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MarketScreener Homepage  >  Equities  >  Toronto Stock Exchange  >  Constellation Software Inc.    CSU   CA21037X1006

CONSTELLATION SOFTWARE INC.

(CSU)
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Constellation Software : Q1 2020 Financial Statements

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05/07/2020 | 05:24pm EDT

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.

15

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

16

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).

17

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.

18

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

19

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.

20

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.

22

Disclaimer

Constellation Software Inc. published this content on 07 May 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 07 May 2020 21:23:01 UTC

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Financials (USD)
Sales 2020 3 842 M - -
Net income 2020 350 M - -
Net Debt 2020 72,0 M - -
P/E ratio 2020 92,1x
Yield 2020 0,26%
Capitalization 32 904 M 24 640 M -
EV / Sales 2020 8,58x
EV / Sales 2021 7,26x
Nbr of Employees 19 000
Free-Float 93,8%
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Number of Analysts 9
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Managers
NameTitle
Mark Henri Leonard Chairman & President
Mark Robert Miller Chief Operating Officer & Director
Jamal Nizam Baksh Chief Financial Officer
Stephen R. Scotchmer Lead Independent Director
Jeff James Bender Director
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