Constellation Software : Q1 2020 Financial Statements

Condensed Consolidated Interim Financial Statements (In U.S. dollars)

CONSTELLATION

SOFTWARE INC.

For the three months ended March 31, 2020 and 2019 Unaudited

CONSTELLATION SOFTWARE INC.

Condensed Consolidated Interim Statements of Financial Position

(In millions of U.S. dollars, except per share amounts. Due to rounding, numbers presented may not foot.) Unaudited

			March 31, 2020		December 31, 2019		March 31, 2019
Assets
Current assets:
	Cash	$	364	$	316	$	717
	Accounts receivable		455		422		362
	Unbilled revenue		104		110		97
	Inventories		32		31		39
	Other assets (note 5)		209		184		165
			1,163		1,062		1,380
Non-current assets:
	Property and equipment		78		78		67
	Right of use assets		233		234		209
	Deferred income taxes		46		45		48
	Other assets (note 5)		70		72		65
	Intangible assets (note 6)		1,987		1,997		1,556
			2,414		2,425		1,944
Total assets	$	3,577	$	3,488	$	3,324
Liabilities and Shareholders' Equity
Current liabilities:
	CSI facility (note 7)	$	-	$	63	$	-
	Debt without recourse to Constellation Software Inc. (note 8)		2		57		1
	TSS membership liability (note 9)		90		86		65
	Accounts payable and accrued liabilities		453		529		388
	Dividends payable (note 13)		21		21		445
	Deferred revenue		1,035		788		877
	Provisions		10		13		19
	Acquisition holdback payables		78		76		47
	Lease obligations		59		62		51
	Income taxes payable		60		36		38
			1,809		1,732		1,931
Non-current liabilities:
	Debt without recourse to Constellation Software Inc. (note 8)		143		153		104
	TSS membership liability (note 9)		145		136		114
	Debentures (note 10)		203		222		218
	Deferred income taxes		250		246		195
	Acquisition holdback payables		30		25		12
	Lease obligations		191		187		170
	Other liabilities (note 5)		87		101		74
			1,049		1,069		888
Total liabilities		2,858		2,800		2,820
Shareholders' equity (note 13):
	Capital stock		99		99		99
	Accumulated other comprehensive income (loss)		(70)		(40)		(40)
	Retained earnings		690		628		445
			719		687		505
Subsequent events (notes 13 and 20)
Total liabilities and shareholders' equity	$	3,577	$	3,488	$	3,324

See accompanying notes to the condensed consolidated interim financial statements.

1

CONSTELLATION SOFTWARE INC.

Condensed Consolidated Interim Statements of Income

(In millions of U.S. dollars, except per share amounts. Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 Unaudited

	Three months ended March 31,
		2020		2019
Revenue
License	$	57	$	53
Professional services		178		158
Hardware and other		42		36
Maintenance and other recurring		676		572
		953		819
Expenses
Staff		510		445
Hardware		23		21
Third party license, maintenance and professional services		79		69
Occupancy		9		9
Travel, telecommunications, supplies, software and equipment		51		44
Professional fees		14		11
Other, net		5		21
Depreciation		25		21
Amortization of intangible assets		94		75
		810		715
Foreign exchange loss (gain)		(6)		1
TSS membership liability revaluation charge (note 9)		18		10
Finance and other expense (income) (note 14)		(0)		(3)
Bargain purchase gain		-		(28)
Impairment of intangible and other non-financial assets		5		-
Finance costs (note 14)		11		9
		28		(11)
Income before income taxes		115		115
Current income tax expense (recovery)		44		36
Deferred income tax expense (recovery)		(12)		(8)
Income tax expense (recovery)		33		28
Net income		83		87
Earnings per share
Basic and diluted (note 15)	$	3.91	$	4.09

See accompanying notes to the condensed consolidated interim financial statements.

2

CONSTELLATION SOFTWARE INC.

Condensed Consolidated Interim Statements of Comprehensive Income

(In millions of U.S. dollars, except per share amounts. Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019

Unaudited

		Three months ended March 31,
		2020		2019
Net income	$	83	$	87
Items that are or may be reclassified subsequently to net income:
Foreign currency translation differences from foreign operations		(30)		(3)
Deferred income tax recovery (expense)		-		-
Other comprehensive (loss) income for the period, net of income tax		(30)		(3)
Total comprehensive income (loss) for the period	$	53	$	83

See accompanying notes to the condensed consolidated interim financial statements.

3

CONSTELLATION SOFTWARE INC.

Condensed Consolidated Interim Statements of Changes in Equity

(In millions of U.S. dollars, except per share amounts. Due to rounding, numbers presented may not foot.) Unaudited

Three months ended March 31, 2020	Capital stock	Accumulated other comprehensive		Retained earnings		Total
				income (loss)
				Cumulative translation account
Balance at January 1, 2020	$	99	$	(40)	$	628	$	687
Total comprehensive income for the period:
Net income		-		-		83		83
Other comprehensive income (loss)
Foreign currency translation differences from
foreign operations		-		(30)		-		(30)
Total other comprehensive income (loss)
for the period		-		(30)		-		(30)
Total comprehensive income (loss) for the period		-		(30)		83		53
Transactions with owners, recorded directly in equity
Dividends to shareholders of the Company (note 13)		-		-		(21)		(21)
Balance at March 31, 2020	$	99	$	(70)	$	690	$	719

See accompanying notes to the condensed consolidated interim financial statements.

4

CONSTELLATION SOFTWARE INC.

Condensed Consolidated Interim Statements of Changes in Equity

(In millions of U.S. dollars, except per share amounts. Due to rounding, numbers presented may not foot.)

Unaudited

Three months ended March 31, 2019

	Capital stock	Accumulated other comprehensive		Retained earnings		Total
				income (loss)
				Cumulative translation account
Balance at January 1, 2019	$	99	$	(37)	$	804	$	866
Total comprehensive income for the period:
Net income		-		-		87		87
Other comprehensive income (loss)
Foreign currency translation differences from						-
foreign operations		-		(3)			(3)
Total other comprehensive income (loss) for the period		-		(3)		-		(3)
Total comprehensive income for the period		-		(3)		87		83
Transactions with owners, recorded directly in equity
Dividends to shareholders of the Company (note 13)		-		-		(445)		(445)
Balance at March 31, 2019	$	99	$	(40)	$	445	$	505

See accompanying notes to the condensed consolidated interim financial statements.

5

CONSTELLATION SOFTWARE INC.

Condensed Consolidated Interim Statements of Cash Flows

(In millions of U.S. dollars, except per share amounts. Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 Unaudited

			Three months ended March 31,
			2020		2019
Cash flows from operating activities:
	Net income	$	83	$	87
	Adjustments for:
	Depreciation		25		21
	Amortization of intangible assets		94		75
	TSS membership liability revaluation charge		18		10
	Finance and other expense (income)		(0)		(3)
	Bargain purchase (gain)		-		(28)
	Impairment of intangible and other non-financial assets		5		-
	Finance costs		11		9
	Income tax expense (recovery)		33		28
	Foreign exchange loss (gain)		(6)		1
	Change in non-cash operating assets and liabilities		136		123
	exclusive of effects of business combinations (note 19)
	Income taxes paid		(38)		(38)
	Net cash flows from operating activities		361		284
Cash flows from (used in) financing activities:
	Interest paid on lease obligations		(2)		(2)
	Interest paid on other facilities		(8)		(8)
	Increase (decrease) in CSI facility		(65)		-
	Increase (decrease) in revolving credit under debt facilities without recourse to CSI		(55)		(51)
	Repayments of term debt under facilities without recourse to CSI		(1)		(0)
	Payments of lease obligations		(14)		(10)
	Distribution to TSS minority owners (note 9)		-		(11)
	Dividends paid		(21)		(21)
	Net cash flows from (used in) in financing activities		(167)		(103)
Cash flows from (used in) investing activities:		(107)		(47)
	Acquisition of businesses (note 4)
	Cash obtained with acquired businesses (note 4)		14		25
	Post-acquisition settlement payments, net of receipts		(32)		(26)
	Purchases of other investments		(1)		-
	Interest, dividends and other proceeds received		0		3
	Property and equipment purchased		(7)		(7)
	Net cash flows from (used in) investing activities		(133)		(52)
Effect of foreign currency on		(13)		(1)
	cash and cash equivalents
Increase (decrease) in cash		48		128
Cash, beginning of period		316		589
Cash, end of period		364		717
See accompanying notes to the condensed consolidated interim financial statements.

6

CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

Notes to the condensed consolidated interim financial statements

1.	Reporting entity	11.	Provisions
2.	Basis of presentation	12.	Income taxes
3.	Significant accounting policies	13.	Capital and other components of equity
4.	Business acquisitions	14.	Finance and other income and finance costs
5.	Other assets and other non-current liabilities	15.	Earnings per share
6.	Intangible assets	16.	Financial instruments
7.	CSI facility	17.	Operating segments
8.	Debt without recourse to CSI	18.	Contingencies
9.	TSS Membership liability	19.	Changes in non-cash operating assets and liabilities
10.	Debentures	20.	Subsequent events

7

CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

1. Reporting entity

Constellation Software Inc. is a company domiciled in Canada. The address of Constellation's registered office is 20 Adelaide Street East, Suite 1200, Toronto, Ontario, Canada. The condensed consolidated interim financial statements of Constellation as at and for the period ended March 31, 2020 comprise Constellation and its subsidiaries (together referred to as "Constellation", "CSI", or the "Company") and the Company's interest in associates. The Company is engaged principally in the development, installation and customization of software relating to the markets listed below, and in the provision of related professional services and support.

Public transit operators	Asset management	Municipal systems
Para transit operators	Fleet and facility management	School administration
School transportation	District attorney	Public safety
Non-emergency medical	Taxi dispatch	Healthcare
Ride share	Benefits administration	Rental
Local government	Insurance	Electric utilities
Agri-business	Collections management	Court
Marine asset management	Water utilities	School and special library
Communications	Credit unions	Drink distribution
Education	Financial services	Notaries
Fashion retail	Pharmacies	Long-term care
Home and community care	County systems	Research management
Retail management and distribution	Public housing authorities	Not-for-profit organizations
Automotive	Accountancy	Catering
Small and medium sized businesses	Property management	Food services
Creative agencies	Commercial printing	Horticulture
Event management	Distillery	Hospitality
Manufacturing plant performance	Advertising and marketing	Project management
Quality management	Real estate brokers and agents	Compliance
Private clubs and daily fee golf courses	Lease management	Window manufacturers
Construction	Winery management	Cabinet manufacturers
Aerospace	Buy here pay here dealers	Made-to-order manufacturers
Health clubs	RV and marine dealers	Window and other dealers
Moving and storage	Pulp and paper manufacturers	Multi-carrier shipping
Metal service centers	Agriculture equipment dealers	Supply chain optimization
Attractions	Outdoor equipment dealers	Multi-channel distribution
Leisure centers	Ombudsman	Wholesale distribution
Human resources and payroll	Healthcare electronic medical	Homebuilders
	records
Radiology and laboratory information	Pharmaceutical and biotech	Third party logistics warehouse
systems	manufacturers	management systems
Product licensing	Marinas	Grocery
Tire distribution	Salons and spas	Association management
Housing finance agencies	Municipal treasury and debt	Mining
	systems

8

CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

Tour operators	Auto clubs	Publishing
Design and welding	Textiles and apparel	Oil and gas
Legal	Logistics	Aviation
Industrial distribution	Public libraries

2. Basis of presentation

(a) Statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting ("IAS 34") as issued by the International Accounting Standards Board ("IASB") and using the accounting policies disclosed in Note 3 of the Company's 2019 annual consolidated financial statements except as disclosed herein.

The policies applied in these condensed consolidated interim financial statements are based on International Financial Reporting Standards (IFRS), issued and outstanding as of May 7, 2020, the date the Board of Directors approved the condensed consolidated interim financial statements.

These condensed consolidated interim financial statements should be read in conjunction with the Company's 2019 annual consolidated financial statements.

(b) Basis of measurement

The condensed consolidated interim financial statements have been prepared on the historical cost basis except for certain assets and liabilities initially recognized in connection with business combinations, derivative financial instruments and contingent consideration related to business acquisitions, which are measured at their estimated fair value.

(c) Functional and presentation of currency

The condensed consolidated interim financial statements are presented in U.S. dollars, which is Constellation's functional currency.

(d) Use of estimates and judgements

The preparation of the condensed consolidated interim financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses, consistent with those disclosed in the 2019 annual consolidated financial statements and described in these condensed consolidated interim financial statements. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Estimates are based on historical experience and other assumptions that are considered reasonable in the circumstances. The actual amount or values may vary in certain instances from the assumptions and estimates made. Changes will be recorded, with corresponding effect in profit or loss, when, and if, better information is obtained.

9

CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

The Company is closely monitoring the impact of the 2019 novel coronavirus, or COVID-19, on all aspects of its business. COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020. The COVID-19 pandemic has adversely impacted many of Constellation's business units' operations to date. The future impacts of the pandemic and any resulting economic impact are largely unknown and rapidly evolving. It is possible that the COVID-19 pandemic, the measures taken by the governments of countries affected and the resulting economic impact may continue to adversely affect the Company's results of operations, cash flows and financial position as well as its customers in future periods.

3. Significant accounting policies

The significant accounting policies used in preparing these condensed consolidated interim financial statements are unchanged from those disclosed in the Company's 2019 annual consolidated financial statements and have been applied consistently to all periods presented in these condensed consolidated interim financial statements; however, the Company is now presenting one reportable segment, consistent with the objective and basic principles of IFRS 8. See note 17, Operating Segments, for further details.

The accounting policies have been applied consistently by Constellation's subsidiaries.

4. Business acquisitions

During the three-month period ended March 31, 2020, the Company completed a number of acquisitions for aggregate cash consideration of $107 plus cash holdbacks of $41 and contingent consideration with an estimated fair value of $7 resulting in total consideration of $155. The contingent consideration is payable on the achievement of certain financial targets in the post-acquisition periods. The obligation for contingent consideration for acquisitions during the three-month period ended March 31, 2020 has been recorded at its estimated fair value at the various acquisition dates. The estimated fair value of the applicable contingent consideration is calculated using the estimated financial outcome and resulting expected contingent consideration to be paid and inclusion of a discount rate as appropriate. For these arrangements, which include both maximum, or capped, and unlimited contingent consideration amounts, the estimated increase to the initial consideration is not expected to exceed $14. Aggregate contingent consideration of $44 (December 31, 2019 - $59) has been reported in the condensed consolidated interim statement of financial position at its estimated fair value relating to applicable acquisitions completed in the current and prior periods. Changes made to the estimated fair value of contingent consideration are included in other, net in the condensed consolidated interim statements of income. A recovery of $13 been recorded for the three months ended March 31, 2020, as a result of such changes (expense of $5 for the three months ended March 31, 2019).

There were no acquisitions during the three-month period that were deemed to be individually significant. The majority of the businesses acquired during the three-month period were acquisitions of shares and the remainder were asset acquisitions. The cash holdbacks are generally payable over a two-year period and are adjusted, as necessary, for such items as working capital or net tangible asset assessments, as defined in the agreements, and claims under the respective representations and warranties of the purchase and sale agreements.

The acquisitions during the three month period ended March 31, 2020 include software companies catering to the following markets: advertising and marketing, asset management, automotive, aviation, communications, compliance, construction, education, healthcare, hospitality, legal, logistics, industrial distribution, mining, moving and storage, oil and gas, private clubs and daily fee golf courses, public libraries, real estate brokers and agents, retail management and distribution, third party logistics warehouse management systems, and utilities all of which are software businesses similar to existing businesses operated by the Company. The acquisitions have been

10

CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

accounted for using the acquisition method with the results of operations included in these consolidated financial statements from the date of each acquisition.

The goodwill recognized in connection with these acquisitions is primarily attributable to the application of Constellation's best practices to improve the operations of the companies acquired, synergies with existing businesses of Constellation, and other intangibles that do not qualify for separate recognition including assembled workforce. Goodwill in the amount of $0 is expected to be deductible for income tax purposes.

The gross contractual amounts of acquired receivables was $23; however, the Company has recorded an allowance of $0 as part of the acquisition accounting to reflect contractual cash flows that are not expected to be collected.

Due to the complexity and timing of certain acquisitions made, the Company is in the process of determining and finalizing the estimated fair value of the net assets acquired as part of the acquisitions closed during the last three quarters of 2019 and first quarter of 2020. The amounts determined on a provisional basis generally relate to net asset assessments and measurement of the assumed liabilities, including acquired contract liabilities. The cash consideration associated with these provisional estimates totals $608.

The aggregate impact of acquisition accounting applied in connection with business acquisitions in the three-month period ended March 31, 2020 is as follows:

Assets acquired:
Cash	$	14
Accounts receivable		23
Other current assets		6
Property and equipment		3
Other non-current assets		11
Deferred income taxes		0
Technology assets		80
Customer assets		88
		225
Liabilities assumed:
Current liabilities		14
Deferred revenue		29
Deferred income taxes		26
Other non-current liabilities		8
		76
Goodwill		7
Total consideration	$	155

11

CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

The 2020 business acquisitions did not have a material impact to either the consolidated revenue or the consolidated net income for the three months ended March 31, 2020. The materiality threshold is reviewed on a regular basis taking into account the quantitative (contribution to revenue and net income) and qualitative (size and comparability with other Constellation businesses) factors of current period acquisitions on both an individual and aggregate basis.

5. Other assets and other non-current liabilities

(a) Other assets

		March 31, 2020		December 31, 2019
Prepaid and other current assets	$	105	$	96
Investment tax credits recoverable		28		26
Sales tax receivable		15		18
Equity securities held for trading		8		10
Other receivables		53		34
Total other current assets	$	209	$	184
Investment tax credits recoverable	$	11	$	13
Costs to obtain a contract		37		37
Non-current trade and other receivables and other assets		20		20
Equity accounted investees		2		2
Total other non-current assets	$	70	$	72
(b) Other non-current liabilities
		March 31, 2020		December 31, 2019
Contingent consideration	$	30	$	42
Deferred revenue		39		41
Other non-current liabilities		18		18
Total other non-current liabilities	$	87	$	101

12

CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

6. Intangible Assets

	Technology		Customer			Non-compete
		Assets		Assets		Backlog	agreements	Trademarks	Goodwill		Total
Cost
Balance at January 1, 2019	$	1,793	$	964	$	16	$	3	$	7	$	302	$	3,085
Acquisitions through business combinations		368		344		0		-		-		59		770
Effect of movements in foreign exchange		8		1		0		0		(0)		0		10
Balance at December 31, 2019	$	2,169	$	1,309	$	16	$	3	$	7	$	361	$	3,865
Balance at January 1, 2020	$	2,169	$	1,309	$	16	$	3	$	7	$	361	$	3,865
Acquisitions through business combinations		79		88		-		-		-		9		175
Effect of movements in foreign exchange		(66)		(46)		0		(0)		(0)		(12)		(124)
Balance at March 31, 2020	$	2,182	$	1,350	$	17	$	3	$	7	$	357	$	3,916
Accumulated amortization and impairment losses
Balance at January 1, 2019	$	1,124	$	391	$	16	$	3	$	2	$	-	$	1,536
Amortization for the period		226		104		0		(0)		0		-		331
Impairment charge		-		-		-		-		-		-		-
Effect of movements in foreign exchange		1		0		(0)		0		-		-		2
Balance at December 31, 2019	$	1,351	$	495	$	16	$	3	$	2	$	-	$	1,868
Balance at January 1, 2020	$	1,351	$	495	$	16	$	3	$	2	$	-	$	1,868
Amortization for the period		61		33		0		0		0		-		94
Impairment charge		3		1		-		-		-		1		5
Effect of movements in foreign exchange		(27)		(11)		(0)		(0)		0		-		(38)
Balance at March 31, 2020	$	1,389	$	518	$	16	$	3	$	2	$	1	$	1,929
Carrying amounts
At January 1, 2019	$	669	$	573	$	-	$	-	$	6	$	302	$	1,549
At December 31, 2019	$	817	$	813	$	(0)	$	0	$	5	$	361	$	1,997
At January 1, 2020	$	817	$	813	$	(0)	$	0	$	5	$	361	$	1,997
At March 31, 2020	$	793	$	832	$	0	$	0	$	5	$	356	$	1,987

13

CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

7. CSI Facility

On December 13, 2019, Constellation completed an amendment and restatement of its revolving credit facility agreement (the "CSI Facility"), with a syndicate of Canadian chartered banks, U.S. banks, and a Japanese bank in the amount of $700, extending its maturity date to December 2024. The CSI Facility bears a variable interest rate with no fixed repayments required over the term to maturity. Interest rates are calculated at standard U.S. and Canadian reference rates plus interest rate spreads based on a leverage table. The CSI Facility is currently collateralized by the majority of the Company's assets including the assets of certain material subsidiaries. The CSI Facility contains standard events of default which if not remedied within a cure period would trigger the repayment of any outstanding balance. As at March 31, 2020 $nil (December 31, 2019 - $65) had been drawn from this credit facility, and letters of credit totaling $19 (December 31, 2019 - $21) were issued, which limits the borrowing capacity on a dollar-for-dollar basis. Transaction costs associated with the CSI Facility are included in other assets in the consolidated statement of financial position as at March 31, 2020 and are being amortized through profit or loss using the effective interest rate method. As at March 31, 2020 the carrying amount of such costs is $2, included in other assets (December 31, 2019 - $2, included as a reduction to the CSI Facility).

8. Debt without recourse to CSI

Certain of CSI's subsidiaries have entered into term debt facilities and revolving credit facilities with various financial institutions. CSI does not guarantee the debt of its subsidiaries, nor are there any cross-guarantees between subsidiaries. The credit facilities are collateralized by substantially all of the assets of the borrowing entity and its subsidiaries. The credit facilities typically bear interest at a rate calculated using an interest rate index plus a margin. The financing arrangements for each subsidiary typically contain certain restrictive covenants, which may include limitations or prohibitions on additional indebtedness, payment of cash dividends, redemption of capital, capital spending, making of acquisitions and sales of assets. In addition, certain financial covenants must be met by those subsidiaries that have outstanding debt.

Debt without recourse to CSI comprises the following:

	Revolving Credit Facilities		Term Debt Facilities		Total
Principal outstanding at March 31, 2020 (and equal to fair value)	$	-	$	148	$	148
Deduct: Carrying value of transaction costs included in debt balance		-		(4)		(4)
Carrying value at March 31, 2020		-		145		145
Current portion		-		2		2
Non-current portion		-		143		143

14

CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

The annual minimum repayment requirements for the term facilities without recourse to CSI is as follows:

Year	Term Debt Facilities
2020	2
2021	2
2022	2
2023	99
2024	1
2025	44
	148

9. TSS Membership Liability

On December 23, 2014, in accordance with the terms of the purchase and sale agreement for the Total Specific Solutions ("TSS") acquisition, and on the basis of the term sheets attached thereto, Constellation and the sellers of TSS along with members of TSS' executive management team (collectively, the "minority owners") entered into a Members Agreement pursuant to which the minority owners acquired 33.29% of the voting interests in Constellation Software Netherlands Holding Cooperatief U.A. ("CNH"), a subsidiary of Constellation and the indirect owner of 100% of TSS. Total proceeds from this transaction was €39 ($49).

Commencing any time after December 31, 2014, each of the minority owners may exercise a put option to sell all or a portion of their interests in CNH back to Constellation for an amount calculated in accordance with a valuation methodology described within the Members Agreement. Accordingly, the Company classified the proceeds from the Members Agreement as a liability. The main valuation driver in such calculation is the maintenance and other recurring revenue of CNH. Upon the exercise of a put option, Constellation would be obligated to redeem up to 33.33% of the minority owners' interests put, no later than 30 business days from the date notice is received, and up to 33.33% on each of the first and second anniversary of the date the first redemption payment is made. In determining the valuation of the liability at each reporting period, the Company assumes the minority owners exercised their put option on the last day of the current reporting period, and redeemed 33.33% of their interests on exercise (which is classified as a current liability), and will redeem 33.33% on each of the first and second anniversary dates. Maintenance and recurring revenue of CNH for the trailing twelve months determined at the end of the current reporting period was used as the basis for valuing the interests at each redemption date. Any increase or decrease in the value of the membership liability is recorded as an expense or income in the consolidated statements of income for the period.

The seller of TSS also has an option available to it to sell approximately 68% of its interests in CNH, for an amount calculated in accordance with a valuation methodology described within the Members Agreement, in the event that Robin Van Poelje, TSS' CEO, is no longer employed by TSS. The remaining interest of approximately 32% can be sold via the put option described above.

In the event of a change of control in Constellation, the minority owners would have the option to sell 100% of their interests in CNH for an amount calculated in accordance with a valuation methodology described within the Members Agreement. Constellation would be obligated to remit payment in respect thereof no later than 30 business days from the date notice is given.

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CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

Commencing at any time after December 31, 2023, Constellation may exercise a call option to purchase all of the minority owners' interests in CNH, for an amount calculated in accordance with a valuation methodology described within the Members Agreement. Upon exercise of the call option, the full purchase price will be paid within 30 business days of the notice date, following which the minority owners' membership in CNH will be terminated.

If any of TSS' executive management team that participate in the Members Agreement are terminated for urgent cause as defined in Section 7:678 of the Dutch Civil Code, Constellation shall have the right to purchase all of the interests beneficially owned by the terminated executive for an amount calculated in accordance with a valuation methodology described within the Members Agreement. The full purchase price will be paid within 30 business days from the date notice is given, following which the terminated executive's membership in CNH will be terminated. An option does exist for the terminated executive to elect to be paid in annual installments of 33.33% of his interests in CNH over a 3-year period. The valuation of the interests being purchased will be calculated at each reporting period. During the periods ended March 31, 2020 and December 31, 2019, no options were exercised.

10. Debentures

On October 1, 2014 and November 19, 2014, the Company issued debentures with a total principal value of C$96 for total proceeds of C$91. On September 30, 2015, the Company issued another tranche of debentures (collectively with the 2014 issuances called the "Debentures") with a total principal value of C$186 for total proceeds of C$214.

The Debentures have a maturity date of March 31, 2040 (the "Maturity Date").

The interest rate from and including:

• March 31, 2018 but excluding March 31, 2019 was 8.1%
• March 31, 2019 but excluding March 31, 2020 was 8.8%
• March 31, 2020 but excluding March 31, 2021 is 8.6%

Subsequent from and including March 31, 2021 to but excluding the Maturity Date, the interest rate applicable to the Debentures will be reset on an annual basis on March 31 of each year, at a rate equal to the annual average percentage change in the All-items Consumer Price Index during the 12-month period ending on December 31 in the prior year (which amount may be positive or negative) plus 6.5%. Notwithstanding the foregoing, the interest rate applicable to the debentures will not be less than 0%. The Company may, subject to certain approvals, elect the Payment in Kind election ("PIK Election"), in lieu of paying interest in cash, to satisfy all or any portion of its interest obligation payable on an interest payment date by issuing to each Debenture holder PIK Debentures equal to the amount of the interest obligation to be satisfied. The PIK Debentures will have the same terms and conditions as the Debentures and will form part of the principal amount of the Debentures. If, on any interest payment date, the Company fails to pay the amount of interest owing on the Debentures in full in cash, the Company will not (A) declare or pay dividends of any kind on the Common Shares, nor (B) participate in any share buyback or redemption involving the Common Shares, until the date on which the Company pays such interest (or the unpaid portion thereof) in cash to holders of the Debentures; however, where the Company has issued PIK Debentures in respect of all or a portion of the amount of interest owing on the Debentures on an interest payment date, the Company may resume declaring or paying dividends of any kind on the Common Shares and participating in any share buyback or redemption involving the Common Shares beginning on the next earlier of (i) the interest payment date of which the Company pays the amount of interest owing on the Debentures in full in cash and (ii) the date on which

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CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

the Company repays all amounts owing under the PIK Debenture. All payments in respect of the Debentures will be subordinated in right of payment to the prior payment in full of all senior indebtedness of the Company.

The Debentures will be redeemable in certain circumstances at the option of the Company or the holder. During the period beginning on March 16 and ending on March 31 of each year, the Company will have the right, at its option, to give notice to holders of Debentures of its intention to redeem the Debentures, in whole or in part, on March 31 in the year that is five years following the year in which notice is given, at a price equal to the principal amount thereof plus accrued and unpaid interest up to but excluding the date fixed for redemption. During the period beginning on March 1 and ending on March 15 of each year, holders of Debentures will also have the right, at their option, to give notice to the Company of their intention to require the Company to repurchase (or to "put") the Debentures, in whole or in part, on March 31 in the year that is five years following the year in which notice is given, at a price equal to the principal amount thereof plus accrued and unpaid interest up to but excluding the date fixed for repurchase.

During the periods ended March 31, 2020 and December 31, 2019, no notices for redemption of the Debentures were received or given by the Company.

The fair value of the debentures as at March 31, 2020 was $233 (December 31, 2019 - $286).

11. Provisions

At January 1, 2020	$	16
Reversal		(1)
Provisions recorded during the period		3
Provisions used during the period		(4)
Effect of movements in foreign exchange and other		(1)
At March 31, 2020	$	14
Provisions classified as current liabilities		10
Provisions classified as other non-current liabilities		3

The provisions balance is comprised of various individual provisions for onerous contracts and other estimated liabilities of the Company of uncertain timing or amount.

12. Income taxes

Income tax expense is recognized based on management's best estimate of the actual income tax rate for the interim period applied to the pre-tax income of the interim period for each entity in the consolidated group. As a result of foreign exchange fluctuations, acquisitions and ongoing changes due to intercompany transactions amongst entities operating in different jurisdictions, the Company has determined that a reasonable estimate of a weighted average annual tax rate cannot be determined on a consolidated basis. The Company's consolidated effective tax rate in respect of continuing operations for the three months ended March 31, 2020 was 28% (25% for the three months ended March 31, 2019).

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CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

Constellation is subject to tax audits in the countries in which the Company does business globally. These tax audits could result in additional tax expense in future periods relating to historical filings. Reviews by tax authorities generally focus on, but are not limited to, the validity of the Company's inter-company transactions, including financing and transfer pricing policies which generally involve subjective areas of taxation and a significant degree of judgment. If any of these tax authorities are successful with their challenges, the Company's income tax expense may be adversely affected and Constellation could also be subject to interest and penalty charges.

13. Capital and other components of equity

	Common Shares
	Number		Amount
March 31, 2020	21,191,530	$	99
December 31, 2019	21,191,530	$	99

Dividends and other distributions to shareholders

During the three months ended March 31, 2020, the Company declared a $1.00 per share dividend to all common shareholders of record at close of business on March 16, 2020. The dividend declared in the quarter ended March 31, 2020 representing $21 were paid and settled on April 7, 2020.

A dividend of $1.00 per share representing $21 were accrued as at December 31, 2019 and subsequently paid and settled on January 8, 2020.

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CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

14. Finance and other expense (income) and finance costs

		Three months ended March 31,
		2020		2019
Interest income on cash	$	(0)	$	(3)
(Increase) decrease in the fair value of equity securities held for trading		2		-
Share in net (income) loss of equity investee		(0)		(0)
Finance and other income		(2)		0
Finance and other expense (income)	$	(0)	$	(3)
Interest expense on debt and debentures	$	8	$	7
Interest expense on lease obligations		2		2
Amortization of debt related transaction costs		0		0
Amortization of debenture discount (premium) and associated rights offering, net		(1)		(1)
Other finance costs		2		1
Finance costs	$	11	$	9

15. Earnings per share

Basic and diluted earnings per share

		Three months ended March 31,
		2020		2019
Numerator:
Net income	$	83	$	87
Denominator:
Basic and diluted shares outstanding		21,191,530		21,191,530
Earnings per share
Basic and diluted	$	3.91	$	4.09

16. Financial instruments

Fair values versus carrying amounts

The carrying values of cash, accounts receivable, accounts payable, accrued liabilities, dividends payable, income taxes payable, the majority of acquisition holdbacks, debt without recourse to CSI and the CSI Facility, approximate

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CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

their fair values due to the short-term nature of these instruments. Bank debt and debt without recourse to CSI is subject to market interest rates.

Fair value hierarchy

The table below analyzes financial instruments carried at fair value, by valuation method.

• level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;
• level 2 inputs are inputs other than quoted prices included in level 1 that are observable for the asset or liability either directly (i.e. prices) or indirectly (i.e. derived from prices); and
• level 3 inputs are inputs for the asset or liability that are not based on observable market data (i.e. unobservable inputs).

In the table below, the Company has segregated all financial assets and liabilities that are measured at fair value into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.

Financial assets and financial liabilities measured at fair value as at March 31, 2020 and December 31, 2019 in the condensed consolidated interim financial statements are summarized below. The Company has no additional financial liabilities measured at fair value after initial recognition other than those recognized in connection with business combinations.

				March 31, 2020						December 31, 2019
	Level 1		Level 2		Level 3		Total	Level 1	Level 2		Level 3		Total
Assets:
Equity securities held for trading	$	8	$	-	$	-	$	8	$	10	$	-	$	-	$	10
		8		-		-		8		10		-		-		10
Liabilities:
Contingent consideration	$	-	$	-	$	44	$	44	$	-	$	-	$	59	$	59
		-		-		44		44		-		-		59		59

There were no transfers of fair value measurement between level 1, 2 and 3 of the fair value hierarchy in the periods ended March 31, 2020 and December 31, 2019.

The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements in level 3 of the fair value hierarchy.

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CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

Balance at January 1, 2020	$	59
Increase from business acquisitions		7
Cash recoveries (payments)		(7)
Charges through profit or loss		(12)
Foreign exchange and other movements		(5)
Balance at March 31, 2020		44
Contingent consideration classified as current liabilities		13
Contingent consideration classified as other non-current liabilities		30

Estimates of the fair value of contingent consideration are performed by the Company on a quarterly basis. Key unobservable inputs include revenue/profitability growth rates and the discount rates applied (8% to 11%). The estimated fair value increases as the annual revenue/profitability growth rate increases and as the discount rate decreases and vice versa.

17. Operating segments

For fiscal 2019 and earlier periods, the Company aggregated CSI into two distinct segments for financial reporting purposes: (i) the public sector reportable segment, which included business units focused primarily on government and government-related customers, and (ii) the private sector reportable segment, which included business units focused primarily on commercial customers. Following the guidance set out by IFRS 8, Operating Segments ("IFRS 8"), the public sector reportable segment was derived by combining the Company's Volaris, Harris and TSS operating segments, and the private sector reportable segment was derived by combining the Company's Vela, Jonas and Perseus operating segments. While the operating segments in the public sector were comprised of businesses that primarily serve government and government-related customers, they also included businesses that serve commercial customers, and similarly the operating groups in the private sector were comprised of businesses that primarily serve commercial customers but also include businesses that serve government and government- related customers. For the fiscal years ended December 31, 2019 and 2018 approximately 35% and 30% respectively of the revenue in in the public sector reportable segment was generated from commercial customers, and 15% and 16% respectively of revenue in the private sector reportable segment was generated from government and government-related customers.

Each of the Company's operating segments operate essentially as mini Constellations, conglomerates of small vertical market software companies with similar economic characteristics. Each operating segment CEO is focused on investing capital that generates returns at or above the investment hurdle rates set by CSI's head office (primarily the President) and the Board of Directors, irrespective of whether the acquired business operates primarily in the public or private sector. Accordingly presenting information on a public and private sector basis is no longer meaningful and the Company now aggregates the six operating segments into one reportable segment, consistent with the objective and basic principles of IFRS 8.

21

CONSTELLATION SOFTWARE INC.

Notes to Condensed Consolidated Interim Financial Statements

(In millions of U.S. dollars, except per share amounts and as otherwise indicated.) (Due to rounding, numbers presented may not foot.)

Three months ended March 31, 2020 and 2019 (Unaudited)

18. Contingencies

In the normal course of operations, the Company is subject to litigation and claims from time to time. The Company may also be subject to lawsuits, investigations and other claims, including environmental, labour, income and sales tax, product, customer disputes and other matters. Management believes that adequate provisions have been recorded in the accounts where required. Although it is not always possible to estimate the extent of potential costs, if any, management believes that the ultimate resolution of such contingencies will not have a material adverse impact on the results of operations, financial position or liquidity of the Company.

19. Changes in non-cash operating assets and liabilities

	Three months ended
		March 31,
	2020		2019
Decrease (increase) in current accounts receivable	$	(29)	$	8
Decrease (increase) in current unbilled revenue		6		(17)
Decrease (increase) in other current assets		(10)		(14)
Decrease (increase) in inventories		(1)		(5)
Decrease (increase) in other non-current assets		4		1
Increase (decrease) in other non-current liabilities		(12)		(1)
Increase (decrease) in current accounts payable and accrued liabilities,
excluding holdbacks from acquisitions		(64)		(71)
Increase (decrease) in current deferred revenue		245		212
Increase (decrease) in current provisions		(3)		10
Change in non-cash operating working capital	$	136	$	123
20. Subsequent events

On May 7, 2020 the Company declared a $1.00 per share dividend that is payable on July 10, 2020 to all common shareholders of record at close of business on June 19, 2020.

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