** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D. C.  20549**

**FORM10-Q**
| **(Mark One)**                                                                                                  |       |                                                                                          |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                            |       |                                                                                          |
| x                                                                                                               | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|                                                                                                            |       |                                                                                          |
| **For the quarterly period ended September 30,  2006**                                                          |
|                                                                                                            |       |                                                                                          |
| **OR**                                                                                                          |
|                                                                                                            |       |                                                                                          |
| o                                                                                                               | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                            |       |                                                                                          |
| **For the transition period from               to** |
|                                                                                                            |       |                                                                                          |
| **Commission File No. 1-31946**                                                                                 |

 

**HOSPIRA,INC.**

| **A Delaware corporation** |   | I.R.S. Employer  Identification |
|----------------------------|--------|---------------------------------|
|                       |   | No. **20-0504497**              |

 

**275 N. Field Drive**

**LakeForest, Illinois 60045**

Telephone:**  (224) 212-2000**

Indicate by check markwhether the registrant (l) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of l934 during the precedingl2 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.     Yes  x  No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x    Acceleratedfiler  o                             Non-acceleratedfiler  o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).     Yes  oNo  x

As of October 31, 2006, Hospira, Inc. had outstanding 155,809,780shares of common stock, par value $0.01 per share.

 

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| Table of Contents |
|-------------------|

 

**Hospira,Inc.**

**QuarterlyReport on Form 10-Q**

**Index**
| **Part I – Financial Information** |   |                                                                                                                                    |
|-----------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
|                                    |   |                                                                                                                                    |   |   |
| Item 1.                                 |   | Financial  Statements                                                                                                                   |   |   |
|                                    |   |                                                                                                                                    |   |   |
| ** **                              |   | Condensed Consolidated Statements of Income  (Unaudited) – Three and Nine Months Ended   September 30, 2006 and September 30, 2005 |   | 3 |
|                                    |   |                                                                                                                                    |   |   |
|                                    |   | Condensed Consolidated Statements of Cash Flows  (Unaudited) – Nine Months Ended September 30, 2006 and September 30, 2005         |   | 4 |
|                                    |   |                                                                                                                                    |   |   |
| ** **                              |   | Condensed Consolidated Balance Sheets (Unaudited) –  September 30, 2006 and December 31, 2005                                      |   | 5 |
| ** **                              |   |                                                                                                                                    |   |   |
|                                    |   | Condensed Consolidated Statement of Changes in  Shareholders’ Equity (Unaudited) – Nine Months Ended September 30, 2006       |   | 6 |
|                                    |   |                                                                                                                                    |   |   |
|                                    |   | Notes to Condensed Consolidated Financial Statements  (Unaudited)                                                                       |   | 7 |
|                                    |   |                                                                                                                                    |   |   |
| Item 2.                                 |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                             |   | 18 |
|                                    |   |                                                                                                                                    |   |   |
| Item 3.                                 |   | Quantitative and Qualitative Disclosures about Market  Risk                                                                             |   | 28 |
|                                    |   |                                                                                                                                    |   |   |
| Item 4.                                 |   | Controls and Procedures                                                                                                                 |   | 28 |
|                                    |   |                                                                                                                                    |   |   |
| **Part  II – Other Information**   |   |                                                                                                                                    |
| ** **                              |   |                                                                                                                                    |   |   |
| Item  1.                                |   | Legal  Proceedings                                                                                                                      |   | 29 |
|                                    |   |                                                                                                                                    |   |   |
| Item 1A.                                |   | Risk Factors                                                                                                                            |   | 29 |
|                                    |   |                                                                                                                                    |   |   |
| Item 2.                                 |   | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                            |   | 30 |
|                                    |   |                                                                                                                                    |   |   |
| Item 6.                                 |   | Exhibits                                                                                                                                |   | 30 |

 

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Table of Contents

**PART I.  FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**Hospira,Inc.**

**Condensed Consolidated Statements ofIncome**

**(Unaudited)**

***(dollars and shares in thousands,except for per share amounts)***
| ** **                                   | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                                | ** ** | **2005**                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales                                    |       | $                                                       | 605,264    |                                                   | $          | 613,898 |   | $ | 1,859,273 |   | $ | 1,849,103 |   |
| Net sales to Abbott  Laboratories            |       | 41,376                                                  |       | 42,672                                                 |       | 122,762 |   | 131,443 |   |
| Total Net Sales                              |       | 646,640                                                 |       | 656,570                                                |       | 1,982,035 |   | 1,980,546 |   |
|                                         |       |                                                    |       |                                                   |       |   |   |   |   |
| Cost of products sold                        |       | 427,612                                                 |       | 429,008                                                |       | 1,293,125 |   | 1,316,790 |   |
| Gross Profit                                 |       | 219,028                                                 |       | 227,562                                                |       | 688,910 |   | 663,756 |   |
|                                         |       |                                                    |       |                                                   |       |   |   |   |   |
| Research and  development                    |       | 36,470                                                  |       | 35,525                                                 |       | 106,526 |   | 96,767 |   |
| Selling, general and  administrative         |       | 103,506                                                 |       | 91,483                                                 |       | 316,373 |   | 260,767 |   |
| Income From  Operations                      |       | 79,052                                                  |       | 100,554                                                |       | 266,011 |   | 306,222 |   |
|                                         |       |                                                    |       |                                                   |       |   |   |   |   |
| Interest expense                             |       | 8,059                                                   |       | 6,916                                                  |       | 22,999 |   | 20,942 |   |
| Other (income), net                          |       | (4,099                                                  | )          | (3,409                                                 | )          | (12,394 | ) | (8,090 | ) |
| Income Before  Income Taxes                  |       | 75,092                                                  |       | 97,047                                                 |       | 255,406 |   | 293,370 |   |
|                                         |       |                                                    |       |                                                   |       |   |   |   |   |
| Income tax expense                           |       | 19,147                                                  |       | 37,192                                                 |       | 65,128 |   | 84,309 |   |
| Net Income                                   |       | $                                                       | 55,945     |                                                   | $          | 59,855 |   | $ | 190,278 |   | $ | 209,061 |   |
|                                         |       |                                                    |       |                                                   |       |   |   |   |   |
| Earnings Per Common  Share:                  |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic                                        |       | $                                                       | 0.36       |                                                   | $          | 0.38 |   | $ | 1.21 |   | $ | 1.32 |   |
| Diluted                                      |       | $                                                       | 0.35       |                                                   | $          | 0.37 |   | $ | 1.18 |   | $ | 1.30 |   |
|                                         |       |                                                    |       |                                                   |       |   |   |   |   |
| Weighted Average Common  Shares Outstanding: |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic                                        |       | 156,359                                                 |       | 160,103                                                |       | 157,897 |   | 158,643 |   |
| Diluted                                      |       | 158,781                                                 |       | 162,842                                                |       | 161,214 |   | 160,797 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

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**Hospira,Inc.**

**Condensed Consolidated Statements ofCash Flows**

**(Unaudited)**

***(dollars in thousands)***
| ** **                                                                       | ** ** | **Nine Months Ended September 30** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
|                                                                             |       |                                                   |       |   |   |
| Cash Flow From  (Used in) Operating Activities:                                  |       |                                                   |       |   |   |
|                                                                             |       |                                                   |       |   |   |
| Net income                                                                       |       | $                                                      | 190,278    |   | $ | 209,061 |   |
| Adjustments to reconcile net income to net cash from  operating activities— |       |                                                   |       |   |   |
| Depreciation                                                                     |       | 114,731                                                |       | 116,647 |   |
| Amortization of intangibles                                                      |       | 1,446                                                  |       | 1,349 |   |
| Stock-based compensation expense                                                 |       | 27,819                                                 |       | — |   |
| Gain on asset dispositions                                                       |       | (7,851                                                 | )          | — |   |
| Changes in assets and liabilities—                                          |       |                                                   |       |   |   |
| Trade receivables                                                                |       | (23,979                                                | )          | 398 |   |
| Inventories                                                                      |       | (101,637                                               | )          | (7,788 | ) |
| Prepaid expenses and other assets                                                |       | (13,648                                                | )          | (13,527 | ) |
| Trade accounts payable and other liabilities                                     |       | 96,818                                                 |       | 165,703 |   |
| Other, net                                                                       |       | 47,888                                                 |       | (538 | ) |
| Net Cash From Operating Activities                                               |       | 331,865                                                |       | 471,305 |   |
|                                                                             |       |                                                   |       |   |   |
| Cash Flow From  (Used in) Investing Activities:                                  |       |                                                   |       |   |   |
|                                                                             |       |                                                   |       |   |   |
| Acquisitions of property and equipment                                           |       | (183,632                                               | )          | (189,525 | ) |
| Proceeds from asset dispositions                                                 |       | 19,283                                                 |       | 31,818 |   |
| Purchase of investments and intangibles                                          |       | (17,438                                                | )          | (30,790 | ) |
| Sales of marketable securities                                                   |       | —                                                 |       | 72,438 |   |
| Net Cash (Used in) Investing Activities                                          |       | (181,787                                               | )          | (116,059 | ) |
|                                                                             |       |                                                   |       |   |   |
| Cash Flow From  (Used in) Financing Activities:                                  |       |                                                   |       |   |   |
|                                                                             |       |                                                   |       |   |   |
| Payment to Abbott for international net assets                                   |       | (124,251                                               | )          | (106,521 | ) |
| Common stock repurchased                                                         |       | (299,766                                               | )          | — |   |
| Issuance of long-term debt, net of fees paid                                     |       | —                                                 |       | 1,750 |   |
| Repayment of long-term debt                                                      |       | (111                                                   | )          | (84 | ) |
| Other borrowings, net                                                            |       | 1,955                                                  |       | 3,843 |   |
| Excess tax benefit from stock-based compensation  arrangements                   |       | 3,373                                                  |       | — |   |
| Proceeds from stock options exercised                                            |       | 39,576                                                 |       | 97,612 |   |
| Net Cash (Used in) Financing Activities                                          |       | (379,224                                               | )          | (3,400 | ) |
|                                                                             |       |                                                   |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                    |       | 2,128                                                  |       | (2,032 | ) |
|                                                                             |       |                                                   |       |   |   |
| Net change in  cash and cash equivalents                                         |       | (227,018                                               | )          | 349,814 |   |
| Cash and cash  equivalents at beginning of period                                |       | 520,610                                                |       | 127,695 |   |
| Cash and cash  equivalents at end of period                                      |       | $                                                      | 293,592    |   | $ | 477,509 |   |
|                                                                             |       |                                                   |       |   |   |
| Supplemental  Cash Flow Information                                              |       |                                                   |       |   |   |
|                                                                             |       |                                                   |       |   |   |
| Cash paid during  the period for:                                                |       |                                                   |       |   |   |
| Interest                                                                         |       | $                                                      | 23,434     |   | $ | 20,055 |   |
| Income taxes, net                                                                |       | $                                                      | 21,224     |   | $ | (4,019 | ) |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

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**Hospira,Inc.**

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

***(dollars inthousands except for share data)***
| ** **                                                                                                                            | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                                                                                                            | ** ** | **2006**              | ** ** | **2005**             | ** ** |
| **Assets**                                                                                                                            | ** ** | ** **            | ** ** | ** **           | ** ** |
| Current Assets:                                                                                                                       |       |                  |       |                 |       |
| Cash and cash equivalents                                                                                                             |       | $                     | 293,592    |                 | $          | 520,610 |   |
| Trade receivables, less allowances of $15,720 in  2006 and $16,887 in 2005                                                            |       | 355,679               |       | 327,146              |       |
| Inventories:                                                                                                                          |       |                  |       |                 |       |
| Finished products                                                                                                                     |       | 387,124               |       | 300,860              |       |
| Work in process                                                                                                                       |       | 98,314                |       | 71,449               |       |
| Materials                                                                                                                             |       | 132,956               |       | 137,959              |       |
| Total inventories                                                                                                                     |       | 618,394               |       | 510,268              |       |
| Prepaid expenses, deferred income taxes and other  receivables                                                                        |       | 224,038               |       | 203,141              |       |
| Total Current Assets                                                                                                                  |       | 1,491,703             |       | 1,561,165            |       |
| Property and  equipment, at cost                                                                                                      |       | 2,246,440             |       | 2,181,022            |       |
| Less:   accumulated depreciation                                                                                                 |       | 1,225,502             |       | 1,190,209            |       |
| Net Property and Equipment                                                                                                            |       | 1,020,938             |       | 990,813              |       |
| Intangible  assets, net of amortization                                                                                               |       | 13,480                |       | 14,926               |       |
| Goodwill                                                                                                                              |       | 89,197                |       | 89,197               |       |
| Deferred income  taxes                                                                                                                |       | 31,534                |       | 17,692               |       |
| Other assets                                                                                                                          |       | 122,924               |       | 115,389              |       |
| Total Assets                                                                                                                          |       | $                     | 2,769,776  |                 | $          | 2,789,182 |   |
| **Liabilities and Shareholders’ Equity**                                                                                         | ** ** | ** **            | ** ** | ** **           | ** ** |
| Current  Liabilities:                                                                                                                 |       |                  |       |                 |       |
| Short-term borrowings                                                                                                                 |       | $                     | 7,817      |                 | $          | 2,579 |   |
| Trade accounts payable                                                                                                                |       | 157,329               |       | 129,865              |       |
| Salaries payable and other accruals                                                                                                   |       | 441,182               |       | 384,713              |       |
| Due to Abbott, net                                                                                                                    |       | —                |       | 79,079               |       |
| Total Current Liabilities                                                                                                             |       | 606,328               |       | 596,236              |       |
| Long-term debt                                                                                                                        |       | 690,401               |       | 695,285              |       |
| Post-retirement  obligations, deferred income taxes and other long-term liabilities                                                   |       | 155,889               |       | 169,794              |       |
| Commitments and  Contingencies                                                                                                        |       |                  |       |                 |       |
| Shareholders’  Equity:                                                                                                           |       |                  |       |                 |       |
| Common stock, par value $0.01 - authorized:  400,000,000 shares; issued and outstanding shares: 2006: 155,762,018; 2005:  161,668,083 |       | 1,633                 |       | 1,617                |       |
| Preferred stock, par value $0.01 - authorized:  50,000,000 shares; issued and outstanding:   0 shares                            |       | —                |       | —               |       |
| Treasury stock, at cost - Shares: 2006: 7,584,400                                                                                     |       | (299,766              | )          | —               |       |
| Unearned compensation                                                                                                                 |       | —                |       | (263                 | )          |
| Additional paid-in capital                                                                                                            |       | 1,021,837             |       | 943,577              |       |
| Retained earnings                                                                                                                     |       | 629,238               |       | 438,960              |       |
| Accumulated other comprehensive (loss)                                                                                                |       | (35,784               | )          | (56,024              | )          |
| Total Shareholders’ Equity                                                                                                       |       | 1,317,158             |       | 1,327,867            |       |
| Total Liabilities and  Shareholders’ Equity                                                                                      |       | $                     | 2,769,776  |                 | $          | 2,789,182 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

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**Hospira,Inc.**

**Condensed Consolidated Statement ofChanges in Shareholders’ Equity**

**(Unaudited)**

***(dollars and shares in thousands)***
| ** **                                                                         | ** ** | **Common Stock** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Additional  Paid-in** | ** ** | **Treasury** | ** ** | **Unearned** | ** ** | **Retained**     | ** ** | ** **   | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|------------------|------------|--------------|------------|
| ** **                                                                         | ** ** | **Shares**            | ** ** | **Amount**                            | ** ** | **Income (Loss)**  | ** ** | **Capital**  | ** ** | **Stock**    | ** ** | **Compensation** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
|                                                                               |       |                  |       |                                  |       |                    |       |         |       |         |       |             |       |         |       |   |   |
| **Balances  at December 31, 2005**                                                 |       | 161,668               |       | $                                     | 1,617      |                    | $          | (56,024      | )          | $            | 943,577    |             | $          | —       |       | $ | (263 | ) | $ | 438,960 |   | $ | 1,327,867 |   |
| ** **                                                                         | ** ** | ** **            | ** ** | ** **                            | ** ** | ** **              | ** ** | ** **   | ** ** | ** **   | ** ** | ** **       | ** ** | ** **   | ** ** | ** ** | ** ** |
| Net Income                                                                         |       | —                |       | —                                |       | —                  |       | —       |       | —       |       | —           |       | 190,278      |       | 190,278 |   |
|                                                                               |       |                  |       |                                  |       |                    |       |         |       |         |       |             |       |         |       |   |   |
| Other  comprehensive income                                                        |       | —                |       | —                                |       | 20,240                  |       | —       |       | —       |       | —           |       | —       |       | 20,240 |   |
|                                                                               |       |                  |       |                                  |       |                    |       |         |       |         |       |             |       |         |       |   |   |
| Common stock  repurchases                                                          |       | (7,584                | )          | —                                |       | —                  |       | —       |       | (299,766     | )          | —           |       | —       |       | (299,766 | ) |
|                                                                               |       |                  |       |                                  |       |                    |       |         |       |         |       |             |       |         |       |   |   |
| Changes in  shareholders’ equity related to stock-based compensation programs |       | 1,678                 |       | 16                                    |       | —                  |       | 78,260       |       | —       |       | 263              |       | —       |       | 78,539 |   |
|                                                                               |       |                  |       |                                  |       |                    |       |         |       |         |       |             |       |         |       |   |   |
| **Balances at September 30, 2006**                                                 |       | 155,762               |       | $                                     | 1,633      |                    | $          | (35,784      | )          | $            | 1,021,837  |             | $          | (299,766     | )          | $ | — |   | $ | 629,238 |   | $ | 1,317,158 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

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**Hospira, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**September30, 2006**

**(Unaudited)**

**Note 1****–****Basis of Presentation**

These condensed consolidated financial statements have beenprepared pursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”) and, therefore, do not include all information and footnotedisclosures normally included in audited financial statements. However, in theopinion of management, all adjustments, consisting only of normal recurringadjustments, unless otherwise noted herein, necessary to present fairly theresults of operations, financial position and cash flows have been made. Thesecondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and notes thereto included in Hospira’sAnnual Report on Form 10-K for the year ended December 31, 2005. Theresults of operations for any interim period are not necessarily indicative ofthe results of operations to be expected for the full year.

Hospira became aseparate public company pursuant to a spin-off from Abbott Laboratories (“Abbott”)on April 30, 2004 (the “spin-off date”). In connection with the spin-off,Hospira and Abbott agreed that the legal transfer of certain operations andassets (net of liabilities) outside the United States would occur, and becompleted, within two years after the spin-off. During the transition period,these operations and assets were used in the conduct of Hospira’s internationalbusiness and Hospira was subject to the risks and entitled to the benefitsgenerated by such operations and assets. Hospira was dependent on Abbott’sinternational infrastructure until such legal transfers occurred in eachinternational country. These transfers were completed in the second quarter of2006.

**Note 2 – Recently Issued AccountingStandards**

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No.157 clarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing an asset or liability andestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions. Under the standard, fair value measurements would beseparately disclosed by level within the fair value hierarchy. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007. Hospira is currently evaluating the potential impact ofSFAS No. 157 on its financial statements.

In September 2006, the FASB issued Statementof Financial Accounting Standards No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requiresfull recognition of the funded status of Hospira’s defined benefit plans andmeasurement of the plan’s assets and its obligations to determine the fundedstatus as of the end of the fiscal year. SFAS No. 158 is effective as of the endof fiscal years ending after December 15, 2006. Hospira is currently evaluatingthe potential impact of SFAS No. 158 on its financial statements.

In September 2006, the SEC issued Staff AccountingBulletin No. 108, “Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements” (“SAB No.108”). SAB No. 108 provides interpretive guidance on how the effects of thecarryover or reversal of prior year misstatements should be considered inquantifying a current year misstatement. The SEC staff believes thatregistrants should quantify errors using both a balance sheet and an incomestatement approach and evaluate whether either approach results in quantifyinga misstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. SAB No. 108 is effective for fiscal years ending on orafter November 15, 2006. Adoption of SAB No. 108 is not expected to have amaterial impact on the financial statements of Hospira.

In July 2006, the FASBissued FASB Interpretation No. 48,**“Accounting for Uncertainty in Income Taxes– an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48prescribes a recognition threshold and measurement attribute for financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. The interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition of uncertain tax positions. The provisionsof FIN 48 are effective at the beginning of the first fiscal year that beginsafter December 15, 2006, with the cumulative effect of the change in accountingprinciple recorded as an adjustment to opening retained earnings for that year.Hospira is currently evaluating the potential impact of FIN 48 on its financialstatements.

**Note 3 – Significant Accounting Policies**

The preparation offinancial statements in accordance with generally accepted accountingprinciples in the United States (GAAP) requires management to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses. A summary of Hospira’s significant accounting policies isincluded in Note 1 to the company’s consolidated financial statements

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included in Hospira’sAnnual Report on Form 10-K for the year ended December 31, 2005.

In 2006, Hospira expandedits revenue recognition policy to incorporate changes related to new productofferings, which include a server-based suite of software applications andrelated maintenance and implementation services. In addition, Hospira adopted SFAS No. 123R, “Share-Based Payment” onJanuary 1, 2006. All other significant accounting policies remain unchanged.The updated policies are as follows.

*Revenue Recognition* — Hospira recognizes revenues from product saleswhen persuasive evidence of an arrangement exists, delivery has occurred, theprice is fixed and determinable, and collectibility is reasonably assured. Forother than certain drug delivery pumps and injectable pharmaceutical contractmanufacturing, product revenue is recognized when products are delivered tocustomers and title passes. In certain circumstances, Hospira enters intoarrangements in which it provides multiple elements to its customers. In thesecases, total revenue is divided among the separate units of accounting(deliverables) based on their relative fair value and is recognized for eachdeliverable in accordance with the applicable revenue recognition criteria. Therecognition of revenue is delayed if there are significant post-deliveryobligations, such as installation or customer acceptance.

For drug delivery pumps, revenueis typically derived under one of three types of arrangements: outright salesof the drug delivery pump; placements under lease arrangements; and placementsunder contracts that include associated disposable set purchases. For leasearrangements under which Hospira’s warranty obligation extends through theentire term are accounted for as operating leases. For these, Hospirarecognizes revenue over the lease term, which averages five years. For leasesunder which Hospira’s warranty obligation is limited to approximately one year,Hospira accounts for these as sales-type leases, under which the discountedsales value of the drug delivery pump is recorded as revenue upon delivery tothe customer or completion of post-delivery obligations, if significant.Hospira has contractual arrangements with certain customers whereby it placesdrug delivery pumps at customer sites, and the customers agree to purchaseminimum levels of disposable products (sets) that are used with the pumps.These arrangements do not include any upfront fees or payments.  The contractual arrangements generally setforth fixed prices for the purchases of the disposable products, where theprices for the disposables do not change over the term of the arrangement,other than, in some cases, for changes in Consumer Price Index provisions.Title for the pumps is retained by Hospira throughout these arrangements, andthe related asset is depreciated over its estimated useful life on astraight-line basis. In these placement arrangements, revenue is recognized asthe disposable products are delivered, in accordance with SFAS No. 48, “RevenueRecognition when Right of Return Exists,” and SAB No. 104, “RevenueRecognition.”

Hospirahas introduced a server-based suite of software applications designed toexchange data from a hospital’s drug information library database to drugdelivery pumps throughout the hospital. The arrangements related to suchapplications typically include a perpetual software license, softwaremaintenance and implementation services. Hospira recognizes revenue related tothese arrangements in accordance with the provisions of Statement of Position(SOP) 97-2, “Software Revenue Recognition,” as amended. Software licenserevenue and implementation service revenue are generally recognized uponcompletion of related obligations or customer acceptance and softwaremaintenance revenue is recognized ratably over the contract period.

Injectablepharmaceutical contract manufacturing involves filling customers’ activepharmaceutical ingredients (“API”) into delivery systems. Under thesearrangements, customers’ API is often consigned to Hospira and revenue isrecorded for the materials and labor provided by Hospira, plus a profit, uponshipment to the customer.

Upon recognizing revenuefrom a sale, Hospira records an estimate for certain items that reduce grosssales in arriving at its reported net sales for each period.  These items include chargebacks, rebates andother items (such as cash discounts and returns).  Provisions for chargebacks and rebatesrepresent the most significant and complex of these estimates.

*Chargebacks—*  Hospira sells a significant portion of itsgeneric injectable pharmaceutical products through wholesalers, which maintaininventories of Hospira products and later sell those products to endcustomers.  In connection with its salesand marketing efforts, Hospira negotiates prices with end customers for certainproducts under pricing agreements (including, for example, group purchasingorganization contracts). Consistent with industry practice, the negotiated endcustomer prices are typically lower than the prices charged to the wholesalers.

Whenan end customer purchases a Hospira product that is covered by a pricingagreement from a wholesaler, the end customer pays the wholesaler the pricedetermined under the pricing agreement. The wholesaler is then entitled tocharge Hospira back for the difference between the price the wholesaler paidHospira and the contract price paid by the end customer (a “chargeback”).  This process is necessary to enable Hospirato track actual sales to the end customer, which is essential information torun the business effectively.  Settlementof chargebacks generally occurs between 30 and 40 days after the saleto wholesalers.

Toaccount for the chargeback, Hospira records the initial sale to a wholesaler atthe price invoiced to the wholesaler and at the same time, records a provisionequal to the estimated amount the wholesaler will later charge back to Hospira,reducing gross sales and trade receivables. This provision must be estimated because the actual end customer andapplicable pricing terms may vary at the

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timeof the sale to the wholesaler. Accordingly, the most significant estimates inherent in the initialchargeback provision relate to the volume of sales to the wholesalers that willbe subject to chargeback and the ultimate end customer contract price.  These estimates are based primarily on ananalysis of Hospira’s product sales and most recent historical averagechargeback credits by product, estimated wholesaler inventory levels, currentcontract pricing, anticipated future contract pricing changes and claimsprocessing lag time. Hospira estimates the levels of inventory at thewholesalers through analysis of wholesaler purchases and inventory data obtaineddirectly from certain of the wholesalers. A one percent decrease in endcustomer contract prices for sales pending chargeback at September 30, 2006would decrease net sales and income before income taxes by $1.6 million. A onepercent increase in wholesale units sold subject to chargebacks at September30, 2006 would decrease net sales and income before income taxes by $1.4million.

Hospiraregularly monitors the provision for chargebacks and makes adjustments when itbelieves the actual chargebacks may differ from estimates. Hospira identified adecrease in the trend of wholesale units sold subject to chargeback and in thethird quarter of 2005, adjusted the chargeback provision downward by $7.0million. Hospira utilized a consistent methodology to develop its assumptionsused in estimating and providing for chargebacks across all periods presented.

*Rebates—*  Hospira primarily offers rebates to directcustomers, customers who purchase from certain wholesalers at end customercontract prices and government agencies, which administer various programs suchas Medicaid. Direct rebates are generally rebates paid to direct purchasingcustomers based on a contracted discount applied to the direct customer’spurchases.  Indirect rebates are rebatespaid to “indirect customers” which have purchased Hospira products from awholesaler under a pricing agreement with Hospira.  Governmental agency rebates are amounts owedbased on legal requirements with public sector benefit providers (such asMedicaid), after the final dispensing of the product by a pharmacy to a benefitplan participant.  Rebate amounts areusually based upon the volume of purchases. Hospira estimates the amount of therebate due at the time of sale, and records the liability and a reduction ofgross sales at the same time the product sale is recorded. Each period theestimates are reviewed and revised, if necessary, in conjunction with a reviewof contract volumes within the period. Adjustments related to prior periodsales have not been material in any period. Settlement of rebates generallyoccurs from three to 12 months after sale.

Indetermining provisions for rebates to direct customers, Hospira considers thevolume of eligible purchases by these customers and the rebate terms.  In determining rebates on sales throughwholesalers, Hospira considers the volume of eligible contract purchases, therebate terms and the estimated level of inventory at the wholesalers that wouldbe subject to a rebate, which is estimated as described above under “Chargebacks.”  Upon receipt of a chargeback, due to theavailability of product and customer specific information, Hospira can thenestablish a specific provision for fees or rebates based on the specific termsof each agreement.  Rebates undergovernmental programs are based on the estimated volume of products soldsubject to these programs.

Hospiraregularly analyzes the historical rebate trends and makes adjustments torecorded reserves for changes in trends and terms of rebate programs. Themethodology used to estimate and provide for rebates was consistent across allperiods presented.

*Stock-Based Compensation –*On January 1, 2006, Hospira adopted SFAS No. 123R,“Share-Based Payment,” which requires, among other changes, that the costresulting from all share-based payment transactions be recognized ascompensation cost over the vesting period based on the fair value of theinstrument on the date of grant. Under SFAS No. 123R, Hospira uses theBlack-Scholes option valuation model to determine the fair value of stockoptions. The fair value model includes various assumptions, including theexpected volatility and expected life of the awards. These assumptions reflectHospira’s best estimates, but they involve inherent uncertainties based onmarket conditions generally outside of Hospira’s control. As a result, if otherassumptions had been used, stock-based compensation expense, as calculated andrecorded under SFAS No. 123R, could have been materially impacted. Furthermore,if Hospira uses different assumptions in future periods, stock-basedcompensation expense could be materially impacted in future periods. See Note 7for additional information regarding stock-based compensation.

**Note 4 – Mayne Pharma LimitedAcquisition**

On September 20, 2006, Hospira entered into a scheme implementationagreement (the “Scheme”), with Mayne Pharma Limited (“Mayne Pharma”), anAustralian public company listed on the Australian Stock Exchange. Mayne Pharmamanufactures and sells primarily generic injectable pharmaceuticals. The Schemecontemplates that Hospira will acquire Mayne Pharma by means of a scheme ofarrangement transaction under Australian law pursuant to which Hospira will payAustralian $4.10 per share for all outstanding shares of Mayne Pharma,representing a total acquisition price of approximately US$2.0 billion(the “Transaction”). The Scheme is subject to the satisfaction or waiver ofcertain closing conditions, including, among others, approval by the SupremeCourt of Victoria, Australia; Mayne Pharma shareholder approval; the absence ofa Mayne Pharma material adverse change; and required regulatory approvals orclearances, including clearance by the U.S. Federal Trade Commission (the“FTC”) under the Hart Scott Rodino Antitrust Improvements Act of 1976. OnNovember 3, 2006, the parties received a second request from the FTC in connectionwith the Transaction relating to certain products of both companies. Subject tothese conditions, the Scheme is expected to become effective, and theTransaction currently is expected to close around the end of 2006.

In connection with the financing of theTransaction, various banks have committed to provide up to $1.925 billion ofacquisition financing, which includes a $500 million three-year term loanfacility and a $1.425 billion bridge facility. The remainder of the

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purchase price will be funded with cash onhand.  Borrowings under the term loanfacility and bridge facility will bear interest at LIBOR plus a margin thatwill be determined based on Hospira’s credit ratings.

**Note 5 – BresaGen Investment**

During the third quarter, Hospira acquired an initial 19.95% equity stakeand launched an off-market takeover bid for the remaining shares in BresaGenLimited (“BresaGen”), an Australian public company listed on the AustralianStock Exchange. BresaGen is a biotechnology company that develops protein andpeptide therapeutics. Hospira paid $3.2 million for the initial investment,which was accounted for using the equity method. Upon completion of theacquisition, Hospira will fully consolidate BresaGen in its financialstatements. Hospira expects to pay $12.6 million for the remaining outstandingshares of BresaGen. In early October 2006, Hospira received acceptance fromover 90% of BresaGen shareholders, allowing the acquisition to proceed andexpects to complete the acquisition in the fourth quarter of 2006.

**Note 6 – Restructuring Costs**

In August 2005 andFebruary 2006, Hospira announced plans to close manufacturing plants inDonegal, Ireland; Ashland, Ohio; and Montreal, Canada. Hospira also providedthe planned timeline for phasing out production at a facility in AbbottLaboratories’ North Chicago, Illinois campus, where it has leased space sincethe spin-off in April 2004. The aggregate restructuring charges that Hospirawill incur related to these actions are expected to be in the range of $75million to $95 million on a pre-tax basis. The restructuring costs are expectedto be incurred through 2009 and consist primarily of costs related to severanceand certain other employee benefit costs, additional depreciation resultingfrom the decreased useful lives of the buildings and certain equipment, andother exit costs.

During the three monthsended September 30, 2006, Hospira recorded pre-tax restructuring charges of$11.3 million in cost of products sold. Of the total charges, $3.1 million wasrecorded in the U.S. segment and $8.2 million in the International segment.

During the nine monthsended September 30, 2006, Hospira recorded pre-tax restructuring charges of$35.6 million in cost of products sold. Of the total charges, $11.2 million wasrecorded in the U.S. segment and $24.4 million in the International segment.Hospira has incurred $44.2 million to date for restructuring charges related tothese actions. In May 2006, the Donegal manufacturing plant was sold for $11.5million, resulting in a pre-tax gain of $7.9 million, which is reported in costof products sold in the International segment. Hospira will continue to occupythe plant under a short-term lease until all product transfers are completed,which is currently anticipated to be by the end of 2006. In September 2006, theMontreal manufacturing plant was sold for $7.8 million, resulting in a pre-taxgain of $3.1 million, of which the full amount is being deferred and will berecognized at the end of the lease-back term, as Hospira will continue tooccupy the plant under a lease until all product transfers are completed, whichis currently anticipated to be in the first half of 2008. Hospira is currentlyevaluating the potential disposition of its Ashland manufacturing plant and isplanning to take the steps necessary to prepare for such disposition, includingenvironmental studies. At this time, Hospira cannot estimate what incrementalcosts, if any, might be incurred.

The following summarizesthe restructuring activity for the nine months ended September 30, 2006:

*(dollars in thousands)*
| ** **                          | ** ** | **Balance at  January 1, 2006** | ** ** | **Costs incurred** | ** ** | **Payments** | ** ** | **Non-cash  items** | ** ** | **Balance at  September 30, 2006** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|-------------------------|------------|--------------|------------|---------------------|------------|---------------------------------------------------|------------|
| Employee-related  benefit costs (1) |       | $                                         | 7,264      |                    | $          | 29,931       |       | $                   | (11,806    | )                                                 | $          | (1,518 | ) | $ | 23,871 |   |
| Accelerated  Depreciation           |       | —                                    |       | 4,600                   |       | —       |       | (4,600              | )          | —                                            |       |
| Other                               |       | —                                    |       | 1,076                   |       | (640         | )          | (31                 | )          | 405                                               |       |
|                                |       | $                                         | 7,264      |                    | $          | 35,607       |       | $                   | (12,446    | )                                                 | $          | (6,149 | ) | $ | 24,276 |   |

 

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(1)          Includes pension plan curtailmentcharge of $1.5 million related to the announcement in the first quarter 2006 ofthe Ashland plant shutdown.

**Note 7 – Stock-Based Compensation**

On January 1, 2006, Hospira adopted SFAS No. 123R, whichrequires, among other changes, that the cost resulting from all share-basedpayment transactions be recognized as compensation cost over the vesting periodbased on the fair value of the instrument on the date of grant. SFAS No. 123Rrevises SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”),which previously allowed pro forma disclosure of certain share-basedcompensation expense.  Further, SFAS No.123R supercedes Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” which previously allowed the intrinsic value method of

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accounting for stock options. Such method was applied byHospira, and accordingly, Hospira’s reported net income has not includedrecognition of stock-based compensation expense prior to the adoption of SFASNo. 123R.

Hospira adopted SFAS No. 123R as of January 1, 2006,using the modified prospective transition method. In accordance with themodified prospective transition method, Hospira’s condensed consolidatedfinancial statements for the prior periods have not been restated to reflect,and do not include, the impact of SFAS No. 123R. Stock-based compensationexpense of $8.2 million and $27.8 million was recognized under SFAS No. 123Rfor the three and nine months ended September 30, 2006, respectively. Therelated income tax benefit recognized was $2.9 million and $9.7 million,respectively. As noted above, there was no stock-based compensation expenserelated to employee stock options recognized in the statement of income duringthe three and nine months ended September 30, 2005.

For a more detailed description of Hospira’s stock-basedcompensation plan, see Note 13 to the company’s consolidated financialstatements included in Hospira’s Annual Report on Form 10-K for the year endedDecember 31, 2005.

The following table illustrates the pro forma effect onnet income and earnings per share if Hospira had applied the fair valuerecognition provisions of SFAS No. 123 during the three and nine months endedSeptember 30, 2005.

*(dollars in thousands, except pershare amounts):*
|                                                                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                      | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
| Net Income, as  reported                                                                        |       | $                                | 59,855     |                             | $          | 209,061 |   |
| Deduct: Total  stock-based compensation expense determined under fair value method, net of  tax |       | (3,583                           | )          | (11,096                          | )          |
| Pro forma net  income                                                                           |       | $                                | 56,272     |                             | $          | 197,965 |   |
|                                                                                            |       |                             |       |                             |       |
| Basic EPS, as  reported                                                                         |       | $                                | 0.38       |                             | $          | 1.32 |   |
| Basic EPS, pro  forma                                                                           |       | $                                | 0.35       |                             | $          | 1.25 |   |
| Diluted EPS, as  reported                                                                       |       | $                                | 0.37       |                             | $          | 1.30 |   |
| Diluted EPS, pro forma                                                                          |       | $                                | 0.34       |                             | $          | 1.23 |   |

 

SFAS No. 123R requires that cash flows relating to thebenefits of tax deductions in excess of recognized compensation cost bereported as financing cash flow, rather than as an operating cash flow, aspreviously required. For options exercised during the three and nine monthsended September 30, 2006, this excess tax benefit was $0.2 million and $3.4million, respectively.

In May 2006, 2.2 million options were granted to certainemployees for the 2006 annual stock option grant. These options were awarded atthe fair market value at the time of grant, generally vest over three years andhave a ten-year term. A summary of information related to stock options is asfollows:
| Hospira Stock Options    | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Life (Years)** | ** ** | **Aggregate  Intrinsic  Value  (dollars in  thousands)** | ** ** |
|------------------------------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Outstanding at  December 31, 2005  |       | 13,111,691 |       | $                                      | 29.65      |                                                |       |                                                          |       |   |
| Granted                            |       | 2,676,508  |       | 41.98                                  |       |                                                |       |                                                          |       |
| Exercised                          |       | (2,033,776 | )          | 27.14                                  |       |                                                |       |                                                          |       |
| Lapsed  (forfeited or cancelled)   |       | (172,185   | )          | 33.10                                  |       |                                                |       |                                                          |       |
| Outstanding at  September 30, 2006 |       | 13,582,238 |       | $                                      | 32.41      |                                                | 6.29       |                                                          | $          | 91,817 |   |
| Exercisable at  September 30, 2006 |       | 8,425,849  |       | $                                      | 29.88      |                                                | 4.92       |                                                          | $          | 73,246 |   |

 

Thetotal intrinsic value of options exercised during the three and nine monthsended September 30, 2006 was $3.0 million and $32.8 million, respectively.

As of September 30, 2006, there was $43.8 million oftotal unrecognized compensation cost related to non-vested share-basedcompensation arrangements. That cost is expected to be recognized over aweighted average period of 1.6 years. The total fair value of shares becomingfully vested during the three months and nine months ended September 30, 2006was $2.4 million and $10.0 million, respectively.

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The weighted average fair value for the Hospira optionsgranted in the three and nine months ended September 30, 2006 was $15.76 and$15.96, respectively. The weighted average fair value for the Hospira optionsgranted in the three and nine months ended September 30, 2005 was $11.20 and$11.25, respectively. The fair value was estimated using the Black-Scholesoption-pricing model, based on the average market price at the grant dateand the weighted average assumptions specific to the underlying options.Expected volatility assumptions are based on a combination of historicalvolatility of Hospira’s stock and historical volatility of peer companies.Expected life assumptions for 2006 are based on the “simplified” method asdescribed in SEC SAB No. 107, which is the midpoint between the vesting dateand the end of the contractual term. The risk-free interest rate was selectedbased upon yields of U.S. Treasury issues with a term equal to the expectedlife of the option being valued. The weighted average assumptions utilized foroption grants during the periods presented are as follows:
| ** **                                                           | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                                | ** ** | **2005**                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Hospira Stock  Options Black-Scholes assumptions (weighted average): |       |                                                    |       |                                                   |       |   |   |   |   |
| Volatility                                                           |       | 31.0                                                    | %          | 30.0                                                   | %          | 31.0 | % | 30.0 | % |
| Expected life  (years)                                               |       | 5.5                                                     |       | 3.3                                                    |       | 5.7 |   | 4.9 |   |
| Risk-free  interest rate                                             |       | 5.0                                                     | %          | 4.2                                                    | %          | 5.0 | % | 3.9 | % |
| Dividend yield                                                       |       | 0.0                                                     | %          | 0.0                                                    | %          | 0.0 | % | 0.0 | % |

 

**Note 8 – Income Taxes**

Taxes on income reflectthe estimated annual effective rates, excluding the effect of significantunusual items. The effective tax rates are less than the statutory U.S. federalincome tax rate principally due to the benefit of tax exemptions, of varyingdurations, in several non-U.S. taxing jurisdictions.

**Note 9 - Earnings per Share**

Basic earnings per shareare computed by dividing net income by the number of weighted average commonshares outstanding during the reporting period. Diluted earnings per share are calculated to give effect to allpotentially dilutive common shares that were outstanding during the reportingperiod. The following table shows the effect of stock options on the weightedaverage number of shares outstanding used in calculating diluted earnings pershare:

*(shares in thousands)*
| ** **                                           | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                                | ** ** | **2005**                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average  common shares outstanding          |       | 156,359                                                 |       | 160,103                                                |       | 157,897 |   | 158,643 |   |
| Assumed exercise  of stock options                   |       | 2,422                                                   |       | 2,739                                                  |       | 3,317 |   | 2,154 |   |
| Weighted average  dilutive common shares outstanding |       | 158,781                                                 |       | 162,842                                                |       | 161,214 |   | 160,797 |   |

 

The number of outstandingoptions to purchase Hospira stock for which the exercise price of the optionsexceeded the average stock price was 2.7 million for both the three and ninemonths ended September 30, 2006, and 0.2 million and 1.6 million for the threeand nine months ended September 30, 2005, respectively.  Accordingly, these options are excluded fromthe diluted earnings per share calculation for these periods.

**Note**** 10****– Litigation**

Hospira, Abbott, or insome instances both, are involved in various claims and legal proceedings,including product liability claims and proceedings related to Hospira’sbusiness.

Various state and federalagencies, including the U.S. Department of Justice and various state attorneysgeneral, are investigating a number of pharmaceutical companies, includingAbbott, for allegedly engaging in improper marketing and pricing practices withrespect to certain Medicare and Medicaid reimbursable products, includingpractices relating to average wholesale price (“AWP”).  These are civil investigations that areseeking to identify the practices and determine whether those practicesviolated any laws, including federal and state false claims acts, orconstituted fraud in connection with the Medicare and/or Medicaid reimbursementpaid to third parties.  In addition,Abbott is a defendant in a number of purported class actions on behalf ofindividuals or entities, including healthcare insurers and other third-partypayors, that allege generally that Abbott and numerous other pharmaceuticalcompanies reported false or misleading pricing information in connection withfederal, state and private reimbursement for certain drugs.  Many of the products involved in theseinvestigations and lawsuits are Hospira products.  Hospira is cooperating with the

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authorities in theseinvestigations. There may be additional investigations or lawsuits, oradditional claims in the existing investigations or lawsuits, initiated withrespect to these matters in the future. Hospira cannot be certain that it will not be named as a subject ordefendant in these investigations or lawsuits. Hospira is a named defendant intwo such lawsuits: *The State of Texas exrel. Ven-A-Care of the Florida Keys, Inc. v. Abbott Laboratories Inc., Hospira,Inc., B. Braun Medical Inc. and Baxter Healthcare Corporation,*CaseNo. GV401286, pending in the District Court of Travis County, Texas and *State of Hawaii v. Abbott Laboratories, Inc., et al.*,CaseNo. 06-1-0720-04, pending in the Circuit Court of the First Circuit, Hawaii.Hospira has been dismissed as a defendant in the case, *UnitedStates of America ex rel. Ven-A-Care of the Florida Keys, Inc. v. AbbottLaboratories, Inc.,* et al Case No. 95-1354, pending in the UnitedStates District Court for the Southern District of Florida. Abbott willindemnify Hospira for liabilities associated with pending or future AWPinvestigations and lawsuits only to the extent that they are of the same natureas the lawsuits and investigations that existed against Abbott as of the spin-offdate and relate to the sale of Hospira products prior to the spin-off.  Hospira will assume any other losses that mayresult from these investigations and lawsuits related to Hospira’s products,including any losses associated with post-spin-off activities. Theseinvestigations and lawsuits could result in changes to Hospira’s businesspractices or pricing policies, civil or criminal monetary damages, penalties orfines, imprisonment and/or exclusion of Hospira products from participation infederal and state healthcare programs, including Medicare, Medicaid andVeterans’ Administration health programs, any of which could have a materialadverse effect on its business, profitability and financial condition.

Hospira has been named asa defendant in a lawsuit alleging generally that the spin-off of Hospira fromAbbott Laboratories adversely affected employee benefits in violation of theEmployee Retirement Security Act of 1974 (“ERISA”).  The lawsuit was filed on November 8, 2004 inthe United States District Court for the Northern District of Illinois, and iscaptioned:  *Myla Nauman,Jane Roller and Michael Loughery v. Abbott Laboratories and Hospira, Inc.*  On November 18, 2005, the complaint wasamended to assert an additional claim against Abbott and Hospira for breach offiduciary duty under ERISA.  Hospira hasbeen dismissed as a defendant with respect to the new fiduciary dutyclaim.  By Order dated December 30, 2005,the Court granted class action status to the lawsuit.  The new claim in the amended complaint is notsubject to the class certification ruling. As to the sole claim against Hospira in the original complaint, thecourt certified a class defined as:  “allemployees of Abbott who were participants in the Abbott Benefit Plans and whoseemployment with Abbott was terminated between August 22, 2003 and April 30,2004, as a result of the spin-off of the HPD/creation of Hospira announced byAbbott on August 22, 2003, and who were eligible for retirement under theAbbott Benefit Plans on the date of their terminations.”  Hospira denies all material allegationsasserted against it in the complaint.

On August 12, 2005,Retractable Technologies, Inc. (“RTI”) filed a lawsuit against AbbottLaboratories, Inc. alleging breach of contract and fraud in connection with aNational Marketing and Distribution Agreement (“Agreement”) between Abbott andRTI signed in May 2000. *Retractable Technologies,Inc. v. Abbott Laboratories, Inc.*, Case No. 505CV157, pending inU.S. District Court for the Eastern District of Texas. RTI purported toterminate the contract for breach in 2003. The lawsuit alleges that Abbottmisled RTI and breached the Agreement in connection with Abbott’s marketingefforts. RTI seeks unspecified monetary damages as well as punitive damages. Hospirahas conditionally agreed to defend and indemnify Abbott in connection with thislawsuit, which involves a contract carried out by Abbott’s former HospitalProducts Division. Abbott denies all material allegations in the complaint.Additionally, Abbott maintains that the dispute must be resolved byarbitration, in accordance with the terms of the Agreement. Abbott intends topursue claims against RTI for breach of the Agreement in arbitration or infederal court. Hospira is entitled, pursuant to its agreements with Abbott, toany amounts recovered due to RTI’s breach of the Agreement.

Hospira’s productliability claim exposures are evaluated each reporting period. Hospira’sreserves, which are not significant at September 30, 2006 and 2005, are the bestestimate of loss, as defined by SFAS No. 5, “Accounting for Contingencies.”Based upon information that is currently available, management believes thatthe likelihood of a material loss in excess of recorded amounts is remote.

Additional legal proceedingsmay occur that may result in a change in the estimated reserves recorded byHospira. It is not feasible to predict the outcome of such proceedings withcertainty and there can be no assurance that their ultimate disposition willnot have a material adverse effect on Hospira’s financial position, cash flows,or results of operations.

**Note 11  - Post-Retirement Benefits**

Retirement plans consistof defined benefit (“pension”), defined contribution, and post-retirementmedical and dental plans. The pension and post-retirement medical and dentalplans cover certain employees both in and outside of the United States.

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Net cost (benefit)recognized for the three and nine months ended September 30, 2006 and 2005 forthe major pension plans and post-retirement medical and dental benefit plans,is as follows:

*(dollarsin thousands)*
|                                                   | ** ** | **Pension Plans**                              | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
| ** **                                        | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost for  benefits earned during the year |       | $                                                   | 677        |   | $ | 529 |   | $ | 1,971 |   | $ | 1,587 |   |
| Interest cost on  projected benefit obligations   |       | 6,117                                               |       | 5,508 |   | 18,257 |   | 16,524 |   |
| Expected return  on plans’ assets            |       | (7,538                                              | )          | (7,345 | ) | (22,261 | ) | (22,035 | ) |
| Net amortization                                  |       | 708                                                 |       | 306 |   | 2,430 |   | 918 |   |
| Curtailment of  benefits (1)                      |       | —                                              |       | — |   | 1,518 |   | — |   |
| Net cost (benefit)                                |       | $                                                   | (36        | ) | $ | (1,002 | ) | $ | 1,915 |   | $ | (3,006 | ) |

 

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(1)Relates to the planned shutdown of the Ashland plant.

*(dollarsin thousands)*
|                                                   | ** ** | **Medical and Dental Plans**         | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
| ** **                                        | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost for  benefits earned during the year |       | $                                                   | 526        |   | $ | 359 |   | $ | 1,577 |   | $ | 1,077 |   |
| Interest cost on  projected benefit obligations   |       | 842                                                 |       | 789 |   | 2,528 |   | 2,367 |   |
| Net amortization                                  |       | 437                                                 |       | 483 |   | 1,310 |   | 1,449 |   |
| Net cost                                          |       | $                                                   | 1,805      |   | $ | 1,631 |   | $ | 5,415 |   | $ | 4,893 |   |

 

The pension plan foremployees of the Ashland plant was merged with the Hospira Annuity RetirementPlan (Hospira’s primary pension plan) on April 1, 2006. As a result of themerger, the plan obligations of both plans were re-measured during the secondquarter. This resulted in a decrease in the additional minimum pensionliability of $24.4 million ($12.9 million net-of-tax). The reduction of theminimum pension liability is reflected in accumulated other comprehensiveincome.

Hospira’s employeesparticipate in the Hospira 401(k) Retirement Savings Plan. Hospira’scontributions to this defined contribution plan for the three months ended September30, 2006 and 2005 were $8.3 million and $9.0 million, respectively. For thenine months ended September 30, 2006 and 2005 contributions were $25.8 millionand $39.3 million, respectively. Included in the nine months ended September30, 2005 is a $13.8 million one-time company contribution that was announcedand accrued in 2004.

Hospira funds itsdomestic pension plans according to IRS funding limitations. Based on thoselimitations, Hospira does not expect to contribute to its U.S. pension plans in2006.

**Note 12 –Intangible Assets**

Intangibleassets, primarily technology and product rights, are as follows:

(*dollars in thousands*)
|                                 | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Cost                            |       | $                                | 40,768     |                            | $          | 40,768 |   |
| Less:  accumulated amortization |       | (27,288                          | )          | (25,842                         | )          |
| Intangible assets, net          |       | $                                | 13,480     |                            | $          | 14,926 |   |

 

Intangibleassets have definite lives and are amortized on a straight-line basis overtheir estimated useful lives (3 to 10 years, average 9 years). Intangible assetamortization for each of the five succeeding fiscal years is estimated at $0.5million for the remainder of 2006, $1.9 million for 2007, $1.7 million for2008, $1.5 million for 2009, and $1.4 million for 2010.

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**Note 13—Short-termBorrowings and Long-term Debt**

Hospira’s debt consists of the following at September 30,2006 and December 31, 2005:

*(dollars in thousands)*
|                                                      | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Long-term debt:                                      |       |                             |       |                            |       |
| Senior unsecured notes due 2009                      |       | $                                | 300,000    |                            | $          | 300,000 |   |
| Senior unsecured notes due 2014                      |       | 400,000                          |       | 400,000                         |       |
| Economic development promissory notes due 2015       |       | 1,353                            |       | 1,465                           |       |
| International borrowings due 2007                    |       | —                           |       | 3,502                           |       |
| Fair value of interest rate swap instruments         |       | (10,037                          | )          | (8,662                          | )          |
| Total long-term debt                                 |       | 691,316                          |       | 696,305                         |       |
| Unamortized debt  discount on senior unsecured notes |       | (915                             | )          | (1,020                          | )          |
| Long-term debt                                       |       | 690,401                          |       | 695,285                         |       |
| Short-term  borrowings                               |       | 7,817                            |       | 2,579                           |       |
| Total debt                                           |       | $                                | 698,218    |                            | $          | 697,864 |   |

 

Hospira has a five-year$375 million unsecured revolving credit facility, which it entered into onDecember 16, 2005 (the “Revolver”), and which is available for working capitaland other requirements.  The Revolverallows Hospira to borrow funds at variable interest rates as short-term cashneeds dictate. As of September 30, 2006, Hospira had no amounts outstandingunder the Revolver.

The Revolver and the indenture governing Hospira’soutstanding senior unsecured notes contain, among other provisions, covenantswith which Hospira must comply while they are in force. The covenants limitHospira’s ability to allow liens on its properties or assets, or merge orconsolidate with other entities.  Under the Revolver, among other things,Hospira must also comply with certain financial covenants, including a minimuminterest coverage ratio and a maximum leverage ratio.  As of September 30, 2006, Hospira was incompliance with all covenants under the Revolver and the Senior UnsecuredNotes. Upon the closing of the Mayne Pharmaacquisition, the Revolver will be amended to permit the acquisition and totemporarily increase the maximum leverage ratio and lower the minimum interestcoverage ratio.

**Note 14- Comprehensive Income, net of tax**

*(dollarsin thousands)*
|                                                   | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                                | ** ** | **2005**                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Foreign currency  translation (losses) gains      |       | $                                                       | (1,643     | )                                                      | $          | 243 |   | $ | 6,594 |   | $ | (10,643 | ) |
| Unrealized gains  on marketable equity securities |       | 626                                                     |       | 1,951                                                  |       | 751 |   | 1,531 |   |
| Minimum pension  liability adjustment             |       | —                                                  |       | —                                                 |       | 12,895 |   | — |   |
| Total other  comprehensive (loss) income          |       | (1,017                                                  | )          | 2,194                                                  |       | 20,240 |   | (9,112 | ) |
| Net Income                                        |       | 55,945                                                  |       | 59,855                                                 |       | 190,278 |   | 209,061 |   |
| Total Comprehensive  Income                       |       | $                                                       | 54,928     |                                                   | $          | 62,049 |   | $ | 210,518 |   | $ | 199,949 |   |

 
|                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Cumulative  foreign currency translation gains                           |       | $                      | 6,816      |                  | $          | 222 |   |
| Cumulative  unrealized gains on marketable equity securities, net of tax |       | 4,936                  |       | 4,185                 |       |
| Cumulative  minimum pension liability adjustments, net of tax            |       | (47,536                | )          | (60,431               | )          |
| Accumulated Other  Comprehensive (Loss)                                  |       | $                      | (35,784    | )                     | $          | (56,024 | ) |

 

**Note 15- Segment Information**

Hospira’s principalbusiness is the development, manufacture and sale of a broad line of hospitalproducts, including specialty injectable pharmaceuticals and medicationdelivery systems, and the provision of injectable pharmaceutical contractmanufacturing services. Hospira has two reportable segments: U.S. andInternational.

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Hospira’s underlyingaccounting records are maintained on a legal entity basis for government andpublic reporting requirements. Segment disclosures are on a performance basisconsistent with internal management reporting. For internal managementreporting, intersegment transfers of inventory are recorded at standard costand are not a measure of segment income from operations. The costs of certaincorporate functions that benefit the entire organization are not allocated. Thefollowing segment information has been prepared in accordance with the internalaccounting policies of Hospira, as described above.

*(dollarsin thousands)*
| ** **                  | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|-----------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                  | ** ** | **Net Sales**                                      | ** ** | **Income from Operations**                   | ** ** | **Net Sales** | ** ** | **Income from Operations** | ** ** |
| ** **                  | ** ** | **2006**                                                | ** ** | **2005**                                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                  | ** ** | ** **                                              | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.                        |       | $                                                       | 533,025    |                                                   | $          | 551,329 |   | $ | 80,623 |   | $ | 98,905 |   | $ | 1,639,901 |   | $ | 1,651,099 |   | $ | 277,738 |   | $ | 289,731 |   |
| International               |       | 113,615                                                 |       | 105,241                                                |       | 10,831 |   | 15,805 |   | 342,134 |   | 329,447 |   | 29,445 |   | 57,997 |   |
| Total reportable  segments  |       | $                                                       | 646,640    |                                                   | $          | 656,570 |   | 91,454 |   | 114,710 |   | $ | 1,982,035 |   | $ | 1,980,546 |   | 307,183 |   | 347,728 |   |
|                        |       |                                                    |       |                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Corporate  functions        |       |                                                    |       |                                                   |       | (12,402 | ) | (14,156 | ) |   |   |   |   | (41,172 | ) | (41,506 | ) |
| Income from  operations     |       |                                                    |       |                                                   |       | 79,052 |   | 100,554 |   |   |   |   |   | 266,011 |   | 306,222 |   |
| Other                       |       |                                                    |       |                                                   |       | (3,960 | ) | (3,507 | ) |   |   |   |   | (10,605 | ) | (12,852 | ) |
| Income before income  taxes |       |                                                    |       |                                                   |       | $ | 75,092 |   | $ | 97,047 |   |   |   |   |   | $ | 255,406 |   | $ | 293,370 |   |

 

**Note16 – Relationship with Abbott**

In connection with the spin-off,Hospira and Abbott entered into agreements pursuant to which Hospira and Abbottprovided to the other, on an interim, transitional basis, various services. Theagreed-upon charges for such services were generally intended to allow theservicing party to recover all out-of-pocket costs plus a mark up.  The services generally commenced on thespin-off date and terminated no later than 24 months following thespin-off date. The net cost of these various services to Hospira was $0.5million for the nine months ended September 30, 2006. For the three and ninemonths ended September 30, 2005, the net cost was $1.2 million and $3.9million, respectively.

In addition, Hospiraleases floor space in certain Abbott facilities. The terms of the leases rangefrom two to ten years from the spin-off date, unless terminated earlier byHospira, and include additional services provided by Abbott. These additionalservices are integral to the facilities and primarily include manufacturingsupport functions, quality assurance and information technology systems. As ofSeptember 30, 2006, the only remaining lease is for a facility in AbbottLaboratories’ North Chicago, Illinois campus. The cost for the leases andadditional services was $5.0 million and $16.1 million for the three and ninemonths ended September 30, 2006, respectively, and $6.3 million and $19.8million for the three and nine months ended September 30, 2005, respectively.

Both Hospira and Abbotthave provided and will continue to provide manufacturing services to the other.For manufacturing services provided to Abbott, Hospira records as revenue itscosts plus a third-party manufacturing profit. For certain products, Hospirareceives bulk material from Abbott and the mark up is on the value-addedportion only.  Inventory that Hospirapurchases from Abbott is at Abbott’s cost plus a third-party manufacturingprofit. Sales to Abbott amounted to $41.4 million and $122.8 million for thethree and nine months ended September 30, 2006, respectively, and $42.7 millionand $131.4 million for the three and nine months ended September 30, 2005,respectively. Product purchases from Abbott were $18.2 million and $60.6million for the three and nine months ended September 30, 2006, respectively,and $22.1 million and $60.6 million for the three and nine months endedSeptember 30, 2005, respectively.

In connection with thespin-off, Hospira and Abbott agreed that the legal transfer of certainoperations and assets (net of liabilities) outside the United States wouldoccur, and be completed, within two years after the spin-off. During thetransition period, these operations and assets were used in the conduct ofHospira’s international business and Hospira was subject to the risks andentitled to the benefits generated by such operations and assets. Hospira wasobligated to pay Abbott for these operations and assets, and assume thecorresponding liabilities, over a two-year period after the spin-off date asHospira established its business infrastructure outside the United States andobtained regulatory approval for the transfer of the marketing authorizationsfor Hospira products to local Hospira affiliates or third-party distributors.The transfers were completed in the second quarter of 2006. The total amountspaid were $25.7 million and $124.3 million in the third quarter and for thenine months ended September 30, 2006, respectively, and $241.0 million todate.  As of September 30, 2006, Hospirahas amounts due to Abbott in the amount of $2.0 million for settlement ofcertain transfers of net assets. The amount due to Abbott for these settlementsis offset by $6.9 million due from Abbott for items

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that are related to theinternational business. These items include amounts due for operating profitsand inventory purchases of Hospira products to support the internationalbusiness.

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

**Overview**

Hospira is a globalspecialty pharmaceutical and medication delivery company that is focused onproducts that improve the productivity, safety and efficacy of patient care inthe acute care setting. Hospira is a leader in the development, manufacture andmarketing of specialty injectable pharmaceuticals and medication delivery systemsthat deliver drugs and intravenous (I.V.) fluids. Hospira is also a leadingprovider of contract manufacturing services to pharmaceutical and biotechnologycompanies for formulation development, filling and finishing of injectablepharmaceuticals. Hospira’s broad portfolio of products is used by hospitals andalternate site providers, such as clinics, home healthcare providers andlong-term care facilities.

Please refer to theoverview of “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in Hospira’s Annual Report on Form 10-K for the yearended December 31, 2005, which was filed with the Securities and ExchangeCommission on March 15, 2006.  Except asdiscussed in this Item 2, Hospira is not aware of any material changes to suchinformation.

**Transitionfrom Abbott**

Hospira completed itsseparation from Abbott during the second quarter of 2006 as the operations andnet assets in all remaining countries outside the United States weretransferred to Hospira from Abbott.  Forfurther information regarding such transfers, and the amount remaining payablefor settlements of certain transfers, please see “Liquidity and CapitalResources at September 30, 2006 compared with December 31, 2005.”

During the three and ninemonths ended September 30, 2006, Hospira incurred $4.4 million and $30.8million, respectively, of non-recurring transition costs. These costs relate tothe establishment of new facilities, the build-out of independent informationtechnology systems, and product registration and re-labeling. Since thespin-off, Hospira has incurred $109.2 million of these costs in the aggregatethrough September 30, 2006. The company expects the aggregate non-recurringtransition expenses to total approximately $112 million to $115 million(pre-tax) through December 31, 2006. The remaining transition activities aresubject to risks and uncertainties, including the possibility of incurringhigher than expected costs to complete the transition and possible difficultiesimplementing and operating the information technology system.

**MaynePharma Acquisition**

On September 20, 2006, Hospira entered into anagreement to acquire Mayne Pharma Limited, an Australian public company listedon the Australian Stock Exchange that manufactures and sells primarily genericinjectable pharmaceuticals, for approximately US$2.0 billion in cash.

As Mayne Pharma has strong market positions in Europeand Australia and a significant international commercial infrastructure, theacquisition is expected to substantially increase Hospira’s internationalpresence.  The acquisition is alsoexpected to broaden Hospira’s generic injectable pharmaceutical product line.

The acquisition is subject to the satisfaction orwaiver of certain closing conditions, including, among others, approval by theSupreme Court of Victoria, Australia; Mayne Pharma shareholder approval; theabsence of a Mayne Pharma material adverse change; and required regulatoryapprovals or clearances, including clearance by the U.S. Federal Trade Commission(the “FTC”) under the Hart Scott Rodino Antitrust Improvements Act of 1976 (the“HSR Act”). Subject to these conditions, the acquisition currently is expectedto close around the end of 2006.

On November 3, 2006, theparties received a second request from the FTC in connection with thetransaction relating to certain products of both companies.  As a result of the second request, thewaiting period under the HSR Act will be extended until 30 days after theparties have substantially complied with the request (unless earlier terminatedby the FTC).  The parties are proceedingto comply with the request and address the FTC’s questions.  The parties are also working with the FTC todetermine the terms upon which the FTC might agree upon earlier termination ofthe waiting period, which may include divestiture of certain products andassets.  The effect of the secondrequest, including with respect to any possible delay in the completion of thetransaction and any potential divestitures or other terms, cannot be determinedat this time.

In connection with the closing of the acquisition,Hospira will incur substantial charges relating to purchase accounting,including a write-off of in-process research and development and a write-up ofinventory.  After the closing, Hospirawill incur costs relating to the integration of Mayne Pharma.

Hospira expects tofinance the acquisition and related expenses using approximately $100 millionof cash on hand and borrowing approximately $1.925 billion.  The proposed financing arrangements aredescribed below under “Liquidity and Capital Resources.”

**OtherFactors**

*GPO Contracts.*Approximately50% of Hospira’s net sales are made under contracts with group purchasingorganizations (“GPOs”). Typically, these contracts cover a portion of Hospira’sproduct lines, specify the prices for Hospira’s products, and are effective forthree to five years. Generally, the contracts are extended or competitively bidprior to contract expiration. Of the four GPO pharmacy contracts scheduled tobe renewed or renegotiated during 2006, three of these GPO pharmacy contractswere signed as new contracts and one contract is nearing completion of arenewal as of September 30, 2006.

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*Share Repurchase.*InFebruary 2006, Hospira’s board of directors approved a $400 million sharerepurchase program. As of September 30, 2006, Hospira repurchased 7,584,400shares for $299.8 million. Hospira expects to fund any future repurchases underthis program from operating cash flows.

*Stock-Based Compensation Expense.*Beginning January 1, 2006, expenses relating to stock optionsissued to Hospira’s employees have been reflected in Hospira’s results ofoperations. For the three and nine months ended September 30, 2006, suchexpense was $8.2 million and $27.8 million, respectively. The amount ofstock-based compensation expense in the future will depend on the number ofoptions (or other share-based awards) granted, the terms of those awards andtheir fair values. For further information, see Note 7 to the condensedconsolidated financial statements included in Item 1.

*Drug Delivery Pumps.*  Hospira expects to achieve sales growth in2006 and beyond in part due to increased sales of its drug delivery pumps andrelated products. Hospira believes that the features and functionality offeredby its newer technology products position it to achieve such growth over thelong-term. As a result, Hospira is aggressively competing to upgrade itscurrent customer base as well as to capture competitive business.  Because of changes in technology, it may takemore time and effort to sell and implement newer-technology products to itscustomers, which may impact the period over which revenue is recognized. Hospiraalso expects intense competition for existing and potential customers fromother competitors. The timing and amount of purchases made by customers duringthe year cannot be predicted with certainty.

*International Operations*.  As Hospira’s international operations havetransitioned from Abbott, Hospira has experienced some disruptions in theinternational business as a result of establishing its global supply chain,systems, structure and processes.  Thesedisruptions led to an inability to supply customers on a timely basis incertain countries and lower customer service levels during the second quarterof 2006. Hospira is working to resolve these transition-related disruptions andhas begun to improve its customer service levels internationally.  However, if Hospira does not successfullyresolve these issues, Hospira may lose customers and incur additional operatingcosts, which would adversely affect its sales and profitability.

*Contract Manufacturing*. Hospira’s contract manufacturing product line has received lowerforecasted 2007 volumes from existing customers. In addition, certain drugsunder contract are losing patent protection, which results in lower demand forHospira’s contract manufacturing services. As Hospira has not replaced all ofsuch forecasted lost volume, Hospira expects sales in the contractmanufacturing product line to be approximately $50 million lower in 2007when compared to 2006.

**Critical Accounting Policies**

The preparation offinancial statements in accordance with generally accepted accountingprinciples in the United States (GAAP) requires management to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses. A summary of Hospira’s significant accounting policies is includedin Note 1 to the company’s consolidated financial statements, which areincluded in Hospira’s Annual Report on Form 10-K for the year ended December31, 2005. Certain of Hospira’s accounting policies are considered critical, asthese policies require significant, difficult or complex judgments bymanagement, often employing the use of estimates about the effects of mattersthat are inherently uncertain. Such policies are summarized in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” of Hospira’s Annual Report on Form 10-K for the year ended December31, 2005.

In 2006, Hospira expandedits revenue recognition policy to incorporate changes related to new productofferings, which include a server-based suite of software applications andrelated maintenance and implementation services. In addition, Hospira adopted Statement of Financial Accounting Standards (“SFAS”)No. 123R, “Share-Based Payment” on January 1, 2006. All other criticalaccounting policies remain unchanged. The updated policies are as follows.

*Revenue Recognition* — Hospira recognizes revenues from product saleswhen persuasive evidence of an arrangement exists, delivery has occurred, theprice is fixed and determinable, and collectibility is reasonably assured. Forother than certain drug delivery pumps and injectable pharmaceutical contractmanufacturing, product revenue is recognized when products are delivered tocustomers and title passes. In certain circumstances, Hospira enters intoarrangements in which it provides multiple elements to its customers. In thesecases, total revenue is divided among the separate units of accounting(deliverables) based on their relative fair value and is recognized for eachdeliverable in accordance with the applicable revenue recognition criteria. Therecognition of revenue is delayed if there are significant post-deliveryobligations, such as installation or customer acceptance.

For drug delivery pumps, revenue is typically derivedunder one of three types of arrangements: outright sales of the drug deliverypump; placements under lease arrangements; and placements under contracts thatinclude associated disposable set purchases. For lease arrangements under whichHospira’s warranty obligation extends through the entire term are accounted foras operating leases. For these, Hospira recognizes revenue over the lease term,which averages five years. For leases under which Hospira’s warranty obligationis limited to approximately one year, Hospira accounts for these as sales-typeleases, under which the discounted sales value of the drug

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delivery pump is recorded as revenue upon placement withthe customer. Hospira has contractual arrangements with certain customerswhereby it places drug delivery pumps at customer sites, and the customersagree to purchase minimum levels of disposable products (sets) that are usedwith the pumps. These arrangements do not include any upfront fees or payments.The contractual arrangements generally set forth fixed prices for the purchasesof the disposable products, where the prices for the disposables do not changeover the term of the arrangement, other than, in some cases, for changes inConsumer Price Index provisions. Title for the pumps is retained by Hospirathroughout these arrangements, and the related asset is depreciated over itsestimated useful life on a straight-line basis. In these placementarrangements, revenue is recognized as the disposable products are delivered,in accordance with SFAS No. 48, “Revenue Recognition when Right of ReturnExists,” and SAB No. 104, “Revenue Recognition.”

Hospirahas introduced a server-based suite of software applications designed toexchange data from a hospital’s drug information library database to drugdelivery pumps throughout the hospital. The arrangements related to suchapplications typically include a perpetual software license, softwaremaintenance and implementation services. Hospira recognizes revenue related tothese arrangements in accordance with the provisions of Statement of Position(SOP) 97-2, “Software Revenue Recognition,” as amended. Software licenserevenue and implementation service revenue are generally recognized uponcompletion of related obligations or customer acceptance and softwaremaintenance revenue is recognized ratably over the contract period.

Injectable pharmaceutical contract manufacturing involvesfilling customers’ active pharmaceutical ingredients (“API”) into deliverysystems. Under these arrangements, customers’ API is often consigned to Hospiraand revenue is recorded for the materials and labor provided by Hospira, plus aprofit, upon shipment to the customer.

Upon recognizing revenuefrom a sale, Hospira records an estimate for certain items that reduce grosssales in arriving at its reported net sales for each period.  These items include chargebacks, rebates andother items (such as cash discounts and returns).  Provisions for chargebacks and rebatesrepresent the most significant and complex of these estimates.

*Chargebacks—*  Hospira sells a significant portion of itsgeneric injectable pharmaceutical products through wholesalers, which maintaininventories of Hospira products and later sell those products to end customers.  In connection with its sales and marketingefforts, Hospira negotiates prices with end customers for certain productsunder pricing agreements (including, for example, group purchasing organizationcontracts). Consistent with industry practice, the negotiated end customerprices are typically lower than the prices charged to the wholesalers.

Whenan end customer purchases a Hospira product that is covered by a pricingagreement from a wholesaler, the end customer pays the wholesaler the pricedetermined under the pricing agreement. The wholesaler is then entitled tocharge Hospira back for the difference between the price the wholesaler paidHospira and the contract price paid by the end customer (a “chargeback”).  This process is necessary to enable Hospirato track actual sales to the end customer, which is essential information torun the business effectively. Settlement of chargebacks generally occursbetween 30 and 40 days after the sale to wholesalers.

Toaccount for the chargeback, Hospira records the initial sale to a wholesaler atthe price invoiced to the wholesaler and at the same time, records a provisionequal to the estimated amount the wholesaler will later charge back to Hospira,reducing gross sales and trade receivables. This provision must be estimated because the actual end customer andapplicable pricing terms may vary at the time of the sale to thewholesaler.  Accordingly, the mostsignificant estimates inherent in the initial chargeback provision relate tothe volume of sales to the wholesalers that will be subject to chargeback andthe ultimate end customer contract price. These estimates are based primarily on an analysis of Hospira’s productsales and most recent historical average chargeback credits by product,estimated wholesaler inventory levels, current contract pricing, anticipatedfuture contract pricing changes and claims processing lag time. Hospiraestimates the levels of inventory at the wholesalers through analysis ofwholesaler purchases and inventory data obtained directly from certain of thewholesalers. A one percent decrease in end customer contract prices for salespending chargeback at September 30, 2006 would decrease net sales and incomebefore income taxes by $1.6 million. A one percent increase in wholesale unitssold subject to chargebacks at September 30, 2006 would decrease net sales andincome before income taxes by $1.4 million.

Hospiraregularly monitors the provision for chargebacks and makes adjustments when itbelieves the actual chargebacks may differ from estimates. Hospira identified adecrease in the trend of wholesale units sold subject to chargeback and in thethird quarter of 2005, adjusted the chargeback provision downward by $7.0million. Hospira utilized a consistent methodology to develop its assumptionsused in estimating and providing for chargebacks across all periods presented.

*Rebates—*  Hospira primarily offers rebates to directcustomers, customers who purchase from certain wholesalers at end customercontract prices and government agencies, which administer various programs suchas Medicaid. Direct rebates are generally rebates paid to direct purchasingcustomers based on a contracted discount applied to the direct customer’spurchases.  Indirect rebates are rebatespaid to “indirect customers” which have purchased Hospira products from awholesaler under a pricing agreement with Hospira.  Governmental agency rebates are amounts owedbased on legal requirements with public sector benefit providers (such asMedicaid), after the final dispensing of the product by a pharmacy to a benefitplan participant.  Rebate amounts areusually based upon the volume of purchases. Hospira estimates the amount of therebate due at the time of sale, and records the liability and a

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reductionof gross sales at the same time the product sale is recorded. Each period theestimates are reviewed and revised, if necessary, in conjunction with a reviewof contract volumes within the period. Adjustments related to prior periodsales have not been material in any period. Settlement of rebates generallyoccurs from three to 12 months after sale.

Indetermining provisions for rebates to direct customers, Hospira considers thevolume of eligible purchases by these customers and the rebate terms.  In determining rebates on sales throughwholesalers, Hospira considers the volume of eligible contract purchases, therebate terms and the estimated level of inventory at the wholesalers that wouldbe subject to a rebate, which is estimated as described above under “Chargebacks.”  Upon receipt of a chargeback, due to theavailability of product and customer specific information, Hospira can thenestablish a specific provision for fees or rebates based on the specific termsof each agreement.  Rebates undergovernmental programs are based on the estimated volume of products soldsubject to these programs.

Hospira regularly analyzes the historical rebatetrends and makes adjustments to recorded reserves for changes in trends andterms of rebate programs. The methodology used to estimate and provide forrebates was consistent across all periods presented.

*Stock-Based Compensation –*On January 1, 2006, Hospira adopted SFAS No. 123R,“Share-Based Payment,” which requires, among other changes, that the costresulting from all share-based payment transactions be recognized ascompensation cost over the vesting period based on the fair value of theinstrument on the date of grant. Under SFAS No. 123R, Hospira uses theBlack-Scholes option valuation model to determine the fair value of stockoptions. The fair value model includes various assumptions, including theexpected volatility and expected life of the awards. These assumptions reflectHospira’s best estimates, but they involve inherent uncertainties based onmarket conditions generally outside of Hospira’s control. As a result, if otherassumptions had been used, stock-based compensation expense, as calculated andrecorded under SFAS No. 123R, could have been materially impacted. Furthermore,if Hospira uses different assumptions in future periods, stock-basedcompensation expense could be materially impacted in future periods. See Note 7to the condensed consolidated financial statements included in Item 1 foradditional information regarding stock-based compensation.

**Recently Issued Accounting Standards**

In September 2006, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards No. 157,*“Fair Value Measurements”* (“SFAS No. 157”).SFAS No. 157 clarifies the principle that fair value should be based on theassumptions market participants would use when pricing an asset or liabilityand establishes a fair value hierarchy that prioritizes the information used todevelop those assumptions. Under the standard, fair value measurements would beseparately disclosed by level within the fair value hierarchy. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007. Hospira is currently evaluating the potential impact ofSFAS No. 157 on its financial statements.

In September 2006, the FASB issued Statementof Financial Accounting Standards No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requiresfull recognition of the funded status of Hospira’s defined benefit plans, andmeasurement of the plan’s assets and its obligations to determine the fundedstatus as of the end of the fiscal year. SFAS No. 158 is effective as of the endof fiscal years ending after December 15, 2006. Hospira is currentlyevaluating the potential impact of SFAS No. 158 on its financialstatements.

In September 2006, the SEC issued Staff AccountingBulletin No. 108, “Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements” (“SAB No.108”). SAB No. 108 provides interpretive guidance on how the effects of thecarryover or reversal of prior year misstatements should be considered inquantifying a current year misstatement. The SEC staff believes thatregistrants should quantify errors using both a balance sheet and an incomestatement approach and evaluate whether either approach results in quantifyinga misstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. SAB No. 108 is effective for fiscal years ending on orafter November 15, 2006. Adoption of SAB No. 108 is not expected to have amaterial impact on the financial statements of Hospira.

In July 2006, the FASB,issued FASB Interpretation No. 48,**“Accounting for Uncertainty in Income Taxes– an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48prescribes a recognition threshold and measurement attribute for financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. The interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition of uncertain tax positions. The provisions of FIN 48are effective at the beginning of the first fiscal year that begins afterDecember 15, 2006, with the cumulative effect of the change in accountingprinciple recorded as an adjustment to opening retained earnings for that year.Hospira is currently evaluating the potential impact of FIN 48 on its financialstatements.

**2006 Third Quarter Events**

·                  Announced an agreement to acquire MaynePharma, an Australia-based publicly-held specialty injectable pharmaceuticals

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company, for approximatelyUS$2 billion in cash. Assuming all necessary regulatory approvals are securedand customary closing conditions met, the transaction is expected to becompleted around the end of the year.

·                  Launched the generic anti-infective drugciprofloxacin in vial flip-top format immediately following the patentexpiration of the branded version.

·                  Announced separate agreements with two GPOs,Premier and HealthTrust Purchasing Group, to provide their member organizationsaccess to Hospira’s line of pain management pumps. Both agreements are new andnational in scope.

**Results of operations for the threemonths ended September 30, 2006 compared to September 30, 2005**

*Net Sales*

Net sales decreased(1.5)% in the third quarter of 2006 compared to the third quarter of 2005.Sales to third parties represented a (1.3)% decrease in overall sales, drivenby volume/mix of (2.4)%, which includes the 2005 reduction in chargebackprovision of (1.1)%, partially offset by price of 0.5% in the U.S., and theimpact of exchange of 0.6%. Sales to Abbott had an unfavorable impact of (0.2)%on overall sales, driven primarily by demand, partially offset by favorableprice.

A comparison of product line sales is as follows:

**Hospira,Inc.**

**Sales byProduct Line**

**(Unaudited)**

***(dollars in thousands)***

 
|                                                   | ** ** | **Three Months Ended September 30** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                                | ** ** | **2005** | ** ** | **Percent  Change vs.  Prior Year** | ** ** |
| U.S. —                                       |       |                                                    |       |   |   |   |   |
| Specialty  Injectable Pharmaceuticals             |       | $                                                       | 198,362    |   | $ | 205,230 |   | (3.3 | ) |
| Medication  Delivery Systems                      |       | 199,029                                                 |       | 206,119 |   | (3.4 | ) |
| Injectable  Pharmaceutical Contract Manufacturing |       | 38,090                                                  |       | 43,843 |   | (13.1 | ) |
| Sales to Abbott  Laboratories                     |       | 25,038                                                  |       | 25,553 |   | (2.0 | ) |
| Other                                             |       | 72,506                                                  |       | 70,584 |   | 2.7 |   |
|                                              |       |                                                    |       |   |   |   |   |
| Total U.S.                                        |       | 533,025                                                 |       | 551,329 |   | (3.3 | ) |
|                                              |       |                                                    |       |   |   |   |   |
| International —                              |       |                                                    |       |   |   |   |   |
|                                              |       |                                                    |       |   |   |   |   |
| Sales to Third  Parties                           |       | 97,277                                                  |       | 88,122 |   | 10.4 |   |
| Sales to Abbott  Laboratories                     |       | 16,338                                                  |       | 17,119 |   | (4.6 | ) |
|                                              |       |                                                    |       |   |   |   |   |
| Total  International Sales                        |       | 113,615                                                 |       | 105,241 |   | 8.0 |   |
|                                              |       |                                                    |       |   |   |   |   |
| Consolidated Net Sales                            |       | $                                                       | 646,640    |   | $ | 656,570 |   | (1.5 | ) |

 

Sales in SpecialtyInjectable Pharmaceuticals decreased, driven by lower year-over-year sales ofceftriaxone, which was launched in the third quarter of 2005, and lower salesof Add-Vantage diluents due to competitive drug supply issues. The salesdecline in Medication Delivery Systems was driven primarily by lower price andvolumes in the infusion therapy product line.

The sales decline inInjectable Pharmaceutical Contract Manufacturing was primarily due to theimpact of the termination of certain lower-margin contracts, coupled with thetiming of customer purchases under several existing supply agreements.

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The decrease in U.S. Salesto Abbott was primarily due to decreased demand by Abbott for several of itsproducts, partially offset by increased price.

Other U.S. sales increased,reflecting higher sales of anesthesia products, including recently introducedpropofol, to alternate site healthcare customers, and other adjustments.  The product line was unfavorably impacted bydecreased sales of deferoxamine due to a competitive product launch; loweryear-over-year sales of ceftriaxone, which was launched in the third quarter of2005; and lower critical care sales.

International Sales to ThirdParties reflect increased sales on third party manufacturing contracts andfavorable exchange. International Sales to Abbott decreased primarily due todecreased demand, partially offset by increased price.

*Gross Profit*

Gross profit decreased$8.5 million, or (3.8)%, for the quarter ended September 30, 2006, comparedwith the same period in 2005. Gross profit margin decreased to 33.9% for thethree months ended September 30, 2006, from 34.7% for the three months endedSeptember 30, 2005. The decrease is primarily the result of costs associatedwith the planned manufacturing plant closures of (2.7)%; incremental freightand distribution costs, primarily in the International segment, of (0.9)% andother net changes of (0.5)%. These decreases were partially offset byvolume/product mix improvement of 0.6%, which included the 2005 reduction inchargeback provision of (0.7)%, favorable price in the U.S. of 0.5%; lowermanufacturing costs of 0.8%; lower project expense of 0.7% and lower non-recurringtransition related costs of 0.7%.

*Research and Development*

Research and development(R&D) expenses increased $0.9 million, or 2.7%, for the quarter endedSeptember 30, 2006, compared with the same period in 2005. The increase wasprimarily related to stock option expense as a result of the adoption of SFASNo. 123R. R&D expenses increased to 5.6% of net sales for the quarter endedSeptember 30, 2006, compared with 5.4% of net sales for the same period in2005.

*Selling, General and Administrative*

Selling, general andadministrative (SG&A) expenses increased $12.0 million, or 13.1%, for thequarter ended September 30, 2006, compared with the same period in 2005. Ofthis increase, 5.8% is related to stock option expense as a result of the adoptionof SFAS No. 123R. The remainder of the increase was primarily due to additionalcosts related to establishment of Hospira’s business infrastructure outside theUnited States and costs associated with the implementation of Hospira’s newinformation technology system. SG&A expenses increased to 16.0% of netsales for the quarter ended September 30, 2006, compared with 13.9% of netsales for the same period in 2005.

*Interest and Other (Income), Net*

Interest expense was $8.1million for the quarter ended September 30, 2006, compared to $6.9 million inthe same period in 2005. The increase was primarily due to the interest rateswap entered into in 2005, offset by higher capitalized interest in 2006. Other(income), net was $(4.1) million for the quarter ended September 30, 2006compared to $(3.4) million for the quarter ended September 30, 2005. The changewas primarily related to foreign exchange gains realized in 2006.

*IncomeTax Expense*

The effective tax ratewas 25.5% for the quarter ended September 30, 2006, compared to 38.3% for thesame period in 2005. The third quarter of 2005 included an increase in theannual effective tax rate of 24% to 25.5% due to an increase in expectedearnings in the U.S. and an estimated $9.5 million related to the decision to repatriateundistributed foreign earnings of $175 million under the American Jobs CreationAct of 2004. The effective tax rates are less than the statutory U.S. federalincome tax rate principally due to the benefit of tax exemptions, of varyingdurations, in certain jurisdictions outside the United States.

**Results of operations for the ninemonths ended September 30, 2006 compared to September 30, 2005**

*Net Sales*

Net sales increased 0.1%in the nine months ended September 30, 2006 compared to the nine months endedSeptember 30, 2005. Sales to third parties represented a 0.5% increase inoverall sales, driven by price of 0.9% in the U.S. and the impact of exchangeof 0.2%; partially offset by volume/mix of (0.6)%, which includes theunfavorable impact of the Berlex contract termination of (3.4)%. Sales toAbbott had an unfavorable impact of (0.4)% on overall sales, driven primarilyby demand, partially offset by increased price.

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A comparison of product line sales is as follows:

**Hospira,Inc.**

**Sales byProduct Line**

**(Unaudited)**

***(dollars inthousands)***
|                                                   | ** ** | **Nine Months Ended September 30** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                               | ** ** | **2005** | ** ** | **Percent  Change vs.  Prior Year** | ** ** |
| U.S. —                                       |       |                                                   |       |   |   |   |   |
| Specialty  Injectable Pharmaceuticals             |       | $                                                      | 590,915    |   | $ | 630,994 |   | (6.4 | ) |
| Medication  Delivery Systems                      |       | 626,498                                                |       | 598,726 |   | 4.6 |   |
| Injectable  Pharmaceutical Contract Manufacturing |       | 139,879                                                |       | 145,989 |   | (4.2 | ) |
| Sales to Abbott  Laboratories                     |       | 70,860                                                 |       | 80,537 |   | (12.0 | ) |
| Other                                             |       | 211,749                                                |       | 194,853 |   | 8.7 |   |
|                                              |       |                                                   |       |   |   |   |   |
| Total U.S.                                        |       | 1,639,901                                              |       | 1,651,099 |   | (0.7 | ) |
|                                              |       |                                                   |       |   |   |   |   |
| International —                              |       |                                                   |       |   |   |   |   |
|                                              |       |                                                   |       |   |   |   |   |
| Sales to Third  Parties                           |       | 290,232                                                |       | 278,541 |   | 4.2 |   |
| Sales to Abbott  Laboratories                     |       | 51,902                                                 |       | 50,906 |   | 2.0 |   |
|                                              |       |                                                   |       |   |   |   |   |
| Total  International Sales                        |       | 342,134                                                |       | 329,447 |   | 3.9 |   |
|                                              |       |                                                   |       |   |   |   |   |
| Consolidated Net Sales                            |       | $                                                      | 1,982,035  |   | $ | 1,980,546 |   | 0.1 |   |

 

Sales in SpecialtyInjectable Pharmaceuticals declined, reflecting the 2005 termination of theBerlex imaging agents distribution agreement. Excluding Berlex, sales withinthis product line increased, driven by the impact of sales of ceftriaxone,launched in the third quarter of 2005, and increased sales of certainanti-infective products (which Hospira believes was partially driven by acompetitor’s inability to supply product earlier in the year), and favorableprice. The sales increase in Medication Delivery Systems was driven primarilyby growth in medication management systems. The growth in medication managementsystems was due primarily to placements of Hospira’s newer technology Plum A+® pumps with Hospira MedNet® coupled with the impact of placements ofHospira’s LifeCare PCA® infusion system, launched in the first quarterof 2006.

Sales in InjectablePharmaceutical Contract Manufacturing were down, due to the impact of thetermination of certain lower-margin contracts, partially offset by growth indemand for several existing supply agreements.

The decrease in U.S. Salesto Abbott was primarily due to decreased demand by Abbott for several of itsproducts, partially offset by increased price.

The increase in Other U.S.sales was primarily due to increased sales to alternate site healthcarecustomers including higher sales of anesthesia products, includingrecently introduced propofol, increased sales of certain anti-infective products(which Hospira believes was partially driven by a competitor’s inability tosupply product earlier in the year),and other adjustments; partially offset by decreased sales of deferoxamine dueto a competitive product launch and lower critical care sales.

International Sales to Third Parties were up,primarily reflecting increased sales in Canada and on third party manufacturingcontracts and favorable exchange, partially offset by reduced volumes due totransition-related supply chain disruptions and lower pricing to distributorscompared to the prior Abbott direct sales model. International Sales to Abbottincreased primarily due to increased price.

*Gross Profit*

Gross profit increased$25.2 million, or 3.8%, for the nine months ended September 30, 2006, comparedwith the same period in 2005. Gross profit margin increased to 34.8% for thenine months ended September 30, 2006, from 33.5% for the nine months ended

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September 30, 2005. Theincreased margin is primarily the result of volume/product mix improvement of2.2%, which includes the impact of Berlex of 1.0%; favorable price in the U.S.of 0.7%; gain on sale of the Donegal, Ireland manufacturing plant of 0.4%; anasset impairment and obligations assumed in 2005 of 0.9% relating to the saleof the Salt Lake City manufacturing facility; lower project expense of 0.4%,and other net changes of 0.4%. These improvements were partially offset bycosts associated with the planned manufacturing plant closures of (2.5)% andincremental freight and distribution costs, primarily in the Internationalsegment, of (1.2)%.

*Research and Development*

Research and development(R&D) expenses increased $9.8 million, or 10.1%, for the nine months endedSeptember 30, 2006, compared with the same period in 2005. The increase wasprimarily due to stock option expense as a result of the adoption of SFAS No.123R, costs associated with the move to the new R&D building and spendingon new product development. R&D spending on new product development in thenine months primarily related to new compounds in Hospira’s generic injectabledrug pipeline and medication delivery devices. R&D expenses increased to5.4% of net sales for the nine months ended September 30, 2006, compared with4.9% of net sales for the same period in 2005.

*Selling, General and Administrative*

Selling, general andadministrative (SG&A) expenses increased $55.6 million, or 21.3%, for thenine months ended September 30, 2006, compared with the same period in 2005. Ofthis increase, 7.2% is related to stock option expense as a result of theadoption of SFAS No. 123R. The remainder of the increase was primarily due toadditional costs related to establishment of Hospira’s business infrastructure outsidethe United States and costs associated with the implementation of Hospira’s newinformation technology system. SG&A expenses increased to 16.0% of netsales for the nine months ended September 30, 2006, compared with 13.2% of netsales for the same period in 2005.

*Interest and Other (Income), Net*

Interest expense was$23.0 million for the nine months ended September 30, 2006, compared to $20.9million in the same period in 2005. The increase was primarily due to theinterest rate swap entered into in 2005, offset by higher capitalized interestin 2006. Other (income), net was $(12.4) million for the nine months endedSeptember 30, 2006 compared to $(8.1) million for the nine months endedSeptember 30, 2005. The change was primarily related to higher interest incomeand foreign exchange gains realized in 2006.

*IncomeTax Expense*

The effective tax ratewas 25.5% for the nine months ended September 30, 2006, compared to 28.7% forthe same period in 2005. The nine months ended September 30, 2005 included anestimated $9.5 million related to the decision to repatriate undistributedforeign earnings of $175 million under the American Jobs Creation Act of 2004.The effective tax rates are less than the statutory U.S. federal income taxrate principally due to the benefit of tax exemptions, of varying durations, incertain jurisdictions outside the United States.

**Liquidityand Capital Resources at September 30, 2006 compared with December 31, 2005**

Net Cash from OperatingActivities continues to be Hospira’s primary source of funds to financeoperating needs and capital expenditures. Other capital resources include cashon hand and borrowing availability under Hospira’s $375 million revolvingcredit facility.

Operating activitiesprovided net cash of $331.9 million, primarily driven by net income of $190.3million, non-cash depreciation and amortization charges of $116.2 million,non-cash stock-based compensation expense of $27.8 million, and changes inoperating assets and liabilities of $5.5 million, offset by a pre-tax gain onthe sale of the Donegal, Ireland facility of $7.9 million. The changes inoperating assets and liabilities consist primarily of an increase in tradereceivables and inventories, offset by an increase in trade accounts payableand other liabilities and changes in Other, net. The increase in inventoryreflected planned normal inventory builds and additional safety stocks tosupport the business as manufacturing production transfers occur.

Net Cash Used inInvesting Activities of $181.8 million includes capital expenditures of $183.6million for upgrading and expanding manufacturing and administrative supportfacilities and information technology systems. In addition, investingactivities includes proceeds from the sale of the Donegal, Ireland andMontreal, Canada facilities of $19.3 million and the use of cash of $17.5million for other investments.

Net Cash Used inFinancing Activities of $379.2 million consists primarily of common stockrepurchases of $299.8 million and payments to Abbott for international netassets of $124.3 million, offset by proceeds from employee stock optionexercises and

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related tax benefits of$43.1 million and an increase in other borrowings, net of $1.8 million.

Hospira believes that itscurrent capital resources, including cash and cash equivalents, cash generatedfrom operations, and funds available from its revolving credit facility will besufficient to finance its operations, including product development, transitioncosts, international net asset transfers and capital expenditures, for theforeseeable future.

During the third quarter, Hospira acquired an initial 19.95% equity stakeand launched an off-market takeover bid for the remaining shares in BresaGenLimited (“BresaGen”), an Australian public company listed on the AustralianStock Exchange. BresaGen is a biotechnology company that develops protein andpeptide therapeutics. Hospira paid $3.2 million for the initial investment, whichwas accounted for using the equity method. Upon completion of the acquisition,Hospira will fully consolidate BresaGen in its financial statements. Hospiraexpects to pay $12.6 million for the remaining outstanding shares of BresaGen.In early October 2006, Hospira received acceptance from over 90% of BresaGenshareholders, allowing the acquisition to proceed and expects to complete theacquisition in the fourth quarter of 2006. Hospira expects to finance thisacquisition with available cash from operations.

In connection with thefinancing of the Mayne Pharma acquisition, various banks have committed toprovide up to $1.925 billion of acquisition financing, which includes a$500 million three-year term loan facility and a $1.425 billionbridge facility. The remainder of the purchase price will be funded with cashon hand. Borrowings under the term loan facility and bridge facility will bearinterest at LIBOR plus a margin that will be determined based on Hospira’ssenior unsecured debt ratings from Standard & Poor’s and Moody’s as setforth in the following table:

| At or  higher than  A- or A3 | ** ** | **BBB+ or  Baa1** | ** ** | **BBB or  Baa2** | ** ** | **BBB- or  Baa3** | ** ** | **Lower than  investment  grade** | ** ** |
|---------------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|----------------------------------------|------------|
| 0.35%                                       |       | 0.45%                  |       | 0.60%                 |       | 0.70%                  |       | 1.20%                                  |       |

 

If there is a splitrating, the higher rating will apply.  Ifthe ratings differ by more than two gradations, the rating that is one ratingabove the lower will apply. The acquisition credit facilities will contain covenantssimilar to those included in Hospira’s existing revolving credit facility.  Hospira anticipates issuing senior debtsecurities in one or more registered public or exempt offerings in order torefinance any borrowings outstanding under the bridge facility. Upon completionof the acquisition, Hospira will dedicate a significant portion of future cashflow from operations to repaying outstanding debt obligations.

InFebruary 2006, Hospira announced that its board of directors authorizedthe repurchase of up to $400 million of the company’s common stock. The programauthorizes the company to repurchase common shares from time to time throughthe open market in compliance with securities regulations and other legalrequirements. The size and timing of any purchases are at the discretion of companymanagement, based on factors such as alternative uses of cash, and business andmarket conditions. As of September 30, 2006, Hospira repurchased 7,584,400shares for $299.8 million.

Hospira has a five-year$375 million unsecured revolving credit facility, which it entered into onDecember 16, 2005 (the “Revolver”), and which is available for working capitaland other requirements.  The Revolverallows Hospira to borrow funds at variable interest rates as short-term cashneeds dictate. As of September 30, 2006, Hospira had no amounts outstandingunder the Revolver.

The Revolver and the indenturegoverning Hospira’s outstanding senior unsecured notes contain, among otherprovisions, covenants with which Hospira must comply while they are in force.The covenants limit Hospira’s ability to allow liens on its properties orassets, or merge or consolidate with other entities. Under the Revolver,among other things, Hospira must also comply with certain financial covenants,including a minimum interest coverage ratio and a maximum leverage ratio. As ofSeptember 30, 2006, Hospira was in compliance with all covenants under theRevolver and the Senior Unsecured Notes. Upon the closing of the Mayne Pharmaacquisition, the Revolver will be amended to permit the acquisition and totemporarily increase the maximum leverage ratio and lower the minimum interestcoverage ratio upon the closing of the acquisition.

Hospira has entered into various loan agreements inconjunction with the legal transfer of certain international operations fromAbbott. These borrowings are made by Hospira’s foreign affiliates in theirlocal currency and are used to optimize the capital structure. As of September30, 2006, Hospira had $7.7 million of such loans outstanding, all of which areclassified as short-term.

In connection withthe spin-off, Hospira and Abbott agreed that the legal transfer of certainoperations and assets (net of liabilities) outside the United States wouldoccur, and be completed, within two years after the spin-off. During thetransition period, these operations and assets were used in the conduct ofHospira’s international business and Hospira was subject to the risks andentitled to the benefits generated by such operations and assets. Hospira wasobligated to pay Abbott for these operations and assets, and assume thecorresponding liabilities, over a two-year period after the spin-off date asHospira established its business infrastructure outside the United States andobtained regulatory approval for the transfer of the marketing authorizationsfor Hospira products to local Hospira affiliates or third-party distributors.The transfers were completed in the second quarter of 2006. The total amounts

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paid were $25.7million and $124.3 million in the third quarter and for the nine months endedSeptember 30, 2006, respectively, and $240.1 million to date.  As of September 30, 2006, Hospira has amountsdue to Abbott in the amount of $2.0 million for settlement of certain transfersof net assets. The amount due to Abbott for these settlements is offset by $6.9million due from Abbott for items that are related to the internationalbusiness. These items include amounts due for operating profits and inventorypurchases of Hospira products to support the international business.

**Contractual Obligationsand Off-Balance Sheet Arrangements**

The following table summarizes Hospira’s estimated contractualobligations as of September 30, 2006:

*(dollarsin millions)*
|                                                                                             | ** ** | **Payment Due by Period** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Total**                                | ** ** | **2006** | ** ** | **2007-2008** | ** ** | **2009-2010** | ** ** | **2011 and  Thereafter** | ** ** |
| Long-term debt  and interest payments                                                       |       | $                                        | 942.7      |   | $ | 27.0 |   | $ | 77.2 |   | $ | 355.0 |   | $ | 483.5 |   |
| Lease  obligations                                                                          |       | 182.9                                    |       | 7.3 |   | 50.3 |   | 43.7 |   | 81.6 |   |
| Purchase commitments  (1)                                                                   |       | 372.8                                    |       | 269.6 |   | 102.7 |   | 0.5 |   | — |   |
| Other long-term  liabilities reflected on the consolidated balance sheet (2)                |       | 26.4                                     |       | — |   | 26.4 |   | — |   | — |   |
| Amounts due to  Abbott for settlement of certain international net asset transfers (3) |       | 2.0                                      |       | 2.0 |   | — |   | — |   | — |   |
| Total                                                                                       |       | $                                        | 1,526.8    |   | $ | 305.9 |   | $ | 256.6 |   | $ | 399.2 |   | $ | 565.1 |   |

 

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(1)       Purchase commitments consistprimarily of inventory purchases made in the normal course of business to meetoperational requirements. Contractual capital commitments are also includedhere, but these commitments represent only a portion of expected capitalspending.

(2)       Excludes $129.5 million of otherlong-term liabilities related primarily to post-retirement benefit obligations.

(3)       The amount due to Abbott for the acquisition of certain internationalnet assets excludes an offsetting amount of $6.9 million for items that are duefrom Abbott related to the international business. These include amounts duefor operating profits and inventory purchases of Hospira products to supportthe international business.

Hospira has no material exposures to off-balance sheetarrangements, no special purpose entities, and no activities that includenon-exchange-traded contracts accounted for at fair value.

**LegislativeIssues**

Hospira’s primary markets are highly competitive andsubject to substantial government regulation. Hospira expects debate tocontinue at both the federal and state levels over the availability, method ofdelivery and payment for healthcare products and services. If additionallegislation is enacted, it could have the effect of reducing prices, orreducing the rate of price increases, for medical products and services.International operations are also subject to a significant degree of governmentregulation. It is not possible to predict the extent to which Hospira or thehealthcare industry in general might be adversely affected by these factors inthe future.

**Private Securities Litigation ReformAct of 1995 — A Caution Concerning Forward-Looking Statements**

Under the safe harborprovisions of the Private Securities Litigation Reform Act of 1995, Hospiracautions investors that any forward-looking statements or projections made byHospira, including those made in this document, are subject to risks anduncertainties that may cause actual results to differ materially from thoseprojected. In some cases, these statements can be identified by the use offorward-looking words such as “may,” “will,” “should,” “anticipate,” “estimate,”“expect,” “plan,” “believe,” “predict,” “potential,” “project,” “intend,” “could,”or similar expressions. In particular, statements regarding Hospira’s plans,strategies, prospects and expectations regarding Hospira’s business areforward-looking statements. Please be aware that these statements and any otherforward-looking statements in this document only reflect Hospira’s expectationsand are not guarantees of performance. These statements involve risks,uncertainties and assumptions. Many of these risks, uncertainties andassumptions are beyond Hospira’s control, and may cause actual results andperformance to differ materially from Hospira’s expectations.

Economic, competitive,governmental, technological and other factors that may affect Hospira’soperations are discussed in Hospira’s Annual Report on Form 10-K for the yearended December 31, 2005, and elsewhere in this document.  Accordingly, undue reliance should not beplaced on the forward-looking statements contained in this document. Theseforward-looking statements speak only as of the date on which the statementswere made. Hospira undertakes no obligation to update or revise publicly anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

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**Item3.  Quantitative And QualitativeDisclosures About Market Risk**

There have been nomaterial changes to the information provided in Hospira’s Annual Report on Form10-K for the year ended December 31, 2005.

**Item 4.    Controls and Procedures**

*Evaluation of disclosure controlsand procedures.*  The Chief Executive Officer, Christopher B.Begley, and Senior Vice President, Finance and Chief Financial Officer, ThomasE. Werner, evaluated the effectiveness of Hospira’s disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securitiesand Exchange Act of 1934) as of the end of the period covered by this report,and concluded that Hospira’s disclosure controls and procedures were effective.

*Changes in internal controls.* During Hospira’s most recent fiscalquarter, there was no change in Hospira’s internal control over financialreporting that has materially affected, or is reasonably likely to materiallyaffect, Hospira’s internal control over financial reporting.

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**PART II.  OTHERINFORMATION**

**Item 1.****                           LegalProceedings**

The disclosure containedin Note 10 to the condensed consolidated financial statements included in PartI. Item 1 hereof is incorporated herein by reference.

**Item1A.  Risk Factors**

Please refer to Item 1A. in Hospira’s Annual Report onForm 10-K for the year ended December 31, 2005 for a discussion of risks towhich Hospira’s business, financial condition, results of operations and cashflows are subject. The following are additional risk factors as a result ofHospira’s pending acquisitions.

**Risks Related to Proposed or Pending Acquisitions**

*If the acquisition is consummated, the integrationof Mayne Pharma into Hospira’s operations may present significant challenges.*

Hospira may face significant challenges in combiningits operations and product lines with Mayne Pharma in a timely and efficientmanner. The Mayne Pharma acquisition will be the largest in Hospira’s history,and successful integration will be important to Hospira’s future success.  This integration will be complex andtime-consuming, and may divert management away from day-to-day operations. Theintegration is also expected to result in significant additional expenses. Thefailure to successfully integrate Mayne Pharma’s business into Hospira’sbusiness and to manage the challenges presented by the transition processsuccessfully may prevent Hospira from achieving the anticipated potential benefitsof the acquisition.

*Hospira will incur substantial charges relating tothe pending acquisitions*.

In addition to integration related expenses, Hospirawill also incur other charges and expenses in connection with the pending MaynePharma and BresaGen acquisitions, the substantial majority of which wouldrelate to the Mayne Pharma acquisition. These charges will include purchase accounting charges, such aswrite-off of in-process research and development and write-up of inventory, aswell as expenses related to amortization of intangible expenses after theclosing, and will negatively affect Hospira’s results of operations.

*The Mayne Pharma acquisition agreement can beterminated if closing conditions are not satisfied or a superior proposal isreceived.*

Hospira entered into an agreement to acquire MaynePharma on September 20, 2006. Under the agreement, the acquisition is subjectto the satisfaction or waiver of certain closing conditions including approvalsby an Australian court, the absence of a material adverse change with respectto Mayne Pharma, receipt of regulatory approvals and other conditions.  On November 3, 2006, the parties received asecond request from the FTC in connection with the transaction relating tocertain products of both companies.  As aresult of the second request, the waiting period under the HSR Act will beextended until 30 days after the parties have substantially complied with therequest (unless earlier terminated by the FTC). Compliance with the second request, and satisfaction of the otherconditions may jeopardize or delay completion of the acquisition.  The effect of complying with the secondrequest is uncertain, and may require divestitures of certain products andassets and compliance with other terms, which may harm Hospira’s ability torealize the potential benefits of the transaction. If the conditions are notsatisfied by January 31, 2007, Hospira and Mayne Pharma each have certainrights to terminate the agreement. In addition, Mayne Pharma has limited rightsto terminate the agreement if it receives a superior acquisition proposal froma third party, subject to paying Hospira a termination fee.

*Hospira will incur significant indebtedness inorder to finance the acquisition, which may limit its operating flexibility.*

In order to finance the acquisition, Hospira expectsto incur incremental borrowings of approximately $1.9 billion. As aresult, Hospira would have approximately $2.6 billion of debt.  This significant indebtedness may:

·                  require Hospirato dedicate a significant portion of its cash flow from operations to paymentson its debt, thereby reducing the availability of cash flow to fund capitalexpenditures, to pursue other acquisitions or investments in new technologiesand for general corporate purposes;

·                  increase Hospira’svulnerability to general adverse economic conditions, including increases ininterest rates; and

·                  limit Hospira’sflexibility in planning for, or reacting to, changes in or challenges relatingto its business and industry.

In addition, the terms of the loan agreements willcontain restrictions on Hospira’s ability to, among other things:

·                  incur additionalindebtedness;

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·                  create or incurliens;

·                  sell all orsubstantially all of its assets; and

·                  consolidate ormerge with another entity.

These restrictions will be applicable to Hospira afterthe acquisition. In addition, to the extent that Hospira’s credit ratings arebelow pre-acquisition levels, borrowing costs would increase.  If Hospira’s credit ratings fall belowinvestment grade, in connection with the refinancing of the bridge loanfacility, Hospira could become subject to more stringent restrictions.  These restrictions could include additionalcovenants, conditions to borrowing, subsidiary guarantees and stock pledges.

*Hospira’s credit ratings may be downgraded from itscurrent credit levels and it is possible that its credit ratings could fallbelow investment grade.*

Hospira currently has investment grade credit ratingsof BBB+ from Standard & Poor’s and Baa3 from Moody’s. After the MaynePharma acquisition was announced, both of these rating agencies placed Hospira’scredit ratings under review for possible downgrade if the Mayne Pharmaacquisition is consummated.  It ispossible that Hospira’s credit ratings could fall below investment grade. Thecredit ratings assigned to Hospira’s indebtedness affect its ability to obtainnew financing and the cost of financing and credit. If Hospira’s credit ratingswere to be further downgraded, its borrowing costs would increase, it maybecome subject to more stringent covenants and its access to unsecured debtmarkets could be limited.

Ratings are not recommendations to buy, sell or holdsecurities and are subject to revision or withdrawal at any time by the ratingagencies.  Each rating should beevaluated independently of any other rating.

**Item2.    Unregistered Sales of EquitySecurities and Use of Proceeds**

(c)          Issuer Purchases ofEquity Securities

The table below givesinformation on a monthly basis regarding purchases made by Hospira of itscommon stock.
| Period                           | ** ** | **Total Number  of Shares  Purchased (1)** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number  (or Approximate  Dollar Value) of  Shares that May  Yet be Purchased  Under the Plans or  Programs (2)** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| July 1- July 31,  2006           |       | 15,758                                                    |       | $                                                | 42.65      |                                                                                                                         | —     |                                                                                                                                                                                   | $          | 149,822,266 |   |
| August 1- August  31, 2006       |       | 1,383,395                                                 |       | $                                                | 35.92      |                                                                                                                         | 1,380,900  |                                                                                                                                                                                   | $          | 100,233,606 |   |
| September 1-  September 30, 2006 |       | 6,123                                                     |       | $                                                | 37.87      |                                                                                                                         | —     |                                                                                                                                                                                   | $          | 100,233,606 |   |
| Total                            |       | 1,405,276                                                 |       | $                                                | 36.00      |                                                                                                                         | 1,380,900  |                                                                                                                                                                                   | $          | 100,233,606 |   |

 

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(1)          These shares include:

a.               the shares deemedsurrendered to Hospira to pay the exercise price and satisfy tax withholdingobligations in connection with the exercise of employee stock options — 15,758in July; 2,495 in August, and 6,123 in September; and

b.              the shares purchasedon the open market relating to footnote (2) below — no shares in July;1,380,900 shares in August and no shares in September.

(2)          In February 2006,Hospira’s board of directors authorized the repurchase of up to $400 million ofthe company’s common stock in accordance with Rule 10b-18 under the SecuritiesExchange Act of 1934. The repurchase of shares commenced in early March 2006.

**Item 6.    Exhibits**

Alist of exhibits filed herewith or incorporated by reference herein immediatelyprecedes such exhibits and is incorporated herein by reference.

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SIGNATURE

Pursuantto the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|        |   |   | HOSPIRA, INC. |
|--------|--------|--------|--------------------|
|   |   |   |               |   |
|   |   |   | By                 | /s/ THOMAS E. WERNER |   |
|   |   |   |               | Thomas E. Werner,  Senior Vice President, Finance and  Chief Financial Officer |
|   |   |   |               | Date: November 8, 2006 |

 

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EXHIBIT INDEX
| Exhibit No. | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                   |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                          |
| 2.1         |       | Scheme Implementation Agreement, dated September 20,  2006, among Hospira, Inc., Hospira Holdings (S.A.) Pty Ltd and Mayne Pharma  Limited (incorporated by reference to Exhibit 2.1 to Hospira’s Current Report  on Form 8-K filed with the Securities and Exchange Commission on September  21, 2006). |
|        |       |                                                                                                                                                                                                                                                                                                          |
| 3.1         |       | Amended and Restated By-laws of Hospira, Inc.  (incorporated by reference to Exhibit 3.1 to Hospira’s Current Report on Form  8-K filed with the Securities and Exchange Commission on August 25, 2006).                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                          |
| 10.1        |       | Summary of terms of employment of Thomas E. Werner  (incorporated by reference to Items 1.01 and 5.02 of Hospira’s Current Report  on Form 8-K filed with the Securities and Exchange Commission on August 11, 2006).                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                          |
| 10.2        |       | Form of Change in Control Agreement between Hospira,  Inc. and Thomas E. Werner (incorporated by reference to Exhibit 10.1 to  Hospira’s Current Report on Form 8-K filed with the Securities and Exchange  Commission on August 11, 2006).                                                              |
|        |       |                                                                                                                                                                                                                                                                                                          |
| 10.3        |       | Commitment Letter, dated September 15, 2006, among  Morgan Stanley Senior Funding, Inc. and Hospira, Inc. (incorporated by  reference to Exhibit 10.1 to Hospira’s Current Report on Form 8-K filed with  the Securities and Exchange Commission on September 21, 2006).                                 |
|        |       |                                                                                                                                                                                                                                                                                                          |
| 12          |       | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                          |
| 31.1        |       | Certificate of Chief Executive Officer pursuant to  Rule 13a-14(a).                                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                          |
| 31.2        |       | Certificate of Chief Financial Officer pursuant to  Rule 13a-14(a).                                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                          |
| 32.1        |       | Certificate of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                          |
| 32.2        |       | Certificate of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                            |

 

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