ABBOTT LABORATORIES Financial Review
Abbott's revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements. Patent protection and licenses, technological and performance features, and inclusion ofAbbott's products under a contract most impact which products are sold; price controls, competition and rebates most impact the net selling prices of products; and foreign currency translation impacts the measurement of net sales and costs.
In 2020, the coronavirus (COVID-19) pandemic affectedAbbott's diversified health care businesses in various ways. As is further described below, some businesses have performed at the levels required to successfully meet new demands, others have faced challenges, and still others have been relatively less impacted by the pandemic.Abbott's Diagnostics business experienced the most significant change in sales from 2019 to 2020 as sales from new tests and other related products to detect COVID-19 more than outweighed the negative impact of COVID-19 on routine diagnostic testing volumes.Abbott mobilized its teams across multiple fronts to develop and launch the following new diagnostic tests for COVID-19 in 2020:
In March,
? (PCR) methods on its m2000™ RealTime lab-based platform to detect COVID-19
pursuant to an Emergency Use Authorization (EUA) in the
? In March,
NOW™ rapid point-of-care platform in the
In April,
test on its ARCHITECT® i1000SR and i2000SR® laboratory instruments for the
? detection of an antibody to determine if someone was previously infected with the virus. The serology test was granted an EUA in theU.S. and CE Mark in April.
? In May,
system pursuant to an EUA in the
In May,
? detect COVID-19 pursuant to an EUA in the
test in June.
In June,
? Panbio™ system in select countries pursuant to a CE Mark. This serology test
detects an antibody to determine if someone was previously infected with the
virus.
In August,
? lab-based serology test for use on its ARCHITECT and Alinity platforms pursuant
to a CE Mark.
? In August,
lateral flow rapid test to detect COVID-19 pursuant to an EUA in the
In September,
? pursuant to a CE Mark. In October,
In December,
? quantitative lab-based serology blood test for use on its ARCHITECT and Alinity
i platforms.
In December,
? use of its BinaxNOW COVID-19
the product for at-home use.
In December,
? system to detect COVID-19, flu A, flu B, and respiratory syncytial virus (RSV)
pursuant to a CE Mark.
21
In 2020,
In addition to negatively impacting routine core diagnostic testing volumes, the pandemic negatively affected the number of cardiovascular and neuromodulation procedures performed by health care providers globally, thereby reducing the demand forAbbott's cardiovascular and neuromodulation devices and routine diagnostic tests in 2020. The decrease began in February inChina as that country implemented quarantine restrictions and postponed non-emergency health care activities. The negative impact on cardiovascular and neuromodulation procedures and routine diagnostic tests expanded to other countries and geographic regions as COVID-19 spread geographically in the first half of 2020 and health care systems in these countries shifted their focus to fighting COVID-19.
The extent of the impact and the timing of a recovery in the number of
procedures and routine testing in a particular country or geographic region
depended upon the progression of COVID-19 cases in the country or region. The
recovery in procedures and routine testing volumes in
In
other parts of the world, such as theU.S. andEurope , volumes improved acrossAbbott's hospital-based businesses as the second quarter progressed and the improvement continued in the third quarter. However, in the fourth quarter, the improving trends in the demand for procedures and routine testing flattened or were negatively impacted depending upon the business and the region as many countries experienced an increase in the number of COVID-19 cases and hospitalizations.Abbott's branded generic pharmaceuticals business was also negatively affected by the pandemic in 2020 as COVID-19 spread across emerging market countries in the second and third quarters of 2020.Abbott's nutritional and diabetes care businesses were the least affected by the pandemic as is further discussed below.Abbott is continually implementing business continuity plans in the face of the pandemic. Due to the critical nature of its products and services,Abbott was generally exempt from governmental orders issued during the first quarter of 2020 in theU.S. and other countries requiring businesses to cease operations. The majority of its office-based work was conducted remotely during the period of such governmental orders and the company implemented strict travel restrictions. As some governmental orders were lifted in May andJune 2020 ,Abbott entered a new phase in its operations whereby some office-based employees started working atAbbott's offices on a rotational basis. As various governmental orders and guidelines were modified in the fourth quarter to put in place new restrictions,Abbott continued to ensure that its guidance was aligned with such restrictions.Abbott has taken aggressive steps to limit exposure and enhance the safety of facilities for its employees. Due to the unpredictability of the duration and impact of the current COVID-19 pandemic, the extent to which the COVID-19 pandemic will have a material effect on its business, financial condition or results of operations is uncertain. WhileAbbott's 2020 sales were most significantly affected by the COVID-19 pandemic, the increase in total sales over the last three years also reflects volume growth due to the introduction of new products across various businesses as well as higher sales of various existing products. Sales in emerging markets, which represent approximately 37 percent of total company sales, increased 2.0 percent in 2020 and 8.2 percent in 2019, excluding the impact of foreign exchange. (Emerging markets include all countries exceptthe United States ,Western Europe ,Japan ,Canada ,Australia and New Zealand .) Over the last three years,Abbott's operating margin as a percentage of sales increased from 11.9 percent in 2018 to 14.2 percent in 2019 and 15.5 percent in 2020. The increase in 2020 reflects the sales volume increases in the rapid and molecular diagnostics businesses, partially offset by lower Medical Devices sales due to the impact of the pandemic and the unfavorable effect of foreign exchange. In addition, a reduction in the costs associated with business acquisitions and restructuring activities drove an improvement in operating margins from 2018 to 2020. In 2019, the increase inAbbott's operating margin also reflects margin improvement in various businesses and lower intangible amortization expense compared to 2018. With respect to the performance of each reportable segment over the last three years, sales in the Medical Devices segment excluding the impact of foreign exchange decreased 3.8 percent in 2020 and increased 10.5 percent in 2019. The sales decrease in 2020 was driven byAbbott's cardiovascular and neuromodulation businesses due primarily to reduced procedure volumes as a result of the COVID-19 pandemic. These decreases were partially offset by double-digit growth in Diabetes Care. The sales increase in 2019 was driven primarily by higher Diabetes Care, Structural Heart, Electrophysiology and Heart Failure sales. 22 In 2020, operating earnings for the Medical Devices segment decreased 19.4 percent. The operating margin profile decreased from 30.8 percent of sales in 2019 to 25.8 percent in 2020 primarily due to lower sales and manufacturing volumes as a result of the pandemic and pricing pressures on drug eluting stents (DES) as a result of market competition in theU.S. and other major markets.
In 2020, key product approvals in the Medical Devices segment included:
CE Mark for
? for the treatment of significant mitral regurgitation (MR) in patients
requiring a heart valve replacement who are not candidates for open-heart
surgery or transcatheter mitral valve repair,
CE Mark for
? minimally invasive, clip-based device for repair of a leaky tricuspid heart
valve,
? integrated continuous glucose monitoring (iCGM) system for adults and children
ages 4 and older with diabetes,
CE Mark for
? real time, up-to-the-minute glucose readings, 14-day accuracy and real-time
glucose alarms,
CE Mark for the Libre Sense™ Glucose Sport Biosensor that provides continuous
? glucose monitoring to help athletes better understand the efficacy of their
nutrition choices on training and athletic performance,
defibrillator and cardiac resynchronization therapy defibrillator devices which
? help manage heart rhythm disorders and offer Bluetooth technology and a new
patient smartphone app for improved remote monitoring and enhanced
patient-physician engagement,
? CE Mark for MitraClip® G4,
repair device,
? CE Mark of EnSite™ X EP System, a next-generation 3D cardiac mapping platform
used for ablation therapy to treat abnormal heart rhythms,
? minimally invasive device that uses heat to target specific nerves for the
management of chronic pain, and
? to be used in pediatric patients with advanced refractory left ventricular
heart failure.
InAbbott's worldwide diagnostics business, sales increased 40.6 percent in 2020 and 5.9 percent in 2019, excluding the impact of foreign exchange. As was discussed above, sales growth in 2020 was driven by demand forAbbott's portfolio of COVID-19 diagnostics tests across its rapid and lab-based platforms, partially offset by lower volumes of routine laboratory testing due to the pandemic. Growth in 2019 reflected continued market penetration by the core laboratory business in theU.S. and internationally. The 2019 growth included the continued adoption by customers of Alinity, which isAbbott's integrated family of next-generation diagnostic systems and solutions that are designed to increase efficiency by running more tests in less space, generating test results faster and minimizing human errors while continuing to provide quality results.Abbott has regulatory approvals in theU.S. ,Europe ,China , and other markets for the "Alinity c" and "Alinity i" instruments and has continued to build out its test menu for clinical chemistry and immunoassay diagnostics.Abbott has obtained regulatory approval for the "Alinity h" instrument for hematology inEurope andJapan .Abbott has also obtained regulatory approvals in theU.S. andEurope for the "Alinity s" (blood screening) and "Alinity m" (molecular) instruments and several testing assays. In 2020, operating earnings for the Diagnostics segment increased 94.8 percent. The operating margin profile increased from 24.9 percent of sales in 2018 to 34.5 percent in 2020 primarily due to higher sales in 2020 inRapid Diagnostics andMolecular Diagnostics , partially offset by lower volumes of routine testing inCore Laboratory . 23 InAbbott's worldwide nutritional products business, sales over the last three years were positively impacted by numerous new product introductions, including the roll-outs of human milk oligosaccharide, or HMO, in infant formula and of high-protein Ensure®, that leveragedAbbott's strong brands. Sales were also positively affected by demographics such as an aging population and an increasing rate of chronic disease in developed markets and the rise of a middle class in many emerging markets. Excluding the impact of foreign exchange, total adult nutrition sales increased 10.3 percent in 2020 and 6.6 percent in 2019 led by the continued growth of Ensure,Abbott's market-leading complete and balanced nutrition brand, and Glucerna®,Abbott's market-leading diabetes-specific nutrition brand, across several countries. The 2019 sales growth was partially offset by the unfavorable impact of the discontinuation of a non-core product line in theU.S. Excluding the impact of foreign exchange, total pediatric nutrition sales increased 0.3 percent in 2020 and 3.4 percent in 2019 driven by the PediaSure® and Pedialyte® brands in theU.S. as well as infant and toddler product growth across several markets inAsia andLatin America , partially offset by challenging market dynamics in the infant category inGreater China .
The 2020 increase was also driven by higher Similac® sales in the
The Established Pharmaceutical Products segment focuses on the sale of its products in emerging markets. Excluding the impact of foreign exchange, Established Pharmaceutical sales increased 1.9 percent in 2020 and 7.3 percent in 2019. The sales increases in 2020 and 2019 reflect higher sales in several geographies includingIndia ,China ,Brazil andRussia . Operating margins decreased from 20.2 percent of sales in 2018 to 18.5 percent in 2020 primarily due to the unfavorable impact of foreign exchange, product mix and lower gross margins. With respect toAbbott's financial position, atDecember 31, 2020 ,Abbott's cash and cash equivalents and short-term investments total approximately$7.1 billion compared to$4.1 billion atDecember 31, 2019 .Abbott's long-term debt and short-term borrowings total$18.7 billion and$18.1 billion atDecember 31, 2020 and 2019, respectively.Abbott declared dividends of$1.53 per share in 2020 compared to$1.32 per share in 2019, an increase of approximately 16 percent. Dividends paid totaled$2.560 billion in 2020 compared to$2.270 billion in 2019. The year-over-year change in the amount of dividends paid primarily reflects the increase in the dividend rate. InDecember 2020 ,Abbott increased the company's quarterly dividend by 25 percent to$0.45 per share from$0.36 per share, effective with the dividend paid inFebruary 2021 . In 2021,Abbott will focus on continuing to meet the demand for COVID-19 tests and will continue to invest in product development areas that provide the opportunity for strong sustainable growth over the next several years. In its diagnostics business,Abbott will continue to focus on driving market adoption and geographic expansion of its Alinity suite of diagnostics instruments. In the medical devices business,Abbott will continue to focus on expanding its market position in various areas including diabetes care, structural heart, electrophysiology, and heart failure. In its nutritionals business,Abbott will continue to focus on driving growth globally and further enhancing its portfolio with the introduction of line extensions of its science-based products. In the established pharmaceuticals business,Abbott will continue to focus on growing its business with the depth and breadth of its portfolio in emerging markets. 24 Critical Accounting Policies
Sales Rebates - In 2020, approximately 41 percent ofAbbott's consolidated gross revenues were subject to various forms of rebates and allowances thatAbbott recorded as reductions of revenues at the time of sale. Most of these rebates and allowances in 2020 are in the Nutritional Products and Diabetes Care businesses.Abbott provides rebates to state agencies that administer theSpecial Supplemental Nutrition Program for Women , Infants, and Children (WIC), wholesalers, group purchasing organizations, and other government agencies and private entities. Rebate amounts are usually based upon the volume of purchases using contractual or statutory prices for a product. Factors used in the rebate calculations include the identification of which products have been sold subject to a rebate, which customer or government agency price terms apply, and the estimated lag time between sale and payment of a rebate. Using historical trends, adjusted for current changes,Abbott estimates the amount of the rebate that will be paid, and records the liability as a reduction of gross sales whenAbbott records its sale of the product. Settlement of the rebate generally occurs from one to six months after sale.Abbott regularly analyzes the historical rebate trends and makes adjustments to reserves for changes in trends and terms of rebate programs. Rebates and chargebacks charged against gross sales in 2020, 2019 and 2018 amounted to approximately$3.3 billion ,$3.1 billion and$3.0 billion , respectively, or 20.1 percent, 19.1 percent and 19.0 percent of gross sales, respectively, based on gross sales of approximately$16.6 billion ,$16.3 billion and$16.0 billion , respectively, subject to rebate. A one-percentage point increase in the percentage of rebates to related gross sales would decrease net sales by approximately$166 million in 2020.Abbott considers a one-percentage point increase to be a reasonably likely increase in the percentage of rebates to related gross sales. Other allowances charged against gross sales were approximately$207 million ,$169 million and$175 million for cash discounts in 2020, 2019 and 2018, respectively, and$232 million ,$192 million and$191 million for returns in 2020, 2019 and 2018, respectively. Cash discounts are known within 15 to 30 days of sale, and therefore can be reliably estimated. Returns can be reliably estimated becauseAbbott's historical returns are low, and because sales returns terms and other sales terms have remained relatively unchanged for several periods.
Management analyzes the adequacy of ending rebate accrual balances each quarter.
In the domestic nutritional business, management uses both internal and external data available to estimate the accruals. In the WIC business, estimates are required for the amount of WIC sales within each state whereAbbott holds the WIC contract. The state where the sale is made, which is the determining factor for the applicable rebated price, is reliably determinable. Rebated prices are based on contractually obligated agreements generally lasting a period of two to four years. Except for a change in contract price or a transition period before or after a change in the supplier for the WIC business in a state, accruals are based on historical redemption rates and data from theU.S. Department of Agriculture (USDA) and the states submitting rebate claims. TheUSDA , which administers the WIC program, has been making its data available for many years. Management also estimates the states' processing lag time based on sales and claims data. Inventory in the retail distribution channel does not vary substantially. Management has access to several large customers' inventory management data, which allows management to make reliable estimates of inventory in the retail distribution channel. AtDecember 31, 2020 ,Abbott had WIC business in 27 states. Historically, adjustments to prior years' rebate accruals have not been material to net income.Abbott employs various techniques to verify the accuracy of claims submitted to it, and where possible, works with the organizations submitting claims to gain insight into changes that might affect the rebate amounts. For government agency programs, the calculation of a rebate involves interpretations of relevant regulations, which are subject to challenge or change in interpretation. Income Taxes -Abbott operates in numerous countries where its income tax returns are subject to audits and adjustments. BecauseAbbott operates globally, the nature of the audit items is often very complex, and the objectives of the government auditors can result in a tax on the same income in more than one country.Abbott employs internal and external tax professionals to minimize audit adjustment amounts where possible. In accordance with the accounting rules relating to the measurement of tax contingencies, in order to recognize an uncertain tax benefit, the taxpayer must be more likely than not of sustaining the position, and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit. Application of these rules requires a significant amount of judgment. In theU.S. ,Abbott's federal income tax returns through 2016 are settled. Undistributed foreign earnings remain indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in its foreign entities is not practicable. 25 Pension and Post-Employment Benefits -Abbott offers pension benefits and post-employment health care to many of its employees.Abbott engages outside actuaries to assist in the determination of the obligations and costs under these programs.Abbott must develop long-term assumptions, the most significant of which are the health care cost trend rates, discount rates and the expected return on plan assets. The discount rates used to measure liabilities were determined based on high-quality fixed income securities that match the duration of the expected retiree benefits. The health care cost trend rates representAbbott's expected annual rates of change in the cost of health care benefits and are a forward projection of health care costs as of the measurement date. A difference between the assumed rates and the actual rates, which will not be known for years, can be significant in relation to the obligations and the annual cost recorded for these programs. Low interest rates have significantly increased actuarial losses for these plans. AtDecember 31, 2020 , pretax net actuarial losses and prior service costs and (credits) recognized in Accumulated other comprehensive income (loss) were net losses of$4.6 billion forAbbott's defined benefit plans and net losses of$419 million forAbbott's medical and dental plans. Actuarial losses and gains are amortized over the remaining service attribution periods of the employees under the corridor method, in accordance with the rules for accounting for post-employment benefits.
Differences between the expected long-term return on plan assets and the actual annual return are amortized over a five-year period.
Valuation of Intangible Assets -Abbott has acquired and continues to acquire significant intangible assets thatAbbott records at fair value at the acquisition date. Transactions involving the purchase or sale of intangible assets occur with some frequency between companies in the health care field and valuations are usually based on a discounted cash flow analysis. The discounted cash flow model requires assumptions about the timing and amount of future net cash flows, risk, cost of capital, terminal values and market participants. Each of these factors can significantly affect the value of the intangible asset.Abbott engages independent valuation experts who reviewAbbott's critical assumptions and calculations for acquisitions of significant intangibles.Abbott reviews definite-lived intangible assets for impairment each quarter using an undiscounted net cash flows approach. If the undiscounted cash flows of an intangible asset are less than the carrying value of an intangible asset, the intangible asset is written down to its fair value, which is usually the discounted cash flow amount. Where cash flows cannot be identified for an individual asset, the review is applied at the lowest group level for which cash flows are identifiable.Goodwill and indefinite-lived intangible assets, which relate to in-process research and development acquired in a business combination, are reviewed for impairment annually or when an event that could result in impairment occurs. AtDecember 31, 2020 , goodwill amounted to$23.7 billion and net intangibles amounted to$14.8 billion . Amortization expense in continuing operations for intangible assets amounted to$2.1 billion in 2020,$1.9 billion in 2019 and$2.2 billion in 2018. There was no reduction of goodwill relating to impairments in 2020, 2019 and 2018. Litigation - Abbott accounts for litigation losses in accordance withFinancial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No. 450, "Contingencies." Under ASC No. 450, loss contingency provisions are recorded for probable losses at management's best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. These estimates are often initially developed substantially earlier than the ultimate loss is known, and the estimates are refined each accounting period as additional information becomes known. Accordingly,Abbott is often initially unable to develop a best estimate of loss, and therefore the minimum amount, which could be zero, is recorded. As information becomes known, either the minimum loss amount is increased, resulting in additional loss provisions, or a best estimate can be made, also resulting in additional loss provisions.
Occasionally, a best estimate amount is changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected.
Accruals of approximately$105 million have been recorded atDecember 31, 2020 for these proceedings and exposures. These accruals represent management's best estimate of probable loss, as defined by FASB ASC No. 450, "Contingencies."
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Results of Operations
Sales
The following table details the components of sales growth by reportable segment
for the last two years:
Components of % Change
Total
% Change Price Volume Exchange
Total Net Sales
2020 vs. 2019 8.5 (0.4) 10.2 (1.3)
2019 vs. 2018 4.3 0.2 7.3 (3.2)
Total U.S.
2020 vs. 2019 14.2 (1.1) 15.3 -
2019 vs. 2018 5.2 (0.4) 5.6 -
Total International
2020 vs. 2019 5.3 0.1 7.2 (2.0)
2019 vs. 2018 3.9 0.5 8.3 (4.9)
Established Pharmaceutical Products Segment
2020 vs. 2019 (4.1) 2.7 (0.8) (6.0)
2019 vs. 2018 1.4 3.0 4.3 (5.9)
Nutritional Products Segment
2020 vs. 2019 3.2 0.8 3.9 (1.5)
2019 vs. 2018 2.5 0.9 3.9 (2.3)
Diagnostic Products Segment
2020 vs. 2019 40.1 (0.8) 41.4 (0.5)
2019 vs. 2018 2.9 (0.5) 6.4 (3.0)
Medical Devices Segment
2020 vs. 2019 (3.7) (1.9) (1.9) 0.1
2019 vs. 2018 7.6 (0.9) 11.4 (2.9)
The increase in Total Net Sales in 2020 reflects volume growth in the
Diagnostics and Nutritional Products segments. In Medical Devices, the impact
of COVID-19 on Abbott's cardiovascular and neuromodulation businesses was
partially offset by double-digit volume growth in Diabetes Care. The increase
in Total Net Sales in 2019 reflects volume growth across all of Abbott's
segments. The price declines related to the Medical Devices segment in 2020 and
2019 primarily reflect DES pricing pressures as a result of market competition
in the U.S. and other major markets.
27
A comparison of significant product and product group sales is as follows.
Percent changes are versus the prior year and are based on unrounded numbers.
Total Impact of Total Change
2020 2019 Change Exchange Excl. Exchange
(dollars in millions)
Total Established Pharmaceuticals -
Key Emerging Markets $ 3,209 $ 3,392 (5) % (8) % 3 %
Other 1,094 1,094 - 1 (1)
Nutritionals -International Pediatric Nutritionals 2,140 2,282 (6) (2) (4) U.S. Pediatric Nutritionals 1,987 1,879 6 - 6 International Adult Nutritionals 2,228 2,017 11
(3) 14
U.S. Adult Nutritionals 1,292 1,231 5 - 5
Diagnostics -
Core Laboratory 4,475 4,656 (4) (1) (3)
Molecular 1,438 442 225 (1) 226
Point of Care 516 561 (8) - (8)
Rapid Diagnostics 4,376 2,054 113 1 112
Medical Devices -
Rhythm Management 1,914 2,144 (11) - (11)
Electrophysiology 1,578 1,721 (8) 1 (9)
Heart Failure 740 769 (4) - (4)
Vascular (a) 2,339 2,850 (18) - (18)
Structural Heart 1,247 1,400 (11) - (11)
Neuromodulation 702 831 (16) - (16)
Diabetes Care 3,267 2,524 29 - 29
(a) Vascular Product Lines:
Coronary and Endovascular 2,263 2,740 (17) - (17)
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Total Impact of Total Change
2019 2018 Change Exchange Excl. Exchange
(dollars in millions)
Total Established Pharmaceuticals -
Key Emerging Markets $ 3,392 $ 3,363 1 % (7) % 8 %
Other 1,094 1,059 3 (3) 6
Nutritionals -International Pediatric Nutritionals 2,282 2,254 1 (4) 5 U.S. Pediatric Nutritionals 1,879 1,843 2 - 2 International Adult Nutritionals 2,017 1,900 6
(5) 11
U.S. Adult Nutritionals 1,231 1,232 - - -
Diagnostics -
Core Laboratory 4,656 4,386 6 (4) 10
Molecular 442 484 (9) (3) (6)
Point of Care 561 553 2 - 2
Rapid Diagnostics 2,054 2,072 (1) (2) 1
Medical Devices -
Rhythm Management 2,144 2,198 (3) (3) -
Electrophysiology 1,721 1,561 10 (3) 13
Heart Failure 769 646 19 (1) 20
Vascular (a) 2,850 2,929 (3) (3) -
Structural Heart 1,400 1,239 13 (3) 16
Neuromodulation 831 864 (4) (2) (2)
Diabetes Care 2,524 1,933 31 (5) 36
(a) Vascular Product Lines:
Coronary and Endovascular 2,740 2,778 (1) (2) 1
In order to compute results excluding the impact of exchange rates, current yearU.S. dollar sales are multiplied or divided, as appropriate, by the current year average foreign exchange rates and then those amounts are multiplied or divided, as appropriate, by the prior year average foreign exchange rates.
The Established Pharmaceutical Products segment is focused on several key emerging markets includingIndia ,Russia ,China andBrazil . Excluding the impact of foreign exchange, total sales in these key emerging markets increased 2.6 percent in 2020 and 7.9 percent in 2019 due to higher sales in several geographies includingChina ,Brazil ,India andRussia . Excluding the impact of foreign exchange, sales inEstablished Pharmaceuticals' other emerging markets decreased 0.5 percent in 2020 and increased 5.6 percent in 2019. Total Nutritional Products sales increased 4.7 percent in 2020 and 4.8 percent in 2019, excluding the impact of foreign exchange. In 2020, International Pediatric Nutritional sales, excluding the effect of foreign exchange, decreased 4.1 percent as growth acrossAbbott's pediatric products in various countries inSoutheast Asia was more than offset by challenging market dynamics in the infant category inGreater China . The 4.6 percent increase in 2019 International Pediatric Nutritional sales, excluding the effect of foreign exchange, was driven by growth acrossAbbott's portfolio, including Similac and PediaSure in various countries inAsia andLatin America and Pedialyte inLatin America . This growth was partially offset by challenging market dynamics in the infant category inGreater China . In theU.S. Pediatric Nutritional business, sales increased 5.8 percent in 2020 and 1.9 percent in 2019, reflecting growth in Similac in 2020 and growth in PediaSure and Pedialyte in both years. 29 In the International Adult Nutritional business, sales increased 13.6 percent and 10.9 percent in 2020 and 2019, respectively, excluding the effect of foreign exchange, due to continued growth of Ensure and Glucerna in several countries. In 2020 U.S. Adult Nutritional sales increased 4.9 percent, primarily due to growth of Ensure. In 2019,U.S. Adult Nutritional sales were unchanged from 2018 due to the impact ofAbbott's discontinuation of a non-core product line during the third quarter of 2018 that was offset by growth in other areas of the business. In the Diagnostics segment,Core Laboratory sales decreased 2.8 percent in 2020, excluding the effect of foreign exchange, as the lower volume of routine testing performed in hospital and other laboratories due to COVID-19 was partially offset by sales ofAbbott's COVID-19 laboratory-based tests for the detection of the IgG and IgM antibodies, which determine if someone was previously infected with the virus.Core Laboratory antibody testing-related sales onAbbott's ARCHITECT and Alinity i platforms were$268 million in 2020. The 225.7 percent increase inMolecular Diagnostics sales in 2020, excluding the effect of foreign exchange, reflects higher volumes due to demand forAbbott's laboratory-based molecular tests for COVID-19 on its m2000 and Alinity m platforms.Abbott receivedU.S. FDA approval inMarch 2020 for its Alinity m molecular diagnostics system. Molecular Diagnostics COVID-19 testing-related sales were$1.023 billion in 2020. InRapid Diagnostics , sales increased 112.3 percent in 2020, excluding the effect of foreign exchange, due to strong demand forAbbott's point-of-care COVID-19 molecular test on its ID NOW platform and its BinaxNOW COVID-19Ag Card test in theU.S. as well as international demand for COVID-19 rapid tests on its Panbio system and increased testing in the first quarter for the flu in theU.S. These increases were partially offset by the unfavorable impact of COVID-19 on routine diagnostic testing. Rapid Diagnostics COVID-19 testing-related sales were$2.593 billion in 2020. In the Diagnostics segment, the sales increase in 2019 was driven by above-market growth inCore Laboratory in theU.S. and internationally, whereAbbott achieved continued adoption of its Alinity family of diagnostic instruments. The 6.3 percent decrease in 2019 Molecular sales, excluding the effect of foreign exchange, reflects the negative impact of lower non-governmental organization purchases inAfrica . InRapid Diagnostics , sales growth in 2019 in various areas, including infectious disease testing in developed markets and cardio-metabolic testing, was mostly offset by lower than expected infectious disease testing sales inAfrica . Excluding the effect of foreign exchange, total Medical Devices sales decreased 3.8 percent and increased 10.5 percent in 2020 and 2019, respectively. In 2020, double-digit growth in Diabetes Care was more than offset by decreases inAbbott's cardiovascular and neuromodulation businesses due to the impact of COVID-19 and lower vascular sales inChina in the fourth quarter of 2020 as a result of a new national tender program. The 2019 sales increase was driven by double-digit growth in Diabetes Care, Structural Heart, Electrophysiology and Heart Failure. The 2020 and 2019 growth in Diabetes Care revenue was driven by continued growth of FreeStyle Libre,Abbott's continuous glucose monitoring system, internationally and in theU.S. In 2020, FreeStyle Libre sales totaled$2.635 billion , which reflected a 42.6 percent increase over 2019, excluding the effect of foreign exchange. FreeStyle Libre sales in 2019 were$1.842 billion , which reflected a 69.8 percent increase, excluding the effect of foreign exchange, over 2018 when sales totaled$1.128 billion . In 2019, growth in Structural Heart revenue was broad-based across several areas of the business, including MitraClip,Abbott's market-leading device for the minimally invasive treatment of mitral regurgitation (MR), a leaky heart valve. 2019 growth in Electrophysiology revenue reflects higher sales of cardiac diagnostic and ablation catheters in both theU.S. and internationally. The growth in Heart Failure revenue in 2019 was driven by rapid market adoption in theU.S. ofAbbott's HeartMate 3® Left Ventricular Assist Device (LVAD) following FDA approval inOctober 2018 as a destination (long-term use) therapy for people living with advanced heart failure as well as higher sales ofAbbott's CardioMEMS® heart failure monitoring system. In Vascular, excluding the effect of foreign exchange, sales in 2019 were flat as the 1.3 percent increase in coronary and endovascular product sales, which includes drug-eluting stents, balloon catheters, guidewires, vascular imaging/diagnostics products, vessel closure, carotid and other coronary and peripheral products, was offset by reductions in royalty and contract manufacturing revenue. In Rhythm Management, higher 2019 international sales, excluding the effect of foreign exchange, were offset by a 4.4 percent decrease inU.S. revenue. In 2019, the 2.4 percent decline in Neuromodulation sales, excluding the effect of foreign exchange, reflects a 4.2 percent decline inU.S. sales.
30
The expiration of licenses and patent protection can affect the future revenues
and operating income of
InApril 2017 ,Abbott received a warning letter from theU.S. FDA related to its manufacturing facility inSylmar, CA which was acquired byAbbott onJanuary 4, 2017 as part of the acquisition ofSt. Jude Medical, Inc. (St. Jude Medical). This facility manufactures implantable cardioverter defibrillators, cardiac resynchronization therapy defibrillators, and monitors.Abbott prepared and executed a comprehensive plan of corrective actions. OnApril 28, 2020 ,Abbott received a letter from the FDA indicating that, based on theFDA's evaluation, it appeared thatAbbott had addressed the items in the warning letter. As a result, the warning letter is considered closed.
Operating Earnings
Gross profit margins were 50.5 percent of net sales in 2020, 52.5 percent in 2019 and 51.3 percent in 2018. In 2020, the decrease primarily reflects the mix of sales acrossAbbott's various businesses and operational inefficiencies due to the impact of COVID-19, as well as the increase in intangible asset amortization, the impairment of intangible assets and the unfavorable effect of foreign exchange on gross margin in 2020. In 2019, the increase primarily reflects lower intangible amortization expense and lower integration and restructuring costs. Research and development (R&D) expenses were$2.4 billion in 2020 and 2019, and$2.3 billion in 2018. R&D spending in 2020 was relatively flat compared to 2019 as the impact of the immediate expensing in 2019 of an R&D asset valued at$102 million that was acquired in conjunction with the acquisition ofCephea Valve Technologies, Inc. (Cephea) was partially offset by the$55 million impairment of an in-process R&D intangible asset in 2020. R&D expense in 2020 also reflects lower integration and restructuring costs in 2020 related to R&D, partially offset by higher spending on various projects. R&D expenses in 2019 increased 6.1 percent, primarily reflecting the immediate expensing of the Cephea R&D asset as well as higher R&D spending in various businesses, primarily in Medical Devices, partially offset by the favorable effect of foreign exchange. In 2020, R&D expenditures totaled$1.3 billion for the Medical Devices segment,$608 million for the Diagnostic Products segment,$189 million for the Nutritional Products segment and$177 million for theEstablished Pharmaceutical Products segment. Selling, general and administrative (SG&A) expenses were basically flat in 2020 and 2019 versus the respective prior years. In 2020, the favorable effect of foreign exchange, income of approximately$100 million from a litigation settlement in 2020, lower spending due to COVID-19 travel restrictions, and the impact of various cost saving initiatives were offset by higher spending to drive growth in various businesses. In 2019, the favorable effect of foreign exchange and lower acquisition-related integration costs offset higher selling and marketing costs to drive continued growth across various businesses.
Restructurings
From 2017 to 2020,Abbott management approved restructuring plans as part of the integration of the acquisitions of St. Jude Medical into the Medical Devices segment, andAlere Inc. (Alere) into the Diagnostic Products segment, in order to leverage economies of scale and reduce costs. As ofDecember 31, 2017 , the accrued balance associated with these actions was$68 million . From 2018 to 2020,Abbott recorded employee related severance and other charges totaling approximately$137 million , comprised of$13 million in 2020,$72 million in 2019 and$52 million in 2018. Approximately$30 million was recorded in Cost of products sold, approximately$15 million was recorded in Research and development, and approximately$92 million was recorded in Selling, general and administrative expense over the last three years. As ofDecember 31, 2020 , the accrued liabilities remaining in the Consolidated Balance Sheet related to these actions total$25 million and primarily represent severance obligations.
From 2016 to 2020,
Abbott recorded employee related severance and other charges of approximately$36 million in 2020,$66 million in 2019 and$28 million in 2018. Approximately$6 million in 2020,$16 million in 2019 and$10 million in 2018 are recorded in Cost of products sold, approximately$2 million in 2020,$28 million in 2019 and$2 million in 2018 are recorded in Research and development, and approximately$28 million in 2020,$22 million in 2019 and$16 million in 2018 are recorded in Selling, general and administrative expense. 31
Interest Expense and Interest (Income)
Interest expense, net decreased$76 million in 2020 due to a reduction in interest expense resulting from the favorable impact of the euro debt financing inNovember 2019 , the repayment of debt inDecember 2019 and a lower interest rate environment in 2020. In 2019, interest expense, net decreased$145 million due to the favorable impact of the euro debt financing inSeptember 2018 , as well as the repayment of debt in 2018 and the first quarter of 2019.
Debt Extinguishment Costs
On
OnOctober 28, 2018 ,Abbott redeemed approximately$4 billion of debt, which included$750 million principal amount of its 2.00% Notes due 2020;$597 million principal amount of its 4.125% Notes due 2020;$900 million principal amount of its 3.25% Notes due 2023;$450 million principal amount of its 3.4% Notes due 2023; and$1.300 billion principal amount of its 3.75% Notes due 2026.Abbott incurred a net charge of$153 million related to the early repayment of this debt and the unwinding of related interest rate swaps. OnMarch 22, 2018 ,Abbott redeemed all of the$947 million principal amount of its 5.125% Notes due 2019, as well as$1.055 billion of the$2.850 billion principal amount of its 2.35% Notes due 2019.Abbott incurred a net charge of$14 million related to the early repayment of this debt.
Other (Income) Expense, net
Other (income) expense, net, for 2020, 2019 and 2018 includes approximately$205 million ,$225 million , and$160 million of income in each year, respectively, related to the non-service cost components of the net periodic benefit costs associated with the pension and post-retirement medical plans. Other (income) expense, net for 2020 also includes equity investment impairments that totaled approximately$115 million . Taxes on Earnings
The income tax rates on earnings from continuing operations were 10.0 percent in 2020, 9.6 percent in 2019 and 18.8 percent in 2018.
In 2020, taxes on earnings from continuing operations include the recognition of approximately$170 million of tax benefits associated with the impairment of certain assets, approximately$140 million of net tax benefits as a result of the resolution of various tax positions related to prior years, and approximately$100 million in excess tax benefits associated with share-based compensation. In 2020, taxes on earnings from continuing operations also include a$26 million increase to the transition tax associated with the 2017 Tax Cuts and Jobs Act (TCJA). The$26 million increase to the transition tax liability was the result of the resolution of various tax positions related to prior years. This adjustment increased the cumulative net tax expense related to the TCJA to$1.53 billion . In 2019, taxes on earnings from continuing operations included approximately$100 million in excess tax benefits associated with share-based compensation, an$86 million reduction of the transition tax and$68 million of tax expense resulting from tax legislation enacted in the fourth quarter of 2019 inIndia . The$86 million reduction to the transition tax liability was the result of the issuance of final transition tax regulations by theU.S. Department of Treasury in 2019. In 2018, taxes on earnings from continuing operations included$98 million of net tax expense related to the settlement ofAbbott's 2014-2016 federal income tax audit in theU.S. , partial settlement of the former St. Jude Medical consolidated group's 2014 and 2015 federal income tax returns in theU.S. and audit settlements in various countries as well as approximately$90 million in excess tax benefits associated with share-based compensation. In 2018,Abbott also recorded$130 million of additional tax expense related to the TCJA; the$130 million reflected a$120 million increase in the transition tax from$2.89 billion to$3.01 billion and a$10 million reduction in the net benefit related to the remeasurement of deferred tax assets and liabilities. 32 Exclusive of these discrete items, tax expense was favorably impacted by lower tax rates and tax exemptions on foreign income primarily derived from operations inPuerto Rico ,Switzerland ,Ireland ,the Netherlands ,Costa Rica ,Singapore , andMalta .Abbott benefits from a combination of favorable statutory tax rules, tax rulings, grants, and exemptions in these tax jurisdictions. See Note 15 to the consolidated financial statements for a full reconciliation of the effective tax rate to theU.S. federal statutory rate.
Discontinued Operations
The net earnings of discontinued operations include income tax benefits of$24 million in 2020 and$39 million in 2018. The 2020 tax benefits primarily relate to the resolution of various tax positions related toAbbott's developed markets branded generic pharmaceuticals business which was sold toMylan Inc. (Mylan) in 2015. The tax positions relate to years prior to the sale to Mylan. The 2018 tax benefits primarily relate to the resolution of various tax positions related to the operations of AbbVie Inc. (AbbVie) for years prior to the separation.Abbott completed the separation of AbbVie, which was formed to holdAbbott's research-based proprietary pharmaceuticals business, inJanuary 2013 .Abbott retained all liabilities for allU.S. federal and foreign income taxes on income prior to the separation.
Research and Development Programs
Research and Development Process
In theEstablished Pharmaceuticals segment, the development process focuses on the geographic expansion and continuous improvement of the segment's existing products to provide benefits to patients and customers. AsEstablished Pharmaceuticals does not actively pursue primary research, development usually begins with work on existing products or after the acquisition of an advanced stage licensing opportunity.
Depending upon the product, the phases of development may include:
? Drug product development.
Phase I bioequivalence studies to compare a future Established Pharmaceutical's
? brand with an already marketed compound with the same active pharmaceutical
ingredient (API).
? Phase II studies to test the efficacy of benefits in a small group of patients.
? Phase III studies to broaden the testing to a wider population that reflects
the actual medical use.
? Phase IV and other post-marketing studies to obtain new clinical use data on
existing products within approved indications.
The specific requirements (e.g., scope of clinical trials) for obtaining regulatory approval vary across different countries and geographic regions. The process may range from one year for a bioequivalence study project to 6 or more years for complex formulations, new indications, or geographic expansion in specific countries, such asChina .
In the Diagnostics segment, the phases of the research and development process include:
? Discovery which focuses on identification of a product that will address a
specific therapeutic area, platform, or unmet clinical need.
Concept/Feasibility during which the materials and manufacturing processes are
? evaluated, testing may include product characterization and analysis is
performed to confirm clinical utility.
Development during which extensive testing is performed to demonstrate that the
? product meets specified design requirements and that the design specifications
conform to user needs and intended uses.
33
The regulatory requirements for diagnostic products vary across different
countries and geographic regions. In the U.S. , the FDA classifies diagnostic
products into classes (I, II, or III) and the classification determines the
regulatory process for approval. While the Diagnostics segment has products in
all three classes, the vast majority of its products are categorized as Class I
or Class II. Submission of a separate regulatory filing is not required for
Class I products. Class II devices typically require pre-market notification to
the FDA through a regulatory filing known as a 510(k) submission. Most Class III
products are subject to the FDA's Premarket Approval (PMA) requirements. Other
Class III products, such as those used to screen blood, require the submission
and approval of a Biological License Application (BLA).
In the European Union (EU), diagnostic products are also categorized into
different categories and the regulatory process, which has been governed by the
European In Vitro Diagnostic Medical Device Directive, depends upon the
category, with certain product categories requiring review and approval by an
independent company, known as a Notified Body, before the manufacturer can affix
a CE mark to the product to declare conformity to the Directive. Other products
only require a self-certification process. In the second quarter of 2017, the
EU adopted the new In Vitro Diagnostic Regulation (IVDR) which replaces the
existing directive in the EU for in vitro diagnostic products. The IVDR will
apply after a five-year transition period and imposes additional premarket and
postmarket regulatory requirements on manufacturers of such products.
In the Medical Devices segment, the research and development process begins with
research on a specific technology that is evaluated for feasibility and
commercial viability. If the research program passes that hurdle, it moves
forward into development. The development process includes evaluation,
selection and qualification of a product design, completion of applicable
clinical trials to test the product's safety and efficacy, and validation of the
manufacturing process to demonstrate its repeatability and ability to
consistently meet pre-determined specifications.
Similar to the diagnostic products discussed above, in the U.S. , medical devices
are classified as Class I, II, or III. Most of Abbott's medical device products
are classified as Class II devices that follow the 510(k) regulatory process or
Class III devices that are subject to the PMA process.
In the EU, medical devices are also categorized into different classes and the regulatory process, which has been governed by the European Medical Device Directive and the Active Implantable Medical Device Directive, varies by class.
Each product must bear a CE mark to show compliance with the Directive. In the second quarter of 2017, the EU adopted the new Medical Devices Regulation (MDR) which replaces the existing directives in the EU for medical devices and imposes additional premarket and postmarket regulatory requirements on manufacturers of such products. While the MDR was previously adopted to apply after a three year transition period, in 2020 theEuropean Parliament postponed the date of application by one year. Some products require submission of a design dossier to the appropriate regulatory authority for review and approval prior to CE marking of the device. For other products, the company is required to prepare a technical file which includes testing results and clinical evaluations but can self-certify its ability to apply the CE mark to the product. Outside theU.S. and the EU, the regulatory requirements vary across different countries and regions.
After approval and commercial launch of some medical devices, post-market trials may be conducted either due to a conditional requirement of the regulatory market approval or with the objective of proving product superiority.
In the Nutritional segment, the research and development process generally focuses on identifying and developing ingredients and products that address the nutritional needs of particular populations (e.g., infants and adults) or patients (e.g., people with diabetes). Depending upon the country and/or region, if claims regarding a product's efficacy will be made, clinical studies typically must be conducted. In theU.S. , the FDA requires that it be notified of proposed new formulations and formulation or packaging changes related to infant formula products. Prior to the launch of an infant formula or product packaging change, the company is required to obtain theFDA's confirmation that it has no objections to the proposed product or packaging. For other nutritional products, notification or pre-approval from the FDA is not required unless the product includes a new food additive. In some countries, regulatory approval may be required for certain nutritional products, including infant formula and medical nutritional products. 34 Areas of Focus
In 2021 and beyond,
Established Pharmaceuticals -Abbott focuses on building country-specific portfolios made up of high-quality medicines that meet the needs of people in emerging markets. Over the next several years,Abbott plans to expand its product portfolio in key therapeutic areas with the aim of being among the first to launch new off-patent and differentiated medicines. In addition,Abbott continues to expand existing brands into new markets, implement product enhancements that provide value to patients and acquire strategic products and technology through licensing activities.Abbott is also actively working on the further development of several key brands such as Creon™, Duphaston™, Duphalac™ and Influvac™. Depending on the product, the activities focus on development of new data, markets, formulations, delivery systems, or indications. One example includes the launch ofAbbott's quadrivalent influenza vaccination Influvac® Tetra in 12 markets and an expanded indication in 16 markets to cover children, adolescents and young adults from 3 to 17 years old.
Medical Devices -
Cardiac Rhythm Management - Development of next-generation rhythm management
? technologies, including advanced communication capabilities and leadless pacing
therapies.
Heart Failure - Continued enhancements to
? support and pulmonary artery pressure systems, including enhanced clinical
performance and usability.
? Electrophysiology - Development of next-generation technologies in the areas of
ablation, diagnostic, mapping, and visualization and recording.
? Vascular - Development of next-generation technologies for use in coronary and
peripheral vascular procedures.
Structural Heart - Development of minimally-invasive transcatheter and surgical
? devices for the repair and replacement of heart valves and other structural
heart conditions.
Neuromodulation - Development of additional clinical evidence and
? next-generation technologies leveraging digital health to improve patient and
physician engagement to treat chronic pain, movement disorders and other
indications.
Diabetes Care - Develop enhancements and additional indications for the
? FreeStyle Libre platform of continuous glucose monitoring products to help
patients improve their ability to manage diabetes and for use beyond diabetes.
Nutritionals -Abbott is focusing its research and development spend on platforms that span the pediatric and adult nutrition areas: gastro intestinal/immunity health, brain health, mobility and metabolism, and user experience platforms. Numerous new products that build on advances in these platforms are currently under development, including clinical outcome testing, and are expected to be launched over the coming years.Core Laboratory Diagnostics -Abbott continues to commercialize its next-generation blood screening, immunoassay, clinical chemistry and hematology systems, along with assays, including a focus on unmet medical need, in various areas including infectious disease, cardiac care, metabolics, and oncology, as well as informatics solutions to help optimize diagnostics laboratory performance and automation solutions to increase efficiency in laboratories.
In addition, the Diagnostics Divisions are pursuing the
35
Given the diversity of Abbott's business, its intention to remain a broad-based
health care company and the numerous sources for potential future growth, no
individual project is expected to be material to cash flows or results of
operations over the next five years. Factors considered included research and
development expenses projected to be incurred for the project over the next year
relative to Abbott's total research and development expenses, as well as
qualitative factors, such as marketplace perceptions and impact of a new product
on Abbott's overall market position. There were no delays in Abbott's 2020
research and development activities that are expected to have a material impact
on operations.
While the aggregate cost to complete the numerous projects currently in
development is expected to be material, the total cost to complete will depend
upon Abbott's ability to successfully finish each project, the rate at which
each project advances, and the ultimate timing for completion. Given the
potential for significant delays and the risk of failure inherent in the
development of medical device, diagnostic and pharmaceutical products and
technologies, it is not possible to accurately estimate the total cost to
complete all projects currently in development. Abbott plans to manage its
portfolio of projects to achieve research and development spending that will be
competitive in each of the businesses in which it participates, and such
spending is expected to approximate 7.0 percent of total Abbott sales in 2021.
AtDecember 31, 2020 , goodwill recorded as a result of business combinations totaled$23.7 billion .Goodwill is reviewed for impairment annually in the third quarter or when an event that could result in an impairment occurs, using a quantitative assessment to determine whether it is more likely than not that the fair value of any reporting unit is less than its carrying amount. The income and market approaches are used to calculate the fair value of each reporting unit. The results of the last impairment test indicated that the fair value of each reporting unit was substantially in excess of its carrying value. Financial Condition Cash Flow Net cash from operating activities amounted to$7.9 billion ,$6.1 billion and$6.3 billion in 2020, 2019 and 2018, respectively. The increase in Net cash from operating activities in 2020 was primarily due to the favorable cash flow impact of higher segment operating earnings, lower payments related to interest, integration expenses, and restructuring actions, and the proceeds from a litigation settlement partially offset by an increased investment in working capital and higher income tax payments. The decrease in Net cash from operating activities in 2019 was primarily due to an increased investment in working capital, timing of pension contributions relative to 2018 and higher income tax payments, partially offset by the favorable cash flow impact of improved segment operating earnings and lower interest and acquisition-related expenses. While a significant portion ofAbbott's cash and cash equivalents atDecember 31, 2020 , are reinvested in foreign subsidiaries,Abbott does not expect such reinvestment to affect its liquidity and capital resources. Due to the enactment of the TCJA, if these funds were needed for operations in theU.S. ,Abbott does not expect to incur significant additional income taxes in the future to repatriate these funds.Abbott funded$400 million in 2020,$382 million in 2019 and$114 million in 2018 to defined benefit pension plans.Abbott expects pension funding of approximately$410 million in 2021 for its pension plans.Abbott expects annual cash flow from operating activities to continue to exceedAbbott's capital expenditures and cash dividends.
Debt and Capital
AtDecember 31, 2020 ,Abbott's long-term debt rating was A byStandard & Poor's Corporation and A3 by Moody's.Abbott expects to maintain an investment grade rating. 36
Abbott has readily available financial resources, including unused lines of credit that support commercial paper borrowing arrangements and provideAbbott with the ability to borrow up to$5 billion on an unsecured basis. The lines of credit are part of a Five Year Credit Agreement (Revolving Credit Agreement) thatAbbott entered into onNovember 12, 2020 . At that time,Abbott also terminated its 2018 revolving credit agreement. There were no outstanding borrowings under the 2018 revolving credit agreement at the time of its termination. Any borrowings under the Revolving Credit Agreement will mature and be payable onNovember 12, 2025 . Any borrowings under the Revolving Credit Agreement will bear interest, atAbbott's option, based on either a base rate or Eurodollar rate, plus an applicable margin based onAbbott's credit ratings.
In 2020, financing activities related to the issuance and repayment of long-term debt included the following:
On
? principal amount of senior notes, consisting of
due 2028 and
On
? amount of its 0.00% Notes due 2020 upon maturity. The repayment equated to
approximately
As of
In 2018 and 2019,
On
InSeptember 2019 , the board of directors authorized the early redemption of up to$5 billion of outstanding long-term notes. This bond redemption authorization superseded the board's previous authorization under which$700 million had not yet been redeemed. OnDecember 19, 2019 ,Abbott redeemed the$2.850 billion outstanding principal amount of its 2.90% Notes due 2021.$2.15 billion of the 2019$5 billion redemption authorization remains available as ofDecember 31, 2020 . OnNovember 19, 2019 ,Abbott's wholly owned subsidiary, Abbott Ireland Financing DAC, completed a euro debt offering of €1.180 billion of long-term debt. The proceeds equated to approximately$1.3 billion . The Notes are guaranteed byAbbott . OnNovember 21, 2019 ,Abbott borrowed ¥59.8 billion under a 5-year term loan and designated the yen-denominated loan as a hedge of its net investment in certain foreign subsidiaries. The term loan bears interest at TIBOR plus a fixed spread, and the interest rate is reset quarterly. The proceeds equated to approximately$550 million .
In total, these 2019 transactions resulted in the repayment of approximately of
InSeptember 2014 , the board of directors authorized the repurchase of up to$3.0 billion ofAbbott's common shares from time to time. Under the program authorized in 2014,Abbott repurchased 36.2 million shares at a cost of$1.666 billion in 2015, 10.4 million shares at a cost of$408 million in 2016, 1.9 million shares at a cost of$130 million in 2018, 6.3 million shares at a cost of$525 million in 2019, and 1.6 million shares at a cost of$173 million in 2020 for a total of approximately$2.9 billion . InOctober 2019 , the board of directors authorized the repurchase of up to$3 billion ofAbbott's common shares from time to time. The 2019 authorization is in addition to the approximately$100 million unused portion of the share repurchase program authorized in 2014. OnApril 27, 2016 , the board of directors authorized the issuance and sale for general corporate purposes of up to 75 million common shares that would result in proceeds of up to$3 billion . No shares have been issued under this authorization.Abbott declared dividends of$1.53 per share in 2020 compared to$1.32 per share in 2019, an increase of approximately 16 percent. Dividends paid were$2.560 billion in 2020 compared to$2.270 billion in 2019. The year-over-year change in dividends paid primarily reflects the impact of the increase in the dividend rate. 37 Working Capital Working capital was$8.5 billion atDecember 31, 2020 and$4.8 billion atDecember 31, 2019 . The increase was due in large part to the higher level of cash and cash equivalents, which was due primarily to the increase in cash generated from operating activities, and the repayment of the current portion of long term debt after the issuance of new long term notes in 2020. Working capital also increased due to the higher levels of accounts receivable and inventory partially offset by an increase in accounts payable associated with the growth of the business.Abbott monitors the credit worthiness of customers and establishes an allowance that reflects the current estimate of credit losses expected to be incurred over the life of the financial asset.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.
Capital Expenditures
Capital expenditures of$2.2 billion in 2020,$1.6 billion in 2019 and$1.4 billion in 2018 were principally for upgrading and expanding manufacturing and research and development facilities and equipment in various segments, investments in information technology, and laboratory instruments placed with customers. The 2020 increase in capital expenditures primarily reflects the building of capacity for the manufacture of COVID-19 diagnostics tests.
Contractual Obligations
The table below summarizesAbbott's estimated contractual obligations as ofDecember 31, 2020 . Payments Due By Period 2026 and (in millions) Total 2021 20222023 20242025 Thereafter Longterm debt, including current maturities$ 18,490 $ 7 $
3,203$ 2,802 $ 12,478 Interest on debt obligations 9,011 596 1,152 1,024 6,239 Operating lease obligations 1,315 272 405 231 407 Purchase commitments (a) 4,757 4,192 478 77 10
Other longterm liabilities (b) 3,845 -
1,959 1,266 620 Total (c)$ 37,418 $ 5,067 $ 7,197 $ 5,400 $ 19,754
(a) Purchase commitments are for purchases made in the normal course of business
to meet operational and capital expenditure requirements.
(b) Other long-term liabilities include estimated payments for the transition tax
under the TCJA, net of applicable credits.
Net unrecognized tax benefits totaling approximately $740 million are
excluded from the table above as
period of cash settlement with the respective taxing authorities on such
items. See Note 15 - Taxes on Earnings from Continuing Operations for further (c) details. The company has employee benefit obligations consisting of pensions
and other post-employment benefits, including medical and life, which have
been excluded from the table. A discussion of the company's pension and
post-retirement plans, including funding matters is included in Note 14 -
Post-employment Benefits.
38
Contingent Obligations
Abbott periodically acquires a business or product rights in which Abbott agrees
to pay contingent consideration based on attaining certain thresholds or based
on the occurrence of certain events.
Legislative Issues
Abbott's primary markets are highly competitive and subject to substantial government regulations throughout the world.Abbott expects debate to continue over the availability, method of delivery, and payment for health care products and services. It is not possible to predict the extent to whichAbbott or the health care industry in general might be adversely affected by these factors in the future. A more complete discussion of these factors is contained in Item 1, Business, and Item 1A, Risk Factors.
Recently Issued Accounting Standards
InDecember 2019 , the FASB issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which among other things, eliminates certain exceptions in the current rules regarding the approach for intraperiod tax allocations and the methodology for calculating income taxes in an interim period, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard becomes effective forAbbott in the first quarter of 2021. Adoption of this new standard will not have a material impact onAbbott's consolidated financial statements. InFebruary 2018 , the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act, from Accumulated other comprehensive income (loss) to retained earnings (Earnings employed in the business).Abbott adopted the new standard at the beginning of the fourth quarter of 2018. As a result of the adoption of the new standard, approximately$337 million of stranded tax effects were reclassified from Accumulated other comprehensive income (loss) to Earnings employed in the business. InOctober 2016 , the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires the recognition of the income tax effects of intercompany sales and transfers of assets, other than inventory, in the period in which the transfer occurs.Abbott adopted the standard onJanuary 1, 2018 , using a modified retrospective approach and recorded a cumulative catch-up adjustment to Earnings employed in the business in the Consolidated Balance Sheet that was not significant.
In
The new methodology requires the recognition of an allowance that reflects the current estimate of credit losses expected to be incurred over the life of the financial asset.Abbott adopted the standard onJanuary 1, 2020 and recorded a cumulative adjustment that was not significant to Earnings employed in the business in the Consolidated Balance Sheet.
Private Securities Litigation Reform Act of 1995 - A Caution Concerning Forward-Looking Statements
Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995,Abbott cautions investors that any forward-looking statements or projections made byAbbott , including those made in this document, are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Economic, competitive, governmental, technological and other factors that may affectAbbott's operations are discussed in Item 1A,
Risk
Factors.
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