# Embecta Corp. (EMBC) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from Embecta Corp.'s 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/1872789/000187278924000037/embc-20240930.htm Accession: 0001872789-24-000037 Filing date: 2024-12-11 Report date: 2024-09-30 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/EMBC/ All MD&A years: /company/EMBC/mda/ Previous year: /company/EMBC/mda/fy2023/ (FY 2023) Next year: /company/EMBC/mda/fy2025/ (FY 2025) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and accompanying notes presented in Item 8 of this Annual Report on Form 10-K. Within the tables presented throughout this discussion, certain columns may not add due to the use of rounded numbers for disclosure purposes. Percentages and earnings per share amounts presented are calculated from the underlying amounts. Dollar amounts are in millions except per share amounts or as otherwise specified. References to years throughout this discussion relate to our fiscal years, which end on September 30. Company Overview We are a leading global medical device company focused on providing solutions to improve the health and well-being of people living with diabetes. In the 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. 33 We have a broad portfolio of marketed products, including a variety of pen needles, syringes and safety injection devices. Our pen needles are sterile, single-use, medical devices, designed to be used in conjunction with pen injectors that inject insulin or other diabetes medications. We also sell safety pen needles, which have shields on both ends of the cannula that automatically deploy after the injection to help prevent needlestick exposure and injury during injection and disposal. Our traditional and safety pen needles are compatible and frequently used with widely available pen injectors in the market today. In addition to pen needles, we sell sterile, single-use insulin syringes, which are used to inject insulin drawn from insulin vials. We also sell safety insulin syringes, which have a sliding safety shield that can be activated with one-hand after the injection to help prevent needlestick exposure and injury during injection and disposal. We primarily sell our products to wholesalers and distributors that sell to retail and institutional channels who in turn sell to patients or use the products to deliver insulin injections to patients. Separation from BD Pursuant to the Separation and Distribution Agreement, the Separation from BD was completed on April 1, 2022. On March 22, 2022, the record date for the distribution, 57,012,925 issued and outstanding shares of Embecta common stock were distributed pro-rata to BD stockholders as of the close of business, determined by applying a ratio of one share of Embecta common stock for every five shares of BD common stock. "Regular-way" trading of Embecta common stock began on April 1, 2022, under the ticker symbol "EMBC". Periods Prior to Separation Prior to the Separation, the Company was referred to as the Diabetes Care Business. For periods prior to April 1, 2022, the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K include certain assets, liabilities, revenues, and expenses 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 Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K have been prepared in accordance with accounting principles generally accepted in the United States of America. Key Trends Affecting Our Results of Operations Competition. The regions in which we conduct our business and the medical devices industry in general are highly competitive. We face significant competition from a wide range of companies in a highly regulated industry. These include large companies with multiple product lines, some of which may have greater financial and marketing resources than us, as well as smaller more specialized companies. Non-traditional entrants, such as technology companies, are also entering into the diabetes care industry and its adjacent markets, some of which may have greater financial and marketing resources than us. Pricing Pressures. 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, the increased scrutiny by regulators on healthcare spending, which accelerated in light of the COVID-19 pandemic, along with a shift towards volume-based procurement and group purchasing organizations, which generally values lower cost over product features, benefits and quality, have placed significant pressure on Embecta to lower price in both developed and emerging markets. These trends may reduce our operating margins, which are only partially offset by our ability to differentiate our products and sell at higher prices. Commoditization of Injection Devices. Given the growing demand for medical devices to assist in the treatment of diabetes and difficulties around access to diabetes care due to complex and costly insurance plans, patient care is increasingly focused on providing more affordable products, which has led to the commoditization of more traditional injection delivery devices, such as insulin syringes and pen needles. Existing and new local and regional low-cost providers, in combination with a shift from insulin vials to insulin pens, have made the pen needle category highly competitive. This has forced providers to provide clinical evidence to differentiate their products. Changes in Clinical Practice. Introduction of new drugs and increased penetration of oral and once-weekly 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, 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. 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 34 physicians and longer wait times for patients. Healthcare delivery for non-emergency diabetes care is expected to continue shifting outside of hospitals to primary care providers, which could have a material impact on our results of operations. Political and Economic Instability in Emerging Markets. We operate in a number of emerging markets, many of which are subject from time to time to significant political and economic disruptions. However, the number of countries we provide products to and our proactive channel management strategies help us manage this variability. Recent Developments 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. In December 2023, we submitted our first 510(k) premarket filing to the FDA for our proprietary disposable insulin delivery system. In September, 2024, we announced that we received 510(k) clearance from the FDA. On November 22, 2024, the Company's Board of Directors approved a plan to discontinue internal and external investment in the research and development of our patch pump program. As a result of this decision, we will undergo an organizational restructuring (the "Restructuring Plan"). In addition, we intend to discontinue our commercial operation plans for the insulin delivery system, including the previous intended limited launch. We estimate that we will incur approximately $25 million - $30 million in pre-tax cash-based charges primarily associated with employee severance payments and benefits related to the workforce reduction. We expect that the majority of the restructuring charges related to the workforce reduction will be incurred in the first quarter of fiscal year 2025 and that the implementation of the workforce reduction, including cash payments, will be substantially complete by the end of the second quarter of fiscal year 2025. We estimate that we will incur approximately $10 million - $15 million of additional pre-tax non-cash charges related to asset impairments and asset write-offs. These preliminary estimates may be revised following the completion of the ongoing analysis of the expected additional pre-tax non-cash charges associated with the implementation of the Restructuring Plan. The estimates of the pre-tax cash charges and additional charges that we expect to incur in connection with the Restructuring Plan, and the timing thereof, are subject to a number of assumptions and actual amounts may differ materially from estimates. In addition, we may incur other pre-tax cash charges or additional charges not currently contemplated due to unanticipated events that may occur, including in connection with the implementation of the Restructuring Plan. On March 28, 2024, we entered into (i) a second amendment (the “TSA Amendment”) to the TSA, dated as of March 31, 2022 and previously amended as of July 1, 2022 by and between Embecta and BD, and (ii) a second amendment (the “LSA Amendment”) to the LSA, dated January 1, 2022 and previously amended as of November 20, 2023, by and between Embecta and BD. Pursuant to the TSA and the LSA, originally entered into in connection with the Separation, Embecta and BD and their respective affiliates provide each other, on an interim, transitional basis, the Business Continuity Processes. Under the TSA Amendment and the LSA Amendment, BD granted Embecta, among other things, a limited extension until November 1, 2024 of certain services in a limited set of markets to support the Business Continuity Processes. We continue to monitor 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 December 11, 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. See Item 1A of this Annual Report on Form 10-K for further details. In addition, our revenues and results of operations have been affected by various fluctuations in macroeconomic conditions and regulatory and policy changes, both on a global level and in particular markets, which include inflation and slowing economic growth and contractions, a rising interest rate environment, supply chain interruptions, tariff policy changes, volatility in capital markets and the availability of credit, tax rates and the rate of exchange between the United States dollar and foreign currencies. The nature and extent of the impact of these factors among others varies by region and remains uncertain and unpredictable and may affect our business. 35 Results of Operations For a discussion of Results of Operations of fiscal year 2023 compared to fiscal year 2022 see our Annual Report on Form 10-K for the year ended September 30, 2023. For the fiscal years ended September 30, 2024 and 2023, our Consolidated Statements of Income are as follows: [[GREPCENT_TABLE]] [["","","","","","","","2024","","2023"],["Revenues","","","","","","","$","1,123.1","","","$","1,120.8"],["Cost of products sold","","","","","","","387.9","","","370.9"],["Gross Profit","","","","","","","735.2","","","749.9"],["Operating expenses:"],["Selling and administrative expense","","","","","","","365.1","","","341.3"],["Research and development expense","","","","","","","78.8","","","85.2"],["Impairment expense","","","","","","","\u2014","","","2.5"],["Other operating expenses","","","","","","","124.5","","","99.4"],["Total Operating Expenses","","","","","","","568.4","","","528.4"],["Operating Income","","","","","","","166.8","","","221.5"],["Interest expense, net","","","","","","","(112.3)","","","(107.0)"],["Other income (expense), net","","","","","","","(10.3)","","","(8.8)"],["Income Before Income Taxes","","","","","","","44.2","","","105.7"],["Income tax provision","","","","","","","(34.1)","","","35.3"],["Net Income","","","","","","","$","78.3","","","$","70.4"],["Net Income per common share:"],["Basic","","","","","","","$","1.36","","","$","1.23"],["Diluted","","","","","","","$","1.34","","","$","1.22"]] [[/GREPCENT_TABLE]] Year Ended September 30, 2024 Summary (on a comparative basis) Key financial results for the year ended September 30, 2024 were as follows: •Revenue increased by $2.3 million to $1,123.1 million from $1,120.8 million; •Gross profit decreased by $14.7 million to $735.2 million, compared to $749.9 million. Gross profit as a percent of revenue was 65.5%, as compared to 66.9% in the prior year comparative period; •Operating income decreased by $54.7 million to $166.8 million from $221.5 million; and •Net income increased by $7.9 million to $78.3 million from $70.4 million. Revenues Our revenues increased by $2.3 million, or 0.2%, to $1,123.1 million for the year ended September 30, 2024 as compared to revenues of $1,120.8 million for the year ended September 30, 2023. The increase in revenues was primarily driven by $27.7 million associated with favorable changes in price. This was partially offset by $14.5 million of unfavorable changes in volume, $6.1 million associated with the negative impact of foreign currency translation primarily due to the strengthening of the U.S. dollar, $4.6 million of unfavorable gross-to-net adjustments primarily attributed to the recognition of incremental Italian payback accruals resulting from two July 22, 2024 rulings by the Constitutional Court of Italy, and a $0.2 million decrease in contract manufacturing revenues related to sales of non-diabetes products to BD. Cost of products sold Cost of products sold increased by $17.0 million, or 4.6%, to $387.9 million for the year ended September 30, 2024 as compared to $370.9 million for the year ended September 30, 2023. Cost of products sold as a percentage of revenues were 34.5% for the year ended September 30, 2024 as compared to 33.1% for the year ended September 30, 2023. The increase in cost of products sold was primarily driven by the impact of inflation on the costs of certain raw materials (including freight), direct labor, and overhead, the impact of negative year-over-year manufacturing variances primarily attributable to 36 the as planned temporary shutdown of our Suzhou, China facility as it relates to production for the domestic Chinese market, and unfavorable impacts due to foreign exchange rates. We intend to continue to work to improve productivity to help partially offset these increased costs. This was partially offset by the impact of profit in inventory adjustments as a result of inventory that was sold to external customers that was manufactured in anticipation of our ERP system and other Business Continuity Processes that went live during fiscal 2024. Operating expenses in 2024 and 2023 were as follows: [[GREPCENT_TABLE]] [["","","","","","","","","Increase"],["(Millions of dollars)","","2024","","2023","","","","2024 vs. 2023"],["Selling and administrative expense","","$","365.1","","","$","341.3","","","","","$","23.8"],["% of revenues","","32.5","%","","30.5","%"],["Research and development expense","","$","78.8","","","$","85.2","","","","","$","(6.4)"],["% of revenues","","7.0","%","","7.6","%"],["Impairment expense","","$","\u2014","","","$","2.5","","","","","nm"],["Other operating expense","","$","124.5","","","$","99.4","","","","","$","25.1"],["nm = not meaningful"]] [[/GREPCENT_TABLE]] Selling and administrative expenses Our selling and administrative expenses increased by $23.8 million, or 7.0%, to $365.1 million for the year ended September 30, 2024 as compared to $341.3 million for the year ended September 30, 2023. The increase year over year was primarily driven by an increase in compensation and benefit costs due to increased headcount on average in the current period in addition to increased outbound freight and warehousing costs. This was partially offset by lower TSA and LSA costs incurred from BD in the current year period. Research and development expenses Our research and development expenses decreased by $6.4 million, or 7.5%, to $78.8 million for the year ended September 30, 2024 as compared to $85.2 million for the year ended September 30, 2023. The decrease was primarily driven by timing of expenses incurred in connection with our insulin patch pump platform. On November 22, 2024, the Company's Board of Directors approved a plan to discontinue internal and external investment in the research and development of the Company's patch pump program. The Company will refocus its research and development strategy on its core business. We expect our research and development expense to decrease sequentially in fiscal year 2025 compared to fiscal year 2024. Impairment expense During the year ended September 30, 2024, the Company did not record any impairment charges. 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 was inherited as part of the Separation from BD. These assets were previously included as a component of Machinery, equipment and fixtures within Property, Plant and Equipment in our Consolidated Balance Sheets in Item 8 of this Annual Report on Form 10-K. The impairment charges are recognized within Impairment expense in the Consolidated Statements of Income. 37 Other operating expenses We incurred other operating expenses of $124.5 million and $99.4 million for the years ended September 30, 2024 and 2023, respectively. The costs incurred primarily relate to accounting, auditing, legal services, marketing, supply chain, employee retention, costs associated with the implementation of our new ERP system and other Business Continuity Processes, and certain other costs to establish certain stand-alone functions to assist with the transition to being a stand-alone entity. These costs also include certain severance costs related to the optimization of certain business functions as we transition to being a stand-alone entity. We expect the amount of those costs to be less in fiscal year 2025 as compared to fiscal year 2024. For the year ended September 30, 2024, we recognized costs associated with the amortization of cloud computing arrangements. For the year ended September 30, 2023, there was no amortization of implementation costs associated with cloud computing arrangements due to the timing of when these projects were placed into service. Other operating expenses are as follows: [[GREPCENT_TABLE]] [["","Twelve months ended September 30,"],["","2024","","2023"],["Costs related to the Separation","$","118.2","","","$","98.3"],["Amortization of cloud computing arrangements","6.3","","","\u2014"],["Other","\u2014","","","1.1"],["Total","$","124.5","","","$","99.4"]] [[/GREPCENT_TABLE]] Interest expense, net Interest expense, net increased to $112.3 million for the year ended September 30, 2024, from $107.0 million for the year ended September 30, 2023 primarily as 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. We are unable to predict future Federal Reserve interest rate decisions and the impact to interest expense on our variable rate debt. See "Liquidity and Capital Resources" below and Note 13 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a further description of our long-term debt. Other income (expense), net Other income (expense), net was $(10.3) million and $(8.8) million for the years ended September 30, 2024 and 2023, respectively. The change in Other income (expense), net year over year is driven by higher losses due to unfavorable impacts from foreign exchange in the year ended September 30, 2024 offset by lower amounts paid to BD for income taxes incurred in deferred jurisdictions where BD is considered the primary obligor in the current period compared with the year ended September 30, 2023. Income tax provision (benefit) The Company's income tax provision (benefit) decreased to $(34.1) million for the year ended September 30, 2024 from $35.3 million for the year ended September 30, 2023. This decrease was primarily due to a reduction in withholding taxes on unremitted earnings of foreign subsidiaries related to the expiration of a two-year stock holding period requirement in Switzerland, the recognition of deferred tax assets from Switzerland tax reform, changes in the geographical mix of earnings and overall lower pre-tax earnings; partially offset by an increase in uncertain tax positions and non-deductible expenses. 38 LIQUIDITY AND CAPITAL RESOURCES For discussion on Liquidity and Capital Resources pertaining to the fiscal years 2023 and 2022 see our Annual Report on Form 10-K for the fiscal year ended September 30, 2023. We believe that our cash and our cash equivalents and cash from operations, together with our borrowing capacity under our revolving credit facility, will provide sufficient financial flexibility to fund seasonal and other working capital requirements, capital expenditures, debt service requirements and other obligations, cash dividends on common shares and additional growth opportunities for the foreseeable future. However, should it become necessary, we believe that our credit profile should provide us with access to additional financing in order to fund normal business operations, make interest payments, fund growth opportunities and satisfy upcoming debt maturities. Debt-Related Activities In February 2022, and in connection with the Separation, Embecta issued $500.0 million aggregate principal amount of 5.00% senior secured notes due February 15, 2030 (the "5.00% Notes"). Interest payments on the 5.00% Notes are due semi-annually in February and August until maturity. Interest payments began in August 2022. In March 2022, Embecta entered into a credit agreement, providing for a Term Loan B Facility (the "Term Loan") in the amount of $950.0 million, with a seven-year term that matures in March 2029 and a Revolving Credit Facility in an aggregate principal amount of up to $500.0 million, with a five-year term that matures in 2027. The interest rate on the Term Loan is 300 basis points over the secured overnight financing rate (“SOFR”), with a 0.50% SOFR floor. 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. The Company may from time to time voluntarily prepay the Term Loan in whole or in part without premium or penalty subject to certain exceptions. 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 September 30, 2024, no amount has been drawn on the Revolving Credit Facility. Additionally, Embecta has outstanding $200.0 million of senior secured notes (the "6.75% Notes"), which carry an interest rate of 6.75% and are due February 2030. Interest payments on the 6.75% Notes are due semi-annually in February and August until maturity. Interest payments began in August 2022. The following is a summary of Embecta's total debt outstanding as of September 30, 2024: [[GREPCENT_TABLE]] [["Term Loan","$","901.3"],["5.00% Notes","500.0"],["6.75% Notes","200.0"],["Total principal debt issued","$","1,601.3"],["Less: current debt obligations","(9.5)"],["Less: debt issuance costs and discounts","(26.5)"],["Long-term debt","$","1,565.3"]] [[/GREPCENT_TABLE]] The schedule of principal payments required on long-term debt for the next five years and thereafter is as follows: [[GREPCENT_TABLE]] [["2025","$","9.5"],["2026","9.5"],["2027","9.5"],["2028","9.5"],["2029","863.3"],["Thereafter","700.0"]] [[/GREPCENT_TABLE]] Certain measures relating to our total debt outstanding as of September 30, 2024 were as follows: [[GREPCENT_TABLE]] [["Total debt","$","1,574.8"],["Short-term debt as a percentage of total debt","0.6","%"],["Weighted average cost of total debt","6.8","%"]] [[/GREPCENT_TABLE]] 39 The credit agreement and the indentures for the 5.00% Notes and the 6.75% Notes contain customary financial covenants, including a total net leverage ratio covenant, which measures the ratio of (i) consolidated total net debt to (ii) consolidated earnings before interest, taxes, depreciation and amortization, and subject to other adjustments, must meet certain defined limits which are tested on a quarterly basis in accordance with the terms of the credit agreement and indentures governing the 5.00% Notes and the 6.75% Notes. In addition, the credit agreement contains covenants that limit, among other things, our ability to prepay, redeem or repurchase our subordinated and junior lien debt, incur additional debt, make acquisitions, merge with other entities, pay dividends or distributions, redeem or repurchase equity interests, and create or become subject to liens. As of September 30, 2024, we were in compliance with all of such covenants. The credit agreement and the senior secured notes are secured by substantially all assets of Embecta and each subsidiary guarantor, subject to certain exceptions. In September 2024, the Company made a discretionary prepayment of $25.0 million on the Term Loan. Debt extinguishment charges as a result of this prepayment were not material to the Company's Consolidated Statements of Income. For additional information related to the Company's debt related activities, refer to Note 13 within the Notes to Consolidated Financial Statements within this Form 10-K. Leases Maturities of our finance lease and operating lease liabilities as of September 30, 2024 by fiscal year are as follows: [[GREPCENT_TABLE]] [["","Finance Lease","","Operating Leases","","Total"],["2024","3.7","","","6.2","","","9.9"],["2025","3.7","","","3.4","","","7.1"],["2026","3.8","","","1.8","","","5.6"],["2027","3.9","","","1.8","","","5.7"],["2028","3.9","","","1.7","","","5.6"],["Thereafter","32.3","","","7.3","","","39.6"],["Total lease payments","$","51.3","","","$","22.2","","","$","73.5"]] [[/GREPCENT_TABLE]] For additional information related to our leases, refer to Note 18 within the Notes to Consolidated Financial Statements of this Form 10-K. Factoring Agreements In conjunction with the Separation, we entered into Factoring Agreements (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. As of March 31, 2024, all Factoring Agreements between Embecta and BD had 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. Access to Capital and Credit Ratings In May 2024 and June 2024, Moody’s Investor Services and Standard & Poor’s Ratings Services published updates to our credit ratings. Our Moody's Investors Services credit rating is B1 and our Standard & Poor's Rating Services credit rating is B+. Cash and equivalents and restricted cash were $274.2 million as of September 30, 2024 as compared to $326.5 million as of September 30, 2023. The primary sources and uses of cash that contributed to the $52.3 million decrease were: [[GREPCENT_TABLE]] [["September 30, 2023 Cash and equivalents and restricted cash balance","$","326.5"],["Cash provided by operating activities","35.7"],["Cash used for investing activities","(15.8)"],["Cash used for financing activities","(73.4)"],["Effect of exchange rate changes on cash and equivalents and restricted cash","1.2"],["September 30, 2024 Cash and equivalents and restricted cash balance","$","274.2"]] [[/GREPCENT_TABLE]] 40 Net cash provided by operating activities was primarily attributable to: [[GREPCENT_TABLE]] [["Net income","$","78.3"],["Non-cash adjustments related to depreciation and amortization, plant and equipment, stock-based compensation, and deferred income taxes","5.1"],["Change in in accounts payable and accrued expenses","60.0"],["Change in trade receivables","(174.7)"],["Change in inventories","(16.5)"],["Change in amounts due from/due to Becton, Dickinson and Company","58.9"],["Change in prepaid expenses and other","39.5"],["Change in income and other net taxes payable","13.2"],["Change in other assets and liabilities, net","(28.1)"],["Net cash provided by operating activities","$","35.7"]] [[/GREPCENT_TABLE]] Update to the unaudited Consolidated Statements of Cash Flows Reported in Earnings Release On November 26, 2024, we furnished a Current Report on Form 8-K that included as an exhibit a press release announcing our financial results for the fourth fiscal quarter and the fiscal year ended September 30, 2024 (the “Earnings Release”). Subsequent to furnishing the Earnings Release, the Company identified certain further revisions within the Consolidated Statements of Cash Flows that results in changes to the operating assets and liabilities related to Prepaid expenses and other and Income and other net taxes payable for fiscal 2024 that were reported in the Condensed Consolidated Statements of Cash Flows including in the Earnings Release. The updated amounts for these line items are included in the audited Consolidated Statements of Cash Flows included in the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. Fiscal 2024 Net Cash Provided by Operating Activities of $35.7 million as presented in the Earnings Release remains unchanged from the amount presented on this Annual Report on Form 10-K. The change in accounts payable and accrued expenses is primarily due to timing attributable to payments to vendors during the fiscal year ended September 30, 2024. 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 in line with contractual customer payment terms. The change in inventories is driven by actions taken to increase raw material purchases and finished goods in the current fiscal year in anticipation of our ERP system and other Business Continuity Processes that went live during fiscal year 2024. 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. The change in prepaid expenses and other are primarily driven by a reduction in payments 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. 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 during fiscal 2024 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 used for investing activities was comprised of capital expenditures of $15.8 million for the fiscal year to support our business and operations. Net cash used for financing activities was primarily attributable to: 41 [[GREPCENT_TABLE]] [["Dividend payments","(34.5)"],["Payments on long-term debt","(34.6)"],["Payments related to tax withholding for stock-based compensation","(3.0)"],["Payments on finance lease","(1.3)"],["Net cash used for financing activities","$","(73.4)"]] [[/GREPCENT_TABLE]] Contractual Obligations Our contractual obligations as of September 30, 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. As of September 30, 2024, total payments due for purchase obligations and lease obligations aggregate to approximately $211 million and $74 million, respectively. Contractual obligations due within the next twelve months approximate $112 million related to purchase commitments and $10 million related to lease obligations. Critical Accounting Policies The following discussion supplements the descriptions of our accounting policies contained in Note 3 to the Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K. Financial Statements and Supplementary Data. The preparation of the Consolidated Financial Statements requires management to use estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements. Some of those judgments can be subjective and complex and, consequently, actual results could differ from those estimates. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. For any given estimate or assumption made by management, it is possible that other people applying reasonable judgment to the same facts and circumstances could develop different estimates. Actual results that differ from management’s estimates could have an unfavorable effect in our Consolidated Financial Statements. Management believes the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of the Consolidated Financial Statements: Revenue Recognition Our revenues are primarily recognized when the customer obtains control of the product sold, which is generally upon shipment or delivery, depending on the delivery terms specified in the distribution or sales agreement. Our gross revenues are subject to a variety of deductions, which include rebates, chargebacks, sales discounts and sales returns. These deductions represent estimates of the related obligations, and judgment is required when determining the impact of these revenue deductions on gross revenues for a reporting period. Rebates are based upon prices determined under our agreements with the end-user customers. Additional factors considered in the estimate of our rebate liability include the quantification of inventory that is either in stock at or in transit to our distributors, as well as the estimated lag time between the sale of product and the payment of corresponding rebates. 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. We maintain 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, we evaluate 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 42 merits. The Company’s policy is to recognize, when applicable, interest and penalties on uncertain tax positions as part of income tax expense. Prior to the Separation, our 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 us in a manner that is systematic, rational, and consistent with the asset and liability method prescribed by the accounting guidance for income taxes. Our 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 we were a separate taxpayer and a standalone enterprise. We believe the assumptions supporting the allocation and presentation of income taxes on a separate return basis are reasonable. Additional disclosures regarding our accounting for income taxes are provided in Note 15 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. Cautionary Statements Regarding Forward-Looking Statements This Annual Report on Form 10-K contains statements that constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995 and other securities laws. Forward-looking statements include those containing such words as “anticipates,” “believes,” "can," “could,” “estimates,” “expects,” “forecasts,” “goal,” “guidance,” “intends,” “may,” “outlook,” “plans,” "possible," “projects,” “seeks,” “sees,” “should,” “targets,” “will,” “would,” or other words of similar meaning. All statements that reflect Embecta’s expectations, assumptions or projections about the future, other than statements of historical fact, are forward-looking statements, including, without limitation, forecasts relating to discussions of future operations and financial performance (including volume growth, pricing, sales and earnings per share growth and cash flows), restructuring expenses and charges, 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. Although Embecta believes that the expectations reflected in any forward-looking statements it makes are based on reasonable assumptions, it can give no assurance that these expectations will be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. Such risks and uncertainties include, but are not limited to: •Competitive factors that could adversely affect Embecta’s operations, including adoption of new drug therapies for treatment of diabetes, new product introductions by Embecta’s competitors, the development of new technologies, lower cost producers that create pricing pressure and consolidation resulting in companies with greater scale and market presence than Embecta. •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 transaction agreements 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. •The adverse financial impact resulting from unfavorable changes in foreign currency exchange rates, as well as regional, national and foreign economic factors, including inflation, deflation, and fluctuations in interest rates, and their potential effect on its operating performance. •The impact of changes in United States, federal laws, and policy that could affect fiscal and tax policies, healthcare and international trade, including import and export regulation, tariffs, and international trade agreements. In particular, tariffs or other trade barriers imposed by the United States or other countries could adversely impact its supply chain costs or otherwise adversely impact its results of operations. 43 •Any future impact of pandemics or geopolitical instability on Embecta’s business, including disruptions in its operations and supply chains. •New or changing laws and regulations affecting Embecta’s domestic and foreign operations, or changes in enforcement practices, including laws relating to healthcare, environmental protection, trade, monetary and fiscal policies, taxation (including tax reforms that could adversely impact multinational corporations) and licensing and regulatory requirements for products. •The expected benefits of the Separation from BD. •Risks associated with indebtedness and our use of indebtedness available to us. •The risk that dis-synergy costs, costs of restructuring transactions and other costs incurred in connection with the Separation will exceed Embecta's estimates. •The impact of the Separation on Embecta's businesses and the risk that the Separation may be more difficult, time-consuming or costly than expected, including the impact on its resources, systems, including ERP, procedures and controls, diversion of management’s attention and the impact on relationships with customers, suppliers, employees and other business counterparties. •The expectations related to the costs, profitability, timing and the estimated financial impact of, and charges associated with, the Restructuring Plan. •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. •The risks associated with the material weakness identified in our internal control over financial reporting and our ability to remediate such material weakness. There can be no assurance that the transactions or uncertainties described above will in fact be consummated or occur in the manner described or at all. As a result, you should not place undue reliance upon our forward-looking statements. The above list of factors is not exhaustive or necessarily in order of importance. For additional information on identifying factors that may cause actual results to vary materially from those stated in forward-looking statements, see the discussions under Item 1A, “Risk Factors,” or in our other filings with the SEC. Any forward-looking statement speaks only as of the date on which it is made, and Embecta expressly disclaims and assumes no obligation to update or revise such statement, whether as a result of new information, future events or otherwise, except as required by applicable law.