Embecta Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2022. Dollar amounts are in millions except per-share amounts. Embecta, a diabetes-care medical-device company selling pen needles, syringes and related products, completed its spin-off from Becton, Dickinson and Company (BD) on April 1, 2022. It began regular-way trading as a standalone public company that day. Pre-separation results reflect allocated BD costs and may not represent standalone operating costs.
Financial performance
| Metric | Three months ended June 30, 2022 | Prior-year quarter | Nine months ended June 30, 2022 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $291.1 | $295.0 | $854.9 | $864.5 |
| Gross profit | $202.9 | $202.6 | $598.0 | $590.2 |
| Gross margin | 69.7% | 68.7% | 69.9% | 68.3% |
| Operating income | $97.1 | $124.3 | $312.6 | $374.8 |
| Net income | $62.4 | $104.7 | $240.8 | $317.9 |
| Diluted earnings per share | $1.07 | $1.81 | $4.14 | $5.50 |
| Operating cash flow | Not separately presented for the quarter | $354.2 | $370.8 |
- Quarterly revenue declined 1.3% as reported, but increased 2.0% on a constant-currency basis; nine-month revenue declined 1.1% as reported and increased 0.8% constant currency. Stronger U.S. dollar translation reduced revenue by $9.7 in the quarter and $16.6 over nine months. U.S. quarterly revenue rose 4.1%; international revenue fell 7.1% as reported but was down 0.3% constant currency.
- Quarterly gross margin improved by 100 basis points, primarily on favorable product mix, partly offset by inflation in materials, freight, labor and overhead. Nine-month margin improved by 160 basis points; the prior-year period included a $13.8 impairment charge.
- Operating income and net income fell despite higher gross profit, reflecting increased selling and administrative costs, separation-related expenses, new interest expense and other expense. Selling and administrative expense rose 38.5% in the quarter and 25.6% for nine months, primarily from standalone-company headcount, compensation and marketing costs.
- Quarterly net interest expense was $19.5; nine-month expense was $24.4. Management expected interest expense to increase sequentially in fiscal Q4. Effective tax rates were 15.2% for both 2022 periods, versus 16.2% for the quarter and 16.0% for nine months in 2021.
- Management-reported non-GAAP adjusted EBITDA was $117.9 for the quarter versus $143.6, and $372.7 for nine months versus $433.4. These measures exclude specified items, including share-based compensation and one-time costs; they are not GAAP measures.
Financial position, cash flow and capital
- At June 30, cash and cash equivalents were $292.3. Current assets were $580.6 and current liabilities $228.5. The resulting working-capital position was positive; the filing does not provide a current ratio.
- Principal debt outstanding was $1,647.6: $947.6 on the Term Loan, $500.0 of 5.00% senior secured notes and $200.0 of 6.75% senior secured notes. Balance-sheet long-term debt, net of current obligations and issuance costs/discounts, was $1,599.2. The $500.0 and $200.0 notes mature in 2030; the $950.0 Term Loan facility matures in 2029. The $500.0 revolving facility, maturing in 2027, was undrawn.
- The Term Loan bears interest at SOFR plus 300 basis points, with a 0.50% SOFR floor. Management estimated that a 100-basis-point rate change would affect annualized interest expense by $9.5. Embecta reported compliance with debt covenants at June 30.
- Nine-month operating cash flow was $354.2; investing cash outflow was $15.4, including $15.0 of capital expenditures; financing cash outflow was $40.9. Operating cash flow was affected by working-capital movements, including $99.6 due from BD, $23.6 of inventory increases and $123.6 of lower trade receivables, principally associated with receivables factoring.
- At June 30, $97.0 was due from BD and $33.8 was due to BD. The company reported shareholders’ deficit of $847.6, largely in the context of the Separation and associated consideration and equity reclassification; this is a significant change from reported equity of $594.3 at September 30, 2021.
Material changes, outlook and risks
- Embecta became a standalone company during the quarter and incurred separation and stand-up costs of $7.7 in the quarter and $23.5 for nine months. Management cautioned that standalone costs may differ from historical BD allocations. The company continues to rely on BD for certain transitional services and manufacturing, logistics and distribution arrangements.
- No specific revenue, earnings or cash-flow guidance was provided in the filing. Management said inflation was expected to pressure gross margin and net income during the year and cited continued productivity efforts to offset cost increases. It also expected higher interest expense in the fourth quarter.
- Risks discussed include supply-chain constraints and inflation; COVID-19 disruption; foreign-exchange movements; interest-rate and indebtedness exposure; competition and customer/product concentration; and possible disruption or nonperformance under BD agreements, including the cannula supply arrangement. Russia and Ukraine sales were not material, but the conflict could affect markets, supply chains, currencies, energy costs and cybersecurity.
- Two customers each represented at least 10% of revenue; together they accounted for approximately 30.5% of quarterly revenue and 31.0% of nine-month revenue. No individual non-U.S. country exceeded 10% of revenue.
- Management reported no material legal proceedings and no material legal loss considered probable and estimable; it cautioned that unfavorable outcomes remain possible. A quarterly dividend of $0.15 per share was declared August 15, payable September 14, 2022.
Important facts for investors to verify
- How revenue, product mix and foreign-exchange trends develop, especially in international markets, and whether inflation offsets or reverses gross-margin gains.
- Standalone expense levels after transition services end, including separation-related and recurring public-company costs.
- Debt-service capacity, variable-rate exposure, covenant headroom and the implications of the substantial debt burden.
- Collection and settlement of BD-related balances, receivables factoring economics, and continuity of BD supply and transitional services.
- Customer concentration, inventory build and the outlook for operating cash flow and working capital.
- The filing’s reported post-separation cash balance of $292.3 versus its narrative that approximately $165.0 was retained after the separation distribution; clarify the timing and reconciliation of these amounts.