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Item 7. Management’s Discussion and Analysis

2023-11-29 compared with 2022-12-22 · 126 added, 200 removed, 187 unchanged (64% of the section changed)

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Company Overview

Embecta is 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.

We are a leading global medical device company focused on providing solutions to improve the health and well-being of people living with diabetes.

As we approach our 100-year centennial, we believe that our products have become one of the most widely recognized and respected brands in diabetes management throughout the world.

We estimate that our products are used by more than 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.

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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.

Our conventional 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.

Our conventional 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 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.

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 (the "Separation Date").

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.

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".

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Prior to the Separation, the Company was referred to as the Diabetes Care Business.

For periods prior to April 1, 2022, the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K include 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.

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

While certain cash and cash equivalents 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 in Item 8 of this Annual Report on Form 10-K.

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 costs 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 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.

For periods prior to April 1, 2022, the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K 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 period subsequent to April 1, 2022, as a standalone publicly traded company, Embecta presents its financial statements on a consolidated basis.

For the periods subsequent to April 1, 2022, as a standalone publicly traded company, Embecta presents its financial statements on a consolidated basis.

The Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K have been prepared in accordance with accounting principles generally accepted in the United States of America.

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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 GPOs, which generally values lower cost over product features, benefits and quality, have placed significant pressure on Embecta to lower pricing.

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 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 .

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Changes in Clinical Practice.

Increased penetration of oral anti-diabetic drugs (e.g., SGLT-2s & DDP-4s) 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.

Introduction of new drugs and increased penetration of oral anti-diabetic drugs (e.g., SGLT-2s), 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.

Decentralization of Chronic Care.

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Recent Developments

COVID-19 Pandemic Impacts and Response and Global Economic Conditions

Various governmental measures to slow and control the spread of COVID-19 have led to a shift in healthcare priorities, supply chain constraints and the disruption of economic activities worldwide.

As further discussed below, our future

operating performance may be subject to further volatility due to the significant uncertainty with respect to the duration and overall impact of the COVID-19 pandemic.

The impacts of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is dependent on certain factors including:

• the extent to which resurgences in COVID-19 infections or new strains of the virus, result in the imposition of new governmental lockdowns, quarantine requirements or other restrictions that may disrupt our operations;

• the continued momentum of the global economy’s recovery from the pandemic and the degree of pressure that a weakened macroeconomic environment would put on the global demand for our products;

• 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 fiscal years 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 I, Item 1A.

"Risk Factors" for further details.

In addition, our revenues and results of operations may be 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.

We continue to monitor and respond to the escalating conflict in Ukraine and the associated sanctions and other restrictions.

We also are monitoring and responding to the Israel-Hamas war.

As of November 29, 2023, there is no material impact to our business operations and financial performance in Ukraine and Israel.

The full impact of the conflicts on our business operations and financial performance remains uncertain and will depend on future developments, including the severity and duration of the conflicts and their impact on regional and global economic conditions.

We will continue to monitor and respond to the conflicts and assess the related restrictions and other effects on our business.

See Item 1A of this Annual Report on Form 10-K for further details.

In addition, our revenues and results of operations 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 United States 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

For a discussion of Results of Operations of fiscal year 2021 compared to fiscal year 2020 see Exhibit 99.1 to the Company’s General Form For Registration of Securities on Amendment No.

1 to Form 10 dated February 2, 2022.

For a discussion of Results of Operations of fiscal year 2022 compared to fiscal year 2021 see our Annual Report on Form 10-K for the year ended September 30, 2022.

For the years ended September 30, 2023 and 2022, our Consolidated Statements of Income are as follows:

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Year Ended September 30, 2023 Summary (on a comparative basis)

Key GAAP financial results for the year ended September 30, 2022 were as follows:

Key financial results for the year ended September 30, 2023 were as follows:

• Revenue decreased by $8.7 million to $1,120.8 million from $1,129.5 million;

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• Net income decreased by $153.2 million to $70.4 million from $223.6 million.

Key Non-GAAP financial results for the year ended September 30, 2022 were as follows:

• Constant Currency Revenues decreased by 0.5%;

• EBITDA decreased by $198.7 million to $334.5 million from $533.2 million;

• Adjusted EBITDA decreased by $105.6 million to $459.9 million from $565.5 million.

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

Our revenues decreased by $35.8 million, or 3.1%, to $1,129.5 million for the year ended September 30, 2022 as compared to revenues of $1,165.3 million for the year ended September 30, 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, $30.1 million was attributable to unfavorable effects from foreign currency translation primarily attributed to the strengthening of the U.S.

dollar, unfavorable impacts due to volume as a result of decisions to exit certain legacy customer relationships, and to a lesser extent, unfavorable changes to estimated sales deductions in the United States.

This decrease was offset by contract manufacturing revenue recognized during 2022 that commenced subsequent to the Separation Date.

Increases in price favorably impacted our revenues from customers in the United States, Canada, Mainland China, and countries within Central and Southeast Asia while decreases in price unfavorably impacted our revenues from customers in Eastern Europe, the Middle East, and Africa.

Increases in volume favorably impacted our revenues from customers in countries within Central and Southeast Asia, Eastern Europe, the Middle East, and Africa and Canada while decreases in volume unfavorably impacted our revenues from customers in the United States, Latin America and Mainland China.

Our revenues decreased by $8.7 million, or 0.8%, to $1,120.8 million for the twelve months ended September 30, 2023 as compared to revenues of $1,129.5 million for the twelve months ended September 30, 2022.

The decrease in revenues was primarily driven by $26.5 million associated with the negative impact of foreign currency translation primarily due to the strengthening of the U.S.

dollar and a $1.9 million decrease in contract manufacturing related to sales of non-diabetes products to BD.

This was partially offset by $19.7 million of favorable changes in price and volume.

Revenues by geographic region are as follows:

United States $ 601.4 $ 600.3

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Cost of products sold

Cost of products sold decreased by $10.3 million, or 2.8%, to $354.6 million for the year ended September 30, 2022 as compared to $364.9 million for the year ended September 30, 2021.

Cost of products sold increased by $16.3 million, or 4.6%, to $370.9 million for the year ended September 30, 2023 as compared to $354.6 million for the year ended September 30, 2022.

Cost of products sold as a percentage of revenues were 33.1% for the year ended September 30, 2023 as compared to 31.4% for the year ended September 30, 2022.

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 fiscal year 2021 and, to a lesser extent, a decrease in revenues in the current year period.

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

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

Operating expenses

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

The increase 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.

Operating expenses in 2023 and 2022 were as follows:

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Our selling and administrative expenses increased by $46.5 million, or 15.8%, to $341.3 million for the year ended September 30, 2023 as compared to $294.8 million for the year ended September 30, 2022.

The increase period over period was primarily attributed to compensation and benefit costs resulting from increased headcount to support and enable Embecta to operate as a stand-alone publicly-traded company and, to a lesser extent, increases in marketing and advertising as a result of the Separation.

The increase year over year 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.

Also contributing to the increase period over period were costs incurred attributed to the LSA with BD whereby BD provides Embecta with certain order-to-cash and logistics services to support certain commercial operations.

Research and development expenses

Our research and development expenses increased by $18.3 million, or 27.4%, to $85.2 million for the year ended September 30, 2023 as compared to $66.9 million for the year ended September 30, 2022.

The increase was primarily attributed to increased investment in new products which includes our insulin patch pump.

The increase was primarily attributed to increased investment in new products which includes our insulin patch pump as well as amounts paid in connection with a collaboration arrangement.

For details on the collaboration arrangement refer to Note 5 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

Impairment expenses

We incurred impairment charges of $58.9 million during the year ended September 30, 2022 associated with the decision to abandon certain manufacturing production lines in the United States that were previously included as a component of Construction in progress within Property, Plant and Equipment, net in our Consolidated Balance Sheets in Item 8 of this Annual Report on Form 10-K.

During the year ended September 30, 2023, the Company recorded impairment charges of $2.5 million related to the abandonment of certain manufacturing equipment in China that is no longer in use that were inherited as part of the spin from BD.

These assets were previously included as a component of Machinery, equipment and fixtures within Property, Plant and Equipment in our Consolidated Balance Sheets in Item 8 of this Annual Report on Form 10-K.

The impairment charges are recognized within Impairment expense in the Consolidated Statements of Income.

During the year ended September 30, 2022, the Company recorded impairment charges of $58.9 million related to the abandonment of certain manufacturing production lines in the United States that are no longer expected to be completed.

These assets were previously included as a component of Construction in progress within Property, Plant and Equipment in our Consolidated Balance Sheets in Item 8 of this Annual Report on Form 10-K.

The impairment charges are recognized within Impairment expense in the Consolidated Statements of Income.

Other operating expenses

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The costs incurred primarily relate to accounting, auditing, and legal services, including costs to establish certain stand-alone corporate functions and other costs associated with the abandonment of certain manufacturing production lines discussed above.

As we continue to stand-up various corporate functions as a stand-alone publicly-traded company, we expect to incur similar costs in fiscal 2023.

As we continue to stand-up various corporate functions as a stand-alone publicly-traded company, we expect to incur costs associated with the same type of activities in fiscal year 2024, however, we currently expect the amount of those costs to be less in fiscal year 2024 as compared to fiscal year 2023.

During the year ended September 30, 2023, the Company recorded approximately $5.6 million of severance costs related to the optimization of certain business functions.

These costs were primarily recorded in the U.S.

and severance costs were not material to any comparable prior year periods presented.

Interest expense, net

Interest expense, net increased to $46.2 million for the year ended September 30, 2022, primarily due to the issuance of long-term 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 in fiscal 2023.

Interest expense, net increased to $107.0 million for the year ended September 30, 2023, from $46.2 million for the year ended September 30, 2022 primarily as a result of debt having been 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.

This was offset by an increase in interest income of $8.8 million as a result of amounts held in interest bearing accounts and money market funds.

If the United States Federal Reserve maintains interest rates at these levels, or continues to raise the benchmark interest rate, then we would expect the interest expense on our variable rate debt to increase in fiscal year 2024 as compared to fiscal year 2023.

See "Liquidity and Capital Resources" below and Note 12 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a further description of our long-term debt.

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Other income (expense), net decreased by $2.0 million to $(8.8) million for the year ended September 30, 2023 as compared to $(6.8) million for the year ended September 30, 2022.

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

Other income (expense), net was not material for the year ended September 30, 2021.

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 decrease in the Company's effective income tax rate from 2022 as compared to 2021 was primarily due to the change in geographical mix of earnings and favorable unrecognized tax benefits recorded in 2022, partially offset by tax expense that has been provided on undistributed earnings of foreign subsidiaries.

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, stockholders 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) stock-based compensation, (ii) non-cash long-lived fixed asset, goodwill and/or intangible asset impairment charges, (iii) restructuring-related costs, (iv) various costs that will enable the Company to operate as a stand-alone publicly traded company, and (v) 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 years ended September 30, 2022 and 2021, the reconciliation of net income to EBITDA and Adjusted EBITDA was as follows:

Net income $ 223.6 $ 414.8

Interest expense, net 46.2 —

Income taxes 33.0 80.1

Depreciation and amortization 31.7 38.3

EBITDA 334.5 533.2

Stock-based compensation expense 18.7 12.8

One-time stand up costs (1)

Other costs associated with impairment (2)(5)

European regulatory initiative-related costs ("EU MDR") (3)

Restructuring-related costs (4)

Impairment charges (5)

Adjusted EBITDA $ 459.9 $ 565.5

(1) One-time stand up costs incurred during the year ended September 30, 2022 primarily relate to costs to establish certain stand-alone corporate functions.

Approximately $37.3 million of the one-time stand up costs are recorded in Other operating expenses and $0.9 million are recorded in S elling, general and administrative expenses .

For the year ended September 30, 2021, $4.8 million of the one-time stand up costs are recorded in Other operating expenses .

During 2022, the Company updated its definition for adjustments to include one-time stand up costs.

This amount was not previously included as an adjustment for fiscal year 2021 as presented in Embecta’s Registration Statement on Form 10.

(2) Represents the expected costs of outstanding purchase commitments associated with the abandonment and impairment of certain manufacturing lines.

Please see footnote (5) below.

These costs are recorded in Other operating expenses .

(3) Represents costs required to develop processes and systems to comply with regulations such as the European Union Medical Device Regulation ("EU MDR") and General Data Protection Regulation ("GDPR") which represent a significant, unusual change to the existing regulatory framework.

We consider these costs to be duplicative of previously incurred costs and/or one-off costs, which are limited to a specific period of time.

These costs were recorded in Research and development expense .

During 2022, the Company updated its definition for adjustments to include costs associated with complying with EU MDR.

This amount was not previously included as an adjustment for fiscal year 2021 as presented in Embecta’s Registration Statement on Form 10.

(4) Represents restructuring-related costs recorded in Other operating expenses .

(5) Relates to impairment charges associated incurred during fiscal years 2022 and 2021.

During 2022, the Company updated its definition for adjustments to include fixed asset, goodwill and/or intangible asset impairment charges.

For 2021, this amount was not previously included as an adjustment as presented in Embecta’s Registration Statement on Form 10.

The impairment charges recorded in 2022 and 2021 were recorded in Impairment Expense and Cost of products sold , respectively.

Each reporting period, we face currency exposure that arises from translating the results of our worldwide operations to the United States dollar at exchange rates that fluctuate from the beginning of such period.

A stronger United States 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 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 years ended September 30, 2022 and 2021, the reconciliation of revenue growth to Constant Currency was as follows:

2022 2021 Total Change Estimated FX Impact Constant Currency Change

Revenues $ 1,129.5 $ 1,165.3 (3.1) % (2.6) % (0.5) %

The increase in the Company's effective income tax rate for fiscal year 2023 as compared to fiscal year 2022 was primarily due to the establishment of a valuation allowance against interest expense carryforwards in the U.S., an increase in U.S.

tax on foreign earnings primarily because of limitations on the utilization of foreign tax credits and higher withholding taxes on unremitted foreign earnings;

partially offset by increased tax benefits from non-taxable items and change in geographical mix of earnings.

In addition, for fiscal year 2023 the Company recorded a tax benefit for the establishment of net deferred tax assets incurred in connection with the ongoing separation of the Diabetes Care Business from BD partially offset by a return to provision adjustment from the prior year.

As of September 30, 2023, the Company has recorded deferred taxes on the undistributed earnings of foreign subsidiaries.

The vast majority of these taxes were accrued, in part, because the Company does not meet certain holding period requirements for stock ownership.

During fiscal year 2024, the Company anticipates that it will meet these requirements at

which time approximately $18.0 million of the accrued balance as of September 30, 2023 will be recorded as a reduction to income tax expense.

LIQUIDITY AND CAPITAL RESOURCES

For discussion on Liquidity and Capital Resources pertaining to the fiscal years 2021 and 2020 see Exhibit 99.1 to the Company’s General Form For Registration of Securities on Amendment No.

1 to Form 10 dated February 2, 2022, which is incorporated by reference herein.

For discussion on Liquidity and Capital Resources pertaining to the fiscal years 2022 and 2021 see our Annual Report on Form 10-K for the year ended September 30, 2022.

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 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.

Debt-Related Activities

Up to the date of Separation on April 1, 2022, Embecta was dependent upon BD for all of its working capital and financing requirements.

Embecta has historically generated, and expects to continue to generate, positive cash flow from operations.

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

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 (the "5.00% Notes").

Interest payments on the 5.00% Notes are due semi-annually in February and August until maturity.

Interest payments began 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.

Subsequently this borrowing has been continued for additional 3-month periods, most recently extended until December 31, 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 until maturity.

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

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As of September 30, 2023, 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 (the "Related Party Notes").

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, as amended.

As of April 1, 2022, the 6.75%

Notes became third party debt of Embecta.

The 6.75% Notes are due February 2030.

Additionally, Embecta has outstanding $200.0 million of senior secured notes (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.

The credit agreement and the indentures for the 5.00% and 6.75% Notes contain customary financial covenants, including a total net leverage ratio covenant, which measures the ratio of (i) consolidated total net debt to (ii) consolidated earnings before interest, taxes, depreciation and amortization, and subject to other adjustments, must meet certain defined limits which are tested on a quarterly basis in accordance with the terms of the credit agreement and indenture governing the 5.00% Notes.

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 indentures governing the 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 September 30, 2023, we were in compliance with all of such covenants.

The credit agreement and the senior secured notes are secured by substantially all assets of Embecta and each subsidiary guarantor, subject to certain exceptions.

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 credit agreement and the senior secured are secured by substantially all assets of Embecta and each subsidiary guarantor, subject to certain exceptions.

The following is a summary of Embecta's total debt outstanding as of September 30, 2023:

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Weighted average cost of total debt 7.1 %

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

The lease is classified as a finance lease.

Base rent payments commenced in the third quarter of 2022.

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

In addition, our lease portfolio consists of real estate and vehicles that are classified as operating leases.

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

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 September 30, 2023 by fiscal year are as follows:

Finance Lease Operating Leases Total

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Total lease payments $ 54.9 $ 27.5 $ 82.4

On April 1, 2022, we entered into a real estate lease for a new Corporate Headquarters located in Parsippany, New Jersey, United States that has not yet commenced.

The lease is expected to commence during the first half of fiscal year 2023 and is in existence for an initial term of 10 years.

The Company has an option to extend the lease for additional periods of six years and four years, respectively.

Factoring Agreements

In conjunction with the Separation, we entered into Trade Receivables Factoring Agreements (the "Factoring Agreements") with BD, whereby 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 Agreements.

In conjunction with the Separation, we entered into Trade Receivable Factoring Agreements (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.

The following table summarizes our Consolidated Statements of Cash Flows for the years ended September 30, 2022 and 2021:

Twelve Months Ended

September 30,

Net cash provided by (used for)

Operating activities $ 412.2 $ 456.3

Investing activities $ (24.0) $ (39.2)

Financing activities $ (48.0) $ (417.1)

Net Cash Flows from Operating Activities

Net cash provided by operating activities during the year ended September 30, 2022 was attributable to net income of $223.6 million and net adjustments of $188.6 million, which includes $96.2 million of non-cash adjustments related to asset impairment charges, depreciation and amortization, stock-based compensation, deferred income taxes, pension expense, and $92.4 million of net cash provided as a result of favorable changes in working capital.

The favorable changes in working capital were driven by a decrease in trade receivables of $122.7 million and an increase of $73.3 million in accounts payable and accrued expenses.

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 which is settled within a 30 to 45 day time frame.

The increase in amounts for accounts payable and accrued expenses relates to increased compensation related costs associated with increased headcount.

Offsetting the amounts above is an increase in amounts due from BD of $47.0 million, and increases of $23.4 million and $44.0 million in inventories and prepaid expenses and other, respectively.

The increase in amounts due from BD primarily relates to factored receivables for which payment has not yet been collected from BD as of September 30, 2022.

The increase in inventories is primarily driven by a concerted effort to build inventory through fiscal year end 2022 to meet expected demand.

Prepaid expenses and other are primarily driven by increased prepaid service contracts related to information technology infrastructure as we transition to our own systems.

Net cash provided by operating activities during the year ended September 30, 2021 was attributable to net income of $414.8 million and net adjustments of $41.5 million, which includes $71.5 million of non-cash adjustments related to depreciation and amortization, impairment of property, plant and equipment, stock-based compensation, deferred income

taxes, and pension expense, and $30.0 million of net cash used relating to changes in working capital.

The net use of cash relating to working capital was driven by an increase in trade receivables of $31.8 million, increase in inventories of $18.0 million and an increase in prepaid expenses and other of $11.5 million, partially offset by a $30.8 million increase in accounts payable.

The increase in trade receivables and inventory primarily related to higher sales in 2021 as compared to 2020 which led to higher outstanding trade receivables and inventories on hand to satisfy demand.

The increase in prepaid expenses and other was driven by increases in prepaid taxes.

The increase in accounts payable was driven by the timing of our rebate payments, which led to higher accounts payable as of period end, as well as increased accrued freight expenses due to higher sales in the period.

Net Cash Flows from Investing Activities

Net cash used for investing activities was primarily comprised of capital expenditures of $23.6 million and $36.8 million during the years ended September 30, 2022 and 2021 respectively, to support further expansion of our business and operations.

Net Cash Flows from Financing Activities

Net cash used for financing activities for the year ended September 30, 2022, was attributable to $1,266.0 million of net consideration paid to BD in connection with the Separation, $177.9 million related to net transfers to BD, $33.3 million of payments for long-term debt issuance costs, $8.6 million of dividend payments, $5.6 million of payments for debt fees associated with the Revolving Credit Facility, $4.8 million of required payments on long-term debt, and $1.8 million for finance lease payments.

This was offset by proceeds from the issuance of long-term debt of $1,450.0 million.

Net cash used for financing activities for the year ended September 30, 2021 represents net transfers entirely to BD (see Note 4 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K).

Cash and cash equivalents

At September 30, 2022, total worldwide cash and equivalents were $330.9 million.

These assets were largely held in jurisdictions outside of the United States.

We regularly review the amount of cash and cash equivalents held outside of the United States and our historical foreign earnings are used to fund foreign investments or meet foreign working capital and property, plant and equipment expenditure needs.

To fund cash needs in the United States, we rely on ongoing cash flow from United States operations, access to capital markets and remittances from foreign subsidiaries of earnings that are not considered to be permanently reinvested.

In November 2023 and June 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.

Cash and cash equivalents were $326.5 million as of September 30, 2023 as compared to $330.9 million as of September 30, 2022.

The primary sources and uses of cash that contributed to the $4.4 million decrease were:

September 30, 2022 Cash and cash equivalents balance $ 330.9

Cash provided by operating activities 67.7

Cash used for investing activities (26.5)

Cash used for financing activities (48.7)

Effect of exchange rate changes on cash and cash equivalents 3.1

September 30, 2023 Cash and cash equivalents balance $ 326.5

Net cash provided by operating activities was primarily attributable to:

Net income $ 70.4

Non-cash adjustments related to depreciation and amortization, impairment of property, plant and equipment, stock-based compensation, and deferred income taxes 77.3

Increase in accounts payable and accrued expenses 7.9

Decrease in trade receivables 7.0

Increase in inventories (28.8)

Increase in amounts due from/due to Becton, Dickinson and Company (23.2)

Increase in prepaid expenses and other (14.2)

Decrease in income and other net taxes payable (12.6)

Increase in other assets and liabilities, net $ (16.1)

Net cash provided by operating activities $ 67.7

The increase in accounts payable and accrued expenses is primarily due to increases in net liabilities for deferred closing entities, which was offset by our annual incentive bonus payment in January 2023.

The decrease in trade receivables primarily relates to the timing of payments received from customers.

The increase in inventories is primarily driven by a concerted effort to build inventory to meet expected demand in anticipation of our enterprise resource planning ("ERP") system platform go-live dates and process to comply with European Union Regulation MDR.

The increase in amounts due from/due to Becton, Dickinson and Company primarily relates to factored receivables and inventory purchases for which payment has not yet been collected from BD as of September 30, 2023.

Increases in prepaid expenses and other are primarily driven by increased subscription contracts primarily associated with our new ERP platform and increases in net assets for deferred closing entities.

The decrease in income and other net taxes payable was primarily due to the timing of required tax payments.

The increase in other assets and liabilities, net is primarily due to costs capitalized associated with the implementation of our new ERP system.

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 used for investing activities was primarily attributable to $26.5 million of capital expenditures during the year to support further expansion of our business and operations.

Net cash used for financing activities was primarily attributable to:

Dividend payments (34.4)

Payments on long-term debt (9.5)

Payments related to tax withholding for stock-based compensation (3.6)

Payments on finance lease (1.2)

Net cash provided by financing activities $ (48.7)

Contractual Obligations

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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.

Over the next several years, we expect to incur significant costs associated with information technology infrastructure as we continue to 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.

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Our revenues are primarily recognized when the customer obtains control of the product sold, which is generally upon shipment or delivery, depending on the delivery terms specified in the distribution or sales agreement.

Our gross revenues are subject to a variety of deductions, which include rebates, sales discounts and sales returns.

Our gross revenues are subject to a variety of deductions, which include rebates, chargebacks, sales discounts and sales returns.

These deductions represent estimates of the related obligations, and judgment is required when determining the impact of these revenue deductions on gross revenues for a reporting period.

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Stock-Based Compensation

We expense all stock-based payment awards to employees, including grants of stock options, over the requisite service period based on the grant date fair value of the awards.

The fair value of certain stock-based awards is determined using the Black-Scholes-Merton ("BSM") option-pricing model which uses both historical and current market data to estimate the fair value.

This method incorporates various assumptions such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the options.

We expense all stock-based payment awards to employees over the requisite service period based on the grant date fair value of the awards.

The fair value of certain stock-based awards that have been granted in the past are determined using the Black-Scholes-Merton ("BSM") option-pricing model which uses both historical and current market data to estimate the fair value.

This method incorporates various assumptions such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the awards.

Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities at the applicable tax rates.

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The Company conducts business and files tax returns in numerous jurisdictions based on its interpretation of tax laws and regulations.

In evaluating the Company’s tax provision, the Company establishes a reserve for uncertain tax positions unless such positions are determined to be more likely than not of being sustained upon examination based on the technical merits.

In evaluating the Company’s tax provision, the Company establishes a reserve for uncertain tax positions

unless such positions are determined to be more likely than not of being sustained upon examination based on the technical merits.

The Company’s policy is to recognize, when applicable, interest and penalties on uncertain tax positions as part of income tax expense.

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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.

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

Such risks and uncertainties include, but are not limited to:

• Competitive factors that could adversely affect Embecta’s operations, including new product introductions by Embecta’s competitors, the development of new technologies, lower cost producers that create pricing pressure and consolidation resulting in companies with greater scale and market presence than Embecta.

• Any events that adversely affect the sale or profitability of one of Embecta’s key products or the revenue delivered from sales to its key customers.

• 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.

• The risk that Embecta is unable to extend the TSA, the LSA, and other transaction agreements or replace the services, including the Interim Business Continuity Processes, that BD currently provides to it on substantially similar terms as the terms on which BD is providing these services or that BD terminates such services.

• 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.

• 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.

• 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.

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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.

• Any new pandemic, such as COVID-19, or any 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.

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

• The impact of the Separation on Embecta's businesses and the risk that the full 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.

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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-K

Item 7. Management’s Discussion and Analysis