Constellation Software Inc. — Interim / Quarterly Report 2020

Nov 2, 2020

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Constellation Software Inc. Announces Results for the Third Quarter Ended September 30, 2020 and Declares Quarterly Dividend

TORONTO, Nov. 02, 2020 -- Constellation Software Inc. (TSX:CSU) (“Constellation” or the “Company”) today announced its financial results for the third quarter ended September 30, 2020 and declared a $1.00 per share dividend payable on January 11, 2021 to all common shareholders of record at close of business on December 18, 2020. This dividend has been designated as an eligible dividend for the purposes of the Income Tax Act (Canada). Please note that all dollar amounts referred to in this press release are in U.S. Dollars unless otherwise stated.

The following press release should be read in conjunction with the Company’s Unaudited Condensed Consolidated Interim Financial Statements for the three and nine months ended September 30, 2020 and the accompanying notes, our Management Discussion and Analysis for the three and nine months ended September 30, 2020 and with our annual Consolidated Financial Statements, prepared in accordance with International Financial Reporting Standards (“IFRS”) and our annual Management’s Discussion and Analysis for the year ended December 31, 2019, which can be found on SEDAR at www.sedar.com and on the Company’s website www.csisoftware.com. Additional information about the Company is also available on SEDAR at www.sedar.com

Our board remains inspired by the dedication and commitment of the Constellation employees who continue to adapt and find new ways to provide value and make a difference in support of each other and our customers by finding opportunities in the challenges created by COVID-19.

Q3 2020 Headlines:

• Revenue grew 15% (negative 1% organic growth, negative 3% after adjusting for changes in foreign exchange rates) to $1,003 million compared to $870 million in Q3 2019.

• Net income increased 50% to $122 million ($5.76 on a diluted per share basis) from $82 million ($3.85 on a diluted per share basis) in Q3 2019.

• Impairment of intangible and other non-financial assets was $3 million in Q3 2020 versus nil in Q3 2019.

• A number of acquisitions were completed for aggregate cash consideration of $123 million (which includes acquired cash). Deferred payments associated with these acquisitions have an estimated value of $25 million resulting in total consideration of $148 million.

• Cash flows from operations (“CFO”) were $234 million, an increase of 32%, or $57 million, compared to $177 million for the comparable period in 2019.

• Free cash flow available to shareholders[1] (“FCFA2S”) increased $47 million to $181 million compared to $134 million for the same period in 2019.

• The Company determined that certain of its subsidiaries qualified for an estimated aggregate amount of $12 million of grants from various government authorities, and recognized such amounts as a reduction to expenses in the quarter.

• On May 20, 2020 the Company entered into a binding agreement with IJssel B.V. to purchase 100% of the shares of Topicus.com B.V., a Netherlands-based diversified vertical market software provider. The transaction is currently expected to close in 2020, subject to the satisfaction of certain closing conditions.

• Subsequent to September 30, 2020, the Company completed or entered into agreements to acquire a number of businesses for aggregate cash consideration of $47 million (which includes acquired cash). Deferred payments associated with these acquisitions have an estimated value of $19 million resulting in total consideration of $66 million.

1. See Non-IFRS measures.

Total revenue for the quarter ended September 30, 2020 was $1,003 million, an increase of 15%, or $133 million, compared to $870 million for the comparable period in 2019. For the first nine months of 2020 total revenues were $2,878 million, an increase of 14%, or $343 million, compared to $2,534 million for the comparable period in 2019. The increase for both the three and nine month periods compared to the same periods in the prior year is primarily attributable to growth from acquisitions as the Company experienced organic growth of negative 1% and negative 4% respectively, and negative 3% for both periods after adjusting for the impact of changes in the valuation of the US dollar against most major currencies in which the Company transacts business.

Net income for the quarter ended September 30, 2020 was $122 million compared to net income of $82 million for the same period in 2019. On a per share basis, this translated into a net income per diluted share of $5.76 in the quarter ended September 30, 2020 compared to net income per diluted share of $3.85 for the same period in 2019. For the nine months ended September 30, 2020, net income was $288 million or $13.58 per diluted share compared to $241 million or $11.39 per diluted share for the same period in 2019.

For the quarter ended September 30, 2020, CFO increased $57 million to $234 million compared to $177 million for the same period in 2019 representing an increase of 32%. For the first nine months of 2020, CFO increased $320 million to $831 million compared to $512 million during the same period in 2019, representing an increase of 62%.

For the quarter ended September 30, 2020, FCFA2S increased $47 million to $181 million compared to $134 million for the

same period in 2019. For the first nine months of 2020, FCFA2S increased $285 million to $682 million compared to $397 million during the same period in 2019, representing an increase of 72%.

The Company is closely monitoring the impact of 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.

Forward Looking Statements

Certain statements herein may be “forward looking” statements that involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Constellation or the industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. 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. These forward looking statements reflect current assumptions and expectations regarding future events and operating performance and are made as of the date hereof and Constellation assumes no obligation, except as required by law, to update any forward looking statements to reflect new events or circumstances.

Non-IFRS Measures

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. Constellation believes that FCFA2S is useful supplemental information as it provides an indication of the uncommitted cash flow that is available to shareholders if Constellation does not make any acquisitions, or investments, and does not repay any debts. While Constellation could use the FCFA2S to pay dividends or repurchase shares, Constellation’s objective is to invest all of our FCFA2S in acquisitions which meet Constellation’s 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.

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 Credit facility transaction costs 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 September		Nine months September

About Constellation Software Inc.

Constellation's common shares are listed on the Toronto Stock Exchange under the symbol "CSU". Constellation acquires, manages and builds vertical market software businesses.

For further information:

Jamal Baksh

Chief Financial Officer (416) 861-9677 info@csisoftware.com www.csisoftware.com

SOURCE: CONSTELLATION SOFTWARE INC.

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
		September 30,
		2020	December	31, 2019 September	30, 2019
Assets
Current assets:
Cash	$	565	$	316 $	235
Accounts receivable		420		422	390
Unbilled revenue		102		110	106
Inventories		30		31	43
Other assets		217		184	182
		1,333		1,062	956
Non-current assets:
Property and equipment		80		78	70
Right of use assets		239		234	220
Deferred income taxes		50		45	38
Other assets		79		72	71
Intangible assets		2,097		1,997	1,882
		2,546		2,425	2,281
Total assets	$	3,879	$	3,488$	3,237
Liabilities and Shareholders' Equity
Current liabilities:
CSI facility	$	-	$	63 $	21
Debt without recourse to Constellation Software Inc.		4		57	99
TSS membership liability		104		86	84
Accounts payable and accrued liabilities		535		529	454
Dividends payable		21		21	21
Deferred revenue		917		788	790
Provisions		11		13	14
Acquisition holdback payables		71		76	77
Lease obligations		68		62	57
Income taxes payable		90		36	30
		1,821		1,732	1,646
Non-current liabilities:
Debt without recourse to Constellation Software Inc. (note
8)		169		153	115
TSS membership liability		184		136	110
Debentures		213		222	219
Deferred income taxes		253		246	241
Acquisition holdback payables		30		25	22
Lease obligations		191		187	179
Other liabilities		116		101	93
		1,155		1,069	978

Total liabilities

2,976 2,800

2,624

Shareholders' equity:
Capital stock		99	99	99
Accumulated other comprehensive income (loss)		(49)	(40)	(44)
Retained earnings		852	628	558
		902	687	613
Total liabilities and shareholders' equity	$	3,879$	3,488$	3,237

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 and nine months ended September 30, 2020 and 2019 Unaudited

Three and nine months ended September 30, 2020 and 2019 Unaudited
		Three months		ended	Nine	months	ended
			September 30,			September 30,
		2020		2019	2020		2019
Revenue
License	$	57	$	51 $	166	$	165
Professional services		187		164	534		485
Hardware and other		45		45	122		122
Maintenance and other recurring		713		609	2,056		1,762
		1,003		870	2,878		2,534
Expenses
Staff		504		434	1,493		1,316
Hardware		25		25	70		68
Third party license, maintenance and professional services		82		75	237		218
Occupancy		9		9	26		26
Travel, telecommunications, supplies, software and equipment		32		50	114		143
Professional fees		15		12	41		34
Other, net		5		18	10		53
Depreciation		26		23	77		65
Amortization of intangible assets		103		84	293		234
		800		730	2,362		2,158
Foreign exchange loss (gain)		1		6	5		20
TSS membership liability revaluation charge		20		12	55		30
Finance and other expense (income)		(2)		1	(4)		(2)
Bargain purchase gain		(0)		(7)	(0)		(36)
Impairment of intangible and other non-financial assets		3		-	11		-
Finance costs		13		11	34		29
		34		22	101		41
Income before income taxes		168		117	414		335
Current income tax expense (recovery)		62		44	177		121
Deferred income tax expense (recovery)		(16)		(8)	(50)		(28)
Income tax expense (recovery)		46		36	127		94

Net income

122 82 288 241 $ 5.76 $ 3.85 $ 13.58 $ 11.39

Earnings per share Basic and diluted

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 and nine months ended September 30, 2020 and 2019 Unaudited

Three and nine months ended September 30, 2020 and 2019 Unaudited
		Three months	ended	Nine	months	ended
		September	30,	September		30,
		2020	2019	2020		2019
Net income	$	122 $	82 $	288 $		241
Items that are or may be reclassified subsequently to net income:
Foreign currency translation differences from foreign operations		8	(12)		(9)	(7)
Deferred income tax recovery (expense)		-	-		-	-
Other comprehensive income (loss) for the period, net of income
tax		8	(12)		(9)	(7)
Total comprehensive income (loss) for the period	$	130 $	70 $	279 $		234

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
Nine months ended September 30, 2020
				Accumulated other
	Capital		comprehensive income			Retained
		stock		(loss)		earnings	Total
			Cumulative translation account
Balance at January 1, 2020	$	99	$	(40)	$	628 $	687
Total comprehensive income for the period:
Net income		-		-		288	288
Other comprehensive income (loss)
Foreign currency translation differences from
foreign operations		-		(9)		-	(9)
Total other comprehensive income (loss)
for the period		-		(9)		-	(9)
Total comprehensive income (loss) for the period		-		(9)		288	279
Transactions with owners, recorded directly in equity
Dividends to shareholders of the Company		-		-		(64)	(64)

Balance at September 30, 2020 $ 99 $ (49) $ 852 $ 902

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
Nine months ended September 30, 2019
				Accumulated other
	Capital		comprehensive income		Retained
		stock		(loss)	earnings	Total
			Cumulative translation account
Balance at January 1, 2019	$	99	$	(37) $	804 $	866
Total comprehensive income for the period:
Net income		-		-	241	241
Other comprehensive income (loss)
Foreign currency translation differences from
foreign operations		-		(7)	-	(7)
Total other comprehensive income (loss) for the
period		-		(7)	-	(7)
Total comprehensive income for the period		-		(7)	241	234
Transactions with owners, recorded directly in equity
Dividends to shareholders of the Company		-		-	(487)	(487)
Balance at September 30, 2019	$	99	$	(44) $	558 $	613

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 and nine months ended September 30, 2020 and 2019
Unaudited
		Three months		ended	Nine	months	ended
			September 30,			September 30,
		2020		2019	2020		2019
Cash flows from operating activities:
Net income	$	122	$	82 $	288	$	241
Adjustments for:
Depreciation		26		23	77		65
Amortization of intangible assets		103		84	293		234
TSS membership liability revaluation charge		20		12	55		30
Finance and other expense (income)		(2)		1	(4)		(2)
Bargain purchase (gain)		(0)		(7)	(0)		(36)
Impairment of intangible and other non-financial assets		3		-	11		-
Finance costs		13		11	34		29
Income tax expense (recovery)		46		36	127		94
Foreign exchange loss (gain)		1		6	5		20

	Change in non-cash operating assets and liabilities exclusive of effects of business combinations Income taxes paid Net cash flows from (used in) operating activities Cash flows from (used in) financing activities: Interest paid on lease obligations Interest paid on other facilities Increase (decrease) in CSI facility Increase (decrease) in revolving credit under debt facilities without recourse to CSI Proceeds from issuance of term debt under facilities without recourse to CSI Repayments of term debt under facilities without recourse to CSI Credit facility transaction costs Payments of lease obligations Distribution to TSS minority owners Dividends paid Net cash flows from (used in) in financing activities Cash flows from (used in) investing activities: Acquisition of businesses Cash obtained with acquired businesses Post-acquisition settlement payments, net of receipts Purchases of other investments Interest, dividends and other proceeds received Property and equipment purchased Net cash flows from (used in) investing activities Effect of foreign currency on cash and cash equivalents	Change in non-cash operating assets and liabilities exclusive of effects of business combinations Income taxes paid	(32) (37) 69 (44) (66) (32) (123) (119) 234 177 831 512 (2) (2) (6) (5) (8) (8) (22) (23) (100) 22 (65) 22 - 89 (55) 49 7 11 22 11 (1) (0) (5) (2) (0) (0) (0) (0) (17) (12) (47) (35) - - - (11) (21) (21) (64) (487) (143) 79 (242) (481) (123) (278) (298) (408) 31 68 55 103 (24) (8) (79) (45) - (4) (2) (9) 1 2 2 5 (5) (9) (19) (24) (120) (228) (340) (378) 8 (7) (1) (6) (21) 21 249 (354) 585 214 316 589 $ 565 $ 235 565 235
	Increase (decrease) in cash Cash, beginning of period
	Cash, end of period