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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C.  20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

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.

(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 October 20, 2011, Registrant had outstanding 164,705,762 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 (Loss) Income and Comprehensive (Loss) 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) expense, net to Equity income from affiliates, net line item on the Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) 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. Further, Hospira reclassified Comprehensive (Loss) Income and Other comprehensive (loss) income and related components, previously disclosed in the Notes to Condensed Consolidated Financial Statements, to the Condensed Consolidated Statements of Comprehensive (Loss) Income. Lastly, Hospira reclassified various line items on the Condensed Consolidated Balance Sheets, primarily Goodwill, Deferred income taxes and Intangible assets, net as of December 31, 2010. These reclassifications related to the measurement period adjustments for finalized purchase price allocation. See Note 2 for additional details.  The reclassifications did not affect net (loss) income, cash flows from operations or shareholders’ equity.

Recently Issued and Adoption of New Accounting Standards

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, “Intangibles — Goodwill and Other” (“ASU No. 2011-08”).  ASU No. 2011-08 amends current guidance to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  Under this amendment an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.  ASU No. 2011-08 applies to all companies that have goodwill reported in their financial statements.  The provisions of ASU No. 2011-08 are effective for reporting periods beginning after December 15, 2011.  Hospira does not believe the adoption of ASU No. 2011-08 will have a material impact on the consolidated financial statements.

In June 2011, Hospira adopted the provisions of ASU No. 2011-05, Comprehensive Income (Topic 220), “Presentation of Comprehensive Income in U.S. GAAP” (“ASU No. 2011-05”). ASU No. 2011-05 requires that comprehensive income and the related components of net income and of other comprehensive income be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements.  ASU No. 2011-05 also requires reclassification adjustments from other comprehensive income to net income be presented on the face of the financial statements. There was no impact to Hospira’s condensed consolidated financial position, results of operations or cash flows upon adoption of this guidance.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820), “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS” (“ASU No. 2011-04”).  ASU No. 2011-04 amends the wording used to describe many of the requirements for measuring fair value to achieve the objective of developing common fair value measurement and disclosure requirements, as well as improving consistency and understandability. Some of the requirements clarify the FASB’s intent about the application of existing fair value measurement requirements while other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. ASU No. 2011-04 is effective for calendar years beginning after December 15, 2011. Early adoption is prohibited. Hospira is currently evaluating the potential impact of ASU No. 2011-04 on the financial statements and related disclosures but does not anticipate a material impact to Hospira.

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In December 2010, the FASB issued 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. ASU No. 2010-29 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”). ASU No. 2010-27 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 on January 1, 2011. 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

Chargebacks

Hospira’s accounting policy for revenue recognition including a description of chargebacks (estimated payments 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.

Sales of Hospira’s generic oncolytic product docetaxel, 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 September 30, 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 docetaxel sales subject to chargebacks at September 30, 2011 could decrease net sales and income before income taxes by approximately $2.6 million.

The following table is a rollforward of Hospira’s total chargeback accrual for all products, including docetaxel, for the nine months ended September 30, 2011.

Certain product related costs

Hospira committed to the U.S. Food and Drug Administration (“FDA”) that it would engage in a comprehensive product review for each of Hospira’s device products.  The product reviews are designed to confirm compliance with current regulatory requirements and document safety and performance of the products.  The product reviews, related investigations and remediation are ongoing, and certain remediation actions, such as product recalls or corrective field actions, for Hospira’s device products have been, and may be required upon finalization of the product reviews.

Hospira accrues for costs of product recalls, corrective actions, and other related costs based on management’s best estimates when it is probable a liability has been incurred, management commits to a plan, and/or regulatory requirement dictates the need for corrective

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action and the amount of loss can be reasonably estimated. Reserves for various product recalls, corrective actions, and other related costs are as follows and are included in Other accrued liabilities on the consolidated balance sheet:

Supplier Advances

In September 2011, Hospira advanced $50 million to a supplier for the expected purchase of certain biosimilar products. Additional supplier advances in aggregate of $50 million for these products may be required over the next two years and timing is based on estimated regulatory approval dates and commercial launch dates.  Supplier advances are refundable, under certain conditions, interest free and unsecured.

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. Hospira expects 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 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 September 30, 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 to address all items raised as part of the regulatory process. Timing of resolution and expected launch of the product is uncertain.

During the second quarter of 2011, Hospira finalized the allocation of the purchase price based on the assets acquired and liabilities assumed at their respective fair values on the acquisition date of July 2, 2010. Upon finalization, Hospira adjusted the preliminary values assigned based on additional information which existed at the acquisition date. The opening balance sheet has been adjusted to reflect these changes, inclusive of previous adjustments since the acquisition date. The aggregate adjustments included an increase to goodwill of $72.8 million, an increase to deferred income taxes, net of $43.7 million, a decrease to in-process research and development (“IPR&D”) of $114.2 million and a decrease to intangible assets of $2.3 million.

The final allocation of the purchase price is as follows:

The $4.5 million of acquired intangible assets includes developed product rights that will be amortized over their estimated useful lives (10 years). The $7.3 million of IPR&D is being accounted for as an indefinite-lived intangible asset until regulatory approval or discontinuation. Upon regulatory approval of the product, Hospira will make a determination as to the useful life of the IPR&D intangible asset and begin amortization. The majority of goodwill, $97.8 million, was assigned to the U.S., Canada, and Latin America (“Americas”) reporting units. 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.

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

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depreciation resulting from the decreased useful lives of the buildings and certain equipment, impairments, other asset charges, exit costs, contract termination 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.

The following summarizes the Project Fuel pre-tax restructuring costs and inventory charges (included in Cost of products sold):

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 cash proceeds of $69.3 million. Hospira recognized a gain of $11.4 million on the disposal of the Wasserburg facility which is included in Restructuring, impairment and (gain) on disposition of assets, net in the first quarter of 2010.

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. In March 2011, Hospira completed the process of transferring related operations and production of products to other Hospira facilities or outsourcing certain product components to third-party suppliers. Hospira incurred aggregate restructuring charges related to these actions of $27.8 million in the Americas segment.

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

Other Restructuring

In addition to the 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 costs to terminate distributor contracts 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 these actions.

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. In October 2011, Hospira provided a notice of termination in connection with its agreement with Kiadis Pharma B.V. for the development and commercialization of ATIR TM , and will no longer be pursuing this product. Hospira has numerous other collaborative arrangements, none of which individually or in the aggregate have had material changes or activity during the nine months ended September 30, 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”), in addition to other equity investments. During the three and nine months ended September 30, 2011, Equity income from affiliates, net, including the ZHOPL equity investment, was $9.3 million and $38.2 million, respectively, primarily due to the launch in 2011 of docetaxel, the majority of which was sourced from ZHOPL.  During the nine months ended September 30, 2011, distributions received from ZHOPL were $30.3 million.

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Note 6 — Fair Value Measures

The following table summarizes the basis used to measure certain assets and liabilities at fair value 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 cash and cash equivalents, which include money market fund instruments, approximate their carrying value due to their short-term nature, and are within Level 1 of the fair value hierarchy. 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.  See additional details in Note 10 related to the fair value of the non-financial assets.

The carrying values of certain financial instruments, including primarily 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:

(1)  The carrying value and fair value excludes the interest rate swaps fair value adjustments.  See Note 7 for further details.

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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:

Note 8 — Inventories

Inventories consist of the following:

Note 9 — Property and equipment, net

Property and equipment, net consists of the following:

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Note 10 — Goodwill and Intangible assets, net

The following summarizes goodwill and intangible assets, net activity:

Goodwill is tested for impairment at least annually as of September 30 or more frequently if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. Hospira’s reporting units are the U.S., Canada, Latin America, EMEA and APAC. The evaluation is based upon the estimated fair value of Hospira’s reporting units compared to the net carrying value of assets and liabilities. Hospira uses internal discounted cash flow estimates and market value comparisons to determine estimated fair value. If this first test indicates that impairment potentially exists, the second step is performed to measure the amount of impairment, if any. Goodwill impairment exists when the estimated implied fair value of goodwill, a non-recurring Level 3 fair value measurement, is less than its carrying value.

In the third quarter of 2011, Hospira determined the EMEA reporting unit’s goodwill carrying value was in excess of its estimated fair value. Hospira considered the current EMEA economic environment and the decline in Hospira’s common stock price beginning late in the third quarter of 2011 and sustained through the date of this filing, which required an increase in the discount rate used in the present value calculation in order to reconcile Hospira’s market capitalization to the aggregate estimated fair value of all of Hospira’s reporting units. In addition, factors that contributed to the estimated fair value of the EMEA reporting unit being below its carrying value include (i) a decrease in projected revenues and operating margins due to continued competition and related price pressure and overall European region market conditions (ii) higher spending expected for strategic product portfolio expansion, introduced in the third quarter of 2011, in the near-term to mid-term with benefit to revenues and operating margin trailing the increased spending.

As of this filing, Hospira has not completed the analysis, due to the complexities involved in determining the implied fair value of the goodwill of the EMEA reporting unit. However, based on the work performed to date, Hospira has concluded that an impairment loss is probable and can be reasonably estimated. Accordingly, Hospira recorded a $155.0 million goodwill impairment charge, representing Hospira’s best estimate of the impairment, during the three months ended September 30, 2011 which was included in Restructuring, impairment and (gain) on disposition of assets, net. The impairment charge is based on a preliminary analysis and may be subject to further adjustments in the next reporting period. For the U.S., Canada, Latin America, and APAC reporting units, the estimated fair value substantially, by greater than ten percent, exceeds its carrying value.

Accumulated impairment losses on goodwill amounted to $155.0 million and $0.0 million as of September 30, 2011 and December 31, 2010, respectively.

Indefinite-lived intangible assets are also tested for impairment at least annually as of September 30.  Both indefinite and definite lived intangibles are tested more frequently if an event occurs or circumstances change that would reduce the fair value of the asset.  During the nine months ended September 30, 2011, Hospira recorded impairment charges of $18.4 million primarily in the Americas reporting segment, including $5.6 million related to IPR&D, due to delays in various product launch dates and related impacts to commercialization, and $8.7 million for the impairment of an oncology product right intangible asset due to competitive pricing. The impairment charges were based on internal discounted cash flow analysis, a non-recurring Level 3 fair value measurement, and were 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 and regulatory approval. Intangible asset amortization expense was $22.0 million and $19.1 million for the three months ended September 30, 2011 and 2010, respectively. Intangible asset amortization expense was $67.1 million and $59.3 million for the nine months ended September 30, 2011 and 2010, respectively. Intangible asset amortization is estimated at $20.5 million for the remainder of 2011, $68.3 million for 2012, $66.8 million for 2013, $56.1 million for 2014, and $45.5 million for 2015.

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Intangible assets, net consist of the following: