D+H Reports Solid First Quarter 2014 Earnings

Stock Exchange Symbol: DH

Website: www.dhltd.com

TORONTO, April 29, 2014 /CNW/ - "D+H opened 2014 with strong contributions from acquisitions and solid organic growth in both the United States and Canada, driving strong growth in Adjusted revenues1, Adjusted EBITDA1 and Adjusted net income1," said Gerrard Schmid, Chief Executive Officer. "We moved our integration agenda ahead in the first quarter and now operate as D+H in all markets with consolidated U.S. and Canadian sales forces. This provides us with a good foundation to advance our standing as a leading financial technology ("FinTech") provider".

As expected, recent strategic acquisitions continued to positively diversify D+H's business. In the first quarter, the U.S. Segment accounted for 46% of Adjusted revenues, versus 13% in the same period a year ago, while lending processing and banking technology service areas accounted for 73% of first quarter Adjusted revenues compared to 57% a year ago.

"Our operations generated solid cash flows in the quarter which allowed us to continue to deleverage, while supporting our growth initiatives and dividend" said Brian Kyle, Chief Financial Officer.

First Quarter Highlights 

  • Revenues from continuing operations increased by 55.1% to $266.3 million from $171.7 million a year ago, or 49.4% after eliminating the impacts of foreign exchange volatility, reflecting the inclusion of Harland Financial Solutions' ("HFS") revenues in the U.S. Segment and organic growth in the Canadian Segment.
  • Adjusted revenues of $275.7 million were $104.1 million, or 60.6%, higher than a year ago. After eliminating the impacts of foreign exchange volatility, Adjusted revenues increased by 54.4%.
  • Adjusted EBITDA increased by 83.0% to $78.7 million (28.6% margin) from $43.0 million (25.1% margin) in 2013. After eliminating the impacts of foreign exchange volatility, Adjusted EBITDA increased by 74.4%.
  • Net income increased to $12.0 million ($0.1488 per share, basic and $0.1484 per share, diluted), from $5.7 million ($0.0969 per share, basic and diluted) a year ago, reflecting higher EBITDA, offset by higher amortization of intangible assets from acquisitions and increased interest expense attributable to the HFS acquisition. Net income in the first quarter of 2013 was impacted by a loss from discontinued operations of $10.7 million.
  • Adjusted net income increased by 68.0% to $38.8 million from $23.1 million in 2013 mainly due to the addition of HFS. Adjusted net income per share1 increased by 23.2% to $0.4808, from $0.3901 in 2013 and reflects the additional common shares issued in connection with the HFS acquisition, and was also impacted by differences in seasonality of D+H's legacy businesses and HFS.
  • Debt repayments during the first quarter of 2014 were $5.0 million, resulting in a March 31, 2014 Debt to EBITDA ratio of 2.93. This ratio, after eliminating the impacts of non-cash foreign exchange volatility, was 2.76.
  • D+H paid $0.32 per share in dividends to shareholders.
  • D+H reaffirmed its leadership position in the FinTech marketplace by being ranked the top Canadian Software-as-a-Service company in the Branham300 rankings for the second year in a row.

D+H's unaudited condensed interim consolidated financial statements for the first quarter of 2014, accompanying notes to the financial statements and management's discussion & analysis ("MD&A") along with the supplementary financial information will be available today at www.dhltd.com and tomorrow on www.sedar.com.

For a more detailed discussion of the results and management's outlook, please see the MD&A below.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This press release contains certain statements that constitute forward-looking information within the meaning of applicable securities laws ("forward-looking statements"). Statements concerning D+H's objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of D+H are forward-looking statements. The words "believe", "expect", "anticipate", "estimate", "intend", "may", "will", "would" and similar expressions and the negative of such expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

D+H has also made certain macroeconomic and general industry assumptions in the preparation of such forward-looking statements. While D+H considers these factors and assumptions to be reasonable based on information currently available, there can be no assurance that actual results will be consistent with these forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause D+H's actual results, performance or achievements, or developments in its industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements.

Risks related to forward-looking statements include, among other things, challenges presented by declines in the use of personal and business cheques; the Company's dependence on a limited number of large financial institution customers in Canada and dependence on their acceptance of new programs; strategic initiatives being undertaken to meet the Company's financial objective; stability and growth in the real estate, mortgage and lending markets; increased pricing pressures and increased competition which could lead to loss of contracts or reduced margins; the Company's ability to successfully integrate acquisitions; changes in the U.S. banking and financial services industry and demand for HFS's products and services; the Company's ability to comply with government regulations; as well as general market conditions, including economic and interest rate dynamics. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.  The documents referenced herein also identify additional factors that could affect the operating results and performance of the Company. Forward-looking statements are based on management's current plans, estimates, projections, beliefs and opinions, and D+H does not undertake any obligation to update forward-looking statements should assumptions related to these plans, estimates, projections, beliefs and opinions change except as required by applicable securities laws.

All of the forward-looking statements made in this press release are qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company.

____________________________________________________
1 D+H's financial results are prepared in accordance with International Financial Reporting Standards ("IFRS"). D+H reports several non-IFRS financial measures, including EBITDA, EBITDA Margin, Adjusted revenues, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted net income and Adjusted net income per share used above.  See Non-IFRS Financial Measures in D+H's Management Discussion and Analysis for the three months ended March 31, 2014 for a more complete description of these terms. Any non-IFRS financial measures should be considered in context with the IFRS financial statement presentation and should not be considered in isolation or as a substitute for IFRS revenues, net income or cash flows. Further, D+H's measures may be calculated differently from similarly titled measures of other companies.

Conference Call

Davis + Henderson will discuss its financial results for the three months ended March 31, 2014 via conference call at 10:00 a.m. ET (Toronto time) on Wednesday, April 30, 2014. The number to use for this call is 647-427-7450 (Local/Int'l) or 1-888-231-8191 (toll-free within North America). The conference call will be hosted by Gerrard Schmid, Chief Executive Officer and by Brian Kyle, Chief Financial Officer. The conference call will also be available on the web by accessing CNW Group's website http://www.newswire.ca/en/webcast/detail/1334807/1475329. For anyone unable to listen to the scheduled call, the rebroadcast number will be: 416-849-0833 (Local/Int'l), or 1-855-859-2056 for all other callers, with Encore Password 26392767. The rebroadcast will be available until Thursday May 15, 2014.  An archive recording of the conference call will also be available at the above noted web address for one month following the call and a text version of the call will be available at www.dhltd.com.

ADDITIONAL INFORMATION

Additional information relating to the Company, including the Company's most recently filed Annual Information Form, is available on SEDAR at www.sedar.com.

MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") of financial condition and results of operations of Davis + Henderson Corporation (the "Corporation" or the "Company" or "D+H" or the "Business") has been prepared with an effective date of April 29, 2014 and should be read in conjunction with D+H's MD&A in the Annual Report for the year ended December 31, 2013, dated February 25, 2014, and the unaudited condensed interim consolidated financial statements for the three months ended March 31, 2014.  External economic and industry factors remain substantially unchanged from those described in the annual MD&A and the Corporation's most recently filed Annual Information Form, except as described herein.

NON-IFRS FINANCIAL MEASURES

The information presented within this MD&A include certain financial measures such as "Adjusted revenues", "EBITDA", "EBITDA margin" (EBITDA divided by revenue), "Adjusted EBITDA", "Adjusted EBITDA margin" (Adjusted EBITDA divided by Adjusted revenues), "Adjusted net income", and "Adjusted net income per share", all of which are not defined terms under International Financial Reporting Standards ("IFRS").

These non-IFRS financial measures should be read in conjunction with the Consolidated Statement of Income, prepared in accordance with IFRS.  See the reconciliations of "Adjusted revenues", "EBITDA", "Adjusted EBITDA" and "Adjusted net income" to the most directly comparable IFRS measures, "revenues" and "net income", in the "Operating Results" section of this MD&A.

Management believes these supplementary financial measures provide useful additional information related to the operating results of the Corporation.  Management uses these measures to assess financial performance and as a supplement to the Consolidated Statement of Income.  Investors are cautioned that these measures should not be construed as an alternative to using net income as a measure of profitability or as an alternative to the IFRS Consolidated Statement of Income or other IFRS statements.

Further, these measures do not have any standardized meaning and D+H's method of calculating each measure may not be comparable to calculations used by other companies bearing the same description.

Adjusted Revenues

The Company uses Adjusted revenues as a measure of performance which eliminates the impact of applying acquisition accounting on the acquisition of HFS. Adjusted revenues is also used in determining Adjusted EBITDA.

Upon acquisition, the acquired deferred revenue balances were adjusted to reflect the fair value based on estimated costs of future delivery of the related services. These fair value adjustments to deferred revenues, recorded as of the acquisition date in accordance with the business combination accounting standard, will reduce revenues recognized post-acquisition under IFRS. Adjusted revenues exclude these acquisition accounting effects.

Management expects to use Adjusted revenues as a measure to the extent that the amortization impacts of the fair value adjustment to the acquired deferred revenues at the time of the HFS acquisition are significant to the Consolidated Statement of Income.

Management believes that this non-IFRS measure provides investors with useful information regarding the underlying performance of the business operations and facilitates meaningful comparisons of pre-acquisition operations to post-acquisition revenues. Without considering these non-IFRS adjustments, acquisition accounting adjustments made in accordance with IFRS may deem it difficult to make meaningful comparisons of the underlying operations of the business between periods.

EBITDA

EBITDA is defined as income from continuing operations excluding interest, taxes, depreciation and amortization, other non-cash finance charges and fair value adjustments of interest-rate swaps which are directly related to interest expense, income from investment in an associate and gain on re-measurement of previously held equity interest in the Compushare investment.  EBITDA is also described as income from operating activities before depreciation and amortization in the Consolidated Statement of Income.

In addition to its use by management as an internal measure of financial performance, EBITDA (with certain adjustments) is used to measure compliance with certain financial covenants under the Company's Credit Facility (as defined in the 'Hedges' section) and bonds. EBITDA is also used by D+H as a factor in assessing the performance and the value of a business. EBITDA has limitations as an analytical tool, and the reader should not consider it in isolation or as a substitute for analysis of results as reported under IFRS.

Adjusted EBITDA  

Adjusted EBITDA is also used by D+H in assessing the performance of its businesses.

Adjusted EBITDA excludes: (i) acquisition-related expenses such as transaction costs, business integration costs and certain retention and incentive costs incurred in connection with acquisitions; (ii) other charges such as corporate development costs related to strategic acquisition initiatives; and (iii) costs incurred in connection with cost-realignment initiatives, all of which are not considered to be part of the normal course of operations. Beginning in the third quarter of 2013, the Company's calculation of Adjusted EBITDA also excluded effects of acquisition accounting on the fair value of deferred revenues and deferred costs acquired from the acquisition of HFS.

These items are excluded in calculating Adjusted EBITDA as they are not considered indicative of the underlying business performance for the period being reviewed and management believes that excluding these adjustments is more reflective of ongoing operating results.

As described above, upon acquisition of HFS, the acquired deferred revenue balances were adjusted to reflect the fair value based on estimated costs of future delivery of the related services. Similarly, deferred costs, which include sales commissions and implementation costs, were adjusted to reflect their fair values of these items at the acquisition date. These fair value adjustments to deferred revenue and deferred costs recorded as of the acquisition date will reduce revenues and expenses recognized post-acquisition under IFRS primarily over the next two years following the acquisition, after which the impact to the consolidated results would not be significant. Adjusted EBITDA excludes the effects of these adjustments from the results in the periods reported.

Similar to EBITDA, Adjusted EBITDA also has limitations as an analytical tool, and the reader should not consider it in isolation or as a substitute for analysis of results as reported under IFRS.

Adjusted Net Income and Adjusted net income per share, basic

Adjusted net income is used as a measure of internal performance similar to net income, but is calculated by adjusting for the impacts of certain non-cash items and certain items of note on an after-tax basis. These adjustments include the after-tax impacts of: the effects of acquisition accounting on fair value of deferred revenue and deferred costs acquired from HFS; acquisition-related and other charges; expenses associated with cost-realignment initiatives; discontinued operations; all of which are not considered to be part of normal course of operations; and, certain non-cash items such as amortization of intangible assets from acquisitions, gain on re-measurement of the previously held equity interest in Compushare, non-cash finance charges such as deferred financing fees associated with D+H's previous credit facility written off upon the refinancing in connection with the acquisition of HFS, amortization of other deferred financing charges, accretion of the Debentures (as defined in the 'Convertible Debentures' section), fair value adjustments of interest-rate swaps and tax effects of these items. These items are excluded in calculating Adjusted net income as they are not considered indicative of the financial performance of the Company for the periods being reviewed.

Basic Adjusted net income per share is calculated by dividing Adjusted net income for the period by the weighted average number of shares outstanding during the period.

ADDITIONAL IFRS MEASURES

Income from Operating Activities 

D+H provides as part of its Consolidated Statement of Income an additional IFRS measure for "Income from Operating Activities". Management believes that this measure provides relevant information to understand the Corporation's financial performance. This additional IFRS measure is representative of activities that would normally be regarded as "operating" for the Company.

STRATEGY

D+H's goal is to be a leading financial technology ("FinTech") provider to the financial services marketplace by delivering differentiated services that underpin comprehensive and robust product offerings. FinTech companies develop and deliver technology and technology-enabled products and services to banks, credit unions and other leading financial services customers who use these solutions to drive growth, improve customer convenience, streamline operations and efficiencies, reduce infrastructure costs and enhance compliance requirements.

D+H's strategy is to establish market-leading positions within well-defined and growing service areas in the financial services marketplace, and to reinforce these positions with integrated technology solutions that deliver increasing value to our customers and shareholders. We expect to advance this strategy through organic initiatives and selective acquisitions. By growing revenue while maintaining efficient operations, D+H intends to achieve its long-term financial objective of growing earnings.

In 2013, D+H significantly advanced its FinTech goal and strategy by acquiring HFS. This acquisition substantially increased D+H's combined customer count and added a suite of market-leading FinTech products to its current offering. Management believes the addition of HFS provides D+H with revenue synergies in the U.S. banking and credit union marketplace and will improve the Company's value proposition as a single-source FinTech provider.

In January 2014, the Company began operating under its single, signature D+H brand in North America and globally, following the retirement of our legacy HFS, Mortgagebot and Compushare brands. All of our leading technology products and solutions now include the D+H brand in addition to their existing product names. We believe rebranding is a strategic enabler that will allow us to unlock synergies and create tangible benefits for our business and clients.

Going forward, management will remain focused on executing its growth strategy with emphasis on: (i) developing an integrated operating model in the United States that will support efficient and effective growth; (ii) cross-selling D+H's suite of FinTech solutions including its SaaS products, cloud-based infrastructure technology, lending and lending compliance and core bank technology primarily within the U.S. marketplace to existing bank and credit union customers as well as approximately 7,000 other U.S. community banks and credit unions that could benefit from these offerings; (iii) enhancing services, capabilities and cost effectiveness across all service lines in Canada and the U.S. as a means of enhancing customer value, expanding margins, and creating additional free cash flow; (iv) building new subscription-based offerings in its payments solutions service area where it won a number of Canadian financial institution mandates in recent years; (v) extending the integrated D+H brand into the U.S. market; and (vi) expanding its offering through strategic partnerships.

In carrying out its cross-selling strategy, D+H will work to achieve synergies in a number of areas including integrating sales activities to better serve customers, and focusing on creating tighter linkages between our technologies to enhance customer satisfaction as D+H grows.

The Company is committed to reducing leverage while continuing to support its current dividend payments. Without taking into account any future acquisitions or strategic investment initiatives, the Company expects to reduce its Total Funded Debt/EBITDA ratio, as defined in the 'Long-term indebtedness' section, to below 2.5 in 2015, on a foreign exchange normalized basis, from 3.05 on the date of acquisition of HFS. At March 31, 2014, debt repayments had reduced this ratio to 2.93. After removing the impacts of foreign exchange fluctuations, this ratio was 2.76.

For a detailed discussion of the operating results for the three months ended March 31, 2014 and management's outlook, please see below.

ACCOUNTING PRINCIPLES AND FINANCIAL INFORMATION PRESENTATION

The Company's unaudited condensed interim consolidated financial statements have been prepared in accordance with IFRS, specifically IAS 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB").

Results from continuing operations include the performance of acquired businesses from the respective dates of acquisition and exclude results from operations classified as discontinued operations.

Effective January 1, 2014 the Company modified its basis of reporting such that the results from our technology products and services supporting leasing, commercial lending and small business lending, which have been experiencing growth in the U.S., are reported as part of the U.S. Segment. Prior to January 1, 2014, the results from these operations were reported as part of the Canadian Segment. This revised view allows management to better evaluate its cross-selling strategies in the U.S. that were implemented after the HFS acquisition and is consistent with how this part of our business is managed and reviewed by the Company's senior management.

Comparative periods have been conformed to the current period classification, where applicable.

All amounts are in Canadian dollars, unless otherwise specified.

OPERATING RESULTS - FIRST QUARTER 2014

The following discussion should be read in conjunction with the unaudited condensed interim consolidated financial statements for the three months ended March 31, 2014 and includes non-IFRS financial measures. Management believes these supplementary disclosures provide useful additional information. See Non-IFRS Financial Measures and Additional IFRS Measures sections for a description of non-IFRS and additional IFRS measures used.

Consolidated Operating Results - Overview

D+H delivered solid operating performance in the first quarter of 2014 that was consistent with its strategic agenda of becoming a leading FinTech provider to the financial services marketplace. Year-over-year growth in revenues, Adjusted revenues and Adjusted EBITDA was primarily attributable to the U.S. Segment and reflected the inclusion of HFS, and a full quarter of Compushare's revenues (annualization). Consolidated EBITDA was higher for the first quarter of 2014 and was inclusive of $3.5 million of acquisition-related expenses, which were reported as part of Corporate, and acquisition accounting adjustments of $6.3 million related to the fair value of deferred revenues and deferred costs acquired from the acquisition of HFS.  Consolidated net income for the first quarter of 2014 was higher compared to 2013 primarily due to higher EBITDA, partially offset by the impacts of higher interest and amortization expense as a result of the HFS acquisition. Consolidated Adjusted net income and Adjusted net income per share, which excluded non-cash and non-normal course items, were also higher than the comparative period primarily as a result of the HFS acquisition. Adjusted net income and Adjusted net income per share also benefited from differences in seasonality of D+H's legacy businesses and HFS, as further discussed below. Adjusted net income per share was also impacted by the additional common shares issued in August 2013 to partially fund the HFS acquisition.

(in thousands of Canadian dollars, except per share amounts, unaudited)

        Quarter ended March 31
        2014     2013
Revenues $        266,291   $      171,661
Expenses            197,291            129,664
EBITDA 1              69,000              41,997
Depreciation of capital assets and amortization of non-acquisition intangibles                9,456                6,519
Amortization of intangible assets from acquisitions              28,582              10,914
Income from operating activities              30,962              24,564
Interest expense              15,249                4,471
Income from investment in an associate, net of tax 2                     -                    (130)
Gain on re-measurement of previously-held equity interest                     -                 (1,587)
Fair value adjustment of derivative instruments 3                  (204)                  (107)
Income tax expense                3,053                5,480
Income from continuing operations              12,864              16,437
Loss from discontinued operations, net of tax 4                  (846)             (10,695)
Net income  $         12,018   $         5,742
               
Income from continuing operations per share,          
   Basic 5 $         0.1593   $       0.2775
   Diluted 6 $         0.1589   $       0.2775
Loss from discontinued operations, per share, net of tax 4          
   Basic 5 $        (0.0105)   $      (0.1806)
   Diluted 6 $        (0.0105)   $      (0.1806)
Net income per share          
   Basic 5 $         0.1488   $       0.0969
   Diluted 6 $         0.1484   $       0.0969

1 EBITDA is a non-IFRS term. See Non-IFRS Financial Measures for a more complete description of this term.
2 Income from investment in an associate consists of D+H's share of income from Compushare, a minority investment prior to D+H acquiring 100% control in January 2013.  
3 Represents mark-to-market adjustments of interest-rate swaps that are not designated as hedges for hedge accounting purposes, and for which any change in the fair value of these contracts is recorded through the Consolidated Statement of Income.
4 Loss relates to D+H's divesture of its non-strategic business processing operations on May 10, 2013.
5 Weighted average number of shares outstanding during the first quarter of 2014 was 80,739,132 shares (first quarter of 2013 - 59,233,373 shares).
6 Diluted per share measure reflects the impacts of outstanding  stock options.  If the average market price during the period is below the option price plus the fair market value of the option, then the options are not included in the dilution calculation for income from operating activities per share. Weighted average number of shares outstanding, on a diluted basis, during the first quarter of 2014 was 80,951,884 (first quarter of 2013 - 59,233,373 shares).

(in thousands of Canadian dollars, unaudited)

      Quarter ended March 31
      2014 2013
Revenues $     266,291 $   171,661
Acquisition accounting adjustments 1             9,457                 -  
Adjusted revenues 2 $     275,748 $   171,661

1 Fair value of the deferred revenue balance acquired with the acquisition of HFS was adjusted to reflect estimated costs of future delivery of services. This add-back represents the amortization of the deferred revenue that was written-off on acquisition.
2 Adjusted revenues is a non-IFRS term.  See Non-IFRS Financial Measures for a more complete description of this term.

(in thousands of Canadian dollars, unaudited)

      Quarter ended March 31
      2014 2013
Revenues $     266,291 $   171,661
Expenses         197,291       129,664
EBITDA 1        69,000         41,997
EBITDA Margin 1 25.9% 24.5%
Adjustments:    
   Acquisition accounting adjustments  2           6,250               -  
   Acquisition-related and other charges 3             3,490           1,028
Adjusted EBITDA 1 $       78,740 $     43,025
Adjusted EBITDA Margin 1 28.6% 25.1%

1 EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin are non-IFRS terms. See Non-IFRS Financial Measures for a more complete description of these terms.
2 Acquisition accounting adjustments relate to the amortization of the fair value adjustments on deferred revenues and deferred costs acquired in connection with the acquisition of HFS. See "Adjusted revenues" and "Adjusted EBITDA" in the 'Non-IFRS Financial Measures' section for a more complete description of these terms.
3 Acquisition-related and other charges for the first quarter of 2014 included business integration costs related to the acquisition of HFS and retention and incentive costs in connection with the acquisitions of businesses. Acquisition-related and other charges for the first quarter of 2013 included transaction costs and certain retention and incentive costs related to acquisition of businesses and business integration costs.

(in thousands of Canadian dollars, unaudited)

      Quarter ended March 31,
      2014 2013
Net income $        12,018 $        5,742
Adjustments:    
  Non-cash items:    
    Acquisition accounting adjustments 1              6,250                 -  
    Non-cash interest expense 2              1,524                 -  
    Amortization of intangible assets from acquisitions            28,582          10,914
    Gain on re-measurement of previously-held equity interest 3                   -             (1,587)
    Fair value adjustment of derivative instruments 4                (204)              (107)
  Other items of note:    
    Acquisition-related and other charges 5              3,490            1,028
  Tax effect of above adjustments 6           (13,688)           (3,578)
  Loss from discontinued operations, net of tax 7                 846          10,695
Adjusted net income 8 $        38,818 $      23,107
         
Adjusted net income per share, basic  8, 9 $        0.4808 $      0.3901

      Quarter ended March 31
        2014 vs. 2013
        % change
Adjusted net income 7   68.0%
Adjusted net income per share, basic  7, 8   23.2%

1 Acquisition accounting adjustments relate to the amortization of the fair value adjustments on deferred revenues and deferred costs acquired in connection with the acquisition of HFS.
2 Non-cash interest charges relate to the accretion of Debentures issued to partially fund the acquisition of HFS and amortization of deferred financing charges incurred in connection with the Company's financing arrangements.
3 Upon acquisition of the remaining interest in Compushare in January 2013, a gain related to re-measurement of the previously held equity interest was recognized in the first quarter of 2013, in accordance with IFRS standards.
4 Amounts include mark-to-market adjustments to interest-rate swaps that are not designated as hedges for hedge accounting purposes, and for which any change in the fair value of these contracts is recorded through the Consolidated Statement of Income.
5 Acquisition-related and other charges for the first quarter of 2014 included business integration costs related to the acquisition of HFS and retention and incentive costs in connection with the acquisitions of businesses. Acquisition-related and other charges for first quarter of 2013 included transaction costs and certain retention and incentive costs related to acquisition of businesses and business integration costs.
6 The adjustments to net income are tax effected at their respective tax rates.
7 Loss relates to D+H's divesture of its non-strategic business processing operations on May 10, 2013.
8 Adjusted net income and Adjusted net income per share are non-IFRS terms. See Non-IFRS Financial Measures for a more complete description of these terms.
9 Weighted average number of shares outstanding during the first quarter of 2014 was 80,739,132 shares (first quarter of 2013 - 59,233,373 shares).

OPERATING RESULTS BY SEGMENT

(in thousands of Canadian dollars, unaudited)

                    Quarter ended March 31,
        Canadian
Segment
    U.S.
Segment
    Corporate     Consolidated
      2014 2013   2014 2013   2014 2013   2014 2013
Revenues $   150,093 $148,640   $116,198 $23,021   $         - $          -   $266,291 $171,661
Acquisition accounting adjustments 1                 -              -          9,457           -                 -              -         9,457              -  
Adjusted revenues 2 $   150,093 $148,640   $125,655 $23,021   $         - $          -   $275,748 $171,661

1 Fair value of the deferred revenue balance acquired with the acquisition of HFS was adjusted to reflect estimated costs of future delivery of services. This add-back represents the amortization of the deferred revenue that was written-off on acquisition.
2 Adjusted revenues is a non-IFRS term. See Non-IFRS Financial Measures for a more complete description of this term.

        

(in thousands of Canadian dollars, unaudited)

                          Quarter ended March 31,
        Canadian
Segment
    U.S.
Segment
    Corporate     Consolidated
      2014 2013   2014 2013   2014 2013   2014 2013
Revenues $    150,093 $148,640   $116,198 $23,021   $           - $        -   $ 266,291 $171,661
Expenses       116,172   114,890       77,629    13,746         3,490    1,028        197,291    129,664
EBITDA 1          33,921     33,750        38,569      9,275         (3,490)        (1,028)           69,000        41,997
EBITDA Margin 1 22.6% 22.7%   33.2% 40.3%                 - -   25.9% 24.5%
                           
Adjustments:                      
  Acquisition accounting adjustments 2                  -             -   6,250            -             -            -           6,250              -  
    Acquisition-related and other charges 3                  -              -                -             -         3,490    1,028            3,490        1,028
Adjusted EBITDA 1 $     33,921 $ 33,750   $ 44,819 $  9,275   $           - $        -   $    78,740 $  43,025
Adjusted EBITDA Margin 1 22.6% 22.7%   35.7% 40.3%                   - -   28.6% 25.1%

1 EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin are non-IFRS terms. See Non-IFRS Financial Measures for a more complete description of these terms.
2 Acquisition accounting adjustments relate to the amortization of the fair value adjustments on deferred revenues and deferred costs acquired in connection with the acquisition of HFS. See "Adjusted revenues" and "Adjusted EBITDA" in the 'Non-IFRS Financial Measures section for a more complete description of these terms.
3 Acquisition-related and other charges for the first quarter of 2014 included business integration costs related to the acquisition of HFS and retention and incentive costs in connection with the acquisitions of businesses. Acquisition-related and other charges for the first quarter of 2013 included transaction costs and certain retention and incentive costs related to acquisition of businesses and business integration costs.

                          Quarter ended
March 31,
                    Canadian   U.S.  
                    Segment   Segment Consolidated
                    2014 vs. 2013   2014 vs. 2013 2014 vs. 2013
                    % change   % change % change
Revenues               1.0%   404.7% 55.1%
Adjusted revenues 1               1.0%   445.8% 60.6%
Adjusted EBITDA 1               0.5%   383.2% 83.0%

1 Adjusted revenues and Adjusted EBITDA are non-IFRS terms. See Non-IFRS Financial Measures for a more complete description of these terms.

REVENUES AND ADJUSTED REVENUES

The following table reflects the relative size of each of the major service areas as a percentage of consolidated Adjusted revenues based on a rolling twelve-month period:

            Twelve months ended March 31,
              2014 2013
Adjusted Revenues - Consolidated              
    Payments solutions             31.5% 42.8%
    Lending processing solutions           29.2% 38.0%
    Banking technology solutions              
             Lending             24.9% 18.7%
             Enterprise             14.4% 0.5%
              100.0% 100.0%

(in thousands of Canadian dollars, unaudited)

                            Quarter ended March 31
    Canadian
Segment
          U.S.
Segment
          Consolidated
  2014 2013         2014 2013         2014 2013
  Revenues Revenues   Revenues Adjustment 1   Adjusted
revenues 2
Revenues   Revenues Adjustment 1   Adjusted
revenues 2
Revenues
Payments solutions $  74,703 $     73,679   $           - $             -   $             - $            -   $    74,703 $             -   $       74,703 $         73,679
Lending processing solutions      66,278         65,123                 -                -                   -                -          66,278                 -            66,278            65,123
Banking technology solutions                            
    Lending        9,112           9,838        60,439         8,322          68,761       19,508          69,551          8,322            77,873            29,346
    Enterprise               -                  -        55,759         1,135          56,894         3,513          55,759          1,135            56,894              3,513  
Total Revenues $ 150,093 $    148,640   $ 116,198 $      9,457   $   125,655 $   23,021   $  266,291 $      9,457   $     275,748 $       171,661

1 Adjustment is related to non-cash fair value adjustment to deferred revenues acquired in connection with the acquisition of HFS. Fair value of the deferred revenue balance was adjusted to reflect estimated costs of future delivery of the services. This add-back represents the amortization of the deferred revenue that was written-off on acquisition.
2 Adjusted revenues is a non-IFRS term.  See Non-IFRS Financial Measures for a more complete description of this term.

Revenues and Adjusted Revenues - Consolidated

Consolidated Adjusted revenues for the first quarter of 2014 were $275.7 million, an increase of $104.1 million, or 60.6%, compared to the same period in 2013. After eliminating the impacts of foreign exchange volatility, Adjusted revenues increased by 54.4% in the first quarter of 2014 (see U.S. Segment discussion below for further details). The increase in Adjusted revenues was primarily due to the inclusion of HFS, and to a lesser extent, the annualization and growth in revenues of Compushare, acquired on January 29, 2013. Payments solutions and lending processing solutions in the Canadian Segment also contributed to the overall revenue growth.

Consolidated revenues for the first quarter of 2014 were $266.3 million, an increase of $94.6 million, or 55.1%, compared to the same period in 2013. After eliminating the impacts of foreign exchange volatility, revenues increased by 49.4% in the first quarter of 2014. Revenues in the 2014 period were impacted by the fair value adjustment to deferred revenues acquired from HFS.

Revenues - Canadian Segment

Total revenues in the Canadian Segment for the first quarter of 2014 of $150.1 million, increased by $1.5 million, or 1.0%, compared to the same quarter in 2013. Adjusted revenues are the same as revenues for the Canadian Segment as this segment was not subject to acquisition accounting adjustments.

Payments Solutions

Payments solutions include: (i) the cheque supply program which serves the personal and small business account holders of our financial services customers; and (ii) various subscription fee-based enhancement services and other service offerings directed towards chequing and credit card programs. These service offerings (excluding the component of enhancement and identity protection services that are integrated in the cheque order) currently represent a small but growing component of revenues within this revenue category.

As a result of growth in alternative payments, the number of cheques written has declined and is expected to continue to decline. Management believes that the downward trend in cheque order volumes is in the mid-single digits annually.  In recent years, there has been more volatility in personal cheque order volumes, while the decline in business cheque order volumes continues to be in the low single digits with comparatively less volatility. Management expects that these trends will continue through 2014. D+H continues to develop service enhancements to offset this impact and to generate future growth within this category. Revenues in this area are not significantly impacted by seasonality.

Revenues from payments solutions for the first quarter of 2014 were $74.7 million, an increase of $1.0 million, or 1.4%, compared to the same quarter in 2013. Revenues from payments solutions reflected the positive impact of higher average order values due to product and service enhancements in the chequing and credit card programs and higher volumes in our subscription fee-based enhancement services offerings. These increases were partially offset by volume declines in cheque orders.

Lending Processing Solutions

Lending processing solutions consist of two distinct sets of customer solutions: loan registration and recovery and student loan administration services.

Loan registration and recovery services, which account for approximately 55% to 65% of the revenues within this category, support the personal and commercial lending activities of our financial services customers with the registration and management of data related to secured lending for both personal and real property loans as well as recovery services related to both secured and unsecured lending activities. Loans relating to vehicle purchases, new and resale, are a significant driver of activity and are variable. In general, registration services are affected by both economic cyclicality and seasonality, while recovery services are, in general, counter-cyclical.

In our student loans administration services area, which accounts for approximately 35% to 45% of revenues within the lending processing solutions category, we manage a $21 billion student loan portfolio servicing 1.7 million students on behalf of the Canadian federal and provincial governments and lenders. Services include student enrollment, management of funds disbursement, loan tracking, student support services, reporting and collections. Revenues from this program are primarily earned based upon the number of student loans serviced while enrolled in school and the number of loans serviced while students are in the repayment cycle. D+H also earns revenue from professional services work connected to program enhancements requested by the lenders. Revenues in this area are not significantly impacted by seasonality.

D+H and the Government of Canada are parties to a contract pursuant to which D+H provides financial and related services in support of the Canada Student Loans and Grants Program ("CSLP") as well as the student loan and grant programs of certain Canadian provinces. The contract with the Government of Canada will expire on March 31, 2016 after which it may be renewed by the Government of Canada for 1-year terms up to a maximum of two such terms. In line with government procurement policy, the Government of Canada has initiated consultations with industry regarding the requirements for administering the CSLP after the expiry of the existing contract and we expect a request for proposals will be issued in the late-Spring of 2014.  D+H intends to aggressively defend its incumbency and believes the quality of our delivery thus far will help us remain competitive in the bid process.

Lending processing solutions revenues for the first quarter of 2014 were $66.3 million, an increase of $1.2 million, or 1.8%, compared to the same quarter in 2013. The increase was mainly due to higher transaction volumes in recovery services and, to a lesser extent, higher average order values in registration services and higher volumes in the student loans program. The rate of year-over-year growth was muted by a reduction in the student loan program project-related and professional services revenues compared to the first quarter of 2013.

Banking Technology Solutions - Lending

In the Canadian Segment, banking technology solutions, reported within the lending category, are directed towards mortgage markets in Canada. Revenues within this category are attributable to transaction-based fees earned in connection with Canadian mortgage originations.  These fees can be variable and are impacted by many factors including the economy, the housing market, interest rates and changes in government regulations among others.  Revenues in this area are subject to some seasonality as the second and third quarters have historically experienced a higher level of origination activity, consistent with the overall housing market in Canada. As described above, revenues pertaining to our technology products and services supporting leasing, commercial lending and small business lending are now reported as part of the U.S. Segment.

Canadian banking technology solutions revenues in the first quarter of 2014 were $9.1 million, a decrease of $0.7 million, or 7.4%, compared to the same quarter in 2013. This reflected lower mortgage origination fees resulting from price modifications and was partially offset by higher origination volumes. We expect the impact of price modifications to be fully accounted for by the end of the second quarter of 2014.

Revenues and Adjusted Revenues - U.S. Segment

Revenues from U.S. banking technology solutions are classified into lending solutions and enterprise solutions categories, as further described below. With the acquisition of HFS, we expect higher levels of seasonality in revenues from our U.S. banking technology service area, as revenues are expected to be stronger in the second and fourth quarters, with the latter being the busiest period. Revenues in the first and third quarters for HFS have historically been weaker.

Total revenues in the U.S. Segment for the first quarter of 2014 of $116.2 million increased by $93.2 million, or 404.7%, compared to the same quarter in 2013. First quarter Adjusted revenues for the U.S. Segment of $125.7 million were $102.6 million, or 445.8%, ahead of the same period of 2013. The sharp increase in revenues and Adjusted revenues was primarily due to the inclusion of HFS and to a lesser degree, our cloud-based solutions. As noted above, HFS revenues in the first quarter have historically been weaker. A strong U.S. dollar in the first quarter of 2014 compared to the same period in 2013 benefited revenues and Adjusted revenues in the U.S. Segment by $9.8 million and $10.6 million, respectively. After eliminating these foreign exchange impacts, revenues increased by 362.1% and Adjusted revenues by 399.7%. The foreign exchange impact was calculated as the difference between the current quarter's actual results and the current quarter's results in local currencies converted at the foreign exchange rates in effect during the same quarter of the prior year.

Lending Solutions

Lending solutions primarily consist of loan and deposit origination and mortgage compliance offerings for a wide variety of loan types, including consumer, mortgage and commercial loans, and also market offerings related to commercial lending risk management, underwriting and portfolio management solutions. Within the U.S. lending solutions category revenues, approximately 50% to 60% comes from recurring subscription fees which generally are market resilient; 15% to 25% comes from sales of software and associated professional services, which can be variable due to timing; 15% to 25% are attributable to post-contract maintenance services, and less than 5% to transaction based revenues which are sensitive to changes in market conditions. Effective January 1, 2014, also included in this category are the technology products and services supporting leasing, commercial lending and small business lending, which were previously reported as part of the Canadian Segment.

U.S. lending solutions revenue for the first quarter of 2014 was $60.4 million, an increase of $40.9 million, or 209.8%, compared to $19.5 million for the same period in 2013. Revenues for the first quarter of 2014 benefited from inclusion of HFS.  Revenues recorded under IFRS for the first quarter of 2014 were impacted by acquisition-accounting adjustments related to fair value of deferred revenue acquired through the acquisition of HFS.  Adjusted revenues of $68.8 million, which removed these acquisition accounting impacts, increased by $49.3 million compared to the same quarter in 2013 due to the inclusion of HFS.

Although to a lesser extent, an increase in professional services fees related to our leasing, commercial lending and small business lending offering also contributed to revenue growth in this category.

Enterprise Solutions

Enterprise solutions primarily consist of revenues from core processing systems including content management, financial accounting and payments solutions, a number of innovative channel solutions related to self-service, business intelligence and branch automation solutions and cloud-based infrastructure technology solutions offerings.

U.S. enterprise solutions revenues for the first quarter of 2014 were $55.8 million, an increase of $52.2 million, compared to the same period in 2013. Revenues recorded under IFRS for the first quarter of 2014 benefited from the acquisition of HFS, and to a lesser degree, growth in, and annualization of, Compushare's revenues.

Adjusted revenues, which are calculated after removing the impacts of purchase accounting adjustments related to fair value of deferred revenues, were $56.9 million for the first quarter of 2014, an increase of $53.4 million, compared to the same period in 2013 for reasons noted above.

EXPENSES

(in thousands of Canadian dollars, unaudited)

                    Quarter ended March 31,
    Canadian
Segment
    U.S.
Segment
    Corporate     Consolidated
  2014 2013   2014 2013   2014 2013   2014 2013
                       
Employee compensation and benefits 1 $    39,919 $      37,435   $  47,895 $   8,720   $       988 $      892   $    88,802 $    47,047
Non-compensation direct expenses 2        59,227          57,469          8,955         573               -              -            68,182        58,042
Other operating expenses 3        17,026          19,986        20,779       4,453          2,502         136          40,307        24,575
Total Expenses $  116,172 $     114,890   $  77,629 $ 13,746   $    3,490 $   1,028   $  197,291 $  129,664

1 Employee compensation and benefits on a consolidated basis includes retention and incentive expenses related to acquisitions of businesses and share-based compensation expenses and are net of apprenticeship tax credits and amounts capitalized related to software product development.
2 Non-compensation direct expenses include materials, shipping, selling expenses, royalties and third party direct disbursements.
3 Other operating expenses include occupancy costs, communication costs, professional fees, contractor fees, transaction costs related to acquisitions of businesses and expenses not included in other categories.  Other operating expenses in the Canadian Segment are net of management fees charged to the U.S. segment by the Canadian Segment.

Expenses - Consolidated 

Consolidated expenses of $197.3 million for the first quarter of 2014 increased by $67.6 million, or 52.2%, compared to the same quarter in 2013.  The increase was mainly attributable to the inclusion of HFS expenses and Compushare expenses effective from January 29, 2013.  Consolidated expenses also included acquisition-related and other charges of $3.5 million for the first quarter of 2014, which are not considered reflective of normal course operations and are disclosed as part of Corporate. Acquisition-related and other charges of $1.0 million were recorded in the first quarter of 2013.

Expenses - Canadian Segment

Total Canadian Segment expenses for the first quarter of $116.2 million, increased $1.3 million, or 1.1%, compared to the same quarter in 2013.

Employee compensation and benefits costs of $39.9 million for the first quarter of 2014 for the Canadian Segment were higher by $2.5 million, or 6.6%, compared to the same quarter in 2013. The increase in expenses for the first quarter of 2014 was due to higher severance payments made to employees in the normal course of operations and an increase in share-based compensation expense reflecting a higher stock price. These increases were offset by benefits realized from past savings initiatives implemented in prior periods.

Non-compensation direct expenses for the Canadian Segment were $59.2 million for the first quarter of 2014, an increase of $1.8 million, or 3.1%, compared to the same quarter in 2013.  In general, these expenses directionally change with revenue changes. This increase in non-compensation direct expenses for the first quarter of 2014 reflected higher volumes in our subscription fee-based enhancement services offerings within our payments solutions service area and an increase in direct costs associated with the lending processing solutions service area, consistent with the increase in revenues.

Other operating expenses of $17.0 million for the first quarter of 2014 decreased by $3.0 million, or 14.8%, compared to the same quarter in 2013. The decrease was primarily due to a higher management fee charged by the Canadian Segment to the U.S. Segment since the acquisition of HFS. The management fee charged to the U.S. Segment was $3.0 million for the first quarter of 2014, compared to $1.0 million charged for the first quarter of 2013. The first quarter 2014 management fees represent an expected annual charge of $12.0 million for 2014, compared to an annual charge of $6.9 million for 2013 reflecting the increased focus of the Company's management team on U.S. operations.

Expenses - U.S. Segment

Total expenses for the U.S. Segment for the first quarter of 2014 were $77.6 million, an increase of $63.9 million, or 464.7%, compared to the same quarter in 2013 with the increase mainly attributable to the inclusion of HFS and, to a lesser extent, the annualization of Compushare's results.

Employee compensation and benefits costs of $47.9 million in the first quarter for the U.S. Segment increased by $39.2 million compared to the same period in 2013. Non-compensation direct expenses for the U.S. Segment of $9.0 million for the first quarter of 2014 were higher by $8.4 million compared to the same period in 2013. Other operating expenses of $20.8 million for the first quarter of 2014 were higher by $16.3 million, compared to the same quarter in 2013. These increases were primarily attributable to the inclusion of HFS and the annualization of Compushare's expenses. Other operating expenses also included a management fee, as further described above, for corporate-related services, charged to the U.S. Segment by the Canadian Segment.

Expenses - Corporate

Employee compensation and benefits

Employee compensation and benefits expenses of $1.0 million recorded as corporate expenses for the first quarter of 2014 primarily consisted of retention and incentive expenses incurred in connection with the acquisitions. For the same period in 2013, employee compensation and benefits included $0.9 million relating to retention and incentive expenses in connection with acquisitions.

Other expenses

Other expenses of $2.5 million mainly consisted of business integration costs incurred in connection with the acquisition of HFS.  For the same period in 2013, other operating expenses of $0.1 million included transaction costs incurred in connection with the acquisition of Compushare and business integration costs.

EBITDA AND EBITDA MARGIN

Consolidated EBITDA for the first quarter of 2014 was $69.0 million, an increase of $27.0 million, or 64.3%, compared to $42.0 million for the same quarter in 2013. First quarter 2014 EBITDA margin of 25.9% was higher than the 24.5% margin for the same period in 2013.

Canadian Segment

Canadian Segment EBITDA for the first quarter of 2014 was $33.9 million, a moderate increase of $0.2 million, or 0.5%, compared to the same quarter in 2013. EBITDA margin for the Canadian Segment for the first quarter of 2014 was 22.6%, compared to 22.7% for the same period in 2013. See Adjusted EBITDA for Canadian Segment for further discussion of the Canadian Segment results.

U.S. Segment

U.S. Segment EBITDA for the first quarter of 2014 was $38.6 million, an increase of $29.3 million, compared to the same quarter in 2013. EBITDA margin was 33.2% for the first quarter of 2014 compared to 40.3% a year ago.

ADJUSTED EBITDA AND ADJUSTED EBITDA MARGIN

Consolidated Adjusted EBITDA during the first quarter of 2014 was $78.7 million, an increase of $35.7 million, or 83.0%, compared to the same quarter in 2013, primarily due to the inclusion of HFS and, to a lesser extent, annualization of Compushare. After eliminating the impacts of foreign exchange volatility, Adjusted EBITDA increased by 74.4% in the first quarter of 2014.

First quarter 2014 consolidated Adjusted EBITDA was calculated by removing: (i) $6.3 million of acquisition accounting adjustments to fair value of deferred revenues and deferred costs associated with the acquisition of HFS representing an add-back to revenues of $9.5 million and expenses of $3.2 million; and (ii) acquisition-related and other charges of $3.5 million, consisting of business integration costs incurred in connection with the acquisition of HFS and retention and incentive costs and integration expenses associated with acquisitions.

On a consolidated basis, Adjusted EBITDA margin for the first quarter of 2014 was 28.6%, compared to 25.1% for the same period in 2013, due to the inclusion of HFS in the U.S. Segment. Although HFS has lower margins than our other U.S. Segment offerings, it has a higher margin than the Canadian Segment.

Canadian Segment

Adjusted EBITDA is the same as EBITDA in the Canadian Segment. Canadian Segment Adjusted EBITDA for the first quarter of 2014 was $33.9 million, an increase of $0.2 million, or 0.5%, compared to the same quarter in 2013. Adjusted EBITDA benefited from higher revenues in payments solutions and lending processing solutions service areas, which was offset by lower mortgage origination fees and higher employee compensation expenses as described above.

Canadian Segment Adjusted EBITDA margin for the first quarter was 22.6% compared to 22.7% for the same period in 2013. Adjusted EBITDA margin was impacted by higher employee compensation expenses as described above and benefited from savings realized from recent transformation and cost-realignment activities and, to a lesser extent, a higher management fee charged to the U.S. Segment since the acquisition of HFS.

U.S. Segment

Adjusted EBITDA for the U.S. Segment during the first quarter of 2014 was $44.8 million, an increase of $35.5 million, or 383.2%, compared to the same quarter in 2013 mainly due to the inclusion of HFS and, to a lesser extent, Compushare. A strong U.S. dollar in the first quarter of 2014 compared to the same period in 2013 benefited Adjusted EBITDA in the U.S. Segment by $3.7 million. After eliminating this foreign exchange impact, Adjusted EBITDA increased by 343.2%.

Adjusted EBITDA in the U.S. Segment excluded the impacts of $6.3 million attributable to acquisition accounting adjustments related to fair value of deferred revenues and deferred costs on D+H's acquisition of HFS, in accordance with IFRS, which consisted of $9.5 million of acquisition accounting adjustments related to fair value of deferred revenues and $3.2 million of fair value adjustments related to deferred costs. 

Adjusted EBITDA margin for the U.S. Segment for the first quarter of 2014 was 35.7%, compared to 40.3% for the same period in 2013. As described earlier, HFS margins are lower than the previously combined SaaS offerings in the U.S. Segment, which resulted in a lower Adjusted EBITDA margin in 2014, compared to 2013.

DEPRECIATION OF CAPITAL ASSETS AND AMORTIZATION OF NON-ACQUISITION INTANGIBLE ASSETS

Consolidated depreciation of capital assets and amortization of non-acquisition intangible assets of $9.5 million in the first quarter of 2014 increased by $2.9 million, or 45.1%, compared to the same period in 2013 mainly due to the inclusion of HFS.

AMORTIZATION OF INTANGIBLE ASSETS FROM ACQUISITIONS

Consolidated amortization of acquisition intangible assets for the first quarter of 2014 was $28.6 million, an increase of $17.7 million, compared to the same period in 2013. The increase was attributable to the amortization resulting from the acquisition of HFS, and annualization of Compushare.

INCOME FROM OPERATING ACTIVITIES

Consolidated income from operating activities was $31.0 million for the first quarter of 2014, an increase of $6.4 million, or 26.0%, compared to $24.6 million for the same quarter in 2013. The increase reflected growth in EBITDA as described above. Income from operating activities was impacted by acquisition-related costs and other charges in connection with the HFS acquisition and higher amortization of intangible assets from acquisitions.

INTEREST EXPENSE

Interest expense of $15.2 million for the first quarter of 2014 increased by $10.8 million compared to the same quarter in 2013. This reflected incremental debt financing through the Credit Facility bearing a higher credit spread and bonds and Debentures issued to partially fund the HFS acquisition in August 2013. Interest expense for the first quarter of 2014 also included a non-cash interest charge of $1.5 million consisting of accretion expense of $1.0 million related to the Debentures and $0.5 million related to amortization of deferred financing charges incurred in connection with the Company's financing arrangements. 

FAIR VALUE ADJUSTMENT OF DERIVATIVE INSTRUMENTS

An unrealized gain of $0.2 million related to fair value changes on derivative instruments was recognized in the first quarter of 2014, compared to $0.1 million in the first quarter of 2013. These changes are related to our interest-rate swaps.

For the interest-rate swaps that are not designated as hedges for accounting purposes, these unrealized gains and losses are recognized in the Consolidated Statement of Income. In general, a loss on interest-rate swaps is recorded when interest rates decrease as compared to certain previous periods and a gain is recorded when interest rates increase. Provided the Company does not cancel its interest-rate swaps, the unrealized amounts represent a non-cash unrealized gain or loss that will subsequently reverse through the Consolidated Statement of Income as the related swaps mature. D+H has historically held its derivative contracts to maturity. The Company is a fixed-rate payer on all of its interest rate swaps.

INCOME TAX EXPENSE

An income tax expense of  $3.1 million was recorded in the first quarter of 2014 compared to an income tax expense of $5.5 million recognized for the same period in 2013. The income tax expense in the first quarter of 2014 is mainly attributable to income from continuing operations, after giving effect to the amortization of intangible assets from acquisitions, and is lower than the expected tax at statutory rates primarily as a result of the geographic mix of such income.

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations for the first quarter of 2014 was $12.9 million, a decrease of $3.6 million, compared to $16.4 million for the same period in 2013.  Income from continuing operations reflected higher EBITDA of $27.0 million resulting from the acquisition of HFS, partially offset by higher amortization expense of $17.7 million relating to acquisition intangible assets and higher interest expense of $10.8 million on debt drawn to fund the HFS acquisition.

LOSS FROM DISCONTINUED OPERATIONS

A loss from discontinued operations of $0.8 million was recorded for the first quarter of 2014 in connection with the divestiture of D+H's non-strategic business processing operations on May 10, 2013. This loss was attributable to: (i) loss on disposal of $0.9 million pertaining to the previously negotiated asset purchase agreement, and (ii) $0.1 million of operating income from discontinued operations pertaining to the previously negotiated transitional services agreement. For the comparative period in 2013, the loss from discontinued operations was $10.7 million.

NET INCOME

Consolidated net income of $12.0 million for the first quarter of 2014 was higher by $6.3 million, compared to consolidated net income of $5.7 million for the same quarter in 2013. Net income in the first quarter of 2014 benefited from an increase in EBITDA of $27.0 million resulting from the acquisition of HFS but was offset by higher amortization expense of $17.7 million relating to acquisition intangible assets, and higher interest expense of $10.8 million on debt drawn to fund the HFS acquisition.

NET INCOME PER SHARE

Net income per share, basic

Consolidated basic net income per share of $0.1488 for the first quarter of 2014 was higher compared to a net income per share of $0.0969 for the same quarter in 2013, on account of acquisition accretion even though we issued additional common shares in August 2013 in connection with the acquisition of HFS.

Net income per share, diluted

For the first quarter of 2014, the inclusion of additional potential shares related to stock options had a dilutive effect on net income while additional potential shares related to the Debentures had an anti-dilutive effect on net income. Net income per share for the first quarter of 2014 on a diluted basis was $0.1484 per share, compared to net income per share of $0.0969 for the same period in 2013. Per share amounts, on a diluted basis, were also impacted by the additional common shares issued in August 2013 to fund the HFS acquisition.

ADJUSTED NET INCOME AND ADJUSTED NET INCOME PER SHARE

Consolidated Adjusted net income of $38.8 million for the first quarter of 2014 was higher by $15.7 million, or 68.0%,  compared to the $23.1 million for the same period in 2013.  Consolidated Adjusted net income per share of $0.4808 increased by 23.2% from $0.3901 per share for the same period in 2013. These increases were mainly due to a higher Adjusted EBITDA resulting from the inclusion of HFS results, partially impacted by higher depreciation of capital assets, amortization of non-acquisition intangible assets and higher cash interest expense on debt drawn to fund the HFS acquisition. Adjusted net income per share for the first quarter of 2014 was also impacted by the additional shares issued, in August 2013, to fund the acquisition of HFS.

The strong growth in Adjusted net income per share in the first quarter of 2014 was primarily due to the positive accretion arising from the acquisition of HFS. This accretion was further magnified due to the seasonality of the legacy D+H business. Historically, for the legacy D+H businesses, the first quarter is seasonally muted compared to the rest of the year.

CONSOLIDATED CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES

The following table is derived from, and should be read in conjunction with, the Consolidated Statement of Cash Flows. Management believes this disclosure provides useful additional information related to the cash flows of the Corporation, repayment of debt and other investing activities.

Consolidated Summary of Cash Flows 

(in thousands of Canadian dollars, unaudited)

          Quarter ended March 31,
          2014 2013
Cash and cash equivalents provided by (used in):      
OPERATING ACTIVITIES      
Income from continuing operations   $       12,864 $       16,437
Depreciation and amortization of assets             38,038           17,433
Fair value adjustment of derivative instruments                (204)              (107)
Interest expense, including amortization of deferred finance fees and accretion           15,249            4,471
Non-cash income tax and options expenses              3,091            5,591
Income from investment in an associate, net of tax                     -              (130)
Gain on re-measurement of previously held equity interest                     -           (1,587)
Increase in non-cash working capital and other items             (3,628)          (18,087)
Cash generated from operating activities             65,410           24,021
Interest paid              (19,257)           (4,043)
Income tax paid            (19,834)           (1,344)
Net cash from operating activities             26,319           18,634
FINANCING ACTIVITIES      
Net change in long-term indebtedness             (5,000)           26,049
Dividends paid              (25,837)          (18,955)
Net cash used in (from) financing activities            (30,837)            7,094
             
INVESTING ACTIVITIES      
Capital expenditures             (11,393)           (6,286)
Acquisition of subsidiaries                     -          (24,393)
Net cash used in investing activities            (11,393)          (30,679)
Decrease in cash and cash equivalents for the period            (15,911)           (4,951)
Cash and cash equivalents, beginning of period             32,398            5,719
Cash and cash equivalents, end of period   $       16,487 $           768

As at March 31, 2014, cash and cash equivalents totalled $16.5 million, compared to $32.4 million at December 31, 2013.

Operating Activities

Operating activities provided $26.3 million during the quarter ended March 31, 2014, compared to $18.6 million for the same period in 2013. The change in net cash from operating activities was primarily attributable to higher EBITDA in the first quarter of 2014 due to the acquisition of HFS, offset by an increase in non-cash working capital and other items as described below. Net cash from operating activities for the first quarter of 2014 were also impacted by income tax payments, and increased interest payments reflecting the HFS acquisition.

Changes in Non-Cash Working Capital and Other Items

(in thousands of Canadian dollars, unaudited)

          Quarter ended March 31,
          2014 2013
Changes in non-cash working capital items   $         4,972 $      (14,794)
Changes in other operating assets and liabilities              (7,782)            1,438
Cash flows used in discontinued operations                (818)           (4,731)
Increase in non-cash working capital and other items   $        (3,628) $      (18,087)

The net decrease in non-cash working capital in the first quarter of 2014 was primarily due to an increase in current deferred revenues, reflecting increased revenues from HFS, which was partially offset by a decrease in accrued and other liabilities, mainly reflecting short term incentive payments.

The net increase in other operating assets and liabilities for the first quarter of 2014 was attributable to increased non-current accounts receivable and deferred costs reflecting growth in our HFS business.

Cash flows used in discontinued operations in the first quarter of 2014 is attributable to cash outflows pertaining to the culmination of the previously negotiated asset purchase agreement, partially offset by activities undertaken in accordance with the previously negotiated transition services agreement associated with the divestiture of D+H's non-strategic business processing operations on May 10, 2013.

Financing Activities

Net cash used in financing activities was $30.8 million during the first quarter of 2014, compared to net cash from financing activities of $7.1 million in the same period in 2013. Net cash used in 2014 was primarily due to debt repayments and a dividend payment. D+H made net debt repayments of $5.0 million during the first quarter of 2014, compared to a net debt drawdown of $26.0 million in the same period in 2013. The drawdown in the first quarter of 2013 was to fund the Compushare acquisition.

Dividends

During the first quarter of 2014, D+H paid a dividend of $0.32 per share ($25.8 million) to its shareholders of record as of March 10, 2014.  For the same quarter in 2013, $0.32 per share ($19.0 million) was paid to shareholders. The increase in total dividends paid during the first quarter of 2014 is due to the additional common shares issued to partially fund the acquisition of HFS in August 2013.

Investing Activities

Net cash of $11.4 million was used in investing activities during the first quarter of 2014, reflecting capital expenditures, compared to $30.7 million used in investing activities in the first quarter of 2013. Cash used in the first quarter of 2013 was higher due to the acquisition of Compushare.

EIGHT QUARTER CONSOLIDATED STATEMENTS OF INCOME - SUMMARY

(in thousands of Canadian dollars, except per share amounts, unaudited)

      2014       2013 2012
      Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
Revenues $   266,291 $ 259,075 $ 209,223 $ 197,134 $ 171,661 $ 172,457 $ 176,689 $ 180,989
Acquisition accounting adjustments 1          9,457       13,058       16,107                 -                 -                 -                 -                 -
Adjusted revenues 2     $   275,748 $ 272,133 $ 225,330 $ 197,134 $ 171,661 $ 172,457 $ 176,689 $ 180,989
                     
Revenue $   266,291 $ 259,075 $ 209,223 $ 197,134 $ 171,661 $ 172,457 $ 176,689 $ 180,989
Expenses 3       197,291     190,876     172,539     144,551     129,664     131,082     129,405     128,289
EBITDA 2, 3         69,000       68,199       36,684       52,583       41,997       41,375       47,284       52,700
EBITDA Margin 2 25.9% 26.3% 17.5% 26.7% 24.5% 24.0% 26.8% 29.1%
                 
Adjustments:                
   Acquistion accounting adjustments 1          6,250         9,217       15,030                 -                 -                 -                 -                 -
   Acquisition-related and other charges 3              3,490         3,842       13,126         5,764         1,028         6,558         3,265         4,378
Adjusted EBITDA 2 $     78,740 $   81,258 $   64,840 $   58,347 $   43,025 $   47,933 $   50,549 $   57,078
Adjusted EBITDA Margin 2 28.6% 29.9% 28.8% 29.6% 25.1% 27.8% 28.6% 31.5%
                     
EBITDA 2, 3 $     69,000 $   68,199 $   36,684 $   52,583 $   41,997 $   41,375 $   47,284 $   52,700
Depreciation of capital assets and amortization                
     of non-acquisition intangibles          9,456       10,937         7,532         6,657         6,519         7,568         6,648         6,986
                 
Amortization of intangible assets from acquisitions        28,582       27,631       19,182       11,060       10,914       11,292       10,597       10,706
Income from operating activities 2        30,962       29,631         9,970       34,866       24,564       22,515       30,039       35,008
                 
Interest expense        15,249       15,509       11,251         4,516         4,471         4,629         4,943         4,821
                 
Other finance charges 4                  -                 -         3,224                 -                 -                 -                 -                 -
Loss (income) from investment in an associate, net of tax                  -                 -                 -                 -          (130)              23            (53)            (38)
                 
Gain on re-measurement of previously held equity interest 5                  -                 -                 -                 -       (1,587)                 -                 -                 -
                     
Fair value adjustment of derivative instruments 6            (204)           (138)        (4,759)        (1,203)           (107)           (542)           (445)            616
Income tax expense (recovery)          3,053          (975)       (7,383)        9,158        5,480        4,165        5,987        8,345
Income from continuing operations        12,864      15,235        7,637      22,395      16,437      14,240      19,607      21,264
Income (loss) from discontinued operatios, net of tax 7           (846)         2,133          (704)       (8,786)     (10,695)          (529)              (2)          (377)
Net income        12,018      17,368        6,933      13,609        5,742      13,711      19,605      20,887
Adjustments:                
  Non-cash items:                
    Acquisition accounting adjustments 1             6,250         9,217       15,030                 -                 -                 -                 -                 -
    Non-cash interest expense 8             1,524         1,349            709                 -                 -                 -                 -                 -
    Other finance charges 4                     -                 -         3,224                 -                 -                 -                 -                 -
    Amortization of intangible assets from acquisitions           28,582       27,631       19,182       11,060       10,914       11,292       10,597       10,706
    Gain on re-measurement of previously held equity interest 5                     -                 -                 -                 -       (1,587)                 -                 -                 -
    Fair value adjustment of derivative instruments 6              (204)          (138)       (4,759)       (1,203)          (107)          (542)          (445)            616
  Other items of note:                    
    Acquisition-related and other charges 3             3,490         3,842       13,126         5,764         1,028         6,558         3,265         4,378
  Tax effect of above adjustments 9         (13,688)     (15,100)     (15,715)       (3,814)       (3,578)       (5,543)       (3,962)       (4,615)
  Loss (income) from discontinued operations, net of tax 7                846       (2,133)            704         8,786       10,695            529                2            377
  Tax effect of acquisitions 10                      -                 -       (1,726)                 -                 -                 -       (1,156)                 -
Adjusted net income 2 $     38,818 $   42,036 $   36,708 $   34,202 $   23,107 $   26,005 $   27,906 $   32,349
                     
Adjusted net income per share, basic 2, 12 $     0.4808 $   0.5206 $   0.5245 $   0.5774 $   0.3901 $   0.4390 $   0.4711 $   0.5461
Income from continuing operations per share, 11, 12                
    Basic     $     0.1593 $   0.1887 $   0.1091 $   0.3781 $   0.2775 $   0.2404 $   0.3310 $   0.3590
    Diluted     $     0.1589 $   0.1883 $   0.1089 $   0.3781 $   0.2775 $   0.2404 $   0.3310 $   0.3590
Income (loss) from discontinued operations per share, 11, 12                
    Basic     $   (0.0105) $   0.0264 $  (0.0101) $  (0.1483) $  (0.1806) $  (0.0089) $           -   $  (0.0064)
    Diluted     $   (0.0105) $   0.0264 $  (0.0100) $  (0.1483) $  (0.1806) $  (0.0089) $           -   $  (0.0064)
Net income per share,  11, 12                
    Basic     $     0.1488 $   0.2151 $   0.0991 $   0.2298 $   0.0969 $   0.2315 $   0.3310 $   0.3526
    Diluted     $     0.1484 $   0.2147 $   0.0989 $   0.2298 $   0.0969 $   0.2315 $   0.3310 $   0.3526

1   Acquisition accounting adjustments consisted of fair value adjustments related to deferred revenues and deferred costs acquired in connection with the acquisition of HFS.
2 Adjusted revenue, EBITDA, EBITDA Margin, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted net income and Adjusted net income per share are non-IFRS terms. See Non-IFRS Financial Measures for a more complete description of these terms.  Income from operating activities is an additional IFRS term.  See Additional IFRS Measures for a more complete description of this term.
3   Acquisition-related and other charges for the first quarter of 2014 consisted of business integration costs incurred in connection with the acquisition of HFS and certain retention and incentive costs in connection with the recent acquisitions.  Acquisition-related and other charges for the other periods included certain retention and incentive costs related to the acquisitions, expenses related to cost-realignment initiatives and corporate development expenses related to strategic acquisition initiatives.
4 Upon acquisition of HFS, the current Credit Facility replaced a previous credit facility entered into in 2011, resulting in a write-off of the unamortized deferred debt issuance costs related to the previous credit facility.
5 Upon acquisition of the remaining interest in Compushare in January 2013, a non-cash gain related to re-measurement of the previously held equity interest was recognized in accordance with IFRS standards.
6 Gain in the third quarter of 2013 was mainly attributable to the fair value changes of the foreign exchange forward contracts entered into by D+H to economically hedge the foreign exchange risk arising from the proceeds denominated in U.S. dollar to fund the acquisition of HFS.  Gains and losses in the other periods included mark-to-market adjustments of interest-rate swaps that are not designated as hedges for hedge accounting purposes, and for which any change in the fair value of these contracts is recorded through the Consolidated Statements of Income.
7 Income/(loss) relates to D+H's divesture of its non-strategic business processing operations on May 10, 2013.
8 Non-cash interest charges relate to accretion of Debentures issued to partially fund the acquisition of HFS and amortization of deferred financing charges incurred in connection with the Company's financing arrangements.
9 The adjustments to net income are tax effected at their respective tax rates.
10 Adjustments for the third quarters of 2013 and 2012 included a non-cash tax recovery related to liabilities recognized in connection with the acquisition of Mortgagebot.  Adjustment for the third quarter of 2013 also includes a one-time income tax expense arising from the revaluation of the Company's deferred taxes to reflect the change in future US income tax rates resulting from the acquisition of HFS.
11 Diluted per share reflects the impacts of outstanding stock options. If the average market price during the period is below the option price plus the fair market value of the option, then the options are not included in the dilution calculation for income from operating activities per share. Weighted average number of shares outstanding on a diluted basis during the first quarter of 2014 was 80,951,884 shares.
12 Weighted average number of shares outstanding during the first quarter of 2014 was 80,739,132 shares.

D+H has generally reported quarterly revenues that are relatively stable and growing when measured on a year-over-year basis. More recently, acquisitions and changes in the economic environment, specifically the housing and mortgage markets and the auto lending markets, have increased volatility. Also, there has also been increased volatility in personal cheque order volumes. Measured on a sequential quarter-to-quarter basis, revenues can vary due to seasonality. Revenue for certain service offerings by D+H can also vary based on the timing of work performed. Fees earned in connection with mortgage origination services and automobile loan registration services are typically stronger in the second and third quarters than in the first and fourth quarters.  The acquisition of HFS is also expected to impact seasonality of D+H's revenues as, historically, HFS has experienced stronger revenues in the second and fourth quarters.

Acquisitions in the prior periods increased revenues and expenses and EBITDA was impacted by acquisition-accounting adjustments related to fair value of deferred revenues and deferred costs, acquisition-related and other charges that were not part of the normal course of operations. Adjusted EBITDA removes the impacts of these items as these are not indicative of underlying business performance and management believes that excluding these items is more reflective of ongoing operating results.

Net income is variable as it has been affected by increased revenues and expenses from acquisitions and non-cash items such as acquisition accounting adjustments, fair value adjustments of derivative instruments, amortization of intangible assets from acquisitions, gain on re-measurement of the equity-interest held in Compushare and other items such as acquisition-related and other charges, loss from discontinued operations, and changes in other non-cash interest and tax items.

Common Shares, Debentures and Stock Options

As at March 31, 2014 and April 29, 2014, D+H had the following common shares and potential common shares outstanding:

  • 80,740,968 common shares issued and outstanding (as at December 31, 2013 - 80,738,373). The increase in the number of shares in the first quarter of 2014 is attributable to the conversion of some Debentures by the Debenture-holders into common shares.

  • $229.9 million principal amount of Debentures outstanding (as at December 31, 2013 - $230.0 million). These Debentures are convertible at the option of the holder to common shares at a conversion price of $28.90 per common share, representing 34.6021 common shares per $1,000 principal amount of the Debenture, for a total of 7,955,887 shares.

  • 916,028 stock options outstanding (as at December 31, 2013 - 916,028). Each stock option is exercisable into one common share of the Corporation.

Hedges

The Company utilizes interest-rate swaps to hedge interest rate exposure and foreign exchange forward contracts to hedge foreign currency risk.

Interest-rate swaps

At March 31, 2014, the Company's outstanding interest rate swaps were as follows:

(in thousands of Canadian dollars, unaudited)

    Fair value of interest-rate swaps  
Maturity date Notional amount Asset Liability Interest rate ¹
 December 18, 2014 2 $                25,000 $                  - $                  270 2.720%
 March 18, 2015 2                    25,000                      -                      411 2.940%
 March 18, 2017 2                    25,000                      -                   1,265 3.350%
 March 20, 2017 2                    20,000                      -                   1,020 3.366%
 October 17, 2016 (US$25,000) 3                    27,638                      -                         79 0.835%
 October 17, 2016 (US$25,000) 3                    27,638                      -                         79 0.835%
 October 17, 2016 (US$25,000) 3                    27,638                      -                         52 0.784%
 October 17, 2016 (US$25,000) 3                    27,638                      -                         59 0.820%
 October 17, 2018 (US$25,000) 3                    27,638                      -                      130 1.645%
  $             233,190 $                  - $               3,365  

1 The listed interest rates offset BA rate/LIBOR and prime-rates currently in effect by way of fixed rate paying swaps.  Spreads could increase or decrease depending on the Company's financial leverage compared to certain levels specified in the Credit Facility agreement.  Based on the financial leverage as at March 31, 2014, the Company's long-term bank indebtedness will be subject to spreads of 2.25% on BA rate/LIBOR rate loans and 1.25% on prime rate loans.
2 Not-designated as hedges for the purposes of hedge accounting. Fair value changes on these swaps impact the Consolidated Statement of Income.
3 Designated as hedges for the purposes of hedge accounting. Fair value changes on these swaps impact other comprehensive income.

As at March 31, 2014, the Company would have to pay $3.4 million if it were to close out all of its interest-rate swap contracts as set out in the Consolidated Statement of Financial Position. It is not management's present intention to close out these contracts and the Company has historically held its derivative contracts to maturity.

In respect of interest-rate swap contracts with its lenders, as of March 31, 2014, the Company's borrowing rates on 46.0% of outstanding long-term indebtedness under the Eighth Amended and Restated Credit Agreement ("Credit Facility") are effectively fixed at the interest rates and for the time periods ending as outlined above. As a result of these swaps, 77.0% of the Company's total indebtedness, including Debentures, is effectively fixed.

Foreign exchange contracts

For the Company's foreign exchange contracts, the Company is required to deliver the agreed U.S. dollar amount and in return receive the contracted Canadian dollar amount set forth in each contract. The Company has historically held its derivative contracts to maturity.

These foreign exchange contracts are designated as hedges of the Corporation's net investment in foreign operations for which the U.S. dollar is the functional currency, in accordance with IAS 39 with the change in fair value of the hedging instrument (foreign exchange forward contracts), to the extent it is effective, is recorded in other comprehensive income.

At March 31, 2014, the Company's foreign exchange forward contracts aggregating US$21.0 million was as follows:

(in thousands of Canadian dollars, unaudited)

       Fair value of foreign exchange contracts  
Maturity date Notional  amount (USD) Asset Liability Exchange rate
         
 April 28, 2014 $         2,000 $              7 $           -   1.1091
 May 29, 2014             2,000                 7               -   1.1099
 June 27, 2014             3,000                11               -   1.1106
 September 29, 2014             7,000                23               -   1.1128
 December 23, 2014   7,000 23 -   1.1150
  $       21,000 $            71 $           -    
         

Long-term indebtedness

As at March 31, 2014 and December 31, 2013, the Company's long-term indebtedness was as follows:

(in thousands of Canadian dollars, unaudited)

    Interest rate 1 Maturity March 31, 2014 December 31, 2013
           
Credit Facility (secured)          
  Revolver (US$25,000; C$37,000)   BA/LIBOR + 2.25% Aug 2018 $           64,638 $            68,590
  Non-revolver I (US$400,000)   LIBOR + 2.25% Aug 2018             442,200             425,440
Credit facilities                   506,838              494,030
           
Bond (secured)   5.99% Jun 2017               50,000                50,000
Bond (secured)   5.17% Jun 2017               30,000                30,000
Bond (secured) (US$63,000)   5.59% Apr 2021               69,647                67,007
Bond (secured) (US$16,500)   3.94% Jun 2022               18,241                17,549
Bond (secured) (US$15,000)   3.94% Jun 2022               16,583                15,954
Bond (secured)   5.76% Aug 2023               20,000                20,000
Bond (secured) (US$100,000)   5.51% Aug 2023             110,550              106,360
Bond (secured) (US$75,000)   5.51% Aug 2023               82,913                79,770
Bond (secured) (US$50,000)   5.51% Aug 2023               55,275                53,180
Bonds                   453,209              439,820
                    960,047              933,850
Deferred finance costs                      (9,306)                 (9,721)
        $         950,741 $          924,129

The table below lists committed and uncommitted arrangements available to D+H. Uncommitted arrangements are subject to the prior approval of the relevant lenders with any fees, spreads and other additional terms to be negotiated at that time:

(in thousands of Canadian dollars, unaudited)

          As at March 31, 2014
    Committed Uncommitted Outstanding Available
Revolver   $             355,000 $                - $           64,638 $          290,362
Non-revolver I                  442,200                   -             442,200                         -
Uncommitted arrangements                             -         100,000                        -              100,000
Credit Facility                  797,200         100,000             506,838              390,362
Bonds                  453,209           96,330             453,209                96,330
    $          1,250,409 $     196,330 $         960,047 $          486,692
           

Covenants

The Company's indebtedness is subject to a number of covenants and restrictions including the requirement to meet certain financial ratios and financial condition tests. One such ratio is the Total Funded Debt / EBITDA Ratio ("Debt to EBITDA ratio"). As at March 31, 2014, this ratio was calculated at 2.93 (December 31, 2013 - 2.93).

Debt to EBITDA ratio - foreign exchange impact

The Debt to EBITDA ratio is impacted by volatility in foreign exchange fluctuations as the Company's U.S. dollar denominated borrowings are translated at the period-end exchange rate while EBITDA (as it pertains to this ratio), denominated in local currencies, is translated at average exchange rates for the period. The acquisition of HFS in the third quarter of 2013 significantly changed the Company's debt structure. Therefore, in order to assess management's capital management efforts post the HFS acquisition, as an internal measure, management eliminates the impact of foreign exchange from this ratio by calculating it using the applicable rates for the period ended September 30, 2013. As such, the Debt to EBITDA ratio, after removing the impacts of foreign exchange fluctuations, was 2.76 (December 31, 2013 - 2.87).

Convertible Debentures

As at March 31, 2014, the Company had $229.9 million principal amount of 6.00% convertible unsecured subordinated debentures ("Debentures") outstanding. During the first three months of 2014, 75 Debentures were converted into 2,595 common shares of the Corporation.

Effective interest rate

As at March 31, 2014, the average effective interest rate on the Company's total indebtedness, including the Debentures, was 4.7%, compared to 4.8% at December 31, 2013.

OUTLOOK

D+H's long-term financial objective is to deliver sustainable and growing earnings through continued organic revenue growth, partnering with third parties and, over time, by way of strategic acquisitions. Management believes the acquisition of HFS will continue to: (i) strengthen our ability to deliver on our goal of being a leading FinTech provider to the financial services industry; (ii) provide enhanced revenue diversification; (iii) deliver strong and sustainable cash flows to fund future growth, dividends and deleveraging; and (iv) support our long-term strategy. Going forward, we will continue to execute our organic growth initiatives including cross-selling our suite of FinTech solutions and developing product innovations and functionalities that meet the needs of our customers, differentiate D+H and achieve our financial goals. Simultaneously across all operations, we will continue to diligently identify and realize on efficiency opportunities to better serve customers, improve our competiveness and enhance margins. We believe that our market leadership and combined capabilities will solidly position D+H in the markets we serve and allow us to grow, consistent with our long-term objectives.

As set out in our statement of strategy, we look to grow through a combination of organic initiatives, partnering with third parties and, over time, by way of selective additional acquisitions. Our organic initiatives include: (i) cross-selling our expanded FinTech products including existing SaaS offerings and cloud-based offerings with those provided by the newly acquired HFS to both our now larger customer base and approximately 7,000 other U.S. financial institutions that could benefit from our technology portfolio; (ii) advancing our payments solutions through growth in value-added consumer and business services to financial institution customers; (iii) expanding our current technology-enabled offerings within the mortgage, auto, personal, student lending, commercial and leasing markets; and (iv) exploring opportunities to provide our expanded solutions to customers in selected international markets and to Canada's credit unions.

We also look to add to our organic growth through partnerships with other leading providers. D+H has established a number of such partnerships over the years, as has HFS, and we intend to capitalize on our expanded customer base to build on these mutually beneficial relationships as we move forward.

The acquisition strategy executed by D+H over the past number of years has evolved our FinTech leadership position within the North American market and has strengthened our operating model by diversifying revenue and reduced our risk profile by lowering our customer concentration and product dependency. Following past acquisitions, D+H has focused on reducing leverage used for acquisition purposes. Consistent with our approach, we intend to repay debt following the HFS acquisition and expect to reduce our Debt to EBITDA ratio to below 2.5 in 2015, on a foreign exchange normalized basis, while supporting our current dividends.

With the inclusion of several new service areas arising from acquisitions made over the last several years, we expect to continue to experience some increase in variability in quarterly revenues, EBITDA, net income and cash flows, due to, among other items: (i) personal cheque order volume declines; (ii) dynamics in the Canadian and U.S. lending environments; (iii) volume variances within the mortgage origination and lien registration markets; (iv) timing and variability in sales activity, including professional services work, and cash receipts; and (v) fees and expenses associated with acquisitions and related integration activities

Historically, for the legacy D+H businesses, the second and third quarters are typically stronger whereas HFS experiences stronger sales in the second and fourth quarters. The impact of these differences in seasonality between D+H's legacy businesses and HFS may result in continued volatility in year-over-year growth until the fourth quarter of 2014. Growth seen in the first quarter of 2014 therefore may not reflect growth in future periods.

Canadian Segment

Within the Canadian Segment, the downward trend in cheque order volumes is expected to continue to be in the mid-single digits through 2014, with ongoing volatility in personal cheque order volumes coupled with comparatively less volatility in business cheque order volumes. In order to offset this decline, management will continue to focus on growing the various subscription fee-based enhancement services offerings.

In the Canadian banking technology service area, Canadian housing markets analysts are expecting a slight increase in real estate activity, along with home price growth consistent with the rate of inflation. In addition, the broker market will continue to experience competition from internal mobile sales force at lending institutions. Revenues from Canadian banking technology service area may be impacted by pricing model adjustments, which may be offset by potential revenue from the launch of new products in the Canadian lending market, including extension of our technology solutions across various areas in the lending value chain.

Revenues within the lending processing solutions are expected to benefit from: (i) growth in tuition rates and an increase in uptake rates in the student loans administration service area; and (ii) modest growth within the auto and auto lending markets.

Volumes in the student loan administration service area are expected to be relatively stable and modestly growing in the short term.  In light of the expected CSLP request for proposals by the Government of Canada, management's focus in this area will be to successfully obtain renewal of the contract. Within the auto and auto lending markets, modest growth in new and resold car sales is expected to continue through 2014, while increases in lender portfolio values and the strong auto recovery from the last few years should continue to drive strong repossession activity.

In addition, within our Canadian Segment, EBITDA and margins may be impacted from the timing of customer adoption of new products and services, which may cause pressure on overall Canadian Segment EBITDA and margins until these new offerings generate sufficient volume to deliver operational leverage.

U.S. Segment

In the U.S. Segment, we expect to benefit from the recovery of the U.S. economy and banking sector, increased need for lending technology products that can meet regulatory and compliance requirements and anticipated growth in spending by community banks and credit unions on core banking technology and additional FinTech solutions.  Recovering housing market activity is also expected to be a positive driver for our businesses that serve the U.S. mortgage markets, partially offset by lower consumer refinancing activity on account of higher interest rates compared to a year ago. We also anticipate revenue synergies from cross selling opportunities between our existing SaaS customers and product offerings. Additionally, community banks are expected to increase technology investment on new core systems over the next few years. There are currently over 13,000 financial institutions in the U.S., of which we currently serve about 6,000.  Our technology suite allows us to offer products to large and small financial institutions alike and we are reaching into the available markets to gain a foothold among approximately 7,000 banks and credit unions who have not used D+H before. We believe we are well-positioned to capture our share of market expansion through our strategies.

Capital spend

For 2014, we anticipate total capital spending of approximately $50 million to $55 million, with a focus on new growth opportunities. Capital spending may vary based on spending in support of new growth opportunities if and as they arise.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This MD&A contains certain statements that constitute forward-looking information within the meaning of applicable securities laws ("forward-looking statements"). Statements concerning D+H's objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of D+H are forward-looking statements.  The words "believe", "expect", "anticipate", "estimate", "intend", "may", "will", "would" and similar expressions and the negative of such expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

D+H has also made certain macroeconomic and general industry assumptions in the preparation of such forward-looking statements.  While D+H considers these factors and assumptions to be reasonable based on information currently available, there can be no assurance that actual results will be consistent with these forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause D+H's actual results, performance or achievements, or developments in its industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements.

Risks related to forward-looking statements include, among other things, challenges presented by declines in the use of personal and business cheques; the Company's dependence on a limited number of large financial institution customers in Canada and dependence on their acceptance of new programs; strategic initiatives being undertaken to meet the Company's financial objective; stability and growth in the real estate, mortgage and lending markets; increased pricing pressures and increased competition which could lead to loss of contracts or reduced margins; the Company's ability to successfully integrate acquisitions; changes in the U.S. banking and financial services industry and demand for HFS's products and services; the Company's ability to comply with government regulations; as well as general market conditions, including economic and interest rate dynamics. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.  The documents referenced herein also identify additional factors that could affect the operating results and performance of the Company. Forward-looking statements are based on management's current plans, estimates, projections, beliefs and opinions, and D+H does not undertake any obligation to update forward-looking statements should assumptions related to these plans, estimates, projections, beliefs and opinions change except as required by applicable securities laws.

All of the forward-looking statements made in this MD&A are qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company.

ADDITIONAL INFORMATION

Additional information relating to the Company, including the Company's most recently filed Annual Information Form, is available on SEDAR at www.sedar.com.


Consolidated Statements of Financial Position
(in thousands of Canadian dollars, unaudited)        
           
      March 31, 2014   December 31, 2013
ASSETS        
Cash and cash equivalents   $        16,487   $       32,398
Trade and other receivables            112,985           111,156
Prepayments and other current assets              23,685            25,370
Inventories                2,969              3,059
Total current assets            156,126           171,983
Non-current trade receivable              28,109            22,179
Deferred tax assets                2,349              4,327
Property, plant and equipment              44,224            44,913
Intangible assets          1,166,964        1,156,170
Goodwill          1,544,969        1,508,430
Other assets                7,598              5,815
Total non-current assets          2,794,213        2,741,834
Total assets   $    2,950,339   $  2,913,817
LIABILITIES        
Trade payables, accrued and other liabilities   $       123,479   $     129,728
Deferred revenue              96,447            86,885
Current tax liabilities              18,408            24,780
Total current liabilities            238,334           241,393
Non-current deferred revenue              19,787            22,048
Derivative liabilities held for risk management                2,684              3,029
Loans and borrowings            950,741           924,129
Convertible debentures            210,537           209,647
Deferred tax liabilities            365,437           366,856
Other long-term liabilities                9,166              9,182
Total non-current liabilities          1,558,352        1,534,891
Total liabilities          1,796,686        1,776,284
EQUITY        
Capital          1,117,860        1,117,785
Reserves              73,383            43,519
Retained deficit             (37,590)           (23,771)
Total equity          1,153,653        1,137,533
Total liabilities and equity   $    2,950,339   $  2,913,817

Consolidated Statements of Income      
(in thousands of Canadian dollars, except per share amounts, unaudited)      
      Three months ended
  March 31, 2014   March 31, 2013
Revenues $            266,291   $       171,661
Employee compensation and benefits                 88,802              47,047
Other expenses               108,489              82,617
Income from operating activities before depreciation and amortization                 69,000              41,997
Depreciation of property, plant and equipment                   3,775                1,936
Amortization of intangible assets                 34,263              15,497
Income from operating activities                 30,962              24,564
Finance expenses:      
   Fair value adjustment of derivative instruments                     (204)                  (107)
   Interest expense                 15,249                4,471
Gain on remeasurement of previously held equity interest                        -                 (1,587)
Income from investment in an associate, net of income tax                        -                    (130)
Income from continuing operations before income tax                 15,917              21,917
Income tax expense                   3,053                5,480
Income from continuing operations                 12,864              16,437
Loss from discontinued operations, net of income tax                     (846)             (10,695)
Net income $             12,018   $          5,742
Earnings per share      
Income per share from continuing operations,      
   Basic $             0.1593   $        0.2775
   Diluted $             0.1589   $        0.2775
Loss per share from discontinued operations,      
   Basic $            (0.0105)   $       (0.1806)
   Diluted $            (0.0105)   $       (0.1806)
Net income per share      
   Basic $             0.1488   $        0.0969
   Diluted $             0.1484   $        0.0969

Consolidated Statements of Comprehensive Income    
         
        Three months ended 
(in thousands of Canadian dollars, unaudited) March 31, 2014   March 31, 2013
Net income $         12,018   $          5,742
The following items may be reclassified subsequently to profit or loss:      
   Cash flow hedges:      
       Effective portion of changes in fair value                (108)                       -
   Foreign currency translation             29,940                3,546
Total comprehensive income $         41,850   $          9,288

Consolidated Statements of Changes in Equity      
(in thousands of Canadian dollars, unaudited)            
               
          Three months ended March 31, 2014
    Reserves    
  Share capital Equity-
settled
share based
compensation
Equity
component
of
Convertible
debentures
Foreign
currency
translation
reserve
Hedging
reserve
Retained
earnings
(deficit)
Total
equity
Balance at January 1, 2014 $1,117,785 $      1,369 $      8,889 $   33,481 $   (220) $ (23,771) $1,137,533
Net income for the period                  -                    -                    -                 -                 -        12,018        12,018
Foreign currency translation                  -                    -                    -        29,940                 -                 -        29,940
Cash flow hedges            (108)            (108)
Share issuance                69                    -                    -                 -                 -                 -               69
Equity component of convertible              
   debentures, net of tax                 6                    -              (6)               -               -                 -                 -
Dividends                  -                    -                    -                 -                 -       (25,837)       (25,837)
Stock options                  -                38                  -                -               -                 -               38
Balance at March 31, 2014 $1,117,860 $       1,407 $      8,883 $   63,421 $   (328) $ (37,590) $1,153,653
               
               
      Three months ended March 31, 2013
    Reserves    
  Share capital Equity-
settled
share based
compensation
Equity
component
of
Convertible
debentures
Foreign
currency
translation
reserve
Hedging
reserve
Retained
earnings
Total
equity
Balance at January 1, 2013 $  672,853 $            827 $                - $     5,884 $             - $   22,544 $ 702,108
Impact of transition to              
   IAS 19R                  -                    -                    -                 -                 -          (385)          (385)
Net income for the period                  -                    -                    -                 -                 -         5,742         5,742
Foreign currency translation                  -                    -                    -         3,546                 -                 -         3,546
Dividends                  -                    -                    -                 -                 -     (18,955)     (18,955)
Stock options                  -                111                    -                 -                 -                 -            111
Balance at March 31, 2013 $  672,853 $            938 $                - $     9,430 $             - $     8,946 $ 692,167

Consolidated Statements of Cash Flows    
(in thousands of Canadian dollars, unaudited)    
     
    Three months ended
  March 31, 2014 March 31, 2013
Cash and cash equivalents provided by (used in):    
OPERATING ACTIVITIES    
Income from continuing operations $             12,864 $               16,437
Adjustments for:    
    Depreciation of property, plant  and equipment                   3,775                     1,936
    Amortization of intangible assets                  34,263                   15,497
    Fair value adjustment of derivative instruments (204) (107)
    Interest expense                 13,725                     4,117
    Amortization of deferred financing fees                      565                        354
    Interest accretion expense                      959                          -  
    Income tax expense                    3,053                     5,480
    Stock options                         38                        111
    Income from investment in an associate, net of income tax                         -   (130)
    Gain on remeasurement of previously held equity interest                         -   (1,587)
    Changes in non-cash working capital items                    4,972 (14,794)
    Changes in other operating assets and liabilities  (7,782)                     1,438
    Cash flows used in discontinued operations (818) (4,731)
Cash generated from operating activities                 65,410                   24,021
    Interest paid (19,257) (4,043)
    Income taxes paid (19,834) (1,344)
Net cash from operating activities                 26,319                   18,634
FINANCING ACTIVITIES    
Repayment of long-term indebtedness (5,000) (1,016)
Proceeds from long-term indebtedness                        -                     27,065
Dividends paid (25,837) (18,955)
Net cash from (used in) financing activities (30,837)                     7,094
INVESTING ACTIVITIES    
Acquisition of property, plant and equipment  (2,183) (1,923)
Acquisition of intangible assets  (9,210) (4,363)
Acquisition of subsidiaries                         -   (24,393)
Net cash used in investing activities (11,393) (30,679)
Decrease in cash and cash equivalents for the period (15,911) (4,951)
Cash and cash equivalents, beginning of period                 32,398                     5,719
Cash and cash equivalents, end of period $             16,487 $                    768

About D+H

D+H is a leading provider of secure and reliable technology solutions to domestic and global financial institutions with a reputation for being a trusted partner that helps clients build deeper, more profitable relationships with their customers based on rich industry and market insight, and consumer knowledge. Today, approximately 7,000 banks, speciality lenders, community banks and credit unions rely on D+H to deliver solutions across three broad service areas: Banking Technology Solutions, Lending Processing Solutions, and Payments Solutions. Our integrated, compliant technology solutions enable clients to grow, compete, and optimize their operations, while our forward looking approach helps them stay ahead of the market and anticipate changing consumer needs. D+H is one of the world's top FinTech companies as measured on the FinTech 100 list.

Davis + Henderson Corporation is listed on the Toronto Stock Exchange under the symbol DH. Further information can be found at www.dhltd.com and in the disclosure documents filed by Davis + Henderson Corporation with the securities regulatory authorities at www.sedar.com.

SOURCE Davis + Henderson Corporation

For further information:

Brian Kyle, Executive Vice President and Chief Financial Officer, Davis + Henderson Corporation, (416) 696-7700, investorrelations@dhltd.com or visit our website at www.dhltd.com.