D+H Reports Third Quarter 2013 Results

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

TORONTO, Nov. 5, 2013 /CNW/ - Davis + Henderson Corporation ("D+H" or the "Corporation" or the "Company") today delivered strong growth and performance for the three and nine months ended September 30, 2013 as it continued to build its standing as a leading North American financial technology ("FinTech") provider.

"During the third quarter, D+H achieved solid organic growth in our Canadian and U.S. Segments and successfully completed the acquisition of Harland Financial Solutions ("HFS") for US$1.2 billion," said Gerrard Schmid, Chief Executive Officer.  "The addition of HFS has significantly increased our size, customer base and FinTech capabilities and presents exciting new opportunities for diversified growth. As planned, we are working aggressively to develop an integrated operating model for the U.S. that will support our objectives for growth, while we drive enhancements to our Canadian operations and offerings. This dual focus should create meaningful value for our shareholders and customers."

During the third quarter, D+H recorded solid operating profitability in its Canadian Segment, driven by both revenue growth and improved cost effectiveness. In D+H's U.S. segment, HFS had a material impact even though it contributed only from the date of acquisition of August 16, and was the primary reason for year over year third quarter Adjusted revenue growth in the U.S. Segment.

"Third quarter results demonstrate that our business is operating on plan, including realizing operational efficiencies within our Canadian operations from previously executed programs, and that we have a strong foundation to support the next phase of our FinTech journey," said Brian Kyle, Chief Financial Officer. "Following the HFS acquisition, we took advantage of positive cash flow within our business to repay $15.0 million in debt. This reduced our debt-to-EBITDA ratio from 3.05 on closing at August 16^th, to 2.90 at September 30^th. As a result, we have accelerated our timeline to reduce debt and now expect it to be at or below 2.5 times in 2015."

Third Quarter Highlights 

• On August 16, 2013, D+H acquired 100% of HFS, a leading U.S. based provider of strategic financial technology, including lending and compliance, core banking, and channel management technology solutions to U.S. banks, credit unions and mortgage companies.
• Revenues from continuing operations increased by 18.4% to $209.2 million from $176.7 million in the same quarter in 2012, reflecting the inclusion of HFS revenues in the U.S. Segment and growth in the Canadian Segment.
• Adjusted revenues¹ of $225.3 million for the period were $48.6 million, or 27.5%, higher than a year ago.
• Adjusted EBITDA¹ increased 28.3% to $64.8 million (28.8% margin) from $50.5 million (28.6% margin) for the same period in 2012.
• Net income of $6.9 million ($0.0991 per share, basic and $0.0989 per share, diluted), decreased compared to a net income of $19.6 million ( $0.3310 per share, basic and diluted) for the same quarter in 2012, primarily due to the after-tax impacts of transaction costs and other acquisition-related expenses and adjustments.
• Adjusted net income¹ increased by 31.5% to $36.7 million from $27.9 million in the third quarter of 2012 mainly due to the addition of HFS.  Adjusted net income per share increased by 11.3% to $0.5245, from $0.4711 in the third quarter of 2012.  Adjusted net income per share for the quarter was impacted by the additional common shares issued to finance the HFS acquisition on August 16, 2013.
• Debt repayments during the third quarter of 2013 were $15.0 million.
• D+H paid $0.32 per share in dividends to its shareholders, up from $0.31 a year ago.

Nine-Month Highlights 

• Revenue from continuing operations increased by 10.5% to $578.0 million from $523.0 million for the same nine-month period in 2012.
• Adjusted revenues¹ were $594.1 million, an increase of $71.1 million, or 13.6%, compared to the same period in 2012.        
• Adjusted EBITDA increased by 11.8% to $166.2 million (28.0% margin) from $148.6 million (28.4% margin) for the same period in 2012.
• Net income was $26.3 million ($0.4182 per share, basic and $0.4177 per share, diluted), a decrease of $29.1 million, or 52.6%, compared to $55.4 million ($0.9357 per share, basic and diluted) for the same period of 2012, mainly due to a loss from discontinued operations of $20.2 million ($0.3211 per share, basic and $0.3208 per share, diluted), the after-tax impacts of transaction costs and acquisition related adjustments in connection with the acquisition of HFS and Compushare.
• Adjusted net income increased by 14.6% to $94.0 million from $82.1 million for the same period in 2012 mainly due to the addition of HFS. Adjusted net income per share increased by 8.0% to $1.4957 per share from $1.3855 per share and was impacted by the additional shares issued to partially fund the acquisition of HFS.
• Debt repayments for the first nine months of 2013 were $36.5 million.
• D+H paid $0.96 per share in dividends to shareholders, up from $0.93 per share in the same period of 2012.

____________________________ 1 D+H's financial results are prepared in accordance with IFRS. D+H reports several non-IFRS financial measures, including EBITDA, Adjusted revenues, Adjusted EBITDA and Adjusted net income used above.  See Non-IFRS Financial Measures for a more complete description of these terms. Any non-IFRS financial measures should be considered in context with the IFRS financial statement presentation and should not be considered in isolation or as a substitute for IFRS net income or cash flows. Further, D+H's measures may be calculated differently from similarly titled measures of other companies.

D+H's unaudited condensed interim consolidated financial statements for the third quarter of 2013, accompanying notes to the financial statements and management's discussion & analysis ("MD&A") along with the supplementary financial information will be available today at www.dhltd.com and tomorrow on www.sedar.com.

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

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This press release contains certain statements that constitute forward-looking information within the meaning of applicable securities laws ("forward-looking statements"). Statements concerning D+H's objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of D+H are forward-looking statements.  The words "believe", "expect", "anticipate", "estimate", "intend", "may", "will", "would" and similar expressions and the negative of such expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.  These forward-looking statements are subject to important assumptions, including the following specific assumptions: the ability of D+H to meet its "Revenues", "Adjusted revenues" "EBITDA", "Adjusted EBITDA" and "Adjusted net income" targets (see Non-IFRS Financial Measures for a more complete description of the terms Adjusted revenues, EBITDA, Adjusted EBITDA and Adjusted net income); general industry and economic conditions; changes in D+H's relationship with its customers and suppliers; pricing pressures and other competitive factors; the anticipated effect of acquisitions on the financial performance of D+H; D+H's belief that there exists a growing market for the replacement of legacy core processing systems; and the ability of D+H to achieve the expected benefits of the acquisition of HFS, including: (i) D+H's ability to enhance its presence in the United States FinTech market, (ii) the diversification of D+H's business in terms of service offerings, clients and geographic focus as a result of the acquisition, (iii) the broadening of D+H's sources of long-term recurring revenues following the acquisition closing; (iv) the benefits of the acquisition for D+H from a margin, accretion and cash flow perspective (each of which may be impacted by final financing arrangements, the realization and timing of any potential synergies and the operating performance of D+H and HFS); (v) D+H's ability to successfully integrate HFS with D+H's existing business; and (vi) D+H's expectations regarding enhanced revenue generation through cross-selling opportunities.

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

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

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

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

CONFERENCE CALL

D+H will discuss its financial results for the three and nine months ended September 30, 2013 via conference call at 10:00 a.m. EST (Toronto time) on Wednesday, November 6, 2013. The number to use for this call is 647-427-7450 for Local / International callers or 1-888-231-8191 for US / Canada callers. The conference call will be hosted by Gerrard Schmid, Chief Executive Officer and by Brian Kyle, Chief Financial Officer. The conference call will also be available on the web by accessing CNW Group's website http://www.newswire.ca/en/webcast/detail/1225679/1349823. For anyone unable to listen to the scheduled call, the rebroadcast number will be: 416-849-0833 for Toronto area callers, or 1-855-859-2056 for all other callers, with Encore Password 65213864. The rebroadcast will be available until Wednesday, November 20, 2013.  An archive recording of the conference call will also be available at the above noted web address for one month following the call and a text version of the call will be available at www.dhltd.com.

ADDITIONAL INFORMATION

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

MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") of financial condition and results of operations of Davis + Henderson Corporation (the "Corporation" or the "Company" or "Davis + Henderson" or "D+H" or the "Business") has been prepared with an effective date of November 5, 2013 and should be read in conjunction with the MD&A in the Annual Report for the year ended December 31, 2012, dated February 26, 2013; and the unaudited condensed interim consolidated financial statements for the three and nine months ended September 30, 2013.  External economic and industry factors remain substantially unchanged from those described in the annual MD&A and the Company's most recently filed Annual Information Form, except as described herein.

NON-IFRS FINANCIAL MEASURES

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

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

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

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

Adjusted Revenues

Effective from the third quarter of 2013, the Company uses Adjusted revenues as a measure in determining Adjusted EBITDA and as a measure of performance due to the impact of applying acquisition accounting on the acquisition of HFS.

Upon acquisition, the acquired deferred revenue balances were adjusted to reflect the fair value based on estimated costs of future delivery of the related services for which cash has already been received. These fair value adjustments to deferred revenues recorded as of the acquisition date in accordance with the acquisition accounting standards will reduce revenues recognized post-acquisition under IFRS.  Adjusted revenues exclude these acquisition accounting effects. Management of the Company believes that this non-IFRS measure provides investors with useful information regarding the underlying performance of the business operations and facilitates meaningful comparisons of pre-acquisition operations to post-acquisition revenues. Without considering these non-IFRS adjustments, acquisition accounting adjustments made in accordance with IFRS may make it difficult to make meaningful comparisons of the underlying operations of the business between periods.

EBITDA

EBITDA is defined as income from continuing operations excluding interest, taxes, depreciation and amortization and fair value adjustments of interest-rate swaps which are directly related to interest expense, income from investment in an associate and gain on remeasurement of previously held equity interest in the Compushare investment.  EBITDA is also described as income from operating activities before depreciation and amortization in the consolidated statement of income.

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

Adjusted EBITDA  

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

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

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

As described above, upon acquisition of HFS, the acquired deferred revenue balances were adjusted to reflect the fair value based on estimated costs of future delivery of the related services for which cash has already been received. Similarly, deferred costs, which include sales commissions and implementation costs, were adjusted to reflect their fair values of these items at the acquisition date. These fair value adjustments to deferred revenue and deferred costs recorded as of the acquisition date will reduce revenues and expenses recognized post-acquisition under IFRS primarily over the next two years, after which the impact to the consolidated results would be insignificant.  Adjusted EBITDA excludes these effects from the results in the periods reported.

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

Adjusted Net Income and Adjusted Net Income per Share

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

ADDITIONAL IFRS MEASURES

Income from Operating Activities 

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

STRATEGY

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

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

On August 16, 2013, D+H significantly advanced its FinTech goal and strategy by acquiring HFS. HFS added: 5,400 U.S. bank and credit union customers to bring our combined customer count to over 6,200 (not counting shared customer relationships); a suite of market-leading FinTech products including LaserPro®, America's first choice for lending and compliance solutions, core banking technology and a number of innovative channel solutions; and 1,350 employees across 17 facilities.  Management believes the addition of HFS provides D+H with sales and revenue synergy opportunities in the U.S. banking and credit union marketplace and will improve the Company's value proposition as a single-source FinTech provider.

The HFS acquisition is fully aligned with D+H's overall vision and with its ongoing plan to reduce risk by increasing revenue diversification by geography and service line.

Going forward, management will remain focused on executing its North American growth strategy with emphasis on: (i) developing an integrated operating model in the United States that will support efficient and effective growth;  ii) cross-selling D+H's suite of FinTech solutions including its Point of Sale ("POS") and Loan Origination Systems ("LOS") products, cloud-based infrastructure technology and the HFS suite of FinTech products primarily within the U.S. marketplace to existing banks and credit union customers as well as the more than 6,000 other U.S. community banks and credit unions that could benefit from these offerings; iii) enhancing services, capabilities and cost effectiveness across all service lines in Canada and the U.S. as a means of enhancing customer value and creating additional free cash flow; iv) building new subscription-based offerings in its payments solutions service line where it won a number of Canadian financial institution mandates in the recent year; v) extending an integrated D+H brand into the U.S. market; and vi) expanding its offering through strategic partnerships.

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

The Company is committed to reducing leverage while continuing to support its current dividend payments.  The Company has targeted reducing its Debt to EBITDA ratio (with adjustments as required pursuant to D+H's lending agreements) to below 2.5 times in 2015 from 3.05 times on the date the acquisition of HFS closed.

INDUSTRY TRENDS AND MARKET OPPORTUNITY

Payments Solutions

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

While credit cards, debit cards and other electronic forms of payment are growing, the number of cheques written has declined and is expected to continue to decline. Management believes that the downward trend in cheque order volumes is in the low to mid-single digit range annually.  In recent periods, there has been more volatility in personal cheque order volumes, while the decline in business cheque order volumes continues to be in the low single digit range with comparatively minimal volatility. Management expects that these trends will continue through the remainder of 2013. D+H continues to develop service enhancements to offset this impact and to generate future growth within this category.

Payments solutions revenues are also affected by consumer confidence and employment. D+H believes the number of cheques printed is driven by the number of cheques written, the number of new chequing accounts opened and reorders reflecting changes in consumers' personal situations (i.e., address changes, marital status, employment status etc.).  Consumer confidence directly correlates with consumer spending, while employment also affects revenues through the number of new chequing accounts being opened.  These volume declines have been partially offset by increased average order values for cheques and growth in service enhancements to the chequing and credit card programs.

Lending Processing Solutions

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

Loan Registration and Recovery

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

The economy has been experiencing continuing recovery within the auto and auto lending markets. The recovery is expected to continue through 2013. Increases in lender portfolio values over the last three years should continue to drive volume increases in our recovery business despite falling delinquency rates.  Registration activities are seasonally higher in the spring and summer than in the fall and winter periods.

Student Loans Administration

In our student loans administration services area, which accounts for approximately 35% to 45% of revenues within the lending processing solutions category, we manage a $20 billion student loan portfolio servicing 1.7 million students on behalf of Canadian federal and provincial governments and lenders. Services include student enrollment, management of funds' disbursement, loan tracking, student support services, reporting and collections. Revenues from this program are primarily earned based upon the number of student loans serviced while enrolled in school and the number of loans serviced while students are in the repayment cycle. D+H also earns revenue from professional services work connected to program enhancements requested by the lenders.  Student loan servicing volumes are expected to stabilize and modestly grow on higher student loan balances and extended loan durations as demand among Canadian students for funds through the federal student loans program continues to increase. 

Banking Technology Solutions

Canadian Banking Technology Solutions

Banking technology solutions is reported within the lending category and includes services directed towards mortgage markets in Canada. Also included in this category are the technology products and services supporting leasing, commercial lending and small business lending.  Revenues related to Canadian mortgage markets currently represent approximately 75% to 85% of revenues within this category with over 90% attributable to transaction-based fees earned in connection with Canadian mortgage originations.  Mortgage origination fees can be variable and are impacted by many factors including the economy, the housing market, interest rates and changes in government regulations among others.

Regulatory changes aimed at cooling the Canadian housing market have had less of an impact in 2013 than expected.  In addition to normal seasonal activity declines through the remainder of 2013, industry analysts are also expecting a softening of housing prices to continue in the fourth quarter of 2013.  A potential rate increase by the Bank of Canada would likely further decelerate activity and moderate home prices.  In addition, the broker market will continue to experience competition from internal mobile sales force at lending institutions. Revenues in future periods may also continue to be impacted by strategic price modifications, which are expected to be offset over time by potential revenue from the launch of new products for Canadian lenders, including extension of our technology solutions across various areas in the lending value chain.

U.S. Banking Technology Solutions

Effective August 16, 2013, the Company began to include the revenues from HFS in its U.S. Segment.  HFS derives its revenues from processing and account-based fees for cloud services (outsourcing), licenses for in-house solutions, and installation, maintenance, and support fees from its installed customer base. The majority of HFS's revenues are earned pursuant to long-term contracts with typical contract durations of five to seven years. Our U.S. banking technology solutions are classified into Enterprise and Lending offering categories.

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

Lending solutions primarily consist of loan and deposit origination and mortgage compliance offerings for a wide variety of loan types, including consumer, mortgage and commercial loans, and also market offerings related to commercial lending risk management, underwriting and portfolio management solutions. Within the U.S. lending solutions category revenues, approximately 65% to 75% come from recurring subscription fees, and 15% to 25% from transaction-based activity.

During the past 25 years, the number of financial institutions in the United States has declined at a relatively steady rate of approximately 3% per year, which is not expected to change for the balance of 2013, primarily as a result of voluntary mergers and acquisitions. An acquisition benefits us when a newly combined institution is processed on our platform, or elects to move to one of our platforms, and negatively impacts us when a competing platform is selected. Financial institution acquisitions also impact our financial results due to early contract termination fees in our multi-year customer contracts. Contract termination fees are primarily generated when an existing customer with a multi-year contract is acquired by another financial institution. These fees can vary from period to period based on the number and size of customers that are acquired and how early in the contract term the contract is terminated.

Although we effectively serve much larger financial institutions with discrete products, D+H's primary target in the United States are the 13,000 commercial banks, credit unions and mortgage companies of which we currently focus on financial institutions that have assets less than US$5 billion. These financial institutions are facing increasing challenges to improve their competitiveness and operational performance, including requirements to comply with an increasingly complex regulatory environment, the emergence of new technologies and channels, and margin compression on traditional products. As a result, financial institutions invest significant capital in order to process transactions more efficiently, manage risk and information more effectively, maintain regulatory compliance and offer new and innovative products and services to their customers.

A growing core replacement market opportunity exists, due to the large percentage of outdated core systems, as financial institutions rely on core processing systems to manage fundamental operational processes, such as processing banking transactions, maintaining account balances, facilitating general ledger accounting, and integrating all other banking applications. Many of the core processing systems that are currently available in the market are legacy computer systems which (i) limit the banks' operational abilities due to high maintenance costs; (ii) limit flexibility; (iii) delay market access for new products; and (iv) make it difficult to meet changing regulatory requirements.

For a detailed discussion of the operating results for the three and nine months ended September 30, 2013 and management's outlook, please see below.

ACCOUNTING PRINCIPLES AND FINANCIAL INFORMATION PRESENTATION

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

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

Effective January 1, 2013, D+H reports its revenues under the following categories:  (i) payments solutions; (ii) lending processing solutions (previously reported as loan servicing solutions and loan registration and recovery services) and; (iii) banking technology solutions (previously reported as lending technology services). Beginning in the third quarter of 2013, the Company further segregates its U.S. banking technology solutions category into: a) enterprise; and b) lending offerings.  For segment reporting purposes, revenues in respect of payments solutions, lending processing solutions and banking technology solutions (including banking technology solutions to the Canadian mortgage market and technology solutions in the commercial lending, small business lending and leasing areas) are reported as part of the Canadian Segment.  The U.S. Segment includes revenues from banking technology solutions to the U.S. market and effective August 16, 2013, revenues relating to HFS.

Comparative periods have been conformed to the current period classification.

All amounts are in Canadian dollars, unless otherwise specified.

OPERATING RESULTS - THIRD QUARTER AND YEAR-TO-DATE 2013

The following discussion should be read in conjunction with the unaudited condensed interim consolidated financial statements for the three and nine months ended September 30, 2013 and includes non-IFRS financial measures. Management believes these supplementary disclosures provide useful additional information. See Non-IFRS Financial Measures and Additional IFRS Measures sections for a description of non-IFRS and additional IFRS measures used.

The consolidated results include those of HFS effective from the date of acquisition of August 16, 2013 and Compushare effective from the date of acquisition of January 29, 2013.  Revenues and expenses of HFS and Compushare have been reported as part of the U.S. Segment.

Acquisition of Harland Financial Solutions

On August 16, 2013, D+H completed the acquisition of all of the outstanding shares of Harland Financial Solutions, Inc. and Harland Financial Solutions Worldwide Limited and Harland Israel Ltd. (collectively referred to as "HFS"), for a purchase price of approximately US $1.2 billion in cash, subject to post-closing adjustments (refer to Note 4 of the unaudited condensed interim consolidated financial statements for the three and nine months ended September 30, 2013 for further information related to the allocation of the purchase price). HFS is a leading U.S. based provider of strategic financial technology, including lending and compliance, core banking, and channel management technology solutions to U.S. banks, credit unions, and mortgage companies.  HFS operates from offices throughout the U.S., as well as Dublin, Ireland, Trivandrum, India and Tel Aviv, Israel.

The purchase price and associated transaction costs were financed as follows (refer to note 14 and note 17 of the unaudited condensed interim consolidated financial statements for further details):

(i) Gross proceeds of approximately $460.2 million from the issuance of 21.5 million subscription receipts ("Subscription Receipts"). Each Subscription Receipt entitled the holder to receive one common share of the Corporation upon the close of the acquisition, at a price of $21.40; this included an over-allotment option for the subscription receipts which was exercised on closing.

With the completion of the acquisition on August 16, 2013, each Subscription Receipt was automatically exchanged into one common share of the Corporation through the non-certificated inventory system of CDS Clearing and Depositary Services Inc.  The Subscription Receipts were halted from the Toronto Stock Exchange and de-listed after markets closed on August 16, 2013.

(ii) Gross proceeds of $230 million from issuance of 6.00%, 5-year, Convertible Unsecured Subordinated Debentures ("Debentures"). The Debentures are convertible at the holder's option into the common shares of the Corporation at the conversion price of $28.90 ("Conversion Price"). The Debentures can be converted any time after closing of the acquisition and the earlier of a) September 30, 2018 and b) the last business day immediately preceding the date specified by the Corporation for redemption of the Debentures.  This also included an over-allotment option which was exercised on closing.

The Debentures may not be redeemed by the Corporation before September 30, 2016 (except in certain limited circumstances). On or after September 30, 2016 and prior to September 30, 2017, the Debentures may be redeemed at the Corporation's option at a redemption price equal to their principal amount plus accrued and unpaid interest, provided that the then market price of the common shares of the Corporation exceeds 125% of the Conversion Price. On or after September 30, 2017 and prior to the September 30, 2018, the Debentures may be redeemed by the Corporation, at a redemption price equal to their principal amount plus accrued and unpaid interest.

(iii) Senior secured guaranteed notes of US$ 225.0 million and $20 million with a term of 10 years; and

(iv) Non-revolving, non-amortizing secured credit facilities, maturing in 5 years.  As part of these changes to D+H's capital structure, D+H also replaced its $355 million revolving, non-amortizing term credit facility with a new revolving, non-amortizing 5-year term credit facility.

Consolidated Operating Results - Overview

D+H delivered solid operating performance in the third quarter and the first nine months of 2013 that was consistent with its strategic agenda of becoming a leading FinTech provider to the North American financial services marketplace. Year-over-year growth in revenues and Adjusted revenues was attributable to the U.S. Segment and reflected the inclusion of HFS and Compushare. The U.S. Segment also contributed to year-over-year growth in Adjusted EBITDA as a result of acquisitions.  Consolidated EBITDA for the third quarter of 2013 was impacted by $13.1 million of acquisition-related expenses incurred in connection with acquisitions and business integration costs, which were reported as part of Corporate.  EBITDA was also negatively impacted by the acquisition accounting adjustments related to fair value of deferred revenues and deferred costs acquired from the acquisition of HFS. Consolidated net income for the third quarter of 2013 was lower compared to the same period in 2012 primarily due to the impacts of the HFS acquisition.  Consolidated Adjusted net income, which excluded non-cash and non-normal course items, was higher than the comparative period.

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

				Quarter ended September 30,												Nine months ended September 30,
						2013						2012						2013						2012
Revenues				$		209,223				$		176,689				$		578,018				$		522,999
Expenses						172,539						129,405						446,754						382,768
EBITDA 1						36,684						47,284						131,264						140,231
Depreciation of capital assets and amortization of non-acquisition  intangibles						7,532						6,648						20,708						20,099
Amortization of intangibles from acquisitions						19,182						10,597						41,156						31,698
Income from operating activities						9,970						30,039						69,400						88,434
Interest expense						11,251						4,943						20,238						14,585
Other finance charges 7						3,224						-						3,224						-
Income from investment in an associate, net of tax 2						-						(53)						(130)						(91)
Gain on remeasurement of previously-held equity interest 2						-						-						(1,587)						-
Fair value adjustment of derivative instruments 3						(4,759)						(445)						(6,069)						(1,474)
Income tax expense (recovery)						(7,383)						5,987						7,255						19,366
Income (loss) from continuing operations						7,637						19,607						46,469						56,048
Loss from discontinued operations, net of tax 4						(704)						(2)						(20,185)						(622)
Net income				$		6,933				$		19,605				$		26,284				$		55,426
Income from continuing operations per share, 5,  6
Basic				$		0.1091				$		0.3310				$		0.7393				$		0.9462
Diluted				$		0.1089				$		0.3310				$		0.7385				$		0.9462
Loss from discontinued operations, per share, net of tax 4, 5, 6
Basic				$		(0.0101)				$		(0.0000)				$		(0.3211)				$		(0.0105)
Diluted				$		(0.0100)				$		(0.0000)				$		(0.3208)				$		(0.0105)
Net income per share, 5, 6
Basic				$		0.0991				$		0.3310				$		0.4182				$		0.9357
Diluted				$		0.0989				$		0.3310				$		0.4177				$		0.9357

1	EBITDA is a non-IFRS term. See Non-IFRS Financial Measures for a more complete description of this term.
2	Income from investment in an associate consists of D+H's share of profit from Compushare, the minority investment purchased on April 24, 2012. Upon acquisition of the remaining interest in January 2013, a gain related to remeasurement of the previously held equity interest was recognized in accordance with IFRS standards.
3	The gain in the third quarter of 2013 mainly related to the fair value changes relating to the two foreign exchange forward contracts entered into by D+H on July 25, 2013 to economically hedge the foreign exchange exposure related to the USD purchase price of HFS.  Amounts for the nine-month period in 2013 also included mark-to-market adjustments of interest-rate swaps that are not designated as hedges for hedge accounting purposes, and for which any change in the fair value of these contracts is recorded through the Consolidated Statement of Income.
4	On May 10, 2013 D+H closed the previously announced transaction to divest its non-strategic business processing operations.  These operations were reported as part of business service solutions and loan servicing in prior periods and have now been classified as discontinued operations for both the current and comparative periods presented.
5	Diluted net income per share reflects the impacts of outstanding stock options.  If the average market price during the period is below the option price plus the fair market value of the option, then the options are not included in the dilution calculation for income from operating activities per share.
6	Weighted average number of shares outstanding during the third quarter of 2013 was 69,985,873 shares. For the first nine months of 2013, weighted average number of shares outstanding was 62,856,926 shares (Three and nine months ended September 30, 2012 - 59,233,373 shares).
7	Upon acquisition of HFS, a Revolving Credit Facility replaced the Company's previous term credit facility entered into in 2011, resulting in write-off of the unamortized deferred debt issuance costs related to the previous facilities.

(in thousands of Canadian dollars, unaudited)

						Quarter ended September 30,												Nine months ended September 30,
								2013						2012						2013						2012
Revenues						$		209,223				$		176,689				$		578,018				$		522,999
Acquisition accounting adjustments 1								16,107						-						16,107						-
Adjusted revenues 2								225,330						176,689						594,125						522,999

1	Fair value of the deferred revenue balance acquired with the acquisition of HFS was adjusted to reflect estimated costs of future delivery of the services for which cash had already been received.
2	Adjusted revenues is a non-IFRS term.  See Non-IFRS Financial Measures for a more complete description of this term.

(in thousands of Canadian dollars, unaudited)

							Quarter ended September 30,												Nine months ended September 30,
									2013						2012						2013						2012
Revenues							$		209,223				$		176,689				$		578,018				$		522,999
Expenses									172,539						129,405						446,754						382,768
EBITDA 1									36,684						47,284						131,264						140,231
EBITDA Margin									17.5%						26.8%						22.7%						26.8%
Adjustments:
	Acquisition accounting adjustments 3								15,030						-						15,030						-
	Acquisition-related and other charges 2								13,126						3,265						19,918						8,380
Adjusted EBITDA 1							$		64,840				$		50,549				$		166,212				$		148,611
Adjusted EBITDA Margin									28.8%						28.6%						28.0%						28.4%

1	EBITDA, EBITDA Margin,  Adjusted EBITDA and Adjusted EBITDA Margin are non-IFRS terms. See Non-IFRS Financial Measures for a more complete description of these terms.
2	Acquisition-related and other charges for the third quarter of 2013 included transaction costs of $11.3 million related to the acquisition of HFS which were expensed under IFRS, and the balance related to certain retention and incentive costs in connection with the acquisitions of businesses and business integration costs.  Expenses for the nine-month period in 2013 also included expenses related to cost-realignment initiatives.  Acquisition-related and other charges for the same period in 2012 included certain retention and incentive costs related to the Mortgagebot and Avista acquisitions as well as expenses related to cost-realignment initiatives.
3	Acquisition accounting adjustments relate to the effects of acquisition accounting on fair value of deferred revenues and deferred costs acquired in connection with the acquisition of HFS. See "Adjusted revenues" and "Adjusted EBITDA" in the Non-IFRS Financial Measures for a more complete description of these terms.

(in thousands of Canadian dollars, unaudited)

						Quarter ended September 30,												Nine months ended September 30,
								2013						2012						2013						2012
Net income						$		6,933				$		19,605				$		26,284				$		55,426
Adjustments:
	Non-cash items:
		Acquisition accounting adjustments 9						15,030						-						15,030						-
		Non-cash interest expense 10						709						-						709						-
		Other finance charges 7						3,224						-						3,224						-
		Amortization of intangibles from acquisitions						19,182						10,597						41,156						31,698
		Gain on remeasurement of previously-held equity interest 2						-						-						(1,587)						-
		Fair value adjustment of derivative instruments 3						(4,759)						(445)						(6,069)						(1,474)
	Other items of note:
		Acquisition-related and other charges 4						13,126						3,265						19,918						8,380
	Tax effect of above adjustments 6							(15,715)						(3,962)						(23,107)						(11,431)
	Loss from discontinued operations, net of tax6							704						2						20,185						622
	Tax effect of acquisitions							(1,726)						(1,156)						(1,726)						(1,156)
Adjusted net income 1						$		36,708				$		27,906				$		94,017				$		82,065
									Quarter ended September 30,											Nine months ended September 30,
									2013 vs. 2012											2013 vs. 2012
									% change											% change
Adjusted net income 1														31.5%												14.6%
Adjusted net income per share, basic  1, 8														11.3%												8.0%

1	Adjusted net income and Adjusted net income per share are non-IFRS terms. See Non-IFRS Financial Measures for a more complete description of these terms.
2	Upon acquisition of the remaining interest in Compushare in January 2013, a gain related to remeasurement of the previously held equity interest was recognized in accordance with IFRS standards.
3	A gain of $4.7 million resulted from fair value changes related to the foreign exchange forward contracts entered into by D+H to economically hedge the foreign exchange risk related to the proceeds denominated in USD to fund the acquisition of HFS.
4	Acquisition-related and other charges for the third quarter of 2013 included transaction costs related to the acquisition of HFS, certain retention and incentive costs in connection with the acquisitions of businesses and business integration costs.  Acquisition-related and other charges for the same period in 2012 included certain retention and incentive costs related to the Mortgagebot and Avista acquisitions as well as expenses related to cost-realignment initiatives.
5	On May 10, 2013 D+H closed the previously announced transaction to divest its non-strategic business processing operations.  The results of these components were included as part of business service solutions and loan servicing solutions in the Canadian Segment in prior periods.  These components and the related transition services have been classified as discontinued operations for all periods presented.
6	The adjustments to net income are tax effected at their respective tax rates.
7	Upon acquisition of HFS, a Revolving Credit Facility replaced the Company's previous term credit facility entered into in 2011, resulting in write-off of the unamortized deferred debt issuance costs related to the previous facilities.
8	Weighted average number of shares outstanding during the third quarter of 2013 was 69,985,873 shares. For the first nine months of 2013, weighted average number of shares outstanding was 62,856,926 shares (Three and nine months ended September 30, 2012 - 59,233,373 shares).
9	Acquisition accounting adjustments relate to fair value adjustments to deferred revenues and deferred costs acquired in connection with the acquisition of HFS.
10	Non-cash interest charges relate to accretion of the convertible debentures issued to partially fund the acquisition of HFS and amortization of deferred financing charges incurred in connection with the Company's financing arrangements.

OPERATING RESULTS BY SEGMENT

(in thousands of Canadian dollars, unaudited)

				Quarter ended September 30,
				Canadian Segment								U.S. Segment										Corporate												Consolidated
					2013				2012					2013					2012						2013						2012				2013				2012
Revenues				$	167,943			$	160,957			$		41,280			$		15,732			$			-			$			-			$	209,223			$	176,689
Acquisition accounting adjustments 1					-				-					16,107					-						-						-				16,107				-
Adjusted revenues 2					167,943				160,957					57,387					15,732						-						-				225,330				176,689

1	Acquisition accounting adjustments relate to non-cash fair value adjustments to deferred revenues acquired in connection with the acquisition of HFS.  Fair value of the deferred revenue balance was adjusted to reflect estimated costs of future delivery of the services for which cash had already been received.
2	Adjusted revenues is a non-IFRS term. See Non-IFRS Financial Measures for a more complete description of this term.

				Nine months ended September 30,
				Canadian Segment								U.S. Segment										Corporate												Consolidated
					2013				2012					2013					2012						2013						2012				2013				2012
Revenues				$	495,415			$	481,741			$		82,603			$		41,258			$			-			$			-			$	578,018			$	522,999
Acquisition accounting adjustments 1					-				-					16,107					-						-						-				16,107				-
Adjusted revenues 2					495,415				481,741					98,710					41,258						-						-				594,125				522,999

1	Acquisition accounting adjustments relate to non-cash fair value adjustments to deferred revenues acquired in connection with the acquisition of HFS.  Fair value of the deferred revenue balance was adjusted to reflect estimated costs of future delivery of the services for which cash had already been received.
2	Adjusted revenues is a non-IFRS term. See Non-IFRS Financial Measures for a more complete description of this term.

        

						Quarter ended September 30,
						Canadian Segment								U.S. Segment										Corporate									Consolidated
							2013				2012					2013					2012				2013					2012				2013				2012
Revenues						$	167,943			$	160,957			$		41,280			$		15,732			$	-			$		-			$	209,223			$	176,689
Expenses							123,468				119,141					35,945					6,999				13,126					3,265				172,539				129,405
EBITDA 1							44,475				41,816					5,335					8,733				(13,126)					(3,265)				36,684				47,284
EBITDA Margin							26.5%				26.0%					12.9%					55.5%				-					-				17.5%				26.8%
Adjustments:
	Acquisition accounting adjustments 3						-				-					15,030					-				-					-				15,030				-
Acquisition-related and other charges 2							-				-					-					-				13,126					3,265				13,126				3,265
Adjusted EBITDA 1						$	44,475			$	41,816			$		20,365			$		8,733			$	-			$		-			$	64,840			$	50,549
Adjusted EBITDA Margin							26.5%				26.0%					35.5%					55.5%				-					-				28.8%				28.6%

1	EBITDA and Adjusted EBITDA are non-IFRS terms. See Non-IFRS Financial Measures for a more complete description of these terms.
2	Acquisition-related and other charges for the third quarter of 2013 included transaction costs incurred in connection with the acquisition of HFS, certain retention and incentive costs and business integration costs in connection with the acquisitions of HFS, Mortgagebot, Avista and Compushare .  Acquisition-related and other charges for the same period in 2012 included certain retention and incentive costs related to the Mortgagebot and Avista acquisitions as well as expenses related to cost-realignment initiatives.
3	Acquisition accounting adjustments relate to non-cash fair value adjustments to deferred revenues and deferred costs acquired in connection with the acquisition of HFS.  Fair value of the deferred revenue balance was adjusted to reflect estimated costs of future delivery of the services for which cash had already been received.

Quarter ended September 30,

Canadian

U.S.

Segment

Segment

Consolidated

2013 vs. 2012

2013 vs. 2012

2013 vs. 2012

% change

% change

% change

Revenues

4.3%

162.4%

18.4%

Adjusted revenues 1

4.3%

264.8%

27.5%

Adjusted EBITDA 1

6.4%

133.2%

28.3%

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

(in thousands of Canadian dollars, unaudited)

				Nine months ended September 30,
				Canadian Segment								U.S. Segment										Corporate									Consolidated
					2013				2012					2013					2012				2013					2012				2013				2012
Revenues				$	495,415			$	481,741			$		82,603			$		41,258			$	-			$		-			$	578,018			$	522,999
Expenses					366,738				355,103					60,098					19,285				19,918					8,380				446,754				382,768
EBITDA 1					128,677				126,638					22,505					21,973				(19,918)					(8,380)				131,264				140,231
EBITDA Margin					26.0%				26.3%					27.2%					53.3%				-					-				22.7%				26.8%
Adjustments:
Acquisition accounting adjustments 3					-				-					15,030					-				-					-				15,030				-
Acquisition-related and other charges 2					-				-					-					-				19,918					8,380				19,918				8,380
Adjusted EBITDA 1				$	128,677			$	126,638			$		37,535			$		21,973			$	-			$		-			$	166,212			$	148,611
Adjusted EBITDA Margin					26.0%				26.3%					38.0%					53.3%				-					-				28.0%				28.4%

1	EBITDA and Adjusted EBITDA are non-IFRS terms. See Non-IFRS Financial Measures for a more complete description of these terms.
2	Acquisition-related and other charges for the first nine months included corporate development costs related to strategic initiatives, certain retention and incentive costs in connection with the acquisitions of businesses, business integration costs and expenses related to cost-realignment initiatives.  Acquisition-related and other charges for the same period in 2012 included certain retention and incentive costs related to the Mortgagebot and Avista acquisitions as well as expenses related to cost-realignment initiatives.
3	Acquisition accounting adjustments relate to non-cash fair value adjustments to deferred revenues and deferred costs acquired in connection with the acquisition of HFS.

Nine months ended September 30,

Canadian

U.S.

Segment

Segment

Consolidated

2013 vs. 2012

2013 vs. 2012

2013 vs. 2012

% change

% change

% change

Revenues

2.8%

100.2%

10.5%

Adjusted revenues 1

2.8%

139.3%

13.6%

Adjusted EBITDA 1

1.6%

70.8%

11.8%

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

REVENUES AND ADJUSTED REVENUES

Revenues and Adjusted Revenues - Consolidated

(in thousands of Canadian dollars, unaudited)

The table below shows the Company's Adjusted revenues by its major service areas: 

															Quarter ended September 30,
																	2013					2012
Adjusted Revenues - Consolidated
Payments solutions																	34%					42%
Lending processing solutions 1																	32%					38%
Banking technology solutions 2
Enterprise																	10%					-
Lending																	24%					20%
																	100%					100%

1	Reported as loan servicing solutions and loan registration and recovery services in prior periods.
2	Reported as lending technology services in prior periods. Beginning in the third quarter of 2013, the Company reports banking technology solutions segregated further into Enterprise and Lending to reflect the major service areas of HFS.

(in thousands of Canadian dollars, unaudited)

																				Quarter ended September 30,
			Canadian Segment						U.S. Segment											Consolidated
			2013			2012								2013			2012								2013			2012
			Revenue			Revenue			Revenue		Adjustment 1			Adjusted revenue 2			Revenue			Revenue		Adjustment 1			Adjusted revenue 2			Revenue
Payments solutions			76,132			73,751			-		-			-			-			76,132		-			76,132			73,751
Lending processing solutions			73,041			67,220			-		-			-			-			73,041		-			73,041			67,220
Banking technology solutions
Enterprise			-			-			18,018		5,192			23,210			-			18,018		5,192			23,210			-
Lending			18,770			19,986			23,262		10,915			34,177			15,732			42,032		10,915			52,947			35,718
Total Revenues			167,943			160,957			41,280		16,107			57,387			15,732			209,223		16,107			225,330			176,689

1	Adjustment is related to non-cash fair value adjustment to deferred revenues acquired in connection with the acquisition of HFS. Fair value of the deferred revenue balance was adjusted to reflect estimated costs of future delivery of the services for which cash had already been received.
2	Adjusted revenue is a non-IFRS term.  See Non-IFRS Financial Measures for a more complete description of this term.

(in thousands of Canadian dollars, unaudited)

																				Nine months ended September 30,
			Canadian Segment						U.S. Segment											Consolidated
			2013			2012								2013			2012								2013			2012
			Revenue			Revenue			Revenue		Adjustment 1			Adjusted revenue 2			Revenue			Revenue		Adjustment 1			Adjusted revenue 2			Revenue
Payments solutions			228,402			225,319			-		-			-			-			228,402		-			228,402			225,319
Lending processing solutions			214,309			202,202			-		-			-			-			214,309		-			214,309			202,202
Banking technology solutions
Enterprise			-			-			26,449		5,192			31,641			-			26,449		5,192			31,641			-
Lending			52,704			54,220			56,154		10,915			67,069			41,258			108,858		10,915			119,773			95,478
Total Revenues			495,415			481,741			82,603		16,107			98,710			41,258			578,018		16,107			594,125			522,999

1	Adjustment is related to non-cash fair value adjustment to deferred revenues acquired in connection with the acquisition of HFS. Fair value of the deferred revenue balance was adjusted to reflect estimated costs of future delivery of the services for which cash had already been received.
2	Adjusted revenues is a non-IFRS term.  See Non-IFRS Financial Measures for a more complete description of this term.

Consolidated Adjusted revenues for the third quarter of 2013 was $225.3 million, an increase of $48.6 million, or 27.5%, compared to the same period in 2012.  For the first nine months of 2013, consolidated Adjusted revenues of $594.1 million, increased by $71.1 million, or 13.6%, compared to the same period in 2012.  These increases were primarily due to the inclusion of HFS and Compushare revenues effective August 16, 2013 and January 29, 2013 respectively in the U.S. Segment.  Also contributing to this increase was revenue growth in payments solutions and lending processing solutions in the Canadian Segment.

Consolidated revenues for the third quarter of 2013 was $209.2 million, an increase of $32.5 million, or 18.4%, compared to the same period in 2012.  For the first nine months of 2013, consolidated revenues of $578.0 million, increased by $55.0 million, or 10.5%, compared to the same period in 2012.  Revenues for the third quarter and nine month periods in 2013 were impacted by the fair value adjustment to deferred revenues acquired from HFS.

Revenues and Adjusted Revenues - Canadian Segment

Total revenues in the Canadian Segment for the third quarter of 2013 of $167.9 million, increased by $7.0 million, or 4.3%, compared to the same quarter in 2012.  For the first nine months in 2013, total revenues were $495.4 million, an increase of $13.7 million, or 2.8%, compared to the same period in 2012.  Adjusted revenues are the same as revenues for the Canadian Segment as this segment was not subject to acquisition accounting adjustments.

Payments Solutions

Revenues from payments solutions for the third quarter of 2013 were $76.1 million, an increase of $2.4 million, or 3.2%, compared to the same quarter in 2012.  For the nine months ended September 30, 2013, revenue was $228.4 million, an increase of $3.1 million, or 1.4%, compared to the same period in 2012.  For the third quarter and first nine-month period of 2013, revenues from payments solutions reflected the positive impact of higher average order values and product and service enhancements in the chequing and credit card programs, partially offset by volume declines in cheque orders. Revenues for the third quarter of 2013 were also higher as a result of having one additional business day compared to the prior-year period, whereas, revenues for the first nine months of 2013 were not impacted by the number of business days compared to the same period in 2012. Management believes that the downward trend in cheque order volumes is in the low to mid-single digit range annually.

Lending Processing Solutions

Lending processing solutions revenues for the third quarter of 2013 were $73.0 million, an increase of $5.8 million, or  8.7%, compared to the same quarter in 2012.  For the first nine months of 2013, revenues were $214.3 million, an increase of $12.1 million, or 6.0%, compared to the same period in 2012.  For both the third quarter and the first-nine months of 2013, the increase was mainly due to higher transaction volumes in registration and recovery services reflecting a continuing recovery within the auto and auto lending markets and higher average order values in the student loans program. These increases were partially offset by lower professional service fees within the student loans program due to timing of government approval of these services.

Banking Technology Solutions - Lending

All revenues from the banking technology solutions service area within the Canadian Segment come from lending solution offerings.  Revenues from this service area for the third quarter of 2013 were $18.8 million, a decrease of $1.2 million, or  6.1%, compared to the same quarter in 2012.  Revenues were $52.7 million for the first nine months of 2013, a decrease of $1.5 million, or 2.8%, compared to the same quarter in 2012. Third quarter 2013 revenues reflected lower mortgage origination fees resulting from strategic price modifications partially offset by higher professional service fees earned in connection with our technology solutions directed towards leasing, commercial lending and small business lending. Origination volumes during the quarter remained relatively unchanged compared to the same period in 2012. Revenues for the first nine months of 2013 were impacted by price modifications and lower origination volumes, partially offset by higher professional service fees earned in our commercial lending service area discussed above.

Revenues and Adjusted Revenues - U.S. Segment

Total revenues in the U.S. Segment for the third quarter of 2013 of $41.3 million, increased by $25.5 million, or 162.4%, compared to the same quarter in 2012.  For the first nine months in 2013, total revenues were $82.6 million, an increase of $41.3 million, or 100.2%, compared to the same period in 2012.  Third quarter Adjusted revenues for the U.S. Segment of $57.4 million were $41.7 million, or 264.8% ahead of the same period of 2012, and for the first nine months, Adjusted revenues of $98.7 million, were $57.5 million or 139.3% ahead of the previous year. The sharp increases in both periods in revenues and Adjusted revenues were due to the inclusion of HFS and to a lesser degree, Compushare.

As described earlier, the U.S. banking technology solutions classifies revenues within Enterprise and Lending categories. HFS revenues, which consist of processing and account-based fees for cloud services (outsourcing), licenses for in-house solutions, and installation, maintenance, and support fees from its installed customer base, are included in the U.S. Segment, effective from the date of its acquisition.

Beginning in the third quarter of 2013, the Company also started using Adjusted revenues as a measure of performance, similar to revenue, but calculated after removing the effects of acquisition accounting on the fair value of deferred revenue acquired in connection with the acquisition of HFS.

Enterprise Solutions

Revenues from Enterprise Solutions within the U.S. Segment for the third quarter of 2013 was $18.0 million and for the nine months ended September 30, 2013 was $26.4 million. Included in this category are HFS and Compushare revenues since their dates of acquisition of August 16, 2013 and January 29, 2013 respectively.

Adjusted revenues, which are calculated after removing the impacts of purchase accounting adjustments related to fair value of deferred revenue, were $23.2 million for the third quarter of 2013.  There were no comparable figures for the same period in 2012.

Lending Solutions

Revenue from Lending Solutions in the U.S. Segment for the third quarter of 2013 was $23.3 million, an increase of $7.5 million, or 47.9%, compared to $15.7 million for the same period in 2012. For the nine months ended September 30, 2013, revenues were $56.2 million, an increase of $14.9 million, or 36.1%, compared to the same period in 2012.  Revenues for both the third quarter and the first nine months of 2013 benefited from inclusion of HFS since its acquisition on August 16, 2013.  Revenues recorded under IFRS for the third quarter of 2013 were impacted by acquisition accounting adjustments related to fair value of deferred revenue acquired through the acquisition of HFS.  Adjusted revenues of $34.2 million, which removed these acquisition accounting impacts, increased by $18.4 million compared to the same quarter in 2012, due to the inclusion of HFS.

In our POS and LOS SaaS businesses in the U.S., both for the third quarter and nine-month periods in 2013, year-over-year increases in revenues attributable to higher subscription fees from a growing customer base were partially offset by the impact of lower re-financing activity compared to a year ago when historically low interest rates encouraged consumers to re-finance their mortgages. Increasing interest rates within the U.S. market may continue to negatively impact transaction related volumes and revenues within our POS business. Revenues for the nine-month period in 2013 also benefited from annualization of Avista, acquired in May 2012.

EXPENSES

Expenses - Consolidated 

(in thousands of Canadian dollars, unaudited)

															Quarter ended September 30,
			Canadian Segment						U.S. Segment						Corporate						Consolidated
			2013			2012			2013			2012			2013			2012			2013			2012
Employee compensation and benefits 1			40,339			38,392			22,264			4,165			596			3,197			63,199			45,754
Non-compensation direct expenses 2			64,131			60,319			3,060			257			-			-			67,191			60,576
Other operating expenses 3			18,998			20,430			10,621			2,577			12,530			68			42,149			23,075
Total Expenses			123,468			119,141			35,945			6,999			13,126			3,265			172,539			129,405
															Nine months ended September 30,
			Canadian Segment						U.S. Segment						Corporate						Consolidated
			2013			2012			2013			2012			2013			2012						2012
Employee compensation and benefits 1			118,754			115,429			36,707			11,246			3,905			7,717			159,366			134,392
Non-compensation direct expenses 2			187,109			178,783			4,252			793			-			-			191,361			179,576
Other operating expenses 3			60,875			60,891			19,139			7,246			16,013			663			96,027			68,800
Total Expenses			366,738			355,103			60,098			19,285			19,918			8,380			446,754			382,768

1	Employee compensation and benefits on a consolidated basis includes retention and incentive expenses related to acquisitions of businesses and share-based compensation expenses and are net of apprenticeship tax credits and amounts capitalized related to software product development.
2	Non-compensation direct expenses include materials, shipping, selling expenses and third party direct disbursements.
3	Other operating expenses include occupancy costs, communication costs, licensing fees, professional fees, contractor fees, transaction costs related to acquisitions of businesses, corporate development costs related to strategic acquisition initiatives and expenses not included in other categories.

Consolidated expenses of $172.5 million for the third quarter of 2013 increased by $43.1 million, or 33.3%, compared to the same quarter in 2012.  For the first nine months of 2013, consolidated expenses were $446.8 million, an increase of $64.0 million, or 16.7%, compared to the same period in 2012. The increases in both the three and nine-month periods were attributable to the inclusion of HFS expenses effective from August 16, 2013 and Compushare expenses effective from January 29, 2013.  Consolidated expenses also included acquisition-related and other charges of $13.1 million for the third quarter of 2013 and $19.9 million for the first nine months of 2013, which are not considered reflective of normal course operations and are disclosed as part of Corporate. Acquisition-related and other charges of $3.3 million were recorded in the third quarter of 2012 and $8.4 million for the first nine months of 2012.  Annualization of Avista expenses also contributed to the increase for the first nine-month period of 2013.

Expenses - Canadian Segment

Total expenses for the Canadian Segment for the third quarter of 2013 of $123.5 million, increased $4.3 million, or 3.6%, compared to the same quarter in 2012 on higher revenues and other items explained below, partially offset by savings realized from recent transformation and cost reduction activities. Expenses for the first nine months of 2013 were $366.7 million, an increase of $11.6 million, or 3.3%, on higher revenues that were partially offset by benefits from recent transformation and cost reduction activities.  The increase in expenses for the first nine months of 2013 was also attributable to a change in product mix and timing related to new organic growth initiatives.

Employee compensation and benefits costs of $40.3 million for the third quarter of 2013 for the Canadian Segment were higher by $1.9 million, or 5.1%, compared to the same quarter in 2012.  For the first nine months of 2013, employee compensation and benefits costs increased year over year by $3.3 million, or 2.9% to $118.8 million.  Increases in both periods were primarily due to an increase in share-based compensation expense attributable to an increase in the share price of D+H partially offset by savings realized from cost-realignment initiatives.

Non-compensation direct expenses for the Canadian Segment were $64.1 million for the third quarter of 2013, an increase of $3.8 million, or 6.3%, compared to the same quarter in 2012.  For the nine-month period in 2013, non-compensation direct expenses of $187.1 million, increased by $8.3 million, or 4.7%, compared to the same period in 2012. In general, these expenses directionally change with revenue changes.  An increase in direct costs associated with the lending processing solutions and payments solutions service areas is consistent with the increase in revenues.

Other operating expenses of $19.0 million for the third quarter of 2013 decreased by $1.4 million, or 7.0%, compared to the same quarter in 2012, and for the first nine months of 2013, other operating expenses of $60.9 million were flat compared to the same period in 2012.  The decrease in the third quarter of 2013 was due to cost efficiencies realized from transformation and integration activities. For the nine-month period in 2013, benefits from cost-savings initiatives were partially offset by an increase in expenses due to changes in product mix in the Canadian Segment, a trend that is expected to stabilize.

Expenses - U.S. Segment

Total expenses for the U.S. Segment for the third quarter of 2013 were $35.9 million, an increase of $28.9 million, or 413.6%, compared to the same quarter in 2012 and for the first nine months of 2013, were $60.1 million, an increase of $40.8 million, or 211.6%, with increases in both periods attributable to the inclusion of HFS and Compushare in the 2013 periods. The nine-month period in 2013 was also impacted by the annualization of expenses for Avista.

Employee compensation and benefits costs of $22.3 million for the third quarter of 2013 for the U.S. Segment increased by $18.1 million, and for the first nine months of 2013, costs of $36.7 million, increased by $25.5 million, compared to the same periods in 2012. These increases were primarily due to the inclusion of the HFS and Compushare cost bases as well as increased costs related to alignment of employee benefits as a result of the integration of the Mortgagebot and Avista businesses.

Non-compensation direct expenses for the U.S. Segment of $3.1 million for the third quarter of 2013 were higher by $2.8 million, and for the first nine months of 2013, costs of $4.3 million, increased by $3.5 million, compared to the same periods in 2012, due to the inclusion of HFS and Compushare.

Other operating expenses of $10.6 million for the third quarter of 2013 were higher by $8.0 million, compared to the same quarter in 2012.  For the nine months ended September 30, 2013, costs of $19.1 million, increased by $11.9 million, or 164.1%, compared to the same period in 2012. These increases were primarily attributable to the inclusion of HFS and Compushare expenses.

Expenses - Corporate

Employee compensation and benefits

Employee compensation and benefits expenses of $0.6 million recorded as corporate expenses for the third quarter of 2013 and $3.2 million for the same period in 2012 consisted of retention and incentive expenses incurred in connection with the acquisitions. Expenses for the first nine months of 2013 also included severances related to cost-realignment initiatives.

Other expenses

Other expenses of $12.5 million were not included in the Canadian and U.S. Segments for the third quarter of 2013 and mainly consisted of transaction and business integration costs incurred in connection with the acquisition of HFS, which were expensed under IFRS.  For the same period in 2012, other operating expenses of $0.1 million related to transaction costs incurred in connection with the acquisition of Avista. The nine-month period in 2013 also included charges related to cost-realignment initiatives.  The nine-month period of 2012 included transaction costs related to the Avista acquisition.

EBITDA AND EBITDA MARGIN

Consolidated EBITDA for the third quarter of 2013 was $36.7 million, a decrease of $10.6 million, or 22.4%, compared to $47.3 million for the same quarter in 2012. For the first nine months of 2013, consolidated EBITDA of $131.3 million, decreased $9.0 million, or 6.4%, from $140.2 million for the same period in 2012. Third quarter 2013 EBITDA margin of 17.5% was lower than the 26.8% margin for the same period in 2012 due to inclusion of HFS in the U.S. Segment and acquisition accounting adjustments related to fair value of deferred revenue recorded under IFRS.  Generally, HFS has lower margins than the existing combined offerings in the overall U.S. Segment. EBITDA growth in the Canadian Segment for the three month period in 2013 was partially offset by expenses in Corporate and the U.S Segment EBITDA.  For the nine-month period of 2013, consolidated EBITDA margin of 22.7% decreased from 26.8% for the same period in 2012 due to the impact of HFS EBITDA margins in the third quarter of 2013.

Canadian Segment

Canadian Segment EBITDA for the third quarter of 2013 was $44.5 million, an increase of $2.7 million, or 6.4%, compared to the same quarter in 2012.  The nine-month EBITDA was $128.7 million, an increase of $2.0 million, or 1.6%, compared to the same period in 2012. Both the three and nine-month periods in 2013 reflected growth in revenues and savings realized from recent transformation and cost reduction activities in the Canadian Segment. EBITDA in the nine-month period was partially offset by higher expenses related to changes in product mix and timing related to new organic growth initiatives.

EBITDA margin for the Canadian Segment for the third quarter and the first nine months of 2013 was 26.5% and 26.0% respectively, compared to 26.0% and 26.3% for the same periods in 2012.  Higher margins in the third quarter were due to growth in revenues and savings realized from recent transformation and cost reduction activities.  EBTIDA margin growth in the nine-month period in 2013 was partially offset by the impacts of changes in product mix.

U.S. Segment

U.S. Segment EBITDA for the third quarter of 2013 was $5.3 million, a decrease of $3.4 million, compared to the same quarter in 2012, attributable to: (i) the inclusion of HFS results which reflect acquisition accounting adjustments related to fair value of deferred revenues; and (ii) the impact of lower refinancing activity in our SaaS businesses in the U.S. mortgage markets.  EBITDA for the first nine months of 2013 was $22.5 million, an increase of $0.5 million, or 2.4%. For the nine-month period in 2013, the annualization of Avista and continued growth in our other SaaS businesses partially offset the decrease in EBITDA in the U.S. Segment.

EBITDA margin was 12.9% for the third quarter of 2013 compared to 55.5% a year ago and EBITDA margin for the first nine months of 2013 of 27.2%, was lower than the 53.3% during the same period in 2012.  In both periods this was primarily due to the inclusion of HFS and Compushare margins as described above.

ADJUSTED EBITDA AND ADJUSTED EBITDA MARGIN

Consolidated Adjusted EBITDA during the third quarter of 2013 was $64.8 million, an increase of $14.3 million, or 28.3%, compared to the same quarter in 2012. For the first nine months of 2013, consolidated Adjusted EBITDA of $166.2 million, increased by $17.6 million, or 11.8%, compared to the same period in 2012.  Third quarter 2013 consolidated Adjusted EBITDA was calculated by (i) removing $15.0 million of acquisition accounting adjustments to fair value of deferred revenues and deferred costs associated with the acquisition of HFS; (ii) acquisition-related and other charges of $13.1 million, consisting of transaction costs expensed under IFRS, retention and incentive costs and integration expenses associated with acquisitions. On a consolidated basis, Adjusted EBITDA margin for the third quarter and the first nine months of 2013 was 28.8% and 28.0%, respectively, compared to 28.6% and 28.4% for the same period in 2012.

Canadian Segment

Canadian Segment Adjusted EBITDA for the third quarter of 2013 was $44.5 million, an increase of $2.7 million, or 6.4%, compared to the same quarter in 2012. Adjusted EBITDA is the same as EBITDA in the Canadian Segment.  Nine month EBITDA and Adjusted EBITDA were $128.7 million, an increase of $2.1 million, or 1.6% compared to the same period in 2012.

U.S. Segment

Adjusted EBITDA for the U.S. Segment during the third quarter of 2013 was $20.4 million, an increase of $11.6 million, or 133.2%, compared to the same quarter in 2012. For the first nine months of 2013, U.S. Segment Adjusted EBITDA of $37.5 million, increased by $15.6 million, or 70.8%, compared to the same period in 2012.  Adjusted EBITDA in the U.S. Segment excluded the impacts of $15.0 million attributable to the acquisition accounting adjustments related to fair value of deferred revenues and deferred costs on D+H's acquisition of HFS, in accordance with IFRS, which consisted of $16.1 million of acquisition accounting adjustments related to fair value of deferred revenues and $1.1 million of fair value adjustments related to deferred costs.  Adjusted EBITDA margin for the U.S. Segment for the third quarter and the first nine months of 2013 was 35.5% and 38.0%, respectively, compared to 55.5% and 53.3% for the same period in 2012.  As described earlier, HFS margins are lower than the existing SaaS offerings within our U.S. Segment, which resulted in lower Adjusted EBITDA margins in the 2013 periods.

DEPRECIATION OF CAPITAL ASSETS AND AMORTIZATION OF NON-ACQUISITION INTANGIBLES

Consolidated depreciation of capital assets and amortization of non-acquisition intangible assets of $7.5 million in the third quarter of 2013 increased by $0.9 million, or 13.3%, compared to the same period in 2012 due to the inclusion of HFS and Compushare.  For the first nine months of 2013, depreciation and amortization was $20.7 million, an increase of $0.6 million, or 3.0%, compared to the same period in 2012.

AMORTIZATION OF INTANGIBLES FROM ACQUISITIONS

Consolidated amortization of acquisition intangibles for the third quarter of 2013 was $19.2 million, an increase of $8.6 million, compared to the same period in 2012.  For the nine months ended September 30, 2013, amortization was $41.2 million, an increase of $9.5 million, or 29.8%, compared to the same period in 2012.  The increase for the third quarter was attributable to the amortization resulting from the acquisitions of HFS on August 16, 2013 and Compushare on January 29, 2013.  For the nine-months ended September 30, 2013 the increase was also due to the impacts related to the annualization of amortization expense relating to the acquisition of Avista in May 2012.

INCOME FROM OPERATING ACTIVITIES

Consolidated income from operating activities was $10.0 million for the three months ended September 30, 2013, a decrease of $20.1 million, or 66.8%, compared to $30.0 million for the same quarter in 2012.  For the nine months ended September 30, 2013, income from operating activities was $69.4 million, a decrease of $19.0 million, or 21.5%, compared to $88.4 million for the same period in 2012. The decreases in the third quarter of 2013 and the first nine months of 2013 were as a result of an increase in amortization of acquisition intangibles due to the acquisition of HFS and a decrease in EBITDA as a result of acquisition accounting adjustments related to fair value of deferred revenues associated with the acquisition of HFS. For the nine-month period, these decreases were partially offset by EBITDA growth from our existing SaaS businesses.  Both the three and nine-month periods in 2013 were also impacted by acquisition-related costs and other charges in connection with the HFS acquisition.

INTEREST EXPENSE

Interest expense of $11.3 million for the third quarter of 2013 increased by $6.3 million compared to the same quarter in 2012.  The increase was as a result of incremental debt financing through credit facilities bearing a higher credit spread and bonds and convertible debentures issued to partially fund the HFS acquisition.  Interest expense for the third quarter of 2013 also included a non-cash interest charge of $0.7 million attributable to accretion expense of $0.3 million related to the convertible debentures issued to partially fund the acquisition of HFS and $0.4 million related to amortization of deferred financing charges incurred in connection with the Company's financing arrangements. The difference between the carrying value and the face value of the debentures is being accreted over the 5-year term of the Debentures such that the liability at maturity will equal the face value of $230 million. Prior to the acquisition, interest expense in the third quarter of 2013 had been favourably impacted by a lower average loan balance as a result of debt repayments.  For the nine-month period in 2013, interest expense of $20.2 million increased by $5.7 million, or 38.8% compared to the same period in 2012 for the same reasons described above with an additional offset in 2013 related to favourable pricing on the renewed credit facility, due to renegotiated terms.

INCOME FROM INVESTMENT IN AN ASSOCIATE

Consolidated net income for the first nine months of 2012 and for the first 28 days of January 2013 included D+H's share of income related to the minority interest held in Compushare.  Compushare's results were consolidated when D+H obtained 100% ownership on January 29, 2013.

FAIR VALUE ADJUSTMENT OF DERIVATIVE INSTRUMENTS

A net gain of $4.8 million related to fair value changes on derivative instruments was recognized in the third quarter of 2013, compared to $0.4 million in the third quarter of 2012, and for the first nine months of 2013 was $6.1 million, compared to $1.5 million for the same period in 2012.  The net gains in both the three and nine-month periods were mainly attributable to foreign exchange forward contracts to economically hedge a portion of the foreign exchange risk related to the U.S dollar acquisition price of HFS, as described below:

On July 25, 2013, D+H entered into two foreign exchange forward contracts to purchase a total of US $592.5 million, anytime between August 16 and 23, 2013 to economically hedge the foreign exchange risk related to the U.S. dollar acquisition price of HFS.  A gain of $4.7 million relating to the fair value changes during the period was recorded in the Consolidated Statements of Income during the third quarter of 2013.  These forward contracts were settled upon the completion of the acquisition of HFS on August 16, 2013.

Net unrealized gains from interest-rate swaps, reflecting fair value adjustments related to changes in market interest rates at September 30, 2013 compared to June 30, 2013 were insignificant for the three month period ended September 30, 2013.  For the nine-month period in 2013, net unrealized gains relating to interest-rate swaps remained consistent with the gains experienced for the same period in 2012.

OTHER FINANCE CHARGES

As a result of the acquisition of HFS, the Company entered into new non-revolving, non-amortizing secured credit facilities, maturing in five years and senior secured guaranteed notes.

Also, a Revolving Credit Facility replaced the Company's existing credit facility entered into in 2011, resulting in the unamortized deferred debt issuance costs related to the previous facilities of $3.2 million to be written-off of to net income.

INCOME TAX EXPENSE (RECOVERY)

An income tax recovery of  $7.4 million was recorded in the third quarter of 2013 compared to an income tax expense of $6.0 million for the same period in 2012.  The income tax recovery is mainly attributable to lower income from continuing operations before income tax and a change in the geographic mix of that income.  The tax recovery also includes the recognition of previously unrecognized tax losses, and a recovery related to liabilities previously recognized in connection with the acquisition of Mortgagebot.  The third quarter of 2013 included a current tax recovery of $0.6 million and a deferred tax recovery of $6.8 million.

Tax expense for the first nine months of 2013 was $7.3 million compared to $19.4 million for the same period in 2012. The expected tax expense was reduced by the income tax recovery recorded in the third quarter as described above.  Tax expense for the first nine months of 2012 included a tax recovery related to liabilities previously recognized in connection with the acquisition of Mortgagebot.

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations for the third quarter of 2013 was $7.6 million compared to $19.6 million for the same period in 2012.  The decrease in the third quarter of 2013 was primarily attributable to lower EBITDA as described earlier, higher amortization expense relating to acquisition intangibles, higher interest expense on debt drawn to fund the HFS acquisition and the write-off of deferred finance fees related to the previous term credit facilities, partially offset by a gain on fair value changes related to derivative instruments and an income tax recovery. Income from continuing operations for the first nine months of 2013 was $46.5 million compared to $56.0 million for the same period in 2012.

LOSS FROM DISCONTINUED OPERATIONS

Loss from discontinued operations of $0.7 million for the third quarter of 2013 was a result of transition activities associated with the divestiture of D+H's non-strategic business processing operations on May 10, 2013.  For the comparative period in 2012, the loss from discontinued operations was insignificant. For the first nine months of 2013, the loss from discontinued operations was $20.2 million ($0.3211 per share, basic and $0.3208 per share, diluted), which included a loss on disposal of $8.1 million and a loss of $11.2 million related to measurement to fair value less estimated costs to sell the assets held for sale, compared to a loss of $0.6 million ( $0.0105 per share, basic) for the same period in 2012.

NET INCOME

Consolidated net income of $6.9 million for the third quarter of 2013 was lower by $12.7 million, compared to consolidated net income of $19.6 million for the same quarter in 2012, primarily due to lower EBITDA, an increase in amortization from acquisition intangibles, interest on incremental debt and acquisition-related charges incurred in connection with the acquisition of HFS, partially offset by the benefits of fair value changes related to derivative instruments of $4.8 million. For the nine month period ended September 30, 2013, consolidated net income of $26.3 million was lower by $29.1 million, or 52.6%, compared to $55.4 million for the same period in 2012, primarily attributable to the incremental charges related to the acquisition of HFS described above and loss from discontinued operations, net of taxes, of $20.2 million.  This decrease was partially offset by the gain on re-measurement of previously held equity interest in Compushare for the nine-month period ended September 30, 2013.

NET INCOME PER SHARE

Net income per share, basic

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

Consolidated basic net income per share of $0.0991 for the third quarter of 2013 was lower compared to a net income per share of $0.3310 for the same quarter in 2012, primarily due to the additional common shares issued in connection with the acquisition of HFS and the other items discussed above impacting net income, including those related to the acquisition discussed above.  For the nine month period ended September 30, 2013, basic net income per share of $0.4182 was lower compared to $0.9357 per share for the same period in 2012, primarily attributable to the impacts of the HFS acquisition described above and loss from discontinued operations (net of taxes).

Net income per share, diluted

Diluted net income per share is calculated by adjusting net income and the weighted average number of shares outstanding during the period for the effects of dilutive potential shares (resulting from share-based compensation and convertible debentures). The diluted per share amounts for share-based compensation are calculated using the treasury stock method, as if all the share equivalents where the average market price exceeds the issue price had been exercised at the beginning of the reporting period, or the date of issue, as the case may be, and that the funds obtained thereby were used to purchase shares of the Company at the average trading price of the common shares during the period. The dilution impact of the Convertible Debentures is calculated using the if-converted method as at the beginning of the period.

For the third quarter of 2013 and the first nine months of 2013, the inclusion of additional potential shares related to share-based compensation had a dilutive effect on net income while additional potential shares related to convertible debentures had an anti-dilutive effect on net income. Net income per share for the three-month period on a diluted basis was $0.0989 per share, compared to net income per share of $0.3310 for the same period in 2012.  For the nine-month period, net income per share on a diluted basis was $0.4177, compared to $0.9357 for the same period in 2012. Both the three and nine-month period per share amounts were impacted by the additional common shares issued to fund the HFS acquisition. Refer to Note 18 of the Company's condensed interim consolidated financial statements for the three and nine months ended September 30, 2013 for the calculation of diluted net income per share.

ADJUSTED NET INCOME AND ADJUSTED NET INCOME PER SHARE

Consolidated Adjusted net income of $36.7 million for the third quarter of 2013 was higher by $8.8 million, or 31.5%, compared to the $27.9 million for the same period in 2012.  Consolidated Adjusted net income of $0.5245 per share increased by 11.3%, from $0.4711 per share for the same period in 2012.  Consolidated Adjusted net income for the first nine months of 2013 was $94.0 million ($1.4957 per share), an increase of $12.0 million, or 14.6%, compared to $82.1 million ($1.3855 per share) for the same period in 2012.  These increases were mainly due to higher Adjusted EBITDA resulting from the inclusion of HFS results and to a lesser extent, EBITDA growth in the Canadian Segment.  Adjusted net income per share for the third quarter and the nine-month period of 2013 was impacted by the additional shares issued to fund the acquisition of HFS.

CONSOLIDATED CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES

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

Consolidated Summary of Cash Flows 

(in thousands of Canadian dollars, unaudited)

				Quarter ended September 30,												Nine months ended September 30,
					2013							2012					2013							2012
Cash and cash equivalents provided by (used in):
OPERATING ACTIVITIES
Income from continuing operations				$	7,637			$				19,607				$	46,469			$				56,048
Depreciation and amortization of assets					26,714							17,245					61,864							51,797
Amortization and fair value adjustment of derivative instruments					(4,759)							(445)					(6,069)							(1,474)
Income from investment in an associate, net of tax					-							(53)					(130)							(91)
Gain on remeasurement of previously held equity interest					-							-					(1,587)							-
Interest expense					11,251							4,943					20,238							14,585
Other finance charges					3,224							-					3,224							-
Non-cash income tax and options expenses					(7,188)							5,899					7,603							21,093
Changes in non-cash working capital items					23,196							(2,282)					8,053							(29,591)
Changes in other operating assets and liabilities					(702)							1,817					(265)							2,848
Cash flows from (used in) discontinued operations					(958)							713					(10,957)							1,705
Cash generated from operating activities					58,415							47,444					128,443							116,920
Interest paid					(6,189)							(4,163)					(14,407)							(12,870)
Income tax paid					(1,173)							-					(3,296)							-
Net cash from operating activities					51,053							43,281					110,740							104,050
FINANCING ACTIVITIES
Net change in long-term indebtedness					570,563							(17,789)					576,131							22,772
Proceeds from issuance of debentures					230,000							-					230,000							-
Issuance costs of debt and debentures					(17,878)							(791)					(17,878)							(902)
Proceeds from issuance of shares					460,207							-					460,207							-
Issuance costs related to share issuance					(19,883)							-					(19,883)							-
Dividends paid during the period					(25,836)							(18,362)					(63,746)							(55,086)
Net cash from (used in) financing activities					1,197,173							(36,942)					1,164,831							(33,216)
INVESTING ACTIVITIES
Capital expenditures					(9,301)							(6,934)					(22,222)							(23,600)
Acquisition of investment in an associate					-							-					-							(10,058)
Acquisition of subsidiary					(1,231,601)							-					(1,256,450)							(37,946)
Proceeds from sale of property, plant and equipment					631							-					631							-
Cash flows from (used in) discontinued operations					-							-					8,500							-
Net cash used in investing activities					(1,240,271)							(6,934)					(1,269,541)							(71,604)
Increase (decrease) in cash and cash equivalents for the period					7,955							(595)					6,030							(770)
Cash and cash equivalents, beginning of period					3,794							2,038					5,719							2,213
Cash and cash equivalents, end of period				$	11,749			$				1,443				$	11,749			$				1,443

Our primary liquidity needs are: (i) to fund normal operating expenses; (ii) to meet the interest and principal requirements of our outstanding indebtedness; (iii) to fund dividend payments and (iv) to fund capital expenditures and operating lease payments. We believe these needs will be satisfied using cash flow generated by our operations, our cash and cash equivalents of $11.7 million as at September 30, 2013, compared to $5.7 million at December 31, 2012 and  available borrowings under our Revolving Credit Facility.

Operating Activities

Operating activities provided $51.1 million during the quarter ended September 30, 2013, compared to $43.3 million for the same period in 2012. For the first nine months of 2013, operating activities provided $110.7 million, compared to $104.0 million for the same period in 2012. The change in net cash from operating activities for the quarter and nine-month period ended September 30, 2013 was primarily due to the non-cash working capital changes as described below and HFS.

Changes in Non-Cash Working Capital and Other Items

(in thousands of Canadian dollars, unaudited)

				Quarter ended September 30,															Nine months ended September 30,
								2013								2012							2013							2012
Change in non-cash working capital				$				23,196			$					(2,282)			$				8,053			$				(29,591)
Change in other operating assets and liabilities								(702)								1,817							(265)							2,848
Discontinued operations								(958)								713							(10,957)							1,705
Decrease in non-cash working capital and other items				$				21,536			$					248			$				(3,169)			$				(25,038)

The net decrease in non-cash working capital in the third quarter of 2013 primarily related to an increase in compensation costs, and from an increase in financing and acquisition costs related to HFS.  In addition, accounts receivables increased quarter over quarter as a result of the HFS acquisition.  Excluding the acquisition, receivables actually decreased as a result of the collection of the 2012 apprenticeship tax credit as well as collecting certain trade receivables earlier than anticipated.

The net increase in non-cash working capital for the first nine months of 2013 related to higher trade receivables compared to December 2012 partially offset by higher payables and accruals (due primarily to the acquisition of HFS).

Cash flows used in discontinued operations of $1.0 million represent the results of activities undertaken in accordance with the Transition Services Agreement related to the divestiture of the non-strategic businesses in May 2013.

Financing Activities

Net cash from financing activities was $1.2 billion during the quarter ended September 30, 2013, compared to $36.9 million used for the same period in 2012. The net change during the quarter was primarily due to proceeds from financing arrangements (described below) and issuance of common shares to fund the acquisition of HFS, net of issuance costs.  Financing activities during the third quarter of 2013 also reflected a debt repayment of $15.0 million and an increase in dividend payments following a dividend increase in the fourth quarter of 2012 and dividends on the additional common shares issued in connection with the acquisition of HFS, compared to the same period in 2012.

For the first nine months of 2013, net cash provided by financing activities was $1.2 billion, compared to $33.2 million used by financing activities for the same period in 2012.  The net change was primarily due to funds drawn from credit facilities and proceeds from issuances of notes, common shares and convertible debentures in connection with the acquisition of HFS, partially offset by dividends of $63.8 million paid during the nine-month period in 2013.  Cash used in financing activities during the same period in 2012 included dividends of $55.1 million paid to D+H shareholders during the nine-month period, partially offset by funds drawn from our credit facilities to finance the acquisition of Avista and the minority investment in Compushare in 2012.

Long-Term Indebtedness

Long-term indebtedness is recorded on the Consolidated Statement of Financial Position, net of unamortized deferred financing fees. Long-term indebtedness as at September 30, 2013, before deducting unamortized deferred finance fees of $10.1 million, was $924.1 million, compared to $346.3 million at December 31, 2012.

As a result of the completion of D+H's acquisition of HFS, the Company entered into new non-revolving, non-amortizing secured credit facilities, maturing in five years and senior secured guaranteed notes.

At September 30, 2013, the Company had $1,196.3 million of committed funds consisting of a $355.0 million revolving term credit facility (of which $82.8 million was drawn as at September 30, 2013), a $412.1 million non-revolving term credit facility and $429.2 million drawn from bonds.  The Company also had $191.8 million of additional uncommitted arrangements available, subject to prior approval of the relevant lenders with any fees, spreads and other additional terms to be negotiated at that time, of which $100.0 million was under the credit facility and $91.8 million from the bonds.

The Company has historically entered into certain hedges against increases in market interest rates on certain of its debt by utilizing interest-rate swaps and by issuing fixed rate long-term bonds as described above.  At September 30, 2013, the average effective interest rate on the Corporation's total indebtedness was approximately 4.7%, compared to 4.5% as at December 31, 2012.

The Revolving Credit Facility replaced the Company's existing credit facility entered into in 2011 and amended in 2012, resulting in a $3.2 million charge recognized in the statement of income associated with the write-off of unamortized deferred debt issuance costs.

The Company's indebtedness is subject to a number of covenants and restrictions including the requirement to meet certain financial ratios and financial condition tests including a Total Funded Debt to EBITDA ratio and Interest Coverage Ratio.  The Debentures are not included in the Total Funded Debt for covenant purposes.

Convertible Debentures

On August 13, 2013, the Company issued $230.0 million principal amount of 6.00% Convertible Unsecured Subordinated Debentures for net proceeds of $220.6 million. The Debentures pay interest semi-annually on March 31 and September 30, commencing with the initial interest payment on March 31, 2014 and have a maturity date of September 30, 2018. The Debentures are convertible at the option of the holder to common shares at a conversion price of $28.90 per common share. The Company has the option to redeem the Debentures on and after September 30, 2016 and at any time prior to September 30, 2017 at a redemption price equal to 100% of their principal amount plus accrued and unpaid interest provided that the current market price is at least 125% of the conversion price of $28.90. On redemption or maturity the Company may elect to repay the principal and satisfy its interest obligations by issuing D+H common shares.

Upon issuance of the debentures, the liability component of the convertible debentures was recognized initially at the fair value of a similar liability that does not have an equity conversion option. The market interest rate of 7.45% was used for the estimation of the liability component of convertible debenture. The difference of $12.8 million has been recorded as equity with the remaining $217.2 million allocated to debt. Directly attributable transaction costs of $9.4 million were allocated to the liability and equity components of the debentures proportionately. The difference between the carrying value and the face value of the debentures is being accreted over the 5-year term of the Debenture such that the liability at maturity will equal the face value of the Debenture of $230 million.

Issuance of common shares

Gross proceeds of approximately $460.2 million were received from the issuance of 21.5 million Subscription Receipts to partially fund the acquisition of HFS, which included an over-allotment option for the subscription receipts which was exercised on closing.  Each Subscription Receipt entitled the holder to receive one common share of the Corporation upon the close of the acquisition, at a price of $21.40.

With the completion of the acquisition on August 16, 2013, each Subscription Receipt was automatically exchanged into one common share of the Corporation.

Dividends

During the third quarter of 2013, D+H paid a dividend of $0.32 per share ($25.8 million) to its shareholders on record as of August 30, 2013.  For the same quarter in 2012, $0.31 per share ($18.4 million) was paid to shareholders.  During the first nine months of 2013, D+H paid $0.96 per share ($63.8 million) to its shareholders, and for the same period in 2012, $0.93 per share ($55.1 million) was paid.

Investing Activities

Net cash of $1.2 billion was used in investing activities during the third quarter of 2013 which reflected the acquisition of HFS on August 16, 2013 for a cash purchase price of $1.2 billion, and capital expenditures of $9.3 million. For the same quarter in 2012, $6.9 million was used for capital expenditures.  For the nine-month period ended September 30, 2013, investing activities used $1.3 billion, which was primarily used for the acquisition of HFS and $22.2 million was used for capital expenditures, compared to $71.6 million during the same period in 2012 for capital expenditures, acquisition of Avista and the minority investment in Compushare. Cash used in investing activities during the nine-month period of 2013 was partially offset by the proceeds from the sale of the non-strategic business processing operations in May 2013.

Capital Expenditures

Consolidated capital expenditures were $9.3 million for the third quarter of 2013, $2.4 million higher compared to the same period of 2012.  For the nine months ended September 30, 2013, capital expenditures were $22.2 million, a decrease of $1.4 million, compared to the same period in 2012. Lower capital expenditures in the first nine months of 2013 reflected timing of expenditures.

CONTRACTUAL OBLIGATIONS

										Less than					1 - 3					4 - 5					After 5
(in thousands of Canadian dollars, unaudited)						Total				1 year					years					years					years
Long-term indebtedness				$		924,066			$	-			$		-			$		574,885			$		349,181
Convertible debentures1 Operating leases						230,000 54,518				- 13,863					- 19,210					230,000 13,125					- 8,320
Employee future benefits						3,362				210					420					420					2,312
Obligations relating to deferred compensation program						5,667				2,943					2,724					-					-
Other obligations						5,006				2,780					1,647					552					27
Total contractual obligations				$		1,222,619			$	19,796			$		24,001			$		818,982			$		359,84

1	Upon conversion or redemption, the convertible debentures can be settled in cash or common shares.

The table above is a summary of the contractual obligations as of September 30, 2013.  The significant changes in the balances compared to the amounts disclosed in the MD&A for the year ended December 31, 2012 as part of the 2012 Annual Report, relate to the acquisition of HFS and the related financing arrangements as described in the Long-term indebtedness and Convertible debentures sections above.

EIGHT QUARTER CONSOLIDATED STATEMENT OF INCOME - SUMMARY

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

					2013												2012																2011
						Q3				Q2				Q1				Q4				Q3				Q2				Q1				Q4
Revenue					$	209,223			$	197,134			$	171,661			$	172,457			$	176,689			$	180,989			$	165,321			$	166,580
Expenses1						172,539				144,551				129,664				131,082				129,405				128,289				125,074				121,865
EBITDA 1, 3						36,684				52,583				41,997				41,375				47,284				52,700				40,247				44,715
Adjustments:
	Acquistion accounting adjustments 2					15,030				-				-				-				-				-				-				-
	Acquisition-related and other charges 1					13,126				5,764				1,028				6,558				3,265				4,378				737				637
Adjusted EBITDA 3					$	64,840			$	58,347			$	43,025			$	47,933			$	50,549			$	57,078			$	40,984			$	45,352
EBITDA 1, 3					$	36,684			$	52,583			$	41,997			$	41,375			$	47,284			$	52,700			$	40,247			$	44,715
Depreciation of capital assets and amortization
	of non-acquisition intangibles					7,532				6,657				6,519				7,568				6,648				6,986				6,465				6,171
Amortization of intangibles from acquisitions						19,182				11,060				10,914				11,292				10,597				10,706				10,395				10,465
Income from operating activities3						9,970				34,866				24,564				22,515				30,039				35,008				23,387				28,079
Interest expense						11,251				4,516				4,471				4,629				4,943				4,821				4,821				4,909
Loss (income) from investment in an associate, net of tax						-				-				(130)				23				(53)				(38)				-				-
Other finance charges 12						3,224				-				-				-				-				-				-				-
Gain on remeasurement of previously held equity interest 10						-				-				(1,587)				-				-				-				-				-
Amortization and fair value adjustment of
	derivative instruments4					(4,759)				(1,203)				(107)				(542)				(445)				616				(1,645)				(145)
Income tax expense (recovery)						(7,383)				9,158				5,480				4,165				5,987				8,345				5,034				7,758
Income from continuing operations						7,637				22,395				16,437				14,240				19,607				21,264				15,177				15,557
Loss from discontinued operations, net of tax 5						(704)				(8,786)				(10,695)				(529)				(2)				(377)				(243)				(188)
Net income					$	6,933			$	13,609			$	5,742			$	13,711			$	19,605			$	20,887			$	14,934			$	15,369
Adjustments:
	Non-cash items:
		Acquisition accounting adjustments 2				15,030				-				-				-				-				-				-				-
		Non-cash interest expense 11				709				-				-				-				-				-				-				-
		Other finance charges 12				3,224				-				-				-				-				-				-				-
		Amortization of intangibles from acquisitions				19,182				11,060				10,914				11,292				10,597				10,706				10,395				10,465
		Gain on remeasurement of previously held   equity interest 10				-				-				(1,587)				-				-				-				-				-
		Amortization and fair value adjustment of   derivative instruments 4				(4,759)				(1,203)				(107)				(542)				(445)				616				(1,645)				(145)
	Other items of note:
		Acquisition-related and other charges 1				13,126				5,764				1,028				6,558				3,265				4,378				737				637
	Tax effect of above adjustments 6					(15,715)				(3,814)				(3,578)				(5,543)				(3,962)				(4,615)				(2,854)				(3,237)
	Loss from discontinued operations, net of tax 5					704				8,786				10,695				529				2				377				243				188
	Tax effect of  acquisitions 7					(1,726)				-				-				-				(1,156)				-				-				2,080
Adjusted net income3					$	36,708			$	34,202			$	23,107			$	26,005			$	27,906			$	32,349			$	21,810			$	25,357
					2013												2012																2011
						Q3				Q2				Q1				Q4				Q3				Q2				Q1				Q4
Adjusted net income per share, basic 3, 8, 9					$	0.5245			$	0.5774			$	0.3901			$	0.4390			$	0.4711			$	0.5461			$	0.3682			$	0.4281
Income from continuing operations per share, 8,9
		Basic			$	0.1091			$	0.3781			$	0.2775			$	0.2404			$	0.3310			$	0.3590			$	0.2562			$	0.2626
		Diluted			$	0.1089			$	-			$	-			$	-			$	-			$	-			$	-			$	-
Loss from discontinued operations per share, 8,9
		Basic			$	(0.0101)			$	(0.1483)			$	(0.1806)			$	(0.0089)			$	-			$	(0.0064)			$	(0.0041)			$	(0.0032)
		Diluted			$	(0.0100)			$	-			$	-			$	-			$	-			$	-			$	-			$	-
Net income per share, basic and diluted 8,9
		Basic			$	0.0991			$	0.2298			$	0.0969			$	0.2315			$	0.3310			$	0.3526			$	0.2521			$	0.2595
		Diluted			$	0.0989			$	-			$	-			$	-			$	-			$	-			$	-			$	-

1	Acquisition-related and other charges for the third quarter of 2013 included transaction costs of $11.3 million related to the acquisition of HFS which were expensed under IFRS, certain retention and incentive costs in connection with the acquisitions of businesses and business integration costs.  Acquisition- related and other charges for the same period in 2012 included certain retention and incentive costs related to the Mortgagebot and Avista acquisitions as well as expenses related to cost-realignment initiatives.
2	Acquisition accounting adjustments consist of fair value adjustments related to deferred revenues and deferred costs acquired in connection with the acquisition of HFS.
3	EBITDA, Adjusted EBITDA, Adjusted net income and Adjusted net income per share are non-IFRS terms. See Non-IFRS Financial Measures for a more complete description of these terms.  Income from operating activities is an additional IFRS term.  See Additional IFRS Measures for a more complete description of this term.
4	Gain in the third quarter of 2013 was mainly attributable to the fair value changes of the foreign exchange forward contracts entered into by D+H to economically hedge the foreign exchange risk arising from the proceeds denominated in USD to fund the acquisition of HFS.  Gains and losses in the other periods include mark-to-market adjustments of interest-rate swaps that are not designated as hedges for hedge accounting purposes, and for which any change in the fair value of these contracts is recorded through the Consolidated Statement of Income.
5	On May 10, 2013, D+H completed the divestiture of its non-strategic business processing operations.  The results of operations of these components were included as part of business service solutions and loan servicing solutions in the Canadian Segment in prior periods.  These components and the related transition services have been classified as discontinued operations for all periods presented.
6	The adjustments to net income are tax effected at their respective tax rates.
7	Adjustments for the third quarter of 2012 included a non-cash tax recovery related to liabilities recognized in connection with the acquisition of Mortgagebot.  Adjustments for the fourth quarter of 2011 related to de-recognition of previously recognized tax attributes.
8	Diluted Adjusted net income per share (non-IFRS term) reflects the impacts of outstanding options.  If the average market price during the period is below the option price plus the fair market value of the option, then the options are not included in the dilution calculation.
9	Weighted average number of shares outstanding during the third quarter of 2013 was 69,985,873 shares (Q3 2012 - 59,233,373 shares).
10	Upon acquisition of the remaining interest in January 2013, a gain related to remeasurement of the previously held equity interest was recognized in accordance with IFRS standards.
11	Non-cash interest charges relate to accretion of the convertible debentures issued to partially fund the acquisition of HFS and amortization of deferred financing charges incurred in connection with the Company's financing arrangements.
12	Upon acquisition of HFS, a Revolving Credit Facility replaced the Company's previous term credit facility entered into in 2011, resulting in write-off of the unamortized deferred debt issuance costs related to the previous facilities.

D+H has generally reported quarterly revenues that are relatively stable and growing when measured on a year-over-year basis. More recent changes in the economic environment, specifically the housing and mortgage markets and the auto lending markets, have increased volatility. Also, there has been more volatility in personal cheque order volumes. Measured on a sequential quarter-to-quarter basis, revenues can also vary due to seasonality. Fees earned in connection with mortgage origination services and automobile loan registration services are typically stronger in the second and third quarters than in the first and fourth quarters.  The acquisitions of Avista on May 3, 2012, Compushare on January 29, 2013 and HFS on August 16, 2013 increased revenues and expenses. EBITDA was impacted by acquisition accounting adjustments related to fair value of deferred revenues and deferred costs, acquisition-related and other charges during the quarters, including transaction costs, business integration costs and certain retention and incentive costs related to acquisitions as well as other charges attributable to cost-realignment initiatives and strategic acquisition initiatives that are not considered to be incurred in the normal course of operations. Adjusted EBITDA removes the impacts of these items as these are not indicative of the underlying business performance and management believes that excluding these items is more reflective of ongoing operating results.

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

Common Shares

As at September 30, 2013 and November 5, 2013, D+H had 80,738,373 common shares issued and outstanding (as at December 31, 2012 - 59,233,373), reflecting 21,505,000 common shares issued in connection with the acquisition of HFS on August 16, 2013.  The weighted average number of shares outstanding during the quarter ended September 30, 2013 was 69,985,873 (Q3 2012 - 59,233,373). For the nine months ended September 30, 2013, the weighted average number of share outstanding was 62,856,926 (Nine months ended September 30, 2012 - 59,233,373).

Normal Course Issuer Bid ("NCIB")

The NCIB program expired during the quarter ended September 30, 2013.  No shares were repurchased under the NCIB.

Hedging Instruments

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

Interest-rate swaps

In respect of interest-rate swap contracts with its lenders, as of September 30, 2013, the Company's borrowing rates on 19.2% of outstanding long-term indebtedness under the Eighth Amended and Restated Credit Agreement ("Credit Agreement") are effectively fixed at the interest rates and for the time periods ending as outlined in the following table:

(in thousands of Canadian dollars, unaudited)

										Fair value of interest-rate swaps
Maturity Date							Notional amount				Asset				Liability				Interest Rate 1
December 18, 2014						$	25,000			$	-			$	434				2.720%
March 18, 2015							25,000				-				588				2.940%
March 18, 2017							25,000				-				1,264				3.350%
March 20, 2017							20,000				-				1,022				3.366%
						$	95,000			$	-			$	3,308

1

The listed interest rates exclude bankers' acceptance fees and prime-rate spreads currently in effect.  Such fees and spreads could increase or decrease depending on the Company's financial leverage compared to certain levels specified in the Credit Agreement.  Based on the financial leverage as at September 30, 2013, the Company's long-term bank indebtedness will be subject to bankers' acceptance fees of 2.50% over the applicable BA rate and prime rate spreads of 1.50% over the prime rate.

Subsequent to September 30, 2013, the Company entered into 3-month resetting interest-rate swaps of $75.0 million to fix interest rates on its USD denominated debt.  Reflecting these interest rate swaps, the Company's borrowing rates would have been effectively fixed for approximately 34.4% of the outstanding long-term indebtedness of D+H under the Credit Agreement.  These interest-rate swaps have been designated as cash flow hedges for hedge accounting purposes.

Foreign exchange contracts

The Company had no foreign exchange contracts in place as at September 30, 2013.

BUSINESS RISKS

A comprehensive discussion of the risks that impact the Business can be found on the Corporation's most recently filed Annual Information Form, annual MD&A and Q3 2013 MD&A, available on SEDAR at www.sedar.com.

OUTLOOK

D+H's long-term financial objective is to deliver sustainable and growing earnings through continued organic revenue growth and by way of strategic acquisitions. Management believes the recent acquisition of HFS will: (i) strengthen our ability to deliver on our goal of being a leading FinTech provider to the North American financial services industry; (ii) provide enhanced revenue diversification; (iii) deliver strong and sustainable cash flows to fund future growth, distributions and deleveraging; and (iv) support our long-term strategy.

Going forward, we will focus on building an integrated operating model for our U.S. operations that will enable us to efficiently and effectively execute our organic growth initiatives including cross-selling our now larger suite of FinTech solutions inclusive of HFS.  This includes achieving effective integration of our HFS platform technologies and sales plans.  Simultaneously across all North American operations, we will continue to diligently identify and realize on efficiency opportunities to better serve customers, and achieve our financial goals.  We believe that our market leadership and combined capabilities will solidly position D+H in the markets we serve and allow us to grow, consistent with our long-term objectives.

As set out in our statement of strategy, we look to grow through a combination of organic initiatives, partnering with third parties and, over time, by way of selective additional acquisitions. Our organic initiatives include: (i) cross-selling our expanded FinTech products including existing SaaS offerings and cloud-based offerings with those provided by the newly acquired HFS to both our now larger customer base and more than 6,000 other U.S. financial institutions that could benefit from our technology portfolio; (ii) advancing our payments solutions through growth in value-added consumer and business services to financial institution customers; (iii) expanding our current technology-enabled offerings within the mortgage, auto, personal, student lending, commercial and leasing markets; and (iv) exploring opportunities to provide our expanded solutions to customers in selected international markets and to Canada's credit unions.

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

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

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

Canadian Segment

Within the Canadian Segment, the downward trend in cheque order volumes is expected to continue to be in the low to mid-single digit range throughout the remainder of 2013, with ongoing volatility in personal cheque order volumes coupled with comparatively minimal volatility in business cheque order volumes.

In the Canadian banking technology service area, Canadian housing markets analysts are expecting a softening to continue in the fourth quarter of 2013.  Furthermore, a potential rate increase by the Bank of Canada would likely further slow down activity and moderate home prices.  In addition, the broker market will continue to experience competition from internal mobile sales force at lending institutions.  Revenues from Canadian banking technology service area may be impacted by pricing model adjustments, which may be offset by potential revenue from the launch of new products in the Canadian lending market, including extension of our technology solutions across various areas in the lending value chain.

Revenues within the lending processing solutions is expected to benefit from: (i) growth in tuition rates and an increase in uptake rates in the student loans administration service area; and (ii) continuing recovery within the auto and auto lending markets, including increased repossessions.

Volumes in the student loan administration service area are expected to be relatively stable and modestly growing in the short term.  Activities related to cost management and improving delivery efficiency are being directed towards lowering the impact of reduced pricing and fees related to the recent customer consolidation.  Within the auto and auto lending markets, growth in new car sales is expected to continue through the remainder of 2013, while increases in lender portfolio values should continue to drive recovery volume increases despite falling delinquency rates.

In addition, within our Canadian Segment, EBITDA and margins may be impacted from the timing of customer adoption of new products and service, which may cause pressure on overall Canadian Segment EBITDA and margins in the short term as these programs mature.

U.S. Segment

In the U.S. Segment, we expect to benefit from the emerging recovery of the U.S. economy and banking sector, anticipated growth in spending by community banks and credit unions on core banking technology and additional FinTech solutions and increased need for lending technology products that can meet regulatory and compliance requirements.  We also anticipate revenue synergies from cross selling opportunities between our existing POS and LOS customers and product offerings. Additionally, community banks are expected to increase technology investment on new core systems over the next few years.  The recovering U.S. housing market will be offset by the impact that higher interest rates may have on refinancing activity.

Capital spend

Inclusive of HFS for the final months of 2013, we anticipate total capital spending of approximately $35 million for 2013.  For 2014, we anticipate capital spending of approximately $50 million, focusing more on new growth opportunities. Capital spending in the fourth quarter of 2013 and fiscal 2014 may vary based on spending in support of new growth opportunities if and as they arise.

Cash taxes

The Corporation will pay its 2013 Canadian tax liability in early 2014 and will begin to make regular Canadian tax installment payments in 2014, in addition to its existing US tax installment payments, which have increased due to the acquisition of HFS.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This MD&A contains certain statements that constitute forward-looking information within the meaning of applicable securities laws ("forward-looking statements"). Statements concerning D+H's objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of D+H are forward-looking statements.  The words "believe", "expect", "anticipate", "estimate", "intend", "may", "will", "would" and similar expressions and the negative of such expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.  These forward-looking statements are subject to important assumptions, including the following specific assumptions: the ability of D+H to meet its "Revenues", "Adjusted revenues" "EBITDA", "Adjusted EBITDA" and "Adjusted net income" targets (see Non-IFRS Financial Measures for a more complete description of the terms Adjusted revenues, EBITDA, Adjusted EBITDA and Adjusted net income); general industry and economic conditions; changes in D+H's relationship with its customers and suppliers; pricing pressures and other competitive factors; the anticipated effect of acquisitions on the financial performance of D+H; D+H's belief that there exists a growing market for the replacement of legacy core processing systems; and the ability of D+H to achieve the expected benefits of the acquisition of HFS, including: (i) D+H's ability to enhance its presence in the United States FinTech market, (ii) the diversification of D+H's business in terms of service offerings, clients and geographic focus as a result of the acquisition, (iii) the broadening of D+H's sources of long-term recurring revenues following the acquisition closing; (iv) the benefits of the Acquisition for D+H from a margin, accretion and cash flow perspective (each of which may be impacted by final financing arrangements, the realization and timing of any potential synergies and the operating performance of D+H and HFS); (v) D+H's ability to successfully integrate HFS with D+H's existing business; and (vi) D+H's expectations regarding enhanced revenue generation through cross-selling opportunities.

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

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

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

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

ADDITIONAL INFORMATION

On November 2, 2013, John O'Malley resigned from the Board of Directors to pursue an employment opportunity at a U.S. FinTech company.

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

Consolidated Statements of Financial Position
(in thousands of Canadian dollars, unaudited)
							September 30, 2013				December 31, 2012
ASSETS
Cash and cash equivalents							$	11,749			$	5,719
Trade and other receivables								116,571				84,996
Prepayments and other current assets								21,710				14,104
Inventories								3,083				4,181
Total current assets								153,113				109,000
Non-current trade receivable								16,520				-
Deferred tax assets								5,067				3,171
Property, plant and equipment								44,508				30,201
Investment in an associate								-				10,145
Intangible assets								1,146,737				421,366
Goodwill								1,485,729				690,583
Other assets								2,306				-
Total non-current assets								2,700,867				1,155,466
Total assets							$	2,853,980			$	1,264,466
LIABILITIES
Trade payables, accrued and other liabilities							$	122,811			$	99,910
Deferred revenue								77,532				12,586
Current tax liabilities								10,785				697
Total current liabilities								211,128				113,193
Non-current deferred revenue								15,451				9,419
Derivative liabilities held for risk management								3,308				4,686
Loans and borrowings								913,956				340,577
Convertible debentures								208,777				-
Deferred tax liabilities								372,368				88,367
Other long-term liabilities								8,081				6,116
Total non-current liabilities								1,521,941				449,165
Total liabilities								1,733,069				562,358
EQUITY
Capital								1,117,785				672,853
Reserves								18,429				6,711
Retained earnings (deficit)								(15,303)				22,544
Total equity								1,120,911				702,108
Total liabilities and equity							$	2,853,980			$	1,264,466

Consolidated Statements of Income
(in thousands of Canadian dollars, except per share amounts, unaudited)
								Three months ended								Nine months ended
				September 30, 2013				September 30, 2012				September 30, 2013				September 30, 2012
Revenue				$	209,223			$	176,689			$	578,018			$	522,999
Employee compensation and
benefits					63,199				45,754				159,366				134,392
Other expenses					109,340				83,651				287,388				248,376
Income from operating activities before
depreciation and amortization					36,684				47,284				131,264				140,231
Depreciation of property, plant and
equipment					2,889				2,151				7,098				6,356
Amortization of intangible assets					23,825				15,094				54,766				45,441
Income from operating activities					9,970				30,039				69,400				88,434
Finance expenses:
Fair value adjustment of
derivative instruments					(4,759)				(445)				(6,069)				(1,474)
Interest expense					11,251				4,943				20,238				14,585
Other finance charges					3,224				-				3,224				-
Gain on remeasurement of
previously held equity interest					-				-				(1,587)				-
Income from investment in an
associate, net of income tax					-				(53)				(130)				(91)
Income from continuing operations
before income tax					254				25,594				53,724				75,414
Income tax expense (recovery)					(7,383)				5,987				7,255				19,366
Income from continuing operations					7,637				19,607				46,469				56,048
Loss from discontinued operations,
net of income tax					(704)				(2)				(20,185)				(622)
Net income				$	6,933			$	19,605			$	26,284			$	55,426
Earnings per share
Income per share from continuing operations,
Basic				$	0.1091			$	0.3310			$	0.7393			$	0.9462
Diluted				$	0.1089			$	0.3310			$	0.7385			$	0.9462
Loss per share from discontinued operations,
Basic				$	(0.0101)			$	(0.0000)			$	(0.3211)			$	(0.0105)
Diluted				$	(0.0100)			$	(0.0000)			$	(0.3208)			$	(0.0105)
Net income per share
Basic				$	0.0991			$	0.3310			$	0.4182			$	0.9357
Diluted				$	0.0989			$	0.3310			$	0.4177			$	0.9357

Consolidated Statements of Comprehensive Income
(in thousands of Canadian dollars, unaudited)
								Three months ended								Nine months ended
				September 30, 2013				September 30, 2012				September 30, 2013				September 30, 2012
Net income				$	6,933			$	19,605			$	26,284			$	55,426
The following items may be
reclassified subsequently to profit or loss:
Cash flow hedges:
Effective portion of changes in fair value					-				(52)				-				(126)
Net amount transferred to profit or loss					-				(82)				-				(167)
Foreign currency translation					(7,027)				(5,380)				2,481				(5,261)
Total comprehensive income				$	(94)			$	14,091			$	28,765			$	49,872

Consolidated Statements of Changes in Equity
(in thousands of Canadian dollars, unaudited)
			Three months ended September 30, 2013
							Reserves
			Share capital1				Equity-settled share based compensation1				Equity component of Convertible debentures				Foreign currency translation reserve				Hedging reserve				Retained earnings (deficit)				Total equity
Balance at July 1, 2013			$	672,853			$	980			$	-			$	15,392			$	-			$	3,600			$	692,825
Net income for the period				-				-				-				-				-				6,933				6,933
Foreign currency translation				-				-				-				(7,027)				-				-				(7,027)
Share issuance				444,932				-				-				-				-				-				444,932
Equity component of convertible
debentures, net of tax				-				-				8,889				-				-				-				8,889
Dividends				-				-				-				-				-				(25,836)				(25,836)
Options				-				195				-				-				-				-				195
Balance at September 30, 2013			$	1,117,785			$	1,175			$	8,889			$	8,365			$	-			$	(15,303)			$	1,120,911

1 Stock options were presented as part of share capital in prior periods.

										Three months ended September 30, 2012
					Reserves
			Share capital1				Equity-settled share based compensation1				Equity component of Convertible debentures				Foreign currency translation reserve				Hedging reserve				Retained earnings				Total equity
Balance at July 1, 2012			$	672,853			$	662			$	-			$	9,445			$	(399)			$	26,546			$	709,107
Net income for the period				-				-				-				-				-				19,605				19,605
Cash flow hedges				-				-				-				-				(134)				-				(134)
Foreign currency translation				-				-				-				(5,380)				-				-				(5,380)
Dividends				-				-				-				-				-				(18,362)				(18,362)
Options				-				176				-				-				-				-				176
Balance at September 30, 2012			$	672,853			$	838			$	-			$	4,065			$	(533)			$	27,789			$	705,012

1 Stock options were presented as part of share capital in prior periods.

					Nine months ended September 30, 2013
								Reserves
				Share capital1				Equity-settled share based compensation1				Equity component of Convertible debentures				Foreign currency translation reserve				Hedging reserve				Retained earnings (deficit)				Total equity
Balance at January 1, 2013				$	672,853			$	827			$	-			$	5,884			$	-			$	22,544			$	702,108
Impact of transition to
	IAS 19R				-				-				-				-				-				(385)				(385)
Net income for the period					-				-				-				-				-				26,284				26,284
Foreign currency translation					-				-				-				2,481				-				-				2,481
Share issuance					444,932				-				-				-				-				-				444,932
Equity component of convertible
	debentures, net of tax				-				-				8,889				-				-				-				8,889
Dividends					-				-				-				-				-				(63,746)				(63,746)
Options					-				348				-				-				-				-				348
Balance at September 30, 2013				$	1,117,785			$	1,175			$	8,889			$	8,365			$	-			$	(15,303)			$	1,120,911

1 Stock options were presented as part of share capital in prior periods.

				Nine months ended September 30, 2012
							Reserves
			Share capital1				Equity-settled share based compensation1				Equity component of Convertible debentures				Foreign currency translation reserve				Hedging reserve				Retained earnings				Total equity
Balance at January 1, 2012			$	672,853				310				-			$	9,326			$	(240)			$	27,449			$	709,698
Net income for the period				-				-				-				-				-				55,426				55,426
Cash flow hedges				-				-				-				-				(293)				-				(293)
Foreign currency translation				-				-				-				(5,261)				-				-				(5,261)
Dividends				-				-				-				-				-				(55,086)				(55,086)
Options				-				528				-				-				-				-				528
Balance at September 30, 2012			$	672,853			$	838			$	-			$	4,065			$	(533)			$	27,789			$	705,012

1 Stock options were presented as part of share capital in prior periods.

Consolidated Statements of Cash Flows (in thousands of Canadian dollars, unaudited)
								Three months ended								Nine months ended
				September 30, 2013				September 30, 2012				September 30, 2013				September 30, 2012
Cash and cash equivalents provided by (used in):
OPERATING ACTIVITIES
Income from continuing operations				$	7,637			$	19,607			$	46,469			$	56,048
Adjustments for:
	Depreciation of property, plant  and equipment				2,889				2,151				7,098				6,356
	Amortization of intangible assets				23,825				15,094				54,766				45,441
	Fair value adjustment of derivative instruments				(4,759)				(445)				(6,069)				(1,474)
	Interest expense				10,542				4,593				18,823				13,613
	Amortization of deferred financing fees				450				350				1,156				972
	Interest accretion expense				259				-				259				-
	Other finance charges				3,224				-				3,224				-
	Income tax expense				(7,383)				5,723				7,255				20,565
	Stock options				195				176				348				528
	Income from investment in an associate,
	net of income tax				-				(53)				(130)				(91)
	Gain on remeasurement of previously held
	equity interest				-				-				(1,587)				-
	Changes in non-cash working capital items				23,196				(2,282)				8,053				(29,591)
	Changes in other operating assets
	and liabilities				(702)				1,817				(265)				2,848
	Cash flows from (used in) discontinued
	operations				(958)				713				(10,957)				1,705
Cash generated from operating activities					58,415				47,444				128,443				116,920
	Interest paid				(6,189)				(4,163)				(14,407)				(12,870)
	Income taxes paid				(1,173)				-				(3,296)				-
Net cash from operating activities					51,053				43,281				110,740				104,050
FINANCING ACTIVITIES
Repayment of long-term indebtedness					(544,545)				(50,280)				(566,042)				(80,280)
Proceeds from long-term indebtedness					1,115,108				32,491				1,142,173				103,052
Payment of issuance costs of long-term indebtedness					(8,521)				(791)				(8,521)				(902)
Proceeds from issuance of convertible debentures					230,000				-				230,000				-
Payment of issuance costs of convertible debentures					(9,357)				-				(9,357)				-
Proceeds from issuance of shares					460,207				-				460,207				-
Payment of issuance costs of shares					(19,883)				-				(19,883)				-
Dividends paid					(25,836)				(18,362)				(63,746)				(55,086)
Net cash from (used in) financing activities					1,197,173				(36,942)				1,164,831				(33,216)
INVESTING ACTIVITIES
Acquisition of property, plant and equipment					(3,353)				(1,355)				(8,046)				(5,552)
Acquisition of intangible assets					(5,948)				(5,579)				(14,176)				(18,048)
Acquisition of subsidiaries					(1,231,601)				-				(1,256,450)				(37,946)
Proceeds from sale of property, plant and equipment					631				-				631				-
Sale of discontinued operations					-				-				8,500				-
Acquisition of investment in an associate					-				-				-				(10,058)
Net cash used in investing activities					(1,240,271)				(6,934)				(1,269,541)				(71,604)
Increase (decrease) in cash and cash
	equivalents for the period				7,955				(595)				6,030				(770)
Cash and cash equivalents, beginning of period					3,794				2,038				5,719				2,213
Cash and cash equivalents, end of period				$	11,749			$	1,443			$	11,749			$	1,443

About D+H

D+H is a leading provider of secure and reliable technology solutions to North American financial institutions with a reputation for being a trusted partner that helps clients build deeper, more profitable relationships with their customers based on rich industry and market insight, and consumer knowledge. Banks and credit unions across North America rely on D+H to deliver solutions across three broad service areas: Banking and Lending Technology, Lending Processing Solutions, and Payments Solutions. Our integrated, compliant technology solutions enable clients to grow, compete, and optimize their operations, while our forward looking approach helps them stay ahead of the market and anticipate changing consumer needs.

The acquisition of HFS, and its complementary product suite, will enhance D+H's position as a North American FinTech provider, increase our current client base to approximately 6,200 banks and credit unions, expand our capabilities as a leader in lending and compliance solutions, core banking technology solutions and channel solutions, create significant cross-selling and revenue synergies, improve diversification and provide further support for our growth strategies. In 2012, D+H rose to 35th on the FinTech 100, a ranking of the top technology providers to the global financial services industry, and is ranked 24th on the 2013 Branham 300, a listing of the top Canadian ICT companies.

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

 

 

 

 

 

SOURCE Davis + Henderson Corporation