Hospira Reports Second-Quarter 2006 Results

LAKE FOREST, Ill., Aug. 9 /PRNewswire-FirstCall/ -- Hospira, Inc. , a leading global hospital products company, today reported results for the second quarter ended June 30, 2006.

"Hospira had a solid second quarter in our underlying commercial performance," said Christopher B. Begley, chief executive officer, Hospira. "We are pleased with the progress we've made year to date and are on track with our earnings expectations for the first half of 2006. While the timing of expenses this year is different from last year, making quarterly comparisons difficult, we continue to expect this to be a very good year for Hospira and have reaffirmed our 2006 adjusted diluted earnings per share projections."

Certain results in this press release are discussed on both a U.S. Generally Accepted Accounting Principles (GAAP) and a non-GAAP (adjusted) basis. Adjusted* measures exclude certain items more fully described in the section "Use of Non-GAAP Financial Measures" contained in this press release. A reconciliation of the adjusted financial information to the most comparable GAAP measure is contained in the schedules attached to this press release.

Hospira's adoption of Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" (SFAS No. 123R), on Jan. 1, 2006, resulted in the recognition of stock option expense in the 2006 income statements; this adversely affects comparisons to the 2005 period.

Significant Events for the Second Quarter -- Launched several new injectable generic products, including propofol, sodium bicarbonate in Hospira's proprietary Ansyr(R) syringe delivery system, and ceftazidime in Hospira's proprietary ADD-Vantage(R) delivery system. -- Introduced the VisIV(TM) next-generation intravenous (I.V.) container, a product that Hospira believes represents the most significant improvement to the I.V. bag since the switch from glass to plastic in the 1970s, advanced by its heightened safety and environmentally friendly features. -- Announced the partnership with InnerWireless, Inc. to enhance connectivity between hospital systems and Hospira's medication management devices. Hospira is the first supplier of infusion devices to offer interoperability with InnerWireless's in-building wireless system. -- Effectively completed the legal separation from Abbott, including the transition of the remaining countries to Hospira. Hospira now has its own sales forces in 18 countries and distributor relationships in 38 others. -- Announced the promotion of Terrence C. Kearney to the newly created position of chief operating officer. Kearney is also acting as chief financial officer until a successor is appointed. -- Announced the election of Ronald A. Matricaria and Mark F. Wheeler, M.D., to Hospira's board of directors at the company's annual meeting of shareholders on May 17, 2006. Financial and Operating Review

Net sales in the second quarter increased 1.4 percent to $671.1 million, compared with $661.9 million in the second quarter of 2005. Core net sales* grew 4.2 percent. A schedule detailing sales by product line for the second quarters and first six months of 2006 and 2005 is attached to this press release.

The components of the year-over-year improvement to net sales are as follows:

-- Improved volume and mix (excluding the sales of Berlex imaging agents) - 1.9 percentage points, -- Favorable pricing in the U.S. - 1.6 percentage points, -- Favorable foreign currency translation - 0.4 percentage point, and -- Termination of the Berlex agreement to distribute its imaging agents - unfavorable (2.5) percentage points.

Gross profit in the quarter was $225.1 million, an increase of 3.1 percent from $218.4 million in the same period last year. Gross margin in the quarter was 33.5 percent, compared with 33.0 percent in the prior year's second quarter. Adjusted* gross profit was $233.4 million, compared with $233.6 million in the same quarter of 2005. The adjusted* gross margin for the second quarter was 34.8 percent, compared with 35.3 percent in the second quarter of 2005.

The change to adjusted* gross margin was primarily attributable to: -- Higher freight and distribution costs, primarily in the International segment, due in part to additional costs related to the segment's new business infrastructure and to temporary supply chain disruptions - unfavorable (1.5) percentage points, -- Lower manufacturing throughput - unfavorable (0.5) percentage point, -- Impact of stock option expense - unfavorable (0.4) percentage point, -- Favorable pricing in the U.S. - 1.1 percentage points, and -- Improved volume and mix - 1.3 percentage points, of which 0.8 percentage point represented the impact of the termination of the Berlex agreement.

Research and development (R&D) expense rose 18.9 percent in the quarter to $39.1 million, or 5.8 percent of sales, compared with $32.9 million, or 5.0 percent of sales, in the second quarter of 2005. Adjusted* R&D expense in the quarter was $38.0 million, or 5.7 percent of sales, compared with $32.7 million, or 4.9 percent of sales, for the same period last year. The increase in adjusted* R&D expense was due to new product development and stock option expense as a result of the adoption of SFAS No. 123R.

Selling, general and administrative (S,G&A) expense in the quarter was $111.1 million, or 16.6 percent of sales, compared with $87.4 million, or 13.2 percent of sales in the second quarter of 2005. Adjusted* S,G&A expense in the quarter was $102.5 million, or 15.3 percent of sales, compared with $79.2 million for the same period last year, or 12.0 percent of sales. The increase was partly driven by the inclusion of stock option expense in the second quarter of 2006. Also contributing to the increase were higher ongoing, incremental costs associated with being a stand-alone public company, particularly for the company's independent information technology system and for international operations, now fully separated from Abbott.

Income from operations in the quarter was $75.0 million, compared with $98.2 million in the second quarter of 2005. The operating margin for the quarter was 11.2 percent, compared with 14.8 percent for the same period in 2005. Adjusted* income from operations in the quarter was $92.9 million, compared with $121.7 million in the second quarter of 2005. The adjusted* operating margin for the quarter was 13.8 percent, compared with 18.4 percent in the same period of 2005. The decrease was attributable to the higher S,G&A and R&D expense.

Interest expense in the quarter was $7.3 million, compared with $6.9 million in the same period of 2005. Other income, primarily interest income, was $3.5 million in both the 2006 and 2005 quarters.

Net income in the quarter was $54.2 million, compared with $72.0 million in the second quarter of 2005. Adjusted* net income for the quarter was $67.8 million compared with $89.9 million in 2005.

The tax rate for the quarter was 24.0 percent, the same as in the second quarter of 2005. The company is now projecting the full-year 2006 tax rate to be 25.5 percent, a decrease from the previously estimated rate of 26.5 percent, due primarily to an anticipated higher proportion of income from lower-tax jurisdictions. The second-quarter tax rate reflects the amount required to bring the year-to-date rate to the currently projected 2006 rate of 25.5 percent.

Six-Month Results

Net sales for the six months ended June 30, 2006, increased 0.9 percent to $1.34 billion, compared with $1.32 billion in the same period of 2005. Core net sales* grew 7.3 percent.

Net income was $134.3 million, compared with $149.2 million in the first six months of 2005. Diluted earnings per share were $0.83, compared with $0.93 last year. Adjusted* net income was $171.1 million, compared with $177.1 million last year. Adjusted* diluted earnings per share in the first six months of 2006 were $1.06 compared with $1.07 in the prior year, including pro-forma stock option expense.

Cash Flow Items

Cash flow from operations for the first six months of 2006 was $179.9 million, compared with $300.2 million in the same period last year, primarily due to year-over-year increases in working capital. The rise in working capital is primarily due to higher inventory, reflecting planned normal inventory builds and additional safety stocks to support the business as manufacturing production transfers occur; and higher receivables resulting from sales growth.

Depreciation and amortization expense was $78.9 million for the first six months of 2006, compared with $80.5 million for the first half of 2005. The decrease reflects a lower balance of infusion pumps on Hospira's balance sheet due to fewer placements under operating leases versus sales-type leases or outright sales.

Capital expenditures were $139.8 million for the first half of 2006, compared with $131.1 million for the same period in 2005. The increase was driven primarily by manufacturing-related projects.

2006 Projections

Hospira projects that core net sales* will grow 7 to 9 percent. On a GAAP basis, net sales growth is now projected to range between 3 and 5 percent.

Adjusted* diluted earnings per share for 2006, which exclude the items listed below, are projected to be in the range of $1.97 to $2.02, including stock option expense of $0.17 per share. The adjusted* operating margin is estimated to be in the 16.3 to 16.8 percent range, including pre-tax stock option expense of approximately $36 million. Stock option expense was previously projected to be $33 million.

The reconciliation between the projected adjusted* diluted earnings per share and earnings per share on a GAAP basis is:

Diluted earnings per share - adjusted* $1.97 - $2.02 (includes $0.17 of stock option expense) Estimated non-recurring transition expenses related to becoming an independent, stand-alone company (estimated $0.16 to $0.17 per diluted share for 2006) ($0.16) Estimated charges related to previously announced manufacturing optimization initiatives (mid-point of an estimated $0.24 to $0.28 per diluted share range for 2006) ($0.26) Diluted earnings per share - GAAP basis $1.55 - $1.60

Cash flow from operations in 2006 is now projected to range between $425 million and $475 million. The company continues to project that depreciation and amortization will range between $150 million and $160 million, and that capital expenditures will be in the $230 million to $260 million range.

*Use of Non-GAAP Financial Measures

In addition to the results reported in accordance with GAAP included within this press release, Hospira has provided certain information that is considered to be non-GAAP financial measures.

As used in this press release, "adjusted" refers to operating performance measures that exclude the non-recurring transition expenses in 2006 and 2005 related to becoming an independent, stand-alone company and charges related to the company's manufacturing optimization initiatives. In addition, the company is providing adjusted* earnings per share including pro-forma stock option expense for the second quarter and first six months of 2005 to facilitate year-over-year comparability, given the company's adoption of SFAS No. 123R on Jan. 1, 2006.

"Core net sales," as used in this press release, refer to Hospira's net sales excluding U.S. and international sales to Abbott related to transition arrangements made at the time of the spin-off, sales of Berlex imaging agents under the arrangement that terminated during the second quarter of 2005, and the impact of foreign exchange translation. Management believes that core net sales provide investors an additional measure to assess the underlying sales trend of Hospira's ongoing business.

Management believes that the charges and sales excluded in the manner described above are not necessarily indicative of the company's base business results. Therefore, management believes that these non-GAAP financial measures, when presented together with and reconciled to the comparable measures presented in accordance with GAAP, are useful to both management and investors in their analysis of the company's ongoing business and operating performance. Management believes that such presentation enables investors to have more complete information with which to assess the company's results of operations and prospects. Such presentation also facilitates period-to-period comparison of Hospira's operating results. In addition, management uses this information for operational planning and decision-making purposes.

Non-GAAP financial measures should not be considered a substitute for any GAAP measure. Additionally, non-GAAP financial measures as presented by Hospira may not be comparable to similarly titled measures reported by other companies.

In the second quarter of 2006, Hospira incurred non-recurring pre-tax transition expenses of $11 million ($8.4 million, or $0.05 per diluted share, after tax) related to establishing an independent infrastructure. The company had previously estimated these non-recurring transitional expenses to total approximately $100 million over the two-year period ending in the second quarter of 2006. A total of $104.8 million was incurred through June 30, 2006. The company effectively completed the legal separation from Abbott during the second quarter. However, the company determined that completing the remaining transition-related matters, the majority of which relates to the company's independent information technology system, would require an additional $7 million to $10 million of estimated expenditures in the second half of 2006. The company now expects the aggregate non-recurring transition expenses to total between $112 million and $115 million.

Also included in the second-quarter 2006 GAAP diluted earnings per share were manufacturing optimization-related expenses of $15.9 million ($12.1 million, or $0.08 per diluted share, after tax), partially offset by the $7.9 million ($6.0 million, or $0.04 per diluted share, after tax) gain on the sale of the Donegal, Ireland, facility and by a $1.1 million ($0.8 million, or less than a penny per diluted share, after tax) reduction of the obligation associated with the 2005 sale of the Salt Lake City manufacturing facility. (The company's manufacturing optimization initiatives include the planned closing of the Donegal, Montreal and Ashland, Ohio, facilities; the relocation of production from the leased North Chicago facility; and the sale of the Salt Lake City facility.)

In the second quarter of 2005, Hospira incurred non-recurring pre-tax transition expenses of $10.2 million ($7.7 million, or $0.05 per diluted share, after tax) related to establishing an independent infrastructure. The company also incurred a charge of $13.4 million ($10.2 million or $0.06 per diluted share, after tax) for obligations related to the Salt Lake City facility sale. In addition, as previously indicated, the second-quarter 2005 GAAP results do not include stock option expense.

Webcast

A conference call for investors and media will be held at 9 a.m. Central Time on Wednesday, Aug. 9, 2006. A live webcast of the conference call will be available at http://www.hospirainvestor.com/. Listeners should log on approximately 10 minutes in advance to ensure proper computer setup for receiving the webcast. A replay will be available on the Hospira Web site for 30 days following the call.

About Hospira

Hospira, Inc. is a global specialty pharmaceutical and medication delivery company dedicated to Advancing Wellness(TM) by developing, manufacturing and marketing products that help improve the productivity, safety and efficacy of patient care. With 70 years of service to the hospital industry, Hospira's portfolio includes one of the industry's broadest lines of generic acute-care injectables, which help address the high cost of proprietary pharmaceuticals; integrated solutions for medication management and infusion therapy; and the leading U.S. injectable contract manufacturing business. Headquartered north of Chicago in Lake Forest, Ill., Hospira has approximately 13,000 employees and 14 manufacturing facilities worldwide. Hospira's news releases and other information can be found at http://www.hospira.com/.

Private Securities Litigation Reform Act of 1995 -- A Caution Concerning Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections of certain measures of Hospira's results of operations and other statements regarding Hospira's goals and strategy. Hospira cautions that these forward- looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward- looking statements. Economic, competitive, governmental, technological and other factors that may affect Hospira's operations and may cause actual results to be materially different from expectations include the risks, uncertainties and factors discussed under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Hospira's Annual Report on Form 10-K for the year ended Dec. 31, 2005, and subsequent Quarterly Reports on Form 10-Q, filed with the Securities and Exchange Commission, which are incorporated by reference. Hospira undertakes no obligation to release publicly any revisions to forward- looking statements as the result of subsequent events or developments.

Hospira, Inc. Condensed Consolidated Statements of Income (Unaudited) (dollars and shares in thousands, except for per share amounts) Three Months Ended Six Months Ended June 30 June 30 2006 2005 % Change 2006 2005 % Change Net sales $629,903 $618,510 1.8 $1,254,009 $1,235,205 1.5 Net sales to Abbott Laboratories 41,198 43,405 (5.1) 81,386 88,771 (8.3) Total Net Sales 671,101 661,915 1.4 1,335,395 1,323,976 0.9 Cost of products sold 446,015 443,497 0.6 865,513 887,782 (2.5) Gross Profit 225,086 218,418 3.1 469,882 436,194 7.7 Research and development 39,055 32,851 18.9 70,056 61,242 14.4 Selling, general and administrative 111,073 87,409 27.1 212,867 169,284 25.7 Income From Operations 74,958 98,158 (23.6) 186,959 205,668 (9.1) Interest expense 7,283 6,857 6.2 14,940 14,026 6.5 Other (income), net (3,549) (3,476) nm (8,295) (4,681) nm Income Before Income Taxes 71,224 94,777 (24.9) 180,314 196,323 (8.2) Income tax expense 17,074 22,746 (24.9) 45,981 47,117 (2.4) Net Income $54,150 $72,031 (24.8) $134,333 $149,206 (10.0) Earnings Per Common Share: Basic $0.35 $0.45 (22.2) $0.85 $0.94 (9.6) Diluted $0.34 $0.44 (22.7) $0.83 $0.93 (10.8) Weighted Average Common Shares Outstanding: Basic 156,448 158,568 (1.3) 158,673 157,896 0.5 Diluted 159,655 160,908 (0.8) 162,026 159,757 1.4 Hospira, Inc. Reconciliation of Condensed Consolidated Statements of Income (Unaudited) (dollars and shares in thousands, except per share amounts) Three Months Ended June 30, 2006 2005 GAAP Adjustments Adjusted GAAP Adjustments Adjusted Net sales $629,903 $ - $629,903 $618,510 $ - $618,510 Net sales to Abbott Laboratories 41,198 - 41,198 43,405 - 43,405 Total Net Sales 671,101 - 671,101 661,915 - 661,915 Cost of products sold 446,015 (8,303)A 437,712 443,497 (15,230)C 428,267 Gross Profit 225,086 8,303 233,389 218,418 15,230 233,648 Research and development 39,055 (1,069)B 37,986 32,851 (112)B 32,739 Selling, general and administrative 111,073 (8,593)B 102,480 87,409 (8,218)B 79,191 Income From Operations 74,958 17,965 92,923 98,158 23,560 121,718 Interest expense 7,283 - 7,283 6,857 - 6,857 Other (income), net (3,549) - (3,549) (3,476) - (3,476) Income Before Income Taxes 71,224 17,965 89,189 94,777 23,560 118,337 Income tax expense 17,074 4,285 D 21,359 22,746 5,655 28,401 Net Income $54,150 $13,680 $67,830 $72,031 $17,905 $89,936 Earnings Per Common Share: Basic $0.35 $0.09 $0.44 $0.45 $0.11 $0.56 Diluted $0.34 $0.09 $0.43 $0.44 $0.11 $0.55 Weighted Average Common Shares Outstanding: Basic 156,448 156,448 156,448 158,568 158,568 158,568 Diluted 159,655 159,655 159,655 160,908 160,908 160,908 Statistics (as a % of Total Net Sales, except for income tax rate) Gross Profit 33.5% 34.8% 33.0% 35.3% R&D 5.8% 5.7% 5.0% 4.9% SG&A 16.6% 15.3% 13.2% 12.0% Income From Operations 11.2% 13.8% 14.8% 18.4% Income Before Income Taxes 10.6% 13.3% 14.3% 17.9% Net Income 8.1% 10.1% 10.9% 13.6% Income tax rate 24.0% 24.0% 24.0% 24.0% % Change vs. Prior Year GAAP Adjusted Net sales 1.8 1.8 Net sales to Abbott Laboratories (5.1) (5.1) Total Net Sales 1.4 1.4 Cost of products sold 0.6 2.2 Gross Profit 3.1 (0.1) Research and development 18.9 16.0 Selling, general and administrative 27.1 29.4 Income From Operations (23.6) (23.7) Interest expense 6.2 6.2 Other (income), net nm nm Income Before Income Taxes (24.9) (24.6) Income tax expense (24.9) (24.8) Net Income (24.8) (24.6) Earnings Per Common Share: Basic (22.2) (21.4) Diluted (22.7) (21.8) E Weighted Average Common Shares Outstanding: Basic (1.3) (1.3) Diluted (0.8) (0.8) A -- Includes costs of $15,892 related to the planned closure of the Donegal, Ireland; Ashland, Ohio; Montreal; and North Chicago, IL plants, a reduction of the obligation associated with the sale of the Salt Lake City manufacturing plant to ICU Medical ($1,100), a gain on the sale of the Donegal, Ireland facility ($7,851) and non-recurring transition costs of $1,362. B -- Non-recurring transition costs. C -- Includes a charge of $13,404 related to the sale of the Salt Lake City manufacturing plant to ICU Medical, and non-recurring transition costs of $1,826. D -- Includes the impact of decreasing the overall effective tax rate from 26.5% to 25.5%. E -- Had the Company recorded stock option expense during 2005, adjusted diluted EPS would have declined by (18.9%). A reconciliation follows: 2005 2006 % Change Adjusted diluted EPS $0.55 $0.43 -21.8% Pro-forma Option Expense 0.02 n/a n/a Adjusted diluted EPS (including 2005 Pro-forma Option Expense) $0.53 $0.43 -18.9% Hospira, Inc. Reconciliation of Condensed Consolidated Statements of Income (Unaudited) (dollars and shares in thousands, except per share amounts) Six Months Ended June 30, 2006 2005 GAAP Adjustments Adjusted GAAP Adjustments Adjusted Net sales $1,254,009 $ - $1,254,009 $1,235,205 $ - $1,235,205 Net sales to Abbott Laborator- ies 81,386 - 81,386 88,771 - 88,771 Total Net Sales 1,335,395 - 1,335,395 1,323,976 - 1,323,976 Cost of products sold 865,513 (27,131)A 838,382 887,782 (18,371)C 869,411 Gross Profit 469,882 27,131 497,013 436,194 18,371 454,565 Research and development 70,056 (3,004)B 67,052 61,242 (220)B 61,022 Selling, general and admini- strative 212,867 (19,201)B 193,666 169,284 (18,137)B 151,147 Income From Oper- ations 186,959 49,336 236,295 205,668 36,728 242,396 Interest expense 14,940 - 14,940 14,026 - 14,026 Other (income), net (8,295) - (8,295) (4,681) - (4,681) Income Before Income Taxes 180,314 49,336 229,650 196,323 36,728 233,051 Income tax expense 45,981 12,581 58,562 47,117 8,815 55,932 Net Income $134,333 $36,755 $171,088 $149,206 $27,913 $177,119 Earnings Per Common Share: Basic $0.85 $0.23 $1.08 $0.94 $0.18 $1.12 Diluted $0.83 $0.23 $1.06 $0.93 $0.18 $1.11 Weighted Average Common Shares Outstanding: Basic 158,673 158,673 158,673 157,896 157,896 157,896 Diluted 162,026 162,026 162,026 159,757 159,757 159,757 Statistics (as a % of Total Net Sales, except for income tax rate) Gross Profit 35.2% 37.2% 32.9% 34.3% R&D 5.2% 5.0% 4.6% 4.6% SG&A 15.9% 14.5% 12.8% 11.4% Income From Operations 14.0% 17.7% 15.5% 18.3% Income Before Income Taxes 13.5% 17.2% 14.8% 17.6% Net Income 10.1% 12.8% 11.3% 13.4% Income tax rate 25.5% 25.5% 24.0% 24.0% % Change vs. Prior Year GAAP Adjusted Net sales 1.5 1.5 Net sales to Abbott Laboratories (8.3) (8.3) Total Net Sales 0.9 0.9 Cost of products sold (2.5) (3.6) Gross Profit 7.7 9.3 Research and development 14.4 9.9 Selling, general and administrative 25.7 28.1 Income From Operations (9.1) (2.5) Interest expense 6.5 6.5 Other (income), net nm nm Income Before Income Taxes (8.2) (1.5) Income tax expense (2.4) 4.7 Net Income (10.0) (3.4) Earnings Per Common Share: Basic (9.6) (3.6) Diluted (10.8) (4.5) D Weighted Average Common Shares Outstanding: Basic 0.5 0.5 Diluted 1.4 1.4 A -- Includes costs of $31,951 related to the planned closure of the Donegal, Ireland; Ashland, Ohio; Montreal; and North Chicago, IL plants, a reduction of the obligation associated with the sale of the Salt Lake City manufacturing plant to ICU Medical ($1,100), a gain on the sale of the Donegal, Ireland facility ($7,851) and non-recurring transition costs of $4,131. B -- Non-recurring transition costs. C -- Includes charges of $15,833 related to the sale of the Salt Lake City manufacturing plant to ICU Medical, and non-recurring transition costs of $2,538. D -- Had the Company recorded stock option expense during 2005, adjusted diluted EPS would have declined by (0.9%). A reconciliation follows: 2005 2006 % Change Adjusted diluted EPS $1.11 $1.06 -4.5% Pro-forma Option Expense 0.04 n/a n/a Adjusted diluted EPS (including 2005 Pro-forma Option Expense) $1.07 $1.06 -0.9% Hospira, Inc. Condensed Consolidated Balance Sheets (Unaudited) (dollars in thousands) June 30 December 31 Assets 2006 2005 Current Assets: Cash and cash equivalents $ 256,445 $ 520,610 Net trade receivables 364,696 327,146 Inventories 591,209 510,268 Prepaid expenses, deferred income taxes and other receivables 209,626 203,141 Total Current Assets 1,421,976 1,561,165 Net property and equipment 1,023,208 990,813 Intangible assets, net of amortization 13,962 14,926 Goodwill 89,197 89,197 Deferred income taxes 11,355 17,692 Other assets 121,356 115,389 Total Assets $2,681,054 $2,789,182 Liabilities and Shareholders' Equity Current Liabilities: Short-term borrowings $ 9,490 $ 2,579 Trade accounts payable 140,038 129,865 Salaries payable and other accruals 381,261 384,713 Due to Abbott, net 13,307 79,079 Total Current Liabilities 544,096 596,236 Long-term debt 687,632 695,285 Post-retirement obligations, deferred income taxes and other long-term liabilities 151,726 169,794 Commitments and Contingencies - - Total Liabilities 1,383,454 1,461,315 Total Shareholders' Equity 1,297,600 1,327,867 Total Liabilities and Shareholders' Equity $2,681,054 $2,789,182 Hospira, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (dollars in thousands) Six Months Ended June 30 2006 2005 Cash Flow From (Used in) Operating Activities: Net income $134,333 $149,206 Adjustments to reconcile net income to net cash from operating activities -- Depreciation 77,909 79,606 Amortization of intangibles 964 936 Stock-based compensation expense 19,584 - Gain on sale of facility (7,851) - Changes in assets and liabilities -- Trade receivables (32,595) (812) Inventories (71,669) 5,339 Prepaid expenses and other assets (6,017) (5,721) Trade accounts payable and other liabilities 17,530 70,974 Other, net 47,744 630 Net Cash From Operating Activities 179,932 300,158 Cash Flow From (Used in) Investing Activities: Acquisitions of property and equipment (139,784) (131,089) Proceeds from sale of facility 11,500 31,818 Investments (12,045) - Sale of marketable securities - 72,438 Net Cash (Used in) Investing Activities (140,329) (26,833) Cash Flow From (Used in) Financing Activities: Payment to Abbott for international net assets (98,536) (45,768) Common stock repurchased (250,178) - Issuance of long-term debt, net of fees paid - 1,750 Repayment of long-term debt (71) (44) Other borrowings, net 4,069 - Excess tax benefit from stock-based compensation arrangements 3,159 - Proceeds from stock options exercised 34,851 70,255 Net Cash (Used in) From Financing Activities (306,706) 26,193 Effect of exchange rate changes on cash and cash equivalents 2,938 (2,532) Net change in cash and cash equivalents (264,165) 296,986 Cash and cash equivalents at beginning of period 520,610 127,695 Cash and cash equivalents at end of period $256,445 $424,681 Hospira, Inc. (Unaudited) (dollars in thousands) Sales by Product Line Three Months Ended June 30 Six Months Ended June 30 Percent Percent Change vs. Change vs. Prior Prior 2006 2005 Year 2006 2005 Year U.S. -- Specialty Injectable Pharmaceuticals $207,317 $201,284 3.0 $392,553 $425,764 (7.8) Medication Delivery Systems 214,443 204,536 4.8 427,469 392,607 8.9 Injectable Pharmaceutical Contract Manufacturing 49,687 52,058 (4.6) 101,789 102,146 (0.3) Sales to Abbott Laboratories 21,441 26,776 (19.9) 45,822 54,984 (16.7) Other 64,794 64,726 0.1 139,243 124,269 12.0 Total U.S. 557,682 549,380 1.5 1,106,876 1,099,770 0.6 International -- Sales to Third Parties 93,662 95,906 (2.3) 192,955 190,419 1.3 Sales to Abbott Laboratories 19,757 16,629 18.8 35,564 33,787 5.3 Total International Sales 113,419 112,535 0.8 228,519 224,206 1.9 Consolidated Net Sales $671,101 $661,915 1.4 $1,335,395 $1,323,976 0.9 Reconciliation of Consolidated Net Sales to Core Net Sales Three Months Ended June 30 Six Months Ended June 30 Percent Percent Change vs. Change vs. Prior Prior 2006 2005 Year 2006 2005 Year Consolidated Net Sales $671,101 $661,915 1.4 $1,335,395 $1,323,976 0.9 Less: Sales to Abbott Laboratories (41,198) (43,405) (81,386) (88,771) Berlex imaging agents - (16,830) - (67,174) Impact of foreign currency (2,700) - (1,200) - Core Net Sales $627,203 $601,680 4.2 $1,252,809 $1,168,031 7.3 Hospira, Inc. Segment Information (Unaudited) (dollars in thousands) Three Months Ended June 30 Net Sales Income from Operations % % 2006 2005 Change 2006 2005 Change U.S. $557,682 $549,380 1.5 $83,070 A $92,674 A (10.4) International 113,419 112,535 0.8 6,700 B 20,539 B (67.4) Total reportable segments $671,101 $661,915 1.4 89,770 113,213 (20.7) Corporate functions (14,812) C (15,055) C (1.6) Income from operations 74,958 98,158 (23.6) Other, net (3,734) (3,381) nm Income before income taxes $71,224 $94,777 (24.9) Included in the reported Income before income taxes above, are the following costs: A -- US Non-recurring transition costs $6,996 $8,148 Costs/(Income) associated with the sale of the Salt Lake City Manufacturing Plant (1,100) 13,404 Costs related to the planned closure of the Ashland, Ohio and North Chicago, Illinois plants 7,732 - Total US $13,628 $21,552 B -- International Non-recurring transition costs 2,869 921 Costs related to the planned closure of the Montreal and Donegal, Ireland plants 8,160 - Gain on the sale of the Donegal, Ireland plant (7,851) - Total International $3,178 $921 C -- Corporate Non-recurring transition costs 1,159 1,087 Total Corporate $1,159 $1,087 Total $17,965 $23,560 Hospira, Inc. Segment Information (Unaudited) (dollars in thousands) Six Months Ended June 30 Net Sales Income from Operations % % 2006 2005 Change 2006 2005 Change U.S. $1,106,876 $1,099,770 0.6 $197,115 A $190,826 A 3.3 International 228,519 224,206 1.9 18,614 B 42,192 B (55.9) Total reportable segments $1,335,395 $1,323,976 0.9 215,729 233,018 (7.4) Corporate functions (28,770) C (27,350) C 5.2 Income from operations 186,959 205,668 (9.1) Other, net (6,645) (9,345) nm Income before income taxes $180,314 $196,323 (8.2) Included in the reported Income before income taxes above, are the following costs: A -- US Non-recurring transition costs $16,307 $17,284 Expenses/(Income) associated with the sale of the Salt Lake City Manufacturing Plant (1,100) 15,833 Costs related to the planned closure of the Ashland, Ohio and North Chicago, Illinois plants 15,757 - Total US $30,964 $33,117 B -- International Non-recurring transition costs 7,663 2,403 Costs related to the planned closure of the Montreal and Donegal, Ireland plants 16,194 - Gain on the sale of the Donegal, Ireland plant (7,851) - Total International $16,006 $2,403 C -- Corporate Non-recurring transition costs 2,366 1,208 Total Corporate $2,366 $1,208 Total $49,336 $36,728