Embecta (EMBC) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Embecta Corp.'s comprehensive financial information, including statements and management's analysis Item 1. Financial Statements and Supplementary Data (Unaudited) Embecta Corp.'s unaudited condensed consolidated financial statements and detailed notes for specified periods are presented Condensed Consolidated Statements of Income Presents Embecta Corp.'s unaudited condensed consolidated statements of income for specified periods Condensed Consolidated Statements of Income (Unaudited) | Metric (Millions USD) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Nine Months Ended June 30, 2023 | Nine Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Revenues | $286.1 | $291.1 | $838.9 | $854.9 | | Cost of products sold | $96.6 | $88.2 | $270.8 | $256.9 | | Gross Profit | $189.5 | $202.9 | $568.1 | $598.0 | | Operating Income | $51.3 | $97.1 | $195.7 | $312.6 | | Net Income | $15.2 | $62.4 | $64.4 | $240.8 | | Basic EPS | $0.27 | $1.08 | $1.13 | $4.17 | | Diluted EPS | $0.26 | $1.07 | $1.12 | $4.14 | - For the three months ended June 30, 2023, Net Income decreased by 75.6% to $15.2 million from $62.4 million in the prior year. For the nine months ended June 30, 2023, Net Income decreased by 73.3% to $64.4 million from $240.8 million[9][119] Condensed Consolidated Statements of Comprehensive Income Details Embecta Corp.'s unaudited condensed consolidated statements of comprehensive income, including foreign currency adjustments Condensed Consolidated Statements of Comprehensive Income (Unaudited) | Metric (Millions USD) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Nine Months Ended June 30, 2023 | Nine Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net Income | $15.2 | $62.4 | $64.4 | $240.8 | | Foreign currency translation adjustments | $1.5 | $(21.4) | $30.2 | $(37.3) | | Comprehensive Income | $16.7 | $41.0 | $94.6 | $203.5 | - Foreign currency translation adjustments positively impacted comprehensive income by $1.5 million for the three months ended June 30, 2023, a significant improvement from a $(21.4) million loss in the prior year period[12] Condensed Consolidated Balance Sheets Outlines Embecta Corp.'s unaudited condensed consolidated balance sheets, showing assets, liabilities, and equity Condensed Consolidated Balance Sheets (Unaudited) | Metric (Millions USD) | June 30, 2023 | September 30, 2022 | | :-------------------- | :------------ | :----------------- | | Total Current Assets | $787.5 | $664.7 | | Total Assets | $1,252.1 | $1,086.4 | | Total Current Liabilities | $385.8 | $301.0 | | Long-Term Debt | $1,595.0 | $1,598.1 | | Total Equity | $(809.4) | $(891.4) | - Total assets increased to $1,252.1 million as of June 30, 2023, from $1,086.4 million as of September 30, 2022, primarily driven by increases in current assets such as inventories and amounts due from Becton, Dickinson and Company[15] - Total Equity improved from an accumulated deficit of $(891.4) million to $(809.4) million, indicating a reduction in the accumulated deficit[15] Condensed Consolidated Statements of Equity Presents Embecta Corp.'s unaudited condensed consolidated statements of equity, detailing changes in capital and accumulated deficit Key Changes in Equity (Millions USD) | Metric | Nine Months Ended June 30, 2023 | Nine Months Ended June 30, 2022 | | :---------------------- | :------------------------------ | :------------------------------ | | Net income | $64.4 | $240.8 | | Other comprehensive income (loss) | $30.2 | $(37.3) | | Stock-based compensation plans | $16.6 | $5.8 | | Common dividends | $(25.8) | — | - The accumulated deficit decreased from $(577.1) million at October 1, 2022, to $(538.5) million at June 30, 2023, primarily due to net income and other comprehensive income, partially offset by common dividends[20] - Embecta paid common dividends of $0.45 per share (totaling $25.8 million) during the nine months ended June 30, 2023[20] Condensed Consolidated Statements of Cash Flows Summarizes Embecta Corp.'s unaudited condensed consolidated statements of cash flows, categorizing operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Unaudited) | Activity (Millions USD) | Nine Months Ended June 30, 2023 | Nine Months Ended June 30, 2022 | | :---------------------- | :------------------------------ | :------------------------------ | | Operating Activities | $38.1 | $354.2 | | Investing Activities | $(17.3) | $(15.4) | | Financing Activities | $(39.0) | $(40.9) | | Net Change in Cash | $(13.5) | $292.3 | - Net cash provided by operating activities significantly decreased to $38.1 million for the nine months ended June 30, 2023, from $354.2 million in the prior year, primarily due to lower net income and increased working capital usage[23][144] - Cash and cash equivalents decreased by $13.5 million during the nine months ended June 30, 2023, closing at $317.4 million[23] Notes to Condensed Consolidated Financial Statements Provides detailed explanatory notes to Embecta Corp.'s condensed consolidated financial statements Note 1 — Background Describes Embecta Corp.'s business as a global medical device company and its spin-off from Becton, Dickinson and Company - Embecta Corp. is a global medical device company focused on diabetes solutions, offering pen needles, syringes, safety devices, and a digital application[26] - The company spun off from Becton, Dickinson and Company (BD) on April 1, 2022, becoming a standalone publicly traded entity on The Nasdaq Global Select Market under the ticker 'EMBC'[27][28] Note 2 — Basis of Presentation Explains the basis of presentation for Embecta Corp.'s financial statements, including post-separation consolidation and cost allocations - Post-Separation (April 1, 2022), Embecta's financial statements are presented on a consolidated basis, prepared in accordance with Form 10-Q rules[30] - Prior to Separation, financial statements were derived from BD's records, with certain corporate and shared costs allocated to Embecta[31][32] - The company capitalizes costs for cloud computing arrangements, primarily for a new ERP system, totaling $26.6 million as of June 30, 2023[39] Note 3 — Third Party Arrangements and Related Party Disclosures Details Embecta Corp.'s ongoing agreements and financial relationships with Becton, Dickinson and Company post-separation - Post-Separation, BD ceased to be a related party, but various agreements (e.g., TSA, Factoring, Supply) govern the ongoing relationship[42][44] Amounts Due From/To BD (Millions USD) | Category | June 30, 2023 | | :------------------- | :------------ | | Amounts due from BD | $169.0 | | Amounts due to BD | $68.6 | - Transfers of certain assets and liabilities in jurisdictions like China, Mexico, and Italy were deferred at Separation and are expected to close at a future date[47] Note 4 — Collaboration Agreement Outlines Embecta Corp.'s collaboration agreement for developing an interoperable automated glycemic controller for its insulin patch pump - In March 2023, Embecta entered a collaboration to develop and commercialize an interoperable automated glycemic controller (iAGC) for its insulin patch pump[54] - An upfront payment of $2.5 million for project costs was expensed to Research and development during the nine months ended June 30, 2023[54] Note 5 — Other Operating Expenses Details Embecta Corp.'s separation and stand-up costs incurred to establish standalone operational functions Separation and Stand-up Costs (Millions USD) | Period | 2023 | 2022 | | :-------------------- | :---- | :---- | | Three months ended June 30 | $25.6 | $7.7 | | Nine months ended June 30 | $61.1 | $23.5 | - These costs primarily cover accounting, auditing, legal services, supply chain, employee retention, and ERP implementation to establish standalone functions[56] Note 6 — Contingencies States that Embecta Corp. was not a party to any material legal proceedings as of June 30, 2023 - The Company was not a party to any material legal proceedings as of June 30, 2023, or September 30, 2022[57] Note 7 — Revenues Describes Embecta Corp.'s revenue recognition policies and sales deductions for diabetes management products - Embecta sells syringes, pen needles, and other diabetes management products primarily to wholesalers and distributors[58] Sales Deductions (Millions USD) | Period | 2023 | 2022 | | :-------------------- | :----- | :----- | | Three months ended June 30 | $106.2 | $84.8 | | Nine months ended June 30 | $294.0 | $248.7 | - The company's contract asset balance remained stable at $1.2 million as of June 30, 2023, and September 30, 2022[63] Note 8 — Segment and Geographical Data Presents Embecta Corp.'s revenue disaggregated by geographic region, operating as a single segment - Embecta operates as a single segment, with revenue disaggregated by geographic region[64][67] Revenues by Geographic Region (Millions USD) | Region | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Nine Months Ended June 30, 2023 | Nine Months Ended June 30, 2022 | | :------------ | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | United States | $153.9 | $158.0 | $449.6 | $450.4 | | International | $132.2 | $133.1 | $389.3 | $404.5 | | Total | $286.1 | $291.1 | $838.9 | $854.9 | Note 9 — Stock-Based Compensation Details Embecta Corp.'s stock-based compensation plans, including granted units and associated expenses - Embecta granted 634,032 time-vested restricted stock units (TVUs) and 244,192 performance-based restricted stock units (PSUs) during the nine months ended June 30, 2023[68][69] Total Stock-Based Compensation Expense (Millions USD) | Period | 2023 | 2022 | | :-------------------- | :---- | :---- | | Three months ended June 30 | $5.7 | $5.8 | | Nine months ended June 30 | $17.0 | $14.3 | - Unrecognized compensation expense for non-vested stock-based awards was approximately $37.7 million as of June 30, 2023, to be recognized over a weighted-average remaining life of 2.0 years[74] Note 10 — Goodwill and Other Intangible Assets Summarizes Embecta Corp.'s goodwill and other intangible assets, including patents and customer relationships Goodwill and Other Intangible Assets (Millions USD) | Asset Category | June 30, 2023 | September 30, 2022 | | :------------------------------ | :------------ | :----------------- | | Patents – net | $6.3 | $5.5 | | Customer Relationships and Other – net | $3.0 | $3.4 | | Total amortized intangible assets | $9.3 | $8.9 | | Goodwill | $15.7 | $15.7 | | Total Goodwill and Other Intangible Assets | $25.0 | $24.6 | Note 11 — Long-Term Debt Outlines Embecta Corp.'s long-term debt structure, including term loans and senior secured notes - Embecta has a Credit Agreement including a $950.0 million Term Loan (matures March 2029, SOFR + 300 bps) and a $500.0 million Revolving Credit Facility (matures 2027, undrawn as of June 30, 2023)[77][78] - The company also has $500.0 million in 5.00% senior secured notes and $200.0 million in 6.75% senior secured notes, both due February 2030[77][78] Total Debt Outstanding (Millions USD) | Debt Type | June 30, 2023 | | :------------------------ | :------------ | | Term Loan due March 2029 | $938.1 | | 5.00% Notes due February 2030 | $500.0 | | 6.75% Notes due February 2030 | $200.0 | | Total principal debt issued | $1,638.1 | | Long-term debt (net) | $1,595.0 | Note 12 — Earnings per Share Explains the calculation of Embecta Corp.'s basic and diluted earnings per share for various periods - The calculation of EPS for periods prior to the Separation (April 1, 2022) uses 57,012,925 shares, the number distributed to BD shareholders[80] Earnings Per Common Share (Unaudited) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Nine Months Ended June 30, 2023 | Nine Months Ended June 30, 2022 | | :---------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Basic EPS | $0.27 | $1.08 | $1.13 | $4.17 | | Diluted EPS | $0.26 | $1.07 | $1.12 | $4.14 | | Basic weighted average shares (thousands) | 57,296 | 57,802 | 57,223 | 57,799 | | Diluted weighted average shares (thousands) | 57,582 | 58,207 | 57,714 | 58,204 | Note 13 — Income Taxes Details Embecta Corp.'s effective tax rates and the primary factors influencing their changes Effective Tax Rates | Period | 2023 | 2022 | | :-------------------- | :---- | :---- | | Three months ended June 30 | 24.4% | 15.2% | | Nine months ended June 30 | 36.0% | 15.2% | - The increase in effective tax rates is primarily due to an increase in valuation allowance on interest expense carryforwards, higher tax expense on undistributed foreign earnings, and increased non-deductible expenses[83] Note 14 — Financial Instruments and Fair Value Measurements Describes Embecta Corp.'s financial instruments, fair value measurements, and management of market risks - Cash and cash equivalents totaled $317.4 million as of June 30, 2023, primarily held in money market funds (Level 1 fair value)[85] - The company uses foreign currency forward contracts to mitigate transactional currency exposures, with notional amounts of $6.1 million as of June 30, 2023[86][87] - Embecta transferred the majority of its trade receivables to BD under Factoring Agreements, reducing its credit risk exposure[90] - Three customers collectively represented approximately 39.8% of total gross revenues for the three months ended June 30, 2023, indicating a concentration of credit risk[91] Note 15 — Property, Plant and Equipment Presents Embecta Corp.'s property, plant, and equipment, net, categorized by asset type Property, Plant and Equipment, Net (Millions USD) | Asset Category | June 30, 2023 | September 30, 2022 | | :------------------------------ | :------------ | :----------------- | | Land | $2.3 | $1.4 | | Buildings | $127.1 | $123.7 | | Machinery, equipment and fixtures | $577.3 | $505.1 | | Construction in progress | $39.1 | $64.9 | | Total Property, Plant and Equipment, Net | $308.7 | $301.6 | Note 16 — Leases Details Embecta Corp.'s finance and operating lease obligations, including maturity schedules - Embecta has finance leases primarily for its Holdrege, Nebraska manufacturing site and operating leases mainly for real estate, including a new Corporate Headquarters in Parsippany, NJ[95][96][98] Lease Liabilities Maturities as of June 30, 2023 (Millions USD) | Fiscal Year | Finance Leases | Operating Leases | Total Lease Payments | | :---------- | :------------- | :--------------- | :------------------- | | 2023 | $0.9 | $0.7 | $1.6 | | 2024 | $3.6 | $3.8 | $7.4 | | 2025 | $3.7 | $2.9 | $6.6 | | 2026 | $3.7 | $2.6 | $6.3 | | 2027 | $3.8 | $2.2 | $6.0 | | Thereafter | $40.1 | $13.4 | $53.5 | | Total Lease Payments | $55.8 | $25.6 | $81.4 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Embecta's financial performance, key trends, liquidity, and strategic investments post-separation from BD Company Overview Embecta is a global medical device company specializing in diabetes care solutions, spun off from BD in April 2022 - Embecta is a leading global medical device company specializing in diabetes care solutions, with products used by nearly 30 million people in over 100 countries[102] - The company's product portfolio includes pen needles, syringes, safety injection devices, and a proprietary digital application for diabetes management[103] - Embecta completed its spin-off from BD on April 1, 2022, becoming a standalone public company[105] Key Trends Affecting Our Results of Operations Key trends impacting operations include intense competition, pricing pressures, and shifts in diabetes treatment practices - The company faces significant competition from large and specialized companies, as well as non-traditional entrants in the highly regulated medical devices industry[108] - Increased scrutiny on healthcare spending, volume-based procurement, and group purchasing organizations are creating significant pricing pressures, impacting operating margins[109] - The market for traditional injection devices (insulin syringes and pen needles) is experiencing commoditization due to demand for affordable products and competition from low-cost providers[111] - Changes in clinical practice, including new drug therapies (e.g., SGLT-2s, GLP-1s) and the transition to insulin infusion pumps, are delaying insulin initiation and reducing demand for traditional products[112] Recent Developments Recent developments cover the ongoing impact of the COVID-19 pandemic and broader macroeconomic conditions on operations - The COVID-19 pandemic continues to impact healthcare priorities, supply chains, and economic activities, leading to increased costs and disrupted availability of raw materials[116] - The company has mitigated supply chain disruptions by increasing inventory levels to ensure uninterrupted supply to customers[116] - Macroeconomic conditions, including inflation, slowing economic growth, rising interest rates, and volatility in capital markets, continue to affect revenues and results of operations[118] Results of Operations Analysis of Embecta's financial results, including revenues, gross profit, operating income, and net income performance Summary of Financial Results (Millions USD) | Metric | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | % Change | 9 Months Ended June 30, 2023 | 9 Months Ended June 30, 2022 | % Change | | :-------------------- | :--------------------------- | :--------------------------- | :------- | :--------------------------- | :--------------------------- | :------- | | Revenues | $286.1 | $291.1 | (1.7)% | $838.9 | $854.9 | (1.9)% | | Gross Profit | $189.5 | $202.9 | (6.6)% | $568.1 | $598.0 | (5.0)% | | Operating Income | $51.3 | $97.1 | (47.2)% | $195.7 | $312.6 | (37.4)% | | Net Income | $15.2 | $62.4 | (75.6)% | $64.4 | $240.8 | (73.3)% | - Revenue decreased by $5.0 million (1.7%) for the three months and $16.0 million (1.9%) for the nine months ended June 30, 2023, primarily due to negative foreign currency translation and unfavorable price/volume in the U.S., partially offset by international price/volume increases[121][122] - Cost of products sold increased by 9.5% and 5.4% for the three and nine months, respectively, driven by inflation on raw materials, direct labor, and overhead, as well as higher costs from the Cannula Supply Agreement with BD[124] - Research and development expenses increased significantly by 58.0% and 25.7% for the three and nine months, respectively, due to increased investment in the insulin patch pump program and collaboration arrangement costs[126] - Interest expense, net, increased by $7.5 million and $55.0 million for the three and nine months, respectively, primarily due to higher interest rates on variable rate debt and debt outstanding for a longer period in fiscal year 2023[128] Liquidity and Capital Resources Assessment of Embecta's financial flexibility, cash position, debt structure, and compliance with covenants - Embecta believes its cash, cash equivalents, cash from operations, and revolving credit facility provide sufficient financial flexibility for future funding needs[132] - The company has $1,638.1 million in total principal debt issued, including a Term Loan ($938.1M), 5.00% Notes ($500.0M), and 6.75% Notes ($200.0M)[137] - As of June 30, 2023, Embecta was in compliance with all financial covenants related to its credit agreement and notes[136] Net Cash Flows (Millions USD) | Activity | Nine Months Ended June 30, 2023 | Nine Months Ended June 30, 2022 | | :------------------ | :------------------------------ | :------------------------------ | | Operating activities | $38.1 | $354.2 | | Investing activities | $(17.3) | $(15.4) | | Financing activities | $(39.0) | $(40.9) | - Net cash provided by operating activities decreased significantly due to lower net income and increased working capital usage, including a $42.5 million increase in inventories[144] - Financing activities for the nine months ended June 30, 2023, included $25.8 million in dividend payments and $7.1 million in long-term debt payments[147] Contractual Obligations Details Embecta's contractual obligations, including purchase and lease commitments, with no material changes reported - Contractual obligations include purchase obligations for goods and services and lease obligations, with no material changes outside the ordinary course of business as of June 30, 2023[150][151] - The company expects significant costs for information technology infrastructure as it transitions to its own systems[150] Critical Accounting Policies Confirms no changes to Embecta's critical accounting policies as detailed in the 2022 Form 10-K - There have been no changes to Embecta's critical accounting policies as of June 30, 2023, which are detailed in the 2022 Form 10-K[152] Cautionary Statements Regarding Forward-Looking Statements Highlights risks and uncertainties associated with Embecta's forward-looking statements, including competitive and economic factors - The report contains forward-looking statements subject to numerous risks and uncertainties, including competitive factors, product profitability, BD's performance under separation agreements, increased operating costs, changes in reimbursement practices, foreign currency fluctuations, and geopolitical instability[153][154] - Other risks include the impact of the Separation, dis-synergy costs, and the ability to complete strategic partnerships or acquisitions[162] Item 3. Quantitative and Qualitative Disclosures About Market Risk Embecta's exposure to foreign currency exchange and interest rate risks, and management strategies, are outlined - Embecta is exposed to foreign currency exchange rate risk due to global operations and mitigates this through forward contracts[157][158] - Interest rate risk primarily relates to the Term Loan, with a 100 basis point change in interest rates impacting annual interest expense by $9.4 million based on June 30, 2023, borrowings[160] Item 4. Controls and Procedures Management confirms effective disclosure controls, with reliance on BD for certain internal control processes during transition - Embecta's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2023[161] - The company continues to rely on BD for certain material processes and internal control over financial reporting during the TSA period[163] - No changes in internal control over financial reporting during the fiscal quarter ended June 30, 2023, have materially affected or are reasonably likely to materially affect Embecta's internal control over financial reporting[163] PART II. OTHER INFORMATION This section provides additional information, including risk factors, exhibits, and official signatures Item 1A. Risk Factors No material changes to Embecta's risk factors from those described in the 2022 Form 10-K are reported - No material changes to Embecta's risk factors from those described in the 2022 Form 10-K[166] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amended bylaws and certifications - Exhibits include Amended and Restated Bylaws (effective August 2, 2023), Certifications of CEO and CFO (pursuant to SEC Rule 13a–14(a) and Section 1350), and financial statements formatted in iXBRL[167] Signatures Official signatures of Embecta Corp.'s key executives certify the accuracy of the report - The report is signed by Devdatt Kurdikar (President and CEO), Jacob Elguicze (SVP, CFO), and Brian Capone (VP, Controller and Chief Accounting Officer) on August 8, 2023[170]