embc-20221231

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: December 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-41186

EMBECTA CORP.

(Exact name of registrant as specified in its charter)


Delaware						87-1583942
(State or other jurisdiction of incorporation or organization)						(I.R.S. employer identification no.)

300 Kimball Drive, Suite 300, Parsippany, New Jersey						07054
(Address of principal executive offices)						(Zip code)

(862) 401-0000

(Registrant’s telephone number, including area code)

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Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

symbol(s)

Name of each exchange

on which registered

Common Stock, par value $0.01 per share

EMBC

The Nasdaq Stock Market LLC (Nasdaq Global Select Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Emerging growth company

☐

Smaller reporting company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of Embecta Corp. common stock outstanding as of February 1, 2023 was 57,273,185 shares, par value $0.01 per share.

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Embecta Corp.

Form 10-Q

For the Quarterly Period ended December 31, 2022

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		Page
Part I. Financial Information		1
Item 1.	Financial Statements and Supplementary Data (Unaudited)	1
	Condensed Consolidated Statements of Income	1
	Condensed Consolidated Statements of Comprehensive Income	2
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	26
Part II. Other Information		27

Item 1A.	Risk Factors	27




Item 6.	Exhibits	27
Signatures		28

-i-

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements and Supplementary Data.

Condensed Consolidated Statements of Income

Embecta Corp.

(Unaudited)


	Three Months Ended December 31,
	2022		2021

Revenues	$	275.7	$	289.3
Cost of products sold(1)	86.9		85.4
Gross Profit	$	188.8	$	203.9
Operating expenses:
Selling and administrative expense	72.8		62.2
Research and development expense	16.9		16.7

Other operating expenses	10.3		8.4
Total Operating Expenses	$	100.0	$	87.3
Operating Income	$	88.8	$	116.6
Interest expense, net	(25.6)		—
Other income (expense), net	(7.1)		—
Income Before Income Taxes	$	56.1	$	116.6
Income tax provision	20.9		17.8
Net Income	$	35.2	$	98.8

Net Income per common share:
Basic	$	0.62	$	1.73
Diluted	$	0.61	$	1.73

(1)For periods prior to the Separation, this income statement line includes cost of products sold from related party inventory purchases. For the three month period ended December 31, 2021, cost of products sold from related party inventory purchases was $11.5 million.

See notes to the Unaudited Condensed Consolidated Financial Statements.


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

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Condensed Consolidated Statements of Comprehensive Income

Embecta Corp.

(Unaudited)


	Three Months Ended December 31,
	2022		2021

Net Income	$	35.2	$	98.8
Other Comprehensive Income (Loss), net of tax
Foreign currency translation adjustments	26.0		(8.8)
Other Comprehensive Income (Loss)	$	26.0	$	(8.8)
Comprehensive Income	$	61.2	$	90.0

See notes to the Unaudited Condensed Consolidated Financial Statements.


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

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Condensed Consolidated Balance Sheets

Embecta Corp.


	December 31, 2022		September 30, 2022
	(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	385.2	$	330.9
Trade receivables, net (net of allowance for doubtful accounts of $1.3 million as of December 31, 2022 and September 30, 2022, respectively)	19.9		22.2
Inventories:
Materials	27.8		23.4
Work in process	6.6		5.6
Finished products	109.0		93.8
Total Inventories	$	143.4	$	122.8
Amounts due from Becton, Dickinson and Company	123.4		110.9
Prepaid expenses and other	89.8		77.9
Total Current Assets	$	761.7	$	664.7
Property, Plant and Equipment, Net	314.3		301.6
Goodwill and Other Intangible Assets	24.3		24.6
Deferred Income Taxes and Other Assets	96.6		95.5
Total Assets	$	1,196.9	$	1,086.4
Liabilities and Equity
Current Liabilities
Accounts payable	$	37.2	$	41.4
Accrued expenses	156.8		104.3
Amounts due to Becton, Dickinson and Company	69.7		66.5
Salaries, wages and related items	48.6		48.5
Current debt obligations	9.5		9.5
Current finance lease liabilities	3.6		3.6
Income taxes	44.9		27.2
Total Current Liabilities	$	370.3	$	301.0
Deferred Income Taxes and Other Liabilities	33.3		46.1
Long-Term Debt	1,597.1		1,598.1
Non Current Finance Lease Liabilities	32.3		32.6
Commitments and Contingencies
Embecta Corp. Equity
Common stock, $0.01 par value Authorized - 250,000,000 Issued and outstanding - 57,213,757 as of December 31, 2022 and 57,055,327 as of September 30, 2022	$	0.6	$	0.6
Additional paid-in capital	12.7		10.0
Accumulated deficit	(550.5)		(577.1)

Accumulated other comprehensive loss	(298.9)		(324.9)
Total Equity	$	(836.1)	$	(891.4)
Total Liabilities and Equity	$	1,196.9	$	1,086.4

See notes to the Unaudited Condensed Consolidated Financial Statements.


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

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Condensed Consolidated Statements of Equity

Embecta Corp.

(Unaudited)


	Common Stock
	Shares	Par Value		Additional Paid-In Capital		Accumulated Deficit		Net Investment from Becton, Dickinson and Company		Accumulated Other Comprehensive (Loss) Income		Total
Balance at October 1, 2021	—	$	—	$	—	$	—	$	864.8	$	(270.5)	$	594.3
Net income attributable to Diabetes Care Business	—	—		—		—		98.8		—		98.8
Other comprehensive loss, net of taxes	—	—		—		—		—		(8.8)		(8.8)
Net transfers to Becton, Dickinson and Company	—	—		—		—		(133.8)		—		(133.8)
Balance at December 31, 2021	—	$	—	$	—	$	—	$	829.8	$	(279.3)	$	550.5

Balance at October 1, 2022	57,055,327	$	0.6	$	10.0	$	(577.1)	$	—	$	(324.9)	$	(891.4)


Net income attributable to Embecta Corp.	—	—		—		35.2		—		—		35.2
Other comprehensive income, net of taxes	—	—		—		—		—		26.0		26.0
Stock-based compensation plans	—	—		5.5		—		—		—		5.5
Common dividends ($0.15 per share)	—	—		—		(8.6)		—		—		(8.6)
Issuance of shares related to stock-based compensation plans	158,430	—		(2.8)		—		—		—		(2.8)
Balance at December 31, 2022	57,213,757	$	0.6	$	12.7	$	(550.5)	$	—	$	(298.9)	$	(836.1)

See notes to the Unaudited Condensed Consolidated Financial Statements.


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

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Condensed Consolidated Statements of Cash Flows

Embecta Corp.

(Unaudited)


	Three Months Ended December 31,
	2022		2021
Operating Activities
Net income	$	35.2	$	98.8
Adjustments to net income to derive net cash provided by operating activities:
Depreciation and amortization	7.2		8.4
Amortization of debt issuance costs	1.6		—

Stock-based compensation	5.5		4.6
Net periodic pension benefit and other postretirement costs	1.2		2.2
Deferred income taxes	1.4		—
Change in operating assets and liabilities:
Trade receivables, net	3.0		30.7
Inventories	(14.7)		(4.3)
Due from/due to Becton, Dickinson and Company	(9.5)		—
Prepaid expenses and other	(6.6)		0.9
Accounts payable, accrued expenses and other current liabilities	19.4		(2.5)
Income and other net taxes payable	18.2		—
Other assets and liabilities, net	(1.5)		—
Net Cash Provided by Operating Activities	$	60.4	$	138.8
Investing Activities
Capital expenditures	$	(4.7)	$	(4.3)

Net Cash Used for Investing Activities	$	(4.7)	$	(4.3)
Financing Activities

Payments on long-term debt	$	(2.4)	$	—


Payments related to tax withholding for stock-based compensation	(2.8)		—
Payments on finance lease	(0.9)		—


Net transfers to Becton, Dickinson and Company	—		(134.5)
Net Cash Used for Financing Activities	$	(6.1)	$	(134.5)
Effect of exchange rate changes on cash and cash equivalents	4.7		—
Net Change in Cash and cash equivalents	$	54.3	$	—
Opening Cash and cash equivalents	330.9		—
Closing Cash and cash equivalents	$	385.2	$	—

Schedule of non-cash Financing Activities:
Dividends payable	$	8.6	$	—

See notes to the Unaudited Condensed Consolidated Financial Statements.


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

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Notes to Unaudited Condensed Consolidated Financial Statements

Embecta Corp.

Note 1—Background

Embecta Corp. ("Embecta" or the "Company") is a leading global medical device company focused on providing solutions to improve the health and well-being of people living with diabetes. The Company has a broad portfolio of marketed products, including a variety of pen needles, syringes and safety devices, which are complemented by a proprietary digital application designed to assist people with managing their diabetes. The Company primarily sells products to wholesalers and distributors that sell to retail and institutional channels who in turn sell to patients.

On April 1, 2022, Embecta and Becton, Dickinson and Company ("BD") entered into a Separation and Distribution Agreement (the "Separation and Distribution Agreement"). Pursuant to the Separation and Distribution Agreement, BD agreed to spin off its diabetes care business ("Diabetes Care Business") into Embecta, a new, publicly traded company (the "Separation").

The Separation occurred by means of a pro-rata distribution of all of Embecta’s issued and outstanding shares of common stock on the basis of one share of Embecta common stock, par value $0.01 per share, for every five shares of BD common stock, par value $1.00 per share, held as of the close of business on March 22, 2022, the record date for the distribution. Embecta is now a standalone publicly traded company and, on April 1, 2022, regular-way trading of Embecta common stock commenced on the Nasdaq Global Select Market under the ticker symbol "EMBC".

In connection with the Separation, BD and Embecta entered into various agreements to provide a framework for the relationship between BD and Embecta after the Separation, including, but not limited to, a separation and distribution agreement, a transition services agreement, a tax matters agreement, an employee matters agreement, a cannula supply agreement, contract manufacturing agreements, an intellectual property matters agreement, a logistics services agreement, distribution agreements, factoring and receivables agreements, local support and service agreements and other transaction documents.

Note 2 - Basis of Presentation

On April 1, 2022, the Company became a standalone publicly traded company, and its financial statements are now presented on a consolidated basis. Prior to the Separation on April 1, 2022, the Company’s historical combined financial statements were prepared on a standalone basis and were derived from BD's Consolidated Financial Statements and accounting records. The unaudited financial statements for all periods presented, including the historical results of the Company prior to April 1, 2022, are now referred to as "Condensed Consolidated Financial Statements", and have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by United States generally accepted accounting principles ("GAAP") for complete consolidated financial statements are not included herein. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. In the Company’s opinion, all adjustments necessary for a fair statement of these interim statements have been included and are of a normal and recurring nature. These interim statements should be read in conjunction with the audited financial statements and notes thereto included in Embecta’s Annual Report on Form 10-K for the year ended September 30, 2022 filed with the Securities and Exchange Commission on December 22, 2022 (the "2022 Form 10-K").

Prior to the Separation, the Company was referred to as the Diabetes Care Business. The assets, liabilities, revenue and expenses of the Diabetes Care Business were reflected in the Condensed Combined Financial Statements on a historical cost basis, as included in the consolidated financial statements of BD, using the historical accounting policies applied by BD. The Condensed Combined Financial Statements did not purport to reflect what the Company’s results of operations, comprehensive income, financial position, equity or cash flows would have been had the Company operated as a standalone public company during the periods presented.

The Diabetes Care Business had historically functioned together with the other businesses controlled by BD. Accordingly, the Diabetes Care Business relied on BD’s corporate and other support functions for its business. Therefore, for the period prior to the Separation, certain corporate and shared costs were allocated to the Diabetes Care Business based on a specific identification basis or, when specific identification was not practicable, a proportional cost allocation method. Refer to Note 2 of the audited Consolidated Financial Statements in the 2022 Form 10-K for additional details on Embecta's basis of presentation during periods prior to the Separation, at Separation and post Separation.

As the separate legal entities that made up the Diabetes Care Business were not historically held by a single legal entity, Net Investment from Becton, Dickinson and Company was shown in lieu of stockholders’ equity in these Condensed Consolidated Financial Statements. Net Investment from Becton, Dickinson and Company represented BD’s interest in the recorded assets of the Diabetes Care Business and the cumulative investment by BD through the date of the Separation, inclusive of operating results.


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

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For periods prior to the Separation, income tax expense and tax balances in the Condensed Combined Financial Statements were calculated on a separate tax return basis. The separate tax 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. Management believes the assumptions supporting the allocation and presentation of income taxes on a separate return basis are reasonable.

As part of the Separation, Net Investment from Becton, Dickinson and Company was reclassified as Common Stock and Accumulated Deficit.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates or assumptions affect reported assets, liabilities, revenues and expenses, including determining the allocation of shared costs and expenses from BD, depreciable and amortizable lives, sales returns and allowances, rebate accruals, inventory reserves and taxes on income as reflected in the Condensed Consolidated Financial Statements. Actual results could differ from these estimates.

The following provides updates to our "Summary of Significant Accounting Policies" as disclosed in the Form 10-K.

Cloud Computing Arrangements

The Company capitalizes costs incurred to implement cloud computing arrangements that are service contracts within Prepaid expenses and other and Deferred Income Taxes and Other Assets in the Company's Condensed Consolidated Balance Sheets. Implementation costs associated with cloud computing arrangements are capitalized when incurred during the application development phase. The Company amortizes the costs over the expected term of the hosting arrangement using the straight-line method to the same income statement line as the associated cloud operating expenses. The total balance of capitalized costs associated with these arrangements as of December 31, 2022 is $10.9 million which primarily relates to the implementation of the Company's new enterprise resource planning system ("ERP"). Once the implementation of the new ERP is complete and ready for its intended use, the capitalized costs are expected to be amortized over the term of the hosting arrangement which is expected to be five years.

Recently Adopted Accounting Standards

In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers, as if it had originated the contracts. The Company adopted this guidance at the beginning of fiscal year 2023 and it did not materially impact the Company's condensed consolidated financial statements.

Note 3 — Third Party Arrangements and Related Party Disclosures

Pursuant to the Separation, BD ceased to be a related party to Embecta and accordingly, no related party transactions or balances are reported subsequent to April 1, 2022.

In connection with the Separation, the Company entered into the Separation and Distribution Agreement, which contains provisions that, among other things, relate to (i) assets, liabilities and contracts to be transferred, assumed and assigned to each of Embecta and BD (including certain deferred assets and liabilities) as part of the Separation, (ii) cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of Embecta's business with Embecta and financial responsibility for the obligations and liabilities of BD’s remaining businesses with BD, (iii) procedures with respect to claims subject to indemnification and related matters, (iv) the allocation among Embecta and BD of rights and obligations under existing insurance policies with respect to occurrences prior to completion of the Separation, as well as the right to proceeds and the obligation to incur certain deductibles under certain insurance policies, and (v) procedures governing Embecta’s and BD’s obligations and allocations of liabilities with respect to ongoing litigation matters that may implicate each of BD’s business and Embecta’s business.

Agreements that Embecta entered into with BD that govern aspects of Embecta's relationship with BD following the Separation include, but are not limited to the Transition Services Agreements ("TSA"), Trade Receivables Factoring Agreements ("Factoring Agreements"), Distribution Agreements, Cannula Supply Agreement, Tax Matters Agreement, Logistics Services Agreement, employee matters agreement, an intellectual property matters agreement, local support services agreements, certain other manufacturing arrangements and a process services agreement and lease agreement for a


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

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manufacturing facility located in Holdrege, Nebraska. For details on the rights and responsibilities of the parties under these agreements refer to Note 4 to the audited Consolidated Financial Statements in the 2022 Form 10-K.

The amount due from BD under the above agreements was $123.4 million at December 31, 2022 and is reflected in Amounts due from Becton, Dickinson and Company. The amount due to BD under these agreements was $69.7 million at December 31, 2022 and is included in Amounts due to Becton, Dickinson and Company.

The closing of the transfers of certain assets and liabilities related to the Diabetes Care Business in certain jurisdictions, including China, Mexico, and Italy, as contemplated by the Separation and Distribution Agreement did not occur at Separation. The transfers of the relevant local assets and liabilities for these deferred countries are expected to close at a future date. As of December 31, 2022, the Company estimates that amounts due to BD related to certain assets and liabilities in deferred close jurisdictions is $29.9 million and are reflected in Accrued expenses. As of December 31, 2022, the Company estimates that amounts due from BD related to certain assets and liabilities in deferred close jurisdictions are $4.9 million and is reflected in Prepaid expenses and other.

Prior to the Separation, the Company did not operate as a standalone business and the Condensed Combined Financial Statements were derived from the consolidated financial statements and accounting records of BD. The following disclosure summarizes activity between the Company and BD up to the Separation, including the affiliates of BD that were not part of the Separation.

Corporate and Medical Segment Allocations from BD

Prior to the Separation, BD provided significant corporate, finance, human resources, information technology, facilities, and legal services, among others (collectively, “General Corporate Expenses”) to the Company. Some of these services continue to be provided by BD to the Company on a temporary basis under the Transition Services Agreement. For purposes of these Condensed Consolidated Financial Statements for the periods prior to the Separation, the General Corporate Expenses have been allocated to the Company.

The allocations of General Corporate Expenses are reflected in the Condensed Consolidated Statements of Income as follows:


	Three months ended December 31,
	2021
Cost of products sold	$	1.6
Selling and administrative expense	24.4
Research and development expense	1.7
Other (income) expense, net	(1.0)
Total General Corporate Expenses	$	26.7

These expenses were allocated to the Company on a pro rata basis of global and regional revenues, headcount, research and development spend and other drivers. Management believes the assumptions underlying the Condensed Consolidated Financial Statements, including the assumptions regarding allocating General Corporate Expenses from BD, are reasonable. Nevertheless, the Condensed Consolidated Financial Statements for periods prior to the Separation may not include all of the actual expenses that would have been incurred and may not reflect the Company’s consolidated results of operations, financial position and cash flows had it been a standalone public company during the periods presented. Actual costs that would have been incurred if the Company had been a standalone public company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure.

Related party transactions

The following transactions represent activity in the ordinary course of business between the Company and BD prior to the Separation for certain materials for use in production of certain medical products that were not at arm’s length. The following table summarizes related party purchases for the three month period ended December 31, 2021:


	Three months ended December 31,
	2021
Purchases from BD	$	14.4

All significant intercompany transactions between the Company and BD prior to the Separation have been included in the Condensed Consolidated Financial Statements and are considered to be effectively settled for cash at the time the


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

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transaction is recorded. For the period prior to the Separation, the total net effect of the settlement of these intercompany transactions is reflected in the Condensed Consolidated Statements of Cash Flows as a financing activity and in the Condensed Consolidated Balance Sheets as Net Investment from Becton, Dickinson and Company.

Prior to the Separation, net transfers to BD were included within Net Investment from Becton, Dickinson and Company. in the Condensed Consolidated Statements of Equity and represent the net effect of transactions between the Company and BD.

The following table summarizes the components of net transfers to BD for the three months ended December 31, 2021:




Cash pooling and general financing activities(1)	$	170.3
Corporate and segment allocations, excluding non-cash stock-based compensation	(25.1)

Taxes deemed settled with BD	(10.7)
Net transfers to BD as reflected in the Condensed Consolidated Statements of Cash Flows	134.5
Stock-based compensation expense	(4.6)




Pension expense	(2.2)
Other transfers to (from) BD, net	6.1
Net transfers to BD	$	133.8

(1)The nature of activities includes financing activities for capital transfers, cash sweeps and other treasury services. As part of this activity, cash balances were swept to BD on a daily basis under the BD Treasury function and the Company receives capital from BD for its cash needs.

Note 4 — Other Operating Expenses

In connection with the Separation, the Company incurred separation and stand-up costs of approximately $9.9 million and restructuring related costs of approximately $0.4 million during the three months ended December 31, 2022. There were $8.4 million of separation and stand-up costs incurred during the three months ended December 31, 2021. The costs incurred primarily consist of costs associated with accounting, auditing, legal services, supply chain, employee retention, and certain other costs to establish certain stand-alone functions to assist with the transition to being a stand-alone entity.

Note 5 — Contingencies

The Company was not a party to any material legal proceedings at December 31, 2022 or September 30, 2022, nor is it a party to any material legal proceedings as of the date of issuance of these Condensed Consolidated Financial Statements.

Note 6 — Revenues

The Company’s policies for recognizing sales have not changed from those described in the 2022 Form 10-K. The Company sells syringes, pen needles and other products used in the management of diabetes which are primarily sold to wholesalers and distributors that sell to retail and institutional channels who in turn sell to patients. End-users of the Company’s products include healthcare institutions, physicians, life science researchers, clinical laboratories, the pharmaceutical industry, and the general public.

Measurement of Revenues

Payment terms extended to the Company’s customers are based upon commercially reasonable terms for the markets in which the Company’s products are sold. Because the Company generally expects to receive payment within one year or less from when control of a product is transferred to the customer, the Company does not generally adjust its revenues for the effects of a financing component. The Company’s allowance for doubtful accounts reflects the current estimate of credit losses expected to be incurred over the life of its trade receivables. Such estimated credit losses are determined based on historical loss experiences, customer specific credit risk, and reasonable and supportable forward-looking information, such as country or regional risks that are not captured in the historical loss information. Amounts are written off against the allowances for doubtful accounts when the Company determines that a customer account is uncollectible. The allowance for doubtful accounts for trade receivables is not material to the Company’s Condensed Consolidated financial results.

The Company’s gross revenues are subject to a variety of deductions which are recorded in the same period that the underlying revenues are recognized. Such variable consideration includes rebates, sales discounts, and sales returns. Because these deductions represent estimates of the related obligations, judgment is required when determining the impact of these revenue deductions on gross revenues for a reporting period. Rebates provided by the Company are based upon


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

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prices determined under the Company’s agreements primarily with its end-user customers. Additional factors considered in the estimate of the Company’s rebate liability include the quantification of inventory that is either in stock at or in transit to the Company’s distributors, as well as the estimated lag time between the sale of product and the payment of corresponding rebates.

The Company’s liability attributed to variable consideration at December 31, 2022 and September 30, 2022 was $43.1 million and $43.8 million, respectively. Sales deductions recorded as a reduction of gross revenues for the three months ended December 31, 2022 and 2021 were $92.6 million and $85.8 million, respectively.

Disaggregation of Revenues

Disaggregation of revenue by geographic region is provided within Note 7.

Contract Assets and Liabilities

The Company does not have contract liabilities. Contract assets consist of the Company’s right to consideration that is conditional upon its future performance pursuant to private label agreements and are presented within Prepaid expenses and other in the Condensed Consolidated Balance Sheets.

The Company’s contract asset balance was $1.2 million as of December 31, 2022 and September 30, 2022, respectively.

Note 7 — Segment and Geographical Data

Operating segments are identified as components of an enterprise in which discrete financial information is available for evaluation by the chief operating decision-maker (“CODM”) in making decisions regarding assessing business performance and allocating resources and capital. Management has concluded that the Company operates in one segment based upon the information used by the CODM in evaluating the performance of the Company’s business and allocating resources and capital.

Disaggregation of Revenues

The Company has distribution agreements with regional or national distributors (including wholesalers and medical suppliers) to ensure broad availability of its products as well as a direct sales force in certain countries and regions around the world. In the United States and Canada, the Company utilizes its large and small key account managers that call on payers, retailers, wholesalers and institutional customers, and field-based territory managers that call on health care providers and pharmacies. In certain markets within Europe, the Company has dedicated sales representatives and in certain regions of the Middle East and Africa, the Company has distribution agreements. In Greater Asia, the Company has distribution agreements, and in China the Company relies on its own commercial team to support sales execution. In Latin America, the Company maintains distribution agreements and direct sales representatives.

The Company disaggregates its revenue by geography as management believes this category best depicts how the nature, amount, and timing of revenues and cash flows are affected by economic factors.

Revenues by geographic region are as follows:


	Three months ended December 31,
	2022		2021
United States	$	149.3	$	150.9
International(1)	126.4		138.4
Total	$	275.7	$	289.3

(1)For the three months ended December 31, 2022 and 2021, no individual country outside of the United States generated net revenues that represented more than 10.0% of total revenues.

Note 8 — Stock-Based Compensation

Time Vested Restricted Stock Units ("TVUs")

During the three months ended December 31, 2022, Embecta granted 572,884 of restricted stock units ("RSUs") in the form of TVUs to employees which vest ratably over three years, subject to continued employment of the recipients.

Performance Based Restricted Stock Units ("PSUs")

During the three months ended December 31, 2022, Embecta awarded 244,192 of RSUs in the form of PSUs to certain executive officers and employees which vest after three years, subject to continued employment of the recipients and the


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

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achievement of certain performance metric targets. The Company has identified certain performance metrics associated with these awards and certain targets will be fully established at a future date. The Company has determined that the service inception date precedes the grant date for these awards as (a) the awards were authorized prior to establishing an accounting grant date, (b) the recipients began providing services prior to the grant date, and (c) there are performance conditions that, if not met by the accounting grant date, will result in the forfeiture of the awards. As the service inception date precedes the accounting grant date, the Company recognizes stock-based compensation expense for each separately-vesting tranche over the requisite service period based on the fair value at each reporting date. Stock-based compensation expense for these awards for the three months ended December 31, 2022 was $0.1 million.

Stock-Based Compensation Expense

Total direct and allocated stock-based compensation expense for the three months ended December 31, 2022 and 2021 and the respective income tax benefits recognized by the Company in the Condensed Consolidated Statements of Income are as follows:


	Three months ended December 31,
	2022		2021
Cost of products sold	$	0.6	$	1.0
Selling and administrative expense	4.6		2.9
Research and development expense	0.3		0.7
Total Stock-Based Compensation Expense	$	5.5	$	4.6
Tax benefit associated with stock-based compensation costs recognized	$	0.8	$	1.0

A summary of stock appreciation rights ("SARs") outstanding as of December 31, 2022 and changes during the three months ended December 31, 2022 are as follows:


	SARs (in thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Balance at October 1	1,916.7	$	28.98



Balance at December 31	1,916.7	$	28.98	8.4	$	0.4
Vested and expected to vest at December 31	1,840.2	$	28.95	8.4	$	0.4
Exercisable at December 31	524.0	$	27.06	7.2	$	0.4

*The amounts exercised include shares withheld for taxes that are not formally issued to the market.

There were no SARs granted, exercised or forfeited during the three months ended December 31, 2022.

A summary of time-vested RSUs outstanding as of December 31, 2022 and changes during the three months ended December 31, 2022 are as follows:


	RSUs (in thousands)	Weighted Average Grant Date Fair Value
Nonvested at October 1	977.5	$	28.34
Granted	572.9	33.01
Distributed*	(237.2)	27.37
Forfeited, canceled or expired	(15.3)	27.31
Nonvested at December 31	1,297.9	30.72
Expected to vest at December 31	1,229.9	$	30.60

*The RSUs distributed include shares withheld for taxes that are not formally issued to the market.

At December 31, 2022, the weighted average remaining vesting term of time vested restricted stock units is 2.2 years.


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

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The amount of unrecognized compensation expense for all non-vested stock-based awards granted as of December 31, 2022, is approximately $38.9 million, which is expected to be recognized over a weighted-average remaining life of approximately 2.4 years. At December 31, 2022, 3.6 million shares were authorized for future grants under the 2022 Employee and Director Equity Based Compensation Plan.

Note 9 — Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets consisted of:


	December 31, 2022		September 30, 2022
Amortized intangible assets
Patents – gross	$	9.4	$	9.4
Less: accumulated amortization	(4.0)		(3.9)
Patents – net	$	5.4	$	5.5
Customer Relationships and Other – gross	$	5.2	$	5.2
Less: accumulated amortization	(2.0)		(1.8)
Customer Relationships and Other – net	$	3.2	$	3.4
Total amortized intangible assets	$	8.6	$	8.9
Goodwill	15.7		15.7
Total Goodwill and Other Intangible Assets	$	24.3	$	24.6

Note 10 — Long-Term Debt

Credit Agreement

On March 31, 2022, Embecta entered into a credit agreement (the “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. The interest rate is 300 basis points over the secured overnight financing rate (“SOFR”), with a 0.50% SOFR floor. The Term Loan was issued at a discount of 0.50%. Principal and interest payments on the Term Loan commenced 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; and

•a Revolving Credit Facility (the "Revolving Credit Facility") in an aggregate principal amount of up to $500.0 million, with a five-year term that matures in 2027. Borrowings under the Revolving Credit Facility bear interest, at Embecta’s option, 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 December 31, 2022, no amount has been drawn on the Revolving Credit Facility.

The Credit Agreement and the indentures for Embecta's outstanding 5.00% senior secured notes due February 2030 (the "5.00% Notes") and 6.75% senior secured notes due February 2030 (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 the 5.00% Notes and 6.75% Notes. In addition, the Credit Agreement contains covenants that will limit, among other things, Embecta’s ability to prepay, redeem or repurchase its 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.


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

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