Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 — Basis of Presentation and 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. Hospira's portfolio includes generic injectables, biosimilars, and 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.
Hospira conducts operations worldwide and is managed in three reportable segments: Americas; Europe, Middle East and Africa ("EMEA"); and Asia Pacific ("APAC"). See Note
25
for further information.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and, therefore, do not include all information and footnote disclosures normally included in audited financial statements in conformity with generally accepted accounting principles in the U.S. ("GAAP"). However, in the opinion of management, all adjustments, consisting of normal recurring adjustments, unless otherwise noted herein, necessary to present fairly the results of operations, financial position and cash flows have been made. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on the 2013 Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
Adoption of New Accounting Standards
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date" ("ASU 2013-04"). ASU 2013-04 provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of ASU 2013-04 is fixed at the reporting date. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors, as well as any additional amount the reporting entity expects to pay on behalf of its co-obligors. ASU 2013-04 also requires an entity to disclose the nature and amount of those obligations. ASU 2013-04 was first effective for reporting periods beginning after December 15, 2013, with early adoption permitted. Retrospective application was required. Hospira adopted ASU 2013-04 in the first quarter of 2014. There was no material impact to Hospira's condensed consolidated financial position, results of operations or cash flows upon adoption of this guidance.
In March 2013, the FASB issued ASU 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity" ("ASU 2013-05"). ASU 2013-05 clarifies the applicable guidance for the release of cumulative translation adjustments into net income when a reporting entity either sells a part or all of its investment in a foreign entity or ceases to have a controlling financial interest in a subsidiary or group of assets that constitute a business within a foreign entity. ASU 2013-05 was first effective prospectively for reporting periods beginning after December 15, 2013, with early adoption permitted. Hospira adopted ASU 2013-05 in the first quarter of 2014. There was no material impact to Hospira's condensed consolidated financial position, results of operations or cash flows upon adoption of this guidance.
In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"). ASU 2013-11 requires, unless certain conditions exist, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar tax loss, or a tax credit carryforward. ASU 2013-11 was first effective prospectively for reporting periods beginning after December 15, 2013, with early adoption permitted. Retrospective application was permitted. Hospira prospectively adopted ASU 2013-11 in the first quarter of 2014, and as a result, reduced long-term
Deferred income taxes
assets and
Post-retirement obligations and other
long-term liabilities
presented on the condensed consolidated balance sheet by approximately
$25.0 million
. There was no material impact to Hospira's condensed consolidated results of operations or cash flows upon adoption of this guidance.
Recently Issued Accounting Standards
In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" ("ASU 2014-08"). ASU 2014-08 amends guidance for reporting discontinued operations and disposals of components of an entity. ASU 2014-08 requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity's financial results or a business activity classified as held for sale be reported as discontinued operations. The guidance also expands the disclosure requirements for discontinued operations and adds new disclosures for individually significant dispositions that do not qualify as discontinued operations. ASU 2014-08 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014 with early adoption permitted only for disposals that have not been previously reported. Hospira is currently evaluating the impact of ASU 2014-08 on its condensed consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. Hospira is currently evaluating the impact of ASU 2014-09 on its condensed consolidated financial statements and related disclosures.
In June 2014, the FASB issued ASU 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period" ("ASU 2014-12"). ASU 2014-12 requires that a performance target which affects vesting and could be achieved after the requisite service period be treated as a performance condition in accordance with ASC 718, Compensation - Stock Compensation. ASU 2014-12 is effective prospectively for annual periods beginning after December 15, 2015 with early adoption permitted. Hospira is currently evaluating the impact of ASU 2014-12 on its condensed consolidated financial statements and related disclosures.
Significant Accounting Policies
Supplier Advances
Hospira has advanced a cumulative
$75.0 million
to Celltrion, Inc. and Celltrion Healthcare, Inc. (collectively "Celltrion") through
June 30, 2014
for the purchase of certain biosimilar products. As of
June 30, 2014
, Hospira has received
$45.6 million
in inventory against these advances. Additional supplier advances for these biosimilar products may be required over the next
two
years, the timing of which is based on estimated regulatory approval dates and commercial launch dates. Hospira may distribute and market additional products sourced from Celltrion which would require additional advances.
As of
June 30, 2014
, Hospira had outstanding advances of
$21.3 million
to Orchid Chemicals & Pharmaceuticals Ltd. ("Orchid") to supply certain active pharmaceutical ingredient ("API") products. These advances were settled as part of the purchase price upon the close of the acquisition described further in Note
2
.
Total supplier advances were
$80.8 million
and
$102.2 million
as of
June 30, 2014
and
December 31, 2013
, respectively. The current and long-term portions are reported in
Prepaid expenses
and
Other assets
, respectively, in the condensed consolidated balance sheets. 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.
Unapproved Products
Hospira capitalizes product costs, material and conversion costs, in preparation for product launches prior to regulatory approval when regulatory approval of the products is considered probable. Unapproved product inventories were
$24.2 million
and
$7.1 million
as of
June 30, 2014
and
December 31, 2013
, respectively, and the current and long-term portions are reported in
Prepaid expenses
and
Other assets
, respectively, in the condensed consolidated balance sheets. Unapproved product reserves were
$2.4 million
and
$2.3 million
as of
June 30, 2014
and
December 31, 2013
, respectively.
Note 2 — Business Acquisitions
Orchid (Penem and Penicillin Active Pharmaceutical Ingredient Business & Associated Research and Development Facility)
On July 4, 2014, Hospira, through its wholly-owned subsidiary, Hospira Healthcare India Private Limited ("Hospira India"), acquired from Orchid its penem and penicillin API business located in Aurangabad, India and associated research and development ("R&D") facility based in Chennai, India, along with the related assets and employees associated with these operations, for a preliminary purchase price of approximately
$247.0 million
, subject to certain adjustments. The purchase price, based on the final purchase agreement terms, includes foreign currency exchange rate impacts, working capital adjustments, the assumption of debt, and settlement of
$29.5 million
of amounts due to Hospira from Orchid, including
$6.0 million
of advances, net of product receipts, in July 2014. In addition, a portion of the purchase price,
$17.0 million
, is subject to an eighteen month hold-back. Pursuant to the terms of the purchase agreement, some or all of such hold-back amount may ultimately be retained by Hospira. See Note 1 for additional information on Hospira's advances to Orchid. During the
three
months ended
June 30, 2014
and
2013
, Hospira incurred
$1.9 million
and
$1.1 million
, respectively, of acquisition and integration-related costs, reported in
Selling, general and administrative
. During the
six
months ended
June 30, 2014
and
2013
, these costs were
$2.8 million
and
$2.8 million
, respectively. Hospira expects to incur additional costs in 2014, including the charges noted below. Cumulative acquisition and integration-related costs as of
June 30, 2014
were
$8.4 million
.
Also on July 4, 2014, Hospira advanced, through a loan facility, approximately
$17.3 million
to an entity controlled by the primary shareholder of Orchid to fund obligations of this entity necessary to close the transaction. Hospira will pursue collection in accordance with the terms of the facility, however,
as collectability is not reasonably assured, an allowance will be established.
Separately, Orchid remains a current supplier of cephalosporin APIs to Hospira.
Evolabis
In February 2014, Hospira acquired a Brazilian-based oncology distributor, Evolabis Produtos Farmacêuticos Ltda., adding approximately
15
on-market oncology products to Hospira's portfolio in Brazil, accelerating expansion of its injectable pharmaceutical product line. The impact of this acquisition is not anticipated to be material to Hospira's results of operations in 2014.
Note 3 — Restructuring and Optimization Actions
Hospira aims to achieve a culture of continuous improvement to enhance its efficiency, effectiveness and competitiveness and improve its cost base. As part of this strategy, 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, other exit costs, contract termination costs and gains or losses on disposal of assets.
Restructuring
From time to time Hospira incurs costs to implement restructuring actions for specific initiatives. In late 2012 and continuing into 2014, Hospira incurred costs to optimize commercial organizational structures, in all segments, and exit device products in certain APAC markets. As Hospira continues to optimize its global commercial operations and align investments to support future growth, Hospira anticipates that similar restructuring actions will continue through 2015. The aggregate costs are reported in
Restructuring and impairment
and primarily include severance charges of
$13.4 million
and contract termination charges of
$3.1 million
. Of the aggregate costs,
$1.6 million
and
$0.5 million
were incurred in the
three
months ended
June 30, 2014
and
2013
, respectively, and
$1.9 million
and
$4.5 million
were incurred in the
six
months ended
June 30, 2014
and
2013
, respectively.
The following summarizes the aggregate restructuring activity for the
six
months ended
June 30, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Employee-Related
Benefit Costs
|
|
Other
|
|
Total
|
Balance at January 1, 2014
|
$
|
2.5
|
|
|
$
|
1.8
|
|
|
$
|
4.3
|
|
Costs incurred
|
1.9
|
|
|
—
|
|
|
1.9
|
|
Payments
|
(1.5
|
)
|
|
—
|
|
|
(1.5
|
)
|
Balance at June 30, 2014
|
$
|
2.9
|
|
|
$
|
1.8
|
|
|
$
|
4.7
|
|
Facilities Optimization
In April 2014, Hospira agreed to sell its Buffalo, NY, manufacturing facility. As part of this agreement, the buyer purchased substantially all manufacturing facility assets and entered into an agreement to manufacture the components and sub-assemblies Hospira produced in Buffalo for various Hospira manufacturing facilities. Hospira closed the transaction in July 2014. Hospira incurred a pre-tax loss on disposal of assets of
$5.0 million
in the
three
months ended
June 30, 2014
.
Note 4 — Device Strategy
Hospira continues to implement its Device Strategy announced in May 2013, an initiative intended to establish a streamlined and modernized product portfolio addressing customer needs and positioning Hospira for future innovation and growth, while supporting continued advancement of device remediation, including device quality improvement efforts. The Device Strategy is anticipated to be completed during the second half of 2015. Actions include investments in (i) modernizing and streamlining Hospira's installed base of devices through retirement and replacement programs, (ii) strengthening device quality systems/processes and (iii) developing next generation technology, such as the Plum 360™ and SapphirePlus™ pumps, to support further modernization of its installed base. Under the retirement and replacement actions, Hospira is retiring older pumps from the market and initiating customer replacement programs. Among alternatives provided to customers, Hospira is offering customer sales allowances and/or accommodations which may be used as a credit for transitioning to alternative technology.
In connection with the Device Strategy, Hospira expects to incur aggregate charges related to these actions in the range of approximately
$300 million
to
$350 million
on a pretax basis. The total estimated aggregate charges include pre-tax cash costs of approximately
$240 million
to
$290 million
. Major cash costs include the following: (i) customer sales allowances; (ii) customer accommodations, contract termination, and pump collection and destruction costs; and (iii) pump retirement and replacement program administration, quality systems/process improvement, consulting costs and other costs. Further, of the total pre-tax charges, approximately
$60 million
relates to non-cash charges for various asset charges, primarily pump inventory charges, other pump-related asset impairments and accelerated depreciation on production equipment and Hospira-owned pumps in service.
Charges incurred for the Device Strategy, primarily in the Americas segment, were reported as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
Line Item in the
Condensed Consolidated
Statement of Income (Loss)
|
(dollars in millions)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
Customer sales allowances
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
104.3
|
|
|
Net sales
|
Consulting, customer accommodations, contract termination, collection and destruction, and other costs
|
|
4.1
|
|
|
17.7
|
|
|
9.7
|
|
|
41.3
|
|
|
Cost of products sold
|
Inventory charges
|
|
2.0
|
|
|
(3.1
|
)
|
|
2.3
|
|
|
45.8
|
|
|
Cost of products sold
|
Other asset impairments and accelerated depreciation
|
|
0.9
|
|
|
2.4
|
|
|
1.3
|
|
|
7.1
|
|
|
Restructuring and impairment
|
Total charges
|
|
$
|
7.0
|
|
|
$
|
17.0
|
|
|
$
|
13.3
|
|
|
$
|
198.5
|
|
|
|
The amount, timing and recognition of additional charges associated with the Device Strategy over the anticipated time period will be affected by the nature of spending and the occurrence of commitments and triggering events, among other factors.
See Note
16
for Device Strategy related and other accrual activity for the
six
months ended
June 30, 2014
.
Note 5 — Collaborative and Other Arrangements
On April 29, 2013, Hospira and NovaQuest Co-Investment Fund I, L.P. ("NovaQuest") entered into an arrangement for
three
biosimilar products: Hospira's erythropoietin biosimilar ("EPO") (in the U.S. and Canada), filgrastim (in the U.S.) and pegylated filgrastim (globally). Hospira is responsible for research and development, regulatory approval, commercialization and distribution of these products. NovaQuest will contribute development funding up to
$120.0 million
with contributions not exceeding
$50.0 million
in any single year and such amounts are recorded as an offset to
Research and development
expense as incurred as there is substantive and genuine risk of return of the investment inherent in these biosimilar development programs. In exchange for the development funding, if applicable, Hospira will make milestone payments to NovaQuest upon achieving the first commercial sale for each product, and such payments will be expensed to
Cost of products sold
as incurred. Hospira will also be required to pay NovaQuest royalties based upon commercial net sales of the products. In certain instances that result in the delay or failure of the products to be marketed (other than the failure of the products to achieve regulatory approval), Hospira may be obligated to make certain payments to NovaQuest as compensation for such unanticipated events. In these circumstances, reimbursement will be made in the form of royalties related to certain sales of Hospira's on-market products. Hospira's total payments to NovaQuest inclusive of the milestones and royalties are capped at a multiple of development funding, which in any reported period could be significant. For the
three
and
six
months ended
June 30, 2014
, in connection with the NovaQuest agreement, Hospira recognized an offset to
Research and development
expense for development funding of
$11.8 million
and
$18.7 million
, respectively. For the
three
and
six
months ended
June 30, 2013
, the offset recognized to
Research and development
expense was
$14.3 million
. Cumulative development funding as of
June 30, 2014
was
$68.7 million
.
On June 2, 2014, Hospira agreed to advance
$30.0 million
for an investment with a research and development venture with the potential obligation to invest an additional
$15.0 million
within 12 months. In the initial phase of the agreement, the investment is fully refundable, subject to credit risk, to the extent certain development milestones are not met. The
$30.0 million
advance was made during July 2014 and will be initially accounted for as a cost method investment.
For information on other Hospira collaborative and other arrangements see Note 5 to Hospira's consolidated financial statements included in Hospira's
2013
Form 10-K.
Note 6 — Investments
Investments include equity-method investments in which Hospira has significant influence but not control over the investee. 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, India. Equity income from affiliates, net, including the ZHOPL equity investment, was
$8.7 million
and
$4.5 million
for the
three
months ended
June 30, 2014
and
2013
, respectively. Equity income from affiliates, net, including the ZHOPL equity investment, was
$12.0 million
and
$10.1 million
for the
six
months ended
June 30, 2014
and
2013
, respectively.
No
distributions were received from ZHOPL during the
six
months ended
June 30, 2014
. During the
six
months ended
June 30, 2013
, distributions received from ZHOPL were
$30.1 million
.
Combined income statement financial information of unconsolidated equity method investments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
(dollars in millions)
|
|
2014
|
|
2013
|
Revenue
|
|
$
|
29.7
|
|
|
$
|
49.1
|
|
Operating expenses
|
|
18.6
|
|
|
25.5
|
|
Operating income
|
|
11.1
|
|
|
23.6
|
|
Net Income
|
|
17.4
|
|
|
19.6
|
|
During the
three
months ended
June 30, 2013
, Hospira recognized non-cash impairment charges of
$8.3 million
in
Other (income) expense, net
to impair equity method investments. The impairments were primarily due to a decline in market value of the investments based on management's assessment of future cash flows or earnings from the investments.
During the
six
months ended
June 30, 2013
, Hospira assessed the decline in the market value of its marketable equity securities to be other-than-temporary, primarily due to the nature 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 impairment charges of
$3.1 million
in
Other (income) expense, net
.
Note 7 — Fair Value Measures
The following table summarizes the methodology used to measure certain assets and liabilities at fair value on a recurring basis in the condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date, Using:
|
|
|
|
|
Quoted Prices
in Active Markets for
Identical Items
|
|
Significant
Other
Observable
Inputs
|
|
|
|
|
June 30,
|
|
|
|
Significant
Unobservable
Inputs
|
(dollars in millions)
|
|
2014
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale marketable equity securities
|
|
$
|
4.4
|
|
|
$
|
4.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
2.9
|
|
|
—
|
|
|
2.9
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date, Using:
|
|
|
|
|
Quoted Prices
in Active Markets for
Identical Items
|
|
Significant
Other
Observable
Inputs
|
|
|
|
|
December 31,
|
|
|
|
Significant
Unobservable
Inputs
|
(dollars in millions)
|
|
2013
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Financial Assets:
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
$
|
2.8
|
|
|
$
|
—
|
|
|
$
|
2.8
|
|
|
$
|
—
|
|
Available-for-sale marketable equity securities
|
|
3.8
|
|
|
3.8
|
|
|
—
|
|
|
—
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
The fair value of 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 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 Trade receivables,
Trade 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
(dollars in millions)
|
|
Carrying
Value
|
|
Fair Value
|
|
Carrying
Value
|
|
Fair Value
|
Senior unsecured notes
|
|
$
|
1,750.0
|
|
|
$
|
1,832.6
|
|
|
$
|
1,750.0
|
|
|
$
|
1,794.8
|
|
Note 8 — Financial Instruments and Derivatives
Hospira's operations are exposed to market risk primarily due to changes in currency exchange and interest rates. The objective in managing these risks is to reduce volatility on earnings and cash flows. To reduce the risk, Hospira enters into certain derivative financial instruments, when available on a cost-effective basis, to hedge its underlying economic exposure. For a more detailed description of Hospira's financial instruments and derivatives, see Note 8 to Hospira's consolidated financial statements included in Hospira's
2013
Form 10-K.
In June 2014, Hospira closed foreign currency option contracts with an aggregate notional value of
10.0 billion
Indian rupees, for a gain of
$6.0 million
. These contracts were entered into to mitigate a portion of the exposure resulting from movements of the U.S. dollar against the Indian rupee in connection with the purchase price for the acquisition of Orchid's penem and penicillin API business and related R&D facility. See Note
2
for further information regarding the acquisition. Since the derivatives were hedges of foreign currency risk for a business combination denominated in a foreign currency, the change in the value of the derivatives was recognized in
Other (income) expense, net
in the condensed consolidated financial statements.
The following table summarizes Hospira's fair value of outstanding derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance
Sheet Presentation
|
|
June 30,
|
|
December 31,
|
(dollars in millions)
|
|
|
2014
|
|
2013
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts:
|
|
Other receivables
|
|
$
|
—
|
|
|
$
|
2.8
|
|
|
|
Other accrued liabilities
|
|
2.9
|
|
|
0.1
|
|
The impact on earnings from derivatives activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Presentation of (Gain) Loss
Recognized on Derivatives
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(dollars in millions)
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Other (income) expense, net
|
|
$
|
1.5
|
|
|
$
|
(4.0
|
)
|
|
$
|
0.8
|
|
|
$
|
3.0
|
|
Note 9 — Inventories, Net
Inventories, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(dollars in millions)
|
|
2014
|
|
2013
|
Finished products
|
|
$
|
533.0
|
|
|
$
|
442.3
|
|
Work in process
|
|
303.1
|
|
|
294.1
|
|
Materials
|
|
331.7
|
|
|
329.8
|
|
Total
|
|
$
|
1,167.8
|
|
|
$
|
1,066.2
|
|
Inventory reserves were $
139.6 million
and
$143.3 million
as of
June 30, 2014
and
December 31, 2013
, respectively.
Note 10 — Property and Equipment, Net
Property and equipment, net
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(dollars in millions)
|
|
2014
|
|
2013
|
Property and equipment, at cost
|
|
$
|
3,429.4
|
|
|
$
|
3,286.2
|
|
Accumulated depreciation
|
|
(1,773.8
|
)
|
|
(1,712.0
|
)
|
Total property and equipment, net
|
|
$
|
1,655.6
|
|
|
$
|
1,574.2
|
|
Note 11 — Goodwill and Intangible Assets, Net
The following summarizes
Goodwill
and
Intangible assets, net
activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
(dollars in millions)
|
|
Goodwill
|
|
Balance at January 1, 2014
|
|
$
|
1,057.7
|
|
|
$
|
172.2
|
|
Additions
|
|
7.1
|
|
|
9.1
|
|
Amortization
|
|
—
|
|
|
(43.9
|
)
|
Currency translation effect and other
|
|
6.1
|
|
|
1.9
|
|
Balance at June 30, 2014
|
|
$
|
1,070.9
|
|
|
$
|
139.3
|
|
Additions to
Goodwill
and
Intangible assets, net
are primarily related to Hospira's acquisition of Evolabis as discussed in Note
2
, and are allocated to the Americas reportable segment. See Note
25
for information on reportable segments.
Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives (
1
to
16
years, weighted average
10
years). Indefinite lived intangibles, principally in-process research and development ("IPR&D"), are not amortized until completion and regulatory approval. During the
three
months ended
June 30, 2014
and
2013
, intangible asset amortization expense was
$22.1 million
and
$21.6 million
, respectively, and reported in
Cost of products sold
. During the
six
months ended
June 30, 2014
and
2013
, intangible asset amortization expense was
$43.9 million
and
$43.5 million
, respectively. Intangible asset amortization is estimated at
$79 million
for 2014,
$46 million
for 2015,
$24 million
for 2016,
$14 million
for 2017 and
$5 million
for 2018. These amortization estimates, and the above summary of
Goodwill
and
Intangible assets, net
activity, do not include amortization associated with intangible assets acquired through the Orchid acquisition in July 2014, as discussed in Note 2.
Intangible assets, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Intangible assets, net
|
|
|
June 30,
|
|
December 31,
|
|
June 30,
|
|
December 31,
|
|
June 30,
|
|
December 31,
|
(dollars in millions)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Product rights and other
|
|
$
|
580.2
|
|
|
$
|
562.6
|
|
|
$
|
(470.3
|
)
|
|
$
|
(422.9
|
)
|
|
$
|
109.9
|
|
|
$
|
139.7
|
|
Customer relationships
|
|
12.2
|
|
|
11.9
|
|
|
(8.8
|
)
|
|
(7.8
|
)
|
|
3.4
|
|
|
4.1
|
|
IPR&D
|
|
1.3
|
|
|
2.2
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
|
2.2
|
|
Technology
|
|
51.6
|
|
|
48.9
|
|
|
(26.9
|
)
|
|
(22.7
|
)
|
|
24.7
|
|
|
26.2
|
|
|
|
$
|
645.3
|
|
|
$
|
625.6
|
|
|
$
|
(506.0
|
)
|
|
$
|
(453.4
|
)
|
|
$
|
139.3
|
|
|
$
|
172.2
|
|
Note 12 — Other Assets
Other assets
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(dollars in millions)
|
|
2014
|
|
2013
|
Supplier advances
|
|
$
|
51.4
|
|
|
$
|
59.8
|
|
Net investment in sales-type leases, less current portion
|
|
15.5
|
|
|
19.9
|
|
All other
|
|
67.4
|
|
|
64.6
|
|
Total
|
|
$
|
134.3
|
|
|
$
|
144.3
|
|
Note 13 — Sales-Type Leases
The net investment in sales-type leases of certain medication management products consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(dollars in millions)
|
|
2014
|
|
2013
|
Minimum lease payments receivables
|
|
$
|
26.3
|
|
|
$
|
32.1
|
|
Unearned interest income
|
|
(2.4
|
)
|
|
(3.3
|
)
|
Net investment in sales-type leases
|
|
23.9
|
|
|
28.8
|
|
Current portion
(1)
|
|
(8.4
|
)
|
|
(8.9
|
)
|
Net investment in sales-type leases, less current portion
(1)
|
|
$
|
15.5
|
|
|
$
|
19.9
|
|
|
|
(1)
|
The current and long-term portions are reported in Trade receivables and
Other assets
, respectively.
|
Hospira monitors the credit quality of sales-type leases and recognizes an allowance for credit loss based on historical loss experience. As of
June 30, 2014
and
December 31, 2013
, 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
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(dollars in millions)
|
|
2014
|
|
2013
|
Accrued rebates
|
|
$
|
147.7
|
|
|
$
|
150.4
|
|
Income taxes payable
|
|
5.0
|
|
|
10.4
|
|
Product recalls, customer sales allowances, customer accommodations and other related accruals
|
|
152.7
|
|
|
110.5
|
|
Accrued returns
|
|
24.1
|
|
|
20.1
|
|
All other
|
|
309.8
|
|
|
265.4
|
|
Total
|
|
$
|
639.3
|
|
|
$
|
556.8
|
|
See Notes
4
and
16
for further details regarding product recalls, customer sales allowances, customer accommodations and other related accruals.
Note 15 — Post-Retirement Obligations and Other Long-term Liabilities
Post-retirement obligations and other long-term liabilities
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(dollars in millions)
|
|
2014
|
|
2013
|
Accrued post-retirement medical and dental costs
|
|
$
|
48.3
|
|
|
$
|
48.3
|
|
Pension liabilities
|
|
43.5
|
|
|
46.9
|
|
Unrecognized tax benefits, including penalties and interest
|
|
23.4
|
|
|
45.7
|
|
Product recalls, customer sales allowances, customer accommodations and other related accruals
|
|
41.5
|
|
|
103.7
|
|
Accrued returns
|
|
11.9
|
|
|
10.3
|
|
All other
|
|
35.4
|
|
|
46.8
|
|
Total
|
|
$
|
204.0
|
|
|
$
|
301.7
|
|
See Notes
4
and
16
for further details regarding product recalls, customer sales allowances, customer accommodations and other related accruals.
Note 16 — Product Recalls, Customer Sales Allowances, Customer Accommodations and Other Related Accruals
Accruals for various product recalls, customer sales allowances, customer accommodations and other related accruals were
$194.2 million
and
$214.2 million
as of
June 30, 2014
and
December 31, 2013
, 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 condensed consolidated balance sheets, respectively. Customer sales allowance charges are recognized in
Net sales
, while charges associated with product recalls, customer accommodations, and other related costs are recognized in
Cost of products sold
.
The following summarizes product recalls, customer sales allowances, customer accommodations and other related accrual activity for the
six
months ended
June 30, 2014
:
|
|
|
|
|
|
(dollars in millions)
|
|
|
Balances at January 1, 2014
|
|
$
|
214.2
|
|
Provisions net of releases of prior provisions
|
|
8.2
|
|
Payments
|
|
(28.2
|
)
|
Balances at June 30, 2014
|
|
$
|
194.2
|
|
Note 17 — Pension and Other Post-Retirement Benefits
Hospira's 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 periodic benefit cost recognized for Hospira's pension and medical and dental plans consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(dollars in millions)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Service cost for benefits earned during the period
|
|
$
|
0.4
|
|
|
$
|
0.3
|
|
|
$
|
0.8
|
|
|
$
|
0.7
|
|
Interest cost on projected benefit obligations
|
|
6.5
|
|
|
5.9
|
|
|
13.0
|
|
|
11.8
|
|
Expected return on plans' assets
|
|
(7.8
|
)
|
|
(7.9
|
)
|
|
(15.6
|
)
|
|
(15.7
|
)
|
Amortization of net actuarial losses
|
|
3.1
|
|
|
4.8
|
|
|
6.2
|
|
|
9.6
|
|
Net periodic benefit cost
|
|
$
|
2.2
|
|
|
$
|
3.1
|
|
|
$
|
4.4
|
|
|
$
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical and Dental Plans
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(dollars in millions)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Service cost for benefits earned during the period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Interest cost on projected benefit obligations
|
|
0.6
|
|
|
0.5
|
|
|
1.2
|
|
|
1.0
|
|
Amortization of net actuarial losses
|
|
0.1
|
|
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
Net periodic benefit cost
|
|
$
|
0.7
|
|
|
$
|
0.6
|
|
|
$
|
1.5
|
|
|
$
|
1.3
|
|
Hospira has no estimated U.S. minimum required contribution for 2014 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 its 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. No contributions were made to the U.S. pension plan for the
six
months ended
2014
, nor does Hospira expect to make any discretionary cash contributions in
2014
.
Certain Hospira employees in the U.S. and Puerto Rico participate in the Hospira 401(k) Retirement Savings Plan. Hospira's expenses for this defined contribution plan for the
three
months ended
June 30, 2014
and
2013
were
$9.9 million
and
$10.0 million
, respectively. For the
six
months ended
June 30, 2014
and
2013
, these expenses were
$21.5 million
and
$21.1 million
, respectively.
Note 18
—
Short-term Borrowings and Long-term Debt
As of
June 30, 2014
, Hospira had a $
1.0 billion
unsecured revolving credit facility (the "Revolver") maturing in
October 2016
with no amounts outstanding. Amounts borrowed under the Revolver, if any, are included in the leverage ratio covenant and may limit Hospira's availability for borrowings to less than
$1.0 billion
. As of
June 30, 2014
, Hospira had approximately
$839 million
of availability under the Revolver. The availability of funds is limited by financial covenants related to Hospira's debt and financial position.
As of
June 30, 2014
, Hospira was in compliance with all financial covenants.
Note 19 — Income Taxes
Taxes on income reflect the estimated annual effective rates, excluding the effect of significant unusual items. The effective tax rates are less than the statutory U.S. federal income tax rate principally due to the benefit of tax exemptions, of varying durations, in certain non-U.S. taxing jurisdictions.
Hospira remains subject to tax examinations, which are in various stages, in the following major tax-paying jurisdictions: for years 2006 forward in Italy, for years 2007 forward in Australia, for years 2009 forward in Canada and for years 2010 forward
in the U.S. and United Kingdom. Hospira estimates that within the next twelve months a decrease of up to
$10 million
in the balance of unrecognized tax benefits could occur as a result of audit settlements or statute of limitations expirations.
Note 20
—
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. As of
June 30, 2014
and
December 31, 2013
,
181.7 million
and
179.1 million
common shares were issued and
168.5 million
and
166.0 million
common shares were outstanding, respectively. As of those dates, no shares of preferred stock were issued and outstanding. During May 2014, shareholders approved an amendment to the Company's 2004 Long-Term Stock Incentive Plan, as further discussed in Note 23, to increase the maximum number of shares available for issuance under this Plan.
Treasury Stock
In April 2011, Hospira's Board of Directors authorized the repurchase of up to
$1.0 billion
of Hospira's common stock. 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
six
months ended
June 30, 2014
.
Note 21
—
Accumulated Other Comprehensive Loss
,
Net of Tax
Changes in
Accumulated Other Comprehensive Loss
, net of taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Cumulative Foreign Currency Translation Adjustments
(1)
|
|
Cumulative Unrealized Retirement Plans Losses
(2)
|
|
Cumulative Unrealized Gains on Marketable Equity Securities
(1)
|
|
Cumulative Losses on
Terminated Cash Flow Hedges
(3)
|
|
Total Accumulated Other Comprehensive Loss
|
Balance at January 1, 2014
|
|
$
|
(98.4
|
)
|
|
$
|
(103.4
|
)
|
|
$
|
1.5
|
|
|
$
|
(1.7
|
)
|
|
$
|
(202.0
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
38.7
|
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
39.3
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
3.9
|
|
|
—
|
|
|
0.1
|
|
|
4.0
|
|
Balance at June 30, 2014
|
|
$
|
(59.7
|
)
|
|
$
|
(99.5
|
)
|
|
$
|
2.1
|
|
|
$
|
(1.6
|
)
|
|
$
|
(158.7
|
)
|
|
|
(1)
|
Net of taxes of
$0.0 million
as of
June 30, 2014
and
December 31, 2013
.
|
|
|
(2)
|
Net of taxes of
$59.5 million
and
$62.0 million
as of
June 30, 2014
and
December 31, 2013
, respectively.
|
|
|
(3)
|
Net of taxes of
$1.1 million
as of
June 30, 2014
and
December 31, 2013
.
|
The following summarizes reclassifications out of
Accumulated Other Comprehensive Loss
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Reclassified from
Accumulated Other Comprehensive Loss
|
|
|
(dollars in millions)
|
|
Three Months Ended June 30, 2014
|
|
Six Months Ended
June 30, 2014
|
|
Line Item in the
Condensed Consolidated
Statement of Income (Loss)
|
Amortization of loss on terminated cash flow hedges
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
Other (income) expense, net
|
|
|
—
|
|
|
—
|
|
|
Income tax expense (benefit)
|
Net of income taxes
|
|
0.1
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension plans actuarial losses
|
|
3.1
|
|
|
6.2
|
|
|
(1)
|
Amortization of medical and dental plans actuarial losses
|
|
0.1
|
|
|
0.2
|
|
|
(1)
|
Total amortization before income taxes
|
|
3.2
|
|
|
6.4
|
|
|
|
|
|
(1.0
|
)
|
|
(2.5
|
)
|
|
Income tax expense (benefit)
|
Net of income taxes
|
|
2.2
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
2.3
|
|
|
$
|
4.0
|
|
|
|
|
|
(1)
|
These
Accumulated Other Comprehensive Loss
components are included in the computation of net periodic benefit cost. See Note
17
for additional details.
|
Note 22 —
Earnings (Loss) Per Share
Basic
Earnings (Loss) Per Share
is computed by dividing
Net Income (Loss)
by the number of weighted average common shares outstanding during the reporting period. Diluted
Earnings (Loss) Per Share
is calculated to give effect to all potentially dilutive common shares that were outstanding during each respective reporting period, in which such effect was 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
, and the number of outstanding shares to purchase Hospira stock excluded from the Diluted
Earnings (Loss) Per Share
calculation as the exercise price of the awards exceeded the average stock price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(shares in millions)
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Weighted average basic common shares outstanding
|
167.7
|
|
|
165.5
|
|
|
167.1
|
|
|
165.4
|
|
Incremental shares outstanding related to stock-based awards
|
2.3
|
|
|
0.8
|
|
|
2.7
|
|
|
—
|
|
Weighted average dilutive common shares outstanding
|
170.0
|
|
|
166.3
|
|
|
169.8
|
|
|
165.4
|
|
|
|
|
|
|
|
|
|
Outstanding awards for which the exercise price of the award exceeds the average stock price
|
3.9
|
|
|
10.1
|
|
|
4.0
|
|
|
10.1
|
|
For the
six
months ended
June 30, 2013
,
0.8 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 the
six
months ended
June 30, 2013
.
Note 23 — Incentive Stock Program
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 2014, shareholders approved amending the 2004 Plan primarily to extend the term by
10
years to May 7, 2024, and to increase the number of shares that may be granted during the life of the 2004 Plan by an additional
10,000,000
shares. Stock-based compensation expense associated with Hospira's 2004 Plan consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(dollars in millions)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Stock-based compensation expense
|
|
$
|
17.7
|
|
|
$
|
9.2
|
|
|
$
|
28.7
|
|
|
$
|
20.7
|
|
Income tax benefit recognized
|
|
6.5
|
|
|
3.4
|
|
|
10.5
|
|
|
7.6
|
|
As of
June 30, 2014
, there was
$99.7 million
of total unrecognized compensation costs related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of
2.3
years.
Stock Options
During the
six
months ended
June 30, 2014
,
1.4 million
options were granted to certain employees primarily as part of the 2014 annual stock option grant. These options were awarded at the fair market value at the time of grant, generally vest over
four
years and have a
seven
-year term. 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 weighted average grant date fair value using the Black-Scholes option-pricing model, and the corresponding weighted average assumptions for stock option grants, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Expected volatility
|
|
27.7
|
%
|
|
31.5
|
%
|
|
27.7
|
%
|
|
30.3
|
%
|
Expected life (years)
|
|
4.7
|
|
|
5.1
|
|
|
4.7
|
|
|
5.1
|
|
Risk-free interest rate
|
|
1.5
|
%
|
|
1.5
|
%
|
|
1.5
|
%
|
|
0.9
|
%
|
Expected dividend yield
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Fair value per stock option
|
|
$
|
13.47
|
|
|
$
|
11.39
|
|
|
$
|
11.29
|
|
|
$
|
8.46
|
|
Performance Share Awards
During the
six
months ended
June 30, 2014
,
0.1 million
performance share awards were granted to key members of management primarily as part of the 2014 annual grant. These awards vest at the end of the three-year performance cycle. The amount of awards is earned based on a formula measuring performance using relative total shareholder return over a three-year performance cycle compared to an industry peer group. Based on the actual performance at the end of 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.
The weighted average grant date fair value using the Monte Carlo simulation model and the corresponding weighted average assumptions for the annual performance share award grants, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2014
|
|
2013
|
Expected volatility
|
|
30.8
|
%
|
|
30.8
|
%
|
Risk-free interest rate
|
|
0.6
|
%
|
|
0.4
|
%
|
Expected dividend yield
|
|
0.0
|
%
|
|
0.0
|
%
|
Fair value per performance share
|
|
$
|
54.55
|
|
|
$
|
29.46
|
|
Restricted Stock Units
During the
six
months ended
June 30, 2014
,
0.8 million
restricted stock units ("restricted awards") were granted to certain employees and non-employee directors primarily as part of the 2014 annual grant. Hospira issues restricted awards with a vesting period ranging from
one
to
three
years. The weighted average grant date fair value of restricted awards granted for the
six
months ended
June 30, 2014
was
$42.96
per restricted award. The weighted average grant date fair value for the
six
months ended
June 30, 2013
was
$29.45
per restricted award.
Note
24
— Commitments and Contingencies
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.
Precedex™ Matters
Hospira is involved in
seven
patent lawsuits concerning Hospira's Precedex™ (dexmedetomidine hydrochloride), a proprietary sedation agent.
In December 2013, Hospira entered into a settlement agreement in its patent infringement litigation over Precedex™ with Sandoz, Inc. and Sandoz Canada, Inc. (collectively "Sandoz"), related to Sandoz's "Paragraph IV" notice indicating that it has filed an abbreviated new drug application ("ANDA") with the FDA for a generic version of Precedex™. The agreement provides for a market entry date for Sandoz to sell a generic version of Precedex™ no later than December 26, 2014. The agreement also includes a number of accelerator provisions which, if triggered, could lead to an earlier Sandoz market entry date, and is subject to standard contingencies.
On November 12, 2010, Hospira brought suit against Caraco Pharmaceutical Laboratories, Ltd. ("Caraco") for patent infringement. The lawsuit, which alleges infringement of U.S. Patent No. 6,716,867 (the "867 patent") (expires March 31, 2019) 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.
On January 15, 2014, the FDA opened a public docket to solicit comment from potential generic competitors for Precedex™ concentrate regarding the ability of potential competitors to "carve-out" labeled indications and potentially achieve final product approval at any time. Depending on how it rules, action by the FDA could lead to one or more launches of generic Precedex™ concentrate anytime thereafter which would have a material adverse impact on Hospira's sales of Precedex™ and related results of operations.
On April 18, 2014, Hospira and Orion Corporation, brought suit in separate actions against the following parties alleging infringement of the 867 patent:
|
|
|
Defendant
|
U.S. District Court Where Filed
|
Akorn, Inc.
|
Northern District of Illinois., No. 14-cv-02811
|
Actavis US Holding LLC and Actavis LLC
|
District of Delaware, No. 14-cv-00488
|
Ben Venue Laboratories, Inc. d/b/a Bedford Laboratories
|
District of Delaware, No. 14-cv-00487
|
Aurobindo Pharma Ltd. and Aurobindo Pharma USA, Inc.
|
District of Delaware, No. 14-cv-00486
|
Intas Pharmaceuticals Ltd. and Accord Healthcare, Inc. USA
|
Middle District of North Carolina, No. 14-cv-00336
|
The lawsuits are based on the "Paragraph IV" notice provided by the respective ANDA holders above indicating that each has filed an ANDA with the FDA for a generic version of Precedex™. Hospira seeks a judgment of infringement, injunctive relief and costs.
On June 20, 2014, Hospira received a "Paragraph IV" notice from Bedford Laboratories referencing Hospira's patents for Precedex™, including patents covering the pre-mix formulation of Precedex™. Hospira intends to respond to the notice within 45-days from receipt.
Securities Litigation
Hospira and certain of its current and former corporate officers are defendants in a class action 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 fourth quarter, 2009 financial results)
through October 17, 2011 (Hospira announced preliminary financial results for third quarter, 2011 on October 18, 2011). The parties have reached a tentative agreement to settle this matter, subject to the Court's review and grant of final approval. The settlement will be fully funded by insurance proceeds.
Derivative Securities Litigation
Hospira is a nominal defendant in a consolidated shareholder derivative lawsuit, which names as defendants certain current and former Hospira officers, and members of Hospira's Board of Directors. The case is:
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, 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)
. In general terms, the lawsuit alleges breaches of fiduciary duties by the individual defendants and seeks damages, purportedly on behalf of Hospira.
In July 2014, a shareholder derivative suit,
International Union of Operating Engineers Pension Plan of Eastern Pennsylvania and Delaware v. Christopher B. Begley, F. Michael Ball, Thomas E. Werner, 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, and Ronald A. Matricaria and Hospira, Inc. (Nominal Defendant)
, was filed in Delaware Chancery Court. This suit alleges breaches of fiduciary duty by the individual defendants and seeks damages, purportedly on behalf of Hospira, in connection with the matters covered by the lawsuit described in the preceding paragraph and the securities lawsuit described under "Securities Litigation" above. The plaintiff shareholder previously made a written Demand for Action on the Board of Directors in February and May 2014. Counsel for another shareholder made a similar demand in April 2012 to investigate the matters covered by the derivative and securities lawsuits, but that shareholder is not a party to the lawsuit filed in July 2014.
Regulatory Matters
Hospira's businesses are subject to regulatory inspections by regulatory authorities across the globe. Such regulatory inspections may lead to observations (commonly referred to as Form 483 observations in the U.S.), untitled letters, warning letters or similar correspondence, voluntary or involuntary product recalls, consent decrees, injunctions to halt manufacture and distribution of products, seizures of violative products, import and export bans or restrictions, monetary sanctions, delays in product approvals, civil penalties, criminal prosecution and other restrictions on operations.
Hospira has received warning letters from the FDA related to matters affecting its pharmaceutical and device manufacturing facilities in Clayton and Rocky Mount, North Carolina, its device manufacturing facility in La Aurora de Heredia, Costa Rica, Irungattukottai, India, and its device quality systems and governance in Lake Forest, Illinois. The Company has responded fully, and in a timely manner, to these warning letters. The remediation plans involve commitments by Hospira to enhance its quality system, products, facilities, employee training, quality processes and procedures, and technology. While Hospira continues implementing its remediation plans, the plans are subject to update and revision based on issues encountered by Hospira or its third-party consultants during the remediation process, or on further interaction with the FDA or other regulatory bodies. Hospira cannot, however, give any assurances as to the expected date of resolution of the matters identified in the warning letters.
Litigation Exposure Evaluation
Hospira's litigation exposure, including product liability claims, is evaluated each reporting period. Hospira's accruals, which are not significant at
June 30, 2014
and
December 31, 2013
, 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 Information
Hospira conducts operations worldwide and is managed in
three
reportable segments: Americas, EMEA and APAC. The Americas reportable segment includes
three
operating segments, the U.S., Canada and Latin America; the EMEA reportable segment includes
one
operating segment, Europe, the Middle East and Africa; and the APAC reportable segment includes
two
operating segments, Asia & Japan and Australia & New Zealand. 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 (income) expense, 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 in Note 1 of Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, of Hospira's 2013 Form 10-K.
Reportable segment information:
The table below presents information about Hospira's reportable segments for the
three
months ended
June 30
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Income (Loss) From Operations
|
(dollars in millions)
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Americas
|
$
|
913.2
|
|
|
$
|
816.2
|
|
|
$
|
136.6
|
|
|
$
|
97.5
|
|
EMEA
|
132.7
|
|
|
129.3
|
|
|
(11.7
|
)
|
|
(14.9
|
)
|
APAC
|
89.9
|
|
|
80.7
|
|
|
12.2
|
|
|
1.6
|
|
Total reportable segments
|
$
|
1,135.8
|
|
|
$
|
1,026.2
|
|
|
137.1
|
|
|
84.2
|
|
Corporate functions
|
|
|
|
|
|
|
(19.9
|
)
|
|
(22.8
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
(17.7
|
)
|
|
(9.2
|
)
|
Income From Operations
|
|
|
|
|
|
|
99.5
|
|
|
52.2
|
|
Interest and Other (income) expense, net
|
|
|
|
|
|
|
(18.4
|
)
|
|
(30.0
|
)
|
Income Before Income Taxes
|
|
|
|
|
|
|
$
|
81.1
|
|
|
$
|
22.2
|
|
The table below presents information about Hospira's reportable segments for the
six
months ended
June 30
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Income (Loss) From Operations
|
(dollars in millions)
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Americas
|
$
|
1,755.0
|
|
|
$
|
1,514.6
|
|
|
$
|
278.4
|
|
|
$
|
71.8
|
|
EMEA
|
265.5
|
|
|
246.5
|
|
|
(25.8
|
)
|
|
(59.1
|
)
|
APAC
|
166.1
|
|
|
149.1
|
|
|
13.1
|
|
|
(15.2
|
)
|
Total reportable segments
|
$
|
2,186.6
|
|
|
$
|
1,910.2
|
|
|
265.7
|
|
|
(2.5
|
)
|
Corporate functions
|
|
|
|
|
|
|
(37.9
|
)
|
|
(43.2
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
(28.7
|
)
|
|
(20.7
|
)
|
Income (Loss) From Operations
|
|
|
|
|
|
|
199.1
|
|
|
(66.4
|
)
|
Interest and Other (income) expense, net
|
|
|
|
|
|
|
(36.9
|
)
|
|
(51.9
|
)
|
Income (Loss) Before Income Taxes
|
|
|
|
|
|
|
$
|
162.2
|
|
|
$
|
(118.3
|
)
|
Net sales
and
Income (Loss) From Operations
for the
six
months ended
June 30, 2013
includes charges of
$104.3 million
, including
$88.4 million
in the Americas segment,
$13.2 million
in the EMEA segment and
$2.7 million
in the APAC segment related to the Device Strategy. See Note
4
for further information.