Notes to Consolidated Financial Statements
Note 1 — Summary of Significant Accounting Policies
Description of Business
Hospira, Inc. ("Hospira") is a provider of injectable drugs and infusion technologies that it develops, manufactures, distributes and markets globally. Through a broad, integrated portfolio, Hospira is uniquely positioned to Advance Wellness
™
by improving patient and caregiver safety while reducing healthcare costs. Hospira's portfolio includes generic acute-care and oncology injectables, as well as integrated infusion therapy and medication management products. Hospira's broad portfolio of products is used by hospitals and alternate site providers, such as clinics, home healthcare providers and long-term care facilities.
Basis of Presentation
The consolidated financial statements, prepared in conformity with United States ("U.S.") generally accepted accounting principles ("GAAP"), include the accounts of Hospira and all of its controlled majority-owned subsidiaries. All intercompany balances and transactions have been eliminated.
Use of Estimates
The financial statements include amounts based on estimates and assumptions by management. Actual results could differ from those amounts. Significant estimates include, but are not limited to, provisions for chargebacks, rebates, and returns, inventories, stock-based compensation, impairment of long-lived assets, income taxes, pension and other post-retirement benefit liabilities and loss contingencies.
Revenue Recognition
Hospira recognizes revenues from product sales when persuasive evidence of an arrangement exists, delivery has occurred (or services have been rendered), the price is fixed or determinable and collectability is reasonably assured. For other than certain drug delivery pumps and contract manufacturing, product revenue is recognized when products are delivered to customers and title passes. Contract manufacturing involves filling customers' active pharmaceutical ingredients ("API") into delivery systems. Under these arrangements, customers' API is often consigned to Hospira and revenue is recorded for the materials and labor provided by Hospira, plus a profit, primarily upon shipment to the customer. Upon recognizing revenue from a sale, Hospira records an estimate for certain items that reduce gross sales in arriving at its reported net sales for each period. These items include chargebacks, rebates and other items (such as cash discounts and returns). Provisions for chargebacks and rebates represent the most significant and complex of these estimates.
Arrangements with Multiple Deliverables
—In certain circumstances, Hospira enters into arrangements in which it commits to provide multiple elements (deliverables) to its customers. Hospira accounts for sales of drug delivery pumps ("pumps") and server-based suite of software applications ("software"), inclusive of certain software related services, under multi-element arrangements, depending on the functionality of the software associated with the pump, as one or two units of accounting.
Hospira allocates revenue to arrangements with multiple deliverables based on their relative selling prices. In such circumstances, Hospira applies a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence ("VSOE") of fair value, (ii) third-party evidence of selling price ("TPE"), and (iii) best estimate of the selling price ("ESP"). VSOE generally exists only when Hospira sells the deliverable separately and is the price actually charged by Hospira for that deliverable. Where VSOE and TPE are not available, Hospira's process for determining ESP includes multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered in developing the ESP for pumps, software and software related services include prices charged by Hospira for similar offerings, historical pricing practices, the market and nature of the deliverable and the relative ESP of certain deliverables compared to the total selling price of the arrangement.
For certain arrangements where the software is not essential to the functionality of the pump, Hospira has identified three primary deliverables. The first deliverable is the pump which is recognized as delivered, the second deliverable is the related sale of disposable products ("sets") which are recognized as the products are delivered and the third deliverable is the software and software related services. Revenue recognition for the third deliverable is further described below in the Software section of
this Note 1. The allocation of revenue for the first and second deliverable is based on VSOE and for the third deliverable is based on Hospira's ESP.
For other arrangements where the software is essential to the functionality of the pump, Hospira has also identified three primary deliverables. The first deliverable is the pump and software essential to the functionality of the pump which is delivered and recognized at the time of installation. The second deliverable is the related sale of sets which are recognized as the products are delivered and the third deliverable is software related services. Revenue recognition for the third deliverable is further described below in the Software section of this Note 1. The allocation of revenue for the first and third deliverable is based on Hospira's ESP. The allocation of revenue for the second deliverable is based on VSOE.
Software
—Hospira recognizes revenue for the server-based suite of software applications not essential to the functionality of a pump and related maintenance and implementation services in accordance with software specific accounting guidance. Software revenue for multiple-element revenue arrangements is allocated based on the relative fair value of each element, and fair value is generally determined by VSOE. If Hospira cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements, Hospira defers revenue until all elements are delivered and services have been performed. Perpetual software license revenue and implementation service revenue are generally recognized as obligations are completed. Software subscription license and software maintenance revenue is recognized ratably over the applicable contract period.
Chargebacks
—Hospira sells a significant portion of its specialty injectable pharmaceutical products through wholesalers, which maintain inventories of Hospira products and later sell those products to end customers. In connection with its sales and marketing efforts, Hospira negotiates prices with end customers for certain products under pricing agreements (including, for example, group purchasing organization contracts). Consistent with industry practice, the negotiated end customer prices are typically lower than the prices charged to the wholesalers. When an end customer purchases a Hospira product that is covered by a pricing agreement from a wholesaler, the end customer pays the wholesaler the price determined under the pricing agreement. The wholesaler is then entitled to charge Hospira back for the difference between the price the wholesaler paid Hospira and the contract price paid by the end customer (a "chargeback").
Hospira records the initial sale to a wholesaler at the price invoiced to the wholesaler and at the same time, records a provision equal to the estimated amount the wholesaler will later charge back to Hospira, reducing gross sales and trade receivables. This provision must be estimated because the actual end customer and applicable pricing terms may vary at the time of the sale to the wholesaler. Accordingly, the most significant estimates inherent in the initial chargeback provision relate to the volume of sales to the wholesalers that will be subject to chargeback and the ultimate end customer contract price. These estimates are based primarily on an analysis of Hospira's product sales and most recent historical average chargeback credits by product, estimated wholesaler inventory levels, current contract pricing, anticipated future contract pricing changes and claims processing lag time. Hospira estimates the levels of inventory at the wholesalers through analysis of wholesaler purchases and inventory data obtained directly from certain wholesalers. Hospira regularly monitors the provision for chargebacks and makes adjustments when it believes the actual chargebacks may differ from earlier estimates. The methodology used to estimate and provide for chargebacks was consistent across all periods presented.
Hospira's total chargeback accrual for all products was
$182.2 million
and
$148.2 million
at
December 31, 2012
and
2011
, respectively, and included in Trade receivables in the consolidated balance sheets. Settlement of chargebacks generally occurs between
25
and
37
days after the sale to wholesalers. A one percent decrease in end customer contract prices for sales pending chargeback at
December 31, 2012
, would decrease net sales and income before income taxes by approximately
$1.7 million
. A one percent increase in units sold subject to chargebacks held by wholesalers at
December 31, 2012
, would decrease net sales and income before income taxes by approximately
$1.5 million
, compared to what sales would have been if the units sold were not subject to chargebacks.
Rebates
—Hospira offers rebates to direct customers, customers who purchase from certain wholesalers at end customer contract prices and government agencies, which administer various programs such as Medicaid. Direct rebates are generally rebates paid to direct purchasing customers based on a contracted discount applied to the direct customer's purchases. Indirect rebates are rebates paid to "indirect customers" that have purchased Hospira products from a wholesaler under a pricing agreement with Hospira. Governmental agency rebates are amounts owed based on legal requirements with public sector benefit providers (such as Medicaid), after the final dispensing of the product by a pharmacy to a benefit plan participant. Rebate amounts are usually based upon the volume of purchases. Hospira estimates the amount of the rebate due at the time of sale, and records the liability as a reduction of gross sales at the same time the product sale is recorded. Settlement of the rebate generally occurs from
1
to
15
months after sale.
In determining provisions for rebates to direct customers, Hospira considers the volume of eligible purchases by these customers and the rebate terms. In determining rebates on sales through wholesalers, Hospira considers the volume of eligible contract purchases, the rebate terms and the estimated level of inventory at the wholesalers that would be subject to a rebate, which is estimated as described above under "Chargebacks." Upon receipt of a chargeback, due to the availability of product and customer specific information, Hospira can then establish a specific provision for fees or rebates based on the specific terms of each agreement. Rebates under governmental programs are based on the estimated volume of products sold subject to these programs. Each period the estimates are reviewed and revised, if necessary, in conjunction with a review of contract volumes within the period.
Hospira regularly analyzes the historical rebate trends and makes adjustments to recorded accruals for changes in trends and terms of rebate programs. At
December 31, 2012
and
2011
, accrued rebates of
$143.4 million
and
$129.5 million
, respectively, are included in Other accrued liabilities on the consolidated balance sheets. The methodology used to estimate and provide for rebates was consistent across all periods presented.
Returns
—Provisions for returns are provided for at the time the related net sales are recognized, and are reflected as a reduction of sales. The estimate of the provision for returns is primarily based on historical experience of actual returns. Additionally, Hospira considers other factors such as levels of inventory in the distribution channel, product dating and expiration period, whether products have been discontinued, and entrance in the market of additional competition. This estimate is reviewed periodically and, if necessary, revised, with any revisions recognized immediately as adjustments to net sales. Accrued returns were
$28.8 million
and
$32.2 million
as of
December 31, 2012
and
2011
, respectively, and included in Other accrued liabilities and Post-retirement obligations and other long-term liabilities on the consolidated balance sheets.
Warranties
Hospira offers warranties on certain medication management products and generally determines the warranty liability by applying historical claims rate experience and the cost to replace or repair products under warranty. Product warranty accruals were not material at
December 31, 2012
and
2011
.
Product Recalls and Other Related Accruals
Hospira accrues for costs of product recalls, corrective or preventative 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 or preventive action and the amount of loss can be reasonably estimated. Product recall, life-cycle management programs, and corrective or preventive action costs, recognized in Cost of products sold, include materials, development costs to address identified issues, deployment costs such as labor, freight, and non-conforming product disposal, and customer accommodations. Cost estimates consider factors such as historical experience, product quantity, product type (device hardware or software, pharmaceutical product), location of product subject to recall, age of device and duration of activities, among other factors. Accruals for various product recalls, life-cycle management, corrective or preventive actions, and other related costs were
$110.7 million
and
$73.1 million
as of
December 31, 2012
and
December 31, 2011
respectively, and the current and long-term portions are reported in Other accrued liabilities and Post-retirement obligations and other long-term liabilities on the consolidated balance sheets.
Concentration of Risk
Financial instruments that are subject to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and trade receivables. Hospira holds cash and cash equivalents and marketable securities with a diversified group of major financial institutions to limit the amount of credit exposure to non-performance by any one institution.
Hospira provides credit to its customers in the normal course of business and does not require collateral. In estimating the allowance for doubtful accounts, management considers historical collections, the past-due status of receivables and economic conditions. Hospira conducts business with certain government supported customers or distributors, including those in Italy, Spain, Portugal and Greece, among other European countries, where deteriorating credit and economic conditions continue to present significant challenges. While the European economic downturn has not significantly impacted Hospira's ability to collect these receivables, such conditions have resulted, and may continue to result, in delays in the collection of receivables. Hospira continually evaluates these receivables, particularly in Italy, Spain, Portugal and Greece and other parts of Europe for potential risks associated with sovereign credit ratings and governmental healthcare funding and reimbursement practices. In addition, Hospira monitors economic conditions and other fiscal developments in these countries. As of
December 31, 2012
, Hospira's trade receivables in Italy, Spain, Portugal and Greece totaled $
101.2 million
(gross) and $
97.1 million
(net of
allowances). Of these net trade receivables, $
48.9 million
and $
37.5 million
related to customers in Italy and Spain, respectively. As of
December 31, 2012
,
95.0%
of the Italy and
92.4%
of the Spain net receivables were from public hospitals primarily funded by the government.
In
2012
,
2011
and
2010
, no end use customer accounted for more than
10%
of net sales. For
2012
and
2011
, the combined largest
four
wholesalers and distributors accounted for approximately
44%
and
45%
, respectively, of net trade receivables. Net sales through the same four wholesalers and distributors noted above accounted for approximately
41%
,
41%
and
40%
of net sales in
2012
,
2011
and
2010
, respectively. Net sales related to group purchasing organizations contracts amounted to
$1.8 billion
in
2012
,
$1.9 billion
in
2011
and
$1.7 billion
in
2010
.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method, assets acquired, including in-process research and development ("IPR&D") projects, and liabilities assumed, are recorded at their respective fair values as of the acquisition date in our consolidated financial statements. The excess of consideration transferred to the seller over the fair value of the net assets acquired is recorded as goodwill. Acquisition costs, such as legal costs, audit fees and business valuation costs, are expensed as incurred.
Loss Contingencies
Hospira accrues for loss contingencies when a loss is considered probable and the amount can be reasonably estimated. If a reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, the minimum loss contingency amount in the range is accrued. These estimates are often initially developed substantially earlier than the ultimate loss is known, and the estimates are refined each accounting period, as additional information becomes known.
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 general, the consolidated statements of income (loss) presentation for these collaborations are as follows:
|
|
|
|
Nature / Type of Collaboration
|
|
Consolidated Statement of
Income (Loss) Presentation
|
Third party sale of product
|
|
Net sales
|
Royalties / milestones paid to collaborative partner (post-regulatory approval)
(1)
|
|
Cost of products sold
|
Upfront payments and milestones paid to collaborative partner (pre-regulatory approval)
|
|
Research and development
|
Refundable upfront payments paid to collaborative partner (pre-regulatory approval)
(2)
|
|
Research and development or Cost of products sold
|
Research and development payments to collaborative partner
|
|
Research and development
|
_______________________________________________________________________________
|
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(1)
|
Milestone payments are capitalized as intangible assets and amortized to Cost of products sold over the estimated useful life.
|
|
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(2)
|
Refundable payments for which the contingency is resolved prior to regulatory approval are expensed to Research and development as the contingency becomes probable of being resolved. For refundable payments for which the contingency is regulatory approval, payments are capitalized as intangible assets and amortized to Cost of products sold over the useful life upon receiving regulatory approval.
|
Each arrangement tends to be unique in nature. Hospira's most significant collaborative arrangements are discussed in Note 4.
Research and Development Costs
Internal research and development costs are expensed as incurred. Clinical trial costs incurred by third parties are expensed as the contracted work is performed. Services provided to third parties for research and development is recorded upon completion of all obligations under the contract in Research and development for products in development. Revenue from third-party research and development is not significant.
Income Taxes
Hospira's provision for income taxes is based on taxable (loss) income at statutory tax rates in effect in the various jurisdictions in which Hospira operates. Significant judgment is required in determining the provision for income taxes and in evaluating tax positions that are subject to audits and adjustments. Liabilities for unrecognized tax benefits are established when, despite Hospira's belief that the tax return positions are fully supportable, certain positions are likely to be challenged based on the applicable tax authority's determination of the positions. Such liabilities are based on management's judgment, utilizing internal and external tax advisors and represent management's best estimate as to the likely outcome of tax audits. The provision for income taxes includes the impact of changes to unrecognized tax benefits. Each quarter, Hospira reviews the anticipated mix of income derived from the various taxing jurisdictions and its associated liabilities. Hospira considers prescribed recognition thresholds and measurement attributes for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Deferred income taxes are provided for the tax effect of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements at the enacted statutory rate expected to be in effect when the taxes are paid. Provision for income taxes and foreign withholding taxes are not provided for undistributed earnings of certain foreign subsidiaries when Hospira intends to reinvest these earnings indefinitely to fund foreign investments or meet working capital and plant and equipment acquisition needs.
Cash and Cash Equivalents
Hospira considers cash in banks and highly liquid investments with an original maturity of three months or less to be cash and cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or market. Inventory cost includes material and conversion costs. Hospira monitors inventories for exposures related to obsolescence, excess and date expiration, non-conformance, product recalls and loss and damage, and recognizes a charge to Cost of products sold for the amount required to reduce the carrying value of inventory to estimated net realizable value. If conditions are less favorable than estimated, additional charges may be required. See Note 8 for more details.
Unapproved Products
Hospira capitalizes costs associated with certain products prior to regulatory approval and launch. Hospira capitalizes product costs, material and conversion costs, in preparation for product launches prior to regulatory approval when the products are considered to have a high probability of regulatory approval, but no earlier than a formal drug approval submission with the applicable regulatory authority. Hospira monitors the status of unapproved products on a regular basis and, in making the determination to capitalize the costs, considers the normal regulatory approval process, specific regulatory risks or other contingencies, such as legal risks or hurdles, or if there are any specific issues identified during the process relating to the safety, efficacy, manufacturing, marketing or labeling of the product. To meet the initial product launch requirements, Hospira capitalizes product costs based on anticipated future sales and product expiry dates, which support the net realizable value. If there is a delay in commercialization or regulatory approval is no longer considered highly probable, the capitalized product costs are evaluated and Hospira recognizes a charge to Cost of products sold for the amount required to reduce the carrying value to estimated net realizable value. Unapproved products were
$9.1 million
and
$12.4 million
as of
December 31, 2012
and
2011
, respectively, and are included in Prepaid expenses in the consolidated balance sheets. Unapproved product reserves were
$6.7 million
and
$3.9 million
as of
December 31, 2012
and
2011
, respectively.
Capitalized Interest
Hospira capitalizes interest incurred associated with projects under construction for the duration of the asset construction period. Hospira capitalized interest of
$18.8 million
,
$12.4 million
and
$8.4 million
in
2012
,
2011
and
2010
, respectively.
Capitalized Software Costs
Costs incurred during the application development stage of software projects that are developed or obtained for internal use are capitalized. At
December 31, 2012
and
2011
, capitalized software costs, net of depreciation, totaled
$98.6 million
and
$84.8 million
, respectively. Such capitalized amounts will be depreciated ratably over the expected useful lives of the projects when they become operational, not to exceed
10
years. Depreciation was
$19.3 million
,
$11.1 million
and
$14.5 million
for the years ended
2012
,
2011
and
2010
, respectively, and is included in Depreciation in the consolidated statements of cash flows.
Costs incurred during the application development stage for software held for sale are capitalized once a project has reached the point of technological feasibility. Completed projects are amortized after reaching the point of general availability using the straight-line method based on an estimated useful life. Hospira monitors the net realizable value of capitalized software held for sale to ensure that the investment will be recovered through future sales.
Investments
Investments in companies in which Hospira has significant influence, but less than a majority owned controlling interest, are accounted for using the equity method. Significant influence is generally deemed to exist if Hospira has an ownership interest in the voting stock of the investee of between
20%
and
50%
, although other factors, such as representations on the investee's Board of Directors, are considered in determining whether the equity method of accounting is appropriate.
Investments in companies in which Hospira does not have a controlling interest or is unable to exert significant influence are either classified as available-for-sale and reported at fair value if the investments have readily determinable fair values or accounted for using the cost method if ownership is not more than
20%
and it is not practicable to estimate the fair value of the investment. Unrealized gains and losses on available-for-sale investments accounted for at market value are reported, net-of-tax, in accumulated other comprehensive (loss) income until the investment is sold or considered other-than-temporarily impaired, at which time the realized gain or loss is charged to Other expense (income), net.
Property and Equipment, Net
Property and equipment are stated at cost and depreciation is provided on a straight-line basis over the estimated useful lives or lease term of the assets. Instruments placed with customers are drug delivery systems placed with or leased to customers under operating leases. See Note 10 for more details.
Goodwill and Intangible Assets, Net
Goodwill represents the excess of the purchase price of an acquired business over the amounts assigned to assets and liabilities assumed in the business combination. Goodwill is not amortized. Acquired IPR&D is accounted for as an indefinite-lived intangible asset until completion, regulatory approval or discontinuation. Upon successful completion or regulatory approval of each project, Hospira will make a determination as to the useful life of the intangible asset and begin amortization. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives of
1
to
16
years.
Impairment of Long-Lived Assets and Other Assets
Property and Equipment and Intangible Assets, Net
—The carrying value of long-lived assets, including amortizable intangible assets and property and equipment, are reviewed whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment of assets with definite-lives is generally determined by comparing projected undiscounted cash flows to be generated by the asset, or appropriate grouping of assets, to its carrying value. Indefinite-lived intangible assets are tested for impairment at least annually, or more frequently if an event occurs or circumstances change that would reduce the fair value below its carrying value. If an impairment is identified, a loss is recorded equal to the excess of the asset's net book value over its fair value, and the cost basis is adjusted. Determining the extent of an impairment, if any, typically requires various estimates and assumptions including using management's judgment, cash flows directly attributable to the asset, the useful life of the asset and residual value, if any. When necessary, Hospira uses internal cash flow estimates, quoted market prices and appraisals as appropriate to determine fair value. Actual results could vary from these estimates. In addition, the remaining useful life of the impaired asset is revised, if necessary.
Goodwill
—Goodwill is evaluated for impairment at least annually, using either a qualitative assessment, if elected, or a quantitative test. Goodwill can be tested 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 currently are as follows: (i) U.S.; (ii) Canada; (iii) Latin America (collectively the "Americas" segment); (iv) Europe, Middle East and Africa ("EMEA"); and (v) Asia Pacific ("APAC"). The qualitative assessment allows Hospira to first assess qualitative factors to determine whether it is more likely
than not that the reporting unit's fair value is less than its carrying amount. Hospira elected to bypass the qualitative assessment and performed the quantitative impairment tests for 2012. The quantitative goodwill impairment test ("Step-one") 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 ("DCF") estimates and market value comparisons to determine estimated fair value. If the Step-one test indicates that impairment potentially exists, a second quantitative step ("Step-two") is performed to measure the amount of goodwill impairment, if any. Goodwill impairment exists in Step-two when the implied fair value of goodwill is less than the carrying value of goodwill. The implied fair value of goodwill is determined based on the difference between the fair value of the reporting unit determined in Step-one and the fair value allocated to the identifiable assets, including unrecognized intangible assets, and liabilities of the reporting unit.
Historically, Hospira's policy was to perform the annual impairment test for goodwill at September 30 of each year. Hospira completed its 2012 annual impairment test in the third quarter of 2012 in accordance with this policy, electing to bypass the qualitative only assessment. During the fourth quarter of 2012, Hospira changed the date of its annual goodwill impairment test to October 31 to better align with the timing of its annual and long-term planning process, which is a significant element in the testing process. Accordingly, Hospira believes this change in accounting principle is preferable. The change did not delay, accelerate, or avoid an impairment charge. This change in the annual goodwill impairment testing date was applied prospectively beginning on October 31, 2012 and had no effect on the consolidated financial statements. This change was not applied retrospectively as it is impracticable to do so because retrospective application would have required the application of significant estimates and assumptions without the use of hindsight.
The goodwill impairment testing process involves the use of significant assumptions, estimates and judgments, and is subject to inherent uncertainties and subjectivity in performing the qualitative assessment, if elected, and in determination of the fair value of the reporting units in Step-one, and, if necessary in Step-two, the allocation of the fair value to identifiable assets and liabilities. Estimating a reporting unit's projected cash flows involves the use of significant assumptions, estimates and judgments with respect to numerous factors, including long-term rate of revenue growth, operating margin, including research and development, selling, general and administrative expense rates, capital expenditures, allocation of shared or corporate items, among other factors. These estimates are based on internal current operating plans and long-term forecasts for each reporting unit. These projected cash flow estimates are then discounted, which necessitates the selection of an appropriate discount rate. The discount rates selected reflect market-based estimates of the risks associated with the projected cash flows of the reporting unit. The market value comparisons of fair value require selection of appropriate peer group companies. In addition, Hospira analyzes differences between the sum of the fair value of the reporting units and Hospira's total market capitalization for reasonableness, taking into account certain factors including control premiums. In Step-two, the fair value allocation requires several analyses to determine fair value of assets and liabilities including, among others trade names, customer relationships, inventory, intangible assets (both recognized and unrecognized), and property, plant and equipment.
The use of different assumptions, estimates or judgments in the goodwill impairment testing process may significantly increase or decrease the estimated fair value of a reporting unit or the implied fair value of goodwill, or both. Generally, changes in DCF estimates would have a similar effect on the estimated fair value of the reporting unit. That is, a one percent decrease in estimated DCF's would decrease the estimated fair value of the reporting unit by approximately one percent. Hospira believes that its estimates of DCF's and allocations of fair value to assets and liabilities and the above underlying assumptions used are reasonable, but future changes in the underlying assumptions could differ due to the inherent judgment in making such estimates.
Goodwill impairment charges may be recognized in future periods to the extent changes in factors or circumstances occur, including deterioration in the macro-economic environment or in the equity markets, including the market value of our common shares, deterioration in our performance or our future projections, or changes in Hospira's plans for one or more reporting units.
Investments
—Hospira regularly reviews its investments to determine whether an impairment or other-than-temporary decline in market value exists. Hospira considers factors affecting the investee, factors affecting the industry the investee operates in and general equity market trends. Hospira considers the length of time an investment's market value has been below carrying value and the prospects for recovery to carrying value. When Hospira determines that an impairment or other-than-temporary decline has occurred, the carrying basis of the investment is written down to fair value and the amount of the write-down is included in Other (income) expense, net.
Supplier Advances
Hospira periodically makes supplier advances to achieve timely procurement of products or product components. Supplier advances are in some cases long-term, refundable under certain conditions, either interest bearing or interest free, primarily unsecured and subject to credit risk. The current and long-term portions of supplier advances are included in Prepaid expenses
and Other assets, in the consolidated balance sheets, respectively. Total supplier advances were
$92.9 million
and
$63.6 million
as of
December 31, 2012
and
December 31, 2011
, respectively.
In
2012
and
2011
, Hospira advanced
$10.0 million
and
$50.0 million
, respectively to a supplier for the expected purchase of certain biosimilar products. Additional supplier advances in aggregate of
$40.0 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.
In 2012, Hospira has and may continue to make advances to a supplier for certain API products, some of which may be settled upon the close of the pending acquisition transaction described in Note 2 or settled upon receipt of API products. The outstanding advances to this supplier were
$35.3 million
as of December 31, 2012.
Pension and Post-Retirement Benefits
Hospira develops assumptions, the most significant of which are the discount rate, the expected rate of return on plan assets and the healthcare cost trend rate. For these assumptions, management consults with actuaries, monitors plan provisions and demographics and reviews public market data and general economic information. These assumptions involve inherent uncertainties based on market conditions generally outside of Hospira's control.
The U.S. discount rate estimates were developed with the assistance of actuarially developed yield curves. For non-U.S. plans, benchmark yield data for high-quality fixed income investments for which the timing and amounts of payments match the timing and amounts of projected benefit payments is used to derive discount rate assumptions.
The expected return on assets for the pension plans represent the average rate of return to be earned on plan assets over the period the benefits are expected to be paid. The expected return on assets is developed from the expected future return of each asset class, weighted by the expected allocation of pension assets to that asset class. Hospira considers historical performance for the types of assets in which the plans invest, independent market forecasts and economic and capital market conditions.
Stock-Based Compensation
Stock-based compensation transactions are recognized as compensation cost over the vesting period based on the fair value of the instrument on the date of grant. Hospira uses the Black-Scholes option valuation model and the Monte Carlo simulation model to determine the fair value of stock options and performance share awards, respectively. The fair value models include various assumptions, including the expected volatility, expected life of the awards, and forfeiture rates. These assumptions involve inherent uncertainties based on market conditions generally outside of Hospira's control. As a result, if other assumptions had been used, stock-based compensation expense, as calculated could have been materially impacted. Furthermore, if Hospira uses different assumptions for future stock-based compensation transactions, stock-based compensation expense could be materially impacted in future periods.
Translation Adjustments
For foreign operations in highly inflationary economies, if any, translation gains and losses are included in Other expense (income), net. For remaining foreign operations, translation adjustments are included as a component of Accumulated other comprehensive income (loss).
Recently Issued Accounting Standards
In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-11, “Disclosures About Offsetting Assets and Liabilities” (“ASU 2011-11”). The amendments in ASU 2011-11 require disclosures about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on an entity’s financial position. The amendments affect financial instruments and derivative instruments that are either (i) offset in accordance with current literature or (ii) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. ASU 2011-11 is effective for fiscal years and interim periods within those years, beginning on or after January 1, 2013. Retrospective application is required for all comparative periods presented. Hospira is currently evaluating the impact of ASU 2011-11 on its consolidated financial statements and related disclosures.
Adoption of New Accounting Standards
In July 2012, the FASB issued ASU 2012-02, "Intangibles — Goodwill and Other" ("ASU 2012-02"). ASU 2012-02 amends current guidance to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative indefinite-lived intangible asset impairment test. Under this amendment an entity would not be required to calculate the fair value of an indefinite-lived intangible asset 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 2012-02 applies to all companies that have indefinite-lived intangible assets reported in their financial statements. The provisions of ASU 2012-02 are effective for reporting periods beginning after September 15, 2012 with early adoption permitted. Hospira adopted ASU 2012-02 in the third quarter of 2012. There was no material impact to Hospira's consolidated financial position, results of operations or cash flows upon adoption of this guidance.
Note 2 — Business Acquisitions
Orchid (Penem and Penicillin Active Pharmaceutical Ingredient Business)
On
August 29, 2012
, Hospira, through its wholly-owned subsidiary, Hospira Healthcare India Private Limited, ("Hospira India") entered into a definitive agreement (the “Agreement”) with Orchid Chemicals & Pharmaceuticals Ltd. ("Orchid") to acquire from Orchid its penem and penicillin API business for $
202.5 million
in cash. As part of the Agreement, Hospira re-characterized $
15.0 million
of previous inventory supply advances as an advance payment of the purchase price to be settled at closing. The pending acquisition includes an FDA-approved manufacturing facility located in Aurangabad, India, and a research and development facility based in Chennai, India, along with the related assets and employees associated with those operations. Orchid is a current supplier of APIs to Hospira and will continue to supply cephalosporin APIs following the pending closing. During 2012, Hospira incurred
$1.0 million
of acquisition and integration related costs, reported in Selling, general and administrative, and expects to incur additional costs in 2013.
The Agreement contains customary covenants by Hospira India and Orchid. The transaction is subject to customary closing conditions and regulatory approvals and it is possible that the Agreement may be further modified by Hospira India and Orchid prior to closing to reflect additional negotiations and regulatory considerations. Hospira expects to close the transaction during the first half of 2013, but can give no assurance that the transaction will be consummated during that time period, or at all.
Javelin Pharma
In July 2010, Hospira completed the acquisition of Javelin Pharmaceuticals, Inc. ("Javelin Pharma") for a purchase price of
$161.9 million
, which included Javelin Pharma's main product candidate, Dyloject
™
, a post-operative pain management drug currently awaiting FDA approval. Acquisition and integration related charges of
$7.9 million
were recognized during 2010, the majority of which are in Selling, general and administrative ("SG&A"). The impact of this acquisition was not material to Hospira's results of operations in 2010, exclusive of the acquisition and integration related charges.
During 2011, Hospira adjusted the preliminary fair values of the assets acquired and liabilities assumed 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 IPR&D of
$114.2 million
and a decrease to intangible assets of
$2.3 million
.
The following table summarizes the final fair values of the assets acquired and liabilities assumed:
|
|
|
|
|
(dollars in millions)
|
|
Intangible assets
|
$
|
4.5
|
|
IPR&D
|
7.3
|
|
Goodwill
|
97.8
|
|
Deferred income taxes, net
|
57.1
|
|
Other liabilities, net
|
(4.8
|
)
|
Net assets acquired
|
$
|
161.9
|
|
The majority of the net assets acquired were assigned to the U.S., Canada, and Latin America 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 was not deductible for tax purposes.
Orchid (Generic Injectable Pharmaceutical Business)
In March 2010, Hospira completed its acquisition of the generic injectable pharmaceutical business of Orchid for
$381.0 million
which was purchased by Hospira India. The acquisition included a beta-lactam antibiotic formulations manufacturing complex and pharmaceutical research and development facility, as well as a generic injectable dosage-form product portfolio and pipeline. Acquisition and integration related charges of
$12.3 million
were recognized during 2010, the majority of which are in SG&A. The impact of this acquisition was not material to Hospira's results of operations in 2010, exclusive of the acquisition and integration related charges.
The following table summarizes the fair values of the assets acquired and liabilities assumed:
|
|
|
|
|
(dollars in millions)
|
|
Current assets, net
|
$
|
13.3
|
|
Property and equipment
|
88.0
|
|
Intangible assets
|
88.1
|
|
IPR&D
|
13.3
|
|
Goodwill
|
171.1
|
|
Deferred income taxes, net
|
7.2
|
|
Net assets acquired
|
$
|
381.0
|
|
The
$88.1 million
of acquired intangible assets includes
$83.4 million
of developed product rights and
$4.7 million
of customer relationships that will be amortized over their estimated useful lives (
5
to
9
years, weighted average
8
years). The amount allocated to IPR&D is being accounted for as an indefinite-lived intangible asset until completion, regulatory approval or discontinuation. Upon successful completion or regulatory approval of each project, Hospira will make a determination as to the useful life of the intangible asset and begin amortization. Of the
$171.1 million
of goodwill,
$121.5 million
was assigned to the Americas reporting unit,
$18.4 million
was assigned to the EMEA reporting unit, and
$31.2 million
was assigned to the APAC reporting unit. Goodwill recorded as part of the acquisition includes the expected synergies and other benefits that Hospira believes will result from the combined operations. Goodwill was not expected to be deductible for tax purposes.
Note 3 — Restructuring Actions and Asset Impairments
Hospira aims to achieve a culture of continuous improvement that will enhance its efficiency, effectiveness and competitiveness to improve its cost base. 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 termination costs and gains or losses on disposal of assets.
Project Fuel
In March 2009, Hospira announced details of a restructuring and optimization plan (“Project Fuel”) that 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
.
The following tables summarize the Project Fuel restructuring costs reported in Restructuring, impairment and (gain) on disposition of assets, net and inventory charges reported in Cost of products sold for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs
|
(dollars in millions)
|
Aggregate
through completion
|
|
2012
|
|
2011
|
|
2010
|
Americas
|
$
|
29.1
|
|
|
$
|
—
|
|
|
$
|
1.7
|
|
|
$
|
4.7
|
|
EMEA
|
7.8
|
|
|
—
|
|
|
1.1
|
|
|
4.9
|
|
APAC
|
5.1
|
|
|
—
|
|
|
0.6
|
|
|
1.7
|
|
Total
|
$
|
42.0
|
|
|
$
|
—
|
|
|
$
|
3.4
|
|
|
$
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory charges
|
(dollars in millions)
|
Aggregate
through completion
|
|
2012
|
|
2011
|
|
2010
|
Americas
|
$
|
19.3
|
|
|
$
|
—
|
|
|
$
|
5.0
|
|
|
$
|
(4.4
|
)
|
EMEA
|
6.4
|
|
|
—
|
|
|
0.4
|
|
|
1.4
|
|
APAC
|
4.3
|
|
|
—
|
|
|
(0.3
|
)
|
|
4.6
|
|
Total
|
$
|
30.0
|
|
|
$
|
—
|
|
|
$
|
5.1
|
|
|
$
|
1.6
|
|
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
of which
$62.6 million
and
$6.7 million
were received in 2010 and 2011, respectively. Hospira recognized a gain of
$11.4 million
included in Restructuring, impairment and (gain) on disposition of assets, net in 2010.
Facilities Optimization
In June 2012, as part of its effort to streamline and modernize existing facilities, Hospira initiated plans to exit a specialty injectable drug packaging and inspection finishing operation at one facility and commence modernization of drug finishing operations, including installing additional automated visual inspection equipment, at other existing facilities. As a result, primarily in the Americas segment, Hospira incurred equipment and facility impairment charges of $
18.6 million
, which is reported in Restructuring, impairment, and (gain) on disposition of assets, net on the consolidated statements of income (loss) for the
year
ended
December 31, 2012
. Hospira may incur lease contract termination charges upon final exit from the operations of up to approximately $
5 million
in 2013.
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. During the years ended December 31, 2011 and 2010, Hospira incurred, in the Americas segment, restructuring costs of
$0.3 million
and $
7.1 million
, respectively. Hospira incurred aggregate restructuring charges related to these actions of
$27.8 million
in the Americas segment. In May 2012, Hospira sold the Morgan Hill, California facility for approximately
$5 million
.
Other Restructuring
In 2012, Hospira initiated plans to exit various non-strategic product lines. As a result, in the Americas segment, Hospira incurred equipment impairment charges of $
24.1 million
and contract termination charges of $
1.6 million
, which are reported in Restructuring, impairment and (gain) on disposition of assets, net. In addition, Hospira incurred other asset (inventory) charges of $
5.4 million
, which is reported in Cost of products sold. Additionally, in 2012, Hospira sold a non-strategic product line and recognized a $
1.9 million
gain upon disposition which was reported in Restructuring, impairment and (gain) on disposition of assets, net.
In addition to the programs discussed above, from time to time Hospira incurs costs to implement restructuring actions for specific operations. In 2012, Hospira incurred costs of
$6.9 million
, primarily in the APAC segment, to optimize the commercial organizational structure and exit device products in certain markets. The costs include primarily severance charges of
$3.8 million
and contract termination charges of
$3.1 million
. In 2011, Hospira incurred costs of
$7.8 million
to terminate distributor contracts in the Americas segment related to the restructuring of certain Latin America operations. For both actions, the charges are reported in Restructuring, impairment and (gain) on disposition of assets, net.
Restructuring Actions and Asset Impairment Activity
The following summarizes the aggregate restructuring and asset impairment activity for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Employee-Related
Benefit Costs
|
|
Accelerated
Depreciation
|
|
Impairment
Charges
|
|
Other
|
|
Total
|
Balance at January 1, 2010
|
$
|
23.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.4
|
|
|
$
|
27.4
|
|
Costs incurred
|
8.2
|
|
|
8.0
|
|
|
—
|
|
|
2.2
|
|
|
18.4
|
|
Payments
|
(21.7
|
)
|
|
—
|
|
|
—
|
|
|
(2.5
|
)
|
|
(24.2
|
)
|
Non cash items
|
(1.7
|
)
|
|
(8.0
|
)
|
|
—
|
|
|
(0.7
|
)
|
|
(10.4
|
)
|
Balance at December 31, 2010
|
7.8
|
|
|
—
|
|
|
—
|
|
|
3.4
|
|
|
11.2
|
|
Costs incurred
|
3.3
|
|
|
—
|
|
|
—
|
|
|
8.2
|
|
|
11.5
|
|
Payments
|
(9.7
|
)
|
|
—
|
|
|
—
|
|
|
(11.2
|
)
|
|
(20.9
|
)
|
Non cash items
|
(1.1
|
)
|
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
|
(1.5
|
)
|
Balance at December 31, 2011
|
0.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
Costs incurred
|
3.8
|
|
|
—
|
|
|
42.7
|
|
|
4.7
|
|
|
51.2
|
|
Payments
|
(0.6
|
)
|
|
—
|
|
|
—
|
|
|
(1.1
|
)
|
|
(1.7
|
)
|
Non cash items
|
—
|
|
|
—
|
|
|
(42.7
|
)
|
|
—
|
|
|
(42.7
|
)
|
Balance at December 31, 2012
|
$
|
3.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.6
|
|
|
$
|
7.1
|
|
Note 4 — Collaborative Arrangements
Hospira has numerous collaborative arrangements, none of which are in the aggregate or individually significant or exceed
5.0%
of annual Research and development costs, except for the following.
During 2010, Hospira and Kiadis Pharma B.V. ("Kiadis") entered into a collaborative agreement to develop, license, and commercialize Kiadis' ATIR
TM
drug candidate. In 2010, Hospira recorded a charge of $
21.3 million
in Research and development related to an initial payment and development milestone. Research and development costs recognized during
2011
were $
3.0 million
. No milestone payments were made during
2012
and
2011
. In January 2012, Hospira and Kiadis entered into an agreement that terminates Hospira's obligations with respect to ATIR
TM
going forward. The termination agreement contains provisions which allow Hospira to collect royalty payments should ATIR
TM
be commercialized in the future.
During 2010, Hospira and DURECT Corporation entered into a collaborative agreement to develop, license, and market DURECT's POSIDUR
TM
which was under Phase III development at the time Hospira entered into the agreement. In 2010, Hospira recorded a charge of
$27.5 million
in Research and development related to an initial payment and development milestone. During
2012
,
2011
and
2010
, Hospira recognized charges of
$1.9 million
,
$8.3 million
and
$3.4 million
in Research and development, respectively. In January 2012, DURECT announced the top-line results from a Phase III clinical study, which did not reach statistical significance. Subsequently in 2012, Hospira and DURECT entered into an agreement that terminates Hospira's rights and obligations with respect to POSIDUR
TM
going forward.
During 2009, Hospira and Ivax International GmbH ("Ivax") (formerly ChemGenex Pharmaceuticals Limited)
entered into a collaborative agreement to develop, license, and commercialize Ivax's oncology product candidate in EMEA. In 2009, Hospira recorded a charge of
$16.0 million
in Research and development related to an initial payment and development milestone charge. Costs recognized by Hospira during 2012, 2011 and 2010 were not material. In 2012, Hospira and Ivax entered into an agreement that terminates Hospira's rights and obligations with respect to Ivax's oncology product candidate going forward.
During 2006, Hospira and Bioceuticals Arzneimittel AG ("Bioceuticals") entered into a collaborative agreement to license and market Retacrit
TM
, a biosimilar version of erythropoietin, to be sold in certain countries in EMEA, the U.S. and Canada. In EMEA, Hospira is responsible for global sales and marketing, while Bioceuticals is responsible for development, regulatory approval, and manufacturing. For the U.S. and Canada, Hospira is responsible for development, regulatory approval, manufacturing, sales and marketing. In 2006, Hospira recorded a charge of
$20.6 million
, primarily related to an initial payment for EMEA development milestones. In 2007 and 2010, Hospira recognized product right intangible assets of $
16.8 million
and
$1.4 million
, respectively, upon reaching EMEA regulatory approval milestones. Hospira could be required to make future payments to Bioceuticals of up to
$18.7 million
upon reaching certain regulatory approval milestones in the U.S. and Canada. In addition, Hospira makes royalty payments in EMEA based upon commercial sales and will make royalty payments based on U.S. and Canada commercial sales upon regulatory approval. During the years ended
2012
,
2011
and
2010
,
Hospira recognized
$3.4 million
,
$3.7 million
and
$4.5 million
, respectively, for royalty expense and intangible asset amortization in Cost of products sold.
In January 2013, Hospira entered into a distribution and collaboration agreement with Q Core Medical, Ltd. ("Q Core") under which Hospira will market and distribute the Q Core Sapphire
TM
, a multi-therapy infusion system. The agreement also enables Hospira to collaborate with Q Core for distribution of the other products within Q Core's development pipeline.
Note 5 — Investments
Investments as of December 31, consist of the following:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2012
|
|
2011
|
Investments, at cost
|
$
|
3.1
|
|
|
$
|
11.4
|
|
Investments, at fair value
(1)
|
5.9
|
|
|
7.8
|
|
Investments, equity-method
(2)
|
62.8
|
|
|
29.5
|
|
|
$
|
71.8
|
|
|
$
|
48.7
|
|
_______________________________________________________________________________
|
|
(1)
|
As of December 31,
2012
and
2011
, Investments, at fair value (available-for-sale marketable equity securities) includes
$0.4 million
and
$0.9 million
, respectively, of unrealized gains, which are included in Accumulated other comprehensive (loss) income.
|
|
|
(2)
|
The majority of Hospira's equity-method investments consist of a
50%
ownership interest in a joint venture, Zydus Hospira Oncology Private Limited ("ZHOPL") with Cadila Healthcare Limited, a pharmaceutical company located in Ahmedabad, Gujarat State, India. ZHOPL began commercial manufacturing of injectable cytotoxic drugs in the first half of 2009 and manufactures docetaxel which Hospira launched in the U.S. and Australia in 2011. During the year ended December 31, 2011, distributions received from ZHOPL were
$40.0 million
. No distributions were received from ZHOPL during the years ended December 31, 2012 and 2010.
|
Combined financial information of unconsolidated equity method investments is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(dollars in millions)
|
2012
|
|
2011
|
Current assets
|
$
|
119.1
|
|
|
$
|
48.7
|
|
Noncurrent assets
|
17.4
|
|
|
16.6
|
|
Current liabilities
|
11.4
|
|
|
14.7
|
|
Noncurrent liabilities
|
0.1
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(dollars in millions)
|
2012
|
|
2011
|
|
2010
|
Revenue
(1)
|
$
|
140.5
|
|
|
$
|
160.7
|
|
|
$
|
56.7
|
|
Operating expenses
|
48.4
|
|
|
43.3
|
|
|
38.8
|
|
Operating income
|
92.1
|
|
|
117.4
|
|
|
17.9
|
|
Net Income
|
77.0
|
|
|
99.1
|
|
|
17.3
|
|
_______________________________________________________________________________
|
|
(1)
|
Revenue includes profit share earned by ZHOPL primarily related to docetaxel, which was launched by Hospira in 2011 in the U.S. and Australia.
|
In
2012
,
2011
and
2010
, Hospira recognized non-cash, impairment charges of
$8.4 million
,
$1.5 million
and
$8.8 million
, respectively, in Other expense (income), net to impair cost-method investments. The 2012 impairment was primarily due to an investment's capital call that indicated a decline in market value. The 2011 and 2010 impairments were primarily due to a decline in market value of certain investments based on management's assessment of future cash flows or earnings from the investments.
In 2012, Hospira assessed the decline in the market value of marketable equity securities to be other-than-temporary, primarily due to the duration and severity of the investment's decline in market value and the near-term prospects for recovery
to the original invested value. Accordingly, Hospira recognized a non-cash, impairment charge of
$1.7 million
in Other (income) expense, net. The changes in market value are reported, net-of-tax, in accumulated other comprehensive (loss) income until the investment is sold or considered other-than-temporarily impaired in periods subsequent to the 2012 impairment.
Note 6 — Fair Value Measures
The following table summarizes the basis used to measure certain assets and liabilities at fair value on a recurring basis in the consolidated balance sheets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date, Using:
|
|
|
|
|
Quoted Prices
in Active Markets for
Identical Items
|
|
Significant
Other
Observable
Inputs
|
|
|
|
|
December 31,
|
|
|
|
Significant
Unobservable
Inputs
|
Description (dollars in millions)
|
|
2012
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
Available-for-sale marketable equity securities
|
|
5.9
|
|
|
5.9
|
|
|
—
|
|
|
—
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
|
0.9
|
|
|
—
|
|
|
0.9
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date, Using:
|
|
|
|
|
Quoted Prices
in Active Markets for
Identical Items
|
|
Significant
Other
Observable
Inputs
|
|
|
|
|
December 31,
|
|
|
|
Significant
Unobservable
Inputs
|
Description (dollars in millions)
|
|
2011
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
|
$
|
5.4
|
|
|
$
|
—
|
|
|
$
|
5.4
|
|
|
$
|
—
|
|
Available-for-sale marketable equity securities
|
|
7.8
|
|
|
7.8
|
|
|
—
|
|
|
—
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
|
1.3
|
|
|
—
|
|
|
1.3
|
|
|
—
|
|
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.
The carrying values of certain financial instruments, primarily including 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
December 31, 2011
|
Description (dollars in millions)
|
|
Carrying
Value
|
|
Fair Value
|
|
Carrying
Value
|
|
Fair Value
|
Senior unsecured notes
|
|
$
|
1,700.0
|
|
|
$
|
1,865.7
|
|
|
$
|
1,700.0
|
|
|
$
|
1,767.3
|
|
Note 7 — Financial Instruments and Derivatives
Foreign Exchange Hedges
Hospira's operations are exposed to currency exchange-rate risk, which is mitigated by Hospira's use of foreign currency forward exchange contracts ("forward contracts"). The objective is to reduce volatility of earnings and cash flows associated with foreign currency exchange-rate changes. Currency exposures primarily in Euros, Australian dollars, Canadian dollars,
Indian Rupees and British pounds include foreign currency denominated assets and liabilities, commitments and anticipated foreign currency revenue and expenses, including inter-company payables, receivables and loans. These forward contracts are not designated as hedges, therefore, changes in the fair value are recognized in earnings in Other expense (income), net, during the term of the forward contract. The fair value changes of these forward contracts offset the foreign exchange currency changes of the underlying exposure that are also recognized in earnings. As of
December 31, 2012
, Hospira has forward contracts with
$744.6 million
notional value and
$147.5 million
net notional value primarily denominated in Euros, Australian dollars, Canadian dollars and British pounds that mature within
one
to
three
months.
Interest Rate Hedges
Hospira's operations are exposed to the impact of interest rate risk. Hospira's objective is to manage interest rate changes on cash flows and reduce volatility on earnings. Hospira utilizes a mix of debt maturities along with both fixed-rate and variable-rate debt to manage changes in interest rates.
Hospira may use interest rate swap contracts on certain borrowing transactions to manage its net exposure to interest rate changes and to reduce its overall cost of borrowing. For further details, see Note 18.
For these fair value hedges, changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed-rate debt due to changes in market interest rates. Interest rate swap contract gains and losses are included in Interest expense. During 2011, Hospira terminated all of its interest rate swap contracts. There was no ineffectiveness during the calendar year ended December 31, 2011.
The following table summarizes Hospira’s fair value of outstanding derivatives as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance
Sheet Presentation
|
|
|
|
|
(dollars in millions)
|
|
|
2012
|
|
2011
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
Foreign currency forward exchange contracts:
|
|
Other receivables
|
|
$
|
0.6
|
|
|
$
|
5.4
|
|
|
|
Other accrued liabilities
|
|
0.9
|
|
|
1.3
|
|
The impact on earnings for the years ended December 31, from derivatives activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Presentation of Loss (Gain)
Recognized on Derivatives
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
2012
|
|
2011
|
|
2010
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts
|
|
Other expense (income), net
|
|
$
|
(4.2
|
)
|
|
$
|
14.8
|
|
|
$
|
(15.3
|
)
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
Interest expense
|
|
—
|
|
|
(3.4
|
)
|
|
(4.1
|
)
|
Note 8 — Inventories, net
Inventories, net as of December 31, consist of the following:
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2012
|
|
2011
|
Finished products
|
|
$
|
445.6
|
|
|
$
|
478.2
|
|
Work in process
|
|
262.2
|
|
|
259.4
|
|
Materials
|
|
290.0
|
|
|
289.4
|
|
Total
|
|
$
|
997.8
|
|
|
$
|
1,027.0
|
|
Inventory reserves were $
126.8 million
and
$127.0 million
at
December 31, 2012
and
2011
, respectively.
Note 9 — Other Receivables
Other receivables as of December 31, consist of the following:
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2012
|
|
2011
|
Income tax
|
|
$
|
11.0
|
|
|
$
|
29.1
|
|
All other
|
|
64.3
|
|
|
56.9
|
|
Total
|
|
$
|
75.3
|
|
|
$
|
86.0
|
|
Note 10 — Property and Equipment, net
Property and equipment, net as of December 31, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Classification (dollars in millions)
|
2012
|
|
2011
|
|
Estimated Useful Life
|
Land
|
$
|
52.7
|
|
|
$
|
52.8
|
|
|
N/A
|
Buildings
|
547.4
|
|
|
538.2
|
|
|
10 to 50 years (weighted average 29 years)
|
Equipment
|
1,829.8
|
|
|
1,767.4
|
|
|
3 to 20 years (weighted average 8 years)
|
Construction in progress
|
394.9
|
|
|
257.1
|
|
|
N/A
|
Instruments placed with customers
|
242.7
|
|
|
226.5
|
|
|
3 to 7 years (weighted average 5 years)
|
Property and equipment, at cost
|
3,067.5
|
|
|
2,842.0
|
|
|
|
Less: accumulated depreciation
|
(1,622.4
|
)
|
|
(1,487.0
|
)
|
|
|
Property and equipment, net
|
$
|
1,445.1
|
|
|
$
|
1,355.0
|
|
|
|
Note 11 — Goodwill and Intangible Assets, net
The following summarizes goodwill and intangible assets, net activity:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Goodwill
|
|
Intangible
assets, net
|
Balance at January 1, 2011
|
$
|
1,500.8
|
|
|
$
|
480.3
|
|
Acquisitions
|
—
|
|
|
4.6
|
|
Amortization
|
—
|
|
|
(91.5
|
)
|
Impairments
|
(400.2
|
)
|
|
(25.9
|
)
|
Currency translation effect and other
|
(17.7
|
)
|
|
(11.7
|
)
|
Balance at December 31, 2011
|
1,082.9
|
|
|
355.8
|
|
Acquisitions
|
—
|
|
|
9.3
|
|
Amortization
|
—
|
|
|
(83.6
|
)
|
Impairments
|
—
|
|
|
(14.0
|
)
|
Currency translation effect and other
|
(3.8
|
)
|
|
(0.7
|
)
|
Balance at December 31, 2012
|
$
|
1,079.1
|
|
|
$
|
266.8
|
|
Accumulated impairment losses for goodwill were
$400.2 million
as of
December 31, 2012
and
December 31, 2011
. Accumulated impairment losses on goodwill were
$229.1 million
for the EMEA reporting unit and
$171.1 million
for the APAC reporting unit as of December 31,
2012
and
2011
, respectively.
2012 Activity
—Hospira completed its annual impairment test in the third quarter with no identified impairment charges. During the fourth quarter of 2012, Hospira changed the date of its annual goodwill impairment test to October 31, and performed an additional impairment test which also resulted in no identified impairment charges.
Intangible asset impairment charges of
$14.0 million
, primarily in the EMEA segment, included a charge of
$8.1 million
for a customer relationship intangible asset due to anticipated delayed launch dates for certain products,
$3.2 million
for a pain
management product right due to reduced projected royalties, and
$2.7 million
for an anti-infective product right due to increased competition and related pricing impact. These charges were based on internal discounted cash flow analysis and are included in Restructuring, impairment and (gain) on disposition of assets, net.
2011 Activity
—During the third quarter 2011, Hospira performed its annual goodwill impairment test and determined that 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, which required an increase in the discount rate to present value the estimated cash flows 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, and (ii) higher spending expected for strategic product portfolio expansion, in the near-term to mid-term with benefit to revenues and operating margin trailing the increased spending. Accordingly, Hospira recognized a goodwill impairment charge of
$151.2 million
for the EMEA reporting unit, as the implied fair value of goodwill, a non-recurring Level 3 fair value measurement, was less than its carrying value.
During the fourth quarter of 2011, based on a combination of factors, including continued declines in Hospira's common stock price and declines in projected revenue and operating margins in all reporting units, Hospira concluded that there were sufficient indicators to require an interim goodwill impairment test for the EMEA and APAC reporting units. Hospira performed the interim goodwill impairment test as of December 31, 2011, which indicated that the EMEA and APAC reporting units' estimated fair values were below their respective carrying value. Hospira recognized goodwill impairment charges of
$77.9 million
and
$171.1 million
for the EMEA and APAC reporting units, respectively, as the implied fair value of goodwill, a non-recurring Level 3 fair value measurement, was less than their respective carrying value.
Intangible asset impairments of
$25.9 million
, primarily in the Americas reporting segment, included a charge of
$8.7 million
for an oncology product right intangible asset due to competitive pricing pressure,
$13.1 million
related to IPR&D due to changes in various product launch dates, and life-cycle management spending plans and related impacts to commercialization and other intangible impairments of
$4.1 million
. These charges were based on internal discounted cash flow analysis, a non-recurring Level 3 fair value measurement, and are included in Restructuring, impairment and (gain) on disposition of assets, net.
2010 Activity
—In 2010, Hospira recorded an intangible asset impairment charge of
$12.7 million
related to an anti-infective product right, primarily in the EMEA reporting segment, due to increased competition. 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.
Additionally, intangible assets, net as of December 31, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
(dollars in millions)
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Product rights and other
|
$
|
624.2
|
|
|
$
|
622.5
|
|
|
$
|
(389.0
|
)
|
|
$
|
(310.8
|
)
|
|
$
|
235.2
|
|
|
$
|
311.7
|
|
Customer relationships
|
12.7
|
|
|
31.2
|
|
|
(6.8
|
)
|
|
(14.6
|
)
|
|
5.9
|
|
|
16.6
|
|
IPR&D
|
3.8
|
|
|
7.7
|
|
|
—
|
|
|
—
|
|
|
3.8
|
|
|
7.7
|
|
Technology
|
36.7
|
|
|
33.6
|
|
|
(14.8
|
)
|
|
(13.8
|
)
|
|
21.9
|
|
|
19.8
|
|
|
$
|
677.4
|
|
|
$
|
695.0
|
|
|
$
|
(410.6
|
)
|
|
$
|
(339.2
|
)
|
|
$
|
266.8
|
|
|
$
|
355.8
|
|
Intangible assets with definite lives 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
$83.6 million
,
$91.5 million
and
$81.6 million
in
2012
,
2011
and
2010
, respectively. Intangible asset amortization for each of the five succeeding fiscal years is estimated at
$78.8 million
for
2013
,
$66.7 million
for
2014
,
$47.3 million
for
2015
,
$26.2 million
for
2016
, and
$15.4 million
for
2017
.
Note 12 — Other Assets
Other assets as of December 31, consist of the following:
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2012
|
|
2011
|
Supplier advances
|
|
$
|
72.8
|
|
|
$
|
60.3
|
|
Net investment in sales-type leases, less current portion
|
|
27.9
|
|
|
15.7
|
|
All other
|
|
67.9
|
|
|
57.8
|
|
Total
|
|
$
|
168.6
|
|
|
$
|
133.8
|
|
Note 13 — Sales-Type Leases
The net investment in sales-type leases of certain medication management products as of December 31, consist of the following:
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2012
|
|
2011
|
Minimum lease payments receivables
|
|
$
|
44.1
|
|
|
$
|
26.5
|
|
Unearned interest income
|
|
(5.0
|
)
|
|
(3.0
|
)
|
Net investment in sales-type leases
|
|
39.1
|
|
|
23.5
|
|
Current portion
(1)
|
|
(11.2
|
)
|
|
(7.8
|
)
|
Net investment in sales-type leases, less current portion
(1)
|
|
$
|
27.9
|
|
|
$
|
15.7
|
|
|
|
(1)
|
The current and long-term portions are reported in Trade receivables and Other assets, respectively, in the consolidated balance sheets.
|
Future minimum amounts due under customer agreements accounted for as sales-type leases as of December 31, 2012 are as follows:
|
|
|
|
|
(dollars in millions)
|
Sales-Type
Leases
|
2013
|
$
|
13.5
|
|
2014
|
10.3
|
|
2015
|
9.0
|
|
2016
|
7.3
|
|
2017 and thereafter
|
4.0
|
|
|
$
|
44.1
|
|
Hospira monitors the credit quality of sales-type leases and recognizes an allowance for credit loss based on historical loss experience. As of
December 31, 2012
and
2011
, allowance for credit losses and amounts past due
90
days for sales-type leases were not material.
Note 14 — Other Accrued Liabilities
Other accrued liabilities as of December 31, consist of the following:
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2012
|
|
2011
|
Accrued rebates
|
|
$
|
143.4
|
|
|
$
|
129.5
|
|
Income taxes payable
|
|
54.3
|
|
|
10.6
|
|
Product recalls and other related accruals
|
|
56.6
|
|
|
58.6
|
|
Accrued returns
|
|
21.7
|
|
|
27.4
|
|
All other
|
|
304.3
|
|
|
230.8
|
|
Total
|
|
$
|
580.3
|
|
|
$
|
456.9
|
|
Note 15 — Post-Retirement Obligations and Other Long-term Liabilities
Post-retirement obligations and other long-term liabilities as of December 31, consist of the following:
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2012
|
|
2011
|
Accrued post-retirement medical and dental costs
|
|
$
|
51.3
|
|
|
$
|
53.7
|
|
Pension liabilities
|
|
80.3
|
|
|
93.2
|
|
Unrecognized tax benefits, including penalties and interest
|
|
62.0
|
|
|
67.5
|
|
Product recalls and other related accruals
|
|
54.1
|
|
|
14.5
|
|
Accrued returns
|
|
7.1
|
|
|
4.8
|
|
All other
|
|
51.7
|
|
|
42.0
|
|
Total
|
|
$
|
306.5
|
|
|
$
|
275.7
|
|
Note 16 — Product Recalls and Other Related Accruals
The following table summarizes product recalls and other related accrual activity:
|
|
|
|
|
(dollars in millions)
|
Product recalls
and other related
accruals
|
Balance at January 1, 2011
|
$
|
38.7
|
|
Provisions
|
41.0
|
|
Payments
|
(6.6
|
)
|
Balance at December 31, 2011
|
73.1
|
|
Provisions
|
86.3
|
|
Payments
|
(48.7
|
)
|
Balance at December 31, 2012
|
$
|
110.7
|
|
Note 17 — Pension and 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 Pension and Medical and Dental Benefit Cost
Net benefit cost recognized for the years ended December 31, for Hospira's pension and post-retirement medical and dental benefit plans consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Medical and Dental Plans
|
(dollars in millions)
|
2012
|
|
2011
|
|
2010
|
|
2012
|
|
2011
|
|
2010
|
Service cost for benefits earned during the year
|
$
|
1.2
|
|
|
$
|
1.2
|
|
|
$
|
1.0
|
|
|
$
|
0.2
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Interest cost on projected benefit obligations
|
24.1
|
|
|
25.7
|
|
|
26.2
|
|
|
2.3
|
|
|
2.7
|
|
|
3.2
|
|
Expected return on plans' assets
|
(32.3
|
)
|
|
(34.5
|
)
|
|
(29.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Net amortization
|
19.1
|
|
|
11.1
|
|
|
7.0
|
|
|
0.5
|
|
|
0.4
|
|
|
0.7
|
|
Net cost
|
$
|
12.1
|
|
|
$
|
3.5
|
|
|
$
|
4.5
|
|
|
$
|
3.0
|
|
|
$
|
3.2
|
|
|
$
|
4.0
|
|
Changes in Benefit Obligations and Plan Assets
Information about the changes in benefit obligations and plan assets for the years ended December 31, and the funded status as of December 31, for Hospira's U.S. and international plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Medical and
Dental Plans
|
(dollars in millions)
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Projected benefit obligations at beginning of year
|
$
|
580.8
|
|
|
$
|
494.0
|
|
|
$
|
57.3
|
|
|
$
|
53.5
|
|
Service cost
|
1.2
|
|
|
1.2
|
|
|
0.2
|
|
|
0.1
|
|
Interest cost
|
24.1
|
|
|
25.7
|
|
|
2.3
|
|
|
2.6
|
|
Losses (gains), primarily changes in discount rates and medical trend rates, plan design changes, and differences between actual and estimated health care costs
|
22.5
|
|
|
86.3
|
|
|
(1.8
|
)
|
|
4.3
|
|
Benefits paid
|
(27.7
|
)
|
|
(26.2
|
)
|
|
(3.1
|
)
|
|
(3.1
|
)
|
Other
(1)
|
(0.1
|
)
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(0.1
|
)
|
Projected benefit obligations at end of year
|
$
|
600.8
|
|
|
$
|
580.8
|
|
|
$
|
54.6
|
|
|
$
|
57.3
|
|
Plans' assets at fair value at beginning of year
|
$
|
486.4
|
|
|
$
|
458.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plans' assets
|
58.2
|
|
|
52.2
|
|
|
—
|
|
|
—
|
|
Company contributions
|
2.5
|
|
|
2.1
|
|
|
3.1
|
|
|
3.1
|
|
Benefits paid
|
(27.7
|
)
|
|
(26.2
|
)
|
|
(3.1
|
)
|
|
(3.1
|
)
|
Plans' assets at fair value at end of year
|
$
|
519.4
|
|
|
$
|
486.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded status
|
$
|
(81.4
|
)
|
|
$
|
(94.4
|
)
|
|
$
|
(54.6
|
)
|
|
$
|
(57.3
|
)
|
Amount recognized in the consolidated balance sheet:
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued benefit cost
|
(81.4
|
)
|
|
(94.4
|
)
|
|
(54.6
|
)
|
|
(57.3
|
)
|
Net accrued benefit cost
|
$
|
(81.4
|
)
|
|
$
|
(94.4
|
)
|
|
$
|
(54.6
|
)
|
|
$
|
(57.3
|
)
|
Recognized in accumulated other comprehensive (loss) income:
|
|
|
|
|
|
|
|
Net actuarial loss
|
$
|
200.5
|
|
|
$
|
223.2
|
|
|
$
|
11.6
|
|
|
$
|
13.9
|
|
Net prior service cost
|
—
|
|
|
—
|
|
|
(0.8
|
)
|
|
(0.3
|
)
|
Transitional asset
|
(0.1
|
)
|
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
Total recognized
|
$
|
200.4
|
|
|
$
|
223.0
|
|
|
$
|
10.8
|
|
|
$
|
13.6
|
|
____________________________
|
|
(1)
|
Includes foreign currency translation.
|
The estimated actuarial loss that will be amortized from Accumulated other comprehensive income (loss) into net periodic pension cost and medical and dental benefit cost during
2013
is
$19.1 million
and
$0.4 million
, respectively.
Other changes in plan assets and benefit obligations recognized in Other comprehensive income (loss) for the years ended December 31, for Hospira's pension and post-retirement medical and dental benefit plans, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Medical and Dental Plans
|
(dollars in millions)
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Net (gain) loss arising during the year
|
$
|
(3.4
|
)
|
|
$
|
68.7
|
|
|
$
|
(1.8
|
)
|
|
$
|
4.3
|
|
Prior service credit during the year
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
Net amortization
|
(19.3
|
)
|
|
(11.1
|
)
|
|
(0.6
|
)
|
|
(0.4
|
)
|
Exchange rate movement recognized during the year
|
0.1
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
Net (benefit) cost
|
$
|
(22.6
|
)
|
|
$
|
57.5
|
|
|
$
|
(2.8
|
)
|
|
$
|
3.9
|
|
Actuarial Assumptions
Actuarial weighted average assumptions for Hospira's plans used in determining pension and medical and dental plan information, using a measurement date of December 31,
2012
,
2011
and
2010
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
U.S.
Plans
|
|
Non-U.S.
Plans
|
|
U.S.
Plans
|
|
Non-U.S.
Plans
|
|
U.S.
Plans
|
|
Non-U.S.
Plans
|
Weighted average assumptions used to determine
benefit obligations at the measurement date:
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
4.0
|
%
|
|
5.3
|
%
|
|
4.2
|
%
|
|
6.0
|
%
|
|
5.3
|
%
|
|
6.3
|
%
|
Expected aggregate average long-term change in compensation
|
—
|
%
|
|
2.5
|
%
|
|
—
|
%
|
|
2.6
|
%
|
|
—
|
%
|
|
2.7
|
%
|
Weighted average assumptions used to determine
net benefit cost for the year:
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
4.2
|
%
|
|
6.0
|
%
|
|
5.3
|
%
|
|
6.3
|
%
|
|
5.8
|
%
|
|
6.8
|
%
|
Expected aggregate average long-term change in
compensation
|
—
|
%
|
|
2.6
|
%
|
|
—
|
%
|
|
2.8
|
%
|
|
—
|
%
|
|
3.4
|
%
|
Expected long-term rate of return on plan assets
|
7.0
|
%
|
|
7.2
|
%
|
|
7.5
|
%
|
|
6.8
|
%
|
|
8.0
|
%
|
|
6.2
|
%
|
The overall expected long-term rate of return on plan assets is developed from the expected future return of each asset class, weighted by the expected allocation of pension assets to that asset class. Hospira considers historical performance for the types of assets in which the plans invest, independent market forecasts, and economic and capital market conditions.
The assumed healthcare cost trend rates for the years ended December 31, for Hospira's major medical and dental plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Healthcare cost trend rate assumed for the next year (initial):
|
|
|
|
|
|
Pre-65 years of age
|
7.5
|
%
|
|
7.5
|
%
|
|
7.5
|
%
|
Post-65 years of age
|
7.5
|
%
|
|
7.5
|
%
|
|
8.5
|
%
|
Rate that the cost trend rate gradually declines to (ultimate):
|
|
|
|
|
|
Pre-65 years of age
|
5.0
|
%
|
|
5.0
|
%
|
|
5.0
|
%
|
Post-65 years of age
|
5.0
|
%
|
|
5.0
|
%
|
|
5.0
|
%
|
Year that rate reaches the assumed ultimate rate:
|
|
|
|
|
|
Pre-65 years of age
|
2018
|
|
|
2017
|
|
|
2016
|
|
Post-65 years of age
|
2018
|
|
|
2017
|
|
|
2018
|
|
Sensitivity analysis for the U.S. plan, which represents the primary portion of obligations, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2012 Net Benefit Cost
(Income)/Expense
|
|
As of December 31, 2012
Benefit Obligation
Increase/(Decrease)
|
(dollars in millions)
|
One
Percentage-
Point
Increase
|
|
One
Percentage-
Point
Decrease
|
|
One
Percentage-
Point
Increase
|
|
One
Percentage-
Point
Decrease
|
Pension Plan—U.S.
|
|
|
|
|
|
|
|
Discount rate
|
$
|
(4.4
|
)
|
|
$
|
5.1
|
|
|
$
|
(69.6
|
)
|
|
$
|
85.8
|
|
Expected long-term return on assets
|
(4.6
|
)
|
|
4.6
|
|
|
—
|
|
|
—
|
|
Medical and Dental Plan—U.S.
|
|
|
|
|
|
|
|
Discount rate
|
(0.1
|
)
|
|
0.1
|
|
|
(4.8
|
)
|
|
5.8
|
|
Expected health care cost trend rate (initial and ultimate)
|
0.6
|
|
|
(0.5
|
)
|
|
5.4
|
|
|
(4.6
|
)
|
Pension Plan Assets
The weighted average asset allocation for Hospira's U.S. pension plan as of December 31, and target allocation by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of Plan
Assets
|
(dollars in millions)
|
Target
Allocation
|
|
Asset Category
|
2012
|
|
2011
|
Debt securities
|
71
|
%
|
|
71
|
%
|
|
69
|
%
|
Equity securities
|
29
|
%
|
|
29
|
%
|
|
31
|
%
|
Other and Cash and cash equivalents
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The investment mix between corporate debt securities, equity securities, and other securities is based upon achieving a desired return, balancing higher return, more volatile equity securities, and lower return, less volatile corporate debt securities. In addition, the mix is consistent with the long-term nature of the plans' benefit obligations. Investment allocations are made across a range of markets, industry sectors, capitalization sizes, and, in the case of debt securities, maturities and credit quality. The plan holds no direct investments in securities of Hospira. Due to fluctuations in market conditions, allocation percentages may temporarily deviate from target allocation percentages, particularly before a rebalancing occurs. At
December 31, 2012
, the plan held a significant concentration of plan assets in equity securities which are subject to fluctuation in market conditions. Investment risks and returns are measured and monitored on an on-going basis through annual liability measurements and no less than quarterly investment portfolio reviews to determine whether the asset allocation targets continue to represent an appropriate balance of expected risk and reward.
Fair Value Measurements of Plan Assets
The following table presents the basis used to measure Hospira's pension plans' assets at fair value as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date, Using:
|
Description (dollars in millions)
|
2012
|
|
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Debt securities
|
$
|
368.1
|
|
|
$
|
368.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities
|
149.0
|
|
|
149.0
|
|
|
—
|
|
|
—
|
|
Other and Cash and cash equivalents
|
2.3
|
|
|
—
|
|
|
2.3
|
|
|
—
|
|
|
$
|
519.4
|
|
|
$
|
517.1
|
|
|
$
|
2.3
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date, Using:
|
Description (dollars in millions)
|
2011
|
|
Quoted Prices
in Active
Markets for
Identical Items
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Debt securities
|
$
|
334.2
|
|
|
$
|
334.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities
|
150.3
|
|
|
150.3
|
|
|
—
|
|
|
—
|
|
Other and Cash and cash equivalents
|
1.9
|
|
|
—
|
|
|
1.9
|
|
|
—
|
|
|
$
|
486.4
|
|
|
$
|
484.5
|
|
|
$
|
1.9
|
|
|
$
|
—
|
|
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 is primarily based on market-observable inputs to quoted market prices, benchmark yields and broker/dealer quotes. Specific to Level 2 equity securities, the fair value is based on the net asset value unit price, redeemable at the measurement date, as quoted on a private market that is not active and provided by the administrator of the trust. Level 3 inputs, as applicable, are unobservable inputs which reflect assumptions developed by management to measure assets at fair value.
Cash Funding and Benefit Payments
Hospira has no estimated minimum required contribution for
2013
to meet the funding rules of the Pension Protection Act of 2006, giving consideration to the Worker, Retiree, and Employer Recovery Act of 2008. 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 also makes discretionary contributions when management deems it is prudent to do so. During 2010, Hospira made discretionary funding contributions of
$92.0
million to the U.S. pension plan. No contributions were made to the U.S. pension plan in 2012 and 2011.
The U.S. pension plan is subject to the Employee Retirement Income Security Act of 1974 ("ERISA"). Under ERISA, the Pension Benefit Guaranty Corporation ("PBGC") has the authority to terminate underfunded pension plans under limited circumstances. In the event Hospira's U.S. pension plan is terminated for any reason, while the plan is underfunded, Hospira will incur a liability to the PBGC that may be equal to the entire amount of the U.S. plan underfunding.
The Acts related to healthcare reform eliminated the future tax deduction for prescription drug costs associated with Hospira's post-retirement medical and dental plans for which Hospira receives Medicare Part D subsidies, which was not material to Hospira. Hospira will continue to evaluate any change to our post-retirement liabilities if new interpretations or final regulations are published.
Total benefit payments expected to be paid to participants for the next ten years, which include payments funded from company assets for medical and dental benefits as well as paid from the trusts which hold the pension plan assets, are as follows:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Pension
Plans
|
|
Medical and
Dental Plans
|
2013
|
$
|
29.3
|
|
|
$
|
3.3
|
|
2014
|
29.8
|
|
|
3.3
|
|
2015
|
30.4
|
|
|
3.2
|
|
2016
|
31.0
|
|
|
3.2
|
|
2017
|
31.1
|
|
|
3.1
|
|
Years 2018 through 2022
|
166.7
|
|
|
15.3
|
|
Defined Contribution Plans
Certain Hospira employees in the U.S. and Puerto Rico participate in the Hospira 401(k) Retirement Savings Plan. For the years ended December 31,
2012
,
2011
and
2010
, Hospira's expenses were
$37.3 million
,
$33.4 million
and
$33.3 million
, respectively.
Non-qualified Deferred Compensation Plan
Hospira's non-qualified deferred compensation plan went into effect on January 1, 2008. Certain executive officers and other employees are eligible to participate in the plan. The plan allows participants to defer amounts in excess of the limits imposed on 401(k) plans by the Internal Revenue Code. This plan is not funded. Hospira's expenses were not significant in the years ended December 31,
2012
,
2011
and
2010
.
Note 18
—
Short-term Borrowings and Long-term Debt
Hospira's debt as of December 31, consists of the following:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2012
|
|
2011
|
Long-term debt:
|
|
|
|
5.90% Notes due June 2014
|
$
|
400.0
|
|
|
$
|
400.0
|
|
6.40% Notes due May 2015
|
250.0
|
|
|
250.0
|
|
6.05% Notes due March 2017
|
550.0
|
|
|
550.0
|
|
5.60% Notes due September 2040
|
500.0
|
|
|
500.0
|
|
Other, due 2015
|
4.3
|
|
|
3.0
|
|
Deferred gains on terminated interest rate swap instruments
|
5.5
|
|
|
12.3
|
|
Unamortized debt discount
|
(3.0
|
)
|
|
(3.4
|
)
|
Total long-term debt
|
1,706.8
|
|
|
1,711.9
|
|
Short-term borrowings:
|
|
|
|
Deferred gains on terminated interest rate swap instruments
|
6.8
|
|
|
6.8
|
|
Other
|
22.1
|
|
|
29.8
|
|
Total short-term borrowings
|
28.9
|
|
|
36.6
|
|
Total debt
|
$
|
1,735.7
|
|
|
$
|
1,748.5
|
|
The aggregate maturities of debt, excluding deferred gains on terminated interest rate swap instruments and unamortized debt discount, for each of the next five years and thereafter are as follows:
$22.1 million
in
2013
,
$400.0 million
in
2014
,
$254.3 million
in
2015
,
$0.0 million
in
2016
,
$550.0 million
in
2017
and
$500.0 million
thereafter.
Senior Notes and Other Borrowings
In September 2010, Hospira issued in a registered public offering
$500.0 million
principal amount of
5.60%
notes due on
September 15, 2040
. The net proceeds of the notes after deducting approximately
$2.6 million
of bond discounts and underwriting fees of
$4.4 million
plus cash on-hand were used to extinguish
$500.0 million
principal amount of
5.55%
notes originally due March 2012 and accrued interest in October 2010. Hospira incurred
$36.8 million
in charges associated with the early extinguishment of the notes and is included in Other expenses (income), net.
In connection with acquisitions, facility expansions, international capital structure optimization and equipment lease requirements, Hospira enters into other borrowings including mortgages, lease arrangements and promissory notes. Additionally, Hospira enters into uncommitted lines of credits in certain international countries, available for general entity purposes in their respective countries that are subject to banks' approval. These borrowings bear a weighted average interest rate of
6.2%
and
5.6%
at December 31,
2012
and
2011
, respectively, with principal and interest due in various intervals, and are primarily unsecured. As of December 31,
2012
and
2011
Hospira had
$8.0 million
and
$4.9 million
, respectively, of indebtedness secured by equipment and property. As of December 31,
2012
and
2011
, Hospira had
$26.4 million
and
$32.8 million
, respectively, of other borrowings outstanding, of which
$22.1 million
and
$29.8 million
, respectively, were classified as short-term.
Interest Rate Swap Contracts
In July 2011, Hospira terminated, without penalty, interest rate swap contracts originally entered into in December 2010 with a total notional amount of
$400.0 million
, which had effectively converted from fixed to variable rate debt
$250.0 million
of the
$400.0 million
principal amount notes due in June 2014 and
$150.0 million
of the
$250.0 million
principal amount notes due in May 2015. As a result of the swap terminations Hospira received
$9.0 million
in cash, including accrued interest.
In June 2010, Hospira terminated, without penalty, interest rate swap contracts originally entered into in 2009 with a total notional amount of
$300.0 million
, which had effectively converted from fixed to variable rate debt
$200.0 million
of the
$400.0 million
principal amount notes due in June 2014 and
$100.0 million
of the
$250.0 million
principal amount notes due in May 2015. As a result of the swap terminations, Hospira received
$15.4 million
in cash, including accrued interest.
The corresponding gains described above of
$9.0 million
in 2011 and $
15.4 million
in 2010 related to the basis adjustment of the debt associated with the terminated swap contracts are deferred and are amortized as a reduction of interest expense over the remaining term of the related notes. The cash flows from these contracts are reported as operating activities in the consolidated statements of cash flows. The gains are being recognized against interest expense over the remaining term of
the underlining notes, of which
$6.7 million
,
$5.6 million
and
$2.8 million
, was recognized in
2012
,
2011
and
2010
, respectively.
Revolving Credit Facility
As of
December 31, 2012
, Hospira had a $
1.0 billion
unsecured revolving credit facility (the "Revolver") maturing in
October 2016
with no amounts outstanding. The Revolver is available for general corporate purposes. Borrowings under the Revolver bear interest at LIBOR or a base rate plus, in each case, a margin. Hospira also pays a facility fee on the aggregate amount of the commitments under the Revolver. The annual percentage rates for the LIBOR margin, the base rate margin and the facility fee are
1.2%
,
0.2%
and
0.175%
, respectively, and could be subject to increase or decrease if there is a change in Hospira's credit ratings. The amount of available borrowings may be increased to a maximum of
$1.3 billion
, under certain circumstances. For the year ended and as of December 31,
2012
, Hospira had no amounts borrowed or otherwise outstanding under the Revolver.
Debt Covenants
The Revolver and the indenture governing Hospira's senior notes contain, among other provisions, covenants with which Hospira must comply while they are in force. The covenants in the Revolver limit Hospira's ability to, among other things, sell assets, incur secured indebtedness and liens, incur indebtedness at the subsidiary level and merge or consolidate with other companies. The covenants in the indenture governing Hospira's senior unsecured notes limit Hospira's ability, among other things, to incur secured indebtedness, enter into certain sales and lease transactions and merge or consolidate with other companies. Hospira's debt instruments also include customary events of default (including, in the case of the Revolver, a change of control default), which would permit amounts borrowed to be accelerated and would permit the lenders under the revolving credit agreement to terminate their lending commitments. The Revolver has a financial covenant that requires Hospira to maintain a maximum leverage ratio (consolidated total debt to consolidated net earnings before financing expense, taxes and depreciation, amortization, adjusted for certain non-cash items and agreed-upon certain product quality related charges) of not more than
3.50
to
1.0
. As of
December 31, 2012
, Hospira was in compliance with all applicable covenants.
Note 19 — Other Expense (Income), Net
Other expense (income), net for the years ended December 31, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2012
|
|
2011
|
|
2010
|
Interest income
|
|
$
|
(5.9
|
)
|
|
$
|
(10.4
|
)
|
|
$
|
(9.9
|
)
|
Foreign exchange loss (gain), net
|
|
9.2
|
|
|
(2.8
|
)
|
|
0.2
|
|
Loss on early debt extinguishment
(1)
|
|
—
|
|
|
—
|
|
|
36.8
|
|
All other expense
(2)
|
|
11.1
|
|
|
4.0
|
|
|
11.7
|
|
Total
|
|
$
|
14.4
|
|
|
$
|
(9.2
|
)
|
|
$
|
38.8
|
|
|
|
(1)
|
See Note 18 for details regarding loss on early debt extinguishment.
|
|
|
(2)
|
See Note 5 for details regarding investment impairments in 2012, 2011 and 2010, respectively.
|
Note 20 — Income Taxes
(Loss) Income before income taxes, and the related provisions for taxes on earnings, for the years ended December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2012
|
|
2011
|
|
2010
|
(Loss) Income Before Taxes:
|
|
|
|
|
|
Domestic
|
$
|
(114.0
|
)
|
|
$
|
71.4
|
|
|
$
|
36.4
|
|
Foreign
|
72.1
|
|
|
(98.5
|
)
|
|
342.9
|
|
Total
|
$
|
(41.9
|
)
|
|
$
|
(27.1
|
)
|
|
$
|
379.3
|
|
|
|
|
|
|
|
Taxes on Earnings:
|
|
|
|
|
|
Current:
|
|
|
|
|
|
U.S. Federal
|
$
|
(10.2
|
)
|
|
$
|
11.8
|
|
|
$
|
34.5
|
|
State
|
2.2
|
|
|
2.8
|
|
|
3.5
|
|
Foreign
|
16.5
|
|
|
27.8
|
|
|
37.4
|
|
Total current
|
8.5
|
|
|
42.4
|
|
|
75.4
|
|
Deferred:
|
|
|
|
|
|
Domestic
|
(15.1
|
)
|
|
0.8
|
|
|
(24.4
|
)
|
Foreign
|
(44.4
|
)
|
|
(15.3
|
)
|
|
(16.7
|
)
|
Total deferred
|
(59.5
|
)
|
|
(14.5
|
)
|
|
(41.1
|
)
|
Total
|
$
|
(51.0
|
)
|
|
$
|
27.9
|
|
|
$
|
34.3
|
|
Operating loss carryforwards at
December 31, 2012
amounted to
$405.3 million
, which are subject to expiration in periods from
2015
through
2029
, or are unlimited.
The gross amount of unrecognized tax benefits at
December 31, 2012
,
2011
, and
2010
was
$62.0 million
,
$67.5 million
and
$83.4 million
, respectively. The amount, if recognized, that would affect the effective tax rate was
$56.2 million
,
$60.7 million
and
$74.8 million
at
December 31, 2012
,
2011
, and
2010
, respectively. Hospira recognizes interest and penalties accrued in relation to unrecognized tax benefits in income tax expense, which is consistent with the reporting in prior periods. As of
December 31, 2012
,
2011
, and
2010
, Hospira has recorded liabilities of
$4.4 million
,
$4.6 million
and
$7.4 million
, respectively, for the payment of interest and penalties.
In December 2012, the Internal Revenue Service (“IRS”) audit of Hospira's 2008 and 2009 U.S. federal tax returns was concluded and the years effectively settled. The effective settlement resulted in discrete income tax expense of
$18.8 million
inclusive of interest and state tax impacts recognized in the year ended December 31, 2012. In addition, the effective settlement resulted in an increase to income taxes payable of
$53.9 million
.
In 2012, the IRS commenced the audit of Hospira's 2010 and 2011 tax returns. In addition, Hospira remains subject to tax audits in other jurisdictions and various tax statutes of limitation are expected to close within the next 12 months. Hospira estimates that up to
$30 million
of unrecognized tax benefits may be recognized within the next twelve months.
In 2011, an 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 was a reduction in the gross unrecognized tax benefits for both of the audit years settled, of which
$19.7 million
was recognized in the results for the year ended
December 31, 2011
as a discrete income tax benefit, inclusive of interest and state tax impacts.
Hospira remains open to tax examination in the following major tax-paying jurisdictions: for years 2006 forward in Italy, for years 2007 forward for Australia, for years 2008 forward in Canada, and for years 2010 forward for the U.S. and the United Kingdom.
The following table summarizes the activity for the years ended December 31, related to Hospira's unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2012
|
|
2011
|
|
2010
|
Balances at January 1,
|
$
|
67.5
|
|
|
$
|
83.4
|
|
|
$
|
73.6
|
|
Current year increases
|
7.2
|
|
|
11.4
|
|
|
13.6
|
|
Audit settlements
|
(21.6
|
)
|
|
(21.9
|
)
|
|
(0.9
|
)
|
Statute lapses
|
(4.6
|
)
|
|
(4.4
|
)
|
|
(3.8
|
)
|
Adjustments to prior amounts
|
13.5
|
|
|
(1.0
|
)
|
|
0.9
|
|
Balances at December 31,
|
$
|
62.0
|
|
|
$
|
67.5
|
|
|
$
|
83.4
|
|
U.S. income taxes and foreign withholding taxes were not provided for undistributed earnings of certain foreign subsidiaries of
$1.8 billion
,
$1.7 billion
and
$1.4 billion
at
December 31, 2012
,
2011
, and
2010
, respectively. These undistributed earnings, which are considered to be permanently invested outside of the U.S., would be subject to taxes if they were repatriated to the U.S. as dividends. Due to the complexities associated with the U.S. taxation on earnings of foreign subsidiaries repatriated to the U.S., and the multiple tax jurisdictions involved, it is not practicable to determine the deferred tax liability on these permanently invested earnings.
Differences between the effective income tax rate and the U.S. statutory tax rate for the years ended December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Statutory tax rate
|
(35.0
|
)%
|
|
(35.0
|
)%
|
|
35.0
|
%
|
Benefit of tax exemptions in Costa Rica and
the Dominican Republic
|
(62.2
|
)%
|
|
(222.2
|
)%
|
|
(16.5
|
)%
|
State taxes, net of federal benefit
|
(21.5
|
)%
|
|
4.0
|
%
|
|
(0.3
|
)%
|
Foreign rate differential
|
(43.6
|
)%
|
|
(77.9
|
)%
|
|
(7.3
|
)%
|
Capital loss valuation allowance
|
1.6
|
%
|
|
6.6
|
%
|
|
—
|
%
|
Research credit
|
(11.8
|
)%
|
|
(27.9
|
)%
|
|
(1.3
|
)%
|
Resolution of certain tax positions
|
45.0
|
%
|
|
(72.6
|
)%
|
|
—
|
%
|
Goodwill impairment
|
—
|
%
|
|
498.4
|
%
|
|
—
|
%
|
All other, net
|
5.8
|
%
|
|
29.6
|
%
|
|
(0.6
|
)%
|
Effective tax rate
|
(121.7
|
)%
|
|
103.0
|
%
|
|
9.0
|
%
|
In January 2013, the American Taxpayer Relief Act of 2012 was enacted, retroactively reinstating the federal research and development tax credit and other corporate provisions for the 2012 and 2013 tax years. As a result, the income tax provision for fiscal 2013 will include a discrete tax benefit of
$13.8 million
related to 2012 in the first quarter of 2013, which will significantly impact quarterly and annual effective tax rates for 2013.
The temporary differences that give rise to deferred tax assets and liabilities as of December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
(dollars in millions)
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Compensation, employee benefits and benefit plan liabilities
|
$
|
108.6
|
|
|
$
|
—
|
|
|
$
|
108.9
|
|
|
$
|
—
|
|
Trade receivable reserves and chargeback accruals
|
98.2
|
|
|
—
|
|
|
48.1
|
|
|
—
|
|
Inventories
|
115.1
|
|
|
—
|
|
|
100.6
|
|
|
—
|
|
State income taxes
|
23.4
|
|
|
—
|
|
|
20.9
|
|
|
—
|
|
Foreign income taxes
|
16.1
|
|
|
—
|
|
|
26.0
|
|
|
—
|
|
Property and equipment
|
—
|
|
|
89.3
|
|
|
—
|
|
|
91.8
|
|
Intangibles
|
41.9
|
|
|
—
|
|
|
33.2
|
|
|
—
|
|
Investments
|
10.5
|
|
|
—
|
|
|
7.8
|
|
|
—
|
|
Net operating losses
|
133.2
|
|
|
—
|
|
|
98.0
|
|
|
—
|
|
Capital losses
|
27.8
|
|
|
—
|
|
|
26.3
|
|
|
—
|
|
Other accruals, carryforwards, and reserves not currently deductible
|
57.1
|
|
|
—
|
|
|
59.6
|
|
|
—
|
|
Valuation allowance
|
(35.8
|
)
|
|
—
|
|
|
(36.9
|
)
|
|
—
|
|
Total
|
$
|
596.1
|
|
|
$
|
89.3
|
|
|
$
|
492.5
|
|
|
$
|
91.8
|
|
Valuation allowance consists of
$35.8 million
and
$36.9 million
for certain unrecoverable tax credits, net operating losses and capital losses at
December 31, 2012
, and
2011
, respectively, based on estimated future sources of taxable income in the affected jurisdictions.
Note 21
—
Shareholders’ Equity
Common and Preferred 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, of which
4.0 million
shares are designated as Series A Junior Participating Preferred Stock for issuance in connection with the exercise of preferred share purchase rights as described below. At
December 31, 2012
and
2011
, approximately
8.7 million
and
10.2 million
shares of common stock were reserved for issuance under various employee incentive programs, respectively. As of
December 31, 2012
and
December 31, 2011
,
178.4 million
and
177.8 million
common shares were issued, respectively, and
165.3 million
and
164.7 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 August and December 2010, Hospira entered into accelerated share repurchase ("ASR") contracts with a third party financial institution to repurchase
$100 million
in aggregate of Hospira's common stock, completing the 2006 board authorization. In the aggregate, Hospira repurchased
9.4 million
shares for approximately
$400 million
.
In April 2011, Hospira’s Board of Directors authorized the repurchase of up to
$1.0 billion
of Hospira’s common stock. In April and May 2011, Hospira entered into ASR contracts with a third-party financial institution to repurchase
$200.0 million
in aggregate of Hospira’s common stock, under which Hospira received
3.7 million
shares. Hospira may periodically repurchase additional shares under this authorization, the timing of which will depend on various factors such as cash generation from operations, cash expenditure required for other purposes, current stock price, and other factors. No common stock repurchases were made during the
year
ended
December 31, 2012
.
Preferred Share Purchase Rights
Each outstanding share of common stock provides the holder with one Preferred Share Purchase Right ("Right"). Upon exercise, each Right entitles the holder to purchase
1/100
th
of a share of Series A Junior Participating Preferred Stock of Hospira at a price initially set at
$100
, subject to amendment or adjustment. The Rights will become exercisable only if a person or group (an "acquirer") acquires, or obtains the rights to acquire, without prior approval of the Board of Directors, more than
15%
of Hospira's common stock, or an acquirer announces a tender offer that may result in the acquisition of such percentage
(a "Triggering Event"). After a Triggering Event, Rights held by an acquirer are not exercisable or exchangeable as described below.
If a Triggering Event occurs, each Right will generally be exercisable for common stock of Hospira having a value equal to twice the exercise price of the Right. If the Triggering Event involves an acquisition of Hospira or over
50%
of its assets or earning power, each Right will be exercisable for common stock of the acquirer having a value equal to twice the exercise price of the Right. If a Triggering Event occurs in which the acquirer acquires or obtains the right to acquire less than
50%
of Hospira's common stock, Hospira's Board of Directors, in its discretion, may require that each Right be exchanged for one share of Hospira's common stock or for preferred stock having a value equal to one share of common stock.
The Rights will expire on April 11, 2014, unless earlier exchanged or redeemed at
$0.01
per Right or unless that date is extended by the Board of Directors. The Board of Directors may amend the rights agreement, and may approve acquisitions of Hospira or its securities such that the Rights would not apply to such approved acquisitions.
Accumulated Other Comprehensive (Loss)
Accumulated other comprehensive (loss), net of taxes as of December 31, consists of the following:
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2012
|
|
2011
|
Cumulative foreign currency translation adjustments, net of taxes $0.0 million
|
|
$
|
48.1
|
|
|
$
|
47.9
|
|
Cumulative retirement plans unrealized losses, net of taxes $78.6 million and $89.0 million, respectively
|
|
(132.4
|
)
|
|
(147.7
|
)
|
Cumulative unrealized gains on marketable equity securities, net of taxes $0.0 million
|
|
0.4
|
|
|
0.9
|
|
Cumulative gains on terminated cash flow hedges, net of taxes $(0.4) million and $(0.4) million, respectively
|
|
0.7
|
|
|
0.6
|
|
Accumulated Other Comprehensive (Loss)
|
|
$
|
(83.2
|
)
|
|
$
|
(98.3
|
)
|
Note 22 — Earnings (Loss) per Share
Basic earnings (loss) per share are computed by dividing net income (loss) by the number of weighted average common shares outstanding during the reporting period. Diluted earnings (loss) per share are calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period, only in the periods in which such effect is dilutive. The following table shows the effect of stock-based awards on the weighted average number of shares outstanding used in calculating diluted earnings (loss) per share as of
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(shares in millions, except per share amounts)
|
|
2012
|
|
2011
|
|
2010
|
Weighted average basic common shares outstanding
|
|
165.0
|
|
|
165.5
|
|
|
166.0
|
|
Incremental shares outstanding related to stock-based awards
|
|
1.0
|
|
|
—
|
|
|
3.5
|
|
Weighted average dilutive common shares outstanding
|
|
166.0
|
|
|
165.5
|
|
|
169.5
|
|
Earnings (Loss) Per Common Share:
|
|
|
|
|
|
|
Basic
|
|
$
|
0.27
|
|
|
$
|
(0.06
|
)
|
|
$
|
2.15
|
|
Diluted
|
|
$
|
0.27
|
|
|
$
|
(0.06
|
)
|
|
$
|
2.11
|
|
For the year ended December 31, 2011,
2.4 million
incremental shares related to stock-based awards were not included in the computation of diluted earnings (loss) per share because of the net loss during
2011
. For
2012
,
2011
and
2010
, the number of outstanding stock-based awards to purchase Hospira stock for which the exercise price of the award exceeded the average stock price was
9.6 million
,
3.6 million
and
0.2 million
, respectively. Accordingly, these share-based awards are excluded from the diluted earnings per share calculation for these periods.
Note 23 — Incentive Stock Program
Plan Overview
Hospira's 2004 Long-Term Stock Incentive Plan ("2004 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. In May 2009, shareholders approved amendments primarily to extend the Plan by
ten
years to May 14, 2019, and to increase the number of shares that may be granted during the life of the 2004 Plan by
13.0 million
shares. The option exercise price may not be less than the underlying stock's fair market value at the date of grant, and the maximum term of an option is
ten
years. The amounts granted each calendar year to any one employee or non-employee director is limited depending on the type of award. Stock options comprise the majority of awards granted since inception of the 2004 Plan. As of
December 31, 2012
, approximately
8.7 million
remain available for grant under the 2004 Plan.
Stock-Based Compensation
Stock-based compensation expense of
$40.0 million
,
$41.2 million
and
$47.5 million
was recognized for the years ended
December 31, 2012
,
2011
, and
2010
, respectively. The related income tax benefit recognized was
$14.3 million
,
$14.7 million
and
$16.2 million
for the years ended
December 31, 2012
,
2011
, and
2010
, respectively. For options exercised during
2012
,
2011
, and
2010
, excess tax benefit was
$2.2 million
,
$7.5 million
and
$21.3 million
, respectively.
As of
December 31, 2012
, there was
$61.3 million
of total unrecognized compensation cost related to non-vested share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of
2.3
years. The total fair value of shares that became fully vested during
2012
,
2011
, and
2010
was
$15.4 million
,
$25.2 million
and
$30.6 million
, respectively.
Option Activity and Outstanding Options
During the first quarter of 2012, 2011 and 2010,
2.7 million
,
1.4 million
and
1.9 million
options were granted to certain employees for the annual stock option grants, respectively. For the years ended
December 31, 2012
,
2011
, and
2010
, an additional
0.3 million
,
0.7 million
and
0.5 million
options were granted, respectively. These options were awarded at the fair market value at the time of grant, generally vest over
three
or
four
years and have a
seven
year term. Options awarded before 2007 have a
ten
year term. Included in the above option awards are
140,000
options that have a
five
year term, and will vest and become exercisable if the average stock price over a
thirty
consecutive day period is at or above the vesting trigger price. A summary of information related to stock options for the years ended
December 31, 2012
and
2011
, respectively is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospira Stock Options
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Life (Years)
|
|
Aggregate
Intrinsic
Value
(dollars in
millions)
|
Outstanding at January 1, 2011
|
|
9,618,171
|
|
|
$
|
37.68
|
|
|
|
|
|
|
Granted
|
|
2,093,704
|
|
|
49.68
|
|
|
|
|
|
|
Exercised
|
|
(1,490,069
|
)
|
|
33.25
|
|
|
|
|
|
Lapsed
|
|
(332,820
|
)
|
|
41.26
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
9,888,986
|
|
|
40.76
|
|
|
|
|
|
Granted
|
|
2,965,940
|
|
|
35.31
|
|
|
|
|
|
Exercised
|
|
(369,793
|
)
|
|
23.14
|
|
|
|
|
|
Lapsed
|
|
(818,298
|
)
|
|
44.78
|
|
|
|
|
|
Outstanding at December 31, 2012
(1)
|
|
11,666,835
|
|
|
$
|
39.67
|
|
|
4.0
|
|
$
|
13.7
|
|
Exercisable at December 31, 2012
|
|
7,056,798
|
|
|
$
|
38.75
|
|
|
2.9
|
|
$
|
13.7
|
|
_______________________________________________________________________________
(1)
The difference between options outstanding and those expected to vest is not significant.
The total intrinsic value of options exercised during
2012
,
2011
, and
2010
was
$4.0 million
,
$81.4 million
and
$105.8 million
, respectively.
Summarized information about Hospira stock options outstanding and exercisable as of
December 31, 2012
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Exercisable Options
|
Range of Exercise Prices
|
|
Shares
|
|
Weighted
Average
Remaining
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
$20.01 - $25.00
|
|
1,449,591
|
|
|
3.1
|
|
$
|
22.17
|
|
|
1,449,591
|
|
|
$
|
22.17
|
|
$25.01 - $30.00
|
|
164,757
|
|
|
1.1
|
|
28.19
|
|
|
164,757
|
|
|
28.19
|
|
$30.01 - $35.00
|
|
820,786
|
|
|
3.6
|
|
32.84
|
|
|
581,742
|
|
|
32.44
|
|
$35.01 - $40.00
|
|
3,981,000
|
|
|
4.9
|
|
36.77
|
|
|
1,183,043
|
|
|
39.55
|
|
$40.01 - $45.00
|
|
2,008,016
|
|
|
2.6
|
|
42.62
|
|
|
2,008,016
|
|
|
42.62
|
|
$45.01 - $50.00
|
|
1,548,137
|
|
|
4.1
|
|
49.61
|
|
|
1,031,080
|
|
|
49.60
|
|
$50.01 - $55.00
|
|
1,331,780
|
|
|
4.8
|
|
52.55
|
|
|
422,594
|
|
|
52.42
|
|
$55.01 - $60.00
|
|
362,768
|
|
|
3.7
|
|
55.94
|
|
|
215,975
|
|
|
56.12
|
|
$20.01 - $60.00
|
|
11,666,835
|
|
|
4.0
|
|
$
|
39.67
|
|
|
7,056,798
|
|
|
$
|
38.75
|
|
The fair value was estimated using the Black-Scholes option-pricing model, based on the average market price at the grant date and the weighted average assumptions specific to the underlying options. Expected volatility assumptions are based on historical volatility of Hospira's stock. For
2012
,
2011
and
2010
the expected life assumption of the options is 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 risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued. The weighted average assumptions utilized for option grants during the years ended December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Hospira Stock Options Black-Scholes assumptions
(weighted average):
|
|
|
|
|
|
|
Expected volatility
|
|
31.3
|
%
|
|
29.3
|
%
|
|
30.2
|
%
|
Expected life (years)
|
|
4.8
|
|
|
4.8
|
|
|
4.5
|
|
Risk-free interest rate
|
|
0.8
|
%
|
|
2.0
|
%
|
|
1.9
|
%
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Fair value per stock option
|
|
$
|
10.01
|
|
|
$
|
14.08
|
|
|
$
|
14.21
|
|
Performance Share Awards
Performance share awards are earned based on a formula that measures performance using relative total shareholder return over interim annual periods and a three-year performance cycle compared to an industry peer group. Based on the actual performance at the end of each interim annual period and the three-year performance cycle period, the number of performance share awards earned, which can range between
0%
and
200%
of the target awards granted, will be satisfied with Hospira common stock. Any awards earned vest at the end of the
3
-year performance cycle.
A summary of performance share awards activity for the years ended
December 31, 2012
, and
2011
, respectively, is as follows:
|
|
|
|
|
|
|
|
|
Hospira Performance Share Awards
|
|
Awards
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding at January 1, 2011
|
|
930,488
|
|
|
$
|
44.39
|
|
Granted
|
|
256,578
|
|
|
61.42
|
|
Vested
|
|
(159,551
|
)
|
|
(62.39
|
)
|
Lapsed
|
|
(16,242
|
)
|
|
62.45
|
|
Outstanding at December 31, 2011
|
|
1,011,273
|
|
|
46.14
|
|
Granted
|
|
354,681
|
|
|
51.27
|
|
Vested
|
|
(239,764
|
)
|
|
27.30
|
|
Lapsed
|
|
(317,055
|
)
|
|
27.35
|
|
Outstanding at December 31, 2012
(1)
|
|
809,135
|
|
|
$
|
58.67
|
|
_______________________________________________________________________________
|
|
(1)
|
For the three year performance cycle award period ended
December 31, 2012
,
0.0
shares of Hospira common stock are expected to be earned for these awards granted in
2010
.
|
The weighted average fair value using the Monte Carlo simulation model and the corresponding weighted average assumptions for the performance share award grants during the years ended December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
Hospira Performance share awards Monte Carlo assumptions (weighted average):
|
|
|
|
|
|
|
Expected volatility
|
|
27.3
|
%
|
|
34.7
|
%
|
|
36.2
|
%
|
Risk-free interest rate
|
|
0.4
|
%
|
|
1.2
|
%
|
|
1.4
|
%
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Fair value per performance share award
|
|
$
|
51.39
|
|
|
$
|
61.64
|
|
|
$
|
69.43
|
|
Restricted Stock and Units
Hospira issues restricted stock and units with a vesting period ranging from
1
to
3
years. A summary of restricted stock and unit activity for the years ended
December 31, 2012
, and
2011
, respectively, is as follows:
|
|
|
|
|
|
|
|
|
Hospira Restricted Stock and Units
|
|
Stock and
Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding at January 1, 2011
|
|
237,131
|
|
|
$
|
41.13
|
|
Granted
|
|
144,322
|
|
|
53.16
|
|
Vested
|
|
(52,379
|
)
|
|
34.55
|
|
Lapsed
|
|
(5,000
|
)
|
|
52.65
|
|
Outstanding at December 31, 2011
|
|
324,074
|
|
|
47.37
|
|
Granted
|
|
169,246
|
|
|
33.87
|
|
Vested
|
|
(58,097
|
)
|
|
49.30
|
|
Lapsed
|
|
(18,013
|
)
|
|
37.24
|
|
Outstanding at December 31, 2012
|
|
417,210
|
|
|
$
|
42.34
|
|
The fair value of restricted stock awards and units vested in
2012
,
2011
and
2010
was
$3.9 million
,
$1.8 million
and
$2.4 million
, respectively.
Note
24
— Commitments and Contingencies
Other Commercial Commitments
Hospira's other commercial commitments as of
December 31, 2012
, representing commitments not recorded on the balance sheet, but potentially triggered by future events, primarily consist of non-debt letters of credit to provide credit support for certain transactions as requested by third parties. In the normal course of business, Hospira provides indemnification for guarantees it arranges in the form of bonds guaranteeing the payment of value added taxes, performance bonds, custom bonds and bid bonds. As of
December 31, 2012
, Hospira had
$29.7 million
of these commitments, with a majority expiring from
2013
to
2015
. No amounts have been drawn under these letters of credit or bonds.
Leases
Minimum future operating lease payments, including lease payments for real estate, vehicles, computers and office equipment, as of
December 31, 2012
are:
|
|
|
|
|
(dollars in millions)
|
|
2013
|
$
|
36.6
|
|
2014
|
29.8
|
|
2015
|
23.2
|
|
2016
|
16.5
|
|
2017
|
13.1
|
|
Remaining Years
|
14.3
|
|
Total minimum future lease payments
|
$
|
133.5
|
|
Lease expense under operating leases totaled
$41.2 million
,
$32.7 million
and
$27.3 million
for the
years ended December 31
,
2012
,
2011
and
2010
, respectively.
Litigation
Hospira is involved in various claims and legal proceedings, as well as product liability claims, regulatory matters and proceedings related to Hospira's business, including in some instances when Hospira operated as part of Abbott Laboratories.
Hospira is involved in
two
patent lawsuits concerning Hospira's Precedex
™
(dexmedetomidine hydrochloride), a proprietary sedation agent. On September 4, 2009, Hospira brought suit against Sandoz International GmbH and Sandoz, Inc. for patent infringement. The lawsuit, which alleges infringement of U.S. Patents 4,910,214 (“214”) (expires July 15, 2013) and 6,716,867 (“867”) (expires March 31, 2019), was filed in the U.S. District Court for the District of New Jersey:
Hospira, Inc. and Orion Corp. v. Sandoz International GmbH and Sandoz, Inc.
(D. N.J. 2009). The lawsuit is based on Sandoz's “Paragraph IV” notice indicating that Sandoz has filed an abbreviated new drug application (“ANDA”) with the FDA for a generic version of Precedex
™
. Hospira seeks a judgment of infringement, injunctive relief and costs. Sandoz's ANDA has received tentative approval from the FDA. Trial of this matter has concluded. On April 30, 2012 the court issued its opinion. The court ruled that: (i) the 214 patent is valid and infringed by the Sandoz defendants; and (ii) the 867 patent is invalid as obvious. Hospira and Sandoz have both appealed the District Court ruling to the United States Court of Appeals for the Federal Circuit. The appeal is pending. On November 12, 2010, Hospira brought suit against Caraco Pharmaceutical Laboratories, Ltd. for patent infringement. The lawsuit, which alleges infringement of U.S. Patent No. 6,716,867 (referred to above) is pending in the U.S. District Court for the Eastern District of Michigan:
Hospira, Inc. and Orion Corporation v. Caraco Pharmaceutical Laboratories, Ltd.,
No. 10-cv-14514 (E.D. Mich. 2010). The lawsuit is based on Caraco's “Paragraph IV” notice indicating that Caraco has filed an ANDA with the FDA for a generic version of Precedex
™
. Hospira seeks a judgment of infringement, injunctive relief and costs. Caraco's ANDA has received tentative approval from the FDA. The case is currently stayed.
Hospira and certain of its corporate officers and former corporate officers are defendants in a lawsuit alleging violations of the Securities and Exchange Act of 1934:
City of Sterling Heights General Employees' Retirement System, Individually and on behalf of all others similarly situated vs. Hospira, Inc., F. Michael Ball, Thomas E. Werner, James H. Hardy, Jr., and Christopher B. Begley
, amended complaint filed June 25, 2012 and pending in the United States District Court for the Northern District of Illinois. The lawsuit alleges, generally, that the defendants issued materially false and misleading statements regarding Hospira's financials and business prospects and failed to disclose material facts affecting Hospira's financial condition. The lawsuit alleges a class period from February 4, 2010 (announcement of Q4, 2009 financial results) through October 17, 2011 (Hospira announced preliminary financial results for Q3, 2011 on October 18, 2011). The lawsuit seeks class action status and damages including interest, attorneys' fees and costs.
Hospira has been named as a nominal defendant in
two
shareholder derivative lawsuits (one dismissed) which name as defendants certain Hospira officers, certain former officers and members of Hospira's Board of Directors. The cases are:
Lori Ravenscroft Geare and
Robert J. Casey, II, Derivatively for the Benefit of Hospira, Inc. v. Christopher B. Begley, F. Michael Ball, Thomas E. Werner, Sumant Ramachandra, Irving W. Bailey, II, Jacque J. Sokolov, Barbara L. Bowles, Roger W. Hale, John C. Staley, Connie R. Curran, Heino von Prondzynski, Mark F. Wheeler, Terrence C. Kearney, Ronald A. Matricaria and Brian J. Smith and Hospira, Inc. (Nominal Defendant)
amended complaint filed in September of 2012 in the United States District Court for the Northern District of Illinois; and
Charles L. Currie and Cheryl E. Currie v. Christopher B. Begley, Irving W. Bailey, II, Roger W. Hale, F. Michael Ball, Barbara L. Bowles, Connie R. Curran, Heino von Prondzynski, William G. Dempsey, Jacque J. Sokolov, M.D., John C. Staley, Mark F. Wheeler, M.D., Thomas E. Werner, Terrence C. Kearney, Ronald Squarer and Sumant Ramachandra, M.D. and Hospira, Inc. (Nominal Defendant) ("Currie")
, filed in December 2011 and pending in the Circuit Court of Cook County, Illinois. In general terms, these lawsuits allege breaches of fiduciary duties by the individual defendants and seek damages, purportedly on behalf of Hospira. On October 15, 2012, the court granted defendants' motion to dismiss the
Currie
case in its entirety. On April 9, 2012, the Hospira Board of Directors received a letter from a law firm on behalf of a Hospira shareholder regarding “Demand Upon the Board of Directors to Investigate Claims, Initiate Legal Action and Take Necessary and Appropriate Remedial Measures.” The letter requests investigation of matters entirely covered by the securities and derivative lawsuits that were previously filed, as set forth above.
Hospira, certain members of Hospira's Board of Directors and other current or former Hospira employees were named as defendants in a lawsuit alleging violation of the Employee Retirement Income Security Act of 1974 (“ERISA”). The lawsuit,
Veronica Lynch, Individually and on behalf of all others similarly situated and on behalf of the Hospira 401(k) Retirement Savings Plan v. Hospira, Inc., Pamela Hannon, Henry A. Weishaar, Lori O. Carlson, Richard J. Hoffman, the Compensation Committee of the Board of Directors of Hospira, Inc., Roger W. Hale, Connie R. Curran, Jacque J. Sokolov and Heino von Prondzynski,
was filed June 11, 2012 in the United States District Court for the Northern District of Illinois and alleged breaches of fiduciary duties, generally alleging that Hospira stock was not a prudent investment for 401(k) participants. The lawsuit sought class action status, equitable relief and monetary damages. On October 2, 2012, the case was dismissed in its entirety.
Hospira is subject to certain regulatory matters. Regulatory matters may lead to inspection observations (commonly referred to as Form 483 observations in the U.S.), untitled letters, warning letters, voluntary or involuntary product recalls, consent decrees, injunctions to halt manufacture and distribution of products, import and export bans or restrictions, monetary sanctions, delays in product approvals and other restrictions on operations.
Hospira's litigation exposure, including product liability claims, is evaluated each reporting period. Hospira's accruals, which are not significant at
December 31, 2012
and
December 31, 2011
, are the best estimate of loss. Based upon information that is currently available, management believes that the likelihood of a material loss in excess of recorded amounts is remote.
Additional legal proceedings may occur that may result in a change in the estimated accruals recorded by Hospira. It is not feasible to predict the outcome of such proceedings with certainty and there can be no assurance that their ultimate disposition will not have a material adverse effect on Hospira's financial position, cash flows, or results of operations.
Note 25
—
Segment and Geographic Information
Hospira conducts operations worldwide and is managed in
three
reportable segments: Americas, EMEA and APAC. The Americas segment includes the U.S., Canada and Latin America; the EMEA segment includes Europe, the Middle East and Africa; and the APAC segment includes Asia, Japan, Australia and New Zealand. Hospira has
five
operating units: U.S., Canada, Latin America, EMEA and APAC. Hospira has aggregated the U.S., Canada, and Latin America operating units within the Americas reportable segment. In all segments, Hospira sells a broad line of products, including specialty injectable pharmaceuticals, medication management, and other pharmaceuticals. Specialty Injectable Pharmaceuticals include generic injectables, proprietary specialty injectables and, in certain markets, biosimilars. Medication Management includes infusion pumps, related software and services, dedicated administration sets, gravity administration sets, and other device products. Other Pharmaceuticals include large volume intravenous solutions, nutritionals and contract manufacturing.
Hospira’s underlying accounting records are maintained on a legal-entity basis for government and public reporting requirements. Segment disclosures are on a performance basis consistent with internal management reporting. For internal management reporting, intersegment transfers of inventory are recorded at standard cost and are not a measure of segment income from operations. The costs of certain corporate functions, stock-based compensation, interest expense, and other expense (income), net that benefit the entire organization are not allocated. The following segment information has been prepared in accordance with the internal accounting policies of Hospira, as described above.
Reportable segment information:
The table below presents information about Hospira’s reportable segments for the
years ended December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Income (Loss) from Operations
|
(dollars in millions)
|
2012
|
|
2011
|
|
2010
|
|
2012
|
|
2011
|
|
2010
|
Americas
|
$
|
3,239.4
|
|
|
$
|
3,206.5
|
|
|
$
|
3,137.9
|
|
|
$
|
220.8
|
|
|
$
|
599.1
|
|
|
$
|
674.9
|
|
EMEA
(1)
|
525.8
|
|
|
517.4
|
|
|
488.5
|
|
|
(53.9
|
)
|
|
(275.2
|
)
|
|
(13.9
|
)
|
APAC
(1)
|
326.9
|
|
|
333.2
|
|
|
290.8
|
|
|
10.0
|
|
|
(143.9
|
)
|
|
14.4
|
|
Total reportable segments
|
$
|
4,092.1
|
|
|
$
|
4,057.1
|
|
|
$
|
3,917.2
|
|
|
176.9
|
|
|
180.0
|
|
|
675.4
|
|
Corporate functions
|
|
|
|
|
|
|
(78.1
|
)
|
|
(82.0
|
)
|
|
(108.7
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
(40.0
|
)
|
|
(41.2
|
)
|
|
(47.5
|
)
|
Income from operations
|
|
|
|
|
|
|
58.8
|
|
|
56.8
|
|
|
519.2
|
|
Interest expense and other expense/income, net
|
|
|
|
|
|
|
(100.7
|
)
|
|
(83.9
|
)
|
|
(139.9
|
)
|
(Loss) Income before income taxes
|
|
|
|
|
|
|
$
|
(41.9
|
)
|
|
$
|
(27.1
|
)
|
|
$
|
379.3
|
|
(1)
In
2011
, EMEA and APAC reportable segments (Loss) from operations includes goodwill impairment charges of
$229.1 million
and
$171.1 million
, respectively. See Note 11 for further information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
Amortization for the
Years Ended December 31,
|
|
Additions to Long-Lived
Assets for the
Years Ended December 31,
|
(dollars in millions)
|
2012
|
|
2011
|
|
2010
|
|
2012
|
|
2011
|
|
2010
|
Americas
|
$
|
154.8
|
|
|
$
|
168.3
|
|
|
$
|
167.9
|
|
|
$
|
257.4
|
|
|
$
|
224.4
|
|
|
$
|
167.7
|
|
EMEA
|
48.0
|
|
|
53.6
|
|
|
43.7
|
|
|
28.4
|
|
|
39.9
|
|
|
24.6
|
|
APAC
|
44.8
|
|
|
34.2
|
|
|
34.3
|
|
|
26.0
|
|
|
33.1
|
|
|
17.4
|
|
Total reportable segments
|
$
|
247.6
|
|
|
$
|
256.1
|
|
|
$
|
245.9
|
|
|
$
|
311.8
|
|
|
$
|
297.4
|
|
|
$
|
209.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at
December 31,
|
|
Total Assets
at December 31,
|
(dollars in millions)
|
2012
|
|
2011
|
|
2010
|
|
2012
|
|
2011
|
|
2010
|
Americas
|
$
|
998.1
|
|
|
$
|
1,002.0
|
|
|
$
|
1,026.2
|
|
|
$
|
4,651.8
|
|
|
$
|
4,385.5
|
|
|
$
|
4,199.6
|
|
EMEA
|
—
|
|
|
—
|
|
|
260.2
|
|
|
754.8
|
|
|
699.3
|
|
|
974.2
|
|
APAC
|
81.0
|
|
|
80.9
|
|
|
214.4
|
|
|
682.0
|
|
|
694.3
|
|
|
872.5
|
|
Total reportable segments
|
$
|
1,079.1
|
|
|
$
|
1,082.9
|
|
|
$
|
1,500.8
|
|
|
$
|
6,088.6
|
|
|
$
|
5,779.1
|
|
|
$
|
6,046.3
|
|
Enterprise-wide information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales for the Years
Ended December 31,
|
|
Long-Lived Asset
at December 31,
|
(dollars in millions)
|
2012
|
|
2011
|
|
2010
|
|
2012
|
|
2011
|
|
2010
|
U.S.
|
$
|
2,830.1
|
|
|
$
|
2,836.4
|
|
|
$
|
2,811.1
|
|
|
$
|
1,068.7
|
|
|
$
|
1,031.8
|
|
|
$
|
985.7
|
|
Non-U.S.
|
1,262.0
|
|
|
1,220.7
|
|
|
1,106.1
|
|
|
545.0
|
|
|
457.0
|
|
|
358.5
|
|
Total
|
$
|
4,092.1
|
|
|
$
|
4,057.1
|
|
|
$
|
3,917.2
|
|
|
1,613.7
|
|
|
1,488.8
|
|
|
1,344.2
|
|
Deferred income taxes and Investments
|
|
|
|
|
|
|
368.6
|
|
|
280.9
|
|
|
243.5
|
|
Goodwill and intangible assets, net
|
|
|
|
|
|
|
1,345.9
|
|
|
1,438.7
|
|
|
1,981.1
|
|
Total
|
|
|
|
|
|
|
$
|
3,328.2
|
|
|
$
|
3,208.4
|
|
|
$
|
3,568.8
|
|
Long-lived assets in India were
$282.5 million
and
$196.0 million
as of
December 31, 2012
and
December 31, 2011
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales by Product Line for the
Years Ended December 31,
|
(dollars in millions)
|
2012
|
|
2011
|
|
2010
|
Specialty Injectable Pharmaceuticals
|
$
|
2,570.0
|
|
|
$
|
2,562.5
|
|
|
$
|
2,349.5
|
|
Medication Management
|
1,016.5
|
|
|
987.3
|
|
|
999.1
|
|
Other Pharma
|
505.6
|
|
|
507.3
|
|
|
568.6
|
|
Total
|
$
|
4,092.1
|
|
|
$
|
4,057.1
|
|
|
$
|
3,917.2
|
|
Note 26 — Quarterly Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
(dollars in millions, except for per share amounts)
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
Net Sales
|
|
$
|
965.9
|
|
|
$
|
1,033.3
|
|
|
$
|
994.0
|
|
|
$
|
1,098.9
|
|
Gross Profit
(1)
|
|
300.0
|
|
|
283.5
|
|
|
214.3
|
|
|
314.7
|
|
Income (Loss) From Operations
|
|
46.7
|
|
|
(2.2
|
)
|
|
(16.5
|
)
|
|
30.8
|
|
Net Income (Loss)
|
|
40.2
|
|
|
(2.5
|
)
|
|
1.2
|
|
|
5.3
|
|
Earnings (Loss) per common share, basic
|
|
$
|
0.24
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
Earnings (Loss) per common share, diluted
|
|
$
|
0.24
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
Weighted average common shares outstanding, basic
|
|
164.6
|
|
|
165.1
|
|
|
165.1
|
|
|
165.1
|
|
Weighted average common shares outstanding, diluted
|
|
165.8
|
|
|
165.1
|
|
|
165.9
|
|
|
165.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
(dollars in millions, except for per share amounts)
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
Net Sales
|
|
$
|
1,002.3
|
|
|
$
|
1,064.1
|
|
|
$
|
976.7
|
|
|
$
|
1,014.0
|
|
Gross Profit
(1)
|
|
399.1
|
|
|
413.4
|
|
|
303.9
|
|
|
281.2
|
|
Income (Loss) From Operations
|
|
163.8
|
|
|
190.5
|
|
|
(85.2
|
)
|
|
(212.3
|
)
|
Net Income (Loss)
|
|
149.9
|
|
|
143.6
|
|
|
(88.9
|
)
|
|
(214.0
|
)
|
Earnings (Loss) per common share, basic
|
|
$
|
0.90
|
|
|
$
|
0.86
|
|
|
$
|
(0.54
|
)
|
|
$
|
(1.30
|
)
|
Earnings (Loss) per common share, diluted
|
|
$
|
0.88
|
|
|
$
|
0.85
|
|
|
$
|
(0.54
|
)
|
|
$
|
(1.30
|
)
|
Weighted average common shares outstanding, basic
|
|
166.8
|
|
|
166.1
|
|
|
164.5
|
|
|
164.5
|
|
Weighted average common shares outstanding, diluted
|
|
170.2
|
|
|
169.0
|
|
|
164.5
|
|
|
164.5
|
|
(1)
Gross profit is defined as Net sales less Cost of products sold.