SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A NO. 2
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-15157
PACTIV CORPORATION
(Exact name of Registrant as Specified in its Charter)
DELAWARE 36-2552989
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 WEST FIELD COURT
LAKE FOREST, ILLINOIS 60045
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 482-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock ($.01 par value) and associated New York Stock Exchange
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
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 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value is computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of the last business day of the registrant's most recently completed
second fiscal quarter.
CLASS OF VOTING STOCK AND NUMBER OF SHARES MARKET VALUE OF COMMON STOCK
HELD BY NON-AFFILIATES AT JUNE 28, 2002 HELD BY NON-AFFILIATES
------------------------------------------ ----------------------
COMMON STOCK 157,485,313 SHARES $3,748,150,447
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock ($.01
par value). 159,147,846 shares outstanding as of February 28, 2003. (See Note 12
to the Financial Statements.)
DOCUMENTS INCORPORATED BY REFERENCE:
PART OF THE FORM 10-K
DOCUMENT INTO WHICH INCORPORATED
-------- -----------------------
Pactiv Corporation's Definitive Proxy Part III
Statement for the Annual Meeting of
Shareholders to be held May 16, 2003
EXPLANATORY NOTE
This amendment to Pactiv Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, is being filed to correct an error in
the tabular presentation of the company's property, plant, and equipment
contained in Note 10 to the financial statements of the Annual Report. The gross
values of the company's property, plant, and equipment and accumulated
depreciation at December 31, 2002, have been revised to $2,167 million, and $801
million, respectively. There is no impact from this change on Pactiv
Corporation's financial statements or any other disclosures contained in the
Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX OF THE FINANCIAL STATEMENTS OF PACTIV CORPORATION
AND CONSOLIDATED SUBSIDIARIES
PAGE*
Report of independent auditors....................................................................... 3
Statement of income for each of the three years in the period ended December 31, 2002................ 5
Statement of financial position at December 31, 2002 and 2001........................................ 6
Statement of cash flows for each of the three years in the period ended December 31, 2002............ 7
Statement of changes in shareholders' equity and comprehensive income (loss) for each
of the three years in the period ended December 31, 2002.......................................... 8
Notes to financial statements........................................................................ 9
*Page references are to pages in this Form 10-K/A No. 2.
2
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Pactiv Corporation:
We have audited the accompanying consolidated statements of financial position
of Pactiv Corporation (a Delaware corporation) and consolidated subsidiaries
(the company) as of December 31, 2002, and the related consolidated statements
of income, cash flows, and changes in shareholders' equity and other
comprehensive income (loss) for the year then ended. Our audit also included the
financial statement schedule listed in the index for Item 14, relating to
information as of December 31, 2002 and for the year then ended. These
consolidated financial statements and schedule are the responsibility of the
company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audit. The
consolidated financial statements and schedule as of December 31, 2001, and for
each of the 2 years in the period then ended were audited by another auditor who
has ceased operations and whose report dated January 22, 2002, expressed an
unqualified opinion on such statements before the inclusion of additional
disclosures referred to in the last paragraph of this report.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial-statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the company as of
December 31, 2002, and the consolidated results of its operations and its cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects the
information set forth therein.
As discussed in Notes 2 and 9 to the financial statements, the company changed
its method of accounting for goodwill in the year-ended December 31, 2002.
As discussed above, the financial statements of Pactiv Corporation and
consolidated subsidiaries as of December 31, 2001, and for the 2 years in the
period ended December 31, 2001, were audited by another auditor who has ceased
operations. As described in Note 9, these financial statements have been revised
to include the transitional disclosures required by Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which was
adopted by the company as of January 1, 2002. Our audit procedures with respect
to the disclosures in Note 9 with respect to 2001 and 2000 included (1) agreeing
the previously reported income from continuing operations to the previously
issued financial statements and agreeing the adjustments to reported income from
continuing operations representing amortization expense (including any related
tax effects) recognized in those periods related to goodwill to the company's
underlying records obtained from management, and (2) testing the mathematical
accuracy of the reconciliation of previously reported income from continuing
operations to adjusted income from continuing operations and net income, and the
related earnings-per-share amounts. In our opinion, the disclosures for 2001 and
2000 in Note 9 are appropriate. However, we were not engaged to audit, review,
or apply any procedures to the 2001 or 2000 financial statements of the company
other than with respect to such disclosures and, accordingly, we do not express
an opinion or any other form of assurance on the 2001 or 2000 financial
statements taken as a whole.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
January 21, 2003
3
BELOW IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH THE COMPANY'S FILING ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH THIS FILING ON FORM 10-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Pactiv Corporation:
We have audited the accompanying statements of financial position of Pactiv
Corporation (a Delaware corporation) and consolidated subsidiaries as of
December 31, 2001, and 2000, and the related statements of income (loss),
retained earnings, cash flows, changes in shareholders' equity, and
comprehensive income (loss) for each of the 3 years ended December 31, 2001.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial-statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pactiv Corporation and
consolidated subsidiaries as of December 31, 2001, and 2000, and the results of
its operations and its cash flows for the 3 years ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
As explained in Note 3 to the financial statements referred to above, effective
January 1, 1999, the company changed its method of accounting for the cost of
start-up activities.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedules listed in the index of financial
statements are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audit for the basic financial statements and, in our opinion, fairly state in
all material respects the financial data required to be set forth therein in
relation to the basic financial statement taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
January 22, 2002
4
CONSOLIDATED STATEMENT OF INCOME
FOR YEARS ENDED DECEMBER 31
(In millions, except share and per-share data) 2002 2001 2000
------------ ------------ ------------
SALES
Consumer and Foodservice/Food Packaging $ 2,062 $ 1,997 $ 2,201
Protective and Flexible Packaging 818 815 851
------------ ------------ ------------
2,880 2,812 3,052
------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales, excluding depreciation and amortization 1,967 1,950 2,235
Selling, general, and administrative 296 288 247
Depreciation and amortization 158 177 185
Other (income) expense, net --- 6 (6)
Restructuring and other (4) 12 70
Spin-off transaction --- (12) (20)
------------ ------------ ------------
2,417 2,421 2,711
------------ ------------ ------------
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST 463 391 341
Interest expense, net of interest capitalized 96 107 134
Income tax expense 146 118 91
Minority interest 1 1 3
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 220 165 113
Income from discontinued operations, net of income tax --- 28 134
------------ ------------ ------------
Income before cumulative effect of change in accounting principles 220 193 247
Cumulative effect of change in accounting principles, net of income tax (72) --- ---
------------ ------------ ------------
NET INCOME $ 148 $ 193 $ 247
------------ ------------ ------------
EARNINGS PER SHARE
Average number of shares of common stock outstanding
Basic 158,618,274 158,833,296 161,722,021
Diluted 160,613,075 159,527,170 161,778,740
Basic earnings per share of common stock
Continuing operations $ 1.38 $ 1.04 $ 0.70
Discontinued operations --- 0.17 0.83
Cumulative effect of change in accounting principles (0.45) --- ---
------------ ------------ ------------
$ 0.93 $ 1.21 $ 1.53
------------ ------------ ------------
Diluted earnings per share of common stock
Continuing operations $ 1.37 $ 1.03 $ 0.70
Discontinued operations --- 0.17 0.83
Cumulative effect of change in accounting principles (0.45) --- ---
------------ ------------ ------------
$ 0.92 $ 1.20 $ 1.53
------------ ------------ ------------
The accompanying notes to financial statements are an integral part of this
statement.
5
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AT DECEMBER 31 (In millions, except share data) 2002 2001
------ ------
ASSETS
Current assets
Cash and temporary cash investments $ 127 $ 41
Accounts and notes receivable
Trade, less allowances of $11 and $12 in the respective periods 329 259
Income taxes --- 8
Other 29 21
Inventories 368 332
Deferred income taxes 23 36
Prepayments and other 28 43
------ ------
Total current assets 904 740
------ ------
Property, plant, and equipment, net 1,366 1,273
------ ------
Other assets
Goodwill 612 615
Intangible assets, net 294 293
Deferred income taxes -- 21
Pension assets, net 170 1,045
Other 66 73
------ ------
Total other assets 1,142 2,047
------ ------
TOTAL ASSETS $3,412 $4,060
------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt, including current maturities of long-term debt $ 13 $ 7
Accounts payable 217 201
Taxes accrued 11 10
Interest accrued 9 9
Accrued liabilities 191 167
Other 60 65
------ ------
Total current liabilities 501 459
------ ------
Long-term debt 1,224 1,211
------ ------
Deferred income taxes 140 594
------ ------
Pension and postretirement benefits 586 52
------ ------
Deferred credits and other liabilities 43 47
------ ------
Minority interest 21 8
------ ------
Shareholders' equity
Common stock (158,681,918 and 159,431,382 shares issued and outstanding after
deducting 13,101,457 and 11,759,094 shares held in treasury in the
respective periods) 2 2
Premium on common stock and other capital surplus 1,379 1,398
Accumulated other comprehensive loss (975) (54)
Retained earnings 491 343
------ ------
Total shareholders' equity 897 1,689
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,412 $4,060
------ ------
The accompanying notes to financial statements are an integral part of this
statement.
6
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 (In millions) 2002 2001 2000
------ ------ ------
OPERATING ACTIVITIES
Income from continuing operations $ 220 $ 165 $ 113
Adjustments to reconcile income from continuing operations to
cash provided by continuing operations
Depreciation and amortization 158 177 185
Deferred income taxes 101 112 72
Restructuring and other (4) 12 70
Noncash retirement benefits, net (109) (104) (100)
Changes in components of working capital
(Increase) decrease in receivables (40) (1) 20
(Increase) decrease in inventories (9) 25 4
(Increase) decrease in prepayments and other current assets 3 (7) (7)
Increase (decrease) in accounts payable 4 1 (24)
Increase (decrease) in taxes accrued 35 22 (24)
Decrease in interest accrued --- (5) (3)
Increase (decrease) in other current liabilities 10 (27) 4
Other 15 1 (20)
------ ------ ------
CASH PROVIDED BY OPERATING ACTIVITIES 384 371 290
------ ------ ------
INVESTING ACTIVITIES
Net proceeds related to sale of discontinued operations --- 87 394
Net proceeds from sale of businesses and assets 7 69 50
Expenditures for property, plant, and equipment (126) (145) (135)
Acquisitions of businesses and assets (125) (13) (5)
Investments and other --- 1 (2)
------ ------ ------
CASH PROVIDED (USED) BY INVESTING ACTIVITIES (244) (1) 302
------ ------ ------
FINANCING ACTIVITIES
Issuance of common stock 11 16 15
Purchase of common stock (40) --- (100)
Purchase of preferred stock --- (15) ---
Issuance of long-term debt --- --- 36
Retirement of long-term debt (22) (348) (221)
Net decrease in short-term debt, excluding current maturities of
long-term debt (6) (7) (308)
------ ------ ------
CASH USED BY FINANCING ACTIVITIES (57) (354) (578)
------ ------ ------
Effect of foreign-exchange rate changes on cash and temporary
cash investments 3 (1) ---
------ ------ ------
INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 86 15 14
Cash and temporary cash investments, January 1 41 26 12
------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS, DECEMBER 31 $ 127 $ 41 $ 26
------ ------ ------
SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
Cash paid during year for interest $ 97 $ 114 $ 139
Cash paid (refunded) for income taxes 18 (16) 39
The accompanying notes to financial statements are an integral part of this
statement.
7
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND OTHER COMPREHENSIVE
INCOME (LOSS)
Premium on Accumulated
common stock Retained other Total Total
Common and other earnings comprehensive shareholders' comprehensive
(Dollars in millions) stock capital surplus (deficit) income (loss) equity income
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $2 $1,468 ($96) ($24) $1,350
Premium on common stock issued
(1,565,233 shares) 15 15
Treasury stock repurchased (100) (100)
(11,742,951 shares)
Change in net unrealized gains
and losses 42 42 $ 42
Translation of foreign-currency
statements (15) (15) (15)
Net income 247 247 247
-----
Total comprehensive income 274
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 2 1,383 151 3 1,539
Premium on common stock issued
(1,254,445 shares) 15 15
Change in net unrealized gains
and losses (42) (42) (42)
Translation of foreign currency
statements (7) (7) (7)
Additional minimum pension
liability adjustment, net of
tax of $2 (3) (3) (3)
Purchase of preferred stock (1) (1)
Change in unrealized losses on
interest-rate swaps (5) (5) (5)
Net income 193 193 193
-----
Total comprehensive income 136
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 2 1,398 343 (54) 1,689
Premium on common stock issued
(1,369,545 shares) 21 21
Treasury stock repurchased
(2,119,009 shares) (40) (40)
Translation of foreign-currency
statements 42 42 42
Additional minimum pension
liability adjustment, net of
tax of $538 (966) (966) (966)
Change in unrealized losses on
interest-rate swaps 3 3 3
Net income 148 148 148
-----
Total comprehensive loss ($773)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $2 $1,379 $491 ($975) $ 897
- -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes to financial statements are an integral part of this
statement.
8
NOTES TO FINANCIAL STATEMENTS
NOTE 1. 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. All per-share information is presented on a diluted basis
unless otherwise noted. Certain amounts in the prior years' 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-fibre, 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-fibre 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.
NOTE 2. SUMMARY OF ACCOUNTING POLICIES
Consolidation
The financial statements of the company include all majority-owned
subsidiaries. Investments in 20%- to 50%-owned companies in which Pactiv has the
ability to exert significant influence over operating and financial policies are
carried at cost plus share of equity in undistributed earnings since date of
acquisition. All significant intercompany transactions are eliminated.
Foreign-Currency Translation
Financial statements of international operations are translated into U.S.
dollars using end-of-period exchange rates for assets and liabilities and the
periods' weighted-average exchange rates for sales, expenses, gains, and losses.
Translation adjustments are recorded as a component of shareholders' equity.
Cash and Temporary Cash Investments
The company defines cash and temporary cash investments as checking
accounts, money-market accounts, certificates of deposit, and U.S. Treasury
notes having an original maturity of 90 days or less.
Accounts and Notes Receivable
Trade accounts receivable are classified as current assets and are reported
net of allowances for doubtful accounts. The company records such allowances
based on a number of factors, including historical trends and specific customer
liquidity.
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. Amounts sold were $10 million and $44 million at December 31,
2002, and 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 by operating activities in the statement of cash
flows. Discounts and fees related to these sales totaled $1 million, $5 million,
and $7 million in 2002, 2001, and 2000, respectively, and were included in other
income/expense in the statement of income. In the event that either Pactiv or
the third-party purchaser of the trade receivables were to discontinue this
program, the company's debt would increase or its cash balance would decrease by
an amount corresponding to the level of sold receivables at such time.
Inventories
Inventories are stated at the lower of cost or market. A portion of
inventories (56% at December 31, 2002, and 2001) is valued using the last-in,
first-out method of accounting. All other inventories are valued using the
first-in, first-out (FIFO) or average-cost methods. If FIFO or average-cost
methods had been used to value all inventories, the total inventory balance
would have been $11 million lower at December 31, 2002, and $9 million lower at
December 31, 2001.
9
Property, Plant, and Equipment, Net
Depreciation is recorded on a straight-line basis over the estimated useful
lives of assets. Useful lives range from 10 to 40 years for buildings and
improvements and from 3 to 25 years for machinery and equipment. Depreciation
expense totaled $140 million, $145 million, and $150 million for the years ended
December 31, 2002, 2001, and 2000, respectively.
The company capitalizes certain costs related to the purchase and
development of software used in its business. Such costs are amortized over the
estimated useful lives of the assets, ranging from 3 to 12 years. Capitalized
software development costs, net of amortization, were $57 million and $64
million at December 31, 2002, and 2001, respectively.
The company periodically re-evaluates carrying values and estimated useful
lives of long-lived assets to determine if adjustments are warranted. The
company uses estimates of undiscounted cash flows from long-lived assets to
determine whether the book value of such assets is recoverable over the assets'
remaining useful lives.
In 2001, the company changed estimated useful lives for certain assets of
the Protective and Flexible Packaging business in North America and Europe to be
consistent with those used for similar assets in its other business segment.
This change did not have a material impact on the company's financial
statements.
Goodwill and Intangibles, Net
Effective January 1, 2002, the company adopted 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. Capitalized intangible assets with definite lives are
amortized on a straight-line basis over periods ranging from 5 to 26 years. See
Note 9 for further information regarding goodwill and intangible assets.
Environmental Liabilities
Expenditures for compliance with environmental regulations that relate to
ongoing operations are expensed or capitalized as appropriate. Expenditures for
conditions that relate to operations that no longer contribute to the generation
of sales are expensed as incurred or as warranted by environmental assessments.
Liabilities are recorded when environmental assessments indicate that remedial
efforts are probable and that costs can be reasonably estimated. Estimated
liabilities are based on currently available facts, existing technology, and
requirements of current laws and regulations, taking into consideration the
likely effects of inflation and other factors. All available evidence is
considered, including prior remediation experience with contaminated sites,
other companies' clean-up experience, and data released by the U. S.
Environmental Protection Agency or other organizations. Estimated liabilities
are subject to revision in subsequent periods based on actual cost data or new
information. Liabilities reflected in the statement of financial position are
not discounted.
Sales Recognition
The company recognizes sales when the risks and rewards of ownership have
transferred to the customer, which is generally considered to have occurred as
products are shipped.
Freight
The company records amounts billed to customers for shipping and handling
as sales, and records shipping and handling expenses as cost of sales.
General and Administrative Expenses
The company records net pension income as an offset to selling, general,
and administrative expenses. Such noncash income totaled $109 million, $113
million, and $108 million in 2002, 2001, and 2000, respectively.
Research and Development
Research and development costs, which are expensed as incurred, totaled $35
million, $40 million, and $36 million in 2002, 2001, and 2000, respectively.
10
Advertising
Advertising production costs are expensed as incurred, while advertising
media costs are expensed in the period in which the related advertising first
takes place. Advertising expenses were $17 million, $11 million, and $3 million
in 2002, 2001, and 2000, respectively.
Stock-Based Compensation
In accounting for stock-based employee compensation, the company uses the
intrinsic-value method specified in Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees." Shown below are net income
and basic and diluted earnings per share as reported and adjusted to reflect the
use of the fair-value method in determining stock-based compensation costs, as
prescribed in SFAS No. 123, "Accounting for Stock-Based Compensation."
(Dollars, in millions, except for earnings per-share) 2002 2001 2000
------- ------ ------
Net income $ 148 $ 193 $ 247
After-tax adjustment of stock-based compensation costs:
Intrinsic-value method 4 2 2
Fair-value method (13) (11) (12)
------- ------ ------
Pro forma $ 139 $ 184 $ 237
------- ------ ------
EARNINGS PER SHARE
Basic $ 0.93 $1.21 $ 1.53
Adjustment of stock-based compensation costs:
Intrinsic-value method 0.02 0.01 0.01
Fair-value method (0.08) (0.07) (0.07)
------- ------ ------
Pro forma $ 0.87 $ 1.15 $ 1.47
------- ------ ------
Diluted $ 0.92 $ 1.20 $ 1.53
Adjustment of stock-based compensation costs:
Intrinsic-value method 0.02 0.01 0.01
Fair-value method (0.08) (0.07) (0.07)
------- ------ ------
Pro forma $ 0.86 $ 1.14 $ 1.47
------- ------ ------
Income Taxes
The company utilizes the asset and liability method of accounting for
income taxes, which requires that deferred tax assets and liabilities be
recorded to reflect the future tax consequences of temporary timing differences
between the tax and financial-statement basis of assets and liabilities.
Deferred tax assets are reduced by a valuation allowance if management
determines that it is more likely than not that a portion of deferred tax assets
will not be realized in a future period. Estimates used to recognize deferred
tax assets are subject to revision in subsequent periods based on new facts or
circumstances.
The company does not provide for U.S. federal income taxes on unremitted
earnings of foreign subsidiaries in that it is management's present intention to
reinvest those earnings in foreign operations. Unremitted earnings of foreign
subsidiaries totaled $110 million and $105 million at December 31, 2002, and
December 31, 2001, respectively. The unrecognized deferred tax liability
associated with these unremitted earnings totaled approximately $24 million at
December 31, 2002.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of shares outstanding. Diluted
earnings per share is calculated in the same manner; however, adjustments are
made to reflect the potential issuance of dilutive shares.
Risk Management
From time to time, the company uses derivative financial instruments,
principally foreign-currency purchase and sale contracts with terms less than 1
year, to hedge its exposure to changes in foreign-currency exchange rates. Net
gains or losses on such contracts are recognized in the income statement as
offsets to foreign-currency gains or losses on the underlying transactions. In
the statement of cash flows, cash receipts and payments related to hedge
contracts are classified in the same way as cash flows from the transactions
being hedged.
11
Interest-rate risk management is accomplished through the use of swaps to
create synthetic debt instruments. Gains and losses on the settlement of swaps
are amortized over the remaining life of the underlying asset or liability. The
company does not use derivative financial instruments for speculative purposes.
Changes in Accounting Principles
In May 2000, the Financial Accounting Standards Board's (FASB's) Emerging
Issues Task Force (EITF) reached a consensus on Issue No. 00-14, "Accounting for
Certain Sales Incentives." This issue addresses the recognition, measurement,
and income-statement classification of various types of sales incentives,
including discounts, coupons, rebates, and free products. With the company's
fourth-quarter 2001 adoption of EITF No. 00-14, certain expenses that
historically (i.e., 2001 and prior years) had been included in selling, general,
and administrative costs were reclassified as deductions from sales for all
periods presented herein.
In April 2001, the EITF reached a consensus on Issue No. 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products." This consensus requires that consideration
provided by a vendor to a purchaser of its products be recognized as a reduction
of sales, except in those instances where an identifiable and measurable benefit
is or will be received by the vendor from the purchaser. With the company's
fourth-quarter 2001 adoption of EITF No. 00-25, certain expenses that
historically (i.e., 2001 and prior years) had been included in selling, general,
and administrative costs were reclassified as deductions from sales for all
periods presented herein.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142. SFAS No. 141 requires that business combinations initiated after
June 30, 2001, be accounted for using the purchase method of accounting and
broadens the criteria for recording intangible assets separate from goodwill.
SFAS No. 142 does not permit goodwill and certain intangibles to be amortized,
but requires that an impairment loss be recognized if recorded amounts exceed
fair values. Effective January 1, 2002, the company adopted SFAS No. 142, and
recorded a goodwill-impairment charge of $83 million, $72 million after tax, or
$0.45 per share, in the first quarter of 2002. Adoption of SFAS No. 142 added
$19 million, $14 million, and $0.09 to income before interest, income taxes, and
minority interest; net income from continuing operations; and earnings per
share, respectively, for 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the time that a commitment to an exit or disposal plan
is made. Examples of costs covered by the statement include lease-termination
expenses and certain employee-severance costs that are associated with a
restructuring, discontinuing an operation, a plant closing, or other exit or
disposal activities. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others." FIN No. 45 requires that certain guarantees be recorded
at fair value and requires guarantors to make significant new disclosures, even
if the likelihood of making payments under the guarantees is remote. The initial
recognition and measurement provisions of FIN No. 45 are to be applied on a
prospective basis for guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements issued after
December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." SFAS No. 148 delineates alternative
transition approaches for companies electing to change their method of
accounting for stock-based compensation costs to the fair-value method
prescribed in SFAS No. 123. While not requiring companies to use the fair-value
method of accounting for stock-based compensation, SFAS No. 148 does require
companies to provide greater disclosure, including tabular presentation of pro
forma net income and earnings per share as if the fair value method had been
used for all periods presented, regardless of whether companies use SFAS No.
123's fair-value method or APB Opinion No. 25's intrinsic-value method. SFAS No.
148's transition and disclosure requirements are effective for quarterly and
annual periods ending after December 15, 2002.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 addresses accounting for variable interest
entities (VIEs), defined as separate legal structures that either do not have
equity investors with voting rights or have equity investors with voting rights
that do not provide sufficient financial resources for the entities to support
their activities. FIN No. 46 requires that (1) a VIE be consolidated by a
company if that company is subject to a majority of the VIE's gains and losses,
and (2) disclosures be made regarding VIEs that a company is not required to
12
consolidate but in which it as a significant variable interest. Consolidation
requirements apply immediately to VIEs created after January 31, 2003, and in
the first fiscal year or interim period beginning after June 15, 2003, for
existing VIEs. Certain of the disclosure requirements apply to financial
statements issued after January 31, 2003, regardless of when the VIE was
created. Upon Pactiv's July 1, 2003, adoption of FIN No. 46, the company is
likely to consolidate the VIE associated with the properties covered by its
synthetic-lease facility, resulting in an increase in long-term debt and
property, plant, and equipment of $169 million and $152 million, respectively.
Consolidation of the VIE also would require the company to recognize, as a
cumulative effect of change in accounting principles, depreciation expense on
the leased assets from lease inception to June 30, 2003, which would negatively
impact net income by approximately $10 million, or $0.06 per share. On a
going-forward basis, consolidation of the VIE would reduce net income by
approximately $3 million, or $0.02 per share, annually. See Note 17 for
additional information on the company's synthetic-lease agreement.
Estimates
Financial-statement presentation requires management to make estimates and
assumptions that affect reported amounts for assets, liabilities, sales, and
expenses. Actual results may differ from such estimates.
Reclassifications
Certain prior-year amounts have been reclassified to conform with
current-year presentation.
NOTE 3. RESTRUCTURING AND OTHER AND SPIN-OFF TRANSACTION
Restructuring and Other
In the fourth quarter of 1999, the company recorded a $154 million
restructuring charge, $91 million after tax, or $0.54 per share, related to the
decision to exit noncore businesses and to reduce overhead costs. The
restructuring covered (1) the sale of the company's forest-products and
aluminum-foil container businesses ($68 million), for which cash proceeds of $20
million were received in the fourth quarter of 1999; (2) the sale of certain
assets of the company's administrative service and corporate aircraft operations
($10 million); (3) the impairment of long-lived assets of the company's
packaging-polyethylene business ($68 million); and (4) severance costs
associated with the elimination of 161 positions, primarily in the company's
international operations ($8 million). The impairment charge for the assets of
the packaging-polyethylene business was deemed necessary following completion of
an evaluation of strategic alternatives for the business and represented the
difference between the carrying value of the assets and the forecasted future
cash flows of the business, computed on a discounted basis. In the fourth
quarter of 2000, $1 million of this charge was reversed, as one planned
product-line consolidation was not undertaken and, as a result, 14 positions
were not eliminated. With this exception, all restructuring actions were
completed in 2000.
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 (Sentinel), 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 in the company's Protective
and Flexible Packaging segment. 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 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, largely to reflect a lower loss than was originally recorded 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 related to higher-than-anticipated expenses associated with the exit
of small, noncore European businesses announced in the fourth quarter of 2000.
The remaining $13 million reflected adoption of a restructuring plan to
consolidate operations and reduce costs in both the Consumer and
Foodservice/Food Packaging ($5 million) and Protective and Flexible Packaging
($8 million) segments. Specifically, this charge was for (1) plant closures and
13
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 exit of a North American
product line ($1 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.
Amounts related to the restructuring activities are shown in the following
table.
ASSET
(In millions) SEVERANCE IMPAIRMENT OTHER TOTAL
--------- ---------- ----- -----
Balance at December 31, 1999 $ 8 $--- $ 1 $ 9
2000 restructuring charge 10 56 5 71
Cash payments (6) --- --- (6)
Charged to asset accounts --- (56) --- (56)
Reversal of prior charge --- --- (1) (1)
---- ---- ---- ----
Balance at December 31, 2000 12 --- 5 17
---- ---- ---- ----
2001 restructuring charge 6 11 1 18
Cash payments (7) --- (1) (8)
Charged to asset accounts --- (11) --- (11)
Reversal of prior charge (3) (3) --- (6)
Changes in estimates (2) 3 (1) ---
---- ---- ---- ----
Balance at December 31, 2001 $ 6 $--- $ 4 $ 10
---- ---- ---- ----
Cash payments (6) --- (2) (8)
---- ---- ---- ----
Balance at December 31, 2002 $--- $--- $ 2 $ 2
---- ---- ---- ----
Spin-off Transaction Costs
In the fourth quarter of 1999, the company recorded transaction costs
related to its spin-off from Tenneco Inc. (Tenneco) in 1999 that reduced income
before interest expense, income taxes, and minority interest; net income; and
earnings per share by $136 million, $96 million, and $0.57, respectively. These
costs pertained to special curtailment and termination benefits for former
Tenneco employees ($72 million), professional services ($49 million), and
separation from Tenneco operations ($15 million). In the fourth quarter of 2000
and 2001, the company reversed $20 million, $12 million after tax, or $0.08 per
share, and $12 million, $7 million after tax, or $0.04 per share, respectively,
of the previously recorded spin-off transaction costs to reflect
lower-than-anticipated expenses. Actions related to the spin-off transaction
have been completed.
NOTE 4. ACQUISITIONS AND DISPOSITIONS
In December 1999, the company entered into an agreement to sell its
aluminum-foil reroll facility in Clayton, New Jersey, and its aluminum
packer-processor facility in Shelbyville, Kentucky, for $44 million. The company
recorded a related gain of $6 million, $4 million after tax, or $0.02 per share,
during 2000, and used the proceeds from the transaction to repay debt.
The company recorded a fourth-quarter 2000 charge of $45 million, $29
million after tax, or $0.18 per share, to recognize the impairment of assets
held for sale, including those related to the packaging-polyethylene business
and the company's interest in Sentinel. In January 2001, the company received
cash proceeds of $72 million from the disposition of these assets. In the third
quarter of 2001, the company refunded $7 million to the purchaser of the
packaging-polyethylene business to reflect the final determination of certain
asset and liability amounts. Also, as part of the company's 2000 restructuring
plan, certain small, noncore European businesses were disposed of in 2001 and
2002, for which cash proceeds totaling $6 million and $5 million were received
in December 2001 and May 2002, respectively. See Note 3 for additional
information.
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 from Amerpack S.A. de C.V., a Mexican
company, for $10 million.
14
In January 2002, the company purchased the assets of 2 small Italian
protective-packaging companies, recording these transactions as capital
expenditures. The outstanding shares of a third small Italian
protective-packaging company, Forniture Industriali, were acquired in June 2002,
for $1 million.
On June 18, 2002, the company purchased Winkler Forming Inc. (Winkler), a
leading thermoformer of amorphous polyethylene terephthalate (APET) products for
food packaging, for $78 million. During the third quarter of 2002, the company
received $3 million from the seller in interim settlement of working capital
amounts. At December 31, 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
appraisals.
On October 21, 2002, Pactiv completed the purchase of 70% of the stock
of Mexico-based Central de Bolsas, S.A. de C.V. (Jaguar), 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 the shareholders of Jaguar and made a $20 million equity investment in
Jaguar. At December 31, 2002, the allocation of the purchase price to the net
assets of Jaguar and the related recognition of $7 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
appraisals.
On November 13, 2002, Pactiv purchased the shares of Prvni Obalova SPOL
S.R.O, a distributor and converter of protective-packaging products in the Czech
Republic, for $4 million.
The following unaudited pro forma information summarizes the results of
operations for the 12 months ended December 31, 2002, and 2001, as if fiscal
2002 acquisitions had been completed as of the beginning of the respective
periods. The pro forma data presented reflect actual operating results of the
acquired businesses, with adjustments recorded for depreciation, interest
expense, and income taxes. Excluded from the pro forma data is the potential
impact of cost reductions or operating synergies. These pro forma amounts are
not necessarily indicative of the results that would have actually been achieved
had the acquisitions occurred at the beginning of the periods presented, or that
may be achieved in the future.
PRO FORMA
------------------------
YEARS ENDED DECEMBER 31 (In millions, except earnings per share) 2002 2001
------ ------
Sales $2,971 $2,963
Income from continuing operations 220 168
Net income 148 196
Earnings per share
Continuing operations 1.37 1.05
Net 0.92 1.22
NOTE 5. DISCONTINUED OPERATIONS
In April 1999, the company contributed the containerboard assets of its
paperboard packaging operations to a newly formed joint venture, Packaging
Corporation of America (PCA). For the contribution, Pactiv, along with other
consideration, received a 45% equity interest in PCA.
In February 2000, the company sold 85% of its equity interest in PCA and
used the net proceeds of $398 million primarily to repay debt. The company
recorded a related gain of $224 million, $134 million after tax, or $0.80 per
share. In the first half of 2001, the company sold its remaining interest in PCA
for $87 million, which was used primarily to repay debt, and recorded an
associated gain of $57 million, $28 million after tax, or $0.17 per share.
The company provides office space and certain administrative services to
PCA under a transition-service agreement.
Net assets as of December 31, 2001, and 2000, and results of operations for
the years then ended for the company's discontinued paperboard packaging
operations were as follows:
15
YEARS ENDED DECEMBER 31 (In millions) 2001 2000
---- ----
Net assets $--- $ 72
---- ----
Gain on sale of PCA stock 57 224
---- ----
Income before interest and income taxes 57 224
Income tax expense 29 90
---- ----
Income from discontinued operations $ 28 $ 134
----- -----
Pactiv has retained responsibility for certain contingent liabilities of
its former paperboard-packaging businesses and has recorded related reserves
where, in the judgment of management, it is probable that a quantifiable
liability exists. Management believes that these liabilities will not have a
material effect on the results of operations or financial position of the
company.
In connection with the formation of the PCA joint venture, Pactiv entered
into a 5-year agreement to purchase corrugated products from PCA on an arm's
length basis.
NOTE 6. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS
Long-Term Debt
DECEMBER 31 (In millions) 2002 2001
------ ------
Pactiv Corporation
Borrowings under 5-year, $750 million revolving-credit agreement, effective interest rate based $ 36 $ 36
on LIBOR plus 0.7%
Notes due 2005, effective interest rate of 7.2%, net of $3 million unamortized discount 296 295
Notes due 2007, effective interest rate of 8.0% 98 98
Debentures due 2017, effective interest rate of 8.1% 300 300
Debentures due 2025, effective interest rate of 8.0%, net of $1 million unamortized discount 275 275
Debentures due 2027, effective interest rate of 8.4%, net of $4 million unamortized discount 196 196
Subsidiaries
Notes due 2003 through 2016, average effective interest rate of 4.0% in 2002 and
9.0% in 2001 31 14
Less current maturities (8) (3)
------ ------
Total long-term debt $1,224 $1,211
------ ------
Aggregate maturities of debt outstanding at December 31, 2002, are $8
million, $43 million, $307 million, $7 million, $99 million, and $776 million
for 2003, 2004, 2005, 2006, 2007, and thereafter, respectively.
At December 31, 2002, the total amount of floating-rate, long-term debt was
$36 million. As of December 31, 2002, the company was in full compliance with
financial and other covenants in its various credit agreements.
Short-Term Debt
DECEMBER 31 (In millions) 2002 2001
---- ----
Current maturities of long-term debt $ 8 $3
Other 5 4
--- --
Total short-term debt $13 $7
--- --
The company uses lines of credit and overnight borrowings to finance certain of
its short-term capital requirements. Information regarding short-term debt is
shown below.
(Dollars in millions) 2002 (a) 2001 (a)
-------- --------
Borrowings at end of year $ 5 $ 4
Weighted-average interest rate on borrowings at end of year 10.0% 10.8%
Maximum month-end borrowings during year 7 27
Average month-end borrowings during year 3 11
Weighted-average interest rate on average month-end borrowings during year 8.1% 8.1%
(a) Includes borrowings under committed credit facilities and uncommitted lines
of credit.
16
Financing Arrangements
COMMITTED CREDIT FACILITIES (a)
------------------------------------------------------------
(Dollars in millions) TERM COMMITMENTS UTILIZED AVAILABLE
---- ----------- -------- ---------
Credit agreements
5-year revolving-credit agreement 2004 $ 750 $ 36 $ 714
(a) Agreements call for the payment of utilization fees on borrowings and
facility fees on commitments.
In conjunction with the 1999 realignment of Tenneco debt, the company paid
bank-facility fees of $10 million and entered into an interest-rate swap to
hedge its exposure to interest-rate movement. The company settled this swap in
November 1999 at a loss of $43 million. Both the loss on the swap and the
bank-facility fees are being recognized as additional interest expense over the
average life of the underlying debt.
NOTE 7. FINANCIAL INSTRUMENTS
Asset and Liability Instruments
At December 31, 2002, and 2001, the fair value of cash and temporary cash
investments, short- and long-term receivables, accounts payable, and short-term
debt were considered to be the same as, or not materially different from,
amounts recorded for these assets and liabilities. The fair value of long-term
debt at December 31, 2002, was approximately $1,427 million, compared with its
recorded amount of $1,224 million. At December 31, 2001, the fair value of
long-term debt was not materially different from its recorded amount. The fair
value of long-term debt was based on quoted market prices for the company's debt
instruments.
Instruments with Off-Balance-Sheet Risk
From time to time, Pactiv enters into foreign-currency forward contracts
with terms of less than 1 year to mitigate its exposure to exchange-rate changes
related to third-party trade receivables and accounts payable. The following
table summarizes foreign-currency contracts entered into by the company at
December 31, 2002.
NOTIONAL AMOUNT
-------------------
(In millions) PURCHASE SELL
-------- ----
Foreign-currency contracts
Euros $50 $ 3
British pounds 3 49
--- ---
$53 $52
--- ---
Based on exchange rates at December 31, 2002, the cost of replacing these
contracts in the event of nonperformance by counter parties would not be
material.
In the first quarter of 2001, the company entered into interest-rate swap
agreements to convert 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. As of December 31, 2001, $5 million of deferred net losses
on derivative instruments was recorded in other comprehensive income.
During the first quarter of 2002, the company exited these swap agreements,
and related accumulated deferred net losses of $2 million at December 31, 2002,
will be expensed over the remaining life of the underlying obligations.
Lines of Credit and Guarantees
The company, from time to time, utilizes various short-term lines of credit
to finance operations. Total committed lines of credit were $36 million and $31
million at December 31, 2002, and December 31, 2001, respectively. Certain lines
of credit are backed by payment and performance guarantees. Borrowings under
lines of credit were not material at December 31, 2002, or December 31, 2001.
17
NOTE 8. INVENTORIES
DECEMBER 31 (In millions) 2002 2001
---- ----
Finished goods $244 $209
Work in process 47 43
Raw materials 42 50
Other materials and supplies 35 30
---- ----
$368 $332
==== ====
NOTE 9. 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. 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.
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 (EPS) for 2002 with corresponding amounts recorded in 2001 and 2000
adjusted to exclude the amortization of goodwill.
(In millions, except per-share data) 2002 2001 2000
------ ----- ------
Income from continuing operations $ 220 $ 165 $ 113
Goodwill amortization, net of tax - 14 14
------ ----- ------
Adjusted income from continuing operations 220 179 127
Income from discontinued operations, net of tax - 28 134
Cumulative effect of change in accounting
principles, net of tax (72) -- --
------ ----- ------
Pro forma net income $ 148 $ 207 $ 261
------ ----- ------
Basic EPS
Continuing operations $ 1.38 $1.04 $ 0.70
Goodwill amortization - 0.09 0.08
------ ----- ------
Adjusted continuing operations 1.38 1.13 0.78
Discontinued operations - 0.17 0.83
Cumulative effect of change in accounting
principles (0.45) -- --
------ ----- ------
Pro forma EPS $ 0.93 $1.30 $ 1.61
------ ----- ------
Diluted EPS
Continuing operations $ 1.37 $1.03 $ 0.70
Goodwill amortization -- 0.09 0.08
------ ----- ------
Adjusted continuing operations 1.37 1.12 0.78
Discontinued operations -- 0.17 0.83
Cumulative effect of change in accounting
principles (0.45) -- --
------ ----- ------
Pro forma EPS $ 0.92 $1.29 $ 1.61
------ ----- ------
Changes in the carrying value of goodwill during 2002 by operating segment
are shown in the following table.
<Table>
<Caption>
CONSUMER
FOODSERVICE/ PROTECTIVE AND
(In millions) FOOD PACKAGING FLEXIBLE PACKAGING TOTAL
-------------- ------------------ -----
Balance, December 31, 2001 $376 $239 $615
Goodwill impairment - (83) (83)
Goodwill addition 62 9 71
Translation adjustment - 9 9
---- ---- ----
Balance, December 31, 2002 $438 $174 $612
---- ---- ----
Intangible assets at December 31, 2002, are shown in the following table.
18
WEIGHTED
AVERAGE LIFE CARRYING ACCUMULATED
(Dollars in millions) (YEARS) AMOUNT AMORTIZATION TOTAL
------------ -------- ------------ -----
Intangible assets subject to amortization:
Patents 21.6 $ 186 $ 60 $ 126
Other 13.4 58 19 39
----- ---- -----
244 79 165
Intangible assets not subject to
amortization (primarily
trademarks) 129 --- 129
----- ---- -----
Total intangible assets $ 373 $ 79 $ 294
----- ---- -----
Amortization expense for intangible assets was $18 million for the year
ended December 31, 2002. Amortization expense is estimated to total $12 million,
$12 million, $12 million, $11 million, and $11 million for 2003, 2004, 2005,
2006, and 2007, respectively.
NOTE 10. PROPERTY, PLANT, AND EQUIPMENT, NET
DECEMBER 31 (In millions) 2002 2001
------ ------
Original cost
Land, buildings, and improvements $ 573 $ 475
Machinery and equipment 1,441 1,311
Other, including construction in progress 153 159
------ ------
2,167 1,945
Less accumulated depreciation and amortization (801) (672)
------ ------
$1,366 $1,273
------ ------
NOTE 11. INCOME TAXES
The domestic and foreign components of income (loss) from continuing
operations before income taxes were as follows:
(In millions) 2002 2001 2000
---- ---- ----
U.S. income before income taxes $325 $276 $215
Foreign income (loss) before income taxes 42 8 (8)
---- ---- ----
Total income before income taxes $367 $284 $207
---- ---- ----
Following is a comparative analysis of the components of income tax expense
applicable to continuing operations.
(In millions) 2002 2001 2000
---- ---- ----
Current
Federal $ 25 $ 2 $ 10
State and local 10 5 2
Foreign 9 (1) 7
---- ---- ----
44 6 19
---- ---- ----
Deferred
Federal 88 98 69
State and local 6 9 10
Foreign 8 5 (7)
---- ---- ----
102 112 72
---- ---- ----
Total income tax expense $146 $118 $ 91
---- ---- ----
19
A reconciliation of the difference between the U.S. statutory federal
income tax rate and the company's effective income tax rate is shown in the
following table.
2002 2001 2000
---- ---- ----
U.S. federal income tax rate 35.0% 35.0% 35.0%
Increase in income tax rate resulting from:
Foreign income taxed at various rates 0.5 0.4 0.5
State and local taxes on income, net of U.S. federal income tax benefit 2.9 3.1 3.4
Amortization of nondeductible goodwill --- 1.1 3.4
Other 1.6 1.9 1.7
---- ---- ----
Effective income tax rate 40.0% 41.5% 44.0%
---- ---- ----
Summarized below are the components of the company's net deferred tax
liability.
DECEMBER 31 (In millions) 2002 2001
---- ----
Deferred tax assets
Tax-loss carryforwards
U.S. $--- $ 2
State and local 1 1
Foreign 13 17
Alternative minimum tax-credit carryforward --- 26
Pensions 130 ---
Postretirement benefits 28 51
Restructuring reserves 1 17
Other items 57 55
Valuation allowance (12) (13)
---- ----
Total deferred tax assets 218 156
---- ----
Deferred tax liabilities
Property and equipment 250 229
Pensions --- 390
Other items 85 74
---- ----
Total deferred tax liabilities 335 693
---- ----
Net deferred tax liabilities $117 $537
---- ----
The company had $43 million of foreign tax-loss carryforwards at December
31, 2002, of which $27 million will expire at various dates from 2003 to 2012,
with the remainder having unlimited lives. At December 31, 2002, the company had
$15 million of state tax-loss carryforwards, which will expire at various dates
from 2003 to 2012.
The valuation allowance for deferred tax assets ($12 million at December
31, 2002) was recorded to recognize the potential inability to utilize certain
foreign tax-loss carryforwards.
NOTE 12. COMMON STOCK
The company has 350 million shares of common stock ($0.01 par value)
authorized, of which 158,681,918 shares were issued and outstanding as of
December 31, 2002.
Reserves
RESERVED SHARES (In thousands)
Thrift plans 2,468
2002 incentive-compensation plan 26,911
Employee stock-purchase plan 2,779
------
32,158
------
20
Stock Plans
2002 Incentive-Compensation Plan - In November 1999, the company initiated a
stock-ownership plan that permits the granting of a variety of awards, including
common stock, restricted stock, performance shares, stock appreciation rights,
and stock options to directors, officers, and employees. In May 2002, the 1999
plan was succeeded by the 2002 incentive compensation plan, and all share
balances were transferred to the new plan, which will remain in effect until
amended or terminated. Under the 2002 plan, up to 27 million shares of common
stock can be issued (including shares issued under the prior plan), of which 15
million had been issued or granted as of December 31, 2002.
Restricted-stock, performance-share, and stock-option awards generally
require that, among other things, grantees remain with the company for certain
periods of time. Performance shares granted under the plan vest upon the
attainment of specified performance goals in the 3 years following the date of
grant.
Details of performance-and restricted-stock balances are shown below.
PERFORMANCE RESTRICTED
SHARES SHARES
----------- ----------
Outstanding, January 1, 2001 144,000 30,238
Granted 394,557 ---
Canceled (10,665) ---
------- -------
Outstanding, December 31, 2001 527,892 30,238
Granted 100,433 2,500
Canceled (11,733) ---
Vested --- (32,738)
------- -------
Outstanding, December 31, 2002 616,592 ---
------- -------
Summarized below are stock options issued by Pactiv.
WEIGHTED-
SHARES AVERAGE
UNDER EXERCISE
OPTION PRICE
---------- -----------
Outstanding, January 1, 2001 12,392,842 $24.34
Granted 2,509,382 16.23
Exercised (33,283) 12.59
Canceled (1,440,436) 29.64
----------
Outstanding, December 31, 2001 13,428,505 22.29
----------
Exercisable, December 31, 2001 5,607,768 32.00
----------
Outstanding, January 1, 2002 13,428,505 22.29
Granted 2,288,917 17.65
Exercised (420,064) 12.79
Canceled (1,109,985) 30.41
----------
Outstanding, December 31, 2002 14,187,373 21.19
----------
Exercisable, December 31, 2002 9,324,775 23.23
----------
Stock options expire 10 to 20 years following date of grant and vest over
periods ranging from 1 to 3 years.
The weighted-average fair value of options granted by the company in 2002
($6.17), 2001 ($6.15), and 2000 ($4.57) was determined using the Black-Scholes
option-pricing model with the following assumptions:
2002 2001 2000
---------------------------------------------
ACTUARIAL ASSUMPTIONS
Risk-free interest rate 3.0% 4.3% 5.9%
Life 4.4 years 4.4 years 5.0 years
Volatility 38.7% 41.1% 36.6%
Summarized below is information about stock options outstanding at December
31, 2002.
21
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------------------ -----------------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
---------- ---------------- ---------------- --------- ----------------
RANGE OF EXERCISE PRICE
$ 7 to $12 2,051,452 7.8 years $11.65 1,322,728 $11.64
$13 to $21 8,069,729 8.2 15.47 4,270,073 14.00
$22 to $29 15,000 9.4 22.79 --- 22.79
$30 to $37 1,824,885 11.2 34.22 1,505,667 34.22
$38 to $45 2,226,307 8.0 40.00 2,226,307 40.00
---------- ---------
14,187,373 9,324,775
---------- ---------
See Note 2 for additional information regarding accounting for stock-based
employee compensation.
Employee Stock-Purchase Plan - The company has a stock-purchase plan that
allows U.S. and Canadian employees to purchase Pactiv common stock at a 15%
discount, subject to an annual limitation of $21,240. In 2002, 2001, and 2000,
employees purchased 401,469 shares, 448,910 shares, and 463,412 shares,
respectively, of Pactiv stock at a weighted-average price of $14.68, $10.46, and
$7.25, respectively.
Grantor Trust - In November 1999, the company established a grantor trust
and reserved 3,200,000 shares of Pactiv common stock for the trust. These shares
were issued to the trust in January 2000. This so-called "rabbi trust" is
designed to assure the payment of deferred-compensation and supplemental-pension
benefits. These shares are not considered to be outstanding for purposes of
financial reporting.
Qualified Offer Rights Plan
In November 1999, Pactiv adopted a qualified offer rights plan (QORP) to
deter coercive takeover tactics and to prevent a potential acquirer from gaining
control of the company in a transaction that would not be in the best interests
of shareholders. Under the plan, if a person becomes the beneficial owner of 20%
or more of the company's outstanding common stock, other than pursuant to a
qualified offer, each right will entitle its holder to purchase common stock
having a market value of twice the right's exercise price, but rights held by
the 20%-or-more holder would not be exercisable.
Rights are not exercisable in connection with a qualified offer, which is
defined as an all-cash tender offer for all outstanding shares of common stock
that is fully financed, remains open for a period of at least 60 business days,
results in the offeror owning at least 85% of the common stock after
consummation of the offer, assures a prompt second-step acquisition of shares
not purchased in the initial offer at the same price as the initial offer, and
meets certain other requirements.
In connection with the adoption of the QORP, the board of directors also
adopted an evaluation mechanism that calls for an independent board committee to
review, on an ongoing basis, the QORP and developments in rights plans in
general and, if it deems appropriate, to recommend modification or termination
of the plan. The independent committee is required to report to the board at
least every 3 years as to whether the QORP continues to be in the best interest
of shareholders.
Earnings Per Share
Earnings from continuing operations per share of common stock outstanding
were computed as follows:
(In millions, except share and per-share data) 2002 2001 2000
---- ---- ----
BASIC EARNINGS PER SHARE
Income from continuing operations $ 220 $ 165 $ 113
------------ ------------ ------------
Average number of shares of common stock outstanding 158,618,274 158,833,296 161,722,021
------------ ------------ ------------
Basic earnings from continuing operations per share $ 1.38 $ 1.04 $ 0.70
------------ ------------ ------------
22
DILUTED EARNINGS PER SHARE
Income from continuing operations $ 220 $ 165 $ 113
------------ ------------ ------------
Average number of shares of common stock outstanding 158,618,274 158,833,296 161,722,021
Effect of dilutive securities
Restricted stock --- 18,097 ---
Stock options 1,579,885 498,634 1,406
Performance shares 414,916 177,143 55,313
------------ ------------ ------------
Average number of shares of common stock outstanding including
dilutive securities 160,613,075 159,527,170 161,778,740
------------ ------------ ------------
Diluted earnings from continuing operations per share $ 1.37 $ 1.03 $ 0.70
------------ ------------ ------------
In accordance with a stock-repurchase plan announced in February 2000, the
company acquired 11,742,951 shares of its common stock in 2000 at an average
price of $8.50 per share, for a total outlay of $100 million. In 2002, the
company acquired 2,119,009 shares of its common stock at an average price of
$19.20 per share, for a total outlay of $40 million.
NOTE 13. PREFERRED STOCK
Pactiv has 50 million shares of preferred stock ($0.01 par value)
authorized, none of which were issued at December 31, 2002. The company has
reserved 750,000 shares of preferred stock in connection with the QORP.
NOTE 14. MINORITY INTEREST
In December 2001, the company purchased for $15 million the outstanding
shares of Astro-Valcour, Inc., whose sole asset was the preferred stock of a
Pactiv subsidiary that was issued to it in 1997 in connection with the company's
acquisition of the packaging business of N.V. Koninklijke KNP BT. This amount
had previously been recorded as minority interest in the company's statement of
financial position. In October 2002, the company acquired a 70% interest in
Jaguar and recorded a related minority interest of $13 million.
NOTE 15. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The company has pension plans that cover substantially all of its
employees. Benefits are based on years of service and, for most salaried
employees, final-average compensation. The company's funding policy is to
contribute to the plans amounts necessary to satisfy requirements of applicable
laws and regulations. Plan assets consist principally of equity and fixed-income
securities and included 4,113,548 shares of Pactiv stock with a fair-market
value of $90 million at December 31, 2002. These shares were contributed by
Tenneco prior to the spin-off. Effective with the spin-off, Pactiv became the
sponsor of Tenneco's retirement plans, receiving related assets and assuming the
obligation to provide pension benefits to participating employees of Tenneco
Automotive Inc. and certain former subsidiaries and affiliates of Tenneco. For
Tenneco Automotive Inc. employees, benefits accrued under these plans were
frozen as of November 30, 1999.
The company has postretirement health-care and life-insurance plans that
cover certain of its salaried and hourly employees. For salaried employees, the
plans cover individuals who retire on or after reaching age 55 with at least 10
years of service after reaching age 45. For hourly employees, postretirement-
benefit plans cover individuals who retire in accordance with the various
provisions of such plans. Benefits may be subject to deductibles, copayments,
and other limitations. The company reserves the right to change postretirement
plans, which are not funded.
Financial data pertaining to the company's pension and postretirement
benefit plans appear below.
23
PENSION PLANS POSTRETIREMENT PLANS
---------------------- ---------------------
(In millions) 2002 2001 2002 2001
------ ------ ------ ------
Changes in projected benefit obligations
Benefit obligations at September 30 of the previous year $3,390 $3,195 $ 96 $ 77
Currency-rate conversion 7 (2) --- ---
Service cost of benefits earned 35 30 1 1
Interest cost on benefit obligations 237 231 7 10
Plan amendments --- 6 (10) 11
Actuarial losses 216 166 18 8
Benefits paid (239) (236) (12) (12)
Participant contributions --- --- 2 1
Divestitures (2) --- --- ---
------- ------- ------- -------
Benefit obligations at September 30 $3,644 $3,390 $ 102 $ 96
------- ------- ------- -------
Changes in fair value of plan assets
Fair value at September 30 of the previous year $3,561 $4,508 $ --- $ ---
Currency rate conversion 5 (2) --- ---
Actual return on plan assets (269) (709) --- ---
Employer contributions (1) (1) 10 11
Participant contributions 1 1 2 1
Benefits paid (239) (236) (12) (12)
Divestitures (1) --- --- ---
------- ------- ------- -------
Fair value at September 30 $3,057 $3,561 $ --- $ ---
------- ------- ------- -------
Development of amounts recognized in the statement of financial position
Funded status at September 30 $ (587) $ 171 $ (102) $ (96)
Contributions during the fourth quarter 1 (8) 3 3
Unrecognized cost
Actuarial losses 1,722 851 45 30
Prior-service costs 20 28 (2) 9
Transition asset --- (1) --- ---
------- ------- ------- -------
Net amount recognized at December 31 $1,156 $1,041 $ (56) $ (54)
------- ------- ------- -------
Amounts recognized in the statement of financial position
Prepaid benefit cost $ 170 $1,070 $ --- $ ---
Accrued benefit cost (542) (36) (56) (54)
Intangible assets 18 1 --- ---
Accumulated other comprehensive income 1,510 6 --- ---
------- ------- ------- -------
Net amount recognized at December 31 $1,156 $1,041 $ (56) $ (54)
------- ------- ------- -------
The impact of pension plans on income from continuing operations was as
follows:
(In millions) 2002 2001 2000
------ ------ ------
Service cost of benefits earned $ (35) $ (30) $ (30)
Interest cost on benefit obligations (237) (231) (224)
Expected return on plan assets 385 373 349
Prior-service cost (5) (5) (6)
SFAS No. 87 transition gain 1 6 19
------ ------ ------
Total pension-plan income $ 109 $ 113 $ 108
------ ------ ------
Actuarial assumptions used for the pension plans are shown below.
SEPTEMBER 30 2002 2001 2000
------ ------ ------
Actuarial assumptions
Discount rate 6.75% 7.25% 7.5%
Compensation increases 4.9 4.9 4.9
Return on assets 9.0 9.5 9.5
For pension plans with accumulated benefit obligations in excess of plan
assets, the projected benefit obligations, accumulated benefit obligations, and
fair value of plan assets were $3,326 million, $3,252 million, and $2,711
million, respectively, at September 30, 2002, and $84 million, $74 million, and
$39 million, respectively, at September 30, 2001.
The impact of postretirement-benefit plans on continuing operations was as
follows:
24
(In millions) 2002 2001 2000
------ ------ ------
Service cost of benefits earned $ 1 $ 1 $ 1
Interest cost on benefit obligations 6 6 5
Prior-service cost 2 --- ---
Loss 2 5 1
------ ------ ------
Total postretirement-benefit plan costs $ 11 $ 12 $ 7
------ ------ ------
Actuarial assumptions used to determine postretirement-benefit obligations
follow.
2002 2001 2000
------ ------ ------
Actuarial assumptions
Health-care cost inflation trend (a) 12.0 % 10.0 % 5.0 %
Discount rate 6.75 7.25 7.5
(a) Assumed to decline to 5% over 5 years.
Increasing the assumed health-care cost inflation rate 1% each year would
increase 2002, 2001, and 2000 postretirement-benefit obligations by
approximately $2 million each year; however, the aggregate of service and
interest costs would not change for 2002, 2001, or 2000.
Decreasing the assumed health-care cost inflation rate 1% each year would
decrease 2002, 2001, and 2000 postretirement-benefit obligations by
approximately $2 million each year, but would not change the aggregate of
service and interest costs for 2002, 2001, or 2000.
In accordance with current Employee Retirement Income Security Act
regulations, the company funded $9 million of its postretirement-benefit
obligations with excess pension-plan assets in 2001.
NOTE 16. SEGMENT AND GEOGRAPHIC-AREA INFORMATION
The company has three operating segments: Consumer and Foodservice/Food
Packaging, which relates to the manufacture and sale of disposable plastic,
molded-fibre, 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-fibre 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.
The accounting policies of the segments are the same as those described in
Note 2. Products are transferred between segments and among geographic areas at,
as nearly as possible, market value. In 2002, Wal-Mart Stores, Inc. accounted
for 10.0% of the company's sales. In general, the company's backlog of orders is
not material.
25
The following table sets forth certain segment information.
SEGMENT
--------------------------------------------------------------------------------------
CONSUMER AND
FOODSERVICE/ PROTECTIVE AND RECLASSIFICATIONS
FOOD FLEXIBLE AND
(In millions) PACKAGING PACKAGING OTHER ELIMINATIONS TOTAL
------------ -------------- ------ ----------------- -----
AT DECEMBER 31, 2002, AND FOR THE
YEAR THEN ENDED
Sales to external customers $2,062 $818 $ --- $ --- $2,880
Depreciation and amortization 122 30 6 --- 158
Income before interest, income taxes
and minority interest 346 (a) 62 (b) 55 (c) --- 463
Cumulative effect of change in
accounting principles --- (72) --- --- (72)
Total assets 2,057 713 642 (d) --- 3,412
Investment in affiliated companies 1 3 --- --- 4
Capital expenditures 84 39 3 --- 126
Noncash items other than
depreciation and amortization --- (4) (109)(e) --- (113)
AT DECEMBER 31, 2001, AND FOR THE
YEAR THEN ENDED
Sales to external customers $1,997 $815 $ --- $ --- $2,812
Depreciation and amortization 129 38 10 --- 177
Income before interest, income taxes,
and minority interest 288 (a) 29 (b) 74 (c) --- 391
Income from discontinued operations --- --- 28 --- 28
Total assets 2,005 729 1,451 (d) (125) 4,060
Investment in affiliated companies 1 1 --- --- 2
Capital expenditures 112 27 6 --- 145
Noncash items other than
depreciation and amortization (7) 14 (106)(e) --- (99)
AT DECEMBER 31, 2000, AND FOR THE
YEAR THEN ENDED
Sales to external customers $2,201 $851 $ --- $ --- $3,052
Depreciation and amortization 131 43 11 --- 185
Income before interest, income taxes,
and minority interest 254 (a) 5 (b) 82 (c) --- 341
Income from discontinued operations --- --- 134 --- 134
Total assets 1,989 827 1,496 (d) (89) 4,223
Net assets of discontinued
operations --- --- 72 --- 72
Investment in affiliated companies 1 2 --- --- 3
Capital expenditures 106 27 2 --- 135
Noncash items other than
depreciation and amortization 26 29 (113)(e) --- (58)
</Table>
(a) Includes restructuring and other charges (credits) of $(1) million and $31
million in 2001 and 2000, respectively.
(b) Includes restructuring and other charges (credits) of $(4) million, $13
million, and $39 million in 2002, 2001, and 2000, respectively.
(c) Includes pension-plan income; unallocated corporate expenses; and spin-off
transaction cost reversals of $12 million and $20 million in 2001 and 2000,
respectively.
(d) Includes assets related to pension plans and administrative service
operations.
(e) Includes pension-plan income.
The following table sets forth certain geographic-area information.
GEOGRAPHIC AREA
---------------------------
UNITED RECLASSIFICATIONS
(In millions) STATES FOREIGN (a) AND ELIMINATIONS TOTAL
------ ---------- ----------------- ------
AT DECEMBER 31, 2002, AND FOR THE YEAR THEN ENDED
Sales to external customers (b) $2,286 $594 $--- $2,880
Long-lived assets (c) 1,298 304 --- 1,602
Total assets 2,756 656 --- 3,412
AT DECEMBER 31, 2001, AND FOR THE YEAR THEN ENDED
Sales to external customers (b) $2,262 $550 $--- $2,812
Long-lived assets (c) 2,203 186 --- 2,389
Total assets 3,560 537 (37) 4,060
AT DECEMBER 31, 2000, AND FOR THE YEAR THEN ENDED
Sales to external customers (b) $2,490 $562 $--- $3,052
Long-lived assets (c) 2,189 217 --- 2,406
Total assets 3,775 601 (35) 4,341
(a) Sales to external customers and long-lived assets for individual countries
(primarily in Europe) were not material.
(b) Geographic assignment is based on location of selling business.
(c) Long-lived assets include all long-term assets other than net assets of
discontinued operations, goodwill, intangibles, and deferred taxes.
NOTE 17. COMMITMENTS AND CONTINGENCIES
Capital Commitments
The company estimates that the completion of projects authorized at
December 31, 2002, and for which commitments have been made will require
expenditures of approximately $90 million in 2003.
26
Purchase Commitments
The company occasionally enters into short-term forward contracts with
third parties to fix a portion of the cost of certain commodities used
internally. Several of such contracts for aluminum remained open at December 31,
2002.
Lease Commitments
Pactiv has entered into a $169 million synthetic-lease agreement with a
third-party lessor and various lenders to finance the cost of its headquarters
building and certain of its warehouse facilities and to facilitate additional
leasing arrangements for other operating facilities. This agreement, which will
expire 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. Termination of the synthetic-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 the company might be required to obtain alternative financing to fund such
a payment.
Annual lease payments under the synthetic-lease agreement are expected to
total approximately $4 million in 2003, 2004, and 2005.
Certain of the company's facilities, equipment, and other assets are leased
under long-term arrangements. Minimum lease payments under noncancelable
operating leases with lease terms in excess of 1 year are expected to total $33
million, $25 million, $17 million, $13 million, and $12 million for 2003, 2004,
2005, 2006, and 2007, respectively; and $27 million for subsequent years.
Commitments under capital leases are not significant. Total rental costs
for continuing operations for 2002, 2001, and 2000 were $42 million, $40
million, and $43 million, respectively, which included minimum rentals under
noncancelable operating leases of $36 million, $35 million, and $33 million for
the respective periods.
Litigation
In May 1999, Tenneco, Pactiv (through Tenneco's former paperboard-packaging
operations), and a number of containerboard manufacturers were named as
defendants in a civil, class-action antitrust lawsuit pending in the U.S.
district court for the Eastern District of Pennsylvania. The company also was
named as a defendant in a related class-action antitrust lawsuit. The lawsuits
allege that the defendants conspired to raise linerboard prices for corrugated
containers and corrugated sheets from October 1, 1993, through November 30,
1995, in violation of Section 1 of the Sherman Act. The lawsuits seek treble
damages of unspecified amounts, plus attorneys' fees. Pactiv's management
believes that the allegations have no merit and is vigorously defending the
claims. Tenneco sold its containerboard business in April 1999, prior to the
spin-off of Pactiv in November 1999. In connection with the spin-off, Pactiv was
assigned responsibility for defending the claims against Tenneco with respect to
such lawsuit and for any liability resulting therefrom.
The company is party to other legal proceedings arising from its
operations.
Management believes that the outcome of all of these legal matters,
individually and in the aggregate, will not have a material adverse effect on
the company's earnings or financial position.
Environmental Matters
The company is subject to a variety of environmental and pollution-control
laws and regulations in all jurisdictions in which it operates. Pactiv provides
related reserves where it is probable that liabilities exist and where
reasonable estimates of the liabilities can be made. Estimated liabilities are
subject to change as more information becomes available regarding the magnitude
of possible clean-up costs and the cost and effectiveness of alternative
clean-up technologies. However, management believes that any additional costs
that may be incurred as more information becomes available will not have a
material effect on the earnings or financial condition of the company.
27
NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
CUMULATIVE
INCOME INCOME EFFECT OF
FROM FROM CHANGE IN
CONTINUING DISCONTINUED ACCOUNTING
(In millions) SALES COST OF SALES OPERATIONS OPERATIONS PRINCIPLES NET INCOME
------ ------------- ---------- ------------ ---------- ----------
2002
First quarter $ 647 $ 438 $ 42 $ --- $(72) $(30)
Second quarter 728 494 60 --- --- 60
Third quarter 727 499 59 --- --- 59
Fourth quarter 778 536 59 --- --- 59
------ ------ ---- ----- ---- ----
$2,880 $1,967 $220 $ --- $(72) $148
------ ------ ---- ----- ---- ----
2001
First quarter $ 680 $ 489 $ 29 $ 4 $--- $ 33
Second quarter 728 510 45 24 --- 69
Third quarter 694 475 45 --- --- 45
Fourth quarter 710 476 46 --- --- 46
------ ------ ---- ----- ---- ----
$2,812 $1,950 $165 $ 28 $--- $193
------ ------ ---- ----- ---- ----
BASIC EARNINGS PER SHARE OF COMMON STOCK DILUTED EARNINGS PER SHARE OF COMMON STOCK
-------------------------------------------------- ----------------------------------------------------
CUMULATIVE CUMULATIVE
EFFECT OF EFFECT OF
CHANGE IN CHANGE IN
CONTINUING DISCONTINUED ACCOUNTING NET CONTINUING DISCONTINUED ACCOUNTING NET
OPERATIONS OPERATIONS PRINCIPLES INCOME OPERATIONS OPERATIONS PRINCIPLES INCOME
---------- ------------ ---------- ------ ---------- ------------ ---------- ------
2002 (a)
First quarter $0.26 $ --- $(0.45) $(0.19) $0.26 $ --- $(0.45) $(0.19)
Second quarter 0.38 --- --- 0.38 0.38 --- --- 0.38
Third quarter 0.37 --- --- 0.37 0.37 --- --- 0.37
Fourth quarter 0.37 --- --- 0.37 0.37 --- --- 0.37
----- ----- ------ ------ ----- ----- ------ ------
$1.38 $ --- $(0.45) $ 0.93 $1.37 $ --- $(0.45) $ 0.92
----- ----- ------ ------ ----- ----- ------ ------
2001 (a)
First quarter $0.18 $0.02 $ --- $ 0.20 $0.18 $0.02 $ --- $ 0.20
Second quarter 0.28 0.15 --- 0.43 0.28 0.15 --- 0.43
Third quarter 0.28 --- --- 0.28 0.28 --- --- 0.28
Fourth quarter 0.29 --- --- 0.29 0.29 --- --- 0.29
----- ----- ------ ------ ----- ----- ------ ------
$1.04 $0.17 $ --- $ 1.21 $1.03 $0.17 $ --- $ 1.20
----- ----- ------ ------ ----- ----- ------ ------
(a) The sum of amounts shown for individual quarters may not equal the total for
the year because of changes in the weighted-average number of shares
outstanding throughout the year.
The preceding notes are an integral part of the foregoing financial statements.
28
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements included in this Annual Report on Form 10-K, including
statements in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section and in the notes to the financial statements,
are "forward-looking statements." All statements other than statements of
historical fact, including statements regarding prospects and future results,
are forward-looking. These forward-looking statements generally can be
identified by the use of terms and phrases such as "will", "believe",
"anticipate", "may", "might", "could", "expect", "estimated", "projects",
"intends", "foreseeable 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. Following are factors that might cause the
company's actual results to differ materially from future results expressed or
implied by these forward-looking statements:
- Changes in consumer demand and selling prices for the company's
products, including new products that the company or its competitors
may introduce, that could impact sales and margins. The company
operates in a very competitive environment, in which product innovation
and development has historically been key to obtaining and maintaining
market share and margins.
- Material substitutions and changes in costs of raw materials, including
plastic resins, labor, or utilities that could impact the company's
expenses and margins. Plastic resin prices are impacted by the price of
oil and natural gas. Oil and natural gas prices are affected by
numerous factors, including overall economic activity, geopolitical
situations (particularly involving oil-exporting regions), and
governmental policies and regulation.
- Changes in laws or governmental actions, including changes in
regulations such as those relating to air emissions or plastics
generally.
- Although the company believes it has adequate sources of liquidity for
its operations, the availability or cost of capital could impact growth
or acquisition opportunities.
- 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. may impact not only demand for the company's products, but also
the prices of raw materials and costs of manufacturing.
- As discussed under the caption "Critical Accounting Policies -- Pension
Plans," changes in assumptions regarding the long-term rate of return
on pension assets and the discount rate and other assumptions, as well
as the level of amortization of actuarial gains and losses, could have
a material affect on net income and shareholders' equity.
- 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. See "Changes in Accounting Principles."
- The company's ability to integrate new businesses that it may acquire.
29
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS INCLUDED IN ITEM 8
See "Index of Financial Statements of Pactiv Corporation and
Consolidated Subsidiaries" set forth in Item 8, "Financial Statements and
Supplementary Data."
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES INCLUDED IN ITEM 15
PAGE
-------
Schedule II - Valuation and qualifying accounts - three years ended December 31, 2002 31
SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE
Schedule I - Condensed financial information of registrant
Schedule III - Real estate and accumulated depreciation
Schedule IV - Mortgage loans on real estate
Schedule V - Supplemental information concerning property - casualty insurance operations
30
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In millions)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------- ------------ ------------------------------- ------------ -----------
ADDITIONS
-------------------------------
CHARGED TO
(REVERSED
BALANCE AT FROM) BALANCE
BEGINNING COSTS AND AT END OF
DESCRIPTION OF YEAR EXPENSES ACQUISITIONS DEDUCTIONS YEAR
----------- ------------ ------------- ------------- ------------ -----------
Allowance for doubtful accounts
Year ended December 31, 2002 $ 12 $ (5) $ 3 $ (1) $ 11
Year ended December 31, 2001 17 8 --- 13 12
Year ended December 31, 2000 11 13 --- 7 17
31
REPORTS ON FORM 8-K
The company filed no reports on Form 8-K during the quarter ended
December 31, 2002.
INDEX OF EXHIBITS
The following exhibits are filed as part of this Annual Report on Form
10-K for the fiscal year ended December 31, 2002 (Exhibits designated with an
asterisk are filed with this report; all other exhibits are incorporated by
reference.)
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).
3.1 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).
3.2 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).
32
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 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
33
EXHIBIT NO. DESCRIPTION
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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.
16 None.
18 None.
21 List of subsidiaries of Pactiv Corporation.
22 None.
*23.1 Consent of Ernst & Young LLP.
23.2 Pactiv Corporation explanation concerning absence of current
written consent of Arthur Andersen LLP.
24 Powers of Attorney for the following directors of Pactiv
Corporation: Larry D. Brady, Robert J. Darnall, Mary R. (Nina)
Henderson, Roger B. Porter, Paul T. Stecko, Norman H. Wesley.
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.
----------------
* Filed herewith
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused the report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PACTIV CORPORATION
By: /s/ RICHARD L. WAMBOLD
----------------------------------
Richard L. Wambold
Chairman, President and
Chief Executive Officer
Date: April 9, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following on behalf of the registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD L. WAMBOLD Chairman, President, Chief Executive April 9, 2003
- ------------------------------------------------- Officer and Director (principal executive
Richard L. Wambold officer)
/s/ ANDREW A. CAMPBELL Senior Vice President and Chief Financial April 9, 2003
- ------------------------------------------------- Officer (principal financial
Andrew A. Campbell and accounting officer)
/s/ LARRY D. BRADY* Director April 9, 2003
- -------------------------------------------------
Larry D. Brady
Director
- -------------------------------------------------
K. Dane Brooksher
/s/ ROBERT J. DARNALL* Director April 9, 2003
- -------------------------------------------------
Robert J. Darnall
/s/ MARY R. (NINA) HENDERSON* Director April 9, 2003
- -------------------------------------------------
Mary R. (Nina) Henderson
/s/ ROGER B. PORTER* Director April 9, 2003
- -------------------------------------------------
Roger B. Porter
/s/ PAUL T. STECKO* Director April 9, 2003
- -------------------------------------------------
Paul T. Stecko
/s/ NORMAN H. WESLEY* Director April 9, 2003
- -------------------------------------------------
Norman H. Wesley
*By: /s/ JAMES V. FAULKNER, JR. April 9, 2003
--------------------------------------------
James V. Faulkner, Jr.
Attorney-in-fact
35
CERTIFICATION
I, Richard L. Wambold, the principal executive officer of Pactiv
Corporation (the "company"), certify that:
1. I have reviewed this annual report on Form 10-K for the company, as
amended by the Form 10-K/A No. 1 filed on March 28, 2003, and the Form
10-K/A No. 2 filed on this date;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order 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 annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
Date: April 9, 2003
/s/ RICHARD L. WAMBOLD
- ----------------------------------
Richard L. Wambold
Principal Executive Officer
36
CERTIFICATION
I, Andrew A. Campbell, the principal financial officer of Pactiv
Corporation (the "company"), certify that:
1. I have reviewed this annual report on Form 10-K for the company, as
amended by the Form 10-K/A No. 1 filed on March 28, 2003 and the Form
10-K/A No. 2 filed on this date;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order 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 annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
Date: April 9, 2003
/s/ ANDREW A. CAMPBELL
- -------------------------------------
Andrew A. Campbell
Principal Financial Officer
37