Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Consolidated Financial Statements, including the notes thereto, included elsewhere in this annual 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 global portfolio of high quality, market leading data, insights, analytics and workflow products and solutions through our Academia and Government ("A&G") segment, Life Sciences and Healthcare ("LS&H") segment, and Intellectual Property (“IP”) segment, which are also our reportable segments. Our A&G segment consists of our Academia and Government product group, which provides products and services to organizations that plan, fund, implement and utilize education and research at a global, national, institutional, and individual level. Our LS&H segment consists of our Life Sciences & Healthcare product group, which includes products and solutions that provide insight and foresight across the drug and device lifecycle, empowering life science and healthcare organizations to create a healthier tomorrow. Our IP segment consists of our Patent Intelligence, Brand IP Intelligence and IP Lifecycle Management product groups, which help customers establish, protect and manage their intellectual property.
For further information regarding an overview of our business and certain related trends and uncertainties, refer to Part I - Item 1. Business.
Objective
The objective of the Management Discussion and Analysis is to detail material information, events, uncertainties and factors impacting the Company and provide investors an understanding from "Management's perspective". In Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Management highlights the critical areas for evaluating the Company's performance which includes a discussion of reportable segment information. In addition, refer to Item 1. Business for Management's discussion of forward looking transformational strategy and initiatives including operational improvements, revenue growth and pursuit of acquisition opportunities.
Factors Affecting the Comparability of Our Results of Operations
The following factors have affected the comparability of our results of operations between the periods presented in this annual report and may affect the comparability of our results of operations in future periods.
Strategic Acquisitions
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.
Acquisition of CPA Global
On October 1, 2020, we acquired 100% of the assets, liabilities and equity interests of CPA Global, a global leader in intellectual property software and tech-enabled services. Clarivate acquired all of the outstanding shares of CPA Global in a cash and stock transaction. The aggregate consideration in connection with the closing of the CPA Global acquisition was $8,540.9, net of $102.7 cash acquired, including an equity hold-back consideration of $46.5. The aggregate consideration was composed of (i) $6,565.5 from the issuance of up to 218.2 million ordinary shares to Redtop Holdings Limited, a
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)
portfolio company of Leonard Green & Partners, L.P., representing approximately 35% pro forma fully diluted ownership of Clarivate and (ii) approximately $2,078.1 in cash to fund the repayment of CPA Global's parent company outstanding debt of $2,055.8 and related interest swap termination fee of $22.3. Of the 218.3 million ordinary shares issuable in the acquisition, Clarivate issued 210.4 million ordinary shares on October 1, 2020. There were 6.3 million shares that were transferred to Clarivate to fund an Employee Benefit Trust established for the CPA Global Equity Plan. Accordingly, these shares were excluded from purchase price consideration.
In conjunction with the closing of the transaction, the Company incurred an incremental $1,600.0 of term loans under our term loan facility and used the net proceeds from such borrowings, together with cash on hand, to fund the transaction.
Acquisition of Decision Resources Group
On February 28, 2020, we acquired 100% of the assets, liabilities and equity interests of Decision Resources Group ("DRG"), a premier provider of high-value data, analytics and insights products and services to the healthcare industry, from Piramal Enterprises Limited ("PEL"), which is a part of global business conglomerate Piramal Group. The acquisition helps us expand our core businesses and provides us with the potential to grow in the LS&H segment.
The aggregate consideration paid in connection with the closing of the DRG acquisition was $965.0, composed of $900.0 of base cash plus $6.1 of adjusted closing cash paid on the closing date and up to 2.9 million of the Company's ordinary shares valued at $58.9 on the closing date. The contingent stock consideration was revalued at each period end until its issuance to PEL in March 2021 for a total of $61.6.
Dispositions
Disposition of MarkMonitor Domain Management
On October 31, 2022, the Company completed the sale of the MarkMonitor Domain Management business within the IP segment to Newfold Digital, a leading web presence solutions provider, for a total purchase price of $296.1. A gain of $278.5 was recognized in the Consolidated Statements of Operations within Other operating (income) expense, net during the year ended December 31, 2022.
Disposition of Techstreet
On November 6, 2020, the Company completed the sale of certain assets and liabilities of certain non-core assets and liabilities within the IP segment for a total purchase price of $42.8. A gain of $28.1 was recognized in the Consolidated Statements of Operations within Other operating (income) expense, net during the year ended December 31, 2020.
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). See Note 1 - Background and Nature of Operations for further details on the public ordinary share offerings.
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 ("MCPS") (which included 1.9 million of our MCPS that the underwriters purchased pursuant to their option to purchase additional shares).
Private Placement Notes Offering
2021 Senior Secured Notes and Senior Notes Offering
In June 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. The interest was payable semi-annually to holders of record on June 30 and December 30 of each year, commencing on December 30, 2021. The Old Secured Notes and the Old Unsecured Notes were issued by Clarivate Science Holdings Corporation (the "Issuer"), an indirect wholly-owned subsidiary of Clarivate.
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, we (i) exchanged all of the outstanding, validly tendered and not withdrawn 3.875% Senior Secured Notes due 2028 (the “Old Secured Notes”) for the newly-issued 3.875% Senior Secured Notes due 2028 (the “New Secured Notes”), and (ii) exchanged all of the outstanding, validly tendered and not withdrawn 4.875% Senior Unsecured Notes due 2029 (the “Old Unsecured Notes” and, together with the Old Secured Notes, the “Old Notes”) for the Issuer’s newly-issued 4.875% Senior Notes due 2029 (the “New Unsecured Notes” and, together with the New Secured Notes, the “New Notes”). The initial aggregate principal amount of New Notes is equal to the aggregate principal amount of Old Notes that were validly tendered and not validly withdrawn for exchange, and that were accepted by the Issuer. The offers to exchange are referred to herein as the “Exchange Offers.” Pursuant to the Exchange Offers, the aggregate principal amounts of the Old Notes set forth as follows were validly tendered and not validly withdrawn, and were accepted by the Issuer and subsequently cancelled: (i) $921.2 aggregate principal amount of Old Secured Notes; and (ii) $921.4 aggregate principal amount of Old Unsecured Notes. Following such cancellation, (i) $78.8 aggregate principal amount of Old Secured Notes remained outstanding; and (ii) $78.6 aggregate principal amount of Old Unsecured Notes remained outstanding. The Issuer redeemed such remaining outstanding Old Secured Notes and Old Unsecured Notes at 100% of the principal amount thereof plus accrued and unpaid interest from June 24, 2021, to the redemption date in August 2021. In connection with the settlement of the Exchange Offers, the Issuer (i) issued $921.2 aggregate principal amount of its New Secured Notes; and (ii) issued $921.4 aggregate principal amount of its New Unsecured Notes. The interest is payable semi-annually to holders of record on June 30 and December 30 of each year, commencing on December 30, 2021. The exchange was treated as a debt modification in accordance with Accounting Standards Codification 470, Debt ("ASC 470").
Concurrently with the settlement of the Exchange Offers, the Issuer deposited (or caused to be deposited) an amount in cash equal to the aggregate principal amount of the New Notes of each series into segregated escrow accounts until the date that certain escrow release conditions (the “Escrow Release Conditions”) including the consummation of the ProQuest acquisition, were satisfied. On December 1, 2021, the Escrow Release Conditions were satisfied, and the escrow proceeds were released from the escrow accounts and used to fund a portion of the purchase price of the ProQuest acquisition and to pay related fees and expenses.
In connection with the closing of the ProQuest acquisition on December 1, 2021, the New 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 New Secured Notes are secured on a first-lien pari passu basis with borrowings under the existing credit facilities and senior secured notes, and the New Unsecured Notes are the Issuer’s and such guarantors’ unsecured obligations.
Restructuring
One Clarivate Program
During the second quarter of 2021, the Company approved restructuring actions to streamline operations within targeted areas of the Company. The program resulted in a reduction in operational costs, with the primary driver of the cost saving being from a reduction in workforce. As a result of these actions, the company recorded total pre-tax restructuring charges of approximately $36.7 for all approved phases of the program.
During the years ended December 31, 2022 and 2021, the Company recorded pre-tax charges of $16.7 and $20.0 recognized within Restructuring and impairment in the Consolidated Statements of Operations. These charges were composed of 16.7 and $17.3 in severance and related benefit costs and $— and $2.7 in contract exit costs and legal and advisory fees during the year ended December 31, 2022 and 2021, respectively.
ProQuest Acquisition Integration Program
During the fourth quarter of 2021, the Company approved restructuring actions designed to eliminate duplicative costs following the acquisition of ProQuest and to streamline our operations simplifying our organization and continuing to reduce our lease portfolio. As a result of these actions, the Company expects to record total pre-tax restructuring charges of approximately $76.4 for all phases of the program. Approximately $51.4 of costs have been incurred to date under the program and $25.0 are expected to be incurred in a future period, related to severance, lease impairments and other exit costs, such as legal and advisory fees.
During the years ended December 31, 2022 and 2021, the Company recorded pre-tax charges of $49.4 and $1.9 recognized within Restructuring and impairment in the Consolidated Statements of Operations. These charges were composed of $22.9
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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)
and $1.9 in severance and related benefit costs and $26.5 and $— in contract exit costs and legal and advisory fees during the year ended December 31, 2022 and 2021, respectively.
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, and we are not expecting to incur any further cost under these restructuring plans as of December 31, 2022.
During the years ended December 31, 2022, 2021 and 2020, the Company recorded pre-tax charges of $0.6, $107.6 and $56.1, respectively, recognized within Restructuring and impairment in the Consolidated Statements of Operations. These charges were composed of $(0.4), $38.1 and $39.9 in severance and related benefit costs and $1.0, $69.5 and $16.2 in contract exit costs and legal and advisory fees during the year ended December 31, 2022, 2021 and 2020, respectively.
Effect of Currency Fluctuations
As a result of our geographic reach and operations across regions, we are exposed to currency transaction and currency translation impacts. Currency transaction exposure results when we generate revenues in one currency and incur expenses in another. While we seek to limit our currency transaction exposure by matching revenues and expenses, we are not always able to do so. For example, our revenues and direct expenses before depreciation and amortization, tax and interest were denominated in the following currencies:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Revenues | | | | | |
| USD | 72 | % | | 66 | % | | 74 | % |
| Euros | 12 | % | | 16 | % | | 11 | % |
| British pounds | 11 | % | | 12 | % | | 8 | % |
| Other currencies | 5 | % | | 6 | % | | 6 | % |
| | | | | |
| Direct expenses | | | | | |
| USD | 67 | % | | 57 | % | | 69 | % |
| Euros | 8 | % | | 10 | % | | 9 | % |
| British pounds | 13 | % | | 20 | % | | 13 | % |
| Other currencies | 12 | % | | 13 | % | | 9 | % |
The financial statements of our subsidiaries outside the U.S. are typically measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the balance sheet date exchange rates, while income and expense items are translated at the average monthly exchange rates. Resulting translation adjustments are recorded in Accumulated other comprehensive (loss) income on the Consolidated Balance Sheets.
Subsidiary monetary assets and liabilities that are denominated in currencies other than the functional currency are remeasured using the month-end exchange rate in effect during each month, with any related gain or loss recorded in Other operating (income) expense, net within the Consolidated Statements of Operations.
The Company periodically enters into foreign currency forward 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 $1.2, $6.9 and $(20.8) for the year ended December 31, 2022, 2021 and 2020, respectively, in Other operating (income) expense, net on the Consolidated Statements of Operations. The principal amount
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)
of outstanding foreign currency contracts was $165.1 and $216.7 as of December 31, 2022 and 2021, respectively. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk and Item 8. Financial Statements and Supplementary Data - Notes to the Consolidated Financial Statements - Note 9 - Derivative Instruments, for additional information.
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 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 may be useful to investors for the same reasons, these measures are not a substitute for GAAP financial measures or disclosures. For a reconciliation of our non-GAAP measures to the corresponding most closely related measures calculated in accordance with GAAP, see Certain Non-GAAP Measures below.
Organic revenue growth
We review year-over-year organic revenue growth in our segments as a key measure of our success in addressing customer needs. We also review year-over-year organic 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 organic revenue growth excluding acquisitions, disposals, 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, disposals, 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.
•Acquisitions: We define acquisition 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.
•Disposals: We define disposals revenue as the revenue generated in the prior year comparative period from product lines, services, and/or businesses divested from the date of the sale in the current period presented.
•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
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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)
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 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 77.5%, 79.3% and 78.9% for the years ended December 31, 2022, 2021 and 2020, 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 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | | Change |
| 2022 | | 2021 | | 2020 | | 2022 vs. 2021(1) | | 2021 vs. 2020 |
| Annualized Contract Value | $ | 1,581.9 | | | $ | 1,611.8 | | | $ | 906.5 | | | (1.9) | % | | 77.8 | % |
(1) The change in ACV is primarily due to the acquisition of ProQuest in December 2021 and the disposition of MarkMonitor in October 2022, supplemented by organic ACV growth of 2.6%. |
Annual 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 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 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
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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)
by customers during the applicable reposting period, are excluded from both the numerator and denominator of the calculation. We calculate the annual 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 renewal rates. Our annual renewal rates were 91.3%, 90.6% and 91.2% for the years ended December 31, 2022, 2021 and 2020, respectively.
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 measure the ability of a company to service its 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.
Critical Accounting Policies, Estimates and Assumptions
The preparation of the consolidated financial statements in accordance with GAAP requires management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements. On an ongoing basis, we evaluate estimates, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We consider the following accounting policies to be critical to understanding our financial statements because the application of these policies requires significant judgment on the part of management, which could have a material impact on our financial statements if actual performance should differ from historical experience or if our assumptions were to change. The following accounting policies include estimates that require management’s subjective or complex judgments about the effects of matters that are inherently uncertain. For information on our significant accounting policies, including the policies discussed below, see Item 8. Financial Statements and Supplementary Data - Notes to the Consolidated Financial Statements - Note 3 - Summary of Significant Accounting Policies.
Revenue Recognition
We derive revenues from contracts with customers by selling information on a subscription and single transaction basis as well as performing professional services. Our subscription contract agreements contain standard terms and conditions, and most contracts include a one-year subscription, although we may provide a multi-year subscription in certain instances. In some cases, contracts provide for variable consideration that is contingent upon the occurrence of uncertain future events, such as retroactive discounts provided to the customers, indexed or volume based discounts, and revenues between contract expiration and renewal. We estimate the amount of the variable consideration at the expected value or at the most likely amount depending on the type of consideration. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenues recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimate of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of its anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.
Most of our revenues are derived from subscription contract arrangements, which may contain multiple performance obligations. For these arrangements, the transaction price is allocated to the identified performance obligations based on their relative standalone selling prices. We utilize standard price lists, together with consideration of market conditions, customer demographics, and geographic location, to determine the standalone selling price for most of our products and services, however certain products may not have a standalone selling price that is directly observable, which requires judgment.
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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)
Business Combinations
In a business combination, substantially all identifiable assets, liabilities and contingent liabilities acquired are accounted for using the acquisition method at the acquisition date and are recorded at their respective fair values. One of the most significant estimates relates to the determination of the fair value of these assets and liabilities. The determination of the fair values is based on estimates and judgments made by management. Our estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable. The fair value of the customer relationships intangible assets acquired was estimated by management through a discounted cash flow model using the multi-period excess earnings method, which involved the use of significant estimates and assumptions related to projected revenue growth rates, operating margins, projected cash flows, royalty rates, tax rates, discount rates, tax amortization benefits, and customer attrition rates, among other items. The fair value of the technology and databases and trade names intangible assets acquired was estimated by management through a discounted cash flow model using the relief from royalty method, which involved the use of significant estimates and assumptions related to projected revenue growth rates, royalty rates, tax rates, discount rates, tax amortization benefits, and obsolescence rates. The significant estimates and assumptions used in determining their fair value may change during the finalization of the purchase price allocation. As a result, the Company may make adjustments to the provisional amounts recorded for certain items as part of the purchase price allocation subsequent to the acquisition, not to exceed one year after the acquisition date, until the purchase accounting allocation is finalized.
When a business combination involves contingent consideration, we record a liability for the estimated cost of such contingencies when expenditures are probable and reasonably estimable. A significant amount of judgment is required to estimate and quantify the potential liability in these matters. We engage outside experts as deemed necessary or appropriate to assist in the calculation of the liability; however, management is responsible for evaluating the estimate. We reassess the estimated fair value of the contingent consideration each financial reporting period over the term of the arrangement. Any resulting changes identified subsequent to the measurement period are recognized in earnings and could have a material effect on our results of operations.
Reviews of the tax balances associated with the opening balance sheet of acquired entities is a critical step of the acquisition accounting and throughout the measurement period.
Long-Lived Assets (including Other Intangible Assets)
We evaluate long-lived assets, including computer hardware and other property, computer software, and finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to current forecasts of undiscounted future net cash flows expected to be generated by the asset over its remaining life. An asset is assessed for impairment at the lowest level that the asset generates cash inflows that are largely independent of cash inflows from other assets. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. Any such impairment would be recognized in full in the reporting period in which it has been identified, which could have a material adverse effect on our financial condition or results of operations.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill and indefinite-lived intangible assets are not amortized, but instead are tested for impairment annually during the fourth quarter each year, or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Goodwill
The Company performs goodwill impairment testing during the fourth quarter of each year, or more frequently if triggering events indicate a possible impairment. This testing is performed at the reporting unit level which is defined as the operating segment or one level below the operating segment. As part of our annual goodwill impairment testing, the Company has the option to first perform qualitative testing to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the estimated fair value of a reporting unit with its carrying amount, including
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)
goodwill. The Company estimates the fair value of a reporting unit using the income approach. Under the income approach, a discounted cash flow ("DCF") model is used to determine fair value based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The Company uses its internal forecasts to estimate future cash flows and includes an estimate of long-term future growth rates. Significant judgments inherent in these analyses include, but are not limited to, projected revenue growth rates and operating margins, tax rates, terminal values, and discount rates. The inputs utilized in the analysis are classified as Level 3 inputs within the fair value hierarchy. Changes in these estimates and assumptions could materially affect the determination of estimated fair value. Any such impairment charge would be recognized in full in the reporting period in which it has been identified, which could have a material adverse effect on our financial condition or results of operations.
A quantitative goodwill impairment assessment was performed as of September 30, 2022, over the Company's reporting units due to the following possible impairment indicators: (i) worsening market considerations and macroeconomic conditions such as increasing inflationary pressures and rising interest rates and (ii) sustained declines in the Company's share price during the three months ended September 30, 2022. This coincided with the Company's change in organizational structure to realign its business segments based on the products we offer and the markets they serve. With these changes, the Company changed its reportable segments, operating segments, and reporting units. The goodwill impairment assessment included an analysis on the Company's reporting units immediately before and immediately after the change. This included five reporting units in the legacy structure and four reporting units in the new segment structure.
Based on the quantitative analysis performed in connection with the Company's preparation of the Condensed Consolidated Financial Statements in the third quarter of 2022, the Company recorded a goodwill impairment charge of $4,407.9 as follows: (i) $1,745.8 related to the ProQuest reporting unit within the A&G segment; (ii) $2,569.1 related to the former IP Management reporting unit within the IP segment; and (iii) $93.0 related to the former Patent reporting unit within the IP segment. The impairment charge recorded for the ProQuest reporting unit and the former IP Management reporting unit represented a total write-off of the goodwill associated with each of these reporting units. The estimated fair value of each of the remaining reporting units exceeded their carrying values.
In completing the interim quantitative goodwill impairment assessment, the Company used the following weighted average cost of capital ("WACC") for its discount rate assumptions:
•Legacy Structure: the Company used a WACC of 9.5% for the Science Group, Trademark, Patent, and Domain reporting units. The Company used a 10.5% WACC for the IP Management reporting unit.
•New Structure: the Company used a WACC of 9.5% for the Web of Science Group and Life Sciences & Healthcare reporting units. The Company used a WACC of 10.0% for the ProQuest and Intellectual Property (which includes legacy Trademark, Patent, Domain, and IP Management) reporting units.
The discount rates were derived using a capital asset pricing model and analyzing published rates for industries relevant to each reporting unit to estimate the cost of equity financing. The Company used discount rates we believe to be commensurate with the risks and uncertainty inherent in the respective reporting units and in its internally developed forecasts.
For those reporting units whose estimated fair values exceeded their carrying values, the Company applied a hypothetical sensitivity analysis by increasing the discount rate of these reporting units by 100 basis points and, in a separate test, reducing by 10% the fair value of those reporting units. As a result of either scenario, the Intellectual Property reporting unit's fair value is approximately equal to its carrying value. As of December 31, 2022, the Intellectual Property reporting unit had a goodwill balance of $590.3 million. All other reporting units evaluated under either scenario reflected fair values well in excess of carrying values by at least 40%.
Notwithstanding the results of the Company's interim impairment assessment, if the Company is unable to successfully achieve the revenue growth it projects, the financial performance of any of our reporting units declines significantly, or interest rates continue to rise and this leads to an increase in the cost of capital, then it is possible these financial, economic, and geopolitical conditions could result in another triggering event for the Company in the future and could lead to a potential impairment. In addition, if any of these financial, economic, or geopolitical conditions has a more significant adverse effect on the Company, these could lead to a potential impairment of Company's goodwill or other indefinite-lived or long-lived assets. Such a charge could have a material effect on our financial position and results of operations.
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 the fourth quarter of 2022, the Company performed its annual goodwill impairment testing by applying the qualitative assessment to each of its four reporting units. The Company considered various qualitative factors, including those described above, that would have affected the estimated fair value of the reporting units, as well as the historical significant level of headroom. Given the recency of the last quantitative goodwill impairment assessment performed as of September 30, 2022, and the results of the qualitative assessments, Management concluded that it is not more likely than not that the fair values of the reporting units were less than their carrying values. As such, as of October 1, 2022, our most recent annual goodwill impairment testing date, goodwill was not impaired.
Indefinite-Lived Intangible Assets
The Company has indefinite-lived intangible assets related to trade names. As part of our annual indefinite-lived intangible asset impairment testing, the Company has the option to first perform qualitative testing by evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not (a likelihood of more than 50 percent) that the indefinite-lived assets are impaired. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the indefinite-lived assets are impaired, no quantitative impairment test is required. If the Company chooses not to complete a qualitative assessment, or if the initial assessment indicates that it is more likely than not that the carrying value exceeds the estimated fair value, additional quantitative testing is performed.
The quantitative test for impairment is performed using the relief-from-royalty method under the income approach to determine the fair value based on the present value of estimated future cash flows that the indefinite-lived intangible asset can be expected to generate in the future. Significant judgments inherent in the analysis include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rates and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of estimated fair value and could result in an impairment charge. Any such impairment charge would be recognized in full in the reporting period in which it has been identified, which could have a material adverse effect on our financial condition or results of operations.
In the fourth quarter of 2022, the Company performed its annual indefinite-lived intangible asset impairment testing by applying the qualitative assessment. In our evaluation of the events and circumstances that occurred during the year, the Company considered various qualitative factors, including those described above, as well as the historical significant level of headroom in our last quantitative indefinite-lived intangible asset impairment assessment performed as of October 1, 2021. Based on this evaluation as of October 1, 2022, Management concluded that it is not more likely than not that the indefinite-lived intangible assets are impaired.
Share-Based Compensation
Share-based compensation expense includes cost associated with stock options, restricted stock units (“RSUs”) and Performance stock units ("PSUs") granted to certain key members of management.
The stock option fair value is estimated at the date of grant using the Black-Scholes option pricing model, which requires management to make certain assumptions of future expectations based on historical and current data. The assumptions include the expected term of the stock option, expected volatility, dividend yield, and risk-free interest rate. The expected term represents the amount of time that options granted are expected to be outstanding, based on forecasted exercise behavior. The risk-free rate is based on the rate at grant date of zero-coupon U.S. Treasury Notes with a term comparable to the expected term of the option. Expected volatility is estimated based on the historical volatility of comparable public entities’ stock price from the same industry. Our dividend yield is based on forecasted expected payments, which are expected to be zero for the immediate future. We recognize compensation expense over the vesting period of the award on a graded-scale basis, and we recognize forfeitures as they occur.
The stock-based compensation cost of time-based RSU and PSU grants is calculated by multiplying the grant date fair value by the number of shares granted. We recognize compensation expense over the vesting period of the award on a graded-scale basis, and we recognize forfeitures as they occur. Each quarter, we evaluate the probability of the number of shares that are expected to vest and adjust our expense accordingly.
Equity compensation plans of the acquired CPA Global business were accounted for as a liability as they were paid in cash. Changes in the fair value of these awards are recorded at the end of each reporting period based on the closing share price. There is no outstanding liability as of December 31, 2022, under this plan.
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)
Warrant Liabilities
The Company accounts for Private Placement Warrants for shares of the Company's ordinary stock that are not indexed to its own stock as liabilities at fair value on the balance sheet. The Private Placement Warrants are subject to remeasurement at each balance sheet date, and any change in fair value is recognized as a component of Mark to market adjustment on financial instruments on the Consolidated Statements of Operations. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the ordinary stock warrants. At that time, the portion of the warrant liabilities related to the ordinary stock warrants will be reclassified to additional paid-in capital.
We used a third-party specialist to fair value the awards using the Monte Carlo simulation approach. The assumptions included in the model include, but are not limited to, risk-free interest rate, expected volatility of stock prices for the Company and its peer group, and dividend yield. A discount for the lack of marketability ("DLOM") is applied to shares that are subject to remaining post vesting lock up restrictions.
Taxation
The Company recognizes income taxes under the asset and liability method. Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated current and future taxes to be paid. Significant judgments and estimates are required in determining the consolidated income tax expense for financial statement purposes. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In assessing the realizability of deferred tax assets, we consider projected future taxable income by tax jurisdiction and prudent and feasible tax planning strategies. The Company records a valuation allowance to reduce our deferred tax assets to equal an amount that is more likely than not to be realized.
Changes in tax laws and tax rates could also affect recorded deferred tax assets and liabilities in the future. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. ASC Topic 740, Income Taxes, states that a benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. The Company first records unrecognized tax benefits as liabilities in accordance with ASC 740 and then adjusts these liabilities when our judgment changes as a result of the evaluation of new information not previously available at the time of establishing the liability. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.
Recently Issued and Adopted Accounting Pronouncements
For recently issued and adopted accounting pronouncements, see Item 8. Financial Statements and Supplementary Data - Notes to the Consolidated Financial Statements - Note 3 - Summary of Significant Accounting Policies.
Key Components of Our Results of Operations
Revenues, net
The Company disaggregates revenue based on revenue recognition pattern. Subscription based revenues recognize revenue over time, whereas our re-occurring, transactional and other revenues typically recognize revenue at a point in time with professional services revenue recognized over time. The Company believes subscription, re-occurring, transactional and other is reflective of how the Company manages the business.
Subscription-based revenues are recurring revenues that are earned under annual, multi-year, or evergreen contracts, pursuant to which we license the right to use our products to our customers or provide maintenance services over a contractual term. Revenues from the sale of subscription data, maintenance services, continuing service fees related to our perpetual access license ("PALs"), and analytics solutions are recognized ratably over the contractual term as revenues are earned. Subscription revenues are driven by annual renewal rates, new subscription business, price increases on existing subscription business and subscription upgrades and downgrades from recurring customers. Substantially all of our historical deferred revenues purchase accounting adjustments are related to subscription revenues.
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)
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 purchasing cyclical products. These contracts include either evergreen clauses, in which at least six month advance notice is required prior to cancellation, or terms of multiple years. Due to the cyclical nature of the Company’s re-occurring products, and there typically being upfront setup time with the customer, the re-occurring revenue stream benefits from an established customer base, with minimal customer attrition. A primary driver of the re-occurring revenue stream is the ‘renewal’ business obtained from the CPA global acquisition. Revenue from this revenue stream is typically recognized point in time.
Transactional and other revenues include "clearance searching" and "backfiles" products as well as professional services such as implementation. Clearance searching products relate to preparing detailed, custom reports post screening that uncover potential risks related to a proposed trademark. Backfiles represent an archive of historical data content. 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 content revenues are usually delivered to the customer instantly or in a short period of time, at which time revenues are recognized. 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 services 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.
Cost of Revenues
Cost of revenues consists of costs related to the production, servicing and maintenance of our products and are composed primarily of related personnel costs, such as salaries, benefits and bonuses for employees, fees for contracted labor, and data center services and licensing costs. Cost of revenues also includes the costs to acquire or produce content, royalties payable and non-capitalized R&D expenses. Cost of revenues does not include production costs related to internally generated software or content, which are capitalized.
Selling, General and Administrative
Selling, general and administrative costs consist primarily of salaries, benefits, commission and bonuses for the executive, finance and accounting, human resources, administrative, sales and marketing personnel, third-party professional services fees, such as legal and accounting expenses, facilities rent and utilities and technology costs associated with our corporate infrastructure. Also included within these costs are transaction expenses including costs incurred to complete business combination transactions, including acquisitions, dispositions and capital market activities and include advisory, legal, and other professional and consulting costs.
Depreciation
Depreciation expense relates to our fixed assets, including mainly computer hardware and leasehold improvements, furniture and fixtures. These assets are depreciated over their expected useful lives, and, in the case of leasehold improvements, over the shorter of their useful life or the duration of the related lease.
Amortization
Amortization expense relates to our finite-lived intangible assets, including mainly databases and content, customer relationships, internally generated computer software and trade names. These assets are amortized over periods of between two and twenty-three years. Definite-lived intangible assets are tested for impairment when indicators are present, and, if impaired, are written down to fair value based on discounted cash flows.
Restructuring and Impairment
Restructuring and impairment expense includes costs associated with involuntary termination benefits provided to employees under the terms of a one-time benefit arrangement, ongoing benefit arrangements, certain contract termination costs, other costs associated with an exit or disposal activity and impairment charges associated with right of use assets in which the Company has ceased the use of during the period.
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)
Other Operating (Income) Expense, Net
Other operating (income) expense, net consists of gains or losses related to the disposal of our assets, asset impairments or write-downs and the consolidated impact of re-measurement of the assets and liabilities of our company, sublease income, gain recognized on foreign exchange contract settlement and our subsidiaries that are denominated in currencies other than each relevant entity's functional currency.
Mark to Market Adjustment on Financial Instruments
Mark to market adjustment on financial instruments consists of the mark to market adjustments related to certain of the Company's warrants issued to the founders of Churchill Capital Corp, a special purpose acquisition company or “SPAC” with which the Company consummated a business combination transaction in May 2019.
Interest Expense and Amortization of Debt Discount, Net
Interest expense and amortization of debt discount, net consists of expense related to interest on our borrowings under our term loan facility and our secured notes due 2026, senior unsecured notes due in 2029 and senior secured notes due in 2028, the amortization and write off of debt issuance costs and original discount, and interest related to certain derivative instruments.
Provision for Income Taxes
A provision for income tax is calculated for each of the jurisdictions in which we operate. The benefit or provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The benefit or provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the book and tax bases of assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets to net realizable value when it is more likely than not that a tax benefit will not be realized. Interest accrued related to unrecognized tax benefits and income tax related penalties are included in the provision for income taxes.
Dividends on Preferred Shares
Dividends on our mandatory convertible preferred shares are calculated 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.
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 $2,659.8 in 2022, increased by $782.9, or 41.7%, from $1,876.9 in 2021. On a constant currency basis, Revenues, net increased by $879.9, or 46.9%. Organic revenue growth was slightly impacted by our decision to cease commercial operations in Russia in March 2022.
Revenues, net of $1,876.9 in 2021, increased by $622.8, or 49.7%, from $1,254.1 in 2020. On a constant currency basis, Revenues, net increased by $606.3, or 48.3%.
The comparability of our Revenues, net between periods was impacted by several factors described under “Factors Affecting the Comparability of Our Results of Operations” above. The tables below summarize the items driving the changes in revenues, net between periods.
| | | | | | | | | | | |
| Variance 2022 vs. 2021 |
| (in millions, except percentages) | $ | | % |
| Revenue change driver | | | |
| | | |
| Acquisitions | 844.6 | | | 45.0 | % |
| Disposals | (12.5) | | | (0.7) | % |
| Foreign currency translation | (97.0) | | | (5.2) | % |
| Organic business | 47.8 | | | 2.6 | % |
| Revenues, net (total change) | $ | 782.9 | | | 41.7 | % |
| | | |
| | | | | | | | | | | |
| Variance 2021 vs. 2020 |
| (in millions, except percentages) | $ | | % |
| Revenue change driver | | | |
Reduction in deferred revenues adjustment(1) | $ | 19.1 | | | 2.4 | % |
| Acquisitions | 579.2 | | | 45.3 | % |
| Disposals | (49.3) | | | (3.9) | % |
| Foreign currency translation | 16.6 | | | 1.3 | % |
| Organic business | 57.2 | | | 4.5 | % |
| Revenues, net (total change) | $ | 622.8 | | | 49.7 | % |
|
(1) Reflects the impact of the deferred revenues purchase accounting adjustment associated with businesses that were acquired prior to January 1, 2021. In the fourth quarter of 2021, the Company adopted ASU No. 2021-08, which allows an acquirer to account for the related revenue contracts as if it had originated the contracts in accordance with ASC 606 Revenue from Contracts with Customers. This was applied retrospectively to all business combinations in 2021. The remaining impact of the deferred revenues adjustment pertains only to the continued runoff from business combinations prior to 2021, and is not material to current period results. As a result, the current period revenue tables presented below do not present Adjusted revenues, net. |
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 as the drivers of the variances between periods, including as a percentage of such revenues.
CLARIVATE PLC
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(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) |
| Year Ended
December 31, | | Total Variance (Dollars) | Total Variance (Percentage) | Acquisitions | Disposals | FX Impact | Organic |
| (in millions, except percentages) | 2022 | | 2021 | | | | | | | |
| Subscription revenues | $ | 1,619.8 | | | $ | 1,034.4 | | | $ | 585.4 | | 56.6 | % | 59.2 | % | (1.1) | % | (4.9) | % | 3.4 | % |
| Re-occurring revenues | 441.9 | | | 453.2 | | | (11.3) | | (2.5) | % | — | % | — | % | (7.7) | % | 5.2 | % |
| Transactional and other revenues | 599.1 | | | 393.3 | | | 205.8 | | 52.3 | % | 58.3 | % | (0.2) | % | (3.1) | % | (2.7) | % |
Deferred revenues adjustment(1) | (1.0) | | | (4.0) | | | 3.0 | | 75.0 | % | 75.0 | % | — | % | — | % | — | % |
| Revenues, net | $ | 2,659.8 | | | $ | 1,876.9 | | | $ | 782.9 | | 41.7 | % | 45.0 | % | (0.7) | % | (5.2) | % | 2.6 | % |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
(1) As further described above, reflects the impact of the deferred revenues purchase accounting adjustment associated with businesses that were acquired prior to January 1, 2021. |
|
On a constant currency basis, subscription revenues increased by $635.6, or 61.4%. Acquisitive subscription growth was primarily generated from the ProQuest Transaction. Disposal subscription revenue reductions relate to the MarkMonitor Domain Management business divestiture. Organic subscription revenues increased primarily due to price increases and the benefit of net installations, reflecting a trend consistent with the increase in our ACV between periods.
On a constant currency basis, re-occurring revenues increased by $23.5, or 5.2%. 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 $217.8, or 55.4%. Acquisitive transactional growth was primarily generated from the ProQuest Transaction. Organic transactional and other revenues declined primarily due to lower trademarks transactional volumes and patent filing revenue.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | Variance Increase/(Decrease) | Percentage of Factors Increase/(Decrease) |
| Year Ended
December 31, | | Total Variance (Dollars) | Total Variance (Percentage) | Acquisitions | Disposals | FX Impact | Organic |
| (in millions, except percentages) | 2021 | | 2020 | | | | | | | |
| Subscription revenues | $ | 1,034.4 | | | $ | 877.7 | | | $ | 156.7 | | 17.9 | % | 16.1 | % | (3.6) | % | 1.9 | % | 3.5 | % |
| Re-occurring revenues | 453.2 | | | 111.9 | | | 341.3 | | 305.0 | % | 298.3 | % | — | % | (1.8) | % | 8.4 | % |
| Transactional and other revenues | 393.3 | | | 287.6 | | | 105.7 | | 36.8 | % | 36.2 | % | (6.2) | % | 0.8 | % | 5.9 | % |
Deferred revenues adjustment(1) | (4.0) | | | (23.1) | | | 19.1 | | 82.9 | % | (19.0) | % | — | % | (0.2) | % | 102.1 | % |
| Revenues, net | $ | 1,876.9 | | | $ | 1,254.1 | | | $ | 622.8 | | 49.7 | % | 45.8 | % | (3.9) | % | 1.3 | % | 6.4 | % |
Deferred revenues adjustment(1) | 4.0 | | | 23.1 | | | (19.1) | | (82.9) | % | 19.0 | % | — | % | 0.2 | % | (102.1) | % |
| Adjusted revenues, net | $ | 1,880.9 | | | $ | 1,277.2 | | | $ | 603.7 | | 47.3 | % | 45.3 | % | (3.9) | % | 1.3 | % | 4.5 | % |
| | | | | | | | | | |
(1) As further described above, reflects the impact of the deferred revenues purchase accounting adjustment associated with businesses that were acquired prior to January 1, 2021. |
|
| | | | | | | | | | |
| | | | | | | | | | |
On a constant currency basis, subscription revenues increased by $140.4, or 16.0%. Acquisitive subscription growth was primarily generated from the DRG Transaction, CPA Global Transaction and the ProQuest Transaction. Disposal subscription revenues reduction was derived from the Techstreet Transaction. Organic subscription revenues increased primarily due to price increases, new business and the benefit of net installations in prior year.
Re-occurring revenues of $453.2 in 2021, increased by $341.3, or 305.0% from $111.9 in due to nine months of acquisitive growth generated from the CPA Global Transaction, which was acquired on October 1, 2020. 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 revenues increased by $103.4, or 35.9%. Acquisitive transactional growth was primarily generated from the DRG Transaction, the CPA Global Transaction and the ProQuest Transaction. Disposal transactional revenue reduction was derived from the Techstreet Transaction. Organic transactional revenues increased due
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)
to an increase in trademark search volumes, stronger back file and custom data sales and strength in our professional services business lines.
Revenue by Geography
The below tables present our revenues split by geographic region, separating the impacts of the deferred revenues adjustment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Variance Increase/(Decrease) | Percentage of Factors Increase/(Decrease) |
| Year Ended December 31, | | Total Variance (Dollars) | Total Variance (Percentage) | Acquisitions | Disposals | FX Impact | Organic |
(in millions, except percentages) | 2022 | | 2021 | | | | | | | |
| Americas | $ | 1,463.6 | | | $ | 928.7 | | | $ | 534.9 | | 57.6 | % | 57.3 | % | (1.1) | % | (2.1) | % | 3.5 | % |
| Europe/Middle East/Africa | 698.1 | | | 555.8 | | | 142.3 | | 25.6 | % | 35.6 | % | (0.3) | % | (8.3) | % | (1.3) | % |
| Asia Pacific | 499.1 | | | 396.4 | | | 102.7 | | 25.9 | % | 28.3 | % | (0.2) | % | (7.9) | % | 5.7 | % |
Deferred revenues adjustment(1) | (1.0) | | | (4.0) | | | 3.0 | | 75.0 | % | 75.0 | % | — | % | — | % | — | % |
| Revenues, net | $ | 2,659.8 | | | $ | 1,876.9 | | | $ | 782.9 | | 41.7 | % | 45.0 | % | (0.7) | % | (5.2) | % | 2.6 | % |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
(1) As further described above, reflects the impact of the deferred revenues purchase accounting adjustment associated with businesses that were acquired prior to January 1, 2021. |
|
Acquisitive growth for all regions was primarily related to the ProQuest Transaction. On a constant currency basis, Americas revenues increased by $554.0, or 59.7%, with organic growth due to improved subscription and re-occurring revenues. On a constant currency basis, Europe/Middle East/Africa revenues increased by $188.7, or 34.0%, primarily due to acquisitive growth. On a constant currency basis, Asia Pacific revenues increased by $134.2, or 33.9%, primarily due to acquisitive growth and organic growth led by Academia & Government and Life Sciences and Healthcare subscription revenue.
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| | | | | | | | | | |
| | | | | Variance Increase/(Decrease) | Percentage of Factors Increase/(Decrease) |
| Year Ended
December 31, | | Total Variance (Dollars) | Total Variance (Percentage) | Acquisitions | Disposals | FX Impact | Organic |
(in millions, except percentages) | 2021 | | 2020 | | | | | | | |
Americas | $ | 928.7 | | | $ | 631.2 | | | $ | 297.5 | | 47.1 | % | 45.8 | % | (5.8) | % | 0.1 | % | 7.0 | % |
Europe/Middle East/Africa | 555.8 | | | 365.6 | | | 190.2 | | 52.0 | % | 50.5 | % | (1.9) | % | 3.0 | % | 0.4 | % |
Asia Pacific | 396.4 | | | 280.4 | | | 116.0 | | 41.4 | % | 37.5 | % | (2.0) | % | 1.8 | % | 4.0 | % |
Deferred revenues adjustment(1) | (4.0) | | | (23.1) | | | 19.1 | | 82.9 | % | (19.0) | % | — | % | (0.2) | % | 102.1 | % |
Revenues, net | $ | 1,876.9 | | | $ | 1,254.1 | | | $ | 622.8 | | 49.7 | % | 45.8 | % | (3.9) | % | 1.3 | % | 6.4 | % |
Deferred revenues adjustment(1) | 4.0 | | | 23.1 | | | (19.1) | | 82.9 | % | 19.0 | % | — | % | 0.2 | % | (102.1) | % |
| Adjusted revenues, net | $ | 1,880.9 | | | $ | 1,277.2 | | | $ | 603.7 | | 47.3 | % | 45.3 | % | (3.9) | % | 1.3 | % | 4.5 | % |
| | | | | | | | | | |
(1) As further described above, reflects the impact of the deferred revenues purchase accounting adjustment associated with businesses that were acquired prior to January 1, 2021. |
|
Acquisitive growth for all regions was primarily related to the DRG Transaction, the CPA Global Transaction and the ProQuest Transaction. Disposal revenue reduction for all regions was derived from the Techstreet Transaction. On a constant currency basis, Americas revenues increased by $296.8, or 47.0%, with organic growth due to improved subscription and transactional revenues. Transactional revenue increased primarily due to improved trademark search volumes, stronger back file sales, and custom data sales and strength in our professional services business lines. On a constant currency basis, Europe/Middle East/Africa revenues increased by $179.4, or 49.1%, primarily due to acquisitive growth and improved subscription revenues. Subscription revenue growth reflects the benefit of price increases, new products coming into market and net installations in prior year. On a constant currency basis, Asia Pacific revenues increased by $111.0, or 39.6%, primarily due to acquisitive growth and improved subscription and transactional revenues.
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)
Revenue by Segment
The following tables, and the discussions that follow, present our revenues by segment for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Variance Increase/(Decrease) | Percentage of Factors Increase/(Decrease) |
| Year Ended December 31, | | Total Variance (Dollars) | Total Variance (Percentage) | Acquisitions | Disposals | FX Impact | Organic |
| (in millions, except percentages) | 2022 | | 2021 | | | | | | | |
| Academia and Government | $ | 1,280.1 | | | $ | 489.4 | | | $ | 790.7 | | 161.6 | % | 164.7 | % | — | % | (4.9) | % | 1.8 | % |
| Life Sciences and Healthcare | 452.6 | | | 413.3 | | | 39.3 | | 9.5 | % | 8.6 | % | — | % | (3.2) | % | 4.1 | % |
| Intellectual Property | 928.1 | | | 978.2 | | | (50.1) | | (5.1) | % | — | % | (1.3) | % | (6.1) | % | 2.3 | % |
Deferred revenues adjustment(1) | (1.0) | | | (4.0) | | | 3.0 | | 75.0 | % | 75.0 | % | — | % | — | % | — | % |
| Revenues, net | $ | 2,659.8 | | | $ | 1,876.9 | | | $ | 782.9 | | 41.7 | % | 45.0 | % | (0.7) | % | (5.2) | % | 2.6 | % |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
(1) As further described above, reflects the impact of the deferred revenues purchase accounting adjustment associated with businesses that were acquired prior to January 1, 2021. |
|
Academia and Government Segment: On a constant currency basis, revenues increased by $814.9, or 166.5%, primarily due to acquisitive growth and organic subscription 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 and the benefit of net installations.
Life Sciences and Healthcare Segment: On a constant currency basis, revenues increased by $52.6, or 12.7%. Organic revenues, on a constant currency basis, increased primarily due to subscription revenues growth due to price increases and the benefit of net installations and transaction and other revenue growth on increases in custom data sales.
Intellectual Property Segment: On a constant currency basis, revenues increased by $9.4, or 1.0%. Organic revenues, on a constant currency basis, increased primarily due to growth in re-occurring revenues from patent renewal volumes and improvements in yield per case and subscription revenues due to price increases and the benefit of net installations. Disposal revenue reductions relate to the MarkMonitor Domain Management business divestiture.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Variance Increase/(Decrease) | Percentage of Factors Increase/(Decrease) |
| Year Ended December 31, | | Total Variance (Dollars) | Total Variance (Percentage) | Acquisitions | Disposals | FX Impact | Organic |
| (in millions, except percentages) | 2021 | | 2020 | | | | | | | |
| Academia and Government | $ | 489.4 | | | $ | 384.7 | | | $ | 104.7 | | 27.2 | % | 20.1 | % | — | % | 2.9 | % | 4.2 | % |
| Life Sciences and Healthcare | 413.3 | | | 358.9 | | | 54.4 | | 15.2 | % | 7.6 | % | — | % | 1.1 | % | 6.5 | % |
| Intellectual Property | 978.2 | | | 533.6 | | | 444.6 | | 83.3 | % | 89.0 | % | (9.2) | % | 0.4 | % | 3.3 | % |
Deferred revenues adjustment(1) | (4.0) | | | (23.1) | | | 19.1 | | 82.9 | % | (19.0) | % | — | % | (0.2) | % | 102.1 | % |
| Revenues, net | $ | 1,876.9 | | | $ | 1,254.1 | | | $ | 622.8 | | 49.7 | % | 45.8 | % | (3.9) | % | 1.3 | % | 6.4 | % |
Deferred revenues adjustment(1) | 4.0 | | | 23.1 | | | (19.1) | | 82.9 | % | 19.0 | % | — | % | 0.2 | % | (102.1) | % |
| Adjusted revenues, net | $ | 1,880.9 | | | $ | 1,277.2 | | | $ | 603.7 | | 47.3 | % | 45.3 | % | (3.9) | % | 1.3 | % | 4.5 | % |
| | | | | | | | | | |
(1) As further described above, reflects the impact of the deferred revenues purchase accounting adjustment associated with businesses that were acquired prior to January 1, 2021. |
|
Academia and Government Segment: On a constant currency basis, revenues increased by $93.9, or 24.4%, primarily due to acquisitive growth and organic subscription and transactional revenue growth. Acquisitive growth was generated from the ProQuest Transaction. Organic revenues increased due to growth resulting from new business and price increases in subscriptions and stronger back file sales.
Life Sciences and Healthcare Segment: On a constant currency basis, revenues increased by $50.4, or 14.0%, primarily due to acquisitive growth and organic subscription and transactional revenue growth. Acquisitive growth was generated
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)
primarily from the DRG Transaction, including two months of acquisitions revenue in 2021 compared to ten months in 2020. Organic revenues increased due to growth resulting from custom data sales, new business and price increases in subscriptions and strength in our professional services business lines.
Intellectual Property Segment: On a constant currency basis, revenues increased by $442.6, or 82.9%. Acquisitive growth was generated primarily from the CPA Global Transaction, including nine months of acquisitions revenue in 2021 compared to three months in 2020 and the IncoPat Transaction. Disposal revenue reduction was derived from the Techstreet Transaction. Organic revenues, on a constant currency basis, increased primarily due to growth in re-occurring revenues from patent renewal volumes and yield and transactional revenues on improved trademark search transactional volumes and strength in our professional services business lines.
Operating Expenses
The following table presents certain of our operating expense line item amounts and their associated percentage of revenue:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended December 31, | | Change
2022 vs. 2021 | | Change
2021 vs. 2020 |
| (in millions, except percentages) | | | | | | | | | 2022 | | 2021 | | 2020 | | $ | | % | | $ | | % |
| Operating Expenses: | | | | | | | | | | | | | | | | | | | | | |
| Cost of revenues | | | | | | | | | $ | 954.0 | | $ | 626.1 | | $ | 438.8 | | $ | 327.9 | | | 52.4 | % | | $ | 187.3 | | | 42.7 | % |
| Selling, general and administrative costs | | | | | | | | | 729.9 | | 643.0 | | 544.7 | | 86.9 | | | 13.5 | % | | $ | 98.3 | | | 18.0 | % |
Total cost of revenues and selling, general and administrative costs | | | | | | | | | $ | 1,683.9 | | $ | 1,269.1 | | $ | 983.5 | | $ | 414.8 | | | 32.7 | % | | $ | 285.6 | | | 29.0 | % |
| | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | | | | $ | 710.5 | | $ | 537.8 | | $ | 303.2 | | $ | 172.7 | | | 32.1 | % | | $ | 234.6 | | | 77.4 | % |
| | | | | | | | | | | | | | | | | | | | | |
| As a percentage of revenue: | | | | | | | | | | | | | | | | | | | | | |
| Total cost of revenues and selling, general and administrative costs | | | | | | | | | 63.3 | % | | 67.6 | % | | 78.4 | % | | | | | | | | |
| Depreciation and amortization expense | | | | | | | | | 26.7 | % | | 28.7 | % | | 24.2 | % | | | | | | | | |
Cost of Revenues
On a constant currency basis, cost of revenues increased by $356.3, or 56.9%, for the year ended December 31, 2022. The increase was primarily driven by eleven additional months of ProQuest costs, which was acquired on December 1, 2021. The increase related to ProQuest was partially offset by a reduction in product and people related costs primarily driven by the cost-saving and margin improvement programs designed to generate substantial incremental cash flow. See Note 22 - Restructuring and Impairment for further information. Cost of revenues as a percentage of revenues, net increased by 2.5% to 35.9% for the year ended December 31, 2022, compared to 33.4% for the year ended December 31, 2021.
On a constant currency basis, cost of revenues increased by $182.9, or 41.7%, for the year ended December 31, 2021. The increase for the year ended December 31, 2021 was primarily due to an increase from acquisitions primarily driven by nine additional months of CPA Global expenses, which was acquired in October 2020, two additional months of DRG expenses, which was acquired in February 2020, and one month of ProQuest expenses, which was acquired in December 2021. The increase was also attributed to increased share-based compensation expenses, inclusive of expenses related to phantom equity awards under the CPA Global Equity Plan, as well as increased product expenses, which are attributed to the increase in revenues. The increase in cost of revenues was partially offset by a reduction in cost of revenues for the Techstreet divestiture in Q4 2020 and reduced people costs primarily driven by the Company's cost-saving and margin improvement programs. Cost of revenues as a percentage of revenues, net decreased by 1.6% to 33.4% for the year ended December 31, 2021 compared to 35.0% for the year ended December 31, 2020.
Selling, General and Administrative
On a constant currency basis, selling, general and administrative expense increased by $110.1, or 17.1%, for the year ended December 31, 2022. The increase was primarily driven by eleven additional months of ProQuest expenses. The increase relating to ProQuest was partially offset by reductions in outside services, share-based compensation, legal, rent and other miscellaneous business operating expenses. Selling, general and administrative costs as a percentage of revenues, net decreased by 6.9% to 27.4% for the year ended December 31, 2022, compared to 34.3% for the year ended December 31,
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)
2021, primarily driven by the reductions highlighted above, as well as cost-saving and margin improvement restructuring programs further discussed below.
On a constant currency basis, selling, general and administrative expense increased by $93.4, or 17.1%, for the year ended December 31, 2021. The increase was primarily driven by nine additional months of CPA Global expenses, which was acquired in October 2020, two additional months of DRG expenses, which was acquired in February 2020, and one month of ProQuest expenses, which was acquired in December 2021. The increase was also attributed to an increase in share-based compensation expenses, inclusive of expenses related to phantom equity awards under the CPA Global Equity Plan. These increases were partially offset by the Techstreet divestiture in Q4 2020, a gain associated with the mark to market adjustment on contingent shares and reduced transaction costs, which were driven by expenses related to the DRG Transaction and CPA Global Transaction in 2020 that did not re-occur in 2021. Selling, general and administrative costs as a percentage of revenues, net decreased by 9.1% to 34.3% for the year ended December 31, 2021 compared to 43.4% for the year ended December 31, 2020, primarily driven by the reductions highlighted above, as well as cost-saving and margin improvement restructuring programs further discussed below.
Depreciation and amortization
The increase for the year ended December 31, 2022, was driven by the additional depreciation and amortization on assets acquired from the ProQuest Transaction. This increase was partially offset by run-off of previously purchased capital assets and exchange rate fluctuations. For the year ended December 31, 2022, depreciation and amortization expense as a percentage of revenues, net, decreased by 2.0% to 26.7% compared to 28.7% for the year ended December 31, 2021.
The increase for the year ended December 31, 2021 was driven by additional depreciation and amortization on assets acquired through the DRG Transaction, CPA Global Transaction, ProQuest Transaction, IncoPat Transaction, Bioinfogate Transaction and Hanlim Transaction. This increase was offset by run-off of previously purchased capital assets and a decrease in amortization related to the Techstreet divestiture in Q4 2020. For the year ended December 31, 2021, depreciation and amortization expense as a percentage of revenues, net, increased by 4.5% to 28.7% compared to 24.2% for the year ended December 31, 2020.
Restructuring and Impairment
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| | | | | Year Ended December 31, | | Change
2022 vs. 2021 | | | | Change
2021 vs. 2020 |
| | | | | | | | | 2022 | | 2021 | | | | 2020 | | $ | | % | | | | | | $ | | % |
| Restructuring and impairment | | | | | | | | | $ | 66.7 | | | $ | 129.5 | | | | | $ | 56.1 | | | $ | (62.8) | | | (48.5) | % | | | | | | $73.4 | | 130.8 | % |
The decrease for the year ended December 31, 2022, was primarily driven by the wind-down of expenses associated with the CPA Global Acquisition Integration and Optimization Program, DRG Acquisition Integration Program, and Operation Simplification and Optimization Program. We are not expecting to incur any significant further costs under these restructuring plans as of December 31, 2022. The decrease was partially offset by the One Clarivate and ProQuest Acquisition Integration Programs. See Note 22 - 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.
| | | | | | | | | | | | | | | |
| Total Costs Incurred to Date | | Costs Expected to be Incurred in Future Periods | | | | |
| One Clarivate Program | $ | 36.7 | | | $ | — | | | | | |
| ProQuest Acquisition Integration Program | 51.4 | | | 25.0 | | | | | |
| Other Restructuring Programs: | | | | | | | |
| CPA Global Acquisition Integration and Optimization Program | 128.1 | | | — | | | | | |
| DRG Acquisition Integration Program | 7.3 | | | — | | | | | |
| Operation Simplification and Optimization Program | 44.5 | | | — | | | | | |
| Total Other Restructuring Programs | $ | 179.9 | | | $ | — | | | | | |
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)
Restructuring and impairment charges of $129.5 in 2021, increased by $73.4, or 130.8%, from $56.1 in 2020. The increase for the year ended December 31, 2021 was primarily driven by the CPA Global Acquisition Integration and Optimization Program implemented in Q4 2020, as well as the One Clarivate restructuring plan, which streamlines operations within targeted areas of the Company implemented in Q2 2021. The increase was partially offset by the wind-down of costs associated with the Operation Simplification and Optimization Program and the DRG Acquisition Integration Program.
Goodwill impairment
The Company performed an interim quantitative goodwill impairment assessment during the nine months ended September 30, 2022, which resulted in goodwill impairment of $4,449. Indicators of possible impairment were identified due to worsening market considerations and macroeconomic conditions such as increasing inflationary pressures and rising interest rates, as well as sustained declines in the Company's share price during the three months ended September 30, 2022. No further impairments were taken during the three months ended December 31, 2022, resulting in goodwill impairment for the year ended December 31, 2022, of $4,449.
Other Operating (Income) Expense, Net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended December 31, | | Change
2022 vs. 2021 | | Change
2021 vs. 2020 |
| | | | | | | | | 2022 | | 2021 | | 2020 | | $ | | % | | $ | | % |
| Other operating (income) expense, net | | | | | | | | | $ | (324.8) | | | $ | 27.5 | | | $ | (52.4) | | | $ | (352.3) | | | (1,281.1) | % | | $ | 79.9 | | | 152.5 | % |
The fluctuations for the year ended December 31, 2022, as compared to the year ended December 31, 2021, were primarily driven by the $278.5 gain on sale of the MarkMonitor Domain Management business and 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. Refer to Note 18 - Other Operating (Income) Expense, Net in Item 8. Financial Statements and Supplementary Data, for additional information.
The fluctuations for the year ended December 31, 2021, as compared to year ended December 31, 2020, 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.
Mark to Market (Gain) Loss on Financial Instruments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, | | Change
2022 vs. 2021 | | Change
2021 vs. 2020 |
| | | | | | | | | 2022 | | 2021 | | 2020 | | $ | | % | | $ | | % |
| Mark to market (gain) loss on financial instruments | | | | | | | | | $(206.8) | | $(81.3) | | $205.1 | | $ | (125.5) | | | (154.4) | % | | $ | (286.4) | | | (139.6) | % |
The Company accounts for its outstanding private placement warrants as liabilities at fair value on the balance sheet, which are subject to remeasurement at each balance sheet date and any change in fair value is recognized as of the end of each period for which earnings are reported. The change in fair value, resulting in a gain in 2022 and 2021, and a loss in 2020, was driven primarily by changes in the risk-free rate as well as changes in the Company’s share price, thus impacting inputs to the Black-Scholes option valuation models as of each reporting period then ended.
Interest Expense and amortization of debt discount, Net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, | | Change
2022 vs. 2021 | | Change
2021 vs. 2020 |
| | | | | | | | | 2022 | | 2021 | | 2020 | | $ | | % | | $ | | % |
| Interest expense and amortization of debt discount, net | | | | | | | | | $ | 270.3 | | | $ | 252.5 | | | $ | 111.9 | | | $ | 17.8 | | | 7.0 | % | | $ | 140.6 | | | 125.6 | % |
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 increase for the year ended December 31, 2022, as compared to the year ended December 31, 2021, was primarily attributed to the increase in interest rate in 2022 on Term Loan Facility, 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.
The increase for the year ended December 31, 2021, as compared to year ended December 31, 2020, was primarily attributed to the private placement offerings and subsequent exchange offers of our New Senior Secured Notes due 2028 and Senior Notes due 2029, the $1,600.0 incremental term loan borrowing in connection with the CPA Global Transaction in October 2020 and the additional $360.0 incremental term loan borrowing in connection with the DRG Transaction in February 2020. The increase was also attributable to the $50.0 bridge commitment and structuring fees that were paid in connection with the closing of the ProQuest Transaction on December 1, 2021.
Provision (benefit) for Income Taxes
Benefit for income taxes of $28.9 on pre-tax book loss of $3,989.1 for the year ended December 31, 2022, decreased by $41.2 from a provision of $12.3 on a pre-tax book loss of $258.2 for the year ended December 31, 2021. The effective tax rate was 0.7% for the year ended December 31, 2022, as compared to (4.8)% for the year ended December 31, 2021. The overall decrease in tax expense is driven by one-time tax benefits from the release of a valuation allowance upon the execution of an internal legal entity restructuring effective December 31, 2022, and from the release of an uncertain tax position that was favorably resolved. These benefits were partially offset by tax expense accruals on a significant mark-to-market gain on the Private Warrants and on an increase in taxable income in tax-paying jurisdictions, resulting in a net overall tax benefit compared to prior year results. The current year effective tax rate may not be indicative of our effective tax rates for future periods.
Provision for income taxes of $12.3 on a pre-tax book loss of $258.2 in 2021, increased by $15.0 from a benefit of $2.7 on a pre-tax book expense of $353.3 in 2020. The effective tax rate being (4.8)% in 2021, compared to 0.8% in 2020. The overall increase in tax expense was due to recording valuation allowances against losses in certain jurisdictions where we determined the losses are not realizable.
Dividends on Preferred Shares
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| | | | Year Ended December 31, | | Change
2022 vs. 2021 | | Change
2021 vs. 2020 |
| | | | | | | | | 2022 | | 2021 | | 2020 | | $ | | % | | $ | | % |
| Dividends on preferred shares | | | | | | | | | $ | 75.4 | | | $ | 41.5 | | | $ | — | | | $ | 33.9 | | | 81.7 | % | | $ | 41.5 | | | 100.0 | % |
The fluctuation for the year ended December 31, 2022, as compared to the year ended December 31, 2021, was due to the dividends on our mandatory convertible preferred shares that are calculated at an annual rate of 5.25%. The dividends on our preferred shares were first declared in the third quarter of 2021, and as a result, accumulated more expense in 2022 compared to 2021.
The fluctuation for the year ended December 31, 2021, as compared to the year ended December 31, 2020, was due to the quarterly dividend of approximately $1.12 per share on its 5.25% Series A Mandatory Convertible Preferred Shares, payable in ordinary shares on September 1, 2021, to shareholders of record at the close of business on August 15, 2021. As permitted by the Statement of Rights governing its 5.25% Series A Mandatory Convertible Preferred Shares, such dividend was paid by delivery of ordinary shares (other than $1 paid in cash in lieu of any fractional ordinary share). The number of ordinary shares deliverable in respect of such dividend was 0.7 million, which was determined based on the average volume-weighted average price per ordinary shares over the five consecutive trading day period ending on, and including, the trading day prior to September 1, 2021, which had a value of $16.1. In October 2021, the Company's Board of Directors declared a quarterly dividend of approximately $1.3125 per share on its 5.25% Series A Mandatory Convertible Preferred Shares, payable in cash on December 1, 2021, to shareholders of record at the close of business on November 15, 2021. In February 2022, the Company's Board of Directors declared a quarterly dividend of $1.3125 per share on its 5.25% Series A Mandatory Convertible Preferred Shares, payable in cash on March 1, 2022, to shareholders of record at the close of business on February 15, 2022. As of December 31, 2021, we recognized an additional $6.5 of accrued preferred share dividends. While the dividends on the MCPS are cumulative, they will not be paid until declared by the Company’s Board
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)
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.
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 annual 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, 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) income before the provision for income taxes, depreciation and amortization, and interest expense adjusted to exclude acquisition and/or disposal-related transaction costs, 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 and/or expense, the impact of certain non-cash mark-to-market adjustments on financial instruments, legal settlements, goodwill impairment and other items that are included in net (loss) 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 years ended December 31, 2022, 2021 and 2020, and reconciles these measures to our net 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)
| | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| (in millions, except percentages) | | | | | 2022 | | 2021 | | 2020 |
| Net income (loss) attributable to ordinary shares | | | | | $ | (4,035.6) | | $ | (312.0) | | $ | (350.6) |
| Dividends on preferred shares | | | | | 75.4 | | 41.5 | | — |
| Net income (loss) | | | | | (3,960.2) | | (270.5) | | (350.6) |
| Provision for income taxes | | | | | (28.9) | | 12.3 | | (2.7) |
| Depreciation and amortization | | | | | 710.5 | | 537.8 | | 303.2 |
| Interest expense and amortization of debt discount, net | | | | | 270.3 | | 252.5 | | 111.9 |
Deferred revenues adjustment(1) | | | | | 1.0 | | 4.0 | | 23.1 |
Transaction related costs(2) | | | | | 14.2 | | 46.2 | | 99.3 |
| Share-based compensation expense | | | | | 102.2 | | 139.6 | | 70.5 |
Gain on sale from divestitures(3) | | | | | (278.5) | | — | | (28.1) |
Restructuring and impairment(4) | | | | | 66.7 | | 129.5 | | 56.1 |
| Goodwill impairment | | | | | 4,449.1 | | — | | — |
Mark to market (gain) loss on financial instruments(5) | | | | | (206.8) | | (81.3) | | 205.1 |
Other(6) | | | | | (26.9) | | 30.3 | | (1.2) |
| Adjusted EBITDA | | | | | $ | 1,112.7 | | $ | 800.4 | | $ | 486.6 |
| Adjusted EBITDA margin | | | | | 41.8% | | 42.6% | | 38.1% |
| | | | | | | | | |
(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". 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. 2021 also includes the mark-to-market adjustment (gains) on the contingent stock consideration associated with the CPA Global and DRG acquisitions. |
(3) 2022 represents the net gain from the sale of the MarkMonitor Domain Management business. 2020 represents the net gain from sale of certain assets and liabilities of the Techstreet business. See Note 18 - Other Operating (Income) Expense, Net for further information. |
(4) Primarily reflects costs related to restructuring and impairment associated with the One Clarivate, ProQuest and CPA Global restructuring programs. Refer to Note 22 - Restructuring and Impairment for further information. |
(5) Reflects mark-to-market adjustments on the Private Placement Warrants under ASC 815, Derivatives and Hedging. Refer to Note 10 - Fair Value Measurements for further information. |
(6) Primarily reflects 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 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
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)
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, capital expenditures, debt service, acquisitions, other commitments and contractual obligations. Our principal sources of liquidity include cash from operating activities, cash and cash equivalents on our 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, fund our working capital requirements, make capital expenditures (including 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 | December 31, | | December 31, |
| (in millions) | 2022 | | 2021 |
| Cash and cash equivalents | $ | 348.8 | | | $ | 430.9 | |
Additional availability under revolving credit facility(1) | 740.5 | | | 168.9 | |
| $ | 1,089.3 | | $ | 599.8 |
(1) Net of letters of credit utilization of $9.5 and $6.1, respectively. |
During the fourth quarter of 2022, the Company made a $300.0 prepayment on our Term Loan Facility and paid the $175.0 outstanding balance on its Revolving Credit Facility, which we had borrowed in November 2021 and used the net proceeds for general corporate purposes. As a result, the Company had no outstanding balance on its Revolving Credit Facility as of December 31, 2022. Refer to Note 12 - Debt in Item 8. Financial Statements and Supplementary Data, for additional information related to outstanding borrowings.
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 increased by $400.0 from $350.0 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. Refer to Note 12 - Debt in Item 8. Financial Statements and Supplementary Data, for additional information related to the "springing" maturity date.
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 year ended December 31, 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
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)
Consolidated Statement of Changes in Equity in the amount of $7.7. As of December 31, 2022, the Company had approximately $825.0 of availability remaining under this program. See Note 14 - Shareholders’ Equity for additional information related to the Share Repurchase Program.
Cash Flows
The following table discloses our consolidated cash flows provided by (used in) operating, investing and financing activities for the periods presented:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net cash provided by operating activities | $ | 509.3 | | | $ | 323.8 | | | $ | 263.5 | |
| Net cash provided by (used in) investing activities | 57.3 | | | (4,044.5) | | | (2,988.8) | |
| Net cash (used in) provided by financing activities | (759.2) | | | 4,032.2 | | | 2,926.6 | |
Effect of exchange rates | (38.2) | | | 3.7 | | | (5.0) | |
| Net (decrease) increase in cash and cash equivalents, and restricted cash | $ | (230.8) | | | $ | 315.2 | | | $ | 196.3 | |
| | | | | |
| Net (decrease) increase in cash and cash equivalents | $ | (82.1) | | | $ | 173.1 | | | $ | 181.6 | |
| Net (decrease) increase in restricted cash | (148.7) | | | 142.1 | | | 14.7 | |
| Net (decrease) increase in cash and cash equivalents, and restricted cash | $ | (230.8) | | | $ | 315.2 | | | $ | 196.3 | |
| | | | | |
| Cash and cash equivalents, beginning of period | $ | 430.9 | | | $ | 257.7 | | | $ | 76.1 | |
| Restricted cash, beginning of period | 156.7 | | | 14.7 | | | 0.0 | |
Cash and cash equivalents, and restricted cash beginning of the year | $ | 587.6 | | | $ | 272.4 | | | $ | 76.1 | |
| | | | | |
| Cash and cash equivalents, end of period | $ | 348.8 | | | $ | 430.9 | | | $ | 257.7 | |
| Restricted cash, end of period | 8.0 | | | 156.7 | | | 14.7 | |
Cash and cash equivalents, and restricted cash end of the period | $ | 356.8 | | | $ | 587.6 | | | $ | 272.4 | |
| | | | | |
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, restructuring and impairment, including goodwill, mark to market adjustments on financial instruments, mark to market adjustment on contingent shares, deferred finance charges and for changes in operating assets and liabilities.
The increase of $185.5 in net cash provided by operating activities for the year ended December 31, 2022, was primarily due to higher earnings excluding the non-cash goodwill impairment charge, as well as timing of working capital.
The increase of $60.3 in net cash provided by operating activities for the year ended December 31, 2021, was primarily due to higher results from operations in 2021, which was attributed to increased revenues and a reduction in costs as a percentage of revenues driven by the cost-saving and margin improvement programs designed to generate substantial incremental cash flow including the Operation Simplification and Optimization Program, the DRG Acquisition Integration Program, CPA Global Acquisition Integration and Optimization Program.
Cash Flows Provided by Investing Activities
Cash provided by investing activities are primarily proceeds from divestitures, while cash used in investing activities are primarily for acquisitions and capital expenditures.
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 $4,101.8 increase in cash provided by investing activities for the year ended December 31, 2022, was primarily due to the significant level of cash paid for acquisitions in 2021 further described below. The increase was also attributed to cash proceeds of $285.0 for the sale of the MarkMonitor Domain Management business on October 31, 2022.
The $1,055.7 increase in cash used in investing activities for the year ended December 31, 2021, was primarily due to cash paid for acquisitions, net of cash acquired for ProQuest in December 2021, Patient Connect in December 2021, Bioinfogate in August 2021 and the consideration related to the IncoPat transaction held in escrow that was paid in the fourth quarter of 2021, partially offset by the acquisitions of DRG in February 2020, CPA Global in October 2020, IncoPat in October 2020 and Hanlim in November 2020, as well as the acquisition of intangible assets due to key business intangible assets acquired from CustomersFirst Now in June 2020. The increase in cash used in investing activities was also attributed to an increase in capital expenditures primarily associated with product development from acquired businesses, as well as cash flows provided by the divestiture related to the sale of Techstreet in 2020 and MarkMonitor AntiFraud, Antipiracy, and Brand Protection Products in January 2020.
Our capital expenditures in 2022 consisted primarily of capitalized labor, consulting and other costs associated with product and content development. 2021 and 2020 consisted primarily of capitalized labor, consulting and other costs associated with product development.
Cash Flows Used in Financing Activities
During the year ended December 31, 2022, net cash used in financing activities was primarily driven by the principal payments on term loan, repayments of revolving credit facility and use of $175.0 for repurchases of the Company's ordinary shares. These activities for the year ended December 31, 2021 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 $1,392.6 from the issuance of our 5.25% Series A MCPS, and (iii) net proceeds of $728.0 from the ordinary shares that were issued and sold by the Company in June 2021.
During the year ended December 31, 2021, the increase in net cash provided by financing activities was primarily due to the: (i) increase in proceeds of $1,392.6 from the issuance of our 5.25% Series A MCPS in June 2021; (ii) increase in borrowings under the revolving credit facility; (iii) decrease in repayment of borrowings under the revolving credit facility; (iv) increase in restricted cash proceeds from the sale of treasury shares from the Employee Benefit Trust established for the CPA Equity Plan (v) increase in proceeds from the issuance of debt due to the private placement offering and subsequent exchange offers of $1,000.0 in aggregate principal amount of Old Senior Secured Notes due 2028 and $1,000.0 in aggregate principal amount of Old Senior Notes due 2029 in June 2021 compared to the $1,960.0 of borrowings under our term loan facility in February 2020 and October 2020; (vi) increase in proceeds from the issuance of stock options; (vii) decrease in payments related to tax withholdings for share-based compensation; (viii) decrease in contingent purchase price payments related to the TradeMark Vision contingent earn out in the first quarter of 2020; and (ix) decrease in payment of debt issuance costs compared to the prior period. The increase in cash provided by financing activities was offset by the: (i) decrease in proceeds from the exercise of the Company's outstanding public warrants in the first quarter of 2020; (ii) repayment due to the redemption on the remaining outstanding $78.8 of Old Secured Notes and $78.6 of Old Unsecured Notes in August 2021; (iii) use of proceeds to repurchase 6.6 million of the Company's ordinary shares for a total of $159.4 in 2021; (iv) decrease in proceeds from the issuance of ordinary shares driven by the Company's public offerings of 27.6 million ordinary shares at $20.25 per share in February 2020 and 50.4 million of our ordinary shares at a share price of $22.50 per share, of which 14.0 million were ordinary shares offered by Clarivate and 36.4 million were ordinary shares offered by selling shareholders in June 2020 compared to the 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 were sold by selling shareholders in June 2021; (v) increase in principal payments on the term loan; and (vi) cash payment of dividends associated with our MCPS in 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:
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)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net cash provided by operating activities | $ | 509.3 | | | $ | 323.8 | | | $ | 263.5 | |
| Capital expenditures | (202.9) | | | (118.5) | | | (107.7) | |
| Free cash flow | $ | 306.4 | | | $ | 205.2 | | | $ | 155.8 | |
Cash paid for CPA Global equity plan(1) | 156.7 | | | — | | | — | |
Cash paid for restructuring costs(2) | 41.9 | | | 80.3 | | | 26.0 | |
Cash paid for transaction related costs(3) | 13.4 | | | 78.2 | | | 95.8 | |
Cash paid for other costs(4) | 3.4 | | | 1.6 | | | 16.4 | |
| Cash paid for debt issuance costs | — | | | 57.8 | | | 7.7 | |
Cash paid for interest held in escrow(5) | — | | | 36.3 | | | — | |
| Adjusted free cash flow | $ | 521.8 | | | $ | 459.4 | | | $ | 301.7 | |
| | | | | |
(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 One Clarivate and CPA Global program were substantially complete as of December 31, 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. In 2020, this is related to costs incurred (1) from our separation from Thomson Reuters in 2016 due to the implementation of our standalone company infrastructure and related cost-savings initiatives, costs for which were largely wound down by December 31, 2020, (2) new transition services agreement, offset by the reverse transition services agreement from the sale of MarkMonitor assets, and (3) cash received for hedge accounting transactions. |
(5) Reflects the portion of cash paid on interest expense incurred on the principal related to the 2021 debt offering, that was held in escrow until the completion of the pending acquisition of ProQuest on December 1, 2021. Clarivate used the net proceeds to finance a portion of the purchase price and therefore, considered as part of the transaction costs associated with the pending acquisition. |
Adjusted free cash flow increased $62.4 for the year ended December 31, 2022, compared to the prior year period, due to increased cash provided by operating activities, offset by increased capital expenditures and other adjusting items.
The increase in adjusted free cash flow for the year ended December 31, 2021, compared to the prior year period, was primarily due to higher net cash provided by operating activities due to an increase in the source of cash for improved results from operations, partially offset by an increase in capital expenditures primarily driven by product development from acquired businesses.
Debt Profile
Senior Notes (2029) and Senior Secured Notes (2028)
In June 2021, we issued $1,000.0 in aggregate principal amount of senior secured notes due June 30, 2028 and $1,000.0 in aggregate principal amount of senior notes due June 30, 2029 bearing interest at a rate of 3.875% and 4.875% per annum, respectively (the "old" notes), payable semi-annually to holders of record on June 30 and December 30 of each year, commencing on December 30, 2021. Both series of old notes were issued by Clarivate Science Holdings Corporation (the "Issuer"), an indirect wholly-owned subsidiary of Clarivate.
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, we (i) exchanged all of the outstanding, validly tendered and not withdrawn 3.875% senior secured notes due 2028 for our 3.875% Senior Secured Notes due 2028, and (ii) exchanged all of the outstanding, validly tendered and not withdrawn 4.875% senior notes due 2029 for our 4.875% Senior Notes due 2029. The initial aggregate principal amount of our Senior Secured Notes due 2028 and Senior Notes due 2029 is equal to the aggregate principal amount of the old notes that were validly tendered and not validly withdrawn for exchange, and that were accepted by the Issuer. The offers to exchange are referred to herein as the “Exchange Offers.” Pursuant to the Exchange Offers, the aggregate principal amounts of the old notes set forth as follows were validly tendered and not validly withdrawn, and were accepted by the Issuer and subsequently cancelled: (i) $921.2 aggregate principal amount of old senior secured notes; and (ii) $921.4 aggregate principal amount of Old senior notes. Following such cancellation, (i) $78.8 aggregate principal amount of Old senior secured notes remained outstanding; and (ii) $78.6 aggregate principal amount of Old senior notes remained outstanding. The Issuer redeemed such remaining outstanding Old Notes at 100% of the principal amount thereof plus accrued and unpaid interest from June 24, 2021 to the redemption date in August 2021. In connection with the settlement of the Exchange Offers, the Issuer (i) issued $921.2 aggregate principal amount of its Senior Secured Notes due 2028; and (ii) issued $921.4 aggregate principal amount of its Senior Notes due 2029. The interest is payable semi-annually to holders of record on June 30 and December 30 of each year, commencing on December 30, 2021. The exchange was treated as a debt modification in accordance with Accounting Standards Codification 470, Debt ("ASC 470").
Concurrently with the settlement of the Exchange Offers, the Issuer deposited (or caused to be deposited) an amount in cash equal to the aggregate principal amount of its Senior Secured Notes and Senior Notes into segregated escrow accounts until the date that certain escrow release conditions (the “Escrow Release Conditions”) including the consummation of the ProQuest acquisition, were satisfied. On December 1, 2021, the Escrow Release Conditions were satisfied, and the escrow proceeds were released from the escrow accounts and used to fund a portion of the purchase price of the ProQuest acquisition and to pay related fees and expenses.
In connection with the closing of the ProQuest acquisition on December 1, 2021, both of these series of Notes were 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 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, and the Senior Notes due 2029 are the Issuer’s and such guarantors’ unsecured obligations. As of the date of this annual report, we believe we were in compliance with the indentures' covenants.
Senior Secured Notes (2026)
On October 31, 2019, we closed a private offering of $700.0 in aggregate principal amount of Senior Secured Notes due 2026 bearing interest at 4.50% per annum. These Notes 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 are guaranteed on a joint and several basis by certain of Clarivate’s subsidiaries. We used the net proceeds from the offering, together with proceeds from the Credit Facilities discussed below to, among other things, redeem in full our Senior Secured Notes due 2026, refinance all amounts terminating under the tax receivable agreement and under the prior credit facilities, fund in full the $200.0 payment pursuant to the agreement, and pay fees and expenses related to the foregoing.
The indenture governing the Senior Secured Notes due 2026 contains covenants which, among other things, limit the occurrence of additional indebtedness (including acquired indebtedness), issuance of certain preferred stock, the payment of dividends, making restricted payments and investments, the purchase or acquisition or retirement for value of any equity interests, the provision of loans or advances to restricted subsidiaries, the sale or lease or transfer of any properties to any restricted subsidiaries, the transfer or sale of assets, and the creation of certain liens. As of the date of this annual report, we believe we were in compliance with the indenture covenants.
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 2026.
Revolving Credit Facility
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 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 increased by $400.0 from $350.0 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 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).
During the fourth quarter of 2022, the Company paid the $175.0 outstanding balance on its Revolving Credit Facility that we had borrowed in November 2021 for general corporate purposes. As a result, the Company had no outstanding balance on its Revolving Credit Facility as of December 31, 2022.
Term Loan Facility (2026)
The Company has a Term Loan Facility of $2,860.0 due 2026, which was fully drawn at closing. During the fourth quarter of 2022, the Company made a $300.0 prepayment on its Term Loan Facility. Prior to this prepayment, the principal amount of the Term Loan Facility was 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 of the initial term loans which, as of December 31, 2022, was $2,497.4.
Borrowings under our Credit Facilities are subject to floating base interest rates, plus a margin. For our Term Loan Facility, the base rate is one-month LIBOR (subject to a floor of 0.00% for $1,094.0 and 1.00% for $1,403.4) at December 31, 2022, or Prime plus a margin of 2.25% per annum, as applicable depending on the borrowing. For our 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).
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 Agreement governing 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 December 31, 2022, our consolidated coverage ratio was 4.6 to 1.00 and our consolidated leverage ratio was 4.1 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 Senior Secured Notes due 2026 and 2028 and Senior Notes 2029), 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.
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)
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 20 - Commitments and Contingencies in Item 8. 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 these litigation matters. See Note 20 - Commitments and Contingencies in Item 8. Financial Statements and Supplementary Data, for additional information.
We estimate capital expenditures in 2023 associated with product and content development to be approximately $240. As of December 31, 2022, we had purchase obligations of approximately $637 primarily for cloud computing services and software licenses, pursuant to agreements to purchase goods and services that are enforceable, legally binding, and specify significant terms, including fixed or minimum quantities to be purchased, fixed minimum or variable pricing provisions, and the approximate timing of the transactions. Any amounts for which we are liable are reflected in our Consolidated Balance Sheets as Accounts payable or Accrued expenses and other current liabilities and $278.7 of this amount is expected to be paid within the next 12 months. For additional information related to contractual obligations, such as debt, leases, and commitments and contingencies, Refer to Note 6 - Leases, Note 12 - Debt and Note 20 - Commitments and Contingencies in Item 8. Financial Statements and Supplementary Data.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Clarivate Plc
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Clarivate Plc and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive income (loss), of changes in equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for credit losses in 2020.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appear under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessments for Certain Reporting Units
As described in Notes 3, 8 and 10 to the consolidated financial statements, the Company’s consolidated goodwill balance was $2,876.5 million as of December 31, 2022. Management evaluates its goodwill for impairment at the reporting unit level, defined as an operating segment or one level below an operating segment, annually as of October 1 or more frequently if impairment indicators arise. A quantitative impairment assessment was performed as of September 30, 2022 over the Company’s reporting units due to possible impairment indicators, and this coincided with the Company’s change in organizational structure. This included quantitative assessments over the ProQuest reporting unit post-realignment and the former IP Management and Patent reporting units under the legacy structure. In determining the fair value of a reporting unit, management estimates the fair value using a discounted cash flow model under the income approach. The discounted cash flow model determines the fair value of a reporting unit based on the present value of estimated future cash flows, which include significant judgments related to projected revenue growth rates, operating margins, tax rates, terminal values and discount rates, among others. Based on the quantitative analysis performed in the third quarter of 2022, the Company recorded a goodwill impairment charge of $4,407.9 as follows: (i) $1,745.8 related to the ProQuest reporting unit within the A&G segment; (ii) $2,569.1 related to the former IP Management reporting unit within the IP segment; and (iii) $93.0 related to the former Patent reporting unit within the IP segment.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments for the ProQuest and former IP Management and Patent reporting units is a critical audit matter are (i) the significant judgment by management when developing the fair value estimates of the reporting units; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to projected revenue growth rates, operating margins, terminal values, and discount rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the determination of the reporting units, valuation of the ProQuest and former IP Management and Patent reporting units, and controls over the development of significant assumptions related to projected revenue growth rates, operating margins, terminal values and discount rates. These procedures also included, among others (i) testing management’s process for developing the fair value estimates of the reporting units; (ii) evaluating the appropriateness of the discounted cash flow models; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv) evaluating the reasonableness of management’s significant assumptions related to projected revenue growth rates, operating margins, terminal values and discount rates. Evaluating management’s significant assumptions related to projected revenue growth rates, operating margins, and terminal values involved evaluating whether the assumptions used were reasonable considering (i) the consistency of the assumptions with external market and industry data; (ii) the past performance of the reporting units, and (iii) whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the discounted cash flow models and evaluating the reasonableness of management’s significant assumption related to the discount rates.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 1, 2023
We have served as the Company’s auditor since 2016.
CLARIVATE PLC
Consolidated Balance Sheets
(In millions, except share and per share data)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 348.8 | | | $ | 430.9 | |
| Restricted cash | 8.0 | | | 156.7 | |
| Accounts receivable, net | 872.1 | | | 906.4 | |
| Prepaid expenses | 89.4 | | | 76.6 | |
| Other current assets | 76.9 | | | 66.6 | |
| | | |
| Total current assets | 1,395.2 | | | 1,637.2 | |
| Property and equipment, net | 54.5 | | | 83.8 | |
| Other intangible assets, net | 9,437.7 | | | 10,392.4 | |
| Goodwill | 2,876.5 | | | 7,904.9 | |
| Other non-current assets | 97.9 | | | 50.8 | |
| Deferred income taxes | 24.2 | | | 27.9 | |
| Operating lease right-of-use assets | 58.9 | | | 86.0 | |
| Total Assets | $ | 13,944.9 | | | $ | 20,183.0 | |
| | | |
| Liabilities and Shareholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 101.4 | | | $ | 129.2 | |
| Accrued compensation | 132.1 | | | 150.6 | |
| Accrued expenses and other current liabilities | 352.1 | | | 529.0 | |
| Current portion of deferred revenues | 947.5 | | | 1,030.4 | |
| Current portion of operating lease liability | 25.7 | | | 32.2 | |
| Current portion of long-term debt | 1.0 | | | 30.6 | |
| | | |
| Total current liabilities | 1,559.8 | | | 1,902.0 | |
| Long-term debt | 5,005.0 | | | 5,456.3 | |
| Warrant liabilities | 21.0 | | | 227.8 | |
| Non-current portion of deferred revenues | 38.5 | | | 54.2 | |
| Other non-current liabilities | 119.1 | | | 142.7 | |
| Deferred income taxes | 316.1 | | | 380.1 | |
| Operating lease liabilities | 72.9 | | | 94.0 | |
| Total liabilities | 7,132.4 | | | 8,257.1 | |
Commitments and contingencies (Note 20) | | | |
| | | |
| 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 December 31, 2022 and December 31, 2021 | 1,392.6 | | | 1,392.6 | |
Ordinary Shares, no par value; unlimited shares authorized at December 31, 2022 and December 31, 2021; 674,408,668 and 683,139,210 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively | 11,744.7 | | | 11,827.9 | |
Treasury shares, at cost; 0 and 547,136 shares as of December 31, 2022 and December 31, 2021, respectively | — | | | (16.9) | |
| Accumulated other comprehensive (loss) income | (665.9) | | | 326.7 | |
| Accumulated deficit | (5,658.9) | | | (1,604.4) | |
| Total shareholders’ equity | 6,812.5 | | | 11,925.9 | |
| Total Liabilities and Shareholders’ Equity | $ | 13,944.9 | | | $ | 20,183.0 | |
The accompanying Notes are an integral part of these Consolidated Financial Statements.
CLARIVATE PLC
Consolidated Statements of Operations
(In millions, except per share data)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Revenues, net | $ | 2,659.8 | | | $ | 1,876.9 | | | $ | 1,254.1 | |
| Operating expenses: | | | | | |
| Cost of revenues | 954.0 | | | 626.1 | | | 438.8 | |
| Selling, general and administrative costs | 729.9 | | | 643.0 | | | 544.7 | |
| Depreciation and amortization | 710.5 | | | 537.8 | | | 303.2 | |
| Restructuring and impairment | 66.7 | | | 129.5 | | | 56.1 | |
| Goodwill impairment | 4,449.1 | | | — | | | — | |
| Other operating (income) expense, net | (324.8) | | | 27.5 | | | (52.4) | |
| Total operating expenses | 6,585.4 | | | 1,963.9 | | | 1,290.4 | |
| Income (loss) from operations | (3,925.6) | | | (87.0) | | | (36.3) | |
| Mark to market (gain) loss on financial instruments | (206.8) | | | (81.3) | | | 205.1 | |
| Interest expense and amortization of debt discount, net | 270.3 | | | 252.5 | | | 111.9 | |
| Income (loss) before income taxes | (3,989.1) | | | (258.2) | | | (353.3) | |
| (Benefit) provision for income taxes | (28.9) | | | 12.3 | | | (2.7) | |
| Net income (loss) | (3,960.2) | | | (270.5) | | | (350.6) | |
| Dividends on preferred shares | 75.4 | | | 41.5 | | | — | |
| Net income (loss) attributable to ordinary shares | $ | (4,035.6) | | | $ | (312.0) | | | $ | (350.6) | |
| | | | | |
| Per share: | | | | | |
| Basic | $ | (5.97) | | | $ | (0.49) | | | $ | (0.82) | |
| Diluted | $ | (6.24) | | | $ | (0.61) | | | $ | (0.82) | |
| | | | | |
| Weighted average shares used to compute earnings per share: | | | | | |
| Basic | 676.1 | | | 631.0 | | | 427.0 | |
| Diluted | 678.6 | | | 640.8 | | | 427.0 | |
The accompanying Notes are an integral part of these Consolidated Financial Statements.
CLARIVATE PLC
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net loss | $ | (3,960.2) | | | $ | (270.5) | | | $ | (350.6) | |
| Other comprehensive income (loss), net of tax: | | | | | |
Interest rate swaps, net of tax of $11.7, $1.6 and $0 | 37.0 | | | 4.8 | | | (1.0) | |
Defined benefit pension plans, net of tax (benefit) provision of $0, $0 and $(0.1) | 2.9 | | | (0.6) | | | (0.7) | |
| Foreign currency translation adjustment | (1,032.5) | | | (169.9) | | | 499.0 | |
| Total other comprehensive (loss) income, net of tax | (992.6) | | | (165.7) | | | 497.3 | |
| Comprehensive (loss) income | $ | (4,952.8) | | | $ | (436.2) | | | $ | 146.7 | |
The accompanying Notes are an integral part of these Consolidated Financial Statements.
CLARIVATE PLC
Consolidated Statements of Changes in Equity
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2019 | 306.9 | | | $ | 2,144.4 | | | — | | | $ | — | | | — | | | $ | — | | | $ | (4.9) | | | $ | (890.9) | | | $ | 1,248.6 | |
| Adjustment to opening Accumulated deficit related to adoption of ASC Topic 326 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (9.3) | | | (9.3) | |
| Exercise of public warrants | 28.9 | | | 277.5 | | | — | | | — | | | — | | | — | | | — | | | — | | | 277.5 | |
| Exercise of Private Placement Warrants | 0.3 | | | 4.1 | | | — | | | — | | | — | | | — | | | — | | | — | | | 4.1 | |
| Exercise of stock options | 12.0 | | | 2.1 | | | — | | | — | | | — | | | — | | | — | | | — | | | 2.1 | |
| Vesting of restricted stock units | 0.3 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares returned to the Company for net share settlements | (7.3) | | | (33.1) | | | — | | | — | | | — | | | — | | | — | | | — | | | (33.1) | |
| Issuance of ordinary shares, net | 265.2 | | | 7,558.8 | | | — | | | — | | | — | | | — | | | — | | | — | | | 7,558.8 | |
| Share-based award activity | — | | | 35.4 | | | — | | | — | | | — | | | — | | | — | | | — | | | 35.4 | |
| Treasury shares | — | | | — | | | — | | | — | | | 6.3 | | | (196.0) | | | | | | | (196.0) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (350.6) | | | (350.6) | |
| Other Comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 497.3 | | | — | | | 497.3 | |
| Balance at December 31, 2020 | 606.3 | | $ | 9,989.2 | | | — | | $ | — | | | 6.3 | | $ | (196.0) | | | $ | 492.4 | | | $ | (1,250.8) | | | $ | 9,034.8 | |
| | | | | | | | | | | | | | | | | |
| 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 | 3.1 | | 18.6 | | | — | | — | | | — | | — | | | — | | | — | | | 18.6 | |
| Vesting of restricted stock units | 1.0 | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | |
| Shares returned to the Company for net share settlements | (1.7) | | (24.9) | | | — | | — | | | — | | — | | | — | | | — | | | (24.9) | |
| Issuance of ordinary shares, net | 257.3 | | 6,980.6 | | | — | | — | | | — | | — | | | — | | | — | | | 6,980.6 | |
| Share-based award activity | — | | 56.2 | | | — | | — | | | — | | — | | | — | | | — | | | 56.2 | |
| Repurchases of ordinary shares | — | | — | | | — | | — | | | (183.8) | | (5,211.5) | | | — | | | — | | | (5,211.5) | |
| Retirement of treasury shares | (183.8) | | (5,211.5) | | | — | | — | | | 183.8 | | 5,211.5 | | | — | | | — | | | — | |
CLARIVATE PLC
Consolidated Statements of Changes in Equity
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ordinary Shares | | Preferred Shares | | Treasury Shares | | Accumulated
Other
Comprehensive
Income (Loss) | | Accumulated
Deficit | | Total
Shareholders’
Equity |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| Issuance of preferred shares, net | — | | — | | | 14.4 | | 1,392.6 | | | — | | — | | | — | | | — | | | 1,392.6 | |
| Issuance of treasury shares, net | — | | — | | | — | | — | | | (5.8) | | 179.1 | | | — | | | (41.6) | | | 137.5 | |
| Dividends to preferred stockholders | 0.7 | | 16.1 | | | — | | — | | | — | | — | | | — | | | (41.5) | | | (25.4) | |
| Net loss | — | | — | | | — | | — | | | — | | — | | | — | | | (270.5) | | | (270.5) | |
| Other comprehensive loss | — | | — | | | — | | — | | | — | | — | | | (165.7) | | | — | | | (165.7) | |
| 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 |
| | | | | | | | | | | | | | | | | |
| 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 | 0.4 | | | 0.9 | | | — | | | — | | | — | | | — | | | — | | | — | | | 0.9 | |
| Vesting of restricted stock units | 2.9 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares returned to the Company for net share settlements | (1.3) | | | (14.9) | | | — | | | — | | | — | | | — | | | — | | | — | | | (14.9) | |
| Share-based award activity | — | | | 98.1 | | | — | | | — | | | — | | | — | | | — | | | — | | | 98.1 | |
| Repurchases of ordinary shares | (10.7) | | | — | | | — | | | — | | | 10.7 | | | (175.0) | | | — | | | — | | | (175.0) | |
| Retirement of treasury shares | — | | | (167.3) | | | — | | | — | | | (10.7) | | | 175.0 | | | — | | | (7.7) | | | — | |
| Sale of treasury shares | 0.5 | | | — | | | — | | | — | | | (0.5) | | | 16.9 | | | — | | | (11.2) | | | 5.7 | |
| Dividends to preferred shareholders | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (75.4) | | | (75.4) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,960.2) | | | (3,960.2) | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (992.6) | | | — | | | (992.6) | |
| Balance at December 31, 2022 | 674.4 | | | $ | 11,744.7 | | | 14.4 | | | $ | 1,392.6 | | | — | | | $ | — | | | $ | (665.9) | | | $ | (5,658.9) | | | $ | 6,812.5 | |
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
CLARIVATE PLC
Consolidated Statements of Cash Flows
(In millions)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash Flows From Operating Activities | | | | | |
| Net loss | $ | (3,960.2) | | | $ | (270.5) | | | $ | (350.6) | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 710.5 | | | 537.8 | | | 303.2 | |
| Deferred income taxes | (54.3) | | | (13.3) | | | (45.5) | |
| Share-based compensation | 93.9 | | | 33.3 | | | 34.2 | |
| Restructuring and impairment, including Goodwill | 4,478.5 | | | 48.2 | | | 5.2 | |
| Loss (gain) on foreign currency forward contracts | 1.2 | | | 6.9 | | | (2.9) | |
| Mark to market (gain) loss on contingent shares | — | | | (25.1) | | | 25.2 | |
| Mark to market (gain) loss on financial instruments | (206.8) | | | (81.3) | | | 205.1 | |
Gain on sale from divestitures | (278.5) | | | — | | | (29.2) | |
| Amortization of debt issuance costs | 16.4 | | | 13.2 | | | 5.8 | |
| Other operating activities | (19.5) | | | 6.6 | | | 5.9 | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | (28.3) | | | (64.1) | | | 29.9 | |
| Prepaid expenses | (17.1) | | | 2.7 | | | 5.7 | |
| Other assets | (45.4) | | | 27.7 | | | 45.7 | |
| Accounts payable | (24.0) | | | 31.2 | | | (2.9) | |
| Accrued expenses and other current liabilities | (114.4) | | | 85.9 | | | (54.8) | |
| Deferred revenues | (9.3) | | | 0.2 | | | 80.7 | |
| Operating lease right of use assets | 14.9 | | | 3.4 | | | 5.3 | |
| Operating lease liabilities | (24.5) | | | (25.8) | | | (6.1) | |
| Other liabilities | (23.8) | | | 6.8 | | | 3.6 | |
| Net cash provided by operating activities | $ | 509.3 | | | $ | 323.8 | | | $ | 263.5 | |
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| Cash Flows From Investing Activities | | | | | |
| Capital expenditures | (202.9) | | | (118.5) | | | (107.7) | |
| Payments for acquisitions and cost method investments, net of cash acquired | (24.8) | | | (3,930.3) | | | (2,922.5) | |
| Proceeds from divestitures, net of cash and restricted cash | 285.0 | | | 4.3 | | | 41.4 | |
| Net cash provided by (used in) investing activities | $ | 57.3 | | | $ | (4,044.5) | | | $ | (2,988.8) | |
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| Cash Flows From Financing Activities | | | | | |
| Proceeds from issuance of debt | — | | | 2,000.0 | | | 1,960.0 | |
| Proceeds from revolving credit facility | — | | | 175.0 | | | 60.0 | |
| Redemption of Notes not exchanged | — | | | (157.4) | | | — | |
| Principal payments on term loan | (321.5) | | | (28.6) | | | (12.6) | |
| Repayments of revolving credit facility | (175.0) | | | — | | | (125.0) | |
| Payment of debt issuance costs and discounts | (2.1) | | | (32.5) | | | (38.2) | |
| Contingent purchase price payment | — | | | — | | | (7.8) | |
| Proceeds from issuance of preferred shares | — | | | 1,392.6 | | | — | |
| Proceeds from issuance of ordinary shares | — | | | 728.0 | | | 843.7 | |
| Proceeds from issuance of treasury shares | 5.7 | | | 139.9 | | | — | |
| Repurchases of ordinary shares | (175.0) | | | (159.4) | | | — | |
| Cash dividends on preferred shares | (75.4) | | | (18.9) | | | — | |
| Proceeds from warrant exercises | — | | | — | | | 277.5 | |
| Proceeds from stock options exercised | 0.9 | | | 18.6 | | | 2.1 | |
| Payments related to finance lease | (1.9) | | | (0.2) | | | — | |
| Payments related to tax withholding for stock-based compensation | (14.9) | | | (24.9) | | | (33.1) | |
CLARIVATE PLC
Consolidated Statements of Cash Flows
(In millions)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net cash (used in) provided by financing activities | $ | (759.2) | | | $ | 4,032.2 | | | $ | 2,926.6 | |
| Effects of exchange rates | (38.2) | | | 3.7 | | | (5.0) | |
| | | | | |
| Net (decrease) increase in cash and cash equivalents | (82.1) | | | 173.1 | | | 181.6 | |
| Net (decrease) increase in restricted cash | (148.7) | | | 142.1 | | | 14.7 | |
| Net (decrease) increase in cash and cash equivalents, and restricted cash | $ | (230.8) | | | $ | 315.2 | | | $ | 196.3 | |
| | | | | |
| Beginning of period: | | | | | |
| Cash and cash equivalents | 430.9 | | | 257.7 | | | 76.1 | |
| Restricted cash | 156.7 | | | 14.7 | | | — | |
| Total cash and cash equivalents, and restricted cash, beginning of period | $ | 587.6 | | | $ | 272.4 | | | $ | 76.1 | |
| | | | | |
| End of period: | | | | | |
| Cash and cash equivalents | 348.8 | | | 430.9 | | | 257.7 | |
| Restricted cash | 8.0 | | | 156.7 | | | 14.7 | |
| Total cash and cash equivalents, and restricted cash, end of period | $ | 356.8 | | | $ | 587.6 | | | $ | 272.4 | |
| | | | | |
| Supplemental Cash Flow Information: | | | | | |
| Cash paid for interest | 251.5 | | | 182.4 | | | 97.5 | |
| Cash paid for income tax | 63.7 | | | 33.9 | | | 27.6 | |
| Capital expenditures included in accounts payable | 11.7 | | | 8.7 | | | 7.8 | |
| | | | | |
| Non-Cash Financing Activities: | | | | | |
| Shares issued and returned for funding of CPA Global Equity Plan | — | | | — | | | (196.0) | |
| Shares issued to Capri Acquisition Topco Limited | — | | | 5,052.2 | | | — | |
| | | | | |
| Retirement of treasury shares | (175.0) | | | (5,211.5) | | | — | |
| 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 | | | — | |
Shares issued as dividends on our 5.25% Series A Mandatory Convertible Preferred Shares | — | | | 16.1 | | | — | |
| | | | | |
Dividends accrued on our 5.25% Series A Mandatory Convertible Preferred Shares | 6.5 | | | 6.5 | | | — | |
| | | | | |
| | | | | |
| Total Non-Cash Financing Activities | $ | (168.5) | | | $ | (31.2) | | | $ | (196.0) | |
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(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 information, analytics, professional services and workflow solutions that enable users across government and academic institutions, life science and healthcare companies, corporations and law firms to power the entire innovation lifecycle, from cultivating curiosity to protecting the world's critical intellectual property assets. During the third quarter of 2022, the Company realigned its organization's structure and the composition of its reportable segments, which also resulted in a change to its goodwill reporting units. Clarivate has three reportable segments: Academia & Government ("A&G"), Life Sciences & Healthcare ("LS&H"), and Intellectual Property ("IP"). Our segment structure is organized based on the products we offer and the markets they serve. Segment results for all periods presented have been recast to conform to the current presentation. See Note 19 - Segment Information, for additional information on the Company's reportable segments.
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 were sold by selling shareholders (which included 5.8 million ordinary shares that the underwriters purchased pursuant to their option to purchase additional shares). The ordinary shares sold by selling shareholders included 10.6 million ordinary shares from Onex, 4.1 million ordinary shares from Baring and 0.7 million ordinary shares from Directors, Executive Officers and other shareholders. The Company received approximately $728.1 in net proceeds from the sale of ordinary shares offered by the Company, after deducting underwriting discounts and estimated offering expenses payable. We used the net proceeds to fund a portion of the purchase for the ProQuest acquisition, which was completed on December 1, 2021. The Company did not receive any proceeds from the secondary ordinary shares sold by the selling shareholders.
In June 2021, 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 ("MCPS") which included 1.9 million of our mandatory convertible preferred shares that the underwriters purchased pursuant to their option to purchase additional shares. The Company received approximately $1,392.7 in net proceeds from the mandatory convertible preferred share offering, after deducting underwriting discounts and estimated offering expenses payable. We used the net proceeds to fund a portion of the purchase for the ProQuest acquisition, which was completed on December 1, 2021.
In September 2021, certain selling shareholders completed an underwritten public offering of 25.0 million of our ordinary shares at a share price of $25.25, The ordinary shares sold by selling shareholders included 18.0 million ordinary shares from Onex and 7.0 million ordinary shares from Baring. The Company did not receive any proceeds from the sale of ordinary shares by the selling shareholders. After giving effect to these offerings, Onex and Baring owned approximately 6.7% and 2.6%, respectively, of the Company's ordinary shares.
Risks and Uncertainties
COVID-19 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 modifications and precautionary measures to our daily operations. The Company cannot reasonably estimate the full impact on our business, financial condition and results of operations from any new COVID-19 strains that may emerge or any future pandemic, 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 in 2022 was slightly impacted by our
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
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 Consolidated Financial Statements for the years ended December 31, 2022, 2021 and 2020 were prepared in conformity with U.S. GAAP. The 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 did not hold any shares as treasury shares as of December 31, 2022. As of December 31, 2021, the EBT held Clarivate shares that were recorded as treasury shares as they were legally issued but not outstanding. Refer to Note 14 - Shareholders’ Equity for additional information. The EBT holds cash that is classified as restricted cash on the Consolidated Balance Sheet as on December 31, 2022 and December 31, 2021.
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. Additionally, certain reclassifications and revisions of prior period data have been made to conform to the current year's presentation.
Note 3: Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts and operations of the Company, and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates. The most important of these relate to share-based compensation expenses, revenue recognition, the allowance for doubtful accounts, internally developed computer software, valuation of goodwill and other identifiable intangible assets, determination of the projected benefit obligations of the defined benefit plans, income taxes, fair value of stock options, derivatives and financial instruments, contingent earn-out, and the tax related valuation allowances. On an ongoing basis, management evaluates these estimates, assumptions and judgments, in reference to historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
Cash and Cash Equivalents
Cash and cash equivalents is comprised of cash on hand and short-term deposits with an original maturity at the date of purchase of three months or less.
Restricted Cash
The Company held $8.0 and $156.7 of restricted cash as of December 31, 2022 and 2021, respectively. Restricted cash as of December 31, 2021 primarily included the cash received from the sale of treasury shares from the Employee Benefit Trust established for the CPA Equity Plan in December 2021, which was subsequently paid in the first quarter of 2022.
Accounts Receivable
Through the adoption of ASU 2016-13 and the related standards, the Company revised its policy regarding the recognition of expected credit losses and for its accounts receivable portfolio.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
Accounts receivable are recorded at the amount invoiced to customers and do not bear interest. The Company estimates credit losses for trade receivables by aggregating similar customer types, because they tend to share similar credit risk characteristics, taking into consideration the number of days the receivable is past due. Provision rates for the allowance for doubtful accounts are based upon the historical loss method by evaluating factors such as the length of time receivables are past due and historical collection experience. Additionally, provision rates are based upon current and future economic and competitive environment factors that could impact the collectability of the receivable. Trade and other receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include past due status greater than 360 days or bankruptcy of the debtor.
Concentration of Credit Risk
Accounts receivable are the primary financial instrument that potentially subjects the Company to significant concentrations of credit risk. Accounts receivable represents arrangements in which services were transferred to a customer before the customer pays consideration or before payment is due. Contracts with payment in arrears are recognized as receivables after the Company considers whether a significant financing component exists. The Company does not require collateral or other securities to support customer receivables. Management performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit extended when deemed appropriate. Credit losses have been immaterial and reasonable within management’s expectations. Our ten largest customers represented only 7% of revenues for the year ended December 31, 2022.
The Company maintains its cash and cash equivalent balances with high-quality financial institutions and consequently, the Company believes that such funds are subject to minimal credit risk.
Property and Equipment, net
Generally, property and equipment are recorded at cost and are depreciated over the respective estimated useful lives. Depreciation is computed using the straight‑line method. Repair and maintenance costs are expensed as incurred. The cost and related accumulated depreciation of sold or retired assets are removed from the accounts and any gain or loss is included within Loss from operations in the Consolidated Statements of Operations.
The estimated useful lives are as follows:
| | | | | | | | |
| | |
| Computer hardware | | 3 years |
| Furniture, fixtures and equipment | | 5-7 years |
| Leasehold improvements | | Lesser of lease term or estimated useful life |
Internally Developed Software and Content
Internally Developed Software — Development costs related to internally generated software are capitalized once a project has progressed beyond a conceptual, preliminary stage to that of the application development stage. Costs of significant improvements or enhancements on existing software for internal use, both internally developed and purchased, are also capitalized. Costs related to the preliminary project stage, data conversion and post-implementation/operation stage of an internal use software development project are expensed as incurred. Capitalized costs are amortized over five years, which is the estimated useful life of the related software. Purchased software is amortized over three years, which is the estimated useful life of the related software.
Content — Costs related to the acquisition of source materials, content selection, document processing, editing, abstracting, and indexing are capitalized. The Company also capitalizes internal and external costs associated with the development of product-related software that adds functionality and improves the customer’s ability to search the Company’s content. The Company does not capitalize any costs associated with research and development or marketing. These capitalized costs are amortized over a two to five year useful life.
Both internally developed software and content are evaluated for impairment whenever circumstances indicate the carrying amount may not be recoverable. The test for impairment compares the carrying amounts with the sum of undiscounted cash flows related to the asset. If the carrying value is greater than the undiscounted cash flows of the asset, the asset is written down to its estimated fair value.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
Business Combinations
We include the results of operations of the businesses that we acquire as of the acquisition date. We allocate the purchase price of the acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses, other than those associated with the issuance of debt or equity securities, are recognized separately from the business combination and are expensed as incurred.
Identifiable Intangible Assets, net
Upon acquisition, identifiable intangible assets are recorded at fair value and are carried at cost less accumulated amortization or accumulated impairment for indefinite-lived intangible assets. Useful lives are reviewed at the end of each reporting period and adjusted if appropriate. Fully amortized assets are retained at cost and accumulated amortization accounts until such assets are derecognized.
Customer Relationships — Customer relationships primarily consist of customer contracts and customer relationships arising from such contracts.
Databases and Content — Databases and content primarily consists of repositories of the Company’s specific financial and customer information and intellectual content.
Developed Technology — Developed technology primarily consists of proprietary technology used for healthcare data, analytics, and insights products and services.
Backlog — Backlog primarily consists of orders and contracts received for which performance has not occurred prior to being acquired by the Company.
Non-compete agreements — Non-compete agreements primarily consist of agreements with employees of acquired entities to ensure that if they cease employment with the Company, they will not involve themselves with competition of the business for a given duration.
Trade Names — Trade names consist of purchased brand names that the Company continues to use.
Where applicable, intangible assets are amortized on a straight-line basis over their estimated useful lives as follows:
| | | | | |
| Customer relationships | 2 – 23 years |
| Databases and content | 2 – 20 years |
| Developed technology | 3 – 14 years |
| Computer software | 5 years |
| Finite-lived trade names | 2 - 18 years |
| Non-compete agreements | 5 years |
| Backlog | 4 years |
| Indefinite-lived trade names | Indefinite |
Impairment of Long-Lived Assets
Residual values and useful lives are reviewed at the end of each reporting period and adjusted if appropriate. The Company evaluates its long-lived assets, including computer hardware and other property, computer software, and finite-lived intangible assets for impairment whenever circumstances indicate that their carrying amounts may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over its remaining life. An asset is assessed for impairment at the lowest level that the asset generates cash inflows that are largely independent of cash inflows from other assets. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. As a result of restructuring initiatives, the Company recorded non-cash impairment for leases during each of the years ended December 31, 2020, 2021, and 2022. See Note 22 - Restructuring and Impairment for further information.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill and indefinite-lived intangible assets are not amortized, but instead are tested for impairment annually as of the first day of the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Goodwill impairment testing is performed at the reporting unit level which is defined as the operating segment or one level below the operating segment. As part of our annual goodwill impairment testing, the Company has the option to first perform qualitative testing to determine whether it is more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying value, which is based on an evaluation of the events and circumstances that occurred during the year. If we bypass the qualitative assessment, or if the qualitative assessment indicates that quantitative analysis should be performed, we evaluate goodwill for impairment by comparing the estimated fair value of a reporting unit with its carrying amount, including goodwill. The Company estimates the fair value of a reporting unit using the income approach. Under the income approach, a discounted cash flow ("DCF") model is used to determine fair value based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The Company uses its internal forecasts to estimate future cash flows and includes an estimate of long-term future growth rates. Significant judgments inherent in these analyses include, but are not limited to, projected revenue growth rates and operating margins, tax rates, terminal values, and discount rates. The inputs utilized in the analysis are classified as Level 3 inputs within the fair value hierarchy. Changes in these estimates and assumptions could materially affect the determination of estimated fair value. Any such impairment charge would be recognized in full in the reporting period in which it has been identified, which could have a material adverse effect on our financial condition or results of operations.
The Company has indefinite-lived intangible assets related to trade names. As part of our annual indefinite-lived intangible asset impairment testing, the Company has the option to first perform qualitative testing by evaluating whether any events and circumstances occurred that provide evidence that it is more likely than not that the indefinite-lived assets are impaired. If, based on our evaluation of the events and circumstances that occurred during the year we do not believe that it is more likely than not that the indefinite-lived assets are impaired, no quantitative impairment test is required. If the Company chooses not to complete a qualitative assessment, or if the initial assessment indicates that it is more likely than not that the carrying value exceeds the estimated fair value, additional quantitative testing is performed. The quantitative test for impairment is performed using the relief-from-royalty method under the income approach to determine the fair value based on the present value of estimated future cash flows that the indefinite-lived intangible asset can be expected to generate in the future. Significant judgments inherent in the analysis include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rates and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of estimated fair value and could result in an impairment charge. Any such impairment charge would be recognized in full in the reporting period in which it has been identified, which could have a material adverse effect on our financial condition or results of operations.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use (“ROU”) assets, Current portion of operating lease liability, and Operating lease liabilities on our Consolidated Balance Sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are accounted as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
Debt
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
Debt is recognized initially at par value, net of any applicable discounts or financing costs. Debt is subsequently stated at amortized cost with any difference between the proceeds (net of transactions costs) and the redemption value recognized in the Consolidated Statements of Operations over the term of the debt using the effective interest method. Interest on indebtedness is expensed as incurred. Debt is classified as a current liability when due within 12 months after the end of the reporting period.
Warrant Liabilities
We used a third-party specialist to fair value the awards using the Monte Carlo simulation approach. The assumptions included in the model include, but are not limited to, risk-free interest rate, expected volatility of stock prices for the Company and its peer group, and dividend yield. A discount for the lack of marketability ("DLOM") is applied to shares that are subject to remaining post vesting lock up restrictions.
Foreign Exchange Forward Contracts
The Company periodically enters into foreign currency contracts that are not designated as hedges as defined under ASC 815. The purpose of these derivative instruments is to help manage the Company’s exposure to foreign exchange rate risks. These contracts are initially recognized at fair value at the date the contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. These contracts generally do not exceed 180 days in duration, and these instruments are carried as assets when the fair value is positive (Other current assets on the Consolidated Balance Sheets), and as liabilities when the fair value is negative (Other current liabilities on the Consolidated Balance Sheets). The resulting gain or loss is recognized in profit or loss (other operating income (expense), net) immediately.
Interest Rate Swaps
The Company has interest rate swaps with counterparties to reduce its exposure to variability in cash flows relating to interest payments on a portion of its outstanding first lien senior secured term loan facility (“Term Loan Facility”). The Company applies hedge accounting and has designated these instruments as cash flow hedges of the risk associated with floating interest rates on designated future quarterly interest payments. Management assumes the hedge is highly effective and therefore changes in the value of the hedging instrument are recorded in Accumulated other comprehensive income (loss) in the Consolidated Balance Sheets. Any ineffectiveness is recorded in earnings. Amounts in Accumulated other comprehensive income (loss) are reclassified into earnings in the same period during which the hedged transactions affect earnings, or upon termination of the hedging relationship.
Fair Value of Financial Instruments
In determining fair value, the use of various valuation methodologies, including market, income and cost approaches is permissible. The Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. The accounting guidance for fair value measurements establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value based on the reliability of inputs. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s interest rate swap derivative instruments are classified as Level 2. Earn-out liabilities and defined benefit plan assets are classified as Level 3.
The Company assesses the fair value of the foreign exchange forward contracts, considering current and anticipated movements in future interest rates and the relevant currency spot and future rates available in the market. The Company also receives and reviews third party valuation reports to corroborate our determination of fair value. Accordingly, these instruments are classified as Level 2 inputs.
Contingent Considerations
The Company records liabilities for the estimated cost of such contingencies when expenditures are probable and reasonably estimable. A significant amount of judgment is required to estimate and quantify the potential liability in these matters. We engage outside experts as deemed necessary or appropriate to assist in the calculation of the liability, however management is responsible for evaluating the estimate. As information becomes available regarding changes in circumstances for ongoing contingent considerations, our potential liability is reassessed and adjusted as necessary. See Note 20 - Commitments and Contingencies for further information on contingencies.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
Treasury Shares
Shares repurchased by the company from the open market or shares held in the EBT as previously discussed are classified within equity as Treasury shares and are recorded at the fair value on the date of acquisition. When Clarivate reissues treasury shares at an amount greater (less) than it paid to repurchase the shares, it realizes a gain (loss) on the reissuance of the shares. This gain or loss is recognized within shareholders’ equity. Management has elected to utilize the FIFO method for determining the gains and losses from sales of Treasury shares.
Taxation
The Company recognizes income taxes under the asset and liability method. Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated current and future taxes to be paid. Significant judgments and estimates are required in determining the consolidated income tax expense for financial statement purposes. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In assessing the realizability of deferred tax assets, we consider projected future taxable income by tax jurisdiction and prudent and feasible tax planning strategies. The Company records a valuation allowance to reduce deferred tax assets to the net realizable value that is more likely than not to be realized.
Changes in tax laws and tax rates could also affect recorded deferred tax assets and liabilities in the future. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. ASC Topic 740, Income Taxes, states that a benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. The Company first records unrecognized tax benefits as liabilities in accordance with ASC 740 and then adjusts these liabilities when our judgment changes as a result of the evaluation of new information not previously available at the time of establishing the liability. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.
Interest accrued related to unrecognized tax benefits and income tax related penalties are included in the benefit (provision) for income taxes.
Deferred tax is provided on taxable temporary differences arising on investments in foreign subsidiaries, except where we intend, and are able, to reinvest such amounts on a permanent basis.
Revenue Recognition
The Company derives revenue by selling information on a subscription and single transaction basis as well as from performing professional services. The Company recognizes revenue when control of these services are transferred to the customer for an amount, referred to as the transaction price, that reflects the consideration to which the Company is expected to be entitled in exchange for those goods or services. The Company determines revenue recognition utilizing the following five steps: (1) identification of the contract with a customer, (2) identification of the performance obligations in the contract (promised goods or services that are distinct), (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations, and (5) recognition of revenue when, or as, the Company transfers control of the product or service for each performance obligation. Revenue is recognized net of discounts and rebates, as well as value added and other sales taxes. Cash received or receivable in advance of the delivery of the services or publications is included in deferred revenues. The Company disaggregates revenue based on revenue recognition pattern. Subscription based revenues recognize revenue over time, whereas our re-occurring revenues recognize revenue at a point in time. Our transactional and other revenues recognize revenue at a point in time and other revenues relating to professional services recognize revenue over time. The Company believes subscription, re-occurring and transactional and other revenues is reflective of how the Company manages the business. The revenue recognition policies for the Company’s revenue streams are discussed below.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
Subscription Revenues
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. Subscription revenues are typically generated either on (i) an enterprise basis, meaning that the organization has a license for the particular product or service offering and then anyone within the organization can use it at no additional cost, (ii) a seat basis, meaning each individual that uses the particular product or service offering has to have his or her own license, or (iii) a unit basis, meaning that incremental revenues are generated on an existing subscription each time the product is used (e.g., a trademark or brand is searched or assessed).
Re-occurring Revenues
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. Re-occurring revenues are usually delivered to the customer instantly or in a short period of time, at which time revenues are recognized. The most significant components of our re-occurring revenues is our 'renewal' business within CPA Global.
Transactional and Other Revenues
Transactional and other revenues are revenues that 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 content sales are usually delivered to the customer instantly or in a short period of time, at which time revenues are recognized. Transactional and other revenues are typically generated on a unit basis, although for certain product and service offerings transactional and other revenues are generated on a seat basis. 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 ("PAL") revenues.
Performance Obligations
Content Subscription: Content subscription performance obligations are most prevalent in the Web of Science, Derwent, CPA Global, ProQuest and Life Sciences product lines. Content subscriptions are subscriptions that can only be accessed through the Company’s online platform for a specified period of time through downloads or access codes. On-premise the software is purchased by the customer and installed directly onto the customer’s own operating systems. In addition to the primary content subscription, these types of performance obligations can often include other performance obligations, such as training subscriptions, access to historical content, software licenses, professional services, maintenance and other optional content. Revenue for these performance obligations are primarily recognized over the length of the contract (i.e., subscription revenue). In case of software sold as a subscription, the cloud based hosted services and post-sales support and maintenance are considered as one performance obligation distinct from other services in the contract. Within the Life Sciences product line and resulting from the DRG acquisition, the Company provides analytics and syndicated research and syndicated databases through subscription and membership contracts and through the sale of single reports from the syndicated series. Subscription based revenues are recognized ratably over the period that the service is being provided, generally one year.
There are instances where Content Subscription revenue could be recognized upon delivery (i.e., transactional and other revenues). Historical content and some optional content can be purchased via a perpetual license, which would be recognized upon delivery. Fees are typically paid annually at the beginning of each term. Additionally, within the Life Sciences product line and resulting from the DRG acquisition, the Company sells certain studies and reports on a single requisition basis to customers. Revenue from the sale of single reports is recognized at a point in time of delivery if all other revenue recognition criteria are met. Packages of select single reports are recognized pro rata as the individual reports are delivered if all other revenue recognition criteria are met based on estimated selling price.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
SaaS Subscription: Software-as-a-Service (“SaaS”) software is hosted centrally on a cloud-based system and usage is licensed on an annual subscription fee basis. The company earns revenue from selling SaaS subscriptions where customers purchase on demand access to hosted software products. Revenue from software subscription agreements, a portion of which are for multiple year terms, is recognized ratably over the term of the subscriptions, including any free trial periods before or after the paid subscription term. Revenue from professional services related to SaaS implementation are recognized by the percentage of completion method, determined by the ratio between the actual hours incurred and the total anticipated hours.
Perpetual Archive Licenses ("PAL"): This performance obligation relates to the ProQuest product line. Customers purchase perpetual archive licenses to collections, periodicals, eBooks, and other resources contained in the Company’s databases. The Company will grant access to the platform or service at the time of contract inception and the PAL product is for the customer to own forever. However, the online access to the PAL product is limited by time and if customer wishes to extend the online access, the customer must pay a continuing service fee and if the customer chooses not to pay, the Company will send a hard copy (CD or DVD) of the PAL material. The Company records revenue on the date when the customer is granted access to the license/service and revenue is recognized at a point in time.
Search Services: This performance obligation relates to the CompuMark product line. It is a comprehensive search report across multiple databases for a proposed trademark. The report is compiled by Clarivate’s analysts and sent to customers. Revenue is recognized upon delivery of the report. Fees are typically paid upon delivery.
Trademark Watch: This performance obligation relates to the CompuMark product line. Trademark watch service is an annual subscription that allows customers to protect their trademarks from infringement by providing timely notification of newly filed or published trademarks. Revenue is recognized over the term of the contract, with fees paid annually at the beginning of each contract term.
IP Services: This performance obligation relates to the CPA Global product line. This includes services related to (i) on-premise software installation, (ii) post-sales software support services, (iii) keeping software updated for any changes in laws (i.e., law update service), (iv) docketing, and (v) search and examination services provided to various PTOs. Revenue from IP services is recognized over the period of the contract as and when the service is provided.
Validation Services: This performance obligation relates to the CPA Global product line. This involves services related to:(i) registration of a patent granted in Europe, to various individual countries where it will ultimately be enforceable; (ii) translation of documents to be submitted to a patent and trademark office ("PTO") in local language; (iii) registration of address with PTO, for all future notifications to be received on behalf of the IP holder; and (iv) management of notifications on behalf of IP holder over the lifetime of the patent. The Company has determined each of the above services performed represent separate performance obligations. Revenue is recognized once the provision of the service is complete, and this point is reached when a purchase invoice is received from the agent for (i) and (ii) above and when registration with the PTO gets completed for (iii) above. With respect to management of notifications, revenue is recognized over the lifetime of the patent on a straight-line basis. Revenue from Validation Services is recognized net of official fees collected from customers for remittance to the PTO and any taxes collected from customers, which are subsequently remitted to governmental authorities.
IP Transaction Processing: This performance obligation relates to the CPA Global product line. These services consist of gathering all necessary data and information, preparing the renewal applications, and submitting payment to the PTO in the relevant country on behalf of the IP holders and the Company could have potential liability for the successful completion of the renewal application process, for which we carry insurance. The Company has determined there is one performance obligation relating to the provision of the service, which includes compiling the necessary data and submitting the renewal application, as well as facilitating the payment from the customer to the PTO. Revenue is recognized once the provision of the service is complete, and this point is reached when the PTO receives the payment and documentation to renew the patent or trademark. The PTO fees and any taxes collected from customers are deemed fees collected on behalf of third parties, and therefore revenue from renewals services is recognized net of these fees. Revenue is recognized upon transfer of control of the promised service to customers (i.e., at the time the renewal paperwork and payment are submitted to the PTO) because at that point, the Company has a right to payment and the risks and rewards associated with the Renewal Preparation service are transferred to the customer, coupled with the fact that customer acceptance is deemed a formality that does not impact the timing of transfer of control.
Principal Versus Agent
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
For revenue generated from contracts with customers involving another party, the Company considers if we maintain control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, collection risk, and discretion in establishing price. The assessment of whether we are considered the Principal or the Agent in a transaction could impact our revenues and cost of revenues recognized on the consolidated statements of operations.
The Company evaluated whether contracts with customers involving another party related to the Content Subscription performance obligation have been provided in the capacity as principal or agent and concluded that the Company acts as a Principal based on our responsibility for fulfilling the contract and latitude in establishing the price. Therefore, the Company reports the revenues from these transactions on a gross basis and records the related third-party commission fees as cost of revenues.
The Company evaluated whether the IP Transaction Processing performance obligation and services, as well as the Validation Services performance obligation, have been provided in the capacity as principal or agent, and on the basis of the following factors concluded the Company is acting as a Principal:
(a) The Company is responsible for compiling the necessary data and submitting the renewal application, as well as facilitating the payment from the customer to the PTO. In doing this, the Company’s performance obligation does not include legally renewing the IP, but instead facilitating that process, but the ultimate responsibility for legally renewing the IP rests with PTO;
(b) The Company has latitude in establishing pricing for its services.
Therefore, the Company reports the revenues from these transactions on a gross basis and records the related third-party commission fees as cost of revenues.
As it relates to the Content Subscription, PALs and SaaS Subscription performance obligations have an additional party involved in a transaction and can be categorized as either agreements with Third Party Distributors or Reseller Agreements. Third Party Distributor agreements provide the distributor with the right to market and resell ProQuest products to end customers and based on the indicators of control, revenues from these Third Party Distributor transactions are generally recognized gross. Reseller Agreements involve contracting to resell third party products where the Company is the Reseller and revenues from these transactions are generally recognized net.
Variable Consideration
In some cases, contracts provide for variable consideration that is contingent upon the occurrence of uncertain future events, such as retroactive discounts provided to the customers, indexed or volume-based discounts, time and materials based implementation services, and revenue between contract expiration and renewal. Variable consideration is estimated at the expected value or at the most likely amount depending on the type of consideration. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimate of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of its anticipated performance and all information (historical, current, and forecasted) that is reasonably available to the Company.
Significant Judgments
Significant judgments and estimates are necessary for the allocation of the proceeds received from an arrangement to the multiple performance obligations and the appropriate timing of revenue recognition. Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Determining a standalone selling price that may not be directly observable amongst all the products and performance obligations requires judgment. Specifically, many Web of Science, DRG, CPA Global, and ProQuest product line contracts include multiple product offerings, which may have both subscription and transactional and other revenues. Judgment is also required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the subscription service and recognized over time for other products. The Company allocates value to primary content subscriptions or licenses including PALs and accompanying performance obligations, such as training subscriptions, continuing service fees, access to historical content, maintenance and other
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
optional content. When multiple performance obligations exist in a single contract, the transaction price is allocated to each performance obligation based on the standalone selling price of each performance obligation. The Company utilizes its standard price lists to determine the standalone selling price based on the product and country.
The transaction price in the contract is allocated at contract inception to the distinct good or service underlying each performance obligation in proportion to the standalone selling price. The standalone selling prices are based on the Company’s normal pricing practices when sold separately with consideration of market conditions and other factors, including customer demographics and geographic location. Discounts applied to the contract will be allocated based on the same proportion of standalone selling prices.
For certain of our businesses, the discount is allocated entirely to one or more, but not all, performance obligations in the contract when certain criteria are met.
Cost to Obtain a Contract
Commission costs represent costs to obtain a contract and are considered contract assets. The Company pays commissions to the sales managers and support teams for earning new customers and renewing contracts with existing customers. These commission costs are capitalized within Prepaid expenses and Other non-current assets on the Consolidated Balance Sheets. The costs are amortized to Selling, general and administrative expenses within the Consolidated Statements of Operations. The amortization period is between one and seven years based on the estimated length of the customer relationship.
Deferred Revenues
The timing of revenue recognition may differ from the timing of invoicing to customers. We record deferred revenues when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period and recognize revenue over the term of the coverage period.
Cost of Revenues
Cost of revenues consists of costs related to the production and servicing of the Company’s offerings. These costs primarily relate to information technology, production and maintenance of content and personnel costs relating to professional services and customer service.
Selling, General and Administrative
Selling, general and administrative includes compensation for support and administrative functions in addition to rent, office expenses, professional fees and other miscellaneous expenses. In addition, it includes selling and marketing costs associated with acquiring new customers or selling new products or product renewals to existing customers. Such costs primarily relate to wages and commissions for sales and marketing personnel.
Depreciation
Depreciation expense relates to the Company’s fixed assets including furniture & fixtures, hardware, and leasehold improvements. These assets are depreciated over their expected useful lives, and in the case of leasehold improvements over the shorter of their useful life or the term of the related lease.
Share-based Compensation
Share-based compensation consists of restricted share units ("RSUs"), performance share units ("PSUs") and 2019 Transaction related shares granted to certain key members of management which are recognized in the Consolidated Statements of Operations based on their grant date fair values with forfeitures recognized as they occur. The share-based compensation cost of time-based RSU and PSU grants is calculated by multiplying the grant date fair value by the number of shares granted. We recognize compensation expense over the vesting period of the award. The value of PSUs is weighted between a total shareholder return ("TSR") component and a performance metric component. PSUs with performance metric components are assessed for probability of achieving the targets at each quarterly period end.
The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model, which requires management to make certain assumptions of future expectations based on historical and current data. The assumptions
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
include the expected term of the stock option, expected volatility, dividend yield, and risk-free interest rate. The Company recognizes compensation expense over the vesting period of the award on a graded-scale basis.
Equity compensation plans of the acquired CPA Global business are accounted for as a liability as they will be paid in cash. Changes in the fair value of these awards are recorded at the end of each reporting period.
Restructuring
Restructuring expense includes costs associated with involuntary termination benefits provided to employees, including the acceleration of equity based awards for severed individuals under the CPA Global Equity Plan, certain contract termination costs, and other costs associated with an exit or disposal activity. The involuntary termination benefits included within restructuring charges are recognized in accordance with ASC 420, Exit or Disposal Cost Obligations or ASC 712, Compensation – Nonretirement Postemployment Benefits, as applicable. Liabilities are recognized in accordance with ASC 420 when the programs were approved, the employees to be terminated were identified, the terms of the arrangement were established, it was determined changes to the plan were unlikely to occur and the arrangements were communicated to employees. Liabilities for nonretirement postemployment benefits that fall under ASC 712 are recognized when the severance liability was determined to be probable of being paid and reasonably estimable. The liabilities are recorded within Accrued expenses and other current liabilities in the Consolidated Balance Sheets. The corresponding expenses are recorded within Restructuring and impairment in the Consolidated Statements of Operations. See Note 22 - Restructuring and Impairment for further details.
Other Operating Income (Expense), Net
Other operating income (expense) consists of gains or losses related to the disposal of our assets, asset impairments or write-downs and the consolidated impact of re-measurement of the assets and liabilities of our company and our subsidiaries that are denominated in currencies other than each relevant entity’s functional currency. See Note 18 - Other Operating (Income) Expense, Net for further details.
Interest Expense, Net
Interest expense, net consists of interest expense related to our borrowings under the Term Loan Facility and the Notes as well as the amortization of debt issuance costs and interest related to certain derivative instruments.
Foreign Currency Translation
The operations of each of the Company’s entities are measured using the currency of the primary economic environment in which the subsidiary operates (“functional currency”). Nonfunctional currency monetary balances are re-measured into the functional currency of the operation with any related gain or loss recorded in Selling, general and administrative costs, excluding depreciation and amortization in the accompanying Consolidated Statements of Operations. Assets and liabilities of operations outside the U.S., for which the functional currency is the local currency, are translated into U.S. dollars using period-end exchange rates. Revenues and expenses are translated at the average exchange rate in effect during each fiscal month during the year. The effects of foreign currency translation adjustments are included as a component of Accumulated other comprehensive income (loss) in the accompanying Consolidated Balance Sheets.
Legal Costs
Legal costs are expensed and accrued for expected legal costs to be incurred for legal matters.
Earnings Per Share
The calculation of earnings per share is based on the weighted average number of ordinary shares or ordinary stock equivalents outstanding during the applicable period. The dilutive effect of ordinary stock equivalents is excluded from basic earnings per share and is included in the calculation of diluted earnings per share. Employee equity share options and similar equity instruments granted by the Company are treated as potential ordinary shares outstanding in computing diluted earnings per share. Diluted shares outstanding are calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of benefits that
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
would be recorded in Ordinary shares when the award becomes deductible for tax purposes are assumed to be used to repurchase shares.
Newly Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board ("FASB") issued new guidance, ASU 2016-13, related to measurement of credit losses on financial instruments which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This new guidance replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. The Company has determined that the impact of this new accounting guidance primarily affects our accounts receivable. The Company prospectively adopted the standard on January 1, 2020.
In August 2018, the FASB issued guidance, ASU 2018-14, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance is effective for all entities for fiscal years beginning after December 15, 2020. The Company's January 1, 2021, adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The guidance is effective for all entities for fiscal years beginning after December 15, 2020. The Company's January 1, 2021, adoption of this standard did not have a material impact on the Company's Consolidated Financial Statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The guidance is effective for all entities from the period March 12, 2020, through December 31, 2022. Beginning with the quarter ended September 30, 2020, the Company adopted this standard and elected the optional expedients for its interest rate swap agreements and debt agreements with reference to LIBOR. Upon meeting the specified criteria in the guidance, the Company will continue to account for its interest rate swaps in accordance with hedge accounting and will not apply modification accounting to its debt agreements. In January 2021, the FASB issued ASU 2021-01, which made clarifications relating to the previously issued Reference Rate Reform guidance effective for the same period as ASU 2020-04. This clarification did not have an effect on how the Company accounts for its interest rate swaps and debt agreements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. The amendments require that the acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The Company has elected to early adopt the ASU and has applied the amendments retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the 2021 fiscal year. As a result of the adoption, we have accounted for contract assets and liabilities for our 2021 acquisitions in accordance with this updated guidance.
In June 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity as a result of complexity associated with GAAP for certain financial instruments with characteristics of liabilities and 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 the Company's 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 the Company's Consolidated Financial Statements.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842) Lessors – Certain Leases with Variable Lease Payments, in order 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 ASU 2021-05 effective January 1, 2022, and the adoption did not have a material impact on the Company’s 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 Consolidated Financial Statements, and it is expected that the adoption will not have a material impact.
In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848. Amendments in this ASU defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. This ASU did not have a material impact on the Company as noted above in accordance with ASU 2020-04 beginning with the quarter ended September 30, 2020, the Company adopted this standard and elected the optional expedients for its interest rate swap agreements and debt agreements with reference to LIBOR.
There were no other new accounting standards or updates issued or effective as of December 31, 2022, that have, or are expected to have, a material impact on the Company's 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.
| | | | | | | | |
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 $2.0 of restricted cash. |
The excess of the purchase price over the net tangible and intangible assets was recorded to Goodwill and primarily reflects the assembled workforce and expected synergies, with the majority being deductible for tax purposes. Total transaction costs incurred in connection with the acquisition were $16.2 and $63.0 for the year ended December 31, 2022 and 2021, respectively.
ProQuest is reported primarily as part of our A&G segment. Refer to Note 8 - Other Intangible Assets, net and Goodwill and Note 19 - Segment Information for additional information.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
The purchase price allocation for the ProQuest acquisition as of the close date of December 1, 2021, was preliminary and did change upon completion of the determination of the fair value of assets acquired and liabilities assumed. The following table summarizes the purchase price allocation for this acquisition:
| | | | | | | | | | | | | | | | | |
| Original Purchase Price Allocation | | Measurement Period Adjustments | | Final
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 | | | (3.6) | | | 133.2 | |
| 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 | | | (1.2) | | | 708.1 | |
| Fair value of acquired identifiable assets and liabilities | $ | 3,097.1 | | | $ | 5.2 | | | $ | 3,102.3 | |
| | | | | |
| 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 | | | 5.2 | | | 3,102.3 | |
| Goodwill | $ | 1,897.2 | | | $ | 2.8 | | | $ | 1,900.0 | |
| | | | | |
(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):
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | |
| Fair Value as of December 1, 2021 | | Remaining
Range of Years |
| Customer relationships | $ | 2,773.0 | | | 17-23 |
Technology & databases(1) | 709.3 | | | 5-17 |
| Trade names | 45.7 | | | 2-10 |
| Total identifiable intangible assets | $ | 3,528.0 | | | |
| | | |
(1) Technology and databases intangible assets include both acquired technology intangible assets and acquired databases intangible assets. |
Unaudited pro forma information for the Company for the relevant periods presented as if the acquisition had occurred January 1, 2020, is as follows:
| | | | | | | | | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Pro forma revenues, net | $ | 2,703.0 | | | $ | 2,116.9 | |
| Pro forma net loss attributable to the Company's shareholders | $ | (175.4) | | | $ | (545.5) | |
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 which reduced expenses by $63.0 for the year ended December 31, 2021, and (iv) other one-time non-recurring costs related to undrawn bridge commitment fees which reduced expenses by $55.0 for the year ended December 31, 2021.
Acquisition of CPA Global
On October 1, 2020, we acquired 100% of the assets, liabilities and equity interests of CPA Global, a global leader in intellectual property software and tech-enabled services from Redtop Holdings Limited ("Redtop"). The acquisition helps Clarivate create a true end-to-end platform supporting the full IP lifecycle from idea generation to commercialization and protection.
Clarivate acquired all of the outstanding shares of CPA Global in a cash and stock transaction. The aggregate consideration in connection with the closing of the CPA Global acquisition was $8,540.9, net of $102.7 cash acquired and including an equity holdback consideration of $46.5. The aggregate consideration was composed of (i) $6,565.5 from the issuance of up to 218.2 million ordinary shares to Redtop Holdings Limited, a portfolio company of Leonard Green & Partners, L.P., representing approximately 35% pro forma fully diluted ownership of Clarivate and (ii) approximately $2,078.1 in cash to fund the repayment of CPA Global's parent company outstanding debt of $2,055.8 and related interest swap termination fee of $22.3. Of the 218.3 million ordinary shares issuable in the acquisition, Clarivate issued 210.4 million ordinary shares as of October 1, 2020. There were 6.3 million shares that were issued to Leonard Green & Partners, L.P. that were returned to Clarivate to fund an Employee Benefit Trust established for the CPA Global Equity Plan. Accordingly, these shares were excluded from purchase price consideration. During January 2021, the Company issued the remaining 1.5 million ordinary shares to Redtop Holdings Limited pursuant to a hold-back clause within the purchase agreement.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | | | | |
Issuance of 210.4 million shares | | $ | 6,565.5 | |
| Cash paid for repayment of CPA Global's parent company debt and related interest rate swap termination charge | | 2,078.1 | |
| Total purchase price | | 8,643.6 | |
| Cash acquired | | (102.7) | |
| Total purchase price, net of cash acquired | | $ | 8,540.9 | |
The excess of the purchase price over the net tangible and intangible assets was recorded to Goodwill and primarily reflects the assembled workforce and expected synergies, with the majority being deductible for tax purposes. Total transaction costs incurred in connection with the acquisition were $0.0 and $37.2 during the year ended December 31, 2021 and 2020, respectively.
CPA Global is reported as part of our IP segment. Refer to Note 8 - Other Intangible Assets, net and Goodwill and Note 19 - Segment Information for additional information.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
The purchase price allocation for the CPA Global acquisition as of the close date of October 1, 2020 is final. The following table summarizes the final purchase price allocation for this acquisition:
| | | | | |
| Total |
| Accounts receivable | $ | 380.3 | |
| Prepaid expenses | 27.4 | |
| Other current assets | 38.8 | |
| Property and equipment, net | 13.3 | |
| Other intangible assets | 4,920.3 | |
| Deferred income taxes | 19.3 | |
| Other non-current assets | 8.4 | |
| Operating lease right-of-use assets | 30.6 | |
| Total assets | $ | 5,438.4 | |
| Accounts payable | 53.8 | |
| Accrued expenses and other current liabilities | 284.3 | |
| Current portion of deferred revenue | 181.4 | |
| Current portion of operating lease liabilities | 7.7 | |
| Non-current portion of deferred revenue | 16.8 | |
| Deferred income taxes | 291.9 | |
| Other non-current liabilities | 24.2 | |
| Operating lease liabilities | 23.6 | |
| Total liabilities | 883.7 | |
| Fair value of acquired identifiable assets and liabilities | $ | 4,554.7 | |
| |
Purchase price, net of cash(1) | $ | 8,540.9 | |
| Less: Fair value of acquired identifiable assets and liabilities | 4,554.7 | |
Goodwill(2) | $ | 3,986.2 | |
| |
(1) The Company acquired cash of $102.7 including $3.4 of restricted cash to fund fixed cash awards and certain taxes related to the phantom equity compensation plan as part of CPA Global acquisition accounting. |
(2) Includes $942.2 of buyer-specific synergy goodwill that was allocated to the Clarivate legacy reporting units expected to benefit from the acquisition. |
During the year ended December 31, 2021, the Company recorded measurement period adjustments to the purchase price allocation recorded as of the close date of October 1, 2020. The following table summarizes the measurement period adjustments recorded through the measurement period date ending September 30, 2021:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | |
| Total |
Accounts receivable(1) | $ | 7.1 | |
| Prepaid expenses | (0.1) | |
| Other current assets | 0.4 | |
| Property and equipment, net | 1.0 | |
| Other non-current assets | 1.1 | |
| |
| Total assets | $ | 9.5 | |
| |
| Accounts payable | $ | 0.3 | |
Accrued expenses and other current liabilities(2) | 49.2 | |
| Current portion of deferred revenue | 1.0 | |
| Non-current portion of deferred revenue | — | |
Deferred income taxes(3) | (13.4) | |
| Total liabilities | 37.1 | |
| Fair value of acquired identifiable assets and liabilities | $ | (27.6) | |
| |
| Purchase price, net of cash | $ | (0.7) | |
| Less: Fair value of acquired identifiable assets and liabilities | (27.6) | |
| Goodwill | $ | 26.9 | |
| |
(1) The $7.1 account receivable measurement period adjustment is due to a change in the fair value of CPA Global's accounts receivable, with there being a $9.3 increase in the valuation increase offset by a $2.2 decrease. |
(2) The Company recorded measurement period adjustments of $49.2 increasing accrued expenses and other current liabilities, of which, $61.0 relates to adjustments to CPA Global's accrual for claims existing prior to the date of acquisition, offset by a $11.8 reduction to CPA Global's other accruals. |
(3) The $13.4 deferred income tax measurement period adjustment is due to the tax impact of CPA Global's other measurement period adjustments detailed in the chart above. |
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 CPA Global’s identifiable intangible assets acquired and their remaining amortization period (in years):
| | | | | | | | | | | |
| Fair Value as of October 1, 2020 | | Remaining
Range of Years |
| Customer relationships | $ | 4,643.3 | | | 17-23 |
| Technology | 266.2 | | | 6-14 |
| Trade names | 10.8 | | | 2-17 |
| Total identifiable intangible assets | $ | 4,920.3 | | | |
Unaudited pro forma information for the Company for the periods presented as if the acquisition had occurred January 1, 2019, is as follows:
| | | | | | | |
| |
| Year ended December 31,
|
| 2020 | | |
| Pro forma revenues, net | $ | 1,708.5 | | | |
| Pro forma net loss attributable to the Company's stockholders | $ | (374.4) | | | |
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
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
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 CPA Global.
The unaudited pro forma results include certain pro forma adjustments to revenue and net loss that were directly attributable to the acquisition, assuming the acquisition had occurred on January 1, 2019, 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 CPA Global debt and the additional Company borrowings in conjunction with the acquisition, (iii) acquisition-related transaction costs which reduced expenses by $71.1 for the year ended December 31, 2020.
Acquisition of Decision Resources Group
On February 28, 2020, we acquired 100% of the assets, liabilities and equity interests of Decision Resources Group ("DRG"), a premier provider of high-value data, analytics and insights products and services to the healthcare industry, from Piramal Enterprises Limited ("PEL"), which is a part of global business conglomerate Piramal Group. The acquisition helps us expand our core businesses and provides us with the potential to grow in the LS&H segment. Refer to Note 19 - Segment Information for additional information.
The aggregate consideration paid in connection with the closing of the DRG acquisition was $965.0, comprised of $900.0 of base cash plus $6.1 of adjusted closing cash paid on the closing date and 2.9 million of the Company's ordinary shares issued to PEL on March 5, 2021. The contingent stock consideration was valued at $58.9 on the closing date and was revalued at each period end until the issuance date. For the year ended December 31, 2020, the fair value of the contingent stock consideration increased by $27.1, which was recorded to selling, general and administrative costs in the Consolidated Statements of Operations. The corresponding liability was $86.0 as of December 31, 2020, and recorded to Accrued expenses and other current liabilities in the Consolidated Balance Sheets. As the liability settled on March 5, 2021, with the Company issuing 2.9 million ordinary shares valued at $61.6, there was no liability captured within the December 31, 2021, Consolidated Balance Sheet. The DRG acquisition was accounted for using the acquisition method of accounting. The excess of the purchase price over the net tangible and intangible assets was recorded to Goodwill and primarily reflected the assembled workforce and expected synergies. Goodwill was not deductible for tax purposes. Due to the decrease to the fair value of the contingent stock consideration between December 31, 2020, and March 5, 2021, during the year ended December 31, 2021, total transaction costs in connection with the acquisition of DRG resulted in a net gain of $24.2. Total transaction costs during the year ended December 31, 2020, were $47.1.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
The following table summarizes the final purchase price allocation for this acquisition:
| | | | | |
| Total |
| Accounts receivable | $ | 52.2 | |
| Prepaid expenses | 4.3 | |
| Other current assets | 68.0 | |
| Property and equipment, net | 4.1 | |
Other intangible assets(1) | 491.3 | |
| Other non-current assets | 3.0 | |
| Operating lease right-of-use assets | 25.1 | |
| Total assets | $ | 648.0 | |
| Accounts payable | 3.5 | |
| Accrued expenses and other current liabilities | 88.6 | |
| Current portion of deferred revenue | 35.1 | |
| Current portion of operating lease liabilities | 5.2 | |
| Deferred income taxes | 49.4 | |
| Non-current portion of deferred revenue | 0.9 | |
| |
| Operating lease liabilities | 20.3 | |
| Total liabilities | 203.0 | |
| Fair value of acquired identifiable assets and liabilities | $ | 445.0 | |
| |
Purchase price, net of cash(2) | 944.2 | |
| Less: Fair value of acquired identifiable assets and liabilities | 445.0 | |
| Goodwill | $ | 499.2 | |
| |
(1) Includes $4.0 of internally developed software in progress acquired. |
(2) The Company acquired cash of $20.8. |
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 DRG’s identifiable intangible assets acquired and their remaining amortization period (in years):
| | | | | | | | | | | |
| Fair Value as of February 28, 2020 | | Remaining
Range of Years |
| Customer relationships | $ | 381.0 | | | 10-21 |
| Database and content | 50.2 | | | 2-7 |
| Trade names | 5.2 | | | 4-7 |
| Purchased software | 23.0 | | | 3-8 |
| Backlog | 28.0 | | | 4 |
| Total identifiable intangible assets | $ | 487.4 | | | |
Unaudited pro forma information for the Company for the periods presented as if the acquisition had occurred January 1, 2019, is as follows:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | | | |
| Year ended December 31, |
| 2020 | | |
| Pro forma revenues, net | $ | 1,284.4 | | | |
| Pro forma net loss attributable to the Company's stockholders | $ | (335.7) | | | |
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 DRG.
The unaudited pro forma results include certain pro forma adjustments to revenue and net loss that were directly attributable to the acquisition, assuming the acquisition had occurred on January 1, 2019, 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 DRG debt and the additional Company borrowings in conjunction with the acquisition, (iii) acquisition-related transaction costs and other one-time non-recurring costs which reduced expenses by $26.3 for the year ended December 31, 2020.
Note 5: Accounts Receivable
Our accounts receivable balance consists of the following as of December 31, 2022 and 2021:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Accounts receivable | $ | 899.2 | | | $ | 931.3 | |
| Less: Accounts receivable allowance | (27.1) | | | (24.9) | |
| Accounts receivable, net | $ | 872.1 | | | $ | 906.4 | |
| | | |
The Company estimates credit losses for trade receivables by aggregating similar customer types together, because they tend to share similar credit risk characteristics, taking into consideration the number of days the receivable is past due. Provision rates for the allowance for doubtful accounts are based upon the historical loss method by evaluating factors such as the length of time receivables that are past due and historical collection experience. Additionally, provision rates are based upon current and future economic and competitive environment factors that could impact the collectability of the receivable. Trade and other receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include past due status greater than 360 days or bankruptcy of the debtor. The activity in our accounts receivable allowance consists of the following for the years ended December 31, 2022, 2021 and 2020, respectively: | | | | | | | | | | | | | | | | | |
| | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Balance at beginning of year | $ | 24.9 | | | $ | 23.9 | | | $ | 16.5 | |
Additional provisions(1) | 10.9 | | | 9.2 | | | 19.5 | |
| Write-offs | (7.8) | | | (8.0) | | | (22.2) | |
| Opening balance sheet adjustment (ASU 2016 -13 adoption) | — | | | — | | | 10.1 | |
| Exchange differences | (0.9) | | | (0.2) | | | — | |
| Balance at the end of year | $ | 27.1 | | | $ | 24.9 | | | $ | 23.9 | |
(1) Prior period amounts have been revised pertaining to the accretion of fair value adjustments related to purchase accounting from recent acquisitions. The revisions did not impact Accounts receivable, net in our Consolidated Balance Sheets. |
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
The potential for credit losses is mitigated because customer creditworthiness is evaluated before credit is extended. The Company recorded write-offs against the reserve of $7.8, $8.0 and $22.2 for the years ended December 31, 2022, 2021 and 2020, respectively.
We continue to monitor any impacts from the COVID-19 pandemic on our customers and various counterparties. During the years ended December 31, 2022, 2021 and 2020, the Company’s allowance for doubtful accounts and credit losses considered additional risk related to the pandemic. However, this risk to-date was not considered material.
Note 6: Leases
As the lessee, we currently lease real estate space, automobiles, and certain equipment under non-cancelable operating lease agreements, as well as one financing lease assumed in the ProQuest acquisition. Some of the leases include options to extend the leases for up to an additional 10 years. We do not include any of our renewal options in our lease terms for calculating our lease liability as the renewal options allow us to maintain operational flexibility, and we are not reasonably certain we will exercise these renewal options at this time.
We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease ROU assets, Current portion of operating lease liabilities, and Operating lease liabilities on our Consolidated Balance Sheet. The Company assesses its ROU asset and other lease-related assets for impairment consistent with other long-lived assets. Financing lease assets are included within the Property and Equipment financial statement line item and the related lease liability is treated as an item of indebtedness (see Note 12 - Debt) as a financing lease obligation within the Consolidated Balance Sheet. As of December 31, 2022, we did not record an impairment related to these assets beyond the non-cash adjustments recorded due to restructuring activity further described within Note 22 - Restructuring and Impairment.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. As such, the Company used judgment to determine an appropriate incremental borrowing rate. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our variable lease payments consist of non-lease services related to the lease and lease payments that are based on annual changes to an index. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The initial valuation of financing lease assets and liabilities is identical to the operating leases, as described above, however they are presented separately from Operating lease ROU assets and Operating lease liabilities in the Consolidated Balance Sheet.
We have lease agreements with lease and non-lease components, which are accounted as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
Supplemental balance sheet information related to leases is summarized as follows:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31, |
| | | | 2022 | | 2021 |
| Assets | | Classification | | | | |
| Operating lease assets, net | | Operating lease right-of-use assets(1) | | $ | 58.9 | | | $ | 86.0 | |
| Finance lease assets, net | | Property and equipment, net(2) | | 6.2 | | | 30.5 | |
| Total lease assets | | | | $ | 65.1 | | | $ | 116.5 | |
| Liabilities | | | | | | |
| Current | | | | | | |
| Operating lease liabilities | | Current portion of operating lease liability | | $ | 25.7 | | | $ | 32.2 | |
| Finance lease liabilities | | Current portion of long-term debt | | 1.0 | | | 2.0 | |
| Non-current | | | | | | |
| Operating lease liabilities | | Operating lease liabilities | | 72.9 | | | 94.0 | |
| Finance lease liabilities | | Long-term debt | | 30.3 | | | 28.8 | |
| Total lease liabilities | | | | $ | 129.9 | | | $ | 157.0 | |
(1) Operating lease assets are recorded net of accumulated amortization of $41.4 and $26.4 as of December 31, 2022 and 2021, respectively. |
(2) Finance lease assets are recorded net of accumulated amortization of $1.8 and $1.0 as of December 31, 2022 and 2021, respectively. |
The following illustrates the lease costs for the year ended December 31, 2022 and 2021:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Finance lease cost | | | |
| Amortization of right-of-use assets | $ | 10.8 | | | $ | 1.3 | |
| Interest on lease liabilities | 1.2 | | | 0.1 | |
| Operating lease cost | 27.9 | | | 28.8 | |
| Short-term lease cost | 0.4 | | | 0.8 | |
| Variable lease cost | 2.5 | | | 1.4 | |
| Total lease cost | $ | 42.8 | | | $ | 32.4 | |
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Other information | | | |
| Cash Paid for amounts included in measurement of lease liabilities | | | |
Operating cash flows for operating leases(1) | $ | 34.7 | | $ | 30.8 |
| Operating cash flows for finance leases | 1.2 | | 0.1 |
| Financing cash flows for finance leases | 1.9 | | 0.2 |
| Right-of-use assets obtained in exchange for lease obligations | | | |
| Operating leases | $ | 2.6 | | $ | 13.4 |
| Finance leases | 2.4 | | 29.9 |
| Weighted-average remaining lease term | | | |
| Operating leases | 5 | | 4 |
| Finance leases | 14 | | 2 |
| Weighted-average discount rate | | | |
| Operating leases | 4.3 | % | | 4.4 | % |
| Finance leases | 6.9 | % | | 3.8 | % |
(1) During the preparation of the financial statements for the year ended December 31, 2022, the Company revised the disclosure within this table associated with cash paid for operating leases for the year ended December 31, 2021. Although the Company has determined that this revision did not have a material impact on its previously issued consolidated financial statements, the Company is revising the disclosure to reflect a decrease of $33.0 in cash paid for operating leases. The revision had no impact on cash flows from operating, investing or financing activities in the accompanying consolidated Statements of Cash Flows. |
The future aggregate minimum lease payments as of December 31, 2022, under all non-cancelable leases for the years noted are as follows:
| | | | | | | | | | | | | | | | | |
| Operating Leases | | Finance Leases |
| Year Ending December 31, | | | |
| 2023 | $ | 29.4 | | | $ | 3.2 | |
| 2024 | 24.5 | | | 3.2 | |
| 2025 | 17.7 | | | 3.3 | |
| 2026 | 12.8 | | | 3.4 | |
| 2027 | 9.8 | | | 3.4 | |
| 2028 & Thereafter | 17.1 | | | 33.3 | |
| Total lease commitments | $ | 111.3 | | | $ | 49.8 | |
| Less imputed interest | (12.7) | | | (18.5) | |
| Total | $ | 98.6 | | | $ | 31.3 | |
In connection with certain leases, the Company guarantees the restoration of the leased property to a specified condition after completion of the lease period. As of December 31, 2022 and 2021, the liability of $1.6 and $1.4, respectively, associated with these restorations is recorded within Other non-current liabilities.
There were no material future minimum sublease payments to be received under non-cancelable subleases at December 31, 2022. The Company recognized $3.3, $3.1 and $2.0 of sublease income for the years ended December 31, 2022, 2021 and 2020, respectively.
Total rental expense under operating leases amounted to $27.9, $28.8 and $24.4 the years ended December 31, 2022, 2021 and 2020, respectively.
Note 7: Property and Equipment, Net
Property and equipment, net consisted of the following:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | |
| | | |
| December 31, |
| 2022 | | 2021 |
| Computer hardware | $ | 45.1 | | | $ | 45.5 | |
| Leasehold improvements | 16.1 | | | 11.6 | |
| Furniture, fixtures and equipment | 39.0 | | | 34.7 | |
| Capital office leases - finance lease asset | 8.0 | | | 30.5 | |
| Other | 2.1 | | | 2.3 | |
| Total property and equipment, gross | $ | 110.3 | | | $ | 124.6 | |
| Accumulated depreciation | (55.8) | | | (40.8) | |
| Total property and equipment, net | $ | 54.5 | | | $ | 83.8 | |
| | | |
Depreciation amounted to $35.2, $14.0 and $12.7 for the years ended December 31, 2022, 2021 and 2020, respectively. There were no impairments related to leasehold improvements during the year ended December 31, 2022, compared to $5.5 for the year ended December 31, 2021. As part of the ProQuest Acquisition Integration Program, the Company abandoned a portion of the Capital office lease facility during the year ended December 31, 2022. As a result, the Company recorded a non-cash adjustment to Restructuring and impairment within the Consolidated Statement of Operations of $13.8 for the year ended December 31, 2022, and the carrying value of the capital office leases - finance lease asset was reduced by the same amount.
Note 8: 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| Finite-lived intangible assets | | | | | | | | | | | |
| Customer relationships | $ | 7,809.0 | | | $ | (821.5) | | | $ | 6,987.5 | | | $ | 8,279.1 | | | $ | (514.8) | | | $ | 7,764.3 | |
| Databases and content | 2,681.0 | | | (780.5) | | | 1,900.5 | | | 2,577.1 | | | (591.0) | | | 1,986.1 | |
| Computer software | 765.1 | | | (422.2) | | | 342.9 | | | 733.1 | | | (320.1) | | | 413.0 | |
| Trade names | 61.0 | | | (19.8) | | | 41.2 | | | 62.1 | | | (10.5) | | | 51.6 | |
| Backlog | 27.8 | | | (19.1) | | | 8.7 | | | 29.1 | | | (13.0) | | | 16.1 | |
| Finite-lived intangible assets | $ | 11,343.9 | | | $ | (2,063.1) | | | $ | 9,280.8 | | | $ | 11,680.5 | | | $ | (1,449.4) | | | $ | 10,231.1 | |
| Indefinite-lived intangible assets | | | | | | | | | | | |
| Trade names | 156.9 | | | — | | | 156.9 | | | 161.3 | | | — | | | 161.3 | |
| Total intangible assets | $ | 11,500.8 | | | $ | (2,063.1) | | | $ | 9,437.7 | | | $ | 11,841.8 | | | $ | (1,449.4) | | | $ | 10,392.4 | |
The Company performed the indefinite-lived impairment test as of October 1, 2022 and 2021. Additionally, the Company reviewed goodwill for indicators of impairment at December 31, 2022 and 2021. As part of this analysis, the Company determined that its indefinite-lived trade name assets, with a carrying value of $156.9 and $161.3 as of December 31, 2022 and 2021, respectively, was not impaired and will continue to be reported as indefinite-lived intangible assets.
The weighted-average amortization period for each class of finite-lived intangible assets and for total finite-lived intangible assets, which range between 3 and 23 years, is as follows:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | |
| Remaining Weighted-Average Amortization Period (in years) |
| Customer relationships | 23 |
| Databases and content | 14 |
| Computer software | 9 |
| Trade names | 9 |
| Backlog | 3 |
| Total | 18 |
Amortization amounted to $675.3, $523.8 and $290.5 for the years ended December 31, 2022, 2021 and 2020, respectively. Estimated amortization for each of the five succeeding years as of December 31, 2022, is as follows:
| | | | | |
| 2023 | $ | 651.4 | |
| 2024 | 624.0 | |
| 2025 | 597.5 | |
| 2026 | 560.0 | |
| 2027 | 542.9 | |
| Thereafter | 6,275.8 | |
| Subtotal finite-lived intangible assets | $ | 9,251.6 | |
| Internally developed software projects in process | 29.2 | |
| Total finite-lived intangible assets | $ | 9,280.8 | |
| Intangibles with indefinite lives | 156.9 | |
| Total intangible assets | $ | 9,437.7 | |
Goodwill
The change in the carrying amount of goodwill by segment is shown below:
| | | | | | | | | | | | | | | | | | | | | | | |
| A&G
Segment | | LS&H
Segment | | IP
Segment | | Consolidated Total |
Balance as of December 31, 2020(1) | $ | 1,077.5 | | | $ | 1,045.2 | | | $ | 3,920.3 | | | $ | 6,043.0 | |
Acquisition(1) | 1,786.0 | | | 132.8 | | | 27.0 | | | 1,945.8 | |
| Impact of foreign currency fluctuations | (0.9) | | | (0.7) | | | (82.3) | | | (83.9) | |
Balance as of December 31, 2021(1) | $ | 2,862.6 | | | $ | 1,177.3 | | | $ | 3,865.0 | | | $ | 7,904.9 | |
| Acquisition measurement period adjustments | 2.9 | | | 2.1 | | | — | | | 5.0 | |
Divestiture(2) | — | | | — | | | (42.8) | | | (42.8) | |
Goodwill impairment(3) | (1,745.8) | | | — | | | (2,662.1) | | | (4,407.9) | |
Impact of foreign currency fluctuations(4) | (9.9) | | | (3.0) | | | (569.8) | | | (582.7) | |
| Balance as of December 31, 2022 | $ | 1,109.8 | | | $ | 1,176.4 | | | $ | 590.3 | | | $ | 2,876.5 | |
|
(1) The prior year amounts have been revised for a reclassification of allocated goodwill between reporting units. Refer to Note 19 - Segment Information for additional information. |
(2) Relates to the MarkMonitor Domain Management business divestiture. Refer to Note 18 - Other Operating (Income) Expense, Net for additional information. |
(3) The total goodwill impairment charge reflected in the Consolidated Statements of Operations was $4,449 for the year ended December 31, 2022. The difference represents the CTA impact for amounts recorded in subsidiaries with functional currencies other than USD. |
(4) The impact of foreign currency fluctuations was primarily driven by changes in the GBP/USD translation rate as of December 31, 2022, compared to December 31, 2021. |
|
|
On December 22, 2021, the Company acquired Patient Connect, which included $8.5 of goodwill allocated to the LS&H segment.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
On December 1, 2021, the Company acquired ProQuest, which included $1,897.2 of goodwill allocated to the A&G segment with the exception of $132.8 allocated to the LS&H segment. See Note 4 - Business Combinations for further details.
On August 3, 2021, the Company acquired Bioinfogate, which included $13.1 of goodwill allocated to the LS&H segment.
Results of Impairment Tests
A quantitative goodwill impairment assessment was performed as of September 30, 2022, over the Company's reporting units due to the following possible impairment indicators: (i) worsening market considerations and macroeconomic conditions such as increasing inflationary pressures and rising interest rates and (ii) sustained declines in the Company's share price during the three months ended September 30, 2022. This coincided with the Company's change in organizational structure to realign its business segments based on the products we offer and the markets they serve. With these changes, the Company changed its reportable segments, operating segments, and reporting units. The goodwill impairment assessment included an analysis on the Company's reporting units immediately before and immediately after the change. This included five reporting units in the legacy structure and four reporting units post-realignment. Refer to Note 3 - Summary of Significant Accounting Policies and Note 19 - Segment Information for additional information.
Based on the quantitative analysis performed in connection with the Company's preparation of these Consolidated Financial Statements in the third quarter of 2022, the Company recorded a goodwill impairment charge of $4,407.9 as follows: (i) $1,745.8 related to the ProQuest reporting unit within the A&G segment; (ii) $2,569.1 related to the former IP Management reporting unit within the IP segment; and (iii) $93.0 related to the former Patent reporting unit within the IP segment. The impairment charge recorded for the ProQuest reporting unit and the former IP Management reporting unit represented a total write-off of the goodwill associated with each of these reporting units. The estimated fair value of each of the remaining reporting units exceeded their carrying values.
In completing the interim quantitative goodwill impairment assessment, the Company used the following weighted average cost of capital ("WACC") for its discount rate assumptions:
•Legacy Structure: the Company used a WACC of 9.5% for the Science Group, Trademark, Patent, and Domain reporting units. The Company used a 10.5% WACC for the IP Management reporting unit.
•New Structure: the Company used a WACC of 9.5% for the Web of Science Group and Life Sciences & Healthcare reporting units. The Company used a WACC of 10.0% for the ProQuest and Intellectual Property (which includes legacy Trademark, Patent, Domain, and IP Management) reporting units.
The discount rates were derived using a capital asset pricing model and analyzing published rates for industries relevant to each reporting unit to estimate the cost of equity financing. The Company used discount rates we believe to be commensurate with the risks and uncertainty inherent in the respective reporting units and in its internally developed forecasts.
In the fourth quarter of 2022, the Company performed its annual goodwill impairment testing by applying the qualitative assessment to each of its four reporting units. The Company considered various qualitative factors, including those described above, that would have affected the estimated fair value of the reporting units, as well as the historical significant level of headroom. The results of the qualitative assessments indicated that it is not more likely than not that the fair values of the reporting units were less than their carrying values. As such, as of October 1, 2022, our most recent annual goodwill impairment testing date, goodwill was not impaired.
Notwithstanding the results of the Company's interim impairment assessment, if the Company is unable to successfully achieve the revenue growth it projects, the financial performance of any of our reporting units declines significantly, or interest rates continue to rise and this leads to an increase in the cost of capital, then it is possible these financial, economic, and geopolitical conditions could result in another triggering event for the Company in the future and could lead to a potential impairment. In addition, if any of these financial, economic, or geopolitical conditions has a more significant adverse effect on the Company, these could lead to a potential impairment of Company's goodwill or other indefinite-lived or long-lived assets. Such a charge could have a material effect on our financial position and results of operations.
Divested Operations
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
On October 31, 2022, the Company completed the sale of the MarkMonitor Domain Management business (IP segment) to Newfold Digital, a leading web presence solutions provider. The aggregate closing consideration included proceeds, net of cash transferred of $285.0, deferred closing consideration of $10.6, and other of $0.5. As a result of the sale, the Company recorded a net gain of $278.5 during the year ended December 31, 2022 and wrote off balances associated with the business including intangible assets of $10.6 and goodwill of $42.8.
On November 6, 2020, the Company completed the sale of certain assets and liabilities of the Techstreet business (IP segment) to The International Society of Interdisciplinary Engineers LLC, for a total purchase price of $42.8, of which $4.3 was held in escrow and paid to the Company in November 2021. The Company used the proceeds for general business purposes. As a result of the sale, the Company recorded a net gain on sale of $28.1, inclusive of transaction costs of $0.1 incurred in connection with the divestiture. The gain on sale is included in Other operating (expense) income, net within the Consolidated Statements of Operations during the year ended December 31, 2020. As a result of the sale, the Company wrote off balances associated with Techstreet including intangible assets of $10.2 and goodwill of $9.1.
The divestitures did not represent a strategic shift and are not expected to have a major effect on the Company’s operations or financial results, as defined by ASC 205-20, Discontinued Operations. As a result, the divestitures do not meet the criteria to be classified as discontinued operations.
Note 9: 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 its outstanding Term Loan arrangements. In November 2022, the Company amended an interest rate swap arrangement entered into during March 2021 to increase the 0% LIBOR floor to a 1% LIBOR floor. The interest swap arrangement relates to $150.0 of its Term Loan arrangement effective October 31, 2022, with a maturity date of March 31, 2024. Additionally, in October 2022, the Company amended an interest rate swap arrangement entered into during March 2021 to split the interest rate swap into two arrangements relating to interest payments on a total of $200.0 of its Term Loan arrangements, effective March 31, 2021, and October 31, 2022, respectively. Both of these derivatives have a maturity date of March 28, 2024. The Company applies hedge accounting by designating the interest rate swaps as a hedge on applicable future quarterly interest payments.
In August 2022, the Company entered into two interest rate swap arrangements relating to interest payments on a total of $779.8 of its Term Loan arrangements, effective August 5, 2022, and August 4, 2022, respectively. Both of these derivatives have notional amounts that amortize downward, and a maturity date of October 31, 2026. 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 12 - Debt and Item 7A. 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 Consolidated Balance Sheets, according to the duration of related cash flows. The fair value of the interest rate swaps was an asset of $49.5 and $2.0 as of December 31, 2022 and December 31, 2021, respectively.
The following table summarizes the changes in AOCI (net of tax) related to cash flow hedges for the year ended December 31, 2022, 2021 and 2020:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | |
| AOCI Balance at December 31, 2019 | $ | (2.8) | |
| Derivative losses recognized in Other comprehensive loss | (4.4) | |
| Amount reclassified out of Other comprehensive loss to Net loss | 3.4 | |
| AOCI Balance at December 31, 2020 | $ | (3.8) | |
| Derivative gains recognized in Other comprehensive loss | 3.4 | |
| Amount reclassified out of Other comprehensive loss to Net loss | 3.0 | |
| AOCI Balance at December 31, 2021 | $ | 2.6 | |
| Derivative gains recognized in Other comprehensive loss | 52.8 | |
| Amount reclassified out of Other comprehensive loss to Net loss | (4.1) | |
| AOCI Balance at December 31, 2022 | $ | 51.3 | |
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 (gain) from the mark to market adjustment of $1.2, $6.9 and $(20.8) for the year ended December 31, 2022, 2021 and 2020, respectively, in Other operating (income) expense, net on the Consolidated Statements of Operations. The principal amount of outstanding foreign currency contracts was $165.1 and $216.7 as of December 31, 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 Consolidated Statements of Operations. 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 $0.8 and $2.2 and a liability balance of $0.4 and $0.7 as of December 31, 2022 and December 31, 2021, respectively, which was classified within Other current assets and Accrued expenses and other current liabilities, respectively, on the Consolidated Balance Sheets. See Note 10 - Fair Value Measurements for additional information related to the fair value of derivative instruments.
Note 10: Fair Value Measurements
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The Company records certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy that prioritizes the inputs used to measure fair value is described below. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•Level 3 - Unobservable inputs that are supported by little or no market activity. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Below is a summary of the valuation techniques used in determining fair value:
Derivatives - Derivatives consist of foreign exchange contracts and interest rate swaps. The fair value of foreign exchange contracts is based on observable market inputs of spot and forward rates or using other observable rates. The fair value of the interest rate swaps is the estimated amount that the Company would receive or pay to terminate such agreements, taking
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
into account market interest rates and the remaining time to maturities or using market inputs with mid-market pricing as a practical expedient for bid-ask spread. See Note 9 - Derivative Instruments for additional information.
Contingent Consideration - The Company values contingent cash consideration related to business combinations using a weighted probability calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows. Key assumptions used to estimate the fair value of contingent consideration include revenue, net new business and operating forecasts and the probability of achieving the specific targets. The Company values contingent stock consideration related to business combinations using observable market data, adjusted for indemnity losses and claims for indemnity losses valued using other indirect market inputs observable in the marketplace.
Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable, and Other Accruals - The carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and other accruals readily convertible into cash approximate fair value because of the short-term nature of the instruments.
Debt - The carrying value of the Company's variable interest rate debt, excluding unamortized debt issuance costs and original issue discount, approximates fair value due to the short-term nature of the interest rate benchmark rates. The fair value of the Company's variable and fixed rate debt is estimated based on market observable data for our debt. The fair value of the Company's debt was $4,709.6 and $5,595.5 at December 31, 2022 and 2021, respectively, and is considered Level 2 under the fair value hierarchy.
Private Placement Warrants - The Company has determined that the Private Placement Warrants for shares of the Company's ordinary stock that are not indexed to its own stock are subject to accounting treatment as a liability and should be reported at fair value on the balance sheet. The Company has determined that the fair value of each Private Placement Warrant issued using a Monte Carlo simulation approach for valuations performed through the August 14, 2019, modification described in Note 15 - Share-based Compensation, and a Black-Scholes option valuation model thereafter. Accordingly, the warrants issued are classified as Level 3 financial instruments and are subject to remeasurement at each balance sheet date. Any change in fair value is recognized as a component of mark to market adjustment on financial instruments in the Consolidated Statements of Operations. The assumptions in the models include, but are not limited to, risk-free interest rate, expected volatility of stock prices for the Company and its peer group, dividend yield, and a DLOM was applied to shares that are subject to remaining post vesting lock up restrictions. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the ordinary stock warrants. At that time, the portion of the warrant liabilities related to the ordinary stock warrants will be reclassified to additional paid-in capital. The amount of income recorded within the Consolidated Statement of Operations for each period as a result of the changes in fair value was $206.8 and $81.3 for the year ended December 31, 2022 and 2021, respectively.
Forward Contracts and Interest Rate Swaps - The Company has determined that its forward contracts, included in other current assets, along with its interest rate swaps, included in Accrued expenses and other current liabilities and Other non-current liabilities according to the duration of related cash flows, reside within Level 2 of the fair value hierarchy.
The Company enters into foreign currency contracts that are not designated as hedges as defined under ASC 815. The purpose of these derivative instruments is to help manage the Company's exposure to foreign exchange rate risks. These contracts are initially recognized at fair value at the date the contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. These contracts generally do not exceed 180 days in duration, and these instruments are carried as assets when the fair value is positive (Other current assets on the Consolidated Balance Sheets), and as liabilities when the fair value is negative (Other current liabilities on the Consolidated Balance Sheets). The resulting gain or loss is recognized in profit or loss (other operating income (expense), net) immediately.
The Company assesses the fair value of these instruments, considering current and anticipated movements in future interest rates and the relevant currency spot and future rates available in the market. The Company receives third party valuation reports to corroborate our determination of fair value. Accordingly, these instruments are classified as Level 2 inputs.
Employee Phantom Share Plan - As of December 31, 2021, the Company maintained a liability associated with the CPA Global Phantom Equity Plan, a portion of which was recorded in connection with the acquisition opening balance sheet. Changes in the liability were recorded to Selling, general and administrative costs and Cost of revenues in the Consolidated Statements of Operations, which was primarily driven by the change in fair value pertaining to Clarivate's share price that is
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
marked to market at the end of each reporting period. To the extent vesting of awards were accelerated for colleagues, the Company accounted for these as a modification and acceleration of share-based compensation charges within the Restructuring and impairment line item of the Consolidated Statement of Operations. The current and non-current portions of the liability were recorded in Accrued expenses and other current liabilities and Other non-current liabilities, respectively. The balances were classified as Level 2 in the fair value hierarchy because it was based on observable market data and other indirect observable market input such as, the expected volatility of the Company’s stock price, the DLOM, and the discount for potential forfeiture or modification.
The following table provides a summary of the Company’s assets and liabilities that were recognized at fair value on a recurring basis at December 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
| | | Level 2 | | Level 3 | | Total
Fair Value |
| Assets | | | | | | | |
| Forward currency contracts asset - current | | | $ | 0.8 | | | $ | — | | | $ | 0.8 | |
| Interest rate swap asset - current | | | 2.3 | | | — | | | 2.3 | |
| Interest rate swap asset - non-current | | | 47.2 | | | — | | | 47.2 | |
| Total | | | $ | 50.3 | | | $ | — | | | $ | 50.3 | |
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| Liabilities | | | | | | | |
| Warrant liability | | | $ | — | | | $ | 21.0 | | | $ | 21.0 | |
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| Forward currency contracts liability - current | | | 0.4 | | | — | | | 0.4 | |
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| Total | | | $ | 0.4 | | | $ | 21.0 | | | $ | 21.4 | |
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| | | December 31, 2021 |
| | | Level 2 | | Level 3 | | Total
Fair Value |
| Assets | | | | | | | |
| Forward currency contracts asset - current | | | $ | 2.2 | | | $ | — | | | $ | 2.2 | |
| Interest rate swap asset - non-current | | | 2.0 | | | — | | | 2.0 | |
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| Total | | | $ | 4.2 | | | $ | — | | | $ | 4.2 | |
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| Liabilities | | | | | | | |
| Warrant liability | | | $ | — | | | $ | 227.8 | | | $ | 227.8 | |
CPA Global Equity Plan liability - current(1) | | | 152.4 | | | — | | | 152.4 | |
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| Forward currency contracts liability - current | | | 0.7 | | | — | | | 0.7 | |
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| Total | | | $ | 153.1 | | | $ | 227.8 | | | $ | 380.9 | |
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(1) This amount is reflected within Accrued expenses and other current liabilities within our Consolidated Balance Sheets as of December 31, 2021. |
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Private Placement Warrants - The following table summarizes the changes in the Private Placement Warrants liability for the year ended December 31, 2022 and 2021:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
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| Balance at December 31, 2020 | $ | 312.7 | | | |
| Mark to market adjustment on financial instruments | (81.3) | | | |
| Exercise of Private Placement Warrants | (3.6) | | | |
| Balance at December 31, 2021 | $ | 227.8 | | | |
| Mark to market adjustment on financial instruments | (206.8) | | | |
| Exercise of Private Placement Warrants | — | | | |
| Balance at December 31, 2022 | $ | 21.0 | | | |
There were no transfers of assets or liabilities between levels during the year ended December 31, 2022 and 2021.
Non-Financial Assets Valued on a Non-Recurring Basis
The Company’s long-lived assets, including goodwill, indefinite-lived intangible and finite-lived intangible assets subject to amortization, are measured at fair value on a non-recurring basis. These assets are measured at cost but are written-down to fair value, if necessary, as a result of impairment.
Finite-lived Intangible Assets - If a triggering event occurs, the Company determines the estimated fair value of finite-lived intangible assets by determining the present value of the expected cash flows.
Indefinite-lived Intangible Asset - If a qualitative analysis indicates that it is more likely than not that the estimated fair value is less than the carrying value of an indefinite-lived intangible asset, the Company determines the estimated fair value of the indefinite-lived intangible asset (trade name) by determining the present value of the estimated royalty payments on an after-tax basis that it would be required to pay the owner for the right to use such trade name. If the carrying amount exceeds the estimated fair value, an impairment loss is recognized in an amount equal to the excess.
Goodwill - Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets resulting from business combinations. The Company evaluates its goodwill for impairment at the reporting unit level, defined as an operating segment or one level below an operating segment, annually as of October 1 or more frequently if impairment indicators arise in accordance with ASC Topic 350. The Company performs qualitative analysis of macroeconomic conditions, industry and market considerations, internal cost factors, financial performance, fair value history and other company specific events. If this qualitative analysis indicates that it is more likely than not that the estimated fair value is less than the book value for the respective reporting unit, the Company applies a one-step impairment test in which the Company determines whether the estimated fair value of the reporting unit is in excess of its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the estimated fair value of the reporting unit, the Company performs the second step of the impairment test to determine the implied estimated fair value of the reporting unit’s goodwill. The Company determines the implied estimated fair value of goodwill by determining the present value of the estimated future cash flows for each reporting unit and comparing the reporting unit’s risk profile and growth prospects to selected, reasonably similar publicly traded companies.
Right of Use Asset - The guidance in ASC 360-10 requires three steps to identify, recognize and measure the impairment of a long-lived asset (asset group) to be held and used. The Company evaluates whether there are indicators of impairment present (i.e., whether there are any events or changes in circumstances that indicate that the carrying amount of the long-lived asset (group) might not be recoverable, including the ceased use of the leased property). The Company performs tests for recoverability and if indicators of impairment are present, the Company perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the long-lived asset (asset group) in question to the carrying amount of the long-lived asset (asset group). If the undiscounted cash flows used in the test for recoverability are less than the carrying amount of the long-lived asset (asset group), the Company determines the fair value of the long-lived asset (asset group) and recognizes an impairment loss if the carrying amount of the long-lived asset (asset group) exceeds its fair value. The Company recorded a non-cash adjustment to Restructuring and impairment within the Consolidated Statement of Operations to reduce the carrying value of operating lease right of use assets by $8.6 and $57.3 for the year ended December 31, 2022 and 2021, respectively. Additionally, the Company incurred $0.7 and $3.3 in lease termination fees during the year ended December 31, 2022 and 2021, respectively. Fair value assumptions including sublease probabilities and the present value factor were used in the impairment calculation.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
Note 11: Pension and Other Post‑Retirement Benefits
Retirement Benefits
The Company may be required to sponsor pension benefit plans, for certain international markets, which are unfunded and are not material for the Company. The net periodic pension expense is actuarially determined on an annual basis by independent actuaries using the projected unit credit method. The determination of benefit expense requires assumptions such as the discount rate, which is used to measure service cost, benefit plan obligations and the interest expense on the plan obligations. Other significant assumptions include expected mortality, the expected rate of increase with respect to future compensation and pension. Because the determination of the cost and obligations associated with employee future benefits requires the use of various assumptions, there is measurement uncertainty inherent in the actuarial valuation process. Actual results will differ from results which are estimated based on assumptions.
The liability recognized in the Consolidated Balance Sheets is the present value of the defined benefit obligation at the end of the reporting period. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability. The defined benefit obligation is included in Other non-current liabilities in the Consolidated Balance Sheets. All actuarial gains and losses that arise in calculating the present value of the defined benefit obligation are recognized immediately in Accumulated deficit and included in the Consolidated Statements of Comprehensive Income (Loss).
Employer contributions to defined contribution plans are expensed as incurred, which is as the related employee service is rendered.
Defined contribution plans
Employees participate in various defined contribution savings plans that provide for Company-matching contributions. Costs for future employee benefits are accrued over the periods in which employees earn the benefits. Total expense related to defined contribution plans was $30.5, $18.1 and $13.3 for the years ended December 31, 2022, 2021 and 2020, respectively, which approximates the cash outlays related to the plans.
Defined benefit plans
A limited number of employees participate in noncontributory defined benefit pension plans that are maintained in certain international markets. The plans are managed and funded to provide pension benefits to covered employees in accordance with local regulations and practices. The Company’s obligations related to the defined benefit pension plans is in Accrued expenses and other current liabilities and Other non-current liabilities.
The following table presents the changes in projected benefit obligations, the plan assets, and the funded status of the defined benefit pension plans:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
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| December 31, |
| 2022 | | 2021 |
| Obligation and funded status: | | | |
| Change in benefit obligation | | | |
| Projected benefit obligation at beginning of year | $ | 21.5 | | | $ | 21.6 | |
| Service costs | 1.5 | | | 1.5 | |
| Interest cost | 0.4 | | | 0.3 | |
| Plan participant contributions | 0.1 | | | 0.1 | |
| Actuarial (gains) losses | (2.7) | | | (0.5) | |
| Acquisition/Business Combination/Divestiture | (0.3) | | | 0.9 | |
| Benefit payments | (0.9) | | | (0.9) | |
| Expenses paid from assets | — | | | — | |
| Settlements | (0.1) | | | (0.3) | |
| Curtailment | (0.3) | | | — | |
| Effect of foreign currency translation | (1.5) | | | (1.2) | |
| Projected benefit obligation at end of year | $ | 17.7 | | | $ | 21.5 | |
| Change in plan assets | | | |
| Fair value of plan assets at beginning of year | $ | 6.7 | | | $ | 6.7 | |
| Actual return on plan assets | 0.1 | | | 0.3 | |
| Settlements | (0.1) | | | (0.3) | |
| Plan participant contributions | 0.1 | | | 0.1 | |
| Acquisition/Business Combination/Divestiture | — | | | — | |
| Employer contributions | 1.1 | | | 1.4 | |
| Benefit payments | (0.9) | | | (0.9) | |
| Expenses paid from assets | — | | | — | |
| Effect of foreign currency translation | (0.3) | | | (0.6) | |
| Fair value of plan assets at end of year | 6.7 | | | 6.7 | |
| Unfunded status | $ | (11.0) | | | $ | (14.8) | |
The following table summarizes the amounts recognized in the Consolidated Balance Sheets related to the defined benefit pension plans:
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| December 31, |
| 2022 | | 2021 |
| Current liabilities | $ | (1.1) | | | $ | (1.1) | |
| Non-current liabilities | (9.9) | | | (13.7) | |
| AOCI | (2.1) | | | 0.7 | |
The following table provides information for those pension plans with an accumulated benefit obligation in excess of plan assets and projected benefit obligations in excess of plan assets:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
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| December 31, |
| 2022 | | 2021 |
| Plans with accumulated benefit obligation in excess of plan assets: | | | |
| Accumulated benefit obligation | $ | 15.6 | | | $ | 18.6 | |
| Fair value of plan assets | 6.7 | | | 6.7 | |
| Plans with projected benefit obligation in excess of plan assets: | | | |
| Projected benefit obligation | $ | 17.7 | | | $ | 21.5 | |
| Fair value of plan assets | 6.7 | | | 6.7 | |
The components of net periodic benefit cost changes in plan assets and benefit obligations recognized as follows:
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| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Service cost | $ | 1.5 | | | $ | 1.5 | | | 1.1 | |
| Interest cost | 0.4 | | | 0.3 | | | 0.3 | |
| Expected return on plan assets | (0.2) | | | (0.2) | | | (0.2) | |
| Amortization of actuarial gains | 0.1 | | | — | | | — | |
| Settlement/(Curtailment) | (0.3) | | | (0.1) | | | (0.5) | |
| Net periodic benefit cost | $ | 1.5 | | | $ | 1.5 | | | $ | 0.7 | |
The following table presents the weighted-average assumptions used to determine the net periodic benefit cost as of:
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| December 31, |
| 2022 | | 2021 |
| Discount rate | 2.38 | % | | 1.66 | % |
| Expected return on plan assets | 3.04 | % | | 3.04 | % |
| Rate of compensation increase | 4.89 | % | | 5.18 | % |
| Social Security increase rate | 2.50 | % | | 2.50 | % |
| Pension increase rate | 1.90 | % | | 1.80 | % |
The following table presents the weighted-average assumptions used to determine the benefit obligations as of:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Discount rate | 4.84 | % | | 2.38 | % |
| Rate of compensation increase | 6.35 | % | | 5.79 | % |
| Social Security increase rate | 3.00 | % | | 2.50 | % |
| Pension increase rate | 2.25 | % | | 1.90 | % |
The Company determines the assumptions used to measure plan liabilities as of the December 31 measurement date.
The discount rate represents the interest rate used to determine the present value of the future cash flows currently expected to be required to settle the Company’s defined benefit pension plan obligations. The discount rates are derived using weighted average yield curves on corporate bonds. The cash flows from the Company’s expected benefit obligation payments are then matched to the yield curve to derive the discount rates. At December 31, 2022, the discount rates ranged
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
from 1.60% to 7.20% for the Company’s pension plan and postretirement benefit plan. At December 31, 2021, the discount rates ranged from 0.55% to 5.90% for the Company’s pension plan and postretirement benefit plan.
Plan Assets
The general investment objective for our plan assets is to obtain a rate of investment return consistent with the level of risk being taken and to earn performance rates of return as required by local regulations for our defined benefit plans. For such plans, the strategy is to invest primarily 100% in insurance contracts. Plan assets held in insurance contracts do not have target asset allocation ranges. The expected long-term return on plan assets is estimated based off of historical and expected returns. As of December 31, 2022, the expected weighted-average long-term rate of return on plan assets was 3%.
The fair value of our plan assets and the respective level in the far value hierarchy by asset category is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Fair value measurement of pension plan assets: | Level 1 | Level 2 | Level 3 | Total Assets | | Level 1 | Level 2 | Level 3 | Total Assets |
| Insurance contract | $ | — | | — | | 6.7 | | $ | 6.7 | | | $ | — | | — | | 6.7 | | $ | 6.7 | |
The fair value of the insurance contracts is an estimate of the amount that would be received in an orderly sale to a market participant at the measurement date. The amount the plan would receive from the contract holder if the contracts were terminated is the primary input and is unobservable. The insurance contracts are therefore classified as Level 3 investments.
The following table provides the estimated pension benefit payments that are payable from the plans to participants as of December 31, 2022, for the following years:
| | | | | |
| 2023 | $ | 1.3 | |
| 2024 | 1.4 | |
| 2025 | 1.5 | |
| 2026 | 1.7 | |
| 2027 | 1.7 | |
| 2028 to 2032 | 8.6 | |
| Total | $ | 16.2 | |
Based on the current status of our defined benefit obligations, we expect to make payments in the amount of $1.0 to fund these plans in 2023. However, this estimate may change based on future regulatory changes.
Note 12: Debt
The following table is a summary of the Company’s debt:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
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| | | | December 31, 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 | | 7.234 | % | | — | | | 3.359 | % | | 175.0 | |
| Term Loan Facility | | 2026 | | 7.384 | % | | 2,497.4 | | | 3.860 | % | | 2,818.8 | |
| Senior Secured Notes | | 2026 | | 4.500 | % | | 700.0 | | | 4.500 | % | | 700.0 | |
Finance lease(1) | | 2036 | | 6.936 | % | | 31.3 | | | 3.800 | % | | 30.8 | |
| Total debt outstanding | | | | | | 5,071.3 | | | | | 5,567.2 | |
| Debt issuance costs | | | | | | (36.8) | | | | | (47.1) | |
| Term Loan Facility (2026), Senior Notes (2029), Senior Secured Notes (2028), discounts | | | | | | (28.5) | | | | | (33.2) | |
| Current portion of long-term debt | | | | | | (1.0) | | | | | (30.6) | |
| Long-term debt | | | | | | $ | 5,005.0 | | | | | $ | 5,456.3 | |
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(1) See Note 6 - Leases for additional information. |
The loans were priced at market terms and collectively have a weighted average interest rate of 5.883% and 4.096% for the year ended December 31, 2022 and 2021, respectively.
Financing Transactions
Senior Notes (2029) and Senior Secured Notes (2028)
The Company has $921.2 aggregate principal amount of its Senior Secured Notes due 2028 and $921.4 aggregate principal amount of its Senior Notes due 2029 bearing interest at a rate of 3.875% and 4.875% per annum, respectively, payable semi-annually to holders of record on June 30 and December 30 of each year. The first interest payment was paid in December 2021. Both of these series of 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 series of 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 Senior Secured Notes and Senior Notes are subject to redemption as a result of certain changes in control at 101% of the principal amount, plus accrued and unpaid interest to the date of purchase. At the Company’s election, these Notes may be redeemed (i) prior to June 30, 2024, at a redemption price equal to 100% of the aggregate principal amount of the Notes being redeemed, plus a “make-whole” premium and accrued and unpaid interest to the date of redemption; (ii) prior to June 30, 2024, the Company may use funds, in an aggregate amount not exceeding the net cash proceeds of one or more specified equity offerings, to redeem up to 40% of the aggregate principal amount of the Senior Secured Notes and Senior Notes at a redemption price equal to 103.875% and 104.875% of the aggregate principal amount being redeemed, respectively, plus accrued and unpaid interest and additional amounts to the date of redemption provided that at least 50% of the original aggregate principal amount of the Notes issued on the Closing Date remains outstanding after the redemption (or all Notes are redeemed substantially concurrently) and the redemption occurs within 120 days of the date of the closing of such equity offering; or, (iii) on or after June 30, 2024, during the 12 month period commencing on June 30 of each of the years referenced below based on the call premiums listed below, plus accrued and unpaid interest to the date of redemption.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | | | | |
| Redemption Price (as a percentage of principal) |
Period | Senior Secured Notes (2028) | Senior Notes (2029) |
2024 | 101.938 | % | 102.438 | % |
2025 | 100.969 | % | 101.219 | % |
2026 and thereafter | 100.000 | % | 100.000 | % |
The Indenture governing the Senior Secured Notes due 2028 contains covenants which, among other things, limit the incurrence of additional indebtedness (including acquired indebtedness), issuance of certain preferred stock, the payment of dividends, making restricted payments and investments, the purchase or acquisition or retirement for value of any equity interests, the provision of loans or advances to restricted subsidiaries, the sale or lease or transfer of any properties to any restricted subsidiaries, the transfer or sale of assets, and the creation of certain liens. As of December 31, 2022, we were in compliance with the indenture covenants.
Senior Secured Notes (2026)
The Company has $700.0 aggregate principal amount of its Senior Secured Notes due 2026 bearing interest at 4.50% per annum, payable semi-annually to holders of record on May 1 and November 1 of each year. The first interest payment was paid in May 2020. The Senior Secured Notes due 2026 were issued by Camelot Finance S.A. (the "Lux Issuer"), 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 each of Clarivate's indirect subsidiaries that is an obligor or guarantor under the Credit Facilities and are general senior secured obligations of the Lux Issuer and are secured on a first-priority basis by the collateral now owned or hereafter acquired by the Lux Issuer and each of the guarantors that secures the Issuer’s and such guarantor’s obligations under Clarivate's credit facilities (subject to permitted liens and other exceptions).
The Senior Secured Notes due 2026 are subject to redemption as a result of certain changes in tax laws or treaties of (or their interpretation by) a relevant taxing jurisdiction at 100% of the principal amount, plus accrued and unpaid interest to the date of redemption, and upon certain changes in control at 101% of the principal amount, plus accrued and unpaid interest to the date of purchase. Additionally, at the Company’s election, the Notes may be redeemed (i) prior to November 1, 2022 at a redemption price equal to 100% of the aggregate principal amount of Notes being redeemed plus a “make-whole” premium and accrued and unpaid interest to the date of redemption or (ii) prior to November 1, 2022, the Company may use funds in an aggregate amount not exceeding the net cash proceeds of one or more specified equity offerings to redeem up to 40% of the aggregate principal amount of the Notes at a redemption price equal to 104.5% of the aggregate principal amount of the Notes being redeemed, plus accrued and unpaid interest and additional amounts to the date of redemption provided that at least 50% of the original aggregate principal amount of the Notes issued on the Closing Date remains outstanding after the redemption (or all Notes are redeemed substantially concurrently) and the redemption occurs within 120 days of the date of the closing of such equity offering or (iii) on November 1 of each of the years and respective call premiums listed below, plus accrued and unpaid interest to the date of redemption.
| | | | | |
| Period | Redemption Price
(as a percentage of principal) |
| 2023 | 101.125 | % |
| 2024 and thereafter | 100.000 | % |
The Indenture governing the Senior Secured Notes due 2026 contains covenants which, among other things, limit the incurrence of additional indebtedness (including acquired indebtedness), issuance of certain preferred stock, the payment of dividends, making restricted payments and investments, the purchase or acquisition or retirement for value of any equity interests, the provision of loans or advances to restricted subsidiaries, the sale or lease or transfer of any properties to any restricted subsidiaries, the transfer or sale of assets, and the creation of certain liens. As of December 31, 2022, we were in compliance with the indenture covenants.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
The Credit Facilities
Borrowings under the Credit Facilities, bear interest at a floating rate which can be, at our option, either (i) a Eurocurrency rate plus an applicable margin or (ii) an alternate base rate (equal to the highest of (i) the rate which Bank of America, N.A. announces as its prime lending rate, (ii) the Federal Funds Effective Rate plus one-half of 1.00% and (iii) the Eurocurrency rate for an interest period of one month for loans denominated in dollars plus 1.00% plus an applicable margin). Commencing with the last day of the first full quarter ending after the closing date of the Credit Facilities, the Term Loan Facility will amortize in equal quarterly installments in an amount equal to 1.00% per annum of the original par principal amount thereof, with the remaining balance due at final maturity.
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 Agreement governing the Credit Facilities contains customary events of default and restrictive covenants that limit us from, among other things, incurring certain additional indebtedness, issuing preferred stock, making certain restricted payments and investments, certain transfers or sales of assets, entering into certain affiliate transactions or incurring certain liens.
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 Senior Secured Notes due 2026 and 2028 and Senior Notes 2029), 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.
The Company may be subject to certain negative covenants, including either a fixed charge coverage ratio, total first lien net leverage ratio, or total net leverage ratio if certain conditions are met. As of December 31, 2022, the Company was in compliance with the covenants for the credit facilities.
The obligations of the borrowers under the Credit Agreement are guaranteed by UK Holdco and certain of its restricted subsidiaries and are collateralized by substantially all of UK Holdco’s and certain of its restricted subsidiaries’ assets (with customary exceptions described in the Credit Agreement). UK Holdco and its restricted subsidiaries are subject to certain covenants including restrictions on UK Holdco’s ability to pay dividends, incur indebtedness, grant a lien over its assets, merge or consolidate, make investments, or make payments to affiliates.
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.
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 increased by $400.0 from $350.0 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 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) and 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.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
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 is 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.
During the fourth quarter of 2022, the Company paid the $175.0 outstanding balance on its Revolving Credit Facility that we had borrowed in November 2021 and used the net proceeds for general corporate purposes. As a result, the Company had no outstanding balance on its Revolving Credit Facility as of December 31, 2022.
As of December 31, 2022, letters of credit totaling $9.5 were collateralized by the Revolving Credit Facility. Notwithstanding the Revolving Credit Facility, the Company had unsecured corporate guarantees outstanding for $12.9 and cash collateralized letters of credit totaling $3.3 as of December 31, 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 2026, which was fully drawn at closing. During the fourth quarter of 2022, the Company made a $300.0 prepayment on its Term Loan Facility. Prior to this prepayment, the principal amount of the Term Loan Facility was 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 of the initial term loans which, as of December 31, 2022, was $2,497.4.
The fair value of the Company’s debt was $4,709.6 and $5,595.5 at December 31, 2022 and December 31, 2021, respectively, and is considered Level 2 under the fair value hierarchy. Refer to Note 10 - Fair Value Measurements for additional information.
Amounts due under all of the Company's outstanding borrowings as of December 31, 2022, for the next five years are as follows:
| | | | | |
| 2023 | $ | 1.0 | |
| 2024 | 1.2 | |
| 2025 | 1.3 | |
| 2026 | 3,198.8 | |
| 2027 | 1.7 | |
| Thereafter | 1,867.3 | |
| Total maturities | 5,071.3 | |
| Less: capitalized debt issuance costs and original issue discount | (65.3) | |
Total, including the current portion of long-term debt, as of December 31, 2022 | $ | 5,006.0 | |
Note 13: Revenue
Disaggregated Revenues
We disaggregate our revenues by segment (see Note 19 - 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.
•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
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
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:
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| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Subscription revenues | $ | 1,619.8 | | | $ | 1,034.4 | | | $ | 877.7 | |
| Re-occurring revenues | 441.9 | | | 453.2 | | | 111.9 | |
| Transactional and other revenues | 599.1 | | | 393.3 | | | 287.6 | |
| Total revenues, gross | 2,660.8 | | | 1,880.9 | | | 1,277.2 | |
Deferred revenues adjustment(1) | (1.0) | | | (4.0) | | | (23.1) | |
| Total revenues, net | $ | 2,659.8 | | | $ | 1,876.9 | | | $ | 1,254.1 | |
| | | | | |
(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. |
Cost to Obtain a Contract
The Company has prepaid sales commissions included in both Prepaid expenses and Other non-current assets on the balance sheets. The amount of prepaid sales commissions included in Prepaid expenses was $27.7 and $27.2 as of December 31, 2022 and 2021, respectively. The amount of prepaid sales commissions included in Other non-current assets was $15.5 and $17.1 as of December 31, 2022 and 2021, respectively. The Company has not recorded any impairments against these prepaid sales commissions.
Contract Balances
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | | | | | | | |
| 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 (December 31, 2022) | 872.1 | | | 947.5 | | | 38.5 | |
| Decrease | $ | 34.3 | | | $ | 82.9 | | | $ | 15.7 | |
| | | | | |
| Opening (January 1, 2021) | $ | 737.7 | | | $ | 707.3 | | | $ | 41.4 | |
| Closing (December 31, 2021) | 906.4 | | | 1,030.4 | | | 54.2 | |
| Increase | $ | (168.7) | | | $ | (323.1) | | | $ | (12.8) | |
| | | | | |
| Opening (January 1, 2020) | $ | 333.9 | | | $ | 407.3 | | | $ | 19.7 | |
| Closing (December 31, 2020) | 737.7 | | | 707.3 | | | 41.4 | |
| Increase | $ | (403.8) | | | $ | (300.0) | | | $ | (21.7) | |
The amount of revenue recognized in the period that was included in the opening deferred revenues balances was $955.9, $563.1 and $400.7 for the years ended December 31, 2022, 2021 and 2020, respectively. This revenue consists primarily of subscription revenues.
Transaction Price Allocated to Remaining Performance Obligations
As of December 31, 2022, approximately $101.6 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 on approximately 51% of these performance obligations over the next 12 months. Of the remaining 49%, 24% is expected to be recognized within the following year, 16% is expected to be recognized within three to five years, with the final 9% expected to be recognized within six to ten years.
Note 14: Shareholders’ Equity
As of December 31, 2022, there were unlimited shares of ordinary stock authorized and 674.4 million shares issued and outstanding, with no par value. The Company did not hold any shares as treasury shares as of December 31, 2022, and 0.5 million shares as treasury shares as of December 31, 2021. 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), 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 December 31, 2022, we accrued $6.5 of 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).
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
Each of our MCPS will automatically convert on the second business day immediately following the last trading day of the "Settlement Period" (the 30 consecutive Trading Day period commencing on, and including, the 31st Scheduled Trading Day immediately preceding June 1, 2024) into between 3.2052 and 3.8462 of our ordinary shares (respectively, the “Minimum Conversion Rate” and “Maximum Conversion Rate”), each subject to anti-dilution adjustments. The number of our ordinary shares issuable on conversion of the convertible preferred shares will be determined based on an Average VWAP per ordinary share over the Settlement Period. At any time prior to June 1, 2024, holders may elect to convert each convertible preferred share into ordinary shares at the Minimum Conversion Rate.
Holders of the preferred shares have the right to convert all or any portion of their shares at any time until the close of business on the mandatory conversion date. Early conversions that are not in connection with a “Make-Whole Fundamental Change” will be settled at the minimum conversion rate. If a Make-Whole Fundamental Change occurs, holders of the preferred shares will, in certain circumstances, be entitled to convert their shares at an increased conversion rate for a specified period of time and receive an amount to compensate them for certain unpaid accumulated dividends and any remaining future scheduled dividend payments.
The preferred shares will not be redeemable at our election before the mandatory conversion date and the holders of these shares do not have any voting rights, with limited exceptions. In the event that preferred share dividends have not been declared and paid in an aggregate amount corresponding to six or more dividend periods, whether or not consecutive, the holders of these shares will have the right to elect two new directors until all accumulated and unpaid MCPS dividends have been paid in full, at which time that right will terminate.
Treasury Shares
CPA Global Acquisition Shares - During the year ended December 31, 2021, 5.8 million shares held in the EBT were sold at an average net price per share of $23.78 to fund the payment to the respective employees via payroll in the first quarter of 2022 as it relates to the first lock-up period and vesting date which occurred on October 1, 2021. Given the original share value of $30.99 as of the date of the acquisition, an associated loss was recognized within the Consolidated Statement of Changes in Equity in the amount of $41.6.
During the year ended December 31, 2022, the last remaining 0.5 million 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 $10.72 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 Consolidated Statement of Changes in Equity in the amount of $11.2.
During January 2021, the Company issued 1.5 million ordinary shares as per the purchase agreement for the acquisition of CPA Global pursuant to a hold-back clause within the purchase agreement for a total of $43.9, which was satisfied. See Note 20 - 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 year ended December 31, 2022, the Company repurchased 10.7 million ordinary shares at an average price per share of $16.33 with a total carrying value of $175.0 all of which were subsequently retired at an average price at retirement of $15.61 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 December 31, 2022, the Company had approximately $825.0 of availability remaining under this program.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
Note 15: Share-based Compensation
The Company grants share-based awards under the Clarivate Plc 2019 Incentive Award Plan ("the Plan"). A maximum aggregate amount of 60.0 million ordinary shares are reserved for issuance under the Plan. Equity awards under the 2019 Incentive Award Plan may be issued in the form of options to purchase shares of the Company which are exercisable upon the occurrence of conditions specified within individual award agreements. As of December 31, 2022 and 2021, approximately 29.7 million and 40.2 million shares, respectively, 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 Consolidated Statements of Operations. Total share-based compensation expense for the year ended December 31, 2022, 2021 and 2020, comprised of the following:
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| | | | | | | | | |
| Year Ended December 31, 2022 |
| Stock Options | | RSUs | | PSUs | | CPA Global Equity Plan | | Total |
| Cost of revenues | $ | — | | | $ | 32.9 | | | $ | — | | | $ | 3.4 | | | $ | 36.3 | |
| Selling, general and administrative costs | 0.4 | | | 57.6 | | | 3.2 | | | 4.7 | | | 65.9 | |
| Total share-based compensation expense | $ | 0.4 | | | $ | 90.5 | | | $ | 3.2 | | | $ | 8.1 | | | $ | 102.2 | |
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| Year Ended December 31, 2021 |
| Stock Options | | RSUs | | PSUs | | CPA Global Equity Plan | | Total |
| Cost of revenues | $ | 0.1 | | | $ | 18.9 | | | $ | 0.5 | | | $ | 25.7 | | | $ | 45.2 | |
| Selling, general and administrative costs | 0.4 | | | 32.4 | | | 3.9 | | | 57.2 | | | 93.9 | |
| Total share-based compensation expense | $ | 0.5 | | | $ | 51.3 | | | $ | 4.4 | | | $ | 82.9 | | | $ | 139.1 | |
| | | | | | | | | |
| Year Ended December 31, 2020 |
| Stock Options | | RSUs | | PSUs | | CPA Global Equity Plan/Other SBC Plans | | Total |
| Cost of revenues | $ | 0.2 | | | $ | — | | | $ | — | | | $ | 9.4 | | | $ | 9.6 | |
| Selling, general and administrative costs | 11.2 | | | 16.3 | | | 0.2 | | | 33.9 | | | 61.6 | |
| Total share-based compensation expense | $ | 11.4 | | | $ | 16.3 | | | $ | 0.2 | | | $ | 43.3 | | | $ | 71.2 | |
Total income tax benefits recognized for stock-based compensation arrangements were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Income tax benefits | $ | 8.3 | | | $ | 8.5 | | | $ | 30.6 | |
Stock Options
The Company’s stock option activity for the year ended December 31, 2022, and 2021, respectively is summarized below:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Options | | Weighted
Average Exercise
Price per Share | | Weighted-Average
Remaining
Contractual Life
(in years) | | Aggregate
Intrinsic
Value |
| Balance at December 31, 2021 | 4.8 | | | $ | 13.43 | | | 4.75 | | $ | 49.7 | |
| Granted | — | | | — | | | 0 | | — | |
| Exercised | (0.4) | | | 12.13 | | | 0 | | 0.8 | |
| Forfeited | (0.7) | | | 15.92 | | | 0 | | — | |
| Balance at December 31, 2022 | 3.7 | | | $ | 13.12 | | | 3.96 | | $ | 1.2 | |
| Vested and exercisable at December 31, 2022 | 3.7 | | | $ | 13.12 | | | 3.96 | | $ | 1.2 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Options | | Weighted
Average Exercise
Price per Share | | Weighted-Average
Remaining
Contractual Life
(in years) | | Aggregate
Intrinsic
Value |
| Balance at December 31, 2020 | 7.9 | | | $ | 12.95 | | | 6.2 | | $ | 132.0 | |
| Granted | — | | | — | | | 0 | | — | |
| Exercised | (3.1) | | | 12.19 | | | 0 | | (43.4) | |
| Forfeited | — | | | — | | | 0 | | |
| Balance at December 31, 2021 | 4.8 | | | $ | 13.43 | | | 4.75 | | $ | 49.7 | |
| Vested and exercisable at December 31, 2021 | 4.8 | | | $ | 13.43 | | | 4.75 | | $ | 49.7 | |
The aggregate intrinsic value in the table above represents the difference between the Company’s most recent valuation and the exercise price of each in-the-money option on the last day of the period presented. As of December 31, 2022 and 2021, there was no unrecognized compensation cost related to outstanding stock options.
The contractual term of the option ranges from one to ten years. Expected volatility is the average volatility over the expected terms of comparable public entities from the same industry. The risk-free interest rate is based on a treasury rate with a remaining term similar to the contractual term of the option. The Company is recently formed and at this time does not expect to distribute any dividends to the holders of the Company's ordinary shares. The Company recognizes forfeitures as they occur.
The assumptions used to value the Company’s options granted during the period presented and their expected lives were as follows:
| | | | | | | | | | | | | | | |
| | December 31, |
| | | 2021 | | 2020 |
| Weighted-average expected dividend yield | | | — | | — |
| Expected volatility | | | 25.32% - 35.34% | | 34.05% - 39.43% |
| Weighted-average expected volatility | | | 31.15 | % | | 34.79 % |
| Weighted-average risk-free interest rate | | | 0.37 | % | | 0.14 % |
| Expected life (in years) | | | 1.95 | | 1 |
Restricted Stock Units (“RSUs”) and Performance Stock Units (“PSUs”)
The following table summarizes the Company’s existing share-based compensation awards program activity for the year ended December 31, 2022, and 2021, respectively:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| RSUs | | RSUs Weighted
Average Grant Date Fair Value | | PSUs | | PSUs Weighted
Average Grant Date Fair Value |
| Balance at December 31, 2021 | 4.5 | | | $ | 23.42 | | | 1.4 | | | $ | 24.86 | |
| Granted | 12.9 | | | 12.14 | | 1.2 | | | 13.83 |
| Exercised/Vested | (2.9) | | | 22.27 | | — | | | — | |
| Forfeited/Unexercised | (1.0) | | | 16.99 | | (0.5) | | | 23.26 |
| Balance at December 31, 2022 | 13.5 | | | $ | 13.40 | | | 2.1 | | | $ | 17.67 | |
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| Total remaining unamortized compensation costs | $ | 106.6 | | | | | $ | 6.6 | | | |
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| Weighted average remaining service period | 1.07 years | | | | 1.55 years | | |
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| Year Ended December 31, 2021 |
| RSUs | | RSUs Weighted
Average Grant Date Fair Value | | PSUs | | PSUs Weighted
Average Grant Date Fair Value |
| Balance at December 31, 2020 | 1.8 | | | $ | 19.30 | | | 0.9 | | | $ | 25.16 | |
| Granted | 4.3 | | | 23.91 | | 0.7 | | | 23.56 |
| Vested | (1.0) | | | 23.18 | | — | | | 32.50 | |
| Forfeited | (0.6) | | | 23.39 | | (0.2) | | | 24.52 |
| Balance at December 31, 2021 | 4.5 | | | $ | 23.42 | | | 1.4 | | | $ | 24.86 | |
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| Total remaining unamortized compensation costs | $ | 63.0 | | | | | $ | 7.2 | | | |
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| Weighted average remaining service period | 0.94 years | | | | 1.51 years | | |
Warrants
In connection with the acquisition of Churchill Capital Corp consummated on May 13, 2019, the Company had warrants outstanding for certain individuals to purchase an aggregate of 52.8 million ordinary shares with an exercise price of $11.50 per share, consisting of 34.5 million public warrants and 18.3 million Private Placement Warrants. As of December 31, 2020, no public warrants were outstanding. On November 23, 2020, one individual exercised warrants for 0.3 million ordinary shares through a cashless redemption in which 0.1 million shares were withheld to cover the exercise price. The net impact of the redemption was an issuance of 0.2 million shares. Additionally, on January 21, 2021, one warrant holder exercised warrants for 0.2 million ordinary shares through a cashless redemption in which 0.1 million shares were withheld to cover the exercise price. The net impact of the redemption was an issuance of 0.1 million shares. As of December 31, 2022, there were 17.8 million ordinary shares outstanding for Private Placement Warrants.
The following table summarizes the changes in Private Placement Warrant shares outstanding as of December 31, 2022 and 2021.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | | | |
| Number of Shares | | Weighted Average Fair Value per Share | | |
| Outstanding at December 31, 2020 | 18.0 | | | $ | 17.35 | | | |
| Exercise of Private Placement Warrants | (0.2) | | | 16.93 | | | |
| Outstanding at December 31, 2021 | 17.8 | | | $ | 12.79 | | | |
| | | | | |
| Outstanding at December 31, 2021 | 17.8 | | | $ | 12.79 | | | |
| Exercise of Private Placement Warrants | — | | | 0 | | |
| Outstanding at December 31, 2022 | 17.8 | | | $ | 1.18 | | | |
CPA Global Phantom Plan
The acquired CPA Global business had a legacy deferred compensation plan. Under the plan, there are two groups of employee participants, including a non-management employee participant group and a management participant group. The vesting period for the management participant group plan includes both a lock up period vesting date of October 1, 2021, and an extended lock up period vesting date of October 1, 2022, for certain grants that were issued. The non-management employee participant group included a lock up period vesting period of October 1, 2021. For voluntary leavers under the plan, the participants would forfeit their awards. Given that the awards will be settled in cash, they are accounted for as a liability award in accordance with ASC 718. The liability balance is marked to market at the end of each reporting period.
In connection with the acquisition accounting in accordance with ASC 805, the Company performed an analysis by grant date to attribute the liability between the pre- and post- combination periods. Accordingly, the Company recorded a pre-combination liability of $19.5 which was offset to goodwill in acquisition accounting. The pre-combination liability is accreted over the remaining service periods and the related stock based compensation charge is recorded within the Cost of revenues and Selling, general and administrative costs line items of the Consolidated Statement of Operations.
Given the nature of the lock up periods and the retentive element to the award for the benefit of Clarivate, post-combination stock based compensation charges of $8.1, $82.9 and $29.9 were recorded within the Cost of revenues and Selling, general and administrative costs line items of the Consolidated Statement of Operations for the years ended December 31, 2022, 2021 and 2020, respectively. To the extent vesting of awards were accelerated for colleagues that were involuntarily terminated, the Company accounted for these as a modification and acceleration of stock based compensation charges of $0.1, $4.6 and $8.5 within the Restructuring and impairment line item of the Consolidated Statement of Operations for the years ended December 31, 2022, 2021 and 2020, respectively.
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 held cash that was classified as restricted cash on the Consolidated Balance Sheet. See Note 14 - Shareholders’ Equity for further details on the sale of shares in the EBT for the year ended December 2021 and December 2022 to fund the payment to the respective employees via payroll during 2022.
Note 16: Income Taxes
Income tax (benefit)/expense analyzed by jurisdiction is as follows:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | | 2020 | | |
| Current | | | | | | | |
| U.K. | $ | 9.7 | | | $ | 4.4 | | | $ | 1.3 | | | |
| U.S. Federal | (1.1) | | | 4.8 | | | 17.5 | | | |
| U.S. State | 2.8 | | | 0.3 | | | 2.9 | | | |
| Other | 25.4 | | | 20.2 | | | 15.8 | | | |
| Total current | 36.8 | | | 29.7 | | | 37.5 | | | |
| Deferred | | | | | | | |
| U.K. | 2.2 | | | (8.3) | | | (15.9) | | | |
U.S. Federal(1) | (56.0) | | | 6.0 | | | (15.0) | | | |
| U.S. State | (3.8) | | | (2.8) | | | (1.0) | | | |
| Other | (8.1) | | | (12.3) | | | (8.3) | | | |
Total deferred | (65.7) | | | (17.4) | | | (40.2) | | | |
| | | | | | | |
| | | | | | | |
| Total provision (benefit) for income taxes | $ | (28.9) | | | $ | 12.3 | | | $ | (2.7) | | | |
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(1) The $(56.0) for the year ended December 31, 2022 is inclusive of a release of valuation allowance in the amount of $(56.2) associated with an internal legal entity restructuring executed during the fourth quarter of 2022. | | |
The components of pre-tax income (loss) are as follows:
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | | 2020 | | |
| U.K. income (loss) | $ | 174.7 | | | $ | (13.1) | | | $ | (347.1) | | | |
| U.S. income (loss) | (3,721.5) | | | (284.9) | | | (47.2) | | | |
| Other income (loss) | (442.3) | | | 39.8 | | | 41.0 | | | |
| Pre-tax loss | $ | (3,989.1) | | | $ | (258.2) | | | $ | (353.3) | | | |
A reconciliation of the statutory U.K. income tax rate to the Company’s effective tax rate is as follows:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | | 2020 | | |
| Loss before tax: | $ | (3,989.1) | | | $ | (258.2) | | | $ | (353.3) | | | |
| Income tax (benefit) provision | (28.9) | | | 12.3 | | | (2.7) | | | |
| | | | | | | |
| Statutory rate | 19.0 | % | | 19.0 | % | | 19.0 | % | | |
| | | | | | | |
| | | | | | | |
| Effect of different tax rates | 1.5 | % | | 3.2 | % | | 1.8 | % | | |
| BEAT | (0.2) | % | | (3.8) | % | | (1.9) | % | | |
| Tax rate modifications | — | % | | 17.4 | % | | — | % | | |
| Valuation Allowances | (15.2) | % | | (39.0) | % | | (21.1) | % | | |
| Share-based compensation | (0.2) | % | | (2.7) | % | | 6.6 | % | | |
| Other permanent differences | — | % | | 2.3 | % | | (1.9) | % | | |
| Non-deductible transaction costs | — | % | | (0.8) | % | | (1.4) | % | | |
| | | | | | | |
| Withholding tax | — | % | | (0.4) | % | | (0.2) | % | | |
| | | | | | | |
| Impairments | (6.0) | % | | — | % | | — | % | | |
| Tax Exempt Gain | 1.3 | % | | — | % | | — | % | | |
| Other | 0.5 | % | | — | % | | (0.1) | % | | |
| Effective rate | 0.7 | % | | (4.8) | % | | 0.8 | % | | |
| | | | | | | |
| | |
The tax effects of the significant components of temporary differences giving rise to the Company’s deferred income tax assets and liabilities are as follows:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Accounts receivable | $ | 2.6 | | | $ | 2.6 | |
| Accrued expenses | 19.7 | | | 24.1 | |
| Deferred revenue | 10.0 | | | 5.2 | |
Partnerships outside basis difference(1) | 97.3 | | | — | |
| Other assets | 32.6 | | | 33.0 | |
| | | |
| | | |
| Debt issuance costs | 11.6 | | | 17.0 | |
| Lease liabilities | 12.6 | | | 13.5 | |
Goodwill(1) | 547.0 | | | 73.8 | |
| Operating losses and tax attributes | 601.8 | | | 533.3 | |
| Total deferred tax assets | 1,335.2 | | | 702.5 | |
Valuation Allowances(1) | (1,179.3) | | | (546.8) | |
| Net deferred tax assets | 155.9 | | | 155.7 | |
| | | |
| | | |
| | | |
| | | |
| Other identifiable intangible assets, net | (398.6) | | | (407.9) | |
| Other liabilities | (19.7) | | | (20.0) | |
| Partnerships outside basis difference | — | | | (49.1) | |
| Right of use assets | (7.2) | | | (9.4) | |
| | | |
| | | |
| Fixed assets, net | (22.3) | | | (21.5) | |
| Total deferred tax liabilities | (447.8) | | | (507.9) | |
| Net deferred tax liabilities | $ | (291.9) | | | $ | (352.2) | |
| | | |
(1) Goodwill impairment, recorded during the third quarter of 2022, drove the increase in the Goodwill deferred tax asset and the Partnership outside basis difference deferred tax asset; these increases were primarily offset by increases in Valuation Allowances. |
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
In the Consolidated Balance Sheets, deferred tax assets and liabilities are shown net if they are in the same jurisdiction. The components of the net deferred tax liabilities as reported on the Consolidated Balance Sheets are as follows:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Deferred tax asset | $ | 24.2 | | | $ | 27.9 | |
| Deferred tax liability | (316.1) | | | (380.1) | |
| Net deferred tax liability | $ | (291.9) | | | $ | (352.2) | |
Deferred Tax Assets and Liabilities
The Company is required to assess the realization of its deferred tax assets and the need for a valuation allowance. The assessment requires judgment on the part of management with respect to benefits that could be realized from future taxable income. The valuation allowance is $1,179.3 and $546.8 at December 31, 2022 and 2021, respectively against certain deferred tax assets, as it more likely than not that such amounts will not be fully realized. During the year ended December 31, 2022 and 2021, the valuation allowance increased by $632.5 and $178.8, respectively.
At December 31, 2022, the Company had U.S. federal tax loss carryforwards of $1,315.9, U.K. tax loss carryforwards of $436.6, U.S. state tax loss carryforwards of $495.0, Japan tax loss carryforwards of $49.0, and tax loss carryforwards in other foreign jurisdictions of $81.9, respectively. The majority of the unrecognized tax loss carryforwards relate to UK and U.S. The carryforward period for US federal tax losses is twenty years for losses generated in tax years ended prior to December 31, 2017. The expiration period for these losses begins in 2036. For US losses generated in tax years beginning after January 1, 2018, the carryforward period is indefinite. The carryforward period for the U.K. tax losses is indefinite. The carryforward period for US state losses varies, and the expiration period is between 2022 and 2041. The carryforward period for the Japan tax losses is nine years, and the expiration period begins in 2025. The carryforward period of other losses varies by jurisdiction.
The Company has provided income taxes and withholding taxes in the amount of $16.4 on the undistributed earnings of foreign subsidiaries as of December 31, 2022. The Company is not permanently reinvesting its foreign earnings offshore.
Deferred Tax Valuation Allowance
The following table shows the change in the deferred tax valuation as follows:
| | | | | | | | | | | | | | | | | | | |
| December 31, | | |
| 2022 | | 2021 | | 2020 | | |
| Beginning Balance, January 1 | $ | 546.8 | | | $ | 368.0 | | | $ | 173.3 | | | |
| Change Charged to Expense/(Income) | 657.5 | | | 100.7 | | | 52.1 | | | |
| Change Charged to CTA | (17.0) | | | (4.7) | | | 1.8 | | | |
| | | | | | | |
| | | | | | | |
| Change Charged to Goodwill | (8.0) | | | 82.8 | | | 140.8 | | | |
| Ending Balance, December 31 | $ | 1,179.3 | | | $ | 546.8 | | | $ | 368.0 | | | |
Uncertain Tax Positions
Unrecognized tax benefits represent the difference between the tax benefits that the Company is able to recognize for financial reporting purposes and the tax benefits that have been recognized or expect to be recognized in filed tax returns. The total amount of net unrecognized tax benefits that, if recognized, would impact the Company's effective tax rate were $83.8 and $100.2 as of December 31, 2022 and 2021, respectively. As a result of the acquisition of ProQuest, a reserve of $70.8 has been recorded as part of the acquisition accounting related to positions taken in prior tax years by ProQuest. The majority of the reserve, in the amount of $66.6, is due to a tax controversy in Israel.
The Company recognizes accrued interest and penalties associated with uncertain tax positions as part of the tax provision. As of December 31, 2022, the interest and penalties are $25.8 and, as of December 31, 2021, the interest and penalties are $19.8. It is reasonably possible that the amount of unrecognized tax benefit related to an open exam will change during the
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
next 12 months if the Company is able to resolve material open issues with the local tax authority. We are unable to estimate the range of the reasonably possible change at this time.
The Company files income tax returns in the United Kingdom, the United States and various other jurisdictions. As of December 31, 2022, the Company’s open tax years subject to examination were 2016 through 2022, which includes the Company’s major jurisdictions in the United Kingdom and the United States.
The following table summarizes the Company’s unrecognized tax benefits, excluding interest and penalties:
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 | | 2020 |
| Balance at the beginning of the year | $ | 100.2 | | | $ | 13.7 | | | $ | 1.1 | |
| Increases for tax positions taken in prior years | 2.9 | | | — | | | 12.1 | |
| Increases for tax positions taken in the current year | 1.5 | | | 5.0 | | | 0.5 | |
| | | | | |
| | | | | |
| Increases for acquisitions (recorded against goodwill) | 1.4 | | | 70.8 | | | — | |
| Increases for return to provisions | — | | | 11.0 | | | — | |
| Decreases for tax positions taken in prior years | (19.3) | | | — | | | — | |
| Decreases due to statute expirations | (2.9) | | | (0.3) | | | — | |
| | | | | |
| Balance at the end of the year | $ | 83.8 | | | $ | 100.2 | | | $ | 13.7 | |
Tax Benefits Preservation Plan
The Company’s ability to utilize net operating loss carryforwards and other tax attributes to reduce future U.S. federal taxable income (collectively, “Tax Assets”) is subject to potential limitations under Section 382 of the Internal Revenue Code and its related tax regulations. The utilization of these attributes may be limited if certain ownership changes by 5% shareholders (as defined in Treasury regulations pursuant to Section 382) and the effects of stock issuances by the Company during any three-year period result in a cumulative change of more than 50% in the beneficial ownership of the Company.
There are conditions that exist that are beyond the Company’s control which could cause an ownership change in the future and create a significant limitation on the Company’s ability to utilize those tax attributes. On December 22, 2022, the Board of Directors of the Company adopted a tax benefits preservation plan in order to protect against this possible limitation on the Company’s ability to use Tax Assets to reduce potential future U.S. federal income tax obligations. The Tax Benefits Preservation Plan is intended to reduce the likelihood of such an ownership change by deterring any person or group that would be treated as a 5% shareholder from acquiring beneficial ownership, as determined for relevant tax purposes, of 4.9% or more of the Company’s securities, and deterring existing shareholders who currently meet or exceed this ownership threshold from acquiring additional Company stock. Any such person or group is an “Acquiring Person” within the meaning of the Tax Benefits Preservation Plan.
To implement the Tax Benefits Preservation Plan, the Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each outstanding ordinary share, no par value per share (the “Ordinary Shares”), of the Company. The dividend was payable to holders of record as of the close of business on January 1, 2023. Any Ordinary Shares issued after January 1, 2023 will be issued together with the Rights. The Rights will be exercisable after any person or group becomes an Acquiring Person. The Tax Benefits Preservation Plan contains an exception from the definition of an Acquiring Person for persons or groups who, immediately prior to the first public announcement of the adoption of the Tax Benefits Preservation Plan, were beneficial owners of 4.9% or more of the Company’s Ordinary Shares then outstanding, and the exception applies unless or until such person or group acquires beneficial ownership of additional Ordinary Shares. If the Rights become exercisable, each Right (other than Rights beneficially owned by the Acquiring Person, its affiliates and associates) will entitle the holder to purchase, for $42.00 (the “Purchase Price”), a number of Ordinary Shares having an aggregate market value of twice the Purchase Price. Rights held by the Acquiring Person will become void and will not be exercisable.
The Tax Benefits Preservation Plan also includes an exchange option. At any time after any person or group of persons acquires 4.9% or more of the Company’s Ordinary Shares, but less than 50% or more of the outstanding Ordinary Shares, the Board of Directors, at its option, may exchange the Rights (other than Rights owned by such person or group of persons
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
which will have become void), in whole or in part, at an exchange ratio of one Ordinary Share per outstanding Right (subject to adjustment).
The Rights will trade with the Company’s Ordinary Shares and will expire at the close of business on October 31, 2023, unless earlier terminated or redeemed. The Board of Directors may terminate the Tax Benefits Preservation Plan prior to the time the Rights are triggered or may redeem the Rights prior to the Distribution Date, as defined in the Tax Benefits Preservation Plan, following a determination that the Tax Benefits Preservation Plan is no longer necessary or desirable for the preservation of the Tax Assets.
The Tax Benefits Preservation Plan adopted by the Board of Directors is similar to plans adopted by other publicly held companies with substantial tax assets and has a limited duration of less than one year. The Tax Benefits Preservation Plan is not designed to prevent any action that the Board of Directors determines to be in the best interest of the Company and its shareholders.
Note 17: 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 11.0 million, 9.6 million and 35.5 million options, RSUs, PSUs, and Warrants related to the 2019 Incentive Award Plan were excluded from diluted EPS for the year ended December 31, 2022, 2021 and 2020, respectively, as their inclusion would have been anti-dilutive or their performance metric was not met. See Note 14 - Shareholders’ Equity and Note 15 - 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 year ended December 31, 2022, as their effect would be anti-dilutive.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
The basic and diluted EPS computations for our ordinary shares are calculated as follows: | | | | | | | | | | | | | | | | | |
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| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Basic EPS | | | | | |
| Net income (loss) available to ordinary shareholders | $ | (3,960.2) | | | $ | (270.5) | | | $ | (350.6) | |
| Dividends on preferred shares | 75.4 | | | 41.5 | | | — | |
| Net income (loss) attributable to ordinary shares | $ | (4,035.6) | | | $ | (312.0) | | | $ | (350.6) | |
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| Basic weighted-average number of ordinary shares outstanding | 676.1 | | | 631.0 | | | 427.0 | |
| Basic EPS | $ | (5.97) | | | $ | (0.49) | | | $ | (0.82) | |
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| Diluted EPS | | | | | |
| Net income (loss) attributable to ordinary shares | $ | (4,035.6) | | | $ | (312.0) | | | $ | (350.6) | |
| Change in fair value of private placement warrants | (197.6) | | | (81.3) | | | — | |
| Net income (loss) attributable to ordinary shares, diluted | $ | (4,233.2) | | | $ | (393.3) | | | $ | (350.6) | |
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| Denominator: | | | | | |
| Shares used in computing net income (loss) attributable to per share to ordinary shareholders, basic | 676.1 | | | 631.0 | | | 427.0 | |
| Weighted-average effect of potentially dilutive shares to purchase ordinary shares | 2.5 | | | 9.8 | | | — | |
| Diluted weighted-average number of ordinary shares outstanding | 678.6 | | | 640.8 | | | 427.0 | |
| Diluted EPS | $ | (6.24) | | | $ | (0.61) | | | $ | (0.82) | |
Note 18: Other Operating (Income) Expense, Net
Other operating (income) expense, net, consisted of the following for the years ended December 31, 2022, 2021 and 2020:
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| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net gain on sale of business divestitures | $ | (278.5) | | | $ | — | | | $ | (28.1) | |
| Net foreign exchange (gain) loss | (45.4) | | | 19.6 | | | (19.8) | |
| Miscellaneous expense (income), net | (0.9) | | | 7.9 | | | (4.5) | |
| Other operating (income) expense, net | $ | (324.8) | | | $ | 27.5 | | | $ | (52.4) | |
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On October 31, 2022, the Company completed the sale of the MarkMonitor Domain Management business within the IP segment to Newfold Digital, a leading web presence solutions provider. The aggregate closing consideration included proceeds, net of cash transferred of $285.0, deferred closing consideration of $10.6, and other of $0.5. As a result of the sale, the Company recorded a net gain of $278.5.
On November 6, 2020, the Company completed the sale of certain assets and liabilities of the Techstreet business for an aggregate purchase price of $42.8, which resulted in a net gain of $28.1.
Note 19: 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 Adjusted EBITDA. The CODM does not review assets by segment for the purposes of assessing performance or allocating resources.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
During the quarter ended September 30, 2022, the Company realigned its organizational structure and the composition of its reportable segments, which also resulted in a change to its goodwill reporting units. Clarivate has three reportable segments: Academia & Government ("A&G"), Life Sciences & Healthcare ("LS&H"), and Intellectual Property ("IP"). This structure enables a sharp focus on cross-selling opportunities within the markets we serve and provides substantial scale. The change was effective September 30, 2022, and all segment results for prior periods have been recast to conform to the new presentation and allocation methodologies, which consists of assigning certain costs to each segment based on an identified driver.
Each of the Company’s reportable segments recognizes revenue in accordance with the revenue recognition policy within Note 3 - Summary of Significant Accounting Policies and our ten largest customers represented only 7%, 9%, and 6% of revenues for the years ended December 31, 2022, 2021 and 2020, respectively. Below is the overview of the product groups within each reportable segment.
•The A&G segment consists of our Academia & Government product group, which drives research excellence across institutions, empower researchers to tackle today’s global challenges and help academic institutions and libraries improve operational efficiency and effectiveness.
•The LS&H segment consists of our Life Sciences & Healthcare product group, which includes products and solutions that provide insight and foresight across the drug and device lifecycle, empowering life science and healthcare organizations to create a healthier tomorrow.
•The IP segment consists of our Patent Intelligence, Brand IP Intelligence and IP Lifecycle Management product groups, which enable customers establish, protect and manage their intellectual property.
Each of the three 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 segment revenue and Adjusted EBITDA. Adjusted EBITDA represents net (loss) income before the provision for income taxes, depreciation and amortization, and interest expense adjusted to exclude acquisition and/or disposal-related transaction costs, 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 and/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 (loss) 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:
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| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| Academia and Government | | | | | $ | 1,280.1 | | | $ | 489.4 | | | $ | 384.7 | |
| Life Sciences and Healthcare | | | | | 452.6 | | | 413.2 | | | 352.1 | |
| Intellectual Property | | | | | 927.1 | | | 974.3 | | | 517.3 | |
| Total Revenues, net | | | | | $ | 2,659.8 | | | $ | 1,876.9 | | | $ | 1,254.1 | |
Adjusted EBITDA by segment
The following table presents segment profitability and a reconciliation to net income for the periods indicated:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
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| | | Year Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| Academia and Government | | | | | $ | 485.5 | | | $ | 258.8 | | | $ | 202.5 | |
| Life Sciences and Healthcare | | | | | 184.2 | | | 143.7 | | | 107.0 | |
| Intellectual Property | | | | | 443.0 | | | 397.9 | | | 177.1 | |
| Total Adjusted EBITDA | | | | | $ | 1,112.7 | | | $ | 800.4 | | | $ | 486.6 | |
| Provision for income taxes | | | | | 28.9 | | | (12.3) | | | 2.7 | |
| Depreciation and amortization | | | | | (710.5) | | | (537.8) | | | (303.2) | |
| Interest expense and amortization of debt discount, net | | | | | (270.3) | | | (252.5) | | | (111.9) | |
Mark to market gain (loss) on financial instruments(1) | | | | | 206.8 | | | 81.3 | | | (205.1) | |
Deferred revenues adjustment(2) | | | | | (1.0) | | | (4.0) | | | (23.1) | |
Transaction related costs(3) | | | | | (14.2) | | | (46.2) | | | (99.3) | |
| Share-based compensation expense | | | | | (102.2) | | | (139.6) | | | (70.5) | |
Gain on sale from divestitures(4) | | | | | 278.5 | | | — | | | 28.1 | |
Restructuring and impairment(5) | | | | | (66.7) | | | (129.5) | | | (56.1) | |
| Goodwill impairment | | | | | (4,449.1) | | | — | | | — | |
Other(6) | | | | | 26.9 | | | (30.3) | | | 1.2 | |
| Net (loss) income | | | | | $ | (3,960.2) | | | $ | (270.5) | | | $ | (350.6) | |
| Dividends on preferred shares | | | | | (75.4) | | | (41.5) | | | — | |
| Net (loss) income attributable to ordinary shares | | | | | $ | (4,035.6) | | | $ | (312.0) | | | $ | (350.6) | |
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(1) Reflects mark-to-market adjustments on the Private Placement Warrants under ASC 815, Derivatives and Hedging. Refer to Note 10 - Fair Value Measurements for further information. |
(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". 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. 2021 also includes the mark-to-market adjustment gains on the contingent stock consideration associated with the CPA Global and DRG acquisitions. |
(4) 2022 represents the net gain from the sale of the MarkMonitor Domain Management business. 2020 represents the net gain from sale of certain assets and liabilities of the Techstreet business. See Note 18 - Other Operating (Income) Expense, Net for further information. |
(5) Primarily reflects costs related to restructuring and impairment associated with the One Clarivate, ProQuest and CPA Global restructuring programs. Refer to Note 22 - Restructuring and Impairment for further information. |
(6) Primarily reflects 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. |
Consolidated Revenue and Long-Lived Assets Information by Geographic Area
Revenues recognized in the U.S. represented 50%, 46%, and 45% of revenues for the years ended December 31, 2022, 2021 and 2020, respectively and no other country accounted for more than 10% of revenues.
Revenue by Geography
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
The following table summarizes revenue from external customers by geography, which is based on the location of the customer: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Revenue: | 2022 | | 2021 | | 2020 |
| Americas | $ | 1,463.6 | | | $ | 928.7 | | | $ | 631.2 | |
| Europe/Middle East/Africa | 698.1 | | | 555.8 | | | 365.6 | |
| APAC | 499.1 | | | 396.4 | | | 280.4 | |
| Deferred revenues adjustment | (1.0) | | | (4.0) | | | (23.1) | |
| Total | $ | 2,659.8 | | | $ | 1,876.9 | | | $ | 1,254.1 | |
Assets by Geography
The following table summarizes assets by geography, which is based on operations and physical location:
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| Year Ended December 31, |
| Assets: | 2022 | | 2021 |
| Americas | $ | 6,306.1 | | | $ | 8,944.1 | |
| Europe/Middle East/Africa | 7,110.9 | | | 10,555.9 | |
| APAC | 537.6 | | | 683.0 | |
| Total Assets | $ | 13,954.6 | | | $ | 20,183.0 | |
Note 20: 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 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 approximately $56, 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 were consolidated into a single proceeding on May 18, 2022. On August 8, 2022, plaintiffs filed a consolidated amended complaint, seeking damages on behalf of a putative class of shareholders who acquired Clarivate securities between July 30, 2020, and February 2, 2022, and/or acquired Clarivate common or preferred shares in connection with offerings on June 10, 2021, or Clarivate common shares in connection with a September 13, 2021, offering. The amended complaint, like the prior complaints, references 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
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
financial statements; the amended complaint also alleges that the Company and certain of its executives and directors made false or misleading statements relating to the Company’s product quality and expected organic revenues and organic growth rate, and that they failed to disclose significant known changes to the Company’s business model. Defendants moved to dismiss the amended complaint on October 7, 2022. 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 in June and September 2021. The Company moved to stay this proceeding on August 19, 2022, and filed its preliminary objections to the state court complaint on October 21, 2022. 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.
Warrant Liabilities
Under Accounting Standards Codification 815, Derivatives and Hedging, ("ASC 815"), 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.
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 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 December 31, 2022 and 2021, there were no outstanding contingent liabilities.
MCPS Dividends
As noted in Note 14 - Shareholders’ Equity, dividends on our convertible preferred shares will be payable on a cumulative basis when, as and if declared by our Board of Directors, or an authorized committee of our Board of Directors, at an annual rate of 5.25% of the liquidation preference of $100.00 per share. Refer to Note 14 - Shareholders’ Equity for further details.
Commitments
Unconditional purchase obligations
Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable pricing provisions and the approximate timing of the transactions. The Company has various purchase obligations for materials, supplies, outsourcing and other services contracted in the ordinary course of business. These items are not recognized as liabilities in our Consolidated Financial Statements but are required to be disclosed. The contractual terms of these purchase obligations extend through 2027. The Company paid $157.2 towards these purchase obligations during the year ended December 31, 2022.
The future unconditional purchase obligations as of December 31, 2022, are as follows:
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
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| Year Ending December 31, | |
| 2023 | $ | 278.7 | |
| 2024 | 249.4 | |
| 2025 | 73.2 | |
| 2026 | 15.9 | |
Thereafter | 20.1 | |
| Total | $ | 637.3 | |
Note 21: Related Party Transactions
Two of our independent directors are each affiliated with a Clarivate customer. As of and for the year ended December 31, 2022, the Company had $0.1 of receivables outstanding and recognized $1.3 of revenues, net, from these customers.
An independent director is affiliated with a Clarivate vendor. As of and for the year ended December 31, 2022, the Company had no outstanding payables and incurred $4.5 of expense related to this vendor.
An independent director has an immediate family member who is affiliated with a Clarivate customer. As of both December 31, 2022 and 2021, the Company had $0.1 of receivables outstanding, and recognized $1.1, $1.0 and $1.5 of revenues, net, during the year ended December 31, 2022, 2021 and 2020, respectively, from this customer.
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 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 year ended December 31, 2022, interest expense of $1.2 and amortization of the Finance lease right of use asset ("ROU") of $10.8 is reflected in the Consolidated Statements of Operations. The Finance lease ROU asset of $8.0 is presented within Property, Plant, and Equipment (see Note 7 - Property and Equipment, Net) and the corresponding lease liability of $31.3 is treated as an item of indebtedness (see Note 12 - Debt) within the Consolidated Balance Sheet.
Note 22: Restructuring and Impairment
One Clarivate Program
During the second quarter of 2021, the Company approved a restructuring plan to streamline operations within targeted areas of the Company to reduce operational costs, with the primary cost savings driver being from a reduction in workforce.
During the years ended December 31, 2022 and 2021, components of the pre-tax charges included $16.7 and $17.3 in severance costs and $— and $2.7 in other costs, respectively. Of the total pre-tax charges incurred during the year ended December 31, 2022, $9.3, $3.0, and $4.4 were attributed to our A&G, LS&H, and IP segments, respectively. Of the total pre-tax charges incurred during the year ended December 31, 2021, $7.0, $3.9, and $9.1 were attributed to our A&G, LS&H, and IP segments, respectively. As of December 31, 2022, the Company does not expect to incur any significant further costs associated with this program.
CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
ProQuest Acquisition Integration Program
During the fourth quarter of 2021, the Company approved a restructuring plan to streamline operations within targeted areas of the Company to reduce operational costs, with the primary cost savings driver being from a reduction in workforce.
During the years ended December 31, 2022 and 2021, components of the pre-tax charges included $22.9 and $1.9 in severance costs and $26.5 and $0.0 in other costs, respectively. Of the total pre-tax charges incurred during the year ended December 31, 2022, $26.5, $7.6, and $15.3 were attributed to our A&G, LS&H, and IP segments, respectively. Of the total pre-tax charges incurred during the year ended December 31, 2021, $0.7, $0.4 and $0.8 were attributed to our A&G, LS&H, and IP segments, respectively.
Other Restructuring Programs
During 2020 and the fourth quarter of 2019, we engaged a strategic consulting firm to assist us in optimizing our structure and cost base, resulting in the implementation of several cost-saving and margin improvement programs designed to generate substantial incremental cash flows. As of December 31, 2022, the Company does not expect to incur any significant further costs associated with these programs.
During the years ended December 31, 2022 and 2021, components of the pre-tax charges included $(0.4) and $38.1 in severance costs and $1.0 and $69.5 in other costs, respectively. Of the total pre-tax charges incurred during the year ended December 31, 2022, $0.4, $0.0, and $0.2 were attributed to our A&G, LS&H, and IP segments, respectively. Of the total pre-tax charges incurred during the year ended December 31, 2021, $24.9, $23.9, and $58.8 were attributed to our A&G, LS&H, and IP segments, respectively.
The table below summarizes the activity related to the restructuring reserves across each of Clarivate's cost-saving programs.
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| Restructuring Programs | | Severance and Related Benefit Costs | | Costs Associated with Exit and Disposal Costs(1) | | Total | |
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| Reserve Balance as of December 31, 2020 | | $ | 25.7 | | | $ | 3.8 | | | $ | 29.5 | | |
Expenses recorded(2) | | 57.3 | | | 72.2 | | | 129.5 | | |
| Payments made | | (48.8) | | | (35.2) | | | (84.0) | | |
| Noncash items | | (5.9) | | | (40.1) | | | (46.0) | | |
| Reserve Balance as of December 31, 2021 | | $ | 28.3 | | | $ | 0.7 | | | $ | 29.0 | | |
Expenses recorded(2) | | 39.2 | | | 27.5 | | | 66.7 | | |
| Payments made | | (51.5) | | | (3.5) | | | (55.0) | | |
| Noncash items | | (4.5) | | | (24.6) | | | (29.1) | | |
| Reserve Balance as of December 31, 2022 | | $ | 11.5 | | | $ | 0.1 | | | $ | 11.6 | | |
(1) Relates to lease abandonment, contract exit and legal and advisory fees. | |
(2) Severance and related benefit cost includes non-cash adjustments, primarily related to the acceleration of stock based compensation awards. | |
The following table is a summary of charges incurred related to the Company's restructuring programs for the years ended December 31, 2022, 2021 and 2020.
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| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Severance and related benefit costs | $ | 39.2 | | | $ | 57.3 | | | $ | 39.9 | |
Costs associated with exit and disposal activities(1) | 3.2 | | | 11.1 | | | 8.5 | |
| Costs associated with lease abandonment | 24.3 | | | 61.1 | | | 7.7 | |
| Total restructuring and impairment | $ | 66.7 | | | $ | 129.5 | | | $ | 56.1 | |
(1) Relates primarily to contract exit costs, legal and advisory fees. | | |
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CLARIVATE PLC
Notes to the Consolidated Financial Statements
(In millions, except option prices, ratios or as noted)
Lease Remeasurements
In connection with the Company's digital workplace transformation initiative to enable colleagues to work remotely, the Company had ceased the use of select leased sites during the year ended December 31, 2022 and 2021. As a result, the Company recorded a non-cash adjustment to Restructuring and impairment within the Consolidated Statement of Operations based on the estimate of future recoverable cash flows of $23.6 and $57.3 for the year ended December 31, 2022 (consisting of operating and finance leases) and 2021, respectively. Additionally, the Company incurred $0.7 and $3.3 in lease termination fees during the year ended December 31, 2022 and 2021, respectively.
Note 23: Subsequent Events
Management has evaluated the impact of events that have occurred subsequent to December 31, 2022. Based on this evaluation, other than disclosed within these Consolidated Financial Statements and related notes, the Company has determined no other events were required to be recognized or disclosed.