**Table of Contents**

** **

 

** **

**UNITEDSTATES SECURITIES AND EXCHANGE**

**COMMISSION**

**WASHINGTON, D. C.  20549**

 

**FORM 10-Q**

 

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

 

**For thequarterly period ended March 31, 2009**

 

**OR**

 

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

 

**For thetransition period from             to            **

 

**CommissionFile No. 1-31946**

 

**HOSPIRA,INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                      | ** ** | **20-0504497**                         |
|-------------------------------------------------------------------|------------|----------------------------------------|
| (State or other  jurisdiction

of incorporation  or organization) | ** ** | (I.R.S. Employer

Identification  No.) |

 

**275 North Field DriveLake Forest, Illinois 60045**

(Address of principalexecutive offices, including zip code)

 

**(224) 212-2000**

(Registrant’stelephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData file required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or forsuch shorter period that the registrant was required to submit and post suchfiles).  Yes  o   No o

 

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                         | Smaller reporting  company o |
|----------------------------|--------------------------|-------------------------------------------------|-----------------------------------|
|                       |                     | (Do not check if a  smaller  reporting company) |                              |

 

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 24, 2009, Registrant had outstanding 160,477,383 shares of commonstock, par value $0.01 per share.

 

 

 

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**Hospira, Inc.**

 

**Quarterly Report on Form 10-Q**

 

**Index**

 
| ** ** | ** ** | **Part I  – Financial Information**                                                                                        |   |   |   |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|       |       |                                                                                                                                 |   |   |   |
| Item 1.    |       | Financial Statements                                                                                                                 |   |   |   |
|       |       |                                                                                                                                 |   |   |   |
| ** ** |       | Condensed  Consolidated Statements of Income (Unaudited) – Three Months Ended  March 31, 2009 and March 31, 2008      |   | 3      |   |
|       |       |                                                                                                                                 |   |   |   |
|       |       | Condensed  Consolidated Statements of Cash Flows (Unaudited) – Three Months Ended  March 31, 2009 and March 31, 2008  |   | 4      |   |
|       |       |                                                                                                                                 |   |   |   |
| ** ** |       | Condensed  Consolidated Balance Sheets (Unaudited) – March 31, 2009 and  December 31, 2008                            |   | 5      |   |
|       |       |                                                                                                                                 |   |   |   |
|       |       | Condensed  Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) – Three  Months Ended March 31, 2009 |   | 6      |   |
|       |       |                                                                                                                                 |   |   |   |
|       |       | Notes to  Condensed Consolidated Financial Statements (Unaudited)                                                                    |   | 7      |   |
|       |       |                                                                                                                                 |   |   |   |
| Item 2.    |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                          |   | 17     |   |
|       |       |                                                                                                                                 |   |   |   |
| Item 3.    |       | Quantitative  and Qualitative Disclosures about Market Risk                                                                          |   | 23     |   |
|       |       |                                                                                                                                 |   |   |   |
| Item 4.    |       | Controls and  Procedures                                                                                                             |   | 23     |   |
|       |       |                                                                                                                                 |   |   |   |
| ** ** | ** ** | **Part II  – Other Information**                                                                                           |   |   |   |
|       |       |                                                                                                                                 |   |   |   |
| Item 1.    |       | Legal Proceedings                                                                                                                    |   | 24     |   |
|       |       |                                                                                                                                 |   |   |   |
| Item 1A.   |       | Risk Factors                                                                                                                         |   | 24     |   |
|       |       |                                                                                                                                 |   |   |   |
| Item 2.    |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                         |   | 24     |   |
|       |       |                                                                                                                                 |   |   |   |
| Item 6.    |       | Exhibits                                                                                                                             |   | 24     |   |

 

 

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** **

**PART  I.  FINANCIAL INFORMATION**

 

**Item 1.  FinancialStatements**

 

**Hospira, Inc.**

 

**CondensedConsolidated Statements of Income**

 

**(Unaudited)**

 

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

*** ***
| ** **                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Net sales                                   |       | $                                     | 859.7      |   | $ | 888.7 |   |
|                                        |       |                                  |       |   |   |
| Cost of products sold                       |       | 540.1                                 |       | 571.7 |   |
| Restructuring                               |       | 9.4                                   |       | 3.0 |   |
| Research and development                    |       | 50.0                                  |       | 49.9 |   |
| Selling, general and administrative         |       | 145.5                                 |       | 152.4 |   |
| Total operating expenses                    |       | 745.0                                 |       | 777.0 |   |
| Income From Operations                      |       | 114.7                                 |       | 111.7 |   |
|                                        |       |                                  |       |   |   |
| Interest expense                            |       | 26.9                                  |       | 31.4 |   |
| Other income, net                           |       | (0.3                                  | )          | (4.1 | ) |
| Income Before Income Taxes                  |       | 88.1                                  |       | 84.4 |   |
|                                        |       |                                  |       |   |   |
| Income tax (benefit) expense                |       | (77.4                                 | )          | 19.0 |   |
| Net Income                                  |       | $                                     | 165.5      |   | $ | 65.4 |   |
|                                        |       |                                  |       |   |   |
| Earnings Per Common Share:                  |       |                                  |       |   |   |
| Basic                                       |       | $                                     | 1.04       |   | $ | 0.41 |   |
| Diluted                                     |       | $                                     | 1.03       |   | $ | 0.41 |   |
| Weighted Average Common Shares Outstanding: |       |                                  |       |   |   |
| Basic                                       |       | 159.5                                 |       | 158.7 |   |
| Diluted                                     |       | 160.6                                 |       | 161.0 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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**Hospira, Inc.**

 

**CondensedConsolidated Statements of Cash Flows**

 

**(Unaudited)**

 

***(dollars in millions)***

** **
| ** **                                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                       | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Cash Flow From Operating Activities:                                             |       |                                  |       |   |   |
| Net income                                                                       |       | $                                     | 165.5      |   | $ | 65.4 |   |
| Adjustments to reconcile net income to net cash from operating  activities-      |       |                                  |       |   |   |
| Depreciation                                                                     |       | 41.2                                  |       | 47.1 |   |
| Amortization of intangible assets                                                |       | 14.7                                  |       | 16.9 |   |
| Stock-based compensation expense                                                 |       | 13.1                                  |       | 14.4 |   |
| Deferred income tax and other tax adjustments                                    |       | (89.4                                 | )          | (11.5 | ) |
| Changes in assets and liabilities-                                               |       |                                  |       |   |   |
| Trade receivables                                                                |       | 20.0                                  |       | (13.6 | ) |
| Inventories                                                                      |       | (11.5                                 | )          | (24.8 | ) |
| Prepaid expenses and other assets                                                |       | (13.1                                 | )          | 11.4 |   |
| Trade accounts payable                                                           |       | (14.2                                 | )          | 6.1 |   |
| Other liabilities                                                                |       | (41.7                                 | )          | (47.8 | ) |
| Other, net                                                                       |       | 4.7                                   |       | 9.9 |   |
| Net Cash Provided by Operating Activities                                        |       | 89.3                                  |       | 73.5 |   |
| Cash Flow From Investing Activities:                                             |       |                                  |       |   |   |
| Capital expenditures (including instruments placed with or leased to  customers) |       | (33.8                                 | )          | (42.9 | ) |
| Payments for contingent consideration                                            |       | (7.1                                  | )          | — |   |
| Purchases of intangibles and other investments                                   |       | (3.0                                  | )          | (38.2 | ) |
| Net Cash Used in Investing Activities                                            |       | (43.9                                 | )          | (81.1 | ) |
| Cash Flow From Financing Activities:                                             |       |                                  |       |   |   |
| Repayment of long-term debt                                                      |       | (5.0                                  | )          | (25.0 | ) |
| Other borrowings, net                                                            |       | (0.7                                  | )          | 5.0 |   |
| Excess tax benefit from stock-based compensation arrangements                    |       | —                                |       | 0.8 |   |
| Proceeds from stock options exercised                                            |       | 12.6                                  |       | 12.3 |   |
| Net Cash Provided by (Used in) Financing Activities                              |       | 6.9                                   |       | (6.9 | ) |
| Effect of exchange rate changes on cash and cash equivalents                     |       | (6.7                                  | )          | 5.5 |   |
| Net change in cash and cash equivalents                                          |       | 45.6                                  |       | (9.0 | ) |
| Cash and cash equivalents at beginning of period                                 |       | 483.8                                 |       | 241.1 |   |
| Cash and cash equivalents at end of period                                       |       | $                                     | 529.4      |   | $ | 232.1 |   |
|                                                                             |       |                                  |       |   |   |
| Supplemental Cash Flow Information:                                              |       |                                  |       |   |   |
| Cash paid during the period-                                                     |       |                                  |       |   |   |
| Interest                                                                         |       | $                                     | 33.1       |   | $ | 38.7 |   |
| Income taxes, net of refunds                                                     |       | $                                     | 9.9        |   | $ | 6.7 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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**Hospira, Inc.**

 

**CondensedConsolidated Balance Sheets**

 

**(Unaudited)**

 

***(dollarsin millions)***

 
| *** ***                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| **Assets**                                                          | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current Assets:                                                     |       |               |       |                  |       |
| Cash and cash equivalents                                           |       | $                  | 529.4      |                  | $          | 483.8 |   |
| Trade receivables, less allowances of $7.6 in 2009 and $6.7 in 2008 |       | 553.0              |       | 583.4                 |       |
| Inventories                                                         |       | 834.8              |       | 830.5                 |       |
| Deferred income taxes                                               |       | 176.8              |       | 172.2                 |       |
| Prepaid expenses and other current assets                           |       | 45.2               |       | 35.7                  |       |
| Other receivables                                                   |       | 63.1               |       | 43.7                  |       |
| Total Current Assets                                                |       | 2,202.3            |       | 2,149.3               |       |
| Property and equipment, net                                         |       | 1,177.1            |       | 1,192.1               |       |
| Intangible assets, net                                              |       | 388.9              |       | 404.4                 |       |
| Goodwill                                                            |       | 1,157.6            |       | 1,167.4               |       |
| Deferred income taxes                                               |       | 68.4               |       | 70.1                  |       |
| Investments                                                         |       | 38.2               |       | 37.6                  |       |
| Other assets                                                        |       | 53.2               |       | 53.2                  |       |
| Total Assets                                                        |       | $                  | 5,085.7    |                  | $          | 5,074.1 |   |
| **Liabilities and Shareholders’  Equity**                      | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current Liabilities:                                                |       |               |       |                  |       |
| Short-term borrowings                                               |       | $                  | 704.1      |                  | $          | 338.3 |   |
| Trade accounts payable                                              |       | 216.6              |       | 231.5                 |       |
| Salaries, wages and commissions                                     |       | 107.3              |       | 144.7                 |       |
| Deferred income taxes                                               |       | 1.4                |       | 1.5                   |       |
| Other accrued liabilities                                           |       | 342.6              |       | 331.5                 |       |
| Total Current Liabilities                                           |       | 1,372.0            |       | 1,047.5               |       |
| Long-term debt                                                      |       | 1,457.0            |       | 1,834.0               |       |
| Deferred income taxes                                               |       | 23.8               |       | 25.2                  |       |
| Pension and post-retirement obligations                             |       | 194.9              |       | 195.5                 |       |
| Other long-term liabilities                                         |       | 96.1               |       | 195.5                 |       |
| Commitments and Contingencies                                       |       |               |       |                  |       |
| Total Shareholders’ Equity                                     |       | 1,941.9            |       | 1,776.4               |       |
| Total Liabilities and Shareholders’ Equity                     |       | $                  | 5,085.7    |                  | $          | 5,074.1 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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**Hospira, Inc.**

 

**CondensedConsolidated Statement of Changes in Shareholders’ Equity**

 

**(Unaudited)**

 

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

*** ***
| ** **                                                               | ** ** | **Common Stock** | ** ** | **Treasury** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------|------------|------------------|------------|--------------|------------|-------------------------|------------|--------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                                               | ** ** | **Shares**       | ** ** | **Amount**   | ** ** | **Stock**               | ** ** | **Capital**  | ** ** | **Earnings**                          | ** ** | **Loss**   | ** ** | **Total** | ** ** |
| **Balances at January 1, 2009**                                     |       | 159.6            |       | $            | 1.7        |                    | $          | (299.8       | )          | $                                     | 1,234.2    |       | $          | 1,136.2 |   | $ | (295.9 | ) | $ | 1,776.4 |   |
| Net income                                                               |       | —           |       | —       |       | —                  |       | —       |       | 165.5                                 |       | —     |       | 165.5 |   |
|                                                                     |       |             |       |         |       |                    |       |         |       |                                  |       |       |       |   |   |
| Other comprehensive loss                                                 |       | —           |       | —       |       | —                  |       | —       |       | —                                |       | (26.4      | )          | (26.4 | ) |
|                                                                     |       |             |       |         |       |                    |       |         |       |                                  |       |       |       |   |   |
| Changes in shareholders’ equity related to incentive stock programs |       | 0.5              |       | —       |       | —                  |       | 26.4         |       | —                                |       | —     |       | 26.4 |   |
| **Balances at March 31, 2009**                                      |       | 160.1            |       | $            | 1.7        |                    | $          | (299.8       | )          | $                                     | 1,260.6    |       | $          | 1,301.7 |   | $ | (322.3 | ) | $ | 1,941.9 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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** **

**Hospira, Inc.**

 

**Notesto Condensed Consolidated Financial Statements**

 

**(Unaudited)**

 

**Note 1— Basis of Presentation and Accounting Policies**

 

The accompanying unaudited condensed consolidated financialstatements have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”) and, therefore, do not include allinformation and footnote disclosures normally included in audited financialstatements in conformity with accounting principles generally accepted in theUnited States (GAAP). However, in the opinion of management, all adjustments,consisting only of normal recurring adjustments, unless otherwise noted herein,necessary to present fairly the results of operations, financial position andcash flows have been made. These condensed consolidated financial statementsshould be read in conjunction with the consolidated financial statements andnotes thereto included in the Hospira, Inc. (“Hospira”) Annual Report on Form 10-Kfor the year ended December 31, 2008. The results of operations for anyinterim period are not necessarily indicative of the results of operations tobe expected for the full year.

 

Certain prior yearamounts have been reclassified to conform to the current year presentation.Among other changes, during 2009 Hospira reclassified costs that werepreviously reported in Cost of products sold to Restructuring, a separateoperating cost line item. See Note 4 for additional details related toRestructuring. The reclassifications did not affect net income or shareholders’equity.

 

*Adoption of New Accounting Standards*

 

Hospira adopted theprovisions of the Financial Accounting Standards Board (“FASB”) Staff Position No. FAS107-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP107-1”) to the interim period ending after March 15, 2009. FSP 107-1expands the fair value disclosures required for all financial instrumentswithin the scope of Statement of Financial Accounting Standards (“SFAS”) No. 107to include interim periods. There was no impact to Hospira’s current condensedconsolidated financial position, results of operations or cash flows uponadoption of this statement.

 

In December 2008, the FASB issuedFASB Staff Position No. FAS 132(R)-1, “Employers’ Disclosures aboutPostretirement Benefit Plan Assets” (“FSP 132(R)-1”). FSP 132(R)-1 requiresmore detailed disclosures about Hospira’s plan assets, including investmentstrategies, major categories of plan assets, concentrations of risk within planassets, and valuation techniques used to measure the fair value of plan assets.Additional disclosures are required for the consolidated financial statementsat Hospira’s 2009 year end. There was no impact to Hospira’s current condensedconsolidated financial position, results of operations or cash flows.

 

Hospira adopted the requiredprovisions of FASB Staff Position No. FAS 142-3, “Determination of theUseful Life of Intangible Assets” (“FSP 142-3”) on January 1, 2009. FSP142-3 amends the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under FASB Statement No. 142, “Goodwill and OtherIntangible Assets.” This guidance will be applied prospectively to intangibleassets acquired on or after January 1, 2009. There was no impact toHospira’s current condensed consolidated financial position, results ofoperations or cash flows upon adoption of this statement.

 

Hospira adopted theprovisions of SFAS No. 161, “Disclosures About Derivative Instruments andHedging Activities — an amendment of FASB Statement No. 133” (“SFAS No. 161”) on January 1,2009. SFAS No. 161 expands the disclosure requirements for derivativeinstruments and hedging activities. There was no impact toHospira’s current condensed consolidated financial position, results ofoperations or cash flows upon adoption of this statement.

 

Hospira adopted the provisions of Emerging Issues TaskForce (“EITF”) Issue No. 07-1, “Accounting for Collaborative Arrangements”(“EITF 07-1”) on January 1, 2009. EITF 07-1 provides guidance on how todetermine whether an arrangement constitutes a collaborative arrangement, howcosts incurred and revenue generated on sales to third parties should bereported by the participants in a collaborative arrangement, how payments madebetween participants in a collaborative arrangement should be characterized,and what participants should disclose in the notes to the financial statementsabout a collaborative arrangement. There was no impact toHospira’s current condensed consolidated financial position, results ofoperations or cash flows upon adoption of this statement.

 

Hospira adopted the provisions of SFAS No. 141(revised 2007), “Business Combinations” (“SFAS No. 141R”) on January 1,2009. SFAS No. 141R establishes principles and requirements for thereporting entity in a business combination, including recognition andmeasurement in the financial statements of the identifiable assets acquired,the liabilities assumed, and any noncontrolling interest in the acquiree. Thisstatement also establishes disclosure requirements to enable financialstatement users to evaluate the nature and financial effects of the businesscombination. SFAS No. 141R is effective for business combinations thatclose in years beginning on 

 

 

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or after December 15, 2008. There was noimpact to Hospira’s current condensed consolidated financial position, resultsof operations or cash flows upon adoption of this statement.

 

The provisions of FASB Staff Position No. FAS 157-2, “Effective Dateof FASB Statement No. 157” (“FSP 157-2”) delayed the effective date of theapplication of SFAS No. 157 to fiscal years beginning after November 15,2008, for all nonfinancial assets and nonfinancial liabilities that arerecognized or disclosed at fair value in the financial statements on anon-recurring basis. There was no impact to Hospira’s current condensedconsolidated financial position, results of operations or cash flows uponadoption of this statement.

 

**Note 2 —Investments**

 

InApril 2008, Hospira purchased $24.5 million of marketable equitysecurities and through March 31, 2009 the market value declined,principally in 2008, by $18.2 million. The volatility in the global equitymarkets, length of time the investment’s market value is below the investedvalue, and other factors could adversely impact the fair value of theinvestment and, as a consequence, could result in a charge for another-than-temporary decline in value. Hospira assessed the decline in themarket value to be temporary based on an investment evaluation considering theitems above, Hospira’s ability and intent to remain invested and the prospectsfor recovery among other factors.

 

**Note 3 —Fair Value Measures**

 

The following table summarizes the basisused to measure certain assets and liabilities at fair value, under theprovisions of SFAS No. 157 “Fair Value Measurements,” in the balance sheet:

 
| ** **                                  | ** ** | ** **              | ** ** | **Fair Value Measurements at Reporting Date, Using:**                      | ** ** |
|---------------------------------------------|------------|-------------------------|------------|----------------------------------------------------------------------------|------------|
| **Description (dollars in millions)**       | ** ** | **March 31, 2009** | ** ** | **Quoted Prices  in Active  Markets for  Identical Items  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| Assets:                                     |       |                    |       |                                                                       |       |   |   |   |   |
| Available-for-sale marketable securities    |       | $                       | 4.9        |                                                                       | $          | 4.9 |   | $ | — |   | $ | — |   |
| Foreign currency forward exchange contracts |       | 2.1                     |       | —                                                                     |       | 2.1 |   | — |   |
|                                        |       |                    |       |                                                                       |       |   |   |   |   |
| Liabilities:                                |       |                    |       |                                                                       |       |   |   |   |   |
| Foreign currency forward exchange contracts |       | $                       | 6.7        |                                                                       | $          | — |   | $ | 6.7 |   | $ | — |   |

 

The fair value ofthe Level 1 assets is based on quoted market prices of the identical underlyingsecurity in an active market. The fair value of the Level 2 assets andliabilities is based on market observable inputs to quoted market prices,benchmark yields and broker/dealer quotes. Level 3 inputs, asapplicable, are unobservable inputs which reflect assumptions developed bymanagement to measure assets and liabilities at fair value.

 

**Note 4 —Restructuring Actions**

 

As part of its strategy to improve marginsand cash flows, Hospira has taken a number of actions to reduce operating costsand optimize operations. The costs related to these actions consist primarilyof severance and other employee benefit costs, accelerated depreciationresulting from the decreased useful lives of the buildings and certainequipment, and other exit costs. Hospira will transfer related operations andproduction of the primary products from facilities impacted by these actions toother Hospira facilities, outsource certain product components to third-partysuppliers, or cease activities entirely. Restructuring costs incurred for theseactions during the three months ended March 31, 2009 and 2008 were $9.4million and $3.0 million, respectively.

 

*2009 Actions.*  In March 2009, Hospira announced detailsto a multi-stage restructuring and optimization plan (“Project Fuel”) whichwill occur over the next two years. Project Fuel includes the followingactivities: optimizing the product portfolio, evaluating non-strategic assets,and streamlining the organizational structure. Hospira expects to incuraggregate restructuring charges through 2011 related to these actions in therange of $100 million to $110 million on a pre-tax basis. During the threemonths ended March 31, 2009 Hospira incurred, primarily in the Americassegment, pre-tax restructuring costs of $4.7 million.

 

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Thefollowing summarizes the Project Fuel restructuring activity for 2009:

 
| **(dollars in millions)**      | ** ** | **Balance at  December 31, 2008** | ** ** | **Costs  Incurred** | ** ** | **Payments** | ** ** | **Non cash  Items** | ** ** | **Balance at  March 31, 2009** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|---------------------|------------|--------------|------------|---------------------|------------|-------------------------------------|------------|
| Employee-related benefit costs |       | $                                           | —     |                | $          | 4.6          |       | $                   | (1.3       | )                                   | $          | — |   | $ | 3.3 |   |
| Other                          |       | —                                      |       | 0.1                 |       | —       |       | —              |       | 0.1                                 |       |
|                           |       | $                                           | —     |                | $          | 4.7          |       | $                   | (1.3       | )                                   | $          | — |   | $ | 3.4 |   |

 

*2008 Actions.*  In April 2008,Hospira announced a plan to exit manufacturing operations at its Morgan Hill,California plant over the next two years. Hospira expects to incuraggregate restructuring charges through 2011 related to these actions in therange of $20 million to $24 million on a pre-tax basis. Hospira has incurred $11.8million, pre-tax, to date for restructuring charges related to these actions.During the three months ended March 31, 2009 Hospira incurred in theAmericas segment pre-tax restructuring costs of $3.0 million.

 

Thefollowing summarizes the Morgan Hill, California restructuring activity for2009:

 
| **(dollars in millions)**      | ** ** | **Balance at  December 31, 2008** | ** ** | **Costs  Incurred** | ** ** | **Payments** | ** ** | **Non cash  Items** | ** ** | **Balance at  March 31, 2009** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|---------------------|------------|--------------|------------|---------------------|------------|-------------------------------------|------------|
| Employee-related benefit costs |       | $                                           | 6.6        |                | $          | 2.5          |       | $                   | (0.5       | )                                   | $          | — |   | $ | 8.6 |   |
| Accelerated depreciation       |       | —                                      |       | 0.4                 |       | —       |       | (0.4                | )          | —                              |       |
| Other                          |       | —                                      |       | 0.1                 |       | (0.1         | )          | —              |       | —                              |       |
|                           |       | $                                           | 6.6        |                | $          | 3.0          |       | $                   | (0.6       | )                                   | $          | (0.4 | ) | $ | 8.6 |   |

 

*2006 Actions. *In February 2006,Hospira announced plans to close plants in Ashland, Ohio, Montreal, Canada andNorth Chicago, Illinois and completed these plans in 2007, 2008, and in March 2009,respectively. Hospira incurred $50.7 million, pre-tax, to date forrestructuring charges related to these actions. During the three months ended March 31,2009 and 2008, Hospira incurred in the Americas segment pre-tax restructuring costsof $1.7 million and $3.0 million, respectively.

 

Thefollowing summarizes the Ashland, Ohio; Montreal, Canada; and North Chicago,Illinois restructuring activity for 2009:

 
| **(dollars in millions)**      | ** ** | **Balance at  December 31, 2008** | ** ** | **Costs  Incurred** | ** ** | **Payments** | ** ** | **Non cash  Items** | ** ** | **Balance at  March 31, 2009** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|---------------------|------------|--------------|------------|---------------------|------------|-------------------------------------|------------|
| Employee-related benefit costs |       | $                                           | 10.8       |                | $          | 1.4          |       | $                   | (6.6       | )                                   | $          | — |   | $ | 5.6 |   |
| Accelerated depreciation       |       | —                                      |       | 0.3                 |       | —       |       | (0.3                | )          | —                              |       |
| Other                          |       | 1.0                                         |       | —              |       | (0.1         | )          | —              |       | 0.9                                 |       |
|                           |       | $                                           | 11.8       |                | $          | 1.7          |       | $                   | (6.7       | )                                   | $          | (0.3 | ) | $ | 6.5 |   |

 

**Note 5— Financial Instruments and Derivatives**

 

Hospira is exposed to market risk primarilydue to changes in currency exchange rates and interest rates. The objective inmanaging these risks is to reduce volatility on earnings and cash flows. Toreduce the risk, Hospira enters into certain derivative financial instruments,when available on a cost-effective basis, to hedge its underlying economicexposure. To manage currency exchange rate exposures, Hospira utilizes foreigncurrency forward exchange contracts not formally designated as hedges underSFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities.” To manage interest rate exposures, Hospira utilizes interest rateswap contracts comprised principally of fixed-to-floating rate interest rateswaps, which as designated are subject to fair-value hedge accounting treatmentuntil termination, at which time the related gain or loss is deferred andamortized over the remaining term of the notes.

 

For a more detailed description of Hospira’sfinancial instruments and derivatives and short-term borrowings and long-termdebt, see Note 6 and Note 10, respectively, to Hospira’s consolidated financialstatements included in Hospira’s Annual Report on Form 10-K for the yearended December 31, 2008.

 

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The following table summarizes Hospira’s fairvalue of outstanding derivatives not designated as hedging instruments:

 
| **(dollars in millions)**                    | ** ** | **Balance Sheet Location** | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|
| Foreign currency forward exchange contracts: |       | Other receivables          |       | $                       | 2.1        |                       | $          | — |   |
|                                         |       | Other liabilities          |       |                    | 6.7        |                       |       | 12.7 |   |

 

The following table summarizes the aggregateunrecognized gains (losses) on terminated interest rate swap contracts:

 
| **(dollars in millions)**     | ** ** | **Balance Sheet Location**            | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| Interest rate swap contracts: |       | Short-term borrowings                 |       | $                       | 1.5        |                       | $          | 2.1 |   |
|                          |       | Long-term debt                        |       | 4.2                     |       | 4.4                        |       |
|                          |       | Accumulated other  comprehensive loss |       |                    | (0.8       | )                          |       | (1.1 | ) |

 

The impact on earnings from derivatives notdesignated as hedging instruments, from interest rate swap contracts thatqualified as fair-value hedges prior to termination and terminated interestrate swap contracts were as follows for the three months ended March 31:

 
| **(dollars in millions)**                   | ** ** | **Location of Gain (Loss) Recognized on Derivatives** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Foreign currency forward exchange contracts |       | Other income, net                                     |       | $        | 5.9        |     | $          | (8.4 | ) |
| Interest rate swap contracts - Fair-value   |       | Interest expense                                      |       | —   |       | 0.6      |       |
| Interest rate swap contracts - Terminated   |       | Interest expense                                      |       |     | 0.4        |     |       | — |   |

 

The carrying values of certain financial instruments,including primarily cash and cash equivalents, and accounts receivable andpayable, approximate their estimated fair values due to their short-termnature. The carrying value and estimated aggregate fair value of the seniorunsecured notes are as follows.

 
| ** **                            | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| **Description (dollars in millions)** | ** ** | **Carrying Value**      | ** ** | **Fair Value**             | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Senior unsecured notes                |       | $                       | 2,125.0    |                       | $          | 2,009.2 |   | $ | 2,125.0 |   | $ | 1,924.5 |   |
|                                       |            |                         |            |                            |            |  |  |  |  |  |  |  |  |

 

**Note 6 —Stock-Based Compensation**

 

Hospira’s2004 Long-Term Incentive Plan provides for the grant of shares of stockoptions, stock appreciation rights, stock awards (restricted stock, restrictedstock units, performance shares, performance units), and cash-based awards toemployees and non-employee directors. Costs resulting from share-based paymenttransactions are recognized as compensation cost over the vesting period basedon the fair value of the instrument on the date of grant. Stock-basedcompensation expense of $13.1 million and $14.4 million was recognized for thethree months ended March 31, 2009 and 2008, respectively, primarilyresulting from stock option awards. The related income tax benefit recognizedwas $4.6 million and $5.4 million, respectively.

 

InMarch 2009, 3.5 million options were granted to certain employees for the2009 annual stock option grant. These options were awarded at the fair marketvalue at the time of grant, generally vest over three years, and have aseven-year term.

 

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Theweighted average fair value using the Black-Scholes option-pricing model, andthe corresponding weighted average assumptions during the three months ended March 31are as follows:

 
| ** **                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Volatility                  |       | 30.2     | %          | 28.0     | %          |
| Expected life (years)       |       | 4.5      |       | 4.5      |       |
| Risk-free interest rate     |       | 1.8      | %          | 2.3      | %          |
| Dividend yield              |       | 0.0      | %          | 0.0      | %          |
| Fair value per stock option |       | $        | 6.30       |     | $          | 11.81 |   |
|                             |            |          |            |          |            |  |  |

 

InMarch 2009, 515,206 performance share awards were granted to key membersof management. The performance share awards vest at the end of the three-yearperformance cycle. The 2009 performance share award is based on a formula thatmeasures performance using relative total shareholder return over thethree-year performance cycle compared to an industry peer group. Based on theactual performance, at interim periods, and at the end of the performancecycle, the number of performance share awards earned, which can range between0% and 200% of the target awards granted, will be satisfied with Hospira commonstock.

 

Theweighted average fair value using the Monte Carlo simulation model, and thecorresponding weighted average assumptions during the three months ended March 31are as follows:

 
| ** **                       | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Volatility                       |       | 37.2     | %          | 27.9     | %          |
| Risk-free interest rate          |       | 1.2      | %          | 2.0      | %          |
| Dividend yield                   |       | 0.0      | %          | 0.0      | %          |
| Fair value per performance share |       | $        | 24.98      |     | $          | 62.39 |   |
|                                  |            |          |            |          |            |  |  |

 

Asof March 31, 2009, there was $66.2 million of total unrecognizedcompensation costs related to non-vested share-based compensation arrangements.This cost is expected to be recognized over a weighted average period of 2.2 years.

 

**Note 7— Pension and Post-Retirement Benefits**

 

Retirement plans consist of defined benefitand legislated obligations such as employee severance indemnity plans (“pensionplans”), post-retirement medical and dental plans (“medical and dental plans”),and defined contribution plans. Plans cover certain employees both in andoutside of the U.S.

 

Net costrecognized for the pension plans and medical and dental plans for the threemonths ended March 31, is as follows:

 
| ** **                                         | ** ** | **Pension Plans** | ** ** | **Medical and Dental Plans** | ** ** |
|----------------------------------------------------|------------|-------------------|------------|------------------------------|------------|
| **(dollars in millions)**                          | ** ** | **2009**          | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service cost for benefits earned during the period |       | $                 | 0.3        |                         | $          | 0.5 |   | $ | — |   | $ | 0.1 |   |
| Interest cost on projected benefit obligations     |       | 6.5               |       | 6.2                          |       | 0.8 |   | 0.9 |   |
| Expected return on plans’ assets              |       | (7.0              | )          | (7.2                         | )          | — |   | — |   |
| Net amortization                                   |       | 0.9               |       | 0.8                          |       | 0.2 |   | 0.3 |   |
| Net cost                                           |       | $                 | 0.7        |                         | $          | 0.3 |   | $ | 1.0 |   | $ | 1.3 |   |

 

Based on current Federal laws, regulationsand application guidance issued in 2009, Hospira is not required to make anycontributions and does not expect to make any discretionary contributions toits pension plans for the remainder of 2009. While Hospira’s funding policyrequires contributions to our defined benefit plans equal to the amountsnecessary to, at a minimum, satisfy the funding requirements as prescribed byFederal laws and regulations, Hospira does make discretionary contributionswhen management deems it is prudent to do so.

 

Certain Hospira employees participate in the Hospira401(k) Retirement Savings Plan. Hospira’s contributions to this definedcontribution plan for the three months ended March 31, 2009 and 2008 were$9.4 million and $9.1 million, respectively.

 

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**Note 8 —Income Taxes**

 

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

 

During the three monthsended March 31, 2009, the Internal Revenue Service (“IRS”) audit ofHospira’s 2004 and 2005 tax returns was concluded and the years wereeffectively settled. The outcome of the audit settlement is a reduction in thegross unrecognized tax benefits for both the audit years settled and resultantimpact on tax years 2006 through 2008 in aggregate totaling $100.7 million, ofwhich $91.9 million is recognized in the results for the three months ended March 31,2009 as a discrete income tax benefit. The remaining amounts represent netchanges to current taxes payable and deferred tax accounts. This outcomeincludes interest and state tax impacts.

 

Hospira remains open to tax examination forpost-May 1, 2004 periods in all major tax-paying jurisdictions, includingAustralia, Canada, Ireland, Italy, United Kingdom, and for years 2006 forwardfor the United States. The IRS began the U.S. tax audit of years 2006 and 2007during the three months ended March 31, 2009.

 

**Note 9 —Earnings per Share**

 

Basic earnings per shareare computed by dividing net income by the number of weighted average commonshares outstanding during the reporting period. Diluted earnings per share arecalculated to give effect to all potentially dilutive common shares that wereoutstanding during the reporting period. The following table shows the effectof stock-based awards on the weighted average number of shares outstanding usedin calculating diluted earnings per share for the three months ended March 31:

 

 
| **(shares in millions)**                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|
| Weighted average basic common shares outstanding             |       | 159.5    |       | 158.7    |       |
| Incremental shares outstanding related to stock-based awards |       | 1.1      |       | 2.3      |       |
| Weighted average dilutive common shares outstanding          |       | 160.6    |       | 161.0    |       |

 

The number of outstanding options to purchase Hospirastock for which the exercise price of the options exceeded the average stockprice was 12.1 million and 5.5 million for the three months ended March 31,2009 and 2008, respectively. Accordingly, these options are excluded from thediluted earnings per share calculation for these periods.

 

**Note 10 —Supplemental Financial Information**

 

Inventories consist ofthe following:

 
| ** **                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|--------------------|------------|-----------------------|------------|
| **(dollars in millions)** | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Finished products         |       | $                  | 503.3      |                  | $          | 510.1 |   |
| Work in process           |       | 131.5              |       | 130.6                 |       |
| Materials                 |       | 200.0              |       | 189.8                 |       |
| Total inventories         |       | $                  | 834.8      |                  | $          | 830.5 |   |

 

Property and equipment,net consists of the following:

 
| ** **                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(dollars in millions)**         | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Property and equipment, at cost   |       | $                  | 2,479.9    |                  | $          | 2,540.5 |   |
| Accumulated depreciation          |       | (1,302.8           | )          | (1,348.4              | )          |
| Total property and equipment, net |       | $                  | 1,177.1    |                  | $          | 1,192.1 |   |

 

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Otherlong-term liabilities consist of the following:

 
| ** **                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(dollars in millions)**                            | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Unrecognized tax benefits, penalties and interest(1) |       | $                  | 75.1       |                  | $          | 174.9 |   |
| All other                                            |       | 21.0               |       | 20.6                  |       |
| Total other long-term liabilities                    |       | $                  | 96.1       |                  | $          | 195.5 |   |

 

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(1)           Reflects conclusion and effective settlementof the IRS audit of Hospira’s 2004 and 2005 tax returns during the three monthsended March 31, 2009, see Note 8 for further details.

 

**Note 11 —Goodwill and Intangible Assets, Net**

 

The following summarizes goodwill andintangible assets, net activity:

 
| ** **                | ** ** | ** **                 | ** ** | ** **       | ** ** | ** **       | ** ** | **Currency**           | ** ** | ** **              | ** ** |
|---------------------------|------------|----------------------------|------------|------------------|------------|------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **Balance at**             | ** ** | ** **       | ** ** | ** **       | ** ** | **Translation Effect** | ** ** | **Balance at**          | ** ** |
| **(dollars in millions)** | ** ** | **December 31, 2008** | ** ** | **Acquisitions** | ** ** | **Amortization** | ** ** | **and Other**          | ** ** | **March 31, 2009** | ** ** |
| Goodwill                  |       | $                          | 1,167.4    |             | $          | —           |       | $                      | —     |                    | $          | (9.8 | ) | $ | 1,157.6 |   |
| Intangible assets, net    |       | 404.4                      |       | —           |       | (14.7            | )          | (0.8                   | )          | 388.9                   |       |
|                           |            |                            |            |                  |            |                  |            |                        |            |                         |            |  |  |  |  |  |

 

 

Intangible assets have definite lives and areamortized on a straight-line basis over their estimated useful lives (2 to 11years, weighted average 10 years). Intangible asset amortization expense was$14.7 million and $16.9 million for the three months ended March 31, 2009and 2008, respectively. Intangible asset amortization for each of the fivesucceeding fiscal years is estimated at $45 million for the remainder of 2009,$59 million for 2010, $56 million for 2011, $45 million for 2012, and $44million for 2013.

 

Additionally, intangible assets, net consistof the following:

 
| ** **                | ** ** | **March 31, 2009**     | ** ** | **December 31, 2008**    | ** ** |
|---------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| **(dollars in millions)** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Intangible  Assets** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Intangible  Assets** | ** ** |
| Product rights            |       | $                           | 465.6      |                          | $          | (105.8 | ) | $ | 359.8 |   | $ | 464.3 |   | $ | (92.0 | ) | $ | 372.3 |   |
| Customer relationships    |       | 28.0                        |       | (8.4                          | )          | 19.6 |   | 28.1 |   | (7.5 | ) | 20.6 |   |
| Technology                |       | 13.7                        |       | (4.2                          | )          | 9.5 |   | 15.1 |   | (3.6 | ) | 11.5 |   |
|                      |       | $                           | 507.3      |                          | $          | (118.4 | ) | $ | 388.9 |   | $ | 507.5 |   | $ | (103.1 | ) | $ | 404.4 |   |
|                           |            |                             |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 12****—****Short-term Borrowings andLong-term Debt**

 

For a more detailed description of Hospira’sshort-term borrowings and long-term debt, see Note 10 to Hospira’s consolidatedfinancial statements included in Hospira’s Annual Report on Form 10-K forthe year ended December 31, 2008.

 

Beginning in March 2009, the $375.0million principal amount of floating rate notes are classified as short-termborrowings as they mature in March 2010. The $300.0 million principal4.95% senior unsecured notes mature in June 2009 and are expected to bepaid in full. The remaining $5.0 million in principal outstanding as of December 31,2008, under the $500.0 million three-year term loan facility due March 2010was paid in January 2009.

 

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 31,2009, Hospira had no amounts outstanding under the Revolver.

 

Certain of our borrowing agreements contain covenantsthat require compliance with, among other things, a maximum leverage ratio anda minimum interest coverage ratio. As of March 31, 2009, Hospira was incompliance with all applicable covenants.

 

**Note**** 13****— 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”).

 

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Various state and federalagencies, including the U.S. Department of Justice and various state attorneysgeneral, are investigating or have lawsuits pending against a number ofpharmaceutical companies, including Abbott, for allegedly engaging in impropermarketing and pricing practices with respect to certain Medicare and Medicaidreimbursable products, including practices relating to average wholesale price(“AWP”). These are civil investigations that are seeking to identify thepractices and determine whether those practices violated any laws, includingfederal and state false claims acts, or constituted fraud in connection withthe Medicare and/or Medicaid reimbursement paid to third parties. Inaddition, Abbott is a defendant in a number of lawsuits on behalf ofindividuals or entities, including healthcare insurers and other third-partypayors, that allege generally that Abbott and numerous other pharmaceuticalcompanies reported false or misleading pricing information in connection withfederal, state and private reimbursement for certain drugs. Some of theproducts involved in these investigations and lawsuits are Hospira products. There may be additional investigations or lawsuits, or additional claims in theexisting investigations or lawsuits, initiated with respect to these matters inthe future. Hospira cannot be certain that it will not be named as asubject or defendant in these investigations or lawsuits. The previouslyreported lawsuit, *State of Hawaii v. AbbottLaboratories, Inc., et al.*, Case No. 06-1-0720-04 (FirstCircuit, Hawaii), filed April 2006, has been dismissed without payment by,or other consideration paid by Hospira. Abbott will indemnify Hospira forliabilities associated with AWP investigations and lawsuits, if any, only tothe extent that they are of the same nature as the lawsuits and investigationsthat existed 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-offactivities. These investigations and lawsuits could result in changes toHospira’s business practices or pricing policies, civil or criminal monetarydamages, penalties or fines, imprisonment and/or exclusion of Hospira productsfrom participation in federal and state healthcare programs, includingMedicare, Medicaid and Veterans’ Administration health programs, any of whichcould have a material adverse effect on its business, profitability andfinancial condition.

 

Hospira has been named as a defendant in a lawsuitalleging generally that the spin-off of Hospira from Abbott  resulted in a mass termination of employeesso as to interfere with the future attainment of benefits in violation of theEmployee Retirement Income Security Act of 1974 (“ERISA”). The lawsuit wasfiled on November 8, 2004 in the United States District Court for theNorthern District of Illinois, and is captioned: *Myla Nauman, Jane Roller and Michael Loughery v.Abbott Laboratories and Hospira, Inc.*  Plaintiffsgenerally seek reinstatement in Abbott benefit plans, disgorgement of profitsand attorneys fees. On November 18, 2005, the complaint was amended toassert an additional claim against Abbott and Hospira for breach of fiduciaryduty under ERISA.  Hospira has been dismissed as a defendant with respectto the fiduciary duty claim. By Order dated December 30, 2005, theCourt granted class action status to the lawsuit. As to the sole claimagainst Hospira 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 [HospitalProducts Division]/creation of Hospira announced by Abbott on August 22,2003, and who were eligible for retirement under the Abbott Benefit Plans onthe date of their terminations.” In July 2008, the court denieddefendants’ motions for summary judgment. Hospira denies all materialallegations asserted against it in the complaint. Trial of this matter began inApril of 2009. In the third quarter of 2008, Hospira receivednotice from Abbott requesting that Hospira indemnify Abbott for all liabilitiesthat Abbott may incur in connection with this litigation. Hospira denies anyobligation to indemnify Abbott for the claims asserted against Abbott in thislitigation.

 

On August 12, 2005, Retractable Technologies, Inc.(“RTI”) filed a lawsuit against Abbott alleging breach of contract andfraud in connection with a National Marketing and Distribution Agreement (“Agreement”)between Abbott and RTI signed in May 2000. *Retractable Technologies, Inc. v. Abbott Laboratories, Inc.*,Case No. 505CV157, pending in U.S. District Court for the Eastern Districtof Texas. RTI purported to terminate the contract for breach in 2003. Thelawsuit alleges that Abbott misled RTI and breached the Agreement in connectionwith Abbott’s marketing efforts. RTI seeks unspecified monetary damages as wellas punitive damages. Hospira has conditionally agreed to defend and indemnifyAbbott in connection with this lawsuit, which involves a contract carried outby Abbott’s former Hospital Products Division. Abbott denies all materialallegations in the complaint. Abbott has brought counterclaims against RTI forbreach of the Agreement, including failure to pay marketing fees owed toAbbott. Hospira is entitled, pursuant to its agreements with Abbott, to anyamounts recovered due to RTI’s breach of the Agreement. On February 9,2007, the court ruled that RTI could not be compelled to arbitrate its claims.On June 2, 2008, the Fifth Circuit Court of Appeals upheld that decisionin a 2-1 ruling.  The case will nowproceed in the U.S. District Court for the Eastern District of Texas.

 

Hospira’s litigationexposures, including product liability claims, are evaluated each reportingperiod. Hospira’s reserves, which are not significant at March 31, 2009and December 31, 2008, are the best estimate of loss, as defined bySFAS No. 5, “Accounting for Contingencies.” Based upon information thatis currently available, management believes that the likelihood of a materialloss in excess of recorded amounts is remote.

 

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.

 

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**Note 14****—****Shareholders’ Equity**

 

*Common Stock*

 

Hospira is authorized to issue400.0 million shares of common stock, par value $0.01 per share, and50.0 million shares of preferred stock, par value $0.01 per share. As of March 31,2009 and December 31, 2008, 167.7 million and 167.2 million common shareswere issued and 160.1 million and 159.6 million common shares wereoutstanding, respectively.

 

*Treasury Stock*

 

Hospira has repurchased7.6 million shares for $299.8 million in the aggregate under the 2006 boardauthorization, all of which were purchased during 2006. Hospira does not expectto repurchase any shares in 2009 under this program.

 

**Note 15 —Comprehensive Income and Accumulated Other Comprehensive (Loss)**, **net of tax**

 

Comprehensive income,net, of taxes for the three months ended March 31, consists of thefollowing:

 
| **(dollars in millions)**                                                                                                                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Foreign currency translation adjustments, net of taxes of $0.0                                                                                             |       | $        | (27.3      | )        | $          | 58.7 |   |
| Pension liability adjustments, net of taxes $(0.4) million and $(0.7)  million for the three months ended March 31, 2009 and 2008, respectively       |       | 0.6      |       | 1.1      |       |
| Unrealized gains on cash flow hedges, net of taxes $(0.2) million and  $0.0 million for the three months ended March 31, 2009 and 2008,  respectively |       | 0.3      |       | 0.1      |       |
| Other comprehensive (loss) income                                                                                                                          |       | (26.4    | )          | 59.9     |       |
| Net Income                                                                                                                                                 |       | 165.5    |       | 65.4     |       |
| Comprehensive Income                                                                                                                                       |       | $        | 139.1      |     | $          | 125.3 |   |

 

Accumulated othercomprehensive (loss), net, of taxes consists of the following:

 
| ** **                                                                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(dollars in millions)**                                                                                   | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Cumulative foreign currency translation adjustments, net of taxes of  $0.0                                  |       | $                  | (205.2     | )                     | $          | (177.9 | ) |
| Cumulative retirement plans unrealized losses, net of taxes $63.5  million and $63.9 million, respectively  |       | (99.5              | )          | (100.1                | )          |
| Cumulative unrealized losses on marketable equity securities, net of  taxes of $0.0                         |       | (16.8              | )          | (16.8                 | )          |
| Cumulative unrealized losses on cash flow hedges, net of taxes $0.5  million and $0.7 million, respectively |       | (0.8               | )          | (1.1                  | )          |
| Accumulated Other Comprehensive Loss                                                                        |       | $                  | (322.3     | )                     | $          | (295.9 | ) |

 

**Note 16 —Segment Information**

 

Hospira conductsoperations worldwide and is managed in three reportable segments: Americas,EMEA and APAC. The Americas segment includes the United States, Canada andLatin America; the EMEA segment includes Europe, the Middle East and Africa,while the APAC segment includes Asia, Japan and Australia. In all segments,Hospira sells a broad line of products, including specialty injectablepharmaceuticals, other pharmaceuticals, medication management systems and otherdevices. Specialty Injectable Pharmaceuticals include generic injectables andproprietary specialty injectables. Other Pharmaceuticals include large volumeI.V. solutions, nutritionals and contract manufacturing services. MedicationManagement Systems include infusion pumps, related software, services andadministration sets. Other Devices include gravity administration sets,critical care products and other device products.

 

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 other income,net that benefit the entire 

 

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organization are notallocated. The following segment information has been prepared in accordancewith the internal accounting policies of Hospira, as described above.

 

***Reportable segment information:***

 

The table below presentsinformation about Hospira’s reportable segments for the three months ended March 31:

 
| ** **                             | ** ** | **Net Sales** | ** ** | **Income from Operations** | ** ** |
|----------------------------------------|------------|---------------|------------|----------------------------|------------|
| **(dollars in millions)**              | ** ** | **2009**      | ** ** | **2008**                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                   |       |          |       |                       |       |   |   |   |   |
| Americas                               |       | $             | 684.7      |                       | $          | 674.2 |   | $ | 141.6 |   | $ | 136.3 |   |
| EMEA                                   |       | 121.2         |       | 152.8                      |       | 4.2 |   | 4.5 |   |
| APAC                                   |       | 53.8          |       | 61.7                       |       | 2.7 |   | 2.1 |   |
|                                   |       |          |       |                       |       |   |   |   |   |
| Total reportable segments              |       | $             | 859.7      |                       | $          | 888.7 |   | 148.5 |   | 142.9 |   |
|                                   |       |          |       |                       |       |   |   |   |   |
| Corporate functions                    |       |          |       |                       |       | (20.7 | ) | (16.8 | ) |
| Stock-based compensation               |       |          |       |                       |       | (13.1 | ) | (14.4 | ) |
| Income from operations                 |       |          |       |                       |       | 114.7 |   | 111.7 |   |
| Interest expense and other income, net |       |          |       |                       |       | (26.6 | ) | (27.3 | ) |
|                                   |       |          |       |                       |       |   |   |   |   |
| Income before income taxes             |       |          |       |                       |       | $ | 88.1 |   | $ | 84.4 |   |

 

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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, 2008 (the “2008 Form 10-K”), and (ii) thefactors described in “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in the 2008 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 generic acute-careand oncology injectables, as well as integrated infusion therapy and medicationmanagement systems. Hospira’s broad portfolio of products is used by hospitalsand alternate site providers, such as clinics, home healthcare providers andlong-term care facilities.

 

Certain prior yearamounts have been reclassified to conform to the current year presentation.Among other changes, during 2009 Hospira reclassified costs that werepreviously reported in Cost of products sold to Restructuring, a separateoperating cost line item. The reclassifications did not affect net income orshareholders’ equity.

 

**Cost-Reductionand Optimization Activities**

 

As part of its strategy to improve marginsand cash flows, Hospira has taken a number of actions to reduce operating costsand optimize operations. The costs related to these actions consist primarilyof severance and other employee benefit costs, accelerated depreciationresulting from the decreased useful lives of the buildings and certainequipment, relocation of production, process optimization implementation costand other exit costs. Hospira will transfer related operations and productionof the primary products from facilities impacted by these actions to otherHospira facilities, outsource certain product components to third-partysuppliers, or cease activities entirely. Restructuring and optimization costsincurred for these actions during the three months ended March 31, 2009and 2008 were $22.2 million and $7.8 million, respectively, of which $9.4million and $3.0 million, respectively, were reported as Restructuring with theremainder reported primarily in Cost of products sold and Selling, general andadministrative. For further details regarding the Restructuring related impactof these cost-reduction and optimization activities, see Note 4 to the condensedconsolidated financial statements included in Item 1.

 

*2009 Actions.*  In March 2009, Hospira announced detailsof a multi-stage restructuring and optimization plan (“Project Fuel”) whichwill occur over the next two years. Project Fuel includes the followingactivities: optimizing the product portfolio, evaluating non-strategic assets,and streamlining the organization structure. Hospira expects to incur aggregatecharges through 2011 related to these actions in the range of $140 millionto $160 million on a pre-tax basis, of which approximately$100 million to $110 million are expected to be reported asRestructuring.During thethree months ended March 31, 2009, Hospira incurred costs of $10.5 millionof which $4.7 million is reported as Restructuring, with the remainder reportedprimarily in Selling, general and administrative.

 

*2008 Actions.*  In April 2008, Hospira announced plansto exit manufacturing operations at its Morgan Hill, California plant over thenext two years. During the three months ended March 31, 2009, Hospiraincurred costs of $3.9 million of which $3.0 million is reported as Restructuring,with the remainder reported primarily in Cost of products sold.

 

*2006 Actions.*  In February 2006, Hospira announcedplans to close manufacturing plants in Ashland, Ohio, Montreal, Canada, andNorth Chicago, Illinois, and completed these plans in 2007, 2008, and in March 2009,respectively. During the three months ended March 31, 2009 Hospiraincurred costs of $7.8 million of which $1.7 million is reported asRestructuring, compared to $7.8 million of which $3.0 million is reported asRestructuring during the 

 

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three months ended March 31, 2008. Theremainder of costs incurred are reported primarily in Cost of products sold forthe three months ended March 31, 2009 and 2008, respectively.

 

**MaynePharma Integration**

 

In connection with theintegration of Mayne Pharma Limited (“Mayne Pharma”) into its operations,Hospira incurred cash expenditures for the two-year period after the February 2,2007 closing which reduced earnings, and operating and investing cash flow.These cash expenditures included integration expenses related to the closure of facilities, termination of leaseagreements and employee-related benefit arrangements with the remainder relatedto purchase accounting items and capital projects. Cash expenditures werecompleted by the end of 2008. During the three months ended March 31,2008, Hospira incurred $10.0 million of integration expenses reported primarily in Selling,general and administrative.

 

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**Results ofoperations for the three months ended March 31, 2009 compared to March 31,2008**

 

*Net Sales*

 

A comparison of product line sales is as follows:

 

**Hospira, Inc.**

**NetSales by Product Line**

**(Unaudited)**

**(dollarsin millions)**

 
| ** **                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | **2009**                              | ** ** | **2008** | ** ** | **Percent  Change  vs. Prior  Year** | ** ** |
| Americas—                |       |                                  |       |   |   |   |   |
| Pharmaceuticals               |       |                                  |       |   |   |   |   |
| Specialty Injectables         |       | $                                     | 333.1      |   | $ | 340.7 |   | (2.2 | )% |
| Other Pharma                  |       | 137.8                                 |       | 121.9 |   | 13.0 | % |
|                          |       | 470.9                                 |       | 462.6 |   | 1.8 | % |
| Devices                       |       |                                  |       |   |   |   |   |
| Medication Management Systems |       | 121.4                                 |       | 118.1 |   | 2.8 | % |
| Other Devices                 |       | 92.4                                  |       | 93.5 |   | (1.2 | )% |
|                          |       | 213.8                                 |       | 211.6 |   | 1.0 | % |
|                          |       |                                  |       |   |   |   |   |
| Total Americas                |       | 684.7                                 |       | 674.2 |   | 1.6 | % |
|                          |       |                                  |       |   |   |   |   |
| EMEA—                    |       |                                  |       |   |   |   |   |
| Pharmaceuticals               |       |                                  |       |   |   |   |   |
| Specialty Injectables         |       | 57.6                                  |       | 78.3 |   | (26.4 | )% |
| Other Pharma                  |       | 27.7                                  |       | 36.6 |   | (24.3 | )% |
|                          |       | 85.3                                  |       | 114.9 |   | (25.8 | )% |
| Devices                       |       |                                  |       |   |   |   |   |
| Medication Management Systems |       | 19.1                                  |       | 20.4 |   | (6.4 | )% |
| Other Devices                 |       | 16.8                                  |       | 17.5 |   | (4.0 | )% |
|                          |       | 35.9                                  |       | 37.9 |   | (5.3 | )% |
|                          |       |                                  |       |   |   |   |   |
| Total EMEA                    |       | 121.2                                 |       | 152.8 |   | (20.7 | )% |
|                          |       |                                  |       |   |   |   |   |
| APAC—                    |       |                                  |       |   |   |   |   |
| Pharmaceuticals               |       |                                  |       |   |   |   |   |
| Specialty Injectables         |       | 39.0                                  |       | 45.6 |   | (14.5 | )% |
| Other Pharma                  |       | 3.6                                   |       | 4.1 |   | (12.2 | )% |
|                          |       | 42.6                                  |       | 49.7 |   | (14.3 | )% |
| Devices                       |       |                                  |       |   |   |   |   |
| Medication Management Systems |       | 4.7                                   |       | 5.7 |   | (17.5 | )% |
| Other Devices                 |       | 6.5                                   |       | 6.3 |   | 3.2 | % |
|                          |       | 11.2                                  |       | 12.0 |   | (6.7 | )% |
|                          |       |                                  |       |   |   |   |   |
| Total APAC                    |       | 53.8                                  |       | 61.7 |   | (12.8 | )% |
|                          |       |                                  |       |   |   |   |   |
| Net Sales                     |       | $                                     | 859.7      |   | $ | 888.7 |   | (3.3 | )% |

 

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Specialty Injectablesinclude generic injectables and proprietary specialty injectables. OtherPharmaceuticals include large volume IV solutions, nutritionals and contractmanufacturing services. Medication Management Systems include infusion pumps,related software, services and administration sets. Other Devices includegravity administration sets, critical care products and other miscellaneousdevice products.

 

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Net sales decreased(3.3)%. Excluding the impact of changes in foreign exchange rates Net salesincreased 2.4%.

 

Americas

 

Netsales in the Americas segment increased 1.6%, or 3.9% excluding the impact ofchanges in foreign exchange rates. The decrease in net sales of SpecialtyInjectable Pharmaceuticals was due to significant wholesaler stocking in theprior year, partially offset by increased volume for anesthesia productsincluding Hospira’s proprietary drug Precedex® and theimpact of competitor supply issues. Other Pharma net sales increased due tohigher demand from certain contract manufacturing customers and increased largevolume IV solutions sales due to Group Purchasing Organizations contractawards. Net sales in Medication Management Systems increased due to solidpenetration, particularly for Symbiq®, Hospira’s newest general infusion system. OtherDevices net sales decreased due to price and the impact of changes in foreignexchange rates, partially offset by volume growth in gravity administrationsets.

 

EMEA

 

Netsales in the EMEA segment decreased (20.7)%. Excluding the impact of changes inforeign exchange rates EMEA Net sales decreased (5.7)%. Specialty InjectablePharmaceuticals net sales decreased primarily due to expected price decreasesin oncology products, partially offset by sales of a newly launched biogeneric.Net sales of Other Pharma were lower due to declines in demand from certaincontract manufacturing customers. Excluding the changes in foreign exchangerates, net sales in Medication Management Systems increased due to higher salesvolume of ambulatory and large volume infusion systems.

 

APAC

 

Netsales in the APAC segment decreased (12.8)%. Excluding the impact of changes inforeign exchange rates APAC Net sales increased 7.9%. Excluding the changes inforeign exchange rates, Specialty Injectables net sales increased due to higherdemand in certain anesthesia products including Hospira’s proprietary drugPrecedex®,anti-infective and oncology products. Excluding the changes in foreign exchangerates net sales in Other Pharma and Other Devices increased due to highervolume.

 

*Gross Profit*

** **
| **Three months ended March 31 (dollars in millions)** | ** ** | **2009** | ** ** | **2008** | ** ** | **Percent  change** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|---------------------|------------|
| Gross profit                                               |       | $        | 319.6      |     | $          | 317.0               |       | 0.8 | % |
| As a percent of net sales                                  |       | 37.2     | %          | 35.7     | %          |                |       |
|                                                            |            |          |            |          |            |                     |            |  |  |

 

 

Gross profit, Net salesless Cost of products sold, increased $2.6 million, or 0.8%, for the threemonths ended March 31, 2009, compared with the same period in 2008.

 

The gross profit increaseis primarily the result of favorable product mix and improved manufacturingperformance. These increases were partially offset by the impact of changes inforeign exchange rates, and higher freight and distribution expense. Grossprofit as a percentage of Net sales increased to 37.2% for the three monthsended March 31, 2009, from 35.7% for the three months ended March 31,2008.

 

*Restructuring*

 
| **Three months ended March 31 (dollars in millions)** | ** ** | **2009** | ** ** | **2008** | ** ** | **Percent  change** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|---------------------|------------|
| Restructuring                                              |       | $        | 9.4        |     | $          | 3.0                 |       | 213.3 | % |
| As a percent of net sales                                  |       | 1.1      | %          | 0.3      | %          |                |       |
|                                                            |            |          |            |          |            |                     |            |  |  |

 

Restructuringincreased $6.4million, or 213.3%, for the three months ended March 31, 2009, comparedwith the same period in 2008. The increase in Restructuring was primarily dueto severance and other employee benefit costs related to Project Fuel andMorgan Hill, California plant actions announced in March 2009 and April 2008,respectively. Restructuring, primarily severance costs, incurred for the threemonths ended March 31, 2008 was related to the action to close the NorthChicago, Illinois manufacturing plant, which was completed in March 2009.

 

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*Research and Development*

 
| **Three months ended March 31 (dollars in millions)** | ** ** | **2009** | ** ** | **2008** | ** ** | **Percent  change** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|---------------------|------------|
| Research and development expense                           |       | $        | 50.0       |     | $          | 49.9                |       | 0.2 | % |
| As a percent of net sales                                  |       | 5.8      | %          | 5.6      | %          |                |       |
|                                                            |            |          |            |          |            |                     |            |  |  |

 

Research and development(“R&D”) expenses increased $0.1 million, or 0.2%, for the three monthsended March 31, 2009, compared with the same period in 2008. The increasewas primarily related to increased spending on device product development andincreased spending on product development related to new compounds in Hospira’sgeneric injectable drug pipeline, offset by the impact of changes in foreignexchange rates.

 

*Selling, General and Administrative*

 
| **Three months ended March 31 (dollars in millions)** | ** ** | **2009** | ** ** | **2008** | ** ** | **Percent  change** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|---------------------|------------|
| Selling, general and administrative expense                |       | $        | 145.5      |     | $          | 152.4               |       | (4.5 | )% |
| As a percent of net sales                                  |       | 16.9     | %          | 17.1     | %          |                |       |
|                                                            |            |          |            |          |            |                     |            |  |  |

 

Selling, general andadministrative (“SG&A”) expenses decreased $6.9 million, or (4.5)%, for thethree months ended March 31, 2009, compared with the same period in 2008.The decrease was primarily due to the impact of changes in foreignexchange rates, partially offset by higher sales and marketing support costs in the EMEA andAPAC segments due primarily to new product launches that occurred throughout2008 and early 2009. In addition, the three months ended March 31, 2009include process optimization implementation costs incurred under Project Fuelwhereas the three months ended March 31, 2008 included expenses related tothe Mayne Pharma integration which was completed by the end of 2008.

 

*Interest Expense and Other Income,Net*

 

Hospira incurred interestexpense of $26.9 million for the three months ended March 31, 2009 and$31.4 million in the same period in 2008. The decrease was primarily due tolower debt outstanding in 2009 and lower interest rates on floating rate notes.Other (income), net was $(0.3) million for the three months ended March 31,2009 compared to $(4.1) million for the three months ended March 31, 2008.The decrease is due to lower interest income and foreign exchange transactiongains and losses, net.

 

*IncomeTax Expense*

 

During the three monthsended March 31, 2009, the Internal Revenue Service (“IRS”) audit of Hospira’s2004 and 2005 tax returns was completed and the years were effectively settled.The outcome of the audit settlement is a reduction in the gross unrecognizedtax benefits for both the audit years settled and resultant impact on tax years2006 through 2008 in aggregate totaling $100.7 million, of which $91.9 millionis recognized in the results for the three months ended March 31, 2009 asa discrete income tax benefit. As a result, the effective tax rate was abenefit of 87.8% for the three months ended March 31, 2009, compared to anexpense of 22.5% for the same period in 2008. Excluding the effect of thediscrete income tax benefit, the effective tax rate for the three months ended March 31,2009 was an expense of 16.4% which is less than 2008 due to lower unrecognizedtax benefits in 2009, the re-enactment of the U.S. research tax credit, anddecreased income in higher tax rate jurisdictions. The effective tax rates areless than the statutory U.S. federal income tax rate principally due to the benefitof tax exemptions, of varying durations, in certain jurisdictions outside theU.S.

 

**Liquidityand Capital Resources at March 31, 2009 compared with December 31,2008**

 

Net cash provided byoperating activities continues to be Hospira’s primary source of funds tofinance operating needs, capital expenditures, and repay debt. Other capitalresources include cash on hand, borrowing availability under a $375.0 millionrevolving credit facility expiring in December 2010 and access to thecapital markets. Hospira believes that its current capital resources will besufficient to finance its operations, including debt service obligations,capital expenditures, product development and investments in cost reduction andoptimization activities for the foreseeable future.

 

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*Summaryof Cash Flows*

* *
| ** **                       | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|
| **(dollars in millions)**        | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Cash flow provided by (used in): |       |                                  |       |   |   |
| Operating activities             |       | $                                     | 89.3       |   | $ | 73.5 |   |
| Investing activities             |       | (43.9                                 | )          | (81.1 | ) |
| Financing activities             |       | 6.9                                   |       | (6.9 | ) |
|                                  |            |                                       |            |  |  |  |  |

 

Cashflows provided by operating activities increased in the three months ended March 31,2009, compared with the same period in 2008 primarily due to higher net incomeadjusted for non cash items. In addition, improved collections of tradereceivables were generally offset by other changes in working capital.

 

Cashflows used in investing activities decreased during the three months ended March 31,2009, compared with the same period in 2008. The decrease was primarily due tolower capital expenditures in 2009 and payments in the three months endedMarch 31, 2008 related to Hospira’s acquisition of product rights in late2007.

 

Cash flows provided byfinancing activities increased during the three months ended March 31,2009, compared with the same period in 2008. The increase was primarily due tolower cash outflow for payments on the term loan of $5.0 million in the threemonths ended March 31, 2009, compared to $25.0 million in the prior yearperiod.

 

*Debt and Capital*

 

Beginning in March 2009, the $375.0 million principal amount offloating rate notes are classified as short-term borrowings as they mature in March 2010.The $300.0 million principal 4.95% senior unsecured notes mature in June 2009and are expected to be paid in full. The remaining $5.0 million inprincipal outstanding as of December 31, 2008, under the$500.0 million three-year term loan facility due March 2010 was paidin January 2009.

 

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 31,2009, Hospira had no amounts outstanding under the Revolver.

 

Certain of our borrowingsagreements contain covenants that require compliance with, among other things,a maximum leverage ratio and a minimum interest coverage ratio. As of March 31,2009, Hospira was in compliance with all applicable covenants.

 

**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 31,2008. 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’sDiscussion and Analysis of Financial Condition and Results of Operations” inthe 2008 Form 10-K.

 

**Adoption of New Accounting Standards**

 

Hospira adopted theprovisions of the Financial Accounting Standards Board (“FASB”) Staff Position No. FAS107-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP107-1”) to the interim period ending after March 15, 2009. FSP 107-1expands the fair value disclosures required for all financial instrumentswithin the scope of Statement of Financial Accounting Standards (“SFAS”) No. 107to include interim periods. There was no impact to Hospira’s current condensedconsolidated financial position, results of operations or cash flows uponadoption of this statement.

 

In December 2008 the FASB issuedFASB Staff Position No. FAS 132(R)-1, “Employers’ Disclosures aboutPostretirement Benefit Plan Assets” (“FSP 132(R)-1”). FSP 132(R)-1 requiresmore detailed disclosures about Hospira’s plan assets, including investmentstrategies, major categories of plan assets, concentrations of risk within planassets, and valuation techniques used to measure the fair value of plan assets.Additional disclosures are required for the consolidated financial statementsat Hospira’s 2009 year end. There was no impact to Hospira’s current condensedconsolidated financial position, results of operations or cash flows.

 

Hospira adopted the requiredprovisions of FASB Staff Position No. FAS 142-3, “Determination of theUseful Life of Intangible 

 

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Assets” (“FSP 142-3”) on January 1,2009. FSP 142-3 amends the factors that should be considered in developingrenewal or extension assumptions used to determine the useful life of arecognized intangible asset under FASB Statement No. 142, “Goodwill andOther Intangible Assets.” This guidance will be applied prospectively tointangible assets acquired on or after January 1, 2009. There was no impactto Hospira’s current condensed consolidated financial position, results ofoperations or cash flows upon adoption of this statement.

 

Hospira adopted theprovisions of SFAS No. 161, “Disclosures About Derivative Instruments andHedging Activities — an amendment of FASB Statement No. 133” (“SFAS No. 161”) on January 1,2009. SFAS No. 161 expands the disclosure requirements for derivativeinstruments and hedging activities. There was no impact toHospira’s current condensed consolidated financial position, results ofoperations or cash flows upon adoption of this statement.

 

Hospira adopted the provisions of Emerging Issues TaskForce (“EITF”) Issue No. 07-1, “Accounting for Collaborative Arrangements”(“EITF 07-1”) on January 1, 2009. EITF 07-1 provides guidance on how todetermine whether an arrangement constitutes a collaborative arrangement, howcosts incurred and revenue generated on sales to third parties should bereported by the participants in a collaborative arrangement, how payments madebetween participants in a collaborative arrangement should be characterized,and what participants should disclose in the notes to the financial statementsabout a collaborative arrangement. There was no impact toHospira’s current condensed consolidated financial position, results ofoperations or cash flows upon adoption of this statement.

 

Hospira adopted the provisions of SFAS No. 141(revised 2007), “Business Combinations” (“SFAS No. 141R”) on January 1,2009. SFAS No. 141R establishes principles and requirements for thereporting entity in a business combination, including recognition andmeasurement in the financial statements of the identifiable assets acquired,the liabilities assumed, and any noncontrolling interest in the acquiree. Thisstatement also establishes disclosure requirements to enable financialstatement users to evaluate the nature and financial effects of the businesscombination. SFAS No. 141R is effective for business combinations thatclose in years beginning on or after December 15, 2008. There was noimpact to Hospira’s current condensed consolidated financial position, resultsof operations or cash flows upon adoption of this statement.

 

The provisions of FASB Staff Position No. FAS 157-2, “Effective Dateof FASB Statement No. 157” (“FSP 157-2”) delayed the effective date of theapplication of SFAS No. 157 to fiscal years beginning after November 15,2008, for all nonfinancial assets and nonfinancial liabilities that arerecognized or disclosed at fair value in the financial statements on anon-recurring basis. There was no impact to Hospira’s current condensedconsolidated financial position, results of operations or cash flows uponadoption of this statement.

 

**Item 3.  Quantitativeand 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, 2008.

 

**Item 4.  Controls and Procedures**

 

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

 

*Changes in internal controls.* There have been no changes in internalcontrol over financial reporting that occurred during the first quarter of 2009that have materially affected or are reasonably likely to materially affectHospira’s internal control over financial reporting.

 

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**PART II.  OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

The disclosure containedin Note 13 to the condensed consolidated financial statements included in Part I.Item 1 hereof is incorporated herein by reference.

 

**Item 1A.  Risk Factors**

 

Please refer toItem 1A. in Hospira’s Annual Report on Form 10-K for the year ended December 31,2008 for a discussion of risks to which Hospira’s business, financialcondition, results of operations and cash flows are subject.

 

**Item 2.  UnregisteredSales of Equity Securities and Use of Proceeds**

 

(c)          Issuer Purchases of Equity Securities

 

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, 2009   |       | —                                        |       | $                                 | —     |                                                                                            | —     |                                                                                                                                 | $          | 100,233,606 |   |
| February 1-February 28, 2009 |       | —                                        |       | $                                 | —     |                                                                                            | —     |                                                                                                                                 | $          | 100,233,606 |   |
| March 1-March 31, 2009       |       | 5,272                                         |       | $                                 | 30.38      |                                                                                            | —     |                                                                                                                                 | $          | 100,233,606 |   |
| Total                                  |       | 5,272                                         |       | $                                 | 30.38      |                                                                                            | —     |                                                                                                                                 | $          | 100,233,606 |   |

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(1)          These shares represent the shares deemed surrenderedto Hospira to pay the exercise price and satisfy minimum statutory taxwithholding obligations in connection with the exercise of employee stockoptions.

 

(2)          In February 2006, Hospira’s board of directorsauthorized the repurchase of up to $400.0 million of Hospira’s common stock inaccordance with Rule 10b-18 under the Securities Exchange Act of 1934. Therepurchase of shares commenced in early March 2006. As of March 31,2009, Hospira had purchased 7,584,400 shares for $299.8 million in theaggregate under the 2006 board authority, all of which were purchased during2006. Hospira does not expect to repurchase any shares in 2009 under thisprogram.

 

**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 Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 

|   | HOSPIRA, INC. |
|--------|--------------------|
|   |               |
|   | By                 | /s/ THOMAS E.  WERNER |
|   |               | Thomas E.  Werner,

Senior Vice  President, Finance and

Chief Financial  Officer |
|   |               | Date:  April 28, 2009 |

 

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EXHIBIT INDEX

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                  |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                         |
| 10.1                 |       | Form of Notice of Award and Award Agreement for Restricted Stock  Units and 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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