Davis + Henderson Reports Second Quarter 2010 Results
TSX Stock Symbol: "DHF.UN".
Website: www.dhltd.com
TORONTO, Aug. 10 /CNW/ - Davis + Henderson ("D+H" or the "Business") today reported solid financial results for the three months ended June 30, 2010 including growth in revenue and Adjusted income. The growth compared to last year was primarily attributed to the inclusion of the operations of Resolve Business Outsourcing Income Fund ("Resolve"), which was acquired on July 27, 2009, as well as from the positive impacts on volumes attributed to an improved economy, including areas within our business that benefitted from stronger mortgage origination volumes.
Second Quarter Highlights
- Revenue was $168.7 million, an increase of $74.2 million, or 78.4%,
compared to the same quarter in 2009.
- EBITDA(1) was $43.1 million, an increase of $10.6 million, or 32.7%,
compared to the same quarter in 2009. The increase in EBITDA of 32.7%
relative to the increase in revenue of 78.4% reflected the inclusion
of acquired Resolve service offerings that contributed lower margins
as a percentage of revenues as compared to other D+H services.
- Adjusted income(1) was $34.4 million, an increase of $7.4 million, or
27.4%, as compared to the same quarter in 2009. Adjusted income(1)
per unit was $0.6462, an increase of 5.1%, compared to the same
quarter in 2009.
- Net income was $25.0 million, a year-over-year decrease of
$0.2 million, or 0.8%. Net income per unit was $0.4702, a decrease of
18.1% compared to the same quarter in 2009. The decrease in net
income and net income per unit as compared to the increase in
Adjusted income reflects the recording of non-cash expenses related
to mark-to-market adjustments on interest-rate swaps and the
amortization of acquisition intangibles related to the Resolve
acquisition, both of which are more fully described in the MD&A
below.
- Cash distributions paid for the second quarter of 2010 were $0.4599
per unit, unchanged from the same quarter in 2009.
Six-Month Highlights
- Revenue was $327.2 million for the first six months of 2010, an
increase of $144.1 million, or 78.7%, compared to the same period in
2009.
- EBITDA was $80.6 million for the first six months of 2010, an
increase of $19.6 million, or 32.2%, compared to the same period in
2009. The increase in EBITDA of 32.2% relative to the increase in
revenue of 78.7% reflected the inclusion of acquired Resolve service
offerings that contributed lower margins as a percentage of revenues
as compared to other D+H services.
- Adjusted income was $63.8 million for the first six months of 2010,
an increase of $13.9 million, or 27.9% as compared to the first six
months of 2009. Adjusted income(1) per unit was $1.1982, an increase
of 5.6%, compared to the same period in 2009.
- Net income was $48.1 million for the first six months of 2010, a
year-over-year increase of $3.6 million, or 8.2%. Net income per unit
was $0.9035, a decrease of 10.7% compared to the same period in 2009
and as described above, reflects non-cash expenses including
mark-to-market adjustments on interest-rate swaps and amortization of
intangible assets related to the Resolve acquisition. Net income per
unit was also impacted by the issuance of 9,286,581 additional units
of Davis + Henderson to fund the Resolve acquisition.
- Cash distributions paid for the first six months were $0.9198 per
unit, unchanged from the same period in 2009.
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(1) Davis + Henderson reports several non-GAAP measures, including EBITDA
and Adjusted income used above. Adjusted income is calculated as net
income, adjusted to remove the non-cash impacts of mark-to-market
gains and losses on derivative instruments, future income taxes and
amortization of intangibles from acquisitions. These items are
excluded in calculating Adjusted income as they are non-cash items
and are not considered indicative of the financial performance of the
Business for the period being reviewed. Any non-GAAP measures should
be considered in context with the GAAP financial presentation and
should not be considered in isolation or as a substitute for GAAP net
earnings or cash flow. Further, Davis + Henderson's measures may be
calculated differently from similarly titled measures of other
companies. See Non-GAAP Measures for a more complete description of
these terms.
Management Commentary
We are pleased with the results of the second quarter of 2010. Financially, we benefited from the inclusion of Resolve service offerings, stronger volumes related to services to the lending markets and from program enhancements and changes within our programs to the chequing account.
During the quarter, we continued to advance our strategy related to enhancing our service offerings and integrating our operations. Both of these initiatives are aimed at improving our delivery effectiveness for customers and are part of our goal of positioning D+H to grow in the future.
Also during the quarter, we renewed our credit facilities and completed the issuance of $50.0 million of seven year fixed-rate Bonds. With these financings completed, we are well positioned to continue to advance our strategic plans.
At the combined annual general and special meeting (the "Meeting") held on June 17, 2010, we received unitholder approval to convert to a corporation effective January 1, 2011 and we are executing against that plan. We also reiterated our intention to maintain distributions for the remainder of 2010 at an annualized rate of $1.84 per unit and commencing in 2011 to move to a quarterly dividend payout to owners at $1.20 per share annualized.
For a more detailed discussion of second quarter results and management's outlook, please see Management's Discussion and Analysis below.
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 Davis + Henderson's objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of Davis + Henderson 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 Davis + Henderson to meet its revenue and EBITDA targets; general industry and economic conditions; changes in Davis + Henderson's relationship with its customers and suppliers; pricing pressures and other competitive factors. Davis + Henderson has also made certain macroeconomic and general industry assumptions in the preparation of such forward-looking statements. While Davis + Henderson considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect.
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 Davis + Henderson'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 Fund'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 Fund'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 and investor interest in, and government regulations relating to, Income Trusts. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Forward-looking statements are based on management's current plans, estimates, projections, beliefs and opinions, and Davis + Henderson 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.
Conference Call
Davis + Henderson will discuss its financial results for the three months ended June 30, 2010 via conference call at 10:00 a.m. EST (Toronto time) on Wednesday, August 11, 2010. The number to use for this call is 647-427-7450 for Toronto area callers or 1-888-231-8191 for all other 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 1-800-642-1687 for all other callers, with Encore Password 88497636. The rebroadcast will be available until Wednesday, August 25, 2010. 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 Fund, including the Fund'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 second quarter of 2010 for the Davis + Henderson Income Fund (the "Fund" or the "Company" or the "Business" or "Davis + Henderson" or "D+H" or "we" or "our") should be read in conjunction with the MD&A in the Annual Report for the year ended December 31, 2009, dated March 2, 2010, and the attached interim unaudited consolidated financial statements. External economic and industry factors remain substantially unchanged from those described in the annual MD&A and the Fund's most recently filed Annual Information Form.
STRATEGY
Davis + Henderson 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 and related services for secured loan products and the delivery of leading technology solutions within the mortgage market. 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.
Davis + Henderson'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. The Business' financial goal is to deliver stable and modestly growing cash distributions to unitholders by targeting annual revenue growth in the range of 3% to 5%. The Business has three primary strategies to meet its objectives. These are to: (i) evolve and enhance the value of the cheque supply program and services to the chequing account; (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 Advanced Validation Systems ("AVS") in 2005, Filogix in 2006, Cyence in 2008 and Resolve in 2009, and by further enhancing our services and capabilities. As a result, we offer a diverse range of market-leading services.
Since December 2001, the initial public offering date of Davis + Henderson Income Fund, the Business has operated as a subsidiary of an Income Trust pursuant to its Declaration of Trust. In 2007, changes were made to the Income Tax Act that will require certain Income Trusts, including D+H, to be subject to taxes after fiscal 2010, similar to those paid by taxable Canadian corporations. At the meeting of unitholders held on June 17, 2010, D+H unitholders approved a proposal to convert from an income trust into a corporation effective January 1, 2011. Upon completion of the conversion, unitholders will receive on a tax deferred, roll-over basis, one share of the resulting public corporation for each unit held. The information circular in respect of the Meeting, which provided a detailed outline of the conversion, is available on SEDAR at www.sedar.com.
Independent of the conversion plan and as a result of the enacted tax changes, the Business will be subject to taxes commencing in 2011 that will reduce the amount of cash flow otherwise available for distribution. Our current intention is to pay quarterly distributions commencing in 2011 at an initial annualized rate of $1.20 per share. For the remainder of 2010, we intend to maintain our current annualized distributions at $1.84 per unit ($0.1533 per unit monthly). Subsequent to the conversion, distributions made by Davis + Henderson will be taxed as dividends rather than regular income as they are today. Investors that are taxed as individuals may be entitled to dividend tax credits which may enhance their after-tax yield and therefore significantly reduce the after-tax impact of the reduction in distributions.
Consistent with past practices, actual distributions will only be made to owners of record based upon a declaration by the Trustees. Among other items, in determining actual distributions, the Trustees will consider the financial performance, capital plans, acquisition plans, expectations of future economic conditions and other factors.
Notwithstanding the structural and distribution changes attributed to the changes to the law, the strategies and objectives of the Business will remain unchanged.
FINANCIAL INFORMATION PRESENTATION
Historically, the Business operated and reported upon two business segments, the "D+H Segment" and the "Filogix Segment". Subsequent to the completion of the Resolve acquisition in July 2009, the Business announced that it would move to a single integrated operation in order to better serve customers and maximize effectiveness. The Business is now managed along functional lines and operating decisions and performance assessment are aligned with these functions. As such, the Business reports as a single segment. Segmented data has been provided related to revenues pertaining to major service areas.
OPERATING RESULTS FOR THE SECOND QUARTER - CONSOLIDATED
The following table is derived from, and should be read in conjunction with, the Consolidated Statements of Income and includes non-GAAP measures. Management believes this supplementary disclosure provides useful additional information. See Non-GAAP Measures for a discussion of non-GAAP terms used. Effective July 27, 2009, the consolidated results include those of Resolve.
Consolidated Operating and Financial Results(1)
(in thousands of Canadian dollars, except per unit amounts, unaudited)
Three months ended Six months ended
June 30, June 30,
2010 2009 2010 2009
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Revenue $ 168,734 $ 94,557 $ 327,153 $ 183,086
Expenses 125,637 62,080 246,594 122,171
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EBITDA(2) 43,097 32,477 80,559 60,915
Amortization of capital
assets and non-acquisition
intangibles 5,003 3,679 9,709 7,498
Interest expense 3,692 1,787 7,066 3,534
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Adjusted income(2) 34,402 27,011 63,784 49,883
Amortization of mark-to-market
adjustment of interest-rate
swaps 103 136 292 272
Net unrealized loss (gain) on
derivative instruments(3) 1,694 (1,069) 135 (878)
Future income tax expense
(recovery) 416 (718) 1,003 (782)
Amortization of intangibles
from acquisitions 7,158 3,441 14,255 6,815
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Net income $ 25,031 $ 25,221 $ 48,099 $ 44,456
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Adjusted income per unit,
basic and diluted(2) $ 0.6462 $ 0.6146 $ 1.1982 $ 1.1351
Net income per unit, basic
and diluted $ 0.4702 $ 0.5739 $ 0.9035 $ 1.0116
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Three months ended Six months ended
June 30, June 30,
2010 vs. 2009 2010 vs. 2009
% change % change
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Revenue 78.4% 78.7%
EBITDA(2) 32.7% 32.2%
Adjusted income per unit(2) 5.1% 5.6%
Net income per unit -18.1% -10.7%
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(1) The results of the three and six months ended June 30, 2010 include
the results of the Resolve business.
(2) EBITDA and Adjusted income are non-GAAP terms. See Non-GAAP Measures
for a more complete description of these terms.
(3) The Business enters into derivative contracts to fix the interest
rates and foreign exchange rates on a significant portion of its
outstanding bank debt and foreign currency transactions, which are
relatively minor, respectively. For accounting purposes, these
derivative instruments do not qualify for hedge accounting treatment
and, accordingly, any change in the fair value of these contracts is
recorded through income. Provided the Business does not cancel its
derivative contracts prior to maturity, the amounts represent a non-
cash unrealized gain or loss that will subsequently reverse through
income. The Company has historically held its derivative contracts to
maturity.
Overview
D+H had solid operating performance in the second quarter of 2010. While the large year-over-year increases in revenues and expenses during both the second quarter and the first six months of 2010 were primarily due to the inclusion of Resolve, the Business also benefited from stronger origination services revenue and an increase in revenue from the cheque supply program. In various areas during the current year, we benefitted from an improved economy as compared to the same period in 2009. Additionally, the Business continued its integration activities, including activities related to the attainment of cost synergies. Revenue and Adjusted income increased and, on a per unit basis after reflecting the additional units issued in connection with the acquisition of Resolve, D+H's consolidated Adjusted income per unit was higher by 5.1% and 5.6%, respectively, for the second quarter and the six month periods of 2010 compared to 2009. Net income per unit for the second quarter and year-to-date 2010, was lower by 18.1%, and 10.7%, respectively, compared to the same periods in 2009, largely as a result of the increase in amortization of intangible assets recorded as part of the Resolve acquisition and the mark-to-market adjustment on interest-rate swaps, both non-cash items and both as more fully described below within the MD&A.
Revenue
(in thousands of Canadian dollars, unaudited)
Three months ended Six months ended
June 30, June 30,
2010 2009 2010 2009
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Revenue
Programs to the chequing
account $ 74,660 $ 72,972 $ 147,825 $ 144,531
Loan servicing 30,365 - 60,034 -
Loan registration
technology services 28,338 1,178 51,185 1,942
Lending technology services 20,852 18,619 37,942 32,821
Other 14,519 1,788 30,167 3,792
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$ 168,734 $ 94,557 $ 327,153 $ 183,086
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Revenue - Second Quarter and Year-to-Date
Consolidated revenue for the second quarter of 2010 was $168.7 million, an increase of $74.2 million, or 78.4%, compared to the same quarter in 2009. For the first six months of 2010, consolidated revenue was $327.2 million, an increase of $144.1 million, or 78.7%, compared to the same period in 2009. The increase in consolidated revenues is primarily attributable to the inclusion of revenues from Resolve. Revenue for both the three months and the six months ended June 30, 2010 also benefited from the positive impact of annual cheque program changes and stronger mortgage origination service fees. Services delivered by the Business are subject to seasonality, particularly relating to fees earned in connection with mortgage origination services and automobile loan registration services, which typically are stronger in the second quarter as compared to the first quarter, as was the case this year.
Revenue for the second quarter from programs to the chequing account was $ $74.7 million, an increase of $1.7 million, or 2.3%, compared to the same quarter in 2009. Revenue for the first six months from programs to the chequing account was $147.8 million, an increase of $3.3 million, or 2.3%, compared to the same period in 2009. The modest increase in both periods was primarily attributable to program changes and product and service enhancements. This increase was partially offset by a slight decline in overall volumes in the second quarter of 2010. Management believes that the long-term historical trend related to cheque order decline is relatively unchanged and continues to be in the low single digit range despite more recent volatility due to the changes in the economic environment.
Revenue for the second quarter of 2010 from loan servicing, which includes student loan administration services and credit card servicing was $30.4 million. There was no comparative revenue for the second quarter of 2009 as these services were part of the Resolve business acquired on July 27, 2009. Revenue from student loan administrative services, which comprise the largest portion of revenues within this service area, is expected to be relatively stable over the short-term with modestly growing volumes and new program initiatives being offset by reduced pricing related to particular contracts. The year-to-date results benefitted from strong performance incentives which can be earned under contracts within the service area.
Loan registration technology services revenue for the second quarter of 2010 was $28.3 million and for the first six months was $51.2 million. This service area includes the personal property search and registration ("PPSA") business acquired with the Resolve acquisition and the existing PPSA program operated by D+H. Volumes in this area can be variable, but in general would be expected to improve with an improving economic environment, particularly as it relates to servicing customers within the automotive area. This service area also experiences seasonality and generally has stronger volumes during the second quarter as compared to the first quarter as consumers typically purchase and finance cars in the spring and summer.
Revenue for the second quarter of 2010 from lending technology services, which includes services to the mortgage market and other credit markets was $20.9 million, an increase of $2.2 million, or 12.0%, compared to the same quarter in 2009. For the first six months of 2010, revenue from lending technology services was $37.9 million, an increase of $5.1 million, or 15.6%, compared to the same period in 2009. Growth was primarily related to increased mortgage origination service fees, which increased year-over-year by 26% and 28% respectively for the second quarter and the first six months, due to strong activity in the Canadian housing and mortgage markets, partially offset by reduced professional service revenues within the service area. In general, industry analysts expect a slowing of the housing and mortgage markets as compared to current activity.
Other revenue for the second quarter of 2010 of $14.5 million and $30.2 million for the first six months of 2010 is comprised of a number of smaller service offerings, the largest of which are contact centre services. Revenue within the contact centre services area is more variable due to changing customer initiatives and also will vary depending upon customer contract wins and losses, which are more common in these service areas compared to other D+H service areas.
The following pro forma table reflects management's estimate of the current relative size of each of the major service areas as a percentage of total revenue on an annualized basis:
Allocation of Revenue by Service Area(1) % Revenue
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Revenue
Programs to the chequing account 45%
Loan servicing 18%
Loan registration technology services 15%
Lending technology services 11%
Other 11%
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100%
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(1) Based on management's estimate using pro forma 2009 revenue.
Expenses - Second Quarter and Year-to-Date
On a consolidated basis, expenses for the second quarter of 2010 of $125.6 million increased by $63.6 million, or 102.4%, compared to the same quarter in 2009. Expenses for the first six months of 2010 were $246.6 million, an increase of $124.4 million, or 101.8%. The increase was primarily due to the inclusion of the Resolve expense base and to a lesser extent, the ongoing costs of integrating the businesses, partially offset by continued cost management activities and integration savings.
Three months ended Six months ended
June 30, June 30,
(in thousands of Canadian
dollars, unaudited) 2010 2009 2010(3) 2009
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Employee compensation and
benefits $ 51,271 $ 23,156 $ 103,642 $ 45,412
Non-compensation direct
expenses(1) 49,156 30,374 $ 94,236 $ 59,759
Other operating expenses(2) 20,582 6,830 $ 39,212 $ 13,549
Occupancy costs 4,628 1,720 $ 9,504 $ 3,451
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$ 125,637 $ 62,080 $ 246,594 $ 122,171
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(1) Non-compensation direct expenses include materials, shipping, selling
expenses and third party direct disbursements.
(2) Other operating expenses include communication costs, licensing fees,
professional fees and expenses not included in other categories.
(3) For the six months ended June 30, 2010, to be consistent with the
second quarter presentation, $1.5 million of other operating expenses
from Q1 2010 have been reclassified as Non-compensation direct
expenses. There was no change in total expenses related to this
reclassification.
Employee compensation and benefits costs of $51.3 million for the second quarter of 2010 increased by $28.1 million, or 121.4%, compared to the same quarter in 2009. For the first six months of 2010, employee compensation and benefit costs were $103.6 million, up $58.2 million, or 128.2% compared to the same period in 2009, with the increase primarily due to the inclusion of Resolve expenses for both reporting periods. Resolve service offerings, such as loan servicing, contact centre services and other process outsourcing services are more employee intensive than other D+H service areas.
Non-compensation direct expenses were $49.2 million for the second quarter of 2010, an increase of $18.8 million, or 61.8%, compared to the same quarter in 2009. For the first six months of 2010, these expenses were $94.2 million, an increase of $34.5 million, or 57.7% compared to the same period in 2009. The increase is mainly due to the inclusion of Resolve expenses. In general, these expenses directionally change with revenue changes, and as such increased in the second quarter due to some of the seasonality changes described above.
Other operating expenses were $20.6 million, an increase of $13.8 million, or 201.3% compared to the same quarter in 2009. For the first six months of 2010, other operating expenses were $39.2 million, an increase of $25.7 million, or 189.4% compared to the same period in 2009. These increases were primarily attributed to the inclusion of Resolve expenses and to a lesser extent, the ongoing costs of integration partially offset by cost management activities.
Occupancy costs for the second quarter of 2010 were $4.6 million, an increase of $2.9 million, or 169.1%, compared to the same quarter in 2009. For the first six months of 2010, occupancy costs were $9.5 million, an increase of $6.1 million, or 175.4%, compared to the same period in 2009. Increase in occupancy costs were mainly due to the inclusion of Resolve facilities, which as described above, are employee intensive service businesses.
EBITDA
EBITDA during the second quarter of 2010 was $43.1 million, an increase of $10.6 million, or 32.7%, compared to the same quarter in 2009. For the first six months of 2010, EBITDA was $80.6 million, an increase of $19.6 million, or 32.2% compared to the same period in 2009. The increase in EBITDA relative to the increase in revenue during the first six months of 2010 reflected the inclusion of service offerings within Resolve which contributed lower margins as a percentage of revenues compared to other D+H services. The increase in EBITDA in the second quarter of 2010 as compared to the first quarter of 2010 was largely related to the revenue increases attributed to seasonality as described above, and stronger fees related to mortgage origination services.
Other Expenses
Amortization of capital and non-acquisition intangible assets during the second quarter of 2010 increased by $1.3 million, or 36.0% compared to the second quarter of 2009, and during the first six months of 2010, increased by $2.2 million, or 29.5% compared to the same period in 2009. These increases primarily related to the inclusion of amortization related to assets acquired from the Resolve business and to capital additions during 2010.
Interest expense for the second quarter of 2010 increased by $1.9 million compared to the same quarter last year, due to an increase in the level of outstanding debt related to the acquisition of Resolve and the write-off of certain unamortized financing costs as described below. Similarly, for the first six months of 2010, interest expense increased by $3.5 million compared to the same period in 2009. During the quarter, the Business renewed its bank credit facilities and issued a seven-year Bond as more fully described below. Certain unamortized financing fees totalling $0.4 million were written off during the second quarter of 2010 in connection with the renewal of the credit facilities and changes made to the syndicate. The write-off of the unamortized financing fees that is included in interest expense for the second quarter and the first six months of 2010 represented a one-time charge.
A net unrealized loss of $1.7 million on interest-rate swaps and foreign currency contracts was recognized in the second quarter of 2010 (Q2 2009 - $1.1 million net unrealized gain) reflecting mark-to-market adjustments related to changes in market interest rates at June 30, compared to March 31, and from currency fluctuations on foreign exchange contracts. For the six months ended June 30, 2010, an unrealized loss of $0.1 million was recorded (six months ended June 30, 2009 - unrealized gain of $0.9 million). These unrealized gains and losses are recognized in income because these swaps are not designated as hedges for accounting purposes. In addition, unrealized gains and losses on foreign exchange contracts are recognized in income because the foreign exchange contracts do not qualify for hedge accounting treatment. Provided the Business does not cancel its interest-rate swaps or foreign exchange contracts, the unrealized amounts represent a non-cash unrealized gain or loss that will subsequently reverse through income as the related swaps and foreign exchange contracts mature. The Company has historically held its derivative contracts to maturity.
In the second quarter of 2010, the Fund recorded a future tax expense of $0.4 million (Q2 2009 - $0.7 million recovery). This related to the utilization of tax losses and other deductible temporary differences in certain corporate subsidiaries for which the Fund had previously recorded a future tax benefit net of the decrease in the future tax liability resulting from the amortization of intangibles. Similarly, for the first six months of 2010, the Fund recorded a future tax expense of $1.0 million (six months ended June 30, 2009 - $0.8 million recovery).
Amortization of acquisition related intangibles for the second quarter of 2010 and for the first six months of 2010, increased by $3.7 million and $7.4 million respectively, as compared to the same periods in 2009 due to the incremental intangible assets from the acquisition of Resolve.
Net Income
Net income of $25.0 million for the second quarter of 2010 decreased by $0.2 million, or 0.8%, compared to the same period in 2009. For the six months ended June 30, 2010, net income of $48.1 million increased by $3.6 million, or 8.2% compared to the same period in 2009. On a per unit basis, net income decreased by 18.1% to $0.4702 per unit, compared to the second quarter of 2009. For the first six months of 2010, net income per unit decreased by 10.7% to $0.9035 per unit, compared to the same period in 2009.
Excluding the non-cash impacts of mark-to-market gains and losses on derivative instruments, future income taxes and amortization of intangibles from acquisitions, Adjusted income of $34.4 million for the second quarter of 2010 increased by $7.4 million, or 27.4%, compared to the same period in 2009. Adjusted income for the first six months of 2010 increased by $13.9 million, or 27.9% compared to the same period in 2009. On a per unit basis, reflecting the issuance of 9,286,581 units upon the acquisition of Resolve, Adjusted income per unit of $0.6462 increased by $0.0316, or 5.1%, compared to the second quarter of 2009. For the six months ended June 30, 2010, Adjusted income of $1.1982 per unit increased by 5.6% compared to the same period in 2009.
EIGHT QUARTER CONSOLIDATED STATEMENT OF INCOME - SUMMARY
(in thousands of Canadian dollars, except per unit amounts, unaudited)
2010
Q2 Q1 Q4 Q3
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Revenue $ 168,734 $ 158,419 $ 156,215 $ 142,463
Expenses 125,637 120,957 119,671 104,879
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EBITDA(1) 43,097 37,462 36,544 37,584
Amortization of capital assets
and non-acquisition
intangibles 5,003 4,706 4,551 4,530
Interest expense 3,692 3,374 3,326 2,681
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Adjusted income(1) 34,402 29,382 28,667 30,373
Amortization of mark-to-market
adjustment of interest-rate
swaps 103 189 103 103
Net unrealized loss (gain) on
derivative instruments(2) 1,694 (1,559) (1,620) (1,647)
Future income tax expense
(recovery) 416 587 (2,747) 1,018
Amortization of intangibles
from acquisition 7,158 7,097 7,330 5,942
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Income from continuing
operations 25,031 23,068 25,601 24,957
Income from discontinued
operations - - - -
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Net income $ 25,031 $ 23,068 $ 25,601 $ 24,957
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Adjusted income per unit,
basic and diluted(1) $ 0.6462 $ 0.5519 $ 0.5385 $ 0.6002
Net income per unit, basic
and diluted $ 0.4702 $ 0.4333 $ 0.4809 $ 0.4931
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2009 2008
Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Revenue $ 94,557 $ 88,529 $ 89,357 $ 95,055
Expenses 62,080 60,091 62,413 61,664
-------------------------------------------------------------------------
EBITDA(1) 32,477 28,438 26,944 33,391
Amortization of capital assets
and non-acquisition
intangibles 3,679 3,819 3,800 4,219
Interest expense 1,787 1,747 1,647 1,690
-------------------------------------------------------------------------
Adjusted income(1) 27,011 22,872 21,497 27,482
Amortization of mark-to-market
adjustment of interest-rate
swaps 136 136 151 151
Net unrealized loss (gain) on
derivative instruments(2) (1,069) 191 3,653 728
Future income tax expense
(recovery) (718) (64) 399 52
Amortization of intangibles
from acquisition 3,441 3,374 3,409 3,412
-------------------------------------------------------------------------
Income from continuing
operations 25,221 19,235 13,885 23,139
Income from discontinued
operations - - 51 167
-------------------------------------------------------------------------
Net income $ 25,221 $ 19,235 $ 13,936 $ 23,306
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted income per unit,
basic and diluted(1) $ 0.6146 $ 0.5204 $ 0.4892 $ 0.6253
Net income per unit, basic
and diluted $ 0.5739 $ 0.4377 $ 0.3172 $ 0.5303
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA and Adjusted income are non-GAAP terms. See Non-GAAP Measures
for a more complete description of these terms.
(2) The Business enters into derivative contracts to fix the interest
rates and foreign exchange rates on a significant portion of its
outstanding bank debt and foreign currency transactions, which are
relatively minor, respectively. For accounting purposes, these
derivative instruments do not qualify for hedge accounting treatment.
Accordingly, any change in the fair value of these contracts is
recorded through income. Provided the Business does not cancel its
derivative contracts prior to maturity, the amounts represent a non-
cash unrealized gain or loss that will subsequently reverse through
income. The Company has historically held its derivative contracts to
maturity.
The Business has generally reported quarterly revenues that are stable and growing when measured on a year-over-year basis, however more recent changes in the economic environment and the housing and mortgage markets have increased volatility. Measured on a sequential quarter-over-quarter basis, revenues can also vary as they are subject to seasonality and are generally stronger in the second and third quarters. The acquisition of the Resolve business has resulted in a substantial increase in all reported balances since acquisition on July 27, 2009, except per unit amounts, which were additionally impacted by the issuance of 9,286,581 additional units of Davis + Henderson to fund the Resolve acquisition.
Adjusted income per unit has generally been trending consistently with changing revenue. 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 and foreign exchange contracts, amortization of intangibles from acquisitions and changes in future income tax provisions.
CASH FLOW AND LIQUIDITY
The following table is derived from, and should be read in conjunction with, the Consolidated Statements of Cash Flows and includes non-GAAP measures. Management believes this supplementary disclosure provides useful additional information related to the cash flows of the Fund, repayment of debt and other investing activities. See Non-GAAP Measures for a discussion of non-GAAP terms used.
Summary of Cash Flows(1)
(in thousands of Canadian dollars, unaudited)
Three months ended Six months ended
June 30, June 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Cash flows from operating
activities $ 36,613 $ 27,173 $ 57,594 $ 40,188
Add:
Changes in non-cash working
capital and other items(2) 2,792 3,517 15,899 17,193
-------------------------------------------------------------------------
Adjusted cash flows from
operating activities 39,405 30,690 73,493 57,381
Less:
Asset expenditures(3) 4,526 2,191 7,552 4,037
Contract payments(4) 767 300 1,717 2,817
-------------------------------------------------------------------------
Adjusted cash flows after
capital expenditures and
contract payments 34,112 28,199 64,224 50,527
Less:
Distributions paid to
unitholders 24,482 20,211 48,964 40,422
-------------------------------------------------------------------------
9,630 7,988 15,260 10,105
Cash flows provided by
(used in repayment of)
long-term indebtedness (5,000) (2,000) - (2,000)
Cash flows used in issuance
costs for long-term
indebtedness (2,564) - (2,564) -
Fair value of acquisitions - 103 - 163
Changes in non-cash working
capital and other items(2) (2,792) (3,517) (15,899) (17,193)
-------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents for the
period $ (726) $ 2,574 $ (3,203) $ (8,925)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The subtotals in this table are not consistent with GAAP and
accordingly are considered non-GAAP measures. See Non-GAAP Measures
for a discussion of non-GAAP terms used.
(2) Changes in non-cash working capital and certain other balance sheet
items have been excluded from adjusted cash flows from operating
activities so as to remove the effects of timing differences in cash
receipts and cash disbursements, which generally reverse themselves,
but can vary significantly across quarters and to remove certain of
the payments related to the acquisition and related restructuring
activities that were recorded as part of the acquisition. For
details, see the Changes in Non-Cash Working Capital and Other Items
section.
(3) Asset expenditures include both maintenance asset expenditures and
growth asset expenditures. Maintenance asset expenditures for the
three months ended June 30, 2010 were $2.2 million and for the six
months ended June 30, 2010 were $3.9 million. Maintenance asset
expenditures are defined by the Fund as asset expenditures necessary
to maintain and sustain the current productive capacity of the
Business or generally improve the efficiency of the Business. Growth
asset expenditures for the three months ended June 30, 2010 were
$2.3 million and for the six months ended June 30, 2010 were
$3.7 million. Growth asset expenditures are defined by the Fund as
asset expenditures that increase the productive capacity of the
Business with a reasonable expectation of an increase in cash flow.
(4) The Business has various payment obligations under customer and
partner contracts, which include fixed contract or program initiation
payments and annual payments payable over the life of the contract.
The aggregate of all contract payments, both fixed and variable,
reflects, among other things, the high degree of integration and
sharing between Davis + Henderson and its customers and partners of
the many activities related to ordering, data handling, customer
service, customer access and other activities.
Summary of Cash Flows per Unit
(in Canadian dollars, unaudited)
Three months ended Six months ended
June 30, June 30,
% %
2010 2009 change 2010 2009 change
-------------------------------------------------------------------------
Adjusted cash flows
from operating
activities $ 0.7402 $ 0.6983 6.0% $ 1.3806 $ 1.3057 5.7%
Adjusted cash flows
after capital
expenditures and
contract payments $ 0.6408 $ 0.6417 -0.1% $ 1.2065 $ 1.1497 4.9%
Cash distributions
paid to
unitholders $ 0.4599 $ 0.4599 0.0% $ 0.9198 $ 0.9198 0.0%
Distributions
declared during
period $ 0.4599 $ 0.4599 0.0% $ 0.9198 $ 0.9198 0.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Flows, Income and Distributions Paid
The following table compares cash flows from operating activities and
income to distributions paid:
Three Six
months months Year Year
ended ended ended ended
June June December December
(in thousands of Canadian 30, 30, 31, 31,
dollars, unaudited) 2010 2010 2009 2008
-------------------------------------------------------------------------
Cash flows from operating
activities $ 36,613 $ 57,594 $ 119,722 $ 116,062
Net income $ 25,031 $ 48,099 $ 95,014 $ 78,448
Adjusted income(1) $ 34,402 $ 63,784 $ 108,923 $ 99,168
Distributions paid during
period $ 24,482 $ 48,964 $ 87,962 $ 78,580
Excess (shortfall) of cash
flows from operating
activities over cash
distributions paid $ 12,131 $ 8,630 $ 31,760 $ 37,482
Excess (shortfall) of net
income over cash
distributions paid $ 549 $ (865) $ 7,052 $ (132)
Excess (shortfall) of
Adjusted income over cash
distributions paid $ 9,920 $ 14,820 $ 20,961 $ 20,588
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Adjusted income is a non-GAAP term. See Non-GAAP Measures for a more
complete description of this term.
Historically, excess cash flows from operating activities over cash distributions paid have been used to fund capital expenditures, pay down debt and to fund acquisitions. During certain historical periods distributions have exceeded net income as a result of non-cash charges recorded through income including amortization of intangible assets related to acquisitions and future income taxes. During the second quarter of 2010 and over the next several quarters, payments will be made related to restructuring activities pertaining to the operational integration of the Business as well as payments related to the settlement of outstanding contractual obligations within Resolve.
Expenditures on Capital Assets and Contract Payments
Compared to the prior year periods, total capital asset expenditures increased by $2.3 million to $4.5 million in the second quarter of 2010 and increased by $3.5 million to $7.6 million over the first six months of 2010. Fixed contract payments increased by $0.5 million in the second quarter of 2010 compared to 2009 and decreased by $1.1 million in the first six months of 2010 compared to the same period in 2009. The increase in capital expenditures over 2009 relates to the increased size of operations since the acquisition of Resolve in July 2009 and the Company's plans for further integration activities. The changes in fixed contract payments relate to timing of when payments are made.
The Business' capital program provides for continued expenditures to be funded by cash flows from operations.
Distributions
The Trustees of the Fund establish distribution levels of the Fund with reference to its financial position, historical results, projected performance of the Business and funds required for potential acquisitions.
The Fund paid cash distributions of $0.4599 per unit ($24.5 million) during the second quarter of 2010 and $0.9198 per unit ($49.0 million) in the first six months of 2010, compared to $0.4599 per unit ($20.2 million) and $0.9198 per unit ($40.4 million) in the first three and six months ended June 30, 2009 respectively. In connection with the Resolve acquisition, D+H issued 9,286,581 units on July 27, 2009, which increased the distributions paid of the Fund by $4.3 million in the second quarter of 2010. For the second quarter of 2010 both distributions declared and paid per unit were unchanged.
On an annualized basis, the monthly cash distribution rate for June 2010 was $1.84 per unit, unchanged from June 2009.
Distributions paid can be different than distributions declared during a period. Monthly distributions are declared by the Fund for unitholders of record on the last business day of each month and are paid within 31 days following each month end. In the second quarter of 2010, these amounts were the same on a per unit basis.
In general, mutual fund trusts, like the Fund, must distribute all their taxable income to their unitholders in order not to pay income taxes in the trust.
The estimated tax allocation of distributions to be declared for 2010 is 100% "other income", as was the case for all of 2009.
The Fund may issue an unlimited number of trust units. Each trust unit is transferable and represents an equal, undivided beneficial interest in any distribution from the Fund and the net assets of the Fund. All units are of the same class with equal rights and privileges and are not subject to future calls or assessments. Each unit entitles the holder to one vote at all meetings of unitholders. As at June 30, 2010 and August 10, 2010, the total number of trust units outstanding was 53,233,373 compared to 43,946,792 trust units outstanding as at June 30, 2009. This reflects an issuance of an additional 9,286,581 trust units on July 27, 2009 in exchange for all the outstanding units of Resolve.
Changes in Non-Cash Working Capital and Other Items
(in thousands of Canadian dollars, unaudited)
Three months ended Six months ended
June 30, June 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Decrease (increase) in
non-cash working capital
items $ (4,162) $ (3,724) $ (18,256) $ (17,609)
Decrease (increase) in other
operating assets and
liabilities 1,370 207 2,357 416
-------------------------------------------------------------------------
Decrease (increase) in
non-cash working capital and
other items $ (2,792) $ (3,517) $ (15,899) $ (17,193)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The net increases in non-cash working capital items for both the second quarter of 2010 and six months ended June 30, 2010 were primarily a result of an increase in trade receivables attributable to higher revenues. Revenues are subject to seasonality and are generally stronger in the second and third quarters. Also contributing to the increase in non-cash working capital during the second quarter of 2010, was a decrease in trade payables due to normal course timing differences of when payments are made.
The Company expects to experience a continuing increase in the volatility of non-cash working capital due to the nature of services rendered in connection with the businesses recently acquired.
Acquisition
With the acquisition of Resolve, the Business significantly advanced its strategy by expanding its service offerings within the financial services industry, by establishing market leading positions in several niche markets and by increasing its overall servicing capabilities. The acquisition was funded through the issuance of Davis + Henderson units in exchange for all the outstanding units of Resolve, valued at $119.5 million (net of after-tax issuance costs of $0.6 million), and the assumption of Resolve debt. Including transaction costs and estimated restructuring costs, the total cost of the acquisition (excluding assumed debt) is expected to be approximately $130.0 million. Management has not completed its assessment of the valuation of the assets acquired and liabilities assumed for this acquisition and therefore continues to estimate transaction and restructuring costs. As a result, the presented purchase information may change. For additional information on the acquisition, refer to Note 2 to the consolidated financial statements.
Cash Balances and Long-Term Indebtedness
At June 30, 2010, cash and cash equivalents totalled $0.7 million, compared to $3.9 million at December 31, 2009. The long-term indebtedness as at June 30, 2010, before deducting unamortized deferred finance fees, was unchanged at $210.0 million compared to December 31, 2009 and consisted of drawings under a Fifth Amended and Restated Credit Agreement dated June 30, 2010 ("Credit Agreement") of $160.0 million and fixed-rate Bonds issued under a Note Purchase and Private Shelf Agreement dated June 30, 2010 ("Note Purchase Agreement") of $50.0 million. The long-term indebtedness is recorded on the Balance Sheet, net of unamortized deferred financing fees of $3.1 million as at June 30, 2010.
Total senior secured credit facilities available at June 30, 2010 were $220.0 million, consisting of a non-revolving term loan of $130.0 million and a revolving term credit facility of $90.0 million that each mature on June 30, 2013. As of June 30, 2010, the Business had drawn $130.0 million under the non-revolving term loan and $30.0 million under the revolving term credit facility. The Business is permitted to draw on the revolving facility's available balance of $60.0 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 distributions that may be made by Davis + Henderson, Limited Partnership to the Fund during each rolling, four-quarter period. Davis + Henderson 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.
The Business has $50.0 million of Bonds issued under the senior secured Note Purchase Agreement at a fixed-interest rate of 5.99% until maturity on June 30, 2017. 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 as exist under the Credit Agreement described above. The Note Purchase Agreement is available at www.sedar.com.
To reduce liquidity risk, management has historically renewed the terms of the Fund's long-term indebtedness in advance of its maturity dates and the Fund 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 Fund has made numerous voluntary payments on its outstanding long-term indebtedness and a portion of its committed term credit facilities remain undrawn. Further, the Credit Agreement and the Note Purchase Agreement provide for additional uncommitted credit arrangements of up to $150.0 million and additional Bonds under the uncommitted shelf note facility of up to $30.0 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 Fund looks to hedge against increases in market interest rates by utilizing interest-rate swaps. In respect of interest-rate swap hedge contracts with its lenders, as of June 30, 2010 the Fund's borrowing rates on the 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 table below:
-------------------------------------------------------------------------
Fair value of interest-rate swaps
-----------------------------------
Maturity Date Notional Amount Asset Liability Interest Rate(1)
-------------------------------------------------------------------------
July 15, 2010 $ 33,000 $ - $ 349 4.815%
January 5, 2011 22,000 - 191 1.980%
June 15, 2011 20,000 - 847 4.685%
June 15, 2011 25,000 - 1,059 4.685%
December 18, 2014 25,000 - 339 2.720%
March 18, 2015 25,000 - 538 2.940%
March 20, 2017 25,000 - 745 3.350%
March 20, 2017 20,000 - 616 3.366%
-------------------------------------------------------------------------
$ 195,000 $ - $ 4,684
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 Fund's financial leverage as
compared to certain levels specified in the Credit Agreement. As of
June 30, 2010, the Fund's long-term bank indebtedness was subject to
bankers' acceptance fees of 2.50% over the applicable BA rate and
prime rate spreads of 1.50% over the prime rate.
As at June 30, 2010, the Fund would have to pay the fair value of $4.7 million if it were to close out all of the interest-rate swap contracts as set out on the balance sheet. It is not the present intention of management to close out these contracts and the Company has historically held its derivative contracts to maturity. The Fund expects to continue to enter into interest-rate swaps for the purpose of hedging interest rates.
As of mid July 2010, after the maturing of the July 15, 2010 swap shown above, the average effective interest rate on the Fund's total indebtedness is approximately 5.9%.
The Fund also enters into foreign exchange contracts to fix foreign-exchange rates on its foreign currency transactions, which are relatively minor. As at June 30, 2010, the Fund had six foreign-exchange contracts in place with one of its lenders amounting to $3.0 million USD.
(in thousands of Canadian dollars, unaudited)
-------------------------------------------------------------------------
Fair value of foreign exchange contracts
----------------------------------------
Maturity Date Notional Amount Asset Liability Exchange rate
-------------------------------------------------------------------------
July 15, 2010 $ 500 $ - $ 19 1.0271
August 16, 2010 500 - 19 1.0272
September 15, 2010 500 - 19 1.0273
October 15, 2010 500 - 18 1.0275
November 15, 2010 500 - 18 1.0278
December 15, 2010 500 - 18 1.0282
-------------------------------------------------------------------------
$ 3,000 $ - $ 111
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The last of these contracts expires on December 15, 2010. Under these contracts, the Fund is required to deliver the agreed USD amount and in return receive the contracted CDN dollar amount set forth in each contract. As at June 30, 2010, the fair value the Fund would have paid if it were to have closed out the foreign exchange contracts was $0.1 million. It is not the present intention of management to close out these contracts. The Company has historically held its derivative contracts to maturity.
The Company 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 flow.
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 distributions.
Business Risks
For a comprehensive discussion of business risks, please refer to the Fund's most recently filed Annual Information Form and Annual Report available on SEDAR at www.sedar.com.
Non-GAAP Measures
The information presented within the tables in this MD&A include certain adjusted financial measures such as "EBITDA" (Earnings before income taxes, depreciation and amortization), "Adjusted income" (net income before certain non-cash charges) and "Adjusted cash flow after capital expenditures and contract payments", all of which are not defined terms under Canadian generally accepted accounting principles ("GAAP"). These non-GAAP financial measures are derived from, and should be read in conjunction with, the Consolidated Statements of Income and the Consolidated Statements of Cash Flow. Management believes these supplementary disclosures provide useful additional information related to the operating results of the Fund.
Management uses these subtotals as measures of financial performance and as a supplement to the Consolidated Statements of Income and Consolidated Statements of Cash Flow. 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 GAAP Consolidated Statements of Income or other GAAP statements. Further, the Fund's method of calculating each balance may not be comparable to calculations used by other Income Trusts 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 Fund's credit facility. EBITDA is also widely used by the Fund 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 GAAP.
Adjusted Income
Adjusted income is used as a measure of internal performance similar to net income, but is calculated after removing certain non-cash items such as mark-to-market adjustments on interest-rate swaps and foreign exchange contracts, amortization of intangibles from acquisition and changes in future income tax provisions. These items are excluded in calculating Adjusted income as they are non-cash items and not considered indicative of the financial performance of the Business for the period being reviewed.
Adjusted Cash Flows from Operating Activities and Adjusted Cash Flows after Capital Expenditures and Contract Payments
Certain subtotals presented within the cash flows table above, such as "Adjusted cash flows from operating activities" and "Adjusted cash flows after capital expenditures and contract payments", are not defined terms under GAAP. Management uses these subtotals as measures of internal performance and as a supplement to the Consolidated Statements of Cash Flows.
OUTLOOK
Davis + Henderson's overall long-term objective for revenues is to deliver stable and modestly growing cash distributions by growing revenue in the 3% to 5% range. For 2009 and the first half of 2010, revenue was substantially above this range due to the inclusion of the results of Resolve. For 2010 overall, we expect revenues will continue to show a substantial increase over the prior year as a result of the inclusion of the Resolve business within our consolidated results. As measured on a quarter-over-quarter basis for the balance of 2010, the year-over-year percentage increase will reduce as comparative periods from 2009 will include the Resolve results.
In the immediate future, we will focus on executing our organic growth initiatives, integrating the Business and continuing to diligently manage costs. Beyond the immediate term, we believe that combining Davis + Henderson and Resolve will solidly position the Business 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: (1) the ongoing enhancement and evolution of our cheque program through the addition of value-added service enhancements (such as our IDefence(R) and BizAssist(R) programs), (2) the expansion of our current services within the student lending, commercial and personal lending areas (including the mortgage, credit card and personal property markets), (3) selling and delivering our lending technology services to new customers and (4) combining the capabilities of D+H together with those of the recently acquired Resolve and Cyence businesses to develop new service offerings for our financial institution customers.
With the inclusion of several new service areas over the last several years, we expect to experience some level of increase in variability in year-over-year quarterly revenues, earnings and cash flows, due to: (i) volume variances within the lien registration service area; (ii) variability in professional services work; and (iii) variability in fees relating to mortgage origination services revenues due to recent significant variability in the housing market.
For 2010, with a full-year inclusion of Resolve and various integration initiatives, we expect the consolidated capital program to be in the range of $27.0 million to $30.0 million. This range represents an increase from previous plans to spend $24.0 million to $27.0 million, due to the inclusion of additional initiatives designed to save costs within the integrated business and support revenue growth through the building of technology products. We expect the capital plan for the remainder of 2010 to be more heavily weighted towards the third quarter.
Since December 2001, the initial public offering date of Davis + Henderson Income Fund, the Business has operated as a subsidiary of an Income Trust pursuant to its Declaration of Trust. In 2007, changes were made to the Income Tax Act that will require certain Income Trusts, including D+H, to be subject to taxes after fiscal 2010, similar to those paid by taxable Canadian corporations. At a meeting of unitholders held on June 17, 2010, D+H unitholders approved a proposal to convert from an income trust into a corporation effective January 1, 2011. Upon completion of the conversion, unitholders will receive on a tax deferred, roll-over basis, one share of the resulting public corporation for each unit held. The information circular in respect of the Meeting, which provided a detailed outline of the conversion is available on SEDAR at www.sedar.com.
Independent of the conversion plan and as a result of the enacted tax changes, the Business will be subject to taxes commencing in 2011 that will reduce the amount of cash flow otherwise available for distribution. Our current intention is to pay quarterly distributions commencing in 2011 at an initial annualized rate of $1.20 per share. For the remainder of 2010, we intend to maintain our current annualized distributions at $1.84 per unit ($0.1533 per unit monthly). Subsequent to the conversion, distributions made by Davis + Henderson will be taxed as dividends rather than regular income as they are today. Investors that are taxed as individuals may be entitled to dividend tax credits which may enhance their after-tax yield and therefore significantly reduce the after-tax impact of the reduction in distributions.
Consistent with past practices, actual distributions will only be made to owners of record based upon a declaration by the Trustees. Among other items, in determining actual distributions, the Trustees will consider the financial performance, capital plans, acquisition plans, expectations of future economic conditions and other factors.
Notwithstanding the structural and distribution changes attributed to the changes to the law, the strategies and objectives of the Business will remain unchanged.
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 Davis + Henderson's objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of Davis + Henderson 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 Davis + Henderson to meet its revenue and EBITDA targets; general industry and economic conditions; changes in Davis + Henderson's relationship with its customers and suppliers; pricing pressures and other competitive factors. Davis + Henderson has also made certain macroeconomic and general industry assumptions in the preparation of such forward-looking statements. While Davis + Henderson considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect.
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 Davis + Henderson'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 Fund'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 Fund'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 and investor interest in, and government regulations relating to, Income Trusts. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Forward-looking statements are based on management's current plans, estimates, projections, beliefs and opinions, and Davis + Henderson 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.
ADDITIONAL INFORMATION
Additional information relating to the Fund, including the Fund's most recently filed Annual Information Form, is available on SEDAR at www.sedar.com.
CONSOLIDATED BALANCE SHEETS
(in thousands of Canadian dollars, unaudited)
June 30, December 31,
2010 2009
-------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 675 $ 3,878
Accounts receivable (note 3) 74,505 57,251
Inventory (note 4) 6,163 6,197
Prepaid expenses 7,103 6,156
Future income tax asset - current (note 11) 1,263 3,274
-------------------------------------------------------------------------
89,709 76,756
Future income tax asset (note 11) 23,754 21,425
Capital assets (note 5) 30,837 33,296
Fair value of derivatives (note 9) - 456
Intangible assets (note 6) 273,938 289,774
Goodwill (note 7) 520,364 519,848
-------------------------------------------------------------------------
$ 938,602 $ 941,555
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 72,661 $ 72,274
Distributions payable to unitholders 8,161 8,161
Deferred revenue - current 6,677 7,028
-------------------------------------------------------------------------
87,499 87,463
Long-term indebtedness (note 8) 206,902 208,463
Fair value of derivatives (note 9) 4,795 4,733
Deferred revenue - non-current 9,384 9,510
Other long-term liabilities (note 10) 8,133 7,161
Future income tax liability (note 11) 47,171 48,934
-------------------------------------------------------------------------
363,884 366,264
Unitholders' equity:
Trust units (note 12) 595,859 595,859
Deficit (20,951) (20,086)
Accumulated other comprehensive
income (loss) (190) (482)
-------------------------------------------------------------------------
574,718 575,291
Commitments (note 14)
-------------------------------------------------------------------------
$ 938,602 $ 941,555
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of Canadian dollars, except per unit amounts,unaudited)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Revenue $ 168,734 $ 94,557 $ 327,153 $ 183,086
Cost of sales and operating
expenses (note 4) 126,001 62,393 247,311 122,794
Amortization of capital assets 1,846 1,078 3,683 2,176
-------------------------------------------------------------------------
40,887 31,086 76,159 58,116
Interest expense 3,795 1,923 7,358 3,806
Net unrealized loss (gain)
on derivative instruments 1,694 (1,069) 135 (878)
Amortization of intangible
assets (note 6) 9,951 5,729 19,564 11,514
-------------------------------------------------------------------------
Income before income taxes 25,447 24,503 49,102 43,674
Future income tax expense
(recovery) (note 11) 416 (718) 1,003 (782)
-------------------------------------------------------------------------
Net income $ 25,031 $ 25,221 $ 48,099 $ 44,456
-------------------------------------------------------------------------
Net income per unit, basic
and diluted $ 0.4702 $ 0.5739 $ 0.9035 $ 1.0116
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of Canadian dollars, unaudited)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Net income $ 25,031 $ 25,221 $ 48,099 $ 44,456
Other comprehensive income:
Amortization of mark-to-
market adjustment of
interest-rate swaps 103 136 292 272
-------------------------------------------------------------------------
Total comprehensive income $ 25,134 $ 25,357 $ 48,391 $ 44,728
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF DEFICIT AND ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
(in thousands of Canadian dollars, unaudited)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Deficit
Deficit, beginning of period $ (21,500) $ (26,690) $ (20,086) $ (25,714)
Net income 25,031 25,221 48,099 44,456
Distributions (24,482) (20,211) (48,964) (40,422)
-------------------------------------------------------------------------
Deficit, end of period (20,951) (21,680) (20,951) (21,680)
-------------------------------------------------------------------------
Accumulated Other Comprehensive
Income (Loss)
Accumulated other comprehensive
income (loss), beginning of
period (293) (824) (482) (960)
Other comprehensive income:
Amortization of mark-to-market
adjustment of interest-rate
swaps 103 136 292 272
-------------------------------------------------------------------------
Accumulated other comprehensive
income (loss), end of period(1) (190) (688) (190) (688)
-------------------------------------------------------------------------
Deficit and accumulated other
comprehensive income (loss),
end of period $ (21,141) $ (22,368) $ (21,141) $ (22,368)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Accumulated other comprehensive income (loss) consists of cumulative
net gains and losses that were deferred prior to January 1, 2007 when
hedge accounting was used by the Fund.
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars, unaudited)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Cash and cash equivalents
provided by (used in):
OPERATING ACTIVITIES
Net income $ 25,031 $ 25,221 $ 48,099 $ 44,456
Add:
Amortization of capital
assets 1,846 1,078 3,683 2,176
Amortization of capital
assets included in cost
of sales 364 313 717 623
Amortization of intangible
assets 9,951 5,729 19,564 11,514
Amortization of mark-to-
market adjustment of
interest-rate swaps 103 136 292 272
Net unrealized loss (gain)
on derivative instruments 1,694 (1,069) 135 (878)
Future income tax expense
(recovery) 416 (718) 1,003 (782)
-------------------------------------------------------------------------
39,405 30,690 73,493 57,381
Increase in non-cash working
capital items (4,162) (3,724) (18,256) (17,609)
Changes in other operating
assets and liabilities 1,370 207 2,357 416
-------------------------------------------------------------------------
36,613 27,173 57,594 40,188
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from long-term
indebtedness 50,000 - 60,000 -
Repayment of long-term
indebtedness (55,000) (2,000) (60,000) (2,000)
Issuance costs of long-term
indebtedness (2,564) - (2,564) -
Distributions paid to
unitholders (24,482) (20,211) (48,964) (40,422)
-------------------------------------------------------------------------
(32,046) (22,211) (51,528) (42,422)
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Expenditures on capital
assets, non-acquisition
intangible assets and long
term contracts (5,293) (2,491) (9,269) (6,854)
Acquisition of businesses
and acquisition adjustments - 103 - 163
-------------------------------------------------------------------------
(5,293) (2,388) (9,269) (6,691)
-------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents for
the period (726) 2,574 (3,203) (8,925)
Cash and cash equivalents,
beginning of period 1,401 567 3,878 12,066
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 675 $ 3,141 $ 675 $ 3,141
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary information:
Cash interest paid $ 2,337 $ 1,617 $ 5,405 $ 2,717
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and six months ended June 30, 2010 and 2009
(in thousands of Canadian dollars, except unit and per unit amounts,
unaudited)
NATURE OF BUSINESS
Davis + Henderson Income Fund (the "Fund") is a limited-purpose trust,
formed under the laws of the Province of Ontario by a declaration of
trust dated November 6, 2001 and as amended and restated on July 23,
2004. The Fund holds indirectly all of the partnership units of Davis +
Henderson, Limited Partnership ("Davis + Henderson L.P.") and its
subsidiaries including Filogix Limited Partnership ("Filogix L.P."),
Filogix Inc., Cyence International Inc. ("Cyence") and Resolve
Corporation ("Resolve").
1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared using the
following accounting policies generally accepted in Canada and follow the
same accounting policies and their method of application as the Fund's
consolidated financial statements for the year ended December 31, 2009,
which are included in the 2009 Annual Report. They do not conform in all
respects with disclosures required for annual financial statements and
should be read in conjunction with the audited financial statements of
the Fund for the year ended December 31, 2009.
2. ACQUISITION
Resolve Business
On July 27, 2009, the Fund acquired all of the outstanding units of
Resolve Business Outsourcing Income Fund through the exchange of 0.285
trust units of the Fund for each unit of Resolve Business Outsourcing
Income Fund. A total of 9,286,581 Fund trust units were issued for this
exchange.
Resolve is a leading provider in Canada of student loan administration
services, credit card portfolio management services, and search and
registration services, among other offerings. The net assets acquired and
consideration given were as follows:
Net assets acquired, at fair value:
Current assets $ 55,362
Capital and other assets 16,522
Intangible assets 161,396
Future income tax asset 24,494
Payables and other current liabilities (65,517)
Future income tax liability (45,100)
Long-term indebtedness (73,812)
Other long-term liabilities (6,800)
-------------------------------------------------------------------------
66,545
Goodwill 64,148
-------------------------------------------------------------------------
Total $ 130,693
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration for 100% ownership:
Units issued $ 120,094
Acquisition costs, net of cash acquired of $3,212 10,599
-------------------------------------------------------------------------
Total $ 130,693
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The value of the Fund's trust units issued on acquisition reflects the
unit's average trading price over a five-day period surrounding the
Fund's announcement to acquire Resolve Business Outsourcing Income Fund
on June 3, 2009. The estimated acquisition costs of $13.8 million, which
included transaction and restructuring costs was reduced by Resolve's
cash on hand of $3.2 million at the date of acquisition. In addition, the
Fund also incurred after tax costs of $0.6 million to issue additional
trust units. The Fund has not completed its assessment and valuation of
the assets acquired and liabilities assumed for this acquisition. As a
result, the amount of the purchase price in excess of the carrying value
of the acquired assets and liabilities allocated to the acquired assets
and liabilities in the consolidated balance sheet has not been finalized.
A net adjustment of $0.5 million was made to goodwill in Resolve
during the first six months of 2010. An adjustment of $2.6 million
recorded during the first quarter of 2010 related to the reclassification
of certain customer relationship contracts from intangibles to goodwill.
This was partially offset by an adjustment to goodwill during the second
quarter of 2010 of $2.1 million relating to changes in the estimated tax
attributes of Resolve resulting from information that became available
during the period.
3. ACCOUNTS RECEIVABLE
June 30, December 31,
2010 2009
-------------------------------------------------------------------------
Trade receivables $ 74,168 $ 56,073
Other receivables 337 1,178
-------------------------------------------------------------------------
$ 74,505 $ 57,251
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The amount for allowance for doubtful accounts recorded as at June 30,
2010 was $892 (December 31, 2009 - $614). The amount of past due accounts
as at June 30, 2010 was $1,142 (Q2 2009 - $1,641).
4. INVENTORY
June 30, December 31,
2010 2009
-------------------------------------------------------------------------
Raw materials $ 2,608 $ 2,457
Work-in-process 1,758 1,322
Finished goods 1,797 2,418
-------------------------------------------------------------------------
$ 6,163 $ 6,197
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Raw materials primarily consist of paper but also include foil, hologram
and ink. Work-in-process consists of base stock, which refers to sheets
of cheque stock with non-personalized background print, and manufacturer
coupons. Finished goods primarily consist of retail products, labels,
accessories, security bags and corporate seals.
Inventory that was recognized as cost of sales during the three months
ended June 30, 2010 was $10,511 (Q2 2009 - $11,248) and six months ended
June 30, 2010 was $21,097(six months ended June 30, 2009 - $21,715). The
amount of write-down of inventories recognized as an expense during the
three months ended June 30, 2010 was $61 (Q2 2009 - $83) and six months
ended June 30, 2010 was $101 (six months ended June 30, 2009 - $126).
5. CAPITAL ASSETS
Three months ended June 30, 2010
-------------------------------------------------------------------------
Furniture,
fixtures
and
Machinery leasehold
Land and and Computer improve-
buildings equipment equipment ments Total
-------------------------------------------------------------------------
Cost
Balance at
April 1, 2010 $ 2,975 $ 20,115 $ 24,844 $ 12,921 $ 60,855
Additions - 86 711 270 1,067
Other movements(1) - - - - -
-------------------------------------------------------------------------
At June 30, 2010 $ 2,975 $ 20,201 $ 25,555 $ 13,191 $ 61,922
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
impairment losses
Balance at
April 1, 2010 $ 140 $ 10,541 $ 10,519 $ 7,675 $ 28,875
Amortization 53 539 1,274 344 2,210
Other movements(1) - - - - -
-------------------------------------------------------------------------
At June 30, 2010 $ 193 $ 11,080 $ 11,793 $ 8,019 $ 31,085
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net carrying amount
At June 30, 2010 $ 2,782 $ 9,121 $ 13,762 $ 5,172 $ 30,837
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended June 30, 2009
-------------------------------------------------------------------------
Furniture,
fixtures
and
Machinery leasehold
Land and and Computer improve-
buildings equipment equipment ments Total
-------------------------------------------------------------------------
Cost
Balance at
April 1, 2009 $ - $ 15,594 $ 17,600 $ 8,781 $ 41,975
Additions - 73 732 33 838
Other movements(1) - - (94) - (94)
-------------------------------------------------------------------------
At June 30, 2009 $ - $ 15,667 $ 18,238 $ 8,814 $ 42,719
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
impairment losses
Balance at
April 1, 2009 $ - $ 8,804 $ 6,777 $ 6,516 $ 22,097
Amortization - 227 978 186 1,391
Other movements(1) - - (15) - (15)
-------------------------------------------------------------------------
At June 30, 2009 $ - $ 9,031 $ 7,740 $ 6,702 $ 23,473
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net carrying amount
At June 30, 2009 $ - $ 6,636 $ 10,498 $ 2,112 $ 19,246
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months ended June 30, 2010
-------------------------------------------------------------------------
Furniture,
fixtures
and
Machinery leasehold
Land and and Computer improve-
buildings equipment equipment ments Total
-------------------------------------------------------------------------
Cost
Balance at
January 1, 2010 $ 2,975 $ 19,971 $ 25,589 $ 12,798 $ 61,333
Additions - 201 1,380 360 1,941
Other movements(1) - 29 (1,414) 33 (1,352)
-------------------------------------------------------------------------
At June 30, 2010 $ 2,975 $ 20,201 $ 25,555 $ 13,191 $ 61,922
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
impairment losses
Balance at
January 1, 2010 $ 45 $ 9,998 $ 10,617 $ 7,377 $ 28,037
Amortization 148 1,053 2,538 661 4,400
Other movements(1) - 29 (1,362) (19) (1,352)
-------------------------------------------------------------------------
At June 30, 2010 $ 193 $ 11,080 $ 11,793 $ 8,019 $ 31,085
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net carrying amount
At June 30, 2010 $ 2,782 $ 9,121 $ 13,762 $ 5,172 $ 30,837
At
December 31, 2009 $ 2,930 $ 9,973 $ 14,972 $ 5,421 $ 33,296
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months ended June 30, 2009
-------------------------------------------------------------------------
Furniture,
fixtures
and
Machinery leasehold
Land and and Computer improve-
buildings equipment equipment ments Total
-------------------------------------------------------------------------
Cost
Balance at
January 1, 2009 $ - $ 15,589 $ 18,491 $ 9,048 $ 43,128
Additions - 117 1,525 48 1,690
Other movements(1) - (39) (1,778) (282) (2,099)
-------------------------------------------------------------------------
At June 30, 2009 $ - $ 15,667 $ 18,238 $ 8,814 $ 42,719
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
impairment losses
Balance at
January 1, 2009 $ - $ 8,609 $ 7,438 $ 6,617 $ 22,664
Amortization - 454 1,978 367 2,799
Other movements(1) - (32) (1,676) (282) (1,990)
-------------------------------------------------------------------------
At June 30, 2009 $ - $ 9,031 $ 7,740 $ 6,702 $ 23,473
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net carrying amount
At June 30, 2009 $ - $ 6,636 $ 10,498 $ 2,112 $ 19,246
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Other movements primarily relate to fully amortized assets removed
from the accounts during the period.
6. INTANGIBLE ASSETS
Three months ended June 30, 2010
---------------------------------------------------
Contracts Software
--------- ---------------------
Internally
Purchased developed
---------------------------------------------------
Cost
At April 1, 2010 $ 4,212 $ 28,489 $ 14,397
Additons 767 1,104 2,355
Other movements(1) - (1,080) 1,080
---------------------------------------------------
At June 30, 2010 4,979 28,513 17,832
---------------------------------------------------
---------------------------------------------------
Amortization and
impairment loss
At April 1, 2010 $ 1,564 $ 18,384 $ 4,453
Amortization 408 1,426 958
Other movements(1) - - -
---------------------------------------------------
At June 30, 2010 1,972 19,810 5,411
---------------------------------------------------
---------------------------------------------------
Net carrying amount
At June 30, 2010 3,007 8,703 12,421
---------------------------------------------------
---------------------------------------------------
Three months ended June 30, 2010
-------------------------------------------------------------------------
Acquisition of businesses Total
-------------------------------------------- ----------
Customer
Proprietary Brand relation-
Contracts software names ships
-------------------------------------------------------------------------
Cost
At April 1, 2010 $ 438 $ 70,500 $ 10,900 $229,335 $358,271
Additons - - - - 4,226
Other movements(1) - - - - -
-------------------------------------------------------------------------
At June 30, 2010 438 70,500 10,900 229,335 362,497
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization and
impairment loss
At April 1, 2010 $ 73 $ 18,981 $ 2,363 $ 32,790 $ 78,608
Amortization 273 1,833 182 4,871 9,951
Other movements(1) - - - - -
-------------------------------------------------------------------------
At June 30, 2010 346 20,814 2,545 37,661 88,559
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net carrying amount
At June 30, 2010 92 49,686 8,355 191,674 273,938
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended June 30, 2009
---------------------------------------------------
Contracts Software
--------- ---------------------
Internally
Purchased developed
---------------------------------------------------
Cost
At April 1, 2009 $ 6,599 $ 19,693 $ 9,703
Additions 300 636 719
Other movements(1) (400) 93 -
---------------------------------------------------
At June 30, 2009 $ 6,499 $ 20,422 $ 10,422
---------------------------------------------------
---------------------------------------------------
Amortization and
impairment loss
At April 1, 2009 $ 3,169 $ 15,951 $ 3,112
Amortization 732 1,148 408
Other movements(1) (400) 16 -
---------------------------------------------------
At June 30, 2009 $ 3,501 $ 17,115 $ 3,520
---------------------------------------------------
---------------------------------------------------
Net carrying amount
At June 30, 2009 $ 2,998 $ 3,307 $ 6,902
---------------------------------------------------
---------------------------------------------------
Three months ended June 30, 2009
-------------------------------------------------------------------------
Acquisition of businesses Total
-------------------------------------------- ----------
Customer
Proprietary Brand relation-
Contracts software names ships
-------------------------------------------------------------------------
Cost
At April 1, 2009 $ 1,201 $ 55,900 $ 10,900 $ 90,735 $194,731
Additions - - - - 1,655
Other movements(1) - - - - (307)
-------------------------------------------------------------------------
At June 30, 2009 $ 1,201 $ 55,900 $ 10,900 $ 90,735 $196,079
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization and
impairment loss
At April 1, 2009 $ 1,004 $ 12,221 $ 1,634 $ 16,738 $ 53,829
Amortization 197 1,408 182 1,654 5,729
Other movements(1) - - - - (384)
-------------------------------------------------------------------------
At June 30, 2009 $ 1,201 $ 13,629 $ 1,816 $ 18,392 $ 59,174
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net carrying amount
At June 30, 2009 $ - $ 42,271 $ 9,084 $ 72,343 $136,905
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Other movements during the period primarily relate to fully amortized
assets removed from the accounts.
Six months ended June 30, 2010
---------------------------------------------------
Contracts Software
--------- ---------------------
Internally
Purchased developed
---------------------------------------------------
Cost
At January 1, 2010 $ 6,799 $ 29,814 $ 14,126
Additions 1,717 1,983 3,628
Other movements(1) (3,537) (3,284) 78
---------------------------------------------------
At June 30, 2010 4,979 28,513 17,832
---------------------------------------------------
---------------------------------------------------
Amortization and
impairment loss
At January 1, 2010 $ 4,693 $ 19,261 $ 4,674
Amortization 816 2,753 1,739
Other movements(1) (3,537) (2,204) (1,002)
---------------------------------------------------
At June 30, 2010 1,972 19,810 5,411
---------------------------------------------------
---------------------------------------------------
Net carrying amount
At June 30, 2010 $ 3,007 $ 8,703 $ 12,421
At December 31,
2009 $ 2,106 $ 10,553 $ 9,452
---------------------------------------------------
---------------------------------------------------
Six months ended June 30, 2010
-------------------------------------------------------------------------
Acquisition of businesses Total
-------------------------------------------- ----------
Customer
Proprietary Brand relation-
Contracts software names ships
-------------------------------------------------------------------------
Cost
At January 1, 2010 $ 438 $ 70,500 $ 10,900 $232,935 $365,512
Additions - - - - 7,328
Other movements(1) - - - (3,600) (10,343)
-------------------------------------------------------------------------
At June 30, 2010 438 70,500 10,900 229,335 362,497
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization and
impairment loss
At January 1, 2010 $ 37 $ 17,149 $ 2,180 $ 27,744 $ 75,738
Amortization 309 3,665 365 9,917 19,564
Other movements(1) - - - - (6,743)
-------------------------------------------------------------------------
At June 30, 2010 346 20,814 2,545 37,661 88,559
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net carrying amount
At June 30, 2010 $ 92 $ 49,686 $ 8,355 $191,674 $273,938
At December 31,
2009 $ 401 $ 53,351 $ 8,720 $205,191 $289,774
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months ended June 30, 2009
---------------------------------------------------
Contracts Software
--------- ---------------------
Internally
Purchased developed
---------------------------------------------------
Cost
At January 1, 2009 $ 8,761 $ 21,727 $ 10,676
Additions 1,300 1,118 1,254
Other movements(1) (3,562) (2,423) (1,508)
---------------------------------------------------
At June 30, 2009 $ 6,499 $ 20,422 $ 10,422
---------------------------------------------------
---------------------------------------------------
Amortization and
impairment loss
At January 1, 2009 $ 5,414 $ 17,393 $ 4,194
Amortization 1,649 2,222 829
Other movements(1) (3,562) (2,500) (1,503)
---------------------------------------------------
At June 30, 2009 $ 3,501 $ 17,115 $ 3,520
---------------------------------------------------
---------------------------------------------------
Net carrying amount
At June 30, 2009 $ 2,998 $ 3,307 $ 6,902
---------------------------------------------------
---------------------------------------------------
Six months ended June 30, 2009
-------------------------------------------------------------------------
Acquisition of businesses Total
-------------------------------------------- ----------
Customer
Proprietary Brand relation-
Contracts software names ships
-------------------------------------------------------------------------
Cost
At January 1, 2009 $ 1,201 $ 56,093 $ 10,900 $107,064 $216,422
Additions - - - - 3,672
Other movements(1) - (193) - (16,329) (24,015)
-------------------------------------------------------------------------
At June 30, 2009 $ 1,201 $ 55,900 $ 10,900 $ 90,735 $196,079
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization and
impairment loss
At January 1, 2009 $ 864 $ 11,017 $ 1,452 $ 31,413 $ 71,747
Amortization 337 2,805 364 3,308 11,514
Other movements(1) - (193) - (16,329) (24,087)
-------------------------------------------------------------------------
At June 30, 2009 $ 1,201 $ 13,629 $ 1,816 $ 18,392 $ 59,174
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net carrying amount
At June 30, 2009 $ - $ 42,271 $ 9,084 $ 72,343 $136,905
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Other movements for the six months ended June 30, 2010 reflect fully
amortized assets removed from the accounts and reclassification from
intangibles to goodwill of certain Resolve customer relationship
intangibles in connection with the purchase price adjustment relating
to the Resolve acquisition.
7. GOODWILL
June 30, December 31,
2010 2009
-------------------------------------------------------------------------
Balance, beginning of period $ 519,848 $ 458,989
Goodwill acquired during the period:
Cyence - (1,417)
Resolve 516 63,632
Filogix - (1,356)
-------------------------------------------------------------------------
Balance, end of period $ 520,364 $ 519,848
-------------------------------------------------------------------------
-------------------------------------------------------------------------
A net adjustment of $0.5 million was made to goodwill in Resolve
during the first six months of 2010. An adjustment of $2.6 million
recorded during the first quarter of 2010 related to the reclassification
of certain customer relationship contracts from intangibles to goodwill.
This was partially offset by an adjustment to goodwill during the second
quarter of 2010 of $2.1 million relating to changes in the estimated tax
attributes of Resolve resulting from information that became available
during the period.
8. LONG-TERM INDEBTEDNESS
June 30, December 31,
2010 2009
-------------------------------------------------------------------------
Non-revolving term loan $ 130,000 $ 190,000
Drawings under revolving credit facility 30,000 20,000
-------------------------------------------------------------------------
160,000 210,000
Series A 5.99% Bonds due June 30, 2017 50,000 -
-------------------------------------------------------------------------
210,000 210,000
Deferred finance costs (3,098) (1,537)
-------------------------------------------------------------------------
$ 206,902 $ 208,463
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at June 30, 2010, the Fund had $220 million of available senior
secured credit facilities consisting of a non-revolving term loan of $130
million and a revolving term credit facility of $90 million each maturing
on June 30, 2013. As of June 30, 2010, $30 million was drawn under the
revolving term credit facility. The credit facilities do not require the
Fund to make any principal payments prior to June 30, 2013. The credit
facilities bear interest at rates that depend on certain financial ratios
of the Fund and vary in accordance with borrowing rates in Canada. The
credit facilities, including any hedge contracts and cash management
facilities provided by the lenders, are guaranteed by all entities within
the Fund's corporate structure and are secured in first priority by
substantially all of the Fund's assets and by a pledge of the Fund's
indirect ownership interests in Davis + Henderson L.P. and its other
operating subsidiary entities. The Credit Agreement contains a number of
covenants and restrictions including the requirement to meet certain
financial ratios and financial condition tests and, as at June 30, 2010,
the Fund was in compliance with all of its financial covenants and
financial condition tests. The carrying value of long-term bank
indebtedness approximates its fair value as it bears interest at floating
rates that reset in most cases within three months and in all cases
within one year.
The Fund has $50.0 million of Bonds issued under the senior secured
Note Purchase and Private Shelf Agreement at a fixed-interest rate of
5.99% until maturity on June 30, 2017. The Bonds rank equally in all
respects with amounts outstanding under the Credit Agreement and any
related hedging contracts and cash management facilities and benefit from
the same financial covenants that exist under the Credit Agreement
described above.
Deferred finance costs relate to amendments to the Credit Agreement and
entering into of the Note Purchase and Private Shelf Agreement dated June
30, 2010. Amortization of deferred finance costs during the three months
ended June 30, 2010 was $0.3 million (Q2 2009 - $0.1 million) and the six
months ended June 30, 2010 was $0.6 million (six months ended June 30,
2009 - $0.1 million). Amortization of deferred finance costs is
recognized over the terms of the credit facilities and Bonds as interest
expense using the effective interest method. During the three months
ended June 30, 2010, certain unamortized financing fees of $0.4 million
were written off in connection with the renewal of the credit facilities
and changes in the syndicate. The remaining balance is amortized over the
term of the renewed facilities.
In addition to the credit facilities and Bonds described above, the Fund
also has unsecured obligations outstanding pursuant to letters of credit
and performance guarantees aggregating to $5 million.
9. FINANCIAL INSTRUMENTS
Recognition and Measurement
The Fund's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities,
distributions payable to unitholders, interest-rate swaps, foreign
exchange contracts, long-term indebtedness and Bonds. The Fund does not
enter into financial instruments for trading or speculative purposes. As
such, financial assets are classified as held to maturity, or loans and
receivables. Financial liabilities are recorded at amortized cost.
Initially, all financial assets and financial liabilities must be
recorded on the balance sheet at fair value. Subsequent measurement is
determined by the classification of each financial asset and financial
liability. All derivatives, including embedded derivatives that must be
separately accounted for, are recorded at fair value in the consolidated
balance sheet. Transaction costs related to financial instruments are
generally capitalized and then amortized over the expected life of the
financial instrument using the effective interest method.
Credit Risk
The Fund's financial assets that are exposed to credit risk consist
primarily of cash and cash equivalents, accounts receivable, foreign
exchange contracts and interest-rate swaps. The Fund, in its normal
course of business, is exposed to credit risk from its customers. The
Fund is exposed to credit loss in the event of non-performance by
counterparties to the interest-rate swaps and foreign exchange contracts.
Risks associated with concentrations of credit risk with respect to
accounts receivable, foreign exchange contracts and interest-rate swaps
are limited due to the credit rating of the applicable customers serviced
by the Fund and hedge counterparties utilized by the Fund and by the
generally short payment terms and frequent settlement of foreign exchange
and swap differences.
Market Risk
The Fund is subject to interest-rate risks as its credit facilities bear
interest at rates that depend on certain financial ratios of the Fund and
vary in accordance with borrowing rates in Canada and the United States.
The following table presents a sensitivity analysis to changes in market
interest rates and their potential impact on the Fund for the three and
six months ended June 30, 2010. As the sensitivity is hypothetical, it
should be used with caution.
Three months ended Six months ended
June 30, 2010 June 30, 2010
-------------------------------------------------------------------------
+ 100 bps - 100 bps + 100 bps - 100 bps
-------------------------------------------------------------------------
Increase (decrease) in
interest expense $ (87) $ 87 $ (174) $ 174
Change to net unrealized
(gain) loss on interest-
rate swaps (5,200) 5,200 (5,200) 5,200
-------------------------------------------------------------------------
Increase (decrease) in
net income $ 5,287 $ (5,287) $ 5,374 $ (5,374)
-------------------------------------------------------------------------
Increase (decrease) in
total comprehensive income $ 5,287 $ (5,287) $ 5,374 $ (5,374)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Fund manages its interest-rate risks through the use of interest-rate
swaps for some of its outstanding long-term indebtedness and by way of
the issuance of fixed-interest rate Bonds.
As at June 30, 2010, the following fixed-paying interest-rate swaps were
outstanding:
-------------------------------------------------------------------------
Fair value of
interest-rate swaps
------------------------- Interest
Maturity date Notional Amount Asset Liability rate(1)
-------------------------------------------------------------------------
July 15, 2010 $ 33,000 $ - $ 349 4.815%
January 5, 2011 22,000 - 191 1.980%
June 15, 2011 20,000 - 847 4.685%
June 15, 2011 25,000 - 1,059 4.685%
December 18, 2014 25,000 - 339 2.720%
March 18, 2015 25,000 - 538 2.940%
March 20, 2017 25,000 - 745 3.350%
March 20, 2017 20,000 - 616 3.366%
-------------------------------------------------------------------------
$ 195,000 $ - $ 4,684
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 Fund's financial leverage as
compared to certain levels specified in the Credit Agreement. As of
June 30, 2010, the Fund's long-term bank indebtedness was subject to
bankers' acceptance fees of 2.50% over the applicable BA rate and
prime rate spreads of 1.50% over the prime rate.
The Fund is a party to foreign exchange contracts. As these foreign
exchange contracts do not qualify for hedge accounting, the unrealized
gain or loss is recorded as mark-to-market on derivative instruments in
the consolidated statements of income. The following table lists the
foreign exchange contracts as at June 30, 2010:
-------------------------------------------------------------------------
Fair value of foreign
exchange contracts
------------------------- Exchange
Maturity date Notional Amount Asset Liability rate
-------------------------------------------------------------------------
July 15, 2010 $ 500 $ - $ 19 1.0271
August 16, 2010 500 - 19 1.0272
September 15, 2010 500 - 19 1.0273
October 15, 2010 500 - 18 1.0275
November 15, 2010 500 - 18 1.0278
December 15, 2010 500 - 18 1.0282
-------------------------------------------------------------------------
$ 3,000 $ - $ 111
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table presents a sensitivity analysis to changes in the
foreign exchange between the Canadian and US dollar on the Fund for the
three months ended June 30, 2010. As the sensitivity is hypothetical, it
should be used with caution.
Three months ended Six months ended
June 30, 2010 June 30, 2010
-------------------------------------------------------------------------
+ $0.05 CAD -$0.05 CAD + $0.05 CAD -$0.05 CAD
Per USD Per USD Per USD Per USD
-------------------------------------------------------------------------
Increase (decrease) in
net income $ 111 $ (111) $ 197 $ (197)
Unrealized gain (loss) on
mark-to-market on foreign
exchange contracts (150) 150 (150) 150
-------------------------------------------------------------------------
Total increase (decrease)
in net income $ 39 $ (39) $ (47) $ 47
-------------------------------------------------------------------------
Increase (decrease) in
total comprehensive
income $ 39 $ (39) $ (47) $ 47
-------------------------------------------------------------------------
Liquidity Risk
The Fund has outstanding long-term bank indebtedness of $160 million with
a maturity date of June 30, 2013 and fixed-interest-rate Bonds of $50
million maturing June 30, 2017. The degree to which the Fund is leveraged
may reduce its ability to obtain additional financing for working capital
and to finance investments to maintain and grow the current levels of
cash flows from operations. The Fund may be unable to extend the maturity
date of the credit facilities or to refinance outstanding indebtedness.
Management, to reduce liquidity risk, has historically renewed the terms
of the Fund's long-term indebtedness in advance of its maturity dates and
the Fund 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 Fund has made numerous
voluntary payments on its outstanding long-term indebtedness and a
portion of its committed term credit facilities remain undrawn. Further,
the Credit Agreement and the Note Purchase and Private Shelf Agreement
provide for additional uncommitted credit arrangements of up to $150
million and Bonds (under an uncommitted shelf facility) of up to $30
million with the use of these arrangements subject to the prior approval
of the relevant lenders and fees, spreads and other terms to be
negotiated at that time.
Management measures liquidity risk through comparisons of current
financial ratios with financial covenants contained in the Credit
Agreement and the Note Purchase and Private Shelf Agreement.
Fair Value Hierarchy
The Fund values instruments carried at fair value using quoted market
prices, where available. Quoted market prices represent a Level 1
valuation. When quoted market prices are not available, the Fund
maximizes the use of observable inputs within valuation models. When all
significant inputs are observable, the valuation is classified as Level
2. Valuations that require a significant use of unobservable inputs are
considered Level 3. The following table outlines the fair value hierarchy
of instruments carried at fair value:
June 30, 2010
-------------------------------------------------------------------------
Level 1 Level 2 Level 3 Total
Assets:
Derivative instruments $ - $ - $ - $ -
-------------------------------------------------------------------------
$ - $ - $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities:
Derivative instruments $ - $ 4,795 $ - $ 4,795
-------------------------------------------------------------------------
$ - $ 4,795 $ - $ 4,795
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Level 2 financial instruments recorded in the Fund's balance sheet
include interest-rate swaps and foreign exchange contracts.
Hedge Accounting
Where derivatives are held for risk management purposes or when
transactions meet the criteria, including documentation requirements,
specified in the CICA Handbook Section 3865, hedge accounting is applied
to the risks being hedged. When hedge accounting is not applied, the
change in the fair value of the derivative is recognized in income,
including instruments used for economic hedging purposes that do not meet
the requirements for hedge accounting.
Effective January 1, 2007, the Fund ceased applying hedge accounting on
the outstanding interest-rate swaps and foreign exchange contracts.
Derivative Financial Instruments
Derivatives are carried at fair value and are reported as assets where
they have a positive fair value and liabilities where they have a
negative fair value. Derivatives may be embedded in other financial
instruments or contracts. Derivatives embedded in other financial
instruments are valued as separate derivatives when their economic
characteristics and risks are not clearly and closely related to those of
the host contract unless such contracts relate to normal course
operations and qualify for the normal purchase and sale exemption in
accordance with the standards.
Accumulated Other Comprehensive Income (Loss)
When applicable, changes in the fair value of cash flow hedging
instruments are recorded in accumulated other comprehensive income (loss)
until recognized in the consolidated statement of income. Accumulated
other comprehensive income (loss) forms part of unitholders' equity.
10. OTHER LONG-TERM LIABILITIES
June 30, December 31,
2010 2009
-------------------------------------------------------------------------
Deferred compensation program $ 1,904 $ 845
Employee future benefits 4,927 4,987
Contractual supplier obligation 1,302 1,319
Capital lease - 10
-------------------------------------------------------------------------
$ 8,133 $ 7,161
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The deferred compensation program, which commenced on January 1, 2009, is
a long-term incentive plan that includes a cash award component and a
cash-settled unit-based compensation component. Both the cash component
and the cash-settled unit-based compensation component awarded at the
grant date are subject to a three year target for compound annual growth
in adjusted income. An expense of $0.6 million was recorded in the
consolidated statement of earnings for the three months ended June 30,
2010 relating to the deferred compensation program (Q2 2009 -$0.2
million) and $0.9 million for the six months ended June 30, 2010 (six
months ended June 30, 2009 - $1.0 million).
Employee future benefits consist of defined contribution pension plans
and a non-pension post-retirement benefit plan. Obligations relating to
employee future benefits relate to the non-pension post-retirement
benefit plan. The Fund's non-pension post-retirement benefit plans are
defined benefit plans funded on a cash basis by contributions from the
Fund, which covers certain medical costs of a limited number of
employees. The Fund measures its accrued benefit obligations and the fair
value of the plan for accounting purposes as at December 31 of each year.
The latest actuarial valuation of the post-retirement benefit plan was
performed as at December 31, 2009. The next valuation will be performed
in 2010.
The Fund's principal pension plans are defined contribution pension plans
that provide pensions to substantially all eligible employees. Total
expense for the Fund's defined contribution pension plan for the three
months ended June 30, 2010 was $0.7 million (Q2 2009 - $0.4 million) and
for six months ended June 30, 2010 was $1.5 million (six months ended
June 30, 2009 - $0.9 million).
The contractual supplier obligation relates to payments to be made for a
customized software package. The total liability is $1.3 million of which
$0.3 million is recorded in current liabilities.
11. INCOME TAXES
The Fund is a mutual fund trust for income tax purposes and will be a
specified investment flow through trust ("SIFT") for years commencing
after 2010. As such, the Fund is subject to current income taxes on any
taxable income of its corporate subsidiaries, on any of its taxable
income for its flow-through subsidiaries not distributed to unitholders
prior to January 1, 2011 and on all taxable income subsequent to December
31, 2010. If the Fund's equity capital grows beyond certain dollar limits
prior to January 1, 2011, the Fund would become a SIFT and would commence
in that year being subject to tax on income distributed. The Fund expects
that its income distributed will not be subject to tax prior to 2011 and
accordingly has not provided for future income taxes on its temporary
differences and those of its flow-through subsidiary trust and
partnerships expected to reverse prior to 2011 as it is considered tax
exempt for accounting purposes.
Taxable income distributed by the Fund to its unitholders will be taxable
income of those unitholders.
Significant components of the Fund's future tax assets and liabilities
with respect to differences between the consolidated carrying values and
the related tax bases of the assets and liabilities within certain
partnership, trust and corporate subsidiaries are as follows:
June 30, December 31,
2010 2009
-------------------------------------------------------------------------
Future income tax assets:
Capital assets less than tax values $ 83 $ 2,935
Intangible assets less than tax values 10,559 10,284
Tax losses available for future periods 23,952 19,289
Accrued and other liabilities 4,737 6,088
-------------------------------------------------------------------------
39,331 38,596
Valuation allowance (14,314) (13,897)
-------------------------------------------------------------------------
Total future tax asset 25,017 24,699
Future income tax liabilities:
Capital assets greater than tax values 6,106 3,208
Intangible assets greater than tax values 41,065 45,726
-------------------------------------------------------------------------
Total future tax liabilities 47,171 48,934
-------------------------------------------------------------------------
Net future income tax liabilities $ 22,154 $ 24,235
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Fund does not expect the temporary differences between the carrying
amount and tax base of certain intangible assets to reverse in the
foreseeable future and accordingly has reduced the related future income
tax asset by a valuation allowance of $10,559.
The Fund also does not expect to realize the benefit of certain loss
carry-forwards of corporate subsidiaries in the foreseeable future
and accordingly has not recognized a future income tax asset for such
losses by recording a valuation allowance of $3,755.
No future tax liability has been provided for the taxable temporary
difference related to goodwill since this amount is not deductible for
tax purposes and is therefore specifically exempt from the recognition
requirements.
The provision for future income taxes of $416 in the consolidated
statement of income represents the change in the consolidated net future
income tax liabilities, excluding amounts that were recorded as an
adjustment to goodwill. The effective tax rate for the period differs
from the expected tax rate due to the results of operations of its
corporate subsidiaries; and the change in temporary differences expected
to reverse after 2010 for the Fund, its flow-through trust and
partnership subsidiaries.
As at June 30, 2010, certain corporate subsidiaries of the Fund had
$87,238 of net operating losses for income tax purposes. These losses
will begin to expire commencing in fiscal 2022. The deductibility of
losses of a U.S. corporate subsidiary of $7,361 is subject to annual
limitations.
12. TRUST UNITS
An unlimited number of trust units may be issued by the Fund pursuant to
the Fund's Declaration of Trust. Each unit is transferable and represents
an equal, undivided beneficial interest in any distributions from the
Fund and in the net assets of the Fund. All units are of the same class
with equal rights and privileges and are not subject to future calls or
assessments. Each unit entitles the holder to one vote at all meetings of
unitholders and a pro rata share of distributions declared by the Fund.
The Fund intends to make monthly cash distributions of its distributable
cash, as defined in the Fund's Declaration of Trust, subject to working
capital requirements and other reserves. The net proceeds from the
issuance of trust units and the number of units outstanding are as
follows:
June 30, December 31,
2010 2009
-------------------------------------------------------------------------
Balance, beginning of period $ 595,859 $ 476,343
Units issued - 119,516
-------------------------------------------------------------------------
Balance, end of period $ 595,859 $ 595,859
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Units outstanding, end of period 53,233,373 53,233,373
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The weighted average number of units outstanding during the three and six
months ended June 30, 2010 was 53,233,373 (Q2 2009 - 43,946,792).
13. CAPITAL
The Fund views its capital as the combination of its indebtedness and
equity balances. In general, the overall capital of the Fund is evaluated
and determined in the context of its financial objectives and its
strategic plan.
While the Fund carries a level of cash on hand, this amount is modest in
relation to its overall capital and is generally in an amount determined
in reference to its pending distribution obligations and short-term
changes in non-cash working capital balances.
With respect to its level of indebtedness, the Fund determines the
appropriate level in the context of its cash flow and overall business
risks. Generally, the Fund has maintained low level of indebtedness
relative to cash flow in order to provide increased financial flexibility
and to provide increased protection for unitholders relative to their
expectation of distributions. Additionally, the Fund has historically
generated cash flow in excess of distributions and has used a portion of
such excess to pay down indebtedness. The Fund would consider increasing
its level of indebtedness relative to cash flow to assist in the
financing of an acquisition. As well, the Fund will review its level of
indebtedness in the context of the change in taxation impacting the Fund
commencing 2011.
The Fund's indebtedness is subject to a number of covenants and
restrictions including the requirement to meet certain financial ratios
and financial condition tests at a subsidiary level. One such ratio is
the "Senior Funded Debt / EBITDA Ratio" as defined in the Credit
Agreement. The maximum ratio allowed for a 12-month trailing period is
2.50. For the 12- month trailing period ended June 30, 2010, this ratio
was calculated at 1.37 (12-month trailing period ended June 30, 2009
- 1.25). Management also uses this ratio as a key indicator in managing
the Fund's capital.
With respect to its equity, the current level of capital is considered
adequate in the context of current operations and the present strategic
plan of the Fund. The equity component of capital increases primarily
based upon the income of the business less the distribution paid. Any
major acquisition would be financed in part with additional equity. The
Fund will also review its level of equity in the context of the change in
taxation impacting the Fund commencing in 2011.
14. COMMITMENTS
As at June 30, 2010, the Fund has lease obligations with respect to real
estate, vehicles and equipment as follows:
2010 6,922
2011 8,880
2012 7,597
2013 6,949
2014 6,004
Thereafter 6,915
-------------------------------------------------------------------------
43,267
-------------------------------------------------------------------------
-------------------------------------------------------------------------
15. SIGNIFICANT CUSTOMERS
For the three months ended June 30, 2010, the Fund earned 65% of its
consolidated revenue from its seven largest customers (Q2 2009 - 75%).
For the three months ended June 30, 2010, two of these customers
individually accounted for greater than 10%, but not more than 15% of the
Fund's total revenue (for the three months ended June 30, 2009, three of
these customers individually accounted for greater than 10%, but no more
than 17% of the Fund's total revenue).
For the six months ended June 30, 2010, the Fund earned 64% of its
consolidated revenue from its seven largest customers (Q2 2009 - 76%).
For the six months ended June 30, 2010, two of these customers
individually accounted for greater than 10%, but not more than 14% of the
Fund's total revenue (for the six months ended June 30, 2009, three of
these customers individually accounted for greater than 10%, but no more
than 17% of the Fund's total revenue).
16. SEGMENTED INFORMATION
The Fund had previously operated and reported upon two business segments,
the "D+H Segment" and the "Filogix Segment". Subsequent to the completion
of the Resolve acquisition, the Fund announced that it would move to a
single integrated operation in order to better serve customers and
maximize effectiveness. The business is now managed along functional
lines and operating decisions and performance assessment is aligned with
these functions. As such, the Fund will report its business as a single
segment and prior year segment information has been restated to conform
to the current year's presentation.
Revenue pertaining to major service areas for the three and six months
ended June 30, 2010 and 2009 are as follows:
Three months ended Six months ended
June 30, June 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Revenue
Programs to the chequing
account $ 74,660 $ 72,972 $ 147,825 $ 144,531
Loan servicing 30,365 - 60,034 -
Loan registration
technology services 28,338 1,178 51,185 1,942
Lending technology services 20,852 18,619 37,942 32,821
Other 14,519 1,788 30,167 3,792
-------------------------------------------------------------------------
$ 168,734 $ 94,557 $ 327,153 $ 183,086
-------------------------------------------------------------------------
17. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the
current period's presentation.
SUPPLEMENTARY FINANCIAL INFORMATION
Consolidated Operating Results by Period
-------------------------------------------------------------------------
Three Three Three Three Three
months months months months months
ended ended ended ended ended
(in thousands of June March December September June
Canadian dollars, 30, 31, 31, 30, 30,
unaudited) 2010 2010 2009 2009 2009
-------------------------------------------------------------------------
Revenue $ 168,734 $ 158,419 $ 156,215 $ 142,463 $ 94,557
Expenses 125,637 120,957 119,671 104,879 62,080
-------------------------------------------------------------------------
EBITDA(1) 43,097 37,462 36,544 37,584 32,477
Amortization of
capital assets
and non-
acquisition
intangibles 5,003 4,706 4,551 4,530 3,679
Interest expense 3,692 3,374 3,326 2,681 1,787
-------------------------------------------------------------------------
Adjusted income(1) 34,402 29,382 28,667 30,373 27,011
Amortization of mark-
to-market adjustment
of interest-rate
swaps 103 189 103 103 136
Net unrealized loss
(gain) on derivative
instruments(2) 1,694 (1,559) (1,620) (1,647) (1,069)
Future income tax
expense (recovery) 416 587 (2,747) 1,018 (718)
Amortization of
intangibles from
acquisition 7,158 7,097 7,330 5,942 3,441
-------------------------------------------------------------------------
Net income $ 25,031 $ 23,068 $ 25,601 $ 24,957 $ 25,221
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flows from
operating
activities $ 36,613 $ 20,981 $ 40,575 $ 38,959 $ 27,173
Changes in non-cash
working capital
other items(3) 2,792 13,107 (7,356) (4,056) 3,517
-------------------------------------------------------------------------
Adjusted cash flows
from operating
activities 39,405 34,088 33,219 34,903 30,690
Less:
Asset expenditures
and contract
payments(4) 5,293 3,976 5,133 2,818 2,491
-------------------------------------------------------------------------
Adjusted cash flows
after capital asset
expenditures and
contract payments 34,112 30,112 28,086 32,085 28,199
Distributions paid
to unitholders 24,482 24,482 24,482 23,058 20,211
-------------------------------------------------------------------------
9,630 5,630 3,604 9,027 7,988
Cash flows provided
by (used in) other
financing
activities (7,564) 5,000 (6,000) (5,569) (2,000)
Fair value of trust
units issued - - - 119,394 -
Fair value of
acquisitions - - (1,449) (129,682) 103
Changes in non-cash
working capital and
other items(3) (2,792) (13,107) 7,356 4,056 (3,517)
-------------------------------------------------------------------------
Increase (decrease)
in cash and cash
equivalents for
the period $ (726) $ (2,477) $ 3,511 $ (2,774) $ 2,574
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA and Adjusted income are non-GAAP terms. See Non-GAAP Measures
for a more complete description of these terms.
(2) The Business enters into derivative contracts to fix the interest
rates and foreign exchange rates on a significant portion of its
outstanding bank debt and foreign currency transactions, which are
relatively minor, respectively. For accounting purposes, these
derivative instruments do not qualify for hedge accounting treatment
and, accordingly, any change in the fair value of these contracts is
recorded through income. Provided the Business does not cancel its
derivative contracts prior to maturity, the amounts represent a non-
cash unrealized gain or loss that will subsequently reverse through
income. The Company has historically held its derivative contracts to
maturity.
(3) Changes in non-cash working capital and certain other balance sheet
items have been excluded from adjusted cash flows from operating
activities so as to remove the effects of timing differences in cash
receipts and cash disbursements, which generally reverse themselves,
but can vary significantly across quarters and to remove certain of
the payments related to the acquisition and related restructuring
activities that were recorded as part of the acquisition. For
details, see the Changes in Non-Cash Working Capital and Other Items
section.
(4) Asset expenditures include both maintenance asset expenditures and
growth asset expenditures. Maintenance asset expenditures are defined
by the Fund as asset expenditures necessary to maintain and sustain
the current productive capacity of the Business or generally improve
the efficiency of the Business. Growth asset expenditures are defined
by the Fund as asset expenditures that increase the productive
capacity of the Business with a reasonable expectation of an increase
in cash flow.
-------------------------------------------------------------------------
Three Three Three Three Three
months months months months months
ended ended ended ended ended
June March December September June
(in Canadian dollars, 30, 31, 31, 30, 30,
unaudited) 2010 2010 2009 2009 2009
-------------------------------------------------------------------------
Adjusted income
per unit, basic
and diluted $ 0.6462 $ 0.5519 $ 0.5385 $ 0.6002 $ 0.6146
Net income per
unit, basic and
diluted $ 0.4702 $ 0.4333 $ 0.4809 $ 0.4931 $ 0.5739
Adjusted cash
flows from
operating
activities $ 0.7402 $ 0.6403 $ 0.6240 $ 0.6897 $ 0.6983
Adjusted cash
flows after
capital asset
expenditures
and contract
payments $ 0.6408 $ 0.5657 $ 0.5276 $ 0.6340 $ 0.6417
Distributions paid
to unitholders $ 0.4599 $ 0.4599 $ 0.4599 $ 0.4599 $ 0.4599
Distributions
declared during
period $ 0.4599 $ 0.4599 $ 0.4599 $ 0.4599 $ 0.4599
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Condensed Consolidated Balance Sheet
-------------------------------------------------------------------------
(in thousands of June March December September June
Canadian dollars, 30, 31, 31, 30, 30,
unaudited) 2010 2010 2009 2009 2009
-------------------------------------------------------------------------
Cash and cash
equivalents $ 675 $ 1,401 $ 3,878 $ 367 $ 3,141
Other current
assets 89,034 88,247 72,878 85,242 30,078
Capital and other
non-current assets 54,591 52,848 55,177 61,122 24,121
Intangible assets 273,938 279,663 289,774 293,623 136,905
Goodwill 520,364 522,482 519,848 516,374 457,636
-------------------------------------------------------------------------
$ 938,602 $ 944,641 $ 941,555 $ 956,728 $ 651,881
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Payables and other
current
liabilities $ 87,499 $ 159,873 $ 87,463 $ 93,385 $ 36,745
Other long-term
liabilities 69,483 66,942 70,338 75,165 15,691
Long-term
indebtedness 206,902 143,760 208,463 214,109 145,470
Unitholders'
equity 574,718 574,066 575,291 574,069 453,975
-------------------------------------------------------------------------
$ 938,602 $ 944,641 $ 941,555 $ 956,728 $ 651,881
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distribution History
-------------------------------------------------------------------------
Distributions per unit(1)
Month 2010 2009 2008 2007 2006
-------------------------------------------------------------------------
January $ 0.1533 $ 0.1533 $ 0.1430 $ 0.1280 $ 0.1220
February 0.1533 0.1533 0.1430 0.1280 0.1220
March 0.1533 0.1533 0.1430 0.1320 0.1250
April 0.1533 0.1533 0.1430 0.1320 0.1250
May 0.1533 0.1533 0.1533 0.1320 0.1250
June 0.1533 0.1533 0.1533 0.1320 0.1250
July 0.1533 0.1533 0.1320 0.1250
August 0.1533 0.1533 0.1320 0.1250
September 0.1533 0.1533 0.1320 0.1250
October 0.1533 0.1533 0.1320 0.1250
November(2) 0.1533 0.1533 0.3430 0.1280
December(3) 0.1533 0.1933 0.1430 0.1280
-------------------------------------------------------------------------
$ 0.9198 $ 1.8396 $ 1.8384 $ 1.7980 $ 1.5000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions per unit(1)
Month 2005 2004 2003 2002 2001
-------------------------------------------------------------------------
January $ 0.1200 $ 0.1150 $ 0.1117 $ 0.1083 $ -
February 0.1200 0.1150 0.1117 0.1083 -
March 0.1200 0.1168 0.1117 0.1083 -
April 0.1200 0.1168 0.1133 0.1083 -
May 0.1200 0.1168 0.1133 0.1083 -
June 0.1200 0.1168 0.1133 0.1083 -
July 0.1200 0.1168 0.1133 0.1117 -
August 0.1220 0.1168 0.1133 0.1117 -
September 0.1220 0.1168 0.1133 0.1117 -
October 0.1220 0.1168 0.1150 0.1117 -
November(2) 0.1220 0.1200 0.1150 0.1117 -
December(3) 0.1220 0.1200 0.1150 0.1117 0.0427
-------------------------------------------------------------------------
$ 1.4500 $ 1.4044 $ 1.3599 $ 1.3200 $ 0.0427
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Monthly distributions are made to unitholders of record on the last
business day of each month and are paid within 31 days following each
month end.
(2) November 2007 declared distributions included a special distribution
of $0.20 for unitholders of record on November 15, 2007 and was paid
on November 30, 2007.
(3) Distributions in 2001 are in respect of the 12 calendar days from
December 20, 2001 to December 31, 2001. December 2008 declared
distributions included a non-cash special distribution of $0.04 for
unitholders of record on December 31, 2008 and was paid on December
31, 2008.
Tax Allocation of Distributions
-------------------------------------------------------------------------
2010 2009 2008 2007 2006
-------------------------------------------------------------------------
Dividend income 0.0% 0.0% 0.0% 0.0% 0.0%
Other income 100.0% 100.0% 100.0% 100.0% 100.0%
Return of capital 0.0% 0.0% 0.0% 0.0% 0.0%
-------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0%
-------------------------------------------------------------------------
---------------------------------------------------------------
2005 2004 2003 2002
---------------------------------------------------------------
Dividend income 0.0% 15.0% 19.5% 16.9%
Other income 91.6% 75.2% 69.5% 71.5%
Return of capital 8.4% 9.8% 11.0% 11.6%
-------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0%
-------------------------------------------------------------------------
The above tax allocation of distributions for 2010 represents an estimate
based on the total expected distributions for the year ended December 31,
2010.
Other Statistics
(in thousands, except per unit amounts)
Number Market
Trading price range of units of units capital-
(TSX: "DHF.UN") outstand- ization
---------------------------- Average ing at at
Quarter High Low Close daily quarter quarter
volume end end
-------------------------------------------------------------------------
2010 - Q2 18.46 15.16 16.58 118 53,233 882,609
- Q1 18.00 15.59 17.71 161 53,233 942,763
2009 - Q4 16.92 14.05 16.92 177 53,233 900,709
- Q3 14.99 12.25 14.90 182 53,233 793,177
- Q2 14.29 11.51 12.25 126 43,947 538,348
- Q1 16.76 10.40 11.92 104 43,947 523,846
2008 - Q4 17.15 10.30 16.79 117 43,947 737,867
- Q3 16.40 13.50 15.47 93 43,947 679,857
- Q2 17.85 15.53 15.58 83 43,947 684,691
- Q1 21.75 15.77 17.19 107 43,947 755,445
2007 - Q4 22.00 18.75 21.00 98 43,947 922,883
- Q3 20.10 17.14 19.80 78 43,947 870,146
- Q2 19.79 16.30 19.31 90 43,947 848,613
- Q1 17.19 15.00 16.60 87 43,947 729,517
2006 - Q4 19.80 13.80 15.46 143 43,947 679,417
- Q3 19.49 17.21 19.19 96 43,947 843,339
- Q2 21.99 16.99 17.70 100 43,947 777,858
- Q1 23.18 19.50 21.50 61 37,921 815,297
2005 - Q4 24.00 16.32 23.19 92 37,921 879,383
- Q3 24.07 19.50 21.19 88 37,921 803,542
- Q2 22.85 19.58 20.92 61 37,921 793,303
- Q1 23.25 19.65 22.00 67 37,921 834,257
2004 - Q4 23.25 18.80 22.70 81 37,921 860,802
- Q3 19.62 16.75 19.45 58 37,921 737,559
- Q2 19.34 15.05 18.00 93 37,921 682,574
- Q1 19.40 16.71 19.40 92 37,921 735,663
2003 - Q4 17.50 15.10 17.45 67 37,921 661,718
- Q3 15.65 14.52 15.30 99 37,921 580,188
- Q2 15.20 12.91 15.00 82 37,921 568,812
- Q1 13.69 12.48 12.94 92 37,921 490,695
2002 - Q4 13.25 11.22 12.86 139 37,921 487,661
- Q3 12.13 10.45 12.10 165 37,921 458,842
- Q2 11.25 10.00 10.95 176 37,921 415,233
- Q1 11.20 10.11 10.51 149 18,955 199,217
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About Davis + Henderson
Davis + Henderson is a leading solutions provider to the financial services marketplace. Founded in 1875, the company today provides innovative programs, technology products and technology based business services to customers who offer chequing accounts, credit card accounts and personal, commercial, and other lending and leasing products. Davis + Henderson Income Fund is listed on the Toronto Stock Exchange under the symbol DHF.UN. Further information can be found in the disclosure documents filed by Davis + Henderson Income Fund with the securities regulatory authorities, available at www.sedar.com.
%SEDAR: 00017092EF
For further information: Bob Cronin, Chief Executive Officer, Davis + Henderson, Limited Partnership, (416) 696-7700, extension 5301, [email protected]; Brian Kyle, Chief Financial Officer, Davis + Henderson, Limited Partnership, (416) 696-7700, extension 5690, [email protected]
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