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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, 2009

OR

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

For the transition period from              to

Commission File No. 1-31946

HOSPIRA, INC.

(Exact name of registrant as specified in its charter)

275 North Field Drive
Lake Forest, Illinois 60045

(Address of principal executive offices, including zip code)

(224) 212-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

As of October 23, 2009, Registrant had outstanding 162,159,786 shares of common stock, par value $0.01 per share.

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Hospira, Inc.

Quarterly Report on Form 10-Q

Index

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PART  I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Hospira, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(dollars and shares in millions, except for per share amounts)

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

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Hospira, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(dollars in millions)

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

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Hospira, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(dollars in millions)

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

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Hospira, Inc.

Condensed Consolidated Statement of Changes in Shareholders’ Equity

(Unaudited)

(dollars and shares in millions)

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

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Hospira, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 — Basis of Presentation and Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting and, therefore, do not include all information and footnote disclosures normally included in audited financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). However, in the opinion of management, all adjustments, consisting of normal recurring adjustments, unless otherwise noted herein, necessary to present fairly the results of operations, financial position and cash flows have been made. Subsequent events that occurred after September 30, 2009, up until the filing with the SEC which occurred on October 27, 2009 were considered in the preparation of these condensed consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Hospira, Inc. (“Hospira”) Annual Report on Form 10-K for the year ended December 31, 2008. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.

Certain prior year amounts have been reclassified to conform to the current year presentation. Among other changes, during 2009 Hospira reclassified costs that were previously reported in Cost of products sold and Research and development to Restructuring and impairment, a separate operating costs and expenses line item. See Note 4 for additional details related to Restructuring and impairment. The reclassifications did not affect net income or shareholders’ equity.

Significant Accounting Policies

Hospira’s accounting policy for revenue recognition including a description of chargebacks (estimated reimbursements to wholesalers for honoring contracted prices to end customers) is included in Note 1 — Summary of Significant Accounting Policies in the Hospira Annual Report on Form 10-K for the year ended December 31, 2008. Hospira regularly monitors the provision for chargebacks and makes adjustments when it believes the actual chargeback may differ from estimates. The methodology used to estimate and provide for chargebacks was consistent across all periods presented. Hospira’s generic oxaliplatin sales, launched in the United States (“U.S.”) in August 2009, are subject to chargebacks which are recorded as a reduction to gross sales and trade receivables. The oxaliplatin launch and related sales contributed to the increase in the chargebacks accrual from $60.2 million at December 31, 2008 to $254.9 million at September 30, 2009. Generally, generic product launch sales have a higher degree of end customer price movement as additional competitors enter the market and reflect wholesalers’ common practice of purchasing quantities of product at launch to assure adequate supply for end customer use. A five percent variance in the end customer contract prices for generic oxaliplatin sales subject to chargebacks at September 30, 2009 could increase or decrease net sales and income before income taxes by approximately $3.3 million.

Recently Issued and Adoption of New Accounting Standards

In October 2009, the Financial Accounting Standards Board (“FASB”) codified and issued Accounting Standards Updated (“ASU”) No. 2009-13, Revenue Recognition (Topic 605), “Multiple-Deliverable Revenue Arrangements” (“ASU No. 2009-13”). ASU No. 2009-13 amends the guidance that in the absence of vendor-specific objective and third-party evidence for deliverables in multiple-deliverable arrangements, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangements consideration using the relative selling price method. ASU No. 2009-13 expands the disclosure requirements for multiple-deliverable revenue arrangements. The guidance will be effective for financial statements issued for fiscal years beginning after June 15, 2010. Early adoption is permitted. Hospira is currently evaluating the potential impact of ASU 2009-13 on the financial statements.

In October 2009, the FASB codified and issued ASU No. 2009-14, Software (Topic 985), “Certain Revenue Arrangements That Include Software Elements” (“ASU No. 2009-14”). ASU No. 2009-14 amends the guidance to exclude from the scope of software revenue accounting requirements tangible products if the product contains both software and non-software components that function together to deliver a product’s essential functionality and factors to consider in determining whether a product is within the scope of the guidance. The guidance will be effective for financial statements issued for fiscal years beginning after June 15, 2010. Early adoption is permitted. Hospira is currently evaluating the potential impact of ASU No. 2009-14 on the financial statements.

Hospira adopted the provisions of FASB ASU No. 2009-05, “Measuring Liabilities at Fair Value” (“ASU No. 2009-05”) for interim periods ending after August 28, 2009. ASU No. 2009-05 provides guidance on measuring liabilities at fair value when a quoted price in an active market for the identical liability is not available. There was no impact to Hospira’s current condensed consolidated

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

Effective July 1, 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168 reduces the U.S. GAAP hierarchy to two levels, one that is authoritative and one that is not. Hospira began to use the new guidance and reflect the new accounting guidance references when referring to GAAP in this Form 10-Q for the quarterly period ended September 30, 2009, and all subsequent public filings will use the new accounting guidance references as the sole source of authoritative literature. As the guidance was not intended to change or alter existing GAAP, adoption of this pronouncement did not have an effect on Hospira’s condensed consolidated financial statements.

Hospira adopted the provisions of FASB Accounting Standards Codification (“ASC”) Topic 855 or SFAS No. 165, “Subsequent Events” for the interim periods ending after June 15, 2009. ASC 855-10-50-1 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or available to be issued. There was no impact to Hospira’s condensed consolidated financial position, results of operations, or cash flows upon initial adoption of this guidance.

Hospira adopted the provisions of ASC 825-10-65-1 or the FASB Staff Position No. FAS 107-1, “Interim Disclosures about Fair Value of Financial Instruments” for the interim periods ending after March 15, 2009. ASC 825-10-65-1 expands the fair value disclosures required for all financial instruments within the scope of ASC 825-10-65-1 to include interim periods. There was no impact to Hospira’s condensed consolidated financial position, results of operations or cash flows upon adoption of this guidance.

Hospira adopted the provisions of ASC 715-20-65-2 or the FASB Staff Position No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” on January 1, 2009. ASC 715-20-65-2 requires more detailed disclosures about Hospira’s plan assets, including investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets. Additional disclosures are required beginning with the year end 2009 consolidated financial statements. There was no impact to Hospira’s condensed consolidated financial position, results of operations or cash flows upon adoption of this guidance.

Hospira adopted the provisions of ASC 350-30-55-1C or FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” on January 1, 2009. ASC 350-30-55-1C amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC Topic 350 or FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This guidance will be applied prospectively to intangible assets acquired on or after January 1, 2009. There was no impact to Hospira’s condensed consolidated financial position, results of operations or cash flows upon adoption of this guidance.

Hospira adopted the provisions of ASC 815-10-65-1 or SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” on January 1, 2009. ASC 815-10-65-1 expands the disclosure requirements for derivative instruments and hedging activities. There was no impact to Hospira’s condensed consolidated financial position, results of operations or cash flows upon adoption of this guidance.

Hospira adopted the provisions of ASC 808-10-10-1 or Emerging Issues Task Force (“EITF”) Issue No. 07-1, “Accounting for Collaborative Arrangements” on January 1, 2009. ASC 808-10-10-1 provides guidance on how to determine whether an arrangement constitutes a collaborative arrangement, how costs incurred and revenue generated on sales to third parties should be reported by the participants in a collaborative arrangement, how payments made between participants in a collaborative arrangement should be characterized, and what participants should disclose in the notes to the financial statements about a collaborative arrangement. There was no impact to Hospira’s condensed consolidated financial position, results of operations or cash flows upon adoption of this guidance.

Hospira adopted the provisions of ASC 805-10-65-1 or SFAS No. 141 (revised 2007), “Business Combinations” on January 1, 2009. ASC 805-10-65-1 establishes principles and requirements for the reporting entity in a business combination, including recognition and measurement in the financial statements of the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. This statement also establishes disclosure requirements to enable financial statement users to evaluate the nature and financial effects of the business combination. ASC 805-10-65-1 is effective for business combinations that close in years beginning on or after December 15, 2008. There was no impact to Hospira’s condensed consolidated financial position, results of operations or cash flows upon adoption of this guidance.

The provisions of ASC 820-10-65-1 or FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” delayed the effective date of the application of ASC Topic 820 or SFAS No. 157 to fiscal years beginning after November 15, 2008, for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a non-

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recurring basis. There was no impact to Hospira’s condensed consolidated financial position, results of operations or cash flows upon adoption of this guidance.

Note 2 — Investments

In April 2008, Hospira purchased $24.5 million of marketable equity securities. Hospira assessed during the three months ended June 30, 2009 the decline in the market value to be other-than-temporary, primarily due to the duration and severity of the investment’s decline in market value and the near-term prospects for recovery to the original invested value. Accordingly, Hospira recognized a non-cash, impairment charge of $16.6 million in Other expense (income), net during the three months ended June 30, 2009. The changes in market value are reported, net-of-tax, in accumulated other comprehensive income (loss) until the investment is sold or considered other-than-temporarily impaired in periods subsequent to the June 2009 impairment. The fair value of the investment may continue to be impacted by the volatility in the global equity markets, Hospira’s ability and intent to remain invested and other factors.

Note 3 — Acquisitions

Hospira acquired intangible assets, businesses or portions thereof and other investments during the nine months ended September 30, 2009, none of which will be material to Hospira’s results of operations in 2009.  Hospira also made payments in 2009 for deferred consideration related to acquisitions made in prior years.

Note 4 — Restructuring Actions and Asset Impairments

As part of its strategy to improve margins and cash flows, Hospira has taken a number of actions to reduce operating costs and optimize operations. The costs related to these actions consist primarily of severance and other employee benefits, accelerated depreciation resulting from the decreased useful lives of the buildings and certain equipment, impairments, other asset charges and exit costs.

Project Fuel

2009 Actions.  In March 2009, Hospira announced details of a multi-stage restructuring and optimization plan (“Project Fuel”) which will occur over the next two years. Project Fuel includes the following activities: optimizing the product portfolio, evaluating non-strategic assets, and streamlining the organizational structure. Hospira expects to incur aggregate restructuring costs and other asset charges, over the next two years, related to these actions in the range of $100 million to $110 million on a pre-tax basis. During the three and nine months ended September 30, 2009 Hospira incurred, primarily in the Americas segment, pre-tax Restructuring costs of $5.7 million and $14.8 million, respectively. During the three and nine months ended September 30, 2009, inventory charges of $7.8 million and $9.5 million, respectively, related to product portfolio optimization, primarily impacting the Americas segment, are included in Cost of products sold.

As part of the Project Fuel initiatives and in connection with the close of the quarters ended in June and September 2009, Hospira committed to dispose of certain non-strategic businesses and the underlying assets over the next succeeding twelve months, including Hospira’s critical care and oral pharmaceutical contract manufacturing businesses. In some instances, the expected range of proceeds to be received from these divestitures will be less than the historical carrying value. These businesses have not historically been material to the consolidated financial statements. As a result of these commitments, non-cash, pre-tax impairment charges of $4.8 million and $53.1 million, respectively, were recognized in Restructuring and impairment for the three and nine months ended September 30, 2009.  Additionally, pre-tax inventory charges of $3.1 million were recognized in Cost of products sold during the nine months ended September 30, 2009. The impairment charges recognized during the nine months ended September 30, 2009, reduced property and equipment for these businesses by $23.0 million, allocated goodwill by $7.6 million and intangible assets by $22.5 million impacting primarily the Americas segment. Hospira received $30.5 million in cash upon completion of the critical care business disposal in August 2009 and will provide certain limited transition services through 2010.  As of September 30, 2009, the assets held for sale include $66.2 million of long-lived assets and $8.0 million of other net assets, primarily inventory.

The following summarizes the Project Fuel restructuring and asset impairment activity for 2009:

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Facilities Optimization

2008 Actions.  In April 2008, Hospira announced a plan to exit manufacturing operations at its Morgan Hill, California plant over the next two to three years. Hospira expects to incur aggregate restructuring costs through 2011 related to this action in the range of $20 million to $24 million on a pre-tax basis. Hospira is in the process of transferring related operations and production of the primary products to other Hospira facilities, or outsourcing certain product components to third-party suppliers, or ceasing activities entirely. Hospira has incurred $18.3 million, pre-tax, to date for restructuring costs, primarily employee related, associated with this action. During the three months ended September 30, 2009 and 2008, Hospira incurred in the Americas segment pre-tax Restructuring costs of $3.3 million and $3.5 million, respectively. During the nine months ended September 30, 2009 and 2008, Hospira incurred in the Americas segment pre-tax Restructuring costs of $9.5 million and $6.1 million, respectively.

2006 Actions.  In February 2006, Hospira announced plans to close plants in Ashland, Ohio, Montreal, Canada and North Chicago, Illinois and completed these plans in 2007, 2008, and in March 2009, respectively. Hospira incurred $50.7 million, pre-tax, in aggregate for restructuring costs associated with these actions. During the three months ended September 30, 2008, Hospira incurred in the Americas segment pre-tax Restructuring costs of $1.0 million. During the nine months ended September 30, 2009 and 2008, Hospira incurred in the Americas segment pre-tax Restructuring costs of $1.7 million and $7.7 million, respectively.

The following summarizes the Facilities Optimization (Morgan Hill, California; Ashland, Ohio; Montreal, Canada; North Chicago, Illinois) restructuring activity for 2009:

Note 5 — Fair Value Measures

The following table summarizes the basis used to measure certain assets and liabilities at fair value, under the provisions of ASC 820 or SFAS No. 157 “Fair Value Measurements,” in the balance sheet:

The fair value of the Level 1 assets is based on quoted market prices of the identical underlying security in an active market. The fair value of the Level 2 assets and liabilities is primarily based on market observable inputs to quoted market prices, benchmark yields and broker/dealer quotes. Level 3 inputs, as applicable, are unobservable inputs which reflect assumptions developed by management to measure assets and liabilities at fair value. Specific to the businesses and related assets held for sale, the fair value is based on a combination of projected discounted cash flows and market comparisons including several third-party nonbinding bids reflective of differing assumptions on the future prospects and management of these businesses. These non-financial assets are required to be

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measured at fair value on a non-recurring basis depending on the occurrence of commitments and triggering events defined under GAAP, among other factors.

Hospira allocated a proportion of the applicable reporting units’ goodwill based on the relative fair value of the businesses that will be disposed of compared to the relative fair value of the reporting units’ retained operations. The retained reporting units’ goodwill was not impaired.  See Note 4 for more information on the circumstances leading to the allocation of Goodwill and subsequent impairments.

Note 6 — Financial Instruments and Derivatives

Hospira is exposed to market risk primarily due to changes in currency exchange rates 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. To manage currency exchange rate exposures, Hospira utilizes foreign currency forward exchange contracts not formally designated as cash flow or fair value hedges. To manage interest rate exposures, Hospira utilizes interest rate swap contracts comprised principally of fixed-to-floating rate interest rate swaps, which as designated are subject to fair-value hedge accounting treatment whereby the swap contracts and the underlying debt are recorded at fair value. At termination of an interest rate swap agreement prior to maturity, the related gain or loss recorded as a basis adjustment to the underlying debt is deferred and amortized over the remaining term of the debt. The cash flows from the derivative financial instruments are reflected as operating activities in the condensed consolidated statement of cash flows.

For a more detailed description of Hospira’s financial instruments and derivatives and short-term borrowings and long-term debt, see Note 6 and Note 10, respectively, to Hospira’s consolidated financial statements included in Hospira’s Annual Report on Form 10-K for the year ended December 31, 2008. During the three months ended September 30, 2009, Hospira entered into interest rate swap contracts designated as fair value hedging instruments, see Note 15 for more information.

The following table summarizes Hospira’s fair value of outstanding derivatives:

The following table summarizes the deferred gains (losses) on terminated interest rate swap contracts that qualified as cash flow hedges prior to termination and basis adjustments to the underlying debt associated with terminated interest rate swap contracts that qualified as fair value hedges prior to termination:

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The impact on earnings from derivatives activity was as follows:

The carrying values of certain financial instruments, including primarily cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings, approximate their estimated fair values due to their short-term nature. The carrying value and estimated aggregate fair value, based primarily on market prices, of the senior unsecured notes are as follows:

Note 7 — Stock-Based Compensation

Hospira’s 2004 Long-Term Incentive Plan (“Plan”), as amended, provides for the grant of shares of stock options, stock appreciation rights, stock awards (restricted stock, restricted stock units, performance shares, performance units), and cash-based awards to employees and non-employee directors. In May 2009, shareholders approved amendments primarily to extend the Plan by ten years to May 14, 2019, and to increase the number of shares that may be granted during the life of the Plan by 13.0 million shares. Costs resulting from share-based payment transactions are recognized as compensation cost over the vesting period based on the fair value of the instrument on the date of grant. Stock-based compensation expense of $8.8 million and $8.7 million was recognized for the three months ended September 30, 2009 and 2008, respectively. The related income tax benefit recognized was $3.1 million and $3.2 million, respectively. Stock-based compensation expense of $31.5 million and $33.2 million was recognized for the nine months ended September 30, 2009 and 2008, respectively, primarily resulting from stock option awards. The related income tax benefit recognized was $11.0 million and $12.3 million, respectively.

In March 2009, 3.5 million options were granted to certain employees for the 2009 annual stock option grant. These options were awarded at the fair market value at the time of grant, generally vest over three years, and have a seven-year term.

The weighted average fair value using the Black-Scholes option-pricing model, and the corresponding weighted average assumptions are as follows:

In March 2009, 515,206 performance share awards were granted to key members of management. The performance share awards vest at the end of the three-year performance cycle. The 2009 performance share award is based on a formula that measures performance using relative total shareholder return over the three-year performance cycle compared to an industry peer group. Based on the actual performance, at interim periods, and at the end of the performance cycle, 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.

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The weighted average fair value using the Monte Carlo simulation model and the corresponding weighted average assumptions for the March performance share award grants are as follows:

As of September 30, 2009, there was $49.0 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 2.0 years.

Note 8 — Post-Retirement Benefits

Retirement plans consist of defined benefit and legislated obligations such as employee severance indemnity plans (“pension plans”), post-retirement medical and dental plans (“medical and dental plans”), and defined contribution plans. Plans cover certain employees both in and outside of the U.S.

Net cost recognized for the pension plans and medical and dental plans for the three and nine months ended September 30, is as follows:

Based on current Federal laws, regulations and applicable guidance issued in 2009, Hospira is not required to make any contributions to its U.S. pension plans in 2009. While Hospira’s funding policy requires contributions to our defined benefit plans equal to the amounts necessary to, at a minimum, satisfy the funding requirements as prescribed by Federal laws and regulations, Hospira does make discretionary contributions when management deems it is prudent to do so. In September 2009, Hospira made a discretionary contribution of $30.0 million to the Hospira Annuity Retirement Plan.

Certain Hospira employees participate in the Hospira 401(k) Retirement Savings Plan. Hospira’s contributions to this defined contribution plan for the three months ended September 30, 2009 and 2008 were $8.3 million and $9.0 million, respectively. For the nine months ended September 30, 2009 and 2008, contributions were $26.6 million and $27.7 million, respectively.

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Note 9 — 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 several non-U.S. taxing jurisdictions. During the three and nine months ended September 30, 2009, a discrete income tax benefit was recognized upon the expiration of statutes of limitation on certain unrecognized tax benefits.  In addition, for the nine months ended September 30, 2009, the effective tax rate was impacted by the establishment of a valuation allowance on certain deferred tax assets associated with the impairment of certain non-strategic assets, impairment of non-deductible goodwill, as well as the impairment of marketable equity securities without the availability of a statutory tax benefit. See Note 2 and Note 4 for more information on the circumstances leading to the impairments.

During the nine months ended September 30, 2009, the Internal Revenue Service (“IRS”) audit of Hospira’s 2004 and 2005 tax returns was concluded and the years were effectively settled. The outcome of the audit settlement is a reduction in the gross unrecognized tax benefits for both the audit years settled and resultant impact on tax years 2006 through 2008 in aggregate totaling $100.7 million, of which $91.9 million is recognized in the results for the nine months ended September 30, 2009 as a discrete income tax benefit. The remaining amounts represent net changes to current taxes payable and deferred tax accounts. This outcome includes interest and state tax impacts.

Hospira remains open to tax examination for post-May 1, 2004 periods in all major tax-paying jurisdictions, including Australia, Canada, Ireland, Italy, and the United Kingdom, and for years 2006 forward for the U.S.

Note 10 — Earnings per Share

Basic earnings per share are computed by dividing net income by the number of weighted average common shares outstanding during the reporting period. Diluted earnings per share are calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period. The following table shows the effect of stock-based awards on the weighted average number of shares outstanding used in calculating diluted earnings per share:

The number of outstanding options to purchase Hospira stock for which the exercise price of the options exceeded the average stock price was 3.2 million and 6.2 million for the three and nine months ended September 30, 2009, respectively, and 5.6 million and 5.4 million for the three and nine months ended September 30, 2008, respectively. Accordingly, these options are excluded from the diluted earnings per share calculation for these periods.

Note 11 — Inventories

Inventories consist of the following:

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Note 12 — Property and equipment, net

Property and equipment, net consists of the following:

Note 13 — Other long-term liabilities

Other long-term liabilities consist of the following:

(1)           Reflects conclusion and effective settlement of the IRS audit of Hospira’s 2004 and 2005 tax returns during the nine months ended September 30, 2009.

Note 14 — Goodwill and Intangible assets, net

The following summarizes goodwill and intangible assets, net activity:

See Note 4 for more information on the circumstances leading to the impairments and Note 5 for the related fair value considerations.

Goodwill is not amortized, but is tested for impairment at least annually on September 30 or more frequently if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. As of the latest annual assessment as of September 30, 2009, no additional impairment was indicated.

Intangible assets have definite lives and are amortized on a straight-line basis over their estimated useful lives (1 to 12 years, weighted average 10 years). Intangible asset amortization expense was $15.2 million and $16.7 million for the three months ended September 30, 2009 and 2008, respectively. Intangible asset amortization expense was $45.9 million and $51.1 million for the nine

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months ended September 30, 2009 and 2008, respectively. Intangible asset amortization is estimated at $13 million for the remainder of 2009, $54 million for 2010, $52 million for 2011, $41 million for 2012, and $39 million for 2013.

Additionally, intangible assets, net consist of the following: