D+H Reports Solid Second Quarter 2014 Earnings

Stock Exchange Symbol: DH

Website: www.dhltd.com

TORONTO, July 29, 2014 /CNW/ - DH Corporation ("D+H" or the "Company") (TSX: DH), a leading provider of technology solutions to domestic and global financial institutions, today reported its financial results for the three and six months ended June 30, 2014.

"In both reporting periods, D+H generated strong growth in our key financial metrics" said Gerrard Schmid, Chief Executive Officer. "In addition to funding our dividend, our solid cash flows allowed us to increase investments in targeted new product developments and technology integration, and contributed to another voluntary debt repayment, consistent with our goal for leverage reduction. Results to date are on plan and we are encouraged by positive customer reception to our unified brand and integrated sales activities which will help us to advance our standing in the financial technology ("FinTech") market."

As expected, recent strategic acquisitions continued to positively diversify D+H's business. In the second quarter, the U.S. Segment accounted for 42% of Adjusted revenues1, versus 14% in the same period a year ago, while lending processing and banking technology service areas represented 74% of second quarter Adjusted revenues compared to 60% a year ago.

Second Quarter Highlights

  • Revenues from continuing operations increased 45.1% to $286.0 million from $197.1 million compared to the same quarter in 2013, reflecting the inclusion of Harland Financial Solutions' ("HFS") revenues in the U.S. Segment. After eliminating the impacts of foreign exchange, revenues increased by 40.1%.
  • Adjusted revenues of $292.2 million were $95.0 million, or 48.2%, higher than the same quarter in 2013, or 42.9% higher excluding impacts of foreign exchange.
  • Adjusted EBITDA1 increased 59.4% to $93.0 million (31.8% margin) from $58.3 million (29.6% margin) compared to the same quarter in 2013. After eliminating the impacts of foreign exchange, Adjusted EBITDA increased by 53.2%.
  • Net income increased to $29.9 million ($0.3697 per share, basic and $0.3687 per share, diluted), from $13.6 million ($0.2298 per share, basic and diluted) in the same quarter last year, 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 second quarter of 2013 was impacted by a loss from discontinued operations of $8.8 million.
  • Adjusted net income1 increased 50.4% to $51.5 million from $34.2 million mainly due to the addition of HFS. Adjusted net income per share1 increased 10.3% year-over-year to $0.6369, from $0.5774 and reflects the additional common shares issued in connection with the HFS acquisition.
  • Net debt repayments during the second quarter of 2014 were $5.0 million, resulting in a June 30, 2014 Debt to EBITDA ratio of 2.79. This ratio, after eliminating the impacts of non-cash foreign exchange volatility, was 2.75.
  • D+H paid $0.32 per share in dividends to shareholders.
  • As part of a broader strategy to unify the D+H brand and increase brand recognition across North America and globally, D+H announced that it has changed its name to "DH Corporation" from "Davis + Henderson Corporation". The Company will continue to operate as "D+H" in the market.
  • Effective September 2, 2014, Karen Weaver assumes the role of Executive Vice President and Chief Financial Officer of D+H, replacing Brian Kyle, whose resignation was previously announced. Ms. Weaver has more than 30 years of related experience with leading U.S. and Canadian public companies.

Six-Month Highlights 

  • Revenues from continuing operations increased 49.7% to $552.2 million from $368.8 million a year ago, or 44.4%, after eliminating the impact of foreign exchange, primarily reflecting the inclusion of HFS in the U.S. Segment.
  • Adjusted revenues of $567.9 million were higher by $199.1 million, or 54.0%, compared to the same period a year ago and increased 48.3% after eliminating the impact of foreign exchange.
  • Adjusted EBITDA increased by 69.4% to $171.7 million (30.2% margin) from $101.4 million (27.5% margin) and increased 62.2% after eliminating the impact of foreign exchange.
  • Net income was $41.9 million ($0.5186 per share, basic and $0.5173 per share, diluted), an increase of $22.5 million, or 116.5%, compared to $19.4 million ($0.3267 per share, basic and diluted) for the first six months in 2013, reflecting higher EBITDA, partially offset by higher amortization of intangible assets from acquisitions and increased interest expense attributable to the HFS acquisition. Net income in the same period of 2013 was impacted by a loss from discontinued operations of $19.5 million.
  • Adjusted net income increased 57.5% year-over-year to $90.3 million from $57.3 million mainly due to the addition of HFS. Adjusted net income per share increased 15.5% to $1.1177 from $0.9675, and was impacted by the additional shares in connection with the acquisition of HFS.
  • Net debt repayments during the first six months of 2014 were $10.0 million.
  • D+H paid $0.64 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 second 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.

1D+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 and six months ended June 30, 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 titles measures of other companies.

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 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 D+H'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.

Conference Call

D+H will discuss its financial results for the three and six months ended June 30, 2014 via conference call at 10:00 a.m. EST (Toronto time) on Wednesday, July 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/1383001/1534113. 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 45027673. The rebroadcast will be available until Wednesday August 13, 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 DH Corporation (the "Corporation" or the "Company" or "D+H" or the "Business"), previously Davis + Henderson Corporation, has been prepared with an effective date of July 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 and six months ended June 30, 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 revenues), "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 Statements 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 Statements 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 Statements 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 calculating Adjusted EBITDA and Adjusted EBITDA margin.

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 Statements 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 Statements 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; gains and losses on sales resulting from sale of non-strategic assets; 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 Statements 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. 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 businesses 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 June 30, 2014, debt repayments had reduced this ratio to 2.79. After removing the impacts of foreign exchange fluctuations, this ratio was 2.75.

For a detailed discussion of the operating results for the three and six months ended June 30, 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 for all comparative periods presented.

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 - SECOND QUARTER AND YEAR-TO-DATE 2014

The following discussion should be read in conjunction with the unaudited condensed interim consolidated financial statements for the three and six months ended June 30, 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 second quarter and first six months 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. Consolidated EBITDA was higher for the second quarter of 2014 and was inclusive of $1.8 million of acquisition-related expenses and acquisition accounting adjustments of $3.4 million related to the fair value of deferred revenues and deferred costs acquired from the acquisition of HFS.  Consolidated net income for the second quarter and first six months of 2014 was higher compared to the same periods in 2013 primarily due to EBITDA growth, 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 exclude non-cash and non-normal course items, were also higher than the same periods in 2013 primarily as a result of the HFS acquisition.

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

       
  Quarter ended June 30   Six months ended June 30
    2014   2013   2014   2013
Revenues $ 285,955   $ 197,134   $ 552,246   $ 368,795
Expenses   198,149     144,551     395,440     274,215
EBITDA 1   87,806     52,583     156,806     94,580
Depreciation of capital assets and amortization of
   non-acquisition intangibles
  10,599     6,657     20,055     13,176
Amortization of intangible assets from acquisitions   28,320     11,060     56,902     21,974
Income from operating activities   48,887     34,866     79,849     59,430
Interest expense   15,048     4,516     30,297     8,987
Income from investment in an associate, net of tax 2   -        -        -        (130)
Gain on re-measurement of previously-held equity
   interest 3
  -        -        -        (1,587)
Gain on sale of assets 4   (984)     -        (984)     -   
Fair value adjustment of derivative instruments 5   (284)     (1,203)     (488)     (1,310)
Income tax expense   5,238     9,158     8,291     14,638
Income from continuing operations   29,869     22,395     42,733     38,832
Loss from discontinued operations, net of tax 6   -         (8,786)     (846)     (19,481)
Net income  $ 29,869   $ 13,609   $ 41,887   $ 19,351
                           
Income from continuing operations per share,                      
   Basic 7 $ 0.3697   $ 0.3781   $ 0.5291   $ 0.6556
   Diluted 8 $ 0.3687   $ 0.3781   $ 0.5278   $ 0.6556
Loss from discontinued operations per share, net of tax 6                      
   Basic 7 $ -      $ (0.1483)   $ (0.0105)   $ (0.3289)
   Diluted 8 $ -      $ (0.1483)   $ (0.0105)   $ (0.3289)
Net income per share                      
   Basic 7 $ 0.3697   $ 0.2298   $ 0.5186   $ 0.3267
   Diluted 8 $ 0.3687   $ 0.2298   $ 0.5173   $ 0.3267
   
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 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 Gain realized in the second quarter of 2014 upon the sale of certain non-strategic assets.
5 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 Statements of Income.
6 Loss relates to D+H's divesture of its non-strategic business processing operations on May 10, 2013.
7 Weighted average number of shares outstanding during the second quarter of 2014 was 80,790,585 shares (second quarter of 2013 - 59,233,373 shares). For the first six months of 2014, weighted average number of shares outstanding was 80,765,001 shares (first six months of 2013 - 59,233,373 shares).
8 Diluted per share measures reflect 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 second quarter of 2014 was 81,013,068 (second quarter of 2013 - 59,233,373 shares). For the first six months of 2014, weighted average number of shares outstanding, on a diluted basis, was 80,968,308 shares (first six months of 2013 - 59,233,373 shares).

(in thousands of Canadian dollars, unaudited)

        Quarter ended June 30   Six months ended June 30
      2014 2013 2014 2013
Revenues $ 285,955 $ 197,134 $ 552,246 $ 368,795
Acquisition accounting adjustments 1   6,203   -     15,660   -  
Adjusted revenues 2 $ 292,158 $ 197,134 $ 567,906 $ 368,795
   
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 June 30   Six months ended June 30
  2014 2013   2014 2013
Revenues $ 285,955 $ 197,134   $ 552,246 $ 368,795
Expenses   198,149   144,551     395,440   274,215
EBITDA 1   87,806   52,583     156,806   94,580
EBITDA Margin 1   30.7%   26.7%     28.4%   25.6%
Adjustments:                  
  Acquisition accounting adjustments  2   3,404   -       9,654   -  
  Acquisition-related and other charges 3   1,773   5,764     5,263   6,792
Adjusted EBITDA 1 $ 92,983 $ 58,347   $ 171,723 $ 101,372
Adjusted EBITDA Margin 1   31.8%   29.6%     30.2%   27.5%
   
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 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 second quarter and first six months of 2014 included business integration costs related to the acquisition of HFS and retention and incentive costs in connection with the acquisition of businesses. Acquisition-related and other charges for the second quarter of 2013 included corporate development costs related to strategic acquisition initiatives, certain retention and incentive costs in connection with the acquisition of businesses, business integration costs and expenses related to cost-realignment initiatives. For the first six months of 2013, these charges also included transaction costs.

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

        Quarter ended June 30, Six months ended June 30,
      2014 2013 2014 2013
Net income $ 29,869 $ 13,609 $ 41,887 $ 19,351
Adjustments:                
  Non-cash items:                
    Acquisition accounting adjustments 1   3,404   -     9,654   -  
    Non-cash interest expense 2   1,367   -     2,891   -  
    Amortization of intangible assets from acquisitions   28,320   11,060   56,902   21,974
    Gain on re-measurement of previously-held equity interest 3   -     -     -     (1,587)
    Gain on sale of assets 4   (984)   -     (984)   -  
    Fair value adjustment of derivative instruments 5   (284)   (1,203)   (488)   (1,310)
  Other items of note:                
    Acquisition-related and other charges 6   1,773   5,764   5,263   6,792
  Tax effect of above adjustments 7   (12,009)   (3,814)   (25,697)   (7,392)
  Loss from discontinued operations, net of tax 8   -     8,786   846   19,481
Adjusted net income 9 $ 51,456 $ 34,202 $ 90,274 $ 57,309
Adjusted net income per share, basic  9, 10 $ 0.6369 $ 0.5774 $ 1.1177 $ 0.9675

             
             
 
 
 

  Quarter ended June 30
2014 vs. 2013
% change






Six months ended June 30
2014 vs. 2013
% change
Adjusted net income 9   50.4%       57.5%
Adjusted net income per share, basic  9, 10   10.3%       15.5%
     
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   Gain realized in the second quarter of 2014 upon the sale of certain non-strategic assets.
5   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 Statements of Income.
6   Acquisition-related and other charges for the second quarter and first six months of 2014 included business integration costs related to the acquisition of HFS and retention and incentive costs in connection with the acquisition of businesses. Acquisition-related and other charges for the second quarter of 2013 included corporate development costs related to strategic acquisition initiatives, certain retention and incentive costs in connection with the acquisition of businesses, business integration costs and expenses related to cost-realignment initiatives. For the first six months of 2013, these charges also included transaction costs.
7   The adjustments to net income are tax effected at their respective tax rates.
8   Loss relates to D+H's divesture of its non-strategic business processing operations on May 10, 2013.
9   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.
10   Weighted average number of shares outstanding during the second quarter of 2014 was 80,790,585 shares (second quarter of 2013 - 59,233,373 shares). For the first six months of 2014, weighted average number of shares outstanding was 80,765,001 shares (first six months of 2013 - 59,233,373 shares).
       

OPERATING RESULTS BY SEGMENT

(in thousands of Canadian dollars, unaudited)

                              Quarter ended June 30,
      Canadian
Segment
    U.S.
Segment
    Corporate       Consolidated
  2014 2013   2014 2013   2014 2013   2014 2013
Revenues $ 168,763 $ 169,842   $ 117,192 $ 27,292   $ - $ -   $ 285,955 197,134
Acquisition accounting adjustments 1   -      -         6,203   -       -   -        6,203   -  
Adjusted revenues 2 $ 168,763 $ 169,842   $ 123,395 $ 27,292   $ - $ -   $ 292,158 197,134
   
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 June 30,
            Canadian
Segment
      U.S.
Segment
      Corporate     Consolidated
      2014 2013   2014 2013   2014 2013   2014 2013
Revenues $ 168,763 $ 169,842   $ 117,192 $ 27,292   $ - $ -   $ 285,955 $ 197,134
Expenses   119,964   122,732     76,412   16,055     1,773   5,764     198,149   144,551
EBITDA 1   48,799   47,110     40,780   11,237     (1,773)   (5,764)     87,806   52,583
EBITDA Margin 1   28.9%   27.7%     34.8%   41.2%     -   -     30.7%   26.7%
                                       
Adjustments:                                      
  Acquisition accounting adjustments 2   -   -     3,404   -     -   -     3,404   -  
  Acquisition-related and other charges 3   -   -     -   -     1,773   5,764     1,773   5,764
Adjusted EBITDA 1 $ 48,799 $ 47,110   $ 44,184 $ 11,237   $ - $ -   $ 92,983 $ 58,347
Adjusted EBITDA Margin 1   28.9%   27.7%     35.8%   41.2%     -   -     31.8%   29.6%
   
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 second quarter of 2014 included business integration costs related to the acquisition of HFS and retention and incentive costs in connection with the acquisition of businesses. Acquisition-related and other charges for the second quarter of 2013 included corporate development costs related to strategic acquisition initiatives, certain retention and incentive costs in connection with the acquisition of businesses, business integration costs and expenses related to cost-realignment initiatives.
   

                    Quarter ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Canadian
Segment
 
 
U.S.
Segment

 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 vs. 2013
% change
 
 
2014 vs. 2013
% change

2014 vs. 2013
% change
Revenues                   (0.6%)   329.4%   45.1%
Adjusted revenues 1                   (0.6%)   352.1%   48.2%
Adjusted EBITDA 1                   3.6%   293.2%   59.4%
   
1 Adjusted revenues and Adjusted EBITDA are non-IFRS terms. See Non-IFRS Financial Measures for a more complete description of these terms.
   

(in thousands of Canadian dollars, unaudited)

                          Six months ended June 30,
    Canadian
Segment
    U.S.
Segment
    Corporate     Consolidated
  2013 2012   2014 2013   2014 2013   2014 2013
Revenues $ 318,856 $ 318,482   $ 233,390 $ 50,313   $ - $ -   $ 552,246 368,795
Acquisition accounting adjustments 1   -     -       15,660   -       -   -     15,660   -  
Adjusted revenues 2 $ 318,856 $ 318,482   $ 249,050 $ 50,313   $ - $ -   $ 567,906 $ 368,795
   
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)

                              Six months ended June 30,
      Canadian
Segment
      U.S.
Segment
    Corporate   Consolidated
  2014 2013   2014 2013   2014 2013   2014 2013
Revenues $ 318,856 $ 318,482   $ 233,390 $ 50,313   $ - $ -   $ 552,246 $ 368,795
Expenses   236,136   237,622     154,041   29,801     5,263   6,792     395,440   274,215
EBITDA 1   82,720   80,860     79,349   20,512     (5,263)   (6,792)     156,806   94,580
EBITDA Margin 1   25.9%   25.4%     34.0%   40.8%     -   -     28.4%   25.6%
Adjustments:                                      
  Acquisition accounting adjustments 2   -   -     9,654   -     -   -     9,654   -
  Acquisition-related and other charges 3   -   -     -   -     5,263   6,792     5,263   6,792
                                       
Adjusted EBITDA 1 $ 82,720 $ 80,860   89,003 $ 20,512   $ - $ -   $ 171,723 $ 101,372
Adjusted EBITDA Margin 1   25.9%   25.4%     35.7%   40.8%     -   -     30.2%   27.5%
   
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 six months of 2014 included business integration costs related to the acquisition of HFS and retention and incentive costs in connection with the acquisition of businesses. Acquisition-related and other charges for the first six months of 2013 included transaction costs, corporate development costs related to strategic acquisition initiatives, certain retention and incentive costs in connection with the acquisition of businesses, business integration costs and expenses related to cost-realignment initiatives.
   
   
                         
                        Six months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     
     
Canadian
Segment
 
 
U.S.
Segment
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     
     
2014 vs. 2013
% change
 
 
2014 vs. 2013
% change
  2014 vs. 2013
% change
Revenues               0.1%   363.9%   49.7%
Adjusted revenues 1               0.1%   395.0%   54.0%
Adjusted EBITDA 1               2.3%   333.9%   69.4%

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 June 30,
            2014     2013
Adjusted Revenues - Consolidated                  
  Payments solutions           28.4%     42.1%
  Lending processing solutions           26.7%     37.9%
  Banking technology solutions                  
    Lending           26.9%     18.8%
    Enterprise           18.0%     1.2%
            100.0%     100.0%

(in thousands of Canadian dollars, unaudited)

                                                      Quarter ended June 30
    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   $ 76,238 $ 78,591   $ - $ -   $ - $ -   $ 76,238 $ -   $ 76,238   $ 78,591
Lending processing solutions     76,922   76,145     -   -     -   -     76,922   -     76,922     76,145
Banking technology solutions                                                    
  Lending     15,603   15,106     61,747   5,524     67,271   22,375     77,350   5,524     82,874     37,481
  Enterprise     -   -     55,445   679     56,124   4,917     55,445   679     56,124     4,917
Total Revenues   $ 168,763 $ 169,842   $ 117,192 $ 6,203   $ 123,395 $ 27,292   $ 285,955 $ 6,203   $ 292,158   $ 197,134
 
   

(in thousands of Canadian dollars, unaudited)

                        Six months ended June 30,
      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   $ 150,941 $ 152,270   $ - $ -   $ - $ -   $ 150,941 $ -   $ 150,941 $ 152,270
Lending processing solutions     143,200   141,268     -    -      -   -      143,200   -      143,200   141,268
Banking technology solutions                                                
  Lending     24,715   24,944     122,186   13,846     136,032   41,883      146,901   13,846     160,747   66,827
  Enterprise     -    -     111,204   1,814     113,018   8,430     111,204   1,814     113,018   8,430
Total Revenues   $ 318,856 $ 318,482   $ 233,390 $ 15,660   $ 249,050 $ 50,313   $ 552,246 $ 15,660   $ 567,906 $ 368,795
   
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 revenues for the second quarter of 2014 were $286.0 million, a year-over-year increase of $88.8 million, or 45.1%. For the first six months of 2014, consolidated revenues of $552.2 million, increased by $183.5 million, or 49.7%, compared to the same period in 2013. After eliminating the impacts of foreign exchange volatility, revenues increased by 40.1% and 44.4% in the second quarter and first six months of 2014, respectively. Revenues in 2014 were impacted by the fair value adjustment to deferred revenues acquired from HFS.

Consolidated Adjusted revenues for the second quarter of 2014 were $292.2 million, an increase of $95.0 million, or 48.2%, compared to the same period in 2013. For the first six months of 2014, consolidated Adjusted revenues of $567.9 million, increased by $199.1 million, or 54.0%, compared to the same period in 2013.  After eliminating the impacts of foreign exchange volatility, Adjusted revenues increased by 42.9% in the second quarter of 2014, and by 48.3% for the first six months of 2014 (see U.S. Segment discussion below for further details). These increases were primarily due to the inclusion of HFS, and to a lesser extent, organic growth mainly in recovery services and subscription fee-based enhancement services offerings.

Revenues - Canadian Segment

Total revenues in the Canadian Segment for the second quarter of 2014 were $168.8 million, $1.1 million, or 0.6%, lower than a year ago reflecting the factors noted below. For the first six months in 2014, Canadian Segment revenues were $318.9 million, an increase of $0.4 million, or 0.1%, compared to the same period 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.

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 second quarter of 2014 were $76.2 million, a decrease of $2.4 million, or 3.0%, compared to the same quarter in 2013. For the first six months in 2014, revenues were $150.9 million, a decrease of $1.3 million, or 0.9%, compared to the same period in 2013. Revenues for the second quarter of 2014 were lower than a year ago as a result of having one less business day of sales available in our chequing service area and also due to timing of revenues earned in our enhancement services offerings. Revenues from payments solutions for the three and six-month periods were also impacted by volume declines in cheque orders, partially offset by higher average order values due to product and service enhancements in the chequing and credit card programs and higher volumes in subscription fee-based enhancement services offerings.

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 60% to 70% of the revenues within this category, support the personal and commercial lending activities of our 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. 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 30% to 40% 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 the Government of Canada has the right to renew for one-year terms up to a maximum of two such terms. In line with government procurement policy, the Government of Canada has initiated consultations with the 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 summer 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 second quarter of 2014 were $76.9 million, an increase of $0.8 million, or 1.0%, compared to the same quarter in 2013. For the first six months of 2014, revenues were $143.2 million, a year-over-year increase of $1.9 million, or 1.4%. The increases in both periods were mainly due to higher transaction volumes in recovery services and, to a lesser extent, higher volumes in the student loans program and higher average order values in registration services. The rate of year-over-year growth was muted by a reduction in project-related and professional services revenues in the student loan program compared to 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 earlier, 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 second quarter of 2014 were $15.6 million, an increase of $0.5 million, or 3.3%, compared to the same quarter in 2013.  Revenues for the first six months of 2014 were $24.7 million, a year-over-year decrease of $0.2 million, or 0.9%. Revenues for the second quarter of 2014 benefited from higher professional services fees earned in connection with our mortgage origination business and from strong housing market activity. The impact of price modifications from previous periods was fully accounted for in the second quarter of 2014, however revenues in the first six months of 2014 reflected lower mortgage origination fees resulting from these price modifications.

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 have historically been stronger in the second and fourth quarters, with the latter being the busiest period.

Total revenues in the U.S. Segment for the second quarter of 2014 increased by $89.9 million year-over-year, or 329.4%, of $117.2 million. For the first six months in 2014, total revenues were $233.4 million, an increase of $183.1 million, or 363.9%, compared to the same period in 2013. Second quarter Adjusted revenues for the U.S. Segment of $123.4 million were $96.1 million, or 352.1%, ahead of the same period in 2013. For the first six months of 2014, Adjusted revenues of $249.1 million, were $198.7 million, or 395.0%, ahead of the previous year. The sharp increases in revenues and Adjusted revenues were primarily due to the inclusion of HFS.

A strong U.S. dollar in the second quarter of 2014 compared to the same period in 2013 benefited revenues and Adjusted revenues in the U.S. Segment by $9.9 million and $10.5 million, respectively. After eliminating these foreign exchange impacts, revenues and Adjusted revenues increased by 293.3% and 313.5%, respectively. For the first six months of 2014, the strong U.S. dollar benefited revenues and Adjusted revenues by $19.7 million and $21.2 million, respectively. After eliminating foreign exchange impacts, revenues increased by 324.8% and Adjusted revenues by 353.0% for the first six months. These foreign exchange impacts were calculated as the difference between the current period's actual results and the current period's results in local currency converted at the foreign exchange rates in effect during the same period of the prior year.

Lending Solutions

Lending solutions primarily consist of loan 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 revenue categories, 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 second quarter of 2014 was $61.7 million, an increase of $39.4 million, or 176.0%, compared to $22.4 million for the same period in 2013. For the first six-month period, revenues were $122.2 million, an increase of $80.3 million, or 191.7%, compared to the same period in 2013. Revenues in 2014 primarily benefited from the inclusion of HFS and were impacted by acquisition-accounting adjustments related to fair value of deferred revenue acquired through the acquisition of HFS.  Adjusted revenues of $67.3 million, which removed these acquisition accounting impacts, increased by $44.9 million compared to the same quarter in 2013 due to the inclusion of HFS. For the first six months of 2014, Adjusted revenues were $136.0 million, a year-over-year increase of $94.1 million.

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 second quarter of 2014 were $55.4 million, an increase of $50.5 million, compared to the same period in 2013. For the six months ended June 30, 2014, revenues were $111.2 million, an increase of $102.8 million, compared to the same period in 2013. Revenues recorded under IFRS for the second quarter and first six months of 2014 benefited from the acquisition of HFS.

Adjusted revenues, which are calculated after removing the impacts of purchase accounting adjustments related to fair value of deferred revenues, were $56.1 million for the second quarter of 2014, an increase of $51.2 million. For the first six months of 2014, Adjusted revenues were $113.0 million, an increase of $104.6 million. Adjusted revenues were higher than last year due to the inclusion of HFS.

EXPENSES

(in thousands of Canadian dollars, unaudited)

                      Quarter ended June 30,
      Canadian
Segment
    U.S.
Segment
    Corporate     Consolidated
    2014 2013   2014 2013   2014 2013   2014 2013
Employee compensation and benefits 1, 4   $ 38,528 $ 38,958   $ 48,672 $ 10,663   $ 729 $ 2,417   $     87,929 $ 52,038
Non-compensation direct expenses 2       67,376   65,509      8,596   619     -      -       75,972   66,128
Other operating expenses 3, 4     14,060   18,265      19,144   4,773     1,044    3,347     34,248   26,385
Total Expenses   $ 119,964 $ 122,732   $ 76,412 $   16,055   $ 1,773 $ 5,764   $   198,149 $ 144,551

                      Six-months ended June 30,
      Canadian
Segment
    U.S.
Segment
    Corporate       Consolidated
    2014 2013   2014 2013   2014 2013   2014 2013
Employee compensation and benefits 1, 4   $ 81,282 $ 79,287   $ 96,989 $ 19,557   $ 1,717 $ 3,309   $ 179,988 $ 102,153
Non-compensation direct expenses 2     126,603   122,978      17,551     1,192     -     -        144,154   124,170
Other operating expenses 3, 4     28,251   35,357     39,501    9,052     3,546   3,483      71,298   47,892
Total Expenses   $ 236,136 $ 237,622   $ 154,041 $ 29,801   $ 5,263 $ 6,792   $ 395,440 $ 274,215
   
1 Employee compensation and benefits on a consolidated basis includes retention and incentive expenses related to acquisition 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, transaction costs related to  acquisition 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.
4 Compensation costs for contractors are now included as part of employee compensation and benefits, whereas in prior periods they were recorded as other operating expenses. Prior periods have also been adjusted to conform to current period presentation. For the second quarter of 2013, these costs were $2.5 million in the Canadian Segment and $0.4 million in U.S. Segment. For the first six months of 2013, these costs were $5.4 million in the Canadian Segment and $0.6 million in the U.S. Segment.
   

Expenses - Consolidated 

Consolidated expenses of $198.2 million for the second quarter of 2014 increased by $53.6 million, or 37.1%, compared to the same quarter in 2013.  For the first six months of 2014, consolidated expenses were $395.4 million, an increase of $121.2 million, or 44.2%, compared to the same period in 2013. The increase was mainly attributable to the inclusion of HFS expenses.  Consolidated expenses also included acquisition-related and other charges of $1.8 million and $5.3 million for the second quarter and first six months of 2014, respectively, which are not considered reflective of normal course operations and are disclosed as part of Corporate. Acquisition-related and other charges of $5.8 million and $6.8 million were recorded in the second quarter and first six months of 2013, respectively.

Expenses - Canadian Segment

Total Canadian Segment expenses for the second quarter of $120.0 million, decreased by $2.8 million, or 2.3%, compared to the same quarter in 2013. Expenses for the first six months of 2014 were $236.1 million, a decrease of $1.5 million, or 0.6%. The decreases in total expenses were mainly driven by higher management fees, discussed below.

Employee compensation and benefits costs of $38.5 million for the second quarter of 2014 for the Canadian Segment were lower by $0.4 million, or 1.1%, compared to the same quarter in 2013. For the first six months of 2014, these costs increased year-over-year by $2.0 million, or 2.5%, to $81.3 million. The decrease in expenses for the second quarter was as a result of decreased share based compensation reflecting a revaluation of the related liability. This decrease was partially offset by inflationary salary increases. The increase in expenses for the first six-month period of 2014 was due to higher severance payments in the normal course of operations and an increase in share-based compensation expense reflecting a higher stock price. Increases in 2014 were offset by benefits realized from cost savings initiatives implemented in prior periods.

Non-compensation direct expenses for the Canadian Segment were $67.4 million for the second quarter of 2014, an increase of $1.9 million, or 2.8%, compared to the same quarter in 2013. For the six-month period in 2014, non-compensation direct expenses of $126.6 million, increased by $3.6 million, or 2.9%, compared to the same period in 2013. In general, these expenses directionally change with revenue changes. This increase in non-compensation direct expenses for the second quarter and first six months 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 lending processing solutions, consistent with the increase in revenues. The increase noted in the second quarter of 2014 was partially offset by reduced costs as a result of lower cheque volume within our payments solutions business.

Other operating expenses of $14.1 million for the second quarter of 2014 decreased by $4.2 million, or 23.0%, compared to the same quarter in 2013. For the first six months of 2014, other operating expenses of $28.3 million were lower by $7.1 million, or 20.1%, compared to the same period in 2013. In both periods, the decrease was due to a higher management fee charged by the Canadian Segment to the U.S. Segment since the acquisition of HFS, lower consulting costs and by benefits realized from cost savings initiatives implemented in prior periods.

The management fee charged to the U.S. Segment was $3.0 million for the second quarter of 2014 and $6.0 million for the first six months of 2014, compared to $1.0 and $2.0 million charged for the second quarter and first six months of 2013, respectively. Total management fees are expected to be $12.0 million for 2014, compared to $6.9 million for 2013 reflecting the increased size of U.S. operations.

Expenses - U.S. Segment

Total expenses for the U.S. Segment for the second quarter of 2014 were $76.4 million, an increase of $60.4 million, or 375.9%, compared to the same quarter in 2013. For the first six months of 2014, total expenses for the U.S. Segment were $154.0 million, an increase of $124.2 million, or 416.9%, compared to the same period last year. The increase in total expenses for the 2014 periods was primarily attributable to the inclusion of HFS.

Employee compensation and benefits costs of $48.7 million in the second quarter increased by $38.0 million compared to the same period in 2013. For the first six months of 2014, costs of $97.0 million, increased by $77.4 million, compared to the same periods in 2013. Non-compensation direct expenses for the U.S. Segment of $8.6 million for the second quarter of 2014 were higher by $8.0 million compared to the same period in 2013. For the first six months of 2014, costs of $17.6 million, increased by $16.4 million, compared to the same period in 2013. Other operating expenses of $19.1 million for the second quarter of 2014 were higher by $14.4 million,  compared to the same quarter in 2013. For the six months ended June 30, 2014, other operating expenses of $39.5 million, increased by $30.4 million, compared to the same period in 2013.

As noted above, these increases were primarily attributable to the inclusion of HFS. Employee compensation and benefits expenses and other operating expenses also benefited by cost synergies realized between our other SaaS businesses and HFS. 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 recorded as corporate expenses for the second quarter and first six months of 2014 primarily consisted of retention and incentive expenses incurred in connection with the acquisitions. For the second quarter in 2013 these expenses consisted of charges relating to retention and incentive expenses in connection with acquisitions, and for the first six months of 2013, these expenses also included severances related to cost-realignment initiatives.

Other expenses

Other expenses in the second quarter and first six months of 2014 mainly consisted of business integration costs incurred in connection with the acquisition of HFS.  Other expenses in the second quarter of 2013 primarily related to transaction costs related to strategic acquisition initiatives. Other expenses in 2013 also included transaction costs in connection with the acquisition of Compushare and business integration costs.

EBITDA AND EBITDA MARGIN

Consolidated EBITDA for the second quarter of 2014 was $87.8 million, an increase of $35.2 million, or 67.0%, compared to $52.6 million for the same quarter in 2013. Second quarter 2014 EBITDA margin of 30.7% was higher than the 26.7% margin for the same period in 2013. For the first six months of 2014, consolidated EBITDA of $156.8 million, increased $62.2 million, or 65.8%, from $94.6 million for the same period in 2013. For the six-month period of 2014, consolidated EBITDA margin of 28.4% increased from 25.6% for the same period in 2013.

Canadian Segment

Canadian Segment EBITDA for the second quarter of 2014 was $48.8 million, an increase of $1.7 million, or 3.6%, compared to the same quarter in 2013. EBITDA margin for the Canadian Segment for the second quarter of 2014 was 28.9%, compared to 27.7% for the same period in 2013. Canadian Segment EBITDA for the first six months of 2014 was $82.7 million, an increase of $1.9 million, or 2.3% compared to the same period in 2013. EBITDA margin for the Canadian Segment for the first six months of 2014 was 25.9%, compared to 25.4% for the same period in 2013.

See Adjusted EBITDA for the Canadian Segment for further discussion of the Canadian Segment results.

U.S. Segment

U.S. Segment EBITDA for the second quarter of 2014 was $40.8 million, an increase of $29.5 million, compared to the same quarter in 2013. EBITDA margin was 34.8% for the second quarter of 2014 compared to 41.2% a year ago. U.S. Segment EBITDA for the first six months of 2014 was $79.3 million, an increase of $58.8 million, or 286.8%. U.S. Segment EBITDA margin for the first six months of 2014 of 34.0%, was lower than the 40.8% during the same period in 2013.

See Adjusted EBITDA for the U.S. Segment for further discussion of the U.S. Segment results.

ADJUSTED EBITDA AND ADJUSTED EBITDA MARGIN

Consolidated Adjusted EBITDA during the second quarter of 2014 was $93.0 million, an increase of $34.6 million, or 59.4%, compared to the same quarter in 2013. For the first six months of 2014, consolidated Adjusted EBITDA of $171.7 million, increased by $70.4 million, or 69.4%, compared to the same period in 2013. After eliminating the impacts of foreign exchange volatility, consolidated Adjusted EBITDA increased by 53.2% in the first quarter of 2014, and by 62.2% in the first six months of 2014. These increases in consolidated Adjusted EBITDA were primarily due to the inclusion of HFS.

Second quarter 2014 consolidated Adjusted EBITDA was calculated by removing: (i) $3.4 million of acquisition accounting adjustments to fair value of deferred revenues and deferred costs associated with the acquisition of HFS; and (ii) acquisition-related and other charges of $1.8 million, consisting of business integration costs incurred in connection with the acquisition of HFS and retention and incentive costs.

On a consolidated basis, Adjusted EBITDA margin for the second quarter and the first six months of 2014 was 31.8% and 30.2% respectively, compared to 29.6% and 27.5% for the same periods in 2013. Margins in 2014 were higher mainly 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 second quarter of 2014 was $48.8 million, an increase of $1.7 million, or 3.6%, compared to the same quarter in 2013. Adjusted EBITDA for the first six months of 2014 was $82.7 million, a year-over-year increase of $1.9 million, or 2.3%. Adjusted EBITDA in both periods was higher primarily due to increased revenues in lending processing solutions and a higher management fee charged by the Canadian Segment. Adjusted EBITDA for the second quarter of 2014 also benefited from higher mortgage origination revenues.

Canadian Segment Adjusted EBITDA margin for the second quarter and the six-month period of 2014 was 28.9% and 25.9% respectively, compared to 27.7% and 25.4% for the same periods in 2013. Adjusted EBITDA margin was higher primarily due to the higher management fee charged to the U.S. Segment, lower consulting fees and benefits realized from cost savings initiatives implemented in prior periods.

U.S. Segment

Adjusted EBITDA for the U.S. Segment during the second quarter of 2014 was $44.2 million, an increase of $32.9 million, or 293.2%, compared to the same quarter in 2013. For the first six months of 2014, U.S. Segment Adjusted EBITDA of $89.0 million, increased by $68.5 million, or 333.9%, compared to the same period in 2013. The increase in U.S. Segment Adjusted EBITDA was mainly due to the inclusion of HFS, and to a lesser extent, cost synergies realized between our other SaaS businesses and HFS. A strong U.S. dollar in the second quarter and the first six months of 2014 compared to the same periods in 2013 benefited Adjusted EBITDA in the U.S. Segment by $3.6 million and $7.3 million respectively. After eliminating these foreign exchange impacts, Adjusted EBITDA for the second quarter and the first-half of 2014 increased by 261.0% and 298.2%, respectively.

Adjusted EBITDA in the U.S. Segment for the second quarter of 2014 excluded the impacts of $3.4 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. These adjustments consisted of $6.2 million of fair value adjustments related to deferred revenues and $2.8 million related to deferred costs.

Adjusted EBITDA margin for the U.S. Segment for the second quarter and first six months of 2014 was 35.8% and 35.7%, compared to 41.2% and 40.8% for the same periods in 2013. The change in both periods reflects the fact that HFS margins are lower than those earned by our SaaS offerings which comprised the majority of our U.S. Segment in the comparative periods of 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 $10.6 million in the second quarter of 2014 increased by $3.9 million, or 59.2%, compared to the same period in 2013. For the first six months of 2014, depreciation and amortization was $20.1 million, an increase of $6.9 million, or 52.2%, compared to the same period in 2013. The increase in depreciation and amortization in 2014 was mainly due to the inclusion of HFS.

AMORTIZATION OF INTANGIBLE ASSETS FROM ACQUISITIONS

Consolidated amortization of acquisition intangible assets for the second quarter of 2014 was $28.3 million, an increase of $17.3 million, compared to the same period in 2013. For the six months ended June 30, 2014, amortization was $56.9 million, an increase of $34.9 million, or 159.0%, compared to the same period in 2013. These increases were mainly attributable to the amortization of intangibles resulting from the acquisition of HFS.

GAIN ON SALE OF ASSETS

During the second quarter of 2014, D+H sold certain non-strategic assets and recognized a gain of $1.0 million.

INCOME FROM OPERATING ACTIVITIES

Consolidated income from operating activities was $48.9 million for the second quarter of 2014, an increase of $14.0 million, or 40.2%, compared to $34.9 million for the same quarter in 2013. For the six months ended June 30, 2014, income from operating activities was $79.8 million, an increase of $20.4 million, or 34.4%, compared to $59.4 million for the same period in 2013. These increases reflected growth in EBITDA as described above. Income from operating activities was impacted by higher depreciation of capital assets and amortization of intangible assets, primarily driven by the inclusion of HFS.

INTEREST EXPENSE

Interest expense of $15.0 million for the second quarter of 2014 increased by $10.5 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 second quarter of 2014 also included a non-cash interest charge of $1.4 million consisting of accretion expense of $0.9 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. For the first six-month period in 2014, interest expense of $30.3 million increased by $21.3 million compared to the same period in 2013 for the same reasons described above.

FAIR VALUE ADJUSTMENT OF DERIVATIVE INSTRUMENTS

An unrealized gain of $0.3 million related to fair value changes on derivative instruments was recognized in the second quarter of 2014, compared to an unrealized gain of $1.2 million in the second quarter of 2013. For the first six months of 2014, the unrealized gain was $0.5 million, compared to $1.3 million for the same period in 2013. These changes are related to our interest-rate swaps that are not designated as hedges for accounting purposes.

For the interest-rate swaps that are not designated as hedges for accounting purposes, these unrealized gains and losses are recognized in the Consolidated Statements 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 Statements 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 $5.2 million was recorded in the second quarter of 2014 compared to an income tax expense of $9.2 million recognized for the same period in 2013.  Income tax expense for the first six months of 2014 was $8.3 million compared to $14.6 million for the same period in 2013. The income tax expense in the second quarter and first six months of 2014 was lower as a result of the geographic mix of income from continuing operations as well as the increased amortization of intangible assets from acquisitions. 

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations for the second quarter of 2014 was $29.9 million, up $7.5 million, or 33.4%, from $22.4 million in the same period in 2013. Income from continuing operations reflected higher EBITDA of $35.2 million resulting from the acquisition of HFS, partially offset by higher amortization expense of $17.3 million relating to acquisition intangible assets and higher interest expense of $10.5 million on debt drawn to fund the HFS acquisition. Income from continuing operations for the first six months of 2014 increased 10.0% to $42.7 million from $38.8 million for the same period in 2013. Income from continuing operations for the first six months in 2014 was higher for the same reasons noted above.

NET INCOME

Consolidated net income of $29.9 million for the second quarter of 2014 was higher by $16.3 million, compared to consolidated net income of $13.6 million for the same quarter in 2013. Net income in the second quarter of 2014 benefited from an increase in EBITDA of $35.2 million resulting from the acquisition of HFS, partially offset by higher amortization expense of $17.3 million relating to acquisition intangible assets, and higher interest expense of $10.5 million on debt drawn to fund the HFS acquisition. Net income for the same period in 2013 was impacted by a loss from discontinued operations of $8.8 million.

For the first six-month period in 2014, consolidated net income of $41.9 million was higher by $22.5 million, or 116.5%, compared to $19.4 million for the same period in 2013. Net income for the first six months in 2014 was higher for the same reasons noted above.

NET INCOME PER SHARE

Net income per share, basic

Consolidated basic net income per share in the second quarter of 2014 increased to $0.3697 from $0.2298 for the same quarter in 2013, on account of acquisition accretion even though additional common shares were issued in August 2013 in connection with the acquisition of HFS. For the six-month period ended June 30, 2014, basic net income per share of $0.5186 was also higher compared to $0.3267 per share for the same period in 2013, mainly due to the HFS acquisition.

Net income per share, diluted

For the second 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 second quarter of 2014, on a diluted basis, was $0.3687 per share, compared to net income per share of $0.2298 for the same period in 2013. For the six-month period, net income per share on a diluted basis was $0.5173, compared to $0.3267 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 $51.5 million ($0.6369 per share) for the second quarter of 2014 was higher by $17.3 million, or 50.4%, compared to the $34.2 million ($0.5774 per share) for the same period in 2013.  Consolidated Adjusted net income for the first six months of 2014 was $90.3 million ($1.1177 per share), an increase of $33.0 million, or 57.5%, compared to $57.3 million ($0.9675 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 in 2014 was also impacted by the additional shares issued in August 2013 to fund the acquisition of HFS.

CONSOLIDATED CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES

The following table is derived from, and should be read in conjunction with, the Consolidated Statements 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 June 30,     Six months ended June 30,
            2014   2013     2014   2013
Cash and cash equivalents provided by (used in):                    
OPERATING ACTIVITIES                    
Income from continuing operations   $         29,869 $        22,395   $        42,733 $        38,832
Depreciation and amortization of assets               38,919             17,717               76,957             35,150
Fair value adjustment of derivative instruments                  (284)             (1,203)                  (488)             (1,310)
Interest expense, including amortization of deferred finance fees and accretion               15,048              4,516               30,297              8,987
Non-cash income tax and options expenses                5,058              9,200                8,149             14,791
Income from investment in an associate, net of tax                       -                     -                       -                (130)
Gain on re-measurement of previously held equity interest                       -                     -                       -             (1,587)
Gain on sale of assets                  (984)                     -                  (984)                     -
Increase in non-cash working capital and other items              (20,563)             (6,618)              (24,191)            (24,705)
Cash generated from operating activities               67,063             46,007             132,473             70,028
Interest paid                (10,716)             (4,175)              (29,973)             (8,218)
Income tax paid              (17,621)                (779)              (37,455)             (2,123)
Net cash from operating activities               38,726             41,053               65,045             59,687
FINANCING ACTIVITIES                    
Net change in long-term indebtedness               (5,000)            (20,481)              (10,000)              5,568
Proceeds from exercise of share options                1,907                     -                1,907                     -
Dividends paid                (25,864)            (18,955)              (51,701)            (37,910)
Net cash from financing activities              (28,957)            (39,436)              (59,794)            (32,342)
                                       
INVESTING ACTIVITIES                    
Capital expenditures               (13,293)             (6,635)              (24,686)            (12,921)
Acquisition of subsidiaries                       -                (456)                       -            (24,849)
Proceeds from sale of assets                1,219                     -                1,219                     -
Sale of discontinued operations                       -              8,500                       -              8,500
Net cash from (used in) investing activities              (12,074)              1,409              (23,467)            (29,270)
Increase (decrease) in cash and cash equivalents for the period               (2,305)              3,026              (18,216)             (1,925)
Cash and cash equivalents, beginning of period               16,487                 768               32,398              5,719
Cash and cash equivalents, end of period   $         14,182 $          3,794   $        14,182 $          3,794

As at June 30, 2014, cash and cash equivalents totalled $14.2 million, compared to $32.4 million at December 31, 2013.

Operating Activities

Operating activities provided $38.7 million during the quarter ended June 30, 2014, compared to $41.1 million for the same period in 2013. Net cash from operating activities was lower year-over-year mainly due to income tax installment payments that commenced beginning 2014, increased interest payments reflecting the HFS acquisition and changes in non-cash working capital and other items, further described below. Lower net cash from operating activities in the second quarter of 2014 was partially offset by higher EBITDA. For the first six months of 2014, operating activities provided $65.0 million, compared to $59.7 million for the same period in 2013. Net cash from operating activities for the first six months was also reflective of the factors noted in the three month change, however net cash from operating activities for the first six months of 2014 was primarily higher due to a lesser impact from non-cash working capital and other items.

Changes in Non-Cash Working Capital and Other Items

(in thousands of Canadian dollars, unaudited)

            Quarter ended June 30,       Six months ended June 30,
            2014   2013     2014   2013
Changes in non-cash working capital items   $       (14,926) $                5   $         (9,954) $       (15,143)
Changes in other operating assets and liabilities                (5,637)             (1,355)              (13,419)                 437
Cash flows used in discontinued operations                       -             (5,268)                  (818)             (9,999)
Increase in non-cash working capital and other items   $       (20,563) $         (6,618)   $       (24,191) $       (24,705)

Change in non-cash working capital in the second quarter of 2014 was primarily due to increased accounts receivables, reflecting accruals related to certain incentive payments in our student lending business and timing of receipts in HFS. The net increase was also due to increased prepayments. The change for the first six months of 2014 also reflected an increase in current deferred revenues relating to HFS, which was partially offset by a decrease in accrued and other liabilities, mainly reflecting short term deferred compensation payments.

Change in other operating assets and liabilities for the second quarter and first six months of 2014 was primarily attributable to increased non-current accounts receivable reflecting growth in our HFS business.

Financing Activities

Net cash used in financing activities was $29.0 million during the second quarter of 2014, compared to $39.4 million for the same period in 2013. For the first six months of 2014, net cash used in financing activities was $59.8 million, compared to $32.3 million for the same period in 2013. Net cash used in 2014 was primarily due to debt repayments and dividend payments. D+H made net debt repayments of $5.0 million and $10.0 million during the second quarter and first six months of 2014, respectively, compared to repayments of $20.5 million and $21.5 million in the second quarter and first six months of 2013, respectively. Net drawdown for the first six months of 2013 included $27.1 million drawn to fund the Compushare acquisition.

Dividends

During the second quarter of 2014, D+H paid a dividend of $0.32 per share ($25.9 million) to its shareholders of record as of May 30, 2014.  For the same quarter in 2013, $0.32 per share ($19.0 million) was paid to shareholders. For the first six months of 2014, D+H paid dividends of $0.64 per share ($51.7 million), compared to dividends of $0.64 per share ($37.9 million) for the same period in 2013. The increase in total dividends paid during the second 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 $12.1 million and $23.5 million was used in investing activities during the second quarter and first six months of 2014, respectively, reflecting capital expenditures. Net cash for the second quarter of 2014 also reflected proceeds from sale of certain non-strategic assets, described previously.

Net cash of $1.4 million was provided by investing activities in the second quarter of 2013 which primarily reflected capital expenditures and proceeds from the sale of non-strategic business processing operations. Net cash used in the first six months of 2013 of $29.3 million also reflected the acquisition of the remaining ownership in Compushare.

EIGHT QUARTER CONSOLIDATED STATEMENTS OF INCOME - SUMMARY

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

          2014                 2013       2012
        Q2   Q1   Q4   Q3   Q2   Q1   Q4   Q3
Revenues $    285,955 $    266,291 $ 259,075 $ 209,223 $ 197,134 $ 171,661 $ 172,457 $ 176,689
Acquisition accounting adjustments 1             6,203             9,457         13,058         16,107                   -                   -                   -                   -
Adjusted revenues 2 $        292,158 $    275,748 $ 272,133 $ 225,330 $ 197,134 $ 171,661 $ 172,457 $ 176,689
                                     
Revenue $    285,955 $    266,291 $ 259,075 $ 209,223 $ 197,134 $ 171,661   172,457 $ 176,689
Expenses 3         198,149         197,291       190,876       172,539       144,551       129,664       131,082       129,405
EBITDA 2, 3           87,806           69,000         68,199         36,684         52,583         41,997         41,375         47,284
EBITDA Margin 2   30.7%   25.9%   26.3%   17.5%   26.7%   24.5%   24.0%   26.8%
Adjustments:                                
   Acquistion accounting adjustments 1             3,404             6,250           9,217         15,030                   -                   -                   -                   -
   Acquisition-related and other charges 3                 1,773             3,490           3,842         13,126           5,764           1,028           6,558           3,265
Adjusted EBITDA 2 $      92,983 $      78,740 $   81,258 $    64,840 $    58,347 $    43,025 $    47,933 $    50,549
Adjusted EBITDA Margin 2   31.8%   28.6%   29.9%   28.8%   29.6%   25.1%   27.8%   28.6%
                                       
EBITDA 2, 3 $      87,806 $      69,000 $    68,199 $    36,684 $    52,583 $    41,997 $    41,375 $    47,284
Depreciation of capital assets and amortization                                
     of non-acquisition intangibles           10,599             9,456         10,937           7,532           6,657           6,519           7,568           6,648
Amortization of intangible assets from acquisitions           28,320           28,582         27,631         19,182         11,060         10,914         11,292         10,597
Income from operating activities 2           48,887           30,962         29,631           9,970         34,866         24,564         22,515         30,039
Interest expense           15,048           15,249         15,509         11,251           4,516           4,471           4,629           4,943
Other finance charges 4                     -                     -                   -           3,224                   -                   -                   -                   -
Loss (income) from investment in an associate, net of tax                     -                     -                   -                   -                   -             (130)                23               (53)
Gain on re-measurement of previously held equity interest 5                     -                     -                   -                   -                   -          (1,587)                   -                   -
Gain on sale of assets 9              (984)                     -                   -                   -                   -                   -                   -                   -
Fair value adjustment of derivative instruments 6              (284)              (204)             (138)          (4,759)          (1,203)             (107)             (542)             (445)
Income tax expense (recovery)             5,238             3,053             (975)          (7,383)           9,158           5,480           4,165           5,987
Income from continuing operations           29,869           12,864         15,235           7,637         22,395         16,437         14,240         19,607
Income (loss) from discontinued operations, net of tax 7                     -              (846)           2,133             (704)          (8,786)        (10,695)             (529)                 (2)
Net income           29,869           12,018         17,368           6,933         13,609           5,742         13,711         19,605
Adjustments:                                  
  Non-cash items:                                  
    Acquisition accounting adjustments 1             3,404             6,250           9,217         15,030                   -                   -                   -                   -
    Non-cash interest expense 8             1,367             1,524           1,349              709                   -                   -                   -                   -
    Other finance charges 4                     -                     -                   -           3,224                   -                   -                   -                   -
    Amortization of intangible assets from acquisitions           28,320           28,582         27,631         19,182         11,060         10,914         11,292         10,597
    Gain on re-measurement of previously held equity interest 5                     -                     -                   -                   -                   -          (1,587)                   -                   -
    Gain on sale of assets 9              (984)                     -                   -                   -                   -                   -                   -                   -
    Fair value adjustment of derivative instruments 6              (284)              (204)             (138)          (4,759)          (1,203)             (107)             (542)             (445)
  Other items of note:                                  
    Acquisition-related and other charges 3             1,773             3,490           3,842         13,126           5,764           1,028           6,558           3,265
  Tax effect of above adjustments 10         (12,009)         (13,688)        (15,100)        (15,715)          (3,814)          (3,578)          (5,543)          (3,962)
  Loss (income) from discontinued operations, net of tax 7                     -                846          (2,133)              704           8,786         10,695              529                  2
  Tax effect of  acquisitions 11                     -                     -                   -          (1,726)                   -                   -                   -          (1,156)
Adjusted net income 2 $     51,456 $      38,818 $    42,036 $    36,708 $    34,202 $    23,107 $    26,005 $    27,906
                                       
Adjusted net income per share, basic 2, 13 $      0.6369 $      0.4808 $    0.5206 $    0.5245 $    0.5774 $    0.3901 $   0.4390 $    0.4711
Income from continuing operations per share, 12, 13                                  
    Basic $      0.3697 $     0.1593 $    0.1887 $    0.1091 $    0.3781 $    0.2775 $    0.2404 $    0.3310
    Diluted $      0.3687 $      0.1589 $    0.1883 $    0.1089 $    0.3781 $    0.2775 $    0.2404 $    0.3310
Income (loss) from discontinued operations per share, 12, 13                                  
    Basic $             -   $    (0.0105) $   0.0264 $ (0.0101) $    (0.1483) $    (0.1806) $    (0.0089) $           -  
    Diluted $              -   $     (0.0105) $    0.0264 $    (0.0100) $    (0.1483) $   (0.1806) $   (0.0089) $            -  
Net income per share,  12, 13                                  
    Basic $      0.3697 $     0.1488 $    0.2151 $    0.0991 $    0.2298 $    0.0969 $    0.2315 $    0.3310
      Diluted $      0.3687 $     0.1484 $   0.2147 $   0.0989 $   0.2298 $    0.0969 $    0.2315 $    0.3310

   
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 revenues, 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 second 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 Gain realized in the second quarter of 2014 upon the sale of certain non-strategic assets.
10 The adjustments to net income are tax effected at their respective tax rates.
11 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 U.S. income tax rates resulting from the acquisition of HFS.
12 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 second quarter of 2014 was 81,013,068 shares.
13 Weighted average number of shares outstanding during the second quarter of 2014 was 80,790,585 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. As well, there has 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 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 June 30, 2014 and July 29, 2014, D+H had:

  • 80,839,510 common shares issued and outstanding (as at December 31, 2013 - 80,738,373). The increase in the number of shares during the first six months of 2014 is attributable to the exercise of stock options and 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 7,953,915 shares.

  • 1,191,168 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 June 30, 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   $                  -    $                  181 2.720%
March 18, 2015 2                    25,000                      -                      310 2.940%
March 18, 2017 2                    25,000                      -                   1,212 3.350%
March 20, 2017 2                    20,000                      -                      978 3.366%
October 17, 2016 (US$25,000) 3                    26,675                      -                      123 0.835%
October 17, 2016 (US$25,000) 3                    26,675                      -                      123 0.835%
October 17, 2016 (US$25,000) 3                    26,675                      -                         89 0.784%
October 17, 2016 (US$25,000) 3                    26,675                      -                      105 0.820%
October 17, 2018 (US$25,000) 3                    26,675                      -                      279 1.645%
  $             228,375 $                  - $               3,400  

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 June 30, 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 Statements of Income.
3 Designated as hedges for the purposes of hedge accounting. Fair value changes on these swaps impact other comprehensive income.

As at June 30, 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 Statements 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 June 30, 2014, the Company's borrowing rates on 47.0% 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, 77.8% 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 June 30, 2014, the Company's foreign exchange forward contracts aggregating US$31.0 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
September 29, 2014 $         7,000 $          306 $           -   1.1128
December 23, 2014             7,000              305                    -   1.1150
August 29, 2014             1,500                58                    -   1.1070
November 28, 2014             7,000              271                    -   1.1094
December 22, 2014             3,500              131                    -   1.1088
March 30, 2015             5,000              186                    -   1.1113
  $       31,000 $       1,257 $           -    

Long-term indebtedness

As at June 30, 2014 and December 31, 2013, the Company's long-term indebtedness was as follows:

(in thousands of Canadian dollars, unaudited)

    Interest rate Maturity June 30, 2014 December 31, 2013
Credit Facility (secured)          
  Revolver (US$25,000; C$32,000)   BA/LIBOR + 2.25% Aug 2018 $           58,675 $            68,590
  Non-revolver (US$400,000)   LIBOR + 2.25% Aug 2018             426,800             425,440
Credit facilities                   485,475              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               67,221                67,007
Bond (secured) (US$16,500)   3.94% Jun 2022               17,606                17,549
Bond (secured) (US$15,000)   3.94% Jun 2022               16,005                15,954
Bond (secured)   5.76% Aug 2023               20,000                20,000
Bond (secured) (US$100,000)   5.51% Aug 2023             106,700              106,360
Bond (secured) (US$75,000)   5.51% Aug 2023               80,025                79,770
Bond (secured) (US$50,000)   5.51% Aug 2023               53,350                53,180
Bonds                   440,907              439,820
                    926,382              933,850
Deferred finance costs                      (8,829)                 (9,721)
        $         917,553 $          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 June 30, 2014
     Committed  Uncommitted  Outstanding  Available
Currency denominated in:    CAD  USD  CAD  USD  CAD  USD  CAD  USD
Revolver    $ 255,000  $ 100,000  $ -   -  $ 32,000   26,675  $ 223,000  $ 73,325
Non-revolver     -   426,800   -   -   -   426,800   -   -
Uncommitted arrangements     -   -   100,000   -   -   -   100,000   -
Credit Facility     255,000   526,800   100,000   -   32,000   453,475   323,000   73,325
Bonds     100,000   340,907   30,000   64,020   100,000   340,907   30,000   64,020
     $ 355,000  $ 867,707  $ 130,000  $ 64,020  $ 132,000  $ 794,382  $ 353,000  $ 137,345

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 defined in the Company's annual MD&A for the year-end December 31, 2013. As at June 30, 2014, this ratio was calculated at 2.79 (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 2.75 (December 31, 2013 - 2.87).

Convertible Debentures

As at June 30, 2014, the Company had $229.9 million principal amount of 6.00% convertible unsecured subordinated debentures ("Debentures") outstanding. During the second quarter of 2014, a total of 57 Debentures were converted into 1,972 common shares of the Corporation. For the first six months of 2014, a total of 132 Debentures were converted into 4,567 common shares of the Corporation.

Effective interest rate

As at June 30, 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 competitiveness 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 suite of lending and enterprise solutions including SaaS offerings, cloud-based offerings, lending compliance, core technology and channel products to 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. We have established a number of such partnerships in the U.S. and Canada over the years 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 advanced our FinTech leadership position within the North American market and has strengthened our operating model by diversifying revenue and reducing 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 used to partially fund 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. As such, growth seen in the second quarter and first-half of 2014 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, analysts are expecting the Canadian housing market to enter a moderating phase in the latter half of 2014. The broker market will continue to experience competition from internal mobile sales force at lending institutions. Revenue changes from pricing modifications in our Canadian banking technology solutions have stabilized and the introduction of new products and product extensions for various areas in the lending value chain has and is expected to continue to contribute to organic growth and align us with the transformation of the sales process used in Canadian Banking.

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 our multiple product offerings into our existing client base. 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 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 D+H'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.

July 29, 2014

Consolidated Statements of Financial Position        
(in thousands of Canadian dollars, unaudited)            
               
        June 30, 2014     December 31, 2013
ASSETS            
Cash and cash equivalents    $         14,182   $        32,398
Trade and other receivables              124,704             111,156
Prepayments and other current assets                28,766              25,370
Inventories                  2,645                3,059
Total current assets              170,297             171,983
Non-current trade receivable                33,505              22,179
Deferred tax assets                  2,431                4,327
Property, plant and equipment                43,602              44,913
Intangible assets            1,109,004          1,156,170
Goodwill            1,509,822          1,508,430
Other assets                  8,930                5,815
Total non-current assets            2,707,294          2,741,834
Total assets   $     2,877,591   $   2,913,817
LIABILITIES            
Trade payables, accrued and other liabilities   $        123,990   $      129,728
Deferred revenue                97,552              86,885
Current tax liabilities                16,061              24,780
Total current liabilities              237,603             241,393
Non-current deferred revenue                21,213              22,048
Derivative liabilities held for risk management                  2,909                3,029
Loans and borrowings              917,553             924,129
Convertible debentures              211,354             209,647
Deferred tax liabilities              344,067             366,856
Other long-term liabilities                10,209                9,182
Total non-current liabilities            1,507,305          1,534,891
Total liabilities            1,744,908          1,776,284
EQUITY            
Capital            1,120,072          1,117,785
Reserves                46,196              43,519
Retained deficit               (33,585)             (23,771)
Total equity            1,132,683          1,137,533
Total liabilities and equity   $      2,877,591   $ 2,913,817

Consolidated Statements of Income                    
(in thousands of Canadian dollars, except per share amounts, unaudited)                    
            Three months
ended
          Six months
ended
      June 30, 2014     June 30, 2013     June 30, 2014     June 30, 2013
Revenues   $      285,955   $      197,134   $      552,246   $      368,795
Employee compensation and benefits               87,929               52,038             179,988             102,153
Other expenses             110,220               92,513             215,452             172,062
Income from operating activities before                        
   depreciation and amortization             87,806                52,583               156,806                94,580
Depreciation of property, plant and equipment                 4,022                 2,273                 7,797                 4,209
Amortization of intangible assets               34,897               15,444               69,160               30,941
Income from operating activities               48,887               34,866               79,849               59,430
Finance expenses:                        
   Fair value adjustment of derivative instruments                  (284)                (1,203)                  (488)                (1,310)
   Interest expense               15,048                 4,516               30,297                 8,987
Gain on remeasurement of previously held                        
   equity interest                        -                        -                        -                (1,587)
Income from investment in an associate,                        
   net of income tax                        -                         -                         -                    (130)
Gain on sale of assets                  (984)                        -                  (984)                        -
Income from continuing operations before                        
   income tax               35,107               31,553               51,024               53,470
Income tax expense                 5,238                 9,158                 8,291               14,638
Income from continuing operations               29,869               22,395               42,733               38,832
Loss from discontinued operations,                        
   net of income tax                        -                (8,786)                  (846)              (19,481)
Net income   $        29,869   $        13,609   $        41,887   $        19,351
Earnings per share                        
Income per share from continuing operations,                        
   Basic   $        0.3697   $        0.3781   $        0.5291   $        0.6556
   Diluted   $        0.3687   $        0.3781   $        0.5278   $        0.6556
Loss per share from discontinued operations,                        
   Basic   $               -   $       (0.1483)   $       (0.0105)   $       (0.3289)
   Diluted   $               -   $       (0.1483)   $       (0.0105)   $       (0.3289)
Net income per share                        
   Basic   $        0.3697    $        0.2298   $        0.5186   $        0.3267
   Diluted   $        0.3687   $        0.2298   $        0.5173   $        0.3267

Consolidated Statements of Comprehensive Income                        
                           
              Three months
ended
          Six months
ended
(in thousands of Canadian dollars, unaudited)     June 30, 2014     June 30, 2013     June 30, 2014     June 30, 2013
Net income   $        29,869   $        13,609    $        41,887    $        19,351
The following items may be reclassified                        
   subsequently to profit or loss:                        
                              
   Cash flow hedges:                        
       Effective portion of changes in fair value                   866                        -                   758                        -
   Foreign currency translation              (27,871)                 5,962                 2,069                 9,508
Total comprehensive income   $          2,864   $        19,571   $        44,714    $        28,859

Consolidated Statements of Changes in Equity                                          
(in thousands of Canadian dollars, unaudited)                                          
                                           
                              Three months ended June 30, 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 April 1, 2014   $ 1,117,860   $        1,407   $        8,883   $      63,421   $         (328)   $     (37,590)   $ 1,153,653
Net income for the period                      -                        -                        -                     -                     -            29,869            29,869
Foreign currency translation                      -                        -                        -           (27,871)                     -                     -           (27,871)
Cash flow hedges                                         866                       866
Share issuance               2,210                        -                        -                     -                     -                     -              2,210
Equity component of convertible                                          
   debentures, net of tax                     2                        -                      (2)                     -                     -                     -                     -
Dividends                      -                        -                        -                     -                     -           (25,864)           (25,864)
Stock options                      -                   (180)                        -                     -                     -                     -                (180)
Balance at June 30, 2014   $ 1,120,072   $        1,227   $        8,881   $      35,550   $          538   $     (33,585)   $ 1,132,683

                              Six months ended June 30, 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                      -                        -                        -                     -                     -            41,887            41,887
Foreign currency translation                      -                        -                        -              2,069                     -                     -              2,069
Cash flow hedges                      -                        -                        -                     -                 758                     -                 758
Share issuance               2,279                        -                        -                     -                     -                     -              2,279
Equity component of convertible                                                         -
   debentures, net of tax                     8                        -                      (8)                     -                     -                     -                     -
Dividends                      -                        -                        -                     -                     -           (51,701)           (51,701)
Stock options                      -                   (142)                        -                     -                     -                     -                (142)
Balance at June 30, 2014   $ 1,120,072   $          1,227   $          8,881   $      35,550   $          538   $     (33,585)   $ 1,132,683

Consolidated Statements of Changes in Equity                                          
(in thousands of Canadian dollars, unaudited)                                          
                              Three months ended June 30, 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 April 1, 2013   $     672,853   $             938   $                 -   $       9,430   $              -   $       8,946           692,167
Net income for the period                      -                        -                        -                     -                     -            13,609            13,609
Foreign currency translation                      -                        -                        -              5,962                     -                     -              5,962
Dividends                      -                        -                        -                     -                     -           (18,955)           (18,955)
Stock options                      -                      42                        -                     -                     -                     -                   42
Balance at June 30, 2013   $     672,853   $             980   $                 -   $      15,392   $              -   $       3,600   $    692,825

                                  Six months ended June 30, 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                      -                        -                        -                     -                     -            19,351            19,351
Foreign currency translation                      -                        -                        -              9,508                     -                     -              9,508
Dividends                      -                        -                        -                     -                     -           (37,910)           (37,910)
Stock options                      -                    153                        -                     -                     -                     -                 153
Balance at June 30, 2013   $   672,853   $          980   $    -   $ 15,392   $    -   $   3,600   $ 692,825


Consolidated Statements of Cash Flows                        
(in thousands of Canadian dollars, unaudited)                        
            Three months
ended
          Six months
ended
      June 30, 2014     June 30, 2013     June 30, 2014     June 30, 2013
Cash and cash equivalents provided by (used in):                        
OPERATING ACTIVITIES                        
Income from continuing operations   $            29,869   $            22,395   $           42,733   $           38,832
Adjustments for:                        
    Depreciation of property, plant                      4,022                    2,273                    7,797                    4,209
       and equipment                        
    Amortization of intangible assets                   34,897                  15,444                  69,160                  30,941
    Fair value adjustment of derivative                         
       instruments     (284)     (1,203)     (488)     (1,310)
    Interest expense                  13,681                    4,164                  27,406                    8,281
    Amortization of deferred financing fees                       498                       352                    1,063                      706
    Interest accretion expense                       869                         -                      1,828                         -
    Income tax expense                     5,238                    9,158                    8,291                  14,638
    Stock options      (180)                         42     (142)                      153
    Income from investment in an associate,                         
       net of income tax                          -                         -                         -     (130)
    Gain on remeasurement of previously                         
       held equity interest                          -                         -                         -     (1,587)
    Gain on sale of assets     (984)                         -     (984)                         -  
    Changes in non-cash working capital items      (14,926)                          5     (9,954)     (15,143)
    Changes in other operating assets and                         
       liabilities      (5,637)     (1,355)     (13,419)                      437
    Cash flows used in discontinued                                     
       operations                          -     (5,268)     (818)     (9,999)
Cash generated from operating activities                  67,063                  46,007                132,473                  70,028
    Interest paid     (10,716)     (4,175)     (29,973)     (8,218)
    Income taxes paid     (17,621)     (779)     (37,455)     (2,123)
Net cash from operating activities                  38,726                  41,053                  65,045                  59,687
FINANCING ACTIVITIES                        
Repayment of long-term indebtedness     (10,000)     (20,481)     (15,000)     (21,497)
Proceeds from long-term indebtedness                    5,000                         -                    5,000                  27,065
Proceeds from exercise of share options                     1,907                         -                    1,907                         -
Dividends paid     (25,864)     (18,955)     (51,701)     (37,910)
Net cash used in financing activities     (28,957)     (39,436)     (59,794)     (32,342)
INVESTING ACTIVITIES                        
Acquisition of property, plant and equipment      (4,428)     (2,770)     (6,611)     (4,693)
Acquisition of intangible assets      (8,865)     (3,865)     (18,075)     (8,228)
Acquisition of subsidiaries                          -     (456)                         -     (24,849)
Proceeds from sale of assets                    1,219                         -                    1,219                         -
Sale of discontinued operations                          -                    8,500                         -                    8,500
Net cash from (used in) investing activities     (12,074)     1,409     (23,467)     (29,270)
Increase (decrease) in cash and cash                            
    equivalents for the period     (2,305)                    3,026     (18,216)     (1,925)
Cash and cash equivalents, beginning of period                  16,487                       768                  32,398                    5,719
Cash and cash equivalents, end of period   $            14,182   $             3,794   $           14,182   $             3,794



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.

DH 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 DH Corporation with the securities regulatory authorities at www.sedar.com.

 

 

 

 

SOURCE DH Corporation

For further information:

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