Abbott Laboratories 2022 Form 10-K Summary
Business context and reporting period
Abbott Laboratories is a diversified global health care company operating through four reportable segments: Established Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Medical Devices. This Form 10-K covers the fiscal year ended December 31, 2022, with comparisons to 2021 and 2020. International sales represented approximately 58% of consolidated net sales.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $43.653 billion | $43.075 billion | 1.3% reported increase |
| Operating earnings | $8.362 billion | $8.425 billion | Down $63 million |
| Operating margin | 19.2% | 19.6% | Down 40 basis points |
| Earnings from continuing operations | $6.933 billion | $7.071 billion | Down 2.0% |
| Diluted EPS from continuing operations | $3.91 | $3.94 | Down 0.8% |
| Gross profit margin | 51.5% | 52.2% | Down 70 basis points |
| Net cash from operating activities | $9.581 billion | $10.533 billion | Down $952 million |
| Capital expenditures | $1.777 billion | $1.885 billion | Down $108 million |
| Cash and cash equivalents | $9.882 billion | $9.799 billion | Up $83 million |
| Total debt | $16.773 billion | $18.050 billion | Down $1.277 billion |
Net sales increased despite a 5.1% unfavorable foreign-exchange impact. Excluding COVID-19 testing sales and foreign exchange, total net sales increased 5.1%. COVID-19 testing-related sales were approximately $8.4 billion in 2022 versus $7.7 billion in 2021.
- Established Pharmaceuticals: Sales were $4.912 billion, up 10.6% excluding foreign exchange; operating earnings increased 18.0%.
- Diagnostics: Sales were $16.584 billion, up 10.4% excluding foreign exchange; operating earnings increased 6.6%. Rapid Diagnostics benefited from COVID-19 testing demand, while molecular COVID-19 testing declined.
- Medical Devices: Sales were $14.687 billion, up 8.1% excluding foreign exchange; operating earnings declined 2.3% reported but increased 9.3% excluding foreign exchange. FreeStyle Libre sales reached $4.3 billion, up 22.4% excluding foreign exchange.
- Nutritional Products: Sales were $7.459 billion, down 6.2% excluding foreign exchange; operating earnings decreased 60.0%. Operating margin declined to 9.5% from 22.9% in 2020, primarily due to the infant-formula recall and manufacturing stoppage, inflation, and higher distribution costs.
Abbott declared dividends of $1.92 per share in 2022 versus $1.82 in 2021 and paid $3.309 billion in dividends. It repurchased approximately $3.65 billion of common shares during 2022; $2.434 billion remained available under the share-repurchase authorization at year-end.
Material changes versus the prior comparable period
- The February 2022 voluntary recall of certain powdered infant formula products and the subsequent Sturgis, Michigan manufacturing stoppage materially reduced U.S. pediatric nutrition sales. U.S. pediatric nutrition sales declined approximately 29% in 2022, and sales of recalled-brand powdered formula were $479 million versus $1.2 billion in 2021.
- Abbott entered into a consent decree with the FDA on May 16, 2022, partially restarted Sturgis production on July 1, and subsequently resumed Similac production.
- Operating and gross margins declined because of the recall, manufacturing disruption, inflation, commodity costs, transportation costs, and supply-chain pressures. Margin-improvement initiatives and selected price increases partially offset these effects.
- Net operating cash flow declined because of increased investment in working capital, particularly inventories, partly offset by lower restructuring-related expenditures and lower income-tax payments.
- Long-term debt declined following repayment of the $750 million 2.55% notes in March 2022. However, current debt increased because $2.251 billion of debt was due within one year at December 31, 2022.
- Abbott recorded approximately $234 million of employee-related restructuring charges, plus $23 million of inventory-related charges and $4 million of fixed-asset impairment charges.
Guidance, outlook, management commentary, risks, and unusual items
Abbott did not provide a clear consolidated earnings or revenue guidance figure in the filing. Management stated that 2023 priorities include continued investment in Alinity and rapid diagnostics, new Medical Devices products, recovery of the infant-formula business, global nutrition growth, and expansion of Established Pharmaceuticals in emerging markets. Research and development spending is targeted at approximately 7% of 2023 sales.
- Abbott expects inflationary pressures on raw materials, packaging, and transportation to continue in 2023, with partial mitigation from price increases and margin-improvement initiatives.
- Management expects COVID-19 to shift toward an endemic state in 2023, likely resulting in significantly lower demand for COVID-19 tests. The timing and magnitude remain uncertain, particularly following the planned U.S. public health emergency end on May 11, 2023.
- Abbott expects 2023 operating cash flow to exceed capital expenditures and cash dividends. It expects approximately $407 million of pension contributions in 2023.
- Approximately $2.3 billion of debt principal is scheduled to mature in 2023 and is expected to be funded from cash on hand. Abbott also has up to $5 billion available under an unsecured revolving credit agreement.
- Abbott entered into a February 2023 agreement to acquire Cardiovascular Systems, Inc. for approximately $890 million in expected equity value, subject to shareholder and regulatory approvals. The acquisition is expected to be funded with cash.
- Material risks include product recalls and manufacturing compliance, infant-formula litigation and investigations, regulatory approvals and enforcement, declining COVID-19 testing demand, pricing and reimbursement pressure, foreign-exchange volatility, inflation and supply-chain disruption, cybersecurity, intellectual-property litigation, product liability, and Abbott’s significant indebtedness.
- As of January 31, 2023, Abbott reported 399 lawsuits involving certain preterm infant formula products. The Department of Justice, the SEC, and the FTC were also conducting investigations or requesting information related to Abbott’s infant-formula business. Management stated that the ultimate resolution of legal proceedings is not expected to materially affect financial position, cash flows, or results of operations, but outcomes remain uncertain.
- Legal and environmental accruals were approximately $45 million against an estimated possible-loss range of $40 million to $50 million. The filing does not provide a specific estimated exposure for the infant-formula lawsuits and investigations.
- Abbott’s auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The critical audit matter was unrecognized tax benefits, which totaled approximately $2.036 billion at year-end.
Important facts for investors to verify
- Whether infant-formula production and U.S. pediatric nutrition sales recover as expected, and the continuing effects of the FDA consent decree.
- The pace and profitability of the expected decline in COVID-19 testing demand, including the status of emergency-use authorizations and customary regulatory approvals.
- The outcome and potential financial exposure from infant-formula product-liability lawsuits, the DOJ investigation, SEC subpoena, FTC inquiry, and related disclosures.
- Whether inflation, supply-chain costs, foreign exchange, and pricing actions materially change Abbott’s 2023 margins.
- Abbott’s ability to refinance or repay the approximately $2.3 billion of debt maturing in 2023 while funding dividends, share repurchases, capital expenditures, pensions, and the proposed CSI acquisition.
- The sustainability of growth in FreeStyle Libre, Medical Devices, Established Pharmaceuticals, routine diagnostics, and adult nutrition as pandemic-related sales normalize.
- Potential effects of the global 15% minimum-tax regime on Abbott’s future effective tax rate.