**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D. C. 20549**

**FORM10-Q**
| **(Mark One)**                                                                                                                                                                          |       |                                                                                          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                    |       |                                                                                          |
| x

                                                                                                                                                                                | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|                                                                                                                                                                                    |       |                                                                                          |
| **For the quarterly period ended March 31, 2007**                                                                                                                                       |
|                                                                                                                                                                                    |       |                                                                                          |
| ** **                                                                                                                                                                              |       | **OR**                                                                                        |
|                                                                                                                                                                                    |       |                                                                                          |
| o                                                                                                                                                                                       | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                    |       |                                                                                          |
| **For the transition period from               to            ** |
|                                                                                                                                                                                    |       |                                                                                          |
| **Commission File No. 1-31946**                                                                                                                                                         |
|                                                                                                                                                                                         |            |                                                                                               |  |  |

 

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

 

**275 N. Field Drive**

**LakeForest, Illinois 60045**

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

Indicate by check markwhether the registrant (l) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of l934 during the preceding l2months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.     Yes  x  No o

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

Large accelerated filer x    Acceleratedfiler  o                             Non-acceleratedfiler  o

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

As of April 30, 2007, Registrant had outstanding 156,623,526 shares ofcommon stock, par value $0.01 per share.

 

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Table of Contents

**Hospira, Inc.**

**QuarterlyReport on Form 10-Q**

**Index**
| **Part I – Financial  Information** |
|------------------------------------------|
|                                     |   |   |   |   |
| Item 1.                                  |   | Financial Statements |   |   |
|                                     |   |   |   |   |
| ** **                               |   | Condensed  Consolidated Statements of Income (Unaudited) – Three Months Ended |   |   |
|                                     |   | March 31, 2007  and March 31, 2006 |   | 3 |
|                                     |   |   |   |   |
|                                     |   | Condensed  Consolidated Statements of Cash Flows (Unaudited) – Three Months Ended |   |   |
|                                     |   | March 31, 2007  and March 31, 2006 |   | 4 |
|                                     |   |   |   |   |
| ** **                               |   | Condensed Consolidated  Balance Sheets (Unaudited) – March 31, 2007 and December 31, 2006 |   | 5 |
| ** **                               |   |   |   |   |
|                                     |   | Condensed Consolidated  Statement of Changes in Shareholders’ Equity (Unaudited) – |   |   |
|                                     |   | Three Months  Ended March 31, 2007 |   | 6 |
|                                     |   |   |   |   |
|                                     |   | Notes to  Condensed Consolidated Financial Statements (Unaudited) |   | 7 |
|                                     |   |   |   |   |
| Item 2.                                  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 16 |
|                                     |   |   |   |   |
| Item 3.                                  |   | Quantitative  and Qualitative Disclosures about Market Risk |   | 21 |
|                                     |   |   |   |   |
| Item 4.                                  |   | Controls and  Procedures |   | 22 |
|                                     |   |   |   |   |
| ** **                               |   | **Part II – Other  Information** |   |   |
| ** **                               |   | ** ** |   |   |
| Item 1.                                  |   | Legal Proceedings |   | 23 |
|                                     |   |   |   |   |
| Item  1A.                                |   | Risk  Factors |   | 23 |
|                                     |   |   |   |   |
| Item 2.                                  |   | Unregistered  Sales of Equity Securities and Use of Proceeds |   | 23 |
|                                     |   |   |   |   |
| Item  6.                                 |   | Exhibits |   | 23 |

 

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**PART I.  FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**Hospira,Inc.**

**Condensed Consolidated Statements ofIncome**

**(Unaudited)**

***(dollars and shares in thousands,except for per share amounts)***
| ** **                                    | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Net sales                                     |       | $                                                   | 782,798    |   | $ | 664,294 |   |
| Cost of products sold                         |       | 508,249                                             |       | 419,498 |   |
| Gross Profit                                  |       | 274,549                                             |       | 244,796 |   |
|                                          |       |                                                |       |   |   |
| Research and  development                     |       | 43,511                                              |       | 31,001 |   |
| Acquired in-process  research and development |       | 84,800                                              |       | — |   |
| Selling, general and  administrative          |       | 131,863                                             |       | 101,794 |   |
| Income From  Operations                       |       | 14,375                                              |       | 112,001 |   |
|                                          |       |                                                |       |   |   |
| Interest expense                              |       | 30,522                                              |       | 7,657 |   |
| Other income, net                             |       | (703                                                | )          | (4,746 | ) |
| Income (Loss)  Before Income Taxes            |       | (15,444                                             | )          | 109,090 |   |
|                                          |       |                                                |       |   |   |
| Income tax expense                            |       | 13,912                                              |       | 28,907 |   |
| Net Income  (Loss)                            |       | $                                                   | (29,356    | ) | $ | 80,183 |   |
|                                          |       |                                                |       |   |   |
| Earnings Per Common  Share:                   |       |                                                |       |   |   |
| Basic                                         |       | $                                                   | (0.19      | ) | $ | 0.50 |   |
| Diluted                                       |       | $                                                   | (0.19      | ) | $ | 0.49 |   |
| Weighted Average Common  Shares Outstanding:  |       |                                                |       |   |   |
| Basic                                         |       | 156,076                                             |       | 160,933 |   |
| Diluted                                       |       | 158,357                                             |       | 164,345 |   |

 

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

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**Hospira,Inc.**

**Condensed Consolidated Statements ofCash Flows**

**(Unaudited)**

***(dollars in thousands)***
| ** **                                                                  | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Cash Flow From  (Used in) Operating Activities:                             |       |                                                |       |   |   |
| Net (loss) income                                                           |       | $                                                   | (29,356    | ) | $ | 80,183 |   |
| Adjustments to reconcile net income to net cash from  operating activities- |       |                                                |       |   |   |
| Depreciation                                                                |       | 41,230                                              |       | 37,137 |   |
| Amortization of intangibles                                                 |       | 9,240                                               |       | 482 |   |
| Write-off of acquired in-process research and  development                  |       | 84,800                                              |       | — |   |
| Stock-based compensation expense                                            |       | 7,154                                               |       | 6,511 |   |
| Changes in assets and liabilities-                                          |       |                                                |       |   |   |
| Trade receivables                                                           |       | (7,093                                              | )          | (32,815 | ) |
| Inventories                                                                 |       | 12,869                                              |       | (50,929 | ) |
| Prepaid expenses and other assets                                           |       | (4,144                                              | )          | (3,109 | ) |
| Trade accounts payable                                                      |       | 5,080                                               |       | 46,232 |   |
| Other liabilities                                                           |       | (64,256                                             | )          | 20,452 |   |
| Other, net                                                                  |       | (5,698                                              | )          | 26,387 |   |
| Net Cash From Operating Activities                                          |       | 49,826                                              |       | 130,531 |   |
| Cash Flow From  (Used in) Investing Activities:                             |       |                                                |       |   |   |
| Acquisitions of property and equipment                                      |       | (51,854                                             | )          | (75,986 | ) |
| Acquisition of Mayne Pharma, net of cash acquired                           |       | (1,961,285                                          | )          | — |   |
| Settlements of foreign currency contracts                                   |       | (41,250                                             | )          | — |   |
| Proceeds from dispositions of product rights                                |       | 13,771                                              |       | — |   |
| Purchases of intangibles and other investments                              |       | —                                              |       | (12,045 | ) |
| Net Cash (Used in) Investing Activities                                     |       | (2,040,618                                          | )          | (88,031 | ) |
| Cash Flow From  (Used in) Financing Activities:                             |       |                                                |       |   |   |
| Issuance of long-term debt, net of fees paid                                |       | 3,335,708                                           |       | — |   |
| Repayment of long-term debt                                                 |       | (1,437,541                                          | )          | (44 | ) |
| Other borrowings, net                                                       |       | (391                                                | )          | 9 |   |
| Payment to Abbott for international assets                                  |       | —                                              |       | (26,129 | ) |
| Common stock repurchased                                                    |       | —                                              |       | (224,793 | ) |
| Excess tax benefit from stock-based compensation  arrangements              |       | 254                                                 |       | 2,430 |   |
| Proceeds from stock options exercised                                       |       | 15,647                                              |       | 16,574 |   |
| Net Cash From (Used in) Financing Activities                                |       | 1,913,677                                           |       | (231,953 | ) |
| Effect of  exchange rate changes on cash and cash equivalents               |       | 5,290                                               |       | 635 |   |
| Net change in  cash and cash equivalents                                    |       | (71,825                                             | )          | (188,818 | ) |
| Cash and cash  equivalents at beginning of period                           |       | 322,045                                             |       | 520,610 |   |
| Cash and cash  equivalents at end of period                                 |       | $                                                   | 250,220    |   | $ | 331,792 |   |
| Supplemental  Cash Flow Information                                         |       |                                                |       |   |   |
| Cash paid during  the period:                                               |       |                                                |       |   |   |
| Interest                                                                    |       | $                                                   | 14,992     |   | $ | 227 |   |
| Income taxes, net                                                           |       | $                                                   | 30,164     |   | $ | (147 | ) |

 

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

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**Hospira,Inc.**

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

***(dollars inthousands except for share data)***
| ** **                                                                                                                            | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                                                                                                            | ** ** | **2007**          | ** ** | **2006**             | ** ** |
|                                                                                                                                  |       |              |       |                 |       |
| **Assets**                                                                                                                            |       |              |       |                 |       |
| Current Assets:                                                                                                                       |       |              |       |                 |       |
| Cash and cash equivalents                                                                                                             |       | $                 | 250,220    |                 | $          | 322,045 |   |
| Trade receivables, less allowances of $12,766 in  2007 and $13,688 in 2006                                                            |       | 536,977           |       | 335,334              |       |
| Inventories:                                                                                                                          |       |              |       |                 |       |
| Finished products                                                                                                                     |       | 518,803           |       | 405,781              |       |
| Work in process                                                                                                                       |       | 144,088           |       | 85,849               |       |
| Materials                                                                                                                             |       | 170,430           |       | 135,304              |       |
| Total inventories                                                                                                                     |       | 833,321           |       | 626,934              |       |
| Prepaid expenses, deferred taxes and other  receivables                                                                               |       | 223,230           |       | 238,577              |       |
| Total Current Assets                                                                                                                  |       | 1,843,748         |       | 1,522,890            |       |
| Property and  equipment, at cost                                                                                                      |       | 2,501,560         |       | 2,273,124            |       |
| Less: accumulated depreciation                                                                                                        |       | 1,258,593         |       | 1,233,693            |       |
| Net Property and Equipment                                                                                                            |       | 1,242,967         |       | 1,039,431            |       |
| Intangible  assets, net of amortization                                                                                               |       | 527,679           |       | 17,103               |       |
| Goodwill                                                                                                                              |       | 1,202,226         |       | 91,857               |       |
| Deferred income  taxes                                                                                                                |       | 39,023            |       | 76,367               |       |
| Investments                                                                                                                           |       | 40,190            |       | 31,341               |       |
| Other assets                                                                                                                          |       | 78,688            |       | 68,598               |       |
| Total Assets                                                                                                                          |       | $                 | 4,974,521  |                 | $          | 2,847,587 |   |
| **Liabilities and Shareholders’ Equity**                                                                                         | ** ** | ** **        | ** ** | ** **           | ** ** |
| Current  Liabilities:                                                                                                                 |       |              |       |                 |       |
| Short-term borrowings                                                                                                                 |       | $                 | 101,088    |                 | $          | 4,532 |   |
| Trade accounts payable                                                                                                                |       | 182,187           |       | 130,968              |       |
| Salaries payable and other accruals                                                                                                   |       | 487,283           |       | 470,726              |       |
| Total Current Liabilities                                                                                                             |       | 770,558           |       | 606,226              |       |
| Long-term debt                                                                                                                        |       | 2,525,356         |       | 702,044              |       |
| Post-retirement  obligations, deferred income taxes and other long-term liabilities                                                   |       | 309,842           |       | 178,228              |       |
| Commitments and  Contingencies                                                                                                        |       |              |       |                 |       |
| Shareholders’  Equity:                                                                                                           |       |              |       |                 |       |
| Common stock, par value $0.01 - authorized:  400,000,000 shares; issued and outstanding shares: 2007: 156,487,532; 2006:  155,883,712 |       | 1,641             |       | 1,635                |       |
| Preferred stock, par value $0.01 - authorized:  50,000,000 shares; issued and outstanding shares: 0 shares                            |       | —            |       | —               |       |
| Treasury stock, at cost - Shares: 2007 and 2006:  7,584,400                                                                           |       | (299,766          | )          | (299,766             | )          |
| Additional paid-in capital                                                                                                            |       | 1,059,032         |       | 1,033,345            |       |
| Retained earnings                                                                                                                     |       | 649,359           |       | 676,639              |       |
| Accumulated other comprehensive (loss)                                                                                                |       | (41,501           | )          | (50,764              | )          |
| Total Shareholders’ Equity                                                                                                       |       | 1,368,765         |       | 1,361,089            |       |
| Total Liabilities and  Shareholders’ Equity                                                                                      |       | $                 | 4,974,521  |                 | $          | 2,847,587 |   |

 

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

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**Hospira,Inc.**

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

**(Unaudited)**

***(dollars and shares in thousands)***
| ** **                                                                | ** ** | **Common Stock** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Additional  Paid-in** | ** ** | **Treasury** | ** ** | **Retained** | ** ** | ** **   | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|---------------------------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **                                                                | ** ** | **Shares**            | ** ** | **Amount**                            | ** ** | **Income (Loss)**  | ** ** | **Capital**  | ** ** | **Stock**    | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| **Balances  at December 31, 2006**                                        |       | 155,884               |       | $                                     | 1,635      |                    | $          | (50,764      | )          | $            | 1,033,345  |         | $          | (299,766 | ) | $ | 676,639 |   | $ | 1,361,089 |   |
| Net Loss                                                                  |       | —                |       | —                                |       | —                  |       | —       |       | —       |       | (29,356      | )          | (29,356 | ) |
|                                                                      |       |                  |       |                                  |       |                    |       |         |       |         |       |         |       |   |   |
| Other  comprehensive income                                               |       | —                |       | —                                |       | 9,263                   |       | —       |       | —       |       | —       |       | 9,263 |   |
|                                                                      |       |                  |       |                                  |       |                    |       |         |       |         |       |         |       |   |   |
| Adoption of FASB  Interpretation No. 48                                   |       |                  |       |                                  |       |                    |       |         |       |         |       | 2,076        |       | 2,076 |   |
|                                                                      |       |                  |       |                                  |       |                    |       |         |       |         |       |         |       |   |   |
| Changes in  shareholders’ equity related to incentive stock programs |       | 604                   |       | 6                                     |       | —                  |       | 25,687       |       | —       |       |         |       | 25,693 |   |
| **Balances at March 31, 2007**                                            |       | 156,488               |       | $                                     | 1,641      |                    | $          | (41,501      | )          | $            | 1,059,032  |         | $          | (299,766 | ) | $ | 649,359 |   | $ | 1,368,765 |  

  |

 

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

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**Hospira, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**March31, 2007**

**(Unaudited)**

**Note 1– Basis of Presentation**

These condensed consolidated financial statements have beenprepared pursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”) and, therefore, do not include all information and footnotedisclosures normally included in audited financial statements. However, in theopinion of management, all adjustments, consisting only of normal recurringadjustments, unless otherwise noted herein, necessary to present fairly theresults of operations, financial position and cash flows have been made. Thesecondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and notes thereto included in Hospira’sAnnual Report on Form 10-K for the year ended December 31, 2006. Theresults of operations for any interim period are not necessarily indicative ofthe results of operations to be expected for the full year.

Hospira became aseparate public company pursuant to a spin-off from Abbott Laboratories (“Abbott”)on April 30, 2004 (the “spin-off date”). In connection with the spin-off,Hospira and Abbott agreed that the legal transfer of certain operations andassets (net of liabilities) outside the United States would occur, and becompleted, within two years after the spin-off. During the transition period,these operations and assets were used in the conduct of Hospira’s internationalbusiness and Hospira was subject to the risks and entitled to the benefitsgenerated by such operations and assets. Hospira was dependent on Abbott’sinternational infrastructure until such legal transfers occurred in eachinternational country. These transfers were completed in 2006.

On February 2, 2007, Hospira acquired allthe outstanding ordinary shares of Mayne Pharma Limited (“Mayne Pharma”), anAustralian public company listed on the Australian Stock Exchange. The resultsof operations of Mayne Pharma are included in Hospira’s results for periods onand after that date, which has affected comparability of the financialstatements for the periods presented in this report and will affectcomparability in future periods.

For comparative purposes, Net sales toAbbott Laboratories have been reclassified to Net sales on the CondensedConsolidated Statement of Income for the three months ended March 31, 2006. Thereclassification did not affect net income or shareholders’ equity.

**Note 2 – Recently Issued AccountingStandards**

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities – Including an amendment of FASB Statement No. 115” (“SFASNo. 159”). SFAS No. 159 provides a company with the option to measure selectedfinancial instruments and certain other items at fair value at specifiedelection dates. The election may be applied on an item by item basis, withdisclosure regarding reasons for partial election and additional informationabout items selected for fair value option. SFAS No. 159 is effective forfinancial statements issued for fiscal years beginning after November 15,2007. Hospira is currently evaluating the potential impact of SFAS No. 159 onits financial statements.

In September 2006, the FASB issuedStatement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (“SFAS No. 157”). SFAS No. 157 clarifies the principle that fairvalue should be based on the assumptions market participants would use whenpricing an asset or liability and establishes a fair value hierarchy thatprioritizes the information used to develop those assumptions. Under thestandard, fair value measurements would be separately disclosed by level withinthe fair value hierarchy. SFAS No. 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007. Hospira iscurrently evaluating the potential impact of SFAS No. 157 on its financialstatements.

In September 2006, the FASB issued Statementof Financial Accounting Standards No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans – an amendment of FASB Statements No. 87,88, 106, and 132(R)” (“SFAS No. 158”). One provision of SFAS No. 158 requiresthe measurement of Hospira’s defined benefit plan’s assets and its obligationsto determine the funded status be made as of the end of the fiscal year. Thisprovision of SFAS No. 158 is effective for fiscal years ending after December15, 2008. Hospira does not anticipate that the impact from the adoptionof this provision of SFAS No. 158 will be significant to its financialstatements.

**Note 3 – Mayne Pharma Acquisition**

On February 2, 2007, Hospira acquired allthe outstanding ordinary shares of Mayne Pharma (including those sharesissuable pursuant to stock options) for $2,055 million. The $2,055 millionpurchase price includes the cash purchase price and direct

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acquisition costs. Mayne Pharmamanufactures and sells primarily specialty injectable pharmaceuticals. Theresults of operations of Mayne Pharma are included in Hospira’s results forperiods on and after February 2, 2007.

The following allocationof the purchase price is preliminary and subject to revision. The finalvaluation is expected to be completed as soon as practicable and must becompleted no later than 12 months after the completion of the acquisition. Thepreliminary allocation is as follows:
| (dollars in thousands)                                                              | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|------------|
| Current assets                                                                      |       | $          | 481,498    |   |
| Property and  equipment                                                             |       | 198,212    |       |
| Intangible  assets                                                                  |       | 602,959    |       |
| Goodwill                                                                            |       | 1,082,054  |       |
| Other assets                                                                        |       | 7,202      |       |
| Current liabilities                                                                 |       | (241,333   | )          |
| Long-term debt                                                                      |       | (4,536     | )          |
| Post-retirement  obligations, deferred income taxes and other long-term liabilities |       | (71,023    | )          |
| Total estimated  allocation of purchase price                                       |       | $          | 2,055,033  |   |

 

Of the preliminaryestimate of $603.0 million of acquired intangible assets, $486.6 millionrelates to developed product rights that will be amortized over their estimateduseful lives (9 to 12 years, average 11 years), including $13.8 million ofproduct rights to be disposed of as a result of the acquisition, $31.6 millionrelates to customer relationships that will be amortized over their estimateduseful lives (4 to 12 years, average 10 years) and $84.8 million relates toacquired in-process research and development that was expensed at the date of acquisition.Of the preliminary estimate of $1,082.1 million of goodwill, approximately$419.0 million was assigned to the U.S. segment and approximately $663.1million was assigned to the International segment. Goodwill is not expected tobe deductible for tax purposes.

Hospira has progressedwith its plans for the integration of Mayne Pharma into its operations. AsHospira takes certain actions in connection with the integration that give riseto restructuring charges, such as termination of employees and exiting certainactivities and facilities, certain of those charges are recorded as goodwill aspart of the purchase price allocation. As of March 31, 2007, the impact togoodwill associated with restructuring charges for these activities is $11.7million, net of taxes, and is included in current liabilities. Additionalrestructuring charges that impact goodwill may continue to be incurred during2007 as Hospira completes its integration plan.

The total purchase priceof $2,055.0 million is comprised of $2,042.3 million of cash purchase price and$12.7 million of direct acquisition costs. OnFebruary 1, 2007, Hospira incurred $1,925.0 million of bank debt to finance theMayne Pharma acquisition.  The remainderof the purchase price was funded with cash on hand. The bank facilitiesincluded a $500.0 million, three-year term loan facility and a$1,425.0 million one-year bridge loan facility. The bridge loan facilitywas completely refinanced on March 23, 2007 through the issuance of long-termdebt securities. See Note 11 for more details. In connection with theacquisition, Hospira entered into certain foreign currency forward exchangecontracts to limit its exposure from currency movements of the Australiandollar. Forward contract gains and losses of this exposure substantially offsetthe remeasurement of the related asset and both are included in other income.During the quarter ended March 31, 2007, Hospira paid $41.2 million for thesettlements relating to these contracts.

Supplemental information on an unaudited pro forma basis for the quartersended March 31, 2007 and 2006, as if the Mayne Pharma acquisition had takenplace on January 1, 2007 and 2006, is as follows:
|                                      | ** ** | **Three Months Ended March 31** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| **(dollars in thousands)** | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Net sales                            |       | $                                                   | 834,083    |   | $ | 805,850 |   |
| Net income  (loss)                   |       | $                                                   | (45,687    | ) | $ | (47,189 | ) |
| Diluted earnings per  share          |       | $                                                   | (0.29      | ) | $ | (0.29 | ) |

 

Unaudited pro forma supplemental information is based on accountingestimates and judgments, which Hospira believes are reasonable. The unauditedpro forma supplemental information also includes purchase accountingadjustments, (including inventory step-up charges, adjustments to depreciationon acquired property and equipment, and a charge for in-process research anddevelopment) amortization charges from acquired intangible assets, adjustmentsto interest expense, and related tax effects. The

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unaudited pro forma supplemental information is not necessarily indicativeof the results of operations in future periods or the results that actuallywould have been realized had Hospira and Mayne Pharma been combined at thebeginning of each period presented.

**Note 4 – Restructuring Costs**

Hospira announced plansto close manufacturing plants in Donegal, Ireland in August 2005; and Ashland,Ohio and Montreal, Canada in February 2006. Hospira also provided the plannedtimeline for phasing out production at a leased facility in Abbott Laboratories’North Chicago, Illinois campus. Hospira expects to incur aggregaterestructuring charges related to these actions in the range of $75 million to$95 million on a pre-tax basis. The restructuring costs are expected to beincurred through 2009 and consist primarily of costs related to severance andcertain other employee benefit costs, additional depreciation resulting fromthe decreased useful lives of the buildings and certain equipment, and otherexit costs.

During the three monthsended March 31, 2007, Hospira recorded pre-tax restructuring charges of $5.9million in cost of products sold. Of the total charges, $3.7 million wasrecorded in the U.S. segment and $2.2 million in the International segment.During the three months ended March 31, 2006, Hospira recorded pre-taxrestructuring charges of $11.9 million in cost of products sold. Of the totalcharges, $3.9 million was recorded in the U.S. segment and $8.0 million in theInternational segment. Hospira has incurred $58.1 million to date forrestructuring charges related to these actions. Product transfers from theDonegal, Ireland plant were completed in 2006. Hospira expects to complete allproduct transfers relating to the Montreal, Canada manufacturing plant and exitthe facility at the end of 2007. Hospira is currently evaluating the potentialdisposition of its Ashland, Ohio manufacturing plant and is planning to takethe steps necessary to prepare for such disposition, including environmentalstudies. At March 31, 2007, Hospira had $0.6 million recorded for environmentalclean-up costs related to these actions.

The following summarizesthe restructuring activity for the three months ended March 31, 2007:
| ** **                           | ** ** | **Balance at**           | ** ** | **Costs**    | ** ** | ** **   | ** ** | **Non cash** | ** ** | **Balance at**          | ** ** |
|--------------------------------------|------------|-------------------------------|------------|--------------|------------|--------------|------------|-------------------|------------|------------------------------|------------|
| **(dollars in thousands)** | ** ** | **January 1, 2007** | ** ** | **Incurred** | ** ** | **Payments** | ** ** | **Items**         | ** ** | **March 31, 2007** | ** ** |
| Employee-related  benefit costs      |       | $                             | 16,473     |         | $          | 4,018        |       | $                 | (2,047     | )                            | $          | — |   | $ | 18,444 |   |
| Accelerated  depreciation            |       | —                        |       | 1,217        |       | —       |       | (1,217            | )          | —                       |       |
| Other                                |       | 1,309                         |       | 688          |       | (262         | )          | (45               | )          | 1,690                        |       |
|                                 |       | $                             | 17,782     |         | $          | 5,923        |       | $                 | (2,309     | )                            | $          | (1,262 | ) | $ | 20,134 |   |

 

**Note 5 – Stock-Based Compensation**

Costs resulting from share-based payment transactions arerecognized as compensation cost over the vesting period based on the fair valueof the instrument on the date of grant. Stock-based compensation expense of$7.2 million and $6.5 million was recognized for the three months ended March31, 2007 and 2006, respectively, primarily resulting from stock option awards.The related income tax benefit recognized was $2.6 million and $2.1 million,respectively.

The weighted average fair value for the Hospira optionsgranted in the three months ended March 31, 2007 and 2006 was $9.75 and $10.21,respectively. The fair value was estimated using the Black-Scholes option-pricingmodel, based on the average market price at the grant date and the weightedaverage assumptions specific to the underlying options. Expected volatilityassumptions are based on a combination of historical volatility of Hospira’sstock and historical volatility of peer companies. Expected life assumptionsfor the periods presented are based on the “simplified” method as described inSEC Staff Accounting Bulletin No. 107, “Share-Based Payment,” which is themidpoint between the vesting date and the end of the contractual term. Therisk-free interest rate was selected based upon yields of U.S. Treasury issueswith a term equal to the expected life of the option being valued. The weightedaverage assumptions utilized for option grants during the periods presented areas follows:
|                                                                      | ** ** | **Three Months Ended March 31** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Hospira Stock  Options Black-Scholes assumptions (weighted average): |       |                                                |       |   |   |
| Volatility                                                           |       | 31.0                                                | %          | 30.0 | % |
| Expected life  (years)                                               |       | 2.8                                                 |       | 2.5 |   |
| Risk-free  interest rate                                             |       | 4.5                                                 | %          | 4.7 | % |
| Dividend yield                                                       |       | 0.0                                                 | %          | 0.0 | % |

 

For a more detailed description of Hospira’s stock-basedcompensation plan, see Note 14 to Hospira’s consolidated financialstatements included in Hospira’s Annual Report on Form 10-K for the year endedDecember 31, 2006.

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**Note 6 – Income Taxes**

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

Hospira adopted theprovisions of FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes – an interpretation of FASB Statement No. 109” (FIN 48) on January 1,2007.  As a result of the implementationof FIN 48, Hospira recognized a $2.1 million decrease in the liability forunrecognized tax benefits.  This decreasein the liability resulted in an increase in the January 1, 2007 balance ofretained earnings of $2.1 million.  Thegross amount of unrecognized tax benefits at January 1, 2007 is $113.1million.  The amount, if recognized, thatwould affect the effective tax rate is $104.2 million.

Hospira recognizesinterest and penalties accrued in relation to unrecognized tax benefits inincome tax expense, which is consistent with the reporting in priorperiods.  As of January 1, 2007, Hospirahas recorded liabilities of $1.9 million for the payment of interest andpenalties.

Hospira began operationsas a new taxpayer on May 1, 2004, and the U.S. federal tax returns for 2004 and2005 are currently under examination by the Internal Revenue Service.  It is not expected that the amount ofunrecognized tax benefits will significantly change during the next 12 months.

**Note 7 – Earnings per Share**

Basic earnings per shareare computed by dividing net income by the number of weighted average commonshares outstanding during the reporting period. Diluted earnings per share are calculated to give effect to allpotentially dilutive common shares that were outstanding during the reportingperiod. The following table shows the effect of stock options on the weightedaverage number of shares outstanding used in calculating diluted earnings pershare:
|                                                      | ** ** | **Three Months Ended March 31** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(shares in thousands)**                            | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Weighted average  basic common shares outstanding    |       | 156,076                                             |       | 160,933 |   |
| Assumed exercise of stock options                    |       | 2,281                                               |       | 3,412 |   |
| Weighted average  dilutive common shares outstanding |       | 158,357                                             |       | 164,345 |   |

 

The number of outstandingoptions to purchase Hospira stock for which the exercise price of the optionsexceeded the average stock price was 2.8 million for the three months endedMarch 31, 2007 and 0.5 million for the three months ended March 31, 2006.  Accordingly, these options are excluded fromthe diluted earnings per share calculation for these periods.

**Note**** 8****– Litigation**

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

Various state andfederal agencies, including the U.S. Department of Justice and various stateattorneys general, are investigating a number of pharmaceutical companies,including Abbott, for allegedly engaging in improper marketing and pricingpractices with respect to certain Medicare and Medicaid reimbursable products,including practices relating to average wholesale price (“AWP”).  Theseare civil investigations that are seeking to identify the practices anddetermine whether those practices violated any laws, including federal andstate false claims acts, or constituted fraud in connection with the Medicareand/or Medicaid reimbursement paid to third parties.  In addition, Abbottis a defendant in a number of purported class actions on behalf of individualsor entities, including healthcare insurers and other third-party payors, thatallege generally that Abbott and numerous other pharmaceutical companiesreported false or misleading pricing information in connection with federal,state and private reimbursement for certain drugs.  Many of the productsinvolved in these investigations and lawsuits are Hospira products. Hospira is cooperating with the authorities in these investigations. There maybe additional investigations or lawsuits, or additional claims in the existinginvestigations or lawsuits, initiated with respect to these matters in thefuture.  Hospira cannot be certain that it will not be named as a subjector defendant in these investigations or lawsuits. Hospira is a named defendantin two such lawsuits: *The State of Texas exrel. Ven-A-Care of the Florida Keys, Inc. v. Abbott Laboratories Inc., Hospira,Inc., B. Braun Medical Inc. and Baxter Healthcare Corporation,*CaseNo. GV401286, pending in the District Court of Travis County, Texas and *State of Hawaii v. Abbott Laboratories, Inc., et al.*,Case No. 06-1-0720-04, pending in the Circuit Court of the First Circuit,Hawaii. Hospira has been dismissed as a defendant in the case, *United States of America ex rel. Ven-A-Care of theFlorida Keys, Inc. v. Abbott Laboratories,*

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*Inc.,*et al Case No. 95-1354, pending in the United States District Court for the SouthernDistrict of Florida. Abbott will indemnify Hospira for liabilities associatedwith pending or future AWP investigations and lawsuits only to the extent thatthey are of the same nature as the lawsuits and investigations that existedagainst Abbott as of the spin-off date and relate to the sale of Hospiraproducts prior to the spin-off.  Hospira will assume any other losses thatmay result from these investigations and lawsuits related to Hospira’sproducts, including any losses associated with post-spin-off activities. Theseinvestigations and lawsuits could result in changes to Hospira’s businesspractices or pricing policies, civil or criminal monetary damages, penalties orfines, imprisonment and/or exclusion of Hospira products from participation infederal and state healthcare programs, including Medicare, Medicaid andVeterans’ Administration health programs, any of which could have a materialadverse effect on its business, profitability and financial condition.

Hospira has beennamed as a defendant in a lawsuit alleging generally that the spin-off ofHospira from Abbott Laboratories interfered with employee benefits in violationof the Employee Retirement Security Act of 1974 (“ERISA”).  The lawsuitwas filed 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.*  On November 18, 2005,the complaint was amended to assert an additional claim against Abbott andHospira for breach of fiduciary duty under ERISA.  Hospira has beendismissed as a defendant with respect to the new fiduciary duty claim.  ByOrder dated December 30, 2005, the Court granted class action status to thelawsuit. As to the sole claim against Hospira in the original complaint,the court certified a class defined as:  “all employees of Abbott who wereparticipants in the Abbott Benefit Plans and whose employment with Abbott wasterminated between August 22, 2003 and April 30, 2004, as a result of thespin-off of the HPD/creation of Hospira announced by Abbott on August 22, 2003,and who were eligible for retirement under the Abbott Benefit Plans on the dateof their terminations.” Hospira denies all material allegations assertedagainst it in the complaint.

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

Hospira’s productliability claim exposures are evaluated each reporting period. Hospira’sreserves, which are not significant at March 31, 2007 and 2006, are the bestestimate of loss, as defined by SFAS No. 5, “Accounting for Contingencies.”Based upon information that is currently available, management believes thatthe likelihood of a material loss in excess of recorded amounts is remote.

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

**Note 9– Post-Retirement Benefits**

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

Net cost (benefit)recognized for the three months ended March 31, 2007 and 2006 for the majorpension plans and post-retirement medical and dental benefit plans, is asfollows:

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|                                                   | ** ** | **Pension Plans**           | ** ** | **Medical and Dental Plans** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Three Months Ended**            | ** ** |
| ** **                                        | ** ** | **March 31**                | ** ** | **March 31**                           | ** ** |
| **(dollars in thousands)**              | ** ** | **2007**                         | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost for  benefits earned during the year |       | $                                | 389        |                                        | $          | 644 |   | $ | — |   | $ | 526 |   |
| Interest cost on  projected benefit obligations   |       | 6,152                            |       | 6,023                                       |       | 713 |   | 843 |   |
| Expected return  on plans’ assets            |       | (7,092                           | )          | (7,296                                      | )          | — |   | — |   |
| Net amortization                                  |       | 1,160                            |       | 968                                         |       | 215 |   | 437 |   |
| Curtailment of  benefits(1)                       |       | —                           |       | 1,518                                       |       | — |   | — |   |
| Net cost                                          |       | $                                | 609        |                                        | $          | 1,857 |   | $ | 928 |   | $ | 1,806 |   |

 

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

Hospira’s employeesparticipate in the Hospira 401(k) Retirement Savings Plan. Hospira’scontributions to this defined contribution plan for the three months endedMarch 31, 2007 and 2006 were $8.6 million and $8.5 million, respectively.

Hospira funds itsdomestic pension plans according to IRS funding limitations. Based on thoselimitations, Hospira does not expect to contribute to its U.S. pension plans in2007.

**Note 10 –Goodwill and Intangible Assets**

Goodwillas of March 31, 2007 totaled $1,202.2 million compared to $91.9 million as ofDecember 31, 2006. The increase of $1,110.3 million in the first quarter of2007, including the effect of exchange rate changes of $28.4 million, isrelated to the acquisition of Mayne Pharma. See Note 3 for more details.

Intangibleassets, primarily product rights, customer relationships and technology, are asfollows:
| (dollars in thousands)     | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Cost                                 |       | $                            | 564,689    |                            | $          | 44,873 |   |
|  Less: accumulated amortization |       | (37,010                      | )          | (27,770                         | )          |
| Intangible assets, net               |       | $                            | 527,679    |                            | $          | 17,103 |   |

 

Theincrease of $519.8 million in 2007, including the effect of exchange ratechanges of $16.0 million, is primarily related to the acquisition of MaynePharma. See Note 3 for more details.

Intangibleassets have definite lives and are amortized on a straight-line basis overtheir estimated useful lives (3 to 12 years, average 10 years). Intangibleasset amortization for each of the five succeeding fiscal years is estimated at$44.8 million for the remainder of 2007, $53.9 million for 2008, $53.7 millionfor 2009, $53.7 million for 2010, and $51.1 million for 2011.

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

Hospira’s debt consists of the following at March 31,2007 and December 31, 2006:

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| (dollars in thousands)                                                                   | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Long-term debt:                                                                                    |       |                         |       |                            |       |
| 4.95% Notes due 2009                                                                               |       | $                            | 300,000    |                            | $          | 300,000 |   |
| 5.90% Notes due 2014                                                                               |       | 400,000                      |       | 400,000                         |       |
| Floating rate notes due 2010 (weighted-average floating  interest rate of 5.83% at March 31, 2007) |       | 375,000                      |       | —                          |       |
| 5.55% Notes due 2012                                                                               |       | 500,000                      |       | —                          |       |
| 6.05% Notes due 2017                                                                               |       | 550,000                      |       | —                          |       |
| Term loan due 2010 (weighted-average floating interest  rate of 5.96% at March 31, 2007)           |       | 400,000                      |       | —                          |       |
| Economic development promissory notes due 2015                                                     |       | 1,276                        |       | 1,320                           |       |
| International borrowings due 2008                                                                  |       | —                       |       | 4,914                           |       |
| Securitized mortgage note due 2015                                                                 |       | 4,859                        |       | 4,871                           |       |
| Other unsecured loans due 2009                                                                     |       | 4,658                        |       | —                          |       |
| Fair value of interest rate swap instruments                                                       |       | (7,794                       | )          | (8,181                          | )          |
| Total long-term debt                                                                               |       | 2,527,999                    |       | 702,924                         |       |
| Unamortized debt  discount                                                                         |       | (2,643                       | )          | (880                            | )          |
| Long-term debt                                                                                     |       | 2,525,356                    |       | 702,044                         |       |
| Short-term  borrowings                                                                             |       | 101,088                      |       | 4,532                           |       |
| Total debt                                                                                         |       | $                            | 2,626,444  |                            | $          | 706,576 |   |

 

OnFebruary 1, 2007, Hospira incurred $1,925 million of bank debt to finance theMayne Pharma acquisition.  The remainderof the purchase price was funded with cash on hand. The bank facilitiesincluded a $500 million, three-year term loan facility and a$1,425 million one-year bridge loan facility. The bridge loan facility wascompletely refinanced on March 23, 2007 through the issuance of long-term debtsecurities described below.

Under the term loanfacility, Hospira must repay $12.5 million in principal at the end of eachquarter in 2007, $50.0 million at the end of each quarter in 2008 and $62.5million at the end of each quarter in 2009 (with the final payment to be madeon the maturity date of January 15, 2010). The amount due within one year is$87.5 million and is recorded as short-term borrowings. Hospira is permitted toprepay amounts borrowed under the term loan from time to time without penalty.Borrowings under the term loan facility and bridge loan facility bear interestat LIBOR plus a margin that is determined based on Hospira’s senior unsecureddebt ratings from Standard & Poor’s and Moody’s.  Based on Hospira’s ratings of BBB (stableoutlook) from Standard and Poor’s and Baa3 (negative outlook) from Moody’s, themargin is currently 0.60%. Ratings are not recommendations to buy, sell or holdsecurities and are subject to revision or withdrawal at any time by the ratingagencies. Each rating should be evaluated independently of any other rating.

On March 23, 2007,Hospira issued $375 million principal amount of Floating Rate Notes due 2010,$500 million principal amount of 5.55% Notes due 2012 and $550 millionprincipal amount of 6.05% Notes due 2017 in a registered public offering. TheFloating Rate Notes due 2010 bear interest at three-month LIBOR plus 48 basispoints. All series of notes are due on March 30 of the year of maturity. Thenet proceeds of the notes (after deducting approximately $10 million ofunderwriters’ discounts and offering expenses of $5.6 million), together withapproximately $21.5 million of cash on hand, were used to repay the bridge loanfacility and related interest in full.

Hospira has a five-year$375 million unsecured revolving credit facility (the “Revolver”), which itentered into on December 16, 2005 and was amended on January 15, 2007 to permitthe Mayne Pharma acquisition and to temporarily increase the maximum leverageratio and lower the minimum interest coverage ratio. This Revolver is availablefor working capital and other requirements. The Revolver allows Hospira to borrow funds at variable interest ratesas short-term cash needs dictate. As of March 31, 2007, Hospira had no amountsoutstanding under the Revolver.

Hospira’s debt instruments contain covenants thatlimit Hospira’s ability to, among other things, sell assets, incur securedindebtedness and liens, incur indebtedness at the subsidiary level and merge orconsolidate with other companies. Hospira’sdebt instruments also include customary events of default, which would permitamounts borrowed to be accelerated and would permit the lenders under therevolving credit agreement to terminate their lending commitments. Adescription of certain covenants is set forth below.

*Change of Control.* The notes issued onMarch 23, 2007 include covenants that require Hospira to offer to repurchasethose notes at 101% of their principal amount if: (1) there is a change ofcontrol of Hospira and (2) Hospira is rated below investment grade by bothMoody’s and Standard & Poor’s at or within a specified time after the timeof announcement of the change of control transaction. A change of control wouldconstitute an event of default under the term loan agreement and Hospira’srevolving credit agreement.

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*Financial Covenants.* Hospira’s term loanfacility and revolving credit facility include requirements to maintain amaximum leverage ratio and a minimum interest coverage ratio. The leverageratio is calculated by dividing Hospira’s debt by its earnings before interest,taxes, depreciation and amortization (excluding certain purchase accountingcharges relating to the Mayne Pharma acquisition, expenses relating to theintegration of Mayne Pharma into Hospira, expenses relating to Hospira’stransition from Abbott Laboratories, expenses relating to Hospira’smanufacturing optimization activities and certain non-cash gains, expenses andlosses, subject in certain cases to agreed-upon maximums) for the twelve monthsending on the last day of each quarter. The coverage ratio is calculated bydividing Hospira’s earnings before interest, taxes, depreciation andamortization (excluding the items described above) by its consolidatedfinancing expense, in each case for the twelve months ended on the last day ofeach quarter. As of the end of each calendar quarter during 2007, the ratioswill be calculated on a pro forma basis assuming the acquisition of MaynePharma and the related financing transactions had occurred on the first day ofthe period.

The maximum leverage ratio is 4.5as of March 31, 2007, 4.00 as of June 30, 2007, 3.5 as of September 30, 2007and 3.25 as of the end of all quarters thereafter. The minimum coverage ratiois 4.00 as of March 31, 2007, 4.5 as of June 30, 2007, 4.75 as of September 30,2007 and 5.00 as of the end of all quarters thereafter.

As of March 31, 2007, Hospira was in compliance withall applicable covenants.

**Note 12- Comprehensive Income, net of tax**
|                                                   | ** ** | **Three Months Ended March 31** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(dollars in thousands)**              | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Foreign currency  translation gains               |       | $                                                   | 8,888      |   | $ | 1,955 |   |
| Retirement plan  adjustments                      |       | 847                                                 |       | — |   |
| Unrealized gains  on marketable equity securities |       | 704                                                 |       | 1,434 |   |
| Unrealized  losses on cash flow hedges            |       | (1,176                                              | )          | — |   |
| Total other  comprehensive income                 |       | 9,263                                               |       | 3,389 |   |
| Net Income  (Loss)                                |       | (29,356                                             | )          | 80,183 |   |
| Total  Comprehensive Income (Loss)                |       | $                                                   | (20,093    | ) | $ | 83,572 |   |

 
|                                                                          | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| **(dollars in thousands)**                                               | ** ** | **2007**          | ** ** | **2006**             | ** ** |
| Cumulative  foreign currency translation gains                           |       | $                 | 21,798     |                 | $          | 12,910 |   |
| Cumulative  retirement plan adjustments, net of tax                      |       | (67,993           | )          | (68,840              | )          |
| Cumulative  unrealized gains on marketable equity securities, net of tax |       | 5,870             |       | 5,166                |       |
| Cumulative  unrealized losses on cash flow hedges, net of tax            |       | (1,176            | )          | —               |       |
| Accumulated Other Comprehensive  Loss                                    |       | $                 | (41,501    | )                    | $          | (50,764 | ) |

 

**Note 13 –Segment Information**

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

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

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|                                      | ** ** | **Three Months Ended March 31**     | ** ** |
|--------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                           | ** ** | **Net Sales to External Customers** | ** ** | **Income from Operations** | ** ** |
| **(dollars in thousands)** | ** ** | **2007**                                                | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                 |       |                                                    |       |   |   |   |   |   |   |
| U.S.                                 |       | $                                                       | 569,008    |   | $ | 549,194 |   | $ | 43,357 |   | $ | 114,045 |   |
|                                 |       |                                                    |       |   |   |   |   |   |   |
| International                        |       | 213,790                                                 |       | 115,100 |   | (9,891 | ) | 11,914 |   |
|                                 |       |                                                    |       |   |   |   |   |   |   |
| Total reportable  segments           |       | $                                                       | 782,798    |   | $ | 664,294 |   | 33,466 |   | 125,959 |   |
|                                 |       |                                                    |       |   |   |   |   |   |   |
| Corporate  functions                 |       |                                                    |       |   |   | (19,091 | ) | (13,958 | ) |
| Income from  operations              |       |                                                    |       |   |   | 14,375 |   | 112,001 |   |
| Other, net                           |       |                                                    |       |   |   | (29,819 | ) | (2,911 | ) |
|                                 |       |                                                    |       |   |   |   |   |   |   |
| Income (loss)  before income taxes   |       |                                                    |       |   |   | $ | (15,444 | ) | $ | 109,090 |   |

 
|                                      | ** ** | **Total Assets** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **March 31**     | ** ** | **December 31** | ** ** |
| **(dollars in thousands)** | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                 |       |                  |       |   |   |
| U.S.                                 |       | $                     | 1,881,191  |   | $ | 2,036,486 |   |
|                                 |       |                  |       |   |   |
| International                        |       | 1,363,425             |       | 702,141 |   |
|                                 |       |                  |       |   |   |
| Total reportable  segments           |       | 3,244,616             |       | 2,738,627 |   |
| Goodwill and net  intangible assets  |       | 1,729,905             |       | 108,960 |   |
| Total                                |       | $                     | 4,974,521  |   | $ | 2,847,587 |   |

 

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

**Forward-Looking Statements**

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, 2006 (the “2006 Form 10-K”), as may be updatedby Part II. Item 1A. of this report and (ii) the factors described in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in the 2006 Form 10-K, as may be updated by this Item 2.Accordingly, you should not place undue reliance on the forward-lookingstatements contained in this report. These forward-looking statements speakonly as of the date on which the statements were made. Hospira undertakes noobligation to update or revise publicly any forward-looking statements, whetheras 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 productivity, safetyand efficacy of patient care. In February 2007, Hospira acquired Mayne PharmaLimited (“Mayne Pharma”) to increase its presence in specialty genericinjectable pharmaceuticals. Hospira’s portfolio includes one of the industry’sbroadest lines of generic acute-care and oncology injectables, which helpaddress the high cost of proprietary pharmaceuticals; and integrated solutionsfor medication management and infusion therapy. Hospira’s broad portfolio ofproducts is used by hospitals and alternate site providers, such as clinics,home healthcare providers and long-term care facilities.

Please refer to “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in the 2006 Form 10-K. The information in this Item 2 is intendedto supplement, and should be read in conjunction with, the information includedin Item 7. of the 2006 Form 10-K. The 2006 Form 10-K was filed with theSecurities and Exchange Commission on February 28, 2007.

**MaynePharma Acquisition**

On February 2, 2007,Hospira completed its acquisition of Mayne Pharma for $2,055 million. Theresults of operations of Mayne Pharma are included in Hospira’s results forperiods on and after that date, which has affected comparability of thefinancial statements for the periods presented in this report and will affectcomparability in future periods. Hospira financed the acquisition and relatedexpenses through borrowing approximately $1,925 million and the remainder wasfunded with cash on hand. The financing arrangements are described below under “Liquidityand Capital Resources.”

In connection with theacquisition, Hospira recorded $106.2 million of charges relating to purchaseaccounting during the first quarter, including $84.8 million of in-processresearch and development and $21.4 million of inventory step-up. Hospira expectsto record additional inventory step-up charges during the second quarter.Hospira also recorded $518.2 million of intangible assets in connection withthe acquisition, which will be amortized over their useful lives (which have aweighted-average life of 10 years).  Inconnection with the integration of Mayne Pharma into its operations, Hospiraexpects to incur approximately $95 to $110 million of cash expenditures for thetwo-year period after the closing, of which $60 million to $75 million will berecorded as expenses and the remainder relates to purchase accounting items andcapital projects. These expenses relate to the closure of facilities, terminationof lease agreements and employee-related benefit arrangements during thetwo-year period after the closing, as well as other direct acquisition-relatedcosts. Approximately $18.4 million of integration and otheracquisition-related expenses were recorded during the first quarter of 2007.For further information regarding the acquisition and its financial impact,please see Note 3 to the condensed consolidated financial statements includedin this report.

**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 endedDecember 31, 2006. Certain of Hospira’s accounting policies are consideredcritical, as these policies require significant, difficult or complex judgmentsby management, often employing the use of estimates about the effects ofmatters that are inherently uncertain. Such policies are summarized in

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“Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthe 2006 Form 10-K.

**Recently Issued Accounting Standards**

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities – Including an amendment of FASB Statement No. 115” (“SFASNo. 159”). SFAS No. 159 provides a company with the option to measure selectedfinancial instruments and certain other items at fair value at specifiedelection dates. The election may be applied on an item by item basis, withdisclosure regarding reasons for partial election and additional informationabout items selected for fair value option. SFAS No. 159 is effective forfinancial statements issued for fiscal years beginning after November 15,2007. Hospira is currently evaluating the potential impact of SFAS No. 159 onits financial statements.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, *“Fair ValueMeasurements”* (“SFAS No. 157”). SFAS No. 157 clarifies the principlethat fair value should be based on the assumptions market participants woulduse when pricing an asset or liability and establishes a fair value hierarchythat prioritizes the information used to develop those assumptions. Under thestandard, fair value measurements would be separately disclosed by level withinthe fair value hierarchy. SFAS No. 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007. Hospira iscurrently evaluating the potential impact of SFAS No. 157 on its financialstatements.

In September 2006, the FASB issued Statementof Financial Accounting Standards No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans – an amendment of FASB Statements No.87, 88, 106, and 132(R)” (“SFAS No. 158”). One provision of SFAS No. 158 requiresthe measurement of Hospira’s defined benefit plan’s assets and its obligationsto determine the funded status be made as of the end of the fiscal year. Thisprovision of SFAS No. 158 is effective for fiscal years ending after December15, 2008. Hospira does not anticipate that the impact from the adoptionof this provision of SFAS No. 158 will be significant to its financialstatements.

**2007 First Quarter Events**

·                  Completedthe acquisition of Mayne Pharma, an Australia-based specialty injectablepharmaceuticals company, for approximately $2,055 million.

·                  Successfullycompleted a $1,425 million debt offering, with bond maturities ranging fromthree to 10 years. The proceeds were used to finance the majority of the MaynePharma acquisition.

·                  Announcedcollaborations with several leading hospital information system providers toestablish communications interfaces between their technologies and Hospira’smedication management solutions.

**Results of operations for the threemonths ended March 31, 2007 compared to March 31, 2006**

*Net Sales*

Net sales increased 17.8%in the first quarter of 2007 compared to the first quarter of 2006. Of thisincrease, 17.0% is related to the acquisition of Mayne Pharma. The remaining0.8% increase in overall sales is primarily driven by increased price of 0.3%in the United States and the impact of exchange of 0.4%.

A comparison of product line sales is as follows:

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**Hospira, Inc.**

**Sales by Product Line**

**(Unaudited)**

**(dollarsin thousands)**
|                                                   | ** ** | **Three Months Ended March 31** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                        | ** ** | ** **                                          | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                                        | ** ** | ** **                                          | ** ** | ** ** | ** ** | **Change** | ** ** |
| ** **                                        | ** ** | ** **                                          | ** ** | ** ** | ** ** | **vs. Prior** | ** ** |
| ** **                                        | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **Year** | ** ** |
| U.S.—                                        |       |                                                |       |   |   |   |   |
| Specialty  Injectable Pharmaceuticals             |       | $                                                   | 205,759    |   | $ | 185,236 |   | 11.1 |   |
| Medication  Delivery Systems                      |       | 212,981                                             |       | 213,026 |   | (0.0 | ) |
| Injectable  Pharmaceutical Contract Manufacturing |       | 41,226                                              |       | 52,102 |   | (20.9 | ) |
| Sales to Abbott  Laboratories                     |       | 17,151                                              |       | 24,381 |   | (29.7 | ) |
| Mayne Pharma                                      |       | 21,059                                              |       | — |   | nm |   |
| Other                                             |       | 70,832                                              |       | 74,449 |   | (4.9 | ) |
|                                              |       |                                                |       |   |   |   |   |
| Total U.S.                                        |       | 569,008                                             |       | 549,194 |   | 3.6 |   |
|                                              |       |                                                |       |   |   |   |   |
| International—                               |       |                                                |       |   |   |   |   |
| Sales to Third  Parties                           |       | 106,565                                             |       | 99,293 |   | 7.3 |   |
| Sales to Abbott  Laboratories                     |       | 15,489                                              |       | 15,807 |   | (2.0 | ) |
| Mayne Pharma                                      |       | 91,736                                              |       | — |   | nm |   |
|                                              |       |                                                |       |   |   |   |   |
| Total  International Sales                        |       | 213,790                                             |       | 115,100 |   | 85.7 |   |
|                                              |       |                                                |       |   |   |   |   |
| Consolidated Net Sales                            |       | $                                                   | 782,798    |   | $ | 664,294 |   | 17.8 |   |

 

Salesin Specialty Injectable Pharmaceuticals increased, driven by strength in thebase product portfolio, contributions from new product launches in 2006,including ampicillin sulbactam and propofol, and favorable pricing.

Salesin Medication Delivery Systems were approximately equal in both years. Growthin infusion therapy products sales was largely due to increased volume from newand existing customer contracts. This was offset by lower placements ofmedication management systems in 2007 compared to placements in 2006.

Salesin Injectable Pharmaceutical Contract Manufacturing were down due to lowervolume demand from existing customers for certain products, including severalproducts that now have generic competition.

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

The Other product lineincludes sales of Hospira’s products to alternate site providers such asclinics, home healthcare providers and long-term care facilities, as well assales of critical care devices and brain function monitoring systems. Thegrowth in sales to alternate site healthcare customers was more than offset bya decline in sales of critical care devices, the planned exit of certainproduct lines manufactured in Ashland, Ohio, and other adjustments. Sales toalternate site healthcare customers increased due to higher overall sales ofspecialty injectable pharmaceuticals and medication delivery systems, partiallyoffset by decreased sales of deferoxamine.

International Sales to ThirdParties were up primarily reflecting growth in Canada and the Asia Pacificregion, favorable exchange, and increased sales on a third party manufacturingcontract.

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*Gross Profit*

Gross profit increased$29.8 million, or 12.2%, for the first quarter ended March 31, 2007, comparedwith the same period in 2006. Of this increase, $20.2 million, or 8.3%, isrelated to the Mayne Pharma acquisition.

Gross profit margindecreased by (1.8)% to 35.1% for the first quarter of 2007, from 36.9% for thefirst quarter of 2006. Of this decrease, (2.9)% is related to the Mayne Pharmaacquisition, which primarily includes the inventory step-up charge resultingfrom purchase accounting of (3.1)% and amortization of the acquired intangibleassets of (1.2)%, partially offset by improvement in volume/product mix of1.4%.

The remaining increase of1.1% not related to the Mayne Pharma acquisition is primarily the result ofvolume/product mix improvement of 1.2% and favorable price in the U.S. of 0.3%,and other net changes of 0.2%. In addition, during the 2007 and 2006 quarters,Hospira recorded insurance settlements of $4.6 million and $1.4 million,respectively, relating to a business interruption at a Hospira facility during2004, which were reported as reductions to cost of products sold during theseperiods. The insurance settlement favorably impacted the 2007 quarter by 0.4%.The improvements and favorable items described above were partially offset bylower manufacturing activity of (1.0)%.

*Research and Development*

Research and development(“R&D”) expenses increased $12.5 million, or 40.4%, for the quarter endedMarch 31, 2007, compared with the same period in 2006. Of this increase, 26.9%is related to the acquisition of Mayne Pharma. The remainder of the increasewas primarily related to higher spending on new product development related tonew compounds in Hospira’s generic injectable drug pipeline and clinicalstudies on Hospira’s branded sedative, Precedex®, partially offset by lowerspending in 2007 on medication delivery infusion systems as a result of newproduct launches in 2006. R&D expenses increased to 5.6% of net sales forthe quarter ended March 31, 2007, compared with 4.7% of net sales for the sameperiod in 2006.

*Acquired In-Process Research andDevelopment*

On February 2, 2007, Hospira completed its acquisitionof Mayne Pharma. As part of the purchase price allocation, Hospira allocatedand expensed $84.8 million to acquired in-process research and developmentrelated to Mayne Pharma’s pipeline products.

*Selling, General and Administrative*

Selling, general andadministrative (“SG&A”) expenses increased $30.1 million, or 29.5%, for thequarter ended March 31, 2007, compared with the same period in 2006. Of thisincrease, 23.9% is related to the acquisition of Mayne Pharma. The remainder ofthe increase was primarily due to additional costs related to the integrationof Mayne Pharma partially offset by lower costs associated with theimplementation of Hospira’s new independent infrastructure in 2006. SG&Aexpenses increased to 16.8% of net sales for the quarter ended March 31, 2007,compared with 15.3% of net sales for the same period in 2006.

*Interest and Other (Income), Net*

Interest expense was$30.5 million for the quarter ended March 31, 2007, compared to $7.7 million inthe same period in 2006. The increase was primarily due to the issuance ofadditional debt and related costs due to the Mayne Pharma acquisition. Other (income),net was $(0.7) million for the quarter ended March 31, 2007 compared to $(4.7)million for the quarter ended March 31, 2006. The change was primarily relatedto $(5.7) million of foreign exchange losses realized in 2007 due to the MaynePharma acquisition.

*IncomeTax Expense*

The effective tax ratewas (90.1)% for the quarter ended March 31, 2007, compared to 26.5% for thesame period in 2006. The effective tax rate for 2007 included the impact of asignificant unusual item, the expensing of acquired in-process research anddevelopment. Excluding the effect of this item, the 2007 effective tax rate was20.1%. The decrease in the effective tax rate in 2007 compared to 2006,excluding the significant unusual item, was due primarily to increased expensesin higher tax rate jurisdictions in connection with the Mayne Pharmaacquisition, including intangible amortization expense and purchase accountingcharges. The effective tax rates are less than the statutory U.S. federalincome tax rate principally due to the benefit of tax exemptions, of varyingdurations, in certain jurisdictions outside the United States.

**Liquidityand Capital Resources at March 31, 2007 compared with December 31, 2006**

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

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facility and access tocapital markets. Beginning with the first quarter of 2007, Hospira’s operatingcash flows included operating cash flows generated by Mayne Pharma. During thetwo-year period after the closing, Hospira expects to incur approximately $95million to $110 million of cash expenditures relating to the integration ofMayne Pharma, which will reduce operating cash flows. In addition, as a resultof the debt incurred during the first quarter of 2007 to finance the MaynePharma acquisition, Hospira must dedicate substantially greater cash to debtservice obligations (including interest expense and mandatory principalpayments on the term loan described below) on an ongoing basis compared to pastperiods. Hospira believes that its current capital resources, including cashand cash equivalents, cash generated from operations, funds available from itsrevolving credit facility and access to the capital markets will be sufficientto finance its operations, including debt service obligations, capitalexpenditures, product development and Mayne Pharma integration expenditures forthe foreseeable future.

*Summary of Cash Flows*

Operating activitiesprovided net cash of $49.8 million, primarily driven by non-cash depreciationand amortization charges of $50.5 million, non-cash stock-based compensationexpense of $7.2 million, and the write-off of acquired in-process research anddevelopment of $84.8 million, offset by net loss of $29.4 million and changesin operating assets and liabilities of $63.3 million. The changes in operatingassets and liabilities consist primarily of significant payments made onacquired Mayne Pharma current liabilities, including merger advisory fees.

Net Cash Used inInvesting Activities of $2,040.6 million includes the acquisition of MaynePharma for $1,961.3 million, net of cash acquired and capital expenditures of$51.9 million. In connection with the acquisition of Mayne Pharma, Hospiraentered into certain foreign currency forward exchange contracts to limit itsexposure from currency movements of the Australian dollar. During the quarterended March 31, 2007, Hospira paid $41.2 million for the settlements relatingto these contracts. These decreases were partially offset by proceeds fromdispositions of certain product rights for $13.8 million.

Net Cash From FinancingActivities of $1,913.7 million consists primarily of Hospira incurring $1,925million of bank debt to finance the Mayne Pharma acquisition.  The bank facilities included a $500 million,three-year term loan facility and a $1,425 million one-year bridge loanfacility. The bridge loan facility was completely refinanced on March 23, 2007through the issuance of long-term debt securities. In addition, financingactivities includes proceeds from employee stock option exercises and relatedtax benefits of $15.9 million.

*Debt and Capital*

OnFebruary 1, 2007, Hospira incurred $1,925 million of bank debt to finance theMayne Pharma acquisition.  The remainderof the purchase price was funded with cash on hand. The bank facilitiesincluded a $500 million, three-year term loan facility and a$1,425 million one-year bridge loan facility. The bridge loan facility wascompletely refinanced on March 23, 2007 through the issuance of long-term debtsecurities described below.

Under the term loanfacility, Hospira must repay $12.5 million in principal at the end of eachquarter in 2007, $50.0 million at the end of each quarter in 2008 and $62.5million at the end of each quarter in 2009 (with the final payment to be madeon the maturity date of January 15, 2010). The amount due within one year is$87.5 million and is recorded as short-term borrowings. Hospira is permitted toprepay amounts borrowed under the term loan from time to time without penalty.Borrowings under the term loan facility and bridge loan facility bear interestat LIBOR plus a margin that is determined based on Hospira’s senior unsecureddebt ratings from Standard & Poor’s and Moody’s.  Based on Hospira’s ratings of BBB (stableoutlook) from Standard and Poor’s and Baa3 (negative outlook) from Moody’s, themargin is currently 0.60%. Ratings are not recommendations to buy, sell or holdsecurities and are subject to revision or withdrawal at any time by the ratingagencies. Each rating should be evaluated independently of any other rating.

On March 23, 2007,Hospira issued $375 million principal amount of Floating Rate Notes due 2010,$500 million principal amount of 5.55% Notes due 2012 and $550 millionprincipal amount of 6.05% Notes due 2017 in a registered public offering. TheFloating Rate Notes due 2010 bear interest at three-month LIBOR plus 48 basispoints. All series of notes are due on March 30 of the year of maturity. Thenet proceeds of the notes (after deducting approximately $10 million ofunderwriters’ discounts and offering expenses of $5.6 million), together withapproximately $21.5 million of cash on hand, were used to repay the bridge loanfacility and related interest in full.

Hospira has a five-year$375 million unsecured revolving credit facility (the “Revolver”), which itentered into on December 16, 2005, and which was amended on January 15, 2007 topermit the Mayne Pharma acquisition and to temporarily increase the maximumleverage ratio and lower the minimum interest coverage ratio. This Revolver isavailable for working capital and other requirements.  The Revolver allows Hospira to borrow fundsat variable interest rates as short-term cash needs dictate. As of March 31,2007, Hospira had no amounts outstanding under the Revolver.

Hospira’s debt instrumentscontain covenants that limit Hospira’s ability to, among other things, sell assets,incur secured indebtedness

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and liens, incur indebtedness atthe subsidiary level and merge or consolidate with othercompanies. Hospira’s debt instruments also include customary events ofdefault, which would permit amounts borrowed to be accelerated and would permitthe lenders under the revolving credit agreement to terminate their lendingcommitments. A description of certain covenants is set forth below.

*Change of Control.* The notes issued onMarch 23, 2007 include covenants that require Hospira to offer to repurchasethose notes at 101% of their principal amount if: (1) there is a change ofcontrol of Hospira and (2) Hospira is rated below investment grade by bothMoody’s and Standard & Poor’s at or within a specified time after the timeof announcement of the change of control transaction. A change of control wouldconstitute an event of default under the term loan agreement and Hospira’srevolving credit agreement.

*Financial Covenants.* Hospira’s term loanfacility and revolving credit facility include requirements to maintain amaximum leverage ratio and a minimum interest coverage ratio. The leverageratio is calculated by dividing Hospira’s debt by its earnings before interest,taxes, depreciation and amortization (excluding certain purchase accountingcharges relating to the Mayne Pharma acquisition, expenses relating to theintegration of Mayne Pharma into Hospira, expenses relating to Hospira’stransition from Abbott Laboratories, expenses relating to Hospira’smanufacturing optimization activities and certain non-cash gains, expenses andlosses, subject in certain cases to agreed-upon maximums) for the twelve monthsending on the last day of each quarter. The coverage ratio is calculated bydividing Hospira’s earnings before interest, taxes, depreciation andamortization (excluding the items described above) by its consolidated financingexpense, in each case for the twelve months ended on the last day of eachquarter. As of the end of each calendar quarter during 2007, the ratios will becalculated on a pro forma basis assuming the acquisition of Mayne Pharma andthe related financing transactions had occurred on the first day of the period.

The maximum leverage ratio is 4.5as of March 31, 2007, 4.00 as of June 30, 2007, 3.5 as of September 30, 2007and 3.25 as of the end of all quarters thereafter. The minimum coverage ratiois 4.00 as of March 31, 2007, 4.5 as of June 30, 2007, 4.75 as of September 30,2007 and 5.00 as of the end of all quarters thereafter.

As of March 31, 2007, Hospira wasin compliance with all applicable covenants.

**Contractual Obligationsand Off-Balance Sheet Arrangements**

The following table summarizes Hospira’s estimated contractualobligations as of March 31, 2007:

*(dollarsin millions)*
| ** **                                                                   | ** ** | **Payment Due by Period** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                   | ** ** | **Total**                                | ** ** | **2007** | ** ** | **2008-2009** | ** ** | **2010-2011** | ** ** | **2012 and  Thereafter** | ** ** |
| Long-term debt  and interest payments                                        |       | $                                        | 3,425.4    |   | $ | 144.9 |   | $ | 1,019.1 |   | $ | 551.9 |   | $ | 1,709.5 |   |
| Lease  obligations                                                           |       | 212.7                                    |       | 27.0 |   | 63.8 |   | 49.4 |   | 72.5 |   |
| Purchase  commitments (1)                                                    |       | 576.2                                    |       | 522.5 |   | 48.6 |   | 5.1 |   | — |   |
| Other long-term  liabilities reflected on the consolidated balance sheet (2) |       | 133.3                                    |       | — |   | 94.2 |   | 39.1 |   | — |   |
| Total                                                                        |       | $                                        | 4,347.6    |   | $ | 694.4 |   | $ | 1,225.7 |   | $ | 645.5 |   | $ | 1,782.0 |   |

 

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(1)       Purchase commitments consist primarily of inventory purchases madein the normal course of business to meet operational requirements. Contractualcapital commitments are also included here, but these commitments representonly a portion of expected capital spending.

(2)       Includes liability of $104.2 million relating to unrecognized taxbenefits and excludes $176.6 million of other long-term liabilities relatedprimarily to post-retirement benefit obligations.

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

**Item3.  Quantitative And Qualitative DisclosuresAbout Market Risk**

On March 23, 2007,Hospira issued $375 million principal amount of Floating Rate Notes due 2010that bear interest at a three-month LIBOR plus 48 basis points. A hypotheticalone percentage point increase/(decrease) in interest rates wouldincrease/(decrease) interest expense by $3.8 million. On February 1, 2007, Hospira incurred a $500 million,three-year term loan facility bearing interest at LIBOR plus a margin that isdetermined based on Hospira’s senior unsecured debt ratings from Standard &Poor’s and Moody’s. A hypothetical one percentage point increase/(decrease) ininterest rates would increase/(decrease) interest expense by $5.0 million.Refer to the Liquidity and Capital Resources section above, as well as Note 11to the condensed consolidated financial statements included in this quarterlyreport on Form 10-Q, for further information.

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There have been no othermaterial changes to the information provided in Hospira’s Annual Report on Form10-K for the year ended December 31, 2006.

**Item 4.    Controls and Procedures**

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

*Changes in internal controls.* Hospira completed the acquisition ofMayne Pharma on February 2, 2007. Hospira believes that the internal controlsof Mayne Pharma have a material effect on Hospira’s internal control overfinancial reporting. Hospira is currently evaluating the internal controls ofMayne Pharma and expects to include those controls as part of its management’sevaluation within the time period permitted by the Sarbanes-Oxley Act of 2002and applicable rules, regulations and interpretations of the Securities andExchange Commission thereunder. Except as described above, during Hospira’smost recent fiscal quarter, there was no change in Hospira’s internal controlover financial reporting that has materially affected, or is reasonably likelyto materially affect, Hospira’s internal control over financial reporting.

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**PART II.  OTHER INFORMATION**

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

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

**Item1A.  Risk Factors**

Please refer to Item 1A. in Hospira’s Annual Report onForm 10-K for the year ended December 31, 2006 for a discussion of risks towhich Hospira’s business, financial condition, results of operations and cashflows are subject.

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

(c)          Issuer Purchases ofEquity Securities

The table below givesinformation on a monthly basis regarding purchases made by Hospira of itscommon stock.
| Period                        | ** ** | **Total Number  of Shares  Purchased (1)** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number   of Shares  Purchased as  Part of   Publicly  Announced  Plans or   Programs** | ** ** | **Maximum Number  (or Approximate  Dollar Value) of  Shares that May  Yet be Purchased  Under the Plans or   Programs (2)** | ** ** |
|-------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| January  1-January 31, 2007   |       | 33,043                                                    |       | $                                                | 35.20      |                                                                                                                                   | —     |                                                                                                                                                                                         | $          | 100,233,606 |   |
| February  1-February 28, 2007 |       | 29,715                                                    |       | $                                                | 36.99      |                                                                                                                                   | —     |                                                                                                                                                                                         | $          | 100,233,606 |   |
| March 1-March  31, 2007       |       | 92,474                                                    |       | $                                                | 39.34      |                                                                                                                                   | —     |                                                                                                                                                                                         | $          | 100,233,606 |   |
| Total                         |       | 155,232                                                   |       | $                                                | 38.01      |                                                                                                                                   | —     |                                                                                                                                                                                         | $          | 100,233,606 |   |

 

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(1)          These shares representthe shares deemed surrendered to Hospira to pay the exercise price and satisfytax withholding obligations in connection with the exercise of employee stockoptions.

(2)          In February 2006,Hospira’s board of directors authorized the repurchase of up to $400 million ofHospira’s common stock in accordance with Rule 10b-18 under the SecuritiesExchange Act of 1934. The repurchase of shares commenced in early March 2006.As of March 31, 2007, Hospira had purchased 7,584,400 shares for $299.8 millionin the aggregate under the 2006 board authority, all of which were purchasedduring 2006.

**Item 6.    Exhibits**

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

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SIGNATURE

Pursuantto the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|        |   |   | HOSPIRA, INC. |
|--------|--------|--------|--------------------|
|   |   |   |               |   |
|   |   |   | By                 | /s/ THOMAS E. WERNER  |
|   |   |   |               | Thomas E. Werner, |
|   |   |   |               | Senior Vice President, Finance and |
|   |   |   |               | Chief Financial Officer |
|   |   |   |               | Date: May 9, 2007 |

 

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EXHIBIT INDEX
| Exhibit No. | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                                                                |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1         |       | Amended and Restated By-laws of Hospira, Inc.  (incorporated by reference to Exhibit 3.1 to Hospira’s Current Report on Form  8-K filed with the Securities and Exchange Commission on February 23, 2007).                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.1         |       | Form of Floating Rate Note due 2010.                                                                                                                                                                                                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.2         |       | Form of 5.55% Note due 2012.                                                                                                                                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.3         |       | Form of 6.05% Note due 2017.                                                                                                                                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.4         |       | Actions of Authorized Officers with respect to  Hospira’s Floating Rate Notes due 2010, 5.55% Notes due 2012 and 6.05% Notes  due 2017.                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 4.5         |       | Company Certificate and Order with respect to  Hospira’s Floating Rate Notes due 2010, 5.55% Notes due 2012 and 6.05% Notes  due 2017.                                                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.1        |       | Summary of terms of employment for named executive  officers.                                                                                                                                                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2        |       | Credit Agreement and Guaranty, dated as of December  16, 2005, and amended as of January 15, 2007, by and among Hospira and the  lenders and agents named therein (incorporated by reference to Exhibit 10.16  to Hospria’s Annual Report on Form 10-K for the year ended December 31, 2006  filed with the Securities and Exchange Commission on February 28, 2007). |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3        |       | Term Loan Agreement, dated as of January 15, 2007,  by and among Hospira and the lenders and agents named therein (incorporated  by reference to Exhibit 10.17 to Hospira’s Annual Report on Form 10-K for the  year ended December 31, 2006 filed with the Securities and Exchange  Commission on February 28, 2007).                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 10.4        |       | Agreement, dated January 15, 2007, between Hospira  and John Arnott (incorporated by reference to Exhibit 10.12(c) to Hospira’s  Annual Report on Form 10-K for the year ended December 31, 2006 filed with  the Securities and Exchange Commission on February 28, 2007).                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                       |
| 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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