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 Consolidated 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 “embecta” refer to embecta Corp. as defined in the Condensed Consolidated Financial Statements included within this report. Company Overview We are a leading global medical device company focused on providing solutions to improve the health and well-being of people living with diabetes. Over the close to 100 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”) 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 $291.1 million and $295.0 million during the three months ended June 30, 2022 and 2021, respectively, and $854.9 million and $864.5 million during the nine months ended June 30, 2022 and 2021, 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 Pursuant to the Separation and Distribution Agreement, the Separation from BD was completed on April 1, 2022. 57,797,841 shares of embecta common stock were distributed to BD stockholders, determined by applying a ratio of one share of embecta common stock for every five shares of BD common stock. "Regular-way" trading of embecta common stock began on April 1, 2022, under the ticker symbol "EMBC." Periods Prior to Separation Prior to the Separation, the Company was referred to as the Diabetes Care Business. For periods prior to April 1, 2022, the Condensed Consolidated Financial Statements included certain assets and liabilities that were historically been held at the BD corporate level but are specifically identifiable or otherwise allocable to the Diabetes Care Business. BD used a centralized approach to cash management and financing of its operations. While certain cash and cash equivalents related to and were specifically identifiable to embecta, the cash and cash equivalents held by BD at the corporate level were not specifically identifiable to the Diabetes Care Business and therefore were not allocated for any of the periods presented prior to Separation. These arrangements are not reflective of the manner in which embecta would have financed its operations had it been a standalone company separate from BD during the prior periods presented. Cash pooling, related interest and intercompany arrangements were excluded from the asset and liability balances in the consolidated balance sheets. These amounts were instead reported as Net Investment from Becton, Dickinson and Company as a component of Equity. Additionally, BD provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support to the Diabetes Care Business. The cost of these services were 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 considered these allocations to be a reasonable reflection of the benefits received by the Diabetes Care Business. Actual costs that may have been incurred if the Diabetes Care Business had been a standalone company would depend on a Dollar amounts are in millions except per share amounts or as otherwise specified. 22 Table of Contents number of factors, including the chosen organizational structure, whether functions were outsourced or performed by Diabetes Care Business employees, and strategic decisions made in areas such as manufacturing, selling and marketing, research and development, information technology and infrastructure. Periods Post Separation For the period subsequent to April 1, 2022, as a standalone publicly traded company, embecta presents its financial statements on a consolidated basis. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Recent Developments COVID-19 Pandemic Impacts and Response and Global Economic Conditions Various governmental measures to slow and control the spread of COVID-19 have led to a shift in healthcare priorities, supply chain constraints and the disruption of economic activities worldwide. As further discussed below, 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, 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 vaccines and vaccination efforts. In addition, we continue to face increases in the cost and availability of raw materials, components, and other inputs necessary to manufacture and distribute our products due to constraints and inflation within the global supply chain, as well as increases in the cost and time to distribute our products. Uncertainty around inflationary pressures, could potentially cause new, or exacerbate existing, economic challenges that we may face. To date we have been able to successfully mitigate this disruption and ensure uninterrupted supply to our customers by increasing our inventory levels and taking other measures. While inflation is expected to negatively impact gross margins and net income throughout the year, we intend to continue to work to improve productivity to help offset these increased costs. Russia and Ukraine Conflict The military conflict in Russia and Ukraine and the sanctions imposed by the United States government and other nations in response to this conflict have caused significant volatility and disruptions to the global markets. During both the three and nine months ended June 30, 2022 net sales in Russia and Ukraine were not material to our consolidated net revenues in both periods. Although operations in both Russia and Ukraine do not constitute a material portion of our business, there is uncertainty around the military conflict and the impact it will have on the global economy, supply chains and fuel prices generally, and therefore our business. Refer to Part II, Item 1A. "Risk Factors" for further details. Dollar amounts are in millions except per share amounts or as otherwise specified. 23 Table of Contents Results of Operations Our unaudited Condensed Consolidated Statements of Income are as follows: Three months ended June 30, Nine months ended June 30, 2022 2021 % 2022 2021 % Revenues $ 291.1 $ 295.0 (1.3) % $ 854.9 $ 864.5 (1.1) % Cost of products sold 88.2 92.4 (4.5) 256.9 274.3 (6.3) Gross Profit 202.9 202.6 0.1 598.0 590.2 1.3 Operating expenses: Selling and administrative expense 83.8 60.5 38.5 212.9 169.5 25.6 Research and development expense 14.3 15.7 (8.9) 49.0 43.8 11.9 Other operating expenses 7.7 2.1 nm 23.5 2.1 nm Total Operating Expenses 105.8 78.3 35.1 285.4 215.4 32.5 Operating Income 97.1 124.3 (21.9) 312.6 374.8 (16.6) Interest expense, net (19.5) — nm (24.4) — nm Other income (expense), net (4.0) 0.6 (766.7) (4.1) 3.7 (210.8) Income Before Income Taxes 73.6 124.9 (41.1) 284.1 378.5 (24.9) Income tax provision 11.2 20.2 (44.6) 43.3 60.6 (28.5) Net Income $ 62.4 $ 104.7 (40.4) % $ 240.8 $ 317.9 (24.3) % Net Income per common share: Basic $ 1.08 $ 1.81 nm $ 4.17 $ 5.50 nm Diluted $ 1.07 $ 1.81 nm $ 4.14 $ 5.50 nm nm = not meaningful Three Months Ended June 30, 2022 Summary (on a comparative basis) Key GAAP financial results for the three months ended June 30, 2022 were as follows: • Revenue decreased by $3.9 million to $291.1 million from $295.0 million; • Gross profit increased by $0.3 million to $202.9 million from $202.6 million. Gross profit as a percent of revenue was 69.7%, as compared to 68.7% in the prior year comparative period; • Operating income decreased by $27.2 million to $97.1 million from $124.3 million; and • Net income decreased by $42.3 million to $62.4 million from $104.7 million. Key Non-GAAP financial results for the three months ended June 30, 2022 were as follows: • Constant Currency Revenues increased by 2.0%; • EBITDA decreased by $32.6 million to $102.2 million from $134.8 million; and • Adjusted EBITDA decreased by $25.7 million to $117.9 million from $143.6 million. Nine Months Ended June 30, 2022 Summary (on a comparative basis) Key GAAP financial results for the nine months ended June 30, 2022 were as follows: • Revenue decreased by $9.6 million to $854.9 million from $864.5 million; • Gross profit increased by $7.8 million to $598.0 million, compared to $590.2 million. Gross profit as a percent of revenue was 69.9%, as compared to 68.3% in the prior year comparative period; • Operating income decreased by $62.2 million to $312.6 million from $374.8 million; and • Net income decreased by $77.1 million to $240.8 million from $317.9 million. Dollar amounts are in millions except per share amounts or as otherwise specified. 24 Table of Contents Key Non-GAAP financial results for the nine months ended June 30, 2022 were as follows: • Constant Currency Revenues increased by 0.8%; • EBITDA decreased by $75.2 million to $332.7 million from $407.9 million; and • Adjusted EBITDA decreased by $60.7 million to $372.7 million from $433.4 million. Please see a description of our Non-GAAP Financial Measures below. Revenues Our revenues decreased by $3.9 million, or 1.3%, to $291.1 million in the third quarter of 2022 as compared to revenues of $295.0 million in the third 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. Of this decrease, $9.7 million was attributable to unfavorable effects from foreign currency translation primarily due to the strengthening of the US dollar and to lesser extent, unfavorable changes to estimated sales deductions. Increases in volume and to a lesser extent price, favorably impacted our revenues for customers in the U.S. and Central and Southeast Asia. Our revenues decreased by $9.6 million, or 1.1%, to $854.9 million for the nine months ended June 30, 2022 as compared to revenues of $864.5 million for the nine months ended June 30, 2021. Of this decrease, $16.6 million was attributable to unfavorable effects from foreign currency translation primarily attributed to the strengthening of the US dollar and to a lesser extent, unfavorable changes to estimated sales deductions. Increases in volume and to a lesser extent price, favorably impacted our revenues for customers in the U.S., Canada, Mainland China, and countries within Eastern Europe, the Middle East, Africa and Central and Southeast Asia. Revenues by geographic region are as follows: Three months ended June 30, Nine months ended June 30, 2022 2021 As Reported Constant Currency 2022 2021 As Reported Constant Currency United States $ 158.0 $ 151.8 4.1 % 4.1 % $ 450.4 $ 450.1 0.1 % 0.1 % International 133.1 143.2 (7.1) (0.3) 404.5 414.4 (2.4) 1.6 Total $ 291.1 $ 295.0 (1.3) % 2.0 % $ 854.9 $ 864.5 (1.1) % 0.8 % Cost of products sold Cost of products sold decreased by $4.2 million, or 4.5%, to $88.2 million in the third quarter of 2022 as compared to $92.4 million in the third quarter of 2021. Cost of products sold as a percentage of revenues were 30.3% for the three months ended June 30, 2022 as compared to 31.3% in the three months ended June 30, 2021. The decrease in cost of products sold between periods was primarily driven by a decrease in revenues in the current period. Costs of products sold as a percentage of revenues decreased by approximately 100 basis points as compared to the prior year period due to favorable product mix in the current year period. This was partially offset by the negative impact of inflation on raw materials costs (including freight), direct labor, and overhead. We intend to continue to work to improve productivity to help offset these increased costs. Cost of products sold decreased by $17.4 million, or 6.3%, to $256.9 million for the nine months ended June 30, 2022 as compared to $274.3 million for the nine months ended June 30, 2021. Cost of products sold as a percentage of revenues were 30.0% for the nine months ended June 30, 2022 as compared to 31.7% in the nine months ended June 30, 2021. The decrease in cost of products sold between periods was primarily driven by $13.8 million of impairment charges associated with the write-offs of certain construction in progress assets that were recorded in the first quarter of fiscal year 2021, and to a lesser extent, a decrease in revenues in the current year period, and the impact of inflation on costs of certain raw materials (including freight), direct labor, and overhead. We intend to continue to work to improve productivity to help offset these increased costs. This impairment charge negatively impacted our cost of products sold as a percentage of revenues in the prior year period by approximately 120 basis points. Excluding this impairment charge, our cost of product sold as a percentage of revenues would have been approximately 30.6% in the prior year period. Dollar amounts are in millions except per share amounts or as otherwise specified. 25 Table of Contents Selling and administrative expenses Selling and administrative expenses increased by $23.3 million, or 38.5%, to $83.8 million in the third quarter of 2022 as compared to $60.5 million in the third quarter of 2021. Our selling and administrative expenses increased by $43.4 million, or 25.6%, to $212.9 million for the nine months ended June 30, 2022 as compared to $169.5 million for the nine months ended June 30, 2021. The increase for both the three and nine month comparative periods were primarily driven by an increase in compensation and benefit costs due to increased headcount and to a lesser extent increases in marketing and advertising spend both attributed to the Separation and embecta becoming a stand-alone publicly-traded company. Research and development expenses Research and development expenses decreased by $1.4 million, or 8.9%, to $14.3 million in the third quarter of 2022 as compared to $15.7 million in the third quarter of 2021. Our research and development expenses increased by $6.6 million, or 11.9%, to $49.0 million for the nine months ended June 30, 2022 as compared to $43.8 million for the nine months ended June 30, 2021. The decrease for the three month comparative period was primarily driven by timing of research and development projects. The increase for the nine month comparative period was primarily driven by increased investment in the development of new products, specifically our insulin patch pump. Other operating expenses We incurred other operating expenses of $7.7 million and $23.5 million for the three and nine months ended June 30, 2022, respectively, driven by costs related to the Separation. The costs incurred primarily relate to accounting, auditing, and legal services, including costs to establish certain stand-alone corporate functions and other transaction costs attributed to being a stand-alone publicly traded company. Interest expense, net Interest expense, net increased to $19.5 million in the third quarter of 2022, primarily due to the issuance of long-term debt. We expect our interest expense, net to increase sequentially in the fourth quarter of 2022. See Note 10 to the Condensed Consolidated Financial Statements included elsewhere in this report for a further description of our long-term debt. Other income (expense), net Other income (expense), net, decreased by $4.6 million to $(4.0) million in the third quarter of 2022 as compared to $0.6 million in the third quarter of 2021. Other income (expense), net decreased by $7.8 million to $(4.1) million for the nine months ended June 30, 2022 as compared to $3.7 million for the nine months ended June 30, 2021. The decrease for the three and nine month comparative periods was mainly driven by amounts due to BD for tax liabilities incurred in deferred jurisdictions where BD is considered the primary obligor. Income tax provision The effective income tax rates were 15.2% and 16.2% for the three months ended June 30, 2022 and 2021, respectively, and 15.2% and 16.0% for the nine months ended June 30, 2022 and 2021, respectively. The decrease in effective tax rates for both comparative periods is primarily driven by the geographical mix of income attributable to various jurisdictions that have income tax rates that vary from the U.S. tax rate. The Company is subject to income tax in the various jurisdictions in which we operate. A significant portion of the Company's earnings are taxed in jurisdictions with statutory tax rates that are lower than the statutory tax rate of the United States. The effective tax rate can vary from quarter to quarter because of changes in the geographical mix of the Company's earnings, changes in tax laws and matters related to tax audits. Dollar amounts are in millions except per share amounts or as otherwise specified. 26 Table of Contents 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. Additionally, EBITDA and Adjusted EBITDA are important metrics for debt investors who utilize debt-to-EBITDA ratios. 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) one-time costs which include costs to stand up the Company, 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 help provide an accurate measure of on-going core operating results and to evaluate comparative results period over period. For the three and nine month periods ended June 30, 2022, the reconciliation of net income to EBITDA and adjusted EBITDA was as follows: Three Months Ended June 30, Nine Months Ended June 30, 2022 2021 2022 2021 Net income $ 62.4 $ 104.7 $ 240.8 $ 317.9 Interest expense 19.5 — 24.4 — Income taxes 11.2 20.2 43.3 60.6 Depreciation and amortization 9.1 9.9 24.2 29.4 EBITDA 102.2 134.8 332.7 407.9 Share-based compensation expense 5.8 2.9 14.3 9.6 One-time costs (1)(2) 9.9 2.1 25.7 2.1 Impairment losses (3) — 3.8 — 13.8 Adjusted EBITDA $ 117.9 $ 143.6 $ 372.7 $ 433.4 (1) One-time costs incurred during the three months ended June 30, 2022 primarily include costs to stand up the Company. Approximately $7.7 million of the one-time costs are recorded in Other operating expenses, $1.7 million are recorded in Selling, general and administrative expenses, $0.3 million are recorded in Research and development expense, and $0.2 million are recorded in Cost of products sold. For the three months ended June 30, 2021, $2.1 million of the one-time costs are classified in Other operating expenses. (2) One-time costs incurred during the nine months ended June 30, 2022 primarily include costs to stand up the Company. Approximately $23.5 million of the one-time costs are recorded in Other operating expenses, $1.7 million are recorded in Selling, general and administrative expenses, $0.3 million are recorded in Research and development expense, and $0.2 million are recorded in Cost of products sold. For the nine months ended June 30, 2021, $2.1 million of the one-time costs are classified in Other operating expenses. (3) Relates to impairment charges incurred during 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 period. 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 Dollar amounts are in millions except per share amounts or as otherwise specified. 27 Table of Contents 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 and nine months ended June 30, 2022, the reconciliation of revenue growth to Constant Currency was as follows: Three months ended June 30, 2022 2021 Total Change Estimated FX Impact Constant Currency Change Total Revenues $ 291.1 $ 295.0 (1.3) % (3.3) % 2.0 % Nine months ended June 30, 2022 2021 Total Change Estimated FX Impact Constant Currency Change Total Revenues $ 854.9 $ 864.5 (1.1) % (1.9) % 0.8 % LIQUIDITY AND CAPITAL RESOURCES Up to the date of Separation on April 1, 2022, embecta (historically the "Diabetes Care Business") was dependent upon BD for all of its working capital and financing requirements. embecta has historically generated, and expect to continue to generate, positive cash flow from operations. In February 2022, and in connection with the Separation, embecta issued $500.0 million aggregate principal amount of 5.00% senior secured notes due February 15, 2030. Interest payments on the 5.00% Notes are due semi-annually in February and August until maturity, with the first interest payment due in August 2022 . In March 2022, embecta entered into a credit agreement, providing for a Term Loan B Facility (the "Term Loan") in the amount of $950.0 million, with a seven -year term that matures in March 2029 and a Revolving Credit Facility in an aggregate principal amount of up to $500.0 million, with a five -year term that matures in 2027. The interest rate on the Term Loan is 300 basis points over the secured overnight financing rate (“SOFR”), with a 0.50% SOFR floor. The initial draw of the full amount of the Term Loan was for a 3-month period at an interest rate of 3.65%. In late June, the borrowing has been continued for another 3-month period until September 30, 2022, at which point it can be repaid or further continued, at our option; we currently intend to continue to borrow under the Term Loan from time to time until maturity. Principal and interest payments on the Term Loan began on June 30, 2022. Such quarterly principal payments are calculated as 0.25% of the initial principal amount, with the remaining balance payable upon maturity. Principal amounts repaid under the Term Loan may not be reborrowed by us. Borrowings under the Revolving Credit Facility bear interest, at embecta’s option, initially at an annual rate equal to (a) in the case of loans denominated in U.S. dollars (i) the SOFR or (ii) the alternate base rate or (b) in the case of loans denominated in Euros, the EURIBOR rate, in each case plus an applicable margin specified in the credit agreement. A commitment fee applies to the unused portion of the Revolving Credit Facility, equal to 0.25% per annum . As of June 30, 2022, no amount has been drawn on the Revolving Credit Facility. Additionally in March 2022, embecta issued $200.0 million of 6.75% senior secured notes to BD. On April 1, 2022, BD transferred the Related Party Notes with a notional of $200.0 million issued by embecta to Morgan Stanley pursuant to a tender offer. Morgan Stanley then sold the senior secured notes to qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as amended. As of April 1, 2022, the 6.75% Notes became third party debt of embecta. The 6.75% Notes carry an interest rate of 6.75% and are due February 2030. Interest payments on the 6.75% Notes are due semi-annually in February and August until maturity, with the first interest payment due in August 2022. The credit agreement and the indenture for the 5.00% Notes contain customary financial covenants, including a total net leverage ratio covenant, which measures the ratio of (i) consolidated total net debt to (ii) consolidated earnings before interest, taxes, depreciation and amortization, and subject to other adjustments, must meet certain defined limits which are tested on a quarterly basis in accordance with the terms of the credit agreement and 5.00% Notes. In addition, the credit agreement contains covenants that limit, among other things, our ability to prepay, redeem or repurchase our subordinated and junior lien debt, incur additional debt, make acquisitions, merge with other entities, pay dividends or distributions, Dollar amounts are in millions except per share amounts or as otherwise specified. 28 Table of Contents redeem or repurchase equity interests, and create or become subject to liens. As of June 30, 2022, we were in compliance with all of such covenants. We utilized the aggregate proceeds received to make distribution payment of approximately $1,466.0 million to BD in connection with the Separation for assets transferred by BD to embecta. Subsequent to the proceeds received and distribution payment made to BD, we retained approximately $165.0 million in cash and cash equivalents. The following is a summary of embecta's total debt outstanding as of June 30, 2022: Term Loan $ 947.6 5.00% Notes 500.0 6.75% Notes $ 200.0 Total principal debt issued $ 1,647.6 Less: current debt obligations (9.5) Less: debt issuance costs and discounts (38.9) Long-term debt $ 1,599.2 The schedule of principal payments required on long-term debt for the next five years and thereafter is as follows: 2022 $ 2.4 2023 $ 9.5 2024 $ 9.5 2025 $ 9.5 2026 $ 9.5 Thereafter $ 1,607.3 Leases In conjunction with the Separation, we entered into a lease agreement with BD pursuant to which the Company would lease approximately 278,000 square feet of manufacturing space and equipment at BD's manufacturing facility in Holdrege, Nebraska for an initial term of 10 years. The lease is classified as a finance lease. Base rent payments commenced in the third quarter of 2022. The Company has an option to extend the lease term for an additional period of up to five-years. Maturities of our Holdrege finance lease and other operating lease liabilities as of June 30, 2022 by fiscal year are as follows: Finance Leases Operating Leases Total 2022 $ 0.9 $ 0.8 $ 1.7 2023 3.6 1.2 4.8 2024 3.6 1.2 4.8 2025 3.7 1.2 4.9 2026 3.7 0.4 4.1 Thereafter 43.9 — 43.9 Total lease payments $ 59.4 $ 4.8 $ 64.2 On April 1, 2022, the Company entered into a real estate lease for a new Corporate Headquarters located in Parsippany, NJ that has not yet commenced. The lease is expected to commence during the first half of fiscal year 2023. Factoring Agreement In conjunction with the Separation, we entered into a Trade Receivables Factoring Agreement with BD. 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 Trade Receivables Factoring Agreement. Access to Capital and Credit Ratings In January 2022, Moody’s Investor Services (“Moody’s”) and Standard & Poor’s Ratings Services (“S&P”) assigned credit ratings to embecta of Ba3 and B+, respectively. Dollar amounts are in millions except per share amounts or as otherwise specified. 29 Table of Contents The following table summarizes our Condensed Consolidated Statements of Cash Flows: Nine Months Ended June 30, 2022 2021 Net cash provided by (used for) Operating activities $ 354.2 $ 370.8 Investing activities $ (15.4) $ (25.9) Financing activities $ (40.9) $ (344.9) Net Cash Flows from Operating Activities Net cash provided by operating activities during the nine months ended June 30, 2022 was attributable to net income of $240.8 million and net adjustments of $113.4 million, which includes $46.7 million of non-cash adjustments related to depreciation and amortization, share-based compensation, and pension expense, and $66.2 million of net cash used relating to changes in working capital. Cash used relating to working capital was driven by an increase in amounts due from Becton, Dickinson and Company of $99.6 million, and increases of $23.6 million and $25.8 million in inventories and prepaid expenses, respectively. Offsetting the amounts above is cash provided by a decrease in trade receivables of $123.6 million, an increase of $67.3 million in accounts payable and accrued expenses, and an increase of $10.8 million in income and other net taxes payables. The increase in amounts due from Becton, Dickinson and Company primarily relates to factored receivables and inventory purchases for which payment has not yet been collected from BD as of June 30, 2022. The increase in inventories is primarily driven by a concerted effort to build inventory for the remainder of fiscal 2022 to meet expected demand. The decrease in trade receivables primarily relates to the Factoring Agreement, in which embecta transfers certain trade receivable assets to BD in exchange for cash. The increase in amounts for accounts payable and accrued expenses relates current liabilities with BD primarily for inventory purchases, as well as increases in employee benefits and payroll. The increase in income and other net taxes payables is driven by income tax on earnings in the various jurisdictions in which the Company operates. Net cash provided by operating activities during the nine months ended June 30, 2021 was attributable to net income of $317.9 million and net adjustments of $52.7 million, which includes $59.8 million of non-cash adjustments related to depreciation and amortization, impairment of property, plant and equipment, share-based compensation, and pension expense, and a $6.9 million net use of cash relating to changes in working capital. The net use of cash relating to working capital was driven by an increase in inventories of $16.7 million and an increase in prepaid expenses and other of $4.0 million. These changes were partially offset by an increase in other current liabilities of $4.4 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. Net Cash Flows from Investing Activities Net cash used for investing activities was primarily comprised of capital expenditures of $15.0 million and $24.0 million during the nine months ended June 30, 2022 and 2021, respectively, to support further expansion of our business and operations. Dollar amounts are in millions except per share amounts or as otherwise specified. 30 Table of Contents Net Cash Flows from Financing Activities Net cash used for financing activities for the nine months ended June 30, 2022, represents proceeds from the issuance of long-term debt of $1,450.0 million, offset by $33.3 million of payments for long-term debt issuance costs, $5.6 million of payments for debt fees associated with the revolving credit facility, $2.4 million of required payments on long-term debt, and $1,266.0 million of net consideration paid to Becton, Dickinson and Company in connection with the Separation. See Note 10 to the Condensed Consolidated Financial Statements elsewhere in this report for further details. Additionally, proceeds from the issuance of long-term debt was further offset by $182.7 million related to net transfers to Becton, Dickinson and Company. Net cash used for financing activities for the nine months ended June 30, 2021, represents net transfers entirely to BD (see Note 3 to the Condensed Consolidated Financial Statements included elsewhere in this report). On August 15, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.15 for each issued and outstanding share of the company’s common stock. The dividend is payable on September 14, 2022 to stockholders of record at the close of business on August 26, 2022. Cautionary Statements Regarding Forward-Looking Statements All statements and assumptions contained in this Quarterly Report on Form 10-Q that relate to future events and expectations and, as such, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995 and other 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 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 embecta’s strategy for growth, future product development, regulatory clearances and approvals, competitive position and expenditures. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and changes in circumstances that are difficult to predict. Although 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 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, as well as regional, national and foreign economic factors, including inflation, deflation, and fluctuations in interest rates, 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 and international trade agreements. 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. Dollar amounts are in millions except per share amounts or as otherwise specified. 31 Table of Contents • 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 of the separation from BD. • Risks associated with indebtedness. • The risk that dis-synergy costs, costs of restructuring transactions and other costs incurred in connection with the separation will exceed embecta's estimates. • The impact of the separation on embecta's 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 transactions or uncertainties described above will in fact be consummated or occur 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 the Form 10. Any forward-looking statement speaks only as of the date on which it is made, and embecta assumes no obligation to update or revise such statement, whether as a result of new information, future events or otherwise, except as required by applicable law.