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

CONSTELLATION SOFTWARE INC.

(CSU)
  Report
Delayed Quote. Delayed Toronto Stock Exchange - 07/06 12:57:19 pm
1590 CAD   +2.91%
06/29CONSTELLATION SOFTWARE : Announces Special Shareholder Meeting
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06/18CONSTELLATION SOFTWARE INC. : Ex-dividend day for
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06/02CONSTELLATION SOFTWARE : Announces Appointments to its Board of Directors
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Constellation Software : Q1 2020 Shareholder Report

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05/07/2020 | 05:24pm EDT

Constellation Software Inc.

INTERIM FINANCIAL REPORT

First Quarter Fiscal Year 2020

For the three month period ended

March 31, 2020

(UNAUDITED)

CONSTELLATION SOFTWARE INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")

The following discussion and analysis should be read in conjunction with the Unaudited Condensed Consolidated Interim Financial Statements for the three month period ended March 31, 2020, which we prepared in accordance with International Financial Reporting Standards ("IFRS"). Certain information included herein is forward-looking and based upon assumptions and anticipated results that are subject to uncertainties. Should one or more of these uncertainties materialize or should the underlying assumptions prove incorrect, actual results may vary significantly from those expected. See "Forward-Looking Statements" and "Risks and Uncertainties".

Unless otherwise indicated, all dollar amounts are expressed in U.S. dollars. All references to "$" are to U.S. dollars and all references to "C$" are to Canadian dollars. Due to rounding, certain totals and subtotals may not foot and certain percentages may not reconcile.

Additional information about Constellation Software Inc. (the "Company" or "Constellation"), including our most recently filed Annual Information Form ("AIF"), is available on SEDAR at www.sedar.com.

Forward Looking Statements

Certain statements in this report may contain "forward looking" statements that involve risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. Words such as "may", "will", "expect", "believe", "plan", "intend", "should", "anticipate" and other similar terminology are intended to identify forward looking statements. These statements reflect current assumptions and expectations regarding future events and operating performance as of the date of this MD&A, May 7, 2020. Forward looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to vary significantly from the results discussed in the forward looking statements, including, but not limited to, the factors discussed under "Risks and Uncertainties". Although the forward looking statements contained in this MD&A are based upon what management of the Company believes are reasonable assumptions, the Company cannot assure investors that actual results will be consistent with these forward looking statements. These forward looking statements are made as of the date of this MD&A and the Company assumes no obligation, except as required by law, to update any forward looking statements to reflect new events or circumstances. This report should be viewed in conjunction with the Company's other publicly available filings, copies of which can be obtained electronically on SEDAR at www.sedar.com.

Non-IFRS Measures

This MD&A includes certain measures which have not been prepared in accordance with IFRS such as Free cash flow available to shareholders.

Free cash flow available to shareholders ''FCFA2S'' refers to net cash flows from operating activities less interest paid on lease obligations, interest paid on other facilities, credit facility transaction costs, repayments of lease obligations, the TSS membership liability revaluation charge, and property and equipment purchased, and includes interest and dividends received. We believe that FCFA2S is useful supplemental information as it provides an indication of the uncommitted cash flow that is available to shareholders if we do not make any acquisitions, or investments, and do not repay any debts. While we could use the FCFA2S to pay dividends or repurchase shares, our objective is to invest all of our FCFA2S in acquisitions which meet our hurdle rate.

FCFA2S is not a recognized measure under IFRS and, accordingly, readers are cautioned that FCFA2S should not be construed as an alternative to net cash flows from operating activities. See ''Results of Operations

1

-Free cash flow available to shareholders" for a reconciliation of FCFA2S to net cash flows from operating activities.

Overview

We acquire, manage and build vertical market software ("VMS") businesses. Generally, these businesses provide mission critical software solutions that address the specific needs of our customers in particular markets. Our focus on acquiring businesses with growth potential, managing them well and then building them, has allowed us to generate significant cash flows and revenue growth during the past several years.

Our revenue consists primarily of software license fees, maintenance and other recurring fees, professional service fees and hardware sales. Software license revenue is comprised of license fees charged for the use of our software products generally licensed under multiple-year or perpetual arrangements. Maintenance and other recurring revenue primarily consists of fees charged for customer support on our software products post-delivery and also includes, to a lesser extent, recurring fees derived from software as a service, subscriptions, combined software/support contracts, transaction-related revenues, and hosted products. Maintenance and other recurring fee arrangements generally include ongoing customer support and rights to certain product updates "when and if available" and products sold on a subscription basis. Professional service revenue consists of fees charged for implementation and integration services, customized programming, product training and consulting. Hardware sales include the resale of third party hardware that forms part of our customer solutions, as well as sales of customized hardware assembled internally. Our customers typically purchase a combination of software, maintenance, professional services and hardware, although the type, mix and quantity of each vary by customer and by product.

Expenses consist primarily of staff costs, the cost of hardware, third party licenses, maintenance and professional services to fulfill our customer arrangements, travel and occupancy costs and other general operating expenses.

2

Results of Operations

(In millions of dollars, except percentages and per share amounts) Unaudited

Revenue

Expenses

Amortization of intangible assets Foreign exchange (gain) loss

TSS membership liability revaluation charge Finance and other income

Bargain purchase gain

Impairment of intangible and other non-financial assets Finance costs

Income before income taxes

Income tax expense (recovery)

Current income tax expense (recovery)

Deferred income tax expense (recovery)

Income tax expense (recovery)

Net income

Net cash flows from operating activities

Free cash flow available to shareholders

Weighted average number of shares outstanding

Basic and diluted

Net income per share

Basic and diluted

Net cash flows from operating activities per share Basic and diluted

Free cash flow available to shareholders per share Basic and diluted

Cash dividends declared per share

Basic and diluted

NM - Not meaningful

Three months ended

Period-Over-

March 31,

Period Change

2020

2019

$

%

953

819

134

16%

716

640

76

12%

94

75

19

25%

(6)

1

(7)

NM

18

10

8

83%

(0)

(3)

2

-84%

-

(28)

28

-100%

5

-

5

NM

11

9

2

25%

115

115

1

1%

44

36

8

23%

(12)

(8)

(4)

49%

33

28

4

15%

83

87

(4)

-4%

361

284

76

27%

311

250

60

24%

21.2

21.2

$

3.91

$

4.09

$ (0.18)

-4%

$

17.01

$

13.40

$

3.61

27%

$

14.66

$

11.81

$

2.85

24%

$

1.00

$

1.00

$

-

0%

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

3

Comparison of the first quarter ended March 31, 2020 and 2019

Revenue:

Total revenue for the quarter ended March 31, 2020 was $953 million, an increase of 16%, or $134 million, compared to $819 million for the comparable period in 2019. The increase is primarily attributable to growth from acquisitions as the Company experienced organic growth of negative 2% in the quarter, 0% after adjusting for the impact of changes in the valuation of the US dollar against most major currencies in which the Company transacts business. For acquired companies, organic growth is calculated as the difference between actual revenues achieved by each company in the financial period following acquisition compared to the estimated revenues they achieved in the corresponding financial period preceding the date of acquisition by Constellation.

The following table displays the breakdown of our revenue according to revenue type:

Q119

Three months

Period-Over-

Proforma

Organic

ended March 31,

Period Change

Adj.

Growth

(Note 1)

2020

2019

$

%

$

%

($ in millions, except percentages)

Licenses

57

53

5

9%

10

-8%

Professional services

178

158

20

12%

34

-8%

Hardware and other

42

36

6

17%

5

3%

Maintenance and other recurring

676

572

104

18%

104

0%

$M - Millions of dollars

953

819

134

16%

153

-2%

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

Note 1: Estimated pre-acquisition revenues for the three months ended March 31, 2019 from companies acquired after December 30, 2018. (Obtained from unaudited vendor financial information.)

For comparative purposes the table below shows the quarterly organic growth as compared to the same period in the prior year by revenue type since Q1 2018.

Quarter Ended

Mar. 31

Jun. 30

Sep. 30

Dec. 31

Mar. 31

Jun. 30

Sep. 30

Dec. 31

Mar. 31

2018

2018

2018

2018

2019

2019

2019

2019

2020

Licenses

‐4%

‐5%

‐9%

‐3%

‐3%

5%

‐14%

‐10%

‐8%

Professional services

3%

3%

‐5%

1%

‐5%

‐7%

‐8%

‐8%

‐8%

Hardware and other

‐16%

‐11%

‐20%

4%

‐4%

‐15%

‐2%

‐22%

3%

Maintenance and other recurring

8%

6%

3%

2%

1%

2%

1%

2%

0%

Revenue

5%

4%

‐1%

2%

‐1%

‐1%

‐2%

‐3%

‐2%

4

The following table shows the same information adjusting for the impact of foreign exchange movements.

Quarter Ended

Mar. 31

Jun. 30

Sep. 30

Dec. 31

Mar. 31

Jun. 30

Sep. 30

Dec. 31

Mar. 31

2018

2018

2018

2018

2019

2019

2019

2019

2020

Licenses

‐8%

‐7%

‐7%

‐1%

1%

8%

‐12%

‐9%

‐7%

Professional services

‐3%

0%

‐4%

3%

‐1%

‐4%

‐5%

‐7%

‐6%

Hardware and other

‐20%

‐13%

‐19%

5%

‐1%

‐14%

0%

‐21%

4%

Maintenance and other recurring

4%

4%

4%

4%

5%

4%

3%

3%

2%

Revenue

0%

1%

0%

3%

3%

2%

0%

‐2%

0%

For fiscal 2019 and earlier periods, we aggregated our business 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 our Volaris, Harris and TSS operating segments, and the private sector reportable segment was derived by combining our 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 included 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 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 our 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. Accordingly, we now aggregate our six operating segments into one reportable segment, consistent with the objective and basic principles of IFRS 8.

5

Expenses:

The following table displays the breakdown of our expenses:

Three months ended

Period-Over-

March 31,

Period Change

2020

2019

$

%

Expenses

($ in millions, except percentages)

Staff

510

445

65

15%

Hardware

23

21

2

11%

Third party license, maintenance

and professional services

79

69

10

15%

Occupancy

9

9

0

4%

Travel, Telecommunications, Supplies & Software and

equipment

51

44

6

15%

Professional fees

14

11

3

25%

Other, net

5

21

(16)

-76%

Depreciation

25

21

5

23%

716

640

76

12%

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

Overall expenses for the quarter ended March 31, 2020 increased 12%, or $76 million to $715 million, compared to $640 million during the same period in 2019. As a percentage of total revenue, expenses equalled 75% for the quarter ended March 31, 2020 and 78% for the same period in 2019. The change in valuation of the US dollar against most major currencies in which the Company transacts business resulted in an approximate 2% decrease in expenses for the three months ended March 31, 2020 compared to the first quarter of 2019.

Staff expense - Staff expenses increased 15% or $65 million for the quarter ended March 31, 2020 over the same period in 2019. Staff expense can be broken down into five key operating departments: Professional Services, Maintenance, Research and Development, Sales and Marketing, and General and Administrative. Included within staff expenses for each of the above five departments are personnel and related costs associated with providing the necessary services. The table below compares the period over period variances.

Three months ended

Period-Over-

March 31,

Period Change

2020

2019

$

%

($ in millions, except percentages)

Professional services

110

96

14

14%

Maintenance

101

88

13

15%

Research and development

143

123

20

16%

Sales and marketing

70

63

7

11%

General and administrative

85

74

12

16%

510

445

65

15%

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

6

The increase in staff expenses for the quarter ended March 31, 2020 was primarily due to the growth in the number of employees compared to the same period in 2019 primarily due to acquisitions. Staff expenses in the first quarter of every year are typically higher as a percentage of revenue as compared to other quarters, largely attributable to increased payroll tax costs associated with our annual bonus payments that are made in the month of March.

Hardware expenses - Hardware expenses increased 11% or $2 million for the quarter ended March 31, 2020 over the same period in 2019, as compared to the 17% increase in hardware and other revenue for the same periods. Hardware margin for the three months ended March 31, 2020 was 46% as compared to 43% for the same period in 2019.

Third party license, maintenance and professional services expenses - Third party license, maintenance and professional services expenses increased 15% or $10 million for the quarter ended March 31, 2020 over the same period in 2019. The increase is primarily due to third party license, maintenance and professional services expenses of acquired businesses.

Occupancy expenses - Occupancy expenses increased 4% or $0.3 million for the quarter ended March 31, 2020 over the same period in 2019. This increase is primarily due to the occupancy expenses of acquired businesses.

Travel, Telecommunications, Supplies & Software and equipment expenses - Travel, Telecommunications, Supplies & Software and equipment expenses increased 15% or $6 million for the quarter ended March 31, 2020 over the same period in 2019. The increase in these expenses is primarily due to expenses incurred by acquired businesses.

Professional fees - Professional fees increased 25% or $3 million for the quarter ended March 31, 2020 over the same period in 2019. There are no individually material reasons contributing to this variance.

Other, net - Other expenses decreased 76% or $16 million for the quarter ended March 31, 2020 over the same period in 2019. The following table provides a further breakdown of expenses within this category.

Three months ended

Period-Over-Period

March 31,

Change

2020

2019

$

%

($ in millions, except percentages)

Advertising and promotion

13

11

1

11%

Recruitment and training

4

4

0

6%

Bad debt expense

3

1

2

187%

R&D tax credits

(5)

(5)

(1)

16%

Contingent consideration

(13)

5

(18)

NM

Other expense, net

3

4

(1)

-19%

5

21

(16)

-76%

NM - Not meaningful

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

The contingent consideration negative expense amount recorded for Q1 2020 relates to a decrease in anticipated acquisition earnout payment accruals primarily as a result of decreases to revenue forecasts for the associated acquisitions. Revenue forecasts are updated on a quarterly basis and the related anticipated acquisition earnout payment accruals are updated accordingly. The bad debt expense increase is primarily related to an increased risk of payment defaults. Both the decrease in revenue forecasts and the increased risk of payment

7

defaults are primarily attributable to the COVID-19 pandemic. See "Risks and Uncertainties". There are no individually material reasons contributing to the remaining variances.

Depreciation - Depreciation of property and equipment increased 23% or $5 million for the quarter ended March 31, 2020 over the same period in 2019. This increase is primarily due to the depreciation expense associated with acquired businesses.

Other Income and Expenses:

The following table displays the breakdown of our other income and expenses:

Three months ended

Period-Over-

March 31,

Period Change

2020

2019

$

%

($ in millions, except percentages)

Amortization of intangible assets

94

75

19

25%

Foreign exchange (gain) loss

(6)

1

(7)

NM

TSS membership liability revaluation charge

18

10

8

83%

Finance and other expense (income)

(0)

(3)

2

-84%

Bargain purchase gain

-

(28)

28

-100%

Impairment of intangible and other non-financial assets

5

-

5

NM

Finance costs

11

9

2

25%

Income tax expense (recovery)

33

28

4

15%

NM - Not meaningful

155

93

62

67%

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

Amortization of intangible assets - Amortization of intangible assets increased 25% or $19 million for the quarter ended March 31, 2020 over the same period in 2019. The increase in amortization expense is primarily attributable to an increase in the carrying amount of our intangible asset balance over the twelve-month period ended March 31, 2020 as a result of acquisitions completed during this twelve-month period.

Foreign exchange - Most of our businesses are organized geographically so many of our expenses are incurred in the same currency as our revenues, which mitigates some of our exposure to currency fluctuations. For the quarter ended March 31, 2020, we realized a foreign exchange gain of $6 million compared to a loss of $1 million for the same period in 2019. The following table provides a breakdown of these amounts.

8

Unrealized foreign exchange (gain) loss related to:

  • revaluation of intercompany loans between entities with differing functional currencies (1)
  • revaulation of the Company's unsecured subordinated floating rate debentures as a result of the appreciation (depreciation) of the Canadian dollar against the US dollar.

Remaining foreign exchange (gain) loss

NM - Not meaningful

Three months ended Period-Over-Period

March 31,

Change

2020

2019

$

%

($ in millions, except percentages)

16

(2)

19 NM

(18)

4

(23)

NM

(4)

(1)

(3)

349%

(6)

1

(7)

NM

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

  1. Offsetting amounts recorded in other comprehensive income. Net impact to Total comprehensive income for each period is nil.

The remaining foreign exchange gains and losses per the table above are primarily related to the unrealized foreign exchange translation gains of certain net Canadian dollar denominated liability balances to US dollars as a result of the Canadian dollar's depreciation against the US dollar.

TSS membership liability revaluation charge - The valuation of the TSS membership liability that was put in place in Q4 2014 increased by approximately 8% from Q4 2019 or $18 million. The increase is primarily the result of the growth in TSS' reported trailing twelve month maintenance revenue (primarily due to acquisitions). Maintenance revenue and net tangible assets are the two main drivers in the calculation of the liability. The liability recorded on the balance sheet increased by 6% or $14 million over the three month period ended March 31, 2020 from $221 million to $235 million as a result of the revaluation charge of $18 million and a $4 million foreign exchange gain that was recorded through other comprehensive income. The TSS membership liability is denominated in Euros and the Euro depreciated 2% versus the US dollar during Q1 2020.

Finance and other expense (income) - Finance and other income for the quarter ended March 31, 2020 was $0.5 million compared to $3 million for the same period in 2019. Interest earned on cash balances was $0.1 million in Q1 2020 and $3 million in Q1 2019.

Bargain purchase gain - A bargain purchase gain adjustment totalling $28 million was recorded in the three month period ended March 31, 2019 relating to two of the acquisitions made during 2018 and 2019. No similar gain was recognized for the same period in 2020. In Q4 2018 the Company acquired a business that was undergoing an extensive restructuring. The seller of that business capitalized the balance sheet on closing with cash in the amount of €47 million ($53 million) that was to be utilized to fund expected losses generated by the business, contributing to a bargain purchase gain of $63 million being recorded in Q4 2018. Revisions to the restructuring cost expectations resulted in a further bargain purchase gain of $4 million being recorded in Q1 2019. The business recorded an EBITA loss of $13 million in Q1 2019. There was no current income tax recovery recorded in Q1 2019 associated with these losses. The remaining $24 million bargain purchase gain related to an acquisition where the seller continues as a minority partner in the acquired business. The seller contributed $17 million into the partnership.

9

Impairment of intangible and other non-financial assets - An impairment expense of $5 million was recorded in the three month period ended March 31, 2020 primarily relating to three businesses acquired during 2019. Primarily due to the near-termimpact, as well as the yet uncertain but probable longer-termimpact of the COVID-19pandemic, the forecasted cash flows for these businesses have declined significantly from the forecasted cash flows at the time of acquisition. See "Risks and Uncertainties". There was no similar expense recorded for the same period in 2019.

Finance costs - Finance costs for the quarter ended March 31, 2020 increased $2 million to $11 million, compared to $9 million for the same period in 2019 primarily a result of an increase in the average debt outstanding in Q1 2020 as compared to Q1 2019.

Income taxes - We operate globally and we calculate our tax provision in each of the jurisdictions in which we conduct business. Our effective tax rate on a consolidated basis is, therefore, affected by the realization and anticipated relative profitability of our operations in those various jurisdictions, as well as different tax rates that apply and our ability to utilize tax losses and other credits. For the quarter ended March 31, 2020, income tax expense increased $4 million to $33 million compared to $28 million for the same period in 2019. Current tax expense has historically approximated our cash tax rate however the quarterly expense can sometimes fall outside of the annual range due to out of period adjustments. Current tax expense reflects gross taxes before the application of R&D tax credits which are classified as part of "other, net" expenses in the statement of income.

Constellation is subject to tax audits in the countries in which the Company carries on 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.

Net Income and Earnings per Share:

Net income for the quarter ended March 31, 2020 was $83 million compared to net income of $87 million for the same period in 2019. On a per share basis this translated into a net income per diluted share of $3.91 in the quarter ended March 31, 2020 compared to net income per diluted share of $4.09 for the same period in 2019. There was no change in the number of shares outstanding.

Net cash flows from operating activities ("CFO"):

For the quarter ended March 31, 2020, CFO increased $76 million to $361 million compared to $284 million for the same period in 2019 representing an increase of 27%.

Free cash flow available to shareholders ("FCFA2S"):

For the quarter ended March 31, 2020, FCFA2S increased $60 million to $311 million compared to $250 million for the same period in 2019 representing an increase of 24%.

10

The following table reconciles FCFA2S to net cash flows from operating activities:

Net cash flows from operating activities Adjusted for:

Interest paid on lease obligations Interest paid on other facilities Payments of lease obligations

TSS membership liability revaluation charge Property and equipment purchased Interest and dividends received

Free cash flow available to shareholders

Due to rounding, certain totals may not foot.

Three months ended

March 31,

2020 2019

($ in millions, except percentages)

361 284

  1. (2)
  1. (8)
  1. (10)
  1. (10)
  1. (7)

0 3

311 250

Quarterly Results

Quarter Ended

Mar. 31

Jun. 30

Sep. 30

Dec. 31

Mar. 31

Jun. 30

Sep. 30

Dec. 31

Mar. 31

2018

2018

2018

2018

2019

2019

2019

2019

2020

Revenue

718

752

759

831

819

846

870

956

953

Net income

83

52

66

179

87

73

82

92

83

CFO

258

53

143

208

284

50

177

255

361

FCFA2S

242

27

112

178

250

12

134

193

311

Net income per share

Basic & diluted

3.90

2.45

3.10

8.46

4.09

3.45

3.85

4.34

3.91

CFO per share

Basic & diluted

12.16

2.50

6.75

9.84

13.40

2.36

8.37

12.02

17.01

FCFA2S per share

Basic & diluted

11.41

1.27

5.29

8.39

11.81

0.58

6.35

9.12

14.66

We experience seasonality in our operating results in that CFO and FCFA2S in the first quarter of every year is typically the highest and CFO and FCFA2S in the second quarter of every year is the lowest. The key driver impacting this seasonality is the timing of annual maintenance contract renewals. Our quarterly results may also fluctuate as a result of the various acquisitions which may be completed by the Company in any given quarter. We may experience variations in our net income on a quarterly basis depending upon the timing of certain expenses or gains, which may include changes in provisions, acquired contract liabilities, foreign exchange gains and losses, bargain purchase gains, and gains or losses on the sale of financial and other assets.

11

Liquidity

Our net cash position (cash less bank indebtedness excluding capitalized transaction costs) increased by $180 million to $216 million in the three months ended March 31, 2020 resulting from cash flows from operations exceeding the net capital deployed on acquisitions plus dividends. Cash increased by $48 million to $364 million at March 31, 2020 compared to $316 million at December 31, 2019 and bank indebtedness decreased by $132 million to $148 million at March 31, 2020 compared to $280 million at December 31, 2019.

Total assets increased $89 million, from $3,488 million at December 31, 2019 to $3,577 million at March 31, 2020. The increase is primarily due to a $48 million increase in cash, $33 million increase in accounts receivable and $25 million increase in other current assets. At March 31, 2020 three subsidiaries holding cash totalling $118 million maintained debt facilities, which facilities are without recourse to Constellation. As explained in the "Capital Resources and Commitments" section below, there are limitations on the ability of these subsidiaries to distribute funds to Constellation.

Current liabilities increased $77 million, from $1,732 million at December 31, 2019 to $1,809 million at March 31, 2020. The increase is primarily due to an increase in deferred revenue of $247 million mainly due to acquisitions made since December 31, 2019 and the timing of maintenance and other billings versus performance and delivery under those customer arrangements, offset by a decrease in bank indebtedness of $119 million and a decrease in accounts payable and accrued liabilities of $76 million largely relating to the payment of bonuses accrued in 2019.

Net Changes in Cash Flows (in $M's)

Three months

Three months

ended March 31,

ended March 31,

2020

2019

Net cash provided by operating activities

361

284

Net cash from (used in) financing activities

(167)

(103)

Cash used in the acquisition of businesses

(139)

(73)

Cash obtained with acquired businesses

14

25

Net cash from (used in) other investing activities

(8)

(5)

Net cash from (used in) investing activities

(133)

(52)

Effect of foreign currency

(13)

(1)

Net increase (decrease) in cash and cash equivalents

48

128

The net cash flows from operating activities were $361 million for the quarter ended March 31, 2020. The $361 million provided by operating activities resulted from $83 million in net income plus $180 million of non- cash adjustments to net income and $136 million of cash from non-cash operating working capital, offset by $38 million in taxes paid.

The net cash flows used in financing activities in the quarter ended March 31, 2020 were $167 million, which is mainly a result of dividends paid of $21 million, a net decrease in bank indebtedness of $120 million, lease obligation payments of $14 million, and interest paid on bank indebtedness and the Company's unsecured subordinated floating rate debentures in the period of $8 million.

12

The net cash flows used in investing activities in the quarter ended March 31, 2020 were $133 million. The cash used in investing activities was primarily due to acquisitions for an aggregate of $139 million (including payments for holdbacks relating to prior acquisitions) offset by $14 million of acquired cash.

We believe we have sufficient cash and available credit capacity to continue to operate for the foreseeable future. Generally our VMS businesses operate with negative working capital as a result of the collection of maintenance payments and other revenues in advance of the performance of the related services. As such, management anticipates that it can continue to grow the business organically without any additional funding. If we continue to acquire VMS businesses we may need additional external funding depending upon the size and timing of the potential acquisitions.

Capital Resources and Commitments

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 million, 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 had been drawn from this credit facility, and letters of credit totaling $19 million were issued, which limits the borrowing capacity on a dollar-for-dollar basis.

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 ($ in millions):

Revolving Credit

Term Debt

Facilities

Facilities

Total

Principal outstanding at March 31, 2020 (and equal to fair value)

$

Deduct: Carrying value of transaction costs included in debt balance

-

$

148

$

148

-

(4)

(4)

Carrying value at March 31, 2020

-

145

145

Current portion

-

2

2

Non-current portion

-

143

143

13

Debentures

On October 1, 2014 and November 19, 2014, the Company issued unsecured subordinated debentures (the "Debentures") with a total principal value of C$96.0 million for total proceeds of C$91.2 million. The proceeds were used by the Company to pay down $81.2 million of outstanding bank indebtedness.

On September 30, 2015, the Company issued an additional tranche of Debentures with a total principal value of C$186.2 million for total proceeds of C$214.2 million. The proceeds were used by the Company to pay down $130.4 million of outstanding bank indebtedness. The September 30, 2015 issuance formed a single series with the outstanding C$96.0 million aggregate principal amount of Debentures, Series 1 of the Company. The Debentures have a maturity date of March 31, 2040.

TSS Membership Liability

On December 23, 2014, in accordance with the terms of the purchase and sale agreement for the 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. Proceeds from this transaction in the amount of $48.5 million (€39.4 million) were utilized to repay, in part, outstanding bank indebtedness of Constellation. In accordance with IFRS, 100% of the financial results for TSS are included in the consolidated financial results of the Company.

Each of the minority owners may, at any time, 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 (classified as a current liability), and up to 33.33% on each of the first and second anniversary of the date the first redemption payment is made.

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 approximately 32% remaining interest 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.

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. There is a valuation premium if the call option is exercised versus the put option.

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 the 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%

14

of his interests in CNH over a 3 year period. The valuation of the interests being purchased will be calculated at each annual payment date.

Other commitments

Commitments include operating leases for office equipment and facilities, letters of credit and performance bonds issued on our behalf by financial institutions in connection with facility leases and contracts with public sector customers. Also, occasionally we structure some of our acquisitions with contingent consideration based on the future performance of the acquired business. The fair value of contingent consideration recorded in our statement of financial position was $44 million at March 31, 2020. Aside from the aforementioned, we do not have any other business arrangements, derivative financial instruments, or any equity interests in non-consolidated entities that would have a significant effect on our assets and liabilities as at March 31, 2020.

The TSS membership liability commitment assumes that the minority owners have exercised their put option to sell 100% of their interests back to Constellation. This option however has not been exercised as at May 7, 2020. See the "Critical Accounting Estimate" section of the Company's 2019 Annual Consolidated Financial Statements for a discussion on the valuation methodology utilized.

Foreign Currency Exposure

We operate internationally and have foreign currency risks related to our revenue, operating expenses, assets and liabilities denominated in currencies other than the U.S. dollar. Consequently, we believe movements in the foreign currencies in which we transact will impact future revenue and net income. The impact to organic revenue growth for the three months ended March 31, 2020 was approximately negative 2%. We cannot predict the effect of foreign exchange gains or losses in the future; however, if significant foreign exchange losses are experienced, they could have a material adverse effect on our business, revenues, results of operations, and financial condition. The Company enters into forward foreign exchange contracts from time to time with the objective of mitigating volatility in profit or loss in respect of financial liabilities. In entering into these forward exchange contracts, the Company is exposed to the credit risk of the counterparties to such contracts and the possibility that the counterparties will default on their payment obligations under these contracts. However, given that the counterparties are Schedule 1 banks or affiliates thereof, the Company believes these risks are not material. During the quarter ended March 31, 2020, the Company did not purchase any contracts of this nature.

The following table provides an approximate breakdown of our revenue and expenses by currency, expressed as a percentage of total revenue and expenses, as applicable, for the three months ended March 31, 2020:

Three Months Ended March 31, 2020

Currencies

% of Revenue

% of Expenses

USD

51%

47%

CAD

7%

12%

GBP

8%

8%

EURO

21%

20%

CHF

1%

3%

Others

11%

11%

Total

100%

100%

Off-Balance Sheet Arrangements

As a general practice, we have not entered into off-balance sheet financing arrangements. Except for insignificant and short-term operating leases and letters of credit, all of our liabilities and commitments are reflected as part of our statement of financial position.

15

Proposed Transactions

We seek potential acquisition targets on an ongoing basis and may complete several acquisitions in any given fiscal year.

Share Capital

As at May 7, 2020, there were 21,191,530 common shares outstanding.

Risks and Uncertainties

The Company's business is subject to a number of risk factors which are described in our most recently filed AIF. Additional risks and uncertainties not presently known to us or that we currently consider immaterial also may impair our business and operations and cause the price of the common shares to decline. If any of the noted risks actually occur, our business may be harmed and the financial condition and results of operation may suffer significantly. In that event, the trading price of the common shares could decline, and shareholders may lose all or part of their investment.

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 had disruptive effects in countries in which the Company operates and has adversely impacted many of its business units' operations to date, including through the cancellation by certain customers of their ongoing software maintenance contracts and the suspension or cancellation of new software purchases. The pandemic may also have an adverse impact on many of the Company's customers, including their ability to satisfy ongoing payment obligations to the Company, which could increase the Company's bad debt exposure. 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, and this impact could be material.

Controls and Procedures

Evaluation of disclosure controls and procedures:

Management is responsible for establishing and maintaining disclosure controls and procedures as defined under National Instrument 52-109. At March 31, 2020, the President and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective and that material information relating to the Company, including its subsidiaries, was made known to them and was recorded, processed, summarized and reported within the time periods specified under applicable securities legislation.

Internal controls over financial reporting:

The President and Chief Financial Officer have designed or caused to be designed under their supervision, disclosure controls and procedures which provide reasonable assurance that material information regarding the Company is accumulated and communicated to the Company's management, including its President and Chief Financial Officer in a timely manner.

In addition, the President and Chief Financial Officer have designed or caused it to be designed under their supervision internal controls over financial reporting ("ICFR") to provide reasonable assurance regarding the

16

reliability of financial reporting and the preparation of financial statements. The President and Chief Financial Officer have been advised that the control framework the President and the Chief Financial Officer used to design the Company's ICFR is recognized by the Committee of Sponsoring Organizations of the Treadway Commission.

The President and the Chief Financial Officer have evaluated, or caused to be evaluated under their supervision, whether or not there were changes to its ICFR during the period ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect the Company's ICFR. No such changes were identified through their evaluation.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Due to inherent limitations in all such systems, no evaluations of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures and our internal controls over financial reporting are effective in providing reasonable, not absolute, assurance that the objectives of our control systems have been met.

17

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.

19

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.

20

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.

21

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.

22

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.

23

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.

24

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

25

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

26

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.

27

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

28

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

29

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

30

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

31

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

32

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.

33

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

34

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).

35

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.

36

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

37

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.

38

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.

39

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.

40

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 21:23:02 UTC

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Financials (USD)
Sales 2020 3 972 M - -
Net income 2020 367 M - -
Net Debt 2020 32,8 M - -
P/E ratio 2020 65,8x
Yield 2020 0,35%
Capitalization 24 147 M 24 122 M -
EV / Sales 2019
EV / Sales 2020 6,09x
Nbr of Employees 19 000
Free-Float 94,7%
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Mean consensus OUTPERFORM
Number of Analysts 9
Average target price 1 150,43 $
Last Close Price 1 139,44 $
Spread / Highest target 12,8%
Spread / Average Target 0,96%
Spread / Lowest Target -11,5%
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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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