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.

Transcription

1 ANNUAL REPORT 2016

2 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 5,500 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 CAD, 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 Message to Stakeholders Management s Discussion and Analysis Financial Reporting Responsibility of Management Auditors Report Consolidated Financial Statements and Notes Board of Directors Executive Management

3 Message to Stakeholders On March 13, 2017 D+H and Vista Equity Partners ( Vista ) entered into a definitive arrangement agreement under which Vista will acquire all of the outstanding shares of DH Corporation for $25.50 per share in cash including the assumption of all debt obligations including the issued convertible debentures, for a total enterprise value of approximately $4.8 billion. The transaction price represents a premium of approximately 36% over D+H s closing share price on December 5, 2016, the last trading day before media reports surfaced suggesting the Company was exploring strategic alternatives. Vista intends to combine D+H with another of its portfolio companies, United Kingdom-based, Misys, a leading global software provider for retail and corporate banking, lending, treasury and capital markets, investment management and enterprise risk. The combination will create a diversified FinTech market leader, with a global footprint and one of the broadest set of financial software solutions available to the market with approximately $2.96 billion (approximately US$2.2 billion) in revenues, approximately 10,000 employees, and 9,000+ customers across 130 countries, including 48 of the top 50 Banks. Misys and D+H are highly complementary in terms of both software solutions and geographical footprint. With D+H s strength in Payments, Lending, and Retail Banking solutions in North America combined with Misys s strength in Capital Markets, Corporate Banking, and Retail Banking globally, the combined business will serve customers all over the world with an unrivalled, broad and complete solution portfolio. The integration of these solutions will also create one of the broadest offerings in the financial services space. The arrangement agreement follows a comprehensive review of strategic alternatives. A Special Committee of Independent Directors and the Board of Directors of D+H have unanimously concluded that this agreement is in the best interests of the Company and its stakeholders A special meeting of the shareholders of D+H with respect to the approval of the arrangement will be held on May 16, Shareholders of D+H as of the record date of March 27, 2017 will be entitled to receive notice of and vote at the meeting. The transaction is subject to customary closing conditions, including receipt of all regulatory approvals, and is expected to close prior to the end of the third quarter The transaction is structured as a plan of arrangement under the Business Corporations Act (Ontario). Further details regarding the arrangement will be set forth in a management information circular to be mailed in advance of the special meeting. The circular will be filed by D+H under its SEDAR profile at D+H Annual Report

4 MANAGEMENT S DISCUSSION AND ANALYSIS D+H Annual Report Management s Discussion and Analysis For the quarter and year ended December 31, INTRODUCTION Caution concerning forward-looking statements Preparation of the MD&A Variability of our results 4 2 BUSINESS OVERVIEW AND 2016 FINANCIAL PERFORMANCE AND HIGHLIGHTS Historical Financial Highlights 5 3 STRATEGY AND OUTLOOK Objectives and strategy Performance Against Guidance Strategy and Outlook 13 4 CONSOLIDATED FINANCIAL PERFORMANCE Consolidated operating results, liquidity and capital 17 5 BUSINESS SEGMENT FINANCIAL RESULTS Operating results by segment and corporate Global Transaction Banking Solutions segment Lending & Integrated Core segment Canadian segment Corporate 37 6 SUMMARY OF EIGHT QUARTER CONSOLIDATED RESULTS 38 7 CAPITAL STRUCTURE AND LIQUIDITY Credit facilities, convertible debentures and other borrowings Outstanding share information Financial instruments and commitments Cash Flow Cash from operating activities Cash (used in) from financing activities Cash used in investing activities 44 8 CHANGES IN FINANCIAL POSITION 45 9 SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING STANDARDS DEVELOPMENTS Significant accounting policies Accounting standards developments BUSINESS PRODUCTS AND SERVICES GTBS segment L&IC segment Canadian segment DEFINITIONS AND RECONCILIATIONS Non-IFRS financial measures and key performance indicators Non-IFRS financial measures and key performance indicators - Outlook Reconciliation Foreign exchange rates DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING BUSINESS RISKS 69

5 1 INTRODUCTION Our discussion in this Management s Discussion and Analysis ( MD&A ) is qualified in its entirety by the Caution Concerning Forward-Looking 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 ), including without limitations, the statements contained in section entitled Objectives, strategy and outlook. 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. Certain material factors and assumptions were applied in providing these forward-looking statements. Forward-looking information involves numerous assumptions including projections, completion of bookings, successful project implementation, operating expense levels, volumes and values for products and transaction processing services in the Canadian segment and implementation of our global operating realignment. Projections maybe impacted by macroeconomic factors, changes in the value of the Canadian and U.S. dollar relative to other currencies, the timing of client decisioning on technology investments, the pace of implementation of technology by the customer, in addition to other factors not controllable by the Company. D+H has also made certain macroeconomic and general industry assumptions in the preparation of such forward-looking statements. Management believes that the expectations reflected in forward-looking statements are based upon reasonable assumptions; however, Management can give no assurance that actual results will be consistent with these forward-looking statements. Not all factors which affect our forward-looking information are known, and actual results may vary from the projected results in a material respect, and may be above or below the forward-looking information presented in a material respect. These forward-looking statements are also subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations including, among other things, those outlined in section 13 - Business Risks. 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. Given these risks and 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. D+H does not undertake any obligation to update forward-looking statements should the factors and assumptions related its plans, estimates, projections, beliefs and opinions, including those listed above, change except as required by applicable securities laws. All of the forward-looking statements made in this MD&A are qualified by these cautionary statements and other cautionary statements or factors contained herein and there can be no assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. 1.2 Preparation of the MD&A This MD&A has been prepared with an effective date of March 7, The sections that follow are a discussion of D+H s financial condition and results of operations for the three months and year ended December 31, 2016, and should be read in conjunction with the audited consolidated financial statements of D+H for the year ended December 31, Our 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, bookings, backlog, earnings before interest, tax, depreciation and amortization ( EBITDA ), Adjusted EBITDA, Adjusted EBITDA margin, Adjusted net income, Adjusted net income per share (diluted), Adjusted net cash from operating activities, Payout ratio, Adjusted payout ratio, 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 11. All amounts in the MD&A are in Canadian dollars, unless otherwise specified. As part of its consolidated statements of (loss) 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 D+H Annual Report 3

6 MANAGEMENT S DISCUSSION AND ANALYSIS This MD&A and the consolidated financial statements were reviewed by D+H s Audit Committee and approved by the Board of Directors on March 7, Additional information relating to the Company, including the Company s most recently filed Annual Information Form, is available on SEDAR at Comparative figures have been reclassified to conform to the current period classification, where applicable. 1.3 Variability of our results With the growth of our business through acquisition and internal developed products, we have and expect to continue to experience some increase in variability in quarterly revenues, bookings, EBITDA, net (loss) income and cash flows, due to, among other items: (i) macroeconomic impacts on global banks and decisioning around IT investments in particular related to payment systems and market regulation related to payments; (ii) dynamics in the United States ( U.S. ) mortgage, consumer and commercial lending environments; in the United States, the investments related to lending system capabilities primarily by community banks; (iii) the mortgage origination market in Canada along with market value changes in the housing market; (iv) cheque order volume declines in Canada; (v) volume variances and fees within the Canadian lien registration and asset recovery markets; (vi) timing and variability in sales activity in all business segments, timely delivery of professional services work, and cash receipts; and (v) acquisition and integration activities and realignment of our business to advance operating effectiveness and long term growth in new markets. 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. The GTBS segment, which has the largest contracts and longest implementation cycle for respective solutions, has the most significant potential impact from timing of client decisioning or completion of contracts and related professional services. 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 Indian rupee, Euro, Swiss franc, British pounds sterling, 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. 2 BUSINESS OVERVIEW AND 2016 FINANCIAL PERFORMANCE AND HIGHLIGHTS 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 5,500 employees worldwide who partner with clients to create forward-thinking solutions that fit their needs. Our strategy is to build market-leading positions in payments and lending technologies. Lending and Payments are key growth sectors of the financial services industry. We aim to reinforce these positions with integrated technology solutions that deliver increasing value to our clients. We have been executing on the strategy over the past several years as we have evolved from a Canadian cheque supplier into a leading participant in the global financial technology market. The Company has transformed itself via a series of acquisitions that have added additional clients, markets and products. Today we operate globally with a one company view in how we seek to interact with customers, employees and partners. Refer to the discussion on Operating Model and Realignment in section 5 of this MD&A for changes on how our business will be organized and conducted globally in the future D+H Annual Report

7 Global Transaction Banking (GTBS) Lending and Integrated Core (L&IC) Canada Solutions Global Payment Technologies (Global and U.S. Domestic) Cash Management Financial Messaging Merchant Services Clients Global financial institutions and large corporate clients Approximately 1,000 clients globally Solutions Integrated Core Solutions Core Banking Channel and Optimization Solutions Lending Solutions Mortgage Lending Consumer Lending Commercial Lending Clients United States based financial institutions including banks and credit unions and other lenders Approximately 5,500 clients in the United States Solutions Payments Solutions Cheque Program Enhancement Services Lending Solutions Mortgage Technology Collateral Management Solutions Student Lending Clients Canadian financial institutions and corporate clients Approximately 1,000 clients in Canada 2.1 Historical Financial Highlights Over the last several years, we have continued to grow our revenues and cash flows through both acquisitions and organic growth, while broadening our geographic reach and product offering. We measure our business using a number of key metrics including: Adjusted revenues, Adjusted EBITDA, Adjusted net income per share, diluted and Adjusted net cash from operating activities. Other key metrics that we use to monitor our growth, profitability, liquidity, capital structure and statements of financial position are outlined in section 4. Some of these metrics are non-ifrs measures. We use these measures to assist in the evaluation of year-over-year performance and we believe that they are meaningful to investors as a measure of underlying operational growth. These non-ifrs measures are not intended to replace the presentation of our financial results in accordance with IFRS. The reconciliation of these measures to IFRS figures is outlined in section 11 of this MD&A. The following are our consolidated financial results for the years ended December 31: (In millions of dollars, unless otherwise noted) Year ended December Revenues $ 1,679.9 $ 1,506.6 $ 1,138.9 Income from operating activities before depreciation, amortization and impairment $ $ $ Depreciation of property, plant and equipment Amortization of intangible assets Impairment of goodwill Finance expense Income tax (recovery)/expense (50.7) (8.0) 13.3 Loss from discontinued operations, net of tax 0.8 Net (loss) income $ (67.7)$ 84.0 $ Net (loss) income per share, diluted $ (0.63)$ 0.84 $ 1.31 Net cash from operating activities $ $ $ Includes $50.6 million related to the reclassification of settlement loss on forward contracts, relating to the acquisition of Fundtech, from OCI to net (loss) income. Refer to note 11 of the consolidated financial statements D+H Annual Report 5

8 MANAGEMENT S DISCUSSION AND ANALYSIS Adjusted Revenues 1 (All figures in C$ millions) $1, $1,684 $365 Consolidated Adjusted revenues of $1,684.4 million grew by $156.3 million or 10.2% in 2016, primarily due to the full year inclusion of the GTBS segment acquired on April 30, 2015, net organic growth in our Canadian segment and the strengthening of the U.S. dollar. Key drivers of the growth in Adjusted revenues in 2016 relative to 2015 include the following: The acquisition of Fundtech, now operating as the GTBS segment, acquired $1,159 $508 $595 $608 on April 30, 2015, contributed to an increase in Adjusted revenues totaling $116.3 million, primarily due to its full year inclusion and the strengthening of the U.S. dollar. Adjusted revenues in constant currency for the full year 2016 increased by 1.6% compared to the full year of 2015 proforma. Lower growth in revenues was due to slower client contracting in our global payment technologies business, despite an improvement in our overall market competitiveness, and repositioning of our cash management business. $711 $651 $ GTBS L&IC Canada Our Canadian segment lending solutions contributed to an increase in Adjusted revenues of $30.0 million in 2016, primarily driven by major bank contracts entered into in The increase was offset by a decline in our payment solutions revenue, resulting in a net contribution to Adjusted revenues of $28.0 million. Our L&IC segment Adjusted revenues increased by a net $11.9 million in 2016 primarily due to the strengthening of the U.S. dollar and growth in our integrated core business, offset by a decline in revenues in our lending solutions. The decline in lending solutions was driven by the renewal cycle in our LaserPro product which has not impacted cash realized in the year due to the revenue recognition versus billing cycle for the product. Refer to section 11.1 in the MD&A for the definition of Adjusted Revenues and reconciliation to Revenues. 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures D+H Annual Report

9 Adjusted EBITDA 1 (All figures in C$ millions) Consolidated Adjusted EBITDA of $449.9 million declined by $24.8 million or 5.2% in $352 $475 $69 $450 $71 Key drivers of the decline in Adjusted EBITDA in 2016 relative to 2015 include the following: Our L&IC segment noted a decline of $25.2 million in Adjusted EBITDA, primarily due to lower revenue in lending solutions due to the LaserPro renewal cycle, increased direct costs related to revenue growth in our integrated core business, and compensation-related and other expenses driven by investments in research and development and risk initiatives. $181 $218 $192 Decline in our GTBS segment revenues primarily due to increased contracting duration in our global payments business and lower revenues in cash management, in addition to increased investments in research and development and risk initiatives in our GTBS segment. These increases were offset by the full year inclusion of our GTBS segment Adjusted EBITDA in 2016 as our comparable 2015 Adjusted EBITDA included our GTBS segment results for the period April 30, 2015 through to December 31, $171 $188 $ GTBS L&IC Canada Our Canadian segment Adjusted EBITDA decreased by $1.2 million due to declination of the cheque volumes, partially offset by increased by growth in enhancement services in our Payment solutions. In our Lending solutions, Collateral Management increased due to a new contract in 2015 and Canadian Mortgage Technology experienced strong growth driven by the market. In Student Lending we incurred professional services fees related to the new CSLP contract, and we had a non-cash unfavourable exchange rate variance. Refer to section 11.1 in the MD&A for the definition of Adjusted Revenues and reconciliation to Revenues. 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures D+H Annual Report 7

10 MANAGEMENT S DISCUSSION AND ANALYSIS Adjusted net income per share, diluted 1 (All figures in C$) $2.56 $2.34 $2.01 Consolidated Adjusted net income per share, diluted, declined by $0.54 per share in 2016, reflecting a decline in Adjusted net income of $40.8 million and an increase in the weighted average common shares outstanding as a result of the acquisition of Fundtech in 2015 and common shares issued to participants in the Dividend Reinvestment Plan ( DRIP ) during 2015 and Refer to section 11.1 in this MD&A for the definition of Adjusted net income per share and reconciliation to net (loss) income per share Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures D+H Annual Report

11 Adjusted net cash from operating activities 1 (All figures in C$ millions) $282 $331 $302 Adjusted net cash from operating activities, which is net cash from operating activities adjusted for acquisition-related and other charges and realignment of global operations and related restructuring expenses, increased in 2016 over 2015 primarily due to the acquisition of Fundtech, the strengthening of the U.S. dollar, in addition to lower income taxes paid during the year, partially offset by increased interest payments made during the year. $204 $247 $50 $81 The Company s business historically has strong Adjusted net cash from operating activities. Management applied the Adjusted net cash from operating activities to the following: Net debt repayment 1 $188 $27 $96 Following each acquisition and related financing activity, it is management s objective to use net cash from operating activities to repay outstanding debt. The Company made net debt repayments of $81 million in 2016 and $50 million in $58 $103 Capital expenditures Capital expenditures are related to the Company s ongoing development and enhancement of our product offerings and solutions and our corporate infrastructure. Dividends Dividends totalled $1.28 per share per year from 2014 through to the end of $103 $94 $125 Total cash dividends paid increased in 2016 due to the full year inclusion of the increase in common shares due to the common shares issuance related to financing the Fundtech acquisition. Adjustments to net cash from operating activities include the following nonrecurring expenses: Adjusted net cash from operating activities Net debt repayment Capital expenditure Cash dividends a) Acquisition related and other charges of $12.5 million, $60.8 million and $3.1 million in 2014, 2015 and 2016, respectively. b) Realignment of global operations and related restructuring expenses of $34.2 million in Refer to the section 11.1 of this MD&A for the definition of Adjusted net cash from operating activities and a reconciliation to net cash from operating activities. 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. 2 Net debt repayment is net of repayments and new financings from acquisition borrowings D+H Annual Report 9

12 MANAGEMENT S DISCUSSION AND ANALYSIS 3 STRATEGY AND OUTLOOK Objectives and strategy Our strategy is to build market-leading positions in payment and lending technologies. Lending and payments are key growth sectors of the financial services industry. We aim to reinforce these positions with integrated technology solutions that deliver increasing value to our clients. We have been executing on the strategy over the past several years as we have evolved from a Canadian cheque supplier to a leading participant in the global Financial Technology market. The Company has transformed itself via a series of acquisitions over the past decade that have added additional clients, markets, and products. One of our strengths is a diverse and stable customer base where we have nearly 8,000 customers with contract renewal rates in excess of 90% on the vast majority of our products. We also have a diverse and broadly stable revenue base with approximately 40% of revenues from contractually committed recurring revenue from our software-as-a-service ( SaaS ) contracts and software maintenance; 39% from multi-year contractual agreements that generate recurring transactional and product related revenues (specifically within our Canadian market) and 21% from non-recurring sources, primarily licenses and professional services. Our existing solutions and customer base provide us with additional opportunities to develop new technology platforms for our existing solutions such as hosted and SaaS delivery to enhance our market opportunity and share of customer technology investments. Regulatory changes impacting financial institutions and the continuing adoption of faster payments globally continue to provide opportunities for growth. We expect to continue to evolve and grow our business primarily through developing our solutions and organic growth. Key Growth Activities by Segment In 2016, the Company focused on advancing the following specific strategies through various business activities: Global Transaction Banking Solutions (GTBS): Build on our leading global position in payment technologies, including payment hubs, financial messaging solutions, cash management and merchant services to advance our market share globally. Key activities driving our business to achieve strategic objectives in the year and longer term include: Advanced our market leadership by substantially winning the majority of decisioned competitive proposals for global payment hubs Key contracts the Company signed during the year include: with a major Southeast Asian financial institution and a major Israel-based financial institution to provide complete treasury management solutions for their customers with a major UK-based global bank for global payments services to enhance its clients payables and receivables processes with a major South African bank for an Authenticated Clearing solution in order to achieve compliance with new payments regulations with a system integrator to deliver, for the first time, the Company s Global PAYplus solution as a Payments Platform as a Service (i.e. outsourced payments processing) for a major European bank within Australia supporting a large financial institution and a system integrator for their NPP/Faster Payments deployment of our payment hub. with a number of global financial institutions to execute payment hub proof-of-concepts in the U.S. Payments business for its point payment solutions, including with a large mortgage loan processor in the United States, automating the client s various manual processes in the Financial Messaging business 15 new client contracts where signed for messaging and compliance platforms Management committed significant risk management investment toward resolution of the FFIEC (Federal Financial Institutions Examination Council) Consent Order and has asserted full compliance with the Consent Order requirements as of December 31, 2016 and communicated same to the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and the Federal Reserve Bank of Atlanta as well as our U.S. hosted payment customers. Continued to invest in development of our products and solutions to advance our technology capability, prepare our products for emerging demand in various markets, and accelerate our implementation time frames. Invested in our GPP technology to prepare a SaaS version for certain regional markets including the US market and to accelerate implementations of our enterprise payment hub solution. Continued to develop our SaaS solution for Cash management (rebranded as Total Treasury) targeted to the North American market D+H Annual Report

13 Initiated a blockchain pilot with a large European bank and successfully executed a proof of concept where D+H s payments services hub, together with a provider of a multichain blockchain solution, were able to execute cross-border payments in near real-time for the bank using distributed ledger/blockchain technology D+H s 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 Lending and Integrated Core (L&IC): Build on our leading US capabilities in lending and integrated core solutions to advance our market share within US financial institutions. Key activities driving our business to achieve strategic objectives in the year and longer term include: Lending Solutions: We advanced our strategy of bundling more lending products into each LaserPro booking, increasing total contract value. New LaserPro bookings included other lending bundled products in 28% of contracts, an increase over 2015 where bundled bookings accounted for approximately 25% of the contracts. Announced the launch of a completely mobile loan application solution for lenders with the introduction of MortgagebotMobile, part of the Mortgagebot end-to-end lending platform. Implemented a reseller agreement with DocMagic providing seamless integration with D+H s MortgagebotLOS. Our clients now have an end-to-end solution for loan application, origination, document preparation and compliance. Launched a new commercial origination and processing solution that seamlessly integrates to our industry-leading compliance product LaserPro. Integrated Core Solutions: Strategic focus on delivering a comprehensive core and channel solution anchored by our leading Phoenix platform and enhanced by our existing channels in addition to our new mobile banking partner and including introducing GTBS solutions such as Merchant Services, into the total core solution suite. In the year integrated core had a 25% increase in core bundle wins and 30% growth in contract value. All of our 2016 bookings for core platforms and related solutions were completed as hosted solutions. Once implemented, these contracts are expected to increase our long term stable revenue stream. Entered into a new partnership providing a strong channel for mobile banking; Canada: Defend our historical core market positions while expanding into additional customer segments and value propositions. Key activities driving our business to achieve strategic objectives in the year and longer term include: Realized growth in our subscription-based enhancement services product and collateral management solutions primarily due to the onboarding of new clients in Continue to invest in our SaaS-based registry platform for our Canadian collateral management solution and migrating key customers. Following quarter end we successfully migrated a large Canadian auto lender onto our next generation Collateral Guard Enterprise SaaS solution. Launched Barometer, the first new SaaS solution to be delivered from the public cloud (Azure PaaS) and an entirely new regulation-based technology solution for North American lenders. Initiated development of a digital platform for delivery of Enhancement Services. The Company was selected in 2016 by the Government of Canada to provide financial solutions and related services for the Canada Student Loans Program ( CSLP ) and five integrated provincial programs. Services under the new contract are expected to be operational on April 1, Until that time, the Company will continue as the incumbent CSLP services provider under its current contract with the Government of Canada. The development of the CSLP platform is underway and key milestones were successfully delivered in the year. Continued to optimize cheque manufacturing operations through investment in new printing and packaging equipment and planned closure of a cheque manufacturing plant with effect in Q D+H Annual Report 11

14 MANAGEMENT S DISCUSSION AND ANALYSIS Other Activities Beyond the specific initiatives within each business unit, we also advanced several strategies, including: Invested in our business to promote long-term revenue growth and increase operating efficiency. Primary activities in 2016, in addition to solution specific development, included continuing investment in: Existing data centre operations and corporate systems to better support our expanded global operations. Risk management by expanding our information security, regulatory compliance and risk management resources. Adopted an agile software development strategy by investing in training our team, adding additional team members with specific agile capabilities as well as software tools to enhance agile productivity. Operating effectiveness of the global operations were advanced through a realignment of the organization and accountabilities. Continued to align the Company around a common brand. Activities in 2016 included: Continued to build the D+H brand in the payments and treasury markets globally through various digital, advertising and event programs, including hosting over 50 EMEA (Europe, Middle East and Africa) banks and corporates at our largest ever Insights EMEA customer event in London, UK, plus hosting multiple US global, regional and community banks at events in NY and Chicago. The Company participated in SIBOS, a major global payments event, where it was a feature presenter on real-time payments and blockchain technology. Hosted an industry leading first with real-time payments events in Hong Kong and Malaysia, two countries that will go live with realtime payments schemes in 2018 The Company rebranded its flagship financial messaging platform as Total Messaging (previously Global Messaging Plus) and its treasury and cash management platform as Total Treasury (previously Global Cash Plus). The Bank of China, one of our largest customers and one of the largest banks in the world, won Celent s prestigious Model Bank Award for the deployment of our payment hub across multiple countries Launched our new re-designed website, repositioning our brand, improving performance, navigation and usability to ensure customers can better understand the value we bring. Effective use of capital resources. Activities in 2016 included: Continued investment in our products, platforms and infrastructure, investing $26.5 million in the fourth quarter of 2016 and $96.0 million in the year ended Returned $34.2 million in cash dividends in the fourth quarter of 2016 and $124.5 million in the year ended Acquired $1.3 million in shares from the market and $10.9 million by way of treasury issuance for settlement of the dividend reinvestment plan ( DRIP ) participation in the year ($12.2 million year-to-date, $10.9 million by way of treasury issuance). The DRIP was suspended effective October 25, During the fourth quarter of 2016, the Company announced a reduction of its quarterly dividend from $0.32 per share to $0.12 per share, effective January 1, 2017, which is consistent with the ongoing strategic transformation of D+H into a leading FinTech company. Repaid a total of $31.0 million of debt in the fourth quarter to bring the 2016 year-to-date debt repayment to $81.0 million. Subsequent to the year end, the Company repaid a further $9.4 million of debt in January 2017 Renegotiated debt covenants to extend the timing of the step down in the net debt to EBITDA covenant requirement. Initiated a realignment of our global operating structure to achieve more effective global operations and cost synergies, which we expect will increase our overall return on capital from our acquisitions of both HFS and Fundtech D+H Annual Report

15 Performance Against Guidance We updated our guidance in the third quarter report issued in October, Our performance relative to this guidance is as follows: (In millions of dollars, unless otherwise noted) 2016 Forecast FY 2016 Actual to Forecast High Low Actuals Revenue $ 1,685 $ 1,655 $ 1,680 Revenue was at the high end of our range due to: Strong Canada payments and lending volumes Strong US Lending bookings and renewals, particularly in LaserPro renewals Adjusted Revenue, constant currency $ 1,665 $ 1,635 $ 1,653 EBITDA $ 423 $ 401 $ 419 EBITDA Margin (%) 25.1% 24.2% 24.9% Adjusted EBITDA 1 $ 460 $ 440 $ 450 Adjusted EBITDA Margin (%) % 26.9% 27.2% Partially offset by: Lower US Integrated Core revenues due to delivery shortfall and rationalized product acceleration and lower card volumes Lower transaction volumes in certain GTBS solutions Adjusted EBITDA was at the mid end of our range due to: Noncash impacts of FX recorded in EBITDA in Canada and GTBS Non recurring costs recorded in the period in Canada and L&IC Higher consulting and professional fees in the GTBS segment 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. Refer to Section 11.2 Non-IFRS financial measures and key performance indicators - Outlook Reconciliations for a reconciliation of the above metrics to IFRS amounts. 3.3 Strategy and Outlook Consolidated objectives and outlook In 2017 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 including go to market strategies and cross selling our solutions to our existing customer base; Focusing on the effectiveness and efficiency of our global business operations; Reducing operating costs; Enhancing capabilities in software engineering and product management, including employing agile development practices across our main product groups; Broadening our product range by launching several next generation products and rationalizing certain others; Enhancing our risk management practices by building on the momentum in 2016; and Continuing reduction in leverage D+H Annual Report 13

16 MANAGEMENT S DISCUSSION AND ANALYSIS Our long term financial objectives serve as a guide in developing our strategy. While these metrics serve as a guide to developing and executing our long term strategy, management does not anticipate achieving these objectives annually and these should not be considered as guidance. Our long term financial objectives are: Adjusted revenue and Adjusted EBITDA growth of 5-7%; High single-digit growth in Adjusted net income per share; Consolidated Adjusted EBITDA margins of 30%; Reinvestment of cash in future business growth, debt repayments and returns to shareholders; and Investing in the range of $100 - $110 million annually in product development and infrastructure capital initiatives. Formation of Board Special Committee and 2017 Guidance In December 2016, we acknowledged that a process has been established by our Board of Directors, including the formation of a Special Committee of independent Directors, to address expressions of interest from certain third parties to acquire DH. There can be no assurances that any transaction will result from this process. The Special Committee has retained professional advisors to assist in this effort. DH does not intend to comment further on these or other discussions unless a definitive agreement is reached with any third party or unless otherwise required by law. As a result of the above mentioned process, the Company is currently not intending to provide specific financial guidance for fiscal 2017 until this process is complete, at which time it will assess whether financial guidance is warranted. Note that the Company will be reporting its 2017 results in its new segments in the first quarter report of Outlook and Trends Overall, we believe that our solutions are well positioned in their respective competitive markets. Several factors drive long term demand for our products - changing regulation, the need for customers to enhance their competitiveness through the adoption of new technology solutions and increasing requirements for banks to improve their cost competitiveness. We are clear market leaders in several categories in which we compete, and believe that, notwithstanding a shifting sales cycle in payments, we have continued to strengthen our differentiation in several instances. The Company is also focused on extending the differentiation through launching new products to meet changing market demands. We launched several new products in 2016 and anticipate others in Additionally, the Company is focused on enhancing the efficiency and effectiveness of its global operations. We will continue to capitalize on various operating strategies, and implementation of solutions to assist in effective management in our various functions and workforce alignment globally. Overall the Company typically has a strong recurring revenue component and high cash flow conversion from its operations. We expect this to continue based on the current markets where we operate and solutions that we provide. Overtime, as the Company continues to develop and introduce SaaS based delivery of its solutions, these revenues are expected to continue to increase as a percent of total revenues. In the past 18 months, SaaS based product development initiatives have been initiated in each of our segments and we expect to bring these products to market over the next two years. We believe that these products will accelerate the growth of the Company and its margins over the long term and are a key strategy for achieving its long term financial objectives. We enter 2017 with a capital allocation strategy that allows us to focus on debt repayment, investing in our products and infrastructure, and return of capital to shareholders. This capital allocation will be instrumental in the Company achieving its long term growth objectives. Segment Outlook GTBS Since mid 2016, we noted an increased impact of global macroeconomic conditions on financial institutions, particularly in our GTBS segment where we primarily serve large global financial institutions. During the second half of the year we saw growing evidence of a broader, more cautionary stance in terms of technology spend by these banks, most notable among banks outside the United States, which negatively impacted the timing and nature of implementations and decisioning among these institutions on large enterprise technology initiatives. Additionally, in certain markets, financial institutions were assessing the potential impact of the exit of the United Kingdom from the European Union ( Brexit ) and other unrelated regulatory events, on decisions relating to technology resources and spend. These factors caused some headwinds in culmination of contracts for technology solutions during the second half of This impacted our revenues and bookings D+H Annual Report

17 specifically in the GTBS segment starting in the second quarter and continued through the fourth quarter. We believe the effect of these factors will moderate through 2017 and we expect this to lead to higher demand for our solutions in Part of this demand, we believe, will be driven by the increasing regulatory requirements that we have seen evidence of on three fronts: (i) in markets where faster payments have been adopted and customers are considering refreshing their capabilities, (ii) in new markets turning to faster payments (such as Hong Kong and the United States), (iii) in markets with changing payments regulation like the European Union via the Payment Services Directive. In markets where faster payments regulation has been adopted, we continue to see demand for our global payment solutions. In markets such as the United States, Canada, Australia, South Africa and now Hong Kong, where faster payments infrastructure is moving toward adoption, we also see increased demand for our payment solutions. The timing of commitments by customers is the key factor in capitalizing on the demand for our solutions in 2017 and beyond. We remain confident in our competitive stance based on our awarded but unsigned contracts and proposal pipeline, however, we anticipate continued elongated decisioning and contracting by financial institutions on large technology spending into the first half of Our current outlook for the GTBS segment revenue is positive over the long term with growth in the high single digits, but more muted in the near term in light of delays in customer buying patterns with some of our larger payment hub customers. In cash management (which is typically approximately 10% of total GTBS Adjusted revenues), we expect the impact on growth which we noted in 2016 due to product development and market re-positioning on this product to continue into the first half of We anticipate that these activities will result in higher growth and margins in future years. As referenced earlier, we are also pleased with the progress we made in 2016 in our risk management agenda. In light of our investments in risk management and associated progress, we believe we are fully in compliance with the Consent Order requirements for the US market and have communicated the same to the appropriate US regulators and our US hosted payments customers. We continue to invest in our payments and treasury solutions to capitalize on longer-term growth from new customer demand and where financial institutions are looking for technology solutions that are SaaS-enabled. The combination of product and risk investments impacted expenses and margins in We anticipate that the product related investment will continue into 2017 in our Global Payments enterprise software and in our Total Payments and Total Treasury solutions for the United States markets. However, we remain confident in our long term view in this segment based on the market dynamics for our solutions. L&IC In the United States, where the economic and regulatory environment is more positive, particularly since the recent change in the government relative to potential impacts on our customers, we are optimistic with respect to potential impacts on our business in the mid term. Integrated Core: We continue to be encouraged by the stability and market competitiveness of our key solutions in the integrated core business. During 2016 we announced a new partnership that provides the Company with a strong channel for mobile banking and we have added the Merchant Services solution from our GTBS segment as another solution available to our bank clients. In addition, the Company will look to cross sell the Total Payments SaaS product to its US customer base as this market adopts faster payments into During 2016 we implemented various initiatives to rationalize certain products and reduce costs. Strategically, we are focused on providing a cohesive and comprehensive suite of solutions based on modern technology with our market leading core product, Phoenix, serving as the anchor going forward. We expect this business to maintain its historical characteristic of stability and low growth. Over the long term, we anticipate growth to be in the low single digits and to be modestly more muted in the near term primarily due to the rationalization initiatives underway and lower bookings in Lending: In 2017, we anticipate stronger growth driven by a higher number of contractual LaserPro renewals, in addition to new clients for our mortgage, commercial and small business customers. Additionally, the positive impacts from our new bookings improved revenues in the fourth quarter of 2016 as we expected. The Company s go to market strategy related to bundling lending products for both new and renewal customers is expected to increase total contract values and thus the revenues over the terms of the contract, while also providing increased value to our customers. Sales cycles and implementation time increases with bundled product sales. Bundled bookings will typically result in revenue recognition up to six months following the booking. However, as we are generating higher lending revenue per client, we see this as net positive impact over the longer term of the contract. In addition, the Company expects to introduce new products into the US lending market and will look to cross sell certain products into the Canadian market. Our solutions, in particular LaserPro and Mortgagebot, have strong market positions and we expect to realize continuing strength in our market competitiveness as we further develop our suite of products and advance our go to market strategy. We expect our long term growth in US lending to be in the high single digits, however, in 2017 they will be slightly muted primarily as a result of our bundled bookings driving longer implementation time frames D+H Annual Report 15

18 MANAGEMENT S DISCUSSION AND ANALYSIS Canada In Canada, we enter 2017 with a mixed view of the economic growth due to concerns of the values of the housing markets and uncertainty due to the prices of commodities and trade regulations with the United States. However, we remain cautiously optimistic regarding the growth of our lending business, which will be offset by the continuing decline in our cheque volumes. Payments: During 2016 we saw ongoing declines in our cheque business volumes; the increased declination we saw in the third quarter normalized in the fourth quarter. This decline was offset by growth in our enhancement services solutions primarily due to a new contract in 2015; this growth will normalize in In keeping with our prior efforts, we are very focused on continuing to reduce the costs of the chequing business. The rate of the declination of the cheque business is expected to continue and may possibly accelerate as consumers and businesses increasingly shift to electronic payment alternatives. The increases in average order value in the cheque program combined with cost reduction initiatives are expected to continue to partially offset ongoing cheque order volume decline. During the latter part of the year, the Company finalized plans to further consolidate its cheque facilities by closing a production facility in Quebec, which will result in lower costs starting in mid The Company remains focused on these, and other activities, to maintain margins in this business. In our enhancement services business, we intend to shift toward a digitally-enabled platform and expand our product offerings. We expect to continue to grow our enhancement services products and the profitability of this business over the long term, however, the growth rate is not anticipated to offset the cheque revenue declination. As a result of the continuing decline in the cheque volumes, partially offset by increases in average order value and reduced operating costs, and the normalization of the enhancement services growth, we enter the year with an expectation of a mid single digit declination in the combined cheque and enhancement services solutions revenues in 2017 with potentially accelerating declines over the medium to long term. Lending: During 2016, we benefited from the additional volume from a large contract awarded in Q in our collateral management solutions. Moving forward, we are cautious with respect to broader economic downdrafts in Canada, which may negatively influence volumes and revenues in the registry business. We expect that this will be partially offset by an increase in revenues associated with new clients along with a volume rise in our recovery business, which can be expected in a declining market. Our expectation is for low single digit growth in the near term as the historical contract volumes normalize. We have also seen solid growth in our mortgage technology solutions in However, in 2017, new mortgage qualification requirements were announced by the Government of Canada in response to concerns for an overvalued real estate market in certain cities, which may have some impact on reduced volumes in this business in Additionally, the competitive market dynamics may bring increased competition. Overall, we expect this business to have muted growth in the near term. Within student lending, with the success of the CSLP program contract win, the Company s activities are focused on developing the new operating platform and technology solution for implementation in Until the contract reset on April 1, 2018 we expect student lending growth to remain consistent. Thereafter, the Company will see a reduction in revenues and EBITDA margins as the new contract comes into effect. Over the term of the contract, which is initially for 8 years, we expect both the revenues and the margins to increase, and once the new platform matures we anticipate margins returning to levels approximating our current levels. Additionally, the Company expects to benefit from the technology and operating platform in terms of other cost synergies D+H Annual Report

19 4 CONSOLIDATED FINANCIAL PERFORMANCE 4.1 Consolidated operating results, liquidity and capital (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December 31 Statement of income $ Change $ Change % Change 2014 Revenues $ 425,812 $ 424,145 $ 1,667 $ 1,679,857 $ 1,506,611 $ 173, %$ 1,138,940 Expenses 301, ,305 (6,215) 1,261,308 1,081, , % 803,731 Income from operating activities before depreciation, amortization and impairment ( EBITDA ) 1 124, ,840 7, , ,700 (6,151) (1.4 )% 335,209 EBITDA margin % 27.5 % 1.8 % 24.9% 28.2% (3.3)% n/a 29.4 % Depreciation of property, plant and equipment 6,866 7,053 (187) 27,962 23,298 4, % 15,804 Amortization of intangible assets 85,082 73,346 11, , ,601 54, % 141,023 Impairment of goodwill 2 121, , , ,041 (Loss) income from operating activities (88,267) 36,441 (124,708) (14,473) 171,801 (186,274) (108.4 )% 178,382 Finance expense 26,058 28,551 (2,493) 103,934 95,833 8, % 57,766 (Loss) income before income taxes (114,325) 7,890 (122,215) (118,407) 75,968 (194,375) (255.9 )% 120,616 Income tax (recovery) expense (19,912) (5,444) (14,468) (50,744) (8,037) (42,707) % 13,316 (Loss) income from continuing operations (94,413) 13,334 (107,747) (67,663) 84,005 (151,668) (180.5 )% 107,300 Loss from discontinued operations, net of tax 846 Net (loss) income for the period $ (94,413) $ 13,334 $ (107,747) $ (67,663) $ 84,005 $ (151,668) (180.5 )%$ 106,454 Weighted average number of shares outstanding during the period, diluted (in thousands) 106, , ,742 99,838 6, % 81,459 Net (loss) income per share, diluted $ (0.88) $ 0.13 $ (1.01) $ (0.63) $ 0.84 $ (1.47) $ 1.31 Other non-ifrs measures Adjusted revenues 1 $ 426,468 $ 437,709 $ (11,241) $ 1,684,437 $ 1,528,165 $ 156, %$ 1,159,087 Adjusted EBITDA 1 $ 120,790 $ 150,145 $ (29,355) $ 449,939 $ 474,696 $ (24,757) (5.2 )%$ 352,284 Adjusted EBITDA margin % 34.3% (6.0)% 26.7% 31.1 % (4.4)% n/a 30.4 % Adjusted net income 1 $ 57,032 $ 82,715 $ (25,683) $ 214,214 $ 254,869 $ (40,655) (16.0 )%$ 190,052 Adjusted net income per share, diluted 1 $ 0.53 $ 0.78 $ (0.25) $ 2.01 $ 2.55 $ (0.54) $ 2.33 Adjusted payout ratio % 29.2% 53.6% 52.5% 70.5 % Liquidity Net cash from operating activities $ 100,857 $ 96,109 $ 4,748 $ 293,472 $ 221,380 $ 72, %$ 191,955 Add (less): Acquisition related and other charges $ (272) $ 16,274 $ (16,546) $ 3,139 $ 60,774 $ (57,635) $ 12,463 Add: Realignment of global operations and related restructuring expenses $ (610) $ $ (610) $ 34,191 $ $ 34,191 $ Adjusted net cash from operating activities 1 $ 99,975 $ 112,383 $ (12,408) $ 330,802 $ 282,154 $ 48, %$ 204,418 Adjusted net cash from operating activities as a percentage of Adjusted revenues % 25.7% 19.6% 18.5% 17.6 % Uses of Adjusted net cash from operating activities: Capital expenditures $ (26,476) $ (27,659) $ 1,183 $ (95,993) $ (103,259) $ 7,266 (7.0 )%$ (57,674) Cash dividends $ (34,203) $ (24,739) $ (9,464) $ (125,765) $ (93,881) $ (31,884) 34.0 %$ (103,437) Adjusted net cash from operating activities after capital expenditures and cash dividends 1 $ 39,296 $ 59,985 $ (20,689) $ 109,044 $ 85,014 $ 24,030 $ 43,307 Net debt repayment 3 $ (31,016) $ (30,000) $ (1,016) $ (81,016) $ (50,000) $ (31,016) $ (26,600) Adjusted net cash from operating activities after capital expenditures, cash dividends and net debt repayment 1, 3 $ 8,280 $ 29,985 $ (21,705) $ 28,028 $ 35,014 $ (6,986) $ 16,707 Dividends declared per share $ 0.32 $ 0.32 $ $ 1.28 $ 1.28 $ $ 1.28 December 31 Capital structure $ Change % Change 2014 Loans and borrowings $ 1,513,254 $ 1,636,922 $ (123,668) (7.6 )%$ 772,429 Convertible debentures $ 431,093 $ 422,576 $ 8, %$ 212,997 Total equity $ 2,132,626 $ 2,369,066 $ (236,440) (10.0 )%$ 1,411,678 Debt to EBITDA x 3.185x n/a n/a 2.113x 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. 2 Includes $50.6 million related to the reclassification of settlement loss on forward contracts, relating to the acquisition of Fundtech, from OCI to net (loss) income. Refer to note 11 of the consolidated financial statements. 3 Net debt repayment is net of repayments and new financings from acquisition borrowings D+H Annual Report 17

20 MANAGEMENT S DISCUSSION AND ANALYSIS Revenues and Adjusted revenues Revenues in the fourth quarter of 2016 increased by $1.7 million or 0.4% from $424.1 million in the fourth quarter of 2015 to $425.8 million in the fourth quarter of The increase was primarily due to $2.2 million of growth in our Canadian segment revenues, flat revenues in our L&IC segment as a result of increased lending solutions revenues which were offset by lower integrated core solutions revenue and lower fourth quarter 2016 revenues in our GTBS segment. For the year ended 2016, revenues increased $173.2 million or 11.5% from $1,506.6 million in 2015 to $1,679.9 million in 2016 primarily due to the full year inclusion of the GTBS segment acquired April 30, 2015 and growth in our Canadian segment which contributed $28.0 million of revenue growth compared to the prior year as a result of growth in our Canadian lending solutions which was offset by a $2.1 million decline in Canadian Payments. The increase in revenues for the year ended 2016 was further impacted by the strengthening of the U.S. dollar in our L&IC segment which contributed to an increase in revenues of $19.7 million compared to the prior year. Furthermore, the L&IC segment growth in our integrated core revenue was offset by declines in our L&IC segment lending revenue primarily driven by the renewal cycle in our LaserPro product. Adjusted revenues for the fourth quarter declined by $11.2 million or 2.6%, while Adjusted revenues for the year ended 2016 increased by $156.3 million or 10.2%. The changes in Adjusted revenues reflect changes to revenues as discussed above. Refer to section 11.1 for additional information and reconciliation to IFRS measures. Adjusted revenues by type 1, 2 (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December $ Change % Change $ Change % Change SaaS $ 108,241 25% $ 104,887 24% $ 3, % $ 427,379 25% $ 363,230 24% $ 64, % Software Licenses (Perpetual and Term) 49,548 12% 55,653 13% (6,105) (11.0)% 161,071 10% 172,031 11% (10,960) (6.4)% Maintenance 57,897 14% 61,253 14% (3,356) (5.5)% 233,391 14% 201,444 13% 31, % Professional Services 45,439 11% 49,993 11% (4,554) (9.1)% 179,389 11% 139,372 9% 40, % Transaction Processing Services 83,306 20% 79,693 18% 3, % 337,620 20% 307,529 20% 30, % Canadian Payments Products/Solutions 76,751 18% 79,326 18% (2,575) (3.2)% 314,632 19% 316,689 21% (2,057) (0.6)% Other 3 5,286 1% 6,904 2% (1,618) (23.4)% 30,955 2% 27,870 2% 3, % Total $ 426, % $ 437, % $ (11,241) (2.6)% $ 1,684, % $ 1,528, % $ 156, % 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. 2 The definitions of these revenue types can be found in Section Other includes hardware sales, conference revenues and other billable costs. Our Adjusted revenues declined $11.2 million in the fourth quarter of 2016 and comprised of changes in the following types of Adjusted revenues: lower software licenses primarily in our GTBS segment lower professional services and software licenses revenue in our GTBS segment; lower maintenance revenue in both our GTBS from volume driven maintenance and L&IC segments; and reduced volumes in our Canadian payments business, offset by increased transaction processing revenues in our Canadian collateral management solutions business; and increases in our GTBS and L&IC SaaS businesses. Revenues by type for the year ended 2016 increased in all revenue streams with the exception of software licenses driven by lower Laser Pro revenues and Canadian Payments Products/Solutions. The acquisition of GTBS on April 30, 2015 and the strengthening of the U.S. dollar positively impacted the SaaS, Software Licenses, Maintenance and Professional Services. Refer to Section 5 for revenue by type for each segment D+H Annual Report

21 Expenses Consolidated expenses of $301.1 million, decreased by $6.2 million or 2.0% in the fourth quarter of 2016 compared to the prior year comparable quarter, primarily due to $16.5 million of lower acquisition-related and integration costs as a result of the Fundtech acquisition and global delivery initiatives that were incurred in the fourth quarter of 2015 which did not recur in the fourth quarter of Additionally we recognized $17.0 million of lower incentive and equity based compensation expense mostly impacting senior executives, in light of our financial performance in 2016 relative to our established performance metrics. In the fourth quarter of 2016, we had a non-cash foreign exchange loss of $1.6 million as compared to a gain of $2.6 million in the fourth quarter of 2015, which increased expenses year over year. Also partially offsetting the expense declines noted above were increased direct costs related to our L&IC segment, consulting and professional fees in our L&IC and GTBS segments. Expenses also increased due to ongoing product development initiatives, primarily compensation related (partially offset by reduced compensation expenses from our global operating model realignment). For the year ended 2016, consolidated expenses of $1,261.3 million, increased by $179.4 million or 16.6% compared to the prior year. The increase was primarily attributable to the full year inclusion of the GTBS segment expenses. We had a non-cash foreign exchange loss of $1.2 million in 2016 compared to a $27.8 million gain in 2015, resulting in a $29.0 million increase in net consolidated expenses year over year. In addition, our Canadian segment expenses increased due to higher direct costs associated with enhancement services and our collateral management solutions business, consistent with the increases in associated revenues. We also had higher volume incentive expenses in our mortgage origination business. The strengthening of the U.S. dollar in our L&IC segment increased expenses by $14.5 million along with costs associated with product development and risk initiatives. EBITDA and Adjusted EBITDA EBITDA in the fourth quarter of 2016 of $124.7 million, increased by $7.9 million or 6.7% primarily due to lower acquisition-related and integration costs in 2016 as a result of the Fundtech acquisition and global delivery initiatives that were incurred in the fourth quarter of 2015 and did not recur in the fourth quarter of Also, in the fourth quarter of 2016, we had a non-cash foreign exchange loss of $1.6 million as compared to a $2.6 million gain in the fourth quarter of EBITDA was impacted to a lesser extent by an increase in Canadian segment revenues. The growth in EBITDA was partially offset by increased professional and consulting fees, increased direct costs in our Canada and L&IC segments and unfavourable exchange rate variances over the prior year comparable period on certain accounts on our balance sheet. EBITDA for the year ended 2016 of $418.5 million, decreased by $6.2 million or 1.4% primarily due to a decline in our L&IC segment EBITDA of $25.6 million as a result lower revenue in our L&IC lending solutions due to the LaserPro renewal cycle and increased expenses in our L&IC segment as a result of increased direct costs, rationalization initiatives and costs associated with product development and risk initiatives. We had a non-cash foreign exchange loss of $1.2 million in 2016 compared to a $27.8 million gain in 2015, resulting in a $29.0 million increase in net consolidated expenses year over year. The decrease in EBITDA was further impacted by a decline in our Canadian segment cheque business due to lower cheque revenues and certain expenses related to cheque optimization initiatives, reduced revenues in our cash management business and increased corporate infrastructure investments. These decreases were partially offset by increases in our GTBS segment EBITDA due to the full year inclusion of our GTBS segment results in 2016 as our comparable 2015 EBITDA included our GTBS for the period April 30, 2015 through to December 31, 2015 and, to a lesser extent, the strengthening of the U.S. dollar. Additionally the 2016 realignment and related restructuring costs, and acquisition-related expenses were $23.4 million lower, on a net basis, compared to the prior year. 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, was $120.8 million in the fourth quarter of 2016 representing a decrease of $29.4 million or 19.6% compared to the prior year comparable period. In our fourth quarter of 2016, we had a non-cash operational foreign exchange loss of $3.8 million as compared to a non-cash operational foreign exchange gain of $8.8 million in The decrease is also attributable to reduced revenues in our GTBS segment, increased professional and consulting fees in our GTBS segment, increased direct costs in our L&IC segment and unfavourable exchange rate variances over the prior year comparable period on certain amounts on our balance sheet. Our full year 2016 Adjusted EBITDA was $449.9 million, representing a decrease of $24.8 million or 5.2% compared to the prior year. The decrease is primarily attributable to lower revenue in lending solutions due to the LaserPro renewal cycle and rationalization initiatives in our L&IC segment and costs of risk initiatives in our GTBS segment and product development in all of our segments. Adjusted EBITDA was further impacted by a decline in our Canadian segment cheque business due to lower cheque revenues, reduced revenues in our cash management business and increased corporate infrastructure investments. In 2016, we had a non-cash operational foreign exchange loss of $4.2 million as compared to a non-cash operational foreign exchange gain of $6.1 million in 2015, impacting adjusted EBITDA by $10.3 million D+H Annual Report 19

22 MANAGEMENT S DISCUSSION AND ANALYSIS The decreases in Adjusted EBITDA noted above were partially offset by an increase in our GTBS segment EBITDA due to the full year inclusion of our GTBS segment results in 2016 as our comparable 2015 Adjusted EBITDA included our GTBS segment results for the period April 30, 2015 through to December 31, 2015 and, to a lesser extent, the strengthening of the U.S. dollar. EBITDA margin and Adjusted EBITDA margin EBITDA margin for the fourth quarter of 2016 was 29.3%, representing an increase of 1.8% from 27.5% in the fourth quarter of 2015 primarily due to the decrease in consolidated expenses as discussed above. For the year ended 2016, EBITDA margin was 24.9%, representing a decrease of 3.3% from 28.2% in the prior year primarily due to the decline in our LaserPro lending solutions revenue in our L&IC segment and increase in expenses in all segments as discussed above. Adjusted EBITDA margin for the fourth quarter of 2016 was 28.3%, representing a decrease of 6.0% from 34.3% in the fourth quarter of Adjusted EBITDA margins for the year ended 2016 was 26.7%, representing a decrease of 4.4% from 31.1% in the prior year. The decline in Adjusted EBITDA margins in the fourth quarter and year ended 2016 were due to the changes in revenues and expenses and Adjusted revenues and expenses as discussed above. Depreciation of capital assets and amortization of intangible assets (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December $ Change % Change $ Change % Change Depreciation of property, plant and equipment $ 6,866 $ 7,053 $ (187) (3)% $ 27,962 $ 23,298 $ 4,664 20% Amortization of intangible assets Contract $ 1,096 $ 1,407 $ (311) (22)% $ 4,384 $ 3,519 $ % Software 1 12,730 17,728 (4,998) (28)% 48,970 41,375 7,595 18% Non-acquisition intangible assets 13,826 19,135 (5,309) (28)% 53,354 44,894 8,460 19% Intangible assets from acquisition 2 71,256 54,211 17, % 230, ,707 45,958 25% Total amortization of intangibles $ 85,082 $ 73,346 $ 11, % $ 284,019 $ 229,601 $ 54,418 24% Total depreciation of property, plant and equipment and amortization of intangibles $ 91,948 $ 80,399 $ 11, % $ 311,981 $ 252,899 $ 59,082 23% 1 Includes impairment loss related to internally developed software of $0.2 million for the fourth quarter and year ended 2016 and $6.3 million for the fourth quarter and year ended Includes impairment loss related to customer relationships of $16.2 million for the fourth quarter and year ended 2016 and $nil for the fourth quarter and year ended Depreciation of property, plant, and equipment totalled $6.9 million in the fourth quarter of 2016, compared to $7.1 million in the comparable quarter of Amortization of non-acquisition related intangible assets of $13.8 million, decreased in the fourth quarter of 2016 by $5.3 million, compared to the fourth quarter of The decrease is primarily related to an impairment charge of $6.3 million included in nonacquisition intangible asset amortization in the fourth quarter of The decline was partially offset by increased amortization in our L&IC segment due to increased investments in the L&IC and Canadian segments throughout 2015 and For the year ended 2016, depreciation of property, plant, and equipment increased by $4.7 million to $28.0 million. Amortization of nonacquisition related intangible assets increased $8.5 million. The increases are primarily due to the full year inclusion of the GTBS segment in 2016, the impact of increased investments in the L&IC and Canadian segments throughout 2015 and 2016, as well as the strengthening of the U.S. dollar compared to the prior year. These increases were partially offset by a $6.3 million impairment charge included in nonacquisition intangible asset amortization in the prior year. Consolidated amortization of acquired intangible assets in the fourth quarter of 2016 was $71.3 million, representing an increase of $17.0 million as compared to the same quarter in 2015 primarily due to an impairment loss of $16.2 million related to acquired intangible assets in our cash management business. For the year ended 2016, consolidated amortization of acquired intangible assets was $230.7 million, representing an increase of $46.0 million, compared to the prior year primarily due to the amortization of acquisition intangibles relating to the GTBS segment, an impairment D+H Annual Report

23 loss of $16.2 million related to our acquired intangible assets in our cash management business and the strengthening of the U.S. dollar. A significant portion of intangible assets in this category are from previous acquisitions, including GTBS, and are denominated in U.S. dollars. Goodwill impairment In the fourth quarter of 2016, the Company was required to recognize an impairment of goodwill of $121.0 million, comprised of $70.5 million of impairment goodwill in the GTBS segment and $50.6 million related to the reclassification from OCI to net (loss) income of losses incurred on forward foreign exchange contracts established at the time of the Fundtech acquisition to hedge the foreign currency exposure associated with the USD purchase price. The impairment loss was driven by a year over year reduction in projected cash flows originating from the elongation of the sales cycle for our payment hub technologies and from the repositioning of our cash management business, coupled with varying assumptions used in the goodwill valuation analysis. This charge does not impact management s view of our market competitiveness and the long term growth potential within GTBS. Notwithstanding the elongation of the sales cycle in our payment hub business, we remain encouraged by several positive attributes of our business. With the broadening of payment modernization agendas globally, driven by the movement toward real time payments as well as regulatory and competitive drivers we continue to see growing evidence of banks seeking to modernize their payments infrastructure. Our view, which is consistent with the view of industry analysts and experts, is this as a long term area of spend amongst financial institutions. Additionally, we have continued to increase our win rate relative to competitors in competitive RFP decisions, and, in 2016, secured significantly more wins than our closest competitors. We also have seen ongoing evidence of our existing payment hub customers continuing to invest in extending our payment hub more broadly across their businesses. We anticipate these trends continuing for several years. Within cash management, while we have repositioned the business, and exited certain markets where we lacked the requisite depth, we have invested in 2016 in building a competitive next generation SaaS platform, called Total Treasury, that will allow us to more aggressively compete for business in large homogenous markets including, but not limited to, the US market. We believe these product investments will allow us to accelerate our growth and expand margins in the future. Impairment of Goodwill 2016 Impairment $ 70,484 Reclassification of loss on forward contracts from OCI to (loss) income 50,557 Impairment of Goodwill $ 121,041 Finance expense Finance expense is comprised of interest expense and financing related charges as detailed in the table below. (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December $ Change % Change $ Change % Change Net interest expense $ 23,953 $ 24,408 $ (455) (2)% $ 94,447 $ 79,436 $ 15, % Amortization of deferred financing fees 628 2,356 (1,728) (73)% 2,423 9,986 (7,563) (76)% Accretion expense (5.0%, 5.5 year convertible debenture) 1,156 1, % 4,392 2,969 1, % Accretion expense (6.0%, 5 year convertible debenture) 1, % 4,289 3, % Fair value adjustment of derivative instruments (749) (272) (477) 175 % (1,617) (515) (1,102) 214 % Total finance expense $ 26,058 $ 28,551 $ (2,493) (9)% $ 103,934 $ 95,833 $ 8,101 8 % Finance expense in the fourth quarter of 2016 decreased by $2.5 million compared to the fourth quarter of 2015, primarily due to a nonrecurring write-off of unamortized deferred financing fees of $1.8 million in the fourth quarter of 2015 related to the financing of the acquisition of Fundtech. For the year ended 2016, finance expense totalled $103.9 million, an increase of $8.1 million compared to 2015 primarily due to an increase in net interest expense of $15.0 million and an increase in accretion expense of $1.4 million due to the issuance of convertible debentures in the second quarter of 2015 related to financing the acquisition of Fundtech. These increases were partially offset by a decrease of $7.6 million 2016 D+H Annual Report 21

24 MANAGEMENT S DISCUSSION AND ANALYSIS in amortization of deferred financing fees due to a non-recurring write down of unamortized deferred financing fees of $7.4 million in the year ended 2015 related to the financing of the acquisition of Fundtech and, to a lesser extent, changes in fair value of our derivative instruments. The increase in interest expense of $15.0 million for the year ended 2016 was due to an increase of $11.7 million from higher longterm borrowings, calculated on a weighted average basis, $1.0 million due to an increase in the cost of debt and $2.3 million due to the strengthening of the U.S. dollar compared to the prior year. Income tax recovery An income tax recovery of $19.9 million was recorded in the fourth quarter of 2016 compared to an income tax recovery of $5.4 million recognized in the same period of 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 and tax benefits related to R&D credits. This was partially offset by non-deductible expenses related to the impairment of goodwill and foreign exchange losses previously recorded in OCI. An income tax recovery of $50.7 million was recorded in the year ended 2016 compared to an income tax recovery of $8.0 million in the prior year. 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 and tax benefits related to R&D credits. This was partially offset by non-deductible expenses related to the impairment of goodwill and foreign exchange losses previously recorded in OCI. In addition, there were non-deductible transaction costs related to the acquisition of Fundtech which reduced the tax recovery in Net (loss) income and Net (loss) income per share, diluted Consolidated net loss in the fourth quarter of 2016 was $94.4 million, a decrease of $107.7 million or 808.1% from the fourth quarter of 2015 net income of $13.3 million, primarily due to an impairment on goodwill of $121.0 million and a year-over-year increase in impairment on intangible assets of $10.1 million. These decreases were partially offset by an increase in income tax recovery of $14.5 million, increase in EBITDA of $7.9 million, and a decrease in finance expense of $2.5 million. Consolidated net loss for the year ended 2016 was $67.7 million, a decrease of $151.7 million or 180.5% from the prior year net income of $84.0 million, primarily due to primarily due to an impairment on goodwill of $121.0 million and a year-over-year increase in impairment on intangible assets of $10.1 million, an increase in finance expense of $8.1 million and a decline in EBITDA of $6.2 million. These decreases were partially offset by an increase in income tax recovery of $42.7 million. Net loss per share, diluted of $0.88 in the fourth quarter of 2016 decreased from a net income per share of $0.13 in the fourth of 2015 as a result of a decrease consolidated net income as discussed above. For the year ended 2016, net loss per share of $0.63 declined from a net income per share $0.84 in 2015 as a result of a decrease in consolidated net income, as discussed above, and an increase in diluted shares outstanding issued as part of the financing of our Fundtech acquisition. Diluted weighted average common shares outstanding in the fourth quarter and year ended 2016 were million and million compared to million and 99.8 million shares for the fourth quarter and year ended 2015, respectively. Adjusted net income and Adjusted net income per share, diluted Adjusted net income in the fourth quarter of 2016 was $57.0 million, a decrease of $25.7 million or 31.0% from the prior year comparable period. Adjusted net income per share, diluted in the fourth quarter of 2016 of $0.53 was lower by $0.25 from the prior year comparable period. Full year 2016 Adjusted net income was $214.2 million, a decrease of $40.7 million or 16.0% compared to the prior year. Adjusted net income per share, diluted for the year ended 2016 of $2.01 which was lower by $0.54 from the prior year. A reconciliation to Adjusted net income and Adjusted net income per share, diluted from net income and net income per share, respectively, can be found in section 11.1 of this MD&A. Global Operating Model and Realignment In 2016 we began to realign our operations to achieve the following strategic 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. In the first half of 2016, the Company announced and began to execute a plan to realign the organization for an estimated net savings of $25 million in annualized compensation and related costs. Restructuring expenses totalling $0.6 million and $34.2 million have been recorded D+H Annual Report

25 in the fourth quarter and year ended 2016, respectively. These expenses include severance costs, consulting and professional fees, office closure costs and other related costs. During 2016 the Company achieved net savings of approximately $15 million which is consistent with our expected savings reported in our MD&A dated October 25, The restructuring expenses have been recorded in the Corporate segment and added back in the reconciliation to Adjusted EBITDA. Strategic Business Units effective in 2017 In light of the operating model realignment undertaken, 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. Our future business segments are planned to be presented as follows: New Segments in 2017 Existing Segments Global Payments Solutions Global Lending Solutions Financial Solutions Global Transactions Banking Solutions (GTBS) Global payment technologies(including US payments and Global payments) Treasury technologies (including cash management and financial messaging) Merchant services Lending and Integrated Core Solutions (L&IC) Lending solutions - US Integrated core solutions Canada Lending solutions - Canada Payment solutions Global Payments Solutions will be focused on the development, sales and integration of products, delivering leading global, cross-border 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. The merchant services business will be combined with our integrated core business in the Financial Solutions segment. 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 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. Commencing in the first quarter of 2017, the strategic infrastructure and operations of the Company that have historically been aligned with the business segments have 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. These costs will be allocated to the respective segments including a corporate segment and will be included in the segment level EBITDA going forward. The transition to the new operating model is underway. We expect to begin managing and reporting under our new business segments commencing in the first quarter of 2017 with the comparable information for the first quarter of Additionally, we plan to map revenue under new and old segments, and going forward revenue will be reported for the segments shown above and EBITDA will be reported at the segment level. In addition, the Company will have a corporate segment for certain costs that are not planned to be allocated to the segments D+H Annual Report 23

26 MANAGEMENT S DISCUSSION AND ANALYSIS 5 BUSINESS SEGMENT FINANCIAL RESULTS 5.1 Operating results by segment and corporate 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, our reporting currency, on a monthly basis using the Bank of Canada s average exchange rates. 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, Indian rupee, Euro, Swiss franc, British pounds sterling, and other currencies. See Section 11.2 for details on foreign exchange rates. Our segment financial results are as follows: (In thousands of dollars, unless otherwise noted) Three months ended December 31, 2016 GTBS segment L&IC segment Canadian segment Corporate Consolidated Revenues $ 88,704 $ 162,494 $ 174,614 $ $ 425,812 Expenses 74, , ,162 (3,136) 301,090 EBITDA 1 $ 14,179 $ 60,955 $ 46,452 $ 3,136 $ 124,722 EBITDA margin % 37.5% 26.6% 29.3% Adjusted revenues 1 $ 88,704 $ 163,150 $ 174,614 $ $ 426,468 Adjusted EBITDA 1 $ 14,179 $ 60,159 $ 46,452 $ $ 120,790 Adjusted EBITDA margin % 36.9% 26.6% 28.3% (In thousands of dollars, unless otherwise noted) Three months ended December 31, 2015 GTBS segment L&IC segment Canadian segment Corporate Consolidated Revenues $ 89,337 $ 162,419 $ 172,389 $ $ 424,145 Expenses 65,606 95, ,408 22, ,305 EBITDA 1 $ 23,731 $ 66,586 $ 48,981 $ (22,458)$ 116,840 EBITDA margin % 41.0% 28.4% 27.5% Adjusted revenues 1 $ 101,857 $ 163,463 $ 172,389 $ $ 437,709 Adjusted EBITDA 1 $ 35,574 $ 65,590 $ 48,981 $ $ 150,145 Adjusted EBITDA margin % 40.1% 28.4% 34.3% D+H Annual Report

27 (In thousands of dollars, unless otherwise noted) Year ended December 31, 2016 GTBS segment L&IC segment Canadian segment Corporate Consolidated Revenues $ 363,722 $ 604,413 $ 711,722 $ 1,679,857 Expenses 293, , ,415 34,290 1,261,308 EBITDA 1 $ 69,747 $ 195,785 $ 187,307 $ (34,290)$ 418,549 EBITDA margin % 32.4% 26.3% 24.9% Adjusted revenues 1 $ 365,122 $ 607,593 $ 711,722 $ 1,684,437 Adjusted EBITDA 1 $ 70,232 $ 192,400 $ 187,307 $ 449,939 Adjusted EBITDA margin % 31.7% 26.3% 26.7% (In thousands of dollars, unless otherwise noted) Year ended December 31, 2015 GTBS segment 2 L&IC segment Canadian segment Corporate Consolidated Revenues $ 232,303 $ 590,617 $ 683,691 $ 1,506,611 Expenses 178, , ,183 39,023 1,081,911 EBITDA 1 $ 53,802 $ 221,413 $ 188,508 $ (39,023)$ 424,700 EBITDA margin % 37.5% 27.6% 28.2% Adjusted revenues 1 $ 248,777 $ 595,697 $ 683,691 $ 1,528,165 Adjusted EBITDA 1 $ 68,518 $ 217,670 $ 188,508 $ 474,696 Adjusted EBITDA margin % 36.5% 27.6% 31.1% 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. 2 GTBS segment information covers period from April 30, 2015 to December 31, Global Transaction Banking Solutions 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 1,700 employees and 19 offices worldwide, including development centers in the United States, India, Israel, Switzerland, Germany and the United Kingdom. GTBS offers a comprehensive line of transaction banking solutions including global and domestic payments solutions, financial messaging, corporate cash and liquidity management and merchant services. In 2016, GTBS generated approximately 30% of its revenues in currencies other than U.S. dollars and therefore experienced fluctuations based on the strength of the U.S. dollar. 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 approximately 22% of the fourth quarter and full year 2016 of consolidated adjusted revenues. Revenues and Adjusted revenues (In thousands of dollars) Three months ended December 31 Year ended December 31 April 30 to December 31 In Canadian dollars $ Change % Change $ Change % Change Total revenues $ 88,704 $ 89,337 $ (633) (0.7)%$ 363,722 $ 232,303 $ 131, % Total Adjusted revenues 1 $ 88,704 $ 101,857 $ (13,153) (12.9)%$ 365,122 $ 248,777 $ 116, % In U.S. dollars Total revenues US$ 66,511 US$ 66,790 US$ (279) (0.4)%US$ 274,953 US$ 178,647 US$ 96, % Total Adjusted revenues 1 US$ 66,511 US$ 75,979 US$ (9,468) (12.5)%US$ 275,989 US$ 190,929 US$ 85, % 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures D+H Annual Report 25

28 MANAGEMENT S DISCUSSION AND ANALYSIS Adjusted revenues 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 11.1 of this MD&A for full discussion). These adjustments which increased Adjusted revenues do not increase cash. In the fourth quarter of 2016, GTBS Adjusted revenues decreased by $13.2 million or 12.9% from $101.9 million in the fourth quarter of 2015 to $88.7 million in the fourth quarter of The decline in revenues were primarily due to lower revenues in global payment technologies due to delayed client contracting and decisioning, lower cash management revenues due to reduced sales and product repositioning, lower revenues in merchant services primarily due to decreased volumes. For the full year of 2016, GTBS Adjusted revenues increased by $116.3 million or 46.8% from $248.8 million in the prior year to $365.1 million in The increase is primarily due to full year inclusion of the GTBS acquisition on April 30, 2015, and to a lesser extent, by currency impacts due to the strengthening of the U.S. dollar. Constant currency Adjusted revenues In the fourth quarter of 2016, Adjusted revenues in constant currency decreased by 10.6% compared to the fourth quarter of The decrease was primarily due to a decline in Adjusted revenues of 7.5% in global payment technologies, including both our payment hub and US payments solutions, and a 34.9% declination in our cash management business as a result of product and market repositioning in the year. While we did not own GTBS for the period January 1, 2015 to April 29, 2015, we have calculated GTBS constant currency adjusted revenue growth for the full year 2016 based on proforma measurements. Proforma Adjusted revenues for the year ended 2016 increased by 1.6% compared to the prior year, on a constant currency basis. Global payment technologies increased by 7.2% while our financial messaging and merchant businesses delivered a combined growth of 0.6%. These increases were partially offset by a 22.9% declination in the cash management business due to product and market repositioning in the year. Bookings In the fourth quarter of 2016, bookings declined 23.9% to US$62.4 million. Our global payments technologies bookings totalled US$47.3 million in the fourth quarter of 2016, a decline of 32.3%, versus prior year quarter, The decrease was primarily due to several payment hub projects segregating into two contracting stages. The first, a scope validation stage and the second a comprehensive implementation. Scope validation has historically been an early phase of an implementation plan rather than a distinct contract. The impact of this change has been lower initial bookings as the scope validation is typically limited to a shorter-term services only engagement. Upon completion of the scope validation, we anticipate booking comprehensive agreements reflecting the license, enhancements and services. We expect each of the active scope validation projects to be complete during the first half of While these factors have negatively impacted bookings in the quarter, we have a solid outlook for this business given our current level of sales and contracting activity and market outlook. In the year ended 2016, bookings totalled US$191.1 million, representing a decrease of 21.3%, compared to the prior year. Our global payments technologies bookings totalled US$147.3 million, a decline of 15.6% compared to prior year. The primary driver of the year-overyear decrease in global payment technologies is similar to that described for the fourth quarter above, partially offset by 79.3% growth in wire transfer and ACH services for U.S. tier II and tier III financial institutions. In light of changing approaches to contracting for payment hubs observed in 2016 we are entering 2017 with greater visibility into our 2017 bookings than at a comparable point in A portion of the 2016 bookings were recognized in earnings in 2016 and the balance is expected to convert to a revenue stream in the next 6 to 24 months. Refer to section 11.1 of this MD&A for the definition of bookings D+H Annual Report

29 Adjusted revenues by type 1, 2, 4 (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December 31 April 30 to December $ Change % Change $ Change % Change SaaS $ 32,362 36% $ 31,926 31% $ % $ 127,057 35% $ 81,140 33% $ 45, % License (Perpetual and Term) 1,772 2% 8,966 9% (7,194) (80.2)% 21,598 6% 21,860 9% (262) (1.2)% Maintenance 21,664 24% 23,241 23% (1,577) (6.8)% 87,069 24% 57,432 23% 29, % Professional Services 32,106 36% 36,542 36% (4,436) (12.1)% 125,634 34% 85,420 34% 40, % Other % 1,182 1% (382) (32.3)% 3,764 1% 2,925 1% % Total $ 88, % $ 101, % $ (13,153) (12.9)% $ 365, % $ 248, % $ 116, % 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. 2 The definitions of these revenue types can be found in Section Other includes hardware sales. 4 Totals may not add due to rounding Revenues by type for the fourth quarter of 2016 compared to the same prior year period reflects the following impacts of our segment results: SaaS revenues are consistent with the prior year with growth in our US Payments solutions partially offset by lower SaaS revenues in our merchant services. Lower license revenues primarily in our global payment hub software. Lower professional services revenues is primarily attributable to reduced implementations in cash management. Expenses (In thousands of dollars) Year ended April 30 to Three months ended December 31 December 31 December 31 In Canadian dollars $ Change % Change $ Change % Change Employee compensation and benefits 1 $ 41,898 $ 43,074 $ (1,176) (2.7)% $ 181,435 $ 119,118 $ 62, % Non-compensation direct expenses 2,4 2,299 3,356 (1,057) (31.5)% 10,449 8,521 1, % Other operating expenses 3,4 30,328 19,176 11, % 102,091 50,862 51, % Total expenses $ 74,525 $ 65,606 $ 8, % $ 293,975 $ 178,501 $ 115, % In U.S. dollars Employee compensation and benefits 1 US$ 31,400 US$ 32,257 US$ (857) (2.7)% US$ 136,965 US$ 91,837 US$ 45, % Non-compensation direct expenses 2,4 1,724 2,518 (794) (31.5)% 7,893 6,571 1, % Other operating expenses 3,4 22,729 14,487 8, % 77,095 39,285 37, % Total expenses US$ 55,853 US$ 49,262 US$ 6, % US$ 221,953 US$ 137,693 US$ 84, % 1 Employee compensation and benefits expenses include incentive 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. In the fourth quarter and year ended 2015, these costs were $0.6 million (US$0.4 million) and $1.9 million (US$1.5 million), respectively D+H Annual Report 27

30 MANAGEMENT S DISCUSSION AND ANALYSIS Employee compensation and benefits Employee compensation and benefits expenses in the fourth quarter of 2016 decreased by $1.2 million or 2.7% from $43.1 million in the fourth quarter of 2015 to $41.9 million in the fourth quarter of 2016, primarily due to a reversal of severance costs based on revised estimates, partially offset by increased employee compensation costs as a result of a larger employee base during the quarter in our Global Payments business, which is consistent with the increased product development in addition to normal implementation activities. Full year employee compensation and benefits expenses increased by $62.3 million or 52.3% from $119.1 million in the prior year to $181.4 million in The increase was primarily due to the full year inclusion of GTBS in 2016, and to a lesser extent, the impact of foreign exchange and increased product development activities in addition to risk initiatives. Non-compensation direct expenses Non-compensation direct expenses decreased in the fourth quarter of 2016 by $1.1 million or 31.5% from $3.4 million in the fourth quarter of 2015 to $2.3 million in the fourth quarter of 2016 partly due to decreases in processing fees and hardware costs from our merchant services business. Full year non-compensation direct expenses increased by $1.9 million or 22.6% from $8.5 million in 2015 to $10.4 million in The increase was primarily due to acquiring GTBS on April 30, 2015, and to a lesser extent, the impact of foreign exchange. Other operating expenses Other operating expenses increased by $11.2 million or 58.2% from $19.2 million in the fourth quarter of 2015 to $30.3 million in the fourth quarter of 2016, primarily due to increased consulting and other professional fees, higher software maintenance costs related to higher data centre costs and additional software and license purchases. Other operating expenses increased by $51.2 million or 100.7% from $50.9 million in the prior year to $102.1 million in the year ended The increase was primarily due to acquiring GTBS on April 30, 2015, and to a lesser extent, the impact of foreign exchange and increased costs associated with governance and risk initiatives in addition to branding and other general operating costs. EBITDA and EBITDA margin 1 (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December 31 April 30 to December 31 In Canadian dollars $ Change % Change $ Change % Change EBITDA 1 $ 14,179 $ 23,731 $ (9,552) (40.3)% $ 69,747 $ 53,802 $ 15, % EBITDA margin % 26.6% (10.6)% 19.2% 23.2% (4.0)% In U.S. dollars EBITDA 1 US$ 10,658 US$ 17,528 US$ (6,870) (39.2)% US$ 53,000 US$ 40,954 US$ 12, % EBITDA margin % 26.2% (10.2)% 19.3% 22.9% (3.6)% 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. Adjusted EBITDA and Adjusted EBITDA margin 1 (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December 31 April 30 to December 31 In Canadian dollars $ Change % Change $ Change % Change Adjusted EBITDA 1 $ 14,179 $ 35,574 $ (21,395) (60.1)% $ 70,232 $ 68,518 $ 1, % Adjusted EBITDA margin % 34.9% (18.9)% 19.2% 27.5% (8.3)% In U.S. dollars Adjusted EBITDA 1 US$ 10,658 US$ 26,209 US$ (15,551) (59.3)% US$ 53,359 US$ 51,882 US$ 1, % Adjusted EBITDA margin % 34.5% (18.5)% 19.3% 27.2% (7.9)% 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. In the fourth quarter of 2016, Adjusted EBITDA decreased by $21.4 million or 60.1% from $35.6 million in the fourth quarter of 2015 to $14.2 million in the fourth quarter of This decrease is primarily due to revenue declination in our global payment technologies and cash D+H Annual Report

31 management business as a result of product and market repositioning in the year and, to a lesser extent, decline in our merchant services revenues in addition to the increased expenses as discussed above. In the year ended 2016, Adjusted EBITDA increased by $1.7 million or 2.5% from $68.5 million in 2015 to $70.2 million in The increase was primarily due to the full year inclusion of GTBS effective April 30, 2015 and is partially offset by the noted increase in expenses discussed above. EBITDA and EBITDA margins were impacted by the revenue and expenses discussed above. GTBS segment expenses exclude acquisition-related and other charges, business integration costs and costs related to the Company s initiatives to align global operations and achieve cost synergies following the acquisition of Fundtech in These costs are reported in the Corporate segment. 5.3 Lending & Integrated Core 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 38% and 36% of the fourth quarter and year ended 2016 consolidated Adjusted revenues of the Company, respectively. Revenues (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December 31 In Canadian dollars $ Change % Change $ Change % Change Lending solutions $ 92,480 $ 90,289 $ 2, % $ 317,378 $ 321,750 $ (4,372) (1.4)% Integrated core solutions 70,014 72,130 (2,116) (2.9)% 287, ,867 18, % Total revenues $ 162,494 $ 162,419 $ % $ 604,413 $ 590,617 $ 13, % In U.S. dollars Lending solutions US$ 69,327 US$ 67,355 US$ 1, % US$ 239,644 US$ 250,912 US$ (11,268) (4.5)% Integrated core solutions 52,485 53,996 (1,511) (2.8)% 216, ,073 6, % Total revenues US$ 121,812 US$ 121,351 US$ % US$ 456,410 US$ 460,985 US$ (4,575) (1.0)% Adjusted revenues 1 (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December 31 In Canadian dollars $ Change % Change $ Change % Change Lending solutions $ 93,006 $ 91,219 $ 1, % $ 319,994 $ 326,295 $ (6,301) (1.9)% Integrated core solutions 70,144 72,244 (2,100) (2.9)% 287, ,402 18, % Total Adjusted revenues 1 $ 163,150 $ 163,463 $ (313) (0.2)% $ 607,593 $ 595,697 $ 11, % In U.S. dollars Lending solutions US$ 69,721 US$ 68,051 US$ 1, % US$ 241,614 US$ 254,486 US$ (12,872) (5.1)% Integrated core solutions 52,583 54,081 (1,498) (2.8)% 217, ,493 6, % Total Adjusted revenues 1 US$ 122,304 US$ 122,132 US$ % US$ 458,803 US$ 464,979 US$ (6,176) (1.3)% 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. Adjusted revenues - Lending solutions In the fourth quarter of 2016, Adjusted revenues from lending solutions was $93.0 million compared to $91.2 million in the fourth quarter of 2015, representing an increase of $1.8 million or 2.0% from $91.2 million (increased by 2.5% in U.S. dollars) in the prior quarter. The increase was primarily due to increased revenues in our mortgage solutions services as a result of new customer contracts. In the quarter, we benefited from additional revenues from strong new and add-on LaserPro bookings offset by lower revenues from LaserPro renewals. On a sequential basis LaserPro renewal revenues were higher in the quarter than in prior quarters of D+H Annual Report 29

32 MANAGEMENT S DISCUSSION AND ANALYSIS For the full year 2016, Adjusted revenues from lending solutions was $320.0 million, representing a decrease of $6.3 million or 1.9% compared to $326.3 million (decrease of 5.1% in U.S. dollars) in the prior year. The decrease was primarily due to lower revenues from our LaserPro product related to a lower than normal year for renewal contracts, which was most evident in the first half of 2016 and decreasing through the year. The decreases were partially offset by the strengthening of the U.S. dollar, and to a lesser extent, increased revenues from our commercial and consumer lending solutions. We retained 95% of LaserPro clients and over 98% of the value for LaserPro clients relative to our client base at the beginning of Retention for all lending solutions products exceeded 90% in Bookings Lending solutions new bookings in the fourth quarter of 2016 totalled US$47.5 million representing an increase of 12.3% in fourth quarter of 2016 compared to the fourth quarter of New and add-on bookings of LaserPro drove most of the increase, with bundled products included in 21% of new LaserPro contracts in the fourth quarter of 2016, a decrease over the fourth quarter of 2015 bundled bookings of 24%. We expect Adjusted revenues to continue to grow in 2017 based on our bookings in the fourth quarter of Lending solutions new bookings for the year ended 2016 totalled US$133.5 million representing an increase of 8.9% compared to 2015 full year bookings. This growth is driven primarily by strong bookings from our lending origination solution as well as new LaserPro sales offset by reduced bookings primarily in other lending solutions. New and add-on bookings included bundled products in 28% of its new contracts, an increase over the year ended 2015, where bundled bookings accounted for approximately 25% of the contracts. The revenues from in-year bookings will be delayed on certain contracts due to the inclusion of bundled solutions or contracts which have a longer implementation cycle. A portion of the 2016 bookings were recognized in earnings in 2016 and the balance is expected to convert to a revenue stream in the next 1 to 6 months. Contract renewals are not included in bookings. See section 11.1 of this MD&A for the definition of Bookings. Backlog The lending solutions backlog as at December 31, 2016 was US$64.5 million, which represents a 5.6% increase compared to the backlog as at December 31, Refer to section 11.1 of this MD&A for the definition of backlog. Adjusted revenues - Integrated core solutions In the fourth quarter of 2016, Adjusted revenues from our integrated core solutions were $70.1 million compared to fourth quarter 2015 revenues of $72.2 million, a decrease of $2.1 million or 2.9% (decreased by 2.8% in U.S. dollars). The decline during the fourth quarter was primarily due to a decline in our enterprise and channel solutions Adjusted revenues as a result of lower contract renewals and product rationalization during the quarter. The decrease was partially offset by increase in our payment solutions Adjusted revenue, as a result of strong 2015 bookings. For the year ended 2016, Adjusted revenues from our integrated core solutions increased by $18.2 million or 6.8% from $269.4 million in the prior year to $287.6 million in the year ended 2016 (increased by 3.2% in U.S. dollars). The growth during 2016 is primarily attributable to the strengthening of the U.S. dollar and growth in our payments solutions revenues as a result of bookings primarily in 2015 and the first half of These increases were partially offset by lower optimization solutions revenues as a result of product rationalizations during the year and modest core client attrition among our smaller core clients. Integrated Core retention rate was 95% across the core platforms with 68 core renewals in Bookings Integrated core banking and channel solutions bookings for the fourth quarter of 2016 totalled US$36.3 million representing a decrease of 24.7% over the same quarter in 2015 primarily attributable to timing of new deals being moved into 2017 along with accelerated implementation and product rationalization D+H Annual Report

33 Bookings for the year ended 2016 totalled US$98.8 million, representing a decrease of 21.9% over the prior year, driven primarily from normalizing for products rationalized, and timing of certain deals moving to The company is focused on bundles of Core, Payments and channels bookings. As a result Integrated Core wins in the year were comprised of a 25% increase in Core bundles wins and a 30% growth in contract value, backed by our Phoenix platform. A portion of the bookings for the year were recognized in earnings in 2016 and the balance is expected to convert to a revenue stream in the next 3 to 12 months. Backlog The integrated core solutions backlog as at December 31, 2016 was US$126.2 million, which represents a 8.7% decrease compared to the backlog as at December 31, The reduction is driven by decreased bookings in 2016 versus Refer to section 11.1 of this MD&A for the definition of backlog. Adjusted revenues by type 1, 2, 4 (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December $ Change % Change $ Change % Change SaaS $ 61,322 38% $ 59,591 36% $ 1, %$ 240,852 40% $ 222,617 37% $ 18, % License (Perpetual and Term) 47,776 29% 46,687 29% 1, % 139,473 23% 150,171 25% (10,698) (7.1)% Maintenance 36,233 22% 38,012 23% (1,779) (4.7)% 146,322 24% 144,012 24% 2, % Professional Services 13,333 8% 13,451 8% (118) (0.9)% 53,755 9% 53,952 9% (197) (0.4)% Other 3 4,486 3% 5,722 4% (1,236) (21.6)% 27,191 4% 24,945 4% 2, % Total $ 163, % $ 163, % $ (313) (0.2)%$ 607, % $ 595, % $ 11, % 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. 2 The definitions of these revenue types can be found in Section Other includes hardware sales, conference revenues and billable costs. 4 Totals may not add due to rounding. SaaS revenues have increased in the fourth quarter and year ended 2016 as a result of growth in our lending LOS solution due to strong 2016 bookings and from our integrated core card payment solutions due to strong bookings in License revenues for term contracts increased in the fourth quarter due to implementation of two licensed enterprise deals. License revenue from term contracts for the year ended 2016 decreased due to reduced LaserPro contract renewals in the year, partially offset by new client revenues. Maintenance revenues decreased in the quarter primarily due to attrition in one of our enterprise solutions where we are no longer planning to maintain market competitive positioning. However, maintenance revenues increased for the year due to recurring annual growth in our LaserPro and other lending solutions client base. Professional Services revenues decreased in the fourth quarter and in the year ended 2016 due to timing of implementations in both lending and integrated core solutions. Other revenues decreased in the fourth quarter due to the timing of hardware sales and lower early termination fees. Lower early termination fees are viewed positively by the Company as clients are retained on their existing platforms. The increase in other revenues for the full year of 2016 relates to the timing of hardware sales and other billable costs flow through D+H Annual Report 31

34 MANAGEMENT S DISCUSSION AND ANALYSIS Expenses (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December 31 In Canadian dollars $ Change % Change $ Change % Change Employee compensation and benefits 1 $ 57,567 $ 58,935 $ (1,368) (2.3 )% $ 239,513 $ 227,301 $ 12, % Non-compensation direct expenses 2, 4 21,698 15,233 6, % 73,869 56,568 17, % Other operating expenses 3, 4 22,274 21, % 95,246 85,335 9, % Total expenses $ 101,539 $ 95,833 $ 5, % $ 408,628 $ 369,204 $ 39, % In U.S. dollars Employee compensation and benefits 1 US$ 43,144 US$ 44,180 US$ (1,036) (2.3 )% US$ 180,673 US$ 178,201 US$ 2, % Non-compensation direct expenses 2, 4 16,265 11,408 4, % 55,788 44,260 11, % Other operating expenses 3, 4 16,717 16, % 71,992 66,510 5, % Total expenses US$ 76,126 US$ 71,799 US$ 4, % US$ 308,453 US$ 288,971 US$ 19, % 1 Employee compensation and benefits expenses include incentive 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 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 fourth quarter and year ended 2015, these costs were $0.8 million (US$0.6 million) and $3.1 million (US$2.4 million), respectively. Employee compensation and benefits Employee compensation and benefits expenses in the fourth quarter decreased by $1.4 million or 2.3% from $58.9 million in the fourth quarter of 2015 to $57.6 million in the fourth quarter of 2016, primarily due to lower incentive compensation costs and lower costs in the quarter as a result of our realignment initiatives. These decreases were partially offset by increased temporary labour costs during the quarter related to product delivery. In the year ended 2016, employee compensation and benefits expenses increased $12.2 million or 5.4% from $227.3 million in the prior year to $239.5 million in the year ended 2016 primarily due to the appreciation of the U.S. dollar, resulting in an increase of $9.1 million, and to a lesser extent, annual merit increases, increased risk initiatives, product development, product implementation costs and decreased R&D tax credit incentives which were partially offset by lower incentive compensation costs and reduced headcount. Non-compensation direct expenses Non-compensation direct expenses in the fourth quarter increased by $6.5 million or 42.4% from $15.2 million in the fourth quarter of 2015 to $21.7 million in the fourth quarter of The increases were primarily due to increased direct expenses as a result of growth in our card payments solutions, increased software license fees and costs related to our rationalization initiatives. Full year 2016 non-compensation direct expenses increased by $17.3 million or 30.6% from $56.6 million in the prior year to $73.9 million. The increase was primarily attributable to the reasons noted above, in addition to the strengthening of the U.S. dollar as well as costs related to our rationalization initiatives. Other operating expenses Other operating expenses increased by $0.6 million or 2.8% from $21.7 million in the fourth quarter of 2015 to $22.3 million in the fourth quarter of 2016, primarily due to increased telecommunications and repairs and maintenance costs. Other expenses increased by $9.9 million or 11.6% from $85.3 million in the prior year to $95.2 million in the year ended 2016, which primarily reflected a stronger U.S. dollar for the year in addition to increased telecommunications costs, consulting fees, customer related costs that are not expected to recur and other professional fees in support of our risk initiatives and growth strategy D+H Annual Report

35 EBITDA and EBITDA margin 1 (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December 31 In Canadian dollars $ Change % Change $ Change % Change EBITDA 1 $ 60,955 $ 66,586 $ (5,631) (8.5)% $ 195,785 $ 221,413 $ (25,628) (11.6)% EBITDA margin % 41.0% (3.5)% 32.4% 37.5% (5.1)% In U.S. dollars EBITDA 1 US$ 45,686 US$ 49,552 US$ (3,866) (7.8)% US$ 147,957 US$ 172,014 US$ (24,057) (14.0)% EBITDA margin % 40.8% (3.3)% 32.4% 37.3% (4.9)% 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. EBITDA and Adjusted EBITDA and EBITDA margin and Adjusted EBITDA margin for the fourth quarter and year ended 2016 reflect the changes in revenues and expenses period over period as discussed above. The decline in both periods is primarily due to reduced LaserPro revenues. Adjusted EBITDA and Adjusted EBITDA margin 1 (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December 31 In Canadian dollars $ Change % Change $ Change % Change Adjusted EBITDA 1 $ 60,159 $ 65,590 $ (5,431) (8.3)% $ 192,400 $ 217,670 $ (25,270) (11.6)% Adjusted EBITDA margin % 40.1% (3.2)% 31.7% 36.5% (4.8)% In U.S. dollars Adjusted EBITDA 1 US$ 45,089 US$ 48,806 US$ (3,717) (7.6)% US$ 145,406 US$ 169,085 US$ (23,679) (14.0)% Adjusted EBITDA margin % 40.0% (3.1)% 31.7% 36.4% (4.7)% 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. Adjusted EBITDA and Adjusted EBITDA margins reflect lower acquisition accounting adjustments that increased EBITDA by $0.8 million and $1.0 million for the fourth quarter of 2016 and 2015, respectively, and by $3.4 million and $3.7 million for the year ended 2016 and 2015, respectively. Adjusted EBITDA and Adjusted EBITDA margins declined in the fourth quarter and year ended 2016 and reflect the changes in revenues and expenses period over period as discussed above. The decline in both periods is primarily due to reduced LaserPro revenues. 5.4 Canadian segment Business overview We generate revenues from lending and payments solutions in Canada. The Canadian segment accounted for 41% and 42% of the fourth quarter and year ended 2016 consolidated Adjusted revenues, respectively. 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 first half 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. Services under the new contract are expected to be operational on April 1, Until that time, the Company will continue as the incumbent CSLP services provider under its current contract with the Government of Canada. The new contract will have an initial term of eight years with up to a further seven year extension at the Government of Canada s option D+H Annual Report 33

36 MANAGEMENT S DISCUSSION AND ANALYSIS Revenues and Adjusted revenues 1 (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December $ Change % Change $ Change % Change Lending solutions $ 97,860 $ 93,064 $ 4, %$ 397,087 $ 367,003 $ 30, % Payments solutions 76,754 79,325 (2,571) (3.2)% 314, ,688 (2,053) (0.6)% Total Adjusted revenues 1 $ 174,614 $ 172,389 $ 2, %$ 711,722 $ 683,691 $ 28, % 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. Adjusted revenues are the same as revenues recorded under IFRS for the Canadian segment as this segment was not subject to acquisition accounting adjustments. Adjusted Revenues - Lending solutions Lending solutions revenues for the fourth quarter of 2016 increased from $93.1 million in the fourth quarter of 2015 to $97.9 million in the fourth quarter of 2016, a $4.8 million or 5.2% increase. The increase was driven primarily by increases in collateral management solutions and mortgage origination services while our student lending revenues remained fairly consistent with the comparable quarter in the prior year. Lending solutions revenues for the year ended 2016 increased from $367.0 million in the prior year to $397.1 million in the year ended 2016, a $30.1 million or 8.2% increase. The increase was driven primarily by increases in collateral management solutions and to a lesser degree student lending revenues while our mortgage origination revenues remained consistent with prior year results. Collateral management solutions revenues in the fourth quarter were higher compared to the prior year comparative period primarily due to a non-recurring transaction in our recovery business and as a result of a new major recovery contract with the auto finance division of a large Canadian bank in These increases were partially offset by decreases in volumes during the quarter. This new contract also increased full year 2016 revenues. Additionally, higher average order values and to a lesser degree, to a non-recurring sale in our recovery business during the fourth quarter also increased full year revenues. These increases were partially offset by lower volumes during the year. Student lending revenues in the fourth quarter of 2016 were slightly lower compared to the last year due to a one-time price adjustment which increased revenues in the fourth quarter of 2015 in addition to decreased professional services revenue in the fourth quarter of These decreases were partially offset by higher volumes during the quarter. For the year ended 2016, student lending revenues increased primarily due to higher volumes and increased professional services revenue. These increases were partially offset by a 2015 one-time price adjustment related to enhanced functionality in our repayment assistance program, which increased revenues in the year ended Mortgage origination revenues for the fourth quarter of 2016 increased compared to the same period last year, primarily due to increased volumes and to a lesser degree, an increase in professional services revenue. For the year ended 2016, mortgage origination revenues remained consistent with the prior year primarily due to higher volumes which were offset by the impact of a retroactive price adjustment for a contract signed in the beginning of 2015 which increased revenues during that period. Adjusted revenues - Payments solutions Revenues from payments solutions for the fourth quarter of 2016 decreased from $79.3 million in the fourth quarter of 2015 to $76.8 million in the fourth quarter of 2016, a $2.6 million or 3.2% decrease. The decrease in payments solutions revenues for the fourth quarter of 2016 was primarily due to lower cheque volumes which were partially offset by increased average order values in the cheque program and the reversal of certain accounting charges. Payment solutions revenue for the year ended 2016 decreased from $316.7 million in the prior year to $314.6 million in the year ended 2016, a $2.1 million or 0.6% decrease. The decrease in payments solutions revenues for the year ended 2016 was primarily due to lower cheque volumes which were partially offset by the growth in our enhancement services program and increased average order values in the cheque program. Subscription fee-based enhancement services revenue grew in the year ended 2016 compared to the prior year, primarily due to the onboarding of new and existing subscribers throughout 2015 from a strategic partnership that D+H entered into in 2014 with one of Canada s major financial institutions D+H Annual Report

37 Adjusted revenues by type 1, 2, 3 (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December $ Change % Change $ Change % Change SaaS $ 14,557 8%$ 13,370 8%$ 1, %$ 59,470 8% $ 59,473 9%$ (3) 0.0 % Transaction Processing Services 83,306 48% 79,693 46% 3, % 337,620 47% 307,529 45% 30, % Canadian Payments Products/Solutions 76,751 44% 79,326 46% (2,575) (3.2)% 314,632 44% 316,689 46% (2,057) (0.6)% Total $ 174, %$ 172, %$ 2, %$ 711, % $ 683, %$ 28, % 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. 2 The definitions of these revenue types can be found in Section Totals may not add due to rounding. SaaS revenues are from the Canadian mortgage technology solutions and increased in the fourth quarter and remained consistent on a full year basis as discussed above in Adjusted revenues - Lending solutions. Transaction processing services primarily relate to the collateral management solutions and Canada student lending business and increased in the fourth quarter and year-to-date period as discussed above in Adjusted revenues - Lending solutions. Canadian payments products/solutions which includes cheque products and enhancement services and other solutions decreased in both the fourth quarter and the year-to-date periods as discussed above in Adjusted revenues - Payment solutions. Expenses (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December $ Change % Change $ Change % Change Employee compensation and benefits 1 $ 31,309 $ 34,971 $ (3,662) (10.5)%$ 137,555 $ 147,426 $ (9,871) (6.7)% Non-compensation direct expenses 2 74,286 74, % 311, ,868 28, % Other operating expenses 3 22,567 14,402 8, % 74,930 63,889 11, % Total expenses $ 128,162 $ 123,408 $ 4, %$ 524,415 $ 495,183 $ 29, % 1 Employee compensation and benefits expenses include incentive 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 materials, shipping, selling, royalties and third-party direct disbursements. 3 Other operating expenses include occupancy costs, communication costs, professional fees, insurance, legal and other expenses not included in other categories. Employee compensation and benefits Employee compensation and benefits costs decreased in the fourth quarter by $3.7 million or 10.5% from $35.0 million in the fourth quarter of 2015 to $31.3 million in the fourth quarter of The decrease in the fourth quarter is primarily due to lower incentive compensation, lower severance costs and lower salaries due to our global operating model changes and our global delivery strategy partially offset by higher costs related to risk initiatives, product development initiatives and enterprise-wide system initiatives. For the year ended 2016, employee compensation and benefits costs decreased by $9.9 million or 6.7% from $147.4 million in the prior year to $137.6 million in the year ended The decrease is primarily due to lower incentive compensation, lower severance costs, lower costs due to our global delivery strategy and global operating model changes partially offset by higher costs related to ongoing investments in our product development, risk initiatives and enterprise-wide system initiatives D+H Annual Report 35

38 MANAGEMENT S DISCUSSION AND ANALYSIS Non-compensation direct expenses Non-compensation direct expenses increased in the fourth quarter by $0.3 million or 0.3% from $74.0 million in the fourth quarter of 2015 to $74.3 million in the fourth quarter of The increase is primarily attributable to the increase in direct costs which are consistent with the increases in revenues in our collateral management solutions business. For the year ended 2016, non-compensation direct expenses increased by $28.1 million or 9.9% from $283.9 million in the prior year to $311.9 million in the year ended The increase is attributable to the direct costs associated with managing our collateral management solutions business which are consistent with the increase in volumes and resulting revenues in this business, 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 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 fourth quarter of 2016, other operating expenses increased by $8.2 million or 56.7% from $14.4 million in the fourth quarter of 2015 to $22.6 million in the fourth quarter of In the fourth quarter of 2016, we had a foreign exchange loss relating to operating accounts of $3.6 million compared to an operational foreign exchange gain of $5.2 million in the comparable period last year, effectively increasing other operating expenses by $8.7 million. For the year ended 2016, other operating expenses increased by $11.0 million or 17.3% from $63.9 million in the prior year to $74.9 million. We had increased professional services fees related to the new CSLP contract and increased risk and other professional services fee expenses, partially offset by lower telecommunications and other costs. Additionally, for the year ended 2016, we had a foreign exchange loss relating to operating accounts of $2.3 million compared to an operational foreign exchange gain of $2.4 million in the prior year, effectively increasing other operating expenses by $4.6 million. Adjusted EBITDA and Adjusted EBITDA margin 1 (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December $ Change % Change $ Change % Change Adjusted EBITDA 1,2 $ 46,452 $ 48,981 $ (2,529) (5.2)% $ 187,307 $ 188,508 $ (1,201) (0.6)% Adjusted EBITDA margin 1,2 26.6% 28.4% (1.8)% 26.3% 27.6% (1.3)% 1 Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. 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 fourth quarter of 2016, Adjusted EBITDA and Adjusted EBITDA margin have decreased compared to the fourth quarter of 2015 and reflect the changes in revenues and expenses period over period as discussed above. Exclusion of the non-cash unfavourable exchange rate variance would result in an increase in this margin by 300bps. For the year ended 2016, Adjusted EBITDA and Adjusted EBITDA margin have decreased compared to the prior year and reflects the changes in revenues and expenses period-over-period as discussed above. The negative impact of the U.S. dollar decreased margins for the year ended 2016 by 0.6% D+H Annual Report

39 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 and cost reduction initiatives. All of the items included in corporate are reflected as adjustments to EBITDA in our calculation of Adjusted EBITDA. (Income) Expenses (In thousands of dollars, unless otherwise noted) Three months ended December 31 Year ended December $ Change % Change $ Change % Change Employee compensation and benefits (income)/expense $ (1,863) $ 10,406 $ (12,269) (117.9)%$ 27,182 $ 32,196 $ (5,014) (15.6)% Other operating (income) expenses 1 (1,273) 12,052 (13,325) (110.6)% 7,108 6, % Total (income) expenses $ (3,136) $ 22,458 $ (25,594) (114.0)%$ 34,290 $ 39,023 $ (4,733) (12.1)% 1 For the year ended December 31, 2015, integration costs of $0.9 million were included in non-compensation direct expenses and have been reclassified to other operating (income) expenses to conform to current year classification. Corporate expenses are typically not comparable in quarters or years due to the variable drivers of these costs. Employee compensation and benefits 2016 In the fourth quarter of 2016, employee compensation and benefits income totalled $1.9 million and primarily consisted of a reversal of $1.6 million related to the Company s estimated cost for initiatives to align global operations and achieve cost synergies following D+H s acquisitions including Fundtech in 2015, and a reversal of $0.4 million related to estimated integration-related costs with the acquisition of Fundtech. For the year ended 2016, employee compensation and benefits expenses totalled $27.2 million and consisted of $21.4 million related to the Company s initiatives to align global operations and achieve cost synergies following D+H s acquisitions including Fundtech in 2015, and $5.8 million of integration-related costs incurred with the acquisition of Fundtech During the fourth quarter and year ended 2015, employee compensation and benefits expenses totalled $10.4 million and $32.2 million, respectively, and included $7.3 million and $21.5 million, respectively, of integration related costs in connection with the acquisition of Fundtech. There were also $2.1 million and $7.5 million of charges in the fourth quarter and year ended 2015, respectively, related to the Company s program to expand global capabilities on a cost-effective basis. Other operating (income) expenses 2016 In the fourth quarter of 2016, other operating income totalled $1.3 million and primarily consisted of a non-cash foreign exchange gain of $2.3 million of financing related intercompany balances, which was partially offset by $0.9 million of costs related to the Company s initiatives to align global operations and achieve cost synergies following D+H s acquisitions including Fundtech in For the year ended 2016, other operating expense totalled $7.1 million and primarily consisted of $12.8 million of costs related to the Company s initiatives to align global operations and achieve cost synergies following D+H s acquisitions including Fundtech in 2015, which was partially offset by a non-cash foreign exchange gain of $3.0 million of financing-related intercompany balances and a reversal of $2.6 million of integration-related costs incurred with the acquisition of Fundtech Other operating expenses totalled $12.1 million in the fourth quarter and $6.8 million in the year ended 2015 and consisted of $3.0 million and $30.0 million, respectively, of transaction and business integration costs incurred in connection with the acquisition of Fundtech. Other operating expenses also included a non-cash foreign exchange loss of $6.2 million in the fourth quarter of 2015 and a non-cash foreign exchange gain of $21.8 million for the year ended 2015, on finance-related intercompany balances. The year ended 2015 also included a $5.5 million gain recorded in the first quarter of 2015 related to HFS closing working capital settlement. The remaining expenses are attributable to business integration costs incurred in connection with the acquisitions D+H Annual Report 37

40 MANAGEMENT S DISCUSSION AND ANALYSIS 6 SUMMARY OF EIGHT QUARTER CONSOLIDATED RESULTS (In thousands of dollars, unless otherwise noted) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Revenues GTBS $ 88,704 $ 90,473 $ 90,355 $ 94,190 $ 89,337 $ 87,864 $ 55,102 $ L&IC 162, , , , , , , ,746 Canadian 174, , , , , , , ,268 Consolidated revenues $ 425,812 $ 417,709 $ 424,187 $ 412,149 $ 424,145 $ 415,076 $ 372,376 $ 295,014 Expenses GTBS $ 74,525 $ 76,119 $ 70,843 $ 72,488 $ 65,606 $ 69,021 $ 43,874 $ L&IC 101, , , ,565 95,833 90,082 93,956 89,333 Canadian 128, , , , , , , ,823 Corporate (3,136) 4,004 22,147 11,275 22,458 (983) 23,657 (6,111) Consolidated expenses $ 301,090 $ 311,247 $ 329,071 $ 319,900 $ 307,305 $ 287,536 $ 286,025 $ 201,045 EBITDA 1 GTBS $ 14,179 $ 14,354 $ 19,512 $ 21,702 $ 23,731 $ 18,843 $ 11,228 $ L&IC 60,955 46,305 46,486 42,039 66,586 60,541 45,873 48,413 Canadian 46,452 49,807 51,265 39,783 48,981 47,173 52,907 39,445 Corporate 3,136 (4,004) (22,147) (11,275) (22,458) 983 (23,657) 6,111 Consolidated EBITDA 1 124, ,462 95,116 92, , ,540 86,351 93,969 Consolidated EBITDA margin % 25.5% 22.4% 22.4% 27.5% 30.7% 23.2% 31.9% Depreciation and amortization 91,948 70,318 73,045 76,670 80,399 71,831 58,231 42,438 Impairment of goodwill 2 121,041 (Loss) income from operating activities (88,267) 36,144 22,071 15,579 36,441 55,709 28,120 51,531 Finance expense 26,058 25,759 25,641 26,476 28,551 25,488 27,364 14,430 (Loss) income before income taxes (114,325) 10,385 (3,570) (10,897) 7,890 30, ,101 Income tax (recovery) expense (19,912) (6,195) (8,953) (15,684) (5,444) (474) (5,223) 3,104 (Loss) net income for the period $ (94,413) $ 16,580 $ 5,383 $ 4,787 $ 13,334 $ 30,695 $ 5,979 $ 33,997 Net (loss) income per share, diluted $ (0.88) $ 0.16 $ 0.05 $ 0.04 $ 0.13 $ 0.29 $ 0.06 $ 0.39 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 Exchange rate as at period end date Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures. 2 Includes $50.6 million related to the reclassification of settlement loss on forward contracts, relating to the acquisition of Fundtech, from OCI to net (loss) income. Refer to note 11 of the consolidated financial statements. The Company s segments experience seasonal fluctuations in their businesses. The GTBS segment is subject to seasonal and contractual fluctuations in its volume-based SaaS offerings and its payments hub solution, respectively. The payments hub offerings, which are multipledeliverable 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. However, due to the size and complexity of on-premise licensee D+H Annual Report

41 payment hub contracts and the timing of customer decisioning, it is possible to see variations in revenue growth in any quarter. Additionally, SaaS transaction volumes tend to increase during the fourth quarter. As a result, revenue recognition is typically higher during the fourth quarter and EBITDA margins are generally expanded. 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 and L&IC segments, 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. Additional Information (In thousands of dollars, unless otherwise noted) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Adjusted revenues 1 GTBS $ 88,704 $ 90,473 $ 90,694 $ 95,251 $ 101,857 $ 90,352 $ 56,568 $ L&IC 163, , , , , , , ,263 Canadian 174, , , , , , , ,268 Consolidated Adjusted revenues 1 $ 426,468 $ 418,445 $ 425,337 $ 414,187 $ 437,709 $ 418,762 $ 375,163 $ 296,531 Adjusted EBITDA 1 GTBS $ 14,179 $ 14,354 $ 19,634 $ 22,065 $ 35,574 $ 20,666 $ 12,278 $ L&IC 60,159 45,476 45,646 41,119 65,590 59,581 44,974 47,525 Canadian 46,452 49,807 51,265 39,783 48,981 47,173 52,907 39,445 Consolidated Adjusted EBITDA 1 $ 120,790 $ 109,637 $ 116,545 $ 102,967 $ 150,145 $ 127,420 $ 110,159 $ 86,970 Adjusted EBITDA margin 1 GTBS 16.0% 15.9% 21.6% 23.2% 34.9% 22.9% 21.7% L&IC 36.9% 30.9% 30.9% 27.5% 40.1% 39.2% 31.9% 34.1% Canadian 26.6% 27.6% 27.4% 23.5% 28.4% 26.7% 29.8% 25.1% Consolidated Adjusted EBITDA margin % 26.2% 27.4% 24.9% 34.3% 30.4% 29.4% 29.3% Debt to EBITDA x 3.071x 2.998x 3.016x 3.185x 3.441x 3.389x 2.336x Net cash from operating activities $ 100,857 $ 82,480 $ 55,362 $ 54,773 $ 96,109 $ 63,559 $ 51,890 $ 9,822 Adjusted net cash from operating activities 1 $ 99,975 $ 84,037 $ 79,571 $ 67,218 $ 112,383 $ 79,396 $ 71,102 $ 19,273 Adjusted net income for the period 1 $ 57,032 $ 52,832 $ 58,914 $ 45,436 $ 82,715 $ 65,154 $ 59,640 $ 47,360 Adjusted net income per share, diluted 1 $ 0.53 $ 0.49 $ 0.55 $ 0.43 $ 0.78 $ 0.61 $ 0.60 $ Non-IFRS measure: see Non-IFRS financial measures and key performance indicators in Section 11.1 for additional information and reconciliation to IFRS measures D+H Annual Report 39

42 MANAGEMENT S DISCUSSION AND ANALYSIS 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 borrowings The movements in D+H s secured debt during the fourth quarter and year ended 2016 are as follows: Debt roll-forward (In thousands of CAD dollars) Three months ended December 31, 2016 Credit Facility Bonds Total Debt denominated in CAD USD CAD USD Balance, October 1, 2016 $ 9,400 $ 886,342 $ 100,000 $ 524,024 $ 1,519,766 Repayments (31,016) (31,016) Foreign exchange adjustments 20,947 12,385 33,332 Balance, December 31, 2016 $ 9,400 $ 876,273 $ 100,000 $ 536,409 $ 1,522,082 (In thousands of CAD dollars) Year ended December 31, 2016 Credit Facility Bonds Total Debt denominated in CAD USD CAD USD Balance, January 1, 2016 $ 59,400 $ 935,196 $ 100,000 $ 552,908 $ 1,647,504 Repayments (50,000) (31,016) (81,016) Foreign exchange adjustments (27,907) (16,499) (44,406) Balance, December 31, 2016 $ 9,400 $ 876,273 $ 100,000 $ 536,409 $ 1,522,082 In 2016, we have used cash generated from operations for repayments of our debt. During the fourth quarter and the year ended 2016, we have repaid US$23.1 million ($31.0 million) and $81.0 million of debt, respectively. Convertible debentures As at December 31, 2016, net of conversions to date, the Company had $229.3 million principal amount of 6% unsecured, convertible debentures outstanding compared to $229.5 million as at December 31, These are convertible at the option of the holder to common shares at a conversion price of $28.90 per common share, representing 34.6 common shares per $1,000 principal amount of the convertible debenture, for a total of 7,934,291 shares. During the year ended December 31, 2016, the Company issued 5,985 common shares following the conversion of $174 thousand of convertible debentures at a conversion price of $ The Company also had $230.0 million principal amount of 5% convertible unsecured subordinated debentures outstanding as at December 31, 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 19.0 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 $36.13 ( Call Price ) which commenced 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 $65.94 and the Soft Call Date is September 30, 2018 and Hard Call Date is September 30, D+H Annual Report

43 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. In our fourth quarter of 2016, the Company entered into amended agreements with its syndicate of lenders and private noteholders regarding the step down of its Total Net Funded Debt to EBITDA ratio covenants. There was no change to the interest coverage ratio as a result of the amendment. The covenants for net debt to EBITDA as specified in our amended lending agreements requires the ratio to be a maximum of 3.50x for the quarters ending December 31, 2016 up to September 30, 2017; a maximum of 3.35x for the quarter ending December 31, 2017; a maximum of 3.25x for each subsequent quarter up to June 30, 2018; and 3.00x thereafter. As at December 31, 2016, the Debt to EBITDA ratio was 3.276x, compared to 3.451x following the closing of the acquisition of Fundtech on April 30, 2015, and 3.185x as at December 31, As at December 31, 2016, the interest coverage ratio was 4.80x, compared to 5.80x at December 31, As these ratios are not specifically defined by IFRS, section 11 contains additional details on these ratios including their definitions and corresponding calculations. 7.2 Outstanding share information As at December 31, 2016, D+H had the following common shares outstanding: Outstanding share information December 31, 2016 December 31, 2015 Common shares issued and outstanding 106,881, ,443,450 Dividend reinvestment plan and stock options outstanding: During the first quarter of 2015, DH Corporation commenced a DRIP for its Canadian resident shareholders. The DRIP allowed eligible shareholders to reinvest the cash dividends paid on all or a portion of their common shares in additional common shares, which would be issued at an applicable discount to 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. As of January 1, 2016, the discount available under DRIP was reduced to nil. During the year ended 2016, the Company had issued 298,880 common shares under its DRIP from treasury at a weighted average price of $36.42 and 44,878 common shares with a weighted average price of $27.85 were purchased on the open market and transferred to eligible shareholders participating in the DRIP (Year ended issued 976,561 common shares at a weighted average price of $36.27). The Company suspended its DRIP subsequent to the third quarter of Dividend reinvestment plan and stock options outstanding Three months ended December 31 Year ended December Dividends paid in common shares under DRIP from treasury (in thousands of dollars) 1 $ $ 9,228 $ 10,885 $ 35,420 Number of common shares issued under DRIP from treasury 297, , ,561 Weighted average price of issuance ($) $ $ $ $ Stock options outstanding 2 3,550,654 3,432,097 3,550,654 3,432,097 1 Dividends paid does not include shares repurchased on the open market and transferred to eligible shareholders under the DRIP. 2 Each stock option is exercisable into one common share of the Company. Refer to note 21 of the Company s audited consolidated financial statements for the year ended December 31, 2016 for further details D+H Annual Report 41

44 MANAGEMENT S DISCUSSION AND ANALYSIS 7.3 Financial instruments and commitments Interest-rate swaps By way of interest-rate swap contracts, as at December 31, 2016, the Company s borrowing rates on 43.0% of outstanding bank indebtedness under the Credit Facility were effectively fixed. As a result of these swaps, 74.5% of the interest rates associated with the Company s total debt, including convertible debentures, is effectively fixed. Refer to the audited consolidated financial statements of the Company for the year ended December 31, 2016 for further details on our interest-rate swaps. See table below for the fixed component of our total indebtedness: December 31, 2016 December 31, 2015 Percentage of amount fixed Percentage of amount fixed (In thousands of dollars, unless otherwise noted) Amounts (in C$) Fixed Component 1 Amounts (in C$) Fixed Component 1 Credit Facility Total Credit Facility $ 885,673 $ 380,679 43% $ 994,596 $ 460,200 46% Bonds Bonds (denominated in CAD) $ 100,000 $ 100,000 $ 100,000 $ 100,000 Bonds (denominated in USD) 536, , , ,908 Total Bonds Fixed $ 636,409 $ 636, % $ 652,908 $ 652, % Convertible debentures Convertible debentures (6.0%, 5-year) $ 229,301 $ 229,301 $ 229,474 $ 229,474 Convertible debentures (5.0%, 5.5-year) 230, , , ,000 Total Convertible Debentures Fixed $ 459,301 $ 459, % $ 459,474 $ 459, % Total $ 1,981,383 $ 1,476,389 75% $ 2,106,978 $ 1,572,582 75% 1 For the Credit Facility, the fixed component represents the total that is effectively hedged by way of interest-rate swaps contracts. Foreign exchange forward contracts As at December 31, 2016, no forward contracts were held. As at December 31, 2015, the Company had forward contracts to purchase Indian Rupees ( INR ) with notional amounts of million INR (US$16.1 million). These contracts have not been designated as hedges and changes in fair value were recorded in net (loss) income. As at December 31, 2015, the forwards were in a liability position of $25 thousand. The Company may also enter into forward contracts to manage foreign exchange risk relating to its debt covenants. Refer to Note 19 of the audited consolidated financial statements of the Company for the year ended December 31, 2016 for further details. Letters of credit The Company had outstanding letters of credit of $13.1 million as at December 31, 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. Contractual Obligations We are committed under the terms of contractual obligations with various expiration dates. These are summarized in the following table: (In thousands of dollars, unless otherwise noted) As at December 31, 2016 Total 1 Year 2-3 Years 4-5 Years 5+ Years Long-term indebtedness $ 1,522,082 $ 80,000 $ $ 970,263 $ 471,819 Debentures 459, , ,000 Operating leases 115,025 20,706 42,588 23,707 28,024 Purchase obligations 98,946 38,232 37,546 21,186 1,982 Obligations relating to deferred compensation program 13,917 4,958 8,959 Employee future benefits 27,852 1,000 2,030 2,051 22,771 Other obligations 17,956 1,039 9,114 3,258 4,545 Total contractual obligations $ 2,255,079 $ 145,935 $ 329,538 $ 1,250,465 $ 529, D+H Annual Report

45 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 repayment of debt. Cash generated from operations, (used in) / from financing activities and used in investing activities are outlined below: Cash from operating activities (In thousands of dollars) Year ended December $ Change Net (loss) income for the period $ (67,663) $ 84,005 $ (151,668) Depreciation and amortization of property, plant and equipment and intangible assets 311, ,899 59,082 Impairment of goodwill 1 121, ,041 Finance expense 103,934 95,833 8,101 Income tax recovery (50,744) (8,037) (42,707) Stock options 3,815 5,461 (1,646) Changes in non-cash working capital and other operating assets and liabilities (16,562) (76,973) 60,411 Cash generated from operating activities 405, ,188 52,614 Interest paid (96,018) (77,699) (18,319) Income tax paid (16,312) (54,109) 37,797 Net cash from operating activities $ 293,472 $ 221,380 $ 72,092 1 Includes $50.6 million related to the reclassification of settlement loss on forward contracts, relating to the acquisition of Fundtech, from OCI to net (loss) income. Refer to note 11 of the consolidated financial statements. During the year ended 2016, net cash from operating activities increased by $72.1 million over the comparative period in 2015 mainly due to changes in non-cash working capital and other operating assets and liabilities as discussed below and lower income taxes paid, partially offset by higher interest payments and a lower EBITDA. Changes in non-cash working capital and other operating assets and liabilities (In thousands of dollars) Year ended December $ Change Changes in non-cash working capital items $ 207 $ (2,866) $ 3,073 Changes in other operating assets and liabilities (16,769) (74,107) 57,338 Changes in non-cash working capital and other operating assets and liabilities $ (16,562)$ (76,973) $ 60,411 For further information regarding the breakdown of the above balances, please refer to Note 8 of the audited consolidated financial statements Cash (used in) from financing activities (In thousands of dollars) Year ended December $ Change Repayment of loans and borrowings $ (81,016) $ (156,496) $ 75,480 Proceeds from loans and borrowings 804,740 (804,740) Payment of issuance costs of loans and borrowings (11,608) 11,608 Proceeds from issuance of convertible debentures 230,000 (230,000) Payment of issuance costs of convertible debentures (8,623) 8,623 Proceeds from issuance of shares 720,165 (720,165) Payment of costs from issuance of shares (30,678) 30,678 Proceeds from exercise of stock options 2,853 1,817 1,036 Cash dividends paid (124,515) (93,881) (30,634) Common shares repurchased for the dividend reinvestment program (1,250) (1,250) Net cash (used in) from financing activities $ (203,928) $ 1,455,436 $ (1,659,364) 2016 D+H Annual Report 43

46 MANAGEMENT S DISCUSSION AND ANALYSIS For the year ended 2016, net cash used in financing activities include debt repayment of $81.0 million and cash dividend payments of $124.5 million. For the year ended 2015, we received cash proceeds of $804.7 million from the issuance of debt, $720.2 million from the issuance of shares and $230.0 million from the issuance of convertible debentures. These funds were primarily used to finance our 2015 acquisition of Fundtech (see 2015 investing activities below). We also paid $93.9 million in cash dividends in Cash used in investing activities (In thousands of dollars) Year ended December $ Change Additions to property, plant and equipment and intangible assets $ (95,993) $ (103,259) $ 7,266 Acquisition of subsidiary (net of cash acquired) (1,495,446) 1,495,446 Settlement of foreign exchange contracts 473 (50,557) 51,030 Net cash used in investing activities $ (95,520) $ (1,649,262) $ 1,553,742 Net cash used in investing activities during the year ended 2016 reflect capital asset and intangible asset additions of $96.0 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. The table below outlines our capital asset additions by type: (In thousands of dollars) Three months ended December 31 Year ended December % of total spend 2015 % of total spend 2016 % of total spend 2015 % of total spend Product development, enhancements and corporate systems $ 13,901 53% $ 12,704 46% $ 50,408 53%$ 43,541 42% Property, plant, equipment and purchased software 12,575 47% 13,439 49% 45,585 47% 38,702 38% Contracts 1,516 5% 21,016 20% Total $ 26, % $ 27, % $ 95, % $ 103, % Product development, enhancements and corporate systems additions increased by $1.2 million and $6.9 million in the fourth quarter and year ended 2016, respectively, over the comparative periods as we continue to invest in our solutions and business infrastructure. Property, plant, equipment and purchased software additions are primarily related to infrastructure required to support the on-going business operations. Expenditures decreased by $0.9 million in the fourth quarter of 2016 in comparison to the fourth quarter of 2015 due to fewer software purchases in our Canada and GTBS segments. Expenditures increased by $6.9 million in the year ended 2016, primarily related to investments in equipment in our Canadian chequing operations, leasehold improvements in the Canadian segment, growth of our business resulting from the acquisition of GTBS, investments related to risk, and foreign exchange on additions in the L&IC and GTBS segments. The 2015 customer contract additions are primarily attributable to a strategic partnership that D+H entered into 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 we expect to provide future benefits by segment: (In thousands of dollars) Three months ended December 31 Year ended December GTBS segment $ 3,283 $ 3,093 $ 13,094 $ 7,185 L&IC segment 4,462 4,373 18,109 19,784 Canadian segment 6,156 5,238 19,205 16,572 Total $ 13,901 $ 12,704 $ 50,408 $ 43,541 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, including both the Global Pay Plus product and a new product for the U.S. Payments business, in addition to Cash Management, and incremental enhancements in Financial Messaging D+H Annual Report

47 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 clients needs. Investment in our Lending solutions is focused on our origination and compliance solutions where we are developing next generation technology and expanding our offerings in mortgage, consumer, small business and commercial lending technologies. In Integrated Core solutions the internal software development focus has primarily been around providing a best in class enterprise core platform, leveraging our award winning core banking solution offering. These strategies are underpinned with additional investment in order to respond to strong market demand for deep Channels and Payment integration with our platforms. Canadian product development and enhancements In the Canadian segment, we are modernizing our student lending solution set, while also investing in a digital platform to expand our Enhancement Services product offerings, upgrading our corporate information systems, a SaaS-based platform for the registry of our Collateral Management Solutions and a new SaaS solution for our lending segment, while also digitizing certain cheque order channels. 8 CHANGES IN FINANCIAL POSITION (In thousands of dollars, unless otherwise noted) December 31, 2016 December 31, 2015 $ Change % Change Current assets $ 387,603 $ 423,220 $ (35,617) (8.4)% Non-current assets Non-current unbilled receivables 1 $ 88,928 $ 81,917 $ 7, % Other non-current assets 4,582,346 5,011,933 (429,587) (8.6)% Total non-current assets $ 4,671,274 $ 5,093,850 $ (422,576) (8.3)% Current liabilities Deferred revenues $ 129,455 $ 159,288 $ (29,833) (18.7)% Other current liabilities 315, , , % Total current liabilities $ 444,679 $ 373,611 $ 71, % Non-current liabilities Non-current deferred revenues $ 35,833 $ 38,171 $ (2,338) (6.1)% Other non-current liabilities 2,445,739 2,736,222 (290,483) (10.6)% Total non-current liabilities $ 2,481,572 $ 2,774,393 $ (292,821) (10.6)% 1 During the year ended December 31, 2015, unbilled receivables were referred to as unbilled revenues. The change in our balance sheet as at December 31, 2016 compared December 31, 2015 was driven by foreign exchange and our operations, as shown in the table below: (In thousands of dollars) December 31, 2016 vs. December 31, 2015 Change Foreign Exchange Operations Total Current assets $ (9,813) $ (25,804) $ (35,617) Non-current assets Non-current unbilled receivables 1 $ (2,736) $ 9,747 $ 7,011 Other non-current assets (131,443) (298,144) (429,587) Total non-current assets $ (134,179) $ (288,397) $ (422,576) Current liabilities Deferred revenues $ (3,603) $ (26,230) $ (29,833) Other current liabilities (4,099) 105, ,901 Total current liabilities $ (7,702) $ 78,770 $ 71,068 Non-current liabilities Non-current deferred revenues $ (736) $ (1,602) $ (2,338) Other non-current liabilities (60,808) (229,675) (290,483) Total non-current liabilities $ (61,544) $ (231,277) $ (292,821) 1 During the year ended December 31, 2015, unbilled receivables were referred to as unbilled revenues D+H Annual Report 45

48 MANAGEMENT S DISCUSSION AND ANALYSIS Current assets Current assets as at December 31, 2016 decreased by $35.6 million compared to December 31, 2015, mainly due to a decrease in current tax assets of $20.4 million. In addition, there were decreases due to fluctuations in foreign exchange rates of $9.8 million, cash and cash equivalents of $6.2 million and prepayments and other current assets of $3.0 million. These decreases were partially offset by an increase trade, unbilled and other receivables of $3.8 million. LaserPro accounts for 42.3% of current unbilled receivables. Non-current unbilled receivables Non-current unbilled receivables all 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 which typically ranges from 3 to 5 years. Noncurrent unbilled receivables increased by $7.0 million as at December 31, 2016 compared to December 31, 2015 due to an increase of $9.7 million attributable to timing of revenue recognition related to increased LaserPro term licenses, offset by $2.7 million decrease in foreign exchange rates. Other non-current assets Other non-current assets as at December 31, 2016 decreased by $429.6 million compared to December 31, 2015, mainly due to a decrease in intangible assets of $239.4 million. The decrease in intangibles was primarily attributed to amortization and an impairment charge of $16.2 million recorded in our cash management business in GTBS. In 2016, the Company recorded an impairment of goodwill of $70.5 million in GTBS, also contributing to the reduction in other non-current assets year over year. Additionally, there was a decrease of $131.4 million due to fluctuations in foreign exchange rates and a decrease in deferred tax assets of $0.5 million. These decreases were partially offset by an increase of $13.2 million in other assets, primarily related to deferred commissions and a net increase in property, plant and equipment of $5.1 million, largely due to additions net of depreciation. 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 $29.8 million compared to December 31, 2015, primarily due to a decrease in bookings within our GTBS segment and the timing of revenue recognition from financial solutions products within our L&IC segment as more revenue is being recognized up front due to vendor specific objective evidence. This decrease was compounded by a $3.6 million decrease due to fluctuations in exchange rates. Other current liabilities Other current liabilities increased by $100.9 million, primarily due the fact that $80.0 million of loans and borrowings relating to secured bonds have become current and are due in less than 12 months. The increases in trade payables, accrued and other liabilities of $18.7 million and current tax liabilities of $6.3 million have also attributed to the overall increase in other current liabilities year-over-year. These increases were offset by a decrease of $4.1 million due to fluctuations in foreign exchange rates. 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 decreased by $2.3 million compared to December 31, 2015 due to decrease of $1.6 million relating to our L&IC segment SaaS and hosting arrangements as described above. This is partially offset by increase of $0.7 million from fluctuations in foreign exchange rates. Other non-current liabilities Other non-current liabilities decreased by $290.5 million compared to December 31, 2015, due to a net debt repayment of $81.0 million, a decrease in non-current loans and borrowings of $80.0 million due to the balance becoming current, a decrease in deferred tax liabilities of $83.3 million due to amortization of intangible assets and changes in future tax rates, and a $60.8 million decrease due to fluctuations in foreign exchange rates. These decreases were partially offset by increases in convertible debentures of $8.5 million and in other long-term liabilities of $5.4 million D+H Annual Report

49 9 SIGNIFICANT ACCOUNTING POLICIES AND ACCOUNTING STANDARDS DEVELOPMENTS 9.1 Significant accounting policies Our significant accounting policies are described in note 3 of our annual consolidated financial statements for the year ended December 31, Certain of these accounting policies, listed below, require management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. These accounting estimates are considered critical because they require management to make subjective and/or complex judgments that are inherently uncertain and because they could have a material impact on the presentation of our financial condition, changes in financial position or results of operations. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Revenue Recognition The Company has multiple revenue streams, with varying revenue recognition principles. The Company s revenue streams include: Software license arrangements (term and perpetual); SaaS contracts and hosting arrangements; Professional fees for services performed for software implementation; Products and related services (for example, cheques); Maintenance revenues from software licenses; Transaction processing services; and Hardware and other service revenues comprising: equipment sold in conjunction with service and training services. In all revenue streams, management exercises judgment in determining whether the related revenue contracts outcome can be estimated reliably. Management also applies estimates in the calculation of future contract costs and related profitability as it relates to labour hours and other considerations that are used in the determination of the amounts recoverable on contracts as well as the timing of revenue recognition. Revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to the entity, the stage of completion of the transactions can be measured, the amount can be estimated and it can be reasonably assured that collection is probable. Most of the products and services we offer are part of multiple deliverable arrangements. These arrangements are typical of our L&IC and GTBS business segments, as they may include licenses, SaaS, hosting, professional services, hardware and maintenance. Below is a summary of assessments required for multiple deliverable arrangements revenue recognition: A delivered element is considered a separate unit of account if it has value to the customer on a standalone basis, and delivery or performance of the undelivered elements is considered probable and substantially under the Company s control. If these criteria are not met, the delivered element is combined with other related elements for purposes of revenue recognition. Revenue is allocated to each unit of account based on their relative fair value or by using the residual method. Under the residual method, revenue is allocated to the undelivered components of the arrangement based on their fair values and the residual amount of the arrangement revenue is allocated to delivered components. Objective evidence of fair value for certain elements of an arrangement is based upon the pricing in comparable transactions when the element is sold separately. Objective evidence of fair value for maintenance is primarily based upon the price charged for the same or similar maintenance when sold in contracts with substantive renewal terms, as substantiated by contractual renewal rates and the Company s renewal experience. Objective evidence of fair value for professional services is based upon the price charged when the services are sold separately. Objective evidence of fair value for software related implementation services and non-essential professional services and maintenance is typically present in our licensing multiple element arrangements D+H Annual Report 47

50 MANAGEMENT S DISCUSSION AND ANALYSIS Component of Multiple Deliverable Arrangement License (term and perpetual) Applicable segments: L&IC GTBS Software related implementation services Applicable segments: L&IC GTBS Maintenance Applicable segments: L&IC GTBS SaaS/hosted arrangements Applicable segments: Canada: Mortgage Technology L&IC GTBS How we recognize the revenue If there is an implementation that is considered essential to the license and typically involves significant modification or customization of the software (without implementation by the Company the software license is of no value to the customer) the license and implementation are considered one component and they are recognized based on the percentage-of-completion of the implementation If the implementation services are considered non-essential, the license revenue is recognized when the license is delivered. If we are unable to establish objective evidence of fair value of undelivered elements (for example the maintenance component of the contract or non-essential services), the license revenue is recognized over the term of the contract (term contracts only) or over the first year of maintenance for perpetual licenses. If an arrangement does not require significant production, modification or customization then revenue can be recognized when all other criteria for revenue recognition are met. Term licenses typically range from 3 to 5 years. Implementation services are recorded as revenue based on percentage-of-completion of the project as a whole. In some cases, professional services are deferred and amortized over the life of the contract. In these circumstances, the associated expenses are also deferred and recognized over the life of the contract. All licenses are sold with a maintenance component, including the right to receive telephone support, bug fixes and unspecified updates, for a specified period of time, usually one year. Maintenance revenue is recognized ratably over the life of the maintenance period. Some term and usage-based licenses may include maintenance as a bundled item that is committed for the period of the agreement and does not have objective evidence of fair value. The software under such contracts cannot be treated as a separate component and all related revenue is recognized ratably over the term of the agreement or on an actual usage basis once all of the other elements have been delivered. These contracts are generally term based ranging from 3 to 10 years. Implementation fees typically do not meet the criteria as a separate unit of accounting. These are deferred and recognized on a straight-line basis over the term of the contract. On-going hosting fees are recognized as revenue over the hosting period. Usage-based fees and minimum transaction fees are recognized monthly over the term. Product sales Applicable to all segments Non-essential professional services Applicable to all segments Subscription Applicable to all segments Transaction processing services Applicable segments: Canada: Enhancement Services Canada: Student Lending Canada: Collateral Management Revenue is recognized when the product/hardware is delivered. Non-essential professional services revenue includes fees derived from the delivery of certain consulting and training services. Revenue is recognized on a time and materials basis or lump sum after delivery is complete. Subscription revenues are recorded over the subscription period. Transactional revenues are recognized as provided D+H Annual Report

51 Other considerations After delivery, if substantive uncertainty exists about customer acceptance of the software, license revenue is deferred until acceptance occurs. The Company considers the following in evaluating the effect of customer acceptance: historical experience with similar types of arrangements or products, whether the acceptance provisions are specific to the customer or are included in all arrangements, the length of the acceptance term and historical experience with the specific customer. In some instances, the Company offers extended-payment terms on its term software licenses. When the receipt of payment is deferred over the term of the arrangement, the arrangement effectively constitutes a financing transaction. In such cases, the fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest. Revenue from sales of third party vendor products, such as software licenses, hardware, or services is recorded gross when the Company is a principal to the transaction and is recorded net of costs when the Company is acting as an agent between the client and vendor. Factors generally considered to determine whether the Company is a principal or an agent are if the Company is the primary obligor to the client, if it adds meaningful value to the vendor s product or service and if it assumes delivery and credit risks. Deferred costs relating to revenue arrangements Certain contract acquisition costs, comprised mostly of sales commissions, that are direct and incremental to obtaining revenue contracts and are recoverable from minimum future cash flows associated with the contract are deferred and amortized to employee compensation and benefits in the consolidated statements of (loss) income over the term of the related revenue. Upfront direct costs for initial installation and implementation that relate to future activity on a customer contract are deferred and recognized as an asset within Other Assets when it is probable that they will be recovered through future minimum payments specified in contractual agreements. The deferred contract costs are amortized over the period of the related contract revenue. Typical revenue recognition cycles of some of our major products LaserPro A typical 5-year LaserPro term arrangement is a multiple element contract with annual payment terms. Each contract 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 using the residual method and typically represents approximately 65% of the contract value excluding non-essential services. The license is delivered within 3 days of contract execution for new customers and upon execution for renewals. Non-essential services, if any, relate to training and interfaces deliverables, and are recognized when delivered, and typically represent less than 20% of the contract value. The balance of the contract is maintenance which is annually renewable and recognized on a ratable basis over the period commencing upon license delivery. The portion of license revenue recognized in excess of billing is allocated between short and long term unbilled fees on the balance sheet net of discount calculated using our rate for cost of funds. LaserPro may be licensed with CreditQuest and/or DecisionPro, both of which include essential services. Assuming all other revenue recognition criteria are met, the license component and the essential services are recognized over the delivery period, typically, 4-6 months following the execution of the contract. Approximately 20% of LaserPro renewals include an additional software solution. Maintenance is billed annually in advance and recognized over the term. In Q4 2012, HFS implemented new contract terms on its LaserPro product; and since then LaserPro contracts are comprised of a software license, non-essential services and maintenance. Revenue is recognized as outlined above using the residual method. For LaserPro contracts entered into prior to Q4 2012, the resulting revenue recognition commenced over the remaining term of the contract only when the final non-essential service was delivered. This has resulted in uneven revenue recognition for LaserPro since Q4 2012; however, the cash received from the contracts was consistently billed and collected over the contract term. The average contract term of LaserPro is approximately 4.6 years; therefore, the majority of the LaserPro revenue recognition from 2016 forward will be consistently recognized as noted above. LaserPro contracts are similar to SaaS and hosted arrangements in that they are term contracts, the renewal rate is greater than 95% and they provide a steady cash flow stream over the contract term. Mortgagebot POS/LOS A typical Mortgagebot POS/LOS SaaS solution contract includes an implementation fee and a subscription fee with CPI escalations. The implementation fee is recognized over the term of the contract. Implementation costs are expensed as incurred. The implementation fees are typically a small component of the total contract value, representing 3-8% of the total value. Following implementation, subscription fees are recognized and invoiced monthly over the term D+H Annual Report 49

52 MANAGEMENT S DISCUSSION AND ANALYSIS Integrated Core An Integrated Core and Channel hosted contract typically includes essential services and a monthly subscription fee for a term of 7 to 10 years. Subscription fees can include flat monthly fees plus usage and/or monthly minimums. The essential services can be invoiced upon execution which appears as deferred revenue in the statement of financial position. Standalone value is not present between the subscription and essential services, and therefore revenue recognition for both commences upon delivery and continues monthly through the term of the contract. Any discount is allocated to each element based on relative fair value of all elements and is reflected in monthly revenue. Direct labour costs related to implementation are deferred then amortized over the term of the subscription upon contract commencement. Certain Core and Channel solutions have volume-based revenue. The majority of our Integrated Core solutions sold in 2016 will be delivered to customers on a hosted versus in-house basis. Global PAYplus Global PAYplus contracts are multiple element contracts that typically include a license, professional services and maintenance components. Certain contracts may also involve a volume-based license fee component. Typically the contracts include one to three components of the GPP solution (high-value payments, low-value payments and faster payments) and a geographic region (typically one or more countries). Additional components or geographic regions are separate contracts. The license component of revenue is recognized over the implementation phase, typically months. The license is billed in accordance with the contract terms and may include upfront payments resulting in a deferred revenue. Professional services to deliver and set up the software are billed and recognized based on the percentage completion method over the implementation period. Implementation costs are expensed as incurred. Valuation of Goodwill and Intangibles (i) Goodwill and measuring for impairment Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquiree at the date of acquisition. Goodwill is tested annually for impairment or more frequently, if events or changes in circumstances indicate the non-financial assets may be impaired, and carried at cost less accumulated impairment losses. Goodwill recognized by the Company arose from various acquisitions including the acquisition of Fundtech in 2015, HFS and Compushare Inc. ( Compushare ) businesses in 2013 and from other acquisitions in prior years. The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cashgenerating units, or groups thereof, that are expected to benefit from the synergies of the combination. We measure for impairment at the lowest level of identifiable cash flows being the recoverable amount of the groups of cash-generating units to which the goodwill relates. The significant assumptions underlying the recoverability of goodwill include future cash flow and growth projections, considering industry performance and general business and economic conditions, weighted average cost of capital and may include annual earnings multiples. Our estimate of future performance is dependent on a number of market economic trends, such as consolidation of financial institutions, changing government regulations, decisions by financial institutions whether or not to replace their legacy computer systems, decline in cheque usage due to the implementation and adoption of alternative payment methods, interest rates, residential real estate activity and lending activity in general, among other items. Our search and loan registration service area is dependent on car loan volumes, which are influenced by interest rates and the general economic environment. As management uses judgment in estimating the fair value of its groups of cash-generating units ( CGU ), imprecision in any assumptions and estimates used in the fair value calculations could influence the determination of goodwill impairment and affect the valuation of goodwill. An impairment loss in respect of goodwill is not reversible in subsequent periods. (ii) Intangibles: Research and development and capitalization of software development Expenditures on research activities, undertaken with the prospect of gaining technical knowledge and understanding, are recognized in the consolidated statements of (loss) income as incurred. Certain costs incurred in connection with the development of software to be used internally or for providing services to customers are capitalized once a project has progressed beyond a conceptual, preliminary stage to that of application development. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by us are recognized as intangible assets when the following criteria are met: it is technically feasible to complete the software product so that it will be available for use; there is an ability and management intends to complete the software product and use or sell it; it can be demonstrated how the software product will generate probable future economic benefits; D+H Annual Report

53 adequate technical, financial and other resources to complete the development and to use or sell the software products are available; and the expenditure attributable to the software product during its development can be reliably measured. Costs that qualify for capitalization include both internal and external costs, but are limited to those that are directly related to the specific project. Capitalized development expenditure is measured at cost less accumulated amortization and accumulated impairment losses. (iii) Other intangible assets Other intangible assets that are acquired by the Company, which have finite useful lives, are measured at cost less accumulated amortization and accumulated impairment losses. These intangible assets include customer service contracts, purchased software, proprietary software, customer relationships and brand names. (iv) Subsequent expenditures Subsequent expenditures related to an asset initially recognized as an intangible asset are capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditures are recognized in the consolidated statements of (loss) income as incurred. Separately identifiable intangible assets that derive their value from contractual customer relationships have a finite useful life and are amortized over their estimated useful lives. Determining the estimated useful life of these finite life intangible assets requires an analysis of the circumstances and management judgment. Finite life intangible assets, including capitalized software costs of an intangible not yet available for use, are tested for impairment, whenever circumstances indicate that the carrying value may not be recoverable and require management to exercise judgment in analyzing such possible circumstances. Financial assets and measuring for impairment If a financial asset is not carried at fair value through profit or loss ( FVTPL ), it is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset or a loss event had a negative effect on the estimated future cash flows of the asset that can be reliably measured. Objective evidence that financial assets are impaired can include default or delinquency by a debtor or indications that the debtor may enter bankruptcy. We consider evidence of impairment for receivables at both specific and collective levels. All individually significant receivables found not to be specifically impaired are then collectively assessed for any impairment that has occurred but not specifically identified. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively for the companies that share similar credit risk characteristics. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. All impairment losses are recognized in the consolidated statements of (loss) income. Interest on the impaired asset continues to be recognized through the unwinding of the discount. An impairment loss is reversed through the consolidated statements of (loss) income if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For financial assets measured at amortized cost, the reversal is recognized in the consolidated statements of (loss) income. Non-financial assets and measuring for impairment For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units or groups thereof that are expected to benefit from the synergies of the combination. The carrying amounts of the Company s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives, the recoverable amount is estimated each year at the same time or more frequently, if events or changes in circumstances indicate the non-financial asset may be impaired. The recoverable amount of an asset, CGU or group of CGUs is the greater of its value in use and its fair value less costs of disposal. In estimating the recoverable amounts of its CGUs, the Company uses a fair value less cost to sell model based on discounted cash flows. An impairment loss is recognized if the carrying amount of an asset or its CGU or group of CGUs exceeds its estimated recoverable amount. Impairment losses are recognized in the consolidated statements of (loss) income. Impairment losses recognized in respect of CGUs are 2016 D+H Annual Report 51

54 MANAGEMENT S DISCUSSION AND ANALYSIS allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Deferred income taxes Deferred income tax assets and liabilities and the corresponding impact on deferred income tax expense or recovery are based on the temporary differences that are expected to reverse in future periods. Management uses judgment in determining when temporary differences will reverse and if the benefits of deductible temporary differences and tax losses can be realized. A key assumption in determining the deferred income taxes is that D+H will be able to maintain sufficient levels of income such that the deferred tax assets will be realized. Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in the consolidated statements of income except to the extent that it relates to a business combination or to items recognized directly in equity or in OCI. In determining the amount of current and deferred tax, the Company takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Company believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Company to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made. 9.2 Accounting standards developments The Company actively monitors developments in standards as issued by the IASB and the Canadian Accounting Standards Board, as well as regulatory developments as issued by the Canadian Securities Administrators. New and revised accounting standards The Company adopted the following standards and amendments 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 there was no impact on the Company s consolidated financial statements. IAS 1, Presentation of Financial Statements At January 1, 2016, the Company adopted this amendment and determined there was no impact on the Company s consolidated financial statements. The following are upcoming changes to IFRS standards that may impact D+H: IFRS 15, Revenue from Contracts with Customers ( IFRS 15 ) - IFRS 15 will supersede all existing standards and interpretations in IFRS relating to revenue, including IAS 18, Revenue and IFRIC 13, Customer Loyalty Programmes. IFRS 15 introduces a single model for recognizing revenue from contracts with customers. This standard applies to all contracts with customers, with only some exceptions, including certain contracts accounted for under other IFRS standards. The standard requires revenue to be recognized in a manner that depicts the transfer of promised goods or services to a customer and at an amount that reflects the consideration expected to be received in exchange for transferring those goods or services. This is achieved by applying the new Five-Step Model: 1. Identify the contract with a customer; 2. Identify the performance obligations in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to the performance obligations in the contract; and 5. Recognize revenue when (or as) the entity satisfies a performance obligation D+H Annual Report

55 IFRS 15 also provides guidance relating to the treatment of contract acquisition and contract fulfillment costs. The Company expects the application of this new standard will have significant impacts on our reported results, specifically with regards to the timing of recognition and classification of revenue, but somewhat less of an impact for the treatment of costs incurred in acquiring customer contracts. The Company already has a policy to defer contract acquisition costs and labour related to certain contract service agreements. The timing of recognition and classification of some revenue will be affected because IFRS 15 requires the estimation of total consideration over the contract term at contract inception and allocation of consideration to all performance obligations in the contract based on their relative stand-alone selling prices. The Company anticipates this will most significantly affect our Lending and Payments arrangements where compliance requirements currently provided as part of Post Contract Support may be considered non-distinct from the software. This could result in a decrease to upfront revenue in favour of revenue recognized over the life of the license or term of the contract. IFRS 15 requires certain contract acquisition costs (such as sales commissions) to be recognized as an asset and amortized into operating expenses over time. This requirement is expected to have minimal impact as most segments already account for such costs as an asset and amortize them over the term of the contract. The Company believes significant judgments will need to be made when defining the enforceable rights and obligations of a contract, in determining whether a promise to deliver goods or services is considered distinct, and to determine when the customer obtains control of the distinct good or service. The Company has a team dedicated to ensuring our compliance with IFRS 15. This team has also been responsible for determining system requirements, ensuring our data collection is appropriate and communicating the upcoming changes with various stakeholders. In addition, this team is assisting in the development of new internal controls. The standard is effective for annual periods beginning on or after January 1, When IFRS 15 is adopted, it can be applied either on a fully retrospective basis, requiring the restatement of the comparative periods presented in the financial statements, or with the cumulative retrospective impact of IFRS 15 applied as an adjustment to equity on the date of adoption. When the latter approach is applied, it is necessary to disclose the impact of IFRS 15 on each line item in the financial statements in the reporting period. The Company is still evaluating our adoption approach. IFRS 16, Leases ( IFRS 16 ) In January 2016, the IASB issued the final publication of the IFRS 16 standard, which will supersede the current IAS 17, Leases ( IAS 17 ) standard. Under IFRS 16, a lease will exist when a customer controls the right to use an identified asset as demonstrated by the customer having exclusive use of the asset for a period of time. IFRS 16 introduces a single accounting model for lessees and all leases will require an asset and liability to be recognized on the statement of financial position at inception. The accounting treatment for lessors will remain largely the same as under IAS 17. The Company intends to adopt these amendments in its financial statements for the annual period beginning on January 1, The extent of the impact of adoption of the Standard has not yet been determined. IFRS 9, Financial instruments ( IFRS 9 ) IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets, and the new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. The Company intends to adopt these amendments in its financial statements for the annual period beginning on January 1, The extent of the impact of adoption of the Standard has not yet been determined. 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, The Company intends to adopt these amendments for the annual period beginning on January 1, D+H Annual Report 53

56 MANAGEMENT S DISCUSSION AND ANALYSIS 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, The amendments to IAS 12 are not expected to have a significant impact on our financial statements. 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 cashsettled to equity-settled. The Company intends to adopt the amendments to IFRS 2 for the annual period beginning on January 1, The amendments to IFRS 2 are not expected to have a significant impact on our financial statements. 10 BUSINESS PRODUCTS AND SERVICES We have a wide range of products and services supporting Payments, Lending and Integrated Core solutions across our business units as detailed below: 10.1 GTBS segment Our transaction banking solutions enable our customers (primarily large domestic or global financial institutions and large corporations) to manage all types of payments, within and across national borders, to and from any channel, with a high degree of automation and straightthrough-processing. With our solutions, our customers can exchange standardized messages over secure electronic networks, manage their cash, liquidity and working capital requirements and implement remote deposit capture, e-billing and Internet payment solutions. Within our payment hub and related technology solutions, we serve a growing global base of approximately 1,000 clients, which includes 17 of the 25 biggest banks in the world, 59 of the top 100 banks in the U.S. (including 7 of the top 10 U.S. banks), as well as governmentsponsored entities and large corporations. GTBS accounted for 21% of the fourth quarter and 22% of the full year 2016 consolidated Adjusted revenues. Payments We offer a range of global and domestic payment solutions in our GTBS segment. Our flagship payments platform captures, manages and processes payments in domestic and international environments, sourced from multiple initiating channels and routed to multiple clearing networks globally. Within the FinTech industry, this type of solution is commonly referred to as a payment hub. Our products and solutions are designed to simplify the processing of global payments, by providing globally deployable, single-instance payment hub software that enables banks to originate, process, transact and settle every type of payment in any currency, anywhere in the world, at any hour of the day and in real time. Our single instance of software capabilities is a key competitive advantage as it means that all of the banks global and domestic payment transactions flow through one single integrated, multi-channel, multi-instrument payment hub, Global PAYplus. This solution eliminates the need for multiple payment systems and sits at the centre of a bank s IT architecture. Global PAYplus is differentiated in today s market because it provides a flexible rules-based engine with best-in-class functionality. Our software has a track record of reliability, can scale to meet the highest payment volumes of the world s largest banks and is equipped with compliance controls and audit tools. Global PAYplus is built on what is known as Service-Oriented Architecture ( SOA ), which means it is designed to easily integrate into new applications as they are introduced over time and become part of an overall bank system. Payment hub relationships with our customers are typically multi-year due to the scale of the undertaking, leading to subsequent addon licenses, service and maintenance revenues, and in turn increases our recurring revenue stream. Our revenue model includes SaaS contracts that stipulate fees per transaction based on usage, as well as licenses that include service and maintenance. We also offer an integrated wire and compliance solution for U.S. financial institutions. The solution is available in-house or through a SaaS solution and supports the processing of all payment types, including Fedwire funds transfers, Fedwire securities transfers, SWIFT messaging and foreign exchange transfers, among others. We continue to experience global growth due to the growth of our international client roster, the increase in payment transactions processed by our existing customers and the additional revenues generated as our customers roll out new features and functionality D+H Annual Report

57 The solutions targeted at Tier 1 and Tier 2 banks are typically offered on-premise, while the solutions targeted at Tier 3 and Tier 4 banks are provided on a SaaS basis. Tier 1 generally refers to banks with over $500 billion in assets, Tier 2 refers to banks with $20 billion to $500 billion in assets, Tier 3 refers to banks with $2 billion to $20 billion in assets and Tier 4 refers to banks with under $2 billion in assets. The primary products in this category include Global PAYplus, as well as PAYplus and ACHplus. Cash Management Cash management solutions enable financial institutions to offer their corporate customers effective cash and liquidity management. Our global cash management software platform is a multi-region, multi-lingual and multi-currency online banking channel for financial institutions. It enables banks to optimize the management of their clients working capital via an integrated suite of modules. Cash management is offered through both an on-premise and hosted solution as well as a on a SaaS basis. It is offered globally with a focus on Tier 1 through Tier 3 banks in developed economies. The primary products in this category include Global CASHplus and CASHplus. Financial Messaging Financial messaging solutions enable the exchange of standard transaction messages over secure networks. Our financial messaging solution offers a global message gateway software to financial institutions and corporate clients, enabling extensive connectivity to interbank services, including the SWIFT messaging network. This is a single-instance platform which processes all types of financial messages. Our financial messaging solution is offered as an in-house or SaaS-solution, targeted at Tier 1 through Tier 3 banks and multi-national corporations. It is offered globally with a focus on Europe and North America. The primary products in this category include Global Messaging Plus and Global Compliance Plus. Merchant Services Our merchant services include a range of payment solutions for small and medium businesses as well as large corporate clients. Our solutions include Internet payments, remote deposit capture, Bacs payments and electronic invoicing solutions, which provide businesses with a complete accounts payable and receivable service. Our secure and scalable remote deposit capture solutions allow the scanning of cheques via scanner or mobile and transmit scanned images and/or ACH data to financial institutions for clearing. The primary products in this category, which are offered as SaaS, include TotalTransact, NetCapture, Bacsactive-IP and Accountis EIPP L&IC segment Our L&IC segment currently serves approximately 5,500 financial institution and corporate customers. Our technology suite allows us to offer products to large and small financial institutions alike, and we are targeting new customers to gain a foothold among the other 5,000+ banks and credit unions who do not use D+H s solutions today. Furthermore, due to the breadth of our offerings, we have a significant opportunity to cross-sell to our current clients, thereby increasing our share of customer wallet. We often sell an additional 8 to 10 channel solutions when we sell an integrated core banking platform, which illustrates the cross-sell dynamics. Since we introduced our brand in the U.S., we have observed increases in our brand awareness and have expanded our relationships with industry analysts and industry consulting firms. Our products have received recognition and awards for the solutions that they provide to financial institutions. Our business continues to benefit from increasing regulatory compliance requirements for banks. Under the direction of the Dodd-Frank Act, the U.S. Consumer Financial Protection Bureau issued a new regulation effective on October 3, TRID is a significant rollout of U.S. mortgage reform rules which require banks to use mortgage disclosure forms that are easier for borrowers to understand and use. D+H successfully implemented all upgrades to its products by the effective date. Our lending solutions have helped banks maintain compliance with these new regulations in their lending operations and we see continued interest by financial institutions seeking cost efficient solutions for compliance and serving their customers. Lending Solutions Lending solutions in the L&IC segment include solutions that simplify the lending application and origination process and provide compliant loan documents. The majority of solutions support commercial, consumer and mortgage lending, enabling clients to leverage their technology investments across multiple lines of business. L&IC s lending solutions accounted for 22% of the fourth quarter and 19% of the full year 2016 consolidated Adjusted revenues. These solutions include: Mortgage lending: D+H provides SaaS, web-based solutions that allow lenders to obtain qualified applications from multiple point-of-sale channels (via the Internet, in the branch or call centre, or through professional loan officers) throughout the entire loan 2016 D+H Annual Report 55

58 MANAGEMENT S DISCUSSION AND ANALYSIS origination and servicing process. Our mortgage lending solutions also integrate with our compliant loan documentation solution. In our mortgage lending business, D+H competes with other companies in the U.S. that provide end-to-end loan origination platforms. In addition, D+H competes with a small number of large, diversified FinTech providers based in the U.S. that may incorporate, or already have incorporated, some loan origination functionalities into their core offerings. We also compete with internal legal teams at larger financial institutions and external legal counsels at smaller banks and credit unions. The primary products in this category include LaserPro mortgage lending, Mortgagebot POS and Mortgagebot LOS. Revenues are primarily driven by monthly fixed subscription fees paid by lenders, and to a lesser extent, by transaction fees that fluctuate with mortgage application volumes. Similar to our Canadian mortgage technology services, mortgage application volumes in this service area are affected by many factors including the economy, the housing market, interest rates and changes in government regulations. Additionally, revenues are also affected by a more variable refinancing market, which is primarily impacted by interest rates and interest rate expectations. In 2015, our Mortgagebot LOS solution had been endorsed by the American Bankers Association ( ABA ) through its Corporation for American Banking subsidiary. Mortgagebot LOS is D+H s all-in-one loan origination system that supports retail, wholesale and correspondent mortgage lending. The suite also includes Mortgagebot POS, a point-of-sale solution that is also endorsed by the ABA. To earn the ABA endorsement, D+H had to undergo a comprehensive due-diligence process that took into consideration the Company s financial soundness, management strength, training and support and customer service. Consumer lending: D+H s industry leading solutions in this category provide flexibility to automate the consumer lending process, including applications acceptance from multiple channels, automating the loan origination process and providing the capabilities to automate the loan approval process and are integrated with D+H s solutions to provide compliant loan documents. In our consumer lending business, D+H competes with other companies in the U.S. that provide end-to-end loan origination platforms. In addition, D+H competes with a small number of large, diversified FinTech providers based in the U.S. that may incorporate, or already have incorporated, some loan origination functionalities into their core offerings. We also compete with internal legal teams at larger financial institutions and external legal counsels at smaller banks and credit unions. The primary products in this category include LaserPro consumer lending and DecisionPro. Revenues are driven by the sale of licenses and subscriptions that are typically accompanied by professional services and maintenance fees. Commercial lending: D+H provides solutions to manage the end-to-end commercial lending process including origination, analysis, underwriting, covenant tracking and portfolio reporting including commercial real estate, one-time capital investments, leasing and financing and more. D+H also provides clients with solutions to produce compliant commercial loan documents. In our commercial lending business, D+H competes with other companies in the U.S. that provide end-to-end loan origination platforms. In addition, D+H competes with a small number of large, diversified FinTech providers based in the U.S. that may incorporate, or already have incorporated, some loan origination functionalities into their core offerings. We also compete with internal legal teams at larger financial institutions and external legal counsels at smaller banks and credit unions. The primary products in this category include CreditPath, CreditQuest and LaserPro commercial lending. Revenues are driven by the sale of licenses and subscriptions, which are typically accompanied by professional services and maintenance fees. Integrated Core Solutions Integrated core solutions, offered in the L&IC segment, include our core banking platform offerings and complementary channel solutions. Integrated core solutions also include optimization solutions which assist our customers in managing technology infrastructure and driving efficiencies. Integrated core accounted for 16% and 17% of the fourth quarter and the full year 2016 Adjusted revenues, respectively. Core: D+H provides integrated core banking platforms to a broad array of financial institutions, including community-based banks and credit unions. These core banking solutions provide comprehensive functionality, including real-time transaction processing and account servicing, which can be seamlessly integrated with our other specialized products. D+H s principal competitors for core processing systems are a small number of large, diversified FinTech providers based in the U.S. The primary products in this category include PhoenixEFE Core, Phoenix System International and UltraData Enterprise Core. Revenues are driven by the sale of long term contracts for D+H to provide outsourced hosted services and/or licenses and subscriptions that are typically accompanied by professional services and maintenance fees. Revenues for core are affected by mergers and acquisitions as the newly combined entity may be processed on our platform, or that of a competitor s. In July 2016 D+H was awarded the BEST USER EXPERIENCE AWARD for the PhoenixEFE platform by Aite Group. This award is focused on the critical areas of platform user experience, 360-degree view, navigation, user interface and system usability, CRM capabilities, messaging and marketing tools, and administrative tools and reporting D+H Annual Report

59 D+H was named the winner of a 2015 XCelent Award in Celent s Core Banking Systems (CBS) for Community Banks 2015 report. D+H s PhoenixEFE was recognized as one of only two CBS platforms to earn a four-star rating for technology, client base and overall solution competitiveness among the Top 5 banking technology providers. Highlights of the 2015 report include: PhoenixEFE earned a four-star rating for Advanced Technology, one of only two CBS platforms to achieve this rating. The associated criteria includes: the architecture of the system, the level of integration with third-party systems, the degree of customization afforded, the level of scalability, and the flexibility of deployment of the CBS. PhoenixEFE earned a higher than average rating of four stars for architecture, systems integration capabilities and deployment options. PhoenixEFE earned five stars for Average Assets Processed, the most of any CBS platform in the report. The average client size of PhoenixEFE was more than twice the median for the CBS platforms reviewed. PhoenixEFE earned a rating of four stars for system reporting. PhoenixEFE offers nearly 700 standard core reports, and its use of a standard Microsoft SQL database to hold core system data allows for relatively easy customization of standard reports, as well as the ability to create ad hoc CBS reports. Channel: Our channel solutions encompass an extensive portfolio of technologies that are ancillary to our core banking offerings. These include technologies that enable financial institutions to provide various forms of banking, including Internet and mobile, among others. Our solutions also include several branch automation tools, debit/credit card processing and production, person-toperson payments and account-to-account transfer solutions. Within our channel solutions business, D+H competes with a small number of large, diversified FinTech providers based in the U.S. along with other smaller niche providers. The primary products in this category include Card Payments, Cavion, Encore, and ubanking. Revenues are primarily attributable to recurring subscription-based fees which generally are based on the number of users in an organization. Optimization: Our optimization solutions include business intelligence tools and cloud-based infrastructure technology solutions. These and other offerings within this category assist our clients in reducing their business risks and associated technology costs. In the optimization solutions category, we compete with other larger infrastructure providers, although the Company is uniquely positioned in the Infrastructure-as-a-Service ( IaaS ) market because it provides one of the IaaS solutions specifically developed to meet the rigorous compliance and security requirements of financial institutions in the U.S. The primary products in this category include Compushare and Touche. Revenues are primarily attributable to recurring subscription-based fees which generally are based on the number of users in an organization Canadian segment Lending Solutions Our lending solutions help lenders manage debt collateral and process mortgages and assist various governments and banks in managing their student lending programs. D+H is the market leader in lending solutions in Canada. The Canadian segment lending solutions accounts for 23% and 24% of the fourth quarter and the full year 2016 consolidated Adjusted revenues, respectively. These solutions include: Collateral management solutions: D+H s collateral management solutions enable lenders to minimize risk, reduce workload, and maximize profitability. We are a leading provider of recovery, lien registration services and insolvency management solutions to Canadian lenders. Registry: When performing due diligence searches, registering a lien on a property, and discharging liens and mortgages, our single point of access platforms manage the unique rules and regulations of each jurisdiction and integrate into any lending operation. Recovery: D+H also provides a suite of recovery management services. Our collateral management solutions enable our clients to co-ordinate various activities in the recovery process through a single point of contact, thus reducing operating costs, and minimizing the time they spend on non-core administrative activities. We compete with smaller, local firms with limited national capability (in our registration services) and primarily insourcing by lender institutions (in our recovery services). In registry services, revenues are fee-based and driven by volume of consumer loans. Registration activities are seasonally higher in the spring and summer relative to the fall and winter periods. Within recovery services, revenues are generally based on amounts recovered and are driven by volume of loan recoveries. In both registration and recovery services, the largest volumes processed by D+H relate to auto loans, both new and used D+H Annual Report 57

60 MANAGEMENT S DISCUSSION AND ANALYSIS Automobile sales are expected to show modest growth in 2017 resulting in low single digit growth for registrations in Collateral Management Solutions. Any risk to registry volumes of a possible downturn in the Canadian auto sector would be somewhat off-set by increases in revenues in our Recovery business. Student loans administration: D+H is a leader in student lending technology and program management, servicing key clients such as the Government of Canada combined with five provincial governments as part of a single contract. We also have separate servicing contracts with the provinces of Prince Edward Island, Nova Scotia and Alberta, and certain large Canadian financial institutions. D+H supports over 1.7 million students and administers a $22 billion loan portfolio. Our student lending solutions include the technology applications and the deep program management expertise that allow D+H to manage our clients programs across the entire lending lifecycle from loan origination, through to loan maintenance, loan repayment and loan discharge. Our services include student enrollment, management of funds disbursement, loan tracking, student support services, reporting and collections. Revenues from the student lending program are primarily earned based on the number of student loans managed by D+H. We also earn incentive-based revenues from targeted improvements to our clients specific lending programs, along with revenues from professional services work connected to program enhancements requested by the lenders. The delivery of these professional services is impacted by the timing of government directed requests for enhancements and the acceptance of delivery of these services. The volumes and enhancements are historically stable along with the related revenues though we do have some quarterly revenue bumps following delivery and acceptance of enhancement projects. We expect this to continue through the end of the current contract. In 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. Services under the new contract are expected to be operational on April 1, Until that time, the Company will continue as the incumbent CSLP services provider under its current contract with the Government of Canada. The new contract will have an initial term of eight years with up to a further seven year extension at the Government of Canada s option. Canadian mortgage technology: D+H s Canadian mortgage lending platform enables effective management of the residential mortgage process from origination within the brokerage community through the underwriting process by lenders. Our SaaS based origination solution provides a standardized application process for both brokers and lenders. The platform includes a solution for mortgage underwriting, which works in tandem with the mortgage origination engine to simplify the application review and decision process for lenders. Our platform also includes offerings that give lenders and mortgage professionals a common solution for document sharing, management and storage. Our primary competition is a private company offering similar services. The primary products in this category include Exchange, Express and Expert. Canadian mortgage technology revenues are volume-based, with primarily two pricing models: a fee per transaction model and a model where the pricing is linked to the value of the mortgage. The revenues are realized from new and refinanced mortgages and mortgage transfers. As such, fees are variable and are primarily impacted by many factors including the housing market (new home starts, average value of homes and resale activities), interest rates, mortgage renewal and refinancing activities, changes in government regulations, and the general state of the economy, among others. Analysts are expecting a flattening out of property prices in most Canadian markets, with some areas of the country experiencing a decline in both sales activity and prices, as other areas continue to experience price gains, albeit at a much slower pace than we ve seen in recent years. Despite a predicted sales decline for Ontario, homes prices in the Greater Toronto Area and in the larger Ontario region known as the Golden Horsehoe are expected to continue to remain strong primarily due to a lack of supply of housing stock, particularly for single-family detached homes. A flattening of the Canadian Market would likely impact the volume of transactions in our Canadian mortgage technology services, and would be tempered by the volume of mortgage renewals and home refinancing activities. The introduction of new products and product extensions for various areas in the lending value chain is expected to continue to contribute to organic growth as these new products are added to our platforms, and align us with the transformation of the sales processes used in Canadian banking. Payments Solutions Payments solutions offered in the Canadian segment include our cheque program, where D+H is a market leader and serves consumers and small businesses, and the enhancement services program, an expanding business where D+H provides value-add fraud prevention and related services to the banks customers. Canadian Payments solutions account for 18% and 19% of the fourth quarter and the full year 2016 consolidated adjusted revenues, respectively. These solutions include: D+H Annual Report

61 Cheques: D+H is the primary supplier of personal and business cheques for most financial institutions in Canada. Our personal cheque program offers cheque products, options and added value features. Our primary competition in this service area is from alternative payment methods. D+H s revenues are based on the number of cheques delivered. As a result of the growth in credit cards, debit cards and other electronic forms of payment such as online banking and mobile payments, the number of cheques written has declined over the past several years and volume is expected to continue to decline by mid-to-high single digits, with ongoing volatility in personal and business cheque order volumes. We anticipate some offset to these volume declines through increases in average order value and we have various programs underway to decrease operational costs and to mitigate future legacy vendor risks. We are also looking to increase the business cheque volumes through new marketing programs with our customers. Enhancement services: D+H s enhancement services program allows Canadian financial institutions to offer additional products to their customers to further enhance the value they gain from their chequing or credit card accounts. Revenues are mainly attributable to subscription-based monthly fees. The program provides subscribers with a suite of services related to identity protection and restoration services, and credit monitoring services. Although currently representing a small component of our business, enhancement services is one of the growth drivers within payments solutions. There are a small number of competitors providing similar services in Canada. The primary products in this category include CreditDefend and MyIdentityAssist. In addition, to offset the impact of this cheque decline, management will continue to focus on growing various subscription fee-based enhancement services offerings with other banking clients and on deepening the product offering with existing customers. 11 DEFINITIONS AND RECONCILIATIONS 11.1 Non-IFRS financial measures and key performance indicators The information presented within this MD&A includes certain financial measures such as Adjusted revenues, Proforma Adjusted revenues, Bookings, Backlog, 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, diluted, Payout ratio, Adjusted payout ratio 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 audited 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 the financial performance of the business and are a supplement to the audited 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 audited 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 D+H Annual Report 59

62 MANAGEMENT S DISCUSSION AND ANALYSIS 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 (loss) income. Adjusted revenues reconciliation (In thousands of dollars) Three months ended December 31 Year ended December Revenues $ 425,812 $ 424,145 $ 1,679,857 $ 1,506,611 Acquisition accounting adjustments ,564 4,580 21,554 Adjusted revenues $ 426,468 $ 437,709 $ 1,684,437 $ 1,528,165 1 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 The following table details the adjustments. Fair value adjustments on deferred revenues (In thousands of dollars) Q Q YTD 2016 YTD 2015 Acquisition of HFS $656 $1,044 $3,180 $5,080 Acquisition of Fundtech 12,520 1,400 16,474 Total adjustments $656 $13,564 $4,580 $21,554 Adjusted Revenues by Type Definitions SaaS: Software as a service is a software licensing and delivery model in which software is licensed on a subscription basis and is hosted by D+H on our premises. These contracts are generally term-based ranging from 3 to 10 years. On-going hosting fees and related transactionbased fees are recognized as revenue over the hosting period. Software Licenses (Perpetual and Term): A software license provides the customer with the right to use software for an indefinite period of time if it is a perpetual license or for the length of the contract if it is a term license. The licensed software is installed on the customer s premises. Generally, the software license and implementation revenues are recognized based on the percentage-of-completion of the implementation. Term licenses typically range from 3 to 5 years. Maintenance: All of the Company s perpetual and term software license products are sold with a maintenance component which allows customers to continue to receive specified levels of support following implementation including telephone support, bug fixes and unspecified upgrades and enhancements, for a specified period of time, usually one year. Maintenance revenue is recognized ratably over the life of the related maintenance period. Professional Services: This revenue stream captures the professional services provided by D+H as part of a client software implementation project and may also include product enhancements, support, training and development. Implementation services are recorded as revenue based on percentage-of-completion of the implementation. For non-essential professional services revenue, including fees derived from the delivery of certain consulting and training services, revenue is recognized on a time and materials basis or a lump sum after delivery is complete, based on revenue recognition criteria. In some cases, professional services are deferred and amortized over the life of the contract. In these circumstances, the associated expenses are also deferred and recognized over the life of the contract. Transaction Processing Services: These transactions are specific to our Canadian segment s lending business. Transactional revenues are recognized upon completion of each transaction. Canadian Payments Products/ Solutions: This revenue stream captures sales of products and services delivered by the Company to Canadian financial institutions. The revenue is primarily for cheques and enhancement services. Enhancement services allow Canadian financial institutions to offer additional products to their customers. Revenues for enhancement services are mainly attributable to subscription-based monthly fees D+H Annual Report

63 Bookings Bookings represent new, signed revenue contracts with new and existing customers for incremental business, excluding renewals, that will generate revenues in the current and future periods. Bookings are derived based on the total contract revenues to be earned over the duration of the contract. Management regards bookings as an important directional indicator of future revenues but they are not to be substituted for an analysis of revenues under IFRS. Bookings are not cumulative. Bookings include perpetual licenses, other term-based license subscriptions and related maintenance, data processing fees, hardware and professional services fees. SaaS subscriptions and maintenance are included in the bookings for L&IC and GTBS solutions. L&IC term-based SaaS, term licenses, processing and subscription products will generally have contractual terms ranging between 3-5 years for lending solutions and 3-10 years for integrated core solutions and are included in bookings for the full term. GTBS SaaS contracts are included in bookings at the contractual minimums for the initial term of the contract. SaaS contract terms vary by product but are generally three to five years for cash management, wire and ACH products. Financial messaging contracts are generally for a one year initial term with an auto-renewal feature that requires the customer to provide advance notice in the event of cancellation. Bookings for license agreements include the license value, the contracted enhancements and services, and maintenance for the shorter of the contractual term or five years. Prior to 2016, our GTBS reported bookings for SaaS and maintenance were limited to the first year of the contract term. Under the revised definition, the proforma bookings for the full year of 2015 are US$242.8 million, versus US$182.2 million as reported under the previous definition. Contracts in currencies other than the U.S. Dollar are included in bookings at the conversion rate to the U.S. Dollar as of the date of contract execution. For the GTBS segment, bookings growth compares the full year 2016 bookings to the full year 2015 bookings including the period prior to the acquisition (January 1, 2015 to April 29, 2015) based on constant currency. Bookings may fluctuate significantly due to the timing of signing large contracts and the length of time for implementation which varies significantly by software solution. The timing of revenue recognition may also vary; refer to section 9 of our MD&A and note 3 of our audited consolidated financial statements for our revenue recognition policies. Beginning total backlog plus bookings, minus revenues, will not equal ending total backlog due to foreign currency fluctuations, contract adjustments and other factors. Backlog Backlog represents committed but undelivered products and services for contracts at the period end. Backlog is not a complete measure of our future revenues. Backlog may fluctuate significantly due to the timing of signing large contracts and the length of time for implementation which varies significantly by software solution. The timing of revenue recognition may also vary; refer to section 9 of our MD&A and note 3 of our audited consolidated financial statements for our revenue recognition policies. Beginning total backlog plus bookings, minus revenues, will not equal ending total backlog due to foreign currency fluctuations, contract adjustments and other factors. EBITDA and Adjusted EBITDA EBITDA is defined as net income before finance expense, taxes, depreciation, amortization and impairment. EBITDA is also described as income from operating activities before depreciation, amortization and impairment in the consolidated statements of (loss) 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) 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 Annual Report 61

64 MANAGEMENT S DISCUSSION AND ANALYSIS 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 (In thousands of dollars) Three months ended December 31 Year ended December Net (loss) income for the period $ (94,413) $ 13,334 $ (67,663) $ 84,005 Finance expense 26,058 28, ,934 95,833 Income tax recovery (19,912) (5,444) (50,744) (8,037) Depreciation of property, plant and equipment 6,866 7,053 27,962 23,298 Amortization of intangible assets 85,082 73, , ,601 Impairment of goodwill 1 $ 121,041 $ $ 121,041 $ EBITDA $ 124,722 $ 116,840 $ 418,549 $ 424,700 Acquisition accounting adjustments 2 (796) 10,847 (2,901) 10,973 Acquisition-related and other charges/(recoveries) 3 (272) 16,274 3,139 60,774 Realignment of global operations and related restructuring expenses 3 (610) 34,191 Foreign exchange (gain)/loss 5 (2,254) 6,184 (3,039) (21,751) Adjusted EBITDA $ 120,790 $ 150,145 $ 449,939 $ 474,696 1 Includes $50.6 million related to the reclassification of settlement loss on forward contracts, relating to the acquisition of Fundtech, from OCI to net (loss) income. Refer to note 11 of the consolidated financial statements. 2 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. Fair value adjustments on deferred revenues and deferred costs (In thousands of dollars) Q Q YTD 2016 YTD 2015 Acquisition of HFS $(796) $(996) $(3,386) $(3,743) Acquisition of Fundtech 11, ,716 Total adjustments $(796) $10,847 $(2,901) $10,973 3 Acquisition-related and other charges include the Company s integration and transaction costs pertaining to the acquisition of Fundtech (Q4 2016: reversal of $0.3 million; YTD: expense of $2.4 million - refer to section 5.5), business integration, costs related to expanding global capabilities, retention and incentive costs in connection with the acquisition of businesses. 4 Realignment of global operations and related restructuring expenses pertains to D+H s initiatives to align global operations to achieve cost synergies following the Company s acquisitions, as well as cost reduction initiatives within the Canadian payments operations. 5 Relates to non-cash foreign exchange (gain)/loss on financing related intercompany balances. Adjusted Net Income and Adjusted Net Income Per Share, Diluted 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; D+H Annual Report

65 accretion of the convertible debentures; fair value adjustments of interest-rate swaps not designated as hedges for the purposes of hedge accounting; impairment of intangible assets; impairment of goodwill; reclassification of settlement of forward contracts relating to Fundtech acquisition; 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, diluted, is calculated by dividing Adjusted net income for the period by the weighted average number of shares (diluted) outstanding during the period. Adjusted net income reconciliation (In thousands of dollars) Three months ended December 31 Year ended December Net (loss) income $ (94,413)$ 13,334 $ (67,663)$ 84,005 Non-cash items: Acquisition accounting adjustments 1 (796) 10,847 (2,901) 10,973 Foreign exchange (gain)/loss 2 (2,254) 6,184 (3,039) (21,751) Non-cash interest expense 3 2,854 4,415 11,104 16,912 Amortization of intangible assets from acquisitions 55,069 54, , ,707 Fair value adjustment of derivative instruments 4 (749) (272) (1,617) (515) Impairment of intangible assets 16,387 6,281 16,387 6,281 Impairment of goodwill 5 121, ,041 Acquisition-related and other (recoveries)/charges 6 (272) 16,274 3,139 60,774 Realignment of global operations and related restructuring expenses, including depreciation and amortization 7 (610) 34,350 Tax effect of above adjustments 8 (39,225) (28,559) (111,065) (86,517) Adjusted net income $ 57,032 $ 82,715 $ 214,214 $ 254,869 Adjusted net income per share, diluted $ 0.53 $ 0.78 $ 2.01 $ 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. Fair value adjustments on deferred revenues and deferred costs (In thousands of dollars) Q Q YTD 2016 YTD 2015 Acquisition of HFS $(796) $(996) $(3,386) $(3,743) Acquisition of Fundtech 11, ,716 Total adjustments $(796) $10,847 $(2,901) $10,973 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. 4 Amounts include mark-to-market adjustments to interest-rate swaps and foreign exchange contracts that are not designated as hedges for hedge accounting purposes and for which any realized or unrealized change in the fair value of these contracts is recorded through the consolidated statements of (loss) income. 5 Includes $50.6 million related to the reclassification of settlement loss on forward contracts, relating to the acquisition of Fundtech, from OCI to net (loss) income. Refer to note 11 of the consolidated financial statements. 6 Acquisition-related and other charges include the Company s integration and transaction costs pertaining to the acquisition of Fundtech (Q4 2016: reversal of $0.3 million; YTD: expense of $2.4 million - refer to section 5.5), business integration, costs related to expanding global capabilities, retention and incentive costs in connection with the acquisition of businesses. 7 Realignment of global operations and related restructuring expenses pertains to D+H s initiatives to align global operations to achieve cost synergies following the Company s acquisitions, as well as cost reduction initiatives within the Canadian payments operations. 8 The adjustments to net income are tax effected at their respective tax rates D+H Annual Report 63

66 MANAGEMENT S DISCUSSION AND ANALYSIS 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. Adjusted net cash from operating activities (In thousands of dollars) Three months ended December 31 Year ended December Net cash from operating activities $ 100,857 $ 96,109 $ 293,472 $ 221,380 Acquisition related and other (recoveries)/charges 1 (272) 16,274 3,139 60,774 Realignment of global operations and related restructuring expenses 2 (610) 34,191 Adjusted net cash from operating activities $ 99,975 $ 112,383 $ 330,802 $ 282,154 1 Acquisition-related and other charges include the Company s integration and transaction costs pertaining to the acquisition of Fundtech (Q4 2016: reversal of $0.3 million; YTD: expense of $2.4 million - refer to section 5.5), business integration, costs related to expanding global capabilities, retention and incentive costs in connection with the acquisition of businesses. 2 Realignment of global operations and related restructuring expenses pertains to D+H s initiatives to align global operations to achieve cost synergies following the Company s acquisitions, as well as cost reduction initiatives within the Canadian payments operations. Payout ratio and Adjusted payout ratio Payout ratio is defined as cash dividends paid divided by net cash from operating activities after capital expenditure. Payout ratio (In thousands of dollars) Three months ended December 31 Year ended December Net cash from operating activities $ 100,857 $ 96,109 $ 293,472 $ 221,380 Less: Capital expenditures (26,476) (27,659) (95,993) (103,259) Net cash from operating activities after capital expenditures $ 74,381 $ 68,450 $ 197,479 $ 118,121 Cash dividends paid 1 (34,203) (24,739) (125,765) (93,881) Payout ratio 46% 36% 64% 79% 1 Cash dividends paid for the year ended December 31, 2016 includes $1.25 million of common shares purchased on the open market for the dividend reinvestment program D+H Annual Report

67 Adjusted payout ratio is defined as cash dividends paid divided by Adjusted net cash from operating activities after capital expenditure. Management believes the Adjusted payout ratio is an important indicator of financial strength and the Company s ability to repay debt. Adjusted payout ratio (In thousands of dollars) Three months ended December 31 Year ended December Adjusted net cash from operating activities $ 99,975 $ 112,383 $ 330,802 $ 282,154 Less: Capital expenditures (26,476) (27,659) (95,993) (103,259) Adjusted net cash from operating activities after capital expenditures $ 73,499 $ 84,724 $ 234,809 $ 178,895 Cash dividends paid 1 (34,203) (24,739) (125,765) (93,881) Adjusted payout ratio 47% 29% 54% 52% 1 Cash dividends paid for the year ended December 31, 2016 includes $1.25 million of common shares purchased on the open market for the dividend reinvestment program. 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 secured bank accounts. A maximum aggregate amount of up to $50 million of cash in secured bank accounts 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 (loss) income. Other add-backs to net income include stock option expense, certain deferred revenue changes, and impacts of acquisition accounting adjustments to revenues with respect to the Fundtech acquisition D+H Annual Report 65

68 MANAGEMENT S DISCUSSION AND ANALYSIS 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. (In thousands of dollars, unless otherwise noted) December 31, 2016 December 31, 2015 Loans and borrowings $ 1,522,082 $ 1,647,504 Add: Letters of credit 13,143 6,338 Capital leases Total Funded Debt $ 1,535,265 $ 1,654,148 Less: Cash (for covenant purposes only) 2 (50,000) (50,000) Total Net Funded Debt $ 1,485,265 $ 1,604,148 Net (loss) income $ (67,663) $ 84,005 Add (deduct): Interest expense 105,551 96,348 Depreciation of property, plant and equipment 27,962 23,298 Amortization of intangible assets 284, ,601 Impairment of goodwill 3 121,041 Income tax recovery (50,744) (8,037) Fair value adjustment of derivative instruments 4 (1,617) (515) Stock options 3,815 5,461 Acquisition accounting adjustments 5 (2,901) 10,973 Acquisition-related and other charges and realignment of global operations and related restructuring expenses 6 37,330 60,774 Foreign exchange gain 7 (3,039) (21,751) Other items 8 (394) 23,461 EBITDA (for covenant purposes only) $ 453,360 $ 503,618 Total Net Funded Debt to EBITDA 3.276x 3.185x Maximum allowed per covenant 3.50x 3.70x 1 Calculated on a twelve-month trailing basis. 2 Cash (for covenant purposes only) represents the secured global cash balances in all bank accounts up to a maximum of $50 million as at December 31, 2016 ( maximum of $50 million). 3 Includes $50.6 million related to the reclassification of settlement loss on forward contracts, relating to the acquisition of Fundtech, from OCI to net (loss) income. Refer to note 11 of the consolidated financial statements. 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 realized or unrealized change in the fair value of these contracts is recorded through the consolidated statements of (loss) income. 5 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. Fair value adjustments on deferred revenues and deferred costs (In thousands of dollars) YTD 2016 YTD 2015 Acquisition of HFS $(3,386) $(3,743) Acquisition of Fundtech ,716 Total adjustments $(2,901) $10,973 6 Acquisition-related and other charges include the Company s integration and transaction costs pertaining to the acquisition of Fundtech (Q4 2016: reversal of $0.3 million; YTD: expense of $2.4 million - refer to section 5.5), business integration, costs related to expanding global capabilities, retention and incentive costs in connection with the acquisition of businesses. Realignment of global operations and related restructuring expenses pertains to D+H s initiatives to align global operations to achieve cost synergies following the Company s acquisitions, as well as cost reduction initiatives within the Canadian payments operations. 7 Non-cash foreign exchange gain is for financing related intercompany balances. 8 Other items include changes in deferred revenues for certain D+H businesses, and GTBS incremental EBITDA on a twelve-month trailing basis D+H Annual Report

69 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 (In thousands of dollars, unless otherwise noted) December 31, 2016 December 31, 2015 EBITDA (for covenant purposes only) $ 453,360 $ 503,618 Interest expense (for covenant purposes only) $ 103,934 $ 96,348 Less: non-cash interest 9,487 9,519 Interest expense (for covenant purposes only) $ 94,447 $ 86,829 Interest coverage ratio (EBITDA / Interest expense) 4.80x 5.80x Minimum allowed per covenant 3.00x 3.00x 1 Calculated on a twelve-month trailing basis Non-IFRS financial measures and key performance indicators - Outlook Reconciliation In the third quarter 2016 Management Discussion and Analysis, the Company provided management s financial outlook relating to the Company s expected financial performance for both IFRS and non-ifrs key financial indicators. The table below outlines the Company s performance relative to the outlook provided at that time. Fiscal 2016 Fiscal 2016 Forecast Actual to Forecast (In millions of dollars, unless otherwise noted) Actuals High Low High Low Revenue 1 $ 1,680 $ 1,685 $ 1,655 $ (5) $ 25 Fair Value Adjustments USD FX normalization adjustment 2 (32) (25) (25) (7) (7) Adjusted Revenue, constant currency $ 1,653 $ 1,665 $ 1,635 $ (12) $ 18 EBITDA to Adjusted EBITDA Reconciliation Net (loss) income (67) (121) (107) Finance Expense Income tax recovery (51) (28) (36) (23) (15) Depreciation of capital assets (2) (2) Amortization of intangible assets Impairment of goodwill EBITDA $ 419 $ 423 $ 401 $ (4) $ 18 EBITDA Margin (%) 25% 25% 24% % 1% Acquisition accounting adjustments (3) (3) (3) Acquisition-related and other charges (2) (2) Foreign exchange (gain) (3) (1) (1) (2) (2) Realignment of global operations and related restructuring expenses (2) (4) Adjusted EBITDA $ 450 $ 460 $ 440 $ (10) $ 10 Adjusted EBITDA Margin (%) 27% 28% 27% (1)% % 1 The Fiscal 2016 forecast is based on an average CAD/USD exchange rate of 1.30 in the fourth quarter and year-to-date exchange impact realized as disclosed in Section 6. 2 Fiscal 2016 forecast and actual Adjusted revenues have been normalized using USD exchange rate from fiscal 2015 of Includes $50.6 million related to the reclassification of settlement loss on forward contracts, relating to the acquisition of Fundtech, from OCI to net (loss) income. Refer to note 11 of the consolidated financial statements. For further commentary on our performance against guidance, refer to section 3.2 in this MD&A D+H Annual Report 67

70 MANAGEMENT S DISCUSSION AND ANALYSIS 11.3 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: Period / date January 1 to December 31 average October 1 to December 1 average As at December The average exchange rates for the past eight quarters can be found in section 6 of this MD&A. 12 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. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was conducted as at December 31, 2016 by the Company s management under the supervision of the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that, as of December 31, 2016, our disclosure controls and procedures, as defined by National Instrument ( NI ), Certification of Disclosures in issuer s annual and interim filings are effective. 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 the second quarter of 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, In the third quarter of 2016, the Company completed the global implementation of its Human Resource Information system ( HRIS ) adding GTBS employees to the system. Additionally, the Company has broadened the global functionality of the system to include other functionality including recruitment controls. These changes impact the financial controls over our payroll and benefits processes. With the exception of the changes relating to the internal controls of Fundtech described above and the completion of our HRIS global implementation, there have been no other changes in the Company s internal controls over financial reporting during 2016 that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting. Management, under the supervision of the CEO and CFO, has evaluated the Company s ICFR using the framework and criteria established in the 2013 Internal Controls - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission ( COSO ). Based on this evaluation, the CEO and CFO have concluded that, as at December 31, 2016, ICFR (as defined by NI ) were effective D+H Annual Report

71 13 BUSINESS RISKS In addition to the normal risks of business, we are subject to significant risks and uncertainties, including those listed below and others described elsewhere in this MD&A. Any of the risks described herein could result in a significant adverse effect on our results of operations and financial condition. References in these Risk Factors to particular business segments, including Global Transaction Banking (GTBS), Lending and Integrated Core (L&IC) and Canada, reflect the business segments as reported in this MD&A. Refer to the discussion on Operating Model and Realignment in section4 of this MD&A for changes on how our business will be organized and conducted globally in Unauthorized disclosure of data, security breaches, cyber-attacks or computer viruses could harm our business by disrupting delivery of services, pose a risk of protracted and costly litigation, and cause loss of customers and reputational damage or harm to our intellectual property. As part of certain of our business/product lines, we collect, process, store and transmit confidential and personal information, including sensitive proprietary information, relating to our businesses as well as those of our clients (including personal data of our clients customers). Unauthorized access to our computer systems by third parties, or improper use of such access by our employees, contractors or other personnel, could result in the unauthorized access or use of this information and could cause business disruption or other impacts to our operations. In addition, despite our implementation of security measures, our systems are vulnerable to damages from computer viruses, cyber-attack and other similar disruptions. The occurrence of any of these events could disrupt our delivery of products and services and the integrity, continuity, security and trust of our systems and make our applications unavailable or cause similar disruptions to our operations. These risks are greater with increased information transmission over the internet and the increasing level of sophistication posed by cyber criminals. If a malicious attempt to penetrate our network security or otherwise misappropriate sensitive data is successful, or if unauthorized access otherwise occurs as described above, we could be subject to liability or increased regulatory scrutiny, there could be a loss of confidence in our ability to serve our customers, our business could be interrupted, or harm to our intellectual property (including exposure of trade secrets) or reputation could occur, and any of these developments could have a material adverse effect on our business, results of operations and financial condition. We cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities, attempts to exploit vulnerabilities in our systems, data thefts, physical system or network break-ins or inappropriate access, or other developments will not compromise or breach the technology protecting our networks and confidential information. In addition, as these threats continue to rapidly evolve, we may be required to modify our business processes and/or invest significant additional resources to modify and enhance our information and cyber security controls or to investigate and remediate any security vulnerabilities. Although none of the threats that have been encountered to date have materially impacted us, the impact of a material event could have a material adverse effect on our business. Long Sales Cycles and Fluctuations in Customer Buying Patterns Potential customers generally commit significant resources to an evaluation of available software and services and require us to expend substantial time, effort, and money educating them prior to sales. Further, as part of the sale or deployment of our technology solutions and services, customers may also require us to perform significant related services to complete a proof of concept or custom development to meet their needs. All of the aforementioned activities may expend significant funds and management resources and, ultimately, the customer may determine not to close the sale or complete the implementation. In weak economic environments, it is not uncommon to see reduced information technology spending. Customers may react to worsening conditions by reducing their capital expenditures, and it may take several months, or even several quarters or years, for marketing opportunities to materialize. In addition, global macroeconomic factors may result in customer procurement processes being significantly delayed or involving increased scrutiny and risk aversion on the part of the customer, especially where there is significant regulatory oversight. This may significantly delay the execution of contracts with such customers. A delay or cancellation of even a small number of transactions could cause our quarterly sales, revenues and profitability to fall short of management s expectations. If we are unsuccessful in closing sales, or if the customer delays or decides not to complete an implementation after we expend significant funds and management resources, it could have an adverse effect on our business, financial condition, and results of operations. Our operations could be adversely impacted by changes in the global market and economic conditions We market and sell our products and services throughout the world, with approximately 10% of revenues currently generated outside of the United States and Canada. As a result, we may be exposed to difficult and unsettled economic climates, in particular in emerging markets that may be characterized by significant economic volatility. We are subject to a number of risks customary for international operations, 2016 D+H Annual Report 69

72 MANAGEMENT S DISCUSSION AND ANALYSIS including: (i) economic or political changes in international markets; (ii) currency and exchange rate fluctuations; (iii) differing regulatory and industry standards; (iv) greater difficulty in accounts receivable collection and longer collection periods; (v) difficulties and costs of staffing and managing foreign operations; (vi) the uncertainty of protection for intellectual property rights in some countries, particularly in the Commonwealth of Independent States and southeast Asia regions; and (vii) multiple and possibly overlapping tax structures. In addition, a general weakening of the global economy or a continued weakening of the economy in a particular region, in particular macroeconomic impacts on global banks and their decision-making around information technology investments, could result in the cancellation of or delay in customer purchases. Any of the foregoing could have a material adverse effect on our financial condition or results of operations. See also Long Sales Cycles and Fluctuations in Customer Buying Patterns in these Risk Factors. The recent United Kingdom referendum on our membership in the European Union ( EU ) resulted in a majority of United Kingdom voters voting to exit the EU ( Brexit ). We have operations and customers in the United Kingdom and the EU, and as a result, we face risks associated with the potential uncertainty and disruptions that may follow Brexit. These are not entirely known and may include volatility in exchange rates and interest rates, changes to regulatory regimes applicable to our operations, and economic uncertainty which may lead our customers to reduce their spending budgets for our products and services. Any of these effects, and others we cannot anticipate or that may evolve over time, could adversely affect our business, operating results and financial condition. Undetected Errors or Defects Our technology solutions and software may contain undetected errors, defects or bugs, and there can be no assurance that errors would not be found in our existing or future products or third party products upon which products are dependent, with the possible results including delays in implementing products or cancellations by our clients, interruption in our customers use of products, loss of market acceptance of products, diversion of resources, injury to our reputation and increased service and warranty expenses and/or payment of damages. Any such undetected errors, defects or bugs could also make our applications unavailable or cause similar disruptions to our, or our customers, operations. Any one of the foregoing could have a material adverse effect on our business. Our solutions are complex and require regular updating. If implementation of a critical update is delayed by a customer or third party software provider, we may be required to enact compensating controls to address unsupported legacy systems, and this in turn may force us to rely on unsupported or obsolete third-party software (see Reliance on Third Party Products and Services in these Risk Factors). There can be no assurances that any compensating controls will be effective, and any failures could result in security risks including increased potential for vulnerabilities because a third party no longer provides patches or support, incompatibility with other systems in a client s environment, and limitations in the effectiveness of security features. The occurrence of any of the foregoing could have a material adverse effect on our business, financial results or results of operations. Failure to Develop or Update Products and Services and Accurately Predict and Respond to Market Developments or Demands Our ability to enhance our current products and services and to develop and introduce new innovative products and services to keep pace with technological developments, evolving industry standards, changes to the regulatory environment in which we operate and the increasingly sophisticated needs of our clients and their customers, will significantly affect our future success. Given the highly competitive and rapidly evolving technology environment we operate in, and the potential for disruptive technologies to enter the market, it is important for us to constantly enhance our existing product offerings, as well as develop new product offerings to meet strategic opportunities as they evolve. In addition, as more of our revenue shifts to SaaS (Software as a Service), cloud, BPaaS (Business Platform as a Service), PPaaS (Payments Platform as a Service) and other new or different technology offerings, the need to keep pace with rapid technological change may become more acute. Developing and supporting new products and software is resource-intensive; we may encounter delays when developing new technology solutions and services, and the investment in product development may involve a long payback cycle. Our future plans include significant investment in, and reliance on, technology solutions research and development and related product opportunities. See Research and Development in these Risk Factors. The market for our existing products and services continues to develop and evolve. The constant development and evolution of this market makes it difficult to predict demand for our products and services. We cannot guarantee that the market for our products will grow or that our products will become widely accepted. If the market for our products does not develop in the time frames and with the demand that our management has projected, our future revenues and profitability will be adversely affected. In addition, changes in technologies, industry standards, the regulatory environment, customer requirements and new product introductions and investment by existing or future competitors could render our existing products or service offerings obsolete and unmarketable, or less competitive. This could negatively affect our ability to attract new customers or to maintain contract renewal rates, or it may require us D+H Annual Report

73 to develop new products or service offerings, which may create risks with respect to the retention of key customers and overall customer retention rates. The failure to properly manage the expanding offering of products and services, including by achieving high renewal rates, and accurately predicting and responding to market developments and demands, as well as the failure to develop and successfully market new products and services at favourable margins, could have an adverse effect on our business, financial results or results of operations. Furthermore, any failure by us to provide solutions that are compliant in an ever-evolving regulatory environment could result in significant fines or liability, including liability of our clients and their customers, for which we may bear ultimate liability or could result in a breach of our contractual obligations to these clients. See We Service the Financial Services Industry which is Subject to Complex and Potentially Changing Government Regulations in these Risk Factors. Dependence on Decisions by Potential Customers to Replace their Legacy Computer Systems We derive a portion of our revenues from the full range of services complementing our products, including outsourcing, installation, implementation, training, supplemental services provided on a SaaS basis, licenses for in-house solutions, maintenance and support services. A large portion of these fees are either directly attributable to licenses of our core software platforms or are generated over time by customers using our core software platforms. Banks and credit unions historically have been and may continue to be slow to adopt new technologies. Many of these financial institutions have traditionally met their information technology needs through legacy computer systems or third party systems, in which they have often invested significant resources, and may perceive potential disadvantages to switching, including loss of accustomed functionality, increased costs (including conversion costs) and business disruption. As a result, these financial institutions may be inclined to resist replacing their legacy or third party systems with our core software platforms. Similarly, they may be averse to upgrading to new versions of our products. Our future financial performance will depend in part on the successful development, introduction and client acceptance of new and enhanced versions of our core software platforms and our other complementary products. Our failure to successfully develop, introduce and achieve client acceptance of new and enhanced versions of our core software platforms and other products could have a material adverse effect on our business. We Service the Financial Services Industry which is Subject to Complex and Potentially Changing Laws and Regulations The financial services industry and financial institutions are subject to extensive and complex laws and regulations (which may, depending on the jurisdiction, operate at the federal/national, provincial/state or other levels of government). Current and future regulations and actions by governmental and regulatory authorities, including the Dodd-Frank Act in the United States, could have an impact on the decisions of our customers, as well as the timing and implementation of those decisions. In particular, some regulations have affected and are expected to continue to affect financial institution capitalization requirements in the U.S. and other jurisdictions, which may contribute to reduced information technology spending (see Long Sales Cycles and Fluctuations in Customer Buying Patterns in these Risk Factors). Our products and services must be designed to work within the regulatory constraints under which our customers operate, and we are also subject to contractual requirements imposed by financial institution clients with respect to a number of regulations. In addition, our business is affected by a number of regulations, including privacy laws, payments regulations and payment card network rules such as Payment Card Industry Data Security Standards, and any failure to comply with these rules and regulations could result in fines, litigation, or restrictions on our operations. Given the intense regulatory scrutiny and increased regulatory requirements to which the financial services industry is subject, and will likely continue to be subject, this may be a continuous challenge in the design and delivery of our products and services. The inability of our products and services to work properly within the regulatory framework may have a material adverse effect on our business. The laws, rules or regulations that we and our customers must comply with, including to ensure adequate protection of consumer privacy and to ensure consumers are not impacted by deceptive business practices, could render our business or operations more costly and burdensome or less efficient, and could require us to modify our current or future products or services. Any of these events, if realized, could have a material adverse effect on our business, financial results or results of operations. Consolidation and Failures of Financial Institutions Our market consists of banks, credit unions and other financial institutions. The number of community banks and credit unions has decreased due to failures in recent years, and mergers and acquisitions over the last several decades, and is expected to continue to decrease as more consolidation occurs. Failures, mergers or consolidations of banks and other financial institutions in the future could reduce the number of our customers and potential customers. A smaller market for our services could have a material adverse impact on our business and results of operations even if these events do not reduce the aggregate activities of the consolidated entities. It is also possible that the larger banks, credit unions or financial institutions resulting from mergers or consolidations could have greater leverage in negotiating terms with us or could decide to perform in-house some or all of the services which we currently provides or could provide, or could use the consolidation as an opportunity to save costs by terminating contracts. Any of these developments could have a material adverse effect on our business, financial results or results of operations D+H Annual Report 71

74 MANAGEMENT S DISCUSSION AND ANALYSIS Exposure to Fluctuations in Residential Mortgage and Other Lending Market Activity A portion of our consolidated Adjusted revenues is driven by mortgage activity and directly or indirectly by residential real estate activity in Canada and the United States. Over the past several years, these markets have been variable due to changing economic conditions, housing markets, interest rate changes and regulatory changes among other factors. In the future, potentially higher interest rates, adverse cyclical economic changes, regulatory or other significant changes in the housing or mortgage markets could have a negative effect on transaction volumes and on our business and as these services provide generally strong margins, such negative volume changes could have an adverse effect on our business. A portion of our consolidated Adjusted revenues is also driven by personal borrowing activity. Personal loan volumes are influenced by factors such as the number of new and used cars purchased (in the case of car loans), the general economic environment, and interest rates, among other factors. In the future, potentially higher interest rates or other adverse cyclical economic changes could have a negative effect on transaction volumes. Canadian Cheque Order Volume Decline Approximately 19% of our consolidated adjusted 2016 revenues were from the Canadian Payments Solutions revenue stream. The majority of revenues in this service area are related to cheque orders and are, therefore, affected by cheque usage in Canada. Management believes that the adoption of alternative payment methods by consumers and businesses has and will continue to impact cheque order volumes and that the rate of adoption may differ between personal and business cheques. The use of alternative payment methods continues to grow and expand and may accelerate further to reduce cheque order volumes and values, mitigation strategies adopted and implemented by management may not be effective and the rate of decline in cheque order volume may be faster than anticipated. Any significant reductions will have an adverse effect on our business. Reliance on Third Party Products and Services In some areas of our operations, we rely on third parties to supply production, fulfillment, or other services. Examples of such services by third parties include contracts with service providers for Canadian postal services (in respect of Canadian operations), certain program support services related to enhancement services, connectivity to third party technology and data service providers, third party network and data centre providers and other outsourcing or partnering arrangements in general. In addition, our software products are designed to work in conjunction with certain third party software products, including Microsoft and Oracle relational databases as well as open source software. We have commitments to deliver products and services to our customers and we may be exposed to operational disruption, increased expenses or claims from customers if our service providers or partners fail to perform under their contractual obligations for any reason, if the third party products have defects or errors, if continued outsourcing or partnering arrangements are not renewed or secured or if the delivery of products and services to us by any such service providers or partners is interrupted or delayed as a result of computer viruses, unauthorized access, cyber-attack or other similar disruptions. Current profit margins reflect these third party arrangements; therefore, if we were required to find an alternative arrangement, margins and cash flows could be negatively impacted and could have an adverse effect on us. These risks are particularly pronounced in instances where there are few third parties that have the capability to provide the applicable product or service, or where a third party product is critical or core to the functioning of our products. Reliance on Key Personnel Our global operations are dependent on the abilities, experience and efforts of many key employees and executives, and competition within the technology industry for the services of qualified personnel is significant. Should any of our executives or key employees be unable or unwilling to continue their employment, or should we be unable to develop or attract personnel with the skills and capabilities needed for the continued evolution of our larger and more complex business, it could have a material adverse effect on our business. Competition from Competitors Supplying Similar Products and Services The market for our products and services is competitive. We encounter competition from a number of sources and these competitors vary in size and in the scope and breadth of the products and services they provide. Some of our competitors have advantages over us due to their longer operating and product development history, larger installed client base, substantially greater financial, technical and marketing resources, and, in some cases, greater worldwide presence, and/or willingness to lower their prices and margins to gain access to increased market shares. As such, we are exposed to competition which could lead to loss of contracts or reduced margins and could have an adverse effect on our business. We expect that the international markets in which we compete will continue to attract new competitors and new technologies, including providers of similar products and services, which may have a lower cost structure. We also expect that competition will intensify as a result of consolidation within the industries in which we operate. There can be no assurance that we will be able to compete successfully against D+H Annual Report

75 current or future competitors or that competitive pressures we face in the markets in which we operate will not have a material adverse effect on our business. In response to competition, we may be required in the future to furnish additional discounts to customers, otherwise modify pricing practices or offer more favourable payment terms and/or contractual terms. Any such developments could have a material adverse effect on our business. Inability to Successfully Integrate or to Attain the Expected Benefits from Acquisitions In 2015, we completed the acquisition of the Fundtech group of companies, which represents the GTBS segment of our business. The benefits we expect to achieve as a result of the acquisition of Fundtech will depend, in part, on the ability to realize anticipated growth opportunities. GTBS operates in a complex, regulated marketplace that has been highly variable. There can be no assurance that we will be able to fully realize the expected benefits of the acquisition of Fundtech. Even if we are able to integrate these businesses and operations successfully, this integration may not result in the realization of the full benefits of the growth opportunities our management currently expects within the anticipated time frame or at all. Our ability to realize the anticipated benefits of our recent growth and our acquisitions depends in part on successfully consolidating functions and integrating operations, procedures, systems, and personnel of our businesses in a timely and efficient manner, as well as on the ability to realize the anticipated growth, cross-selling opportunities and potential synergies from integrating operations. There is no assurance that improved operating results will be achieved as a result of growth or acquisitions or that we will successfully integrate our businesses in a timely manner. We intend to continue to identify, acquire and develop suitable acquisition targets in both new and existing markets. Our success in our acquisition activities depends on our ability to identify suitable acquisition candidates, acquire them on acceptable terms and successfully integrate their operations. The integration of companies that have previously operated independently may result in significant challenges, and we may be unable to accomplish the integration smoothly or successfully, resulting in additional demands on our resources, systems, procedures and controls. In particular, the coordination of geographically dispersed organizations with differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration of acquired businesses may also require the dedication of significant management resources, which may temporarily distract management s attention from the day-to-day operations of our business, and the process of integrating operations may cause an interruption of, or loss of momentum in, the activities of one or more of our businesses and the loss of key personnel (see Reliance on Key Personnel in these Risk Factors). Our strategy is, in part, predicated on our ability to realize cost savings and to increase revenues through the acquisition of businesses that add to the breadth and depth of our products and services while also providing cross-selling opportunities, in addition to increasing global reach. Achieving these cost savings and revenue growth (including through the realization of cross-selling opportunities) is dependent upon a number of factors, many of which are beyond our control. In particular, we may not be able to realize the benefits of anticipated integration of sales forces, asset rationalization, systems integration and more comprehensive product and service offerings. Reliance on Contracts with Key Customers and Major Customer Loss While we serve approximately 8,000 customers, our Canadian operations remain dependent upon certain significant customers and several large mortgage intermediaries, such as independent mortgage brokers, as well as a significant contract with the Government of Canada in respect of the Canada Student Loan Program. Loss of a major contract, due to consolidation amongst customers, competition or other reasons may have material adverse effects on our business. There can be no assurance that our contracts with our key customers will be renewed or that our services will be utilized by those parties. Although our retention rates have been high historically, there is no guarantee that our customers will renew their contracts at the same or higher levels of service, if at all. There could be material adverse effects on our business, financial results or results of operations if we fail to renew our contracts with these parties, if these parties merge or are acquired by other businesses that have established relationships with other service providers, or if these parties decide to perform the applicable product, service or technology solution supply functions inhouse. Further, there is no assurance that any new agreement or renewal we enter into will have terms similar to those contained in current arrangements, and the failure to obtain those terms could have an adverse effect on our business. Uncertainty of Strategic Review Process and Impact on the Business A process has been established by our Board of Directors, including the formation of a Special Committee of independent Directors, to address expressions of interest from certain third parties to acquire D+H. There can be no assurances that any transaction will result from this process and some of our competitors may attempt to use this process to unduly influence some of our customers or potential customers by raising uncertainties as to our future ownership or structure. Until further announcements are made, this could lead to potential delays in contract commitments, which could in turn impact bookings in future periods. A lengthy process could also result in higher than usual employee turnover D+H Annual Report 73

76 MANAGEMENT S DISCUSSION AND ANALYSIS Foreign Exchange Exposure A significant portion of our revenues are earned in U.S. dollars and other foreign currencies. We revalue all foreign currency revenues and expenses into Canadian dollars for reporting purposes, resulting in exposure to fluctuations in the applicable foreign exchange rates. In addition, to the extent necessary, we may convert foreign currencies into Canadian dollars for the purposes of making certain payments denominated in Canadian dollars. The GTBS segment of our business is also exposed to market risks attributable to fluctuations in the value of various foreign currencies including the Israeli New Shekel, Indian Rupee, Swiss Franc, Euro and British pounds sterling. We conduct business in many geographic markets and we and our subsidiaries may enter into various arrangements to mitigate foreign currency risk, but there can be no assurances that such arrangements will prove to be favorable. To mitigate the potential foreign exchange fluctuation risk, we enter into foreign exchange forward contracts from time to time. Currency hedging entails currency market risk and the risk of using hedges could result in losses greater than if the hedging had not been used. Hedging arrangements may have the effect of limiting or reducing the total returns if purchases at hedged rates result in lower margins than otherwise earned if purchases had been made at spot rates. To the extent the net exposure is not covered by the contracts, we may realize foreign exchange gains or losses based on the fluctuations in the currency market. Our credit facilities are denominated predominantly in U.S. dollars. All borrowings in U.S. dollars are revalued into Canadian dollars for reporting purposes and, as a result, fluctuations in the applicable foreign exchange rate may impact the value of our reported debt. In addition, our bank leverage covenant under our credit facilities is calculated in Canadian dollars, and a weakening of the Canadian dollar against the U.S. dollar is likely to adversely impact our leverage, which is used to determine the pricing on our floating rate debt. An adverse effect on our leverage could make it more difficult for us to comply with those leverage covenants and increase the potential for default under our credit facilities. To the extent our consolidated balance sheet is unhedged, fluctuations in the applicable exchange rates will impact our consolidated statement of (loss) income, although an adjustment is made to eliminate capital structure related non-cash foreign exchange gain or loss from Adjusted net income. Infringement of Third Party Intellectual Property Rights Third parties may claim that we are infringing their intellectual property rights. It is anticipated that software and technology providers could increasingly be subject to infringement claims. We may be exposed to additional liability as we usually agree to indemnify our customers against third party infringement claims, and often such liability is not subject to contractual liability limits. Any assertion by a third party, regardless of merit, that we are, or a client that we are obligated to indemnify is, infringing that third party s intellectual property rights, or that our intellectual property rights are invalid, may subject us to litigation or force us to change our products or services, and such changes may be expensive or impractical. As a result, we may then be forced to seek royalty or license agreements from the owner of such rights. If we are unable to agree on acceptable terms, we may be required to discontinue the sale of key products or halt other aspects of our operations, and this could results in liability to our customers, if they are forced to cease using our products. We may also be liable for financial damages for a violation of intellectual property rights, and we may incur expenses in connection with indemnifying our customers against losses suffered by them. Any adverse result related to violation of third party intellectual property rights could materially and adversely harm our business, financial condition and results of operations. Even if intellectual property claims brought against us are without merit, they may result in costly and time consuming litigation, cause product shipment and installation delays, affect the decision by prospective customers to enter into agreements with us, and may divert our management and key personnel from operating our business. Additionally, in some circumstances, such as in the provision of cloud-based services and managed service offerings, we rely on our customers to obtain and maintain required third party licenses. Failure by these customers to comply with their contractual requirements could expose us to potential claims. Limited Ability to protect Intellectual Property Rights Our ability to compete depends on our proprietary systems, software and technology. We rely on a combination of trade mark and copyright laws, patent laws, trade secret protection and confidentiality and license agreements to protect our intellectual property. Intellectual property laws afford limited protection, and the steps we have taken to protect our intellectual property and proprietary rights may not prevent the misappropriation of our technology. Agreements entered into for that purpose may not be enforceable or may not provide us with adequate remedies D+H Annual Report

77 Certain of our customers and partners have access to source code of our products and other sensitive information. In other cases, it may be possible for a third party to copy or reverse engineer our products and services, or otherwise obtain our proprietary information without our permission. Policing unauthorized use of our proprietary rights is difficult. There is no assurance that competitors will not independently develop products and services that are substantially equivalent or superior to our products and services and this would have a material adverse effect on our business. We also use a limited amount of software under open source licenses. Some of these licenses contain non-standard terms that may require that derivative works based on the open source software be made available to the third parties or the public, that we release source code of our proprietary software if we combine it with open source software in a certain manner, or other unanticipated conditions or restrictions on our use of such open source software or our ability to commercialize our solutions. Monitoring of software development operations for use of open source software is difficult and uncertain, and there can be no assurances that all open source software is properly utilized to avoid these risks. Any improper use of open source software impacting our ability to use or commercialize our software could have a material adverse effect on our business. Bookings and backlog might not result in future revenue Our bookings and backlog at any particular date may not be indicative of revenues for subsequent periods. There can be no assurance that amounts included in bookings or backlog will ultimately result in recognition of revenue or occur in any particular financial reporting period. In addition, in any given period, we may be required to reduce bookings or backlog due to factors such as a cancellation of a contract, changes in the financial condition of a customer and other unforeseen circumstances. Changes to bookings or backlog during any particular period, or the failure of our bookings or backlog to result in future revenue, could have a material adverse effect on our financial condition and results of operations. Potential Undisclosed Liabilities Associated with Acquisitions In recent years, we have acquired a number of businesses, including Fundtech in In connection with these acquisitions, there may be liabilities that we or prior owners failed or were unable to discover, or were unable to quantify, in their diligence prior to the consummation of the acquisitions. Within the applicable purchase and sale agreements, we may not be fully indemnified for some or all of these liabilities by the former owners of acquired businesses. To the extent that prior owners of such businesses failed to comply with or otherwise violated applicable laws, including environmental laws, or breached contracts, we, as a successor owner may be financially responsible for these violations and breaches. The discovery of any material liabilities could have an adverse effect on our business. Furthermore, acquisitions may involve a number of special risks including diversion of management s attention, failure to retain key personnel and unanticipated events or circumstances, some or all of which could have an adverse effect on our business. Leverage, Liquidity and Restrictive Covenants Our ability to meet our debt-services requirements will depend on our ability to generate cash in the future, which depends on many factors, including our financial performance, debt-service obligations, working capital and future capital-expenditure requirements. The terms of our existing credit agreements, outstanding debentures and other agreements contain numerous restrictive covenants that limit the discretion of management with respect to certain business matters and in certain situations, the ability to make dividend payments to Shareholders. In addition, our ability to borrow funds under the Credit Agreement in the future will depend on the satisfaction of such covenants. A failure to comply with any covenants or obligations under our consolidated indebtedness could result in a default, which, if not cured or waived, could result in the acceleration of the relevant indebtedness. If such indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full. There can also be no assurance that we will generate cash flow in amounts sufficient to pay outstanding indebtedness or to fund any other liquidity needs. If the amounts become repayable due to an inability to comply with covenants, or if we are unable to extend the terms of the facilities at time of renewal, the loss of the credit facilities could have an adverse effect on our business. Our degree of leverage could increase and this could have adverse consequences for our business, operating results and financial condition, including: limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; restricting our flexibility and discretion to operate our business; limiting our ability to declare dividends; having to dedicate a portion of our cash flows from operations to the payment of interest on our existing indebtedness and not having such cash flows available for other purposes; exposing us to increased interest expense on borrowings at variable rates; limiting our ability to adjust to changing market conditions; placing us at a competitive disadvantage compared to our competitors that have less debt; making us vulnerable in a downturn in general economic conditions; and making us unable to make expenditures that are important to our growth and strategies D+H Annual Report 75

78 MANAGEMENT S DISCUSSION AND ANALYSIS Taxes and Changes in Tax Regimes Our business is subject to various Canadian and foreign tax laws and regulations. Significant judgment is required for determining our tax provision for income taxes and our tax filings, which are subject to audit by Canadian and foreign taxation authorities. Various internal and external factors may have favourable or unfavourable effects on our future provision for income taxes, income taxes receivable, and our effective income tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, results of audits by taxation authorities, changing interpretations of existing tax laws or regulations, changes in estimates of prior years items, the impact of transactions we complete, changes in the valuation of our deferred tax assets and liabilities, transfer pricing adjustments, changes in the overall mix of income among the different jurisdictions in which we operate, and changes in overall levels of income before taxes. While we believe that our tax provisions for income taxes and tax filings are made in material compliance with applicable tax laws and regulations, there is a risk that a taxation authority could have a different interpretation and potentially impose additional taxes, penalties or fines which may negatively impact our business. Changes in tax laws or tax rulings, or changes in interpretations of existing laws, could materially affect our financial position and results of operations. A number of countries and organizations have recently proposed or recommended changes to existing tax laws or have enacted new laws that could potentially increase our tax obligations. The Organization for Economic Cooperation and Development has been working on a Base Erosion and Profit Shifting Project, and issued in 2015, and is expected to continue to issue, guidelines and proposals that may change various aspects of the existing framework under which our tax obligations are determined in some of the countries in which we operate. The European Commission has conducted investigations in multiple countries focusing on whether local country tax rulings or tax legislation provides preferential tax treatment that violates European Union state aid rules. Investigations may result in changes to the tax treatment of our foreign operations. In addition, the current U.S. administration and key members of Congress have made public statements indicating that tax reform is a priority. Due to the large and expanding scale of our international business activities, many of these types of changes to the taxation of our activities could increase our worldwide effective tax rate and harm our financial position and results of operations. FFIEC Consent Order On December 5, 2013, the Federal Deposit Insurance Corporation ( FDIC ) entered in to a consent order ( FFIEC Consent Order ) together with the Office of the Comptroller of the Currency ( OCC ) against two subsidiaries acquired by us pursuant to the Fundtech acquisition (Fundtech Corporation and BServ, Inc., together Fundtech ). This covered regulated financial institutions that are Fundtech s U.S. data center customers for different service offerings including in our U.S. Payments and Merchant Services segments. Pursuant to the FFIEC Consent Order, Fundtech was ordered, among other things, to address various matters related to risk management and to communicate these actions to clients and to shareholders. Management has asserted full compliance with the FFIEC Consent Order as of December 31, 2016 and communicated same to the FDIC, OCC and the Federal Reserve Bank of Atlanta as well as the former Fundtech s U.S. data center customers. However, there can be no assurances that the FFIEC Consent Order will be terminated within the timelines expected by management. The timing of terminating the FFIEC Consent Order will occur as determined jointly by the FDIC and the OCC. The expectations and requirements of regulators for us to comply with the FFIEC Consent Order may change, and such changes may require additional cost, effort or both. While our management does not see any significant current impact of the FFIEC Consent Order on the former Fundtech operations, both in our ability to attract and to retain customers, it is possible that the FFIEC Consent Order may have a negative impact on our ability to retain existing customers or attract new customers, and/or on our ability to negotiate favourable contractual terms consistent with past practice. The FFIEC Consent Order may also make it more challenging for our customers to comply with vendor monitoring requirements of applicable regulators. Any such developments could have a material effect on the existing U.S. Payments and Merchant Services businesses. Research and Development Developing and localizing software is resource-intensive, and the investment in product development may involve a long payback cycle. Our future plans include investments in software research and development and related product opportunities. While our management believes that we must continue to dedicate a significant amount of resources to our research and development efforts in order to maintain our competitive position, future revenues from these investments are not fully predictable. Therefore, we may not realize any benefits from our research and development efforts in a timely fashion or at all. Additionally, if it is determined that an investment in product development will not produce the revenues expected by management, we may be required to recognize an impairment loss related to intangible assets in respect of that investment. Contract Performance Most customer contracts contain provisions that govern the delivery and support of products and the performance of the services being provided, and impose other key obligations on the applicable D+H entity. Failure to meet the terms or performance standards, whether or not such failures are within our control, can result in variability in revenue earned, early termination of the contract, financial performance D+H Annual Report

79 penalties or litigation and damage awards. In some cases, other D+H entities are guarantors for such performance and can be impacted by any failure of the contracting entity. There can be no assurance that product and service delivery disputes will not occur. Disputes and the resolution thereof could have an adverse effect on our business. Risks of Future Legal Proceedings Failure to comply with laws and regulations could lead to termination of our customer contracts or liability for breach thereof, cancellation of the Credit Agreement, imposition of fines or penalties, or denial, revocation or delay of the renewal of permits and licenses by governmental authorities. We may also be susceptible to lawsuits and claims brought against us, either directly or indirectly, by governmental authorities and third parties, including purported class actions. In addition, governmental authorities as well as third parties may claim that we are liable for environmental damages. A significant judgment against us, the loss of a significant permit or other approval or the imposition of significant damages, fines or penalties could have a material adverse effect on our business. We now have significant operations in the United States and globally and are, therefore, increasingly exposed to the threat of litigation or other proceedings in the U.S. and other jurisdictions. Financial Instruments The main risks to our business associated with interest-rate swaps are counterparty (credit) risk and early termination risk. We mitigate counterparty risk by conducting swaps only with highly rated financial institutions and those that are members of the lending syndicate under the Credit Agreement. Should we reduce our indebtedness that the swaps relate to, we may choose also to reduce the relevant swap amounts at such time. To the extent that market interest rates applicable to the remaining term of such swaps are lower than the fixed rate agreed to in the swap, we would have to pay the fair value at such time to the counterparty. Upon maturity of the swaps, or in the event that we increase our outstanding indebtedness, we could be exposed to the risk that higher interest rates may exist at such time. Indemnity Agreements and Indemnity Arrangements In the normal course of business, we have entered into agreements that include indemnities in favour of third parties, such as customer contracts, purchase and sale agreements, confidentiality agreements, engagement letters with advisors and consultants, outsourcing agreements, leasing contracts, license agreements, information technology agreements and various product, service, data hosting and network access agreements with customers. These indemnification arrangements may require the applicable D+H entity to compensate counterparties for losses incurred by the counterparties as a result of breaches in representations, covenants and warranties provided by the particular D+H entity or as a result of litigation claims or statutory sanctions that may be suffered by the counterparties as a consequence of the transaction. The terms of these indemnities are sometimes not explicitly defined within the particular agreement or contract. The applicable D+H entity, whenever possible, tries to negotiate to limit this potential liability within the particular agreement or contract, but due to the unpredictability of future events the maximum amount of any potential reimbursement cannot be reasonably estimated, and could have a material adverse effect on our business, operating results and financial condition. In connection with the sale of any businesses, we may be required to make certain representations and warranties about the applicable business and our financial affairs. In many cases, we have an obligation to indemnify the purchaser of the applicable business in respect of such representations and warranties. This indemnification obligation could have a material adverse effect on our business, operating results and financial condition. Uninsured and Underinsured Losses Our insurance coverage is maintained in the form of comprehensive property and casualty insurance with coverages and amounts sufficient to repair or replace any assets physically damaged or destroyed, including coverage for business interruption losses, or extra expenses sustained, cyber liability coverage, and coverage in respect of claims for bodily injury or property damage arising out of assets or operations. However, not all risks are covered by insurance, and no assurance can be given that insurance will be consistently available or will be consistently available on an economically feasible basis or that the amounts of insurance will at all times be sufficient to cover each and every loss or claim that may occur involving our assets or operations. Geopolitical conditions in Israel and the Middle East as a whole could negatively impact our GTBS operations Political, economic and military conditions in Israel have a direct influence on the GTBS segment of our business because a significant research and development facility and an executive office is located there. Any hostilities, armed conflicts or escalating political instability in the region could disrupt international trading activities in Israel and may materially and negatively affect business conditions and could harm results of operations. Certain countries, as well as certain companies and organizations, restrict doing business with Israel. There have been sales opportunities that we could not pursue and there may be such opportunities in the future from which we may be precluded. In addition, such boycotts, restrictive laws, policies or practices may change over time and we cannot predict which countries, as well as whether certain companies and organizations, will be subject thereto. Any boycott, restrictive laws, policies or practices directed towards Israel or Israeli businesses could, individually or in the aggregate, have an adverse effect on our business, financial condition and results of operations D+H Annual Report 77

80 MANAGEMENT S DISCUSSION AND ANALYSIS Risk of Insourcing Certain of our key customers are large financial institutions with significant resources. There can be no assurance that these institutions will not alter their existing operating methods and replace our products and services with internally developed or acquired technology applications. These internally developed or acquired solutions may then be marketed to other financial institutions or implemented in financial institutions that they have acquired. Thus, we may compete with both software vendors within our industry and the in-house IT departments of certain of our potential customers. Acquisitions and Access to Cost of Competitive Capital An important part of our strategy for growth and diversification is to make selective acquisitions. The inability to access cost-effective capital or any capital at all, may limit or prevent us from making acquisitions or could make future acquisition offers less commercially attractive to owners, both of which could have an adverse effect on our business. We May Issue Additional Shares Diluting Existing Shareholders Interests Our articles of incorporation authorize us to issue an unlimited number of Shares for that consideration and on those terms and conditions as are established by the Directors without the approval of any Shareholders. In addition, we may issue Shares upon the conversion, redemption or maturity of or payment of interest on the Debentures. Accordingly, holders of Shares may suffer dilution. Volatility of Market Price of Shares The market price of the Shares may be volatile. This volatility may affect the ability of holders of Shares or Debentures to sell their securities at an advantageous price. In addition, it may result in greater volatility in the market price of the Debentures than would be expected for non-convertible debt securities. Market price fluctuations in the Shares may be due to our operating results failing to meet financial forecasts or expectations of securities analysts, or investors in any period, downward revision in securities analysts estimates, adverse changes in general global market conditions or global economic trends, acquisitions, dispositions or other material public announcements by us or our competitors, along with a variety of additional factors. These broad market fluctuations may adversely affect the market prices of the Shares and Debentures. In addition, because a portion of our total compensation program for our executive officers and key personnel includes the award of options to buy our Common Shares, fluctuations in the market price of our Common Shares may adversely affect our ability to retain or attract critical personnel. An impairment of investments in goodwill generated from prior acquisitions would require a write-down that would reduce net income. Goodwill is assessed for impairment annually or sooner if circumstances indicate a possible impairment. Factors that could lead to impairment of goodwill include significant under-performance relative to historical or projected future operating results, a significant decline in our stock price and market capitalization and negative industry or economic trends. In the event that the book value of goodwill is impaired, any such impairment would be charged to earnings in the period of impairment. In the event of significant volatility in operating performance, volatility in the capital markets or a worsening of current economic conditions, we may be required to record an impairment charge, which would negatively impact results of operations. Possible future impairment of goodwill may have a material adverse effect on our business, financial condition and results of operations. Labour The sole collective agreement involving our employees, representing approximately 42 unionized employees, expired on March 31, 2015 and was not renewed. To management s knowledge, our business has not suffered any loss of production due to work stoppages by our employees during our history, but there can be no assurance that a work stoppage will not occur in the future. In addition, a number of our suppliers (including Canada Post Corporation and certain paper suppliers) have employees who are represented by collective agreements and may be subjected to work stoppages. Such work stoppages could have a material adverse effect on our business D+H Annual Report

81 Raw Material Exposure In the Canadian segment, we utilize a number of raw materials which are subject to price fluctuations beyond our control. Market price fluctuations of these raw materials could have a material adverse effect on our financial condition and results of operations. There has generally been a lag time before those increases and decreases can be passed on to our customers. There can be no assurance that the price of our raw materials will not increase in the future or that we will be able to pass on those increases to our customers. A significant increase in the price of raw materials that is not passed on to customers could have a material adverse effect on our business, operating results and financial condition. Regulatory, Environment, Health and Safety Requirements and Other Considerations Our operations are subject to numerous and significant laws, including statutes, regulations, by-laws, guidelines and policies as well as permits and other approvals, relating to the protection of the environment and workers health and safety governing, among other things, air emissions, water discharges, non-hazardous and hazardous waste (including waste water), the storage, handling, transportation and distribution of dangerous goods and hazardous materials such as chemicals, remediation of releases and the presence of hazardous materials, land use and zoning and employee health and safety in Canada and other public regulatory, employee, environmental and health and safety requirements ( Environment, Health and Safety Requirements ). As a result of our operations, we are or may be involved from time to time in administrative and judicial proceedings and inquiries relating to Environment, Health and Safety Requirements among others. Future proceedings or inquiries could have a material adverse effect on our business. In addition, changes to existing Environment, Health and Safety Requirements or the adoption of new Environment, Health and Safety Requirements in the future, changes to the enforcement of Environment, Health and Safety Requirements, as well as the discovery of additional or unknown conditions at facilities that we own, operate or use, could require expenditures which might have an adverse effect on our business, operating results and financial condition, to the extent these risks are not covered by an indemnity or by insurance. Risks Associated with Future Dividend Payments On November 21, 2016, we announced a reduction in our dividend payment. Future dividend payments and the level thereof is uncertain, as the dividend policy and the funds available for the payment of dividends will be dependent upon, among other things: operating cash flow; financial requirements for our operations; execution of our growth strategy; fluctuations in working capital and the timing and amount of capital expenditures; debt service requirements; and other factors, some of which may be beyond our control. The market value of the Shares may deteriorate if we are unable to meet our cash dividend targets in the future, and such deterioration may be material. Reliance on Information Technology We rely heavily on information technology in our operations, including in our accounting and financial reporting systems, and any material failure, inadequacy, interruption or security failure of that technology could increase the likelihood of errors in financial reporting or introduce greater operational risk, which could have a material adverse effect on our business, operating results and financial condition. Investment Eligibility There can be no assurance that the Shares will continue to be qualified investments under the Tax Act for trusts governed by a registered retirement savings plan, deferred profit sharing plan, registered retirement income fund, registered education savings plan, registered disability savings plan and tax-free savings account. Moreover, in certain circumstances, even if Shares are a qualified investment for a trust governed by a tax-free savings account, they may nevertheless constitute a prohibited investment for the purposes of a tax-free savings account in which case a holder of a tax-free savings account would be subject to a penalty tax D+H Annual Report 79

82 FINANCIAL REPORTING RESPONSIBILITY OF MANAGEMENT The accompanying consolidated financial statements for DH Corporation (the Corporation ) have been prepared by management and approved by the Board of Directors of the Corporation. Management is responsible for the preparation and presentation of these financial statements and all the financial information contained within this annual report within reasonable limits of materiality. The Corporation s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. In the preparation of these financial statements, estimates are sometimes necessary because a precise determination of certain assets and liabilities is dependent on future events. Management believes such estimates have been based on careful judgments and have been properly reflected in the accompanying consolidated financial statements. The financial information throughout this annual report is consistent with that in the financial statements. To assist management in discharging these responsibilities, the Corporation has developed and maintains a system of internal controls which are designed to provide reasonable assurance that the Corporation s consolidated assets are properly accounted for and safeguarded, that transactions are executed in accordance with management s authorization and that the financial records form a reliable base for the preparation of accurate and timely financial information. Management recognizes its responsibilities for conducting the Corporation s affairs in compliance with established financial standards and applicable laws, and for the maintenance of proper standards of conduct in its activities. KPMG LLP, Chartered Professional Accountants, are appointed by the shareholders and have audited the consolidated financial statements of the Corporation that are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Their report outlines the nature of their audit and expresses their opinion on the consolidated financial statements of the Corporation. The Board of Directors has appointed an Audit Committee composed of three independent directors. The Audit Committee meets periodically with management and the auditors to discuss internal controls over the financial reporting process, auditing matters and financial reporting issues. They are responsible for reviewing the Corporation s annual and interim consolidated financial statements and the report of the auditors. The Audit Committee reports the results of such reviews to the Board of Directors and makes recommendations with respect to the appointment of the Corporation s auditors. In addition, the Board of Directors may refer to the Audit Committee any other matters and questions relating to the financial position of the Corporation and its subsidiaries. The Board of Directors are responsible for ensuring that management fulfills its responsibilities for financial reporting, and are responsible for approving the consolidated financial statements of the Corporation. Gerrard Schmid Chief Executive Officer DH Corporation Karen H. Weaver Chief Financial Officer DH Corporation March 7, D+H Annual Report

83 INDEPENDENT AUDITORS REPORT To the Shareholders of DH Corporation We have audited the accompanying consolidated financial statements of DH Corporation, which comprise the consolidated statements of financial position as at December 31, 2016 and December 31, 2015, the consolidated statements of (loss) income, comprehensive (loss) income, changes in equity and cash flows for the years ended December 31, 2016 and December 31, 2015, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of DH Corporation as at December 31, 2016 and December 31, 2015 and its consolidated financial performance and its consolidated cash flows for the years ended December 31, 2016 and December 31, 2015 in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants March 7, 2017 Toronto, Canada 2016 D+H Annual Report 81

84 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at December 31 (thousands of Canadian dollars) ASSETS Cash and cash equivalents (note 5) $ 58,247 $ 66,459 Trade, unbilled and other receivables, net (note 9) 257, ,404 Prepayments and other current assets (note 10) 57,508 61,716 Current income tax assets (note 13) 14,010 34,641 Total current assets 387, ,220 Non-current unbilled receivables (note 9) 88,928 81,917 Deferred tax assets (note 13) 3,603 4,440 Property, plant and equipment (note 14) 81,974 78,476 Intangible assets (note 15) 1,824,673 2,114,699 Goodwill (note 11) 2,615,428 2,769,290 Other assets (note 12) 56,668 45,028 Total non-current assets 4,671,274 5,093,850 Total assets $ 5,058,877 $ 5,517,070 LIABILITIES Trade payables, accrued and other liabilities (note 16) $ 216,852 $ 191,759 Loans and borrowings - current (note 17) 80,000 Deferred revenues 129, ,288 Current tax liabilities (note 13) 18,372 22,564 Total current liabilities 444, ,611 Non-current deferred revenues 35,833 38,171 Loans and borrowings - non-current (note 17) 1,433,254 1,636,922 Convertible debentures (note 18) 431, ,576 Deferred tax liabilities (note 13) 525, ,246 Other long-term liabilities (note 20) 55,407 51,478 Total non-current liabilities 2,481,572 2,774,393 Total liabilities 2,926,251 3,148,004 EQUITY Capital (note 22) 2,064,135 2,050,223 Reserves 331, ,949 Deficit (263,419) (59,106) Total equity 2,132,626 2,369,066 Total liabilities and equity $ 5,058,877 $ 5,517,070 The accompanying notes are an integral part of these consolidated financial statements D+H Annual Report

85 CONSOLIDATED STATEMENTS OF (LOSS) INCOME For the year ended December 31 (thousands of Canadian dollars, except per share amounts) Revenues (note 6) $ 1,679,857 $ 1,506,611 Employee compensation and benefits (note 7) 585, ,041 Other expenses, net (note 7) 675, ,870 Income from operating activities before depreciation, amortization and impairment 418, ,700 Depreciation of property, plant and equipment (note 14) 27,962 23,298 Amortization of intangible assets (note 15) 284, ,601 Impairment of goodwill (note 11) 121,041 (Loss) income from operating activities (14,473) 171,801 Finance expense (note 17) 103,934 95,833 (Loss) income before income taxes (118,407) 75,968 Income tax recovery (note 13) (50,744) (8,037) Net (loss) income for the period $ (67,663)$ 84,005 (Loss) earnings per share - basic and diluted (note 23) $ (0.63)$ 0.84 The accompanying notes are an integral part of these consolidated financial statements D+H Annual Report 83

86 CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME For the year ended December 31 (thousands of Canadian dollars) Net (loss) income for the period $ (67,663) $ 84,005 Other comprehensive income (loss): Items that will not be re-classified to net (loss) income: Actuarial revaluation of pension obligation (note 20) 2, Tax expense on items above (658) (325) 1, Items that are or may be reclassified subsequently to net (loss) income: Settlement of forward contracts loss relating to acquisition of Fundtech (note 19) (50,557) Reclassification of settlement loss on forward contracts to (loss) income (note 11 & note 19) 50,557 Cash flow hedges - effective portion of changes in fair value (note 19) (1,659) (3,624) Cash flow hedges - reclassified to consolidated statements of (loss) income 3,783 3,278 Foreign currency translation (loss) gain (102,775) 297,803 Tax (expense) recovery on items above (1,774) 1,364 Other comprehensive (loss) income, net of tax (50,050) 248,529 Total comprehensive (loss) income for the period $ (117,713) $ 332,534 The accompanying notes are an integral part of these consolidated financial statements D+H Annual Report

87 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (thousands of Canadian dollars, except share amounts) Number of common shares Share capital Equity-settled share-based compensation Reserves Equity component of convertible debentures Accumulated other comprehensive income Deficit Total equity Balance as at January 1, ,443,450 $ 2,050,223 $ 7,763 $ 22,461 $ 347,725 $ (59,106) $ 2,369,066 Net loss for the period (67,663) (67,663) Dividends (136,650) (136,650) Shares issued under dividend reinvestment plan (note 22) 298,880 10,885 10,885 Conversion of convertible debentures 5, (10) 164 Stock options (note 21) 133,641 2,853 4,021 6,874 Other comprehensive loss (50,050) (50,050) Balance as at December 31, ,881,956 $ 2,064,135 $ 11,784 $ 22,451 $ 297,675 $ (263,419)$ 2,132,626 (thousands of Canadian dollars, except share amounts) Number of common shares Share capital Equity-settled share-based compensation Reserves Equity component of convertible debentures Accumulated other comprehensive income Deficit Total equity Balance as at January 1, ,402,314 $ 1,315,122 $ 2,302 $ 8,868 $ 99,196 $ (13,810) $ 1,411,678 Net income for the period 84,005 84,005 Share issuance (note 22) 18,975, , ,679 Dividends (129,301) (129,301) Shares issued under dividend reinvestment plan (note 22) 976,561 35,420 35,420 Equity component of convertible debentures, net of tax (note 18) 13,602 13,602 Conversion of convertible debentures 5, (9) 176 Stock options (note 21) 84,247 1,817 5,461 7,278 Other comprehensive income 248, ,529 Balance as at December 31, ,443,450 $ 2,050,223 $ 7,763 $ 22,461 $ 347,725 $ (59,106)$ 2,369,066 The accompanying notes are an integral part of these consolidated financial statements D+H Annual Report 85

88 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 (thousands of Canadian dollars) Cash and cash equivalents provided by (used in): OPERATING ACTIVITIES Net (loss) income for the period $ (67,663) $ 84,005 Adjustments for: Depreciation of property, plant and equipment 27,962 23,298 Amortization of intangible assets 284, ,601 Impairment of goodwill (note 11) 121,041 Finance expenses: Net interest expense (note 17) 94,447 79,436 Amortization of deferred financing fees (note 17) 2,423 9,986 Accretion expense (note 17) 8,681 6,926 Fair value adjustment of derivative instruments (note 19) (1,617) (515) Income taxes (note 13) (50,744) (8,037) Stock options (note 21) 3,815 5,461 Changes in non-cash working capital items, net (note 8) 207 (2,866) Changes in other operating assets and liabilities, net (note 8) (16,769) (74,107) Cash generated from operating activities 405, ,188 Interest paid (96,018) (77,699) Income tax paid (16,312) (54,109) Net cash generated from operating activities 293, ,380 FINANCING ACTIVITIES Repayment of loans and borrowings (note 17) (81,016) (156,496) Proceeds from loans and borrowings (note 17) 804,740 Payment of issuance costs of loans and borrowings (11,608) Proceeds from issuance of convertible debentures (note 18) 230,000 Payment of issuance costs of convertible debentures (note 18) (8,623) Proceeds from issuance of shares 720,165 Payment of costs from issuance of shares (30,678) Proceeds from exercise of stock options 2,853 1,817 Cash dividends paid (124,515) (93,881) Common shares repurchased for the dividend reinvestment program (note 22) (1,250) Net cash (used in) from financing activities (203,928) 1,455,436 INVESTING ACTIVITIES Additions to property, plant and equipment (note 14) (35,193) (28,118) Additions to intangible assets (note 15) (60,800) (75,141) Acquisition of subsidiary, net of cash acquired (note 4) (1,495,446) Settlement of foreign exchange contracts (note 19) 473 (50,557) Net cash used in investing activities (95,520) (1,649,262) (Decrease) increase in cash and cash equivalents for the period (5,976) 27,554 Cash and cash equivalents, beginning of year 66,459 34,761 Effect of movements in exchange rates on cash held (2,236) 4,144 Cash and cash equivalents, end of year $ 58,247 $ 66,459 The accompanying notes are an integral part of these consolidated financial statements D+H Annual Report

89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (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 consolidated financial statements are of DH Corporation and its subsidiaries, together referred to as D+H or the Company. D+H s service offerings in the United States ( U.S. ) include Lending and Integrated Core ( L&IC ) solutions. U.S. lending solutions consist of mortgage, consumer and commercial lending solutions. Mortgage lending solutions include web-based software that allows 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 identity protection and other related services. D+H established its Global Transaction Banking Solutions ( GTBS ) segment through the acquisition of Fundtech Investments II, Inc. ( Fundtech ) in April Refer to note 4 for acquisition related details. GTBS service offerings include an international business of global and domestic payments solutions, financial messaging, corporate cash and liquidity management and merchant services solutions. 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. 2 BASIS OF PRESENTATION a. Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ), as issued by the International Accounting Standards Board ( IASB ). These consolidated financial statements were authorized for issue by the Board of Directors on March 7, b. Basis of measurement The consolidated financial statements have been prepared on a going concern basis, under the historical cost convention, except for the following which are measured at fair value: derivative financial instruments liabilities for cash-settled share-based payment arrangements defined benefit pension obligations c. Functional and presentation currency and foreign currency translation The consolidated financial statements are presented in Canadian dollars, which is D+H s functional and reporting currency and the functional currency of the Canadian operations. The assets and liabilities of the Company s foreign operations with local currencies as the functional currency are translated to Canadian dollars at the exchange rate at the reporting date. Revenues and expenses are translated at average exchange rates prevailing during the year. The resulting unrealized gains or losses are recognized in other comprehensive (loss) income ( OCI ). Monetary assets and liabilities denominated in foreign currencies that are different from the functional currency are translated to the functional currency at the exchange rate at the reporting date. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated to the functional currency at the exchange rate when the fair value was determined. Realized and unrealized foreign currency differences are generally recognized in the consolidated statements of (loss) income. However, foreign currency differences arising from the translation of qualifying cash flow hedges to the extent that hedges are effective are initially recognized in OCI D+H Annual Report 87

90 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) d. Use of estimates and judgments The preparation of consolidated financial statements is in conformity with IFRS and requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements are: Note 4 Business combinations Note 6 Revenue recognition Note 13 Income taxes for the recognition of deferred income tax assets and liabilities Notes 11 and 15 Goodwill and intangible assets for the measurement of the recoverable amounts of cash-generating units containing goodwill and intangible assets Business combinations For business acquisitions, the Company applies judgment on the recognition and measurement of assets acquired and liabilities assumed, and estimates are utilized to calculate and measure such amounts. Revenue recognition Management exercises judgment in determining whether the related revenue contract s outcome can be estimated reliably. Management also applies estimates in the calculation of future contract costs and related profitability as it relates to labour hours and other considerations that are used in the determination of the amounts recoverable on contracts and the timing of revenue recognition. Assessing whether the deliverables within an arrangement are separately identifiable components requires judgment by management. A component is considered as separately identifiable if it has value to the client on a stand-alone basis. The Company first reviews the contract clauses to evaluate if the deliverable is accepted separately by the client. Then, the Company assesses if the deliverable could have been provided by another vendor and if it would have been possible for the client to decide to not purchase the deliverable. The Company uses judgment to allocate the contract consideration to each separately identifiable component. Incentive fees related to the student loans administration services are determined based on achieving performance thresholds as outlined in the contracts with the financial institutions and the federal and provincial governments. As management uses judgment in estimating the expected outcome for the remainder of the contract year, imprecision in any of the assumptions could influence the determination of revenue. Deferred income taxes Deferred income tax assets and liabilities and the corresponding impact on deferred income tax expense or recovery are based on the temporary differences that are expected to reverse in future periods. Management uses judgment in determining when temporary differences will reverse and if the benefits of deductible temporary differences and tax losses can be realized. A key assumption in determining the deferred income taxes is that D+H will be able to maintain sufficient levels of income such that the deferred tax assets will be realized. In determining the amount of current and deferred tax, D+H also takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due, based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. Valuation of goodwill and intangibles The recoverable amount of an asset or groups of assets ( cash-generating unit or CGU ) is the greater of its value in use and its fair value less costs of disposal ( FVLCD ).The significant assumptions underlying the recoverability of goodwill include estimated discretionary after-tax cash flow and growth projections, considering industry performance and general business and economic conditions. Other significant assumptions include weighted average cost of capital ( WACC ) and terminal value growth rates which are included in the discounted cash flow ( DCF ) models D+H Annual Report

91 D+H s estimate of future performance is dependent on a number of global economic and business specific trends in the markets where solutions and products are sold. These trends include government regulations which impact the demand for these solutions, decisions by financial institutions whether or not to replace their legacy computer systems and invest in new technology to enhance their competitive position, and interest rates among other factors. In Canada, the decline in cheque usage due to the implementation and adoption of alternative payment methods, interest rates, residential real estate activity and initiatives by major financial institutions to outsource certain operations where the Company has a solution are factors that impact performance. In the United States, interest rates and lending activity also impact future performance. As management uses judgment in estimating the fair value of its CGUs or groups thereof, imprecision in any assumptions and estimates used in the fair value calculations could influence the determination of goodwill impairment and affect the valuation of goodwill. Separately identifiable intangible assets that derive their value from contractual customer relationships or from internal use have a finite useful life and are amortized over their estimated useful lives. Determining the estimated useful life of these finite life intangible assets requires an estimate of the period over which these assets will generate future benefit to the Company and therefore, significant management judgment. Finite life intangible assets, including capitalized software costs of an intangible asset not yet available for use, are tested for impairment, whenever circumstances indicate that the carrying value may not be recoverable and require management to exercise judgment in analyzing such possible circumstances. e. Comparative figures Certain comparative amounts have been reclassified to conform to current period presentation. Deferred revenues of $7.5 million have been reclassified to non-current deferred revenues in the comparative financial statements. 3 SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements. (a) Basis of consolidation (i) Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date. The Company measures goodwill as the fair value of the consideration transferred less the net amount of the identifiable assets acquired and liabilities assumed, as of the acquisition date. Transaction costs, other than those associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred. (ii) Subsidiaries Subsidiaries are entities controlled by the Company. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries are consistent with the policies adopted by the Company. (iii) Transactions eliminated on consolidation Intercompany balances and transactions, and any unrealized income and expenses arising from intercompany transactions, are eliminated in preparing the consolidated financial statements. (b) Financial instruments (i) Financial assets Purchase and sale of financial assets are recognized on the settlement date, which is the date on which the asset is delivered to or by the Company. Financial assets are derecognized when the rights to receive cash flows from the investment have expired or were transferred and the Company has transferred substantially all risks and rewards of ownership. The Company s financial assets are classified as either financial assets at fair value through profit or loss ( FVTPL ) or loans and receivables D+H Annual Report 89

92 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) (ii) Financial liabilities and equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual agreement. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. (iii) Derivative financial instruments The Company, from time to time, holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures. Derivatives are recognized initially at fair value; attributable transaction costs are recognized in the consolidated statements of (loss) income as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below (see sections (iv) to (v)). Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at FVTPL. (iv) Hedging activities Where hedge accounting can be applied, certain criteria are documented at the inception of the hedge and updated at each reporting date. Cash flow hedges The Company uses cash flow hedges to manage interest rate and foreign exchange risks. For a cash flow hedge of a forecasted transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported net (loss) income. When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect the consolidated statements of (loss) income, the effective portion of changes in the fair value of the derivative is recognized in OCI. The amount recognized in OCI is removed and included in the consolidated statements of (loss) income in the same period as the hedged cash flows affect the consolidated statements of (loss) income under the same line item in the consolidated statements of comprehensive (loss) income as the hedged item. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in the consolidated statements of (loss) income. The Company has elected to treat any hedges of a firm commitment to acquire a business or a forecasted business combination through the acquisition of an equity interest in the entity as a hedge of the purchase of the business which represents a non-financial item. If a highly probable forecasted transaction results in the recognition of a non-financial asset or non-financial liability, the Company has elected to account for the effective portion of changes in the fair value of the derivative as an adjustment to OCI. Reclassification of the effective portion of the gain or loss arising from the hedging instrument from equity to profit or loss occurs when the asset affects profit or loss; for example if the asset is depreciated or sold, or in the case of a non-financial asset arising from a business combination, when the residual is impaired. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in OCI and presented in hedging reserve within equity remains there until the forecasted transaction affects the consolidated statements of (loss) income. When the hedged item is a non-financial asset, the amount recognized in OCI is transferred to the carrying amount of the asset when the asset is recognized. If the forecast transaction is no longer expected to occur, then the balance in OCI is recognized immediately in the consolidated statements of (loss) income. In other cases the amount recognized in OCI is transferred to the consolidated statements of (loss) income in the same period that the hedged item affects the consolidated statements of (loss) income. (v) FVTPL financial assets or liabilities An instrument is classified as FVTPL if it is a derivative or it is designated as such upon initial recognition. Upon initial recognition, attributable transaction costs are recognized in the consolidated statements of (loss) income when incurred D+H Annual Report

93 Financial instruments at FVTPL are measured at fair value, and changes therein are recognized in the consolidated statements of (loss) income unless they are designated hedging instruments. The Company s interest-rate swaps that are not designated for hedge accounting purposes are classified as FVTPL financial assets or liabilities. (vi) Loans and receivables Trade and other receivables are amounts due from customers from the rendering of services or sale of goods in the ordinary course of business and have fixed or determinable payments that are not quoted in an active market and are classified as loans and receivables. Loans and receivables are initially recognized at the transaction value and subsequently carried at amortized cost less impairment losses. The impairment loss of receivables is based on review of all outstanding amounts at period end. Bad debts are written off during the year in which they are identified. Loans and receivables are classified as current assets if payment is due within one year or less. (vii) Cash and cash equivalents All temporary investments with an original maturity of three months or less when purchased are considered to be cash equivalents. (viii) Other financial liabilities Other financial liabilities are initially measured at fair value, net of transaction costs, and are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis. The Company has classified trade payables, loans and borrowings, convertible debentures and accrued liabilities as other financial liabilities. (c) Inventories Inventories consist of raw materials, work-in-process ( WIP ) and finished goods and are measured at the lower of cost and net realizable value based on the first-in first-out principle, and include expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and WIP, cost includes an appropriate share of production overheads based on normal operating capacity. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Raw materials primarily consist of paper but also include foil, hologram and ink. WIP consists of base stock which refers to sheets of cheque stock with non-personalized background print. Finished goods primarily consist of retail products, labels, accessories, security bags and corporate seals. (d) Property, plant and equipment (i) Recognition and measurement Items of property, plant and equipment ( PPE ) are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. When parts of an item of PPE have different useful lives, they are accounted for as separate items (major components) of PPE. Gains and losses on disposal of an item of PPE are determined by comparing the proceeds from disposal with the carrying amount of PPE, and are recognized in the consolidated statements of (loss) income. (ii) Subsequent costs The cost of replacing part of an item of PPE is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The carrying amount of the replaced part is expensed. The costs of the day-to-day servicing of PPE is expensed in the consolidated statements of (loss) income as incurred D+H Annual Report 91

94 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) (iii) Depreciation Depreciation is calculated over the depreciable amount, which is the cost of the asset less its estimated residual value. Depreciation is recognized based on the methods noted below, over the estimated useful lives of each part of PPE, as this mostly reflects the expected pattern of consumption of future economic benefits embodied in the assets. The estimated useful lives for the current and comparative year are as follows: Buildings Machinery and equipment Computer equipment, furniture and fixtures Leasehold improvements Straight-line over 40 years 10% to 30% declining balance 20% to 45% declining balance Lower of the remaining term of the lease or its useful life Depreciation methods, useful lives and residual values are reviewed at each financial year-end and adjusted prospectively if appropriate. (e) Goodwill and intangible assets (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquiree at the date of acquisition. Goodwill is tested annually for impairment or more frequently, if events or changes in circumstances indicate the non-financial asset may be impaired, and is carried at cost less accumulated impairment losses. Goodwill recognized by the Company arose from various acquisitions including the acquisition of Fundtech in 2015, Harland Financial Solutions Inc. ( HFS ) and Compushare Inc. businesses in 2013 and from other acquisitions in prior years. Research and development and capitalization of software development Expenditures on research activities undertaken with the prospect of gaining technical knowledge and understanding are recognized in the consolidated statements of (loss) income as incurred. Certain costs incurred in connection with the development of software to be used internally or for providing services to customers are capitalized once a project has progressed beyond a conceptual, preliminary stage to that of application development. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Company are recognized as intangible assets when the following criteria are met: it is technically feasible to complete the software product so that it will be available for use; there is an ability and management intends to complete the software product and use or sell it; it can be demonstrated how the software product will generate probable future economic benefits; adequate technical, financial and other resources to complete the development and to use or sell the software products are available; and the expenditure attributable to the software product during its development can be reliably measured. Costs that qualify for capitalization include both internal and external costs, but are limited to those that are directly related to the specific project. Capitalized development expenditure is measured at cost less accumulated amortization and accumulated impairment losses. (ii) Other intangible assets Other intangible assets that are acquired by the Company, which have finite useful lives, are measured at cost less accumulated amortization and accumulated impairment losses. These intangible assets include customer service contracts, purchased software, proprietary software, customer relationships and brand names. (iii) Subsequent expenditures Subsequent expenditures related to an asset initially recognized as an intangible asset are capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditures are recognized in the consolidated statements of (loss) income as incurred D+H Annual Report

95 (iv) Amortization of intangible assets Amortization is recognized in the consolidated statements of (loss) income on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use. The estimated useful lives are as follows: Customer service contracts Purchased software Internally developed software Proprietary software Brand names Customer relationships straight-line over remaining term straight-line over 3 years straight-line over 3 to 10 years straight-line over 6 to 10 years straight-line over 15 to 16 years straight-line over 10 to 15 years (f) Leased assets Leases are classified as either operating or financing, based on the substance of the transaction at inception of the lease. Classification is re-assessed if the terms of the lease are changed. Leases in which a significant portion of the risk and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are recognized in the consolidated statements of (loss) income on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense over the term of the lease. Minimum lease payments made under financing leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. (g) Impairment (i) Financial assets If a financial asset is not carried at FVTPL, it is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, or a loss event had a negative effect on the estimated future cash flows of the asset that can be reliably measured. Objective evidence that financial assets are impaired can include default or delinquency by a debtor or indications that the debtor may enter bankruptcy. The Company considers evidence of impairment for receivables at both specific and collective levels. All individually significant receivables found not to be specifically impaired are then collectively assessed for any impairment that has occurred but not specifically identified. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively for the companies that share similar credit risk characteristics. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. All impairment losses are recognized in the consolidated statements of (loss) income. Interest on the impaired asset continues to be recognized through the unwinding of the discount. An impairment loss is reversed through the consolidated statements of (loss) income if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For financial assets measured at amortized cost, the reversal is recognized in the consolidated statements of (loss) income. (ii) Non-financial assets For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to CGUs or groups thereof that are expected to benefit from the synergies of the combination D+H Annual Report 93

96 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) The carrying amounts of the Company s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives, the recoverable amount is estimated each year at the same time or more frequently, if events or changes in circumstances indicate the non-financial asset may be impaired. The recoverable amount of an asset, CGU or group of CGUs is the greater of its value in use and its FVLCD. In estimating the recoverable amounts of its CGUs, the Company uses a fair value less costs to sell model based on discounted cash flows. An impairment loss is recognized if the carrying amount of an asset or its CGU or group of CGUs exceeds its estimated recoverable amount. Impairment losses are recognized in the consolidated statements of (loss) income. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis. An impairment loss with respect to goodwill is not reversible in subsequent periods. With respect to other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. (h) Employee benefits (i) Defined contribution plans A defined contribution plan is a post-employment pension plan under which the Company pays fixed contributions and will have no legal or constructive obligation to pay further amounts. Payments to defined contribution plans are expensed as incurred, which is as the related employee service is rendered. (ii) Defined benefit and other long-term employee benefits The Company maintains three defined benefit plans and provides certain post-retirement benefits for eligible employees. These benefits include health care, life insurance and dental benefits. The Company s net obligation is the amount of future benefit that the employees have earned in return for their service in current and prior periods and the benefit is discounted to determine the present value. The calculation is performed annually by a qualified actuary using the projected unit credit method. Actuarial gains/losses are recognized immediately into OCI. Past service costs for members who have reached full eligibility are recognized immediately and on a linear basis over the expected average remaining service period to full eligibility for active members who have not reached full eligibility. (iii) Termination benefits Termination benefits are expensed at the earlier of when the Company can no longer withdraw the offer of those benefits and when the Company recognizes costs for restructuring. (iv) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (v) Share-based compensation The fair value of the amount payable to employees in respect of share-based payments, which are settled in cash, is recognized as employee compensation with a corresponding increase in liabilities, over the period that the employees become unconditionally entitled to payment. The liability is re-measured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognized in the consolidated statements of (loss) income. For equity-settled plans, compensation expense is based on the fair value of the awards granted, calculated on the grant date, with a corresponding increase in equity. The expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions are satisfied D+H Annual Report

97 (i) (j) Provisions A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are measured by discounting the expected future cash flows at a rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost. Revenue recognition The Company has multiple revenue streams, all with different revenue recognition. The revenue streams include: Software license arrangements (term and perpetual) Software as a Service ( SaaS ) contracts Hosting arrangements Professional fees for services performed for software implementation Products and related services Maintenance revenues from software licenses Transaction processing services Hardware and other service revenues including: equipment sold in conjunction with service and training services Revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to the entity, the stage of completion of the transactions can be measured, the amount can be estimated and it can be reasonably assured that collection is probable. Certain products and services the Company offers are sold as part of multiple deliverable arrangements. These arrangements are typical in licensing (term and perpetual), Saas, and hosting arrangements in the L&IC and GTBS business segments. Below is a summary of assessments required for multiple deliverable arrangements revenue recognition: A delivered element is considered as a separate unit of account if it has value to the customer on a standalone basis, and delivery or performance of the undelivered elements is considered probable and substantially under the Company s control. If these criteria are not met, the delivered element is combined with other related elements for purposes of revenue recognition. Revenue is allocated to each unit of account based on their relative fair value or by using the residual method. Under the residual method, revenue is allocated to the undelivered components of the arrangement based on their fair values and the residual amount of the arrangement revenue is allocated to delivered components. Objective evidence of fair value for certain elements of an arrangement is based upon the pricing in comparable transactions when the element is sold separately. Objective evidence of fair value for maintenance is primarily based upon the price charged for the same or similar maintenance when sold in contracts with substantive renewal terms, as substantiated by contractual renewal rates and the Company s renewal experience. Objective evidence of fair value for professional services is based upon the price charged when the services are sold separately. (i) How revenue is recognized for the components of a multiple deliverable arrangement License (term and perpetual) If there is an implementation that is considered essential to the license and typically involves significant production, modification or customization of the software (without implementation by the Company the software license is of no value to the customer) the license and implementation are considered one component and they are recognized based on the percentage-of-completion of the implementation. If the implementation services are considered non-essential, the license revenue is recognized: At relative fair value when the license is delivered if relative fair values exist for each element in the multiple deliverable arrangement; or Using the residual method when the license is delivered if objective evidence of the fair value for the delivered elements cannot be determined and fair values exist for the undelivered elements; or Over the term of the contract (term contracts only) and over the first year of the maintenance for perpetual licenses if objective evidence of fair value of undelivered elements cannot be established (for example the maintenance component of the contract or non-essential services) D+H Annual Report 95

98 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) If an arrangement does not require significant production, modification or customization then revenue can be recognized when all other criteria for revenue recognition are met. Software related implementation services are recorded as revenue based on percentage-of-completion. All licenses are sold with a maintenance component, including the right to receive telephone support, bug fixes and unspecified upgrades and enhancements, for a specified period of time, usually one year. Maintenance revenue is recognized ratably over the life of the related maintenance period. Some term and usage-based licenses may include maintenance as a bundled item that is committed for the period of the agreement that does not have objective evidence of fair value. The software under such contracts is not treated as a separate component and the related revenue is recognized ratably over the term of the agreement or on an actual usage basis once all of the other elements have been delivered. SaaS / Hosted arrangements These contracts are generally term based. Implementation fees typically do not meet the criteria as a separate unit of accounting. These are deferred and recognized on a straight-line basis over the term of the contract. On-going hosting fees are recognized as revenue over the hosting period. Usage-based fees and minimum transaction fees are recognized monthly over the term. (ii) Revenue recognition specific to certain other categories of products and services Product sales Revenue is recognized when the hardware is delivered and accepted by the customer. Non-essential professional services Non-essential professional services revenue includes fees derived from the delivery of certain consulting and training services. Revenue is recognized on a time and materials basis or after delivery is complete. Subscription Subscription revenues are recognized over the subscription period. Transactional processing services Transactional revenues are recorded upon completion of each transaction. After delivery, if substantive uncertainty exists about customer acceptance of the software, license revenue is deferred until acceptance occurs. The Company considers the following in evaluating the effect of customer acceptance: historical experience with similar types of arrangements or products, whether the acceptance provisions are specific to the customer or are included in all arrangements, the length of the acceptance term, and historical experience with the specific customer. In some instances, the Company offers extended-payment terms on its term software licenses. When the receipt of payment is deferred over the term of the arrangement, the arrangement effectively constitutes a financing transaction. In such cases, the fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest. Revenue from sales of third party vendor products, such as software licenses, hardware, or services is recorded gross when the Company is a principal to the transaction and is recorded net of costs when the Company is acting as an agent between the client and vendor. Factors generally considered to determine whether the Company is a principal or an agent are if the Company is the primary obligor to the client, if it adds meaningful value to the vendor s product or service and if it assumes delivery and credit risks. Deferred costs relating to revenue arrangements Certain contract acquisition costs, comprised mostly of sales commissions, that are direct and incremental to obtaining revenue contracts and are recoverable from minimum future cash flows associated with the contract are deferred and amortized to employee compensation and benefits in the consolidated statements of (loss) income over the term of the related revenue D+H Annual Report

99 Upfront direct costs for initial installation and implementation that relate to future activity on a customer contract are deferred and recognized as an asset within other assets when it is probable that they will be recovered through future minimum payments specified in contractual agreements. The deferred contract costs are amortized over the period of the related contract revenue. (k) Finance income and expenses Interest income is recognized as it accrues in the consolidated statements of (loss) income, using the effective interest method. Finance expenses are comprised of interest expense on borrowings, including convertible debentures, using the effective interest method and amortization of deferred finance costs. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in the consolidated statements of (loss) income. Amortization of deferred finance costs related to non-substantial modification of the Company s debt is recognized over the term of the debt using the effective interest method. (l) Government grants Grants that compensate the Company for expenses incurred are recognized in the consolidated statements of (loss) income as a reduction in expenses on a systematic basis in the same periods in which the expenses are recognized. (m) Income tax Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in the consolidated statements of (loss) income except to the extent that it relates to a business combination, or items recognized directly in equity or in OCI. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and these relate to income taxes levied by the same tax authority on the same taxable entity, or on different taxable entities, but they intend to settle current tax liabilities and assets on a net basis or these tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. In determining the amount of current and deferred tax the Company takes into account the impact of uncertain tax positions and whether additional taxes, penalties and interest may be due. Amounts recorded are based on the Company s best estimate of amounts to be paid. (n) Net (loss) income per share Basic net (loss) income per share is calculated by dividing net (loss) income by the weighted average number of shares outstanding during the period. Diluted net (loss) income per share is calculated by adjusting net (loss) income and the weighted average number of shares outstanding during the period for the effects of dilutive potential shares, which comprise options granted and issued convertible debentures. (o) Convertible debentures Convertible debentures, where the holder has the option to convert the instrument into a fixed amount of common shares of the Company, represent a compound financial instrument. A compound instrument comprises two components: a financial liability (a contractual arrangement to deliver cash or another financial asset) and an equity instrument (a call option granting the holder the 2016 D+H Annual Report 97

100 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) right, for a specified period of time, to convert it into a fixed number of common shares of the Company). At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible instruments. This amount is recorded as a liability on an amortized cost basis using the effective interest rate method until extinguished upon conversion or at the instrument s maturity date. The carrying amount of the equity instrument represented by the option to convert the instrument into common shares is then determined by deducting the fair value of the financial liability from the fair value of the compound financial instrument as a whole. This residual amount is recognized and included in equity, net of income tax effects, and is not subsequently re-measured. Transaction costs that relate to the issuance of convertible instruments are allocated to the liability and equity components in proportion to the allocation of the gross proceeds. Transaction costs relating to the equity component are recognized directly in equity. Transaction costs relating to the liability component are included in the carrying amount of the liability component and are amortized over the life of the convertible instrument using the effective interest method. Interest expense on a compound instrument is determined by applying an effective interest rate to the outstanding liability component whereby cash interest payments are applied to reduce the liability component and interest expense is accreted to the liability component. Upon conversion of a compound instrument, a ratable portion of the carrying value of the liability component is reclassified as equity. (p) New and revised accounting standards The Company also adopted the following standards and amendments 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 there was no impact on the Company s consolidated financial statements. IAS 1, Presentation of Financial Statements At January 1, 2016, the Company adopted this amendment and determined there was no impact on the Company s consolidated financial statements. (q) New standards and interpretations not yet adopted The following are upcoming changes to IFRS standards that may impact D+H: IFRS 15, Revenue from Contracts with Customers ( IFRS 15 ) - IFRS 15 will supersede all existing standards and interpretations in IFRS relating to revenue, including IAS 18, Revenue and IFRIC 13, Customer Loyalty Programmes. IFRS 15 introduces a single model for recognizing revenue from contracts with customers. This standard applies to all contracts with customers, with only some exceptions, including certain contracts accounted for under other IFRS standards. The standard requires revenue to be recognized in a manner that depicts the transfer of promised goods or services to a customer and at an amount that reflects the consideration expected to be received in exchange for transferring those goods or services. This is achieved by applying the new Five-Step Model: 1. Identify the contract with a customer; 2. Identify the performance obligations in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to the performance obligations in the contract; and 5. Recognize revenue when (or as) the entity satisfies a performance obligation. IFRS 15 also provides guidance relating to the treatment of contract acquisition and contract fulfillment costs. The Company expects the application of this new standard will have significant impacts on our reported results, specifically with regards to the timing of recognition and classification of revenue, but somewhat less of an impact for the treatment of costs incurred in acquiring customer contracts. The Company already has a policy to defer contract acquisition costs and labour related to certain contract service agreements. The timing of recognition and classification of some revenue will be affected because IFRS 15 requires the estimation of total consideration over the contract term at contract inception and allocation of consideration to all performance obligations in the contract based on their relative stand-alone selling prices. The Company anticipates this will most significantly affect our Lending and Payments arrangements where compliance requirements currently provided as part of Post Contract Support may be considered non-distinct from the software. This could result in a decrease to upfront revenue in favour of revenue recognized over the life of the license or term of the contract D+H Annual Report

101 IFRS 15 requires certain contract acquisition costs (such as sales commissions) to be recognized as an asset and amortized into operating expenses over time. This requirement is expected to have minimal impact as most segments already account for such costs as an asset and amortize them over the term of the contract. The Company believes significant judgments will need to be made when defining the enforceable rights and obligations of a contract, in determining whether a promise to deliver goods or services is considered distinct, and to determine when the customer obtains control of the distinct good or service. The Company has a team dedicated to ensuring our compliance with IFRS 15. This team has also been responsible for determining system requirements, ensuring our data collection is appropriate and communicating the upcoming changes with various stakeholders. In addition, this team is assisting in the development of new internal controls. The standard is effective for annual periods beginning on or after January 1, When IFRS 15 is adopted, it can be applied either on a fully retrospective basis, requiring the restatement of the comparative periods presented in the financial statements, or with the cumulative retrospective impact of IFRS 15 applied as an adjustment to equity on the date of adoption. When the latter approach is applied, it is necessary to disclose the impact of IFRS 15 on each line item in the financial statements in the reporting period. The Company is still evaluating its adoption approach. IFRS 16, Leases ( IFRS 16 ) In January 2016, the IASB issued the final publication of the IFRS 16 standard, which will supersede the current IAS 17, Leases ( IAS 17 ) standard. Under IFRS 16, a lease will exist when a customer controls the right to use an identified asset as demonstrated by the customer having exclusive use of the asset for a period of time. IFRS 16 introduces a single accounting model for lessees and all leases will require an asset and liability to be recognized on the statement of financial position at inception. The accounting treatment for lessors will remain largely the same as under IAS 17. The Company intends to adopt these amendments in its financial statements for the annual period beginning on January 1, The extent of the impact of adoption of the Standard has not yet been determined. IFRS 9, Financial instruments ( IFRS 9 ) IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets, and the new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. The Company intends to adopt these amendments in its financial statements for the annual period beginning on January 1, The extent of the impact of adoption of the Standard has not yet been determined. 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, The Company intends to adopt these amendments for the annual period beginning on January 1, 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, The amendments to IAS 12 are not expected to have a significant impact on our financial statements. 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, The amendments to IFRS 2 are not expected to have a significant impact on our financial statements D+H Annual Report 99

102 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) 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 ( measurement period ) of the acquisition of Fundtech, the Company completed its assessment and valuation of assets acquired and liabilities assumed in the acquisition and recorded final adjustments to the purchase price which related primarily to tax and foreign exchange related items. During the measurement period, 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 has not recast the comparative information for prior periods. The net assets acquired and consideration transferred were 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) Other long-term liabilities (25,336) Total identifiable net assets 700,961 Goodwill 850,642 Total cash consideration for 100% ownership $ 1,551,603 Financed by: Issuance of common shares, net of share issuance costs $ 689,487 Issuance of 5%, 5.5 year convertible debentures, net of issuance costs 221,377 Issuance of 4.32% senior secured guaranteed notes 96,184 Non-revolving, non-amortizing secured credit facility 294,564 Revolving credit facility (US$163,100) 196,095 Revolving credit facility 109,400 Bank and other related charges (4,947) Derivatives loss on settlement (note 19) (50,557) $ 1,551, D+H Annual Report

103 During the year ended December 31, 2016, as a result of revised estimates related to acquisition-related professional services fees, the Company has reversed acquisition costs of $3.6 million. During the year ended December 31, 2015, the Company incurred acquisition costs of $22.8 million. Acquisition costs were recorded in other expenses, net, on the consolidated statements of (loss) income. 5 CASH AND CASH EQUIVALENTS As at December 31, 2016, the cash and cash equivalents balance included short term cash advances of $11.8 million (2015: $9.5 million) held separately on behalf of clients as part of the Canadian Lending business. 6 REVENUES Revenues by major service areas are as follows: Year ended December Lending solutions $ 714,465 $ 688,753 Global transaction banking solutions 1 363, ,303 Payments solutions 314, ,688 Integrated core solutions 287, ,867 Total Revenues $ 1,679,857 $ 1,506,611 1 Effective April 30, 2015, D+H recorded revenues earned by GTBS in connection with our acquisition of Fundtech. Therefore, 2015 reported revenues do not include a full year of revenue earned by GTBS (note 4). For the year ended December 31, 2016, no customers individually accounted for 10% or more of the Company s total revenue ( no customers individually accounted for 10% or more of the Company s total revenue). 7 EXPENSES Employee compensation and benefits Year ended December Wages and salaries $ 451,490 $ 412,543 Restructuring expenses 1 21,416 Benefits 48,515 38,290 Statutory contributions 33,899 30,745 Integration and other related charges 2 5,649 32,113 Other labour costs 24,718 12,350 Total Employee compensation and benefits $ 585,687 $ 526,041 1 Severance-related restructuring expenses; refer to note 16 for further details. 2 For the year ended December 31, 2016, integration and other related charges included $5.0 million ( $22.0 million) of incentive compensation costs related to the acquisition of Fundtech. For the year ended December 31, 2016, $50.4 million ( $43.5 million) of expenses, primarily employee compensation and benefits, were capitalized related to software product development and included as part of intangible assets on the consolidated statements of financial position D+H Annual Report 101

104 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) Other expenses, net Year ended December Material, shipping and selling expenses 1 $ 296,179 $ 252,242 Third party disbursements 100,031 96,715 Legal, audit and professional fees 64,454 37,647 Occupancy costs 43,809 36,725 Repairs and maintenance expenses 43,438 29,949 Telecommunications expenses 36,296 31,134 Travel 21,075 20,370 Restructuring and other expenses 1,2 12,775 Trade shows and conferences 11,671 8,580 Integration and other related costs 1,103 11,327 Fundtech acquisition costs 3 (3,613) 22,789 Foreign exchange loss (gain) 1,174 (27,837) Gain related to acquisition adjustment 4 (5,455) Other expenses 1 47,229 41,684 Total Other expenses, net $ 675,621 $ 555,870 1 For the year ended December 31, 2016, billable travel expenses and cost management initiatives within Canadian payment operations have been reclassified from other expenses to material, shipping and selling expenses and restructuring and other expenses, respectively. Comparative figures have been reclassified to conform to the current year classification. 2 Refer to note 16 for further details. 3 During the year ended December 31, 2016, as a result of revised estimates related to acquisition-related professional services fees, the Company has reversed acquisition costs of $3.6 million. 4 Relates to the final settlement of working capital adjustments as a result of the HFS acquisition completed in 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 for the years ended December 31, 2016 and Trade, unbilled and other receivables, net $ 1,569 $ (63,214) Prepayments and other current assets 4,208 3,360 Trade payables, accrued and other liabilities 24,263 31,457 Deferred revenues (29,833) 25,531 Changes in non-cash working capital items, net $ 207 $ (2,866) D+H Annual Report

105 The table below outlines the changes in other operating assets and liabilities, net as a source (use) of cash from operating activities for the years ended December 31, 2016 and Unbilled receivables, non-current $ (7,011)$ (34,857) Other assets, non-current (10,864) (25,500) Deferred revenues, non-current (2,338) 9,378 Other long-term liabilities 8,307 7,477 Other 1 (4,863) (30,605) Changes in other operating assets and liabilities, net $ (16,769)$ (74,107) 1 Relates primarily to foreign currency translation adjustments. 9 TRADE, UNBILLED AND OTHER RECEIVABLES, NET As at December Trade receivables $ 120,441 $ 128,515 Unbilled receivables - current 135,924 $ 129,996 Other receivables 6,568 4,341 Allowance for doubtful accounts (5,095) (2,448) Trade, unbilled and other receivables, net - current $ 257,838 $ 260,404 Unbilled receivables, non-current $ 88,928 $ 81,917 Total trade, unbilled and other receivables, net $ 346,766 $ 342,321 Current unbilled receivables, included in trade receivables of $135.9 million (2015: $130.0 million), represent revenue earned for services rendered but not yet invoiced as at the reporting date. Non-current unbilled receivables of $88.9 million (2015: $81.9 million) represent future amounts to be billed that are contractually due to the Company as a result of term software licenses delivered in the L&IC 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. The aging of gross receivables and unbilled revenue as at December 31, 2016 and 2015 are as follows: Current $ 200,287 $ 213,284 Past due 1-30 days 28,982 26,248 Past due > 30 days 33,664 23,320 Total trade, unbilled and other receivables $ 262,933 $ 262,852 Allowance for doubtful accounts (5,095) (2,448) Total trade, unbilled and other receivables, net $ 257,838 $ 260, D+H Annual Report 103

106 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) The changes in the allowance for doubtful accounts as at December 31, 2016 and 2015 are as follows: Balance, as at January 1 $ 2,448 $ 1,642 Charges 2, Balance, as at December 31 $ 5,095 $ 2, PREPAYMENTS AND OTHER CURRENT ASSETS As at December Maintenance contracts $ 18,082 $ 12,984 Deferred commissions 11,448 9,045 Advances and deposits 3,971 5,040 Prepaid search and registration fees 3,728 3,662 Inventories 3,479 4,643 Deferred implementation costs 3,777 6,236 Prepaid royalties 2,681 2,606 Prepaid insurance 2,416 1,833 Deferred compensation payments related to the acquisition of Fundtech 7,850 Other 7,926 7,817 Total Prepayments and other current assets 1 $ 57,508 $ 61,716 1 Prior period comparatives have been reclassified to conform to current year classification. 11 GOODWILL Goodwill is tested annually for impairment, or more frequently, if events or changes in circumstances indicate that goodwill may be impaired. During the fourth quarter of fiscal 2016, the Company completed its annual impairment review. Additionally, for a certain period during the fourth quarter, the carrying amount of the net assets of the Company exceeded its market capitalization, which was considered to be an indicator of impairment. As a result, the Company tested for impairment at the underlying CGU level, as required by IAS 36, when there is an indication of possible impairment at this level. In the prior year, our review was performed at the Group CGU level as there was no indication of impairment in the underlying CGUs. We define the Group CGUs level as the segment level: the Canadian segment, the L&IC segment and the GTBS segment. These are also consistent with our operating segments, as defined in accordance with IFRS 8. Refer to Note 26 for further details. Individual CGUs are defined as the lines of service offered within our segments. Refer to the table below for the Company s 12 CGUs and Group CGUs. Group CGUs Global Transaction Banking Solutions Lending and Integrated Core Canada CGUs Global Payment Technologies (Global and U.S. Domestic) U.S. Payment Technologies Cash Management Financial Messaging Merchant Services Integrated Core Lending Solutions Cheque Program Enhancement Services Canadian Mortgage Technology Collateral Management Solutions Student Lending D+H Annual Report

107 In 2016, our impairment testing was performed in a two-step approach. The first step of the impairment test was performed at the individual CGU level without goodwill allocated, and any impairment loss was charged to intangible assets and other assets, as applicable.the Company recognized an impairment charge of $16.2 million in intangible assets related to the cash management CGU in the GTBS Group CGU, as a result of the first step of the Company s impairment test. This was due to the repositioning of our cash management business, coupled with varying market related assumptions used in the DCF analysis. No impairment was recognized in the remaining 11 individual CGUs as a result of our impairment review. Refer to Note 15 for further details regarding the Company s intangible assets balance. The second step of the impairment test is applied to the Group CGUs to which goodwill relates. In this step, the Company s testing concluded that the recoverable amounts exceeded the carrying values of the Group CGUs in the Canadian and L&IC segments and no impairment was recorded in these two segments for the year ended December 31, The Company recognized a goodwill impairment charge of $70.5 million in the GTBS segment, which was driven by a year-over-year reduction in the cash flows originating from the elongation of the sales cycle for our payment hub technologies and from the repositioning of our cash management business, coupled with varying market related assumptions used in the DCF analysis. Recent global macroeconomic challenges and political uncertainty have been significant contributors to constraints on discretionary spending by the segment s customers and the aforementioned elongated sales cycle. As at December 31, 2016, the recoverable amount of the GTBS segment was $570.5 million (USD 425 million). No impairment charges were recognized in the Company s goodwill balances during the year ended December 31, In 2015, the Company entered into a foreign exchange contract as part of the Company s acquisition of Fundtech, which was treated as an effective hedge for accounting purposes. The Company elected to treat this as a hedge of a firm commitment to acquire Fundtech, with the effective portion of changes in the fair value of the derivative recognized in OCI, resulting in the $50.5 million loss on the settlement of the forward contracts being recorded in OCI. As a result of the goodwill impairment recognized in the current year in GTBS, the loss recognized in OCI has been reclassified to impairment of goodwill in the consolidated statement of (loss) income. The following tables present the Company s goodwill balance as at December 31, 2016 and 2015 and the impairment charges recorded in Goodwill Balance, as at January 1 $ 2,769,290 $ 1,592,032 Changes during the period: Acquisition of Fundtech (note 4) 4, ,888 Impairment (70,484) Effect of movements in exchange rates (88,132) 331,370 Balance, as at December 31 $ 2,615,428 $ 2,769,290 For presentation purposes, the impairment of goodwill and the reclassification of loss on forward contracts, relating to the acquisition of Fundtech, from OCI to net (loss) income have been included within impairment of goodwill in the consolidated statements of (loss) income. Refer to reconciliation below. Impairment of Goodwill 2016 Impairment $ 70,484 Reclassification of loss on forward contracts from OCI to (loss) income 50,557 Impairment of Goodwill $ 121,041 Goodwill for each segment as at December 31, 2016 and 2015 is as follows: Canadian segment $ 537,455 $ 537,455 L&IC segment 1,220,568 1,258,112 GTBS segment 857, ,723 Total Goodwill $ 2,615,428 $ 2,769, D+H Annual Report 105

108 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) The recoverable amounts of the individual CGUs were determined based on the FVLCD method and were determined using the DCF approach by discounting the projected future cash flows to be generated by each CGU. The recoverable amount for the Group CGUs was determined by aggregating the recoverable amounts of the individual CGUs within the group. The fair value measurement was categorized as a Level 3 based on the inputs in the valuation technique used. The key assumptions and sensitivities applied in the goodwill impairment test are described below: Key assumptions The key assumptions used in determining the FVLCD are described in the table below: Assumption Projected EBITDA Methodology Estimated discretionary after-tax cash flows were based on the Company s plan, including Adjusted revenue and Adjusted EBITDA, net of planned capital expenditures, the tax shield on depreciation and amortization, and net working capital for the next five years, together with terminal growth rates or multiples, as appropriate. Cash flow projections are based on management s best estimates considering historical and expected operating plans, strategic goals, economic considerations and the general outlook for the industry or segment in which the businesses operate. The projections are based on the most recent financial plan approved by the Company s Board of Directors. Weighted average cost of capital ( WACC ) Terminal value growth rate D+H s estimate of future performance is subject to a number of factors including, but not necessarily limited to, market trends such as consolidation of financial institutions, changing government regulations, decisions by financial institutions whether or not to replace their legacy software, decline in cheque usage due to alternative payment methods, interest rates, residential real estate activity, lending activity, among other items. The WACC discount rate used in the valuation was based on a market participant view of the cost of debt and after tax cost of equity, weighted based on a market based capital structure suitable for the financial technology industry. The cost of equity was estimated using a Capital Asset Pricing Model ( CAPM ) and included the following inputs; i) the current risk free rate; ii) the average relevered beta of publicly traded comparable companies; iii) the equity risk premium per region; iv) a size premium at the underlying CGU level; and, v) an unsystematic risk premium. Five years of cash flows have been included in the DCF models for each individual CGU. The estimated terminal value was based on a terminal growth rate that was derived by assessing the regional average GDP growth over the last 20 years, average inflation rates, the industry s expected growth rates and management s estimate of the individual CGU growth rates relative to the industry. The table below shows the key assumptions used in the FVLCD calculations for each of the Group CGUs: Canada L&IC GTBS Blended WACC % 9.50% 9.40% 9.50% 10.10% 10.00% Blended terminal value growth rate % 2.00% 3.75% 3.00% 3.70% 3.00% 1 The goodwill test is conducted at the individual CGU level, and therefore the WACC is built on a bottom up basis per CGU. The blended WACC is the implied WACC that results in the same recoverable amount as the sum of the Group of CGUs. 2 The goodwill test is conducted at the individual CGU level, and therefore the terminal growth rates are derived for each individual CGU. The blended terminal growth rate is the implied growth rate that results in the same recoverable amount as the sum of the Group CGUs. Sensitivity analysis A sensitivity analysis of significant assumptions is conducted as part of the annual impairment test. These sensitivities are indicative only and should be considered with caution, as the effect of the variation in each assumption on the estimated recoverable amount is calculated in isolation without changing any other assumptions. In practice, changes in one factor may result in changes in another, which may magnify or counteract the disclosed sensitivities. The Company sensitized two key assumptions, in isolation: the WACC and the terminal growth rates per CGU. In general, the CGU recoverable amounts are more sensitive to changes in the terminal growth rates than they are to the WACC. In addition, the recoverable D+H Annual Report

109 amount per CGU is more sensitive to the changes in WACC and terminal growth rate depending on the size and nature of cash flows (the smaller the cash flows result in higher sensitivity to changes in key assumptions). Canada Group CGUs: Either the WACC for the individual CGUs would have to increase by 9.1% in absolute, or the terminal growth rate would have to decline by 18.5% in absolute to result in the total Canadian Group CGU recoverable amount being equal to the carrying value. L&IC Group CGUs: Either the WACC for the individual CGUs would have to increase by 1.6% in absolute, or the terminal growth rate would have to decline by 2.0% in absolute to result in the total L&IC Group CGU recoverable amount to equal the carrying value. GTBS Group CGUs: The GTBS segment has also been sensitized against WACC and terminal growth rates. For the WACC sensitivity of +/- 100bps, the total recoverable amount of all CGUs would result in a decrease of $203.1 million (USD 152 million, -36%) or an increase of $279.7 million (USD 209 million, +49%). The terminal growth rate sensitivity of +/- 100bps would result in a change to the aggregate recoverable amount by an increase of $226.7 million (USD 169 million, +40%) or a decrease of $164.8 million (USD 123 million, -29%). For the year ended December 31, 2015, management believed that no reasonably possible change in any of the key assumptions would cause the carrying value of any Group CGU to exceed its recoverable amounts. 12 OTHER ASSETS, NON-CURRENT As at December Deferred commissions $ 31,751 $ 26,313 Deferred implementation costs 15,867 6,551 Long-term prepayments 3,095 5,029 Advances and deposits 2,823 2,179 Maintenance contracts 946 4,802 Derivative assets held for risk management (note 19) 776 Other 1, Total Other assets, non-current 1 $ 56,668 $ 45,028 1 Prior period comparatives have been reclassified to conform to current year classification. 13 INCOME TAXES Income tax recognized in the consolidated statements of (loss) income Current tax expense Year ended December Current year tax expense $ 31,642 $ 33,076 Adjustment to tax expense related to prior years 706 (774) Tax benefits related to prior acquisitions (2,221) Total current tax expense $ 32,348 $ 30,081 Deferred tax recovery Origination and reversal of temporary differences $ (70,290) $ (38,059) Decrease in tax rate (8,446) (538) Adjustment to tax expense related to prior years (4,356) 479 Total deferred tax recovery $ (83,092) $ (38,118) Income tax recovery $ (50,744) $ (8,037) 2016 D+H Annual Report 107

110 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) Reconciliation of effective tax rate Year ended December (Loss) income from operations $ (67,663) $ 84,005 Income tax recovery (50,744) (8,037) Net (loss) income from operations before tax $ (118,407) $ 75,968 Income tax/(recovery) expense using the statutory rate % $ (31,354) % $ 20,185 Increase/(decrease) in tax rate 7.13 % (8,446) (0.71 )% (538) Effect of tax rates in foreign jurisdictions 30.4 % (36,000) (31.36 )% (23,822) Adjustment to tax expense related to prior years 3.08 % (3,650) (0.39 )% (295) Tax benefits related to prior acquisitions % (2.92 )% (2,221) Recognition of previously unrecognized tax losses (0.93 )% 1,099 (4.87 )% (3,700) Loss re-classified from OCI for which no tax benefits are recognized (10.28 )% 12,177 % Non-deductible expenses/non-taxable income (2.42 )% 2, % 423 Non-deductible goodwill impairment loss (16.44 )% 19,462 % Withholding taxes (1.71 )% 2, % 1,841 Increase/(decrease) to investment in subsidiaries 4.57 % (5,412) (1.57 )% (1,189) Other items 2.97 % (3,512) 1.68 % 1,279 Income tax (recovery) expense % $ (50,744) (10.59 )% $ (8,037) D+H Annual Report

111 Recognized deferred tax assets and liabilities: Significant components of the Company s deferred tax assets and liabilities with respect to differences between the consolidated carrying values and the related tax bases of the assets and liabilities as at December 31, 2016 and 2015 are as follows: Deferred tax assets Deferred tax liabilities Net Deferred tax assets Deferred tax liabilities Net Tax losses available for future periods $ 39,012 $ $ 39,012 $ 37,623 $ $ 37,623 Accrued and other liabilities 44,704 44,704 43,665 43,665 Property, plant and equipment greater than tax values (44,975) (44,975) (40,926) (40,926) Intangible assets greater than tax values (520,656) (520,656) (597,582) (597,582) Partnership income deferred for tax purposes (12,006) (12,006) Investment in subsidiaries (40,849) (40,849) (51,580) (51,580) Set off of tax (80,495) 80,495 (76,848) 76,848 Net deferred tax assets (liabilities) $ 3,603 $ (525,985)$ (522,382)$ 4,440 $ (625,246)$ (620,806) Unrecognized deferred tax assets and liabilities: The Company did not recognize the following temporary differences as deferred tax assets because it is not probable that future taxable profit will be available in their respective jurisdictions against which the Company can utilize these benefits: As at December Deductible temporary differences, including capital losses $ 181,938 $ 171,383 Non-capital losses $ 4,350 $ 10, D+H Annual Report 109

112 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) The deductible temporary differences, including capital losses, and the non-capital losses do not expire under current tax legislation. The Company also has no unused tax credits ( $2.7 million) that were not recognized as deferred tax assets. Deferred tax liabilities are not required to be recognized for taxable temporary differences arising on investments in subsidiaries, associates and interests in joint ventures if the Company controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. As at December 31, 2016, taxable temporary differences of $748.1 million ( $757.8 million) related to the Company s investment in subsidiaries were not recognized as deferred tax liabilities in line with these requirements. Movement in recognized deferred tax balances during the year As at December 31, 2016 Balance as at January 1, 2016 Recognized in continuing operations Recognized in equity and OCI Effect of movements in exchange rates Acquired in business combinations Total Tax losses available for future periods $ 37,623 $ 4,413 $ (1,211) $ (2,096) $ 283 $ 39,012 Accrued and other liabilities 43,665 3,099 (2,515) ,704 Property, plant and equipment greater than tax values (40,926) (773) 185 (3,460) (44,974) Intangible assets greater than tax values (597,582) 55,432 20,042 1,452 (520,656) Partnership income deferred for tax purposes (12,006) 12, Investment in subsidiaries (51,580) 8,533 2,197 (40,850) Net Deferred Tax $ (620,806) $ 83,092 $ (3,726) $ 20,782 $ (1,724) $ (522,382) As at December 31, 2015 Balance as at January 1, 2015 Recognized in continuing operations Recognized in equity and OCI Effect of movements in exchange rates Acquired in business combinations Total Tax losses available for future periods $ 3,376 $ (21,742) $ 1,211 $ 5,303 $ 49,475 $ 37,623 Accrued and other liabilities 18,945 5,081 3,556 8,291 7,792 43,665 Property, plant and equipment greater than tax values (30,755) (4,762) (2,560) (2,849) (40,926) Intangible assets greater than tax values (338,532) 54,126 (91,710) (221,466) (597,582) Partnership income deferred for tax purposes (16,231) 4,225 (12,006) Investment in subsidiaries 1,190 (6,860) (45,910) (51,580) Net Deferred Tax $ (363,197) $ 38,118 $ 4,767 $ (87,536) $ (212,958) $ (620,806) D+H Annual Report

113 14 PROPERTY, PLANT AND EQUPIMENT Machinery and equipment Computer equipment Furniture, fixtures, buildings and leasehold improvements Total Cost Balance as at January 1, 2016 $ 25,646 $ 105,540 $ 33,245 $ 164,431 Additions 4,290 23,568 7,335 35,193 Disposals (1,839) (8,114) (5,725) (15,678) Effect of movements in exchange rates (85) (2,565) 391 (2,259) As at December 31, 2016 $ 28,012 $ 118,429 $ 35,246 $ 181,687 Accumulated depreciation Balance as at January 1, 2016 $ 16,857 $ 59,882 $ 9,216 $ 85,955 Depreciation 2,302 20,700 4,960 27,962 Disposals (1,524) (7,737) (4,888) (14,149) Effect of movements in exchange rates (24) (1,372) 1,341 (55) As at December 31, 2016 $ 17,611 $ 71,473 $ 10,629 $ 99,713 Net carrying amount As at December 31, 2016 $ 10,401 $ 46,956 $ 24,617 $ 81,974 Machinery and equipment Computer equipment Furniture, fixtures, buildings and leasehold improvements Total Cost Balance as at January 1, 2015 $ 21,554 $ 67,189 $ 19,640 $ 108,383 Acquisition of business 12,576 9,823 22,399 Additions 3,623 19,544 4,951 28,118 Disposals (5) (2,049) (4,254) (6,308) Effect of movements in exchange rates 474 8,280 3,085 11,839 As at December 31, 2015 $ 25,646 $ 105,540 $ 33,245 $ 164,431 Accumulated depreciation Balance as at January 1, 2015 $ 15,389 $ 41,238 $ 8,907 $ 65,534 Depreciation 1,299 18,387 3,612 $ 23,298 Disposals (5) (2,049) (3,467) $ (5,521) Effect of movements in exchange rates 174 2, $ 2,644 As at December 31, 2015 $ 16,857 $ 59,882 $ 9,216 $ 85,955 Net carrying amount As at December 31, 2015 $ 8,789 $ 45,658 $ 24,029 $ 78, D+H Annual Report 111

114 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) 15 INTANGIBLE ASSETS Contracts Software Acquisition of businesses Purchased Internally developed Proprietary software Brand names Customer relationships Cost Balance as at January 1, 2016 $ 26,266 $ 45,035 $ 152,940 $ 722,917 $ 227,261 $ 1,599,565 $ 2,773,984 Additions 10,391 50,409 60,800 Disposals (1,750) (6,920) (3,250) (11,920) Effect of movements in exchange rates (1,060) (1,530) (21,065) (7,506) (45,926) (77,087) As at December 31, 2016 $ 24,516 $ 47,446 $ 198,569 $ 701,852 $ 219,755 $ 1,553,639 $ 2,745,777 Total Accumulated amortization and impairment losses Balance as at January 1, 2016 $ 3,969 $ 25,559 $ 58,638 $ 218,634 $ 44,656 $ 307,829 $ 659,285 Amortization 4,384 14,202 34,568 90,927 14, , ,632 Impairment loss 1, ,187 16,387 Disposals (1,750) (6,767) (3,060) (11,577) Effect of movements in exchange rates 179 (66) (4,095) (1,199) (5,442) (10,623) As at December 31, 2016 $ 6,603 $ 33,173 $ 90,280 $ 305,466 $ 58,344 $ 427,238 $ 921,104 Net carrying amount As at December 31, 2016 $ 17,913 $ 14,273 $ 108,289 $ 396,386 $ 161,411 $ 1,126,401 $ 1,824,673 1 For presentation purposes, the impairment loss is included in amortization expense in the consolidated statements of (loss) income and consolidated statements of cash flows. 2 The impairment loss of $16.2 million recorded in customer relationships relates to impairment in the cash management CGU, as disclosed in Note D+H Annual Report

115 Contracts Software Acquisition of businesses Purchased software Internally developed software Proprietary software Brand names Customer relationships Cost Balance as at January 1, 2015 $ 8,089 $ 27,624 $ 101,250 $ 389,139 $ 97,477 $ 913,753 $ 1,537,332 Acquisition of business 5,826 8, ,029 99, , ,696 Additions 21,016 10,584 43,541 75,141 Disposals (2,839) (3,103) (8,325) (14,267) Effect of movements in exchange rates 4,104 7,912 88,749 30, , ,082 As at December 31, 2015 $ 26,266 $ 45,035 $ 152,940 $ 722,917 $ 227,261 $ 1,599,565 $ 2,773,984 Accumulated Amortization and impairment losses Balance as at January 1, 2015 $ 3,289 $ 14,830 $ 35,480 $ 117,309 $ 28,124 $ 199,325 $ 398,357 Amortization 3,519 11,903 23,191 86,085 11,300 87, ,320 Impairment loss 1 6,281 6,281 Disposals (2,839) (3,103) (8,304) (14,246) Effect of movements in exchange rates 1,929 1,990 15,240 5,232 21,182 45,573 As at December 31, 2015 $ 3,969 $ 25,559 $ 58,638 $ 218,634 $ 44,656 $ 307,829 $ 659,285 Net carrying amount As at December 31, 2015 $ 22,297 $ 19,476 $ 94,302 $ 504,283 $ 182,605 $ 1,291,736 $ 2,114,699 1 For presentation purposes, the impairment loss is included in amortization expense in the consolidated statements of (loss) income and consolidated statements of cash flows. Total 16 TRADE PAYABLES, ACCRUED AND OTHER LIABILITIES As at December Trade payables $ 70,860 $ 54,519 Compensation-related accrued liabilities 62,013 78,550 Restructuring-related and other payables 9,068 Commissions 21,469 17,171 Customer advances 1 17,167 15,241 Interest payable 12,211 11,178 Capital and other tax Other accrued liabilities 1 22,925 14,043 Derivative liabilities held for risk management - current (note 19) Total Trade payables, accrued and other liabilities $ 216,852 $ 191,759 1 For the year ended December 31, 2015, customer advances of $5.2 million were included in other accrued liabilities and have been reclassified to customer advances to conform to current year classification. 2 For the year ended December 31, 2016, withholding tax and tax reserves have been reclassified from capital and other tax to current tax liabilities. In the comparative year $10.0 million has been reclassified to conform to the current year classification D+H Annual Report 113

116 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) Restructuring and other expenses During the year ended December 31, 2016, the Company initiated a realignment of its business functions, which included real estate rationalization, to capitalize on its global scale and growth opportunities and increase support of our customers. The Company recognized $31.4 million in expenses as a result of this initiative. Additionally, the Company continued its cost management initiatives within the Canadian payments operations, which consisted of $2.8 million in expenses this year. Total restructuring related expenses related to these two initiatives was approximately $34.2 million for the year ended December 31, There were no restructuring and other related expenses incurred during the year ended December 31, Restructuring and other expenses related to these initiatives for the year ended December 31, 2016 are noted below: Restructuring and other expenses Severance $ 21,416 Lease obligation 3,477 Consulting 5,133 Other 4,165 Total Restructuring and other expenses 1 $ 34,191 1 During the year ended December 31, 2016, restructuring and other expenses included cost management initiatives within the Canadian payments operations of $2.8 million ( nil). Included in trade payables, accrued and other liabilities are provisions for restructuring and other activities being undertaken by the Company: Restructuring and other liability 2016 Balance, as at January 1 $ Restructuring and other expenses $ 34,191 Share-based compensation expenses 1 (1,670) Payments (20,548) Balance, as at December 31 2 $ 11,973 1 Share-based compensation expenses include stock options which are equity settled and cash settled awards, which have been excluded from the liability reconciliation above. Liability relating to cash settled awards are included within the compensation-related accrued liabilities. Stock options relating to equity settled awards are settled through the issuance of equity. 2 Includes restructuring-related and other liabilities of $2.9 million, which is included in other long-term liabilities (note 20). 17 LOANS AND BORROWINGS The amounts available and drawn under the Credit Facility and the amounts of issued and outstanding bonds are listed in the table and further described below. Effective April 30, 2015, the Eighth Amended and Restated Credit Agreement ( Previous Credit Facility ) was replaced with the Ninth Amended and Restated Credit Agreement ( Credit Facility ). 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 ), increasing the Company s revolving capacity from $450 million, of which $109.4 million and US$163.1 million were drawn on April 30, 2015 to partially finance the acquisition of Fundtech. The Revolver may be used for capital expenditures and general corporate purposes. Draws of $9.4 million and US$140.0 million were outstanding on this facility as at December 31, 2016 ( $59.4 million and US$163.1 million). ii. iii. 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 December 31, 2016 and A non-revolving, non-amortizing term credit facility in the amount of US$80.0 million ( Note Bridge Facility ) which was drawn on April 30, 2015 to partially finance the acquisition of Fundtech. Bonds with an aggregate principal amount of US$80 million were issued on May 8, 2015 to fully pay down and terminate the Note Bridge Facility. Bonds in the amount of $100 million and US$399.5 million were outstanding on December 31, 2016 and D+H Annual Report

117 Effective November 10, 2016, the terms of the Credit Facility were amended resulting in a deferral in the step down of the Company s net funded debt to EBITDA ratio covenants. There were no changes to applicable interest rate spreads as set forth in the Credit Facility. The amended terms resulted in a coupon increase of 25 basis points ( bps ) on outstanding private notes and the payment of amendment fees totaling $0.8 million, which will be amortized over the remaining term of the modified liability. 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, including Total Net Funded Debt to EBITDA and Interest Coverage Ratios, and certain financial condition tests. The Company was in compliance with all financial covenants and financial condition tests as at December 31, 2016 and December 31, During the year ended December 31, 2016, the Company made repayments of $50.0 million and US$23.1 million ($31.0 million) against the Canadian dollar and US Dollar portion of the Revolver, respectively. During the year ended December 31, 2015, the Company made repayments of $50.0 million against the against the Canadian Revolver. The Company s long-term indebtedness as at December 31, 2016 and 2015 is as follows: Credit facility (secured) Total credit facility Interest rate Maturity Revolver $ 362,022 1 BA % 2 Apr 2020 $ 9,400 $ 59,400 Revolver (US$140,000) 187,978 LIBOR % 2 Apr , ,730 Total Revolver 550, , ,130 Non-revolver (US$512,620) 688,295 LIBOR % 2 Apr , ,466 Total credit facility $ 1,238,295 $ 885,673 $ 994,596 Bond (secured) 7.24% 3 Jun 2017 $ 50,000 $ 50,000 Bond (secured) 6.42% 3 Jun ,000 30,000 Bond (secured) (US$63,000) 6.84% 3 Apr ,590 87,192 Bond (secured) (US$40,000) 4.57% 3 May ,708 55,360 Bond (secured) (US$40,000) 4.57% 3 May ,708 55,360 Bond (secured) (US$16,500) 5.19% 3 Jun ,155 22,836 Bond (secured) (US$15,000) 5.19% 3 Jun ,140 20,760 Bond (secured) 6.26% 3 Aug ,000 20,000 Bond (secured) (US$100,000) 6.01% 3 Aug , ,400 Bond (secured) (US$75,000) 6.01% 3 Aug , ,800 Bond (secured) (US$50,000) 6.01% 3 Aug ,135 69,200 Total bonds $ 636,409 $ 652,908 Total loans and borrowings excluding deferred finance costs $ 1,522,082 $ 1,647,504 Deferred finance costs (8,828) (10,582) Total loans and borrowings $ 1,513,254 $ 1,636,922 Current portion $ 80,000 $ Non-current portion $ 1,433,254 $ 1,636,922 1 Amounts available may be drawn in Canadian dollar ( CAD ) or its U.S. dollar ( 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$250 million), refer to note 19 for further details. 3 During the year ended December 31, 2016, all bonds had a further coupon increase of 25bps. 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 D+H Annual Report 115

118 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) Finance expense Year ended December Interest expense $ 97,073 $ 82,060 Interest income 1 (2,626) (2,624) Net interest expense $ 94,447 $ 79,436 Amortization of deferred financing fees 2 2,423 9,986 Accretion expense (5.0%, 5.5 year convertible debenture) 4,392 2,969 Accretion expense (6.0%, 5 year convertible debenture) 4,289 3,957 Fair value adjustment of derivative instruments (1,617) (515) 1 Interest income primarily related to non-current customer billing contracts. $ 103,934 $ 95,833 2 During the year ended December 31, 2015, the replacement of the Previous Credit Facility, with the Credit Facility resulted in a $7.4 million loss associated with the write-off of unamortized deferred debt issuance costs pertaining to the Previous Credit Facility. Letters of credit The Company had outstanding letters of credit of $13.1 million as at December 31, 2016 ( $6.3 million), 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. Capital Management The Company actively manages its capital in order to support its growth objectives, and ensure sufficient liquidity to support its financial obligations and to execute its operating and strategic plans. The Company defines capital that it manages as equity (primarily common share capital) and short-term and long-term indebtedness (including loans, borrowings, bonds and convertible debentures). The Company manages its capital structure, commitments and maturities and makes adjustments based on general economic conditions, financial markets and operating risks and our investment and working capital requirements. To maintain or adjust its capital structure, the Company may, with approval from its Board of Directors, issue or repay debt and/or short-term borrowings, issue share capital, pay dividends, repurchase shares or undertake other activities as deemed appropriate under the circumstances. The Board of Directors reviews and approves the annual capital and operating budgets, and any material transactions that are not part of the ordinary course of business, including proposals for acquisitions or other major financing transactions, investments or divestitures. The Company manages its capital structure through the measurement of various debt leverage ratios, and ensures its ability to service debt and meet other fixed obligations by tracking interest coverage ratios. As part of this process the Company calculates and monitors the following ratios: Total Net Funded Debt to EBITDA The Company was in compliance with all covenants as at December 31, 2016 and December 31, The Company is not subject to any externally-imposed capital requirements. The covenant calculation is affected by (but not limited to) acquisitions,disposals, foreign exchange movements and changes in accounting treatment D+H Annual Report

119 Debt to EBITDA ratio 1 (thousands of Canadian dollars, unless otherwise noted) As at December Loans and borrowings $ 1,522,082 $ 1,647,504 Add: Letters of credit 13,143 6,338 Capital leases Total Funded Debt 1,535,265 1,654,148 Less: Cash (for covenant purposes only) 2 (50,000) (50,000) Total Net Funded Debt $ 1,485,265 $ 1,604,148 Net (loss) income $ (67,663) $ 84,005 Add (deduct): Interest expense 105,551 96,348 Depreciation of property, plant and equipment 27,962 23,298 Amortization of intangible assets 284, ,601 Impairment of goodwill 121,041 Income tax recovery (50,744) (8,037) Fair value adjustment of derivative instruments 3 (1,617) (515) Stock options 3,815 5,461 Acquisition accounting adjustments 4 (2,901) 10,973 Acquisition-related and other charges 5 37,330 60,774 Foreign exchange gain 6 (3,039) (21,751) Other items 7 (394) 23,461 EBITDA (for covenant purposes only) $ 453,360 $ 503,618 Total Net Funded Debt to EBITDA 3.276x 3.185x Maximum allowed per covenant 3.500x 3.700x 1 Calculated on a twelve-month trailing basis. 2 Cash (for covenant purposes only) represents the secured global cash balances in all bank accounts up to a maximum of $50 million as at December 31, 2016 ( 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 realized or unrealized change in the fair value of these contracts is recorded through the consolidated statements of (loss) income. 4 Acquisition accounting adjustments relate to the amortization of the fair value adjustments on deferred revenues and deferred costs acquired. 5 Acquisition-related and other charges include integration and transaction costs pertaining to the acquisition of Fundtech, business integration, charges related to cost-realignment initiatives, including the program for expanding global capabilities, retention and incentive costs in connection with the acquisition of businesses. 6 Non-cash foreign exchange gain is for finance 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 Annual Report 117

120 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) 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 (thousands of Canadian dollars, unless otherwise noted) As at December EBITDA (for covenant purposes only) $ 453,360 $ 503,618 Interest expense (for covenant purposes only) 103,934 96,348 Less: non-cash interest 9,487 9,519 Interest expense (for covenant purposes only) $ 94,447 $ 86,829 Interest coverage ratio (EBITDA / Interest expense) 4.80x 5.80x Minimum allowed per covenant 3.00x 3.00x 1 Calculated on a twelve-month trailing basis. 18 CONVERTIBLE DEBENTURES As at December Carrying amount of 5.0%, 5.5 year convertible debenture, matures Sept 30, , ,819 Carrying amount of 6.0%, 5 years convertible debenture, matures Sept 30, , ,757 Total liability as at December 31, 2016 $ 431,093 $ 422,576 5% semi-annual convertible debentures On April 9, 2015, the Company issued $230 million of 5% extendible, convertible, unsecured subordinated debentures. The Debentures bear interest at an annual rate of 5% payable semi-annually, in arrears, on June 30 and December 31, commencing on June 30, The debentures had an initial maturity date of September 30, 2015 which automatically extended to September 30, 2020 upon completion of the acquisition of Fundtech. Each Debenture is convertible into common shares of the Company at the option of the holder at any time prior to September 30, 2020 at a conversion price of $52.75 per common share, representing approximately common shares per $1,000 principal. The conversion price is subject to adjustment in limited circumstances to mitigate the impact of potential dilutive events on the holders of the instruments. On conversion, holders are entitled to receive accrued and unpaid interest in cash. Between September 30, 2018 and September 30, 2019, if the price of the common shares of the Company exceeds 125% of the conversion price, the Debentures are redeemable, at the option of the Company, in whole or in part, at a redemption price equal to the principal plus accrued interest. On or after September 30, 2019, up to the maturity date, the Debentures may be redeemed at a redemption price equal to the principal plus accrued and unpaid interest. The Debentures cannot be redeemed prior to September 30, 2018, except in certain limited circumstances following a change in control, as specifically defined in the governing Trust Indenture. Interest and principal on the debentures is payable, at the option of the Company, in either cash or common shares of the Company. The Debentures have priority over the payment of any dividend but are unsecured and are subordinated to Senior Indebtedness of the Company (see note 17 for further details). 6% semi-annual convertible debentures The Company also has outstanding, $230 million principal amount of 6% convertible, unsecured subordinated debentures. These Debentures pay interest semi-annually on March 31 and September 30 and have a maturity date of September 30, The Debentures are convertible at the option of the holder to common shares at a conversion price of $28.90 per common share. The Company has the option to redeem D+H Annual Report

121 the Debentures on or after September 30, 2016 and at any time prior to September 30, 2017 at a redemption price equal to 100% of their principal amount plus accrued and unpaid interest provided that the current market price of the common shares is at least 125% of the conversion price of $ On or after September 30, 2017 and prior to September 30, 2018, the Debentures may be redeemed in whole or in part at the option of the Company at a redemption price equal to their principal amount plus accrued and unpaid interest. On redemption or maturity the Company may elect to repay the principal and satisfy its interest obligations by issuing the Company s common shares. The Debentures can be converted to common shares at a conversion price of $28.90, representing approximately common shares per every $1,000 of the principle amount of the Debentures. The Debentures are the Company s direct obligations and are subordinated to the Company s other liabilities. 19 FINANCIAL INSTRUMENTS The Company is exposed to the following risks from its use of financial instruments: Credit Risk Market Risk (includes interest-rate and foreign exchange risk) Liquidity Risk Risk Management Framework The Company s financial risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits, controls and monitoring adherence to limits. Management regularly reviews these policies to reflect changes in market conditions and activities of the Company. Credit Risk The Company s financial instruments that are exposed to credit risk consist primarily of cash and cash equivalents, receivables and financial derivatives. The Company, in its normal course of business, is exposed to credit risk from its customers. The Company is exposed to credit loss in the event of non-performance by counterparties to the interest-rate swaps and foreign exchange contracts. Risks associated with concentrations of credit risk with respect to receivables and financial derivatives are limited due to the credit rating of the applicable customers and counterparties. The carrying amount of the Company s financial assets represents the maximum credit exposure. Market Risk The Company is subject to interest-rate risks as the Credit Facility (note 17) bears interest at rates that are based on floating rates based on Prime, bankers acceptance ( BA ) and London Interbank Offer ( LIBOR ) which vary in accordance with borrowing rates in Canada and the U.S., respectively. The following table presents a sensitivity analysis to changes in market interest rates and their potential impact on the Company for the year ended December 31, 2016 and As the sensitivity is hypothetical, it should be used with caution Interest rate sensitivity bps -100 bps bps -100 bps Increase (decrease) in interest expense $ 5,050 $ (5,050) $ 5,344 $ (5,344) Change to net unrealized (gain) loss on interest-rate swaps (95) 95 (544) 544 Change to net unrealized (gain) loss on interest-rate swaps through other comprehensive (loss) income (8,405) 8,405 (10,610) 10,610 Decrease (increase) in (loss) income before income taxes $ 4,955 $ (4,955) $ 4,800 $ (4,800) Decrease (increase) in total comprehensive (loss) income $ (3,450) $ 3,450 $ (5,810)$ 5, D+H Annual Report 119

122 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) The Company manages interest-rate risk through the use of interest-rate swaps for a portion of its outstanding credit facilities. As at December 31, 2016 and 2015, the following fixed-paying interest-rate swaps were outstanding: Maturity date Notional amount Interest rate 1 Liability (Assets) 2 October 17, 2016 (US$25,000) 3,4 $ 33, % $ $ 58 October 17, 2016 (US$25,000) 3,4 33, % 58 October 17, 2016 (US$25,000) 3,4 33, % 39 October 17, 2016 (US$25,000) 3,4 33, % 48 March 18, , % March 20, , % August 28, 2018 (US$25,000) 3 33, % August 28, 2018 (US$25,000) 3 33, % August 28, 2018 (US$25,000) 3 33, % August 28, 2018 (US$20,000) 3 26, % 5 57 October 17, 2018 (US$25,000) 3 33, % October 17, 2019 (US$25,000) 3 33, % (388) October 17, 2019 (US$25,000) 3 33, % (388) August 28, 2020 (US$30,000) 3 40, % August 28, 2020 (US$25,000) 3 33, % August 28, 2020 (US$25,000) 3 33, % Total derivative assets and liabilities held for risk management $ 196 $ 3,464 1 The listed fixed interest rates offset floating rates of BA/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 and the non-current portion is included in other long-term liabilities and other assets. 3 Designated as hedges for the purposes of hedge accounting. Fair value changes on these swaps are recognized in OCI. 4 This interest rate swap has been settled. 5 Not-designated as hedges for the purposes of hedge accounting. Fair value changes on these swaps are recognized in net (loss) income and presented under finance expense. The following table presents the impact of cash flow hedges on D+H s financial results for the year ended December 31, 2016 and 2015: Fair value gain (loss) 2016 Fair value gain (loss) recorded in OCI 1 recorded in finance expense Interest rate swaps $ (1,659) $ 1,144 Foreign exchange forward contracts 473 Total $ (1,659) $ 1, Interest rate swaps $ (1,578) $ 540 Foreign exchange forward contracts (49,325) (25) Total $ (50,903) $ Settlement loss on forward contract of $50.6 million was reclassified from OCI to (loss) income D+H Annual Report

123 Foreign exchange contracts The Company is subject to foreign exchange risk on its USD and other foreign currency denominated financial assets and liabilities. The Company, from time to time, manages a portion of its USD 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 USD is the functional currency. The Company may also enter into forward contracts to manage foreign exchange risk relating to its debt covenants. As at December 31, 2016, no forward contracts were held. As at December 31, 2015, the Company had forward contracts to purchase Indian Rupees ( INR ) with notional amounts of million INR (US$16.1 million). These contracts have not been designated as hedges and changes in fair value were recorded in net (loss) income. As at December 31, 2015, the forwards were in a liability position of $25 thousand. The following table presents a sensitivity analysis to changes in the foreign exchange rate between the CAD and USD for the year ended December 31, 2016 and As the sensitivity is hypothetical, it should be used with caution Foreign exchange sensitivity + $0.05 CAD Per USD -$0.05 CAD Per USD + $0.05 CAD Per USD -$0.05 CAD Per USD Unrealized gain (loss) on translation $ (975) $ 975 $ (698) $ 698 Increase (decrease) in net (loss) income $ (975) $ 975 $ (698) $ 698 Liquidity Risk The table below provides the remaining contractual maturities of the Company s revolving and non-revolving, non-amortizing term Credit Facility and all fixed-interest-rate bonds as at December 31, 2016 and Non-derivative financial liabilities More than 5 years 3-5 years 1-3 years Less than 1 year Contractual amount Contractual amount Revolver $ $ 9,400 $ $ $ 9,400 $ 59,400 Revolver (US$140,000) 187, , ,730 Non-revolver (US$512,620) 688, , ,466 Bond (secured) 50,000 50,000 50,000 Bond (secured) 30,000 30,000 30,000 Bond (secured) (US$63,000) 84,590 84,590 87,192 Bond (secured) (US$40,000) 53,708 53,708 55,360 Bond (secured) (US$40,000) 53,708 53,708 55,360 Bond (secured) (US$16,500) 22,155 22,155 22,836 Bond (secured) (US$15,000) 20,140 20,140 20,760 Bond (secured) 20,000 20,000 20,000 Bond (secured) (US$100,000) 134, , ,400 Bond (secured) (US$75,000) 100, , ,800 Bond (secured) (US$50,000) 67,135 67,135 69,200 Total loans and borrowings excluding deferred finance costs $ 471,819 $ 970,263 $ $ 80,000 $ 1,522,082 $ 1,647, D+H Annual Report 121

124 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) The degree to which the Company is leveraged may reduce its ability to obtain additional financing for working capital and to finance investments to maintain and grow the current levels of cash flows from operating activities. The Company s ability to extend the maturity date of the Credit Facility or to refinance outstanding indebtedness is dependent upon a number of factors, including the Company s future performance and economic conditions. As a result, there is no certainty that the Company will be able to extend the Credit Facility or refinance outstanding indebtedness. To reduce liquidity, risk management has historically renewed the terms of the Company s long-term indebtedness in advance of its maturity dates. To enhance its liquidity position, up to $352.6 million, subject to covenant limitations, of the Company s committed term Revolving Credit Facility remained undrawn as at December 31, 2016 and the Credit Facility provides for an additional uncommitted credit arrangement of up to $250.0 million. The Company s bond shelf facilities provides for an additional uncommitted arrangement of up to $191.1 million. The use of the uncommitted credit arrangement and bond shelf facilities are subject to the prior approval of the relevant lenders with the fees, spreads and other terms to be negotiated at that time. With respect to its level of indebtedness, the Company determines the appropriate level in the context of its cash flow and overall business risks. Management assesses liquidity risk through comparisons of current financial ratios with financial covenants contained in the Credit Facility and ongoing monitoring of the Company s liquidity to ensure that the Company has sufficient liquidity to meet its liabilities when they are due. 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 cash and cash equivalents, trade, unbilled and other receivables and trade payables, accrued and other liabilities, 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 consolidated statements of financial position as at December 31, 2016 and 2015: Fair value Carrying Carrying Fair value hierarchy amount amount Fair value Financial assets measured at fair value Derivative assets held for risk management1 Level 2 $ (776) $ (776) $ $ Financial liabilities measured at fair value Derivative liabilities held for risk management 1 Level 2 $ 972 $ 972 $ 3,464 $ 3,464 Financial liabilities not measured at fair value Convertible debentures (6.0%, 5-year) - liability component Level 2 $ 220,883 $ 225,953 $ 216,757 $ 205,603 Convertible debentures (5.0%, 5.5-year) - liability component Level 2 210, , , ,415 Loans and borrowings Level 2 1,513,254 1,573,726 1,636,922 1,662,427 $ 1,944,543 $ 2,026,080 $ 2,062,962 $ 2,096,909 1 The current portion of derivative liabilities held for risk management as at December 31, 2016 of $0.3 million ( $0.2 million) is presented on the consolidated statement of financial position as part of trade payables, accrued and other liabilities (note 16) D+H Annual Report

125 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 DCF 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 DCF 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. 20 OTHER LONG-TERM LIABILITIES As at December Share-based compensation program (note 21) $ 8,959 $ 11,363 Employee future benefits 27,852 29,617 Lease incentive liability 1 7,925 3,001 Restructuring-related and other liabilities (note 16) 2,905 Derivative liabilities held for risk management (note 19) ,261 Other 3 7,065 4,236 Total Other Long-term Liabilities $ 55,407 $ 51,478 1 Primarily relates to lease incentives. 2 For the year ended December 31, 2016, non-current derivative liabilities held for risk management are included in other long-term liabilities. Comparative figures have been reclassified to conform to the current year classification. 3 Other long-term liabilities primarily consist of other employee compensation related balances. Employee future benefits The Company operates post-retirement benefit plans of both a defined contribution and defined benefit nature. The cost of the defined contribution plan is charged to the consolidated statements of (loss) income on the basis of contributions payable during the year. The total expense recorded for the defined contribution plan in 2016 and 2015 was $12.6 million and $11.5 million, respectively. The Company operates defined benefit pension plans primarily for the benefit of employees in Switzerland, with smaller plans in India and Canada. These plans were recognized in 2015 as a result of the Company s acquisition of Fundtech (note 4). The plans in Switzerland and India are partially funded. The plan in Canada is unfunded. The Company matches 100% of all contributions made by participants in two of the plans, and the third plan is employer funded. The funding requirements are based on the pension fund s actuarial measurement framework set out in the funding policies of the plan. The Company s other post-retirement benefit plans are defined benefit plans funded on a cash basis by contributions from the Company, which covers certain medical costs for a limited number of employees. For all defined benefit plans, the defined benefit liability is equal to the difference between the actuarial present value of the defined benefit obligation and the fair value of plan assets. The obligations for the plans are based on the projected unit credit method. The method projects benefits payable upon retirement based on applicable actuarial assumptions for all active participants. Changes in these factors could cause actual future contributions to differ from our current estimates and could actually require us to increase contributions to our post-retirement benefit plans in the future, which could have a negative effect on our liquidity and financial performance. The Company measures its accrued benefit obligations for accounting purposes as at December 31 of each year. The latest actuarial valuation of the post-retirement benefit plan was performed as at December 31, 2016 and has been included as part of employee future benefits under other long-term liabilities. These plans expose the Company to actuarial risks, such as longevity risk, currency risk, interest rate risk and market risk D+H Annual Report 123

126 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) The total expense for all defined benefit plans for the year ended December 31, 2016 was $4.0 million ( $2.7 million). The net defined pension obligation was $27.9 million as at December 31, 2016 ( $29.6 million). The components of post-retirement benefit obligations recognized as at December 31, 2016 and 2015 are as follows: Defined benefit obligation Fair value of plan assets Net Change in post-retirement benefit obligation Balance at beginning of year $ 77,634 $ 3,269 $ (48,017)$ $ 29,617 $ 3,269 Acquired on acquisition of Fundtech 64,248 (39,969) 24,279 Current service costs (recovery) 4,013 2,702 4,013 2,702 Interest cost (income) (270) (161) Benefits paid (10,042) 2,426 9,843 (2,709) (199) (283) Contributions paid (2,969) (1,902) (2,969) (1,902) Actuarial loss (gain) arising from: Demographic assumptions (163) (21) (163) (21) Financial assumptions 35 (32) 35 (32) Experience adjustments (2,115) (625) (2,115) (625) Return on plan assets excluding interest income (233) 88 (233) 88 Effects of movement in exchange rates (2,544) 5,105 1,944 (3,364) (600) 1,741 Net post-retirement benefit liability $ 67,554 $ 77,634 $ (39,702)$ (48,017) $ 27,852 $ 29,617 The following were the principal actuarial assumptions as at December 31, 2016 and 2015 (expressed as weighted averages): Discount rate 1.52 % 1.55 % Rate of compensation increase % 1.79 % Expected return on plan assets % 0.60 % Health cost trend rate 6.00 % 6.12 % 1 These assumptions relate specifically to two of the plans acquired through the acquisition of Fundtech in Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below: As at December % increase: Discount rate $ (9,199) $ (11,875) Rate of compensation increase 2,228 3,101 Health cost trend rate % decrease: Discount rate $ 11,065 $ 12,727 Rate of compensation increase (2,453) (3,745) Health cost trend rate (153) (144) The following table presents the net defined benefit obligation recognized in 2016 and 2015 for the pension plan in Switzerland. As at December Defined benefit obligation $ (61,744) $ (71,941) Fair value of plan assets 39,560 47,894 Net defined benefit obligation $ (22,184) $ (24,047) D+H Annual Report

127 The following table presents the asset allocation of the pension plan in Switzerland as at December 31, 2016 and As at December 31 Asset Category Equity securities and investment funds 6 % 4 % Debt securities 92 % 93 % Alternative investments and other 2 % 3 % Total 100 % 100 % 21 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 ). Share-based compensation expenses for the year ended December 31, 2016 are $3.1 million ( $12.1 million) and were included in the consolidated statements of (loss) income under Employee Compensation and Benefits expense. Share-based compensation expense (recovery) Stock options $ 3,815 $ 5,461 DSU (553) 1,525 RSU/PSU (161) 5,128 Total share-based compensation expense $ 3,101 $ 12,114 Stock Options D+H maintains a stock option plan for certain employees, including its key management personnel. The aggregate number of shares issuable under the stock option plan shall not exceed 5% of the total number of shares issued and outstanding (calculated on a non-diluted basis). Any shares subject to an option which for any reason is cancelled or terminated without having been exercised shall again be available for grants under the option plan, and under all other share compensation arrangements. Any shares subject to an option which have been exercised by a participant shall again be available for grants under the option plan, and under all other share compensation arrangements. In accordance with this option plan, the exercise price of the options are the closing share price on the last trading day immediately prior to the grant date and vest over a four or five-year period starting from their grant date with a contractual life of seven years. All options are settled by the delivery of shares. The following table presents information regarding the number of stock options granted by the Company for the year ended December 31, 2016 and 2015: Number of options (in units) Weighted average price Number of options (in units) Weighted average price Balance as at January 1 3,432,097 $ ,170,279 $ Granted 773,084 $ ,529,207 $ Exercised (133,641) $ (84,247) $ Forfeited (520,886) $ (183,142) $ Outstanding balance as at December 31 3,550,654 $ ,432,097 $ Exercisable balance as at December 31 1,226,798 $ ,411 $ The following table provides additional information about D+H s stock option plans as at December 31, 2016: Range of exercise prices Number of stock options outstanding Weighted average remaining contractual life (years) $10 - $20 454, $20 - $30 177, $30 - $42 2,919, D+H Annual Report 125

128 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) The fair value of options granted is determined using a Black-Scholes valuation model. The following weighted average assumptions were used in computing the fair value of stock options granted during the year ended December 31, 2016 and 2015: 2016 Grants 2015 Grants Share price $ $ Fair value per stock option granted $ 3.90 $ 5.17 Expected dividend yield 4.3 % 3.2 % Expected volatility 24.0 % 20.0 % Risk-free rate of return 0.6 % 1.3 % Expected life of option (years) Expected volatility has been based on an evaluation of the historical volatility of the Company s share price. DSUs The Company offers a DSU plan for members of its Board of Directors as a compensation alternative. Under this plan, directors may elect to receive a portion of their compensation in DSUs. DSUs are awarded to Directors on a yearly basis, based on the total fees payable for serving as a member of the Board of Directors and any of its committees, including annual retainers and chair retainer, but excluding meeting attendance fees, committee membership or chairmanship fees, and reimbursement for expenses during the applicable period. The number of DSUs that a Director receives in any period is based upon the percentage of Directors fees that the applicable Director has elected to receive in DSUs, subject to a minimum of 50%, multiplied by the applicable fees for such period, divided by the volume-weighted average price of the shares on the TSX for the five (5) most recent preceding days on which they were traded on the date of grant, with the balance, if any, being paid in cash. DSUs have a one year vesting period, and vest one quarter (¼) on the last day of each fiscal quarter of the applicable fiscal year in which they are awarded. The following table presents the number of DSU units granted by the Company for the year ended December 31, 2016 and 2015: Balance as at January 1 82,499 49,976 Granted 24,614 31,814 Exercised (17,680) Forfeited (2,101) Other 1 4,464 2,810 Balance as at December 31 93,897 82,499 1 Other includes reinvested dividends. RSUs and PSUs Obligations relating to the Company s deferred compensation program as at December 31, 2016 consisted of two components: (i) RSUs and (ii) PSUs. Both components have a three-year vesting period and are cash-settled share-based compensation. The RSUs vest one third (1/3) on each of the first, second and third anniversaries of January 1 of the calendar year in which the award is granted. PSUs vest in full on the third anniversary of January 1 of the calendar year in which the award of PSUs is granted. The PSUs also have a performance target which is based on two factors: 1) the annual three-year change in adjusted (loss) earnings per share during the vesting period; and 2) three-year annual average relative total shareholder return as measured against a defined peer group. These factors are measured against a performance grid set for a specific period, and based on this measure, the final number of performance share units will vary from 0% to 200% of the number of units outstanding at maturity. The fair value amount payable was measured using the closing price of $22.28 as at December 31, 2016 and an expected dividend payment of $1.28 per share, representing the annualized declared dividend as at December 31, D+H Annual Report

129 The following table presents the number of RSU units granted by the Company for the year ended December 31, 2016 and 2015: Balance as at January 1 270, ,608 Granted 116, ,438 Exercised (69,413) (86,738) Forfeited (50,248) (29,321) Other 1 8,813 10,190 Balance as at December , ,177 1 Other includes reinvested dividends. The following table presents the number of PSU units granted by the Company for the year ended December 31, 2016 and 2015: Balance as at January 1 271, ,048 Granted 188, ,106 Exercised (70,787) (76,049) Forfeited (47,398) (37,017) Other 1 32,112 40,417 Balance as at December , ,505 1 Other includes reinvested dividends and performance target units for fully vested grants. 22 CAPITAL The authorized capital of D+H consists of an unlimited number of common shares without par value and an unlimited number of preferred shares issuable in a series. Holders of common shares are entitled to one vote per share at D+H s shareholders meetings and will receive dividends if declared by the board of directors. Holders of preferred shares do not have any voting rights and the shares have rights, privileges, restrictions and conditions that are determined by the Board of Directors prior to issuance. As at December 31, 2016 and December 31, 2015, there were 106,881,956 and 106,443,450 common shares outstanding, respectively. The Company did not issue shares during the year ended December 31, 2016 with exception to the dividend reinvestment plan ( DRIP ) as noted below. During the year ended December 31, 2015, the Company issued shares for gross proceeds of $720.2 million and incurred issuance costs of $30.7 million. A deferred tax recovery of $8.2 million was recognized with respect to share issuance costs in Dividend reinvestment plan During the first quarter of 2015, DH Corporation commenced a DRIP for its Canadian resident shareholders. The DRIP allowed eligible shareholders to reinvest the cash dividends paid on all or a portion of their common shares in additional common shares, which would be issued at an applicable discount to 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. During the first three quarters of 2015, the discount available under the DRIP was 4% and then commencing with the fourth quarter, the discount available under the DRIP was reduced to 1%. As of January 1, 2016 the discount available under DRIP was reduced to nil. Dividends reinvested in accordance with the Company s DRIP are recognized in the period in which they declared. Any common shares issued under the DRIP will be reflected as share capital and recorded as dividends paid within retained earnings. During the year ended December 31, 2016, 298,880 common shares were issued under the DRIP program at a weighted average price of $36.42 for a total increase in share capital of $10.9 million and 44,878 common shares with a weighted average price of $27.85 were purchased on the open market and transferred to eligible shareholders participating in the DRIP. During the year ended December 31, 2015, 976,561 common shares were issued under the DRIP program at a weighted average price of $36.27 for a total increase in share capital of $35.4 million. On October 25, 2016, the Company announced the suspension of the DRIP D+H Annual Report 127

130 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) 23 (LOSS) EARNINGS PER SHARE Basic and diluted net (loss) income per share are calculated by dividing net (loss) income for the period by the weighted average number of shares outstanding during the period. Diluted net (loss) income per share is calculated by dividing net (loss) income for the period by the weighted average number of shares outstanding during the period adjusted for the effects of dilutive potential shares. The diluted per share amounts for stock options are calculated using the treasury stock method, as if all the share equivalents where the average market price exceeds the issue price had been exercised at the beginning of the reporting period, or the date of issue, as the case may be, and that the funds obtained thereby were used to purchase shares of D+H at the average trading price of the common shares during the period. The dilution impact of the debentures is calculated using the if-converted method from 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 (loss) income per share for the year ended December 31, 2016 and 2015: Numerator for basic and diluted (loss) earnings per share (thousands of Canadian dollars) Net (loss) income for the period $ (67,663)$ 84,005 Denominator (thousands of shares) Weighted average number of shares outstanding for: Basic (loss) earnings per share 106,742 99,568 Effect of dilutive securities: Stock options 270 Weighted average number of shares outstanding for : Diluted (loss) earnings per share 106,742 99,838 (Loss) earnings per share - basic and diluted $ (0.63)$ 0.84 The following table lists the number of equity securities excluded from the computation of diluted (loss) earnings per share for the year ended December 31, 2016 and Potential shares related to stock options were excluded in the diluted (loss) 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 (loss) earnings per share. (thousands of shares) Diluted net (loss) income per share - equity securities excluded Stock options 1 3,551 2,359 Convertible debentures 12,270 12,300 1 Net loss for the year ended December 31, 2016 resulted in all stock options being anti-dilutive D+H Annual Report

131 24 RELATED PARTY TRANSACTIONS D+H s related parties include its subsidiaries, key management personnel, their close family members and their related entities, and its postemployment benefit plans. Balances and transactions between the Company and its subsidiaries have been eliminated on consolidation. The Company owns 100% of the equity interests of its subsidiaries. Key management personnel consist of the executive team and the directors of D+H. Compensation of key management personnel for the year ended December 31, 2016 and 2015 is comprised of: Short-term employee compensation $ 9,165 $ 7,182 Post-employment benefits Share-based compensation 2,568 6,959 Termination benefits 1,715 1,840 $ 13,855 $ 16, COMMITMENTS As at December 31, 2016 and December 31, 2015, the Company had annual lease obligations with respect to real estate, vehicles and equipment. The minimum payments not including operating expenses as at December 31, 2016 and 2015 are expected to be as follows: Less than 1 year $ 20,706 $ 26,460 Between 1 and 5 years 66,295 64,351 More than 5 years 28,024 25,561 $ 115,025 $ 116,372 The Company enters into operating leases in the ordinary course of business, primarily for real property, vehicles and equipment. An expense of $29.6 million was recognized during the year ended December 31, 2016 ( $23.9 million) for operating leases. Significant leases relate to offices and typically run for a period of 10 years, with an option to renew. Payments for these leases are contractual obligations as scheduled per each agreement. The Company had outstanding letters of credit of $13.1 million as at December 31, 2016 ( $6.3 million), 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. The Company and its subsidiaries are parties to various legal actions and complaints arising in the normal course of business. Reserves related to the potential resolution of any outstanding legal proceedings are based on the amounts that are determined by the Company to be probable and reasonably estimated. These reserves are not significant. Based on the information currently available, management believes the result of current pending claims and litigation will not have a material impact on the Company s consolidated financial statements D+H Annual Report 129

132 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2016 and 2015 (thousands of Canadian dollars unless otherwise noted) 26 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 GTBS, L&IC and Canadian segments. 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. For all three segments, the Company s CODM reviews internal management reports on a monthly basis. Information regarding the results of each reportable segment is included below. Performance is measured based on the segment s Adjusted EBITDA 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. Year ended December 31 GTBS segment L&IC segment Canadian segment Total Revenues $ 363,722 $ 232,303 $ 604,413 $ 590,617 $ 711,722 $ 683,691 $ 1,679,857 $ 1,506,611 Adjusted EBITDA $ 70,232 $ 68,518 $ 192,400 $ 217,670 $ 187,307 $ 188,508 $ 449,939 $ 474,696 Year ended December Reconciliation of information on reportable segments to the consolidated statements of (loss) income Total segment measure of profit - Adjusted EBITDA $ 449,939 $ 474,696 Acquisition accounting adjustments (2,901) 10,973 Acquisition, integration and other related charges 3,139 60,774 Realignment of global operations and related restructuring and other expenses 1 34,191 Foreign exchange gain (3,039) (21,751) Income from operating activities before depreciation, amortization, impairment and finance expense 418, ,700 Depreciation of property, plant and equipment 27,962 23,298 Amortization of intangible assets 284, ,601 Finance expense 103,934 95,833 Impairment of goodwill 2 121,041 (Loss) income before income taxes $ (118,407) $ 75,968 1 Restructuring and other expenses; refer to note 16 for further details. 2 Includes $50.6 million related to the reclassification of settlement loss on forward contracts, relating to the acquisition of Fundtech, from OCI to net (loss) income. Refer to note 11 of the consolidated financial statements D+H Annual Report

133 Geographic information Revenues from the Canadian operating segment represent revenues earned in Canada. The L&IC and GTBS segments represent revenues earned in the U.S. and internationally. The Company s non-current assets and revenues by geographic location are as follows: As at December 31 Non-current assets Canada $ 791,693 $ 812,479 United States 2,478,375 3,292,328 Israel 1,060, ,752 Remainder of locations 336, ,851 Total non-current assets 1 $ 4,667,671 $ 5,089,410 1 Excludes deferred tax assets. Year ended December 31 Revenues Canada $ 711,722 $ 683,691 United States 802, ,395 Israel 74,148 53,017 Switzerland 36,840 24,952 Remainder of locations 54,672 34,556 Total revenues $ 1,679,857 $ 1,506, D+H Annual Report 131

134 BOARD of DIRECTORS Paul Damp Board Chair, Director Mr. Damp is Managing Partner of Kestrel Capital Partners (a private investment firm). From October 1996 to June 1998, Mr. Damp was Chairman, Director and Chief Executive Officer of Accugraph Corporation (a telecommunications software provider). Prior to November 1994, he was President and Chief Operating Officer of SHL Systemhouse Inc., and prior to October 1990, a partner at KPMG LLP. Mr. Damp is currently a Director of Element Fleet Management Corp., and several other private companies. Mr. Damp is a Chartered Professional Accountant. A Director since December 2001, Mr. Damp is Board Chair and a member of the Audit Committee. Ellen Costello Director Ms. Costello is a Corporate Director and former executive of BMO Financial Group. She retired after 30 years in 2013 as Chief Executive Officer of BMO Financial Corp. and U.S. Country Head of BMO Financial Group, responsible for providing governance and regulatory oversight for BMO s U.S. businesses in personal and commercial banking, wealth management and capital markets. She was Chief Executive Officer of BMO Harris Bank from 2006 to Prior roles include senior leadership positions in corporate banking and capital markets in Canada, Asia and the U.S. She also serves on the Boards of Citigroup Inc. and the Chicago Council on Global Affairs, and is currently the Chair of the Board of Directors for the United Way of Metropolitan Chicago. Gerrard Schmid Chief Executive Officer, Director Mr. Schmid joined D+H in 2007 as President of one of the Company s operating divisions and had served as the Corporation s President and Chief Operating Officer since 2009 before commencing his term as Chief Executive Officer in February Mr. Schmid has more than 15 years of experience in financial services, and prior to joining D+H, he served as head of the deposits and overdraft lending business of Lloyds TSB Bank in the United Kingdom, and in Canada, as Chief Operating Officer of CIBC s retail bank. Cara Heiden Director Ms. Heiden is the retired Co-President of Wells Fargo Home Mortgage, a Wells Fargo company and the largest provider of residential mortgages in the United States. A Certified Public Accountant, she began her career with Wells Fargo (formerly Norwest Corporation) in 1981, and held a wide range of senior leadership positions in personal and commercial banking, including Chief Financial Officer of Norwest Bank Iowa and Norwest Mortgage, respectively. Ms. Heiden is a multi-year honoree of The 25 Most Powerful Women in Banking by American Banker, ranking seventh the year before her retirement. She also currently serves on the Board of GuideOne Mutual Insurance Company and Vermeer Manufacturing Company. A Director since October 2014, Ms. Heiden is Chair of the Governance and Nominating Committee and a member of the Risk Committee. A Director since October 2014, Ms. Costello is Chair of the Risk Committee and a member of the Human Resources and Compensation Committee. Michael Foulkes Director Mr. Foulkes is a Corporate Director and a former executive of TD Bank Group, having held a variety of executive positions over 30 years with the bank and retiring in late 2006 as President and Chief Executive Officer, TD Waterhouse UK. He was also previously a Director and Chairman of Symcor Services Inc. Mr. Foulkes is currently a Director of First Nations Bank of Canada. A Director since May 2007, Mr. Foulkes is Chair of the Human Resources and Compensation Committee and a member of the Governance and Nominating Committee. 132 D+H Annual Report 2016

135 Jon Judge Director Mr. Judge is the former Chief Executive Officer of First Data Corporation, an e-commerce and payment processing company, and has 45 years of global technology, operations and senior management experience. Prior to his role at First Data Corporation, he was President and Chief Executive Officer at Paychex, a provider of payroll and HR services. Mr. Judge also served as President and Chief Executive Officer of Crystal Decisions Inc. from 2002 until the merger of Crystal Decisions with Business Objects S.A. in December Previously, Mr. Judge held numerous senior management positions at IBM, including General Manager of its personal computing division. Mr. Judge currently serves on the Board of Directors at FEXCO Holdings Ltd. and Allscripts Healthcare Solutions. He was previously Board Chair of PMC-Sierra and also served on the Boards of Dun & Bradstreet and the Federal Reserve Bank of New York, Buffalo branch. Mr. Judge holds a Bachelor of Arts degree in Economics from Harvard University. A Director since October 2016, Mr. Judge is a member of the Human Resources and Compensation Committee. Deborah Kerr Director Deborah Kerr is a proven technology leader in the software industry with more than 20 years of diverse management experience. As Executive Vice President and Chief Product and Technology Officer at Sabre, she is responsible for leading the global product and technology organization. Prior to her appointment at Sabre, Ms. Kerr was Executive Vice President, Chief Product and Technology Officer at FICO. Her prior experience includes senior leadership roles with Hewlett-Packard, Peregrine Systems and NASA s Jet Propulsion Laboratory. Since January 2015, Ms. Kerr has served as a member of the Board of Directors, the Audit Committee and the Compensation Committee of EXL Service Holdings, Inc. Ron LaLonde Director Mr. Lalonde is a Corporate Director and retired executive of CIBC. During his time at the bank, he held numerous leadership positions in corporate and investment banking, finance, operations, technology, risk management, and human resources, before retiring in 2010 as Senior Executive Vice President of Technology and Operations. Prior to CIBC, he held positions at Domtar, the Canada Consulting Group, and General Motors Corporation. Mr. Lalonde currently serves on the Boards of Street Capital Group Inc., Morneau Shepell, and the Toronto Transit Commission. Additionally, he is a Director and past Board Chair of the Canadian Stage Company. A Director since April 2016, Mr. Lalonde is a member of the Audit Committee and the Human Resources and Compensation Committee. Bradley Nullmeyer Director Mr. Nullmeyer was appointed President of Element Financial Corporation (a finance company) in September 2012 and became Chief Executive Officer of Element Fleet Management Corp. upon the separation of Element Financial into two companies in Prior to that, he was President and Chief Executive Officer of A&A Capital (a private investment company). From 1999 to 2001, he was Chief Executive Officer, Vendor Finance of CIT Group (a finance company) and, prior to 1999, President of Newcourt Financial (a finance company). Mr. Nullmeyer is a Chartered Professional Accountant, previously with Ernst & Young, and a graduate of McMaster University. A Director since December 2001, Mr. Nullmeyer is Chair of the Audit Committee. A Director since May 2013, Ms. Kerr is a member of the Risk Committee and the Governance and Nominating Committee. D+H Annual Report

136 EXECUTIVE MANAGEMENT Gerrard Schmid Chief Executive Officer Karen Weaver Chief Financial Officer William Neville Chief Operating Officer Duncan Hannay President, Global Lending Solutions Edward Ho President, Global Payments Solutions Hugh Cumming Chief Technology Officer Kellie Bickenbach Chief Risk Officer David Caldwell Chief Talent and Strategy Officer 134 D+H Annual Report 2016