ABBOTT LABORATORIES - Quarter Report: 2022 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

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(Mark One)

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For the quarterly period ended March 31, 2022

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For the transition period from                   to                  

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Commission File No. 1-2189

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ABBOTT LABORATORIES

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100 Abbott Park Road

Abbott Park, Illinois 60064-6400

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Telephone:  (224) 667-6100

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Securities Registered Pursuant to Section 12(b) of the Act:

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Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 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 ☐

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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

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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. ☐

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

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As of March 31, 2022, Abbott Laboratories had 1,750,942,289 common shares without par value outstanding.

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Abbott Laboratories

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Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Earnings

(Unaudited)

(dollars in millions except per share data; shares in thousands)

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The accompanying notes to the condensed consolidated financial statements are an integral part of this statement.

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Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Comprehensive Income

(Unaudited)

(dollars in millions)

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The accompanying notes to the condensed consolidated financial statements are an integral part of this statement.

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Abbott Laboratories and Subsidiaries

Condensed Consolidated Balance Sheet

(Unaudited)

(dollars in millions)

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The accompanying notes to the condensed consolidated financial statements are an integral part of this statement.

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Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Shareholders’ Investment

(Unaudited)

(in millions except shares and per share data)

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The accompanying notes to condensed consolidated financial statements are an integral part of this statement.

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Abbott Laboratories and Subsidiaries

Condensed Consolidated Statement of Cash Flows

(Unaudited)

(dollars in millions)

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The accompanying notes to the condensed consolidated financial statements are an integral part of this statement.

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Abbott Laboratories and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

March 31, 2022

(Unaudited)

Note 1 — Basis of Presentation

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The accompanying unaudited, condensed consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnote disclosures normally included in audited financial statements. However, in the opinion of management, all adjustments (which include only normal adjustments) necessary to present fairly the results of operations, financial position and cash flows have been made. It is suggested that these statements be read in conjunction with the financial statements included in Abbott’s Annual Report on Form 10-K for the year ended December 31, 2021. The condensed consolidated financial statements include the accounts of the parent company and subsidiaries, after elimination of intercompany transactions.

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Note 2 — Revenue

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Abbott’s revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements. Abbott has four reportable segments: Established Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Medical Devices.

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The following table provides detail by sales category:

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Note 2 — Revenue (Continued)

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Remaining Performance Obligations

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As of March 31, 2022, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) was approximately $3.8 billion in the Diagnostics segment and approximately $428 million in the Medical Devices segment. Abbott expects to recognize revenue on approximately 60 percent of these remaining performance obligations over the next 24 months, approximately 16 percent over the subsequent 12 months and the remainder thereafter.

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These performance obligations primarily reflect the future sale of reagents/consumables in contracts with minimum purchase obligations, extended warranty or service obligations related to previously sold equipment, and remote monitoring services related to previously implanted devices. Abbott has applied the practical expedient described in Accounting Standards Codification (ASC) 606-10-50-14 and has not included remaining performance obligations related to contracts with original expected durations of one year or less in the amounts above.

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Other Contract Assets and Liabilities

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Abbott discloses Trade receivables separately in the Condensed Consolidated Balance Sheet at the net amount expected to be collected. Contract assets primarily relate to Abbott’s conditional right to consideration for work completed but not billed at the reporting date. Contract assets at the beginning and end of the period, as well as the changes in the balance, were not significant.

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Contract liabilities primarily relate to payments received from customers in advance of performance under the contract. Abbott’s contract liabilities arise primarily in the Medical Devices reportable segment when payment is received upfront for various multi-period extended service arrangements.

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Changes in the contract liabilities during the period are as follows:

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Note 3 — Supplemental Financial Information

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Shares of unvested restricted stock that contain non-forfeitable rights to dividends are treated as participating securities and are included in the computation of earnings per share under the two-class method. Under the two-class method, net earnings are allocated between common shares and participating securities. Net earnings allocated to common shares for the three months ended March 31, 2022 and 2021 were $2.438 billion and $1.785 billion, respectively.

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Other, net in Net cash from operating activities in the Condensed Consolidated Statement of Cash Flows for the first three months of 2022 includes $334 million of pension contributions and the payment of cash taxes of approximately $195 million. The first three months of 2021 includes $16 million of pension contributions and the payment of cash taxes of approximately $270 million.

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Note 3 — Supplemental Financial Information (Continued)

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The following summarizes the activity for the first three months of 2022 related to the allowance for doubtful accounts as of March 31, 2022:

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The allowance for doubtful accounts reflects the current estimate of credit losses expected to be incurred over the life of the accounts receivable. Abbott considers various factors in establishing, monitoring, and adjusting its allowance for doubtful accounts, including the aging of the accounts and aging trends, the historical level of charge-offs, and specific exposures related to particular customers. Abbott also monitors other risk factors and forward-looking information, such as country risk, when determining credit limits for customers and establishing adequate allowances.

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The components of long-term investments as of March 31, 2022 and December 31, 2021 are as follows:

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The decrease in Abbott’s long-term investments as of March 31, 2022 versus the balance as of December 31, 2021 primarily relates to a decrease in the value of investments held in a rabbi trust.

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Abbott’s equity securities as of March 31, 2022, include $357 million of investments in mutual funds that are held in a rabbi trust and were acquired as part of the St. Jude Medical, Inc. (St. Jude Medical) business acquisition. These investments, which are specifically designated as available for the purpose of paying benefits under a deferred compensation plan, are not available for general corporate purposes and are subject to creditor claims in the event of insolvency.

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Abbott also holds certain investments as of March 31, 2022 with a carrying value of $244 million that are accounted for under the equity method of accounting and other equity investments with a carrying value of $92 million that do not have a readily determinable fair value.

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Note 4 — Changes in Accumulated Other Comprehensive Income (Loss)

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The changes in accumulated other comprehensive income (loss), net of income taxes, are as follows:

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(Income) loss amounts reclassified from accumulated other comprehensive income related to cash flow hedges are recorded as Cost of products sold. Net actuarial losses and prior service cost are included as a component of net periodic benefit costs; see Note 11 for additional details.

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Note 5 — Goodwill and Intangible Assets

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The total amount of goodwill reported was $23.2 billion at March 31, 2022 and December 31, 2021. Foreign currency translation adjustments decreased goodwill by approximately $50 million in the first three months of 2022. The amount of goodwill related to reportable segments at March 31, 2022 was $2.8 billion for the Established Pharmaceutical Products segment, $286 million for the Nutritional Products segment, $3.7 billion for the Diagnostic Products segment, and $16.4 billion for the Medical Devices segment. There was no reduction of goodwill relating to impairments in the first three months of 2022.

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The gross amount of amortizable intangible assets, primarily product rights and technology, was $27.7 billion as of March 31, 2022 and December 31, 2021 and accumulated amortization was $16.4 billion as of March 31, 2022 and $15.9 billion as of December 31, 2021. Foreign currency translation adjustments increased intangible assets by $3 million in the first three months of 2022. Abbott’s estimated annual amortization expense for intangible assets is approximately $2.1 billion in 2022, $2.0 billion in 2023, $1.9 billion in 2024, $1.7 billion in 2025 and $1.6 billion in 2026.

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Indefinite-lived intangible assets, which relate to in-process R&D (IPR&D) acquired in a business combination, were approximately $919 million as of March 31, 2022 and December 31, 2021.

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Note 6 — Restructuring Plans

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On May 27, 2021, Abbott management approved a restructuring plan related to its Diagnostic Products segment to align its manufacturing network for COVID-19 diagnostic tests with changes in the second quarter in projected testing demand driven by several factors, including significant reductions in cases in the U.S. and other major developed countries, the accelerated rollout of COVID-19 vaccines globally and the U.S. health authority’s updated guidance on testing for fully vaccinated individuals. In the second quarter of 2021, Abbott recorded charges of $499 million under this plan in Cost of products sold. The charge recognized in the second quarter included fixed asset write-downs of $80 million, inventory-related charges of $248 million, and other exit costs, which included contract cancellations and employee-related costs of $171 million.

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In the second half of 2021, as the Delta and Omicron variants of COVID-19 spread and the number of new COVID-19 cases increased significantly, particularly in the U.S., demand for rapid COVID-19 tests increased significantly. As a result, in the second half of 2021, Abbott sold approximately $181 million of inventory that was previously estimated to have no net realizable value under the second quarter of 2021 restructuring action. In addition, the estimate of other exit costs was reduced by a net $58 million as Abbott fulfilled its purchase obligations under certain contracts for which a liability was recorded in the second quarter or Abbott settled with the counterparty in the second half of 2021.

The following summarizes the activity related to this restructuring action and the status of the related accruals as of March 31, 2022:

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In 2021, Abbott management approved plans to streamline operations in order to reduce costs and improve efficiencies in Abbott’s diagnostics, established pharmaceuticals, nutritional, and medical devices businesses. Abbott recorded employee-related severance and other charges of approximately $68 million in 2021 of which approximately $16 million was recorded in Cost of products sold, approximately $4 million was recorded in Research and development, and approximately $48 million was recorded in Selling, general and administrative expense.

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The following summarizes the activity for these restructurings:

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Note 7 — Incentive Stock Programs

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In the first three months of 2022, Abbott granted 2,594,059 stock options, 514,148 restricted stock awards and 5,303,072 restricted stock units under its incentive stock program. At March 31, 2022, approximately 86 million shares were reserved for future grants. Information regarding the number of options outstanding and exercisable at March 31, 2022 is as follows:

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The total unrecognized share-based compensation cost at March 31, 2022 amounted to approximately $825 million which is expected to be recognized over the next three years.

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Note 8 — Debt and Lines of Credit

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On March 15, 2022, Abbott repaid the $750 million outstanding principal amount of its 2.55% Notes due 2022 upon maturity.

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Note 9 — Financial Instruments, Derivatives and Fair Value Measures

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Certain Abbott foreign subsidiaries enter into foreign currency forward exchange contracts to manage exposures to changes in foreign exchange rates primarily for anticipated intercompany purchases by those subsidiaries whose functional currencies are not the U.S. dollar. These contracts, with gross notional amounts totaling $8.5 billion at March 31, 2022 and $8.6 billion at December 31, 2021 are designated as cash flow hedges of the variability of the cash flows due to changes in foreign exchange rates and are recorded at fair value. Accumulated gains and losses as of March 31, 2022 will be included in Cost of products sold at the time the products are sold, generally through the next twelve to eighteen months.

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Abbott enters into foreign currency forward exchange contracts to manage currency exposures for foreign currency denominated third-party trade payables and receivables, and for intercompany loans and trade accounts payable where the receivable or payable is denominated in a currency other than the functional currency of the entity. For intercompany loans, the contracts require Abbott to sell or buy foreign currencies, primarily European currencies, in exchange for primarily U.S. dollars and other European currencies. For intercompany and trade payables and receivables, the currency exposures are primarily the U.S. dollar and European currencies. At March 31, 2022 and December 31, 2021, Abbott held the gross notional amount of $12.2 billion of such foreign currency forward exchange contracts.

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Abbott has designated a yen-denominated, 5-year term loan of approximately $491 million and $521 million as of March 31, 2022 and December 31, 2021, respectively, as a hedge of the net investment in certain foreign subsidiaries. The change in the value of the debt, which is due to changes in foreign exchange rates, is recorded in Accumulated other comprehensive income (loss), net of tax.

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Abbott is a party to interest rate hedge contracts totaling approximately $2.9 billion at March 31, 2022 and December 31, 2021 to manage its exposure to changes in the fair value of fixed-rate debt. These contracts are designated as fair value hedges of the variability of the fair value of fixed-rate debt due to changes in the long-term benchmark interest rates. The effect of the hedge is to change a fixed-rate interest obligation to a variable rate for that portion of the debt. Abbott records the contracts at fair value and adjusts the carrying amount of the fixed-rate debt by an offsetting amount.

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Note 9 — Financial Instruments, Derivatives and Fair Value Measures (Continued)

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The following table summarizes the amounts and location of certain derivative financial instruments as of March 31, 2022 and December 31, 2021:

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The following table summarizes the activity for foreign currency forward exchange contracts designated as cash flow hedges and certain other derivative financial instruments, as well as the amounts and location of income (expense) and gain (loss) reclassified into income for the three months ended March 31, 2022 and 2021.

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Losses of $51 million and gains of $49 million were recognized in the three months ended March 31, 2022 and 2021, respectively, related to foreign currency forward exchange contracts not designated as a hedge. These amounts are reported in the Condensed Consolidated Statement of Earnings on the Net foreign exchange (gain) loss line.

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