Embecta (EMBC) - 2024 Q1 - Quarterly Report

Financial Performance - Revenues for the three months ended December 31, 2023, increased by $1.6 million, or 0.6$277.3 million compared to $275.7 million in the same period of 2022[108] - Gross profit decreased by$2.9 million to $185.9 million, with gross profit as a percentage of revenue at 67.0$43.3 million to $45.5 million, a decrease of 48.8$15.1 million to $20.1 million, representing a decline of 42.9$35.2 million in the prior year[109] Expenses - Selling and administrative expenses rose by $17.5 million, or 24.0$90.3 million, primarily due to increased compensation and benefits costs[111] - Research and development expenses increased by $3.3 million, or 19.5$20.2 million, driven by spending on the insulin patch pump platform[112] - Cost of products sold increased by $4.5 million, or 5.2$91.4 million, with costs as a percentage of revenues rising to 33.0% from 31.5%[110] Debt and Interest - As of December 31, 2023, total principal debt issued by Embecta is $1,633.4 million, with long-term debt amounting to$1,592.9 million[119] - Interest expense, net increased by $2.1 million to$27.7 million, primarily due to higher interest rates on variable rate debt[115] - The weighted average cost of total debt is 7.2%, with short-term debt representing 0.6% of total debt as of December 31, 2023[119] - The interest rate on the Term Loan is set at 300 basis points over SOFR, with a 0.50% SOFR floor[141] - A 100 basis points change in interest rates would impact interest expense on the Term Loan by $9.3 million annually[141] - The company is subject to risks related to changes in SOFR for any borrowings on the revolving credit facility[141] Cash Flow and Liquidity - Cash and cash equivalents decreased from$326.5 million as of September 30, 2023, to $298.7 million as of December 31, 2023, a reduction of$27.8 million[124] - Net cash used for operating activities was $13.1 million, primarily due to changes in trade receivables, which decreased by$78.6 million[124] - The company expects to convert outstanding trade receivables into cash during fiscal 2024 in line with contractual payment terms[126] Taxation - The effective tax rate was (40.6)% for the three months ended December 31, 2023, a decrease from 37.3% in the prior year, influenced by a tax benefit related to changes in Swiss tax law[117] Market Conditions - The company continues to face pricing pressures and increased competition in the medical device industry, impacting operating margins[96] Capital Expenditures and Obligations - Capital expenditures for the three months ended December 31, 2023, were $2.7 million, supporting further business expansion[131] - Lease obligations total$81.3 million, with significant payments due in the years following 2028[121] Credit Ratings - Moody's and S&P maintained credit ratings of Ba3 and B+, respectively, unchanged since January 2022[124] Inventory and Receivables - The change in inventories was driven by product sales of certain inventory levels built up in anticipation of the North America ERP system going live in November 2023[127] - The company is now responsible for the collection of outstanding trade receivables in the U.S. following the termination of a portion of the Factoring Agreement with BD[123]