Constellation Software Inc. — Interim / Quarterly Report 2020

Aug 6, 2020

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

TORONTO, Aug. 06, 2020 -- Constellation Software Inc. (TSX:CSU) (“Constellation” or the “Company”) today announced its financial results for the second quarter ended June 30, 2020 and declared a $1.00 per share dividend payable on October 9, 2020 to all common shareholders of record at close of business on September 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 six months ended June 30, 2020 and the accompanying notes, our Management Discussion and Analysis for the three and six months ended June 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 remain both grateful and impressed by the Constellation employees who continue to re-think, re-invent and reimagine how they support each other and our customers through the many challenges created by COVID-19.

Q2 2020 Headlines:

• Revenue grew 9% (negative 8% organic growth, negative 7% after adjusting for changes in foreign exchange rates) to $922 million compared to $846 million in Q2 2019.

• Net income increased 12% to $83 million ($3.90 on a diluted per share basis) from $73 million ($3.45 on a diluted per share basis) in Q2 2019.

• Impairment of intangible and other non-financial assets was $4 million in Q2 2020 versus nil in Q2 2019.

• A number of acquisitions were completed for aggregate cash consideration of $67 million (which includes acquired cash). Deferred payments associated with these acquisitions have an estimated value of $17 million resulting in total consideration of $84 million.

• Cash flows from operations (“CFO”) were $237 million, an increase of 370%, or $186 million, compared to $50 million for the comparable period in 2019.

• Free cash flow available to shareholders[1] (“FCFA2S”) increased $178 million to $190 million compared to $12 million for the same period in 2019.

• CFO and FCFA2S were positively impacted by the deferral of approximately $29 million of tax instalment payments to the second half of 2020 in conjunction with the certain government’s COVID-19 relief programs.

• The Company determined that certain of its subsidiaries qualified for an estimated aggregate amount of $17 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 June 30, 2020, the Company completed or entered into agreements to acquire a number of businesses for aggregate cash consideration of $64 million (which includes acquired cash). Deferred payments associated with these acquisitions have an estimated value of $14 million resulting in total consideration of $78 million.

1. See Non-IFRS measures.

Total revenue for the quarter ended June 30, 2020 was $922 million, an increase of 9%, or $76 million, compared to $846 million for the comparable period in 2019. For the first six months of 2020 total revenues were $1,875 million, an increase of 13%, or $210 million, compared to $1,665 million for the comparable period in 2019. The increase for both the three and six 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 8% and negative 5% respectively, negative 7% and negative 4% respectively 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 June 30, 2020 was $83 million compared to net income of $73 million for the same period in 2019. On a per share basis, this translated into a net income per diluted share of $3.90 in the quarter ended June 30, 2020 compared to net income per diluted share of $3.45 for the same period in 2019. For the six months ended June 30, 2020, net income was $166 million or $7.81 per diluted share compared to $160 million or $7.54 per diluted share for the same period in 2019.

For the quarter ended June 30, 2020, CFO increased $186 million to $237 million compared to $50 million for the same period in 2019 representing an increase of 370%. For the first six months of 2020, CFO increased $263 million to $597 million compared to $334 million during the same period in 2019, representing an increase of 79%.

For the quarter ended June 30, 2020, FCFA2S increased $178 million to $190 million compared to $12 million for the same period in 2019. For the first six months of 2020, FCFA2S increased $238 million to $501 million compared to $263 million during the same period in 2019, representing an increase of 91%.

CFO and FCFA2S for the three and six months ended June 30, 2020 were positively impacted by the deferral of approximately $29 million of tax instalment payments to the second half of 2020 in conjunction with certain government’s COVID-19 relief programs.

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 ended June 30, 2020 2019 ($ in millions, except percentages) 237 50 (2) (2) (5) (7) (0) - (16) (13) (17) (8) (6) (8) 0 0 190 12		Six months ended June 30, 2020 2019 ($ in millions, except percentages) 597 334 (4) (4) (14) (15) (0) - (30) (23) (35) (18) (13) (15) 0 3 501 263

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
			December		31,
	June 30, 2020			2019		June 30, 2019
Assets
Current assets:
Cash	$	585	$		316	$	214
Accounts receivable		393			422		368
Unbilled revenue		103			110		105
Inventories		32			31		45
Other assets		207			184		183
		1,319		1,062			915
Non-current assets:
Property and equipment		78			78		69
Right of use assets		241			234		211
Deferred income taxes		45			45		48
Other assets		73			72		66
Intangible assets		2,011		1,997			1,621
		2,448		2,425			2,014
Total assets	$	3,767	$	3,488		$	2,929
Liabilities and Shareholders' Equity
Current liabilities:
CSI facility	$	98	$		63	$	-
Debt without recourse to Constellation Software Inc.		3			57		11
TSS membership liability		93			86		69
Accounts payable and accrued liabilities		480			529		400
Dividends payable		21			21		22
Deferred revenue		938			788		802
Provisions		10			13		17
Acquisition holdback payables		72			76		53
Lease obligations		67			62		54
Income taxes payable		95			36		25
		1,879		1,732			1,452
Non-current liabilities:
Debt without recourse to Constellation Software Inc.		159			153		106
TSS membership liability		164			136		121
Debentures		210			222		222
Deferred income taxes		243			246		202
Acquisition holdback payables		29			25		15
Lease obligations		193			187		170

	Other liabilities 98 101 76
	1,095 1,069 913
Total liabilities 2,974 2,800 2,365
Shareholders' equity: Capital stock 99 99 99 Accumulated other comprehensive income (loss) (57) (40) (32) Retained earnings 752 628 497 794 687 564
	794 687 564
Total liabilities and shareholders' equity $ 3,767$ 3,488$ 2,929

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 six months ended June 30, 2020 and 2019 Unaudited

Three and six months ended June 30, 2020 and 2019 Unaudited
		Three months ended June
			30,		Six	months ended	June	30,
		2020		2019		2020	2019
Revenue
License	$	51	$	61	$	108 $	113
Professional services		170		164		347	322
Hardware and other		35		41		77		77
Maintenance and other recurring		666		581		1,342	1,152
		922		846		1,875	1,665
Expenses
Staff		480		437		990	882
Hardware		22		22		45		43
Third party license, maintenance and professional
services		77		73		156	142
Occupancy		8		9		17		17
Travel, telecommunications, supplies, software and equipment		31		49		82		93
Professional fees		13		11		26		22
Other, net		0		15		5		36
Depreciation		25		21		51		42
Amortization of intangible assets		96		75		190	151
		752		713		1,562	1,428
Foreign exchange loss (gain)		10		13		4		15
TSS membership liability revaluation charge		17		8		35		18
Finance and other expense (income)		(1)		(0)		(2)		(3)
Bargain purchase gain		(0)		-		(0)		(28)
Impairment of intangible and other non-financial assets		4		-		8		-
Finance costs		10		9		22		18
		39		30		67		19
Income before income taxes		131		103		246	218
Current income tax expense (recovery)		70		42		115		78
Deferred income tax expense (recovery)		(22)		(12)		(34)		(20)

Income tax expense (recovery)		48	30	80	58
Net income		83	73	166	160
Earnings per share
Basic and diluted	$	3.90$	3.45$	7.81$	7.54

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 six months ended June 30, 2020 and 2019
Unaudited
		Three	months ended June
			30,			Six	months	ended June	30,
		2020		2019			2020	2019
Net income	$		83	$	73	$	166 $		160
Items that are or may be reclassified subsequently to	net income:
Foreign currency translation differences from foreign operations			13		8		(17)		4
Deferred income tax recovery (expense)			-		-			-	-
Other comprehensive (loss) income for the period, net	of income
tax			13		8		(17)		4
Total comprehensive income (loss) for the period	$		96	$	81	$	149 $		164
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
Six months ended June 30, 2020
	Capital		Accumulated			Retained		Total
	stock			other		earnings
			comprehensive
			income (loss)
			Cumulative
			translation
			account
Balance at January 1, 2020	$	99	$	(40)	$		628	$	687
Total comprehensive income for the period:
Net income		-		-			166		166
Other comprehensive income (loss)
Foreign currency translation differences from
foreign operations		-		(17)			-		(17)

Total other comprehensive income (loss)

for the period		-		(17)		-	(17)
Total comprehensive income (loss) for the period		-		(17)		166	149
Transactions with owners, recorded directly in equity
Dividends to shareholders of the Company		-		-		(42)	(42)
Balance at June 30, 2020	$	99	$	(57)	$	752$	794

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
Six months ended June 30, 2019
		Capital		Accumulated			Retained	Total
		stock			other		earnings
				comprehensive
				income (loss)
					Cumulative
					translation
					account
Balance at January 1, 2019	$		99	$	(37)	$	804$	866
Total comprehensive income for the period:
Net income			-		-		160	160
Other comprehensive income (loss)
Foreign currency translation differences from
foreign operations			-		4		-	4
Total other comprehensive income (loss) for the period			-		4		-	4
Total comprehensive income for the period			-		4		160	164
Transactions with owners, recorded directly in equity
Dividends to shareholders of the Company			-		-		(466)	(466)
Balance at June 30, 2019	$		99	$	(32)	$	497$	564

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 six months ended June 30, 2020 and 2019
Unaudited
	Three months ended June		Six months ended June
		30,		30,
	2020	2019	2020	2019

Cash flows from operating activities: Net income $ 83 $ 73 $ 166 $ 160 Adjustments for: Depreciation 25 21 51 42 Amortization of intangible assets 96 75 190 151 TSS membership liability revaluation charge 17 8 35 18 Finance and other expense (income) (1) (0) (2) (3) Bargain purchase (gain) (0) - (0) (28) Impairment of intangible and other non-financial assets 4 - 8 - Finance costs 10 9 22 18 Income tax expense (recovery) 48 30 80 58 Foreign exchange loss (gain) 10 13 4 15 Change in non-cash operating assets and liabilities exclusive of effects of business combinations (35) (130) 100 (7) Income taxes paid (19) (49) (57) (88) Net cash flows from operating activities 237 50 597 334 Cash flows from (used in) financing activities: Interest paid on lease obligations (2) (2) (4) (4) Interest paid on other facilities (5) (7) (14) (15) Increase (decrease) in CSI facility 100 - 35 - Increase (decrease) in revolving credit under debt facilities without recourse to CSI - 11 (55) (40) Proceeds from issuance of term debt under facilities without recourse to CSI 15 - 15 - Repayments of term debt under facilities without recourse to CSI (3) (1) (4) (1) Credit facility transaction costs (0) - (0) - Payments of lease obligations (16) (13) (30) (23) Distribution to TSS minority owners - - - (11) Dividends paid (21) (445) (42) (466) Net cash flows from (used in) in financing activities 67 (457) (100) (560) Cash flows from (used in) investing activities: Acquisition of businesses (68) (82) (175) (130) Cash obtained with acquired businesses 10 10 24 35 Post-acquisition settlement payments, net of receipts (23) (12) (55) (37) Purchases of other investments (1) (6) (2) (6) Interest, dividends and other proceeds received 1 1 1 3 Property and equipment purchased (6) (8) (13) (15) Net cash flows from (used in) investing activities (87) (97) (220) (149) Effect of foreign currency on cash and cash equivalents 5 1 (9) 0 Increase (decrease) in cash 221 (503) 269 (375) Cash, beginning of period 364 717 316 589 Cash, end of period $ 585 $ 214 585 214