Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Review — Results of Operations

Abbott’s revenues are derived primarily from the sale of a broad line of healthcare products under short-term receivable arrangements. Patent protection and licenses, technological and performance features, and inclusion of Abbott’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. Abbott’s primary products are medical devices, diagnostic testing products, nutritional products and branded generic pharmaceuticals.

The following tables detail sales by reportable segment for the three months ended March 31. Percent changes are versus the prior year and are based on unrounded numbers.

The 6.8 percent increase in total net sales during the first quarter of 2025, excluding the impact of foreign exchange, primarily reflected higher sales in the Medical Devices, Established Pharmaceutical Products and Nutritional Products segments, fueled by higher sales of existing products as well as the introduction of new products. Diagnostic Products sales growth continued to be impacted by the decline in COVID-19 testing-related sales and the impact of volume-based procurement programs in China. COVID-19 testing-related sales were $84 million in the first quarter of 2025 compared to $204 million in the first quarter of 2024. Abbott’s net sales were unfavorably impacted by changes in foreign exchange rates in the first quarter as the relatively stronger U.S. dollar decreased total international sales by 4.5 percent and total sales by 2.8 percent.

The table below provides detail by sales category for the three months ended March 31. Percent changes are versus the prior year and are based on unrounded numbers.

In the first three months of 2025, total Established Pharmaceutical Products sales, excluding the impact of foreign exchange, increased 7.8 percent. Excluding the unfavorable effect of foreign exchange, sales in Key Emerging Markets for Established Pharmaceutical Products increased 9.3 percent in the first three months of 2025, led by higher revenue in several countries and across several therapeutic areas, including cardiometabolic, gastroenterology, central nervous system/pain management and respiratory. Other Emerging Markets, excluding the effect of foreign exchange, increased by 3.1 percent in the first three months of 2025.

Excluding the impact of foreign exchange, total Nutritional Products sales in the first three months of 2025 increased 6.2 percent. In U.S. Pediatric Nutritionals, the 14.2 percent increase in sales in the first three months of 2025 reflects sales growth across the product portfolio. Excluding the effect of foreign exchange, the 4.8 percent decrease in International Pediatric Nutritionals sales in the first three months of 2025 reflects a decrease in sales in the Asia Pacific and Latin America regions, partially offset by increased sales in Canada and the Europe/Middle East regions.

In the first three months of 2025, U.S. and International Adult Nutritionals sales, excluding the effect of foreign exchange, increased 1.1 percent and 10.6 percent, respectively, due to growth of Ensure® and Glucerna® product sales. U.S. Adult Nutritionals sales were partially offset by the discontinuation of the ZonePerfect® product line in March 2024.

Diagnostic Products sales decreased 4.9 percent in the first three months of 2025, excluding the impact of foreign exchange. In Core Laboratory, sales increased 0.9 percent in the first three months of 2025, excluding the effect of foreign exchange, due to continued deployment of Abbott's Alinity® testing platform, mostly offset by the impact of volume-based procurement programs in China. In Rapid Diagnostics, sales decreased 16.1 percent in the first three months of 2025, excluding the effect of foreign exchange, primarily due to lower demand for COVID-19 tests.

Excluding the effect of foreign exchange, total Medical Devices sales increased 12.6 percent in the first three months of 2025, led by growth in Diabetes Care, Structural Heart, Heart Failure and Electrophysiology. Higher Diabetes Care sales were driven by continued growth in Abbott's continuous glucose monitoring (CGM) systems. CGM systems sales totaled $1.7 billion and $1.5 billion in the first three months of 2025 and 2024, respectively. Excluding the effect of foreign exchange, CGM systems sales increased 21.6 percent in the first three months of 2025.

During the first three months of 2025, procedure volumes continued to increase across the cardiovascular and neuromodulation businesses. In Structural Heart, the 14.7 percent increase in sales, excluding the effect of foreign exchange, primarily reflects growth in Navitor® and TriClip® products. In Heart Failure, the 12.4 percent increase in sales, excluding the effect of foreign exchange, primarily reflects growth in chronic and acute pump products and related accessories. In Electrophysiology, the 9.9 percent increase in sales, excluding the effect of foreign exchange, primarily reflects higher procedure volumes and increased demand for diagnostic and mapping catheters.

In Rhythm Management, the 6.1 percent sales increase in the first three months of 2025, excluding the impact of foreign exchange, was primarily due to growth in Aveir® leadless pacemakers, partially offset by a decrease in traditional pacemaker and implantable cardioverter-defibrillator sales. In Vascular, the 5.7 percent increase in sales, excluding the impact of foreign exchange, was primarily due to growth in vascular imaging, vessel closure products and the Esprit™ (BTK) system, Abbott's below-the-knee resorbable stent.

In March 2025, Abbott obtained CE Mark for its Volt™ Pulse Field Ablation (PFA) System to treat patients with atrial fibrillation.

The gross profit margin percentage was 52.8 percent for the first quarter of 2025 compared to 50.5 percent for the first quarter of 2024. The increase in the first three months of 2025 reflects the favorable impacts of gross margin improvement initiatives and foreign exchange.

Research and development (R&D) expenses increased $32 million to $716 million, or 4.6 percent, in the first quarter of 2025. The increase in R&D expense in the first three months of 2025 was primarily driven by higher spending on various projects.

Selling, general and administrative expenses increased $102 million, or 3.5 percent, in the first quarter of 2025 as higher selling and marketing spending to drive growth across various businesses was partially offset by the favorable impact of foreign exchange.

Restructuring Plans

In 2025, Abbott management approved plans to streamline operations in order to reduce costs and improve efficiencies in its diagnostic and medical devices businesses. In the three months ended March 31, 2025, Abbott recorded employee related severance and other charges of $34 million, of which $13 million was recorded in Cost of products sold, $13 million was recorded in Research and development, and $8 million was recorded in Selling, general and administrative expenses. Payments related to these actions totaled $4 million in the first three months of 2025 and the remaining liabilities totaled $30 million at March 31, 2025. In addition, Abbott recognized asset impairment charges of $12 million related to these restructuring plans.

Other (Income) Expense, net

Other income, net increased from $111 million of income in the first quarter of 2024 to $127 million of income in the first quarter of 2025. The increase in the first three months of 2025 primarily reflects lower investment impairments and higher income associated with the non-service cost components of net pension and post-retirement medical benefit costs, partially offset by unfavorable changes in the fair value of contingent consideration liabilities related to previous business combinations.

Interest Expense, net

Interest expense, net decreased $12 million to $49 million in the first quarter of 2025. In the first quarter of 2025, interest expense decreased primarily as a result of the repayment of long-term debt in November of 2024 and March 2025, combined with an increase in interest income due to higher average cash and short-term investment balances versus the prior year.

Taxes on Earnings

Taxes on earnings reflect the estimated annual effective rates and include charges for interest and penalties. In the first three months of 2025 and 2024, taxes on earnings include $73 million and $25 million, respectively, in excess tax benefits associated with share-based compensation. The 2025 taxes on earnings includes approximately $200 million of tax expense related to a deferred tax asset that was recognized as a significant non-cash tax benefit in a prior year. In the first three months of 2024, taxes on earnings also included approximately $10 million of tax expense as the result of the resolution of various tax positions related to prior years.

In September 2023, Abbott received a Statutory Notice of Deficiency (SNOD) from the U.S. Internal Revenue Service (IRS) for the 2019 Federal tax year in the amount of $417 million. The primary adjustments proposed in the SNOD relate to the reallocation of income between Abbott’s U.S. entities and its foreign affiliates. Abbott believes that the income reallocation adjustments proposed in the SNOD are without merit, in part because certain adjustments contradict methods that were agreed to with the IRS in prior audit periods. The SNOD also contains other proposed adjustments that Abbott believes are erroneous and unsupported. Abbott filed a petition with the U.S. Tax Court contesting the SNOD in December 2023.

In June 2024, Abbott received a SNOD from the IRS for the 2017 and 2018 Federal tax years in the amount of $192 million. The matters proposed in the 2017/2018 SNOD are substantially similar to the income allocation adjustments included in the 2019 SNOD. Abbott filed a petition in September 2024 with the U.S. Tax Court contesting the 2017/2018 SNOD in a manner consistent with its petition for the 2019 SNOD.

In October 2024, Abbott received a SNOD from the IRS for the 2020 Federal tax year assessing an additional $443 million of income tax. The primary adjustments proposed in the SNOD are substantially similar to the income allocation adjustments included in the 2017/2018 and 2019 SNODs. Abbott believes that the income reallocation adjustments proposed in the SNOD are without merit. The SNOD also contains other proposed adjustments and omissions that Abbott believes are erroneous and unsupported. In addition to the tax assessment for the 2020 tax year, the 2020 SNOD also contested a deduction for which an estimated $440 million cash tax benefit would be available in a different taxable year as allowed under applicable U.S. tax law. Abbott filed a petition with the U.S. Tax Court contesting the SNOD in December 2024.

Abbott intends to vigorously defend its filing positions through ongoing discussions with the IRS, the IRS independent appeals process and/or through litigation as necessary. Abbott reserves for uncertain tax positions related to unresolved matters with the IRS and other taxing authorities. Abbott continues to believe that its reserves for uncertain tax positions are appropriate.

The Organization for Economic Cooperation & Development (OECD) has proposed a two-pillared plan for a revised international tax system. Pillar 1 proposes to reallocate taxing rights among the jurisdictions in which in-scope multinational corporations operate. Abbott is continuing to analyze the Pillar 1 proposal. Pillar 2 proposes to assess a 15 percent minimum tax on the earnings of in-scope multinational corporations on a country-by-country basis. Numerous countries have enacted legislation to adopt the Pillar 2 model rules. The enactment of current Pillar 2 model rules did not and is not projected to have a material impact to Abbott's consolidated financial statements.

Liquidity and Capital Resources

The decrease in cash and cash equivalents from $7.6 billion at December 31, 2024 to $6.5 billion at March 31, 2025 reflects the repayment of debt in March 2025 of $1.0 billion, the payment of dividends and capital expenditures in the first three months of 2025, partially offset by cash generated from operations. Working capital was $10.1 billion at March 31, 2025 and $9.5 billion at December 31, 2024. The increase in working capital in 2025 primarily reflects increases in inventory and trade receivables.

In the Condensed Consolidated Statement of Cash Flows, Net cash from operating activities for the first three months of 2025 totaled $1.4 billion, an increase of $392 million from the prior year, primarily due to higher segment operating earnings. In the first three months of 2025, Net cash from operating activities included $235 million of pension contributions and the payment of cash taxes of $255 million. Net cash from operating activities in 2024 included $280 million of pension contributions and the payment of cash taxes of $225 million.

At March 31, 2025, Abbott’s long-term debt rating was AA- by S&P Global Ratings and Aa3 by Moody’s Investors Service. Abbott expects to maintain an investment grade rating.

On March 17, 2025, Abbott repaid the $1.0 billion outstanding principal amount of its 2.95% Notes upon maturity.

In October 2024, the board of directors authorized the repurchase of up to $7 billion of Abbott common shares, from time to time. The new authorization is in addition to the $293 million unused portion of the share repurchase program authorized in December 2021.

In the first quarter of 2025, Abbott declared a quarterly dividend of $0.59 per share on its common shares, which represents an increase of 7.3 percent over the $0.55 per share dividend declared in the first quarter of 2024.

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 healthcare products and services. It is not possible to predict the extent to which Abbott or the healthcare 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, in the 2024 Annual Report on Form 10-K.

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 that any forward-looking statements made by Abbott are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2024, and are incorporated herein by reference. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law.

PART I. FINANCIAL INFORMATION