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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D. C.  20549

FORM 10-Q

For the transition period from              to          

Commission File No. 1-31946

HOSPIRA, INC.

(Exact name of registrant as specified in its charter)

275 North Field Drive
Lake Forest, Illinois 60045

(Address of principal executive offices, including zip code)

(224) 212-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

As of April 21, 2011, Registrant had outstanding 167,775,166 shares of common stock, par value $0.01 per share.

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Hospira, Inc.

Quarterly Report on Form 10-Q

Index

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Hospira, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

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

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

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Hospira, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(dollars in millions)

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

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Hospira, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(dollars in millions)

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

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Hospira, Inc.

Condensed Consolidated Statement of Changes in Shareholders’ Equity

(Unaudited)

(dollars and shares in millions)

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

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Hospira, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 — Basis of Presentation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting and, therefore, do not include all information and footnote disclosures normally included in audited financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). However, in the opinion of management, all adjustments, consisting of normal recurring adjustments, unless otherwise noted herein, necessary to present fairly the results of operations, financial position and cash flows have been made. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Hospira, Inc. (“Hospira”) Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”). The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.

Certain prior year amounts have been reclassified to conform to the current year presentation. During 2011, Hospira reclassified income that was previously reported in Other income, net to Equity income from affiliates, net line item on the Condensed Consolidated Statements of Income. In addition, Hospira reclassified cash flows from operating activities that were previously reported in Other, net to Undistributed equity income from affiliates line item on the Condensed Consolidated Statements of Cash Flows. See Note 5 for additional details related to Equity income from affiliates. The reclassifications did not affect net income, cash flows from operations or shareholders’ equity.

Recently Issued and Adoption of New Accounting Standards

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-29, Business Combinations (Topic 805), “Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU No. 2010-29”). ASU No. 2010-29 requires revenues and earnings of the combined entity be disclosed as if the business combination occurred as of the beginning of the comparable prior annual reporting period. The ASU also requires additional disclosures about adjustments included in the reported pro forma revenues and earnings. Hospira adopted the provisions of ASU No. 2010-29 prospectively for business combinations for which the acquisition date is on or after January 1, 2011. There was no impact to Hospira’s condensed consolidated financial position, results of operations or cash flows upon adoption of this guidance.

In December 2010, the FASB issued ASU No. 2010-27, Other Expenses (Topic 720), “Fees Paid to the Federal Government by Pharmaceutical Manufacturers” (“ASU No. 2010-27”). ASU No. 2010-27 specifies the accounting for annual fees imposed on the pharmaceutical manufacturing industry by the Patient Protection and Affordable Care Acts as amended by the Health Care and Education Reconciliation Act (collectively, the “Acts”). The ASU specifies that a liability for the fee should be estimated and recorded in full upon the first qualifying sale with deferred costs amortized to expense on a straight-line basis, unless another method of allocation is more appropriate. ASU No. 2010-27 is effective for calendar years beginning after December 31, 2010. Hospira adopted the provisions of ASU No. 2010-27. There was no material impact to Hospira’s condensed consolidated financial position, results of operations or cash flows upon adoption of this guidance.

Significant Accounting Policies - Revenue Recognition

Chargebacks

Hospira’s accounting policy for revenue recognition including a description of chargebacks (estimated reimbursements to wholesalers for honoring contracted prices to end customers) is included in Note 1 — Summary of Significant Accounting Policies in Hospira’s 2010 Form 10-K. Hospira regularly monitors the provision for chargebacks and makes adjustments when it believes the actual chargeback may differ from estimates. The methodology used to estimate and provide for chargebacks was consistent across all periods presented.

Hospira’s generic docetaxel sales, launched in the United States (“U.S.”) in March 2011, are subject to chargebacks and contributed to the increase of the chargeback accrual from December 31, 2010 to March 31, 2011. Generally, generic product launch sales have a higher degree of end customer price movement, which may be greater than 80% from the end customer price prior to generic introduction, as additional competitors enter the market. A five percent decrease in the end customer contract prices for generic

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docetaxel sales subject to chargebacks at March 31, 2011 could decrease net sales and income before income taxes by approximately $5 million.

The following table is a rollforward of Hospira’s total chargeback accrual for all products, including docetaxel, for the three months ended March 31, 2011.

Note 2 — Business Acquisition

In July 2010, Hospira completed the acquisition of Javelin Pharmaceuticals, Inc. (“Javelin Pharma”) for a purchase price of $161.9 million. The acquisition will enable Hospira to take advantage of operating synergies between Hospira’s Precedex TM  and Javelin Pharma’s main product candidate, Dyloject TM , a post-operative pain management drug currently awaiting U.S. Food and Drug Administration (“FDA”) approval. The impact, except for the acquisition costs of $7.9 million in 2010, of this acquisition was not significant to Hospira’s results of operations through March 31, 2011.

In October 2010, Hospira received a complete response letter from the FDA regarding Dyloject TM . Hospira and its third party manufacturer continue to work closely with the FDA to address all items, including visual inspection methods and a product particulate issue identified at the acquisition date, raised as part of the regulatory process. Timing of resolution and expected launch of the product is uncertain.

The allocation of the purchase price is preliminary, based on the initial accounting of the assets acquired and liabilities assumed at their respective estimated fair values on the acquisition date of July 2, 2010. The allocation of the purchase price for intangible assets and acquired in-process research and development (“IPR&D”) is pending finalization of the valuation and allocation of goodwill among reporting units. The final allocation of the purchase price may result in adjustments to the recognized amounts of assets and liabilities, which could be significant. Hospira expects to finalize the preliminary allocation by the end of the second quarter 2011. The preliminary allocation based on management’s best estimate is as follows:

The majority of goodwill, $68.2 million, was assigned to the U.S., Canada, and Latin America (“Americas”) segment. Goodwill recorded as part of the acquisition includes the expected synergies and other benefits that Hospira believes will result from the combined operations. Goodwill is not expected to be deductible for tax purposes.

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Note 3 — Restructuring Actions

As part of its strategy to improve margins and cash flows, Hospira has taken a number of actions to reduce operating costs and optimize operations. The net charges related to these actions consist primarily of severance and other employee benefits, accelerated depreciation resulting from the decreased useful lives of the buildings and certain equipment, impairments, other asset charges, exit costs, contract terminations costs and gain on disposal of assets.

Project Fuel

In March 2009, Hospira announced details of a restructuring and optimization plan, (“Project Fuel”), which was completed in March 2011.  Project Fuel included the following activities: optimizing the product portfolio, evaluating non-strategic assets and streamlining the organizational structure. Hospira incurred aggregate restructuring costs and other asset charges related to these actions of $72.0 million on a pre-tax basis, slightly higher than the expected range of $60 million to $70 million.

The following summarizes the Project Fuel pre-tax restructuring costs and inventory charges (included in Cost of products sold) for the three months ended March 31:

As part of Project Fuel initiatives, Hospira committed to dispose of certain non-strategic businesses and the underlying assets. In February 2010, Hospira completed the disposal of a facility in Wasserburg, Germany for $69.3 million, comprised of initial cash proceeds of $62.6 million and an additional $6.7 million received in the first quarter of 2011. Hospira recognized a gain of $11.4 million on the disposal of the Wasserburg facility and is included in Restructuring, impairment and (gain) on disposition of assets, net in the first quarter of 2010. Subsequent to the 2009 disposal of the manufacturing facility in Salisbury, Australia (“Salisbury”), Hospira can receive contingent consideration based on sales for each year through 2015 which were estimated and accrued at the time of sale. In the first quarter of 2011, Hospira received $6.4 million related to the Salisbury disposal.

The following summarizes the Project Fuel restructuring activity for 2011:

Facilities Optimization

In April 2008, Hospira announced a plan to exit manufacturing operations at its Morgan Hill, California facility. Hospira has completed the process of transferring related operations and production of products to other Hospira facilities or outsourcing certain product components to third-party suppliers. During the three months ended March 31, 2011 and 2010, Hospira incurred in the Americas segment pre-tax restructuring costs of $0.3 million and $1.0 million, respectively. Hospira incurred aggregate restructuring charges related to these actions of $27.8 million in the Americas segment, at the lower end of the expected range of $28 million to $30 million.

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The following summarizes the Facilities Optimization for Morgan Hill, California restructuring activity for 2011:

Other Restructuring

In addition to the significant programs discussed above, from time to time Hospira incurs costs to implement restructuring actions for specific operations. During the three months ended March 31, 2011, Hospira incurred distributor contracts termination costs in the Americas segment of $7.8 million reported in Restructuring, impairment and (gain) on disposition of assets, net related to the restructuring of certain Latin America operations. No additional restructuring costs are expected to be incurred for this action.

Note 4 — Collaborative Arrangements

Hospira enters into collaborative arrangements with third parties for product development and commercialization. These arrangements typically involve two (or more) parties who are active participants in the collaboration and are exposed to significant risks and rewards dependent on the commercial success of the activities. Hospira’s rights and obligations under these collaborative arrangements vary. These collaborations usually involve various activities including research and development, marketing and selling, and distribution. Hospira has numerous collaborative arrangements none of which individually or in the aggregate have had material changes or activity during the three months ended March 31, 2011. For a more detailed description of Hospira’s collaborative arrangements see Note 4 to Hospira’s consolidated financial statements included in Hospira’s 2010 Form 10-K.

Note 5 — Investments

Equity investments consist of investments in affiliated companies over which Hospira has significant influence but not the majority of the equity or risks and rewards. Hospira has a 50% ownership in a joint venture, Zydus Hospira Oncology Private Limited (“ZHOPL”) with Cadila Healthcare Limited, in addition to other equity investments. Equity income from affiliates of $17.2 million during the three months ended March 31, 2011 was primarily due to the launch of generic docetaxel, the majority of which was sourced from ZHOPL, and the related net income recognized by ZHOPL.

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Note 6 — Fair Value Measures

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the balance sheet:

The fair value of the Level 1 assets is based on quoted market prices of the identical underlying security in an active market. The fair value of the Level 2 assets and liabilities is primarily based on market observable inputs to quoted market prices, benchmark yields and broker/dealer quotes. Level 3 inputs, as applicable, are unobservable inputs which reflect assumptions developed by management to measure assets and liabilities at fair value.

The carrying values of certain financial instruments, including primarily cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings, approximate their estimated fair values due to their short-term nature. The carrying value and estimated aggregate fair value, based primarily on market prices (Level 1), of the senior unsecured notes are as follows:

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Note 7 — Financial Instruments and Derivatives

Hospira’s operations are exposed to market risk primarily due to changes in currency exchange and interest rates. The objective in managing these risks is to reduce volatility on earnings and cash flows. To reduce the risk, Hospira enters into certain derivative financial instruments, when available on a cost-effective basis, to hedge its underlying economic exposure. For a more detailed description of Hospira’s financial instruments and derivatives see Note 7 to Hospira’s consolidated financial statements included in Hospira’s 2010 Form 10-K.

The following table summarizes Hospira’s fair value of outstanding derivatives:

The impact on earnings from derivatives activity was as follows for the three months ended March 31:

Note 8 — Inventories

Inventories consist of the following:

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Note 9 — Property and equipment, net

Property and equipment, net consists of the following:

Note 10 — Goodwill and Intangible assets, net

The following summarizes goodwill and intangible assets, net activity:

In the first quarter of 2011, Hospira recorded an impairment charge of $1.7 million related to IPR&D, primarily in the Americas reporting segment, due to expected delays in various product launch dates. The charge was based on internal discounted cash flow analysis, a non-recurring Level 3 fair value measurement, and is included in Restructuring, impairment and (gain) on disposition of assets, net.

Intangible assets have definite lives and are amortized on a straight-line basis over their estimated useful lives (1 to 16 years, weighted average 9 years). Indefinite lived intangibles, principally IPR&D, are not amortized until completion, regulatory approval or discontinuation. Intangible asset amortization expense was $22.2 million and $21.5 million for the three months ended March 31, 2011 and 2010, respectively. Intangible asset amortization is estimated at $61.3 million for the remainder of 2011, $70.5 million for 2012, $68.9 million for 2013, $57.9 million for 2014, and $47.6 million for 2015.

Intangible assets, net consist of the following:

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Note 11 — Sales-Type Leases

The net investment in sales-type leases of certain medication management products consist of the following:

(1)  The current and long-term portions were recorded in Trade receivables and Other assets, respectively, in the condensed consolidated balance sheets.

Hospira monitors the credit quality of sales-type leases and recognizes an allowance for credit loss based on historical loss experience. As of March 31, 2011 and December 31, 2010, allowance for credit losses and amounts past due 90 days for sales-type leases were not material.

Note 12 — Other Accrued Liabilities

Other accrued liabilities consist of the following:

Note 13 — Post-Retirement Benefits

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

Net cost recognized for the pension plans and medical and dental plans for the three months ended March 31, were as follows:

Based on current Federal laws and regulations, Hospira is not required to make any contributions to its U.S. pension plans in 2011. While Hospira’s funding policy requires contributions to our defined benefit plans equal to the amounts necessary to, at a minimum, satisfy the funding requirements as prescribed by Federal laws and regulations, Hospira does make discretionary contributions when management deems it is prudent to do so.

Certain Hospira employees in the U.S. and Puerto Rico participate in the Hospira 401(k) Retirement Savings Plan. Hospira’s expenses for this defined contribution plan for the three months ended March 31, 2011 and 2010 were $8.0 million and $8.4 million, respectively.

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Note 14 — Short-term Borrowings and Long-term Debt

Hospira has a $700.0 million unsecured revolving credit facility expiring in October 2012 under which no amounts are outstanding as of March 31, 2011.

Certain borrowing agreements contain covenants that require compliance with, among other restrictions, a maximum leverage ratio and a minimum interest coverage ratio. As of March 31, 2011, Hospira was in compliance with all applicable covenants.

Note 15 — Income Taxes

Taxes on income reflect the estimated annual effective rates, excluding the effect of significant unusual items. The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the benefit of tax exemptions, of varying durations, in certain non-U.S. taxing jurisdictions.

During the three months ended March 31, 2011, the Internal Revenue Service (“IRS”) audit of Hospira’s 2006 and 2007 U.S. federal tax returns was concluded and the years were effectively settled. The outcome of the audit settlement is a reduction in the gross unrecognized tax benefits for both of the audit years settled, of which $19.7 million is recognized in the results for the three months ended March 31, 2011 as a discrete income tax benefit, inclusive of interest and state tax impacts. The IRS has commenced the audit of Hospira’s 2008 and 2009 U.S. federal tax returns during the three months ended March 31, 2011.

Hospira remains open to tax examinations, which are in various stages, in the following major tax-paying jurisdictions: for years 2005 forward in Canada, for years 2006 forward for Italy, for years 2007 forward for Australia, and for years 2008 forward for the U.S. and United Kingdom. In addition, various tax statutes of limitation are expected to close within the next 12 months. Accordingly, a change in unrecognized tax benefit may occur for which at this time an estimate of the range cannot be quantified.

Note 16 — Shareholders’ Equity

Common Stock

Hospira is authorized to issue 400.0 million shares of common stock, par value $0.01 per share, and 50.0 million shares of preferred stock, par value $0.01 per share. As of March 31, 2011 and December 31, 2010, 177.0 million and 175.9 million common shares were issued and 167.6 million and 166.7 million common shares were outstanding, respectively.

Treasury Stock

In February 2006, Hospira’s Board of Directors authorized the repurchase of up to $400.0 million of Hospira’s common stock in accordance with Rule 10b-18 under the Securities Exchange Act of 1934. In December 2010, Hospira entered into an accelerated share repurchase agreement (“ASR”) contract with a third party financial institution to repurchase $50.0 million of Hospira’s common stock. Under the ASR, Hospira received 0.7 million shares in December 2010 based on seventy-five percent of the $50.0 million repurchased on the trade date, with the remaining 0.2 million shares delivered in February of 2011. In the aggregate, Hospira had repurchased 9.4 million shares for approximately $400.0 million completing the 2006 board authorization.

In April 2011, Hospira’s Board of Directors authorized the repurchase of up to $1.0 billion of Hospira’s common stock in accordance with Rule 10b-18 under the Securities Exchange Act of 1934. Hospira is considering repurchasing shares under this authorization which will depend on various factors such as cash generation from operations, current stock price and other factors.

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Note 17 — Comprehensive Income and Accumulated Other Comprehensive Income , net of tax

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

Accumulated other comprehensive income, net of taxes, consists of the following:

Note 18 — Earnings per Share

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

The number of outstanding options and awards to purchase Hospira stock for which the exercise price of the options exceeded the average stock price was 0.4 million and 1.0 million for the three months ended March 31, 2011 and 2010, respectively. Accordingly, these options are excluded from the diluted earnings per share calculation for these periods.

Note 19 — Stock-Based Compensation

Hospira’s 2004 Long-Term Stock Incentive Plan, as amended, provides for the grant of shares of stock options, stock appreciation rights, stock awards (restricted stock, restricted stock units, performance shares and performance units), and cash-based awards to employees and non-employee directors. Stock-based compensation expense of $13.7 million and $17.3 million was recognized for the three months ended March 31, 2011 and 2010, respectively. The related income tax benefit recognized was $4.7 million and $5.8 million, respectively.  As of March 31, 2011, there was $79.3 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 2.2 years.

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Stock Options

In February 2011, 1.4 million options were granted to certain employees for the 2011 annual stock option grant. For the three months ended March 31, 2011, an additional 0.2 million options were granted. These options were awarded at the fair market value at the time of grant, generally vest over three to four years, and have a seven-year term.  The expected life assumption of the options was based on the expected amount of time that options granted are expected to be outstanding, based on historical and forecasted exercise behavior of employees’ post-vesting forfeitures and exercises.

The weighted average fair value using the Black-Scholes option-pricing model, and the corresponding weighted average assumptions for stock option grants for the three months ended March 31, were as follows: