in the health solutions side because we can't ignore the fact that balanced value maybe insignificant for the next 18 to 24 months because we don't see any material rise in rates of at least until mid 2011. So we're working with clients to reprice some of that, so I think you'll see improvement there but I think if the high level that you were suggesting or you have to assume that the health business at the movement is marginally contributing to overall results and that the results are really driven by mutual funds and output.

Andrew Gundlak - ASB

Yeah, that's really helpful, I appreciate that what that also suggests that despite all the movement and the types of accounts, subaccounting et cetera would have been here over the past years that the EBIT profitability is unchanged if not I mean on a per account type of basis is unchanged if not even or touched stronger than it might have used a bit. It's impossible to figure it out, if there is from the outside at least. If it's possible, if you can take the healthcare portion, if it's competitively possible to take the healthcare portion out of financial services it would be really helpful from an analyst perspective.

Thomas McDonnell

Obviously, we've looked at it because of it's heavy integration with AWD and so forth it's sort of and to some extend even though it's not huge at the moment. We've had some crossover between financial services and healthcare clients in the area of some of the health savings plans that are out there. But we will continue to look at that segment as to whether or not given the way we actually run it within the business. If here we should break it out, but currently we have to assume at least through the end of the year, it will be part of financial services. But I think your other comment, I mean obviously one of things we've been doing like most organizations is focusing very heavily on cost of delivery and so forth. And those are initiatives that are ongoing and I think some of the changes that are been made there hopefully are doable. So, we'd like think then with some overall increases in revenue it should have more positive impact on margins because the cost actions we've taken are not -- more or less permanent so to speak and they are not directly linear to increased volumes.

Andrew Gundlak - ASB

That's a helpful comment. Thank you.

Thomas McDonnell

Thank you. You're welcome.

Operator

And at this time there are no further questions.

Thomas McDonnell

Okay, I want to thank all the participants; we look forward to call in January. Operator you want to give the information on the recording.

Operator

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