DST Systems, Inc.(NYSE:DST)'s investors are exposed to the increased possibility of adverse events, in part due to warning signs such as the information processing and software services company's estimations about its recent acquisitions.
The Kansas City, Mo-based company's financial statements reflect an AGR score of 8 as of June, indicating higher accounting and governance risk than 92% of comparable companies. The AGR score has worsened from 44 as of December 2010.
DST said this August that its profit soared by 162.5% to $144.9 million during the three months ended June 30 compared to the same period last year. But the gain came from investment sales used to pay down debt, at the same time DST's earnings from operations declined year over year.
While DST has been selling off investments to raise money, it has also spent in other areas recently. The company undertook a number of acquisitions in 2011, such as the retirement and healthcare marketing firm Newkirk Products, Inc. that May, the automated compliance and surveillance solutions provider Subserveo Inc. that June, and the asset management solutions provider ALPS Holdings Inc. that October. The amount it paid above book value for such acquisitions was $484.9 million as of June 30, or nearly 14% of total assets, compared to nearly 10% of assets as of September 30, 2011. Meanwhile DST's estimation of the value of assets that have no physical substance such as patents, brands, or licenses also jumped to $161.1 million as of June, or nearly 5% of total assets, compared to nearly 3% of assets as of September 30, 2011.
Sometimes DST makes mistakes on its estimations. For example, DST also said this August that it backed out of an insurance processing service that was tied to its joint venture with State Street Corp, and as a result downwardly revised its earlier estimate of assets by $5.8 million related to software costs associated with the development of services. And DST took additional impairment charges in its December 2011 filing and in its September 30 filing.
In another red flag, DST's managers aren't as well supervised as they could be. For example, 77-year-old A. Edward Allinson, who was executive vice president of State Street from March 1990 through December 1999, has served on DST's board since 1995 after taking a pause from an earlier stint between 1977 and 1990. While experience undoubtedly has its merits, those who are more familiar are also less likely to hold those they supervise accountable.
DST is rated "F" on its corporate governance overall.
Region: North America
Industry: IT Services / Consulting
Market Cap: $ 2,430.7mm (Mid Cap)
ESG Rating: F
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am a corporate governance specialist.