**UNITEDSTATES**

** **

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D. C.  20549**

 

**FORM 10-Q**

 

| **(Mark One)** | ** **                                                                                              |
|----------------|---------------------------------------------------------------------------------------------------------|
| ** **     | ** **                                                                                              |
| **x**          | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**For the quarterly period ended March 31,2008**

 

**OR**

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For the transition period from             to            **

 

**Commission File No. 1-31946**

 

**HOSPIRA,INC.**

 

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

 

**275 N. Field DriveLake Forest, Illinois 60045**

 

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

 

Indicateby check mark whether the registrant (l) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act ofl934 during the preceding l2 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90days.     Yes  x   Noo

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filer  x |   | Accelerated filer o |   | Non-accelerated filer o  (Do not check if a smaller reporting company) |   | Smaller reporting  company o |
|----------------------------|--------|--------------------------|--------|------------------------------------------------------------------------|--------|-----------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).     Yes  o No  x

 

Asof April 30, 2008, Registrant had outstanding 159,095,276 shares of commonstock, par value $0.01 per share.

 

 

 

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

 

**Hospira, Inc.**

 

**Quarterly Report on Form 10-Q**

 

**Index**

 
| **Part I  — Financial Information** |
|-----------------------------------------------|
|                                          |   |   |   |
| Item 1.                                       | Financial Statements |   |   |
|                                          |   |   |   |
| ** **                                    | Condensed  Consolidated Statements of Income (Loss) (Unaudited) — Three Months Ended  March 31, 2008 and March 31, 2007 |   | 3 |
|                                          |   |   |   |
|                                          | Condensed  Consolidated Statements of Cash Flows (Unaudited) — Three Months Ended  March 31, 2008 and March 31, 2007 |   | 4 |
|                                          |   |   |   |
| ** **                                    | Condensed  Consolidated Balance Sheets (Unaudited) — March 31, 2008 and  December 31, 2007 |   | 5 |
|                                          |   |   |   |
|                                          | Condensed  Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Three  Months Ended March 31, 2008 |   | 6 |
|                                          |   |   |   |
|                                          | Notes to  Condensed Consolidated Financial Statements (Unaudited) |   | 7 |
|                                          |   |   |   |
| Item 2.                                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 16 |
|                                          |   |   |   |
| 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 1A.                                      | Risk Factors |   | 22 |
|                                          |   |   |   |
| Item 2.                                       | Unregistered  Sales of Equity Securities and Use of Proceeds |   | 22 |
|                                          |   |   |   |
| Item 6.                                       | Exhibits |   | 22 |

 

 

2

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

 

**PART  I.  FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**Hospira, Inc.**

 

**Condensed Consolidated Statements ofIncome (Loss)**

 

**(Unaudited)**

 

***(dollars and shares in millions,except for per share amounts)***

*** ***
| ** **                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| Net sales                                     |       | $                                     | 888.7      |   | $ | 782.8 |   |
| Cost of products sold                         |       | 574.7                                 |       | 508.2 |   |
| Gross Profit                                  |       | 314.0                                 |       | 274.6 |   |
|                                          |       |                                  |       |   |   |
| Research and development                      |       | 49.9                                  |       | 43.5 |   |
| Acquired in-process  research and development |       | —                                |       | 84.8 |   |
| Selling, general and  administrative          |       | 152.4                                 |       | 131.9 |   |
| Income From Operations                        |       | 111.7                                 |       | 14.4 |   |
|                                          |       |                                  |       |   |   |
| Interest expense                              |       | 31.4                                  |       | 30.5 |   |
| Other income, net                             |       | (4.1                                  | )          | (0.6 | ) |
| Income (Loss) Before Income Taxes             |       | 84.4                                  |       | (15.5 | ) |
|                                          |       |                                  |       |   |   |
| Income tax expense                            |       | 19.0                                  |       | 13.9 |   |
| Net Income (Loss)                             |       | $                                     | 65.4       |   | $ | (29.4 | ) |
|                                          |       |                                  |       |   |   |
| Earnings (Loss) Per Common  Share:            |       |                                  |       |   |   |
| Basic                                         |       | $                                     | 0.41       |   | $ | (0.19 | ) |
| Diluted                                       |       | $                                     | 0.41       |   | $ | (0.19 | ) |
| Weighted Average Common  Shares Outstanding:  |       |                                  |       |   |   |
| Basic                                         |       | 158.7                                 |       | 156.1 |   |
| Diluted                                       |       | 161.0                                 |       | 158.4 |   |

 

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

 

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**Hospira, Inc.**

 

**Condensed Consolidated Statements ofCash Flows**

 

**(Unaudited)**

 

***(dollars in millions)***

** **
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| Cash Flow From Operating  Activities:                                              |       |                                  |       |   |   |
| Net income (loss)                                                                  |       | $                                     | 65.4       |   | $ | (29.4 | ) |
| Adjustments to reconcile net income (loss) to net cash from operating  activities- |       |                                  |       |   |   |
| Depreciation                                                                       |       | 47.1                                  |       | 41.2 |   |
| Amortization of intangibles                                                        |       | 16.9                                  |       | 9.2 |   |
| Write-off of acquired in-process research and development                          |       | —                                |       | 84.8 |   |
| Step-up value of acquired inventories sold                                         |       | —                                |       | 21.4 |   |
| Stock-based compensation expense                                                   |       | 14.4                                  |       | 7.2 |   |
| Changes in assets and liabilities-                                                 |       |                                  |       |   |   |
| Trade receivables                                                                  |       | (13.6                                 | )          | (18.6 | ) |
| Inventories                                                                        |       | (24.8                                 | )          | (8.5 | ) |
| Prepaid expenses and other assets                                                  |       | 11.4                                  |       | (4.1 | ) |
| Trade accounts payable                                                             |       | 6.1                                   |       | 5.1 |   |
| Other liabilities                                                                  |       | (47.8                                 | )          | (64.3 | ) |
| Other, net                                                                         |       | (1.6                                  | )          | 5.8 |   |
| Net Cash Provided by Operating Activities                                          |       | 73.5                                  |       | 49.8 |   |
| Cash Flow From Investing  Activities:                                              |       |                                  |       |   |   |
| Capital expenditures (including instruments placed with or leased to  customers)   |       | (42.9                                 | )          | (51.9 | ) |
| Acquisition of Mayne Pharma Limited, net of cash acquired                          |       | —                                |       | (1,961.3 | ) |
| Purchases of intangibles and other investments                                     |       | (38.2                                 | )          | — |   |
| Settlements of foreign currency contracts                                          |       | —                                |       | (41.2 | ) |
| Proceeds from dispositions of product rights                                       |       | —                                |       | 13.8 |   |
| Net Cash Used in Investing Activities                                              |       | (81.1                                 | )          | (2,040.6 | ) |
| Cash Flow From Financing  Activities:                                              |       |                                  |       |   |   |
| Issuance of long-term debt, net of fees paid                                       |       | —                                |       | 3,335.7 |   |
| Repayment of long-term debt                                                        |       | (25.0                                 | )          | (1,437.5 | ) |
| Other borrowings, net                                                              |       | 5.0                                   |       | (0.4 | ) |
| Excess tax benefit from stock-based compensation arrangements                      |       | 0.8                                   |       | 0.3 |   |
| Proceeds from stock options exercised                                              |       | 12.3                                  |       | 15.6 |   |
| Net Cash (Used in) Provided by Financing Activities                                |       | (6.9                                  | )          | 1,913.7 |   |
| Effect of exchange rate  changes on cash and cash equivalents                      |       | 5.5                                   |       | 5.3 |   |
| Net change in cash and  cash equivalents                                           |       | (9.0                                  | )          | (71.8 | ) |
| Cash and cash equivalents  at beginning of period                                  |       | 241.1                                 |       | 322.0 |   |
| Cash and cash equivalents  at end of period                                        |       | $                                     | 232.1      |   | $ | 250.2 |   |
|                                                                               |       |                                  |       |   |   |
| Supplemental Cash Flow  Information:                                               |       |                                  |       |   |   |
| Cash paid during the  period-                                                      |       |                                  |       |   |   |
| Interest                                                                           |       | $                                     | 38.7       |   | $ | 15.0 |   |
| Income taxes, net                                                                  |       | $                                     | 6.7        |   | $ | 30.2 |   |

 

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

 

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**Hospira, Inc.**

 

**Condensed Consolidated Balance Sheets**

 

**(Unaudited)**

 

***(dollars and sharesin millions, except par value)***

*** ***
| ** **                                                                                                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| **Assets**                                                                                                                                                                                        | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current Assets:                                                                                                                                                                                   |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                         |       | $                  | 232.1      |                  | $          | 241.1 |   |
| Trade receivables, less allowances of $14.1 in 2008 and $14.1 in 2007                                                                                                                             |       | 588.1              |       | 559.0                 |       |
| Inventories:                                                                                                                                                                                      |       |               |       |                  |       |
| Finished products                                                                                                                                                                                 |       | 494.2              |       | 465.4                 |       |
| Work in process                                                                                                                                                                                   |       | 147.4              |       | 128.2                 |       |
| Materials                                                                                                                                                                                         |       | 164.9              |       | 173.0                 |       |
| Total inventories                                                                                                                                                                                 |       | 806.5              |       | 766.6                 |       |
| Deferred income taxes                                                                                                                                                                             |       | 149.5              |       | 176.7                 |       |
| Prepaid expenses and other receivables                                                                                                                                                            |       | 88.5               |       | 97.6                  |       |
| Total Current Assets                                                                                                                                                                              |       | 1,864.7            |       | 1,841.0               |       |
| Property and equipment, at cost                                                                                                                                                                   |       | 2,643.0            |       | 2,620.2               |       |
| Less: accumulated depreciation                                                                                                                                                                    |       | 1,364.0            |       | 1,343.3               |       |
| Net Property and Equipment                                                                                                                                                                        |       | 1,279.0            |       | 1,276.9               |       |
| Net intangible assets                                                                                                                                                                             |       | 551.2              |       | 554.0                 |       |
| Goodwill                                                                                                                                                                                          |       | 1,259.5            |       | 1,240.9               |       |
| Deferred income taxes                                                                                                                                                                             |       | 102.8              |       | 79.4                  |       |
| Investments                                                                                                                                                                                       |       | 23.7               |       | 23.7                  |       |
| Other assets                                                                                                                                                                                      |       | 64.3               |       | 68.8                  |       |
| Total Assets                                                                                                                                                                                      |       | $                  | 5,145.2    |                  | $          | 5,084.7 |   |
| **Liabilities and Shareholders’  Equity**                                                                                                                                                    | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current Liabilities:                                                                                                                                                                              |       |               |       |                  |       |
| Short-term borrowings                                                                                                                                                                             |       | $                  | 57.9       |                  | $          | 58.5 |   |
| Trade accounts payable                                                                                                                                                                            |       | 196.3              |       | 190.3                 |       |
| Salaries, wages and commissions                                                                                                                                                                   |       | 112.3              |       | 143.6                 |       |
| Deferred income taxes                                                                                                                                                                             |       | 9.1                |       | 8.4                   |       |
| Other accrued liabilities                                                                                                                                                                         |       | 351.1              |       | 393.5                 |       |
| Total Current Liabilities                                                                                                                                                                         |       | 726.7              |       | 794.3                 |       |
| Long-term debt                                                                                                                                                                                    |       | 2,170.6            |       | 2,184.4               |       |
| Deferred income taxes                                                                                                                                                                             |       | 32.3               |       | 50.7                  |       |
| Post-retirement obligations and other long-term liabilities                                                                                                                                       |       | 315.7              |       | 310.1                 |       |
| Commitments and Contingencies                                                                                                                                                                     |       |               |       |                  |       |
| Shareholders’ Equity:                                                                                                                                                                        |       |               |       |                  |       |
| Common stock, par value $0.01 - authorized: 400.0 shares; 166.6 and  166.2 shares issued, and 159.0 and 158.6 shares outstanding at March 31,  2008 and December 31, 2007, respectively |       | 1.7                |       | 1.7                   |       |
| Preferred stock, par value $0.01 - authorized: 50.0 shares; issued  and outstanding shares: 0 shares                                                                                              |       | —             |       | —                |       |
| Treasury stock, at cost: 2008 and 2007: 7.6 shares, respectively                                                                                                                                  |       | (299.8             | )          | (299.8                | )          |
| Additional paid-in capital                                                                                                                                                                        |       | 1,189.6            |       | 1,160.2               |       |
| Retained earnings                                                                                                                                                                                 |       | 880.9              |       | 815.5                 |       |
| Accumulated other comprehensive income                                                                                                                                                            |       | 127.5              |       | 67.6                  |       |
| Total Shareholders’ Equity                                                                                                                                                                   |       | 1,899.9            |       | 1,745.2               |       |
| Total Liabilities and Shareholders’ Equity                                                                                                                                                   |       | $                  | 5,145.2    |                  | $          | 5,084.7 |   |

 

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

 

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**Hospira, Inc.**

 

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

 

**(Unaudited)**

 

***(dollars and shares in millions)***

*** ***
| ** **                                                               | ** ** | **Common Stock** | ** ** | **Accumulated Other Comprehensive** | ** ** | **Additional Paid-in** | ** ** | **Treasury** | ** ** | **Retained** | ** ** | ** **   | ** ** |
|--------------------------------------------------------------------------|------------|------------------|------------|-------------------------------------|------------|------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **                                                               | ** ** | **Shares**       | ** ** | **Amount**                          | ** ** | **Income**             | ** ** | **Capital**  | ** ** | **Stock**    | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| **Balances at December 31, 2007**                                   |       | 158.6            |       | $                                   | 1.7        |                   | $          | 67.6         |       | $            | 1,160.2    |         | $          | (299.8 | ) | $ | 815.5 |   | $ | 1,745.2 |   |
| Net income                                                               |       | —           |       | —                              |       | —                 |       | —       |       | —       |       | 65.4         |       | 65.4 |   |
|                                                                     |       |             |       |                                |       |                   |       |         |       |         |       |         |       |   |   |
| Other comprehensive income                                               |       | —           |       | —                              |       | 59.9                   |       | —       |       | —       |       | —       |       | 59.9 |   |
|                                                                     |       |             |       |                                |       |                   |       |         |       |         |       |         |       |   |   |
| Changes in shareholders’ equity related to incentive stock programs |       | 0.4              |       | —                              |       | —                 |       | 29.4         |       | —       |       | —       |       | 29.4 |   |
| **Balances at March 31, 2008**                                      |       | 159.0            |       | $                                   | 1.7        |                   | $          | 127.5        |       | $            | 1,189.6    |         | $          | (299.8 | ) | $ | 880.9 |   | $ | 1,899.9 |   |

 

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

 

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**Hospira, Inc.**

 

**Notes to Condensed ConsolidatedFinancial Statements**

 

**(Unaudited)**

 

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

 

These condensed consolidated financial statements have beenprepared pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”) and, therefore, do not include all information andfootnote disclosures normally included in audited financial statements.However, in the opinion of management, all adjustments, consisting only ofnormal recurring adjustments, unless otherwise noted herein, necessary topresent fairly the results of operations, financial position and cash flowshave been made. These condensed consolidated financial statements should beread in conjunction with the consolidated financial statements and notesthereto included in the Hospira, Inc. (“Hospira”) Annual Report on Form 10-Kfor the year ended December 31, 2007. The results of operations for anyinterim period are not necessarily indicative of the results of operations tobe expected for the full year.

 

In 2008, Hospira hasre-aligned its segment presentation to better reflect how the business iscurrently managed. Hospira has three reportable segments: Americas; Europe,Middle East and Africa (“EMEA”) and Asia Pacific (“APAC”). Prior year segmentdisclosure has been reclassified to conform to the current year presentation.

 

On February 2, 2007, Hospira acquiredall the outstanding ordinary shares of Mayne Pharma Limited (“Mayne Pharma”),an Australian public company listed on the Australian Stock Exchange. Theresults of operations of Mayne Pharma are included in Hospira’s results forperiods on and after that date, which has affected comparability of thefinancial statements for the periods presented in this report.

 

For comparative purposes,Hospira made certain reclassifications to prior period amounts. Thereclassifications did not affect net income or shareholders’ equity.

 

**Note 2****–****Recently Issued Accounting Standards**

 

In March 2008, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “DisclosuresAbout Derivative Instruments and Hedging Activities — an amendment of FASBStatement No. 133” (“SFAS No. 161”). SFAS No. 161 expands thedisclosure requirements for derivative instruments and hedging activities. Theprovisions will be effective for financial statements issued for fiscal yearsbeginning after November 15, 2008. Hospira is currently evaluating the potentialimpact of SFAS No. 161 on its financial statements.

 

In December 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements — an amendment of ARB No. 51”(“SFAS No. 160”). SFAS No. 160 states that accounting and reportingfor minority interests will be recharacterized as noncontrolling interests andclassified as a component of equity. SFAS No. 160 also establishesreporting requirements that provide sufficient disclosures that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners. SFAS No. 160 applies to all entities thatprepare consolidated financial statements, except not-for-profit organizations,but will affect only those entities that have an outstanding noncontrollinginterest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160is effective for financial statements issued for fiscal years beginning after December 15,2008. Hospira is currently evaluating the potential impact of SFAS No. 160on its financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “BusinessCombinations” (“SFAS No. 141R”). SFAS No. 141R establishes principlesand requirements for the reporting entity in a business combination, includingrecognition and measurement in the financial statements of the identifiableassets acquired, the liabilities assumed, and any noncontrolling interest inthe acquiree. This statement also establishes disclosure requirements to enablefinancial statement users to evaluate the nature and financial effects of thebusiness combination. SFAS No. 141R is effective for financial statementsissued for fiscal years beginning after December 15, 2008. Hospira iscurrently evaluating the potential impact of SFAS No. 141R on itsfinancial statements.

 

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans — an amendment of FASBStatements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). Oneprovision of SFAS No. 158 requires the measurement of Hospira’s defined benefitplan’s assets and its obligations to determine the funded status be made as ofthe end of the fiscal year. Thisprovision of SFAS No. 158 is effective for fiscal years ending after December 15,2008. Hospira doesnot anticipate that the impact from the adoption of this provision of SFAS No. 158will be significant to its financial statements.

 

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**Note 3 –Fair Value Measures**

 

Hospira adopted the required provisions of SFAS No. 157, “Fair ValueMeasurements” (“SFAS No. 157”) on January 1, 2008. SFAS No. 157clarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing an asset or liability andestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions. There was no impact to the condensed consolidatedfinancial statements upon the adoption of SFAS No. 157.

 

FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”delays the effective date of the application of SFAS No. 157 to fiscalyears beginning after November 15, 2008 for all nonfinancial assets andnonfinancial liabilities that are recognized or disclosed at fair value in thefinancial statements on a non-recurring basis. Hospira adopted SFAS No. 157with the exception of the application of the statement to non-recurring nonfinancialassets and liabilities. Non-recurring nonfinancial assets and nonfinancialliabilities for which Hospira has not applied the provisions of SFAS No. 157primarily include those measured at fair value in goodwill and long-lived assetimpairment testing, those initially measured at fair value in a businesscombination, and nonfinancial liabilities for exit or disposal activities.

 

SFAS No. 157 establishes a fair valuehierarchy for disclosure of the inputs used to measure fair values. Thishierarchy prioritizes the inputs into three broad levels. Level 1 inputs arequoted prices (unadjusted) in active markets for identical assets orliabilities. Level 2 inputs are quoted prices for similar assets andliabilities in active markets or inputs that are observable for similar assetsor liabilities, either directly or indirectly through market corroboration, forsubstantially the full term of the financial instrument. Level 3 inputs areunobservable inputs which reflect assumptions developed by management to measureassets and liabilities at fair value. A financial asset or liability’sclassification within the hierarchy is determined based on the lowest levelinput that is significant to the fair value measurement.

 

The following table summarizes the basisused to measure certain assets and liabilities at fair value on a recurringbasis, under the applicable provisions of SFAS No. 157, in the balancesheet:

 
| ** **                                         | ** ** | ** **                    | ** **      | **Fair Value Measurements at Reporting Date, Using:**                 | ** ** |
|----------------------------------------------------|------------|-------------------------------|-----------------|-----------------------------------------------------------------------|------------|
| **Description (dollars in  millions)**             | ** ** | **March 31,  2008**      | ** **      | **Quoted Prices  in Active  Markets for  Identical Items  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| Financial Assets:                                  |       |                          |            |                                                                  |       |   |   |   |   |
| Foreign currency forward exchange contracts        |       | $                             |   4.9 |                                                                  | $          | — |   | $ |   4.9 |   | $ | — |   |
|                                               |       |                          |            |                                                                  |       |   |   |   |   |
| Financial Liabilities:                             |       |                          |            |                                                                  |       |   |   |   |   |
| Foreign currency forward exchange contracts        |       | $                             | (17.9)          |                                                                  | $          | — |   | $ | (17.9) |   | $ | — |   |
| Interest rate swap derivative financial instrument |       |     (3.3) |            |    —                                              |       |     (3.3) |   |    — |   |

 

Hospira adopted the provisions of SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities — Including an amendment of FASBStatement No. 115” (“SFAS No. 159”) on January 1, 2008. SFAS No. 159provides a company with the option to measure selected financial instrumentsand certain other items at fair value at specified election dates. Uponadoption, Hospira has not elected to apply SFAS No. 159 to measureselected financial instruments and certain other items, therefore, there was noimpact to the condensed consolidated financial statements upon adoption of SFASNo. 159. Subsequent to the initial adoption of SFAS No. 159 on January 1,2008, Hospira has not made any elections during the three months ended March 31,2008.

 

**Note 4 –Restructuring Costs**

 

InAugust 2005, Hospira announced plans to close its manufacturing plant inDonegal, Ireland. In February 2006, Hospira further announced plans toclose manufacturing plants in Ashland, Ohio and Montreal, Canada, and alsoprovided the planned timeline for phasing out production at a leased facilityin North Chicago, Illinois. Hospira expects to incur aggregate restructuringcharges related to these actions in the range of $75 million to $95 million ona pre-tax basis. The restructuring costs are expected to be incurred through 2009and consist primarily of costs related to severance and certain other employeebenefit costs, additional depreciation resulting from the decreased usefullives of the buildings and certain equipment, and other exit costs.

 

 

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Hospirarecorded pre-tax restructuring charges in the following segments to cost ofproducts sold:

 
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| **(dollars in millions)**           | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| Americas                            |       | $                                     | 3.0        |   | $ | 5.4 |   |
| EMEA                                |       | —                                |       | 0.5 |   |
| APAC                                |       | —                                |       | — |   |
| Total pre-tax restructuring charges |       | $                                     | 3.0        |   | $ | 5.9 |   |

 

Todate, Hospira has incurred pre-tax restructuring charges of $69.5 millionrelated to these actions. Product transfers from the Donegal, Irelandmanufacturing plant were completed in 2006. Hospira expects to complete allproduct transfers relating to the Montreal, Canada manufacturing plant and exitthe facility during the three months ended June 30, 2008. Hospira ceasedproduction at the Ashland, Ohio facility during the three months ended September 30,2007. Hospira is currently evaluating the potential disposition of its Ashland,Ohio manufacturing plant, and has begun to take the steps necessary to preparefor such disposition, including conducting environmental studies. At March 31,2008, Hospira has $0.5 million in other accrued liabilities for environmentalclean-up costs related to these studies and actions.

 

Thefollowing summarizes the restructuring activity for the three months ended March 31,2008:

 
| ** **                      | ** ** | **Balance at**             | ** ** | **Costs**    | ** ** | ** **   | ** ** | **Non cash** | ** ** | **Balance at**          | ** ** |
|---------------------------------|------------|----------------------------|------------|--------------|------------|--------------|------------|--------------|------------|-------------------------|------------|
| **(dollars in millions)**       | ** ** | **December 31, 2007** | ** ** | **Incurred** | ** ** | **Payments** | ** ** | **Items**    | ** ** | **March 31, 2008** | ** ** |
| Employee-related benefit  costs |       | $                          | 17.8       |         | $          | 2.2          |       | $            | (1.0       | )                       | $          | — |   | $ | 19.0 |   |
| Accelerated depreciation        |       | —                     |       | 0.4          |       | —       |       | (0.4         | )          | —                  |       |
| Other                           |       | 0.6                        |       | 0.4          |       | (0.4         | )          | —       |       | 0.6                     |       |
|                            |       | $                          | 18.4       |         | $          | 3.0          |       | $            | (1.4       | )                       | $          | (0.4 | ) | $ | 19.6 |   |

 

**Note 5 –Stock-Based Compensation**

 

Hospira’s 2004 Long-Term Incentive Plan provides for thegrant of shares of stock options, stock appreciation rights, stock awards (restrictedstock, restricted stock units, performance shares, performance units), andcash-based awards to employees and non-employee directors. Costs resulting fromshare-based payment transactions are recognized as compensation cost over thevesting period based on the fair value of the instrument on the date of grant.Stock-based compensation expense of $14.4 million and $7.2 million wasrecognized for the three months ended March 31, 2008 and 2007,respectively, primarily resulting from stock option awards. The related incometax benefit recognized was $5.4 million and $2.6 million, respectively.

 

In March 2008, 2.3 million options were granted tocertain employees for the 2008 annual stock option grant. These options wereawarded at the fair market value at the time of grant, generally vest overthree years, and have a seven-year term. The annual stock optionsgrant was awarded in the first quarter of 2008 as compared to the secondquarter of 2007.

 

The weighted average fair value for the Hospira optionsgranted in the three months ended March 31, 2008 and 2007 was $11.81 and$9.75, respectively. The fair value was estimated using the Black-Scholesoption-pricing model, based on the average market price at the grant date andthe weighted average assumptions specific to the underlying options. Expectedvolatility assumptions are based on a combination of historical volatility ofHospira’s stock and historical volatility of peer companies. Expected lifeassumptions for the periods presented are based on the “simplified” method asdescribed in SEC Staff Accounting Bulletin No. 107, “Share-Based Payment”(“SAB 107”) which is the midpoint between the vesting date and the end of thecontractual term. The “simplified” method is used due to limited historicaldata regarding expected life. The risk-free interest rate was selected basedupon yields of U.S. Treasury issues with a term equal to the expected life ofthe option being valued. The weighted average assumptions utilized for optiongrants during the periods presented are as follows:

 
| ** **                                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| Hospira Stock Options Black-Scholes assumptions (weighted average): |       |                                  |       |   |   |
| Volatility                                                          |       | 28.0                                  | %          | 31.0 | % |
| Expected life (years)                                               |       | 4.5                                   |       | 2.8 |   |
| Risk-free interest rate                                             |       | 2.3                                   | %          | 4.5 | % |
| Dividend yield                                                      |       | 0.0                                   | %          | 0.0 | % |

 

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In March 2008, approximately 195,000 performanceshare awards were granted to key members of management. The performance shareawards vest at the end of the three-year performance cycle. The 2008performance share award is based on a formula that measures performance usingrelative total shareholder return over the three-year performance cyclecompared to an industry peer group. Based on the actual performance, at interimperiods, and at the end of the performance cycle, the number of performanceshare awards earned, which can range between 0% and 200% of the target awardsgranted, will be satisfied with Hospira common stock.

 

The 2008 performance share award fair value was $62.39per share, measured using a Monte Carlo simulation model. The Monte Carlosimulation uses multiple input variables that determine the probability ofsatisfying performance measures stipulated in the performance award grant.

 

The valuation model for the March 2008 performanceshare award used the following assumptions:

 
| **Weighted-Average  Expected Volatility** | ** ** | **Risk-Free  Interest Rate** | ** ** | **Expected  Dividend Yield** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| 27.9                                      | %          | 2.0                          | %          | 0.0                          | %          |

 

For a more detailed description of Hospira’s stock-basedcompensation plan, see Note 14 to Hospira’s consolidated financialstatements included in Hospira’s Annual Report on Form 10-K for the yearended December 31, 2007.

 

**Note 6 –Income Taxes**

 

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

 

Thegross amount of unrecognized tax benefits at March 31, 2008 is $153.2million. The amount, if recognized, that would affect the effective tax rate is$138.7 million.

 

Hospirarecognizes interest and penalties accrued in relation to unrecognized taxbenefits in income tax expense, which is consistent with the reporting in priorperiods.  As of March 31, 2008,Hospira has recorded liabilities of $13.1 million for the payment of interestand penalties.

 

Hospirabegan operations as a new taxpayer on May 1, 2004, and the U.S. federaltax returns for 2004 and 2005 are currently under examination by the InternalRevenue Service (“IRS”). Hospira expects the audit fieldwork and the issuance of the initial IRSaudit report to be completed within the next 9 months. However, theultimate resolution of the 2004 — 2005 IRS audit is dependent on a number offactors and procedures that can not be predicted at this time.  Inaddition, certain taxstatutes are also expected to close within the next 12 months. Accordingly, itis reasonably possible that a change in unrecognized tax benefits will occurwithin the next 12 months; however, quantification of a range cannot be made atthis time.

 

Hospira remains open to tax examination inall major tax-paying jurisdictions, including Australia, Canada, Ireland,Italy, United Kingdom and the United States.

 

**Note 7 –Earnings per Share**

 

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

 
| ** **                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|
| **(shares in millions)**                                     | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| Weighted average basic common shares outstanding             |       | 158.7                                 |       | 156.1 |   |
| Incremental shares outstanding related to stock-based awards |       | 2.3                                   |       | 2.3 |   |
| Weighted average dilutive common shares outstanding          |       | 161.0                                 |       | 158.4 |   |

 

The number of outstanding options to purchase Hospirastock for which the exercise price of the options exceeded the average stockprice was 5.5 million and 2.8 million for the three months ended March 31,2008 and 2007, respectively. Accordingly, these options are excluded from the diluted earnings pershare calculation for these periods.

 

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**Note**** 8********–****Litigation**

 

Hospira is involved invarious claims and legal proceedings, as well as product liability claims andproceedings related to Hospira’s business, including in some instances whenHospira operated as part of Abbott Laboratories (“Abbott”).

 

Various state and federalagencies, including the U.S. Department of Justice and various state attorneysgeneral, are investigating a number of pharmaceutical companies, including Abbott,for allegedly engaging in improper marketing and pricing practices with respectto certain Medicare and Medicaid reimbursable products, including practicesrelating to average wholesale price (“AWP”).  These are civilinvestigations that are seeking to identify the practices and determine whetherthose practices violated any laws, including federal and state false claimsacts, or constituted fraud in connection with the Medicare and/or Medicaidreimbursement paid to third parties.  In addition, Abbott is a defendantin a number of purported class actions on behalf of individuals or entities,including healthcare insurers and other third-party payors, that allegegenerally that Abbott and numerous other pharmaceutical companies reportedfalse or misleading pricing information in connection with federal, state andprivate reimbursement for certain drugs.  Many of the products involved inthese investigations and lawsuits are Hospira products.  Hospira iscooperating with the authorities in these investigations. There may beadditional investigations or lawsuits, or additional claims in the existinginvestigations or lawsuits, initiated with respect to these matters in thefuture.  Hospira cannot be certain that it will not be named as a subjector defendant in these investigations or lawsuits. Hospira is a named defendantin two such lawsuits: *The State of Texas exrel. Ven-A-Care of the Florida Keys, Inc. v. Abbott Laboratories Inc.,Abbott Laboratories and Hospira, Inc,*Case No. GV-04-001286,pending in the District Court of Travis County, Texas and *State of Hawaii v. Abbott Laboratories, Inc., etal.*, Case No. 06-1-0720-04, pending in the Circuit Court of theFirst Circuit, Hawaii. Hospira denies all material allegations asserted againstit in these two lawsuits. Hospira has been dismissed as a defendant in thecase, *United States of America ex rel.Ven-A-Care of the Florida Keys, Inc. v. Abbott Laboratories, Inc.,*et al Case No. 95-1354, pending in the United States District Court forthe Southern District of Florida. Abbott will indemnify Hospira for liabilitiesassociated with pending or future AWP investigations and lawsuits only to theextent that they are of the same nature as the lawsuits and investigations thatexisted against Abbott as of the spin-off date and relate to the sale ofHospira products prior to the spin-off.  Hospira will assume any otherlosses that may result from these investigations and lawsuits related toHospira’s products, including any losses associated with post-spin-off activities.These investigations and lawsuits could result in changes to Hospira’s businesspractices or pricing policies, civil or criminal monetary damages, penalties orfines, imprisonment and/or exclusion of Hospira products from participation infederal and state healthcare programs, including Medicare, Medicaid andVeterans’ Administration health programs, any of which could have a materialadverse effect on its business, profitability and financial condition.

 

Hospira has been named as a defendant in a lawsuitalleging generally that the spin-off of Hospira from Abbott interfered withemployee benefits in violation of the Employee Retirement Security Act of 1974(“ERISA”).  The lawsuit was filed on November 8, 2004 in the UnitedStates District Court for the Northern District of Illinois, and iscaptioned:  *Myla Nauman, Jane Rollerand Michael Loughery v. Abbott Laboratories and Hospira, Inc.* On November 18, 2005, the complaint was amended to assert an additionalclaim against Abbott and Hospira for breach of fiduciary duty underERISA.  Hospira has been dismissed as a defendant with respect to thefiduciary duty claim.  By Order dated December 30, 2005, the Courtgranted class action status to the lawsuit. As to the sole claim againstHospira in the original complaint, the court certified a class definedas:  “all employees of Abbott who were participants in the Abbott BenefitPlans and whose employment with Abbott was terminated between August 22,2003 and April 30, 2004, as a result of the spin-off of the HPD/creationof Hospira announced by Abbott on August 22, 2003, and who were eligiblefor retirement under the Abbott Benefit Plans on the date of theirterminations.” Hospira denies all material allegations asserted against itin the complaint. 

 

OnAugust 12, 2005, Retractable Technologies, Inc. (“RTI”) filed alawsuit against Abbott alleging breach of contract and fraud in connection witha National Marketing and Distribution Agreement (“Agreement”) between Abbottand RTI signed in May 2000. *RetractableTechnologies, Inc. v. Abbott Laboratories, Inc.*, Case No. 505CV157,pending in U.S. District Court for the Eastern District of Texas. RTI purportedto terminate the contract for breach in 2003. The lawsuit alleges that Abbottmisled RTI and breached the Agreement in connection with Abbott’s marketingefforts. RTI seeks unspecified monetary damages as well as punitive damages.Hospira has conditionally agreed to defend and indemnify Abbott in connectionwith this lawsuit, which involves a contract carried out by Abbott’s formerHospital Products Division. Abbott denies all material allegations in thecomplaint. Abbott intends to pursue claims against RTI for breach of theAgreement in arbitration or in federal court. Hospira is entitled, pursuant toits agreements with Abbott, to any amounts recovered due to RTI’s breach of theAgreement. On February 9, 2007, the court ruled that RTI could not becompelled to arbitrate its claims, but granted Abbott leave to appeal theruling. Abbott has appealed the ruling that RTI is not required to arbitrateits claims.

 

Hospira’s productliability claim exposures are evaluated each reporting period. Hospira’sreserves, which are not significant at March 31, 2008 and December 31,2007, are the best estimate of loss, as defined by SFAS No. 5, “Accountingfor Contingencies.” Based upon information that is currently available,management believes that the likelihood of a material loss in excess ofrecorded amounts is remote.

 

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Additional legalproceedings may occur that may result in a change in the estimated reservesrecorded 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 9– Post-Retirement Benefits**

 

Net costrecognized for the pension and post-retirement medical and dental benefit plansis as follows:

 
| ** **                                        | ** ** | **Pension Plans**      | ** ** | **Medical and Dental Plans** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Three Months Ended**       | ** ** |
| ** **                                        | ** ** | **March 31,**     | ** ** | **March 31,**           | ** ** |
| **(dollars in millions)**                         | ** ** | **2008**               | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost for benefits earned  during the year |       | $                      | 0.5        |                         | $          | 0.4 |   | $ | 0.1 |   | $ | — |   |
| Interest cost on projected  benefit obligations   |       | 6.2                    |       | 6.1                          |       | 0.9 |   | 0.7 |   |
| Expected return on plans’  assets            |       | (7.2                   | )          | (7.1                         | )          | — |   | — |   |
| Net amortization                                  |       | 0.8                    |       | 1.2                          |       | 0.3 |   | 0.2 |   |
| Net cost                                          |       | $                      | 0.3        |                         | $          | 0.6 |   | $ | 1.3 |   | $ | 0.9 |   |

 

Based on Federal laws and regulations,Hospira is not required to make any contributions, and does not expect to makeany discretionary contributions to its U.S. pension plans in 2008.

 

Certain Hospira employeesparticipate in the Hospira 401(k) Retirement Savings Plan. Hospira’scontributions to this defined contribution plan for the three months ended March 31,2008 and 2007 were $9.1 million and $8.6 million, respectively.

 

**Note 10 –Goodwill and Intangible Assets**

 

Goodwill is not amortized, but is tested forimpairment at least annually, or more frequently if an event occurs orcircumstances change that would reduce the fair value of a reporting unit belowits carrying value. In 2008, Hospira has re-aligned its segment presentation tobetter reflect how the business is currently managed. Hospira’s reporting unitsare the same as its reportable operating segments: Americas, EMEA and APAC.Prior year has been reclassified to conform to the current year presentation.

 

Goodwill consists of the following:

 
| ** **                | ** ** | **Balance at**             | ** ** | **Currency**           | ** ** | **Balance at**          | ** ** |
|---------------------------|------------|----------------------------|------------|------------------------|------------|-------------------------|------------|
| **(dollars in millions)** | ** ** | **December 31, 2007** | ** ** | **Translation Effect** | ** ** | **March 31, 2008** | ** ** |
| Americas                  |       | $                          | 749.0      |                   | $          | —                  |       | $ | 749.0 |   |
| EMEA                      |       | 263.8                      |       | 10.0                   |       | 273.8                   |       |
| APAC                      |       | 228.1                      |       | 8.6                    |       | 236.7                   |       |
|                      |       | $                          | 1,240.9    |                   | $          | 18.6                    |       | $ | 1,259.5 |   |

 

Intangible assets consists of the following:

 
| ** **                | ** ** | **March 31, 2008**   | ** ** | **December 31, 2007**   | ** ** |
|---------------------------|------------|---------------------------|------------|------------------------------|------------|
| **(dollars in millions)** | ** ** | **Gross Carrying Amount** | ** ** | **Accumulated Amortization** | ** ** | **Net Intangible Assets** | ** ** | **Gross Carrying Amount** | ** ** | **Accumulated Amortization** | ** ** | **Net Intangible Assets** | ** ** |
| Product rights            |       | $                         | 580.9      |                         | $          | (63.2 | ) | $ | 517.7 |   | $ | 565.4 |   | $ | (46.2 | ) | $ | 519.2 |   |
| Customer relationships    |       | 36.4                      |       | (5.6                         | )          | 30.8 |   | 36.0 |   | (4.2 | ) | 31.8 |   |
| Technology                |       | 4.8                       |       | (2.1                         | )          | 2.7 |   | 4.8 |   | (1.8 | ) | 3.0 |   |
|                      |       | $                         | 622.1      |                         | $          | (70.9 | ) | $ | 551.2 |   | $ | 606.2 |   | $ | (52.2 | ) | $ | 554.0 |   |

 

Intangible assets have definite lives and areamortized on a straight-line basis over their estimated useful lives (3 to 12years, weighted average 10 years). Intangible asset amortization expense was$16.9 million and $9.2 million for the three months ended 

 

 

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March 31, 2008 and 2007, respectively.Intangible asset amortization for each of the five succeeding fiscal years isestimated at $47 million for the remainder of 2008, $63 million for 2009 and2010, $60 million for 2011, and $50 million for 2012.

 

Inthe fourth quarter of 2007, Hospira acquired product rights, primarily relatedto an oncology compound, which were paid in the quarter ended March 31,2008.

 

**Note 11– Short-term Borrowings and Long-term Debt**

 

Short-term Borrowingsand Long-Term Debt consists of the following:

* *
| ** **                                                                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(dollars in millions)**                                                                               | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Long-term debt:                                                                                         |       |               |       |                  |       |
| 4.95% Notes due 2009                                                                                    |       | $                  | 300.0      |                  | $          | 300.0 |   |
| Term loan due 2010 (weighted-average floating interest rate of 5.83%  at March 31, 2008)           |       | 35.2               |       | 55.6                  |       |
| Floating rate notes due 2010 (weighted-average floating interest rate  of 5.67% at March 31, 2008) |       | 375.0              |       | 375.0                 |       |
| 5.55% Notes due 2012                                                                                    |       | 500.0              |       | 500.0                 |       |
| 5.90% Notes due 2014                                                                                    |       | 400.0              |       | 400.0                 |       |
| 6.05% Notes due 2017                                                                                    |       | 550.0              |       | 550.0                 |       |
| Other unsecured loans and financing due 2009 and 2010                                                   |       | 2.4                |       | 0.4                   |       |
| Securitized mortgage note due 2015                                                                      |       | 5.0                |       | 4.8                   |       |
| Economic development promissory notes due 2015                                                          |       | 1.0                |       | 1.1                   |       |
| Fair value of interest rate swap instruments                                                            |       | 4.2                |       | (0.2                  | )          |
| Total long-term debt                                                                                    |       | 2,172.8            |       | 2,186.7               |       |
| Unamortized debt discount                                                                               |       | (2.2               | )          | (2.3                  | )          |
| Long-term debt                                                                                          |       | 2,170.6            |       | 2,184.4               |       |
| Short-term borrowings                                                                                   |       | 57.9               |       | 58.5                  |       |
| Total debt                                                                                              |       | $                  | 2,228.5    |                  | $          | 2,242.9 |   |

 

Under the three-year termloan facility, Hospira was required to repay $50.0 million in principal at theend of each quarter in 2008 and $62.5 million for the four remaining payments.Hospira is permitted to repay amounts borrowed under the facility from time totime without penalty. Prepayments are prorated against future payments underthe facility reducing the future obligations. Principal prepayments made in2007 of $359.7 million and an additional $13.9 million in the three monthsended March 31, 2008, reduced the amounts required to be repaid to $9.4million at the end of the second, third and fourth quarters of 2008 and $11.7million for the four remaining payments. As a result of the prepayments made,the amount due within one year is $39.8 million, and is recorded as short-termborrowings.

 

Hospira has a five-year$375.0 million unsecured revolving credit facility (the “Revolver”).TheRevolver is available for working capital and other requirements. As of March 31,2008, Hospira had no amounts outstanding under the Revolver.

 

The Revolver and the indenture governing Hospira’ssenior unsecured notes contain, among other provisions, covenants with whichHospira must comply while they are in force. The covenants in the Revolverlimit Hospira’s ability to, among other things, sell assets, incur securedindebtedness and liens, incur indebtedness at the subsidiary level and merge orconsolidate with other companies. The covenants in the indenture governing Hospira’s senior unsecured notes limit Hospira’s ability, among otherthings, to incur secured indebtedness, enter into certain sales and leasetransactions and merge or consolidate with other companies. Hospira’s debtinstruments also include customary events of default, which would permitamounts borrowed to be accelerated and would permit the lenders under theRevolver to terminate their lending commitments.

 

As of March 31, 2008, Hospira was in compliancewith all applicable covenants.

 

 

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**Note 12 –Comprehensive Income (Loss), net of tax, and Accumulated Other ComprehensiveIncome**

 

Comprehensive income(loss), net of taxes consists of the following:

 
| ** **                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| **(dollars in millions)**                         | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| Foreign currency  translation adjustments         |       | $                                     | 58.7       |   | $ | 8.9 |   |
| Pension liability  adjustments                    |       | 1.1                                   |       | 0.9 |   |
| Unrealized gains on  marketable equity securities |       | —                                |       | 0.7 |   |
| Unrealized gains (losses)  on cash flow hedges    |       | 0.1                                   |       | (1.2 | ) |
| Other comprehensive income                        |       | 59.9                                  |       | 9.3 |   |
| Net Income (Loss)                                 |       | 65.4                                  |       | (29.4 | ) |
| Comprehensive Income  (Loss)                      |       | $                                     | 125.3      |   | $ | (20.1 | ) |

 

Accumulated othercomprehensive income, net of taxes consists of the following:

 
|                                                                    |   | **March 31,** | ** ** | **December 31,** |   |
|-------------------------------------------------------------------------|--------|--------------------|------------|-----------------------|--------|
| **(dollars in millions)**                                               |   | **2008**           | ** ** | **2007**              |   |
| Cumulative foreign  currency translation adjustments                    |   | $                  | 188.4      |                  | $      | 129.7 |   |
| Cumulative retirement  plans unrealized losses, net of tax              |   | (58.9              | )          | (60.0                 | )      |
| Cumulative unrealized loss on marketable equity securities, net of  tax |   | (0.3               | )          | (0.3                  | )      |
| Cumulative unrealized  losses on cash flow hedges, net of tax           |   | (1.7               | )          | (1.8                  | )      |
| Accumulated Other  Comprehensive Income                                 |   | $                  | 127.5      |                  | $      | 67.6 |   |

 

**Note 13 –Segment Information**

 

Hospira conductsoperations worldwide and is managed in three reportable segments: Americas, EMEAand APAC. The Americas segment includes the United States, Canada and LatinAmerica; the EMEA segment includes Europe, the Middle East and Africa, whilethe APAC segment includes Asia, Japan and Australia. In all regions, Hospirasells a broad line of hospital products, including specialty injectablepharmaceuticals and medication management systems. In 2008, Hospira hasre-aligned its segment presentation to better reflect how the business iscurrently managed. Previously, Hospira operated in two reportable segments:U.S. and International. Prior year segment disclosure has been reclassified toconform to the current year presentation.

 

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

 
| ** **                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **Net Sales**                         | ** ** | **Income (Loss) from Operations** | ** ** |
| **(dollars in millions)**               | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                    |       |                                  |       |   |   |   |   |   |   |
| Americas                                |       | $                                     | 674.2      |   | $ | 624.5 |   | $ | 138.0 |   | $ | 64.8 |   |
| EMEA                                    |       | 152.8                                 |       | 116.0 |   | 8.1 |   | (13.3 | ) |
| APAC                                    |       | 61.7                                  |       | 42.3 |   | (3.2 | ) | (10.8 | ) |
|                                    |       |                                  |       |   |   |   |   |   |   |
| Total reportable segments               |       | $                                     | 888.7      |   | $ | 782.8 |   | 142.9 |   | 40.7 |   |
|                                    |       |                                  |       |   |   |   |   |   |   |
| Corporate functions                     |       |                                  |       |   |   | (16.8 | ) | (19.1 | ) |
| Stock-based compensation                |       |                                  |       |   |   | (14.4 | ) | (7.2 | ) |
| Income from operations                  |       |                                  |       |   |   | 111.7 |   | 14.4 |   |
| Interest expense and other  income, net |       |                                  |       |   |   | (27.3 | ) | (29.9 | ) |
|                                    |       |                                  |       |   |   |   |   |   |   |
| Income (loss) before  income taxes      |       |                                  |       |   |   | $ | 84.4 |   | $ | (15.5 | ) |

 

 

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| ** **                | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| ** **                | ** ** | **Depreciation and Amortization**     | ** ** | **Additions to Long-Term Assets** | ** ** |
| **(dollars in millions)** | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                      |       |                                  |       |   |   |   |   |   |   |
| Americas                  |       | $                                     | 39.6       |   | $ | 36.0 |   | $ | 36.4 |   | $ | 38.4 |   |
| EMEA                      |       | 8.2                                   |       | 4.9 |   | 0.9 |   | 2.6 |   |
| APAC                      |       | 16.2                                  |       | 9.5 |   | 2.6 |   | 4.9 |   |
|                      |       |                                  |       |   |   |   |   |   |   |
| Total reportable segments |       | $                                     | 64.0       |   | $ | 50.4 |   | $ | 39.9 |   | $ | 45.9 |   |

 
|                      | ** ** | **Total  Assets**  | ** ** |
|---------------------------|------------|--------------------|------------|
|                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| **(dollars in millions)** | ** ** | **2008**           | ** ** | **2007** | ** ** |
|                      |       |               |       |   |   |
| Americas                  |       | $                  | 3,144.9    |   | $ | 3,157.9 |   |
| EMEA                      |       | 988.3              |       | 950.4 |   |
| APAC                      |       | 1,012.0            |       | 976.4 |   |
|                      |       |               |       |   |   |
| Total reportable segments |       | $                  | 5,145.2    |   | $ | 5,084.7 |   |

 

**Note 14 –Subsequent Events**

 

In April 2008,Hospira announced a plan to exit the manufacturing operations at its MorganHill, California, plant and transfer most of the operations to other Hospiralocations or other third parties over the next two to three years.Approximately 500 positions will be impacted by these actions, while someproduct support and manufacturing positions will remain in the vicinity ofMorgan Hill. The aggregate charges that Hospira will incur related to the planare expected to be in the range of approximately $29 million to $35 million ona pre-tax basis, of which approximately $24 million to $30 million are expectedto be reported as cash charges in the Americas segment. The restructuring costsconsist primarily of costs related to severance and other employee benefitcosts, additional depreciation resulting from the decreased useful lives of thebuilding and certain equipment, and other exit costs. Hospira expects to incurseverance and certain other employee benefit costs over the expected serviceperiod of the related employees and all other exit costs, including relocationof production, through 2011. The cash impact does not include capitalexpenditures related to establishing capacity in any new locations or theeventual proceeds from the sale of the existing facility in Morgan Hill. Theaggregate charges do not include any related gains (losses) from the sale ofthe existing facility in Morgan Hill.

 

 

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

 

**Forward-LookingStatements**

 

This report containsforward-looking statements within the meaning of the federal securities laws.Hospira intends that these forward-looking statements be covered by the safeharbor provisions for 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’splans, strategies, prospects and expectations regarding its business andindustry are forward-looking statements. Investors should be aware that thesestatements 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 expectations.Important factors that could cause Hospira’s actual results to be materiallydifferent from its expectations include (i) the risks and uncertaintiesdescribed in “Item 1A. Risk Factors” in Hospira’s Annual Report on Form 10-Kfor the year ended December 31, 2007 (the “2007 Form 10-K”), and (ii) thefactors described in “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in the 2007 Form 10-K, as updated bythis Item 2. Accordingly, you should not place undue reliance on theforward-looking statements contained in this report. These forward-lookingstatements speak only as of the date on which the statements were made. Hospiraundertakes no obligation to update or revise publicly any forward-lookingstatements, whether as a result of new information, future events or otherwise.

 

**Overview**

 

Hospira is a globalspecialty pharmaceutical and medication delivery company that develops,manufactures and markets products that help improve the safety, cost andproductivity of patient care. Hospira’s portfolio includes one of the industry’sbroadest lines of generic acute-care and oncology injectables, as well asintegrated infusion therapy and medication management solutions. Hospira’sbroad portfolio of products is used by hospitals and alternate site providers,such as clinics, home healthcare providers and long-term care facilities. In February 2007,Hospira acquired Mayne Pharma Limited (“Mayne Pharma”) to increase its globalpresence in specialty generic injectable pharmaceuticals.

 

In 2008, Hospira hasre-aligned its segment presentation to better reflect how the business iscurrently managed. Hospira has three reportable segments: Americas; Europe,Middle East and Africa (“EMEA”) and Asia Pacific (“APAC”). Prior year segmentdisclosure has been reclassified to conform to the current year presentation.

 

Please refer to “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in the 2007 Form 10-K. The information in this Item 2 isintended to supplement, and should be read in conjunction with, the informationincluded in Item 7 of the 2007 Form 10-K. The 2007 Form 10-K wasfiled with the Securities and Exchange Commission on February 28, 2008.

 

**MaynePharma Acquisition**

 

On February 2, 2007,Hospira completed its acquisition of Mayne Pharma for $2,055.0 million. Theresults of operations of Mayne Pharma are included in Hospira’s results forperiods on and after that date, which has affected comparability of thefinancial statements for the periods presented in this report and will affectcomparability in future periods. Hospira financed the acquisition and relatedexpenses through borrowing approximately $1,925.0 million, and the remainderwas funded with cash on hand.  Net salesof Mayne Pharma products, which are principally specialty injectablepharmaceutical products, are reported within each of Hospira’s reportablesegments.

 

In connection with theacquisition, Hospira recorded $106.2 million of charges relating to purchaseaccounting during the three months ended March 31, 2007, including $84.8million of acquired in-process research and development and $21.4 million ofinventory step-up charges. Hospira also recorded $518.2 million of intangibleassets in connection with the acquisition, which will be amortized over theirestimated useful lives (which have a weighted average life of 10 years).

 

In connection with theintegration of Mayne Pharma into its operations, Hospira expects to incurapproximately $95 million to $110 million of cash expenditures for the two-yearperiod after the closing, of which $60 million to $75 million will be recordedas expense and the remainder relates to purchase accounting items and capitalprojects. These expenses relate to the closure of facilities, termination of lease agreements andemployee-related benefit arrangements during the two-year period after theclosing. To date, approximately $88.3 million of cash expenditures have beenmade, of which $53.8 million of expenses have been incurred. Approximately $10.0 million and $10.5million of integration expenses were recorded during the three months ended March 31,2008 and 2007, respectively. In additionto integration expenses, Hospira recorded other acquisition-related expenses of$7.9 million in the three months ended March 31, 2007.

 

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**Critical Accounting Policies**

 

The preparation offinancial statements in accordance with generally accepted accountingprinciples in the United States (GAAP) requires management to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses. A summary of Hospira’s significant accounting policies isincluded in Note 1 to the company’s consolidated financial statements, whichare included in Hospira’s Annual Report on Form 10-K for the year ended December 31,2007. Certain of Hospira’s accounting policies are considered critical, asthese policies require significant, difficult or complex judgments bymanagement, often employing the use of estimates about the effects of mattersthat are inherently uncertain. Such policies are summarized in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in the 2007 Form 10-K.

 

**Recently Issued Accounting Standards**

 

In March 2008, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “DisclosuresAbout Derivative Instruments and Hedging Activities — an amendment of FASBStatement No. 133” (“SFAS No. 161”). SFAS No. 161 expands thedisclosure requirements for derivative instruments and hedging activities. Theprovisions will be effective for financial statements issued for fiscal yearsbeginning after November 15, 2008. Hospira is currently evaluating thepotential impact of SFAS No. 161 on its financial statements.

 

In December 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements — an amendment of ARB No. 51”(“SFAS No. 160”). SFAS No. 160 states that accounting and reportingfor minority interests will be recharacterized as noncontrolling interests andclassified as a component of equity. SFAS No. 160 also establishesreporting requirements that provide sufficient disclosures that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners. SFAS No. 160 applies to all entities thatprepare consolidated financial statements, except not-for-profit organizations,but will affect only those entities that have an outstanding noncontrollinginterest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160is effective for financial statements issued for fiscal years beginning after December 15,2008. Hospira is currently evaluating the potential impact of SFAS No. 160on its financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “BusinessCombinations” (“SFAS No. 141R”). SFAS No. 141R establishes principlesand requirements for the reporting entity in a business combination, includingrecognition and measurement in the financial statements of the identifiableassets acquired, the liabilities assumed, and any noncontrolling interest inthe acquiree. This statement also establishes disclosure requirements to enablefinancial statement users to evaluate the nature and financial effects of thebusiness combination. SFAS No. 141R is effective for financial statementsissued for fiscal years beginning after December 15, 2008. Hospira iscurrently evaluating the potential impact of SFAS No. 141R on itsfinancial statements.

 

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans — an amendment of FASBStatements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). Oneprovision of SFAS No. 158 requires the measurement of Hospira’s defined benefitplan’s assets and its obligations to determine the funded status be made as ofthe end of the fiscal year. Thisprovision of SFAS No. 158 is effective for fiscal years ending after December 15,2008. Hospira doesnot anticipate that the impact from the adoption of this provision of SFAS No. 158will be significant to its financial statements.

 

**Results ofoperations for the three months ended March 31, 2008 compared to March 31,2007**

 

*Net Sales*

 

Net sales increased 13.5%in the three months ended March 31, 2008 compared to the three monthsended March 31, 2007. The net sales increase is primarily driven by volumeand product mix of 9.4%, including an additional month of Mayne Pharma in 2008,the impact of foreign exchange of 4.0%, and price increases of 0.1%.

 

 

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A comparison of product line sales is as follows:

 

**Hospira, Inc.**

**NetSales by Product Line**

**(Unaudited)**

**(dollarsin millions)**

 
| ** **                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | **2008**                              | ** ** | **2007** | ** ** | **Percent  Change  vs. Prior  Year** | ** ** |
| Americas—                |       |                                  |       |   |   |   |   |
| Pharmaceuticals               |       |                                  |       |   |   |   |   |
| Specialty Injectables         |       | $                                     | 340.7      |   | $ | 290.8 |   | 17.2 | % |
| Other Pharma                  |       | 121.9                                 |       | 126.2 |   | (3.4 | )% |
|                          |       | 462.6                                 |       | 417.0 |   | 10.9 | % |
| Devices                       |       |                                  |       |   |   |   |   |
| Medication Management Systems |       | 118.1                                 |       | 116.4 |   | 1.5 | % |
| Other Devices                 |       | 93.5                                  |       | 91.1 |   | 2.6 | % |
|                          |       | 211.6                                 |       | 207.5 |   | 2.0 | % |
| Total Americas                |       | 674.2                                 |       | 624.5 |   | 8.0 | % |
|                          |       |                                  |       |   |   |   |   |
| EMEA—                    |       |                                  |       |   |   |   |   |
| Pharmaceuticals               |       |                                  |       |   |   |   |   |
| Specialty Injectables         |       | 78.3                                  |       | 48.9 |   | 60.1 | % |
| Other Pharma                  |       | 36.6                                  |       | 33.0 |   | 10.9 | % |
|                          |       | 114.9                                 |       | 81.9 |   | 40.3 | % |
| Devices                       |       |                                  |       |   |   |   |   |
| Medication Management Systems |       | 20.4                                  |       | 16.5 |   | 23.6 | % |
| Other Devices                 |       | 17.5                                  |       | 17.6 |   | (0.6 | )% |
|                          |       | 37.9                                  |       | 34.1 |   | 11.1 | % |
| Total EMEA                    |       | 152.8                                 |       | 116.0 |   | 31.7 | % |
|                          |       |                                  |       |   |   |   |   |
| APAC—                    |       |                                  |       |   |   |   |   |
| Pharmaceuticals               |       |                                  |       |   |   |   |   |
| Specialty Injectables         |       | 45.6                                  |       | 29.4 |   | 55.1 | % |
| Other Pharma                  |       | 4.1                                   |       | 2.1 |   | 95.2 | % |
|                          |       | 49.7                                  |       | 31.5 |   | 57.8 | % |
| Devices                       |       |                                  |       |   |   |   |   |
| Medication Management Systems |       | 5.7                                   |       | 4.3 |   | 32.6 | % |
| Other Devices                 |       | 6.3                                   |       | 6.5 |   | (3.1 | )% |
|                          |       | 12.0                                  |       | 10.8 |   | 11.1 | % |
| Total APAC                    |       | 61.7                                  |       | 42.3 |   | 45.9 | % |
|                          |       |                                  |       |   |   |   |   |
| Net Sales                     |       | $                                     | 888.7      |   | $ | 782.8 |   | 13.5 | % |

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Specialty InjectablePharmaceuticals include generic injectables (including biogenerics) andproprietary specialty injectables (such as Precedex®). Other Pharmaceuticalsinclude large volume IV solutions, nutritionals and contract manufacturingservices (including former “Sales to Abbott”). Medication Management Systemsinclude infusion pumps, related software and services, and administration setsfor infusion pumps. Other Devices include gravity administration sets, criticalcare products and other miscellaneous device products.

Net sales in 2008included three months of Mayne Pharma compared to two months in 2007. MaynePharma net sales are classified in the appropriate product lines.

 

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Americas

 

Netsales in Specialty Injectable Pharmaceuticals increased due to higher base productportfolio sales as well as new product introductions. Increases in the baseproduct portfolio included: higher volume for anti-infectives, increased awardsin Group Purchasing Organization pharmacy contracts, drug wholesaler purchasingpatterns and benefits from competitor supply issues. Other Pharma net saleswere down due to demand from existing contract manufacturing customers,partially offset by increased volume from IV solutions, nutritionals and anadditional month of Mayne Pharma. Net sales in Medication Management Systemsincreased due to the impact of foreign exchange. Other Devices net salesincreased due to the impact of foreign exchange and higher gravityadministration sets volume, partially offset by decreases in critical care andother device products.

 

EMEA

 

Netsales in both Specialty Injectable Pharmaceuticals and Other Pharma increaseddue to an additional month of Mayne Pharma sales in 2008 and the impact offoreign exchange. In addition, within Other Pharma, increases in compoundingwere partially offset by expected decreases in contract manufacturing volume.Medication Management Systems net sales were favorable due to the impact offoreign exchange and higher pump placements. The decrease in Other Devices netsales was due to lower volume in critical care and other device products,partially offset by the impact of foreign exchange.

 

APAC

 

Netsales in both Specialty Injectable Pharmaceuticals and Other Pharma increaseddue to an additional month of Mayne Pharma sales in 2008, and the impact offoreign exchange as well as increases in contract manufacturing volume withinOther Pharma. The Medication Management Systems net sales increase was drivenby higher pump placements and the impact of foreign exchange. The decrease inOther Devices net sales was due to lower volume in other device products,partially offset by the impact of foreign exchange.

 

*Gross Profit*

 

Gross profit increased$39.4 million, or 14.3%, for the three months ended March 31, 2008,compared with the same period in 2007.

 

The gross profit increaseis primarily the result of higher volume, inclusive of an additional month ofMayne Pharma gross profit in 2008 and the favorable impact of foreign exchange.In addition, lower costs related to the addition of Mayne Pharma which in theprior year included inventory step-up charges and amortization of the acquiredintangible assets from the date of acquisition, were partially offset by increasesin inflation and other manufacturing related costs, incremental freight anddistribution expense and higher project expenses. Gross margin increased by0.2% to 35.3% for the three months ended March 31, 2008, from 35.1% forthe three months ended March 31, 2007.

 

*Research and Development*

 

Research and development(“R&D”) expenses increased $6.4 million, or 14.7%, for the three monthsended March 31, 2008, compared with the same period in 2007. The expenseincrease was primarily related to the addition of Mayne Pharma and to higherspending on new product development related to new compounds in Hospira’s genericinjectable drug pipeline and medication management systems projects, partiallyoffset by lower spending in 2008 for clinical trials on Hospira’s brandedsedative, Precedex®. R&D expenses remained at 5.6% of net sales for thethree months ended March 31, 2008, compared with the same period in 2007.

 

*Acquired In-Process Research and Development*

 

In the three months ended March 31, 2007, as partof the Mayne Pharma purchase price allocation, Hospira allocated and expensed$84.8 million to acquired in-process research and development related to MaynePharma’s pipeline products.

 

*Selling, General and Administrative*

 

Selling, general andadministrative (“SG&A”) expenses increased $20.5 million, or 15.5%, for thethree months ended March 31, 2008, compared with the same period in 2007.The expense increase was primarily due to the addition of Mayne Pharma,additional stock-based compensation expense and the impact of foreign exchange.The annual stock options grant was awarded in the first quarter of 2008 as comparedto the second quarter of 2007. SG&A expenses increased to 17.1% of netsales for the three months ended March 31, 2008, compared with 16.8% ofnet sales for the same period in 2007.

 

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*Interest Expense and Other (Income),Net*

 

Interest expense was$31.4 million for the three months ended March 31, 2008, compared to $30.5million in the same period in 2007. The increase was primarily due to anadditional month of interest expense associated with the Mayne Pharmaacquisition. Other (income), net was $(4.1) million for the three months ended March 31,2008 compared to $(0.6) million for the three months ended March 31, 2007.The increase was primarily related to higher foreign exchange gains realized,offset by lower interest income.

 

*IncomeTax Expense*

 

The effective tax ratewas 22.5% for the three months ended March 31, 2008, compared to (90.1)%for the same period in 2007. The effective tax rate for 2007 included theimpact of a significant unusual item, the expensing of acquired in-processresearch and development. Excluding the effect of this item, the 2007 effectivetax rate was 20.1%. The increase in the effective tax rate for the three monthsended March 31, 2008 compared to 2007, excluding the significant unusualitem, was due primarily to decreased expenses in higher tax rate jurisdictionsin connection with the Mayne Pharma acquisition and purchase accounting chargesin the 2007 period. The effective tax rates are less than the statutory U.S.federal income tax rate principally due to the benefit of tax exemptions, ofvarying durations, in certain jurisdictions outside the United States.

 

**Liquidityand Capital Resources at March 31, 2008 compared with December 31,2007**

 

Net Cash provided byOperating Activities continues to be Hospira’s primary source of funds tofinance operating needs, capital expenditures and repayment of debt. Othercapital resources include cash on hand, borrowing availability under Hospira’s$375.0 million revolving credit facility and access to capital markets.Beginning on February 2, 2007, Hospira’s operating cash flows includeoperating cash flows generated by Mayne Pharma. During the two-year periodafter the closing, Hospira expects to incur approximately $95 million to $110million of cash expenditures relating to the integration of Mayne Pharma, whichwill reduce operating cash flows and to date, approximately $88.3 million of cash expenditures have beenincurred. Inaddition, as a result of the debt incurred during the first quarter of 2007 tofinance the Mayne Pharma acquisition, Hospira must dedicate substantiallygreater cash to service debt obligations (including interest expense and mandatoryprincipal payments on the term loan described below) on an ongoing basiscompared to past periods. Hospira believes that its current capital resources,including cash and cash equivalents, cash generated from operations, fundsavailable from its revolving credit facility and access to the capital marketswill be sufficient to finance its operations, including debt serviceobligations, capital expenditures, product development and Mayne Pharmaintegration expenditures for the foreseeable future.

 

*Summary of Cash Flows*

 

Operatingactivities provided net cash of $73.5 million driven by net income of $65.4million. Non-cash depreciation, amortization charges, and stock-basedcompensation expense totaled $78.4 million. Changes in operating assets andliabilities and Other, net of $(70.3) million consist primarily of higher tradereceivables due to increased sales, higher inventory and decreased liabilities,partially offset by higher trade payables.

 

NetCash Used in Investing Activities of $81.1 million includes capitalexpenditures of $42.9 million and $38.2 million of payments for certainintangible assets and other investments including product rights, primarilyacquired in the prior year.

 

Net Cash Used inFinancing Activities of $6.9 million includes prepayments of $13.9 million inprincipal amount of the term loan, in addition to the rescheduled $11.1 millionin principal, for a total of $25.0 million. In addition, financing activitiesincludes proceeds from employee stock option exercises and related tax benefitsof $13.1 million.

 

*Debt and Capital*

 

Under Hospira’sthree-year term loan facility, Hospira was required to repay $50.0 million inprincipal at the end of each quarter in 2008 and $62.5 million for the fourremaining payments. Hospira is permitted to repay amounts borrowed under thefacility from time to time without penalty. Prepayments are prorated againstfuture payments under the facility reducing the future obligations. Principalprepayments made in 2007 of $359.7 million and an additional $13.9 million inthe three months ended March 31, 2008, reduced the amounts required to berepaid to $9.4 million at the end of the second, third and fourth quarters of2008 and $11.7 million for the four remaining payments. As a result of theprepayments, the amount due within one year is $39.8 million, and is recordedas short-term borrowings.

 

Hospira has a five-year$375.0 million unsecured revolving credit facility (the “Revolver”). TheRevolver is available for working capital and other requirements. The Revolverallows Hospira to borrow funds at variable interest rates as short-term cashneeds dictate. As of March 31, 2008, Hospira had no amounts outstandingunder the Revolver.

 

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TheRevolver and the indenture governing Hospira’s senior unsecured notes contain,among other provisions, covenants with which Hospira must comply while they arein force. The covenants in the Revolver limit Hospira’s ability to, among otherthings, sell assets, incur secured indebtedness and liens, incur indebtednessat the subsidiary level and merge or consolidate with other companies. Thecovenants in the indenture governing Hospira’s senior unsecured notes limitHospira’s ability, among other things, to incur secured indebtedness, enterinto certain sales and lease transactions and merge or consolidate with othercompanies. Hospira’s debt instruments also include customary events of default,which would permit amounts borrowed to be accelerated and would permit thelenders under the revolving credit agreement to terminate their lendingcommitments. A description of certain covenants is set forth below.

 

*Changeof Control.* The Floating Rate Notes due in2010, 5.55% Notes due in 2012 and 6.05% Notes due in 2017 include covenantsthat require Hospira to offer to repurchase those notes at 101% of theirprincipal amount if: (1) there is a change of control of Hospira and (2) Hospirais rated below investment grade by both Moody’s and Standard & Poor’sat or within a specified time after the time of announcement of the change ofcontrol transaction. A change of control, as described above, would constitutean event of cross default under the term loan agreement and Hospira’s revolvingcredit agreement.

 

*FinancialCovenants.* Hospira’s term loan facilityand revolving credit facility include requirements to maintain a maximumleverage ratio and a minimum interest coverage ratio. The leverage ratio iscalculated by dividing Hospira’s debt by its earnings before interest, taxes,depreciation and amortization (excluding certain purchase accounting chargesrelating to the Mayne Pharma acquisition, expenses relating to the integrationof Mayne Pharma into Hospira, expenses relating to Hospira’s facilitiesoptimization activities and certain non-cash gains, expenses and losses,subject in certain cases to agreed-upon maximums) for the 12 months ending onthe last day of each quarter. The coverage ratio is calculated by dividingHospira’s earnings before interest, taxes, depreciation and amortization(excluding the items described above) by its consolidated financing expense(interest expense and net capitalized interest), in each case for the 12 monthsended on the last day of each quarter.

 

Themaximum leverage ratio is 3.25 and the minimum coverage ratio is 5.00.

 

As of March 31,2008, Hospira was in compliance with all applicable covenants.

 

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

 

There have been nomaterial changes to the information provided in Item 7A. to Hospira’s AnnualReport on Form 10-K for the year ended December 31, 2007.

 

**Item4.   Controls and Procedures**

 

*Evaluation of disclosure controlsand procedures.*  The Chairman and Chief Executive Officer,Christopher B. Begley, and Senior Vice President, Finance and Chief FinancialOfficer, Thomas E. Werner, evaluated the effectiveness of Hospira’s disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities and Exchange Act of 1934) as of the end of the period covered bythis report, and concluded that Hospira’s disclosure controls and procedureswere effective.

 

*Changes in internal controls.* There was no change in Hospira’sinternal control over financial reporting that has materially affected, or isreasonably likely to materially affect, Hospira’s internal control overfinancial reporting.

 

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**PART II.  OTHER INFORMATION**

 

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

 

The disclosure containedin Note 8 to the condensed consolidated financial statements included in Part I.Item 1 hereof is incorporated herein by reference.

 

**Item1A.****          ****Risk Factors**

 

Please refer toItem 1A. in Hospira’s Annual Report on Form 10-K for the year ended December 31,2007 for a discussion of risks to which Hospira’s business, financialcondition, results of operations and cash flows are subject.

 

**Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds**

 

(c)          Issuer Purchases of EquitySecurities

 

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

 
| **Period**                              | ** ** | **Total Number  of Shares  Purchased (1)** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number  of Shares  Purchased as  Part of  Publicly  Announced  Plans or  Programs** | ** ** | **Maximum Number  (or Approximate  Dollar Value) of  Shares that May  Yet be Purchased  Under the Plans or  Programs (2)** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| January 1-January 31,  2008   |       | 10,591                                     |       | $                                 | 42.11      |                                                                                             | —     |                                                                                                                       | $          | 100,233,606 |   |
| February 1-February 29,  2008 |       | 9,364                                      |       | $                                 | 41.30      |                                                                                             | —     |                                                                                                                       | $          | 100,233,606 |   |
| March 1-March 31,  2008       |       | 14,697                                     |       | $                                 | 42.49      |                                                                                             | —     |                                                                                                                       | $          | 100,233,606 |   |
| Total                                   |       | 34,652                                     |       | $                                 | 42.05      |                                                                                             | —     |                                                                                                                       | $          | 100,233,606 |   |

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(1)          These shares represent theshares deemed surrendered to Hospira to pay the exercise price and satisfyminimum statutory tax withholding obligations in connection with the exerciseof employee stock options.

 

(2)          In February 2006,Hospira’s board of directors authorized the repurchase of up to $400.0 millionof Hospira’s common stock in accordance with Rule 10b-18 under theSecurities Exchange Act of 1934. The repurchase of shares commenced in early March 2006.As of March 31, 2008, Hospira had purchased 7,584,400 shares for $299.8million in the aggregate under the 2006 board authority, all of which werepurchased during 2006.

 

**Item 6.       Exhibits**

 

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

 

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SIGNATURE

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

|   | HOSPIRA, INC. |
|--------|--------------------|
|   |               |
|   | By                 | /s/ THOMAS  E. WERNER |
|   |               | Thomas E. Werner, |
|   |               | Senior Vice President, Finance and |
|   |               | Chief Financial Officer |
|   |               | Date: May 7, 2008 |

 

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EXHIBIT INDEX

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                  |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | Summary of terms of employment for named executive officers.                                                                                                 |
|                 |       |                                                                                                                                                         |
| 10.2                 |       | Form of Non-Qualified Stock Option Terms for awards made on or  after March 6, 2008.                                                               |
|                 |       |                                                                                                                                                         |
| 10.3                 |       | Form of Notice of Award and Award Agreement for Restricted Stock  Units: Election Deferral Form.                                                        |
|                 |       |                                                                                                                                                         |
| 12.1                 |       | Statement regarding Computation of Ratios.                                                                                                                   |
|                 |       |                                                                                                                                                         |
| 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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