Abbott Laboratories 2023 Q3 Form 10-Q Summary
Business context and reporting period
Abbott Laboratories reported unaudited results for the three and nine months ended September 30, 2023. The company operates through Established Pharmaceutical Products, Nutritional Products, Diagnostic Products, and Medical Devices. Results were significantly affected by the continuing decline in COVID-19 diagnostic testing demand, partly offset by growth in nutrition, pharmaceuticals, and medical devices.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $10.143 billion | $10.410 billion | $29.868 billion | $33.562 billion |
| Operating earnings | $1.647 billion | $1.770 billion | $4.698 billion | $7.058 billion |
| Net earnings | $1.436 billion | $1.435 billion | $4.129 billion | $5.900 billion |
| Diluted EPS | $0.82 | $0.81 | $2.35 | $3.32 |
| Gross margin | 49.7% | 50.7% | 50.1% | 52.1% |
| Operating margin | 16.2% | 17.0% | 15.7% | 21.0% |
| Net margin | 14.2% | 13.8% | 13.8% | 17.6% |
Q3 reported sales declined 2.6%, while sales excluding foreign exchange declined 1.2%. Excluding COVID-19 testing sales and foreign exchange, sales increased 14.1%. COVID-19 testing-related sales were approximately $305 million in Q3 2023 versus $1.7 billion in Q3 2022. For the first nine months, COVID-19 testing sales were approximately $1.3 billion versus $7.3 billion in the prior-year period.
- Segment sales, Q3: Established Pharmaceuticals $1.368 billion, up 3.2%; Nutritionals $2.073 billion, up 15.5%; Diagnostics $2.449 billion, down 32.7%; Medical Devices $4.249 billion, up 16.6%.
- Segment sales, 9M: Established Pharmaceuticals $3.844 billion, up 4.0%; Nutritionals $6.116 billion, up 8.4%; Diagnostics $7.454 billion, down 43.5%; Medical Devices $12.444 billion, up 12.9%.
- FreeStyle Libre sales were $3.9 billion for the first nine months, up 26.2% excluding foreign exchange.
- Research and development expense decreased 5.6% for the first nine months, primarily because a prior-year in-process research and development impairment did not recur.
- Interest expense, net declined to $182 million from $309 million for the first nine months, mainly because higher interest income offset the effects of interest-rate hedges.
Cash flow, balance sheet, debt, and liquidity
- Net cash from operating activities was $4.223 billion for the first nine months, down from $7.255 billion in 2022. The period included approximately $1.180 billion of cash taxes and $302 million of pension contributions.
- Capital expenditures were $1.447 billion, and acquisitions of businesses and technologies used $877 million of cash.
- Cash used in financing activities was $5.039 billion, including $2.668 billion of dividends, $1.447 billion of long-term debt repayments, and $968 million of share purchases.
- Cash and cash equivalents declined to $6.709 billion from $9.882 billion at December 31, 2022. Short-term investments were $338 million.
- Total long-term debt, including the current portion, was $15.528 billion at September 30, 2023, compared with $16.773 billion at year-end 2022. Approximate net debt was $8.8 billion excluding short-term investments.
- Abbott reported $5.0 billion of available credit lines expiring in 2025, investment-grade ratings of AA- from S&P and Aa3 from Moody’s, and expects to maintain an investment-grade rating.
- Approximately $1.709 billion remained available under the $5 billion share-repurchase authorization. Abbott declared a quarterly dividend of $0.51 per share, an 8.5% increase from $0.47 in 2022.
Material changes versus the prior comparable period
- Revenue and profitability declined for the first nine months primarily because COVID-19 diagnostic testing demand fell sharply.
- Diagnostics sales declined 42.1% excluding foreign exchange for the first nine months, while non-COVID diagnostic businesses showed more resilient performance.
- Medical Devices and Nutritionals delivered strong growth; the latter benefited from recovery following the 2022 infant-formula recall.
- Gross margin declined 200 basis points for the first nine months because of lower COVID-19 test sales, foreign exchange, and higher manufacturing input costs, partly offset by margin initiatives and the non-recurrence of 2022 recall effects.
- Abbott completed the $851 million acquisition of Cardiovascular Systems, Inc. on April 27, 2023, and acquired Bigfoot Biomedical on September 22, 2023. Bigfoot and CSI contributed revenues and earnings that were not material to consolidated results.
- Abbott repaid approximately $1.2 billion of euro-denominated notes at maturity and approximately $197 million of acquisition-related debt in September 2023.
Outlook, risks, contingencies, and unusual items
The filing does not provide a clear numerical earnings or revenue outlook. Management states that future COVID-19 testing demand and its effect on the business remain unpredictable. Key ongoing risks include healthcare regulation, pricing and reimbursement pressure, competition, foreign exchange, technological and product risks, and changing tax legislation.
- Abbott received a $417 million IRS Statutory Notice of Deficiency for the 2019 tax year, primarily involving income allocation between U.S. entities and foreign affiliates. Abbott disputes the proposed adjustments and expected to petition the U.S. Tax Court in December 2023. The 2017 and 2018 tax years remain under examination for similar issues.
- Implementation of the OECD Pillar 2 15% minimum tax and related international tax rules could materially affect future financial statements; the impact was not determinable from the filing.
- Restructuring charges for the first nine months included approximately $102 million of employee-related charges and $29 million of fixed-asset impairments. The related accrued balance was $149 million at September 30.
- Abbott recorded a $55 million impairment charge for certain indefinite-lived medical-device intangible assets and reported other acquisition, restructuring, and investment-related items.
- Legal and environmental proceedings had an estimated possible loss range of $25 million to $35 million, with approximately $30 million accrued. Management does not expect the ultimate disposition to materially affect financial position, cash flows, or results.
- Remaining performance obligations were approximately $4.2 billion in Diagnostics and $456 million in Medical Devices; approximately 59% is expected to be recognized over the next 24 months.
Investor verification checklist
- Verify the extent to which future revenue growth excludes or depends on COVID-19 testing comparisons.
- Monitor Diagnostics recovery, particularly Molecular and Rapid Diagnostics, and the sustainability of Medical Devices and FreeStyle Libre growth.
- Reconcile operating cash flow with net earnings, including working-capital movements, cash taxes, and pension contributions.
- Assess the effect of the $417 million IRS notice, related tax examinations, and potential OECD minimum-tax implementation.
- Review debt maturities, interest-rate hedges, foreign-exchange exposure, and remaining liquidity after acquisitions, dividends, and share repurchases.
- Track acquisition accounting for CSI, including the preliminary allocation of goodwill and intangible assets, and subsequent impairment or integration charges.