- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 JUNE 30, 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:149,767,294 as of July 31, 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.................... 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 26
Item 4. Controls and Procedures........................... 27
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................. 28
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds*.............................................. 29
Item 3. Defaults Upon Senior Securities*.................. 29
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 29
Item 5. Other Information*................................ 29
Item 6. Exhibits.......................................... 29
</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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2005 2004 2005 2004
(In millions, except share and per-share data) ------------ ------------ ------------ ------------
SALES...................................... $ 707 $ 654 $ 1,320 $ 1,229
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales, excluding depreciation and
amortization.......................... 525 453 988 848
Selling, general, and administrative..... 66 62 123 118
Depreciation and amortization............ 36 32 71 69
Other expense, net....................... 2 1 1 2
Restructuring and other.................. -- 11 6 75
------------ ------------ ------------ ------------
629 559 1,189 1,112
------------ ------------ ------------ ------------
OPERATING INCOME........................... 78 95 131 117
Interest expense, net of interest
capitalized........................... 20 21 40 42
Income tax expense....................... 21 27 33 28
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS.......... 37 47 58 47
INCOME (LOSS) OF DISCONTINUED OPERATIONS, NET
OF INCOME TAXES.......................... (79) 5 (78) 5
------------ ------------ ------------ ------------
NET INCOME (LOSS).......................... $ (42) $ 52 $ (20) $ 52
------------ ------------ ------------ ------------
Average number of shares of common stock
Outstanding
Basic.................................... 149,329,245 151,913,718 149,124,670 153,433,091
Diluted.................................. 151,208,648 154,445,044 151,175,843 155,910,941
EARNINGS (LOSS) PER SHARE
Basic
Continuing operations.................... $ 0.25 $ 0.31 $ 0.39 $ 0.31
Discontinued operations.................. (0.53) 0.03 (0.52) 0.03
------------ ------------ ------------ ------------
$ (0.28) $ 0.34 $ (0.13) $ 0.34
------------ ------------ ------------ ------------
Diluted
Continuing operations.................... $ 0.24 $ 0.30 $ 0.38 $ 0.30
Discontinued operations.................. (0.52) 0.03 (0.52) 0.03
------------ ------------ ------------ ------------
$ (0.28) $ 0.33 $ (0.14) $ 0.33
------------ ------------ ------------ ------------
</Table>
The accompanying notes to financial statements are an integral part of this
statement.
3
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<Table>
<Caption>
JUNE 30, 2005 DECEMBER 31, 2004
(In millions, except share data) ---------------- --------------------
ASSETS
Current assets
Cash and temporary cash investments....................... $ 71 $ 222
Accounts and notes receivable
Trade, less allowances of $6 and $6 at the respective
dates.................................................. 201 267
Other.................................................. 14 11
Inventories
Finished goods......................................... 199 167
Work in process........................................ 51 55
Raw materials.......................................... 70 55
Other materials and supplies........................... 40 34
Other..................................................... 43 42
Assets held for sale...................................... 652 735
------- ------
Total current assets...................................... 1,341 1,588
------- ------
Property, plant, and equipment, net......................... 1,154 1,137
------- ------
Other assets
Goodwill.................................................. 529 466
Intangible assets, net.................................... 270 270
Pension assets, net....................................... 10 214
Other..................................................... 65 66
------- ------
Total other assets........................................ 874 1,016
------- ------
TOTAL ASSETS................................................ $ 3,369 $3,741
------- ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt, including current maturities of long-term
debt................................................... $ 303 $ 471
Accounts payable.......................................... 175 182
Taxes accrued............................................. 26 3
Interest accrued.......................................... 9 9
Accrued promotions, rebates, and discounts................ 69 65
Accrued litigation........................................ 25 25
Accrued payroll and benefits.............................. 52 59
Other..................................................... 84 65
Liabilities related to held for sale...................... 179 145
------- ------
Total current liabilities................................. 922 1,024
------- ------
Long-term debt.............................................. 880 869
------- ------
Deferred income taxes....................................... 204 241
------- ------
Pension and postretirement benefits......................... 358 473
------- ------
Other....................................................... 33 42
------- ------
Minority interest........................................... 9 9
------- ------
Shareholders' equity
Common stock (149,592,768 and 148,711,815 shares issued
and outstanding, after deducting 22,190,408 and
23,071,362 shares held in treasury, at the respective
dates)................................................. 2 2
Premium on common stock and other capital surplus......... 1,156 1,141
Accumulated other comprehensive loss...................... (1,004) (889)
Retained earnings......................................... 809 829
------- ------
Total shareholders' equity................................ 963 1,083
------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 3,369 $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 SIX MONTHS ENDED JUNE 30 (In millions) ----- -----
OPERATING ACTIVITIES
Income from continuing operations........................... $ 58 $ 47
Adjustments to reconcile income from continuing operations
to cash provided by continuing operations:
Depreciation and amortization............................. 71 69
Deferred income taxes..................................... 17 20
Restructuring and other................................... -- 47
Pension income............................................ (27) (28)
Net working capital....................................... 23 (16)
Other..................................................... (6) 1
----- -----
Cash provided by operating activities -- continuing
operations................................................ 136 140
Cash provided by -- discontinued operations................. 28 29
----- -----
Cash provided by operating activities....................... 164 169
----- -----
INVESTING ACTIVITIES
Expenditures for property, plant, and
equipment -- continuing operations........................ (61) (29)
Acquisitions of businesses and assets....................... (98) --
Other continuing operations investing activities............ (1) --
----- -----
Cash used by investing activities -- continuing
operations................................................ (160) (29)
Expenditures for property, plant, and
equipment -- discontinued operations...................... (14) (8)
Other -- discontinued operations investing activities....... -- 1
----- -----
Cash used by investing activities........................... (174) (36)
----- -----
FINANCING ACTIVITIES
Issuance of common stock.................................... 11 19
Purchase of common stock.................................... -- (171)
Retirement of long-term debt................................ (169) --
Issuance of long-term debt.................................. 11 --
Other....................................................... 10 --
----- -----
Cash used by financing activities -- continuing
operations................................................ (137) (152)
Cash used by financing activities -- discontinued
operations................................................ -- (1)
----- -----
Cash used by financing activities........................... (137) (153)
----- -----
Effect of foreign-exchange rate changes on cash and
temporary cash investments................................ (4) (1)
----- -----
DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS............. (151) (21)
Cash and temporary cash investments, January 1.............. 222 140
----- -----
CASH AND TEMPORARY CASH INVESTMENTS, JUNE 30................ $ 71 $ 119
----- -----
</Table>
The accompanying notes to financial statements are an integral part of this
statement.
5
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The Consolidated Statement of Income for the three- and six-month period,
ended June 30, 2005, and 2004, the Condensed Consolidated Statement of Financial
Position at June 30, 2005, and the Condensed Consolidated Statement of Cash
Flows for the six-month period ended June 30, 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 (SEC). 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. Certain amounts in the financial statements and supporting footnote
disclosures have been reclassified to conform to the current year's
presentation.
On June 23, 2005, Pactiv entered into an agreement to sell most of its
worldwide protective- and flexible-packaging businesses to an affiliate of AEA
Investors LLC, an international private equity firm. This transaction, which is
subject to regulatory approval, is expected to be completed in the third quarter
of 2005. The company has reported the operating results of the affected
businesses as income (loss) from discontinued operations in the consolidated
statement of income for all periods presented. The assets and liabilities of the
businesses to be sold have been classified as assets held for sale and
liabilities related to assets held for sale, respectively, in the company's
consolidated statement of financial position.
These businesses historically were included in the company's Protective and
Flexible Packaging segment. In conjunction with the planned sale of these
entities, the company reviewed its reporting segments in accordance with the
requirements of Statement of Financial Accounting Standard (SFAS) No. 131,
"Disclosures About Segments of an Enterprise and Related Information." Based on
this review, the company has included the Protective and Flexible packaging
businesses that are not being sold in the Foodservice/Food Packaging segment,
which has been restated to reflect this change for all periods presented herein.
Following this divestiture, the company will have 3 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; 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.
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 (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
outlined in
6
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation."
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2005 2004 2005 2004
(In millions, except per-share data) -------- -------- ------- -------
Net income (loss).......................................... $ (42) $ 52 $ (20) $ 52
After-tax adjustment of stock-based compensation costs:
Intrinsic-value method................................... -- 1 1 1
Fair-value method........................................ (3) (3) (6) (6)
------ ------ ------ ------
Pro forma.................................................. $ (45) $ 50 $ (25) $ 47
------ ------ ------ ------
EARNINGS PER SHARE
Basic...................................................... $(0.28) $ 0.34 $(0.13) $ 0.34
Adjustment of stock-based compensation costs:
Intrinsic-value method................................... -- 0.01 0.01 0.01
Fair-value method........................................ (0.02) (0.02) (0.04) (0.04)
------ ------ ------ ------
Pro forma.................................................. $(0.30) $ 0.33 $(0.16) $ 0.31
------ ------ ------ ------
Diluted
As reported................................................ $(0.28) $ 0.33 $(0.14) $ 0.33
Adjustment of stock-based compensation costs:
Intrinsic-value method................................... -- 0.01 0.01 0.01
Fair-value method........................................ (0.02) (0.02) (0.04) (0.04)
------ ------ ------ ------
Pro forma.................................................. $(0.30) $ 0.32 $(0.17) $ 0.30
------ ------ ------ ------
</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 $95 million and $10 million at June 30, 2005,
and June 30, 2004, respectively. The remainder of the pool ($15 million at June
30, 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 receivable in the
statement of financial position, and the related proceeds are included in cash
provided by operating activities in the statement of cash flows. Discounts and
fees related to these sales were $1 million for the three and six month periods
ended June 30, 2005 and immaterial for the same periods in 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 Payments." 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 Accounting
Principles Board (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
grant-date fair value of awards and is recognized in the statement of income
over the period that employees are 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
7
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 in that they depend on the timing of employee stock-option exercises.
There were no amounts recognized for such excess tax-deduction benefits in the
first six months 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 850 salaried and hourly positions worldwide. In
this connection, the company recorded restructuring and other charges totaling
$11 million, $7 million after tax, or $0.05 per share, in the second quarter of
2004 and $75 million $47 million after tax, or $0.30 per share for the six
months ending June 30, 2004, covering severance, asset write-offs, and other,
which consisted 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. No further charges related to this program are anticipated.
After-tax cash payments related to restructuring and other actions totaled
$4 million for the first six months of 2005 and $12 million for full-year 2004.
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 MARCH 31, 2005...... $ 1 $-- $ 5 $ 6
Additions/adjustments to the account
Consumer Products.................................. 1 -- -- 1
Foodservice/Food Packaging......................... (1) 1 (1) (1)
--- --- --- ---
Total additions.................................... -- 1 (1) --
Cash payments........................................ -- -- (2) (2)
Charges against asset accounts....................... -- (1) -- (1)
--- --- --- ---
ACCRUED RESTRUCTURING BALANCE AT JUNE 30, 2005....... $ 1 $-- $ 2 $ 3
--- --- --- ---
RESTRUCTURING PROGRAM COSTS TO DATE
Consumer Products.................................. $ 5 $-- $ 1 $ 6
Foodservice/Food Packaging......................... 10 31 35 76
Other.............................................. -- -- 3 3
--- --- --- ---
Total.............................................. $15 $31 $39 $85
--- --- --- ---
</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.
NOTE 4. DISCONTINUED OPERATIONS
On June 23, 2005, Pactiv entered into an agreement to sell most of its
worldwide protective- and flexible-packaging businesses to an affiliate of AEA
Investors LLC, an international private equity firm, for
8
$530 million in cash and the assumption of certain liabilities. The sale price
is subject to adjustment based on final working-capital levels. This
transaction, which is subject to regulatory approval, is expected to be
completed in the third quarter of 2005. The company has reported the results of
the affected businesses as discontinued operations and restated financial
statements for all periods presented herein to reflect this change.
Included in income (loss) of discontinued operations is an allocation of
interest expense for all periods presented. Amounts allocated were based on the
percent of net assets of discontinued operations to the company's total net
assets plus consolidated debt. Amounts allocated were $4 million for the three
months periods ended June 30, 2005 and 2004 and $8 million for the six month
periods ended June 30, 2005, and June 30, 2004. The debt of the discontinued
operations will not be assumed by the buyer, and the company does not have any
debt required to be repaid as result of the sale.
As a result of entering into the sale agreement, the company performed an
impairment test as prescribed by SFAS No. 142, "Goodwill and Other Intangible
Assets," and determined that goodwill for certain of the business to be sold was
impaired, resulting in the recording of a goodwill impairment charge of $36
million, net of tax. Additionally, the company recorded an estimated net loss on
the sale of the businesses to be sold of $31 million, which included sales
commissions, income taxes, and pursuant to the sale agreement, a $15 million
contribution to certain U.K. pension plans. Both the goodwill imparment charge
and the loss on the sale of the businesses were included in the income (loss) of
discontinued operations for the quarter ended June 30, 2005.
Income (loss) of discontinued operations for the three-month period ended
June 30, 2005, also included U.S. federal income-tax expense of approximately
$14 million on unremitted earnings of foreign subsidiaries being sold.
The assets and liabilities of the businesses to be sold have been
classified as assets held for sale and liabilities related to assets held for
sale in the accompanying consolidated statement of financial position for all
periods presented. Previously, these businesses were included in the Protective
and Flexible Packaging segment, while the remaining portion of this segment has
been included in the Foodservice/Food Packaging segment for all periods
presented. Pursuant to the sale agreement, the company has agreed to provide the
buyer of the businesses with certain transition services for one year.
Operating results for discontinued operations were as follows:
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ---------------
2005 2004 2005 2004
(In millions) ------ ------ ------ ------
Sales....................................................... $224 $204 $443 $404
Income (loss) before tax.................................... (55) 8 (53) 7
</Table>
Assets held for sale and liabilities related to assets held for sale were
as follows:
<Table>
<Caption>
JUNE 30, 2005 DECEMBER 31, 2004
(In millions) ---------------- --------------------
Accounts receivable, net.................................... $125 $127
Inventories................................................. 92 95
Other current assets........................................ 6 4
Property, plant, and equipment, net......................... 287 308
Other long-term assets...................................... 142 201
---- ----
$652 $735
---- ----
Accounts payable............................................ 68 64
Accrued expenses and other.................................. 73 41
Long-term liabilities....................................... 38 40
---- ----
$179 $145
---- ----
</Table>
9
NOTE 5. 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 June 30, 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 6. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying value of goodwill for the six months ended June 30,
2005, are shown in the following table.
<Table>
<Caption>
TOTAL
CONSUMER FOODSERVICE/ CONTINUING
PRODUCTS FOOD PACKAGING OPERATIONS
(In millions) -------- -------------- ----------
Balance, December 31, 2004................................ $136 $330 $466
Goodwill additions........................................ -- 63 63
---- ---- ----
Balance, June 30, 2005.................................... $136 $393 $529
---- ---- ----
</Table>
Details of intangible assets are shown in the following table.
<Table>
<Caption>
JUNE 30, 2005 DECEMBER 31, 2004
----------------------------- -----------------------------
ACCUMULATED ACCUMULATED
CARRYING VALUE AMORTIZATION CARRYING VALUE AMORTIZATION
(In millions) -------------- ------------ -------------- ------------
Intangible assets subject to amortization
Patents................................. $ 85 $ 50 $ 85 $48
Other................................... 159 54 153 50
---- ---- ---- ---
244 104 238 98
Intangible assets not subject to
amortization (primarily trademarks)..... 130 -- 130 --
---- ---- ---- ---
Total intangible assets................... $374 $104 $368 $98
---- ---- ---- ---
</Table>
Amortization expense for intangible assets was $7 million for the six
months ended June 30, 2005, and $7 million for the six months ended June 30,
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 7. PROPERTY, PLANT, AND EQUIPMENT, NET
<Table>
<Caption>
JUNE 30, 2005 DECEMBER 31, 2004
(In millions) ---------------- --------------------
Original cost
Land, buildings, and improvements......................... $ 634 $ 621
Machinery and equipment................................... 1,433 1,377
Other, including construction in progress................. 103 79
------- ------
2,170 2,077
Less accumulated depreciation and amortization.............. (1,016) (940)
------- ------
Total....................................................... $ 1,154 $1,137
------- ------
</Table>
10
NOTE 8. COMMON STOCK
EARNINGS PER SHARE
Income from continuing operations per share of common stock outstanding was
computed as follows:
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2005 2004 2005 2004
(In millions, except share and per-share data) ------------ ------------ ------------ ------------
BASIC EARNINGS PER SHARE
Income from continuing operations...... $ 37 $ 47 $ 58 $ 47
------------ ------------ ------------ ------------
Average number of shares of common stock
outstanding......................... 149,329,245 151,913,718 149,124,670 153,433,091
------------ ------------ ------------ ------------
Basic earnings per average share of common
stock............................... $ 0.25 $ 0.31 $ 0.39 $ 0.31
------------ ------------ ------------ ------------
DILUTED EARNINGS PER SHARE
Income from continuing operations...... $ 37 $ 47 $ 58 $ 47
------------ ------------ ------------ ------------
Average number of shares of common stock
outstanding......................... 149,329,245 151,913,718 149,124,670 153,433,091
Dilutive securities
Stock options....................... 1,575,086 2,104,329 1,693,774 2,021,791
Performance shares.................. 304,317 426,997 357,399 456,059
------------ ------------ ------------ ------------
Average number of shares of common stock
outstanding including dilutive
securities.......................... 151,208,648 154,445,044 151,175,843 155,910,941
------------ ------------ ------------ ------------
Diluted earnings per average share of common
stock............................... $ 0.24 $ 0.30 $ 0.38 $ 0.30
------------ ------------ ------------ ------------
</Table>
In the second quarter of 2004, the company acquired 3,794,336 shares of its
common stock for $88 million, or at an average price of $23.22 per share. For
the six-month period ended June 30, 2004, the company acquired 7,625,136 shares
of its common stock for $171 million, or at an average price of $22.48 per
share. The company did not repurchase any of its common stock in the first six
months of 2005.
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 9. SEGMENT INFORMATION
The company has 3 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;
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.
11
On June 23, 2005, Pactiv entered into an agreement to sell most of its
worldwide protective- and flexible-packaging businesses to an affiliate of AEA
Investors LLC, an international private equity firm. This transaction, which is
subject to regulatory approval, is expected to be completed in the third quarter
of 2005. The company has reported the operating results of the affected
businesses as income (loss) from discontinued operations in the consolidated
statement of income for all periods presented. The assets and liabilities of the
businesses to be sold have been classified as assets held for sale and
liabilities related to assets held for sale, respectively, in the company's
consolidated statement of financial position.
These businesses historically were included in the company's Protective and
Flexible Packaging segment. In conjunction with the planned sale of these
entities, the company reviewed its reporting segments in accordance with
requirements of SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." Based on this review, the company has included the
Protective and Flexible Packaging businesses that are not being sold (primarily
a European food packaging unit) in the Foodservice/Food Packaging segment, which
has been restated to reflect this change for all periods presented herein.
The following table sets forth certain segment information.
<Table>
<Caption>
FOODSERVICE/
CONSUMER FOOD
PRODUCTS PACKAGING OTHER TOTAL
(In millions) -------- ------------ ------ ------
FOR THE THREE MONTHS ENDED JUNE 30, 2005
Sales to external customers..................... $ 251 $ 456 $ -- $ 707
Operating income................................ 30(c) 46(a) 2(b) 78
FOR THE THREE MONTHS ENDED JUNE 30, 2004
Sales to external customers..................... $ 237 $ 417 $ -- $ 654
Operating income................................ 48 45(a) 2(b) 95
AT JUNE 30, 2005, AND FOR THE SIX MONTHS THEN
ENDED
Sales to external customers..................... $ 465 $ 855 $ -- $1,320
Operating income................................ 50(c) 74(a) 7(b) 131
Total assets.................................... 1,168 1,185 1,016(d) 3,369
AT JUNE 30, 2004, AND FOR THE SIX MONTHS THEN
ENDED
Sales to external customers..................... $ 437 $ 792 $ -- $1,229
Operating income................................ 85(c) 24(a) 8(b) 117
Total assets.................................... 931 1,293 1,401(d) 3,625
</Table>
- ---------------
(a) Includes restructuring and other charges of ($1) million and $10 million in
the three months ended June 30, 2005 and 2004, respectively, and $5 million
and $70 million in the six months ended June 30, 2005 and 2004,
respectively.
(b) Includes pension-plan income and unallocated corporate expenses and, in the
three and six months ended June 30, 2004, restructuring and other charges
of $1 million.
(c) Includes restructuring and other charges of $1 million in the three months
ended June 30, 2005, and $1 million and $4 million in the six months ended
June 30, 2005 and 2004, respectively.
(d) Includes assets of discontinued operations held for sale of $652 million
and $693 million for the period ended June 30, 2005 and 2004, respectively.
Includes administrative-service operations, assets held for sale, which
were previously reported in the Protective and Flexible Packaging segment,
and, for 2004, assets related to pension plans (net).
12
NOTE 10. COMPREHENSIVE INCOME (LOSS)
Details of total comprehensive income (loss) for the three and six-months
ended June 30, 2005, and 2004, were as follows:
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- ------------
2005 2004 2005 2004
(In millions) ----- ----- ----- ----
Net income (loss)........................................... $(42) $52 $ (20) $ 52
Other comprehensive income
Additional minimum pension liability, net of tax of $43
million................................................ -- -- (72) --
Net currency-translation losses........................... (23) (7) (44) (18)
Other comprehensive income................................ -- -- 1 --
---- --- ----- ----
Total comprehensive income (loss)........................... $(65) $45 $(135) $ 34
---- --- ----- ----
</Table>
NOTE 11. 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 June 30, 2005, available lines of credit totaled $17
million, against which no amounts were borrowed.
NOTE 12. 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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- -------------
2005 2004 2005 2004
(In millions) ----- ----- ----- -----
Components of net periodic-benefit income (expense)
Service cost of benefits earned........................... $ (4) $ (6) $ (9) $ (12)
Interest cost on benefit obligations...................... (58) (57) (116) (115)
Expected return on plan assets............................ 86 86 172 173
Amortization of:
Unrecognized net losses................................ (9) (8) (18) (16)
Unrecognized prior-service cost........................ (1) (1) (2) (2)
---- ---- ----- -----
Total net periodic-benefit income........................... $ 14 $ 14 $ 27 $ 28
---- ---- ----- -----
</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 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, 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.
13
NOTE 13. 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, Tenneco's former container
board 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. The company has settled substantially
all of such suits for $16 million, net of tax, to be paid in the third quarter.
This amount was equal to the established reserves.
During the fourth quarter of 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 of the
facility, to whom a predecessor of the company, who operated it 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.
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
14
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.
NOTE 14. SUBSEQUENT EVENTS
In August 2005, Pactiv's board of directors increased the company's share
repurchase authorization by 6.1 million shares of Pactiv stock. This new
authorization, coupled with the remainder of a prior authorization, brings the
total shares that can be repurchased to 10 million.
The above notes are an integral part of the foregoing financial statements.
15
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.
On June 23, 2005, Pactiv entered into an agreement to sell most of its
worldwide protective- and flexible-packaging businesses to an affiliate of AEA
Investors LLC, an international private equity firm. This transaction, which is
subject to regulatory approval, is expected to be completed in the third quarter
of 2005. The company has reported the operating results of the affected
businesses as income (loss) from discontinued operations in the consolidated
statement of income for all periods presented. The assets and liabilities of the
businesses to be sold have been classified as assets held for sale and
liabilities related to assets held for sale, respectively, in the company's
consolidated statement of financial position.
These businesses historically were included in the company's Protective and
Flexible Packaging segment. In conjunction with the planned sale of these units,
the company reviewed its reporting segments in accordance with SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." Based on
this review, the company has included the Protective and Flexible Packaging
businesses that are not being sold in the Foodservice/Food Packaging segment,
which has been restated to reflect this change for all periods presented herein.
Following the divestiture, the company will have 3 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; 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 850 salaried and hourly positions worldwide. In
this connection, the company recorded restructuring and other charges totaling
$11 million, $7 million after tax, or $0.05 per share, in the second quarter of
2004 and $75 million $47 million after tax, or $0.30 per share for the six
months ending June 30, 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. No further charges related to this program are anticipated.
After-tax cash payments related to restructuring and other actions totaled
$4 million for the first six months of 2005 and $12 million for full-year 2004.
16
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 MARCH 31, 2005...... $ 1 $-- $ 5 $ 6
Additions/adjustments to the account
Foodservice/Food Packaging......................... 1 -- -- 1
Corporate.......................................... (1) 1 (1) (1)
--- --- --- ---
Total additions/adjustments........................ -- 1 (1) --
Cash payments........................................ -- -- (2) (2)
Charges against asset accounts....................... -- (1) -- (1)
--- --- --- ---
ACCRUED RESTRUCTURING BALANCE AT JUNE 30, 2005....... $ 1 $-- $ 2 $ 3
--- --- --- ---
RESTRUCTURING PROGRAM COSTS TO DATE
Consumer Products.................................. $ 5 $-- $ 1 $ 6
Foodservice/Food Packaging......................... 10 31 35 76
Corporate.......................................... -- -- 3 3
--- --- --- ---
Total.............................................. $15 $31 $39 $85
--- --- --- ---
</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 JUNE 30, 2005, COMPARED WITH THREE MONTHS ENDED JUNE 30, 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 26% higher in the second 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 27% in the second 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 resin cost increases.
Average industry prices for polystyrene in the second quarter were even
with the first quarter of 2005, while average industry prices for polyethylene
fell by approximately 8% in the second quarter compared with the previous
quarter. However, resin costs will likely continue to be a source of uncertainty
for the company, as oil prices remain near their historic highs. In response to
the high oil prices, resin vendors have announced price increases effective in
the third 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.
In the first quarter of 2005, the company 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, Hefty(R) E-Z Ovenware Casserole Pans(TM), occurred early in the
third quarter of 2005 in the Consumer products 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 advertising and promotion (A&P) costs
are expected to increase significantly in 2005 compared with 2004. The impact on
pretax profit
17
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.
Sales
<Table>
<Caption>
THREE MONTHS
ENDED
JUNE 30,
-------------
2005 2004 CHANGE
(Dollars in millions) ----- ----- ------
Consumer Products........................................... $251 $237 5.9%
Foodservice/Food Packaging.................................. 456 417 9.4
---- ----
Total....................................................... $707 $654 8.1%
---- ----
</Table>
Total sales increased $53 million, or 8.1% versus the prior year. Excluding
the positive impact of foreign-currency exchange rates ($3 million) and
acquisitions ($16 million), sales grew by 5.2%, driven mainly by pricing
actions.
Sales for the Consumer Products business increased $14 million, or 5.9%,
from the second quarter of 2004, reflecting an 11.4% price increases in, offset
partially by a volume decline of 5.5%. Strong sales of new products and a volume
increase in food bags and the addition of new products were more than offset by
declines in waste bags, primarily related to a one-time inventory adjustment by
a large customer, and foam tableware, reflecting soft market conditions and some
price-related share loss.
Sales in the Foodservice/Food Packaging business increased $39 million, or
9.4%, from last year, reflecting price gains of 6.8% and volume growth of 2.6%.
The volume growth was driven by sales of Newspring Industrial Corp. (Newspring),
which was acquired in March of 2005, offset, in part, by a slight decline in
base volume reflecting a sluggish market.
Operating Income
<Table>
<Caption>
THREE MONTHS
ENDED
JUNE 30,
------------
2005 2004 CHANGE
(Dollars in millions) ---- ---- ------
Consumer Products........................................... $30 $48 (37.5)%
Foodservice/Food Packaging.................................. 46 45 2.2
Other....................................................... 2 2 --
--- ---
Total....................................................... $78 $95 (17.9)%
--- ---
</Table>
Total operating income was $78 million in the second quarter of 2005, a
decrease of $17 million, or 17.9%, from last year. Included in 2004's
second-quarter results were restructuring and other charges of $11 million.
The following table summarizes by segment the impact of restructuring and
other charges on operation of income in the second quarter of 2004.
<Table>
<Caption>
OPERATING INCOME (LOSS)
----------------------------------------------------------
U.S. GAAP RESTRUCTURING AND EXCLUDING RESTRUCTURING
BASIS OTHER CHARGES AND OTHER CHARGES
(Dollars in millions) ------------ ----------------- -----------------------
Consumer Products.............................. $48 $-- $ 48
Foodservice/Food Packaging..................... 45 10 55
Other.......................................... 2 1 3
--- --- ----
Total.......................................... $95 $11 $106
--- --- ----
</Table>
The company's management believes that measuring operating income excluding
the effect of restructuring and other charges is a meaningful alternative way of
evaluating the company's operating results.
18
Restructuring and other charges relate to actions that will have an ongoing
effect on the company's results, and to consider such charges as being only
applicable to the periods in which they are recognized could make operating
performance in such periods more difficult to evaluate, particularly when
compared with other periods in which no such charges were recorded. 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 shows operating income excluding restructuring and
other charges for the second quarter of 2005 and 2004.
<Table>
<Caption>
THREE MONTHS
ENDED
JUNE 30,
-------------
2005 2004 CHANGE
(Dollars in millions) ----- ----- ------
Consumer Products........................................... $30 $ 48 (37.5)%
Foodservice/Food Packaging.................................. 46 55 (16.4)
Other....................................................... 2 3 (33.3)
--- ----
Total....................................................... $78 $106 (26.4)%
--- ----
</Table>
Excluding restructuring and other charges in 2004, operating income was $78
million, a decrease of $28 million, or 26.4%, from 2004, as higher product
launch and costs, lower volume, and higher manufacturing and logistics expenses,
more than offset favorable spread between selling prices and raw material costs.
Operating income in the Consumer Products segment was $30 million, compared
with $48 million in 2004, a decline of $18 million, or 37.5%, primarily
reflecting higher product-launch costs. Favorable spread partially offset lower
volume and higher manufacturing and logistics costs.
Excluding restructuring and other charges, operating income for the
Foodservice/Food Packaging segment operating income was $46 million, a decline
of $9 million, or 16.4%, from 2004, as higher raw-material, manufacturing, and
logistics costs more than offset the benefit of higher pricing and volume.
Spread improved from the first quarter of 2005 and with the prior year.
Income from Continuing Operations
The company recorded income from continuing operations of $37 million, or
$0.24 per share, in the second quarter of 2005, compared with $47 million, or
$0.30 per share, last year. Results in the second quarter of 2004 included
restructuring and other charges totaling $7 million after tax, or $0.05 per
share.
DISCONTINUED OPERATIONS
Income(loss) from Discontinued Operations
On June 23, 2005, Pactiv entered into an agreement to sell most of its
worldwide protective- and flexible-packaging businesses to an affiliate of AEA
Investors LLC, an international private equity firm, for $530 million in cash
and the assumption of certain liabilities. The sale price is subject to
adjustment based on final working-capital levels. This transaction, which is
subject to regulatory approval, is expected to be completed in the third quarter
of 2005. The company has reported the results of the affected businesses as
discontinued operations and restated financial statements for all periods
presented herein to reflect this change.
Included in income (loss) of discontinued operations is an allocation of
interest expense for all periods presented. Amounts allocated were based on the
percent of net assets of discontinued operations to the company's total net
assets plus consolidated debt. Amounts allocated were $4 million for the three
months periods ended June 30, 2005 and 2004 and $8 million for the six month
periods ended June 30, 2005, and June 30, 2004. The debt of the discontinued
operations will not be assumed by the buyer, and the company does not have any
debt required to be repaid as result of the sale.
19
As a result of entering into the sale agreement, the company performed an
impairment test as prescribed by SFAS No. 142, "Goodwill and Other Intangible
Assets," and determined that goodwill for certain of the business to be sold was
impaired, resulting in the recording of a goodwill impairment charge of $36
million, net of tax. Additionally, the company recorded an estimated net loss on
the sale of the businesses to be sold of $31 million, which included sales
commissions, income taxes, and pursuant to the sale agreement, a $15 million
contribution to certain U.K. pension plans. Both the goodwill impairment charge
and the loss on the sale of the businesses were included in the income (loss) of
discontinued operations for the quarter ended June 30, 2005.
Income (loss) of discontinued operations for the three-month period ended
June 30, 2005, also included U.S. federal income-tax expense of approximately
$14 million on unremitted earnings of foreign subsidiaries being sold.
The assets and liabilities of the businesses to be sold have been
classified as assets held for sale and liabilities related to assets held for
sale in the accompanying consolidated statement of financial position for all
periods presented. Previously, these businesses were included in the Protective
and Flexible Packaging segment, while the remaining portion of this segment has
been included in the Foodservice/Food Packaging segment for all periods
presented. Pursuant to the sale agreement, the company has agreed to provide the
buyer of the businesses with certain transition services for one year.
Operating results for discontinued operations were as follows:
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- -----------
2005 2004 2005 2004
(In millions) ----- ----- ---- ----
Sales....................................................... $224 $204 $443 $404
Income (loss) before tax.................................... (55) 8 (53) 7
</Table>
Assets held for sale and liabilities related to assets held for sale are as
follows:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2005 2004
(In millions) ----------- ---------------
Accounts receivable, net.................................... $125 $127
Inventories................................................. 92 95
Other current assets........................................ 6 4
Property, plant, and equipment, net......................... 287 308
Other long-term assets...................................... 142 201
---- ----
$652 $735
---- ----
Accounts payable............................................ 68 64
Accrued expenses and other.................................. 73 41
Long-term liabilities....................................... 38 40
---- ----
$179 $145
---- ----
</Table>
SIX MONTHS ENDED JUNE 30, 2005, COMPARED WITH SIX MONTHS ENDED JUNE 30, 2004
Sales
<Table>
<Caption>
SIX MONTHS
ENDED
JUNE 30,
---------------
2005 2004 CHANGE
(Dollars in millions) ------ ------ ------
Consumer Products........................................... $ 465 $ 437 6.4%
Foodservice/Food Packaging.................................. 855 792 8.0
------ ------
Total....................................................... $1,320 $1,229 7.4%
------ ------
</Table>
Total sales increased $91 million, or 7.4% versus the prior year. Excluding
the positive impact of foreign-currency exchange rates ($3 million) and
acquisitions ($19 million), sales grew by 5.6%.
20
Sales for the Consumer Products business increased $28 million, or 6.4%,
from 2004, as price increases of 8.3% were offset partially by a 1.9% volume
decline. Strong sales of new products and a volume increase in food were more
than offset by declines in waste bags, primarily related to a one-time inventory
adjustment by a large customer, and foam tableware, reflecting soft market
conditions and some price-related share loss. 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 ramped up in the second quarter. The promotional
investment to launch these products, as well as for Hefty(R) Ultra Flex(TM)
waste bags, launched in the third quarter of 2004, negatively impacted sales in
the first half of 2005, and will continue throughout 2005.
Sales in the Foodservice/Food Packaging business increased $63 million, or
8.0%, from last year, driven by an 8.8% and favorable foreign exchange of 0.4%,
offset partially, reduced by a 1.2% volume decline. Prices were increased in the
second half of 2004 and the first quarter of 2005 in response to higher
raw-material costs. The volume decline reflected from adjustments that typically
occur when selling prices increase significantly and sluggish market demand in
the second quarter of 2005, offset somewhat by sale of Newspring.
Operating Income
<Table>
<Caption>
SIX MONTHS
ENDED
JUNE 30,
-----------
2005 2004 CHANGE
(Dollars in millions) ---- ---- ------
Consumer Products........................................... $ 50 $ 85 (41.2)%
Foodservice/Food Packaging.................................. 74 24 208.3
Other....................................................... 7 8 (12.5)
---- ----
Total....................................................... $131 $117 12.0%
---- ----
</Table>
Total operating income was $131 million , an increase of $14 million from
last year. Results for 2005 and 2004 included restructuring and other charges of
$6 million and $75 million, respectively.
The following tables summarize by segment the impact of restructuring and
other charges in the first six months of 2005 and 2004.
<Table>
<Caption>
OPERATING INCOME (LOSS) -- SIX MONTHS ENDED JUNE 30, 2005
----------------------------------------------------------
U.S. GAAP RESTRUCTURING AND EXCLUDING RESTRUCTURING
BASIS OTHER CHARGES AND OTHER CHARGES
(Dollars in millions) ------------ ----------------- -----------------------
Consumer Products.............................. $ 50 $ 1 $ 51
Foodservice/Food Packaging..................... 74 5 79
Other.......................................... 7 -- 7
---- ----- ----
Total.......................................... $131 $ 6 $137
---- ----- ----
</Table>
<Table>
<Caption>
OPERATING INCOME (LOSS) -- SIX MONTHS ENDED JUNE 30, 2004
----------------------------------------------------------
U.S. GAAP RESTRUCTURING AND EXCLUDING RESTRUCTURING
BASIS OTHER CHARGES AND OTHER CHARGES
(Dollars in millions) ------------ ----------------- -----------------------
Consumer Products.............................. $ 85 $ 4 $ 89
Foodservice/Food Packaging..................... 24 70 94
Other.......................................... 8 1 9
---- --- ----
Total.......................................... $117 $75 $192
---- --- ----
</Table>
The company's management believes that measuring 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 have an ongoing effect on the company's results, and to
consider such charges as being only applicable to the periods in which they are
recognized could make operating performance in such periods more difficult to
evaluate, particularly when compared with other periods in which no such charges
were recorded. 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.
21
The following table summarizes operating income excluding restructuring and
other charges for the six-month period ending June 30, 2005 and 2004.
<Table>
<Caption>
SIX MONTHS
ENDED
JUNE 30,
-----------
2005 2004 CHANGE
(Dollars in millions) ---- ---- ------
Consumer Products........................................... $ 51 $ 89 (42.7)%
Foodservice/Food Packaging.................................. 79 94 (16.0)
Other....................................................... 7 9 (22.2)
---- ----
Total....................................................... $137 $192 (28.6)%
---- ----
</Table>
Excluding restructuring and other charges, operating income was $137
million, a decrease of $55 million, or 28.6%, from 2004, primarily as a result
of higher raw-material costs and higher investment in new-product launches,
offset partially by higher prices.
Excluding restructuring charges, Consumer Products, operating income was
$51 million compared with $89 million in 2004. The decrease was driven primarily
by higher product-launch and raw-material costs, offset partially by favorable
pricing.
Excluding restructuring charges, , operating income for the
Foodservice/Food Packaging segment was $79 million, compared with $94 million in
2004, a decline of 16.0%. The decrease reflected higher raw-material and
logistics costs, as well as lower volume, offset partially by price gains.
Excluding restructuring charges, operating income for the other segment was
$7 million, compared with $9 million in 2004, a decline of 22.2%, driven mainly
by lower pension-related income.
Income from Continuing Operations
The company recorded income from continuing operations of $58 million, or
$0.38 per share, for the six months ended June 30, 2005, compared with $47
million, or $0.30 per share, last year. Results for 2005 and 2004 included the
impact of restructuring and other charges totaling $4 million ($0.02 per share)
and $47 million, or ($0.30 per share), respectively.
DISCONTINUED OPERATIONS
Income (Loss) from Discontinued Operations
In the second quarter of 2005, the company entered into an agreement to
sell most of its protective-flexible- packaging businesses, and classified the
operating results of these businesses as discontinued operations. For the
six-months ended June 30, 2005, the company recorded a loss from discontinued
operations, net of income taxes, of $78 million, or $0.52 per share, compared
with income of $5 million, or $0.03 per share, for the same period of 2004. See
the earlier discussion under "Three Months Ended June 30, 2005, compared with
Three Months Ended June 30, 2004" for further details.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2005 2004 CHANGE
(In millions) -------- ------------ ------
Short-term debt, including current maturities of long-term
debt...................................................... $ 303 $ 471 $(168)
Long-term debt.............................................. 880 869 11
------ ------ -----
Total debt.................................................. 1,183 1,340 (157)
Minority interest........................................... 9 9 --
Shareholders' equity........................................ 963 1,083 (120)
------ ------ -----
Total capitalization........................................ $2,155 $2,432 $(277)
------ ------ -----
</Table>
22
The ratio of debt to total capitalization declined to 54.9% at June 30,
2005, from 55.1% at December 31, 2004. The $168 million decline in short-term
debt from December 31, 2004, was due to the first-quarter 2005 repayment of
company's synthetic-lease facility balance of $169 million. Long term debt
increased $11 million from year end 2004, reflecting borrowings against the
company's revolving credit facility. Shareholders' equity declined $120 million,
from December 31, 2004, primarily due to the recording of additional minimum
pension liability of $72 million, unfavorable foreign-currency translation
adjustments of $44 million, and $20 million of net losses, offset partially by
the issuance of $16 million of common stock in connection with the
administration of employee-benefit plans.
In August 2005, the board of directors increased the company's common stock
repurchase authorization by 6 million shares. This new authorization, coupled
with the remainder of the prior authorization, brings the total shares that can
be repurchased to 10 million.
Cash Flows
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-----------------
2005 2004
(In millions) ------- -------
Cash provided (used) by:
Operating activities...................................... $ 164 $ 169
Investing activities...................................... (174) (36)
Financing activities...................................... (137) (153)
</Table>
Cash provided by operating activities was $164 million in 2005, primarily
reflecting an increase of $85 million in the company's asset-securitization
program balance, offset, in part, by higher working. Receivables sold under the
asset-securitization program totaled $95 million at June 30, 2005, and $10
million at December 31, 2004.
Investing activities used $174 million and $36 million of cash in 2005 and
2004, respectively. Expenditures for property, plant, and equipment were $75
million in 2005 and $37 million in 2004. Additionally, in 2005, the company
acquired Newspring for $98 million.
Cash used by financing activities was $137 million in 2005, primarily
reflecting repayment of the company's synthetic-lease facility balance ($169
million), offset partially by the issuance of company stock ($11 million) in
connection with the administration of employee-benefits plans, an increase in
revolving-credit borrowings ($11 million), and future amounts ($11 million) due
in connection with the acquisition of Newspring. Cash used by financing
activities was $153 million in 2004, primarily reflecting the repurchase of
company stock ($171 million), offset partially by the issuance of company stock
($19 million) in connection with the administration of employee-benefit plans.
Capital Commitments
Commitments for authorized capital expenditures totaled approximately $123
million at June 30, 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, $11 million of which was outstanding at June 30,
2005. The company was in full compliance with financial and other covenants of
its revolving-credit
23
agreement at the end of the second quarter of 2005. The company also utilizes an
off-balance sheet asset-securitization program. Amounts securitized under this
program were $95 million at June 30, 2005, and $10 million at December 31, 2004.
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. Based on long-term projections and
regulations in existence at December 31, 2004, cash contributions to the U.S.
plan will not be required through at least 2014.
In December 2003, the board of directors approved a plan for the company 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 to repurchase an additional 5 million shares of Pactiv 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 to repurchase a
third tranche of 5 million shares of company 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,
for $22 million, or at an average cost of $23.11 per share, and 10,148,500
shares in 2004 for $230 million, or at an average cost of $22.71 per share. No
additional shares were purchased during the first six months of 2005.
In January 2005, the company prepaid the $169 million due under its
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 Payments." 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 grant-date fair value of
awards and is recognized in the statement of income over the period that
employees are 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 in that 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 in that they depend on the timing of employee stock-option exercises. No
amounts were recognized for such excess tax-deduction benefits in the first six
months 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.
24
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; customer mix (including customer concentration
and consolidation among customers); and 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 in 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 (1) assumptions regarding the long-term rate of return on
pension assets and other factors, (2) the discount rate, and (3) the
level of amortization of actuarial gains and losses, could have a
material effect on net income and 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,
including the redeployment of proceeds from any divestiture.
25
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 June 30, 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
-- Sell....................................... (21) 1.807 (37)
Euros
-- Purchase................................... 55 1.207 66
-- Sell....................................... (2) 1.207 (2)
U.S. dollars
-- Sell....................................... (29) 1.000 (29)
Czech korunas
-- Sell....................................... (8) 0.040 --
Polish zloty
-- Purchase................................... 5 0.299 1
Hungarian forints
-- Sell....................................... (102) 0.005 (1)
</Table>
Interest Rates
At June 30, 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 has a variable interest rate line of
credit against which it had borrowed $11 million at June 30, 2005.
26
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.................................................. $303 $104 $979 $1,386
Floating-rate debt.......................................... $ 11 $ -- $ -- $ 11
Average interest rate....................................... 6.25% -- -- 6.25%
Fair value.................................................. $ 11 $ -- $ -- $ 11
Floating-rate debt.......................................... $ 1 $ -- $ -- $ 1
Average interest rate....................................... 3.1% -- -- 3.1%
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 $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 facility 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, with the remaining $1 million expensed in the
first quarter of 2005 in conjunction with the 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, has concluded that such controls and
procedures were adequate and effective as of June 30, 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
June 30, 2005, that materially affected, or is reasonably likely to have a
material affect, the company's internal controls over financial reporting.
27
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. The company has settled substantially all of such suits for
$16 million, net of tax to be paid in the third quarter. This amount was equal
to the established reserve.
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 of the
facility, to whom a predecessor of the company, who operated it 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
28
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.
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 2-3. NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company's 2005 annual meeting of shareholders was held on May 20, 2005,
for the purpose of (1) electing directors, (2) ratifying the appointment of
Ernst & Young LLP as independent public accountants for the year 2005, and (3)
acting upon such other matters as might be properly brought before the meeting
or any adjournment or postponement thereof.
At the meeting, the following persons were elected to the company's board
of directors, each for a term to expire at the company's 2006 annual meeting of
shareholders:
<Table>
<Caption>
NUMBER OF VOTES
-----------------------
NOMINEE FOR WITHHELD
- ------- ----------- ---------
Larry D. Brady.............................................. 135,826,119 1,754,289
K. Dane Brooksher........................................... 135,923,070 1,657,338
Robert J. Darnall........................................... 131,902,219 5,678,189
Mary R. (Nina) Henderson.................................... 135,933,173 1,647,235
Roger B. Porter............................................. 135,642,848 1,937,560
Richard L. Wambold.......................................... 134,484,886 3,095,522
Norman H. Wesley............................................ 135,712,735 1,867,673
</Table>
The shareholders ratified the appointment of Ernst & Young LLP as the
company's independent auditors for the year 2005, with 135,917,460 votes cast
for ratification, 529,231 votes cast against ratification, and 1,133,717
abstentions.
ITEM 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).
</Table>
29
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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).
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, 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).
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).
</Table>
30
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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).
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).
</Table>
31
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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).
10.21 Stock Purchase agreement dated as of June 23, 2005, among
Pactiv Corporation and certain of its affiliates, as
sellers, and PFP Holding II Corporation, as purchaser.
11 None.
12 None.
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
32
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: August 15, 2005
33