Financial Reporting

Transcription

Financial Reporting

DH CORPORATION
Management’s Discussion and Analysis
For the three and six months ended June 30, 2016
Management’s Discussion and Analysis
For the three and six months ended June 30, 2016
Section
Page
1
Introduction
3
2
Business overview
4
3
Objectives, strategy and outlook
4
4
Consolidated financial performance
9
5
Business segment financial results
13
6
Summary of eight quarter consolidated results
22
7
Capital structure and liquidity
24
8
Changes in financial position
28
9
Significant accounting policies and accounting standards developments
29
10
Definitions and reconciliations
30
11
Disclosure controls and procedures and internal controls over financial reporting
35
12
Business risks
35
D+H Q2 2016
2
MANAGEMENT’S DISCUSSION AND ANALYSIS
1 INTRODUCTION
Our discussion in this Management’s Discussion and Analysis (“MD&A”) is qualified in its entirety by the Caution Concerning ForwardLooking Statements that follow. Throughout this MD&A, DH Corporation and its subsidiaries are referred to as “D+H”, “Company”, “we”,
“our” or “us”.
1.1 Caution concerning forward-looking statements
This MD&A contains certain statements that constitute forward-looking information within the meaning of applicable securities laws (“forwardlooking statements”). Statements concerning D+H’s objectives, goals, strategies, priorities, 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”, “could”, “should”, “continue”, “goal”, “objective”, 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.
Risks related to forward-looking statements include, among other things, those that can be found on the Company’s most recently filed Annual
Information Form and the most recently filed annual MD&A for the year ended December 31, 2015, copies of which are available on SEDAR
at www.sedar.com.
Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The documents referred
to 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.
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 available at that time, 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.
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.
1.2 Preparation of the MD&A
This MD&A has been prepared with an effective date of July 26, 2016. The sections that follow are a discussion of D+H’s financial condition
and results of operations for the three and six months ended June 30, 2016, and should be read in conjunction with D+H’s MD&A for the
year ended December 31, 2015, dated February 23, 2016, and the unaudited condensed interim consolidated financial statements of D+H
for the three and six months ended June 30, 2016. Our unaudited financial results are reported in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Our use of the term IFRS in this MD&A
is a reference to these standards. In our discussion, we also use certain non-IFRS financial measures to evaluate our performance, monitor
compliance with debt covenants and manage our capital structure. These non-IFRS measures include proforma Adjusted revenues, Adjusted
revenues, EBITDA, Adjusted EBITDA, Adjusted net income, Adjusted net income per share, Adjusted net cash from operating activities,
constant currency, Debt to EBITDA ratio, and Interest coverage ratio. These measures are defined, qualified, where applicable, and reconciled
with their nearest IFRS measures in section 10. All amounts in the MD&A are in Canadian dollars, unless otherwise specified.
As part of its consolidated statements of income, D+H provides an additional IFRS measure for “Income from Operating Activities”.
Management believes that this measure provides relevant information to understand the Company’s financial performance. This additional
IFRS measure is representative of activities that would normally be regarded as “operating” for the Company.
This MD&A and the unaudited condensed interim consolidated financial statements were reviewed by D+H’s Audit Committee and approved
by the Board of Directors on July 26, 2016. Additional information relating to the Company, including the Company’s most recently filed Annual
Information Form, is available on SEDAR at www.sedar.com.
Comparative figures have been reclassified to conform to the current period classification, where applicable.
1.3 Variability of our results
With the inclusion of several new service areas arising from acquisitions made over the last several years, we have and expect to continue
to experience some increase in variability in quarterly revenues, EBITDA, net income and cash flows, due to, among other items: (i) dynamics
in the United States (“U.S.”), Canadian, and global lending environments; (ii) cheque order volume declines; (iii) volume variances and fees
within the mortgage origination and lien registration markets; (iv) timing and variability in sales activity, including professional services work,
and cash receipts; and (v) acquisition and integration activities. Quarterly variability is also driven by business and economic cycles in addition
to timing of client decisions related to technology investments. With the acquisition of Harland Financial Solutions (“HFS”) in 2013 and
Fundtech Investments II, Inc. (“Fundtech”) in 2015, the fourth quarter typically will have the highest revenue and EBITDA for the Lending
and Integrated Core ("L&IC") and Global Transaction Banking Solutions ("GTBS") segments. The Canadian segment typically experiences
higher revenues and EBITDA in the second and third quarters.
Given that D+H reports its consolidated results in Canadian dollars, the relative value of the Canadian dollar has an impact on our reported
results and year-over-year performance primarily for U.S. operations when translated into Canadian dollars and also, to a limited extent, the
Canadian operations to the degree that goods and services are sourced from the U.S. Since late 2014, the Canadian dollar has depreciated
against the U.S. dollar, reflecting widespread strength of the U.S. currency. With the acquisition of Fundtech, our results are also impacted,
although to a lesser extent, by the relative value of various currencies including Israeli new shekel, Indian rupee, Euro, Swiss franc, British
pounds sterling, and other currencies, against the U.S. dollar. The Company uses various economic hedging strategies for its debt and its
U.S. dollar cash flows and will continue to deploy these strategies in the future. The Company does not hedge all expenditures but rather
only a portion of forecasted future cash outflows. Additional information on the Company’s hedging strategies can be found in section 7 of
this MD&A.
D+H Q2 2016
3
2 BUSINESS OVERVIEW
D+H (TSX: DH) is a leading financial technology provider that the world's financial institutions rely on every day to help them grow
and succeed. Our global payments, lending and financial solutions are trusted by nearly 8,000 banks, specialty lenders, community
banks, credit unions, governments and corporations. Headquartered in Toronto, Canada, D+H has more than 5,400 employees
worldwide who are passionate about partnering with clients to create forward-thinking solutions that fit their needs. With annual
revenues in excess of $1.5 billion, D+H is recognized as one of the world's top FinTech companies on IDC Financial Insights FinTech
Rankings and American Banker's FinTech Forward rankings. For more information, visit dh.com. Today, the Company offers software
products and other solutions and services in the areas as outlined below. Refer to the discussion on Operating Model and Realignment
in this MD&A for changes on how our business will be organized and conducted globally in the future.
Global Transaction Banking
Lending and Integrated Core
Canada
Solutions
Solutions
Solutions
Integrated Core Solutions
Payments Solutions
•
Global Payment Technologies
(Global and U.S. Domestic)
•
Cash Management
•
•
Financial Messaging
Merchant Services
•
•
Core Banking
Channel and Optimization Solutions
•
•
Cheque Program
Enhancement Services
Lending Solutions
•
•
Mortgage Lending
Consumer Lending
•
Mortgage Technology
•
Commercial Lending
•
•
Collateral Management Solutions
Lending Solutions
Student Lending
Clients
Clients
Clients
Global financial institutions and large
corporate clients
United States based financial institutions
including banks and credit unions and
other lenders
Canadian financial institutions and
corporate clients
Approximately 1,000 clients globally
Approximately 1,000 clients in Canada
Operations
Approximately 5,500 clients in the United
States
Operations
Global operations team based in the
U.S., EMEA, APAC
U.S. operations team based in several
states
Canadian operations team based
primarily in Ontario and British Columbia,
Canada
Operations
3 OBJECTIVES, STRATEGY AND OUTLOOK
3.1 2016 Objectives and Strategy
Our strategy is to build market-leading positions in growth sectors in the financial services industry and to reinforce these positions
with integrated technology solutions that deliver increasing value to our clients. In 2016, the Company is focused on advancing the
following strategies through various business activities:
Build on GTBS’ leading global position in payment technologies, including payment hubs, financial messaging solutions,
cash management and merchant services.
•
•
•
•
•
•
•
•
The Company signed new contracts with a major Southeast Asian financial institution and a major Israel-based financial
institution for our Global Cash Plus solution providing a complete treasury management solution for their customers.
The Company signed a contract with a major UK-based global bank for global payments services to enhance their clients'
payables and receivables processes.
The Company signed a new contract with a major South African bank for an Authenticated Clearing solution in order to
achieve compliance with new payments regulations.
The D+H PAYplus FTS solution was awarded the SWIFT Certified Application label for the second consecutive year
recognizing the ability to process SWIFT payment messages in accordance with its high technical standards.
The Company signed a contract with one major European bank and a system integrator for the company's first Global
PAYplus installation as a Payments Platform as a Service in Europe during the first six months of 2016.
The Company also signed a major contract within Australia supporting a large financial institution and a system integrator
for their NPP/Faster Payments deployment of our payment hub. This deployment will take the form of a Payments Platform
as a Service.
The Company signed a contract with a large mortgage loan processor in the United States for its SaaS-based wire transfer
solution, automating the customer's various manual processes.
The Company was successful in winning a blockchain application pilot with a large European bank.
D+H Q2 2016
4
Build on L&IC’s leading capabilities in lending and integrated core solutions
•
•
The Company continues to invest in additional functionality and certain next generation technology in lending solutions.
In the second quarter, we launched a new commercial origination and processing solution that seamlessly integrates to our
industry-leading compliance product LaserPro.
Defend core market positions in Canada while expanding into additional customer segments and value propositions
•
•
•
Realized significant growth in our subscription-based enhancement services product and collateral management solutions
primarily due to the onboarding of new clients in 2015.
The Company has been selected by the Government of Canada to provide financial solutions and related services for the
Canada Student Loans Program (“CSLP”), and five integrated provincial programs. The new contract will be effective on
April 1, 2018 and the current contract is expected to be extended to this date.
The development of the platform is underway and the first milestone was successfully delivered.
Invest in our business to promote long-term revenue growth and increase operating efficiency
•
•
•
•
Continued investment in our leading Global Payment Technologies solutions in response to the ongoing market evolution
to faster payments and real time settlement.
Continued investment in our SaaS-based registry platform for our collateral management solutions.
Continued investment in our existing data center operations and corporate systems to better support our expanded global
operations.
Continued investment in risk management by expanding our information security, regulatory compliance and risk
management resources.
Continue to align the Company around a common brand
•
•
The Company continued to build the D+H brand in the payments and treasury markets globally through various digital,
advertising and event programs.
In the second quarter, we hosted a large number of EMEA banks and corporates at our largest ever Insights EMEA customer
event in London, UK.
Effective use of capital resources
•
•
•
•
Continued investment in our products, platforms and infrastructure, investing $22.7 million in the quarter and $43.7 million
year to date.
Returned $32.6 million in the quarter and $57.4 million year to date of capital to investors through the payment of cash
dividends, and $1.5 million in the quarter and $10.9 million year to date in shares to participants in the DRIP.
Repaid a total of $30.0 million of debt since January 1, 2016, including $10.0 million in the current quarter.
Initiated a realignment of our global operating structure to achieve more effective global operations and cost synergies which
will increase our overall return on capital from our acquisitions of both HFS and Fundtech.
3.2 Outlook
In the second half of 2016, the Company intends to continue with the strategy outlined under Section 3.1. In addition, the Company
will focus on the following initiatives:
• Disciplined and strategic focus on organic revenue growth;
•
Enhancing capabilities in software engineering and product management, including employing agile development practices
across our main product groups;
•
Optimize our products by increasing investment in innovation and next generation financial technologies and rationalizing
certain products;
•
Evolving our business model and strategic capabilities to more effectively manage a global business;
•
Reducing operating costs while increasing operating effectiveness; and
•
Continuing to strengthen our risk management practices and regulatory compliance capabilities
•
Continued reduction in leverage.
Although the Company continues to include acquisitions as part of its long-term growth and diversification strategy, the focus in the
near term will be the implementation of the operating model to advance our global strategy, cross-selling, reduction of financial
leverage and operating effectiveness.
In the second quarter the Company noted an increasing focus from global financial institutions on the macro economic conditions
globally. In certain markets, financial institutions are also assessing the potential impact of the exit of the United Kingdom from the
European Union ("Brexit") as well as the implications of certain regulatory ring-fencing requirements. In the United States and Canada,
while the economic outlook is mixed, we see no new changes that impact our current business in these markets. See below for further
discussion on our outlook by segment.
D+H Q2 2016
5
Segment Outlook
GTBS
Our current outlook for the GTBS segment revenue is positive with long term growth in the high single digits. While we continue to
see demand from business and technology groups in large financial institutions for our global payment technologies, we anticipate
some delayed spending by some of these institutions due to uncertainty in macro economic conditions globally. Certain markets and
financial institutions are also assessing the potential impact from Brexit. In markets where faster payments has been adopted we
continue to see demand for our global payment solutions. In markets such as the United States, Canada, Australia and South Africa
where faster payments infrastructure is moving toward adoption, we see higher demand for our payment solutions.
Our growth outlook for 2016 in global payment technologies is partially offset by lower growth collectively in our other solutions.
Growth in global payment technologies is expected in the low double digits proforma on a constant currency basis. We expect lower
growth in cash management solutions in 2016 due to development activities on its products that should result in higher growth and
margins in future years.
We continue to invest in payments and treasury solutions to capitalize on growth from new customer demand and where financial
institutions, particularly those in the United States, are looking for technology solutions that are SaaS-enabled. We also continue to
invest in risk initiatives in this segment. The combination of product and risk investments will impact expenses and margins in 2016
and 2017 in this segment, but reflects our long term confidence in this segment.
We are tempering our proforma revenue growth outlook for 2016 in this segment to the mid single digits primarily related to some
caution we are seeing by customers due to the global economic conditions and any potential impact from Brexit.
L&IC
The outlook for our L&IC segment is continued solid revenue growth from our integrated core and channel solutions for the balance
of the year while our lending solutions revenue is muted by the renewal cycle for the LaserPro product as discussed in the first quarter.
We expect the lending solutions revenues for the year, including bookings and revenues from new and add-on LaserPro and other
lending solutions contracts, will reduce the impact of the lower LaserPro renewal cycle on the lending revenue growth as the year
progresses.
In our integrated core business, we will see revenue growth in 2016 from our bookings in 2015 as implementations are completed
during the year. We expect revenues from hosted solutions and channel solutions to continue to have the strongest growth. In particular
we see strong growth from our card payments channel. We continue to be encouraged by the growth in our integrated core business.
The Company also continues to develop, simplify and rationalize its technology offerings to meet changing market demand for these
products.
Our lending solutions today serve over 4,300 clients, many of which are LaserPro clients in addition to other products. The LaserPro
contracts range in term from 3 - 7 years and have an average term of the portfolio of approximately 4.4 years. However, the maturities
are not evenly distributed from year to year. The previous two years had a higher proportion of contracts renewing than is expected
in 2016. In 2016, only approximately 10% of our LaserPro contracts are maturing in the year, therefore, we anticipate lower revenues
from contracts renewing in 2016 with an increase in 2017. We do not anticipate a change in the high renewal rates we have experienced
since the HFS acquisition which continues to be greater than 95%. In the second half of 2016 we expect growth in revenues from
new bookings to offset the reduced revenues from renewal contracts by the end of the year.
The lower number and value of LaserPro contract maturities will drive an overall reduction in revenue and EBITDA growth in the
lending solutions business in the current year primarily due to the multiple element accounting for these term contracts where a
significant portion of the revenues are recorded under IFRS in the initial year of the contract or renewal year. However, since these
contracts are billed and collected annually over the term of the contract, we expect to see an increase in the cash generated from
our business, even with current year revenue decreases, due to the renewals and new contract bookings in 2014 and 2015. The
cash generated in this product is expected to grow in the mid single digits annually as a result of the growth in bookings since the
acquisition of HFS.
In the past two years, we have focused on cross selling our lending products to clients from our HFS, Avista and Mortgagebot
acquisitions and had successes in cross selling products in conjunction with LaserPro renewals. Our focus in lending in 2016 will be
on our new LaserPro origination and processing capability for commercial lending, broadening our customer base and continuing
our cross-sell efforts to our U.S. client base. Since launching our new LaserPro commercial and origination processing capability in
the second quarter of 2016 we've seen positive early signs of customer adoption.
In the United States the financial institutions are focused on increasing their products and solutions provided to customers, particularly
with hosted and SaaS and SaaS-like solutions. We are not seeing the macro economic concerns that are being expressed by global
financial institutions.
D+H Q2 2016
6
Canada
In Canada, while the economic environment is mixed, we are not seeing any additional impacts related to our business other than
the normal cycles and business drivers including auto sales, mortgage financing activity and the ongoing cheque decline. There is
continuing focus by our customers related to improving services and margins which typically provide opportunities for our solutions.
In our payments solutions, our enhancement services revenue will continue to benefit from the onboarding of a new client at the end
of the first quarter in 2015. In addition the increases in average order value in the cheque program, are expected to continue to
partially offset ongoing cheque order volume declines which are expected to continue in the high single digits. The Company also
remains focused on efficiency and cost reduction initiatives to increase the profitability in this business.
In our lending solutions business, we are expecting our collateral management solutions revenues to continue to benefit from a new
major contract effective in the third quarter of 2015. Volumes in the registry business and recovery business are typically strongest
in the second and third quarters. We are cautious with respect to the volumes in these businesses in the fourth quarter, and we
anticipate that broader economic status in Canada will influence the mix of revenues and as a result EBITDA.
Mortgage origination revenues for the year are also expected to be influenced by the housing market and mortgage refinancing
activity in Canada. We remain watchful on these activities and value levels.
With the success of the CSLP program contract win, the Company's activities are focused on developing the new platform and
technology solution for implementation in 2018. In the second quarter of 2016, we successfully delivered against the first major
milestone toward the new platform.
Margins in the Canadian segment are expected to be lower than the prior year due to revenues realized during the first six months
of 2015 that are not recurring. Growth will moderate in the year as the impacts from new clients in enhancement services in the
second quarter of 2015 and in collateral mortgage solutions in the third quarter of 2015 normalize. During the second quarter of 2016,
we also recorded additional expenses related to our mortgage origination business for contracts being renewed with increased
volume-based incentives. Margins are also impacted year over year as a result of product mix and growth in products with lower than
average margins relative to the prior year.
Capital Investments
To support our near to long term growth and operations, we also plan to invest approximately $100 million to $110 million in capital
asset additions in 2016, with a focus on new growth opportunities from new solutions in addition to normal renewal of hardware and
software infrastructure and the ongoing enhancement of our lending and payments products and enterprise-wide systems. Capital
asset additions may vary based on spending in support of new growth opportunities if and as they arise, and the timing of opportunities
during the year. In addition to the capital investments, the company incurs additional expenses related to software development that
are included in operating expenses.
Operating Model and Realignment
To better position the business for longer term growth and effectiveness, management has been pursuing three broad activities: 1)
continuing to invest in new product development, 2) improving our aggregate risk profile by optimizing our product portfolio and
investing in enhanced risk capabilities, and 3) realigning our operations to advance our strategy and achieve our vision. We are
realigning how we organize our operations to achieve the following goals: (i) to operate on a global scale in both lending and payments;
(ii) to operate our major functions and business processes globally to benefit from standardization, scale and increased efficiencies;
and (iii) to redirect some of the efficiencies from this program to investments in our products.
The Company has realigned the organization, in which expected gross savings of approximately $53 million are offset by investments
in new positions, for an estimated net savings of $25 million in annualized compensation and related cost savings. Net savings are
expected starting in the middle of the third quarter. The restructuring expenses are estimated to be between $30 million and $32
million, and will be recognized primarily in 2016. Restructuring expenses totaling $22.0 million and $28.8 million have been recorded
in the second quarter and year-to-date in 2016. These expenses include severance costs, consulting and professional fees, financial
systems and other related costs. During 2016 the Company expects to achieve net savings of approximately $19 million of which
30% has been realized through the end of the second quarter.
Strategic Business Units
Our business functions and products are being realigned into three new strategic business units to better align the capabilities of the
Company to support the needs of our customers and allow us to capitalize on global scale and growth opportunities. The three
strategic business units will be: Global Payments Solutions, Global Lending Solutions and Financial Solutions. Additionally we will
have a Corporate function.
Global Payments Solutions will be focused on the development, sales and integration of products, delivering leading global, crossborder and domestic payment solutions to a range of banks, non-bank financial institutions and corporate customers. This will include
most of our current GTBS segment, including our market leading global payments, financial messaging and treasury management
solutions. This team will be focused on growth of the business globally including expanding initiatives with existing customers and in
markets where payments infrastructures are undergoing change to real-time settlements.
Global Lending Solutions will advance our strong leadership position in lending solutions and focus on growing our business in North
America and more broadly over the medium-term. This will allow us to deliver lending solutions for consumer, commercial and
D+H Q2 2016
7
mortgage lending, as well as loan servicing and equipment financing, to support the needs of banks, credit unions and specialty
lenders around the world. All of our current L&IC and Canadian lending products and solutions will be included in this business
segment.
Financial Solutions will include our integrated core business (currently in our L&IC segment), our Canadian cheque and enhancement
services businesses, as well as our merchant services business (currently in our GTBS segment). This team will focus on maximizing
the potential of these businesses in their respective markets.
The strategic infrastructure and operations of the Company that have historically been aligned with the business segments have also
been reorganized under executives accountable for driving global scale and operating effectiveness. These business operations
include customer support, technology infrastructure and other shared services, in addition to risk management, finance and talent.
The transition to the new operating model is underway. The Company will continue to manage and report financial results for GTBS,
L&IC and Canada through the end of 2016. We will begin reporting under our new business segments commencing in the first quarter
of 2017 with the comparable information for the first quarter of 2016.
D+H Q2 2016
8
4 CONSOLIDATED FINANCIAL PERFORMANCE
4.1 Consolidated operating results
Three months ended June 30
(In thousands of dollars, unless otherwise noted)
Statement of income
2016
2015
$ Change
Revenues
$ 424,187
$ 372,376
$ 51,811
Expenses
329,071
286,025
43,046
15.0 %
EBITDA 1
95,116
86,351
8,765
10.2 %
EBITDA margin 1
22.4%
23.2%
Six months ended June 30
% Change
2016
13.9 % $ 836,336
2015
% Change
$ 168,946
25.3 %
648,971
487,070
161,901
33.2 %
187,365
180,320
7,045
22.4%
(0.8)%
$ Change
667,390
$
3.9 %
27.0%
(4.6)%
Depreciation of property, plant and
equipment
Amortization of intangible assets
6,928
5,395
1,533
28.4 %
14,182
9,771
4,411
66,117
52,836
13,281
25.1 %
135,533
90,898
44,635
49.1 %
Income from operating activities
22,071
28,120
(6,049)
(21.5)%
37,650
79,651
(42,001)
(52.7)%
Finance expense
25,641
27,364
(1,723)
(6.3)%
52,117
41,794
10,323
24.7 %
(4,326)
(572.2)%
(14,467)
37,857
(52,324)
(138.2)%
(3,730)
71.4 %
(24,637)
(2,119)
(22,518)
1,062.7 %
$ (29,806)
(74.6)%
(Loss) / income before income taxes
(3,570)
Income tax recovery
(8,953)
Net income for the period
Weighted average number of shares
outstanding during the period (in
thousands)
Net income per share, basic and diluted
$
5,383
756
(5,223)
$
106,779
$
0.05
5,979
$
7,233
99,546
$
0.06
(596)
$
(10.0)% $
10,170
7.3 %
106,626
(0.01)
$
$
39,976
93,012
0.10
$
0.43
45.1 %
14.6 %
13,614
$
(0.33)
Other non-IFRS measures
Adjusted revenues 1
$ 425,337
$ 375,163
$ 50,174
13.4 % $ 839,524
$
671,694
$ 167,830
25.0 %
Adjusted EBITDA 1
$ 116,545
$ 110,159
$
6,386
5.8 % $ 219,512
$
197,129
$ 22,383
11.4 %
(1.2)% $ 104,350
$
107,000
$
(2,650)
0.98
$
1.15
$
(0.17)
6.7 % $ 110,135
$
61,712
$ 48,423
$ (20,795)
Adjusted EBITDA margin 1
27.4%
29.4%
26.1%
(2.0)%
29.3%
(3.2)%
Adjusted net income 1
$
58,914
$
59,640
$
(726)
Adjusted net income per share, basic 1
$
0.55
$
0.60
$
(0.05)
$
55,362
$
51,890
$
3,472
$
2,214
$
19,212
$ (16,998)
$
7,868
$
28,663
$
21,995
$
—
$ 21,995
$
28,786
$
—
$ 28,786
$
79,571
$
71,102
11.9 % $ 146,789
$
90,375
$ 56,414
$
(2.5)%
Liquidity
Net cash from operating activities
Add: Acquisition related and other
charges
Add: Realignment of global
operations and related restructuring
expenses
Adjusted net cash from operating
activities1
activities as a percentage of Adjusted
revenues 1
activities per weighted average share
outstanding 1
Uses of Adjusted net cash from
operating activities:
Capital expenditures
Cash dividends
18.7%
activities after capital expenditures,
cash dividends and net debt
repayment 1
Dividends declared per share
8,469
17.5%
19.0%
0.75
$
(22,739) $
(17,163) $
(5,576)
32.5 % $
$
(32,620) $
(24,588) $
(8,032)
32.7 % $
$
$
$
0.71
$
0.04
$
activities after capital expenditures and
$
cash dividends 1
Net debt repayment
$
$
$
29,351
(5,139)
$
(10,000) $
—
$ (10,000)
$
29,351
$ (15,139)
$
24,212
14,212
0.32
$
0.32
$
—
1.38
0.41
(43,701) $
(44,837) $
1,136
(57,373) $
(45,124) $ (12,249)
$
0.97
$
414
(30,000) $
—
15,715
62.4 %
13.5%
$
45,715
78.5 %
$
0.64
(2.5)%
27.1 %
$ 45,301
$ (30,000)
414
$ 15,301
0.64
—
June 30 December 31
Capital structure
2016
2015
$ Change
Loans and borrowings
$1,508,832
$ 1,636,922
$(128,090)
Convertible debentures
$ 426,668
$
$
Total equity
$2,156,564
$ 2,369,066
Debt to EBITDA 1
2.998x
422,576
3.185x
% Change
(7.8)%
4,092
1.0 %
(9.0)%
$(212,502)
n/a
1. Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 10.1 for additional information and reconciliation to IFRS measures.
D+H Q2 2016
9
Our revenues are further broken down by service area as follows:
Revenues by service area
Lending solutions
2016
$
178,688
2015
42% $
172,066
2016
2015
46% $
343,332
41% $
330,150
49%
Global transaction banking solutions
90,355
21%
55,102
15%
184,545
22%
55,102
8%
Payments solutions
82,545
19%
81,329
22%
162,142
19%
155,076
23%
Integrated core solutions
Total revenues
$
72,599
17%
63,879
17%
146,317
17%
127,062
19%
424,187
100% $
372,376
100% $
836,336
100% $
667,390
100%
Adjusted revenues by service area 1
Lending solutions
2016
$
179,358
2015
42% $
173,242
2016
2015
46% $
344,821
41% $
332,698
50%
90,694
21%
56,568
15%
185,945
22%
56,568
8%
Payments solutions
82,545
19%
81,329
22%
162,142
19%
155,076
23%
Total Adjusted revenues 1
$
72,740
17%
64,024
17%
146,616
18%
127,352
19%
425,337
100% $
375,163
100% $
839,524
100% $
671,694
100%
Revenues and Adjusted revenues
Revenues on a consolidated basis for the second quarter of 2016 increased $51.8 million or 13.9%, partially due to the inclusion of
the GTBS segment acquired on April 30, 2015, the strengthening of the U.S. dollar in our L&IC segment which increased revenues
by $6.7 million for the second quarter of 2016, and organic growth in our Canadian segment which contributed $9.7 million compared
to the prior year period.
For the first six months of 2016, revenues on a consolidated basis increased $168.9 million or 25.3%, primarily due to the inclusion
of the GTBS segment acquired April 30, 2015, the strengthening of the U.S. dollar in our L&IC segment which increased revenues
by $20.7 million for the first six months of 2016, and organic growth in our Canadian segment which contributed $21.8 million compared
to the prior year period.
Expenses
Consolidated expenses increased by $43.0 million or 15.0% and $161.9 million or 33.2% in the second quarter and first six months
of 2016 compared to the prior year. The increase was primarily attributable to the inclusion of the GTBS segment expenses, the
strengthening of the U.S. dollar in our L&IC segment which increased expenses by $4.6 million and $14.7 million for the second
quarter and first six months of 2016, respectively, and increases in expenses in our Canadian segment attributable to the direct costs
associated with enhancement services and our collateral management solutions business, which are consistent with the increase in
revenues, and the recording of volume incentive expenses in our mortgage origination business.
In addition, in the second quarter and first six months of 2016, we incurred $22.0 million and $28.8 million, respectively, of expenses
related to the Company’s initiatives to align global operations and achieve cost synergies following D+H’s acquisitions, including
Fundtech in 2015.
We also incurred expenses related to business integration costs of $2.2 million and $7.9 million for the second quarter and first six
months of 2016, respectively, incurred primarily in connection with the acquisition of Fundtech, representing a decrease of $17.0
million and $20.8 million for the second quarter and first six months of 2016, respectively, compared to the prior year.
EBITDA and Adjusted EBITDA
EBITDA for the second quarter and first six months of 2016 increased $8.8 million or 10.2% and $7.0 million or 3.9%, respectively,
primarily due to the inclusion of our GTBS business EBITDA, an increase in revenues from our Canadian segment, the strengthening
of the U.S. dollar in our L&IC segment and decrease in acquisition and business integration costs. These increases are partially offset
by $22.0 million and $28.8 million of costs in the second quarter and first six months of 2016, respectively, related to the Company’s
initiatives to align global operations and achieve cost synergies following D+H’s acquisitions, including Fundtech in 2015 and a
decrease in L&IC lending revenues. In addition, we incurred $1.2 million and $2.4 million for the second quarter and first six months
of 2016, respectively, in annual recurring marketing costs that were incurred in the second quarter and first six months of 2016 but
were incurred in the third quarter of 2015 and therefore not in the comparative period of 2015.
The change in non-cash foreign exchange gains and losses for financing related intercompany balances resulted in an increase to
EBITDA of $6.5 million for the second quarter of 2016 and a decrease to EBITDA of $7.9 million for the first six months of 2016.
Adjusted EBITDA, which removes from EBITDA the impacts of the acquisition accounting adjustments, acquisition-related and other
charges, costs related to our global operations realignment, and foreign exchange gain or loss on financing related intercompany
balances, grew by $6.4 million or 5.8% and $22.4 million or 11.4%, for the second quarter and first six months of 2016, respectively,
compared to the prior year. These increases were primarily driven by contribution from the inclusion of GTBS and the strengthening
of the U.S. dollar in the L&IC segment which increased Adjusted EBITDA by $2.1 million and $5.9 million in the second quarter and
first six months of 2016, respectively. These increases are partially offset by decreases in Adjusted EBITDA for the L&IC segment,
D+H Q2 2016
10
of $1.5 million and $11.6 million for the second quarter and first six months of 2016, respectively, excluding the impact of foreign
exchange, as a result of reduced revenues and increased expenses in this segment.
EBITDA margin and Adjusted EBITDA margin
During the second quarter and first six months of 2016, EBITDA margins decreased by 0.8% and 4.6%, respectively, primarily due
to the increase in expenses as discussed above and a nonrecurring gain related to HFS’ closing working capital settlement in the
first six months of 2015. Adjusted EBITDA margin decreased by 2.0% and 3.2% in the second quarter and first six months of 2016,
respectively, primarily due to the inclusion of the GTBS segment which historically has lower margins than the existing D+H business,
the change in sales mix in lending solutions in both our L&IC and Canadian segment, annual customer marketing costs in the second
quarter and first six months of 2016 in the L&IC segment that were incurred in the third quarter of 2015 and therefore not in the
comparative period of 2015, and the impact of recognizing year-to-date volume incentive expenses from our Canadian mortgage
origination business recorded in the second quarter of 2016. The margins were further impacted by temporary increases in revenues
in the second quarter and first six months of 2015 that did not recur in our Canadian segment related to enhancement services,
mortgage origination and our student lending repayment assistance program.
Depreciation of capital assets and amortization of intangible assets
(In thousands of dollars, unless otherwise
noted)
Depreciation of property, plant and
equipment
$
2016
2015
$ Change
6,928 $
5,395 $
% Change
2016
1,533
28% $
687
168% $
2015
14,182 $
$ Change
9,771 $
% Change
4,411
45%
1,374
168%
11,964
7,721
4,243
55%
24,269
14,312
9,957
70%
Non-acquisition intangible assets
13,060
8,130
4,930
61%
26,461
15,130
11,331
75%
Intangible assets from acquisition
53,057
44,706
8,351
19%
109,072
75,768
33,304
44%
Contract
$
Software
1,096 $
409 $
2,192 $
818 $
Total amortization of intangibles
$
66,117 $
52,836 $
13,281
25% $
135,533 $
90,898 $
44,635
49%
Total depreciation of property, plant
and equipment and amortization of
intangibles
$
73,045 $
58,231 $
14,814
25% $
149,715 $
100,669 $
49,046
49%
Depreciation of property, plant, and equipment, and amortization of non-acquisition related intangible assets increased in the second
quarter by $1.5 million and $4.9 million, respectively, compared to the second quarter of 2015. For the first six months of 2016,
depreciation of property, plant, and equipment, and amortization of non-acquisition related intangible assets increased by $4.4 million
and $11.3 million, respectively. The increases are primarily due to the inclusion of the GTBS segment since April 30, 2015, the impact
of increased investments in the L&IC and Canadian segment throughout 2015, as well as the strengthening of the U.S. dollar compared
to the prior year comparatives.
Consolidated amortization of acquired intangible assets for the second quarter and first six months of 2016 increased by $8.4 million
and $33.3 million, respectively, compared to to the prior year primarily due to the inclusion of the GTBS segment and the strengthening
of the U.S. dollar compared to the prior year. A significant portion of intangible assets in this category are from previous acquisitions,
including GTBS, and are denominated in U.S. dollars.
Finance expense
Finance expense is comprised of interest expense and financing related charges as detailed in the table below.
Interest expense
$
Amortization of deferred financing fees
2016
2015
23,182 $
19,567 $
603
6,246
Accretion expense (5.0%, 5.5 year convertible
debenture)
1,115
893
Accretion expense (6.0%, 5 year convertible
debenture)
1,026
945
Fair value adjustment of derivative instruments
Total finance expenses
$
(285)
(287)
25,641 $
27,364 $
$ Change
3,615
(5,643)
% Change
18 % $
2016
2015
47,201 $
32,059 $
$ Change
% Change
15,142
47 %
(5,719)
(82)%
(90)%
1,245
6,964
222
25 %
2,155
893
1,262
141 %
81
9%
2,101
1,940
161
8%
2
(1,723)
(1)%
(6)% $
(585)
52,117 $
(62)
41,794 $
(523)
844 %
10,323
25 %
Interest expense increased by $3.6 million in the second quarter of 2016 due to an increase of $2.5 million from higher long-term
borrowings, calculated on a weighted average basis, and $0.5 million due to the strengthening of the U.S. dollar as our debt is primarily
denominated in U.S. dollars, compared to the same prior year period in 2015. For the first six months of 2016, the increase in interest
expense of $15.1 million was due to an increase of $13.2 million from higher long-term borrowings, calculated on a weighted average
basis, and $2.0 million due to the strengthening of the U.S. dollar compared to the same prior year period in 2015.
The increase in accretion expense for the second quarter and first six months of 2016 is due to an issuance of convertible debentures
in the second quarter of 2015 as a result of financing the acquisition of Fundtech. These increases are offset by a decrease in
D+H Q2 2016
11
amortization of deferred financing fees of $5.6 million and $5.7 million during the second quarter and first six months of 2016,
respectively, due to a write-off deferred financing fees incurred during the second quarter and first six months of 2015 as a result of
the financing the acquisition of Fundtech.
Income tax recovery
An income tax recovery of $9.0 million was recorded in the second quarter of 2016 compared to an income tax recovery of $5.2
million recognized in the same period of 2015. The increase in the income tax recovery was primarily attributable to a decrease in
income before income taxes and changes in the geographic mix of income and losses. The tax recovery was further increased by
changes in withholding tax accruals. In addition, there were non-deductible transaction costs related to the acquisition of Fundtech
which were recorded in 2015. These increases were partially offset by the tax impacts related to net foreign exchange gains and
losses.
An income tax recovery of $24.6 million was recorded for the first six months of 2016 compared to an income tax recovery of $2.1
million for the same period in 2015. The increase in the income tax recovery was primarily attributable to a decrease in income before
income taxes and changes in the geographic mix of income and losses. The tax recovery was further increased by changes in statutory
tax rates and withholding tax accruals. In addition, there were non-deductible transaction costs related to the acquisition of Fundtech
which were recorded in 2015. These increases were partially offset by the tax impacts related to net foreign exchange gains and
losses.
Net income and Net income per share
Consolidated net income for the second quarter of 2016 of $5.4 million compared to the prior period net income of $6.0 million, a
decrease of $0.6 million or 10.0%, is primarily due to an increase in amortization of intangible assets of $13.3 million partially offset
by a decrease in finance expense of $1.7 million and increase in EBITDA of $8.8 million as discussed above. The increase was also
due to an increase in income tax recovery of $3.7 million in the second quarter of 2016.
Consolidated net income for the first six months of 2016 of $10.2 million compared to the prior period net income of $40.0 million, a
decrease of $29.8 million or 74.6%, is primarily due to an increase in amortization of intangible assets of $44.6 million and finance
expense of $10.3 million as discussed above. The decreases were partially offset by an increase in income tax recovery of $22.5
million in the first six months of 2016.
Net income per share, basic and diluted of $0.05 and $0.10 in the second quarter and first six months of 2016, respectively, declined
from $0.06 and $0.43 per share in the second quarter and first six months of 2015, respectively, as a result of a decrease in net
income and an increase in shares outstanding due to the financing of our Fundtech acquisition. Weighted average common shares
outstanding in the second quarter and first six months of 2016 were 106.8 million and 106.6 million, respectively, compared to 99.5
million and 93.0 million shares for the second quarter and first six months of 2015, respectively.
Adjusted net income and Adjusted net income per share
Adjusted net income for the second quarter and first six months of 2016 was $58.9 million and $104.4 million, respectively, compared
to Adjusted net income of $59.6 million and $107.0 million in the second quarter and first six months of 2015, respectively. This reflects
a decrease of $0.7 million or 1.2% and $2.7 million or 2.5% for the second quarter and first six months of 2016 compared to the prior
year. Adjusted net income per share for the second quarter of 2016 of $0.55 was lower by $0.05 and Adjusted net income per share
for the first six months of 2016 of $0.98 was lower by $0.17. The declines are primarily a result of higher shares outstanding as noted
above and the decrease in Adjusted net income for the periods. A reconciliation to Adjusted net income and Adjusted net income per
share from net income and net income per share, respectively, can be found in section 10.1 of this MD&A.
D+H Q2 2016
12
5 BUSINESS SEGMENT FINANCIAL RESULTS
5.1 Operating results by segment and corporate
We report our results based on three operating segments: Global Transaction Banking Solutions (“GTBS”), Lending & Integrated
Core (“L&IC”) and Canada. Certain activities, as described under the definition of Adjusted EBITDA in section 10.1, are recorded as
part of “Corporate” as these items are not part of the core operations of the segments. The Company announced a realignment of
its business into three segments Global Payments Solutions, Global Lending Solutions and Financial Solutions in the third quarter
of 2016. The transition to the new operating model is underway. The Company will continue to manage and report financial results
for GTBS, L&IC, and Canada through the end of 2016 and will begin reporting under our new business segments commencing in
the first quarter of 2017.
Foreign exchange impacts
Results from our GTBS and L&IC segments are impacted by movements in foreign exchange rates. The GTBS segment results are
translated into Canadian dollars from U.S. dollars. A portion of GTBS’ results are denominated in U.S. dollars, while the remainder
is translated to U.S. dollars from Indian rupee, Euro, Swiss franc, British pounds sterling, and other currencies. The L&IC segment
results are translated into Canadian dollars from U.S. dollars and other foreign currencies. These segment results are translated into
Canadian dollars on a monthly basis using the Bank of Canada’s average exchange rates for the month. In order to enhance the
comparability of results, our GTBS and L&IC segment results are also presented in U.S. dollars. Certain information related to the
GTBS segment is also presented on a constant currency basis for comparability with 2015 currency levels in U.S. dollars, Israeli
new shekel, Indian rupee, Euro, Swiss franc, British pounds sterling, and other currencies. See Section 10.2 for details on foreign
exchange rates.
Our segment financial results are as follows:
Three months ended June 30, 2016
GTBS segment
Revenues
$
Expenses
90,355
$
19,512
Adjusted revenues 1
$
Adjusted EBITDA 1
$
EBITDA margin
$
70,843
EBITDA 1
1
146,715
$
100,229
$
46,486
90,694
$
19,634
$
$
Expenses
$
EBITDA margin 1
Adjusted revenues
55,102
$
95,116
187,117
$
— $
425,337
45,646
$
51,265
$
— $
116,545
27.4%
(22,147) $
329,071
$
—
27.4%
—
11,228
Canadian
segment
139,829
$
93,956
$
45,873
177,445
Corporate
$
$
52,907
— $
23,657
124,538
32.8%
20.4%
Adjusted EBITDA 1
$
424,187
147,526
L&IC segment
43,874
1
22,147
Consolidated
22.4%
27.4%
GTBS segment 2
EBITDA 1
— $
51,265
Revenues
Corporate
$
$
30.9%
21.6%
187,117
135,852
31.7%
21.6%
Canadian
segment
L&IC segment
$
29.8%
(23,657) $
—
Consolidated
372,376
286,025
86,351
23.2%
$
56,568
$
141,150
$
177,445
$
— $
375,163
$
12,278
$
44,974
$
52,907
$
— $
110,159
21.7%
31.9%
29.8%
—
29.4%
2. GTBS segment information covers period of April 30, 2015 to June 30, 2015.
D+H Q2 2016
13
Six months ended June 30, 2016
GTBS segment
Revenues
$
Expenses
EBITDA
$
$
295,319
$
88,525
Adjusted EBITDA 1
Corporate
356,472
$
91,048
33,422
$
187,365
22.4%
—
185,945
$
297,107
$
356,472
— $
839,524
$
41,699
$
86,765
$
91,048
— $
219,512
29.2%
22.4%
25.5%
26.1%
—
GTBS segment 2
$
$
43,874
$
11,228
Adjusted revenues 1
$
Adjusted EBITDA 1
$
EBITDA margin 1
277,575
$
183,289
$
94,286
56,568
$
12,278
$
Corporate
334,713
Consolidated
— $
17,546
242,361
487,070
92,352
280,413
$
334,713
— $
671,694
92,499
$
92,352
— $
197,129
34.0%
(17,546) $
27.6%
33.0%
21.7%
$
667,390
$
20.4%
Canadian
segment
L&IC segment
55,102
Expenses
EBITDA 1
648,971
(33,422) $
25.5%
836,336
$
1
Revenues
Consolidated
— $
265,424
30.0%
22.3%
Adjusted revenues 1
$
206,794
41,214
EBITDA margin 1
Adjusted EBITDA margin
L&IC segment
184,545
143,331
1
Canadian
segment
27.0%
—
27.6%
180,320
29.3%
—
2. GTBS segment information covers period of April 30, 2015 to June 30, 2015.
5.2 Global Transaction Banking Solutions (GTBS) segment
Business overview
GTBS is a leading provider of financial technology to banks and corporations of all sizes in the Americas, EMEA (Europe, Middle
East and Africa), and APAC (Asia Pacific) regions with approximately 1,600 employees and 19 offices worldwide, including
development centers in the United States, India, Israel, Switzerland and the United Kingdom.
Based on 2015 proforma Adjusted revenues, approximately 50% of GTBS revenues are earned from clients in North America, 39%
in EMEA and 11% in APAC. GTBS generates approximately 25% - 30% of its revenues in currencies other than U.S. dollars and
therefore will have fluctuations based on the strength of the U.S. dollar. While we did not own GTBS for the period of January 1,
2015 to April 29, 2015, we have calculated the growth in GTBS Adjusted revenues based on proforma measurements for 2015.
Management uses proforma figures for comparability and assessing trends in the business.
Effective April 30, 2015, the operating results from our acquisition of Fundtech are reported as the GTBS segment of D+H. The GTBS
segment represented 21% and 22% of the second quarter and first six months of 2016 of consolidated Adjusted revenues, respectively.
Revenues and Adjusted revenues
Three months ended
(In thousands of dollars)
In Canadian dollars
June 30, 2016
March 31, 2016
April 30, 2015 to
December 31, 2015 September 30, 2015
June 30, 2015
Total revenues
$
90,355 $
94,190 $
89,337 $
87,864 $
55,102
$
90,694 $
95,251 $
101,857 $
90,352 $
56,568
In U.S. dollars
Total revenues
US$
70,126
US$
68,990
US$
66,790
US$
67,012
US$
44,845
US$
70,390
US$
69,762
US$
75,979
US$
68,912
US$
46,038
We use Adjusted revenues as a performance measure as it normalizes the impact of applying acquisition accounting. For the Fundtech
acquisition, acquired deferred revenues were adjusted to reflect the fair value at the acquisition date in accordance with IFRS (see
section 10.1 of this MD&A for full discussion).
Adjusted revenues in the second quarter of 2016 were $90.7 million (US$70.4 million) compared to $95.3 million (US$69.8 million)
in the first quarter of 2016. The revenues reflect the normal cycle of business for GTBS which historically has its highest revenues
in the fourth quarter. SaaS and maintenance revenues generated approximately 58% of GTBS Adjusted revenues in the second
quarter of 2016.
On a constant currency basis, GTBS proforma Adjusted revenues for the second quarter and first six months of 2016 increased by
6.7% and 8.4%, respectively, compared to the second quarter and first six months of 2015. Global Payment Technologies (Global
Payments and U.S. Payments), represents 45% and 46% of GTBS of proforma Adjusted revenues on a constant currency basis for
the second quarter and first six months of 2016, respectively. On a constant currency basis, Global Payment Technologies proforma
D+H Q2 2016
14
Adjusted revenues for the second quarter and first six months of 2016 increased by 14.8% and 17.5%, respectively, compared to
the second quarter and first six months of 2015. This growth was offset in part by reduced revenues in our cash management solutions.
Expenses
Three months ended
In Canadian dollars
June 30, 2016
Employee compensation and benefits
1
$
Other operating expenses 3,4
$
April 30, 2015 to
47,519 $
45,291 $
Non-compensation direct expenses 2,4
Total expenses
March 31, 2016
43,074
$
June 30, 2015
45,724 $
30,320
2,759
2,737
2,803
2,372
1,442
22,793
22,232
19,729
20,925
12,112
70,843 $
72,488 $
65,606
$
69,021 $
43,874
35,164 US$
34,592 US$
32,257
US$
34,881 US$
24,699
In U.S. dollars
Employee compensation and benefits1 US$
Non-compensation direct expenses
2,4
Other operating expenses 3,4
Total expenses
US$
2,142
1,993
2,098
1,815
17,684
16,182
14,907
15,987
54,990 US$
52,767 US$
49,262
US$
1,178
9,871
52,683 US$
35,748
1. Employee compensation and benefits expenses include share-based compensation expenses and costs related to risk, branding, finance and governance at D+H
Corporate. These costs are net of amounts capitalized related to software product development.
2. Non-compensation direct expenses include material, shipping and selling expenses.
3. Other operating expenses include occupancy costs, professional fees, communication costs, repairs and maintenance costs, travel expenses, marketing and promotion
expenses, and expenses not included in other categories.
4. Reimbursable travel expenses are now included as part of non-compensation direct expenses, whereas in the prior period they were reported as other operating
expenses. The prior year periods have also been adjusted to conform to current period presentation. These costs were $0.5 million (US$0.4 million) in the period April
30, 2015 to June 30, 2015, $0.8 million (US$0.6 million) for the third quarter of 2015, and $0.6 million (US$0.4 million) for the fourth quarter of 2015.
Expenses in the GTBS segment are primarily related to the global employee base that develops, sells and delivers software and
related professional services to clients along with the related infrastructure costs such as technology, facilities, travel, administrative
and business development expenses. Expenses tend to be fairly stable throughout the year, fluctuating based on changes in the
professional services team capacity requirements for client deliveries. Since acquisition, these expenses also include costs for risk
initiatives and a portion of the costs related to finance, branding and governance from D+H Corporate. Expenses in the second
quarter of 2016 decreased over the first quarter of 2016 by $1.6 million or 2.3%, and increased 4.2% in U.S. dollars due to foreign
exchange, offset in part from lower share based incentive compensation.
EBITDA and EBITDA margin1
Three months ended
In Canadian dollars
EBITDA
1
EBITDA margin
June 30, 2016
$
1
19,512
March 31, 2016
$
21,702
$
23.0%
21.6%
April 30, 2015 to
23,731
$
26.6%
18,843
June 30, 2015
11,228
$
21.4%
20.4%
In U.S. dollars
EBITDA 1
US$
EBITDA margin 1
15,136
US$
21.6%
16,223
US$
23.5%
17,528
US$
26.2%
14,329
US$
21.4%
9,097
20.3%
Adjusted EBITDA and Adjusted EBITDA margin1
Three months ended
In Canadian dollars
June 30, 2016
March 31, 2016
April 30, 2015 to
June 30, 2015
1
$
19,634 $
21.6%
22,065 $
23.2%
35,574 $
34.9%
20,666 $
22.9%
1
US$
15,231 US$
21.6%
16,487 US$
23.6%
26,209 US$
34.5%
15,721 US$
22.8%
Adjusted EBITDA
1
12,278
21.7%
In U.S. dollars
Adjusted EBITDA
1
9,952
21.6%
For the second quarter of 2016, EBITDA was $19.5 million, and Adjusted EBITDA was $19.6 million. For the first six months of 2016
EBITDA was $41.2 million, and Adjusted EBITDA was $41.7 million. GTBS segment expenses exclude acquisition-related and other
charges, including business integration costs and costs related to the Company’s initiatives to align global operations and achieve
cost synergies following D+H’s acquisitions, which are reported in Corporate.
During the year the Company has successfully launched a new managed service, in conjunction with certain partners for customers,
called "Payments Platform as a Service". In this service, the Company and its respective partners will host, implement, and support
the Company's Global PAYplus solution for the customer. In general, this service has a term of 10 years and the Company will receive
a fee for each transaction processed on behalf of the customer, with a minimum revenue threshold per year. We believe that the
revenues derived from this service will provide an attractive return when compared to a traditional license and maintenance transaction.
D+H Q2 2016
15
5.3 Lending & Integrated Core (L&IC) segment
Business overview
We generate revenues from lending and integrated core solutions in the L&IC segment. Lending solutions include offerings that
simplify the lending application and origination processes and provide compliance loan documents. The majority of solutions support
commercial, consumer and mortgage lending, enabling clients to leverage their technology investments across multiple lines of
business. Integrated core solutions include our core banking platform offerings and complementary channel solutions. Integrated
core solutions also include optimization solutions which assist our clients in managing technology infrastructure and driving efficiencies.
Our L&IC segment comprised 35% of both the second quarter and first six months of 2016 consolidated Adjusted revenues of the
Company.
Revenues
(In thousands of dollars, unless
otherwise noted)
In Canadian dollars
Lending solutions
$
Total revenues
$
2016
2015
74,116 $
75,950 $
72,599
63,879
146,715 $
$ Change
(1,834)
8,720
139,829 $
6,886
% Change
2016
2015
(2.4)% $
149,002 $
150,513 $
(1,511)
(1.0)%
13.7 %
146,317
127,062
19,255
15.2 %
295,319 $
277,575 $
17,744
6.4 %
(9,652)
(7.9)%
4.9 % $
$ Change
% Change
In U.S. dollars
Lending solutions
US$ 57,528 US$ 61,786 US$
Total revenues
56,359
51,950
(4,258)
4,409
US$ 113,887 US$ 113,736 US$
151
(6.9)% US$ 112,164 US$ 121,816 US$
8.5 %
110,079
102,858
0.1 % US$ 222,243 US$ 224,674 US$
7,221
7.0 %
(2,431)
(1.1)%
Adjusted revenues1
otherwise noted)
In Canadian dollars
Lending solutions
2016
$
$
2015
74,786 $
77,126 $
72,740
64,024
147,526 $
$ Change
141,150 $
(2,340)
8,716
6,376
% Change
2016
2015
$ Change
% Change
(3.0)% $
150,491 $
153,061 $
(2,570)
(1.7)%
13.6 %
146,616
127,352
19,264
15.1 %
297,107 $
280,413 $
16,694
6.0 %
4.5 % $
In U.S. dollars
Lending solutions
US$ 58,048 US$ 62,744 US$
56,468
52,068
US$ 114,516 US$ 114,812 US$
(4,696)
4,400
(296)
(7.5)% US$ 113,280 US$ 123,879 US$ (10,599)
8.5 %
110,303
103,093
(0.3)% US$ 223,583 US$ 226,972 US$
(8.6)%
7,210
7.0 %
(3,389)
(1.5)%
In the second quarter of 2016, L&IC Adjusted revenues increased by $6.4 million or 4.5% from $141.2 million in the second quarter
of 2015 to $147.5 million in the second quarter of 2016, however decreased by 0.3% in U.S. dollars.
For the first six months of 2016, L&IC Adjusted revenues increased by $16.7 million or 6.0% from $280.4 million in the first six months
of 2015 to $297.1 million in the first six months of 2016, however decreased by 1.5% in U.S. dollars.
Lending solutions
In the second quarter of 2016, Adjusted revenues from lending solutions decreased by $2.3 million or 3.0% from $77.1 million in the
second the quarter of 2015 to $74.8 million in the second quarter of 2016 or decreased by 7.5% in U.S. dollars.
For the first six months of 2016 Adjusted revenues from lending solutions decreased by $2.6 million or 1.7% from $153.1 million in
the second quarter of 2015 to $150.5 million in the second quarter of 2016 or decreased by 8.6% in U.S. dollars.
This decrease during the second quarter and first six months of 2016 was primarily due to lower revenues from our LaserPro product
due to reduced contractual renewals in the second quarter and first six months relative to the second quarter and first six months of
2015. The lower rate of renewals was driven by the lower number of contracts up for renewal in the year as renewal cadence is not
evenly distributed from year to year. Importantly, we continue to see very high retention rates with respect to LaserPro contract
renewals. In 2015, we retained 96% of the clients and 97% of the value for clients renewing in the year.
In addition to the low quarter and year in the cycle of renewals, LaserPro revenues relating to term contracts have also been impacted
by the method of revenue recognition that is followed under IFRS. A typical 5-year LaserPro term arrangement is a multiple element
contract with annual payment terms and is comprised of the software license, non-essential services, and maintenance. Because
of our long and successful history of full and timely payment over the term of the contract, the extended payment terms do not delay
the recognition of revenue. Therefore, where fair value of the undelivered elements exists, license revenue is recognized upon delivery
and typically represents approximately 65% of the contract value excluding non-essential services. However, total contract amounts
due are billed annually over the contract term and result initially in an increase, then in a reduction in unbilled receivables on the
balance sheet. Cash generated from this business will continue to grow in 2016 as a result of prior year’s renewals and new contracts.
The LaserPro revenue decreases discussed above were partially offset by increased revenues from other lending products.
D+H Q2 2016
16
In the second quarter of 2016, Adjusted revenues from our integrated core solutions increased by $8.7 million or 13.6% from $64.0
million in the second quarter of 2015 to $72.7 million in the second quarter of 2016, or 8.5% in U.S. dollars.
For the first six months of 2016 Adjusted revenues from our integrated core solutions increased by $19.3 million or 15.1% from $127.4
million in the second quarter of 2015 to $146.6 million in the second quarter of 2016 or 7.0% in U.S. dollars.
The growth during the second quarter and first six months of 2016 was primarily driven from growth in our core banking and channel
solutions revenues and in particular our card payments solution as a result of strong bookings primarily in 2016 and 2015 in addition
to volume growth in card payments.
For the second quarter of 2016, the increase in our card payments revenues was partially impacted by a correction, in the second
quarter of 2015, for certain pass-through fees of $1.1 million (US$0.9 million) which previously were recorded as a gross reduction
of revenues. This correction had an equal and offsetting decrease to our operating expenses. When normalized in 2015 for this
change, revenues and Adjusted revenues from our integrated core solutions, for the second quarter of 2016, would increase by $9.8
million or 15.5% versus the prior quarter, or 10.3% in U.S. dollars. The net impact to EBITDA of the reclassification was nil as the
revenue and corresponding expense were equal and offsetting. Following the second quarter of 2015 these revenues and expenses
are recorded on the same basis in the quarterly reporting periods. For the first six months of 2016, card payment revenues were
appropriately reflected for this correction.
Expenses
otherwise noted)
In Canadian dollars
2016
2015
59,598 $
58,406 $
1,192
Non-compensation direct
expenses 2, 4
16,522
15,218
1,304
8.6 %
33,340
Other operating expenses 3, 4
24,109
20,332
3,777
18.6 %
49,383
93,956 $
6,273
Employee compensation and
benefits 1
Total expenses
$
$
100,229 $
$ Change
% Change
2.0 % $
6.7 % $
2016
2015
124,071 $
116,651 $
206,794 $
$ Change
% Change
7,420
6.4 %
27,703
5,637
20.3 %
38,935
10,448
26.8 %
23,505
12.8 %
(1,283)
(1.4)%
183,289 $
In U.S. dollars
benefits 1
US$ 46,266 US$ 47,516 US$
(1,250)
(2.6)% US$ 93,174 US$ 94,457 US$
expenses 2, 4
12,824
12,367
457
3.7 %
25,086
22,425
2,661
11.9 %
Other operating expenses 3, 4
18,718
16,534
2,184
13.2 %
37,197
31,480
5,717
18.2 %
7,095
4.8 %
Total expenses
US$ 77,808 US$ 76,417 US$
1,391
1.8 % US$ 155,457 US$ 148,362 US$
2. Non-compensation direct expenses include materials, shipping, selling, royalties and third-party direct disbursements.
3. Other operating expenses include occupancy costs, communication costs, professional fees, transaction costs related to acquisition of businesses and expenses not
included in other categories.
4. Reimbursable travel expenses are now included as part of non-compensation direct expenses, whereas in the prior period they were reported as other operating
expenses. The prior period has also been adjusted to conform to current period presentation. In the second quarter and first six months of 2015, these costs were $0.8
million (US$0.6 million) and $1.4 million (US$1.1 million), respectively.
Employee compensation and benefits expenses in the second quarter and first six months of 2016 increased by $1.2 million or 2.0%
and $7.4 million or 6.4%, respectively, primarily due to the stronger U.S. dollar and partly offset by lower salaries and benefits in the
second quarter of 2016 as a result of a reduced headcount from our global delivery and other operating changes initiated in 2015.
Employee compensation and benefits expenses in U.S. dollars decreased 2.6% and 1.4% over the second quarter and first six
months of 2016, respectively, compared to the prior year.
Non-compensation direct expenses increased in the second quarter and first six months of 2016 by $1.3 million or 8.6% and $5.6
million or 20.3%, respectively. The increases were primarily due to the stronger U.S. dollar and as a result of direct expenses tied to
the growth of recurring revenues in our channel solutions business, increased direct expenses as a result of growth in our card
payments solutions and growth in our cloud-based solutions business.
For the second quarter of 2016, the increase in non-compensation direct expenses was impacted by a correction, in the second
quarter of 2015, for certain pass-through fees of $1.1 million (US$0.9 million) which previously were recorded as a gross reduction
of expenses. This correction had an equal and offsetting decrease to our revenues and Adjusted revenues. When normalized in 2015
for this change, non-compensation direct expenses for the second quarter of 2016 would increase by $2.4 million or 16.8% versus
the prior quarter, or 11.5% in U.S. dollars. The net impact to EBITDA of the reclassification was nil as the expense and corresponding
revenue were equal and offsetting. Following the second quarter of 2015 these revenues and expenses are recorded on the same
basis in the quarterly reporting periods.
D+H Q2 2016
17
Other operating expenses
The increase in other expenses of $3.8 million or 18.6% and $10.4 million or 26.8% in the second quarter and first six months of
2016, respectively, primarily reflected a stronger U.S. dollar, increased telecommunications costs, and consulting fees and other
professional fees in support of our risk activities and growth strategy. In addition, we had $1.2 million and $2.4 million for the second
quarter and first six months of 2016, respectively, in annual recurring marketing costs that were incurred in the third quarter of 2015
and therefore not in the comparative period of 2015. In the first six months of 2016 we also had $1.0 million of customer related costs
that are not expected to recur.
EBITDA and EBITDA margin1
otherwise noted)
In Canadian dollars
EBITDA 1
EBITDA margin
2016
$
1
46,486
2015
$
31.7%
45,873
$ Change
$
613
32.8%
% Change
1.3 % $
(1.1)%
2016
88,525
2015
$
30.0%
94,286
$ Change
$
(5,761)
34.0%
% Change
(6.1)%
(4.0)%
In U.S. dollars
EBITDA 1
US$ 36,079
EBITDA margin 1
US$ 37,319
31.7%
US$
(1,240)
32.8%
(3.3)% US$ 66,786
(1.1)%
US$ 76,312
30.1%
US$
(9,526)
34.0%
(12.5)%
(3.9)%
EBITDA and Adjusted EBITDA and EBITDA margin and Adjusted EBITDA margin for the second quarter and first six months of 2016
reflect the changes in revenues and expenses period over period as discussed above.
otherwise noted)
In Canadian dollars
Adjusted EBITDA 1
2016
$
45,646
2015
$
30.9%
44,974
$ Change
$
672
31.9%
% Change
1.5 % $
(1.0)%
2016
86,765
2015
$
29.2%
92,499
$ Change
$
(5,734)
33.0%
% Change
(6.2)%
(3.8)%
In U.S. dollars
Adjusted EBITDA 1
US$ 35,427
US$ 36,588
30.9%
US$
(1,161)
31.9%
(3.2)% US$ 65,464
(1.0)%
US$ 74,862
29.3%
US$ (9,398)
33.0%
(12.6)%
(3.7)%
Adjusted EBITDA and Adjusted EBITDA margin reflect acquisition accounting adjustments that increased EBITDA by $0.8 million
and $0.9 million for the second quarter of 2016 and 2015, respectively, and by $1.8 million for the first six months of both 2016 and
2015.
5.4 Canadian segment
Business overview
We generate revenues from lending and payments solutions in Canada. The Canadian segment accounted for 44% of the second
quarter and 42% of the first six months of 2016 consolidated Adjusted revenues.
We have long-term relationships with the five largest Canadian banks, smaller banks, credit unions, specialized lenders, the federal
government and various provincial governments. Because of these relationships, we benefit from a well-established brand in Canada
that is deeply rooted in trust. D+H holds a market leading position within each of its businesses in Canada.
In the second quarter of 2016, the Government of Canada selected D+H, the incumbent provider, to provide financial solutions and
related services for the Canada Student Loans Program, and five integrated provincial programs. D+H expects that it will continue
to provide services under the terms of its existing contract, which D+H has been advised will be extended until the implementation
of its new solution, which is expected to be operational by April 2018. The new contract will have an initial term of eight years with
up to a further seven years extension at the Government of Canada's option.
Revenues and Adjusted revenues1
otherwise noted)
Lending solutions
$
Payments solutions
2016
2015
104,572 $
96,116 $
8,456
81,329
1,216
9,672
82,545
$
187,117 $
177,445 $
$ Change
% Change
2016
2015
8.8% $
194,330 $
179,637 $
1.5%
162,142
155,076
5.5% $
356,472 $
334,713 $
$ Change
% Change
14,693
8.2%
7,066
4.6%
21,759
6.5%
Adjusted revenues are the same as revenues recorded under IFRS for the Canadian segment as this segment was not subject to
acquisition accounting adjustments.
D+H Q2 2016
18
Lending solutions
Lending solutions revenues for the second quarter of 2016 increased from $96.1 million to $104.6 million, an $8.5 million or 8.8%
increase, when compared to the same quarter in 2015. The increase was driven primarily by increases in collateral management
solutions and to a lesser degree student lending revenues, offset by a decrease in mortgage origination revenues.
Lending solutions revenues for the first six months of 2016 increased from $179.6 million to $194.3 million, a $14.7 million or 8.2%
increase when compared to the same period last year. The increase was driven primarily by increases in collateral management
solutions offset by a decrease in student lending revenues and in mortgage origination revenues.
Collateral management solutions revenues in the second quarter and first six months of 2016 increased compared to the prior year
due to higher volumes, primarily as a result of a new major recovery contract with the auto finance division of a large Canadian bank
and higher average order values.
Student lending revenues in the second quarter of 2016 were slightly higher compared to the prior year comparative quarter due to
timing of professional services revenues and increase in volumes, partially offset by the timing of incentive revenues which were
recorded in the second quarter of 2015. For the first six months of 2016, revenues were slightly lower compared to the prior year
due to a 2015 one-time price adjustment related to enhanced functionality in our repayment assistance program, which increased
revenues in the first quarter and first six months of 2015, partially offset by higher incentive revenues, higher volume and new sales
initiatives in the first six months of 2016.
Mortgage origination revenues for the second quarter of 2016 decreased compared to the same period last year, primarily due to a
change in product mix, lower average order values and lower volumes. For the first six months of 2016, mortgage origination revenues
were lower primarily due to the impact of a retroactive price adjustment for a contract signed in the first quarter of 2015 which increased
revenues during that period, and, to a lesser extent, due to changes in product mix and average order values.
Payments solutions
Revenues from payments solutions for the second quarter of 2016 increased from $81.3 million to $82.5 million, a $1.2 million or
1.5% increase, compared to the same period last year, while revenues for the first six months of 2016 increased from $155.1 million
to $162.1 million, a $7.1 million or 4.6% increase, when compared to the same period in 2015.
The increase in payments solutions for the second quarter and first six months of 2016 was a result of growth in our enhancement
services program and increased average order values in the cheque program, partially offset by ongoing cheque order volume
declines in addition to a reversal of certain accounting charges in the first six months of 2015 related to our subscription-fees business
which increased our revenue for the 2015 comparative period.
Subscription fee-based enhancement services revenue grew in the second quarter and first six months of 2016 compared to the
prior year, primarily due to the onboarding of clients throughout 2015 from a strategic partnership that D+H entered into in 2014 with
one of Canada’s major financial institutions.
Expenses
otherwise noted)
benefits 1
$
2016
2015
$ Change
33,470 $
37,774 $
(4,304)
% Change
(11.4)% $
2016
2015
71,469 $
77,250 $
$ Change
(5,781)
% Change
(7.5)%
expenses 2
84,172
72,499
11,673
16.1 %
158,312
134,066
24,246
18.1 %
Other operating expenses 3
18,210
14,265
3,945
27.7 %
35,643
31,045
4,598
14.8 %
23,063
9.5 %
Total expenses
$
135,852 $
124,538 $
11,314
9.1 % $
265,424 $
242,361 $
2. Non-compensation direct expenses include materials, shipping, selling, royalties and third-party direct disbursements.
3. Other operating expenses include occupancy costs, communication costs, professional fees, transaction costs related to acquisition of businesses, insurance, legal
and other expenses not included in other categories.
Employee compensation and benefits costs decreased by $4.3 million or 11.4% in the second quarter of 2016 compared to the same
quarter in the prior year. The decrease in the second quarter is primarily due to increased capitalization of software development
costs to support ongoing investments in our product and solutions and enterprise-wide initiatives and decreased share-based
compensation. For the first six months of 2016, employee compensation and benefits costs decreased by $5.8 million or 7.5%
compared to the prior year. The decrease in the first six months of 2016 is primarily due to increased capitalization of software
development costs to support ongoing investments in our products and solutions and enterprise-wide initiatives, lower short term
compensation incentives and decreased share-based compensation, and a reduction in the use of third party development resources
from an increased utilization of our global software development workforce.
Non-compensation direct expenses increased by $11.7 million or 16.1% in the second quarter of 2016 compared to the same quarter
in the prior year. For the first six months of 2016, non-compensation direct expenses increased by $24.2 million or 18.1% compared
to the prior year. The increase in the second quarter and first six months of 2016 is attributable to the direct costs associated with
D+H Q2 2016
19
managing the services of our collateral management solutions business which are consistent with the increase in volumes and
resulting revenues in these businesses, the direct costs associated with the upfront acquisition cost of subscription fee-based
enhancement services clients for which subscription revenue will be earned monthly over the tenure of the customer, and the recording
of volume incentive expenses in our mortgage origination business. The increases were partially offset by decreased expenses
associated with our chequing program as a result of lower volumes and cost management initiatives.
Other operating expenses
For the second quarter of 2016, other operating expenses increased by $3.9 million or 27.7% compared to the same quarter in the
prior year. For the first six months of 2016, other expenses increased by $4.6 million or 14.8% compared to the prior year. The
increase in the second quarter and first six months is primarily due to unfavourable exchange rate variances on some elements of
our balance sheet and higher governance, consulting and risk costs as we continue to build capability to support D+H’s growth
strategy, partially offset by lower telecommunications costs.
otherwise noted)
2016
Adjusted EBITDA 1,2
$
1,2
51,265
2015
$
27.4%
52,907
$ Change
$
(1,642)
29.8%
% Change
2016
(3.1)% $
2015
91,048
$
92,352
25.5%
(2.4)%
$ Change
$
(1,304)
27.6%
% Change
(1.4)%
(2.1)%
2. Adjusted EBITDA and EBITDA, and their respective margins, are the same under the Canadian segment.
Adjusted EBITDA is the same as EBITDA for the Canadian segment. For the second quarter and first six months of 2016, Adjusted
EBITDA and Adjusted EBITDA margin have decreased compared to the prior year primarily due to one time items recorded in
revenues and expenses in the second quarter and first six months 2015 as discussed above. Specifically for the year to date period,
decreases are mainly due to a favourable price adjustment which was recognized as revenue and related to enhanced functionality
in our student lending repayment assistance program recorded in the first quarter of 2015, a retroactive price adjustment recognized
as revenue for a contract signed in the mortgage origination business in the first quarter of 2015, accounting charges related to our
subscription-fees business which increased our revenue in the second quarter of 2015 and the impact of recognizing year-to-date
volume incentive expenses in our mortgage origination business recorded in the second quarter of 2016.
Furthermore, the decline in Adjusted EBITDA margin for the second quarter and first six months of 2016 is also impacted by changes
in our revenues and expenses from product mix as our lower margin lending and payment solution products are increasing as a
percent of total revenues and expenses.
5.5 Corporate
Corporate expenses are primarily related to acquisitions, business integration, foreign exchange gains and losses on financing related
intercompany balances and other initiatives to align global operations to achieve cost synergies following D+H's acquisitions, all of
which are adjustments to EBITDA in calculation of Adjusted EBITDA.
Expenses (Income)
2016
$
22,637 $
2015
$ Change % Change
7,016 $
15,621
(21)
—
(21)
Other operating expenses (income)
(469)
16,641
(17,110)
Total expenses
$
22,147 $
23,657 $
(1,510)
222.6 % $
—
(102.8)%
(6.4)% $
2016
31,394 $
(37)
2,065
33,422 $
2015
$ Change % Change
9,295 $
22,099
237.8 %
—
(37)
8,251
(6,186)
(75.0)%
15,876
90.5 %
17,546 $
—
During the second quarter and first six months of 2016, employee compensation and benefits expenses primarily consisted of $3.8
million and $8.4 million, respectively, of integration related costs incurred in connection with the acquisition of Fundtech. There were
also $18.6 million and $22.4 million, in the second quarter and first six months of 2016, respectively, related to the Company’s
initiatives to align global operations and achieve cost synergies following D+H’s acquisitions, including Fundtech in 2015. While the
majority of the costs related to this realignment have already been incurred, we expect to incur some further costs in the second half
of 2016 relating to financial systems realignment and other costs. Included in this expense is $1.3 million of costs associated with
the outsourcing of development activities and customer support for two core banking products in our L&IC segment. The products
that have been outsourced are not considered strategic products; outsourcing will reduce associated costs and simplify operations.
We will continue to incur these types of restructuring expenses through 2017 as we complete our strategic review of product offerings.
During the second quarter and first six months of 2015, employee compensation and benefits expenses of $7.0 million and $9.3
million, respectively, consisted of $1.9 million and $3.5 million, respectively, of charges related to cost-realignment initiatives, and
retention and incentive expenses incurred in connection with acquisitions. For the second quarter and first six months of 2015,
employee compensation and benefits expenses also included $5.2 million of integration related costs in connection with the acquisition
of Fundtech.
D+H Q2 2016
20
During the second quarter and first six months of 2016, non-compensation direct expenses related to transition costs to support the
Company's global delivery program. There were no comparable expenses in the second quarter and first six months of 2015.
Other operating expenses (income)
Other operating income was $0.5 million in the second quarter of 2016 and operating expense was $2.1 million for the first six months
of 2016 and included $3.4 million and $6.4 million for the second quarter and first six months of 2016, respectively, of expenses
related to the Company’s initiatives to align global operations and achieve cost synergies following D+H’s acquisitions. These costs
were partially offset by a reversal of acquisition costs of $2.0 million during the second quarter and first six months of 2016 and noncash foreign exchange gains of $2.1 million and $3.2 million for the second quarter and first six months of 2016, respectively, on
financing related intercompany balances.
Other operating expenses during the second quarter and first six months of 2015 included a non-cash foreign exchange loss of $4.4
million and a foreign exchange gain of $11.1 million, respectively, on financing related intercompany balances. In addition, there were
$12.1 million and $23.7 million, respectively, of transaction and business integration costs incurred in connection with the acquisition
of Fundtech during the second quarter and first six months of 2015. These operating costs were further reduced by a $5.5 million
gain related to HFS’ closing working capital settlement during the first quarter of 2015.
D+H Q2 2016
21
6 SUMMARY OF EIGHT QUARTER CONSOLIDATED RESULTS
noted)
2016
Q2
2015
Q1
Q4
Q3
Q2
2014
Q1
Q4
Q3
Revenues
GTBS
$
L&IC
Canadian
Consolidated revenues
90,355
$
146,715
94,190
$
89,337
$
162,419
148,604
87,864
$
150,623
55,102
$
139,829
—
$
137,746
—
$
134,030
—
120,375
187,117
169,355
172,389
176,589
177,445
157,268
163,452
168,837
$ 424,187
$ 412,149
$ 424,145
$ 415,076
$ 372,376
$ 295,014
$ 297,482
$ 289,212
$
$
$
$
$
$
$
$
Expenses
GTBS
70,843
72,488
65,606
69,021
43,874
—
—
—
L&IC
100,229
106,565
95,833
90,082
93,956
89,333
85,279
76,870
Canadian
135,852
129,572
123,408
129,416
124,538
117,823
123,531
120,152
Corporate
Consolidated expenses
22,147
11,275
22,458
$ 329,071
$ 319,900
$ 307,305
$
$
$
(983)
(6,111)
23,657
(1,271)
3,730
$ 287,536
$ 286,025
$ 201,045
$ 207,539
$ 200,752
$
$
$
$
$
EBITDA 1
GTBS
19,512
21,702
23,731
18,843
11,228
—
—
—
L&IC
46,486
42,039
66,586
60,541
45,873
48,413
48,751
43,505
Canadian
51,265
39,783
48,981
47,173
52,907
39,445
39,921
48,685
Corporate
(22,147)
(11,275)
(22,458)
(23,657)
6,111
1,271
(3,730)
95,116
92,249
116,840
86,351
93,969
89,943
88,460
Consolidated EBITDA 1
Consolidated EBITDA margin 1
22.4%
983
127,540
27.5%
22.4%
30.7%
23.2%
31.9%
30.2%
30.6%
Depreciation and amortization
73,045
76,670
80,399
71,831
58,231
42,438
40,724
39,146
22,071
15,579
36,441
55,709
28,120
51,531
49,219
49,314
Finance expense
25,641
26,476
28,551
25,488
27,364
14,430
14,214
14,727
(Loss) / income before income taxes
(3,570)
(10,897)
7,890
30,221
756
37,101
35,005
34,587
Income tax (recovery) / expense
(8,953)
(15,684)
(5,444)
3,104
2,643
(474)
(5,223)
2,382
$
5,383
$
4,787
$
13,334
$
30,695
$
5,979
$
33,997
$
32,362
$
32,205
Net income per share, basic and diluted
$
0.05
$
0.04
$
0.13
$
0.29
$
0.06
$
0.39
$
0.39
$
0.40
Dividends declared per share
$
0.32
$
0.32
$
0.32
$
0.32
$
0.32
$
0.32
$
0.32
$
0.32
Exchange rate (Canadian dollars for
one U.S. dollar)
Average exchange rate for the period
1.2883
1.3741
1.3351
1.3093
1.2294
1.2412
1.1360
1.0892
Exchange rate as at period end date
1.2917
1.2987
1.3840
1.3345
1.2490
1.2666
1.1601
1.1200
The Company’s segments experience seasonal fluctuations in their business. The GTBS segment is subject to seasonal fluctuations
as a result of its payments hub and volume-based SaaS offerings. The payments hub offerings, which are multiple-deliverable
arrangements, have license and professional services revenue recognition that are typically percentage-of-completion based and
have historically had milestone activity weighted towards the end of the year. Additionally, SaaS transaction volumes tend to increase
during the fourth quarter. As a result, revenue recognition is higher during the fourth quarter and EBITDA margins are expanded.
However, due to the size and complexity of on-premise licensee payment hub contracts, it is possible to see variations in revenue
growth in any quarter.
The L&IC segment generally experiences higher revenue in the fourth quarter due to the buying patterns of its clients and the timing
of renewals for SaaS and term-based license products.
The Canadian segment typically experiences higher revenues in the second and third quarters due to increased automotive sales
and mortgage market activity which drives volumes in our mortgage technology and collateral management product offerings.
The largest expense incurred in the business relates to the team members employed globally to deliver services to customers and
execute on the Company’s strategy. These expenses are largely fixed, however vary somewhat with the number of team members,
incentive compensation and foreign exchange rates. In addition, particularly in the Canadian segment, there are non-compensation
direct expenses that relate directly to the volume or value of transactions or services delivered. As a result, the margins in the operating
segments and consolidated for the Company will fluctuate in the quarters and typically increase in the second half of the year compared
to the first half of the year.
D+H Q2 2016
22
Additional Information
noted)
2016
Q2
2015
Q1
Q4
Q3
Q2
2014
Q1
Q4
Q3
Adjusted revenues 1
GTBS
$
L&IC
Canadian
Consolidated Adjusted revenues 1
90,694
$
147,526
95,251
$ 101,857
149,581
163,463
$
90,352
$
151,821
56,568
$
141,150
—
$
139,263
—
$
135,708
—
123,184
187,117
169,355
172,389
176,589
177,445
157,268
163,452
168,837
$ 425,337
$ 414,187
$ 437,709
$ 418,762
$ 375,163
$ 296,531
$ 299,160
$ 292,021
$
$
$
$
$
$
$
$
Adjusted EBITDA 1
GTBS
19,634
22,065
35,574
20,666
12,278
—
—
—
L&IC
45,646
41,119
65,590
59,581
44,974
47,525
48,080
43,875
Canadian
51,265
39,783
48,981
47,173
52,907
39,445
39,921
48,685
$ 116,545
$ 102,967
$ 150,145
$ 127,420
$ 110,159
Consolidated Adjusted EBITDA1
$
86,970
$
88,001
$
92,560
GTBS
21.6%
23.2%
34.9%
22.9%
21.7%
—
—
—
L&IC
30.9%
27.5%
40.1%
39.2%
31.9%
34.1%
35.4%
35.6%
Canadian
27.4%
23.5%
28.4%
26.7%
29.8%
25.1%
24.4%
28.8%
Consolidated Adjusted EBITDA margin 1
27.4%
24.9%
34.3%
30.4%
29.4%
29.3%
29.4%
Debt to EBITDA 1
2.998x
3.016x
3.185x
3.441x
3.389x
2.336x
31.7%
2.113x
2.795x
$
55,362
$
54,773
$
96,109
$
63,559
$
51,890
$
9,822
$
84,235
$
42,868
activities 1
$
79,571
$
67,218
$ 112,383
$
79,396
$
71,102
$
19,273
$
87,705
$
46,598
Adjusted net income for the period 1
$
58,914
$
45,436
$
82,715
$
65,154
$
59,640
$
47,360
$
49,130
$
50,648
Adjusted net income per share, basic
and diluted 1
$
0.55
$
0.43
$
0.78
$
0.62
$
0.60
$
0.55
$
0.59
$
0.63
D+H Q2 2016
23
7 CAPITAL STRUCTURE AND LIQUIDITY
D+H’s capital structure is primarily comprised of a secured Credit Facility, secured notes, unsecured convertible debentures and
common shares.
7.1 Credit facilities, convertible debentures and other long-term indebtedness
The movements in D+H’s secured long-term indebtedness during the second quarter and year to date of 2016 are as follows:
Debt roll-forward
Credit Facility
Debt denominated in
Balance, April 1, 2016
$
Repayments
Balance, June 30, 2016
USD
CAD
USD
39,400 $
877,558 $
100,000 $
518,832 $
(10,000)
Foreign exchange adjustments
—
$
Bonds
CAD
29,400 $
—
(4,730)
872,828 $
—
—
100,000 $
Credit Facility
Debt denominated in
$
Repayments
516,034 $
USD
CAD
USD
59,400 $
935,196 $
100,000 $
552,908 $
—
$
Bonds
CAD
(30,000)
Foreign exchange adjustments
Balance, June 30, 2016
(2,798)
1,535,790
(10,000)
(7,528)
1,518,262
Balance, January 1, 2016
—
Total
29,400 $
—
(62,368)
872,828 $
—
—
100,000 $
—
(36,874)
516,034 $
Total
1,647,504
(30,000)
(99,242)
1,518,262
In 2016, we intend to use cash generated from operations for repayments of our debt. During the second quarter and first six months
of 2016 we have repaid $10.0 million and $30.0 million of debt, respectively.
As at June 30, 2016, net of conversions to date, the Company had $229.3 million principal amount of 6% convertible debentures
outstanding compared to $229.5 million as at December 31, 2015. These are convertible at the option of the holder to common
shares at a conversion price of $28.90 per common share, representing 34.6021 common shares per $1,000 principal amount of
the convertible debenture, for a total of 7,934,291 shares. During the six months ended June 30, 2016, the Company issued 5,985
common shares following the conversion of $174 thousand of convertible debentures at a conversion price of $28.90.
The Company also had $230.0 million principal amount of 5% convertible unsecured subordinated debentures outstanding as at
June 30, 2016 issued in connection with the acquisition of Fundtech. These are convertible at the option of the holder to common
shares at a conversion price of $52.75 per common share, representing 18.96 common shares per $1,000 principal amount of the
convertible debenture, for a total of 4,360,190 shares.
With respect to the 6% convertible unsecured subordinated debentures, the Company can call the convertible debentures at par,
plus accrued and unpaid interest if the Company’s share price is in excess of $36.125 (“Call Price”) commencing September 30,
2016 (the “Soft Call Date”) and can otherwise call the convertible debentures at par, plus accrued and unpaid interest commencing
September 30, 2017 (the “Hard Call Date”).
With respect to the 5% convertible unsecured subordinated debentures, the Call Price is $65.938 and the Soft Call Date is September
30, 2018 and Hard Call Date is September 30, 2019.
Covenants
The Company’s Credit Facility and bonds are subject to a number of covenants and restrictions including the requirement to comply
with the Debt to EBITDA ratio and the interest coverage ratio as defined in our lending agreements. As at June 30, 2016, the Debt
to EBITDA ratio was 2.998x, compared to 3.451x following the closing of the acquisition of Fundtech on April 30, 2015, and 3.185x
at December 31, 2015. As at June 30, 2016, the interest coverage ratio was 5.24x, compared to 5.80x at December 31, 2015. As
these ratios are not specifically defined by IFRS, section 10 contains additional details on these ratios including their definitions and
corresponding calculations.
D+H Q2 2016
24
7.2 Outstanding share information
As at June 30, 2016 and July 26, 2016, D+H had the following common shares and potential common shares outstanding:
Outstanding share information
Common shares issued and outstanding
June 30, 2016
December 31, 2015
106,827,284
106,443,450
The Company has a dividend reinvestment plan (“DRIP”) for its Canadian resident shareholders. The DRIP allows eligible
shareholders to reinvest the cash dividends paid on all or a portion of their common shares in the form of additional common shares
issued at the weighted average trading price, net of available discount, of the common shares on the Toronto Stock Exchange
during the last five trading days immediately preceding the relevant dividend payment date.
Dividend reinvestment plan and stock options outstanding
Dividends paid in common shares under DRIP (in thousands of dollars)
$
Stock options outstanding 1
2015
1,549 $
9,210 $
48,644
Number of common shares issued under dividend reinvestment plan
Weighted average price of issuance ($)
2016
$
31.84 $
3,601,793
240,123
38.36 $
3,626,500
2016
10,885 $
298,880
36.42 $
3,601,793
2015
16,324
425,580
38.09
3,626,500
1. Each stock option is exercisable into one common share of the Company. Refer to note 14 of the Company’s unaudited condensed interim consolidated financial
statements for the quarter ended June 30, 2016 for further details.
During the second quarter of 2016 and 2015, the discount available under the DRIP was nil and 4%, respectively.
7.3 Financial instruments and commitments
Interest-rate swaps
By way of interest-rate swap contracts, as at June 30, 2016, the Company’s borrowing rates on 47.9% of outstanding bank
indebtedness under the Credit Facility were effectively fixed. As a result of these swaps, 76.2% of the interest rates associated with
the Company’s total indebtedness, including convertible debentures, is effectively fixed. Refer to the unaudited condensed interim
consolidated financial statements of the Company for the three and six months ended June 30, 2016 for further details on our
interest-rate swaps.
Foreign exchange forward contracts
As at June 30, 2016, the Company had forward contracts to sell USD with notional amounts of US$4.3 million for Indian Rupees
(“INR”) with settlement amounts 295.4 million INR (December 31, 2015 – notional amounts of US$11.4 million with settlement
amounts of 769.7 million INR). These contracts have not been designated as hedges for accounting purposes and changes in fair
value are recorded in net income and presented under finance expense. As at June 30, 2016, the forwards are in an asset position
of $71 thousand (December 31, 2015 – liability position of $25 thousand).
Letters of credit
The Company had outstanding letters of credit of $12.4 million as at June 30, 2016, compared to $6.3 million as at December 31,
2015, which is a part of the total Credit Facility. Letters of credit are issued by the Company, at the request of the beneficiary, as a
form of security should the Company not meet its financial contractual obligation.
D+H Q2 2016
25
7.4 Cash Flow
We generate significant cash from our operations which we use to reinvest in our business including acquisitions, to return cash to
our shareholders through our dividend program and for the repayment of debt. Cash generated from operations, (used in) / from
investing activities and used in financing activities are outlined below:
7.4.1 Cash from operating activities
$
Depreciation and amortization of capital assets
Finance expense
Income tax recovery
Stock options
2016
2015
10,170 $
39,976 $
$ Change
(29,806)
49,046
149,715
100,669
52,117
41,794
10,323
(24,637)
(2,119)
(22,518)
1,987
2,476
(489)
Changes in non-cash working capital and other operating assets and liabilities
(13,404)
(62,682)
Cash generated from operating activities
175,948
120,114
55,834
Interest paid
(48,256)
(30,801)
(17,455)
Income tax paid
(17,557)
(27,601)
10,044
$
61,712 $
110,135 $
49,278
48,423
During the first six months of 2016, net cash from operating activities increased by $48.4 million over the comparative period in
2015 mainly due to a higher EBITDA, changes in non-cash working capital and other operating assets and liabilities as discussed
below, lower income taxes paid partially offset by higher interest payments.
2016
Changes in non-cash working capital items
$
Changes in other operating assets and liabilities
$
2015
$ Change
(4,354) $
(31,097) $
26,743
(9,050)
(31,585)
22,535
(62,682) $
49,278
(13,404) $
Changes in non-cash working capital in first six months of 2016 were primarily attributable to a decrease in deferred revenues of
$2.7 million and trade payables, accrued and other liabilities of $3.2 million and an increase is prepayments and other current assets
of $0.5 million offset by a decrease in trade, unbilled and other receivables, net, of $2.1 million.
Changes in other operating assets and liabilities for the first six months of 2016 were primarily due to a decrease in other long-term
liabilities, partially offset by a decrease in non-current unbilled receivables and other assets.
7.4.2 Cash (used in) from financing activities
Repayment of loans and borrowings
Proceeds from loans and borrowings
Payment of issuance costs of loans and borrowings
Proceeds from issuance of convertible debentures
Payment of issuance costs of convertible debentures
Proceeds from issuance of shares
Payment of costs from issuance of shares
Proceeds from exercise of stock options
Cash dividends paid
Net cash (used in) from financing activities
$
$
2016
(30,000) $
—
—
—
—
—
—
1,554
(57,373)
(85,819) $
2015
$ Change
(106,496) $
76,496
(804,740)
804,740
10,711
(10,711)
(230,000)
230,000
(8,625)
8,625
(720,165)
720,165
30,504
(30,504)
1,372
182
(45,124)
1,554,817 $
(12,249)
(1,640,636)
For the first six months of 2016, net cash used in financing activities include debt repayment of $30.0 million and cash dividend
payments of $57.4 million.
D+H Q2 2016
26
7.4.3 Cash used in investing activities
Additions to property, plant and equipment and intangible assets
$
2016
2015
(43,701) $
(44,837) $
Acquisition of subsidiary (net of cash acquired)
—
Settlement of foreign exchange contracts
$
1,136
(1,495,446)
—
Net cash used in investing activities
$ Change
1,495,446
50,557
(50,557)
(1,590,840) $
(43,701) $
1,547,139
Net cash used in investing activities during the first six months of 2016 reflect capital asset additions of $43.7 million.
Our capital expenditures typically include information technology hardware and software (external and internally developed),
machinery and equipment for our cheque business, leasehold improvements, and office furniture. Such amounts are expected to
be funded from our operating cash flow. Additional capital expenditure requirements may result from significant business expansion.
The table below outlines our capital asset additions by type for the three and six months ended June 30, 2016 and 2015:
2016
Product development and enhancements
and corporate systems
Property, plant, equipment and
purchased software
61%
10,502
8,946
39%
6,661
—
$
2015
13,793
Contracts
Total
% of total
spend
22,739
—
100% $
—
17,163
% of total
spend
2016
% of total
spend
2015
% of total
spend
61% $
24,091
55% $
19,131
43%
39%
19,610
45%
13,706
31%
—%
12,000
27%
100% $
44,837
100%
—%
100% $
—
43,701
Product development and enhancements and corporate systems additions increased by $3.3 million and $5.0 million in the three
and six months ended June 30, 2016, respectively, over the comparative periods as we continue to invest in our business.
Property, plant, equipment and purchased software additions are primarily related to infrastructure required to support the on-going
business operations. Expenditures increased by $2.3 million and $5.9 million in the three and six months ended June 30, 2016,
respectively, primarily related to the growth of our business resulting from the acquisition of GTBS and foreign exchange on additions
in the L&IC segment.
The 2015 customer contract additions are primarily attributable to a strategic partnership that D+H entered into in 2014 with one of
Canada’s major financial institutions to support the growth in our enhancement services product offering.
The following table outlines a breakdown of the product development and enhancements that provide future benefits by segment
for the second quarter and six months ended June 30, 2016 and 2015:
GTBS segment
L&IC segment
Canadian segment
Total
2016
2015
$
3,988 $
1,937
4,701
5,250
5,104
3,315
$
13,793 $
10,502
$
$
2016
2015
6,744 $
1,937
8,931
10,458
8,416
6,736
24,091 $
19,131
GTBS product development and enhancements
In the GTBS segment, we are investing in the development of the next generation of our flagship products in Global Payment
Technologies, Financial Messaging and Cash Management.
L&IC product development and enhancements
In the L&IC segment, we invest annually in enhancing our product capabilities and the ability to better serve our client’s needs.
Investment in our Lending segment is focused on our compliance and mortgage solutions where we are developing certain next
generation technology and expanding our offerings in these areas. In Integrated Core Solutions the internal software development
focus has primarily been around providing a best in class enterprise solution centered around our Phoenix core platform as well as
various channel solutions.
Canadian product development and enhancements
In the Canadian segment we are investing in the development of a SaaS-based Registry platform to modernize our collateral
management solutions, in expanding our enhancement services platform to increase our product offerings, in upgrading our
Corporate information systems, and in modernizing some of our cheque ordering functionalities.
D+H Q2 2016
27
8 CHANGES IN FINANCIAL POSITION
June 30, 2016
Current assets
$
December 31, 2015
391,520 $
$ Change
423,220 $
% Change
(31,700)
(7.5)%
Non-current assets
Non-current unbilled receivables 1
(4,614)
(5.6)%
4,615,900
5,011,933
(396,033)
(7.9)%
$
4,693,203 $
5,093,850 $
(400,647)
(7.9)%
$
164,075 $
166,768 $
(2,693)
(1.6)%
286,104
214,323
71,781
33.5 %
450,179 $
381,091 $
69,088
18.1 %
$
Other non-current assets
Total non-current assets
77,303 $
81,917 $
Current liabilities
Deferred revenues
Other current liabilities
Total current liabilities
$
Non-current liabilities
Non-current deferred revenues
$
Other non-current liabilities
Total non-current liabilities
$
(10)
—%
2,447,299
30,681 $
2,736,222
30,691 $
(288,923)
(10.6)%
2,477,980 $
2,766,913 $
(288,933)
(10.4)%
1. Prior to the first quarter of 2016, “unbilled receivables” were referred to as “unbilled revenues”.
The change in our balance sheet in the second quarter of 2016 compared to the fourth quarter of 2015 was driven by foreign exchange
and our operations, as shown in the table below:
Current assets
Non-current assets
Non-current unbilled receivables 1
Current liabilities
Deferred revenues
Non-current liabilities
$
$
$
$
$
$
$
June 30, 2016 vs. December 31, 2015 Change
Foreign
Operations
Total
Exchange
(8,641) $
(23,059) $
(31,700)
(5,524) $
(290,105)
(295,629) $
910 $
(105,928)
(105,018) $
(10,985) $
(8,149)
(19,134) $
8,292 $
79,930
88,222 $
(1,529) $
(139,845)
(141,374) $
1,519 $
(149,078)
(147,559) $
(4,614)
(396,033)
(400,647)
(2,693)
71,781
69,088
(10)
(288,923)
(288,933)
1. Prior to the first quarter of 2016, “unbilled receivables” were referred to as “unbilled revenues”.
Current assets
Current assets as at June 30, 2016 decreased by $31.7 million compared to December 31, 2015 mainly due to fluctuations in foreign
exchange rates of $23.1 million. Excluding this change, there was a decrease in cash and cash equivalents of $16.9 million and
current tax assets of $6.0 million. These decreases were partially offset by increases in prepayments and other current assets of
$3.7 million, and trade and other receivables of $10.6 million.
Non-current unbilled receivables
Non-current unbilled receivables relate to term licenses from LaserPro within our L&IC segment, where license revenue is recognized
upon delivery, however contractual billings occur annually over the term of the contract. Non-current unbilled receivables decreased
by $4.6 million as at June 30, 2016 compared to December 31, 2015, of which $5.5 million was due to fluctuations in foreign exchange
rates, partially offset by an increase of $0.9 million attributable to timing of term license revenue recognition in our lending products
within the L&IC segment.
Other non-current assets as at June 30, 2016 decreased by $396.0 million compared to December 31, 2015 primarily a result of a
decrease of $290.1 million due to fluctuations in the foreign exchange rates. Excluding this change, there was a decrease in intangible
assets and property, plant and equipment of $110.9 million and $1.7 million, respectively, primarily attributable to amortization, partially
offset by an increase in goodwill due to purchase price adjustments of $4.8 million relating to the acquisition of Fundtech. In addition,
there was an increase of $2.0 million in other assets primarily related to long-term prepaid maintenance fees related to our infrastructure.
D+H Q2 2016
28
Deferred revenues, current
Deferred revenues relate to undelivered products and services already paid for by clients. The liability converts to revenue upon
delivery or fulfillment of our obligation either at a point in time or over time. The current portion of deferred revenues decreased by
$2.7 million in the period compared to December 31, 2015 due to an increase of $8.3 million primarily due to timing of revenue
recognition from the lending products within our GTBS and L&IC segment that are sold with other products that require further
implementation or due to contracts with the clients that contain language precluding revenue recognition until future obligations are
delivered. This increase was offset by $11.0 million due to fluctuations in foreign exchange rates.
Other current liabilities increased by $71.8 million, primarily due to an increase of $80.0 million in current portion of loans and borrowings
due to timing of loan maturities on existing loans and an increase of $7.3 million in trade payables, accrued and other liabilities. These
increases were offset by a decrease of $8.1 million due to changes in foreign exchange rates and a decrease of $7.4 million in current
tax liabilities.
Deferred revenues, non-current
As described above in current deferred revenues, deferred revenues relate to undelivered services for which cash has been received
from clients. Non-current deferred revenues also result from hosted or SaaS services that D+H provides where any implementation
fees are deferred and recognized into revenue over the term of the SaaS / hosting arrangement.
Non-current deferred revenues balances remained consistent from December 31, 2015 due to decreases from foreign exchange
fluctuations of $1.5 million offset by an increase of $1.5 million mainly relating to our L&IC segment SaaS and hosting arrangements
as described above.
Other non-current liabilities decreased by $288.9 million primarily due to a $139.8 million decrease from fluctuations in foreign
exchange rates. Excluding this change, there was a decrease in deferred tax liabilities of $42.0 million, a net debt repayment of $30.0
million, a decrease in non-current loans and borrowings of $80.0 million due to timing of loan maturities on existing loans and a
decrease in other long-term liabilities of $5.5 million. These decreases were partially offset by changes in convertible debentures of
$4.1 million and in derivative liabilities held for risk management of $3.3 million.
9 SIGNIFICANT ACCOUNTING POLICIES AND STANDARDS DEVELOPMENTS
Refer to section 9 of our MD&A for the year ended December 31, 2015 and note 3 of our audited consolidated financial statements
for the year ended December 31, 2015 for our significant accounting policies. Our accounting policies have been the same since
December 31, 2015 except for the following standards that became effective on January 1, 2016.
•
IAS 16, Property, Plant and Equipment and IAS 38, Intangible assets
At January 1, 2016, the Company adopted these amendments and determined that there was no impact on the Company’s
unaudited condensed interim consolidated financial statements.
•
IAS 1, Presentation of Financial Statements
Recent accounting pronouncements not yet adopted
The IASB has issued new standards and amendments to existing standards. These changes have not yet been adopted by the
Company and could have an impact on future periods. These following changes are described in our annual consolidated financial
statements for the year ended December 31, 2015:
•
IFRS 15, Revenue from contracts with customers
•
IFRS 16, Leases; and
•
IFRS 9, Financial instruments
The following are upcoming amendments to International Financial Reporting Standards that may impact the Company:
•
IAS 7, Statement of cash flows (“IAS 7”)
The amendments to IAS 7, require disclosures that enable users of financial statements to evaluate changes in liabilities
arising from financing activities, including both changes arising from cash flow and non-cash changes. The Company intends
to adopt these amendments for the annual period beginning on January 1, 2017. The extent of the impact of adoption of the
amendments has not yet been determined.
•
IAS 12, Income taxes (“IAS 12”)
The amendments to IAS 12, clarify that the existence of a deductible temporary difference depends solely on a comparison
of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future
changes in the carrying amount or expected manner of recovery of the asset. The amendments also clarify the methodology
D+H Q2 2016
29
to determine the future taxable profits used for assessing the utilization of deductible temporary differences. The Company
intends to adopt these amendments for the annual period beginning on January 1, 2017. The extent of the impact of adoption
of the amendments has not yet been determined.
•
IFRS 2, Shared-based Payment (“IFRS 2”)
The amendments provide requirements on the accounting for the effects of vesting and non-vesting conditions on the
measurement of cash-settled share-based payments, share-based payment transactions with a net settlement feature for
withholding tax obligations, and a modification to the terms and conditions of a share-based payment that changes the
classification of the transaction from cash-settled to equity-settled. The Company intends to adopt the amendments to IFRS
2 for the annual period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet been
determined.
10 DEFINITIONS AND RECONCILIATIONS
10.1 Non-IFRS financial measures and key performance indicators
The information presented within this MD&A includes certain financial measures such as “Adjusted revenues”, “Constant Currency”,
“EBITDA”, “EBITDA margin” (EBITDA divided by revenues), “Adjusted EBITDA”, “Adjusted EBITDA margin” (Adjusted EBITDA divided
by Adjusted revenues), “Adjusted net income”, “Adjusted net income per share”, and “Adjusted net cash from operating activities”,
all of which are not defined terms under IFRS. This MD&A also contains “Debt to EBITDA ratio” and “Interest coverage ratio”, collectively
as “Covenant Ratios”, which are also not defined terms under IFRS.
These non-IFRS financial measures and key performance indicators should be read in conjunction with the Company’s unaudited
condensed interim consolidated financial statements prepared in accordance with IFRS. See reconciliations below of non-IFRS
financial measures to the most directly comparable IFRS measure.
Management believes these supplementary financial measures provide useful additional information related to the operating results
of the Company. These measures are used by management to assess financial performance of the business and are a supplement
to the unaudited condensed interim consolidated financial statements. 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 Company’s IFRS-based
unaudited condensed interim consolidated financial statements. In addition, the Company’s lending agreements require that the
Company comply with maximum or minimum requirements related to its Covenant Ratios and, as such, management actively monitors
the Company’s compliance to these Covenant Ratios.
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.
Constant Currency
Amounts calculated on a constant currency basis eliminate the effects of foreign exchange rate fluctuations by converting the current
period’s results in local currency at the foreign exchange rates in effect during the same period of the prior year.
Proforma Adjusted Revenues
Amounts calculated for Proforma Adjusted Revenues for GTBS include the results of GTBS for the period of January 1, 2015 to April
29, 2015 during which we did not own GTBS. The Proforma Adjusted Revenues calculation for this period are consistent with the
Adjusted Revenues measure defined below.
Adjusted Revenues
The Company uses Adjusted revenues as a measure of performance which eliminates the impact of applying acquisition accounting
on the acquisition of HFS and Fundtech. Adjusted revenues are also used in calculating Adjusted EBITDA and Adjusted EBITDA
margin.
Upon acquisition of subsidiaries, the acquired deferred revenues balances are adjusted to reflect the fair value based on estimated
costs of future delivery of the related services. These fair value adjustments to deferred revenues, recorded as of the acquisition date
in accordance with the business combination accounting standard, reduce revenues recognized post-acquisition under IFRS. Adjusted
revenues exclude these acquisition accounting effects. Management believes that Adjusted revenues facilitates meaningful
comparisons of pre-acquisition and post-acquisition revenues.
Management expects to use Adjusted revenues as a measure to the extent that the amortization impacts of the fair value adjustment
to the acquired deferred revenues are significant to the consolidated statements of income.
D+H Q2 2016
30
Adjusted revenues reconciliation
2016
Revenues
$
424,187
$
425,337
Acquisition accounting adjustments 1
1.
2015
$
372,376
$
375,163
1,150
Adjusted revenues
2016
$
836,336
$
839,524
2,787
2015
$
667,390
$
671,694
3,188
4,304
Acquisition accounting adjustments relate to the amortization of the fair value adjustments on deferred revenues acquired. The valuation of deferred revenues acquired
as part of the Fundtech acquisition was finalized in the second quarter of 2016. The following table details the adjustments.
Fair value adjustments on deferred revenues
Q2 2016
Q2 2015
YTD 2016
YTD 2015
Acquisition of HFS
$810
$1,321
$1,787
$2,838
Acquisition of Fundtech
$340
1,466
$1,401
1,466
$1,150
$2,787
$3,188
$4,304
Total adjustments
EBITDA and Adjusted EBITDA
EBITDA is defined as net income excluding finance expenses, taxes, depreciation and amortization. EBITDA is also described as
income from operating activities before depreciation and amortization in the consolidated statements of income.
In addition to its use by management as an internal measure of financial performance, EBITDA 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 reported under IFRS.
Adjusted EBITDA is also used by D+H in assessing the performance of its businesses. Adjusted EBITDA excludes: (i) acquisitionrelated expenses such as transaction costs, business integration costs, certain retention and incentive costs incurred in connection
with acquisitions, and the settlement amount of HFS’ closing working capital adjustment; (ii) other charges such as costs related to
the Company’s initiatives to align global operations and achieve cost synergies following the acquisitions, and costs incurred in
connection with cost-realignment initiatives; and (iii) certain foreign exchange gains and losses on financing related intercompany
balances. Adjusted EBITDA also excludes effects of acquisition accounting on the fair value of deferred revenues and deferred costs
acquired as part of acquisitions.
These items are excluded in calculating Adjusted EBITDA as they are not considered indicative of the underlying business performance
for the periods being reviewed and management believes that excluding these adjustments is more reflective of ongoing operating
results.
As described above, upon acquisition, the acquired deferred revenues balances are adjusted to reflect the fair value based on
estimated costs of future delivery of the related services. Similarly, deferred costs, which include sales commissions and
implementation costs, are also adjusted to reflect the fair values of these items at the acquisition date. These fair value adjustments
to deferred revenues and deferred costs recorded as of the acquisition date result in reducing revenues and expenses recognized
post-acquisition under IFRS. Adjusted EBITDA excludes the effects of these adjustments from the results in the periods reported.
Similar to EBITDA, Adjusted EBITDA also has limitations as an analytical tool and the reader should not consider it in isolation or as
a substitute for analysis of results reported under IFRS.
EBITDA and Adjusted EBITDA reconciliation
Finance expenses
Income tax recovery
Depreciation of capital assets
EBITDA
Acquisition-related and other charges 2
Realignment of global operations and related restructuring expenses 3
Foreign exchange (gain)/loss 4
Adjusted EBITDA
1.
2016
2015
5,383 $
5,979 $
$
25,641
27,364
$
$
(8,953)
6,928
66,117
95,116 $
(718)
2,214
21,995
(2,062)
116,545 $
(5,223)
5,395
52,836
86,351 $
151
19,212
—
4,445
110,159 $
2016
2015
10,170 $
39,976
52,117
41,794
(2,119)
(24,637)
14,182
9,771
135,533
90,898
187,365 $
180,320
(1,276)
(737)
7,868
28,663
28,786
—
(3,231)
(11,117)
219,512 $
197,129
Acquisition accounting adjustments relate to the amortization of the fair value adjustments on deferred revenues and deferred costs acquired. The valuation of deferred
revenues and deferred costs acquired as part of the Fundtech acquisition was finalized in the second quarter of 2016.The following table details the adjustments.
D+H Q2 2016
31
Fair value adjustments on deferred revenues and deferred costs
Q2 2016
Q2 2015
YTD 2016
YTD 2015
$(840)
$(899)
$(1,761)
$(1,787)
$122
1,050
$485
1,050
$(718)
$151
$(1,276)
$(737)
Acquisition of HFS
Total adjustments
2.
Acquisition-related and other charges include the Company’s integration and transaction costs pertaining to the acquisition of Fundtech (Q2 2016: $2.0 million, YTD:
$7.2 million), business integration, costs related to expanding global capabilities, retention and incentive costs in connection with the acquisition of businesses.
3.
Realignment of global operations and related restructuring expenses pertain to the Company’s initiatives to align global operations and achieve cost synergies following
the Company's acquisitions.
4.
Relates to non-cash foreign exchange (gain)/loss on financing related intercompany balances.
Adjusted Net Income and Adjusted Net Income per Share, Basic
Adjusted net income is used as a measure of internal performance similar to net income, and 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:
•
•
•
•
certain non-cash items
•
the effects of acquisition accounting on fair value of deferred revenues and deferred costs acquired;
•
certain foreign exchange gains and losses;
•
amortization of deferred financing charges;
•
amortization of intangible assets from acquisitions;
•
accretion of the convertible debentures;
•
fair value adjustments of interest-rate swaps not designated as hedges for the purposes of hedge accounting;
acquisition-related and other charges;
realignment of global operations and related restructuring expenses, including depreciation and amortization; and
tax effects of these items
These items are excluded in calculating Adjusted net income as they are not considered to be part of the normal course of operations
or indicative of the financial performance of the Company for the periods being reviewed. Adjusted net income per share, basic is
calculated by dividing Adjusted net income for the period by the weighted average number of shares (basic) outstanding during the
period.
Adjusted net income reconciliation
Net income
$
2016
2015
5,383 $
5,979 $
2016
(718)
151
(1,276)
(737)
(2,062)
4,445
(3,231)
(11,117)
2,744
2,439
5,501
4,152
10,170 $
2015
39,976
Non-cash items:
Foreign exchange (gain)/loss
2
Non-cash interest expense 3
Write-off of unamortized deferred financing fees related to
previous credit facility
Amortization of intangible assets from acquisitions
Fair value adjustment of derivative instruments 4
—
5,645
—
5,645
53,057
44,706
109,072
75,768
(285)
Acquisition-related and other charges 5
(287)
(585)
(62)
2,214
19,212
7,868
28,663
22,154
—
28,945
—
Realignment of global operations and related restructuring expenses,
including depreciation and amortization 6
Tax effect of above adjustments
7
(52,114)
(35,288)
Adjusted net income
$
(23,573)
58,914 $
(22,650)
59,640 $
104,350 $
107,000
Adjusted net income per share, basic
$
0.55 $
0.60 $
0.98 $
1.15
1. Acquisition accounting adjustments relate to the amortization of the fair value adjustments on deferred revenues and deferred costs acquired. The valuation of deferred
Acquisition of HFS
Total adjustments
Q2 2016
Q2 2015
YTD 2016
YTD 2015
$(840)
$(899)
$(1,761)
$(1,787)
$122
1,050
$485
1,050
$(718)
$151
$(1,276)
$(737)
2. Relates to non-cash foreign exchange (gain)/loss on financing related intercompany balances.
3. Non-cash interest expense relates to the accretion of convertible debentures issued to partially fund the acquisition of HFS and Fundtech, and amortization of deferred
financing charges incurred in connection with the Company’s financing arrangements.
D+H Q2 2016
32
4. Amounts include mark-to-market adjustments to interest-rate swaps that are not designated as hedges for hedge accounting purposes and for which any change in
the fair value of these contracts is recorded through the consolidated statements of income.
5. Acquisition-related and other charges include the Company’s integration and transaction costs pertaining to the acquisition of Fundtech (Q2 2016: $2.0 million, YTD:
6. Realignment of global operations and related restructuring expenses pertain to the Company’s initiatives to align global operations and achieve cost synergies following
7. The adjustments to net income are tax effected at their respective tax rates.
Adjusted net cash from operating activities
D+H’s management considers Adjusted net cash from operating activities as an important indicator of financial strength and
performance of the business. Adjusted net cash from operating activities is Net cash from operating activities on the Consolidated
Statements of Cash Flows and adds back the impact of acquisition related and other charges and realignment of global operations
and related restructuring expenses. Adjusted net cash from operating activities represents the amount of cash flow that D+H has for
repayment of debt, capital expenditures, payment of dividends, acquisition related activities (including integration), and for supporting
other business decisions and strategic initiatives. As this is a non-IFRS measure, Adjusted net cash from operating activities should
not be considered an alternative to the measures in the consolidated statements of cash flows.
Acquisition related and other charges 1
Realignment of global operations and related restructuring expenses
$
2
$
2016
55,362 $
2,214
21,995
79,571 $
2015
51,890 $
19,212
—
71,102 $
2016
110,135 $
7,868
28,786
146,789 $
2015
61,712
28,663
—
90,375
1. Acquisition-related and other charges include the Company’s integration and transaction costs pertaining to the acquisition of Fundtech (Q2 2016: $2.0 million, YTD:
2. Realignment of global operations and related restructuring expenses pertain to the Company’s initiatives to align global operations and achieve cost synergies following
Debt to EBITDA ratio
The Company entered into the Ninth Amended and Restated Credit Agreement on April 30th, 2015, and is required to comply with
the Total Net Funded Debt to EBITDA ratio, referred to as “Debt to EBITDA ratio” in this MD&A. The Debt to EBITDA ratio includes
all of the Company’s outstanding indebtedness, amounts capitalized under finance leases, bankers’ acceptances, and letters of credit,
and is net of cash in North America and Switzerland bank accounts. A maximum aggregate amount of up to $50 million can be netted
against the Total Net Funded Debt. Convertible Debentures are excluded from the Debt to EBITDA ratio.
EBITDA, for the purposes of the Debt to EBITDA ratio noted above, is calculated on a twelve-month trailing basis as net income plus:
interest expense, depreciation and amortization, income tax expenses, other non-cash expenses and certain restructuring and
transaction expenses, to the extent expensed in the consolidated statements of income. Other add-backs to net income include
certain deferred revenue changes and impacts of acquisition accounting adjustments to revenues with respect to the Fundtech
acquisition. The covenant requires the ratio to be a maximum of 3.50x.
D+H Q2 2016
33
Debt to EBITDA ratio 1
Debt and EBITDA used for the purposes of this ratio are different than "loans and borrowings" and "EBITDA" in the MD&A. See
reconciliation below for details.
June 30, 2016 December 31, 2015
$
1,518,262 $
1,647,504
Add:
Letters of credit
12,411
Capital leases
6,338
145
Total Funded Debt
306
$
1,530,818 $
Total Net Funded Debt
$
1,504,510 $
1,604,148
Net income
$
54,199 $
84,005
Less: Cash (for covenant purposes only) 2
(26,308)
1,654,148
(50,000)
Add (deduct):
Interest expense
107,191
Depreciation of property, plant and equipment
96,348
27,709
23,298
274,236
229,601
Income tax recovery
(30,555)
Fair value adjustment of derivative instruments 3
(8,037)
(1,037)
Stock options
Acquisition-related and other charges and realignment of global operations and related
restructuring expenses 5
Foreign exchange gain 6
Other items 7
EBITDA (for covenant purposes only)
$
Total Net Funded Debt to EBITDA
Maximum allowed per covenant
(515)
4,972
5,461
10,434
10,973
68,766
60,774
(13,866)
(21,751)
(243)
23,461
501,806 $
503,618
2.998x
3.185x
3.50x
3.70x
1.
Calculated on a twelve-month trailing basis.
2.
Cash (for covenant purposes only) represents the cash balance in all Canadian, U.S., Luxembourg and Switzerland bank accounts up to a maximum of $50 million.
3.
Amounts include mark-to-market adjustments to interest-rate swaps that are not designated as hedges for hedge accounting purposes and for which any change in
the fair value of these contracts is recorded through the consolidated statements of income.
4.
Acquisition accounting adjustments relate to the amortization of the fair value adjustments on deferred revenues and deferred costs acquired. The valuation of deferred
Acquisition of HFS
Total adjustments
YTD 2016
YTD 2015
$(1,761)
$(1,787)
$485
1,050
$(1,276)
$(737)
5.
Acquisition-related and other charges include the Company’s integration and transaction costs pertaining to the acquisition of Fundtech (Q2 2016: $2.0 million, YTD:
Realignment of global operations and related restructuring expenses pertain to the Company’s initiatives to align global operations and achieve cost synergies following
6.
Non-cash foreign exchange gain is for financing related intercompany balances.
7.
Other items include changes in deferred revenues for certain D+H businesses, and GTBS’ incremental EBITDA on a twelve-month trailing basis.
D+H Q2 2016
34
Interest coverage ratio
The interest coverage ratio is defined as the ratio of the trailing twelve-month EBITDA (EBITDA calculated in the same manner as
for the Debt to EBITDA ratio) to the trailing twelve-month interest expense, excluding non-cash interest expense. The covenant
requires this ratio to be a minimum of 3.00x.
Interest Coverage Ratio 1
June 30, 2016 December 31, 2015
EBITDA (for covenant purposes only)
$
501,806 $
503,618
Interest expense (for covenant purposes only)
$
106,607 $
96,348
Less: non-cash interest
Interest expense (for covenant purposes only)
10,868
$
9,519
95,739 $
86,829
Interest coverage ratio (EBITDA / Interest expense)
5.24x
5.80x
Minimum allowed per covenant
3.00x
3.00x
1.
Calculated on a twelve-month trailing basis.
10.2 Foreign exchange rates
The following table reflects the Bank of Canada’s exchange rates in Canadian dollars for one U.S. dollar for the periods noted:
2016
2015
January 1 to June 30 average
1.3312
1.2352
April 1 to June 30 average
1.2883
1.2294
As at June 30
1.2917
1.2490
Period / date
The average exchange rates for the past eight quarters can be found in section 6 of this MD&A.
11 DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL
REPORTING
Disclosure controls and procedures
Disclosure controls and procedures are designed to provide reasonable assurance that material information is gathered and reported
to senior management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), on a timely basis so
that appropriate decisions can be made regarding public disclosure.
The Company’s management, under the supervision of the CEO and CFO, has designed a set of disclosure controls and procedures
to provide reasonable assurance that material information is made known to us by others and information required to be disclosed
in filings or reports submitted under securities legislation is recorded, processed, summarized and reported within the time periods
specified in securities legislation.
Internal controls over financial reporting
Internal controls over financial reporting (“ICFR”) are designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance with IFRS. Management is responsible for establishing internal
control over financial reporting for the Company.
The Company’s management, under the supervision of the CEO and CFO, have also designed a set of internal controls over financial
reporting to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for
external purposes in accordance with IFRS.
Effective Q2 2016, management has removed the scope limitation applied in the previous periods relating to the design of the
disclosure controls and procedures and internal control over financial reporting relating to controls, policies and procedures of Fundtech
acquired on April 30, 2015.
With the exception of the changes relating to the internal controls of Fundtech described above, there have been no other changes
in the Company’s internal controls over financial reporting during the second quarter of 2016 that have materially affected, or are
reasonably likely to materially affect, its internal controls over financial reporting.
12 BUSINESS RISKS
A comprehensive discussion of the risks that impact D+H can be found on the Company’s most recently filed Annual Information
Form and the most recently filed annual MD&A for the year ended December 31, 2015, available on SEDAR at www.sedar.com.
Risks and uncertainties related to the Company have not significantly changed since the filing of the 2015 Annual Information Form
and the 2015 annual MD&A.
D+H Q2 2016
35
DH CORPORATION
Unaudited condensed interim consolidated financial statements
Three and six months ended June 30, 2016 and 2015
D+H Q2 2016
36
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30
2016
(unaudited, thousands of Canadian dollars)
December 31
2015
ASSETS
Cash and cash equivalents
$
Trade and other receivables, net (note 8)
44,519 $
66,459
257,350
260,404
Prepayments and other current assets (note 9)
62,249
61,716
Current income tax assets
27,402
34,641
391,520
423,220
77,303
81,917
Total current assets
Non-current unbilled receivables (note 8)
Deferred tax assets
3,826
4,440
73,527
78,476
Intangible assets
1,882,952
2,114,699
Goodwill (note 10)
2,611,584
2,769,290
Property, plant and equipment
Other assets
44,011
45,028
4,693,203
5,093,850
$
5,084,723 $
5,517,070
$
201,006 $
201,777
Total assets
LIABILITIES
Trade payables, accrued and other liabilities (note 11 & note 13)
Loans and borrowings - current (note 12)
Deferred revenues
Current tax liabilities
Loans and borrowings - non-current (note 12)
Derivative liabilities held for risk management (note 13)
Deferred tax liabilities
Other long-term liabilities
80,000
—
164,075
166,768
5,098
12,546
450,179
381,091
30,681
30,691
1,428,832
1,636,922
426,668
422,576
6,521
3,261
544,981
625,246
40,297
48,217
2,477,980
2,766,913
Total liabilities
2,928,159
3,148,004
2,062,836
2,050,223
210,922
377,949
EQUITY
Capital
Reserves
Deficit
(117,194)
Total equity
Total liabilities and equity
$
(59,106)
2,156,564
2,369,066
5,084,723 $
5,517,070
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
D+H Q2 2016
37
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
2016
(unaudited, thousands of Canadian dollars, except per share amounts)
Revenues (note 5)
2015
2016
2015
836,336 $
667,390
133,517
319,743
233,517
168,075
152,508
329,228
253,553
95,116
86,351
187,365
180,320
6,928
5,395
14,182
9,771
66,117
52,836
135,533
90,898
22,071
28,120
37,650
79,651
Finance expense (note 12)
25,641
27,364
(Loss) Income before income taxes
(3,570)
Income tax recovery
(8,953)
$
424,187 $
372,376
Employee compensation and benefits (note 6)
160,996
Other expenses, net (note 6)
Income from operating activities before depreciation and amortization
$
756
(5,223)
52,117
41,794
(14,467)
37,857
(24,637)
(2,119)
$
5,383 $
5,979
$
10,170 $
39,976
Earnings per share - basic and diluted (note 15)
$
0.05 $
0.06
$
0.10 $
0.43
D+H Q2 2016
38
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
$
2016
2015
5,383 $
5,979
2016
$
10,170 $
2015
39,976
Items that are or may be reclassified subsequently to net income:
Cash flow hedges - effective portion of changes in fair value
(1,870)
Cash flow hedges - reclassified to consolidated statements of income
967
Foreign currency translation (loss) gain
(27,382)
Tax recovery (expense) on items above
180
Other comprehensive (loss) income, net of tax
Total comprehensive (loss) income for the period
$
(48,044)
554
25,035
(644)
(6,669)
2,082
(164,839)
422
(51,262)
1,159
100,572
(225)
(28,105)
(23,099)
(169,004)
50,244
(22,722) $
(17,120) $
(158,834) $
90,220
D+H Q2 2016
39
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Reserves
(unaudited, thousands of Canadian
dollars, except share amounts)
Balance at January 1, 2016
Number of
common
shares
106,443,450 $
Share capital
Equity-settled
share-based
compensation
2,050,223 $
Equity
Accumulated
component of
other
convertible comprehensive
debentures
income
7,763 $
22,461 $
347,725 $
Deficit
(59,106) $
Total equity
2,369,066
—
—
—
—
—
10,170
10,170
Dividends (note 17)
—
—
—
—
—
(68,258)
(68,258)
298,880
10,885
—
—
—
—
5,985
174
—
(10)
—
—
164
78,969
1,554
1,987
—
—
—
3,541
Shares issued under dividend
reinvestment plan (note 17)
Conversion of convertible debentures
Stock options (note 14)
Other comprehensive loss
Balance at June 30, 2016
Balance at January 1, 2015
Share issuance
Dividends (note 17)
Shares issued under dividend
reinvestment plan (note 17)
Equity component of convertible
debentures, net of tax
Conversion of convertible debentures
Other comprehensive income
Balance at June 30, 2015
—
—
—
—
(169,004)
—
10,885
(169,004)
106,827,284 $
2,062,836 $
9,750 $
22,451 $
178,721 $
(117,194) $
2,156,564
86,402,314 $
1,315,122 $
99,196 $
(13,810) $
1,411,678
2,302 $
8,868 $
—
—
—
—
—
39,976
39,976
18,975,000
697,766
—
—
—
—
697,766
—
—
—
—
—
425,580
16,324
—
—
—
—
16,324
13,602
13,602
—
—
—
5,328
185
—
67,451
1,372
—
—
105,875,673 $
2,030,769 $
(61,448)
(61,448)
—
—
(9)
—
—
176
2,476
—
—
—
3,848
—
—
50,244
—
50,244
4,778 $
22,461 $
149,440 $
(35,282) $
2,172,166
D+H Q2 2016
40
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
2016
2015
Cash and cash equivalents provided by (used in):
OPERATING ACTIVITIES
$
10,170 $
39,976
Adjustments for:
14,182
9,771
135,533
90,898
Finance expenses:
Interest expense
47,201
32,059
1,245
6,964
Accretion expense
4,256
2,833
Income taxes
(585)
(62)
(24,637)
(2,119)
1,987
2,476
Changes in non-cash working capital items, net (note 7)
(4,354)
(31,097)
Changes in other operating assets and liabilities, net (note 7)
(9,050)
(31,585)
Cash generated from operating activities
175,948
120,114
Interest paid
(48,256)
(30,801)
Income tax paid
(17,557)
(27,601)
110,135
61,712
(30,000)
(106,496)
FINANCING ACTIVITIES
Repayment of loans and borrowings (note 12)
Proceeds from loans and borrowings (note 12)
—
804,740
Payment of issuance costs of loans and borrowings
—
(10,711)
230,000
Proceeds from issuance of convertible debentures
—
Payment of issuance costs of convertible debentures
—
Proceeds from issuance of shares
—
720,165
Payment of costs from issuance of shares
—
(30,504)
Proceeds from exercise of stock options
(8,625)
1,554
1,372
Cash dividends paid (note 17)
(57,373)
(45,124)
Net cash (used in) from financing activities
(85,819)
1,554,817
INVESTING ACTIVITIES
Additions to property, plant and equipment
(12,926)
Additions to intangible assets
(30,775)
(11,448)
(33,389)
Acquisition of subsidiary, net of cash acquired (note 4)
—
(1,495,446)
Settlement of foreign exchange contracts
—
(50,557)
Net cash used in investing activities
(43,701)
(Decrease) increase in cash and cash equivalents for the period
(19,385)
25,689
Cash and cash equivalents, beginning of period
66,459
34,761
Effect of movements in exchange rates on cash held
(2,555)
1,949
Cash and cash equivalents, end of period
$
44,519 $
(1,590,840)
62,399
D+H Q2 2016
41
Notes to Condensed Interim Consolidated Financial Statements
Three and Six months ended June 30, 2016 and 2015
(unaudited, thousands of Canadian dollars unless otherwise noted)
1. Reporting entity
DH Corporation is domiciled in Canada. The address of the registered office is 120 Bremner Blvd., Suite 3000, Toronto, ON, M5J
0A8. The unaudited condensed interim consolidated financial statements are of DH Corporation and its subsidiaries, together referred
to as “D+H” or the “Company”.
The Company acquired Fundtech Investments II, Inc. (“Fundtech”) in April 2015, as discussed in note 4. Fundtech offers a
comprehensive suite of transaction banking solutions including global and domestic payments solutions, financial messaging,
corporate cash and liquidity management and merchant services. It also offers related domestic and cross-border products that
include clearing and settlement of foreign exchange transactions, direct connectivity to the U.S. Fedwire network and a payment
processing and initiation platform.
D+H’s service offerings in the United States (“U.S.”) also include lending and integrated core solutions. U.S. lending solutions consist
of mortgage, consumer and commercial lending services. Mortgage lending services include web-based solutions that allow lenders
to obtain qualified applications from multiple point-of-sale channels throughout the entire loan origination process and provide compliant
loan documents. Consumer lending services assist in automating the lending process from acceptance of applications through to
the loan approval process and providing compliant loan documents. Commercial lending solutions assist in producing compliant
commercial loan documents. Integrated core services consist of core banking platform offerings and complementary channel and
hosting solutions to community-based banks, larger banks and credit unions.
The Company’s service offerings within Canada include lending and payments solutions. Lending solutions in Canada consist of
collateral management solutions, designed to help lenders manage debt collateral, mortgage technology solutions to process
mortgages and student loans administration solutions to assist various governments and banks in managing their student lending
programs. The Company’s payments solutions service area includes a cheque program, where D+H serves consumers and small
businesses, and enhancement services, where D+H provides fraud prevention and other related services.
2. Basis of presentation
a.
Statement of compliance
The unaudited condensed interim consolidated financial statements have been prepared in accordance with International
Accounting Standard (“IAS”) 34, Interim Financial Reporting, as issued by the International Accounting Standards Board
("IASB"), and do not include all of the disclosures required for full annual consolidated financial statements. The unaudited
condensed interim consolidated financial statements should be read in conjunction with the annual consolidated financial
statements for the year ended December 31, 2015.
These unaudited condensed interim consolidated financial statements were authorized for issue by the Board of Directors
on July 26, 2016.
b.
Use of estimates and judgments
The preparation of these unaudited condensed interim consolidated financial statements requires the use of certain significant
accounting estimates and judgments made by management in applying D+H’s accounting policies. The areas involving
significant estimates and judgments have been set out in note 2(d) of D+H’s annual consolidated financial statements for
the year ended December 31, 2015.
c.
Comparative figures
Certain comparative amounts have been reclassified to conform to current period presentation.
D+H Q2 2016
42
3. Significant accounting policies
The accounting policies applied by the Company in these unaudited condensed interim consolidated financial statements are the
same as those applied by the Company in its annual consolidated financial statements as at and for the year ended December 31,
2015 except for the following amendments to standards that became effective for annual periods commencing January 1, 2016.
•
IAS 16, Property, Plant and Equipment and IAS 38, Intangible assets
•
IAS 1, Presentation of Financial Statements
Recent accounting pronouncements not yet adopted
The IASB has issued new standards and amendments to existing standards. These changes have not yet been adopted by the
Company and could have an impact on future periods. These following changes are described in our annual consolidated financial
statements for the year ended December 31, 2015:
•
IFRS 15, Revenue from contracts with customers
•
IFRS 16, Leases; and
•
IFRS 9, Financial instruments
The following are upcoming amendments to International Financial Reporting Standards that may impact the Company:
•
IAS 7, Statement of cash flows (“IAS 7”)
The amendments to IAS 7, require disclosures that enable users of financial statements to evaluate changes in liabilities
arising from financing activities, including both changes arising from cash flow and non-cash changes. The Company intends
to adopt these amendments for the annual period beginning on January 1, 2017. The extent of the impact of adoption of the
amendments has not yet been determined.
•
IAS 12, Income taxes (“IAS 12”)
The amendments to IAS 12, clarify that the existence of a deductible temporary difference depends solely on a comparison
of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future
changes in the carrying amount or expected manner of recovery of the asset. The amendments also clarify the methodology
to determine the future taxable profits used for assessing the utilization of deductible temporary differences. The Company
intends to adopt these amendments for the annual period beginning on January 1, 2017. The extent of the impact of adoption
of the amendments has not yet been determined.
•
IFRS 2, Shared-based Payment (“IFRS 2”)
The amendments provide requirements on the accounting for the effects of vesting and non-vesting conditions on the
measurement of cash-settled share-based payments, share-based payment transactions with a net settlement feature for
withholding tax obligations, and a modification to the terms and conditions of a share-based payment that changes the
classification of the transaction from cash-settled to equity-settled. The Company intends to adopt the amendments to IFRS
2 for the annual period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet been
determined.
D+H Q2 2016
43
4. Acquisition of Fundtech
On April 30, 2015, D+H purchased all of the outstanding shares of Fundtech. During the second quarter of 2016, and within one year
of the acquisition of Fundtech, the Company completed its assessment and valuation of assets acquired and liabilities assumed in
the acquisition and booked final adjustments to the purchase price which related primarily to tax and foreign exchange related items.
During the six months ended June 30, 2016, the Company adjusted the acquisition date values ascribed to assets acquired and
liabilities assumed, resulting in the following changes from amounts disclosed in the Company’s consolidated financial statements
as at and for the year ended December 31, 2015: an increase of $4.8 million to goodwill, a $1.0 million decrease to trade and other
receivables, net, a $2.0 million increase to deferred tax liabilities, a $0.7 million decrease to current tax liabilities, and a $2.5 million
increase to trade payables, accrued and other long-term liabilities. During the measurement period, the Company recognized
adjustments to the provisional amounts as if the accounting for the business combination had been completed at the acquisition date.
The Company does not consider these adjustments to the provisional amounts material, and therefore will not recast the comparative
information for prior periods.
The net assets acquired and consideration transferred are as follows:
Cash and cash equivalents
$
56,157
Trade and other receivables, net
62,722
Prepayments and other current assets
28,499
Inventories
407
Current tax assets
1,281
Property, plant and equipment
22,399
Intangible assets
844,696
Other assets
1,969
Trade payables, accrued and other liabilities
(35,930)
Current tax liabilities
(2,982)
Deferred revenues
(38,007)
Deferred tax liabilities
(214,914)
(25,336)
Total identifiable net assets
700,961
Goodwill
850,642
Total cash consideration for 100% ownership
$
1,551,603
During the three and six months ended June 30, 2016, as a result of revised estimates related to acquisition-related professional
services fees, the Company has reversed acquisition costs of $2.0 million. During the three and six months ended June 30, 2015,
the Company incurred acquisition costs of $10.8 million and $22.9 million, respectively. Acquisition costs were recorded in other
expenses, net, on the consolidated statements of income.
5. Revenues
Revenues by major service areas are as follows:
Lending solutions
Payments solutions
2016
2015
$
178,688 $
172,066
90,355
55,102
82,545
81,329
72,599
63,879
$
424,187 $
372,376
$
$
2016
2015
343,332 $
330,150
184,545
55,102
162,142
155,076
146,317
127,062
836,336 $
667,390
D+H Q2 2016
44
6. Expenses
2016
Wages and salaries
$
113,906 $
2015
105,780
2016
$
236,011 $
2015
183,531
Restructuring expenses 1
18,618
—
22,399
—
Benefits
12,552
10,111
25,474
18,377
Statutory contributions
8,238
7,476
19,765
15,497
Integration and other related charges
4,016
7,016
8,992
9,295
Other labour costs
3,666
$
160,996 $
3,134
133,517
7,102
$
319,743 $
6,817
233,517
1. Severance-related restructuring expenses; see note 11 for further details.
For the three and six months ended June 30, 2016, $13.8 million and $24.1 million, respectively, of expenses, primarily employee
compensation and benefits, were capitalized related to software product development and included as part of intangible assets on
the condensed consolidated statement of financial position (three and six months ended June 30, 2015 - $10.5 million and $19.1
million, respectively).
Other expenses, net
2016
2015
Material, shipping and selling expenses
2016
2015
75,224 $
62,867
Third party disbursements
28,208
26,831
49,554
46,172
Legal, audit and professional fees
14,535
8,283
28,027
14,217
Occupancy costs
10,689
8,992
21,638
15,889
Repairs and maintenance expenses
10,253
6,565
20,778
11,970
Telecommunications expenses
8,399
7,216
17,482
13,580
Travel
5,779
6,779
10,967
9,011
Restructuring expenses 1
3,377
—
6,387
—
Trade shows and conferences
3,163
314
7,320
3,148
$
Integration and other related costs
210
Fundtech acquisition costs 3
Foreign exchange (gain) loss
Gain related to acquisition adjustment 2
888
117,578
1,936
10,835
(2,012)
22,887
(47)
3,420
(1,432)
(12,604)
10,297
$
1,361
147,557 $
(2,012)
—
Other expenses
$
168,075 $
—
—
9,045
152,508
22,074
$
329,228 $
(5,455)
15,224
253,553
1. See note 11 for further details.
2. Relates to the final settlement of working capital adjustments as a result of the Harland Financial Solutions (“HFS”) acquisition completed in 2013.
3. During the three and six months ended June 30, 2016, as a result of revised estimates related to acquisition-related professional services fees, the Company has
reversed acquisition costs of $2.0 million.
D+H Q2 2016
45
7. Supplemental cash flow information
The table below outlines the changes in non-cash working capital items as a source (use) of cash from operating activities.
2016
Trade and other receivables, net
$
Prepayments and other current assets
2015
2,057 $
(28,505)
(533)
(2,860)
Trade payables, accrued and other liabilities
(3,185)
(9,847)
Deferred revenues
(2,693)
10,115
Changes in non-cash working capital items, net
$
(4,354) $
(31,097)
The table below outlines the changes in other operating assets and liabilities, net as a source (use) of cash from operating activities.
Non-current unbilled receivables
Other assets
Other 1
Changes in other operating assets and liabilities, net
$
$
2016
2015
4,614 $
(14,008)
1,017
(7,263)
(10)
2,980
(7,920)
4,015
(6,751)
(17,309)
(9,050) $
(31,585)
1. Relates primarily to foreign currency translation adjustments.
8. Trade, other and unbilled receivables, net
June 30
2016
Trade receivables
$
Other receivables
256,046 $
4,234
Allowance for doubtful accounts
(2,930)
December 31
2015
258,511
4,341
(2,448)
Trade and other receivables, net - current
$
Unbilled receivables - non-current
$
77,303 $
81,917
Total trade, other and unbilled receivables, net
$
334,653 $
342,321
257,350 $
260,404
Current unbilled receivables, included in trade receivables, represent revenue earned for services rendered but not yet invoiced as
at the reporting date. Non-current unbilled receivables represent future amounts to be billed that are contractually due to the Company
as a result of term software licenses delivered in the Lending & Integrated Core segment. These amounts have been recognized in
revenues, however not billed as the contract stipulates the amounts are to be billed and payable ratably over the contract term.
9. Prepayments and other current assets
June 30
2016
Maintenance contracts 1
$
Deferred implementation costs
December 31
2015
21,407 $
12,984
14,403
11,355
Advances and deposits
4,362
5,040
Inventories
3,929
4,643
Deferred compensation payments related to the acquisition of Fundtech
1,842
7,850
16,306
19,844
62,249 $
61,716
Other
2
$
1. Relates primarily to current portion of long-term software maintenance contracts.
2. Relates primarily to current portion of long-term prepaid deposits and rebates that are being amortized over the term of the customer's contract.
D+H Q2 2016
46
10. Goodwill
June 30
December 31
2016
Balance, beginning of period January 1, 2016
2015
2,769,290 $
$
1,592,032
Changes during the period:
Fundtech (note 4)
4,754
Effect of movements in exchange rates
Balance, end of period June 30, 2016
845,888
(162,460)
331,370
2,611,584 $
$
2,769,290
11. Trade payables, accrued and other liabilities
June 30
December 31
2016
Trade payables
2015
41,658 $
54,519
Compensation-related accrued liabilities
54,967
78,550
Restructuring-related payables
20,839
—
Commissions
18,685
17,171
Customer advances
16,337
10,066
Interest payable
11,478
11,178
Capital and other tax
13,066
10,872
Other accrued liabilities
23,030
19,218
$
Derivative liabilities held for risk management - current
946
$
203
201,006 $
201,777
Restructuring
During the six months ended June 30, 2016, the Company initiated a realignment of its business functions to capitalize on its global
scale and growth opportunities and increase support of our customers.
Restructuring expenses for the three and six months ended June 30, 2016 were $22.0 million and $28.8 million, respectively, as
noted below:
Restructuring expense
Severance
Consulting
Other
Three months ended Six months ended
June 30, 2016
June 30, 2016
18,618 $
$
22,399
2,315
5,040
1,062
1,347
21,995 $
$
28,786
There were no restructuring expenses incurred during the three and six months ended June 30, 2015.
Included in trade payables, accrued and other liabilities are provisions for restructuring activities being undertaken by the Company:
Restructuring liability
Balance, beginning of period January 1, 2016
Restructuring expense
Payments
Effect of movements in exchange rates
Balance, end of period June 30, 2016
$
$
June 30
2016
—
28,786
(8,110)
163
20,839
The associated payments have occurred in the six months ended June 30, 2016 and are expected to continue in the second half of
2016 and throughout 2017.
D+H Q2 2016
47
12. Loans and borrowings
The Company’s credit facility, which matures on April 30, 2020, provides for the following:
i.
A revolving, non-amortizing credit facility in the amount of $550 million (“Revolver”). The Revolver may be used for capital
expenditures and general corporate purposes. Draws totalling $240.1 million were outstanding on this facility as at June 30,
2016 (December 31, 2015 - $285.1 million).
ii.
A non-revolving, non-amortizing term credit facility in the amount of US$512.6 million (“Non-revolver”). This facility was
fully drawn as at June 30, 2016 and as at December 31, 2015.
Bonds in the amount of $100 million and US$399.5 million were outstanding on June 30, 2016 and December 31, 2015.
The Company’s bonds and credit facilities are secured by the assets of the Company and are subject to certain non-financial and
financial covenants, including the requirement to meet certain financial ratios and certain financial condition tests. The Company is
in compliance with all covenants as at June 30, 2016.
During the three and six months ended June 30, 2016, the Company made repayments of $10 million and $30 million, respectively,
against the Canadian dollar portion of the Revolver.
The Company’s long-term indebtedness is as follows:
June 30
Total credit facility
Credit facility (secured)
Revolver
Revolver (US$163,100)
Total Revolver
Non-revolver (US$512,620)
Total credit facility
$
$
Bond (secured)
Bond (secured)
Bond (secured) (US$63,000)
Bond (secured)
Total bonds
Total loans and borrowings excluding deferred
finance costs
Deferred finance costs
Total loans and borrowings
339,324
210,676
550,000
662,151
1,212,151
Interest rate
1
Maturity
2016
December 31
2015
BA + 2.50% 2
LIBOR + 2.50% 2
Apr 2020 $
Apr 2020
29,400 $
210,676
240,076
59,400
225,730
285,130
LIBOR + 2.50% 2
Apr 2020
$
662,151
902,227 $
709,466
994,596
Jun 2017 $
Jun 2017
Apr 2021
May 2022
May 2022
Jun 2022
Jun 2022
Aug 2023
Aug 2023
Aug 2023
Aug 2023
$
50,000 $
30,000
81,377
51,668
51,668
21,313
19,376
20,000
129,170
96,878
64,585
616,035 $
50,000
30,000
87,192
55,360
55,360
22,836
20,760
20,000
138,400
103,800
69,200
652,908
$
1,518,262 $
1,647,504
$
(9,430)
1,508,832 $
(10,582)
1,636,922
6.99% 3
6.17% 3
6.59% 3
4.32% 1
4.32% 1
4.94% 3
4.94% 3
6.01% 3
5.76% 3
5.76% 3
5.76% 3
1. Amounts available may be drawn in CAD or its USD equivalent.
2. A portion of payments under the Credit Facility are fixed by means of interest-rate swaps (notional amounts of $45 million and US$300 million), see note 13.
3. During the year ended December 31, 2015, bonds issued in 2012 or prior had a coupon increase of 100bps and bonds issued in 2013 had a coupon increase of
25bps. The coupon increases are on a temporary basis and will revert back to previous rates when the Debt-to-EBITDA ratio (as defined) is less than 3:00x for two
consecutive fiscal quarters.
Finance expense
Interest expense
Accretion expense (5.0%, 5.5 year convertible debenture)
Accretion expense (6.0%, 5 year convertible debenture)
2016
2015
23,182 $
19,567 $
$
603
6,246
1,115
893
1,026
945
(285)
(287)
25,641 $
27,364 $
$
2016
2015
47,201 $
32,059
1,245
6,964
2,155
893
2,101
1,940
(585)
(62)
52,117 $
41,794
D+H Q2 2016
48
Letters of credit
The Company had outstanding letters of credit of $12.4 million as at June 30, 2016, compared to $6.3 million as at December 31,
2015, which is a part of the total Credit Facility. Letters of credit are issued by the Company, at the request of the beneficiary, as a
form of security should the Company not meet its financial contractual obligation.
13. Financial instruments
The Company’s policies and procedures to monitor, evaluate and manage risks related to financial instruments are consistent with
those in place at December 31, 2015. Information about D+H’s risk management practices are described in note 18 of the consolidated
financial statements for the year ended December 31, 2015.
As at June 30, 2016, the following fixed-paying interest-rate swaps were outstanding:
June 30
December 31
2016
Maturity date
Notional amount
October 17, 2016 (US$25,000)
4
October 17, 2016 (US$25,000)
Interest rate
1
Liability
2015
2
32,293
0.835% $
32 $
58
4
32,293
0.835%
32
58
October 17, 2016 (US$25,000)
4
32,293
0.784%
24
39
October 17, 2016 (US$25,000)
4
March 18, 2017
3
March 20, 2017
3
$
32,293
0.820%
27
48
25,000
3.350%
460
784
20,000
3.366%
370
631
August 28, 2018 (US$25,000)
4
32,293
1.348%
438
88
August 28, 2018 (US$25,000)
4
32,293
1.344%
434
84
August 28, 2018 (US$25,000)
4
32,293
1.350%
439
91
August 28, 2018 (US$20,000)
4
25,834
1.330%
340
57
32,293
1.645%
712
380
October 17, 2018 (US$25,000)
4
August 28, 2020 (US$30,000)
4
38,751
1.850%
1,589
464
August 28, 2020 (US$25,000)
4
32,293
1.835%
1,305
364
August 28, 2020 (US$25,000)
4
32,293
1.805%
1,264
$
7,466 $
318
3,464
1. The listed interest rates offset floating rates of bankers’ acceptance/LIBOR/prime-rate loans.
2. For presentation purposes, the current portion of the fair value of the interest rate swaps are included in trade payables, accrued and other liabilities.
3. Not-designated as hedges for the purposes of hedge accounting. Fair value changes on these swaps are recognized in net income and presented under finance
expense.
4. Designated as hedges for the purposes of hedge accounting. Fair value changes on these swaps are recognized in other comprehensive income.
Foreign exchange contracts
The Company is subject to foreign exchange risk on its U.S. dollar denominated debt and other foreign currency denominated financial
assets and liabilities. The Company, from time to time, manages a portion of its U.S. dollar exchange risk through the use of foreign
exchange forward contracts, most with a maturity of less than one year from the reporting date.
Also, from time to time, the Company enters into foreign exchange forward contracts to manage foreign exchange rate risk related
to the Company’s net investment in foreign operations for which the U.S. dollar is the functional currency.
As at June 30, 2016, the Company had forward contracts to sell USD with notional amounts of US$4.3 million for Indian Rupees
(“INR”) with settlement amounts 295.4 million INR (December 31, 2015 – notional amounts of US$11.4 million with settlement amounts
of 769.7 million INR). These contracts have not been designated as hedges and changes in fair value are recorded in net income
and presented under finance expense. As at June 30, 2016, the forwards are in an asset position of $71 thousand (December 31,
2015 – liability position of $25 thousand).
D+H Q2 2016
49
Fair value hierarchy
A fair value hierarchy is utilized by the Company to categorize inputs used in valuation techniques to measure derivatives at fair
value. The fair value hierarchy levels are defined as follows:
•
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the
measurement date.
•
Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly.
•
Level 3: unobservable inputs for the asset or liability.
Fair value measurements
The Company has not included the fair values of short term trade accounts receivable, accounts payable and cash and cash equivalents
in the table below because their carrying amounts are a reasonable approximation of their fair values due to the short term nature
of these amounts.
The following table lists the carrying amounts and fair values of other financial assets and financial liabilities on the condensed
consolidated statements of financial position:
June 30
December 31
2016
Fair value
hierarchy
Carrying
amount
Fair value
2015
Carrying
amount
Fair value
Financial liabilities measured at fair value
Derivative liabilities held for risk management
1
Level 2 $
7,466 $
7,466 $
3,464 $
3,464
Convertible debentures (6.0%, 5-year) - liability component
Level 2 $
218,695 $
233,245 $
216,757 $
205,603
Convertible debentures (5.0%, 5.5-year) - liability component
Level 2
207,973
227,470
205,819
225,415
Level 2
1,508,832
1,570,456
1,636,922
1,662,427
1,942,966 $
2,038,637 $
2,062,962 $
2,096,909
Financial liabilities not measured at fair value
$
1.The current portion of derivative liabilities held for risk management as at June 30, 2016 of $0.9 million (December 31, 2015 - $0.2 million) is presented on the
condensed consolidated statement of financial position as part of trade payables, accrued and other liabilities.
Derivative instruments held for risk management purposes, carried at fair value, are included in Level 2 of the fair value hierarchy as
they are valued using pricing models or discounted cash flow models. These models require a variety of inputs, including, but not
limited to, contractual terms, market prices, forward price curves and yield curves.
Loans and borrowings are included in Level 2 of the fair value hierarchy as they are valued using the discounted cash flow model.
These models require a variety of inputs, including, but not limited to, contractual terms, market prices, forward price curves, yield
curves, and the credit-adjusted discount rate.
The liability component of the convertible debentures is included in Level 2 of the fair value hierarchy as it is valued using the fair
value of a similar liability that does not have an equity conversion option. Specifically, the fair value of the liability component is derived
from applying credit spreads to the discount rate of the liability component that are implied from separating the fair value of the equity
conversion option from the observable fair market value of the compound instrument in aggregate.
Inputs used are obtained from or corroborated with the market where possible.
14. Share-based compensation
The Company has four components of its share-based compensation plans: stock options, deferred share units (“DSUs”), restricted
share units (“RSUs”) and performance share units (“PSUs”). The expense associated with each component is as follows:
Share-based compensation expense
Stock options
$
2016
2015
1,254 $
1,493
$
2016
2015
1,987 $
2,476
DSU
(200)
169
329
350
RSU
(916)
1,508
763
2,774
PSU
(78)
392
1,091
2,154
4,170 $
7,754
Total expense
$
60 $
3,562
$
D+H Q2 2016
50
Stock Options
D+H maintains a stock option plan for its key management personnel. The following table presents information regarding the number
of stock options granted by the Company for the three and six months ended June 30, 2016:
2016
Number of
options (in
units)
Balance at April 1
Granted
Exercised
Forfeited
Balance at June 30
Weighted
average
exercise price
2015
Number of
options (in
units)
Weighted
average
exercise price
3,665,616 $
35.42
2,162,899 $
30.61
104,178
33.84
1,597,505
40.55
—
—
(65,606)
20.28
(168,001)
37.97
(68,298)
41.75
3,601,793 $
35.26
3,626,500 $
34.97
Six Months Ended June 30
2016
Number of
options (in
units)
Weighted
average
exercise price
2015
Number of
options (in
units)
Weighted
average
exercise price
3,447,740 $
34.96
2,170,279 $
30.58
Granted
598,470
36.66
1,597,505
40.55
Exercised
(78,969)
19.68
(67,451)
20.35
Forfeited
(365,448)
38.12
(73,833)
40.33
3,601,793 $
35.26
3,626,500 $
34.96
Balance at January 1
Balance at June 30
The fair value of options granted is determined using a Black-Scholes valuation model. The following assumptions were used in
computing the fair value of stock options granted during the three and six months ended June 30, 2016:
Grant Date
June 2016
March 2016
Share price
$
33.84
$
37.25
Fair value per stock option granted
$
4.10
$
4.61
Expected dividend yield
Expected volatility
Risk-free rate of return
3.8%
3.4%
23.3%
22.6%
0.6%
0.6%
5
5
Expected life of option (in years)
Expected volatility has been based on an evaluation of the historical volatility of the Company’s share price.
DSUs
The following table presents information regarding the number of DSUs granted by the Company. DSUs have no vesting period and
are cash-settled share-based compensation.
2016
2015
Balance at April 1
85,288
82,466
Granted
23,910
—
1,087
662
110,285
83,128
DSU Summary (in units)
Other
1
Balance at June 30
1. Other includes reinvested dividends and performance target units.
D+H Q2 2016
51
2016
2015
84,587
49,976
Granted
23,910
31,814
DSU Summary (in units)
Other
1
Balance at June 30
1,788
1,338
110,285
83,128
RSUs and PSUs
The following table presents information regarding the number of RSUs and PSUs granted by the Company. Both RSUs and PSUs
have a three-year vesting period and are cash-settled share-based compensation.
2016
2015
Balance at April 1
243,589
294,653
Exercised
(20,141)
(4,353)
Forfeited
(20,232)
(7,109)
RSU Summary (in units)
Other 1
Balance at June 30
1,838
2,249
205,054
285,440
RSU Summary (in units)
Granted
2016
2015
264,945
197,756
23,862
174,935
Exercised
(57,448)
(83,508)
Forfeited
(30,262)
(9,058)
Other 1
Balance at June 30
3,957
5,315
205,054
285,440
2016
2015
Balance at April 1
271,553
320,931
Forfeited
(30,411)
(17,749)
3,344
2,311
244,486
305,493
PSU Summary (in units)
Other 1
Balance at June 30
2016
2015
291,091
344,816
54,628
123,106
Exercised
(70,787)
(74,809)
Forfeited
(34,333)
(24,729)
PSU Summary (in units)
Granted
Other 1
Balance at June 30
3,887
244,486
(62,891)
305,493
As at June 30, 2016, the fair value of the liability recorded relating to DSUs, RSUs and PSUs was $12.4 million (December 31, 2015
- $15.2 million).
D+H Q2 2016
52
15. Earnings per share
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.
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. The diluted per share amounts are calculated using the treasury stock method
for stock options, as if all the options where the average market price exceeds the exercise price had been exercised at the beginning
of the reporting period, or the date of grant, as the case may be, and that the funds obtained thereby were used to purchase shares
of D+H at the average trading price of the common shares during the period. The diluted per share amounts are calculated using the
if-converted method for convertible debentures, as if the conversion option was exercised at the beginning of the period, or the date
of issue, as the case may be.
The following table sets out the computation of basic and diluted net income per share:
2016
2015
2016
2015
Numerator for basic and diluted earnings per share
$
5,383 $
5,979
$
10,170 $
39,976
Denominator (thousands of shares)
Weighted average number of shares outstanding for:
Basic earnings per share
106,779
99,546
106,626
93,012
178
330
173
298
106,957
99,876
106,799
93,310
Effect of dilutive securities:
Stock options
Weighted average number of shares outstanding for :
Diluted earnings per share
Earnings per share - basic and diluted
$
0.05 $
0.06
$
0.10 $
0.43
The following table lists the number of equity securities excluded from the computation of diluted earnings per share. Potential shares
related to stock options were excluded in the diluted earnings per share calculation as the average market price of the Company’s
shares was below the exercise price of these options. Potential shares related to convertible debentures were excluded as use of
the if-converted method had an anti-dilutive effect on earnings per share.
(thousands of shares)
2016
2015
2016
2015
Diluted net income per share - equity securities excluded
Options
3,096
2,492
3,096
2,492
12,294
12,300
12,294
12,300
16. Operating segments
The Company operates in three strategic business units, reflecting management’s strategic views of D+H. The three reportable
segments based on the strategic business units are the Global Transaction Banking Solutions (“GTBS”) Segment, the Lending and
Integrated Core (“L&IC”) Segment and the Canadian segment. The GTBS segment is comprised of the Company’s operations in the
U.S and other international locations acquired as part of the Fundtech acquisition. The L&IC segment primarily comprises the
Company’s operations in the U.S., except those related to Fundtech. The Canadian segment primarily comprises the Company’s
operations in Canada. The GTBS, L&IC and Canadian segments are components that the Company’s chief operating decision maker
(“CODM”) monitors in making decisions about resources to be allocated to the segments and to assess performance, and for which
discrete financial information is available.
Information regarding the results of each reportable segment is included below. Performance is measured based on the segment’s
Adjusted EBITDA, which is calculated as net income excluding finance expense, taxes, depreciation and amortization and also
excludes: (i) acquisition-related expenses such as transaction costs, business integration costs, certain retention and incentive costs
incurred in connection with acquisitions, and the settlement amount of HFS’ closing working capital adjustment; (ii) other charges
such as costs related to the Company’s initiatives to align global operations and achieve cost synergies following the acquisitions,
and costs incurred in connection with cost-realignment initiatives; and (iii) certain foreign exchange gains and losses on financing
related intercompany balances. Adjusted EBITDA also excludes effects of acquisition accounting on the fair value of deferred revenues
and deferred costs acquired as part of acquisitions.
D+H Q2 2016
53
GTBS segment
2016
2015
L&IC segment
2016
Canadian segment
2015
2016
Total
2015
2016
2015
Revenues
$
90,355 $
55,102 $ 146,715 $
139,829 $
187,117 $
177,445 $
424,187 $
372,376
Adjusted EBITDA
$
19,634 $
12,278 $
45,646 $
44,974 $
51,265 $
52,907 $
116,545 $
110,159
GTBS segment
2016
Revenues
$
184,545 $
Adjusted EBITDA
$
41,699 $
2015
L&IC segment
2016
Canadian segment
2015
2016
Total
2015
2016
2015
55,102 $ 295,319 $
277,575 $
356,472 $
334,713 $
836,336 $
667,390
86,765 $
92,499 $
91,048 $
92,352 $
219,512 $
197,129
12,278 $
2016
2015
2016
2015
Reconciliation of information on reportable segments to the consolidated statements of income
Total segment measure of profit - Adjusted EBITDA
$
Acquisition accounting adjustments
116,545 $
(718)
Acquisition, integration and other related charges
110,159 $
151
219,512 $
(1,276)
2,214
19,212
7,868
Realignment of global operations and related restructuring expenses 1
21,995
—
28,786
Foreign exchange (gain) / loss
(2,062)
4,445
95,116
86,351
Income from operating activities before depreciation, amortization and
finance expense
Finance expense
(Loss) Income before income taxes
$
(3,231)
187,365
197,129
(737)
28,663
—
(11,117)
180,320
6,928
5,395
14,182
9,771
66,117
52,836
135,533
90,898
25,641
27,364
52,117
41,794
(3,570) $
756 $
(14,467) $
37,857
1. Restructuring expenses; see note 11 for further details.
Seasonality of business operations and related revenues and expenses
The Company’s segments experience seasonal fluctuations in their business. The GTBS segment is subject to seasonal
fluctuations as a result of its payments hub and volume-based Software-as-a-Service ("SaaS") offerings. The payments hub
offerings, which are a multiple-deliverable arrangement, have license and professional services revenue recognition that are
typically percentage-of-completion based and have historically had milestone activity weighted towards the end of the year.
Additionally, SaaS transaction volumes tend to increase during the fourth quarter. As a result, revenues and Adjusted EBITDA are
historically higher during the fourth quarter. However, due to the size and complexity of on-premise licensee payment hub
contracts, it is possible to see variations in revenue growth in any quarter.
The L&IC segment generally experiences higher revenues in the fourth quarter due to the buying patterns of its customers and the
timing of renewals for SaaS and term-based license products.
The Canadian segment typically experiences higher revenues in the second and third quarters due to increased automotive sales
and mortgage market activity which drives volumes in our mortgage technology and collateral management product offerings.
The largest expense incurred in the business relates to the team members employed globally to deliver services to customers and
execute on the Company’s strategy. These expenses are largely fixed, however vary somewhat with the number of team
members, incentive compensation and foreign exchange rates. In addition, particularly in the Canadian segment, there are noncompensation direct expenses that relate directly to the volume or value of transactions or services delivered. As a result, the
margins in the operating segments and consolidated for the Company will fluctuate in the quarters and typically increase in the
second half of the year compared to the first half of the year.
D+H Q2 2016
54
17. Capital
The Company has a dividend reinvestment plan (“DRIP”) for its Canadian resident shareholders. The DRIP allows eligible shareholders
to reinvest the cash dividends paid on all or a portion of their common shares in additional common shares issued at the weighted
average trading price of the common shares on the Toronto Stock Exchange during the last five trading days immediately preceding
the relevant dividend payment date. The following table sets out the details of the DRIP:
Dividend reinvestment plan
2016
Dividends paid in common shares under DRIP (in thousands of dollars) $
Weighted average price of issuance ($)
1,549 $
48,644
Number of common shares issued under DRIP
$
31.84 $
2015
9,210 $
240,123
38.36 $
2016
10,885 $
298,880
36.42 $
2015
16,324
425,580
38.09
During the second quarter of 2016 and 2015, the discount available under the DRIP was nil and 4%, respectively.
D+H Q2 2016
55

Financial Reporting

Transcription

Documents pareils

Mallorca

2016 - Swimming.lu Home

French-banking-sector-keys-figures

BEC_CERF 2016 jobfair registration form

Code fr isteamy

Playlist été.xlsx

Freight departures per direction from 22:00 on

Gite n°55141 Photo album

Investor Fact Sheet - Q2 | 2016

canada`s top albums for 2007 - Barry Kowal Hits of All Decades