Embecta Corp. 10-K

Item 8. Financial Statements and Supplementary Data. Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Embecta Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Embecta Corp (the Company) as of September 30, 2023 and 2022, the related consolidated statements of income, comprehensive income , equity, and cash flows for each of the three years in the period ended September 30, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 29, 2023 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 42 Income Taxes Description of the Matter As described in Notes 3 and 14 to the consolidated financial statements, the Company’s provision for income taxes post-Separation contemplates its stand-alone legal entity structure. The Company’s income tax provision for 2023 was $35.3 million. In addition, as of September 30, 2023, the Company recorded a liability for unrecognized tax benefits of $7.2 million, and total deferred tax assets and liabilities of $78.1 million and $33.3 million, respectively. Given the multi-jurisdictional nature of the business, the complexity of the tax rules across the various countries the Company operates in, and the stand-alone legal entity structure, auditing management’s accounting for uncertain tax positions required a high degree of auditor judgment and increased extent of effort, including the need to involve our tax subject matter professionals. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s evaluation of uncertain tax positions, including assessment of technical merits of positions. With the support of our tax subject matter professionals, our audit procedures included evaluating the appropriateness of transfer pricing assumptions underlying the income tax provision. For example, we developed an expectation of the foreign income tax expense by jurisdiction and compared it to the recorded balances. We involved our tax subject matter professionals to evaluate the technical merits of the Company’s accounting for its tax positions, including assessing correspondence with the relevant tax authorities and evaluating third-party advice obtained. /s/ ERNST & YOUNG LLP We have served as the Company’s auditor since 2021. New York, New York November 29, 2023 43 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Embecta Corp. Opinion on Internal Control Over Financial Reporting We have audited Embecta Corp’s internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Embecta Corp. (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2023, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company as of September 30, 2023 and 2022, the related consolidated statements of income, comprehensive income and cash flows for each of the three years in the period ended September 30, 2023, and the related notes and our report dated November 29, 2023 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ ERNST & YOUNG LLP New York, New York November 29, 2023 44 Consolidated Statements of Income Embecta Corp. Years Ended September 30 2023 2022 2021 R evenues $ 1,120.8 $ 1,129.5 $ 1,165.3 Cost of products sold (1) 370.9 354.6 364.9 Gross Profit $ 749.9 $ 774.9 $ 800.4 Operating expenses: Selling and administrative expense 341.3 294.8 240.3 Research and development expense 85.2 66.9 63.3 Impairment expense 2.5 58.9 — Other operating expenses 99.4 44.7 4.8 Total Operating Expenses $ 528.4 $ 465.3 $ 308.4 Operating Income $ 221.5 $ 309.6 $ 492.0 Interest expense, net ( 107.0 ) ( 46.2 ) — Other income (expense), net ( 8.8 ) ( 6.8 ) 2.9 Income Before Income Taxes $ 105.7 $ 256.6 $ 494.9 Income tax provision 35.3 33.0 80.1 Net Income $ 70.4 $ 223.6 $ 414.8 Net Income per common share: Basic $ 1.23 $ 3.92 $ 7.28 Diluted $ 1.22 $ 3.89 $ 7.28 (1) For periods prior to the Separation, this income statement line includes cost of products sold from related party inventory purchases. Refer to Note 4 for further detail. See notes to the Consolidated Financial Statements. Dollar amounts are in millions except per share amounts or as otherwise specified. 45 Consolidated Statements of Comprehensive Income Embecta Corp. Years Ended September 30 2023 2022 2021 Net Income $ 70.4 $ 223.6 $ 414.8 Other Comprehensive Income (Loss), net of tax Benefit plan net loss and prior service credit, net of amortization ( 1.6 ) — — Foreign currency translation adjustments 17.4 ( 64.2 ) ( 8.9 ) $ 15.8 $ ( 64.2 ) $ ( 8.9 ) Comprehensive Income $ 86.2 $ 159.4 $ 405.9 See notes to the Consolidated Financial Statements. Dollar amounts are in millions except per share amounts or as otherwise specified. 46 Consolidated Balance Sheets Embecta Corp. September 30 2023 2022 Assets Current Assets Cash and cash equivalents $ 326.5 $ 330.9 Trade receivables, net (net of allowance for doubtful accounts of $ 1.0 million and $ 1.3 million as of September 30, 2023 and September 30, 2022, respectively) 16.7 22.2 Inventories: Materials 32.1 23.4 Work in process 8.1 5.6 Finished products 111.9 93.8 Total Inventories $ 152.1 $ 122.8 Amounts due from Becton, Dickinson and Company 142.4 110.9 Prepaid expenses and other 111.4 77.9 Total Current Assets $ 749.1 $ 664.7 Property, Plant and Equipment, Net 300.2 301.6 Goodwill and Other Intangible Assets 24.7 24.6 Deferred Income Taxes and Other Assets 140.4 95.5 Total Assets $ 1,214.4 $ 1,086.4 Liabilities and Equity Current Liabilities Accounts payable $ 53.5 $ 41.4 Accrued expenses 118.1 104.3 Amounts due to Becton, Dickinson and Company 73.1 66.5 Salaries, wages and related items 62.1 48.5 Current debt obligations 9.5 9.5 Current finance lease liabilities 3.6 3.6 Income taxes 33.6 27.2 Total Current Liabilities $ 353.5 $ 301.0 Deferred Income Taxes and Other Liabilities 57.2 46.1 Long-Term Debt 1,593.9 1,598.1 Non Current Finance Lease Liabilities 31.5 32.6 Commitments and Contingencies Embecta Corp. Equity Common stock, $ 0.01 par value Authorized - 250,000,000 Issued and outstanding - 57,333,353 as of September 30, 2023 and 57,055,327 as of September 30, 2022 0.6 0.6 Additional paid-in capital 27.9 10.0 Accumulated deficit ( 541.1 ) ( 577.1 ) Accumulated other comprehensive loss ( 309.1 ) ( 324.9 ) Total Equity $ ( 821.7 ) $ ( 891.4 ) Total Liabilities and Equity $ 1,214.4 $ 1,086.4 See notes to the Consolidated Financial Statements. Dollar amounts are in millions except per share amounts or as otherwise specified. 47 Consolidated Statements of Equity Embecta Corp. Common Stock Shares Par Value Additional Paid-In Capital Accumulated Deficit Net Investment from Becton, Dickinson and Company Accumulated Other Comprehensive (Loss) Income Total Balance at October 1, 2020 — $ — $ — $ — $ 833.8 $ ( 261.6 ) $ 572.2 Net income attributable to Diabetes Care Business — — — — 414.8 — 414.8 Other comprehensive loss, net of taxes — — — — — ( 8.9 ) ( 8.9 ) Net transfers to Becton, Dickinson and Company — — — — ( 383.8 ) — ( 383.8 ) Balance at September 30, 2021 — — — — 864.8 ( 270.5 ) 594.3 Balance at October 1, 2021 — — — — 864.8 ( 270.5 ) 594.3 Net transfers to Becton, Dickinson and Company including Separation adjustments — — — — ( 390.3 ) 9.8 ( 380.5 ) Issuance of common stock in connection with the Separation and reclassification of Net Investment from Becton, Dickinson and Company 57,012,925 0.6 — ( 613.7 ) 613.1 — — Net consideration paid to Becton, Dickinson, and Company in connection with Separation — — — — ( 1,266.0 ) — ( 1,266.0 ) Net income attributable to Embecta Corp. — — — 45.2 178.4 — 223.6 Other comprehensive loss, net of taxes — — — — — ( 64.2 ) ( 64.2 ) Stock-based compensation plans — — 10.0 — — — 10.0 Common dividends ($ 0.15 per share) — — — ( 8.6 ) — — ( 8.6 ) Issuance of shares related to stock-based compensation plans 42,402 — — — — — — Balance at September 30, 2022 57,055,327 $ 0.6 $ 10.0 $ ( 577.1 ) $ — $ ( 324.9 ) $ ( 891.4 ) Balance at October 1, 2022 57,055,327 $ 0.6 $ 10.0 $ ( 577.1 ) $ — $ ( 324.9 ) $ ( 891.4 ) Net income attributable to Embecta Corp. — — — 70.4 — — 70.4 Other comprehensive loss, net of taxes — — — — — 15.8 15.8 Stock-based compensation plans — — 21.5 — — — 21.5 Common dividends ($ 0.15 per share) — — — ( 34.4 ) — — ( 34.4 ) Issuance of shares related to stock-based compensation plans 278,026 — ( 3.6 ) — — — ( 3.6 ) Balance at September 30, 2023 57,333,353 $ 0.6 $ 27.9 $ ( 541.1 ) $ — $ ( 309.1 ) $ ( 821.7 ) See notes to the Consolidated Financial Statements. Dollar amounts are in millions except per share amounts or as otherwise specified. 48 Consolidated Statements of Cash Flows Embecta Corp. Years Ended September 30 2023 2022 2021 Operating Activities Net income $ 70.4 $ 223.6 $ 414.8 Adjustments to net income to derive net cash provided by operating activities: Depreciation and amortization 32.6 31.7 38.3 Amortization of debt issuance costs 6.4 3.2 — Impairment of property, plant and equipment 2.5 58.9 13.8 Stock-based compensation 21.5 18.7 12.8 Deferred income taxes 14.3 ( 26.5 ) ( 2.8 ) Change in operating assets and liabilities: — Trade receivables, net 7.0 122.7 ( 31.8 ) Inventories ( 28.8 ) ( 23.4 ) ( 18.0 ) Due from/due to Becton, Dickinson and Company ( 23.2 ) ( 47.0 ) — Prepaid expenses and other ( 14.2 ) ( 44.0 ) ( 11.5 ) Accounts payable, accrued expenses and other current liabilities 7.9 76.9 40.2 Income and other net taxes payable ( 12.6 ) 10.3 — Other assets and liabilities, net ( 16.1 ) 7.1 0.5 Net Cash Provided by Operating Activities $ 67.7 $ 412.2 $ 456.3 Investing Activities Capital expenditures ( 26.5 ) ( 23.6 ) ( 36.8 ) Acquisition of intangible assets — ( 0.4 ) ( 2.4 ) Net Cash Used for Investing Activities $ ( 26.5 ) $ ( 24.0 ) $ ( 39.2 ) Financing Activities Proceeds from the issuance of long-term debt — 1,450.0 — Payments on long-term debt ( 9.5 ) ( 4.8 ) — Payment of long-term debt issuance costs — ( 33.3 ) — Payment of revolving credit facility fees — ( 5.6 ) — Payments related to tax withholding for stock-based compensation ( 3.6 ) — — Payments on finance lease ( 1.2 ) ( 1.8 ) — Dividend payments ( 34.4 ) ( 8.6 ) — Net consideration paid to Becton, Dickinson and Company in connection with the Separation — ( 1,266.0 ) — Net transfers to Becton, Dickinson and Company — ( 177.9 ) ( 417.1 ) Net Cash Used for Financing Activities $ ( 48.7 ) $ ( 48.0 ) $ ( 417.1 ) Effect of exchange rate changes on cash and cash equivalents 3.1 ( 9.3 ) — Net Change in Cash and cash equivalents $ ( 4.4 ) $ 330.9 $ — Opening Cash and cash equivalents 330.9 — — Closing Cash and cash equivalents $ 326.5 $ 330.9 $ — See notes to the Consolidated Financial Statements. Dollar amounts are in millions except per share amounts or as otherwise specified. 49 Notes to Consolidated Financial Statements Embecta Corp. Note 1 — Background Embecta Corp. ("Embecta" or the "Company") is a leading global medical device company focused on providing solutions to improve the health and well-being of people living with diabetes. The Company has a broad portfolio of marketed products, including a variety of pen needles, syringes and safety devices, which are complemented by a proprietary digital application designed to assist people with managing their diabetes. The Company primarily sells products to wholesalers and distributors that sell to retail and institutional channels who in turn sell to patients or use the products to deliver insulin injections to patients. On April 1, 2022 (the "Separation Date"), Embecta and Becton, Dickinson and Company ("BD") entered into a Separation and Distribution Agreement (the "Separation and Distribution Agreement"). Pursuant to the Separation and Distribution Agreement, BD agreed to spin off its diabetes care business (the "Diabetes Care Business") into Embecta, a new, publicly traded company (the "Separation"). The Separation occurred by means of a pro-rata distribution (the "Distribution") of all of Embecta’s issued and outstanding shares of common stock on the basis of one share of Embecta common stock, par value $ 0.01 per share, for every five shares of BD common stock, par value $ 1.00 per share, held as of the close of business on March 22, 2023, the record date for the distribution. Embecta is now a standalone publicly traded company and, on April 1, 2022, regular-way trading of Embecta common stock commenced on the Nasdaq Global Select Market under the ticker symbol "EMBC". In connection with the Separation, BD and Embecta entered into various agreements to provide a framework for the relationship between BD and Embecta after the Separation, including, but not limited to, a separation and distribution agreement, a transition services agreement, a tax matters agreement, an employee matters agreement, a cannula supply agreement, contract manufacturing agreements, an intellectual property matters agreement, a logistics services agreement, distribution agreements, factoring and receivables agreements, local support and service agreements and other transaction documents. Note 2 — Basis of Presentation On April 1, 2022, the Company became a standalone publicly traded company, and its financial statements are now presented on a consolidated basis. Prior to the Separation on April 1, 2022, the Company’s historical combined financial statements were prepared on a standalone basis and were derived from BD's consolidated financial statements and accounting records. The financial statements for all periods presented, including the historical results of the Company prior to April 1, 2022, are now referred to as "Consolidated Financial Statements", and have been prepared pursuant to the rules and regulations for reporting on Form 10-K. Periods Prior to Separation Prior to the Separation, the Company was referred to as the Diabetes Care Business. The assets, liabilities, revenue and expenses of the Diabetes Care Business were reflected in the combined financial statements on a historical cost basis, as included in the consolidated financial statements of BD, using the historical accounting policies applied by BD. The Consolidated Financial Statements did not purport to reflect what the Company’s results of operations, comprehensive income, financial position, equity or cash flows would have been had the Company operated as a standalone public company during the periods presented. The Diabetes Care Business had historically functioned together with the other businesses controlled by BD. Accordingly, the Diabetes Care Business relied on BD’s corporate and other support functions for its business. Therefore, for the period prior to the Separation, certain corporate and shared costs were allocated to the Diabetes Care Business based on a specific identification basis or, when specific identification was not practicable, a proportional cost allocation method, including: i. expenses related to BD support functions, including expenses for facilities, executive oversight, treasury, finance, legal, human resources, shared services, compliance, procurement, information technology and other corporate functions. ii. certain manufacturing and supply costs incurred by BD, including facility management, distribution, logistics, planning and global quality. iii. certain costs incurred by BD’s Medication Delivery Solutions organizational unit in relation to selling and marketing activities, and related administrative support functions. iv. certain costs incurred by BD for activities related to device research and development, as well as medical and regulatory affairs. v. stock-based compensation expenses (see Note 10). vi. certain compensation expenses maintained on a centralized basis such as certain employee benefit expenses. Dollar amounts are in millions except per share amounts or as otherwise specified. 50 Management believes these cost allocations were a reasonable reflection of the utilization of services provided to, or the benefit derived by, the Diabetes Care Business during the period prior to the Separation, though the allocations may not be indicative of the actual costs that would have been incurred had the Diabetes Care Business operated as a standalone public company. Actual costs that may have been incurred if the Diabetes Care Business had been a standalone company would depend on a number of factors, including the chosen organizational structure, whether functions were outsourced or performed by Diabetes Care Business employees, and strategic decisions made in areas such as manufacturing, selling and marketing, research and development, information technology and infrastructure. BD utilized a centralized approach to cash management and the financing of its operations. Cash generated by the Diabetes Care Business was routinely transferred into accounts managed by BD’s centralized treasury function and cash disbursements related to operations prior to the Separation were funded as needed by BD. Balances held by the Diabetes Care Business with BD for cash transfers and loans were reflected as Amounts due to Becton, Dickinson and Company prior to the Separation. All other cash and cash equivalents and related transfers between BD and the Diabetes Care Business were generally held centrally through accounts controlled and maintained by BD and were not specifically identifiable to the Diabetes Care Business. Accordingly, such balances were accounted for through Net Investment from Becton, Dickinson and Company . BD’s third-party debt and related interest expense were not attributed to the Diabetes Care Business because the business was not the legal obligor of the debt and the borrowings were not specifically identifiable to the business. For the Diabetes Care Business, transactions with BD affiliates were included in the Consolidated Statements of Income and related balances were reflected as Amounts due to Becton, Dickinson and Company , Amounts due from Becton, Dickinson and Company or Related Party Loans Payable . Other balances between the Diabetes Care Business and BD were considered to be effectively settled in the Consolidated Financial Statements at the time the transactions were recorded. As the separate legal entities that made up the Diabetes Care Business were not historically held by a single legal entity, Net Investment from Becton, Dickinson and Company was shown in lieu of stockholders’ equity in these Consolidated Financial Statements. Net Investment from Becton, Dickinson and Company represented BD’s interest in the recorded assets of the Diabetes Care Business and the cumulative investment by BD through the date of the Separation, inclusive of operating results. For periods prior to the Separation, income tax expense and tax balances in the Consolidated Financial Statements were calculated on a separate tax return basis. The separate tax return method applies the accounting guidance for income taxes to the standalone financial statements as if the Company was a separate taxpayer and a standalone enterprise. Management believes the assumptions supporting the allocation and presentation of income taxes on a separate return basis are reasonable. The provision for income taxes for the period prior to the Separation was calculated by applying an estimated effective income tax rate for the full year to ordinary income adjusted by the tax impact of discrete items. As of the Separation Date Certain assets and liabilities, including patents and unrecognized tax benefits that were included in the Consolidated Balance Sheet prior to the Separation, have been retained by BD post-Separation and therefore were transferred to BD through Net Investment from Becton, Dickinson and Company in the Company's Consolidated Financial Statements. In connection with the Separation, additional pension assets, deferred tax assets, other compensation obligations, and certain other assets and liabilities were transferred to the Company through Net Investment from Becton, Dickinson and Company , and the Company recorded these in the Consolidated Balance Sheet. As part of the Separation, Net Investment from Becton, Dickinson and Company was reclassified as Common Stock and Accumulated Deficit . Periods Post Separation Following the Separation, certain functions continue to be provided by BD under the Transition Services Agreements or are being performed using Embecta’s own resources or third-party service providers. Additionally, under manufacturing and supply agreements, the Company manufactures certain products for BD, or its applicable affiliate and BD manufactures certain products for the Company. The Company incurred certain costs in its establishment as a standalone public company and expects to incur ongoing additional costs associated with operating as an independent, publicly traded company. All intercompany transactions and accounts within Embecta have been eliminated. Certain reclassifications were made to conform the prior period Consolidated Financial Statements to the current period presentation. Dollar amounts are in millions except per share amounts or as otherwise specified. 51 Note 3 — Summary of Accounting Policies Revenue Recognition The Company recognizes revenue from product sales and considers performance obligations satisfied when the customer obtains control of the product, which is generally upon shipment or delivery, depending on the delivery terms specified in the sales agreement. The Company acts as the principal in its customer arrangements and therefore records revenue on a gross basis. When arrangements include multiple performance obligations, the total transaction price of the contract is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. The point in time upon which shipment or delivery occurs is the most faithful depiction of when control of the goods transfers to the customer. Variable consideration such as rebates, chargebacks, sales discounts, and sales returns are estimated and treated as a reduction of revenue in the same period the related revenue is recognized. These estimates are based on contractual terms, historical practices and current trends, and are adjusted as new information becomes available. Revenues exclude any taxes that the Company collects from customers and remits to tax authorities. Additional disclosures regarding the Company’s accounting for revenue recognition are provided in Note 8. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments with a maturity of three months or less at the date of acquisition. Interest income on Cash and cash equivalents is recorded as earned. Trade Receivables The Company grants credit to customers in the normal course of business and the resulting trade receivables are stated at their net realizable value. The allowance for doubtful accounts represents the Company’s estimate of probable credit losses relating to trade receivables and is determined based on historical experience, current conditions, reasonable and supportable forecasts and other specific account data. Amounts are written off against the allowances for doubtful accounts when the Company determines that a customer account is uncollectible. Inventories Inventories are stated at the lower of approximate cost or net realizable value determined on the first-in, first-out basis. Cloud Computing Arrangements The Company capitalizes costs incurred to implement cloud computing arrangements that are service contracts within Prepaid expenses and other and Deferred Income Taxes and Other Assets in the Company's Condensed Consolidated Balance Sheets. Implementation costs associated with cloud computing arrangements are capitalized when incurred during the application development phase. Once the implementation of a cloud computing arrangement is complete and ready for its intended use, the Company amortizes the costs over the expected term of the hosting arrangement using the straight-line method to the same income statement line as the associated cloud operating expenses. The total balance of capitalized costs associated with these arrangements as of September 30, 2023 is $ 38.0 million which primarily relates to the implementation of the Company's new enterprise resource planning ("ERP") system. These capitalized costs are included in Deferred Income Taxes and Other Assets. Costs amortized during fiscal year ended September 30, 2023 were not material to the Company's consolidated financial results. As of September 30, 2023, cloud computing arrangement assets in-service have useful lives which range from approximately three to nine years . In 2022, the Company commenced on the process of building a new ERP system to replace the existing systems provided by BD. The ERP system is designed to accurately maintain the Company's financial records used to report operating results. The implementation of the ERP will occur in phases. The first phase of the ERP system implementation began in the fourth quarter of 2023. Property, Plant and Equipment Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is principally provided on the straight-line basis over estimated useful lives, which range from 20 to 45 years for buildings, 4 to 13 years for machinery and equipment and 1 to 20 years for leasehold improvements. Depreciation expense was $ 31.5 million in 2023, $ 31.0 million in 2022, and $ 37.2 million in 2021. Property, plant and equipment are periodically reviewed when impairment indicators are present to assess recoverability or a decision has been made to abandon efforts associated with construction in progress assets. Recoverability is determined by comparing the carrying values of the assets or asset groups to the undiscounted cash flows to be generated from the use and eventual disposition of such assets or asset groups. If the asset’s or asset group’s carrying value exceeds such Dollar amounts are in millions except per share amounts or as otherwise specified. 52 undiscounted cash flows, the assets or asset groups are not recoverable and an impairment loss is recognized based on the amount by which the carrying value of the asset or asset group exceeds its calculated fair value. Capitalized Interest The interest cost on capital projects is capitalized and included in the cost of the project. Capitalization commences with the first expenditure for the project and continues until the project is substantially complete and ready for its intended use. When no debt is incurred specifically for a project, interest is capitalized on project expenditures using the weighted average cost of the Company's outstanding borrowings. For the years ended September 30, 2023 and 2022, the Company capitalized $ 4.6 million and $ 5.2 million of interest expense, respectively, into Property, Plant and Equipment, Net and capitalized $ 0.9 million of interest expense into Deferred Income Taxes and Other Assets during the year ended September 30, 2023. Advertising Costs Advertising costs are expensed as incurred and included in S elling and administrative expense . The Company recorded advertising costs of $ 15.5 million, $ 11.6 million, and $ 9.3 million in 2023, 2022 and 2021, respectively. Goodwill and Other Intangible Assets Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired. The Company has one reporting unit. Goodwill is evaluated for impairment as of July 1 each year, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that fair value is less than carrying value. If the Company concludes it is more likely than not that fair value is less than carrying value, a quantitative fair value test is performed. If carrying value is greater than fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of goodwill). The Company completed the annual goodwill impairment test as of July 1, 2023 and concluded that no impairment to goodwill was necessary as the fair value of the Company's one reporting unit was significantly in excess of the carrying value. No goodwill impairments were identified during the years ended September 30, 2022, or 2021, and no accumulated impairment losses are recorded. Amortized intangible assets primarily consist of patents and customer relationships. Patents are generally amortized over 20 years using the straight-line method. Customer relationship assets are generally amortized over periods ranging from 10 to 15 years, using the straight-line method. Other intangibles with finite useful lives are amortized over periods principally ranging from 1 to 40 years, using the straight-line method. Finite-lived intangible assets are periodically reviewed when impairment indicators are present to assess recoverability from future operations using undiscounted cash flows. The carrying values of these finite-lived assets are compared to the undiscounted cash flows they are expected to generate and an impairment loss is recognized in operating results to the extent any finite-lived intangible asset’s carrying value exceeds its calculated fair value. Foreign Currency Translation Generally, foreign subsidiaries’ functional currency is the local currency of operations and the net assets of foreign operations are translated into United States dollars using current exchange rates. The United States dollar results that arise from such translation are included in Accumulated other comprehensive loss . Shipping and Handling Costs The Company considers its shipping and handling costs to be contract fulfillment costs and records them within selling and administrative expense. Shipping and handling costs were $ 36.9 million, $ 27.4 million, and $ 13.6 million in 2023, 2022, and 2021, respectively. Contingencies The Company establishes accruals for future losses which are both probable and can be reasonably estimated (and in the case of environmental matters, without considering possible third-party recoveries). Additional disclosures regarding the Company’s accounting for contingencies are provided in Note 7. Stock-Based Compensation Prior to the Separation, certain of the Company’s employees historically participated in BD’s stock-based compensation plans. Stock-based compensation expense was either allocated to the Company based on a proportionate cost allocation method or recorded based on specific identification. Effective April 1, 2022, the Company established the 2022 Employee and Director Equity Based Compensation Plan (the "Plan"). The Plan provides for the grant of various types of awards, including restricted stock unit ("RSU") awards, stock appreciation rights, stock options, performance-based awards and cash awards. Under the Plan, the exercise price of awards, if any, is set on the grant date and generally may not be less than Dollar amounts are in millions except per share amounts or as otherwise specified. 53 the fair market value per share on that date. The Company measures stock-based compensation for equity awards at fair value on the date of grant and records stock-based compensation as a charge to earnings net of the estimated impact of forfeited awards. For awards that ultimately settle in cash, we treat them as liability awards and mark the award to market each reporting period and recognize any adjustment in our Consolidated Statements of Income. The Company recognizes stock-based compensation cost only for those stock-based awards that are estimated to ultimately vest over their requisite service period, based on the vesting provisions of the individual grants. The cumulative effect on current and prior periods of a change in the estimated forfeiture rate is recognized as compensation cost in earnings in the period of the change (see Note 10). Benefit Plans Prior to the Separation, the defined benefit plans in which the Company participated related primarily to plans sponsored by BD and for which other businesses of BD also participate (the "Shared Plans"). The Company accounted for the Shared Plans as multiemployer plans and therefore the related assets and liabilities were not reflected in the Consolidated Balance Sheets. For such periods prior to the Separation, the Consolidated Statements of Income reflect a proportional allocation of net periodic benefit cost for the Shared Plans associated with the Company. The Company's participation in the defined pension and postretirement benefit plans sponsored by BD concluded upon the completion of the Separation on April 1, 2022. At and after Separation, Embecta became the plan sponsor for certain non-United States defined benefit pension plans (see Note 18). Research and Development Research and development costs are expensed as incurred. Income Taxes Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities at the applicable tax rates. The Company maintains valuation allowances where it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances are included in the tax provision in the period of change. In determining whether a valuation allowance is warranted, the Company evaluates factors such as prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. From time to time, the Company engages in transactions in which tax consequences may be subject to uncertainty. The Company conducts business and files tax returns in numerous jurisdictions based on its interpretation of tax laws and regulations. In evaluating the Company’s tax provision, the Company establishes a reserve for uncertain tax positions unless such positions are determined to be more likely than not of being sustained upon examination based on the technical merits. The Company’s policy is to recognize, when applicable, interest and penalties on uncertain tax positions as part of income tax expense. While the Company believes it has identified all reasonable exposures and the reserve it has established is appropriate under the circumstances, it is possible that additional exposures exist and that exposures may be settled at amounts different than the amounts reserved. It is also possible that changes in facts and circumstances could cause the Company to either materially increase or reduce the carrying amount of its tax reserve. The Tax Cuts and Jobs Act was enacted on December 22, 2017 and introduced an additional United States tax on the earnings of non-United States subsidiaries which are referred to as Global Intangible Low Taxed Income (“GILTI”). The Company has elected to treat GILTI as a period cost. Prior to the Separation, the Company's operations were included in the tax returns of BD. Income taxes as presented in the Consolidated Financial Statements attribute current and deferred income tax assets and liabilities of BD to the Company in a manner that is systematic, rational, and consistent with the asset and liability method prescribed by the accounting guidance for income taxes. The Company's income tax provision prior to the Separation was prepared using the separate return method. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if the Company were a separate taxpayer and a standalone enterprise. The Company believes the assumptions supporting the allocation and presentation of income taxes on a separate return basis are reasonable. Additional disclosures regarding the Company's accounting for income taxes are provided in Note 14. Segment Data The Company operates and reports its financial information as one segment. In making this determination, the Company (i) determines its Chief Operating Decision Maker (“CODM”), (ii) identifies and analyzes potential business components, (iii) Dollar amounts are in millions except per share amounts or as otherwise specified. 54 identifies its operating segments and (iv) determines whether there are multiple operating segments requiring presentation as reportable segments. The Company’s decision to report as one segment is based upon the following: (1) its internal organizational structure; (2) the manner in which its operations are managed; and (3) the criteria used by the Company’s President, its CODM, to evaluate performance of the Company’s business and allocate resources and capital. Fair Value Measurements A fair value hierarchy is applied to prioritize inputs used in measuring fair value. The three levels of inputs used to measure fair value are detailed below. Additional disclosures regarding the Company’s fair value measurements are provided in Note 15. Level 1—Inputs to the valuation methodology which represent unadjusted quoted prices in active markets for identical assets and liabilities. Level 2—Inputs to the valuation methodology which include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability. Level 3—Inputs to the valuation methodology which are unobservable and significant to the fair value measurement. Leases The Company determines whether an arrangement contains a lease at inception. If a lease is identified in an arrangement, the Company recognizes a right-of-use asset and liability in the Company's Consolidated Balance Sheets and determine whether the lease should be classified as a finance or operating lease. The Company does not recognize assets or liabilities for leases with lease terms of less than 12 months. A lease qualifies as a finance lease if any of the following criteria are met at the inception of the lease: (i) there is a transfer of ownership of the leased asset to Embecta by the end of the lease term, (ii) the Company holds an option to purchase the leased asset that the Company is reasonably certain to exercise, (iii) the lease term is for a major part of the remaining economic life of the leased asset, (iv) the present value of the sum of lease payments equals or exceeds substantially all of the fair value of the leased asset, or (v) the nature of the leased asset is specialized to the point that it is expected to provide the lessor no alternative use at the end of the lease term. All other leases are recorded as operating leases. Finance and operating lease assets and liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term using the discount rate implicit in the lease. If the implicit rate is not readily determinable, the Company utilizes its incremental borrowing rate at the lease commencement date. Operating lease assets are further adjusted for prepaid or accrued lease payments. Operating lease payments are expensed using the straight-line method as an operating expense over the lease term. Finance lease assets are amortized to depreciation expense using the straight-line method over the shorter of the useful life of the related asset or the lease term. Finance lease payments are bifurcated into (i) a portion that is recorded as imputed interest expense and (ii) a portion that reduces the finance liability associated with the lease. For lease arrangements that are recognized on the Company’s Consolidated Balance Sheets, the right-of-use asset and lease liability is initially measured at the commencement date based upon the present value of the lease payments due under the lease. These payments represent the combination of the fixed lease and fixed non-lease components that are due under the arrangement. Variable lease payments are expensed as incurred. If a lease includes an option to extend or terminate the lease, the Company reflects the option in the lease term if it is reasonably certain the Company will exercise the option. Finance leases are recorded in Property, Plant and Equipment, Net , Current finance lease liabilities , and Non Current Finance Lease Liabilities and operating leases are recorded in Deferred Income Taxes and Other Assets , Accrued expenses , and Deferred Income Taxes and Other Liabilities in the Company's Consolidated Balance Sheets. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates or assumptions affect reported assets, liabilities, revenues and expenses, including determining the allocation of shared costs and expenses from BD, depreciable and amortizable lives, sales returns and allowances, rebate accruals, restructuring costs, inventory reserves and taxes on income as reflected in the Consolidated Financial Statements. Actual results could differ from these estimates. Net Investment from Becton, Dickinson and Company — Net investment from Becton, Dickinson and Company represented BD’s interest in the recorded assets of the Company and the cumulative investment by BD in the Company through the date of the Separation, inclusive of operating results and the net effect of the transactions with and allocations from BD. See Notes 2 and 4 for additional information. Dollar amounts are in millions except per share amounts or as otherwise specified. 55 Supplemental Disclosures Of Cash Flow Information Cash paid for interest related to debt during the year ended September 30, 2023 and 2022 was $ 111.0 million and $ 38.9 million, respectively. The Company did not have any debt outstanding during the year ended September 30, 2021. Cash paid for income taxes, net of refunds, for the years ended September 30, 2023 and 2022 was $ 30.4 million and $ 15.6 million, respectively. For the year ended September 30, 2021, the Company's current tax liabilities computed under the separate return method are considered to be effectively settled at the time the transaction is recorded, with the offset recorded against Net investment from Becton, Dickinson and Company . Recently Adopted Accounting Standards In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers, as if it had originated the contracts. The Company adopted this guidance at the beginning of fiscal year 2023 and it did not materially impact the Company's Condensed Consolidated Financial Statements. Note 4 — Third Party Arrangements and Related Party Disclosures Pursuant to the Separation, BD ceased to be a related party to Embecta and accordingly, no related party transactions or balances are reported subsequent to April 1, 2022. In connection with the Separation, the Company entered into the Separation and Distribution Agreement, which contains provisions that, among other things, relate to (i) assets, liabilities and contracts to be transferred, assumed and assigned to each of Embecta and BD (including certain deferred assets and liabilities) as part of the Separation, (ii) cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of Embecta's business with Embecta and financial responsibility for the obligations and liabilities of BD’s remaining businesses with BD, (iii) procedures with respect to claims subject to indemnification and related matters, (iv) the allocation among Embecta and BD of rights and obligations under existing insurance policies with respect to occurrences prior to completion of the Separation, as well as the right to proceeds and the obligation to incur certain deductibles under certain insurance policies, and (v) procedures governing Embecta’s and BD’s obligations and allocations of liabilities with respect to ongoing litigation matters that may implicate each of BD’s business and Embecta’s business. Agreements that Embecta entered into with BD that govern aspects of Embecta's relationship with BD following the Separation include, but are not limited to: • Transition Services Agreements ("TSA") - Pursuant to the TSA, Embecta and BD and their respective affiliates provide each other, on an interim, transitional basis, various services, including, but not limited to, information technology, human resources, procurement, quality and regulatory affairs, medical affairs, tax and treasury services. The agreed-upon charges for such services are generally intended to allow the servicing party to charge a price comprised of out-of-pocket costs and expenses and a predetermined profit in the form of a mark-up of such out-of-pocket costs and expenses. The services will terminate no later than 24 months following the Separation, subject to the Extension. The Extension is conditioned upon BD obtaining a supplemental private letter ruling. The service recipient may terminate any services by giving prior written notice to the provider of such services and paying any applicable wind-down charges. • Trade Receivables Factoring Agreements - Embecta and BD entered into trade receivables factoring agreements (the "Factoring Agreements"), under which Embecta transfers certain net trade receivable assets to BD, and pays a service fee calculated as 0.1 % of annual revenues related to countries subject to the Factoring Agreements in exchange for the services provided by BD. Per the terms of the Factoring Agreements, the Company and its relevant subsidiaries sell receivables to the corresponding BD subsidiary in the same jurisdiction and such BD subsidiary collects the receivables from Company's customers. The BD subsidiary assumes the credit risk in respect of the receivables, and accordingly deducts a factoring fee from the purchase price of such receivables. Accordingly, Embecta accounts for the transfer as sales of trade receivables by recognizing an increase to Cash and cash equivalents and a decrease to Trade Receivables, net in the Consolidated Balance Sheets when proceeds from the transactions are received. The transfers are presented in the Consolidated Statements of Cash Flows as operating activities and the related service fee is presented as a component of Other income (expense), net in the Consolidated Statements of Income. • Distribution Agreements - Embecta and BD entered into distribution agreements for certain territories, principally in the Asia Pacific Region and Latin America, whereby a subsidiary of BD is appointed as a distributor of Embecta or its relevant subsidiaries to support certain commercial operations of the diabetes care business on a transitional basis in these regions for a maximum of two years . The distribution agreements will each continue Dollar amounts are in millions except per share amounts or as otherwise specified. 56 until either (1) certain governmental approvals needed to distribute products in the defined territory are obtained and order-to-cash processes and other services of the Company for such territory are migrated to an alternative commercial arrangement between the parties or (2) the applicable services are transitioned to a third-party distributor or independently performed by Embecta, but in any event no longer than the maximum term of two years , except certain such agreements may be extended in connection with the Extension. Embecta shall pay BD a return of 1.5 % to 2.0 % of net revenue for each territory. • Cannula Supply Agreement - Embecta and BD entered into a cannula supply agreement whereby BD sells to Embecta cannulas for incorporation into Embecta's existing syringes and pen needles, safety syringes and safety pen needles, and products currently under development. BD retains ownership of all cannula technology, cannula production activities and the intellectual property rights therein. Embecta is limited to a maximum number of cannulas that it can purchase under the cannula supply agreement, which will be an absolute upper limit of cannulas per year and yearly limits that vary with annual demand. The cannula supply agreement is terminable by Embecta without cause by providing at least 36 months’ written notice; however, such termination can be effective no earlier than five years from the Separation. The cannula supply agreement will be terminable by BD without cause by providing at least 36 months’ written notice; however, such termination can be effective no earlier than ten years from the Separation. However, in the event of a change of control of Embecta, BD has the right to terminate the cannula supply agreement in its sole discretion. The cannula supply agreement will also terminate automatically, subject to a 36 -month wind-down period, if Embecta’s yearly forecast is below the required minimum purchase amount, and the parties have other customary termination rights for material breach or bankruptcy of the other party. • Tax Matters Agreement - Pursuant to the tax matters agreement, Embecta agreed to certain covenants that contain restrictions intended to preserve the tax-free status of the distribution and certain related transactions. Embecta may take certain actions prohibited by these covenants only if Embecta obtains and provides to BD an opinion from a United States tax counsel or accountant of recognized national standing, in either case satisfactory to BD, to the effect that such action would not jeopardize the tax-free status of the distribution and certain related transactions, or if Embecta obtains prior written consent of BD. Embecta is barred from taking any action, or failing to take any action, where such action or failure to act adversely affects or could reasonably be expected to adversely affect the tax-free status of the distribution and certain related transactions or result in certain other taxes to BD, for all relevant time periods. In addition, during the period ending two years after the Separation, these covenants include specific restrictions on Embecta’s (i) discontinuing the active conduct of Embecta’s trade or business; (ii) issuance or sale of stock or other securities (including securities convertible into Embecta stock, but excluding certain compensatory arrangements); (iii) liquidating, merging, or consolidating with any other person; (iv) amending Embecta’s certificate of incorporation (or other organizational documents) or taking any other action, whether through a stockholder vote or otherwise, affecting the voting rights of Embecta common stock; (v) sales of assets outside the ordinary course of business; and (vi) entering into any other corporate transaction which would cause Embecta to undergo a 50 % or greater change in its stock ownership. • Logistics Services Agreement - Embecta and BD entered into a logistics services agreement whereby BD provides Embecta with certain order-to-cash and logistics services to support certain commercial operations for a maximum term of two years , which BD has agreed to extend through March 31, 2024. Embecta will pay BD (i) reimbursable costs, including all shipping costs, selling costs, general administration costs, costs of goods, research and development services costs, and other income and expenses related solely to the diabetes care business, that are incurred by BD directly, as allocated costs or as costs payable to a third party and (ii) a monthly administrative fee of 1.0 % of net revenue (which will increase to 1.25 % of net revenue after January 1, 2024). • Other agreements that Embecta entered into with BD include, but are not limited to, the employee matters agreement ("EMA"), an intellectual property matters agreement, local support services agreements, certain other manufacturing arrangements and a process services agreement and lease agreement for a manufacturing facility located in Holdrege, Nebraska. See Note 17 for more information on the lease agreement for Holdrege. As it pertains to the Distribution Agreements noted above, Embecta has determined it is the principal under these arrangements and is entitled to all the benefits, and is liable for all the risks, related to the inventory and receivables. Additionally, Embecta has latitude in pricing, has the ability to direct BD regarding decisions over inventory, and is responsible for all credit and collections risks and losses associated with the related receivables when there is no factoring agreement in place. As such, Embecta recognizes these sales on a gross basis. The amount due from BD under the above agreements was $ 142.4 million at September 30, 2023 and is reflected in Amounts due from Becton, Dickinson and Company . The amount due to BD under these agreements was $ 73.1 million at September 30, 2023 and is included in Amounts due to Becton, Dickinson and Company . The closing of the transfers of certain assets and liabilities related to the Diabetes Care Business in certain jurisdictions, including China, Mexico, and Italy, as contemplated by the Separation and Distribution Agreement did not occur at Dollar amounts are in millions except per share amounts or as otherwise specified. 57 Separation. The transfers of the remaining relevant local assets and liabilities for these deferred countries are expected to close at a future date. As of September 30, 2023, the Company estimates that amounts due to BD related to certain assets and liabilities in deferred close jurisdictions is $ 29.7 million and are reflected in Accrued expenses . As of September 30, 2023, the Company estimates that amounts due from BD related to certain assets and liabilities in deferred close jurisdictions are $ 8.4 million and is reflected in Prepaid expenses and other . Prior to the Separation, the Company did not operate as a standalone business and the Consolidated Financial Statements were derived from the consolidated financial statements and accounting records of BD. The following disclosure summarizes activity between the Company and BD up to the Separation, including the affiliates of BD that were not part of the Separation. For the years ended September 30, 2022 and 2021, cost of products sold from related party inventory purchases were $ 28.0 million and $ 40.6 million, respectively. For the year ended September 30, 2023 there were no cost of products sold from related party inventory purchases. Corporate and Medical Segment Allocations from BD Prior to the Separation, BD provided significant corporate, finance, human resources, information technology, facilities, and legal services, among others (collectively, “General Corporate Expenses”) to the Company. Some of these services continue to be provided by BD to the Company on a temporary basis under the TSA. For purposes of these Consolidated Financial Statements for the periods prior to the Separation, the General Corporate Expenses have been allocated to the Company. The allocations of General Corporate Expenses are reflected in the Consolidated Statements of Income as follows: Year ended September 30, 2022 2021 Cost of products sold $ 2.3 $ 13.0 Selling and administrative expense 47.9 98.3 Research and development expense 3.5 5.2 Other (income) expense, net ( 0.6 ) ( 1.3 ) Total General Corporate Expenses $ 53.1 $ 115.2 These expenses were allocated to the Company on a pro rata basis of global and regional revenues, headcount, research and development spend and other drivers. Management believes the assumptions underlying the Consolidated Financial Statements, including the assumptions regarding allocating General Corporate Expenses from BD, are reasonable. Nevertheless, the Consolidated Financial Statements for periods prior to the Separation may not include all of the actual expenses that would have been incurred and may not reflect the Company’s Consolidated results of operations, financial position and cash flows had it been a standalone public company during the periods presented. Actual costs that would have been incurred if the Company had been a standalone public company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. Related party transactions The following transactions represent activity in the ordinary course of business between the Company and BD prior to the Separation for certain materials for use in production of certain medical products that were not at arm’s length. The following table summarizes such former related party purchases as follows: Year ended September 30, 2022 2021 Purchases from BD $ 28.0 $ 40.6 All significant intercompany transactions between the Company and BD prior to the Separation have been included in the Consolidated Financial Statements and are considered to be effectively settled for cash at the time the transaction is recorded. For the period prior to the Separation, the total net effect of the settlement of these intercompany transactions is reflected in the Consolidated Statements of Cash Flows as a financing activity and in the Consolidated Balance Sheets as Net Investment from Becton, Dickinson and Company. Prior to the Separation, net transfers to BD were included within Net Investment from Becton, Dickinson and Company . in the Consolidated Statements of Equity and represent the net effect of transactions between the Company and BD. Dollar amounts are in millions except per share amounts or as otherwise specified. 58 The following table summarizes the components of the net transfers to BD as follows: Year ended September 30, 2022 2021 Cash pooling and general financing activities (1) $ 255.9 $ 599.5 Corporate and segment allocations, excluding non-cash stock-based compensation ( 50.4 ) ( 109.9 ) Taxes deemed settled with BD ( 16.2 ) ( 72.5 ) Other Separation related adjustments, net ( 11.4 ) — Net transfers to BD as reflected in the Consolidated Statements of Cash Flows 177.9 417.1 Share-based compensation expense ( 8.5 ) ( 12.5 ) Pension expense ( 3.6 ) ( 9.4 ) Net consideration paid to BD in connection with the Separation 1,266.0 — Related party senior secured notes 197.0 — Other transfers to (from) BD, net 84.1 ( 11.4 ) Net transfers to BD $ 1,712.9 $ 383.8 (1) The nature of activities includes financing activities for capital transfers, cash sweeps and other treasury services. As part of this activity, cash balances were swept to BD on a daily basis under the BD Treasury function and the Company receives capital from BD for its cash needs. Related Party Senior Secured Notes On March 31, 2022, Embecta issued $ 200.0 million of senior secured notes to BD (the "Related Party Notes"). The Related Party Notes issued to BD were not issued for cash and instead were subject to a debt-for-debt exchange which occurred on April 1, 2022. As of April 1, 2022 t he Related Party Notes were reclassified to Long-Term Debt in the Consolidated Balance Sheets as the Related Party Notes are third party debt for periods post Separation. Refer to Note 12 for further information. Note 5 — Collaboration Agreement In March 2023, the Company entered into a collaboration agreement with a third-party to develop and commercialize an interoperable automated glycemic controller ("iAGC") to complement the Company's insulin patch pump currently in development. The Company believes that both parties are active participants in the operating activities of the collaboration and exposed to certain risks and rewards depending on commercial success. The transaction included an upfront payment of $ 2.5 million for project costs, which was expensed to Research and development expense during the year ended September 30, 2023. Upon successful commercialization of the iAGC, the Company will be responsible for the sales and marketing effort and would pay a royalty to the third-party based on future product sales to customers. The Company expects that it will be the principal in the end customer sale and 100 % of product sales will be included in Revenues and any royalty payments and continued project costs after commercialization will be included in Cost of products sold as they are incurred. Note 6 — Other Operating Expenses In connection with the Separation, the Company incurred separation and stand-up costs of approximately $ 92.7 million, $ 44.7 million, and $ 4.8 million during the years ended September 30, 2023, 2022, and 2021, respectively. The costs incurred primarily consist of costs associated with accounting, auditing, legal services, supply chain, employee retention, the implementation of the Company's new ERP system, and certain other costs to establish certain stand-alone functions to assist with the transition to being a stand-alone entity. 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. Liabilities for costs associated with these activities were not material to any period presented. For the years ended September 30, 2022, and 2021 severance costs were not material to the Company's Consolidated Statements of Income. Dollar amounts are in millions except per share amounts or as otherwise specified. 59 Note 7 — Contingencies The Company is subject to potential liabilities under government regulations and various claims and legal actions that are pending or may be asserted from time-to-time. These matters arise in the ordinary course and conduct of the Company’s business and include, for example, commercial, product liability, breach of contract and tort, intellectual property, product liability, environmental, securities and employment matters. The Company intends to continue to defend itself vigorously in such matters and when warranted, take legal action against others. Furthermore, the Company regularly assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its financial statements. An estimated loss contingency is accrued in the Company’s Financial Statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on the Company’s assessment, it has adequately accrued an amount for contingent liabilities currently in existence. The Company does not accrue amounts for liabilities that it does not believe are probable. Litigation is inherently unpredictable, and unfavorable resolutions could occur. As a result, assessing contingencies is highly subjective and requires judgment about future events. The amount of ultimate loss may exceed the Company’s current accruals, and it is possible that its cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies. The Company was not a party to any material legal proceedings at September 30, 2023 or September 30, 2022, nor is it a party to any material legal proceedings as of the date of issuance of these Consolidated Financial Statements. Note 8 — Revenues Measurement of Revenues Payment terms extended to the Company’s customers are based upon commercially reasonable terms for the markets in which the Company’s products are sold. Because the Company generally expects to receive payment within one year or less from when control of a product is transferred to the customer, the Company does not generally adjust its revenues for the effects of a financing component. The Company’s allowance for doubtful accounts reflects the current estimate of credit losses expected to be incurred over the life of its trade receivables. Such estimated credit losses are determined based on historical loss experiences, customer specific credit risk, and reasonable and supportable forward-looking information, such as country or regional risks that are not captured in the historical loss information. Amounts are written off against the allowances for doubtful accounts when the Company determines that a customer account is uncollectible. The allowance for doubtful accounts for trade receivables is not material to the Company’s consolidated financial results. The Company’s gross revenues are subject to a variety of deductions which are recorded in the same period that the underlying revenues are recognized. Such variable consideration includes rebates, sales discounts, and sales returns. Because these deductions represent estimates of the related obligations, judgment is required when determining the impact of these revenue deductions on gross revenues for a reporting period. Rebates provided by the Company are based upon prices determined under the Company’s agreements primarily with its end-user customers. Additional factors considered in the estimate of the Company’s rebate liability include the quantification of inventory that is either in stock at or in transit to the Company’s distributors, as well as the estimated lag time between the sale of product and the payment of corresponding rebates. The Company’s liability attributed to variable consideration at September 30, 2023 and September 30, 2022 was $ 36.4 million and $ 43.8 million, respectively. Sales deductions recorded as a reduction of gross revenues for the years ended September 30, 2023, 2022 and 2021 were $ 411.1 million, $ 336.4 million, and $ 298.7 million respectively. Disaggregation of Revenues Disaggregation of revenue by geographic region is provided within Note 9. Contract Assets and Liabilities The Company does not have contract liabilities. Contract assets consist of the Company’s right to consideration that is conditional upon its future performance pursuant to private label agreements and are presented within Prepaid expenses and other in the Consolidated Balance Sheets. The Company’s contract asset balance was $ 1.2 million as of each of September 30, 2023 and 2022. Note 9 — Segment and Geographical Data Operating segments are identified as components of an enterprise in which discrete financial information is available for evaluation by the CODM in making decisions regarding assessing business performance and allocating resources and capital. Management has concluded that the Company operates in one segment based upon the information used by the CODM in evaluating the performance of the Company’s business and allocating resources and capital. Dollar amounts are in millions except per share amounts or as otherwise specified. 60 Disaggregation of Revenues The Company has distribution agreements with regional or national distributors (including wholesalers and medical suppliers) to ensure broad availability of its products as well as a direct sales force in certain countries and regions around the world. In the United States and Canada, the Company utilizes its large and small key account managers that call on payers, retailers, wholesalers and institutional customers, and field-based territory managers that call on health care providers and pharmacies. In certain markets within Europe, the Company has dedicated sales representatives and in certain regions of the Middle East and Africa, the Company has distribution agreements. In Asia, the Company has distribution agreements and in China, the Company relies on its own commercial team to support sales execution. In Latin America, the Company maintains distribution agreements and direct sales representatives. The Company disaggregates its revenue by geography as management believes this category best depicts how the nature, amount, and timing of revenues and cash flows are affected by economic factors. Revenues by geographic region are as follows: Year ended September 30, 2023 2022 2021 United States $ 601.4 $ 600.3 $ 609.4 International (1) 519.4 529.2 555.9 Total $ 1,120.8 $ 1,129.5 $ 1,165.3 (1) For the years ended September 30, 2023, 2022, and 2021 no individual country outside of the United States generated net revenues that represented more than 10.0% of total revenues. Note 10 — Stock-Based Compensation Periods Prior to Separation Prior to the Separation, certain of the Company's employees participated in stock-based compensation plans sponsored by BD. Under these plans BD granted time-vested restricted stock units ("TVUs"), stock appreciation rights ("SARs"), and performance share units ("PSUs") to certain management level employees. Prior to the Separation on April 1, 2022, share-based compensation expense in the Consolidated Statements of Income is representative of those employees who were dedicated to the Diabetes Care Business. Additionally, share-based compensation expense was allocated to the Diabetes Care Business for BD Corporate and Medical Segment employees who were not dedicated solely to the Diabetes Care Business. This stock-based compensation expense was allocated using a proportional cost allocation method and is included as a component of corporate allocations for periods prior to the Separation. The amounts presented for the periods prior to the Separation are not necessarily indicative of future awards and do not necessarily reflect the costs that the Company would have incurred as an independent company. As of Separation Date and Periods Post Separation In connection with the Separation, and in accordance with the EMA, Embecta's employees with outstanding former BD share-based awards received replacement share-based awards under the Plan. The ratio used to convert the BD share-based awards was designed to preserve the aggregate intrinsic value of the award immediately after the Separation when compared to the aggregate intrinsic value of the award immediately prior to Separation. As a result of the award modification, Embecta will incur $ 6.1 million of incremental stock-based compensation expense. Of this amount, $ 1.8 million and $ 2.3 million was recognized during the year ended September 30, 2023 and 2022, respectively. $ 2.0 million will be recognized at a future date over the awards' remaining vesting period. Effective April 1, 2022, Embecta established the Plan. A total of 7,000,000 shares of common stock are authorized under the Plan. The Plan provides for the grant of various types of awards including RSU awards, SARs, stock options, performance-based awards and other stock-based awards. Under the Plan, the exercise price of awards, if any, is set on the grant date and may not be less than the fair market value per share on that date. Generally SARs have a term of ten years and a three or four year vesting period, subject to limited exceptions. The Company recognizes stock-based compensation cost only for those stock-based awards that are estimated to ultimately vest over their requisite service period, based on the vesting provisions of the individual grants. The cumulative effect on current and prior periods of a change in the estimated forfeiture rate is recognized as compensation cost in earnings in the period of the change. Dollar amounts are in millions except per share amounts or as otherwise specified. 61 On April 1, 2022, Embecta granted 48,192 potential shares to non-employee directors in the form of RSUs, which vest at the earlier of (i) the first anniversary of the grant date or (ii) the date of the first annual meeting of stockholders, subject to continued service of the recipients. On April 4, 2022 and in connection with the Separation, Embecta granted 860,611 of potential shares to members of the Embecta leadership team as a one-time sign-on equity grant, subject to continued employment, comprised of the following: • 172,787 grants of time-vested RSUs which cliff vest on the third anniversary after grant date; • 528,167 grants of SARs which cliff vest on the third anniversary after grant date and; • 27,653 of TVUs and 132,004 of SARs granted to the Embecta's chief executive officer which vest evenly over three and four years , respectively. Stock-Based Compensation Expense Total direct and allocated stock-based compensation expense for the years ended September 30, 2023, 2022, and 2021 and the respective income tax benefits recognized by the Company in the Consolidated Statements of Income are as follows: 2023 2022 2021 Cost of products sold $ 2.2 $ 2.3 $ 2.7 Selling and administrative expense 18.1 14.6 7.8 Research and development expense 1.6 1.8 2.3 Total Stock-Based Compensation Expense $ 21.9 $ 18.7 $ 12.8 Tax benefit associated with stock-based compensation costs recognized $ 2.7 $ 2.9 $ 2.8 The following table summarizes the Company's total stock-based compensation expense by classification of award: 2023 2022 2021 Equity Awards $ 21.5 $ 18.7 $ 12.8 Liability Awards 0.4 — — Total $ 21.9 $ 18.7 $ 12.8 The following table summarizes the Company's total stock-based compensation expense by award type for the years ended September 30, 2023 and 2022, subsequent to the Separation: 2023 2022 Time-Vested Restricted Stock Units (TVUs) $ 16.2 $ 6.6 Performance-Based Restricted Stock Units (PSUs) 1.0 — Stock Appreciation Rights (SARs) 4.7 3.7 Total $ 21.9 $ 10.3 Time Vested Restricted Stock Units During the year ended September 30, 2023 , Embecta granted 680,281 RSUs in the form of TVUs to employees which vest ratably over three years , subject to continued employment of the recipients. TVUs vest on a graded basis over a period of three years . The related stock-based compensation expense is recorded over the requisite service period, which is the vesting period or is based on retirement eligibility. The fair value of all TVUs is based on the market value of the Company’s stock on the date of grant. Dollar amounts are in millions except per share amounts or as otherwise specified. 62 A summary of TVUs outstanding as of September 30, 2023 and changes during the year then ended is as follows: Stock Units (in thousands) Weighted Average Grant Date Fair Value Nonvested at October 1 977.5 $ 28.34 Granted 680.3 31.00 Distributed* ( 386.6 ) 28.07 Forfeited, canceled or expired ( 82.4 ) 29.47 Nonvested at September 30 1,188.8 $ 29.42 Expected to vest at September 30 1,134.6 $ 29.39 *The amounts distributed include shares withheld for taxes that are not formally issued to the market. The weighted average grant date fair value of TVUs granted during the years 2023 and 2022 are as follows: 2023 2022 Weighted average grant date fair value of units granted $ 31.00 $ 31.23 The total fair value of TVUs vested during the years 2023 and 2022 was as follows: 2023 2022 Total fair value of units vested $ 10.9 $ 1.6 At September 30, 2023, the weighted average remaining vesting term of TVUs is 1.5 years. Performance Based Restricted Stock Units During the year ended September 30, 2023 , Embecta awarded 244,192 RSUs in the form of PSUs to certain executive officers and employees which vest after three years , subject to continued employment of the recipients and the achievement of certain performance metric targets. For a portion of these awards, the Company has identified certain performance metrics and targets that will be fully established at a future date. The Company has determined that the service inception date precedes the grant date for these awards as (a) the awards were authorized prior to establishing an accounting grant date, (b) the recipients began providing services prior to the grant date, and (c) there are performance conditions that, if not met by the accounting grant date, will result in the forfeiture of the awards. As the service inception date precedes the accounting grant date, the Company recognizes stock-based compensation expense for each separately-vesting tranche over the requisite service period based on the fair value at each reporting date. PSUs cliff vest on the third anniversary after grant date. The related stock-based compensation expense is recorded over the requisite service period, which is the vesting period or is based on retirement eligibility. The fair value of all PSUs is based on the market value of the Company’s stock on the date of grant. A summary of PSUs outstanding as of September 30, 2023 and changes during the year then ended is as follows: Stock Units (in thousands) Weighted Average Grant Date Fair Value Nonvested at October 1 — $ — Granted 61.0 30.24 Distributed — — Forfeited, canceled or expired ( 3.2 ) 30.24 Nonvested at September 30 57.8 $ 30.24 Expected to vest at September 30 54.6 $ 30.24 The weighted average grant date fair value of PSUs granted during 2023 is as follows: Weighted average grant date fair value of units granted $ 30.24 At September 30, 2023, the weighted average remaining vesting term of PSUs is 2.2 years. Dollar amounts are in millions except per share amounts or as otherwise specified. 63 Stock Appreciation Rights SARs represent the right to receive, upon exercise, shares of common stock having a value equal to the difference between the market price of common stock on the date of exercise and the exercise price on the date of grant. SARs generally vest over a period of three to four years and have a term of ten years . The fair value of awards are estimated on the date of grant using a Black-Scholes-Merton (“BSM”) model. The BSM assumptions include expected dividend yield, risk-free interest rate, volatility, and term of the SARs. In connection with the SARs granted during 2022, the Company used the BSM to determine the fair value of the SARs as of the grant date. In applying this model, the Company uses both historical data and current market data to estimate the fair value of its SARs. The expected dividend yield is based on forecasted patterns of dividend payments. The risk-free interest rate is based on the rate at grant date of zero-coupon United States Treasury Notes with a term equal to the expected term of the SAR. Expected volatility is estimated using historical volatility. Due to the lack of trading history of Embecta's stock at the time of valuation efforts, the historical component of expected volatility is based on historical monthly price changes of the peer group within the industry. BD's historical data for Embecta employees was used to estimate equity award exercise and employee termination behavior within the valuation model. The expected term represents the amount of time that SARs granted are expected to be outstanding based on historical and forecasted exercise behavior. The weighted average fair value of SARs was determined using the following assumptions: 2022 Risk-free interest rate 2.5 % Expected volatility 37.8 % Expected dividend yield 2.9 % Expected life 6.5 Fair value per SAR $ 9.38 A summary of SARs outstanding as of September 30, 2023 and changes and changes during the year then ended is as follows: SARs (in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Balance at October 1 1,916.7 $ 28.98 Granted — — Exercised* ( 25.1 ) 21.98 Forfeited, canceled or expired ( 59.9 ) $ 29.53 Balance at September 30 1,831.7 $ 29.06 7.7 $ — Vested and expected to vest at September 30 1,740.8 $ 29.05 7.7 $ — Exercisable at September 30 179.1 $ 26.96 6.3 $ — *The amounts exercised include shares withheld for taxes that are not formally issued to the market. A summary of SARs exercised during the years 2023 and 2022 is as follows: 2023 2022 Total intrinsic value of SARs exercised $ 0.3 $ 0.1 Total fair value of SARs exercised $ 0.6 $ 6.1 Unrecognized Compensation Expense and Other Stock Plans The amount of unrecognized compensation expense for all non-vested stock-based awards as of September 30, 2023, is approximately $ 28.2 million, which is expected to be recognized over a weighted-average remaining life of approximately 1.8 years. At September 30, 2023, 3.4 million shares were authorized for future grants under the Plan. Dollar amounts are in millions except per share amounts or as otherwise specified. 64 Note 11 — Goodwill and Other Intangible Assets Goodwill and Other Intangible Assets consisted of: Weighted Average Amortization Period (Years) September 30, 2023 September 30, 2022 Amortized intangible assets Patents – gross 12.2 $ 10.6 $ 9.4 Less: accumulated amortization ( 4.5 ) ( 3.9 ) Patents – net $ 6.1 $ 5.5 Customer Relationships and Other – gross 5.8 $ 5.4 $ 5.2 Less: accumulated amortization ( 2.4 ) ( 1.8 ) Customer Relationships and Other – net $ 3.0 $ 3.4 Total amortized intangible assets $ 9.1 $ 8.9 Goodwill 15.6 15.7 Total Goodwill and Other Intangible Assets $ 24.7 $ 24.6 Intangible asset amortization expense was $ 1.2 million for the year ended September 30, 2023, $ 0.7 million for the year ended September 30, 2022 and $ 0.3 million for the year ended September 30, 2021, respectively. The estimated intangible asset amortization expense for each of the fiscal years ended September 30, 2024 through 2028 is expected to approximate $ 1.1 million per year and $ 3.6 million for years subsequent thereafter. Note 12 — Long-Term Debt 5.00 % Senior Secured Notes due 2030 On February 10, 2022 Embecta issued $ 500.0 million aggregate principal amount of 5.00 % senior secured notes due February 15, 2030 (the “ 5.00 % Notes”). Interest payments on the 5.00 % Notes are due semi-annually in February and August until maturity . 6.75 % Senior Secured Notes due 2030 On March 31, 2022, Embecta issued $ 200.0 million of 6.75 % Related Party Notes at a discount of $ 3.0 million. The Related Party Notes issued to BD were not issued for cash and instead were subject to a debt-for-debt exchange which occurred on April 1, 2022. As such, the issuance of the Related Party Notes is a non-cash financing activity and is not presented in the Consolidated Statements of Cash Flows for the year ended September 30, 2022. On April 1, 2022, BD transferred the Related Party Notes with a notional value of $ 200.0 million issued by Embecta to Morgan Stanley in exchange for certain notes of BD that were purchased by Morgan Stanley pursuant to a tender offer. Morgan Stanley then sold the senior secured notes to qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as amended. As of April 1, 2022, the 6.75 % senior secured notes (the " 6.75 % Notes") became third party debt of Embecta. Interest payments on the 6.75 % Notes are due semi-annually in February and August until maturity. The 6.75 % Notes will mature on February 15, 2030. Credit Agreement On March 31, 2022, Embecta entered into a credit agreement (the “Credit Agreement”), providing for: • a Term Loan B Facility (the "Term Loan") in the amount of $ 950.0 million, with a seven -year term that matures in March 2029. The interest rate is 300 basis points over the secured overnight financing rate (“SOFR”), with a 0.50 % SOFR floor. The Term Loan was issued at a discount of 0.50 %. Principal and interest payments on the Term Loan commenced on June 30, 2022. Such quarterly principal payments are calculated as 0.25 % of the initial principal amount, with the remaining balance payable upon maturity; and • a Revolving Credit Facility (the "Revolving Credit Facility") in an aggregate principal amount of up to $ 500.0 million, with a five -year term that matures in 2027. Borrowings under the Revolving Credit Facility bear interest, at Embecta’s option, at an annual rate equal to (a) in the case of loans denominated in United States dollars (i) the SOFR or (ii) the alternate base rate or (b) in the case of loans denominated in Euros, the EURIBOR rate, in each case plus an applicable margin specified in the credit agreement. A commitment fee applies to the unused portion of the Revolving Credit Facility, equal to 0.25 % per annum. As of September 30, 2023, no amount has been drawn on the Revolving Credit Facility. Dollar amounts are in millions except per share amounts or as otherwise specified. 65 The credit agreement and the senior secured notes are secured by substantially all assets of Embecta and each subsidiary guarantor, subject to certain exceptions. The Credit Agreement and the indentures for Embecta's outstanding 5.00 % Notes and 6.75 % Notes contain customary financial covenants, including a total net leverage ratio covenant, which measures the ratio of (i) consolidated total net debt to (ii) consolidated earnings before interest, taxes, depreciation and amortization, and subject to other adjustments, must meet certain defined limits which are tested on a quarterly basis in accordance with the terms of the Credit Agreement and the 5.00 % Notes and 6.75 % Notes. In addition, the Credit Agreement contains covenants that will limit, among other things, Embecta’s ability to prepay, redeem or repurchase its subordinated and junior lien debt, incur additional debt, make acquisitions, merge with other entities, pay dividends or distributions, redeem or repurchase equity interests, and create or become subject to liens. The following is a summary of Embecta's total debt outstanding as of September 30, 2023: Term Loan due March 2029 $ 935.8 5.00 % Notes due February 2030 500.0 6.75 % Notes due February 2030 200.0 Total principal debt issued $ 1,635.8 Less: current debt obligations ( 9.5 ) Less: debt issuance costs and discounts ( 32.4 ) Long-term debt $ 1,593.9 The debt issuance costs on the Term Loan, 5.00 % Notes, 6.75 % Notes and the discount on the Term Loan are reported in the Consolidated Balance Sheets as a reduction of debt and are amortized as a component of Interest expense, net over the term of the related debt using the effective interest method. The schedule of principal payments required on long-term debt for the next five fiscal years and thereafter is as follows: 2023 $ 9.5 2024 $ 9.5 2025 $ 9.5 2026 $ 9.5 2027 $ 9.5 Thereafter $ 1,588.3 The estimated fair value of long-term debt (including current portion) at September 30, 2023 was $ 1,474.2 million compared with a carrying value (which includes a reduction for unamortized debt issuance costs and discounts) of $ 1,603.4 million. Fair value was estimated using inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability and would be considered Level 2 in the fair value hierarchy. Note 13 — Earnings per Share On April 1, 2022, the date of the Separation, 57,012,925 shares of Embecta's common stock, par value $ 0.01 per share, were distributed to BD shareholders of record as of March 22, 2022, the record date of the distribution. This share amount is utilized for the calculation of earnings per basic and diluted common share for all periods presented prior to the Separation. In connection with the Separation, and in accordance with the EMA, Embecta's employees with outstanding former BD share-based awards received replacement share-based awards under the Plan. The ratio used to convert the BD share-based awards was designed to preserve the aggregate intrinsic value of the award immediately after the Separation when compared to the aggregate intrinsic value of the award immediately prior to the Separation (see Note 10 for additional details). The calculation of earnings per basic and diluted common share for the years ended September 30, 2023, 2022 and 2021 were as follows: Dollar amounts are in millions except per share amounts or as otherwise specified. 66 ($ in millions and shares in thousands, except per share amounts) 2023 2022 2021 Net Income attributable to Embecta $ 70.4 $ 223.6 $ 414.8 Basic weighted average number of shares outstanding 57,248 57,024 57,013 Stock awards and equity units (share equivalent) 510 437 — Diluted weighted average shares outstanding 57,758 57,461 57,013 Earnings per common share - Basic $ 1.23 $ 3.92 $ 7.28 Earnings per common share - Diluted $ 1.22 $ 3.89 $ 7.28 For periods prior to the Separation, it is assumed that there were no dilutive equity instruments as there were no equity awards of Embecta outstanding prior to the Separation. For periods subsequent to the Separation, diluted earnings per share is computed by giving effect to all potentially dilutive stock awards that are outstanding. The computation of earnings per diluted share excludes the effect of the potential exercise of stock-based awards, when the effect of the potential exercise would be anti-dilutive. For both 2023 and 2022, 1.8 million of dilutive share equivalents issuable under stock-based compensation plans were excluded from the diluted shares outstanding calculation because the result would have been antidilutive. Note 14 — Income Taxes Income (Loss) Before Income Taxe s The components of Income Before Income Taxes for the years ended September 30 consisted of: 2023 2022 2021 Domestic $ ( 100.9 ) $ ( 29.1 ) $ 87.5 Foreign 206.6 285.7 407.4 Income before income taxes $ 105.7 $ 256.6 $ 494.9 Provision (benefit) for Income Taxes The provision (benefit) for income taxes for the years ended September 30 consisted of: 2023 2022 2021 Current: Federal $ 2.6 $ 20.4 $ 19.2 State ( 0.8 ) 3.4 4.3 Foreign 19.2 35.7 59.4 $ 21.0 $ 59.5 $ 82.9 Deferred: Federal $ 5.9 $ ( 31.1 ) $ ( 1.3 ) State 0.7 ( 4.6 ) ( 0.3 ) Foreign 7.7 9.2 ( 1.2 ) $ 14.3 $ ( 26.5 ) $ ( 2.8 ) Income tax provision $ 35.3 $ 33.0 $ 80.1 The Company's income tax provision for the first half of 2022 and the year ended September 30, 2021 were prepared using a separate return method. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if the Company was a separate taxpayer and a standalone enterprise. The Company believes the assumptions supporting the allocation and presentation of income taxes on a separate return basis are reasonable. For a portion of fiscal year 2022 and all periods prior to the Separation, the Company’s domestic and foreign operations were included in BD’s domestic consolidated and foreign tax returns, and payments to all tax authorities were made by BD on the Company’s behalf. The Company filed its own foreign tax return and made its own foreign tax payments in Ireland. The Company’s current tax liabilities computed under the separate return method were considered to be effectively settled in the consolidated financial statements at the time the transaction was recorded, with the offset recorded against Net parent investment. Dollar amounts are in millions except per share amounts or as otherwise specified. 67 Tax Rate Reconciliation A reconciliation of federal statutory tax rate to the Company's effective income tax rate was as follows: 2023 2022 2021 Federal statutory tax rate 21.0 % 21.0 % 21.0 % State and local income taxes, net of federal tax benefit — ( 0.8 ) 0.7 Foreign income tax at rates other than 21% ( 17.3 ) ( 7.0 ) ( 6.1 ) US tax on foreign earnings 12.5 0.2 0.5 Taxes on unremitted foreign earnings 11.1 3.2 — Tax reserves ( 0.4 ) ( 1.8 ) 0.5 Valuation allowances 14.0 — — Tax credits ( 1.5 ) ( 0.7 ) ( 0.4 ) Nontaxable items ( 8.6 ) ( 1.1 ) — Nondeductible compensation 2.5 — — Other, net 0.1 ( 0.1 ) — Effective income tax rate 33.4 % 12.9 % 16.2 % 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. For fiscal year 2023, the Other, net included 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. The decrease in the Company's effective income tax rate for fiscal year 2022 as compared to fiscal year 2021 was primarily due to the change in geographical mix of earnings and favorable unrecognized tax benefits recorded in fiscal year 2022; partially offset by tax expense that have been provided on undistributed earnings of foreign subsidiaries. Dollar amounts are in millions except per share amounts or as otherwise specified. 68 Deferred Income Taxes Deferred income taxes at September 30 consisted of: 2023 2022 Deferred tax assets: Compensation and benefits $ 9.7 $ 8.6 Accruals and reserves 9.1 10.3 Intangibles 24.6 26.2 Property, plant and equipment 11.7 19.0 Capitalized research and development expenses 16.6 7.0 Leases 12.9 9.7 Interest expense carryforwards 16.4 — Tax loss and credit carryforwards 6.6 0.5 Other 2.1 5.4 Gross deferred tax assets before valuation allowance $ 109.7 $ 86.7 Valuation allowance $ ( 31.6 ) $ ( 10.4 ) Total deferred tax assets $ 78.1 $ 76.3 Deferred tax liabilities: Taxes on unremitted foreign earnings ( 20.5 ) ( 8.2 ) Right of use asset ( 12.8 ) ( 9.5 ) Total deferred tax liabilities $ ( 33.3 ) ( 17.7 ) Net deferred tax assets (liabilities) (i) $ 44.8 $ 58.6 i. Net deferred tax assets are included in Deferred Income Taxes and Other Assets and net deferred tax liabilities are included in Deferred Income Taxes and Other Liabilities in the Consolidated Balance Sheets. Deferred tax assets and liabilities are netted in the Consolidated Balance Sheets by separate tax jurisdictions. As of September 30, 2023 and September 30, 2022, the Company has recorded deferred taxes on 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. As of September 30, 2023 the Company has recorded valuation allowances of $ 31.6 million due to the uncertainty that exists regarding future realizability of certain deferred tax assets primarily for interest expense carryforwards in the U.S. related to limitations on the annual deductibility of such interest, state net operating losses, state tax credits and deferred tax assets related to certain foreign manufacturing operations. As of September 30, 2022, the Company has recorded valuation allowances of $ 10.4 million for deferred tax assets related to certain foreign manufacturing operations. The approximate tax reduction related to a tax holiday in Switzerland in which the Company does business is $ 2.1 million and $ 0.04 impact on diluted earnings per share in fiscal year 2023. The tax holiday will expire in 2026. Tax loss and credit carryforwards consist of approximately $ 1.0 million of state income tax credit carryforwards and $ 5.6 million net operating loss carryforwards in various jurisdictions. Approximately $ 1.0 million of net operating loss carryforwards will not expire and the remaining carryforwards expire in varying amounts from 2028 through 2042. Dollar amounts are in millions except per share amounts or as otherwise specified. 69 Unrecognized Tax Benefits The table below summarizes the gross amounts of unrecognized tax benefits without regard to reduction in tax liabilities or additions to deferred tax assets and liabilities if such unrecognized tax benefits were settled. 2023 2022 2021 Balance at October 1 $ 5.7 $ 16.0 $ 14.5 Increase due to current year tax positions 5.0 1.0 1.3 Increase due to prior year tax positions 3.7 — 0.3 Decrease due to prior year tax positions ( 0.3 ) ( 6.7 ) — Decrease due to settlements with tax authorities — — ( 0.1 ) Decrease due to lapse of statute of limitations ( 4.7 ) ( 4.6 ) — Balance at September 30 $ 9.4 $ 5.7 $ 16.0 Unrecognized tax benefits including interest and penalties that would affect the effective tax rate if recognized $ 7.2 $ 7.2 $ 20.0 For a portion of fiscal year 2022 and all periods prior to the Separation, the Company’s domestic and foreign operations were included in BD’s domestic consolidated and foreign tax returns, with the exception of Ireland. The Company conducts business and files tax returns in numerous countries and currently has no tax audits in progress for the period after the Separation. The following were included for the years ended September 30 as a component of Income tax provision in the Consolidated Statements of Income and the Consolidated Balance Sheets. 2023 2022 2021 Interest and penalties expense (benefit) associated with unrecognized tax benefits on the Consolidated Statements of Income $ ( 1.2 ) $ ( 1.5 ) $ 0.9 Interest and penalties associated with unrecognized tax benefits on the Consolidated Balance Sheets $ 0.2 $ 1.5 $ 4.0 Note 15 — Financial Instruments and Fair Value Measurements The following reconciles Cash and cash equivalents reported within the Consolidated Balance Sheets as of September 30, 2023 and September 30, 2022, to the total amounts shown in the Consolidated Statements of Cash Flows: September 30, 2023 September 30, 2022 Cash and cash equivalents $ 326.5 $ 330.9 Cash and cash equivalents includes cash held in money market funds and other cash equivalents. All cash and cash equivalents are Level 1 in the fair value hierarchy. Interest income on Cash and cash equivalents was $ 9.4 million for the year ended September 30, 2023 and is included as a component of Interest expense, net . For the years ended September 30, 2022 and 2021, interest income was not material to the Company's Consolidated Statements of Income. Foreign Currency Risks and Related Strategies The Company has foreign currency exposures throughout Europe, Asia, Canada and Latin America. Transactional currency exposures that arise from entering into transactions, generally on an intercompany basis, in non-hyperinflationary countries that are denominated in currencies other than the functional currency are mitigated primarily through the use of forward contracts. The notional amounts of the Company’s foreign currency-related derivative instruments were as follows: Hedge Designation September 30, 2023 September 30, 2022 Foreign exchange contracts (a) Undesignated $ 6.7 $ 5.1 a. Represent hedges of transactional foreign exchange exposures resulting primarily from intercompany payables and receivables. Gains and losses on these instruments are recognized immediately in Other income (expense), net . These gains and losses are largely offset by gains and losses on the underlying hedged items, as well as the Dollar amounts are in millions except per share amounts or as otherwise specified. 70 hedging costs associated with the derivative instruments. Gains and losses recognized to date on these instruments were not material to the Company's Consolidated Financial Statements. Nonrecurring Fair Value Measurements Non-financial assets, including property, plant and equipment as well as intangible assets, are measured at fair value when there are indicators of impairment and these assets are recorded at fair value only when an impairment is recognized. These measurements of fair value are generally based upon Level 3 inputs, including values estimated using the income approach. During the year ended September 30, 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 . 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 . The impairment charges are recognized within Impairment expense in the Consolidated Statements of Income. During the year ended September 30, 2021, the Company recorded impairment charges related to certain construction in progress assets related to discontinued projects totaling $ 13.8 million. The impairment charges were recorded to adjust the carrying amount of the assets to the assets’ fair values, which were estimated through a discounted cash flow model that utilized Level 3 inputs. The impairment charges are recognized within Cost of products sold in the Consolidated Statements of Income. Concentration of Credit Risk Historically and prior to the Separation, the Company’s operations formed part of BD’s monitoring of concentrations of credit risk associated with financial institutions for which BD conducted business. As of September 30, 2023, the Company had transferred the majority of its trade receivables to BD under the Factoring Agreements (see Note 4). As a result, the Company is no longer exposed to credit risk associated with those transferred receivables and does not have material credit risk exposure associated with the remaining $ 16.7 million of trade receivables. Three of the Company’s customers represented at least 10.0% of total gross revenues individually and, in the aggregate, represented approximately 40.2 % and 40.1 % for the years ended September 30, 2023 and 2022, respectively. Two customers represented at least 10.0% of total revenues individually and, in the aggregate, represented approximately 30.7 % of total revenues for the year ended September 30, 2021. Substantially all of the Company’s trade receivables are due from public and private entities involved in the healthcare industry. The Company does not normally require collateral from its customers. Note 16 — Property, Plant and Equipment Property, Plant and Equipment, Net consisted of: As of September 30, 2023 As of September 30, 2022 Land $ 2.3 $ 1.4 Buildings 124.5 123.7 Machinery, equipment and fixtures 567.2 505.1 Leasehold improvements 9.1 6.5 Construction in progress 44.8 64.9 $ 747.9 $ 701.6 Less: accumulated depreciation ( 447.7 ) ( 400.0 ) Total Property, Plant and Equipment, Net $ 300.2 $ 301.6 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 . Dollar amounts are in millions except per share amounts or as otherwise specified. 71 During the year ended September 30, 2022, the Company recorded impairment charges of $ 58.9 million related to the abandonment of certain manufacturing production lines in the United States that are no longer expected to be completed. These assets were previously included as a component of Construction in progress within Property, Plant and Equipment . The impairment charges are recognized within Impairment expense in the Consolidated Statements of Income. Note 17 — Leases Finance Lease 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 and an option for the Company to extend the lease term for an additional period of up to five years . This lease is classified as a finance lease. For the year ended September 30, 2023, the Company recorded total finance lease costs of $ 4.8 million which is comprised of $ 2.4 million attributable to depreciation of assets and $ 2.4 million attributable to interest expense associated with the lease liability. The amounts are included in Cost of products sold and Interest expense, net, respectively. For the year ended September 30, 2022, total finance lease costs were not material to the Company's Consolidated Statements of Income. Operating Leases The Company's operating leases primarily relate to its real estate leases that are not classified as finance leases. The Company entered into a real estate lease for a new Corporate Headquarters located in Parsippany, NJ which commenced during the second quarter of fiscal year 2023 for an initial term of ten years . The Company has options to extend the lease for additional period of six years and to extend for a subsequent additional period of four years , after the expiration of the first extension period. For the year ended September 30, 2023 operating lease costs were $ 4.5 million. For the years ended September 30, 2022, and 2021 total operating lease costs were not material to the Company's Consolidated Statements of Income. Aggregate Lease Information The Company's leases are included in its Consolidated Balance Sheets as follows: As of September 30, 2023 As of September 30, 2022 Finance Lease Property, Plant, and Equipment, Net $ 33.1 $ 35.5 Total Finance Lease Assets $ 33.1 $ 35.5 Current finance lease liabilities $ 3.6 $ 3.6 Non Current Finance Lease Liabilities 31.5 32.6 Total Finance Lease Liabilities $ 35.1 $ 36.2 Weighted-average remaining lease term (years) 13.5 14.5 Weighted-average discount rate 6.8 % 6.8 % Operating Leases Deferred Income Taxes and Other Assets $ 23.0 $ 6.3 Total Operating Lease Assets $ 23.0 $ 6.3 Accrued expenses $ 5.9 $ 2.0 Deferred Income Taxes and Other Liabilities 15.4 4.3 Total Operating Lease Liabilities $ 21.3 $ 6.3 Weighted-average remaining lease term (years) 7.3 3.2 Weighted-average discount rate 6.9 % 5.9 % Dollar amounts are in millions except per share amounts or as otherwise specified. 72 Supplemental cash flow information related to leases was as follows as of September 30, 2023 and 2022: September 30, 2023 September 30, 2022 Right of use assets obtained in exchange for lease liabilities Finance Lease $ — $ 36.7 Operating Leases 19.0 2.8 For the year ended September 30, 2021 right of use assets obtained in exchange for lease liabilities was not material. September 30, 2023 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from Operating Leases $ 2.9 Financing cash flows from Finance Lease 1.2 Operating cash flows from Finance Lease 2.4 For the years ended September 30, 2022, and 2021 cash paid for amounts included in the measurement of lease liabilities were not material. Maturities of the Company's finance and operating lease liabilities as of September 30, 2023 by fiscal year are as follows: Finance Leases Operating Leases Total 2024 3.6 5.6 9.2 2025 3.7 3.6 7.3 2026 3.7 2.8 6.5 2027 3.8 2.2 6.0 2028 3.9 2.1 6.0 Thereafter 36.2 11.2 47.4 Total lease payments $ 54.9 $ 27.5 $ 82.4 Less: amount representing interest 19.8 6.2 26.0 Present value of lease liabilities $ 35.1 $ 21.3 $ 56.4 Dollar amounts are in millions except per share amounts or as otherwise specified. 73 Note 18 — Benefit Plans Defined Benefit Plans Prior to the Separation on April 1, 2022, Embecta participated in BD's non-United States plans. BD has defined benefit pension plans covering eligible employees in certain of its international subsidiaries. The Company participated in BD's benefit plans as though it was a participant in a multi-employer plan with the other businesses of BD. The retirement benefits accounting guidance provides that liabilities beyond any contributions currently due and unpaid are not required to be reported. Accordingly, no assets or liabilities associated with plans where the Company was a participant in a multi-employer plan with the other businesses of BD have been reflected in the Company’s Consolidated Balance Sheets. The Consolidated Statements of Income include expense allocations for these benefits, which were determined using a proportional allocation method. Total benefit plan expense allocated to the Company for the years ended September 30, 2022 and 2021 was $ 3.6 million and $ 9.0 million, respectively. Except for deferred closing countries, the Company's participation in the defined pension and postretirement benefit plans sponsored by BD concluded upon the completion of the Separation on April 1, 2022. As of April 1, 2022, Embecta became the plan sponsor for certain global defined benefit pension plans. These Consolidated Financial Statements reflect the periodic benefit costs and funded status of such plans. The Company uses September 30 as the year-end measurement date for these plans. Net periodic benefit cost for the Company’s global defined benefit pension plans for the years ended September 30, 2023 and 2022 was $ 1.0 million and $ 0.7 million, respectively. Of the plans, the defined benefit pension plan covering employees in Switzerland (the "Swiss Plan") is the only defined benefit pension plan material to the Company's Consolidated Financial Statements. The Company's Swiss Plan is a government-mandated retirement account balance plan. Companies within the Swiss regulatory environment have substantial freedom in setting their pension plan design (e.g. with regards to the salary covered, level of retirement benefits, or overall benefit design) provided the benefits are always at least equal to the minimum requirements as defined by law. Most employers provide higher benefits than those required by law, which is the case for Embecta. The minimum level of retirement benefit is expressed by a cash balance formula with age-related contribution rates (or "retirement credits") based on an insured salary defined by law, and a minimum required interest crediting rate which is set by the government (1.00% in 2023 and 2022). The sum of the Company's contributions should be at least equal to the sum of employee contributions. Contributions to the Swiss Plan are invested into a diversified fund managed by an investment fiduciary. As of September 30, 2023 and 2022, the Swiss plan had an unfunded net pension obligation of $ 1.9 million and $ 0.6 million, respectively, and plan assets that totaled $ 14.1 million and $ 8.0 million, respectively. Since the Separation, the Company recognized net periodic benefit cost totaling $ 0.9 million and $ 0.2 million during the fiscal years ended September 30, 2023 and 2022, respectively, related to the Company's Swiss plan, of which $ 0.3 million and $ 0.1 million was included in Other income (expense), net during the fiscal years ended September 30, 2023 and 2022, respectively. Defined Contribution Plans The Company has various defined contribution savings plans that cover substantially all employees in the United States, Ireland, and Japan. The Company matches a certain percentage of each employee’s contributions as per the provisions of the plans. Total employer contributions by the Company to the plans were $ 14.1 million and $ 8.9 million for the fiscal years ended September 30, 2023 and 2022, respectively. Between April 1, 2022 and September 30, 2022, BD remained the defined benefit pension plan sponsor for certain Embecta employees in Ireland. The Company accounts for this plan as though it was a participant in a multi-employer plan with other businesses of BD. The amount of contributions to BD for this plan are included in the amounts noted above. At the Separation Date, Embecta effectuated an Embecta sponsored defined contribution pension plan for certain other employees in Ireland. On October 1, 2022, any Embecta employees who remained participating in the BD defined benefit pension plan ceased participating and these employees began participating in an Embecta sponsored defined contribution pension plan that was effectuated at the Separation Date. Deferred Compensation Plan On the date of the Separation, the Company established a Deferred Compensation Plan in which certain directors and employees of the Company may defer the payment and taxation of up to 75 % of their base salary and up to 100 % of bonus amounts and other eligible cash compensation. A participant's deferrals are “invested” at the direction of the employee in a hypothetical portfolio of investments which are tracked by an administrator. The amounts accrued under this plan were $ 6.1 million and $ 3.7 million as of September 30, 2023, and 2022, respectively. Dollar amounts are in millions except per share amounts or as otherwise specified. 74 Note 19 — Supplemental Financial Information Trade Receivables, Net The amounts recognized in fiscal years 2023, 2022 and 2021 relating to allowances for doubtful accounts and cash discounts, which are netted against trade receivables, are provided in the following table: Allowance for Doubtful Accounts Allowance for Cash Discounts Total Balance at September 30, 2020 ( 3.9 ) ( 2.2 ) ( 6.1 ) Additions charged to costs and expenses ( 0.3 ) ( 16.0 ) ( 16.3 ) Deductions and other 1.1 (a) 15.1 16.2 Balance at September 30, 2021 ( 3.1 ) ( 3.1 ) ( 6.2 ) Additions charged to costs and expenses ( 0.3 ) ( 18.1 ) ( 18.4 ) Deductions and other 2.1 (b) 21.1 23.2 Balance at September 30, 2022 ( 1.3 ) ( 0.1 ) ( 1.4 ) Additions charged to costs and expenses ( 0.2 ) ( 18.7 ) ( 18.9 ) Deductions and other 0.5 (a) 18.8 19.3 Balance at September 30, 2023 ( 1.0 ) — ( 1.0 ) (a) Accounts written off (b) Amounts factored to BD Long-Lived Assets Long-lived assets, which include Property, Plant and Equipment, net , and Goodwill and Other Intangibles, net, by geographic area where located at September 30, 2023 and 2022 is as follows: 2023 2022 United States $ 109.2 $ 109.3 Europe, Middle East, and Africa 176.9 174.5 Asia 38.4 42.3 Other 0.4 0.1 $ 324.9 $ 326.2 Note 20 — Subsequent Events Performance-Based and Time-Vested Restricted Stock Units In November 2023 and pursuant to the Company's 2022 Employee and Director Equity Based Compensation Plan (the "Plan"), the Company granted approximately 1.3 million TVUs in connection with the Company's annual grant which vest on a graded basis over a period of three years , subject to continuous service to the Company by the employee. The Company also awarded approximately 0.5 million PSUs to certain executive officers and employees in connection with the Company's annual grant which vest after three years , subject to continued employment of the recipients and the achievement of certain performance metric targets. The Company has identified certain performance metrics and targets that will be fully established at a future date. The Company has determined that the service inception date precedes the grant date for these awards as (a) the awards were authorized prior to establishing an accounting grant date, (b) the recipients began providing services prior to the grant date, and (c) there are performance conditions that, if not met by the accounting grant date, will result in the forfeiture of the awards. Dollar amounts are in millions except per share amounts or as otherwise specified. 75 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures. None.