Davis + Henderson Reports Third Quarter 2011 Results

Stock Exchange Symbol: DH
Website: www.dhltd.com

TORONTO, Nov. 8, 2011 /CNW/ - Davis + Henderson Corporation ("D+H" or the "Business" or the "Company" or the "Corporation" or "Davis + Henderson") today reported solid financial results for the three and nine months ended September 30, 2011 that were consistent with expectations and we are satisfied with these results in the context of activities undertaken related to our strategic agenda.  On January 18, 2011, Davis + Henderson completed the acquisition of substantially all the assets of ASSET Inc. ("ASSET"), followed by the acquisition of Mortgagebot LLC ("Mortgagebot") on April 12, 2011 and accordingly, the results of the acquired businesses have been included in the consolidated results since those dates.

Third Quarter Highlights

  • Revenue was $186.3 million, an increase of $22.0 million, or 13.4%, compared to the same quarter in 2010.
  • EBITDA1 was   $46.2 million, an increase of $10.1 million, or 27.8%, compared to $36.2 million for the same quarter in 2010.  EBITDA for the third quarter of 2011 included acquisition-related costs of $0.6 million and, for the third quarter of 2010, included a restructuring charge and acquisition-related costs, totalling $4.4 million.
  • Adjusted net income1 was $26.2 million ( $0.4429 per share) for the third quarter of 2011.  There is no comparable measure for the same period in 2010.
  • Net income was $15.1 million ( $0.2542 per share),  a year-over-year decrease of  $3.6 million, or  19.4%,  compared to $18.7 million ( $0.3512 per unit) for the same quarter in 2010. This change reflected the positive contribution from acquisitions and also the impacts related to acquisition-related items, the change in taxation with the conversion to a corporation in January 2011 and a non-cash, unrealized mark-to-market loss related to reduced interest rates occurring during the third quarter of 2011.Net income per share for both the quarter ended September 30, 2011 and the first nine months of 2011 was also impacted by the issuance of 6 million shares in April 2011 to partially fund the Mortgagebot acquisition.
  • During the quarter, D+H increased its target annual dividend by 4 cents per share (approximately 3%) from $1.20 per share to $1.24 per share annualized.
  • On September 30, 2011 the Company paid a dividend of $0.31 per share to its shareholders of record on August 31, 2011.
  • In September 2011, the Company announced succession plans related to the Chief Executive Officer ("CEO"), with Gerrard Schmid, currently the President and Chief Operating Officer ("COO"), becoming the CEO effective February 2012 concurrent with the retirement of the current CEO, Bob Cronin.

Nine-Month Highlights

  • Revenue was $540.9 million, an increase of $53.7 million, or 11.0%, compared to the same nine-month period in 2010.
  • EBITDA was $131.8 million, an increase of $14.2 million, or 12.0%, compared to the same period in 2010. EBITDA for the first nine months of 2011 included acquisition-related costs of $3.1 million and for the first nine months of 2010 included a restructuring charge and acquisition-related costs totalling $4.4 million.
  • Adjusted net income was $83.8 million for the first nine months of 2011, and there is no comparable measure for the same period in 2010.
  • Net income was $74.6 million ( $1.3077 per share),  a year-over-year increase of  $7.8 million, or  11.7% compared to  $66.8 million ( $1.2541 per unit) for the same period in 2010. The increase in net income reflected the inclusion from the first quarter of 2011 of a non-cash tax recovery primarily attributable to D+H's conversion to a corporation and IFRS adjustments and in the second quarter of 2011, in connection with the acquisition of Mortgagebot a non-cash tax recovery, relating to losses within certain US subsidiaries that were not previously recognized and the various impacts of acquisition-related items as described.
  • During the first nine months of 2011, $0.9133 per share was paid to the shareholders of D+H.

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1 D+H financial results are prepared in accordance with IFRS. D+H reports several non-IFRS financial measures, including EBITDA and Adjusted net income used above. Adjusted net income is calculated as net income, adjusted to remove certain non-cash items and certain items of note such as acquisition-related expenses and discontinued operations. These items are excluded in calculating adjusted net income as they are not considered indicative of the financial performance of the Business for the period being reviewed. Any non-IFRS financial measures should be considered in context with the IFRS financial presentation and should not be considered in isolation or as a substitute for IFRS net income or cash flow. Further, D+H's measures may be calculated differently from similarly titled measures of other companies. See Non-IFRS Financial Measures for a more complete description of these terms.

D+H's unaudited consolidated financial statements for the third quarter of 2011 and accompanying notes to the financial statements and management's discussion & analysis (MD&A) along with the supplementary financial information will be available tomorrow on www.sedar.com and at www.dhltd.com.

For a more detailed discussion of the results and management's outlook, please see Management's Discussion and Analysis below.

Caution Concerning Forward-Looking Statements

This press release contains certain statements that constitute forward-looking information within the meaning of applicable securities laws ("forward-looking statements"). Statements concerning D+H's objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of D+H are forward-looking statements.  The words "believe", "expect", "anticipate", "estimate", "intend", "may", "will", "would" and similar expressions and the negative of such expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.  These forward-looking statements are subject to important assumptions, including the following specific assumptions: the ability of D+H to meet its revenue and EBITDA targets; general industry and economic conditions; changes in D+H's relationship with its customers and suppliers; pricing pressures and other competitive factors; the anticipated effect of the acquisition of Mortgagebot on the financial performance of D+H; and the expected benefits arising as a result of the acquisition of Mortgagebot. 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 the actual results, performance or achievements of the Business, or developments in D+H's 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 cheques by consumers; the Company's dependence on a limited number of large financial institution customers 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; 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 incorporated by reference 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 and the documents incorporated by reference herein 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

Davis + Henderson will discuss its financial results for the three and nine months ended September 30, 2011 via conference call at 10:00 a.m. EST (Toronto time) on Wednesday, November 9, 2011. The number to use for this call is 647-427-7450 for Local / International callers or 1-888-231-8191 for US / Canada callers. The conference call will be hosted by Bob Cronin, 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 www.newswire.ca/webcast/. For anyone unable to listen to the scheduled call, the rebroadcast number will be: 416-849-0833 for Toronto area callers, or 1-855-859-2056 for all other callers, with Encore Password 17263564. The rebroadcast will be available until Wednesday, November 23, 2011.  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

Management's Discussion and Analysis ("MD&A") for the third quarter of 2011 for Davis + Henderson Corporation (the "Company" or the "Corporation" or the "Business" or "Davis + Henderson" or "D+H" or "we" or "our"), which was formerly known as Davis + Henderson Income Fund (the "Fund"), has been prepared with an effective date of November 8, 2011 and should be read in conjunction with the MD&A in the Annual Report for the year ended December 31, 2010, dated March 8, 2011, and the attached interim unaudited consolidated financial statements for the three and nine months ended September 30, 2011. 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.

Adoption of IFRS

For fiscal years beginning on or after January 1, 2011, Canadian public companies are required to prepare their financial statements in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB"). Due to the requirement to present comparative financial information, the effective transition date was January 1, 2010. Effective January 1, 2011, the Company's financial statements have been prepared in accordance with IFRS, with 2010 comparative figures restated to conform to IFRS.

Conversion from an Income Trust to a Corporation

Effective January 1, 2011, pursuant to a plan of arrangement ("the Arrangement"), the Fund's income trust structure was converted to a corporate structure and the publicly traded corporation is now named Davis + Henderson Corporation (the "Corporation").  Under the Arrangement, unitholders of the Fund received, on a tax deferred, roll-over basis, one common share of the Corporation, for each unit of the Fund held. Common shares of Davis + Henderson Corporation commenced trading on the Toronto Stock Exchange on January 4, 2011, under the symbol DH.

In conjunction with the conversion, the Company also undertook an internal reorganization to simplify its business operations by consolidating the various businesses it had previously operated as separate legal entities.  The combined business now primarily operates within D+H Limited Partnership.  The conversion was treated as a change in business form and was accounted for as a continuity of interests. As such, the carrying amounts of assets, liabilities and unitholders' equity in the consolidated financial statements of the Fund immediately before the conversion remained the same as the carrying values of Davis + Henderson Corporation immediately after the conversion.  Effective January 1, 2011, the share capital of Davis + Henderson Corporation in respect of the common shares were reduced by the deficit balance of the Fund as at December 31, 2010.

Notwithstanding the structural and distribution changes described herein, the strategies and objectives of the Business remain unchanged.

STRATEGY

D+H is a leading solutions provider to the financial services marketplace. We have several market-leading service offerings within Canada, including: our cheque supply program; the servicing of student loans; the provision of registration, recovery and related services for secured loan products; and the delivery of lending technology solutions within the mortgage market. Additionally, with the recent acquisition of Mortgagebot, D+H is a market-leading provider of web-based, point-of-sale solutions in the United States and provides a wide range of consumer direct, loan officer and branch and call centre mortgage origination solutions for over 1,000 banks and credit unions. We also offer broader technology solutions in the commercial lending, small business lending and leasing area, as well as servicing solutions within the credit card market and other outsourced services in a number of specialty areas.

D+H's strategy is to establish market-leading positions within well defined and growing service areas in the financial services marketplace and to further expand our service offerings by enhancing the activities that we perform on behalf of our customers. We expect to advance this strategy through internal (or organic) initiatives, as well as by partnering with third parties and by way of selective acquisitions. D+H's long-term financial objective is to deliver sustainable and growing earnings through continued organic revenue growth and by way of strategic acquisitions. The Business has three primary strategies to meet its objectives. These are to: (i) evolve and enhance the value of our programs to the chequing and credit card accounts; (ii) extend our technology supported services related to personal, student and commercial lending and leasing markets; and (iii) pursue opportunities in other areas within the financial services marketplace.

Over the past several years, D+H has executed this strategy by evolving our programs to the chequing account, completing several acquisitions, including Resolve Business Outsourcing Income Fund ("Resolve") in 2009, substantially all the assets of ASSET Inc. ("ASSET") in January 2011, and Mortgagebot LLC ("Mortgagebot") in April 2011, and by further enhancing our services and capabilities. As a result, we offer a diverse range of market-leading services.

For a detailed discussion of the third quarter 2011 results, management's outlook, risk factors and caution concerning forward- looking statements, please see below.

ACCOUNTING PRINCIPLES AND FINANCIAL INFORMATION PRESENTATION

All financial information presented in this MD&A is determined and presented in accordance with IFRS, as issued by the IASB, unless otherwise noted.  All information relating to 2010 reporting periods presented as comparatives have been reclassified to reflect the IFRS presentation, unless otherwise noted.  All amounts are in Canadian dollars, unless otherwise specified.

Effective January 1, 2011, the Corporation commenced preparing its consolidated financial statements in accordance with IFRS.  Prior to January 1, 2011, the consolidated financial statements were prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"), and therefore, comparative periods for 2010 have been restated to be in accordance with IFRS. Comparative periods presented in this MD&A that are prior to January 1, 2010, have not been restated for IFRS and have been presented in accordance with Canadian GAAP.

Comparative information presented for periods prior to January 1, 2011 relate to those of the Fund, and the results for the periods subsequent to January 1, 2011 are those of the Corporation. Consequently, throughout this MD&A, any references to distributions, unitholders, and per unit amounts relate to periods prior to January 1, 2011, and any references to dividends, shareholders and per share amounts relate to periods subsequent to January 1, 2011.

Note 24 of the Corporation's financial statements for the three and nine months ended September 30, 2011 contain reconciliations and descriptions of the effect of the transition from Canadian GAAP to IFRS on equity, earnings and comprehensive income, including line-by-line reconciliations of the statement of financial position as at September 30, 2010 as well as the statement of income for the three and nine months ended September 30, 2010.  The Company previously described the adjustments that were anticipated in converting from Canadian GAAP to IFRS; with the completion of the IFRS implementation project, the final adjustments have been determined, revised where appropriate, and are reported in Note 24.

OPERATING RESULTS FOR THE THIRD QUARTER - CONSOLIDATED

The following table is derived from, and should be read in conjunction with, the Consolidated Statements of Income and includes non-IFRS financial measures. Management believes this supplementary disclosure provides useful additional information. See Non-IFRS Financial Measures section for a description of non-IFRS terms used.

The consolidated results include those of ASSET, effective January 18, 2011, and Mortgagebot effective April 12, 2011.

Operating and Financial Results1

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

  Quarter ended September 30,     Nine months ended September 30, 
      2011 2010   2011 2010
Revenue    $ 186,275  $ 164,319    $ 540,943  $ 487,241
Expenses 2   140,050 128,147   409,118 369,586
EBITDA 2, 3   46,225 36,172   131,825 117,655
               
Amortization of capital assets and non-acquisition intangibles   5,820 5,030   17,151 14,661
Amortization of intangibles from acquisitions   11,040 6,925   29,722 21,180
Interest expense   4,792 3,517   14,053 10,583
Amortization and fair value adjustment of derivative instruments4     3,991 1,566   3,531 1,993
Income tax expense (recovery) 7   5,522 (1,447)   (7,051) (148)
Income from continuing operations   15,060 20,581   74,419 69,386
Income (loss) from discontinued operations, net of tax 5   - (1,886)   140 (2,627)
Net income 15,060 18,695   74,559 66,759
               
Adjustments:          
  Non-cash items:          
      Amortization of intangibles from acquisitions 11,040     29,722  
      Amortization and fair value adjustment of derivative instruments 4 3,991     3,531  
  Other items of note:          
      Acquisition-related items2 610     3,116  
      Discontinued operations, net of tax 5 -     (140)  
  Tax effect of above adjustments (excluding discontinued operations) 7 (4,465)     (9,854)  
  Tax effect of corporate conversion, acquisitions and IFRS adjustments 6 -     (17,137)  
               
Adjusted net income3  $ 26,236      $ 83,797  
               
               
Adjusted net income per share, basic and diluted 3, 8, 9  $ 0.4429  n/m     $ 1.4698  n/m 
Net income per share, basic and diluted 8, 9  $ 0.2542  $ 0.3512    $ 1.3077  $ 1.2541
  Quarter ended September 30,   Nine months ended September 30,
        2011 vs. 2010     2011 vs. 2010
           % change     % change
Revenue       13.4%     11.0%
EBITDA 2, 3     27.8%     12.0%
Adjusted net income per share 3, 6, 8    n/m      n/m 

 n/m = not measurable

1 The results for both the quarter and nine months ended September 30, 2011 include those of ASSET and Mortgagebot, effective from the dates of acquisition of January 18, 2011 and April 12, 2011, respectively.
2 Expenses for 2011 include acquisition-related items such as transaction costs and certain retention and incentive payments related to the Mortgagebot acquisition and for 2010, a restructuring charge and acquisition-related costs, totalling $4.4 million recorded in the third quarter.
3 EBITDA and Adjusted net income are non-IFRS terms.    See Non-IFRS Financial Measures for a more complete description of these terms.  Periods prior to January 1, 2011, do not have a comparable measure for Adjusted net income due to the differences in taxation for D+H as an income trust prior to January 1, 2011 and as a corporation subsequent to that date.
4 Includes (i) mark-to-market adjustments of interest-rate swaps that existed as at September 30, 2011 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 income; and (ii) amortization of mark-to-market adjustment of interest-rate swaps relating to cumulative net gains and losses that were deferred prior to January 1, 2007 when hedge accounting was used by the Company.
5 The Business sold a non-strategic component of its contact centre business in October 2010 and entered into a transition agreement with the buyer which ended on April 1, 2011.  The results of these operations are presented as discontinued operations. 
6 Adjustments for the first nine months of 2011 included the following: (i) in connection with the acquisition of Mortgagebot, a non-cash income tax recovery recorded in the second quarter of 2011 related to losses within certain US subsidiaries that had been previously recognized; and (ii) non-cash income tax recoveries recorded in the first quarter of 2011 in connection with the conversion to a corporation and implementation of IFRS, among other items.
7 The following adjustments to net income are tax effected at their respective tax rates: (i)  amortization of acquisition intangibles; (ii) mark-to-market adjustment of derivative instruments; and (iii) acquisition-related costs.
8 Diluted Net income per share and Diluted Adjusted net income per share (non-IFRS term) reflect impacts of outstanding options.  If the option price is below the average market price during the period, then the options are not included in the dilution calculation.
9 Weighted average number of shares outstanding during the three months ended September 30, 2011 was 59.2 million shares and during the nine months ended September 30, 2011 was 57.0 million shares.

Overview

D+H had solid operating performance in the third quarter of 2011 that was consistent with our expectations and we are satisfied with these results in the context of activities undertaken related to our strategic agenda. Overall, in the first nine months of 2011, the Business had growth in revenues and EBITDA, compared to the same period in 2010, due primarily to the inclusion of ASSET and Mortgagebot and additionally from the impacts of acquisition-related costs and restructuring charges.  For a more detailed description on revenues and expenses, see the comments below.

Revenue

The following table reflects the current relative size of each of the major service areas as a percentage of total revenue based on a 12-month rolling period:

Allocation of Revenue by Service Area1   % Revenue
Revenue         
  Programs to the chequing account     42%
  Loan registration and recovery services   21%
  Loan servicing   19%
  Lending technology services   13%
  Other   5%
      100%

1 Allocation is based on 12- month rolling revenue from Q4 2010 to Q3 2011.

Programs to the chequing account include: (i) our cheque program which is directed towards the personal and small business account holders of our financial services customers; and (ii) various other smaller service offerings directed towards account opening activities, identity protection services and other enhancement services, including services directed toward credit card holders. These smaller service offerings (excluding the component of enhancement and identity protection services that are integrated in the cheque order) currently represent a small component of revenues within this revenue category. In general, cheque order volumes in this area have historically declined as consumers and small businesses choose other payment methods.

Loan registration and recovery services are directed toward supporting the personal and commercial lending activities of our financial services customers. Services include the registration and management of data related to secured lending for both personal and real property loans as well as recovery services related to both secured and unsecured lending activities. The largest service areas within this revenue category are registration services which currently account for approximately 55% to 65% of revenue and recovery services which account for approximately 25% to 35% of revenue. In both instances, loans relating to vehicle purchases are a significant driver of activity and as such can be variable. In general, registration services are impacted by both economic cyclicality and seasonality, while recovery services are, in general, counter cyclical. Other services within this revenue category include mortgage discharge services and various search-related services, both of which we do on behalf of our financial institution customers.

Loan servicing programs include student loans administration services offered to financial institutions and governments and credit card servicing offered to card issuers.  The student loans offerings currently account for approximately 75% to 85% of revenues within this revenue category.

Lending technology services include services directed towards mortgage markets in both Canada and, more recently with the acquisition of Mortgagebot in April 2011, the United States. As well, we offer technology products and services in both countries directed towards leasing, commercial lending and small business lending. Revenues related to the mortgage area currently represent approximately 85% to 95% of the revenue within this category and within this area approximately 65% to 75% are transaction based fees related to Canadian mortgage origination. Mortgage origination fees can be variable and are impacted by many factors including the economy, the housing market and interest rates, among others.

Other revenues include a number of smaller service offerings that are primarily outsourced activities we perform on behalf of a variety of customers including non-financial services customers.

Revenue - Third Quarter and Year-to-Date

Consolidated revenue for the third quarter of 2011 was $186.3 million, an increase of $22.0   million, or 13.4%, compared to the same quarter in 2010. For the first nine months of 2011, consolidated revenue was $540.9 million, an increase of $53.7 million, or 11.0%, compared to the same period in 2010.  The increases were primarily due to the inclusion of ASSET acquired January 18, 2011 and Mortgagebot, acquired April 12, 2011, with both increases and decreases in other service areas as described below.

Services delivered by the Business are subject to seasonality, including fees earned in connection with mortgage origination services and automobile loan registration services, which are typically stronger in the second and third quarters than in the first and fourth quarters.

(in thousands of Canadian dollars, unaudited)

       Quarter ended September 30,     Nine months ended September 30, 
      2011 2010 2011 2010
Revenue             
  Programs to the chequing account     $ 74,095 $ 72,994 $ 222,564 $ 220,819
  Loan registration and recovery services     42,002 29,646 121,417 85,736
  Loan servicing      32,426 32,738 97,771 92,772
  Lending technology services     29,026 19,392 70,883 57,334
  Other1     8,726 9,549 28,308 30,580
      $ 186,275 $ 164,319 $ 540,943 $ 487,241

1 Excluded from the amounts reported are discontinued operations

Programs to the chequing account revenue for the third quarter of 2011 was $74.1 million, an increase of $1.1 million, or 1.5%, compared to the same quarter in 2010. Revenue from this service area for the first nine months of 2011 was $222.6 million, an increase of $1.7 million, or 0.8%, compared to the same period in 2010.  Revenue for the third quarter of 2011 benefitted from a recovery in order volume previously impacted by the postal strike in the second quarter of 2011 and from the continued positive impact of higher average order values, partially offset by volume decreases.  The modest increase in the first nine months of 2011 was also primarily attributable to program changes and product and service enhancements that provided increased average order values partially offset by cheque order volume reductions.  Management believes that the long-term historical trend related to current cheque order decline is relatively unchanged and continues to be in the low single digit range, however, there has been more volatility in order volumes in recent periods.

Loan registration and recovery services revenue for the third quarter of 2011 was $42.0 million, an increase of $12.4 million, or 41.7%, compared to the same quarter in 2010.  Revenue for the nine months ended September 30, 2011 was  $121.4 million, an increase of  $35.7 million, or 41.6%, compared to the same period in 2010.  In both periods, this increase was due primarily to the inclusion of ASSET, acquired on January 18, 2011.  Volumes in this area can be variable due to changes in the economy, changes in the auto and auto lending market and seasonality. Typically, this service area experiences stronger volumes during the second and third quarters as compared to the first and fourth quarters as consumers more frequently purchase and finance cars in the spring and summer. Generally, the recovery fees related to ASSET have been as expected.

Loan servicing programs revenue for the third quarter was $32.4 million, a decrease of $0.3 million, or 1.0%, compared to the same quarter in 2010. Transaction revenue from student loan administrative services, which comprises the largest portion of revenues within this service area, was relatively unchanged for both periods as compared to 2010. For the first nine months of 2011, revenue was $97.8 million, an increase of $5.0 million, or  5.4% compared to the same period in 2010.  The majority of the year-to-date revenue increase in this service area is attributed to the credit card servicing area, and in turn, primarily related to specific customer initiatives that increased both revenues and expenses with minimal impact on profitability.   Volumes in this area are expected to be relatively stable and modestly growing in the short-term and cost management activities are being directed towards lowering the impact of reduced pricing and fees related to particular customers, including reduced fees we will earn as one of our customers integrates the servicing of their portfolio into that of another one of our customers.

Lending technology services revenue for the third quarter of 2011 was $29.0 million, an increase of $9.6   million, or 49.7%, compared to the same quarter in 2010. For the first nine months of 2011, revenue from this service area was  $70.9 million, an increase of $13.5 million, or 23.6% compared to the same period in 2010.   The increase during the third quarter of 2011 was largely due to the inclusion of Mortgagebot partially offset by reduced fees in other areas.  Fees related to origination volumes were impacted by the repatriation by a customer of certain services we historically performed for them.  For the nine-month period, the net revenue increase was due to the inclusion of Mortgagebot, partially offset by reduction in several other areas.  In general, industry analysts expect the Canadian housing markets to be relatively stable through 2012.

Other revenue for the third quarter of 2011 was $8.7 million, as compared to $9.5 million for the same period in 2010.  For the first nine months of 2011, revenue within this category was $28.3 million, as compared to $30.6 million for the same period in 2010.  In general, we have recently experienced and expect to continue to experience some reductions in this area as certain customers repatriate certain outsourced activities.  On October 7, 2010, the Business sold a non-strategic component of its contact centre business and entered into a transition agreement with the buyer, which expired on April 1, 2011.  The results of these operations were previously reported in this revenue category and have been presented as discontinued operations for the comparative periods presented.

Expenses1

On a consolidated basis, expenses of $140.1 million for the third quarter of 2011 increased by $11.9 million, or 9.3%, compared to the same quarter in 2010.  For the first nine months of 2011, consolidated expenses were $409.1 million, an increase of $39.5 million, or 10.7%, compared to the same period in 2010. The increase primarily reflects the inclusion of ASSET and Mortgagebot expenses and the ongoing costs associated with the transformation and integration activities, including in the technology area, partially reduced by cost management and other net savings, including reduced restructuring and acquisition-related expenses.

     Quarter ended September 30,    Nine months ended September 30, 
 (in thousands of Canadian dollars, unaudited)    2011 2010 2011 2010
Employee compensation and benefits 2   $ 57,810  $ 51,166  $ 165,057  $ 146,502
Non-compensation direct expenses 3   59,290 52,387 174,805 153,919
Other operating expenses 4   22,950 24,594 69,256 69,165
       $ 140,050  $ 128,147  $ 409,118  $ 369,586

1 Excluded from the reported amounts are the discontinued operations.
2 Employee compensation and benefits include acquisition-related costs such as retention and incentive payments related to the acquisition of Mortgagebot and are net of certain employee-related tax benefits and amounts capitalized related to software product development. Certain comparative figures have been reclassified and adjusted to conform to current period's presentation. There was no change in total expenses related to this reclassification.
3 Non-compensation direct expenses include materials, shipping, selling expenses and third party direct disbursements. Certain comparative figures have been reclassified and adjusted to conform to current period's presentation.  There was no change in total expenses related to this reclassification.
4 Other operating expenses include occupancy costs, communication costs, licensing fees, professional fees, contractor fees, transaction costs related to acquisitions and expenses not included in other categories. Certain comparative figures have been reclassified and adjusted to conform to current period's presentation. There was no change in total expenses related to this reclassification.    

Employee compensation and benefits costs of $57.8 million for the third quarter of 2011 increased by $6.6 million, or 13.0%, compared to the same quarter in 2010.  For the first nine months of 2011, employee compensation and benefits costs were $165.1 million, an increase of $18.6 million, or 12.7%, compared to the same period in 2010. The increase was primarily related to the inclusion of ASSET and Mortgagebot expenses, and a general increase in compensation levels, partially offset by apprenticeship program benefits. As well, the third quarter of 2010 included a restructuring charge related to transformation and integration activities. Additionally, we have been replacing contract labour (recorded as other operating expenses) with full-time staff as the nature and certainty of work within certain service areas mature.

Non-compensation direct expenses were $59.3 million for the third quarter of 2011, an increase of $6.9 million, or 13.2%, compared to the same quarter in 2010. For the first nine months of 2011, non-compensation direct expenses of $174.8 million, increased by $20.9 million, or 13.6%, compared to the same period in 2010. The increase is primarily attributable to the third party direct disbursements relating to the ASSET business.  In general, these expenses directionally change with revenue changes.

Other operating expenses for the third quarter of 2011 of $23.0 million, decreased by $1.6 million, or  6.7% compared to the same quarter in 2010 and for the first nine months of 2011, increased by $0.1 million, or 0.1%, to $69.3 million, compared to the same period in 2010.  The decrease in other operating expenses reflected decreases in several cost areas, including costs savings realized related to transformation and integration project initiatives.

EBITDA

EBITDA during the third quarter of 2011 was $46.2 million, an increase of $10.1 million, or 27.8%, compared to the same quarter in 2010. The majority of the increase was attributable to the acquisitions of ASSET and Mortgagebot and to the impact on EBITDA in the third quarter of 2010 of the restructuring charge and acquisition-related expenses.  EBITDA for the first nine months of 2011 was $131.8 million, an increase of $14.2 million, or 12.0%, compared to the same period of 2010, relatively consistent with the increase in revenue.  EBITDA for both the third quarter of 2011 and the first nine months of 2011 was reduced by acquisition-related costs of $0.6 million and $3.1 million, respectively, and for the third quarter and the first nine months of 2010, was reduced by a restructuring charge and acquisition-related expenses totalling $4.4 million.

Amortization of Capital and Non-acquisition Intangibles

Amortization of capital and non-acquisition intangible assets during the third quarter of 2011 increased by   $0.8 million, or 15.7% compared to the third quarter of 2010 and for the first nine months of 2011, increased by $2.5 million, or 17.0% compared to the first nine months of 2010.  These increases were primarily related to capital additions and the inclusion of the ASSET and Mortgagebot businesses.

Amortization of Intangibles from Acquisitions

Amortization of acquisition-related intangibles for the third quarter of 2011 increased by $4.1 million, and for the first nine months of 2011 increased by $8.5 million, as compared to the same periods in 2010 due to the addition of intangibles related to the acquisitions of ASSET and Mortgagebot.

Interest Expense

Interest expense for the third quarter of 2011 increased by $1.3 million, compared to the same quarter in 2010, and for the nine months ended September 30, 2011, increased by $3.5 million, compared to the first nine months of 2010, due to increased borrowings in relation to the acquisitions of ASSET and Mortgagebot.

Amortization and Fair Value Adjustment of Derivative Instruments

Interest-rate swaps

A net unrealized loss of $4.0 million  on interest-rate swaps was recognized in the third quarter of 2011 (Q3 2010 - net unrealized loss of $1.6 million) reflecting mark-to-market adjustments related to changes in market interest rates at September 30, 2011 as compared to June 30, 2011. Amounts for the nine months ended September 30, 2011 as well as the same periods in 2010 also include the amortization related to the cumulative gains and losses that were deferred prior to January 1, 2007 when hedge accounting was used by D+H.

These unrealized gains and losses are recognized in income because these interest-rate swaps are not designated as hedges for accounting purposes. 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 income as the related swaps mature.  The Company has historically held its derivative contracts to maturity.

Effective January 1, 2011, the Company's policy is to adopt hedge accounting prospectively on any new derivative instruments entered into subsequent to January 1, 2011.  As of September 30, 2011, the Company had not entered into any new interest-rate swaps and the fair value adjustments of the existing interest-rate swaps continue to be recognized in the Consolidated Statement of Income.

Foreign exchange forward contracts

During the third quarter of 2011, the Company entered into four foreign exchange forward contracts with one of its lenders, aggregating US $12.0 million.  In accordance with D+H's policy effective January 1, 2011 to adopt hedge accounting prospectively on any new derivative instruments entered into subsequent to January 1, 2011, these foreign exchange contracts have been designated as hedges in accordance with IFRS, for hedge accounting purposes, and the Company accounts for these hedges as cash flow hedges as per IAS 39. The fair value change of the hedging instrument (Currency Forwards), to the extent it is effective, is recorded in Other Comprehensive Income ("OCI"). The ineffective portion of the gain or loss on the hedging instrument is recognized in profit or loss.  During the third quarter of 2011, the fair value changes were recorded in OCI, as the hedging relationship was considered to be effective both at inception of these hedges and at the reporting date.

Income Tax Expense (Recovery)

In the third quarter of 2011, a non-cash income tax expense of $5.5 million was recorded (Q3 2010 -  $1.4 million recovery). The Company continues to benefit from certain tax losses and unamortized tax balances such that no current taxes are expected in 2011. Due to the corporate structure, certain available tax losses, and no tax instalment base, the Company does not expect to pay cash taxes in 2012. In 2013, we expect to pay 2012 taxes and commence regular tax instalments. The deferred tax expense was partially offset by a recovery related to changes in timing and permanent differences between tax and accounting balances. The income tax recovery for the first nine months included a tax recovery related to the recognition of a deferred tax asset attributable to losses of certain US subsidiaries that are now expected to be realized in connection with the acquisition of Mortgagebot as well as the recognition of a deferred tax asset related to intangible assets that are now expected to be realized as a consequence of the corporate conversion and an internal reorganization.

Net Income

Net income of $15.1 million for the third quarter of 2011 decreased by  $3.6 million, or 19.4%, compared to the same period in 2010.  For the first nine months of 2011, net income of $74.6 million increased by $7.8 million, or 11.7% compared to the same period in 2010.  The change in results in the third quarter of 2011 was primarily attributable to the impacts of the ASSET and Mortgagebot acquisitions, the changes in the tax status of the Business as a result of the conversion from an income trust to a corporation, the non-cash unrealized loss on interest-rate swaps and the various impacts of acquisition-related items as previously described.  For the nine-month period in 2011, net income increased primarily due to the factors described above as well to non-cash tax recoveries also as previously described.

Adjusted Net Income

Effective January 1, 2011, as a result of the conversion from an income trust structure to a corporate structure, the Business commenced using Adjusted net income as a measure for evaluating its financial results.  Adjusted net income is a non-IFRS financial measure.  See Non-IFRS Financial Measures for a more complete description of this term.  Periods prior to January 1, 2011, do not have a comparable measure for Adjusted net income.

Adjusted net income excludes both: (i) non-cash impacts of items such as mark-to-market gains and losses on derivative instruments, amortization of intangibles from acquisitions (and for the first nine months of 2011, an income tax recovery related to the recognition of a deferred tax asset attributable to losses of certain US subsidiaries that were not previously recognized and to tax recoveries related to the corporate conversion and IFRS adjustments); and (ii) other items of note such as acquisition-related costs referred to below and discontinued operations.  Adjusted net income was $26.2 million for the third quarter of 2011 and $83.8 million for the first nine months of 2011.   Net income is also adjusted for the tax impact of these adjustments to arrive at Adjusted net income.

Acquisition-related Costs

During the third quarter of 2011, the Corporation recorded acquisition-related costs of $0.6 million, which included certain retention and incentive payments related to Mortgagebot.   For the first nine months of 2011, acquisition-related costs were $3.1 million, which, in addition to the retention and incentive payments, also included transaction costs.

During the third quarter of 2010, the purchase accounting for the Resolve acquisition was finalized under Canadian GAAP. Under IFRS certain costs did not qualify for equivalent recognition. As such, acquisition-related costs of $2.3 million were recorded as part of continuing operations and $1.9 million (before taxes) was recorded as part of discontinued operations.

EIGHT QUARTER CONSOLIDATED STATEMENT OF INCOME - SUMMARY 1, 9
(in thousands of Canadian dollars, except per share amounts, unaudited)

                     
       IFRS  Canadian
GAAP
      2011 2010 2009
       Q3   Q2   Q1   Q4   Q3   Q2   Q1   Q4 
Revenue  $ 186,275  $ 185,120  $ 169,548  $ 162,474  $ 164,319  $ 167,093  $ 155,829  $ 151,521
Expenses2 140,050 137,023 132,045 133,018 128,147 123,319 118,120 114,467
EBITDA 2, 3 46,225 48,097 37,503 29,456 36,172 43,774 37,709 37,054
                     
Amortization of capital assets and non-acquisition intangibles 5,820 5,827 5,504 5,643 5,030 4,962 4,669 4,514
Amortization of intangibles from acquisitions 11,040 10,590 8,092 7,108 6,925 7,158 7,097 7,330
Interest expense  4,792 5,272 3,989 3,405 3,517 3,692 3,374 3,326
Amortization and fair value adjustment of derivative instruments4 3,991 1,227 (1,687) (2,796) 1,566 1,797 (1,370) (1,517)
Income tax expense (recovery) 5,522 1,717 (14,290) 3,448 (1,447) 395 904 (2,605)
Income from continuing operations 15,060 23,464 35,895 12,648 20,581 25,770 23,035 26,006
Income (loss) from discontinued operations, net of tax 5 - - 140 (620) (1,886) (531) (210) (405)
Net income $15,060  $ 23,464  $ 36,035  $ 12,028  $ 18,695  $ 25,239  $ 22,825  $ 25,601
Adjustments:                  
  Non-cash items:                  
    Amortization of intangibles from acquisitions 11,040 10,590 8,092          
    Amortization and fair value adjustment of derivative instruments 4 3,991 1,227 (1,687)          
  Other items of note:                  
    Acquisition-related items2 610 707 1,799          
    Discontinued operations, net of tax 5 - - (140)          
  Tax effect of above adjustments (excluding discontinued operations) 7   (4,465) (3,256) (2,133)            
  Tax effect of corporate conversion, acquisitions and IFRS adjustments 6   - (3,628) (13,509)            
Adjusted net income3    $ 26,236  $ 29,104  $ 28,457          
                     
Adjusted net income per share, basic and diluted 3, 8  $ 0.4429  $ 0.4974  $ 0.5346  n/m   n/m   n/m   n/m   n/m 
Net income per share, basic and diluted 8      $ 0.2542  $ 0.4010  $ 0.6769  $ 0.2260  $ 0.3512  $ 0.4741  $ 0.4288  $ 0.4809

 n/m = not measurable

1 The 2011 results include those of ASSET, effective from the date of acquisition of January 18, 2011 and those of Mortgagebot effective from the date of acquisition of April 12, 2011.  Certain comparative figures have been reclassified and adjusted to conform to the current period's presentation.
2 Expenses for 2011 include acquisition-related items such as transaction costs and certain retention and incentive payments related to the Mortgagebot acquisition and for 2010, a restructuring charge and acquisition-related costs totalling $4.4 million, recorded in the third quarter.
3 EBITDA and Adjusted net income are non-IFRS terms.  See Non-IFRS Financial Measures for a more complete description of these terms.  Periods prior to January 1, 2011, do not have a comparable measure for Adjusted net income due to the differences in taxation for D+H as an income trust prior to January 1, 2011 and as a corporation subsequent to that date.
4 Includes: (i) amortization of mark-to-market adjustment of interest-rate swaps relating to the amortization of cumulative net gains and losses that were deferred prior to January 1, 2007 when hedge accounting was used by the Company; and (ii) mark-to-market adjustments of interest-rate swaps that existed as at September 30, 2011 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 income.
5 The Business sold a non-strategic component of its contact centre business in October 2010 and entered into a transition agreement with the buyer, which expired on April 1, 2011.  The results of these operations are presented as discontinued operations for the comparative periods presented.
6 Adjustments for the second quarter of 2011 included, a non-cash income tax recovery related to losses within certain US subsidiaries that were not previously recognized, in connection with the acquisition of Mortgagebot.  Adjustments for the first quarter of 2011 included non-cash income tax recoveries recorded in connection with the conversion to a corporation and implementation of IFRS, among other items.
The following adjustments to net income are tax effected at their respective tax rates: (i) amortization of acquisition intangibles; (ii) amortization and fair value adjustment on derivative instruments; and (iii) acquisition-related costs.
Diluted Net income per share and Diluted Adjusted net income per share (non-IFRS term) reflect impacts of outstanding options.  If the option price is below the average market price during the period, then the options are not included in the dilution calculation.
9 With the adoption of IFRS, 2010 comparative figures have been restated.  The reconciliations from Canadian GAAP to IFRS for all four quarters of 2010 have been provided below:

                         
    Q1 2010     Q2 2010     Q3 2010     Q4 2010  
 
 
 
 
 
Cdn GAAP
Effect of
Transition 
to IFRS
 
 
IFRS
 
 
Cdn GAAP
Effect of
Transition 
to IFRS
 
 
IFRS
 
 
Cdn GAAP
Effect of
Transitio
to IFRS
 
 
IFRS
 
 
Cdn GAAP
Effect of
Transitio
to IFRS
 
 
IFRS
Revenue 1  $ 153,698  $ 2,131  $ 155,829  $ 164,319  $ 2,774  $ 167,093  $ 161,900  $ 2,419  $ 164,319  $ 160,457  $ 2,017  $ 162,474
Expenses 1 115,989 2,131 118,120 120,545 2,774 123,319 121,311 6,836 128,147 124,733 8,285 133,018
Restructuring Charges 2 - - - - - - 2,160 (2,160) - 6,268 (6,268) -
EBITDA 5 37,709 - 37,709 43,774 - 43,774 38,429 (2,257) 36,172 29,456 - 29,456
                         
Amortization of capital assets and non-acquisition intangibles 4,669 - 4,669 4,962 - 4,962 5,030 - 5,030 5,643 - 5,643
Amortization of intangibles from acquisitions 7,097 - 7,097 7,158 - 7,158 6,925 - 6,925 7,108 - 7,108
Interest expense  3,374 - 3,374 3,692 - 3,692 3,517 - 3,517 3,405 - 3,405
Amortization and fair value adjustment of derivative instruments (1,370) - (1,370) 1,797 - 1,797 1,566 - 1,566 (2,796) - (2,796)
Income tax expense (recovery) 3 661 243 904 603 (208) 395 (645) (802) (1,447) 2,620 828 3,448
Income from continuing operations 23,278 (243) 23,035 25,562 208 25,770 22,036 (1,455) 20,581 13,476 (828) 12,648
Income (loss) from discontinued operations, net of tax 4 (210) - (210) (531) - (531) (465) (1,421) (1,886) (620) - (620)
Net income  $ 23,068  $ (243)  $ 22,825  $ 25,031  $ 208  $ 25,239  $ 21,571  $ (2,876)  $ 18,695  $ 12,856  $ (828)  $ 12,028
Net income per unit, basic and diluted  $ 0.4333 $ (0.0046)  $ 0.4288  $ 0.4702  $ 0.0039  $ 0.4741  $ 0.4052 $ (0.0540)  $ 0.3512  $ 0.2415 $ (0.0156)  $ 0.2260

1 IFRS requires that uniform policies be used for like transactions and events throughout the Company.  The Company determined that revenue transactions related to loan registration and recovery services should be presented on the basis of gross amount billed to customers.  A subsidiary previously accounted for these transactions on a net basis.  With the conversion to IFRS, the subsidiary has aligned its treatment of these transactions with that of the Company and the effect is to increase revenue and expenses with no impact on net income.
2 Under IFRS, non-recurring items are not classified as separate line items.  The effect in the third and fourth quarters of 2010 was to reclassify the restructuring charges as expenses within relevant categories with no impact on net income.
3 The effect of transition to IFRS on income tax expense (recovery) relates to the tax rates used to calculate deferred tax asset and liabilities under Canadian GAAP versus IFRS.
4 During the third quarter of 2010, the purchase accounting for Resolve acquisition was finalized under Canadian GAAP. Under IFRS, certain costs did not qualify for the equivalent recognition.  Such costs amounted to $4,177 of which $2,257 was recorded as part of the continuing operations and $1,421 was recorded as part of the discontinued operations ($1,920 before taxes) for IFRS purposes.
5 EBITDA is a non-IFRS term.  See Non-IFRS Financial Measures for a more complete description of this term.

The Business has generally reported quarterly revenues that are relatively stable and growing when measured on a year-over-year basis, however more recent changes in the economic environment generally, the housing and mortgage markets and the auto lending markets specifically, have increased volatility. Measured on a sequential quarter-to-quarter basis, revenues can also vary due to seasonality and are generally stronger in the second and third quarters. The acquisition of the Resolve business resulted in a substantial increase in all reported balances since the acquisition on July 27, 2009, except per share amounts, which were additionally impacted by the issuance of 9,286,581 additional units of Davis + Henderson Income Fund in the third quarter of 2009 to fund the Resolve acquisition. Additionally, the acquisition of ASSET on January 18, 2011 and the acquisition of Mortgagebot on April 12, 2011 increased revenues and expenses. Per share amounts were also impacted by the issuance of 6,000,000 additional shares of Davis + Henderson Corporation in April 2011 to partially fund the acquisition of Mortgagebot.

Effective January 1, 2011, as a result of the conversion from an income trust structure to a corporate structure, the Business commenced using Adjusted net income as a measure for evaluating its results.  Adjusted net income is a non-IFRS financial measure.  See Non-IFRS Financial Measures for a more complete description of this term.  Periods prior to January 1, 2011, do not have a comparable measure for Adjusted net income.

Net income has been more variable as it has been affected by the variability in non-cash items such as mark-to-market adjustments on interest-rate swaps, amortization of intangibles from acquisitions and changes in other non-cash tax items.

CASH FLOW AND LIQUIDITY

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

Summary of Cash Flows
(in thousands of Canadian dollars, unaudited)

           Quarter ended September 30,     Nine months ended September 30, 
        2011 2010   2011 2010
Cash and cash equivalents provided by (used in):               
                 
OPERATING ACTIVITIES             
Net income from continuing operations       $ 15,060  $ 20,581    $ 74,419  $ 69,386
Depreciation and amortization of assets      16,860 11,955   46,873 35,841
Amortization and fair value adjustment of derivative instruments      3,991 1,566   3,531 1,993
Business combination adjustments      - 2,257   - 2,257
Difference in interest expense and cash interest paid      282 (894)   1,015 767
Non-cash income tax and options expenses      5,627 (1,447)   (6,897) (148)
        41,820 34,018   118,941 110,096
 Decrease (increase) in non-cash working capital items      1,036 2,789   (29,767) (17,128)
 Changes in other operating assets and liabilities and discontinued operations      1,130 (64)   2,467 1,369
Net cash from operating activities      43,986 36,743    $ 91,641  $ 94,337
                 
FINANCING ACTIVITIES             
Net change in long-term indebtedness        (15,000) (5,000)   169,505 (5,000)
Issuance costs, equity and debt      (103) -   (9,900) (2,564)
Proceeds from issuance of shares      - -   121,800 -
Distributions and dividends paid during the period      (18,362) (24,482)   (52,278) (73,446)
Net cash from (used in) financing activities      (33,465) (29,482)   229,127 (81,010)
                 
INVESTING ACTIVITIES             
Capital expenditures     (7,073) (7,079)   (24,724) (16,348)
Acquisitions      - 167   (292,993) 167
Net cash used in investing activities       (7,073) (6,912)   (317,717) (16,181)
Increase (decrease) in cash and cash equivalents for the period      3,448 349   3,051 (2,854)
Cash and cash equivalents, beginning of period      747 675   1,144 3,878
Cash and cash equivalents, end of period      $ 4,195  $ 1,024    $ 4,195  $ 1,024

Capital Expenditures

Total capital expenditures remained consistent for the third quarter of 2011 compared to the same period in 2010 and increased by $8.4 million to $24.7 million in the first nine months of 2011. Capital expenditures also include certain contract payments which relate to payment obligations under customer and partner contracts, including fixed contract or program initiation payments and annual payments payable over the life of the contract.  These contract payments reflect, among other things, the high degree of integration and sharing between D+H and its customers and partners of the many activities related to ordering, data handling, customer service, customer access and other activities.

The increase in capital expenditures over the nine-month period in 2010 primarily reflected increased integration and upgrade activities, consistent with the higher capital spend commencing in the latter part of 2010, and investing in the building of technology products and capability.

The Business' capital program provides for continued expenditures to be funded by cash flows from operations.

Dividends

Consistent with the announcement in 2010 of our intention to pay quarterly dividends commencing in 2011 at an initial annualized amount of $1.20 per share, D+H paid approximately $0.30 per share during each of the first and second quarters of 2011. For the third quarter of 2011, D+H paid $0.31 per share as it increased its target annualized dividend amount by 4 cents to $1.24 per share effective for shareholders of record as of August 31, 2011, paid on September 30, 2011.

For the third quarter of 2010, both cash distributions declared and paid were $0.4599 per unit ( $24.5 million) and for the first nine months of 2010, both cash distributions declared and paid were $1.3797 per unit ( $73.4 million).

Dividends payable by D+H to its shareholders are recorded when declared.  Actual dividends declared will be subject to the discretion of the D+H Board of Directors and may vary from the intentions stated.  Among other items, in determining actual dividends declared, the Board of Directors will consider the financial performance, capital plans, acquisition plans, expectations of future economic conditions and other factors.

As at September 30, 2011, and November 8, 2011, 59,233,373 common shares were outstanding, reflecting the additional 6 million common shares issued in April 2011 to fund the Mortgagebot acquisition (as at September 30, 2010 - 53,233,373 trust units).

Changes in Non-Cash Working Capital and Other Items

(in thousands of Canadian dollars, unaudited)

    Quarter ended September 30, Nine months ended September 30,
    2011 2010 2011 2010
Decrease (increase) in non-cash working capital items   $ 1,036 $ 2,789 $ (29,767) $ (17,128)
Decrease (increase) in other operating assets and liabilities and discontinued operations   1,130 (64) 2,467 1,369
Decrease (increase)  in non-cash working capital and other items   $ 2,166 $ 2,725 $ (27,300) $ (15,759)

The net decrease in non-cash working capital items for the third quarter of 2011 was attributable to several items, including a decrease in trade receivables due to increased collections in the third quarter of 2011 related to the effect on payments from the postal strike during the second quarter of 2011 and an increase in trade payables, partially offset by an increase in prepaid expenses.

The Company expects to experience continued variability of non-cash working capital due to the nature and timing of services rendered in connection with the businesses recently acquired.

Acquisitions

On April 12, 2011, D+H completed the acquisition of Mortgagebot for a purchase price of US $232.7 million, excluding transaction costs. The acquisition was funded through the issuance of $121.8 million new equity (6 million common shares at $20.30 per share) and the balance from borrowings.   Mortgagebot is a leading provider of web-based mortgage point-of-sale solutions in the United States and provides a wide range of consumer direct, loan officer and branch and call centre mortgage origination solutions for over 1,000 banks and credit unions.

On January 18, 2011, D+H acquired the assets and operations of ASSET for $74.9 million, excluding transaction costs. This acquisition was funded by utilizing an extension of the Company's secured credit facilities.  ASSET is Canada's largest provider of technology based asset recovery and insolvency management solutions to the Canadian financial services industry.

For additional information on the acquisitions, refer to Note 8 of the consolidated financial statements of the Company for the three and nine months ended September 30, 2011.

Management has not yet completed its assessment and valuation of the assets acquired and liabilities assumed for these acquisitions, and as a result, the presented purchase information may change.

Cash Balances and Long-Term Indebtedness

At September 30, 2011, cash and cash equivalents totalled $4.2 million, compared to $1.1 million at December 31, 2010.

The long-term indebtedness is recorded on the Consolidated Statement of Financial Position, net of unamortized deferred financing fees of $6.5 million as at September 30, 2011. The long-term indebtedness as at September 30, 2011, before deducting unamortized deferred finance fees, was $374.0 million compared to $199.0 million at December 31, 2010.  During the third quarter of 2011, the Business made a repayment of $15.0 million on its credit facilities.

The long-term indebtedness includes drawings under a Seventh Amended and Restated Credit Agreement ("Credit Agreement") dated April 12, 2011 of $228.0 million.  Total committed senior secured credit facilities under this Credit Agreement at September 30, 2011 were $355.0 million, consisting of a revolving credit facility that matures on April 12, 2016.  The Business is permitted to draw on the revolving facility's available balance of $127.0 million to fund capital expenditures or for other general purposes.  The Credit Agreement contains a number of covenants and restrictions, including the requirement to meet certain financial ratios and financial condition tests.  The financial covenants include a leverage test, a fixed charge coverage ratio test and a limit on the maximum amount of income and capital that may be distributed by Davis + Henderson Corporation to its shareholders during each rolling four-quarter period.  The Company was in compliance with all of its financial covenants and financial condition tests as of the end of its latest quarterly period.  A copy of the Credit Agreement is available at www.sedar.com.

As at September 30, 2011, and November 8, 2011, long-term indebtedness also consists of fixed-rate Bonds of $80.0 million issued under a Second Amended and Restated Note Purchase and Private Shelf Agreement dated April 12, 2011 ("Note Purchase Agreement"), which include $50.0 million issued under the senior secured Note Purchase Agreement at a fixed-interest rate of 5.99% and $30.0 million at 5.17%, both maturing on June 30, 2017.  In addition, the Business also entered into a Note Purchase and Private Shelf Agreement pursuant to which the Company issued US$ 63 million of senior secured guaranteed notes at 5.59%, maturing on April 12, 2021 to partially fund the acquisition of Mortgagebot.

The Bonds rank equally in all respects with amounts outstanding under the Credit Agreement, any related hedging contracts and cash management facilities and benefit from the same financial covenants that exist under the Credit Agreement described above.  The Note Purchase Agreements are available at www.sedar.com.

To reduce liquidity risk, management has historically renewed the terms of the Company's long-term indebtedness in advance of its maturity dates and the Company has maintained financial ratios that are conservative compared to financial covenants applicable to the financing arrangements.  To enhance its liquidity position, in prior years the Company has made numerous voluntary payments on its outstanding long-term indebtedness and a portion of its committed credit facilities remain undrawn.

As at September 30, 2011, and as at November 8, 2011, the Credit Agreement provides for an additional uncommitted credit arrangement of up to $150.0 million and the Note Purchase and Private Shelf Agreement provides for an additional uncommitted arrangement of up to US$ 37 million with the use of these arrangements subject to the prior approval of the relevant lenders with any fees, spreads and other additional terms to be negotiated at that time.

The Company has historically hedged against increases in market interest rates on certain of its debt by utilizing interest-rate swaps and more recently by issuing fixed rate long-term bonds. In respect of interest-rate swap hedge contracts with its lenders, as of September 30, 2011, the Company's borrowing rates on 41.7% of outstanding long-term indebtedness under the Credit Agreement are effectively fixed at the interest rates and for the time periods ending as outlined in the following table:

(in thousands of Canadian dollars, unaudited)

       
    Fair value of interest-rate swaps  
Maturity Date  Notional Amount Asset Liability Interest Rate ¹
  December 18, 2014 $25,000 $- $1,225 2.720%
  March 18, 2015 25,000 - 1,464 2.940%
  March 18, 2017 25,000 - 2,301 3.350%
  March 20, 2017 20,000 - 1,858 3.366%
   $ 95,000  $ -  $ 6,848  
         

1 The listed interest rates exclude bankers' acceptance fees and prime-rate spreads currently in effect.  Such fees and spreads could increase or decrease depending on the Company's financial leverage as compared to certain levels specified in the Credit Agreement.  As at September 30, 2011, the Company's long-term bank indebtedness was subject to bankers' acceptance fees of 2.25% over the applicable BA rate and prime rate spreads of 1.25% over the prime rate.

As at September 30, 2011, the Company would have to pay the fair value of $6.8 million if it were to close out all of the interest-rate swap contracts as set out in the Consolidated Statement of Financial Position.  It is not the present intention of management to close out these contracts and the Company has historically held its derivative contracts to maturity.

As at September 30, 2011, the average effective interest rate on the Corporation's total indebtedness was approximately 4.8%.

The Company also enters into foreign exchange contracts to fix foreign exchange rates on its foreign currency transactions, which are relatively minor.  During the third quarter of 2011, D+H entered into four foreign exchange forward contracts with one of its lenders, aggregating US $12.0 million as follows:

(in thousands of Canadian dollars, unless otherwise noted, unaudited)

       
  Notional  Fair value of foreign exchange contracts  
 Maturity date  amount (USD) Asset Liability Exchange rate      
  December 15, 2011  $ 3,000  $ -  $ 42 1.0324
  March 15, 2012 3,000 - 42 1.0334
  June 15, 2012 3,000 - 43 1.0339
  September 14, 2012 3,000 - 42 1.0347
     $  12,000  $ -  $ 169  
         

Under these contracts, the Company is required to deliver the agreed US dollar amount and in return receive the contracted Canadian dollar amount set forth in each contract.  As at September 30, 2011, the fair value that the Company would have paid if it were to have closed out the foreign exchange contracts was $0.2 million.  It is not the present intention of management to close out these contracts.  The Company has historically held its derivative contracts to maturity. These foreign exchange contracts have been designated as hedges in accordance with IFRS, for hedge accounting purposes.

D+H believes that its customers, suppliers and lenders, while impacted by economic volatility, will continue to operate with the Company on similar terms to those currently in place.  As well, while the Company's products and services may be impacted by the changing economic environment, the Company expects to remain profitable and generate positive cash flows.

Cash flows from operations, together with cash balances on hand and unutilized term credit facilities are expected to be sufficient to fund the Business' operating requirements, asset expenditures, contractual obligations and anticipated dividends.

NON-IFRS FINANCIAL MEASURES

The information presented within the tables in this MD&A include certain adjusted financial measures such as "EBITDA" (Earnings before interest, taxes, depreciation and amortization), "Adjusted net income" (net income before certain non-cash charges and certain items of note such as acquisition-related expenses and discontinued operations), and "Adjusted net income per share", all of which are not defined terms under IFRS. These non-IFRS financial measures are derived from, and should be read in conjunction with, the Consolidated Statements of Income. See the reconciliation of EBITDA and Adjusted net income to the most directly comparable IFRS measure in the "Operating Results" section of this MD&A.

Management believes these supplementary disclosures provide useful additional information related to the operating results of the Corporation. Management uses these subtotals as measures of 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, D+H's method of calculating each balance may not be comparable to calculations used by other companies bearing the same description.

EBITDA

In addition to its use by management as an internal measure of financial performance, EBITDA is used to measure (with adjustments) compliance with certain financial covenants under the Company's credit facility. EBITDA is also widely used by D+H and others in assessing performance and 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 Net Income and Adjusted Net Income per Share

Effective January 1, 2011, as a result of the conversion from an income trust structure to a corporate structure, the Business commenced using Adjusted net income and Adjusted net income per share as a measure for evaluating its results.  Periods prior to January 1, 2011, do not have a comparable measure.

Adjusted net income is used as a measure of internal performance similar to net income, but is calculated after removing the impacts of certain items that are non-regularly recurring such as acquisition-related expenses, discontinued operations and certain non-cash items such as amortization of intangibles from acquisitions and mark-to-market adjustments of interest-rate swaps. These items are excluded in calculating Adjusted net income as they are not considered indicative of the financial performance of the Business for the period being reviewed.

CHANGES IN ACCOUNTING POLICIES

The Company actively monitors developments in standards as issued by the IASB and the Canadian Accounting Standards Board ("AcSB"), as well as regulatory developments as issued by the Canadian Securities Administrators ("CSA").

As previously described, effective January 1, 2011, the Company's policy is to adopt hedge accounting prospectively on any new derivative instruments entered into subsequent to January 1, 2011.

Foreign Exchange Forward Contracts

Each of the Company's existing currency forwards has been designated in its entirety at inception to hedge a set amount of the forecasted cash inflows.  The Company accounts for this hedge as a cash flow hedge as per IAS 39. The fair value change of the hedging instrument (Currency Forwards), to the extent it is effective, is recorded in other comprehensive income ("OCI"). The ineffective portion of the gain or loss on the hedging instrument is recognized in profit or loss.

In respect of each hedging relationship, at the end of each reporting date during the term of that hedging relationship, the balance in accumulated other comprehensive income ("AOCI") associated with the hedged item will be adjusted to the lesser of the following (in absolute amounts):

(i) the cumulative gain or loss on the hedging instrument from inception of the hedge; and

(ii) the cumulative change in fair value (present value) of the expected future cash flows on the hedged net cash inflows from inception of the hedge.

To the extent that (i) is greater than (ii), there will be ineffectiveness and this will be recognized in the income statement in the respective reporting period.

At inception and during the life of the hedging relationship, an eligible hedge is expected to be highly effective in offsetting the changes in the hedging instrument's fair value and the variability in cash flows attributable to the hedged item. D+H will conclude that the hedge is effective if changes in the fair value of the currency forward are between 80% and 125% of the present value of the changes in the cash flows of the hedged cash-flows attributable to changes in designated forward foreign exchange rate.

D+H will assess prospective effectiveness at the inception of each hedge, and will perform prospective and retrospective testing on each outstanding hedge at the end of every reporting period.  All effectiveness testing will be performed using regression analysis.  At each reporting date subsequent to the inception of the hedge, the regression analysis performed for demonstrating effectiveness retrospectively will also be used for assessing effectiveness prospectively.

Interest-rate swaps

As of September 30, 2011, the Company had not entered into any new interest-rate swaps and the mark-to-market adjustments of the existing interest-rate swaps continue to be recognized in the Consolidated Statement of Income.

Adoption of IFRS

Commencing January 1, 2011, the Corporation's financial statements have been prepared in accordance with IFRS, with 2010 comparative figures restated to conform to IFRS.

IFRS implementation plan

The Company has completed the final phase of its IFRS implementation plan.  The implementation project consisted of three primary phases:  (1) Scoping and Diagnostic Phase, (2) Impact Analysis and Design Phase, and (3) Implementation and Review Phase.  As part of this transition plan, the Company completed the following:

  • Performed a detailed analysis of the current accounting policies and practices with all relevant IFRS standards and applicable interpretations;
  • Made accounting policy choices, including those under IFRS 1, First-Time Adoption of International Financial Reporting Standards ("IFRS 1");
  • Identified and implemented changes to existing accounting policies, data systems, business processes, internal controls over financial reporting and disclosure controls;
    • These changes were adequately tested prior to reporting for the first quarter of 2011.
    • We have completed the design, implementation and documentation of the internal controls over the IFRS changeover process by applying our existing control framework.  All accounting policy selections and changes and transitional impacts to the financial statements were subject to review by senior management and the Audit Committee of the Board of Directors.

Some of the key differences identified that were applicable to the Company between Canadian GAAP and IFRS for the opening Consolidated Statement of Financial Position include accounting for business combinations, change in tax rates used to calculate deferred income tax assets and liabilities and recognition of vested past service costs. The differences identified did not have significant effects on the business functions of the Company.

IFRS 1 Exemptions 

Upon evaluation of the options under IFRS 1, D+H elected to use the following exemptions:

Business Combinations

A first-time adopter of IFRS may elect not to apply IFRS 3 retrospectively to business combinations that occurred before the date of transition to IFRSs.  The retrospective basis would require restatement of all business combinations that occurred prior to the transition date.  The Company has elected not to apply IFRS 3 retrospectively to business combinations that occurred prior to the transition date and such business combinations will not be restated.  As a result of applying these exemptions, except as required under IFRS 1, any goodwill arising on such business combinations before the transition date was not adjusted from the carrying value previously determined under Canadian GAAP.

Fair value as deemed cost

IFRS 1 permits measuring, at the date of transition, an item of property, plant and equipment or intangible assets that meet the criteria specified in IAS 38 at either its fair value and using those amounts as deemed cost, or using the historical valuation under previous GAAP.  The Company continues to apply the cost model to property, plant and equipment and intangible assets and did not restate to fair value under IFRS.  The Company continues to use the historical basis under Canadian GAAP as deemed cost under IFRS at transition date.

Employee Future Benefits

A first-time adopter of IFRS may elect to recognize all cumulative actuarial gains and losses at the date of transition to IFRS, even if it uses the corridor approach for future actuarial gains and losses.  The Company elected to apply the exemption at transition date.

Key Differences Identified Between Canadian GAAP and IFRS

The key differences identified by the Company compared to the accounting policies under Canadian GAAP are as follows (Refer to Note 24 of the Corporation's financial statements for the three and nine months ended September 30, 2011 which contains reconciliations and descriptions of the effect of the transition from Canadian GAAP to IFRS on equity, earnings and comprehensive income including line-by-line reconciliations of the statement of financial position as at September 30, 2010 as well as statement of income for the three and nine months ended September 30, 2010):

Business Combinations

As described above, the Company has elected under IFRS 1 not to apply IFRS 3 Business Combinations retrospectively to business combinations that occurred prior to the transition date of January 1, 2010.

Employee Future Benefits

Cumulative gains and losses: The Company has elected under IFRS 1 to recognize all cumulative gains and losses related to employee benefits deferred under Canadian GAAP in opening retained earnings at the transition date.

Past service costs:  Under IFRS, if past service cost entitlements are not conditional on future service and thus vest immediately, then the expense and the change in the obligation are recognized in full immediately.  Under Canadian GAAP, liabilities and expenses for both vested and unvested past service cost are amortized on a straight-line basis over the remaining service period of the employees.

Income Taxes

For the periods prior to January 1, 2011, prior to the conversion of the income trust to a corporate structure, IAS 12 requires that current and deferred tax assets and liabilities are measured at the tax rate applicable to undistributed profits until such time that the distribution becomes payable.  Canadian GAAP allows an entity to anticipate future distributions, provided certain conditions are met, and therefore uses the tax rate applicable to distributed profits.  Under the tax rules applicable to income trusts, distributions from a unit trust are taxed at corporate tax rates whereas undistributed income is taxed at the top marginal individual income tax rate.  As such, the net deferred tax liability of the flow-through entities must be recorded under IFRS at the top marginal tax rate for individuals in Ontario, which is approximately 46.4%, as opposed to the corporate tax rate, which is less than 30%.

Impact on internal controls over financial reporting and disclosure controls

The Company completed the assessment of the impact of the conversion to IFRS on internal controls over financial reporting and disclosure controls and determined that its current information technology infrastructure, data systems and reporting capabilities are sufficient to support the Company during and after transition to IFRS.

Future Accounting and Reporting Changes

The Company will continue to monitor changes to IFRS in the upcoming periods. The IFRS standard-setting bodies have significant ongoing projects that could impact the IFRS accounting policies that D+H has selected. In particular, there may be additional new or revised standards in relation to revenue recognition, consolidation, financial instruments, hedge accounting, discontinued operations, leases and employee benefits. We have implemented processes to ensure that potential changes to the IFRS are monitored, evaluated and implemented in a timely manner.

DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

The Corporation and its subsidiaries have designed and maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in filings made pursuant to Multilateral Instrument 52-109 is recorded, processed, summarized and reported within the time periods specified in the Canadian Securities Administrators' rules and forms.

The Corporation and its subsidiaries have also designed and maintain a set of internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with IFRS for periods effective January 1, 2011.

D+H management has limited its certification with respect to the scope of the design of disclosure controls and procedures and internal control over financial reporting to exclude controls, policies and procedures of the ASSET business acquired on January 18, 2011 and the Mortgagebot business acquired on April 12, 2011.

The following is a summary of certain financial information relating to the ASSET and Mortgagebot businesses:

    As at September 30, 2011
Assets    
  Current assets    $16,079
  Capital assets and Non-acquisition intangible assets   2,739
    18,818
Liabilities    
  Current liabilities   11,060
     
     $11,060
     
  Commitments    $1,789
     
    Three months ended
September 30, 2011
     
  Revenue    $21,436
  Expenses   14,501
  Amortization    309

Except for the acquisition of Mortgagebot, there have been no other changes in the Company's internal controls over financial reporting during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

BUSINESS RISKS

For a comprehensive discussion of the business risks, refer to the Company's most recently filed Annual Information Form available on SEDAR at www.sedar.com. In connection with the acquisition of Mortgagebot, for a comprehensive discussion of the business and business risks refer to the Company's Prospectus dated April 6, 2011 available on SEDAR at www.sedar.com. Other than the risks related to Mortgagebot referred to above, risks and uncertainties related to the Corporation have not changed since the filing of the 2010 Annual MD&A and the Annual Information Form.

OUTLOOK

D+H's long-term financial objective is to deliver sustainable and growing earnings through continued organic revenue growth and by way of strategic acquisitions. In January and April 2011, respectively, the Company completed the acquisitions of ASSET and Mortgagebot and these acquisitions will increase revenues and expenses of future periods as compared to previous periods. The acquisitions also provide further revenue diversification and support our long-term strategy.

Additionally, in the immediate future, we will focus on executing our organic growth initiatives, integrating the Business and continuing to diligently manage costs through our transformational and integration initiatives.  Beyond the immediate term, 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 our Business through a combination of organic initiatives, partnering with third parties and by way of selective acquisitions. Our organic initiatives are many and include: (i) the ongoing enhancement and evolution of programs to the chequing and credit card accounts through the addition of value-added service enhancements; (ii) the expansion of our current services within the student lending, commercial and personal lending areas (including the mortgage, credit card and personal property markets); (iii) selling and delivering our lending technology services to new customers; and (iv) combining the capabilities of D+H together with those of the recently acquired businesses to develop new service offerings for our financial institution customers. Our acquisition strategy focuses on acquiring companies that extend or add to the services that we provide within the financial services marketplace.  Our acquisition plans may continue to involve extending beyond the Canadian market consistent with the expansion strategies of our major Canadian customers.

With the inclusion of several new service areas over the last several years, we expect to continue to experience some level of increase in variability in year-over-year quarterly revenues, earnings and cash flows, due to, among other items: (i) volume variances within the lien registration and mortgage origination service areas; (ii) variability in professional services work; and (iii) fees and expenses incurred in connection with acquisitions and related business integration activities.  The Company believes that, in general, revenues in early 2010 benefited from stronger volumes as housing and mortgage markets, and auto and personal lending markets increased following earlier contractions. During the first nine months of 2011 and for the next several quarters, our results will compare to these earlier periods that featured strong activity in real estate, mortgage and other lending markets where activity is now expected to moderate. 

For 2011 and 2012, we anticipate that our capital spending will be in the range of $32.0 million - $35.0 million and $35.0 million to $40.0 million, respectively, including the capital requirements for ASSET and Mortgagebot.

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.  These forward-looking statements are subject to important assumptions, including the following specific assumptions: the ability of D+H to meet its revenue and EBITDA targets; general industry and economic conditions; changes in D+H's relationship with its customers and suppliers; pricing pressures and other competitive factors; the anticipated effect of the acquisition of Mortgagebot on the financial performance of D+H; and the expected benefits arising as a result of the acquisition of Mortgagebot. 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 the actual results, performance or achievements of the Business, or developments in D+H's 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 cheques by consumers; the Company's dependence on a limited number of large financial institution customers 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; 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 incorporated by reference 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 and the documents incorporated by reference herein are qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company.

ADDITIONAL INFORMATION

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

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION     
 (in thousands of Canadian dollars, unaudited)         
         
     
    September 30, 2011   December 31, 2010
         
ASSETS         
Cash and cash equivalents  $   4,195  $   1,144
Trade and other receivables   85,946   63,902
Inventories   5,131   6,006
Prepayments    10,598   7,552
Total current assets    105,870   78,604
Deferred tax assets   46,076   31,079
Property, plant and equipment   32,891   32,289
Intangible assets   455,640   266,837
Goodwill    669,411   524,228
Total non-current assets    1,204,018   854,433
Total assets  $   1,309,888  $   933,037
         
LIABILITIES         
Trade payable and accrued liabilities $   90,824  $   79,569
Dividend (distribution) payable     -   8,161
Provisions   4,404   12,358
Deferred revenue   8,318   6,338
Total current liabilities    103,546   106,426
         
Loans and borrowings   367,573   196,215
Derivative liabilities held for risk management   7,017   3,403
Deferred revenue    9,633   9,226
Other long-term liabilities   8,722   7,290
Deferred tax liabilities    95,788   55,327
Total non-current liabilities    488,733   271,461
Total liabilities    592,279   377,887
         
EQUITY         
Capital   673,007    -
Trust units    -   595,859
Retained earnings (deficit)    30,442   (40,623)
Accumulated other comprehensive income (loss)    14,160   (86)
Total equity   717,609   555,150
         
Commitments        
Total liabilities and equity  $   1,309,888  $   933,037
         
         

CONSOLIDATED STATEMENTS OF INCOME               
(in thousands of Canadian dollars, except per share amounts, unaudited)               
                 
   Three months ended     Nine months ended 
    September 30, 2011   September 30, 2010   September 30, 2011   September 30, 2010
Revenue   $  186,275  $  164,319  $  540,943  $  487,241
Employee compensation and benefits    57,810   51,166   165,057   146,502
Non-compensation direct expenses    59,290   52,387   174,805   153,919
Other operating expenses   22,950   24,594   69,256   69,165
    46,225   36,172   131,825   117,655
                 
Depreciation of property, plant and equipment   2,570   2,391   7,504   6,751
Amortization of intangible assets   14,290   9,564   39,369   29,090
Results from operating activities    29,365   24,217   84,952   81,814
                 
Finance expenses:                 
Amortization and fair value adjustment of derivative instruments    3,991   1,566   3,531   1,993
Interest expense    4,792   3,517   14,053   10,583
Income from continuing operations before income tax     20,582   19,134   67,368   69,238
                 
Income tax expense (recovery)   5,522   (1,447)   (7,051)   (148)
Income from continuing operations    15,060   20,581   74,419   69,386
                 
Income (loss) from discontinued operations, net of taxes      (1,886)   140   (2,627)
Net income   $  15,060  $  18,695  $  74,559  $  66,759
Net income per share (unit) from continuing operations, basic and diluted   $  0.2542  $  0.3866  $  1.3053  $  1.3034
Net income (loss) per share (unit) from discontinued operations, basic and diluted   $    -   $  (0.0354)  $  0.0025  $  (0.0493)
Net income per share (unit), basic and diluted   $  0.2542  $  0.3512  $  1.3077  $  1.2541
                 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                 
 (in thousands of Canadian dollars, unaudited)                 
     Three months ended     Nine months ended 
      September 30, 2011   September 30, 2010   September 30, 2011   September 30, 2010
                   
Net income  $ 15,060 $ 18,695 $ 74,559 $  66,759
                   
Other comprehensive income:                 
Amortization of mark-to-market adjustment                
 of derivative instruments      52   86   344
Translation gain    13,493   -   14,160   -
Total comprehensive income  $ 28,553 $ 18,747 $ 88,805 $ 67,103
                 

 

 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY 
(in thousands of Canadian dollars, unaudited)                     
                     
          Three months ended September 30, 2011
    Capital   Translation reserve   Unrealized gain
(loss) on cash flow
hedges
  Retained earnings
(deficit)
  Total equity
                     
Balance at June 30, 2011 $ 672,902 $ 667 $  - $ 33,744 $ 707,313
Net income for the period   -   -   -   15,060   15,060
Translation gain   -   13,493   -   -   13,493
Amortization of mark-to-market adjustment
  of derivative instruments
 
 
 
-
 
 
 
-

 

-

 

-

 

-
Dividends   -   -   -   (18,362)   (18,362)
Options    105   -   -   -   105
Balance at September 30, 2011 $ 673,007 $ 14,160 $  - $ 30,442 $ 717,609
                     
            Three months ended September 30, 2010
    Capital   Translation reserve   Unrealized gain
(loss) on cash flow
hedges
  Retained earnings
(deficit)
  Total equity
                     
Balance at June 30, 2010 $ 595,859 $  - $ (190) $ (22,382) $ 573,287
Net income for the period   -   -   -   18,695   18,695
Amortization of mark-to-market adjustment                    
  of derivative instruments   -   -   52   -   52
Distributions   -   -   -   (24,482)   (24,482)
Balance at September 30, 2010 $ 595,859 $ - $ (138) $ (28,169) $ 567,552
                     
            Nine months ended September 30, 2011
    Capital   Translation reserve   Unrealized gain
(loss) on cash flow
hedges
  Retained earnings
(deficit)
  Total equity
                     
Balance at January 1, 2011 $ 595,859 $ - $ (86) $ (40,623) $ 555,150
Net income for the period   -   -   -   74,559   74,559
Translation gain   -   14,160   -   -   14,160
Amortization of mark-to-market adjustment                    
  of derivative instruments   -   -   86   -   86
Capital reduction pursuant to the Arrangement    (40,623)   -   -   40,623   -
Share issuance   117,617   -   -   -   117,617
Dividends   -   -   -   (44,117)   (44,117)
Options   154   -   -   -   154
Balance at September 30, 2011 $ 673,007 $ 14,160 $ - $ 30,442 $ 717,609
                     
                  Nine months ended September 30, 2010
    Capital   Translation reserve   Unrealized gain
(loss) on cash flow
hedges
  Retained earnings
(deficit)
  Total equity
                     
Balance at January 1, 2010 $ 595,859 $   - $ (482) $ (21,482) $ 573,895
Net income for the period   -   -   -   66,759   66,759
Amortization of mark-to-market adjustment                    
  of derivative instruments   -   -   344   -   344
Distributions   -   -   -   (73,446)   (73,446)
Balance at September 30, 2010 $ 595,859 $  - $ (138) $ (28,169) $ 567,552
                     
                     

 

CONSOLIDATED STATEMENTS OF CASH FLOWS                 
(in thousands of Canadian dollars, unaudited)                 
                 
         Three months ended    Nine months ended
    September 30, 2011   September 30, 2010   September 30, 2011   September 30, 2010
                 
Cash and cash equivalents provided by (used in):                 
                 
OPERATING ACTIVITIES                 
Net income from continuing operations  $ 15,060 $ 20,581 $ 74,419 $ 69,386
Adjustments for:                
  Depreciation of property, plant and equipment    2,570   2,391   7,504   6,751
  Amortization of intangible assets    14,290   9,564   39,369   29,090
  Amortization of mark-to-market adjustment                 
    of derivative instruments    -   52   86   344
  Fair value adjustment of derivative instruments    3,991   1,514   3,445   1,649
  Business combination adjustments    -   2,257   -   2,257
  Finance costs    4,792   3,517   14,053   10,583
  Cash interest paid    (4,510)   (4,411)   (13,038)   (9,816)
  Non-cash income tax expense (recovery)    5,522   (1,447)   (7,051)   (148)
  Options expense    105   -   154   -
    41,820   34,018   118,941   110,096
                 
Changes in non-cash working capital items    1,036   2,789   (29,767)   (17,128)
Changes in other operating assets and liabilities   1,130   524   2,278   2,881
Cash flows from (to) discontinued operations      (588)   189   (1,512)
Net cash from operating activities    43,986   36,743   91,641   94,337
                 
FINANCING ACTIVITIES                 
Repayment of long-term indebtedness    (15,000)   (5,000)   (232,000)   (77,900)
Proceeds from long-term indebtedness    -   -   401,505   72,900
Issuance costs of long-term indebtedness    (103)   -   (4,439)   (2,564)
Issuance of shares    -   -   121,800   -
Issuance costs of shares    -   -   (5,461)   -
Dividends (distributions) paid    (18,362)   (24,482)   (52,278)   (73,446)
Net cash from (used in) financing activities    (33,465)   (29,482)   229,127   (81,010)
                 
INVESTING ACTIVITIES                 
Expenditures on property, plant and equipment    (1,912)   (2,496)   (5,859)   (4,437)
Expenditures on intangible assets    (5,161)   (4,583)   (18,865)   (11,911)
Acquisition of subsidiaries and acquisition adjustments    -   167   (292,993)   167
Net cash used in investing activities    (7,073)   (6,912)   (317,717)   (16,181)
                 
Increase (decrease) in cash and cash equivalents                
  for the period   3,448   349   3,051   (2,854)
Cash and cash equivalents, beginning of period    747   675   1,144   3,878
Cash and cash equivalents, end of period  $ 4,195 $ 1,024 $ 4,195  $ 1,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SOURCE Davis + Henderson Corporation

For further information:

Brian Kyle, Chief Financial Officer, Davis + Henderson Corporation, (416) 696-7700, extension 5690, brian.kyle@dhltd.com

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Davis + Henderson Corporation

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