Embecta Corp

Previous wording

We are a leading global medical device company focused on providing solutions to improve the health and well-being of people living with diabetes. 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. Our business traces its origins to 1924, when BD developed the first dedicated insulin syringe. Since then, we have built a world-class organization with a unique manufacturing, supply chain and commercial footprint.

Current wording

We are a leading global medical device company focused on providing solutions to improve the health and well-being of people living with diabetes. 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 approximately 30 million people in over 100 countries for insulin administration and to aid with the daily management of diabetes. Our business traces its origins to 1924, when BD developed the first dedicated insulin syringe. Since then, we have built a world-class organization with a unique manufacturing, supply chain and commercial footprint.

Previous wording

Changes in Clinical Practice. 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.

Current wording

Changes in Clinical Practice. 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, including weekly insulin, in development are targeted to challenge the current diabetes treatment paradigm, including the frequency insulin is dosed (weekly vs. daily injections) and amount of insulin used. Additionally, insulin therapy in developed markets continues to transition to infusion pumps.

Previous wording

•Gross profit decreased by $2.9 million to $185.9 million from $188.8 million. Gross profit as a percent of revenue was 67.0%, as compared to 68.5% in the prior year comparative period;

Current wording

•Gross profit decreased by $4.4 million to $185.4 million from $189.8 million. Gross profit as a percent of revenue was 64.6%, as compared to 68.5% in the prior year comparative period;

Previous wording

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 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.

Current wording

Our revenues increased by $10.1 million, or 3.6%, to $287.2 million for the three months ended March 31, 2024 as compared to revenues of $277.1 million for the three months ended March 31, 2023. Changes in our revenues are driven by the volume of goods that the Company sells, the prices we negotiate with customers and changes in foreign exchange rates. The increase in revenues was driven by $15.0 million of favorable changes in volume. This was partially offset by $2.5 million associated with the negative impact of foreign currency translation primarily due to the strengthening of the U.S. dollar, $1.4 million of unfavorable changes in price, and a $1.0 million decrease in contract manufacturing revenues related to sales of non-diabetes products to BD.

Previous wording

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.

Current wording

Cost of products sold increased by $14.5 million, or 16.6%, to $101.8 million for the three months ended March 31, 2024 as compared to $87.3 million for the three months ended March 31, 2023. Cost of products sold as a percentage of revenues was 34.2% for the three months ended March 31, 2024 as compared to 31.5% for the three months ended March 31, 2023. Cost of products sold increased by $19.0 million, or 10.9%, to $193.2 million for the six months ended March 31, 2024 as compared to $174.2 million for the six months ended March 31, 2023. Cost of products sold as a percentage of revenues were 34.2% for the six months ended March 31, 2024 as compared to 31.5% in the six months ended March 31, 2023. The increase in cost of products sold for the three and six month comparative periods was primarily driven by the impact of inflation on the costs of certain raw materials (including freight), direct labor, and overhead, 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, and unfavorable impacts due to foreign exchange rates. We intend to continue to work to improve productivity to help partially offset these increased costs.

Previous wording

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.

Current wording

Selling and administrative expenses increased by $7.1 million, or 8.3%, to $92.3 million for the three months ended March 31, 2024 as compared to $85.2 million for the three months ended March 31, 2023. Selling and administrative expenses increased by $24.6 million, or 15.6%, to $182.6 million for the six months ended March 31, 2024 as compared to $158.0 million for the six months ended March 31, 2023. The increase for both the three and six month comparative periods were primarily driven by an increase in compensation and benefit costs due to increased headcount and increased outbound freight and warehousing costs. This was partially offset primarily by lower TSA and LSA costs with BD incurred in the current year periods.

Previous wording

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.

Current wording

Research and development expenses decreased by $3.7 million, or 16.7%, to $18.4 million for the three months ended March 31, 2024 as compared to $22.1 million for the three months ended March 31, 2023. Research and development expenses decreased by $0.4 million, or 1.0%, to $38.6 million for the six months ended March 31, 2024 as compared to $39.0 million for the six months ended March 31, 2023. The decrease for the three and six month comparative periods were primarily driven by an upfront payment made in connection with a collaboration arrangement in the prior year. This was partially offset by increased spending in the current year periods 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.

Previous wording

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.

Current wording

We incurred other operating expenses of $35.5 million and $26.9 million for the three months ended March 31, 2024 and 2023, respectively, and $65.4 million and $37.2 million for the six months ended March 31, 2024 and 2023, respectively, driven by costs related to the Separation. The costs incurred primarily relate to accounting, auditing, legal services, marketing, 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.

Previous wording

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.

Current wording

Interest expense, net increased by $1.0 million to $27.8 million for the three months ended March 31, 2024 as compared to $26.8 million for the three months ended March 31, 2023. Interest expense, net increased by $3.1 million to $55.5 million for the six months ended March 31, 2024 as compared to $52.4 million for the six months ended March 31, 2023. The increases for both comparative periods were primarily a result of higher interest rates on our variable rate debt which is attributable to increases in SOFR that impacted our Term Loan. This was partially offset by an increase in interest income from amounts held in interest bearing accounts and money market funds. It remains unclear whether the United States Federal Reserve will increase or reduce the benchmark interest rate during the remainder of fiscal 2024. An increase in the benchmark interest rate would result in an increase in interest expense on our variable rate debt and a reduction in the benchmark interest rate would result in a decrease in interest expense on our variable rate debt.

Previous wording

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.

Current wording

Other income (expense), net, was $(1.5) million and $(4.3) million for the three months ended March 31, 2024 and 2023, respectively. Other income (expense), net, was $(5.0) million and $(11.4) million for the six months ended March 31, 2024 and 2023, respectively. The costs incurred for all periods primarily relate to amounts due to BD for income taxes payable incurred in deferred jurisdictions where BD is considered the primary obligor.

Previous wording

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.

Current wording

The effective tax rates were (102.5)% and 39.0% for the six months ended March 31, 2024 and 2023, respectively. The decrease in the Company’s effective tax rate from the prior comparative period is primarily due to lower withholding taxes on undistributed foreign earnings which includes a discrete tax benefit of approximately $18.8 million related to Swiss withholding taxes from prior years, a tax benefit of approximately $17.1 million for the establishment of a deferred tax asset attributed to a higher Swiss cantonal tax rate and additional tax basis that is amortizable for income tax purposes over a period of seven years, reduced unrecognized tax benefits, and lower income in the current period which increases the variability of the effective tax rate.

Previous wording

We believe that our cash and our cash equivalents and cash from operations, together with our borrowing capacity under our revolving credit facility, will provide sufficient financial flexibility to fund seasonal and other working capital requirements, capital expenditures, debt service requirements and other obligations, cash dividends on common shares, share repurchases and additional growth opportunities for the foreseeable future. However, should it become necessary, we believe that our credit profile should provide us with access to additional financing in order to fund normal business operations, make interest payments, fund growth opportunities and satisfy upcoming debt maturities.

Current wording

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

Previous wording

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

Current wording

In conjunction with the Separation, we entered into the Factoring Agreements with BD. Embecta owed BD 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 pursuant to the Factoring Agreements.

Previous wording

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.

Current wording

As of March 31, 2024, all factoring agreements between Embecta and BD have expired and terminated as a result of our implementation and onboarding of certain Business Continuity Processes in North America, and certain jurisdictions in Europe and Asia.

Previous wording

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

Current wording

Cash and equivalents and restricted cash were $306.5 million as of March 31, 2024 as compared to $326.5 million as of September 30, 2023.

Previous wording

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

Current wording

The primary sources and uses of cash that contributed to the $20.0 million decrease were:

Previous wording

Net cash used for operating activities was primarily attributable to:

Current wording

Net cash provided by operating activities was primarily attributable to:

Previous wording

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.

Current wording

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

Previous wording

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.

Current wording

As a result of the implementation of certain Business Continuity Processes, including our ERP system that went live in November 2023 for our North America business operations and in March 2024 for our EMEA and Greater Asia business operations as well as the expiration and termination of the factoring agreements between Embecta and BD, we are now responsible for the collection of any outstanding trade receivables in those respective regions. The increase in trade receivables is a direct result of this impact, and we expect to convert these outstanding trade receivables into cash during fiscal 2024 in line with contractual customer payment terms.

Previous wording

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.

Current wording

The change in inventories is driven by an increase in raw material purchases in the current year offset by current year product sales of certain inventory levels that had been built up at the end of fiscal 2023 in anticipation of our ERP system and other Business Continuity Processes that went live during the first half of fiscal 2024.

Previous wording

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.

Current wording

The change in amounts due from/due to Becton, Dickinson and Company primarily relates to the expiration and termination of the Factoring Agreement between Embecta and BD as we are now responsible for the collection of any outstanding trade receivables on a global basis.

Previous wording

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.

Current wording

The change in prepaid expenses and other are primarily driven by a reduction in payments during the first half 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, including our ERP system, that went live in fiscal 2024.

Previous wording

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

Current wording

The change in other assets and liabilities, net is primarily due to costs capitalized during fiscal 2024 associated with the implementation of our ERP system.

Previous wording

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.

Current wording

Net cash used for investing activities was comprised of capital expenditures of $6.1 million for the six months ended March 31, 2024 to support further expansion of our business and operations.

Previous wording

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. Over the next several years, we expect to incur significant costs associated with information technology infrastructure as we transition to our own systems. Lease obligations include lease agreements for which a contract has been signed even if the lease has not yet commenced. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 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.

Current wording

Our contractual obligations as of March 31, 2024, which require material cash requirements in the future, consist of purchase obligations and lease obligations. Purchase obligations are enforceable and legally binding obligations for purchases of goods and services which include inventory purchase commitments. Over the next several years, we expect to incur material costs associated with operating and maintaining our information technology infrastructure. Lease obligations include lease agreements for which a contract has been signed even if the lease has not yet commenced. Refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2023 Form 10-K for further details. As of March 31, 2024, there have been no material changes to our contractual obligations outside the ordinary course of business.

Previous wording

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. 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 December 31, 2023.

Current wording

Our significant accounting policies, which include management’s best estimates and judgments, are included in Note 3 to the Consolidated Financial Statements included in the 2023 Form 10-K. 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 the 2023 Form 10-K. There have been no changes to our critical accounting policies as of March 31, 2024.

Previous wording

•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.

Current wording

•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

Previous wording

•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.

Current wording

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

Previous wording

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

Current wording

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