Attached files
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EX-32.1 - EX-32.1 - PACTIV CORP | c54400exv32w1.htm |
EX-32.2 - EX-32.2 - PACTIV CORP | c54400exv32w2.htm |
EX-31.2 - EX-31.2 - PACTIV CORP | c54400exv31w2.htm |
EX-31.1 - EX-31.1 - PACTIV CORP | c54400exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
WASHINGTON, D.C. 20549
FORM 10-Q
(mark one) | ||
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Quarterly Period Ended September 30,
2009
|
||
OR
|
||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number
1-15157
PACTIV
CORPORATION
(Exact name of registrant as
specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization) |
36-2552989 (I.R.S. Employer Identification No.) |
1900 West Field Court Lake Forest, Illinois |
60045 (Zip Code) |
|
(Address of principal executive
offices)
|
Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
filer þ
|
Accelerated filer o |
Non-accelerated
filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock as of the latest
practicable date: Common stock, par value $0.01 per share:
132,316,451 as of October 31, 2009. (See Notes to Financial
Statements.)
TABLE OF
CONTENTS
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8 | ||||||||
18 | ||||||||
29 | ||||||||
30 | ||||||||
31 | ||||||||
31 | ||||||||
31 | ||||||||
Item 3. Defaults Upon Senior Securities*
|
31 | |||||||
Item 4. Submission of Matters to a Vote of Security Holders*
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31 | |||||||
31 | ||||||||
31 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
* | No response to this item is included herein because either it is inapplicable or there is nothing to report. |
2
Table of Contents
PART I
FINANCIAL INFORMATION
ITEM 1. | Financial Statements (Unaudited) |
Consolidated
Statement of Income
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(In millions, except share and per share data) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Sales
|
$ | 839 | $ | 925 | $ | 2,506 | $ | 2,684 | ||||||||
Costs and expenses
|
||||||||||||||||
Cost of sales, excluding depreciation and amortization
|
573 | 711 | 1,621 | 2,013 | ||||||||||||
Selling, general, and administrative
|
83 | 67 | 263 | 208 | ||||||||||||
Depreciation and amortization
|
46 | 46 | 138 | 138 | ||||||||||||
Other
|
| 1 | 1 | 1 | ||||||||||||
Restructuring and other
|
| (2 | ) | | 14 | |||||||||||
702 | 823 | 2,023 | 2,374 | |||||||||||||
Operating income
|
137 | 102 | 483 | 310 | ||||||||||||
Other income (expense)
|
||||||||||||||||
Interest income
|
| 1 | 1 | 2 | ||||||||||||
Interest expense, net of interest capitalized
|
(23 | ) | (25 | ) | (70 | ) | (79 | ) | ||||||||
Income before income taxes
|
114 | 78 | 414 | 233 | ||||||||||||
Income tax expense
|
41 | 24 | 153 | 80 | ||||||||||||
Income from continuing operations
|
73 | 54 | 261 | 153 | ||||||||||||
Discontinued operations, net of tax
|
15 | | 14 | (4 | ) | |||||||||||
Net income
|
88 | 54 | 275 | 149 | ||||||||||||
Less: Net income attributable to the noncontrolling interest
|
1 | 1 | 1 | 1 | ||||||||||||
Net income attributable to Pactiv
|
$ | 87 | $ | 53 | $ | 274 | $ | 148 | ||||||||
Amounts attributable to Pactiv common shareholders
|
||||||||||||||||
Income from continuing operations, net of tax
|
$ | 72 | $ | 53 | $ | 260 | $ | 152 | ||||||||
Discontinued operations, net of tax
|
15 | | 14 | (4 | ) | |||||||||||
Net income
|
$ | 87 | $ | 53 | $ | 274 | $ | 148 | ||||||||
Earnings per share
|
||||||||||||||||
Weighted-average number of shares of common
|
||||||||||||||||
stock outstanding
|
||||||||||||||||
Basic
|
131,972,681 | 130,907,540 | 131,860,351 | 130,762,298 | ||||||||||||
Diluted
|
133,193,283 | 132,098,844 | 132,819,294 | 132,050,604 | ||||||||||||
Basic earnings per share of common stock attributable to Pactiv
common shareholders
|
||||||||||||||||
Continuing operations
|
$ | 0.55 | $ | 0.40 | $ | 1.97 | $ | 1.16 | ||||||||
Discontinued operations
|
0.12 | | 0.11 | (0.03 | ) | |||||||||||
Total
|
$ | 0.67 | $ | 0.40 | $ | 2.08 | $ | 1.13 | ||||||||
Diluted earnings per share of common stock attributable to
Pactiv common shareholders
|
||||||||||||||||
Continuing operations
|
$ | 0.54 | $ | 0.40 | $ | 1.96 | $ | 1.15 | ||||||||
Discontinued operations
|
0.11 | | 0.10 | (0.03 | ) | |||||||||||
Total
|
$ | 0.65 | $ | 0.40 | $ | 2.06 | $ | 1.12 | ||||||||
The accompanying notes to the financial statements are an
integral part of this statement.
3
Table of Contents
Condensed
Consolidated Statement of Financial Position
September 30, |
December 31, |
|||||||
(In millions, except share data) | 2009 | 2008 | ||||||
Assets
|
||||||||
Current assets
|
||||||||
Cash and temporary cash investments
|
$ | 104 | $ | 80 | ||||
Accounts and notes receivable
|
||||||||
Trade, less allowances of $6 and $7 at the respective dates
|
249 | 264 | ||||||
Other
|
26 | 47 | ||||||
Total accounts and notes receivable
|
275 | 311 | ||||||
Inventories
|
||||||||
Finished goods
|
198 | 161 | ||||||
Work in process
|
52 | 55 | ||||||
Raw materials
|
77 | 78 | ||||||
Other materials and supplies
|
48 | 50 | ||||||
Total inventories
|
375 | 344 | ||||||
Deferred income tax assets
|
7 | 14 | ||||||
Other
|
14 | 16 | ||||||
Total current assets
|
775 | 765 | ||||||
Property, plant, and equipment, net
|
1,181 | 1,209 | ||||||
Other assets
|
||||||||
Goodwill
|
1,129 | 1,124 | ||||||
Intangible assets, net
|
379 | 396 | ||||||
Pension asset
|
6 | 5 | ||||||
Noncurrent deferred income tax asset
|
31 | 161 | ||||||
Other
|
62 | 65 | ||||||
Total other assets
|
1,607 | 1,751 | ||||||
Total assets
|
$ | 3,563 | $ | 3,725 | ||||
Liabilities and equity
|
||||||||
Current liabilities
|
||||||||
Accounts payable
|
$ | 147 | $ | 115 | ||||
Taxes accrued
|
23 | 14 | ||||||
Interest accrued
|
28 | 20 | ||||||
Accrued promotions, rebates, and discounts
|
79 | 68 | ||||||
Accrued payroll and benefits
|
87 | 66 | ||||||
Other
|
45 | 50 | ||||||
Total current liabilities
|
409 | 333 | ||||||
Long-term debt
|
1,275 | 1,345 | ||||||
Pension and postretirement benefits
|
798 | 1,266 | ||||||
Other
|
100 | 96 | ||||||
Noncurrent liabilities related to discontinued operations
|
13 | 30 | ||||||
Pactiv shareholders equity
|
||||||||
Common stock $0.01 par value,
350,000,000 shares authorized, 131,995,376 and
131,510,270 shares issued and outstanding, after deducting
39,787,801 and 40,272,907 shares held in treasury, at the
respective dates
|
1 | 1 | ||||||
Premium on common stock and other capital surplus
|
719 | 710 | ||||||
Accumulated other comprehensive income (loss)
|
||||||||
Currency translation adjustment
|
(8 | ) | (16 | ) | ||||
Pension and postretirement plans
|
(1,666 | ) | (1,689 | ) | ||||
Gain (loss) on derivatives
|
6 | 7 | ||||||
Retained earnings
|
1,900 | 1,626 | ||||||
Total Pactiv shareholders equity
|
952 | 639 | ||||||
Noncontrolling interest
|
16 | 16 | ||||||
Total equity
|
968 | 655 | ||||||
Total liabilities and equity
|
$ | 3,563 | $ | 3,725 | ||||
The accompanying notes to the financial statements are an
integral part of this statement.
4
Table of Contents
Condensed
Consolidated Statement of Cash Flows
For the nine months ended September 30 (In millions) | 2009 | 2008 | ||||||
Operating activities
|
||||||||
Net income
|
$ | 275 | $ | 149 | ||||
Discontinued operations
|
(14 | ) | 4 | |||||
Income from continuing operations
|
261 | 153 | ||||||
Adjustments to reconcile income from continuing operations to
cash provided (used) by operating activities:
|
||||||||
Depreciation and amortization
|
138 | 138 | ||||||
Deferred income taxes
|
114 | 41 | ||||||
Restructuring and other
|
(1 | ) | 13 | |||||
Pension income
|
(27 | ) | (37 | ) | ||||
Noncash compensation expense
|
13 | 12 | ||||||
Net working capital
|
92 | (104 | ) | |||||
Pension contributions
|
(400 | ) | | |||||
Other
|
4 | (5 | ) | |||||
Cash provided (used) by operating activities
continuing operations
|
194 | 211 | ||||||
Cash provided (used) by operating activities
discontinued operations
|
(3 | ) | (7 | ) | ||||
Cash provided (used) by operating activities
|
$ | 191 | $ | 204 | ||||
Investing activities
|
||||||||
Expenditures for property, plant, and equipment
|
$ | (78 | ) | $ | (109 | ) | ||
Acquisitions of businesses and assets
|
(20 | ) | | |||||
Other investing activities
|
2 | | ||||||
Cash provided (used) by investing activities
|
$ | (96 | ) | $ | (109 | ) | ||
Financing activities
|
||||||||
Issuance of common stock
|
$ | 2 | $ | 2 | ||||
Purchase of common stock
|
| (2 | ) | |||||
Revolving credit facility payment
|
(70 | ) | (150 | ) | ||||
Dividends paid to noncontrolling interest
|
(1 | ) | (1 | ) | ||||
Other
|
(2 | ) | (1 | ) | ||||
Cash provided (used) by financing activities
|
$ | (71 | ) | $ | (152 | ) | ||
Effect of foreign exchange rate changes on cash and temporary
cash investments
|
| (1 | ) | |||||
Increase (decrease) in cash and temporary cash investments
|
24 | (58 | ) | |||||
Cash and temporary cash investments, January 1
|
80 | 95 | ||||||
Cash and temporary cash investments, September 30
|
$ | 104 | $ | 37 | ||||
The accompanying notes to the financial statements are an
integral part of this statement.
5
Table of Contents
Consolidated
Statement of Changes in Equity
(In millions,
except share amounts)
Pactiv Shareholders | ||||||||||||||||||||||||
Premium on |
||||||||||||||||||||||||
common stock |
Accumulated |
|||||||||||||||||||||||
and other |
other |
|||||||||||||||||||||||
Common |
capital |
Retained |
comprehensive |
Noncontrolling |
Total |
|||||||||||||||||||
stock | surplus | earnings | income (loss) | interest | equity | |||||||||||||||||||
Nine months ended September 30, 2009
|
||||||||||||||||||||||||
Balance, December 31, 2008
|
$ | 1 | $ | 710 | $ | 1,626 | $ | (1,698 | ) | $ | 16 | $ | 655 | |||||||||||
Premium on common stock issued (485,106 shares)
|
12 | 12 | ||||||||||||||||||||||
Translation of foreign currency statements
|
8 | 8 | ||||||||||||||||||||||
Stock-based compensation
|
(3 | ) | (3 | ) | ||||||||||||||||||||
Gain (loss) on derivatives
|
(1 | ) | (1 | ) | ||||||||||||||||||||
Change in pension and postretirement plan funded status, net of
tax of $14
|
23 | 23 | ||||||||||||||||||||||
Dividends paid to noncontrolling interest
|
(1 | ) | (1 | ) | ||||||||||||||||||||
Net income
|
274 | 1 | 275 | |||||||||||||||||||||
Balance, September 30, 2009
|
$ | 1 | $ | 719 | $ | 1,900 | $ | (1,668 | ) | $ | 16 | $ | 968 | |||||||||||
Nine months ended September 30, 2008
|
||||||||||||||||||||||||
Balance, December 31, 2007
|
$ | 1 | $ | 683 | $ | 1,402 | $ | (862 | ) | $ | 15 | $ | 1,239 | |||||||||||
Premium on common stock issued (574,165 shares)
|
13 | 13 | ||||||||||||||||||||||
Treasury stock repurchased (75,218 shares)
|
(2 | ) | (2 | ) | ||||||||||||||||||||
Translation of foreign currency statements
|
(4 | ) | 1 | (3 | ) | |||||||||||||||||||
Stock-based compensation
|
| | ||||||||||||||||||||||
Gain (loss) on derivatives
|
(1 | ) | (1 | ) | ||||||||||||||||||||
Impact of adopting ASC
715-20-65
measurement date change, net of tax of $4
|
7 | 7 | ||||||||||||||||||||||
Change in pension and postretirement plan funded status, net of
tax of $17
|
27 | 27 | ||||||||||||||||||||||
Dividends paid to noncontrolling interest
|
(1 | ) | (1 | ) | ||||||||||||||||||||
Net income
|
148 | 1 | 149 | |||||||||||||||||||||
Balance, September 30, 2008
|
$ | 1 | $ | 694 | $ | 1,557 | $ | (840 | ) | $ | 16 | $ | 1,428 | |||||||||||
The accompanying notes to the financial statements are an
integral part of this statement.
6
Table of Contents
Consolidated
Statement of Comprehensive Income (Loss)
Three months |
Nine months |
|||||||||||||||
ended |
ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
(In millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Consolidated net income
|
$ | 88 | $ | 54 | $ | 275 | $ | 149 | ||||||||
Other comprehensive income (loss)
|
||||||||||||||||
Pension and postretirement plans
|
8 | 7 | 23 | 27 | ||||||||||||
Net currency translation gain (loss)
|
2 | (13 | ) | 8 | (3 | ) | ||||||||||
Gain (loss) on derivatives
|
(1 | ) | | (1 | ) | (1 | ) | |||||||||
Total other comprehensive income (loss )
|
9 | (6 | ) | 30 | 23 | |||||||||||
Consolidated comprehensive income (loss)
|
97 | 48 | 305 | 172 | ||||||||||||
Comprehensive income (loss) attributable to the noncontrolling
interest
|
1 | 1 | 1 | 2 | ||||||||||||
Comprehensive income (loss) attributable to Pactiv
|
$ | 96 | $ | 47 | $ | 304 | $ | 170 | ||||||||
The accompanying notes to the financial statements are an
integral part of this statement.
7
Table of Contents
Notes to
Financial Statements (Unaudited)
Note 1. | Basis of Presentation |
The consolidated statement of income for the three- and
nine-month periods ended September 30, 2009, and 2008, the
condensed consolidated statement of financial position at
September 30, 2009, the condensed consolidated statement of
cash flows for the nine-month period ended September 30,
2009, and 2008, the consolidated statement of changes in equity
for the nine-month period ended September 30, 2009, and
2008, and the consolidated statement of comprehensive income
(loss) for the three- and nine-month periods ended
September 30, 2009, and 2008 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
and at the dates 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 Pactivs
Form 10-K
for the year ended December 31, 2008, 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 the current year
presentation.
We acquired 100% of the stock of Prairie Packaging, Inc.
(Prairie) on June 5, 2007. The results of Prairies
operations have been included in the consolidated financial
statements as of that date.
On January 5, 2009, we purchased the polypropylene cup
business of WinCup for $20 million. This business operated
one manufacturing facility in North Carolina with approximately
100 employees. The results of this business have been
included in the consolidated financial statements as of that
date.
We have three reporting segments:
| Consumer Products manufactures disposable plastic, foam, molded fiber, pressed paperboard, and aluminum packaging products, and sells them to customers 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®. | |
| Foodservice/Food Packaging manufactures foam, clear plastic, aluminum, pressed paperboard, and molded fiber packaging products, and sells them to customers in the food distribution channel, who prepare and process food for consumption. Customers include foodservice distributors, restaurants, other institutional foodservice outlets, food processors, and grocery chains. | |
| Other includes 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.
We have evaluated subsequent events through November 6,
2009, the filing date of this
Form 10-Q,
and have determined that there were no subsequent events to
recognize or disclose in these financial statements.
Note 2. | Summary of Accounting Policies |
For a complete discussion of our accounting policies, refer to
Pactivs most recent filing on
Form 10-K.
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.
8
Table of Contents
Related proceeds are included in cash provided by operating
activities in the statement of cash flows. At September 30,
2009, receivables totaling $110 million were sold, while
receivables totaling $130 million were sold at
September 30, 2008. Discounts and fees related to such
sales were immaterial for the three-month period and
$1 million for the nine-month period ended
September 30, 2009, compared to $1 million for the
three-month period and $3 million for the nine-month period
ended September 30, 2008. 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
The Financial Accounting Standards Board (FASB) issued
Accounting Standards Codification (ASC)
105-10,
The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles,
which was effective for fiscal years, and interim periods within
such fiscal years, ending after September 15, 2009. ASC
105-10
establishes an authoritative United States GAAP superseding all
pre-existing accounting standards and literature. ASC
105-10 is
effective for our September 30, 2009 interim financial
reporting, and did not have a material effect on our financial
statements upon adoption. We have updated all references to
specific authoritative guidance within our interim financial
reporting to reflect the new Accounting Standards Codification
structure.
The FASB issued ASC
820-10,
Fair Value Measurements and Disclosures which was
effective as of January 1, 2008. ASC
820-10
establishes a framework for measuring fair value by providing a
standard definition of fair value as it applies to assets and
liabilities. ASC
820-10,
which does not require the use of any new fair value
measurements, clarifies the application of other accounting
pronouncements that require or permit fair value measurements.
ASC 820-10
did not have a material effect on our financial statements upon
adoption and as of September 30, 2009.
The FASB issued ASC
715-20,
Compensation Retirement Benefits, of
which we adopted the recognition and disclosure provisions on
December 31, 2006. We recorded a charge to accumulated
other comprehensive income of $41 million upon adoption. We
adopted the measurement provisions of ASC
715-20-65 on
January 1, 2008, using the transition method based on the
data as of our September 30, 2007, measurement date. As a
result, we increased retained earnings by
$7 million after tax in 2008.
The FASB issued ASC
825-10,
Financial Instruments which was effective
January 1, 2008. ASC
825-10
permits entities to choose to measure many financial instruments
and certain other items at fair value as of specified election
dates. ASC
825-10
expands the use of fair value measurement, but does not
eliminate disclosure requirements of other accounting standards,
including ASC
820-10. ASC
825-10 did
not impact our financial statements upon adoption and as of
September 30, 2009. We did not choose to measure any
financial instruments at fair value as permitted under the
statement.
The FASB issued ASC
805-10,
Business Combinations, which replaces prior
authoritative guidance on business combinations, and is
effective on a prospective basis for all business combinations
that occur in fiscal years beginning after December 15,
2008, with the exception of accounting for valuation allowances
on deferred taxes and acquired tax contingencies. ASC
805-10
retains the underlying concepts of the prior authoritative
guidance in that all business combinations are still required to
be accounted for at fair value using the acquisition method of
accounting, but it changes the application of the acquisition
method in a number of significant ways. In this regard, the
pronouncement requires that (1) acquisition-related costs
generally be expensed as incurred, (2) noncontrolling
interests be recorded at fair value, (3) in-process
research and development costs be recorded at fair value as an
indefinite lived intangible asset, (4) restructuring costs
associated with a business combination generally be expensed
subsequent to the date of such a combination, and
(5) changes in valuation allowances on deferred tax assets
and income tax uncertainties after the acquisition date
generally be recorded as income tax expense. ASC
805-10
amends ASC
740-10,
Income Taxes such that adjustments made to valuation
allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective
date of ASC
805-10 would
also be subject to the
9
Table of Contents
provisions of ASC
805-10. ASC
805-10 was
effective on January 1, 2009, and did not have a material
impact on our financial statements upon adoption and as of
September 30, 2009.
The FASB issued ASC
810-10-45,
Consolidation which was effective for fiscal years,
and interim periods within such fiscal years, beginning on or
after December 15, 2008. ASC
810-10-45
requires that noncontrolling (minority) interests be recognized
as equity (but separate from parents equity) in
consolidated financial statements, and that net earnings related
to noncontrolling interests be included in consolidated net
income, but identified separately on the face of the income
statement. ASC
810-10-45
also amends prior authoritative guidance, and expands disclosure
requirements regarding the interests of parents and
noncontrolling interests. ASC
810-10-45
was effective on January 1, 2009, and did not have a
material impact on our financial statements upon adoption and as
of September 30, 2009.
The FASB issued the disclosure requirements within ASC
815-10-65,
Derivatives and Hedging which was effective for
fiscal years, and interim periods within such fiscal years,
beginning on or after November 15, 2008. ASC
815-10-65
requires enhanced disclosures about an entitys derivative
and hedging activities, specifically how and why an entity uses
derivative instruments, how derivative instruments and related
hedged items are accounted for under ASC
815-10 and
its related interpretations, and how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows. The disclosure
requirements of ASC
815-10-65
were effective on January 1, 2009, and did not have a
material impact on our financial statements upon adoption and as
of September 30, 2009.
The FASB issued the disclosure requirements within ASC
825-10-65,
Financial Instruments which was effective for
interim reporting periods ending after June 15, 2009. ASC
825-10-65
amends prior authoritative guidance to require disclosures about
fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual
financial statements. ASC
825-10-65
also amends ASC
270-10,
Interim Reporting, to require those disclosures in
summarized financial information at interim reporting periods.
The disclosure requirements of ASC
825-10-65
were effective for our June 30, 2009 interim reporting, and
did not have a material effect on our financial statements upon
adoption and as of September 30, 2009.
The FASB issued ASC
855-10,
Subsequent Events which was effective for fiscal
years, and interim periods within such fiscal years, ending
after June 15, 2009. ASC
855-10
requires the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date, that
is, whether that date represents the date the financial
statements were issued or were available to be issued. ASC
855-10 was
effective for our June 30, 2009 interim reporting, and did
not have a material effect on our financial statements upon
adoption and as of September 30, 2009.
The FASB issued ASC
860-10
Transfers and Servicing which is effective for
interim and annual periods ending after November 15, 2009.
ASC 860-10
requires additional information about transfers of financial
assets and where companies have continuing exposure to the risk
related to transferred financial assets. ASC
860-10
eliminates the concept of a qualifying special purpose entity,
changes the requirements for derecognizing financial assets, and
requires additional disclosures. We are currently reviewing ASC
860-10, and
evaluating the potential impact of its adoption on our financial
statements.
Note 3. | Restructuring and Other |
In 2008, we implemented a cost reduction program that included
the consolidation of two small facilities, asset
rationalizations, and headcount reductions. The program is
essentially complete with the exception of a small idle plant
held for sale. The accrued restructuring balance of
$1 million as of September 30, 2009, and
$2 million as of December 31, 2008, is for remaining
severance payments. Cash payments related to restructuring and
other were $1 million pretax for the nine-month period
ended September 30, 2009.
In the first nine months of 2008, we recorded a charge of
$9 million after tax, or $0.07 per share. Cash payments
related to restructuring and other charges were cash neutral for
the nine-month period ended September 30, 2008.
10
Table of Contents
Note 4. | Business Combination |
On January 5, 2009, we purchased the polypropylene cup
business of WinCup for $20 million. The results of this
business have been included in the consolidated financial
statements as of that date.
The total cost of the acquisition was allocated to the assets
acquired and the liabilities assumed based on their respective
fair values. Goodwill and other intangible assets recorded in
connection with the acquisition totaled $1 million and
$3 million, respectively, and all of the goodwill is
expected to be deductible for tax purposes. Recorded intangible
assets pertain to customer relationships and are being amortized
over a
15-year
period.
Preliminary appraisals of the fair-market value and physical
counts of the assets acquired during the third quarter of 2009
resulted in goodwill being decreased by $1 million, and
property, plant, and equipment being increased by the same
amount.
The following table summarizes the preliminary estimated fair
values of the assets acquired and liabilities assumed as of the
acquisition date.
(In millions) | ||||
Current assets
|
$ | 4 | ||
Property, plant, and equipment
|
13 | |||
Intangible assets
|
3 | |||
Goodwill
|
1 | |||
Total assets acquired
|
21 | |||
Current liabilities
|
1 | |||
Total liabilities assumed
|
1 | |||
Net assets acquired
|
$ | 20 | ||
Note 5. | Discontinued Operations |
On October 12, 2005, we completed the sale of most of our
protective and flexible packaging businesses to Pregis
Corporation for $523 million. Amounts recorded in our
financial statements related to those businesses are classified
as being applicable to discontinued operations.
In the third quarter of 2009, we recorded $15 million of
income from discontinued operations related to the expiration of
the statute of limitations on the 2005 tax year for tax
liabilities which had been recorded in conjunction with divested
businesses.
Liabilities related to discontinued operations totaled
$13 million at September 30, 2009, and
$30 million at December 31, 2008.
Note 6. | Long-Term Debt and Financing Arrangements |
We have a revolving credit facility, against which there were no
borrowings at September 30, 2009.
As a part of the Prairie acquisition, we assumed its liability
for $5 million borrowed from the Illinois Department
Finance Authority (IDFA), which was funded by industrial
development revenue bonds issued by the IDFA. This debt will
mature on December 1, 2010, and bears interest at varying
rates (0.60% as of September 30, 2009) not to exceed
12% per annum.
11
Table of Contents
Note 7. | Financial Instruments |
Asset
and Liability Instruments
At September 30, 2009, and December 31, 2008, the fair
value of cash and temporary cash investments, short- and
long-term receivables, accounts payable, and short-term debt
were the same as, or not materially different from, the amount
recorded for these assets and liabilities. The fair value of
long-term debt was approximately $1.5 billion at
September 30, 2009, and $1.4 billion at
December 31, 2008. The recorded amount was
$1.3 billion at September 30, 2009, and at
December 31, 2008. The fair value of long-term debt was
based on quoted market prices for our debt instruments.
Instruments
with Off-Balance Sheet Risk (Including
Derivatives)
We use derivative instruments, principally swaps, forward
contracts, and options, to manage our exposure to movements in
foreign currency values, interest rates, and commodity prices.
Cash Flow
Hedges
For derivative instruments that are designated and qualify as
cash flow hedges, the effective portion of the gain or loss on
the derivative is reported as a component of other comprehensive
income (OCI) and reclassified into earnings in the same period
or periods in which the hedged transaction affects earnings.
Financial instruments designated as cash flow hedges are
assessed both at inception and quarterly thereafter to ensure
they are effective in offsetting changes in the cash flows of
the related underlying exposures. The fair value of the hedge
instruments are reclassified from OCI to earnings if the hedge
ceases to be highly effective or if the hedged transaction is no
longer probable.
Foreign
Currency
From time to time, we use derivative financial instruments to
hedge our exposure to changes in foreign currency exchange
rates, principally using foreign currency purchase and sale
contracts with terms of less than one year. We do so to mitigate
our exposure to exchange rate changes related to third-party
trade receivables and accounts payable. Net gains or losses on
such contracts are recognized in the statement of income as
offsets to foreign currency exchange gains or losses on the
underlying transactions. In the statement of cash flows, cash
receipts and payments related to hedging contracts are
classified in the same way as cash flows from the transactions
being hedged. We had no open foreign currency contracts as of
September 30, 2009.
Interest
Rates
We entered into interest rate swap agreements in connection with
the acquisition of Prairie. The agreements were terminated on
June 20, 2007, resulting in a gain of $9 million. This
gain is being recorded as a reduction of interest expense over
the average life of the underlying debt. Amounts recognized in
earnings related to our hedging transactions were
$1 million for the nine months ended September 30,
2009, and September 30, 2008.
Commodity
During the third quarter of 2009, we entered into natural gas
purchase agreements with third parties, hedging a portion of the
fourth quarter of 2009 and first quarter of 2010 purchases of
natural gas used in the production processes at certain of our
plants. These purchase agreements are marked to market, with the
resulting gains or losses recognized in earnings when hedged
transactions are recorded. The
mark-to-market
adjustments at September 30, 2009, were immaterial.
To minimize volatility in our margins due to large fluctuations
in the price of commodities, in the second quarter of 2009 we
entered into swap contracts to manage risks associated with
market fluctuations in resin prices. These contracts are
designated as cash flow hedges of forecasted commodity
purchases. As of
12
Table of Contents
September 30, 2009, we have hedged, on a monthly basis,
approximately 4% of the expected resin purchase volume for the
remainder of 2009. Assuming the market prices of the swap
contracts remain unchanged from the prices at September 30,
2009, the estimated gain expected to be reclassified to earnings
in the remainder of 2009 is immaterial.
Fair
Value Measurements
Financial assets and liabilities that are recorded at fair value
consist of derivative contracts that are used to hedge exposures
to interest rate, commodity, and currency risks. ASC
820-10-35
sets out a fair value hierarchy that groups fair value
measurement inputs into three classifications: Level 1,
Level 2, or Level 3. Level 1 inputs are quoted
prices in an active market for identical assets or liabilities.
Level 2 inputs are inputs other than quoted prices included
within Level 1 that are observable for the asset or
liability, either directly or indirectly. Level 3 inputs
are unobservable inputs for the asset or liability. All of our
fair value measurements for derivative contracts use
Level 2 inputs.
The fair value of our derivative instruments recorded in the
consolidated balance sheet was immaterial as of
September 30, 2009, and as of December 31, 2008.
The following table indicates the amounts recognized in OCI for
those derivatives designated as cash flow hedges for the nine
months ended September 30, 2009, and September 30,
2008.
(Gain) or Loss |
||||||||||||||||||
Reclassified from OCI into |
||||||||||||||||||
Gain or (Loss) |
Income |
|||||||||||||||||
Recognized in OCI |
Location of Gain or (Loss) |
(Effective |
||||||||||||||||
(Effective Portion) |
Reclassified from OCI into |
Portion) | ||||||||||||||||
(In millions) | 2009 | 2008 | Income (Effective Portion) | 2009 | 2008 | |||||||||||||
Commodity Contracts
|
$ | | $ | | Cost of Sales | $ | (2 | ) | $ | | ||||||||
Interest Rate Contracts
|
$ | | $ | | Interest Expense | $ | (1 | ) | $ | (1 | ) |
There were no transactions that ceased to qualify as a cash flow
hedge in the first nine months of 2009 or 2008.
Note 8. | Goodwill and Intangible Assets |
The changes in the carrying values of goodwill between
December 31, 2008, and September 30, 2009, are shown
in the following table.
Consumer |
Foodservice/ |
|||||||||||
(In millions) | Products | Food Packaging | Total | |||||||||
Balance, December 31, 2008
|
$ | 289 | $ | 835 | $ | 1,124 | ||||||
Goodwill additions
|
1 | | 1 | |||||||||
Foreign currency translation adjustment
|
| 4 | 4 | |||||||||
Balance, September 30, 2009
|
$ | 290 | $ | 839 | $ | 1,129 | ||||||
13
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Intangible assets are summarized in the following table.
September 30, 2009 | December 31, 2008 | |||||||||||||||
Carrying |
Accumulated |
Carrying |
Accumulated |
|||||||||||||
(In millions) | value | amortization | value | amortization | ||||||||||||
Intangible assets subject to amortization
|
||||||||||||||||
Patents
|
$ | 87 | $ | 73 | $ | 87 | $ | 69 | ||||||||
Customer relationships
|
209 | 32 | 206 | 21 | ||||||||||||
Other
|
145 | 86 | 145 | 81 | ||||||||||||
441 | 191 | 438 | 171 | |||||||||||||
Intangible assets not subject to amortization (primarily
trademarks)
|
129 | | 129 | | ||||||||||||
$ | 570 | $ | 191 | $ | 567 | $ | 171 | |||||||||
Intangible assets of $3 million were recorded in connection
with the acquisition of WinCup and are being amortized over a
15-year
period for both book and tax purposes. Amortization expense for
intangible assets was $19 million for the nine months ended
September 30, 2009, and $20 million for the nine
months ended September 30, 2008. Amortization expense is
estimated to total $26 million for 2009, $25 million
for 2010, $24 million for 2011, $23 million for 2012,
and $19 million for 2013.
We review the carrying value of our goodwill and
indefinite-lived intangibles for possible impairment on an
annual basis. Our annual review is conducted in the fourth
quarter of the year, or earlier if warranted by events or
changes in circumstances. There were no events or changes in
circumstances in the first nine months of 2009 that warranted an
impairment review of the goodwill and indefinite-lived
intangibles.
Note 9. | Property, Plant, and Equipment, Net |
September 30, |
December 31, |
|||||||
(In millions) | 2009 | 2008 | ||||||
Original cost
|
||||||||
Land, buildings, and improvements
|
$ | 661 | $ | 654 | ||||
Machinery and equipment
|
1,879 | 1,808 | ||||||
Other, including construction in progress
|
126 | 125 | ||||||
$ | 2,666 | $ | 2,587 | |||||
Less accumulated depreciation and amortization
|
(1,485 | ) | (1,378 | ) | ||||
Net property, plant, and equipment
|
$ | 1,181 | $ | 1,209 | ||||
Capitalized interest was $1 million for the nine months
ended September 30, 2009, and was $2 million for the
nine months ended September 30, 2008.
Note 10. | Income Taxes |
Total gross unrecognized income tax benefits were
$41 million as of September 30, 2009, and
$57 million as of December 31, 2008. The total amount
of unrecognized income tax benefits that, if recognized, would
favorably impact our effective tax rate for continuing
operations in future periods was $32 million at
September 30, 2009, and $34 million at
December 31, 2008. As of September 30, 2009, it is
reasonably possible that the amount of unrecognized income tax
benefits may increase or decrease during the following twelve
months. However, it is not expected that any such changes,
individually or in total, would significantly affect our
operating results or financial condition.
It is our continuing practice to record accruals for interest
and penalties related to income tax matters as income tax
expense. Such accruals totaled $9 million as of
September 30, 2009, and $10 million as of
14
Table of Contents
December 31, 2008. Expense recorded in the first nine
months of 2009 for interest and penalties for continuing
operations was $1 million.
U.S. federal income tax returns filed for the years 2006
through 2008 are open for examination by the Internal Revenue
Service. Various state, local, and foreign tax returns filed for
the years 2002 through 2008 are open for examination by tax
authorities in those jurisdictions.
Total gross unrecognized income tax benefits related to
discontinued operations were $1 million as of
September 30, 2009, and $14 million as of
December 31, 2008. The total amount of unrecognized income
tax benefits that, if recognized, would favorably impact income
related to discontinued operations in future periods was
$1 million at September 30, 2009, and $14 million
at December 31, 2008. In the first nine months of 2009, an
income tax benefit of $14 million was recorded, which
included the reversal of $2 million of interest and
penalties as a result of the expiration of the 2005 tax year
statute of limitations.
In connection with the adoption of ASC
718-10,
Share-Based Payment, we elected to use the
simplified method in calculating our additional paid-in capital
pool, as described in prior authoritative guidance. ASC
718-10
requires that tax deductions for compensation costs in excess of
amounts recognized for accounting purposes be reported as cash
flow from financing activities, rather than as cash flow from
operating activities. Such excess amounts totaled
$1 million for the nine months ended September 30,
2009.
Note 11. | Common Stock |
Earnings
Per Share
Earnings from continuing operations per share of common stock
outstanding were computed as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(In millions, except share and per share data) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Basic earnings per share
|
||||||||||||||||
Income from continuing operations attributable to Pactiv
|
$ | 72 | $ | 53 | $ | 260 | $ | 152 | ||||||||
Weighted-average number of shares of common stock outstanding
|
131,972,681 | 130,907,540 | 131,860,351 | 130,762,298 | ||||||||||||
Basic earnings from continuing operations per share attributable
to Pactiv
|
$ | 0.55 | $ | 0.40 | $ | 1.97 | $ | 1.16 | ||||||||
Diluted earnings per share
|
||||||||||||||||
Income from continuing operations attributable to Pactiv
|
$ | 72 | $ | 53 | $ | 260 | $ | 152 | ||||||||
Weighted-average number of shares of common stock outstanding
|
131,972,681 | 130,907,540 | 131,860,351 | 130,762,298 | ||||||||||||
Effect of dilutive securities Stock options
|
512,681 | 667,501 | 293,795 | 705,627 | ||||||||||||
Performance shares
|
707,921 | 522,591 | 665,148 | 580,876 | ||||||||||||
Restricted shares
|
| 1,212 | | 1,803 | ||||||||||||
Weighted-average number of shares of common stock outstanding,
including dilutive securities
|
133,193,283 | 132,098,844 | 132,819,294 | 132,050,604 | ||||||||||||
Diluted earnings from continuing operations per share
attributable to Pactiv
|
$ | 0.54 | $ | 0.40 | $ | 1.96 | $ | 1.15 | ||||||||
15
Table of Contents
We did not repurchase stock in the first nine months of 2009. In
the same period of 2008, we acquired 75,218 shares of our
common stock at an average price of $26.38 per share, for a
total of $2 million.
Rabbi
Trust
In November 1999, we established a rabbi 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
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 12. | Pension Plans and Other Postretirement Benefits |
The impact of pension plans on pretax income was as follows:
Nine months |
||||||||||||||||
Three months |
ended |
|||||||||||||||
ended September 30, | September 30, | |||||||||||||||
(In millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Components of net periodic benefit income (expense)
|
||||||||||||||||
Service cost of benefits earned
|
$ | (4 | ) | $ | (4 | ) | $ | (11 | ) | $ | (12 | ) | ||||
Interest cost of benefit obligations
|
(60 | ) | (60 | ) | (180 | ) | (180 | ) | ||||||||
Expected return on plan assets
|
87 | 87 | 256 | 262 | ||||||||||||
Amortization of unrecognized net losses
|
(13 | ) | (11 | ) | (38 | ) | (33 | ) | ||||||||
Total net periodic benefit income (expense)
|
$ | 10 | $ | 12 | $ | 27 | $ | 37 | ||||||||
We have postretirement 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, copayments, and other
limitations. These postretirement plans are not funded, and we
reserve the right to change them.
The impact of postretirement plans on pretax income was as
follows:
Three months |
Nine months |
|||||||||||||||
ended |
ended |
|||||||||||||||
September 30, | September 30, | |||||||||||||||
(In millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Components of net periodic benefit income (expense)
|
||||||||||||||||
Service cost of benefits earned
|
$ | (1 | ) | $ | (1 | ) | $ | (1 | ) | $ | (1 | ) | ||||
Interest cost of benefit obligations
|
(1 | ) | (1 | ) | (3 | ) | (4 | ) | ||||||||
Amortization of unrecognized prior service costs
|
1 | 1 | 1 | 1 | ||||||||||||
Amortization of unrecognized net losses
|
| (1 | ) | | (1 | ) | ||||||||||
Total net periodic benefit income (expense)
|
$ | (1 | ) | $ | (2 | ) | $ | (3 | ) | $ | (5 | ) | ||||
Note 13. | Segment Information |
Our three segments are Consumer Products, Foodservice/Food
Packaging, and Other. See Note 1 for additional details.
16
Table of Contents
The following table sets forth certain segment information.
Consumer |
Foodservice/Food |
|||||||||||||||
(In millions) | Products | Packaging | Other | Total | ||||||||||||
For the three months ended September 30, 2009
|
||||||||||||||||
Sales to external customers
|
$ | 312 | $ | 527 | $ | | $ | 839 | ||||||||
Operating income (loss)
|
72 | 70 | (5 | ) (b) | 137 | |||||||||||
For the three months ended September 30, 2008
|
||||||||||||||||
Sales to external customers
|
$ | 342 | $ | 583 | $ | | $ | 925 | ||||||||
Operating income (loss) (a)
|
51 | 52 | (1 | ) (b) | 102 | |||||||||||
At September 30, 2009, and for the nine months then
ended
|
||||||||||||||||
Sales to external customers
|
$ | 951 | $ | 1,555 | $ | | $ | 2,506 | ||||||||
Operating income (loss)
|
240 | 254 | (11 | ) (b) | 483 | |||||||||||
Total assets
|
1,248 | 2,099 | 216 | (c) | 3,563 | |||||||||||
At September 30, 2008, and for the nine months then
ended
|
||||||||||||||||
Sales to external customers
|
$ | 990 | $ | 1,694 | $ | | $ | 2,684 | ||||||||
Operating income (loss) (a)
|
142 | 167 | 1 | (b) | 310 | |||||||||||
Total assets
|
1,351 | 2,181 | 328 | (c) | 3,860 |
(a) | Includes restructuring and other charges/(credits) of ($2) million for the three months ended September 30, 2008 ($3 million of credits for Consumer Products and $1 million of charges for Foodservice/Food Packaging), and $14 million for the nine months ended September 30, 2008 ($4 million for Consumer Products, $9 million for Foodservice/Food Packaging, and $1 million for Other). | |
(b) | Includes pension plan income and unallocated corporate expenses. | |
(c) | Includes administrative service operations. |
Note 14. | Noncontrolling Interests |
The FASB issued ASC
810-10-45,
Consolidation which is effective for fiscal years,
and interim periods within such fiscal years, beginning on or
after December 15, 2008. ASC
810-10-45
requires that noncontrolling (minority) interests be recognized
as equity (but separate from parents equity) in
consolidated financial statements, and that net earnings related
to noncontrolling interests be included in consolidated net
income, but identified separately on the face of the income
statement. ASC
810-10-45
also amends prior authoritative guidance, and expands disclosure
requirements regarding the interests of parents and
noncontrolling interests. In order to meet the ASC
810-10-45
disclosure requirements upon adoption, we have added a statement
of shareholders equity and a statement of comprehensive
income (loss) to our interim reporting.
There were no changes in ownership interest in our subsidiaries
for the nine months ended September 30, 2009, or
September 30, 2008.
The preceding notes are an integral part of the foregoing
financial statements.
17
Table of Contents
ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Basis of
Presentation
Financial statements for all periods presented in this report
were 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
prior year financial information to conform to the current year
presentation.
We acquired 100% of the stock of Prairie Packaging, Inc.
(Prairie) on June 5, 2007. The results of Prairies
operations have been included in the consolidated financial
statements as of that date.
On January 5, 2009, we purchased the polypropylene cup
business of WinCup for $20 million. This business operated
one manufacturing facility in North Carolina with approximately
100 employees. The results of this business have been
included in the consolidated financial statements as of that
date.
We have three reporting segments:
| Consumer Products manufactures disposable plastic, foam, molded fiber, pressed paperboard, and aluminum packaging products, and sells them to customers 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®. | |
| Foodservice/Food Packaging manufactures foam, clear plastic, aluminum, pressed paperboard, and molded fiber packaging products, and sells them 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 includes 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 2008, we implemented a cost reduction program that included
the consolidation of two small facilities, asset
rationalizations, and headcount reductions. The program is
essentially complete with the exception of a small idle plant
held for sale. The accrued restructuring balance of
$1 million as of September 30, 2009, and
$2 million as of December 31, 2008, is for remaining
severance payments. Cash payments related to restructuring and
other were $1 million pretax for the nine-month period
ended September 30, 2009.
In the first nine months of 2008, we recorded a charge of
$9 million after tax, or $0.07 per share. Cash payments
related to restructuring and other charges were cash neutral for
the nine-month period ended September 30, 2008.
18
Table of Contents
Significant
Trends, Opportunities and Challenges
The primary raw materials used to manufacture our products are
plastic resins, principally polystyrene and polyethylene.
Average industry prices for polystyrene and polyethylene as
published by Chemical Market Associates, Inc. are depicted in
the following graphs.
CMAI Polystyrene (cents/lb) | CMAI Polyethylene (cents/lb) | |
The prices of plastic resins are affected by the prices of crude
oil and natural gas, as well as supply and demand factors of
various intermediate petrochemicals. In recent years, there have
been significant movements in resin prices, which rose to
historic highs in 2008, and dropped precipitously at the end of
2008 and into early 2009. In the third quarter of 2009, prices
rose moderately from the second quarter of 2009. We have
historically adjusted our selling prices to reflect changes in
raw material costs, although there is usually a lag of several
months. Some of our business is pursuant to contracts that have
price indices that automatically adjust after a set number of
months, usually three or six, to reflect changes in certain raw
materials.
Our business is sensitive to other energy-related cost
movements, particularly those that affect transportation and
utility costs. Historically, we have been able to mitigate the
effect of higher energy-related costs with productivity
improvements and other cost reductions. As energy costs have
declined, we have seen a favorable impact on our margins in the
first nine months of 2009.
The economic downturn that began in late 2007 has impacted
consumer spending in many areas and has reduced demand for some
of our products. However, our overall volume has not been
adversely impacted by the economic downturn.
In 2006, we began to introduce lean principles and
tools in many of our operating facilities. We are expanding the
use of lean principles to help us accelerate productivity
improvements by reducing inventory and scrap levels, providing
rapid stock replenishment, shortening scheduling cycles,
improving our one-stop shopping service, eliminating
nonvalue-added activities, and streamlining processes. As this
is a long-term process, we expect our ability to use these tools
throughout the organization will have a positive effect on our
operating results in future years.
Worldwide stock markets declined significantly in 2008, and, as
a result, our U.S. pension plan was substantially
underfunded at December 31, 2008. See the Liquidity
and Capital Resources section for further discussion of
the impact on the company of this underfunding.
We believe that cash flow from operations, available cash
reserves, and the ability to obtain cash under our credit
facility and asset securitization program will be sufficient to
meet current and future potential pension funding, liquidity,
and capital requirements.
19
Table of Contents
Results
of Continuing Operations
Three
Months Ended September 30, 2009, Compared with Three Months
Ended September 30, 2008
Sales
Three months |
||||||||||||||||
ended |
Increase |
|||||||||||||||
September 30, | (decrease) | |||||||||||||||
(In millions) | 2009 | 2008 | Amount | Percent | ||||||||||||
Consumer Products
|
$ | 312 | $ | 342 | $ | (30 | ) | (8.8 | )% | |||||||
Foodservice/Food Packaging
|
527 | 583 | (56 | ) | (9.6 | ) | ||||||||||
Total
|
$ | 839 | $ | 925 | $ | (86 | ) | (9.3 | )% | |||||||
Sales declined 9%, reflecting lower pricing of 11% offset
partially by volume growth of 2%.
Sales for Consumer Products decreased 9%, reflecting lower
pricing of 8% and a volume decline of 1%. The price decline
reflects normal reductions due to lower raw material costs.
Volume was negatively impacted by a decline in waste bags, which
was offset partially by strength in tableware. Waste bag volume
was down due to a decline in the overall waste bag market, as
well as lower shipments related to
Hefty®
waste bag promotions in the non-grocery channels.
Foodservice/Food Packaging sales fell 10%, driven by lower
average selling prices of 13% and unfavorable foreign exchange
of 1%, offset partially by volume growth of 4%. The lower
pricing was related to decreases in raw material costs. The
volume increase primarily was related to continued growth in
cups and cutlery, as well as growth in a number of other product
areas, including polypropylene and paper-based items.
Operating
Income
Three months |
||||||||||||||||
ended |
Increase |
|||||||||||||||
September 30, | (decrease) | |||||||||||||||
(In millions) | 2009 | 2008 | Amount | Percent | ||||||||||||
Consumer Products
|
$ | 72 | $ | 51 | $ | 21 | 41.2 | % | ||||||||
Foodservice/Food Packaging
|
70 | 52 | 18 | 34.6 | ||||||||||||
Other
|
(5 | ) | (1 | ) | (4 | ) | (400.0 | ) | ||||||||
Total
|
$ | 137 | $ | 102 | $ | 35 | 34.3 | % | ||||||||
Operating income increased primarily as a result of lower
operating costs of $23 million driven by productivity and
lower freight and utility rates, a $19 million improvement
in spread (the difference between selling prices and raw
material costs), and higher volume of $10 million. This was
offset, in part, by higher selling, general, and administrative
(SG&A) expense of $16 million. The increase in
SG&A expense was primarily a result of more normal
advertising spending and incentive compensation accruals this
year, as well as lower pension income.
The following table shows the impact of restructuring and other
charges (credits) on 2008 operating income by segment.
Operating income - three months ended September 30, 2008 | ||||||||||||
GAAP |
Restructuring and |
Excluding restructuring |
||||||||||
(In millions) | basis | other | and other | |||||||||
Consumer Products
|
$ | 51 | $ | (3 | ) | $ | 48 | |||||
Foodservice/Food Packaging
|
52 | 1 | 53 | |||||||||
Other
|
(1 | ) | | (1 | ) | |||||||
Total
|
$ | 102 | $ | (2 | ) | $ | 100 | |||||
20
Table of Contents
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. The
restructuring and other charges relate to actions that will have
an ongoing effect on our company. Considering such charges as
being only applicable to the periods in which they are
recognized could make our operating performance in those periods
more difficult to evaluate relative to other periods in which
there are 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 shows operating income excluding
restructuring and other charges.
Three months |
Increase |
|||||||||||||||
ended September 30, | (decrease) | |||||||||||||||
(In millions) | 2009 | 2008 | Amount | Percent | ||||||||||||
Consumer Products
|
$ | 72 | $ | 48 | $ | 24 | 50.0 | % | ||||||||
Foodservice/Food Packaging
|
70 | 53 | 17 | 32.1 | ||||||||||||
Other
|
(5 | ) | (1 | ) | (4 | ) | (400.0 | ) | ||||||||
Total
|
$ | 137 | $ | 100 | $ | 37 | 37.0 | % | ||||||||
The increase in operating income for Consumer Products was
driven mainly by favorable spread of $21 million, lower
operating costs of $11 million, offset partially by higher
SG&A expense of $8 million. The increase in SG&A
expense primarily was due to higher advertising expense in
support of the launch of
Hefty®
Odor
Block®
unscented odor control waste bags.
Higher operating income for Foodservice/Food Packaging was
driven primarily by lower operating costs of $12 million,
and increased volume of $11 million, partially offset by
higher SG&A expense of $4 million.
The decrease in Other operating income was due mainly to lower
pension income.
Income
from Continuing Operations
We recorded income from continuing operations of
$73 million, or $0.54 per share, compared with
$54 million, or $0.40 per share, in 2008. The change was
driven primarily by higher operating income of $22 million
($35 million before tax) as described previously.
Discontinued
Operations
Income
(Loss) from Discontinued Operations
In the third quarter of 2009, we recorded $15 million of
income from discontinued operations related to the expiration of
the statute of limitations on the 2005 tax year for tax
liabilities which had been recorded in conjunction with divested
businesses.
Nine
Months Ended September 30, 2009, Compared with Nine Months
Ended September 30, 2008
Sales
Nine months |
Increase |
|||||||||||||||
ended September 30, | (decrease) | |||||||||||||||
(In millions) | 2009 | 2008 | Amount | Percent | ||||||||||||
Consumer Products
|
$ | 951 | $ | 990 | $ | (39 | ) | (3.9 | )% | |||||||
Foodservice/Food Packaging
|
1,555 | 1,694 | (139 | ) | (8.2 | ) | ||||||||||
Total
|
$ | 2,506 | $ | 2,684 | $ | (178 | ) | (6.6 | )% | |||||||
21
Table of Contents
Sales decreased 7%, reflecting lower pricing of 7% and
unfavorable foreign exchange of 1%, offset in part by higher
volume of 1%. The decrease in pricing was due to normal price
declines related to lower raw material costs.
Sales for Consumer Products declined 4%, reflecting lower
pricing.
Foodservice/Food Packaging sales fell 8%, as higher volume of 2%
was more than offset by average selling price decreases of 8%
and unfavorable foreign exchange of 2%.
Operating
Income
Nine months |
||||||||||||||||
ended |
Increase |
|||||||||||||||
September 30, | (decrease) | |||||||||||||||
(In millions) | 2009 | 2008 | Amount | Percent | ||||||||||||
Consumer Products
|
$ | 240 | $ | 142 | $ | 98 | 69.0 | % | ||||||||
Foodservice/Food Packaging
|
254 | 167 | 87 | 52.1 | ||||||||||||
Other
|
(11 | ) | 1 | (12 | ) | (1,200.0 | ) | |||||||||
Total
|
$ | 483 | $ | 310 | $ | 173 | 55.8 | % | ||||||||
Operating income increased primarily as a result of a
$147 million improvement in spread, lower operating costs
of $51 million driven by productivity and lower freight and
utility rates, and lower restructuring costs of
$14 million. This was offset, in part, by higher SG&A
expense of $55 million, primarily due to higher incentive
compensation accruals, increased advertising expense, and lower
pension income.
The following table shows the impact of restructuring and other
charges on 2008 operating income by segment.
Operating income - nine months ended September 30, 2008 | ||||||||||||
GAAP |
Restructuring and |
Excluding restructuring |
||||||||||
(In millions) | Basis | other | and other | |||||||||
Consumer Products
|
$ | 142 | $ | 4 | $ | 146 | ||||||
Foodservice/Food Packaging
|
167 | 9 | 176 | |||||||||
Other
|
1 | 1 | 2 | |||||||||
Total
|
$ | 310 | $ | 14 | $ | 324 | ||||||
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. The
restructuring and other charges relate to actions that will have
an ongoing effect on our company. Considering such charges as
being only applicable to the periods in which they are
recognized could make our operating performance in those periods
more difficult to evaluate relative to other periods in which
there are 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 shows operating income excluding
restructuring and other charges.
Nine months |
||||||||||||||||
ended |
Increase |
|||||||||||||||
September 30, | (decrease) | |||||||||||||||
(In millions) | 2009 | 2008 | Amount | Percent | ||||||||||||
Consumer Products
|
$ | 240 | $ | 146 | $ | 94 | 64.4 | % | ||||||||
Foodservice/Food Packaging
|
254 | 176 | 78 | 44.3 | ||||||||||||
Other
|
(11 | ) | 2 | (13 | ) | (650.0 | ) | |||||||||
Total
|
$ | 483 | $ | 324 | $ | 159 | 49.1 | % | ||||||||
22
Table of Contents
The increase in operating income for Consumer Products was
driven mainly by favorable spread of $98 million and lower
operating costs of $28 million, offset partially by higher
SG&A expense of $29 million, primarily related to
higher advertising expense as well as higher incentive
compensation accruals.
Higher operating income for Foodservice/Food Packaging was
driven primarily by favorable spread of $49 million, lower
operating costs of $23 million, and higher volume of
$21 million, partially offset by increased SG&A
expense of $14 million, primarily related to increased
incentive compensation accruals.
The decrease in Other operating income was due mainly to higher
compensation accruals and lower pension income.
Income
from Continuing Operations
We recorded income from continuing operations of
$261 million, or $1.96 per share, for the nine months ended
September 30, 2009, compared with $153 million, or
$1.15 per share, in 2008. The change was driven primarily by
higher operating income of $109 million ($173 million
before tax) as described previously.
Discontinued
Operations
Income
(Loss) from Discontinued Operations
In 2009, we recorded $14 million of income from
discontinued operations primarily related to the expiration of
the statute of limitations on the 2005 tax year for tax
liabilities which had been recorded in conjunction with divested
businesses. In 2008, we recorded expense from discontinued
operations of $4 million which was attributed to taxes
associated with business dispositions, which occurred in prior
years.
Liquidity
and Capital Resources
Capitalization
September 30, |
December 31, |
Increase |
||||||||||
(In millions) | 2009 | 2008 | (decrease) | |||||||||
Short-term debt, including current maturities of long-term debt
|
$ | | $ | | $ | | ||||||
Long-term debt
|
1,275 | 1,345 | (70 | ) | ||||||||
Total debt
|
1,275 | 1,345 | (70 | ) | ||||||||
Noncontrolling interest
|
16 | 16 | | |||||||||
Pactiv shareholders equity
|
952 | 639 | 313 | |||||||||
Total capitalization
|
$ | 2,243 | $ | 2,000 | $ | 243 | ||||||
Ratio of total debt to total capitalization
|
56.8 | % | 67.3 | % |
Cash
Flows
Nine months |
Increase |
|||||||||||
ended September 30, |
(decrease) |
|||||||||||
(In millions) | 2009 | 2008 | in cash flow | |||||||||
Cash provided (used) by:
|
||||||||||||
Operating activities
|
$ | 191 | $ | 204 | $ | (13 | ) | |||||
Investing activities
|
(96 | ) | (109 | ) | 13 | |||||||
Financing activities
|
(71 | ) | (152 | ) | 81 |
The decrease in cash provided by operating activities was driven
primarily by a $400 million pretax contribution to our
U.S. pension plan, reduced by related favorable cash tax
effects of approximately
23
Table of Contents
$100 million. This was offset partially by higher income
from continuing operations of $108 million. In addition, a
smaller inventory build versus prior year added
$55 million, a reduction in accounts receivable compared
with an increase in accounts receivable the previous year
contributed $48 million, an increase in other current
liabilities added $41 million, an increase in tax accruals
added $23 million, and lower pension income accounted for
$10 million.
The decrease in cash used by investing activities was driven by
lower capital expenditures of $31 million, partially offset
by the acquisition of the WinCup polypropylene cup business for
$20 million.
The decrease in cash used by financing activities was a result
of lower long-term revolving debt repayments of $80 million.
Capital
Commitments
Commitments for authorized capital expenditures totaled
approximately $75 million at September 30, 2009. It is
anticipated that the majority of these expenditures will be
funded from existing cash and short-term investments and
internally generated cash.
Contractual
Obligations
There has been no material change in the companys
aggregate contractual obligations since December 31, 2008.
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
revolving credit facility of $750 million, under which no
balance was outstanding at September 30, 2009. We were in
full compliance with the financial and other covenants of our
revolving credit agreement at the end of the period. The two
financial covenant ratios contained in our debt agreements are
an interest coverage ratio and the total debt to EBITDA ratio.
The interest coverage ratio is defined as consolidated earnings
before interest, taxes, depreciation and amortization, and other
unusual noncash items (EBITDA) divided by interest expense. The
minimum required ratio is 3.50 to 1. The total debt to EBITDA
ratio is calculated by dividing the total debt by EBITDA. The
maximum permitted total debt to EBITDA ratio is 3.50 to 1.
24
Table of Contents
The interest coverage ratio and the debt to EBITDA ratio are
shown in the following table.
Plus |
Less |
|||||||||||||||
Twelve months |
Nine months |
Nine months |
Twelve months |
|||||||||||||
ended |
ended |
ended |
ended |
|||||||||||||
(In millions) | December 31, 2008 | September 30, 2009 | September 30, 2008 | September 30, 2009 | ||||||||||||
Net income attributable to Pactiv (1)
|
$ | 217 | $ | 274 | $ | 148 | $ | 343 | ||||||||
Adjustments:
|
||||||||||||||||
Noncash restructuring and other (2)
|
12 | (1 | ) | 13 | (2 | ) | ||||||||||
Discontinued operations, net of tax (1)
|
| (14 | ) | | (14 | ) | ||||||||||
Interest expense, net of interest capitalized (1)
|
106 | 70 | 79 | 97 | ||||||||||||
Income tax expense (1)
|
120 | 153 | 80 | 193 | ||||||||||||
Depreciation and amortization (1)
|
182 | 138 | 138 | 182 | ||||||||||||
Noncontrolling interest (1)
|
1 | 1 | 1 | 1 | ||||||||||||
EBITDA
|
$ | 638 | $ | 621 | $ | 459 | $ | 800 | ||||||||
EBITDA
|
$ | 638 | $ | 800 | ||||||||||||
Interest expense, net of interest capitalized (1)
|
106 | 97 | ||||||||||||||
Interest coverage ratio
|
6.02 | 8.25 | ||||||||||||||
Total debt (3)
|
$ | 1,345 | $ | 1,275 | ||||||||||||
EBITDA
|
638 | 800 | ||||||||||||||
Total debt to EBITDA ratio
|
2.11 | 1.59 | ||||||||||||||
(1) | Amounts per the consolidated statement of income (for 2008 information, refer to our 2008 10-K and third quarter 2008 10-Q). | |
(2) | Amounts per the consolidated statement of cash flows (for 2008 information, refer to our 2008 10-K and third quarter 2008 10-Q). | |
(3) | Amounts per the consolidated statement of financial position. |
We also use an asset securitization facility as a form of
off-balance-sheet financing. At September 30, 2009,
$110 million was securitized under this facility, and
$130 million was securitized at December 31, 2008. We
do not participate in financial commercial paper markets.
We have a U.S. qualified pension plan that covers
approximately 7,000 of our employees, as well as approximately
65,000 others, mostly retirees and persons who worked for
predecessor companies that were part of Tenneco Inc. The
requirement to make contributions to this plan is a function of
several factors, the most important of which are the return on
plan assets and applicable funding discount rate used in
calculating plan liabilities. We are not required to make a
contribution to this plan in 2009; however, we have elected to
make contributions in 2009 to lessen the impact of possible
required contributions in the future. We contributed
$400 million pretax in the first nine months of 2009. The
related cash tax benefits of the contributions are
$140 million ($120 million to be realized in 2009 and
$20 million that will carry over into 2010).
As of September 30, 2009, the plan assets on a
year-to-date
basis had earned approximately 22% and the IRS full yield curve
discount rate was 5.6% for the month of September. The return on
plan assets for 2009 could be as low as 5% and there would be no
required cash contribution to the U.S. pension plan in
2010. Each one
25
Table of Contents
percentage-point decrease in the annual actual rate of return
below 5% would increase the minimum cash contribution on an
after-tax basis by approximately $17 million.
The above funding scenarios all assume we would maintain a
funded ratio above 80% as defined in the Pension Protection Act
of 2006 in order to avoid certain benefit restrictions on our
plan. However, as long as our funded ratio is above 60%, those
benefit restrictions do not have a meaningful impact on us or
the plan. This allows us more flexibility in the timing of
pension contributions.
We believe that cash flow from operations, available cash
reserves, and the ability to obtain cash under our credit
facility and asset securitization program will be sufficient to
meet current and future potential pension funding, liquidity,
and capital requirements.
Changes
in Accounting Principles
The Financial Accounting Standards Board (FASB) issued
Accounting Standards Codification (ASC)
105-10,
The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles,
which was effective for fiscal years, and interim periods within
such fiscal years, ending after September 15, 2009. ASC
105-10
establishes an authoritative United States GAAP superseding all
pre-existing accounting standards and literature. ASC
105-10 is
effective for our September 30, 2009 interim financial
reporting, and did not have a material effect on our financial
statements upon adoption. We have updated all references to
specific authoritative guidance within our interim financial
reporting to reflect the new Accounting Standards Codification
structure.
The FASB issued ASC
820-10,
Fair Value Measurements and Disclosures which was
effective as of January 1, 2008. ASC
820-10
establishes a framework for measuring fair value by providing a
standard definition of fair value as it applies to assets and
liabilities. ASC
820-10,
which does not require the use of any new fair value
measurements, clarifies the application of other accounting
pronouncements that require or permit fair value measurements.
ASC 820-10
did not have a material effect on our financial statements upon
adoption and as of September 30, 2009.
The FASB issued ASC
715-20,
Compensation Retirement Benefits, of
which we adopted the recognition and disclosure provisions on
December 31, 2006. We recorded a charge to accumulated
other comprehensive income of $41 million upon adoption. We
adopted the measurement provisions of ASC
715-20-65 on
January 1, 2008, using the transition method based on the
data as of our September 30, 2007, measurement date. As a
result, we increased retained earnings by
$7 million after tax in 2008.
The FASB issued ASC
825-10,
Financial Instruments which was effective
January 1, 2008. ASC
825-10
permits entities to choose to measure many financial instruments
and certain other items at fair value as of specified election
dates. ASC
825-10
expands the use of fair value measurement, but does not
eliminate disclosure requirements of other accounting standards,
including ASC
820-10. ASC
825-10 did
not impact our financial statements upon adoption and as of
September 30, 2009. We did not choose to measure any
financial instruments at fair value as permitted under the
statement.
The FASB issued ASC
805-10,
Business Combinations, which replaces prior
authoritative guidance on business combinations, and is
effective on a prospective basis for all business combinations
that occur in fiscal years beginning after December 15,
2008, with the exception of accounting for valuation allowances
on deferred taxes and acquired tax contingencies. ASC
805-10
retains the underlying concepts of the prior authoritative
guidance in that all business combinations are still required to
be accounted for at fair value using the acquisition method of
accounting, but it changes the application of the acquisition
method in a number of significant ways. In this regard, the
pronouncement requires that (1) acquisition-related costs
generally be expensed as incurred, (2) noncontrolling
interests be recorded at fair value, (3) in-process
research and development costs be recorded at fair value as an
indefinite lived intangible asset, (4) restructuring costs
associated with a business combination generally be expensed
subsequent to the date of such a combination, and
(5) changes in valuation allowances on deferred tax assets
and income tax uncertainties after the acquisition date
generally be recorded as income tax expense. ASC
805-10
amends ASC
740-10,
Income
26
Table of Contents
Taxes such that adjustments made to valuation allowances
on deferred taxes and acquired tax contingencies associated with
acquisitions that closed prior to the effective date of ASC
805-10 would
also be subject to the provisions of ASC
805-10. ASC
805-10 was
effective on January 1, 2009, and did not have a material
impact on our financial statements upon adoption and as of
September 30, 2009.
The FASB issued ASC
810-10-45,
Consolidation which was effective for fiscal years,
and interim periods within such fiscal years, beginning on or
after December 15, 2008. ASC
810-10-45
requires that noncontrolling (minority) interests be recognized
as equity (but separate from parents equity) in
consolidated financial statements, and that net earnings related
to noncontrolling interests be included in consolidated net
income, but identified separately on the face of the income
statement. ASC
810-10-45
also amends prior authoritative guidance, and expands disclosure
requirements regarding the interests of parents and
noncontrolling interests. ASC
810-10-45
was effective on January 1, 2009, and did not have a
material impact on our financial statements upon adoption and as
of September 30, 2009.
The FASB issued the disclosure requirements within ASC
815-10-65,
Derivatives and Hedging which was effective for
fiscal years, and interim periods within such fiscal years,
beginning on or after November 15, 2008. ASC
815-10-65
requires enhanced disclosures about an entitys derivative
and hedging activities, specifically how and why an entity uses
derivative instruments, how derivative instruments and related
hedged items are accounted for under ASC
815-10 and
its related interpretations, and how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows. The disclosure
requirements of ASC
815-10-65
were effective on January 1, 2009, and did not have a
material impact on our financial statements upon adoption and as
of September 30, 2009.
The FASB issued the disclosure requirements within ASC
825-10-65,
Financial Instruments which was effective for
interim reporting periods ending after June 15, 2009. ASC
825-10-65
amends prior authoritative guidance to require disclosures about
fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual
financial statements. ASC
825-10-65
also amends ASC
270-10,
Interim Reporting, to require those disclosures in
summarized financial information at interim reporting periods.
The disclosure requirements of ASC
825-10-65
were effective for our June 30, 2009 interim reporting, and
did not have a material effect on our financial statements upon
adoption and as of September 30, 2009.
The FASB issued ASC
855-10,
Subsequent Events which was effective for fiscal
years, and interim periods within such fiscal years, ending
after June 15, 2009. ASC
855-10
requires the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date, that
is, whether that date represents the date the financial
statements were issued or were available to be issued. ASC
855-10 was
effective for our June 30, 2009 interim reporting, and did
not have a material effect on our financial statements upon
adoption and as of September 30, 2009.
The FASB issued ASC
860-10
Transfers and Servicing which is effective for
interim and annual periods ending after November 15, 2009.
ASC 860-10
requires additional information about transfers of financial
assets and where companies have continuing exposure to the risk
related to transferred financial assets. ASC
860-10
eliminates the concept of a qualifying special purpose entity,
changes the requirements for derecognizing financial assets, and
requires additional disclosures. We are currently reviewing ASC
860-10, and
evaluating the potential impact of its adoption on our financial
statements.
Critical
Accounting Policies
For a complete discussion of the companys critical
accounting policies, refer to Pactivs most recent filing
on
Form 10-K.
27
Table of Contents
CAUTIONARY
STATEMENT FOR PURPOSES OF SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements included in this Quarterly Report on
Form 10-Q,
including statements in the Managements 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. | |
| Changes in U.S. and/or foreign governmental regulations relating to pension plan funding. | |
| Changes enacted by the SEC, the FASB, 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 have acquired and may acquire, or to dispose of businesses or business segments that we may wish to divest. |
28
Table of Contents
ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk |
Derivative
Financial Instruments
We are exposed to market risks related to changes in foreign
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.
Commodity
Derivatives
During the third quarter of 2009, we entered into natural gas
purchase agreements with third parties, hedging a portion of the
fourth quarter of 2009 and first quarter of 2010 purchases of
natural gas used in the production processes at certain of our
plants. These purchase agreements are marked to market, with the
resulting gains or losses recognized in earnings when hedged
transactions are recorded. The
mark-to-market
adjustments at September 30, 2009, were immaterial.
Cash Flow
Hedges
To minimize volatility in our margins due to large fluctuations
in the price of commodities, in the second quarter of 2009 we
entered into swap contracts to manage risks associated with
market fluctuations in resin prices. These contracts are
designated as cash flow hedges of forecasted commodity
purchases. As of September 30, 2009, we have hedged, on a
monthly basis, approximately 4% of the expected resin purchase
volume for the remainder of 2009. Assuming the market prices of
the swap contracts remain unchanged from the prices at
September 30, 2009, the estimated gain expected to be
reclassified to earnings in the remainder of 2009 is immaterial.
Interest
Rates
At September 30, 2009, we had public debt securities of
$1.276 billion outstanding, with fixed interest rates and
maturities ranging from 3 to 18 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 have a
5-year
revolving credit facility of $750 million, which expires in
2011, under which no balance was outstanding at
September 30, 2009.
As a part of the acquisition of Prairie Packaging Inc.
(Prairie), we assumed its liability for $5 million borrowed
from the Illinois Development Finance Authority (IDFA), which
was funded by industrial development revenue bonds issued by the
IDFA. The debt matures on December 1, 2010, and bears
interest at varying rates (0.60% as of September 30, 2009),
not to exceed 12% per annum.
The following table provides information about Pactivs
financial instruments that are sensitive to interest rate risks.
Maturities | ||||||||||||||||
(In millions, except percentages) | 2010 | 2012 | Thereafter | Total | ||||||||||||
Fixed rate debt
|
$ | 250 | $ | 1,026 | $ | 1,276 | ||||||||||
Average interest rate
|
5.7 | % | 7.7 | % | 7.3 | % | ||||||||||
Fair value
|
$ | 266 | $ | 1,212 | $ | 1,478 | ||||||||||
Floating rate debt
|
$ | 5 | $ | 5 | ||||||||||||
Average interest rate
|
0.6 | % | 0.6 | % | ||||||||||||
Fair value
|
$ | 5 | $ | 5 |
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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.
In April 2007, we entered into interest rate swap agreements to
hedge the interest rate risk related to $250 million of the
debt expected to be issued in connection with the acquisition of
Prairie. The swap agreements were terminated on June 20,
2007, resulting in a gain of $9 million. This gain is being
recorded as a reduction of interest expense over the average
life of the underlying debt.
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 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 of 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
September 30, 2009.
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 September 30, 2009, that
materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
30
Table of Contents
PART II
OTHER INFORMATION
ITEM 1. | Legal Proceedings |
We are party to various 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.
ITEM 1A. | Risk Factors |
There has been no material change in the risk factors disclosed
in our
Form 10-K
for the year ended December 31, 2008.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
In July 2006, the board of directors approved the repurchase of
10 million shares of our common stock. As of
September 30, 2009, the remaining number of shares
authorized to be repurchased was 522,361. We repurchase shares
using open market or privately negotiated transactions.
Repurchased shares are held in treasury for general corporate
purposes. There is no expiration date for the current share
repurchase authorization.
We did not repurchase stock in the first nine months of 2009.
ITEM 3-5.
None
ITEM 6. | Exhibits |
Exhibits designated with an asterisk in the following index are
furnished or filed herewith; all other exhibits are incorporated
by reference.
Exhibit No.
|
Description
|
|||
2 | Distribution Agreement by and between Tenneco Inc. and the registrant (incorporated herein by reference to Exhibit 2 to Pactiv Corporations 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 Corporations 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 (incorporated herein by reference to Exhibit 3.1 to Pactiv Corporations Current Report on Form 8-K dated September 4, 2009, File No. 1-15157). | ||
4 | .1 | Specimen Stock Certificate of Pactiv Corporation Common Stock (incorporated herein by reference to Exhibit 4.1 to Pactiv Corporations 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 Corporations 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 Corporations Registration Statement on Form S-8 dated November 8, 2002, File No. 333-101121). |
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Exhibit No.
|
Description
|
|||
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 Corporations 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 Corporations 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 Corporations 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 29, 1999, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.3(e) to Pactiv Corporations 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 Corporations Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). | ||
4 | .3(g) | Sixth Supplemental Indenture dated as of June 25, 2007 to Indenture, dated as of September 29, 1999, between Pactiv Corporation and the Bank of New York Trust Company, N.A., as Trustee (incorporated herein by reference to Exhibit 4.1 to Pactiv Corporations Current Report on Form 8-K dated June 25, 2007, File No. 1-15157). | ||
4 | .3(h) | Seventh Supplemental Indenture dated as of June 25, 2007 to Indenture, dated as of September 29, 1999, between Pactiv Corporation and the Bank of New York Trust Company, N.A., as Trustee (incorporated herein by reference to Exhibit 4.2 to Pactiv Corporations Current Report on Form 8-K dated June 25, 2007, 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 Corporations Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). | ||
10 | .1 | Pactiv Corporation (formerly known as Tenneco Packaging Inc.) Executive Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.5 to Pactiv Corporations Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). | ||
10 | .2 | Pactiv Corporation (formerly known as Tenneco Packaging Inc.) Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.6 to Pactiv Corporations Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). | ||
10 | .3 | Amended and Restated Change in Control Severance Benefit Plan for Key Executives (incorporated herein by reference to Exhibit 10.6 to Pactiv Corporations Current Report on Form 8-K dated September 4, 2009, File No. 1-15157). | ||
10 | .4 | Pactiv Corporation (formerly known as Tenneco Packaging Inc.) Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.8 to Pactiv Corporations Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). | ||
10 | .5 | Pactiv Corporation Rabbi Trust (incorporated herein by reference to Exhibit 10.11 to Pactiv Corporations Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). |
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Table of Contents
Exhibit No.
|
Description
|
|||
10 | .6 | 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 Corporations Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). | ||
10 | .7 | Pactiv Corporation 2002 Incentive Compensation Plan (incorporated herein by reference to Exhibit 4.7 to Pactiv Corporations Registration Statement on Form S-8 dated November 8, 2002, File No. 333-101121). | ||
10 | .8 | 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 (incorporated herein by reference to Exhibit 10.15 to Pactiv Corporations Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-15157). | ||
10 | .9 | Pactiv Corporation Deferred Retirement Savings Plan (incorporated herein by reference to Exhibit 10.16 to Pactiv Corporations Annual Report on Form 10-K for the year ended December 31, 2004, File No. 1-15157). | ||
10 | .10 | Form of Pactiv Corporation Non-Qualified Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.17 to Pactiv Corporations Annual Report on Form 10-K for the year ended December 31, 2004, File No. 1-15157). | ||
10 | .11 | Form of Pactiv Corporation Performance Share Award Agreement (incorporated herein by reference to Exhibit 10.18 to Pactiv Corporations Annual Report on Form 10-K for the year ended December 31, 2004, File No. 1-15157). | ||
10 | .12 | Receivables Purchase Agreement, dated as of December 21, 2006, among the registrant and Atlantic Asset Securitization LLC and Calyon New York Branch, as agent for Purchasers (incorporated herein by reference to Exhibit 10.22 to Pactiv Corporations Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-15157). | ||
10 | .13 | Continuing Agreement for Standby Letters of Credit between Pactiv Corporation and JPMorgan Chase Bank, N.A. dated June 5, 2007 (incorporated herein by reference to Exhibit 10.20 to Pactiv Corporations Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, File No. 1-15157). | ||
10 | .14 | Credit Agreement between Pactiv Corporation and JPMorgan Chase Bank, N.A. dated June 5, 2007 (incorporated herein by reference to Exhibit 10.21 to Pactiv Corporations Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, 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. |
* | Filed herewith | |
** | Furnished herewith |
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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/ EDWARD
T. WALTERS
|
Edward T. Walters
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 6, 2009
34
Table of Contents
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/ DONALD
E. KING
|
Donald E. King
Corporate Controller and Chief Accounting Officer
(Principal Accounting Officer)
Date: November 6, 2009
35