Embecta Corp. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended December 31, 2022. Embecta is a standalone medical-device company focused on diabetes-care products, including pen needles, syringes and safety devices. It was spun off from Becton, Dickinson and Company (BD) on April 1, 2022; the comparative quarter reflects the pre-separation Diabetes Care Business.
Financial performance
Amounts are in millions, except per-share data.
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $275.7 | $289.3 | (4.7%) |
| Gross profit / margin | $188.8 / 68.5% | $203.9 / 70.5% | Profit down $15.1; margin down 2.0 points |
| Operating income | $88.8 | $116.6 | (23.8%) |
| Net income | $35.2 | $98.8 | (64.4%) |
| Diluted earnings per share | $0.61 | $1.73 | Down |
| Cash from operating activities | $60.4 | $138.8 | Down $78.4 |
| Capital expenditures | $4.7 | $4.3 | Up $0.4 |
Cash and cash equivalents were $385.2 at December 31, 2022, compared with $330.9 at September 30, 2022. Total principal debt was $1,642.9; reported long-term debt was $1,597.1, net of current obligations and debt issuance costs/discounts. The $500.0 revolving facility was undrawn. The weighted-average cost of total debt was 6.7%; the company reported compliance with its debt covenants.
Changes and management commentary
- Revenue fell $13.6. Unfavorable foreign-currency translation reduced revenue by $15.6, primarily due to U.S.-dollar strength. Price and volume were favorable internationally but unfavorable in the U.S.; contract manufacturing for BD provided a benefit.
- Cost of products sold rose 1.8% despite lower revenue, as inflation increased raw-material, freight, labor and overhead costs. Management said it would pursue productivity improvements to offset cost pressure.
- Selling and administrative expense increased 17.0%, primarily from compensation and headcount associated with operating as a standalone public company. Other operating expenses were $10.3, including approximately $9.9 of separation and stand-up costs and $0.4 of restructuring costs.
- Interest expense was $25.6, primarily reflecting debt issued in connection with the separation and higher rates on variable-rate debt. Other expense was $7.1, primarily related to tax liabilities due to BD for deferred jurisdictions.
- The effective tax rate rose to 37.3% from 15.3%, principally due to a valuation allowance on interest-expense carryforwards, tax on undistributed foreign earnings and increased U.S. tax on foreign-subsidiary earnings.
- Operating cash flow declined from the prior year; inventory investment used $14.7 of cash, while changes in payables, accrued liabilities and taxes provided cash. Management said inventory was being built to meet expected demand.
Liquidity, outlook and risks
Management believes cash, operating cash flow and available revolving-credit capacity will be sufficient for working capital, capital spending, debt service, dividends and other needs for the foreseeable future. The filing provides no specific earnings or revenue guidance. Management noted that further Federal Reserve rate increases could raise interest expense; a 100-basis-point rate change would affect annualized Term Loan interest expense by approximately $9.4.
Key risks include competitive and pricing pressure, commoditization of injection devices, inflation and supply-chain disruption, foreign-exchange movements, changes in reimbursement and clinical practice, and macroeconomic or geopolitical uncertainty. Three customers each accounted for at least 10% of gross revenue and together represented approximately 40.5%. The business also remained reliant on certain BD transition services and agreements; management identified ERP and other standalone-system transition costs as ongoing obligations. Capitalized cloud implementation costs, primarily for the new ERP, were $10.9 and are expected to be amortized over a five-year hosting term once ready for use.
The company reported no material legal proceedings and no material changes to its previously disclosed risk factors. Management concluded disclosure controls were effective; certain financial-reporting processes and controls continued to be performed by BD during the transition-services period.
Important facts for investors to verify
- Revenue, gross-margin and profit trends, including the reported foreign-exchange impact and regional price/volume mix.
- Ability to sustain cash generation while funding inventory, standalone operations, ERP implementation and separation-related costs.
- Debt-service exposure to variable interest rates, covenant headroom and the large debt maturities due after 2027.
- Customer concentration and continuing reliance on BD under transition, supply, distribution and other agreements.
- Whether inflation, competition, reimbursement changes and product-market shifts continue to pressure pricing and margins.