**FORM 10-Q**

 

**SECURITIESAND 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, 2005**                                                                                                                                    |
|                                                                                                                                                                                      |                                                                                                     |
| **OR**                                                                                                                                                                                    |
|                                                                                                                                                                                      |                                                                                                     |
| **o**                                                                                                                                                                                     | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                      |
| **For the transition period from               to              ** |
|                                                                                                                                                                                      |
| **Commission File No. 1-31946**                                                                                                                                                      |

 

**HOSPIRA,INC.**

 
| **A  Delaware corporation** |   |                                                 |   | I.R.S. Employer  Identification |
|-----------------------------|--------|------------------------------------------------------|--------|---------------------------------|
|                        |   |                                                 |   | No. **20-0504497**         |
|                        |   | **275 N.  Field Drive  Lake Forest, Illinois 60045** |   |                            |
|                        |   |                                                 |   |                            |
|                        |   | Telephone:**  (224) 212-2000**                  |   |                            |

 

Indicateby check mark whether the registrant (l) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of l934during the preceding l2 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.     Yes  ý.  No o.

 

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

 

Asof April 30, 2005, Hospira, Inc. had outstanding 158,082,661 commonshares, par value $0.01 per share.

 

 

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Table of Contents

 

**Hospira, Inc.**

 

**QuarterlyReport on Form 10-Q**

 

**Index**

 
| **Part I –  Financial Information** |                                                                                                                                  |
|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|
|                                          |                                                                                                                                  |   |
| Item 1.                                  | Financial Statements                                                                                                                  |   |
|                                          |                                                                                                                                  |   |
| ** **                                    | Condensed  Consolidated Statements of Income (Unaudited) – Three Months Ended  March 31, 2005 and March 31, 2004       | 3 |
|                                          |                                                                                                                                  |   |
|                                          | Condensed  Consolidated Statements of Cash Flows (Unaudited) – Three Months Ended  March 31, 2005 and March 31, 2004   | 4 |
|                                          |                                                                                                                                  |   |
| ** **                                    | Condensed  Consolidated Balance Sheets (Unaudited) – March 31, 2005 and December 31,  2004                             | 5 |
|                                          |                                                                                                                                  |   |
|                                          | Condensed  Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) –   Three Months Ended March 31, 2005 | 6 |
|                                          |                                                                                                                                  |   |
|                                          | Notes  to Condensed Consolidated Financial Statements (Unaudited)                                                                     | 7 |
|                                          |                                                                                                                                  |   |
| Item 2.                                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                           | 15 |
|                                          |                                                                                                                                  |   |
| Item 3.                                  | Quantitative  and Qualitative Disclosures about Market Risk                                                                           | 21 |
|                                          |                                                                                                                                  |   |
| Item 4.                                  | Controls and  Procedures                                                                                                              | 21 |
|                                          |                                                                                                                                  |   |
| **Part II – Other  Information**    |                                                                                                                                  |
|                                          |                                                                                                                                  |   |
| Item 1.                                  | Legal Proceedings                                                                                                                     | 22 |
|                                          |                                                                                                                                  |   |
| Item  2.                                 | Changes  in Securities and Use of Proceeds                                                                                            | 23 |
|                                          |                                                                                                                                  |   |
| Item 6.                                  | Exhibits                                                                                                                              | 24 |

 

2

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**PART****  I****.  FINANCIAL INFORMATION**

 

**Item 1.****  Financial Statements**

 

**Hospira, Inc.**

 

**Condensed Consolidated Statements of Income**

 

**(Unaudited)**

 

***(dollars and shares in thousands, except forper share amounts)***

 
| ** **                                   | ** ** | **Three Months Ended March 31** | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| Net sales                                    |       | $                               | 616,695    |   | $ | 575,198 |   |
| Net sales to  Abbott Laboratories            |       | 45,366                          |       | 46,020 |   |
| Total Net  Sales                             |       | 662,061                         |       | 621,218 |   |
|                                         |       |                            |       |   |   |
| Cost of  products sold                       |       | 444,285                         |       | 452,879 |   |
| Gross Profit                                 |       | 217,776                         |       | 168,339 |   |
|                                         |       |                            |       |   |   |
| Research and  development                    |       | 28,391                          |       | 24,446 |   |
| Selling,  general and administrative         |       | 81,875                          |       | 57,510 |   |
| Income From  Operations                      |       | 107,510                         |       | 86,383 |   |
|                                         |       |                            |       |   |   |
| Interest  expense                            |       | 7,169                           |       | — |   |
| Other  (income) expense, net                 |       | (1,205                          | )          | 868 |   |
| Income  Before Income Taxes                  |       | 101,546                         |       | 85,515 |   |
|                                         |       |                            |       |   |   |
| Income tax  expense                          |       | 24,371                          |       | 20,524 |   |
| Net Income                                   |       | $                               | 77,175     |   | $ | 64,991 |   |
|                                         |       |                            |       |   |   |
| Earnings Per  Common Share:                  |       |                            |       |   |   |
| Basic                                        |       | $                               | 0.49       |   | $ | 0.42 |   |
| Diluted                                      |       | $                               | 0.49       |   | $ | 0.42 |   |
|                                         |       |                            |       |   |   |
| Weighted Average  Common Shares Outstanding: |       |                            |       |   |   |
| Basic                                        |       | 157,191                         |       | 156,043 |   |
| Diluted                                      |       | 158,519                         |       | 156,043 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

3

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**Hospira, Inc.**

 

**Condensed Consolidated Statements of Cash Flows**

 

**(Unaudited)**

 

***(dollars in thousands)***

 
| ** **                                                                       | ** ** | **Three Months Ended March 31** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|                                                                             |       |                                 |       |   |   |
| Cash Flow  From (Used in) Operating Activities:                                  |       |                                 |       |   |   |
|                                                                             |       |                                 |       |   |   |
| Net income                                                                       |       | $                                    | 77,175     |   | $ | 64,991 |   |
| Adjustments  to reconcile net income to net cash from operating activities— |       |                                 |       |   |   |
| Depreciation                                                                     |       | 39,770                               |       | 37,035 |   |
| Amortization  of intangibles                                                     |       | 815                                  |       | 1,091 |   |
| Trade  receivables                                                               |       | (28,753                              | )          | (24,072 | ) |
| Inventories                                                                      |       | (8,370                               | )          | (22,906 | ) |
| Prepaid  expenses and other assets                                               |       | 1,079                                |       | (1,403 | ) |
| Trade  accounts payable and other liabilities                                    |       | 5,675                                |       | 20,830 |   |
| Other, net                                                                       |       | 3,013                                |       | (3,288 | ) |
| Net Cash  From Operating Activities                                              |       | 90,404                               |       | 72,278 |   |
|                                                                             |       |                                 |       |   |   |
| Cash Flow  From (Used in) Investing Activities:                                  |       |                                 |       |   |   |
|                                                                             |       |                                 |       |   |   |
| Acquisitions  of property and equipment                                          |       | (50,065                              | )          | (59,088 | ) |
| Sale of  marketable securities                                                   |       | 72,438                               |       | — |   |
| Net Cash  From (Used in) Investing Activities                                    |       | 22,373                               |       | (59,088 | ) |
|                                                                             |       |                                 |       |   |   |
| Cash Flow  From (Used in) Financing Activities:                                  |       |                                 |       |   |   |
|                                                                             |       |                                 |       |   |   |
| Net  transactions with Abbott Laboratories                                       |       | —                               |       | (13,177 | ) |
| Issuance of  long-term debt                                                      |       | 1,750                                |       | — |   |
| Proceeds  from stock options exercised                                           |       | 15,338                               |       | — |   |
| Net Cash  From (Used in) Financing Activities                                    |       | 17,088                               |       | (13,177 | ) |
|                                                                             |       |                                 |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                    |       | (774                                 | )          | (13 | ) |
|                                                                             |       |                                 |       |   |   |
| Net change  in cash and cash equivalents                                         |       | 129,091                              |       | — |   |
| Cash and  cash equivalents at beginning of period                                |       | 127,695                              |       | — |   |
| Cash and  cash equivalents at end of period                                      |       | $                                    | 256,786    |   | $ | — |   |
|                                                                                  |            |                                      |            |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**Hospira, Inc.**

 

**Condensed Consolidated Balance Sheets**

 

**(Unaudited)**

 

***(dollars in thousands except for share data)***

 
| ** **                                                                                                   | ** ** | **March 31  2005** | ** ** | **December 31  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| **Assets**                                                                                                   | ** ** | ** **              | ** ** | ** **                 | ** ** |
| Current  Assets:                                                                                             |       |                    |       |                       |       |
| Cash and  cash equivalents                                                                                   |       | $                       | 256,786    |                       | $          | 127,695 |   |
| Marketable  securities                                                                                       |       | —                  |       | 72,438                     |       |
| Trade  receivables, less allowances of $14,423 in 2005 and $16,083 in 2004                                   |       | 350,548                 |       | 326,356                    |       |
| Inventories:                                                                                                 |       |                    |       |                       |       |
| Finished  products                                                                                           |       | 319,563                 |       | 330,111                    |       |
| Work in  process                                                                                             |       | 84,203                  |       | 70,329                     |       |
| Materials                                                                                                    |       | 119,672                 |       | 117,884                    |       |
| Total  inventories                                                                                           |       | 523,438                 |       | 518,324                    |       |
| Assets held  for sale                                                                                        |       | 20,694                  |       | —                     |       |
| Prepaid  expenses, deferred income taxes and other receivables                                               |       | 151,196                 |       | 153,512                    |       |
| Total  Current Assets                                                                                        |       | 1,302,662               |       | 1,198,325                  |       |
| Property and  equipment, at cost                                                                             |       | 2,124,671               |       | 2,173,933                  |       |
| Less:  accumulated depreciation and amortization                                                             |       | 1,194,848               |       | 1,227,629                  |       |
| Net Property  and Equipment                                                                                  |       | 929,823                 |       | 946,304                    |       |
| Intangible  assets, net of amortization                                                                      |       | 242                     |       | 1,057                      |       |
| Goodwill                                                                                                     |       | 80,973                  |       | 80,973                     |       |
| Other assets                                                                                                 |       | 107,350                 |       | 116,131                    |       |
| Total Assets                                                                                                 |       | $                       | 2,421,050  |                       | $          | 2,342,790 |   |
| **Liabilities  and Shareholders’ Equity**                                                               |       |                    |       |                       |       |
| Current  Liabilities:                                                                                        |       |                    |       |                       |       |
| Trade  accounts payable                                                                                      |       | $                       | 104,943    |                       | $          | 101,537 |   |
| Salaries  payable and other accruals                                                                         |       | 288,967                 |       | 268,615                    |       |
| Due to  Abbott, net                                                                                          |       | 139,799                 |       | 166,042                    |       |
| Total  Current Liabilities                                                                                   |       | 533,709                 |       | 536,194                    |       |
| Due to  Abbott, net                                                                                          |       | 14,678                  |       | 23,100                     |       |
| Long-term  debt                                                                                              |       | 693,562                 |       | 698,841                    |       |
| Post-retirement  obligations, deferred income taxes and other long-term liabilities                          |       | 105,894                 |       | 100,736                    |       |
| Commitments  and Contingencies                                                                               |       |                    |       |                       |       |
| Shareholders’  Equity:                                                                                  |       |                    |       |                       |       |
| Common  stock, par value $0.01 - authorized: 400,000,000 shares; issued and  outstanding: 157,567,789 shares |       | 1,576                   |       | 1,570                      |       |
| Preferred  stock, par value $0.01 - authorized: 50,000,000 shares; issued and  outstanding: 0 shares         |       | —                  |       | —                     |       |
| Unearned  compensation                                                                                       |       | (28                     | )          | (114                       | )          |
| Additional  paid-in capital                                                                                  |       | 807,784                 |       | 791,252                    |       |
| Retained  earnings                                                                                           |       | 280,497                 |       | 203,322                    |       |
| Accumulated  other comprehensive (loss)                                                                      |       | (16,622                 | )          | (12,111                    | )          |
| Total  Shareholders’ Equity                                                                             |       | 1,073,207               |       | 983,919                    |       |
| Total  Liabilities and Shareholders’ Equity                                                             |       | $                       | 2,421,050  |                       | $          | 2,342,790 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

5

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**Hospira, Inc.**

 

**Condensed Consolidated Statement of Changes in Shareholders’Equity**

 

**(Unaudited)**

 

***(dollars and shares in thousands)***

 
| ** **                                                                | ** ** | ** **       | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **   | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------|------------|------------------|------------|-------------------|------------|-----------------|------------|----------------|------------|------------------|------------|--------------|------------|------------|------------|
| ** **                                                                | ** ** | ** **       | ** ** | ** **        | ** ** | **Other**       | ** ** | **Additional** | ** ** | ** **       | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                                                | ** ** | **Common Stock** | ** ** | **Comprehensive** | ** ** | **Paid-in**     | ** ** | **Unearned**   | ** ** | **Retained**     | ** ** | ** **   | ** ** |
| ** **                                                                | ** ** | **Shares**       | ** ** | **Amount**        | ** ** | **(Loss)**      | ** ** | **Capital**    | ** ** | **Compensation** | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
|                                                                      |       |             |       |              |       |            |       |           |       |             |       |         |       |       |       |
| **Balances at  December 31, 2004**                                   |       | 156,970          |       | $                 | 1,570      |            | $          | (12,111        | )          | $                | 791,252    |         | $          | (114       | )          | $ | 203,322 |   | $ | 983,919 |   |
|                                                                      |       |             |       |              |       |            |       |           |       |             |       |         |       |       |       |
| Net Income                                                                |       | —           |       | —            |       | —          |       | —         |       | —           |       | 77,175       |       | 77,175     |       |
|                                                                      |       |             |       |              |       |            |       |           |       |             |       |         |       |       |       |
| Other comprehensive loss                                                  |       | —           |       | —            |       | (4,511          | )          | —         |       | —           |       | —       |       | (4,511     | )          |
| Changes in shareholders’  equity related to incentive stock programs |       | 598              |       | 6                 |       | —          |       | 16,532         |       | 86               |       | —       |       | 16,624     |       |
|                                                                      |       |             |       |              |       |            |       |           |       |             |       |         |       |       |       |
| **Balances at  March 31, 2005**                                      |       | 157,568          |       | $                 | 1,576      |            | $          | (16,622        | )          | $                | 807,784    |         | $          | (28        | )          | $ | 280,497 |   | $ | 1,073,207 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

6

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**Hospira, Inc.**

 

**Notes to Condensed Consolidated Financial Statements**

 

**March 31,2005**

 

**(Unaudited)**

 

**Note 1 –Basis of Presentation**

 

Thesecondensed consolidated financial statements have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”) and, therefore,do not include all information and footnote disclosures normally included inaudited financial statements. However, in the opinion of management, alladjustments, consisting only of normal recurring adjustments, unless otherwisenoted herein, necessary to present fairly the results of operations, financialposition and cash flows have been made. These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto included in Hospira’s Annual Report on Form 10-Kfor the year ended December 31, 2004. The results of operations for anyinterim period are not necessarily indicative of the results of operations tobe expected for the full year.

 

Hospirabecame a separate public company pursuant to a spin-off from AbbottLaboratories (“Abbott”) on April 30, 2004 (the “spin-off date”). Theaccompanying unaudited interim condensed consolidated financial statementsreflect Hospira’s operations as a separate, stand-alone entity for all periodssubsequent to April 30, 2004. For periods through April 30, 2004, thefinancial statements reflect the historical operations of Hospira when itoperated as a part of Abbott and include expense allocations related toservices provided to Hospira by Abbott. Hospira considers those allocations tobe reasonable reflections of the utilization of services provided.  For periods through the spin-off date,intercompany accounts with Abbott have been combined with invested capital andreported in the consolidated financial statements as Net Investment in Hospira, Inc.by Abbott Laboratories.

 

Thefinancial information in these financial statements, for periods through April 30,2004, does not include all the expenses that would have been incurred hadHospira been a separate, stand-alone entity and does not reflect Hospira’sresults of operations, financial position and cash flows had Hospira been astand-alone entity prior to the spin-off. Because a direct ownershiprelationship did not exist among all the various units comprising Hospira, NetInvestment in Hospira, Inc. by Abbott Laboratories is shown in lieu ofshareholders’ equity in the consolidated financial statements through April 30,2004.

 

Whilethe legal transfer of certain operations and assets (net of liabilities)outside the United States will occur over a two-year period after the spin-offdate, these operations and assets are used in the conduct of Hospira’sinternational business and Hospira is subject to the risks and entitled to thebenefits generated by the operations and assets. Hospira is dependent on Abbott’sinternational infrastructure until such legal transfers occur in eachinternational country. Such transfers must be completed within two years afterthe spin-off date.

 

**Note 2 –Recently Issued Accounting Standards**

 

InNovember 2004, the Financial Accounting Standards Board (‘‘FASB’’) issuedStatement of Financial Accounting Standards (“SFAS”) No. 151,’’InventoryCosts.’’ This statement clarifies the accounting for the abnormal amount ofidle facilities expense, freight, handling costs and wasted material. This statementrequires that those items be recognized as current-period expense. In addition,the statement requires that allocation of fixed overhead to the cost ofconversion be based on the normal capacity of the production facilities. Thisstatement is effective for inventory costs incurred after December 31,2005. Adoption of this statement is not expected to have a material effect onthe financial statements of Hospira.

 

InDecember 2004, the FASB issued SFAS No. 123R, ‘‘Share-Based Payment,’’which requires, among other changes, that the cost resulting from allshare-based payment transactions be recognized as compensation cost over thevesting period based on the fair value of the instrument on the date of grant.SFAS No. 123R revises SFAS No. 123, ‘‘Accounting for Stock-BasedCompensation’’ which previously allowed pro forma disclosure of certaincompensation expense. Further, SFAS No. 123R supercedes AccountingPrinciples Board Opinion No. 25, ‘‘Accounting for Stock Issued toEmployees,’’ which previously allowed the intrinsic value method of accountingfor stock options rather than the fair value method when determining optionvalue used to measure compensation cost. On April 14, 2005, the Securitiesand Exchange Commission adopted a rule that amended the compliance datesof SFAS No. 123R to require implementation no later than the beginning ofthe first fiscal year beginning after June 15, 2005 (the first quarter of2006 for Hospira). Upon implementation, Hospira will commence recordingcompensation expense for any outstanding unvested share-based payments over theremaining vesting period. In addition, compensation expense will be recordedfor future grants of share-based payments over the specified vesting period. Hospirais currently evaluating the impact of SFAS No. 123R on its financialposition and results of operations. Hospira discloses in Note 11 the pro formanet income and earnings per share as if the fair value recognition provisionsof SFAS No. 123 had been applied through March 31, 2005.

 

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TheAmerican Jobs Creation Act of 2004 (‘‘Jobs Act’’), which was signed into law onOctober 22, 2004, provides for a special one-time dividends receiveddeduction on the repatriation of certain foreign earnings to a U.S. taxpayer,provided certain criteria are met. In accordance with FASB Staff Position 109-2,‘‘Accounting and Disclosure Guidance for the Foreign Earnings RepatriationProvision within the American Jobs Creation Act of 2004,’’ Hospira continues toevaluate whether it will repatriate qualified undistributed foreign earnings asa result of the Jobs Act. Tax authorities are expected to provide clarifyingguidance on key elements of the repatriation legislation that remain unclear.Hospira has not yet completed its evaluation in part due to the pendingclarifying language regarding spin-off transactions and its effect on theeconomic value of implementing any individual opportunity and its ability tomeet qualifying criteria. Accordingly, at this time it is not possible toreasonably estimate the amount of undistributed earnings, if any, that may berepatriated and the income tax effects of such repatriation. Hospira expects tocomplete its evaluation by the end of 2005.

 

**Note 3 – Assets Held for Sale**

 

OnFebruary 28, 2005, Hospira announced a strategic manufacturing,commercialization and development agreement with ICU Medical, Inc. and thesale of related assets. Under the terms of the agreements, on May 1, 2005,ICU Medical purchased Hospira’s Salt Lake City, Utah manufacturing facility andrelated equipment and inventory for approximately $32 million in cash. As aresult of these agreements, during the first quarter of 2005, Hospiraclassified the property and equipment to be sold under the agreements, totaling$20.7 million, as held for sale. In accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” Hospira recorded animpairment charge of approximately $2.4 million, representing the amount bywhich the carrying value of the assets exceeds the fair value less cost tosell.  In addition, raw materials andwork in process inventory of approximately $11.2 million will be sold as partof the transaction. As a condition of the purchase agreement, Hospira will beobligated to reimburse ICU Medical for certain obligations for up to 24 monthsafter closing.  The cost related to theseobligations is not expected to exceed $18.0 million.

 

**Note 4 – Income Taxes**

 

Taxeson income reflect the estimated annual effective rates and are determined on aseparate-return basis through April 30, 2004, at which time Hospira becamea separate stand-alone taxpayer. 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. Abbott hasretained responsibility for all tax liabilities through the spin-off date.

 

**Note 5 - Earnings per Share**

 

Basicearnings per share are computed by dividing net income by the number of weightedaverage common shares outstanding during the reporting period.  Diluted earnings per share are calculated togive effect to all potentially dilutive common shares that were outstandingduring the reporting period.  For periodsthrough April 30, 2004, basic and diluted earnings per share are computedusing the number of shares of Hospira common stock outstanding on April 30,2004, the date on which the Hospira common stock was distributed to theshareholders of Abbott.  On the spin-offdate, outstanding Abbott awards for non-retirement eligible Hospira employeeswere cancelled and replaced by new awards for Hospira common stock.  The new awards maintained both thepre-conversion aggregate intrinsic value of each award and the ratio of theexercise price per share to the market value per share.  Abbott awards granted to Hospira employeeswho were retirement eligible on the spin-off date remained options to purchaseAbbott stock and have no impact on Hospira share dilution.  The following table shows the effect of stockoptions on the weighted average number of shares outstanding used incalculating diluted earnings per share:

 

*(shares in thousands)*

 
| ** **                                           | ** ** | **Three Months Ended March 31** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Weighted  average common shares outstanding          |       | 157,191                              |       | 156,043 |   |
| Assumed  exercise of stock options                   |       | 1,328                                |       | — |   |
| Weighted  average dilutive common shares outstanding |       | 158,519                              |       | 156,043 |   |

 

Forthe three months ended March 31, 2005, there were outstanding options topurchase approximately 2.5 million shares of Hospira stock for which theexercise price of the options exceeded the average stock price.  Accordingly, these options are excluded fromthe diluted earnings per share calculation for these periods.

 

8

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**Note 6 – Litigation**

 

Hospira,or in some instances Abbott, is involved in various claims and legalproceedings, including product liability claims and proceedings related toHospira’s business.

 

Hospira’sproduct liability claim exposures are evaluated each reporting period. Hospira’sreserves, which are immaterial at March 31, 2005, are the best estimate ofloss, as defined by SFAS No. 5, “Accounting for Contingencies.”

 

Variousstate and federal agencies, including the U.S. Department of Justice andvarious state attorneys general, are investigating a number of pharmaceuticalcompanies, including Abbott, for allegedly engaging in improper marketing andpricing practices with respect to certain Medicare and Medicaid reimbursableproducts, including practices relating to average wholesale price (“AWP”).  These are civil investigations that areseeking to identify the practices and determine whether those practicesviolated any laws, including federal and state false claims acts, orconstituted fraud in connection with the Medicare and/or Medicaid reimbursementpaid to third parties.  In addition,Abbott is a defendant in a number of purported class actions on behalf ofindividuals or entities, including healthcare insurers and other third-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 be additional investigations or lawsuits, oradditional claims in the existing investigations or lawsuits, initiated withrespect to these matters in the future. Hospira cannot be certain that it will not be named as a subject ordefendant in these investigations or lawsuits. Hospira has been added as a defendant in one AWP proceeding, *The State of Texas ex rel. Ven-A-Care of the FloridaKeys, Inc. v. Abbott Laboratories Inc., Hospira, Inc., B. BraunMedical Inc. and Baxter Healthcare Corporation,*Case No. GV401286,pending in the District Court of Travis County, Texas.  The lawsuit alleges generally that thedefendants made false representations of prices and costs for drugs directlyand indirectly to the Texas Medicaid Program. Abbott will indemnify Hospira for liabilities associated with pending orfuture AWP investigations and lawsuits only to the extent that they are of thesame nature as the lawsuits and investigations that existed against Abbott asof the spin-off 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 related toHospira’s products. These investigations and lawsuits could result in changesto Hospira’s business practices or pricing policies, civil or criminal monetarydamages, penalties or fines, imprisonment and/or exclusion of Hospira productsfrom participation in federal and state healthcare programs, includingMedicare, Medicaid and Veterans’ Administration health programs, any of whichcould have a material adverse effect on its business, profitability andfinancial condition.

 

Hospirahas been named as a defendant in a lawsuit brought by three employees alleginggenerally that the spin-off of Hospira from Abbott Laboratories adverselyaffected employee benefits in violation of the Employee Retirement IncomeSecurity Act of 1974.  The lawsuit wasfiled on November 8, 2004, in the United States District Court for theNorthern District of Illinois, and is captioned: *Myla Nauman, Jane Roller and Michael Loughery v. Abbott Laboratoriesand Hospira, Inc.* The lawsuit seeks class action certificationon behalf of “All employees of Abbott who were participants and beneficiariesof the Abbott Benefit Plans whose employment with Abbott was terminated betweenAugust 22, 2003 and April 30, 2004, as a result of the spin-offannounced by Abbott on August 22, 2003.” On April 27, 2005, the courtissued an opinion denying the motions of Abbott and Hospira to dismiss thecomplaint. The ruling is not a determination of the merits of the plaintiffs’claims. Hospira denies all material allegations asserted against it in thecomplaint.

 

Basedupon information that is currently available, management believes that thelikelihood of a material loss to Hospira is remote. In accordance withSFAS No. 5, no loss reserves have been recorded for the non-productliability exposures discussed above.

 

Additionallegal proceedings may occur that may result in a change in the estimatedreserves recorded by Hospira. It is not feasible to predict the outcome of suchproceedings with certainty and there can be no assurance that their ultimatedisposition will not have a material adverse effect on Hospira’s financialposition, cash flows, or results of operations.

 

**Note 7 – Post-Retirement Benefits**

 

Retirementplans consist of defined benefit (“pension”), defined contribution, andpost-retirement medical and dental plans. The pension and post-retirement medical and dental plans cover certainemployees both in and outside of the United States.

 

Inconnection with the spin-off, Hospira and Abbott entered into an EmployeeBenefits Agreement, which provided that Abbott retain liabilities for pensionbenefits for U.S. non-union and international employees who were retired as ofthe spin-off date and liabilities for post-retirement medical and dentalbenefits for U.S. non-union employees who were retired or eligible to retire asof the spin-off date.

 

9

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***Net Pension and Medical and DentalBenefit Cost***

 

Inthe second quarter of 2004, Hospira announced a series of benefit plan changesincluding the enhancement of its 401(k) defined contribution plan, the freezingof the U.S. non-union pension plan and the discontinuation of the U.S.non-union post-retirement medical and dental plan. The discontinuation of theU.S. non-union post-retirement medical and dental plan was effective May 1,2004.  Effective December 31, 2004,the U.S. non-union pension plan was frozen. Eligible employees covered by theplan will continue to age into their benefits and will be entitled to allbenefits earned when they retire. Beginning January 1, 2005, all U.S.non-union employees are eligible to receive an additional company-matchingcontribution to the 401(k) plan and employees that are age 40 and above, as of December 31,2004, are eligible to receive an additional annual company-matchingcontribution for five years beginning in 2005.

 

Netcost (benefit) recognized for the three months ended March 31 for themajor pension plans and post-retirement medical and dental benefit plans, is asfollows:

 

*(dollars in thousands)*

 
| ** **                                        | ** ** | **Pension Plans**      | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
| ** **                                        | ** ** | **March 31**      | ** ** |
| ** **                                        | ** ** | **2005**               | ** ** | **2004(1)** | ** ** |
| Service cost  for benefits earned during the year |       | $                      | 529        |   | $ | 7,774 |   |
| Interest  cost on projected benefit obligations   |       | 5,508                  |       | 10,954 |   |
| Expected  return on plans’ assets            |       | (7,345                 | )          | (12,751 | ) |
| Net  amortization                                 |       | 306                    |       | 1,308 |   |
| Net pension  cost                                 |       | $                      | (1,002     | ) | $ | 7,285 |   |

 

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Notes

(1)          The net pension cost for the three months ended March 31, 2004includes costs allocated from Abbott for all Hospira employees, includingemployees who were retired as of the spin-off date.

 

*(dollars in thousands)*

 
| ** **                                        | ** ** | **Medical and Dental Plans** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended**       | ** ** |
| ** **                                        | ** ** | **March 31**            | ** ** |
| ** **                                        | ** ** | **2005**                     | ** ** | **2004(1)** | ** ** |
| Service cost  for benefits earned during the year |       | $                            | 359        |   | $ | 4,328 |   |
| Interest  cost on projected benefit obligations   |       | 789                          |       | 5,626 |   |
| Net  amortization                                 |       | 483                          |       | 808 |   |
| Net medical  and dental cost                      |       | $                            | 1,631      |   | $ | 10,762 |   |

 

----

Notes

(1)          The net medical and dental cost for the three months ended March 31,2004 includes costs allocated from Abbott for all U.S. Hospira employees,including employees who were retired or eligible to retire as of the spin-offdate.

 

Hospira’semployees participated through the spin-off date in the Abbott Stock RetirementPlan that is Abbott’s principal defined contribution plan, and thereafter inthe Hospira 401(k) Retirement Savings Plan. Hospira’s contributions to these defined contribution plans for thethree months ended March 31, 2005 and 2004 were approximately $22.1million and $5.0 million, respectively. Included in the three months ended March 31, 2005 is a $13.8million one-time special company contribution that was announced and recordedin 2004.

 

***Cash Funding***

 

Hospirafunds its domestic pension plans according to IRS funding limitations. Based onthose limitations, Hospira does not expect to contribute to its U.S. pensionplans in 2005.

 

10

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**Note 8 - Debt**

 

Hospirahas outstanding $700 million aggregate principal amount of notes, consisting of$300 million principal amount of five-year senior unsecured notes and $400million principal amount of ten-year senior unsecured notes. The $300 millionfive-year notes bear interest at a rate of 4.95% per annum and mature on June 15,2009, and the $400 million ten-year notes bear interest at a rate of 5.9% perannum and mature on June 15, 2014.

 

InJanuary 2005, Hospira entered into interest rate swap transactions wherebythe $300 million five-year senior unsecured notes due in June 2009 wereeffectively converted from fixed to floating rate debt.

 

InMarch 2005, Hospira entered into economic development promissory notes,the proceeds of which were used for a distribution facility expansion. The$1.75 million ten-year notes bear a fixed rate of interest of 2%, with principaland interest due monthly.

 

Hospira’srevolving credit facility consists of an unsecured revolving credit facility of$375 million (“Revolver”) that is available for working capital and otherrequirements. On April 29, 2005, the Revolver was amended to reduce oreliminate certain restrictions, in order to increase Hospira's operating flexibility.The Revolver allows Hospira to borrow funds on an unsecured basis at variableinterest rates as short-term cash needs dictate. As of March 31, 2005,Hospira had no amounts outstanding under the Revolver.

 

Theamended Revolver and the Senior Unsecured Notes contain, among otherprovisions, covenants with which Hospira must comply while they are in force.Under such covenants, Hospira is restricted from allowing liens on propertiesor assets, or merging or consolidating with any other corporation.  The amended Revolver further restrictsHospira from selling certain assets. Under the amended Revolver, Hospira must also comply with certainfinancial covenants, including interest coverage ratio, leverage ratio andminimum consolidated net worth. As of March 31, 2005, Hospira was incompliance with all covenants under the Revolver and the Senior UnsecuredNotes.

 

**Note 9 - Comprehensive Income, net of tax**

 

*(dollars in thousands)*

 
| ** **                                                 | ** ** | **Three Months Ended March 31** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Foreign  currency translation (losses)                     |       | $                                    | (4,218     | ) | $ | (32,304 | ) |
| Unrealized  (losses) gains on marketable equity securities |       | (293                                 | )          | 1,159 |   |
| Total other  comprehensive (loss)                          |       | (4,511                               | )          | (31,145 | ) |
| Net Income                                                 |       | 77,175                               |       | 64,991 |   |
| Total  Comprehensive Income                                |       | $                                    | 72,664     |   | $ | 33,846 |   |

 

 
| ** **                                                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| Cumulative  foreign currency translation gains                           |       | $                  | 7,288      |                  | $          | 11,506 |   |
| Cumulative  minimum pension liability adjustments, net of tax            |       | (25,360            | )          | (25,360               | )          |
| Cumulative  unrealized gains on marketable equity securities, net of tax |       | 1,450              |       | 1,743                 |       |
| Accumulated  Other Comprehensive (Loss)                                  |       | $                  | (16,622    | )                     | $          | (12,111 | ) |

 

**Note 10 - Segment Information**

 

Hospira’sprincipal business is the development, manufacture and sale of a broad line ofhospital products, including specialty injectable pharmaceuticals andmedication delivery systems, and the provision of injectable pharmaceuticalcontract manufacturing services. Hospira has two reportable segments: U.S. andInternational.

 

Hospira’sunderlying accounting records are maintained on a legal entity basis forgovernment and public reporting requirements. Segment disclosures are on aperformance basis consistent with internal management reporting. Certainimmaterial reclassifications have been made to the basis of presentation tofacilitate comparable reporting. Intersegment transfers of inventory arerecorded at standard cost and are not a measure of segment income fromoperations. The costs of some corporate functions are sold to segments atpredetermined rates that approximate cost. Remaining costs, if any, are notallocated.  The following segmentinformation has been prepared in accordance with the internal accountingpolicies of Hospira, as described above.

 

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*(dollars in thousands)*

 
| ** **                  | ** ** | **Three Months Ended March 31,  2005** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | **Net Sales**                               | ** ** | **Income from Operations** | ** ** |
| ** **                  | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                        |       |                                        |       |   |   |   |   |   |   |
| U.S.                        |       | $                                           | 550,390    |   | $ | 520,931 |   | $ | 98,152 |   | $ | 80,124 |   |
|                        |       |                                        |       |   |   |   |   |   |   |
| International               |       | 111,671                                     |       | 100,287 |   | $ | 21,653 |   | 17,352 |   |
| Total  reportable segments  |       | $                                           | 662,061    |   | $ | 621,218 |   | 119,805 |   | 97,476 |   |
| Corporate  functions        |       |                                        |       |   |   | (12,295 | ) | (11,093 | ) |
| Income from  operations     |       |                                        |       |   |   | 107,510 |   | 86,383 |   |
| Other, net                  |       |                                        |       |   |   | (5,964 | ) | (868 | ) |
| Income  before income taxes |       |                                        |       |   |   | $ | 101,546 |   | $ | 85,515 |   |

 

**Note 11 – Incentive Stock Programs**

 

Certainemployees of Hospira who were Abbott employees prior to the spin-off held stockoption awards granted under Abbott incentive stock programs.  For employees who were retirement eligible atthe spin-off date, these awards remained options to purchase Abbott stock (“unconvertedoptions”).

 

Forthose employees who were not retirement eligible at the spin-off date, theAbbott stock option awards were cancelled and replaced by new awards of options(“converted options”) to purchase Hospira common stock under the 2004 Plan atthe time of the spin-off.  The convertedoptions maintain both the pre-conversion aggregate intrinsic value of eachaward and the ratio of the exercise price per share to the market value pershare.  All other terms of the convertedoptions remain the same.

 

Hospirameasures compensation cost using the intrinsic value-based method of accountingfor stock options. In accordance with this intrinsic value method, nocompensation expense is recognized for Hospira’s stock option plans. If thefair value method of accounting was used for the Abbott and Hospira options,net income and earnings per share (EPS) in the periods during 2005 and 2004would have been as follows:

 

*(dollars in thousands)*

 
| ** **                                          | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                          | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Net Income,  as reported                            |       | $                                    | 77,175     |   | $ | 64,991 |   |
| Hospira  stock-based compensation, net of tax       |       | (2,384                               | )          | — |   |
| Pro forma  net income including Hospira stock-based |       |                                 |       |   |   |
| compensation  expense                               |       | 74,791                               |       | 64,991 |   |
| Abbott  stock-based compensation, net of tax (1)    |       | —                               |       | (5,716 | ) |
| Pro forma  net income including all stock-based     |       |                                 |       |   |   |
| compensation  expense                               |       | $                                    | 74,791     |   | $ | 59,275 |   |
|                                                |       |                                 |       |   |   |
| Basic EPS,  as reported                             |       | $                                    | 0.49       |   | $ | 0.42 |   |
| Basic EPS,  pro forma                               |       | $                                    | 0.48       |   | $ | 0.38 |   |
| Diluted EPS,  as reported                           |       | $                                    | 0.49       |   | $ | 0.42 |   |
| Diluted EPS,  pro forma                             |       | $                                    | 0.47       |   | $ | 0.38 |   |

 

----

Notes

(1)          For periods prior to the spin-off, these amounts reflect the Abbottstock-based compensation for Hospira employees, whether or not those awardswere cancelled and replaced by Hospira awards at the time of the spin-off. Forperiods subsequent to the spin-off, Abbott awards for Hospira employees whowere not retirement eligible were converted to Hospira options, and onlythe corresponding unvested portion of such awards impacts pro forma income.

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Theweighted average fair value for the Hospira options granted in the three monthsended March 31, 2005 was $9.30. The weighted average fair value for theAbbott options granted in the three months ended March 31, 2004 was$11.79. The fair value was estimated using the Black-Scholes option-pricingmodel based on the weighted average market price at the grant date and theweighted average assumptions specific to the underlying options. The historicalAbbott assumptions relate to Abbott stock and are therefore based on Abbott’svaluation assumptions. The assumptions utilized for option grants during theperiods presented are as follows:

 
| ** **                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Hospira  Stock Options Black-Scholes assumptions |       |     |       |     |       |
| (weighted  average):                             |       |     |       |     |       |
| Volatility                                       |       | 32.0%    |       | N/A      |       |
| Expected  life (years)                           |       | 3.4      |       | N/A      |       |
| Risk-free  interest rate                         |       | 4.0%     |       | N/A      |       |
| Dividend  yield                                  |       | 0.0%     |       | N/A      |       |
|                                             |       |     |       |     |       |
| Abbott Stock  Options Black-Scholes assumptions  |       |     |       |     |       |
| (weighted  average):                             |       |     |       |     |       |
| Volatility                                       |       | N/A      |       | 32.0%    |       |
| Expected  life (years)                           |       | N/A      |       | 5.4      |       |
| Risk-free  interest rate                         |       | N/A      |       | 2.9%     |       |
| Dividend  yield                                  |       | N/A      |       | 2.2%     |       |

 

In May 2005, approximately 2.6 million options were granted to certainemployees for the 2005 annual stock option grant.

 

**Note 12 – Relationship with Abbott**

 

Hospiraoperated as part of Abbott through the spin-off date, during which time Abbottprovided various services to Hospira. The cost of these services was allocatedto Hospira utilizing various allocation methods.  Management believes that the methods used toallocate expenses to Hospira were reasonable. In connection with the spin-off,Hospira and Abbott entered into agreements pursuant to which Hospira and Abbottwill provide to the other, on an interim, transitional basis, various services.The agreed-upon charges for such services are generally intended to allow theservicing party to recover all out-of-pocket costs plus a mark up. The servicesgenerally commenced on the spin-off date and will terminate no later than 24 monthsfollowing the spin-off date. The receiving party may terminate the agreementrelated to such services upon prior written notice. The net cost of thesevarious services to Hospira were approximately $2 million for the three monthsended March 31, 2005. Prior year amounts of $5 million for the threemonths ended March 31, 2004 include only those costs that were allocatedto Hospira as a part of Abbott, including the costs related to leases notedbelow.

 

Inaddition, Hospira leases floor space in certain Abbott facilities. The terms ofthe leases range from two to ten years from the spin-off date, unlessterminated earlier by Hospira, and include additional services provided byAbbott. These additional services are integral to the facilities and primarily includemanufacturing support functions, quality assurance and information technologysystems.  The cost for the leases andadditional services for the three months ended March 31, 2005 wasapproximately $6 million.

 

BothHospira and Abbott have provided and will continue to provide manufacturingservices to the other. Prior to the spin-off date, under Abbott’s and Hospira’sinternal reporting practices, these services were provided at cost to thepurchasing entity and Hospira’s sales to Abbott included the value of the bulkmaterial. Subsequent to the spin-off date, for manufacturing services providedto Abbott, Hospira records as revenue its costs plus a third-partymanufacturing profit and, for certain products, Hospira receives the bulkmaterial from Abbott and the mark up is on the value-added portion only.  Inventory that Hospirapurchases from Abbott is at Abbott’s cost plus a third-partymanufacturing profit. Sales to Abbott amounted to approximately $45 million and$46 million for the three months ended March 31, 2005 and 2004,respectively. Product purchases from Abbott were approximately $19 million and$20 million for the three months ended March 31, 2005 and 2004,respectively.

 

Hospirais obligated to purchase certain international operations and assets, andassume the corresponding liabilities, from Abbott over a two-year period afterthe spin-off date as Hospira establishes its business infrastructure outsidethe United States and obtains regulatory approval for the transfer of themarketing authorizations for Hospira products to local Hospira affiliates orthird-party distributors. The purchase price will be equal to the net bookvalue of those assets and liabilities at the time of such purchase.

 

13

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Accordingly,the net book value will be affected by normal operations, exchange rates andother business factors. Hospira pays Abbott interest on a portion of thispurchase price at local prevailing short-term rates in connection with Hospira’suse of these assets during that period. As of March 31, 2005, the net bookvalue of those assets and liabilities was approximately $273.2 million, ofwhich $14.7 million is recorded as long-term. The net book value is primarilycomprised of accounts receivable of $109.2 million, inventory of $92.9 million,equipment of $67.3 million and other, net of $3.8 million. Each amount has beenincluded in the corresponding balance sheet line item. The amount due to Abbottfor the net book value of assets and liabilities is offset by $115.4 millionfor items that are due from Abbott related to the international business. Theseitems include amounts due for operating profits and inventory purchases ofHospira products to support the international business.  All charges between Hospira and Abbott areincluded in Due to Abbott, Net on the balance sheet. In May 2005, Hospirapurchased the net assets of Canada and the Netherlands from Abbott. Hospiraexpects to purchase the net assets of additional countries each quarterthroughout the remaining transition period.

 

14

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**Item 2.****  Management’sDiscussion And Analysis Of Financial Condition And Results OfOperations**

 

**Overview**

 

Hospirais a global specialty pharmaceutical and medication delivery company that isfocused on products that improve the productivity, safety and efficacy ofpatient care in the acute care setting. Hospira is a leader in the development, manufacture and marketing ofspecialty injectable pharmaceuticals and medication delivery systems thatdeliver drugs and intravenous (I.V.) fluids. Hospira is also a leading providerof contract manufacturing services to pharmaceutical and biotechnologycompanies for formulation development, filling and finishing of injectablepharmaceuticals.  Hospira’s broadportfolio of products is used by hospitals and alternate site providers, suchas clinics, home healthcare providers and long-term care facilities.

 

**Transition from Abbott**

 

Forall periods prior to the spin-off, Hospira operated as a part of Abbott’sHospital Products and International segments. References to the historical assets, liabilities, products, businessesor activities of Hospira prior to the spin-off are generally intended to referto the historical assets, liabilities, products, businesses or activities ofthe business as it was conducted as part of Abbott and its subsidiaries priorto the spin-off. Hospira’s condensed consolidated financial statements for thethree months ended March 31, 2005 reflect Hospira’s operations as aseparate, stand-alone entity subsequent to the spin-off. The financialinformation in the financial statements included in the three months ended March 31,2004, does not include all the expenses that would have been incurred, nor doesit reflect Hospira’s results of operations, financial position and cash flows,had Hospira been a stand-alone company.

 

Whilethe legal transfer of certain operations and assets (net of liabilities)outside the United States will occur over a two-year period after the spin-offdate, these operations and assets are used in the conduct of Hospira’sinternational business and Hospira is subject to the risks and entitled to thebenefits generated by the operations and assets. Hospira is dependent on Abbott’sinternational infrastructure until such legal transfers occur in eachinternational country.  Such transfersmust be completed within two years after the spin-off date.

 

Hospiraexpects to incur increased expenses on an ongoing basis, including expensesrelating to establishing corporate functions, operating and maintaininginformation technology systems, and operating internationally on a stand-alonebasis, as well as on a non-recurring, transitional basis, including expensesrelating to the establishment of new facilities, the build-out of independentinformation technology systems, and product registration and re-labeling. Thesenon-recurring transitional costs are estimated to total approximately $100million (pre-tax) over the 24-month period subsequent to the spin-off. As of March 31,2005, Hospira had incurred $43.1 million of these costs, of which $10.7 millionwere incurred during the three months ended March 31, 2005.

 

**Critical Accounting Policies**

 

Thepreparation of financial statements in accordance with generally acceptedaccounting principles (GAAP) requires management to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses. A summary of Hospira’s significant accounting policies are includedin Note 1 to the company’s consolidated financial statements, which areincluded in Hospira’s Annual Report on Form 10-K for the year ended December 31,2004. Certain of Hospira’s accounting policies are considered critical, asthese policies require significant, difficult or complex judgments bymanagement, often employing the use of estimates about the effects of mattersthat are inherently uncertain. Such policies are summarized in the Management’sDiscussion and Analysis section of Hospira’s Annual Report on Form 10-Kfor the year ended December 31, 2004. There have been no significantchanges in the application of the critical accounting policies since December 31,2004.

 

**Recently Issued Accounting Standards**

 

InNovember 2004, the FASB issued SFAS No. 151,’’Inventory Costs.’’ Thisstatement clarifies the accounting for the abnormal amount of idle facilitiesexpense, freight, handling costs and wasted material. This statement requiresthat those items be recognized as current-period expense. In addition, thestatement requires that allocation of fixed overhead to the cost of conversionbe based on the normal capacity of the production facilities. This statement iseffective for inventory costs incurred after December 31, 2005. Adoptionof this statement is not expected to have a material effect on the financialstatements of Hospira.

 

InDecember 2004, the FASB issued SFAS No. 123R, ‘‘Share-Based Payment,’’which requires, among other changes, that the cost resulting from allshare-based payment transactions be recognized as compensation cost over thevesting period based on the fair value of the instrument on the date of grant.SFAS No. 123R revises SFAS No. 123, ‘‘Accounting for Stock-BasedCompensation’’ which previously allowed pro forma disclosure of certaincompensation expense.  Further, SFAS No. 123Rsupercedes Accounting Principles Board Opinion No. 25, ‘‘Accounting forStock Issued to Employees,’’ which previously allowed the intrinsic valuemethod of accounting for stock options rather than the fair value method whendetermining option value used to measure compensation cost. On April 14,2005, the Securities and Exchange Commission adopted a rule that amendedthe compliance dates of SFAS No. 123R to require implementation no laterthan the beginning of the first fiscal year beginning after June 15, 2005(the first quarter of 2006 for Hospira). Upon implementation, Hospira willcommence recording compensation expense for any outstanding unvested

 

15

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share-based payments over the remaining vesting period.In addition, compensation expense will be recorded for future grants ofshare-based payments over the specified vesting period. Hospira is currentlyevaluating the impact of SFAS No. 123R on its financial position andresults of operations. Hospira discloses in Note 11 the pro forma net incomeand earnings per share as if the fair value recognition provisions of SFAS No. 123had been applied through March 31, 2005.

 

TheAmerican Jobs Creation Act of 2004 (‘‘Jobs Act’’), which was signed into law onOctober 22, 2004, provides for a special one-time dividends receiveddeduction on the repatriation of certain foreign earnings to a U.S. taxpayer,provided certain criteria are met. In accordance with FASB Staff Position 109-2,‘‘Accounting and Disclosure Guidance for the Foreign Earnings RepatriationProvision within the American Jobs Creation Act of 2004,’’ Hospira continues toevaluate whether it will repatriate qualified undistributed foreign earnings asa result of the Jobs Act. Tax authorities are expected to provide clarifyingguidance on key elements of the repatriation legislation that remain unclear.Hospira has not yet completed its evaluation in part due to the pendingclarifying language regarding spin-off transactions and its effect on theeconomic value of implementing any individual opportunity and its ability tomeet qualifying criteria. Accordingly, at this time it is not possible toreasonably estimate the amount of undistributed earnings, if any, that may berepatriated and the income tax effects of such repatriation. Hospira expects tocomplete its evaluation by the end of 2005.

 

**2005 First Quarter Events**

 

•                  Signeda manufacturing, commercialization and development agreement for the Hospiracritical care product line with ICU Medical and the related asset purchaseagreement for the sale of the Salt Lake City, Utah manufacturing facility.Hospira will retain worldwide commercial responsibility for its critical careproduct line. The transaction subsequently closed on May 1, 2005.

 

•                  Announceda development agreement with Bridge Medical to create a new, wirelesspoint-of-care medication management solution linking the Hospira MedNetTMsoftware with the Bridge MedPointTM barcode-enabled point-of-care system.

 

**Factors that Influence Results of Operation**

 

Hospira disclosed certain factors that influence its results ofoperations in the Management's Discussion and Analysis section of Hospira'sAnnual Report on Form 10-K for the year ended December 31, 2004.  Other than the factors discussed below, Hospirais not aware of any significant changes in such factors since December 31,2004.

 

Hospirahas historically distributed Berlex’s imaging agents. During the fourth quarterof 2004, Hospira received notification from Berlex that it was exercising the “wind-down”clause in the distribution agreement. Hospira has reached agreement with Berlexwith respect to the terms of the “wind-down.” Hospira anticipates that the relationship with Berlex will end in thesecond quarter of 2005. Hospira’s sales relating to this agreement areanticipated to be approximately $60 to $65 million**,**all of which will be recorded in the first half of the year.In addition, operating profits in 2005 related to this “wind-down” are expectedto be negatively affected by approximately $8 million to $9 million compared to2004.

 

Somewholesalers of Hospira’s pharmaceutical products are attempting to implement afee-for-service model for the distribution of pharmaceutical products. Hospirais evaluating the potential impact of this possible change on its drugwholesale business model. Certain drug wholesalers have taken unilateral stepsto implement service fees and are invoicing Hospira for these fees. Hospiradenies that it owes additional service fees under its existing contracts withthese drug wholesalers and has not recorded any provisions for these fees.Hospira is continuing to address this matter with the drug wholesalers, grouppurchasing organizations and its customers to resolve this matter. If thesefees are successfully implemented, Hospira could experience increased costs todistribute its products, which could be material.

 

Approximately50 percent of Hospira’s net sales are made under numerous contracts with grouppurchasing organizations (“GPO”). Typically, these contracts cover a portion ofHospira’s product lines, specify the prices for Hospira’s products, and areeffective for three to five years. Generally, the contracts are extended orcompetitively bid prior to contract expiration. Hospira has five GPO pharmacycontracts to be renewed or renegotiated during 2005. Of these five GPO pharmacycontracts, two have been extended into 2006, and the other three contracts arenearing completion of their renewals or extensions. Hospira expects to secureits base business with respect to all the contracts up for renewal.

 

**Results of operations for the three months ended March 31,2005 compared to March 31, 2004**

 

Theresults of Hospira’s operations for the three months ended March 31, 2004reflect Hospira’s operations as a part of Abbott prior to the spin-off.

 

16

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*Net Sales*

 

Netsales increased 6.6% in the first quarter of 2005 compared to the first quarterof 2004. Sales to third parties represented 6.7% growth in overall sales,driven by volume/product mix of 5.6%, exchange of 0.7% and price of 0.4%. Salesto Abbott had an unfavorable impact of (0.1%) on overall sales growth driven bythe exclusion of the bulk drug cost for certain products post-spin, partiallyoffset by increased demand.

 

Acomparison of product line sales is as follows:

 
| ** **                                        | ** ** | **Three Months Ended March 31** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | ** **                           | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                                        | ** ** | ** **                           | ** ** | ** ** | ** ** | **Change vs.** | ** ** |
| ** **                                        | ** ** | **2005**                             | ** ** | **2004** | ** ** | **Prior Year*** | ** ** |
| U.S. —                                       |       |                                 |       |   |   |   |   |
| Specialty  Injectable Pharmaceuticals             |       | $                                    | 224        |   | $ | 205 |   | 9.6 |   |
| Medication  Delivery Systems                      |       | 188                                  |       | 187 |   | 0.7 |   |
| Injectable  Pharmaceutical Contract Manufacturing |       | 50                                   |       | 38 |   | 32.1 |   |
| Sales to  Abbott Laboratories                     |       | 28                                   |       | 36 |   | (22.6) |   |
| Other                                             |       | 60                                   |       | 55 |   | 8.3 |   |
|                                              |       |                                 |       |   |   |   |   |
| Total U.S.                                        |       | 550                                  |       | 521 |   | 5.7 |   |
|                                              |       |                                 |       |   |   |   |   |
| International  —                             |       |                                 |       |   |   |   |   |
|                                              |       |                                 |       |   |   |   |   |
| Sales to  Third Parties                           |       | 95                                   |       | 90 |   | 4.2 |   |
| Sales to  Abbott Laboratories                     |       | 17                                   |       | 10 |   | 79.5 |   |
|                                              |       |                                 |       |   |   |   |   |
| Total  International Sales                        |       | 112                                  |       | 100 |   | 11.4 |   |
|                                              |       |                                 |       |   |   |   |   |
| Consolidated  Net Sales                           |       | $                                    | 662        |   | $ | 621 |   | 6.6 |   |

 

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* Percent change computed based on unrounded numbers.

 

Thesales increase in Specialty Injectable Pharmaceuticals was primarily due toincreased sales of Berlex imaging agents, higher sales of genericanti-infective products, new products (fluconazole and deferoxamine), increasedsales of Precedex®, and favorable price, partially offset by a decline inCorlopam® due to generic competition. The sales increase in Medication Delivery Systems was driven by growthin medication management, partially offset by a decline in infusion therapyproducts.  The growth in medicationmanagement was due to increased placements of Hospira’s newer technologyPlumA+® pumps and the impact of the change in business model in late 2004 whichresulted in sales-type lease accounting. The decline in infusion therapyproduct sales was driven by lower pricing on sets, as well as the expiration ofa contract under which Hospira sold product to a competitor, partially offsetby favorable volume/mix.** **The sales increase in InjectablePharmaceutical Contract Manufacturing was primarily due to the timing ofcustomer shipments, favorable price, and growth in demand for several existingsupply agreements. The decrease in U.S. Sales to Abbott was due to theexclusion of the cost of the bulk drug subsequent to the spin-off for certainproducts manufactured for Abbott, while 2004 included the cost of these bulkdrugs.  This reflects the post spin-offmanufacturing arrangement between Hospira and Abbott under which Abbotttransfers the bulk drug to Hospira for processing and Hospira’s sales includeonly the value-added portion plus a markup for these products. This reductionwas partially offset by increased demand by Abbott for several of its productsand by the markup on product sold to Abbott after the spin-off. The increase inOther U.S. sales was primarily due to increased sales of new products tonon-hospital healthcare customers, partially offset by a decline in criticalcare products.  International Sales toThird 

 

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Partiesincreased primarily due to favorable foreign exchange rates. InternationalSales to Abbott increased primarily due to volume related to an additionalproduct manufactured for Abbott subsequent to the spin-off, coupled with theimpact of the markup on products sold to Abbott after the spin-off.

 

*Gross Profit*

 

Grossprofit increased approximately $49.4 million, or 29.4%, for the quarter ended March 31,2005, compared with the same period in 2004. Gross profit margin increased to32.9% for the first quarter of 2005, from 27.1% for the first quarter of 2004.The increased margin is primarily the result of volume/product mix improvementof 1.9%, the markup on sales to Abbott of 1.4%, reduced benefit costs of 1.8%as a result of the changes in benefit plans in 2004, manufacturing productivityof 1.5%, the impact of foreign exchange of 0.5% and a slight increase in priceof 0.3%. These increases were partially offset by additional depreciation of(0.8)% resulting from the 2004 revision in the estimated useful life forcertain drug delivery pumps placed with customers, an impairment charge of(0.4)% related to the assets held for sale at March 31, 2005 and otherchanges of (0.4)%.

 

*Research and Development*

 

Researchand development expenses increased approximately $3.9 million, or 16.1%, forthe quarter ended March 31, 2005, compared with the same period in 2004.The increase in research and development expenses was primarily due to spendingon new product development related to the development of integrated softwarefor drug delivery devices that reduce medication errors, a next generation drugdelivery device and new compounds added to Hospira’s generic injectable drugpipeline. Research and development expenses increased to 4.3% of net sales forthe quarter ended March 31, 2005, compared with 3.9% of net sales for thesame period in 2004.

 

*Selling, General and Administrative*

 

Selling,general and administrative expenses increased approximately $24.4 million, or42.4%, for the quarter ended March 31, 2005, compared with the same periodin 2004. The increase was primarily due to additional costs related to becominga separate stand-alone public company. These costs include the establishment of corporate functions, legal andother professional services, insurance, information technology and costsrelating to establishing business infrastructure outside the United States.Selling, general and administrative expenses increased to 12.4% of net salesfor the quarter ended March 31, 2005, compared with 9.3% of net sales forthe same period in 2004.

 

*Interest and Other (Income) Expense, Net*

 

Interestexpense was approximately $7.2 million for the quarter ended March 31,2005, compared with no expense in the same period in 2004. The increase wasprimarily due to interest relating to the senior unsecured notes, which wereissued in June 2004 to repay the senior unsecured credit facility thatHospira incurred as part of the spin-off. Other (income) expense, net was$(1.2) million for the three months ended March 31, 2005 compared to $0.9million for the three months ended March 31, 2004. The change wasprimarily related to interest income in 2005. Prior to the spin-off, Hospiradid not hold cash.

 

*Income Tax Expense*

 

Theeffective tax rate was 24.0% for each of the quarters ended March 31, 2005and 2004. Hospira estimates its 2005 annual effective tax rate to be 24%. Theeffective tax rates are less than the statutory U.S. federal income tax rateprincipally due to the benefit of tax exemptions, of varying durations, inseveral taxing jurisdictions.

 

**Liquidity and Capital Resources at March 31, 2005compared with December 31, 2004**

 

NetCash From Operating Activities continues to be Hospira’sprimary source of funds to finance operating needs and capital expenditures.  Capital resources include cash on hand andborrowing availability under Hospira’s $375 million credit facility.

 

Operatingactivities provided net cash of $90.4 million, primarily driven by net incomeof $77.2 million and non-cash depreciation and amortization charges of $40.6million, offset by changes in operating assets and liabilities of $27.4million.  The changes in operating assetsand liabilities consist principally of an increase in accounts receivablesgenerated primarily by increases in third-party sales, and an increase ininventory.  The change in Other, net is due primarily to an increase in income taxespayable, net of cash payments.

 

NetCash From Investing Activities of $22.4 millionincludes $72.4 million in sales of marketable debt securities offset by capitalexpenditures of $50.1 million for upgrading and expanding manufacturing andadministrative support facilities and information technology systems. Annualcapital expenditures for 2005 are expected to be approximately $250 million to$275 million.

 

NetCash Provided by Financing Activities of $17.1 million consists primarily ofproceeds from employee stock option exercises.

 

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AtMarch 31, 2005, Hospira’s working capital was approximately $769.0million, compared to working capital of approximately $662.1 million at December 31,2004.  The increase in working capital in2005 was mainly due to the increase in cash and cash equivalents, tradereceivables, and a decrease in the current portion of “Due to Abbott, Net,”which is primarily related to the liability for the international net assets tobe purchased from Abbott, offset by an increase in other accrued liabilities.The increase in cash is due primarily to operating cash flow from operations asdiscussed above.

 

Hospirabelieves that its current capital resources, including cash and cashequivalents, cash generated from operations, and funds available from itsrevolving credit facility will be sufficient to finance its operations,including product development, transition costs, international net assetacquisitions, and capital expenditures, for the foreseeable future.

 

InMarch 2005, Hospira entered into economic development promissory notes,the proceeds of which were used for a distribution facility expansion. The$1.75 million ten-year notes bear a fixed rate of interest of 2%, with principaland interest due monthly.

 

Hospira’srevolving credit facility consists of an unsecured revolving credit facility of$375 million (“Revolver”) that is available for working capital and otherrequirements. On April 29, 2005, the Revolver was amended to reduce oreliminate certain restrictions, in order to increase Hospira's operatingflexibility. The Revolver allows Hospira to borrow funds on an unsecured basisat variable interest rates as short-term cash needs dictate. As of March 31,2005, Hospira had no amounts outstanding under the Revolver.

 

Theamended Revolver and the Senior Unsecured Notes contain, among otherprovisions, covenants with which Hospira must comply while they are in force.Under such covenants, Hospira is restricted from allowing liens on propertiesor assets, or merging or consolidating with any other corporation.  The amended Revolver further restrictsHospira from selling certain assets. Under the amended Revolver, Hospira must also comply with certainfinancial covenants, including interest coverage ratio, leverage ratio andminimum consolidated net worth. As of March 31, 2005, Hospira was incompliance with all covenants under the Revolver and the Senior UnsecuredNotes.

 

Hospirais obligated to purchase certain international operations and assets, andassume the corresponding liabilities, from Abbott over a two-year period afterthe spin-off date as Hospira establishes its business infrastructure outsidethe United States and obtains regulatory approval for the transfer of themarketing authorizations for Hospira products to local Hospira affiliates orthird party distributors. The purchase price will be equal to the net bookvalue of those assets and liabilities at the time of such purchase.Accordingly, the net book value will be affected by normal operations, exchangerates and other business factors. Hospira pays Abbott interest on a portion ofthis purchase price at local prevailing short-term rates in connection withHospira’s use of these assets during that period. Hospira expects to fund thesenet asset purchases from operating cash flow. As of March 31, 2005, thenet book value of those assets and liabilities was approximately $273.2million. The amount owed for the net book value of assets and liabilities isoffset by $115.4 million of items that are due from Abbott related to theinternational business. These items include amounts due for operating profits andinventory purchases of Hospira products to support the international business.In May 2005, Hospira purchased the net assets of Canada and theNetherlands from Abbott. Hospira expects to purchase the net assets ofadditional countries each quarter throughout the remaining transition period.

 

**Contractual Obligations**

 

Hospirahas no material exposures to off-balance sheet arrangements, no special purposeentities, and no activities that include non-exchange-traded contractsaccounted for at fair value.

 

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Thefollowing table summarizes Hospira’s estimated contractual obligations as of March 31,2005 (dollars in millions):

 
| ** **                                                                     | ** ** | **Payment Due by Period** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                     | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2010 and** | ** ** |
| ** **                                                                     | ** ** | **Total**                 | ** ** | **2005** | ** ** | **2006-2007** | ** ** | **2008-2009** | ** ** | **Thereafter** | ** ** |
| Long-term  debt and interest payments                                          |       | $                         | 1,010.3    |   | $ | 38.5 |   | $ | 76.9 |   | $ | 376.9 |   | $ | 518.0 |   |
| Lease  obligations                                                             |       | 149.0                     |       | 16.2 |   | 32.5 |   | 28.9 |   | 71.4 |   |
| Purchase  commitments (1)                                                      |       | 310.7                     |       | 258.9 |   | 51.1 |   | 0.7 |   | — |   |
| Other  long-term liabilities reflected on the consolidated balance sheet (2)   |       | 18.7                      |       | — |   | 18.7 |   | — |   | — |   |
| Amounts due  to Abbott for acquisition of certain international net assets (3) |       | 273.2                     |       | 222.0 |   | 51.2 |   | — |   | — |   |
| Total                                                                          |       | $                         | 1,761.9    |   | $ | 535.6 |   | $ | 230.4 |   | $ | 406.5 |   | $ | 589.4 |   |
|                                                                                |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| (1) |   | Purchase commitments  consist primarily of inventory purchases made in the normal course of  business to meet operational requirements.                                                                                                                                                                                                            |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Excludes approximately  $83.6 million of other long-term liabilities related primarily to  post-retirement benefit plans.                                                                                                                                                                                                                          |
| (3) |   | The amount due to Abbott  for the acquisition of certain international net assets excludes an  offsetting amount of $115.4 million for items that are due from Abbott  related to the international business. These include amounts due for  operating profits and inventory purchases of Hospira products to support the  international business. |

 

**Legislative Issues**

 

TheJobs Act, signed into law in October 2004, provides for a special one-timedividends received deduction on the repatriation of certain foreign earnings toa U.S. taxpayer, provided certain criteria are met. Tax authorities areexpected to provide clarifying guidance on key elements of the repatriationlegislation that remain unclear. Hospira has not yet completed its evaluationof the effect of the Jobs Act on undistributed earnings, in part due to thepending clarifying language regarding spin-off transactions and its effect onthe economic value of implementing any individual opportunity and its abilityto meet qualifying criteria. Accordingly, at this time it is not possible toreasonably estimate the amount of undistributed earnings, if any, that may berepatriated and the income tax effects of such repatriation. Hospira expects tocomplete its evaluation by the end of 2005.

 

Hospira’sprimary markets are highly competitive and subject to substantial governmentregulation. Hospira expects debate to continue at both the federal and statelevels over the availability, method of delivery and payment for healthcareproducts and services. If additional legislation is enacted, it could have theeffect of reducing prices, or reducing the rate of price increases, for medicalproducts and services. International operations are also subject to asignificant degree of government regulation. It is not possible to predict theextent to which Hospira or the healthcare industry in general might beadversely affected by these factors in the future.

 

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

 

Underthe safe harbor provisions of the Private Securities Litigation Reform Act of1995, Hospira cautions investors that any forward-looking statements orprojections made by Hospira, including those made in this document, are subjectto risks and uncertainties that may cause actual results to differ materiallyfrom those projected. In some cases, these statements can be identified by theuse of forward-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 anindependent public company are forward-looking statements. Please be aware thatthese statements and any other forward-looking statements in this document onlyreflect Hospira’s expectations and are not guarantees of performance. Thesestatements involve risks, uncertainties and assumptions. Many of these risks,uncertainties and assumptions are beyond Hospira’s control, and may causeactual results and performance to differ materially from Hospira’sexpectations.

 

Economic,competitive, governmental, technological and other factors that may affectHospira’s operations are discussed in Hospira’s Annual Report on Form 10-Kfor the year ended December 31, 2004. Accordingly, undue reliance should not be placed on the forward-lookingstatements contained in this document. These forward-looking statements speakonly as of the date on which the statements were made. Hospira undertakes noobligation to update or revise publicly any forward-looking statements, whetheras

 

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a result of new information, future events or otherwise.

 

**Item 3.****  Quantitative And Qualitative Disclosures About Market Risk**

 

InJanuary 2005, Hospira entered into interest rate swap transactions wherebythe $300 million five-year senior unsecured notes due in June 2009 wereeffectively converted from fixed to floating rate debt.  The objectives of the transactions enteredinto were to (i) maintain a capital structure containing appropriateamounts of fixed and floating rate debt, and (ii) lower the interestexpense on these notes in the near term. Hospira does not expect cash flows from debt related interestrate-sensitive instruments to be affected to a significant degree by reasonablechanges in market interest rates.

 

Therehave been no other material changes to the information provided in Hospira’sAnnual Report on Form 10-K for the year ended December 31, 2004.

 

**Item 4.****          ****Controls and Procedures**

 

(a)          *Evaluation of disclosurecontrols and procedures. *The Chief Executive Officer, Christopher B.Begley, and Chief Financial Officer, Terrence C. Kearney, evaluated theeffectiveness of Hospira’s disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities and Exchange Act of 1934) as of the end ofthe period covered by this report, and concluded that Hospira’s disclosurecontrols and procedures were effective.

 

(b)         *Changes in internalcontrols.*During Hospira’smost recent fiscal quarter, there was no change in Hospira’s internal controlover financial reporting that has materially affected, or is reasonably likelyto materially affect, Hospira’s internal control over financial reporting.

 

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**PART II.****  OTHERINFORMATION**

 

**Item 1.****          ****Legal Proceedings**

 

Variousstate and federal agencies, including the U.S. Department of Justice andvarious state attorneys general, are investigating a number of pharmaceuticalcompanies, including Abbott, for allegedly engaging in improper marketing andpricing practices with respect to certain Medicare and Medicaid reimbursableproducts, including practices relating to average wholesale price (“AWP”).  These are civil investigations that areseeking to identify the practices and determine whether those practicesviolated any laws, including federal and state false claims acts, orconstituted fraud in connection with the Medicare and/or Medicaid reimbursementpaid to third parties.  In addition,Abbott is a defendant in a number of purported class actions on behalf ofindividuals or entities, including healthcare insurers and other third-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 be additional investigations or lawsuits, oradditional claims in the existing investigations or lawsuits, initiated withrespect to these matters in the future. Hospira cannot be certain that it will not be named as a subject ordefendant in these investigations or lawsuits. Hospira has been added as a defendant in one AWP proceeding, *The State of Texas ex rel. Ven-A-Care of the FloridaKeys, Inc. v. Abbott Laboratories Inc., Hospira, Inc., B. BraunMedical Inc. and Baxter Healthcare Corporation,*Case No. GV401286,pending in the District Court of Travis County, Texas.  The lawsuit alleges generally that thedefendants made false representations of prices and costs for drugs directlyand indirectly to the Texas Medicaid Program. Abbott will indemnify Hospira for liabilities associated with pending orfuture AWP investigations and lawsuits only to the extent that they are of thesame nature as the lawsuits and investigations that existed against Abbott asof the spin-off 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 related toHospira’s products. These investigations and lawsuits could result in changesto Hospira’s business practices or pricing policies, civil or criminal monetarydamages, penalties or fines, imprisonment and/or exclusion of Hospira productsfrom participation in federal and state healthcare programs, includingMedicare, Medicaid and Veterans’ Administration health programs, any of whichcould have a material adverse effect on its business, profitability andfinancial condition.

 

Hospirahas been named as a defendant in a lawsuit brought by three employees alleginggenerally that the spin-off of Hospira from Abbott Laboratories adverselyaffected employee benefits in violation of the Employee Retirement IncomeSecurity Act of 1974 The lawsuit was filed on November 8, 2004, in theUnited States District Court for the Northern District of Illinois, and iscaptioned: *Myla Nauman, Jane Roller andMichael Loughery v. Abbott Laboratories and Hospira, Inc.* Thelawsuit seeks class action certification on behalf of “All employees of Abbottwho were participants and beneficiaries of the Abbott Benefit Plans whoseemployment with Abbott was terminated between August 22, 2003 and April 30,2004, as a result of the spin-off announced by Abbott on August 22, 2003.”On April 27, 2005, the court issued an opinion denying the motions ofAbbott and Hospira to dismiss the complaint. The ruling is not a determinationof the merits of the plaintiffs’ claims. Hospira denies all materialallegations asserted against it in the complaint.

 

Additionallegal proceedings may occur that may result in a change in the estimatedreserves recorded by Hospira. It is not feasible to predict the outcome of suchproceedings with certainty and there can be no assurance that their ultimatedisposition will not have a material adverse effect on Hospira’s financialposition, cash flows, or results of operations.

 

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**Item 2.****          ****Changes in Securities andUse of Proceeds**

 

(c)          Issuer Purchases of Equity Securities

 

Thetable below gives information on a monthly basis regarding purchases made byHospira of its common stock.

 
| ** **                              | ** ** | ** **           | ** ** | ** **         | ** ** | **Total Number of**       | ** ** | **Maximum Number (or**             | ** ** |
|-----------------------------------------|------------|----------------------|------------|--------------------|------------|---------------------------|------------|------------------------------------|------------|
| ** **                              | ** ** | ** **           | ** ** | ** **         | ** ** | **Shares Purchased as**   | ** ** | **Approximate Dollar Value)**      | ** ** |
| ** **                              | ** ** | **Total Number of**  | ** ** | ** **         | ** ** | **Part of Publicly** | ** ** | **of Shares that May Yet be** | ** ** |
| ** **                              | ** ** | **Shares Purchased** | ** ** | **Average Price**  | ** ** | **Announced Plans or**    | ** ** | **Purchased Under the Plans**      | ** ** |
| **Period**                              | ** ** | **(1)**              | ** ** | **Paid per Share** | ** ** | **Programs**              | ** ** | **or Programs**                    | ** ** |
| January 1-January 31,  2005   |       | 7,415                |       | 32.75              |       | —                    |       | —                             |       |
| February 1-February 28,  2005 |       | 4,122                |       | 29.30              |       | —                    |       | —                             |       |
| March 1-March 31,  2005       |       | 9,657                |       | 31.63              |       | —                    |       | —                             |       |
| Total                                   |       | 21,194               |       | 31.57              |       |                      |       |                               |       |

 

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(1)          These shares represent the shares deemed surrendered to Hospira to paythe exercise price and satisfy tax withholding obligations in connection withthe exercise of employee stock options.

 

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**Item 6.****          ****Exhibits**

 

(a)          Exhibits

 
| ** ** | **EXHIBIT  NO.** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|------------|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       | 10.1             |       | Credit Agreement and Guaranty, dated as of April 30, 2004, as  amended as of April 29, 2005, among Hospira, Inc., as the Borrower  and the Guarantor, certain Subsidiary Borrowers, the lenders named therein,  Citigroup Global Markets Inc., ABN AMRO Incorporated, and Morgan Stanley  Senior Funding, Inc., as Joint Lead Bookunners and Joint Lead Arrangers,  ABN AMRO Bank N.V., and Morgan Stanley Senior Funding, Inc., as Joint  Syndication Agents, Bank One, NA and Bank of America, N.A., as  Co-Documentation Agents and Citicorp North America, Inc., as  Administrative Agent |
|       |             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|       | 12               |       | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|       |             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|       | 31.1             |       | Certificate of Chief Executive Officer pursuant to Rule 13a-14(a).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|       |             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|       | 31.2             |       | Certificate of Chief Financial Officer pursuant to Rule 13a-14(a).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|       |             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|       | 32.1             |       | Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|       |             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|       | 32.2             |       | Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

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SIGNATURE

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                     | HOSPIRA,  INC. |
|--------------------------|----------------|
|                     |           |   |
|                     |           |   |
|                     | By:            |   | /s/  Terrence C. Kearney |
|                     |           |   | Terrence C.  Kearney, |
|                     |           |   | Senior Vice  President,  Finance and Chief Financial  Officer |
|                     |           |   |
|                     |           |   |
| Date:  May 12, 2005 |           |   |

 

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