PACTIV CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-15157

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PACTIV CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 36-2552989
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1900 WEST FIELD COURT
LAKE FOREST, ILLINOIS 60045
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 482-2000

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date: Common stock, par value $0.01
per share: 159,465,064 as of April 30, 2003. (See Notes to Financial
Statements.)

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TABLE OF CONTENTS

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* No response to this item is included herein either because it is inapplicable
or there is nothing to report.

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PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

CONSOLIDATED STATEMENT OF INCOME (LOSS)

The accompanying notes to financial statements are an integral part of this
statement.

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CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

The accompanying notes to financial statements are an integral part of this
statement.

4

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

The accompanying notes to financial statements are an integral part of this
statement.

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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The Consolidated Statement of Income (Loss) for the three-month period
ended March 31, 2003, and 2002, the Condensed Consolidated Statement of
Financial Position at March 31, 2003, and the Condensed Consolidated Statement
of Cash Flows for the three-month period ended March 31, 2003, and 2002, are
unaudited. In the company's opinion, the accompanying financial statements
contain all normal recurring adjustments necessary to present fairly the results
of operations, financial position, and cash flows for the periods indicated.
These statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. They do not include all of the information
and footnotes required by generally accepted accounting principles. Accordingly,
these statements should be read in conjunction with the company's Form 10-K for
the year ended December 31, 2002, as amended, which may be found at
www.pactiv.com, under the Investor Relations link section in the subsection
entitled, "SEC Filings." Alternatively, free copies of the company's Form 10-K
for the year ended December 31, 2002, may be obtained by contacting Investor
Relations at (866) 456-5439.

NOTE 2. SUMMARY OF ACCOUNTING POLICIES

For a complete discussion of the company's accounting policies, refer to
Pactiv's most recent filing on Form 10-K.

Stock-Based Compensation

In accounting for stock-based employee compensation, the company uses the
intrinsic-value method specified in Accounting Principals Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees." Shown below are net income
and basic and diluted earnings per share as reported and adjusted to reflect the
use of the fair-value method in determining stock-based compensation costs, as
prescribed in Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation."

NOTE 3. CHANGES IN ACCOUNTING PRINCIPLES

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 does not permit
goodwill and indefinite-lived intangibles to be amortized, but requires that
these assets be reviewed at least annually for possible impairment. Intangible
assets that are not deemed to have an indefinite life will continue to be
amortized over their useful lives. Effective January 1, 2002, the company
adopted SFAS No. 142 and recorded a goodwill-impairment charge for certain
Protective and Flexible Packaging businesses of $83 million, $72 million after
tax, or $0.45 per

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share, as a cumulative effect of change in accounting principles in the first
quarter of 2002. See note 6 to the financial statements for additional
information.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 addresses accounting for variable interest
entities (VIEs), defined as separate legal structures that either do not have
equity investors with voting rights or have equity investors with voting rights
that do not provide sufficient financial resources for the entities to support
their activities. FIN No. 46 requires that (1) a VIE be consolidated by a
company if that company is subject to a majority of the VIE's gains and losses
and (2) disclosures be made regarding VIEs that a company is not required to
consolidate but in which it has a significant variable interest. Consolidation
requirements apply immediately to VIEs created after January 31, 2003, and in
the first fiscal year or interim period beginning after June 15, 2003, for
existing VIEs. Certain of the disclosure requirements apply to financial
statements issued after January 31, 2003, regardless of when the VIE was
created. Upon Pactiv's July 1, 2003, adoption of FIN No. 46, the company is
likely to consolidate the VIE associated with the properties covered by its
synthetic-lease facility (see note 10 to the financial statements for additional
information), resulting in an increase in long-term debt and property, plant,
and equipment of $169 million and $152 million, respectively. Consolidation of
the VIE also would require the company to recognize, as a cumulative effect of
change in accounting principles, depreciation expense on the leased assets from
lease inception to June 30, 2003, which would negatively impact net income by
approximately $10 million, or $0.06 per share. On a going-forward basis,
consolidation of the VIE would reduce net income by approximately $3 million, or
$0.02 per share, annually.

NOTE 4. RESTRUCTURING AND OTHER

In the fourth quarter of 2001, the company recorded a restructuring charge
of $18 million, $10 million after tax, or $0.06 per share. Of this amount, $5
million was related to higher-than-anticipated expenses associated with the exit
of small, noncore European businesses announced in the fourth quarter of 2000.
The remaining $13 million reflected adoption of a restructuring plan to
consolidate operations and reduce costs in both the Consumer and
Foodservice/Food Packaging ($5 million) and Protective and Flexible Packaging
($8 million) segments. Specifically, this charge was for (1) plant closures and
consolidations in North America and Europe, including the elimination of 283
positions ($10 million); (2) other workforce reductions (99 positions -- $2
million); and (3) asset writedowns related to the exit of a North American
product line ($1 million).

Changes in restructuring-reserve balances are shown in the following table.

NOTE 5. ACQUISITIONS

On January 4, 2002, the company purchased MSP Schmeiser GmbH, a German
medical-products company, for $3 million. On February 13, 2002, the company
acquired an egg-packaging production line from Amerpack S.A. de C.V., a Mexican
company, for $10 million.

In January 2002, the company purchased the assets of 2 small Italian
protective-packaging companies, recording these transactions as capital
expenditures. The outstanding shares of a third small Italian protective-
packaging company, Forniture Industriali, were acquired in June 2002, for $1
million.

On June 18, 2002, the company purchased Winkler Forming Inc. (Winkler), a
leading thermoformer of amorphous polyethylene terephthalate (APET) products for
food packaging, for $78 million. During the third quarter of 2002, the company
received $3 million from the seller in interim settlement of working capital
amounts. At March 31, 2003, the allocation of the purchase price to the net
assets of Winkler and the related

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recognition of $55 million of goodwill were based on preliminary estimates of
the fair market value of the assets and liabilities acquired, and, therefore,
are subject to revision based on final appraisals.

On October 21, 2002, Pactiv completed the purchase of 70% of the stock of
Mexico-based Central de Bolsas, S.A. de C.V. (Jaguar), a leading thermoformer of
high-impact polystyrene (HIPS) for cold cups and plates and polystyrene foam for
foodservice/food packaging. For this 70% interest, Pactiv paid $31 million to
the shareholders of Jaguar and made a $20 million equity investment in Jaguar.
At March 31, 2003, the allocation of the purchase price to the net assets of
Jaguar and the related recognition of $6 million of goodwill were based on
preliminary estimates of the fair market value of the assets and liabilities
acquired, and, therefore, are subject to revision based on final appraisals.

On November 13, 2002, Pactiv purchased the shares of Prvni Obalova SPOL
S.R.O, a distributor and converter of protective-packaging products in the Czech
Republic, for $4 million.

NOTE 6. GOODWILL AND INTANGIBLE ASSETS

As of January 1, 2002, the company adopted SFAS No. 142. Following the
adoption of this standard, the company completed a review of its businesses and
tested recorded goodwill amounts for possible impairment by comparing the fair
value of each reporting unit with its carrying value, including attributable
goodwill. Fair value was determined using the income approach. Goodwill was
found to be impaired for certain Protective and Flexible Packaging businesses
that were acquired prior to the company's spin-off from Tenneco Inc. These
businesses had faced increased competition and experienced lower operating
margins. As a result, in the first quarter of 2002, the company recorded a
goodwill-impairment charge of $83 million, $72 million after tax, or $0.45 per
share.

Changes in the carrying amount of goodwill for the three months ended March
31, 2003, by operating segment are shown in the following table.

Trademarks and other intangible assets at March 31, 2003, are shown in the
following table.

Amortization expense for intangible assets subject to amortization was $3
million for the three months ended March 31, 2003. Amortization expense is
estimated to total $12 million, $12 million, $12 million, $11 million, and $11
million for years 2003, 2004, 2005, 2006, and 2007, respectively.

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NOTE 7. EARNINGS PER SHARE

Earnings from continuing operations per share of common stock outstanding
was computed as follows.

In November 1999, the company established a grantor trust and reserved
3,200,000 shares of Pactiv common stock for the trust, which were issued to it
in January 2000. This so-called "rabbi trust" is designed to assure payment of
deferred compensation and supplemental pension benefits. These shares are not
considered to be outstanding for purposes of financial reporting.

NOTE 8. SEGMENT INFORMATION

The company has three operating segments: Consumer and Foodservice/Food
Packaging, which relates to the manufacture and sale of disposable plastic,
molded-fibre, pressed-paperboard, and aluminum packaging products for the
consumer, foodservice, and food-packaging markets; Protective and Flexible
Packaging, which relates to the manufacture and sale of plastic, paperboard, and
molded-fibre products for protective-packaging markets such as electronics,
automotive, furniture, and e-commerce, and for flexible-packaging applications
in food, medical, pharmaceutical, chemical, and hygienic markets; and Other,
which relates to corporate and administrative service operations and
retiree-benefit income and expense.

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The following table sets forth certain segment information.

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(a) Includes pension-plan income and unallocated corporate expenses.

(b) Includes assets related to pension plans (net) and administrative service
operations.

NOTE 9. ACCOUNTS AND NOTES RECEIVABLE

On a recurring basis, the company sells an undivided interest in a pool of
trade receivables meeting certain criteria to a third party as an alternative to
debt financing. Amounts sold were $10 million at March 31, 2003, and December
31, 2002. Such sales, which represent a form of off-balance-sheet financing, are
recorded as a reduction of accounts and notes receivable in the statement of
financial position, and related proceeds are included in cash provided (used) by
operating activities in the statement of cash flows. Discounts and fees related
to these sales were immaterial in the first quarter of 2003, and totaled $1
million in the first quarter of 2002, and were included in other expense in the
statement of income (loss). In the event that either Pactiv or the third-party
purchaser of the trade receivables was to discontinue this program, the
company's debt would increase, or its cash balance would decrease, by an amount
corresponding to the level of sold receivables at such time.

NOTE 10. SYNTHETIC LEASE COMMITMENTS

Pactiv has entered into a $169 million synthetic-lease agreement with a
third-party lessor and various lenders to finance the cost of its headquarters
building and certain of its warehouse facilities and to facilitate additional
leasing arrangements for other operating facilities. This agreement, which will
expire in November 2005, contains customary terms and conditions, covering,
among other things, residual-value guarantees, default provisions, and financial
covenants, and requires that certain financial-ratio tests be satisfied. Upon
expiration of the initial lease periods for the properties, the company may
extend the leases on terms negotiated with the lessors or purchase the leased
assets under specified conditions. Termination of the synthetic-lease agreement,
either before or at expiration, would require the company to make a termination
payment of $169 million, which, in essence, represents off-balance-sheet debt in
that the company might be required to obtain alternative financing to fund such
a payment.

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NOTE 11. COMPREHENSIVE INCOME (LOSS)

Details of total comprehensive income (loss) for the three-month period
ended March 31, 2003, and 2002, were as follows:

NOTE 12. GUARANTEES

The company, from time to time, utilizes various lines of credit to finance
operations of its foreign subsidiaries, which are backed by payment and
performance guarantees. These lines of credit are mainly used as overdraft and
foreign-exchange settlement facilities and are in effect until cancelled by one
or both parties. Performance under the guarantees would be required if the
subsidiary were sold, dissolved, or otherwise failed to satisfy its outstanding
obligations subject to such guaranty. At March 31, 2003, amounts outstanding
under these lines of credit were not material.

The above notes are an integral part of the foregoing financial statements.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

BASIS OF PRESENTATION

Financial statements for all periods presented herein have been prepared on
a consolidated basis in accordance with generally accepted accounting principles
consistently applied. All per-share information is presented on a diluted basis
unless otherwise noted.

The company has three operating segments: Consumer and Foodservice/Food
Packaging, which relates to the manufacture and sale of disposable plastic,
molded-fibre, pressed-paperboard, and aluminum packaging products for the
consumer, foodservice, and food-packaging markets; Protective and Flexible
Packaging, which relates to the manufacture and sale of plastic, paperboard, and
molded-fibre products for protective-packaging markets such as electronics,
automotive, furniture, and e-commerce, and for flexible-packaging applications
in food, medical, pharmaceutical, chemical, and hygienic markets; and Other,
which relates to corporate and administrative service operations and
retiree-benefit income and expense.

RESTRUCTURING AND OTHER

In the fourth quarter of 2001, the company recorded a restructuring charge
of $18 million, $10 million after tax, or $0.06 per share. Of this amount, $5
million was related to higher-than-anticipated expenses associated with the exit
of small, noncore European businesses announced in the fourth quarter of 2000.
The remaining $13 million reflected adoption of a restructuring plan to
consolidate operations and reduce costs in both the Consumer and
Foodservice/Food Packaging ($5 million) and Protective and Flexible Packaging
($8 million) segments. Specifically, this charge was for (1) plant closures and
consolidations in North America and Europe, including the elimination of 283
positions ($10 million); (2) other workforce reductions (99 positions-$2
million); and (3) asset writedowns related to the exit of a North American
product line ($1 million).

THREE MONTHS ENDED MARCH 31, 2003, COMPARED WITH THREE MONTHS ENDED MARCH 31,
2002

RESULTS OF CONTINUING OPERATIONS

Significant Trends

Approximately 80% of Pactiv's sales comes from products made from different
types of plastics. The principal raw materials used by the company to
manufacture these products are plastic resins, including polystyrene,
polyethylene, polypropylene, polyvinyl chloride and amorphous polyethylene
terephthalate. Plastic-resin prices can be volatile and are a function of, among
other things, the availability of production capacity; oil, natural gas, and
other energy-related feedstock costs; and geopolitical circumstances.

During the first quarter of 2003, industry prices for plastic resin
increased by approximately 30%, driven by the precipitous rise in oil and
natural-gas prices related to the war in Iraq and political unrest in Venezuela.
As a result, the company's first-quarter 2003 gross margin fell to 29.1% from
32.3% and 31.1% in the first and fourth quarter of 2002, respectively.
Additional price increases have been announced by most major resin suppliers,
and will take effect in the second quarter.

The company responded by increasing selling prices in many areas of its
business. These pricing actions took effect late in the first quarter and will
benefit all of the second quarter. Additional price increases will be announced
in the second quarter, and are expected to benefit the second half of the year.
These actions, coupled with an anticipated moderation of plastic-resin costs as
energy markets return to a more normal state, are expected to reduce the
pressure on the company's gross margin in the second half of 2003.

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Sales

Total sales increased $70 million, or 10.8%, versus the prior year.
Excluding the positive impact of foreign-currency exchange rates ($20 million)
and acquisitions ($37 million), sales grew by 2%. Volume grew 8%, with 3% coming
from the base business and 5% from acquisitions.

Sales for the Consumer and Foodservice/Food Packaging segment increased $44
million, or 9.6%, from the first quarter of 2002. Volume in this business grew
11%, with 4% coming from the base business and 7% from acquisitions. Hefty(R)
consumer products posted strong volume increases driven by Hefty(R) OneZip(TM)
food-storage bags and tableware. Hefty(R) The Gripper(TM) tall kitchen bags and
Hefty(R) Zoo Pals(R) disposable plates for children, introduced in 2002,
continued to perform well. Also contributing to the volume growth in Hefty(R)
consumer products was the first quarter 2003 introduction of Hefty(R) Hearty
Meals(TM) disposable plates and bowls. In Foodservice/Food Packaging, volume
grew significantly, benefiting from the impact of 2002 acquisitions. In
addition, higher-margin product lines, such as microwaveable home meal
replacement containers and agricultural packaging products, continued to show
strong growth. The higher volume in this segment was partially offset by the
year-over-year decline in selling prices that accompanied the pass through to
customers of lower raw-material costs experienced in the first quarter of 2002.

Sales of protective- and flexible-packaging products increased $26 million,
or 13.6%, compared with 2002. Excluding the positive impact of foreign-currency
exchange rates, sales for this segment increased 2.8% on volume growth of 1%,
primarily from 2002 acquisitions.

Operating Income (Income before Interest Expense, Income Taxes, and Minority
Interest)

Total operating income was $95 million in the first quarter of 2003, an
increase of $2 million, or 2.2%, from last year. The improvement was driven
principally by higher volume (including acquisitions); benefits from the
company's productivity initiatives; lower advertising and promotion expenses;
and cost-containment actions, which more than offset the impact of a spike in
raw-material costs and lower pension income.

Operating income for the Consumer and Foodservice/Food Packaging segment
increased $6 million, or 9.0%, in 2003, driven principally by volume growth
(including acquisitions), productivity improvements, lower advertising and
promotions expenses, and cost-containment actions, partially offset by higher
raw-material costs.

Operating income for the Protective and Flexible Packaging segment of $14
million was even with last year, as higher volume (including acquisitions),
selling-price increases, and cost-containment actions offset the impact of
higher raw-material costs.

Operating income for the Other segment was down $4 million from last year,
mainly because of the decline in pension income from $27 million in 2002 to $15
million in 2003, partially offset by lower administrative spending.

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Income Taxes

The company's effective tax rate for the first quarter of 2003 was 38.0%,
compared with 40.0% for the same period in 2002, reflecting the positive impact
of tax-planning strategies implemented in the United States and Europe.

Income from Continuing Operations

The company recorded net income from continuing operations of $44 million,
or $0.27 per share, in 2003's first quarter, compared with $42 million, or $0.26
per share, in the first quarter of 2002. Included in first-quarter 2003 and 2002
net income is noncash pension income of $10 million, or $0.06 per share, and $16
million, or $0.10 per share, respectively.

Cumulative Effect of Change in Accounting Principles

Effective January 1, 2002, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets."
Goodwill was tested and found to be impaired for certain businesses in the
Protective and Flexible Packaging segment that were acquired prior to the
company's spin-off from Tenneco Inc. These businesses had faced increased
competition and experienced lower operating margins. As a result, the company
recorded a goodwill-impairment charge totaling $83 million, $72 million after
tax, or $0.45 per share, as a cumulative effect of change in accounting
principles.

LIQUIDITY AND CAPITAL RESOURCES

Capitalization

The ratio of debt to total capitalization fell to 55.2% at March 31, 2003,
from 57.4% at December 31, 2002. Total capitalization increased $37 million from
the end of last year, mainly driven by net income recorded in the quarter.

Cash Flows

Cash provided by operating activities was $56 million in the first quarter
of 2003 versus $71 million in the same period last year. The $15 million
decrease was driven mainly by an increase in working capital, primarily
reflecting higher raw-material costs.

Investing activities used $27 million of cash in 2003's first quarter,
primarily for the acquisition of capital items. In 2002, investing activities
used $38 million of cash, mainly for property, plant, and equipment
($27 million) and acquisitions ($13 million).

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Cash used by financing activities was $22 million in the first quarter of
2003, primarily reflecting the early retirement of Jaguar debt. Cash used by
financing activities was $28 million in the first quarter of 2002, principally
for the repurchase of company stock.

Capital Commitments

Open commitments for authorized expenditures totaled approximately $82
million at March 31, 2003. It is anticipated that the majority of these
expenditures will be funded over the next 12 months from existing cash,
short-term investments and internally generated cash.

Liquidity and Off-Balance-Sheet Financing

The company uses various sources of funding to manage liquidity, including
off-balance-sheet financing vehicles.

Sources of liquidity include cash flow from operations and a 5-year, $750
million revolving-credit facility, under which $36 million was outstanding at
March 31, 2003. At the end of the first quarter of 2003, the company was in full
compliance with financial and other covenants included in the revolving-credit
agreement.

Off-balance-sheet financing consists of an asset-securitization program and
a synthetic-lease facility. Asset securitization totaled $10 million at both
March 31, 2003, and December 31, 2002. The synthetic-lease agreement, which will
expire in November 2005, contains customary terms and conditions covering, among
other things, residual-value guarantees, default provisions, and financial
covenants, and requires the company to satisfy certain financial-ratio tests.
Termination of the lease agreement, either before or at expiration, would
require the company to make a termination payment ($169 million at March 31,
2003, and December 31, 2002), which, in essence, represents off-balance-sheet
debt in that the company might be required to obtain alternative financing to
fund such a payment. Likewise, termination of the asset-securitization program
would require the company to increase its debt or decrease its cash balance by a
corresponding amount.

Management believes that cash flow from operations, available cash
reserves, and the ability to obtain cash under the company's credit facilities
and asset-securitization program will be sufficient to meet current and future
liquidity and capital requirements.

CHANGES IN ACCOUNTING PRINCIPLES

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 does not permit goodwill and indefinite-lived intangibles
to be amortized, but requires that these assets be reviewed at least annually
for possible impairment. Intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. Effective
January 1, 2002, the company adopted SFAS No. 142 and recorded a
goodwill-impairment charge for certain Protective and Flexible Packaging
businesses of $83 million, $72 million after tax, or $0.45 per share, as a
cumulative effect of change in accounting principles in the first quarter of
2002. See note 6 to the financial statements for additional information.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 addresses accounting for variable interest
entities (VIEs), defined as separate legal structures that either do not have
equity investors with voting rights or have equity investors with voting rights
that do not provide sufficient financial resources for the entities to support
their activities. FIN No. 46 requires that (1) a VIE be consolidated by a
company if that company is subject to a majority of the VIE's gains and losses
and (2) disclosures be made regarding VIEs that a company is not required to
consolidate but in which it has a significant variable interest. Consolidation
requirements apply immediately to VIEs created after January 31, 2003, and in
the first fiscal year or interim period beginning after June 15, 2003, for
existing VIEs. Certain of the disclosure requirements apply to financial
statements issued after January 31, 2003, regardless of when the VIE was
created. Upon Pactiv's July 1, 2003, adoption of FIN No. 46, the company is
likely to consolidate the VIE associated with the properties covered by its
synthetic-lease facility, resulting in an increase in long-term debt and
property, plant, and equipment of $169 million and $152 million, respectively.
Consolidation of the

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VIE also would require the company to recognize, as a cumulative effect of
change in accounting principles, depreciation expense on the leased assets from
lease inception to June 30, 2003, which would negatively impact net income by
approximately $10 million, or $0.06 per share. On a going-forward basis,
consolidation of the VIE would reduce net income by approximately $3 million, or
$0.02 per share, annually.

CRITICAL ACCOUNTING POLICIES

For a complete discussion of the company's critical accounting policies,
refer to Pactiv's most recent filing on Form 10-K.

Pension Plans

The company accounts for pension plans in accordance with requirements of
SFAS No. 87. Pension-plan income ($15 million and $27 million for the three
months ended March 31, 2003, and 2002, respectively) is included in the
statement of income as an offset to selling, general, and administrative
expenses. Projections indicate that the company's noncash pension income will
total approximately $60 million in 2003, versus $109 million in 2002,
principally reflecting the decline in equity market values, the reduction in the
discount rate used to measure pension obligations from 7.25% to 6.75%, and the
impact of the company's decision to reduce the expected long-term rate of return
on pension assets for 2003 from 9.5% to 9%.

Pension income is based on a number of factors, including estimates of
future returns on pension-plan assets; amortization of actuarial gains/losses;
expectations regarding employee compensation; and assumptions pertaining to
participant turnover, retirement age, and life expectancy.

In developing its assumption regarding the rate of return on pension-plan
assets, the company receives input from its outside actuary and investment
advisors on asset-allocation strategies and projections of long-term rates of
return on various asset classes, risk-free rates of return, and long-term
inflation rates. Since inception in 1971, the pension plans' annual rate of
return on assets has averaged 10.5%. Over its history, the plan has invested
approximately 65% of its assets in equities and 35% in fixed income. After
consideration of all of these factors, the company concluded that a 9%
rate-of-return assumption was appropriate for 2003. Holding all other
assumptions constant, a one-half percentage-point change in the rate-of-return
assumption would impact the company's pension income by approximately $20
million pretax.

The company's discount-rate assumption is based on returns on long-term
corporate bonds that receive the second-highest credit rating from recognized
rating agencies as of its measurement date (approximately 6.75% at September 30,
2002). Consequently, the company lowered its discount-rate assumption for 2003
to 6.75% from 7.25%. Holding all other assumptions constant, a one-half
percentage-point change in the discount rate would impact the company's pension
income by approximately $10 million pretax.

The company utilizes a market-related (smoothed) value of plan assets in
determining the earnings of the plan. Under this method, differences between
smoothed and actual market values are recognized over a 5-year period.
Unrecognized actuarial gains or losses are amortized using the "corridor
approach" outlined in SFAS No. 87. Holding all current assumptions constant, the
company's pension income will decline by approximately $20 million pretax in
2004, principally reflecting the amortization of unrecognized actuarial losses.

Synthetic Leases

The company has entered into a synthetic-lease agreement with a third-party
lessor and various lenders to finance the cost of its headquarters building and
certain of its warehouse facilities. The synthetic-lease agreement, which will
expire in November 2005, contains customary terms and conditions covering, among
other things, residual-value guarantees, default provisions, and financial
covenants, and requires the company to satisfy certain financial-ratio tests,
with which it was in full compliance at March 31, 2003. Termination of the lease
agreement, either before or at expiration, would require the company to make a
termination payment ($169 million at March 31, 2003), which, in essence,
represents off-balance-sheet debt in that the company might be required to
obtain alternative financing to fund such a payment.

16

In January 2003, the FASB issued FIN No. 46, which revises the accounting
and disclosure requirements for VIEs, such as the company's synthetic-lease
agreement. See "Changes in Accounting Principles" for further information
concerning VIEs.

17

CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements included in this Quarterly Report on Form 10-Q,
including statements in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section and in the notes to the financial
statements, are "forward-looking statements." All statements other than
statements of historical fact, including statements regarding prospects and
future results, are forward-looking. These forward-looking statements generally
can be identified by the use of terms and phrases such as "will", "believe",
"anticipate", "may", "might", "could", "expect", "estimated", "projects",
"intends", "foreseeable future", and similar terms and phrases. These
forward-looking statements are not based on historical facts, but rather on the
company's current expectations or projections about future events. Accordingly,
these forward-looking statements are subject to known and unknown risks and
uncertainties. While the company believes that the assumptions underlying these
forward-looking statements are reasonable and makes the statements in good
faith, actual results almost always vary from expected results, and the
differences could be material. Following are factors that might cause the
company's actual results to differ materially from future results expressed or
implied by these forward-looking statements:

- Changes in consumer demand and selling prices for the company's products,
including new products that the company or its competitors may introduce,
that could impact sales and margins. The company operates in a very
competitive environment, in which product innovation and development has
historically been key to obtaining and maintaining market share and
margins. The company's sales and margins can also be impacted by changes
in distribution channels, in customer mix (including consolidation among
customers), and in customer merchandising strategies , including
substitution of unbranded products for branded products.

- Material substitutions and changes in costs of raw materials, including
plastic resins, labor, or utilities that could impact the company's
expenses and margins. Plastic-resin prices are impacted by the price of
oil and natural gas. Oil and natural-gas prices are affected by numerous
factors, including overall economic activity, geopolitical situations
(particularly involving oil-exporting regions), and governmental policies
and regulation.

- Changes in laws or governmental actions, including changes in regulations
such as those relating to air emissions or plastics generally.

- Although the company believes it has adequate sources of liquidity for
its operations, the availability or cost of capital could impact growth
or acquisition opportunities.

- Workforce factors such as strikes or other labor interruptions.

- The general economic, political, and competitive conditions in countries
in which the company operates, including currency fluctuations and other
risks associated with operating outside of the U.S., may impact not only
demand for the company's products, but also the prices of raw materials
and costs of manufacturing.

- Changes in assumptions regarding the long-term rate of return on pension
assets and the discount rate and other assumptions, as well as the level
of amortization of actuarial gains and losses, could have a material
effect on net income and shareholders' equity.

- Changes enacted by the Securities and Exchange Commission, the Financial
Accounting Standards Board, or other regulatory or accounting bodies. See
"Changes in Accounting Principles."

- The company's ability to integrate new businesses that it may acquire, or
effectively divest businesses or business segments.

18

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DERIVATIVE FINANCIAL INSTRUMENTS

The company is exposed to market risks related to changes in
foreign-currency exchange rates, interest rates, and commodity prices. To manage
these risks, the company, from time to time, enters into various hedging
contracts in accordance with the company's policies and procedures. The company
does not use hedging instruments for trading purposes and is not a party to any
transactions involving leveraged derivatives.

Foreign-Currency Exchange

The company uses foreign-currency forward contracts to hedge its exposure
to adverse changes in exchange rates, primarily related to the euro and the
British pound. Associated gains or losses offset gains or losses on underlying
assets or liabilities.

In managing foreign-currency risk, the company aggregates existing
positions and hedges residual exposures through third-party derivative
contracts. The following table summarizes foreign-currency forward contracts in
effect at March 31, 2003, all of which will mature in 2003.

Interest Rates

The company is exposed to interest-rate risk on revolving-credit debt ($36
million at March 31, 2003) that bears interest at a floating rate based on
LIBOR. In addition, the company has issued public-debt securities outstanding
with fixed interest rates and original maturity dates ranging from 2 to 24
years. Should the company decide to redeem these securities prior to their
stated maturity, it would incur costs based on the fair value of the securities
at that time.

In the first quarter of 2001, the company entered into interest-rate swap
agreements to covert floating-rate debt on its synthetic-lease obligations to
fixed-rate debt. This action was taken to reduce the company's exposure to
interest-rate risk. During the first quarter of 2002, the company exited these
swap agreements, and, as a result, related accumulated deferred net losses of $2
million at March 31, 2003, will be expensed over the remaining life of the
underlying obligation.

ITEM 4. CONTROLS AND PROCEDURES

The company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the company in the reports it files
or submits under the Securities Exchange Act is recorded, processed, summarized,
and reported within the appropriate time periods. The company, under the
supervision and with the participation of its management, including the
company's principal executive officer and principal financial officer, has
evaluated the effectiveness of its disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)), and the company and such
officers have concluded that such controls and procedures are adequate and
effective. The company completed its evaluation of such controls and procedures
in connection with the preparation of this quarterly report on Form 10-Q on May
9, 2003.

There have been no significant changes in the company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses therein.

19

PART II -- OTHER INFORMATION

ITEMS 1-5. NONE

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(A) EXHIBITS

Exhibits designated with an asterisk in the following index are furnished
herewith; all other exhibits are incorporated by reference.

(B) REPORTS ON FORM 8-K

On March 20, 2003, the company filed a Form 8-K (dated March 19, 2003)
regarding the election of K. Dane Brooksher to the Board of Directors.

22

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

PACTIV CORPORATION

By: /s/ ANDREW A. CAMPBELL
------------------------------------
Andrew A. Campbell
Senior Vice President and Chief
Financial Officer
(principal financial and accounting
officer)

Date: May 15, 2003

23

CERTIFICATION

I, Richard L. Wambold, the principal executive officer of Pactiv
Corporation (the "company"), certify that:

1. I have reviewed this quarterly report on Form 10-Q for the company;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the company as of, and for, the periods presented in this
quarterly report;

4. The company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the company and we
have:

(a) Designed such disclosure controls and procedures to ensure that
material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

(b) Evaluated the effectiveness of the company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the company's auditors and the audit
committee of the company's Board of Directors:

(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the company's ability to
record, process, summarize and report financial data and have
identified for the company's auditors any material weaknesses in
internal controls; and

(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the company's
internal controls; and

6. The company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: May 9, 2003

/s/ RICHARD L. WAMBOLD
- --------------------------------
Richard L. Wambold
Principal Executive Officer

24

CERTIFICATION

I, Andrew A. Campbell, the principal financial officer of Pactiv
Corporation (the "company"), certify that:

1. I have reviewed this quarterly report on Form 10-Q for the company;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the company as of, and for, the periods presented in this
quarterly report;

4. The company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the company and we
have:

(a) Designed such disclosure controls and procedures to ensure that
material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

(b) Evaluated the effectiveness of the company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the company's auditors and the audit
committee of the company's Board of Directors:

(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the company's ability to
record, process, summarize and report financial data and have
identified for the company's auditors any material weaknesses in
internal controls; and

(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the company's
internal controls; and

6. The company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: May 9, 2003

/s/ ANDREW A. CAMPBELL
- --------------------------------
Andrew A. Campbell
Principal Financial Officer

25