- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
<Table>
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-15157
</Table>
PACTIV CORPORATION
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 36-2552989
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 WEST FIELD COURT
LAKE FOREST, ILLINOIS 60045
(Address of principal executive offices) (Zip Code)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 482-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date: Common stock, par value $0.01
per share:149,229,719 as of April 30, 2005. (See Notes to Financial Statements.)
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statement of Income....................... 3
Condensed Consolidated Statement of Financial
Position.............................................. 4
Condensed Consolidated Statement of Cash Flows......... 5
Notes to Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 22
Item 4. Controls and Procedures........................... 23
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................. 24
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds*.............................................. 25
Item 3. Defaults Upon Senior Securities*.................. 25
Item 4. Submission of Matters to a Vote of Security
Holders*............................................... 25
Item 5. Other Information*................................ 25
Item 6. Exhibits.......................................... 25
</Table>
- ---------------
* No response to this item is included herein either because it is inapplicable
or there is nothing to report.
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENT OF INCOME
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2005 2004
(In millions, except share and per-share data) ------------- -------------
SALES....................................................... $ 832 $ 775
------------ ------------
COSTS AND EXPENSES
Cost of sales, excluding depreciation and amortization.... 640 552
Selling, general, and administrative...................... 83 81
Depreciation and amortization............................. 43 45
Other expense, net........................................ 1 2
Restructuring and other................................... 6 70
------------ ------------
773 750
------------ ------------
OPERATING INCOME............................................ 59 25
Interest expense, net of interest capitalized............. 24 25
Income tax expense........................................ 13 --
------------ ------------
NET INCOME.................................................. $ 22 $ --
------------ ------------
Average number of shares of common stock outstanding
Basic..................................................... 148,904,379 154,865,139
Diluted................................................... 151,118,207 157,270,657
EARNINGS PER SHARE
Basic and diluted earnings per share of common stock........ $ 0.15 $ --
------------ ------------
</Table>
The accompanying notes to financial statements are an integral part of this
statement.
3
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<Table>
<Caption>
MARCH 31, 2005 DECEMBER 31, 2004
(IN MILLIONS, EXCEPT SHARE DATA) -------------- -----------------
ASSETS
Current assets
Cash and temporary cash investments....................... $ 55 $ 222
Accounts and notes receivable
Trade, less allowances of $12 and $11 at the respective
dates.................................................. 310 391
Other.................................................. 16 15
Inventories
Finished goods......................................... 261 216
Work in process........................................ 73 69
Raw materials.......................................... 89 82
Other materials and supplies........................... 36 39
Other..................................................... 50 45
------ ------
Total current assets...................................... 890 1,079
------ ------
Property, plant, and equipment, net......................... 1,455 1,445
------ ------
Other assets
Goodwill.................................................. 715 657
Intangible assets, net.................................... 282 280
Pension assets, net....................................... 11 214
Other..................................................... 65 66
------ ------
Total other assets........................................ 1,073 1,217
------ ------
TOTAL ASSETS................................................ $3,418 $3,741
------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt, including current maturities of long-term
debt................................................... $ 303 $ 472
Accounts payable.......................................... 276 246
Taxes accrued............................................. 24 13
Interest accrued.......................................... 32 9
Accrued promotions, rebates, and discounts................ 60 67
Accrued litigation........................................ 25 25
Accrued payroll and benefits.............................. 60 71
Other..................................................... 89 81
------ ------
Total current liabilities................................. 869 984
------ ------
Long-term debt.............................................. 869 869
------ ------
Deferred income taxes....................................... 203 248
------ ------
Pension and postretirement benefits......................... 403 505
------ ------
Other....................................................... 46 43
------ ------
Minority interest........................................... 9 9
------ ------
Shareholders' equity
Common stock (149,061,805 and 148,711,815 shares issued
and outstanding, after deducting 22,721,372 and
23,071,362 shares held in treasury, at the respective
dates)................................................. 2 2
Premium on common stock and other capital surplus......... 1,147 1,141
Accumulated other comprehensive loss...................... (981) (889)
Retained earnings......................................... 851 829
------ ------
Total shareholders' equity................................ 1,019 1,083
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $3,418 $3,741
------ ------
</Table>
The accompanying notes to financial statements are an integral part of this
statement.
4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
2005 2004
FOR THE THREE MONTHS ENDED MARCH 31 (In millions) ----- ----
OPERATING ACTIVITIES
Net income.................................................. $ 22 $ --
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization............................. 43 45
Deferred income taxes..................................... 3 6
Restructuring and other................................... 1 61
Noncash retirement benefits, net.......................... (12) (12)
Net working capital....................................... 70 (19)
Other..................................................... (1) 2
----- ----
Cash provided by operating activities....................... 126 83
----- ----
INVESTING ACTIVITIES
Expenditures for property, plant, and equipment............. (38) (19)
Acquisitions of business and assets......................... (98) --
Other....................................................... (1) 1
----- ----
Cash used by investing activities........................... (137) (18)
----- ----
FINANCING ACTIVITIES
Issuance of common stock.................................... 4 6
Purchase of common stock.................................... -- (83)
Retirement of long-term debt................................ (169) --
Net decrease in short-term debt, excluding current
maturities of long-term debt.............................. -- (1)
Other....................................................... 11 --
----- ----
Cash used by financing activities........................... (154) (78)
----- ----
Effect of foreign-exchange rate changes on cash and
temporary cash investment................................. (2) (1)
----- ----
DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS............. (167) (14)
Cash and temporary cash investments, January 1.............. 222 140
CASH AND TEMPORARY CASH INVESTMENTS, MARCH 31............... $ 55 $126
----- ----
</Table>
The accompanying notes to financial statements are an integral part of this
statement.
5
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The Consolidated Statement of Income for the three-month period ended March
31, 2005, and 2004, the Condensed Consolidated Statement of Financial Position
at March 31, 2005, and the Condensed Consolidated Statement of Cash Flows for
the three-month period ended March 31, 2005, and 2004, are unaudited. In the
company's opinion, the accompanying financial statements contain all normal
recurring adjustments necessary to present fairly the results of operations,
financial position, and cash flows for the periods indicated. These statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. They do not include all of the information and footnotes
required by generally accepted accounting principles. Accordingly, these
statements should be read in conjunction with the company's Form 10-K for the
year ended December 31, 2004, which may be found at www.pactiv.com, under the
Investor Relations link in the subsection entitled "SEC Filings." Alternatively,
free copies of the company's Form 10-K for the year ended December 31, 2004, may
be obtained by contacting Investor Relations at (866) 456-5439.
NOTE 2. SUMMARY OF ACCOUNTING POLICIES
For a complete discussion of the company's accounting policies, refer to
Pactiv's most recent filing on Form 10-K.
STOCK-BASED COMPENSATION
In accounting for stock-based employee compensation, the company uses the
intrinsic-value method specified in Accounting Principles Board Opinion (APB)
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
outlined in Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation."
<Table>
<Caption>
THREE MONTHS
ENDED MARCH 31,
----------------
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA) 2005 2004
- -------------------------------------------- ------ -------
Net income.................................................. $ 22 $ --
After-tax adjustment of stock-based compensation costs
Intrinsic-value method.................................... 1 --
Fair-value method......................................... (3) (3)
----- ------
Pro forma................................................... $ 20 $ (3)
----- ------
EARNINGS PER SHARE
Basic and diluted........................................... $0.15 $ --
Adjustment of stock-based compensation costs
Intrinsic-value method.................................... -- --
Fair-value method......................................... (0.02) (0.02)
----- ------
Pro forma................................................... $0.13 $(0.02)
----- ------
</Table>
ACCOUNTS AND NOTES RECEIVABLE
On a recurring basis, the company sells an undivided interest in a pool of
trade receivables meeting certain criteria to a third party as an alternative to
debt financing. Amounts sold were $85 million and $10 million at March 31, 2005,
and March 31, 2004 respectively. The remainder of the pool ($21 million at March
31, 2005) is pledged as collateral in the event any of the sold receivables were
to be uncollectible. Such sales, which represent a form of off-balance-sheet
financing, are recorded as a reduction of accounts and notes
6
receivable in the statement of financial position, and the related proceeds are
included in cash provided (used) by operating activities in the statement of
cash flows. Discounts and fees related to these sales were immaterial in the
first quarter of 2005 and 2004 and were included in other 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.
CHANGES IN ACCOUNTING PRINCIPLES
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123(R), "Share-Based Payment." SFAS No. 123(R) requires that the fair
value of all share-based payments to employees, including grants of stock
options, be recognized in the financial statements, and supercedes APB Opinion
No. 25, which requires that the intrinsic-value method be used in determining
share-based employee-compensation expense. Under SFAS No. 123(R), share-based
employee-compensation expense is determined using the grant-date fair value of
the award and is recognized in the statement of income over the period that the
employee is required to provide related service (normally the vesting period).
The effective date of SFAS No. 123(R) was recently delayed until the beginning
of the first annual period after June 30, 2005. The impact of adopting SFAS
123(R) cannot be predicted at this time, since it depends on future levels of
share-based payments. However, if the company had adopted SFAS 123(R) in prior
periods, the impact of its adoption would have paralleled that shown under
"Stock-Based Compensation" in this footnote. SFAS No. 123(R) also requires that
the benefits of tax deductions in excess of recognized compensation costs be
reported as cash flow from financing activities rather than cash flow from
operating activities. It is not possible to predict such amounts, since they
depend on the timing of employee stock-option exercises. There were no amounts
recognized for such excess tax-deduction benefits in the first quarter of 2005
and 2004.
NOTE 3. RESTRUCTURING AND OTHER
In the first quarter of 2004, the company announced a restructuring program
to rationalize excess manufacturing capacity and reduce overhead costs, and to
reinvest a portion of the related savings in strategic growth initiatives. The
principal strategic objectives of the program were to (1) rationalize
inefficient manufacturing assets, primarily certain molded-fiber facilities in
North America and the United Kingdom; (2) reduce overhead in several areas of
the business, thereby eliminating non-value-added activities; (3) increase the
number of new product launches over the next several years; and (4) increase the
value of the Hefty(R) brand. Implementation of the program resulted in the
elimination of approximately 1,000 salaried and hourly positions worldwide. In
this connection, the company recorded restructuring and other charges totaling
$70 million, $44 million after tax, or $0.28 per share, in the first quarter of
2004, and $93 million, $58 million after tax, or $0.38 per share, for full-year
2004, covering severance, asset write-offs, and other, which consists
principally of asset removal costs, including asbestos insulation abatement and
associated expenses at the company's closed molded-fiber facility in the United
Kingdom.
In the first quarter of 2005, the company recorded restructuring and other
charges of $6 million, $4 million after tax, or $0.02 per share, related to this
program. The company anticipates no further charges related to this program.
After-tax cash payments related to the restructuring and other actions
totaled $12 million for full-year 2004, and $5 million for the first quarter of
2005.
7
The following summarizes the impacts of restructuring and related actions.
<Table>
<Caption>
SEVERANCE ASSET WRITE-OFFS OTHER(1) TOTAL
(In millions) --------- ---------------- -------- -----
ACCRUED RESTRUCTURING BALANCE AT DECEMBER 31, 2004... $ 3 $-- $ 8 $11
Additions/adjustments to the account
Consumer Products.................................. -- -- 1 1
Foodservice/Food Packaging......................... -- 6 -- 6
Protective and Flexible Packaging.................. -- -- (1) (1)
--- --- --- ---
Total additions.................................... -- 6 -- 6
Cash payments........................................ (2) -- (3) (5)
Charges against asset accounts....................... -- (6) -- (6)
--- --- --- ---
ACCRUED RESTRUCTURING BALANCE AT MARCH 31, 2005...... $ 1 $-- $ 5 $ 6
--- --- --- ---
RESTRUCTURING PROGRAM COSTS TO DATE
Consumer Products.................................. $ 4 $-- $ 1 $ 5
Foodservice/Food Packaging......................... 8 24 5 37
Protective and Flexible Packaging.................. 12 9 33 54
Other.............................................. -- -- 3 3
--- --- --- ---
Total.............................................. $24 $33 $42 $99
--- --- --- ---
</Table>
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(1) Consists principally of asset removal costs, including asbestos insulation
abatement and associated expenses at the company's closed molded-fiber
facility in the United Kingdom.
NOTE 4. ACQUISITIONS
On March 15, 2005, Pactiv acquired, for $98 million, Newspring Industrial
Corp. (Newspring), a leading manufacturer of thin wall, injection-molded
polypropylene products for use in the take-out, delicatessen, and foodservice
markets. The company paid $87 million for the shares of Newspring and recorded
liabilities of $11 million for anticipated future payments related to
non-compete agreements and other items. At March 31, 2005, the allocation of the
purchase price to the net assets of Newspring and the related recognition of $63
million of goodwill were based on preliminary estimates of the fair market value
of the assets and liabilities acquired, which are subject to revision upon
receipt of final appraisals.
NOTE 5. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying value of goodwill for the three months ended March
31, 2005, are shown in the following table.
<Table>
<Caption>
PROTECTIVE
CONSUMER FOODSERVICE/ AND FLEXIBLE
PRODUCTS FOOD PACKAGING PACKAGING TOTAL
(In millions) -------- -------------- ------------ -----
Balance, December 31, 2004........................ $136 $326 $195 $657
Goodwill additions................................ -- 63 -- 63
Currency-translation adjustment................... -- (1) (4) (5)
---- ---- ---- ----
Balance, March 31, 2005........................... $136 $388 $191 $715
---- ---- ---- ----
</Table>
8
Intangible assets are summarized in the following table.
<Table>
<Caption>
MARCH 31, 2005 DECEMBER 31, 2004
----------------------------- -----------------------------
ACCUMULATED ACCUMULATED
CARRYING VALUE AMORTIZATION CARRYING VALUE AMORTIZATION
(In millions) -------------- ------------ -------------- ------------
Intangible assets subject to amortization
Patents................................. $ 85 $ 49 $ 85 $ 47
Other................................... 183 68 177 66
---- ---- ---- ----
268 117 262 113
Intangible assets not subject to
amortization (primarily trademarks)..... 131 -- 131 --
---- ---- ---- ----
Total intangible assets................... $399 $117 $393 $113
---- ---- ---- ----
</Table>
Amortization expense for intangible assets was $4 million for the three
months ended March 31, 2005, and the three months ended March 31, 2004.
Amortization expense is estimated to total $17 million, $15 million, $15
million, $12 million, and $12 million for years 2005, 2006, 2007, 2008, and
2009, respectively.
NOTE 6. PROPERTY, PLANT, AND EQUIPMENT, NET
<Table>
<Caption>
MARCH 31, 2005 DECEMBER 31, 2004
(In millions) -------------- -----------------
Original cost
Land, buildings, and improvements......................... $ 743 $ 745
Machinery and equipment................................... 1,682 1,654
Other, including construction in progress................. 140 111
------- -------
2,565 2,510
Less accumulated depreciation and amortization.............. (1,110) (1,065)
------- -------
$ 1,455 $ 1,445
------- -------
</Table>
NOTE 7. COMMON STOCK
EARNINGS PER SHARE
Net income per share of common stock outstanding was computed as follows:
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2005 2004
(In millions, except share and per-share data) ------------- -------------
BASIC EARNINGS PER SHARE
Net income................................................ $ 22 $ --
------------ ------------
Average number of shares of common stock outstanding...... 148,904,379 154,865,139
------------ ------------
Basic earnings per share.................................. $ 0.15 $ --
------------ ------------
DILUTED EARNINGS PER SHARE
Net income................................................ $ 22 $ --
------------ ------------
Average number of shares of common stock outstanding...... 148,904,379 154,865,139
Effect of dilutive securities
Stock options.......................................... 1,816,129 1,924,586
Performance shares..................................... 397,699 480,932
------------ ------------
Average number of shares of common stock outstanding
including dilutive securities.......................... 151,118,207 157,270,657
------------ ------------
Diluted earnings per share................................ $ 0.15 $ --
------------ ------------
</Table>
9
In the first quarter of 2004, the company acquired 3,830,800 shares of its
common stock at an average price of $21.74 per share, a total outlay of $83
million. In the first quarter of 2005, no shares of the company's common stock
were acquired.
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
payment of deferred-compensation and supplemental pension benefits. These shares
are not considered to be outstanding for purposes of financial reporting.
NOTE 8. SEGMENT INFORMATION
The company has 4 reporting segments: Consumer Products, which relates
principally to the manufacture and sale of disposable plastic, molded-fiber,
pressed-paperboard, and aluminum packaging products, such as waste bags,
tableware, food-storage bags, and cookware, for consumer markets, such as
grocery stores, mass merchandisers, and discount chains; Foodservice/Food
Packaging, which relates primarily to the manufacture and sale of various
disposable plastic, molded-fiber, pressed-paperboard, and aluminum packaging
products, for foodservice and food-packaging markets, such as restaurants and
other institutional foodservice outlets, food processors, and grocery chains;
Protective and Flexible Packaging, which relates to the manufacture and sale of
plastic, paperboard, and molded-fiber products, for protective-packaging
markets, such as electronics, automotive, furniture, and e-commerce, and for
flexible-packaging applications in food, medical, pharmaceutical, chemical, and
hygienic markets; and Other, which relates to corporate and
administrative-service operations and retiree-benefit income and expense. The
accounting policies of the reporting segments are the same as those for Pactiv
as a whole. Where discrete financial information is not available by segment,
reasonable allocations of expenses and assets are used.
The following table sets forth certain segment information.
<Table>
<Caption>
SEGMENT
--------------------------------------
FOODSERVICE/ PROTECTIVE
CONSUMER FOOD AND FLEXIBLE
PRODUCTS PACKAGING PACKAGING OTHER TOTAL
(In millions) -------- ------------ ------------ ----- ------
AT MARCH 31, 2005, AND FOR THE THREE MONTHS
THEN ENDED
Sales to external customers.................... $214 $ 368 $250 $ -- $ 832
Operating income............................... 20(a) 22(b) 12(c) 5(d) 59
Total assets................................... 986 1,271 803 358(e) 3,418
AT MARCH 31, 2004, AND FOR THE THREE MONTHS
THEN ENDED
Sales to external customers.................... $200 $ 345 $230 $ -- $ 775
Operating income............................... 37(a) 16(b) (34)(c) 6(d) 25
Total assets................................... 917 1,277 765 707(e) 3,666
</Table>
- ---------------
(a) Includes restructuring and other charges of $1 million and $4 million in
2005 and 2004, respectively.
(b) Includes restructuring and other charges of $6 million and $19 million in
2005 and 2004, respectively.
(c) Includes restructuring and other charges (credits) of $(1) million and $47
million in 2005 and 2004, respectively.
(d) Includes pension-plan income and unallocated corporate expenses.
(e) Includes administrative-service operations and, for 2004, assets related to
pension plans (net).
10
NOTE 9. COMPREHENSIVE INCOME (LOSS)
Details of total comprehensive income (loss) for the three-month period
ended March 31, 2005, and 2004, were as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2005 2004
(In millions) ------ ------
Net income.................................................. $ 22 $ --
Additional minimum pension liability, net of tax of $43
million................................................... (72) --
Net currency translation loss............................... (21) (11)
Other comprehensive income (loss)........................... 1 --
---- ----
Total comprehensive loss.................................... $(70) $(11)
---- ----
</Table>
NOTE 10. LINES OF CREDIT AND GUARANTEES
The company, from time to time, utilizes various lines of credit, backed by
payment and performance guarantees, to finance operations of its foreign
subsidiaries. These lines of credit are mainly used as overdraft and
foreign-exchange settlement facilities and are in effect until cancelled by one
or both parties. Performance under the guarantees would be required if such
subsidiaries were sold, dissolved, or otherwise failed to discharge their
related obligations. At March 31, 2005, available lines of credit totaled $19
million against which no amounts were borrowed.
NOTE 11. PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS
The impact of pension plans on pretax income from continuing operations was
as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2005 2004
(In millions) ------ ------
Components of net periodic-benefit income (costs)
Service cost of benefits earned........................... $ (6) $ (8)
Interest cost on benefit obligations...................... (59) (59)
Expected return on plan assets............................ 87 88
Amortization of:
Unrecognized net losses................................ (9) (8)
Unrecognized prior-service cost........................ (1) (1)
---- ----
Total net periodic-benefit income........................... $ 12 $ 12
---- ----
</Table>
The company has post-retirement health-care and life-insurance plans that
cover certain of its salaried and hourly employees who retire in accordance with
the various provisions of such plans. Benefits may be subject to deductibles,
co-payments, and other limitations. The company reserves the right to change
such post-retirement plans, which are not funded.
Effective December 31, 2004, after the company's September 30, 2004,
measurement date, the company's two U.S. qualified pension plans were merged.
The merger does not affect participants' benefits or any other substantive
feature of the plans; however, it is expected to reduce plan administrative
costs. As a result of the merger of the pension plans, the company, at March 31,
2005, wrote off pension assets of $204 million and recorded corresponding
reductions of pension liabilities, equity (other comprehensive income), and
deferred-tax liabilities of $89 million, $72 million, and $43 million,
respectively. The merger has a negligible impact on pension income.
11
NOTE 12. CONTINGENCIES
LITIGATION
On November 3, 2003, the company reached an agreement to settle a civil,
class-action lawsuit filed in 1999 against Tenneco Inc. (Tenneco), Tenneco
Packaging Inc., and Packaging Corporation of America (PCA), Tenneco's former
containerboard business. The settlement resulted in the company recording a
pretax charge of $56 million, $35 million after tax, or $0.22 per share. This
charge included the establishment of a reserve for the estimated liability
associated with lawsuits filed by certain members of the original class-action
who opted out of the class and filed their own lawsuits. While it is not
possible to predict the outcome of any of these proceedings, the company's
management, based on its assessment of the facts and circumstances now known,
does not believe that any of these proceedings, individually or in the
aggregate, will have a materially adverse effect on the company's financial
position. However, actual outcomes may be different than expected and could have
a material effect on the company's results of operations or cash flow in a
particular period.
During the fourth quarter 2004, the company received a letter from a law
firm purporting to represent more than 1,400 potential plaintiffs who allegedly
experienced various personal injuries and property damages as a result of the
alleged release of chemical substances from a wood-treatment facility in
Lockhart, Alabama, during the period from 1953 to 1998. The letter was addressed
to the company and Louisiana Pacific Corporation, the current owner, to whom a
predecessor of the company (which operated the facility from 1978 to 1983) sold
the facility in 1983. As of the date of this report, legal proceedings in
respect of the potential plaintiffs' allegations have not commenced. The company
is not currently able to quantify its financial exposure, if any, relating to
the matters alleged in the letter, and the potential plaintiffs have not
specified the amount of compensation sought. The company intends to defend
vigorously any legal proceedings that may be commenced against it by the
potential plaintiffs.
On March 22, 2005, the company filed a declaratory judgment action in the
United States District Court, Eastern District of Michigan, related to a
"superfund" site in Filer City, Michigan. The final clean-up remedy for the site
was pursuant to a U.S. Environmental Protection Agency (EPA) Record of Decision
and Administrative Order in 1993, in which the EPA expressly determined that
conditions at the site posed no current or potentially unacceptable risk to
human health or the environment. The company contends that, because of the
federal EPA action in 1993, the Michigan Department of Environmental Quality is
precluded from demanding that the company undertake additional investigative and
remedial work at the site. While it is not possible to predict the outcome of
this proceeding, management, based on its assessment of the facts and
circumstances now known, does not believe that this proceeding will have a
material effect on the company's financial position.
The company is party to other legal proceedings arising from its
operations. Related reserves are recorded when it is probable that liabilities
exist and where reasonable estimates of such liabilities can be made. While it
is not possible to predict the outcome of any of these proceedings, the
company's management, based on its assessment of the facts and circumstances now
known, does not believe that any of these proceedings, individually or in the
aggregate, will have a material adverse effect on the company's financial
position. However, actual outcomes may be different than expected and could have
a material effect on the company's results of operations or cash flows in a
particular period.
ENVIRONMENTAL MATTERS
In early 2003, the company discovered that certain air emissions at one of
its California plants exceeded permitted levels. The company reported this
matter to the San Joaquin Valley Air Pollution Control District and, effective
November 2003, entered into a settlement agreement with that agency regarding
the appropriate actions to be taken to address the matter. Some of the actions
to be taken under the settlement agreement are subject to review by the EPA in
its consideration of a Title V air-permit application regarding the Visalia,
California, facility filed with the State of California on April 29, 2005. The
company does not expect (1) any further discussions with the State or the EPA
regarding the terms of the settlement agreement nor (2) any material adverse
effect on the company's financial position, results of operations, or cash flows
to stem from the settlement agreement.
12
The company is subject to a variety of environmental and pollution-control
laws and regulations in all jurisdictions in which it operates. Where it is
probable that related liabilities exist and where reasonable estimates of such
liabilities can be made, Pactiv establishes associated reserves. Estimated
liabilities are subject to change as additional information becomes available
regarding the magnitude of possible clean-up costs, the expense and
effectiveness of alternative clean-up methods, and other possible liabilities
associated with such situations. However, management believes that any
additional costs that may be incurred as more information becomes available will
not have a material adverse effect on the company's financial position, although
such costs could have a material effect on the company's results of operations
or cash flows in a particular period.
The above notes are an integral part of the foregoing financial statements.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BASIS OF PRESENTATION
Financial statements for all periods presented herein have been prepared on
a consolidated basis in accordance with generally accepted accounting
principles. All per-share information is presented on a diluted basis unless
otherwise noted.
The company has 4 reporting segments: Consumer Products, which relates
principally to the manufacture and sale of disposable plastic, molded-fiber,
pressed-paperboard, and aluminum packaging products, such as waste bags,
tableware, food-storage bags, and cookware, for consumer markets, such as
grocery stores, mass merchandisers, and discount chains; Foodservice/Food
Packaging, which relates primarily to the manufacture and sale of various
disposable plastic, molded-fiber, pressed-paperboard, and aluminum packaging
products, for foodservice and food-packaging markets, such as restaurants and
other institutional foodservice outlets, food processors, and grocery chains;
Protective and Flexible Packaging, which relates to the manufacture and sale of
plastic, paperboard, and molded-fiber products, for protective-packaging
markets, such as electronics, automotive, furniture, and e-commerce, and for
flexible-packaging applications in food, medical, pharmaceutical, chemical, and
hygienic markets; and Other, which relates to corporate and
administrative-service operations and retiree-benefit income and expense. The
accounting policies of the reporting segments are the same as those for Pactiv
as a whole. Where discrete financial information is not available by segment,
reasonable allocations of expenses and assets are used.
RESTRUCTURING AND OTHER
In the first quarter of 2004, the company announced a restructuring program
to rationalize excess manufacturing capacity and reduce overhead costs, and to
reinvest a portion of the related savings in strategic growth initiatives. The
principal strategic objectives of the program were to (1) rationalize
inefficient manufacturing assets, primarily certain molded-fiber facilities in
North America and the United Kingdom; (2) reduce overhead in several areas of
the business, thereby eliminating non-value-added activities; (3) increase the
number of new product launches over the next several years; and (4) increase the
value of the Hefty(R) brand. Implementation of the program resulted in the
elimination of approximately 1,000 salaried and hourly positions worldwide. In
this connection, the company recorded restructuring and other charges totaling
$70 million, $44 million after tax, or $0.28 per share, in the first quarter of
2004, and $93 million, $58 million after tax, or $0.38 per share, for full-year
2004, covering severance, asset write-offs, and other, which consists
principally of asset removal costs, including asbestos insulation abatement and
associated expenses at the company's closed molded-fiber facility in the United
Kingdom.
In the first quarter of 2005, the company recorded restructuring and other
charges of $6 million, $4 million after tax, or $0.02 per share, related to this
program. The company anticipates no further charges related to this program.
After-tax cash payments related to the restructuring and other actions
totaled $12 million for full-year 2004, and $5 million for the first quarter of
2005.
14
The following summarizes the impacts of restructuring and related actions.
<Table>
<Caption>
(IN MILLIONS) SEVERANCE ASSET WRITE-OFFS OTHER(1) TOTAL
- ------------- --------- ---------------- -------- -----
ACCRUED RESTRUCTURING BALANCE AT DECEMBER 31, 2004... $ 3 $-- $ 8 $11
Additions/adjustments to the account
Consumer Products.................................. -- -- 1 1
Foodservice/Food Packaging......................... -- 6 -- 6
Protective and Flexible Packaging.................. -- -- (1) (1)
Total additions.................................... -- 6 -- 6
Cash payments........................................ (2) -- (3) (5)
Charges against asset accounts....................... -- (6) -- (6)
--- --- --- ---
ACCRUED RESTRUCTURING BALANCE AT MARCH 31, 2005...... $ 1 $-- $ 5 $ 6
--- --- --- ---
RESTRUCTURING PROGRAM COSTS TO DATE
Consumer Products.................................. $ 4 $-- $ 1 $ 5
Foodservice/Food Packaging......................... 8 24 5 37
Protective and Flexible Packaging.................. 12 9 33 54
Other.............................................. -- -- 3 3
--- --- --- ---
Total.............................................. $24 $33 $42 $99
--- --- --- ---
</Table>
- ---------------
(1) Consists principally of asset removal costs, including asbestos insulation
abatement and associated expenses at the company's closed molded-fiber
facility in the United Kingdom.
THREE MONTHS ENDED MARCH 31, 2005, COMPARED WITH THREE MONTHS ENDED MARCH 31,
2004
RESULTS OF CONTINUING OPERATIONS
Significant Trends
The principal raw materials used to manufacture the company's products are
plastic resins, principally polystyrene and polyethylene. Average industry
prices for polystyrene were approximately 38% higher in the first quarter of
2005 than in the same period of 2004, driven principally by higher oil and
benzene prices, while average industry prices for polyethylene rose by
approximately 40% in the first quarter of 2005 compared with the same period in
2004, fueled by higher natural-gas prices. In response to increases in resin
costs, the company raised selling prices in many areas of its business during
2004 and in the first quarter of 2005, which offset the majority of the resin
cost increases.
Raw-material costs will likely continue to be a source of uncertainty for
the company. Resin vendors have announced additional price increases effective
in the second quarter of 2005; however, at this time it is not clear whether
these price increases will be successfully implemented as announced, or at all.
The company is also sensitive to other energy-related cost movements,
particularly with respect to transportation and logistics costs. Historically,
the company has been able to mitigate higher energy-related costs with
productivity improvements and other cost reductions; however, future significant
energy-related cost increases may not be fully offset with productivity
initiatives.
The company recently announced the launch of Hefty(R) Serve 'n Store(TM)
tableware, a major new product family in its Consumer tableware business, as
well as Hefty(R) Easy Grip(TM)cups. An additional new product launch is expected
to occur in 2005 in the Consumer segment. To support these growth initiatives
and the Hefty(R) UltraFlex(TM) waste-bag line, which was launched in the third
quarter of 2004, the company's investment in advertising and promotion (A&P) in
2005 is expected to increase significantly compared with 2004. The impact on
pretax profit of higher A&P spending, net of operating income on incremental
new-product sales, is expected to be approximately $45 million to $55 million in
2005.
15
Sales
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
-------------
2005 2004 CHANGE
(Dollars in millions) ----- ----- ------
Consumer Products........................................... $214 $200 7.0%
Foodservice/Food Packaging.................................. 368 345 6.7
Protective and Flexible Packaging........................... 250 230 8.7
---- ----
Total....................................................... $832 $775 7.4%
---- ----
</Table>
Total sales increased $57 million, or 7.4% versus the prior year. Excluding
the positive impact of foreign-currency exchange rates ($3 million) and
acquisitions ($3 million), sales grew by 6.6%.
Sales for the Consumer Products business increased $14 million, or 7.0%,
from the first quarter of 2004, reflecting volume growth of 2% and price
increases of 5%. Volume growth reflected strength in the base business,
particularly in waste bags. Rollout of Hefty(R) Serve 'n Store(TM) plates and
bowls, as well as Hefty(R) Easy Grip(TM) party cups, began late in the first
quarter and will ramp up in the second quarter. The investment to launch these
products, as well as for Hefty(R) Ultra Flex(TM), the company's strong and
stretchable waste bag, launched in the third quarter of 2004, will continue
throughout 2005.
Sales in the Foodservice/Food Packaging business increased $23 million, or
6.7%, from last year, as a 12% increase in price more than offset a 5% volume
decrease. The volume decline resulted from adjustments that typically occur when
pricing increases significantly, as well as the impact of discontinuing product
lines that were part of the restructuring program announced in the first quarter
of 2004.
Sales in the Protective and Flexible Packaging business increased $20
million, or 8.7%, compared with 2004, driven by the impact of pricing actions
(7%) and foreign-exchange gains (2%). Sales growth in North America primarily
reflected pricing gains, as well as volume increases in the construction and
industrial sectors, offset by weakness in the furniture market. Growth in Europe
reflected higher prices and flat volume, as modest gains in some businesses were
offset by declines in others.
Operating Income
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
------------
2005 2004 CHANGE
(Dollars in millions) ---- ---- ------
Consumer Products........................................... $20 $37 (45.9)%
Foodservice/Food Packaging.................................. 22 16 37.5
Protective and Flexible Packaging........................... 12 (34) 135.3
Other....................................................... 5 6 (16.7)
--- ---
Total....................................................... $59 $25 136.0%
--- ---
</Table>
Total operating income was $59 million in the first quarter of 2005, an
increase of $34 million from last year, mainly due to the recording of
restructuring and other charges of $70 million in 2004.
16
The following tables summarize by segment the impact of restructuring and
other charges in the first quarter of 2005 and 2004.
<Table>
<Caption>
OPERATING INCOME (LOSS) -- THREE MONTHS ENDED MARCH 31, 2005
------------------------------------------------------------
U.S. GAAP RESTRUCTURING AND EXCLUDING RESTRUCTURING
BASIS OTHER CHARGES AND OTHER CHARGES
(Dollars in millions) ---------- ------------------ ------------------------
Consumer Products............................ $20 $1 $21
Foodservice/Food Packaging................... 22 6 28
Protective and Flexible Packaging............ 12 (1) 11
Other........................................ 5 -- 5
--- -- ---
Total........................................ $59 $6 $65
--- -- ---
</Table>
<Table>
<Caption>
OPERATING INCOME (LOSS) -- THREE MONTHS ENDED MARCH 31, 2004
------------------------------------------------------------
U.S. GAAP RESTRUCTURING AND EXCLUDING RESTRUCTURING
BASIS OTHER CHARGES AND OTHER CHARGES
(Dollars in millions) ---------- ------------------ ------------------------
Consumer Products............................ $37 $ 4 $41
Foodservice/Food Packaging................... 16 19 35
Protective and Flexible Packaging............ (34) 47 13
Other........................................ 6 -- 6
--- --- ---
Total........................................ $25 $70 $95
--- --- ---
</Table>
The company's management believes that considering operating income
excluding the effect of restructuring and other charges is a meaningful
alternative way of evaluating the company's operating results. Restructuring and
other charges relate to actions that will have an ongoing effect on the company,
and to consider such charges as being only applicable to the periods in which
such charges are recognized could make the company's operating performance in
those periods more difficult to evaluate, particularly when compared with other
periods in which there were no such charges. The company's management uses
operating income excluding restructuring and other charges to evaluate operating
performance and, along with other factors, in determining management
compensation.
The following table summarizes operating income excluding restructuring and
other charges for the first quarter of 2005 and 2004.
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
------------
2005 2004 CHANGE
(Dollars in millions) ---- ---- ------
Consumer Products........................................... $21 $41 (48.8)%
Foodservice/Food Packaging.................................. 28 35 (20.0)
Protective and Flexible Packaging........................... 11 13 (15.4)
Other....................................................... 5 6 (16.7)
--- ---
Total....................................................... $65 $95 (31.6)%
--- ---
</Table>
Excluding restructuring and other charges in both years, operating income
was $65 million in 2005, a decrease of $30 million, or 31.6%, from 2004,
primarily as a result of higher raw-material costs and higher investment in
new-product launches, offset partially by higher pricing.
Excluding restructuring charges in both years for the Consumer Products
segment, operating income was $21 million compared with $41 million in 2004.
Approximately one-half of the operating-income decline was due to lower spread
(higher-raw material costs offset partially by higher pricing) and one-half was
due to higher product-launch investment.
17
Excluding restructuring charges in both years for the Foodservice/Food
Packaging segment, operating income was $28 million, a decline of 20% compared
with $35 million in 2004. The decrease reflected higher raw-material and
logistics costs, offset partially by pricing gains.
Excluding restructuring charges in both years for the Protective and
Flexible Packaging segment, operating income was $11 million compared with $13
million in 2004, as higher raw-material costs more than offset restructuring
benefits and price increases.
Net Income
The company recorded net income of $22 million, or $0.15 per share, in the
first quarter of 2005, compared with breakeven last year. First quarter 2005's
results included the impact of restructuring and other charges totaling $4
million, or $0.02 per share, while first quarter 2004's results included the
impact of restructuring and other charges totaling $44 million, or $0.28 per
share.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2005 2004 CHANGE
(In millions) --------- ------------ ------
Short-term debt, including current maturities of long-term
debt...................................................... $ 303 $ 472 $(169)
Long-term debt.............................................. 869 869 --
------ ------ -----
Total debt.................................................. 1,172 1,341 (169)
Minority interest........................................... 9 9 --
Shareholders' equity........................................ 1,019 1,083 (64)
------ ------ -----
Total capitalization........................................ $2,200 $2,433 $(233)
------ ------ -----
</Table>
The ratio of debt to total capitalization declined to 53.3% at March 31,
2005, from 55.1% at December 31, 2004. The decline in short-term debt was due to
the voluntary prepayment of the company's synthetic-lease facility of $169
million. Shareholder's equity declined $64 million primarily due to the
recording of $72 million of additional minimum pension liability and unfavorable
foreign-currency translation adjustments of $21 million, offset partially by $22
million of net income and the issuance of $6 million of common stock in
connection with the administration of employee-benefit plans.
Cash Flows
<Table>
<Caption>
THREE MONTHS
ENDED MARCH 31,
----------------
2005 2004
(In millions) ------- ------
Cash provided (used) by:
Operating activities...................................... $ 126 $ 83
Investing activities...................................... (137) (18)
Financing activities...................................... (154) (78)
</Table>
Cash provided by operating activities was $126 million in the first quarter
of 2005, up $43 million from last year, primarily reflecting an increase in the
company's asset-securitization program balance of $75 million, offset, in part,
by higher working capital related to new products and higher raw-material costs.
Amounts sold under the asset-securitization program were $85 million and $10
million at the end of the first quarter of 2005 and 2004, respectively.
Investing activities used $137 million and $18 million of cash in the first
quarter of 2005 and 2004, respectively. Expenditures for property, plant, and
equipment was $38 million in 2005 and $19 million in 2004. Additionally, in
2005, the company acquired Newspring Industrial Corp. (Newspring) for $98
million.
Cash used by financing activities was $154 million in the first quarter of
2005, primarily reflecting the voluntary prepayment of the company's
synthetic-lease facility ($169 million), offset partially by the issuance
18
of company stock ($4 million) in connection with the administration of
employee-benefits plans, and future amounts ($11 million) due in connection with
the acquisition of Newspring. Cash used by financing activities was $78 million
in 2004, primarily reflecting the repurchase of company stock ($83 million),
offset partially by the issuance of company stock ($6 million) in connection
with the administration of employee-benefit plans.
Capital Commitments
Commitments for authorized capital expenditures totaled approximately $131
million at March 31, 2005. It is anticipated that the majority of these
expenditures will be funded over the next 12 months from existing cash and
short-term investments and internally generated cash.
Contractual Obligations
There has been no material change in the company's aggregate contractual
obligations since the end of 2004.
Liquidity and Off-Balance-Sheet Financing
The company uses various sources of funding to manage liquidity. Sources of
liquidity include cash flow from operations and a 5-year, $600 million
revolving-credit facility, none of which was outstanding at March 31, 2005. The
company was in full compliance with financial and other covenants of its
revolving-credit agreement at the end of the first quarter of 2005. The company
also utilizes an off-balance sheet asset-securitization program. Amounts
securitized under this program were $85 million and $10 million at March 31,
2005, and 2004, respectively. Termination of the asset-securitization program
would require the company to increase its debt or decrease its cash balance by a
corresponding amount.
The company has pension plans that cover substantially all of its
employees. Cash-funding requirements for the U.S. plan is governed primarily by
the Employee Retirement Income Security Act (ERISA). Based on long-term
projections and regulations in existence at December 31, 2004, no cash
contributions to the U.S. plan will be required through at least 2014.
In December 2003, the company's board of directors approved a plan to
repurchase up to 5 million shares of its common stock using open-market or
privately-negotiated transactions, with the repurchased shares to be held in
treasury for general corporate purposes. In March 2004, the board of directors
approved a plan for the company to repurchase an additional 5 million shares of
its common stock under terms and conditions similar to those included in the
December 2003 plan. In August 2004, the board of directors approved a plan for
the company to repurchase a third tranche of 5 million shares of its common
stock under terms and conditions similar to those included in the December 2003
and March 2004 plans. Pursuant to these authorizations, the company acquired
945,600 shares in 2003, at an average cost of $23.11 per share, or a total
outlay of $22 million, and 10,148,500 shares in 2004, at an average cost of
$22.71 per share, or a total outlay of $230 million. No additional shares were
purchased in the first quarter of 2005.
In January 2005, the company voluntarily prepaid its $169 million
synthetic-lease facility.
Management believes that cash flow from operations, available cash
reserves, and the ability to obtain cash under the company's credit facilities
and asset-securitization program will be sufficient to meet current and future
liquidity and capital requirements.
CHANGES IN ACCOUNTING PRINCIPLES
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123(R), "Share-Based Payment." SFAS No. 123(R) requires that the fair
value of all share-based payments to employees, including grants of stock
options, be recognized in the financial statements, and supercedes APB Opinion
No. 25, which requires that the intrinsic-value method be used in determining
share-based employee-compensation expense. Under SFAS No. 123(R), share-based
employee-compensation expense is determined using the grant-date fair value of
the award and is recognized in the statement of income over the period that the
employee is required to provide related service (normally the vesting period).
The effective
19
date of SFAS No. 123(R) was recently delayed until the beginning of the first
annual period after June 30, 2005. The impact of adopting SFAS 123(R) cannot be
predicted at this time, since it depends on future levels of share-based
payments. However, if the company had adopted SFAS 123(R) in prior periods, the
impact of its adoption would have paralleled that shown under "Stock-Based
Compensation" in Note 2 to the financial statements. SFAS No. 123(R) also
requires that the benefits of tax deductions in excess of recognized
compensation costs be reported as cash flow from financing activities rather
than cash flow from operating activities. It is not possible to predict such
amounts, since they depend on the timing of employee stock-option exercises.
There were no amounts recognized for such excess tax-deduction benefits in the
first quarter of 2005 and 2004.
CRITICAL ACCOUNTING POLICIES
For a complete discussion of the company's critical accounting policies,
refer to Pactiv's most recent filing on Form 10-K.
20
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements included in this Quarterly Report on Form 10-Q,
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 often 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 some of the 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. The company's sales and margins can also be impacted by changes
in distribution channels, in customer mix (including customer
concentration and consolidation among customers), and in customer
merchandising strategies, including substitution of unbranded products
for branded products.
- 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 use of 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.
- 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
effect on net income and shareholders' equity. Similarly differences
between actual and assumed rates of return on pension assets affect the
company's net income and possibly shareholders' equity.
- Proposed changes in U.S. and/or foreign governmental regulations as they
relate to funding of retirement 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."
- Competition from products manufactured in countries that have lower labor
and other costs.
- The company's ability to integrate new businesses that it may acquire or
to dispose of businesses or business segments that it may wish to divest.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS
The company is exposed to market risks related to changes in
foreign-currency exchange rates, interest rates, and commodity prices. To manage
these risks, the company, from time to time, enters into various hedging
contracts in accordance with the company's related policies and procedures. The
company does not use hedging instruments for trading purposes and is not a party
to any transactions involving leveraged derivatives.
Foreign-Currency Exchange
The company uses foreign-currency forward contracts to hedge its exposure
to adverse changes in exchange rates, primarily related to the euro and the
British pound. Associated gains or losses offset gains or losses on underlying
assets or liabilities.
In managing foreign-currency risk, the company aggregates existing
positions and hedges residual exposures through third-party derivative
contracts. The following table summarizes foreign-currency forward contracts in
effect at March 31, 2005, all of which will mature in 2005.
<Table>
<Caption>
NOTIONAL AMOUNT NOTIONAL AMOUNT
IN FOREIGN CURRENCY EXCHANGE RATE IN U.S. DOLLARS
(In millions, except settlement rates) ------------------- ------------- ---------------
British pounds
-- Purchase................................... 2 1.878 4
-- Sell....................................... (19) 1.878 (36)
Euros
-- Purchase................................... 48 1.292 62
-- Sell....................................... (3) 1.292 (4)
U.S. dollars
-- Sell....................................... (25) 1.000 (25)
Czech korunas
-- Sell....................................... (16) .043 (1)
Hungarian forints
-- Sell....................................... (100) .005 (1)
</Table>
Interest Rates
At March 31, 2005 the company had public-debt securities of $1.174 billion
outstanding with fixed interest rates and original maturity dates ranging from 1
to 22 years. Should the company decide to redeem these securities prior to their
stated maturity, it would incur costs based on the fair value of the securities
at that time. In addition, the company had other fixed-rate debt totaling $1
million at March 31, 2005.
The following table provides information about Pactiv's financial
instruments that are sensitive to interest-rate risks.
<Table>
<Caption>
2005 2007 THEREAFTER TOTAL
(Dollars in millions) ---- ---- ---------- ------
Fixed-rate debt securities.................................. $299 $ 99 $776 $1,174
Average interest rate....................................... 7.2% 8.0% 8.1% 7.9%
Fair value.................................................. $305 $104 $965 $1,374
Fixed-rate debt............................................. $ 1 $ -- $ -- $ 1
Average interest rate....................................... 4.2% -- -- 4.2%
Fair value.................................................. $ 1 $ -- $ -- $ 1
</Table>
Prior to its spin-off from Tenneco Inc., the company entered into an
interest-rate swap to hedge its exposure to interest-rate movements. The company
settled this swap in November 1999, incurring a
22
$43 million loss, which is being recognized as additional interest expense over
the average life of the underlying debt.
In the first quarter of 2001, the company entered into interest-rate swap
agreements to covert 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. During the first quarter of 2002, the company exited these
swap agreements, and the related accumulated net loss was expensed over the life
of the underlying obligation. The remaining $1 million was expensed in the first
quarter of 2005 in conjunction with the company's prepayment of the
synthetic-lease facility.
ITEM 4. CONTROLS AND PROCEDURES
The company's disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information
required to be disclosed by the company in the reports it files or submits under
the Securities Exchange Act is recorded, processed, summarized, and reported
within the appropriate time periods. The company, under the supervision and with
the participation of its management, including the company's principal executive
officer and principal financial officer, has evaluated the effectiveness of its
disclosure controls and procedures, and the company and such officers have
concluded that such controls and procedures were adequate and effective as of
March 31, 2005.
There were no changes in internal controls over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended
March 31, 2005, that materially affected internal controls over financial
reporting.
23
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 3, 2003, the company reached an agreement to settle a civil,
class-action lawsuit filed in 1999 against Tenneco Inc. (Tenneco), Tenneco
Packaging Inc., and Packaging Corporation of America (PCA), Tenneco's former
containerboard business. The settlement resulted in the company recording a
pretax charge of $56 million, $35 million after tax, or $0.22 per share. This
charge included the establishment of a reserve for the estimated liability
associated with lawsuits filed by certain members of the original class-action
who opted out of the class and filed their own lawsuits. While it is not
possible to predict the outcome of any of these proceedings, the company's
management, based on its assessment of the facts and circumstances now known,
does not believe that any of these proceedings, individually or in the
aggregate, will have a materially adverse effect on the company's financial
position. However, actual outcomes may be different than expected and could have
a material effect on the company's results of operations or cash flow in a
particular period.
During the fourth quarter 2004, the company received a letter from a law
firm purporting to represent more than 1,400 potential plaintiffs who allegedly
experienced various personal injuries and property damages as a result of the
alleged release of chemical substances from a wood-treatment facility in
Lockhart, Alabama, during the period from 1953 to 1998. The letter was addressed
to the company and Louisiana Pacific Corporation, the current owner, to whom a
predecessor of the company (which operated the facility from 1978 to 1983) sold
the facility in 1983. As of the date of this report, legal proceedings in
respect of the potential plaintiffs' allegations have not commenced. The company
is not currently able to quantify its financial exposure, if any, relating to
the matters alleged in the letter, and the potential plaintiffs have not
specified the amount of compensation sought. The company intends to defend
vigorously any legal proceedings that may be commenced against it by the
potential plaintiffs.
On March 22, 2005, the company filed a declaratory judgment action in the
United States District Court, Eastern District of Michigan, related to a
"superfund" site in Filer City, Michigan. The final clean-up remedy for the site
was pursuant to a U.S. Environmental Protection Agency (EPA) Record of Decision
and Administrative Order in 1993, in which the EPA expressly determined that
conditions at the site posed no current or potentially unacceptable risk to
human health or the environment. The company contends that, because of the
federal EPA action in 1993, the Michigan Department of Environmental Quality is
precluded from demanding that the company undertake additional investigative and
remedial work at the site. While it is not possible to predict the outcome of
this proceeding, management, based on its assessment of the facts and
circumstances now known, does not believe that this proceeding will have a
material effect on the company's financial position
The company is party to other legal proceedings arising from its
operations. Related reserves are recorded when it is probable that liabilities
exist and where reasonable estimates of such liabilities can be made. While it
is not possible to predict the outcome of any of these proceedings, the
company's management, based on its assessment of the facts and circumstances now
known, does not believe that any of these proceedings, individually or in the
aggregate, will have a material adverse effect on the company's financial
position. However, actual outcomes may be different than expected and could have
a material effect on the company's results of operations or cash flows in a
particular period.
ENVIRONMENTAL MATTERS
In early 2003, the company discovered that certain air emissions at one of
its California plants exceeded permitted levels. The company reported this
matter to the San Joaquin Valley Air Pollution Control District and, effective
November 2003, entered into a settlement agreement with that agency regarding
the appropriate actions to be taken to address the matter. Some of the actions
to be taken under the settlement agreement are subject to review by the EPA in
its consideration of a Title V air-permit application regarding the Visalia,
California, facility filed with the State of California on April 29, 2005. The
company does not expect (1) any further discussions with the State or the EPA
regarding the terms of the settlement agreement nor (2) any
24
material adverse effect on the company's financial position, results of
operations, or cash flows to stem from the settlement agreement.
The company is subject to a variety of environmental and pollution-control
laws and regulations in all jurisdictions in which it operates. Where it is
probable that related liabilities exist and where reasonable estimates of such
liabilities can be made, Pactiv establishes associated reserves. Estimated
liabilities are subject to change as additional information becomes available
regarding the magnitude of possible clean-up costs, the expense and
effectiveness of alternative clean-up methods, and other possible liabilities
associated with such situations. However, management believes that any
additional costs that may be incurred as more information becomes available will
not have a material adverse effect on the company's financial position, although
such costs could have a material effect on the company's results of operations
or cash flows in a particular period.
ITEMS 2-5. NONE.
ITEM 6. EXHIBITS.
Exhibits designated with an asterisk in the following index are furnished;
all other exhibits are incorporated by reference.
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2 Distribution Agreement by and between Tenneco Inc. and the
registrant (incorporated herein by reference to Exhibit 2 to
Pactiv Corporation's Current Report on Form 8-K dated
November 11, 1999, File No. 1-15157).
3.1 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(a) 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(b) 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).
</Table>
25
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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).
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, Exhibit 4.3(f) to
1999, between the registrant and The Chase Manhattan Bank,
as Trustee (incorporated herein by Pactiv reference to
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).
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 Amended and restated Changes in Control Severance Benefit
Plan for Key Executives as of March 1, 2005 (incorporated
herein by reference to Exhibit 10.6 to Pactiv Corporation's
Annual Report on Form 10-K for the year ended December 31,
2004, File No. 1-15157) (superseding 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).
</Table>
26
<Table>
<Caption>
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).
10.15 Credit Agreement, dated as of May 27, 2004, among the
registrant, Bank of America, N.A., as Administrative Agent,
Bank One, as Syndication Agent and L/C Issuer, BNP Paribas,
Suntrust Bank, and Citicorp North America, Inc., as
Co-Documentation Agents, and the other financial
institutions party thereto (incorporated herein by reference
to Exhibit 10.15 to Pactiv Corporation's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004, File No.
1-15157).
10.16 Pactiv Corporation Defined Retirement Savings Plan
(incorporated herein by reference to Exhibit 10.16 to Pactiv
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2004, File No. 1-15157).
10.17 Form of Pactiv Corporation Non-Qualified Stock Option Award
Agreement (incorporated herein by reference to Exhibit 10.17
to Pactiv Corporation's Annual Report on Form 10-K for the
year ended December 31, 2004, File No. 1-15157).
10.18 Form of Pactiv Corporation Performance Share Award Agreement
(incorporated herein by reference to Exhibit 10.18 to Pactiv
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2004, File No. 1-15157).
10.19 Summary of Compensation Arrangements of Directors
(incorporated herein by reference to Exhibit 10.19 to Pactiv
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2004, File No. 1-15157).
10.20 Summary of Named Executive Officer Compensation Arrangements
(incorporated herein by reference to Exhibit 10.20 to Pactiv
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2004, File No. 1-15157).
11 None.
12 None.
</Table>
27
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
13 None
14 Code of Ethical Conduct for Financial Managers (posted to
company's website, www.pactiv.com) in accordance with Item
406(c)(2) of Regulation S-K.
15 None.
18 None.
19 None.
22 None.
23 None.
24 None.
*31.1 Rule 13a-14(a)/15d-14(a) Certification.
*31.2 Rule 13a-14(a)/15d-14(a) Certification.
**32.1 Section 1350 Certification.
**32.2 Section 1350 Certification.
</Table>
- ---------------
* Filed herewith
** Furnished herewith
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACTIV CORPORATION
By: /s/ ANDREW A. CAMPBELL
------------------------------------
Andrew A. Campbell
Senior Vice President and Chief
Financial Officer
(principal financial and accounting
officer)
Date: May 10, 2005
29