Item 1. Financial Statements and Supplementary Data
CLARIVATE PLC
Condensed Consolidated Balance Sheets (Unaudited)
(In millions, except share and per share data)
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| June 30, 2022 | | December 31, 2021 |
| | | |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 359.7 | | | $ | 430.9 | |
| Restricted cash | 13.2 | | | 156.7 | |
| Accounts receivable, net | 812.4 | | | 906.4 | |
| Prepaid expenses | 102.1 | | | 76.6 | |
| Other current assets | 72.8 | | | 66.6 | |
| | | |
| Total current assets | 1,360.2 | | | 1,637.2 | |
| Property and equipment, net | 76.8 | | | 83.8 | |
| Other intangible assets, net | 9,697.3 | | | 10,392.4 | |
| Goodwill | 7,533.7 | | | 7,904.9 | |
| Other non-current assets | 71.3 | | | 50.8 | |
| Deferred income taxes | 28.2 | | | 27.9 | |
| Operating lease right-of-use assets | 68.6 | | | 86.0 | |
| Total Assets | $ | 18,836.1 | | | $ | 20,183.0 | |
| | | |
| Liabilities and Shareholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 116.7 | | | $ | 129.2 | |
| Accrued expenses and other current liabilities | 501.1 | | | 679.6 | |
| Current portion of deferred revenues | 956.7 | | | 1,030.4 | |
| Current portion of operating lease liability | 29.9 | | | 32.2 | |
| Current portion of long-term debt | 57.1 | | | 30.6 | |
| | | |
| Total current liabilities | 1,661.5 | | | 1,902.0 | |
| Long-term debt | 5,421.5 | | | 5,456.3 | |
| Warrant liabilities | 78.4 | | | 227.8 | |
| Non-current portion of deferred revenues | 50.3 | | | 54.2 | |
| Other non-current liabilities | 136.7 | | | 142.7 | |
| Deferred income taxes | 366.0 | | | 380.1 | |
| Operating lease liabilities | 81.0 | | | 94.0 | |
| Total liabilities | 7,795.4 | | | 8,257.1 | |
| Commitments and contingencies | | | |
| | | |
| Shareholders’ equity: | | | |
Preferred Shares, no par value; 14,375,000 shares authorized; 5.25% Mandatory Convertible Preferred Shares, Series A, 14,375,000 shares issued and outstanding as of both June 30, 2022 and December 31, 2021 | 1,392.6 | | | 1,392.6 | |
Ordinary Shares, no par value; unlimited shares authorized at June 30, 2022 and December 31, 2021; 673,821,721 and 683,139,210 shares issued, and 673,316,307 and 683,139,210 shares outstanding at June 30, 2022 and December 31, 2021, respectively | 11,700.9 | | | 11,827.9 | |
Treasury shares, at cost; 505,414 and 547,136 shares as of June 30, 2022 and December 31, 2021, respectively | (15.6) | | | (16.9) | |
| Accumulated other comprehensive (loss) income | (519.2) | | | 326.7 | |
| Accumulated deficit | (1,518.0) | | | (1,604.4) | |
| Total shareholders’ equity | 11,040.7 | | | 11,925.9 | |
| Total Liabilities and Shareholders’ Equity | $ | 18,836.1 | | | $ | 20,183.0 | |
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
CLARIVATE PLC
Condensed Consolidated Statements of Operations (Unaudited)
(In millions, except share and per share data)
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| Three Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Revenues, net | $ | 686.6 | | | $ | 445.7 | | | |
| Operating expenses: | | | | | |
| Cost of revenues | 244.1 | | | 149.7 | | | |
| Selling, general and administrative costs | 186.1 | | | 179.7 | | | |
| Depreciation and amortization | 175.6 | | | 130.3 | | | |
| | | | | |
| Restructuring and impairment | 19.2 | | | 50.7 | | | |
| Other operating (income) expense, net | (24.6) | | | (0.9) | | | |
| Total operating expenses | 600.4 | | | 509.5 | | | |
| Income (loss) from operations | 86.2 | | | (63.8) | | | |
| Mark to market (gain) loss on financial instruments | (49.0) | | | 21.0 | | | |
| Income (loss) before interest expense and income taxes | 135.2 | | | (84.8) | | | |
| Interest expense and amortization of debt discount, net | 62.3 | | | 38.5 | | | |
| Income (loss) before income taxes | 72.9 | | | (123.3) | | | |
| Provision for income taxes | 10.5 | | | 8.2 | | | |
| Net income (loss) | 62.4 | | | (131.5) | | | |
| Dividends on preferred shares | 18.7 | | | — | | | |
| Net income (loss) attributable to ordinary shares | $ | 43.7 | | | $ | (131.5) | | | |
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| Per share: | | | | | |
| Basic | $ | 0.06 | | | $ | (0.22) | | | |
| Diluted | $ | — | | | $ | (0.22) | | | |
| | | | | |
| Weighted average shares used to compute earnings per share: | | | | | |
| Basic | 674,256,004 | | | 611,093,882 | | | |
| Diluted | 678,372,059 | | | 611,093,882 | | | |
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
CLARIVATE PLC
Condensed Consolidated Statement of Operations (Unaudited)
(In millions, except share and per share data)
| | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 | | |
| Revenues, net | $ | 1,348.8 | | | $ | 874.1 | | | |
| Operating expenses: | | | | | |
| Cost of revenues | 493.3 | | | 297.6 | | | |
| Selling, general and administrative costs | 379.8 | | | 314.0 | | | |
| Depreciation and amortization | 352.0 | | | 261.9 | | | |
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| Restructuring and impairment | 30.9 | | | 118.6 | | | |
| Other operating (income) expense, net | (38.3) | | | 15.3 | | | |
| Total operating expenses | 1,217.7 | | | 1,007.4 | | | |
| Income (loss) from operations | 131.1 | | | (133.3) | | | |
| Mark to market gain on financial instruments | (149.4) | | | (30.2) | | | |
| | | | | |
| Income (loss) before interest expense and income taxes | 280.5 | | | (103.1) | | | |
| Interest expense and amortization of debt discount, net | 121.8 | | | 75.9 | | | |
| Income (loss) before income taxes | 158.7 | | | (179.0) | | | |
| Provision for income taxes | 26.8 | | | 8.5 | | | |
| Net income (loss) | 131.9 | | | (187.5) | | | |
| Dividends on preferred shares | 37.4 | | | — | | | |
| Net income (loss) attributable to ordinary shares | $ | 94.5 | | | $ | (187.5) | | | |
| | | | | |
| Per share: | | | | | |
| Basic | $ | 0.14 | | | $ | (0.31) | | | |
| Diluted | $ | (0.07) | | | $ | (0.35) | | | |
| | | | | |
| Weighted average shares used to compute earnings per share: | | | | | |
| Basic | 678,348,003 | | | 606,795,733 | | | |
| Diluted | 683,167,949 | | | 617,138,407 | | | |
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
CLARIVATE PLC
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In millions)
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| 2022 | | 2021 | | | | |
| Net income (loss) | $ | 62.4 | | | $ | (131.5) | | | | | |
| Other comprehensive income (loss), net of tax: | | | | | | | |
| Interest rate swaps | 3.8 | | | 0.2 | | | | | |
Defined benefit pension plans
| 0.1 | | | — | | | | | |
| Foreign currency translation adjustment | (626.6) | | | 46.9 | | | | | |
| Total other comprehensive (loss) income, net of tax | (622.7) | | | 47.1 | | | | | |
| Comprehensive loss | $ | (560.3) | | | $ | (84.4) | | | | | |
| | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 | | |
| Net income (loss) | $ | 131.9 | | | $ | (187.5) | | | |
| Other comprehensive income (loss), net of tax: | | | | | |
| Interest rate swaps | 15.7 | | | 1.5 | | | |
| Defined benefit pension plans | 0.1 | | | — | | | |
| Foreign currency translation adjustment | (861.7) | | | 65.2 | | | |
| Total other comprehensive (loss) income, net of tax | (845.9) | | | 66.7 | | | |
| Comprehensive loss | $ | (714.0) | | | $ | (120.8) | | | |
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
CLARIVATE PLC
Condensed Consolidated Statements of Changes in Equity (Unaudited)
(In millions)
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| Ordinary Shares | | Preferred Shares | | Treasury Shares | | Accumulated
Other
Comprehensive
Income (Loss) | | Accumulated
Deficit | | Total
Shareholders’
Equity |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| Balance at December 31, 2021 | 683.1 | | | $ | 11,827.9 | | | 14.4 | | $ | 1,392.6 | | | 0.5 | | | $ | (16.9) | | | $ | 326.7 | | | $ | (1,604.4) | | | $ | 11,925.9 | |
| Reclassification of EBT Shares | (0.5) | | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | |
| Exercise of stock options | 0.2 | | | 0.4 | | | — | | — | | | — | | | — | | | — | | | — | | | 0.4 | |
| Vesting of restricted stock units | 0.7 | | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares returned to the Company for net share settlements | (0.4) | | | (5.4) | | | — | | — | | | — | | | — | | | — | | | — | | | (5.4) | |
| Share-based award activity | — | | | 26.9 | | | — | | — | | | — | | | — | | | — | | | — | | | 26.9 | |
| Repurchases of ordinary shares | (4.1) | | | — | | | — | | — | | | 4.1 | | | (66.4) | | | — | | | — | | | (66.4) | |
| Retirement of treasury shares | — | | | (34.8) | | | — | | — | | | (2.1) | | | 33.3 | | | — | | | 1.5 | | | — | |
| Sale of treasury shares | — | | | — | | | — | | — | | | — | | | 1.3 | | | — | | | (0.7) | | | 0.6 | |
| Dividends to preferred shareholders | — | | | — | | | — | | — | | | — | | | — | | | — | | | (18.7) | | | (18.7) | |
| Net income | — | | | — | | | — | | — | | | — | | | — | | | — | | | 69.5 | | | 69.5 | |
| Other comprehensive loss | — | | | — | | | — | | — | | | — | | | — | | | (223.2) | | | — | | | (223.2) | |
| Balance at March 31, 2022 | 679.0 | | | $ | 11,815.0 | | | 14.4 | | $ | 1,392.6 | | | 2.5 | | | $ | (48.7) | | | $ | 103.5 | | | $ | (1,552.8) | | | $ | 11,709.6 | |
| Exercise of stock options | — | | | 0.1 | | | — | | — | | | — | | | — | | | — | | | — | | | 0.1 | |
| Vesting of restricted stock units | 1.3 | | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares returned to the Company for net share settlements | (0.4) | | | (5.3) | | | — | | — | | | — | | | — | | | — | | | — | | | (5.3) | |
| Share-based award activity | — | | | 23.6 | | | — | | — | | | — | | | — | | | — | | | — | | | 23.6 | |
| Repurchases of ordinary shares | (6.6) | | | — | | | — | | — | | | 6.6 | | | (108.6) | | | — | | | — | | | (108.6) | |
| Retirement of treasury shares | — | | | (132.5) | | | — | | — | | | (8.6) | | | 141.7 | | | — | | | (9.2) | | | — | |
| Sale of treasury shares | — | | | — | | | — | | — | | | — | | | — | | | — | | | 0.3 | | | 0.3 | |
| Dividends to preferred shareholders | — | | | — | | | — | | — | | | — | | | — | | | — | | | (18.7) | | | (18.7) | |
| Net income | — | | | — | | | — | | — | | | — | | | — | | | — | | | 62.4 | | | 62.4 | |
| Other comprehensive income | — | | | — | | | — | | — | | | — | | | — | | | (622.7) | | | — | | | (622.7) | |
| Balance at June 30, 2022 | 673.3 | | | $ | 11,700.9 | | | 14.4 | | $ | 1,392.6 | | | 0.5 | | | $ | (15.6) | | | $ | (519.2) | | | $ | (1,518.0) | | | $ | 11,040.7 | |
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
CLARIVATE PLC
Condensed Consolidated Statements of Changes in Equity (Unaudited)
(In millions)
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| Ordinary Shares | | Preferred Shares | | Treasury Shares | | Accumulated
Other
Comprehensive
Income (Loss) | | Accumulated
Deficit | | Total
Shareholders’
Equity |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
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| Balance at December 31, 2020 | 606.3 | | | $ | 9,989.2 | | | — | | $ | — | | | 6.3 | | | $ | (196.0) | | | $ | 492.4 | | | $ | (1,250.8) | | | $ | 9,034.8 | |
| Exercise of Private Placement Warrants | 0.2 | | | 3.6 | | | — | | — | | | — | | | — | | | — | | | — | | | 3.6 | |
| Exercise of stock options | 0.8 | | | 5.1 | | | — | | — | | | — | | | — | | | — | | | — | | | 5.1 | |
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| Shares returned to the Company for net share settlements | (0.4) | | | (4.5) | | | — | | — | | | — | | | — | | | — | | | — | | | (4.5) | |
| Issuance of ordinary shares, net | 4.4 | | | 105.5 | | | — | | — | | | — | | | — | | | — | | | — | | | 105.5 | |
| Share-based award activity | — | | | 10.5 | | | — | | — | | | — | | | — | | | — | | | — | | | 10.5 | |
| Net income (loss) | — | | | — | | | — | | — | | | — | | | — | | | — | | | (56.0) | | | (56.0) | |
| Other comprehensive income | — | | | — | | | — | | — | | | — | | | — | | | 19.6 | | | — | | | 19.6 | |
| Balance at March 31, 2021 | 611.3 | | | $ | 10,109.4 | | | — | | | $ | — | | | 6.3 | | | $ | (196.0) | | | $ | 512.0 | | | $ | (1,306.8) | | | $ | 9,118.6 | |
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| Exercise of stock options | 1.6 | | | 9.7 | | | — | | — | | | — | | | — | | | — | | | — | | | 9.7 | |
| Vesting of restricted stock units | 0.5 | | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares returned to the Company for net share settlements | (0.8) | | | (17.2) | | | — | | — | | | — | | | — | | | — | | | — | | | (17.2) | |
| Issuance of ordinary shares, net | 206.0 | | | 5,780.9 | | | — | | — | | | — | | | — | | | — | | | — | | | 5,780.9 | |
| Share-based award activity | — | | | 12.9 | | | — | | — | | | — | | | — | | | — | | | — | | | 12.9 | |
| Repurchase of ordinary shares | — | | | — | | | — | | — | | | (177.2) | | | (5,052.2) | | | — | | | — | | | (5,052.2) | |
| Retirement of treasury shares | (177.2) | | | (5,052.2) | | | — | | — | | | 177.2 | | | 5,052.2 | | | — | | | — | | | — | |
| Issuance of preferred shares, net | — | | | — | | | 14.4 | | 1,393.2 | | | — | | | — | | | — | | | — | | | 1,393.2 | |
| Net income (loss) | — | | | — | | | — | | — | | | — | | | — | | | — | | | (131.5) | | | (131.5) | |
| Other comprehensive income | — | | | — | | | — | | — | | | — | | | — | | | 47.1 | | | — | | | 47.1 | |
| Balance at June 30, 2021 | 641.4 | | $ | 10,843.5 | | 14.4 | | $ | 1,393.2 | | 6.3 | | $ | (196.0) | | | $ | 559.1 | | $ | (1,438.3) | | $ | 11,161.5 |
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The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
CLARIVATE PLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
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| Six Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Cash Flows From Operating Activities | | | | | |
| Net income (loss) | $ | 131.9 | | | $ | (187.5) | | | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 352.0 | | | 261.9 | | | |
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| Deferred income taxes | (0.9) | | | (0.6) | | | |
| Share-based compensation | 47.2 | | | 18.8 | | | |
| Restructuring and impairment | (1.0) | | | 69.6 | | | |
| Loss (gain) on foreign currency forward contracts | 5.7 | | | (1.9) | | | |
| Mark to market adjustment on contingent shares | — | | | (25.1) | | | |
| Mark to market gain on financial instruments | (149.4) | | | (30.2) | | | |
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| Amortization of debt issuance costs | 7.6 | | | 4.7 | | | |
| Other operating activities | (39.3) | | | 9.0 | | | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | 53.8 | | | 108.7 | | | |
| Prepaid expenses | (26.9) | | | (7.9) | | | |
| Other assets | (24.8) | | | 51.9 | | | |
| Accounts payable | (8.8) | | | 5.9 | | | |
| Accrued expenses and other current liabilities | (150.3) | | | 49.6 | | | |
| Deferred revenues | (29.5) | | | (38.3) | | | |
| Operating lease right of use assets | 14.5 | | | 11.8 | | | |
| Operating lease liabilities | (11.1) | | | (40.3) | | | |
| Other liabilities | (6.1) | | | 1.6 | | | |
| Net cash provided by operating activities | 164.6 | | | 261.7 | | | |
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| Cash Flows From Investing Activities | | | | | |
| Capital expenditures | (89.1) | | | (62.0) | | | |
| Acquisitions, net of cash acquired | (9.3) | | | 0.4 | | | |
| | | | | |
| | | | | |
Acquisition of cost method investment | (5.0) | | | — | | | |
| Net cash used in investing activities | (103.4) | | | (61.6) | | | |
| | | | | |
| Cash Flows From Financing Activities | | | | | |
| | | | | |
| Proceeds from issuance of debt | — | | | 2,000.0 | | | |
| | | | | |
| Principal payments on term loan | (14.3) | | | (14.3) | | | |
| | | | | |
| Payment of debt issuance costs and discounts | (2.1) | | | (4.4) | | | |
| | | | | |
| | | | | |
| Proceeds from issuance of preferred shares | — | | | 1,393.2 | | | |
| | | | | |
| | | | | |
| Proceeds from issuance of ordinary shares | — | | | 728.8 | | | |
| Proceeds from issuance of treasury shares | 0.9 | | | — | | | |
| | | | | |
| | | | | |
| Repurchases of ordinary shares | (175.0) | | | — | | | |
| Cash dividends on preferred shares | (37.7) | | | — | | | |
| | | | | |
| Proceeds from stock options exercised | 0.5 | | | 14.8 | | | |
| Payments related to finance lease | (1.0) | | | — | | | |
| Payments related to tax withholding for stock-based compensation | (10.7) | | | (21.7) | | | |
| Net cash (used in) provided by financing activities | (239.4) | | | 4,096.4 | | | |
| Effects of exchange rates | (36.5) | | | 5.0 | | | |
| | | | | |
| Net (decrease) increase in cash and cash equivalents | $ | (71.2) | | | $ | 2,301.9 | | | |
| Net (decrease) increase in restricted cash | (143.5) | | | 1,999.6 | | | |
| | | | | |
| Net (decrease) increase in cash and cash equivalents, and restricted cash | (214.7) | | | 4,301.5 | | | |
CLARIVATE PLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
| | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2022 | | 2021 | | |
| | | | | |
| Beginning of period: | | | | | |
| Cash and cash equivalents | $ | 430.9 | | | $ | 257.7 | | | |
| Restricted cash | 156.7 | | | 14.7 | | | |
| Total cash and cash equivalents, and restricted cash, beginning of period | 587.6 | | | 272.4 | | | |
| | | | | |
| | | | | |
| | | | | |
| End of period: | | | | | |
| Cash and cash equivalents | 359.7 | | | 2,559.6 | | | |
| Restricted cash | 13.2 | | | 2,014.3 | | | |
| Total cash and cash equivalents, and restricted cash, end of period | $ | 372.9 | | | $ | 4,573.9 | | | |
| | | | | |
| Supplemental Cash Flow Information: | | | | | |
| Cash paid for interest | $ | 113.4 | | | $ | 69.7 | | | |
| Cash paid for income tax | $ | 23.7 | | | $ | 12.6 | | | |
| | | | | |
| | | | | |
| Capital expenditures included in accounts payable | $ | 23.8 | | | $ | 3.8 | | | |
| | | | | |
| Non-Cash Financing Activities: | | | | | |
| | | | | |
| Shares issued to Capri Acquisition Topco Limited | — | | | 5,052.2 | | | |
| Retirement of treasury shares | (175.0) | | | (5,052.2) | | | |
Shares issued as contingent stock consideration associated with the DRG acquisition | — | | | 61.6 | | | |
Shares issued as contingent stock consideration associated with the CPA Global acquisition | — | | | 43.9 | | | |
| | | | | |
| | | | | |
| Dividends accrued on our 5.25% Series A Mandatory Convertible Preferred Shares | 6.2 | | | — | | | |
| Total Non-Cash Financing Activities | $ | (168.8) | | | $ | 105.5 | | | |
| | | | | |
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
Note 1: Background and Nature of Operations
Clarivate Plc (“Clarivate,” “us,” “we,” “our,” or the “Company”), is a public limited company organized under the laws of Jersey, Channel Islands, pursuant to the definitive agreement entered into on May 13, 2019 to effect a merger between Camelot Holdings (Jersey) Limited ("Jersey") and Churchill Capital Corp, a Delaware corporation, ("Churchill") (the “2019 Transaction”). The Company is a provider of proprietary and comprehensive content, analytics, professional services and workflow solutions that enable users across government and academic institutions, life science companies and research and development (“R&D”) intensive corporations to discover, protect and commercialize their innovations. Clarivate has two reportable segments: Science and Intellectual Property ("IP"). See Note 18 - Segment Information, for additional information on the Company's reportable segments.
Risks and Uncertainties
In March 2020, the World Health Organization characterized COVID-19 as a pandemic. The rapid spread of COVID-19 and issues relating to the resurgence of COVID-19 and/or new strains of COVID-19 along with continuously evolving responses to combat it have had an increasingly negative impact on the global economy. This has had, and may continue to have, an adverse impact to our operational and financial performance as well as the businesses of our customers and partners, including their spending priorities. It is difficult to predict the full extent of the potential effects and impact on our operations, business, and financial performance, however, we continue to conduct business with substantial modifications and precautionary measures to our daily operations. Modifications include less employee travel as well as a virtual shift related to work location, and sales and marketing events. Given the uncertainty around the severity and duration of the COVID-19 pandemic, the Company cannot reasonably estimate the full impact on our business, financial condition and results of operations at this time, which may be material.
As the conflict in Ukraine continues to evolve, we are closely monitoring the current and potential impact on our business, our people, and our clients. Given the levying of sanctions, regional instability, geopolitical shifts, and other potential adverse effects on macroeconomic conditions, security conditions, currency exchange, and financial markets, the short and long-term implications of Russia’s invasion of Ukraine are not possible to predict. We do not expect any direct impacts to our business to be material, but we are not currently able to predict any indirect impacts on the global economy and how those could negatively affect our business in the future. However, revenue growth was slightly impacted by our decision to cease commercial operations in Russia in March 2022. We continue to monitor any evolving impacts of this conflict and its effects on the global economy and geopolitical landscape.
Note 2: Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of the Company have been prepared on substantially the same basis as our annual consolidated financial statements and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021. Results from interim periods should not be considered indicative of results for the full year. In the opinion of management, these Condensed Consolidated Financial Statements reflect all adjustments necessary for a fair statement of financial position, results of operations, and cash flows for the periods presented, and such adjustments are of a normal, recurring nature.
The Condensed Consolidated Financial Statements of the Company include the accounts of all of its subsidiaries. Subsidiaries are entities over which the Company has control, where control is defined as the power to govern financial and operating policies. Generally, the Company has a shareholding of more than 50% of the voting rights in its subsidiaries. The effect of potential voting rights that are currently exercisable is considered when assessing whether control exists. Subsidiaries are fully consolidated from the date control is transferred to the Company, and are de-consolidated from the date control ceases. Intercompany accounts and transactions have been eliminated in consolidation.
The Employee Benefit Trust ("EBT") associated with the CPA Global Equity Plan was consolidated on October 1, 2020. The EBT held Clarivate shares that were recorded as treasury shares as they were legally issued but not outstanding. The EBT also holds cash that is classified as restricted cash on the Condensed Consolidated Balance Sheet.
In the current year, the Company has changed its presentation of dollar amounts from thousands to millions and, as a result, any necessary rounding adjustments have been made to prior year disclosed amounts.
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
Note 3: Summary of Significant Accounting Policies
Our significant accounting policies are those that we believe are important to the portrayal of our financial condition and results of operations, as well as those that involve significant judgments or estimates about matters that are inherently uncertain. There have been no material changes to the significant accounting policies discussed in Item 8. – Financial Statements and Supplementary Data – Notes to the Consolidated Financial Statements – Note 3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which was filed with the SEC on March 10, 2022.
Newly Adopted Accounting Standards
In June 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity because of complexity associated with GAAP for certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. This guidance is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods. The Company adopted ASU 2020-06 effective January 1, 2022 prospectively, and the adoption did not have a material impact on our Condensed Consolidated Financial Statements.
In April 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, which provides guidance regarding the accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. This guidance is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted ASU 2021-04 effective January 1, 2022, and the adoption did not have a material impact on our Condensed Consolidated Financial Statements.
In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842) Lessors – Certain Leases with Variable Lease Payments, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities as well as disclosing key information about leasing transactions. This guidance is effective for all entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years for public business entities. The Company adopted the ASU 2021-05 at January 1, 2022, and the adoption did not have a material impact on our Condensed Consolidated Financial Statements.
Recently Issued Accounting Standards
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815) – Portfolio Layer Method, amendments in this ASU allow multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the standard will have on our Condensed Consolidated Financial Statements and it is expected that the adoption will not have a material impact.
There were no other new accounting standards or updates issued or effective as of June 30, 2022, that have, or are expected to have, a material impact on our Condensed Consolidated Financial Statements.
Note 4: Business Combinations
Acquisition of ProQuest
On December 1, 2021, we acquired 100% of ProQuest, a leading global software, data and analytics provider to academic, research and national institutions, and its subsidiaries from Cambridge Information Group (“CIG”), Atairos and certain other equity holders (collectively, the “Seller Group”). The aggregate consideration in connection with the closing of the ProQuest acquisition was $5,002.3, net of $52.5 cash acquired. The aggregate consideration was composed of (i) $1,094.9 from the issuance of 46.9 million ordinary shares to the Seller Group and (ii) approximately $3,959.9 in cash, including approximately $917.5 to fund the repayment of ProQuest debt.
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
| | | | | | | | |
Issuance of 46.9 million shares(1) | | $ | 1,094.9 | |
Cash consideration(2) | | 3,959.9 | |
| Total purchase price | | 5,054.8 | |
Cash acquired(3) | | (52.5) | |
| Total purchase price, net of cash acquired | | $ | 5,002.3 | |
| | |
(1) Based on the Company’s closing share price of $23.34 on November 30, 2021. |
(2) Total cash consideration of $3,959.9 includes a base cash consideration of $3,988.0, less working capital adjustments of $31.7, less closing indebtedness adjustments of $36.6, plus closing cash consideration of $40.2. |
(3) Cash acquired includes $52.5 of total cash acquired, less $2.0 of restricted cash acquired. |
The excess of the purchase price over the net tangible and intangible assets is recorded to Goodwill and primarily reflects the assembled workforce and expected synergies. The majority of goodwill is deductible for tax purposes. During the three and six months ended June 30, 2022, total transaction costs incurred in connection with the acquisition of ProQuest were $3.6 and $9.3, respectively. Total transaction costs during the three and six months ended June 30, 2021 were $10.0 and $10.1, respectively. The ProQuest acquisition is reported as part of the Science Segment, see Note 18 - Segment Information for further details.
The purchase price allocation for the ProQuest acquisition as of the close date of December 1, 2021 is preliminary and may change upon completion of the determination of the fair value of assets acquired and liabilities assumed. For example, the attrition assumptions used in valuing the customer relationship intangible assets acquired are provisional. A 0.5% change in the attrition assumption used would represent a material change in the purchase price allocation. The following table summarizes the preliminary purchase price allocation for this acquisition:
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | | | | | | | |
| Original Purchase Price Allocation | | Measurement Period Adjustments | | Updated Purchase Price Allocation |
| Accounts receivable | $ | 113.5 | | | $ | 1.2 | | | $ | 114.7 | |
| Prepaid expenses | 22.3 | | | 0.9 | | | 23.2 | |
| Other current assets | 23.7 | | | — | | | 23.7 | |
| Property and equipment, net | 62.3 | | | 2.9 | | | 65.2 | |
Other intangible assets(1) | 3,534.7 | | | (1.0) | | | 3,533.7 | |
| Other non-current assets | 18.0 | | | — | | | 18.0 | |
| Deferred income taxes | 3.5 | | | — | | | 3.5 | |
| Operating lease right-of-use assets | 28.4 | | | — | | | 28.4 | |
| Total assets | $ | 3,806.4 | | | $ | 4.0 | | | $ | 3,810.4 | |
| Accounts payable | 17.1 | | | — | | | 17.1 | |
| Accrued expenses and other current liabilities | 136.8 | | | (3.7) | | | 133.1 | |
| Current portion of long-term debt | 1.1 | | | — | | | 1.1 | |
| Current portion of deferred revenue | 335.2 | | | — | | | 335.2 | |
| Current portion of operating lease liabilities | 8.0 | | | — | | | 8.0 | |
| Long-term debt | 33.4 | | | — | | | 33.4 | |
| Deferred income taxes | 58.6 | | | 0.3 | | | 58.9 | |
| Non-current portion of deferred revenue | 6.8 | | | — | | | 6.8 | |
| Other non-current liabilities | 89.2 | | | 2.1 | | | 91.3 | |
| Operating lease liabilities | 23.1 | | | — | | | 23.1 | |
| Total liabilities | 709.3 | | | (1.3) | | | 708.0 | |
| Fair value of acquired identifiable assets and liabilities | $ | 3,097.1 | | | $ | 5.3 | | | $ | 3,102.4 | |
| | | | | |
| Purchase price, net of cash | $ | 4,994.3 | | | $ | 8.0 | | | $ | 5,002.3 | |
| Less: Fair value of acquired identifiable assets and liabilities | 3,097.1 | | | 5.3 | | | 3,102.4 | |
| Goodwill | $ | 1,897.2 | | | $ | 2.7 | | | $ | 1,899.9 | |
| | | | | |
|
(1) Of the $3,534.7, $3,528.0 relates to the valued intangible assets as per the purchase price allocation and $6.7 relates to acquired assets under construction. |
The identifiable intangible assets acquired are amortized on a straight-line basis over their estimated useful lives. The following table summarizes the estimated fair value of ProQuest's identifiable intangible assets acquired and their remaining amortization period (in years):
| | | | | | | | | | | |
| Fair Value as of December 1, 2021 | | Remaining
Range of Years |
| Customer relationships | $ | 2,773.0 | | | 17-23 |
| Technology & databases | 709.3 | | | 5-17 |
| Trade names | 45.7 | | | 2-10 |
| Total identifiable intangible assets | $ | 3,528.0 | | | |
Unaudited pro forma information for the Company for the relevant periods presented as if the acquisition had occurred January 1, 2020 is as follows:
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
| | | | | | | |
| Three Months Ended June 30, | | |
| 2021 | | |
| Pro forma revenues, net | $ | 681.1 | | | |
| Pro forma net loss attributable to the Company's shareholders | (146.0) | | | |
| | | |
| Six Months Ended June 30, | | |
| 2021 | | |
| Pro forma revenues, net | $ | 1,329.2 | | | |
| Pro forma net loss attributable to the Company's shareholders | (217.8) | | | |
The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the acquisition taken place on the date indicated, or the future consolidated results of operations of the Company. The pro forma financial information presented above has been derived from the historical consolidated financial statements of the Company and from the historical accounting records of ProQuest.
The unaudited pro forma results include certain pro forma adjustments to net loss that were directly attributable to the acquisition, assuming the acquisition had occurred on January 1, 2020, including the following: (i) additional amortization expense that would have been recognized relating to the acquired intangible assets, (ii) adjustments to interest expense to reflect the removal of ProQuest debt and the additional Company borrowings in conjunction with the acquisition, and (iii) acquisition-related transaction costs incurred by the Company during the three and six months ended June 30, 2021 described above.
Note 5: Leases
The Company has multiple agreements to sublease operating lease right of use assets and recognized $0.7 of sublease income for both the three months ended June 30, 2022 and 2021, and $1.5 of sublease income for both the six months ended June 30, 2022 and 2021, within Selling, general and administrative costs in the Condensed Consolidated Statements of Operations.
On December 1, 2021, Clarivate closed its acquisition of ProQuest. As part of the acquisition, the Company assumed a finance lease. Refer to Note 6 - Property and Equipment, Net, Note 11 - Debt, and Note 20 - Related Party Transactions for further information.
In connection with the Company's digital workplace transformation initiative and other integration activities to enable colleagues to work remotely, the Company has ceased the use of select leased sites. See Note 21 - Restructuring and Impairment for further information.
Note 6: Property and Equipment, Net
Property and equipment, net consisted of the following:
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | |
| | | |
| June 30, | | December 31, |
| 2022 | | 2021 |
| Computer hardware | $ | 48.2 | | | $ | 45.5 | |
| Leasehold improvements | 16.3 | | | 11.6 | |
| Furniture, fixtures and equipment | 37.9 | | | 34.7 | |
| Capital office leases - finance lease asset | 31.0 | | | 30.5 | |
| Other | 2.1 | | | 2.3 | |
| Total property and equipment, gross | 135.5 | | 124.6 |
| Accumulated depreciation | (58.7) | | | (40.8) | |
| Total property and equipment, net | $ | 76.8 | | | $ | 83.8 | |
| | | |
Depreciation amounted to $9.8 and $3.3 for the three months ended June 30, 2022 and 2021, respectively, and $20.4 and $6.6 for the six months ended June 30, 2022 and 2021, respectively. There were no impairments related to leasehold improvements during the three and six months ended June 30, 2022, compared to $4.2 and $5.2 for the three and six months ended June 30, 2021.
Note 7: Other Intangible Assets, net and Goodwill
Other Intangible Assets, net
The following tables summarize the gross carrying amounts and accumulated amortization of the Company’s identifiable intangible assets by major class:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| Finite-lived intangible assets | | | | | | | | | | | |
| Customer relationships | $ | 7,825.3 | | | $ | (659.4) | | | $ | 7,165.9 | | | $ | 8,279.1 | | | $ | (514.8) | | | $ | 7,764.3 | |
| Databases and content | 2,619.2 | | | (679.6) | | | 1,939.6 | | | 2,577.1 | | | (591.0) | | | 1,986.1 | |
| Computer software | 736.1 | | | (363.2) | | | 372.9 | | | 733.1 | | | (320.1) | | | 413.0 | |
| Trade names | 60.8 | | | (15.4) | | | 45.4 | | | 62.1 | | | (10.5) | | | 51.6 | |
| | | | | | | | | | | |
| Backlog | 29.0 | | | (16.8) | | | 12.2 | | | 29.1 | | | (13.0) | | | 16.1 | |
| Finite-lived intangible assets | 11,270.4 | | | (1,734.4) | | | 9,536.0 | | | 11,680.5 | | | (1,449.4) | | | 10,231.1 | |
| Indefinite-lived intangible assets | | | | | | | | | | | |
| Trade names | 161.3 | | | — | | | 161.3 | | | 161.3 | | | — | | | 161.3 | |
| Total intangible assets | $ | 11,431.7 | | | $ | (1,734.4) | | | $ | 9,697.3 | | | $ | 11,841.8 | | | $ | (1,449.4) | | | $ | 10,392.4 | |
Amortization amounted to $165.8 and $127.0 for the three months ended June 30, 2022 and 2021, respectively, and $331.6 and $255.3 for the six months ended June 30, 2022 and 2021, respectively.
Goodwill
The change in the carrying amount of goodwill is shown below:
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | | | | | | | |
| Science Segment | | Intellectual Property Segment | | Consolidated Total |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Balance as of December 31, 2021 | $ | 3,326.9 | | | $ | 4,578.0 | | | $ | 7,904.9 | |
Measurement Period Adjustments(1) | 5.8 | | | — | | | 5.8 | |
| | | | | |
Impact of foreign currency fluctuations(2) | (8.7) | | | (368.3) | | | (377.0) | |
| Balance as of June 30, 2022 | $ | 3,324.0 | | | $ | 4,209.7 | | | $ | 7,533.7 | |
(1) Includes $5.8 in purchase accounting adjustments recorded in 2022, of which $2.7 were related to the ProQuest acquisition. See Note 4 - Business Combinations for further information. |
(2) The impact of foreign currency fluctuations was primarily driven by changes in the GBP/USD translation rate as of June 30, 2022 compared to December 31, 2021. Approximately half of the Company's Goodwill and Other intangible assets are denominated in GBP. |
|
|
Note 8: Derivative Instruments
The Company had interest rate swap arrangements with counterparties to reduce its exposure to variability in cash flows relating to interest payments on $350.0 of its outstanding Term Loan arrangements which matured on March 31, 2021. In March 2021, the Company replaced the interest rate swaps that matured during March 2021 and entered into new interest rate swap arrangements relating to interest payments on $350.0 of its Term Loan arrangements which were effective March 31, 2021 and have a maturity date of March 31, 2024. The Company applies hedge accounting by designating the interest rate swaps as a hedge on applicable future quarterly interest payments.
In 2019, the Company also entered into two interest rate swap arrangements relating to interest payments on a total of $100.0 of its Term Loan arrangements, effective March 31, 2021 and April 30, 2021, respectively. Both of these derivatives have notional amounts that amortize downward, and a maturity date of September 2023. The Company applies hedge accounting by designating the interest rate swaps as a hedge on applicable future quarterly interest payments.
For additional information on our outstanding Term Loan and related hedging, see Note 11 - Debt and Item 3. Qualitative and Quantitative Disclosures about Market Risk.
Changes in fair value are recorded in accumulated other comprehensive income (loss) ("AOCI") and the amounts reclassified out of AOCI are recorded to Interest expense and amortization of debt discount, net. The fair value of the interest rate swaps is recorded in other current assets or accrued expenses and other current liabilities and other non-current assets or liabilities in the Condensed Consolidated Balance Sheets, according to the duration of related cash flows. The fair value of the interest rate swaps was an asset of $17.9 and $2.0 as of June 30, 2022 and December 31, 2021, respectively.
Foreign Currency Forward Contracts The Company periodically enters into foreign currency contracts to help manage the Company’s exposure to foreign exchange rate risks. These contracts generally do not exceed 180 days in duration. The Company recognized (loss) gains from the mark to market adjustment of $(5.7) and $0.8 for the three months ended June 30, 2022 and 2021, respectively, and $(12.4) and $1.8 for the six months ended June 30, 2022 and 2021, respectively, in Other operating (income) expense, net on the Condensed Consolidated Statements of Operations. The principal amount of outstanding foreign currency contracts was $194.9 and $216.7 as of June 30, 2022 and December 31, 2021, respectively.
The Company accounts for these forward contracts at fair value and recognizes the associated realized and unrealized gains and losses in Other operating (income) expense, net in the Condensed Consolidated Statements of Operations, as the contracts are not designated as accounting hedges under the applicable sections of ASC 815, Derivatives and Hedging. The total fair value of the forward contracts represented an asset balance of $0.1 and $2.2 and a liability balance of $4.3 and $0.7 as of June 30, 2022 and December 31, 2021, respectively, which was classified within Other current assets and Accrued expenses and other current liabilities, respectively, on the Condensed Consolidated Balance Sheets. See Note 9 - Fair Value Measurements for additional information related to the fair value of derivative instruments.
Note 9: Fair Value Measurements
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
The following table provides a summary of the Company’s assets and liabilities that were recognized at fair value on a recurring basis as at June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | |
| | | June 30, 2022 |
| | | Level 2 | | Level 3 | | Total
Fair Value |
| Assets | | | | | | | |
| Forward currency contracts asset | | | $ | 0.1 | | | $ | — | | | $ | 0.1 | |
| | | | | | | |
| Interest rate swap asset | | | 17.9 | | | — | | | 17.9 | |
| | | $ | 18.0 | | | $ | — | | | $ | 18.0 | |
| Liabilities | | | | | | | |
| Warrant liability | | | — | | | 78.4 | | | 78.4 | |
| CPA Global Equity Plan liability - current | | | 9.0 | | | — | | | 9.0 | |
| | | | | | | |
| Forward currency contracts liability | | | 4.3 | | | — | | | 4.3 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total | | | $ | 13.3 | | | $ | 78.4 | | | $ | 91.7 | |
| | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| | | Level 2 | | Level 3 | | Total Fair Value |
| Assets | | | | | | | |
| Forward currency contracts asset | | | $ | 2.2 | | | $ | — | | | $ | 2.2 | |
| Interest rate swap asset | | | 2.0 | | | | | 2.0 | |
| | | | | | | |
| | | $ | 4.2 | | | $ | — | | | $ | 4.2 | |
| Liabilities | | | | | | | |
| Warrant liability | | | — | | | 227.8 | | | 227.8 | |
| CPA Global Equity Plan liability - current | | | 152.4 | | | — | | | 152.4 | |
| | | | | | | |
| Forward currency contracts liability | | | 0.7 | | | — | | | 0.7 | |
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| Total | | | $ | 153.1 | | | $ | 227.8 | | | $ | 380.9 | |
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Private Placement Warrants - The following table summarizes the changes in the Private Placement Warrants liability for the three and six months ended June 30, 2022 and 2021:
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
| | | | | | | |
| Balance at December 31, 2021 | $ | 227.8 | | | |
| Mark to market gain on financial instruments | (100.4) | | | |
| Exercise of Private Placement Warrants | — | | | |
| Balance at March 31, 2022 | $ | 127.4 | | | |
| Mark to market gain on financial instruments | (49.0) | | | |
| Exercise of Private Warrants | — | | | |
| Balance at June 30, 2022 | $ | 78.4 | | | |
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| Balance at December 31, 2020 | $ | 312.8 | | | |
| Mark to market gain on financial instruments | (51.2) | | | |
| Exercise of Private Placement Warrants | (3.6) | | | |
| Balance at March 31, 2021 | $ | 258.0 | | | |
| Mark to market loss on financial instruments | 21.0 | | | |
| Exercise of Private Warrants | — | | | |
| Balance at June 30, 2021 | $ | 279.0 | | | |
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There were no transfers of assets or liabilities between levels during the three and six months ended June 30, 2022 and 2021.
Non-Financial Assets Valued on a Non-Recurring Basis
Right of Use Asset — The Company recorded a non-cash impairment charge to reduce the carrying value of operating lease right of use asset by $6.2 and $28.6 for the three months ended June 30, 2022 and 2021, respectively, and $6.2 and $69.6 for the six months ended June 30, 2022 and 2021, respectively. Additionally, the Company incurred $0.2 and $0 in lease termination fees for the three months ended June 30, 2022 and 2021, respectively, and $0.4 and $3.1 during the six months ended June 30, 2022 and 2021, respectively. Fair value assumptions including sublease probabilities and the present value factor were used in the impairment calculation.
Note 10: Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities, consisted of the following as of June 30, 2022 and December 31, 2021:
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | |
| June 30, | | December 31, |
| 2022 | | 2021 |
CPA Global Equity Plan liability(1) | $ | 9.0 | | | $ | 152.4 | |
| | | |
Employee related accruals(2) | 113.6 | | | 150.6 | |
Accrued professional fees(3) | 40.7 | | | 39.4 | |
Accrued legal liability(4) | 67.9 | | | 79.0 | |
Tax related accruals(5) | 39.5 | | | 28.5 | |
Accrued royalty costs(6) | 66.0 | | | 71.3 | |
Other accrued expenses and other current liabilities(7) | 164.4 | | | 158.4 | |
| Total accrued expenses and other current liabilities | $ | 501.1 | | | $ | 679.6 | |
| | | |
(1) See Note 9 - Fair Value Measurements and Note 14 - Share-based Compensation for further information. |
|
(2) Employee related accruals include accrued payroll, bonus and employee commissions. |
(3) Professional and outside service-related fees include accrued legal fees, audit fees, outside services, technology, and contractor fees. |
(4) Of the balance as of June 30, 2022 and December 31, 2021, management estimated the Company's potential liability for the larger legal claims is $60.4 and $60.5, respectively, which includes estimated legal costs and accrued interest. See Note 19 - Commitments and Contingencies for further information with respect to the probable claim reserves. |
(5) Tax related accruals include value-added taxes payable and other current taxes payable. |
(6) Represents accrued royalty costs associated with licensee agreements. |
(7) Includes current liabilities due to customers, interest payable, and miscellaneous other current liabilities. As of June 30, 2022 and December 31, 2021, we recognized $6.2 and $6.5, respectively of accrued preferred share dividends. |
Note 11: Debt
The following table is a summary of the Company’s debt:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2022 | | December 31, 2021 |
| Type | | Maturity | | Effective
Interest
Rate | | Carrying
Value | | Effective
Interest
Rate | | Carrying
Value |
| Senior Notes | | 2029 | | 4.875 | % | | $ | 921.4 | | | 4.875 | % | | $ | 921.4 | |
| Senior Secured Notes | | 2028 | | 3.875 | % | | 921.2 | | | 3.875 | % | | 921.2 | |
| Revolving Credit Facility | | 2027 | | 4.375 | % | | 175.0 | | | 3.359 | % | | 175.0 | |
| Term Loan Facility | | 2026 | | 4.666 | % | | 2,804.5 | | | 3.860 | % | | 2,818.8 | |
| Senior Secured Notes | | 2026 | | 4.500 | % | | 700.0 | | | 4.500 | % | | 700.0 | |
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Finance lease(1) | | 2023 | | 3.800 | % | | 29.8 | | | 3.800 | % | | 30.8 | |
| Total debt outstanding | | | | | | 5,551.9 | | | | | 5,567.2 | |
| Debt issuance costs | | | | | | (42.7) | | | | | (47.1) | |
| Term Loan Facility (2026), Senior Notes (2029), Senior Secured Notes (2028), discounts | | | | | | (30.6) | | | | | (33.2) | |
| Short-term debt, including current portion of Long-term debt | | | | | | (57.1) | | | | | (30.6) | |
| Long-term debt, net of current portion and debt issuance costs | | | | | | $ | 5,421.5 | | | | | $ | 5,456.3 | |
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(1) See Note 5 - Leases for additional information. |
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
Senior Notes (2029) and Senior Secured Notes (2028)
The Company has $921.2 aggregate principal amount of its Senior Secured Notes due in 2028 and $921.4 aggregate principal amount of its Senior Notes due in 2029. The Senior Secured Notes and Senior Notes bear interest at a rate of 3.875% and 4.875% per annum, respectively, and the interest is payable semi-annually to holders of record on June 30 and December 30 of each year, commencing on December 30, 2021. Both of these Notes were issued by Clarivate Science Holdings Corporation (the "Issuer"), an indirect wholly-owned subsidiary of Clarivate.
The Senior Secured Notes due 2028 are secured on a first-lien pari passu basis with borrowings under the existing credit facilities and senior secured notes due 2026. Both of these Notes are guaranteed on a joint and several basis by each of Clarivate’s indirect subsidiaries that is an obligor or guarantor under Clarivate’s existing credit facilities and senior secured notes due 2026. The Senior Notes due 2029 are the Issuer’s and such guarantors’ unsecured obligations.
The Credit Facilities
The Company's Credit Facilities consist of a $750.0 Revolving Credit Facility with a $80.0 letter of credit sublimit, due in 2027, and a $2,860.0 Term Loan Facility, due in 2026.
Revolving Credit Facility
The Revolving Credit Facility provides for revolving loans, same-day borrowings and letters of credit pursuant to commitments in an aggregate principal amount of $750.0 with a letter of credit sublimit of $80.0. Proceeds of loans made under the Revolving Credit Facility may be borrowed, repaid and reborrowed prior to the maturity of the Revolving Credit Facility. Our ability to draw under the Revolving Credit Facility or issue letters of credit thereunder will be conditioned upon, among other things, delivery of required notices, accuracy of the representations and warranties contained in the Credit Agreement and the absence of any default or event of default under the Credit Agreement.
On March 31, 2022, the Company’s direct and indirect subsidiaries that are borrowers or guarantors under the Credit Agreement dated as of October 31, 2019, (the "Credit Agreement") entered into an amendment thereto, pursuant to which the total revolving credit commitments thereunder were further increased by $400.0 to $750.0 in the aggregate and the maturity date for revolving credit commitments was extended to March 31, 2027, subject to a “springing” maturity date that is 90 days prior to the maturity date of (i) the term loans outstanding under the Credit Agreement as of the date of the amendment or (ii) the 4.50% senior secured notes due in 2026 and issued by Camelot Finance S.A. (but only to the extent such term loans or senior secured notes have not, prior thereto, been refinanced or extended to have a maturity date of no earlier than 90 days after March 31, 2027).
The Revolving Credit Facility carries an interest rate at Term SOFR, plus a 0.1% SOFR adjustment, plus 3.25% per annum (or 2.75% per annum, based on first lien leverage ratios) or Prime plus a margin of 2.25% per annum, as applicable depending on the borrowing. The Revolving Credit Facility interest rate margins will decrease upon the achievement of certain first lien net leverage ratios (as the term is used in the Credit Agreement).
In November 2021, the Company borrowed $175.0 on the existing Revolving Credit Facility and used the net proceeds from such borrowings for general corporate purposes. The Revolving Credit Facility is subject to a commitment fee rate of 0.5% per annum (or 0.375% per annum, based on first lien leverage ratios) times the unutilized amount of total revolving commitments.
As of June 30, 2022, letters of credit totaling $6.3 were collateralized by the Revolving Credit Facility. Notwithstanding the Revolving Credit Facility, the Company had an unsecured corporate guarantee outstanding for $10.5 and cash collateralized letters of credit totaling $2.6 as of June 30, 2022, all of which were not collateralized by the Revolving Credit Facility.
Term Loan Facility (2026)
The Company has a Term Loan Facility of $2,860.0 due in 2026, which was fully drawn at closing. The principal amount of the Term Loan Facility is repaid by the Company on the last Business Day of each March, June, September and December, in an amount equal to 0.25% of the aggregate outstanding amount. As of June 30, 2022, we had $2,804.5 outstanding on our Term Loan Facility.
Senior Secured Notes (2026)
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
The Company has $700.0 in aggregate principal amount of Senior Secured Notes due in 2026 bearing interest at 4.50% per annum, payable semi-annually to holders of record in May and November. The first interest payment was paid in May 2020. The Secured Notes due 2026 were issued by Camelot Finance S.A., an indirect wholly-owned subsidiary of Clarivate, and are secured on a first-lien pari passu basis with borrowings under the Credit Facilities and Senior Secured Notes due 2028. These Notes are guaranteed on a joint and several basis by certain Clarivate subsidiaries and will be general senior secured obligations of the Issuer and will be secured on a first-priority basis by the collateral now owned or hereafter acquired by the Issuer and each of the Guarantors that secures the Issuer’s and such Guarantor’s obligations under the New Senior Credit Facility (subject to permitted liens and other exceptions).
The carrying value of the Company’s variable interest rate debt, excluding unamortized debt issuance costs, approximates fair value due to the short-term nature of the interest rate benchmark rates. The fair value of the fixed rate debt is estimated based on market observable data for debt with similar prepayment features. The fair value of the Company’s debt was $5,015.8 and $5,595.5 at June 30, 2022 and December 31, 2021, respectively. The debt is considered a Level 2 liability under the fair value hierarchy.
Note 12: Revenue
Disaggregated Revenues
We disaggregate our revenues by segment (see Note 18 - Segment Information) and by transaction type based on revenue recognition pattern as follows:
•Subscription-based revenues are recurring revenues that are earned under annual, evergreen or multi-year contracts pursuant to which we license the right to use our products to our customers or provide maintenance services over a contractual term. Revenues from the sale of subscription data, maintenance services, and analytics solutions are recognized ratably over the contractual period as revenues are earned.
•Re-occurring 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. These contracts include either evergreen clauses, in which at least six month advance notice is required prior to cancellation, or the contract is for multiple years. Deliverables are usually received by the customer instantly or in a short period of time, at which time the revenues are recognized. The most significant component of our re-occurring revenues is our 'renewal' business within CPA Global.
•Transactional and other revenues. Transactional and other 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 and other revenues may involve sales to the same customer on multiple occasions but with different products or services comprising the order. Other revenues relate to professional services including implementation for software and software as a service ("SaaS") subscriptions. These contracts vary in length from several months to years for multi-year projects. Revenue is recognized over time utilizing a reasonable measure of progress depicting the satisfaction of the related performance obligation. Other revenues also includes one-time perpetual archive license revenues.
The following table presents the Company’s revenues by transaction type based on revenue recognition pattern for the periods presented:
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2022 | | 2021(1) | | |
| Subscription revenues | $ | 407.4 | | | $ | 243.4 | | | |
| Re-occurring revenues | 112.0 | | | 113.7 | | | |
| Transactional and other revenues | 168.0 | | | 90.0 | | | |
| Total revenues, gross | 687.4 | | | 447.1 | | | |
Deferred revenues adjustment (2) | (0.8) | | | (1.4) | | | |
| Total revenues, net | $ | 686.6 | | | $ | 445.7 | | | |
| | | | | |
(1) Certain prior period amounts have been reclassified to conform to current period presentation. |
(2) Reflects the deferred revenues adjustment made as a result of purchase accounting prior to the adoption of ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In the fourth quarter of 2021, Clarivate adopted ASU No. 2021-08 which allows an acquirer to account for the related revenue contracts in accordance with ASC 606 Revenue from Contracts with Customers, as if it had originated the contracts. This guidance was applied retrospectively to all business combinations for which the acquisition date occurs during or subsequent to 2021. |
| | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021(1) | | |
| Subscription revenues | $ | 811.2 | | | $ | 482.4 | | | |
| Re-occurring revenues | 226.5 | | | 223.2 | | | |
| Transactional and other revenues | 311.7 | | | 172.9 | | | |
| Total revenues, gross | 1,349.4 | | | 878.5 | | | |
Deferred revenues adjustment(2) | (0.6) | | | (4.4) | | | |
| Total revenues, net | $ | 1,348.8 | | | $ | 874.1 | | | |
| | | | | |
| | | | | |
(1) Certain prior period amounts have been reclassified to conform to current period presentation. |
(2) Reflects the deferred revenues adjustment made as a result of purchase accounting prior to the adoption of ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In the fourth quarter of 2021, Clarivate adopted ASU No. 2021-08 which allows an acquirer to account for the related revenue contracts in accordance with ASC 606 Revenue from Contracts with Customers, as if it had originated the contracts. This guidance was applied retrospectively to all business combinations for which the acquisition date occurs during or subsequent to 2021. |
Contract Balances
| | | | | | | | | | | | | | | | | |
| Accounts receivable, net | | Current portion of deferred revenues | | Non-current portion of deferred revenues |
| Opening (January 1, 2022) | $ | 906.4 | | | $ | 1,030.4 | | | $ | 54.2 | |
| Closing (June 30, 2022) | 812.4 | | | 956.7 | | | 50.3 | |
| Decrease / (increase) | $ | 94.0 | | | $ | 73.7 | | | $ | 3.9 | |
| | | | | |
| Opening (January 1, 2021) | $ | 737.7 | | | $ | 707.3 | | | $ | 41.4 | |
| Closing (June 30, 2021) | 628.1 | | | 664.9 | | | 48.1 | |
| Decrease / (increase) | $ | 109.6 | | | $ | 42.4 | | | $ | (6.7) | |
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The amount of revenue recognized in the period that was included in the opening deferred revenues balances was $628.5 and $377.9 for the six months ended June 30, 2022 and 2021, respectively. This revenue consists primarily of subscription revenues.
Transaction Price Allocated to the Remaining Performance Obligation
As of June 30, 2022, approximately $126.8 of revenue is expected to be recognized in the future from remaining performance obligations, excluding contracts with a duration of one year or less. The Company expects to recognize revenue
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
on approximately 58.6% of these performance obligations over the next 12 months. Of the remaining 41.4%, 23.3% is expected to be recognized within the following year, 11.4% is expected to be recognized within three to five years, with the final 6.7% expected to be recognized within six to ten years.
Note 13: Shareholders’ Equity
As of June 30, 2022, there were unlimited shares of ordinary stock authorized, 673.8 million shares issued and 673.3 million shares outstanding, with no par value. The Company held 0.5 million and 0.5 million shares as treasury shares as of June 30, 2022 and December 31, 2021, respectively. The Company’s ordinary shareholders are entitled to one vote per share.
DRG Acquisition Shares
In connection with the DRG acquisition, 2.9 million ordinary shares of the Company were issued to Piramal Enterprises Limited ("PEL") in March 2021.
MCPS Offering
In June 2021, concurrently with the June 2021 Ordinary Share Offering (see Note 1 - Background and Nature of Operations, in our Annual Report on Form 10-K), we completed a public offering of 14.4 million of our 5.25% Series A Mandatory Convertible Preferred Shares ("MCPS") (which included 1.9 million of our MCPS that the underwriters purchased pursuant to their option to purchase additional shares). Dividends on our mandatory convertible preferred shares are payable, as and if declared by our Board of Directors, at an annual rate of 5.25% of the liquidation preference of $100.00 per share. We may pay declared dividends on March 1, June 1, September 1 and December 1 of each year, commencing on September 1, 2021 and ending on, and including, June 1, 2024. Each of our convertible preferred shares has a liquidation preference of $100.00.
As of June 30, 2022, we recognized $6.2 of accrued preferred share dividends within Accrued expenses and other current liabilities. While the dividends on the MCPS are cumulative, they will not be paid until declared by the Company’s Board of Directors. If the dividends are not declared, they will continue to accumulate until paid, due to a backstop contained in the agreement (even if never declared).
Treasury Shares
CPA Global Acquisition Shares - During the six months ended June 30, 2022, 41.7 thousand shares held in the Employee Benefit Trust ("EBT"), established for the CPA Global Equity Plan, were sold at an average net price per share of $15.01 to fund the payment to the respective employees. Given the original share value of $30.99 as of the date of the acquisition, an associated loss was recognized within the Condensed Consolidated Statement of Changes in Equity in the amount of $0.7.
During January 2021, the Company issued 1.5 million ordinary shares to Redtop Holdings Limited pursuant to a hold-back clause within the purchase agreement for a total of $43.9, which was satisfied. See Note 19 - Commitments and Contingencies for additional details.
Share Repurchase Program and Share Retirements - In August 2021, the Company's Board of Directors authorized a share repurchase program allowing the Company to purchase up to $250.0 of its outstanding ordinary shares, subject to market conditions. In February 2022, the Company's Board of Directors approved the purchase of up to $1,000.0 of the Company's ordinary shares through open-market purchases, to be executed through December 31, 2023. The February 2022 repurchase program replaces the repurchase program previously announced in August 2021. During the six months ended June 30, 2022, the Company repurchased 10.7 million ordinary shares with a total carrying value of $175.0 which were subsequently retired and restored as authorized but unissued ordinary shares. Upon formal retirement and in accordance with ASC Topic 505, Equity, the Company reduced its ordinary shares account by the carrying amount of the treasury shares. Additionally, given the differences of the original repurchase share value and the value at the time of formal retirements, an associated loss was recognized within the Consolidated Statement of Changes in Equity in the amount of $7.7. As of June 30, 2022, the Company had approximately $825.0 of availability remaining under this program. A summary of the ordinary shares repurchased and retired during the six months ended June 30, 2022 is as follows:
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
| | | | | | | |
| Six Months Ended June 30, |
| (in millions) | 2022 | | |
| Total number of shares repurchased | 10.7 | | | |
| Average price paid per share | $ | 16.33 | | | |
Total | $ | 175.0 | | | |
| | | |
| Total shares retired | 10.7 | | | |
| Average price paid per share | $ | 16.33 | | | |
Total | $ | 175.0 | | | |
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CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
Note 14: Share-based Compensation
The Company grants share-based awards under the Clarivate Plc 2019 Incentive Award Plan ("the "Plan"). As of June 30, 2022, approximately 36.3 million shares of the Company’s ordinary shares were available for share-based awards. The Plan provides for the issuance of stock options, restricted stock units ("RSUs") and performance share units ("PSUs"). Share-based compensation expense is recorded to the “Cost of revenues’ and “Selling, general and administrative” line items on the accompanying Condensed Consolidated Statements of Operations. Total share-based compensation expense for the three and six months ended June 30, 2022, and 2021 comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| Stock Options | | RSUs | | PSUs | | | | CPA Global Equity Plan | | Total |
| Cost of revenues | $ | — | | | $ | 7.5 | | | $ | 0.1 | | | | | $ | (0.2) | | | $ | 7.4 | |
| Selling, general and administrative costs | — | | | 12.6 | | | 0.9 | | | | | 0.8 | | | 14.3 | |
| Total share-based compensation expense | $ | — | | | $ | 20.1 | | | $ | 1.0 | | | | | $ | 0.6 | | | $ | 21.7 | |
| | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Stock Options | | RSUs | | PSUs | | | | CPA Global Equity Plan | | Total |
| Cost of revenues | $ | — | | | $ | 17.1 | | | $ | 0.3 | | | | | $ | (0.6) | | | $ | 16.8 | |
| Selling, general and administrative costs | — | | | 28.8 | | | 1.9 | | | | | 0.9 | | | 31.6 | |
| Total share-based compensation expense | $ | — | | | $ | 45.9 | | | $ | 2.2 | | | | | $ | 0.3 | | | $ | 48.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| Stock Options | | RSUs | | PSUs | | | | CPA Global Equity Plan | | Total |
| Cost of revenues | $ | 0.1 | | | $ | 4.4 | | | $ | 0.2 | | | | | $ | 13.1 | | | $ | 17.8 | |
| Selling, general and administrative costs | 0.4 | | | 9.6 | | | 1.2 | | | | | 29.2 | | | 40.4 | |
| Total share-based compensation expense | $ | 0.5 | | | $ | 14.0 | | | $ | 1.4 | | | | | $ | 42.3 | | | $ | 58.2 | |
| | | | | | | | | | | |
| Six months ended June 30, 2021 |
| Stock Options | | RSUs | | PSUs | | | | CPA Global Equity Plan | | Total |
| Cost of revenues | $ | 0.1 | | | $ | 8.2 | | | $ | 0.3 | | | | | $ | 22.2 | | | $ | 30.8 | |
| Selling, general and administrative costs | 0.4 | | | 15.2 | | | 2.4 | | | | | 48.4 | | | 66.4 | |
| Total share-based compensation expense | $ | 0.5 | | | $ | 23.4 | | | $ | 2.7 | | | | | $ | 70.6 | | | $ | 97.2 | |
The following table summarizes the Company’s existing share-based compensation awards program activity for the six months ended June 30, 2022, and 2021, respectively (in millions):
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 | | | | |
| Stock Options | | RSUs | | PSUs | | | | |
| Balance at December 31, 2021 | 4.8 | | | 4.5 | | | 1.4 | | | | | |
| Granted | — | | | 4.5 | | | 0.9 | | | | | |
| Exercised/Vested | (0.2) | | | (2.0) | | | — | | | | | |
| Forfeited/Unexercised | (0.1) | | | (0.4) | | | (0.1) | | | | | |
| Balance at June 30, 2022 | 4.5 | | | 6.6 | | | 2.2 | | | | | |
| | | | | | | | | |
| Total remaining unearned compensation costs | — | | | 72.1 | | | 9.4 | | | | | |
| | | | | | | | | |
| Weighted average remaining service period | 0 years | | 1.43 years | | 1.69 years | | | | |
| | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2021 |
| Stock Options | | RSUs | | PSUs |
| Balance at December 31, 2020 | 7.9 | | | 1.8 | | | 0.9 | |
| Granted | — | | | 2.2 | | | 0.5 | |
| Vested | (2.4) | | | (0.5) | | | — | |
| Forfeited | — | | | (0.2) | | | — | |
| Balance at June 30, 2021 | 5.5 | | | 3.3 | | | 1.4 | |
| | | | | |
| Total remaining unearned compensation costs | — | | | 52.1 | | | 10.7 | |
| | | | | |
| Weighted average remaining service period | 0 years | | 1.41 years | | 2.04 years |
Note 15: Income Taxes
During the three months ended June 30, 2022 and 2021, the Company recognized an income tax provision of $10.5 on income before income tax of $72.9 and $8.2 on loss before income tax of $123.3, respectively. During the six months ended June 30, 2022 and 2021, the Company recognized an income tax provision of $26.8 on income before income tax of $158.7 and $8.5 on loss before income tax of $179.0, respectively. The effective tax rate was 16.9% for the six months ended June 30, 2022, as compared to 4.7% for the six months ended June 30, 2021. The effective tax rate was 14.4% for the three months ended June 30, 2022, as compared to 6.7% for the three months ended June 30, 2021. The overall increase in tax expense is primarily due to the pre-tax book income, the acquisition of ProQuest, the higher mark to market gain on the private warrants, and reflects the change in the mix of taxing jurisdictions in which pre-tax profits and losses were recognized.
Note 16: Earnings Per Share
Basic net earnings per ordinary share from continuing operations (“EPS”) is calculated by taking Net income (loss) available to ordinary shareholders divided by the weighted average number of ordinary shares outstanding for the applicable period. Diluted net EPS is computed by taking net earnings adjusted for the effect of the fair value of Private Placement Warrants divided by the weighted average number of ordinary shares outstanding increased by the number of additional shares which have a dilutive effect.
Potential ordinary shares on a gross basis of 9.7 million and 10.1 million options, RSUs, and PSUs related to the 2019 Incentive Award Plan were excluded from diluted EPS for the six months ended June 30, 2022 and 2021, respectively, as their inclusion would have been anti-dilutive or their performance metric was not met. Potential ordinary shares on a gross basis of 10.1 million and 27.9 million options, RSUs, and PSUs related to the 2019 Incentive Award Plan were excluded from diluted EPS for the three months ended June 30, 2022 and 2021, respectively, as their inclusion would have been anti-
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
dilutive or their performance metric was not met. See Note 13 - Shareholders’ Equity and Note 14 - Share-based Compensation for additional information.
The potential dilutive effect of our MCPS outstanding during the period was calculated using the if-converted method assuming the conversion as of the earliest period reported or at the date of issuance, if later. The resulting weighted-average ordinary shares of 55.3 million related to our MCPS are not included in the dilutive weighted-average ordinary shares outstanding calculation for the three and six months ended June 30, 2022, as their effect would be anti-dilutive.
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
The basic and diluted EPS computations for our ordinary shares are calculated as follows: | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Basic EPS | | | | | |
| Net income (loss) available to ordinary shareholders | $ | 62.4 | | | $ | (131.5) | | | |
| Dividends on preferred shares | 18.7 | | — | | |
| Net income (loss) attributable to ordinary shares | $ | 43.7 | | | $ | (131.5) | | | |
| | | | | |
| Basic weighted-average number of ordinary shares outstanding | 674.3 | | | 611.1 | | | |
| Basic EPS | $ | 0.06 | | | $ | (0.22) | | | |
| | | | | |
| Diluted EPS | | | | | |
| Net income (loss) attributable to ordinary shares | $ | 43.7 | | | $ | (131.5) | | | |
| Change in fair value of private placement warrants | (46.8) | | | — | | | |
| Net income (loss) attributable to ordinary shares, diluted | $ | (3.1) | | | $ | (131.5) | | | |
| | | | | |
| Denominator: | | | | | |
| Shares used in computing net income (loss) attributable to per share to ordinary shareholders, basic | 674.3 | | | 611.1 | | | |
| Weighted-average effect of potentially dilutive shares to purchase ordinary shares | 4.1 | | | — | | | |
| Diluted weighted-average number of ordinary shares outstanding | 678.4 | | | 611.1 | | | |
| Diluted EPS | $ | (0.00) | | | $ | (0.22) | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Six Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Basic EPS | | | | | |
| Net income (loss) available to ordinary shareholders | $ | 131.9 | | | $ | (187.5) | | | |
| Dividends on preferred shares | 37.4 | | | — | | | |
| Net income (loss) attributable to ordinary shares | $ | 94.5 | | | $ | (187.5) | | | |
| | | | | |
| Basic weighted-average number of ordinary shares outstanding | 678.3 | | | 606.8 | | | |
| Basic EPS | $ | 0.14 | | | $ | (0.31) | | | |
| | | | | |
| Diluted EPS | | | | | |
| Net income (loss) attributable to ordinary shares | $ | 94.5 | | | $ | (187.5) | | | |
| Change in fair value of private placement warrants | (141.7) | | | (30.1) | | | |
| Net income (loss) attributable to ordinary shares, diluted | $ | (47.2) | | | $ | (217.6) | | | |
| | | | | |
| Denominator: | | | | | |
| Shares used in computing net income (loss) attributable to per share to ordinary shareholders, basic | 678.3 | | | 606.8 | | | |
| Weighted-average effect of potentially dilutive shares to purchase ordinary shares | 4.9 | | | 10.3 | | | |
| Diluted weighted-average number of ordinary shares outstanding | 683.2 | | | 617.1 | | | |
| Diluted EPS | $ | (0.07) | | | $ | (0.35) | | | |
|
| | | | | |
Note 17: Other Operating (Income) Expense, Net
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
Other operating (income) expense, net, consisted of the following for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | |
| | | | | |
| Three Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Net foreign exchange (gain) loss | $ | (23.5) | | | $ | (0.2) | | | |
| | | | | |
| Miscellaneous (income) expense, net | (1.1) | | | (0.7) | | | |
| Other operating (income) expense, net | $ | (24.6) | | | $ | (0.9) | | | |
| | | | | |
| Six Months Ended June 30, | | |
| 2022 | | 2021 | | |
| | | | | |
| Net foreign exchange (gain) loss | $ | (43.9) | | | $ | 15.8 | | | |
| Miscellaneous expense (income), net | 5.6 | | | (0.5) | | | |
| Other operating (income) expense, net | $ | (38.3) | | | $ | 15.3 | | | |
| | | | | |
|
Note 18: Segment Information
The Chief Executive Officer is the Company’s Chief Operating Decision Maker (“CODM”). The CODM evaluates segment performance based primarily on revenue and segment Adjusted EBITDA, as described below. The CODM does not review assets by operating segment for the purposes of assessing performance or allocating resources.
Science: The Science segment consists of our Academia and Government Product Line, which includes ProQuest, and our Life Sciences Product Line. Both Product Lines provide curated, high-value, structured information and consulting services that is delivered and embedded into the workflows of our customers, which include research-intensive corporations, life science organizations and universities world-wide.
Intellectual Property: The Intellectual Property segment consists of our Patent, Trademark, Domain and IP Management Product Lines. These Product Lines help manage customer’s end-to-end portfolio of intellectual property from patents to trademarks to corporate website domains.
Each of the two operating segments represent the segments for which discrete financial information is available and upon which operating results are regularly evaluated by the CODM in order to assess performance and allocate resources. The CODM evaluates performance based primarily on revenue and segment Adjusted EBITDA. Adjusted EBITDA represents net (loss) income 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, unrealized foreign currency gains/(losses), transformational and restructuring expenses, acquisition-related adjustments to deferred revenues prior to the adoption of FASB ASU No. 2021-08 in 2021, non-operating income or expense, the impact of certain non-cash mark-to-market adjustments on financial instruments, 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.
Revenues, net by segment
The following table summarizes revenue by reportable segment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Science Segment | $ | 448.2 | | | $ | 202.3 | | | $ | 868.6 | | | $ | 393.6 | |
Intellectual Property Segment | 238.4 | | | 243.4 | | | 480.2 | | | 480.5 | |
| Total Revenues, net | $ | 686.6 | | | $ | 445.7 | | | $ | 1,348.8 | | | $ | 874.1 | |
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
Adjusted EBITDA by segment
The following table presents segment profitability and a reconciliation to net income for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | |
| Science Segment Adjusted EBITDA | $ | 175.2 | | | $ | 100.7 | | | $ | 326.4 | | | $ | 191.3 | | | |
| Intellectual Property Segment Adjusted EBITDA | 99.2 | | | 88.3 | | | 210.3 | | | 162.5 | | | |
| Total Adjusted EBITDA | $ | 274.4 | | | $ | 189.0 | | | $ | 536.7 | | | $ | 353.8 | | | |
| Provision for income taxes | (10.5) | | | (8.2) | | | (26.8) | | | (8.5) | | | |
| Depreciation and amortization | (175.6) | | | (130.3) | | | (352.0) | | | (261.9) | | | |
| Interest expense and amortization of debt discount, net | (62.3) | | | (38.5) | | | (121.8) | | | (75.9) | | | |
| | | | | | | | | |
| | | | | | | | | |
Mark to market gain (loss) on financial instruments(1) | 49.0 | | | (21.0) | | | 149.4 | | | 30.2 | | | |
Deferred revenues adjustment(2) | (0.8) | | | (1.4) | | | (0.6) | | | (4.4) | | | |
Transaction related costs(3) | (5.1) | | | (13.9) | | | (11.8) | | | 9.0 | | | |
| Share-based compensation expense | (22.1) | | | (58.2) | | | (59.1) | | | (97.2) | | | |
Restructuring and impairment(4) | (19.2) | | | (50.7) | | | (30.9) | | | (118.6) | | | |
Other(5) | 34.6 | | | 1.7 | | | 48.8 | | | (14.0) | | | |
| Net income (loss) | $ | 62.4 | | | $ | (131.5) | | | $ | 131.9 | | | $ | (187.5) | | | |
| Dividends on preferred shares | (18.7) | | | — | | | (37.4) | | | — | | | |
| Net income (loss) attributable to ordinary shares | $ | 43.7 | | | $ | (131.5) | | | $ | 94.5 | | | $ | (187.5) | | | |
| | | | | | | | | | |
(1) Reflects mark-to-market adjustments on financial instruments under ASC 815, Derivatives and Hedging. Warrant instruments that do not meet the criteria to be considered indexed to an entity's own stock shall be initially classified as a liability at their estimated fair values, regardless of the likelihood that such instruments will ever be settled in cash. In periods subsequent to issuance, changes in the estimated fair value of the liabilities are reported through earnings. | | |
(2) Reflects the deferred revenues adjustment made as a result of purchase accounting prior to the adoption of ASU No. 2021-08, "Accounting for Contract Assets and Contract Liabilities from Contracts with Customers". In the fourth quarter of 2021, Clarivate adopted ASU No. 2021-08 which allows an acquirer to account for the related revenue contracts in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. This guidance was applied retrospectively to all business combinations for which the acquisition date occurs during or subsequent to 2021. | | |
(3) 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. During the six months ended June 30, 2021, this also includes the mark-to-market adjustments on the contingent stock consideration associated with the CPA Global and DRG acquisitions. | | |
(4) Primarily reflects costs related to restructuring and impairment associated with One Clarivate, ProQuest and CPA Global Programs. Refer to Note 21 - Restructuring and Impairment for further information. | | |
(5) 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. | | |
Note 19: Commitments and Contingencies
The Company does not have any recorded or unrecorded guarantees of the indebtedness of others.
Lawsuits and Legal Claims
The Company is engaged in various legal proceedings, claims, audits and investigations that have arisen in the ordinary course of business. These matters may include among others, antitrust/competition claims, intellectual property infringement claims, employment matters and commercial matters. The outcome of all of the matters against the Company is subject to future resolution, including the uncertainties of litigation.
From time to time, we are involved in litigation in the ordinary course of our business, including claims or contingencies that may arise related to matters occurring prior to our acquisition of businesses. At the present time, primarily because the
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
matters are generally in early stages, we can give no assurance as to the outcome of any pending litigation to which we are currently a party, and we are unable to determine the ultimate resolution of these matters or the effect they may have on us.
Our best estimate of the Company's potential liability for the larger legal claims is $60.4, which includes estimated legal costs and accrued interest. The recorded probable loss is an estimate and the actual costs arising from our litigation could be materially lower or higher. We have and will continue to vigorously defend ourselves against these claims. We maintain appropriate levels of insurance, which we expect are likely to provide coverage for some of these liabilities or other losses that may arise from these litigation matters.
Between January and March 2022, three putative securities class action complaints were filed in the United States District Court for the Eastern District of New York against Clarivate and certain of its executives and directors alleging that there were weaknesses in the Company’s internal controls over financial reporting and financial reporting procedures that it failed to disclose in violation of federal securities law. The complaints, which were consolidated into a single proceeding on May 18, 2022, collectively seek damages on behalf of a putative class of shareholders who acquired Clarivate securities between November 10, 2020 and February 2, 2022, and/or acquired Clarivate preferred shares in connection with a June 9, 2021 offering. The complaints reference an error in the accounting treatment of an equity plan included in the Company’s 2020 business combination with CPA Global that was disclosed on December 27, 2021, and related restatements issued on February 3, 2022 of certain of the Company's previously issued financial statements. On June 7, 2022, a class action was filed in Pennsylvania state court in the Court of Common Pleas of Philadelphia asserting claims under the Securities Act of 1933, based on substantially similar allegations, with respect to alleged misstatements and omissions in the offering documents for two issuances of Clarivate ordinary shares on June 9, 2021 and September 9, 2021. Clarivate does not believe that the claims alleged in the complaints have merit and will vigorously defend against them. Given the early stage of the proceedings, we are unable to estimate the reasonably possible loss or range of loss, if any, arising from these matters.
Contingent Liabilities
In conjunction with the acquisition of DRG, the Company agreed to pay up to 2.9 million shares as contingent stock consideration, valued at $58.9 on the closing date of the acquisition. Amounts payable were contingent upon any indemnity losses or claims to indemnity losses occurring within that one-year period. During March 2021, the Company issued 2.9 million shares as per the purchase agreement for the acquisition of DRG for a total of $61.6 which was satisfied. The issuance of these shares represents a non-cash financing activity on the Condensed Consolidated Statement of Cash Flows.
In conjunction with the acquisition of CPA Global, the Company agreed to pay up to 1.5 million shares as contingent stock consideration, valued at $46.5 on the closing date of the acquisition. The amount was payable 110 days after the acquisition date and was contingent upon any indemnity losses or claims for indemnity losses as defined in the purchase agreement. During January 2021, the Company issued 1.5 million shares as per the purchase agreement for the acquisition of CPA Global related to a hold-back clause for a total of $43.9 which was satisfied. The issuance of these shares represents a non-cash financing activity on the statement of cash flows.
As of June 30, 2022 and December 31, 2021, there were no outstanding contingent liabilities.
Note 20: Related Party Transactions
The Company incurred expenses of $0.3 for both the three months ended June 30, 2022 and 2021, and $0.4 and $0.5 during the six months ended June 30, 2022 and 2021, respectively, associated with two vendors that are controlled affiliates of Baring. The outstanding liability as of June 30, 2022 and December 31, 2021 related to these vendors was $0.4 and $0.3, respectively.
The Company recognized net revenues of $1.4 and $0.2 during the three months ended June 30, 2022 and 2021, respectively, and $2.0 and $0.8 during the six months ended June 30, 2022 and 2021, respectively, from a customer that is a controlled affiliate of Onex. The Company had outstanding receivables of $0.3 as of June 30, 2022.
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
During the three and six months ended June 30, 2022, two controlled affiliates of Leonard Green & Partners, L.P. were customers of ours. From these two customers, respectively, the Company recognized net revenues of $0.1 and $0.1 during both the three and six months ended June 30, 2022. These customers had no outstanding receivables as of June 30, 2022. During the three and six months ended June 30, 2021, three controlled affiliates of Leonard Green & Partners, L.P. were customers of ours. From these three customers, respectively, the Company recognized net revenues of $0.1, $11.0 and $0.0 during the three months ended June 30, 2021 and $0.1, $20.6 and $0.1 during the six months ended June 30, 2021. These customers had outstanding receivables of $0.0, $71.0 and $0.1, respectively, as of December 31, 2021.
The Company incurred expenses of $2.3 and $4.5 during the three and six months ended June 30, 2022, respectively, associated with a vendor that is a controlled affiliate of Leonard Green & Partners, L.P. The outstanding liability as of June 30, 2022 related to this vendor was $4.7. The Company incurred expenses of $7.9, $2.0 and $0.4 during the three months ended June 30, 2021, and $15.5, $2.0 and $0.6 during the six months ended June 30, 2021, associated with three vendors, respectively, that were controlled affiliates of Leonard Green & Partners, L.P. There was no outstanding liability as of December 31, 2021 related to these vendors.
One of our independent directors has an immediate family member who is a member of management for one of our customers. The Company recognized net revenues of $1.1 and $0.3 for the three months ended June 30, 2022 and 2021, respectively, and $1.3 and $0.5 during the six months ended June 30, 2022 and 2021, respectively, from this customer and had $1.7 receivables outstanding as of June 30, 2022 and $0.1 outstanding as of December 31, 2021.
One of our independent directors is also a director on the board of one of Clarivate’s customers. The Company recognized net revenues of $0.2 and $0.3 during the three and six months ended June 30, 2022, respectively, from this customer and had $0.1 of receivables outstanding as of June 30, 2022.
On May 15, 2021, Clarivate entered into an agreement with Capri Acquisition Topco Limited (“Capri”) and Solaro ExchangeCo Limited (“NewCo”), and for certain limited purposes, LGP. Capri and NewCo are controlled by LGP and held Clarivate ordinary shares beneficially owned by LGP and certain other existing shareholders. Under the agreement, Capri contributed 177.2 million of its Clarivate ordinary shares to NewCo. Clarivate then acquired NewCo in exchange for the issuance of the same number of Clarivate ordinary shares to Capri. This transaction did not involve any change in beneficial ownership of Clarivate’s ordinary shares and the issuance of the new ordinary shares to Capri were exempt from the registration requirements of the Securities Act under Section 4(a)(2) thereof. Pursuant to authority granted to Clarivate by shareholders at its 2021 Annual General Meeting, following its acquisition of Newco, Clarivate purchased the ordinary shares held by Newco for a nominal price and then canceled such shares. This was a non-cash financing transaction that had a net immaterial impact on the Condensed Consolidated Financial Statements.
On December 1, 2021, Clarivate closed its acquisition of ProQuest from CIG, Atairos and certain other equity holders (the "Seller Group"). The aggregate consideration included $1,094.9 from the issuance of 46.9 million ordinary shares to the Seller Group. As part of the acquisition, and as a result, CIG is a related party to Clarivate. Clarivate assumed a Finance lease in which CIG is the Lessor as part of the acquisition. For the three and six months ended June 30, 2022, interest expense of $0.3 and $0.6, respectively, and amortization of the Finance lease right of use asset ("ROU") of $3.8 and $7.7, respectively, is reflected in the Condensed Consolidated Statements of Operations. The Finance lease ROU asset of $31.0 is presented within Property, Plant, and Equipment (see Note 6 - Property and Equipment, Net) and the corresponding lease liability of $29.8 is treated as an item of indebtedness (see Note 11 - Debt) within the Condensed Consolidated Balance Sheet.
Note 21: Restructuring and Impairment
One Clarivate Program
During the second quarter 2021, the Company approved a restructuring plan to streamline operations within targeted areas of the Company. The program is expected to result in a reduction in operational costs, with the primary cost savings driver being from a reduction in workforce. Components of the pre-tax charges include $5.5 and $2.0 in severance costs incurred during the three months ended June 30, 2022 and 2021, respectively. Costs incurred during the six months ended June 30, 2022 and 2021 include $11.1 and $2.0 in severance costs, respectively. The Science and IP segments incurred $3.9 and $1.6 of the expense, respectively, during the three months ended June 30, 2022 and $7.1 and $4.1, respectively, during the six
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
months ended June 30, 2022. The Science and IP Segments incurred $0.7 and $1.3 of the expense, respectively, during the three and six months ended June 30, 2021.
ProQuest Acquisition Integration Program
During the fourth quarter 2021, the Company approved a restructuring plan to streamline operations within targeted areas of the Company. The program is expected to result in a reduction in operational costs, with the primary cost savings driver being from a reduction in workforce. Components of the pre-tax charges include $7.7 and $12.0 in severance costs and $6.3 and $8.1 in other costs incurred during the three and six months ended June 30, 2022, respectively. The Science and IP segments incurred $7.8 and $6.2 of the expense, respectively, during the three months ended June 30, 2022 and $12.6 and $7.5, respectively, during the six months ended June 30, 2022.
Other Restructuring Programs
During 2020 and the fourth quarter 2019, we engaged a strategic consulting firm to assist us in optimizing our structure and cost base. As a result, we implemented several cost-saving and margin improvement programs designed to generate substantial incremental cash flows including the Operation Simplification and Optimization Program, the DRG Acquisition Integration Program and the CPA Global Acquisition Integration and Optimization Program. The costs associated with these programs were substantially complete as of June 30, 2022. Components of the pre-tax charges include $(1.1) and $24.2 in severance costs and $0.7 and $24.5 in other costs incurred during the three months ended June 30, 2022 and 2021, respectively. Costs incurred during the six months ended June 30, 2022 and 2021 include $(0.7) and $46.4 in severance costs, respectively, and $0.2 and $70.2 in other costs, respectively. The Science and IP segments incurred $(0.2) and $(0.2) of the expense, respectively, during the three months ended June 30, 2022 and $(0.3) and $(0.2) during the six months ended June 30, 2022. The Science and IP Segments incurred $13.9 and $25.7 of the expense, respectively, during the three months ended June 30, 2021 and $37.0 and $67.4, respectively, during the six months ended June 30, 2021.
The table below summarizes the activity related to the restructuring reserves across each of Clarivate's cost-saving programs.
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | | | | | | | | | | |
| Restructuring Programs | | Severance and Related Benefit Costs | | Costs Associated with Exit and Disposal Costs(1) | | Total |
| | | | | | |
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| | | | | | |
| | | | | | |
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| Reserve Balance as of December 31, 2021 | | $ | 28.3 | | | $ | 0.7 | | | $ | 29.0 | |
Expenses recorded(2) | | 10.3 | | | 1.4 | | | 11.7 | |
| Payments made | | (23.7) | | | (0.5) | | | (24.2) | |
| Noncash items | | (0.1) | | | 0.5 | | | 0.4 | |
| Reserve Balance as of March 31, 2022 | | $ | 14.8 | | | $ | 2.1 | | | $ | 16.9 | |
Expenses recorded(2) | | 12.1 | | | 7.1 | | | 19.2 | |
| Payments made | | (10.9) | | | (2.2) | | | (13.1) | |
| Noncash items | | (2.5) | | | (5.9) | | | (8.4) | |
| Reserve Balance as of June 30, 2022 | | $ | 13.5 | | | $ | 1.1 | | | $ | 14.6 | |
| | | | | | |
| Reserve Balance as of December 31, 2020 | | $ | 25.7 | | | $ | 3.8 | | | $ | 29.5 | |
Expenses recorded(2) | | 22.2 | | | 45.7 | | | 67.9 | |
| Payments made | | (15.9) | | | (4.2) | | | (20.1) | |
| Noncash items | | (1.4) | | | (40.9) | | | (42.3) | |
| Reserve Balance as of March 31, 2021 | | $ | 30.6 | | | $ | 4.4 | | | $ | 35.0 | |
Expenses recorded(2) | | 26.2 | | | 24.5 | | | 50.7 | |
| Payments made | | (10.6) | | | (22.8) | | | (33.4) | |
| Asset Impairment Charge | | — | | | (2.7) | | | (2.7) | |
| Reserve Balance as of June 30, 2021 | | $ | 46.2 | | | $ | 3.4 | | | $ | 49.6 | |
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(1) Relates primarily to lease exit costs and legal and advisory fees. Certain prior period amounts were revised for both the three months ended March 31, 2021 and June 30, 2021 to properly reflect certain cash payments previously omitted or classified as Noncash items. |
(2) Expenses include the acceleration of phantom equity awards under the CPA Global Equity Plan that were held by employees whose employment was involuntarily terminated. These expenses will be paid in cash and are accounted for as a liability award. |
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The following table is a summary of charges incurred related to the Company's restructuring programs for the three and six months ended June 30, 2022 and 2021.
| | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Severance and related benefit costs | $ | 12.1 | | | $ | 26.2 | | | |
Costs associated with exit and disposal activities(1) | 0.3 | | | 1.8 | | | |
Costs associated with lease exit costs including impairment(2) | 6.8 | | | 22.7 | | | |
| Total restructuring and impairment | $ | 19.2 | | | $ | 50.7 | | | |
| | | | | |
| Six Months Ended June 30, | | |
| 2022 | | 2021 | | |
| Severance and related benefit costs | $ | 22.4 | | | $ | 48.4 | | | |
Costs associated with exit and disposal activities(1) | 2.0 | | | 2.3 | | | |
Costs associated with lease exit costs including impairment(2) | 6.5 | | | 67.9 | | | |
| Total restructuring and impairment | $ | 30.9 | | | $ | 118.6 | | | |
(1) Relates primarily to contract exit costs, legal and advisory fees. | | |
(2) Relates primarily to lease exit costs. | | |
| | | | | |
CLARIVATE PLC
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(In millions, except option prices, ratios or as noted)
Lease Impairments
The Company evaluates long-lived assets for indicators of impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company considers a triggering event to have occurred upon exiting a facility if the expected undiscounted cash flows for the sublease period are less than the carrying value of the assets group. An impairment charge is recorded in the excess of each operating lease ROU asset's carrying amount over its estimated fair value. In connection with the Company's digital workplace transformation initiative to enable colleagues to work remotely, the Company ceased the use of select leased sites during the six months ended June 30, 2022 and 2021. As a result, the Company recorded a non-cash impairment charge to restructuring and impairment within the Condensed Consolidated Statement of Operations based on the estimate of future recoverable cash flows of $6.2 and $28.6 for the three months ended June 30, 2022 and 2021, respectively, and $6.2 and $69.6 for the six months ended June 30, 2022 and 2021, respectively. Additionally, the Company incurred $0.2 and $0.0 in lease termination fees during the three months ended June 30, 2022 and 2021, respectively, and $0.4 and $3.1 during the six months ended June 30, 2022 and 2021, respectively.
Employee Rights Upon Retirement
In Israel, the Company is required by law to make severance payments upon dismissal of an employee or upon termination of employment in certain other circumstances. The Company operates a number of post-employment defined contribution plans. A defined contribution plan is a program that benefits an employee after termination of employment, under which the Company regularly makes ongoing deposits into Israeli employees' pension plans to fund their severance liabilities. According to Section 14 of the Severance Pay Law, for employees employed by the Company under Section 14, the Company deposits are made in lieu of the Company's severance liability for 85% of the employees' salaries, therefore no obligation is provided for in the financial statements for such portion of the employees' salaries. Severance pay liabilities for the Section 14 employees, is calculated for 15% of salary and provided for in the financial statements based upon the latest monthly salary multiplied by the number of years of employment. The fund assets for such Section 14 employees are not included in the Company’s financial position. For employees that are not under Section 14, severance pay liabilities are provided for in the financial statements based upon the latest monthly salary multiplied by the number of years of employment. The fund assets for such non-Section 14 employees are included in the Company’s financial position. In accordance with its terms, the plans meet the definition of a defined contribution plan.
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| | June 30, 2022 | | December 31, 2021 | |
| Long-term severance payable | $ | 7.4 | | | $ | 8.6 | | |
Note 22: Subsequent Events
On July 11, 2022, the Company announced that Jonathan Gear had assumed the role of Chief Executive Officer-Elect effective as of July 11, 2022, and was joining the Board of Directors, which was increased from 13 to 14 members. Mr. Gear will become the Chief Executive Officer of the Company on September 1, 2022. Jerre Stead, who has served as Executive Chair and Chief Executive Officer of the Company since 2019, is retiring from his Chief Executive Officer role effective September 1, 2022 and will continue as the non-executive Chair of the Board of Directors of the Company.
In August 2022, the Company entered into interest rate swap arrangements with counterparties to reduce its exposure to variability in cash flows relating to interest payments on $780 of its outstanding Term loan arrangements in total. These swaps mature in October 2026. The Company is in the process of evaluating these arrangements and intends to apply hedge accounting treatment, similar to its currently existing interest rate swap agreements.
Management has evaluated the impact of events that have occurred subsequent to June 30, 2022. Based on this evaluation, other than disclosed within these Condensed Consolidated Financial Statements and related notes, the Company has determined no other events were required to be recognized or disclosed.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, 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 Annual Report on Form 10-K and the 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 segment and Intellectual Property (“IP”) segment, which are also our reportable segments. Our Science segment consists of our Academic and Government Product Line (“AGPL”) and Life Sciences Product Lines, and our IP segment consists of our Patent, Trademark, Domain, and IP Management 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 preclinical research, competitive intelligence, regulatory information and clinical trials. Our Patent 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 Trademark Product Line allow businesses and legal professionals to access our comprehensive trademark database. Our Domain Product Line offerings include enterprise web domain portfolio management products and services. Finally, our IP Management Product Line provides technology solutions and legal support services across the IP lifecycle, including renewal and validation of IP rights on behalf of customers and the development and provision of IP management software, as well as other patent activities including patent searching, IP filing, prosecution support and trademark watching.
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 ProQuest
On December 1, 2021, we acquired 100% of ProQuest, a leading global software, data and analytics provider to academic, research and national institutions, and its subsidiaries from Cambridge Information Group (“CIG”), Atairos and certain other equity holders (collectively, the “Seller Group”). The aggregate consideration in connection with the closing of the ProQuest acquisition was $4,994.3, net of $52.5 cash acquired. The aggregate consideration was composed of (i) $1,094.9 from the issuance of 46.9 million ordinary shares to the Seller Group and (ii) approximately $3,959.9 in cash.
Public Ordinary and Mandatory Convertible Preferred Share Offerings
In June 2021, we completed an underwritten public offering of 44.2 million of our ordinary shares at a share price of $26.00, of which 28.8 million ordinary shares were issued and sold by Clarivate and 15.4 million ordinary shares were sold by selling shareholders (which included 5.8 million ordinary shares that the underwriters purchased pursuant to their option to purchase additional shares).
Concurrently with the June 2021 Ordinary Share Offering, we completed an underwritten public offering of 14.4 million of our 5.25% Series A Mandatory Convertible Preferred Shares (which included 1.9 million of our MCPS that the underwriters purchased pursuant to their option to purchase additional shares).
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
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. We include Revenue growth, Adjusted EBITDA, Adjusted EBITDA margin, Annualized Contract Value, Annual Revenue Renewal Rates, Free Cash Flow and Adjusted Free Cash Flow as key performance indicators 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.
Adjusted EBITDA, Adjusted EBITDA margin, Free Cash Flow and Adjusted Free Cash Flow are financial measures that are not prepared in accordance with U.S. generally accepted accounting principles (“non-GAAP”). Although we believe these measures are useful for investors for the same reasons, we recommend users of the financial statements note these measures are not a substitute for GAAP financial measures or disclosures.
Revenue growth
We review year-over-year revenue growth in our segments as a key measure of our success in addressing customer needs. We also review year-over-year revenue growth by transaction type to help us identify and address broad changes in product mix, and by geography to help us identify and address broad changes and revenue trends by region. We measure revenue growth in terms of organic, acquisitive, and foreign currency impacts. We define these components as follows:
•Organic: We define organic revenue growth as total revenue growth from continuing operations for all factors other than acquisitions and foreign currency movements. We drive this type of revenue growth through pricing, up-selling and cross-selling efforts, securing new customer business, and the sale of new or enhanced product offerings.
•Acquisitive: We define acquisitive revenue as the revenue generated from acquired products and services from the date of acquisition to the first anniversary date of that acquisition. This type of growth comes as a result of our strategy of the pursuit of acquisition opportunities.
•Foreign Currency: We define the foreign currency impact on revenue as the difference between current revenue at current exchange rates and current revenue at the corresponding prior period exchange rates. Due to the significance of revenue transacted in foreign currencies, we believe that it is important to measure the impact of foreign currency movements on revenue.
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), share-based compensation, mandatory convertible preferred share dividend expense, unrealized foreign currency gains (losses), transformational and restructuring expenses, acquisition-related adjustments to deferred revenues prior to the adoption of FASB ASU No. 2021-08 in 2021, non-operating income or expense, the impact of certain non-cash, mark to market adjustments on financial instruments, 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 Revenues, net plus the impact of the deferred revenue purchase accounting adjustments relating to acquisitions prior to 2021.
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
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
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 and re-occurring 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 and re-occurring revenues, which accounted for 75.6% and 79.9% of our total revenues for the three months ended June 30, 2022 and 2021 and 76.9% and 80.2% for the six months ended June 30, 2022 and 2021, respectively. We calculate and monitor ACV for each of our segments 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:
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| | June 30, | | Change(1) |
| 2022 | | 2021 | | | | 2022 vs. 2021 | | |
| Annualized Contract Value | $ | 1,625.9 | | | $ | 924.4 | | | | | $ | 701.5 | | | 75.9 | % | | |
(1) The change in ACV is primarily due to the acquisition of ProQuest in December 2021, supplemented by organic ACV growth of 3.8%. | | |
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 Segments, 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 91.3% and 90.8% for the six months ended June 30, 2022 and 2021, respectively.
Free Cash Flow and Adjusted Free Cash Flow
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
We use free cash flow and adjusted free cash flow in our operational and financial decision-making and believe free cash flow and adjusted 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 and adjusted 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.
We define free cash flow as net cash provided by operating activities less capital expenditures. Adjusted free cash flow is calculated as free cash flow, less cash paid for restructuring and lease-exit activities, payments related to the CPA Global equity plan, transaction related costs, interest on debt held in escrow, debt issuance costs, and other one-time payments that the Company does not consider indicative of its ongoing operating performance. For further discussion on free cash flow and adjusted free cash flow, including a reconciliation to cash flows provided by operating activities, refer to Liquidity and Capital Resources - Cash Flows below.
Key Components of Our Results of Operations
There have been no material changes to the key components of our results of operations discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations to our Annual Report on Form 10-K for the year ended December 31, 2021.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
Results of Operations
Revenues, net
Total Revenue
Revenues, net of $686.6 for the three months ended June 30, 2022, increased by $240.9, or 54.0%, from $445.7 for the three months ended June 30, 2021. On a constant currency basis, Revenues, net increased by $266.8, or 59.9% for the three months ended June 30, 2022. Revenues, net of $1,348.8 for the six months ended June 30, 2022, increased by $474.7, or 54.3%, from $874.1 for the six months ended June 30, 2021. On a constant currency basis, Revenues, net increased by $513.7, or 58.8% for the six months ended June 30, 2022. Organic revenue growth was slightly impacted by our decision to cease commercial operations in Russia in March 2022.
Revenue by Transaction Type
The following tables present the amounts of our subscription, re-occurring and transactional and other revenues for the periods indicated, as well the drivers of the variances between periods, including as a percentage of such revenues.
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| | | | | Variance Increase/(Decrease) | Percentage of Factors Increase/(Decrease) |
| Three Months Ended June 30, | | Total Variance (Dollars) | Total Variance (Percentage) | Acquisitions | | FX Impact | | Organic |
| (in millions, except percentages) | 2022 | | 2021(1) | | | | | | | | |
| Subscription revenues | $ | 407.4 | | | $ | 243.4 | | | $ | 164.0 | | 67.4 | % | 68.9 | % | | (5.4) | % | | 3.8 | % |
| Re-occurring revenues | 112.0 | | | 113.7 | | | (1.7) | | (1.5) | % | — | % | | (8.2) | % | | 6.7 | % |
| Transactional and other revenues | 168.0 | | | 90.0 | | | 78.0 | | 86.7 | % | 85.6 | % | | (3.9) | % | | 5.0 | % |
Deferred revenues adjustment(2) | (0.8) | | | (1.4) | | | 0.6 | | 42.9 | % | (42.9) | % | | — | % | | — | % |
| Revenues, net | $ | 686.6 | | | $ | 445.7 | | | $ | 240.9 | | 54.0 | % | 55.1 | % | | (5.8) | % | | 4.8 | % |
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(1) Certain prior period amounts have been reclassified to conform to current period presentation. |
(2) Reflects the deferred revenues adjustment made as a result of purchase accounting prior to the adoption of ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In the fourth quarter of 2021, Clarivate adopted ASU No. 2021-08 which allows an acquirer to account for the related revenue contracts in accordance with ASC 606 Revenue from Contracts with Customers, as if it had originated the contracts. This guidance was applied retrospectively to all business combinations for which the acquisition date occurs during or subsequent to 2021. |
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On a constant currency basis, subscription revenues increased by $177.1, or 72.8%. Acquisitive subscription growth was primarily generated from the ProQuest Transaction. Organic subscription revenues increased primarily due to price increases and the benefit of net installations in prior year.
On a constant currency basis, re-occurring revenues increased by $7.6, or 6.7%. Organic re-occurring revenues increased primarily due to increases in patent renewal volumes and improvements in yield per case.
On a constant currency basis, transactional and other revenues increased by $81.5, or 90.6%. Acquisitive transactional growth was primarily generated from the ProQuest Transaction. Organic transactional and other revenues increased due to an increase in back file and custom data sales.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
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| | | | | Variance Increase/(Decrease) | Percentage of Factors Increase/(Decrease) |
| Six Months Ended June 30, | | Total Variance (Dollars) | Total Variance (Percentage) | Acquisitions | | FX Impact | | Organic |
| (in millions, except percentages) | 2022 | | 2021(1) | | | | | | | | |
| Subscription revenues | $ | 811.2 | | | $ | 482.4 | | | $ | 328.8 | | 68.2 | % | 68.8 | % | | (4.0) | % | | 3.3 | % |
| Re-occurring revenues | 226.5 | | | 223.2 | | | 3.3 | | 1.5 | % | — | % | | (6.5) | % | | 8.0 | % |
| Transactional and other revenues | 311.7 | | | 172.9 | | | 138.8 | | 80.3 | % | 79.7 | % | | (3.1) | % | | 3.7 | % |
Deferred revenues adjustment(2) | (0.6) | | | (4.4) | | | 3.8 | | 86.4 | % | (86.4) | % | | — | % | | — | % |
| Revenues, net | $ | 1,348.8 | | | $ | 874.1 | | | $ | 474.7 | | 54.3 | % | 54.2 | % | | (4.5) | % | | 4.6 | % |
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(1) Certain prior period amounts have been reclassified to conform to current period presentation. |
(2) Reflects the deferred revenues adjustment made as a result of purchase accounting prior to the adoption of ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In the fourth quarter of 2021, Clarivate adopted ASU No. 2021-08 which allows an acquirer to account for the related revenue contracts in accordance with ASC 606 Revenue from Contracts with Customers, as if it had originated the contracts. This guidance was applied retrospectively to all business combinations for which the acquisition date occurs during or subsequent to 2021. |
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On a constant currency basis, subscription revenues increased by $347.9, or 72.1%. Acquisitive subscription growth was primarily generated from the ProQuest Transaction. Organic subscription revenues increased primarily due to price increases and the benefit of net installations in prior year.
On a constant currency basis, re-occurring revenues increased by $17.8, or 8.0%. Organic re-occurring revenues increased primarily due to increases in patent renewal volumes and improvements in yield per case.
On a constant currency basis, transactional and other revenues increased by $144.2, or 83.4%. Acquisitive transactional growth was primarily generated from the ProQuest Transaction. Organic transactional and other revenues increased due to an increase in custom data sales.
Revenue by Geography
The below tables present our revenues split by geographic region, separating the impacts of the deferred revenues adjustment:
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| | | | | Variance Increase/(Decrease) | Percentage of Factors Increase/(Decrease) |
| Three Months Ended June 30, | | Total Variance (Dollars) | Total Variance (Percentage) | Acquisitions | | FX Impact | Organic |
(in millions, except percentages) | 2022 | | 2021 | | | | | | | |
Americas | $ | 384.5 | | | $ | 221.4 | | | $ | 163.1 | | 73.7 | % | 71.8 | % | | (2.2) | % | 4.0 | % |
Europe/Middle East/Africa | 178.6 | | | 133.5 | | | 45.1 | | 33.8 | % | 41.0 | % | | (9.3) | % | 2.0 | % |
Asia Pacific | 124.3 | | | 92.2 | | | 32.1 | | 34.8 | % | 33.6 | % | | (9.4) | % | 10.6 | % |
Deferred revenues adjustment(1) | (0.8) | | | (1.4) | | | 0.6 | | 42.9 | % | (42.9) | % | | — | % | — | % |
Revenues, net | $ | 686.6 | | | $ | 445.7 | | | $ | 240.9 | | 54.0 | % | 55.1 | % | | (5.8) | % | 4.8 | % |
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(1) Reflects the deferred revenues adjustment made as a result of purchase accounting prior to the adoption of ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In the fourth quarter of 2021, Clarivate adopted ASU No. 2021-08 which allows an acquirer to account for the related revenue contracts in accordance with ASC 606 Revenue from Contracts with Customers, as if it had originated the contracts. This guidance was applied retrospectively to all business combinations for which the acquisition date occurs during or subsequent to 2021. |
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Acquisitive growth for all regions was primarily related to the ProQuest Transaction. On a constant currency basis, Americas revenues increased by $167.9, or 75.8%, with organic growth due to improved subscription and re-occurring revenues. Re-occurring revenues increased primarily due to increases in patent renewal volumes and improvements in yield per case. On a constant currency basis, Europe/Middle East/Africa revenues increased by $57.5, or 43.1%, primarily due to acquisitive growth and improved re-occurring and transactional and other revenues. On a constant currency basis, Asia
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
Pacific revenues increased by $40.8, or 44.3%, primarily due to acquisitive growth and balanced growth across the Science Group and IP Group among subscription, re-occurring and transactional and other revenues.
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| | | | Variance Increase/(Decrease) | Percentage of Factors Increase/(Decrease) |
| Six Months Ended June 30, | | Total Variance (Dollars) | Total Variance (Percentage) | Acquisitions | | FX Impact | Organic |
(in millions, except percentages) | 2022 | | 2021 | | | | | | | |
Americas | $ | 744.8 | | | $ | 424.6 | | | $ | 320.2 | | 75.4 | % | 70.7 | % | | (1.8) | % | 6.5 | % |
Europe/Middle East/Africa | 356.1 | | | 265.6 | | | 90.5 | | 34.1 | % | 40.8 | % | | (7.0) | % | 0.3 | % |
Asia Pacific | 248.5 | | | 188.3 | | | 60.2 | | 32.0 | % | 32.6 | % | | (6.9) | % | 6.3 | % |
Deferred revenues adjustment(1) | (0.6) | | | (4.4) | | | 3.8 | | 86.4 | % | (86.4) | % | | — | % | — | % |
Revenues, net | $ | 1,348.8 | | | $ | 874.1 | | | $ | 474.7 | | 54.3 | % | 54.2 | % | | (4.5) | % | 4.6 | % |
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(1) Reflects the deferred revenues adjustment made as a result of purchase accounting prior to the adoption of ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In the fourth quarter of 2021, Clarivate adopted ASU No. 2021-08 which allows an acquirer to account for the related revenue contracts in accordance with ASC 606 Revenue from Contracts with Customers, as if it had originated the contracts. This guidance was applied retrospectively to all business combinations for which the acquisition date occurs during or subsequent to 2021. |
Acquisitive growth for all regions was primarily related to the ProQuest Transaction. On a constant currency basis, Americas revenues increased by $327.7, or 77.2%, with organic growth due to improved subscription, re-occurring and transactional and other revenues. Transactional and other revenues increased primarily due to improved custom data sales. On a constant currency basis, Europe/Middle East/Africa revenues increased by $109.1, or 41.1%, primarily due to acquisitive growth. On a constant currency basis, Asia Pacific revenues increased by $73.1, or 38.8%, primarily due to acquisitive growth and improved subscription and re-occurring revenues.
The following tables, and the discussions that follow, present our revenues by segment for the periods indicated.
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| | | | | Variance Increase/(Decrease) | Percentage of Factors Increase/(Decrease) |
| Three Months Ended June 30, | | Total Variance (Dollars) | Total Variance (Percentage) | Acquisitions | | FX Impact | Organic |
| (in millions, except percentages) | 2022 | | 2021 | | | | | | | |
| Science Segment | $ | 448.2 | | | $ | 202.3 | | | $ | 245.9 | | 121.6 | % | 121.0 | % | | (4.9) | % | 5.5 | % |
| IP Segment | $ | 239.2 | | | $ | 244.8 | | | $ | (5.6) | | (2.3) | % | — | % | | (6.5) | % | 4.2 | % |
Deferred revenues adjustment(1) | $ | (0.8) | | | $ | (1.4) | | | $ | 0.6 | | 42.9 | % | (42.9) | % | | — | % | — | % |
| Revenues, net | $ | 686.6 | | | $ | 445.7 | | | $ | 240.9 | | 54.0 | % | 55.1 | % | | (5.8) | % | 4.8 | % |
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(1) Reflects the deferred revenues adjustment made as a result of purchase accounting prior to the adoption of ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In the fourth quarter of 2021, Clarivate adopted ASU No. 2021-08 which allows an acquirer to account for the related revenue contracts in accordance with ASC 606 Revenue from Contracts with Customers, as if it had originated the contracts. This guidance was applied retrospectively to all business combinations for which the acquisition date occurs during or subsequent to 2021. |
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| | | | | | | | | | |
| | | | | | | | | | |
Science Segment: On a constant currency basis, revenues increased by $255.9, or 126.5%. Acquisitive growth was generated from the ProQuest Transaction. Organic subscription revenue growth reflects the benefit of price increases and net installations in prior year. Transactional and other revenues growth is primarily due to stronger back file and custom data sales.
Intellectual Property Segment: On a constant currency basis, revenues increased by $10.3, or 4.2%. Organic revenues, on a constant currency basis, grew due to growth in re-occurring revenues primarily due to volume and yield per case growth and transactional and other revenues primarily due to improved trademark search volumes.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Variance Increase/(Decrease) | Percentage of Factors Increase/(Decrease) |
| Six Months Ended June 30, | | Total Variance (Dollars) | Total Variance (Percentage) | Acquisitions | | FX Impact | Organic |
| (in millions, except percentages) | 2022 | | 2021 | | | | | | | |
| Science Segment | $ | 868.6 | | | $ | 393.6 | | | $ | 475.0 | | 120.7 | % | 119.4 | % | | (3.7) | % | 5.0 | % |
| IP Segment | 480.8 | | | 484.9 | | | (4.1) | | (0.8) | % | — | % | | (5.1) | % | 4.2 | % |
Deferred revenues adjustment(1) | (0.6) | | | (4.4) | | | 3.8 | | 86.4 | % | (86.4) | % | | — | % | — | % |
| Revenues, net | $ | 1,348.8 | | | $ | 874.1 | | | $ | 474.7 | | 54.3 | % | 54.2 | % | | (4.5) | % | 4.6 | % |
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(1) Reflects the deferred revenues adjustment made as a result of purchase accounting prior to the adoption of ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In the fourth quarter of 2021, Clarivate adopted ASU No. 2021-08 which allows an acquirer to account for the related revenue contracts in accordance with ASC 606 Revenue from Contracts with Customers, as if it had originated the contracts. This guidance was applied retrospectively to all business combinations for which the acquisition date occurs during or subsequent to 2021. |
Science Segment: On a constant currency basis, revenues increased by $489.4, or 124.3%, primarily due to acquisitive growth and organic subscription and transactional and other revenues growth. Acquisitive growth was primarily generated from the ProQuest Transaction. Organic revenues, on a constant currency basis, increased primarily due to subscription revenues due to price increases, new business and the benefit of net installations in prior year and transactional and other revenues increased due to custom data sales.
Intellectual Property Segment: On a constant currency basis, revenues increased by $20.5, or 4.2%. Organic revenues, on a constant currency basis, increased primarily due to growth in re-occurring revenues from patent renewal volumes and yield and subscription revenues due to price increases, new business and the benefit of net installations in prior year.
Operating Expenses
The following table presents certain of our operating expense line item amounts and their associated percentage of revenue:
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| Three Months Ended June 30, | | Change
2022 vs. 2021 | | Six Months Ended June 30, | | Change
2022 vs. 2021 |
| (in millions, except percentages) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Operating Expenses: | | | | | | | | | | | | | | | |
| Cost of revenues | $ | 244.1 | | $ | 149.7 | | $ | 94.4 | | | 63.1 | % | | $ | 493.3 | | $ | 297.6 | | $ | 195.7 | | | 65.8 | % |
| Selling, general and administrative costs | 186.1 | | 179.7 | | 6.4 | | | 3.6 | % | | 379.8 | | 314.0 | | 65.8 | | | 21.0 | % |
Total cost of revenues and selling, general and administrative costs | $ | 430.2 | | $ | 329.4 | | $ | 100.8 | | | 30.6 | % | | $ | 873.1 | | $ | 611.6 | | $ | 261.5 | | | 42.8 | % |
| | | | | | | | | | | | | | | |
Depreciation and amortization expense | $ | 175.6 | | $ | 130.3 | | $ | 45.3 | | | 34.8 | % | | $ | 352.0 | | $ | 261.9 | | $ | 90.1 | | | 34.4 | % |
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| As a percentage of revenue: | | | | | | | | | | | | | | | |
| Total cost of revenues and selling, general and administrative costs | 62.7 | % | | 73.9 | % | | | | | | 64.7 | % | | 70.0 | % | | | | |
| Depreciation and amortization expense | 25.6 | % | | 29.2 | % | | | | | | 26.1 | % | | 30.0 | % | | | | |
Cost of Revenues
On a constant currency basis, cost of revenues increased by $104.9, or 70.1%, for the three months ended June 30, 2022. The increase for the three months ended June 30, 2022 was primarily due to an increase from the acquisition of ProQuest, which was acquired in December 2021 and has no prior year comparative amount. The increase was partially offset by a reduction in share-based compensation expenses related to phantom equity awards under the CPA Global Equity Plan. See Note 14 - Share-based Compensation for further information. Cost of revenues as a percentage of revenues, net increased by 2.0% to 35.6% for the three months ended June 30, 2022 compared to 33.6% for the three months ended June 30, 2021.
On a constant currency basis, cost of revenues increased by $206.3, or 69.3%, for the six months ended June 30, 2022. The increase for the six months ended June 30, 2022 was primarily due to an increase from the acquisition of ProQuest. The increase was partially offset by a reduction in people related costs primarily driven by the cost-saving and margin
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
improvement programs designed to generate substantial incremental cash flow. See Note 21 - Restructuring and Impairment for further information. Cost of revenues as a percentage of revenues, net increased by 2.5% to 36.6% for the six months ended June 30, 2022 compared to 34.0% for the six months ended June 30, 2021.
Selling, General and Administrative
On a constant currency basis, selling, general and administrative expense increased by $14.9, or 8.3%, for the three months ended June 30, 2022, primarily due to additional expense from the acquisition of ProQuest. The increase was partially offset by a decrease in share-based compensation expense related to phantom equity awards under the CPA Global Equity Plan. Selling, general and administrative costs as a percentage of revenues, net decreased by 13.2% to 27.1% for the three months ended June 30, 2022 compared to 40.3% for the three months ended June 30, 2021, largely driven by the cost-saving and margin improvement programs designed to generate substantial incremental cash flow including the One Clarivate and ProQuest Acquisition Integration Programs.
On a constant currency basis, selling, general and administrative expense increased by $74.2, or 23.6%, for the six months ended June 30, 2022, primarily due to additional expense from the acquisition of ProQuest. The increase was also attributed to mark to market gains on contingent shares associated with the CPA Global and DRG acquisitions that settled in the first quarter of 2021. These increases were partially offset by a decrease in share-based compensation expense related to phantom equity awards under the CPA Global Equity Plan. Selling, general and administrative costs as a percentage of revenues, net decreased by 7.8% to 28.2% for the six months ended June 30, 2022 compared to 35.9% for the six months ended June 30, 2021, largely driven by the cost-saving and margin improvement programs designed to generate substantial incremental cash flow including the One Clarivate and ProQuest Acquisition Integration Programs.
Depreciation and amortization
The increase for the three and six months ended June 30, 2022 was driven by the additional depreciation and amortization on assets acquired through the ProQuest Transaction. This increase was partially offset by run-off of previously purchased capital assets.
Restructuring and Impairment
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| Three Months Ended June 30, | | Change
2022 vs. 2021 | | Six Months Ended June 30, | | | | Change
2022 vs. 2021 | | |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | | | $ | | % | | |
| Restructuring and impairment | $ | 19.2 | | | $ | 50.7 | | | $ | (31.5) | | | (62.1) | % | | $ | 30.9 | | | $ | 118.6 | | | | | $ | (87.7) | | | (73.9) | % | | |
The decrease for the three and six months ended June 30, 2022 was primarily driven by wind down of expenses associated with the CPA Global Acquisition Integration and Optimization Program, DRG Acquisition Integration Program, and Operation Simplification and Optimization Program, which were substantially complete as of June 30, 2022. The decrease was partially offset by the cost-saving and margin improvement programs designed to generate substantial incremental cash flow including the One Clarivate and ProQuest Acquisition Integration Programs. See Note 21 - Restructuring and Impairment for further information.
The following table summarizes the total costs incurred to date and expected costs to be incurred in a future period for each program.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
| | | | | | | | | | | | | | | |
| Total Costs Incurred to Date | | Costs Expected to be Incurred in Future Periods | | | | |
| One Clarivate Program | $ | 31.2 | | | $ | 5.0 | | | | | |
| ProQuest Acquisition Integration Program | 22.1 | | | 30.0 | | | | | |
| Other Restructuring Programs: | | | | | | | |
| CPA Global Acquisition Integration and Optimization Program | 127.7 | | | — | | | | | |
| DRG Acquisition Integration Program | 6.7 | | | — | | | | | |
| Operation Simplification and Optimization Program | 44.5 | | | — | | | | | |
| Total Other Restructuring Programs | $ | 178.9 | | | $ | — | | | | | |
Other Operating (Income) Expense, Net
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| Three Months Ended June 30, | | Change
2022 vs. 2021 | | Six Months Ended June 30, | | Change
2022 vs. 2021 |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Other operating (income) expense, net | $ | (24.6) | | | $ | (0.9) | | | $ | 23.7 | | | 2,633.3 | % | | $ | (38.3) | | | $ | 15.3 | | | $53.6 | | 350.3 | % |
The fluctuations for the three and six months ended June 30, 2022, as compared to the three and six months ended June 30, 2021, respectively, were primarily driven by 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, with the largest impacts derived from transactions denominated in GBP.
Mark to Market (gain) loss on Financial Instruments
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| Three Months Ended June 30, | Change
2022 vs. 2021 | | Six Months Ended June 30, | | Change
2022 vs. 2021 |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Mark to market (gain) loss on financial instruments | $ | (49.0) | | | $ | 21.0 | | | $ | 70.0 | | | 333.3 | % | | $(149.4) | | $(30.2) | | $119.2 | | 394.7 | % |
The increase was driven by the change in the Company’s share price and its impact as an input to the Black-Scholes option valuation model for the three and six months ended June 30, 2022, as compared to the three and six months ended June 30, 2021, respectively.
Interest Expense and amortization of debt discount, Net
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| Three Months Ended June 30, | Change
2022 vs. 2021 | | Six Months Ended June 30, | | Change
2022 vs. 2021 |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Interest expense and amortization of debt discount, net | $ | 62.3 | | | $ | 38.5 | | | $ | 23.8 | | | 61.8 | % | | $ | 121.8 | | | $ | 75.9 | | | $45.9 | | 60.5 | % |
The increases were primarily attributed to the private placement offerings and subsequent exchange offers of our New Senior Secured Notes due 2028 and Senior Notes due 2029, which took place in the second and third quarter of 2021, respectively.
Provision (benefit) for Income Taxes
Provision for income taxes of $10.5 on pre-tax book income of $72.9 for the three months ended June 30, 2022, increased by $2.3 from a provision of $8.2 on a pre-tax book loss of $123.3 for the three months ended June 30, 2021. Provision for income taxes of $26.8 on pre-tax book income of $158.7 for the six months ended June 30, 2022, increased by $18.3 from a provision of $8.5 on a pre-tax book loss of $179.0 for the six months ended June 30, 2021. The effective tax rate was 16.9%
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
for the six months ended June 30, 2022, as compared to 4.7% for the six months ended June 30, 2021. The overall increase in tax expense is due to the pre-tax book income, the higher mark to market gain on the private warrants, and reflects the change in the mix of taxing jurisdictions in which pre-tax profits and losses were recognized. The current quarter effective tax rate may not be indicative of our effective tax rates for future periods.
Dividends on Preferred Shares
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| Three Months Ended June 30, | Change
2022 vs. 2021 | | Six Months Ended June 30, | | Change
2022 vs. 2021 |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Dividends on preferred shares | $ | 18.7 | | | $ | — | | | $ | 18.7 | | | 100.0 | % | | $ | 37.4 | | | $ | — | | | $37.4 | | 100.0 | % |
The increase is due to the dividends on our mandatory convertible preferred shares that are calculated at an annual rate of 5.25% of the liquidation preference of $100.00 per share. While the dividends on the MCPS are cumulative, they will not be paid until declared by the Company’s Board of Directors. If no dividends are declared and paid, they will continue to accumulate as the agreement contains a backstop to it being paid even if never declared by the Board. The dividends on our preferred shares were first reported in the third quarter of 2021, and as a result, there are no prior period comparative amounts.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
Certain Non-GAAP Measures
We include non-GAAP measures in this quarterly report, including Adjusted EBITDA, Adjusted EBITDA margin, Free Cash Flow and Adjusted 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 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), share-based compensation, mandatory convertible preferred share dividend expense, unrealized foreign currency gains (losses), transformational and restructuring expenses, acquisition-related adjustments to deferred revenues, non-operating income or expense, the impact of certain non-cash, mark-to-market adjustments on financial instruments, 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 Revenues, net plus the impact of the deferred revenue purchase accounting adjustments relating to acquisitions prior to 2021.
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 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.
The following table presents our calculation of Adjusted EBITDA for the three and six months ended June 30, 2022 and 2021, and reconciles these measures to our net income (loss) for the same periods:
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (in millions, except percentages) | 2022 | | 2021 | | 2022 | | 2021 | | |
| Net income (loss) attributable to ordinary shares | $ | 43.7 | | $ | (131.5) | | $ | 94.5 | | $ | (187.5) | | |
| Dividends on preferred shares | 18.7 | | — | | 37.4 | | — | | |
| Net income (loss) | 62.4 | | (131.5) | | 131.9 | | (187.5) | | |
| Provision for income taxes | 10.5 | | 8.2 | | 26.8 | | 8.5 | | |
| Depreciation and amortization | 175.6 | | 130.3 | | 352.0 | | 261.9 | | |
| Interest expense and amortization of debt discount, net | 62.3 | | 38.5 | | 121.8 | | 75.9 | | |
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Deferred revenues adjustment(1) | 0.8 | | 1.4 | | 0.6 | | 4.4 | | |
Transaction related costs(2) | 5.1 | | 13.9 | | 11.8 | | (9.0) | | |
| Share-based compensation expense | 22.1 | | 58.2 | | 59.1 | | 97.2 | | |
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Restructuring and impairment(3) | 19.2 | | 50.7 | | 30.9 | | 118.6 | | |
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Mark to market (gain) loss on financial instruments(4) | (49.0) | | 21.0 | | (149.4) | | (30.2) | | |
Other(5) | (34.6) | | (1.7) | | (48.8) | | 14.0 | | |
| Adjusted EBITDA | $ | 274.4 | | $ | 189.0 | | $ | 536.7 | | $ | 353.8 | | |
| Adjusted EBITDA margin | 39.9% | | 42.3% | | 39.8% | | 40.3% | | |
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(1) Reflects the deferred revenues adjustment made as a result of purchase accounting prior to the adoption of ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In the fourth quarter of 2021, Clarivate adopted ASU No. 2021-08 which allows an acquirer to account for the related revenue contracts in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. This guidance was applied retrospectively to all business combinations for which the acquisition date occurs during or subsequent to 2021. |
(2) 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. During the six months ended June 30, 2021, this also includes the mark-to-market adjustments on the contingent stock consideration associated with the CPA Global and DRG acquisitions. |
(3) Primarily reflects costs related to restructuring and impairment associated with One Clarivate, ProQuest and CPA Global Programs. Refer to Note 21 - Restructuring and Impairment in Item 1, Financial Statements and Supplementary Data, for further information. |
(4) Reflects mark-to-market adjustments on financial instruments under ASC 815, Derivatives and Hedging. Warrant instruments that do not meet the criteria to be considered indexed to an entity's own stock shall be initially classified as a liability at their estimated fair values, regardless of the likelihood that such instruments will ever be settled in cash. In periods subsequent to issuance, changes in the estimated fair value of the liabilities are reported through earnings. |
(5) Primarily includes 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 and Adjusted Free Cash Flow
We use free cash flow and adjusted free cash flow in our operational and financial decision-making and believe free cash flow and adjusted free cash flow are 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 and adjusted 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.
We define free cash flow as net cash provided by operating activities less capital expenditures. Adjusted free cash flow is calculated as free cash flow, less cash paid for restructuring and lease-exit activities, payments related to the CPA Global equity plan, transaction related costs, interest on debt held in escrow, debt issuance costs, and other one-time payments that the Company does not consider indicative of its ongoing operating performance. For further discussion on free cash flow and adjusted 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
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
on our Condensed Consolidated Balance Sheets 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 and re-occurring transaction 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, the unsecured notes due 2029, the secured notes due 2028, the 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. 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 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.
The below table summarizes our total liquidity for the periods presented:
| | | | | | | | | | | | | | | |
| Total Liquidity | June 30, | | December 31, | | | | |
| (in millions) | 2022 | | 2021 | | | | |
| Cash and cash equivalents | $ | 359.7 | | | $ | 430.9 | | | | | |
| | | | | | | |
| Additional availability under revolving credit facility | 568.7 | | | 168.9 | | | | | |
| $ | 928.4 | | | $ | 599.8 | | | | | |
Unrestricted cash and cash equivalents was $359.7 and $430.9 as of June 30, 2022 and December 31, 2021, respectively. Restricted cash decreased from $156.7 as of December 31, 2021 to $13.2 as of June 30, 2022 primarily due to the payments in the first quarter of 2022 to respective employees via payroll from restricted cash related to the CPA Global Equity Plan. In the fourth quarter of 2021, the Company received cash from the sale of treasury shares from the Employee Benefit Trust established for the CPA Global Equity Plan in December 2021. As of June 30, 2022, we had $5,551.9 of total debt outstanding, consisting of $2,804.5 in borrowings under our term loan facility, $921.4 in outstanding principal of our senior notes due 2029, $921.2 in outstanding principal of our senior secured notes due 2028, $700.0 in outstanding principal of senior secured notes due 2026, $175.0 of borrowings under our revolving credit facility, and $29.8 related to a finance lease.
As of both June 30, 2022 and December 31, 2021, we had $175.0 outstanding on the revolving credit facility. Additional availability under the revolving credit facility as of June 30, 2022 and December 31, 2021 was $568.7 and $168.9, respectively, which is net of a letter of credit utilization of $6.3 and $6.1.
On June 24, 2021, we issued $1,000.0 in aggregate principal amount of Senior Secured Notes due June 30, 2028 (the "Old Secured Notes") and $1,000.0 in aggregate principal amount of Senior Notes due June 30, 2029 (the "Old Unsecured Notes" and, together with the Old Secured Notes, the "Old Notes") bearing interest at a rate of 3.875% and 4.875% per annum, respectively. In August 2021, we exchanged all of the outstanding, validly tendered and not withdrawn Old Secured Notes for the newly issued 3.875% Senior Secured Notes due 2028, and exchanged all of the outstanding, validly tendered and not withdrawn Old Unsecured Notes for the Issuer’s newly-issued 4.875% Senior Notes due 2029. The exchange was treated as a debt modification in accordance with ASC 470. We used the net proceeds to finance a portion of the purchase price for the ProQuest acquisition, which was completed on December 1, 2021.
Refer to Note 11 - Debt in Item 1, Financial Statements and Supplementary Data, for additional information and a summary of amounts due under all of the outstanding borrowings as of June 30, 2022 and December 31, 2021.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
In August 2021, the Company's Board of Directors authorized a share repurchase program allowing the Company to purchase up to $250.0 of its outstanding ordinary shares, subject to market conditions. In February 2022, the Company's Board of Directors approved the purchase of up to $1,000.0 of the Company's ordinary shares through open-market purchases, to be executed through December 31, 2023. The February 2022 repurchase program replaces the repurchase program previously announced in August 2021. During the six months ended June 30, 2022, the Company repurchased 10.7 million ordinary shares with a total carrying value of $175.0 which were subsequently retired and restored as authorized but unissued ordinary shares. Upon formal retirement and in accordance with ASC Topic 505, Equity, the Company reduced its ordinary shares account by the carrying amount of the treasury shares. Additionally, given the differences of the original repurchase share value and the value at the time of formal retirements, an associated loss was recognized within the Consolidated Statement of Changes in Equity in the amount of $7.7. As of June 30, 2022, the Company had approximately $825.0 of availability remaining under this program. See Note 13 - Shareholders’ Equity for additional information related to the Share Repurchase Program.
Cash Flows
The following table discloses our condensed consolidated cash flows provided by (used in) operating, investing and financing activities for the periods presented:
| | | | | | | | | | | | | | | |
| | | | | | | |
| Six Months Ended June 30, | | |
| 2022 | | 2021 | | | | |
| Net cash provided by operating activities | $ | 164.6 | | | $ | 261.7 | | | | | |
| Net cash used in investing activities | (103.4) | | | (61.6) | | | | | |
| Net cash (used in) provided by financing activities | (239.4) | | | 4,096.4 | | | | | |
Effect of exchange rates | (36.5) | | | 5.0 | | | | | |
| Net (decrease) increase in cash and cash equivalents, and restricted cash | $ | (214.7) | | | $ | 4,301.5 | | | | | |
| | | | | | | |
| Net (decrease) increase in cash and cash equivalents | $ | (71.2) | | | $ | 2,301.9 | | | | | |
| Net (decrease) increase in restricted cash | (143.5) | | | 1,999.6 | | | | | |
| Net (decrease) increase in cash and cash equivalents, and restricted cash | $ | (214.7) | | | $ | 4,301.5 | | | | | |
| | | | | | | |
| Cash and cash equivalents, beginning of period | $ | 430.9 | | | $ | 257.7 | | | | | |
| Restricted cash, beginning of period | 156.7 | | | 14.7 | | | | | |
Cash and cash equivalents, and restricted cash beginning of the year | $ | 587.6 | | | $ | 272.4 | | | | | |
| | | | | | | |
| Cash and cash equivalents, end of period | $ | 359.7 | | | $ | 2,559.6 | | | | | |
| Restricted cash, end of period | 13.2 | | | 2,014.3 | | | | | |
| | | | | | | |
Cash and cash equivalents, and restricted cash end of the period | $ | 372.9 | | | $ | 4,573.9 | | | | | |
| | | | | | | |
Cash Flows Provided by Operating Activities
Net cash provided by operating activities consists of net income (loss) adjusted for non-cash items, such as: depreciation and amortization of property and equipment and intangible assets, deferred income taxes, share-based compensation, mark to market adjustments on financial instruments, mark to market adjustment on contingent shares, deferred finance charges and for changes in net working capital assets and liabilities.
The decrease of $97.1 in net cash provided by operating activities was primarily due to payments in the first quarter of 2022 to respective employees via payroll from restricted cash related to the CPA Global Equity Plan and higher working capital requirements, partially offset by higher earnings attributable to increased revenues and a reduction in employee related costs driven by the cost-saving and margin improvement programs designed to generate substantial incremental cash flow.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
| | | | | | | | | | | | | | | | | | | | | | | |
| Net Working Capital | | | | | | | |
| June 30, 2022 |
| December 31, 2021 | | June 30, 2021 | | December 31, 2020 |
| Current assets | $ | 1,360.2 | | | $ | 1,637.2 | | | $ | 5,316.4 | | | $ | 1,147.6 | |
| Current liabilities | 1,661.5 | | | 1,902.0 | | | 3,360.6 | | | 1,423.1 | |
| Net Working Capital | $ | (301.3) | | | $ | (264.8) | | | $ | 1,955.8 | | | $ | (275.5) | |
Cash Flows Used in Investing Activities
Cash used in investing activities are primarily for acquisitions and capital expenditures, while cash inflows are primarily proceeds from divestitures.
The $41.8 increase in cash used in investing activities was primarily due to increased capital expenditures associated with product development. Our capital expenditures in both 2022 and 2021 consisted primarily of capitalized labor, consulting and other costs associated with product development.
Cash Flows Used in Financing Activities
During the six months ended June 30, 2022, net cash used in financing activities was primarily driven by the use of $175.0 for repurchases of the Company's ordinary shares and $37.7 used for payment of cash dividends associated with our MCPS. During the six months ended June 30, 2021, net cash provided by financing activities was primarily related to the cash raised to finance the purchase price of the ProQuest acquisition in December 2021, which included: (i) the private placement offering of $1,000.0 in aggregate principal amount of Senior Secured Notes due 2028 and $1,000.0 in aggregate principal of Senior Notes due 2029, (ii) net proceeds of $1,393.2 from the issuance of our 5.25% Series A MCPS, and (iii) net proceeds of $728.8 from the ordinary shares that were issued and sold by the Company in June 2021.
Free Cash Flow and Adjusted Free Cash Flow (non-GAAP measures)
The following table reconciles Free cash flow and Adjusted free cash flow, which are non-GAAP measures, to net cash provided by operating activities:
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2022 | | 2021 | | | | |
| Net cash provided by operating activities | $ | 164.6 | | | $ | 261.7 | | | | | |
| Capital expenditures | (89.1) | | | (62.0) | | | | | |
| Free cash flow | $ | 75.5 | | | $ | 199.7 | | | | | |
Cash paid for CPA Global equity plan(1) | 150.7 | | | — | | | | | |
Cash paid for restructuring costs(2) | 21.7 | | | 48.7 | | | | | |
Cash paid for transaction related costs(3) | 7.9 | | | 8.8 | | | | | |
Cash paid for other costs(4) | 2.3 | | | 1.3 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Adjusted free cash flow | $ | 258.1 | | | $ | 258.5 | | | | | |
| | | | | | | |
(1) Includes cash funded by a trust related to CPA Global equity plan payout upon vesting. |
(2) Reflects cash payments for costs primarily related to restructuring and lease-exit activities associated with the One Clarivate, ProQuest and CPA Global Programs. The costs associated with the CPA Global program were substantially complete as of June 30, 2022. |
(3) Includes cash paid for costs incurred to complete business combination transactions, which comprises of acquisitions, dispositions and capital market activities, as well as advisory, legal, and other professional and consulting costs. |
(4) Includes cash paid for other costs that do not reflect our ongoing operating performance. |
Adjusted free cash flow was consistent with the prior year period, primarily due to higher working capital requirements and increased capital spending, offset by higher earnings attributable to increased revenues, a reduction in employee related costs and the mark to market gain on financial instruments.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
There have been no 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 for the year ended December 31, 2021, 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 - Liquidity - Debt Profile section, in our Annual Report on Form 10-K for the year ended December 31, 2021.
Revolving Credit Facility
On March 31, 2022, the Company’s direct and indirect subsidiaries that are borrowers or guarantors under the Credit Agreement dated as of October 31, 2019, (the "Credit Agreement") entered into an amendment thereto, pursuant to which the total revolving credit commitments thereunder were further increased by $400.0 to $750.0 in the aggregate and the maturity date for revolving credit commitments was extended to March 31, 2027, subject to a “springing” maturity date that is 90 days prior to the maturity date of (i) the term loans outstanding under the Credit Agreement as of the date of the amendment or (ii) the 4.50% senior secured notes due in 2026 and issued by Camelot Finance S.A. (but only to the extent such term loans or senior secured notes have not, prior thereto, been refinanced or extended to have a maturity date of no earlier than 90 days after March 31, 2027).
Credit Facilities
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), 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 first 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 35% of the revolving credit facility (excluding (i) non-cash collateralized, issued and undrawn letters of credit in an amount up to $20.0 and (ii) any cash collateralized letters of credit) is utilized at such date. As of June 30, 2022, our consolidated coverage ratio was 5.34 to 1.00 and our consolidated leverage ratio was 4.30 to 1.00. As of the date of this Report, we are in compliance with the covenants in the credit facilities.
The credit facilities provide that, upon the occurrence of certain events of default, our obligations thereunder may be accelerated and the lending commitments terminated. Such events of default include payment defaults to the lenders, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to other material indebtedness (including the secured notes due in 2026), voluntary and involuntary bankruptcy proceedings, material money judgments, loss of perfection over a material portion of collateral, material ERISA/pension plan events, certain change of control events and other customary events of default, in each case subject to threshold, notice and grace period provisions.
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.
Dividends on our mandatory convertible preferred shares are payable, as and if declared by our Board of Directors, at an annual rate of 5.25% of the liquidation preference of $100.00 per share. We may pay declared dividends in cash or, subject to certain limitations, in our ordinary shares, or in any combination of cash and ordinary shares, on March 1, June 1, September 1 and December 1 of each year, commencing on September 1, 2021 and ending on, and including, June 1, 2024. See Note 19 - Commitments and Contingencies in Item 1, Financial Statements and Supplementary Data, for additional information.
The Company is engaged in various legal proceedings and claims that have arisen in the ordinary course of business. We have taken what we believe to be adequate reserves related to the litigation and threatened claims. We maintain appropriate insurance policies in place, which are likely to provide some coverage for these liabilities or other losses that may arise from
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except share and per share data, option prices, ratios or as noted)
these litigation matters. See Note 19 - Commitments and Contingencies in Item 1, Financial Statements and Supplementary Data, for additional information.
Critical Accounting Policies, Estimates and Assumptions
There have been no 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 for the year ended December 31, 2021.
Recently Issued and Adopted Accounting Pronouncements
For recently issued and adopted accounting pronouncements, see Note 3 - Summary of Significant Accounting Policies in Item 1. Financial Statements and Supplementary Data.
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 Form 10-K for the year ended December 31, 2021.
Foreign Currency Exchange Rate Risk
We are exposed to foreign currency exchange risk related to our transactions and our subsidiaries’ balances that are denominated in currencies other than the U.S. dollar, our functional currency. These currencies may continue to fluctuate, in either direction, especially as a result of central bank responses to inflation, concerns regarding future economic growth and other macroeconomic factors, and such fluctuations will affect financial statement line item comparability.
The following table presents the average of the quarterly weighted average exchange rates of the currencies, which have the most significant impact on our business:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Rate for 1 USD | | Three Months Ended June 30, | | Six Months Ended June 30, |
| Currency: | | 2022 | | 2021 | | Percentage Change | | 2022 | | 2021 | | Percentage Change |
| GBP | | $ | 0.80 | | | $ | 0.72 | | | 11 | % | | $ | 0.77 | | | $ | 0.72 | | | 7 | % |
| EUR | | 0.94 | | | 0.83 | | | 13 | % | | 0.92 | | | 0.83 | | | 11 | % |
| JPY | | 129.66 | | | 109.46 | | | 18 | % | | 123.02 | | | 107.71 | | | 14 | % |
Interest Rate Risk
Our interest rate risk arises primarily from our borrowings at floating interest rates. Borrowings under our credit facilities are subject to floating base interest rates, plus a margin. As of June 30, 2022, we had $2,979.5 of floating rate debt outstanding under our credit facilities, consisting of borrowings under the revolving and term loan facilities. For the term loan facility, the base rate is one-month LIBOR (subject to a floor of 0.00% for $1,228.5 and 1.00% for $1,576.0), which was at 1.79% at June 30, 2022, or Prime plus a margin of 2.25% per annum, as applicable depending on the borrowing. For the revolving credit facility, the base interest rate is at Term SOFR, plus a 0.1% SOFR adjustment, plus 3.25% per annum (or 2.75% per annum, based on first lien leverage ratios) or Prime plus a margin of 2.25% per annum, as applicable depending on the borrowing. The interest rate margins under our credit facilities will decrease upon the achievement of certain first lien net leverage ratios (as the term is used in the Credit Agreement). Of the total debt outstanding under our credit facilities, we hedged $448.8 of our principal amount of our floating rate debt using interest rate swaps. As a result, $2,530.7 of our outstanding borrowings effectively bore interest at floating rates. A 0.125 basis point increase or decrease in the applicable base interest rate under our credit facilities would have an impact of $0.5 and $0.9 on our cash interest expense for the three and six months ended June 30, 2022.
For additional information on our outstanding debt and related hedging, see Item 1. Financial Statements and Supplementary Data - Notes to the Condensed Consolidated Financial Statements - Note 8 - Derivative Instruments, Note 11 - Debt, and Note 22 - Subsequent Events.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Pursuant to Rules 13a-15(b) and 15d-15(b) 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, as of June 30, 2022, due to the material weaknesses in our internal control over financial reporting described below, our disclosure controls and procedures were not effective to ensure reasonable assurance that the 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, as appropriate, to allow timely decisions regarding required disclosure.
Material Weaknesses in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
Management identified material weaknesses in our internal control over financial reporting related to: 1) the lack of an effectively designed control over the communication of modifications to pre-existing compensation agreements in an acquisition transaction between legal function and the accounting function to ensure the accounting impact of the modifications could be evaluated, and (2) the lack of an effectively designed control that is designed with a sufficient level of precision to allow for an appropriate review of the tax balances associated with the opening balance sheet of acquired entities, as disclosed in our Form 10-K for the year ended December 31, 2021.
Remediation Progress of Previously Identified Material Weakness
To address the previously reported material weakness in internal control over financial reporting related to the communication of modifications to pre-existing compensation agreements in an acquisition transaction, as disclosed in Part II, Item 9A in our 2021 Annual Report on Form 10-K, we designed and implemented new control activities to identify and communicate the inventory of pre-existing compensation agreements in an acquisition transaction, and any modifications of such agreements, to the accounting department through the transaction close date to ensure the inventory includes the current version of the agreements.
To address the previously reported material weakness in internal control over financial reporting related to the tax balances associated with the opening balance sheet of acquired entities, as disclosed in Part II, Item 9A in our 2021 Annual Report on Form 10-K, we designed and implemented enhanced control activities to operate periodically during the measurement period to allow for an appropriate review of the tax balances.
The control activities described above were designed and implemented during the first quarter of 2022.
Changes in Internal Control Over Financial Reporting
There were no changes in Clarivate’s internal control over financial reporting during the second quarter 2022 that materially affected, or is reasonably likely to materially affect, internal control over financial reporting.