**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D. C. 20549**

 

| **(Mark  One)**                                                                                                                                                                           |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                      |
| ý                                                                                                                                                                                    |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                      |
| **For the quarterly period ended March 31, 2004**                                                                                                                                         |
|                                                                                                                                                                                      |
| **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 DriveLake Forest, Illinois 60045**

** **

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

** **

Indicate by check mark whether the registrant (l) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act ofl934 during the preceding l2 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90days.     Yes  o.  No  ý.

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the ExchangeAct).     Yes  o.No  ý.

 

As of April 30, 2004, Hospira, Inc. had outstanding 156,042,544 commonshares, par value $0.01 per share.

 

 

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PART  I. FINANCIAL INFORMATION

 

 

Item 1.  FinancialStatements

 

Hospira, Inc.

 

Condensed CombinedStatements of Earnings

 

(Unaudited)

 

*(dollars in thousands)*

* *
|                                 |   | **Three  Months Ended March 31** |    |
|--------------------------------------|--------|----------------------------------|---------|
|                                 |   | **2004**                         |    | **2003** |   |
| Net Sales                            |   | $                                | 575,198 |   | $ | 571,522 |   |
| Net Sales to  Abbott Laboratories    |   | 46,020                           |    | 61,589 |   |
| Total Net Sales                      |   | 621,218                          |    | 633,111 |   |
|                                 |   |                             |    |   |   |
| Cost of products  sold               |   | 452,879                          |    | 459,413 |   |
| Research and  development            |   | 24,446                           |    | 19,365 |   |
| Selling, general  and administrative |   | 57,510                           |    | 56,762 |   |
| Total Operating  Costs and Expenses  |   | 534,835                          |    | 535,540 |   |
|                                 |   |                             |    |   |   |
| Operating  Earnings                  |   | 86,383                           |    | 97,571 |   |
|                                 |   |                             |    |   |   |
| Other expense,  net                  |   | 868                              |    | 2,365 |   |
| Earnings Before  Taxes               |   | 85,515                           |    | 95,206 |   |
|                                 |   |                             |    |   |   |
| Taxes on  earnings                   |   | 20,524                           |    | 28,086 |   |
| Net Earnings                         |   | $                                | 64,991  |   | $ | 67,120 |   |

 

The accompanying notesare an integral part of these condensed combined financial statements.

 

2

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Hospira, Inc.

 

Condensed CombinedStatements of Cash Flows

 

(Unaudited)

 

*(dollars in thousands)*

 
|                                                                           |   | **Three  Months Ended March 31** |   |
|--------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                           |   | **2004**                         |   | **2003** |   |
| Cash Flow From  (Used in) Operating Activities:                                |   |                             |   |   |   |
| Net earnings                                                                   |   | $                                | 64,991 |   | $ | 67,120 |   |
| Adjustments to  reconcile net earnings to net cash from operating activities - |   |                             |   |   |   |
| Depreciation                                                                   |   | 37,035                           |   | 37,436 |   |
| Amortization of  intangibles                                                   |   | 1,091                            |   | 1,145 |   |
| Trade  receivables                                                             |   | (24,072                          | )      | 332 |   |
| Inventories                                                                    |   | (22,906                          | )      | (41,492 | ) |
| Prepaid expenses  and other assets                                             |   | (1,403                           | )      | (10,357 | ) |
| Trade accounts  payable and other liabilities                                  |   | 20,830                           |   | (21,254 | ) |
| Other, net                                                                     |   | (3,288                           | )      | (24,134 | ) |
| Net Cash From  Operating Activities                                            |   | 72,278                           |   | 8,796 |   |
|                                                                           |   |                             |   |   |   |
| Cash Flow (Used  in) Investing Activities:                                     |   |                             |   |   |   |
| Acquisitions of  property and equipment                                        |   | (59,088                          | )      | (48,768 | ) |
|                                                                           |   |                             |   |   |   |
| Cash Flow From  (Used in) Operating and Investing Activities                   |   | 13,190                           |   | (39,972 | ) |
|                                                                           |   |                             |   |   |   |
| Cash Flow (Used  in) From Financing Activities:                                |   |                             |   |   |   |
| Net transactions  with Abbott Laboratories                                     |   | (13,177                          | )      | 39,876 |   |
|                                                                           |   |                             |   |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                  |   | (13                              | )      | 96 |   |
|                                                                           |   |                             |   |   |   |
| Net Change in  Cash and Cash Equivalents                                       |   | $                                | — |   | $ | — |   |

 

The accompanying notesare an integral part of these condensed combined financial statements.

 

3

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Hospira, Inc.

 

Condensed CombinedBalance Sheets

 

(Unaudited)

 

*(dollars in thousands)*

* *
|                                                                       |   | **March 31  2004** |      | **December  31  2003** |   |
|----------------------------------------------------------------------------|--------|--------------------|-----------|------------------------|--------|
| Assets                                                                     |   |               |      |                   |   |
| Current Assets:                                                            |   |               |      |                   |   |
| Trade  receivables, less allowances of $13,907 in 2004 and $16,876 in 2003 |   | $                  | 326,275   |                   | $      | 315,646 |   |
| Inventories:                                                               |   |               |      |                   |   |
| Finished  products                                                         |   | 328,729            |      | 316,109                |   |
| Work in process                                                            |   | 102,427            |      | 124,594                |   |
| Materials                                                                  |   | 154,355            |      | 168,588                |   |
| Total  inventories                                                         |   | 585,511            |      | 609,291                |   |
| Prepaid  expenses, deferred income taxes and other receivables             |   | 153,451            |      | 150,496                |   |
| Total Current  Assets                                                      |   | 1,065,237          |      | 1,075,433              |   |
| Property and  Equipment, at Cost                                           |   | 2,038,312          |      | 2,009,202              |   |
| Less:  accumulated depreciation and amortization                           |   | 1,171,447          |      | 1,153,925              |   |
| Net Property and  Equipment                                                |   | 866,865            |      | 855,277                |   |
| Intangible  Assets, net of amortization                                    |   | 4,244              |      | 5,335                  |   |
| Goodwill                                                                   |   | 80,973             |      | 80,973                 |   |
| Deferred Income  Taxes and Other Assets                                    |   | 272,073            |      | 233,145                |   |
|                                                                       |   | $                  | 2,289,392 |                   | $      | 2,250,163 |   |
| Liabilities and Net Investment in Hospira, Inc.                            |   |               |      |                   |   |
| Current  Liabilities:                                                      |   |               |      |                   |   |
| Trade accounts  payable                                                    |   | $                  | 95,544    |                   | $      | 105,613 |   |
| Salaries payable  and other accruals                                       |   | 278,969            |      | 253,988                |   |
| Total Current  Liabilities                                                 |   | 374,513            |      | 359,601                |   |
| Post-employment  Obligations and Other Long-term Liabilities               |   | 440,746            |      | 437,098                |   |
| Commitments and  Contingencies                                             |   |               |      |                   |   |
| Net investment  in Hospira, Inc. by Abbott Laboratories                    |   | 1,532,757          |      | 1,480,943              |   |
| Accumulated  other comprehensive (loss)                                    |   | (58,624            | )         | (27,479                | )      |
|                                                                       |   | $                  | 2,289,392 |                   | $      | 2,250,163 |   |

 

The accompanying notesare an integral part of these condensed combined financial statements.

 

4

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Hospira, Inc.

 

Notes to CondensedCombined Financial Statements

 

March 31, 2004

 

(Unaudited)

 

**Note 1 - Basis ofPresentation **

 

Thesecondensed combined financial statements have been prepared pursuant to rulesand regulations of the Securities and Exchange Commission (“SEC”) and,therefore, do not include all information and footnote disclosures normallyincluded in audited financial statements. However, in the opinion ofmanagement, all adjustments, consisting only of normal recurring adjustments,necessary to present fairly the results of operations, financial position andcash flows have been made. These statements should be read in conjunction withthe combined financial statements and notes thereto for the year endedDecember 31, 2003, included in Hospira’s information statement included asan exhibit to Hospira’s registration statement on Form 10, which the SECdeclared effective on April 13, 2004 (the “Form 10”).  The results of operations for any interim period are notnecessarily indicative of the results of operations to be expected for the fullyear.

 

Hospira, Inc. (“Hospira” or the “Company”)was incorporated in Delaware as a wholly owned subsidiary of AbbottLaboratories (“Abbott”) on September 16, 2003, as part of a previouslyannounced plan by Abbott to create a separate company relating to themanufacture and sale of hospital products, including specialty injectablepharmaceuticals, medication delivery systems and injectable pharmaceuticalcontract manufacturing.  Hospira iscomprised of most of Abbott’s Hospital Products segment and a portion ofAbbott’s International segment.

 

On April 30, 2004 (the “distributiondate”), Abbott transferred the assets and liabilities comprising Hospira to theCompany, except as noted below, and distributed all of the shares of theCompany’s common stock to Abbott shareholders in the form of a dividend of oneshare of the Company’s common stock, and the associated preferred stockpurchase right, for every ten Abbott common shares.  Abbott has received a ruling from the Internal Revenue Service(“IRS”) that the transfer of the hospital products business to the Company andthe subsequent distribution of all of the common stock of the Company to Abbottshareholders qualifies as a tax-free distribution for U.S. federal income taxpurposes, except with respect to the distribution of cash in lieu of fractionalshares. 

 

While thelegal transfer of certain operations and assets (net of liabilities) outsidethe United States will occur after the distribution date, these operations andassets will be used in the conduct of Hospira’s international business and Hospirawill be subject to the risks and entitled to the benefits generated by theoperations and assets commencing immediately after the distribution date.Hospira will be dependent on Abbott’s international infrastructure for up totwo years following the distribution date. 

 

Theaccompanying unaudited interim condensed combined financial statements reflectthe combined historical results of operations, financial position and cashflows of Hospira.  Intercompany accountswith Abbott have been combined with invested capital and reported in thecombined financial statements as Net Investment in Hospira, Inc. by AbbottLaboratories.  The historical cost basisof assets and liabilities has been reflected in these financialstatements.  Management believes the assumptionsunderlying the combined financial statements are reasonable.  However, the financial information in thesefinancial statements does not include all the expenses that would have beenincurred had Hospira been a separate, stand-alone entity and does not reflectHospira’s results of operations, financial position and cash flows had Hospirabeen a stand-alone entity during the periods presented. Because a directownership relationship did not exist among all the various units comprisingHospira, Net Investment in Hospira, Inc. by Abbott Laboratories is shown inlieu of shareholders’ equity in the combined financial statements.  

 

**Note 2 -Taxes on Earnings**

** **

Taxes on earnings reflect the estimated annualeffective rates and are determined on a separate-return basis.  The effective tax rates are less than thestatutory U.S. federal income tax rate principally due to the benefit of taxexemptions, of varying durations, in several taxing jurisdictions.

 

5

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**Note 3 - Litigation**

** **

Abbott isinvolved in various claims and legal proceedings, including product liabilityclaims and proceedings related to Hospira’s business, for which Hospira will berequired to indemnify Abbott.

 

Hospira’sproduct liability claim exposures are evaluated each reporting period and anestimated loss is recorded. Hospira’s reserves, which are immaterial at March31, 2004, are the best estimate of loss, as defined by Statement of FinancialAccounting Standards (SFAS) No. 5, “Accounting for Contingencies.”

 

Various state and federal agencies, including the U.S. Department ofJustice and various state attorneys general, are investigating a number ofpharmaceutical companies, including Abbott, for allegedly engaging in impropermarketing and pricing practices with respect to certain Medicare and Medicaidreimbursable products, including practices relating to average wholesaleprice.  These are civil investigationsthat are seeking to identify the practices and determine whether thosepractices violated 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 health care 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 authorities in theseinvestigations.  There may be additionalinvestigations or lawsuits, or additional claims in the existing investigationsor lawsuits, initiated with respect to these matters in the future.  Hospira cannot be certain that it will notbe named as a subject or defendant in these investigations or lawsuits.  Abbott will indemnify Hospira forliabilities made in the pending or future investigations and lawsuits describedabove only to the extent they both relate to the existing allegations as of thedistribution date and relate to the sale of Hospira products prior to thespin-off.  Hospira will assume any otherlosses that may result from these investigations and lawsuits. Based uponinformation that is currently available, management believes that thelikelihood of a material loss is remote. In accordance with SFAS No. 5, noloss reserves have been recorded for these potential exposures.  These investigations and lawsuits couldresult in changes to Hospira’s business practices or pricing policies, civil orcriminal monetary damages, penalties or fines, imprisonment and/or exclusion ofHospira products from participation in federal and state healthcare programs,including Medicare, Medicaid and Veterans’ Administration health programs, anyof which, because of our obligation to indemnify Abbott or because we may benamed as defendants ourselves, could have a material adverse effect on ourbusiness, profitability and financial condition.

 

Additional legal proceedings may occur that mayresult in a change in the estimated reserves recorded by Hospira. It is notfeasible to predict the outcome of such proceedings with certainty and therecan be no assurance that their ultimate disposition will not have a materialadverse effect on Hospira’s financial position, cash flows, or results ofoperations.

 

**Note 4 - Intangible Assets**

** **

The grossamount of intangible assets, primarily product rights, was $25 million at bothMarch 31, 2004 and at December 31, 2003, and accumulated amortization was$21 million and  $20 million,respectively. Estimated annual amortization for intangible assets is $4 millionfor 2004 and $1 million for 2005. Intangible assets are amortized on astraight-line basis over five to nine years (average 5.7 years). 

 

**Note 5  - Post-Employment Benefits**

** **

Retirement plans consist of defined benefit, definedcontribution, and medical and dental plans. Hospira’s portion of the net cost recognized for the three months endedMarch 31 for Abbott’s major defined benefit plans and post-employment medicaland dental benefit plans for all Hospira employees, whether or not thecorresponding post-employment benefit liabilities will be retained by Abbott,is as follows:

 

6

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*(dollarsin millions)*

* *
|                                                     |   | **Defined  Benefit Plans** |       | **Medical  and Dental Plans** |       |
|----------------------------------------------------------|--------|----------------------------|------------|-------------------------------|------------|
|                                                     |   | **2004**                   |       | **2003**                      |       | **2004** |   | **2003** |   |
|                                                     |   |                       | ** ** |                          | ** ** |   | ** ** |   | ** ** |
| Service cost — benefits earned during the year |   | $                          | 7.8        |                          | $          | 8.0 |   | $ | 4.4 |   | $ | 4.0 |   |
| Interest cost on projected benefit obligations           |   | 11.0                       |       | 11.3                          |       | 5.6 |   | 6.3 |   |
| Expected return on plans’ assets                    |   | (12.8                      | )          | (13.9                         | )          | — |   | — |   |
| Net amortization                                         |   | 1.3                        |       | 0.1                           |       | 0.8 |   | 1.2 |   |
| Net cost                                                 |   | $                          | 7.3        |                          | $          | 5.5 |   | $ | 10.8 |   | $ | 11.5 |   |

 

Abbott funds its U.S. pension plans according to IRSfunding limitations. In the first quarter of 2004, funding of $45 million wasallocated to Hospira relative to the main U.S. pension plan.  Contributions allocated to Hospira for thisplan are expected to be between $56 million and $67 million in 2004, includingthe contribution made in the first quarter 2004.

 

Hospira’s employees also participate in the AbbottStock Retirement Plan that is Abbott’s principal defined contribution plan.Hospira’s contributions to this plan in the first quarter of both 2004 and 2003were approximately $5 million. 

 

As part of the spin-off, Abbott retained theliabilities associated with post-employment medical and dental plans for mostretirement-eligible Hospira U.S. employees. Abbott also retained the defined benefit plan liabilities and assetsrelated to most Hospira U.S. employees who were retired at the time of thedistribution.  

 

**Note 6 - Comprehensive Income, net oftax**

** **

*(dollarsin millions)*

 
|                                              |   | **Three  Months Ended March 31** |   |
|---------------------------------------------------|--------|----------------------------------|--------|
|                                              |   | **2004**                         |   | **2003** |   |
|                                              |   |                             |   |   |   |
| Foreign currency  translation (losses) gains      |   | $                                | (32.3  | ) | $ | 15.6 |   |
| Unrealized gains  on marketable equity securities |   | 1.2                              |   | 0.3 |   |
| Other  comprehensive (loss) income                |   | (31.1                            | )      | 15.9 |   |
| Net Earnings                                      |   | 65.0                             |   | 67.1 |   |
| Comprehensive  Income                             |   | $                                | 33.9   |   | $ | 83.0 |   |

 
|                                                         |   | **March 31  2004** | ** ** | **December  31  2003** | ** ** |
|--------------------------------------------------------------|--------|--------------------|------------|------------------------|------------|
| Supplemental  Comprehensive Income Information:              |   |               |       |                   |       |
|                                                         |   |               |       |                   |       |
| Cumulative  foreign currency translation gains               |   | $                  | 8.6        |                   | $          | 40.9 |   |
| Cumulative  minimum pension liability adjustments            |   | (70.5              | )          | (70.5                  | )          |
| Cumulative  unrealized gains on marketable equity securities |   | 3.3                |       | 2.1                    |       |
|                                                         |   | $                  | (58.6      | )                      | $          | (27.5 | ) |

 

7

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**Note 7 - Segment Information**

** **

Hospira’sprincipal business is the development, manufacture and sale of a broad line ofhospital products including specialty injectable pharmaceuticals, medicationdelivery systems and the provision of injectable pharmaceutical contractmanufacturing services. Hospira has two reportable segments: U.S. andinternational. 

 

Hospira’s underlying accounting records aremaintained on a legal entity basis for government and public reportingrequirements. Segment disclosures are on a performance basis consistent withinternal management reporting. Certain immaterial reclassifications have beenmade to the basis of presentation from the Form 10.  Intersegment transfers of inventory are recorded at standard costand are not a measure of segment operating earnings. The costs of somecorporate functions are sold to segments at predetermined rates thatapproximate cost. Remaining costs, if any, are not allocated.  The following segment information has been prepared in accordance with the internalaccounting policies of Hospira, as described above, and are not presented inaccordance with generally accepted accounting principles applied to thecombined financial statements.

 

*(dollarsin millions)*

* *
|                       |   | **Three  Months Ended March 31** |   |
|----------------------------|--------|----------------------------------|--------|
|                       |   | **Net Sales**                    |   | **Operating  Earnings** |   |
|                       |   | **2004**                         |   | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| U.S.                       |   | $                                | 521    |   | $ | 540 |   | $ | 79 |   | $ | 91 |   |
| International              |   | 100                              |   | 93 |   | 18 |   | 16 |   |
| Total Reportable  Segments |   | $                                | 621    |   | $ | 633 |   | 97 |   | 107 |   |
| Corporate  functions       |   |                             |   |   |   | (11 | ) | (9 | ) |
| Operating  Earnings        |   |                             |   |   |   | $ | 86 |   | $ | 98 |   |

 

**Note 8 – Incentive Stock Programs**

** **

Certain employees of Abbott who became Hospira employees following thedistribution held stock option awards granted under Abbott incentive stockprograms.  For those employees who werenot retirement eligible at the distribution date, these awards were cancelledand replaced by new awards for Hospira common stock at the time ofdistribution.  The new awards maintainboth the pre-conversion aggregate intrinsic value of each award and the ratioof the exercise price per share to the market value per share.  All other terms of the awards remain thesame.

 

Hospira measures compensation cost using the intrinsic value-basedmethod of accounting for stock options and replacement options granted toemployees. Had compensation cost attributable to all awards to Hospiraemployees, whether or not those awards were cancelled and replaced by Hospiraawards at the time of distribution, been determined using the fair value-basedaccounting method, pro forma net income would have been as follows: 

 

*(dollars in millions)*

 
|                                                                      |   | **Three  Months Ended March 31** |   |
|---------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                      |   | **2004**                         |   | **2003** |   |
|                                                                      |   |                             |   |   |   |
| Net income, as  reported                                                  |   | $                                | 65.0   |   | $ | 67.1 |   |
| Compensation  cost under fair value-based accounting method, net of taxes |   | (5.7                             | )      | (5.2 | ) |
|                                                                      |   |                             |   |   |   |
| Net income, pro  forma                                                    |   | $                                | 59.3   |   | $ | 61.9 |   |

 

8

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**Note 9 - Related Party Transactions**

** **

Abbottprovided Hospira certain services, which include administration of treasury,insurance, payroll, accounts payable, employee compensation and benefits,travel and meeting services, public and investor relations, real estateservices, internal audit, telecommunications, computing services, corporateincome tax and selected legal services. Some of these services will be providedto Hospira on a temporary basis after the distribution date. The financial informationin these combined financial statements does not include all the expenses thatwould have been incurred had Hospira been a separate, stand-alone entity. Assuch, the financial information herein does not reflect the combined financialposition, results of operations and cash flows of Hospira in the future or whatthey would have been had Hospira been a separate, stand-alone entity during theperiods presented. Management believes that the methods used to allocateexpenses to Hospira are reasonable. The allocation methods include relativesales, headcount, square footage and number of transactions. These servicesaccounted for a total expense of $5 million and $6 million for the three monthsended March 31, 2004 and 2003, respectively.

 

Each of Abbott and Hospira has providedmanufacturing services to the other, and certain of these arrangements willcontinue after the distribution date. Under Abbott’s and Hospira’s internalreporting practices, these services were provided at cost to the purchasing entity.Sales to Abbott amounted to $46 million and $62 million for the three monthsended March 31, 2004 and 2003, respectively. Product purchases from Abbottwere approximately $20 million for each of the three months endedMarch 31, 2004 and 2003.

 

**Note 10 - Subsequent Events**

* *

On April 28, 2004, Abbott and Hospira entered into a$700 million, short-term senior unsecured credit facility (“SeniorFacility”).  The borrowing initiallybears interest at a rate of LIBOR plus .875% and is repayable on or before April27, 2005. The proceeds of the Senior Facility borrowing were retained byAbbott.  On the distribution date,Abbott was relieved of all obligations under the Senior Facility and Hospirabecame solely responsible for repayment of the principal and for payment ofinterest and fees on this debt.  Hospirais subject to additional lending costs of up to $1.1 million if the SeniorFacility is not refinanced by October 29, 2004, and up to an additional $2.1million if the Senior Facility is not refinanced by December 31, 2004. 

 

Hospira has also entered into an unsecured revolvingcredit facility of $375 million (“Revolver”) that will be available for workingcapital and other requirements.  TheRevolver allows Hospira to borrow funds on an unsecured basis at variableinterest rates as short-term cash needs dictate.  Borrowings under the Revolver initially bear interest at LIBORplus .575%, plus a utilization fee of .125% if borrowings under the Revolverexceed $125 million. The commitment is subject to an annual facility fee,initially .175%, and expires in April 2009.

 

Interest rates under both facilities and the facilityfee on the Revolver are subject to increase or decrease if there is a change inHospira’s credit rating (currently BBB by Standard & Poor’s). The maximuminterest rates would be LIBOR plus 1.75% on the Senior Facility and LIBOR plus1.25% on the Revolver.  The maximumfacility fee on the Revolver is .375%. Both credit agreements contain customaryrestrictions, covenants and events of default for an unsecured financing.

 

On April 30, 2004, Abbott transferredthe assets and liabilities comprising Hospira to the Company, except as notedbelow, and distributed all of the shares of the Company’s common stock toAbbott shareholders in the form of a dividend of one share of the Company’scommon stock, and the associated preferred stock purchase right, for every tenAbbott common shares.  Abbott hasreceived a ruling from the Internal Revenue Service that the transfer of thecore hospital products business to the Company and the subsequent distributionof all of the common stock of the Company to Abbott shareholders qualifies as atax-free distribution for U.S. federal income tax purposes, except with respectto the distribution of cash in lieu of fractional shares. 

 

In accordance with the contracts covering the spin-offof Hospira, Abbott has retained liabilities for taxes on income prior to thedistribution date, post-employment medical benefits for most of Hospira’sretirees and retirement eligible employees, certain liabilities, if any,related to alleged improper pricing practices with respect to Medicaid andMedicare reimbursable products, and the defined benefit retirement planliabilities and plan assets for most of Hospira’s retirees.  Hospira, Abbott and their benefitconsultants are in the process of determining the amount of these liabilitiesand will recognize the transfer of these liabilities and assets with acorresponding adjustment to Hospira’s equity balance in the second quarter,along with the assumption or incurrence of debt and other adjustments givingeffect to the distribution. 

 

9

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Hospira will purchase certain international operationsand assets (net of liabilities) from Abbott over a period of time of up to twoyears after the distribution date as Hospira establishes its businessinfrastructure outside the United States and obtains regulatory approval forthe transfer of marketing authorizations for Hospira products.  Hospira is obligated to purchase thoseinternational net assets from Abbott for the net book value of such assets atthe time of purchase.  As of March 31,2004, the net book value of such assets was approximately $300 million.

 

Hospiraand Abbott entered into agreements pursuant to which Hospira and Abbott willprovide to the other, on an interim, transitional basis, various services,including, for example, internal audit, treasury administration, employeebenefits administration and quality assurance services. The agreed-upon chargesfor such services are generally intended to allow the servicing party torecover all out-of-pocket costs and expenses and a predetermined profit. Theservices generally will commence on the distribution date and will terminate nolater than 24 months following the distribution date. The receiving partymay terminate the provision of such services upon prior written notice. 

 

Effective as of April 30, 2004, the Company adoptedthe Hospira 2004 Long-Term Stock Incentive Plan (“Hospira Stock Plan”), theHospira 401(k) Retirement Savings Plan, the Abbott/Hospira Transitional AnnuityRetirement Plan and other employee benefit plans that replicated the previousAbbott plans.  The maximum number ofshares available for awards under the Hospira Stock Plan is 31 millionshares.  Management has decided not toreplicate the Abbott post-employment medical and dental plan.  As noted above, Hospira and its benefitconsultants are in the process of determining the related impact, which will berecorded in the second quarter of 2004.

 

Certain employees of Abbott who became Hospira employees following thedistribution held stock option awards granted under Abbott incentive stockprograms.  For those employees who werenot retirement eligible at the distribution date, these awards were cancelledand replaced by new awards, issued under the Hospira Stock Plan, based onHospira’s common stock at the time of distribution.  The new awards maintain both the pre-conversion aggregateintrinsic value of each award and the ratio of the exercise price per share tothe market value per share.  All otherterms of the awards remain the same. A total of 7.5 million options were issuedas replacements for the cancelled Abbott options.  Hospira employees who were retirement eligible at the time of thedistribution retained their Abbott options.

 

On May 4, 2004, Hospira’s Board of Directors approveda Founders Grant of 8,409,000 options to be awarded under the Hospira StockPlan to substantially all employees in the United States and certain employeesoutside the United States with an exercise price of $26.50. These options willvest on November 4, 2004, and have a term of five years, except for grants tocorporate officers, which will vest equally over three years and have a term often years.

 

Each of the outstanding shares of Hospira common stockis accompanied by a preferred stock purchase right.  The rights areexercisable if a person or group acquires fifteen percent or more of theoutstanding shares of Hospira common stock or announces a tender or exchangeoffer which would result in ownership of fifteen percent or more of theoutstanding shares of Hospira common stock.  Following the acquisition offifteen percent or more of the outstanding shares of Hospira common stock, theholders of the rights, other than the acquiring person or group, may purchaseHospira common stock with a value equal to two times the exercise price of theright.  The rights are also exercisable in the event of a merger or otheracquisition of Hospira. In this event, the holders of the rights, other thanthe acquiring person or group, may purchase shares of the acquiring entity witha value equal to two times the exercise price of the right. The rights were notexercisable at April 30, 2004.

 

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Item 2.  Management’s Discussion AndAnalysis Of Financial Condition And Results Of Operations

 

Hospira, Inc.has operated as a part of Abbott’s Hospital Products and International segmentsduring the period of time covered by the financial statements included herein.References to the historical assets, liabilities, products, businesses oractivities of Hospira are generally intended to refer to the historical assets,liabilities, products, businesses or activities of the business as it wasconducted as part of Abbott and its subsidiaries prior to the distributiondate.  Resource allocations made withinAbbott’s Hospital Products and International segments have impacted the levelof resources allocated to Hospira’s business in any given year. These resourceallocations affected Hospira’s manufacturing cost structure, research anddevelopment project funding, and marketing, promotion and selling activities.After the separation from Abbott, Hospira’s resource allocations may change. Inaddition, the financial information in the financial statements does notinclude all the ongoing or transitional costs or capital expenditures thatwould have been incurred had Hospira been a separate, stand-alone entity anddoes not reflect Hospira’s results of operations, financial position and cashflows had Hospira been a stand-alone entity during the periods presented. 

 

Overview

 

Hospirais a global specialty pharmaceutical and medication delivery company that isfocused on products that improve the safety and efficacy of patient care in theacute care setting.  Hospira is a globalleader in the development, manufacture and marketing of specialty injectablepharmaceuticals and medication delivery systems that deliver drugs and intravenous(I.V.) fluids and is also a leading provider of contract manufacturing servicesto pharmaceutical and biotechnology companies for formulation development,filling and finishing of injectable pharmaceuticals.  Hospira’s broad portfolio of products is used by hospitals,alternate site clinics, home healthcare providers and long-term carefacilities.

 

Spin-off from Abbott Laboratories

 

In August 2003, Abbott announced a plan to create aseparate publicly traded company consisting of most of its existing corehospital products business.  On April12, 2004, Abbott announced its board of directors had declared a specialdividend distribution of all of the outstanding shares of common stock ofHospira, Inc., the global hospital products company to be spun off byAbbott.  The special dividenddistribution was paid on April 30, 2004. For every ten Abbott common shares held, Abbott shareholders receivedone share of Hospira common stock.  Allof the shares of Hospira’s common stock were distributed to Abbott shareholdersin a tax-free distribution on a pro-rata basis. Abbott has received a rulingfrom the Internal Revenue Service that the spin-off qualifies as a tax-freedistribution for U.S. federal income tax purposes,except with respect to the distribution of cash in lieu of fractional shares.

 

While thelegal transfer of certain operations and assets (net of liabilities) outsidethe United States will occur after the distribution date, these operations andassets will be used in the conduct of Hospira’s international business andHospira will be subject to the risks and entitled to the benefits generated bythe operations and assets commencing immediately after the distribution date.Hospira will be dependent on Abbott’s international infrastructure for up to twoyears after the distribution date. 

 

As part of the distribution, Hospira incurred$700 million in debt under a senior unsecured credit facility that Abbottand Hospira entered into prior to the distribution date. Upon the distribution,Abbott retained all proceeds and was relieved of all obligations under thecredit facility and Hospira became solely obligated to satisfy all payments andother terms of the credit facility. Over a period of time of up to two yearsafter the distribution date, Hospira will also be obligated to purchase theinternational net assets from Abbott for the net book value of such assets atthe time of such purchase. As of March 31, 2004, the net book value ofsuch assets was approximately $300 million.

 

**UNAUDITED PRO FORMA COMBINEDFINANCIAL STATEMENTS**

** **

Theunaudited pro forma combined financial statements reported below consist of anunaudited pro forma combined statement of earnings for the three months endedMarch 31, 2004, and an unaudited pro forma combined balance sheet as ofMarch 31, 2004. The unaudited pro forma combined financial statementsreported below should be read in conjunction with the combined financialstatements and the corresponding notes included elsewhere herein. 

 

Theunaudited pro forma combined balance sheet and statement of earnings includedherein have been derived from the combined financial statements includedelsewhere herein and do not purport to represent what Hospira’s financialposition and results of operations actually would have been had the separationand distribution occurred on the dates indicated, or to project Hospira’sfinancial performance for any future period. Abbott did not account for thecontributed business as, and the contributed business was not operated as, aseparate, independent entity for the period presented. 

 

The proforma Combined Balance Sheet adjustments assume that our separation from Abbottoccurred as of March 31, 2004. The pro forma adjustments to the CombinedStatements of Earnings for the three months ended March 31, 2004, assume thatthe separation occurred as of January 1, 2004. 

 

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**Unaudited Pro Forma CombinedStatement of Earningsfor the Three Months Ended March 31, 2004**

** **

**(Dollars and Shares in Millions,Except Per Share Amounts)**

 
|                                                             |   | **Historical** |   | **Pro Forma  Adjustments** |   | **Pro Forma** |   |
|------------------------------------------------------------------|--------|----------------|--------|----------------------------|--------|---------------|--------|
| Net sales                                                        |   | $              | 575    |                       | $      | (2            | )(C)   | $ | 573 |   |
| Net sales to  Abbott Laboratories                                |   | 46             |   | (10                        | )(C)   | 36            |   |
| Total net sales                                                  |   | 621            |   | (12                        | )      | 609           |   |
| Cost of products  sold                                           |   | 453            |   | (2                         | )(B)   | 436           |   |
|                                                             |   |           |   | (15                        | )(C)   |          |   |
|                                                             |   |           |   |                       |   |          |   |
| Research and  development                                        |   | 24             |   | (1                         | )(B)   | 23            |   |
| Selling, general  and administrative                             |   | 57             |   | (2                         | )(B)   | 55            |   |
| Total operating  costs and expenses                              |   | 534            |   | (20                        | )      | 514           |   |
|                                                             |   |           |   |                       |   |          |   |
| Interest expense                                                 |   | —         |   | 4                          | (A)    | 4             |   |
| Other (income)  expense, net                                     |   | 1              |   | —                     |   | 1             |   |
|                                                             |   |           |   |                       |   |          |   |
| Earnings before  taxes                                           |   | 86             |   | 4                          |   | 90            |   |
| Taxes on  earnings                                               |   | 21             |   | 1                          | (D)    | 22            |   |
| Net earnings                                                     |   | $              | 65     |                       | $      | 3             |   | $ | 68 |   |
|                                                             |   |           |   |                       |   |          |   |
| Unaudited Pro  Forma Earnings Per Share                          |   |           |   |                       |   |          |   |
| Basic                                                            |   | N/A            |   | N/A                        |   | $             | 0.43   | (E) |
| Diluted                                                          |   | N/A            |   | N/A                        |   | $             | 0.43   | (F) |
|                                                             |   |           |   |                       |   |          |   |
| Average Number  of Shares Used in Calculating Earnings Per Share |   |           |   |                       |   |          |   |
| Basic                                                            |   | N/A            |   | N/A                        |   | 156.0         | (E)    |
| Diluted                                                          |   | N/A            |   | N/A                        |   | 156.6         | (F)    |

 

See Accompanying Notes To Unaudited Pro Forma CombinedFinancial Statements. 

 

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**Unaudited Pro Forma Combined BalanceSheet as of March 31, 2004**

**(Dollars in Millions)**

 
|                                                                                                     |   | **Historical** |   | **Pro Forma  Adjustments** |      | **Pro Forma** |   |
|----------------------------------------------------------------------------------------------------------|--------|----------------|--------|----------------------------|-----------|---------------|--------|
| **Assets**                                                                                               |   |           |   |                       |      |          |   |
| Current Assets:                                                                                          |   |           |   |                       |      |          |   |
| Trade  receivables, net                                                                                  |   | $              | 326    |                       | $         | —        |   | $ | 326 |   |
| Inventories                                                                                              |   | 586            |   | —                     |      | 586           |   |
| Prepaid  expenses, deferred income taxes and other receivables                                           |   | 153            |   | (6                         | )(J)      | 132           |   |
|                                                                                                     |   |           |   | (15                        | )(M)      |          |   |
| Total Current  Assets                                                                                    |   | 1,065          |   | (21                        | )         | 1,044         |   |
| Net Property and  Equipment                                                                              |   | 867            |   | (60                        | )(K)      | 872           |   |
|                                                                                                     |   |           |   | 65                         |  (L) |          |   |
| Intangible  Assets, net                                                                                  |   | 4              |   | —                     |      | 4             |   |
| Goodwill                                                                                                 |   | 81             |   | —                     |      | 81            |   |
| Deferred Income  Taxes and Other Assets                                                                  |   | 272            |   | (118                       | )(J)      | 139           |   |
|                                                                                                     |   |           |   | (15                        | )(M)      |          |   |
| Total Assets                                                                                             |   | $              | 2,289  |                       | $         | (149          | )      | $ | 2,140 |   |
|                                                                                                     |   |           |   |                       |      |          |   |
| **Liabilities  and Shareholders’ Equity**                                                           |   |           |   |                       |      |          |   |
| Current  Liabilities:                                                                                    |   |           |   |                       |      |          |   |
| Trade accounts  payable                                                                                  |   | $              | 96     |                       | $         | —        |   | $ | 96 |   |
| Salaries and  other accruals                                                                             |   | 279            |   | (15                   | )(J)      | 243           |   |
|                                                                                                     |   |           |   | (21                        | )(M)      |          |   |
| Short-term debt                                                                                          |   | —         |   | 700                        |  (G) | 700           |   |
| Due to Abbott  Laboratories within one year                                                              |   | —         |   | 191                        |  (H) | 191           |   |
| Total Current  Liabilities                                                                               |   | 375            |   | 855                        |      | 1,230         |   |
| Due to Abbott  Laboratories beyond one year                                                              |   | —         |   | 109                        |  (H) | 109           |   |
| Post-employment  Obligations and Other Long-Term Liabilities                                             |   | 441            |   | (328                       | )(J)      | 96            |   |
|                                                                                                     |   |           |   | (17                        | )(M)      |          |   |
|                                                                                                     |   |           |   |                       |      |          |   |
| Net investment  in Hospira, Inc. by Abbott Laboratories                                             |   | 1,532          |   | (1,532                     | )(I)      | —        |   |
| Common stock,  $0.01 par value, authorized 400,000,000 shares;  outstanding 156,042,544 shares |   | —         |   | 2                          |  (I) | 2             |   |
| Additional paid  in capital                                                                              |   | —         |   | 560                        |  (I) | 561           |   |
|                                                                                                     |   |           |   | 1                          |  (M) |          |   |
| Retained  earnings                                                                                       |   | —         |   | 138                        |  (I) | 138           |   |
| Accumulated  other comprehensive (loss) income                                                           |   | (59            | )      | 64                         |  (J) | 4             |   |
|                                                                                                     |   |           |   | (1                         | )(M)      |          |   |
| Total  Liabilities and Shareholders’ Equity                                                         |   | $              | 2,289  |                       | $         | (149          | )      | $ | 2,140 |   |

 

See Accompanying Notes To Unaudited Pro Forma CombinedFinancial Statements. 

 

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**Notes to Unaudited Pro Forma CombinedFinancial Statements**

 

Due toregulations governing the preparation of pro forma financial statements, thepro forma financial statements do not reflect certain estimated incrementalexpenses associated with being an independent public company. These additionalpretax expenses are estimated to be approximately $40 million for thefiscal year ending December 31, 2004. The estimated incremental expensesassociated with being an independent, public company include costs for computersystems and costs associated with corporate administrative services such astax, treasury, audit, risk management and insurance, legal, investor relations,shareholder services and human resources. 

 

(A)         Reflects interest expenserelated to $700 million in debt that Hospira has incurred. Also includesinterest expense of $1 million on equipment and inventory as described innote H below. Interest expense was calculated assuming constant debtlevels throughout the period at LIBOR (1.1%) plus .875%. Interest expense maybe higher or lower if Hospira’s actual interest rate or Hospira’s creditratings change. 

 

(B)           Reflects the removal ofthe cost of retirement benefits that have been retained by Abbott. Abbott hasagreed to retain the post-employment medical benefits obligations for most of Hospira’semployees who were retired or who were eligible to retire as of thedistribution date. Abbott has also retained the defined benefit planobligations and assets for most of Hospira’s retirees as of the distributiondate. 

 

(C)           Reflects the estimateddifferences in revenues and costs that Hospira will record for purchases andsales of product between Hospira and Abbott under contract manufacturingarrangements that will last at least one year, versus the amounts recorded inthe historical financial statements. Historically, inventory transfers betweenAbbott and Hospira were recorded at cost. Subsequent to the distribution,Hospira will record as revenue its costs plus a third-party manufacturingprofit for manufacturing services provided to Abbott. For certain products,Hospira will receive the bulk material from Abbott and the mark-up will be onthe value-added portion only. Inventory that Hospira purchases from Abbott willbe on the same basis as the historical amounts, but will also include a third-partymanufacturing profit. Also reflects the impact of changes in terms of certaininternational sales subject to local currency restrictions. 

 

(D)          Reflects the tax effectsof the pro forma adjustments at the applicable income tax rates. 

 

(E)            The number of Hospirashares used to compute basic earnings per share is based on the number ofshares of Hospira common stock outstanding on the distribution date. 

 

(F)            The number of sharesused to compute diluted earnings per share is based on the number of basicshares of Hospira common stock as described in Note E above, plusincremental shares assuming exercise of dilutive outstanding options awarded asHospira replacement options on the distribution date.  The number of dilutive shares was determined based on the openingmarket price on the first day of trading.

 

(G)           Hospira has incurred$700 million in debt under a senior unsecured credit facility that Hospiraand Abbott entered into prior to the distribution date. Abbott has retained allof the proceeds of the borrowing under the credit facility. 

 

(H)          Hospira will purchasecertain international operations and assets (net of liabilities) from Abbottafter the distribution date as Hospira establishes its business infrastructureoutside the United States and obtains regulatory approval for the transfer ofthe marketing authorizations for Hospira products. The total amount due toAbbott is expected to be approximately $300 million, of which$191 million has been reflected as due within one year and the remaining$109 million has been reflected as due beyond one year. These amounts dueto Abbott represent the estimated consideration for these net assets. Hospirawill also pay Abbott interest on Abbott’s net investment in equipment placedwith customers from the distribution date until local closing, and on thebeginning inventory until that inventory is realized by collection of areceivable. Hospira does not expect to pay interest on the accounts receivablerelated to most, if not all, of these operations, as Hospira expects to pay forthese receivables as they are collected. 

 

(I)               On the distributiondate, Net Investment in Hospira, Inc. by Abbott Laboratories was redesignatedas Hospira Shareholders’ Equity and allocated between common stock andadditional paid in capital based on the number of shares of Hospira commonstock outstanding at the distribution date. The pro forma amount allocated toretained earnings represents accumulated retained earnings from Hospira’sincorporation on September 16, 2003 through March 31, 2004. 

 

(J)              Reflects theestimated retirement obligations, net of assets, retained by Abbott, asdescribed in Note B above. The adjustment

 

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includes an anticipated payment from Abbott of anamount that would cause the Abbott and Hospira plans to be funded on anequivalent basis. 

 

(K)          Reflects an adjustmentto eliminate two international manufacturing facilities, Sligo, Ireland andToronto, Canada, and one manufacturing facility in North Chicago, Illinois thatHospira operated in the past, and which Abbott has retained. The North Chicagofacility has been leased to Hospira. 

 

(L)            Reflects an adjustmentto add a manufacturing facility in Liscate, Italy, which will be used byHospira on a short-term basis for manufacture of an Abbott product and on along-term basis for the manufacture of Hospira products. Also includescapitalized software that will be transferred to Hospira. 

 

(M)       Under the contracts betweenAbbott and Hospira, certain assets and liabilities will not or may not betransferred or assumed by Hospira. These amounts are not significantindividually or in the aggregate.

 

Results of Operations 

 

Net sales decreased 1.9 percent in the first quarter2004 versus the first quarter 2003. This decrease reflects a volume decline of 2.3 percent, primarily fromsales to Abbott, coupled with lower prices on certain products of 1.1 percent,partially offset by the effect of the weaker U.S. dollar, which increased salesby 1.5 percent.

 

 Acomparison of product line sales is as follows: 

 

*(dollars in millions)*

 
|                                              |   | **Three  Month Period Ended March 31** |   |
|---------------------------------------------------|--------|----------------------------------------|--------|
|                                              |   | **2004**                               |   | **Percent  Change  vs. Prior  Year*** |   | **2003** |   | **Percent  Change  vs. Prior  Year*** |   |
| U.S. —                                       |   |                                   |   |   |   |   |   |   |   |
| Specialty  Injectable Pharmaceuticals             |   | $                                      | 205    |   | (1.3) |   | $ | 208 |   | 3.1 |   |
| Medication  Delivery Systems                      |   | 187                                    |   | 5.2 |   | 177 |   | 2.2 |   |
| Injectable  Pharmaceutical Contract Manufacturing |   | 38                                     |   | 4.1 |   | 37 |   | 21.5 |   |
| Sales to Abbott  Laboratories                     |   | 36                                     |   | (29.6) |   | 52 |   | 80.2 |   |
| Other                                             |   | 55                                     |   | (17.2) |   | 66 |   | (1.5) |   |
| Total U.S.                                        |   | 521                                    |   | (3.5) |   | 540 |   | 7.7 |   |
| International—                               |   |                                   |   |   |   |   |   |   |   |
| Sales to Third  Parties                           |   | 90                                     |   | 8.7 |   | 83 |   | 1.5 |   |
| Sales to Abbott  Laboratories                     |   | 10                                     |   | (2.2) |   | 10 |   | 21.9 |   |
| Total  International Sales                        |   | 100                                    |   | 7.3 |   | 93 |   | 3.3 |   |
| Combined Net  Sales                               |   | $                                      | 621    |   | (1.9) |   | $ | 633 |   | 7.0 |   |

 

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* Percent change computed based on unrounded numbers

 

The sales decrease in Specialty InjectablePharmaceuticals in 2004 was due primarily to approval of a competitor’s genericversion of Corlopam® in late 2003 and the related impact of the redeployment ofcommercial resources in anticipation of the generic launch.  The sales increase in Medication DeliverySystems in 2004 was primarily due to increased placements, including therelated sales of disposable sets, of Hospira’s newer technology Plum A+®,Gemstar® and Lifecare PCA® 3 pumps. Sales to Abbott, which are recorded at cost, are impacted by Abbott’sunit volume requirements.  The decreasein U.S. sales to Abbott in 2004 was driven primarily by lower production levelsfor one of its proprietary anesthesia products and a thrombolytic agentproduct.  Other U.S. sales primarilyinclude sales to non-hospital customers and sales of critical caredevices.  The decrease in these 2004sales was primarily

 

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due to the divestiture of paclitaxel in 2003, adecline in critical care products and the wind-down of the home infusionproduct line.  The increase inInternational sales in 2004 was due to the favorable impact of the weaker U.S.dollar.

 

The sales increase in Specialty InjectablePharmaceuticals in 2003 was primarily due to volume gains in genericpharmaceuticals and imaging agents.  The2003 increase in Injectable Pharmaceutical Contract Manufacturing sales wasprimarily due to a one-time inventory build by a customer prior to thetransition of manufacturing responsibility to them. The decrease in Other salesin 2003 was primarily due to a termination of a supply agreement and a declinein critical care products, partially offset by the launch of an oncologyproduct in the middle of 2002 and the related sales to non-hospitalcustomers.  

 

Grossprofit margins were 27.1 percent of net sales in 2004 and27.4 percent in 2003. The decrease in the gross profit margin was dueprimarily to increased manufacturing costs and lower U.S. prices, partiallyoffset by a reduction in sales to Abbott. The effect of recording sales to Abbott at cost, as discussed above,reduced the gross margin by approximately 2 percentage points in 2004 and3 percentage points in 2003. 

 

Researchand development expense was $24 million in 2004 and $19 million in2003, and represented a 26.2 percent increase year over year. This increase wasdue to increased spending in medication management systems and genericpharmaceutical development. 

 

Selling,general and administrative expense was $58 million in 2004 and$57 million in 2003, representing a 1.3 percent increase year overyear.  The increase was primarily drivenby inflation. 

 

Taxes on Earnings 

 

Taxes onearnings reflect the estimated annual effective rates and are determined on aseparate-return basis. The effective tax rates are less than the statutory U.S.federal income tax rate principally due to the benefit of tax exemptions, ofvarying durations, in several taxing jurisdictions. The decrease in theeffective income tax rate in the first quarter of 2004 versus the same periodin 2003 is largely attributable to a greater portion of income derived fromoperations in jurisdictions subject to more favorable tax rates than the UnitedStates.

 

Transition from Abbott and Cost to Operate as anIndependent Company 

 

Thecombined financial statements reflect the operating results and financialposition of Hospira as it was operated by Abbott, rather than as an independentcompany. Hospira will incur additional ongoing operating expenses to operate asan independent company as discussed below. Also, as a part of the separationfrom Abbott, Hospira will incur additional transitional costs and increasedcapital expenditures over the 2004 to 2006 time frame.

 

*Costs of corporate headquarters functions*—The combined financial statements do notinclude many corporate headquarters functions that Hospira will need toestablish and maintain. Hospira management estimates that annual ongoingincremental costs of a corporate headquarters will be approximately$29 million. In addition, Hospira will incur additional transitionalexpenses to establish corporate headquarters functions, as discussed below. 

 

*Costs of computer systems that were previously shared withother Abbott operations*—The operating costs of computer systems have been allocated to Hospiraon bases which management believes are reasonable. Included in theseallocations is Hospira’s proportionate share of fixed operating costs. As anindependent company, Hospira’s computer operating costs will be higher.Management estimates the costs associated with operating separate Hospiracomputer systems will increase annual expense by approximately$16 million. In addition, Hospira will incur additional transitional expensesand capital expenditures to establish its independent computer systems, asdiscussed below. 

 

*Costs of the international operating infrastructure*—Hospira’s international operations werea small portion of Abbott’s International segment. Hospira does not currentlyhave sufficient infrastructure for independent commercial operations ininternational markets. Abbott will provide infrastructure support to Hospirafor up to two years after the distribution date. During the transition fromAbbott, Hospira will incur additional transitional expenses, as discussedbelow, to establish its international infrastructure. Once the internationalinfrastructure is fully in place, Hospira expects to incur approximately$10 million of annual expenses in excess of the expenses recorded in thehistorical results of operations. 

 

*Capital expenditures and costs to replace space that wasshared with other Abbott functions*—Hospira has been charged for space that belongs toand will remain with Abbott. Accordingly, Hospira management expects thatHospira will purchase or construct separate facilities shortly after thedistribution date, resulting in additional transitional capital expendituresand related expenses, as discussed below. 

 

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*Transitional costs and capital expenditures*—In order to establish corporateheadquarters, international infrastructure and independent computer systems,Hospira will incur additional transitional expenses and capital expenditures.These are estimated to total approximately $100 million of pretax expenseand $82 million of capital expenditures over the 2004 to 2006 timeframe. 

 

Liquidity and Capital Resources at March 31, 2004Compared with December 31, 2003 

 

Net CashFrom Operating Activities was $72 million for the first quarter 2004. Hospiraexpects future annual Net Cash From Operating Activities to be between$300 million and $500 million.

 

At March31, 2004, Hospira’s working capital of approximately $691 million compared toworking capital of approximately $716 million at December 31, 2003. Thedecrease in working capital in 2004 was primarily due to a decrease ininventories.****Capital expendituresof $59 million in 2004 were principally for upgrading and expandingmanufacturing and administrative support facilities, and for equipment placedwith customers. Annual capital expenditures for 2004 through 2006 are expectedto be between $200 million and $300 million, including thetransition-related capital expenditures discussed above. This level ofexpenditure is expected to decrease after 2006.

 

On April 28, 2004, Abbott and Hospira entered into a$700 million, short-term senior unsecured credit facility (“SeniorFacility”).  The borrowing initiallybears interest at a rate of LIBOR plus .875% and is repayable on or beforeApril 27, 2005. The proceeds of the Senior Facility borrowing were retained byAbbott. On the distribution date, Abbott was relieved of all obligations underthe Senior Facility and Hospira became solely responsible for repayment of theprincipal and for payment of interest and fees on this debt. Hospira is subjectto additional lending costs of up to $1.1 million if the Senior Facility is notrefinanced by October 29, 2004, and up to an additional $2.1 million if the SeniorFacility is not refinanced by December 31, 2004. Hospira intends to refinancethe Senior Facility in 2004 by incurring long-term indebtedness.

 

Hospira has also entered into an unsecured revolvingcredit facility of $375 million (“Revolver”) that will be available for workingcapital and other requirements.  TheRevolver allows Hospira to borrow funds on an unsecured basis at variableinterest rates as short-term cash needs dictate.  Borrowings under the Revolver initially bear interest at LIBORplus .575%, plus a utilization fee of .125% if borrowings under the Revolverexceed $125 million. The commitment is subject to an annual facility fee,initially .175%, and expires in April 2009.

 

Interest rates under both facilities and the facilityfee on the Revolver are subject to increase or decrease if there is a change inHospira’s credit rating (currently BBB by Standard & Poor’s). The maximuminterest rates would be LIBOR plus 1.75% on the Senior Facility and LIBOR plus1.25% on the Revolver.  The maximum facilityfee on the Revolver is .375%. Both credit agreements contain customaryrestrictions, covenants and events of default for an unsecured financing.

 

Hospirawill purchase certain international operations and assets, and assume thecorresponding liabilities, from Abbott over a two-year period after thedistribution date as Hospira establishes its business infrastructure outsidethe United States and obtains regulatory approval for the transfer of themarketing authorizations for Hospira products. The purchase price will be equalto the net book value of those assets and liabilities at the time of suchpurchase. As of March 31, 2004, the net book value of those assets andliabilities was approximately $300 million. Hospira will pay Abbott intereston a portion of this purchase price at local prevailing short-term rates inconnection with Hospira’s use of these assets during that period. Hospiraexpects to fund these net asset purchases from operating cash flow. 

 

Legislative Issues

 

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, reporting requirements and payment for health care products and services.If additional legislation is enacted, it could have the effect of reducingprices, or reducing the rate of price increases, for medical products andservices. International operations are also subject to a significant degree ofgovernment regulation. It is not possible to predict the extent to whichHospira or the health care industry in general might be adversely affected bythese factors in the future.

 

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Private Securities Litigation Reform Act of 1995 — ACaution Concerning Forward-Looking Statements

 

Under the safe harbor provisions of the Private Securities LitigationReform Act of 1995, Hospira cautions investors that any forward-lookingstatements or projections made by Hospira, including those made in thisdocument, are subject to risks and uncertainties that may cause actual resultsto differ materially from those projected. In some cases, these statements can be identified by 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 as an independentpublic company are forward-looking statements. Please be aware that these statements and any other forward-lookingstatements in this document only reflect Hospira’s expectations and are notguarantees of performance.  Thesestatements 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’s operations arediscussed in the information statement included as an exhibit in the Company’sregistration statement on Form 10 which the Securities and Exchange Commissiondeclared effective on April 13, 2004. Accordingly, undue reliance should not be placed on the forward-lookingstatements contained in this document. These forward-looking statements speak only as of the date on which thestatements were made.  Hospiraundertakes no obligation to update or revise publicly any forward-lookingstatements, whether as a result of new information, future events or otherwise.

 

Item 3.  Quantitative And Qualitative Disclosures AboutMarket Risk

 

There have been no material changes to the information provided in theinformation statement included as an exhibit in the Company’s registrationstatement on Form 10 which the Securities and Exchange Commission declaredeffective on April 13, 2004.

 

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Item 4.**            **Controls and Procedures

 

(a)                                  *Evaluation ofdisclosure controls and procedures. *The Chief Executive Officer, ChristopherB. Begley, and Chief Financial Officer, Terrence C. Kearney, evaluated theeffectiveness of Hospira’s disclosure controls and procedures as of the end ofthe period covered by this report, and concluded that Hospira’s disclosurecontrols and procedures were effective to ensure that information Hospira isrequired to disclose in its filings with the Securities and Exchange Commissionunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported, within the time periods specified in the Commission’s rules andforms, and to ensure that information required to be disclosed by Hospira inthe reports that it files under the Exchange Act is accumulated andcommunicated to Hospira’s management, including its principal executive officerand principal financial officer, as appropriate to allow timely decisionsregarding required disclosure.

 

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# **PART II.**                                                 OTHER INFORMATION

 

Item 1.  LegalProceedings

 

Various state and federal agencies, including the U.S.Department of Justice and various state attorneys general, are investigating anumber of pharmaceutical companies, including Abbott, for allegedly engaging inimproper marketing and pricing practices with respect to certain Medicare andMedicaid reimbursable products, including practices relating to averagewholesale price.  These are civilinvestigations that are seeking to identify the practices and determine whetherthose practices violated any laws, including federal and state false claimsacts, or constituted fraud in connection with the Medicare and/or Medicaidreimbursement paid to third parties.  Inaddition, Abbott is a defendant in a number of purported class actions onbehalf of individuals or entities, including health care insurers and otherthird-party payors, that allege generally that Abbott and numerous otherpharmaceutical companies reported false or misleading pricing information inconnection with federal, state and private reimbursement for certaindrugs.  Many of the products involved inthese investigations and lawsuits are Hospira products.  Hospira is cooperating with the authoritiesin these investigations.  There may beadditional investigations or lawsuits, or additional claims in the existinginvestigations or lawsuits, initiated with respect to these matters in thefuture.  Hospira cannot be certain thatit will not be named as a subject or defendant in these investigations orlawsuits.  Abbott will indemnify Hospirafor liabilities made in the pending or future investigations and lawsuitsdescribed above only to the extent they both relate to the existing allegationsas of the distribution date and relate to the sale of Hospira products prior tothe spin-off.  Hospira will assume anyother losses that may result from these investigations and lawsuits.  These investigations and lawsuits couldresult in changes to Hospira’s business practices or pricing policies, civil orcriminal monetary damages, penalties or fines, imprisonment and/or exclusion ofHospira products from participation in federal and state healthcare programs,including Medicare, Medicaid and Veterans’ Administration health programs, any ofwhich, because of our obligation to indemnify Abbott or because we may be namedas defendants ourselves, could have a material adverse effect on our business,profitability and financial condition.

 

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Item 6.  Exhibits and Reports on Form 8-K

 

(a)                                  Exhibits

 

Incorporated by reference to the Exhibit Index included herewith.

 

(b)                                 Reportson Form 8-K

 

On April 19, 2004,Hospira, Inc. furnished a Current Report on Securities and Exchange CommissionForm 8-K reporting materials that Hospira, Inc. intended to present in meetingswith certain potential investors.

 

On April 28, 2004,Hospira, Inc. filed a Current Report on Securities and Exchange Commission Form8-K reporting a revised page 31 to materials that Hospira, Inc. intended topresent in meetings with certain potential investors.

 

On May 10, 2004, Hospira,Inc. furnished a Current Report on Securities and Exchange Commission Form 8-Kreporting that Hospira has granted certain stock options under its 2004 LongTerm Stock Incentive Plan.

 

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SIGNATURE

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                      | HOSPIRA, INC. |
|---------------------------|---------------|
|                      |          |   |
|                      |          |   |
|                      | By:           |   | /s/  Terrence  C. Kearney |
|                      |          |   | Terrence C. Kearney, |
|                      |          |   | Senior Vice President,  Finance and Chief Financial  Officer |
|                      |          |   |
|                      |          |   |
| Date:  May  27, 2004 |          |   |

 

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**EXHIBITINDEX**

 
| **EXHIBIT NO.** |   | **DESCRIPTION**                                                                                                                                                                                    |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                               |
| 2.1             |   | Separation and Distribution Agreement, dated as of April 12, 2004,  between Abbott Laboratories and Hospira, Inc.                                                                                  |
|            |   |                                                                                                                                                                                               |
|            |   | [The schedules to the Separation and Distribution Agreement have been  omitted and will be furnished supplementally to the Securities and Exchange  Commission upon request.]                      |
|            |   |                                                                                                                                                                                               |
| 3.1             |   | Restated Certificate of Incorporation of Hospira, Inc. (filed as  Exhibit 3.1 to Hospira, Inc.’s Registration Statement on Form 10 (File No.  1-31946) and incorporated herein by reference). |
|            |   |                                                                                                                                                                                               |
| 3.2             |   | Amended and Restated Bylaws of Hospira, Inc. (filed as Exhibit 3.2 to  Hospira, Inc.’s Registration Statement on Form 10 (File No. 1-31946) and  incorporated herein by reference).           |
|            |   |                                                                                                                                                                                               |
| 4.1             |   | Rights Agreement, dated as of April 12, 2004, between Hospira, Inc.  and EquiServe Trust Company, N.A., as Rights Agent.                                                                           |
|            |   |                                                                                                                                                                                               |
| 4.1(a)          |   | Form of Certificate of Designations of Series A Junior Participating  Preferred Stock (attached as Exhibit A to the Rights Agreement filed as  Exhibit 4.1 hereto).                                |
|            |   |                                                                                                                                                                                               |
| 4.1(b)          |   | Form of Rights Certificate (attached as Exhibit B to the Rights  Agreement filed as Exhibit 4.1 hereto).                                                                                           |
|            |   |                                                                                                                                                                                               |
| 10.1            |   | Form of Transition Services Agreement between Abbott Laboratories and  Hospira, Inc.                                                                                                               |
|            |   |                                                                                                                                                                                               |
| 10.2            |   | Tax Sharing Agreement, dated as of April 16, 2004, between Abbott  Laboratories and Hospira, Inc.                                                                                                  |
|            |   |                                                                                                                                                                                               |
| 10.3            |   | Employee Benefits Agreement, dated as of April 16, 2004, by and among  Abbott Laboratories, TAP Pharmaceutical Products Inc. and Hospira, Inc.                                                     |
|            |   |                                                                                                                                                                                               |
| 10.4            |   | Form of Lease between Abbott Laboratories and Hospira, Inc.                                                                                                                                        |
|            |   |                                                                                                                                                                                               |
| 10.5            |   | Information Technology Agreement, dated as of April 29, 2004, between  Abbott Laboratories and Hospira, Inc.                                                                                       |
|            |   |                                                                                                                                                                                               |
| 10.6            |   | Form of Manufacture and Supply Agreement between Abbott Laboratories  and Hospira, Inc.                                                                                                            |
|            |   |                                                                                                                                                                                               |
| 10.7            |   | Form of Transition Marketing and Distribution Services Agreement  between Subsidiaries of Abbott Laboratories and Hospira, Inc.                                                                    |
|            |   |                                                                                                                                                                                               |
| 10.8            |   | Hospira 2004 Long Term Stock Incentive Plan.                                                                                                                                                       |
|            |   |                                                                                                                                                                                               |
| 10.8(a)         |   | Form of Conversion Incentive Stock Option Terms.                                                                                                                                                   |
|            |   |                                                                                                                                                                                               |
| 10.8(b)         |   | Form of Conversion Non-Qualified Stock Option Terms.                                                                                                                                               |
|            |   |                                                                                                                                                                                               |
| 10.8(c)         |   | Form of Conversion Replacement Non-Qualified Stock Option Terms.                                                                                                                                   |
|            |   |                                                                                                                                                                                               |
| 10.8(d)         |   | Form of Non-Qualified Stock Option Terms (10 year term).                                                                                                                                           |
|            |   |                                                                                                                                                                                               |
| 10.8(e)         |   | Form of Non-Qualified Stock Option Terms (5 year term).                                                                                                                                            |

 

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| 10.8(f)  |   | Form of Non-Employee Director Restricted Stock Award Agreement.                                                                                                                                                                  |
|----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                             |
| 10.8(g)  |   | Form of Non-Employee Director Non-Qualified Stock Option Terms.                                                                                                                                                                  |
|     |   |                                                                                                                                                                                                                             |
| 10.9     |   | Hospira, Inc. 2004 Performance Incentive Plan.                                                                                                                                                                                   |
|     |   |                                                                                                                                                                                                                             |
| 10.10    |   | Hospira, Inc. Non-Employee Directors’ Fee Plan.                                                                                                                                                                             |
|     |   |                                                                                                                                                                                                                             |
| 10.11    |   | Hospira, Inc. 401(k) Supplemental Plan.                                                                                                                                                                                          |
|     |   |                                                                                                                                                                                                                             |
| 10.12    |   | Form of Agreement between Hospira, Inc. and each of Chistopher B.  Begley, John Arnott, Terrence C. Kearney, Edward A. Ogunro, Ph. D. and Brian  J. Smith regarding Change in Control.                                           |
|     |   |                                                                                                                                                                                                                             |
| 10.13    |   | Form of Grantor Trust Arrangement by and among Abbott Laboratories,  Hospira, Inc. and each of Christopher B. Begley, John Arnott, Terrence C.  Kearney and Edward A. Ogunro, Ph.D.                                              |
|     |   |                                                                                                                                                                                                                             |
| 10.13(a) |   | Abbott Laboratories 401(k) Supplemental Plan, as amended (filed as  Exhibit 10.3 to the Abbott Laboratories Quarterly Report on Form 10-Q for the  quarter ended June 30, 2003 and incorporated herein by reference).            |
|     |   |                                                                                                                                                                                                                             |
| 10.13(b) |   | Abbott Laboratories Supplemental Pension Plan, as amended (filed as  Exhibit 10.4 to the Abbott Laboratories Quarterly Report on Form 10-Q for the  quarter ended June 30, 2003 and incorporated herein by reference).           |
|     |   |                                                                                                                                                                                                                             |
| 10.13(c) |   | The 1986 Abbott Laboratories Management Incentive Plan, as amended  (filed as Exhibit 10.5 to the Abbott Laboratories Quarterly Report on Form  10-Q for the quarter ended June 30, 2003 and incorporated herein by  reference). |
|     |   |                                                                                                                                                                                                                             |
| 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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