Embecta Corp. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2021, compared with the three months ended December 31, 2020. The filing reports the historical Diabetes Care Business of Becton, Dickinson and Company (BD) on a combined basis, before its planned spin-off; these results may not represent Embecta’s standalone performance.
Business context
Embecta’s business sells diabetes injection devices, including pen needles, syringes and safety products, in more than 100 countries. BD’s board approved the spin-off in February 2022, and the distribution was expected on April 1, 2022, at one Embecta share for every five BD shares held on the March 22 record date. The filing states that the distribution was expected to qualify as tax-free for U.S. federal income tax purposes.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $289.3 million | $285.3 million |
| Gross profit / gross margin | $203.9 million / 70.5% | $191.3 million / 67.1% |
| Operating income / margin | $116.6 million / 40.3% | $124.1 million / 43.5% |
| Net income | $98.8 million | $105.3 million |
| Operating cash flow | $138.8 million | $121.4 million |
| Capital expenditures | $4.3 million | $11.4 million |
Revenue rose 1.4% as reported and 1.7% in constant currency. U.S. revenue was $150.9 million, up 0.9%; international revenue was $138.4 million, up 1.9% as reported and 2.6% in constant currency. Management attributed growth mainly to higher volume, including new U.S. and emerging-market customers, and price increases, partly offset by unfavorable foreign exchange.
Gross margin improved primarily because the prior-year quarter included a $10.0 million impairment charge. Operating income fell 6.0% and net income fell 6.2%, as higher selling and administrative, R&D, and spin-off expenses more than offset the gross-profit improvement. Selling and administrative expense increased 16.9% to $62.2 million, and R&D increased 19.3% to $16.7 million. The company recorded $8.4 million of separation and stand-up costs in the quarter.
EBITDA was $125.0 million versus $134.4 million; adjusted EBITDA was $138.0 million versus $148.2 million. Adjusted EBITDA excludes items including share-based compensation and separation costs, and the prior-year impairment charge.
Financial position, liquidity and debt
At December 31, 2021, total assets were $739.9 million, current assets $258.3 million, and current liabilities $159.1 million; the resulting current ratio was approximately 1.62. Trade receivables were $118.3 million and inventory was $119.1 million. Cash and cash equivalents were zero on the combined balance sheet because BD swept cash balances through its centralized treasury arrangements. The filing reports no standalone debt on the historical balance sheet; BD debt and interest were not allocated to the business.
Operating cash flow increased to $138.8 million, aided mainly by a $30.7 million decrease in trade receivables, partly offset by inventory build. Financing cash outflow of $134.5 million represented net transfers to BD. Management said it expected to meet short-term liquidity needs, while noting that standalone liquidity would depend on operating cash flow and financing access.
After quarter-end, Embecta issued $500 million of 5.000% senior secured notes due 2030. It expected to enter into a $1.15 billion senior secured seven-year term loan and a $500 million five-year revolving facility, expected to be undrawn at the spin-off. The term loan rate was stated as 300 basis points over SOFR, with a 0.5% floor. The company expected to distribute approximately $1.44 billion to BD and retain approximately $160 million in cash. These post-period financing plans are not reflected in the December 31 balance sheet.
Material changes, outlook and risks
- Operating costs are expected to change after separation. Management anticipated higher TSA and standalone-company costs, as well as one-time separation expenses; it also expected some current separation costs to decline after the spin-off.
- The company planned to build inventory in preparation for the spin-off and expected this trend to continue as a standalone business. A trade-receivables factoring agreement with BD was expected to provide liquidity; its service fee was set at 0.1% of annual revenue in covered countries.
- No specific financial guidance was provided in the supplied filing text. Management cited uncertainty from COVID-19, including new variants, restrictions, supply-chain disruption and macroeconomic effects.
- Other identified risks include competition and pricing pressure, dependence on key products and customers, raw-material availability and cost, reimbursement changes, foreign-exchange and interest-rate movements, regulatory changes, execution of separation agreements, and the possibility that separation costs exceed estimates or the distribution does not receive expected tax treatment.
- Two customers each represented at least 10% of gross receivables and together approximately 23% of the balance; two customers together represented approximately 30.1% of quarterly revenue. Rebates reduced revenue by $76.4 million during the quarter, and the rebate liability was $76.9 million at December 31.
- Management reported no material legal proceedings and no material changes to previously disclosed risk factors. It concluded disclosure controls were effective; no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- Whether the spin-off completed on the expected date and whether the distribution received the expected tax treatment.
- Final financing terms, resulting debt burden, interest expense, covenant requirements and cash retained after the distribution to BD.
- Actual standalone costs, TSA dependence, manufacturing and supply arrangements, and the timing and amount of separation expenses.
- Customer concentration, rebate accruals, inventory levels and the business’s ability to generate cash without BD’s treasury support.
- Exposure to raw-material supply and costs, foreign exchange, COVID-19 disruptions and competitive or reimbursement pressures.