Embecta (EMBC) - 2025 Q1 - Quarterly Report

Financial Performance - Revenues decreased by $15.4 million, or 5.6$261.9 million for the three months ended December 31, 2024, compared to $277.3 million for the same period in 2023[112] - Gross profit decreased by$28.8 million to $157.1 million, with gross profit as a percentage of revenue dropping to 60.0$16.8 million to $28.7 million, representing a decrease of 36.9$20.1 million to $0.0 million, marking a 100$13.4 million, or 14.7%, to $104.8 million, with cost of products sold as a percentage of revenues rising to 40.0$9.2 million, or 10.2%, to $81.1 million, primarily due to lower costs associated with BD[114] - Research and development expenses increased slightly by$0.1 million, or 0.5%, to $20.3 million, driven by asset impairments related to the discontinued patch pump program[115] Debt and Cash Flow - As of December 31, 2024, total principal debt issued by the company was$1,568.9 million, with long-term debt amounting to $1,534.7 million after accounting for current debt obligations and debt issuance costs[123] - The company's total debt as of December 31, 2024, was$1,544.2 million, with short-term debt representing 0.6% of total debt and a weighted average cost of total debt at 6.7%[124] - Cash and equivalents decreased from $274.2 million on September 30, 2024, to$216.7 million on December 31, 2024, primarily due to cash used for financing activities totaling $45.2 million[133] - The company paid approximately$32.4 million on the Term Loan during the first quarter of fiscal year 2025, with $30.0 million being discretionary payments[125] - Net cash used for operating activities was$5.3 million, primarily due to changes in accounts payable and accrued expenses, which were affected by the timing of payments[133] - The company plans to explore options for retiring or repurchasing outstanding debt, depending on market conditions and liquidity requirements[126] Tax and Regulatory Issues - The effective tax rate increased to 100.0% for the three months ended December 31, 2024, compared to (40.6)% in the prior year, primarily due to the absence of tax benefits from deferred tax assets[121] Operational Challenges - The company continues to face pricing pressures and competition in the medical device industry, impacting operating margins[100] - The company is subject to various risks, including competitive factors, operating cost fluctuations, and potential impacts from geopolitical instability[141] - The company is exposed to foreign currency exchange risks that could adversely affect its financial condition and cash flows[145] Internal Controls and Compliance - As of December 31, 2024, the company's disclosure controls and procedures were deemed ineffective due to a material weakness in internal control over financial reporting[150] - The company has initiated a remediation plan to address the identified material weakness, which will continue through fiscal year 2025[152] - No changes in internal control over financial reporting occurred during the three months ended December 31, 2024, that materially affected internal controls[153] - The company is enhancing control documentation and design to improve the accuracy of data used in financial reporting[154] Technology and Infrastructure - The company expects to incur material costs associated with operating and maintaining its information technology infrastructure over the next several years[138] - The implementation of a new ERP system is ongoing, with phases completed in North America, EMEA, Asia, and Greater China during fiscal years 2023 and 2024; Latin America implementation was completed in Q1 FY2025[151] Interest Rates - The interest rate on the company's Term Loan is set at 300 basis points over SOFR, with a 0.50% SOFR floor; a 100 basis points change in interest rates would impact interest expense by $8.7 million annually[148] Lease Obligations - Total lease payments, including finance and operating leases, are projected to be$71.6 million as of December 31, 2024[128] Credit Ratings - The company’s credit ratings are B1 from Moody's and B+ from Standard & Poor's as of mid-2024[131]