What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-14 compared with 2022-08-15 · 149 added, 220 removed, 110 unchanged (77% of the section changed)

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This discussion contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and other factors described throughout this discussion and analysis, particularly in the section “Cautionary Statement Concerning Forward-Looking Statements.”

References in this section to “embecta” refer to embecta Corp.

as defined in the Condensed Consolidated Financial Statements included within this report.

Company Overview

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We estimate that our products are used by nearly 30 million people in over 100 countries for insulin administration and to aid with the daily management of diabetes.

Our business traces its origins to 1924, when Becton, Dickinson and Company (“BD”) developed the first dedicated insulin syringe.

Since then, we have built a world-class organization with a unique manufacturing supply chain and commercial footprint, delivering over 7.6 billion units of diabetes injection devices globally in 2021.

We generated revenues of $291.1 million and $295.0 million during the three months ended June 30, 2022 and 2021, respectively, and $854.9 million and $864.5 million during the nine months ended June 30, 2022 and 2021, respectively.

We have a broad portfolio of marketed products, including a variety of pen needles, syringes and safety devices, which are complemented by our proprietary digital applications designed to assist people with managing their diabetes.

Our pen needles are sterile, single-use, medical devices, designed to be used in conjunction with insulin pens and are used to inject insulin or other diabetes medications.

We also sell safety pen needles, which include resin injection-molded shields on both ends of the cannula that automatically deploy to help prevent needlestick exposure and injury during injection and disposal.

Our business traces its origins to 1924, when BD developed the first dedicated insulin syringe.

Since then, we have built a world-class organization with a unique manufacturing supply chain and commercial footprint.

We have a broad portfolio of marketed products, including a variety of pen needles, syringes and safety injection devices, which are complemented by our proprietary digital application designed to assist people with managing their diabetes.

Our pen needles are sterile, single-use, medical devices, designed to be used in conjunction with pen injectors that inject insulin or other diabetes medications.

We also sell safety pen needles, which have shields on both ends of the cannula that automatically deploy after the injection to help prevent needlestick exposure and injury during injection and disposal.

Our traditional and safety pen needles are compatible and frequently used with widely available pen injectors in the market today.

In addition to pen needles, we sell sterile, single-use insulin syringes, which are used to inject insulin drawn from insulin vials.

We also sell safety insulin syringes, which incorporate a manually activated sliding sleeve to help prevent needlestick exposure and injury during injection and disposal.

We primarily sell our products to wholesalers and distributors, which in turn sell such products to customers in primarily retail and institutional channels.

We also sell safety insulin syringes, which have sliding safety arm that can be activated with one-hand after the injection to help prevent needlestick exposure and injury during injection and disposal.

We primarily sell our products to wholesalers and distributors that sell to retail and institutional channels who in turn sell to patients.

Separation from BD

Pursuant to the Separation and Distribution Agreement, the Separation from BD was completed on April 1, 2022.

57,797,841 shares of embecta common stock were distributed to BD stockholders, determined by applying a ratio of one share of embecta common stock for every five shares of BD common stock.

57,012,925 issued and outstanding shares of Embecta common stock were distributed pro-rata to BD stockholders as of the close of business on March 22, 2022, the record date for the distribution, determined by applying a ratio of one share of Embecta common stock for every five shares of BD common stock.

"Regular-way" trading of Embecta common stock began on April 1, 2022, under the ticker symbol "EMBC".

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For periods prior to April 1, 2022, the Condensed Consolidated Financial Statements included certain assets and liabilities that were historically been held at the BD corporate level but are specifically identifiable or otherwise allocable to the Diabetes Care Business.

BD used a centralized approach to cash management and financing of its operations.

While certain cash and cash equivalents related to and were specifically identifiable to embecta, the cash and cash equivalents held by BD at the corporate level were not specifically identifiable to the Diabetes Care Business and therefore were not allocated for any of the periods presented prior to Separation.

These arrangements are not reflective of the manner in which embecta would have financed its operations had it been a standalone company separate from BD during the prior periods presented.

Cash pooling, related interest and intercompany arrangements were excluded from the asset and liability balances in the consolidated balance sheets.

These amounts were instead reported as Net Investment from Becton, Dickinson and Company as a component of Equity.

Additionally, BD provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support to the Diabetes Care Business.

The cost of these services were allocated to the Diabetes Care Business on the basis of the proportion of net sales, headcount, and other drivers.

The Diabetes Care Business and BD considered these allocations to be a reasonable reflection of the benefits received by the Diabetes Care Business.

Actual costs that may have been incurred if the Diabetes Care Business had been a standalone company would depend on a

Dollar amounts are in millions except per share amounts or as otherwise specified.

number of factors, including the chosen organizational structure, whether functions were outsourced or performed by Diabetes Care Business employees, and strategic decisions made in areas such as manufacturing, selling and marketing, research and development, information technology and infrastructure.

Periods Post Separation

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The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Key Trends Affecting Our Results of Operations

The regions in which we conduct our business and the medical devices industry in general are highly competitive.

We face significant competition from a wide range of companies in a highly regulated industry.

These include large companies with multiple product lines, some of which may have greater financial and marketing resources than us, as well as smaller more specialized companies.

Non-traditional entrants, such as technology companies, are also entering into the diabetes care industry and its adjacent markets, some of which may have greater financial and marketing resources than us.

Pricing Pressures.

The increased scrutiny by regulators on healthcare spending, which has accelerated in light of the COVID-19 pandemic, along with a shift towards volume-based procurement and group purchasing organizations, which generally values lower cost over product features, benefits and quality, have placed significant pressure on Embecta to

Dollar amounts are in millions except per share amounts or as otherwise specified.

lower pricing.

These trends may reduce our operating margins, which are only partially offset by our ability to differentiate our products and sell at higher prices.

Commoditization of Injection Devices.

Given the growing demand for medical devices to assist in the treatment of diabetes and difficulties around access to diabetes care due to complex and costly insurance plans, patient care is increasingly focused on providing more affordable products, which has led to the commoditization of more traditional injection delivery devices, such as insulin syringes and pen needles.

Existing and new local and regional low-cost providers, in combination with a shift from insulin vials to insulin pens, have made the pen needle category highly competitive.

This has forced providers to provide clinical evidence to differentiate their products.

Changes in Clinical Practice.

Introduction of new drugs and increased penetration of oral anti-diabetic drugs (e.g., SGLT-2s) and GLP-1s and GLP-1 combination products have delayed initiation of insulin therapy and contributed to less demand for our products.

COVID-19 Impacting Delivery and Allocation of Healthcare.

The COVID-19 pandemic has accelerated the adoption of, and reimbursement by governments and private payers for, the delivery of healthcare using digital technologies, including telehealth technologies and other at-home self-care solutions and various media for virtual engagement with healthcare providers.

Our ability to adapt the delivery of our products and sales and marketing efforts to these trends, including with the development of our diabetes care app, may materially affect our results of operations.

The pandemic has also caused hospitals and other healthcare providers to reassess their prioritization and allocation of their healthcare resources.

In many cases, providers were forced to balance between diverting resources toward COVID-19 needs and maintaining routine care, including for people living with long term conditions.

If this trend persists, particularly in regions where COVID-19 continues to spread, it could have an adverse impact on the delivery of care for people with diabetes and our sales and marketing efforts.

Decentralization of Chronic Care.

Many countries are facing an aging population and a rapidly growing number of people living with diabetes.

While healthcare investments in certain regions continue to grow, there is an increased burden on physicians and longer wait times for patients.

Healthcare delivery for non-emergency diabetes care is expected to continue shifting outside of hospitals to primary care providers, which could have a material impact on our results of operations.

Political and Economic Instability in Emerging Markets.

We operate in a number of emerging markets, many of which are subject from time to time to significant political and economic disruptions.

However, the number of countries we provide products to and our proactive channel management strategies help us manage this variability.

Recent Developments

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• the effectiveness of vaccines and vaccination efforts.

In addition, we continue to face increases in the cost and availability of raw materials, components, and other inputs necessary to manufacture and distribute our products due to constraints and inflation within the global supply chain, as well as increases in the cost and time to distribute our products.

Uncertainty around inflationary pressures, could potentially cause new, or exacerbate existing, economic challenges that we may face.

To date we have been able to successfully mitigate this disruption and ensure uninterrupted supply to our customers by increasing our inventory levels and taking other measures.

While inflation is expected to negatively impact gross margins and net income throughout the year, we intend to continue to work to improve productivity to help offset these increased costs.

Russia and Ukraine Conflict

We continue to face increases in the cost and disrupted availability of raw materials, components, and other inputs necessary to manufacture and distribute our products due to constraints and inflation within the global supply chain, as well as increases in the cost and time to distribute our products.

To date we have been able to successfully mitigate this disruption and provide uninterrupted supply to our customers by increasing our inventory levels and taking other measures.

The military conflict in Russia and Ukraine and the sanctions imposed by the United States government and other nations in response to this conflict have caused significant volatility and disruptions to the global markets.

During both the three and nine months ended June 30, 2022 net sales in Russia and Ukraine were not material to our consolidated net revenues in both periods.

For all periods presented, our net sales in Russia and Ukraine were not material to our consolidated net revenues.

Although operations in both Russia and Ukraine do not constitute a material portion of our business, there is uncertainty around the military conflict and the impact it will have on the global economy, supply chains and fuel prices generally, and therefore our business.

Refer to Part II, Item 1A.

"Risk Factors" for further details.

Refer to the "Risk Factors" set forth in the 2022 Form 10-K for further details.

Dollar amounts are in millions except per share amounts or as otherwise specified.

In addition, our revenues and results of operations may and have been affected by various fluctuations in macroeconomic conditions and regulatory and policy changes, both on a global level and in particular markets, which include inflation and slowing economic growth and contractions, a rising interest rate environment, supply chain interruptions, tariff policy changes, volatility in capital markets and the availability of credit, tax rates and the rate of exchange between the U.S.

dollar and foreign currencies.

The nature and extent of the impact of these factors among others varies by region and remains uncertain and unpredictable and may affect our business.

Results of Operations

Our unaudited Condensed Consolidated Statements of Income are as follows:

Three months ended June 30, Nine months ended June 30,

Three months ended December 31,

Revenues $ 275.7 $ 289.3 (4.7) %

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Research and development expense 16.9 16.7 1.2

Other operating expenses 7.7 2.1 nm 23.5 2.1 nm

Other operating expenses 10.3 8.4 22.6

Total Operating Expenses 100.0 87.3 14.5

Operating Income 88.8 116.6 (23.8)

Interest expense, net (19.5) — nm (24.4) — nm

Other income (expense), net (4.0) 0.6 (766.7) (4.1) 3.7 (210.8)

Interest expense, net (25.6) — nm

Other income (expense), net (7.1) — nm

Income Before Income Taxes 56.1 116.6 (51.9)

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Net Income per common share:

Basic $ 1.08 $ 1.81 nm $ 4.17 $ 5.50 nm

Diluted $ 1.07 $ 1.81 nm $ 4.14 $ 5.50 nm

Basic $ 0.62 $ 1.73 nm

Diluted $ 0.61 $ 1.73 nm

nm = not meaningful

Three Months Ended June 30, 2022 Summary (on a comparative basis)

Key GAAP financial results for the three months ended June 30, 2022 were as follows:

• Revenue decreased by $3.9 million to $291.1 million from $295.0 million;

• Gross profit increased by $0.3 million to $202.9 million from $202.6 million.

Gross profit as a percent of revenue was 69.7%, as compared to 68.7% in the prior year comparative period;

• Operating income decreased by $27.2 million to $97.1 million from $124.3 million;

• Net income decreased by $42.3 million to $62.4 million from $104.7 million.

Key Non-GAAP financial results for the three months ended June 30, 2022 were as follows:

• Constant Currency Revenues increased by 2.0%;

• EBITDA decreased by $32.6 million to $102.2 million from $134.8 million;

• Adjusted EBITDA decreased by $25.7 million to $117.9 million from $143.6 million.

Nine Months Ended June 30, 2022 Summary (on a comparative basis)

Key GAAP financial results for the nine months ended June 30, 2022 were as follows:

Three Months Ended December 31, 2022 Summary (on a comparative basis)

Key financial results for the three months ended December 31, 2022 were as follows:

• Revenue decreased by $13.6 million to $275.7 million from $289.3 million;

• Gross profit increased by $7.8 million to $598.0 million, compared to $590.2 million.

• Gross profit decreased by $15.1 million to $188.8 million from $203.9 million.

Gross profit as a percent of revenue was 68.5%, as compared to 70.5% in the prior year comparative period;

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Dollar amounts are in millions except per share amounts or as otherwise specified.

Key Non-GAAP financial results for the nine months ended June 30, 2022 were as follows:

• Constant Currency Revenues increased by 0.8%;

• EBITDA decreased by $75.2 million to $332.7 million from $407.9 million;

• Adjusted EBITDA decreased by $60.7 million to $372.7 million from $433.4 million.

Please see a description of our Non-GAAP Financial Measures below.

Our revenues decreased by $3.9 million, or 1.3%, to $291.1 million in the third quarter of 2022 as compared to revenues of $295.0 million in the third quarter of 2021.

Changes in our revenue are driven by the volume of goods that we sell, the prices we negotiate with customers and changes in foreign exchange rates.

Of this decrease, $9.7 million was attributable to unfavorable effects from foreign currency translation primarily due to the strengthening of the US dollar and to lesser extent, unfavorable changes to estimated sales deductions.

Increases in volume and to a lesser extent price, favorably impacted our revenues for customers in the U.S.

and Central and Southeast Asia.

Our revenues decreased by $9.6 million, or 1.1%, to $854.9 million for the nine months ended June 30, 2022 as compared to revenues of $864.5 million for the nine months ended June 30, 2021.

Of this decrease, $16.6 million was attributable to unfavorable effects from foreign currency translation primarily attributed to the strengthening of the US dollar and to a lesser extent, unfavorable changes to estimated sales deductions.

Increases in volume and to a lesser extent price, favorably impacted our revenues for customers in the U.S., Canada, Mainland China, and countries within Eastern Europe, the Middle East, Africa and Central and Southeast Asia.

Revenues by geographic region are as follows:

Three months ended June 30, Nine months ended June 30,

2022 2021 As Reported Constant

Currency 2022 2021 As Reported Constant

United States $ 158.0 $ 151.8 4.1 % 4.1 % $ 450.4 $ 450.1 0.1 % 0.1 %

International 133.1 143.2 (7.1) (0.3) 404.5 414.4 (2.4) 1.6

Total $ 291.1 $ 295.0 (1.3) % 2.0 % $ 854.9 $ 864.5 (1.1) % 0.8 %

Our revenues decreased by $13.6 million, or 4.7%, to $275.7 million for the three months ended December 31, 2022 as compared to revenues of $289.3 million for the three months ended December 31, 2021.

Changes in our revenues are driven by the volume of goods that we sell, the prices we negotiate with customers and changes in foreign exchange rates.

Of this decrease, $15.6 million was attributable to unfavorable effects from foreign currency translation primarily due to the strengthening of the U.S.

Subsequent to the Separation Date, we contract manufacture certain products for BD that favorably impacted our revenues in the current period.

Changes in price and volume period over period favorably impacted our revenues from customers primarily in our international regions.

Changes in price and volume period over period unfavorably impacted our revenues from customers primarily in the U.S.

Cost of products sold

Cost of products sold decreased by $4.2 million, or 4.5%, to $88.2 million in the third quarter of 2022 as compared to $92.4 million in the third quarter of 2021.

Cost of products sold as a percentage of revenues were 30.3% for the three months ended June 30, 2022 as compared to 31.3% in the three months ended June 30, 2021.

The decrease in cost of products sold between periods was primarily driven by a decrease in revenues in the current period.

Costs of products sold as a percentage of revenues decreased by approximately 100 basis points as compared to the prior year period due to favorable product mix in the current year period.

This was partially offset by the negative impact of inflation on raw materials costs (including freight), direct labor, and overhead.

We intend to continue to work to improve productivity to help offset these increased costs.

Cost of products sold decreased by $17.4 million, or 6.3%, to $256.9 million for the nine months ended June 30, 2022 as compared to $274.3 million for the nine months ended June 30, 2021.

Cost of products sold as a percentage of revenues were 30.0% for the nine months ended June 30, 2022 as compared to 31.7% in the nine months ended June 30, 2021.

The decrease in cost of products sold between periods was primarily driven by $13.8 million of impairment charges associated with the write-offs of certain construction in progress assets that were recorded in the first quarter of fiscal year 2021, and to a lesser extent, a decrease in revenues in the current year period, and the impact of inflation on costs of certain raw materials (including freight), direct labor, and overhead.

Cost of products sold increased by $1.5 million, or 1.8%, to $86.9 million for the three months ended December 31, 2022 as compared to $85.4 million for the three months ended December 31, 2021.

Cost of products sold as a percentage of revenues was 31.5% for the three months ended December 31, 2022 as compared to 29.5% for the three months ended December 31, 2021.

The increase in cost of products sold between periods was primarily driven by the negative impact of inflation on raw materials costs (including freight), direct labor, and overhead.

We intend to continue to work to improve productivity to help offset these increased costs.

This impairment charge negatively impacted our cost of products sold as a percentage of revenues in the prior year period by approximately 120 basis points.

Excluding this impairment charge, our cost of product sold as a percentage of revenues would have been approximately 30.6% in the prior year period.

Dollar amounts are in millions except per share amounts or as otherwise specified.

Selling and administrative expenses

Selling and administrative expenses increased by $23.3 million, or 38.5%, to $83.8 million in the third quarter of 2022 as compared to $60.5 million in the third quarter of 2021.

Our selling and administrative expenses increased by $43.4 million, or 25.6%, to $212.9 million for the nine months ended June 30, 2022 as compared to $169.5 million for the nine months ended June 30, 2021.

The increase for both the three and nine month comparative periods were primarily driven by an increase in compensation and benefit costs due to increased headcount and to a lesser extent increases in marketing and advertising spend both attributed to the Separation and embecta becoming a stand-alone publicly-traded company.

Selling and administrative expenses increased by $10.6 million, or 17.0%, to $72.8 million for the three months ended December 31, 2022 as compared to $62.2 million for the three months ended December 31, 2021.

The increase was primarily driven by an increase in compensation and benefit costs due to increased headcount attributed to the Separation and Embecta becoming a stand-alone publicly-traded company.

Research and development expenses

Research and development expenses decreased by $1.4 million, or 8.9%, to $14.3 million in the third quarter of 2022 as compared to $15.7 million in the third quarter of 2021.

Our research and development expenses increased by $6.6 million, or 11.9%, to $49.0 million for the nine months ended June 30, 2022 as compared to $43.8 million for the nine months ended June 30, 2021.

The decrease for the three month comparative period was primarily driven by timing of research and development projects.

The increase for the nine month comparative period was primarily driven by increased investment in the development of new products, specifically our insulin patch pump.

Research and development expenses increased by $0.2 million, or 1.2%, to $16.9 million for the three months ended December 31, 2022 as compared to $16.7 million for the three months ended December 31, 2021.

The increase for the three month comparative period was primarily driven by timing of research and development projects.

Other operating expenses

We incurred other operating expenses of $7.7 million and $23.5 million for the three and nine months ended June 30, 2022, respectively, driven by costs related to the Separation.

We incurred other operating expenses of $10.3 million and $8.4 million for the three months ended December 31, 2022 and 2021, respectively, driven by costs related to the Separation.

The costs incurred primarily relate to accounting, auditing, and legal services, including costs to establish certain stand-alone corporate functions and other transaction costs attributed to being a stand-alone publicly traded company.

Interest expense, net

Interest expense, net increased to $19.5 million in the third quarter of 2022, primarily due to the issuance of long-term debt.

We expect our interest expense, net to increase sequentially in the fourth quarter of 2022.

See Note 10 to the Condensed Consolidated Financial Statements included elsewhere in this report for a further description of our long-term debt.

Interest expense, net increased to $25.6 million for the three months ended December 31, 2022, primarily due to the higher interest rates on our variable rate debt that was issued on March 31, 2022.

If the United States Federal Reserve continues to raise the benchmark interest rate, then we would expect the interest expense on our variable rate debt to increase during the remainder of fiscal 2023.

See "Liquidity and Capital Resources" below and Note 10 to the Condensed Consolidated Financial Statements included elsewhere in this report for a further description of our long-term debt.

Other income (expense), net

Other income (expense), net, decreased by $4.6 million to $(4.0) million in the third quarter of 2022 as compared to $0.6 million in the third quarter of 2021.

Other income (expense), net decreased by $7.8 million to $(4.1) million for the nine months ended June 30, 2022 as compared to $3.7 million for the nine months ended June 30, 2021.

The decrease for the three and nine month comparative periods was mainly driven by amounts due to BD for tax liabilities incurred in deferred jurisdictions where BD is considered the primary obligor.

Income tax provision

The effective income tax rates were 15.2% and 16.2% for the three months ended June 30, 2022 and 2021, respectively, and 15.2% and 16.0% for the nine months ended June 30, 2022 and 2021, respectively.

The decrease in effective tax rates for both comparative periods is primarily driven by the geographical mix of income attributable to various jurisdictions that have income tax rates that vary from the U.S.

The Company is subject to income tax in the various jurisdictions in which we operate.

A significant portion of the Company's earnings are taxed in jurisdictions with statutory tax rates that are lower than the statutory tax rate of the United States.

The effective tax rate can vary from quarter to quarter because of changes in the geographical mix of the Company's earnings, changes in tax laws and matters related to tax audits.

Dollar amounts are in millions except per share amounts or as otherwise specified.

Non-GAAP financial measures

In evaluating our operating performance, we supplement the reporting of our financial information determined under GAAP with certain non-GAAP financial measures including (i) earnings before interest, taxes, depreciation, and amortization (“EBITDA”), (ii) adjusted EBITDA, as further defined below, and (iii) Constant Currency revenue growth.

These non-GAAP financial measures are indicators of our performance that are not required by, or presented in accordance with, GAAP.

They are presented with the intent of providing greater transparency to financial information used by us in our financial analysis and operational decision-making.

We believe that these non-GAAP measures provide meaningful information to assist investors, shareholders and other readers of our consolidated financial statements in making comparisons to our historical operating results and analyzing the underlying performance of our results of operations.

Additionally, EBITDA and Adjusted EBITDA are important metrics for debt investors who utilize debt-to-EBITDA ratios.

These non-GAAP financial measures are not intended to be, and should not be, considered separately from, or as an alternative to, the most directly comparable GAAP financial measures.

We believe EBITDA is an important valuation measurement for management and investors given the effect non-cash charges such as amortization related to acquired intangible assets and depreciation of capital equipment have on net income.

Additionally, we regard EBITDA as a useful measure of operating performance and cash flow before the effect of interest, taxes, depreciation and amortization and as a complement to operating income, net income and other GAAP financial performance measures.

We define adjusted EBITDA as EBITDA excluding certain items that affect comparability of operating results and the trend of earnings.

These adjustments are either non-cash or irregular in nature, may not be indicative of our past and future performance and are therefore excluded to allow investors to better understand underlying operating trends.

The following are examples of the types of adjustments that are excluded:

(i) share-based compensation, (ii) impairment losses incurred, (iii) one-time costs which include costs to stand up the Company, and (iv) other significant items management deems irregular or non-operating in nature.

We use adjusted EBITDA when evaluating operating performance because we believe the exclusion of such adjustments is necessary to help provide an accurate measure of on-going core operating results and to evaluate comparative results period over period.

For the three and nine month periods ended June 30, 2022, the reconciliation of net income to EBITDA and adjusted EBITDA was as follows:

Three Months Ended

June 30, Nine Months Ended

2022 2021 2022 2021

Net income $ 62.4 $ 104.7 $ 240.8 $ 317.9

Interest expense 19.5 — 24.4 —

Income taxes 11.2 20.2 43.3 60.6

Depreciation and amortization 9.1 9.9 24.2 29.4

EBITDA 102.2 134.8 332.7 407.9

Share-based compensation expense 5.8 2.9 14.3 9.6

One-time costs (1)(2)

9.9 2.1 25.7 2.1

Impairment losses (3)

Adjusted EBITDA $ 117.9 $ 143.6 $ 372.7 $ 433.4

(1) One-time costs incurred during the three months ended June 30, 2022 primarily include costs to stand up the Company.

Approximately $7.7 million of the one-time costs are recorded in Other operating expenses, $1.7 million are recorded in Selling, general and administrative expenses, $0.3 million are recorded in Research and development expense, and $0.2 million are recorded in Cost of products sold.

For the three months ended June 30, 2021, $2.1 million of the one-time costs are classified in Other operating expenses.

(2) One-time costs incurred during the nine months ended June 30, 2022 primarily include costs to stand up the Company.

Approximately $23.5 million of the one-time costs are recorded in Other operating expenses, $1.7 million are recorded in Selling, general and administrative expenses, $0.3 million are recorded in Research and development expense, and $0.2 million are recorded in Cost of products sold.

For the nine months ended June 30, 2021, $2.1 million of the one-time costs are classified in Other operating expenses.

(3) Relates to impairment charges incurred during fiscal year 2021.

Refer to the Cost of products sold section above.

Each reporting period, we face currency exposure that arises from translating the results of our worldwide operations to the U.S.

dollar at exchange rates that fluctuate from the beginning of such period.

A stronger U.S.

dollar, compared to the prior-year period, resulted in an unfavorable foreign currency translation impact to our revenues as compared to the prior-year period.

We evaluate our results of operations on both a reported and a Constant Currency basis, which excludes the impact of fluctuations in foreign currency exchange rates by comparing results between periods as if exchange rates had remained constant period-over-period.

As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a Constant Currency basis in addition to reported results helps

Other income (expense), net, was $(7.1) million for the three months ended December 31, 2022.

The costs incurred primarily relate to amounts due to BD for tax liabilities incurred in deferred jurisdictions where BD is considered the primary obligor.

Dollar amounts are in millions except per share amounts or as otherwise specified.

improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods.

We calculate Constant Currency percentages by converting our current-period local currency financial results using the prior-period foreign currency exchange rates and comparing these adjusted amounts to our current-period results.

These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP.

Results on a Constant Currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with GAAP.

For the three and nine months ended June 30, 2022, the reconciliation of revenue growth to Constant Currency was as follows:

Three months ended June 30,

2022 2021 Total

Total Revenues $ 291.1 $ 295.0 (1.3) % (3.3) % 2.0 %

Nine months ended June 30,

2022 2021 Total

Total Revenues $ 854.9 $ 864.5 (1.1) % (1.9) % 0.8 %

Income tax provision

The effective tax rates were 37.3% and 15.3% for the three months ended December 31, 2022 and 2021, respectively.

The increase in the Company’s effective tax rate from the prior comparative period is primarily due to the establishment of a valuation allowance against the utilization of interest expense carryforwards generated during the three months ended December 31, 2022 resulting from U.S.

interest deduction limitation rules, increased tax expense on undistributed earnings of foreign subsidiaries and increased U.S.

taxes on the earnings of foreign subsidiaries, partially offset by tax benefits from non-taxable permanent differences.

LIQUIDITY AND CAPITAL RESOURCES

Up to the date of Separation on April 1, 2022, embecta (historically the "Diabetes Care Business") was dependent upon BD for all of its working capital and financing requirements.

embecta has historically generated, and expect to continue to generate, positive cash flow from operations.

We believe that our cash and our cash equivalents and cash from operations, together with our borrowing capacity under our revolving credit facility, will provide sufficient financial flexibility to fund seasonal and other working capital requirements, capital expenditures, debt service requirements and other obligations, cash dividends on common shares, share repurchases and additional growth opportunities for the foreseeable future.

However, should it become necessary, we believe that our credit profile should provide us with access to additional financing in order to fund normal business operations, make interest payments, fund growth opportunities and satisfy upcoming debt maturities.

In February 2022, and in connection with the Separation, Embecta issued $500.0 million aggregate principal amount of 5.00% senior secured notes due February 15, 2030.

Interest payments on the 5.00% Notes are due semi-annually in February and August until maturity, with the first interest payment due in August 2022 .

In March 2022, embecta entered into a credit agreement, providing for a Term Loan B Facility (the "Term Loan") in the amount of $950.0 million, with a seven -year term that matures in March 2029 and a Revolving Credit Facility in an aggregate principal amount of up to $500.0 million, with a five -year term that matures in 2027.

The interest rate on the Term Loan is 300 basis points over the secured overnight financing rate (“SOFR”), with a 0.50% SOFR floor.

The initial draw of the full amount of the Term Loan was for a 3-month period at an interest rate of 3.65%.

In late June, the borrowing has been continued for another 3-month period until September 30, 2022, at which point it can be repaid or further continued, at our option;

we currently intend to continue to borrow under the Term Loan from time to time until maturity.

In March 2022, we entered into a credit agreement, providing for the Term Loan in the amount of $950.0 million, with a seven -year term that matures in March 2029 and a Revolving Credit Facility in an aggregate principal amount of up to $500.0 million, with a five -year term that matures in 2027.

The interest rate on the Term Loan is 300 basis points over SOFR, with a 0.50% SOFR floor.

Principal and interest payments on the Term Loan began on June 30, 2022.

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Principal amounts repaid under the Term Loan may not be reborrowed by us.

Borrowings under the Revolving Credit Facility bear interest, at embecta’s option, initially at an annual rate equal to (a) in the case of loans denominated in U.S.

dollars (i) the SOFR or (ii) the alternate base rate or (b) in the case of loans denominated in Euros, the EURIBOR rate, in each case plus an applicable margin specified in the credit agreement.

Borrowings under the Revolving Credit Facility bear interest, at Embecta’s option, initially at an annual rate equal to (a) in the case of loans denominated in United 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 June 30, 2022, no amount has been drawn on the Revolving Credit Facility.

Additionally in March 2022, embecta issued $200.0 million of 6.75% senior secured notes to BD.

On April 1, 2022, BD transferred the Related Party Notes with a notional of $200.0 million issued by embecta to Morgan Stanley pursuant to a tender offer.

Morgan Stanley then sold the senior secured notes to qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as amended.

As of April 1, 2022, the 6.75% Notes became third party debt of embecta.

The 6.75% Notes carry an interest rate of 6.75% and are due February 2030.

As of December 31, 2022, no amount has been drawn on the Revolving Credit Facility.

Additionally we have outstanding the 6.75% Notes, which carry an interest rate of 6.75% and are due February 2030.

Interest payments on the 6.75% Notes are due semi-annually in February and August until maturity, with the first interest payment due in August 2022.

The credit agreement and the indenture for the 5.00% Notes contain customary financial covenants, including a total net leverage ratio covenant, which measures the ratio of (i) consolidated total net debt to (ii) consolidated earnings before interest, taxes, depreciation and amortization, and subject to other adjustments, must meet certain defined limits which are tested on a quarterly basis in accordance with the terms of the credit agreement and 5.00% Notes.

In addition, the credit agreement contains covenants that limit, among other things, our ability to prepay, redeem or repurchase our subordinated and junior lien debt, incur additional debt, make acquisitions, merge with other entities, pay dividends or distributions,

Dollar amounts are in millions except per share amounts or as otherwise specified.

redeem or repurchase equity interests, and create or become subject to liens.

As of June 30, 2022, we were in compliance with all of such covenants.

We utilized the aggregate proceeds received to make distribution payment of approximately $1,466.0 million to BD in connection with the Separation for assets transferred by BD to embecta.

Subsequent to the proceeds received and distribution payment made to BD, we retained approximately $165.0 million in cash and cash equivalents.

The following is a summary of embecta's total debt outstanding as of June 30, 2022:

The credit agreement and the indentures for the 5.00% Notes and the 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 5.00% Notes and the 6.75% Notes.

As of December 31, 2022, we were in compliance with all of such covenants.

The following is a summary of Embecta's total debt outstanding as of December 31, 2022:

Term Loan $ 942.9

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Long-term debt $ 1,597.1

Dollar amounts are in millions except per share amounts or as otherwise specified.

The schedule of principal payments required on long-term debt for the next five years and thereafter is as follows:

Thereafter $ 1,597.8

In conjunction with the Separation, we entered into a lease agreement with BD pursuant to which the Company would lease approximately 278,000 square feet of manufacturing space and equipment at BD's manufacturing facility in Holdrege, Nebraska for an initial term of 10 years.

Certain measures relating to our total debt outstanding as of December 31, 2022 were as follows:

Total debt $ 1,606.6

Short-term debt as a percentage of total debt 0.6 %

Weighted average cost of total debt 6.7 %

For additional information related to the Company's debt related activities, refer to Note 10 within the Notes to Condensed Consolidated Financial Statements within this Form 10-Q.

The lease is classified as a finance lease.

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The Company has an option to extend the lease term for an additional period of up to five years.

Maturities of our Holdrege finance lease and other operating lease liabilities as of June 30, 2022 by fiscal year are as follows:

Finance Leases Operating Leases Total

Maturities of our finance lease and operating lease liabilities as of December 31, 2022 by fiscal year are as follows:

Finance Lease Operating Leases Total

2023 $ 2.7 $ 2.2 $ 4.9

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Total lease payments $ 57.6 $ 7.4 $ 65.0

On April 1, 2022, the Company entered into a real estate lease for a new Corporate Headquarters located in Parsippany, NJ that has not yet commenced.

The lease is expected to commence during the first half of fiscal year 2023.

Factoring Agreement

In conjunction with the Separation, we entered into a Trade Receivables Factoring Agreement with BD.

embecta owes BD a service fee calculated as 0.1% of annual revenues related to countries subject to the agreement, in exchange for the services provided by BD pursuant to the Trade Receivables Factoring Agreement.

On April 1, 2022, we entered into a real estate lease for a new Corporate Headquarters located in Parsippany, New Jersey, United States.

The lease commenced during the second quarter of fiscal year 2023 and is in existence for an initial term of ten years.

We have an option to extend the lease for additional periods of six years and four years, respectively.

For additional information related to our leases, refer to Note 15 within the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

Factoring Agreements

In conjunction with the Separation, we entered into the Factoring Agreements with BD.

Embecta owes BD a service fee calculated as 0.1% of annual revenues related to countries subject to the agreement, in exchange for the services provided by BD pursuant to the Factoring Agreements.

Access to Capital and Credit Ratings

In January 2022, Moody’s Investor Services (“Moody’s”) and Standard & Poor’s Ratings Services (“S&P”) assigned credit ratings to embecta of Ba3 and B+, respectively.

In January 2023 and January 2022, Moody’s Investor Services and Standard & Poor’s Ratings Services assigned credit ratings to Embecta of Ba3 and B+, respectively.

Dollar amounts are in millions except per share amounts or as otherwise specified.

The following table summarizes our Condensed Consolidated Statements of Cash Flows:

Nine Months Ended

Three Months Ended

Net cash provided by (used for)

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Net Cash Flows from Operating Activities

Net cash provided by operating activities during the nine months ended June 30, 2022 was attributable to net income of $240.8 million and net adjustments of $113.4 million, which includes $46.7 million of non-cash adjustments related to depreciation and amortization, share-based compensation, and pension expense, and $66.2 million of net cash used relating to changes in working capital.

Cash used relating to working capital was driven by an increase in amounts due from Becton, Dickinson and Company of $99.6 million, and increases of $23.6 million and $25.8 million in inventories and prepaid expenses, respectively.

Offsetting the amounts above is cash provided by a decrease in trade receivables of $123.6 million, an increase of $67.3 million in accounts payable and accrued expenses, and an increase of $10.8 million in income and other net taxes payables.

The increase in amounts due from Becton, Dickinson and Company primarily relates to factored receivables and inventory purchases for which payment has not yet been collected from BD as of June 30, 2022.

The increase in inventories is primarily driven by a concerted effort to build inventory for the remainder of fiscal 2022 to meet expected demand.

The decrease in trade receivables primarily relates to the Factoring Agreement, in which embecta transfers certain trade receivable assets to BD in exchange for cash.

The increase in amounts for accounts payable and accrued expenses relates current liabilities with BD primarily for inventory purchases, as well as increases in employee benefits and payroll.

The increase in income and other net taxes payables is driven by income tax on earnings in the various jurisdictions in which the Company operates.

Net cash provided by operating activities during the nine months ended June 30, 2021 was attributable to net income of $317.9 million and net adjustments of $52.7 million, which includes $59.8 million of non-cash adjustments related to depreciation and amortization, impairment of property, plant and equipment, share-based compensation, and pension expense, and a $6.9 million net use of cash relating to changes in working capital.

The net use of cash relating to working capital was driven by an increase in inventories of $16.7 million and an increase in prepaid expenses and other of $4.0 million.

These changes were partially offset by an increase in other current liabilities of $4.4 million.

The increase in inventories can primarily be attributed to the timing of capitalized variances as well as higher inventory on hand as of period end compared to prior year.

Net cash provided by operating activities during the three months ended December 31, 2022 was attributable to net income of $35.2 million and net adjustments of $25.2 million, which includes $16.9 million of non-cash adjustments related to depreciation and amortization, stock-based compensation, deferred income taxes and pension expense, and $8.3 million of net cash provided relating to changes in working capital.

Cash provided relating to working capital was driven by an increase in accounts payable, accrued expenses and other current liabilities of $19.4 million, an increase of $18.2 million in income and other net taxes payables, and a decrease in trade receivables, net of $3.0 million.

Offsetting the amounts above is cash used for working capital related to increases in amounts due from BD of $9.5 million, an increase of $14.7 million in inventories, an increase of $6.6 million in prepaid expenses and other, and an increase of $1.5 million in other assets and liabilities, net.

The increase in accounts payable, accrued expenses and other current liabilities is related to increases in net liabilities for deferred closing entities.

The increase in income and other net taxes payable is primarily due to the timing of required tax payments as compared to the amounts accrued in the ordinary course of business during the three months ended December 31, 2022.

The increase in inventories is primarily driven by a concerted effort to build inventory to meet expected demand.

The increase in amounts due from BD primarily relates to factored receivables for which payment has not yet been collected from BD as of December 31, 2022.

All other movements related to working capital were due to timing of payments and receipts of cash in the ordinary course of business.

Net cash provided by operating activities during the three months ended December 31, 2021 was attributable to net income of $98.8 million and net adjustments of $40.0 million, which includes $15.2 million of non-cash adjustments related to depreciation and amortization, stock-based compensation, and pension expense, and $24.8 million of cash provided relating to changes in working capital.

Cash provided relating to working capital was driven by a decrease in trade receivables of $30.7 million, partially offset by an increase in inventories of $4.3 million and a decrease in accounts payable and accrued expenses of $2.5 million.

The decrease in trade receivables can be attributed to the timing of payments made in the normal course of business and a decrease in certain rebate and cash discount reserves.

The increase in inventories is primarily driven by a concerted effort in the first three months of fiscal year 2022 to build inventory in preparation for the spin-off.

The decrease in accounts payable and accrued expenses is mainly driven by the timing of payments made in the normal course of business for managed care rebates payments and a decrease in accrued professional services in connection with various market research and consulting projects.

Net Cash Flows from Investing Activities

Net cash used for investing activities was primarily comprised of capital expenditures of $15.0 million and $24.0 million during the nine months ended June 30, 2022 and 2021, respectively, to support further expansion of our business and operations.

Net cash used for investing activities was primarily comprised of capital expenditures of $4.7 million and $4.3 million during the three months ended December 31, 2022 and 2021, respectively, to support further expansion of our business and operations.

Dollar amounts are in millions except per share amounts or as otherwise specified.

Net Cash Flows from Financing Activities

Net cash used for financing activities for the nine months ended June 30, 2022, represents proceeds from the issuance of long-term debt of $1,450.0 million, offset by $33.3 million of payments for long-term debt issuance costs, $5.6 million of payments for debt fees associated with the revolving credit facility, $2.4 million of required payments on long-term debt, and $1,266.0 million of net consideration paid to Becton, Dickinson and Company in connection with the Separation.

See Note 10 to the Condensed Consolidated Financial Statements elsewhere in this report for further details.

Additionally, proceeds from the issuance of long-term debt was further offset by $182.7 million related to net transfers to Becton, Dickinson and Company.

Net cash used for financing activities for the nine months ended June 30, 2021, represents net transfers entirely to BD (see Note 3 to the Condensed Consolidated Financial Statements included elsewhere in this report).

On August 15, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.15 for each issued and outstanding share of the company’s common stock.

The dividend is payable on September 14, 2022 to stockholders of record at the close of business on August 26, 2022.

Net cash used for financing activities for the three months ended December 31, 2022, represents $2.8 million of payments related to tax withholding for stock-based compensation, $2.4 million of required payments on long-term debt, and $0.9 million in payments on our finance lease.

Net cash used for financing activities for the three months ended December 31, 2021, represents net transfers entirely to BD (see Note 3 within the Notes to Condensed Consolidated Financial Statements of this Form 10-Q).

On February 14, 2023, the Company’s Board of Directors declared a quarterly dividend of $0.15 for each issued and outstanding share of the Company’s common stock.

The dividend is payable on March 13, 2023 to stockholders of record at the close of business on February 27, 2023.

Contractual Obligations

Our contractual obligations as of December 31, 2022, which require material cash requirements in the future, consist of purchase obligations and lease obligations.

Purchase obligations are enforceable and legally binding obligations for purchases of goods and services which include inventory purchase commitments.

Over the next several years, we expect to incur significant costs associated with information technology infrastructure as we transition to our own systems.

Lease obligations include lease agreements for which a contract has been signed even if the lease has not yet commenced.

Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2022 Form 10-K for further details.

As of December 31, 2022, there have been no material changes to our contractual obligations outside the ordinary course of business.

Critical Accounting Policies

Our significant accounting policies, which include management’s best estimates and judgments, are included in Note 3 to the Consolidated Financial Statements included in our 2022 Form 10-K.

See Note 2 within the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information on the adoption of new accounting standards during the current fiscal year.

There have been no changes to our accounting policies as of December 31, 2022.

A discussion of accounting estimates considered critical because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates are disclosed in the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Embecta's 2022 Form 10-K.

Cautionary Statements Regarding Forward-Looking Statements

All statements and assumptions contained in this Quarterly Report on Form 10-Q that relate to future events and expectations and, as such, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995 and other securities laws.

Forward-looking statements include those containing such words as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “guidance,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “sees,” “should,” “targets,” “will,” “would,” or other words of similar meaning.

This Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995 and other securities laws.

Forward-looking statements include those containing such words as “anticipates,” “believes,” "can," “could,” “estimates,” “expects,” “forecasts,” “goal,” “guidance,” “intends,” “may,” “outlook,” “plans,” "possible," “projects,” “seeks,” “sees,” “should,” “targets,” “will,” “would,” or other words of similar meaning.

All statements that reflect Embecta’s expectations, assumptions or projections about the future, other than statements of historical fact, are forward-looking statements, including, without limitation, forecasts relating to discussions of future operations and financial performance (including volume growth, pricing, sales and earnings per share growth and cash flows) and statements regarding Embecta’s strategy for growth, future product development, regulatory clearances and approvals, competitive position and expenditures.

Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and changes in circumstances that are difficult to predict.

Forward-looking statements are based upon our present intent, beliefs or expectations, are not guarantees of future performance and are subject to numerous risks, uncertainties, and changes in circumstances that are difficult to predict.

Although Embecta believes that the expectations reflected in any forward-looking statements it makes are based on reasonable assumptions, it can give no assurance that these expectations will be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties.

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• Any failure by BD to perform its obligations under the various separation agreements entered into in connection with the Separation and Distribution, including the cannula supply agreement.

• Increases in operating costs, including fluctuations in the cost and availability of oil-based resins and other raw materials, as well as certain components, used in its products, the ability to maintain favorable supplier arrangements and relationships, and the potential adverse effects of any disruption in the availability of such items.

• Increases in operating costs, including fluctuations in the cost and availability of oil-based resins, other raw materials, and energy as well as certain components, used in its products, the ability to maintain favorable supplier arrangements and relationships, and the potential adverse effects of any disruption in the availability of such items.

Dollar amounts are in millions except per share amounts or as otherwise specified.

• Changes in reimbursement practices of governments or private payers or other cost containment measures.

• The adverse financial impact resulting from unfavorable changes in foreign currency exchange rates, as well as regional, national and foreign economic factors, including inflation, deflation, and fluctuations in interest rates, and their potential effect on its operating performance.

• The impact of changes in U.S., federal laws and policy that could affect fiscal and tax policies, healthcare and international trade, including import and export regulation and international trade agreements.

• The impact of changes in United States, federal laws and policy that could affect fiscal and tax policies, healthcare and international trade, including import and export regulation and international trade agreements.

In particular, tariffs or other trade barriers imposed by the United States or other countries could adversely impact its supply chain costs or otherwise adversely impact its results of operations.

• Any impact of the COVID-19 pandemic on embecta’s business, including disruptions in its operations and supply chains.

Dollar amounts are in millions except per share amounts or as otherwise specified.

• Any continuing impact of the COVID-19 pandemic or geopolitical instability on Embecta’s business, including disruptions in its operations and supply chains.

• New or changing laws and regulations affecting Embecta’s domestic and foreign operations, or changes in enforcement practices, including laws relating to healthcare, environmental protection, trade, monetary and fiscal policies, taxation (including tax reforms that could adversely impact multinational corporations) and licensing and regulatory requirements for products.

• The expected benefits of the Separation from BD.

• Risks associated with indebtedness.

• Risks associated with indebtedness and our use of indebtedness available to us.

• The risk that dis-synergy costs, costs of restructuring transactions and other costs incurred in connection with the Separation will exceed Embecta's estimates.

• The impact of the separation on embecta's businesses and the risk that the separation may be more difficult, time-consuming or costly than expected, including the impact on its resources, systems, procedures and controls, diversion of management’s attention and the impact on relationships with customers, suppliers, employees and other business counterparties.

• The impact of the Separation on Embecta's businesses and the risk that the Separation may be more difficult, time-consuming or costly than expected, including the impact on its resources, systems, including enterprise resource planning, procedures and controls, diversion of management’s attention and the impact on relationships with customers, suppliers, employees and other business counterparties.

• The risk that we may not complete strategic collaborative partnerships and acquisition opportunities that enable us to accelerate our growth or strategic collaborative opportunities that give us access to innovative technologies, complementary product lines, and new markets.

There can be no assurance that the transactions or uncertainties described above will in fact be consummated or occur in the manner described or at all.

As a result, you should not place undue reliance upon our forward-looking statements.

The above list of factors is not exhaustive or necessarily in order of importance.

For additional information on identifying factors that may cause actual results to vary materially from those stated in forward-looking statements, see the discussions under “Risk Factors,” included within Amendment No.

1 to the Form 10.

Any forward-looking statement speaks only as of the date on which it is made, and embecta assumes no obligation to update or revise such statement, whether as a result of new information, future events or otherwise, except as required by applicable law.

Any forward-looking statement speaks only as of the date on which it is made, and Embecta expressly disclaims and assumes no obligation to update or revise such statement, whether as a result of new information, future events or otherwise, except as required by applicable law.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis