HOSPIRA INC - FORM 10-Q - November 6, 2014

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.  20549
FORM 10-Q 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 1-31946 
HOSPIRA, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-0504497
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 275 North Field Drive
Lake Forest, Illinois 60045
(Address of principal executive offices, including zip code)
(224) 212-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨ No  x
As of November 3, 2014, Registrant had outstanding 169,202,014 shares of common stock, par value $0.01 per share.
 


Hospira, Inc.

Quarterly Report on Form 10-Q

Index

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Forward-Looking Statements
This report contains, or may contain, forward-looking statements within the meaning of the federal securities laws that are based upon management's assumptions and expectations regarding future events or circumstances and their effects upon revenues, expenses and business opportunities. Generally speaking, any statement in this report not based upon historical fact is a forward-looking statement. Forward-looking statements also can be identified by the use of forward-looking words, such as "may," "will," "should," "anticipate," "estimate," "expect," "plan," "believe," "predict," "potential," "project," "intend," "could" or similar expressions. In particular, statements regarding Hospira Inc.'s ("Hospira," "we," "us" or "our") plans, strategies, prospects and expectations regarding its business and industry are forward-looking statements. You should be aware that these statements and any other forward-looking statements in this document only reflect Hospira's expectations and are not guarantees of performance. These forward-looking statements involve risks, uncertainties and assumptions, many of which are beyond Hospira's control. Actual results and performance may differ materially from these forward-looking statements.
The forward-looking statements are based on assumptions about many factors, including the following:
•
continuing growth in demand and/or breadth of our currently marketed products and development of competitive products, and our ability to identify, successfully complete and receive expected benefits from business development and other growth opportunities;
•
healthcare reform, other legislative or regulatory initiatives and governmental pressures that may affect pricing, biosimilar development, the speed of new product or generic product introduction, quality control, reimbursement, rebate, taxation or other elements of our business;
•
actions undertaken by global regulatory, trade, accounting and taxation bodies, including (i) administrative action taken by the U.S. Food and Drug Administration ("FDA") that could delay or otherwise adversely impact our product development or the manufacturing, registration, importing or selling of products, (ii) trade restrictions or sanctions issued by the U.S. or foreign governments that may limit or close certain geographic markets, and (iii) changes in accounting or tax principles that may change the manner in which we are required to account for our activities; all of which could affect our financial results by affecting revenue opportunities or result in additional expenses or liabilities;
•
product quality or patient safety issues leading to product recalls or other corrective actions, product withdrawals, device product remediation, replacement and retirement programs, product launch delays, import and export bans or restrictions, suspensions, sanctions, seizures, injunctions, litigation or declining sales;
•
our ability to protect our intellectual property rights, including patents related to Precedex™, and the success of our life-cycle management programs, including the life-cycle management program related to Precedex™;
•
our ability to prevail against the intellectual property rights of third parties related to our research and development pipeline;
•
product development risks, including satisfactory clinical performance, general unpredictability associated with the product development cycle, the timing of regulatory approvals, the quality of our regulatory submissions and the satisfactory condition of our manufacturing facilities to support new product approvals, including our new Vizag, India facility;
•
risks associated with biosimilar development, including significant uncertainty concerning the regulatory pathway in the U.S. to obtain approval, and risks associated with our product development and collaboration agreements;
•
the availability and pricing of acceptable raw materials and component supplies;
•
our ability to realize the anticipated benefits of our continuous improvement initiatives, including any modernization and streamlining activities, and the potential consequences of these initiatives, including the impairment of fixed assets, intangible assets and goodwill, and other restructuring charges; and
•
economic factors, including inflation, contraction in capital markets, changes in interest rates and changes in foreign currency exchange rates.
Other important factors that could cause our actual results to differ materially from our expectations include (i) risks and uncertainties described in "Part I, Item 1A. Risk Factors," in Hospira's Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K"), as updated by "Part II, Item 1A. Risk Factors," in this report, (ii) factors described in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in Hospira's 2013 Form 10-K, as updated by "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," in this report, and (iii) matters discussed in "Part II, Item 8. Financial Statements and Supplementary Data, Note 25," in Hospira's 2013 Form 10-K, as updated by "Part I, Item 1. Financial Statements, Note 24," in this report. These forward-looking statements speak only as of the date on which the statements were made. Accordingly, you should not place undue reliance on the forward-looking statements contained in this report. Hospira undertakes no obligation to update or correct any of these statements and investors and others should not expect that Hospira will make additional updates or corrections, unless required by law.

3

PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
Hospira, Inc.

Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Unaudited)

(dollars and shares in millions, except for per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
1,150.6

 
$
1,008.2

 
$
3,337.2

 
$
2,918.4

 
 
 
 
 
 
 
 
Cost of products sold
719.3

 
718.0

 
2,136.3

 
2,159.5

Restructuring, impairment and (gain) on disposal of assets, net
(106.3
)
 
9.8

 
(92.0
)
 
21.4

Research and development
86.3

 
69.9

 
245.2

 
218.1

Selling, general and administrative
223.8

 
180.7

 
621.1

 
556.0

Total operating costs and expenses
923.1

 
978.4

 
2,910.6

 
2,955.0

Income (Loss) From Operations
227.5

 
29.8

 
426.6

 
(36.6
)
 
 
 
 
 
 
 
 
Interest expense
19.2

 
23.3

 
58.9

 
62.8

Other expense, net
4.3

 
39.0

 
1.4

 
51.3

Income (Loss) Before Income Taxes
204.0

 
(32.5
)
 
366.3

 
(150.7
)
Income tax expense (benefit)
48.6

 
(31.7
)
 
84.1

 
(96.2
)
Equity income from affiliates, net
(3.2
)
 
(2.7
)
 
(15.2
)
 
(12.7
)
Net Income (Loss)
$
158.6

 
$
1.9

 
$
297.4

 
$
(41.8
)
 
 
 
 
 
 
 
 
Earnings (Loss) Per Common Share:
 

 
 

 
 
 
 
Basic
$
0.94

 
$
0.01

 
$
1.77

 
$
(0.25
)
Diluted
$
0.92

 
$
0.01

 
$
1.75

 
$
(0.25
)
Weighted Average Common Shares Outstanding:
 

 
 

 
 
 
 
Basic
168.9

 
165.7

 
167.7

 
165.5

Diluted
171.8

 
167.0

 
170.2

 
165.5

 
 
 
 
 
 
 
 
Comprehensive Income (Loss):
 

 
 

 
 
 
 
Foreign currency translation adjustments, net of taxes of $0.0 million for all periods
$
(96.3
)
 
$
(5.5
)
 
$
(57.6
)
 
$
(139.3
)
Pension liability adjustments, net of taxes of $(1.1) million and $(1.9) million for the three months ended September 30, 2014 and 2013, respectively, and $(3.7) million and $(5.6) million for the nine months ended September 30, 2014 and 2013, respectively
2.1

 
2.9

 
5.9

 
9.0

Unrealized losses on investments, net of taxes of $0.0 million for all periods
(2.7
)
 
—

 
(2.1
)
 
—

(Losses) gains on cash flow hedges, net of taxes of $0.0 million and $1.3 million for the three months ended September 30, 2014 and 2013, respectively, and $0.0 million and $1.4 million for the nine months ended September 30, 2014 and 2013, respectively
—

 
(2.3
)
 
0.1

 
(2.4
)
Other Comprehensive Loss
(96.9
)
 
(4.9
)
 
(53.7
)
 
(132.7
)
Net Income (Loss)
158.6

 
1.9

 
297.4

 
(41.8
)
Comprehensive Income (Loss)
$
61.7

 
$
(3.0
)
 
$
243.7

 
$
(174.5
)

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

4

Hospira, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(dollars in millions)
 
Nine Months Ended September 30,
 
2014
 
2013
Cash Flow From Operating Activities:
 

 
 

Net Income (Loss)
$
297.4

 
$
(41.8
)
Adjustments to reconcile Net Income (Loss) to net cash from operating activities-
 

 
 

Depreciation
134.7

 
128.9

Amortization of intangible assets
60.8

 
63.8

Loss on early debt extinguishment
—

 
33.4

Stock-based compensation expense
40.3

 
31.1

Undistributed equity income from affiliates
(15.2
)
 
(12.7
)
Distributions received from equity affiliates
16.3

 
30.1

Deferred income taxes and other tax adjustments
12.8

 
(119.7
)
Impairments and other asset charges
7.3

 
73.1

Gain on disposal of assets
(100.8
)
 
(0.9
)
Changes in assets and liabilities, net of the effects of acquisitions-
 

 
 

Trade receivables
(57.4
)
 
11.2

Inventories
(100.4
)
 
(144.3
)
Prepaid expenses and other assets
(8.2
)
 
(48.7
)
Trade accounts payable
33.4

 
(11.3
)
Other liabilities
(0.3
)
 
60.0

Other, net
13.6

 
9.3

Net Cash Provided by Operating Activities
334.3

 
61.5

 
 
 
 
Cash Flow From Investing Activities:
 

 
 

Capital expenditures (including instruments placed with or leased to customers)
(279.0
)
 
(248.5
)
Acquisitions, net of cash acquired
(223.4
)
 
—

Purchases of intangibles and other investments
(35.2
)
 
(12.2
)
Purchase of debt security
(200.0
)
 
—

Proceeds from disposal of businesses and assets
130.7

 
1.4

Net Cash Used in Investing Activities
(606.9
)
 
(259.3
)
 
 
 
 
Cash Flow From Financing Activities:
 

 
 

Issuance of long-term debt, net of fees paid
—

 
691.8

Repayment of long-term debt
—

 
(650.0
)
Payment on early debt extinguishment
—

 
(39.8
)
Other borrowings, net
(84.8
)
 
56.0

Excess tax benefit from stock-based compensation arrangements
4.4

 
1.1

Proceeds from stock options exercised
105.9

 
13.0

Net Cash Provided by Financing Activities
25.5

 
72.1

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(9.6
)
 
(14.6
)
 
 
 
 
Net change in cash and cash equivalents
(256.7
)
 
(140.3
)
Cash and cash equivalents at beginning of period
798.1

 
772.1

Cash and cash equivalents at end of period
$
541.4

 
$
631.8

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Cash paid during the period-
 
 
 
Interest
$
101.7

 
$
93.7

Income taxes, net of refunds
$
40.6

 
$
55.7

Accrued capital expenditures
$
27.9

 
$
12.2


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

5

Hospira, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(dollars in millions)
 
 
September 30,
2014
 
December 31,
2013
Assets
 

 
 

Current Assets:
 

 
 

Cash and cash equivalents
$
541.4

 
$
798.1

Trade receivables, less allowances of $10.3 and $11.2, respectively
610.2

 
574.3

Inventories, net
1,190.0

 
1,066.2

Deferred income taxes and other
215.2

 
208.6

Prepaid expenses
71.3

 
90.0

Other receivables
131.1

 
101.3

Total Current Assets
2,759.2

 
2,838.5

Property and equipment, net
1,787.7

 
1,574.2

Intangible assets, net
145.1

 
172.2

Goodwill
1,093.0

 
1,057.7

Deferred income taxes
314.6

 
358.9

Investments
257.1

 
33.1

Other assets
136.4

 
144.3

Total Assets
$
6,493.1

 
$
6,178.9

Liabilities and Shareholders' Equity
 

 
 

Current Liabilities:
 

 
 

Short-term borrowings
$
12.9

 
$
93.7

Trade accounts payable
356.1

 
329.2

Salaries, wages and commissions
212.7

 
185.4

Other accrued liabilities
588.2

 
556.8

Total Current Liabilities
1,169.9

 
1,165.1

Long-term debt
1,749.2

 
1,747.0

Deferred income taxes
6.9

 
3.2

Post-retirement obligations and other long-term liabilities
215.4

 
301.7

Commitments and Contingencies


 


Total Shareholders' Equity
3,351.7

 
2,961.9

Total Liabilities and Shareholders' Equity
$
6,493.1

 
$
6,178.9


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

6

Hospira, Inc.

Condensed Consolidated Statement of Changes in Shareholders' Equity

(Unaudited)

(dollars and shares in millions)
 
Common Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss
 
 
 
Shares
 
Amount
 
 
 
 
 
Total
Balances at January 1, 2014
166.0

 
$
1.8

 
$
(599.8
)
 
$
1,838.1

 
$
1,923.8

 
$
(202.0
)
 
$
2,961.9

Net Income
—

 
—

 
—

 
—

 
297.4

 
—

 
297.4

Other Comprehensive Loss
—

 
—

 
—

 
—

 
—

 
(53.7
)
 
(53.7
)
Changes in shareholders' equity related to incentive stock programs
3.1

 
—

 
—

 
146.1

 
—

 
—

 
146.1

Balances at September 30, 2014
169.1

 
$
1.8

 
$
(599.8
)
 
$
1,984.2

 
$
2,221.2

 
$
(255.7
)
 
$
3,351.7


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

7

Hospira, Inc.

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, 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 Hospira's Annual Report on Form 10-K for the year ended December 31, 2013 ("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

8

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 financial position, results of operations or cash flows upon adoption of this guidance.

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 adopted ASU 2014-08 in the third 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.

Recently Issued Accounting Standards

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 outstanding advances, net of inventory receipts, of $50.5 million to Celltrion, Inc. and Celltrion Healthcare, Co., Ltd. (collectively "Celltrion") through September 30, 2014 for the purchase of certain biosimilar products. Additional supplier advances in the aggregate of $25.0 million 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.

Total supplier advances were $54.9 million and $102.2 million as of September 30, 2014 and December 31, 2013, respectively. A portion of the decrease in supplier advances relates to the acquisition of Orchid Chemicals & Pharmaceuticals Ltd.'s ("Orchid") penem and penicillin Active Pharmaceutical Ingredient ("API") business, as further described in Note 2. 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 $42.8 million and $7.1 million as of September 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 $7.0 million and $2.3 million as of September 30, 2014 and December 31, 2013, respectively.


9

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 $247.2 million, subject to certain adjustments. This acquisition provides Hospira additional API capacity and allows for continued vertical integration of anti-infective penem and penicillin products. 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. 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.

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 was established and reported in Selling, general and administrative in the three and nine months ended September 30, 2014.

The following summarizes acquisition and integration-related costs:
(dollars in millions)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Cost of products sold
 
$
1.9

 
$
—

 
$
1.9

 
$
—

Selling, general and administrative
 
24.8

 
1.2

 
27.6

 
3.9

Total
 
$
26.7

 
$
1.2

 
$
29.5

 
$
3.9


Cumulative acquisition and integration-related costs as of September 30, 2014 were $35.1 million.

The assets acquired and liabilities assumed at their respective estimated fair values is preliminary and based on the initial measurements as of the acquisition date of July 4, 2014. The fair value of intangible assets and acquired in-process research and development ("IPR&D") is pending finalization of the valuation, which may result in significant adjustments, and will be completed as soon as practicable. The following table summarizes the fair value of the assets acquired and liabilities assumed, based on management's best estimate:
(dollars in millions)
 
Current assets, net
$
53.5

Property and equipment
120.1

Intangible assets (product rights)
18.0

IPR&D
13.0

Goodwill
48.7

Other non-current assets and liabilities, net
(6.1
)
Total allocation of purchase price
$
247.2


Intangible assets (product rights) have an estimated weighted average useful life of 9 years. IPR&D is considered an indefinite-lived intangible asset until completion, regulatory approval or discontinuation, at which point Hospira will make a determination as to the useful life of the intangible asset and begin amortization. Goodwill, primarily assigned to the Americas reportable segment, includes the expected synergies and other benefits that Hospira believes will result from the integrated operations. Goodwill is not expected to be deductible for tax purposes.

Separately, Orchid remains a current supplier of cephalosporin APIs to Hospira.

Evolabis


10

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 operating results of the acquisitions have been included in Hospira's results of operations since the individual acquisition dates, and pro forma results of operations for these acquisitions have not been presented as they are not material to Hospira's results of operations, either individually or in the aggregate.

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, impairment and (gain) on disposal of assets, net and primarily include severance charges of $13.6 million and contract termination charges of $2.3 million. Of the aggregate costs, $(0.6) million and $3.1 million were (released) incurred in the three months ended September 30, 2014 and 2013, respectively, and $1.4 million and $7.6 million were incurred in the nine months ended September 30, 2014 and 2013, respectively.

The following summarizes the aggregate restructuring activity for the nine months ended September 30, 2014:
(dollars in millions)
Employee-Related
Benefit Costs
 
Other
 
Total
Balance at January 1, 2014
$
2.5

 
$
1.8

 
$
4.3

Costs (releases)
2.2

 
(0.8
)
 
1.4

Payments
(2.9
)
 
(0.4
)
 
(3.3
)
Balance at September 30, 2014
$
1.8

 
$
0.6

 
$
2.4


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 and incurred a pre-tax loss on disposal of assets of $5.0 million reported in Restructuring, impairment and (gain) on disposal of assets, net in the nine months ended September 30, 2014.

Divestitures

In August 2014, Hospira sold its surgical suction product line for $21.5 million payable in three installments through December 2015. Hospira will retain distribution rights to the products for varying periods of time depending on the territory and provide certain transition services through no later than December 2016. Hospira recognized a pre-tax gain of $15.9 million upon disposition of the product line reported in Restructuring, impairment and (gain) on disposal of assets, net in the three and nine months ended September 30, 2014.

In September 2014, Hospira sold its clinical surveillance software business, TheraDoc, Inc. ("TheraDoc") for a purchase price of $117.0 million, subject to adjustments for ending working capital, cash and indebtedness. Hospira recognized a pre-tax gain of $89.9 million upon disposition of the business reported in Restructuring, impairment and (gain) on disposal of assets, net in the three and nine months ended September 30, 2014.


11

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 September 30,
 
Nine Months Ended September 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
 
2.7

 
14.8

 
12.3

 
56.1

 
Cost of products sold
Inventory charges
 
0.6

 
0.9

 
3.0

 
46.7

 
Cost of products sold
Other asset impairments and accelerated depreciation
 
—

 
3.2

 
1.3

 
10.3

 
Restructuring, impairment and (gain) on disposal of assets, net
Total charges
 
$
3.3

 
$
18.9

 
$
16.6

 
$
217.4

 
 

Cumulative Device Strategy charges as of September 30, 2014 were $243.5 million. 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 nine months ended September 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 nine months ended September 30, 2014, in connection with the NovaQuest agreement, Hospira recognized an offset to Research and development expense for

12

development funding of $9.4 million and $28.1 million, respectively. For the three and nine months ended September 30, 2013, the offset recognized to Research and development expense was $22.1 million and $36.4 million, respectively. Cumulative development funding from NovaQuest as of September 30, 2014 was $78.1 million.

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

Equity Method 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 $3.2 million and $2.7 million for the three months ended September 30, 2014 and 2013, respectively. Equity income from affiliates, net, including the ZHOPL equity investment, was $15.2 million and $12.7 million for the nine months ended September 30, 2014 and 2013, respectively. Distributions received from ZHOPL were $16.3 million and $30.1 million, for the nine months ended September 30, 2014 and 2013, respectively.

Combined income statement financial information of unconsolidated equity method investments is as follows:
 
 
Nine Months Ended September 30,
(dollars in millions)
 
2014
 
2013
Revenue
 
$
47.3

 
$
69.9

Operating expenses
 
27.3

 
33.3

Operating income
 
20.0

 
36.6

Net Income
 
24.2

 
28.9


Fair Value Investments

On September 30, 2014, Hospira closed a convertible bond subscription agreement with Celltrion Healthcare Co., Ltd. ("Celltrion Healthcare"). Celltrion Healthcare issued a convertible bond with an aggregate principal amount denominated in Korean Won equal to $200.0 million U.S. Dollars, due on September 30, 2019. Interest will be payable quarterly at an annual rate of 6.0%. The convertible bond will be recognized as an available-for-sale investment and is subject to credit risk. Hospira may redeem some or all of the principal of the convertible bond for cash or an equity interest in Celltrion Healthcare, or, starting on the third anniversary of the issue of the convertible bond, the supply of biosimilar products. Additionally, Celltrion Healthcare may elect to pay interest on the convertible bond in cash, or in kind by providing biosimilar product to Hospira. Further, Hospira amended its co-exclusive agreement with Celltrion to amend commercial terms, which includes providing Hospira exclusive rights to specific biosimilar products in the U.S. and certain other territories. The terms of the convertible bond do not impact cumulative supplier advances already made from Hospira to Celltrion, described in "Note 1. Basis of Presentation and Significant Accounting Policies."

Cost Method Investments

In July 2014, Hospira advanced $30.0 million for an investment with a research and development venture with the potential obligation to invest an additional $15.0 million as early as 2015. 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 products developed are expected to provide Hospira commercialization opportunities in future periods.

Impairments

During the three and nine months ended September 30, 2013, Hospira recognized non-cash impairment charges of $2.7 million and $11.0 million, respectively, reported in Other 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.


13

During the three and nine months ended September 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 $0.4 million and $3.5 million, respectively, reported in Other 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
 
 
 
 
September 30,
 
 
 
Significant
Unobservable
Inputs
(dollars in millions)
 
2014
 
(Level 1)
 
(Level 2)
 
(Level 3)
Financial Assets:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
$
7.6

 
$
7.6

 
$
—

 
$
—

Investments
 
201.6

 
4.1

 
197.5

 
—

Financial Liabilities:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
1.4

 
—

 
1.4

 
—


See Note 6 for additional information on the Level 2 investment.
 
 
 
 
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

 
$
—

Investments
 
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:
 
 
September 30, 2014
 
December 31, 2013
(dollars in millions)
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Senior unsecured notes
 
$
1,750.0

 
$
1,887.7

 
$
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

14

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 $5.8 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 expense, net in the condensed consolidated financial statements.

The following table summarizes Hospira's fair value of outstanding derivatives:
 
 
Condensed Consolidated Balance
Sheet Presentation
 
September 30,
 
December 31,
(dollars in millions)
 
 
2014
 
2013
Derivatives not designated as hedging instruments
 
 
 
 

 
 

Foreign currency exchange contracts:
 
Other receivables
 
$
7.6

 
$
2.8

 
 
Other accrued liabilities
 
1.4

 
0.1


The impact on earnings from derivatives activity was as follows:
 
 
Presentation of (Gain) Loss
Recognized on Derivatives
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in millions)
 
 
2014
 
2013
 
2014
 
2013
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other expense, net
 
$
(5.6
)
 
$
(3.0
)
 
$
(4.8
)
 
$
—


Note 9 — Inventories, Net

Inventories, net consists of the following:
 
 
September 30,
 
December 31,
(dollars in millions)
 
2014
 
2013
Finished products
 
$
513.4

 
$
442.3

Work in process
 
358.5

 
294.1

Materials
 
318.1

 
329.8

Total
 
$
1,190.0

 
$
1,066.2


Inventory reserves were $143.2 million and $143.3 million as of September 30, 2014 and December 31, 2013, respectively.

Note 10 — Property and Equipment, Net

Property and equipment, net consists of the following:
 
 
September 30,
 
December 31,
(dollars in millions)
 
2014
 
2013
Property and equipment, at cost
 
$
3,563.4

 
$
3,286.2

Accumulated depreciation
 
(1,775.7
)
 
(1,712.0
)
Total property and equipment, net
 
$
1,787.7

 
$
1,574.2



15

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
 
55.8

 
39.9

Amortization
 
—

 
(60.8
)
Disposals
 
(17.6
)
 
(4.9
)
Currency translation effect
 
(2.9
)
 
(1.3
)
Balance at September 30, 2014
 
$
1,093.0

 
$
145.1


Additions to Goodwill and Intangible assets, net are primarily related to Hospira's acquisition of Orchid's penem and penicillin API business and Evolabis as discussed in Note 2, and are primarily assigned to the Americas reportable segment. Disposals of Goodwill are related to Hospira's disposals of TheraDoc and the surgical suction product line, as discussed in Note 3, and are a reduction primarily from 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 IPR&D, are not amortized until completion and regulatory approval. During the three months ended September 30, 2014 and 2013, intangible asset amortization expense was $16.6 million and $20.5 million, respectively, and reported in Cost of products sold. During the nine months ended September 30, 2014 and 2013, intangible asset amortization expense was $60.8 million and $63.8 million, respectively. Intangible asset amortization is estimated at $75 million for 2014, $47 million for 2015, $26 million for 2016, $16 million for 2017 and $7 million for 2018.

Intangible assets, net consists of the following:
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Intangible assets, net
 
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
September 30,
 
December 31,
(dollars in millions)
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Product rights and other
 
$
568.8

 
$
562.6

 
$
(461.2
)
 
$
(422.9
)
 
$
107.6

 
$
139.7

Customer relationships
 
7.7

 
11.9

 
(6.4
)
 
(7.8
)
 
1.3

 
4.1

IPR&D
 
13.8

 
2.2

 
—

 
—

 
13.8

 
2.2

Technology
 
39.0

 
48.9

 
(16.6
)
 
(22.7
)
 
22.4

 
26.2

Total
 
$
629.3

 
$
625.6

 
$
(484.2
)
 
$
(453.4
)
 
$
145.1

 
$
172.2


Note 12 — Other Assets

Other assets consists of the following:
 
 
September 30,
 
December 31,
(dollars in millions)
 
2014
 
2013
Supplier advances
 
$
29.1

 
$
59.8

Net investment in sales-type leases, less current portion
 
13.0

 
19.9

Unapproved products
 
32.6

 
—

Non-current receivables
 
32.5

 
33.0

All other
 
29.2

 
31.6

Total
 
$
136.4

 
$
144.3



16

Note 13 — Sales-Type Leases

The net investment in sales-type leases of certain medication management products consists of the following:
 
 
September 30,
 
December 31,
(dollars in millions)
 
2014
 
2013
Minimum lease payments receivables
 
$
23.2

 
$
32.1

Unearned interest income
 
(2.0
)
 
(3.3
)
Net investment in sales-type leases
 
21.2

 
28.8

Current portion (1)
 
(8.2
)
 
(8.9
)
Net investment in sales-type leases, less current portion (1)
 
$
13.0

 
$
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 September 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:
 
 
September 30,
 
December 31,
(dollars in millions)
 
2014
 
2013
Accrued rebates
 
$
134.7

 
$
150.4

Income taxes payable
 
35.2

 
10.4

Product recalls, customer sales allowances, customer accommodations and other related accruals
 
141.3

 
110.5

Accrued returns
 
28.4

 
20.1

All other
 
248.6

 
265.4

Total
 
$
588.2

 
$
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:
 
 
September 30,
 
December 31,
(dollars in millions)
 
2014
 
2013
Accrued post-retirement medical and dental costs
 
$
48.3

 
$
48.3

Pension liabilities
 
42.3

 
46.9

Unrecognized tax benefits, including penalties and interest
 
44.3

 
45.7

Product recalls, customer sales allowances, customer accommodations and other related accruals
 
36.6

 
103.7

Accrued returns
 
12.2

 
10.3

All other
 
31.7

 
46.8

Total
 
$
215.4

 
$
301.7


See Notes 4 and 16 for further details regarding product recalls, customer sales allowances, customer accommodations and other related accruals.


17

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 $177.9 million and $214.2 million as of September 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 nine months ended September 30, 2014:
(dollars in millions)
 
 
Balances at January 1, 2014
 
$
214.2

Provisions net of releases of prior provisions
 
5.5

Payments
 
(41.8
)
Balances at September 30, 2014
 
$
177.9


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 September 30,
 
Nine Months Ended September 30,
(dollars in millions)
 
2014
 
2013
 
2014
 
2013
Service cost for benefits earned during the period
 
$
0.4

 
$
0.4

 
$
1.3

 
$
1.1

Interest cost on projected benefit obligations
 
6.5

 
5.9

 
19.5

 
17.7

Expected return on plans' assets
 
(7.8
)
 
(7.8
)
 
(23.4
)
 
(23.5
)
Amortization of net actuarial losses
 
3.1

 
4.7

 
9.3

 
14.3

Net periodic benefit cost
 
$
2.2

 
$
3.2

 
$
6.7

 
$
9.6

 
 
Medical and Dental Plans
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in millions)
 
2014
 
2013
 
2014
 
2013
Service cost for benefits earned during the period
 
$
—

 
$
0.1

 
$
0.1

 
$
0.2

Interest cost on projected benefit obligations
 
0.6

 
0.5

 
1.8

 
1.5

Amortization of net actuarial losses
 
0.1

 
0.1

 
0.3

 
0.3

Net periodic benefit cost
 
$
0.7

 
$
0.7

 
$
2.2

 
$
2.0


In the third quarter of 2014, Hospira offered certain terminated vested participants in a U.S. pension plan, the Abbott/Hospira Transitional Annuity Retirement Plan, the opportunity to receive a lump-sum payment equal to the present value of the participant's pension benefit. The election window was open through October 31, 2014, with cash payment from the plan assets expected to occur during the fourth quarter of 2014. If payments from plan assets exceed a threshold, a settlement loss would be incurred, which would be recognized as a reclassification from Other Comprehensive Loss to Net Income (Loss). Administrative processes are still ongoing; however, anticipated payments at this time are not expected to exceed this threshold.

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

18

deems it is prudent to do so. No contributions were made to the U.S. pension plan for the nine 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 September 30, 2014 and 2013 were $11.5 million and $11.0 million, respectively. For the nine months ended September 30, 2014 and 2013, these expenses were $33.0 million and $32.1 million, respectively.

Note 18 — Short-term Borrowings and Long-term Debt

As of September 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. The availability of funds is limited by financial covenants related to Hospira's debt and financial position, and as of September 30, 2014, Hospira had no limit on the availability under the Revolver.

As of September 30, 2014, Hospira was in compliance with all financial covenants.

In August 2013, Hospira issued, in a registered public offering, $350.0 million principal amount of 5.20% notes due on August 12, 2020 and $350.0 million principal amount of 5.80% notes due on August 12, 2023 ("2020 and 2023 Notes"). In September 2013, the net proceeds of the 2020 and 2023 Notes, after deducting approximately $2.1 million of bond discounts and underwriting fees of $6.1 million plus cash on-hand, were used to extinguish $400.0 million principal amount of 5.90% notes originally due June 2014, $250.0 million principal amount of 6.40% notes originally due May 2015 ("2014 and 2015 Notes"), accrued interest and a make-whole premium payment of $39.8 million. In aggregate, Hospira incurred $33.4 million in charges associated with the early extinguishment of the 2014 and 2015 Notes, which is reported in Other expense, net, in the three and nine months ended September 30, 2013. The early debt extinguishment charges included a make-whole premium, write-off of previously capitalized debt issuance costs, discounts and deferred gains on interest rate hedges.

In August 2013, Hospira terminated the forward starting interest rate swaps, notional amount of $550 million, which had effectively fixed the benchmark interest rates upon entering into the transactions in July 2013 and up to the issuance of the 2020 and 2023 Notes. As a result of the swap terminations, Hospira paid $3.6 million, including interest. The corresponding loss will be deferred in Accumulated other comprehensive loss and amortized into Interest expense over the terms of the 2020 and 2023 notes, respectively.

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 approximately $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 September 30, 2014 and December 31, 2013, 182.3 million and 179.1 million common shares were issued and 169.1 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

19


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 nine months ended September 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 (Losses) on Investments(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 loss before reclassifications
 
(57.6
)
 
—

 
(2.1
)
 
—

 
(59.7
)
Amounts reclassified from accumulated other comprehensive loss
 
—

 
5.9

 
—

 
0.1

 
6.0

Balance at September 30, 2014
 
$
(156.0
)
 
$
(97.5
)
 
$
(0.6
)
 
$
(1.6
)
 
$
(255.7
)

(1) 
Net of taxes of $0.0 million as of September 30, 2014 and December 31, 2013.
(2) 
Net of taxes of $58.3 million and $62.0 million as of September 30, 2014 and December 31, 2013, respectively.
(3) 
Net of taxes of $1.1 million as of September 30, 2014 and December 31, 2013.

The following summarizes reclassifications out of Accumulated Other Comprehensive Loss:
 
 
Amounts Reclassified from
Accumulated Other Comprehensive Loss
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
(dollars in millions)
 
2014
 
2013
 
2014
 
2013
 
Line Item in the
Condensed Consolidated
Statement of Income (Loss)
Impairment on investments
 
$
—

 
$
0.4

 
$
—

 
$
3.5

 
Other expense, net
 
 
—

 
—

 
—

 
—

 
Income tax expense (benefit)
Net of income taxes
 
—

 
0.4

 
—

 
3.5

 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of loss on terminated cash flow hedges
 
—

 
(0.1
)
 
0.1

 
(0.2
)
 
Other expense, net
 
 
—

 
—

 
—

 
—

 
Income tax expense (benefit)
Net of income taxes
 
—

 
(0.1
)
 
0.1

 
(0.2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of pension plans actuarial losses
 
3.1

 
4.7

 
9.3

 
14.3

 
(1) 
Amortization of medical and dental plans actuarial losses
 
0.1

 
0.1

 
0.3

 
0.3

 
(1) 
Total amortization before income taxes
 
3.2

 
4.8

 
9.6

 
14.6

 
 
 
 
(1.1
)
 
(1.9
)
 
(3.7
)
 
(5.6
)
 
Income tax expense (benefit)
Net of income taxes
 
2.1

 
2.9

 
5.9

 
9.0

 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
2.1

 
$
3.2

 
$
6.0

 
$
12.3

 
 

(1) 
These components are included in the computation of net periodic benefit cost. See Note 17 for additional details.

20


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 shares excluded from the Diluted Earnings (Loss) Per Share calculation as the exercise price of the awards exceeded the average stock price:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(shares in millions)
2014
 
2013
 
2014
 
2013
Weighted average basic common shares outstanding
168.9

 
165.7

 
167.7

 
165.5

Incremental shares outstanding related to stock-based awards
2.9

 
1.3

 
2.5

 
—

Weighted average dilutive common shares outstanding
171.8

 
167.0

 
170.2

 
165.5

 
 
 
 
 
 
 
 
Outstanding awards for which the exercise price of the award exceeds the average stock price
0.3

 
8.2

 
3.7

 
8.5


For the nine months ended September 30, 2013, 1.0 million incremental shares related to stock-based awards were not included in the computation of Diluted Earnings (Loss) Per Share due to the net loss for that period.

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 an amendment to 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 September 30,
 
Nine Months Ended September 30,
(dollars in millions)
 
2014
 
2013
 
2014
 
2013
Stock-based compensation expense
 
$
11.6

 
$
10.4

 
$
40.3

 
$
31.1

Income tax benefit recognized
 
4.2

 
3.8

 
14.7

 
11.4


As of September 30, 2014, there was $87.6 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 2.1 years.

Stock Options

During the nine months ended September 30, 2014, 1.4 million options were granted to certain employees primarily as part of the 2014 annual 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.

21


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 September 30,
 
Nine Months Ended September 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
 
1.7
%
 
1.3
%
 
1.5
%
 
0.9
%
Expected dividend yield
 
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
Fair value per stock option
 
$
13.94

 
$
11.77

 
$
11.37

 
$
8.48


Performance Share Awards

During the nine months ended September 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 a 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:
 
 
Nine Months Ended September 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
 
$
54.14

 
$
29.46


Restricted Stock Units

During the nine months ended September 30, 2014, 0.9 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 nine months ended September 30, 2014 was $43.65 per restricted award. The weighted average grant date fair value for the nine months ended September 30, 2013 was $29.53 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 a number of lawsuits relating to the ability of various competitors to market a generic form of Hospira's Precedex™ (dexmedetomidine hydrochloride), a proprietary sedation agent.

On January 15, 2014, the FDA opened a public docket to solicit comment from potential generic competitors for Precedex™ concentrate regarding the ability of those competitors to "carve-out" labeled indications and potentially achieve final product approval at any time. On August 18, 2014, the FDA allowed a carved-out label. Immediately following that decision, Mylan Institutional, LLC ("Mylan") and Par Sterile Products, LLC ("Par") launched generic versions of Precedex™ concentrate. On August 19, 2014, Hospira commenced action in the U.S. District Court for Maryland against the FDA (Sylvia Mathews Burwell, Secretary, U.S. Department of Health and Human Services and Dr. Margaret Hamburg, Commissioner, U.S. Food and Drug Administration) requesting, among other relief, a temporary restraining order. Mylan and Par intervened. Although a

22

temporary restraining order was granted initially, the Court ruled in favor of the FDA on September 5, 2014, and Mylan and Par resumed their generic sales. On September 5, 2014, Hospira appealed to the U.S. Court of Appeals for the Fourth Circuit. On October 29, 2014, the Fourth Circuit Court dismissed the appeal, as the parties to the litigation entered into a settlement agreement on October 28, 2014. Pursuant to that settlement agreement, Mylan and Par may continue their generic sales under a carved-out label until near the end of the first quarter of 2015, after which those sales may continue with either the carved-out label or a full label.

On August 25, 2014, Par filed a declaratory judgment action in the U.S. District Court for the District of New Jersey, Case 3:14-cv-05343-MLC-TJB seeking, inter alia, a finding of non-infringement and invalidity of U.S. Patent No. 6,716,867 (the "867 patent") (expires March 31, 2019), as well as injunctive and monetary relief against Hospira for violations of Section 2 of the Sherman Act, 15 U.S.C. § 2. This litigation was settled and dismissed as part of the settlement of the litigation discussed in the previous paragraph.

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™. On September 22, 2014, the settlement agreement was amended to allow Sandoz to launch a generic version of Precedex™ in the U.S. from that date and Sandoz immediately launched a generic version of Precedex™ in the U.S.

Hospira and Orion Corporation have brought suit in separate actions against the following parties alleging infringement of the 867 patent:

Defendant
U.S. District Court Where Filed*
Caraco Pharmaceutical Laboratories, Ltd.
Eastern District of Michigan, No. 10-cv-14514
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
*All filed April 18, 2014, except Caraco Pharmaceutical Laboratories, Ltd., which was filed November 12, 2010.

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. Intas Pharmaceuticals Ltd. and Accord Healthcare, Inc. have notified Hospira that they converted their Paragraph IV certification to a "little viii" indicating an amendment to their label to carve out an indication. Caraco's ANDA has received tentative approval from the FDA.

On June 20, 2014, Hospira received another "Paragraph IV" notice from Bedford Laboratories referencing Hospira's patents for Precedex™, including patents covering the pre-mix formulation of Precedex™. On August 1, 2014, Hospira brought suit against Ben Venue Laboratories, Inc. formerly d/b/a Bedford Laboratories, Hikma Pharmaceuticals Plc, and West-Ward Pharmaceutical Corp. in the District of Delaware, Case No. 14-cv-01008 seeking a judgment of infringement, injunctive relief and costs.

Securities Litigation

On September 5, 2014, the U.S. District Court for the Northern District of Illinois approved a settlement and dismissed a class action lawsuit filed against Hospira and certain of its current and former corporate officers alleging violations of the Securities and Exchange Act of 1934. In 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, the plaintiffs alleged, 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 settlement was fully funded by insurance proceeds.

Derivative Securities Litigation


23

The parties have reached a tentative agreement to settle, subject to the Court's review and approval, two shareholder derivative lawsuits, which name as defendants certain current and former Hospira officers, and members of Hospira's Board of Directors. The first case, which consolidated two lawsuits filed in the United States District Court for the Northern District of Illinois in December 2011, 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). The second case, filed in June 2014 in Delaware Chancery Court, is: 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). In general terms, both lawsuits allege breaches of fiduciary duties by the individual defendants and seek damages, purportedly on behalf of Hospira, in connection with the matters covered by the securities lawsuit described under "Securities Litigation" above. It is anticipated that the settlement will be fully funded by insurance proceeds.

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 manufacturing facility in Mulgrave, Victoria, Australia, 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 September 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 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 September 30:
 
Net Sales
 
Income From Operations
(dollars in millions)
2014
 
2013
 
2014
 
2013
Americas
$
939.0

 
$
804.2

 
$
277.1

 
$
75.7

EMEA
135.1

 
123.5

 
(15.0
)
 
(14.5
)
APAC
76.5

 
80.5

 
2.4

 
(1.5
)
Total reportable segments
$
1,150.6

 
$
1,008.2

 
264.5

 
59.7

Corporate functions
 

 
 

 
(25.4
)
 
(19.5
)
Stock-based compensation
 

 
 

 
(11.6
)
 
(10.4
)
Income From Operations
 

 
 

 
227.5

 
29.8

Interest expense and Other expense, net
 

 
 

 
(23.5
)
 
(62.3
)
Income (Loss) Before Income Taxes
 

 
 

 
$
204.0

 
$
(32.5
)

The table below presents information about Hospira's reportable segments for the nine months ended September 30:
 
Net Sales
 
Income (Loss) From Operations
(dollars in millions)
2014
 
2013
 
2014
 
2013
Americas
$
2,694.0

 
$
2,318.9

 
$
557.7

 
$
147.5

EMEA
400.5

 
369.9

 
(40.8
)
 
(73.5
)
APAC
242.7

 
229.6

 
15.5

 
(16.7
)
Total reportable segments
$
3,337.2

 
$
2,918.4

 
532.4

 
57.3

Corporate functions
 

 
 

 
(65.5
)
 
(62.8
)
Stock-based compensation
 

 
 

 
(40.3
)
 
(31.1
)
Income (Loss) From Operations
 

 
 

 
426.6

 
(36.6
)
Interest expense and Other expense, net
 

 
 

 
(60.3
)
 
(114.1
)
Income (Loss) Before Income Taxes
 

 
 

 
$
366.3

 
$
(150.7
)

Net sales and Income (Loss) From Operations for the nine months ended September 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.


24

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Hospira is a provider of injectable pharmaceutical drugs and infusion technologies that it develops, manufactures, distributes and markets globally. Through a broad, integrated product portfolio, Hospira is uniquely positioned to Advance Wellness™ by improving patient and caregiver safety while reducing healthcare costs.

Hospira's portfolio of products includes Specialty Injectable Pharmaceuticals, Medication Management and Other Pharmaceuticals. Specialty Injectable Pharmaceuticals, which represented approximately 68% of global Net sales for the first nine months of 2014, includes Hospira's generic acute-care and oncology injectable products, biosimilars and the proprietary sedation agent Precedex™. Hospira's Specialty Injectable Pharmaceuticals portfolio also includes many of its products offered in differentiated delivery formats. Medication Management, which represented approximately 19% of global Net sales for the first nine months of 2014, includes the Company's medication management systems and gravity administration sets. Medication management systems are integrated infusion delivery systems that include dedicated administration sets and safety software system offerings that help make the medication delivery process safer and more efficient. Other Pharmaceuticals, which represented approximately 13% of global Net sales for the first nine months of 2014, includes intravenous solutions and One2One™, Hospira's global contract manufacturing services.

In the nine months ended September 30, 2014, Hospira derived 81% of its global Net sales from the Americas, which includes the United States ("U.S."), Canada and Latin America; 12% from Europe, Middle East and Africa ("EMEA"); and, 7% from Asia Pacific, which includes Asia, Japan, Australia and New Zealand ("APAC").

On August 18, 2014, the U.S. Food and Drug Administration ("FDA") allowed generic competitors for Precedex™ to carve-out labeled indications. Immediately following that decision, several competitors launched generic versions of Precedex™ concentrate. Consequently, Hospira expects revenues and margins derived from the sale of Precedex™ to be adversely affected.

Hospira's biosimilars, generic pharmaceuticals and device products are key strategic growth drivers. Through continued global expansion, biosimilar research and development, work with collaborative partners and Hospira's Device Strategy (discussed below), Hospira continues to position itself to deliver a broad portfolio of products used by hospitals and other healthcare providers around the globe.

In addition to product development and global market expansion, Hospira seeks opportunities for continuous improvement (including efficiency, effectiveness and competitiveness to improve its cost base and cash flows) demonstrated through Hospira's continued construction of a manufacturing facility in Vizag, India, and the closing of an acquisition, in July 2014, in which Hospira acquired Orchid Chemicals & Pharmaceuticals Ltd.'s ("Orchid") penem and penicillin Active Pharmaceutical Ingredient ("API") business and associated research and development ("R&D") facility located in India.

Although product development and global market expansion are areas of significant investment, Hospira recognizes that its industry is complex, evolving and highly regulated. Hospira has made substantial investments designed to meet the ever-increasing demands of the highly regulated industry in which it operates. Hospira works closely with regulators, including the FDA and other regulatory bodies around the world, and has undertaken significant initiatives, including its Device Strategy and certain quality matters, to support its products in a highly regulated industry. Specifically, Hospira is working to address matters involving its facilities and processes raised in warning letters, untitled letters and Form 483 observations received from the FDA or comparable inspection results from other governmental regulatory agencies. Hospira has developed and is implementing remediation plans, which involve changes to facilities, processes and products, and will involve capital and operating expenditures.

For additional overview information on Hospira, see "Item 1. Business" in Hospira's Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Form 10-K").

Product Development and Product Launches

Hospira manages its product development programs and related costs through the following four product categories: biosimilars, generic pharmaceuticals, devices and proprietary pharmaceuticals.


25

Biosimilar Product Development

Hospira seeks a leading position in the development, marketing and support of biosimilars. Biosimilars are generally more complex molecules than is the case with generic drugs. As a result, Hospira expects that the amount of spending on biosimilar development will represent a higher percentage of total R&D expenditures over the next several years. This expectation is attributable to investment in R&D for biosimilars that are not approved in certain markets, and incremental life-cycle spending for currently approved, on-market, biosimilars. Costs for on-market biosimilars can include studies to demonstrate additional indications, regulator required post-launch studies, and various other life-cycle management or enhancement programs, which may or may not alter the current product indications and approvals. As part of these efforts, Hospira has sought to share risks and rewards of such development activities with development and commercial partners, who can provide research assistance and/or share development costs.

As of September 30, 2014, Hospira's biosimilar development pipeline, including exclusive and co-exclusive commercialization rights for biosimilars developed with Celltrion, Inc. and Celltrion Healthcare, Co., Ltd. (collectively "Celltrion"), consisted of up to 11 compounds. On September 25, 2014, Hospira amended its co-exclusive agreement with Celltrion in connection with a convertible bond subscription agreement, further discussed under the section captioned "Liquidity and Capital Resources" within this Item 2, to amend commercial terms, which includes providing Hospira exclusive rights to specific products in certain territories.

Information for certain products in the pipeline includes the following:

•
Inflectra™: Hospira's infliximab biosimilar, Inflectra™, for patients with autoimmune diseases such as rheumatoid arthritis and inflammatory bowel disease, has received approval in all European Economic Area ("EEA") countries. Hospira has launched Inflectra™ in several early-launch countries and is working to further commercialize Inflectra™ in all EEA countries at the earliest opportunity taking into account any relevant patent protection and other factors. Celltrion is able to commercialize its infliximab product in the same EEA territories. Additionally, Hospira has exclusive commercialization rights from Celltrion to the Celltrion infliximab product in the U.S. and certain other territories. In August 2014, Celltrion submitted an infliximab biosimilar for FDA approval in the U.S.;

•
Trastuzumab: Celltrion continues to develop trastuzumab, primarily for patients with breast cancer. Once available, Hospira has exclusive commercialization rights from Celltrion to the Celltrion trastuzumab product in the U.S. and certain other territories; and

•
EPO: In October 2011, Hospira began its Phase III U.S. clinical trial of its biosimilar erythropoietin ("EPO") for patients with certain renal dysfunction who have anemia. In December 2013, Hospira received positive results of its Phase I U.S. EPO clinical study, and Hospira's review of these results concluded in January 2014. Hospira continues to progress its development milestones towards a planned U.S. FDA submission in late 2014 or early 2015.

On April 29, 2013, Hospira and NovaQuest Co-Investment Fund I, L.P. ("NovaQuest") entered into an arrangement for three biosimilar products: 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. This arrangement aligns with Hospira's pre-existing biosimilar strategy to expand its portfolio and capabilities with measured investment and risk. For the three and nine months ended September 30, 2014, in connection with the NovaQuest agreement, Hospira recognized an offset to Research and development expense for development funding of $9.4 million and $28.1 million, respectively. For the three and nine months ended September 30, 2013, the offset recognized to Research and development expense was $22.1 million and $36.4 million, respectively. Cumulative development funding from NovaQuest as of September 30, 2014 was $78.1 million.

Generic Pharmaceutical Product Development

Hospira includes products in its pipeline if they are approved for development and activity has occurred. As of September 30, 2014, Hospira's generic pharmaceutical pipeline consisted of 67 compounds. A majority of Hospira's current pipeline consists of compounds related to oncology, anti-infectives, anesthesia and analgesia.

In addition, in 2011 Hospira adopted a global market expansion program related to its generic specialty injectable pharmaceutical product line. Execution of this program has involved, and will involve, Hospira qualifying certain of its on-

26

market products into new countries. Hospira continues to qualify certain on-market products, and is on pace to achieve over 250 cumulative new to country submissions since program inception through the end of 2014.

As discussed in the caption "Acquisitions" below, on July 4, 2014, Hospira acquired an R&D facility from Orchid. The impact of this acquisition on Hospira's generic pharmaceutical pipeline continues to be evaluated.

Device Product Development

Hospira's device development programs include the development of advanced infusion platforms and systems, program/software updates to those platforms and systems as well as consumable product development.

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. Under this initiative, Hospira's development efforts for on-market products will focus on the Plum A+™, Sapphire™ and LifeCare PCA™ platforms. In addition, Hospira is investing in the development of the next-generation of the Plum™ and Sapphire™ pumps, while furthering Hospira's position in providing intravenous clinical integration technology, which integrates infusion systems with electronic health records. Consistent with this strategy, a submission was filed with the FDA for the Plum 360™ pump in the second quarter of 2014. For further information related to the Device Strategy, see the section captioned "Device Strategy" within this Item 2.

Proprietary Pharmaceutical Product Development

As of September 30, 2014, Hospira had in development two proprietary pharmaceuticals, Precedex™ and Dyloject™, for which development spending is now nominal.

Research and Development Expense

R&D expense includes costs identifiable to specific development projects, support activities that are essential to all of Hospira's R&D operations and upfront and development milestone payments or funding associated with external collaborative or other arrangements. R&D expense includes:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in millions)
2014
 
2013
 
2014
 
2013
Research and development expense
$
86.3

 
$
69.9

 
$
245.2

 
$
218.1

 
 
 
 
 
 
 
 
Specific project costs as a percentage of total R&D expense*
 
 
 
 
 
 
 
EPO Phase III U.S. clinical trial expenses and other related project costs
7.1
%
 
1.1
%
 
12.2
%
 
9.5
%
* Net of R&D arrangement funding reimbursements recognized as an offset to R&D expense.

Other than EPO Phase III trial costs, the costs attributable to a specific project were not individually material to Hospira's R&D expense line item for the periods presented.

Continuous Improvement Activities

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 manufacturing start-up, severance and other employee benefits, other exit costs, contract termination costs and gains or losses on disposal of assets.

Facilities Optimization and Capacity Expansion

In 2014, Hospira continues to advance construction on a specialty injectable pharmaceutical manufacturing facility in Vizag, India, which began in 2011. Capital expenditures and related start-up costs are anticipated, with the first commercial production expected by the end of 2014, with production increasing over the course of the next several years. In aggregate, Hospira estimates Vizag, India capacity expansion capital expenditures of $375 million to $450 million. Hospira has incurred total

27

capital expenditures of $298.2 million through September 30, 2014. For the Vizag, India capacity expansion, capital expenditures were $16.1 million and $71.0 million for the three and nine months ended September 30, 2014, respectively. For the three and nine months ended September 30, 2013, these capital expenditures were $22.6 million and $54.1 million, respectively. Capital expenditures in 2014 are expected to be approximately $90 million with the remaining amounts to be capitalized in subsequent years.

Hospira currently purchases certain oncology drugs from Hospira's joint venture, Zydus Hospira Oncology Private Limited ("ZHOPL"), a pharmaceutical company located in Ahmedabad, India. Hospira and the joint venture continue to advance plans, initiated in 2011 and continuing through 2015, to qualify and validate manufacturing and related activities to support certain other oncology compounds at this location.

For both the joint venture and the Vizag, India facility capacity expansion activities, Hospira will continue to incur manufacturing start-up, validation (facility and product-related), registration costs, and unabsorbed production costs over the next few years. The estimated range of costs in 2014 is expected to be approximately $60 million to $80 million, subject to timing of applicable regulatory approval and other external factors. For the three and nine months ended September 30, 2014, Hospira incurred charges of $16.4 million and $44.4 million, respectively, primarily related to start-up and facility validation activities which are reported in Cost of products sold. For the three and nine months ended September 30, 2013, these charges were $6.6 million and $14.3 million, respectively. Since inception, charges incurred through September 30, 2014 were $88.6 million. Hospira anticipates the amount, timing and recognition of charges and capital expenditures will be affected by various facility construction, product validation and registration timelines throughout the duration of the projects and corresponding regulatory outcomes in connection therewith. As Hospira transitions from start-up to normalized production levels, Hospira may incur further unabsorbed costs which will be impacted by the rate of transition and utilization of each production line.

In March 2014, the FDA concluded a pre-approval inspection at the Vizag, India facility which resulted in the FDA issuing a Form 483 listing 10 observations. Hospira responded to these observations, and in July 2014 received an untitled letter requesting additional information regarding two of Hospira's corrective actions. Hospira responded to this letter and will continue working to resolve the FDA's concerns. Hospira's ability to commercially sell product produced in Vizag, India will ultimately depend on FDA approval.

Furthermore, Hospira expects higher capital expenditures related to modernization and streamlining at its existing facilities. Hospira anticipates the timing and recognition of charges and capital expenditures will be affected by various facility construction and product validation timelines throughout the duration of the projects as well as quality remediation activities and timelines as discussed in the section captioned "Certain Quality and Product Related Matters" within this Item 2.

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 and incurred a pre-tax loss on disposal of assets of $5.0 million reported in Restructuring, impairment and (gain) on disposal of assets, net in the nine months ended September 30, 2014.

Divestitures

In August 2014, Hospira sold its surgical suction product line for $21.5 million payable in three installments through December 2015. Hospira will retain distribution rights to the products for varying periods of time depending on the territory and provide certain transition services through no later than December 2016. Hospira recognized a pre-tax gain of $15.9 million upon disposition of the product line reported in Restructuring, impairment and (gain) on disposal of assets, net in the three and nine months ended September 30, 2014.

In September 2014, Hospira sold its clinical surveillance software business, TheraDoc, Inc. ("TheraDoc") for a purchase price of $117.0 million, subject to adjustments for ending working capital, cash and indebtedness. Hospira recognized a pre-tax gain of $89.9 million upon disposition of the business reported in Restructuring, impairment and (gain) on disposal of assets, net in the three and nine months ended September 30, 2014.

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

28

reported in Restructuring, impairment and (gain) on disposal of assets, net and primarily include severance charges of $13.6 million and contract termination charges of $2.3 million. Of the aggregate costs, $(0.6) million and $3.1 million were (released) incurred in the three months ended September 30, 2014 and 2013, respectively, and $1.4 million and $7.6 million were incurred in the nine months ended September 30, 2014 and 2013, respectively.

Financial Related Impact

The charges incurred for the above continuous improvement activities collectively were reported in the condensed consolidated statements of income (loss) line items as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in millions)
 
2014
 
2013
 
2014
 
2013
Cost of products sold
 
$
16.4

 
$
6.6

 
$
44.4

 
$
14.3

Restructuring, impairment and (gain) on disposal of assets, net
 
(106.4
)
 
3.1

 
(99.4
)
 
7.6

Total charges
 
$
(90.0
)
 
$
9.7

 
$
(55.0
)
 
$
21.9


As Hospira continues to consider each continuous improvement activity, the amount, the timing and recognition of charges will be affected by the occurrence of commitments and triggering events as defined under U.S. generally accepted accounting principles ("GAAP"), among other factors. For more information about risks related to these matters, see the section captioned "Hospira's continuous improvement activities have resulted, and may continue to result, in significant charges and cash expenditures. These activities may disrupt Hospira's business and may not result in the intended improvement or cost savings" in "Part I, Item 1A. Risk Factors" of Hospira's 2013 Form 10-K.

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 $247.2 million, subject to certain adjustments. This acquisition provides Hospira additional API capacity and allows for continued vertical integration of anti-infective penem and penicillin products. 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. 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 to the condensed consolidated financial statements included in Item 1 of this report for additional information on Hospira's advances to Orchid.

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 was established and reported in Selling, general and administrative in the three and nine months ended September 30, 2014.

The following summarizes acquisition and integration-related costs:
(dollars in millions)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Cost of products sold
 
$
1.9

 
$
—

 
$
1.9

 
$
—

Selling, general and administrative
 
24.8

 
1.2

 
27.6

 
3.9

Total
 
$
26.7

 
$
1.2

 
$
29.5

 
$
3.9


Cumulative acquisition and integration-related costs as of September 30, 2014 were $35.1 million.

Separately, Orchid remains a current supplier of cephalosporin APIs to Hospira.

Evolabis

29


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 operating results of the acquisitions have been included in Hospira's results of operations since the individual acquisition dates, and pro forma results of operations for these acquisitions have not been presented as they are not material to Hospira's results of operations, either individually or in the aggregate.

Certain Quality and Product Related Matters

Hospira and its suppliers are subject to extensive, complex and evolving regulations and increasing oversight by the FDA and other domestic and foreign regulatory authorities. Hospira's manufacturing and other facilities, and those of its suppliers, are subject to periodic inspections to verify compliance with current FDA and other governmental regulatory requirements. This regulatory oversight may lead to, including, but not limited to, inspection observations (commonly called Form 483 observations in the U.S.), warning letters (directing the company to respond and to take voluntary corrective action), untitled letters (which cite observations that do not meet the threshold of regulatory significance for a warning letter, but require the company to respond and to take corrective action), 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. Any of these regulatory actions as well as Hospira's inspections, reviews and commitments may require remediation activities with respect to products, facilities and quality/production policies, procedures and processes.

The following information provides additional detail regarding certain quality and product related matters.

Warning Letter Matters

At this time, the FDA warning letters received by Hospira generally have not restricted production or shipment of Hospira's existing products from these facilities (with the exception of Costa Rica, as discussed below); but, Hospira's sites that have received an FDA warning letter generally are restricted from obtaining new product approvals in the U.S. (until the impacted site successfully passes a subsequent inspection, such as Clayton and Rocky Mount, as discussed below).

Warning Letter (April 2010) and Related Matters

In April 2010, Hospira received a Warning Letter from the FDA ("2010 Warning Letter") in connection with the FDA's inspections of Hospira's pharmaceutical and device manufacturing facilities located in Clayton, North Carolina, and Rocky Mount, North Carolina. In the 2010 Warning Letter, the FDA cited current good manufacturing practice deficiencies related to particulate in certain emulsion products at the Clayton facility and the failure to adequately validate the processes used to manufacture products at the Rocky Mount facility. The 2010 Warning Letter also asserted other inadequacies, including procedures related to the Quality Control unit, investigations and medical reporting obligations.

Since issuing the 2010 Warning Letter, the FDA has completed multiple follow-up inspections at both the Clayton and Rocky Mount facilities.
•
Clayton: In June 2013, after the latest FDA inspection at the Clayton facility, the facility was designated as No Action Indicated ("NAI").
•
Rocky Mount: In February 2014, the status of Rocky Mount's pharmaceutical manufacturing was upgraded to Voluntary Action Indicated ("VAI") status. In June 2014, after the latest FDA inspection at the Rocky Mount facility, the FDA did not issue any Form 483 observations.

Under NAI or VAI status, Hospira is free to pursue new product approvals and export certifications for pharmaceutical products manufactured at Clayton and Rocky Mount.

Warning Letter (August 2012), Import Alert and Related Matters

In August 2012, Hospira received a Warning Letter from the FDA related to the FDA's April 2012 inspection of Hospira's La Aurora de Heredia, Costa Rica device manufacturing facility and corresponding Form 483 ("2012 Warning Letter"). In the 2012 Warning Letter, the FDA cited current good manufacturing practice deficiencies related to the failure to (i) correct and prevent recurrence of nonconforming product; (ii) implement changes in procedures needed to correct and prevent identified quality problems; (iii) evaluate suppliers on their ability to meet requirements; (iv) establish adequate procedures for

30

acceptance of incoming product; and (v) maintain appropriate device history records. The Costa Rica site manufactures most of Hospira's infusion devices and administration sets.

In November 2012, the FDA issued an import alert that prohibits the importation of Symbiq™ infusion pumps into the U.S., and in February 2013, the FDA expanded the import alert to prohibit the importation into the U.S. of the Plum™, GemStar™ and LifeCare PCA™ infusion pumps which are manufactured in Hospira's Costa Rica facility. The FDA's import alert does not restrict the importation of Hospira's other medication management products, including consumables or Hospira's other infusion pump accessories. Hospira cannot predict when the FDA import alert for the above infusion devices will end. The FDA import alert is not expected to be lifted until at least the re-inspection of the Costa Rica facility, and perhaps other related facilities, occurs and the FDA is satisfied with the results and until Hospira demonstrates adequate progress on its Device Strategy. Hospira continues to support the repair and service of all impacted pumps to existing customers in the U.S.

Other regulatory agencies have restricted the supply of Hospira infusion pumps into certain international markets for reasons similar to those cited by the FDA in its August 2012 Warning Letter concerning Hospira's Costa Rica facility. The National Standards Authority of Ireland ("NSAI") has performed multiple audits of Hospira's Lake Forest site. The NSAI has reissued the International Organization for Standardization certifications for the Lake Forest and Costa Rica sites, which allows Hospira to continue to import, tender, sell and distribute consumables or Hospira's other infusion pump accessories in various international markets. NSAI also communicated to Hospira that the European Conformity ("CE") certificate for infusion pumps and related software, covering Plum A+™ and Hospira MedNet™ expired and were withdrawn on August 31, 2013. Hospira is pursuing CE marking for certain infusion devices and related software during 2014. Hospira cannot predict the timing and outcome of obtaining these new CE certificates, which if not received could negatively impact Hospira's ongoing sales of device products.

Warning Letters (May 2013) and Related Matters

In May 2013, Hospira received a Warning Letter from the FDA related to the FDA's inspection of Hospira's device quality systems and governance in Lake Forest, Illinois, in January and February 2013 ("2013 Device Warning Letter"). The 2013 Device Warning Letter cited current good manufacturing practice deficiencies, including failures related to design controls, corrective and preventive actions, complaint handling, purchasing controls and document controls and other inadequacies, including deviations from the medical device reporting regulation. Hospira's Lake Forest site does not manufacture any device products but performs many portions of Hospira's quality system procedures which support all of Hospira's device products and operations. In May 2014, the FDA issued a Form 483 listing observations after inspection of Hospira's Lake Forest site. A number of the observations dealt with events that occurred prior to the quality systems remediation actions taken by the Company. In June 2014, Hospira submitted a written response to the observations that included actions to address the FDA's concerns.

Also in May 2013, Hospira received a Warning Letter from the FDA related to the FDA's inspection of Hospira's pharmaceutical manufacturing facility in Irungattukottai, India ("IKKT" facility) in October 2012 ("2013 Pharmaceutical Warning Letter"). The 2013 Pharmaceutical Warning Letter cited current good manufacturing practice deficiencies, including failure to establish and follow appropriate written procedures, including failure to validate all aseptic and sterilization processes, and failure to appropriately maintain manufacturing facilities.

In December 2013, the FDA completed a follow-up inspection of Hospira's IKKT facility. At the close of the inspection, the FDA issued a Form 483 listing observations related primarily to processes and procedures. Hospira responded to the specific FDA observations in January 2014, having already completed a majority of the identified corrective actions. In April 2014, the FDA issued an untitled letter for the IKKT facility. The untitled letter was based on the December 2013 inspection and Hospira's corresponding response. Hospira does not anticipate any impact to product supply from this facility as a result of the untitled letter, and expects to continue working cooperatively with the FDA regarding the scope and timing of remediation efforts at the facility.

Warning Letter (March 2014) and Related Matters

In March 2014, Hospira received a Warning Letter from the FDA related to an inspection of device-related matters at Hospira's manufacturing facility in Rocky Mount, North Carolina ("2014 Device Warning Letter"). The Rocky Mount facility primarily manufactures pharmaceutical products, but also manufactures device and combination products. The 2014 Device Warning Letter cited current good manufacturing practice deficiencies, including failures related to complaint handling, documentation of monitoring and control methods and data for a validated process, and procedures for corrective and preventive actions. In March 2014, Hospira responded to the 2014 Device Warning Letter referencing ongoing and planned device remediation efforts

31

at the Rocky Mount facility. The 2014 Device Warning Letter does not change the status of Rocky Mount's pharmaceutical manufacturing, which is currently designated as VAI status.

Warning Letter (September 2014) and Related Matters

In September 2014, Hospira received a Warning Letter from the FDA in connection with the FDA's inspection of Hospira's pharmaceutical manufacturing facility located in Mulgrave, Victoria, Australia ("2014 Mulgrave Warning Letter"). In the 2014 Mulgrave Warning Letter, the FDA listed inspectional observations, including: discrepancies in certain manufacturing processes, the need to implement better corrective or preventive actions, and the need to establish certain written procedures and an adequate system for monitoring environmental conditions. In October 2014, Hospira responded to the FDA’s observations.

Hospira's Response to Warning Letters and Related Matters

Hospira takes these matters seriously and has responded fully, and in a timely manner, to the FDA's Warning Letters (which are publicly available on the FDA's website, http://www.fda.gov/ICECI/EnforcementActions/WarningLetters/default.htm). The remediation plans involve commitments by Hospira to enhance its quality system, products, facilities, employee training, quality processes and procedures, and technology. The comprehensive remediation plan for devices includes the Device Strategy announced in May 2013. Elements of the device remediation plan are being implemented in a phased approach with initial implementation at device component production facilities, service centers and design centers and a second phase of implementation at sites that primarily manufacture pharmaceutical products but also manufacture devices and combination products. While Hospira has continued 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 through 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 above. For more information about risks related to these matters, see the section captioned "Hospira's issues with its quality systems and processes could have an adverse effect upon Hospira's business, subject Hospira to further regulatory action and costly litigation, and cause a loss of confidence in Hospira and its products" in "Part I, Item 1A. Risk Factors" of Hospira's 2013 Form 10-K.

All of Hospira's manufacturing facilities and related operations, including domestic and international, are subject to FDA inspections and some of those facilities have received Form 483 observations or FDA-issued untitled letters or comparable inspection results from other governmental regulatory agencies, which are not included above. Hospira is working to achieve alignment between all of its facilities and quality policies, procedures and processes and the commitments made to the FDA, and as a result, Hospira has incurred and will continue to incur additional costs for strengthening quality, compliance and production processes at other facilities. For example, third-party oversight and consulting costs for remediation activities have been and will continue to be incurred at a number of other manufacturing sites.

Device Remediation Matters

Comprehensive Medication Management Product Review

In late 2010, Hospira committed to the FDA that it would engage in a comprehensive product review for each of Hospira's medication management products to confirm compliance with current regulatory requirements and document safety and performance of the products. Hospira completed the product review investigations in 2013. As an outcome of the reviews, Hospira identified the need to take certain remediation actions, such as product recalls which require deployment of a modification to the installed customer base, design history file updates, incorporation of certain corrective actions into new production or other corrective or preventive actions for Hospira's medication management products which will continue to be advanced. Examples of such remediation actions include deployment of a remediated battery and door roller assembly on the Plum A+™ pumps and deployment of a remediated door on the LifeCare PCA™ infusion pumps to the installed customer base.

In May 2013, Hospira announced its Device Strategy, which builds on Hospira's comprehensive device review of its global installed base of infusion pumps. In this regard, see matters discussed under the sections captioned "Device Strategy" and "Product Development and Product Launches - Device Product Development" within this Item 2.


32

Overall Financial Impact

The charges incurred for certain quality and product related matters collectively were reported in the Cost of products sold line item in the condensed consolidated statements of income (loss) as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(dollars in millions)
 
2014
 
2013
 
2014
 
2013
Warning Letter Matters
 
 
 
 
 
 
 
 
Third-party oversight and consulting
 
$
5.1

 
$
17.5

 
$
14.9

 
$
51.8

Other charges (primarily extended production downtime related costs and failure to supply penalties)
 
2.1

 
8.4

 
7.3

 
20.4

Device Remediation Matters
 
 
 
 
 
 
 
 
Third party consulting and other charges (product review and remediation activities)
 
5.1

 
6.9

 
15.1

 
18.2

Corrective action and life-cycle management charges (credits)
 
—

 
9.7

 
14.1

 
(3.2
)
Total Charges
 
$
12.3

 
$
42.5

 
$
51.4

 
$
87.2


In 2014, Hospira expects to incur aggregate charges of approximately $60 million to $80 million related to these quality and product related matters, which are primarily for third-party oversight and consulting and device remediation matters, including product recalls. The amount, timing and recognition of additional charges associated with these certain matters in 2014 will be affected by the nature of spending and the occurrence of commitments and triggering events as defined under GAAP, among other factors.

In addition to the charges incurred for these certain quality and product related matters, Hospira has incurred, and expects that it will continue to incur higher operating costs, which have been and will continue to be impacted by these matters. Further, costs for long-term solutions, product improvements and life-cycle management programs will depend on various production, quality, and development efforts and corresponding regulatory outcomes in connection therewith. In addition, capital expenditures to remediate and/or enhance Hospira's existing facilities and operations may be required. In this regard, see matters discussed in the section captioned "Continuous Improvement Activities - Facilities Optimization and Capacity Expansion" within this Item 2.

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.

The Device Strategy builds on Hospira's comprehensive device review of its global installed base of infusion pumps. Hospira has communicated this strategy to the FDA and other global regulatory agencies, and has been working continually with these agencies as it implements the Device Strategy.

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. The majority of the activity includes:

•
retirement of Symbiq™ infusion pumps and older legacy Plum™ pumps, replacing these devices with Plum A+™ pumps and future devices under development;
•
retirement of GemStar™ ambulatory pumps, replacing these devices with Sapphire™ pumps in markets where the device is available, such as the U.S. (where the Sapphire™ pump was given regulatory clearance by the FDA in October 2013), Australia, Canada and portions of Europe. Hospira markets and distributes the Sapphire™ pump through a distribution agreement with Q Core Medical, Ltd.; and
•
retirement of older legacy PCA pumps, replacing these devices with LifeCare PCA™ or Sapphire™ pumps.

33


See the section captioned "Product Development and Product Launches" within this Item 2 for additional information on the submission of the Plum 360™ to the FDA.

Hospira will continue to support the affected pumps during the retirement and replacement period. Hospira continues to transition customers to Hospira's streamlined portfolio of remediated devices. See the section captioned "Certain Quality and Product Related Matters - Warning Letter (August 2012) and Related Matters," within this Item 2 for a description of international regulatory matters that could impact Hospira's ability to move forward with transitioning customers outside of the U.S.

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 September 30,
 
Nine Months Ended September 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
 
2.7

 
14.8

 
12.3

 
56.1

 
Cost of products sold
Inventory charges
 
0.6

 
0.9

 
3.0

 
46.7

 
Cost of products sold
Other asset impairments and accelerated depreciation
 
—

 
3.2

 
1.3

 
10.3

 
Restructuring, impairment and (gain) on disposal of assets, net
Total charges
 
$
3.3

 
$
18.9

 
$
16.6

 
$
217.4

 
 

Cumulative Device Strategy charges as of September 30, 2014 were $243.5 million. In 2014, Hospira expects to incur aggregate charges of approximately $25 million to $35 million related to the Device Strategy. 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.

The Device Strategy charges above are exclusive of other device product-related and comprehensive product review charges. In this regard, see matters discussed above under the section captioned "Certain Quality and Product Related Matters" within this Item 2. Also, see section captioned "Certain Quality and Product Related Matters" within this Item 2 regarding an import alert issued by the FDA that prohibits the importation into the U.S. of the infusion pumps that are manufactured at Hospira's Costa Rica facility and a description of device remediation activities.

For more information about risks related to the Device Strategy, see the sections captioned "Hospira may not be able to realize all of the expected benefits of its global device strategy, could incur additional costs to execute the strategy, or could encounter unforeseen difficulties in implementing the strategy, all of which could adversely affect Hospira's business or operating results" in "Part I, Item 1A Risk Factors" of Hospira's 2013 Form 10-K.

Patent-Related Product Matters

Hospira is involved in patent-related disputes with several companies who have branded products over Hospira's efforts to market generic versions of those products and with companies regarding certain of Hospira's Precedex™ patents. Hospira faces generic competition for Precedex™ as a result of the FDA's August 2014 ruling allowing competitors to "carve-out" labeled indications. The pending patent litigation, the timing of patent expirations, the breadth of patent coverage, the success of life-cycle management programs and other factors will impact the timing and extent of generic competition. Consequently, Hospira expects revenues and margins derived from the sale of Precedex™ to be adversely affected. For further details regarding

34

Hospira's patents and other patent-related litigation, see Note 24 to the condensed consolidated financial statements included in Item 1 of this report.

For more information about risks related to these matters, see the sections captioned "If Hospira is unable to protect its intellectual property rights, its business and prospects could be harmed" and "If Hospira infringes the intellectual property rights of third parties, Hospira may face legal action, adverse damage awards, increased costs and delays in marketing new products" in "Part I, Item IA. Risk Factors" of Hospira's 2013 Form 10-K.

Results of operations for the three months ended September 30, 2014 compared to September 30, 2013

Net sales

A comparison of product line Net sales by segment is as follows:

Hospira, Inc.
Net Sales by Product Line
(Unaudited)
(dollars in millions)
 
 
Three Months Ended September 30,
 
 
2014
 
2013
 
Percent Change
at Actual
Currency Rates
 
Percent Change
at Constant
Currency Rates(1)
Americas—
 
 

 
 

 
 

 
 

Specialty Injectable Pharmaceuticals
 
$
629.8

 
$
539.8

 
16.7
 %
 
16.9
 %
Medication Management
 
169.9

 
175.2

 
(3.0
)%
 
(1.9
)%
Other Pharma
 
139.3

 
89.2

 
56.2
 %
 
56.5
 %
Total Americas
 
939.0

 
804.2

 
16.8
 %
 
17.2
 %
EMEA—
 
 

 
 

 
 

 
 

Specialty Injectable Pharmaceuticals
 
87.1

 
80.4

 
8.3
 %
 
8.0
 %
Medication Management
 
25.6

 
23.9

 
7.1
 %
 
6.7
 %
Other Pharma
 
22.4

 
19.2

 
16.7
 %
 
11.5
 %
Total EMEA
 
135.1

 
123.5

 
9.4
 %
 
8.3
 %
APAC—
 
 

 
 

 
 

 
 

Specialty Injectable Pharmaceuticals
 
63.4

 
64.8

 
(2.2
)%
 
(2.3
)%
Medication Management
 
12.0

 
10.7

 
12.1
 %
 
12.1
 %
Other Pharma
 
1.1

 
5.0

 
(78.0
)%
 
(78.0
)%
Total APAC
 
76.5

 
80.5

 
(5.0
)%
 
(5.2
)%
Net Sales
 
$
1,150.6

 
$
1,008.2

 
14.1
 %
 
14.3
 %

Specialty Injectable Pharmaceuticals ("SIP") includes generic injectables, proprietary specialty injectables and, in certain markets, biosimilars. Medication Management includes infusion pumps, related software, services, dedicated administration sets, gravity administration sets and other device products. Other Pharma includes large volume intravenous solutions, nutritionals and contract manufacturing.

(1)
The comparisons at constant currency rates reflect comparative local currency balances at prior periods' foreign exchange rates and are non-GAAP measures. Hospira calculated these percentages by taking current period reported Net sales less the respective prior period reported Net sales, divided by the prior period reported Net sales, all at the respective prior period's foreign exchange rates. This measure provides information on the change in Net sales assuming that foreign currency exchange rates have not changed between the prior and the current period. Management believes the use of this measure aids in the understanding of changes in Net sales without the impact of foreign currency and provides greater transparency into Hospira's results of operations. Management uses these measures internally to monitor business unit performance and in evaluating management performance. These

35

measures are intended to supplement the applicable GAAP measures and should not be considered in isolation from or a replacement for, financial measures prepared in accordance with GAAP.

Three months ended September 30, 2014 compared to three months ended September 30, 2013:

Net sales increased 14.1%, or 14.3% excluding the impact of changes in foreign exchange rates.

Americas

Net sales in the Americas segment increased 16.8%, or 17.2% excluding the impact of changes in foreign exchange rates. Net sales of SIP increased due to certain product price increases in the U.S. and increased volume due to supply recovery of certain Hospira U.S. products. Medication Management Net sales decreased, primarily due to the sale of TheraDoc in September 2014, and decreased volume for gravity administration sets. Other Pharma Net sales increased due to certain product price increases in the U.S. and increased contract manufacturing volumes.

EMEA

Net sales in the EMEA segment increased 9.4%, or 8.3% excluding the impact of changes in foreign exchange rates. Net sales of SIP increased due to continued strong sales volume of biosimilar products, offset by continued generic SIP competitive pricing pressures. Medication Management Net sales increased due to sales of the recently launched Sapphire™ infusion pump. Other Pharma Net sales increased due to higher compounding sales.

APAC

Net sales in the APAC segment decreased 5.0%, or 5.2% excluding the impact of changes in foreign exchange rates. Net sales of SIP decreased due to lower sales of paclitaxel in China offset by price favorability in generic products across the region. Medication Management Net sales increased primarily due to sales of the recently launched Sapphire™ infusion pump and gravity administration set volume increases. Other Pharma Net sales decreased due to lower contract manufacturing volumes.

Gross profit (Net sales less Cost of products sold)
 
 
 
 
 
 
Percent
Three months ended September 30 (dollars in millions)
 
2014
 
2013
 
change
Gross profit
 
$
431.3

 
$
290.2

 
48.6
%
As a percent of Net sales
 
37.5
%
 
28.8
%
 
 

Gross profit increased $141.1 million, or 48.6%, for the three months ended September 30, 2014, compared with the same period in 2013. Gross profit increased due to higher pricing on U.S. SIP products, lower manufacturing spending related to strengthening quality, compliance and production processes, and lower Device Strategy charges, offset by higher start-up and facility validation charges related to the Vizag, India capacity expansion.

Restructuring, impairment and (gain) on disposal of assets, net
 
 
 
 
 
 
Percent
Three months ended September 30 (dollars in millions)
 
2014
 
2013
 
change
Restructuring, impairment and (gain) on disposal of assets, net
 
$
(106.3
)
 
$
9.8

 
nm
As a percent of Net sales
 
(9.2
)%
 
1.0
%
 
 
nm—Percentage change is not meaningful

Restructuring, impairment and (gain) on disposal of assets, net of $(106.3) million for the three months ended September 30, 2014 primarily included gains on the sales of TheraDoc and Hospira's surgical suction product line. Restructuring, impairment and (gain) on disposal of assets, net of $9.8 million for the three months ended September 30, 2013 included charges related to the APAC segment other restructuring-related activities, accelerated depreciation charges related to the Device Strategy, and intangible asset impairments associated with certain product rights.


36

Research and development
 
 
 
 
 
 
Percent
Three months ended September 30 (dollars in millions)
 
2014
 
2013
 
change
Research and development
 
$
86.3

 
$
69.9

 
23.5
%
As a percent of Net sales
 
7.5
%
 
6.9
%
 
 

R&D increased $16.4 million, or 23.5%, for the three months ended September 30, 2014, compared with the same period in 2013 primarily due to timing of development funding offset.

Selling, general and administrative
 
 
 
 
 
 
Percent
Three months ended September 30 (dollars in millions)
 
2014
 
2013
 
change
Selling, general and administrative
 
$
223.8

 
$
180.7

 
23.9
%
As a percent of Net sales
 
19.5
%
 
17.9
%
 
 

Selling, general and administrative increased $43.1 million for the three months ended September 30, 2014, compared with the same period in 2013 primarily due to acquisition and integration charges related to the acquisition of an API business and associated R&D facility, higher employee related compensation charges, increased information technology charges and higher selling and promotional expense for expansion in emerging markets.

Interest expense and Other expense, net

Hospira recognized Interest expense of $19.2 million for the three months ended September 30, 2014 and $23.3 million in the same period in 2013. Interest expense decreased primarily due to higher capitalization of interest in 2014 and higher interest expense due to an overlap of outstanding debt in 2013 for senior notes issued and senior notes redeemed. Other expense, net was $4.3 million for the three months ended September 30, 2014 and $39.0 million in the same period in 2013. The change to Other expense, net was primarily due to charges of $33.4 million related to the early extinguishment of debt in 2013.

Income tax expense (benefit)

The effective tax rate was an expense of 23.8% for the three months ended September 30, 2014, compared to a benefit of 97.5% for the same period in 2013, primarily a result of higher U.S. income and fewer tax deductions for the three months ended September 30, 2014. The tax rate for 2014 also reflects favorable tax gains on the sales of TheraDoc and Hospira's surgical suction product line; excluding these gains, the effective tax rate was an expense of 30.2%. The effective tax rates are generally less than the statutory U.S. federal income tax rate due to the benefit of tax exemptions of varying durations in certain jurisdictions outside the U.S.

Equity income from affiliates, net

Equity income from affiliates, net increased to $3.2 million during the three months ended September 30, 2014 compared to $2.7 million for the same period in 2013. The increase is primarily due to higher income from Hospira's joint venture, ZHOPL.


37

Results of operations for the nine months ended September 30, 2014 compared to September 30, 2013

Net sales

A comparison of product line Net sales by segment is as follows:

Hospira, Inc.
Net Sales by Product Line
(Unaudited)
(dollars in millions)
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
Percent Change
at Actual
Currency Rates
 
Percent Change
at Constant
Currency Rates(1)
Americas—
 
 

 
 

 
 

 
 

Specialty Injectable Pharmaceuticals
 
$
1,825.8

 
$
1,590.4

 
14.8
%
 
15.5
%
Medication Management
 
516.7

 
450.4

 
14.7
%
 
16.6
%
Other Pharma
 
351.5

 
278.1

 
26.4
%
 
26.8
%
Total Americas
 
2,694.0

 
2,318.9

 
16.2
%
 
17.1
%
EMEA—
 
 

 
 

 
 

 
 

Specialty Injectable Pharmaceuticals
 
257.5

 
244.7

 
5.2
%
 
2.2
%
Medication Management
 
79.2

 
69.2

 
14.5
%
 
11.0
%
Other Pharma
 
63.8

 
56.0

 
13.9
%
 
8.0
%
Total EMEA
 
400.5

 
369.9

 
8.3
%
 
4.8
%
APAC—
 
 

 
 

 
 

 
 

Specialty Injectable Pharmaceuticals
 
198.5

 
191.6

 
3.6
%
 
7.3
%
Medication Management
 
33.4

 
28.5

 
17.2
%
 
21.1
%
Other Pharma
 
10.8

 
9.5

 
13.7
%
 
13.7
%
Total APAC
 
242.7

 
229.6

 
5.7
%
 
9.3
%
Net Sales(2)
 
$
3,337.2

 
$
2,918.4

 
14.4
%
 
14.9
%

Specialty Injectable Pharmaceuticals ("SIP") includes generic injectables, proprietary specialty injectables and, in certain markets, biosimilars. Medication Management includes infusion pumps, related software, services, dedicated administration sets, gravity administration sets and other device products. Other Pharma includes large volume intravenous solutions, nutritionals and contract manufacturing.

(1)
The comparisons at constant currency rates reflect comparative local currency balances at prior periods' foreign exchange rates and are non-GAAP measures. Hospira calculated these percentages by taking current period reported Net sales less the respective prior period reported Net sales, divided by the prior period reported Net sales, all at the respective prior period's foreign exchange rates. This measure provides information on the change in Net sales assuming that foreign currency exchange rates have not changed between the prior and the current period. Management believes the use of this measure aids in the understanding of changes in Net sales without the impact of foreign currency and provides greater transparency into Hospira's results of operations. Management uses these measures internally to monitor business unit performance and in evaluating management performance. These measures are intended to supplement the applicable GAAP measures and should not be considered in isolation from or a replacement for, financial measures prepared in accordance with GAAP.
(2)
Net sales for the nine months ended September 30, 2013 included the impact of the $104.3 million sales allowances charge to the Medication Management product line, 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. Excluding this charge, Net sales increased 10.4%, or 10.9% excluding the impact of changes in foreign exchange rates. See the section captioned "Device Strategy" within this Item 2 for further information.


38

Net sales were adversely impacted by Hospira's inability to ship certain Medication Management products to the market and to gain regulatory approval for certain new products due to the ongoing quality remediation efforts. See the section captioned "Certain Quality and Product Related Matters" within this Item 2 for further information.

Nine months ended September 30, 2014 compared to nine months ended September 30, 2013:

Net sales increased 14.4%, or 14.9% excluding the impact of changes in foreign exchange rates. Excluding the impact of $104.3 million of Device Strategy charges in 2013, Net sales increased 10.4%, or 10.9% excluding the impact of changes in foreign exchange rates.

Americas

Net sales in the Americas segment increased 16.2%, or 17.1% excluding the impact of changes in foreign exchange rates. Net sales of SIP increased due to certain product price increases in the U.S. and increased volume due to supply recovery of certain Hospira U.S. products. This growth is partially offset by continued docetaxel price erosion following its 2011 launch. Excluding the impact of $88.4 million of Device Strategy charges in 2013, Medication Management Net sales decreased primarily due to the FDA import alert prohibiting the importation into the U.S. of the Plum™, GemStar™ and LifeCare PCA™ infusion pumps. For more information on the retirement of the GemStar™ pump, see the section captioned "Device Strategy" within this Item 2. Other Pharma Net sales increased due to certain product price increases in the U.S. and increased volume due to competitor supply issues.

EMEA

Net sales in the EMEA segment increased 8.3%, or 4.8% excluding the impact of changes in foreign exchange rates. Net sales of SIP increased due to continued strong sales volume of biosimilar products, offset by continued generic SIP competitive pricing pressures. Excluding the impact of $13.2 million of Device Strategy charges in 2013, Medication Management Net sales decreased, primarily due to reduced volume related to regulatory agency restrictions on Plum™ and GemStar™ infusion pumps leading to reduced dedicated administration set sales. For more information on the retirement of the GemStar™ pump, see the section captioned "Device Strategy" within this Item 2. Other Pharma Net sales increased due to increased compounding activities offset by lower contract manufacturing volumes.

APAC

Net sales in the APAC segment increased 5.7%, or 9.3% excluding the impact of changes in foreign exchange rates. Net sales of SIP increased primarily due to volume growth of generic products across the region and continued volume growth of Precedex™ in Japan. Excluding the impact of $2.7 million of Device Strategy charges in 2013, Medication Management Net sales increased primarily due to sales of the recently launched Sapphire™ infusion pump and gravity administration set volume increases. Other Pharma Net sales increased due to higher contract manufacturing volumes.

Gross profit (Net sales less Cost of products sold)
 
 
 
 
 
 
Percent
Nine months ended September 30 (dollars in millions)
 
2014
 
2013
 
change
Gross profit
 
$
1,200.9

 
$
758.9

 
58.2
%
As a percent of Net sales
 
36.0
%
 
26.0
%
 
 

Gross profit increased $442.0 million, or 58.2%, for the nine months ended September 30, 2014, compared with the same period in 2013. Gross profit for the nine months ended September 30, 2013 included charges of $207.1 million related to the Device Strategy, and charges continued to a lesser extent in 2014. Gross profit also increased due to higher pricing on U.S. SIP products and lower manufacturing spending related to strengthening quality, compliance and production processes offset by lower docetaxel sales and higher start-up and facility validation charges related to the Vizag, India capacity expansion.


39

Restructuring, impairment and (gain) on disposal of assets, net
 
 
 
 
 
 
Percent
Nine months ended September 30 (dollars in millions)
 
2014
 
2013
 
change
Restructuring, impairment and (gain) on disposal of assets, net
 
$
(92.0
)
 
$
21.4

 
nm
As a percent of Net sales
 
(2.8
)%
 
0.7
%
 
 
nm—Percentage change is not meaningful

Restructuring, impairment and (gain) on disposal of assets, net of $(92.0) million for the nine months ended September 30, 2014 included gains on the sales of TheraDoc and Hospira's surgical suction product line offset by impairment charges for certain property and equipment and charges related to the sale of Hospira's Buffalo, NY, manufacturing facility. Restructuring, impairment and (gain) on disposal of assets, net of $21.4 million for the nine months ended September 30, 2013 included charges related to the APAC and EMEA segments other restructuring-related activities, asset impairment and accelerated depreciation charges related to the Device Strategy, and intangible asset impairments associated with certain product rights.

Research and development
 
 
 
 
 
 
Percent
Nine months ended September 30 (dollars in millions)
 
2014
 
2013
 
change
Research and development
 
$
245.2

 
$
218.1

 
12.4
%
As a percent of Net sales
 
7.3
%
 
7.5
%
 
 

R&D increased $27.1 million, or 12.4%, for the nine months ended September 30, 2014, compared with the same period in 2013 primarily due to timing of development funding offset and higher spending on Inflectra™ clinical trials as part of EEA regulatory requirements post launch and higher spending on filgrastim and pegfilgrastim, two biosimilar products in development.

Selling, general and administrative
 
 
 
 
 
 
Percent
Nine months ended September 30 (dollars in millions)
 
2014
 
2013
 
change
Selling, general and administrative
 
$
621.1

 
$
556.0

 
11.7
%
As a percent of Net sales
 
18.6
%
 
19.1
%
 
 

Selling, general and administrative increased $65.1 million for the nine months ended September 30, 2014, compared with the same period in 2013 primarily due to higher employee related compensation charges, acquisition and integration charges related to the acquisition of an API business and associated R&D facility and higher selling and promotional expense for expansion in emerging markets.

Interest expense and Other expense, net

Hospira recognized Interest expense of $58.9 million for the nine months ended September 30, 2014 and $62.8 million in the same period in 2013. Interest expense decreased due to an increase in capitalized interest in 2014, partially offset by accelerated swap gains recognized in 2013 after Hospira refinanced a portion of its outstanding debt. Other expense, net was $1.4 million for the nine months ended September 30, 2014 and $51.3 million in the same period in 2013. The change to Other expense, net was primarily due to charges of $33.4 million related to the early extinguishment of debt and certain investment impairments charges of $14.5 million in 2013.

Income tax expense (benefit)

The effective tax rate was an expense of 23.0% for the nine months ended September 30, 2014, compared to a benefit of 63.8% for the same period in 2013. Hospira realized a Net Loss for the nine months ended September 30, 2013, primarily a result of charges related to the initiation of Hospira's Device Strategy. The tax rate for 2014 also reflects favorable tax gains on the sales of TheraDoc and Hospira's surgical suction product line; excluding these gains, the effective tax rate was an expense of 25.0%. The effective tax rates are generally less than the statutory U.S. federal income tax rate due to the benefit of tax exemptions of varying durations in certain jurisdictions outside the U.S.


40

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 in 2013 includes a discrete tax benefit of $13.8 million related to 2012 in the nine months ended September 30, 2013. Without this item, the effective tax rate was a benefit of 54.7%.

Equity income from affiliates, net

Equity income from affiliates, net increased to $15.2 million during the nine months ended September 30, 2014 compared to $12.7 million for the same period in 2013. The increase is primarily due to the release of a tax valuation allowance previously established by ZHOPL.

Liquidity and Capital Resources

Net cash provided by operating activities and cash on hand continues to be Hospira's primary source of funds to finance operating needs, acquisitions, capital expenditures, certain quality and product related matters, research and development related expenditures, common stock repurchases and repayments of debt. Other capital resources include borrowing availability under the revolving credit facility, other uncommitted lines of credit in certain international countries and access to the capital markets. In addition, Hospira may enter into further development alliances and collaborations to fund Hospira's research and development activities. Hospira believes that its current capital resources will be sufficient to finance its operations, including debt service obligations, capital expenditures, product development and investments in continuous improvement, quality-related activities, and Device Strategy initiatives for the foreseeable future.

Of the total cash and cash equivalents at September 30, 2014, approximately $215.2 million is held in foreign jurisdictions. Hospira regularly reviews its needs in the U.S. for possible repatriation of foreign subsidiary earnings, and intends to permanently invest all foreign subsidiary earnings outside of the U.S. Hospira plans to use these foreign subsidiary earnings and cash held outside the U.S. in its foreign operations to fund foreign investments or meet foreign working capital and capital expenditure needs. Hospira believes that its current U.S. cash flow from operations, U.S. cash balances, borrowing capacity under its credit facility and access to capital markets are sufficient to meet U.S. operating and strategic needs. Additionally, Hospira utilizes certain funding strategies in an effort to ensure its worldwide cash is available in the locations in which it is needed. For the foregoing reasons, Hospira has no intention of repatriating cash held in foreign locations. Under current U.S. tax laws, if funds were repatriated for use in Hospira's U.S. operations, Hospira could be required to pay additional income taxes, net of available foreign tax credits, at the tax rates then in effect. Future changes in U.S. tax legislation could cause Hospira to reevaluate the possible repatriation of foreign subsidiary earnings.

Hospira has incurred and expects to incur further charges and higher capital expenditures related to certain quality and product-related matters, the Device Strategy, and continuous improvement activities that will require cash outflows in the future. These matters are further discussed above under sections captioned "Certain Quality and Product Related Matters," "Device Strategy," and "Continuous Improvement Activities." Hospira currently believes current capital resources will be sufficient to fund capital expenditures and costs associated with these activities.

Hospira has outstanding advances, net of inventory receipts, of $50.5 million to Celltrion through September 30, 2014 for the purchase of certain biosimilar products. Additional supplier advances in the aggregate of $25.0 million 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. These supplier advances are refundable under certain conditions, interest free and unsecured. Hospira may distribute and market additional products sourced from Celltrion which would require additional advances.

On July 4, 2014 Hospira acquired Orchid's penem and penicillin API business and related R&D facility, as further described in the section captioned "Acquisitions" within this Item 2, for a preliminary purchase price of $247.2 million, which included the settlement of previous Hospira advances, with available capital resources.

On September 30, 2014, Hospira closed a convertible bond subscription agreement with Celltrion Healthcare. Celltrion Healthcare issued a convertible bond with an aggregate principal amount denominated in Korean Won equal to $200.0 million U.S. Dollars, due on September 30, 2019. Interest will be payable quarterly at an annual rate of 6.0%. The convertible bond will be recognized as an available-for-sale investment and is subject to credit risk. Hospira may redeem some or all of the principal of the convertible bond for cash or an equity interest in Celltrion Healthcare, or, starting on the third anniversary of the issue of the convertible bond, the supply of biosimilar products. Additionally, Celltrion Healthcare may elect to pay interest on the convertible bond in cash, or in kind by providing biosimilar product to Hospira. The terms of the convertible bond and amendment to the co-exclusive agreement, discussed under the section captioned "Product Development and Product Launches" within this Item 2, do not impact cumulative supplier advances discussed above.

41


Summary of Sources and (Uses) of Cash
 
 
Nine Months Ended September 30,
(dollars in millions)
 
2014
 
2013
Operating activities
 
$
334.3

 
$
61.5

Investing activities
 
(606.9
)
 
(259.3
)
Financing activities
 
25.5

 
72.1


Operating Activities

Net cash provided by operating activities increased in the nine months ended September 30, 2014, compared with the same period in 2013 primarily due to higher operating earnings.

Investing Activities

Net cash used in investing activities increased in the nine months ended September 30, 2014, compared with the same period in 2013 primarily due to the acquisition of an API business and associated R&D facility, an investment in Celltrion Healthcare, Vizag, India capacity expansion and the increased capital expenditures for modernization initiatives at several of Hospira's manufacturing facilities, offset by proceeds from the sales of assets and businesses.

Financing Activities

Net cash provided by financing activities decreased in the nine months ended September 30, 2014, compared with the same period in 2013 primarily due to repayments of Hospira's other borrowings in certain foreign locations, offset by proceeds from employee stock option exercises.

Debt and Capital

As of September 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. The availability of funds is limited by financial covenants related to Hospira's debt and financial position, and as of September 30, 2014, Hospira had no limit on the availability under the Revolver.

As of September 30, 2014, Hospira was in compliance with all financial covenants.

In August 2013, Hospira issued, in a registered public offering, $350.0 million principal amount of 5.20% notes due on August 12, 2020 and $350.0 million principal amount of 5.80% notes due on August 12, 2023 ("2020 and 2023 Notes"). In September 2013, the net proceeds of the 2020 and 2023 Notes, after deducting approximately $2.1 million of bond discounts and underwriting fees of $6.1 million plus cash on-hand, were used to extinguish $400.0 million principal amount of 5.90% notes originally due June 2014, $250.0 million principal amount of 6.40% notes originally due May 2015 ("2014 and 2015 Notes"), accrued interest and a make-whole premium payment of $39.8 million. In aggregate, Hospira incurred $33.4 million in charges associated with the early extinguishment of the 2014 and 2015 Notes, which is reported in Other expense, net, in the three and nine months ended September 30, 2013. The early debt extinguishment charges included a make-whole premium, write-off of previously capitalized debt issuance costs, discounts and deferred gains on interest rate hedges.

In August 2013, Hospira terminated the forward starting interest rate swaps, notional amount of $550 million, which had effectively fixed the benchmark interest rates upon entering into the transactions in July 2013 and up to the issuance of the 2020 and 2023 Notes. As a result of the swap terminations, Hospira paid $3.6 million, including interest. The corresponding loss will be deferred in Accumulated other comprehensive loss and amortized into Interest expense over the terms of the 2020 and 2023 notes, respectively.

Hospira has entered into short-term borrowings and other debt arrangements as described under the section "Debt and Capital" in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of Hospira's 2013 Form 10-K. There have been no material changes to the short-term borrowing or other debt arrangement information provided in Hospira's 2013 Form 10-K.

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Contractual Obligations

There have been no material changes to the contractual obligations information provided in Hospira's 2013 Form 10-K.

Off-Balance Sheet Arrangements

Hospira has no material exposures to any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition or results of operations.

Critical Accounting Policies

The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of Hospira's significant accounting policies is included in Note 1 to Hospira's consolidated financial statements, which are included in "Part II, Item 8. Financial Statements and Supplementary Data" to Hospira's 2013 Form 10-K. Certain of Hospira's accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Hospira's 2013 Form 10-K.

Recently Issued and Adoption of New Accounting Standards

The disclosures contained in Note 1 to the condensed consolidated financial statements included in Part I Item 1 of this report are incorporated herein by reference.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

As part of its risk management program, Hospira performs sensitivity analyses of changes in the fair value of foreign currency forward contracts outstanding at September 30, 2014. While not predictive in nature, these analyses indicated that if the U.S. dollar uniformly fluctuates unfavorably by 10% against all currencies the net asset balance of $6.3 million would decrease by $21.9 million.

The sensitivity analyses recalculate the fair value of the foreign currency forward exchange contracts outstanding at September 30, 2014 by replacing the actual exchange rates at September 30, 2014 with exchange rates that are 10% unfavorable to the actual exchange rates for each applicable currency. All other factors are held constant. These sensitivity analyses disregard the possibility that currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. The analyses also disregard the offsetting change in value of the underlying hedged transactions and balances.

There have been no other material changes to the information provided in "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" to Hospira's 2013 Form 10-K.

Item 4.  Controls and Procedures

Evaluation of disclosure controls and procedures. Chief Executive Officer, F. Michael Ball, and Chief Financial Officer, Thomas E. Werner, evaluated the effectiveness of Hospira's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and concluded that Hospira's disclosure controls and procedures were effective.

Changes in internal controls. There have been no changes in internal control over financial reporting that occurred during the third quarter of 2014 that have materially affected or are reasonably likely to materially affect Hospira's internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

The disclosure contained in Note 24 to the condensed consolidated financial statements included in Part I, Item 1 of this report is incorporated herein by reference.

Item 1A. Risk Factors

Please refer to "Part I, Item 1A. Risk Factors" in Hospira's 2013 Form 10-K for a discussion of risks to which Hospira's business, financial condition, results of operations and cash flows are subject. There have been no material changes in Hospira's Risk Factors as disclosed in Hospira's 2013 Form 10-K, except for the following:

Even after our products receive regulatory approval, such products may not achieve expected levels of market acceptance.

Even if we are able to obtain regulatory approvals for our pharmaceutical products, generic or proprietary, including, among other products, biosimilars, the success of those products depends on market acceptance. Market acceptance for our products could be impacted by several factors, including, among other things, FDA-required studies for additional indications, post-launch studies, and various other life-cycle management or enhancement programs with negative results, or perceived negative results, which could adversely affect the product indications, approvals and sales of our on-market products. Such studies can call into question the use, safety, and efficacy of currently marketed and future products. In some cases, studies for other companies have resulted, and may in the future result for others or Hospira, in the delay or loss of marketing approval, the discontinuance of product marketing, changes in product labeling or new or increased concerns about side effects or efficacy of a product, or the need for other risk management programs (e.g., a patient registry). Also, the discovery of significant problems with a product similar to one of our products that implicate (or are perceived to implicate) an entire class of products could have an adverse effect on sales of our products. And, new data about our products, or products similar to our products, could negatively impact demand for our products due to real or perceived side effects or uncertainty regarding efficacy and, in some cases, could result in product withdrawal. As, for example, Hospira's biosimilar development programs progress, Hospira expects that over the next several years the amount of spending to increase on these incremental life-cycle studies for currently approved, on-market, biosimilars. Costs for on-market biosimilars can include studies to demonstrate additional indications, regulator required post-launch studies, and various other life-cycle management or enhancement programs. The occurrence of any of the above risks could result in delays or increased costs during product development, clinical trials and regulatory review, and/or increased costs to comply with additional post-approval regulatory requirements, any or all of which could adversely affect our profitability, financial condition, and results of operations and/or cash flow.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c)          Issuer Purchases of Equity Securities

The table below gives information on a monthly basis regarding purchases made by Hospira of its common stock during the third quarter of 2014.
 
 
Total Number
of Shares
Purchased (1)
 
Average Price
Paid per Share
 
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
 
Maximum Number
(or Approximate
Dollar Value) of
Shares that May
Yet be Purchased
Under the Plans or
Programs (2)
Period
 
 
 
 
July 1-July 31, 2014
 
1,100
 
$
51.55

 
—

 
$
800,000,000

August 1-August 31, 2014
 
2,000
 
54.22

 
—

 
800,000,000

September 1-September 30, 2014
 
900
 
52.78

 
—

 
800,000,000

Total
 
4,000
 
$
53.19

 
—

 
$
800,000,000



44

(1)
These shares represent the shares purchased on the open market for the benefit of participants in the Hospira Healthcare Corporation Stock Purchase Plan. The volume of share repurchases under this plan depends upon the level of employee participation in the plan and purchases are made on a monthly basis. As a result, there is no specified maximum number of shares to be repurchased and no specified termination date for the repurchases.
(2)
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 accelerated share repurchase contracts with a third-party financial institution to repurchase $200.0 million in aggregate of Hospira's common stock. Hospira may periodically repurchase additional shares under this authorization, which will depend on various factors such as cash generation from operations, cash expenditures required for other purposes, current stock price and other factors.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.

Item 6. Exhibits

A list of exhibits immediately precedes such exhibits and is incorporated herein by reference.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
HOSPIRA, INC.
 
 
 
 
By:
/s/ THOMAS E. WERNER
 
 
Thomas E. Werner,
Senior Vice President, Finance and Chief Financial Officer
 
 
Date: November 6, 2014


46

EXHIBIT INDEX

Exhibit No.
 
Exhibit
 
 
 
4.3
 
Hospira 2004 Long-Term Stock Incentive Plan (filed with the SEC on March 21, 2014 as Exhibit A to the Hospira, Inc. Definitive Proxy Statement on Schedule 14A and incorporated herein by reference.)
 
 
 
12.1
 
Computation of Ratio of Earnings to Fixed Charges.
 
 
 
31.1
 
Certificate of Chief Executive Officer pursuant to Rule 13a-14(a).
 
 
 
31.2
 
Certificate of Chief Financial Officer pursuant to Rule 13a-14(a).
 
 
 
32.1
 
Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
 
Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101
 
The following financial statements from the Hospira, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed on November 6, 2014, formatted in Extensive Business Reporting Language (XBRL): (i) condensed consolidated statements of income (loss) and comprehensive income (loss), (ii) condensed consolidated statements of cash flows, (iii) condensed consolidated balance sheets, (iv) condensed consolidated statement of changes in shareholders' equity, and (v) the notes to the condensed consolidated financial statements.


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