Note 22: Subsequent Events
On October 1, 2020, the Company completed the previously announced combination with CPA Global, a global leader in intellectual property software and tech-enabled services. Clarivate acquired all of the outstanding shares of CPA Global in a cash and stock transaction. The aggregate consideration in connection with the closing of the CPA Global acquisition was $8,722,563, net of $91,878 cash acquired and including an equity holdback consideration of $46,485. The aggregate consideration was comprised of (i) $6,761,515 from the issuance of up to 218,183,778 ordinary shares to Redtop Holdings Limited, a portfolio company of Leonard Green & Partners, L.P., representing approximately 35% pro forma fully diluted ownership of Clarivate and (ii) approximately $2,052,926 in cash to fund the repayment of CPA Global's parent company outstanding debt. Of the 218,306,663 ordinary shares issuable in the acquisition, Clarivate issued 216,683,778 ordinary shares as of October 1, 2020.
CLARIVATE PLC
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Issuance of 218,183,778 shares
|
|
$
|
6,761,515
|
|
|
Cash paid for repayment CPA Global's parent company debt
|
|
2,052,926
|
|
|
Total purchase price
|
|
8,814,441
|
|
|
Cash acquired
|
|
(91,878)
|
|
|
Total purchase price, net of cash acquired
|
|
$
|
8,722,563
|
|
|
|
|
|
|
|
|
|
The Company recorded costs related to the CPA Global combination within Transaction expense in the Quarterly Condensed Consolidated Statements of Operations during three and nine months ended September 30, 2020, as follows:
|
|
|
|
|
|
|
|
Accounting and legal fees
|
$
|
8,493
|
|
|
Other
|
290
|
|
|
Total
|
$
|
8,783
|
|
On October 1, 2020, in connection with the CPA Global acquisition, the Company incurred an incremental $1,600,000 of borrowings under our term loan facility and used the net proceeds from such borrowings to fund a portion of the repayment of CPA Global's $2,052,926 of outstanding debt. The Company borrowed $60,000 on the existing Revolving Credit Facility and used the net proceeds from such borrowings to fund the debt extinguishment costs in connection with funding of the repayment of CPA Global's outstanding debt. $187,663 remains undrawn subsequent to the borrowing.
On August 12, 2020, the company entered into an agreement pursuant to which, on October 26, 2020, it acquired control of Beijing IncoPat Technology Co., Ltd. (“IncoPat”), a leading patent information service provider in China via cash on hand. IncoPat is complementary to Clarivate’s intellectual property portfolio. The Company will consolidate the financial results of IncoPat beginning in the fourth quarter of 2020.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our unaudited Condensed Consolidated Financial Statements, including the notes thereto, included elsewhere in this report. Certain statements in this section are forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations and intentions. Our future results and financial condition may differ materially from those we currently anticipate as a result of the factors we describe under "Item 1A. Risk Factors." Certain income statement amounts discussed herein are presented on an actual and on a constant currency basis. We calculate constant currency by converting the non-U.S. dollar income statement balances for the most current year to U.S. dollars by applying the average exchange rates of the preceding year. Certain amounts that appear in this section may not sum due to rounding.
Overview
We offer a collection of high quality, market leading information and analytic products and solutions through our Science and Intellectual Property (“IP”) Product Groups. Our Science Product Group consists of our Web of Science and Life Science Product Lines, and our IP Product Group consists of our Derwent, CompuMark and MarkMonitor Product Lines. Our highly curated Web of Science products are offered primarily to universities, helping them navigate scientific literature, facilitate research and evaluate and measure the quality of researchers, institutions and scientific journals across various academic disciplines. Our Life Sciences Product Line offerings serve the content and analytical needs of pharmaceutical and biotechnology companies across the drug development lifecycle, including content on discovery and pre-clinical research, competitive intelligence, regulatory information and clinical trials. Our Derwent Product Line offerings help patent and legal professionals in R&D intensive businesses evaluate the novelty and patentability of new ideas and products to help protect and research patents. Our CompuMark products and services allow businesses and legal professionals to access our comprehensive trademark database. Finally, our MarkMonitor offerings include enterprise web domain portfolio management products and services.
Factors Affecting the Comparability of Our Results of Operations
There have been no material changes to the factors affecting the comparability of our results of operations associated with our business previously disclosed in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting the Comparability of Our Results of Operations” section in our Annual Report on Form 10-K, except as set forth below. The disclosures set forth below updates, and should be read together with, the disclosures in the "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting the Comparability of Our Results of Operations” section, in our Annual Report on Form 10-K.
Acquisition of Decision Resources Group
On February 28, 2020, we acquired 100% of the assets, liabilities and equity interests of Decision Resources Group ("DRG"), a premier provider of high-value data, analytics and insights products and services to the healthcare industry, from Piramal Enterprises Limited ("PEL"), which is a part of global business conglomerate Piramal Group. The acquisition helps us expand our core businesses and provides us with the potential to grow in the Life Sciences Product Line.
The aggregate consideration paid in connection with the closing of the DRG acquisition was $964,997, comprised of $900,000 of base cash plus $6,100 of adjusted closing cash paid on the closing date and up to 2,895,638 of the Company's ordinary shares to be issued to PEL following the one-year anniversary of closing. The contingent stock consideration was valued at $58,897 on the closing date and will be revalued at each period end and included in the Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.
February Offering
In February 2020, we completed an underwritten public offering of 27,600,000 of our ordinary shares, generating proceeds of $540,736, which we used to fund a portion of the cash consideration for the DRG acquisition. In addition, we incurred an incremental $360,000 of term loans under our term loan facility and used the net proceeds from such borrowings, together with cash on hand, to fund the remainder of the cash consideration for the DRG
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except per share and per share data, option price amounts, ratios or as noted)
acquisition and to pay related fees and expenses. As a result of the additional term loan, we had $1,250,550 outstanding on our term loan facility at September 30, 2020.
Acquisition of CPA Global
On October 1, 2020, the Company completed the previously announced combination with CPA Global, a global leader in intellectual property software and tech-enabled services. Clarivate acquired all of the outstanding shares of CPA Global in a cash and stock transaction. The aggregate consideration in connection with the closing of the CPA Global acquisition was $8,722,563, net of $91,878 cash acquired, including an equity holdback consideration of $46,485. The aggregate consideration was comprised of (i) $6,761,515 from the issuance of up to 218,183,778 ordinary shares to Redtop Holdings Limited, a portfolio company of Leonard Green & Partners, L.P., representing approximately 35% pro forma fully diluted ownership of Clarivate and (ii) approximately $2,052,926 in cash to fund the repayment of CPA Global's parent company outstanding debt. Of the 218,306,663 ordinary shares issuable in the acquisition, Clarivate issued 216,683,778 ordinary shares as of October 1, 2020.
In conjunction with the closing of the combination, the Company incurred an incremental $1,600,000 of term loans under our term loan facility and used the net proceeds from such borrowings, together with cash on hand, to fund the transaction.
MarkMonitor Brand Protection, Antipiracy and Antifraud Disposition
In November 2019, we entered into an agreement with an unrelated third-party for the sale of certain assets and liabilities of our MarkMonitor Product Line within the IP Group. The divestment closed in January 2020 for a consideration of approximately $3,751. An impairment charge of $18,431 was recognized in the Statement of Operations during the fourth quarter of 2019 to reduce the Assets Held for Sale to their fair value. Accordingly, we recorded an immaterial loss on the divestiture during the nine months ended September 30, 2020.
Disposition of Certain Non-core Assets and Liabilities
As of September 30, 2020, the Company began the process of negotiating an agreement for the sale of certain non-core assets and liabilities. As of September 30, 2020, the assets and liabilities related to the divestment met the criteria for classification as Assets held for sale on the Company’s Balance Sheet. In anticipation of the sale, current assets of $15,958 and Long term assets of $20,101 were reclassified to Current assets held for sale, while Current liabilities of $24,650 and Long term liabilities of $398 were reclassified to Current liabilities held for sale.
Restructuring
The restructuring charges for the plans noted below were recognized in accordance with ASC 420, Exit or Disposal Cost Obligations or ASC 712, Compensation – Nonretirement Postemployment Benefits, as applicable. Liabilities were recognized in accordance with ASC 420 when the programs were approved, the employees to be terminated were identified, the terms of the arrangement were established, it was determined changes to the plan were unlikely to occur and the arrangements were communicated to employees. Liabilities for nonretirement postemployment benefits that fall under ASC 712 were recognized when the severance liability was determined to be probable of being paid and reasonably estimable.
Operation Simplification and Optimization Program
During the fourth quarter of 2019, the Company approved restructuring actions designed to streamline our operations by simplifying our organization and focusing on two product groups in planned phases. As a result of these actions, the Company expects to record total pre-tax restructuring charges of approximately $49,000 for all phases of the program. Approximately $33,000 of costs have been incurred to date under the program and a total remaining of approximately $16,000 are expected to be incurred in 2020. This estimate includes approximately $4,000 for severance related charges and approximately $12,000 of estimated maximum lease exit costs, assuming no sublease agreements are entered into.
During the three and nine months ended September 30, 2020, the Company recorded pre-tax charges of $1,833 and $22,109, respectively, recognized within Restructuring and impairment in the Condensed Consolidated Statement of Operations comprised of $855 and $5,763 of lease impairment and location exit costs, $506 and $4,435 of contract exit costs and legal and advisory fees and $472 and $11,911 of severance and related benefit costs, respectively.
DRG Acquisition Integration Program
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except per share and per share data, option price amounts, ratios or as noted)
During the second quarter of 2020, the Company approved restructuring actions designed to eliminate duplicative costs following the acquisition of DRG in planned phases. As a result of these actions, the company expects to record total pre-tax restructuring charges of approximately $14,800 for all phases of the program. Approximately $10,800 of costs have been incurred to date under the program and $4,000 are expected to be incurred for all phases associated with this charge which is expected to be substantially complete in 2020. This estimate includes approximately $0 for severance related charges and approximately $4,000 of estimated maximum lease exit costs, assuming no sublease agreements are entered into.
During the three and nine months ended September 30, 2020, the Company recorded pre-tax charges of $1,359 and $4,683, respectively, recognized in Restructuring and impairment in the Condensed Consolidated Statement of Operations comprised of $149 and $161 of asset related charges and $1,210 and $4,522 of severance and related benefit costs.
June Ordinary Share Offering
In June 2020, we completed an underwritten public offering of 50,400,000 of our ordinary shares (including 2,400,000 ordinary shares pursuant to the underwriters' option to purchase up to an additional 7,200,000 ordinary shares from certain selling shareholders) at a share price of $22.50. Of the 50,400,000 ordinary shares, 14,000,000 ordinary shares were offered by Clarivate and 36,400,000 ordinary shares were offered by selling shareholders, including 20,821,765 ordinary shares from Onex, 8,097,354 ordinary shares from Baring and 7,480,881 ordinary shares from Directors, Executive Officers and other shareholders. The underwriters' option to purchase the remaining 4,800,000 ordinary shares from certain selling shareholders expired on July 3, 2020.
The Company received approximately $304,030 in net proceeds from the sale of ordinary shares offered by the Company, after deducting underwriting discounts and estimated offering expenses payable. We used the net proceeds, in conjunction with the new $1,600,000 incremental term loan facility available to Clarivate on October 1, 2020, to fund the repayment of CPA Global's $2,052,926 of outstanding debt. The Company did not receive any proceeds from the secondary ordinary shares sold by the selling shareholders.
Key Components of Our Results of Operations
Revenues, net
We categorize our revenues into two categories: subscription and transactional.
Subscription-based revenues are recurring revenues that are earned under annual, multi-year, or evergreen contracts, pursuant to which we license the right to use our products to our customers. Revenues from the sale of subscription data and analytics solutions are typically invoiced annually in advance and recognized ratably over the year as revenues are earned. Subscription revenues are driven by annual revenue renewal rates, new subscription business, price increases on existing subscription business and subscription upgrades and downgrades from recurring customers. Substantially all of our historical deferred revenues purchase accounting adjustments are related to subscription revenues.
Transactional revenues are earned under contracts for specific deliverables that are typically quoted on a product, data set or project basis and often derived from repeat customers, including customers that also generate subscription-based revenues. Transactional products and services are invoiced according to the terms of the contract, typically in arrears. Transactional content revenues are usually delivered to the customer instantly or in a short period of time, at which time revenues are recognized. Transactional revenues also include, to a lesser extent, professional services, which are typically performed under contracts that vary in length from several months to years for multi-year projects and are typically invoiced based on the achievement of milestones. The most significant components of our transactional revenues include our “clearance searching” and “backfiles” products.
Cost of Revenues, Excluding Depreciation and Amortization
Cost of revenues consists of costs related to the production, servicing and maintenance of our products and are comprised primarily of related personnel costs, such as salaries, benefits and bonuses for employees, fees for contracted labor, and data center services and licensing costs. Cost of revenues also includes the costs to acquire or produce content, royalties payable and non-capitalized R&D expenses. Cost of revenues does not include production costs related to internally generated software, which are capitalized.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
Selling, General and Administrative, Excluding Depreciation and Amortization
Selling, general and administrative costs consist primarily of salaries, benefits, commission and bonuses for the executive, finance and accounting, human resources, administrative, sales and marketing personnel, third-party professional services fees, such as legal and accounting expenses, facilities rent and utilities and technology costs associated with our corporate infrastructure.
Share-based Compensation
Share-based compensation expense includes costs associated with stock awards granted to and certain modifications for certain members of management and expense related to the issuance of shares in connection with our merger with Churchill Capital Corp in 2019.
Depreciation
Depreciation expense relates to our fixed assets, including mainly computer hardware and leasehold improvements, furniture and fixtures. These assets are depreciated over their expected useful lives, and in the case of leasehold improvements over the shorter of their useful life or the duration of the related lease.
Amortization
Amortization expense relates to our finite-lived intangible assets, including mainly databases and content, customer relationships, internally generated computer software and trade names. These assets are amortized over periods of between two and 20 years. Definite-lived intangible assets are tested for impairment when indicators are present, and, if impaired, are written down to fair value based on discounted cash flows. No impairment of intangible assets has been identified during any financial period included in our accompanying unaudited Condensed Consolidated Financial Statements.
Transaction Expenses
Transaction expenses are incurred to complete business combination transactions, including costs incurred to complete business combination transactions, including acquisitions, dispositions and capital market activities and include advisory, legal, and other professional and consulting costs.
Transition, Integration and Other Related Expenses
Transition, integration and other related expenses, including transformation expenses, mainly reflect the costs of transitioning certain activities performed under the transition services agreement by Thomson Reuters and certain consulting costs related to standing up our back-office systems to enable our operation on a stand-alone basis. These costs include labor costs of full time employees currently working on migration projects, including primarily employees whose labor costs are capitalized in other circumstances (such as employees working on application development). In 2019, these costs also relate to the Company's transition expenses incurred following the merger with Churchill Capital Corp.
Restructuring and Impairment
Restructuring expense includes costs associated with involuntary termination benefits provided to employees under the terms of a one-time or ongoing benefit arrangements, certain contract termination costs, and other costs associated with an exit or disposal activity.
Legal Settlement
Legal settlement represents a net gain recorded for cash received in relation to closure of a confidential legal matter.
Other Operating Income (Expense), Net
Other operating income (expense), net consists of gains or losses related to legal settlements and the disposal of our assets, asset impairments or write-downs and the consolidated impact of re-measurement of the assets and liabilities of our company, sublease income, gain recognized on foreign exchange contract settlement and our subsidiaries that are denominated in currencies other than each relevant entity's functional currency.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
Interest Expense, net
Interest expense, net consists of expense related to interest on our borrowings under our term loan facility and our secured notes due 2026, the amortization and write off of debt issuance costs and original discount, and interest related to certain derivative instruments.
Benefit (Provision) for Income Taxes
A benefit or provision for income tax is calculated for each of the jurisdictions in which we operate. The benefit or provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The benefit or provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the book and tax bases of assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Interest accrued related to unrecognized tax benefits and income tax related penalties are included in the provision for income taxes.
Key Performance Indicators
We regularly monitor the following key performance indicators to evaluate our business and trends, measure our performance, prepare financial projections and make strategic decisions.
Adjusted Revenues
We present Adjusted Revenues, which excludes the impact of the deferred revenue purchase accounting adjustment (recorded in connection with the separation from Thomson Reuters) and revenues from divestitures. We present these measures because we believe it is useful to readers to better understand the underlying trends in our operations. See “— Certain Non-GAAP Measures — Adjusted Revenues” below for important information on the limitations of Adjusted Revenues and their reconciliation to the respective revenues measures under U.S. GAAP.
Adjusted EBITDA and Adjusted EBITDA margin
Adjusted EBITDA is presented because it is a basis upon which our management assesses our performance, and we believe it is useful for investors to understand the underlying trends of our operations. See “— Certain Non-GAAP Measures — Adjusted EBITDA and Adjusted EBITDA margin” for important information on the limitations of Adjusted EBITDA and its reconciliation to our Net loss under U.S. GAAP. Adjusted EBITDA represents net loss before provision for income taxes, depreciation and amortization, interest income and expense adjusted to exclude acquisition or disposal-related transaction costs (such costs include net income from continuing operations before provision for income taxes, depreciation and amortization and interest income and expense from divestitures), losses on extinguishment of debt, stock-based compensation, unrealized foreign currency gains/(losses), costs associated with the transition services agreement with Thomson Reuters, which we entered into in connection with our separation from Thomson Reuters in 2016, separation and integration costs, transformational and restructuring expenses, acquisition-related adjustments to deferred revenues, costs related to our merger with Churchill Capital Corp in 2019, non-cash income/(loss) on equity and cost method investments, non-operating income or expense, the impact of certain non-cash, legal settlements and other items that are included in net income for the period that the Company does not consider indicative of its ongoing operating performance and certain unusual items impacting results in a particular period. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by Adjusted Revenues.
Annualized Contract Value
Annualized Contract Value (“ACV”), at a given point in time, represents the annualized value for the next 12 months of subscription-based client license agreements, assuming that all expiring license agreements during that period are renewed at their current price level. License agreements may cover more than one product and the standard subscription period for each license agreement typically runs for no less than 12 months. The renewal period for our subscriptions starts 90 days before the end of the current subscription period, during which customers must provide notice of whether they intend to renew or cancel the license agreement.
An initial subscription period for new customers may be for a term of less than 12 months, in certain circumstances. Most of our customers, however, opt to enter into a full 12-month initial subscription period, resulting in renewal
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except per share and per share data, option price amounts, ratios or as noted)
periods spread throughout the calendar year. Customers that license more than one subscription-based product may, at any point during the renewal period, provide notice of their intent to renew only certain subscriptions within the license agreement and cancel other subscriptions, which we typically refer to as a downgrade. In other instances, customers may upgrade their license agreements by adding additional subscription-based products to the original agreement. Our calculation of ACV includes the impact of downgrades, upgrades, price increases, and cancellations that have occurred as of the reporting period. For avoidance of doubt, ACV does not include fees associated with transactional revenues.
We monitor ACV because it represents a leading indicator of the potential subscription revenues that may be generated from our existing customer base over the upcoming 12-month period. Measurement of subscription revenues as a key operating metric is particularly relevant because a majority of our revenues are generated through subscription-based products, which accounted for 77.5% and 82.6% in each of the three months ended September 30, 2020 and 2019 and 78.4% and 82.8% for the nine months ended September 30, 2020 and 2019, respectively. We calculate and monitor ACV for each of our Groups and use the metric as part of our evaluation of our business and trends.
The amount of actual subscription revenues that we earn over any 12-month period are likely to differ from ACV at the beginning of that period, sometimes significantly. This may occur for numerous reasons, including subsequent changes in annual revenue renewal rates, impact of price increases (or decreases), cancellations, upgrades and downgrades, and acquisitions and divestitures.
We calculate the ACV on a constant currency basis to exclude the effect of foreign currency fluctuations.
The following table presents ACV as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
Variance
|
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
$
|
|
%
|
|
Annualized contract value
|
$
|
860,932
|
|
|
$
|
788,700
|
|
|
$
|
72,232
|
|
|
9.2
|
%
|
Annual Revenue Renewal Rates
Our revenues are primarily subscription based, which leads to high revenue predictability. Our ability to retain existing subscription customers is a key performance indicator that helps explain the evolution of our historical results and is a leading indicator of our revenues and cash flows for the subsequent reporting period.
“Annual revenue renewal rate” is the metric we use to determine renewal levels by existing customers across all of our Groups, and is a leading indicator of renewal trends, which impact the evolution of our ACV and results of operations. We calculate the annual revenue renewal rate for a given period by dividing (a) the annualized dollar value of existing subscription product license agreements that are renewed during that period, including the value of any product downgrades, by (b) the annualized dollar value of existing subscription product license agreements that come up for renewal in that period. “Open renewals,” which we define as existing subscription product license agreements that come up for renewal, but are neither renewed nor canceled by customers during the applicable reposting period, are excluded from both the numerator and denominator of the calculation. We calculate the annual revenue renewal rate to reflect the value of product downgrades but not the value of product upgrades upon renewal, because upgrades reflect the purchase of additional services.
The impact of upgrades, new subscriptions and product price increases is reflected in ACV, but not in annual revenue renewal rates. Our annual revenue renewal rates were 91.0% and 90.6% for the nine months ended September 30, 2020 and 2019, respectively.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except per share and per share data, option price amounts, ratios or as noted)
Results of Operations
The following table presents the results of operations for the three months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Variance Increase / (Decrease)
|
|
|
2020
|
|
2019
|
|
|
|
|
|
$
|
|
%
|
|
(in thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
$
|
284,360
|
|
|
$
|
242,998
|
|
|
|
|
|
|
$
|
41,362
|
|
|
17.0
|
%
|
|
Cost of revenues, excluding depreciation and amortization
|
(91,805)
|
|
|
(87,117)
|
|
|
|
|
|
|
4,688
|
|
|
5.4
|
%
|
|
Selling, general and administrative costs, excluding depreciation and amortization
|
(91,319)
|
|
|
(96,017)
|
|
|
|
|
|
|
(4,698)
|
|
|
(4.9)
|
%
|
|
Share-based compensation expense
|
(6,796)
|
|
|
(9,567)
|
|
|
|
|
|
|
(2,771)
|
|
|
(29.0)
|
%
|
|
Depreciation
|
(2,918)
|
|
|
(2,281)
|
|
|
|
|
|
|
637
|
|
|
27.9
|
%
|
|
Amortization
|
(65,696)
|
|
|
(41,656)
|
|
|
|
|
|
|
24,040
|
|
|
57.7
|
%
|
|
Transaction expenses
|
(34,938)
|
|
|
(8,645)
|
|
|
|
|
|
|
26,293
|
|
|
N/M
|
|
Transition, integration and other related expenses
|
(222)
|
|
|
(3,327)
|
|
|
|
|
|
|
(3,105)
|
|
|
(93.3)
|
%
|
|
Restructuring and impairment
|
(3,192)
|
|
|
—
|
|
|
|
|
|
|
3,192
|
|
|
N/M
|
|
Legal settlement
|
—
|
|
|
39,399
|
|
|
|
|
|
|
(39,399)
|
|
|
N/M
|
|
Other operating income (expense), net
|
(138)
|
|
|
2,057
|
|
|
|
|
|
|
(2,195)
|
|
|
N/M
|
|
Total operating expenses
|
(297,024)
|
|
|
(207,154)
|
|
|
|
|
|
|
(89,870)
|
|
|
(43.4)
|
%
|
|
Income (loss) from operations
|
(12,664)
|
|
|
35,844
|
|
|
|
|
|
|
(48,508)
|
|
|
N/M
|
|
Interest expense, net
|
(20,244)
|
|
|
(23,369)
|
|
|
|
|
|
|
(3,125)
|
|
|
(13.4)
|
%
|
|
Income (loss) before income tax
|
(32,908)
|
|
|
12,475
|
|
|
|
|
|
|
(45,383)
|
|
|
N/M
|
|
Provision for income taxes
|
(4,325)
|
|
|
(1,644)
|
|
|
|
|
|
|
2,681
|
|
|
N/M
|
|
Net income (loss)
|
$
|
(37,233)
|
|
|
$
|
10,831
|
|
|
|
|
|
|
$
|
(48,064)
|
|
|
N/M
|
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
The following table presents the results of operations for the nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Variance Increase / (Decrease)
|
|
|
2020
|
|
2019
|
|
$
|
|
%
|
|
(in thousands, except percentages)
|
(unaudited)
|
|
|
|
|
|
Revenues, net
|
$
|
798,452
|
|
|
$
|
719,332
|
|
|
$
|
79,120
|
|
|
11.0
|
%
|
|
Cost of revenues, excluding depreciation and amortization
|
(265,063)
|
|
|
(264,013)
|
|
|
1,050
|
|
|
0.4
|
%
|
|
Selling, general and administrative costs, excluding depreciation and amortization
|
(266,749)
|
|
|
(280,766)
|
|
|
(14,017)
|
|
|
(5.0)
|
%
|
|
Share-based compensation expense
|
(31,121)
|
|
|
(46,675)
|
|
|
(15,554)
|
|
|
(33.3)
|
%
|
|
Depreciation
|
(8,151)
|
|
|
(6,463)
|
|
|
1,688
|
|
|
26.1
|
%
|
|
Amortization
|
(168,049)
|
|
|
(138,694)
|
|
|
29,355
|
|
|
21.2
|
%
|
|
Transaction expenses
|
(70,154)
|
|
|
(42,073)
|
|
|
28,081
|
|
|
66.7
|
%
|
|
Transition, integration and other related expenses
|
(3,774)
|
|
|
(9,750)
|
|
|
(5,976)
|
|
|
(61.3)
|
%
|
|
Restructuring and impairment
|
(26,792)
|
|
|
—
|
|
|
26,792
|
|
|
N/M
|
|
Legal settlement
|
—
|
|
|
39,399
|
|
|
(39,399)
|
|
|
N/M
|
|
Other operating income, net
|
14,675
|
|
|
3,047
|
|
|
11,628
|
|
|
N/M
|
|
Total operating expenses
|
(825,178)
|
|
|
(745,988)
|
|
|
(79,190)
|
|
|
(10.6)
|
%
|
|
Loss from operations
|
(26,726)
|
|
|
(26,656)
|
|
|
(70)
|
|
|
(0.3)
|
%
|
|
Interest expense, net
|
(72,306)
|
|
|
(93,938)
|
|
|
(21,632)
|
|
|
(23.0)
|
%
|
|
Loss before income tax
|
(99,032)
|
|
|
(120,594)
|
|
|
21,562
|
|
|
17.9
|
%
|
|
Provision for income taxes
|
(13,693)
|
|
|
(5,596)
|
|
|
8,097
|
|
|
N/M
|
|
Net loss
|
$
|
(112,725)
|
|
|
$
|
(126,190)
|
|
|
$
|
13,465
|
|
|
10.7
|
%
|
Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
Revenues, Net
Revenues, net of $284,360 for the three months ended September 30, 2020, increased by $41,362, or 17.0%, from $242,998 for the three months ended September 30, 2019. On a constant currency basis, Revenues, net increased $37,048, or 15.2% for the three months ended September 30, 2020. Revenues, net of $798,452 for the nine months ended September 30, 2020, increased by $79,120, or 11.0%, from $719,332 for the nine months ended September 30, 2019. On a constant currency basis, Revenues, net increased $79,612, or 11.1% for the nine months ended September 30, 2020.
Adjusted Revenues, which excludes the impact of the deferred revenues adjustment, increased $43,402, or 17.9%, to $286,467 in the three months ended September 30, 2020 from $243,065 in the three months ended September 30, 2019. On a constant currency basis, Adjusted Revenues increased $39,088, or 16.1% for the three months ended September 30, 2020. Adjusted Revenues increased $86,179, or 12.0%, to $805,873 in the nine months ended September 30, 2020 from $719,694 in the nine months ended September 30, 2019. On a constant currency basis, Adjusted Revenues increased $86,671, or 12.0% for the nine months ended September 30, 2020. For an explanation of our calculation of Adjusted Revenues and the limitations as to its usefulness, see “— Certain Non-GAAP Measures — Adjusted Revenues, Adjusted Subscription Revenues and Adjusted Transactional Revenues.”
The following tables present the amounts of our subscription and transactional revenues for the periods indicated, as well the drivers of the variances between periods, including as a percentage of such revenues.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance Increase/(Decrease)
|
Percentage of Factors Increase/(Decrease)
|
|
|
Three Months Ended September 30,
|
|
Total Variance (Dollars)
|
Total Variance (Percentage)
|
Acquisitive
|
Disposal
|
FX Impact
|
Organic
|
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Subscription revenues
|
$
|
222,069
|
|
|
$
|
200,813
|
|
|
$
|
21,256
|
|
10.6
|
%
|
11.7
|
%
|
(6.5)
|
%
|
1.9
|
%
|
3.5
|
%
|
|
Transactional revenues
|
64,398
|
|
|
42,252
|
|
|
22,146
|
|
52.4
|
%
|
67.8
|
%
|
(0.5)
|
%
|
1.3
|
%
|
(16.2)
|
%
|
|
Deferred revenues adjustment (1)
|
(2,107)
|
|
|
(67)
|
|
|
(2,040)
|
|
NM
|
NM
|
—
|
%
|
—
|
%
|
61.0
|
%
|
|
Revenues, net
|
$
|
284,360
|
|
|
$
|
242,998
|
|
|
$
|
41,362
|
|
17.0
|
%
|
20.6
|
%
|
(5.5)
|
%
|
1.8
|
%
|
0.2
|
%
|
|
Deferred revenues adjustment (1)
|
2,107
|
|
|
67
|
|
|
2,040
|
|
NM
|
NM
|
—
|
%
|
—
|
%
|
(61.0)
|
%
|
|
Adjusted Revenues, net
|
$
|
286,467
|
|
|
$
|
243,065
|
|
|
$
|
43,402
|
|
17.9
|
%
|
21.5
|
%
|
(5.5)
|
%
|
1.8
|
%
|
0.1
|
%
|
(1) Reflects the deferred revenues adjustment as a result of purchase accounting.
Subscription revenues increased by $21,256, or 10.6% for the three months ended September 30, 2020. On a constant currency basis, subscription revenues increased by $17,502, or 8.7%. Acquisitive subscription growth was generated from the acquisitions of Darts-ip in November 2019 ("Darts Transaction") and DRG in February 2020 ("DRG Transaction"). Disposal subscription reduction was derived from the divestiture of the MarkMonitor Brand Protection, Antipiracy, and Antifraud products in January 2020 ("MarkMonitor Transaction"). Organic subscription revenues increased primarily due to price increases and new business.
Transactional revenues increased by $22,146, or 52.4% for the three months ended September 30, 2020. On a constant currency basis, transactional revenues increased by $21,586, or 51.1%. Acquisitive transactional growth was generated from the DRG Transaction. Disposal transactional reduction was derived from the MarkMonitor Transaction. Organic transactional revenues decreased due to an overall decrease in demand primarily driven by economic conditions resulting from the COVID-19 pandemic.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance Increase/(Decrease)
|
Percentage of Factors Increase/(Decrease)
|
|
|
Nine Months Ended September 30,
|
|
Total Variance (Dollars)
|
Total Variance (Percentage)
|
Acquisitive
|
Disposal
|
FX Impact
|
Organic
|
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Subscription revenues
|
$
|
631,873
|
|
|
$
|
596,052
|
|
|
$
|
35,821
|
|
6.0
|
%
|
9.5
|
%
|
(6.9)
|
%
|
(0.1)
|
%
|
3.5
|
%
|
|
Transactional revenues
|
174,000
|
|
|
123,642
|
|
|
50,358
|
|
40.7
|
%
|
52.1
|
%
|
(0.9)
|
%
|
(0.1)
|
%
|
(10.4)
|
%
|
|
Deferred revenues adjustment (1)
|
(7,421)
|
|
|
(362)
|
|
|
(7,059)
|
|
NM
|
NM
|
—
|
%
|
—
|
%
|
69.4
|
%
|
|
Revenues, net
|
$
|
798,452
|
|
|
$
|
719,332
|
|
|
$
|
79,120
|
|
11.0
|
%
|
15.8
|
%
|
(5.9)
|
%
|
(0.1)
|
%
|
1.2
|
%
|
|
Deferred revenues adjustment (1)
|
7,421
|
|
|
362
|
|
|
7,059
|
|
NM
|
NM
|
—
|
%
|
—
|
%
|
(69.4)
|
%
|
|
Adjusted Revenues, net
|
$
|
805,873
|
|
|
$
|
719,694
|
|
|
$
|
86,179
|
|
12.0
|
%
|
16.8
|
%
|
(5.9)
|
%
|
(0.1)
|
%
|
1.2
|
%
|
(1) Reflects the deferred revenues adjustment as a result of purchase accounting.
Subscription revenues increased by $35,821, or 6.0% for the nine months ended September 30, 2020. On a constant currency basis, subscription revenues increased by $36,182, or 6.1%. Acquisitive subscription growth was generated from the Darts Transaction and DRG Transaction. Disposal subscription revenues reduction was derived from the MarkMonitor Transaction. Organic subscription revenues increased primarily due to price increases and new business.
Transactional revenues increased by $50,358, or 40.7% for the nine months ended September 30, 2020. On a constant currency basis, transactional revenues increased by $50,490, or 40.8%. Acquisitive transactional growth was generated from the DRG Transaction. Disposal transactional reduction was derived from the MarkMonitor Transaction. Organic transactional revenues decreased due to an overall decrease in demand primarily driven by economic conditions resulting from the COVID-19 pandemic.
The table below presents our revenue split by geographic region for the periods indicated, as well the drivers of the variances between periods, including as a percentage of such revenues.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance Increase/(Decrease)
|
Percentage of Factors Increase/(Decrease)
|
|
Revenues by Geography
|
Three Months Ended September 30,
|
|
Total Variance (Dollars)
|
Total Variance (Percentage)
|
Acquisitive
|
Disposal
|
FX Impact
|
Organic
|
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Americas
|
$
|
146,213
|
|
|
$
|
114,937
|
|
|
$
|
31,276
|
|
27.2
|
%
|
33.4
|
%
|
(7.7)
|
%
|
0.2
|
%
|
1.3
|
%
|
|
Europe/Middle East/Africa
|
77,552
|
|
|
68,659
|
|
|
8,893
|
|
13.0
|
%
|
16.1
|
%
|
(5.0)
|
%
|
3.7
|
%
|
(1.8)
|
%
|
|
Asia Pacific
|
$
|
62,702
|
|
|
59,469
|
|
|
$
|
3,233
|
|
5.4
|
%
|
4.6
|
%
|
(1.6)
|
%
|
2.5
|
%
|
(0.1)
|
%
|
|
Deferred revenues adjustment (1)
|
(2,107)
|
|
|
(67)
|
|
|
(2,040)
|
|
NM
|
NM
|
—
|
%
|
—
|
%
|
61.0
|
%
|
|
Revenues, net
|
$
|
284,360
|
|
|
$
|
242,998
|
|
|
$
|
41,362
|
|
17.0
|
%
|
20.6
|
%
|
(5.5)
|
%
|
1.8
|
%
|
0.2
|
%
|
|
Deferred revenues adjustment (1)
|
2,107
|
|
|
67
|
|
|
2,040
|
|
NM
|
NM
|
—
|
%
|
—
|
%
|
(61.0)
|
%
|
|
Adjusted Revenues
|
$
|
286,467
|
|
|
$
|
243,065
|
|
|
$
|
43,402
|
|
17.9
|
%
|
21.5
|
%
|
(5.5)
|
%
|
1.8
|
%
|
0.1
|
%
|
(1) Reflects the deferred revenues adjustment as a result of purchase accounting.
Acquisitive growth for all regions was related to the Darts Transaction and DRG Transaction. Disposal reduction for all regions was derived from the MarkMonitor Transaction. On a constant currency basis, Americas revenues increased by $31,008, or 27.0%, with organic growth due to improved subscription revenues. On a constant currency basis, Europe/Middle East/Africa revenues increased by $6,335, or 9.2%, with an organic decline due to lower transactional revenues due to an overall decrease in demand primarily driven by economic conditions resulting from the COVID-19 pandemic, partially offset by improved subscription revenues. On a constant currency basis, Asia Pacific revenues increased $1,745, or 2.9% with an organic decline due to lower transactional revenues due to an overall decrease in demand primarily driven by economic conditions resulting from the COVID-19 pandemic, partially offset by improved subscription revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance Increase/(Decrease)
|
Percentage of Factors Increase/(Decrease)
|
|
Revenues by Geography
|
Nine Months Ended September 30,
|
|
Total Variance (Dollars)
|
Total Variance (Percentage)
|
Acquisitive
|
Disposal
|
FX Impact
|
Organic
|
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Americas
|
$
|
405,791
|
|
|
$
|
345,180
|
|
|
$
|
60,611
|
|
17.6
|
%
|
25.9
|
%
|
(8.1)
|
%
|
—
|
%
|
(0.2)
|
%
|
|
Europe/Middle East/Africa
|
218,195
|
|
|
203,850
|
|
|
14,345
|
|
7.0
|
%
|
12.1
|
%
|
(5.5)
|
%
|
(0.2)
|
%
|
0.5
|
%
|
|
Asia Pacific
|
$
|
181,887
|
|
|
170,664
|
|
|
$
|
11,223
|
|
6.6
|
%
|
3.9
|
%
|
(1.8)
|
%
|
—
|
%
|
4.4
|
%
|
|
Deferred revenues adjustment (1)
|
(7,421)
|
|
|
(362)
|
|
|
(7,059)
|
|
NM
|
NM
|
—
|
%
|
—
|
%
|
69.4
|
%
|
|
Revenues, net
|
$
|
798,452
|
|
|
$
|
719,332
|
|
|
$
|
79,120
|
|
11.0
|
%
|
15.8
|
%
|
(5.9)
|
%
|
(0.1)
|
%
|
1.2
|
%
|
|
Deferred revenues adjustment (1)
|
7,421
|
|
|
362
|
|
|
7,059
|
|
NM
|
NM
|
—
|
%
|
—
|
%
|
(69.4)
|
%
|
|
Adjusted Revenues
|
$
|
805,873
|
|
|
$
|
719,694
|
|
|
$
|
86,179
|
|
12.0
|
%
|
16.8
|
%
|
(5.9)
|
%
|
(0.1)
|
%
|
1.2
|
%
|
(1) Reflects the deferred revenues adjustment as a result of purchase accounting.
Acquisitive growth for all regions was related to the Darts Transaction and DRG Transaction. Disposal reduction for all regions was derived from the MarkMonitor Transaction. On a constant currency basis, Americas revenues increased by $60,701, or 17.6% with organic decline due to lower transactional revenues due to an overall decrease in demand primarily driven by economic conditions resulting from the COVID-19 pandemic, offset by improved subscription revenues. On a constant currency basis, Europe/Middle East/Africa revenues increased by $14,763, or 7.2%, with organic growth due to improved subscription revenues. On a constant currency basis, Asia Pacific revenues increased $11,207, or 6.6%, with organic growth due to improved subscription revenues.
The following tables, and the discussion that follows, present our revenues by Product Group for the periods indicated, as well the drivers of the variances between periods, including as a percentage of such revenues.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance Increase/(Decrease)
|
Percentage of Factors Increase/(Decrease)
|
|
Revenues by Product Group
|
Three Months Ended September 30,
|
|
Total Variance (Dollars)
|
Total Variance (Percentage)
|
Acquisitive
|
Disposal
|
FX Impact
|
Organic
|
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Science Product Group
|
$
|
190,718
|
|
|
$
|
136,060
|
|
|
$
|
54,658
|
|
40.2
|
%
|
36.4
|
%
|
—
|
%
|
2.3
|
%
|
1.5
|
%
|
|
IP Product Group
|
95,749
|
|
|
107,005
|
|
|
(11,256)
|
|
(10.5)
|
%
|
2.5
|
%
|
(12.4)
|
%
|
1.1
|
%
|
(1.7)
|
%
|
|
Deferred revenues adjustment (1)
|
(2,107)
|
|
|
(67)
|
|
|
(2,040)
|
|
NM
|
NM
|
—
|
%
|
—
|
%
|
61.0
|
%
|
|
Revenues, net
|
$
|
284,360
|
|
|
$
|
242,998
|
|
|
$
|
41,362
|
|
17.0
|
%
|
20.6
|
%
|
(5.5)
|
%
|
1.8
|
%
|
0.2
|
%
|
|
Deferred revenues adjustment (1)
|
2,107
|
|
|
67
|
|
|
2,040
|
|
NM
|
NM
|
—
|
%
|
—
|
%
|
(61.0)
|
%
|
|
Adjusted revenues
|
$
|
286,467
|
|
|
$
|
243,065
|
|
|
$
|
43,402
|
|
17.9
|
%
|
21.5
|
%
|
(5.5)
|
%
|
1.8
|
%
|
0.1
|
%
|
(1) Reflects the deferred revenues adjustment as a result of purchase accounting.
Science Product Group: Revenues of $190,718 for the three months ended September 30, 2020 increased $54,658, or 40.2% from $136,060 for the three months ended September 30, 2019. On a constant currency basis, revenues increased by $51,566, or 37.9%, driven by acquisitive and subscription revenue growth. Acquisitive growth was generated from the DRG Transaction. Organic revenues increased due to price increases and new business in subscription revenues, partially offset by lower transactional revenues due to a decline in demand primarily driven by economic conditions resulting from the COVID-19 pandemic.
IP Product Group: Revenues of $95,749 for the three months ended September 30, 2020 decreased $11,256, or 10.5% from $107,005 for the three months ended September 30, 2019. On a constant currency basis, revenue decreased $12,478, or 11.8%, driven by a disposal reduction and a decrease in transactional revenues, offset by increases to acquisitive growth. Disposal reduction was derived from the MarkMonitor Transaction. Organic revenues decreased due to lower transaction revenues due to a decrease in demand primarily driven by economic conditions resulting from the COVID-19 pandemic, offset by improved subscription revenues driven by new business and price increases. Acquisitive growth was generated from the Darts Transaction.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance Increase/(Decrease)
|
Percentage of Factors Increase/(Decrease)
|
|
Revenues by Product Group
|
Nine Months Ended September 30,
|
|
Total Variance (Dollars)
|
Total Variance (Percentage)
|
Acquisitive
|
Disposal
|
FX Impact
|
Organic
|
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Science Product Group
|
$
|
521,649
|
|
|
$
|
401,392
|
|
|
$
|
120,257
|
|
30.0
|
%
|
28.2
|
%
|
—
|
%
|
(0.1)
|
%
|
1.9
|
%
|
|
IP Product Group
|
284,224
|
|
|
318,302
|
|
|
(34,078)
|
|
(10.7)
|
%
|
2.4
|
%
|
(13.3)
|
%
|
—
|
%
|
—
|
%
|
|
Deferred revenues adjustment (1)
|
(7,421)
|
|
|
(362)
|
|
|
(7,059)
|
|
NM
|
NM
|
—
|
%
|
—
|
%
|
69.4
|
%
|
|
Revenues, net
|
$
|
798,452
|
|
|
$
|
719,332
|
|
|
$
|
79,120
|
|
11.0
|
%
|
15.8
|
%
|
(5.9)
|
%
|
(0.1)
|
%
|
1.2
|
%
|
|
Deferred revenues adjustment (1)
|
7,421
|
|
|
362
|
|
|
7,059
|
|
NM
|
NM
|
—
|
%
|
—
|
%
|
(69.4)
|
%
|
|
Adjusted revenues
|
$
|
805,873
|
|
|
$
|
719,694
|
|
|
$
|
86,179
|
|
12.0
|
%
|
16.8
|
%
|
(5.9)
|
%
|
(0.1)
|
%
|
1.2
|
%
|
(1) Reflects the deferred revenues adjustment as a result of purchase accounting.
Science Product Group: Revenues of $521,649 for the nine months ended September 30, 2020 increased $120,257, or 30.0% from $401,392 for the nine months ended September 30, 2019. On a constant currency basis, revenues increased by $120,816, or 30.1%, driven by acquisitive and subscription revenue growth. Acquisitive growth was generated from the DRG Transaction. Organic revenues increased due to price increases and new business in subscription revenues, partially offset by a lower transactional revenues due to a decline in demand primarily driven by economic conditions resulting from the COVID-19 pandemic..
IP Product Group: Revenues of $284,224 for the nine months ended September 30, 2020 decreased $34,078, or 10.7% from $318,302 for the nine months ended September 30, 2019. On a constant currency basis, revenue decreased $34,116, or 10.8% driven by a disposal reductions and a decrease in transactional revenues, offset by increases to acquisitive growth. Disposal reduction was derived from the MarkMonitor Transaction. Acquisitive growth was generated from the Darts Transaction. Organic revenues increased due to an increase subscription revenue driven by content upgrades, offset by lower transactional revenues due to a decline in demand primarily driven by economic conditions resulting from the COVID-19 pandemic.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
Cost of Revenues, Excluding Depreciation and Amortization
Cost of revenues of $91,805 for the three months ended September 30, 2020 increased by $4,688, or 5.4%, from $87,117 for the three months ended September 30, 2019. Cost of revenues of $265,063 for the nine months ended September 30, 2020 increased by $1,050, or 0.4%, from $264,013 for the nine months ended September 30, 2019. On a constant currency basis, cost of revenues increased by $4,027 or 4.6% for the three months ended September 30, 2020 primarily due to additional costs related to DRG, which was acquired in February 2020, offset by a decrease in costs associated with the transition service agreement, employee related costs and outside services including consulting fees, as well as the MarkMonitor Transaction in January 2020. On a constant currency basis, cost of revenues increased by $2,293 or 0.9% for the nine months ended September 30, 2020 primarily due to additional costs related to DRG, which was acquired in February 2020, offset by a decrease in costs associated with the transition service agreement, employee related costs and outside services including consulting fees, as well as the MarkMonitor Transaction in January 2020.
Selling, General and Administrative, Excluding Depreciation and Amortization
Selling, general and administrative expense of $91,319 for the three months ended September 30, 2020, decreased by $4,698, or 4.9%, from $96,017 for the three months ended September 30, 2019. Selling, general and administrative expense of $266,749 for the nine months ended September 30, 2020, decreased by $14,017, or 5.0%, from $280,766 for the nine months ended September 30, 2019. On a constant currency basis, Selling, general and administrative expenses decreased by $5,354, or 5.6%, for the three months ended September 30, 2020 primarily due to a decrease in costs associated with transition service agreement, employee related costs, outside services including consulting fees and marketing costs, offset by additional costs related to DRG, which was acquired in February 2020. On a constant currency basis, Selling, general and administrative expense decreased 13,113, or 4.7%, for the nine months ended September 30, 2020 primarily due to a decrease in costs associated with transition service agreement, employee related costs, outside services including consulting fees and marketing costs, offset by additional costs related to DRG.
Share-based Compensation
Share-based compensation expense of $6,796 for the three months ended September 30, 2020 decreased by $2,771, or 29.0% from $9,567 for the three months ended September 30, 2019. Share-based compensation expense of $31,121 for the nine months ended September 30, 2020 decreased by $15,554, or 33.3% from $46,675 for the nine months ended September 30, 2019. The decrease in the three and nine months ended September 30, 2020 was largely due to accelerated vesting, additional awards granted, and expense related to our merger with Churchill Capital Corp in 2019. This decrease was partially offset by additional expense related to the waived performance vesting condition associated with the Merger Shares in Q1 2020 and the issuance of RSUs in the nine months ended September 30, 2020.
Depreciation
Depreciation of $2,918 for the three months ended September 30, 2020 increased by $637, or 27.9% from $2,281 for the three months ended September 30, 2019. Depreciation of $8,151 for the nine months ended September 30, 2020 increased by $1,688, or 26.1% from $6,463 for the nine months ended September 30, 2019. The increase in the three and nine months ended September 30, 2020 was driven by the additional depreciation on assets acquired through the Darts Transaction and DRG Transaction. This increase was offset by run-off of previously purchased capital assets.
Amortization
Amortization of $65,696 for the three months ended September 30, 2020 increased by $24,040, or 57.7%, from $41,656 for the three months ended September 30, 2019. Amortization of $168,049 for the nine months ended September 30, 2020 increased by $29,355, or 21.2%, from $138,694 for the nine months ended September 30, 2019. The increase in the period three and nine months ended September 30, 2020 was driven by an increase in the amortization on intangible assets acquired through the Darts-ip Transaction and DRG Transaction. This increase was offset by a decrease in amortization related to intangible assets acquired in connection with our separation from Thomson Reuters in 2016 that are now fully amortized and reduction of amortization from MarkMonitor Transaction.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
Transaction Expenses
Transaction expenses of $34,938 for the three months ended September 30, 2020, increased by $26,293 from $8,645 for the three months ended September 30, 2019. Transaction expenses of $70,154 for the nine months ended September 30, 2020, increased by $28,081, or 66.7% from $42,073 for the nine months ended September 30, 2019. The increase in the three months ended September 30, 2020 was due to costs associated with the DRG acquisition and CPA Global acquisition during 2020, offset by costs incurred with the closing of a secondary offering and increases in the estimate of contingent payments for acquisition related earn-outs during 2019. The increase in the nine months ended September 30, 2020 was due to costs associated with the DRG acquisition, the CPA Global acquisition, the MarkMonitor divestiture and other finance merger and acquisition related activities during 2020, offset by costs incurred in association with our merger with Churchill Capital Corp in 2019.
Transition, Integration, and Other Related Expenses
Transition, integration, and other expenses of $222 for the three months ended September 30, 2020, decreased by $3,105, or 93.3%, from $3,327 for the three months ended September 30, 2019. Transition, integration, and other expenses of $3,774 for the nine months ended September 30, 2020, decreased by $5,976, or 61.3%, from $9,750 for the nine months ended September 30, 2019. The decrease in the three and nine months ended September 30, 2020 reflects the slowing pace of costs incurred in connection with establishing our standalone company infrastructure following our separation from Thomson Reuters in 2016 and our merger with Churchill Capital Corp in 2019.
Restructuring and impairment
Restructuring and impairment of $3,192 for the three months ended September 30, 2020, increased by $3,192, from $0 for the three months ended September 30, 2019. Restructuring and impairment of $26,792 for the nine months ended September 30, 2020, increased by $26,792, from $0 for the nine months ended September 30, 2019. The increase is related to initiatives, following our merger with Churchill Capital Corp in 2019 and acquisition of DRG in February 2020, to streamline our operations by simplifying our organization and focusing on two product groups.
Legal Settlement
The three and nine months ended September 30, 2019 includes a gain on a confidential legal settlement of $39,399.
Other Operating Income (Expense), Net
Other operating income (expense), net of $(138) for the three months ended September 30, 2020 decreased by $2,195 from income of $2,057 for the three months ended September 30, 2019. Other operating income, net of $14,675 for the nine months ended September 30, 2020 increased by $11,628 from $3,047 for the nine months ended September 30, 2019. The change was attributed to the consolidated impact of the remeasurement of the assets and liabilities of our Company that are denominated in currencies other than each relevant entity’s functional currency.
Interest Expense, net
Interest expense, net of $20,244 for the three months ended September 30, 2020, decreased by $3,125, or 13.4% from $23,369 for the three months ended September 30, 2019. Interest expense, net of $72,306 for the nine months ended September 30, 2020, decreased by $21,632, or 23.0% from $93,938 for the nine months ended September 30, 2019. The decreases in the interest expense, net for periods three and nine months ended September 30, 2020 was due to lower interest payments resulting from lower interest rates on the Company's borrowings as the result of the refinancing transaction in October 2019 offset by the additional $360,000 incremental term loan borrowings.
Benefit (Provision) for Income Taxes
There was a provision of $4,325 for the three months ended September 30, 2020, compared to a provision of $1,644 for income taxes for the three months ended September 30, 2019. There was a provision of $13,693 for the nine months ended September 30, 2020, compared to a provision of $5,596 for income taxes for the nine months ended September 30, 2019. The tax provision in each period reflected the mix of taxing jurisdictions in which pre-tax profits and losses were recognized.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
Certain Non-GAAP Measures
We include non-GAAP measures in this Report, including Adjusted Revenues, Adjusted EBITDA, Adjusted EBITDA margin and Free Cash Flow because they are a basis upon which our management assesses our performance, and we believe they reflect the underlying trends and indicators of our business by allowing management to focus on the most meaningful indicators of our continuous operational performance.
Although we believe these measures are useful for investors for the same reasons, we recommend users of the financial statements to note these measures are not a substitute for GAAP financial measures or disclosures. We provide reconciliations of these non-GAAP measures to the corresponding most closely related GAAP measure.
Adjusted Revenues
We present Adjusted Revenues, which excludes the impact of the deferred revenues purchase accounting adjustment recorded in connection with the separation from Thomson Reuters and acquisitions. We present this measure because we believe it is useful to readers to better understand the underlying trends in our operations.
Our presentation of Adjusted Revenues is for informational purposes only and is not necessarily indicative of our future results. You should compensate for these limitations by relying primarily on our GAAP results and only using non-GAAP measures for supplementary analysis.
The following table presents our calculation of Adjusted Revenues for the three and nine months ended September 30, 2020 and 2019 and a reconciliation of this measure to our Revenues, net for the same periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Variance
|
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
$
|
|
%
|
|
Revenues, net
|
$
|
284,360
|
|
|
$
|
242,998
|
|
|
$
|
41,362
|
|
|
17.0
|
%
|
|
Deferred revenues adjustment
|
2,107
|
|
|
67
|
|
|
2,040
|
|
|
NM
|
|
Adjusted revenues
|
$
|
286,467
|
|
|
$
|
243,065
|
|
|
$
|
43,402
|
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Variance
|
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
$
|
|
%
|
|
Revenues, net
|
$
|
798,452
|
|
|
$
|
719,332
|
|
|
$
|
79,120
|
|
|
11.0
|
%
|
|
Deferred revenues adjustments
|
7,421
|
|
|
362
|
|
|
7,059
|
|
|
NM
|
|
Adjusted revenues
|
$
|
805,873
|
|
|
$
|
719,694
|
|
|
$
|
86,179
|
|
|
12.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA and Adjusted EBITDA margin
Adjusted EBITDA is presented because it is a basis upon which our management assesses our performance, and we believe it is useful for investors to understand the underlying trends of our operations. See "— Certain Non-GAAP Measures — Adjusted EBITDA and Adjusted EBITDA margin" for important information on the limitations of Adjusted EBITDA and its reconciliation to our Net loss under GAAP. Adjusted EBITDA represents net loss before provision for income taxes, depreciation and amortization, interest income and expense adjusted to exclude acquisition or disposal-related transaction costs (such costs include net income from continuing operations before provision for income taxes, depreciation and amortization and interest income and expense from divestitures), losses on extinguishment of debt, share-based compensation expense, unrealized foreign currency gains/(losses), costs associated with the transition services agreement with Thomson Reuters, which we entered into in connection with our separation from Thomson Reuters in 2016, separation and integration costs, transformational and restructuring expenses, acquisition-related adjustments to deferred revenues, costs related to our merger with Churchill Capital Corp in 2019, non-cash income/(loss) on equity and cost method investments, non-operating income or expense, deferred revenues adjustment, Transaction related costs, restructuring costs, the impact of certain non-cash, legal settlements and other items that are included in net income for the period that the Company does not consider indicative of its ongoing operating performance and certain unusual items impacting results in a particular period. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by Adjusted Revenues.
Our presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be construed as an inference that our future results will be unaffected by any of the adjusted items, or that our projections and estimates will be realized in their entirety or at all. In addition, because of these limitations, Adjusted EBITDA should not be
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
considered as a measure of liquidity or discretionary cash available to us to fund our cash needs, including investing in the growth of our business and meeting our obligations. You should compensate for these limitations by relying primarily on our U.S. GAAP results and only use Adjusted EBITDA and Adjusted EBITDA margin for supplementary analysis.
The following table presents our calculation of Adjusted EBITDA for the three and nine months ended September 30, 2020 and 2019 and reconciles these measures to our Net loss for the same periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(in thousands, except percentages)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net loss
|
$
|
(37,233)
|
|
|
$
|
10,831
|
|
|
$
|
(112,725)
|
|
|
$
|
(126,190)
|
|
|
Provision for income taxes
|
4,325
|
|
|
1,644
|
|
|
13,693
|
|
|
5,596
|
|
|
Depreciation and amortization
|
68,614
|
|
|
43,937
|
|
|
176,200
|
|
|
145,157
|
|
|
Interest, net
|
20,244
|
|
|
23,369
|
|
|
72,306
|
|
|
93,938
|
|
|
Transition services agreement costs(1)
|
(115)
|
|
|
2,734
|
|
|
647
|
|
|
10,481
|
|
|
Transition, transformation and integration expense(2)
|
222
|
|
|
11,488
|
|
|
3,774
|
|
|
25,289
|
|
|
Deferred revenues adjustment(3)
|
2,107
|
|
|
67
|
|
|
7,421
|
|
|
362
|
|
|
Transaction related costs(4)
|
34,938
|
|
|
8,645
|
|
|
70,154
|
|
|
42,073
|
|
|
Share-based compensation expense
|
6,796
|
|
|
9,567
|
|
|
31,121
|
|
|
46,675
|
|
|
Restructuring(5)
|
3,192
|
|
|
—
|
|
|
26,792
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal Settlement
|
—
|
|
|
(39,399)
|
|
|
—
|
|
|
(39,399)
|
|
|
Other(6)
|
5,117
|
|
|
4,189
|
|
|
(2,835)
|
|
|
5,533
|
|
|
Adjusted EBITDA
|
$
|
108,207
|
|
|
$
|
77,072
|
|
|
$
|
286,548
|
|
|
$
|
209,515
|
|
|
Adjusted EBITDA margin
|
37.8
|
%
|
|
31.7
|
%
|
|
35.6
|
%
|
|
29.1
|
%
|
(1) In 2020, this is related to a new transition services agreement and offset by the reverse transition services agreement from the sale of MarkMonitor assets. In 2019, this includes payments to Thomson Reuters under the Transition Services Agreement.
(2) Includes costs incurred in connection with and after our separation from Thomson Reuters in 2016 relating to the implementation of our standalone company infrastructure and related cost-savings initiatives. These costs include mainly transition consulting, technology infrastructure, personnel and severance expenses relating to our standalone company infrastructure, which are recorded in Transition, integration, and other line-item of our income statement, as well as expenses related to the restructuring and transformation of our business following our separation from Thomson Reuters in 2016, mainly related to the integration of separate business units into one functional organization and enhancements in our technology.
(3) Reflects the deferred revenues adjustment as a result of purchase accounting.
(4) Includes costs incurred to complete business combination transactions, including acquisitions, dispositions and capital market activities and include advisory, legal, and other professional and consulting costs.
(5) Reflects costs incurred in connection with the initiative, following our merger with Churchill Capital Corp in 2019, to streamline our operations by simplifying our organization and focusing on two product groups. This also includes restructuring related costs following the acquisition of DRG in 2020.
(6) Includes primarily the net impact of foreign exchange gains and losses related to the re-measurement of balances and other items that do not reflect our ongoing operating performance.
Free Cash Flow
We use free cash flow in our operational and financial decision-making and believe free cash flow is useful to investors because similar measures are frequently used by securities analysts, investors, ratings agencies and other interested parties to evaluate our competitors and to measure the ability of companies to service their debt.
Our presentation of free cash flow should not be construed as a measure of liquidity or discretionary cash available to us to fund our cash needs, including investing in the growth of our business and meeting our obligations. You should compensate for these limitations by relying primarily on our U.S. GAAP results.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
We define free cash flow as net cash provided by operating activities less capital expenditures. For further discussion on free cash flow, including a reconciliation to cash flows provided by operating activities, refer to “— Liquidity and Capital Resources — Cash Flows" below.
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, capital expenditures, debt service, acquisitions, other commitments and contractual obligations. Our principal sources of liquidity include cash from operating activities, cash and cash equivalents on our Condensed Balance Sheet and amounts available under our revolving credit facility. We consider liquidity in terms of the sufficiency of these resources to fund our operating, investing and financing activities for a period of 12 months after the financial statement issuance date.
Our cash flows from operations are generated primarily from payments from our subscription customers. As described above, the standard term of a subscription is typically 12 months. When a customer enters into a new subscription agreement, or submits a notice to renew their subscription, we typically invoice for the full amount of the subscription period, record the balance to deferred revenues, and ratably recognize the deferral throughout the subscription period. As a result, we experience cash flow seasonality throughout the year, with a heavier weighting of operating cash inflows occurring during the first half, and particularly first quarter, of the year, when most subscription invoices are sent, as compared to the second half of the year.
We require and will continue to need significant cash resources to, among other things, meet our debt service requirements under our credit facilities, our secured notes due 2026 and any future indebtedness, fund our working capital requirements, make capital expenditures (including related to product development), and expand our business through acquisitions. We continue to assess the changing environment in relation to COVID-19 and conducted a scenario planning exercise to assess the potential impact on our liquidity and our future financial position. The scenario planning has taken into account our existing cash position, the creditworthiness of our banking partners, potential revenue outcomes (in both a worst and reasonable downside scenario), and to be prudent evaluated potential reductions in the cost base. Based on our forecasts, we believe that cash flow from operations, available cash on hand and available borrowing capacity under our revolving credit facility will be adequate to service debt, meet liquidity needs and fund necessary capital expenditures for at least the next 12 months. Our future capital requirements will depend on many factors, including the number of future acquisitions, data center infrastructure investments, and the timing and extent of spending to support product development efforts. We could be required, or could elect, to seek additional funding through public or private equity or debt financings; however, additional funds may not be available on terms acceptable to us.
Unrestricted cash and cash equivalents were $601,075 and $76,130 as of September 30, 2020 and December 31, 2019, respectively. We had approximately $1,950,550 of debt as of September 30, 2020, consisting primarily of $1,250,550 in borrowings under our term loan facility, and $700,000 in outstanding principal of secured notes due 2026 with no borrowings under our revolving credit facility as of the date. As of December 31, 2019, we had approximately $1,665,000 of debt, consisting primarily of $900,000 in borrowings under our term loan facility, $700,000 in outstanding principal of secured notes due 2026 and $65,000 of borrowings under our revolving credit facility (which borrowings under our revolving credit facility we subsequently paid down in full in February 2020). On February 28, 2020, we incurred an incremental $360,000 of term loans under our term loan facility and used the net proceeds from such borrowings, together with cash on hand, to fund a portion of the cash consideration for the DRG acquisition and to pay related fees and expenses. On October 1, 2020, in connection with the CPA Global acquisition, the Company incurred an incremental $1,600,000 of borrowings under our term loan facility and used the net proceeds from such borrowings to fund a portion of the repayment of CPA Global's $2,052,926 of outstanding debt. The Company borrowed $60,000 on the existing Revolving Credit Facility and used the net proceeds from such borrowings to fund the debt extinguishment costs in connection with funding of the repayment of CPA Global's outstanding debt. See “—Debt Profile” below.
Cash Flows
The following table discloses our consolidated cash flows provided by (used in) operating, investing and financing activities for the periods presented:
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
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Nine Months Ended September 30,
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(in thousands)
|
2020
|
|
2019
|
|
|
|
Net cash provided by operating activities
|
$
|
128,022
|
|
|
$
|
112,488
|
|
|
|
|
Net cash used in investing activities
|
(966,151)
|
|
|
(46,306)
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|
|
|
|
Net cash provided by (used in) financing activities
|
1,370,079
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|
|
(4,143)
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|
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Effect of exchange rates
|
(6,447)
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|
|
1,198
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|
|
Net increase in cash and cash equivalents, and restricted cash
|
525,503
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|
|
63,237
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|
|
Cash and cash equivalents, and restricted cash beginning of the year
|
76,139
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|
25,584
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Cash and cash equivalents, and restricted cash end of the period
|
$
|
601,642
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|
|
$
|
88,821
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|
|
Cash Flows Provided by Operating Activities
Net cash provided by operating activities consists of net loss adjusted for non-cash items, such as: depreciation and amortization of property and equipment and intangible assets, deferred income taxes, share-based compensation, deferred finance charges and for changes in net working capital assets and liabilities.
Net cash provided by operating activities was $128,022 and $112,488 for the nine months ended September 30, 2020 and September 30, 2019, respectively. The $128,022 of net cash provided by operating activities for the nine months ended September 30, 2020 included net loss of $112,725 offset with $227,956 of non-cash adjustments and changes in operating assets and liabilities of $12,791. The increase in operating cash flows was driven by year over year increases in earnings driven by increases in revenue and lower operating expenses.
Cash Flows Used in Investing Activities
Net cash used in investing activities was $966,151 for the nine months ended September 30, 2020. Cash flows used in investing is attributable to: (1) $885,323 used to acquire key business intangible assets from DRG, (2) $78,597 in capital expenditures and (3) $5,982 of key business intangible assets acquired from CustomersFirst Now. This activity was offset by cash flows provided by investing related to $3,751 of divestiture related to the sale of the MarkMonitor AntiFraud, Antipiracy, and Brand Protection products.
Net cash used in investing activities was $46,306 for the nine months ended September 30, 2019 reflecting $43,681 capital expenditures and $2,625 of key business intangible assets acquired from SequenceBase.
Our capital expenditures in both 2020 and 2019 consisted primarily of capitalized labor, consulting and other costs associated with product development.
Cash Flows Provided by (Used in) Financing Activities
Net cash provided by financing activities was $1,370,079 for the nine months ended September 30, 2020. Key drivers of cash flows provided by financing include: (1) Proceeds of $843,752 from the issuance of ordinary shares related to our public offerings, (2) $360,000 from the issuance of an incremental term loan and (3) $277,526 and $1,307 from the exercise of warrants and employee share options, respectively. This activity was offset by cash flows used in financing related to: (1) $65,000 repayment of borrowings under the revolving credit facility, (2) $28,674 of payments related to tax withholdings for stock-based compensation, (3) $4,115 payment related to the TradeMark Vision contingent earn-out, (4) $5,267 payment of debt issuance costs related to the issuance of the incremental term loan and (5) $9,450 principle payment on the term loan facility.
Net cash used in financing activities was $4,143 for the nine months ended September 30, 2019. Key drivers of cash flows used in financing include: (1) Payment of $630,000 on the Term Loan Facility upon consummation of the Transaction with Churchill, (2) $50,000 repayment of borrowings under the Revolving Credit Facility and (3) $11,509 in recurring Term Loan Facility principal repayments. This activity was offset by cash flows provided by financing related to: (1) $682,087 of proceeds from the Transactions, net of cash acquired, (2) $5,000 in proceeds from the Revolving Credit Facility and (3) $278 related to the issuance of ordinary shares.
In February 2020, we completed an underwritten public offering of 27,600,000 of our ordinary shares, generating net proceeds of $539,714, which we used to fund a portion of the cash consideration for the DRG acquisition. In addition, we incurred an incremental $360,000 of term loans under our term loan facility and used the net proceeds
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
from such borrowings, together with cash on hand, to fund the remainder of the cash consideration for the DRG acquisition and to pay related fees and expenses.
In June 2020, we completed an underwritten public offering of 50,400,000 of our ordinary shares at a share price of $22.50. Of the 50,400,000 ordinary shares, 14,000,000 were primary ordinary shares offered by Clarivate and 36,400,000 were secondary ordinary shares offered by selling shareholders including 20,821,765 ordinary shares from Onex, 8,097,354 ordinary shares from Baring and 7,480,881 ordinary shares from Directors, Executive Officers and other shareholders. The Company did not receive any proceeds from the sale of secondary ordinary shares by the selling shareholders. The Company received approximately $304,030 in net proceeds from the sale of ordinary shares offered by the Company, after deducting underwriting discounts and estimated offering expenses payable. We intend to use the net proceeds of the offering received by us for general corporate purposes.
During the period January 1, 2020 through February 21, 2020, 24,132,666 of the Company’s outstanding warrants were exercised for one ordinary share per whole warrant at a price of $11.50 per share.
Free Cash Flow (non-GAAP measure)
The following table reconciles free cash flow measure, which is a non-GAAP measure, to net cash provided by operating activities:
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Nine Months Ended September 30,
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(in thousands)
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2020
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2019
|
|
|
|
Net cash provided by operating activities
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$
|
128,022
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|
|
$
|
112,488
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|
|
|
|
Capital expenditures
|
(78,597)
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|
|
(43,681)
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Free cash flow
|
$
|
49,425
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|
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$
|
68,807
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|
Free cash flow was $49,425 for the nine months ended September 30, 2020, compared to $68,807 for the nine months ended September 30, 2019. The decrease in free cash flow was primarily due to an increase in capital expenditures.
Required Reported Data —Standalone Adjusted EBITDA
We are required to report Standalone Adjusted EBITDA, which is identical to Consolidated EBITDA and EBITDA as such terms are defined under our credit facilities, dated as of October 31, 2019 and the indenture governing our secured notes due 2026 issued by Camelot Finance S.A. and guaranteed by certain of our subsidiaries, respectively. In addition, the credit facilities and the indenture contain certain restrictive covenants that govern debt incurrence and the making of restricted payments, among other matters. These restrictive covenants utilize Standalone Adjusted EBITDA as a primary component of the compliance metric governing our ability to undertake certain actions otherwise proscribed by such covenants. Standalone Adjusted EBITDA reflects further adjustments to Adjusted EBITDA for cost savings already implemented and excess standalone costs.
Because Standalone Adjusted EBITDA is required pursuant to the terms of the reporting covenants under the credit facilities and the indenture and because this metric is relevant to lenders and noteholders, management considers Standalone Adjusted EBITDA to be relevant to the operation of its business. It is also utilized by management and the compensation committee of the Board as an input for determining incentive payments to employees.
Excess standalone costs are the difference between our actual standalone company infrastructure costs, and our estimated steady state standalone infrastructure costs. We make an adjustment for the difference because we have had to incur costs under the transition services agreement, with Thomson Reuters after we had implemented the infrastructure to replace the services provided pursuant to the transition services agreement, thereby incurring dual running costs. Furthermore, there has been a ramp up period for establishing and optimizing the necessary standalone infrastructure. Since our separation from Thomson Reuters, we have had to transition quickly to replace services provided under the transition services agreement, with optimization of the relevant standalone functions typically following thereafter. Cost savings reflect the annualized “run rate” expected cost savings, net of actual cost savings realized, related to restructuring and other cost savings initiatives undertaken during the relevant period.
Standalone Adjusted EBITDA is calculated under the credit facilities and the indenture by using our Consolidated Net Loss for the trailing 12-month period (defined in the credit facilities and the indenture as our U.S. GAAP net
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
income adjusted for certain items specified in the credit facilities and the indenture) adjusted for items including: taxes, interest expense, depreciation and amortization, non-cash charges, expenses related to capital markets transactions, acquisitions and dispositions, restructuring and business optimization charges and expenses, consulting and advisory fees, run-rate cost savings to be realized as a result of actions taken or to be taken in connection with an acquisition, disposition, restructuring or cost savings or similar initiatives, “run rate” expected cost savings, operating expense reductions, restructuring charges and expenses and synergies related to the transition projected by us, costs related to any management or equity stock plan, other adjustments that were presented in the offering memorandum used in connection with the issuance of the secured notes due 2026 and earn-out obligations incurred in connection with an acquisition or investment.
The following table reconciles Standalone Adjusted EBITDA to our Net loss for the period presented:
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Twelve Months Ended September 30,
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(in thousands)
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2020
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Net loss
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$
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(197,512)
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Provision for income taxes
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18,298
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Depreciation and amortization
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231,585
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Interest, net
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136,057
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Transition services agreement costs(1)
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647
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Transition, transformation and integration expense(2)
|
2,857
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Deferred revenues adjustment(3)
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7,497
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Transaction related costs(4)
|
74,295
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Share-based compensation expense
|
35,829
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|
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|
|
|
|
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Restructuring(5)
|
42,462
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Impairment on assets held for sale
|
18,431
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Other(6)
|
653
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|
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Adjusted EBITDA
|
371,099
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|
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|
|
Realized foreign exchange gain
|
(5,730)
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DRG Adjusted EBITDA impact(7)
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26,580
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|
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Cost savings(8)
|
36,345
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|
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|
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Excess standalone costs(9)
|
29,959
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|
|
|
|
Standalone Adjusted EBITDA
|
$
|
458,253
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|
|
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(1) In 2020, this is related to a new transition services agreement and offset by the reverse transition services agreement from the sale of MarkMonitor assets. In 2019, this includes payments to Thomson Reuters under the Transition Services Agreement.
(2) Includes cash payments in connection with and after our separation from Thomson Reuters in 2016 relating to the implementation of our standalone company infrastructure and related cost-savings initiatives. These cash payments include mainly transition consulting, technology infrastructure, personnel and severance expenses relating to our standalone company infrastructure, which are recorded in Transition, integration, and other line-item of our income statement, as well as cash payments related to the restructuring and transformation of our business following our separation from Thomson Reuters in 2016 mainly related to the integration of separate business units into one functional organization and enhancements in our technology. This also includes cash payments following our merger with Churchill Capital Corp in 2019, to streamline our operations by simplifying our organization and focusing on two product groups.
(3) Reflects the deferred revenues adjustment as a result of purchase accounting.
(4) Includes costs incurred to complete business combination transactions, including acquisitions, dispositions and capital market activities and include advisory, legal, and other professional and consulting costs.
(5) Reflects costs incurred in connection with the initiative, following our merger with Churchill Capital Corp in 2019, to streamline our operations by simplifying our organization and focusing on two product groups. This also includes restructuring related costs following the acquisition of DRG in 2020.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
(6) Includes primarily the net impact of foreign exchange gains and losses related to the re-measurement of balances and other items that do not reflect our ongoing operating performance.
(7) Represents DRG Adjusted EBITDA for the period beginning October 1, 2019 through the acquisition date of February 28, 2020 to reflect the company's Standalone EBITDA as though material acquisitions occurred at the beginning of the presented period.
(8) Reflects the estimated annualized run-rate cost savings, net of actual cost savings realized, related to restructuring and other cost savings initiatives undertaken during the period (exclusive of any cost reductions in our estimated standalone operating costs), including synergies related to acquisitions.
(9) Reflects the difference between our actual standalone company infrastructure costs, and our estimated steady state standalone operating costs, which were as follows:
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|
|
Twelve Months Ended September 30,
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(in thousands)
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2020
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Actual standalone company infrastructure costs
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$
|
164,896
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Steady state standalone cost estimate
|
(134,937)
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Excess standalone costs
|
$
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29,959
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The foregoing adjustments (8) and (9) are estimates and are not intended to represent pro forma adjustments presented within the guidance of Article 11 of Regulation S-X. Although we believe these estimates are reasonable, actual results may differ from these estimates, and any difference may be material. See “— Cautionary Statement Regarding Forward-Looking Statements”
Debt Profile
During the nine months ended September 30, 2020 we incurred an incremental $360,000 of term loans under our term loan facility. In October 2020, in conjunction with the closing of the CPA Global acquisition, we incurred an additional $1,600,000 of term loans under our term loan facility. See "Item 1. – Financial Statements and Supplementary Data – Notes to the Consolidated Financial Statements – Note 22." There have been no further material changes to the debt profile associated with our business previously disclosed in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity” section in our Annual Report on Form 10-K, except as discussed above and further set forth below. The disclosures set forth below updates, and should be read together with, the disclosures in the "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity—Debt Profile” section, in our in our Annual Report on Form 10-K.
The credit facilities are secured by substantially all of our assets and the assets of all of our U.S. restricted subsidiaries and certain of our non-U.S. subsidiaries, including those that are or may be borrowers or guarantors under the Credit Facilities, subject to customary exceptions. The credit facilities contain customary events of default and restrictive covenants that limit us from, among other things, incurring certain additional indebtedness, issuing preferred stock, making certain restricted payments and investments, certain transfers or sales of assets, entering into certain affiliate transactions or incurring certain liens. These credit facilities limitations are subject to customary baskets, including certain limitations on debt incurrence and issuance of preferred stock, subject to compliance with a consolidated coverage ratio of Consolidated EBITDA (as defined in the credit facilities), a measure identical to our Standalone Adjusted EBITDA disclosed above under “— Required Reported Data — Standalone Adjusted EBITDA”, to interest and other fixed charges on certain debt (as defined in the credit facilities) of 2.00 to 1.00. In addition, the credit facilities require us to comply with a springing financial covenant pursuant to which, as of the third quarter of 2020, we must not exceed a total first lien net leverage ratio (as defined under the credit facilities) of 7.25 to 1.00, to be tested on the last day of any quarter only when more than 30% of the revolving credit facility (excluding (i) non-cash collateralized, issued and undrawn letters of credit in an amount up to $10,000 and (ii) any cash collateralized letters of credit) is utilized at such date. As of September 30, 2020, our consolidated coverage ratio was 4.91 to 1.00 and our consolidated leverage ratio was 2.94 to 1.00. As of the date of this Report, we are in compliance with the covenants in the credit facilities. During the nine months ended September 30, 2020, the Company paid down an additional $65,000 drawn on the revolving credit facility. In addition, in connection with the acquisition of DRG, the Company incurred an incremental $360,000 of term loans under our term loan facility. In October 2020, in conjunction with the closing of the CPA Global acquisition, we incurred an additional $1,600,000
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
of term loans under our term loan facility. See "Item 1. – Financial Statements and Supplementary Data – Notes to the Consolidated Financial Statements – Note 22."
Commitments and Contingencies
Our contingent liabilities consist primarily of letters of credit and performance bonds and other similar obligations in the ordinary course of business. Additionally, the Company has agreed to pay the former shareholders of acquired companies certain amounts in conjunction with the Publons, TradeMarkVision and Kopernio acquisitions. Regarding the Publons acquisition, the Company agreed to pay the former shareholders up to an additional $9,500 through 2020. Regarding the TradeMarkVision acquisition, the Company agreed to pay former shareholders earn-out payments through 2020. Regarding the Kopernio acquisition, the Company agreed to pay contingent consideration of up to $3,500 through 2021. Amounts payable are contingent upon Publons’, TrademarkVision’s and Kopernio’s achievement of certain milestones and performance metrics. As of September 30, 2020, the Company had an outstanding liability for Publons of $3,701 related to the estimated fair value of this contingent consideration included in Accrued expenses and Other current liabilities. The Company paid $8,000 of the contingent purchase price in the nine months ended September 30, 2020, as a result of TradeMarkVision achieving milestones and performance metrics. As of September 30, 2020, the Company had an outstanding liability for TradeMarkVision of $0 related to the estimated fair value of this contingent consideration. During the nine months ended September 30, 2020, the Company paid $2,184 of the contingent consideration as a result of Kopernio achieving milestones and performance metrics. As of September 30, 2020, the Company had an outstanding liability for Kopernio of $0 related to the estimated fair value of this contingent compensation earn-out.
Off Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Contractual Obligations
We have various contractual obligations and commercial commitments that are recorded as liabilities in our financial statements. Other items, such as purchase obligations and other executory contracts, are not recognized as liabilities in our consolidated financial statements but are required to be disclosed.
The Company incurred an incremental $360,000 of term loans under our term loan facility. In October 2020, in conjunction with the closing of the CPA Global acquisition, we incurred an additional incremental $1,600,000 of term loans under our term loan facility. See "Item 1. – Financial Statements and Supplementary Data – Notes to the Consolidated Financial Statements – Note 22."
There have been no other material changes, outside of the ordinary course of business, to our contractual obligations as previously disclosed in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity—Contractual Obligations” section, in our Annual Report on Form 10-K.
Critical Accounting Policies, Estimates and Assumptions
There have been no other material changes from the critical accounting policies, estimates, and assumptions previously disclosed in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies, Estimates and Assumptions” section in our Annual Report on Form 10-K, except as set forth below. The disclosures set forth below updates, and should be read together with, the disclosures in the "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies, Estimates and Assumptions” section, in our Annual Report on Form 10-K.
Accounts Receivable
Through the adoption of ASU 2016-13 and the related standards, the Company revised the policy regarding recognition of the uncollectible receivables as follows.
Accounts receivable are recorded at the amount invoiced to customers and do not bear interest. We maintain an allowance for doubtful accounts for losses resulting from the inability of specific customers to meet their financial obligations, representing our best estimate of probable credit losses in existing trade accounts receivable. A specific reserve for doubtful receivables is recorded against the amount due from these customers. We recognize reserves for doubtful receivables utilizing the historical loss method by evaluating factors such as the length of time receivables
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except share and per share data, option price amounts, ratios or as noted)
are past due, historical collection experience, and the current economic and competitive environment. If any of these estimates change or actual results differ from expected results, then an adjustment is recorded in the period in which the amounts become reasonably estimable. For all other customers, we recognize a general reserve based on average yearly write-offs divided by average quarterly accounts receivable aging by risk buckets.
Recently Issued and Adopted Accounting Pronouncements
For recently issued and adopted accounting pronouncements, see "Item 1. Financial Statements and Supplementary Data— Notes to Condensed Consolidated Financial Statements — Note 3” within this Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding our exposure to certain market risks, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk,” in the Annual Report on Form 10-K.
Interest Rate Risk
Our interest rate risk arises from our long-term borrowings at floating interest rates. Borrowings under our Credit Facilities are subject to floating base interest rates, plus a margin. As of September 30, 2020, we had $1,250,550 of floating rate debt outstanding under the credit facilities, consisting of borrowings under the term loan facility for which the base rate was one-month LIBOR (subject, with respect to the term loan facility only, to a floor of 0.0%), which stood at 0.15%. Of this amount, we hedged $337,952 of our principal amount of our floating rate debt under hedges that we deemed effective as of September 30, 2020. As a result, $912,598 of our outstanding long-term debt effectively bore interest at floating rates. A 100 basis point increase or decrease in the applicable base interest rate under the Credit Facilities would have had an impact of $346 and $919 on our cash interest expense for the three and nine months ended September 30, 2020, respectively. For additional information on our outstanding debt and related hedging, see Notes 10 and 13 to our unaudited condensed consolidated financial statements in this Report.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures.
Pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level to ensure that information required to be disclosed in the reports required to be filed or submitted under the Securities Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.