- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-15157
</Table>
---------------------
PACTIV CORPORATION
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 36-2552989
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</Table>
<Table>
1900 WEST FIELD COURT
LAKE FOREST, ILLINOIS 60045
(Address of principal executive offices) (Zip Code)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 482-2000
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve 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 ninety days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
Common stock, par value $0.01 per share: 158,470,817 as of October 31,
2002. (See Notes to Financial Statements.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statement of Income....................... 3
Condensed Consolidated Statement of Financial
Position.............................................. 4
Condensed Consolidated Statement of Cash Flows......... 5
Notes to Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 20
Item 4. Controls and Procedures........................... 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings*................................ 22
Item 2. Changes in Securities*............................ 22
Item 3. Defaults Upon Senior Securities*.................. 22
Item 4. Submission of Matters to a Vote of Security
Holders*............................................... 22
Item 5. Other Information*................................ 22
Item 6. Exhibits and Reports on Form 8-K.................. 22
</Table>
- ---------------
* No response to this item is included herein either because it is inapplicable
or there is nothing to report.
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENT OF INCOME
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- -------------------------------
2002 2001 2002 2001
(In millions, except share and per-share data) --------------- --------------- -------------- --------------
SALES.................................... $ 727 $ 694 $ 2,102 $ 2,102
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales, excluding depreciation and
amortization........................ 499 475 1,431 1,474
Selling, general, and administrative... 70 72 220 206
Depreciation and amortization.......... 37 44 116 132
Other (income) expense, net............ (1) -- (1) 2
Restructuring and other................ -- -- (4) --
------------ ------------ ------------ ------------
605 591 1,762 1,814
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES,
AND MINORITY INTEREST.................. 122 103 340 288
Interest expense, net of interest
capitalized......................... 24 25 71 82
Income tax expense..................... 39 32 107 85
Minority interest...................... -- 1 1 2
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS........ 59 45 161 119
Income from discontinued operations, net of
income tax.......................... -- -- -- 28
Cumulative effect of change in accounting
principles, net of income tax....... -- -- (72) --
------------ ------------ ------------ ------------
NET INCOME............................... $ 59 $ 45 $ 89 $ 147
============ ============ ============ ============
Average number of shares of common stock
outstanding
Basic.................................. 158,316,017 158,978,933 158,631,819 158,681,438
Diluted................................ 160,060,429 159,881,752 160,632,352 159,220,834
EARNINGS PER SHARE
Basic and diluted earnings per share of common
stock
Continuing operations.................. $ 0.37 $ 0.28 $ 1.01 $ 0.75
Discontinued operations................ -- -- -- 0.17
Cumulative effect of change in accounting
principles.......................... -- -- (0.45) --
------------ ------------ ------------ ------------
$ 0.37 $ 0.28 $ 0.56 $ 0.92
============ ============ ============ ============
</Table>
The accompanying notes to financial statements are an integral part of this
statement.
3
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<Table>
<Caption>
SEPTEMBER 30, 2002 DECEMBER 31, 2001
(In millions, except share data) ------------------ -----------------
ASSETS
Current assets
Cash and temporary cash investments....................... $ 133 $ 41
Accounts and notes receivable
Trade, less allowances of $12 and $12 at the respective
dates................................................ 302 259
Other.................................................. 19 29
Inventories
Finished goods......................................... 251 209
Work in process........................................ 46 43
Raw materials.......................................... 55 50
Other materials and supplies........................... 30 30
Deferred income taxes..................................... 23 36
Other..................................................... 26 43
------ ------
Total current assets...................................... 885 740
------ ------
Property, plant, and equipment, net......................... 1,287 1,273
------ ------
Other assets
Goodwill, net............................................. 599 615
Intangible assets, net.................................... 297 293
Pension assets, net....................................... 162 1,045
Other..................................................... 63 94
------ ------
Total other assets........................................ 1,121 2,047
------ ------
TOTAL ASSETS................................................ $3,293 $4,060
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt, including current maturities of long-term
debt................................................... $ 5 $ 7
Accounts payable.......................................... 209 201
Interest accrued.......................................... 32 9
Other..................................................... 268 242
------ ------
Total current liabilities................................. 514 459
------ ------
Long-term debt.............................................. 1,204 1,211
------ ------
Deferred income taxes....................................... 87 594
------ ------
Pension and postretirement benefits......................... 575 52
------ ------
Deferred credits and other liabilities...................... 41 47
------ ------
Minority interest........................................... 8 8
------ ------
Shareholders' equity
Common stock (158,284,528 and 159,431,382 shares issued
and outstanding, after deducting 13,396,875 and
11,759,094 shares held in treasury, at the respective
dates)................................................. 2 2
Premium on common stock and other capital surplus......... 1,373 1,398
Accumulated other comprehensive loss...................... (943) (54)
Retained earnings......................................... 432 343
------ ------
Total shareholders' equity................................ 864 1,689
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $3,293 $4,060
====== ======
</Table>
The accompanying notes to financial statements are an integral part of this
statement.
4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
2002 2001
FOR THE NINE MONTHS ENDED SEPTEMBER 30 (In millions) ----- -----
OPERATING ACTIVITIES
Income from continuing operations........................... $ 161 $ 119
Adjustments to reconcile income from continuing operations
to cash provided by continuing operations:
Depreciation and amortization............................. 116 132
Deferred income taxes..................................... 76 62
Restructuring and other................................... (4) --
Noncash retiree expenses.................................. (81) (77)
Net working capital....................................... 23 45
Other..................................................... 15 3
----- -----
Cash provided by operating activities....................... 306 284
----- -----
INVESTING ACTIVITIES
Net proceeds related to sale of discontinued operations..... -- 87
Net proceeds from sale of businesses and assets............. 5 63
Expenditures for property, plant, and equipment............. (87) (98)
Acquisitions of businesses and assets....................... (90) (13)
Other....................................................... 3 1
----- -----
Cash provided (used) by investing activities................ (169) 40
----- -----
FINANCING ACTIVITIES
Issuance of common stock.................................... 7 12
Purchase of common stock.................................... (40) --
Retirement of long-term debt................................ (9) (334)
Net decrease in short-term debt, excluding current
maturities of long-term debt.............................. (4) (6)
----- -----
Cash used by financing activities........................... (46) (328)
----- -----
Effect of foreign-exchange rate changes on cash and
temporary cash investments................................ 1 (1)
----- -----
INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
INVESTMENTS............................................... 92 (5)
Cash and temporary cash investments, January 1.............. 41 26
----- -----
CASH AND TEMPORARY CASH INVESTMENTS, SEPTEMBER 30........... $ 133 $ 21
===== =====
</Table>
The accompanying notes to financial statements are an integral part of this
statement.
5
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The Consolidated Statement of Income for the three- and nine-month periods
ended September 30, 2002, and 2001, the Condensed Consolidated Statement of
Financial Position at September 30, 2002, and the Condensed Consolidated
Statement of Cash Flows for the nine-month periods ended September 30, 2002, and
2001, are unaudited. In the company's opinion, the accompanying financial
statements contain all normal recurring adjustments necessary to present fairly
the results of operations, financial position, and cash flows for the periods
indicated. These statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles. It is presumed that users of the accompanying interim
financial information have read, or have access to, the company's audited
financial statements for the preceding year. Accordingly, these statements
should be read in conjunction with the company's Form 10-K for the year ended
December 31, 2001. Certain amounts in the prior year's financial statements have
been reclassified to conform with the presentation used in 2002.
NOTE 2. CHANGES IN ACCOUNTING PRINCIPLES
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 does not permit goodwill and indefinite-lived intangibles
to be amortized, but requires that these assets be reviewed at least annually
for possible impairment. Intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. Effective
January 1, 2002, the company adopted SFAS No. 142 and recorded a
goodwill-impairment charge for certain Protective and Flexible Packaging
businesses of $83 million, $72 million after tax, or $0.45 per share, as a
cumulative effect of change in accounting principles in the first quarter of
2002. See note 6 to the financial statements for additional information.
NOTE 3. RESTRUCTURING AND OTHER
In the fourth quarter of 2000, the company recorded a restructuring charge
of $71 million, $47 million after tax, or $0.29 per share. Of this amount, $45
million was for the impairment of assets held for sale, including those related
to the packaging polyethylene business and the company's interest in Sentinel
Polyolefins LLC, a protective-packaging joint venture. In January 2001, the
company received cash proceeds of $72 million from the disposition of these
assets. The remaining $26 million was related to the realignment of operations
and the exiting of low-margin businesses of the company's Protective and
Flexible Packaging unit. Specifically, this charge was for (1) plant closures in
North America and Europe, including the elimination of 202 positions ($6
million); (2) other workforce reductions (187 positions), mainly in Europe ($6
million); (3) impairment of European long-lived assets held for sale ($10
million); and (4) asset write-offs related to the elimination of certain
low-margin product lines ($4 million). The impairment charge for European assets
was recorded following completion of an evaluation of strategic alternatives for
the related businesses and represented the difference between the carrying value
of the assets and their fair value based on market estimates. Restructuring-plan
actions generally have been completed. Actual cash outlays for severance and
other costs were $3 million less than originally estimated, as 78 fewer
positions were eliminated, while charges for asset write-offs were $3 million
more than initially estimated. Additionally, the company recognized a benefit of
$6 million, $4 million after tax, or $0.02 per share, in the fourth quarter of
2001, primarily as a result of incurring a lower-than-expected loss on the sale
of the company's packaging polyethylene business.
In the fourth quarter of 2001, the company recorded a restructuring charge
of $18 million, $10 million after tax, or $0.06 per share. Of this amount, $5
million was for higher-than-anticipated expenses associated with the exit of
small, noncore European businesses announced in the fourth quarter of 2000. The
remaining $13 million pertained to the adoption of a restructuring plan to
consolidate operations and reduce costs in the Consumer and Foodservice/Food
Packaging ($5 million) and Protective and Flexible Packaging ($8 million) units.
Specifically, this charge was for (1) plant closures and consolidations in North
America and Europe, including the elimination of 283 positions ($10 million);
(2) other workforce reductions (99 positions --
6
$2 million); and (3) asset writedowns related to the elimination of a North
American product line ($1 million). The cash cost of executing these
restructuring programs is anticipated to be approximately $5 million.
In the second quarter of 2002, the company recognized a benefit of $4
million, $2 million after tax, or $0.02 per share, related to a previously
recorded restructuring charge, primarily as a result of incurring a lower-
than-anticipated loss on the sale of a noncore European business.
Changes in restructuring-reserve balances are shown in the following table.
<Table>
<Caption>
SEVERANCE OTHER TOTAL
(In millions) --------- ----- -----
Balance at December 31, 2001................................ $ 6 $ 4 $10
Cash payments............................................... (4) (2) (6)
--- --- ---
Balance at September 30, 2002............................... $ 2 $ 2 $ 4
=== === ===
</Table>
NOTE 4. ACQUISITIONS
On January 4, 2002, the company purchased MSP Schmeiser GmbH, a German
medical products company, for $3 million. On February 13, 2002, the company
acquired an egg-packaging production line in Mexico from Amerpack S.A. de C.V.
for $10 million.
Additionally, in January 2002, the company purchased the assets of two
small Italian protective-packaging companies. These purchases were recorded as
capital expenditures. The outstanding shares of a third small Italian
protective-packaging company, Forniture Industriali, were purchased in June
2002, for $1 million.
On June 18, 2002, the company purchased Winkler Forming Inc., a leading
thermoformer of amorphous polyethylene terephthalate (APET) products for food
packaging, for $78 million, including settlement of estimated working capital
adjustments. During the third quarter of 2002, the company received $3 million
from the seller in settlement of working capital amounts. At September 30, 2002,
the allocation of the purchase price to the net assets of Winkler and the
related recognition of $55 million of goodwill were based on preliminary
estimates of the fair market value of the assets and liabilities acquired, and
therefore are subject to revision based on final appraisal.
Acquisitions completed in the first nine months of 2002 were not considered
to be material, either individually or in the aggregate, and, as a result, the
inclusion of related pro-forma information is not required.
See note 13 to the financial statements for additional information
regarding acquisitions.
NOTE 5. DISCONTINUED OPERATIONS
In the first quarter of 2001, the company sold a portion of its interest in
Packaging Corporation of America (PCA) and recorded a related gain of $8
million, $4 million after tax, or $0.02 per share. In April 2001, the company
sold its remaining interest in PCA and recorded an associated gain of $49
million, $24 million after tax, or $0.15 per share. Net proceeds from the 2001
transactions totaled $87 million, which were used primarily to repay debt.
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, the company adopted SFAS No. 142. In this
connection, the company completed a review of its businesses and tested recorded
goodwill amounts for possible impairment. Goodwill was found to be impaired for
certain Protective and Flexible Packaging businesses that were acquired prior to
the company's spin-off from Tenneco Inc. These businesses have recently faced
increased competition and experienced lower operating margins. As a result, the
company recorded a goodwill-impairment charge of $83 million, $72 million after
tax, or $0.45 per share, in the first quarter of 2002.
7
In accordance with requirements of SFAS No. 142, the company discontinued
the amortization of goodwill effective January 1, 2002. Shown below is a
comparison of income from continuing operations, net income, and earnings per
share for the three and nine months ended September 30, 2002, with amounts
recorded in the same periods of 2001 adjusted to exclude the amortization of
goodwill.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
(In millions, except per-share data) ----- ----- ----- -----
NET INCOME
Income from continuing operations...................... $ 59 $ 45 $ 161 $ 119
Add goodwill amortization, net of tax.................. -- 3 -- 10
----- ----- ----- -----
Adjusted income from continuing operations............. 59 48 161 129
Income from discontinued operations, net of tax........ -- -- -- 28
Cumulative effect of change in accounting principles,
net of tax........................................... -- -- (72) --
----- ----- ----- -----
Adjusted net income.................................... $ 59 $ 48 $ 89 $ 157
===== ===== ===== =====
BASIC AND DILUTED EARNINGS PER SHARE
Income from continuing operations...................... $0.37 $0.28 $1.01 $0.75
Add goodwill amortization, net of tax.................. -- 0.02 -- 0.06
----- ----- ----- -----
Adjusted income from continuing operations............. 0.37 0.30 1.01 0.81
Income from discontinued operations, net of tax........ -- -- -- 0.17
Cumulative effect of change in accounting principles,
net of tax........................................... -- -- (0.45) --
----- ----- ----- -----
Adjusted net income.................................... $0.37 $0.30 $0.56 $0.98
===== ===== ===== =====
</Table>
Changes in the carrying value of goodwill during the nine months ended
September 30, 2002, by operating segment are shown in the following table.
<Table>
<Caption>
CONSUMER AND
FOODSERVICE/FOOD PROTECTIVE AND
PACKAGING FLEXIBLE PACKAGING TOTAL
(In millions) ---------------- ------------------ -----
Balance, December 31, 2001............................. $376 $239 $615
Goodwill impairment.................................... -- (83) (83)
Goodwill addition...................................... 55 6 61
Translation adjustment................................. -- 6 6
---- ---- ----
Balance, September 30, 2002............................ $431 $168 $599
==== ==== ====
</Table>
Intangible assets at September 30, 2002, are shown in the following table.
<Table>
<Caption>
ACCUMULATED
CARRYING AMOUNT AMORTIZATION NET
(In millions) --------------- ------------------ -----
Intangible assets subject to amortization
Patents............................................... $184 $ 56 $128
Other................................................. 56 16 40
---- ---- ----
240 72 168
Intangible assets not subject to amortization (primarily
trademarks)........................................... 129 -- 129
---- ---- ----
Total intangible assets................................. $369 $ 72 $297
==== ==== ====
</Table>
Amortization expense for intangible assets was $4 million and $10 million
for the three- and nine-month periods ended September 30, 2002, respectively.
Amortization expense for intangible assets is estimated to total $13 million,
$12 million, $12 million, $12 million, and $11 million for years 2002, 2003,
2004, 2005, and 2006, respectively.
8
NOTE 7. CAPITAL STOCK
Earnings Per Share
Earnings from continuing operations per share of common stock outstanding
was computed as follows.
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
(In millions, except share and per-share data) -------------- -------------- -------------- --------------
BASIC EARNINGS PER SHARE
Income from continuing operations....... $ 59 $ 45 $ 161 $ 119
Average number of shares of common stock
outstanding.......................... 158,316,017 158,978,933 158,631,819 158,681,438
Earnings from continuing operations per
share of common stock................ $ 0.37 $ 0.28 $ 1.01 $ 0.75
DILUTED EARNINGS PER SHARE
Income from continuing operations....... $ 59 $ 45 $ 161 $ 119
Average number of shares of common stock
outstanding.......................... 158,316,017 158,978,933 158,631,819 158,681,438
Effect of dilutive securities
Restricted stock..................... 30,412 19,867 28,072 16,411
Stock options........................ 1,292,608 703,878 1,559,539 351,533
Performance shares................... 421,392 179,074 412,922 171,452
------------ ------------ ------------ ------------
Average number of shares of common stock
outstanding including dilutive
securities........................... 160,060,429 159,881,752 160,632,352 159,220,834
------------ ------------ ------------ ------------
Earnings from continuing operations per
share of common stock................ $ 0.37 $ 0.28 $ 1.01 $ 0.75
============ ============ ============ ============
</Table>
The company has established a grantor trust to assure payment of deferred
compensation and supplemental pension benefits and has issued 3,200,000 shares
of Pactiv common stock to this trust. These shares are not considered to be
outstanding for purposes of financial reporting.
Stock-Based Compensation
The company follows requirements of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," in accounting for stock options.
NOTE 8. SEGMENT INFORMATION
The company has three operating segments: Consumer and Foodservice/Food
Packaging, which relates to the manufacture and sale of disposable plastic,
molded-fiber, pressed-paperboard, and aluminum packaging products for the
consumer, foodservice, and food-packaging markets; Protective and Flexible
Packaging, which relates to the manufacture and sale of plastic, paperboard, and
molded-fiber products for protective-packaging markets, such as electronics,
automotive, furniture, and e-commerce, and for flexible-packaging applications
in food, medical, pharmaceutical, chemical, and hygienic markets; and Other,
which relates to corporate and administrative service operations and
retiree-benefit income and expense.
9
The following table sets forth certain segment information.
<Table>
<Caption>
SEGMENT
--------------------------------------
CONSUMER AND PROTECTIVE
FOODSERVICE/ AND FLEXIBLE RECLASSIFICATIONS
FOOD PACKAGING PACKAGING OTHER AND ELIMINATIONS TOTAL
(In millions) -------------- ------------ ------ ----------------- ------
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
Sales to external customers........ $ 518 $209 $ -- $ -- $ 727
Income before interest, income
taxes, and minority interest..... 93 14 15(a) -- 122
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
Sales to external customers........ $ 492 $202 $ -- $ -- $ 694
Income before interest, income
taxes, and minority interest..... 74 12 17(a) -- 103
AT SEPTEMBER 30, 2002, AND FOR THE
NINE MONTHS THEN ENDED
Sales to external customers........ $1,495 $607 $ -- $ -- $2,102
Income before interest, income
taxes, and minority interest..... 252 48(b) 40(a) -- 340
Cumulative effect of change in
accounting principles, net of
tax.............................. -- (72) -- -- (72)
Total assets....................... 1,975 690 629(c) (1) 3,293
AT SEPTEMBER 30, 2001, AND FOR THE
NINE MONTHS THEN ENDED
Sales to external customers........ $1,485 $617 $ -- $ -- $2,102
Income before interest, income
taxes, and minority interest..... 207 33 48(a) -- 288
Income from discontinued
operations, net of tax........... -- -- 28 -- 28
Total assets....................... 2,001 768 1,451(c) (162) 4,058
</Table>
- ---------------
(a) Includes pension-plan income and unallocated corporate expenses.
(b) Includes restructuring credit of $4 million.
(c) Includes assets related to pension plans (net) and administrative service
operations.
NOTE 9. ACCOUNTS AND NOTES RECEIVABLE
On a recurring basis, the company sells an undivided interest in a pool of
trade receivables meeting certain criteria to a third party as an alternative to
debt financing. Trade receivables sold were $15 million, $44 million, and $96
million at September 30, 2002, December 31, 2001, and September 30, 2001,
respectively. Such sales, which represent a form of off-balance-sheet financing,
are recorded as a reduction of accounts and notes receivable in the statement of
financial position, and changes in such amounts are included in cash
provided/used by operating activities in the statement of cash flows. Discounts
and fees related to these sales were included in other income/expense in the
statement of income and were immaterial in the third quarter of 2002 and totaled
$1 million in the third quarter of 2001. In the event that either Pactiv or the
third-party purchaser of the trade receivables were to discontinue this program,
the company's debt might increase by an amount corresponding to the level of
sold receivables at such time.
10
NOTE 10. SYNTHETIC LEASE COMMITMENTS
Pactiv has entered into a $169 million synthetic-lease agreement with a
third-party lessor and various lenders for certain operating leases and public
warehouse arrangements and to facilitate additional leasing arrangements for
other operating facilities. This agreement, which covers operating leases for
the company's corporate headquarters building and certain of its warehouse
facilities, expires in November 2005; contains customary terms and conditions
covering, among other things, residual-value guarantees, default provisions, and
financial covenants; and requires that certain financial-ratio tests be
satisfied. Upon expiration of the initial lease periods for the properties, the
company may extend the leases on terms negotiated with the lessors or purchase
the leased assets under specified conditions. Cancellation of the lease
agreement, either before or at expiration, would require the company to make a
termination payment of $169 million, which, in essence, represents
off-balance-sheet debt in that related funding might require the company to
obtain alternative financing for the properties. If made, this termination
payment may be refunded partially or in full depending on the amounts received
by the lessors upon the sale of the properties.
NOTE 11. PENSION PLANS
The company has funded pension plans for current and former employees and
accounts for the pension plans in accordance with requirements of SFAS No. 87,
"Employers' Accounting for Pensions." At September 30, 2002, the accumulated
pension-benefit obligation for the company's largest pension plan exceeded the
fair market value of its assets. As a result, SFAS No. 87 required the company
to recognize a minimum pension-plan liability and to reduce its net pension-plan
assets, resulting in a reduction of shareholders' equity of $918 million. These
adjustments were necessary because of the sharp decline in equity market values
in the past year and a reduction in the discount rate used to determine pension
obligations, precipitated by the significant decline in market interest rates
compared with a year ago. These adjustments have no effect on income, cash flow,
bank-covenant compliance, or requirements to make contributions to the pension
plan.
For pension plans with accumulated benefit obligations in excess of plan
assets, the projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets was $3,222 million, $3,161 million, and $2,665
million, respectively, at September 30, 2002, and $84 million, $74 million, and
$39 million, respectively, at September 30, 2001.
11
NOTE 12. COMPREHENSIVE INCOME (LOSS)
Details of total comprehensive income(loss) for the three- and nine-month
periods ended September 30, 2002, and 2001, were as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2002 2001 2002 2001
----- ---- ------ -----
Net income................................................ $ 59 $45 $ 89 $147
Other comprehensive income (loss)
Net currency translation gains (losses)................. (1) 12 26 (6)
Reversal of previously recorded unrealized gain on
securities held for sale (a)......................... -- -- -- (42)
Recognition of minimum pension-plan liability and
reduction of net pension-plan assets................. (918) -- (918) --
Net changes in interest-rate swaps...................... -- (9) 3 (7)
----- --- ----- ----
(919) 3 (889) (55)
----- --- ----- ----
Total comprehensive income (loss)......................... $(860) $48 $(800) $ 92
===== === ===== ====
</Table>
- ---------------
(a) Represents offset to gain on sale of PCA stock included in net income.
NOTE 13. SUBSEQUENT EVENT
On October 21, 2002, Pactiv completed its purchase of 70% of the stock of
Mexico-based Central de Bolsas, S.A. de C.V. (Jaguar Corporation), a leading
thermoformer of high impact polystyrene (HIPS) for cold cups and plates and
polystyrene foam for foodservice/food packaging. For this 70% interest, Pactiv
paid $31 million to shareholders of Jaguar and made a $20 million equity
investment in Jaguar.
The above notes are an integral part of the foregoing financial statements.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BASIS OF PRESENTATION
Financial statements for all periods presented herein have been prepared on
a consolidated basis in accordance with generally accepted accounting principles
consistently applied. Certain amounts in the prior year's financial statements
have been reclassified to conform with the presentation used in 2002.
The company has three operating segments: Consumer and Foodservice/Food
Packaging, which relates to the manufacture and sale of disposable plastic,
molded-fiber, pressed-paperboard, and aluminum packaging products for the
consumer, foodservice, and food-packaging markets; Protective and Flexible
Packaging, which relates to the manufacture and sale of plastic, paperboard, and
molded-fiber products for protective-packaging markets, such as electronics,
automotive, furniture, and e-commerce, and for flexible-packaging applications
in food, medical, pharmaceutical, chemical, and hygienic markets; and Other,
which relates to corporate and administrative service operations and
retiree-benefit income and expense.
RESTRUCTURING AND OTHER
In the fourth quarter of 2000, the company recorded a restructuring charge
of $71 million, $47 million after tax, or $0.29 per share. Of this amount, $45
million was for the impairment of assets held for sale, including those related
to the packaging polyethylene business and the company's interest in Sentinel
Polyolefins LLC, a protective-packaging joint venture. In January 2001, the
company received cash proceeds of $72 million from the disposition of these
assets. The remaining $26 million was related to the realignment of operations
and the exiting of low-margin businesses of the company's Protective and
Flexible Packaging unit. Specifically, this charge was for (1) plant closures in
North America and Europe, including the elimination of 202 positions ($6
million); (2) other workforce reductions (187 positions), mainly in Europe ($6
million); (3) impairment of European long-lived assets held for sale ($10
million); and (4) asset write-offs related to the elimination of certain
low-margin product lines ($4 million). The impairment charge for European assets
was recorded following completion of an evaluation of strategic alternatives for
the related businesses and represented the difference between the carrying value
of the assets and their fair value based on market estimates. Restructuring-plan
actions generally have been completed. Actual cash outlays for severance and
other costs were $3 million less than originally estimated, as 78 fewer
positions were eliminated, while charges for asset write-offs were $3 million
more than initially estimated. Additionally, the company recognized a benefit of
$6 million, $4 million after tax, or $0.02 per share, in the fourth quarter of
2001, primarily as a result of incurring a lower-than-anticipated loss on the
sale of the company's packaging polyethylene business.
In the fourth quarter of 2001, the company recorded a restructuring charge
of $18 million, $10 million after tax, or $0.06 per share. Of this amount, $5
million was for higher-than-anticipated expenses associated with the exit of
small, noncore European businesses announced in the fourth quarter of 2000. The
remaining $13 million pertained to the adoption of a restructuring plan to
consolidate operations and reduce costs in the Consumer and Foodservice/Food
Packaging ($5 million) and Protective and Flexible Packaging ($8 million) units.
Specifically, this charge was for (1) plant closures and consolidations in North
America and Europe, including the elimination of 283 positions ($10 million);
(2) other workforce reductions (99 positions-$2 million); and (3) asset
writedowns related to the elimination of a North American product line ($1
million). The cash cost of executing these restructuring programs is anticipated
to be approximately $5 million.
In the second quarter of 2002, the company recognized a benefit of $4
million, $2 million after tax, or $0.02 per share, related to a previously
recorded restructuring charge, primarily as a result of incurring a lower-
than-anticipated loss on the sale of a noncore European business.
13
THREE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2001
RESULTS OF CONTINUING OPERATIONS
Sales
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2002 2001 CHANGE
(Dollars in millions) ---- ----- ------
Consumer and Foodservice/Food Packaging..................... $518 $ 492 5.3%
Protective and Flexible Packaging........................... 209 202 3.5
---- -----
Total....................................................... $727 $ 694 4.8%
---- -----
</Table>
Total company sales were up $33 million, or 4.8%, compared with last year.
Sales of businesses acquired in 2002 were $18 million in the quarter. Versus the
year-ago period, the positive impact of foreign-currency exchange rates ($8
million) was offset by the negative effect of business divestitures ($8
million).
Sales in the Consumer and Foodservice/Food Packaging segment rose $26
million, including $15 million from acquisitions, or 5.3%, reflecting a volume
gain of 9%, offset partially by a decline in selling prices as a result of the
pass through of lower raw material costs earlier in the year. Significant volume
growth continued in most Hefty(R) consumer product lines. Hefty(R) waste bags
posted strong volume improvement in both the base business and in new Hefty(R)
The Gripper(TM) tall kitchen bags. New, heavier gauge Hefty(R) OneZip(TM) food
bags drove the volume increase in the food-bag category. Volume of tableware
products grew by 7%, with a variety of products contributing to the growth,
particularly Hefty(R) Zoo Pals(TM) disposable plates for children, which were
introduced in the first quarter of 2002. The company also had growth in the
quarter in sales of foodservice/food packaging products, reflecting significant
increases in volume in the base business and of innovative new products,
including items for major fast-food restaurants. Higher-margin products, such as
rigid-display packaging, agricultural products, and microwaveable home-meal
replacement items, drove much of this growth.
Sales of protective- and flexible-packaging products increased $7 million,
or 3.5%, compared with 2001, with the positive impact of foreign-currency
exchange rates ($8 million) offsetting the negative effect of businesses
divested in 2001 ($8 million). Volume in the segment rose 6%, offset partially
by a decline in selling prices as a result of the pass through of lower raw
material costs earlier in the year. The European medical packaging business and
the North American protective-packaging unit led the volume growth.
Operating Income (Income before Interest Expense, Income Taxes, and
Minority Interest)
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2002 2001 CHANGE
(Dollars in millions) ---- ---- ------
Consumer and Foodservice/Food Packaging..................... $ 93 $ 74 25.7%
Protective and Flexible Packaging........................... 14 12 16.7
Other....................................................... 15 17 (11.8)
---- ----
Total....................................................... $122 $103 18.4%
---- ----
</Table>
Total company operating income was $122 million in 2002, an increase of $19
million, or 18.4%, from 2001. The improvement was driven principally by 8%
volume growth (including acquisitions), productivity gains, and the elimination
of goodwill amortization in 2002 ($5 million benefit), offset partially by
unfavorable spread (the difference between selling prices and raw material
costs).
Operating income for the Consumer and Foodservice/Food Packaging segment
increased $19 million, or 25.7%, in 2002, as strong volume increases (including
acquisitions) and productivity improvement more than offset unfavorable spread.
Also contributing to the increase in operating income was the 2002 elimination
of goodwill amortization ($3 million benefit).
14
Operating income for the Protective and Flexible Packaging segment
increased $2 million, or 16.7%, versus the same period last year, as a 6% volume
increase was offset partially by unfavorable spread. The elimination of goodwill
amortization added $2 million to operating income in the third quarter of 2002.
Operating income for the Other segment decreased $2 million from last year,
principally because of lower pension income.
Interest Expense, Net of Interest Capitalized
Interest expense was $24 million in the third quarter of 2002, down $1
million, or 4.0%, from 2001, principally because of a decline in borrowings.
Income Taxes
The company's effective tax rate for the third quarter of 2002 was 40.0%,
compared with 41.5% for the same period in 2001.
Income from Continuing Operations
The company recorded net income from continuing operations of $59 million,
or $0.37 per share, in the third quarter of 2002, compared with $45 million, or
$0.28 per share, last year. Excluding the impact of pension income and goodwill
amortization, earnings per share from continuing operations grew from $0.19 in
2001 to $0.27 in the current quarter, an increase of 42.1%.
NINE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2001
RESULTS OF CONTINUING OPERATIONS
Sales
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2002 2001 CHANGE
(Dollars in millions) ------- ------- ------
Consumer and Foodservice/Food Packaging..................... $1,495 $1,485 0.7%
Protective and Flexible Packaging........................... 607 617 (1.6)
------ ------
Total....................................................... $2,102 $2,102 --%
------ ------
</Table>
Total company sales were even with last year. Excluding the positive impact
of foreign-currency exchange rates ($9 million) and the negative effect of
divestitures ($43 million), sales grew 1.6%. Volume grew 7% (including
acquisitions), while selling prices declined as a result of the pass through of
lower raw material costs.
Sales for the Consumer and Foodservice/Food Packaging segment were up $10
million, or 0.7%, from last year. Excluding the negative effect of divestitures
($15 million), sales for this segment grew 1.7%. Volume in the segment grew 8%
(including acquisitions), which was offset partially by a decline in selling
prices from the pass through of lower raw material costs. Contributing to the
volume growth was the introduction of new products in waste bags (Hefty(R) The
Gripper(TM) tall kitchen bag), tableware (Hefty(R) Zoo Pals(TM) disposable
plates for children), and foodservice (products for major fast-food
restaurants).
Sales of protective- and flexible-packaging products declined $10 million,
or 1.6%, compared with 2001. Excluding the positive impact of foreign-currency
exchange rates ($9 million) and the negative impact of divestitures in 2001 ($28
million), sales for this segment improved 1.5%, reflecting volume growth of 5%
(including acquisitions), offset partially by a decline in selling prices as a
result of the pass through of lower raw material costs.
15
Operating Income (Income before Interest Expense, Income Taxes, and
Minority Interest)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2002 2001 CHANGE
(Dollars in millions) ------ ------ ------
Consumer and Foodservice/Food Packaging..................... $252 $207 21.7%
Protective and Flexible Packaging........................... 48 33 45.5
Other....................................................... 40 48 (16.7)
---- ----
Total....................................................... $340 $288 18.1%
---- ----
</Table>
Total company operating income for 2002, including the impact of reversing
$4 million of a previously recorded restructuring charge related to the
Protective and Flexible Packaging segment, was $340 million, up $52 million, or
18.1%, from last year. Excluding the effect of the restructuring-charge reversal
(unusual item), operating income by segment was as follows:
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2002 2001 CHANGE
(Dollars in millions) ------ ------ ------
Consumer and Foodservice/Food Packaging..................... $252 $207 21.7%
Protective and Flexible Packaging........................... 44 33 33.3
Other....................................................... 40 48 (16.7)
---- ----
Total....................................................... $336 $288 16.7%
---- ----
</Table>
Excluding the unusual item, total company operating income was $336 million
in 2002, an increase of $48 million, or 16.7%, from 2001. The improvement was
driven principally by volume growth; improvement in gross margin, primarily
reflecting growth in higher-margin product lines and benefits from the company's
productivity initiatives; and the elimination of goodwill amortization in 2002
($14 million benefit).
Operating income for the Consumer and Foodservice/Food Packaging segment
increased $45 million, or 21.7%, in 2002, driven principally by volume growth,
productivity improvements, and lower logistics costs partially resulting from
the implementation of the company's Customer Linked Manufacturing program. Also
contributing to the increase in operating income was the 2002 elimination of
goodwill amortization ($9 million benefit).
Operating income for the Protective and Flexible Packaging segment
increased $11 million, or 33.3%, from 2001, mainly reflecting higher volume,
benefits from the restructuring program initiated in January 2001, and the 2002
elimination of goodwill amortization ($5 million benefit).
Operating income for the Other segment was down $8 million or 16.7%, from
last year, primarily because of increased insurance expenses, higher
management-incentive compensation costs, and lower pension income.
Interest Expense, Net of Interest Capitalized
Interest expense was $71 million in the first nine months of 2002, down $11
million, or 13.4%, from 2001, principally because of a decline in borrowings.
Income Taxes
The company's effective tax rate for the first nine months of 2002 was
40.0%, compared with 41.5% for the same period in 2001.
Income from Continuing Operations
The company recorded net income from continuing operations of $161 million,
or $1.01 per share, in the first nine months of 2002, compared with $119
million, or $0.75 per share, in 2001. Excluding the previously
16
discussed unusual item, pension income, and goodwill amortization, earnings per
share from continuing operations grew from $0.50 in 2001 to $0.68 in 2002, an
increase of 36%.
DISCONTINUED OPERATIONS
In the first nine months of 2001, the company recorded after-tax income
from discontinued operations of $28 million, or $0.17 per share, which
represented gains on the sale of the company's remaining holdings of Packaging
Corporation of America stock.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001 CHANGE
(In millions) ------------- ------------ ------
Short-term debt, including current maturities of long-term
debt..................................................... $ 5 $ 7 $ (2)
Long-term debt............................................. 1,204 1,211 (7)
------ ------ -----
Total debt................................................. 1,209 1,218 (9)
Minority interest.......................................... 8 8 --
Shareholders' equity....................................... 864 1,689 (825)
------ ------ -----
Total capitalization....................................... $2,081 $2,915 $(834)
------ ------ -----
</Table>
Shareholders' equity decreased $825 million from December 31, 2001, to
September 30, 2002, primarily as a result of recognizing a minimum pension-plan
liability and reducing net pension-plan assets. The recognition of this
liability and the reduction of net pension-plan assets were necessitated by
requirements of SFAS No. 87, "Employers' Accounting for Pensions," because the
fair market value of pension-plan assets fell below the company's accumulated
pension-benefit obligation as of the annual September 30 measurement date. This
resulted from (1) the impact of the sharp decline in equity markets on the
pension plan's assets and (2) the required reduction (from 7.25% to 6.75%) in
the discount rate used to measure pension-plan obligations. These adjustments
have no effect on income, cash flow, bank-covenant compliance, or requirements
to make contributions to the pension plan. Also contributing to the decline in
shareholders' equity in 2002 was the repurchase of $40 million of company stock.
Somewhat offsetting these declines were net income of $89 million, favorable
foreign-currency translation adjustments of $26 million, and shares issued to
employee-benefit plans of $15 million.
Primarily as a result of the decrease in shareholders' equity, the
company's ratio of debt to total capitalization increased to 58.1% at September
30, 2002, compared with 41.8% at December 31, 2001.
Cash Flows
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2002 2001
(In millions) -------- -----
Cash provided (used) by:
Operating activities...................................... $ 306 $ 284
Investing activities...................................... (169) 40
Financing activities...................................... (46) (328)
</Table>
Cash provided by operating activities was $306 million in the 2002 versus
$284 million in the same period last year. The $22 million increase was driven
mainly by improved operating performance.
Investing activities used cash aggregating $169 million in 2002 and
generated cash of $40 million in the same period of 2001. The 2002 cash usage
primarily reflected outlays for acquisitions ($90 million) and capital items
($87 million). Cash generated in 2001 principally represented proceeds from sale
of the company's packaging polyethylene business and its remaining interest in
PCA, offset, in part, by expenditures for property, plant, and equipment and the
acquisition of assets from a former joint venture.
17
Cash used by financing activities was $46 million in 2002, primarily
reflecting the repurchase of company stock ($40 million). Cash used by financing
activities was $328 million in the same period of 2001, principally related to
the retirement of debt ($340 million).
Capital Commitments
Commitments for authorized expenditures totaled approximately $115 million
at September 30, 2002. It is anticipated that the majority of these expenditures
will be funded over the next twelve months from existing cash and short-term
investments, internally generated cash, and borrowings.
On October 21, 2002, Pactiv completed its purchase of 70% of the stock of
Mexico-based Central de Bolsas, S.A. de C.V. (Jaguar Corporation), a leading
thermoformer of high impact polystyrene (HIPS) for cold cups and plates and
polystyrene foam for foodservice/food packaging. For this 70% interest, Pactiv
paid $31 million to shareholders of Jaguar and made a $20 million equity
investment in Jaguar.
Liquidity
The company employs various sources of funding to manage liquidity,
including the use of an asset-securitization program ($15 million at September
30, 2002) and a synthetic-lease arrangements ($169 million at September 30,
2002), which represent off-balance sheet financing. Termination of either the
asset-securitization program or the synthetic-lease agreements, or both, might
require the company to increase its debt by a corresponding amount. The
company's management believes that cash flow from operations and available cash
reserves, along with available borrowing capacity under its credit facilities,
will be sufficient to meet current and future liquidity and capital
requirements.
CHANGES IN ACCOUNTING PRINCIPLES
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 does not permit goodwill and indefinite-lived intangibles
to be amortized, but requires that these assets be reviewed at least annually
for possible impairment. Intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. Effective
January 1, 2002, the company adopted SFAS No. 142 and recorded a
goodwill-impairment charge for certain Protective and Flexible Packaging
businesses of $83 million, $72 million after tax, or $0.45 per share, as a
cumulative effect of change in accounting principles in the first quarter of
2002.
CRITICAL ACCOUNTING POLICIES
For a complete discussion of the company's critical accounting policies,
refer to Pactiv's most recent filing on Form 10-K.
Pension Plans
The company has funded pension plans for current and former employees and
accounts for the pension plans in accordance with requirements of SFAS No. 87.
Pension-plan income ($81 million and $84 million for the nine-months ended
September 30, 2002, and 2001, respectively) is included in the statement of
income as an offset to selling, general, and administrative expenses. Such
noncash income is determined on the basis of a number of factors, including
unamortized gains/losses related to prior returns on pension-plan assets;
estimates of future returns on pension-plan assets; expectations regarding
employee compensation; and assumptions pertaining to participant turnover,
retirement age, and life expectancy. Projections as of the company's annual
September 30 measurement date indicate that the company's noncash, pretax
pension income will decline to approximately $60 million in 2003 from $109
million in 2002, reflecting the decline in equity-market values, the reduction
in the discount rate, and the impact of the company's decision to reduce the
expected long-term rate of return on pension assets for 2003 by one-half
percent, to 9%. Based on projections of the company's independent actuary, the
company does not expect to be required to make cash contributions to the pension
plan under Employee Retirement Income Security Act regulations for the
foreseeable future (approximately five years).
18
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section and in the notes to the
financial statements included in this Quarterly Report on Form 10-Q are
"forward-looking statements." These forward-looking statements generally can be
identified by the use of terms and phrases such as "will", "anticipate", "may",
"might", "could", "expect", "estimated", "projects", "intends", "forseeable
future" and similar terms and phrases. These forward-looking statements are not
based on historical facts, but rather on the company's current expectations or
projections about future events. Accordingly, these forward-looking statements
are subject to known and unknown risks and uncertainties. While the company
believes that the assumptions underlying these forward-looking statements are
reasonable and makes the statements in good faith, actual results almost always
vary from expected results, and the differences could be material. Among the
factors that might cause the company's actual results to differ materially from
future results expressed or implied by these forward-looking statements are
those listed in the company's Annual Report on Form 10-K for the year ended
December 31, 2001, as well as the following:
- Changes in consumer demand and prices for the company's products,
including new products that the company may introduce, that could impact
sales and margins.
- Material substitutions and changes in costs of raw materials for the
company's products, including plastic resins, or of labor or utilities
that could impact the company's expenses and margins.
- Changes in laws or governmental actions, including changes in regulations
such as those relating to air emissions or plastics generally.
- Changes in capital availability or costs.
- Workforce factors such as strikes or other labor interruptions.
- The general economic, political, and competitive conditions in countries
in which the company operates, including currency fluctuations and other
risks associated with operating outside of the U. S.
- The return on the assets in the company's pension plans.
- The company's ability to realize anticipated savings from its
restructuring plans.
- Changes enacted by the Securities and Exchange Commission, the Financial
Accounting Standards Board, or other regulatory or accounting bodies.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS
The company is exposed to market risks related to changes in
foreign-currency exchange rates, interest rates, and commodity prices. To manage
these risks, the company, from time to time, enters into various hedging
contracts in accordance with the company's policies and procedures. The company
does not use hedging instruments for trading purposes and is not a party to any
transactions involving leveraged derivatives.
Foreign-Currency Exchange
The company uses foreign-currency forward contracts to hedge its exposure
to adverse changes in exchange rates, primarily related to the British pound.
Hedging is accomplished through the use of financial instruments, with related
gains or losses offsetting gains or losses on underlying assets or liabilities.
In managing foreign-currency risk, the company aggregates existing
positions and hedges residual exposures through third-party derivative
contracts. The following table summarizes foreign-currency forward contracts in
effect at September 30, 2002, all of which will mature in 2002.
<Table>
<Caption>
NOTIONAL AMOUNT WEIGHTED-AVERAGE NOTIONAL AMOUNT
IN FOREIGN CURRENCY SETTLEMENT RATE IN U.S. DOLLARS
(In millions, except settlement rates) ------------------- ---------------- ---------------
British pounds
-- Sell....................................... 5 1.569 7
U.S. dollars
-- Purchase................................... 7 1.000 7
</Table>
Interest Rates
The company is exposed to interest-rate risk on revolving-credit debt that
bears interest at a floating rate based on LIBOR. In addition, the company has
issued public-debt securities with fixed interest rates and original maturity
dates ranging from 3 to 25 years. Should the company decide to redeem these
securities prior to their stated maturity, it would incur costs based on the
fair value of the securities at that time.
In the first quarter of 2001, the company entered into interest-rate swap
agreements that effectively converted floating-rate debt on its synthetic-lease
obligations to fixed-rate debt. This action was taken to reduce the company's
exposure to interest-rate risk. These swaps are accounted for as cash flow
hedges, with changes in value recorded as accumulated other comprehensive
income, a component of shareholders' equity, on the balance sheet. During the
first quarter of 2002, the company exited these swap agreements, and, as a
result, related accumulated deferred net losses of $3 million will be expensed
over the remaining life of the underlying obligations.
20
ITEM 4. CONTROLS AND PROCEDURES
The company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the company in the reports it files
or submits under the Securities Exchange Act is recorded, processed, summarized,
and reported within the appropriate time periods. The company, under the
supervision and with the participation of its management, including the
company's principal executive officer and principal financial officer, has
evaluated the effectiveness of its disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)), and the company and such
officers have concluded that such controls and procedures are adequate and
effective. The company completed its evaluation of such controls and procedures
in connection with the preparation of this quarterly report on Form 10-Q on
November 5, 2002.
There have been no significant changes in the company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses therein.
21
PART II -- OTHER INFORMATION
ITEMS 1-5. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
Exhibits designated with an asterisk in the following index are filed
herewith; all other exhibits are incorporated by reference.
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2 Distribution Agreement by and between Tenneco Inc. and the
registrant (incorporated herein by reference to Exhibit 2 to
Pactiv Corporation's Current Report on Form 8-K dated
November 11, 1999, File No. 1-15157).
3 Restated Certificate of Incorporation of the registrant
(incorporated herein by reference to Exhibit 3.1 to Pactiv
Corporation's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-15157).
3.1 Amended and Restated By-laws of the registrant (incorporated
herein by reference to Exhibit 3.2 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
3.2 Amended and Restated By-laws of the registrant adopted May
17, 2001(incorporated herein by reference to Exhibit 3.2 to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001, File No. 1-15157).
4.1 Specimen Stock Certificate of Pactiv Corporation Common
Stock (incorporated herein by reference to Exhibit 4.1 to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.2 Qualified Offer Plan Rights Agreement, dated as of November
4, 1999, by and between the registrant and First Chicago
Trust Company of New York, as Rights Agent (incorporated
herein by reference to Exhibit 4.2 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
4.2(a) Amendment No. 1 to Rights Agreement, dated as of November 7,
2002, by and between the registrant and National City Bank,
as rights agent (incorporated herein by reference to Exhibit
4.4(a) to Pactiv Corporation's Registration Statement on
Form S-8, File No. 333-101121).
4.3(a) Indenture, dated September 29, 1999, by and between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.1 to Tenneco
Packaging Inc.'s Registration Statement on Form S-4, File
No. 333-82923).
4.3(b) First Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(b) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.3(c) Second Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(c) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.3(d) Third Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(d) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
</Table>
22
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.3(e) Fourth Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(e) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.3(f) Fifth Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(f) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.4 Registration Rights Agreement, dated as of November 4, 1999,
by and between the registrant and the trustees under the
Pactiv Corporation Rabbi Trust (incorporated herein by
reference to Exhibit 4.4 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
9 None.
10.1 Human Resources Agreement, dated as of November 4, 1999, by
and between Tenneco Inc. and the registrant (incorporated
herein by reference to Exhibit 16.1 to Tenneco Inc.'s
Current Report on Form 8-K dated November 4, 1999, File
No.1-12387).
10.2 Tax Sharing Agreement, dated as of November 3, 1999, by and
between Tenneco Inc. and the registrant (incorporated herein
by reference to Exhibit 16.2 to Tenneco Inc.'s Current
Report on Form 8-K dated November 4, 1999, File No.
1-12387).
10.3 Amended and Restated Transition Services Agreement, dated as
of November 4, 1999, by and between Tenneco Inc. and the
registrant (incorporated herein by reference to Exhibit 10.3
to Tenneco Automotive Inc.'s Quarterly Report on Form 10-Q
for quarterly period ended September 30, 1999, File No.
1-12387).
10.4 Trademark Transition License Agreement, dated as of November
4, 1999, by and between Tenneco Inc. and the registrant
(incorporated herein by reference to Exhibit 10.4 to Pactiv
Corporation's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-15157).
10.5 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Executive Incentive Compensation Plan (incorporated
herein by reference to Exhibit 10.5 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
10.6 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Supplemental Executive Retirement Plan (incorporated
herein by reference to Exhibit 10.6 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
10.7 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Change in Control Severance Benefit Plan for Key
Executives (incorporated herein by reference to Exhibit 10.7
to Pactiv Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, File No. 1-15157).
10.8 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Deferred Compensation Plan (incorporated herein by
reference to Exhibit 10.8 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
10.9 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Stock Ownership Plan (incorporated herein by reference
to Exhibit 10.9 to Pactiv Corporation's Quarterly Report
Form 10-Q for the quarter ended September 30, 1999, File No.
1-15157).
10.10 Professional Services Agreement, dated August 22, 1996, by
and between Tenneco Business Services Inc. and Newport News
Shipbuilding Inc. (incorporated herein by reference to
Exhibit 10.28 of Tenneco Inc.'s Form 10, File No. 1-12387).
</Table>
23
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.11 Pactiv Corporation Rabbi Trust (incorporated herein by
reference to Exhibit 10.11 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
10.12 Release Agreement dated as of October 18, 1999, by and
between Dana G. Mead and Tenneco Management Company, and
Modification of Release Agreement dated as of October 18,
1999, by and among Dana G. Mead, Tenneco Inc. and Tenneco
Management Company (incorporated herein by reference to
Exhibit 10.18 to Tenneco Automotive Inc.'s Quarterly Report
on Form 10-Q for quarterly period ended September 30, 1999,
File No. 1-12387).
10.13 Employment Agreement, dated as of March 11, 1997, by and
between Richard L. Wambold and Tenneco Inc. (incorporated
herein by reference to Exhibit 10.17 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
10.14 Short Term Credit Agreement, dated as of September 29, 1999,
among the registrant, Bank of America, N.A., as
Administrative Agent, Credit Suisse First Boston, as
Syndication Agent, Bank One, NA and Banque Nationale de
Paris, as Co-Documentation Agents, and the other financial
institutions party thereto (incorporated herein by reference
to Exhibit 4.4 to Tenneco Packaging Inc.'s Registration
Statement on Form S-4, File No. 333-82923).
10.14(a) First Amendment, dated as of September 27, 2000, among the
registrant, various financial institutions, and Bank of
America, N.A., as Administrative Agent, amending the Short
Term Credit Agreement (incorporated herein by reference to
Exhibit 10.18(a) to Pactiv Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000, File No.
1-15157).
10.15 Long Term Credit Agreement, dated as of September 29, 1999,
among the registrant, Bank of America, N.A., as
Administrative Agent, Credit Suisse First Boston, as
Syndication Agent, Bank One, NA and Banque Nationale de
Paris, as Co-Documentation Agents, and the other financial
institutions party thereto (incorporated herein by reference
to Exhibit 4.3 to Tenneco Packaging Inc.'s Registration
Statement on Form S-4, File No. 333-82923).
10.16 Term Loan Agreement, dated as of November 3, 1999, between
the registrant and Bank of America (incorporated herein by
reference to Exhibit 10.21 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
10.17 Letter of Agreement dated September 10, 1999, by and among
Tenneco Inc., Bank of America, N.A., and Bank of America
Securities LLC, related to Term Loan Agreement, dated as of
November 3, 1999, by and between the registrant and Bank of
America (incorporated herein by reference to Exhibit 10.22
to Pactiv Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, File No. 1-15157).
10.18 Participation Agreement, dated as of October 28, 1999, among
the registrant, First Security Bank, N.A., Bank of America,
as Administrative Agent, and the other financial
institutions party thereto (incorporated herein by reference
to Exhibit 10.23 to Pactiv Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999, File No.
1-15157).
10.19 Pactiv Corporation 2002 Incentive Compensation Plan
(incorporated herein by reference to Exhibit 4.7 to Pactiv
Corporation's Registration Statement on Form S-8, File No.
333-101121).
11 None.
*12 Computation of Ratio of Earnings to Fixed Charges.
13 None.
15 None.
</Table>
24
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
16 None.
18 None.
19 None.
22 None.
23 None.
27.1 None.
*99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</Table>
(B) REPORTS ON FORM 8-K
On August 9, 2002, the company filed a Form 8-K regarding certifications
made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the company's
principal executive officer, Richard L. Wambold, and its principal financial
officer, Andrew A. Campbell.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACTIV CORPORATION
By: /s/ ANDREW A. CAMPBELL
------------------------------------
Andrew A. Campbell
Senior Vice President and Chief
Financial Officer
(principal financial and accounting
officer)
Date: November 14, 2002
26
CERTIFICATION
I, Richard L. Wambold, the principal executive officer of Pactiv
Corporation (the "company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q for the company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the company as of, and for, the periods presented in this
quarterly report;
4. The company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the company and we
have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the company's disclosure controls and
procedures as of a date within 90 days prior to filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the company's auditors and the audit
committee of the Board of Directors:
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the company's ability to
record, process, summarize, and report financial data and have
identified for the company's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the company's
internal controls; and
6. The company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ RICHARD L. WAMBOLD
- --------------------------------
Richard L. Wambold
Principal Executive Officer
27
CERTIFICATION
I, Andrew A. Campbell, the principal financial officer of Pactiv
Corporation (the "company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q for the company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the company as of, and for, the periods presented in this
quarterly report;
4. The company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the company and we
have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the company's disclosure controls and
procedures as of a date within 90 days prior to filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the company's auditors and the audit
committee of the Board of Directors:
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the company's ability to
record, process, summarize, and report financial data and have
identified for the company's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the company's
internal controls; and
6. The company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ ANDREW A. CAMPBELL
- --------------------------------
Andrew A. Campbell
Principal Financial Officer
28