INOTIV, INC. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto included in this Report. In addition to the historical information contained herein, the discussions in this Report may contain forward-looking statements that may be affected by risks and uncertainties, including those discussed in Item 1A, Risk Factors. Our actual results could differ materially from those discussed in the forward-looking statements, as discussed in the section entitled "Cautionary Note Regarding Forward-Looking Statements" in this Report.
References to fiscal years, years or portions of years in this Item refer to our
fiscal year ended
Recent Developments and Executive Summary
During recent periods, we have undertaken significant internal and external growth initiatives. Our growth initiatives include (1) acquisitions, (2) expansion of existing and acquired businesses, and (3) startup of new services. Prior to fiscal year 2022, our growth initiatives focused on discovery and safety assement (DSA) services, and, as a result of our strategic acquisition ofEnvigo RMS Holding Corp. ("Envigo") inNovember 2021 , which added a complementary research model platform, our full spectrum solutions now span two segments: Discovery and Safety Assessment ("DSA") and Research Models and Services ("RMS"). In addition to growth initiatives in fiscal year 2022, we have also announced site optimization plans in theU.S. and our intent to consult with employee respresentatives for a proposed consolidation of certain European andU.K. sites, in order to enhance margins.
Acquisitions
DSA
We acquired the business ofSeventh Wave Laboratories, LLC , inJuly 2018 (the "Seventh Wave Acquisition"), acquired the toxicology business of Smithers Avanza onMay 1, 2019 (the "Smithers Avanza Acquisition"), acquired the preclinical testing business ofPre-Clinical Research Services, Inc. as well as related real property, onDecember 1, 2019 (the "PCRS Acquisition"), acquired substantially all of the assets ofHistoTox Labs, Inc. ("HistoTox Labs ") onApril 30, 2021 (the "HistoTox Acquisition"), acquiredBolder BioPATH, Inc. ("Bolder BioPATH") onMay 3, 2021 (the "Bolder Merger"), acquired certain assets related to genetic toxicology services from BioReliance in July, 2021 (the "BioReliance Acquisition"), and completed the purchase of all of the outstanding equity interests inGateway Pharmacology Laboratories, LLC ("Gateway Laboratories ") onAugust 2, 2021 (the "Gateway Acquisition"). During the twelve months endedSeptember 30, 2022 , we continued our momentum buildingInotiv into a comprehensive provider of preclinical drug discovery and safety assessment services through our strategic acquisitions ofPlato BioPharma, Inc. ("Plato"),Integrated Laboratory Systems, LLC ("ILS"),Histion, LLC ("Histion"),Protypia, Inc. ("Protypia") and our collaboration with Synexa Life Sciences. Plato brings us important new in vivo pharmacology capabilities, ILS complements our BioReliance® genetic toxicology assets and accelerates the buildout of our genetic toxicology offerings as well as expanding our general rodent toxicology capacity. In addition, ILS allows us to provide a computational toxicology service to provide predictive toxicology assessments. Histion accelerates our development and growth into the highly-specialized plastics and medical device histopathology business and Protypia enhances our ability to support clients in the development of safe and effective medicines, particularly in the areas of immuno-oncology and cell and gene therapy by bringing bioanalytical capability to solid tissue specimens. The partnership with Synexa Life Sciences enhances our large molecule bioanalysis and biomarker platform. Over the last few years, we've significantly broadened and scaled our DSA business, enabling one-stop-shop preclinical programs and quicker speed to market, positioningInotiv as a primary contract research provider for our
growing client base.
RMS
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During the twelve months endedSeptember 30, 2022 and following theEnvigo acquisition, we took steps to leverage our existing RMS capacity with the acquisition ofRobinson Services Inc.'s ("RSI") rabbit breeding business and we acquiredOrient BioResource Center, Inc. ("OBRC"), which provided access to additional non-human primate facilities. In an environment during which global research model demand outstrips supply, these moves mitigate potential supply bottlenecks as we pursue a multitude of cross-selling and growth opportunities across our integrated services.
Expansions of Existing and Acquired Businesses
During the twelve months endedSeptember 30, 2022 , we initiated a facility expansion to our facility inBoulder, Colorado ("Boulder facility"), which was completed inDecember 2022 , we invested in infrastructure, equipment and facility upgrades to increase revenue capacity at our facility inMorrisville, North Carolina ("Morrisville facility"), which was complete inDecember 2022 ; and we invested in a buildout of a newly leased 48,000 square foot facility inRockville, Maryland ("Rockville facility") to support biotherapeutics and genetic toxicology growth, which is expected to be complete byMarch 2023 . In addition, we made significant investments in upgrading facilities and equipment across the facilities that serve the RMS segment in order to implement planned and proposed site optimizations and enhance animal welfare. Further, we have filled critical leadership and scientific positions.
New Service Offerings
We announced new service offerings which we are building internally and startup operations, including mechanistic pharmacology and toxicology, safety pharmacology, juvenile toxicology, SEND (Standard for the Exchange of Nonclinical Data) data reporting; clinical pathology; biotherapeutics; histopathology for devices; genetic toxicology; and cardiovascular safety pharmacology. In fiscal years 2022 and 2021, we incurred start up costs of$5.7 million and$1.5 million , respectively.
Restructurings and Site Optimization Plans
In addition to two sites thatEnvigo announced closing prior to our acquisition ofEnvigo , we announced inJune 2022 that we were closing a purpose-bred canine facility inCumberland , Virgina and a rodent breeding facility inDublin, Virginia as part of restructuring activities. The rodent breeding operations were consolidated into an existing, recently renovated site. TheCumberland facility closure was completed inSeptember 2022 and theDublin facility closure was completed inNovember 2022 . OnNovember 29, 2022 , the Company announced additional site consolidation plans in theU.S. , intent to consult with employee representatives for a proposed consolidation of certain European andU.K. sites, and provided an update on site optimization plans in process. The site optimization plans are intended to allow us to reduce overhead and create efficiencies through scale. Over the last year, we have continued to improve our infrastructure and platform to support future growth and additional potential acquisitions. These improvements included investments in our information technology platforms, building program management functions to enhance management and communication with clients and multi-site programs, further enhancing client services and improving the client experience. We believe the actions taken and investments made in recent periods form a solid foundation upon which we can continue to build. FY 2022 Highlights
Revenue grew to
("FY 2022") from
of incremental revenue from our RMS business. Growth resulted primarily from
acquisitions and growing customer demands along with favorable pricing.
Consolidated net loss for the fiscal year ended
million, or (61.6)% of total revenue, compared to consolidated net income of
million of post combination non-cash stock compensation expense relating to the
adoption of the Envigo Equity Plan; and
remeasurement of the embedded derivative component of the convertible notes issued inSeptember 2021 . 43 Table of Contents
? Book-to-bill ratio was 1.33x for the DSA services business.
? Business Overview
Inotiv is a leading contract research organization dedicated to providing nonclinical and analytical drug discovery and development services to the pharmaceutical and medical device industries and selling a range of research-quality animals and diets to the same industries as well as academia and government clients. Our products and services focus on bringing new drugs and medical devices through the discovery and preclinical phases of development, all while increasing efficiency, improving data, and reducing the cost of discovering and taking new drugs to market.Inotiv is committed to supporting discovery and development objectives as well as helping researchers realize the full potential of their critical research and development projects, all while working together to build a healthier and safer world. We are dedicated to practicing high standards of laboratory animal care and welfare. Through our DSA segment, we support the discovery, nonclinical development and clinical development needs of researchers and clinicians for primarily small molecule drug candidates, as well as biotherapeutics and biomedical devices. Our scientists have skills in analytical instrumentation development, chemistry, computer software development, histology, pathology, physiology, surgery, analytical chemistry, drug metabolism, pharmacokinetics, and toxicology to make the services and products we provide increasingly valuable to our current and potential clients. Our principal clients are companies whose scientists are engaged in analytical chemistry, drug safety evaluation, clinical trials, drug metabolism studies, pharmacokinetics and basic research from small start-up biotechnology companies to some of the largest global pharmaceutical companies. Through our RMS segment, we offer access to a wide range of high-quality small and large research models for basic research and drug discovery and development, as well as specialized models for specific diseases and therapeutic areas. We combine deep animal husbandry expertise and expanded access to scientists across the discovery and preclinical continuum, which reduces nonclinical lead times and provides enhanced project delivery. In conjunction with our contract research organization ("CRO") business, we have the ability to run selected nonclinical studies directly on-site at closely located research model facilities and access to innovative genetically engineered models and services solutions. We have long-standing relationships with our principal clients, which include biopharmaceutical companies, CROs, and academic and government organizations.
Overview of Financial Information
Revenue for the fiscal year endedSeptember 30, 2022 , increased to$547.7 million from$89.6 million in the fiscal year endedSeptember 30, 2021 . Acquired businesses contributed approximately$317.2 million of the increased revenue, while the remainder was from organic growth. During the fiscal year endedSeptember 30, 2022 , operating loss increased to$(263.5) million from$(5.6) million in the fiscal year endedSeptember 30, 2021 , most significantly driven by a non-cash goodwill impairment charge of$236.0 million related to our RMS segment and an increase of amortization of intangible assets to$30.9 million from$1.8 million in the fiscal year endedSeptember 30, 2021 . Net loss attributable to common shareholders in fiscal year 2022 decreased to$(337.0) million from net income of$10.9 million in fiscal year 2021 due to the increase in operating loss described above, as well as$56.7 million of fair value remeasurement on the embedded derivative component of the convertible notes issued inSeptember 2021 and$23.0 million of post combination stock compensation expense relating to the adoption of the Envigo Equity Plan recognized in connection with theEnvigo acquisition.
During fiscal year 2022, our cash flows used in operations was
As of
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DDTL"). The $35 million Additional DDTL was drawn on October 12, 2022 , and a
portion of the proceeds were used to repay the $15.0 million balance on the
revolving credit facility while the remaining was drawn to fund some of the
Company's capital expenditures in 2022 and those planned for 2023. Total debt,
net of debt issuance costs, as of September 30, 2022 was $353.7 million ,
including the balance on the revolving credit facility. We were in compliance
with our debt covenants as of September 30, 2022 .
For a detailed discussion of our revenue, operating loss, net loss/income and
other financial results for the fiscal year ended
Results of Operations
The following table summarizes the consolidated statement of operations as a percentage of total revenues:
Fiscal Year Ended
2022 2021
Service revenue 37.1 % 95.8 %
Product revenue 62.9 4.2
Total revenue 100.0 100.0
Cost of services provided 1 64.4 66.7
Cost of products sold 1 75.4 58.0
Total cost of revenue 71.3 66.3
Operating expenses 76.8 39.9
Operating income (loss) (48.1) (6.3)
Other expense (16.3) 13.1
Loss before income taxes (64.4) 6.8
Income tax (expense) benefit 2.8 5.3
Consolidated net (loss) income (61.6) % 12.2 %
Note: Table may not foot due to rounding
1 Percentage of services and products revenue, respectively
Fiscal Year Ended
(dollars in millions)
Fiscal Years Ended
September 30,
2022 2021 $ Change
Services revenue $ 203.0 $ 85.8 $ 117.2
Products revenue 344.7 3.8 340.9
Total revenue $ 547.7 $ 89.6 $ 458.1
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DSA
(in millions, except percentages) Fiscal Year Ended
September 30,
2022 2021 $ Change % Change
Revenue $ 165.3 $ 89.6 $ 75.7 84.5 %
Cost of revenue1 (105.9) (59.4) (46.5) 78.3
Operating expenses2 (30.9) (14.2) (16.7) 117.6
Amortization of intangible assets (6.2) (1.8) (4.4) 244.4
Operating income (loss)2, 3, 4 $ 22.3 $ 14.2 $ 8.1 57.0 %
Operating income (loss) % of total revenue 4.1 % 15.8 %
Operating income (loss) % of segment revenue 13.5 % 15.8 %
1 Cost of revenue excludes amortization of intangible assets, which is separately stated
2 Operating expenses includes selling, general and administrative and other operating expenses
3 Goodwill impairment losses shown on the consolidated statement of operations only impact the RMS Segment
4 Table may not foot due to rounding
DSA revenue increased $75.7 million for the twelve months ended September 30,
2022 compared to the twelve months ended September 30, 2021 . Acquisitions added
$26.1 million of incremental service revenue in excess of fiscal year 2021
service revenue from acquisitions based upon the baseline revenue prior to the
acquisitions. Organic growth generated $49.6 million of DSA incremental service
revenue during the twelve months ended September 30, 2022 . Of the $165.3 million
DSA revenue, the acquisitions of HistoTox Labs , Bolder BioPATH, Plato, ILS, and
Protypia generated total separately identifiable revenue in fiscal year 2022 of
$52.4 million . Upon acquisition, Gateway Laboratories and Histion were
integrated into previously-existing entities. Therefore, revenue produced by
these entities is not separately identifiable.
In the fiscal year ended September 30, 2022 , we experienced an increase in study
cancellations in our DSA segment due primarily to compounds, which were not yet
available for testing, and due to delayed studies as a result of lack of
funding. When contracts are terminated, we are generally able to recover, at
minimum, our invested costs. Despite an increased trend in cancellations, our
flexibility has enabled us to replace the cancelled or postponed studies with
studies from other clients.
DSA operating income increased by $8.1 million in fiscal year 2022 compared to
fiscal year 2021 primarily due to higher revenues as a result of acquisitions,
favorable pricing and our investments in the DSA business designed to increase
margins and capacity to enhance our ability to meet growing customer demand.
Additionally, operating expenses, including selling, general and administrative
and other operating expense, increased primarily due to increases in general and
administrative expenses from the overall growth in the business as a result of
acquisitions and internal growth, which included an increase of $4.2 million in
startup costs compared to fiscal year 2021. Amortization of intangibles
increased year over year primarily as a result of additional acquired intangible
assets since September 30, 2021 , as well as a full year impact of intangible
assets acquired during fiscal year 2021.
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RMS
(in millions, except percentages) Fiscal Year Ended
September 30,
2022
Revenue $ 382.4
Cost of revenue1 (284.6)
Operating expenses2 (26.4)Amortization of intangible assets (24.7) Goodwill impairment loss3 (236.0) Operating income (loss)2, 3, 4 $ (189.3) Operating income (loss) % of total revenue (34.6) % Operating income (loss) % of segment revenue (49.5) % Operating loss % of segment revenue 1 Cost of revenue excludes amortization of intangible assets, which is separately stated 2 Operating expenses includes selling, general and administrative and other operating expenses 3Goodwill impairment losses shown on the consolidated statement of operations only impact the RMS Segment 4 Table may not foot due to rounding RMS revenue was$382.4 million for the twelve months endedSeptember 30, 2022 . The acquisitions ofEnvigo , RSI and OBRC added$291.1 million of incremental acquisition revenue based upon the baseline revenue prior to the acquisitions, and internal growth generated$91.3 million of additional revenue in the RMS segment during fiscal year 2022. RMS revenue in the twelve months endedSeptember 30, 2022 reflected one partial and three full quarters of contribution fromEnvigo , which was acquired onNovember 5, 2021 , three full quarters of contribution from RSI, which was acquired onDecember 29, 2021 , and one partial and two full quarters of contribution from OBRC, which was acquired onJanuary 27, 2022 . RMS operating loss was$189.3 million in fiscal year 2022. The loss includes non-cash charges for goodwill impairment of$236.0 million ,$24.7 million intangible amortization related to intangible assets acquired through the acquisitions ofEnvigo , RSI and OBRC,$11.1 million of depreciation expense and$10.2 million amortization of inventory step-up related to inventory acquired through the acquisitions ofEnvigo and OBRC. The sustained reduction in our stock price caused the Company to evaluate the carrying value of our goodwill as of fiscal year end. As a result of our impairment assessment, the Company determined that the carrying amount of goodwill attributed to our RMS segment was in excess of its fair value. Additionally, the RMS segment results include restructuring costs of$8.6 million related to the closure of ourDublin facility andCumberland facility
Unallocated Corporate
(in millions, except percentages) Fiscal Year Ended
September 30,
2022 2021 $ Change % Change
Operating expenses1 (96.4) (19.8) (76.6) 386.9
Operating loss2 $ (96.4) $ (19.8) $ (76.6) 386.9 %
Operating loss % of total revenue (17.6) % (22.1) %
1 Operating expenses includes selling, general and administrative and other operating expenses
2 Table may not foot due to rounding
Unallocated corporate costs consist of selling and general and administrative
and other operating expenses that are not directly related or allocated to the
reportable segments. The increase in unallocated corporate costs to $96.4
million , compared to $19.8 million in fiscal year 2021, was primarily related to
increased costs associated with additional headcount, recruiting and relocation
expense, higher compensation expense, acquisition and integration costs and
post
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combination stock compensation expense relating to the adoption of the Envigo
Equity Plan recognized in connection with the
Other Expense
Other (expense) income decreased by$73.9 million for fiscal year 2022 compared to fiscal year 2021. The decrease is primarily due to the loss of$(56.7) million in fiscal year 2022 of fair value remeasurement of the embedded derivative component of the convertible notes issued inSeptember 2021 compared to the gain of$8.4 million in fiscal year 2021 of fair value remeasurement of the embedded derivative component of the convertible notes issued inSeptember 2021 . For additional information, see "Capital Resources - Convertible Senior Notes" below. There was also an increase in interest expense of$28.0 million in fiscal year 2022 compared to fiscal year 2021 as a result of the increased debt balance as a result of the additional debt obtained in connection with the acquisitions ofEnvigo , ILS and OBRC.
Income Taxes
Our effective income tax rates for fiscal year 2022 and 2021 were 4.3% and (78.0)%, respectively. The benefit recorded for each period was$15.2 million and$4.8 million , respectively. The benefit from income taxes for fiscal year 2022 primarily relates to deferred tax benefits on the pre-tax loss, off set primarily by the impact on tax expense of certain non-deductible permanent book to tax differences related to goodwill impairment, loss on fair value remeasurement of the embedded derivative component of the convertible notes, compensation, and other permanent items. The benefit from income taxes for fiscal year 2021 related primarily to a change in valuation allowance resulting from the Bolder BioPATH acquisition onMay 3, 2021 .
Consolidated net (loss) income
As a result of the above described factors, we had a consolidated net loss of$337.3 million for the twelve months endedSeptember 30, 2022 as compared to consolidated net income of$10.9 million during the twelve months endedSeptember 30, 2021 .
Liquidity and Capital Resources
As of
The Company experienced cash used from operating activities in fiscal 2022 which was primarily driven by an increase in working capital, more specifically an increase in inventory and prepaid deposits. These increases in working capital are driven by the timing of prepaid deposits for future NHP shipments, the shipment of NHPs and the collection of cash as it relates to the shipments to customers. The Company also announced the closure of two sites,Cumberland andDublin , in fiscal 2022 which required additional operating cash outflows during fiscal 2022. Those sites were exited in September andDecember 2022 , respectively. As such, the resulting operating efficiencies from those site closures will benefit fiscal 2023, as well as savings of the additional one-time cash outflows previously incurred to close the site. Additionally, the Company had$16.1 million of acquisition and integration costs incurred in fiscal 2022 as a result of the seven acquisitions that it closed during fiscal 2022.
The Company currently does not have any significant acquisitions planned in
fiscal 2023. For additional information regarding the Company's ongoing
liquidity assessment, see Events Subsequent to
Management believes its existing cash and cash equivalents, together with cash
generated from operations, will be sufficient to fund its operations, satisfy
its obligations, including cash outflows for planned targeted capital
expenditures, and comply with minimum liquidity and financial covenant
requirements under its debt covenants related to borrowings pursuant to its
Senior Term Loan for at least the next twelve months. In order to achieve net
positive operating cash flows, the Company believes it will need to continue to
sell a majority of its existing Cambodian NHP inventory. See Note 7- Debt for
further information about our existing credit facilities and requirements under
its debt covenants. The
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Company's liquidity needs thereafter will depend, among other things, on the
timing of NHP shipments, its ability to import NHPs and its ability to generate
cash from operations.
Comparative Cash Flow Analysis
As ofSeptember 30, 2022 , we had cash and cash equivalents, including restricted cash, of$19.0 million compared to$156.9 million as ofSeptember 30, 2021 . As ofSeptember 30, 2022 , we had a$15 million balance on our revolving credit facility. In addition, as ofSeptember 30, 2021 , we had$5.0 million available on our general line of credit and$1.3 million available on our capex line of credit. Net cash used by operating activities was$(5.2) million for the year endedSeptember 30, 2022 , compared to net cash provided by operating activities of$10.7 million for the year endedSeptember 30, 2021 . Contributing factors to our cash used by operations for fiscal year endedSeptember 30, 2022 were consolidated net loss of$(337.3) million , noncash charges of$236.0 million for goodwill impairment loss,$56.7 million for loss on fair value remeasurement of embedded derivative,$49.3 million for depreciation and amortization,$24.2 million for stock compensation expense,$10.2 million for amortization of inventory fair value step-up,$5.3 million of non-cash interest and accretion expense, and$8.5 million for other non-cash operating charges, partially offset by$(17.8) million for changes in deferred taxes and$(40.3) million for changes in operating assets and liabilities. Refer to the Statement of Cash Flows within this Report for further details of net cash used by operating activities. Investing activities used$(333.7) million for the fiscal year endedSeptember 30, 2022 compared to net cash used by investing activities of$(54.1) million for the fiscal year endedSeptember 30, 2021 . Contributing factors to our cash used by investing activities for fiscal year ended were capital expenditures of$(36.3) million ,$0.3 million of proceeds from the sale of equipment and$(297.7) million of cash paid in acquisitions, net of cash acquired. Capital expenditures for the DSA segment relate to infrastructure, equipment and facility upgrades to provide expanded capacity for ourBoulder andMorrisville facilities, the buildout of our newRockville facility to support biotherapeutics and genetic toxicology growth. Further, we made significant investments in upgrading facilities and equipment across the facilities that serve the RMS segment in order to implement planned and proposed site optimizations and enhance animal welfare. Financing activities provided$203.2 million during the fiscal year endedSeptember 30, 2022 compared to$198.8 million during the fiscal year endedSeptember 30, 2021 . Contributing factors included$240.0 million in borrowings on senior term notes and delayed draw term loans,$34.0 million in borrowings on the revolving credit facility, partially offset by$(36.8) million in payments of long-term debt related to the extinguishment of the FIB Term Loans,$(19.0) million in payments on the revolving credit facility,$(10.1) million in payments of debt issuance costs,$(2.2) million in payments on promissory notes,$(1.8) million in payments on senior term notes and delayed draw term loans and$(1.1) of other financing activities, net.
Capital Resources
Credit Facility
OnNovember 5, 2021 , the Company, certain of the subsidiaries of the Company (the "Subsidiary Guarantors"), the lenders party thereto, andJefferies Finance LLC , as administrative agent, entered into a Credit Agreement (the "Credit Agreement"). The Credit Agreement provides for a term loan facility in the original principal amount of$165.0 million , a delayed draw term loan facility in the original principal amount of$35.0 million (available to be drawn up to 18 months from the date of the Credit Agreement), and a revolving credit facility in the original principal amount of$15.0 million . OnNovember 5, 2021 , the Company borrowed the full amount of the term loan facility, but did not borrow any amounts on the delayed draw term loan facility or the revolving credit facility. Prior to the Second Amendment and Third Amendment (as defined below), the Company may elect to borrow on each of the loan facilities at either an adjusted LIBOR rate of interest or an adjusted prime rate of interest. Adjusted LIBOR rate loans shall accrue interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, 49
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depending on the Company's then current Secured Leverage Ratio (as defined in the Credit Agreement). The LIBOR rate must be a minimum of 1.00%. The initial adjusted LIBOR rate of interest is the LIBOR rate plus 6.25%. Adjusted prime rate loans shall accrue interest at an annual rate equal to the prime rate plus a margin of between 5.00% and 5.50%, depending on the Company's then current Secured Leverage Ratio. The initial adjusted prime rate of interest is the prime rate plus 5.25%. Interest expense was accrued at an effective rate of 9.83% throughSeptember 30, 2022 . The Company must pay (i) a fee based on a percentage per annum equal to 0.50% on the average daily undrawn portion of the commitments in respect of the revolving credit facility and (ii) a fee based on a percentage per annum equal to 1.00% on the average daily undrawn portion of the commitments in respect of the delayed draw loan facility. In each case, such fee shall be paid quarterly in arrears. Each of the term loan facility and delayed draw term loan facility require annual principal payments in an amount equal to 1.0% of their respective original principal amounts. The Company shall also repay the term loan facility on an annual basis in an amount equal to a percentage of its Excess Cash Flow (as defined in the Credit Agreement), which percentage will be determined by its then current Secured Leverage Ratio. Each of the loan facilities may be repaid at any time with premium or penalty. The Company is required to maintain an initial Secured Leverage Ratio of not more than 4.25 to 1.00. The maximum permitted Secured Leverage Ratio shall reduce to 3.75 to 1.00 beginning with the Company's fiscal quarter endingSeptember 30, 2023 and to 3.00 to 1.00 beginning with the Company's fiscal quarter endingMarch 31, 2025 . The Company is required to maintain a minimum Fixed Charge Coverage Ratio (as defined in the Credit Agreement), which ratio shall be 1.00 to 1.00 during the first year of the Credit Agreement and shall be 1.10 to 1.00 from and after the Credit Agreement's first anniversary.
Each of the loan facilities is secured by all assets (other than certain excluded assets) of the Company and each of the Subsidiary Guarantors. Repayment of each of the loan facilities is guaranteed by each of the Subsidiary Guarantors.
Utilizing proceeds from the Credit Agreement onNovember 5, 2021 , the Company repaid all indebtedness and terminated the credit agreement related to theFirst Internet Bank of Indiana ("FIB") credit facility and recognized an$0.9 million loss on debt extinguishment. OnJanuary 7, 2022 , the Company drew$35.0 million on the delayed draw term loan facility. The delayed draw term loan facility in the original principal amount of$35.0 million is referred to herein as the "Initial DDTL". Amounts outstanding under the Initial DDTL accrue interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company's then current Secured Leverage Ratio (as defined in the Credit Agreement). The initial adjusted LIBOR rate of interest is the LIBOR rate of 1.00% plus 6.25% for a total rate of 7.25%. Interest expense was accrued at an effective rate of 9.89% throughSeptember 30, 2022 .
As of
First Amendment to Credit Agreement
OnJanuary 27, 2022 , the Company, Subsidiary Guarantors, the lenders party thereto, andJefferies Finance LLC , as administrative agent, entered into a First Amendment (the "Amendment") to the existing Credit Agreement. The Amendment provides for, among other things, an increase to the existing term loan facility in the amount of$40.0 million (the "Incremental Term Loans") and a new delayed draw term loan facility in the original principal amount of$35.0 million , which amount is available to be drawn up to 24 months from the date of the Amendment (the "DDTL"). The Incremental Term Loans and any amounts borrowed under the DDTL are referred to herein as the "Additional Term Loans". OnJanuary 27, 2022 , the Company borrowed the full amount of the Incremental Term Loans, but did not borrow any amounts under the DDTL. Amounts outstanding under the Additional Term Loans will accrue interest at an annual rate equal to the LIBOR rate plus a margin of between 6.00% and 6.50%, depending on the Company's then current Secured Leverage Ratio (as 50
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defined in the Credit Agreement). The initial adjusted LIBOR rate of interest is the LIBOR rate of 1.00% plus 6.25% for a total rate of 7.25%. Actual interest accrued at 9.83% throughSeptember 30, 2022 . . The Additional Term Loans require annual principal payments in an amount equal to 1.0% of the original principal amount. Voluntary prepayments of the Additional Term Loans will be subject to a 2% prepayment premium if made on or prior toNovember 5, 2022 and a 1% prepayment premium if made on or prior toNovember 5, 2023 . Voluntary prepayments made afterNovember 5, 2023 are not subject to a prepayment premium. Each of the Additional Term Loans require annual principal payments in an amount equal to 1.0% of its respective original principal amounts. The Company shall also repay the term loans on an annual basis in an amount equal to a percentage of its Excess Cash Flow (as defined in the Credit Agreement), which percentage will be determined by its then current Secured Leverage Ratio. The Additional Term Loans are secured by all assets (other than certain excluded assets) of the Company and each of the Subsidiary Guarantors. Repayment of the Additional Term Loans is guaranteed by each of the Subsidiary Guarantors.
The Additional Term Loans will mature on
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Long term debt as ofSeptember 30, 2022 andSeptember 30, 2021 is detailed in the table below. As of: (in millions) September 30, 2022 September 30, 2021 FIB Term Loans $ - $ 36.2 Seller Note - Bolder BioPath 0.8 1.5 Seller Note - Smithers Avanza - 0.3 Seller Note - Preclinical Research Services 0.6 0.7 Seller Note - Plato BioPharma 1.5 - Seller Payable - Orient BioResource Center
3.5 -
Seller Note - Histion 0.4 -
Seller Note - Protypia 0.6 -Economic Injury Disaster Loan 0.1 - Convertible Senior Notes 105.0 131.7 Term Loan Facility, Initial DDTL and Incremental Term Loans
238.2 -
350.7 170.3
Less: Current portion (8.0) (9.7)Less: Debt issue costs not amortized (12.0) (6.5) Total Long-term debt $ 330.7 $ 154.1
Note: Table may not foot due to rounding
Refer to Note 7 - Debt for the combined aggregate amount of maturities over the next five years.
Acquisition-related Debt In addition to the indebtedness under the Credit Agreement, certain of the Company's subsidiaries have issued unsecured notes as partial payment of the purchase prices of certain acquisitions as described herein. Each of these notes is subordinated to the indebtedness under the Credit Agreement. As part of the acquisition of Plato, which is a part of the Company'sInotiv Boulder subsidiary,Inotiv Boulder, LLC , the Company issued unsecured subordinated promissory notes payable to the former shareholders of Plato in an aggregate principal amount of$3.0 million . The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date ofJune 1, 2023 . As part of the acquisition of OBRC, the Company agreed to leave in place a payable owed by OBRC to the seller in the amount of$3.7 million , which the Company determined to have a fair value of$3.3 million as ofJanuary 27, 2022 . The payable does not bear interest and is required to be paid to seller on the date that is 18 months after the closing date ofJanuary 27, 2022 . The Company has the right to set off against the payable any amounts that become payable by the seller on account of indemnification obligations under the purchase agreement. As part of the acquisition ofHistion, LLC ("Histion") which is a part of the Company's subsidiary,Bronco Research Services, LLC , the Company issued unsecured subordinated promissory notes payable to the former shareholders of Histion in an aggregate principal amount of$0.4 million . The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date ofApril 1, 2025 . As part of the acquisition ofProtypia, Inc. ("Protypia"), the Company issued unsecured subordinated promissory notes payable to the former shareholders of Protypia in an aggregate principal amount of$0.6 million . The promissory notes bear interest at a rate of 4.5% per annum, with monthly payments of principal and interest and a maturity date ofJanuary 7, 2024 .
Convertible Senior Notes
OnSeptember 27, 2021 , the Company issued$140.0 million principal amount of its 3.25% Convertible Senior Notes due 2027 (the "Notes"). The Notes were issued pursuant to, and are governed by, an indenture, dated as of September 52
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27, 2021, among the Company, the Company's wholly owned subsidiary,BAS Evansville, Inc. , as guarantor (the "Guarantor"), andU.S. Bank National Association , as trustee (the "Indenture"). Pursuant to the purchase agreement between the Company and the initial purchaser of the Notes, the Company granted the initial purchaser an option to purchase, for settlement within a period of 13 days from, and including, the date the Notes were first issued, up to an additional$15.0 million principal amount of the Notes. The Notes issued onSeptember 27, 2021 included$15,000 principal amount of the Notes issued pursuant to the full exercise by the initial purchaser of such option. The Company used the net proceeds from the offering of the Notes, together with borrowings under a new senior secured term loan facility, to fund the cash portion of the purchase price of theEnvigo acquisition and related fees and expenses. The Notes are the Company's senior, unsecured obligations and are (i) equal in right of payment with the Company's existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company's existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company's existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company's non-guarantor subsidiaries. The Notes are fully and unconditionally guaranteed, on a senior, unsecured basis, by the Guarantor. The Notes accrue interest at a rate of 3.25% per annum, payable semi-annually in arrears onApril 15 andOctober 15 of each year, beginning onApril 15, 2022 . The Notes will mature onOctober 15, 2027 , unless earlier repurchased, redeemed or converted. BeforeApril 15, 2027 , noteholders have the right to convert their Notes only upon the occurrence of certain events. From and afterApril 15, 2027 , noteholders may convert their Notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, its common shares or a combination of cash and its common shares, at the Company's election. The initial conversion rate is 21.7162 common shares per$1 thousand principal amount of Notes, which represents an initial conversion price of approximately$46.05 per common share. The conversion rate and conversion price are subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a "Make-Whole Fundamental Change" (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time. As ofSeptember 30, 2022 and 2021, there are$5,060 and$5,909 in unamortized debt issuance costs related to the Convertible Senior Notes, respectively. For the year endedSeptember 30, 2022 , the total interest expense was$10,624 , including coupon interest expense of$4,613 , accretion expense of$5,162 , and the amortization of debt discount and issuance costs of$849 . The Notes are redeemable, in whole and not in part, at the Company's option at any time on or afterOctober 15, 2024 and on or before the 40th scheduled trading day immediately before the maturity date, but only if the last reported sale price per common share of the Company exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such notice. The redemption price is a cash amount equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, calling the Notes for redemption pursuant to the provisions described in this paragraph will constitute a Make-Whole Fundamental Change, which will result in an increase to the conversion rate in certain circumstances for a specified period of time. If certain corporate events that constitute a "Fundamental Change" (as defined in the Indenture) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the Fundamental Change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company's common shares. The Notes have customary provisions relating to the occurrence of "Events of Default" (as defined in the Indenture), which include the following: (i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, are subject to a 30-day cure period); (ii) the Company's failure to send certain notices under the Indenture within specified periods of time; (iii) the failure by the Company or the Guarantor to comply with 53
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certain covenants in the Indenture relating to the ability of the Company or the Guarantor to consolidate with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially all of the assets of the Company or the Guarantor, as applicable, and its subsidiaries, taken as a whole, to another person; (iv) a default by the Company or the Guarantor in its other obligations or agreements under the Indenture or the Notes if such default is not cured or waived within 60 days after notice is given in accordance with the Indenture; (v) certain defaults by the Company, the Guarantor or any of their respective subsidiaries with respect to indebtedness for borrowed money of at least$20.0 million ; (vi) the rendering of certain judgments against the Company, the Guarantor or any of their respective subsidiaries for the payment of at least$20.0 million , where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has expired or on which all rights to appeal have been extinguished; (vii) certain events of bankruptcy, insolvency and reorganization involving the Company, the Guarantor or any of their respective significant subsidiaries; and (viii) the guarantee of the Notes ceases to be in full force and effect (except as permitted by the Indenture) or the Guarantor denies or disaffirms its obligations under its guarantee of the Notes. If an Event of Default involving bankruptcy, insolvency or reorganization events with respect to the Company or the Guarantor (and not solely with respect to a significant subsidiary of the Company or the Guarantor) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding will immediately become due and payable without any further action or notice by any person. If any other Event of Default occurs and is continuing, then, the trustee, by notice to the Company, or noteholders of at least 25% of the aggregate principal amount of Notes then outstanding, by notice to the Company and the trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding to become due and payable immediately. However, notwithstanding the foregoing, the Company may elect, at its option, that the sole remedy for an Event of Default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 days at a specified rate per annum not exceeding 0.50% on the principal amount of the Notes. In accordance with ASC 815, at issuance, the Company evaluated the convertible feature of the Notes and determined it was required to be bifurcated as an embedded derivative and did not qualify for equity classification. The convertible feature of the Notes is subject to fair value remeasurement as of each balance sheet date or until it meets equity classification requirements and is valued utilizing Level 3 inputs as described below. The discount resulting from the initial fair value of the embedded derivative will be amortized to interest expense using the effective interest method. Non-cash interest expense during the period primarily related to this discount. In the first quarter of 2022, the Company adopted Accounting Standards Update ("ASU")ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) ("ASU 2020-06"). The update simplifies the accounting for convertible debt instruments and convertible preferred shares by reducing the number of accounting models and limiting the number of embedded conversion features separately recognized from the primary contract. As a result of the approval of the increase in authorized shares onNovember 4, 2021 (see Note 13 - Equity), the Note conversion rights met all equity classification criteria in ASC 815. As a result, the derivative liability was remeasured as ofNovember 4, 2021 and reclassified out of long-term liabilities and into additional paid-in capital. Based upon the above, the Company remeasured the fair value of the embedded derivative as ofNovember 4, 2021 which resulted in a fair value measurement of$88.6 million and a loss on remeasurement included in other income (loss) for the twelve months endedSeptember 30, 2022 of$56.7 million . The embedded derivative liability of$78.3 million was then reclassified to additional paid-in capital in accordance with ASC 815.
Inflation
We do not believe that inflation has had a material adverse effect on our business, operations or financial condition.
Events Subsequent to
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On
of the proceeds was used to repay the
revolving credit facility.
On
for the
principal supplier of NHPs to the Company, along with two Cambodian government
officials, with conspiring to illegally import NHPs into
imports between
officials, the Company believed that it was prudent, at the time and continuing
as of the date of this release, to refrain from selling or delivering any of
its Cambodian NHPs held in the
experts can evaluate what additionally could be done to satisfy itself that the
NHPs in inventory fromCambodia can be reasonably determined to be purpose-bred.
On
proposed consolidation of certain European and
update on site optimization plans in process.
On
for its pathology campus and training center in
and occupancy of the site expansion at its facility in
On
perspective on the impact to the industry.
? On
Agreement. Refer to Note 18 - Subsequent Events for further detail.
? On
Agreement. Refer to Note 18 - Subsequent Events for further detail.
Temporarily Suspended or Limited Operations
OnNovember 16, 2022 , the Company became aware that theU.S. Attorney's Office for the Southern District of Florida ("USAO-SDFL") had criminally charged employees of the principal supplier of NHPs to the Company, along with two Cambodian government officials, with conspiring to illegally import NHPs into theU.S. fromDecember 2017 throughJanuary 2022 and in connection with seven specific imports betweenJuly 2018 andDecember 2021 . Also as previously disclosed, two of the Company's subsidiaries,Orient BioResource Center andEnvigo Global Services, Inc. , companies acquired by the Company onJanuary 27, 2022 andNovember 5, 2021 , respectively, had received grand jury subpoenas from USAO-SDFL requiring the production of documents and information related to their importation of NHPs into theU.S. The Company has been fully cooperating, and will continue to cooperate, with USAO-SDFL. The Company has not been directed to refrain from selling the Cambodian NHPs in its possession in theU.S. However, due to the allegations contained in the indictment involving the Supplier and the Cambodian government officials, the Company believed that it was prudent, at the time and through the date of its Annual Report on Form 10-K, to refrain from selling or delivering any of its Cambodian NHPs held in theU.S. until the Company's staff and external experts can evaluate what additionally could be done to satisfy itself that the NHPs in inventory fromCambodia can be reasonably determined to be purpose-bred. Historically, the Company has relied on theConvention on International Trade in Endangered Species of Wild Fauna and Flora ("CITES") documentation and related processes and procedures, including release of each import byU.S. Fish and Wildlife Service . The Company has continued to sell NHPs from other suppliers. The Company has shipments of its Cambodian NHP inventory scheduled, which will be resumed once existing inventory can be reasonably determined to be purpose-bred. 55 Table of Contents Of the Company's total revenue of$547.7 million in fiscal 2022, approximately$140 million was from NHPs that it had imported fromCambodia . Refer to the Liquidity section below and Note 18 - Subsequent Events for further discussion of anticipated impacts.
Liquidity
As ofSeptember 30, 2022 , the Company has cash and cash equivalents of approximately$18.5 million . TheNovember 16, 2022 event and subsequent decision to refrain from selling or delivering Cambodian NHPs held in theU.S. , triggered a material adverse event clause in our Credit Agreement discussed in Note 7 to these consolidated financial statements resulting in, among other things a limitation of our ability to draw on our revolving credit facility. The loss of access to our revolving credit facility and reduced liquidity resulting from the decision to refrain from selling Cambodian NHPs held in theU.S. resulted in reduced forecasted liquidity. As a result of these events, we took steps to improve our liquidity, which included negotiating an amendment to our Credit Agreement to reinstate our ability to borrow under our revolving credit facility. Without the amendment, the Company was at risk of not having the revolving credit facility available. During the three months endedDecember 31, 2022 , the Company announced the completion of the closure of theCumberland andDublin, Virginia facilities and announced further intended site optimizations plans for 2023 and 2024, including twoU.S. facilities, which have been approved, and two European facilities, which are subject to approval. Further, the Company has communicated price increases that will begin inJanuary 2023 . The Company also took steps in reducing our 2023 budgeted capital expenditures and certain forecasted expenses, including a reduction of nonessential travel and employee-related expenses among other efficiency-based reductions. As a result, the Company believes its existing cash and cash equivalents, together with cash generated from operations, will be sufficient to fund its operations, satisfy its obligations, including cash outflows for planned targeted capital expenditures, and comply with minimum liquidity and financial covenant requirements under its debt covenants related to borrowings pursuant to its Credit Agreement for at least the next twelve months. In order to achieve the forecasted operating cash flows, the Company believes it will need to begin shipping its existing Cambodian NHP inventory. See Note 7- Debt and Note 18 - Subsequent Events for further information about the Company's existing credit facilities and requirements under its debt covenants. The Company's liquidity needs and compliance with covenants thereafter will depend, among other things, on the timing of NHP shipments and its ability to generate cash from operations.
Critical Accounting Policies and Significant Judgments and Estimates
"Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Liquidity and Capital Resources" is based upon our consolidated financial statements prepared in accordance with generally accepted accounting principles inthe United States (U.S. ). The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses during the reported periods and related disclosures. These estimates and assumptions are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on our historical experience, trends in the industry, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. We believe that the application of our accounting policies, each of which require significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating our reported financial results. Our significant accounting policies are more fully described in Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements contained in Item 8 - Financial Statements and Supplementary Data in this Annual Report on Form 10-K.
We believe the following represent our critical accounting policies and estimates used in the preparation of our financial statements:
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Revenue Recognition
In accordance with Accounting Standards Codification ("ASC") 606, the Company
disaggregates its revenue from clients into two revenue streams, service revenue
and product revenue. At contract inception the Company assesses the services
promised in the contract with the clients to identify performance obligations in
the arrangements. In accordance with ASC 606, the Company determines appropriate
revenue recognition by completing the following steps: (i) identifiying the
contract(s) with a customer; (ii) identifying the performance obligations in the
contract; (iii) determining the transaction price; (iv) allocating of the
transaction price to the performance obligations in the contract; and (v)
recognizing revenue when or as the Company satisfies a performance obligation.
Service revenue
DSA
The Company enters into contracts with clients to provide drug discovery and
development services. The Company also offers archive storage services to its
clients. The Company's fixed fee arrangements may involve nonclinical research
services (e.g., toxicology, pathology, pharmacology), bioanalytical, and
pharmaceutical method development and validation, nonclinical research services
and the analysis of bioanalytical and pharmaceutical samples. For bioanalytical
and pharmaceutical method validation services and nonclinical research services,
revenue is recognized over time using the input method based on the ratio of
direct costs incurred to total estimated direct costs. For contracts that
involve in-life study conduct, method development or the analysis of
bioanalytical and pharmaceutical samples, revenue is recognized over time when
samples are analyzed or when services are performed. In determining the
appropriate amount of revenue to recognize over time, the Company forecasts
remaining costs related to the contracts with customers. In order to forecast
the remaining costs, the Company reviews the billings compared to original cost
estimates, meets with project managers and updates cost estimates in relation to
any scope changes requested by the client.
The Company generally bills for services on a milestone basis. These contracts
represent a single performance obligation and due to the Company's right to
payment for work performed, revenue is recognized over time. Research services
contract fees received upon acceptance are deferred until earned and classified
within fees invoiced in advance on the consolidated balance sheets. Unbilled
revenues represent revenues earned under contracts in advance of billings and
classified within trade receivables and contract assets on the consolidated
balance sheets.
Our service contracts typically establish an fixed fee to be paid for identified
services. In most cases, some percentage of the contract costs is paid in
advance. While we are performing a contract, clients often adjust the scope of
services to be provided based on interim project results. Fees are adjusted
accordingly. Generally, our fee-for-service contracts are terminable by the
client upon written notice of 30 days or less for a variety of reasons,
including the client's decision to forego a particular study, the failure of
product prototypes to satisfy safety requirements, and unexpected or undesired
results of product testing. Cancellation or delay of ongoing contracts may
result in fluctuations in our quarterly and annual results. We are generally
able to recover, at minimum, our invested costs plus an appropriate margin
when
contracts are terminated.
RMS
The Company provides GEMS, which includes the performance of contract breeding
and other services associated with genetically engineered models, client-owned
animal colony care, and health monitoring and diagnostics services related to
research models. For contracts that involve creation of a specific type of
animal, revenue is recognized over time with each milestone as a separate
performance obligation. The Company is due payment for work performed even if
subsequent milestones are unable to be met. Contract breeding revenue and
client-owned animal colony care revenue are recognized over time and are billed
as per diems. Health monitoring revenue and diagnostic services revenue are
recognized once the service is performed.
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Product revenue
DSA
DSA product revenue includes internally-manufactured scientific instruments for life sciences research and the related software for use by pharmaceutical companies, universities, government research centers and medical research institutions under the Company's BASi product line. These products can be sold to multiple clients and have alternative use. Both the transaction sales price and shipping terms are agreed upon in the client order. For these products, all revenue is recognized at a point in time, generally when title of the product and control is transferred to the client based upon shipping terms. These arrangements typically include only one performance obligation.
RMS
Product revenue included research models, diets and bedding and bioproducts. Research models revenue represents the commercial production and sale of research models, principally purpose-bred rats and mice for use by researchers, and large-animal models. Diets and bedding revenue represents laboratory animal diets, bedding, and enrichment products under the Company's Teklad product line. Bioproducts revenue represents the sale of serum and plasma, whole blood, tissues, organs and glands, embryo culture serum and growth factors. Product revenue is recognized at the point in time when the Company's performance obligations with the applicable customers have been satisfied. Revenue is recorded at the transaction price, which is the amount of consideration the Company expects to receive in exchange for transferring products to a customer. The performance obligations, including associated freight to deliver products, are met based agreed upon terms, which are generally upon delivery (destination point) and transfer of title. The Company determines the transaction price based on fixed consideration in its contractual agreements. In determining the transaction price, a significant financing component does not exist since the timing from when the Company delivers product to when the customers pay for the product is less than one year.
Income Taxes
The Company uses the asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are measured using rates expected to apply to taxable income in years in which those temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company uses a two-step process for the measurement of uncertain tax positions that have been taken or are expected to be taken in a tax return. The first step is a determination of whether the tax position should be recognized in the consolidated financial statements. The second step determines the measurement of the tax position. The Company records potential interest and penalties on uncertain tax positions as a component of income tax expense. As ofNovember 5, 2021 , with the acquisition ofEnvigo , the Company adopted an accounting policy regarding the treatment of taxes due on future inclusion of non-U.S. income inU.S. taxable income under the Global Intangible Low-Taxed Income provisions as a current period expense when incurred. 58
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We use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets, which represent a significant portion of the purchase price in many of our acquisitions, requires the use of significant judgment with regard to the fair value. We utilize commonly accepted valuation techniques, such as the income, cost and market approaches, as appropriate, in establishing the fair value of intangible assets. Typically, key assumptions include projections of cash flows that arise from identifiable intangible assets of acquired businesses as well as discount rates based on an analysis of the weighted average cost of capital, adjusted for specific risks associated with the assets. Customer relationship intangible assets are the most significant identifiable definite-lived asset acquired. To determine the fair value of the acquired customer relationships, the Company typically utilizes the multiple period excess earnings model (a commonly accepted valuation technique), which relies on the following key assumptions: projections of cash flows from the acquired entities, which includes future revenue growth rates, operating income margins, and customer attrition rates; as well as discount rates based on an analysis of the acquired entities' weighted average cost of capital.Goodwill represents the difference between the purchase price and the fair value of assets acquired and liabilities assumed when accounted for using the acquisition method of accounting.Goodwill is not amortized, but reviewed for impairment on an annual basis, utilizing an assessment date ofSeptember 30th , or more frequently if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of the Company's reporting units below their carrying amounts. The Company has the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. If the Company elects this option and believes, as a result of the qualitative assessment, that it is more-likely-than-not that the carrying value of goodwill is not recoverable, the quantitative impairment test is required; otherwise, no further testing is required. Alternatively, the Company may elect to not first assess qualitative factors and immediately perform the quantitative impairment test. In the quantitative test, the Company compares the fair value of its reporting units to their carrying values. The estimated cash flows used to determine the fair value of the reporting units used in the impairment test requires significant judgment with respect to revenue growth, gross margin, EBITDA margin, and weighted average cost of capital. If the carrying values of the net assets assigned to the reporting units exceed the fair values of the reporting units an impairment loss equal to the difference would be recorded. See Note 6 for further discussion related to goodwill impairment charges during the fiscal year endedSeptember 30, 2022 . Definite-lived intangible assets are amortized over the pattern in which the economic benefits of the intangible assets are utilized and qualitatively reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. If quantitative determination of recoverability is required, recoverability of assets to be held and used is determined by the Company at the level for which there are identifiable cash flows by comparison of the carrying amount of the assets to future undiscounted net cash flows before interest expense and income taxes expected to be generated by the assets. If the carrying amount exceeds the outcome of the analysis of undiscounted cash flows, impairment is measured through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the definite-lived intangible assets, the definite-lived intangible assets are written-down to their fair values.
Long-lived Tangible Assets
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets or asset group may not be recoverable. Determination of recoverability is
based on an estimate of undiscounted future cash flows resulting from the use of
the asset and its eventual disposition. In the event that such cash flows are
not expected to be sufficient to recover the carrying amount of the assets, the
assets are written-down to their fair values. Long-lived assets to be disposed
of are carried at fair value less costs to sell.
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Fair Value of Financial Instruments
The provisions of the Fair Value Measurements and Disclosure Topic defines fair value, establishes a consistent framework for measuring fair value and provides the disclosure requirements about fair value measurements. This Topic also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's judgment about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the inputs as follows:
? Level 1 - Valuations based on quoted prices for identical assets or liabilities
in active markets that the Company has the ability to access.
? Level 2 - Valuations based on quoted prices in markets that are not active or
for which all significant inputs are observable, either directly or indirectly.
? Level 3 - Valuations based on inputs that are unobservable and significant to
the overall fair value measurement.
Pension Costs
As a result of the
The projected benefit obligation and funded position of the defined benefit plan is estimated by actuaries and the Company recognizes the funded status of its defined benefit plan on its consolidated balance sheets and recognizes gains, losses and prior service costs or credits that arise during the period that are not recognized as components of net periodic benefit cost as a component of accumulated other comprehensive income (loss), net of tax. The Company measures plan assets and obligations as of the date of the Company's year-end consolidated balance sheet, using assumptions to anticipate future events.
The expected return on plan assets is determined using the fair value or calculated value of plan assets.
Additional information about certain effects on net periodic benefit cost for
the next fiscal year that arise from delayed recognition of the gains or losses,
prior service costs or credits, and transition assets or obligations are
disclosed in the notes to the consolidated financial statements (see Note 9 -
Post-employment Benefits).
Our significant accounting policies, including new accounting pronouncements,
are described in more detail in Note 2 of the Notes to Consolidated Financial
Statements included in response to Item 8 of this Report.
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