Embecta Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Certain Factors Affecting Forward-Looking Statements The following discussion and analysis should be read in conjunction with the condensed combined financial statements and accompanying notes contained elsewhere in this Quarterly Report on Form 10-Q. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and other factors described throughout this discussion and analysis, particularly in the section “Cautionary Statement Concerning Forward-Looking Statements.” References in this section to the “Diabetes Care Business” refer to the Diabetes Care Business as defined in the condensed combined financial statements included within this report. References in this section to “Embecta” refer to Embecta Corp. as defined in the condensed combined financial statements included within this report. All amounts discussed are in millions of U.S. dollars, unless otherwise indicated. Company Overview We are a leading global medical device company focused on providing solutions to improve the health and wellbeing of people living with diabetes. Over the 95-year history of our business, we believe that our products have become one of the most widely recognized and respected brands in diabetes management in the world. We estimate that our products are used by nearly 30 million people in over 100 countries for insulin administration and to aid with the daily management of diabetes. Our business traces its origins to 1924, when Becton, Dickinson and Company (“BD” or “Parent”) developed the first dedicated insulin syringe. Since then, we have built a world-class organization with a unique manufacturing supply chain and commercial footprint, delivering over 7.6 billion units of diabetes injection devices globally in 2021. We generated revenues of $289.3 million and $285.3 million during the three months ended December 31, 2021 and 2020, respectively. We have a broad portfolio of marketed products, including a variety of pen needles, syringes and safety devices, which are complemented by our proprietary digital applications designed to assist people with managing their diabetes. Our pen needles are sterile, single-use, medical devices, designed to be used in conjunction with insulin pens and are used to inject insulin or other diabetes medications. We also sell safety pen needles, which include resin injection-molded shields on both ends of the cannula that automatically deploy to help prevent needlestick exposure and injury during injection and disposal. Our traditional and safety pen needles are compatible and frequently used with widely available pen injectors in the market today. In addition to pen needles, we sell sterile, single-use insulin syringes, which are used to inject insulin drawn from insulin vials. We also sell safety insulin syringes, which incorporate a manually activated sliding sleeve to help prevent needlestick exposure and injury during injection and disposal. We primarily sell our products to wholesalers and distributors, which in turn sell such products to customers in primarily retail and institutional channels. Separation from BD In May 2021, BD announced its plan to separate its diabetes care business into an independent public company. The separation will occur through a distribution of all of the outstanding shares of common stock of Embecta Corp., which will hold BD’s Diabetes Care Business, to BD shareholders of record as of the close of business on March 22, 2022, the record date for the spin-off (the “Spin-Off Distribution”). On February 1, 2022, BD’s Board of Directors approved the Spin-Off Distribution. On February 10, 2022, the SEC declared effective Embecta’s Registration Statement on Form 10, as amended. The Spin-Off Distribution is expected to be completed at 12:01 a.m., Eastern Time, on April 1, 2022. “When-issued” trading of Embecta common stock will begin on or shortly before the record date of March 22, 2022, under the ticker symbol “EMBC WI”, and will continue until April 1, 2022. “Regular-way” trading of Embecta common stock is expected to begin on the spin-off date of April 1, 2022, under the same ticker symbol of “EMBC.” -14- Table of Contents Basis of Presentation of Our Financial Information The accompanying historical unaudited condensed combined financial statements included in this report were derived from the unaudited interim condensed consolidated financial statements and accounting records of BD. These condensed combined financial statements reflect the historical results of operations, financial position and cash flows of BD’s Diabetes Care Business as they were historically managed in conformity with U.S. generally accepted accounting principles (“GAAP”). Therefore, the historical combined financial information may not be indicative of our future performance and does not necessarily reflect what our combined results of operations, financial condition and cash flows would have been had the Diabetes Care Business operated as a separate, publicly traded company during the periods presented, particularly because of changes that we expect to experience in the future as a result of our separation from BD, including changes in the financing, cash management, operations, cost structure and personnel needs of our business. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. The condensed combined financial statements include certain assets and liabilities that have historically been held at the BD corporate level but are specifically identifiable or otherwise allocable to the Diabetes Care Business. During the first quarter of 2022, in contemplation of the spin-off, certain assets, liabilities, and operations attributable to the Diabetes Care Business were contributed to Embecta. The remaining assets, liabilities, operations or commitments and contingencies in respect of the Diabetes Care Business will be contributed prior to the spin-off date, at which such business is fully transferred to Embecta. BD uses a centralized approach to cash management and financing of its operations. The cash and cash equivalents held by BD at the corporate level are not specifically identifiable to the Diabetes Care Business and therefore were not allocated for any of the periods presented. These arrangements are not reflective of the manner in which the Diabetes Care Business would have financed its operations had it been a standalone company separate from BD during the periods presented. Cash pooling, related interest and intercompany arrangements are excluded from the asset and liability balances in the combined balance sheets. These amounts have instead been reported as Net parent investment as a component of Parent’s Equity. Additionally, BD provides certain services, such as legal, accounting, information technology, human resources and other infrastructure support to the Diabetes Care Business. The cost of these services has been allocated to the Diabetes Care Business on the basis of the proportion of net sales, headcount, and other drivers. The Diabetes Care Business and BD consider these allocations to be a reasonable reflection of the benefits received by the Diabetes Care Business. Actual costs that would have been incurred if the Diabetes Care Business had been a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, such as information technology and infrastructure. Subsequent to the completion of the separation, we expect to incur expenditures consisting of employee-related costs, costs to start up certain standalone functions and information technology systems and other one-time transaction related costs. Recurring standalone costs include establishing the internal audit, treasury, investor relations, tax and corporate secretary functions as well as the annual expenses associated with running an independent publicly traded company, including listing fees, compensation of non-employee directors, related board of director fees and other fees and expenses related to insurance, legal and external audit. During the three months ended December 31, 2021 we incurred separation and stand-up costs of approximately $8.4 million, reflected within Other operating expenses within the condensed combined statement of income, and as further discussed below. There were no spin-off costs incurred during the three months ended December 31, 2020. Percentages presented are calculated from the underlying amounts. Relationship with BD We have or will enter into several agreements with BD to effect the spin-off and provide a framework for the relationship between BD and Embecta after the spin-off, including a separation and distribution agreement, a transition services agreement (TSA), manufacturing and supply agreements (MSAs), reverse manufacturing and supply agreements (RMSAs), an employee matters agreement, a tax matters agreement, a lease agreement, and certain other commercial agreements. Certain functions that BD provided to the Diabetes Care Business prior to the distribution will either continue to be provided to Embecta by BD under the TSA or will be performed using Embecta’s own resources or third-party service providers. Additionally, under the MSAs, BD will manufacture certain products for and supply raw materials to Embecta and its subsidiaries and Embecta will manufacture certain products for BD and its subsidiaries. Lastly, BD and Embecta will enter into a Trade Receivables Factoring Agreement, in which Embecta owes BD a service fee calculated as 0.1% of annual revenues related to countries subject to the agreement, in exchange for the services provided by BD pursuant to the agreement. -15- Table of Contents Due to these aforementioned contracts, as well as the anticipation of the spin-off, we expect potential changes in costs and cash flows in the quarters immediately subsequent to the spin-off. Specifically, we expect the TSA to result in higher expenses to operate as a standalone entity as compared to the costs we currently incur in carrying out these functions as a component of BD. Following the spin-off, we expect to incur certain one-time costs related to becoming a stand-alone entity; however, we also anticipate a decrease in certain separation costs related to the formation of new legal entities as well as expenses to complete the transfer of assets and liabilities from BD to Embecta that we are currently incurring once the spin-off is complete. Refer to the Other Operating Expenses fluctuation in the “Results of Operations” section for further details on these expenses. Furthermore, we expect the Trade Receivables Factoring Agreement to have an impact on the timing of our cash flows related to our outstanding trade receivables. In addition to the above, we also are planning a build up of inventory in current and future periods in preparation for the anticipated spin-off. We anticipate this trend to continue as we operate as a stand-alone entity. COVID-19 Pandemic Impacts and Response COVID-19 was officially declared a pandemic by the World Health Organization in March 2020 and governments around the world have been implementing various measures to slow and control the spread of COVID-19. These government measures have led to a shift in healthcare priorities and disruptions of economic activities worldwide, which unfavorably affected the demand for our products during fiscal year 2020. We have seen substantial recovery in the demand for our products in the three months ended December 31, 2021 and 2020, as further discussed below, however, our future operating performance may be subject to further volatility due to the significant uncertainty with respect to the duration and overall impact of the COVID-19 pandemic. The impacts of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is dependent on certain factors including: • the extent to which resurgences in COVID-19 infections or new strains of the virus, including the Delta and Omicron variants, result in the imposition of new governmental lockdowns, quarantine requirements or other restrictions that may disrupt our operations; • the continued momentum of the global economy’s recovery from the pandemic and the degree of pressure that a weakened macroeconomic environment would put on the global demand for our products; and • the effectiveness of recently developed vaccines and vaccination efforts. First Quarter 2022 Summary (on a comparative basis) Key GAAP financial results for the three months ended December 31, 2021 were as follows: • Revenue increased by 1.4% to $289.3 million from $285.3 million; • Operating income decreased by 6.0% to $116.6 million from $124.1 million; and • Net income decreased by 6.2% to $98.8 million from $105.3 million. Key Non-GAAP financial results for the three months ended December 31, 2021 were as follows: • Constant Currency Revenues increased by 1.7%; • EBITDA decreased by 7.0% to $125.0 million from $134.4 million; and • Adjusted EBITDA decreased by 6.9% to $138.0 million from $148.2 million. -16- Table of Contents Please see a description of our Non-GAAP Financial Measures below. Results of Operations Our unaudited condensed combined statement of income is as follows: Three months ended January 31 Dollars in millions Increase/(decrease) 2021 2020 $ % Revenues $ 289.3 $ 285.3 $ 4.0 1.4 % Cost of products sold 85.4 94.0 (8.6 ) (9.1 )% Gross Profit 203.9 191.3 12.6 6.6 % Operating expenses: Selling and administrative expense 62.2 53.2 9.0 16.9 % Research and development expense 16.7 14.0 2.7 19.3 % Other operating expenses 8.4 — 8.4 nm Total Operating Expenses 87.3 67.2 20.1 29.9 % Operating Income 116.6 124.1 (7.5 ) (6.0 )% Other income (expense), net — 1.0 (1.0 ) (100.0 )% Income Before Income Taxes 116.6 125.1 (8.5 ) (6.8 )% Income tax provision 17.8 19.8 (2.0 ) (10.1 )% Net Income $ 98.8 $ 105.3 $ (6.5 ) (6.2 )% nm = not meaningful Revenues Our revenues increased by $4.0 million, or 1.4%, to $289.3 million in the first quarter of 2022 as compared to revenues of $285.3 million in the first quarter of 2021. Changes in our revenue are driven by the volume of goods that we sell, the prices we negotiate with customers and changes in foreign exchange rates. Volume and price favorably impacted our revenues by approximately $4.0 million and $1.0 million, respectively, for the three months ended December 31, 2021, as compared to the prior period. The increase in volume was primarily driven by new customers in the U.S. and in emerging markets and the increase in price was driven by standard increases in product prices within certain international regions. This increase was partially offset by unfavorable effects from foreign currency translation of $1.0 million. Revenues by geographic region are as follows: Three months ended December 31 Dollars in millions Increase/(decrease) 2021 2020 $ % Constant Currency % United States $ 150.9 $ 149.5 $ 1.4 0.9 % 0.9 % International 138.4 135.8 2.6 1.9 % 2.6 % Total $ 289.3 $ 285.3 $ 4.0 1.4 % 1.7 % Cost of products sold Cost of products sold decreased by $8.6 million, or 9.1%, to $85.4 million in the first quarter of 2022 as compared to $94.0 million in the first quarter of 2021. The decrease was primarily driven by $10.0 million of impairment charges associated with the write-off of certain construction in progress assets that were recorded in the first quarter of fiscal year 2021. Additional associated disclosures relating to the impairment charges are provided in Note 10 to our combined financial statements included elsewhere in this report. -17- Table of Contents Selling and administrative expenses Selling and administrative expenses increased by $9.0 million, or 16.9%, to $62.2 million in the first quarter of 2022 as compared to $53.2 million in the first quarter of 2021. This increase was primarily driven by an increase in digital media spend and an increase in compensation and benefit costs due to increased headcount in anticipation of the spin-off. Research and development expenses Research and development expenses increased by $2.7 million, or 19.3%, to $16.7 million in the first quarter of 2022 as compared to $14.0 million in the first quarter of 2021. The increase was primarily driven by increased investment in the development of new products, specifically our insulin patch pump and redesigned pen needles. Other operating expenses We incurred other operating expenses of $8.4 million in the first quarter of 2022, driven by costs related to the anticipated spin-off. The costs incurred primarily relate to accounting, auditing, and legal services, including costs to establish certain stand-alone corporate functions and other transaction costs as we transition to being a stand-alone publicly traded company. As mentioned within the “Relationship with BD” section, we anticipate certain separation costs to decline following the spin-off. However, we do anticipate an increase in other costs related to the spin-off, specifically one-time costs related to becoming a stand-alone entity. Income tax provision Income tax expense decreased by $2.0 million, or 10.1%, to $17.8 million in the first quarter of 2022 as compared to $19.8 million in the first quarter of 2021. The decrease was primarily driven by the geographical mix of income attributable to foreign countries that have income tax rates that vary from the U.S. tax rate and costs related to the anticipated spin-off incurred in the first quarter of 2022. Non-GAAP financial measures In evaluating our operating performance, we supplement the reporting of our financial information determined under GAAP with certain non-GAAP financial measures including (i) earnings before interest, taxes, depreciation, and amortization (“EBITDA”), (ii) adjusted EBITDA, as further defined below, and (iii) Constant Currency revenue growth. These non-GAAP financial measures are indicators of our performance that are not required by, or presented in accordance with, GAAP. They are presented with the intent of providing greater transparency to financial information used by us in our financial analysis and operational decision-making. We believe that these non-GAAP measures provide meaningful information to assist investors, shareholders and other readers of our consolidated financial statements in making comparisons to our historical operating results and analyzing the underlying performance of our results of operations. These non-GAAP financial measures are not intended to be, and should not be, considered separately from, or as an alternative to, the most directly comparable GAAP financial measures. We believe EBITDA is an important valuation measurement for management and investors given the effect non-cash charges such as amortization related to acquired intangible assets and depreciation of capital equipment have on net income. Additionally, we regard EBITDA as a useful measure of operating performance and cash flow before the effect of interest, taxes, depreciation and amortization and as a complement to operating income, net income and other GAAP financial performance measures. We define adjusted EBITDA as EBITDA excluding certain items that affect comparability of operating results and the trend of earnings. These adjustments are either non-cash or irregular in nature, may not be indicative of our past and future performance and are therefore excluded to allow investors to better understand underlying operating trends. The following are examples of the types of adjustments that are excluded: (i) share-based compensation, (ii) impairment losses incurred, (iii) separation costs associated with the spin-off, and (iv) other significant items management deems irregular or non-operating in nature. We use adjusted EBITDA when evaluating operating performance because we believe the exclusion of such adjustments is necessary to provide the most accurate measure of on-going core operating results and to evaluate comparative results period over period. -18- Table of Contents Three Months Ended December 31, 2021 2020 In millions Net income $ 98.8 $ 105.3 Income taxes 17.8 19.8 Depreciation 8.4 9.3 Amortization of intangible assets — — EBITDA 125.0 134.4 Share-based compensation expense 4.6 3.8 Separation costs (1) 8.4 — Impairment losses (2) — 10.0 Adjusted EBITDA $ 138.0 $ 148.2 (1) Relates to spin-off costs incurred in the first three months of fiscal year 2022. Refer to the Other operating expenses section above. (2) Relates to impairment charges incurred in the first three months of fiscal year 2021. Refer to the Cost of products sold section above. Each reporting period, we face currency exposure that arises from translating the results of our worldwide operations to the U.S. dollar at exchange rates that fluctuate from the beginning of such period. A stronger U.S. dollar, compared to the prior-year period, resulted in an unfavorable foreign currency translation impact to our revenues as compared to the prior-year quarter. We evaluate our results of operations on both a reported and a Constant Currency basis, which excludes the impact of fluctuations in foreign currency exchange rates by comparing results between periods as if exchange rates had remained constant period-over-period. As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a Constant Currency basis in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods. We calculate Constant Currency percentages by converting our current-period local currency financial results using the prior-period foreign currency exchange rates and comparing these adjusted amounts to our current-period results. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a Constant Currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with GAAP. For the three months ended December 31, 2021, the reconciliation of revenue growth to Constant Currency revenue growth was as follows: Three months ended December 31, Millions of dollars 2021 2020 Total Change Estimated FX Impact Constant Currency Change Total Revenues $ 289.3 $ 285.3 1.4 % (0.3 )% 1.7 % LIQUIDITY AND CAPITAL RESOURCES Historical Liquidity Historically, we have generated positive cash flows from operations. As part of BD, the Diabetes Care Business has been dependent upon BD for all of its working capital and financing requirements. BD uses a centralized approach to cash management and financing of its operations. The majority of the cash of the Diabetes Care Business is transferred to BD daily and BD funds the operating and investing activities of such business as needed. This arrangement is not reflective of the manner in which the Diabetes Care Business would have been able to finance its operations had the Diabetes Care Business been a standalone business separate from BD during the periods presented. Cash transfers to and from BD’s cash management accounts are reflected within Net parent investment as a component of Parent’s Equity. -19- Table of Contents The cash and cash equivalents held by BD at the corporate level are not specifically identifiable to the Diabetes Care Business and therefore were not allocated for any of the periods presented. Third-party debt and the related interest expense of BD have not been allocated to the Diabetes Care Business for any of the periods presented because BD’s borrowings were not directly attributable to this business. Future Liquidity On a recurring basis, our primary future cash needs will be directed toward operating and investing activities, which include working capital needs, capital expenditures, research and development funding, and mergers and acquisitions. We also intend to allocate cash to the interest payments and repayment of borrowings. Our ability to fund these needs will depend, in part, on our ability to generate or raise cash in the future, which is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control. Following the separation, our capital structure and sources of liquidity will change from its historical capital structure because we will no longer participate in BD’s centralized cash management program. Our ability to fund our operating needs will depend on our ability to continue to generate positive cash flow from operations and raise capital in the capital markets. Based upon our history of generating strong cash flows, we believe that we will be able to meet our short-term liquidity needs. We believe that we will meet known and reasonably likely future cash requirements through the combination of cash flows from operating activities, available cash balances and available borrowings through and under our expected financing arrangements, as further discussed below. If these sources of liquidity need to be augmented, additional cash requirements would likely need to be financed through the issuance of debt or equity securities. Financing Facilities In February 2022 and in connection with the spin-off, we issued $500.0 million of senior secured 5.000% notes due February 15, 2030. Prior to the distribution date of April 1, 2022, we expect to enter into a credit agreement which will provide for a $1,150.0 million senior secured seven-year term loan facility, as well as a $500.0 million senior secured five-year revolving credit facility, which is expected to be undrawn at the spin-off date. The interest rate on the $1,150.0 million term loan is 300 basis points over the secured overnight financing rate (“SOFR”), with a 0.5% SOFR floor. We expect to use the aggregate proceeds received from the issuance of the senior secured notes and the term loan facility to make a distribution payment of approximately $1,440.0 million to BD in connection with the spin-off on the effective date of April 1, 2022. We plan to hold approximately $160.0 million in cash upon completion of the spin-off. In addition, Embecta will enter into a Trade Receivables Factoring Agreement with BD effective at the time of the spin-off. Embecta will owe BD a service fee calculated as 0.1% of annual revenues related to countries subject to the agreement, in exchange for the services provided by BD pursuant to the Trade Receivables Factoring Agreement. This factoring agreement will provide Embecta with an additional source of liquidity. Access to Capital and Credit Ratings In January 2022, Standard & Poor’s Ratings Services (“S&P”) assigned Embecta a rating of ‘B+’ as the agency’s first-time outlook for Embecta. In the same month, Moody’s Investor Services (“Moody’s”) also assigned Embecta a rating of Ba3. -20- Table of Contents The following table summarizes our condensed combined statements of cash flows: Three Months Ended December 31, 2021 2020 In millions Net cash provided by (used for) Operating activities $ 138.8 $ 121.4 Investing activities $ (4.3 ) $ (11.9 ) Financing activities $ (134.5 ) $ (109.5 ) Net Cash Flows from Operating Activities Net cash provided by operating activities during the first three months of fiscal year 2022 was attributable to net income of $98.8 million and net adjustments of $40.0 million, including $15.2 million of non-cash adjustments related to depreciation and amortization, share-based compensation, and pension expense, and a $24.8 million net source of cash relating to changes in working capital. The source of cash relating to working capital was mainly driven by decreases in trade receivables of $30.7 million, partially offset by an increase in inventories of $4.3 million and a decrease in accounts payable and accrued expenses of $2.5 million. The decrease in trade receivables can be attributed to the timing of payments made in the normal course of business and a decrease in certain rebate and cash discount reserves. The increase in inventories is primarily driven by a concerted effort in the first three months of fiscal year 2022 to build inventory in preparation for the spin-off. The decrease in accounts payable and accrued expenses is mainly driven by the timing of payments made in the normal course of business for managed care rebates payments and a decrease in accrued professional services in connection with various market research and consulting projects. Net cash provided by operating activities during the first three months of fiscal year 2021 was attributable to net income of $105.3 million and net adjustments of $16.1 million, including $25.5 million of non-cash adjustments related to depreciation and amortization, impairment of property, plant and equipment, share-based compensation, and pension expense, and a $9.4 million net use of cash relating to changes in working capital. The net use of cash relating to working capital was primarily driven by an increase in inventories of $10.4 million and an increase in prepaid expenses of $3.4 million, partially offset by an increase in accounts payable and accrued expenses of $6.3 million. The increase in inventories can primarily be attributed to the timing of capitalized variances as well as higher inventory on hand as of period end compared to prior year. The increase in prepaid expenses is mainly driven by an increase in value-added taxes (“VAT”). The net change in accounts payable and accrued expenses is primarily driven by the timing of payments made in the normal course of business for managed care rebates and other liabilities and a decrease in accrued VAT. Net Cash Flows from Investing Activities Net cash used for investing activities was primarily comprised of capital expenditures of $4.3 million and $11.4 million in the first three months of fiscal year 2022 and 2021, respectively, to support further expansion of our business and operations. Net Cash Flows from Financing Activities Net cash used for financing activities, which entirely represented net transfers to BD (see Note 2 to the Condensed Combined Financial Statements included elsewhere in this report), was $134.5 million in the first three months of fiscal year 2022 and $109.5 million in the first three months of fiscal year 2021. Cautionary Statements Regarding Forward-Looking Statements All statements and assumptions contained in this Quarterly Report on Form 10-Q and other materials BD and Embecta have filed or will file with the SEC (and oral communications that BD or Embecta may make) contain or incorporate by reference statements that relate to future events and expectations and, as such, constitute forward-looking statements under the securities laws. Forward-looking statements include those containing such words as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “guidance,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “sees,” “should,” “targets,” “will,” “would,” or other words of similar meaning. All statements that reflect BD’s or Embecta’s expectations, assumptions or projections about the future, other than statements of historical fact, are forward-looking statements, including, without limitation, forecasts relating to discussions of future operations and financial performance (including volume growth, pricing, sales and earnings per share growth and cash flows) and statements regarding BD’s or Embecta’s strategy for growth, future product development, regulatory clearances and approvals, competitive position and expenditures. Forward-looking -21- Table of Contents statements are not guarantees of future performance and are subject to risks, uncertainties, and changes in circumstances that are difficult to predict. Although each of BD and Embecta believes that the expectations reflected in any forward-looking statements it makes are based on reasonable assumptions, it can give no assurance that these expectations will be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. Such risks and uncertainties include, but are not limited to: • Competitive factors that could adversely affect Embecta’s operations, including new product introductions by Embecta’s competitors, the development of new technologies, lower cost producers that create pricing pressure and consolidation resulting in companies with greater scale and market presence than Embecta. • Any events that adversely affect the sale or profitability of one of Embecta’s key products or the revenue delivered from sales to its key customers. • Any failure by BD to perform its obligations under the various separation agreements to be entered into in connection with the separation and distribution, including the cannula supply agreement. • Increases in operating costs, including fluctuations in the cost and availability of oil-based resins and other raw materials, as well as certain components, used in its products, the ability to maintain favorable supplier arrangements and relationships, and the potential adverse effects of any disruption in the availability of such items. • Changes in reimbursement practices of governments or private payers or other cost containment measures. • The adverse financial impact resulting from unfavorable changes in foreign currency exchange rates, regional, national and foreign economic factors, including inflation, deflation, and fluctuations in interest rates, as well as wars and conflicts, including economic policies in response thereto, and their potential effect on its operating performance. • The impact of changes in U.S., federal laws and policy that could affect fiscal and tax policies, healthcare and international trade, including import and export regulation international trade agreements and sanctions. In particular, tariffs or other trade barriers imposed by the United States or other countries could adversely impact its supply chain costs or otherwise adversely impact its results of operations. • Any impact of the COVID-19 pandemic on Embecta’s business, including disruptions in its operations and supply chains. • New or changing laws and regulations affecting Embecta’s domestic and foreign operations, or changes in enforcement practices, including laws relating to healthcare, environmental protection, trade, monetary and fiscal policies, taxation (including tax reforms that could adversely impact multinational corporations) and licensing and regulatory requirements for products. • The expected benefits and timing of the separation, and the risk that conditions to the separation will not be satisfied and/or that the separation will not be completed within the expected time frame, on the expected terms or at all. • A determination by the IRS that the distribution or certain related transactions are taxable. • The possibility that any consents or approvals required in connection with the separation will not be received or obtained within the expected time frame, on the expected terms or at all. • Expected financing transactions undertaken in connection with the separation and risks associated with additional indebtedness. -22- Table of Contents • The risk that dissynergy costs, costs of restructuring transactions and other costs incurred in connection with the separation will exceed its estimates. • The impact of the separation on its businesses and the risk that the separation may be more difficult, time-consuming or costly than expected, including the impact on its resources, systems, procedures and controls, diversion of management’s attention and the impact on relationships with customers, suppliers, employees and other business counterparties. There can be no assurance that the separation, distribution or any other transaction described above will in fact be consummated in the manner described or at all. The above list of factors is not exhaustive or necessarily in order of importance. For additional information on identifying factors that may cause actual results to vary materially from those stated in forward-looking statements, see the discussions under “Risk Factors,” included within Amendment No. 1 to Embecta’s Registration Statement on Form 10 filed with the SEC on February 2, 2022 (the “Form 10”). Any forward-looking statement speaks only as of the date on which it is made, and each of BD and Embecta assumes no obligation to update or revise such statement, whether as a result of new information, future events or otherwise after the date of this Quarterly Report on Form 10-Q, except as required by applicable law. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in information reported since the filing the Form 10.