Embecta Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Certain Factors Affecting Forward-Looking Statements The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes contained elsewhere in this Quarterly Report on Form 10-Q. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and other factors described throughout this discussion and analysis, particularly in the section “Cautionary Statement Concerning Forward-Looking Statements.” Company Overview We are a leading global medical device company focused on providing solutions to improve the health and well-being of people living with diabetes. Over the close to 100 year history of our business, we believe that our products have become one of the most widely recognized and respected brands in diabetes management in the world. We estimate that our products are used by nearly 30 million people in over 100 countries for insulin administration and to aid with the daily management of diabetes. Our business traces its origins to 1924, when 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 have a sliding safety shield 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 or use the products to deliver insulin injections to patients. Separation from BD Pursuant to the Separation and Distribution Agreement, the Separation from BD was completed on April 1, 2022. On March 22, 2022, the record date for the distribution, 57,012,925 issued and outstanding shares of Embecta common stock were distributed pro-rata to BD stockholders as of the close of business, determined by applying a ratio of one share of Embecta common stock for every five shares of BD common stock. "Regular-way" trading of Embecta common stock began on April 1, 2022, under the ticker symbol "EMBC". Periods Prior to Separation Prior to the Separation, the Company was referred to as the Diabetes Care Business. For periods prior to April 1, 2022, the Condensed Consolidated Financial Statements included certain assets and liabilities that were historically held at the BD corporate level but are specifically identifiable or otherwise allocable to the Diabetes Care Business. Periods Post Separation For the periods subsequent to April 1, 2022, as a standalone publicly traded company, Embecta presents its financial statements on a consolidated basis. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Key Trends Affecting Our Results of Operations Competition. 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 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 lower price in Dollar amounts are in millions except per share amounts or as otherwise specified. 19 Table of Contents both developed and emerging markets. 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. New drug therapies in development are targeted to challenge the current diabetes treatment paradigm, including insulin use. Insulin therapy in developed markets continues to transition to infusion pumps. Continuing Impact From COVID-19 on Delivery and Allocation of Healthcare. The COVID-19 pandemic 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 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 COVID-19 Pandemic Impacts and Response and Global Economic Conditions Various governmental measures to slow and control the spread of COVID-19 have led to a shift in healthcare priorities, supply chain constraints and the disruption of economic activities worldwide. As further discussed below, our future operating performance may be subject to further volatility due to the significant uncertainty with respect to the duration and overall impact of the COVID-19 pandemic. The impacts of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows are dependent on certain factors including: • the extent to which resurgences in COVID-19 infections or new strains of the virus, result in the imposition of new governmental lockdowns, quarantine requirements or other restrictions that may disrupt our operations; • the continued momentum of the global economy’s recovery from the pandemic and the degree of pressure that a weakened macroeconomic environment would put on the global demand for our products; and • the effectiveness of vaccines and vaccination efforts. 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. 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, including further sanctions, and the impact it will have on the global economy, supply chains and energy prices generally, and therefore our business. 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. 20 Table of Contents 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, 2023 2022 % 2023 2022 % Revenues $ 286.1 $ 291.1 (1.7) % $ 838.9 $ 854.9 (1.9) % Cost of products sold 96.6 88.2 9.5 270.8 256.9 5.4 Gross Profit 189.5 202.9 (6.6) 568.1 598.0 (5.0) Operating expenses: Selling and administrative expense 87.6 83.8 4.5 245.6 212.9 15.4 Research and development expense 22.6 14.3 58.0 61.6 49.0 25.7 Other operating expenses 28.0 7.7 263.6 65.2 23.5 171.7 Total Operating Expenses 138.2 105.8 30.6 372.4 285.4 30.5 Operating Income 51.3 97.1 (47.2) 195.7 312.6 (37.4) Interest expense, net (27.0) (19.5) nm (79.4) (24.4) nm Other income (expense), net (4.2) (4.0) nm (15.6) (4.1) nm Income Before Income Taxes 20.1 73.6 (72.7) 100.7 284.1 (64.6) Income tax provision 4.9 11.2 (56.3) 36.3 43.3 (16.2) Net Income $ 15.2 $ 62.4 (75.6) % $ 64.4 $ 240.8 (73.3) % Net Income per common share: Basic $ 0.27 $ 1.08 nm $ 1.13 $ 4.17 nm Diluted $ 0.26 $ 1.07 nm $ 1.12 $ 4.14 nm nm = not meaningful Three Months Ended June 30, 2023 Summary (on a comparative basis) Key financial results for the three months ended June 30, 2023 were as follows: • Revenue decreased by $5.0 million to $286.1 million from $291.1 million; • Gross profit decreased by $13.4 million to $189.5 million from $202.9 million. Gross profit as a percent of revenue was 66.2%, as compared to 69.7% in the prior year comparative period; • Operating income decreased by $45.8 million to $51.3 million from $97.1 million; and • Net income decreased by $47.2 million to $15.2 million from $62.4 million. Dollar amounts are in millions except per share amounts or as otherwise specified. 21 Table of Contents Nine Months Ended June 30, 2023 Summary (on a comparative basis) Key financial results for the nine months ended June 30, 2023 were as follows: • Revenue decreased by $16.0 million to $838.9 million from $854.9 million; • Gross profit decreased by $29.9 million to $568.1 million, compared to $598.0 million. Gross profit as a percent of revenue was 67.7%, as compared to 69.9% in the prior year comparative period; • Operating income decreased by $116.9 million to $195.7 million from $312.6 million; and • Net income decreased by $176.4 million to $64.4 million from $240.8 million. Revenues Our revenues decreased by $5.0 million, or 1.7%, to $286.1 million for the three months ended June 30, 2023 as compared to revenues of $291.1 million for the three months ended June 30, 2022. 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. The decrease in revenues was driven by $4.1 million associated with the negative impact of foreign currency translation primarily due to the strengthening of the U.S. dollar, a $2.3 million decrease in contract manufacturing and sales of non-diabetes products within the U.S. to BD , and $1.8 million of unfavorable changes in price and volume in the U.S. This was partially offset by increases in revenues driven by $3.2 million of favorable changes in price and volume in our International operations. Our revenues decreased by $16.0 million, or 1.9%, to $838.9 million for the nine months ended June 30, 2023 as compared to revenues of $854.9 million for the nine months ended June 30, 2022. The decrease in revenues was primarily driven by $28.1 million associated with the negative impact of foreign currency translation primarily due to the strengthening of the U.S. dollar and $6.2 million of unfavorable changes in price and volume in the U.S. This was partially offset by increases in revenues driven by $12.9 million of favorable changes in price and volume in our International operations and a $5.4 million increase in contract manufacturing and sales of non-diabetes products within the U.S. to BD. Revenues by geographic region are as follows: Three months ended June 30, Nine months ended June 30, 2023 2022 2023 2022 United States $ 153.9 $ 158.0 $ 449.6 $ 450.4 International 132.2 133.1 389.3 404.5 Total $ 286.1 $ 291.1 $ 838.9 $ 854.9 Cost of products sold Cost of products sold increased by $8.4 million, or 9.5%, to $96.6 million for the three months ended June 30, 2023 as compared to $88.2 million for the three months ended June 30, 2022. Cost of products sold as a percentage of revenues was 33.8% for the three months ended June 30, 2023 as compared to 30.3% for the three months ended June 30, 2022. Cost of products sold increased by $13.9 million, or 5.4%, to $270.8 million for the nine months ended June 30, 2023 as compared to $256.9 million for the nine months ended June 30, 2022. Cost of products sold as a percentage of revenues were 32.3% for the nine months ended June 30, 2023 as compared to 30.1% in the nine months ended June 30, 2022. The increases in cost of products sold for the three and nine month comparative periods were primarily driven by the impact of inflation on the costs of certain raw materials (including freight), direct labor, and overhead. The increase for the nine month comparative period was also driven by higher costs associated with the Cannula Supply Agreement with BD post Separation. We intend to continue to work to improve productivity to help partially offset these increased costs. Selling and administrative expenses Selling and administrative expenses increased by $3.8 million, or 4.5%, to $87.6 million for the three months ended June 30, 2023 as compared to $83.8 million for the three months ended June 30, 2022. Selling and administrative expenses increased by $32.7 million, or 15.4%, to $245.6 million for the nine months ended June 30, 2023 as compared to $212.9 million for the nine months ended June 30, 2022. The increases for the three and nine month comparative periods were 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. Dollar amounts are in millions except per share amounts or as otherwise specified. 22 Table of Contents Research and development expenses Research and development expenses increased by $8.3 million, or 58.0%, to $22.6 million for the three months ended June 30, 2023 as compared to $14.3 million for the three months ended June 30, 2022. Research and development expenses increased by $12.6 million, or 25.7%, to $61.6 million for the nine months ended June 30, 2023 as compared to $49.0 million for the nine months ended June 30, 2022. The increases for the three and nine month comparative periods were primarily driven by increased investment in our insulin patch pump program. The increase for the nine month comparative period was also driven by amounts paid in connection with a collaboration arrangement. For details on the collaboration arrangement refer to Note 4 within the Notes to Condensed Consolidated Financial Statements within this Form 10-Q. Other operating expenses We incurred other operating expenses of $28.0 million and $7.7 million for the three months ended June 30, 2023 and 2022, respectively, and $65.2 million and $23.5 million for the nine months ended June 30, 2023 and 2022, respectively, driven by costs related to the Separation. The costs incurred primarily relate to accounting, auditing, legal services, supply chain, employee retention, costs associated with the implementation of the Company's new ERP, and certain other costs to establish certain stand-alone functions to assist with the transition to being a stand-alone entity. Interest expense, net Interest expense, net increased by $7.5 million to $27.0 million for the three months ended June 30, 2023 as compared to $19.5 million for the three months ended June 30, 2022. Interest expense, net increased by $55.0 million to $79.4 million for the nine months ended June 30, 2023 as compared to $24.4 million for the nine months ended June 30, 2022. The increase for the three month comparative period is primarily a result of higher interest rates on our variable rate debt. The increase for the nine month comparative period was primarily a result of debt outstanding for a longer period of time for fiscal year 2023 as compared to fiscal year 2022 and higher interest rates on our variable rate debt. 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 11 within the Notes to Condensed Consolidated Financial Statements within this Form 10-Q for a further description of our long-term debt. Other income (expense), net Other income (expense), net, was $(4.2) million and $(4.0) million for the three months ended June 30, 2023 and 2022, respectively and $(15.6) million and $(4.1) million for the nine months ended June 30, 2023 and 2022, respectively. The costs incurred primarily relate to amounts due to BD for income taxes payable incurred in deferred jurisdictions where BD is considered the primary obligor. Income tax provision The effective tax rates were 24.4% and 15.2% for the three months ended June 30, 2023 and 2022, respectively, and 36.0% and 15.2% for the nine months ended June 30, 2023 and 2022, respectively. The increase in the Company’s effective tax rates for both comparative periods are primarily due to an increase in the valuation allowance on the utilization of interest expense carryforwards related to U.S. interest deduction limitation rules, higher tax expense on undistributed earnings of foreign subsidiaries and an increase in non-deductible expenses; partially offset by lower U.S. tax expense on earnings of foreign affiliates. LIQUIDITY AND CAPITAL RESOURCES 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. Interest payments began in August 2022 . Dollar amounts are in millions except per share amounts or as otherwise specified. 23 Table of Contents 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. Such quarterly principal payments are calculated as 0.25% of the initial principal amount, with the remaining balance payable upon maturity. Principal amounts repaid under the Term Loan may not be reborrowed by us. Borrowings under the Revolving Credit Facility bear interest, at Embecta’s option, initially at an annual rate equal to (a) in the case of loans denominated in 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, 2023, 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. Interest payments began in August 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. 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, redeem or repurchase equity interests, and create or become subject to liens. As of June 30, 2023, we were in compliance with all of such covenants. The following is a summary of Embecta's total debt outstanding as of June 30, 2023: Term Loan $ 938.1 5.00% Notes 500.0 6.75% Notes $ 200.0 Total principal debt issued $ 1,638.1 Less: current debt obligations (9.5) Less: debt issuance costs and discounts (33.6) Long-term debt $ 1,595.0 The schedule of principal payments required on long-term debt for the next five years and thereafter is as follows: 2023 $ 2.4 2024 $ 9.5 2025 $ 9.5 2026 $ 9.5 2027 $ 9.5 Thereafter $ 1,597.7 Certain measures relating to our total debt outstanding as of June 30, 2023 were as follows: Total debt $ 1,604.5 Short-term debt as a percentage of total debt 0.6 % Weighted average cost of total debt 7.2 % For additional information related to the Company's debt related activities, refer to Note 11 within the Notes to Condensed Consolidated Financial Statements within this Form 10-Q. Dollar amounts are in millions except per share amounts or as otherwise specified. 24 Table of Contents Leases In conjunction with the Separation, we entered into a lease agreement with BD pursuant to which the Company would lease approximately 278,000 square feet of manufacturing space and equipment at BD's manufacturing facility in Holdrege, Nebraska for an initial term of ten years. The lease is classified as a finance lease. The Company has an option to extend the lease term for an additional period of up to five years. 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 has an initial term of ten years. The lease is classified as an operating lease. The Company has options to extend the lease for an additional period of six years and to extend for a subsequent additional period of four years after the expiration of the first extension period. Maturities of our finance lease and operating lease liabilities as of June 30, 2023 by fiscal year are as follows: Finance Lease Operating Leases Total 2023 $ 0.9 $ 0.7 $ 1.6 2024 3.6 3.8 7.4 2025 3.7 2.9 6.6 2026 3.7 2.6 6.3 2027 3.8 2.2 6.0 Thereafter 40.1 13.4 53.5 Total lease payments $ 55.8 $ 25.6 $ 81.4 For additional information related to our leases, refer to Note 16 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 2023 and February 2023, Moody’s Investor Services and Standard & Poor’s Ratings Services published updates to our credit ratings of Ba3 and B+, respectively. These ratings remain unchanged from the initial published ratings from January 2022. The following table summarizes our Condensed Consolidated Statements of Cash Flows: Nine Months Ended June 30, 2023 2022 Net cash provided by (used for) Operating activities $ 38.1 $ 354.2 Investing activities $ (17.3) $ (15.4) Financing activities $ (39.0) $ (40.9) Dollar amounts are in millions except per share amounts or as otherwise specified. 25 Table of Contents Net Cash Flows from Operating Activities Net cash provided by operating activities during the nine months ended June 30, 2023 was attributable to net income of $64.4 million and net adjustments of $26.3 million, which includes $50.6 million of non-cash adjustments that primarily relate to depreciation and amortization, stock-based compensation, deferred income taxes and postretirement benefits, and a use of cash of $76.9 million related to changes in our assets and liabilities. This was driven by an increase in amounts due from BD of $54.8 million, which is primarily related to factored receivables for which payment has not yet been collected from BD as of June 30, 2023; a $42.5 million increase in inventories which is primarily driven by a concerted effort to build inventory to meet expected demand; an increase of $29.2 million in prepaid expenses and other as a result of increased subscription contracts and increases in net assets for deferred closing entities; and an $18.1 million increase in other assets and liabilities, net, is primarily due to costs capitalized related to the implementation of the Company's new ERP. This was partially offset by an increase of $53.3 million in accounts payable, accrued expenses and other current liabilities, due to increases in net liabilities for deferred closing entities, which was offset by our annual incentive bonus payment in January 2023; and an increase of $11.3 million in income and other net taxes payable that is primarily due to the timing of required tax payments. 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 nine months ended June 30, 2022 was attributable to net income of $240.8 million and net adjustments of $113.4 million, which includes $47.2 million of non-cash adjustments related to depreciation and amortization, stock-based compensation, deferred income taxes and postretirement benefits, and $66.2 million of cash provided relating to changes in our assets and liabilities. Cash provided relating to changes in our assets and liabilities was driven by a decrease in trade receivables of $123.6 million, an increase of $73.1 million in accounts payable, accrued expenses and other current liabilities, an increase of $10.8 million in income and other net taxes payable, and a decrease of $7.7 million in other assets and liabilities, net, partially offset by an increase in amounts due from BD of $99.6 million, an increase in prepaid expenses and other of $25.8 million, and an increase in inventories of $23.6 million. The decrease in trade receivables primarily relates to the Factoring Agreements, in which embecta transfers certain trade receivable assets to BD in exchange for cash. The increase in accounts payable, accrued expense and other current liabilities relates to current liabilities with BD primarily for inventory purchases. The increase in income and other net taxes payable is primarily due to the timing of required tax payments. 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. Increases in prepaid expenses and other are primarily driven by increased prepaid service contracts related to information technology infrastructure as we transition to our own systems. The increase in inventories is primarily driven by a concerted effort to build inventory to meet expected demand as we execute our separation and stand-up projects. Net Cash Flows from Investing Activities Net cash used for investing activities was primarily comprised of capital expenditures of $17.3 million and $15.0 million during the nine months ended June 30, 2023 and 2022, respectively, to support further expansion of our business and operations. Net Cash Flows from Financing Activities Net cash used for financing activities for the nine months ended June 30, 2023, was attributable to $25.8 million of dividend payments, $7.1 million of required payments on long-term debt, $3.4 million of payments related to tax withholding for stock-based compensation, and $2.7 million in payments on our finance lease. Net cash used for financing activities for the nine months ended June 30, 2022, was attributable to $1,266.0 million of net consideration paid to BD in connection with the Separation, $182.7 million related to net transfers to BD, $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, and $2.4 million of required payments on long-term debt. This was offset by proceeds from the issuance of long-term debt of $1,450.0 million. On August 8, 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 September 13, 2023 to stockholders of record at the close of business on August 25, 2023. Contractual Obligations Our contractual obligations as of June 30, 2023, 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 Dollar amounts are in millions except per share amounts or as otherwise specified. 26 Table of Contents to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2022 Form 10-K for further details. As of June 30, 2023, 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. 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. There have been no changes to our critical accounting policies as of June 30, 2023. Cautionary Statements Regarding Forward-Looking Statements 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 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. Such risks and uncertainties include, but are not limited to: • Competitive factors that could adversely affect Embecta’s operations, including adoption of new drug therapies for treatment of diabetes, new product introductions by Embecta’s competitors, the development of new technologies, lower cost producers that create pricing pressure, and consolidation resulting in companies with greater scale and market presence than Embecta. • Any events that adversely affect the sale or profitability of one of Embecta’s key products or the revenue delivered from sales to its key customers. • Any failure by BD to perform its obligations under the various separation agreements entered into in connection with the Separation and distribution, including the cannula supply agreement. • Increases in operating costs, including fluctuations in the cost and availability of oil-based resins, 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. • 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 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 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 Dollar amounts are in millions except per share amounts or as otherwise specified. 27 Table of Contents 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 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, 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 the 2022 Form 10-K. 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.