- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
<Table>
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
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: 141,149,790 as of April 30, 2006. (See Notes to Financial
Statements.)
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).................. 3
Consolidated Statement of Income....................... 3
Condensed Consolidated Statement of Financial 4
Position..............................................
Condensed Consolidated Statement of Cash Flows......... 5
Notes to Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations....................
Item 3. Quantitative and Qualitative Disclosures About 20
Market Risk............................................
Item 4. Controls and Procedures........................... 21
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings*................................ 22
Item 1A. Risk Factors..................................... 22
Item 2. Unregistered Sales of Equity Securities and Use of 22
Proceeds...............................................
Item 3. Defaults Upon Senior Securities*.................. 22
Item 4. Submission of Matters to a Vote of Security 22
Holders*...............................................
Item 5. Other Information*................................ 22
Item 6. Exhibits.......................................... 22
</Table>
- ---------------
* No response to this item is included herein either because it is inapplicable
or there is nothing to report.
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENT OF INCOME
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2006 2005
(In millions, except share and per-share data) ------------- -------------
SALES....................................................... $ 680 $ 613
COST AND EXPENSES
Cost of sales, excluding depreciation and amortization.... 482 463
Selling, general and administrative....................... 66 57
Depreciation and amortization............................. 35 35
Other expense............................................. 1 --
Restructuring and other................................... (1) 6
------------ ------------
583 561
------------ ------------
OPERATING INCOME............................................ 97 52
Interest income........................................... (2) --
Interest expense, net of interest capitalized............. 18 20
Income-tax expense........................................ 30 12
Share of income of joint ventures......................... -- (1)
------------ ------------
INCOME FROM CONTINUING OPERATIONS........................... 51 21
Income from discontinued operations, net of income taxes.... -- 1
------------ ------------
NET INCOME.................................................. $ 51 $ 22
------------ ------------
EARNINGS PER SHARE
Average number of shares of common stock outstanding
Basic..................................................... 142,097,788 148,904,379
Diluted................................................... 143,733,696 151,118,207
Basic earnings per share of common stock
Continuing operations..................................... $ 0.36 $ 0.14
Discontinued operations................................... -- 0.01
------------ ------------
Net income per basic share of common stock................ $ 0.36 $ 0.15
------------ ------------
Diluted earnings per share of common stock
Continuing operations..................................... $ 0.35 $ 0.14
Discontinued operations................................... -- 0.01
------------ ------------
Net income per diluted share of common stock.............. $ 0.35 $ 0.15
------------ ------------
</Table>
The accompanying notes to financial statements are an integral part of this
statement.
3
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<Table>
<Caption>
MARCH 31, 2006 DECEMBER 31, 2005
(In millions, except share data) ----------------- --------------------
ASSETS
Current assets
Cash and temporary cash investments....................... $ 165 $ 172
------- -------
Accounts and notes receivable
Trade, less allowances of $7 and $8 at the respective
dates................................................ 289 299
Other................................................... 10 20
------- -------
Total accounts and notes receivable..................... 299 319
------- -------
Inventories
Finished goods.......................................... 176 148
Work in process......................................... 50 41
Raw materials........................................... 64 61
Other materials and supplies............................ 40 39
------- -------
Total inventories....................................... 330 289
------- -------
Other..................................................... 39 40
------- -------
Total current assets...................................... 833 820
------- -------
Property, plant, and equipment, net......................... 1,133 1,141
------- -------
Other assets
Goodwill.................................................. 517 527
Intangible assets, net.................................... 258 260
Other..................................................... 69 72
------- -------
Total other assets........................................ 844 859
------- -------
TOTAL ASSETS................................................ $ 2,810 $ 2,820
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt, including current maturities of long-term
debt.................................................... $ 3 $ 3
Accounts payable.......................................... 160 179
Taxes accrued............................................. 42 32
Interest accrued.......................................... 25 8
Accrued promotions, rebates, and discounts................ 65 70
Accrued payroll and benefits.............................. 45 69
Other..................................................... 70 75
Liabilities from discontinued operations.................. 20 20
------- -------
Total current liabilities................................. 430 456
------- -------
Long-term debt.............................................. 869 869
------- -------
Deferred income taxes....................................... 101 104
------- -------
Pension and postretirement benefits......................... 516 525
------- -------
Other....................................................... 40 37
------- -------
Minority interest........................................... 9 9
------- -------
Shareholders' equity
Common stock (141,064,168 and 142,362,441 shares issued
and outstanding, after deducting 30,719,009 and
29,420,736 shares held in treasury, at the respective
dates).................................................. 2 2
Premium on common stock and other capital surplus......... 997 1,021
Accumulated other comprehensive income (loss)
Currency translation adjustment......................... 32 34
Additional minimum pension liability.................... (1,120) (1,120)
Retained earnings......................................... 934 883
------- -------
Total shareholders' equity................................ 845 820
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 2,810 $ 2,820
------- -------
</Table>
The accompanying notes to financial statements are an integral part of this
statement.
4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
2006 2005
FOR THE THREE MONTHS ENDED MARCH 31 (In millions) ---- -----
OPERATING ACTIVITIES
Net income.................................................. $ 51 $ 22
Less income from discontinued operations.................... -- (1)
---- -----
Income from continuing operations........................... 51 21
Adjustments to reconcile income from continuing operations
to cash provided by continuing operations:
Depreciation and amortization............................. 35 35
Deferred income taxes..................................... 4 3
Restructuring and other................................... (1) 2
Pension income............................................ (11) (13)
Noncash compensation expense.............................. 3 --
Net working capital....................................... (38) 72
Other..................................................... 2 (3)
---- -----
Cash provided by operating activities -- continuing
operations................................................ 45 117
Cash provided (used) by operating activities -- discontinued
operations................................................ (3) 9
---- -----
CASH PROVIDED BY OPERATING ACTIVITIES....................... 42 126
---- -----
INVESTING ACTIVITIES
Expenditures for property, plant, and
equipment -- continuing operations........................ (17) (31)
Net proceeds from sale of assets............................ 1 --
Acquisitions of businesses and assets....................... -- (98)
Other continuing operations investing activities............ 3 (1)
---- -----
Cash used by investing activities -- continuing
operations................................................ (13) (130)
Expenditures for property, plant, and
equipment -- discontinued operations...................... -- (7)
---- -----
CASH USED BY INVESTING ACTIVITIES........................... (13) (137)
---- -----
FINANCING ACTIVITIES
Issuance of common stock.................................... 12 4
Purchase of common stock.................................... (46) --
Retirement of long-term debt................................ -- (169)
Other....................................................... (3) 11
---- -----
CASH USED BY FINANCING ACTIVITIES -- CONTINUING
OPERATIONS................................................ (37) (154)
Effect of foreign-exchange rate changes on cash and
temporary cash investments................................ 1 (2)
---- -----
DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS............. (7) (167)
Cash and temporary cash investments, January 1.............. 172 222
---- -----
CASH AND TEMPORARY CASH INVESTMENTS, MARCH 31............... $165 $ 55
---- -----
</Table>
The accompanying notes to financial statements are an integral part of this
statement.
5
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The Consolidated Statement of Income for the three-month period ended March 31,
2006, and 2005, the Condensed Consolidated Statement of Financial Position at
March 31, 2006, and the Condensed Consolidated Statement of Cash Flows for the
three-month period ended March 31, 2006, and 2005, are unaudited. In our
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 Pactiv's Form 10-K for the year
ended December 31, 2005, which may be found at www.pactiv.com, under the
Investor Relations link in the subsection entitled "SEC Filings", or a free copy
may be obtained by contacting Investor Relations at (866) 456-5439. Certain
reclassifications have been made to the prior-year financial information to
conform with current-year presentation.
On October 12, 2005, we completed the sale of most of our protective- and
flexible-packaging businesses to Pregis Corporation for $523 million, and
recorded an estimated loss on the sale of $50 million, net of tax. These
businesses historically were included in our Protective and Flexible Packaging
segment. In conjunction with the sale of these entities, we reviewed our
reporting segments in concert with requirements of the Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an
Enterprise and Related Information." As a result, we elected to include the
retained portions of the protective-and flexible-packaging businesses in our
Foodservice/Food Packaging segment.
We have three reporting segments:
- Consumer Products manufactures and sells disposable plastic, foam,
molded-fiber, pressed-paperboard, and aluminum packaging products to
consumer markets, such as grocery stores, mass merchandisers, and
discount chains. Products include waste bags, food-storage bags, and
disposable tableware and cookware. We sell many of our consumer products
under well-known trademarks, such as Hefty(R).
- Foodservice/Food Packaging manufactures and sells foam, clear plastic,
aluminum, pressed-paperboard, and molded-fiber packaging to customers in
the food distribution channel who prepare and process food for
consumption. Customers include foodservice distributors, restaurants and
other institutional foodservice outlets, food processors, and grocery
chains.
- Other 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/liabilities are used.
NOTE 2. SUMMARY OF ACCOUNTING POLICIES
For a complete discussion of our accounting policies, refer to Pactiv's most
recent filing on Form 10-K.
STOCK-BASED COMPENSATION
Effective January 1, 2006, we adopted the fair value method of accounting for
employee stock-compensation costs required by SFAS No. 123(R), "Share-Based
Payments." Prior to that date, we used the intrinsic value method in accordance
with requirements of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." The following table shows the
effects on net income and earnings per share had the fair value method been used
in determining stock-based compensation costs in the first quarter of 2005.
6
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31, 2005
(In millions, except per-share data) ------------------
Net Income
As reported................................................. $ 22
After-tax adjustment of stock-based compensation costs
Intrinsic-value method.................................... 1
Fair-value method......................................... (3)
------
Pro forma................................................... $ 20
------
EARNINGS PER SHARE
Basic
As reported................................................. $ 0.15
After-tax adjustment of stock-based compensation costs
Intrinsic-value method.................................... --
Fair-value method......................................... (0.02)
------
Pro forma................................................... $ 0.13
------
Diluted
As reported................................................. $ 0.15
After-tax adjustment of stock-based compensation costs
Intrinsic-value method.................................... --
Fair-value method......................................... (0.02)
------
Pro forma................................................... $ 0.13
------
</Table>
On November 28, 2005, our board of directors decided to replace stock options
with performance shares under our long-term compensation program. As part of
this change, the board accelerated the vesting of all unvested stock options as
of that date. Accelerating the vesting of options will give rise to a reduction
in compensation costs going forward, compared with what would be the case if we
had commenced the expensing of these options in 2006.
ACCOUNTS AND NOTES RECEIVABLE
On a recurring basis, we sell an undivided interest in a pool of trade
receivables meeting certain criteria to a third party as an alternative to debt
financing. 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. The related proceeds are included in cash provided by
operating activities in the Statement of Cash Flows. No receivables were sold at
March 31, 2006, while amounts totaling $85 million were sold at March 31, 2005.
Discounts and fees related to these sales were immaterial in the first quarter
of 2006 and 2005. These expenses are 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, our debt would increase, or
our 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), which requires that the fair value of all share-based payments to
employees, including stock options, be recognized in financial statements. SFAS
No. 123(R) superceded APB Opinion No. 25, which required that the intrinsic
value method be used in determining compensation expense for share-based
payments to employees. Under SFAS No. 123(R), employee-compensation expense is
based on the grant-date fair value of awards, and is recognized in the Statement
of Income over the period that recipients of awards are required to provide
related service (normally the vesting period).
7
We adopted SFAS No. 123(R) using the modified prospective method as of January
1, 2006. The impact if SFAS No. 123(R) had been adopted in prior periods is
shown under the "Stock Based Compensation" section of this note. The cumulative
effect of adopting SFAS No. 123(R) in the first quarter of 2006 was immaterial.
We elected to use the simplified method in calculating our additional paid-in
capital pool upon adoption of SFAS No. 123(R) as described in FASB Staff
Position No. FAS 123(R) -- 3, "Transition Election Related to Accounting for the
Tax Effects of Share-Based Payment Awards" (the "simplified method").
SFAS No. 123(R) also requires that tax deductions in excess of recognized
compensation costs be reported as cash flow from financing activities, rather
than as cash flow from operating activities. There was no reduction in taxes
paid in the first quarter of 2006 or 2005 from such "excess" tax-deduction
benefits.
NOTE 3. RESTRUCTURING AND OTHER
In the first quarter of 2004, we announced a restructuring program to reduce
manufacturing capacity and overhead costs and to reinvest a portion of the
related savings in strategic growth initiatives. The total cost of the
restructuring program was $84 million; $54 million after tax, or $0.35 per
share, covering severance, asset write-offs, and other, which consisted
principally of asset-removal costs. The majority of the program was executed in
the second quarter of 2004.
In the first quarter of 2005, we recorded restructuring and other charges of $6
million, $4 million after tax, or $0.02 per share, related to this program. In
the first quarter of 2006, we recorded a restructuring and other credit of $1
million. No further charges related to this program are anticipated.
After-tax cash payments related to the restructuring and other actions were
immaterial in the first quarter of 2006 and $4 million for the first quarter of
2005.
The following summarizes the impacts of restructuring and related actions.
<Table>
<Caption>
SEVERANCE ASSET WRITE-OFFS OTHER TOTAL
(In millions) --------- ---------------- ----- -----
ACCRUED RESTRUCTURING BALANCE AT DECEMBER 31, 2005...... $-- $-- $ 2 $ 2
Additions/adjustments to the account
Foodservice/Food Packaging............................ -- -- (1) (1)
--- --- --- ---
ACCRUED RESTRUCTURING BALANCE AT MARCH 31, 2006......... $-- $-- $ 1 $ 1
--- --- --- ---
CUMULATIVE RESTRUCTURING COSTS AT MARCH 31, 2006
Consumer Products..................................... $ 5 $-- $-- $ 5
Foodservice/Food Packaging............................ 10 31 35 76
Other................................................. -- -- 3 3
--- --- --- ---
TOTAL................................................... $15 $31 $38 $84
--- --- --- ---
</Table>
NOTE 4. DISCONTINUED OPERATIONS
For the quarter ended March 31, 2005, sales from discontinued operations (see
Note 1) were $219 million and income from discontinued operations before taxes
was $1 million. No income from discontinued operations was recorded in the first
quarter of 2006.
At March 31, 2006, and December 31, 2005, liabilities related to discontinued
operations totaled $20 million and included obligations related to income taxes,
certain royalty payments, and the costs of closing a facility in Europe.
NOTE 5. ACQUISITIONS
On March 15, 2005, we acquired Newspring Industrial Corp. (Newspring) for $98
million. Newspring is a leading manufacturer of thin wall, injection-molded
polypropylene products for use in the take-out, delicatessen, and foodservice
markets. We paid $87 million for the stock of Newspring and recorded liabilities
of
8
$11 million for anticipated future payments related to non-compete agreements
and other items. Appraisals of the fair-market value of the assets acquired were
finalized in the first quarter of 2006. This resulted in goodwill being reduced
by $9 million and other intangibles and property, plant, and equipment being
increased by $2 million and $7 million, respectively.
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying value of goodwill for the three months ended March 31,
2006, are shown in the following table.
<Table>
<Caption>
CONSUMER FOODSERVICE/
PRODUCTS FOOD PACKAGING TOTAL
(In millions) -------- -------------- -----
Balance, December 31, 2005.................................. $136 $391 $527
Goodwill adjustment -- prior acquisition.................... -- (9) (9)
Foreign-currency translation adjustment..................... -- (1) (1)
---- ---- ----
Balance, March 31, 2006..................................... $136 $381 $517
---- ---- ----
</Table>
Intangible assets are summarized in the following table.
<Table>
<Caption>
MARCH 31, 2006 DECEMBER 31, 2005
----------------------------- -----------------------------
ACCUMULATED ACCUMULATED
CARRYING VALUE AMORTIZATION CARRYING VALUE AMORTIZATION
(In millions) -------------- ------------ -------------- ------------
Intangible assets subject to amortization
Patents.................................. $ 85 $ 54 $ 85 $ 52
Other.................................... 159 61 157 59
---- ---- ---- ----
244 115 242 111
Intangible assets not subject to
amortization (primarily trademarks)...... 129 -- 129 --
---- ---- ---- ----
Total intangible assets.................... $373 $115 $371 $111
---- ---- ---- ----
</Table>
Amortization expense for intangible assets was $4 million for the three months
ended March 31, 2006, and March 31, 2005. Amortization expense is estimated to
total $16 million, $14 million, $14 million, $13 million, and $12 million for
years 2006, 2007, 2008, 2009, and 2010, respectively.
NOTE 7. PROPERTY, PLANT, AND EQUIPMENT, NET
<Table>
<Caption>
MARCH 31, 2006 DECEMBER 31, 2005
(In millions) ----------------- --------------------
Original cost
Land, buildings, and improvements......................... $ 637 $ 636
Machinery and equipment................................... 1,464 1,454
Other, including construction in progress................. 95 94
------- -------
2,196 2,184
Less accumulated depreciation and amortization.............. (1,063) (1,043)
------- -------
Net property, plant, and equipment.......................... $ 1,133 $ 1,141
------- -------
</Table>
Capitalized interest was $1 million for the three months ended March 31, 2006,
and March 31, 2005.
9
NOTE 8. COMMON STOCK
EARNINGS PER SHARE
Earnings from continuing operations per share of common stock outstanding was
computed as follows:
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2006 2005
(In millions, except share and per-share data) ------------- -------------
BASIC EARNINGS PER SHARE
Income from continuing operations......................... $ 51 $ 21
------------ ------------
Average number of shares of common stock outstanding...... 142,097,788 148,904,379
------------ ------------
Basic earnings from continuing operations per share....... $ 0.36 $ 0.14
------------ ------------
DILUTED EARNINGS PER SHARE
Income from continuing operations......................... $ 51 $ 21
------------ ------------
Average number of shares of common stock outstanding...... 142,097,788 148,904,379
Effect of dilutive securities
Stock options.......................................... 1,356,005 1,816,129
Performance shares..................................... 279,903 397,699
------------ ------------
Average number of shares of common stock outstanding
including dilutive shares.............................. 143,733,696 151,118,207
------------ ------------
Diluted earnings from continuing operations per share..... $ 0.35 $ 0.14
------------ ------------
</Table>
In the first quarter of 2006, we acquired 2,001,900 shares of our common stock
at an average price of $23.08 per share, or a total outlay of $46 million. In
the first quarter of 2005, we did not repurchase any of our common stock.
GRANTOR TRUST
In November 1999, we established a grantor trust and reserved 3,200,000 shares
of Pactiv common stock for the trust. These shares were issued to the trust in
January 2000. This so-called "rabbi trust" is designed to assure the payment of
deferred-compensation and supplemental pension benefits. These shares are not
considered outstanding for purposes of financial reporting.
NOTE 9. SEGMENT INFORMATION
We report the results of our segments in accordance with SFAS No. 131. We have
three segments: Consumer Products, Foodservice/Food Packaging, and Other. See
Note 1 for additional details.
The following table sets forth certain segment information.
<Table>
<Caption>
CONSUMER FOODSERVICE/FOOD
PRODUCTS PACKAGING OTHER TOTAL
(In millions) -------- ---------------- ------ ------
FOR THE THREE MONTHS ENDED MARCH 31, 2006
Sales to external customers.................. 242 438 -- $ 680
Operating income............................. 42 57(a) (2)(b) 97
Total assets................................. 1,003 1,511 296 2,810
FOR THE THREE MONTHS ENDED MARCH 31, 2005
Sales to external customers.................. $ 214 $ 399 $ -- $ 613
Operating income............................. 20(c) 28(a) 4(b) 52
Total assets................................. 1,025 1,454 939(d) 3,418
</Table>
10
- ---------------
(a) Includes restructuring and other charges (credits) of $(1) million and $5
million in 2006, and 2005, respectively.
(b) Includes pension-plan income and unallocated corporate expenses.
(c) Includes restructuring and other charges of $1 million in 2005.
(d) Includes administrative-service operations and assets from discontinued
operations of $731 million.
NOTE 10. COMPREHENSIVE INCOME (LOSS)
Details of total comprehensive income (loss) for the three-month period ended
March 31, 2006, and 2005, were as follows:
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
-------------
2006 2005
(In millions) ----- -----
Net income.................................................. $51 $ 22
Other comprehensive income (loss)
Additional minimum pension liability, net of tax of $43
million................................................ -- (72)
Net currency-translation losses........................... (2) (21)
Other..................................................... -- 1
--- ----
Total comprehensive income (loss)........................... $49 $(70)
--- ----
</Table>
NOTE 11. PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS
The impact of pension plans on pretax income from continuing operations was as
follows:
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
-------------
2006 2005
(In millions) ----- -----
Components of net periodic-benefit income (expense)
Service cost of benefits earned........................... $ (5) $ (5)
Interest cost on benefit obligations...................... (57) (58)
Expected return on plan assets............................ 86 86
Amortization of:
Unrecognized actuarial losses.......................... (13) (9)
Unrecognized prior-service costs....................... -- (1)
---- ----
Total net periodic-beneift income........................... $ 11 $ 13
---- ----
</Table>
We have post-retirement health-care and life-insurance plans that cover certain
of our salaried and hourly employees who retire in accordance with the various
provisions of such plans. Benefits may be subject to deductibles, co-payments,
and other limitations. These post-retirement plans are not funded. We reserve
the right to change post-retirement plans.
NOTE 12. CONTINGENCIES
LITIGATION
In November 2004, 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 1963 to
1998, notified us that it believes we are at least partially responsible for
some of such alleged injuries and damages. A predecessor of Pactiv owned the
facility from 1978 to 1983. The letter was addressed to Pactiv and
Louisiana-Pacific Corporation, the current owner of the facility, to whom a
predecessor of Pactiv sold the
11
facility in 1983. As of the date of this report, 10 lawsuits have been filed in
state and federal court in Alabama, seeking unspecified damages. We are not
currently able to quantify our financial exposure, if any, relating to this
matter. We intend to defend these lawsuits vigorously and any other lawsuits
that may be commenced against us by the potential plaintiffs.
In March 2005, we 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. We contend that, because of the federal EPA action in 1993, the
Michigan Department of Environmental Quality is precluded from demanding that
Pactiv undertake additional investigative and remedial work at the site. While
we cannot predict the outcome of this proceeding, based on our assessment of the
facts and circumstances now known, we do not believe it will have a material
effect on our financial position.
We are party to other legal proceedings arising from our operations. We
establish reserves for claims and proceedings 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 matters,
based on our assessment of the facts and circumstances now known, we do not
believe that any of these matters, individually or in the aggregate, will have a
material adverse effect on our financial position. However, actual outcomes may
be different from those expected and could have a material effect on our results
of operations or cash flows in a particular period.
ENVIRONMENTAL MATTERS
We are subject to a variety of environmental and pollution-control laws and
regulations. From time to time, we identify costs or liabilities arising from
compliance with environmental laws and regulations. When related liabilities are
probable and can be reasonably estimated, we establish appropriate reserves.
Estimated liabilities may change as additional information becomes available. We
appropriately adjust our reserves as new information on possible clean-up costs,
expense and effectiveness of alternative clean-up methods, and other potential
liabilities is received. We do not expect that any additional liabilities
recorded as a result of the availability of new information will have a material
adverse effect on our financial position. However, such costs could have a
material effect on our results of operations or cash flows in a particular
period.
The preceding notes are an integral part of the foregoing financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BASIS OF PRESENTATION
Financial statements for all periods presented in this report have been prepared
on a consolidated basis in accordance with generally accepted accounting
principles consistently applied. All per-share information is presented on a
diluted basis unless otherwise noted. Certain reclassifications have been made
to the prior-year financial information to conform with current-year
presentation.
On October 12, 2005, we completed the sale of most of our protective- and
flexible-packaging businesses to Pregis Corporation for $523 million, and
recorded an estimated loss on the sale of $50 million, net of tax. These
businesses historically were included in our Protective and Flexible Packaging
segment. In conjunction with the sale of these entities, we reviewed our
reporting segments in concert with requirements of the Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an
Enterprise and Related Information." As a result, we elected to include the
retained portions of the protective-and flexible-packaging businesses in our
Foodservice/Food Packaging segment.
We have three reporting segments:
- Consumer Products manufactures and sells disposable plastic, foam,
molded-fiber, pressed-paperboard, and aluminum packaging products to
consumer markets, such as grocery stores, mass merchandisers,
12
and discount chains. Products include waste bags, food-storage bags, and
disposable tableware and cookware. We sell many of our consumer products
under well-known trademarks, such as Hefty(R).
- Foodservice/Food Packaging manufactures and sells foam, clear plastic,
aluminum, pressed-paperboard, and molded-fiber packaging to customers in
the food distribution channel who prepare and process food for
consumption. Customers include foodservice distributors, restaurants and
other institutional foodservice outlets, food processors, and grocery
chains.
- Other 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/liabilities are used.
RESTRUCTURING AND OTHER
In the first quarter of 2004, we announced a restructuring program to reduce
manufacturing capacity and overhead costs, and to reinvest a portion of the
related savings in strategic growth initiatives. The majority of the program was
executed in the second quarter of 2004. 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. In the first quarter of 2006,
we recorded a restructuring and other credit of $1 million. No further charges
related to this program are anticipated.
After-tax cash payments related to the restructuring and other actions were
immaterial in the first quarter of 2006 and $4 million for the first quarter of
2005.
The following summarizes the impacts of restructuring and related actions.
<Table>
<Caption>
SEVERANCE ASSET WRITE-OFFS OTHER TOTAL
(In millions) --------- ---------------- ----- -----
ACCRUED RESTRUCTURING BALANCE AT DECEMBER 31, 2005...... $-- $-- $ 2 $ 2
Additions/adjustments to the account
Foodservice/Food Packaging............................ -- -- (1) (1)
--- --- --- ---
ACCRUED RESTRUCTURING BALANCE AT MARCH 31, 2006......... $-- $-- $ 1 $ 1
--- --- --- ---
CUMULATIVE RESTRUCTURING COSTS AT MARCH 31, 2006
Consumer Products..................................... $ 5 $-- $-- $ 5
Foodservice/Food Packaging............................ 10 31 35 76
Other................................................. -- -- 3 3
--- --- --- ---
TOTAL................................................... $15 $31 $38 $84
--- --- --- ---
</Table>
THREE MONTHS ENDED MARCH 31, 2006, COMPARED WITH THREE MONTHS ENDED MARCH 31,
2005
RESULTS OF CONTINUING OPERATIONS
Significant Trends
The principal raw materials used to manufacture our products are plastic resins,
principally polystyrene and polyethylene. Average industry prices for
polystyrene were approximately 7% lower in the first quarter of 2006 than in the
same period of 2005, driven principally by softer market demand and lower
benzene prices. Lower resin costs helped improve the spread (the difference
between selling prices and raw-material costs) on our polystyrene-based products
in the first quarter of 2006. Average industry prices for polyethylene rose
approximately 19% in the first quarter of 2006, compared with the same period in
2005, fueled by higher natural-gas prices. We were able to raise selling prices
in many areas of our business to mitigate the effect of resin cost increases
over the last three years.
13
In late 2005, an industry-wide disruption of supply of plastic resin occurred
due to the Gulf Coast hurricanes. As a result, resin costs increased in the
fourth quarter of 2005 but decreased slightly in the first quarter of 2006.
Nevertheless, raw-material costs remain high and are still volatile. Resin costs
will likely continue to be a source of uncertainty for us in the near-term, as
oil prices remain near their historic highs. We continue to closely monitor the
resin marketplace in order to respond quickly to any raw-material cost
increases.
Our business is sensitive to other energy-related cost movements, particularly
those that affect transportation, logistics, and utility costs. Historically, we
have been able to mitigate the effect of higher energy-related costs with
productivity improvements and other cost reductions. However, if energy-related
costs increase significantly in the future, we may not be able to fully offset
such increases with productivity gains.
New consumer product lines launched in 2005 included Hefty(R) Serve 'n Store(R)
tableware, Hefty(R) Easy Grip(TM) cups, and Hefty(R) EZ Ovenware(TM) Casserole
Pans. As expected, in the first quarter of 2006, we benefited from better
operating efficiencies and the absence of one-time introduction costs related to
new-product launches in our Consumer segment. For full year 2006, the negative
impact on income from the launch of new products is expected to be about
one-half of what it was in 2005.
Sales
<Table>
<Caption>
THREE MONTHS ENDED INCREASE
MARCH 31, (DECREASE)
------------------ ----------------
2006 2005 AMOUNT PERCENT
(In millions) ------ ------ ------ -------
Consumer Products.......................................... $242 $214 $28 13%
Foodservice/Food Packaging................................. 438 399 39 10
---- ---- ---
Total...................................................... $680 $613 $67 11%
---- ---- ---
</Table>
Sales increased 11% due to favorable pricing of 8% and higher volume from
acquisitions of 3%.
Increased Consumer Products sales reflected price increases of 11% and volume
growth of 2%. Strength in the base business, particularly in food bags and
tableware products, contributed to the volume growth. Hefty(R) Serve 'n
Store(TM) plates and bowls, as well as Hefty(R) Easy Grip(TM) party cups,
launched last year, contributed to the growth in tableware products.
Sales growth in the Foodservice/Food Packaging business was driven by price
increases of 6% and volume gains of 4%. The acquisition of Newspring in March
2005 drove the volume growth, while base-business volume was even with last
year.
Operating Income
<Table>
<Caption>
THREE MONTHS ENDED INCREASE
MARCH 31, (DECREASE)
------------------ ----------------
2006 2005 AMOUNT PERCENT
(In millions) ----- ----- ------ -------
Consumer Products.......................................... $42 $20 $22 110%
Foodservice/Food Packaging................................. 57 28 29 104
Other...................................................... (2) 4 (6) (150)
--- --- ---
Total...................................................... $97 $52 $45 87%
=== === ===
</Table>
Total operating income increased significantly driven by favorable spread and
the absence of one-time introduction costs related to new product launches,
offset, in part, by higher selling, general, and administrative (SG&A) costs.
14
The following tables summarize by segment the impact of restructuring and other
charges in the first quarter of 2006 and 2005.
<Table>
<Caption>
OPERATING INCOME (LOSS) -- THREE MONTHS ENDED
MARCH 31, 2006
--------------------------------------------------
EXCLUDING
US GAAP RESTRUCTURING AND RESTRUCTURING AND
BASIS OTHER CHARGES OTHER CHARGES
(In millions) ------- ----------------- -----------------
Consumer Products................................ $42 $-- $42
Foodservice/Food Packaging....................... 57 (1) 56
Other............................................ (2) -- (2)
--- --- ---
Total............................................ $97 $(1) $96
--- --- ---
</Table>
<Table>
<Caption>
OPERATING INCOME (LOSS) -- THREE MONTHS ENDED
MARCH 31, 2005
---------------------------------------------------
EXCLUDING
US GAAP RESTRUCTURING AND RESTRUCTURING AND
BASIS OTHER CHARGES OTHER CHARGES
(In millions) ------- ----------------- -----------------
Consumer Products............................... $20 $ 1 $21
Foodservice/Food Packaging...................... 28 5 33
Other........................................... 4 -- 4
--- ----- ---
Total........................................... $52 $ 6 $58
--- ----- ---
</Table>
We believe that focusing on operating income excluding the effect of
restructuring and other charges is a meaningful alternative way of evaluating
our operating results. Restructuring and other charges relate to actions that
will have an ongoing effect on our company. Considering such charges as being
applicable to only the periods in which they are recognized could make our
operating performance in those periods more difficult to evaluate when compared
with other periods in which there were no such charges. We use operating income
excluding restructuring and other charges to evaluate operating performance and,
along with other factors, in determining management compensation.
The following table summarizes operating income excluding restructuring and
other charges for the first quarter of 2006 and 2005.
<Table>
<Caption>
OPERATING INCOME (LOSS) EXCLUDING RESTRUCTURING
AND OTHER CHARGES
-----------------------------------------------
THREE MONTHS INCREASE
ENDED MARCH 31, (DECREASE)
------------------ -----------------------
2006 2005 AMOUNT PERCENT
(In millions) ------ ------ -------- ---------
Consumer Products...................................... $42 $21 $21 100%
Foodservice/Food Packaging............................. 56 33 23 70
Other.................................................. (2) 4 (6) (150)
--- --- ---
Total.................................................. $96 $58 $38 66%
--- --- ---
</Table>
Total operating income excluding restructuring and other charges improved versus
2005, driven by favorable spread and the absence of one-time introduction costs
related to new product launches, offset, in part, by higher SG&A costs.
Operating income excluding restructuring and other charges for the Consumer
Products business doubled compared with 2005. The increase was due primarily to
favorable spread, as well as better operating efficiencies and the absence of
one-time introduction costs related to new product launches.
Operating income excluding restructuring and other charges for the
Foodservice/Food Packaging business increased significantly from 2005. The
increase primarily reflected spread recovery, favorable mix, and higher volume.
We continue to improve the profitability of the business by focusing on selling
higher margin products and minimizing sales of low margin products.
15
Operating income excluding restructuring and other charges for the Other segment
decreased from 2005, principally because of higher compensation-related expenses
and lower noncash pension income.
Net Income
We recorded net income of $51 million, or $0.35 per share, in the first quarter
of 2006, compared with $22 million, or $0.15 per share, last year. Results for
the first quarter of 2006 included the impact of restructuring and other credits
totaling $1 million, while the first quarter of 2005 included the impact of
restructuring and other charges totaling $4 million.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
<Table>
<Caption>
MARCH 31, DECEMBER 31, INCREASE
2006 2005 (DECREASE)
(In millions) ------------ --------------- ----------
Short-term debt, including current maturities of long-term
debt...................................................... $ 3 $ 3 $--
Long-term debt.............................................. 869 869 --
------ ------ ---
Total debt.................................................. 872 872 --
Minority interest........................................... 9 9 --
Shareholders' equity........................................ 845 820 25
------ ------ ---
Total capitalization........................................ $1,726 $1,701 $25
------ ------ ---
</Table>
The ratio of debt to total capitalization declined to 50.5% at March 31, 2006,
from 51.3% at December 31, 2005.
Shareholders' equity increased $25 million in the first quarter of 2006 as
detailed below.
<Table>
<Caption>
(In millions)
Shareholders' equity at December 31, 2005................... $820
Increase (decrease)
Unfavorable foreign-currency translation adjustments........ (2)
Stock repurchases........................................... (46)
Net income.................................................. 51
Issuance of common stock in connection with the
administration of employee-benefit plans(a)............... 22
----
Shareholders' equity at March 31, 2006...................... $845
----
</Table>
- ---------------
(a) Includes $8 million of accrued compensation expense related to
performance-share awards.
Cash Flows
<Table>
<Caption>
INCREASE
2006 2005 (DECREASE)
(In millions) ---- ----- ----------
Cash provided (used) by:
Operating activities...................................... $ 42 $ 126 $(84)
Investing activities...................................... (13) (137) 124
Financing activities...................................... (37) (154) 117
</Table>
The decrease in cash provided by operating activities was driven primarily by
reduced usage of our accounts receivable securitization program (See Note 2),
and accounts payable timing, offset partially by the increase in net income.
16
Cash used by investing activities was $13 million in the first quarter of 2006,
primarily representing capital expenditures, compared with $137 million in 2005
($98 million for the Newspring acquisition and $38 million for capital
expenditures).
Cash used by financing activities was $37 million in the first quarter of 2006,
primarily reflecting the repurchase of company stock ($46 million) and payments
related to the non-compete agreements and other items related to the Newspring
acquisition ($3 million), offset partially by the issuance of company stock ($12
million). Cash used by financing activities was $154 million in 2005, primarily
reflecting the repayment of debt related to our synthetic-lease facility ($169
million), offset partially by anticipated future payments related to non-compete
agreements and other items related to the Newspring acquisition ($11 million)
and by the issuance of company stock ($4 million).
Capital Commitments
Commitments for authorized capital expenditures totaled approximately $46
million at March 31, 2006. It is anticipated that the majority of these
expenditures will be funded over the remainder of the year 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 2005.
Liquidity and Off-Balance-Sheet Financing
We use various sources of funding to manage liquidity. Sources of liquidity
include cash flow from operations and a 5-year, $600 million revolving-credit
facility, under which no amounts were outstanding at March 31, 2006. We were in
full compliance with financial and other covenants of the revolving-credit
agreement at the end of the first quarter of 2006. During March 2006, we signed
a commitment letter with our lenders to increase our revolving-credit facility
to $750 million. The agreement was finalized on April 19, 2006. We also use an
asset-securitization program as off-balance-sheet financing. No amounts were
securitized under this program at March 31, 2006, or December 31, 2005.
As a result of the Gulf Coast hurricanes in 2005, the supply of resin materials
was disrupted and our inventory levels were lower than normal at the end of
2005. During the first quarter of 2006, we replenished our inventories,
requiring a significant use of cash.
We have pension plans that cover substantially all of our employees. Funding of
the qualified U.S. plan is determined by the Employee Retirement Income Security
Act. Based on long-term projections and regulations in existence at March 31,
2006, we do not expect to be required to contribute cash to this plan through at
least 2014.
We believe that cash flow from operations, available cash reserves, and the
ability to obtain cash under our credit facilities and asset-securitization
program will be sufficient to meet current and future liquidity and capital
requirements.
CHANGES IN ACCOUNTING PRINCIPLES
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123(R), "Share-Based Payment," which requires that the fair value of all
share-based payments to employees, including stock options, be recognized in
financial statements. SFAS No. 123(R) superceded Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees." APB Opinion
No. 25 required that the intrinsic value method be used in determining
compensation expense for share-based payments to employees. Under SFAS No.
123(R), employee-compensation expense is based on the grant-date fair value of
awards and expense is recognized in the Statement of Income over the period
during which recipients of awards are required to provide service (normally the
vesting period).
17
We adopted SFAS No. 123(R) using the modified prospective method as of January
1, 2006. The impact if SFAS No. 123(R) had been adopted in the prior period is
shown under the "Stock Based Compensation" section of Note 2. The cumulative
effect of adopting SFAS No. 123(R) in the first quarter 2006 results was
immaterial.
We elected to use the simplified method in calculating our additional paid-in
capital pool upon adoption of SFAS No. 123(R) as described in FASB Staff
Position No. FAS 123(R) -- 3, "Transition Election Related to Accounting for the
Tax Effects of Share-Based Payment Awards" (the "simplified method").
SFAS No. 123(R) also requires that tax deductions in excess of recognized
compensation costs be reported as cash flow from financing activities, rather
than as cash flow from operating activities. There was no reduction in taxes
paid in the first quarter of 2006 or 2005 from such "excess" tax-deduction
benefits.
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.
18
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 generally can be
identified by the use of terms and phrases such as "will", "believe",
"anticipate", "may", "might", "could", "expect", "estimated", "projects",
"intends", "foreseeable future", and similar terms and phrases. These
forward-looking statements are not based on historical facts, but rather on our
current expectations or projections about future events. Accordingly, these
forward-looking statements are subject to known and unknown risks and
uncertainties. While we believe that the assumptions underlying these
forward-looking statements are reasonable and make the statements in good faith,
actual results almost always vary from expected results, and the differences
could be material.
See "Risk Factors" section (Item 1A) in our most recently filed Securities and
Exchange Commission (SEC) Form 10-K and Part II (Item 1A) of this report for
some of the factors that we believe could cause our actual results to differ
materially from future results expressed or implied by these forward-looking
statements. These factors include the following:
- Changes in consumer demand and selling prices for our products, including
new products that our competitors or we may introduce that could impact
sales and margins.
- Material substitutions and changes in costs of raw materials, including
plastic resins, labor, utilities, or transportation that could impact our
expenses and margins.
- Changes in laws or governmental actions, including changes in regulations
such as those relating to air emissions or plastics generally.
- 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 we operate, including currency fluctuations and other risks
associated with operating outside of the U. S.
- 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.
- Proposed changes in U.S. and/or foreign governmental regulations relating
to pension-plan funding.
- Changes enacted by the SEC, the Financial Accounting Standards Board, or
other regulatory or accounting bodies. See "Changes in Accounting
Principles."
- Competition from producers located in countries that have lower labor and
other costs.
- Our ability to integrate new businesses that we may acquire or to dispose
of businesses or business segments that we may wish to divest.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS
We are exposed to market risks related to changes in foreign-currency exchange
rates, interest rates, and commodity prices. To manage these risks we may enter
into various hedging contracts in accordance with established policies and
procedures. We do not use hedging instruments for trading purposes and are not a
party to any transactions involving leveraged derivatives.
Foreign-Currency Exchange
We use foreign-currency forward contracts to hedge our 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 March 2006, we entered into a forward contract for delivery in April 2006 of
30 million euros at an exchange rate of $1.207 per euro, or $36 million. This
transaction locked in the exchange rate for cash to be sent back to the U.S.
from a foreign subsidiary in April 2006.
In managing foreign-currency risk, we aggregate existing positions and hedge
residual exposures through third-party derivative contracts. The following table
summarizes foreign-currency forward contracts in effect at March 31, 2006, all
of which will mature in 2006.
<Table>
<Caption>
NOTIONAL AMOUNT NOTIONAL AMOUNT
IN FOREIGN CURRENCY EXCHANGE RATE IN U.S. DOLLARS
(In millions, except settlement rates) ------------------- ------------- ---------------
Euros
Purchase....................................... 6 1.208 7
Sell........................................... 30 1.207 36
British pounds
Sell........................................... (4) 1.740 (7)
</Table>
Interest Rates
At March 31, 2006, we had public-debt securities of $875 million outstanding,
with fixed interest rates and maturity dates ranging from 1 to 21 years. Should
we decide to redeem these securities prior to their stated maturity, we would
incur costs based on the fair value of the securities at that time. In addition,
we had floating-rate debt of $3 million outstanding at March 31, 2006.
The following table provides information about Pactiv's financial instruments
that are sensitive to interest-rate risks.
<Table>
<Caption>
MATURITIES
------------------------
2006 2007 AFTER 2007 TOTAL
(Dollars in millions) ---- ---- ---------- -----
Fixed-rate debt............................................. $ -- $ 99 $776 $875
Average interest rate....................................... --% 8.0% 8.1% 8.1%
Fair value.................................................. $ -- $100 $861 $961
Floating-rate debt.......................................... $ 3 $ -- $ -- $ 3
Average interest rate....................................... 4.8% --% --% 4.8%
Fair value.................................................. $ 3 $ -- $ -- $ 3
</Table>
Prior to our spin-off from Tenneco Inc., we entered into an interest-rate swap
to hedge our exposure to interest-rate movements. We 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.
20
ITEM 4. CONTROLS AND PROCEDURES
Our 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 us in the reports we file or submit under the Securities Exchange
Act is recorded, processed, summarized, and reported within the appropriate time
periods. We, under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, have
evaluated the effectiveness of our disclosure controls and procedures, and we
and such officers have concluded that such controls and procedures were adequate
and effective as of March 31, 2006.
There were no changes in internal controls over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended March
31, 2006, that materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
21
PART II -- OTHER INFORMATION
ITEM 1. NONE
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors disclosed in our Form
10-K for the year ended December 31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In August 2004, our board of directors approved a plan to repurchase up to 5
million shares of our common stock. In August 2005 and October 2005, the board
of directors approved the repurchase of an additional 6.1 million and 6.5
million shares, respectively. As of March 31, 2006, the remaining number of
shares authorized for repurchase under these plans was 5.9 million. We
repurchase shares using open market or privately negotiated transactions.
Repurchased shares are held in treasury for general corporate purposes. There
are no expiration dates for the current share-repurchase authorizations.
The following table summarizes our stock repurchases in the first quarter of
2006.
<Table>
<Caption>
TOTAL TOTAL NUMBER OF SHARES MAXIMUM NUMBER OF
NUMBER OF AVERAGE PURCHASED AS PART OF SHARES THAT MAY YET BE
SHARES PRICE PAID PUBLICLY ANNOUNCED PURCHASED UNDER PLANS
PERIOD PURCHASED PER SHARE PLANS OR PROGRAMS OR PROGRAMS
- ------ --------- ---------- ---------------------- ----------------------
January 2006...................... -- -- -- 7,877,400
February 2006..................... 621,500 $22.58 621,500 7,255,900
March 2006........................ 1,380,400 $23.31 1,380,400 5,875,500(a)
--------- ---------
Total............................. 2,001,900 2,001,900
--------- ---------
</Table>
- ---------------
(a) Represents the remaining number of shares that are available for repurchase
as of March 31, 2006.
ITEMS 3-5. NONE.
ITEM 6. EXHIBITS.
Exhibits designated with an asterisk in the following index are furnished; all
other exhibits are incorporated by reference.
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2 Distribution Agreement by and between Tenneco Inc. and the
registrant (incorporated herein by reference to Exhibit 2 to
Pactiv Corporation's Current Report on Form 8-K dated
November 11, 1999, File No. 1-15157).
3.1 Restated Certificate of Incorporation of the registrant
(incorporated herein by reference to Exhibit 3.1 to Pactiv
Corporation's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-15157).
3.2 Amended and Restated By-laws of the registrant adopted
September 9, 2005 (incorporated herein by reference to
Exhibit 3.2 to Pactiv Corporation's Quarterly Report on Form
10-Q for the quarter ended September 30, 2005, 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).
</Table>
22
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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).
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).
</Table>
23
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.6 Amended and Restated Change 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 April 19, 2006, among the
registrant, Bank of America, N.A., as Administrative Agent,
JP Morgan Chase Bank, N.A., as Syndication Agent and L/C
Issuer, BNP Paribas, Suntrust Bank, and Citibank, N.A., as
Co-Documentation Agents, and the other financial
institutions party thereto.
10.16 Pactiv Corporation Defined Retirement Savings Plan
(incorporated herein by reference to Exhibit 10.16 to Pactiv
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2004, File No. 1-15157).
10.17 Form of Pactiv Corporation Non-Qualified Stock Option Award
Agreement (incorporated herein by reference to Exhibit 10.17
to Pactiv Corporation's Annual Report on Form 10-K for the
year ended December 31, 2004, File No. 1-15157).
10.18 Form of Pactiv Corporation Performance Share Award Agreement
(incorporated herein by reference to Exhibit 10.18 to Pactiv
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2004, File No. 1-15157).
</Table>
24
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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
(incorporated herein by reference to Exhibit 10.21 to Pactiv
Corporation's Current Report on form 8-K dated June 23,
2005, file No. 1-15157)
11 None.
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
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACTIV CORPORATION
By: /s/ ANDREW A. CAMPBELL
------------------------------------
Andrew A. Campbell
Senior Vice President and Chief
Financial Officer
(principal financial and accounting
officer)
Date: May 10, 2006
26