CALGON CARBON CORPORATION 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 toU.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. OurScience Product Group consists of our Web of Science and Life Science Product Lines, and ourIP 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 ofDecision Resources Group OnFebruary 28, 2020 , we acquired 100% of the assets, liabilities and equity interests ofDecision 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 conglomeratePiramal 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 Interim Condensed Consolidated Balance Sheets. February Offering InFebruary 2020 , we completed an underwritten public offering of 27,600,000 of our ordinary shares, generating net 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 36 --------------------------------------------------------------------------------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 $1,253,700 outstanding on our term loan facility at June 30,
2020 .
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 three and six months ended June 30, 2020 .
Restructuring
In accordance with the applicable guidance for ASC 420, Exit or Disposal Cost
Obligations, we recognized liabilities for the restructuring plans noted below
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.
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 $48,000 for all phases of the program. Approximately $25,000 of
costs have been incurred to date under the program and a total remaining of
approximately $23,000 are expected to be incurred in 2020. This estimate
includes approximately $6,000 for severance related charges and approximately
$17,000 of estimated maximum lease exit costs, assuming no sublease agreements
are entered into.
During the three and six months ended June 30, 2020 , the Company recorded
pre-tax charges of $12,522 and $20,276 , respectively, recognized within
Restructuring in the Interim Condensed Consolidated Statement of Operations
comprised of $4,908 of lease impairment and location exit costs, $2,749 and
$3,930 of contract exit costs and legal and advisory fees and $4,865 and $11,438
of severance and related benefit costs, respectively.
DRG Acquisition Integration Program
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 $9,500 of costs have been incurred to date under the
program and $5,300 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 $1,300 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 six months ended June 30, 2020 , the Company recorded
pre-tax charges of $3,324 , recognized in Restructuring and impairment in the
Interim Condensed Consolidated Statement of Operations comprised of $12 of asset
related charges and $3,312 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, Director Nominees, 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 intend to use the net proceeds of
the offering received by us for general corporate purposes. The Company did not
receive any proceeds from the secondary ordinary shares sold by the selling
shareholders.
37
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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)
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.
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.
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 Interim Condensed Consolidated Financial Statements.
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.
38
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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 are incurred to complete business combination transactions,
including acquisitions and dispositions, and typically 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 benefit
arrangement, certain contract termination costs, and other costs associated with
an exit or disposal activity.
Other Operating Income, Net
Other operating income, 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 and our subsidiaries that are denominated in currencies other than each
relevant entity's functional currency.
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
39
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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)
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, 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
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 78.2% and
83.6% in each of the three months ended June 30, 2020 and 2019 and 78.9% and
82.9% for the six months ended June 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:
June 30, Variance
(in thousands, except percentages) 2020 2019 $ %
Annualized contract value $ 852,837 $ 782,600 $ 70,237 9.0 %
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.
40
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CLARIVATE PLCManagement'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)
"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 92.6% and 91.8% for the six months ended June 30, 2020 and
2019, respectively.
Results of Operations
The following table presents the results of operations for the three months
ended June 30, 2020 and 2019:
Variance Increase /
Three Months Ended June 30, (Decrease)
2020 2019 $ %
(in thousands, except percentages)
Revenues, net $ 273,500 $ 242,309 $ 31,191 12.9 %
Cost of revenues, excluding
depreciation and amortization (90,859) (87,629) 3,230 3.7 %
Selling, general and administrative
costs, excluding depreciation and
amortization (88,482) (92,453) (3,971) (4.3) %
Share-based compensation expense (6,856) (33,932) (27,076) (79.8)
Depreciation (2,904) (2,131) 773 36.3 %
Amortization (53,241) (40,932) 12,309 30.1 %
Transaction expenses (8,527) (23,158) (14,631) (63.2) %
Transition, integration and other
related expenses (1,320) (5,262) (3,942) (74.9) %
Restructuring (15,846) - 15,846 N/M
Other operating income, net 8,781 6,607 2,174 32.9 %
Total operating expenses (259,254) (278,890) (19,636) (7.0) %
Gain (loss) from operations 14,246 (36,581) (50,827) N/M
Interest expense, net (21,122) (37,468) (16,346) (43.6) %
Loss before income tax (6,876) (74,049) (67,173) (90.7) %
Benefit (provision) for income taxes 5,385 (3,712) (9,097) N/M
Net loss $ (1,491) $ (77,761) $ (76,270) (98.1) %
41
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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 six months ended
June 30, 2020 and 2019:
Variance Increase /
Six Months Ended June 30, (Decrease)
2020 2019 $ %
(in thousands, except percentages) (unaudited)
Revenues, net $ 514,092 $ 476,334 $ 37,758 7.9 %
Cost of revenues, excluding depreciation
and amortization (173,258) (176,896) (3,638) (2.1) %
Selling, general and administrative
costs, excluding depreciation and
amortization (175,430) (184,749) (9,319) (5.0) %
Share-based compensation expense (24,325) (37,108) (12,783) (34.4) %
Depreciation (5,233) (4,182) 1,051 25.1 %
Amortization (102,353) (97,038) 5,315 5.5 %
Transaction expenses (35,216) (33,428) 1,788 5.3 %
Transition, integration and other
related expenses (3,552) (6,423) (2,871) (44.7) %
Restructuring and impairment (23,600) - 23,600 N/M
Other operating income, net 14,813 990 13,823 N/M
Total operating expenses (528,154) (538,834) (10,680) (2.0) %
Loss from operations (14,062) (62,500) (48,438) (77.5) %
Interest expense, net (52,062) (70,569) (18,507) (26.2) %
Loss before income tax (66,124) (133,069) (66,945) (50.3) %
Provision for income taxes (9,368) (3,952) 5,416 N/M
Net loss $ (75,492) $ (137,021) $ (61,529) (44.9) %
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Revenues, Net
Revenues, net of $273,500 for the three months ended June 30, 2020 , increased by
$31,191 , or 12.9%, from $242,309 for the three months ended June 30, 2019 . On a
constant currency basis, Revenues, net increased $34,259 , or 14.2% for the three
months ended June 30, 2020 . Revenues, net of $514,092 for the six months ended
June 30, 2020 , increased by $37,758 , or 7.9%, from $476,334 for the six months
ended June 30, 2019 . On a constant currency basis, Revenues, net increased
$42,564 , or 8.9% for the six months ended June 30, 2020 .
Adjusted Revenues, which excludes the impact of the deferred revenues
adjustment, increased $34,492 , or 14.2%, to$276,932 in the three months ended
June 30, 2020 from $242,440 in the three months ended June 30, 2019 . On a
constant currency basis, Adjusted Revenues increased $37,560 , or 15.5% for the
three months ended June 30, 2020 . Adjusted Revenues increased $42,777 , or 9.0%,
to $519,406 in the six months ended June 30, 2020 from $476,629 in the six
months ended June 30, 2019 . On a constant currency basis, Adjusted Revenues
increased $47,583 , or 10.0% for the six months ended June 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.
42
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CLARIVATE PLCManagement'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)
Total Variance
Three Months Ended June 30 , (Dollars) Total Variance (Percentage) Acquisitive Disposal FX Impact Organic
(in thousands, except
percentages) 2020 2019
Subscription revenues $ 216,569 $ 202,747 $ 13,822 6.8 % 11.4 % (6.9) % (1.3) % 3.6 %
Transactional revenues 60,363 39,693 20,670 52.1 % 66.1 % (0.6) % (0.8) % (12.6) %
Deferred revenues adjustment
(1) (3,432) (131) (3,301) NM NM - % - % 75.5 %
Revenues, net $ 273,500 $ 242,309 $ 31,191 12.9 % 18.9 % (5.9) % (1.3) % 1.2 %
Deferred revenues adjustment
(1) 3,432 131 3,301 NM NM - % - % (75.5) %
Adjusted Revenues, net $ 276,932 $ 242,440 $ 34,492 14.2 % 20.3 % (5.9) % (1.3) % 1.1 %
(1) Reflects the deferred revenues adjustment as a result of purchase
accounting.
Subscription revenues increased by $13,822 , or 6.8% for the three months ended
June 30, 2020 . On a constant currency basis, subscription revenues increased by
$16,555 , or 8.1%. Acquisitive subscription growth was generated from the
acquisitions of Darts-ip in November 2019 and DRG in February 2020 . Disposal
subscription reduction was derived from the divestiture of the MarkMonitor Brand
Protection, Antipiracy, and Antifraud products in January 2020 . Organic
subscription revenues increased primarily due to price increases and new
business, including several large contracts entered into during June 2020 .
Transactional revenues increased by $20,670 , or 52.1% for the three months ended
June 30, 2020 . On a constant currency basis, transactional revenues increased by
$21,005 , or 52.9%. Acquisitive transactional growth was generated from the
acquisitions of Darts-ip in November 2019 and DRG in February 2020 . Disposal
transactional reduction was derived from the divestiture of the MarkMonitor
Brand Protection, Antipiracy, and Antifraud products in January 2020 . 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)
Total Variance
Six Months Ended June 30 , (Dollars) Total Variance (Percentage) Acquisitive Disposal FX Impact Organic
(in thousands, except
percentages) 2020 2019
Subscription revenues $ 409,804 $ 395,239 $ 14,565 3.7 % 8.3 % (7.1) % (1.0) % 3.5 %
Transactional revenues 109,602 81,390 28,212 34.7 % 44.0 % (1.1) % (0.8) % (7.4) %
Deferred revenues adjustment
(1) (5,314) (295) (5,019) NM NM - % - % 71.3 %
Revenues, net $ 514,092 $ 476,334 $ 37,758 7.9 % 13.3 % (6.1) % (1.0) % 1.7 %
Deferred revenues adjustment
(1) 5,314 295 5,019 NM NM - % - % (71.3) %
Adjusted Revenues, net $ 519,406 $ 476,629 $ 42,777 9.0 % 14.4 % (6.1) % (1.0) % 1.7 %
(1) Reflects the deferred revenues adjustment as a result of purchase
accounting.
Subscription revenues increased by $14,565 , or 3.7% for the six months ended
June 30, 2020 . On a constant currency basis, subscription revenues increased by
$18,679 , or 4.7%. Acquisitive subscription growth was generated from the
acquisitions of Darts-ip in November 2019 and DRG in February 2020 . Disposal
subscription revenues reduction was derived from the divestiture of the
MarkMonitor Brand Protection, Antipiracy, and Antifraud products in January
2020 . Organic subscription revenues increased primarily due to price increases
and new business, including several large contracts entered into during June
2020 .
Transactional revenues increased by $28,212 , or 34.7% for the six months ended
June 30, 2020 . On a constant currency basis, transactional revenues increased by
$28,904 , or 35.5%. Acquisitive transactional growth was generated from the
acquisitions of Darts-ip in November 2019 and DRG in February 2020 . Disposal
transactional reduction was derived from the divestiture of the MarkMonitor
Brand Protection, Antipiracy, and Antifraud products in January 2020 . Organic
transactional revenues decreased due to an overall decrease in demand primarily
driven by economic conditions resulting from the COVID-19 pandemic. This
decrease was offset partially by increased revenues related to the upgrades of
the Techstreet product offerings.
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CLARIVATE PLCManagement'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 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.
Variance Increase/(Decrease) Percentage of Factors Increase/(Decrease)
Total Variance
Revenues by Geography Three Months Ended June 30 , (Dollars) Total Variance (Percentage) Acquisitive Disposal FX Impact Organic
(in thousands, except
percentages) 2020 2019
Americas $ 142,586 $ 118,105 $ 24,481 20.7 % 31.9 % (8.0) % (0.2) % (3.0) %
Europe /Middle East /Africa 73,850 68,195 5,655 8.3 % 13.3 % (5.7) % (2.7) % 3.4 %
Asia Pacific $ 60,496 $ 56,140 $ 4,356 7.8 % 4.7 % (1.8) % (1.8) % 6.7 %
Deferred revenues adjustment
(1) (3,432) (131) (3,301) NM NM - % - % 75.5 %
Revenues, net $ 273,500 $ 242,309 $ 31,191 12.9 % 18.9 % (5.9) % (1.3) % 1.2 %
Deferred revenues adjustment
(1) 3,432 131 3,301 NM NM - % - % (75.5) %
Adjusted Revenues $ 276,932 $ 242,440 $ 34,492 14.2 % 20.3 % (5.9) % (1.3) % 1.1 %
(1) Reflects the deferred revenues adjustment as a result of purchase
accounting.
Acquisitive growth for all regions was related to the acquisitions of Darts-ip
in November 2019 and DRG in February 2020 . Disposal reduction is derived from
the divestiture of the MarkMonitor Brand Protection, Antipiracy, and Antifraud
products in January 2020 . On a constant currency basis, Americas revenues
increased by $24,710 , or 20.9%, with organic growth due to lower demand of the
transactional revenues. On a constant currency basis, Middle East /Africa /Europe
revenues increased by $7,478 , or 11.0%, with organic growth increasing
reflecting improved subscription revenues. On a constant currency basis, Asia
Pacific revenues increased $5,372 , or 9.6%, with organic growth increasing due
to improved subscription revenues.
Variance Increase/(Decrease) Percentage of Factors Increase/(Decrease)
Total Variance
Revenues by Geography Six Months Ended June 30 , (Dollars) Total Variance (Percentage) Acquisitive Disposal FX Impact Organic
(in thousands, except
percentages) 2020 2019
Americas $ 259,578 $ 230,241 $ 29,337 12.7 % 22.2 % (8.3) % (0.2) % (1.0) %
Europe /Middle East /Africa 140,645 135,193 5,452 4.0 % 10.1 % (5.7) % (2.2) % 1.8 %
Asia Pacific $ 119,183 $ 111,195 $ 7,988 7.2 % 3.6 % (1.9) % (1.3) % 6.8 %
Deferred revenues adjustment
(1) (5,314) (295) (5,019) NM NM - % - % 71.3 %
Revenues, net $ 514,092 $ 476,334 $ 37,758 7.9 % 13.3 % (6.1) % (1.0) % 1.7 %
Deferred revenues adjustment
(1) 5,314 295 5,019 NM NM - % - % (71.3) %
Adjusted Revenues $ 519,406 $ 476,629 $ 42,777 9.0 % 14.4 % (6.1) % (1.0) % 1.7 %
(1) Reflects the deferred revenues adjustment as a result of purchase
accounting.
Acquisitive growth for all regions was related to the acquisitions of Darts-ip
in November 2019 and DRG in February 2020 . Disposal reduction is derived from
the divestiture of the MarkMonitor Brand Protection, Antipiracy, and Antifraud
products in January 2020 . On a constant currency basis, Americas revenues
increased by $29,695 , or 12.9%, with organic growth decreasing due to lower
demand of the transactional revenues. On a constant currency basis, Middle
East /Africa /Europe revenues increased by $8,428 , or 6.2%, with organic growth
increasing primarily due to improved subscription revenue. On a constant
currency basis, Asia Pacific revenues increased $9,460 , or 8.5%, with organic
growth increasing 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.
44
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CLARIVATE PLCManagement'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)
Total Variance
Revenues by Product Group Three Months Ended June 30 , (Dollars) Total Variance (Percentage) Acquisitive Disposal FX Impact Organic
(in thousands, except
percentages) 2020 2019
Science Product Group $ 183,671 $ 136,139 $ 47,532 34.9 % 34.3 % - % (1.8) % 2.4 %
IP Product Group 93,261 106,301 (13,040) (12.3) % 2.5 % (13.5) % (0.6) % (0.7) %
Deferred revenues adjustment
(1) (3,432) (131) (3,301) NM NM - % - % 75.5 %
Revenues, net $ 273,500 $ 242,309 $ 31,191 12.9 % 18.9 % (5.9) % (1.3) % 1.2 %
Deferred revenues adjustment
(1) 3,432 131 3,301 NM NM - % - % (75.5) %
Adjusted revenues $ 276,932 $ 242,440 $ 34,492 14.2 % 20.3 % (5.9) % (1.3) % 1.1 %
(1) Reflects the deferred revenues adjustment as a result of purchase
accounting.
Science Product Group : Revenues of $183,671 for the three months ended June 30,
2020 increased $47,532 , or 34.9% from $136,139 for the three months ended June
30, 2019 . On a constant currency basis, revenues increased by $49,939 , or 36.7%,
driven by subscription and transactional revenues growth. Acquisitive growth is
generated from the acquisition of DRG in February 2020 . Organic revenues
increased due to price increases and new business in subscription revenues and a
few large contracts signed in June 2020 , partially offset by a decrease in
transactional revenues due to a decline in demand.
IP Product Group : Revenues of $93,261 for the three months ended June 30, 2020
decreased $13,040 , or 12.3% from $106,301 for the three months ended June 30,
2019 . On a constant currency basis, revenue decreased $12,379 , or 11.7%, driven
by a decrease in subscription and transactional revenues. Acquisitive growth was
generated from the acquisition of Darts-ip in November 2019 . Disposal reduction
was derived from the disposal of the MarkMonitor Brand Protection, Antipiracy,
and Antifraud productions in January 2020 . Organic revenues decreased due to a
decrease in demand for transactional revenues offset by an increase in
subscription driven by momentum across the IP subscription products due in part
to continuing product and content upgrades.
Variance Increase/(Decrease) Percentage of Factors Increase/(Decrease)
Total Variance
Revenues by Product Group Six Months Ended June 30 , (Dollars) Total Variance (Percentage) Acquisitive Disposal FX Impact Organic
(in thousands, except
percentages) 2020 2019
Science Product Group $ 330,931 $ 265,349 $ 65,582 24.7 % 24.0 % - % (1.4) % 2.1 %
IP Product Group 188,475 211,280 (22,805) (10.8) % 2.4 % (13.7) % (0.5) % 1.0 %
Deferred revenues adjustment
(1) (5,314) (295) (5,019) NM NM - % - % 71.3 %
Revenues, net $ 514,092 $ 476,334 $ 37,758 7.9 % 13.3 % (6.1) % (1.0) % 1.7 %
Deferred revenues adjustment
(1) 5,314 295 5,019 NM NM - % - % (71.3) %
Adjusted revenues $ 519,406 $ 476,629 $ 42,777 9.0 % 14.4 % (6.1) % (1.0) % 1.7 %
(1) Reflects the deferred revenues adjustment as a result of purchase
accounting.
Science Product Group : Revenues of $330,931 for the six months ended June 30,
2020 increased $65,582 , or 24.7% from $265,349 for the six months ended June 30,
2019 . On a constant currency basis, revenues increased by $69,232 , or 26.1%,
driven by subscription and transactional revenues growth. Acquisitive growth was
generated from the acquisition of DRG in February 2020 . Organic revenues
increased due to price increases and new business in subscription revenues and a
few large contracts signed in June 2020 , partially offset by a decrease in
transactional revenues due to a decline in demand.
IP Product Group : Revenues of $188,475 for the six months ended June 30, 2020
decreased $22,805 , or 10.8% from $211,280 for the six months ended June 30,
2019 . On a constant currency basis, revenue increased $21,649 , or 10.3%..
Acquisitive growth was generated from the acquisition of Darts-ip in November
2019 . Disposal reduction was derived from the disposal of the MarkMonitor Brand
Protection, Antipiracy, and Antifraud productions in January 2020 . Organic
revenues increased due to an increase in momentum across the IP subscription
products due in part to continuing product and content upgrades and offset by a
decline in demand for transactional revenues.
45
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CLARIVATE PLCManagement'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 $90,859 for the three months ended June 30, 2020 increased
by $3,230 , or 3.7%, from $87,629 for the three months ended June 30, 2019 . Cost
of revenues of $173,258 for the six months ended June 30, 2020 decreased by
$3,638 , or 2.1%, from $176,896 for the six months ended June 30, 2019 . On a
constant currency basis, cost of revenues increased by $4,433 or 5.1% for the
three months ended June 30, 2020 primarily due to additional costs related to
DRG, which was acquired in February 2020 , offset by a decrease in costs
associated with transition service agreement, employee related costs and outside
services including consulting fees. On a constant currency basis, cost of
revenues decreased by 1,746 or 1.0% for the six months ended June 30, 2020
primarily due to a decrease in costs associated with transition service
agreement, employee related costs and outside services including consulting
fees, offset by additional costs related to DRG, which was acquired in February
2020 , and additional software licensing costs.
Selling, General and Administrative, Excluding Depreciation and Amortization
Selling, general and administrative expense of $88,482 for the three months
ended June 30, 2020 , decreased by $3,900 , or 4.3%, from $92,453 for the three
months ended June 30, 2019 . Selling, general and administrative expense of
$175,430 for the six months ended June 30, 2020 , decreased by $9,319 , or 5.0%,
from $184,749 for the six months ended June 30, 2019 . On a constant currency
basis, Selling, general and administrative expenses decreased by $2,985 , or
3.2%, for the three months ended June 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
7,658, or 4.1%, for the six months ended June 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 we acquired in February 2020 .
Share-based Compensation
Share-based compensation expense of $6,856 for the three months ended June 30,
2020 decreased by $27,076 , or 79.8% from $33,932 for the three months ended June
30, 2019 . Share-based compensation expense of $24,325 for the six months ended
June 30, 2020 decreased by $12,783 , or 34.4% from $37,108 for the six months
ended June 30, 2019 . The decreases in the three and six months ended June 30,
2020 were 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 six months ended June 30, 2020 .
Depreciation
Depreciation of $2,904 for the three months ended June 30, 2020 increased by
$773 , or 36.3% from $2,131 for the three months ended June 30, 2019 .
Depreciation of $5,233 for the six months ended June 30, 2020 increased by
$1,051 , or 25.1% from $4,182 for the six months ended June 30, 2019 . The
increase in the three and six months ended June 30, 2020 was driven by the
additional depreciation on assets acquired through the acquisitions of Darts-ip
in November 2019 and DRG in February 2020 . This increase was offset by run-off
of previously purchased capital expenditures.
Amortization
Amortization of $53,241 for the three months ended June 30, 2020 increased by
$12,309 , or 30.1%, from $40,932 for the three months ended June 30, 2019 .
Amortization of $102,353 for the six months ended June 30, 2020 increased by
$5,315 , or 5.5%, from $97,038 for the six months ended June 30, 2019 . The
increase in the period three and six months ended June 30, 2020 was driven by an
increase in the amortization on intangible assets acquired through the
acquisitions of Darts-ip in November 2019 and DRG in February 2020 . 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 on the Mark Monitor intangible
assets disposed of in January 2020 .
46
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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 $8,527 for the three months ended June 30, 2020 ,
decreased by $14,631 , or 63.2% from $23,158 for the three months ended June 30,
2019 . Transaction expenses of $35,216 for the six months ended June 30, 2020 ,
increased by $1,788 , or 5.3 from $33,428 for the six months ended June 30, 2019 .
The decrease in the three months ended June 30, 2020 was due to reduction in
costs incurred in association with our merger with Churchill Capital Corp in
2019, offset by costs associated with the DRG acquisition during 2020. The
increase in the six months ended June 30, 2020 was due to reduction in costs
incurred in association with our merger with Churchill Capital Corp in 2019,
offset by costs associated with the DRG acquisition, the MarkMonitor divestiture
and other finance merger and acquisition related activities during 2020.
Transition, Integration, and Other Related Expenses
Transition, integration, and other expenses of $1,320 for the three months ended
June 30, 2020 , decreased by $4,000 , or 74.9%, from $5,262 for the three months
ended June 30, 2019 . Transition, integration, and other expenses of $3,552 for
the six months ended June 30, 2020 , decreased by $2,871 , or 44.7%, from $6,423
for the six months ended June 30, 2019 . The decrease in the three and six months
ended June 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 of $15,846 for the three months ended June 30, 2020 , increased by
$15,846 , from $0 for the three months ended June 30, 2019 . Restructuring and
impairment of $23,600 for the six months ended June 30, 2020 , increased by
$23,600 , from $0 for the six months ended June 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.
Other Operating Income, Net
Other operating income, net of $8,781 for the three months ended June 30, 2020
increased by $2,174 , or 32.9%, from $6,607 for the three months ended June 30,
2019 . Other operating income, net of $14,813 for the six months ended June 30,
2020 increased by $13,823 from $990 for the six months ended June 30, 2019 . The
change was attributable 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 $21,122 for the three months ended June 30, 2020 ,
decreased by $16,346 , or 43.6% from $37,468 for the three months ended June 30,
2019 . Interest expense, net of $52,062 for the six months ended June 30, 2020 ,
decreased by $18,507 , or 26.2% from $70,569 for the six months ended June 30 ,
2019.The decreases in the interest expense, net for periods three and six months
ended June 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 benefit of $5,385 for the three months ended June 30, 2020 , compared
to a provision of $3,712 for income taxes for the three months ended June 30,
2019 . There was a provision of $9,368 for the six months ended June 30, 2020 ,
compared to a provision of $3,952 for income taxes for the six months ended June
30, 2019 . The tax benefit/provision in each period reflected the mix of taxing
jurisdictions in which pre-tax profits and losses were recognized.
47
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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
months ended June 30, 2020 and 2019 and a reconciliation of this measure to our
Revenues, net for the same periods:
Three Months Ended June 30, Variance
(in thousands, except percentages) 2020 2019 $ %
Revenues, net $ 273,500 $ 242,309 $ 31,191 12.9 %
Deferred revenues adjustment 3,432 131 3,301 NM
Adjusted revenues $ 276,932 $ 242,440 $ 34,492 14.2 %
Six Months Ended June 30, Variance
(in thousands, except percentages) 2020 2019 $ %
Revenues, net $ 514,092 $ 476,334 $ 37,758 7.9 %
Deferred revenues adjustments 5,314 295 5,019 NM
Adjusted revenues $ 519,406 $ 476,629 $ 42,777 9.0 %
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, 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.
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
48
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CLARIVATE PLCManagement'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
months ended June 30, 2020 and 2019 and reconciles these measures to our Net
loss for the same periods:
Six Months Ended June
Three Months Ended June 30, 30,
(in thousands, except percentages) 2020 2019 2020 2019
Net loss $ (1,491)
(5,385) 3,712 9,368 3,952
Depreciation and amortization 56,145 43,063 107,586 101,220
Interest, net 21,122 37,468 52,062 70,569
Transition services agreement costs(1) (789) 2,474 762 7,747
Transition, transformation and integration expense(2) 1,324 11,341 3,552 13,801
Deferred revenues adjustment(3) 3,432 131 5,314 295
Transaction related costs(4) 8,527 23,158 35,216 33,428
Share-based compensation expense 6,856 33,932 24,325 37,108
Restructuring(5) 15,846 - 23,600 -
Other(6) (5,468) (4,300) (7,952) 1,344
Adjusted EBITDA $ 100,119
36.2 % 30.2 % 34.3 % 27.8 %
(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 and dispositions, and typically 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.
49
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CLARIVATE PLCManagement'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 Interim 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$608,522 and$76,130 as ofJune 30, 2020 andDecember 31, 2019 , respectively. We had approximately$1,953,700 of debt as ofJune 30, 2020 , consisting primarily of$1,253,700 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 ofDecember 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 inFebruary 2020 ). OnFebruary 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. 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: 50 --------------------------------------------------------------------------------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)
Six Months Ended June 30,
(in thousands) 2020 2019
Net cash provided by operating activities $ 107,562 $ 42,887
Net cash used in investing activities (940,205) (24,871)
Net cash provided by (used in) financing activities 1,376,254 (448)
Effect of exchange rates (9,218) (80)
Increase in cash and cash equivalents, and restricted cash 534,393
17,488
Cash and cash equivalents, and restricted cash beginning of the year
76,139 25,584
Cash and cash equivalents, and restricted cash end of the period
$ 610,532 $ 43,072 Cash Flows Provided by (Used in) 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$107,562 and$42,887 for the six months endedJune 30, 2020 andJune 30, 2019 , respectively. The$107,562 of net cash from operating activities for the six months endedJune 30, 2020 included net loss of$75,492 offset with$120,436 of non-cash adjustments and changes in operating assets and liabilities of$62,618 . The improvement in operating cash flows was driven by increased in revenue illustrating an increase in sales year over year and offset by a lower operating expenses. Cash Flows Provided by (Used in) Investing Activities Net cash used in investing activities was$940,205 for the six months endedJune 30, 2020 . Cash flows used in investing is attributable to: and (1)$885,323 of key business intangible assets acquired fromDecision Resource Group , (2)$52,651 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$24,871 for the three months endedJune 30, 2019 reflecting capital expenditures. 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$1,376,254 for the six months endedJune 30, 2020 . Key drivers of cash flows provided by financing include: (1) Proceeds of$843,766 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$1,182 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)$25,538 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)$6,300 principle payment on the term loan facility. Net cash used in financing activities was$448 for the six months endedJune 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)$7,672 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)$137 related to the issuance of ordinary shares. InFebruary 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 51 -------------------------------------------------------------------------------- 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.
InJune 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, Director Nominees, Executive Officers and other shareholders. The Company did not receive any proceeds from the secondary ordinary shares sold 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 periodJanuary 1, 2020 throughFebruary 21, 2020 , 24,132,666 of the Company's outstanding warrants were exercised for one ordinary share per whole warrant at a price of$11.50 per share.
Free Cash Flow (non-GAAP measure) The following table reconciles free cash flow measure, which is a non-GAAP measure, to net cash provided by operating activities:
Six Months Ended June 30,
(in thousands) 2020
2019
Net cash provided by operating activities$ 107,562 $ 42,887 Capital expenditures (52,651) (24,871) Free cash flow$ 54,911 $ 18,016 Free cash flow was$54,911 for the three months endedJune 30, 2020 , compared to$18,016 for the three months endedJune 30, 2019 . The decrease in free cash flow was primarily due to higher 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 ofOctober 31, 2019 and the indenture governing our secured notes due 2026 issued byCamelot 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 ourU.S. GAAP net 52 -------------------------------------------------------------------------------- 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 periods presented:
Twelve Months Ended
June 30,
2020
(in thousands)
Net loss $ (149,448)
Provision for income taxes 15,617
Depreciation and amortization 206,908
Interest, net
139,182
Transition services agreement costs(1) 3,496 Transition, transformation and integration expense(2)
14,123
Deferred revenues adjustment(3) 5,457 Transaction related costs(4)
48,002
Share-based compensation expense 38,600 Restructuring(5) 39,270 Legal settlement (39,399) Impairment on assets held for sale 18,431 Other(6) (275) Adjusted EBITDA 339,964 Realized foreign exchange gain
(6,805)
DRG Adjusted EBITDA Impact(7) 35,848 Cost savings(8) 39,733 Excess standalone costs(9) 30,079 Standalone Adjusted EBITDA $ 438,819 (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 withChurchill 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 and dispositions, and typically include advisory, legal and other professional and consulting costs. 53 -------------------------------------------------------------------------------- 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)
(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.
(7) Represents DRG Adjusted EBITDA for the period beginning July 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:
Twelve Months Ended June 30,
(in thousands) 2020
Actual standalone company infrastructure costs $ 164,037
Steady state standalone cost estimate (133,958)
Excess standalone costs $ 30,079 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 six months endedJune 30, 2020 we incurred an incremental$360,000 of term loans under our term loan facility. 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 ourU.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 contains 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 requires us to comply with a springing financial covenant pursuant to which, as of the third quarter of 2019, 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 ofJune 30, 2020 , our consolidated coverage ratio was 5.11 to 1.00 and our consolidated leverage ratio was 3.07 to 1.00. As of the date of this Report, we are in compliance with the covenants in the credit facilities. During the six months endedJune 30, 2020 , the Company paid down an additional$65,000 drawn on the revolving credit facility prior to the close of our merger withChurchill Capital Corp. In addition, in connection with the acquisition of DRG, the Company incurred an incremental$360,000 of term loans under our term loan facility. 54 -------------------------------------------------------------------------------- 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)
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 June 30, 2020 , the Company had an outstanding
liability for Publons of $3,610 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 six
months ended June 30, 2020 , as a result of TradeMark Vision achieving milestones
and performance metrics. As of June 30, 2020 , the Company had an outstanding
liability for TradeMarkVision of $0 related to the estimated fair value of this
contingent consideration. During six months ended June 30, 2020 , the Company
paid $2,184 of the contingent consideration as a result of Kopernio achieving
milestones and performance metrics. As of June 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.
There have been other no 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 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.
55
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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)Recently Issued and Adopted Accounting Pronouncements For recently issued and adopted accounting pronouncements, see "Item 1. Financial Statements and Supplementary Data- Notes to Interim Condensed Consolidated Financial Statements - Note 3" within this Report.
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