Embecta Corp. 10-K

Item 8. Financial Statements and Supplementary Data. Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Embecta Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Embecta Corp. (the Company) as of September 30, 2022 and 2021, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended September 30, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2022, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 42 Income Taxes — Application of Separate Return Method and post Separation tax provision Description of the Matter As described in Notes 2, 3 and 13 to the consolidated financial statements, the provision for income taxes for the period prior to Separation was based on a separate tax return basis and calculated by applying an estimated full year effective income tax rate to ordinary income adjusted by the tax impact of discrete items. When calculating the income tax provision for the period prior to the Separation, management made certain estimates and assumptions when identifying and measuring deferred tax assets and liabilities and identifying and allocating uncertain tax positions. For periods post Separation, the Company will file tax returns on its own behalf and the provision for income taxes contemplates its stand-alone legal entity structure. The Company’s income tax provision for 2022 was $33.0 million. In addition, as of September 30, 2022, the Company recorded a liability for unrecognized tax benefits of $7.2 million, and total deferred tax assets and liabilities of $76.3 million and $17.7 million, respectively. Given the multijurisdictional nature of the business, the complexity of the tax rules across the various countries the Company operates in, and the legal entity structure, auditing management’s provision for income taxes, including the application of the separate return method for periods prior to Separation and the Company’s stand-alone tax structure and provision post Separation, required a high degree of auditor judgment and increased extent of effort, including the need to involve our tax subject matter professionals. How We Addressed the Matter in Our Audit With the support of our tax subject matter professionals, our audit procedures related to management’s application of the separate return method included evaluating the accuracy and completeness of the Company’s income tax provision. For example, we evaluated the appropriateness of transfer pricing assumptions underlying the income tax provision for the period prior to Separation. We developed an expectation of the foreign income tax expense by jurisdiction and compared it to the recorded balances. Additionally, we assessed the reasonableness of management’s significant judgments regarding the identification and allocation of uncertain tax positions by analyzing the Company’s evaluation of the Parent’s uncertain tax positions to determine which positions were attributable to the separate operations of the Company. For the period post-separation, we obtained and reviewed the Company’s transfer pricing assumptions including review of relevant analyses. We involved our tax subject matter professionals to evaluate the technical merits of the Company’s accounting for its tax positions, including assessing correspondence with the relevant tax authorities and evaluating third-party advice obtained. With respect to book to tax differences, we assessed the appropriateness of significant deferred items, tested completeness and existence of book and tax bases of significant timing differences, and recalculated related deferred tax assets and liabilities. /s/ ERNST & YOUNG LLP We have served as the Company’s auditor since 2021. New York, New York December 22, 2022 43 Consolidated Statements of Income Embecta Corp. Years Ended September 30 2022 2021 2020 R evenues $ 1,129.5 $ 1,165.3 $ 1,085.5 Cost of products sold (1) 354.6 364.9 322.9 Gross Profit $ 774.9 $ 800.4 $ 762.6 Operating expenses: Selling and administrative expense 294.8 240.3 214.7 Research and development expense 66.9 63.3 61.4 Impairment expense 58.9 — — Other operating expenses 44.7 4.8 — Total Operating Expenses $ 465.3 $ 308.4 $ 276.1 Operating Income $ 309.6 $ 492.0 $ 486.5 Interest expense, net ( 46.2 ) — — Other income (expense), net ( 6.8 ) 2.9 ( 0.7 ) Income Before Income Taxes $ 256.6 $ 494.9 $ 485.8 Income tax provision 33.0 80.1 58.2 Net Income $ 223.6 $ 414.8 $ 427.6 Net Income per common share: Basic $ 3.92 $ 7.28 $ 7.50 Diluted $ 3.89 $ 7.28 $ 7.50 (1) For periods prior to the Separation, this income statement line includes cost of products sold from related party inventory purchases. Refer to Note 4 for further detail. See notes to the Consolidated Financial Statements. Dollar amounts are in millions except per share amounts or as otherwise specified. 44 Consolidated Statements of Comprehensive Income Embecta Corp. Years Ended September 30 2022 2021 2020 Net Income $ 223.6 $ 414.8 $ 427.6 Other Comprehensive Income (Loss), net of tax Foreign currency translation adjustments ( 64.2 ) ( 8.9 ) 16.4 Other Comprehensive Income (Loss), net of tax $ ( 64.2 ) $ ( 8.9 ) $ 16.4 Comprehensive Income $ 159.4 $ 405.9 $ 444.0 See notes to the Consolidated Financial Statements. Dollar amounts are in millions except per share amounts or as otherwise specified. 45 Consolidated Balance Sheets Embecta Corp. September 30 2022 2021 Assets Current Assets Cash and cash equivalents $ 330.9 $ — Trade receivables, net 22.2 150.6 Inventories: Materials 23.4 13.1 Work in process 5.6 21.0 Finished products 93.8 83.9 $ 122.8 $ 118.0 Amounts due from Becton, Dickinson and Company 110.9 — Prepaid expenses and other 77.9 23.2 Total Current Assets $ 664.7 $ 291.8 Property, Plant and Equipment, Net 301.6 450.9 Goodwill and Other Intangible Assets 24.6 33.9 Deferred Income Taxes and Other Assets 95.5 11.4 Total Assets $ 1,086.4 $ 788.0 Liabilities and Equity Current Liabilities Accounts payable $ 41.4 $ 54.2 Accrued expenses 104.3 81.6 Amounts due to Becton, Dickinson and Company 66.5 — Salaries, wages and related items 48.5 28.2 Current debt obligations 9.5 — Current finance lease liabilities 3.6 — Income taxes 27.2 — Total Current Liabilities $ 301.0 $ 164.0 Deferred Income Taxes and Other Liabilities 46.1 29.7 Long-Term Debt 1,598.1 — Non Current Finance Lease Liabilities 32.6 — Commitments and Contingencies Embecta Corp. Equity Common stock, $ 0.01 par value Authorized - 250,000,000 Issued and outstanding - 57,055,327 0.6 — Additional paid-in capital 10.0 — Accumulated deficit ( 577.1 ) — Net Investment from Becton, Dickinson and Company — 864.8 Accumulated other comprehensive loss ( 324.9 ) ( 270.5 ) Total Equity $ ( 891.4 ) $ 594.3 Total Liabilities and Equity $ 1,086.4 $ 788.0 See notes to the Consolidated Financial Statements. Dollar amounts are in millions except per share amounts or as otherwise specified. 46 Consolidated Statements of Equity Embecta Corp. Common Stock Shares Par Value Additional Paid-In Capital Accumulated Deficit Net Investment from Becton, Dickinson and Company Accumulated Other Comprehensive (Loss) Income Total Balance at October 1, 2019 — $ — $ — $ — $ 855.1 $ ( 278.0 ) $ 577.1 Net income attributable to Diabetes Care Business — — — — 427.6 — 427.6 Other comprehensive loss, net of taxes — — — — — 16.4 16.4 Net transfers to Becton, Dickinson and Company — — — — ( 448.9 ) — ( 448.9 ) Balance at September 30, 2020 — — — — 833.8 ( 261.6 ) 572.2 Balance at October 1, 2020 — — — — 833.8 ( 261.6 ) 572.2 Net income attributable to Diabetes Care Business — — — — 414.8 — 414.8 Other comprehensive loss, net of taxes — — — — — ( 8.9 ) ( 8.9 ) Net transfers to Becton, Dickinson and Company — — — — ( 383.8 ) — ( 383.8 ) Balance at September 30, 2021 — $ — $ — $ — $ 864.8 $ ( 270.5 ) $ 594.3 Balance at October 1, 2021 — $ — $ — $ — $ 864.8 $ ( 270.5 ) $ 594.3 Net income attributable to Embecta Corp. — — — 45.2 178.4 — 223.6 Net transfers to Becton, Dickinson and Company including Separation adjustments — — — — ( 390.3 ) 9.8 ( 380.5 ) Other comprehensive loss, net of taxes — — — — — ( 64.2 ) ( 64.2 ) Common dividends ($ 0.15 per share) — — — ( 8.6 ) — — ( 8.6 ) Net consideration paid to Becton, Dickinson, and Company in connection with Separation — — — — ( 1,266.0 ) — ( 1,266.0 ) Issuance of common stock in connection with the Separation and reclassification of Net Investment from Becton, Dickinson and Company 57,012,925 0.6 — ( 613.7 ) 613.1 — — Stock-based compensation plans — — 10.0 — — — 10.0 Issuance of shares related to stock-based compensation plans 42,402 — — — — — — Balance at September 30, 2022 57,055,327 $ 0.6 $ 10.0 $ ( 577.1 ) $ — $ ( 324.9 ) $ ( 891.4 ) See notes to the Consolidated Financial Statements. Dollar amounts are in millions except per share amounts or as otherwise specified. 47 Consolidated Statements of Cash Flows Embecta Corp. Years Ended September 30 2022 2021 2020 Operating Activities Net income $ 223.6 $ 414.8 $ 427.6 Adjustments to net income to derive net cash provided by operating activities: Depreciation and amortization 31.7 38.3 38.3 Amortization of debt issuance costs 3.2 — — Impairment of property, plant and equipment 58.9 13.8 — Stock-based compensation 18.7 12.8 12.7 Net periodic pension benefit and other postretirement costs 10.2 9.4 9.4 Deferred income taxes ( 26.5 ) ( 2.8 ) ( 2.2 ) Change in operating assets and liabilities: Trade receivables, net 122.7 ( 31.8 ) ( 2.4 ) Inventories ( 23.4 ) ( 18.0 ) 3.5 Due from/due to Becton, Dickinson and Company ( 47.0 ) — — Prepaid expenses and other ( 44.0 ) ( 11.5 ) 15.4 Accounts payable, accrued expenses and other current liabilities 73.3 30.8 ( 3.8 ) Income and other net taxes payable 10.3 — — Other assets, net 0.5 0.5 — Net Cash Provided by Operating Activities $ 412.2 $ 456.3 $ 498.5 Investing Activities Capital expenditures ( 23.6 ) ( 36.8 ) ( 41.9 ) Acquisition of intangible assets ( 0.4 ) ( 2.4 ) — Net Cash Used for Investing Activities $ ( 24.0 ) $ ( 39.2 ) $ ( 41.9 ) Financing Activities Proceeds from the issuance of long-term debt 1,450.0 — — Payments on long-term debt ( 4.8 ) — — Payment of long-term debt issuance costs ( 33.3 ) — — Payment of revolving credit facility fees ( 5.6 ) — — Payments on finance lease ( 1.8 ) — — Dividend payments ( 8.6 ) — — Net consideration paid to Becton, Dickinson and Company in connection with the Separation ( 1,266.0 ) — — Net transfers to Becton, Dickinson and Company ( 177.9 ) ( 417.1 ) ( 456.6 ) Net Cash Used for Financing Activities $ ( 48.0 ) $ ( 417.1 ) $ ( 456.6 ) Effect of exchange rate changes on cash and cash equivalents ( 9.3 ) — — Net Change in Cash and cash equivalents $ 330.9 $ — $ — Opening Cash and cash equivalents — — — Closing Cash and cash equivalents $ 330.9 $ — $ — See notes to the Consolidated Financial Statements. Dollar amounts are in millions except per share amounts or as otherwise specified. 48 Notes to Consolidated Financial Statements Embecta Corp. Note 1— Background Embecta Corp. ("Embecta" or the "Company") is a leading global medical device company focused on providing solutions to improve the health and well-being of people living with diabetes. The Company has a broad portfolio of marketed products, including a variety of pen needles, syringes and safety devices, which are complemented by a proprietary digital application designed to assist people with managing their diabetes. The Company primarily sells products to wholesalers and distributors that sell to retail and institutional channels who in turn sell to patients. On April 1, 2022 (the "Separation Date"), Embecta and Becton, Dickinson and Company ("BD") entered into a Separation and Distribution Agreement (the "Separation and Distribution Agreement"). Pursuant to the Separation and Distribution Agreement, BD agreed to spin off its diabetes care business ("Diabetes Care Business") into Embecta, a new, publicly traded company (the "Separation"). The Separation occurred by means of a pro-rata distribution (the "Distribution") of all of Embecta’s issued and outstanding shares of common stock on the basis of one share of Embecta common stock, par value $ 0.01 per share, for every five shares of BD common stock, par value $ 1.00 per share, held as of the close of business on March 22, 2022, the record date for the distribution. Embecta is now a standalone publicly traded company and, on April 1, 2022, regular-way trading of Embecta common stock commenced on the Nasdaq Global Select Market under the ticker symbol "EMBC". In connection with the Separation, BD and Embecta entered into various agreements to provide a framework for the relationship between BD and Embecta after the Separation, including, but not limited to, a separation and distribution agreement, a transition services agreement, a tax matters agreement, an employee matters agreement, a cannula supply agreement, contract manufacturing agreements, an intellectual property matters agreement, a logistics services agreement, distribution agreements, factoring and receivables agreements, local support and service agreements and other transaction documents. Note 2 - Basis of Presentation On April 1, 2022, the Company became a standalone publicly traded company, and its financial statements are now presented on a consolidated basis. Prior to the Separation on April 1, 2022, the Company’s historical combined financial statements were prepared on a standalone basis and were derived from BD's consolidated financial statements and accounting records. The financial statements for all periods presented, including the historical results of the Company prior to April 1, 2022, are now referred to as "Consolidated Financial Statements", and have been prepared pursuant to the rules and regulations for reporting on Form 10-K. Periods Prior to Separation Prior to the Separation, the Company was referred to as the Diabetes Care Business. The assets, liabilities, revenue and expenses of the Diabetes Care Business were reflected in the combined financial statements on a historical cost basis, as included in the consolidated financial statements of BD, using the historical accounting policies applied by BD. The Consolidated Financial Statements did not purport to reflect what the Company’s results of operations, comprehensive income, financial position, equity or cash flows would have been had the Company operated as a standalone public company during the periods presented. The Diabetes Care Business had historically functioned together with the other businesses controlled by BD. Accordingly, the Diabetes Care Business relied on BD’s corporate and other support functions for its business. Therefore, for the period prior to the Separation, certain corporate and shared costs were allocated to the Diabetes Care Business based on a specific identification basis or, when specific identification was not practicable, a proportional cost allocation method, including: i. expenses related to BD support functions, including expenses for facilities, executive oversight, treasury, finance, legal, human resources, shared services, compliance, procurement, information technology and other corporate functions. ii. certain manufacturing and supply costs incurred by BD, including facility management, distribution, logistics, planning and global quality. iii. certain costs incurred by BD’s Medication Delivery Solutions organizational unit in relation to selling and marketing activities, and related administrative support functions. iv. certain costs incurred by BD for activities related to device research and development, as well as medical and regulatory affairs. v. stock-based compensation expenses (see Note 9). vi. certain compensation expenses maintained on a centralized basis such as certain employee benefit expenses. Dollar amounts are in millions except per share amounts or as otherwise specified. 49 Management believes these cost allocations were a reasonable reflection of the utilization of services provided to, or the benefit derived by, the Diabetes Care Business during the period prior to the Separation, though the allocations may not be indicative of the actual costs that would have been incurred had the Diabetes Care Business operated as a standalone public company. Actual costs that may have been incurred if the Diabetes Care Business had been a standalone company would depend on a 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. BD utilized a centralized approach to cash management and the financing of its operations. Cash generated by the Diabetes Care Business was routinely transferred into accounts managed by BD’s centralized treasury function and cash disbursements related to operations prior to the Separation were funded as needed by BD. Balances held by the Diabetes Care Business with BD for cash transfers and loans were reflected as Due to related party prior to the Separation. All other cash and cash equivalents and related transfers between BD and the Diabetes Care Business were generally held centrally through accounts controlled and maintained by BD and were not specifically identifiable to the Diabetes Care Business. Accordingly, such balances were accounted for through Net Investment from Becton, Dickinson and Company . BD’s third-party debt and related interest expense were not attributed to the Diabetes Care Business because the business was not the legal obligor of the debt and the borrowings were not specifically identifiable to the business. For the Diabetes Care Business, transactions with BD affiliates were included in the Consolidated Statements of Income and related balances were reflected as Due to related party , Due from related party or Related Party Loans Payable . Other balances between the Diabetes Care Business and BD were considered to be effectively settled in the Consolidated Financial Statements at the time the transactions were recorded. As the separate legal entities that made up the Diabetes Care Business were not historically held by a single legal entity, Net Investment from Becton, Dickinson and Company was shown in lieu of stockholders’ equity in these Consolidated Financial Statements. Net Investment from Becton, Dickinson and Company represented BD’s interest in the recorded assets of the Diabetes Care Business and the cumulative investment by BD through the date of the Separation, inclusive of operating results. Income tax expense and tax balances in the Consolidated Financial Statements were calculated on a separate tax return basis. The separate tax return method applies the accounting guidance for income taxes to the standalone financial statements as if we were a separate taxpayer and a standalone enterprise. Management believes the assumptions supporting the allocation and presentation of income taxes on a separate return basis are reasonable. The provision for income taxes for the period prior to the Separation was calculated by applying an estimated effective income tax rate for the full year to ordinary income adjusted by the tax impact of discrete items. As of the Separation Date Certain assets and liabilities, including patents and unrecognized tax benefits that were included in the Consolidated Balance Sheet prior to the Separation, have been retained by BD post-Separation and therefore were transferred to BD through Net Investment from Becton, Dickinson and Company in the Company's Consolidated Financial Statements. In connection with the Separation, additional pension assets, deferred tax assets, other compensation obligations, and certain other assets and liabilities were transferred to the Company through Net Investment from Becton, Dickinson and Company , and the Company recorded these in the Consolidated Balance Sheet. As part of the Separation, Net Investment from Becton, Dickinson and Company was reclassified as Common Stock and Accumulated Deficit . Periods Post Separation Following the Separation, certain functions continue to be provided by BD under the Transition Services Agreements or are being performed using Embecta’s own resources or third-party service providers. Additionally, under manufacturing and supply agreements, the Company manufactures certain products for BD, or its applicable affiliate and BD manufactures certain products for the Company. The Company incurred certain costs in its establishment as a standalone public company and expects to incur ongoing additional costs associated with operating as an independent, publicly traded company. All intercompany transactions and accounts within Embecta have been eliminated. Certain reclassifications were made to conform the prior period Consolidated Financial Statements to the current period presentation. Dollar amounts are in millions except per share amounts or as otherwise specified. 50 Note 3 — Summary of Accounting Policies Revenue Recognition The Company recognizes revenue from product sales and considers performance obligations satisfied when the customer obtains control of the product, which is generally upon shipment or delivery, depending on the delivery terms specified in the sales agreement. When arrangements include multiple performance obligations, the total transaction price of the contract is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. The point in time upon which shipment or delivery occurs is the most faithful depiction of when control of the goods transfers to the customer. Variable consideration such as rebates, sales discounts, and sales returns are estimated and treated as a reduction of revenue in the same period the related revenue is recognized. These estimates are based on contractual terms, historical practices and current trends, and are adjusted as new information becomes available. Revenues exclude any taxes that the Company collects from customers and remits to tax authorities. Additional disclosures regarding the Company’s accounting for revenue recognition are provided in Note 7. Cash Equivalents Cash equivalents are comprised of certain highly liquid investments with original maturities of three months or less. Trade Receivables The Company grants credit to customers in the normal course of business and the resulting trade receivables are stated at their net realizable value. The allowance for doubtful accounts represents the Company’s estimate of probable credit losses relating to trade receivables and is determined based on historical experience, current conditions, reasonable and supportable forecasts and other specific account data. Amounts are written off against the allowances for doubtful accounts when the Company determines that a customer account is uncollectible. Inventories Inventories are stated at the lower of approximate cost or net realizable value determined on the first-in, first-out basis. Property, Plant and Equipment Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is principally provided on the straight-line basis over estimated useful lives, which range from 20 to 45 years for buildings, 4 to 13 years for machinery and equipment and 1 to 20 years for leasehold improvements. Depreciation expense was $ 31.0 million in 2022, $ 37.2 million in 2021, and $ 36.5 million in 2020. Property, plant and equipment are periodically reviewed when impairment indicators are present to assess recoverability or a decision has been made to abandon efforts associated with construction in progress assets. Recoverability is determined by comparing the carrying values of the assets or asset groups to the undiscounted cash flows to be generated from the use and eventual disposition of such assets or asset groups. If the asset’s or asset group’s carrying value exceeds such undiscounted cash flows, the assets or asset groups are not recoverable and an impairment loss is recognized based on the amount by which the carrying value of the asset or asset group exceeds its calculated fair value. Capitalized Interest The interest cost on capital projects is capitalized and included in the cost of the project. Capitalization commences with the first expenditure for the project and continues until the project is substantially complete and ready for its intended use. When no debt is incurred specifically for a project, interest is capitalized on project expenditures using the weighted average cost of the Company's outstanding borrowings. For the year ended September 30, 2022, the Company capitalized $ 5.2 million of interest expense into Property, Plant and Equipment, Net . Advertising Costs Advertising costs are expensed as incurred and included in S elling and administrative expense . The Company recorded advertising costs of $ 11.6 million, $ 9.3 million, and $ 8.2 million in 2022, 2021 and 2020, respectively. Goodwill and Other Intangible Assets Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired. The Company has one reporting unit. Goodwill is evaluated for impairment as of July 1 each year, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that fair value is less than carrying value. If the Company concludes it is more likely than not that fair value is less than carrying value, a quantitative fair value test is performed. If carrying value is greater than fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of goodwill). We completed the annual goodwill impairment Dollar amounts are in millions except per share amounts or as otherwise specified. 51 test as of July 1, 2022 and concluded that no impairment to goodwill was necessary as the fair value of the Company's one reporting unit was significantly in excess of the carrying value. No goodwill impairments were identified during the years ended September 30, 2021, or 2020, and no accumulated impairment losses are recorded. Amortized intangible assets primarily consist of patents and customer relationships. Patents are generally amortized over 20 years using the straight-line method. Customer relationship assets are generally amortized over periods ranging from 10 to 15 years, using the straight-line method. Other intangibles with finite useful lives are amortized over periods principally ranging from 1 to 40 years, using the straight-line method. Finite-lived intangible assets are periodically reviewed when impairment indicators are present to assess recoverability from future operations using undiscounted cash flows. The carrying values of these finite-lived assets are compared to the undiscounted cash flows they are expected to generate and an impairment loss is recognized in operating results to the extent any finite-lived intangible asset’s carrying value exceeds its calculated fair value. Foreign Currency Translation Generally, foreign subsidiaries’ functional currency is the local currency of operations and the net assets of foreign operations are translated into United States dollars using current exchange rates. The United States dollar results that arise from such translation are included in Accumulated other comprehensive loss . Shipping and Handling Costs The Company considers its shipping and handling costs to be contract fulfillment costs and records them within selling and administrative expense. Shipping and handling costs were $ 27.4 million, $ 13.6 million, and $ 12.4 million in 2022, 2021, and 2020, respectively. Contingencies The Company establishes accruals for future losses which are both probable and can be reasonably estimated (and in the case of environmental matters, without considering possible third-party recoveries). Additional disclosures regarding the Company’s accounting for contingencies are provided in Note 6. Stock-Based Compensation Prior to the Separation, certain of the Company’s employees historically participated in BD’s stock-based compensation plans. Stock-based compensation expense was either allocated to the Company based on a proportionate cost allocation method or recorded based on specific identification. Effective April 1, 2022, the Company established the 2022 Employee and Director Equity Based Compensation Plan (the "Plan"). The Plan provides for the grant of various types of awards, including restricted stock unit awards, stock appreciation rights, stock options, performance-based awards and cash awards. Under the Plan, the exercise price of awards, if any, is set on the grant date and generally may not be less than the fair market value per share on that date. The Company measures stock-based compensation for equity awards at fair value on the date of grant and records stock-based compensation as a charge to earnings net of the estimated impact of forfeited awards. Accordingly, the Company recognizes stock-based compensation cost only for those stock-based awards that are estimated to ultimately vest over their requisite service period, based on the vesting provisions of the individual grants. The cumulative effect on current and prior periods of a change in the estimated forfeiture rate is recognized as compensation cost in earnings in the period of the change (see Note 9). Benefit Plans Prior to the Separation, the defined benefit plans in which the Company participated related primarily to plans sponsored by BD and for which other businesses of BD also participate (the "Shared Plans"). The Company accounted for the Shared Plans as multiemployer plans and therefore the related assets and liabilities were not reflected in the Consolidated Balance Sheets. For such periods prior to the Separation, the Consolidated Statements of Income reflect a proportional allocation of net periodic benefit cost for the Shared Plans associated with the Company. The Company's participation in the defined pension and postretirement benefit plans sponsored by BD concluded upon the completion of the Separation on April 1, 2022. At Separation, Embecta became the plan sponsor for certain non-United States defined benefit pension plans (see Note 17). Research and Development Research and development costs are expensed as incurred. Dollar amounts are in millions except per share amounts or as otherwise specified. 52 Income Taxes Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities at the applicable tax rates. We maintain valuation allowances where it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances are included in the tax provision in the period of change. In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. From time to time, the Company engages in transactions in which tax consequences may be subject to uncertainty. The Company conducts business and files tax returns in numerous jurisdictions based on its interpretation of tax laws and regulations. In evaluating the Company’s tax provision, the Company establishes a reserve for uncertain tax positions unless such positions are determined to be more likely than not of being sustained upon examination based on the technical merits. The Company’s policy is to recognize, when applicable, interest and penalties on uncertain tax positions as part of income tax expense. While the Company believes it has identified all reasonable exposures and the reserve it has established is appropriate under the circumstances, it is possible that additional exposures exist and that exposures may be settled at amounts different than the amounts reserved. It is also possible that changes in facts and circumstances could cause the Company to either materially increase or reduce the carrying amount of its tax reserve. The Tax Cuts and Jobs Act was enacted on December 22, 2017 and introduced an additional U.S. tax on certain non-US. Subsidiaries’ earnings which are referred to as Global Intangible Low Taxed Income (“GILTI”) . The Company has elected to treat GILTI as a period cost. Prior to the Separation, our operations were included in the tax returns of BD. Income taxes as presented in the Consolidated Financial Statements attribute current and deferred income tax assets and liabilities of BD to us in a manner that is systematic, rational, and consistent with the asset and liability method prescribed by the accounting guidance for income taxes. Our income tax provision prior to the Separation was prepared using the separate return method. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if we were a separate taxpayer and a standalone enterprise. We believe the assumptions supporting the allocation and presentation of income taxes on a separate return basis are reasonable. Additional disclosures regarding our accounting for income taxes are provided in Note 13. Segment Data The Company operates and reports its financial information as one segment. In making this determination, the Company (i) determines its Chief Operating Decision Maker (“CODM”), (ii) identifies and analyzes potential business components, (iii) identifies its operating segments and (iv) determines whether there are multiple operating segments requiring presentation as reportable segments. The Company’s decision to report as one segment is based upon the following: (1) its internal organizational structure; (2) the manner in which its operations are managed; and (3) the criteria used by the Company’s President, its CODM, to evaluate performance of the Company’s business and allocate resources and capital. Fair Value Measurements A fair value hierarchy is applied to prioritize inputs used in measuring fair value. The three levels of inputs used to measure fair value are detailed below. Additional disclosures regarding the Company’s fair value measurements are provided in Note 14. Level 1—Inputs to the valuation methodology which represent unadjusted quoted prices in active markets for identical assets and liabilities. Level 2—Inputs to the valuation methodology which include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability. Level 3—Inputs to the valuation methodology which are unobservable and significant to the fair value measurement. Dollar amounts are in millions except per share amounts or as otherwise specified. 53 Leases We determine whether an arrangement contains a lease at inception. If a lease is identified in an arrangement, we recognize a right-of-use asset and liability in our Consolidated Balance Sheets and determine whether the lease should be classified as a finance or operating lease. We do not recognize assets or liabilities for leases with lease terms of less than 12 months. A lease qualifies as a finance lease if any of the following criteria are met at the inception of the lease: (i) there is a transfer of ownership of the leased asset to Embecta by the end of the lease term, (ii) we hold an option to purchase the leased asset that we are reasonably certain to exercise, (iii) the lease term is for a major part of the remaining economic life of the leased asset, (iv) the present value of the sum of lease payments equals or exceeds substantially all of the fair value of the leased asset, or (v) the nature of the leased asset is specialized to the point that it is expected to provide the lessor no alternative use at the end of the lease term. All other leases are recorded as operating leases. Finance and operating lease assets and liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term using the discount rate implicit in the lease. If the implicit rate is not readily determinable, the Company utilizes its incremental borrowing rate at the lease commencement date. Operating lease assets are further adjusted for prepaid or accrued lease payments. Operating lease payments are expensed using the straight-line method as an operating expense over the lease term. Finance lease assets are amortized to depreciation expense using the straight-line method over the shorter of the useful life of the related asset or the lease term. Finance lease payments are bifurcated into (i) a portion that is recorded as imputed interest expense and (ii) a portion that reduces the finance liability associated with the lease. For lease arrangements that are recognized on the Company’s Consolidated Balance Sheets, the right-of-use asset and lease liability is initially measured at the commencement date based upon the present value of the lease payments due under the lease. These payments represent the combination of the fixed lease and fixed non-lease components that are due under the arrangement. Variable lease payments are expensed as incurred. If a lease includes an option to extend or terminate the lease, we reflect the option in the lease term if it is reasonably certain we will exercise the option. Finance leases are recorded in Property, Plant and Equipment, Ne t, Current finance lease liabilities , and Non Current Finance Lease Liabilities and operating leases are recorded in Deferred Income Taxes and Other Assets , Accrued expenses , and Deferred Income Taxes and Other Liabilities in our Consolidated Balance Sheets. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates or assumptions affect reported assets, liabilities, revenues and expenses, including determining the allocation of shared costs and expenses from BD, depreciable and amortizable lives, sales returns and allowances, rebate accruals, inventory reserves and taxes on income as reflected in the Consolidated Financial Statements. Actual results could differ from these estimates. Net Investment from Becton, Dickinson and Company — Net investment from Becton, Dickinson and Company represented BD’s interest in the recorded assets of the Company and the cumulative investment by BD in the Company through the date of the Separation, inclusive of operating results and the net effect of the transactions with and allocations from BD. See Notes 2 and 4 for additional information. Supplemental Disclosures Of Cash Flow Information Cash paid for interest related to debt during the year ended September 30, 2022 was $ 38.9 million. The Company did not have any debt outstanding during the years ended September 30, 2021 and 2020. Cash paid for income taxes, net of refunds, for the year ended September 30, 2022 was $ 15.6 million. For the years ended September 30, 2021 and 2020, the Company's current tax liabilities computed under the separate return method are considered to be effectively settled at the time the transaction is recorded, with the offset recorded against Net investment from Becton, Dickinson and Company . Recently Adopted Accounting Standards In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740). The updated guidance simplifies the accounting for income taxes by removing certain exceptions in Topic 740 and clarifying and amending existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted the provisions of this new accounting standard at the beginning of fiscal 2022 and adoption did not have a material impact on its consolidated financial statements. Recently Issued Accounting Standards Not Yet Adopted In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts Dollar amounts are in millions except per share amounts or as otherwise specified. 54 with Customers" ("ASU No. 2021-08"). ASU No. 2021-08 will require companies to apply the definition of a performance obligation under Accounting Standards Codification ("ASC") Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No. 2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. ASU No. 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company intends to early adopt this ASU effective October 1, 2022. Note 4 — Third Party Arrangements and Related Party Disclosures Pursuant to the Separation, BD ceased to be a related party to Embecta and accordingly, no related party transactions or balances are reported subsequent to April 1, 2022. In connection with the Separation, the Company entered into the Separation and Distribution Agreement, which contains provisions that, among other things, relate to (i) assets, liabilities and contracts to be transferred, assumed and assigned to each of Embecta and BD (including certain deferred assets and liabilities) as part of the Separation, (ii) cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of Embecta's business with Embecta and financial responsibility for the obligations and liabilities of BD’s remaining businesses with BD, (iii) procedures with respect to claims subject to indemnification and related matters, (iv) the allocation among Embecta and BD of rights and obligations under existing insurance policies with respect to occurrences prior to completion of the Separation, as well as the right to proceeds and the obligation to incur certain deductibles under certain insurance policies, and (v) procedures governing Embecta’s and BD’s obligations and allocations of liabilities with respect to ongoing litigation matters that may implicate each of BD’s business and Embecta’s business. Agreements that Embecta entered into with BD that govern aspects of Embecta's relationship with BD following the Separation include, but are not limited to: • Transition Services Agreements ("TSA") - Pursuant to the TSA, Embecta and BD and their respective affiliates provide each other, on an interim, transitional basis, various services, including, but not limited to, information technology, human resources, procurement, quality and regulatory affairs, medical affairs, tax and treasury services. The agreed-upon charges for such services are generally intended to allow the servicing party to charge a price comprised of out-of-pocket costs and expenses and a predetermined profit in the form of a mark-up of such out-of-pocket costs and expenses. The services will terminate no later than 24 months following the Separation. The service recipient may terminate any services by giving prior written notice to the provider of such services and paying any applicable wind-down charges. • Trade Receivables Factoring Agreements - Embecta and BD entered into trade receivables factoring agreements (the "Factoring Agreements"), under which Embecta transfers certain net trade receivable assets to BD, and pays a service fee calculated as 0.1 % of annual revenues related to countries subject to the Factoring Agreements in exchange for the services provided by BD. Per the terms of the Factoring Agreements, the Company and its relevant subsidiaries sell receivables to the corresponding BD subsidiary in the same jurisdiction and such BD subsidiary collects the receivables from Company's customers. The BD subsidiary assumes the credit risk in respect of the receivables, and accordingly deducts a factoring fee from the purchase price of such receivables. Accordingly, Embecta accounts for the transfer as sales of trade receivables by recognizing an increase to Cash and cash equivalents and a decrease to Trade Receivables, net in the Consolidated Balance Sheets when proceeds from the transactions are received. The transfers are presented in the Consolidated Statements of Cash Flows as operating activities and the related service fee is presented as a component of Other income (expense), net in the Consolidated Statements of Income. • Distribution Agreements - Embecta and BD entered into distribution agreements for certain territories, principally in the Asia Pacific Region and Latin America, whereby a subsidiary of BD is appointed as a distributor of Embecta or its relevant subsidiaries to support certain commercial operations of the diabetes care business on a transitional basis in these regions for a maximum of two years . The distribution agreements will each continue until either (1) certain governmental approvals needed to distribute products in the defined territory are obtained and order-to-cash processes and other services of the Company for such territory are migrated to an alternative commercial arrangement between the parties or (2) the applicable services are transitioned to a third-party distributor or independently performed by Embecta, but in any event no longer than the maximum term of two years . Embecta shall pay BD a return of 1.5 % to 2.0 % of net revenue for each territory. • Cannula Supply Agreement - Embecta and BD entered into a cannula supply agreement whereby BD sells to Embecta cannulas for incorporation into Embecta's existing syringes and pen needles, safety syringes and safety pen needles, and insulin patch pump, pen needles and safety pen needle currently under development. BD retains Dollar amounts are in millions except per share amounts or as otherwise specified. 55 ownership of all cannula technology, cannula production activities and the intellectual property rights therein. Embecta is limited to a maximum number of cannulas that it can purchase under the cannula supply agreement, which will be an absolute upper limit of cannulas per year and yearly limits that vary with annual demand. The cannula supply agreement is terminable by Embecta without cause by providing at least 36 months’ written notice; however, such termination can be effective no earlier than five years from the Separation. The cannula supply agreement will be terminable by BD without cause by providing at least 36 months’ written notice; however, such termination can be effective no earlier than ten years from the Separation. However, in the event of a change of control of Embecta, BD has the right to terminate the cannula supply agreement in its sole discretion. The cannula supply agreement will also terminate automatically, subject to a 36 -month wind-down period, if Embecta’s yearly forecast is below the required minimum purchase amount, and the parties have other customary termination rights for material breach or bankruptcy of the other party. • Tax Matters Agreement - Pursuant to the tax matters agreement, Embecta agreed to certain covenants that contain restrictions intended to preserve the tax-free status of the distribution and certain related transactions. Embecta may take certain actions prohibited by these covenants only if Embecta obtains and provides to BD an opinion from a United States tax counsel or accountant of recognized national standing, in either case satisfactory to BD, to the effect that such action would not jeopardize the tax-free status of the distribution and certain related transactions, or if Embecta obtains prior written consent of BD. Embecta is barred from taking any action, or failing to take any action, where such action or failure to act adversely affects or could reasonably be expected to adversely affect the tax-free status of the distribution and certain related transactions or result in certain other taxes to BD, for all relevant time periods. In addition, during the period ending two years after the Separation, these covenants include specific restrictions on Embecta’s (i) discontinuing the active conduct of Embecta’s trade or business; (ii) issuance or sale of stock or other securities (including securities convertible into Embecta stock, but excluding certain compensatory arrangements); (iii) liquidating, merging, or consolidating with any other person; (iv) amending Embecta’s certificate of incorporation (or other organizational documents) or taking any other action, whether through a stockholder vote or otherwise, affecting the voting rights of Embecta common stock; (v) sales of assets outside the ordinary course of business; and (vi) entering into any other corporate transaction which would cause Embecta to undergo a 50 % or greater change in its stock ownership. • Logistics Services Agreement - Embecta and BD entered into a logistics services agreement whereby BD provides Embecta with certain order-to-cash and logistics services to support certain commercial operations for a maximum term of two years . Embecta will pay BD (i) reimbursable costs, including all shipping costs, selling costs, general administration costs, costs of goods, research and development services costs, and other income and expenses related solely to the diabetes care business, that are incurred by BD directly, as allocated costs or as costs payable to a third party and (ii) a monthly administrative fee of 1.0 % of net revenue. • Other agreements that Embecta entered into with BD include, but are not limited to, the employee matters agreement ("EMA"), an intellectual property matters agreement, local support services agreements, certain other manufacturing arrangements and a process services agreement and lease agreement for a manufacturing facility located in Holdrege, Nebraska. See Note - 16 for more information on the lease agreement for Holdrege. The amount due from BD under the above agreements was $ 110.9 million at September 30, 2022 and is reflected in Amounts due from Becton, Dickinson and Company . The amount due to BD under these agreements was $ 66.5 million at September 30, 2022 and is included in Amounts due to Becton, Dickinson and Company . Prior to the Separation, the Company did not operate as a standalone business and the Consolidated Financial Statements were derived from the consolidated financial statements and accounting records of BD. The following disclosure summarizes activity between the Company and BD up to the Separation, including the affiliates of BD that were not part of the Separation. For the years ended September 30, 2022, 2021 and 2020, cost of products sold from related party inventory purchases were $ 28.0 million, $ 40.6 million and $ 43.4 million, respectively. Corporate and Medical Segment Allocations from BD BD provided significant corporate, finance, human resources, information technology, facilities, and legal services, among others (collectively, “General Corporate Expenses”) to the Company. Some of these services continue to be provided by BD to the Company on a temporary basis under the Transition Services Agreement. For purposes of these Consolidated Dollar amounts are in millions except per share amounts or as otherwise specified. 56 Financial Statements for the periods prior to the Separation, the General Corporate Expenses have been allocated to the Company. The allocations of General Corporate Expenses are reflected in the Consolidated Statements of Income as follows: Year ended September 30, 2022 2021 2020 Cost of products sold $ 2.3 $ 13.0 $ 9.2 Selling and administrative expense 47.9 98.3 80.2 Research and development expense 3.5 5.2 5.4 Other (income) expense, net ( 0.6 ) ( 1.3 ) 0.5 Total General Corporate Expenses $ 53.1 $ 115.2 $ 95.3 These expenses were allocated to the Company on a pro rata basis of global and regional revenues, headcount, research and development spend and other drivers. Management believes the assumptions underlying the Consolidated Financial Statements, including the assumptions regarding allocating General Corporate Expenses from BD, are reasonable. Nevertheless, the Consolidated Financial Statements for periods prior to the Separation may not include all of the actual expenses that would have been incurred and may not reflect the Company’s Consolidated results of operations, financial position and cash flows had it been a standalone public company during the periods presented. Actual costs that would have been incurred if the Company had been a standalone public company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Related party transactions The following transactions represent activity in the ordinary course of business between the Company and BD prior to the Separation for certain materials for use in production of certain medical products that were not at arm’s length. The following table summarizes related party purchases as follows: Year ended September 30, 2022 2021 2020 Purchases from BD $ 28.0 $ 40.6 $ 43.4 All significant intercompany transactions between the Company and BD prior to the Separation have been included in the Consolidated Financial Statements and are considered to be effectively settled for cash at the time the transaction is recorded. For the period prior to the Separation, the total net effect of the settlement of these intercompany transactions is reflected in the Consolidated Statements of Cash Flows as a financing activity and in the Consolidated Balance Sheets as Net Investment from Becton, Dickinson and Company. Prior to the Separation, net transfers to BD were included within Net Investment from Becton, Dickinson and Company . in the Consolidated Statements of Equity and represent the net effect of transactions between the Company and BD. The following table summarizes the components of the net transfers to BD as follows: Year ended September 30, 2022 2021 2020 Cash pooling and general financing activities (1) $ 255.9 $ 599.5 $ 591.8 Corporate and segment allocations, excluding non-cash stock-based compensation ( 50.4 ) ( 109.9 ) ( 90.4 ) Taxes deemed settled with BD ( 16.2 ) ( 72.5 ) ( 44.8 ) Other Separation related adjustments, net ( 11.4 ) — — Net transfers to BD as reflected in the Consolidated Statements of Cash Flows 177.9 417.1 456.6 Share-based compensation expense ( 8.5 ) ( 12.5 ) ( 12.7 ) Pension expense ( 3.6 ) ( 9.4 ) ( 9.4 ) Net Consideration paid to BD in connection with the Separation 1,266.0 — — Related party senior secured notes 197.0 — — Other transfers to (from) BD, net 84.1 ( 11.4 ) 14.4 Net transfers to BD $ 1,712.9 $ 383.8 $ 448.9 Dollar amounts are in millions except per share amounts or as otherwise specified. 57 (1) The nature of activities includes financing activities for capital transfers, cash sweeps and other treasury services. As part of this activity, cash balances were swept to BD on a daily basis under the BD Treasury function and the Company receives capital from BD for its cash needs. Related Party Senior Secured Notes On March 31, 2022, Embecta issued $ 200.0 million of senior secured notes to BD (the "Related Party Notes"). The Related Party Notes issued to BD were not issued for cash and instead were subject to a debt-for-debt exchange which occurred on April 1, 2022. As of April 1, 2022 t he Related Party Notes were reclassified to Long-Term Debt in the Consolidated Balance Sheets as the Related Party Notes are third party debt for periods post Separation. Refer to Note 11 for further information. Note 5 — Other Operating Expenses In connection with the Separation further described in Note 1, the Company incurred separation and stand-up costs of approximately $ 44.7 million and $ 4.8 million during the years ended September 30, 2022 and 2021, respectively. There were no separation and stand-up costs incurred during the year ended September 30, 2020. The costs incurred primarily relate to accounting, auditing, and legal services, including costs to establish certain stand-alone corporate functions and other costs associated with the abandonment of certain manufacturing production lines. Note 6 — Contingencies The Company is subject to potential liabilities under government regulations and various claims and legal actions that are pending or may be asserted from time-to-time. These matters arise in the ordinary course and conduct of the Company’s business and include, for example, commercial, intellectual property, environmental, securities and employment matters. The Company intends to continue to defend itself vigorously in such matters and when warranted, take legal action against others. Furthermore, the Company regularly assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its financial statements. An estimated loss contingency is accrued in the Company’s Financial Statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on the Company’s assessment, it has adequately accrued an amount for contingent liabilities currently in existence. The Company does not accrue amounts for liabilities that it does not believe are probable. Litigation is inherently unpredictable, and unfavorable resolutions could occur. As a result, assessing contingencies is highly subjective and requires judgment about future events. The amount of ultimate loss may exceed the Company’s current accruals, and it is possible that its cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies. The Company was not a party to any material legal proceedings at September 30, 2022 or September 30, 2021, nor is it a party to any material legal proceedings as of the date of issuance of these Consolidated Financial Statements. Note 7 — Revenues Measurement of Revenues Payment terms extended to the Company’s customers are based upon commercially reasonable terms for the markets in which the Company’s products are sold. Because the Company generally expects to receive payment within one year or less from when control of a product is transferred to the customer, the Company does not generally adjust its revenues for the effects of a financing component. The Company’s allowance for doubtful accounts reflects the current estimate of credit losses expected to be incurred over the life of its trade receivables. Such estimated credit losses are determined based on historical loss experiences, customer specific credit risk, and reasonable and supportable forward-looking information, such as country or regional risks that are not captured in the historical loss information. Amounts are written off against the allowances for doubtful accounts when the Company determines that a customer account is uncollectible. The allowance for doubtful accounts for trade receivables is not material to the Company’s consolidated financial results. The Company’s gross revenues are subject to a variety of deductions which are recorded in the same period that the underlying revenues are recognized. Such variable consideration includes rebates, sales discounts, and sales returns. Because these deductions represent estimates of the related obligations, judgment is required when determining the impact of these revenue deductions on gross revenues for a reporting period. Rebates provided by the Company are based upon prices determined under the Company’s agreements primarily with its end-user customers. Additional factors considered in the estimate of the Company’s rebate liability include the quantification of inventory that is either in stock at or in transit to the Company’s distributors, as well as the estimated lag time between the sale of product and the payment of corresponding rebates. Dollar amounts are in millions except per share amounts or as otherwise specified. 58 The Company’s liability attributed to variable consideration at September 30, 2022 and September 30, 2021 was $ 43.8 million and $ 71.7 million, respectively. The decrease is primarily attributed to the Factoring Agreements by which certain trade receivables are factored to BD net of variable consideration. Sales deductions recorded as a reduction of gross revenues for the years ended September 30, 2022, 2021 and 2020 were $ 336.4 million, $ 298.7 million, and $ 300.7 million respectively. Disaggregation of Revenues Disaggregation of revenue by geographic region is provided within Note 8. Contract Assets and Liabilities The Company does not have contract liabilities. Contract assets consist of the Company’s right to consideration that is conditional upon its future performance pursuant to private label agreements and are presented within Prepaid expenses and other in the Consolidated Balance Sheets. The Company’s contract asset balance was $ 1.2 million and $ 1.4 million as of September 30, 2022 and 2021, respectively. Note 8 — Segment and Geographical Data Operating segments are identified as components of an enterprise in which discrete financial information is available for evaluation by the CODM in making decisions regarding assessing business performance and allocating resources and capital. Management has concluded that the Company operates in one segment based upon the information used by the CODM in evaluating the performance of the Company’s business and allocating resources and capital. Disaggregation of Revenues The Company has distribution agreements with regional or national distributors (including wholesalers and medical suppliers) to ensure broad availability of its products as well as a direct sales force in certain countries and regions around the world. In the United States and Canada, the Company utilizes large and small key account managers that call on payers, retailers, wholesalers and institutional customers, and field-based territory managers that call on health care providers and pharmacies. In certain markets within Europe, the Company has dedicated sales representatives and in certain regions of the Middle East and Africa, the Company has distribution agreements. In Greater Asia, the Company has distribution agreements and in China, the Company relies on its own commercial team to support sales execution. In Latin America, the Company maintains distribution agreements and direct sales representatives. The Company disaggregates its revenue by geography as management believes this category best depicts how the nature, amount, and timing of revenues and cash flows are affected by economic factors. Revenues by geographic region are as follows: Year ended September 30, 2022 2021 2020 United States $ 600.3 $ 609.4 $ 563.0 International (1) 529.2 555.9 522.5 Total $ 1,129.5 $ 1,165.3 $ 1,085.5 (1) For the years ended September 30, 2022, 2021, and 2020 no individual country outside of the United States generated net revenues that represented more than 10.0% of total revenues. Note 9 — Stock-Based Compensation Periods Prior to Separation Prior to the Separation, certain of the Company's employees participated in stock-based compensation plans sponsored by BD. Under these plans BD granted time-vested restricted stock units ("TVUs"), stock appreciation rights ("SARs"), and performance share units ("PSUs") to certain management level employees. Prior to the Separation on April 1, 2022, share-based compensation expense in the Consolidated Statements of Income is representative of those employees who were dedicated to the Diabetes Care Business. Additionally, share-based compensation expense was allocated to the Diabetes Care Business for BD Corporate and Medical Segment employees who were not dedicated solely to the Diabetes Care Business. This stock-based compensation expense was allocated using a proportional cost allocation method and is included as a component of corporate allocations for periods prior to the Dollar amounts are in millions except per share amounts or as otherwise specified. 59 Separation. The amounts presented for the periods prior to the Separation are not necessarily indicative of future awards and do not necessarily reflect the costs that the Company would have incurred as an independent company. As of Separation Date and Periods Post Separation In connection with the Separation, and in accordance with the EMA, Embecta's employees with outstanding former BD share-based awards received replacement share-based awards under the Plan. The ratio used to convert the BD share-based awards was designed to preserve the aggregate intrinsic value of the award immediately after the Separation when compared to the aggregate intrinsic value of the award immediately prior to Separation. As a result of the award modification, Embecta will incur $ 6.1 million of incremental stock-based compensation expense. Of this amount, $ 2.3 million was recognized during the year ended September 30, 2022. $ 3.8 million will be recognized at a future date over the awards' remaining vesting period. Effective April 1, 2022, Embecta established the Plan. A total of 7,000,000 shares of common stock are authorized under the Plan. The Plan provides for the grant of various types of awards including restricted stock unit ("RSU") awards, SARs, stock options, performance-based awards and other stock-based awards. Under the Plan, the exercise price of awards, if any, is set on the grant date and may not be less than the fair market value per share on that date. Generally SARs have a term of ten years and a three or four year vesting period, subject to limited exceptions. The Company recognizes stock-based compensation cost only for those stock-based awards that are estimated to ultimately vest over their requisite service period, based on the vesting provisions of the individual grants. The cumulative effect on current and prior periods of a change in the estimated forfeiture rate is recognized as compensation cost in earnings in the period of the change. On April 1, 2022, Embecta granted 48,192 potential shares to non-employee directors in the form of RSUs, which vest at the earlier of (i) the first anniversary of the grant date or (ii) the date of the first annual meeting of stockholders, subject to continued service of the recipients. On April 4, 2022 and in connection with the Separation, Embecta granted 860,611 of potential shares to members of the Embecta leadership team as a one-time sign-on equity grant, subject to continued employment, comprised of the following: • 172,787 grants of time-vested RSUs which cliff vest on the third anniversary after grant date; • 528,167 grants of SARs which cliff vest on the third anniversary after grant date and; • 27,653 of TVUs and 132,004 of SARs granted to the Embecta's chief executive officer which vest evenly over three and four years , respectively. Stock-Based Compensation Expense Total direct and allocated stock-based compensation expense for the years ended September 30, 2022, 2021, and 2020 and the respective income tax benefits recognized by the Company in the Consolidated Statements of Income are as follows: 2022 2021 2020 Cost of products sold $ 2.3 $ 2.7 $ 2.4 Selling and administrative expense 14.6 7.8 7.8 Research and development expense 1.8 2.3 2.2 Total Stock-Based Compensation Expense $ 18.7 $ 12.8 $ 12.4 Tax benefit associated with stock-based compensation costs recognized $ 2.9 $ 2.8 $ 3.0 Stock Appreciation Rights SARs represent the right to receive, upon exercise, shares of common stock having a value equal to the difference between the market price of common stock on the date of exercise and the exercise price on the date of grant. SARs generally vest over a period of three to four years and have a term of ten years . The fair value of awards are estimated on the date of grant using a Black-Scholes-Merton (“BSM”) model. The BSM assumptions include expected dividend yield, risk-free interest rate, volatility, and term of the SARs. In connection with the SARs granted during 2022, the Company used the BSM to determine the fair value of the SARs as of the grant date. In applying this model, the Company uses both historical data and current market data to estimate the fair value of its SARs. The expected dividend yield is based on forecasted patterns of dividend payments. The risk-free interest rate is based on the rate at grant date of zero-coupon United States Treasury Notes with a term equal to the expected term of the SAR. Expected volatility is estimated using historical volatility. Due to the lack of trading history of Embecta's stock at the time of valuation efforts, the historical component of expected volatility is based on historical monthly price changes of the peer group within the industry. BD's historical data for Embecta employees was used to estimate equity award exercise and employee termination behavior within the valuation model. The expected term represents the amount of time Dollar amounts are in millions except per share amounts or as otherwise specified. 60 that SARs granted are expected to be outstanding based on historical and forecasted exercise behavior. The weighted average fair value of SARs was determined using the following assumptions: 2022 Risk-free interest rate 2.5 % Expected volatility 37.8 % Expected dividend yield 2.9 % Expected life 6.5 Fair value per SAR $ 9.38 A summary of SARs outstanding as of September 30, 2022 and changes since the Separation Date are as follows: SARs (in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Balance at April 1 1,379.8 $ 27.70 Granted 660.2 31.40 Exercised* ( 9.0 ) 13.66 Forfeited, canceled or expired ( 114.3 ) $ 28.64 Balance at September 30 1,916.7 $ 28.98 8.7 $ 1.4 Vested and expected to vest at September 30 1,824.0 $ 28.96 8.7 $ 1.4 Exercisable at September 30 230.6 $ 25.71 6.2 $ 0.8 *The amounts exercised include shares withheld for taxes that are not formally issued to the market. SARs with an intrinsic value of $ 0.1 million and grant date fair value of $ 6.1 million were exercised since the Separation Date. Time-Vested Restricted Stock Units Time vested restricted stock unit awards vest on a graded basis over a period of three years . The related stock-based compensation expense is recorded over the requisite service period, which is the vesting period or is based on retirement eligibility. The fair value of all time vested restricted stock units is based on the market value of the Company’s stock on the date of grant. A summary of time-vested restricted stock units outstanding as of September 30, 2022 and changes since the Separation Date are as follows: Stock Units (in thousands) Weighted Average Grant Date Fair Value Nonvested at April 1 847.0 $ 27.41 Granted 248.6 31.23 Distributed* ( 58.5 ) 27.41 Forfeited, canceled or expired ( 59.6 ) 28.03 Nonvested at September 30 977.5 $ 28.34 Expected to vest at September 30 930.8 $ 28.34 *The amounts distributed include shares withheld for taxes that are not formally issued to the market. The weighted average grant date fair value of time restricted stock units granted since the Separation Date is $ 31.23 and the total fair value of time vested stock units vested since the Separation Date is $ 1.6 million. At September 30, 2022, the weighted average remaining vesting term of time vested restricted stock units is 1.7 years. Unrecognized Compensation Expense and Other Stock Plans Dollar amounts are in millions except per share amounts or as otherwise specified. 61 The amount of unrecognized compensation expense for all non-vested stock-based awards as of September 30, 2022, is approximately $ 27.8 million, which is expected to be recognized over a weighted-average remaining life of approximately 2.2 years. At September 30, 2022, 4.1 million shares were authorized for future grants under the Plan. Note 10 — Goodwill and Other Intangible Assets Goodwill and Other Intangible Assets consisted of: Weighted Average Amortization Period (Years) September 30, 2022 September 30, 2021 Amortized intangible assets Patents – gross 13.0 $ 9.4 $ 20.8 Less: accumulated amortization ( 3.9 ) ( 6.5 ) Patents – net $ 5.5 $ 14.3 Customer Relationships and Other – gross 6.9 $ 5.2 $ 5.4 Less: accumulated amortization ( 1.8 ) ( 1.4 ) Customer Relationships and Other – net $ 3.4 $ 4.0 Total amortized intangible assets $ 8.9 $ 18.3 Goodwill 15.7 15.6 Total Goodwill and Other Intangible Assets $ 24.6 $ 33.9 Intangible asset amortization expense was $ 0.7 million for the year ended September 30, 2022 and $ 0.3 million for the years ended September 30, 2021 and 2020, respectively. The estimated intangible asset amortization expense for each of the fiscal years ended September 30, 2023 through 2027 is expected to approximate $ 1.1 million per year and $ 3.4 million for years subsequent thereafter. Note 11 — Long-Term Debt 5.00 % Senior Secured Notes due 2030 On February 10, 2022 Embecta issued $ 500.0 million aggregate principal amount of 5.00 % senior secured notes due February 15, 2030 (the “ 5.00 % Notes”). Interest payments on the 5.00 % Notes are due semi-annually in February and August until maturity . 6.75 % Senior Secured Notes due 2030 On March 31, 2022, Embecta issued $ 200.0 million of 6.75 % Related Party Notes at a discount of $ 3.0 million. The Related Party Notes issued to BD were not issued for cash and instead were subject to a debt-for-debt exchange which occurred on April 1, 2022. As such, the issuance of the Related Party Notes is a non-cash financing activity and is not presented in the Consolidated Statements of Cash Flows for the year ended September 30, 2022. On April 1, 2022, BD transferred the Related Party Notes with a notional value of $ 200.0 million issued by Embecta to Morgan Stanley in exchange for certain notes of BD that were purchased by 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 % senior secured notes (the " 6.75 % Notes") became third party debt of Embecta. Interest payments on the 6.75 % Notes are due semi-annually in February and August until maturity. The 6.75 % Notes will mature on February 15, 2030. Credit Agreement On March 31, 2022, Embecta entered into a credit agreement (the “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. The interest rate is 300 basis points over the secured overnight financing rate (“SOFR”), with a 0.50 % SOFR floor. The Term Loan was issued at a discount of 0.50 %. Principal and interest payments on the Term Loan commenced 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; and • a Revolving Credit Facility (the "Revolving Credit Facility") in an aggregate principal amount of up to $ 500.0 million, with a five -year term that matures in 2027. Borrowings under the Revolving Credit Facility bear interest, at Embecta’s option, at an annual rate equal to (a) in the case of loans denominated in United Dollar amounts are in millions except per share amounts or as otherwise specified. 62 States 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 September 30, 2022, no amount has been drawn on the Revolving Credit Facility. The credit agreement and the senior secured notes are secured by substantially all assets of Embecta and each subsidiary guarantor, subject to certain exceptions. The Credit Agreement and the indentures for the 5.00 % and 6.75 % 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 the 5.00 % and 6.75 % Notes. In addition, the Credit Agreement contains covenants that will limit, among other things, Embecta’s ability to prepay, redeem or repurchase its subordinated and junior lien debt, incur additional debt, make acquisitions, merge with other entities, pay dividends or distributions, redeem or repurchase equity interests, and create or become subject to liens. The following is a summary of Embecta's total debt outstanding as of September 30, 2022: Term Loan $ 945.3 5.00 % Notes 500.0 6.75 % Notes 200.0 Total principal debt issued $ 1,645.3 Less: current debt obligations ( 9.5 ) Less: debt issuance costs and discounts ( 37.7 ) Long-term debt $ 1,598.1 The debt issuance costs on the Term Loan, 5.00 % Notes, 6.75 % Notes and the discount on the Term Loan are reported in the Consolidated Balance Sheets as a reduction of debt and are amortized as a component of Interest expense, net over the term of the related debt using the effective interest method. The schedule of principal payments required on long-term debt for the next five fiscal years and thereafter is as follows: 2023 $ 9.5 2024 $ 9.5 2025 $ 9.5 2026 $ 9.5 2027 $ 9.5 Thereafter $ 1,597.8 The estimated fair value of long-term debt (including current portion) at September 30, 2022 was $ 1,531.3 million compared with a carrying value (which includes a reduction for amortized debt issuance costs and discounts) of $ 1,607.6 million. Fair value was estimated using inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability and would be considered Level 2 in the fair value hierarchy. Note 12 — Earnings per Share On April 1, 2022, the date of the Separation, 57,012,925 shares of Embecta's common stock, par value $ 0.01 per share, were distributed to BD shareholders of record as of March 22, 2022, the record date of the transaction. This share amount is utilized for the calculation of basic and diluted earnings per share for all periods presented prior to the Separation. In connection with the Separation, and in accordance with the EMA, Embecta's employees with outstanding former BD share-based awards received replacement share-based awards under the Plan. The ratio used to convert the BD share-based awards was designed to preserve the aggregate intrinsic value of the award immediately after the Separation when compared to the aggregate intrinsic value of the award immediately prior to the Separation (see Note 9 for additional details). The calculation of basic and diluted earnings per common share for the years ended September 30, 2022, 2021 and 2020 were as follows: Dollar amounts are in millions except per share amounts or as otherwise specified. 63 ($ in millions and shares in thousands, except per share amounts) 2022 2021 2020 Net Income attributable to Embecta $ 223.6 $ 414.8 $ 427.6 Basic weighted average number of shares outstanding 57,024 57,013 57,013 Stock awards and equity units (share equivalent) 437 — — Diluted weighted average shares outstanding 57,461 57,013 57,013 Earnings per common share - Basic $ 3.92 $ 7.28 $ 7.50 Earnings per common share - Diluted $ 3.89 $ 7.28 $ 7.50 For periods prior to the Separation, it is assumed that there were no dilutive equity instruments as there were no equity awards of Embecta outstanding prior to the Separation. For periods subsequent to the Separation, diluted earnings per share is computed by giving effect to all potentially dilutive stock awards that are outstanding. For 2022, 1.8 million of dilutive share equivalents issuable under stock-based compensation plans were excluded from the diluted shares outstanding calculation because the result would have been antidilutive. Note 13 — Income Taxes Income (Loss) Before Income Taxe s The components of Income Before Income Taxes for the years ended September 30 consisted of: 2022 2021 2020 Domestic $ ( 29.1 ) $ 87.5 $ 73.8 Foreign 285.7 407.4 412.0 Income before income taxes $ 256.6 $ 494.9 $ 485.8 Provision for Income Taxes The provision (benefit) for income taxes for the years ended September 30 consisted of: 2022 2021 2020 Current: Federal $ 20.4 $ 19.2 $ 1.0 State 3.4 4.3 3.7 Foreign 35.7 59.4 55.7 $ 59.5 $ 82.9 $ 60.4 Deferred: Federal $ ( 31.1 ) $ ( 1.3 ) $ ( 2.7 ) State ( 4.6 ) ( 0.3 ) — Foreign 9.2 ( 1.2 ) 0.5 $ ( 26.5 ) $ ( 2.8 ) $ ( 2.2 ) Income tax provision $ 33.0 $ 80.1 $ 58.2 The Company's income tax provision for the first half of 2022 and the years ended September 30, 2021 and 2020 were prepared using a separate return method. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if the Company was a separate taxpayer and a standalone enterprise. The Company believes the assumptions supporting the allocation and presentation of income taxes on a separate return basis are reasonable. For a portion of 2022 and all periods prior to the Separation, the Company’s domestic and foreign operations are included in BD’s domestic consolidated and foreign tax returns, and payments to all tax authorities are made by BD on the Company’s behalf. The Company files its own foreign tax return and makes its own foreign tax payments in Ireland. The Company’s current tax liabilities computed under the separate return method are considered to be effectively settled in the consolidated financial statements at the time the transaction is recorded, with the offset recorded against Net parent investment. Dollar amounts are in millions except per share amounts or as otherwise specified. 64 Tax Rate Reconciliation A reconciliation of federal statutory tax rate to the Company's effective income tax rate was as follows: 2022 2021 2020 Federal statutory tax rate 21.0 % 21.0 % 21.0 % State and local income taxes, net of federal tax benefit ( 0.8 ) 0.7 0.6 Foreign income tax at rates other than 21% ( 7.0 ) ( 6.1 ) ( 6.7 ) US tax on foreign earnings 0.2 0.5 0.5 Taxes on unremitted foreign earnings 3.2 — — Tax reserves ( 1.8 ) 0.5 ( 3.0 ) Tax credits ( 0.7 ) ( 0.4 ) ( 0.4 ) Nontaxable items ( 1.1 ) — — Other, net ( 0.1 ) — — Effective income tax rate 12.9 % 16.2 % 12.0 % The decrease in the Company's effective income tax rate from 2022 as compared to 2021 was primarily due to the change in geographical mix of earnings and favorable unrecognized tax benefits recorded in 2022; partially offset by tax expense that have been provided on undistributed earnings of foreign subsidiaries. The increase in the Company's effective income tax rate from 2021 as compared to 2020 was primarily impacted by favorable unrecognized tax benefits recorded in 2020. Dollar amounts are in millions except per share amounts or as otherwise specified. 65 Deferred Income Taxes Deferred income taxes at September 30 consisted of: 2022 2021 Deferred tax assets: Compensation and benefits $ 8.6 $ 2.1 Accruals and reserves 10.3 5.3 Intangibles 26.2 — Property, plant and equipment 19.0 — Capitalized research and development expenses 7.0 — Leases 9.7 — Tax loss and credit carryforwards 0.5 0.3 Other 5.4 1.6 Gross deferred tax assets before valuation allowance $ 86.7 $ 9.3 Valuation allowance $ ( 10.4 ) $ ( 0.3 ) Total deferred tax assets $ 76.3 $ 9.0 Deferred tax liabilities: Property, plant and equipment $ — $ ( 8.3 ) Taxes on unremitted foreign earnings ( 8.2 ) — Right of use asset ( 9.5 ) — Other — ( 2.0 ) Total deferred tax liabilities $ ( 17.7 ) $ ( 10.3 ) Net deferred tax assets (liabilities) (i) $ 58.6 $ ( 1.3 ) i. Net deferred tax assets are included in Deferred Income Taxes and Other Assets and net deferred tax liabilities are included in Deferred Income Taxes and Other Liabilities in the Consolidated Balance Sheets. Deferred tax assets and liabilities are netted in the Consolidated Balance Sheets by separate tax jurisdictions. As of September 30, 2022, the Company has recorded deferred taxes on undistributed earnings of foreign subsidiaries. As of September 30, 2021 the Company has not provided deferred taxes on undistributed earnings in 2021. The determination of the amount of the unrecognized deferred tax liability in 2021 related to the undistributed earnings is not practicable because of the complexities associated with its hypothetical calculation. The Company has recorded valuation allowances of $ 10.4 million for certain foreign deferred tax assets due to uncertainty that exists regarding future realizability. Unrecognized Tax Benefits The table below summarizes the gross amounts of unrecognized tax benefits without regard to reduction in tax liabilities or additions to deferred tax assets and liabilities if such unrecognized tax benefits were settled. The Company believes it is reasonably possible that the amount of unrecognized tax benefits will change due to one or more of the following events in the next twelve months: expiring statutes, audit activity, and tax payments in matters that are the subject of controversy in various taxing jurisdictions in which the Company operates. 2022 2021 2020 Balance at October 1 $ 16.0 $ 14.5 $ 28.4 Increase due to current year tax positions 1.0 1.3 0.8 Increase due to prior year tax positions — 0.3 0.1 Decrease due to prior year tax positions ( 6.7 ) — ( 14.8 ) Decrease due to settlements with tax authorities — ( 0.1 ) — Decrease due to lapse of statute of limitations ( 4.6 ) — — Balance at September 30 $ 5.7 $ 16.0 $ 14.5 Unrecognized tax benefits including interest and penalties that would affect the effective tax rate if recognized $ 7.2 $ 20.0 $ 17.4 Dollar amounts are in millions except per share amounts or as otherwise specified. 66 For a portion of 2022 and all periods prior to the Separation, the Company’s domestic and foreign operations were included in BD’s domestic consolidated and foreign tax returns, with the exception of Ireland. The Company conducts business and files tax returns in numerous countries and currently has no tax audits in progress for the period after the Separation. The following were included for the years ended September 30 as a component of Income tax provision in the Consolidated Statements of Income. 2022 2021 2020 Interest and penalties associated with unrecognized tax benefits $ 1.5 $ 4.0 $ 2.9 Note 14 — Financial Instruments and Fair Value Measurements The following reconciles Cash and cash equivalents reported within the Consolidated Balance Sheets as of September 30, 2022 and September 30, 2021, to the total amounts shown in the Consolidated Statements of Cash Flows: September 30, 2022 September 30, 2021 Cash and cash equivalents $ 330.9 $ — Cash and cash equivalents includes cash held in money market funds and other cash equivalents. All cash and cash equivalents are Level 1 in the fair value hierarchy. Foreign Currency Risks and Related Strategies The Company has foreign currency exposures throughout Europe, Greater Asia, Canada and Latin America. Transactional currency exposures that arise from entering into transactions, generally on an intercompany basis, in non-hyperinflationary countries that are denominated in currencies other than the functional currency are mitigated primarily through the use of forward contracts. The notional amounts of the Company’s foreign currency-related derivative instruments were as follows: Hedge Designation September 30, 2022 September 30, 2021 Foreign exchange contracts (a) Undesignated $ 5.1 $ — a. Represent hedges of transactional foreign exchange exposures resulting primarily from intercompany payables and receivables. Gains and losses on these instruments are recognized immediately in Other income (expense), net . These gains and losses are largely offset by gains and losses on the underlying hedged items, as well as the hedging costs associated with the derivative instruments. Gains and losses recognized to date on these instruments were not material to the Company's Consolidated Financial Statements. Nonrecurring Fair Value Measurements Non-financial assets, including property, plant and equipment as well as intangible assets, are measured at fair value when there are indicators of impairment and these assets are recorded at fair value only when an impairment is recognized. These measurements of fair value are generally based upon Level 3 inputs, including values estimated using the income approach. During the year ended September 30, 2022, the Company recorded impairment charges of $ 58.9 million related to the abandonment of certain manufacturing production lines in the United States that are no longer expected to be completed. These assets were previously included as a component of Construction in progress within Property, Plant and Equipment . The impairment charges are recognized within Impairment expense in the Consolidated Statements of Income. During the year ended September 30, 2021, the Company recorded impairment charges related to certain construction in progress assets related to discontinued projects totaling $ 13.8 million. The impairment charges were recorded to adjust the carrying amount of the assets to the assets’ fair values, which were estimated through a discounted cash flow model that utilized Level 3 inputs. The impairment charges are recognized within Cost of products sold in the Consolidated Statements of Income. There were no impairment charges incurred during the year ended 2020. Concentration of Credit Risk Historically and prior to the Separation, the Company’s operations formed part of BD’s monitoring of concentrations of credit risk associated with financial institutions for which BD conducted business. Dollar amounts are in millions except per share amounts or as otherwise specified. 67 As of September 30, 2022, the Company had transferred the majority of its trade receivables to BD under the Factoring Agreements (see Note 4). As a result, the Company is no longer exposed to credit risk associated with those transferred receivables and does not have material credit risk exposure associated with the remaining $ 22.2 million of trade receivables. Three of the Company’s customers represented at least 10.0% of total gross revenues individually and, in the aggregate, represented approximately 40.1 % for the year ended September 30, 2022. Two customers represented at least 10.0% of total revenues individually and, in the aggregate, represented 30.7 % and 32.7 % of total revenues for the years ended September 30, 2021 and 2020, respectively. Substantially all of the Company’s trade receivables are due from public and private entities involved in the healthcare industry. The Company does not normally require collateral from its customers. Note 15 — Property, Plant and Equipment Property, Plant and Equipment, Net consisted of: As of September 30, 2022 As of September 30, 2021 Land $ 1.4 $ 3.5 Buildings 123.7 120.4 Machinery, equipment and fixtures 505.1 570.8 Leasehold improvements 6.5 6.1 Construction in progress 64.9 190.8 $ 701.6 $ 891.6 Less: accumulated depreciation ( 400.0 ) ( 440.7 ) Total Property, Plant and Equipment, Net $ 301.6 $ 450.9 During the year ended September 30, 2022, the Company recorded impairment charges of $ 58.9 million related to the abandonment of certain manufacturing production lines in the United States that are no longer expected to be completed. These assets were previously included as a component of Construction in progress within Property, Plant and Equipment, Net. Note 16 — Leases Finance Lease Our finance lease assets and liabilities are attributed to our manufacturing site in Holdrege, Nebraska. This lease is classified as a finance lease because the present value of the sum of the lease payments associated with the lease exceeds substantially all of the fair value of the manufacturing site. Holdrege Lease In conjunction with the Separation, the Company 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 Company determined that the manufacturing space and equipment are highly interdependent and interrelated. Consequently, the Company concluded that the manufacturing space and equipment represent a single lease component. This finance lease is recorded in Buildings within Property, Plant and Equipment, Net , Current finance lease liabilities , and Non Current Finance Lease Liabilities . 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 . Operating Leases Our operating leases primarily relate to our real estate leases that are not classified as finance leases. Dollar amounts are in millions except per share amounts or as otherwise specified. 68 Aggregate Lease Information Our leases are included in our Consolidated Balance Sheets as follows: As of September 30, 2022 As of September 30, 2021 Finance Lease Property, Plant, and Equipment, Net $ 35.5 $ — Total Finance Lease Assets $ 35.5 $ — Current finance lease liabilities $ 3.6 $ — Non Current Finance Lease Liabilities 32.6 — Total Finance Lease Liabilities $ 36.2 $ — Weighted-average remaining lease term (years) 14.5 — Weighted-average discount rate 6.8 % — Operating Leases Deferred Income Taxes and Other Assets $ 6.3 $ 3.9 Total Operating Lease Assets $ 6.3 $ 3.9 Accrued expenses $ 2.0 $ 1.1 Deferred Income Taxes and Other Liabilities 4.3 3.0 Total Operating Lease Liabilities $ 6.3 $ 4.1 Weighted-average remaining lease term (years) 3.2 4.3 Weighted-average discount rate 5.9 % 2.2 % Supplemental cash flow information related to leases for the year ended September 30, 2022 was as follows: September 30, 2022 Right of use assets obtained in exchange for lease liabilities Financing Lease $ 36.7 Operating Leases 2.8 There were no right of use assets obtained in exchange for lease liabilities during the years ended September 30, 2021 and 2020. For the years ended September 30, 2022, 2021, and 2020 lease expense and cash paid for leases were not material. Maturities of our finance and operating lease liabilities as of September 30, 2022 by fiscal year are as follows: Finance Leases Operating Leases Total 2023 3.6 2.3 5.9 2024 3.6 2.1 5.7 2025 3.7 1.2 4.9 2026 3.7 1.0 4.7 2027 3.8 — 3.8 Thereafter 40.1 — 40.1 Total lease payments $ 58.5 $ 6.6 $ 65.1 Less: amount representing interest 22.3 0.3 22.6 Present value of lease liabilities $ 36.2 $ 6.3 $ 42.5 Dollar amounts are in millions except per share amounts or as otherwise specified. 69 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. The lease is expected to commence during the first half of fiscal year 2023 and is in existence for an initial term of 10 years. The Company has an option to extend the lease for additional periods of six years and four years , respectively. Note 17 — Benefit Plans Defined Benefit Plans Prior to the Separation on April 1, 2022, Embecta participated in BD's non-United States plans. BD has defined benefit pension plans covering eligible employees in certain of its international subsidiaries. The Company participated in BD's benefit plans as though it was a participant in a multi-employer plan with the other businesses of BD. The retirement benefits accounting guidance provides that liabilities beyond any contributions currently due and unpaid are not required to be reported. Accordingly, no assets or liabilities associated with plans where the Company was a participant in a multi-employer plan with the other businesses of BD have been reflected in the Company’s Consolidated Balance Sheets. The Consolidated Statements of Income include expense allocations for these benefits, which were determined using a proportional allocation method. Total benefit plan expense allocated to the Company for the years ended September 30, 2022, 2021 and 2020 was $ 3.6 million, $ 9.0 million and $ 9.0 million, respectively. The Company's participation in the defined pension and postretirement benefit plans sponsored by BD concluded upon the completion of the Separation on April 1, 2022. As of April 1, 2022, Embecta became the plan sponsor for certain global defined benefit pension plans. These Consolidated Financial Statements reflect the periodic benefit costs and funded status of such plans. The Company uses September 30 as the year-end measurement date for these plans. Net periodic benefit cost for the Company’s global defined benefit pension plans for the year ended September 30, 2022 was $ 0.7 million. Of the plans, the defined benefit pension plan covering employees in Switzerland (the "Swiss Plan") is the only defined benefit pension plan material to the Company's Consolidated Financial Statements. Our Swiss Plan is a government-mandated retirement cash balance plan. The plan requires a minimum investment determined annually by the Swiss government and was 1.00% in 2022. Under the Swiss plan, the Company and certain employees with annual earnings in excess of government determined amounts are required to make contributions to the plan. The sum of the Company's contributions should be at least equal to the sum of employee contributions. Required minimum employee contributions are based on the respective employee’s age, salary and gender. Contributions to the Swiss Plan are invested into a diversified fund managed by an investment fiduciary. As of September 30, 2022, the Swiss plan had an unfunded net pension obligation of $ 0.6 million, and plan assets that totaled $ 8.0 million. Since Separation, we recognized net periodic benefit cost totaling $ 0.2 million, related to our Swiss plan, of which $ 0.1 million was included in Other income (expense), net . Defined Contribution Plans The Company has various defined contribution savings plans that cover substantially all employees in the United States, Ireland, and Japan. The Company matches a certain percentage of each employee’s contributions as per the provisions of the plans. Total employer contributions by the Company to the plans were $ 8.9 million. Between April 1, 2022 and September 30, 2022, BD remained the defined pension plan sponsor for certain Embecta employees in Ireland. The Company accounts for this plan as though it was a participant in a multi-employer plan with other businesses of BD. The amount of contributions to BD for this plan are included in the amounts noted above. At the Separation Date, Embecta effectuated an Embecta sponsored defined contribution savings plan for certain other employees in Ireland. On October 1, 2022, certain employees participation in the BD defined benefit pension plan ceased and these employees began participating in an Embecta sponsored defined contribution savings plan that was effectuated at the Separation Date. Deferred Compensation Plan On the date of the Separation, the Company established a Deferred Compensation Plan in which certain directors and employees of the Company may defer the payment and taxation of up to 75 % of their base salary and up to 100 % of bonus amounts and other eligible cash compensation. A participant's deferrals are “invested” at the direction of the employee in a hypothetical portfolio of investments which are tracked by an administrator. The amounts accrued under this plan were $ 3.7 million as of September 30, 2022. Dollar amounts are in millions except per share amounts or as otherwise specified. 70 Note 18 — Supplemental Financial Information Trade Receivables, Net The amounts recognized in fiscal years 2022, 2021 and 2020 relating to allowances for doubtful accounts and cash discounts, which are netted against trade receivables, are provided in the following table: Allowance for Doubtful Accounts Allowance for Cash Discounts Total Balance at September 30, 2019 ( 4.2 ) ( 2.5 ) ( 6.7 ) Additions charged to costs and expenses ( 1.1 ) ( 15.2 ) ( 16.3 ) Deductions and other 1.4 (a) 15.5 16.9 Balance at September 30, 2020 ( 3.9 ) ( 2.2 ) ( 6.1 ) Additions charged to costs and expenses ( 0.3 ) ( 16.0 ) ( 16.3 ) Deductions and other 1.1 (a) 15.1 16.2 Balance at September 30, 2021 ( 3.1 ) ( 3.1 ) ( 6.2 ) Additions charged to costs and expenses ( 0.3 ) ( 18.1 ) ( 18.4 ) Deductions and other 2.1 (b) 21.1 23.2 Balance at September 30, 2022 ( 1.3 ) ( 0.1 ) ( 1.4 ) (a) Accounts written off (b) Amounts factored to BD Long-Lived Assets Long-lived assets, which include Property, Plant and Equipment, net , and Goodwill and Other Intangibles, net, by geographic area where located at September 30, 2022 and 2021 is as follows: 2022 2021 United States $ 109.3 $ 165.6 Europe, Middle East, and Africa 174.5 258.7 Greater Asia 42.3 50.4 Other 0.1 10.1 $ 326.2 $ 484.8 Dollar amounts are in millions except per share amounts or as otherwise specified. 71 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures. None.