What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-02-09 compared with 2023-08-08 · 117 added, 167 removed, 131 unchanged (68% of the section changed)

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

Over the close to 100 year history of our business, we believe that our products have become one of the most widely recognized and respected brands in diabetes management in the world.

In our 100-year history of our business, we believe that our products have become some of the most widely recognized and respected brands in diabetes management in the world.

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

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We primarily sell our products to wholesalers and distributors that sell to retail and institutional channels who in turn sell to patients or use the products to deliver insulin injections to patients.

Separation from BD

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

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

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

Periods Prior to Separation

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

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

Periods Post Separation

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

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

Key Trends Affecting Our Results of Operations

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Pricing Pressures.

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

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

both developed and emerging markets.

We face significant pricing pressures from competitors in the pen needle and insulin syringe categories who not only can provide competitive products at lower costs, but also provide payors and customers with more choices for formulary partners in these categories.

In addition, t he increased scrutiny by regulators on healthcare spending, which accelerated in light of the COVID-19 pandemic, along with a shift towards volume-based procurement and group purchasing organizations, which generally values lower cost over product features, benefits and quality, have placed significant pressure on Embecta to lower price in both developed and emerging markets.

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

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Changes in Clinical Practice.

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

New drug therapies in development are targeted to challenge the current diabetes treatment paradigm, including insulin use.

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

New drug therapies in development are targeted to challenge the current diabetes treatment paradigm, including the frequency of insulin use.

Insulin therapy in developed markets continues to transition to infusion pumps.

Continuing Impact From COVID-19 on Delivery and Allocation of Healthcare.

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

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

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

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

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

Decentralization of Chronic Care.

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

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

While healthcare investments in certain regions continue to grow, there is an increased burden on

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

physicians and longer wait times for patients.

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

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Recent Developments

COVID-19 Pandemic Impacts and Response and Global Economic Conditions

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

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

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

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

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

• the effectiveness of vaccines and vaccination efforts.

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

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

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

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

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

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

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

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

dollar and foreign currencies.

We are continuing to work with BD on the process to obtain a supplemental private letter ruling to the private letter ruling BD received in connection with the Separation and the distribution in order to finalize the conditional limited extension granted by BD to the Company until November 1, 2024 of certain services under the TSA, the Logistic Services Agreement (“LSA”) and other transaction documents in a limited set of markets to support various services provided by BD to the Company, including, but not limited to, information technology, procurement, quality and regulatory affairs, medical affairs, tax and treasury services, distribution logistics, and shared services infrastructure support for order-to-cash, source-to-pay, and record-to-report (“Interim Business Continuity Processes”).

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

We also are monitoring the Israel-Hamas war and Houthi attacks on commercial shipping vessels and other naval vessels.

As of February 9, 2024, there is no material impact to our business operations and financial performance as a result of the aforementioned conflicts.

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

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

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

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

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

Results of Operations

Our unaudited Condensed Consolidated Statements of Income are as follows:

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

Three months ended December 31,

Revenues $ 277.3 $ 275.7 0.6

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Operating Income 45.5 88.8 (48.8)

Interest expense, net (27.0) (19.5) nm (79.4) (24.4) nm

Other income (expense), net (4.2) (4.0) nm (15.6) (4.1) nm

Interest expense, net (27.7) (25.6) 8.2

Other income (expense), net (3.5) (7.1) (50.7)

Income Before Income Taxes 14.3 56.1 (74.5)

Income tax provision 4.9 11.2 (56.3) 36.3 43.3 (16.2)

Income tax provision (benefit)

(5.8) 20.9 (127.8)

Net Income $ 20.1 $ 35.2 (42.9)

Net Income per common share:

Basic $ 0.27 $ 1.08 nm $ 1.13 $ 4.17 nm

Diluted $ 0.26 $ 1.07 nm $ 1.12 $ 4.14 nm

nm = not meaningful

Three Months Ended June 30, 2023 Summary (on a comparative basis)

Key financial results for the three months ended June 30, 2023 were as follows:

• Revenue decreased by $5.0 million to $286.1 million from $291.1 million;

Basic $ 0.35 $ 0.62 (43.5) %

Diluted $ 0.35 $ 0.61 (42.6) %

Three Months Ended December 31, 2023 Summary (on a comparative basis)

Key financial results for the three months ended December 31, 2023 were as follows:

• Revenue increased by $1.6 million to $277.3 million from $275.7 million;

• Gross profit decreased by $2.9 million to $185.9 million from $188.8 million.

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• Net income decreased by $15.1 million to $20.1 million from $35.2 million.

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

Nine Months Ended June 30, 2023 Summary (on a comparative basis)

Key financial results for the nine months ended June 30, 2023 were as follows:

• Revenue decreased by $16.0 million to $838.9 million from $854.9 million;

• Gross profit decreased by $29.9 million to $568.1 million, compared to $598.0 million.

Gross profit as a percent of revenue was 67.7%, as compared to 69.9% in the prior year comparative period;

• Operating income decreased by $116.9 million to $195.7 million from $312.6 million;

• Net income decreased by $176.4 million to $64.4 million from $240.8 million.

Our revenues decreased by $5.0 million, or 1.7%, to $286.1 million for the three months ended June 30, 2023 as compared to revenues of $291.1 million for the three months ended June 30, 2022.

Our revenues increased by $1.6 million, or 0.6%, to $277.3 million for the three months ended December 31, 2023 as compared to revenues of $275.7 million for the three months ended December 31, 2022.

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

The decrease in revenues was driven by $4.1 million associated with the negative impact of foreign currency translation primarily due to the strengthening of the U.S.

dollar, a $2.3 million decrease in contract manufacturing and sales of non-diabetes products within the U.S.

to BD , and $1.8 million of unfavorable changes in price and volume in the U.S.

This was partially offset by increases in revenues driven by $3.2 million of favorable changes in price and volume in our International operations.

Our revenues decreased by $16.0 million, or 1.9%, to $838.9 million for the nine months ended June 30, 2023 as compared to revenues of $854.9 million for the nine months ended June 30, 2022.

The decrease in revenues was primarily driven by $28.1 million associated with the negative impact of foreign currency translation primarily due to the strengthening of the U.S.

dollar and $6.2 million of unfavorable changes in price and volume in the U.S.

This was partially offset by increases in revenues driven by $12.9 million of favorable changes in price and volume in our International operations and a $5.4 million increase in contract manufacturing and sales of non-diabetes products within the U.S.

The increase in revenues was driven by $2.3 million associated with the positive impact of foreign currency translation primarily due to the weakening of the U.S.

dollar and $3.4 million of favorable changes in price.

This was partially offset by a $2.1 million decrease in contract manufacturing related to sales of non-diabetes products to BD and $2.0 million of unfavorable changes in volume.

Revenues by geographic region are as follows:

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

2023 2022 2023 2022

Three months ended December 31,

United States $ 148.6 $ 149.3

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Total $ 277.3 $ 275.7

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

Cost of products sold

Cost of products sold increased by $8.4 million, or 9.5%, to $96.6 million for the three months ended June 30, 2023 as compared to $88.2 million for the three months ended June 30, 2022.

Cost of products sold as a percentage of revenues was 33.8% for the three months ended June 30, 2023 as compared to 30.3% for the three months ended June 30, 2022.

Cost of products sold increased by $13.9 million, or 5.4%, to $270.8 million for the nine months ended June 30, 2023 as compared to $256.9 million for the nine months ended June 30, 2022.

Cost of products sold as a percentage of revenues were 32.3% for the nine months ended June 30, 2023 as compared to 30.1% in the nine months ended June 30, 2022.

The increases in cost of products sold for the three and nine month comparative periods were primarily driven by the impact of inflation on the costs of certain raw materials (including freight), direct labor, and overhead.

The increase for the nine month comparative period was also driven by higher costs associated with the Cannula Supply Agreement with BD post Separation.

Cost of products sold increased by $4.5 million, or 5.2%, to $91.4 million for the three months ended December 31, 2023 as compared to $86.9 million for the three months ended December 31, 2022.

Cost of products sold as a percentage of revenues was 33.0% for the three months ended December 31, 2023 as compared to 31.5% for the three months ended December 31, 2022.

The increase in cost of products sold for the three month comparative period was primarily driven by the negative impact of foreign currency translation primarily due to the weakening of the U.S.

dollar, the impact of inflation on the costs of certain raw materials (including freight), direct labor, and overhead, and the impact of negative year-over-year manufacturing variances primarily attributable to the planned temporary shutdown of our Suzhou, China facility as it relates to production for the domestic Chinese market.

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

Selling and administrative expenses

Selling and administrative expenses increased by $3.8 million, or 4.5%, to $87.6 million for the three months ended June 30, 2023 as compared to $83.8 million for the three months ended June 30, 2022.

Selling and administrative expenses increased by $32.7 million, or 15.4%, to $245.6 million for the nine months ended June 30, 2023 as compared to $212.9 million for the nine months ended June 30, 2022.

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

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

Selling and administrative expenses increased by $17.5 million, or 24.0%, to $90.3 million for the three months ended December 31, 2023 as compared to $72.8 million for the three months ended December 31, 2022.

The increase for the three month comparative period was primarily driven by an increase in compensation and benefit costs due to increased headcount.

Research and development expenses

Research and development expenses increased by $8.3 million, or 58.0%, to $22.6 million for the three months ended June 30, 2023 as compared to $14.3 million for the three months ended June 30, 2022.

Research and development expenses increased by $12.6 million, or 25.7%, to $61.6 million for the nine months ended June 30, 2023 as compared to $49.0 million for the nine months ended June 30, 2022.

The increases for the three and nine month comparative periods were primarily driven by increased investment in our insulin patch pump program.

The increase for the nine month comparative period was also driven by amounts paid in connection with a collaboration arrangement.

For details on the collaboration arrangement refer to Note 4 within the Notes to Condensed Consolidated Financial Statements within this Form 10-Q.

Research and development expenses increased by $3.3 million, or 19.5%, to $20.2 million for the three months ended December 31, 2023 as compared to $16.9 million for the three months ended December 31, 2022.

The increase for the three month comparative period was primarily driven by increased spending on our insulin patch pump platform.

In December 2023, we submitted our first 510(k) premarket filing to the U.S.

Food and Drug Administration ("FDA") for our proprietary disposable insulin delivery system.

Other operating expenses

We incurred other operating expenses of $28.0 million and $7.7 million for the three months ended June 30, 2023 and 2022, respectively, and $65.2 million and $23.5 million for the nine months ended June 30, 2023 and 2022, respectively, driven by costs related to the Separation.

The costs incurred primarily relate to accounting, auditing, legal services, supply chain, employee retention, costs associated with the implementation of the Company's new ERP, and certain other costs to establish certain stand-alone functions to assist with the transition to being a stand-alone entity.

We incurred other operating expenses of $29.9 million and $10.3 million for the three months ended December 31, 2023 and 2022, respectively, driven by costs related to the Separation.

The costs incurred primarily relate to accounting, auditing, legal services, supply chain, employee retention, increased costs associated with the implementation of our new ERP system and other Business Continuity Processes, and certain other costs to establish certain stand-alone functions to assist with the transition to being a stand-alone entity.

As we continue to stand-up various corporate functions as a stand-alone publicly-traded company, we expect to incur similar costs associated with the same type of activities in the current year.

During the three months ended December 31, 2023, the Company recorded approximately $1.9 million of severance costs related to the optimization of certain business functions.

These costs were primarily recorded in the U.S.

Severance costs related to the optimization of certain business functions were not material in the comparable prior year period.

Liabilities for costs associated with these activities were not material to any period presented.

Interest expense, net

Interest expense, net increased by $7.5 million to $27.0 million for the three months ended June 30, 2023 as compared to $19.5 million for the three months ended June 30, 2022.

Interest expense, net increased by $55.0 million to $79.4 million for the nine months ended June 30, 2023 as compared to $24.4 million for the nine months ended June 30, 2022.

The increase for the three month comparative period is primarily a result of higher interest rates on our variable rate debt.

The increase for the nine month comparative period was primarily a result of debt outstanding for a longer period of time for fiscal year 2023 as compared to fiscal year 2022 and higher interest rates on our variable rate debt.

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

See "Liquidity and Capital Resources" below and Note 11 within the Notes to Condensed Consolidated Financial Statements within this Form 10-Q for a further description of our long-term debt.

Interest expense, net increased by $2.1 million to $27.7 million for the three months ended December 31, 2023 as compared to $25.6 million for the three months ended December 31, 2022.

The increase for the three month comparative period is primarily a result of higher interest rates on our variable rate debt, primarily as a result of increases in SOFR that impacted our Term Loan, which was partially offset by an increase in interest income from amounts held in interest bearing accounts and money market funds.

If the United States Federal Reserve resumes raising the benchmark interest rate, then we would expect the interest expense on our variable rate debt to increase during the remainder of fiscal 2024.

Other income (expense), net

Other income (expense), net, was $(4.2) million and $(4.0) million for the three months ended June 30, 2023 and 2022, respectively and $(15.6) million and $(4.1) million for the nine months ended June 30, 2023 and 2022, respectively.

Other income (expense), net, was $(3.5) million and $(7.1) million for the three months ended December 31, 2023 and 2022, respectively.

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

Income tax provision

The effective tax rates were 24.4% and 15.2% for the three months ended June 30, 2023 and 2022, respectively, and 36.0% and 15.2% for the nine months ended June 30, 2023 and 2022, respectively.

The increase in the Company’s effective tax rates for both comparative periods are primarily due to an increase in the valuation allowance on the utilization of interest expense carryforwards related to U.S.

interest deduction limitation rules, higher tax expense on undistributed earnings of foreign subsidiaries and an increase in non-deductible expenses;

partially offset by lower U.S.

tax expense on earnings of foreign affiliates.

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

Income tax provision (benefit)

The effective tax rates were (40.6)% and 37.3% for the three months ended December 31, 2023 and 2022, respectively.

The decrease in the Company’s effective tax rate from the prior comparative period is primarily due to a tax benefit of approximately $17.1 million for the establishment of a deferred tax asset related to tax law changes in Switzerland.

The tax law changes instituted a higher cantonal tax rate and additional tax basis that is amortizable for income tax purposes over a period of seven years.

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

Interest payments began in August 2022 .

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

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

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

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

Such quarterly principal payments are calculated as 0.25% of the initial principal amount, with the remaining balance payable upon maturity.

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

Borrowings under the Revolving Credit Facility bear interest, at Embecta’s option, initially at an annual rate equal to (a) in the case of loans denominated in United States dollars (i) the SOFR or (ii) the alternate base rate or (b) in the case of loans denominated in Euros, the EURIBOR rate, in each case plus an applicable margin specified in the credit agreement.

A commitment fee applies to the unused portion of the Revolving Credit Facility, equal to 0.25% per annum .

As of June 30, 2023, no amount has been drawn on the Revolving Credit Facility.

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

Interest payments on the 6.75% Notes are due semi-annually in February and August until maturity.

Interest payments began in August 2022.

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

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

As of June 30, 2023, we were in compliance with all of such covenants.

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

The following is a summary of Embecta's total debt outstanding as of December 31, 2023:

Term Loan $ 933.4

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Thereafter 1,585.9

Certain measures relating to our total debt outstanding as of June 30, 2023 were as follows:

Certain measures relating to our total debt outstanding as of December 31, 2023 were as follows:

Total debt $ 1,602.4

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Weighted average cost of total debt 7.2 %

As of December 31, 2023, we were in compliance with all of such covenants.

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

For additional information related to the Company's debt related activities, refer to Note 11 within the Notes to Condensed Consolidated Financial Statements within this Form 10-Q.

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

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

The lease is classified as a finance lease.

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

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

The lease commenced during the second quarter of fiscal year 2023 and has an initial term of ten years.

The lease is classified as an operating lease.

The Company has options to extend the lease for an additional period of six years and to extend for a subsequent additional period of four years after the expiration of the first extension period.

Maturities of our finance lease and operating lease liabilities as of June 30, 2023 by fiscal year are as follows:

Maturities of our finance lease and operating lease liabilities as of December 31, 2023 by fiscal year are as follows:

Finance Lease Operating Leases Total

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

In November 2023, the portion of the Factoring Agreement between Embecta and BD for services to the U.S.

for the Company’s U.S.

subsidiary expired and terminated as a result of our implementation and onboarding of certain Business Continuity Processes in North America.

Access to Capital and Credit Ratings

In January 2023 and February 2023, Moody’s Investor Services and Standard & Poor’s Ratings Services published updates to our credit ratings of Ba3 and B+, respectively.

In November 2023 and June 2023, Moody’s Investor Services and Standard & Poor’s Ratings Services published updates to our credit ratings of Ba3 and B+, respectively.

These ratings remain unchanged from the initial published ratings from January 2022.

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

Nine Months Ended

Net cash provided by (used for)

Operating activities $ 38.1 $ 354.2

Investing activities $ (17.3) $ (15.4)

Financing activities $ (39.0) $ (40.9)

Cash and cash equivalents were $298.7 million as of December 31, 2023 as compared to $326.5 million as of September 30, 2023.

The primary sources and uses of cash that contributed to the $27.8 million decrease were:

September 30, 2023 Cash and cash equivalents balance $ 326.5

Cash used for operating activities (13.1)

Cash used for investing activities (2.7)

Cash used for financing activities (13.5)

Effect of exchange rate changes on cash and cash equivalents 1.5

December 31, 2023 Cash and cash equivalents balance $ 298.7

Net cash used for operating activities was primarily attributable to:

Net income $ 20.1

Non-cash adjustments related to depreciation and amortization, stock-based compensation, and deferred income taxes 1.1

Change in accounts payable and accrued expenses

Change in trade receivables

Change in inventories

Change in amounts due from/due to Becton, Dickinson and Company

Change in prepaid expenses and other

Change in income and other net taxes payable

Change in other assets and liabilities, net

Net cash used for operating activities $ (13.1)

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

Net Cash Flows from Operating Activities

Net cash provided by operating activities during the nine months ended June 30, 2023 was attributable to net income of $64.4 million and net adjustments of $26.3 million, which includes $50.6 million of non-cash adjustments that primarily relate to depreciation and amortization, stock-based compensation, deferred income taxes and postretirement benefits, and a use of cash of $76.9 million related to changes in our assets and liabilities.

This was driven by an increase in amounts due from BD of $54.8 million, which is primarily related to factored receivables for which payment has not yet been collected from BD as of June 30, 2023;

a $42.5 million increase in inventories which is primarily driven by a concerted effort to build inventory to meet expected demand;

an increase of $29.2 million in prepaid expenses and other as a result of increased subscription contracts and increases in net assets for deferred closing entities;

and an $18.1 million increase in other assets and liabilities, net, is primarily due to costs capitalized related to the implementation of the Company's new ERP.

This was partially offset by an increase of $53.3 million in accounts payable, accrued expenses and other current liabilities, due to increases in net liabilities for deferred closing entities, which was offset by our annual incentive bonus payment in January 2023;

and an increase of $11.3 million in income and other net taxes payable that is primarily due to the timing of required tax payments.

The change in accounts payable and accrued expenses is primarily due to timing attributable to payments to vendors in the first quarter of fiscal 2024.

As a result of our implementation of certain Business Continuity Processes in North America, including our ERP system, that went live in November 2023, and the expiration and termination of a portion of the Factoring Agreement between Embecta and BD for services to the U.S.

subsidiary, we are now responsible for the collection of any outstanding trade receivables in the U.S.

The increase in trade receivables is a direct result of this impact, and we expect to convert these outstanding receivables due from customers into cash during fiscal 2024 in line with contractual payment terms.

The change in inventories is driven by product sales of certain inventory levels that had been built up at the end of fiscal 2023 in anticipation of our North America ERP system and other Business Continuity Processes that went live in November 2023 .

The change in amounts due from/due to Becton, Dickinson and Company primarily relates to the termination of the portion of the Factoring Agreement between Embecta and BD for services to the U.S.

subsidiary as we are now responsible for the collection of any outstanding trade receivables in the U.S.

The change in prepaid expenses and other are primarily driven by a reduction in payments during the first quarter of fiscal 2024 to BD for future payments made to third parties on our behalf as a result of our implementation of certain Business Continuity Processes in North America, including our ERP system, that went live in November 2023.

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

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

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

Net cash provided by operating activities during the nine months ended June 30, 2022 was attributable to net income of $240.8 million and net adjustments of $113.4 million, which includes $47.2 million of non-cash adjustments related to depreciation and amortization, stock-based compensation, deferred income taxes and postretirement benefits, and $66.2 million of cash provided relating to changes in our assets and liabilities.

Cash provided relating to changes in our assets and liabilities was driven by a decrease in trade receivables of $123.6 million, an increase of $73.1 million in accounts payable, accrued expenses and other current liabilities, an increase of $10.8 million in income and other net taxes payable, and a decrease of $7.7 million in other assets and liabilities, net, partially offset by an increase in amounts due from BD of $99.6 million, an increase in prepaid expenses and other of $25.8 million, and an increase in inventories of $23.6 million.

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

The increase in accounts payable, accrued expense and other current liabilities relates to current liabilities with BD primarily for inventory purchases.

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

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

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

The increase in inventories is primarily driven by a concerted effort to build inventory to meet expected demand as we execute our separation and stand-up projects.

Net Cash Flows from Investing Activities

Net cash used for investing activities was primarily comprised of capital expenditures of $17.3 million and $15.0 million during the nine months ended June 30, 2023 and 2022, respectively, to support further expansion of our business and operations.

Net Cash Flows from Financing Activities

Net cash used for financing activities for the nine months ended June 30, 2023, was attributable to $25.8 million of dividend payments, $7.1 million of required payments on long-term debt, $3.4 million of payments related to tax withholding for stock-based compensation, and $2.7 million in payments on our finance lease.

Net cash used for financing activities for the nine months ended June 30, 2022, was attributable to $1,266.0 million of net consideration paid to BD in connection with the Separation, $182.7 million related to net transfers to BD, $33.3 million of payments for long-term debt issuance costs, $5.6 million of payments for debt fees associated with the Revolving Credit Facility, and $2.4 million of required payments on long-term debt.

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

On August 8, 2023, the Company’s Board of Directors declared a quarterly dividend of $0.15 for each issued and outstanding share of the Company’s common stock.

The dividend is payable on September 13, 2023 to stockholders of record at the close of business on August 25, 2023.

Net cash used for investing activities was primarily comprised of capital expenditures of $2.7 million and $4.7 million during the three months ended December 31, 2023 and 2022, respectively, to support further expansion of our business and operations.

Net cash used for financing activities was primarily attributable to:

Dividend payments $ (8.6)

Payments on long-term debt (2.4)

Payments related to tax withholding for stock-based compensation (2.2)

Payments on finance lease (0.3)

Net cash provided by financing activities $ (13.5)

Contractual Obligations

Our contractual obligations as of June 30, 2023, which require material cash requirements in the future, consist of purchase obligations and lease obligations.

Our contractual obligations as of December 31, 2023, which require material cash requirements in the future, consist of purchase obligations and lease obligations.

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

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

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

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

As of June 30, 2023, there have been no material changes to our contractual obligations outside the ordinary course of business.

Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2023 Form 10-K for further details.

As of December 31, 2023, there have been no material changes to our contractual obligations outside the ordinary course of business.

Critical Accounting Policies

Our significant accounting policies, which include management’s best estimates and judgments, are included in Note 3 to the Consolidated Financial Statements included in our 2023 Form 10-K.

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

A discussion of accounting estimates considered critical because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates are disclosed in the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Embecta's 2023 Form 10-K.

There have been no changes to our critical accounting policies as of June 30, 2023.

There have been no changes to our critical accounting policies as of December 31, 2023.

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

Cautionary Statements Regarding Forward-Looking Statements

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

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

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

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

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

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

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

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

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

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

• Embecta’s ability to obtain clearance from the FDA of any product, to market and sell such products successfully, to anticipate the needs of people with diabetes, and future business decisions by Embecta and its competitors.

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

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

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

policies, taxation (including tax reforms that could adversely impact multinational corporations) and licensing and regulatory requirements for products.

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

• The expected benefits of the Separation from BD.

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

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

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

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

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis